<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1997
REGISTRATION NO. 333-34885
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES 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 (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
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
(ADDRESS AND TELEPHONE NUMBER, (405) 842-0131
INCLUDING AREA CODE, OF REGISTRANT'S (NAME, ADDRESS AND TELEPHONE NUMBER,
PRINCIPAL EXECUTIVE OFFICES) OF AGENT FOR SERVICE)
----------------
COPIES TO:
MICHAEL E. DUNN, ESQ. THOMAS P. PALMER, ESQ.
DUNN SWAN & CUNNINGHAM TONKON, TORP, GALEN, MARMADUKE & BOOTH
2800 OKLAHOMA TOWER 1600 PIONEER TOWER
210 PARK AVENUE 888 S.W. FIFTH AVENUE
OKLAHOMA CITY, OKLAHOMA 73102-5604 PORTLAND, OREGON 97204-2099
TELEPHONE: (405) 235-8318 TELEPHONE: (503) 221-1440
FACSIMILE: (405) 235-9605 FACSIMILE: (503) 274-8779
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 ANY OFFER TO BUY NOR SHALL THERE BE ANY SALES 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 3, 1997
PROSPECTUS
ADVANTAGE MARKETING SYSTEMS, INC.
[LOGO]
1,300,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT
Advantage Marketing Systems, Inc. (the "Company") hereby offers 1,300,000
Units, each consisting of one share of Common Stock, $.0001 par value per
share, of the Company (the "Common Stock") and one Redeemable Common Stock
Purchase Warrant (the "Warrants") exercisable to purchase one share of Common
Stock. The Common Stock and Warrants comprising the Units will separate on
, 1997 or such later date as determined in the sole discretion of Paulson
Investment Company, Inc. (the "Separation Date"), following appropriate prior
notice to the holders of the Units. Prior to the Separation Date, each share of
Common Stock and each Warrant comprising a Unit will trade only as a Unit. On
and after the Separation Date, the Common Stock and Warrants comprising the
Units will trade only as separate securities. Each Warrant initially entitles
the holder thereof to purchase one share of Common Stock for an exercise price
equal to 120 percent of the offering price of the Units. The Warrant exercise
price will be adjusted on the 20th day following the Separation Date to 120
percent of the average of the daily closing sale prices of the Common Stock as
reported on the Nasdaq SmallCap Market during the 20-day period, subject to
adjustment in certain events. Unless earlier redeemed, the Warrants will be
exercisable at any time on and after the Separation Date until the fifth
anniversary of the date of this Prospectus. The outstanding Warrants may be
redeemed by the Company, for $0.25 per Warrant, on not less than 30 days'
written notice, at any time after the Separation Date that the sale price per
share of Common Stock, as reported on the Nasdaq SmallCap Market, closes at or
above $ (200 percent of the Warrant exercise price) for a period of 20
consecutive trading days.
The Common Stock is traded in the over-the-counter market under the symbol
"AMSO" and on the Boston Stock Exchange under the symbol "AMM." On October 31,
1997, the closing sale price of the Common Stock in the over-the-counter market
was $4.88. The public offering price of the Units and the initial exercise
price of the Warrants will be determined by negotiation between the Company and
the representatives of the underwriters. See "Underwriting." It is currently
anticipated that the public offering price of the Units will be set at or near
the market price of the Common Stock as of the effective date of this
Prospectus.
Prior to this offering, there has been only a limited market for the Common
Stock and no public market for the Units and Warrants, and there can be no
assurance that an active trading market will develop or be maintained following
this offering. The Company has applied for inclusion of the Common Stock and
Warrants in the Nasdaq SmallCap Market under the symbols "AMSO" and "AMSOW,"
respectively.
----------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
----------
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.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit................................ $ $ $
- --------------------------------------------------------------------------------
Total(3)................................ $ $ $
</TABLE>
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- --------------------------------------------------------------------------------
(1) Excludes a non-accountable expense allowance payable by the Company to
Paulson Investment Company, Inc. equal to two percent of the aggregate
initial public offering price of the Units. The Company has agreed to (i)
sell and issue warrants to Paulson Investment Company, Inc. and Joseph
Charles & Assoc., Inc., the representatives (the "Representatives") of the
several underwriters (the "Underwriters") to purchase up to 130,000 Units
for $ (120 percent of the Price to Public of the Units) (the
"Representatives' Warrants") and (ii) maintain an effective registration at
the Company's expense with respect to the securities underlying the
Representatives' Warrants (and, if necessary, to allow their public resale
without restriction) at all times during the period in which the
Representatives' Warrants are exercisable. The Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "1933 Act").
See "Underwriting."
(2) Before deducting offering expenses payable by the Company estimated to be
$167,700, excluding the Representatives' non-accountable expense allowance.
(3) Assumes no exercise of the Representatives' option, exercisable within 45
days from the date of this Prospectus, to purchase up to 195,000 additional
Units solely to cover any over-allotments (the "Over-Allotment Option"). If
the Over-Allotment Option is exercised in full, the total Price to Public
will be $ , the total Underwriting Discounts and Commissions will be
$ , and the total Proceeds to Company will be $ . See "Underwriting."
The Units are being offered, subject to prior sale, when, as and if delivered
and accepted by the several Underwriters and subject to the approval of certain
legal matters by counsel and certain other conditions. It is expected that
delivery of the certificates representing the Common Stock and Warrants
comprising the Units will be made against payment therefor in New York, New
York on about , 1997.
PAULSON INVESTMENT COMPANY, INC. JOSEPH CHARLES & ASSOC., INC.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the captions "Prospectus Summary," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this Prospectus constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Certain, but not necessarily all, of such forward-
looking statements can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should" or "anticipates" or
other variations thereon, or by discussions of strategies that involve risks
and uncertainties. The actual results of the Company or industry results may
be materially different from any future results expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include general economic and business conditions; the ability of
the Company to implement its business and acquisition strategy, including the
ability to integrate recently acquired businesses into the Company; changes in
the network marketing industry; changes in consumer preferences; competition;
availability of key personnel; increasing operating costs; unsuccessful
advertising and promotional efforts; changes in brand awareness; acceptance of
new product offerings; changes in, or the failure to comply with, government
regulations (especially food and drug laws and regulations); the risk of civil
litigation; the ability of the Company to obtain financing for future
acquisitions; and other factors. See "Risk Factors."
Chambre(R), Spark of Life(R), Young at Heart(R), Co-Clenz(R), Stay 'N
Shape(R) and Sine-eze(R) are registered trademarks of the Company, and Choc-
Quilizer(TM) is a trademark of Tinos, L.L.C.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET
OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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.
Effective December 11, 1995, Advantage Marketing Systems, Inc. (formerly
Pacific Coast International, Inc.), a Delaware corporation and the former
parent of the Company, merged with the Company. The Company, an Oklahoma
corporation which subsequently changed its name from "AMS, Inc."to "Advantage
Marketing Systems, Inc.," was the surviving corporation. The Company expanded
its network marketing organization with the acquisition of Miracle Mountain
International, Inc. on May 31, 1996 (the "MMI Acquisition"), Chambre
International, Inc. on January 31, 1997 (the "CII Acquisition"), and the
acquisition of the assets of Stay 'N Shape International, Inc., Solution
Products International, Inc., Nation of Winners, Inc., and Now International,
Inc. on April 16, 1997 (the "SNSI Asset Purchase"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
General." Unless otherwise indicated, all references to the Company include its
former parent, Advantage Marketing Systems, Inc. and its current subsidiaries.
Furthermore, except as otherwise indicated, the information contained in this
Prospectus reflects a one-for-eight reverse split of the Company's issued and
outstanding Common Stock on October 29, 1996, and assumes that (i) neither the
Over-Allotment Option nor the Representatives' Warrants have been exercised and
(ii) no additional shares of Common Stock will be issued in connection with the
SNSI Asset Purchase.
THE COMPANY
Advantage Marketing Systems, Inc. (the "Company") markets weight management,
dietary supplement and personal care products through a network marketing
organization in which independent distributors purchase products for resale to
retail customers as well as for their own personal use. The number of the
Company's active distributors has increased from approximately 8,100 at
December 31, 1995, and 10,600 at December 31, 1996 to approximately 19,000 at
June 30, 1997. An "active" distributor is one who purchased $60 or more of the
Company's products within the preceding 12 months.
The distributors in the Company's network are encouraged to recruit
interested people to become new distributors of the Company's products. New
distributors are placed beneath the recruiting distributor in the "network" and
are referred to by the Company as being in that distributor's "downline"
organization. The Company's marketing plan is designed to provide incentives
for distributors to build, maintain and motivate an organization of recruited
distributors in their downline organization to maximize their earning
potential. Distributors earn income by purchasing the Company's products at
wholesale prices and reselling them at retail prices. Distributors also earn
bonuses on product purchases generated by the distributors in their downline
organization. See "Business--Network Marketing."
The Company's growth strategy is to expand its product offerings and its
network of independent distributors to increase sales. The Company believes
that the introduction of new products addresses the demand of its customers,
creates enthusiasm among distributors, serves as a promotional tool in selling
other products and attracts new distributors. Since 1995, the Company has
introduced nine new weight management and dietary supplement products to its
product line and has added through acquisition an additional 69 personal care
products and 45 weight management and dietary supplement products to its
product line. See "Risk Factors--Dependence on AM-300." In connection with the
MMI Acquisition, the CII Acquisition and the SNSI Asset Purchase, the Company
also acquired 1,690, 2,100 and 3,000 additional distributors, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General" and "Business--Growth Strategy."
3
<PAGE>
As of the date of this Prospectus, the Company's product line consists
primarily of (i) nine weight management products, (ii) 53 dietary supplement
products and (iii) 69 personal care products consisting primarily of cosmetic
and skin care products. See "Business--Products." The Company's products are
manufactured by various manufacturers, pursuant to formulations developed for
the Company, and are sold to the Company's independent distributors located in
all 50 states and the District of Columbia. The Company also sells its personal
care products to distributors in Greece who do not use the Company's network
marketing system. See "Business--Products."
The Company markets products that it believes will fulfill the needs of its
distributors and their customers, and assists its distributors in building
their own distributor organization. The Company offers individuals the
opportunity to start a home-based business without the significant start-up
costs and other difficulties usually associated with new business ventures. The
Company provides new product development, marketing tools, support services,
product warehousing, distribution and essential record-keeping functions for
its distributors. The Company also provides other support programs to its
distributors, including regular teleconferences, regional seminars, and product
and sales training.
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.
THE OFFERING
Securities Offered......
1,300,000 Units, each consisting of one share of
Common Stock and one Warrant. Prior to the Separation
Date, each share of Common Stock and each Warrant
will trade only as a Unit. On the Separation Date,
the Common Stock and Warrants comprising the Units
will separate and will trade only as separate
securities. Each Warrant initially entitles the
holder to purchase one share of Common Stock for an
exercise price equal to 120 percent of the offering
price of the Units. The Warrant exercise price will
be adjusted on the 20th day following the Separation
Date to 120 percent of the average of the daily
closing sale prices of the Common Stock as reported
on the Nasdaq SmallCap Market for the 20-day period,
subject to adjustment in certain events. Unless
earlier redeemed, the Warrants will be exercisable at
any time on and after the Separation Date until the
fifth anniversary of the date of this Prospectus. The
outstanding Warrants may be redeemed by the Company,
for $0.25 per Warrant, on not less than 30 days'
written notice, at any time after the Separation Date
and only thereafter in the event that the sale price
per share of Common Stock, as reported on the Nasdaq
SmallCap Market, closes at or above $ (200 percent
of the Warrant exercise price) for a period of 20
consecutive trading days. See "Description of
Securities--Common Stock" and "--Redeemable Common
Stock Purchase Warrants."
Securities outstanding:
Common Stock........... 2,680,081 shares as of the date of this Prospectus;
3,980,081 after completion of this offering, assuming
no exercise of the Over-Allotment Option, the
Company's 337,211 outstanding 1997-A Warrants,
1,356,982 outstanding stock options and other
warrants (see "Description of Securities--1997-A
Warrants" and "--Other Options and Warrants") or the
Representatives' Warrants (see "Underwriting"), and
does not include 1,125,000 shares of Common Stock
reserved for issuance pursuant to the Advantage
Marketing Systems, Inc. 1995 Stock Option Plan (the
"Stock
4
<PAGE>
Option Plan") under which options for the purchase of
146,750 shares have been granted and are outstanding
(see "Management--Stock Option Plan"), and additional
shares of Common Stock that may be issued in
connection with the SNSI Asset Purchase (see
"Management's Discussion and Analysis of Financial
Condition and Results of Operations--General--SNSI
Asset Purchase"). As of the date of this Prospectus,
the aggregate number of shares of Common Stock that
may be issued upon exercise of presently outstanding
stock options and warrants is 1,840,943. See "Risk
Factors--Outstanding Stock Options and Warrants."
1997-A Warrants........ 337,211 as of the date of this Prospectus.
Estimated net $5,612,100 (assuming a public offering price of $4.94
proceeds............... per Unit), after deduction of estimated offering
expenses of $809,900 including the Representatives'
non-accountable expense allowance. See "Use of
Proceeds" and "Underwriting."
Use of proceeds......... The net proceeds received by the Company from this
offering will be used to fund the Company's efforts
to expand sales and for general corporate purposes,
including working capital. The Company estimates that
it will use (i) $3.5 million of the net proceeds to
expand its U.S. distributor network and enhancement
of its marketing materials, and (ii) $1.5 million of
the net proceeds to develop new products and enhance
the packaging of its existing products. See "Use of
Proceeds."
Proposed Nasdaq
SmallCap symbols.......
Common Stock:........... AMSO
Warrants:............... AMSOW
1997-A Warrants:........ AMSOL
5
<PAGE>
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following table sets forth summary historical financial and operating
information of the Company for the years ended December 31, 1995 and 1996, and
the six months ended June 30, 1996 and 1997. See "Selected Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The financial and operating information for the
years ended December 31, 1995 and 1996 is derived from the audited consolidated
financial statements of the Company appearing elsewhere in this Prospectus. The
financial and operating information for the six months ended June 30, 1996 and
1997 is derived from the unaudited consolidated financial statements of the
Company appearing elsewhere in this Prospectus which, in the opinion of
management, include all adjustments (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 consolidated
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 data for any particular period are not necessarily
indicative of the results of operations for any future period.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------- -----------------------------
1995 1996 1996 1997
---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net sales............... $4,492,668 $6,129,916 $2,797,284 $ 4,736,408
Gross profit............ 1,341,927 1,598,338 795,224 1,234,110
Income from operations.. 247,171 302,258 179,243 182,183
Income before income
taxes.................. 249,708 325,544 181,639 196,313
Tax benefit (expense)... -- 499,613 -- (74,520)
Net income.............. $ 249,708 $ 825,157 $ 181,639 $ 121,793
Weighted average common
shares outstanding(1).. 2,662,681 3,770,874 3,363,000 3,296,474
Net income per common
share.................. $ 0.09 $ 0.29 $ 0.05 $ 0.04
OPERATING DATA:
Number of active dis-
tributors.............. 8,100 10,600 10,100 19,000
Sales per active dis-
tributor(2)............ $ 46 $ 48 $ 46 $ 42
Total number of products
offered(3)............. 16 28 24 131
CASH FLOW DATA:
Net cash provided (used)
by operating activi-
ties................... $ 360,845 $ 426,421 $ 319,193 $ (175,924)
Net cash provided (used)
by investing activi-
ties................... (70,388) (136,937) (200,427) (1,475,862)
Net cash provided (used)
by financing activi-
ties................... (178,370) (232,002) (49,054) 2,093,858
<CAPTION>
DECEMBER 31, JUNE 30, 1997
---------------------- -----------------------------
1995 1996 ACTUAL AS ADJUSTED(1)(4)
---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.......... $ 283,341 $ 655,243 $1,691,891 $ 7,303,991
Working capital (defi-
ciency)................ (170,734) 16,353 840,166 6,452,266
Total assets............ 532,996 1,790,341 5,001,895 10,613,995
Short-term debt......... 111,048 76,204 100,225 100,225
Long-term debt.......... 104,149 230,022 268,458 268,458
Stockholders' equity
(deficiency)........... (25,228) 921,429 3,881,712 9,493,812
</TABLE>
- --------
(1) Without giving effect to and assuming no exercise of the Over-Allotment
Option, the 337,211 outstanding 1997-A Warrants, 1,356,982 outstanding
stock options and other warrants (see "Description of Securities--1997-A
Warrants" and "--Other Options and Warrants") or the Representatives'
Warrants (see
6
<PAGE>
"Underwriting"), and does not include 1,125,000 shares of Common Stock
reserved for issuance under the Stock Option Plan of which options for the
purchase of 146,750 have been granted and are outstanding (see
"Management--Stock Option Plan"), and additional shares of Common Stock
that may be issued in connection with the SNSI Asset Purchase (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General--SNSI Asset Purchase").
(2) Monthly sales per active distributor for the period presented is computed
using a simple average.
(3) Exclusive of variations in product size, colors or similar variations of
the Company's basic product line.
(4) Adjusted to reflect the sale of the Units offered hereby, assuming the
receipt of the estimated net proceeds of $5,612,100.
SELECTED PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Set forth below is selected unaudited pro forma consolidated financial
information of the Company, assuming that the SNSI Asset Purchase 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 the
combined financial statements of Stay 'N Shape International, Inc., Now
International, Inc., Solution Products, Inc. and Nation of Winners, Inc., and
the unaudited pro forma consolidated financial information of the Company, all
presented elsewhere in this Prospectus. The unaudited pro forma consolidated
financial information is presented for illustrative purposes only and is not
necessarily indicative of the results of operations that would have been
achieved if the SNSI Asset Purchase 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 the Unaudited Pro Forma Consolidated Financial
Statements of Advantage Marketing Systems, Inc. (formerly AMS, Inc.) appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA COMBINED
-------------------------
FOR THE FOR THE SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales............................................. $8,506,938 $5,319,869
Gross profit.......................................... 2,477,549 1,504,322
Net Income............................................ 711,006 127,168
Weighted average common shares outstanding(1)......... 3,896,874 3,422,474
Net income per common share........................... $ 0.25 $ 0.04
</TABLE>
- -------
(1) Without giving effect to and assuming no exercise of the Over-Allotment
Option, the 337,211 outstanding 1997-A Warrants, 1,356,982 outstanding
stock options and other warrants (see "Description of Securities--1997-A
Warrants" and "--Other Options and Warrants") or the Representatives'
Warrants (see "Underwriting"), and does not include 1,125,000 shares of
Common Stock reserved for issuance under the Stock Option Plan of which
options for the purchase of 146,750 have been granted and are outstanding
(see "Management--Stock Option Plan"), and additional shares of Common
Stock that may be issued in connection with the SNSI Asset Purchase (see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--General--SNSI Asset Purchase").
7
<PAGE>
RISK FACTORS
Purchase of Units offered hereby involves a high degree of risk. In addition
to the other information contained in this Prospectus, the following factors
should be considered when evaluating the purchase of and investment in the
Units offered hereby.
RISKS RELATED TO THE COMPANY
DEPENDENCE ON DISTRIBUTORS. The Company's success and growth depend upon its
ability to attract, retain and motivate its network of independent
distributors who market the Company's products. Distributors are independent
contractors who purchase products directly from the Company for resale and
their own use. Distributors typically offer and sell the Company's products on
a part-time basis, and may engage in other business activities, including the
sale of products offered by competitors of the Company. Typically, the Company
has non-exclusive arrangements with its distributors which may be canceled at
will and contain no minimum purchase requirements on the part of the
distributor. While the Company encourages distributors to focus on the
purchase and sale of the Company's products, distributors may give higher
priority to other products, reducing their efforts devoted to marketing the
Company's products. Furthermore, the Company's ability to attract and retain
distributors could be negatively affected by adverse publicity relating to the
Company, its products or its operations. In addition, as a result of the
Company's network marketing system, the distributor downline organizations
headed by a relatively small number of key distributors are responsible for a
significant percentage of total sales. The loss of a significant number of
distributors, including any key distributors, for any reason, could adversely
affect the Company's sales and operating results, and could impair the
Company's ability to attract new distributors. There can be no assurance that
the Company's network marketing program will continue to be successful or that
the Company will be able to retain or expand its current network of
independent distributors. See "Business--Network Marketing."
GOVERNMENT REGULATION. The Company and its operations are subject to and
affected by laws, regulations, administrative determinations, court decisions
and similar constraints at the federal, state and local levels and the laws
and regulations of foreign countries in which the Company's products are or
may be sold. See "Business--Regulation."
Products. The formulation, manufacturing, packaging, labeling, advertising,
distribution and sale of the Company's products are subject to regulation by a
number of governmental agencies, the most active of which is the Food and Drug
Administration (the "FDA"), which regulates the Company's products under the
Federal Food, Drug, and Cosmetic Act (the "FDCA") and regulations promulgated
thereunder. The Company's products are also subject to regulation by the
Federal Trade Commission (the "FTC"), the Consumer Product Safety Commission
(the "CPSC"), the United States Department of Agriculture (the "USDA"), and
the Environmental Protection Agency (the "EPA"). The FDCA has been amended
several times with respect to dietary supplements, most recently by the
Nutrition Labeling and Education Act of 1990 (the "NLEA") and the Dietary
Supplement Health and Education Act of 1994 (the "DSHEA"). The Company's
products are generally classified and regulated as dietary supplements under
the FDCA, as amended, and therefore are not subject to pre-market approval by
the FDA. However, these products are subject to extensive labeling regulation
by the FDA and can be removed from the market if shown to be unsafe. Moreover,
if the FDA determines on the basis of labeling or advertising claims by the
Company, that the "intended use" of any of the Company's products is for the
diagnosis, cure, mitigation, treatment or prevention of disease, the FDA can
regulate those products as drugs and require pre-market clearance for safety
and effectiveness. In addition, if the FDA determines that claims have been
made regarding the effect of dietary supplements on the "structure or
function" of the body, such claims could result in the regulation of such
products as drugs.
On June 4, 1997, the FDA proposed a regulation which will, if adopted,
significantly limit the ability of the Company to sell dietary supplements
that contain ephedra, or ephedrine, a chemical constituent of ephedra,
including the Company's AM-300 product, which for the six months ended June
30, 1997, represented 45.2 percent of the Company's net sales. Ephedrine
products have been the subject of adverse publicity in the United
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States and other countries relating to alleged harmful effects, including the
deaths of several individuals. On April 10, 1996, the FDA issued a statement
warning consumers not to purchase or ingest dietary supplements containing
natural sources of ephedrine which are claimed to produce certain effects
(none of which are claimed for the Company's product). As of the date of this
Prospectus, it is not possible to predict whether the FDA will make any
material changes to the proposed regulations. Many states have also recently
become active in the regulation of dietary supplement products and may require
the Company to modify the labeling or formulation of certain products sold in
those states, and several states either regulate or are considering regulating
ephedrine-containing products as controlled substances or are prohibiting the
sale of such products by persons other than licensed pharmacists.
Consequently, there is a risk that the Company's AM-300 product, which
contains an ephedra herb concentrate containing naturally occurring ephedrine,
may become subject to further federal, state, local or foreign laws or
regulations. These regulations could require the Company to (i) withdraw or
reformulate its AM-300 product with reduced ephedrine levels or with a
substitute for ephedra or ephedrine, (ii) relabel its product with different
warnings or revised directions for use, or (iii) not make certain statements,
possibly including weight loss claims, with respect to any product containing
ephedra or ephedrine. While the Company believes that its AM-300 product could
be reformulated and relabeled, there can be no assurance in that regard or
that reformulation and relabeling would not have an adverse effect on sales of
such product or related products within the Company's product line even though
such products do not contain ephedra or ephedrine. See "--Dependence on AM-
300" and "Business--Regulation--Products."
Product Claims and Advertising. The FTC and certain states regulate
advertising, product claims, and other consumer matters, including advertising
of the Company's products. In the past several years the FTC has instituted
enforcement actions against several dietary supplement companies for false and
misleading advertising of certain products. In addition, the FTC has increased
its scrutiny of the use of testimonials, such as those utilized by the
Company. There can be no assurance that the FTC will not question the
Company's past or future advertising or other operations. Moreover, there can
be no assurance that a state will not interpret product claims presumptively
valid under federal law as illegal under that state's regulations.
Furthermore, the Company's distributors and customers of distributors may file
actions on their own behalf, as a class or otherwise, and may file complaints
with the FTC or state or local consumer affairs offices. These agencies may
take action on their own initiative or on a referral from distributors,
consumers or others, including actions resulting in entries of consent decrees
and the refund of amounts paid by the complaining distributor or consumer,
refunds to an entire class of distributors or customers, or other damages, as
well as changes in the Company's method of doing business. A complaint because
of a practice of one distributor, whether or not that practice was authorized
by the Company, could result in an order affecting some or all distributors in
a particular state, and an order in one state could influence courts or
government agencies in other states. Proceedings resulting from these
complaints may result in significant defense costs, settlement payments or
judgments and could have a material adverse effect on the Company. See
"Business--Regulation--Product Claims and Advertising."
Network Marketing System. The Company's network marketing system is subject
to a number of federal and state laws and regulations administered by the FTC
and various state agencies, 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. These regulations
are generally directed at ensuring that product sales are ultimately made to
consumers (as opposed to other distributors) and that advancement within the
network marketing system is based on sales of the Company's products, rather
than investment in the Company or other non-retail sales related criteria. The
compensation structure of a network marketing organization is very complex,
and compliance with all of the applicable regulations and laws is uncertain in
light of evolving interpretations of existing laws and regulations as well as
the enactment of new laws and regulations pertaining in general to network
marketing organizations and product distribution.
The Company has not obtained any no-action letters or advance rulings from
any federal or state securities regulator or other governmental agency
concerning the legality of the Company's operations, and the Company is not
relying on an opinion of counsel to such effect. The Company accordingly is
subject to the risk that its network marketing system could be found to be in
noncompliance with applicable laws and regulations, which
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could have a material adverse effect on the Company. See "Business--Network
Marketing." Such a decision could require the Company to modify its network
marketing system, result in negative publicity, or have a negative effect on
distributor morale and loyalty. In addition, the Company's network marketing
system will be subject to regulations in foreign markets administered by
foreign agencies should the Company expand its network marketing organization
into such markets.
CIVIL LITIGATION BY DISTRIBUTORS. The Company is subject to the risk of
challenges to the legality of its network marketing organization by the
Company's distributors, both individually and as a class, based on claims that
the Company's network marketing program is operated as an illegal "pyramid
scheme" in violation of federal securities laws, state unfair practice and
fraud laws and the Racketeer Influenced and Corrupt Organizations Act.
Generally, an illegal pyramid scheme is a marketing scheme that promotes
"inventory loading" (i.e., distributors' purchases of large quantities of non-
returnable inventory to obtain the full amount of compensation available under
the network marketing program) and does not encourage retail sales of the
products and services to ultimate consumers. In the event of challenges to the
legality of its network marketing organization by the Company's distributors,
there is no assurance that the Company would be able to demonstrate that its
network marketing policies were enforced and that the network marketing
program and distributors' compensation thereunder serve as safeguards to deter
inventory loading and encourage retail sales to the ultimate consumers.
Proceedings resulting from these claims could result in significant defense
costs, settlement payments or judgments, and could have a material adverse
effect on the Company. A competitor of the Company, Nutrition for Life
International, Inc. ("NFLI"), a multi-level seller of personal care and
nutritional supplements, recently announced that it had settled class action
litigation brought by distributors alleging fraud in connection with the
operation of a pyramid scheme. NFLI agreed to pay in excess of $3 million to
settle claims brought on behalf of its distributors and certain purchasers of
its stock.
The Company believes that its marketing program is significantly different
from the program allegedly promoted by NFLI and that the Company's marketing
program is not in violation of anti-pyramid laws or regulations. However,
there can be no assurance that claims similar to the claims brought against
NFLI and other multi-level marketing organizations will not be made against
the Company, or that the Company would prevail in the event any such claims
were made. Furthermore, even if the Company were successful in defending
against any such claims, the costs of conducting such a defense, both in
dollars spent and in management time, could be material and adversely affect
the Company's operating results and financial condition. In addition, the
negative publicity of such a suit could adversely affect the Company's sales
and ability to attract and retain distributors. See "Business--Regulation--
Network Marketing System."
DEPENDENCE ON AM-300. A significant portion of the Company's net sales has
been, and is expected to continue to be, dependent upon the Company's AM-300
product, which contains an ephedra herb concentrate containing naturally
occurring ephedrine. The Company's net sales of AM-300 represented
approximately 45.2 percent, 39.1 percent, and 31.5 percent of net sales for
the six months ended June 30, 1997 and for fiscal years 1996 and 1995,
respectively. In the event the recently proposed FDA regulation related to
products containing ephedra and ephedrine is adopted as proposed, or such
products become subject to further federal, state or local laws and
regulations, the Company could be required to (i) withdraw or reformulate its
AM-300 product, (ii) relabel such product, or (iii) not make certain
statements, possibly including weight management claims, with respect to such
product. Any such event could have a material adverse effect upon sales,
results of operations and the financial condition of the Company. See "--
Government Regulation--Products," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations" and
"Business--Products" and "--Regulation--Products."
COMPETITION. The Company is subject to significant competition in recruiting
distributors from other network marketing organizations, including those that
market weight management, dietary supplement and personal care products, as
well as other types of products. Most of the Company's competitors are
substantially larger, offer a greater variety of products and have
considerably greater financial resources than the Company. The Company's
ability to remain competitive depends, in significant part, on the Company's
success in recruiting and retaining distributors through an attractive bonus
plan and other incentives. There can be no assurance that the Company's
programs for recruitment and retention of distributors will be successful.
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In addition, the business of distributing and marketing weight management,
dietary supplements, and personal care products is highly competitive. This
market segment includes numerous manufacturers, other network marketing
companies, catalog companies, distributors, marketers, retailers and
physicians that actively compete for the business of consumers. The Company
competes with other providers of such products, especially retail outlets,
based upon convenience of purchase, price and immediate availability of the
purchased product. For the most part, the Company's competitors offering
comparable products are substantially larger and have available considerably
greater financial resources than the Company. The market is highly sensitive
to the introduction of new products or weight management plans (including
various prescription drugs) that may rapidly capture a significant share of
the market. As a result, the Company's ability to remain competitive depends
in part upon the successful introduction of new products at competitive
prices. See "Business--Competition."
PRODUCT INTRODUCTION, OBSOLESCENCE AND MARKETING. The introduction by the
Company or its competitors of new weight management, nutritional supplement
and personal care products offering increased functionality or enhanced
results may render existing products obsolete and unmarketable. Therefore, the
Company's ability to successfully introduce new products into the market on a
timely basis and achieve acceptable levels of sales has and will continue to
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
offered by the Company are important factors in attracting and maintaining the
Company's network of independent distributors, which consequently affects
demand for the Company's products. Although the Company seeks to introduce
additional products each year, the success of new products is subject to a
number of conditions, including customer acceptance. There can be no assurance
that the Company's efforts to develop innovative new products will be
successful, that customers will accept new products or that the Company will
obtain required regulatory approvals of such new products. In addition, no
assurance can be given that new products currently experiencing strong
popularity and rapid growth will maintain their sales over time. In the event
the Company is unable to successfully increase the product mix and maintain
competitive product replacements or enhancements in a timely manner in
response to the introduction of new products, competitive or otherwise, the
Company's sales and earnings will be materially and adversely affected. See
"Business--Products" and "--Network Marketing."
PRODUCT LIABILITY; LACK OF INSURANCE COVERAGE. The Company, like other
marketers of products that are intended to be ingested, faces an inherent risk
of exposure to product liability claims in the event that the use of its
products results in injury. The Company generally does not obtain contractual
indemnification from parties manufacturing its products. Furthermore, the
Company has agreed to indemnify Tinos, L.L.C., the licensor of Choc-Quilizer,
against any product liability claims arising from the Choc-Quilizer product
marketed by the Company, and the Company has agreed to indemnify Chemins
against claims arising from products manufactured by Chemins and marketed by
the Company. The Company also does not maintain any product liability
insurance coverage. Therefore, product liability claims against the Company
could result in material losses to the Company. See "Business--Products--
Product Procurement and Distribution."
DEPENDENCE ON KEY PERSONNEL. The Company's growth and future success depends
in part on the continued availability of certain key management personnel,
including John W. Hail, founder, Chief Executive Officer and Chairman of the
Board of the Company, and Roger P. Baresel, President, Chief Financial Officer
and a director of the Company. The Company does not maintain life insurance
covering the executive officers of the Company. The Company's continued growth
and profitability also depends in part on its ability to attract and retain
other management personnel. Although the Company has not had any difficulty to
date in attracting and retaining management personnel, there can be no
assurance that it will continue to be able to do so in the future. See
"Business--Network Marketing" and "Management--Directors and Executive
Officers."
MANAGEMENT OF GROWTH. The Company has experienced substantial growth in
sales, operations, personnel and the number of distributors, which has
challenged and will continue to challenge the Company's management and
operating resources. Continued growth will require the Company to increase its
sales and marketing, support, and administrative personnel, to increase
distributor training and support capabilities and to expand information
management systems. There can be no assurance that the Company will be able to
attract
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and retain the necessary personnel to accomplish its growth strategies or that
it will not experience constraints that will adversely affect its ability to
satisfactorily support its distributors. If the Company's management is unable
to manage growth effectively, the Company's sales and earnings could be
materially adversely affected. See "Business--Growth Strategy."
DEPENDENCE ON THIRD-PARTY MANUFACTURERS. Substantially all of the products
offered and distributed by the Company are manufactured by third-party
manufacturers pursuant to product formulations developed for the Company. The
Company does not have any written contracts with any of its suppliers or
manufacturers or commitments from any of its suppliers or manufacturers to
continue to sell products to the Company. A substantial portion of the
products purchased by the Company have been supplied by Chemins Company, Inc.
("Chemins") and Nittany Pharmaceutical Laboratories ("Nittany"), which are
privately held corporations with no affiliation with the Company. The Company
believes that its relationships with Chemins and Nittany are satisfactory;
however, there can be no assurance that Chemins and Nittany will continue to
be reliable suppliers to the Company. The Company does not have long-term
supply agreements with Chemins, Nittany or any other vendor; however, the
Company customarily enters into contracts with such third-party manufacturers
to establish the terms and conditions of product purchases. Accordingly, there
is a risk that any of the Company's suppliers or manufacturers could
discontinue selling their products to the Company for any reason. In the event
any of the third-party manufacturers were to become unable or unwilling to
continue to provide the products in required volumes, the Company would be
required to identify and obtain acceptable replacement manufacturing sources,
and no assurance can be given that any alternative manufacturing sources would
become available to the Company on a timely basis. See "Business--Products--
Product Procurement and Distribution."
EFFECT OF UNFAVORABLE PUBLICITY. The Company believes the weight management
and dietary supplement products market is affected by national media attention
regarding the consumption of such products. There can be no assurance that
future scientific research or publicity will not be unfavorable to the weight
management and dietary supplement markets or any particular product, or be
inconsistent with earlier favorable research or publicity. Future reports of
research that are perceived as less favorable or that question earlier
research could have a material adverse effect on the operations of the
Company. Because of the Company's dependence upon consumer perceptions,
adverse publicity associated with illness or other adverse effects resulting
from the consumption of the Company's products, or any similar products
distributed by other companies, could have a material adverse effect on the
Company. Such adverse publicity could arise even if the adverse effects
associated with such products result from failure to consume such products as
directed. In addition, the Company may not be able to counter the effects of
negative publicity concerning the efficacy of its products.
ABSENCE OF CLINICAL STUDIES. Although many of the ingredients in the
Company's products are vitamins, minerals, herbs and other substances for
which there is a long history of human consumption, some of the Company's
products contain ingredients, such as chromium picolinate, shark cartilage,
proanthocyanidins, citrin and colloidal minerals, as to which there is little
history of human consumption. Accordingly, no assurance can be given that the
Company's products, even when used as directed, will have the effects
intended. Although the Company takes steps to ensure that the formulation and
production of its products are safe when consumed as directed, generally the
Company has not sponsored clinical studies on the long-term effect of human
consumption. See "--Effect of Unfavorable Publicity," and "--Product
Liability," and "Business--Regulation--Products."
NON-SPECIFIC ACQUISITION STRATEGY. The Company's business plan includes
expansion and diversification of the Company's network marketing organization
and products through the acquisition of companies engaged in network
marketing. The amount of net proceeds of this offering, if any, expended with
respect to an acquisition will be determined by the Board of Directors of the
Company. In addition to financial demands, the Company's acquisitions may have
adverse consequences, including the diversion of management's attention to the
assimilation of the acquired companies or assets; adverse effects on the
Company's results of operations, such as the amortization of acquired
intangible assets; and the possibility that the acquired company or assets
will not contribute to the Company's business, cash flows and profitability as
expected. See "Business--Growth Strategy."
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RISKS OF THE OFFERING
STOCK PRICE, SALES AND EARNINGS VOLATILITY. Although the Company's Common
Stock is currently traded in the over-the-counter market and on the Boston
Stock Exchange, there is no assurance that an active trading market will
develop or be sustained. See "Price Range of Common Stock and Dividends." The
Company's sales and earnings and, consequently, the market price of the Common
Stock (as well as that of the Warrants, if a market develops) may be subject
to significant potential volatility based upon, among other things, the
adverse effect of non-compliance with applicable governmental regulations; the
negative effect of changes in or interpretations of regulations that may limit
or restrict the sale of certain of the Company's products; the operation of
its network marketing organization; the expansion of its operations into new
markets; the recruitment and retention of distributors; the inability of the
Company to introduce new products or the introduction of new products by the
Company's competitors; general conditions in the weight management, dietary
supplement, and personal care products industries; and consumer perceptions of
the Company's products and operations. In particular, because the Company's
products are ingested by consumers or applied to their bodies, the Company is
highly dependent upon consumers' perception of the safety and quality of the
products marketed by the Company. As a result, substantial negative publicity
concerning one or more of the Company's products, especially the weight
management and dietary supplement products, could adversely affect the
Company's sales and earnings as well as the market price of the Common Stock.
Moreover, the stock market has from time to time experienced extreme price
and volume fluctuations which have particularly affected the market prices for
emerging growth companies and which often have been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock and the Warrants.
Volatility in the market price of a company's securities sometimes results in
the filing of class action lawsuits seeking compensation for alleged
securities law violations. There can be no assurance that such litigation will
not occur in the future against the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect on the Company's business and
results of operations. Any adverse determination in such litigation also could
subject the Company to significant liabilities.
SECONDARY TRADING MARKET; DETERMINATION OF OFFERING PRICE. Although the
Company is a publicly held corporation, historically the market for the Common
Stock has been limited and subject to low trading volume. There can be no
assurance that an active trading market will develop or be maintained
following this offering. The public offering price of the Units and the
exercise price of the Warrants were determined by negotiation among the
Representatives and the Company. Accordingly, the offering price of the Units
set forth on the cover page of this Prospectus may not reflect the actual
value of the Common Stock and Warrants underlying the Units. See
"Underwriting."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE THE
WARRANTS. Purchasers of Units will be able to exercise the Warrants included
therein only if a current prospectus relating to the Common Stock underlying
such Warrants is then in effect, and only if such Common Stock is qualified
for sale or exempt from qualification under applicable state securities laws
of the states in which such holders of the Warrants reside. Although the
Company has undertaken to maintain the effectiveness of a current prospectus
covering the Common Stock underlying the Warrants, there can be no assurance
that the Company will be able to do so. The value of the Warrants may be
impaired if a current prospectus covering the Common Stock issuable upon
exercise of the Warrants is not kept effective, or if such Common Stock is not
qualified or exempt from qualification in the states in which the holders of
the Warrants reside.
The Warrants included as part of the Units will be separately transferrable
upon issuance. Although the Units will not be sold to purchasers in
jurisdictions in which the Units are not registered or otherwise qualified for
sale, purchasers may buy Warrants in the market in, or may move to,
jurisdictions in which the shares underlying the Warrants are not so
registered or qualified during the period that the Warrants are exercisable.
In this event, the Company would be unable to issue shares to those persons
desiring to exercise their Warrants, and such persons would have no choice but
to attempt to sell the Warrants in a jurisdiction where such sale is
permissible or allow them to expire unexercised. See "Description of
Securities--Redeemable Common Stock Purchase Warrants."
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REDEMPTION OF WARRANTS. As described in greater detail elsewhere in this
Prospectus, the outstanding Warrants may be redeemed by the Company, for $0.25
per Warrant, on not less than 30 days' written notice, at any time after the
Separation Date and thereafter only in the event that the bid price of Common
Stock as reported on the Nasdaq SmallCap Market closes at or above 200 percent
of the Warrant exercise price during a period of 20 consecutive trading days.
In the event the Company exercises the right to redeem the Warrants, a holder
will be forced either to exercise the Warrant or accept the redemption price.
See "Description of Securities--Redeemable Common Stock Purchase Warrants."
ACCUMULATED DEFICIT. At June 30, 1997, the Company had an accumulated
deficit of $938,372 representing accumulated losses from operations prior to
1994. See "Selected Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." There is no
assurance that future operating results will eliminate such deficit or that
additional losses from operations will not be sustained by the Company,
resulting in further increase of such accumulated deficit.
DELISTING OF COMMON STOCK AND WARRANTS; PENNY STOCK TRADING RULES. The Units
and Common Stock and, after the Separation Date, the Warrants will be included
on the Nasdaq SmallCap Market, and the Common Stock is listed on the Boston
Stock Exchange. The continued inclusion and listing of the Company's
securities on the Nasdaq SmallCap Market and the Boston Stock Exchange will be
or is subject to certain conditions, generally including the Common Stock
having a certain minimum sale price per share, the Company having certain
minimum levels of assets, stockholders' equity, number of shareholders, and
number of outstanding publicly held shares of Common Stock. In the event such
minimum requirements for inclusion are not met, the Units, Common Stock and
Warrants will be delisted and will no longer be included on the Nasdaq
SmallCap Market or the Boston Stock Exchange. The Units, Common Stock and
Warrants would then be traded in the over-the-counter market and may become
subject to the "penny stock" trading rules. See "Dividend Policy and 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 bid and asked quotations of securities
traded in the over-the-counter market may not be reliable.
PENNY STOCK TRADING RULES. In the event the Units, Common Stock and Warrants
are delisted and no longer included on the Nasdaq SmallCap Market or in the
case of the Common Stock listed on the Boston Stock Exchange, the Units,
Common Stock and Warrants may become subject to the "penny stock" trading
rules. The penny stock trading rules impose additional duties and
responsibilities upon broker-dealers and salespersons effecting purchase and
sale transactions in common stock and other equity securities, 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. 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. In the event the Company's equity
securities become subject to the penny stock trading rules, such rules may
materially limit or restrict the ability of a holder to resell such equity
securities, and the liquidity typically associated with other publicly traded
equity securities may not exist. See "Price Range of Common Stock and Dividend
Policy--Penny Stock Trading Rules."
OUTSTANDING STOCK OPTIONS AND WARRANTS. As of the date of this Prospectus,
there are 337,211 outstanding 1997-A Warrants, each exercisable to purchase
one share of Common Stock at an exercise price of $12.00 on or before January
31, 1999, and 1,503,732 outstanding stock options and other warrants (of which
674,500 are held by current management of the Company and which will be
subject to two-year lock-up agreements with the Representatives), each
exercisable to purchase one share of Common Stock at an exercise price of
$1.60 to $6.00 per share during periods that expire in December 1997 through
May 2007. Assuming and giving effect to the exercise of the outstanding
1,503,732 stock options and warrants (other than the 1997-A Warrants), new
investors purchasing Units in this offering would experience immediate
dilution, on a net tangible book value basis, of $3.00 per share of Common
Stock. During the term of the outstanding 1997-A Warrants, stock options and
other warrants, the holders are given the opportunity to profit from a rise in
the market price
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of the Common Stock. Exercise of such securities may dilute the net book value
per share of outstanding Common Stock at the time of exercise and may be
dilutive on an earnings per share basis, which may adversely affect the
trading price of the Common Stock and, consequently, the Warrants. The
existence of the 1997-A Warrants, stock options and other warrants may
adversely affect the terms on which the Company may obtain additional equity
financing. Furthermore, the holders are likely to exercise the 1997-A
Warrants, stock options or other 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--1997-A Warrants" and "--Other Stock Options and
Warrants," "Management--Stock Option Plan" and "Shares Eligible for Future
Sale--Lock-Up Agreements."
COMMON STOCK ELIGIBLE FOR FUTURE SALE. Sales or availability for sale of
substantial amounts of shares of the Company's Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock and Warrants and, consequently, the Company's ability to raise
additional capital. Immediately after completion of this offering, the Company
will have 3,680,081 shares of Common Stock outstanding, of which 3,119,019
shares will be eligible for sale without regard to volume or other limitations
pursuant to Rule 144 ("Rule 144") promulgated by the Commission under the 1933
Act, except to the extent held by "affiliates" of the Company as that term is
defined under Rule 144. Pursuant to agreements with the Representatives, the
Company's executive officers and directors, who hold in the aggregate 374,682
shares of Common Stock and options and warrants for the purchase of 674,500
shares of Common Stock, have agreed not to sell or otherwise dispose of any
shares of currently held Common Stock for a period of one year, or options,
warrants or shares of Common Stock and all other securities issuable upon
exercise of such options or warrants for a period of two years, from the date
of this Prospectus. See "Security Ownership of Certain Beneficial Owners and
Management" and "Shares Eligible for Future Sale--Lock-Up Agreements."
As of the date of this Prospectus, there are 186,929 shares of the Company's
outstanding Common Stock which are "restricted securities" that are not
subject to lock-up agreements with the Representatives and may in the future
be sold in compliance with Rule 144. Commencing one year following the date of
this Prospectus, 561,984 shares of Common Stock will be eligible for resale
into the open public market in reliance on and subject to Rule 144. See
"Shares Eligible for Future Sale."
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. The Certificate of Incorporation authorizes the issuance of
Preferred Stock in classes or series having voting, redemption and conversion
rights and other rights as determined by the Board of Directors. The issuance
of such Preferred Stock may have the effect of preventing a merger, tender
offer or other takeover attempt that the Company's Board of Directors opposes.
The Company's directors are elected for staggered 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.
The Company is subject to the anti-takeover provisions of the Oklahoma General
Corporation Act, which 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."
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USE OF PROCEEDS
The net proceeds to the Company from sale of the Units pursuant to this
offering are estimated to be approximately $5,612,100 ($6,479,070 if the Over-
Allotment Option is exercised in full), at an assumed public offering price of
$4.94 per Unit. The Company anticipates that it will use approximately $3.5
million (62.4 percent) of the net proceeds to expand its U.S. distributor
network and enhance its marketing materials, and approximately $1.5 million
(26.7 percent) of the net proceeds to expand and enhance its product line and
product packaging. The amounts actually expended for each purpose may vary
significantly. The Company anticipates that the net proceeds of this offering
(without giving effect to exercise of the Over-Allotment Option) will be
expended as follows:
<TABLE>
<CAPTION>
USE OF ESTIMATED NET PROCEEDS AMOUNT PERCENT
----------------------------- ---------- -------
<S> <C> <C>
Expansion of the Company's U.S. distributor network (See
"Business--Network Marketing) by:
enhancing its marketing efforts and improving its
marketing materials.................................. $2,000,000 35.6%
increasing the number of Company-sponsored training
and motivational events.............................. 500,000 8.9%
hiring additional distributor support personnel....... 100,000 1.8%
establishing more convenient Regional Success Centers
in targeted geographical markets..................... 500,000 8.9%
investing in the Company's computerized information
management system.................................... 400,000 7.1%
Expansion and enhancement of the Company's product line
(See "Business--Products") by:
developing new products............................... 750,000 13.4%
enhancing the packaging of its existing products...... 250,000 4.4%
maintaining higher inventory levels at the Company's
Regional Success Centers............................. 500,000 8.9%
General corporate purposes, including working capital
and general administrative overhead.................... 612,100 11.0%
Total estimated net proceeds of this offering........... 5,612,100 100.0%
</TABLE>
Although the Company's business plan also includes expansion and
diversification of the Company's network marketing organization and products
through the acquisition of businesses engaged in network marketing, there are
presently no specific plans, negotiations, agreements or understandings with
respect to any material acquisition. See "Business--Growth Strategy."
The Company believes that the net proceeds of this offering, combined with
cash and cash equivalents, will be sufficient to fund budgeted capital and
operating requirements of the Company for at least the next 12 months and to
permit the Company to implement its growth strategy. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." The Company does not intend to use any of
the net proceeds to discharge existing indebtedness. Pending use of the net
proceeds, they will be invested by the Company in federally insured or
guaranteed securities.
16
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded in the over-the-counter market under the symbol
"AMSO" and on the Boston Stock Exchange under the symbol "AMM." 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-for-eight reverse
split of the outstanding Common Stock 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>
COMMON STOCK
CLOSING BID PRICES
------------------
HIGH LOW
--------- --------
<S> <C> <C>
1997:
First Quarter Ended March 31.............................. $ 6.25 $ 5.50
Second Quarter Ended June 30.............................. 8.38 5.69
Third Quarter Ended September 30.......................... 8.75 5.00
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
Fourth Quarter Ended December 31.......................... 6.50 5.00
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
</TABLE>
On October 31, 1997, the closing bid and asked prices, as quoted by the
National Quotation Bureau, Incorporated, of the Common Stock were $4.75 and
$4.88, respectively. As of the date of this Prospectus, there were
approximately 1,800 holders of the Common Stock.
DIVIDEND POLICY
The Company's policy is to retain 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--Stock Price, Sales and Earnings Volatility," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
PENNY STOCK TRADING RULES
The Units, Common Stock and Warrants will be included on the Nasdaq SmallCap
Market, and the Common Stock is listed on the Boston Stock Exchange. The
continued inclusion or listing of the Company's securities on the Nasdaq
SmallCap Market and the Boston Stock Exchange will be subject to certain
conditions, generally including the Common Stock having a certain minimum sale
price per share, the Company having certain minimum levels of assets,
stockholders' equity, number of shareholders, and number of outstanding
publicly held shares of Common Stock. In the event requirements for continued
inclusion or listing are not met, the Units, Common Stock and Warrants will be
delisted and no longer included on the Nasdaq SmallCap Market and the Boston
Stock Exchange, would then be traded in the over-the-counter market and may
become subject to the "penny stock" trading rules.
The penny stock trading rules impose additional duties and responsibilities
upon broker-dealers recommending the purchase of a penny stock (by a purchaser
that is not an accredited investor as defined by Rule 501(a) promulgated under
the Securities Act of 1933, as amended) or the sale of a penny stock. Among
17
<PAGE>
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., having had an account with
the dealer for at least one year or the dealer having effected for the
purchaser 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 the 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.
Compliance with the penny stock trading rules may affect the ability to
resell the Units, Common Stock or 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. Therefore, the holder of penny stocks 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 totally 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 penny stocks may be unable to sell such
securities. In addition, 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 securities traded in the over-the-counter market may not be
reliable.
18
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1997, the actual
capitalization of the Company without giving effect to the agreement of the
Company to issue any additional shares of Common Stock or to make additional
payments in connection with the SNSI Asset Purchase (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
General--SNSI Asset Purchase"), and as adjusted to reflect the sale of
1,300,000 Units offered by the Company hereby (at an assumed public offering
price of $4.94 per Unit). 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 Consolidated Financial
Statements of Advantage Marketing Systems, Inc. (formerly AMS, Inc.).
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------
AS ADJUSTED
ACTUAL FOR OFFERING
---------- ------------
<S> <C> <C>
Current portion of long-term debt..................... $ 100,225 $ 100,225
Long-term debt, net of current portion................ 268,458 268,458
Stockholders' equity:
Common Stock, $.0001 par value, 495,000,000 shares
authorized; 2,680,081 shares issued and outstanding;
3,980,081 shares issued and outstanding as
adjusted............................................ 268 398
Paid-in capital in excess of par, common stock(1)..... 4,819,816 10,431,786
Retained earnings (deficit)........................... (938,372) (938,372)
---------- -----------
Total stockholders' equity.......................... 3,881,712 9,493,812
---------- -----------
Total capitalization.............................. $4,250,395 $ 9,862,495
========== ===========
</TABLE>
- --------
(1) Without giving effect to and assuming no exercise of the Over-Allotment
Option, the 337,211 outstanding 1997-A Warrants, 1,356,982 outstanding
stock options and other warrants (see "Description of Securities--1997-A
Warrants" and "--Options and Other Warrants") or the Representatives'
Warrants (see "Underwriting"), and does not include 1,125,000 shares of
Common Stock reserved for issuance under the Stock Option Plan of which
options for the purchase of 146,750 shares have been granted and are
outstanding (see "Management--Stock Option Plan"), and additional shares
of Common Stock that may be issued in connection with the SNSI Asset
Purchase (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--General--SNSI Asset Purchase").
19
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial information is qualified by reference to,
and should be read in conjunction with, the consolidated 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 in this Prospectus. 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--Stock Price, Sales and Earnings Volatility." The selected financial
information as of and for the years ended December 31, 1995 and 1996 is
derived from the audited consolidated 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 six
months ended June 30, 1996 and 1997 is derived from the unaudited consolidated
financial statements of the Company, which financial statements are contained
elsewhere in this Prospectus. In the opinion of management of the Company, the
unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such information.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------- -----------------------
1995 1996 1996 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DA-
TA:
Net sales.................... $4,492,668 $6,129,916 $2,797,284 $ 4,736,408
Cost of sales................ 3,150,741 4,531,578 2,002,060 3,502,298
---------- ---------- ---------- -----------
Gross profit............... 1,341,927 1,598,338 795,224 1,234,110
Marketing, distribution and
administrative expenses..... 1,094,756 1,296,080 615,981 1,051,927
---------- ---------- ---------- -----------
Income from operations..... 247,171 302,258 179,243 182,183
Other income (expense):
Interest, net................ (22,998) (10,538) (7,863) 1,007
Other income................. 25,535 33,824 10,259 13,123
---------- ---------- ---------- -----------
Total other income (ex-
pense).................... 2,537 23,286 2,396 14,130
---------- ---------- ---------- -----------
Income before taxes.......... 249,708 325,544 181,639 196,313
Tax benefit (expense)........ -- 499,613 -- (74,520)
---------- ---------- ---------- -----------
Net income................... $ 249,708 $ 825,157 $ 181,639 $ 121,793
========== ========== ========== ===========
Weighted average common
shares outstanding(1)....... 2,662,681 3,770,874 3,363,000 3,296,474
========== ========== ========== ===========
Net income per common share.. $ 0.09 $ 0.29 $ 0.05 $ 0.04
========== ========== ========== ===========
OPERATING DATA:
Number of active distribu-
tors........................ 8,100 10,600 10,100 19,000
Sales per active distribu-
tor(2)...................... $ 46 $ 48 $ 46 $ 42
Total number of products of-
fered(3).................... 16 28 24 131
CASH FLOW DATA:
Net cash provided (used) by
operating activities........ $ 360,845 $ 426,421 $ 319,193 $ (175,924)
Net cash provided (used) in
investing activities........ (70,388) (136,937) (200,427) (1,475,862)
Net cash provided (used) in
financing activities........ (178,370) (232,002) (49,054) 2,093,858
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1997
------------------- ----------------------------
1995 1996 ACTUAL AS ADJUSTED(1)(4)
-------- --------- ---------- -----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets............... $283,341 $ 655,243 $1,691,891 $7,303,991
Working capital (deficien-
cy)......................... (170,734) 16,353 840,166 6,452,266
Total assets................. 532,996 1,790,341 5,001,895 10,613,995
Short-term debt.............. 111,048 76,204 100,225 100,225
Long-term debt............... 104,149 230,022 268,458 268,458
Stockholders' equity (defi-
ciency)..................... (25,228) 921,429 3,881,712 9,493,812
</TABLE>
- --------
(1) Without giving effect to and assuming no exercise of the Over-Allotment
Option, the 337,211 outstanding 1997-A Warrants, 1,356,982 outstanding
stock options and other warrants (see "Description of Securities-- 1997-A
Warrants" and "--Options and Other Warrants") or the Representative's
Warrants (see "Underwriting"), and does not include 1,125,000 shares of
Common Stock reserved for issuance under the Stock Option Plan of which
options for the purchase of 146,750 shares have been granted and are
outstanding (see "Management--Stock Option Plan"), and additional shares
of Common Stock that may be issued in connection with the SNSI Asset
Purchase (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--General--SNSI Asset Purchase").
(2) Monthly sales per active distributor for the period presented is computed
using a simple average.
(3) Exclusive of variations in product size, colors or similar variations of
the Company's basic product line.
(4) Adjusted to reflect the sale of the Units offered hereby, assuming the
receipt of the estimated net proceeds of $5,612,100.
21
<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."
GENERAL
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
"Reincorporation Merger"). Prior to the Reincorporation Merger, all operations
of AMS (Delaware) were conducted solely by the Company. See "Business--Company
History."
The Company's business has been significantly affected by the recently
completed MMI Acquisition, the CII Acquisition and the SNSI Asset Purchase. As
a result of these acquisitions, the Company acquired 6,790 distributors and
added 114 products to its product line.
MMI Acquisition. Effective May 31, 1996, the Company acquired all of the
outstanding capital stock of MMI, and MMI became a wholly owned subsidiary of
the Company. MMI was a network marketer of various third-party manufactured
nutritional supplement products. In connection with the MMI Acquisition, the
Company issued to the shareholders of MMI 20,000 shares of Common Stock. The
Company acquired one product and 1,690 additional distributors as a result of
the MMI Acquisition.
CII Acquisition. Effective January 31, 1997, the Company acquired all of the
issued and outstanding capital stock of CII, and CII became a wholly owned
subsidiary of the Company. CII was a network marketer of various third-party
manufactured cosmetics, skin care and hair care products. In connection with
the CII Acquisition, the Company issued 6,482 shares of Common Stock to the
shareholders of CII at closing and issued an additional 7,518 shares of Common
Stock to the shareholders of CII on March 31, 1997, after determination of
certain liabilities. The Company acquired 68 personal care and six dietary
supplement products and 2,100 additional distributors as a result of the CII
Acquisition.
SNSI Asset Purchase. The Company purchased all of the assets, including the
network marketing organizations, of Stay "N Shape International, Inc.,
Solution Products International, Inc., Nation of Winners, Inc., and Now
International, Inc. pursuant to an Asset Purchase Agreement dated April 16,
1997. In connection with the SNSI Asset Purchase, the Company paid cash of
$1,174,441 and issued 125,984 shares of Common Stock at closing and agreed to
either issue additional shares of the Company's Common Stock having an
aggregate market value equal to, or make a cash payment of, or combination
thereof, $750,000 and $1,050,000 on or before June 29, 1998, and May 30, 1999,
respectively, subject to reduction for variance from specified sales targets.
See "--Liquidity and Capital Resources." As a result of the SNSI Asset
Purchase, the Company acquired 38 weight management and dietary supplement
products and one personal care product, and 3,000 additional distributors.
The following discussion and analysis of financial condition and results of
operations of the Company are the consolidated results of operations of AMS
Delaware, the predecessor of the Company, and the Company prior to and
following the Reincorporation Merger. In addition, the following discussion
and analysis presents the consolidated results of operations of the Company
and MMI since completion of the MMI Acquisition on May 31, 1996, and of the
Company and CII since completion of the CII Acquisition on January 31, 1997,
and gives effect to the SNSI Asset Purchase, since its consummation on April
16, 1997.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, selected
results of operations for (i) the fiscal years ended December 31, 1995 and
1996, which are derived from the audited consolidated financial statements of
the Company, and (ii) the six months ended June 30, 1996 and 1997, which are
derived from the unaudited
22
<PAGE>
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 YEARS ENDED DECEMBER 31, FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------- ---------------------------------------
1995 1996 1996 1997
------------------- ------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $4,492,668 100.0% $6,129,916 100.0% $2,797,284 100.0% $4,736,408 100.0%
Cost of sales........... 3,150,741 70.1 4,531,578 73.9 2,002,060 71.6 3,502,298 73.9
---------- ----- ---------- ----- ---------- ----- ---------- -----
Gross profit........... 1,341,927 29.9 1,598,338 26.1 795,224 28.4 1,234,110 26.1
Marketing, distribution
and administrative
expenses............... 1,094,756 24.4 1,296,080 21.2 615,981 22.0 1,051,927 22.2
---------- ----- ---------- ----- ---------- ----- ---------- -----
Income from operations.. 247,171 5.5 302,258 4.9 179,243 6.4 182,183 3.8
Other income (expense):
Interest, net........... (22,998) (.6) (10,538) (.2) (7,863) (.3) 1,007 --
Other income............ 25,535 .7 33,824 .6 10,259 .4 13,123 .3
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total other income
(expense).............. 2,537 .1 23,286 .4 2,396 .1 14,130 .3
---------- ----- ---------- ----- ---------- ----- ---------- -----
Income before income
taxes.................. 249,708 5.6 325,544 5.3 181,639 6.5 196,313 4.1
Tax benefit (expense)... -- -- 499,613 8.2 -- -- (74,520) (1.6)
---------- ----- ---------- ----- ---------- ----- ---------- -----
Net income.............. $ 249,708 5.6% $ 825,157 13.5% $ 181,639 6.5% $ 121,793 2.5%
========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
During 1995, 1996 and the six months ended June 30, 1997, the Company
experienced increases in net sales and income before income taxes compared to
the preceding year or period. The increases were principally the result of
expansion of the Company's network of independent distributors and additions
to the Company's product line of weight management, dietary supplement and
personal care products. The Company expects to continue to expand its network
of independent distributors, which may result in increased sales volume.
However, there is no assurance that increased sales volume will be achieved
through expansion of the Company's network of independent distributors, or
that, if sales volume increases, the Company will realize increased
profitability. The Company estimated that during the three months ended
September 30, 1997, compared to the same period in 1996, net sales increased
to approximately $2,850,000 from $1,640,501; however, net income before income
taxes decreased to approximately $17,000 from $106,015 due to the continued
special promotions designed to expand the Company's distributor network.
Comparison of Six-Month Periods Ended June 30, 1997 and 1996
Net sales during the six months ended June 30, 1997 increased by $1,939,000,
or 69.3 percent, to $4,736,000 from $2,797,000 during the six months ended
June 30, 1996. The increase was principally attributable to expansion of the
Company's network of independent distributors and increased sales of the
Company's weight management, dietary supplement and personal care products.
Through the MMI Acquisition (which was consummated on May 31, 1996), CII
Acquisition (which was consummated on January 31, 1997) and the SNSI Asset
Purchase (which was consummated on April 16, 1997), the Company added 114
products to its product line and acquired 6,790 distributors. The distributors
acquired in connection with the MMI Acquisition, the CII Acquisition and the
SNSI Asset Purchase contributed $216,000, $257,000 and $361,000, respectively,
to the increase in net sales between the two periods. During the six months
ended June 30, 1997, the Company made aggregate net sales of $4,651,000 to
13,100 active distributors, compared to aggregate sales during the same period
in 1996 of $2,422,000 to 6,000 active distributors. At June 30, 1997, the
Company had approximately 19,000 "active" distributors compared to
approximately 10,100 at June 30, 1996. A distributor is considered to be
"active" if he or she has made a product purchase of $60 or more from the
Company within the previous 12 months. Sales per distributor decreased from
$46 to $42 for the six months ended June 30, 1997, compared to the same period
in 1996. This decrease was due to the increase in the number of active
distributors as a result of the CII Acquisition and SNSI Asset Purchase, which
new distributors did not contribute sales during the full six months ended
June 30, 1997.
Cost of sales during the six months ended June 30, 1997, increased by
$1,500,200, or 74.9 percent, to $3,502,200 from $2,002,000 during the same
period in 1996. This increase was attributable to an increase of (i)
23
<PAGE>
$977,800 in distributor bonuses due to special promotions designed to expand
the Company's distributor network, (ii) $392,800 in the cost of products sold,
and (iii) $129,600 in shipping costs. Total cost of sales, as a percentage of
net sales, increased to 73.9 percent during the six months ended June 30,
1997, from 71.6 percent during the same period in 1996 due to an increase in
distributor bonuses as a percentage of net sales to 46.5 percent from 43.7
percent, offset by a decrease in cost of products sold to 23.3 percent of net
sales from 25.5 percent, due to price reductions obtained from manufacturers
of the Company's products. During periods of growth, it is anticipated that
the Company will from time to time offer promotions to distributors to
increase sales and their income, which, if successful, will result in
increases in distributor bonuses and temporary increases in cost of sales.
The Company's gross profit increased $439,000, or 55.2 percent, to
$1,234,000 for the six months ended June 30, 1997 from $795,000 for the same
period in 1996. Gross profit decreased as a percentage of net sales to 26.1
percent of net sales from 28.4 percent. The decrease in the Company's gross
profit margin resulted from the increase in distributor bonuses during the
more recent period which increased at a faster rate than net sales.
Marketing, distribution and administrative expenses increased $436,000, or
70.8 percent, to $1,052,000 during the six months ended June 30, 1997, from
$616,000 during the same period in 1996. This increase was attributable to
expansion of the Company's administrative infrastructure necessary to support
increased levels of sales. Payroll and employee costs increased by $255,000
during the six months ended June 30, 1997, as compared to the same period in
1996, due to the increase in full-time employees to 31 during the last quarter
of 1996, as compared to 16 full-time employees during the first quarter of
1996. The balance of the increase in marketing, distribution and
administrative expenses resulted from the higher level of activity and
corresponding increases in variable costs, such as postage, telephone, and
supplies.
Income before taxes increased $14,700, or 8.1 percent, to $196,300 during
the six months ended June 30, 1997, from $181,600 during the same period in
1996. Income before taxes as a percentage of net sales decreased to 4.1
percent during the six months ended June 30, 1997, from 6.5 percent during the
same period in 1996, primarily as a result of the decline in the Company's
gross profit margin. Income taxes were $74,520 during the six months ended
June 30, 1997, while during the same period of 1996 there was no income tax
expense. The Company recognized a one-time tax benefit of approximately
$500,000 in 1996 primarily related to the reversal of a deferred tax valuation
allowance related to the expected future tax benefits to be realized from
operating loss carryforwards. As a result, the Company has begun reporting
income tax expense for financial reporting purposes during 1997.
Net income decreased $59,800, or 32.9 percent, to $121,800 during the six
months ended June 30, 1997, from $181,600 during the same period in 1996. This
decrease in net income was primarily the result of the decrease in the
Company's gross profit margin combined with the recording of income tax
expense for financial reporting purposes during the six months ended June 30,
1997. Net income as a percentage of net sales decreased to 2.5 percent during
the six months ended June 30, 1997, from 6.5 percent during the same period in
1996.
Comparison of 1995 and 1996
During the year ended December 31, 1996, net sales increased $1,637,000, or
36.4 percent, to $6,130,000 from $4,493,000 during the year ended December 31,
1995. The increase was principally attributable to expansion of the Company's
network of independent distributors and increased sales of the Company's
weight management, dietary supplement and personal care products. Additional
net sales by the acquired MMI distributors of $296,000 also contributed to the
increase. During 1995, the Company made aggregate sales of $4,064,000 to 5,800
active distributors, compared to aggregate sales in 1996 of $5,785,000 to
9,000 active distributors. Sales per distributor increased from $46 for 1995
to $48 for 1996.
During 1996, cost of sales increased $1,381,000, or 43.8 percent, to
$4,532,000 in 1996 from $3,151,000 during 1995. This increase was attributable
to an increase of (i) $866,000 in distributor bonuses due to special
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promotions designed to expand the Company's distributor network, (ii) $436,000
in cost of products sold, and (iii) $79,000 in shipping costs. Cost of sales,
as a percentage of net sales, increased to 73.9 percent during 1996 from 70.1
percent during 1995, due to an increase in distributor bonuses as a percentage
of net sales to 44.5 percent from 41.4 percent as a result of various
promotions, and an increase in cost of products sold to 26.5 percent of net
sales from 26.4 percent.
The Company's gross profit increased $256,000, or 19.1 percent, to
$1,598,000 in 1996 from $1,342,000 in 1995 as a result of the increased sales.
Gross profit decreased as a percentage of net sales to 26.1 percent in 1996
from 29.9 percent in 1995. The decrease in the Company's gross profit margin
resulted from the increase in distributor bonuses during the more recent
period which increased at a faster rate than net sales.
Marketing, distribution and administrative expenses increased $201,000, or
18.4 percent, to $1,296,000 during 1996 from $1,095,000 during 1995. This
increase was attributable to expansion of the Company's administrative
infrastructure necessary to support increased levels of sales. Payroll and
employee costs increased by $254,000 during 1996 due to the increase in full-
time employees from 14 in the first quarter to 31 in the last quarter of 1996.
The balance of the increase in marketing, distribution and administrative
expenses resulted from the higher level of activity and corresponding
increases in variable costs such as postage, telephone and supplies.
Income before taxes increased $76,000, or 30.4 percent, to $326,000 during
1996 from $250,000 during 1995. Income before taxes as a percentage of net
sales decreased to 5.3 percent during 1996 from 5.6 percent during 1995,
primarily as a result of the decline in the Company's gross profit margin due
to special promotions. The Company recognized a one time tax benefit of
approximately $500,000 in 1996 primarily related to the reversal of a deferred
tax valuation allowance related to the expected future tax benefits to be
realized from operating loss carryforwards. Total net income increased
$575,000, or 230 percent, to $825,000 in 1996 from $250,000 in 1995.
Pro Forma Effect of Stock-Based Compensation
As a portion of and in lieu of payments of salaries and consulting fees, the
Company has historically used options to attract, retain and compensate its
officers, directors, other employees and consultants. 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.
During the twelve months ended December 31, 1995, the Company granted
1,189,819 stock options (as restated for the one-for-eight reverse split of
the Company's Common Stock in October 1996) to certain officers, directors,
other employees and consultants of the Company as a portion of the
compensation for their services to the Company. No options were granted during
1996. In accordance with Accounting Principles Board Opinion No. 25 of the
American Institute of Certified Public Accountants, the compensation cost of
such stock options was not recognized in the consolidated financial statements
of the Company. The weighted average exercise price and calculated fair value
at the date of grant of the options granted in 1995 were $2.77 and $1.75,
respectively, or $3,296,000 and $2,080,000 in the aggregate, respectively,
utilizing the methodology prescribed under SFAS No. 123, Accounting for Stock-
Based Compensation. After giving effect to the weighted average fair value of
such options, the Company would have had a pro forma loss of $1,830,000 ($.69
per common share) for the year ended December 31, 1995. The Company did not
grant any such options during 1996 and there would have been no pro forma
effect on 1996 earnings from options granted in 1995 since all grants vested
in 1995.
Quarterly Results of Operations
No pattern of seasonal fluctuations exists due to the growth patterns that
the Company is currently experiencing. However, there can be no assurance that
the Company will not become subject to seasonal fluctuations in operations.
Income Taxes
The provision for accrued income taxes on pretax income for the six months
ended June 30, 1997 was based on the effective combined federal and state
graduated corporate income tax rates of approximately 38 percent.
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Income tax expense for the six months ended June 30, 1997 was $74,500. The
Company's deferred tax assets at December 31, 1996, relate primarily to net
operating loss carryforwards for income tax purposes totaling $1,347,000,
which will begin to expire in 2003.
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 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
December 31, 1996 of $499,613 and a corresponding tax benefit for the year
ended December 31, 1996. As a result, the Company has begun reporting income
tax expense for financial reporting purposes. The Company will not have a
corresponding cash outflow for income tax expense until its net operating loss
carryforwards have been used up by taxable income.
Accounting Standards Issued But Not Yet Adopted
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128-Earnings Per
Share, which is effective for the Company's year ending December 31, 1997. The
statement establishes standards for computing and presenting earnings per
share. Adoption of SFAS No. 128 is not expected to have a material effect on
the Company's consolidated financial position or results of operations, but
will result in changes to the calculation of earnings per share.
Also in February 1997, the FASB issued SFAS No. 129-Disclosure of
Information about Capital Structure, which is effective for the Company's year
ending December 31, 1997. The statement establishes standards for disclosing
information about a reporting company's capital structure. The Company
believes that adoption of SFAS No. 129 will not have a material effect on the
Company's financial statements.
In June 1997, the FASB issued SFAS No. 130-Reporting Comprehensive Income
which is effective for the Company's year ending December 31, 1998. The
statement addresses the reporting and displaying of comprehensive income and
its components. Earnings per share will only be reported for net income and
not for comprehensive income.
Also in June 1997, the FASB issued SFAS No. 131-Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 modifies current
segment reporting requirements and establishes, for public companies, criteria
for reporting disclosures about a company's products and services, geographic
areas and major customers in annual and interim financial statements. The
Company will adopt SFAS No. 131 for the year ending December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Prior to completion of the offerings described below, the Company's primary
source of liquidity was net cash provided by operating activities and
shareholder loans. The Company does not have any outside bank credit
facilities.
On January 31, 1997, the Company distributed, at no cost, 2,148,191 non-
transferable rights ("Rights") to its shareholders of record on such date.
Each of the Rights entitled the holder to purchase one unit (consisting of one
share of Common Stock and one 1997-A Warrant) on or before March 17, 1997 for
$6.80 per unit (the "Rights Offering"). Concurrently with the Rights Offering,
the Company redeemed its outstanding Class A and Class B Common Stock Purchase
Warrants (the "Public Warrants") for $.0008 per warrant (the "Warrant
Redemption") effective on March 17, 1997. In connection with the Warrant
Redemption, the Company modified the terms of the Public Warrants and offered
to holders of the Public Warrants (the "Warrant Holders") the right to
exercise each of the Public Warrants for the purchase of one unit (consisting
of one share of Common
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Stock and one 1997-A Warrant), at an exercise price of $6.00 (the "Warrant
Modification Offering"). See "Description of Securities--1997-A Warrants."
Proceeds to the Company from the Warrant Modification Offering and the Rights
Offering (the "Offerings") were $2,154,357. Accumulated offering costs of
$323,076 were charged against the proceeds of the Offerings. Pursuant to the
Offerings, the Company issued 337,211 units, consisting of shares of Common
Stock and 1997-A Warrants.
At June 30, 1997, the Company had working capital of $840,200, compared to
$16,000 at December 31, 1996. The increase was primarily related to the net
proceeds from the Offerings. Management believes that its cash and cash
equivalents and cash flows from operations will be sufficient to fund its
working capital needs over the next 12 months. The Company will, however,
require the net proceeds of this offering to implement its growth strategy.
See "Business--Growth Strategy." During the six months ended June 30, 1997,
net cash used by operating activities was $175,900, net cash used by investing
activities was $1,475,900 (consisting primarily of the SNSI Asset Purchase),
and net cash provided by financing activities was $2,093,900 (consisting
primarily of proceeds from the Offerings less payment of deferred offering
costs). This represents an average monthly negative cash flow from operating
activities of $29,300. The Company had a net increase in cash during this
period of $442,100. The Company's working capital needs over the next 12
months consist primarily of marketing, distribution and administrative
expenses.
The Company made non-interest bearing advances to the John Hail Agency, Inc.
("JHA"), a company controlled by John W. Hail, the Chief Executive Officer and
a major shareholder of the Company, of $22,000 during the year ended December
31, 1996. During the six months ended June 30, 1997 and the year ended
December 31, 1996, JHA made repayments to the Company of $6,390 and $6,141,
respectively. 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,
including interest. See "Certain Transactions."
In connection with the SNSI Asset Purchase, the Company agreed to make
installment purchase price payments of $750,000 and $1,050,000 by June 29,
1998 and May 30, 1999, respectively, either by deliveries of additional shares
of the Company's Common Stock or by cash payments or any combination thereof.
The $750,000 installment payment shall be reduced by the aggregate amount that
gross revenues, net of returns and allowances, during the 12-month period
ending April 30, 1998, from (i) sales (other than sales of Choc-Quilizer) of
the purchased network marketing organization, sales to Market America, Inc.
(an unrelated network marketing company) and sales to retail outlet stores,
are less than $2,500,000 and (ii) the Company's sales of Choc-Quilizer are
less than $4,000,000 during such 12-month period. Furthermore, the $1,050,000
installment payment shall also be reduced by the aggregate amount that gross
revenues, net of returns and allowances, during the 12-month period ending
March 31, 1999, from such sales are less than $5,000,000 and less than
$8,000,000, respectively, during such 12-month period. The value of the Common
Stock to be issued and delivered, if any, will be based upon the average of
the closing prices of the Common Stock on the last three trading days of the
month preceding the month in which the applicable 12-month period ends.
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BUSINESS
The Company markets weight management, dietary supplement and personal care
products through a network marketing organization in which independent
distributors purchase products for resale to retail customers as well as for
their own personal use. The number of the Company's active distributors has
increased from approximately 8,100 at December 31, 1995, and 10,600 at
December 31, 1996 to approximately 19,000 at June 30, 1997. An "active"
distributor is one who purchased $60 or more of the Company's products within
the preceding 12 months.
The distributors in the Company's network are encouraged to recruit
interested people to become new distributors of the Company's products. New
distributors are placed beneath the recruiting distributor in the "network"
and are referred to by the Company as being in that distributor's "downline"
organization. The Company's marketing plan is designed to provide incentives
for distributors to build, maintain and motivate an organization of recruited
distributors in their downline organization to maximize their earning
potential. Distributors generate income by purchasing the Company's products
at wholesale prices and reselling them at retail prices. Distributors also
earn bonuses on product purchases generated by the distributors in their
downline organization. See "--Network Marketing."
The Company's growth strategy is to expand its product offerings and its
network of independent distributors to increase sales. The Company believes
that the introduction of new products addresses the demand of its customers,
creates enthusiasm among distributors, serves as a promotional tool in selling
other products and attracts new distributors. Since 1995, the Company has
introduced nine new weight management and dietary supplement products to its
product line. In 1997, the Company added 68 personal care and six additional
dietary supplement products to its product line through the CII Acquisition,
and through the SNSI Asset Purchase, the Company added an additional 38 weight
management and dietary supplement products and one personal care product. See
"Risk Factors--Dependance on AM-300." In connection with the MMI Acquisition,
the CII Acquisition and the SNSI Asset Purchase, the Company also acquired
1,690, 2,100 and 3,000 additional distributors, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General" and "--Growth Strategy."
As of the date of this Prospectus, the Company's product line consists of
(i) nine weight management products, (ii) 53 dietary supplement products and
(iii) 69 personal care products consisting primarily of cosmetic and skin care
products. See "--Products." The Company's products are manufactured by various
manufacturers pursuant to formulations developed for the Company and are sold
to the Company's independent distributors located in all 50 states and the
District of Columbia. The Company also sells its personal care products to
distributors in Greece who do not use the Company's network marketing system.
See "--Products."
The Company believes that its network marketing system is ideally suited to
marketing weight management, dietary supplement and personal care products
because sales of such products are strengthened by ongoing personal contact
between distributors and their customers. The Company's network marketing
system appeals to a broad cross-section of people, particularly those looking
to supplement family income or who are seeking part-time work. Distributors
are given the opportunity through Company-sponsored events and training
sessions to network with other distributors, develop selling skills and
establish personal goals. The Company supplements monetary incentives with
other forms of recognition in order to motivate distributors further and to
foster an atmosphere of excitement throughout its distributor network.
KEY OPERATING STRENGTHS
The Company believes the source of its success is its support of and
compensation program for its distributors. The Company provides its
distributors with high-quality products and a highly attractive bonus program
along with extensive Company-sponsored training and motivational events and
services. The Company believes that it has established a strong operating
platform to support distributors and facilitate future growth. The key
components of this platform include the following:
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. quality products, many of which emphasize herbs and other natural
ingredients to appeal to consumer demand for products that contribute to
a healthy lifestyle;
. a financially rewarding compensation program which provides immediate
income by offering "Fast Start" bonuses on the initial product purchase
of new personally enrolled distributors;
. a compensation program that permits distributors to earn income from
profits on the resale of products and residual income from reorder
bonuses on product purchases within a distributor's downline
organization, as well as to participate in various non-cash awards, such
as vacations offered through promotional programs;
. a superior communications program that seeks to effectively and
efficiently communicate with distributors by utilizing new technologies
and marketing techniques, as well as motivational events and training
seminars;
. a continual expansion and improvement of the Company's product line and
marketing plan; and
. employment of computer technology to provide timely and accurate product
order processing, weekly bonus payment processing, detailed distributor
earnings statements and inventory management.
GROWTH STRATEGY
The Company's growth strategy is to expand its product offerings and network
of independent distributors to increase sales. An increase in the number of
distributors generally results in increased sales volume, and new products
create enthusiasm among distributors, serve as a promotional tool in selling
other products, and attract new distributors. Since 1995, the Company has
introduced nine new weight management and dietary supplement products to its
product line. Through the CII Acquisition, the Company added 68 personal care
and six dietary supplement products to its product line. Through the SNSI
Asset Purchase which was consummated on April 16, 1997, the Company added 38
weight management and dietary supplement products and one personal care
product to its product line. During 1997, the Company introduced Choc-
Quilizer, and plans to introduce several additional products. In connection
with the MMI Acquisition, the CII Acquisition and the SNSI Asset Purchase, the
Company acquired approximately 1,690, 2,100 and 3,000 additional distributors,
respectively. See "--Products," "Risk Factors--Dependence on AM-300," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General."
The Company will also seek to increase sales through initiatives designed to
enhance sales in its existing markets. Such initatives will include increasing
the number of Company-sponsored training and motivational events and
teleconferences, hiring additional distributor support personnel and
establishing more convenient Regional Success Centers in targeted geographic
markets.
In addition, the Company will seek to grow through acquisition. The network
marketing industry, which has relatively low barriers to entry, is fragmented
and includes a number of small marketing companies, many of which are being
acquired by larger companies. The Company's strategy is to capitalize on these
market characteristics to achieve additional growth, both in terms of
distributors and product diversification, through the acquisition of
additional network marketing companies or the assets of such companies.
The principal objective of the Company's acquisition strategy is to acquire
other network marketing organizations that can be combined with the Company's
network marketing organization, resulting in increased sales volume with
minimal additional administrative cost. The Company will not consummate an
acquisition unless, at the time, it is anticipated that such acquisition will
contribute to profitability and provide positive cash flows from operations.
There can be no assurance, however, that the Company will in the future be
able to acquire other network marketing organizations, or that such
acquisitions will result in increased profitability and cash flows.
The Company's growth strategy will require expanded distributor services and
support, increased personnel, expanded operational and financial systems and
implementation of additional control procedures. There can be
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no assurance that the Company will be able to manage expanded operations
effectively. Furthermore, failure to implement financial, information
management, and other systems and to add control procedures could have a
material adverse effect on the Company's results of operations and financial
condition. The Company's acquisitions could involve a number of risks
including the diversion of management's attention to the assimilation of the
acquired companies or assets, adverse short-term effects on the Company's
results of operations, the amortization of acquired intangible assets, and the
possibility that the acquired network marketing organization will not
contribute to the Company's sales, profitability and cash flows, either in the
near or long term, as anticipated.
Although the Company's business plan includes expansion and diversification
of the Company's network marketing organization and products through the
acquisition of businesses engaged in network marketing, there are currently no
specific plans, negotiations, agreements or understandings with respect to any
material acquisition.
Although the Company intends to focus principally on the expansion of sales
within the United States, the Company also intends to expand its sales
activities in Greece. In addition, the Company is considering expansion into
markets in other countries, although the Company has not formalized any such
planned expansion as of the date of this Prospectus. The Company believes
there are numerous additional international markets in which its network
marketing organization and products could prove successful.
INDUSTRY OVERVIEW
Network Marketing. The Company believes that network marketing is one of the
fastest growing channels of distribution for certain types of goods and
services. There are over 300 companies worldwide that utilize network
marketing techniques. Industry sources report that in 1995 about 7.2 million
individuals in the United States were involved in direct selling (of which
network marketing is a major segment) and that total direct sales were
approximately $18 billion.
Weight Management and Dietary Supplement Products. The weight management and
dietary supplement market is expanding because of heightened public awareness
of reports about the positive effects of weight management and dietary
supplements on health. Many individuals also use dietary supplements as a
means of preventive health care. The Company believes several factors account
for the steady growth of the dietary supplement market, including increased
public awareness of the reported health benefits of dietary supplements and
favorable demographic trends toward older Americans who are more likely to
consume dietary supplements.
Over the past several years, widely publicized reports and medical research
findings have suggested a correlation between the consumption of dietary
supplements and the reduced incidence of certain diseases. The United States
government and universities generally have increased sponsorship of research
relating to dietary supplements. In addition, Congress has established the
Office of Alternative Medicine within the National Institutes of Health to
foster research into alternative medical treatments, which may include natural
remedies. Congress also recently established the Office of Dietary Supplements
in the National Institutes of Health to conduct and coordinate research into
the role of dietary supplements in maintaining health and preventing disease.
In addition, the Company believes that the aging of the United States
population, together with a corresponding increased focus on preventative
health care measures, will continue to result in increased demand for dietary
supplement products. According to Congressional findings that accompanied the
DSHEA, national surveys show that almost 43 percent of Americans regularly
consume vitamins, minerals and herbal supplements and 80 percent consume these
products at some time during their lives. The 35-and-older age group of
consumers
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represents 78 percent of the regular users of vitamin and mineral supplements.
Based on data provided by the United States Bureau of the Census, from 1990 to
2010, the 35-and-older age group of the United States population is projected
to increase by 32 percent, a significantly greater increase than the 20
percent projected increase for the United States population in general.
The Company believes these trends have helped fuel the growth of the dietary
supplement market. To meet the increased demand for dietary supplements, a
number of successful dietary supplement products have been introduced over the
past several years by the Company and others, including function specific
products for weight loss, sports nutrition, menopause, energy and mental
alertness. In addition, the use of a number of ingredients, such as chromium
picolinate, shark cartilage, proanthocyanidins, citrin and colloidal minerals,
have created opportunities for the Company and others to offer new products.
Personal Care Products. The personal care products market is a mature market
that has been historically immune to swings in the economy. According to the
Direct Selling Association, the worldwide retail market for personal care and
wellness products exceeded $8.6 billion in 1995. Manufacturers and
distributors of personal care products must continually improve existing
products, introduce new products and communicate product advantages to
consumers. With the aging population, there appears to be a growing demand for
a wide spectrum of new products in the area of skin care.
PRODUCTS
The Company's products include weight management products, dietary
supplements and personal care products. The Company currently markets 131
products, exclusive of variations in product size, colors or similar
variations of the Company's basic product line.
Weight Management Products. In 1996 and the six months ended June 30, 1997,
41.8 and 50.9 percent, respectively, of the Company's sales were derived from
the nine weight management products that the Company markets under its
Advantage Marketing Systems label. The following products represent the
majority of the Company's weight management product sales:
. AM-300--A specialized blend of herbs, including an ephedra concentrate
and chromium picolinate.
. AS-200--A specialized blend of herbs and nutrients in addition to citrin
and chromium picolinate.
As a result of the SNSI Asset Purchase, the Company has recently added
several additional weight management products to its product line that will be
marketed under its Advantage Marketing Systems or Stay "N Shape labels,
including Choc-Quilizer. Choc-Quilizer is an appetite suppression product made
from a compound which occurs naturally in chocolate. It was originally
developed by Dr. George Kargas to control chocolate cravings, and is believed
by Dr. Kargas to decrease the appetite for other foods as well.
Dietary Supplement Products. In 1996 and the six months ended June 30, 1997,
24.7 and 34.9 percent, respectively, of the Company's sales were derived from
53 dietary supplement products containing herbs, vitamins, minerals and other
natural ingredients. They are sold under the Advantage Marketing Systems, Stay
"N Shape and Chambre labels. The following products represent the majority of
the Company's dietary supplement product sales:
. Shark Cartilage Complex--Manufactured from shark fin cartilage and a
blend of curcumin, boswellin and vanadium.
. Super Anti-Oxidant--A blend of enzyme-active and phyto-nutrient rich
whole food and herbal antioxidant concentrates including
proanthocyanidins.
. Colloidal Plus--A natural assortment of 77 plant-derived colloidal
minerals in a time release capsule.
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. Chlorella--Fresh water green algae containing amino acids of protein,
nucleic acids, fibers, vitamins and minerals.
As a result of the SNSI Asset Purchase, the Company has recently added
several additional dietary supplement products that are being marketed under
its Advantage Marketing Systems or Stay "N Shape labels, including Formula of
Life Colloidal Minerals, Stress-Eze and Spark of Life.
Personal Care Products. In January 1997, the Company acquired CII and its
line of skin care, hair care, family care and cosmetic products, which
dramatically expanded and improved the Company's product line. CII had been
marketing its products for over 24 years. During the six months ended June 30,
1997, 7.9 percent of the Company's sales were derived from 68 personal care
products marketed primarily under the Chambre label. The following products
represent the majority of the Company's personal care product sales:
. NH2 Lift System--A three-part skin-care system combining enzymatic
exfoliation and isometric action to firm the skin, build muscle tone and
lift the face.
. Skin Care Collections--Include cleansing lotion, skin freshener, oatmeal
scrub, night treatment, moisturizer and protein or moisture masque.
. Hair Care Systems--Include keratin shampoo, conditioning rinse,
reconstructor, hair hold, and style and set.
. Chambre Cosmetics--Include foundations, mascara, lipliners, eyeliners,
powder and cream blushes, lip colors and eyeshadows.
Promotional Materials. The Company also derives revenues from the sale of
various educational and promotional materials designed to aid its distributors
in maintaining and building their businesses. Such materials include various
sales aids, informational videotapes and cassette recordings, and product and
marketing brochures.
Other Products and Services. Prior to focusing on weight management and
dietary supplement products in October 1993, the Company marketed various
packages of consumer benefit services provided by third-party providers. The
consumer benefit services consist of a discount shopping service, a grocery
coupon service, a discount travel service, pre-paid legal services, and a
variety of other consumer benefits. The services under these consumer benefit
programs, except for the pre-paid legal services, are provided by Consumer
Benefit Services, Inc. The pre-paid legal services are provided by Pre-Paid
Legal Services, Inc. The Company no longer actively markets these programs,
although it continues to maintain the existing memberships. These program
membership sales represented less than one percent of the Company's net sales
for the six months ended June 30, 1997.
New Product Identification. The Company expands its product line through the
development and acquisition of new products. New product ideas are derived
from a number of sources, including trade publications, scientific and health
journals, the Company's management, consultants, distributors and other
outside parties. Potential product acquisitions are identified in a similar
manner. Prior to introducing new products, the Company investigates product
formulation as it relates to regulatory compliance and other issues. See "--
Regulation."
The Company does not maintain its own product development staff, but relies
upon Chemins, Nittany and other manufacturers, independent researchers, vendor
research departments, and others for such services. When a new product concept
is identified or when an existing product must be reformulated, the new
product concept or reformulation project is generally submitted to Chemins or
Nittany for technical development and implementation. The Company is
constantly reviewing its existing products for potential enhancements to
improve their effectiveness and marketability. While the Company considers its
product formulations to be proprietary trade secrets, such formulations are
not patented and there can be no assurance that another company will not
replicate one or more of the Company's products.
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Recent Regulatory Developments. A significant portion of the Company's net
sales has been, and is expected to continue to be, dependent upon the
Company's AM-300 product. The Company's net sales of AM-300 represented 45.2
percent, 39.1 percent, and 31.5 percent of net sales for the six months ended
June 30, 1997 and for the fiscal years 1996 and 1995, respectively. One of the
herbal ingredients in AM-300 is ephedra concentrate, which contains naturally
occurring ephedrine. Ephedrine products have been the subject of adverse
publicity in the United States and other countries relating to alleged harmful
effects, including the deaths of several individuals. Currently, the Company
offers AM-300 only in the United States (except in certain states in which
regulations may prohibit or restrict the sale of such product). On April 10,
1996, the Food and Drug Administration ("FDA") issued a statement warning
consumers not to purchase or ingest natural sources of ephedrine within
dietary supplements claiming to produce certain effects (none of which are
claimed for the Company's product). On June 4, 1997, the FDA proposed a
regulation which will, if it becomes effective as proposed, significantly
limit the ability of the Company to sell AM-300 and any other weight
management products which contain ephedra or ephedrine. See "Risk Factors--
Regulation" and "--Regulation."
Product Procurement and Distribution; Insurance. The Company's weight
management and dietary supplement products are manufactured by Chemins and
Nittany utilizing the Company's product formulations. The Company's personal
care products are manufactured by GDMI, Inc., Custom Cosmetics, Inc. and
Columbia Cosmetics, Inc.
In connection with the SNSI Asset Purchase, the Company succeeded to the
rights and obligations of Nation of Winners International, Inc. under the
Marketing and Distribution Agreement with Tinos, L.L.C. (the "Marketing
Agreement"), pursuant to which the Company acquired the exclusive worldwide
right to market Choc-Quilizer for the purpose of appetite suppression and
weight control through December 6, 2006. The Marketing Agreement is subject to
termination by Tinos, L.L.C. upon 60 days' written notice in the event AMS
does not obtain a sales volume of 300,000 units of 90 count capsules or
caplets of Choc-Quilizer during the period from the date of the license
through December 5, 1998, or reasonable sales volumes during each 12-month
period thereafter.
The Company has not generally entered into long-term supply agreements with
the manufacturers of its products or the third-party providers of its consumer
benefit services. However, the Company customarily enters into contracts with
its manufacturers and suppliers to establish the terms and conditions of
purchases. The Company's arrangements with Chemins or Nittany may be
terminated by either party upon the completion of any outstanding purchase
orders. Therefore, there can be no assurance that Chemins or Nittany will
continue to manufacture products for the Company or provide research,
development and formulation services. In the event the Company's relationship
with any of its manufacturers becomes impaired, the Company would be required
to obtain alternative sources for its products. In such event, there can be no
assurance that the manufacturing processes of the Company's current
manufacturers could be replicated by another manufacturer. Although the
Company has not previously experienced product unavailability or supply
interruptions, the Company believes that it would be able to obtain
alternative sources of its weight management, dietary supplement and personal
care products. A significant delay or reduction in availability of products,
however, could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company, like other marketers of products that are intended to be
ingested, faces an inherent risk of exposure to product liability claims in
the event that the use of its products results in injury. The Company
generally does not obtain contractual indemnification from parties
manufacturing its products. Furthermore, the Company has agreed to indemnify
Tinos, L.L.C., the licensor of Choc-Quilizer, against any product liability
claims arising from the Choc-Quilizer product marketed by the Company, and the
Company has agreed to indemnify Chemins against claims arising from products
manufactured by Chemins and marketed by the Company. The Company does not
maintain any product liability insurance coverage. Therefore, product
liability claims against the Company could result in material losses to the
Company.
All of the Company's products include a customer satisfaction guarantee.
Within 30 days of purchase, any retail customer or distributor who is not
satisfied with a Company product for any reason may return it or any
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unused portion to the distributor from whom it was purchased or to the Company
for a full refund or credit toward the purchase of another Company product.
Distributors may obtain replacements from the Company for products returned to
them by retail customers if they return such products to the Company on a
timely basis. In addition, in most jurisdictions, the Company maintains a buy-
back program pursuant to which it will repurchase products sold to a
distributor (subject to a 10 percent restocking charge), provided that the
distributor resigns from the Company and returns the product in marketable
condition within 12 months of original purchase, or longer where required by
applicable state law or regulations. The Company believes this buy-back policy
addresses a number of the regulatory compliance issues pertaining to network
marketing systems. See "--Regulation--Network Marketing System." For the year
ended December 31, 1996, and the six months ended June 30, 1997, the cost of
products returned to the Company was four percent and three percent of gross
sales, respectively.
The Company's weight management, dietary supplement and personal care
products are distributed principally from the Company's facilities in Oklahoma
City or from its Regional Success Centers. Products are warehoused in Oklahoma
City and at selected Regional Success Centers.
NETWORK MARKETING
The Company markets its products through independent distributors in a
network marketing organization, which consists of more than 19,500 "active"
distributors as of the date of this Prospectus. At December 31, 1996 and June
30, 1997, the Company had 10,600 and 19,000 "active" distributors compared to
8,100 and 10,100 "active" distributors at December 31, 1995 and June 30, 1996,
respectively. A distributor is considered "active" if the distributor
purchased $60 or more of the Company's products within the preceding 12
months. Distributors are independent contractors who purchase products
directly from the Company for resale to retail consumers. Distributors may
elect to work on a full-time or part-time basis. The Company believes that its
network marketing system appeals to a broad cross-section of people,
particularly those seeking to supplement family income, start a home business
or pursue employment opportunities other than conventional, full-time
employment, and that a majority of its distributors therefore work on a part-
time basis.
Management believes that its network marketing system is ideally suited to
marketing its products because sales of such products are strengthened by
ongoing personal contact between retail consumers and distributors, many of
whom use the Company's products themselves. 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 purchase the Company's products by informing potential
customers and distributors of the Company's products and results of personal
use, and the potential financial benefits of becoming a distributor. The
objective of the marketing program is to develop a broad based network
marketing organization of distributors within a relatively short period. The
Company's marketing efforts are typically focused on middle-income families
and individuals.
The Company's network marketing program encourages individuals to develop
their own downline network marketing organizations. Each new distributor is
linked to an existing distributor that personally enrolled the new distributor
into the Company's network marketing organization or is linked to the
enrolling distributor's downline as specified by the enrolling distributor at
the time of enrollment. Growth of a distributor's downline organization is
dependent on the recruiting and enrollment of additional distributors by the
distributor or the distributors within such distributor's downline
organization.
Distributors are encouraged to assume responsibility for training and
motivation of other distributors within their downline organization and to
conduct opportunity meetings as soon as they are appropriately trained. The
Company strives to maintain a high level of motivation, morale, enthusiasm and
integrity among the members of its network marketing organization. The Company
believes this result is achieved through a combination of products, sales
incentives, personal recognition of outstanding achievement, and quality
promotional materials. Under the Company's network marketing program,
distributors purchase sales aids and brochures from the Company and assume the
costs of advertising and marketing the Company's products to their customers
as well as the direct cost of recruiting new distributors. The Company
believes that this form of sales organization is
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cost efficient for the Company because direct sales expenses are primarily
limited to the payment of bonuses, which are only incurred when products are
sold.
The Company continually strives to improve its marketing strategies,
including the compensation structure within its network marketing organization
and the variety and mix of products offered by the Company, to attract and
motivate distributors. These efforts are designed to increase distributors'
monthly product sales and the recruiting of new distributors.
Growth of the network marketing organization is in part attributable to the
Company's bonus structure which provides for payment of bonuses on product
purchases made by other distributors in a distributor's downline organization.
Distributors derive income from several sources. First, distributors earn
profits by purchasing the Company's products at wholesale prices (which are
discounted up to 40 percent from suggested retail prices) and selling the
Company's products to customers at retail. Second, distributors who enroll
other distributors earn Fast Start bonuses of up to 63 percent on the initial
product purchased at the time of enrollment by new personally enrolled
distributors. Third, distributors who establish their own downline distributor
organizations may earn bonuses of up to 10 percent on product reorder
purchases (i.e., other than first-time product purchases by new distributors)
within the first six levels of their downline organization. Fourth,
distributors, who have personally enrolled four other distributors and in a
single month have (i) 20 or more new distributors enrolled within their
downline organization and (ii) purchase volume totaling $30,000 or more within
their downline organization (with certain restrictions on the source of the
volume), become Silver Ambassadors and have the opportunity to build an
additional Silver Ambassador downline organization and receive additional Fast
Start and reorder bonuses of 10 percent and 2.5 percent, respectively, on
product purchases by such downline organization. Fifth, Silver Ambassadors who
develop four Silver Ambassadors, each one from a separate leg of their
downline organization, become Gold Ambassadors and have the opportunity to
build an additional Gold Ambassador downline organization and receive
additional Fast Start and reorder bonuses of 15 percent and 5.0 percent,
respectively, on product purchases by such downline organization. Combining
these levels of bonuses, the Company's total "pay-out" on products subject to
bonuses is approximately 60 percent and 88 percent of the value of reorder and
Fast Start product sales, respectively. However, in the case of a distributor
(other than a Silver or Gold Ambassador) who is not qualified to receive
bonuses (i.e., a distributor who has not personally enrolled any new
distributors or has not purchased $60 or more of the Company's products during
the preceding month), the bonus otherwise payable is retained by the Company.
Each distributor in the Company's network marketing organization has a Silver
and Gold Ambassador, and each Silver Ambassador has a Gold Ambassador. As of
the date of this Prospectus, the Company has 38 Silver Ambassadors and seven
Gold Ambassadors. The Company limits the amount of products subject to Fast
Start bonuses that can be purchased initially by a distributor to $252.
To aid distributors in easily meeting the monthly personal product purchase
requirement to qualify for reorder bonuses, the Company developed the "Q-
Club." Under the Q-Club purchasing arrangement, distributors establish a
standing product order for an amount in excess of $60 which is automatically
charged to their credit cards or deducted from their bank accounts each month
prior to shipment of the ordered products. At December 31, 1995 and 1996, and
at June 30, 1997, the Company had 2,300, 3,800 and 6,100 distributors
participating in the Q-Club, respectively.
Under the Company's Regional Success Center Program, the Company, in its
sole discretion, designates distributors to serve as Regional Success Center
Directors, and provides them special training and support. Each Regional
Success Center Director functions as a product and Fast Start bonus
distribution center for the Company. In addition, the Company offers its
Instant Check Program, under which distributors who enroll new distributors
may receive immediate Fast Start bonus payments on products purchased by newly
enrolled distributors by personally delivering the new distributor's initial
order to the Company offices in Oklahoma City or any Regional Success Center.
The Company believes that the availability of the Fast Start bonuses for
enrolling new distributors serves as a powerful incentive to build the
network. As of the date of this Prospectus, the Company has 40 Regional
Success Center Directors.
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The Company maintains a computerized system for processing distributor
orders and calculating bonus payments which enables it to remit such payments
promptly to distributors. The Company believes that prompt and accurate
remittance of bonuses is vital to recruiting and maintaining distributors, as
well as increasing their motivation and loyalty to the Company. The Company
makes bonus payments to its distributors weekly, based upon the previous
week's product purchases, compared to most network marketing companies that
only make monthly bonus payments. During the six months ended June 30, 1997,
and the year ended December 31, 1996 and 1995, the Company paid bonuses to
3,000, 3,300 and 1,900 distributors, respectively, in the aggregate amount of
$2,200,681, $2,727,330 and $1,823,058, respectively.
The Company is committed to providing the best possible support to its
distributors. Distributors in the Company's network marketing organization are
provided training guides and are given the opportunity to participate in
Company training programs. The Company sponsors regularly scheduled conference
calls for its distributors which include testimonials from successful
distributors and satisfied customers as well as current product and
promotional information. In the second quarter of 1997, the Company introduced
The Advantage Magazine, a publication that provides information on the
Company, its products and network marketing system. The magazine is designed
to help recruit new distributors by answering commonly asked questions and
includes product information and business building information. The magazine
also provides a forum for the Company to give additional recognition to its
distributors for outstanding performance. In addition, the Company regularly
sponsors training sessions for its distributors across the United States, at
which distributors are provided the opportunity to learn more about the
Company's products and selling techniques so that they can more rapidly build
their businesses. The Company produces comprehensive and attractive four color
catalogues and brochures that display and describe the Company's products.
Furthermore, in order to facilitate its continued growth and support
distributor activities, the Company continually upgrades its management
information and telecommunications systems. These systems are designed to
provide, among other things, financial and operating data for management,
timely and accurate product ordering, bonus payment processing, inventory
management and detailed distributor records. Since 1994, the Company has
invested more than $300,000 to enhance its computer and telecommunications
systems.
REGULATION
In the United States as well as in any foreign markets in which the Company
may sell its products, the Company will be subject to laws, regulations,
administrative determinations, court decisions and similar constraints (as
applicable, at the federal, state and local levels) (hereinafter
"regulations") including, among others, regulations pertaining to (i) the
formulation, manufacture, packaging, labeling, distribution, importation, sale
and storage of the Company's products, (ii) product claims and advertising
(including direct claims and advertising by the Company as well as claims and
advertising by distributors, for which the Company may be held responsible),
and (iii) the Company's network marketing organization.
Products. The formulation, manufacture, packaging, storing, labeling,
advertising, distribution and sale of the Company's products are subject to
regulation by federal agencies, including the FDA, the FTC, the CPSC, the
USDA, the EPA and the United States Postal Service. The Company's activities
are also regulated by various agencies of the states, localities and foreign
countries in which the Company's products are or may be manufactured,
distributed and sold. The FDA, in particular, regulates the formulation,
manufacture and labeling of weight management products, dietary supplements,
and cosmetics and skin care products, such as those distributed by the
Company. FDA regulations require the Company and its suppliers to meet
relevant regulatory good manufacturing practices for the preparation,
packaging and storage of these products. Good manufacturing practices for
dietary supplements have yet to be promulgated but are expected to be
proposed. The DSHEA revised the provisions of the FDCA concerning the
composition and labeling of dietary supplements and, the Company believes, is
generally favorable to the dietary supplement industry. The DSHEA created a
new statutory class of "dietary supplements." This new class includes
vitamins, minerals, herbs, amino acids and other dietary substances for human
use to supplement the diet, and DSHEA grandfathered, with certain limitations,
dietary ingredients that were on the market before October 15, 1994. A dietary
supplement which
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contains a new dietary ingredient (i.e., one not on the market before October
15, 1994) will require evidence of a history of use or other evidence of
safety establishing that it is reasonably expected to be safe. Manufacturers
of dietary supplements which make a "statement of nutritional support" must
have substantiation that the statement is truthful and not misleading.
The majority of the Company's sales come from products that are classified
as dietary supplements under the FDCA. The labeling requirements for dietary
supplements have not been clearly established. In December 1995, the FDA
issued proposed regulations which govern the labeling of dietary supplements,
including how to declare nutritional information, how to make permissible
"statements of nutritional support" and when additional, defined terminology
may be used on dietary supplements. The period for comments on the proposed
regulations has been extended until December 2, 1997 and accordingly no final
regulations have been issued. The proposed regulations would require the
Company to revise a substantial number of its labels at an undetermined, but
likely immaterial, expense to the Company. The FDA has not announced an exact
date that the final regulations will become effective. However, the FDA has
stated that the proposed regulations will not become effective until 180 days
following their publication in the Federal Register. Many states have also
recently become active in the regulation of dietary supplement products and
may require the Company to modify the labeling or formulation of certain
products sold in those states.
As a marketer of products that are ingested by consumers, the Company is
subject to the risk that one or more of the ingredients in its products may
become the subject of adverse regulatory action. For example, one of the
ingredients in AM-300 is ephedra herb concentrate, which contains naturally-
occurring ephedrine. Ephedrine products have been the subject of adverse
publicity in the United States and other countries relating to alleged harmful
effects, including the deaths of several individuals.
Many companies manufacture products containing various amounts of ephedra or
ephedrine, and the FDA has on record approximately 900 reports of adverse
reactions to these products. On April 10, 1996, the FDA issued a statement
warning consumers not to purchase or ingest dietary supplements containing
ephedrine that are claimed to produce such effects as euphoria, heightened
awareness, increased sexual sensations or increased energy, because these
products pose significant adverse health risks, including dizziness, headache,
gastrointestinal distress, irregular heartbeat, heart palpitations, heart
attack, strokes, seizures, psychosis and death. The Company markets AM-300
principally as an aid in weight management.
On June 4, 1997, the FDA proposed a regulation that will, if it becomes
effective as proposed, significantly limit the ability of the Company to sell
dietary supplements that contain ephedra or ephedrine, including the Company's
AM-300 product, which for the six months ended June 30, 1997, represented 45.2
percent of the Company's net sales. Currently, the Company offers AM-300 only
where permitted in the United States. The proposed regulation was subject to
comment during the period ended August 18, 1997, which period has been
extended until December 2, 1997. The FDA has indicated that the proposed
regulations will become effective 180 days following issuance of the final
regulation. The Company has been informed that several trade organizations in
the dietary supplement industry intend to comment on the proposed regulation,
requesting substantial modifications. As of the date of this Prospectus, it is
not possible to predict whether the FDA will make any material changes to the
proposed regulation based upon comments.
The Company is a member of a non-profit corporation, The Ephedra Research
Foundation (the "Foundation"), which has contracted with Science, Toxicology
Technology Consultants, Inc., a consulting firm, to conduct a clinical study
concerning the safety of ephedrine when ingested in combination with caffeine
as a dietary supplement. This study is being carried out by researchers at two
nationally recognized hospitals associated with two major universities. The
results of the study are expected by December 31, 1997, with respect to the
acute aspect of the study, and by April 30, 1998, with respect to the chronic
aspect of the study. The Company anticipates that the Foundation will request
an extension of the FDA comment period until the Foundation receives a report
on one or both phases of the study.
There can be no assurance that the FDA will not impose additional
regulations, including regulations prohibiting, limiting potencies or placing
other restrictions on the sale of products containing ephedra or
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ephedrine. In addition, several states either regulate or are considering
regulating ephedrine-containing products as controlled substances or are
prohibiting the sale of such products by persons other than licensed
pharmacists. There is a risk that the Company's AM-300 product, which contains
ephedra concentrate, may become subject to further federal, state, local or
foreign laws or regulations. These regulations could require the Company to
(i) withdraw or reformulate its AM-300 product with reduced ephedrine levels
or with a substitute for ephedra or ephedrine, (ii) relabel its product with
different warnings or revised directions for use, or (iii) not make certain
statements, possibly including weight loss claims, with respect to any product
containing ephedra or ephedrine. Even in the absence of further laws or
regulation, the Company may elect to reformulate or relabel its AM-300 product
containing ephedra or ephedrine. While the Company believes that its AM-300
product could be reformulated and relabeled, there can be no assurance that
reformulation and relabeling would not have an adverse effect on sales of such
product or related products even though such products do not contain ephedra
or ephedrine. See "--Products--Recent Regulatory Developments."
In foreign markets, prior to commencing operations and prior to making or
permitting sales of its products, the Company may be required to obtain an
approval, license or certification from the country's ministry of health or
comparable agency. Prior to entering a new market in which a formal approval,
license or certificate is required, the Company will be required to work
extensively with local authorities to obtain the requisite approvals. The
approval process generally requires the Company to present each product and
product ingredient to appropriate regulators and, in some instances, arrange
for testing of products by local technicians for ingredient analysis. Such
approvals may be conditioned on reformulation of the Company's products or may
be unavailable with respect to certain products or ingredients.
Product Claims and Advertising. The FTC and certain states regulate
advertising, product claims, and other consumer matters, including advertising
of the Company's products. All advertising, promotional and solicitation
materials used by distributors must be approved by the Company prior to use.
The FTC has in the past several years instituted enforcement actions against
several dietary supplement companies for false and misleading advertising of
certain products. In addition, the FTC has increased its scrutiny of the use
of testimonials, such as those utilized by the Company. While the Company has
not been the target of FTC enforcement action, there can be no assurance that
the FTC will not question the Company's advertising or other operations in the
future. In addition, there can be no assurance that a state will not interpret
product claims presumptively valid under federal law as illegal under that
state's regulations, or that future FTC regulations or decisions will not
restrict the permissible scope of such claims. The Company also is subject to
the risk of claims by distributors and customers who may file actions on their
own behalf, as a class or otherwise, and may file complaints with the FTC or
state or local consumer affairs offices. These agencies may take action on
their own initiative against the Company for alleged advertising or product
claim violations or on a referral from distributors, consumers or others.
Remedies sought in such actions may include consent decrees and the refund of
amounts paid by the complaining distributor or consumer, refunds to an entire
class of distributors or customers, or other damages, as well as changes in
the Company's method of doing business. A complaint because of a practice of
one distributor, whether or not that practice was authorized by the Company,
could result in an order affecting some or all distributors in the particular
state, and an order in one state could influence courts or government agencies
in other states considering similar matters. Proceedings resulting from these
complaints may result in significant defense costs, settlement payments or
judgements and could have a material adverse effect on the Company.
Network Marketing System. The Company's network marketing system is subject
to a number of federal and state regulations administered by the FTC and
various state agencies. Regulations applicable to network marketing
organizations are generally directed at ensuring that product sales are
ultimately made to consumers (as opposed to other distributors) and that
advancement within such organization be based on sales of the organizations'
products, rather than investment in the organization or other non-retail sales
related criteria. For instance, in certain markets there are limits on the
extent to which distributors may earn royalties on sales generated by
distributors that were not directly sponsored by the distributor.
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The Company's network marketing organization and activities are subject to
scrutiny by various state and federal governmental regulatory agencies to
ensure compliance with various types of laws 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 compensation structure of such selling
organizations is very complex, and compliance with all of the applicable laws
is uncertain in light of evolving interpretation of existing laws and the
enactment of new laws and regulations pertaining to this type of product
distribution. The Company has an ongoing compliance program with assistance
from counsel experienced in the laws and regulations pertaining to network
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 network marketing operations.
The Company currently has independent distributors in all 50 states and the
District of Columbia. The Company reviews the requirements of various states
as well as seeks legal advice regarding the structure and operation of its
selling organization to insure that it complies with all of the applicable
laws pertaining to network sales organizations. On the basis of these efforts
and the experience of its management, the Company believes that it is in
compliance with all applicable federal and state regulatory requirements.
Although the Company believes that the structure and operation of its network
marketing organization complies with all of the applicable laws pertaining to
network sales organizations, 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. The
Company accordingly remains subject to the risk that, in one or more of its
markets, its marketing system could be found to not be in compliance with
applicable regulations. Failure by the Company to comply with these
regulations could have a material adverse effect on the Company in a
particular market or in general.
The Company is subject to the risk of challenges to the legality of its
network marketing organization, including claims by the Company's
distributors, both individually and as a class, that the Company's network
marketing program is operated as an illegal "pyramid scheme" in violation of
federal securities laws, state unfair practice and fraud laws and the
Racketeer Influenced and Corrupt Organizations Act ("RICO"). Two important FTC
cases have established legal precedent for determining whether a network
marketing program constitutes an illegal pyramid scheme. The first, In re
Koscot Interplanetary, Inc., 86 F.T.C. 1106 (1975), set forth a standard for
determining whether a marketing system constituted a pyramid scheme. Under the
Koscot standard, a pyramid scheme is characterized by the participants'
payment of money to a company in return for (i) the right to sell a product
and (ii) the right to receive, in return for recruiting other participants
into the program, rewards that are unrelated to sales of the product to
ultimate users. Applying the Koscot standard in In Re Amway Corp., 93 F.T.C.
618 (1979), the FTC determined that a company will not be classified as
operating a pyramid scheme if the company adopts and enforces policies that in
fact encourage retail sales to consumers and prevent "inventory loading"
(i.e., distributors' purchases of large quantities of non-returnable inventory
to obtain the full amount of compensation available under the system). In
Amway, the FTC found that Amway Corp.'s marketing system did not constitute a
pyramid scheme, noting the following Amway policies: (i) participants were
required to buy back, from any person they recruited, any saleable, unsold
inventory upon the recruit's leaving Amway; (ii) every participant was
required to sell at wholesale or retail at least 70 percent of the products
bought in a given month in order to receive a bonus for that month; and (iii)
in order to receive a bonus in a month, each participant was required to
submit proof of retail sales made to ten different consumers.
The Company believes that its network marketing system would not be
classified as a pyramid scheme under the standards set forth in Koscot, Amway,
and other applicable law. In particular, in most jurisdictions, the Company
makes available an inventory buy-back program to address the problem of
"inventory loading." Pursuant to this program, the Company will repurchase
products sold to a distributor (subject to a 10 percent restocking charge)
provided that the distributor resigns from the Company and returns the product
in marketable condition within 12 months of original purchase, or longer where
required by applicable state law or regulations. The Company's literature
provided to distributors describes the Company's buy-back program. In
addition,
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pursuant to the Company's agreements with its distributors, each distributor
represents that at least 70 percent of the products he or she buys will be
sold to non-distributors. However, as is the case with other network marketing
companies, the bonuses paid by the Company to its distributors are based on
product purchases including purchases of products that are personally consumed
by the downline distributors and such products may be considered an inventory
loading purchase. Furthermore, distributors' bonuses are based on the
wholesale prices received by the Company on product purchases or, in some
cases based upon the particular product purchased, on prices less than the
wholesale prices. In the event of challenges to the legality of its network
marketing organization by distributors, the Company would be required to
demonstrate that the Company's network marketing policies are enforced, and
that the network marketing program and distributors' compensation thereunder
serve as safeguards to deter inventory loading and encourage retail sales to
the ultimate consumers.
In a recent case, Webster v. Omnitrition International, Inc., 79 F.3d 776
(9th Cir. 1996), the United States Court of Appeals held that a class action
brought against Omnitrition International, Inc. ("Omnitrition"), a multilevel
marketing seller of nutritional supplements and skin care products, should be
allowed to proceed to trial. The plaintiffs, former distributors of
Omnitrition's products, alleged that Omnitrition's selling program was an
illegal pyramid scheme and claimed violations of RICO and several federal and
state fraud and securities laws. Despite evidence that Omnitrition complied
with the Amway standards, the court ruled that a jury would have to decide
whether Omnitrition's policies, many of which apparently were similar to
compliance policies adopted by the Company, were adequate to ensure that
Omnitrition's marketing efforts resulted in a legitimate product marketing and
distribution structure, and not an illegal pyramid scheme. The Company
believes that its marketing and sales programs differ in significant respects
from those of Omnitrition, and that the Company's marketing program complies
with applicable law. In view of the holding of the court of appeals in the
Omnitrition case, however, there can be no assurance that, if challenged, the
Company would prevail against private plaintiffs alleging violations of anti-
pyramid and securities laws. A final ruling against the Company in such a suit
could result in the imposition of material liability against the Company.
Moreover, even if the Company were successful in defending against such suit,
the costs of such defense, both in dollars spent and in management time, could
be material and adversely affect the Company's operating results. In addition,
the negative publicity of such a suit could adversely affect the Company's
sales and ability to attract and retain distributors.
NFLI, a competitor of the Company and a multi-level seller of personal care
and nutritional supplements, recently announced that it had settled class
action litigation brought by distributors alleging fraud in connection with
the operation of a pyramid scheme. NFLI agreed to pay in excess of $3 million
to settle claims brought on behalf of its distributors, and related securities
fraud claims brought on behalf of certain purchasers of its stock. The Company
believes that its marketing program is significantly different from the
program allegedly promoted by NFLI and that the Company's marketing program is
not in violation of anti-pyramid laws or regulations. However, there can be no
assurance that claims similar to the claims brought against NFLI and other
multi-level marketing organizations will not be made against the Company, or
that the Company would prevail in the event any such claims were made.
Furthermore, even if the Company were successful in defending against any such
claims, the costs of conducting such a defense, both in dollars spent and in
management time, could be material and adversely affect the Company's
operating results and financial condition. In addition, the negative publicity
of such a suit could adversely affect the Company's sales and ability to
attract and retain distributors.
INTELLECTUAL PROPERTY
The Company uses several trademarks and tradenames in connection with its
products and operations. As of the date of this Prospectus, the Company had
five federal trademark registrations with the United States Patent and
Trademark Office. The Company relies on common law trademark rights to protect
its unregistered trademarks. Common law trademark rights do not provide the
Company with the same level of protection as afforded by a United States
federal registration of a trademark. Moreover, common law trademark rights are
limited to the geographic area in which the trademark is actually used. In
addition, the Company's product formulations are not protected by patents and
are not patentable. Therefore, there can be no assurance that another company
will not replicate one or more of the Company's products.
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COMPETITION
The Company is subject to significant competition in recruiting distributors
from other network marketing organizations, including those that market weight
management, dietary supplement and personal care products, as well as other
types of products. There are over 300 companies worldwide that utilize network
marketing techniques, many of which are substantially larger, offer a greater
variety of products, and have available considerably greater financial
resources than the Company. The Company's ability to remain competitive
depends, in significant part, on the Company's success in recruiting and
retaining distributors through an attractive bonus plan and other incentives.
The Company believes that its bonus plan and incentive programs provide its
distributors with significant income potential. However, there can be no
assurance that the Company's programs for recruitment and retention of
distributors will continue to be successful.
In addition, the business of marketing weight management, dietary supplement
and personal care products is highly competitive. This market segment includes
numerous manufacturers, other network marketing companies, catalog companies,
distributors, marketers, retailers and physicians that actively compete in the
sale of such products. The Company also competes with other providers of such
products, especially retail outlets, based upon convenience of purchase and
immediate availability of the purchased product. The market is highly
sensitive to the introduction of new products or weight management plans
(including various prescription drugs) that may rapidly capture a significant
share of the market. As a result, the Company's ability to remain competitive
depends in part upon the successful introduction of new products.
The Company's network marketing competitors that market weight management,
dietary supplement and personal care products include small, privately held
companies, as well as larger, publicly held companies with greater financial
resources and greater product and market diversification and distribution. The
Company's competitors include Shakelee Corporation, The A.L. Williams
Corporation, Mary Kay Cosmetics, Inc., Amway Corporation, Nutrition for Life
International, Inc., and Herbalife International, Inc. See "Risk Factors--
Competition."
EMPLOYEES
As of June 30, 1997, the Company had 38 full-time employees, of whom three
were executive officers or directors, 14 were in administrative activities,
seven were in marketing activities, six were in customer service activities,
and eight were in shipping activities. The Company's employees are not
represented by a labor organization. The Company considers its employee
relations to be good. See "Risk Factors--Dependence on Key Personnel."
PROPERTIES
The Company maintains its executive office and warehouse in 6,129 and 3,003
square feet, respectively, at 2601 Northwest Expressway, Suite 1210W, Oklahoma
City, Oklahoma 73112-7293. The premises are occupied pursuant to long-term
leases which expire on May 31, 1998 and January 30, 1998, respectively, and
which require monthly rental payments of $4,469 and $1,251, respectively. The
Company believes that it will need additional space to support its anticipated
growth. In the event the Company is required to relocate its office and
warehouse upon termination of the existing leases, the Company believes other
office and warehouse space is available for lease or purchase under favorable
terms in the Oklahoma City area. The Company does not expect that any portion
of the net proceeds of this offering will be utilized for any such purchase.
LITIGATION
Other than as set forth below, the Company is not a party to any pending
litigation. The Company is under an investigation by the Oklahoma Department
of Securities, which was commenced in September 1995, with respect to a number
of issues, the most prominent of which relates to the AMS Distributor Stock
Pool (the "Pool"). As of the date of this Prospectus, the investigation is in
the discovery stage. The Pool, under which the Company's independent
distributors are permitted to participant on a voluntary basis, was formed in
1990.
41
<PAGE>
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 registered broker-dealer. 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 June 30, 1997, the Pool held
approximately 213,500 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 negotiating an agreement with the Oklahoma Department of Securities
under the proposed terms of which no action will be taken against the Company
and its officers and directors.
COMPANY HISTORY
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 Pacific Coast International, Inc.,
(iii) the Company changed its name from AMS, Inc. to Advantage Marketing
Systems, Inc., (an Oklahoma Corporation) and (iv) Pacific Coast International,
Inc. changed its name to Advantage Marketing Systems, Inc. ("AMS Delaware").
Prior to the Exchange, Pacific Coast International, Inc. and certain
individuals sold, in a public offering, 225,860 shares of Common Stock and
525,860 Class A Common Stock Purchase Warrants ("Class A Warrants") and Class
B Common Stock Purchase Warrants ("Class B Warrants"). The Class A Warrants
and Class B Warrants were redeemed on March 17, 1997.
REINCORPORATION MERGER. Effective December 11, 1995, AMS Delaware, 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"), with the Company as the surviving corporation. As a result of the
Merger, AMS Delaware ceased to exist, and the Company succeeded to all of its
assets and liabilities. Prior to the Merger, AMS Delaware did not conduct any
business, and all operations were conducted by the Company.
42
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each
executive officer and director of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
John W. Hail(1)(2)...... 66 Chairman of the Board, Chief Executive Officer and
Director
Curtis H. Wilson, 71
Sr.(3)................. Vice-Chairman of the Board and Director
Roger P. Baresel(1)(2).. 42 President, Chief Financial Officer, Secretary and
Director
R. Terren Dunlap(3)(5).. 53 Director
Harland C. 59
Stonecipher(4)(5)...... Director
</TABLE>
- --------
(1) Member of the Stock Option Committee. See "--Stock Option Plan."
(2) Term as a Director expires in 1998.
(3) Term as a Director expires in 2000.
(4) Term as a Director expires in 1999.
(5) Member of the Audit Committee.
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 1999, Class II
Directors hold office initially for a term expiring at the annual meeting of
shareholders to be held in 2000, 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. 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 a term expiring at the annual meeting of shareholders held in the third
year following the year of his election. Executive officers are elected by the
Board of Directors and serve at its discretion.
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
of the Company since its inception in June 1988. During 1987 and through May
1988, Mr. Hail served as Executive Vice President, Director and Agency
Director of Pre-Paid Legal Services, Inc., a public company engaged in the
sale of legal services contracts, and 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.
Roger P. Baresel has served as Vice President, Chief Financial Officer,
Secretary and a Director of the Company since June 1995, and in July 1995, he
became President. Mr. Baresel is a Certified Public Accountant and holds a
Master of Business Administration degree. From 1988 until joining the Company
full-time in 1995, he maintained an accounting practice, specializing in
providing consulting services to small and growing businesses and provided
consulting services to the Company.
R. Terren Dunlap has served as a Director of the Company since June 1995. He
is Chief Executive Officer of Total Switch, Inc., a company formed in 1997
that developed and distributes electronic switches. He served as Vice
President-International Development of the Company from June 1995 through
March 1996. Mr. Dunlap is a Director and the co-founder, and from 1984 and
until March 1994 served as Chief Executive Officer and Chairman of the Board,
of Go-Video, Inc., a developer and distributor of consumer electronics
products.
Harland C. Stonecipher has served as a Director of the Company since August
1995. Mr. Stonecipher has been Chairman of the Board and Chief Executive
Officer of Pre-Paid Legal Services, Inc. since its inception in 1972.
43
<PAGE>
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 named
executives for services rendered during the years ended December 31, 1996,
1995 and 1994.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------- AWARD OF OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS OTHER(2) NUMBER OF SHARES
--------------------------- ---- --------- ----- -------- ----------------
<S> <C> <C> <C> <C> <C>
John W. Hail................. 1996 $ -- $-- $22,000 --
Chief Executive Officer 1995 -- -- 87,684 375,000(2)
1994 -- -- 66,026 --
Roger P. Baresel............. 1996 $91,413 $-- $ -- --
President, Chief Financial
Officer and 1995 37,692 -- 13,500(3) 168,750(4)
Secretary 1994 -- -- 19,500(3) 10,000(4)
</TABLE>
- --------
(1) Dollar value of base salary earned during the year.
(2) The Company furnishes the use of an automobile to Mr. Hail, the value of
which is not greater than $5,000 annually. During 1996, 1995, and 1994,
the Company made non-interest bearing advances to the John Hail Agency,
Inc., an affiliate of Mr. Hail, of $22,000, $87,684, and $66,026,
respectively. See "Certain Transactions."
(3) Represents accounting and consulting service fees paid to Mr. Baresel
prior to Mr. Baresel becoming an executive officer of the Company on June
1, 1995. See "Certain Transactions." The Company furnishes the use of an
automobile to Mr. Baresel, the value of which is not greater than $5,000
annually.
(4) Adjusted to give effect to the one-for-eight reverse stock split on
October 29, 1996.
AGGREGATE OPTION GRANTS AND EXERCISES IN 1995 AND 1996 AND YEAR-END OPTION
VALUES
Stock Options and Option Values. During 1995, the Company granted 1,189,819
stock options to its executive officers, other employees, and consultants,
each exercisable for the purchase of one share of Common Stock. The exercise
prices of these stock options are from $2.00 to $6.48 per share of Common
Stock, having an average exercise price of $2.77 per share. These stock
options were not granted under the Company's Stock Option Plan and were
granted in lieu of a portion of salary and cash bonus compensation otherwise
payable during 1995. During 1996, the Company did not grant any stock options.
The following table sets forth information related to options granted to the
named executives during 1995.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------
PERCENT OF
TOTAL OPTIONS EXERCISE
NUMBER GRANTED TO OR BASE
OF OPTIONS EMPLOYEES PRICE PER
GRANTED(1) IN 1995 SHARE
---------- ------------- ---------
<S> <C> <C> <C>
John W. Hail(1)............................ 375,000 50.3% $2.00
Chief Executive Officer
Roger P. Baresel(2)........................ 125,000 16.8% $2.00
President, Chief Financial Officer, Secre-
tary 43,750 5.9% $3.60
</TABLE>
- --------
(1) Of the 375,000 stock options received, Mr. Hail transferred by gift
225,000 stock options during 1995.
(2) Of the 168,750 stock options received, Mr. Baresel transferred by gift
156,250 stock options during 1995.
44
<PAGE>
Aggregate Stock Option Exercise and Year-End and Option Values. The
following table sets forth information related to the number and value of
options held by the named executives at December 31, 1996 and 1995. During
1996 and 1995, no options to purchase Common Stock were exercised by the named
executives.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AS OF OPTIONS AS OF
DECEMBER 31, 1996 AND 1995 DECEMBER 31, 1996 AND 1995(1)
----------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------------- -----------------------------
<S> <C> <C> <C> <C> <C>
John W. Hail............ 1996 150,000 -- $ 562,500 $ --
1995 150,000(2) -- $ 600,000 $ --
Roger P. Baresel........ 1996 35,000 -- $ 134,650 $ --
1995 35,000(3) -- $ 143,400 $ --
</TABLE>
- --------
(1) The closing highest bid price of the Common Stock as quoted by the
National Quotation Bureau, Incorporated on December 31, 1996 and 1995 was
$5.75 and $6.00, respectively, after giving effect to the one-for-eight
reverse stock split on October 29, 1996. The per-share value is calculated
based on the applicable closing highest bid price per share, 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.
(3) During 1995, Mr. Baresel transferred by gift 156,250 stock options.
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 Stock Option 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 to
purchase 146,750 shares of Common Stock have been granted under the Plan at
exercise prices of $6.00 per share and expiring March 2002 through May 2007.
The Stock Option Committee, which is currently comprised of Messrs. Hail and
Baresel, administers and interprets the Plan and, subject to the undertakings
discussed below, has authority to grant options to all eligible employees and
to determine the types of options granted and the terms, restrictions and
conditions of the options at the time of grant. During the one-year period
following the date of this Prospectus, the Company has undertaken not to grant
(i) any additional options or warrants other than pursuant to the Plan, (ii)
stock options under the Plan to any officer, director or employee of the
Company and its subsidiaries that have an aggregate exercise price in excess
of the annual salary during the year of such grant of such officer, director
or employee and (iii) John W. Hail, Curtis H. Wilson, Sr. and Roger P. Baresel
any stock options under the Plan without the unanimous approval of the
independent directors of the Company which at all such times shall not be less
than two independent directors.
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 either (i) averaging the
closing high bid and low
45
<PAGE>
asked quotations for such share on the date of grant of the option as reported
by the National Quotation Bureau, Incorporated, or (ii) if not quoted by the
National Quotation Bureau, Incorporated 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 Stock Option Plan may not be exercised until six
months after the date of the grant, except in the event of death or disability
of the participant. ISO Options and any SARs are exercisable only by
participants while actively employed as an employee or a consultant by the
Company, except in the case of death, retirement or disability. Options may be
exercised at any time within three months after the participant's retirement
or within one year after the participant's disability or death, but not beyond
the expiration date of the option. No option may be granted after April 30,
2005. Options are not transferable except by will or by the laws of descent
and distribution.
OFFICER AND DIRECTOR LIABILITY
As permitted by the provisions of the Oklahoma General Corporation Act, the
Certificate of Incorporation (the "Certificate") eliminates in certain
circumstances the monetary liability of directors of the Company for a breach
of their fiduciary duty as directors. These provisions do not eliminate the
liability of a director for (i) a breach of the director's duty of loyalty to
the Company or its shareholders, (ii) acts or omissions by a director not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) liability arising under Section 1053 of the Oklahoma General
Corporation Act (relating to the declaration of dividends and purchase or
redemption of shares in violation of the Oklahoma General Corporation Act), or
(iv) any transaction from which the director derived an improper personal
benefit. In addition, these provisions do not eliminate liability of a
director for violations of federal securities laws, nor do they limit the
rights of the Company or its shareholders, in appropriate circumstances, to
seek equitable remedies such as injunctive or other forms of non-monetary
relief. Such remedies may not be effective in all cases.
The Certificate of Incorporation and Bylaws of the Company provide that the
Company shall indemnify all directors and officers of the Company to the
fullest 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
interests 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 has obtained insurance to protect its directors and officers
against liability asserted against them in their official capacities. Such
insurance protection covers claims and any related defense costs of up to $3
million based on alleged or actual securities law violations, other than
intentional dishonest or fraudulent acts or omissions, or any willful
violation of any statute, rule or law, or claims arising out of any improper
profit, remuneration or advantage derived by an insured director or officer.
The Company has agreed to cause the Underwriters to be named as additional
insureds under the insurance policy.
46
<PAGE>
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.
John W. Hail, Chief Executive Officer and Chairman of the Board of Directors
of the Company, is the sole
director and shareholder of the John Hail Agency, Inc. ("JHA"). Pursuant to an
unwritten agreement, the Company provided office space, utilities and
supplies, as well as an occasional part-time administrative staff person,
through June 30, 1996, to JHA for a monthly payment of $1,000 as reimbursement
of the Company's costs. In addition, the Company made non-interest bearing
advances to JHA of $22,000 and $87,684 during the years ended December 31,
1996 and 1995, respectively. JHA has made repayments of these advances of
$6,141 and $67,401 during the fiscal years ended December 31, 1996 and 1995,
respectively. During the six months ended June 30, 1997, JHA made repayments
of $6,390. At June 30, 1997, JHA was indebted to the Company in the amount of
$61,431. 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 December 31, 1995, the balance due on a short-term loan to the Company
from Mr. Hail was $81,929. During 1995, the Company combined interest payable
of approximately $52,000 with the principal due under the loan and began
making weekly interest and principal payments of $1,500. The loan was
unsecured, due on demand and bore interest at 12 percent per annum. As of
December 31, 1996, the loan had been paid in full.
During 1995, John W. Hail individually entered into lease agreements
covering telephone equipment and related software and requiring monthly rental
payments. Such equipment and software are utilized exclusively by the Company.
During the six months ended June 30, 1997 and the fiscal years 1996 and 1995,
the Company made aggregate monthly payments pursuant to such lease agreements
of $9,714, $19,427 and $14,314, respectively.
During the five months ended May 31, 1995, Roger P. Baresel provided
accounting and consulting services to the Company, and for such services Mr.
Baresel was paid $13,500. On June 1, 1995, Mr. Baresel became an executive
officer and a Director of the Company and ceased providing accounting and
consulting services to the Company on an independent contractor basis.
During the six months ended June 30, 1997, and the years ended December 31,
1996 and 1995, the Company paid Curtis H. Wilson, Sr., a Director of the
Company, sales commissions of $18,988, $38,337 and $51,669, respectively.
During 1995, the Company granted Mr. Baresel 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. These stock options were
not granted pursuant to the Company's Stock Option Plan. 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. All of the stock
options were granted at the fair value of the Common Stock on the date of
grant and are currently exercisable.
During 1995, the Company granted Mr. Hail 10-year, transferrable stock
options exercisable for the purchase of 375,000 shares of Common Stock for
$2.00 per share. These stock options were not granted pursuant to the
Company's Stock Option Plan. During 1995, Mr. Hail transferred by gift 225,000
of these stock options to third parties. During 1997, pursuant to the
Company's Stock Option Plan, the Company granted Mr. Hail 10-year
nontransferable stock options exercisable for the purchase of 100,000 shares
of Common Stock for $6.00 per share. All of the stock options were granted at
the fair value of the Common Stock on the date of grant and those granted
during 1995 are currently exercisable.
47
<PAGE>
During 1995, the Company granted Mr. Wilson six-year stock options
exercisable for the purchase of 125,000 shares of Common Stock for $3.60 per
share. These stock options were not granted pursuant to the Company's Stock
Option Plan. All of the stock options were granted at the fair 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. These stock
options were not granted pursuant to the Company's Stock Option Plan. All of
the stock options were granted at the fair value of the Common Stock on the
date of grant and are currently exercisable.
During 1995, the Company granted United Financial Advisory, Inc. ("UFAI")
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. As a result of the grant of these stock options, UFAI became a
greater than five percent beneficial owner of the Common Stock of the Company.
These stock options were not granted pursuant to the Company's Stock Option
Plan. In addition, UFAI received cash compensation of $10,000 and $20,000 from
the Company during 1995 and 1997, respectively, for consulting and finanical
advisory services. Effective May 30, 1997, pursuant to written agreement
between UFAI and the Company, the stock options exercisable for the purchase
of 125,000 shares of Common Stock for $4.96 per share were surrendered to and
canceled by the Company. All of the stock options were granted at or above the
fair value of the Common Stock on the date of grant and are currently
exercisable.
During 1995, the Company granted Robert Nance 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. These stock options were not granted
pursuant to the Company's Stock Option Plan. 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 value of the Common Stock on the date of
grant and are currently exercisable.
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 not less than two of the disinterested independent directors of
the Company and that such loans and other transactions with affiliates will be
on terms no less favorable than could be obtained from unaffiliated parties
and approved by a majority of not less than two of the disinterested
independent directors. As of the date of this Prospectus, the Board of
Directors is comprised of five members, of which R. Terren Dunlap and Harland
C. Stonecipher are the only 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 16, 1997, and the beneficial
ownership of the Common Stock as adjusted to give effect to the sale of
1,300,000 shares of Common Stock comprising in part the Units offered pursuant
to this offering (assuming the Over-Allotment Option is not exercised), 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. For purposes of the
following table, the number of shares and percentage of ownership of
outstanding Common Stock that the named person beneficially owns includes
shares of Common Stock that such person has the right to acquire within 60
days of October 16, 1997 upon exercise of the 1997-A Warrants, options and
other warrants, but such shares are not included for the purposes of computing
the number of shares beneficially owned and percentage of outstanding Common
Stock of any other named person.
48
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------
PERCENT OF
SHARES OUTSTANDING
SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING(1)
- ------------------------------------ ------------ -------- -----------
<S> <C> <C> <C>
John W. Hail(2)(3)........................... 491,641 16.8% 11.6%
Curtis H. Wilson(2)(4)....................... 269,945 9.2% 6.4%
Robert and Retha Nance(5).................... 197,591 7.2% 4.9%
Roger P. Baresel(2)(6)....................... 169,328 6.0% 4.1%
Harland C. Stonecipher(7).................... 80,768 3.0% 2.0%
R. Terren Dunlap(2)(8)....................... 37,500 1.4% 0.9%
Executive Officers and Directors as a group
(five persons)(9)........................... 1,049,182 31.2% 22.5%
</TABLE>
- --------
(1) Gives effect to the sale of 1,300,000 shares of Common Stock comprising
the Units pursuant to this offering (assuming the Over-Allotment Option is
not exercised).
(2) A Director or an executive officer of the Company, with a business address
of 2601 Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-
7293.
(3) The number of shares and each percentage presented includes 250,000 shares
of Common Stock that are subject to stock options held by Mr. Hail of
which 150,000 are currently exercisable stock options and 100,000 are
exercisable after November 20, 1997.
(4) The number of shares and each percentage presented includes 250,000 shares
of Common Stock that are subject to currently exercisable stock options
held by Mr. Wilson and 4,338 shares of outstanding Common Stock held by
Ruth Wilson, wife of Mr. Wilson, with respect to which Mr. Wilson
disclaims any beneficial interest.
(5) Mr. and Mrs. Nance are husband and wife and their business address is Post
Office Box 405, Wheatland, Oklahoma 73097. The number of shares consist of
and each percentage presented includes (i) 75 shares of outstanding Common
Stock held by Mr. Nance, (ii) 39,625 shares of outstanding Common Stock
owned by Mrs. Nance, (iii) 103,408 shares of outstanding Common Stock
owned jointly by Mr. and Mrs. Nance, and (iv) 54,483 shares of Common
Stock that are subject to currently exercisable stock options granted to
and held by Mr. Nance.
(6) The number of shares consist of and each percentage presented includes (i)
11,500 shares of outstanding Common Stock jointly held by Mr. Baresel and
his wife, Judith A. Baresel, (ii) 2,000 shares of Common Stock subject to
currently exercisable 1997-A Warrants jointly held by Mr. and Mrs.
Baresel, (iii) 35,000 shares of Common Stock that are subject to currently
exercisable stock options held by Mr. Baresel, (iv) 20,828 shares of
outstanding Common Stock held by Mrs. Baresel, (v) 87,500 shares of Common
Stock that are subject to currently exercisable stock options held by Mrs.
Baresel, and (vii) 12,500 shares of Common Stock that are subject to
currently exercisable stock options held by Mrs. Baresel as the custodian
for the benefit of the children of Mr. and Mrs. Baresel, with respect to
which Mr. Baresel disclaims any beneficial interest.
(7) 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 number of
shares consist of and each percentage presented includes 80,768 shares of
outstanding Common Stock held by Pre-Paid Legal Services, Inc., which may
be deemed to be beneficially owned by Mr. Stonecipher.
(8) The number of shares consist of and each percentage presented includes
37,500 shares of Common Stock that are issuable upon exercise of stock
options.
(9) The number of shares and each percentage presented includes 674,500 shares
of Common Stock that are issuable upon exercise of stock options and
warrants held by the executive officers and directors as a group.
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DESCRIPTION OF SECURITIES
UNITS
The Company is offering 1,300,000 Units, each consisting of one share of
Common Stock and one Redeemable Common Stock Purchase Warrant. Prior to the
Separation Date, each share of Common Stock and each Warrant will trade only
as a Unit. On the Separation Date, the Common Stock and Warrants comprising
the Units will separate on the Separation Date and thereafter will trade only
as separate securities.
AUTHORIZED AND OUTSTANDING CAPITAL
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 the date of this Prospectus, the outstanding
capital stock of the Company consisted of 2,680,081 shares of Common Stock.
After giving effect to this offering, the issued and outstanding capital stock
of the Company will consist of 3,680,081 shares of Common Stock, assuming the
Over-Allotment Option is not exercised by the Underwriters and assuming the
Company's outstanding 1997-A Warrants, stock options and other warrants are
not exercised. See "--Common Stock," "--1997-A Warrants," and "--Options and
Other Warrants."
The following description of certain matters relating to the capital stock
and the warrants is a summary of, and is qualified in its entirety by, the
provisions of the Company's Certificate of Incorporation, Bylaws, and the
warrant agreements between the Company and U.S. Stock Transfer Corp., as
amended, related to the Redeemable Common Stock Purchase Warrants offered
hereby and the outstanding 1997-A Warrants, all of which are filed as exhibits
to the Registration Statement of which this Prospectus is a part. See
"Additional Information."
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 outstanding Preferred Stock. 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. 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 outstanding Preferred Stock entitled to
vote with the holders of the Common Stock. Upon issuance of the Common Stock
as a component of the Units offered hereby, all of the outstanding shares of
Common Stock will be fully paid and non-assessable.
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
The holder of each Warrant issued pursuant to this offering is entitled on
and after the Separation Date, upon payment of the exercise price, to purchase
one share of Common Stock. The exercise price for the first 20 days following
this offering will be equal to 120 percent of the offering price of the Units.
The exercise price will be adjusted on the 20th day following the Separation
Date to 120 percent of the average of the closing sale prices of the Common
Stock as reported on the Nasdaq SmallCap Market during the 20-day period
following the Separation Date. Upon adjustment of the exercise price, the
Company will provide the holders of the Warrants appropriate and prompt notice
of the adjusted exercise price. The number and kind of securities or other
property for which the Warrants are exercisable are subject to adjustments in
certain events, such as mergers,
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reorganizations or stock splits, to prevent dilution. Unless previously
redeemed, the Warrants are exercisable during the five-year period commencing
on the date of this Prospectus. A holder will only be able to exercise the
Warrants held in the event (i) a current prospectus under the 1933 Act
relating to the shares of Common Stock issuable upon exercise of the Warrants
is then in effect and (ii) such Common Stock is qualified for sale or
exemption from qualification under the applicable securities laws of the
states in which the holder resides.
The Warrants are subject to redemption at any time by the Company, on not
less than 30 days' written notice, at a price of $0.25 per Warrant, after the
Separation Date and only after the closing sale price per share of the Common
Stock as reported on the Nasdaq SmallCap Market, for a period of 20
consecutive trading days, has been at or above $ (200 percent of the
exercise price of the Warrant). Holders of Warrants will automatically forfeit
their rights to purchase the shares of Common Stock issuable upon exercise of
the Warrants unless the Warrants are exercised before the close of business on
the business day immediately prior to the date set for redemption. All of the
outstanding Warrants must be redeemed if any are redeemed. A notice of
redemption shall be mailed to the registered holders of the Warrants by first
class mail, postage prepaid, within five business days after the date the
Company determines to exercise its right of redemption, but not less than 30
days before the date fixed for redemption. The notice of redemption shall
specify the redemption price, the date fixed for redemption, the place where
the Warrant certificates shall be delivered and the redemption price to be
paid, and that the right to exercise the Warrants shall terminate at 5:00 p.m.
New York City time on the business day immediately preceding the date fixed
for redemption. The Warrants will only be redeemable if, on the date the
Warrants are called for redemption, there is an effective registration
statement and current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants.
The Warrants may be exercised upon surrender of the certificate(s) therefor
on or prior to 5:00 p.m. New York City time on the expiration date of the
Warrants or, if the Warrants are called for redemption, the business day prior
to the redemption date, as explained above, at the offices of the Company's
warrant agent (the "Warrant Agent") with the subscription on the reverse side
of the certificate completed and executed as indicated, accompanied by payment
of the full exercise price for the number of Warrants being exercised.
In certain cases, the sale of securities by the Company upon exercise of the
Warrants could violate the securities laws of the United States, certain
states or other jurisdictions. The Company has agreed to maintain an effective
registration under the 1933 Act at its expense with respect to the securities
underlying the Warrants (and, if necessary, to allow their public resale
without restriction) at all times during the period in which the Warrants are
exercisable. The Company has agreed to use its best efforts, and to take such
actions under the laws of various states, as may be required to cause the sale
of the securities underlying the Warrants upon their exercise to be lawful.
However, the Company will not be required to honor the exercise of the
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 the 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.
The Warrants contain provisions that protect the holder thereof against
dilution by adjustment of the number of shares of Common Stock or other
securities of the Company purchasable upon exercise of the Warrants in certain
events, such as stock dividends, stock splits, mergers, sale of substantially
all of the Company's assets, and for other extraordinary events.
The Company is not required to issue fractional shares of Common Stock and,
in lieu thereof, will make a cash payment based upon the current market value
of such shares. The holders of the Warrants will not possess any rights as
shareholders of the Company unless and until the holders exercise the Warrants
and then only as a holder of the Common Stock.
1997-A WARRANTS
As of the date of this Prospectus, there are 337,211 1997-A Warrants
outstanding, all of which were issued in connection with the Warrant
Modification Offering and the Rights Offering. See "Management's Discussion
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and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." The terms and conditions of the 1997-A Warrants are set
forth in the Warrant Agreement between the Company and U.S. Stock Transfer
Corp. dated January 26, 1997 (the "1997-A Warant Agreement"). The following
description of the 1997-A Warrants is not complete and is qualified in all
respects by the Warrant Agreement which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."
Each 1997-A Warrant entitles the holder to purchase one share of Common
Stock at any time on or before January 31, 1999, for an exercise price of
$12.00. The Company anticipates that, pursuant to its rights under the 1997-A
Warrant Agreement, the Company will (i) extend the exercise period of the
1997-A Warrants to permit their exercise on or before the period ending five
years from the date of this Prospectus and (ii) reduce the exercise price of
the 1997-A Warrants to the same exercise price of the Warrants comprising in
part the Units. See "--Redeemable Common Stock Purchase Warrants." The number
and kind of securities or other property for which the 1997-A Warrants are
exercisable are subject to adjustment 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 1997-A Warrants for $.0001 per warrant. The 1997-A Warrants not
exercised or redeemed will expire on January 31, 1999. Holders of 1997-A
Warrants do 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
1997-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 1997-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
1997-A Warrants to be lawful. However, the Company will not be required to
honor the exercise of 1997-A Warrants if, in the opinion of counsel, the sale
of securities upon such exercise would be unlawful. The Company may, but is
not required to, purchase 1997-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 1997-A Warrants.
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. There are no
shares of Preferred Stock outstanding as of the date of this Prospectus. 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 shares of Preferred Stock.
Issuance of Preferred Stock 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
or preventing a change in control of the Company.
OTHER OPTIONS AND WARRANTS
As of the date of this Prospectus, the Company has granted stock options and
warrants to purchase 1,503,732 shares of Common Stock during various periods,
which expire December 1997 through May 2007, at exercise prices of $1.60 to
$6.00 per share (with a weighted average exercise price of $2.65). The
exercise prices of the stock options and warrants were equal to or greater
than the fair market value of the Common Stock on the date of the grant of
each stock option or warrant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--Pro
Forma Effect of Stock-Based Compensation" and "Management--Stock Option Plan."
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TAX CONSIDERATIONS REGARDING UNITS
The following is a brief summary of certain of the federal income tax
consequences associated with the purchase and ownership of the Common Stock
and Warrants comprising the Units and the exercise of the Warrants. The
summary is based upon provisions of the Internal Revenue Code of 1986, as
amended, Treasury Regulations, Internal Revenue Service rulings and judicial
decisions in effect on the date of this Prospectus, all of which are subject
to change.
For federal income tax purposes, the issue price of a Unit must be allocated
between the Common Stock and the Warrant comprising the Unit in proportion to
their respective fair market values at the time of issuance. The amount
allocated to the share of Common Stock and the Warrant will constitute the tax
basis of the Common Stock and Warrant for federal income tax purposes. Upon
exercise of a Warrant, the basis of such Warrant and the amount paid on the
exercise of such Warrant will be the basis of the share of Common Stock issued
with respect thereto.
No gain or loss will be recognized upon the exercise of a Warrant (nor will
the Company recognize any income upon the exercise of a Warrant). The holding
period of a share of Common Stock acquired upon exercise of a Warrant will
commence upon the date of exercise. Any gain or loss recognized by a holder
upon the sale of a share of Common Stock or a Warrant (including the
redemption of a Warrant by the Company) will generally constitute a capital
gain or loss. Any loss recognized upon the lapse of a Warrant will ordinarily
constitute a capital loss.
The Company, its shareholders or holders of the Warrants may be subject to
state or local taxation in various states or local jurisdictions, including
those in which they transact business or reside.
Prospective purchasers of the Units are urged to consult with their tax
advisors concerning the tax aspects of the Units, Common Stock and Warrants in
their own particular tax circumstances.
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 classes 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.
Staggered 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 makes 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
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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. The Company is 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 did own, within three years of the proposed combination, 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 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
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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 1997-A Warrants and Redeemable Common
Stock Purchase Warrants, whose address is 1745 Gardena Avenue, Suite 200,
Glendale, California 91204-2991.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 3,680,081 shares of
Common Stock issued and outstanding (assuming no exercise of the outstanding
1997-A Warrants, stock options and other warrants). The Company has reserved
2,794,193 shares of Common Stock for issuance upon exercise of the Warrants,
1997-A Warrants, the Representative's Warrants, stock options and other
warrants, and 1,125,000 shares of Common Stock for issuance under the 1995
Stock Option Plan. See "Security Ownership of Certain Beneficial Owners and
Management," "Description of Securities--1997-A Warrants," and "Management--
Stock Option Plan." Additionally, the Company will have 487,400,726 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. See "Risk Factors--Stock Price, Sales and Earnings Volatility."
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 Company has undertaken not to issue any options or
other securities convertible into Common Stock, other than options issued
under the Company's 1995 Stock Option Plan, for a period of one year after the
Offering.
The Common Stock and Warrants comprising the Units sold pursuant to this
offering will be immediately eligible for resale in the public market without
restriction or further registration under the 1933 Act, except for Common
Stock and 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 the date of
this Prospectus, there are 186,929 shares of Common Stock (the "Restricted
Shares") outstanding which have not been registered under the 1933 Act (of
which 21,853 are 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 a Company affiliate, who has
beneficially owned Restricted Shares for at least one year 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
one-year holding period requirement, in order to sell shares of Common Stock
which are not Restricted Shares. 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 two 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
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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.
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.
OPTIONS
As of the date of this Prospectus, options to purchase a total of 146,750
shares of Common Stock have been granted under the Stock Option Plan, and an
additional 978,250 shares of Common Stock are available for further grants
under the Stock Option Plan. See "Management--Stock Option Plan." Options for
the purchase of 1,356,982 shares of Common Stock have been granted outside of
the Stock Option Plan.
LOCK-UP AGREEMENTS
The Company's executive officers and directors, who hold in the aggregate
374,682 shares of Common Stock and stock options and warrants exercisable for
the purchase of 674,500 shares of Common Stock, have agreed with the
Representatives not to sell, transfer, or otherwise dispose of any shares of
currently held Common Stock for a period of one year, or options, warrants as
well as all other securities issuable upon exercise of such options or
warrants for a period of two years from the date of this Prospectus.
STATE IMPOSED ESCROW ARRANGEMENT
In connection with the registration or qualification of the Units and the
Common Stock and Warrants comprising the Units in Oklahoma, the executive
officers, directors, affiliates and certain other shareholders of the Company
will place all or a portion of their shares of Common Stock and stock options
in escrow arrangements for the benefit of the initial purchasers of the Units
sold pursuant to this offering. The terms and conditions of the escrow
arrangements and the amendment thereof will be determined by the Administrator
of the Oklahoma Department of Securities. The Company anticipates that under
the terms of the escrow arrangements, such shares of Common Stock and the
stock options, as well as any shares of Common Stock received upon exercise of
stock options, will remain in escrow, subject to release under certain
circumstances, for a period of three years following the effective date of the
registration or qualification in Oklahoma. During the period of the escrow
arrangements, the securities held in escrow may not be transferred, sold or
otherwise disposed of by the owner of such securities. As of the date of this
Prospectus, the terms of the escrow arrangements are indefinite and may not
become definitive until after the Registration Statement of which this
Prospectus is a part has been declared effective by the Securities and
Exchange Commission.
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UNDERWRITING
The Underwriters named below, acting through Paulson Investment Company,
Inc. and Joseph Charles & Assoc., Inc., as the Representatives, have agreed,
severally and not jointly, subject to the terms and conditions contained in an
Underwriting Agreement, to purchase the Units from the Company in the amounts
set forth below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF UNITS
----------- ---------------
<S> <C>
Paulson Investment Company, Inc...........................
Joseph Charles & Assoc., Inc..............................
---------
Total................................................. 1,300,000
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the Units offered hereby, other than the Units subject to the
Over-Allotment Option, if any are purchased, subject to certain conditions.
The Representatives have advised the Company that the Underwriters propose
to offer the Units to the public at the Price to Public set forth on the cover
page of this Prospectus and to selected dealers at such price less a
concession within the discretion of the Representatives and that the
Underwriters and such dealers may reallow a concession to other dealers,
including the Underwriters, within the discretion of the Representatives.
After the initial public offering of the Units, the Price to Public, the
concessions to selected dealers and the reallowance to other dealers may be
changed by the Representatives.
The Price to Public of the Units set forth on the cover of this Prospectus
and the exercise price of the Warrants will be determined by negotiation among
the Representatives and the Company. It is currently anticipated that the
offering price of the Units will be set at or near the market price of the
Common Stock as of the effective date of this Prospectus. Other factors that
may be considered in determining the public offering price and the Warrant
exercise price include the prospects of the Company, an assessment of the
industry in which the Company operates, an assessment of management, the
number of shares of Common Stock and Warrants offered and outstanding, the
price the purchasers of such securities might be expected to pay given the
nature of the Company, the history of trading activities in the Company's
Common Stock and the general conditions of the securities markets at the time
of this offering.
The Company has granted the Representatives the Over-Allotment Option,
exercisable during the 45-day period after the date of this Prospectus, to
purchase up to a maximum of an additional 195,000 Units on the same terms as
the Units being purchased by the Underwriters from the Company. The
Representatives may exercise the Over-Allotment Option only to cover over-
allotments made in connection with this offering.
The Company has agreed to sell and issue to the Representatives the
Representatives' Warrants. The Representatives' Warrants are exercisable for a
period of four years beginning one year from the date of this Prospectus. The
Representatives' Warrants are exercisable to purchase up to 130,000 Units at a
price of $ per Unit (120 percent of the Price to Public). The
Representatives' Warrants are nontransferable except to one of the
Underwriters or to any individual who is either a partner or an officer of an
Underwriter, or by will or the laws of descent and distribution. The holders
of the Representatives' Warrants will have, in that capacity, no voting,
dividend, or other shareholder rights. Any profit realized by the
Representatives on the sale of the securities upon exercise of the
Representatives' Warrants may be deemed to be additional underwriting
compensation.
The securities underlying the Representatives' Warrants have been registered
on the Registration Statement of which this Prospectus is a part. The Company
has agreed to maintain an effective registration at it expense with respect to
the securities underlying the Representatives' Warrants (and, if necessary, to
allow their public resale without restriction) at all times during the period
in which the Representatives' Warrants are exercisable.
57
<PAGE>
By virtue of holding the Representatives' Warrants, the Representatives have
the opportunity to profit, at a nominal cost, from an increase in the market
price of the Company's securities. Furthermore, the exercise of the
Representatives' Warrants could dilute the interests of the holders of Common
Stock and the existence of the Representatives' Warrants may make it more
difficult for the Company to raise additional equity capital. Although the
Company will obtain additional equity capital upon exercise of the
Representatives' Warrants, it is likely that the Company could then raise
additional capital on more favorable terms than those of the Representatives'
Warrants.
During and after this offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with this offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock
than they are required to purchase from the Company in this offering. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock which may be higher than the price that might otherwise prevail
in the open market, and these activities, if commenced, may be discontinued at
any time. These transactions may be effected in the over-the-counter market or
otherwise.
Paulson Investment Company, Inc. will also receive at closing a non-
accountable expense allowance equal to three percent of the aggregate Price to
Public of the Units sold in this offering.
The Representatives have informed the Company that they do not expect the
Underwriters to confirm sales of Units offered by this Prospectus to any
account on a discretionary basis.
The Underwriting Agreement provides for reciprocal indemnification and
contribution between the Company and its controlling persons, on the one hand,
and the Underwriters and their respective controlling persons, on the other
hand, against certain liabilities in connection with the Registration
Statement of which this Prospectus is a part, including liabilities under the
1933 Act.
The Company has agreed to add the Underwriters as named insureds under a
directors and officers insurance policy covering defense costs and liabilities
arising out of certain types of claims brought under federal and state
securities laws.
The Company's officers and directors have agreed that they will not offer,
sell, contract to sell, grant any option for the sale or otherwise dispose of
any currently held Common Stock for a period of one year from the date of this
Prospectus, or any options, warants or securities issuable upon exercise of
such options and warrants for a period of two years from the date of this
Prospectus, (other than intra-family transfer or transfers to trusts for
estate planning purposes), without the prior written consent of the
Representatives.
The foregoing is a summary of the principal terms of the Underwriting
Agreement and the Representatives' Warrants and does not purport to be
complete. Reference is made to copies of each such agreement which are filed
as exhibits to the Registration Statement. See "Additional Information."
LEGAL MATTERS
Certain legal matters related to this offering will be passed upon for the
Company by its counsel, Dunn Swan & Cunningham, A Professional Corporation,
Oklahoma City, Oklahoma. Certain legal matters related to this offering will
be passed upon for the Underwriters by Tonkon, Torp, Galen, Marmaduke & Booth,
Portland, Oregon.
EXPERTS
The consolidated financial statements of Advantage Marketing Systems, Inc.
(formerly AMS, Inc.) as of December 31, 1996 and 1995 and for each of the
three years in the period ended December 31, 1996, and the
58
<PAGE>
combined financial statements of Stay 'N Shape International, Inc., Now
International, Inc., Solution Products, Inc. and Nation of Winners, Inc. as of
December 31, 1996 and for the years ended December 31, 1996 and 1995, 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. 333-34885)
(herein, together with all amendments thereto, the "Registration Statement"),
of which this Prospectus constitutes a part, under 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. 001-13343), 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
consolidated 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.
59
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.) AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS:
Unaudited Pro Forma Consolidated Statement of Operations for the Year
Ended December 31, 1996............................................... F-2
Unaudited Pro Forma Consolidated Statement of Operations for the Six
Months Ended June 30, 1997............................................ F-3
Notes to Unaudited Pro Forma Consolidated Financial Statements......... F-4
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.) AND SUBSIDIARIES
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996
(Unaudited)........................................................... F-6
Consolidated Statements of Operations for the Six Months Ended June 30,
1997 and 1996 (Unaudited)............................................. F-7
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1997 and 1996 (Unaudited)............................................. F-8
Notes to Consolidated Financial Statements for the Six Months Ended
June 30, 1997 and 1996 (Unaudited).................................... F-9
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.) AND SUBSIDIARY
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report........................................... F-12
Consolidated Balance Sheets as of December 31, 1996 and 1995........... F-13
Consolidated Statements of Operations for Years Ended December 31,
1996, 1995 and 1994................................................... F-14
Consolidated Statements of Stockholders' Equity (Deficiency) for Years
Ended December 31, 1996, 1995 and 1994................................ F-15
Consolidated Statements of Cash Flows for Years Ended December 31,
1996, 1995 and 1994................................................... F-16
Notes to Consolidated Financial Statements for Years Ended December 31,
1996, 1995 and 1994................................................... F-17
STAY 'N SHAPE INTERNATIONAL, INC., NOW INTERNATIONAL, INC., SOLUTION
PRODUCTS, INC. AND NATION OF WINNERS, INC. UNAUDITED COMBINED FINANCIAL
STATEMENTS:
Combined Balance Sheets as of March 31, 1997 and December 31, 1996
(Unaudited)........................................................... F-27
Combined Statements of Operations for the Three Months Ended March 31,
1997 and 1996 (Unaudited)............................................. F-28
Combined Statements of Cash Flows for the Three Months Ended March 31,
1997 and 1996 (Unaudited)............................................. F-29
Notes to Combined Financial Statements for the Three Months Ended March
31, 1997 and 1996 (Unaudited)......................................... F-30
STAY 'N SHAPE INTERNATIONAL, INC., NOW INTERNATIONAL, INC., SOLUTION
PRODUCTS, INC. AND NATION OF WINNERS, INC. AUDITED COMBINED FINANCIAL
STATEMENTS:
Independent Auditors' Report........................................... F-31
Combined Balance Sheet as of December 31, 1996......................... F-32
Combined Statements of Operations for Years Ended December 31, 1996 and
1995.................................................................. F-33
Combined Statements of Stockholders' Equity for Years Ended December
31, 1996 and 1995..................................................... F-34
Combined Statements of Cash Flows for Years Ended December 31, 1996 and
1995.................................................................. F-35
Notes to Combined Financial Statements for Years Ended December 31,
1996 and 1995......................................................... F-36
</TABLE>
F-1
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
STAY 'N SHAPE
INT. INC. NOW
INT. INC., SOLUTION
ADVANTAGE PRODUCTS, INC.,
MARKETING NATION OF PRO FORMA PRO FORMA
SYSTEMS, INC. WINNERS, INC. ADJUSTMENTS COMBINED
------------- ------------------- ----------- ----------
NOTE 2
<S> <C> <C> <C> <C>
Net sales............... $6,129,916 $2,377,022 $ -- $8,506,938
Cost of sales........... 4,531,578 1,497,811 -- 6,029,389
---------- ---------- --------- ----------
Gross profit.......... 1,598,338 879,211 -- 2,477,549
Marketing, distribution
& administrative
expenses............... 1,296,080 937,470 124,519(a) 2,358,069
---------- ---------- --------- ----------
Income from
operations........... 302,258 (58,259) (124,519) 119,480
Other income (expense):
Interest, net........... (10,538) -- -- (10,538)
Other income............ 33,824 -- -- 33,824
---------- ---------- --------- ----------
Total other income
(expense)............ 23,286 -- -- 23,286
---------- ---------- --------- ----------
Income (loss) before
taxes.................. 325,544 (58,259) (124,519) 142,766
Tax benefit............. 499,613 -- 68,627(b) 568,240
---------- ---------- --------- ----------
Net income (loss)....... $ 825,157 $ (58,259) $ (55,892) $ 711,006
========== ========== ========= ==========
Weighted average common
shares outstanding..... 3,770,874 126,000 3,896,874
========== ========= ==========
Net income per common
share.................. $ 0.29 $ 0.25
========== ==========
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
F-2
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
STAY 'N SHAPE
INT. INC. NOW
INT. INC., SOLUTION
ADVANTAGE PRODUCTS, INC.,
MARKETING NATION OF PRO FORMA PRO FORMA
SYSTEMS, INC. WINNERS, INC. ADJUSTMENTS COMBINED
------------- ------------------- ----------- ----------
NOTE 2
<S> <C> <C> <C> <C>
Net sales............... $4,736,408 $583,461 $ -- $5,319,869
Cost of sales........... 3,502,298 313,249 -- 3,815,547
---------- -------- -------- ----------
Gross profit.......... 1,234,110 270,212 -- 1,504,322
Marketing, distribution
& administrative
expenses............... 1,051,927 230,413 31,130(a) 1,313,470
---------- -------- -------- ----------
Income from
operations........... 182,183 39,799 (31,130) 190,852
Other income (expense):
Interest, net........... 1,007 -- -- 1,007
Other income............ 13,123 -- -- 13,123
---------- -------- -------- ----------
Total other income
(expense)............ 14,130 -- -- 14,130
---------- -------- -------- ----------
Net income before
taxes.................. 196,313 39,799 (31,130) 204,982
Tax expense............. (74,520) -- (3,294)(b) (77,814)
---------- -------- -------- ----------
Net income (loss)....... $ 121,793 $ 39,799 $(34,424) $ 127,168
========== ======== ======== ==========
Weighted average common
shares outstanding..... 3,296,474 126,000 3,422,474
========== ======== ==========
Net income per common
share.................. $ 0.04 $ 0.04
========== ==========
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
F-3
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS FOR PRESENTATION
The pro forma balance sheet and statements of operations present the pro
forma effects of the acquisition by the Company of all of the assets of Stay
'N Shape International, Inc., a Georgia corporation ("SNSI"), Solution
Products, Inc., a Georgia corporation ("SPI"), Nation of Winners, Inc., a
Georgia corporation ("NWI"), Now International, Inc., a Georgia corporation
("NII"), (collectively, SNSI, SPI, NWI and NII are referred to as the "Selling
Group"), free and clear of any lien, charge, claim, pledge, security interest
or other encumbrance of any type or kind whatsoever, known or unknown (the
"SNSI Asset Purchase"). The SNSI Asset Purchase was closed on April 16, 1997.
The SNSI Asset Purchase has been accounted for under the purchase method of
accounting. Each company in the Selling Group is a network marketer of various
third-party manufactured nutritional supplements.
Pursuant to the Asset Purchase Agreement and in connection with the SNSI
Asset Purchase, the Company paid cash of $1,174,441 and issued 125,984 shares
of the Company's common stock at closing and agreed to either issue additional
shares of the Company's common stock having an aggregate market value equal
to, or make cash payments of, or at the Company's sole option any combination
thereof, $750,000 and $1,050,000 on or before June 29, 1998, and May 30, 1999,
respectively. The $750,000 aggregate market value of the additional shares of
the Company's common stock or cash payment will be reduced by the aggregate
amount that gross revenues, net of returns and allowances, during the 12-month
period ended April 30, 1998, from (i) sales (other than Choc-QuilizerTM) of
the purchased network marketing organization, sales to Market America, Inc.
(an unrelated network marketing company) and sales to retail outlet stores,
are less than $2,500,000 and (ii) the Company's sales of Choc-QuilizerTM are
less than $4,000,000 during such 12-month period. Furthermore, the $1,050,000
aggregate market value of the additional shares of the Company's common stock
or cash payment will be reduced by the aggregate amount that gross revenues,
net of returns and allowances, during the 12-month period ended March 31,
1999, from (i) sales (other than Choc-QuilizerTM) of the purchased network
marketing organization, sales to Market America, Inc. and sales to retail
outlet stores, are less than $5,000,000 and (ii) the Company's sales of Choc-
QuilizerTM are less than $8,000,000 during such 12-month period. The value of
the Company's common stock to be issued will be based upon the average of the
closing prices of the Company's common stock on the last three trading days of
the month preceding the month in which the applicable 12-month period ends.
The accompanying unaudited pro forma statements of operations are presented
assuming the SNSI Asset Purchase occurred or was consummated on the first day
of each period presented. The historical information presented for the Company
and the Selling Group as of and for the year ended December 31, 1996, is
derived from the audited financial statements of the Company and the Selling
Group as of such date or for such year. The historical information presented
for the Company and the Selling Group as of and for the periods ended June 30,
1997 and pre-acquisition period ending March 31, 1997, is derived from the
unaudited financial statements of the Company and the Selling Group as of such
date or for such period.
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 statements of operations are not necessarily indicative of the
consolidated results of future operations of the Company following
consummation of the SNSI Asset Purchase.
2. PRO FORMA ADJUSTMENTS
The accompanying unaudited pro forma consolidated financial statements have
been adjusted to record and give effect to the following:
(a) Amortization of goodwill over 20 years, $74,519 and $18,630 for the year
ended December 31, 1996, and for the three month pre-acquisition period
ended March 31, 1997, respectively. Amortization of the
F-4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
covenants not to compete over 10 years, $50,000 and $12,500 for the year
ended December 31, 1996, and for the three month pre-acquisition period
ended March 31, 1997, respectively.
(b) Income taxes are adjusted to reflect the above-mentioned adjustments for
amortization and for the effects of removing the "S Corporation" election
made by the shareholders of the Selling Group.
3. NET INCOME PER SHARE
Pro forma per share calculations for the Company are based upon the number
of shares of common stock outstanding after giving effect to the SNSI Asset
Purchase.
F-5
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash......................................................... $ 611,641 $ 169,569
Receivables--net of allowance of $25,804..................... 121,867 52,013
Receivable from affiliate.................................... 13,573 13,042
Commission advances.......................................... 131,032 44,821
Inventory.................................................... 663,987 217,945
Deferred income taxes........................................ 149,791 157,853
---------- -----------
Total current assets..................................... 1,691,891 655,243
COMMISSION ADVANCES............................................ 4,341 4,341
RECEIVABLES.................................................... 18,545 18,000
RECEIVABLE FROM AFFILIATE...................................... 47,859 54,780
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$375,199 and $327,344, respectively........................... 491,929 377,190
GOODWILL, Net.................................................. 1,753,201 109,232
COVENANTS NOT TO COMPETE, Net.................................. 553,011 52,222
DEFERRED INCOME TAXES.......................................... 277,301 341,760
OTHER ASSETS................................................... 163,817 177,573
---------- -----------
Total Assets............................................. $5,001,895 $ 1,790,341
========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................. $ 367,848 $ 268,433
Accrued expenses............................................. 383,652 247,883
Accrued promotion expense.................................... -- 46,370
Notes payable................................................ 17,516 9,446
Capital lease obligations.................................... 82,709 66,758
---------- -----------
Total current liabilities................................ 851,725 638,890
LONG-TERM LIABILITIES:
Notes payable................................................ 46,561 19,049
Capital lease obligations.................................... 221,897 210,973
---------- -----------
TOTAL LIABILITIES.............................................. 1,120,183 868,912
---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
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 2,680,081 and 2,143,441,
respectively................................................ 268 214
Paid-in capital.............................................. 4,819,816 1,981,380
Accumulated deficit.......................................... (938,372) (1,060,165)
---------- -----------
Total stockholders' equity................................... 3,881,712 921,429
---------- -----------
Total liabilities and stockholders' equity............... $5,001,895 $ 1,790,341
========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
Net sales............................................... $4,736,408 $2,797,284
Cost of sales........................................... 3,502,298 2,002,060
---------- ----------
Gross profit.......................................... 1,234,110 795,224
Marketing, distribution and administrative expenses..... 1,051,927 615,981
---------- ----------
Income from operations................................ 182,183 179,243
Other income (expense):
Interest, net......................................... 1,007 (7,863)
Other income.......................................... 13,123 10,259
---------- ----------
Total other income (expense)........................ 14,130 2,396
---------- ----------
INCOME BEFORE TAXES..................................... 196,313 181,639
INCOME TAX EXPENSE...................................... 74,520 --
---------- ----------
NET INCOME.............................................. $ 121,793 $ 181,639
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES................ 3,296,474 3,363,000*
========== ==========
NET INCOME PER COMMON SHARE............................. $ 0.04 $ 0.05*
========== ==========
</TABLE>
- --------
* Restated for one-for-eight reverse stock split effective October 29, 1996.
See notes to financial statements.
F-7
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1997 1996
----------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 121,793 $ 181,639
Adjustments to reconcile net income to net cash pro-
vided (used) by operating activities:
Depreciation and amortization......................... 94,839 30,965
Deferred income tax................................... 72,521 --
Changes in assets and liabilities which provided (used)
cash:
Inventory............................................. (317,416) (190,940)
Receivables, advances and prepaids.................... (126,340) (19,774)
Accounts payable and accrued expenses................. (21,321) 317,303
----------- ---------
Net cash provided (used) by operating activities..... (175,924) 319,193
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................... (83,531) (57,635)
Purchase of Miracle Mountain International, Inc....... -- (56,103)
Purchase of Chambre International, Inc................ (51,340) --
Purchase of assets pursuant to SNSI Asset Purchase.... (1,274,441) --
Purchase of other assets.............................. (72,940) (64,689)
Advances to affiliate................................. -- (22,000)
Repayment of advances to affiliate.................... 6,390 --
----------- ---------
Net cash used by investing activities................ (1,475,862) (200,427)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock................ 2,234,357 --
Proceeds from notes payable........................... 40,980 --
Payment of deferred offering costs.................... (133,862) --
Payment on notes payable.............................. (5,398) (4,104)
Principal payment on capital leases................... (42,219) (3,721)
Payment on notes payable--stockholder................. -- (41,229)
----------- ---------
Net cash provided (used) by financing activities..... 2,093,858 (49,054)
----------- ---------
NET INCREASE IN CASH................................... 442,072 69,712
BEGINNING CASH BALANCE................................. 169,569 112,087
----------- ---------
ENDING CASH BALANCE.................................... $ 611,641 $ 181,799
=========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest................ $ 11,688 $ 13,701
Cash paid during the year for taxes................... 1,999 --
Noncash financing and investing activities:
Property and equipment acquired by capital lease..... 69,094 6,700
Fair value of capital stock issued to purchase Mira-
cle Mountain International, Inc..................... -- 120,000
SNSI Asset Purchase:
Fair value of assets acquired....................... (84,063) --
Fair value of covenant not to compete............... (500,000) --
Purchase price in excess of tangible assets acquired
and covenant not to compete........................ (1,490,378) --
Fair value of common stock issuance................. 800,000 --
----------- ---------
Cash paid to purchase SNSI assets.................. (1,274,441) --
=========== =========
Acquisition of Chambre International, Inc.:
Fair value of assets acquired....................... (84,802) --
Fair value of covenant not to compete............... (20,000) --
Purchase price in excess of tangible assets acquired
and covenant not to compete........................ (179,325) --
Fair value of common stock issuance................. 84,000 --
Liabilities assumed................................. 148,787 --
----------- ---------
Cash paid to purchase Chambre International, Inc... $ (51,340) $ --
=========== =========
</TABLE>
See notes to financial statements.
F-8
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(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 consolidated financial statements of the
Company, and notes thereto, for the year ended December 31, 1996.
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, 1997. Certain
reclassifications have been made to prior period balances to conform with the
presentation for the current period.
2. ACQUISITIONS
Pursuant to a Stock Purchase Agreement having an effective date of January
31, 1997 (the "Purchase Agreement"), the Company acquired all of the issued
and outstanding capital stock of Chambre International, Inc., a Texas
corporation ("CII"), and CII became a wholly-owned subsidiary of the Company
(the "CII Acquisition"). The CII Acquisition was closed on January 31, 1997,
and was accounted for under the purchase method of accounting. CII is a
network marketer of various third-party manufactured cosmetics, skin care and
hair care products. In connection with the CII Acquisition, the Company issued
6,482 shares of its common stock to the shareholders of CII at closing and
issued an additional 7,518 shares of its common stock to the shareholders of
CII on March 31, 1997, after determination of certain liabilities.
In connection with the CII Acquisition, the excess of the purchase price of
$135,340, which includes $3,549 of transaction costs, over the negative
$63,985 fair market value of assets of CII acquired, net of liabilities
assumed, was allocated $179,325 to Goodwill and $20,000 to a covenant not to
compete. Goodwill and the covenant not to compete will be amortized over 20
year and 47 month periods, respectively.
Pursuant to an Asset Purchase Agreement having an effective date of April
16, 1997 (the "Purchase Agreement"), the Company acquired all of the assets of
Stay 'N Shape International, Inc. ("SNSI"), Solution Products International,
Inc. ("SPII"), Nation of Winners, Inc. ("NWI"), Now International, Inc.
("NII"), all Georgia corporations, (collectively SNSI, SPII, NWI and NII are
referred to as the "Selling Group"), free and clear of any lien, charge,
claim, pledge, security interest or other encumbrance of any type or kind
whatsoever, known or unknown (the "SNSI Asset Purchase"). The SNSI Asset
Purchase was closed on April 16, 1997, and was accounted for under the
purchase method of accounting. Each company in the Selling Group is a network
marketer of various third-party manufactured nutritional supplements and was
under common ownership.
In connection with the SNSI Asset Purchase, the Company paid cash of
$1,174,441 and issued 125,984 shares of the Company's common stock at closing
and agreed to either issue additional shares of the Company's common stock
having an aggregate market value equal to, or make cash payments of, or at the
Company's sole option, any combination thereof, $750,000 and $1,050,000 on or
before June 29, 1998, and May 30, 1999, respectively. The $750,000 aggregate
market value of the additional shares of the Company's common stock or cash
payment will be reduced by the aggregate amount that gross revenues, net of
returns and allowances, during the 12-month period ended April 30, 1998, from
(i) sales (other than Choc-Quilizer(TM)) of the purchased network
F-9
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
marketing organization, sales to Market America, Inc. (an unrelated network
marketing company) and sales to retail outlet stores, are less than $2,500,000
and (ii) the Company's sales of Choc-Quilizer (TM) are less than $4,000,000
during such 12-month period. Furthermore, the $1,050,000 aggregate market
value of the additional shares of the Company's common stock or cash payment
will be reduced by the aggregate amount that gross revenues, net of returns
and allowances, during the 12-month period ended March 31, 1999, from (i)
sales (other than Choc-Quilizer (TM)) of the purchased network marketing
organization, sales to Market America, Inc. and sales to retail outlet stores,
are less than $5,000,000 and (ii) the Company's sales of Choc-Quilizer (TM)
are less than $8,000,000 during such 12-month period. The value of the
Company's common stock to be issued will be based upon the average of the
closing prices of the Company's common stock on the last three trading days of
the month preceding the month in which the applicable 12-month period ends.
In connection with the SNSI Asset Purchase, the excess of the purchase price
of $2,074,441, which includes $100,000 of transaction costs, over the $84,063
fair market value of the assets acquired, was allocated $1,490,378 to goodwill
and $500,000 to two covenants not to compete. Goodwill and the covenants not
to compete will be amortized over 20 and 10 year periods, respectively.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and the Selling Group as if
the acquisition had occurred at the beginning of 1996 and 1997, with pro forma
adjustments to give effect to amortization of goodwill together with the
related income tax effect.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------
<S> <C> <C>
Net sales................................ $8,506,938 $5,319,869
Net earnings............................. 711,006 127,168
Net earnings per share................... 0.25 0.04
</TABLE>
3. STOCK OPTIONS
The Company established the Advantage Marketing Systems, Inc. 1995 Stock
Option Plan (the "Plan") in June 1995. The Plan provides for the issuance of
incentive and nonincentive stock options with or without stock appreciation
rights to employees and consultants of the Company, including employees who
also serve as directors of the Company. The total number of shares of the
Company's common stock authorized and reserved for issuance under the Plan is
1,125,000. During the six months ended June 30, 1997, the Company issued
146,750 options under the Plan. As of June 30, 1997, 146,750 options had been
granted under the Plan.
4. ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128-Earnings Per
Share, which is effective for the Company's year ending December 31, 1997. The
statement establishes standards for computing and presenting earnings per
share. Adoption of SFAS No. 128 is not expected to have a material effect on
the Company's consolidated financial position or results of operations, but
will result in changes to the calculation of earnings per share.
Also in February 1997, the FASB issued SFAS No. 129-Disclosure of
Information about Capital Structure, which is effective for the Company's year
ending December 31, 1997. The statement establishes standards for disclosing
information about a reporting company's capital structure. The Company
believes that adoption of SFAS No. 129 will not have a material effect on the
Company's financial statements.
F-10
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
In June 1997, the FASB issued SFAS No. 130-Reporting Comprehensive Income
which is effective for the Company's year ending December 31, 1998. The
statement addresses the reporting and displaying of comprehensive income and
its components. Earnings per share will only be reported for net income and
not for comprehensive income.
Also in June 1997, the FASB issued SFAS No. 131-Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 modifies current
segment reporting requirements and establishes, for public companies, criteria
for reporting disclosures about a company's products and services, geographic
areas and major customers in annual and interim financial statements. The
Company will adopt SFAS No. 131 for the year ending December 31, 1998.
5. WARRANT MODIFICATION OFFERING AND RIGHTS OFFERING
On January 31, 1997, the Company distributed, at no cost, non-transferable
rights ("Rights") to the holders of record of shares of its common stock, par
value $.0001 per share. The Rights entitled the holders (the "Rights Holders")
to subscribe for and purchase up to 2,148,191 units (each unit consisting of
one share of common stock and one 1997-A warrant) for the price of $6.80 per
unit (the "Rights Offering"). The record date holders of the Company's common
stock received one Right for each share of common stock held by them as of the
record date. The Rights expired on March 17, 1997. Pursuant to the Rights, the
Rights Holders could purchase one unit for each Right held.
Concurrent with the Rights Offering, the Company elected to redeem all of
its outstanding Class A and Class B common stock Purchase Warrants (the
"Public Warrants") for $.0008 per warrant (the "Warrant Redemption") on March
17, 1997. However, in connection with the Warrant Redemption, the Company,
pursuant to modification of the terms of the Public Warrants, offered to the
Public Warrant holders (the "Warrant Holders") the right to exercise the
Public Warrants to purchase units, each comprised of one share of common stock
and one 1997-A warrant, at an exercise price of $6.00 per unit (the "Warrant
Modification Offering").
The share of common stock and 1997-A warrant comprising each unit were
separately transferable immediately after the sale of the units to the Rights
Holders and Warrant Holders. Each 1997-A warrant is exercisable at any time 90
days after January 16, 1997, and on or before January 31, 1999, 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 1997-A warrant.
The units in the offerings described above were offered on a best efforts
basis by the Company and its officers and directors, without commissions,
selling fees or direct or indirect remuneration. The Rights Holders and
Warrant Holders were not required to pay any brokerage commissions or fees
with respect to the exercise of their Rights or Public Warrants. The Company
paid all charges and expenses of the subscription and warrant agents.
Proceeds to the Company from the Warrant Modification Offering and the
Rights Offering (the "Offerings") were $2,154,357. Accumulated offering costs
of $323,076 were charged against the net proceeds from these offerings.
Pursuant to the Offerings the Company issued 337,211 shares of common stock
and a corresponding number of 1997-A warrants.
* * * * * *
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Advantage Marketing Systems, Inc.
(Formerly AMS, Inc.) and Subsidiary
Oklahoma City, Oklahoma
We have audited the accompanying consolidated balance sheets of Advantage
Marketing Systems, Inc. (Formerly AMS, Inc.) and subsidiary (the "Company") as
of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity (deficiency), and cash flows for each of the
three years in the period ended December 31, 1996. These consolidated
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.) and subsidiary at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
April 4, 1997
F-12
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................................................. $ 169,569 $ 112,087
Receivables--net of allowances of $25,804 and $21,485,
respectively......................................... 52,013 18,299
Receivable from affiliate............................. 13,042 51,963
Commission advances................................... 44,821 2,371
Inventory............................................. 217,945 98,621
Deferred income taxes................................. 157,853 --
---------- ----------
Total current assets................................. 655,243 283,341
COMMISSION ADVANCES.................................... 4,341 65
RECEIVABLES............................................ 18,000 22,620
RECEIVABLE FROM AFFILIATE.............................. 54,780 --
PROPERTY AND EQUIPMENT, Net............................ 377,190 159,797
GOODWILL, Net.......................................... 109,232 --
COVENANT NOT TO COMPETE, Net........................... 52,222 --
DEFERRED INCOME TAXES.................................. 341,760 --
OTHER ASSETS........................................... 177,573 67,173
---------- ----------
TOTAL.................................................. $1,790,341 $ 532,996
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable...................................... $ 268,433 $ 91,949
Accrued expenses...................................... 247,883 151,654
Accrued promotion expense............................. 46,370 99,424
Notes payable:
Stockholders......................................... -- 81,929
Other................................................ 9,446 8,440
Capital lease obligations............................. 66,758 20,679
---------- ----------
Total current liabilities............................ 638,890 454,075
LONG-TERM LIABILITIES:
Notes payable--other.................................. 19,049 28,500
Capital lease obligations............................. 210,973 75,649
---------- ----------
Total liabilities.................................... 868,912 558,224
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 12)
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; issued and outstanding 2,143,441 and
2,123,191 shares, respectively (See Note 6).......... 214 212
Paid-in capital....................................... 1,981,380 1,859,882
Accumulated deficit................................... (1,060,165) (1,885,322)
---------- ----------
Total stockholders' equity (deficiency).............. 921,429 (25,228)
---------- ----------
TOTAL.................................................. $1,790,341 $ 532,996
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net sales................................. $6,129,916 $4,492,668 $2,647,322
Cost of sales............................. 4,531,578 3,150,741 1,930,973
---------- ---------- ----------
Gross profit............................ 1,598,338 1,341,927 716,349
Marketing, distribution and administrative
expenses................................. 1,296,080 1,094,756 641,893
---------- ---------- ----------
Income from operations.................. 302,258 247,171 74,456
Other income (expense):
Interest, net............................ (10,538) (22,998) (25,075)
Other income............................. 33,824 25,535 30,625
---------- ---------- ----------
Total other income (expense)............ 23,286 2,537 5,550
---------- ---------- ----------
INCOME BEFORE TAXES....................... 325,544 249,708 80,006
TAX BENEFIT............................... 499,613 -- --
---------- ---------- ----------
NET INCOME................................ $ 825,157 $ 249,708 $ 80,006
========== ========== ==========
Weighted average common shares
outstanding.............................. 3,770,874 2,662,681 2,119,356
========== ========== ==========
Net income per common share............... $ 0.29 $ 0.09 $ 0.04
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS
SHARES COMMON PAID-IN ACCUMULATED EQUITY
(SEE NOTE 6) STOCK CAPITAL DEFICIT (DEFICIENCY)
------------ ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1994................... 2,105,599 $211 $1,823,236 $(2,215,036) $(391,589)
Conversion of payables
into stock............. 1,342 -- 2,147 -- 2,147
Issuance of stock for
services received...... 13,750 1 21,999 -- 22,000
Net income.............. -- -- -- 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 stock for
cash................... 1,250 -- 5,000 -- 5,000
Net income.............. -- -- -- 249,708 249,708
--------- ---- ---------- ----------- ---------
BALANCE, DECEMBER 31,
1995................... 2,123,191 212 1,859,882 (1,885,322) (25,228)
Issuance of stock for
Miracle Mountain
International, Inc.
acquisition............ 20,000 2 119,998 -- 120,000
Warrants exercised...... 250 -- 1,500 -- 1,500
Net income.............. -- -- -- 825,157 825,157
--------- ---- ---------- ----------- ---------
BALANCE, DECEMBER 31,
1996................... 2,143,441 $214 $1,981,380 $(1,060,165) $ 921,429
========= ==== ========== =========== =========
</TABLE>
See notes to consolidated financial statements.
F-15
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 825,157 $ 249,708 $ 80,006
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................ 65,993 43,310 33,403
Deferred taxes............................... (499,613) -- --
Provision for bad debts...................... 4,319 2,000 884
Write-off of deferred offering costs......... 15,000 -- --
Gain on sale of property and equipment....... (1,572) -- --
Stock issued for services.................... -- -- 22,000
Stock issued for refunds..................... -- -- 2,147
Changes in assets and liabilities which
provided (used) cash:
Receivables and advances.................... (80,139) 7,280 31,819
Inventory................................... (119,324) (50,750) (28,854)
Accounts payable and accrued expenses....... 216,600 150,149 20,871
Notes payable to associates................. -- -- (10,728)
Interest payable............................ -- -- 20,860
Deferred revenue............................ -- (40,852) (63,156)
--------- --------- --------
Net cash provided by operating activities.. 426,421 360,845 109,252
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........... (66,675) (50,105) (6,689)
Advances to affiliate......................... (22,000) (87,684) (66,026)
Proceeds from sale of property and equipment.. 1,700 -- --
Repayment of advances to affiliate............ 6,141 67,401 9,069
Purchase of Miracle Mountain International,
Inc.......................................... (56,103) -- --
--------- --------- --------
Net cash used for investing activities..... (136,937) (70,388) (63,646)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock........ 1,500 12,500 --
Loans from stockholders....................... -- 31,963 61,374
Other loans................................... -- 39,098 3,685
Bank overdraft................................ -- (46,663) 13,074
Payment of deferred offering costs............ (125,400) (52,777) --
Payment on notes payable--stockholders........ (81,929) (142,615) (79,138)
Payment on notes payable--other............... (8,445) (7,985) (4,666)
Principal payment on capital leases........... (17,728) (11,891) (39,935)
--------- --------- --------
Net cash used in financing activities...... (232,002) (178,370) (45,606)
--------- --------- --------
NET INCREASE IN CASH........................... 57,482 112,087 --
BEGINNING CASH BALANCE......................... 112,087 -- --
--------- --------- --------
ENDING CASH BALANCE............................ $ 169,569 $ 112,087 $ --
========= ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest..................................... $ 23,021 $ 27,335 $ 4,215
Noncash financing and investing activities:
Additions to property and equipment through
capital leases.............................. 199,131 108,219 --
Reclassify interest payable to notes pay-
able--stockholders.......................... -- 51,806 --
Fair value of capital stock issued to pur-
chase Miracle Mountain International, Inc... 120,000 -- --
Issuance of common stock in satisfaction of
notes and accounts payable.................. -- -- 89,892
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include
the accounts of Advantage Marketing Systems, Inc. (formerly AMS, Inc.), and
its wholly owned subsidiary, Miracle Mountain International, Inc. (the
"Company"). All significant intercompany accounts have been eliminated.
Nature of Business--The Company markets nutritional supplements and weight
management products that are manufactured by various manufacturers. The
Company sells its products and programs through a network of full and part-
time independent distributors 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.
Intangibles--Intangible assets consist of goodwill and a covenant not to
compete. Goodwill represents the excess of cost over the fair value of the net
assets of acquired subsidiaries. The Company amortizes goodwill over seven
years. The covenant not to compete is being amortized over the life of the
contract. The goodwill amortization for the year ended December 31, 1996, was
$9,930. Covenant amortization for the year ended December 31, 1996 was $7,778.
Property and Equipment--Property and equipment are stated at cost or, in the
case of leased assets under capital leases, at the fair value of the leased
property and equipment, less accumulated depreciation and amortization.
Property and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets of three to five years. Assets under
capital leases and leasehold improvements are amortized over the lesser of the
term of the lease or the life of the asset.
Long-Lived Assets--In March 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS"), No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of. Effective for fiscal years beginning after December 15,
1995, SFAS 121 establishes accounting standards for identifying and
calculating the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to such assets. The Company adopted SFAS 121
in 1996 which did not have a material effect on the Company's consolidated
financial statements. Management of the Company assesses recoverability of its
long-lived assets based on undiscounted cash flows.
Earnings per Share--Earnings per common share are 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
F-17
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Note 6. Outstanding stock options and warrants are included in the calculation
of primary earnings per share when they meet the criteria for common stock
equivalents and their effect is dilutive. The Company determined 1996 earnings
per share using the modified treasury stock method which assumes changes to
interest income and expense as part of the calculation. The effects of common
stock equivalents on the weighted average number of shares outstanding was an
increase of 1,636,000 shares and of assumed interest changes was an increase
in net income of approximately $254,000. The effect of common stock
equivalents on the weighted average number of shares outstanding at December
31, 1995 and 1994 was an increase in shares of 538,000 and -0-, respectively.
Warrants have not been included in the earnings per share calculation at
December 31, 1995 and 1994 as they do not meet the criteria for common stock
equivalents. No difference exists between primary and fully diluted earnings
per share. In February 1997, the FASB issued SFAS No. 128, Earnings per Share.
The Company believes that adopting SFAS No. 128 will not have a material
effect on the Company's consolidated financial position or results of
operations, but will result in changes in the calculation of earnings per
share.
Income Taxes--The Company uses an asset and liability approach to account
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 established if, in management's opinion, it is more
likely than not that some portion of the deferred tax asset will not be
realized.
Fair Value Disclosures--The Company's financial instruments consist of
accounts receivable, accounts payable, advances due from an affiliate and
current and long-term notes payable. Amounts recorded for accounts receivable,
accounts payable and current notes payable approximate fair value due to the
short duration of such amounts. The interest rates on advances due from the
affiliate and on notes payable reflect current market rates. Consequently, the
carrying value of these instruments approximate fair value.
Accounting Standards Issued But Not Yet Adopted--In February 1997, the FASB
issued SFAS No. 129, Disclosure of Information About Capital Structure. The
Company will adopt SFAS No. 129 when required. Management believes that
adoption of this standard will not have a material impact on the Company's
consolidated financial position or results of operations.
Stock Option Plan--The Company adopted SFAS No. 123, Accounting for Stock-
Based Compensation on January 1, 1996, as required. The Company has elected to
continue applying Accounting Principles Board Opinion No. 25 in accounting for
its stock-based compensation awards as permitted under SFAS No. 123 and to
disclose the proforma effects of applying SFAS 123 in the footnotes.
Accordingly, no compensation cost relating to the stock option plan has been
recognized in the accompanying consolidated financial statements.
Reclassifications--Certain reclassifications have been made to prior year
balances to conform with the presentation for the current period.
2. OTHER ASSETS
Other assets consist primarily of the direct costs, mainly legal, accounting
and filing fees, associated with a registration statement filed by the Company
with the Securities and Exchange Commission. The registration statement was
declared effective January 16, 1997. See discussion of this registration
statement at Note 12.
F-18
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Office furniture, fixtures and equipment.................... $633,086 $378,287
Automobiles................................................. 44,872 54,056
Leasehold improvements...................................... 26,576 22,220
-------- --------
704,534 454,563
Accumulated depreciation and amortization................... (327,344) (294,766)
-------- --------
Total property and equipment, net........................... $377,190 $159,797
======== ========
</TABLE>
4. NOTES PAYABLE TO STOCKHOLDERS
The Company had a note payable to its major stockholder and chief executive
officer in the amount of $81,929 at December 31, 1995. During 1995, the
Company combined interest payable on the note of approximately $52,000 with
the outstanding principal balance. The principal was due on demand and bore
interest at 12%. During 1996, 1995 and 1994, the Company received advances of
$-0-, $31,963 and $61,374, respectively, and made payments of $81,929,
$127,615 and $79,138, respectively, on this payable. As of December 31, 1996,
the note payable had been paid in full.
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.
5. LEASE AGREEMENTS
During 1995 and 1996, 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
$40,000 per year. The schedule of future minimum lease payments below reflects
all payments under the leases.
The property and equipment accounts include $306,595 and $106,269 for leases
that have been capitalized at December 31, 1996 and 1995, respectively.
Related accumulated amortization amounted to $28,864 and $9,941 at December
31, 1996 and 1995, respectively.
The Company leases office space and certain equipment under noncancellable
operating leases.
F-19
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Future minimum lease payments under capital leases and noncancelable
operating leases with initial or remaining terms of one year or more at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
-------- --------- --------
<S> <C> <C> <C>
Year ending:
1997............................................ $ 87,804 $69,535 $157,339
1998............................................ 87,804 24,235 112,039
1999............................................ 67,451 -- 67,451
2000............................................ 42,954 -- 42,954
2001............................................ 40,272 -- 40,272
-------- ------- --------
Total minimum lease payments.................... 326,285 $93,770 $420,055
======= ========
Less amount representing interest............... 48,554
--------
Present value of net minimum lease payments..... 277,731
Less current portion............................ 66,758
--------
Long-term capital lease obligations............. $210,973
========
</TABLE>
Rental expense under operating leases for the years ended December 31, 1996,
1995 and 1994 was $63,425, $55,476 and $57,458, respectively.
6. STOCKHOLDERS' EQUITY
Common Stock--On October 29, 1996, the Board of Directors of the Company
effected a one-for-eight reverse split of the Company's outstanding common
stock, options and warrants. In addition, the number of the Company's
outstanding options and warrants have been reduced by a factor of eight and
their exercise price has been increased by a factor of eight pursuant to this
action.
This one-for-eight reverse split is reflected in the accompanying
consolidated financial statements and footnotes 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 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, has 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 has been adjusted to $.09 and $.04, respectively.
The Company has filed a registration statement with the Securities and
Exchange Commission to register common stock to be issued in association with
the redemption of outstanding warrants and distribution of common stock
rights. This registration statement was declared effective on January 16,
1997. See Note 12.
During 1996, the Company issued 20,000 shares of common stock in exchange
for all of the issued and outstanding capital stock of a similar multi-level
marketing company. See discussion of this acquisition at Note 11.
During 1994, $2,147 of accounts payable were settled by the Company through
the issuance of 1,342 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.
F-20
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
Common Stock Options--The Company 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 Company's common stock at the date
these options were issued. See Note 7 for the pro forma effects of SFAS 123.
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. All of the issued and outstanding options are currently
exercisable.
During 1994, the Company issued options on 34,108 shares of the Company's
common stock at exercise prices of $2.16 and $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 and vest at 20% per year.
The following table summarizes the Company's stock option activity for the
years ended December 31, 1996, 1995 and 1994 (as restated for the one-for-
eight reverse split in October 1996):
<TABLE>
<CAPTION>
EXERCISE EXERCISE EXERCISE
1996 PRICE 1995 PRICE 1994 PRICE
--------- ------------ --------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year...... 1,540,177 $1.60 - 6.48 350,358 $1.60 - 2.80 316,250 $ 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 expired during
the year............... 11,250 6.48 -- --
--------- --------- -------
Options outstanding, end
of year................ 1,528,927 $1.60 - 4.96 1,540,177 $1.60 - 6.48 350,358 $1.60 - 2.80
========= ========= =======
</TABLE>
F-21
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Common Stock Warrants--The following table summarizes the Company's common
stock warrants and their activity for the years ended December 31, 1996, 1995
and 1994 (as restated for the one-for-eight reverse split in October 1996):
<TABLE>
<CAPTION>
WARRANTS
ISSUED AND EXERCISE
OUTSTANDING PRICE EXERCISE PERIOD
----------- -------- ----------------
<S> <C> <C> <C>
DECEMBER 31, 1996:
Class A Warrants, beginning of year..... 524,610 $6.00 4/26/89--7/26/97
Class A Warrants exercised during the
year................................... (250) $6.00
-------
Class A Warrants, end of year........... 524,360
=======
Class B Warrants........................ 525,860 $8.00 4/26/89--7/26/97
=======
DECEMBER 31, 1995:
Class A Warrants, beginning of year..... 525,860 $6.00 4/26/89--7/26/97
Class A Warrants exercised during the
year................................... (1,250) $6.00
-------
Class A Warrants, end of year........... 524,610
=======
Class B Warrants........................ 525,860 $8.00 4/26/89--7/26/97
=======
DECEMBER 31, 1994:
Class A Warrants........................ 525,860 $6.00 4/26/89--7/26/97
-------
Class B Warrants........................ 525,860 $8.00 4/26/89--7/26/97
-------
</TABLE>
Each warrant entitles the holder to purchase one share of common stock. The
Company redeemed all Class A and Class B Warrants in January 1997. See
discussion of the redemption at Note 12.
Offering--The Company has signed a letter of intent with an underwriter to
make a firmly underwritten public offering in 1997 of units consisting of one
share of common stock of the Company and a warrant to purchase one additional
such share. The agreement between the Company and the underwriter includes a
provision requiring the Company to grant a warrant to the underwriter.
7. STOCK OPTION PLAN
During 1995, the Company approved the 1995 Stock Option Plan (the "Plan").
Under this Plan, options available for grant can 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. The Company has reserved 1,125,000 shares
of the Company's common stock $.0001 par value, for the Plan. 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 is 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
value of the stock at date of exercise. The fair value of stock appreciation
rights is charged to compensation expense. The stock appreciation right is not
separable from the underlying
F-22
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
stock option or incentive stock options originally granted and can only be
exercised in tandem with the stock option. No options under this Plan have
been granted or exercised as of December 31, 1996.
The Company applies Accounting Principles Board Opinion No. 25 in accounting
for its stock-based compensation awards. Accordingly, no compensation cost has
been recognized in the accompanying consolidated financial statements. The
following proforma data is calculated as if compensation cost for the
Company's stock-based compensation awards (see also Note 6) was determined
based upon the fair value at the grant date consistent with the methodology
prescribed under SFAS No. 123, Accounting for Stock-Based Compensation:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- -----------
<S> <C> <C>
Net income as reported................................ $825,157 $ 249,708
Proforma net income (loss)............................ $825,157 $(1,830,000)
Net income per common share as reported............... $ 0.29 $ 0.09
Proforma net income (loss) per common share........... $ 0.29 $ (0.69)
</TABLE>
The weighted average exercise price and fair value at the date of grant for
options granted in fiscal year 1995 was $2.77 and $1.75, respectively. This
fair value is estimated using the Black-Scholes option pricing model with the
following assumptions: no dividend yield; volatility of 59%; a weighted
average risk-free interest rate of 6.8%; no assumed forfeitures; and a
weighted average expected life of 7.3 years. The proforma amounts above are
not likely to be representative of future years because options vest over
several years and additional awards are generally made each year.
8. RELATED PARTIES
During 1996, 1995 and 1994, the Company received approximately $9,116,
$16,415 and $71,713, respectively, from Pre-Paid Legal Services, Inc., a
stockholder, for commissions on sales of memberships for the services provided
by Pre-Paid Legal Services, Inc.
The Company made non-interesting bearing cash 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, $87,684 and $66,026 during the years ended December 31, 1996, 1995
and 1994, respectively. JHA made repayments of these advances of $6,141,
$67,401 and $9,069 during the years ended December 31, 1996, 1995, 1994,
respectively. The Company also provided administrative services for JHA and
recognized revenue from JHA of $6,000, $12,000 and $12,000 for the years ended
December 31, 1996, 1995, and 1994, respectively, and are included in the
advances. The Company ceased providing administrative services for JHA during
1996 and adopted a policy to not make any further advances to JHA. JHA has
executed a promissory note payable to the Company with a principal balance of
$67,822 at December 31, 1996, bearing interest at 8.00% per annum and payable
in installments of $1,499 per month.
Certain stockholders receive commissions on revenue of the Company. Such
commissions are recognized as compensation to the stockholders and are
included in selling expense.
9. INCOME TAXES
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
F-23
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
The Company's deferred tax assets relate primarily to net operating loss
carryforwards for income tax purposes at December 31, 1996, totaling
approximately $1,346,951, which will begin to expire in 2003. Reduction of the
valuation allowance resulted in a deferred tax asset at December 31, 1996, of
$499,613 and a corresponding tax benefit for the year ended December 31, 1996.
A reconciliation of the statutory Federal income tax rate to the effective
income tax rate for the years ended December 31, 1996, 1995, and 1994 is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate..................... 34.0% 34.0% 34.0%
State tax effective rate.............................. 2.6 3.7 4.8
Benefit of graduated tax rates........................ (0.5) (2.2) (13.5)
Benefit of operating loss carryforwards............... (36.1) (35.5) (25.3)
Reduction in valuation allowance...................... (153.5) -- --
------ ----- -----
Effective income tax rate............................. (153.5)% -- % -- %
====== ===== =====
</TABLE>
Deferred tax liabilities and assets at December 31, 1996 and 1995 are
comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- ---------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.......................... $ (850) $ --
-------- ---------
Total deferred tax liabilities........................ (850) --
-------- ---------
Deferred tax assets:
Depreciation and amortization.......................... -- 3,900
Net operating loss carryforwards....................... 500,463 566,400
-------- ---------
Total deferred tax assets............................. 500,463 570,300
Valuation allowance for deferred tax assets............ -- (570,300)
-------- ---------
Total net deferred tax assets......................... 500,463 --
-------- ---------
Net deferred taxes...................................... 499,613 --
Less current portion of net deferred tax assets......... 157,853 --
-------- ---------
Noncurrent portion...................................... $341,760 $ --
======== =========
</TABLE>
10. COMMISSION ADVANCES
Commission advances represent advances to certain associates and are
repayable from future commissions earned by the associates. These advances do
not bear interest and are classified in the accompanying consolidated balance
sheets according to the expected timing of commissions to be earned by the
associates.
F-24
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
11. 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"). The MMI Acquisition was accounted for under the
purchase method of accounting. MMI is a network 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 the Company's common
stock.
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 value of the assets of MMI acquired, net of liabilities assumed,
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 seven
and four and one-half year periods, respectively.
The following unaudited pro forma results of operations for the years ended
December 31, 1996 and 1995 are presented as if the MMI Acquisition had been
made at the beginning of each period presented. The unaudited pro forma
information is not necessarily indicative of either the results of operations
that would have occurred had the purchase been made during the periods
presented or the future results of the combined operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
Net revenues........................................ $ 6,369,000 $ 4,796,000
Net income.......................................... $ 794,000 $ 89,000
Net income per common share......................... $ 0.28 $ 0.03
</TABLE>
12. SUBSEQUENT EVENTS
On January 31, 1997, pursuant to a Stock Purchase Agreement (the "Purchase
Agreement"), the Company acquired all of the issued and outstanding capital
stock of Chambre International, Inc., a Texas corporation ("CII"), and CII
became a wholly owned subsidiary of the Company (the "CII Acquisition"). The
CII Acquisition will be accounted for under the purchase method of accounting.
CII is a network marketer of various third-party manufactured cosmetics, skin
care and hair care products. Pursuant to the Purchase Agreement and in
connection with the CII Acquisition, the Company issued and delivered to the
shareholders of CII 6,482 shares of common stock at closing. In addition, the
Company issued and delivered an additional 7,518 shares of common stock to the
shareholders of CII on March 31, 1997, after determination of certain
liabilities.
In April 1997, the Company acquired all of the assets of Stay 'N Shape
International, Inc., Solution Products International, Inc., Nation of Winners,
Inc., and Now International, Inc. (the "Group"). The Company purchased all of
the assets of the Group, free and clear of all liens and encumbrances, for a
combination of $1,174,441 cash and shares of the Company's restricted
(unregistered) common stock (the "Purchase Price") with an estimated fair
value of up to $2,600,000, dependent upon meeting certain future sales
targets. The cash portion of the Purchase Price was paid at closing. The stock
portion of the Purchase Price will be issued and delivered over a 25-month
period with stock valued at $800,000 delivered at closing, $750,000 due within
14 months of closing, and $1,050,000 due within 25 months from closing. The
Company has the option of substituting cash for any portion of the remaining
purchase price. The number of shares of common stock to be issued and
delivered, if any, is subject to the market value of the Company's common
stock prior to the date of issuance and delivery as
F-25
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
set forth in the purchase agreement. The Purchase Price is subject to
reduction based on sales performance over a two-year period. The Group
acquisition will be accounted for under the purchase method of accounting.
Each company in the Group is a network marketer of various third-party
manufactured nutritional supplements.
On January 31, 1997, at 5:00 p.m. Central Standard Time, the Company
distributed, at no cost, non- transferable rights ("Rights") to the holders of
record of shares of its common stock, par value $.0001 per share. The Rights
entitled the holders (the "Rights Holders") to subscribe for and purchase up
to 2,148,191 units (each unit consisting of one share of common stock and one
1997-A warrant) for the price of $6.80 per unit (the "Rights Offering"). The
record date holders of common stock received one Right for each share of
common stock held by them as of the record date. The Rights expired at 5:00
p.m. Central Standard Time, on March 17, 1997. Pursuant to the Rights, Rights
Holders could purchase one unit for each Right held.
The share of common stock and 1997-A warrant comprising each unit were
separately transferable immediately after the sale of the units to the Rights
Holders. Each 1997-A warrant is exercisable at any time 90 days after January
16, 1997, and on or before January 31, 1999, 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
1997-A warrant.
Concurrent with this Rights Offering, the Company elected to redeem all of
its outstanding Class A and Class B Common Stock Purchase Warrants (the
"Public Warrants") for $.0008 per warrant (the "Warrant Redemption") at 5:00
p.m. Central Standard Time, on March 17, 1997. However, in connection with the
Warrant Redemption, the Company, pursuant to modification of the terms of the
Public Warrants, offered to the Public Warrant holders (the "Warrant Holders")
the right to exercise the Public Warrants to purchase units, each comprised of
one share of common stock and one 1997-A warrant, at an exercise price of
$6.00 per unit (the "Warrant Modification Offering").
The units in the offerings described above were offered on a best efforts
basis by the Company and its officers and directors, without commissions,
selling fees or direct or indirect remuneration. The Rights and Warrant
Holders were not required to pay any brokerage commissions or fees with
respect to the exercise of their Rights or Public Warrants. The Company paid
all charges and expenses of the subscription and warrant agents.
The Company received proceeds of approximately $2,150,000 from the Warrant
Modification Offering and the Rights Offering and paid costs incurred with
respect to the offerings of approximately $325,000. Deferred offering costs of
$175,848 at December 31, 1996, were charged against the net proceeds from
these offerings.
* * * * * *
F-26
<PAGE>
STAY 'N SHAPE INTERNATIONAL, INC.
NOW INTERNATIONAL, INC.
SOLUTION PRODUCTS, INC. AND
NATION OF WINNERS, INC.
COMBINED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................................................. $ 92,608 $ 48,041
Inventory............................................. 132,416 145,150
Prepayments........................................... 6,258 9,508
-------- --------
Total current assets................................. 231,282 202,699
PROPERTY AND EQUIPMENT, Net............................ 3,761 4,337
-------- --------
TOTAL.................................................. $235,043 $207,036
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities.............. $ 55,400 $ 51,090
Due to stockholders................................... -- 16,102
-------- --------
Total liabilities.................................... 55,400 67,192
COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY:
Common stock.......................................... 325,000 325,000
Accumulated deficit................................... (145,357) (185,156)
-------- --------
Total stockholders' equity........................... 179,643 139,844
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $235,043 $207,036
======== ========
</TABLE>
See notes to unaudited financial statements.
F-27
<PAGE>
STAY 'N SHAPE INTERNATIONAL, INC.,
NOW INTERNATIONAL, INC.,
SOLUTION PRODUCTS, INC. AND
NATION OF WINNERS, INC.
COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Net sales............................................... $583,461 $604,419
Cost of sales........................................... 313,249 409,821
-------- --------
Gross profit........................................... 270,212 194,598
Marketing, distribution and administrative expenses..... 230,413 195,507
-------- --------
NET INCOME (LOSS)....................................... $ 39,799 $ (909)
======== ========
</TABLE>
See notes to unaudited combined financial statements.
F-28
<PAGE>
STAY 'N SHAPE INTERNATIONAL, INC.,
NOW INTERNATIONAL, INC.,
SOLUTION PRODUCTS, INC. AND NATION OF WINNERS, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)................................... $ 39,799 $ (909)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization...................... 576 1,317
Changes in assets and liabilities which provided
cash:
Inventory......................................... 12,734 15,251
Other assets...................................... 3,250 --
Accounts payable and accrued expenses............. 4,310 13,709
-------- -------
Net cash provided by operating activities........ 60,669 29,368
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans from stockholders............................. -- 7,000
Payment on notes payable--stockholders.............. (16,102) --
-------- -------
Net cash provided (used) by financing
activities...................................... (16,102) 7,000
-------- -------
NET INCREASE IN CASH................................. 44,567 36,368
BEGINNING CASH BALANCE............................... 48,041 56,002
-------- -------
ENDING CASH BALANCE.................................. $ 92,608 $92,370
======== =======
</TABLE>
See notes to unaudited combined financial statements.
F-29
<PAGE>
STAY 'N SHAPE INTERNATIONAL, INC.,
NOW INTERNATIONAL, INC.,
SOLUTION PRODUCTS, INC. AND NATION OF WINNERS, INC.
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
1. UNAUDITED COMBINED FINANCIAL STATEMENTS
The unaudited combined financial statements and related notes of Stay 'N
Shape International, Inc. ("SSII"), NOW International, Inc. ("NII"), Solution
Products, Inc. ("SPI") and Nation of Winners, Inc. ("NWI"), (collectively
SSII, NII, SPI and NWI are referred to as the "SSII Group"), 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 members of the SSII Group have common owners. All balances
with affiliates have been eliminated in combination.
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, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business--Each member of the SSII Group is engaged in the
marketing of consumer products through a network sales organization of
independent sales associates developed by the SSII Group. The SSII Group 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--Revenue is recognized when products 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 and
depreciated using the straight-line method over the estimated useful lives of
the assets.
Income Taxes--The members of the SSII Group have elected to be treated as "S
Corporations" as permitted by the Internal Revenue Code. Tax liabilities, if
any, are therefore the direct obligations of the members' stockholders.
3. SUBSEQUENT EVENTS
Pursuant to an Asset Purchase Agreement having an effective date of April
16, 1997 (the "Purchase Agreement"), Advantage Marketing Systems, Inc. ("AMS")
acquired all of the assets of the SSII Group, free and clear of any lien,
charge, claim, pledge, security interest or other encumbrance of any type or
kind whatsoever, known or unknown (the "SSII Asset Purchase"). The SSII Asset
Purchase was closed on April 16, 1997. The SSII Asset Purchase will be
accounted for by AMS under the purchase method of accounting.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Stay 'N Shape International, Inc.,
Now International, Inc., Solution Products, Inc.
and Nation of Winners, Inc.
Atlanta, Georgia
We have audited the accompanying combined balance sheet of Stay 'N Shape
International, Inc., Now International, Inc., Solution Products, Inc. and
Nation of Winners, Inc. (collectively the "Companies") as of December 31,
1996, and the related combined statements of operations, stockholder's equity,
and cash flows for the years ended December 31, 1996 and 1995. These financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined 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 combined 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 combined financial statements present fairly, in all
material respects, the combined financial position of the Companies at
December 31, 1996, and the results of their combined operations and their
combined cash flows for the years ended December 31, 1996 and 1995, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
April 11, 1997
F-31
<PAGE>
STAY 'N SHAPE INTERNATIONAL, INC.,
NOW INTERNATIONAL, INC.,
SOLUTION PRODUCTS, INC. AND
NATION OF WINNERS, INC.
COMBINED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................... $ 48,041
Inventory.......................................................... 145,150
Prepayments........................................................ 9,508
---------
Total current assets............................................. 202,699
PROPERTY AND EQUIPMENT, Net.......................................... 4,337
---------
TOTAL................................................................ $ 207,036
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses.............................. $ 51,090
Due to stockholders................................................ 16,102
---------
Total liabilities................................................ 67,192
---------
STOCKHOLDERS' EQUITY:
Common stock....................................................... 325,000
Accumulated deficit................................................ (185,156)
---------
Total stockholders' equity....................................... 139,844
---------
TOTAL................................................................ $ 207,036
=========
</TABLE>
See notes to combined financial statements.
F-32
<PAGE>
STAY 'N SHAPE INTERNATIONAL, INC.,
NOW INTERNATIONAL, INC.,
SOLUTION PRODUCTS, INC. AND
NATION OF WINNERS, INC.
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net sales........................................... $2,377,022 $2,486,565
Cost of sales....................................... 1,497,811 1,316,350
---------- ----------
Gross profit...................................... 879,211 1,170,215
Marketing, distribution and administrative
expenses........................................... 937,470 1,063,911
---------- ----------
NET INCOME (LOSS)................................... $ (58,259) $ 106,304
========== ==========
</TABLE>
See notes to combined financial statements.
F-33
<PAGE>
STAY 'N SHAPE INTERNATIONAL, INC.,
NOW INTERNATIONAL, INC.,
SOLUTION PRODUCTS, INC. AND
NATION OF WINNERS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON TOTAL
STOCK ACCUMULATED STOCKHOLDERS'
(NOTE 3) DEFICIT EQUITY
-------- ----------- -------------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1995..................... $325,000 $(233,201) $ 91,799
Net income................................... -- 106,304 106,304
-------- --------- --------
BALANCE, DECEMBER 31, 1995................... 325,000 (126,897) 198,103
Net loss..................................... -- (58,259) (58,259)
-------- --------- --------
BALANCE, DECEMBER 31, 1996................... $325,000 $(185,156) $139,844
======== ========= ========
</TABLE>
See notes to combined financial statements.
F-34
<PAGE>
STAY 'N SHAPE INTERNATIONAL, INC.,
NOW INTERNATIONAL, INC.,
SOLUTION PRODUCTS, INC. AND
NATION OF WINNERS, INC.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(58,259) $106,304
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation............................................ 5,268 4,927
Changes in assets and liabilities which provided (used)
cash:
Due to/from stockholders.............................. 34,000 (17,898)
Inventory............................................. 28,182 (64,350)
Prepayments........................................... (6,236) (3,272)
Accounts payable and accrued expenses................. (10,916) 33,018
-------- --------
Net cash provided by (used in) operating
activities......................................... (7,961) 58,729
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES--
Purchase of property and equipment........................ -- (2,727)
-------- --------
NET INCREASE (DECREASE) IN CASH............................. (7,961) 56,002
BEGINNING CASH BALANCE...................................... 56,002 --
-------- --------
ENDING CASH BALANCE......................................... $ 48,041 $ 56,002
======== ========
</TABLE>
See notes to combined financial statements.
F-35
<PAGE>
STAY 'N SHAPE INTERNATIONAL, INC.,
NOW INTERNATIONAL, INC.,
SOLUTION PRODUCTS, INC. AND
NATION OF WINNERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Combination--The financial statements include the combined accounts of Stay
'N Shape International, Inc., Now International, Inc., Solution Products, Inc.
and Nation of Winners, Inc. (collectively, the "Companies"). The Companies
have common owners. All balances with affiliates have been eliminated in
combination.
Nature of Business--The Companies are engaged in marketing consumer products
through a network sales organization of independent sales associates. The
Companies also sell supplies and materials to their 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.
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 (first-in, first-out) or market. The
Company purchased approximately 47% and 55% of its merchandise inventory from
one vendor for the years ended December 31, 1996 and 1995, respectively.
Property and Equipment--Property and equipment are recorded at cost and are
depreciated using the straight-line method over the estimated useful lives of
the assets.
Income Taxes--The Companies have elected to be treated as "S Corporations"
as permitted by the Internal Revenue Code. Tax liabilities, if any, are
therefore the direct obligations of the Companies' stockholders.
Revenue Recognition--Revenue is recognized when products are shipped.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of office furniture, fixtures, and equipment
of $21,410 less accumulated depreciation of $17,073 at December 31, 1996.
3. STOCKHOLDERS' EQUITY
Details of the Companies' common stock at December 31, 1996 and 1995 are:
<TABLE>
<CAPTION>
SHARES ISSUED AND DOLLAR VALUE
AUTHORIZED OUTSTANDING PAR VALUE COMMON STOCK
---------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Stay 'N Shape International,
Inc. ...................... 100,000 None Issued $1.25 $ --
Now International, Inc. .... 100,000 100,000 1.00 100,000
Solution Products, Inc. .... 100,000 100,000 1.25 125,000
Nation of Winners, Inc. .... 100,000 100,000 1.00 100,000
--------
$325,000
========
</TABLE>
F-36
<PAGE>
STAY 'N SHAPE INTERNATIONAL, INC.,
NOW INTERNATIONAL, INC.,
SOLUTION PRODUCTS, INC. AND
NATION OF WINNERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
4. SIMPLIFIED EMPLOYEE BENEFIT PLANS
The Companies maintain two simplified employee benefit plans ("SEP's") for
their executives. Contribution amounts are determined annually based on
performance of the Companies. Contribution expense related to these plans
aggregated $60,000 and $45,000 for the years ended December 31, 1996 and 1995,
respectively.
5. SUBSEQUENT EVENTS
In April 1997, Advantage Marketing Systems, Inc. ("AMS") acquired all of the
assets of the Companies. AMS is network marketer of various third party
manufactured nutritional supplements. AMS purchased all of the assets of the
Companies, free and clear of all liens and encumbrances, for a combination of
$1,174,441 cash and shares of AMS' restricted (unregistered) common stock (the
"Purchase Price") with an estimated fair value of up to $2,600,000, dependent
upon meeting certain future sales targets. The cash portion of the Purchase
Price was paid at closing. The stock portion of the Purchase Price will be
issued and delivered over a 25-month period with stock valued at $800,000
delivered at closing, $750,000 due within 14 months of closing, and $1,050,000
due within 25 months from closing. AMS has the option of substituting cash for
any portion of the remaining purchase price. The number of shares of common
stock to be issued and delivered, if any, is subject to the market value of
the AMS' common stock prior to the date of issuance and delivery as set forth
in the purchase agreement. The Purchase Price is subject to reduction based on
sales performance over a two-year period.
* * * * * *
F-37
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRE- SENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UN- DERWRITERS. 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.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 8
Use of Proceeds............................................................ 16
Price Range of Common Stock and Dividend Policy............................ 17
Capitalization............................................................. 19
Selected Financial Information............................................. 20
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................. 22
Business................................................................... 28
Management................................................................. 43
Certain Transactions....................................................... 47
Security Ownership of Certain Beneficial Owners and Management............. 48
Description of Securities.................................................. 50
Shares Eligible for Future Sale............................................ 55
Underwriting............................................................... 57
Legal Matters.............................................................. 58
Experts.................................................................... 58
Additional Information..................................................... 59
Index to Financial Statements.............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,300,000 UNITS
EACH UNIT CONSISTING OF
ONE SHARE OF
COMMON STOCK AND
ONE REDEEMABLE COMMON
STOCK PURCHASE WARRANT
[LOGO]
ADVANTAGE MARKETING SYSTEMS, INC.
---------------
PROSPECTUS
---------------
PAULSON INVESTMENT COMPANY, INC.
JOSEPH CHARLES & ASSOC., INC.
---------------
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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
amounts 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 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>
<S> <C>
S.E.C. Registration Fees....................................... $ 5,404.00
N.A.S.D. Filing Fees........................................... 2,301.00
*State Securities Laws (Blue Sky) Legal Fees.................... 20,000.00
*State Securities Laws Filing Fees.............................. 20,000.00
*Printing and Engraving......................................... 40,000.00
*Legal Fees..................................................... 60,000.00
*Accounting Fees and Expenses................................... 15,000.00
*Transfer and Warrant Agent's Fees and Costs of Certificates.... 2,000.00
*Miscellaneous.................................................. 2,995.00
-----------
$167,700.00
===========
</TABLE>
- --------
* Estimated
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Registrant has sold and issued the securities described below within the
past three years which were not registered under the Act. No underwriting
discounts or commissions were paid with respect to such sales.
<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
W. Hargrove*........ 03-21-97 1.60 10,000 16,000 Cash
T. Melakayll*....... 03-18-97 2.00 1,250 2,500 Cash
D. Melakayll*....... 03-18-97 2.00 1,250 2,500 Cash
R. Nance*........... 02-28-97 2.16 6,945 15,000 Cash
W. Hargrove*........ 04-07-97 1.60 813 1,301 Cash
M. Walke*........... 04-08-97 1.60 1,500 2,400 Cash
M. Steers*.......... 04-11-97 1.60 2,522 4,035 Cash
W. Hargrove*........ 05-13-97 1.60 625 1,000 Cash
W. Hargrove*........ 05-28-97 1.60 1,687 2,699 Cash
M. Steers*.......... 05-29-97 1.60 3,728 5,965 Cash
M. Walke*........... 05-29-97 1.60 4,750 7,600 Cash
W. Hargrove*........ 05-29-97 1.60 11,875 19,000 Cash
</TABLE>
- --------
* The shares of Common Stock were issued pursuant to exercise of stock options
and pursuant to Rule 506 of Regulation D and Rule 147.
Pursuant to a Stock Purchase Agreement having an effective date of May 31,
1996, Registrant acquired the issued and outstanding capital stock of Miracle
Mountain International, Inc., a Colorado corporation. On June 20, 1996,
Registrant issued 160,000 shares of its Common Stock to the shareholders of
Miracle Mountain International, Inc. pursuant to Rule 506 of Regulation D.
Pursuant to a Stock Purchase Agreement having an effective date of January
31, 1997, (the "CII Purchase Agreement"), Registrant acquired the issued and
outstanding capital stock of Chambre International, Inc., a Texas corporation.
Registrant issued and delivered 6,482 shares of Common Stock on January 31,
1997, and issued and delivered an additional 7,518 shares of Common Stock to
the shareholders of Chambre International, Inc. on March 31, 1997, pending
determination of certain liabilities. The shares of Common Stock were issued
pursuant to Rule 506 of Regulation D.
Pursuant to an Asset Purchase Agreement dated April 16, 1997, on August 23,
1997, Registrant issued and delivered 125,984 shares of Common Stock to Danny
Gibson and Carl S. Rainey for their own accounts and as agent for and on
behalf of Stay 'N Shape International, Inc., Nation of Winners, Inc., and Now
International, Inc. The shares of Common Stock were issued pursuant to Rule
506 of Regulation D.
The Company relied on Rules 147 and 506 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 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.
II-2
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C> <S>
1.1 Form of Underwriting Agreement between Paulson Investment
Company, Inc. and Registrant.
2.1 Agreement and Plan of Merger between Registrant and AMS, Inc.(1)
2.2 Certificate of Merger of Advantage Marketing Systems, Inc. (A
Delaware Corporation) with and into Advantage Marketing Systems,
Inc. (An Oklahoma Corporation).(1)
3.1 The Registrant's Certificate of Incorporation.(9)
3.2 The Registrant's Bylaws.(9)
4.1 Certificate of Common Stock of the Registrant.(1)
4.2 Form of Purchase Warrant issued to Paulson Investment Company,
Inc. pursuant to Underwriting Agreement which is submitted as
Exhibit 1.1.(9)
4.3 1997-A Warrant Certificate.(2)
4.4 Warrant Agreement between Registrant and U.S. Stock Transfer
Inc., dated January 20, 1997.(2)
4.5 Stock Purchase Agreement having an effective date of May 31,
1996, between Registrant, Miracle Mountain International, Inc.,
Richard Seaton, Gene Burson, Kaye Jennings, Daryl Burson, James
Rogers.(3)
4.6 Stock Purchase Agreement having an effective date of January 31,
1997, among Registrant, Chambre International, Inc., Janet Britt,
Jerry Hampton, Teresa Hampton, James Baria, Florence Baria, Rose
Cashin, Pat Eason, Joseph Williams, Livia Williams, Don Black,
Nadine Black, Lynda Brown, Gary Galindo, Harold Griffin, Linda
Griffin, Iren Van Vlaenderen, Dean Van Vlaenderen, Rose
Hilgedick, Julie Connary, and Royce Britt.(4)
4.7 Asset Purchase Agreement among Registrant, Stay 'N Shape
International, Inc., Solution Products International, Inc.,
Nation of Winners, Inc., Now International, Inc., Carl S. Rainey
and Danny Gibson, dated April 16, 1997.(8)
4.8 Form of Redeemable Common Stock Purchase Warrant Certificate.(9)
4.9 Form of Unit and Warrant Agreement between Registrant and U.S.
Stock Transfer Inc.
4.10 Form of Unit Certificate.
4.11 Form of Promotional Shares Escrow Agreement among Registrant,
Robert and Retha H. Nance and Liberty Bank and Trust Company of
Oklahoma City, N.A.
4.12 Form of Promotional Shares Escrow Agreement among Registrant,
John W. Hail, Curtis H. Wilson, Sr., Ruth Wilson, Roger P.
Baresel, Judith A. Baresel, R. Terren Dunlap, Pre-Paid Legal
Services and Liberty Bank and Trust Company of Oklahoma City,
N.A.
5.1 Opinion of Dunn Swan & Cunningham, A Professional Corporation,
counsel to Registrant, regarding legality of the securities
covered by this Registration Statement.(9)
10.1 Legal Services Agreement between Registrant and Pre-Paid Legal
Services, dated September 1, 1988.(5)
10.2 Lease Agreement between Registrant and International Business
Machines Corporation, dated May 22, 1989.(5)
10.3 Group Contract between Registrant and Consumer Benefit Services,
Inc., dated April 2, 1989.(5)
10.4 Distribution Agreement between Registrant and Topped, Inc., dated
June 1, 1989.(5)
10.5 Lease Agreement between Registrant and Kaiser Francis Oil
Company, dated June 1, 1993.(6)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C> <S>
10.6 Advantage Marketing Systems, Inc. 1995 Stock Option Plan.(7)
10.7 Agreement between Registrant and Consumer Benefit Services, Inc.,
dated October 20, 1995.(7)
10.8 Agreement between Registrant and Advanced Products, Inc., dated
November 28, 1994.(7)
10.9 Agreement between Registrant and J&K Pharmaceutical Laboratories,
dated April 22, 1996.(2)
10.10 Stock Purchase Agreement having an effective date of May 31,
1996, between Registrant, Miracle Mountain International, Inc.,
Richard Seaton, Gene Burson, Kaye Jennings, Daryl Burson, James
Rogers.(3)
10.11 Stock Purchase Agreement having an effective date of January 31,
1997, among Registrant, Chambre International, Inc., Janet Britt,
Jerry Hampton, Teresa Hampton, James Baria, Florence Baria, Rose
Cashin, Pat Eason, Joseph Williams, Livia Williams, Don Black,
Nadine Black, Lynda Brown, Gary Galindo, Harold Griffin, Linda
Griffin, Iren Van Vlaenderen, Dean Van Vlaenderen, Rose
Hilgedick, Julie Connary, and Royce Britt.(4)
10.12 Asset Purchase Agreement among Registrant, Stay 'N Shape
International, Inc., Solution Products International, Inc.,
Nation of Winners, Inc., Now International, Inc., Carl S. Rainey
and Danny Gibson, dated April 16, 1997.(8)
23.1 Independent Auditors' Consent.
23.2 Consent of Counsel.
24.1 Power of Attorney of John Hail.(9)
24.2 Power of Attorney of Curtis H. Wilson, Sr.(9)
24.3 Power of Attorney of Roger P. Baresel.(9)
24.4 Power of Attorney of R. Terren Dunlap.(9)
24.5 Power of Attorney of Harland C. Stonecipher.(9)
</TABLE>
- --------
(1) Incorporated by reference to Form 8-K, filed with the Commission on
December 11, 1995.
(2) Incorporated by reference to Amendment No. 3 to Form SB-2 Registration
Statement (No. 33-80629), filed with the Commission on January 14, 1997.
(3) Incorporated by reference to Form 8-K, filed with the Commission on July
12, 1996.
(4) Incorporated by reference to Form 8-K, filed with the Commission on
February 18, 1997.
(5) Incorporated by reference to Form 10-K Annual Report for the year ended
December 31, 1989, filed with the Commission on September 18, 1990.
(6) Incorporated by reference to Form 10-K Annual Report for the year ended
December 31, 1993, filed with the Commission on April 14, 1994.
(7) Incorporated by reference to Form SB-2 Registration Statement (No. 33-
80629), filed with the Commission on November 20, 1996.
(8) Incorporated by reference to Form 8-K, filed with the Commission on May 1,
1997.
(9) Previously furnished.
II-4
<PAGE>
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
(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-5
<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 3RD DAY OF NOVEMBER,
1997.
Advantage Marketing Systems, Inc.
(Registrant)
/s/ John W. Hail
By: _________________________________
JOHN W. HAIL,
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 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 3,
JOHN W. HAIL Executive Officer 1997
and Director
Curtis H. Wilson, Sr.* Vice-Chairman of the
- ------------------------------------- Board and Director November 3,
CURTIS H. WILSON, SR. 1997
/s/ Roger P. Baresel President, Chief
- ------------------------------------- Financial Officer November 3,
ROGER P. BARESEL and Director 1997
R. Terren Dunlap* Director
- ------------------------------------- November 3,
R. TERREN DUNLAP 1997
Harland C. Stonecipher* Director
- ------------------------------------- November 3,
HARLAND C. STONECIPHER 1997
/s/ John W. Hail
By: _________________________________
JOHN W. HAIL,
ATTORNEY-IN-FACT
II-6
<PAGE>
EXHIBIT 1.1
1,300,000 Units
ADVANTAGE MARKETING SYSTEMS, INC.
UNDERWRITING AGREEMENT
----------------------
_______, 1997
Paulson Investment Company, Inc.
Joseph Charles & Assoc., Inc.
As Representatives of the
Several Underwriters
c/o Paulson Investment Company, Inc.
811 SW Front Avenue
Portland, Oregon 97204
Gentlemen:
Advantage Marketing Systems, Inc., an Oklahoma corporation (the
"Company"), proposes to sell to the several underwriters (the "Underwriters")
named in Schedule I hereto for whom you are acting as Representatives (the
"Representatives") an aggregate of 1,300,000 Units (the "Firm Units"). Each Unit
will consist of one share of the Company's Common Stock, $0.0001 par value (the
"Common Stock"), and one Redeemable Common Stock Purchase Warrant to purchase
one share of Common Stock substantially on the terms and in the form filed as an
exhibit to the Registration Statement (hereinafter defined) (the "Warrants").
The respective amounts of the Firm Units to be so purchased by the several
Underwriters are set forth opposite their names in Schedule I hereto. The
Company also proposes to grant to the Representatives an option to purchase in
the aggregate up to 195,000 additional Units, identical to the Firm Units (the
"Option Units"), as set forth below. The offer and sale of the Firm Units and
the Option Units pursuant to this Underwriting Agreement (the "Agreement") is
referred to herein as the "Offering."
As the Representatives, you have advised the Company that (a) you are
authorized to enter into this Agreement for yourselves as Representatives and on
behalf of the several Underwriters, and (b) the several Underwriters are
willing, acting severally and not jointly, to purchase the numbers of Firm Units
set forth opposite their respective names in Schedule I. The Firm Units and the
Option Units (to the extent the aforementioned option is exercised) are herein
collectively called the "Units."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
<PAGE>
1. Representations and Warranties of the Company.
---------------------------------------------
The Company represents and warrants to each of the Underwriters as
follows:
(a) A registration statement on Form SB-2 (File No. 333-34885) with
respect to the Units has been carefully prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by the
Company to you. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462(b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to include
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "Prospectus" means (a) the form of prospectus first
filed with the Commission pursuant to Rule 424(b), or (b) the last preliminary
prospectus included in the Registration Statement filed prior to the time it
becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Units, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus
included in the Registration Statement prior to the time it becomes effective is
herein referred to as a "Preliminary Prospectus."
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Oklahoma, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Prospectus. Except as described in the Prospectus,
the Company does not own and never has owned any interest in any corporation or
other business entity. The Company is duly qualified to transact business in
all jurisdictions in which the conduct of its business requires such
qualification.
(c) The outstanding shares of Common Stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable and
have been issued and sold by
2
<PAGE>
the Company in compliance in all material respects with applicable Federal and
state securities laws; the Common Stock and Warrants to be included in the Units
have been duly authorized and when issued and paid for as contemplated herein
will be validly issued, fully paid and non-assessable; and no preemptive rights
of shareholders exist with respect to any security of the Company or the issue
and sale thereof. Neither the filing of the Registration Statement nor the
offering or sale of the Units as contemplated by this Agreement gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock or other securities
of the Company.
(d) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. The Common Stock and the Warrants conform
to the description thereof contained in the Registration Statement. The form of
certificates for the Common Stock and Warrants conform to the corporate law of
the State of Oklahoma. Except as disclosed in the Prospectus, there are no
outstanding rights, options or warrants for the purchase of any securities of
the Company, and the Company is not a party to any agreement pursuant to which
any person has the right to purchase any securities of the Company. Effective
immediately following the Closing Date (hereinafter defined), there will be no
person holding any anti-dilution rights with respect to the securities of the
Company.
(e) Except as described in the Registration Statement, the Company has
not (i) issued any capital stock or any options, warrants, convertible
securities or other rights to purchase its capital stock, (ii) increased its
long-term or short-term debt, or (iii) declared or paid any dividends on its
capital stock.
(f) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Units nor
instituted proceedings for that purpose. The Registration Statement contains,
and the Prospectus and any amendments or supplements thereto will contain, all
statements which are required to be stated therein by, and will conform to, the
requirements of the Act and the Rules and Regulations. The Registration
Statement and any amendments thereto do not contain, and will not contain, any
untrue statement of a material fact and do not omit, and will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading; provided, however, that the Company makes no representations or
warranties as to information contained in or omitted from the Registration
Statement or the Prospectus, or any such amendment or supplement, in reliance
upon, and in conformity with, written information furnished to the Company by or
on behalf of any Underwriter
3
<PAGE>
through either of the Representatives, specifically for use in the preparation
thereof.
(g) The financial statements of the Company, together with related
notes and schedules as set forth in the Registration Statement (the "Financial
Statements"), present fairly the financial position and the results of
operations and cash flows of the Company as of the indicated dates and for the
indicated periods. Such Financial Statements and related schedules have been
prepared in accordance with generally accepted accounting principles,
consistently applied through the periods involved, except as disclosed therein,
and all adjustments necessary for a fair presentation of results for such
periods have been made. The summary financial and statistical data of the
Company included in the Registration Statement present fairly the information
shown therein and such data have been compiled on a basis consistent with the
financial statements presented therein and the books and records of the Company.
(h) Deloitte & Touche LLP, who have certified certain of the
Financial Statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and the
Rules and Regulations.
(i) Except as described in the Prospectus, there is no action, suit,
claim or proceeding pending or, to the best knowledge of the Company, threatened
against the Company before any court or administrative agency or otherwise which
if determined adversely to the Company might result in any material adverse
change in the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company or
prevent the consummation of the transactions contemplated hereby.
(j) The Company has good and marketable title to all of the properties
and assets reflected in the Financial Statements (or as described in the
Registration Statement), subject to no lien, mortgage, pledge, charge or
encumbrance of any kind except those reflected in such Financial Statements (or
as described in the Registration Statement) or which are not material in amount.
The Company occupies its leased properties under valid and binding leases
conforming in all material respects to the description thereof set forth in the
Registration Statement.
(k) The Company has filed all Federal, state and foreign income tax
returns which have been required to be filed and has paid all taxes indicated by
said returns and all assessments received by it to the extent that such taxes
have become due and are not being contested in good faith. All tax liabilities
have been adequately provided for in the financial statements of the Company.
4
<PAGE>
(l) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended or supplemented, there has not been
any material adverse change or any development involving a prospective material
adverse change in or affecting the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise), or prospects of
the Company, whether or not occurring in the ordinary course of business, and
there has not been any material transaction entered into or any material
transaction that is probable of being entered into by the Company, other than
transactions in the ordinary course of business and changes and transactions
described in the Registration Statement, as it may be amended or supplemented.
The Company has no material contingent obligations which are not disclosed in
the Company's Financial Statements.
(m) The Company is not, nor, with the giving of notice or lapse of
time or both, will it be, in violation of or in default under its certificate of
incorporation or bylaws or under any agreement, lease, contract, indenture or
other instrument or obligation to which it is a party or by which it, or any of
its properties, is bound and which default is material in respect of the
condition, financial or otherwise, of the Company or the business, management,
properties, assets, rights, operations, condition (financial or otherwise) or
prospects of the Company. The execution and delivery of this Agreement and the
consummation of the transactions contemplated herein and the fulfillment of the
terms hereof will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust or other agreement or instrument to which the Company is a party, or of
the certificate of incorporation or bylaws of the Company or any order, rule or
regulation applicable to the Company of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction over the
Company or its assets.
(n) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
the National Association of Securities Dealers, Inc. (the "NASD") or such
additional steps as may be necessary to qualify the Units for public offering by
the Underwriters under state securities or Blue Sky laws) has been obtained or
made and is in full force and effect.
(o) Except as described in the Prospectus, the Company holds all
material patents, patent rights, trademarks, trade names, copyrights, trade
secrets and
5
<PAGE>
licenses of any of the foregoing (collectively, "Intellectual Property Rights")
that are necessary for the conduct of its business as conducted and as proposed
to be conducted in accordance with the description contained in the Prospectus;
there is no claim pending or, to the best knowledge of the Company, threatened
against the Company alleging any infringement of Intellectual Property Rights,
or any violation of the terms of any license relating to Intellectual Property
Rights, nor does the Company know of any basis for any such claim. The Company
knows of no material infringement by others of Intellectual Property Rights
owned by or licensed to the Company.
(p) The Company has obtained, is in compliance in all material
respects with and maintains in full force and effect, all material licenses,
certificates, permits, orders or other similar authorizations granted or issued
by any governmental agency (collectively "Government Permits") required to
conduct its business as it is presently conducted. No proceeding to revoke,
limit or otherwise materially change any Government Permit has been commenced
or, to the Company's best knowledge, is threatened against the Company, or any
supplier to the Company with respect to materials supplied to the Company, and
the Company has no reason to anticipate that any such proceeding will be
commenced against the Company or any such supplier. Except as disclosed or
contemplated in the Prospectus, the Company has no reason to believe that any
pending application for a Government Permit will be denied or limited in a
manner inconsistent with the Company's business plan as described in the
Prospectus.
(q) The Company is in compliance with all laws, rules, regulations,
orders of any court or administrative agency, operating licenses or other
requirements imposed by any governmental body applicable to it, including,
without limitation, all applicable laws, rules, regulations, licenses or other
governmental standards relating to the industry in which the Company operates,
including, without limitation, (i) the actions of a multilevel marketing
enterprise including, without limitation, the recruitment of distributors and
the marketing of the Company's programs and products; and (ii) the sale of
nutritional supplements, cosmetics and all other products sold by the Company;
and the conduct of the business of the Company, as described in the Prospectus,
will not cause the Company to be in violation of any such requirements.
(r) Neither the Company nor, to the Company's best knowledge, any of
its affiliates has taken or intends to take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or resale of the
Units.
6
<PAGE>
(s) The Company is not an "investment company" within the meaning of
such term under the Investment Company Act of 1940 (the "1940 Act") and the
rules and regulations of the Commission thereunder.
(t) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accounting of assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(u) Except as otherwise described in the Prospectus, the Company
carries, or is covered by, insurance in such amounts and covering such risks as
is adequate for the conduct of its business and the value of its properties and
as is customary for companies engaged in similar industries.
(v) The Company is not a party to, and the Company (including any
predecessor) has not, within five years of the effective date of the
Registration Statement, been a party to any pension plan governed by the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
(w) The Company is in compliance with all provisions of Section 1 of
Laws of Florida, Chapter 92-198, An Act Relating to Disclosure of Doing Business
-----------------------------------------------
with Cuba, and the Company covenants that if it commences to engage in any
- ---------
business with the government of Cuba or with any person or affiliate located in
Cuba after the date the Registration Statement becomes or has become effective
with the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference into the Prospectus, if any, concerning the Company's
business with Cuba or with any person or affiliate located in Cuba changes in
any material way, the Company will provide the Department notice of such
business or change, as appropriate, in a form acceptable to the Department.
(x) The Warrants have been authorized for issuance to the various
purchasers of the Units and will, when issued, possess rights, privileges and
characteristics as represented in the most recent form of Warrants filed as an
exhibit to the Registration Statement; the securities to be issued upon exercise
of the Warrants, when issued and delivered against payment
7
<PAGE>
therefor in accordance with the terms of the Warrants, will be duly and validly
issued, fully paid, non-assessable and free of preemptive rights, and all
corporate action required to be taken for the authorization and issuance of the
Warrants, and the securities to be issued upon their exercise, has been validly
and sufficiently taken.
(y) The Representatives' Warrants (as defined in paragraph (d) of
Section 2 hereof) have been duly authorized for issuance to the Representatives
and will, when issued, possess rights, privileges, and characteristics as
represented in the most recent form of Representatives' Warrants filed as an
exhibit to the Registration Statement; the securities to be issued upon exercise
of the Representatives' Warrants, when issued and delivered against payment
therefor in accordance with the terms of the Representatives' Warrants, will be
duly and validly issued, fully paid, non-assessable and free of preemptive
rights, and all corporate action required to be taken for the authorization and
issuance of the Representatives' Warrants, and the securities to be issued upon
their exercise, has been validly and sufficiently taken.
(z) The Company has not at any time during the last five years (i)
made any unlawful contribution to any candidate for foreign office, or failed to
disclose fully any contribution in violation of law, or (ii) made any payment to
any federal or state governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof.
(aa) Except as disclosed in the Prospectus, neither the Company nor
any of its officers, directors or affiliates have caused any person, other than
the Underwriters, to be entitled to reimbursement or compensation of any kind,
including, without limitation, any compensation that would be includable as
underwriter compensation under the NASD's Corporate Financing Rule with respect
to the offering of the Units, as a result of the consummation of such offering
based on any activity of such person as a finder, agent, broker, investment
adviser or other financial service provider.
(ab) The Common Stock and the Warrants have been approved for
inclusion, subject to official notice of issuance, in the Nasdaq Small Cap
Market.
8
<PAGE>
2. Purchase, Sale and Delivery of the Units.
----------------------------------------
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the Company
agrees to sell to the Underwriters and each Underwriter agrees, severally and
not jointly, to purchase, at a price of $_________ per Unit, the number of Firm
Units set forth opposite the name of each underwriter in Schedule I hereof,
subject to adjustment in accordance with Section 9 hereof.
(b) Payment for the Firm Units to be sold hereunder is to be made in
New York Clearing House funds and, at the option of the Representatives, by
certified or bank cashier's checks drawn to the order of the Company or bank
wire to an account specified by the Company against either uncertificated or
certificated delivery of the Firm Units (which delivery, if certificated, shall
take place in such location in New York, New York as may be specified by the
Representatives) to the Representatives for the several accounts of the
Underwriters. Such payment is to be made at the offices of Tonkon, Torp, Galen,
Marmaduke & Booth, 888 S.W. Fifth Avenue, Portland, Oregon 97204-2099, at 7:00
a.m., Pacific time, on the third business day after the date on which the
Commission under the Rules and Regulations declares effective the Registration
Statement (the "Effective Date") or at such other time and date not later than
five business days thereafter as the Representatives and the Company shall
agree, such time and date being herein referred to as the "Closing Date." (As
used herein, "business day" means a day on which the New York Stock Exchange is
open for trading and on which banks in New York are open for business and not
permitted by law or executive order to be closed.) Except to the extent
uncertificated Firm Units are delivered at closing, the certificates for the
securities comprising the Firm Units will be delivered in such denominations and
in such registrations as the Representatives shall request in writing not later
than the second full business day prior to the Closing Date, and will be made
available for inspection by the Representatives at least one business day prior
to the Closing Date.
(c) On the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
hereby grants an option to the Representatives to purchase the Option Units at
the price per Unit as set forth in paragraph (a) of this Section 2. The option
granted hereby may be exercised in whole or in part by giving written notice (i)
at any time before the Closing Date and (ii) only once thereafter within 45 days
after the Effective Date, by the Representatives to the Company setting forth
the number of Option Units as to which the Representatives are exercising the
option, the names and denominations in which the Option Units are to be
registered and the time and date at which certificates representing such Units
are to be delivered. The
9
<PAGE>
time and date at which certificates for Option Units are to be delivered shall
be determined by the Representatives but shall not be earlier than three nor
later than ten full business days after the exercise of such option, nor in any
event prior to the Closing Date (such time and date being herein referred to as
the "Option Closing Date"). If the date of exercise of the option is three or
more days before the Closing Date, the notice of exercise shall set the Closing
Date as the Option Closing Date. The option with respect to the Option Units
granted hereunder may be exercised only to cover over-allotments in the sale of
the Firm Units by the Underwriters. The Representatives may cancel such option
at any time prior to its expiration by giving written notice of such
cancellation to the Company. To the extent, if any, that the option is
exercised, payment for the Option Units shall be made on the Option Closing Date
in New York Clearing House funds and, at the option of the Representatives, by
certified or bank cashier's check drawn to the order of the Company or by bank
wire to an account specified by the Company against delivery of certificates
therefor at the offices of Paulson Investment Company, Inc. ("Paulson"), as set
forth on the first page of this Agreement.
(d) In addition to the sums payable to the Representatives as provided
elsewhere herein, the Representatives shall be entitled to receive at the
Closing, for themselves alone and not as representatives of the Underwriters, as
additional compensation for their services, purchase warrants (the
"Representatives' Warrants") for the purchase of up to 130,000 Units at a
price of $_________ per Unit, upon the terms and subject to adjustment as
described in the form of Representatives' Warrants filed as an exhibit to the
Registration Statement.
3. Offering by the Underwriters.
----------------------------
It is understood that the several Underwriters are to make a public
offering of the Firm Units as soon as the Representatives deem it advisable to
do so. The Firm Units are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Units are purchased pursuant
to Section 2 hereof, the Representatives will offer them to the public on the
foregoing terms.
It is further understood that the Representatives will act as
representatives of the Underwriters in the offering and sale of the Units in
accordance with an Agreement Among Underwriters entered into by the
Representatives and the several other Underwriters.
10
<PAGE>
4. Covenants of the Company.
------------------------
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure set forth in
Rule 430A of the Rules and Regulations is followed, to prepare and timely file
with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus
in a form approved by the Representatives containing information previously
omitted at the time of effectiveness of the Registration Statement in reliance
on Rule 430A of the Rules and Regulations, and (B) not file any amendment to the
Registration Statement or supplement to the Prospectus of which the
Representatives shall not previously have been advised and furnished with a copy
or to which the Representatives shall have reasonably objected in writing or
which is not in compliance with the Rules and Regulations.
(b) The Company will advise the Representatives promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission, (C) of any
request of the Commission for amendment of the Registration Statement or for
supplementation of the Prospectus or for any additional information, and (D) of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or the use of the Prospectus or of the institution of
any proceedings for that purpose. The Company will use its best efforts to
prevent the issuance of any such stop order preventing or suspending the use of
the Prospectus and to obtain as soon as possible the lifting thereof, if any is
issued.
(c) The Company will cooperate with the Representatives in endeavoring
to qualify the Units for sale under the securities laws of such jurisdictions as
the Representatives may reasonably have designated in writing and will make such
applications, file such documents, and furnish such information as may be
reasonably required for that purpose, provided the Company shall not be required
to qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction where it is not now so qualified or required to file
such a consent. The Company will, from time to time, prepare and file such
statements, reports, and other documents as are or may be required to continue
such qualifications in effect for so long a period as the Representatives may
reasonably request for distribution of the Units.
11
<PAGE>
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver to, or
upon the order of, the Representatives during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representatives may
reasonably request. The Company will deliver to the Representatives at or
before the Closing Date, three signed copies of the Registration Statement and
all amendments thereto including all exhibits filed therewith, and will deliver
to the Representatives such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
reasonably be requested), and of all amendments thereto, as the Representatives
may reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations of the Commission thereunder, so as to
permit the completion of the distribution of the Units as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the reasonable
opinion of the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in light of the
circumstances existing at the time the Prospectus is delivered to a purchaser,
not misleading, or if it is necessary at any time to amend or supplement the
Prospectus to comply with any law, the Company promptly will prepare and file
with the Commission an appropriate amendment to the Registration Statement or
supplement to the Prospectus so that the Prospectus as so amended or
supplemented will not, in light of the circumstances when it is so delivered, be
misleading, or so that the Prospectus will comply with the law.
(f) The Company will make generally available to its security holders,
as soon as it is practicable to do so, but in any event not later than 15 months
after the Effective Date, an earnings statement (which need not be audited) in
reasonable detail, covering a period of at least 12 consecutive months beginning
after the effective date of the Registration Statement, which earnings statement
shall satisfy the requirements of the Act and Rule 158 of the Rules and
Regulations, and will advise the Representatives in writing when such statement
has been so made available.
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(g) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies of all
other documents, reports and information furnished by the Company to its
shareholders or filed with any securities exchange or the NASD pursuant to the
requirements of such exchange or association or with the Commission pursuant to
the Act or the Exchange Act. The Company will deliver to the Representatives
similar reports with respect to significant subsidiaries, as that term is
defined in the Rules and Regulations, which are not consolidated in the
Company's financial statements.
(h) Other than (i) shares of Common Stock issued upon exercise of
options and warrants described in the Prospectus and outstanding as of the date
of this Agreement, (ii) options issued under the Company's 1995 Stock Option
Plan, as described in the Prospectus (and Common Stock issued upon exercise of
such options), and (iii) as otherwise provided in this Agreement, no offering,
sale, short sale or other disposition of any shares of Common Stock of the
Company or other securities convertible into or exchangeable or exercisable for
shares of Common Stock or derivative of Common Stock (or any agreement for
such), will be made for a period of one year after the date of this Agreement,
directly or indirectly, by the Company, except with the prior written consent of
the Representatives, which consent will not be unreasonably withheld.
(i) The Company will use its best efforts to list, subject to official
notice of issuance, the Common Stock and Warrants, and to maintain the listing
of the Common Stock, on the Nasdaq Small Cap Market.
(j) The Company has caused each of its officers and directors to
furnish to the Representatives, on or prior to the date of this Agreement, a
letter or letters, in the form of Exhibit A hereto ("Lockup Agreements"),
pursuant to which each such person shall agree (A) not to offer to sell, sell,
contract to sell, sell short or otherwise dispose of any shares of Common stock
or other capital stock of the Company, or any other securities convertible,
exchangeable or exercisable for Common Stock or derivatives of Common Stock
owned by such person, or request the registration for the offer or sale of any
of the foregoing for the period described in the Lockup Agreement, directly or
indirectly, except with the prior written consent of Paulson and (B) to provide
prior written notice to Paulson of any offers to sell, sales, contracts to sell,
short sales or other dispositions of Common Stock pursuant to Rule 144 under the
Act or any similar provisions enacted subsequent to the date of this Agreement,
for a period of three years from the date of this Agreement.
(k) The Company shall apply the net proceeds of its sale of the Units
as set forth in the Prospectus.
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(l) The Company shall not invest or otherwise use the proceeds
received by the Company from its sale of the Units in such a manner as would
require the Company or any of its subsidiaries to register as an investment
company under the 1940 Act.
(m) The Company shall maintain as current the prospectus forming a
part of the Registration Statement relating to the Common Stock issuable upon
exercise of the Warrants and the securities issuable upon exercise of the
Representatives' Warrants at all times during which any of the
Warrants or Representatives' Warrants remain outstanding.
(n) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar for the Common
Stock.
(o) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
securities of the Company.
(p) The Company will at all times have in place policies to ensure
compliance with, and take all other steps necessary to operate its business in
accordance with, all applicable federal and state laws governing the sale of
goods and services by a multilevel marketing enterprise. The Company will
retain and consult with experienced counsel with respect to such matters and,
for so long as such counsel so advises, the Company will comply with the
guidelines set forth by the Federal Trade Commission in In Re Amway Corp., 93
-----------------
FTC 618 (1979), with respect to the operation of a multilevel marketing
enterprise.
5. Costs and Expenses.
------------------
(a) Paulson Investment Company, Inc. ("Paulson") shall be entitled to
receive from the Company, for itself alone and not as a representative of the
Underwriters, a nonaccountable expense allowance equal to 2.0% of the aggregate
public offering price of the Units sold to the Underwriters in connection with
the Offering. Paulson shall be entitled to withhold this allowance on the
Closing Date (less the $35,000 advance against such amount that has been paid by
the Company) with respect to Units delivered on the Closing Date and to require
the Company to make payment of this allowance on the Option Closing Date with
respect to Units delivered on the Option Closing Date.
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(b) In addition to the payment described in paragraph (a) of this
Section 5, the Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement, including,
without limitation, the following: accounting fees of the Company; the fees and
disbursements of counsel for the Company; the cost of printing and delivering
to, or as requested by, the Underwriters copies of the Registration Statement,
Preliminary Prospectuses, the Prospectus, this Agreement, the Underwriters'
Selling Memorandum, the Underwriters' Invitation Letter, the Blue Sky Survey and
any supplements or amendments thereto; the filing fees of the Commission; the
filing fees and expenses (including legal fees and disbursements) incident to
securing any required review by the NASD of the terms of the sale of the Units;
the listing fee of the Nasdaq Small Cap Market; the reasonable costs of a due
diligence investigation of the principals of the Company by a firm acceptable to
the Representatives; the Company's expenses related to "road show" meetings; and
the expenses, including the fees and disbursements of counsel for the
Underwriters, incurred in connection with the qualification of the Units under
state securities or Blue Sky laws. Any transfer taxes imposed on the sale of
the Units to the several Underwriters will be paid by the Company. The Company
agrees to pay all costs and expenses of the Underwriters, including the fees and
disbursements of counsel for the Underwriters, incident to the offer and sale of
directed Units by the Underwriters, if any, to employees and persons having
business relationships with the Company. The Company shall not, however, be
required to pay for any other of the Underwriters' expenses (other than those
related to qualification under NASD regulations and state securities or Blue Sky
laws), except that if this Agreement shall not be consummated, then the Company
shall reimburse the several Underwriters for reasonable accountable out-of-
pocket expenses, including fees and disbursements of counsel, incurred in
connection with investigating, marketing and preparing to market the Units or in
contemplation of performing their obligations hereunder (less the $35,000
advance that has been paid by the Company); but the Company shall not in any
event be liable to any of the several Underwriters for damages on account of
loss of anticipated profits from the sale by them of the Units.
6. Conditions of the Obligations of the Underwriters.
-------------------------------------------------
The several obligations of the Underwriters to purchase the Firm Units
on the Closing Date and the Option Units, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company contained
herein, and to the performance by the Company of its covenants
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<PAGE>
and obligations hereunder and to the following additional conditions:
(a) The Registration Statement, all post-effective amendments thereto
and any subsequent registration statement filed pursuant to Rule 462(b) of the
Rules and Regulations shall have become effective and any and all filings
required by Rule 424 and Rule 430A of the Rules and Regulations shall have been
made, and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been disclosed
to the Representatives and complied with to their reasonable satisfaction. No
stop order suspending the effectiveness of the Registration Statement, as
amended from time to time, shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission and no injunction, restraining order, or order of
any nature by a Federal or state court of competent jurisdiction shall have been
issued as of the Closing Date which would prevent the issuance of the Units.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Dunn, Swan & Cunningham,
counsel for the Company, dated the Closing Date or the Option Closing Date, as
the case may be, addressed to the Underwriters (and stating that it may be
relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of Oklahoma, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement; the Company is duly
qualified to transact business in all jurisdictions in which failure to qualify
would have a materially adverse effect upon the business of the Company.
(ii) The Company has authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus; the authorized
shares of the Common Stock have been duly authorized; the outstanding shares of
the Common Stock have been duly authorized and validly issued and are fully paid
and non-assessable; all of the securities of the Company conform to the
description thereof in the Prospectus; the certificates for the Common Stock and
Warrants are in due and proper form; the shares of Common Stock included in the
Units to be sold by the Company pursuant to this Agreement, including shares of
Common Stock to be sold as a part of the Option Units, have been duly authorized
and, upon issuance and delivery thereof and payment therefor as contemplated in
this Agreement and the Registration
16
<PAGE>
Statement, will be validly issued, fully paid and non-assessable; no preemptive
rights of shareholders exist with respect to any of the Common Stock of the
Company or the issuance or sale thereof pursuant to any applicable statute or
the provisions of the Company's charter documents or, to such counsel's best
knowledge, pursuant to any contractual obligation.
(iii) The Warrants and the Representatives' Warrants have been
authorized for issuance to the purchasers of Units or the Representatives, as
the case may be, and will, when issued, possess rights, privileges, and
characteristics as represented in the most recent form of Warrants or
Representatives' Warrants, as the case may be, filed as an exhibit to the
Registration Statement; the securities to be issued upon exercise of the
Warrants or Representatives' Warrants, as the case may be, when issued and
delivered against payment therefor in accordance with the terms of the Warrants
or Representatives' Warrants, will be duly and validly issued, fully paid, non-
assessable and free of preemptive rights, and all corporate action required to
be taken for the authorization and issuance of the Warrants, the
Representatives' Warrants, and the securities to be issued upon their exercise,
has been validly and sufficiently taken.
(iv) Except as described in the Prospectus, to the best knowledge of
such counsel, there are no outstanding securities of the Company convertible or
exchangeable into or evidencing the right to purchase or subscribe for any
shares of capital stock of the Company and there are no outstanding or
authorized options, warrants or rights of any character obligating the Company
to issue any shares of its capital stock or any securities convertible or
exchangeable into or evidencing the right to purchase or subscribe for any
shares of such stock; and except as described in the Prospectus, to the
knowledge of such counsel, no holder of any securities of the Company or any
other person has the right, contractual or otherwise, which has not been
satisfied or effectively waived, to cause the Company to sell or otherwise issue
to them, or to permit them to underwrite the sale of, any Common Stock, or the
right to have any Common Stock or other securities of the Company included in
the Registration Statement or the right, as a result of the filing of the
Registration Statement, to require registration under the Act of any shares of
Common Stock or other securities of the Company.
(v) The Registration Statement has become effective under the Act
and, to the best knowledge of such counsel, no stop order proceedings with
respect thereto have been instituted or are pending or threatened under the Act.
(vi) The Registration Statement, the Prospectus and each amendment or
supplement thereto comply as to form in all
17
<PAGE>
material respects with the requirements of the Act and the Rules and Regulations
(except that such counsel need not express an opinion as to the financial
statements and related schedules therein).
(vii) The statements under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- General," "Business
- -- Regulations," "Management -- Stock Option Plan," "Description of Securities,"
and "Shares Eligible for Future Sale" in the Prospectus and in Item 24 and in
Item 26 of the Registration Statement, insofar as such statements constitute a
summary of documents referred to therein or matters of law, accurately summarize
in all material respects the information called for with respect to such
documents and matters.
(viii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described in
the Registration Statement or the Prospectus which are not so filed or described
as required, and such contracts and documents as are summarized in the
Registration Statement or the Prospectus are accurately summarized in all
material respects.
(ix) Except as described in the Prospectus, under the caption
"Business -- Litigation," such counsel knows of no legal or governmental
proceedings pending or threatened against the Company.
(x) The execution and delivery of this Agreement and the consummation
of the transactions herein contemplated do not and will not conflict with or
result in a breach of any of the terms or provisions of, or constitute a default
under, the certificate of incorporation or bylaws of the Company, or any
agreement or instrument known to such counsel to which the Company is a party or
by which the Company may be bound.
(xi) This Agreement has been duly authorized, executed and delivered
by the Company and is a valid and binding agreement of the Company enforceable
in accordance with its terms, except as rights to indemnity and contribution may
be limited by applicable securities laws and except as enforceability may be
limited by application of bankruptcy, insolvency, moratorium, or similar laws
affecting the rights of creditors generally or judicial limits upon the rights
of specific performance.
(xii) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery of
this Agreement and the consummation of the transactions contemplated herein
(other than as may be required by the NASD or as required by state securities
and Blue Sky laws as to which such counsel need not express an opinion) except
such as have been obtained or made, specifying the same.
18
<PAGE>
(xiii) The Company is not, and will not become for at least a
period of one year following the Effective Date, as a result of the transactions
contemplated by this Agreement and application of the net proceeds therefrom as
described in the Prospectus, required to register as an investment company under
the 1940 Act.
In rendering such opinion, counsel may rely as to matters of fact, to
the extent appropriate, upon certificates and representations of responsible
officers of the Company, of public officials, and of other third parties,
reasonably satisfactory to Tonkon, Torp, Galen, Marmaduke & Booth, counsel to
the Representatives. Furthermore, in rendering such opinion, such counsel may
rely, as to matters governed by laws of states other than Oklahoma or Federal
laws, on local counsel in such jurisdictions, provided that in each case such
counsel shall state that they believe that they and the Underwriters are
justified in relying on such other counsel. In addition to the matters set forth
above, the opinion of Dunn, Swan & Cunningham shall also include a statement to
the effect that nothing has come to the attention of such counsel that has
caused them to believe that (i) the Registration Statement, at the time it
became effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the Closing
Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
(ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances in which they were made, not
misleading (except that such counsel need not express any view as to the
financial statements and related schedules therein).
(c) The Representatives shall have received from Tonkon, Torp. Galen,
Marmaduke & Booth, counsel for the Underwriters, an opinion dated the Closing
Date or the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (i), (v) and (vi) of paragraph (b) of this Section 6.
In rendering such opinion, Tonkon, Torp, Galen, Marmaduke & Booth may rely as to
all matters governed other than by the laws of the State of Oregon or Federal
laws on the opinion of counsel referred to in paragraph (b) of this Section 6.
In addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such counsel
that has caused them to believe that (i) the Registration Statement, at the time
it became effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the Closing
Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or
19
<PAGE>
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements therein, in
light of circumstances under which they were made, not misleading (except that
such counsel need not express any view as to financial statements and related
schedules therein). With respect to such statement, Tonkon, Torp, Galen,
Marmaduke & Booth may state that their belief is based upon the procedures set
forth therein, but is without independent check and verification.
(d) The Representatives shall have received at or prior to the Closing
Date from Tonkon, Torp, Galen, Marmaduke & Booth a memorandum or summary, in
form and substance satisfactory to the Representatives, with respect to the
qualification for offering and sale by the Underwriters of the Units under the
state securities or Blue Sky laws of such jurisdictions as the Representatives
may reasonably have designated to the Company.
(e) The Representatives, on behalf of the several Underwriters, shall
have received, on each of the date hereof, the Closing Date and the Option
Closing Date, as the case may be, a letter dated the date hereof, the Closing
Date or the Option Closing Date, as the case may be, in form and substance
satisfactory to the Representatives, from Deloitte & Touche LLP confirming that
they are independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and stating that in their
opinion the financial statements and schedules examined by them and included in
the Registration Statement comply in form and in all material respects with the
applicable accounting requirements of the Act and the related published Rules
and Regulations, and containing such other statements and information as are
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and Chief Financial Officer of the Company to the effect
that, as of the Closing Date or the Option Closing Date, as the case may be,
each of them severally represents as follows:
(i) The Registration Statement has become effective under the Act
and no stop order suspending the effectiveness of the Registration Statement has
been issued, and
20
<PAGE>
no proceedings for such purpose have been taken or are, to the best of his
knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company contained
in Section 1 hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules 424
or 430A under the Act have been made;
(iv) He has carefully examined the Registration Statement and the
Prospectus and, in his opinion, as of the effective date of the Registration
Statement, the statements contained in the Registration Statement were true and
correct, and such Registration Statement and Prospectus did not omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, and since the effective date of the
Registration Statement no event has occurred which should have been set forth in
a supplement to or an amendment of the Prospectus which has not been set forth
in such supplement or amendment; and
(v) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been any material
adverse change or any development involving a prospective material adverse
change in or affecting the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of the
Company, whether or not arising in the ordinary course of business.
(g) The Company shall have furnished to the Representatives such
further documents confirming the representations and warranties, covenants and
conditions contained herein and related matters as the Representatives may
reasonably have requested.
(h) The Lockup Agreements described in Section 4(j) shall have been
executed, delivered and shall be in full force and effect.
(i) The Common Stock and Warrants shall have been approved for
inclusion, subject to official notice of issuance, in the Nasdaq Small Cap
Market.
(j) The Company shall have obtained and prepaid for a three-year
non-cancelable insurance policy, naming the Underwriters as additional insureds
covering, for a period of three years after the Effective Date, any claim for
which indemnification may be sought by the Underwriters under Section 8 of this
Agreement, which insurance policy shall be in form and substance satisfactory to
the Representatives.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representatives and to Tonkon, Torp,
Galen, Marmaduke & Booth, counsel for the Underwriters.
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<PAGE>
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representatives by notifying the Company of such termination in writing
(including by facsimile transmission) at or prior to the Closing Date or the
Option Closing Date, as the case may be. In such event, the Company and the
Underwriters shall not be under any obligation to each other (except to the
extent provided in Sections 5 and 8 hereof).
7. Conditions of the Obligations of the Company.
--------------------------------------------
The obligations of the Company to sell and deliver the portion of the
Units required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of the
Act, against any losses, claims, damages or liabilities to which such
Underwriter or any such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the circumstances under which
they were made; and will reimburse each Underwriter and each such controlling
person upon demand for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in investigating or defending any such
loss, claim, damage or liability, action or proceeding or in responding to a
subpoena or governmental inquiry related to the offering of the Units, whether
or not such Underwriter or controlling person is a party to any action or
proceeding; provided, however, that the Company will not be liable in any such
-------- -------
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement, or omission or
alleged omission made in the Registration Statement, any Preliminary Prospectus,
the Prospectus, or such amendment or supplement, in reliance upon and in
conformity with written
22
<PAGE>
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were made; and will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer or controlling person in connection with investigating or
defending any such loss, claim, damage, liability, action or proceeding;
provided, however, that each Underwriter will be liable in each case to the
- -------- -------
extent, and only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission has been made in the Registration
Statement, any Preliminary Prospectus, the Prospectus or such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Representatives specifically for use
in the preparation thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a) or (b) shall be available to any party who shall fail to give notice as
provided in this Section 8(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure to give such notice, but the failure to
give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of the provisions of Section 8(a) or (b). In case any
such
23
<PAGE>
proceeding shall be brought against any indemnified party and such indemnified
party shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party and shall pay as incurred the fees and disbursements of such
counsel related to such proceeding. In any such proceeding, any indemnified
party shall have the right to retain its own counsel at its own expense.
Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or
within 30 days of presentation) the fees and expenses of the counsel retained by
the indemnified party in the event (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such counsel,
(ii) the named parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and representation
of both parties by the same counsel would be inappropriate due to actual or
potential differing interests between them or (iii) the indemnifying party shall
have failed to assume the defense and employ counsel acceptable to the
indemnified party within a reasonable period of time after notice of
commencement of the action. It is understood that the indemnifying party shall
not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate firm
for all such indemnified parties. Such firm shall be designated in writing by
Paulson in the case of parties indemnified pursuant to Section 8(a) and by the
Company in the case of parties indemnified pursuant to Section 8(b). The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment. In addition, the indemnifying party will not,
without the prior written consent of the indemnified party, settle or compromise
or consent to the entry of any judgment in any pending or threatened claim,
action or proceeding in which indemnification may be sought hereunder (whether
or not any indemnified party is an actual or potential party to such claim,
action or proceeding) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising out
of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable
24
<PAGE>
by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Units. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total net proceeds from the
Offering (before deducting expenses) received by the Company bears to the total
underwriting discounts, commissions and, if applicable, nonaccountable expense
allowance received by the Underwriters, in each case as set forth and footnoted
in the table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8(d). The amount paid
or payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to above in
this Section 8(d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), (i) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the Units
purchased by such Underwriter, and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of fraudulent
misrepresentation. The Underwriters' obligations in this Section 8(d) to
contribute are
25
<PAGE>
several in proportion to their respective underwriting obligations and not
joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, or expenses are incurred. The indemnity and
contribution agreements contained in this Section 8 and the representations and
warranties of the Company set forth in this Agreement shall remain operative and
in full force and effect, regardless of (i) any investigation made by or on
behalf of any Underwriter or any person controlling any Underwriter, the
Company, its directors or officers or any persons controlling the Company, (ii)
acceptance of any Units and payment therefor hereunder, and (iii) any
termination of this Agreement. A successor to any Underwriter, or to the
Company, its directors or officers, or any person controlling the Company, shall
be bound by and entitled to the benefits of the indemnity, contribution and
reimbursement agreements contained in this Section 8.
9. Default by Underwriters.
-----------------------
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the Units
which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company), the
Representatives shall use their reasonable efforts to procure within 36 hours
thereafter one or more of the other Underwriters, or any others, to purchase
from the Company upon the terms set forth herein, the Firm Units or Option
Units, as the case may be, which the defaulting Underwriter or Underwriters
failed to purchase. If during such 36 hours the Representatives shall not have
procured such other Underwriters, or any others, to purchase the Firm Units or
Option Units, as the case may be, agreed to be purchased by the defaulting
Underwriter or Underwriters, then (a) if the aggregate number of Units with
respect to which such default shall occur does not exceed 10% of the Firm Units
or Option
26
<PAGE>
Units, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Units or
Option Units, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Units or Option Units, as the case may be, which
such defaulting Underwriter or Underwriters failed to purchase, or (b) if the
aggregate number of Firm Units or Option Units, as the case may be, with respect
to which such default shall occur equals or exceeds 10% of the Firm Units or
Option Units, as the case may be, covered hereby, the Company or the
Representatives shall have the right, by written notice given within the next
36-hour period to the parties to this Agreement, to terminate this Agreement
without liability on the part of the non-defaulting Underwriters or of the
Company, except for expenses to be paid by the Company under Section 5 hereof
and except to the extent provided in Section 8 hereof. In the event of a default
by any Underwriter or Underwriters, as set forth in this Section 9, the Closing
Date or Option Closing Date, as the case may be, may be postponed for such
period, not exceeding seven days, as the Representatives may determine in order
that the required changes in the Registration Statement or in the Prospectus or
in any other documents or arrangements may be effected. The term "Underwriter"
includes any person substituted for a defaulting Underwriter. Any action taken
under this Section 9 shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
10. Notices.
-------
All communications hereunder shall be in writing and, except as
otherwise provided herein, shall be mailed, delivered, telecopied or telegraphed
and confirmed as follows:
if to the Representatives or the Underwriters:
Paulson Investment Company, Inc.
811 SW Front Avenue
Portland, Oregon 97204
Attention: Chester L.F. Paulson
with a copy to:
Tonkon, Torp, Galen,
Marmaduke & Booth
1600 Pioneer Tower
888 SW Fifth Avenue
Portland, Oregon 97204
Attention: Thomas P. Palmer
27
<PAGE>
if to the Company:
Advantage Marketing Systems, Inc.
2601 Northwest Expressway
Suite 1210W
Oklahoma City, Oklahoma 73112
Attention: John W. Hail
with a copy to:
Dunn, Swan & Cunningham
2800 Oklahoma Tower
210 Park Avenue
Oklahoma City, Oklahoma 73102
Attention: Michael E. Dunn
11. Termination.
-----------
This Agreement may be terminated by the Representatives by notice to
the Company as follows:
(a) at any time prior to the earlier of (i) the time the Units are
released by the Representatives for sale by notice to the Underwriters, or (ii)
11:30 a.m. Pacific Time on the first business day following the Effective Date;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
earnings, business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and its
subsidiaries taken as a whole, whether or not arising in the ordinary course of
business, (ii) any outbreak or escalation of hostilities or declaration of war
or national emergency or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
escalation, declaration, emergency, calamity, crisis or change on the financial
markets of the United States would, in the Representatives' reasonable judgment,
make it impracticable to market the Units or to enforce contracts for the sale
of the Units, (iii) the Dow Jones Industrial Average shall have fallen by 15
percent or more from its closing price on the day immediately preceding the
Effective Date, (iv) suspension of trading in securities generally on the New
York Stock Exchange or the American Stock Exchange or limitation on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such Exchange, (v) the enactment, publication, decree or other
promulgation of any
28
<PAGE>
statute, regulation, rule or order of any court or other governmental authority
which in the Representatives' opinion materially and adversely or may materially
and adversely affect the business or operations of the Company, (vi) declaration
of a banking moratorium by United States or New York State authorities; (vii)
the suspension of trading of the Common Stock or the Warrants by the Commission
or the NASD on the Nasdaq Small Cap Market or (viii) the taking of any action by
any governmental body or agency in respect of its monetary or fiscal affairs
which in the Representatives' reasonable opinion has a material adverse effect
on the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. Successors.
----------
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Units from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
13. Information Provided by Underwriters.
------------------------------------
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), the legends required by Item
502(d) of Regulation S-B under the Act and the information under the caption
"Underwriting" in the Prospectus.
14. Miscellaneous.
-------------
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Units under
this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
29
<PAGE>
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Oregon. All disputes relating to this Agreement shall
be adjudicated before a court located in Multnomah County, Oregon to the
exclusion of all other courts that might have jurisdiction.
If the foregoing letter is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate copies
hereof, whereupon it will become a binding agreement among the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
ADVANTAGE MARKETING SYSTEMS, INC.
By
---------------------------
Chief Executive Officer
The foregoing Underwriting Agreement is
hereby confirmed and accepted as of the
date first above written.
PAULSON INVESTMENT COMPANY, INC.
As Representative of the several
Underwriters listed on Schedule I
By
-------------------------------
Authorized Officer
30
<PAGE>
SCHEDULE I
Schedule of Underwriters
Number of Firm Units
Underwriter to be Purchased
----------- --------------------
Paulson Investment Company, Inc.
Joseph Charles & Assoc., Inc.
Total: 1,300,000
=========
31
<PAGE>
EXHIBIT 4.9
UNIT AND WARRANT AGREEMENT
between
ADVANTAGE MARKETING SYSTEMS, INC.
and
U.S. STOCK TRANSFER CORPORATION
Dated as of , 1997
THIS WARRANT AGREEMENT, dated as of , 1997, is between Advantage
Marketing Systems, Inc., an Oklahoma corporation (the "Company"), and U.S. Stock
Transfer Corporation (the "Warrant Agent").
Whereas, the Company, at or about the time that it is entering into this
Agreement, proposes to offer and sell to public investors up to 1,300,000 shares
of Common Stock, $.0001 par value (the "Common Stock") and 1,300,000 Redeemable
Common Stock Purchase Warrants (each referred to herein as the "Warrant" or
collectively as the "Warrants") in 1,300,000 units of one share of Common Stock
and one Warrant (the "Units"), with an over-allotment option for an additional
195,000 Units (the "Offering"). Each Warrant entitles the holder thereto to
purchase one share of Common Stock for an initial purchase price of $ ,
which shall be adjusted to a purchase price equal to 120 percent of the average
daily closing price of the Common Stock for the 20-day period ending after the
Separation Date as defined below (the "Purchase Price"). The securities
purchasable upon exercise of each Warrant, as well as the Purchase Price
thereof, is subject to the terms and conditions, including adjustment in certain
circumstances, of this Agreement;
Whereas, the Company proposes to issue to Paulson Investment Company, Inc.
and Joseph Charles & Assoc., Inc., the representatives of the several
underwriters of the Offering (the "Representatives") and their assigns warrants
(the "Representatives' Warrants") to purchase up to 130,000 Units;
Whereas, the Warrant Agent also serves as the stock transfer agent and
registrar of the Company's Common Stock;
Whereas, the Company desires to retain the Warrant Agent to act on behalf
of the Company, and the Warrant Agent is willing to act, in connection with the
issuance, transfer, exchange and replacement of the certificates evidencing the
Units (the "Unit Certificates" and the Warrants (the "Warrant Certificates")
(collectively and individually the Unit Certificates and Warrant Certificates
are referred to as the "Certificates" or "Certificate") to be issued in
connection with the Offering and to the Representatives and their assigns upon
exercise of the Representatives' Warrants under this Agreement 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 Units and 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 Certificates. The
Certificates (and the Subscription and the 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 Exhibits A and B 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
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<PAGE>
regulation of any stock exchange on which the Common Stock or Warrants may be
listed, or to conform to usage. Each Certificate shall entitle the registered
holder thereof, subject to the provisions of this Agreement and of the
Certificate, to purchase on or before the close of business on , 2002 (the
"Expiration Date"), one fully paid and non-assessable share of Common Stock for
each Warrant evidenced by such Certificate, upon payment of the Purchase Price
per share described in Section 6 hereof. 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 Units and
Warrants of the extended Expiration Date. Each Unit Certificate issued as a part
of the Offering shall be dated , 1997; each other 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., New York City time, on such date; provided, however,
that if such date is not a business day, it shall mean 5:00 p.m., New York City
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 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 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 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 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 Certificate
had not ceased to be such officer of the Company.
Section 3. Subsequent Issue of Certificates. Subsequent to their original
issuance, no Certificates shall be reissued except (i) Certificates issued upon
transfer thereof in accordance with Section 4 hereof, (ii) Certificates issued
upon any combination, split-up, or exchange of Certificates pursuant to Section
4 hereof, (iii) Certificates issued in replacement of mutilated, destroyed, lost
or stolen Certificates pursuant to Section 5 hereof, (iv) Certificates issued
upon the partial exercise of Warrants pursuant to Section 7 hereof, and (v)
Certificates issued pursuant to Section 22 hereof to reflect any adjustment or
change in the Purchase Price or the number or kind of shares or securities
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 hereof, the new Certificates required for purposes thereof, and the
Company, whenever required by the Warrant Agent, will supply the Warrant Agent
with Certificates duly executed on behalf of the Company for such purposes.
Section 4. Transfers and Exchanges of Certificates. The Warrant Agent
shall keep or cause to be kept books for registration of ownership and transfer
of the Certificates issued in accordance with this Agreement. Such registers
shall show the names and addresses of the respective holders of the Certificates
and the number of shares of Common Stock, if applicable, and Warrants evidenced
by each such Certificate.
The Warrant Agent shall, from time to time, register the transfer of any
outstanding Units and Warrants upon the books to be maintained by the Warrant
Agent for that purpose, upon surrender of the Certificate evidencing such Units
or Warrants, with the Assignment duly filled in and executed, to the Warrant
Agent at its stock transfer office at any time on or before the Expiration Date,
and upon payment to the Warrant 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 Certificate, with the Assignment duly completed and
executed, accompanied by payment of an amount equal to any applicable transfer
tax, the Warrant Agent shall promptly cancel the surrendered
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<PAGE>
Certificate and countersign and deliver to the transferee a new Certificate for
the number of full Units or Warrants transferred to such transferee; provided,
however, that in case the registered holder of any Certificate shall elect to
transfer fewer than all of the Units or Warrants evidenced by such Certificate,
the Warrant Agent shall also promptly countersign and deliver to such registered
holder a new Certificate or Certificates for the number of full Units or
Warrants not so transferred.
Any Certificate or Certificates may be exchanged at the option of the
holder thereof for another Certificate or Certificates of different
denominations, of like tenor and representing in the aggregate the same number
of Units or Warrants, upon surrender of such Certificate or Certificates, with
the Assignment duly completed 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 Certificate and deliver the new Certificate pursuant to
the provisions of this Section.
In the event of the issuance of new Certificates pursuant to this Section 4
in replacement of the Unit Certificates after , 1997, or such later if such date
is extended by Paulson Investment Company, Inc., in its sole discretion,
pursuant to appropriate advance notice to the holders of the Units (the
"Separation Date"), the Warrant Agent, in its capacity as Warrant Agent and as
Transfer Agent and Registrar of the Common Stock, shall promptly cancel the
surrendered Unit Certificate and countersign and deliver to the person entitled
to receive the new Certificates in accordance with this Section 4 certificates
evidencing separately the shares of Common Stock and Warrants evidenced by the
surrendered Unit Certificate and the surrendered Unit Certificate shall be
cancelled.
Section 5. Mutilated, Destroyed, Lost or Stolen 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 Certificate, and, in the
case of loss, theft or destruction, such 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 Certificate, the Warrant Agent shall countersign and deliver
a new Certificate of like tenor for the same number of Warrants. In the event of
the issuance of a new Certificate pursuant to this Section 5 after the
Separation Date in replacement of a Unit Certificate, the Warrant Agent, in its
capacity as Warrant Agent and Transfer Agent and Registrar of the Common Stock,
shall countersign and deliver a Certificate evidencing the number of shares of
Common Stock and a Warrant Certificate evidencing the number of Warrants
evidenced by the lost, stolen, destroyed or mutilated Unit Certificate.
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 (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 unchanged, but the number of
shares of capital stock purchasable upon 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 the holder 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
the holder 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
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<PAGE>
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
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 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.
6.6 Irrespective of any adjustments in the number or kind of shares
issuable upon exercise of Warrants, the Certificates theretofore or thereafter
issued may continue to express the same price and number and kind of shares as
are stated in the similar 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
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<PAGE>
(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 par value to no par value, or from no par value to 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 for not less than a 20-day period 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 provide not less than 15 days' prior 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
Certificate may exercise the Warrants evidenced thereby, in whole at any time or
in part from time to time on or after the Separation Date and at or prior to the
close of business on the Expiration Date, subject to the provisions of Section 9
hereof, at which time the 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
Certificate evidencing such Warrants, with the Subscription on the reverse side
thereof duly completed and executed, to the Warrant Agent at its stock transfer
office, 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 Certificate, with the Subscription duly completed 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 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 to cause such property to be delivered to or
upon the order of the registered holder of such 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, and the Company agrees to supply the Warrant Agent with sufficient number
of prospectuses for such purpose.
7.3 In case the registered holder of any Certificate shall exercise fewer
than all of the Warrants evidenced by such Certificate, the Warrant Agent shall
promptly countersign and deliver to the registered holder of such Certificate or
Certificates, or to his duly authorized assigns, a new Certificate or
Certificates evidencing the number of Warrants that were not so exercised. In
the event exercised Warrants are evidenced by a Unit Certificate, the Warrant
Agent shall also promptly countersign and deliver to the registered holder a
Certificate or Certificate evidencing the number of shares of Common Stock
evidenced by the Unit Certificate and the Unit Certificate shall be cancelled.
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 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
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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, on not less than 30 days' (the "Notice Period") written notice
to the holders of such Warrants at a price equal to $0.25 per Warrant (the
"Redemption Price"). The right to redeem the Warrants may be exercised by the
Company only in the event (i) the closing sale price for the Company's shares of
Common Stock has exceeded 200 percent of the Purchase Price, as so adjusted
pursuant to Section 6 hereof, during any period of at least 20 consecutive
trading days whether immediately preceding or otherwise any notice of
redemption, (ii) the Company has an effective registration statement (or post-
effective amendment to an existing registration statement) pertaining to the
securities underlying the Warrants, which registration statement would enable a
Warrant holder to exercise the Warrants under the Securities Act, and (iii)
expiration of the 30-day notice period before the Expiration Date. '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.
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 Warrant Agent 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. New York 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 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.
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 In the event 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
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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 Certificate evidencing a fraction of a Unit or 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 8, 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 Certificate was surrendered for exercise in accordance
with Section 7 hereof. By accepting a Certificate, the holder thereof expressly
waives any right to receive a 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 file a Registration Statement on the appropriate form and all post-
effective amendments to such Registration Statement necessary to permit the
offer and sale of the securities underlying the Warrants pursuant to the
Securities Act at any and all times during the term of the Warrants; provided,
however, that in no event shall such securities be issued, and the 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.
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 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 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 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 until any such tax shall have been paid,
all such tax being payable by the holder of such 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
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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 Warrants. Upon the
exercise 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.
The Warrant Agent shall keep copies of this Agreement available for
inspection by holders of Warrants during normal business hours at the stock
transfer office of the Warrant Agent. Copies of this Agreement may be obtained
upon written request addressed to the Warrant Agent at its stock transfer
office.
Section 14. Warrant Holder Not Deemed a Shareholder. No holder, as such, of
any Warrant 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 by a Certificate for any
purpose whatever, nor shall anything contained herein or in any Certificate be
construed to confer upon the holder of any Warrant, 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 shall have been
exercised in accordance with the provisions of this Agreement 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 Certificates;
and any registered holder of any Certificate, without the consent of the Warrant
Agent or of the holder of any Certificate, may, on his own behalf for his own
benefit, enforce,
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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 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 Certificate and in this Agreement.
Section 16. Agreement of Holders of Certificates. Every holder of a
Certificate, by accepting the same, consents and agrees with the Company, the
Warrant Agent and every other holder of a Certificate that:
16.1 The 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 Certificate is registered as the absolute owner of the Unit or
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 Certificates. In the event that the Company
shall purchase or otherwise acquire any Certificate or Certificates after the
issuance thereof, such 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 Certificate delivered to it for exercise, in whole or in part,
or delivered to it for transfer, split-up, combination or exchange. 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.
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 instrument or
agreement 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 the case at the time such
successor to the Warrant Agent shall succeed to the agency created by this
Agreement, any of the 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 Certificates so
countersigned; and in the case that at any time the Certificates shall not have
been countersigned, any successor to the Warrant Agent may countersign such
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 Certificates shall
have the full force provided in the Certificates and in this Agreement.
In the case that at any time the name of the Warrant Agent shall be changed
and at such time any of the Certificates shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior name
and deliver Certificates so countersigned; and in case at that time any of the
Certificates shall not have been countersigned, the Warrant Agent may
countersign such Certificates either in its prior name or in its changed name;
and in such cases such Certificates shall have the full force provided in the
Certificates and in this Agreement.
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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 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 any two of 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
Certificates (except its countersignature on the 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 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 Certificate; nor shall it be responsible
for any change in the number of shares of Common Stock required under the
provisions of Section 6 hereof 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 Certificate or as to whether any shares of Common Stock will,
when issued, be validly issued, fully paid and nonassessable.
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
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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 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 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 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 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 Certificates. Notwithstanding any of the
provisions of this Agreement or the Certificates to the contrary, the Company
may, at its option, issue new 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 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 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:
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U.S. Stock Transfer Corporation
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 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 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 Certificates and which shall not
adversely affect the interests of the holders of 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.
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 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 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 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
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.
-12-
<PAGE>
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 4.10
ADVANTAGE MARKETING SYSTEMS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF OKLAHOMA
UNIT CERTIFICATE
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT
UNIT NUMBER UNITS
- --------------- --------------
| | | |
- --------------- --------------
CUSIP 00756G 40 7
THIS CERTIFIES that, for value received
or registered assigns (the "Registered Holder"), is the owner of the number of
units (the "Units") specified above, each of which consists of one (1) share of
common stock, par value $.0001 per share (the "Common Stock"), of Advantage
Marketing Systems, Inc., a corporation incorporated under the laws of the State
of Oklahoma (the "Company"), and one (1) Redeemable Common Stock Purchase
Warrant (the "Warrant" or, collectively, the "Warrants"). Prior to ,
1997 or such later date as determined in the sole discretion of Paulson
Investment Company, Inc. (the "Separation Date"), following appropriate prior
notice to the holders of the Units, the Company will not recognize any separate
transfer or exchange of the Warrants and Common Stock which comprise the Units
represented by this Unit Certificate.
This Unit Certificate is exchangeable upon surrender hereof by the
Registered Holder to the Transfer Agent and Registrar or its successor for a new
Unit Certificate(s) of like tenor representing an equal aggregate number of
Units. Each of such new Unit Certificates shall represent the number of Units
as shall be designated by such Registered Holder at the time of such surrender.
This Unit Certificate shall be transferrable at the office of the Transfer Agent
and Registrar or its successor by the Registered Holder in person or by attorney
duly authorized in writing upon surrender of this Unit Certificate. Upon due
presentment and payment of any applicable tax or other charge imposed in
connection therewith or incidental thereto for registration of transfer of this
Unit Certificate at such office, a new Unit Certificate(s) representing an equal
aggregate number of Units will be issued to the transferee in exchange for this
Unit Certificate. Commencing on the Separation Date, the Registered Holder shall
be entitled to exchange this Unit Certificate for separate certificates
representing the number of shares of Common Stock and Warrants comprising the
Units represented by this Unit Certificate upon surrender of this Unit
Certificate to the Transfer Agent and Registrar at the office of the Transfer
Agent and Registrar, together with any documentation required by the Transfer
Agent and Registrar.
The Warrants are issued pursuant to and are subject in all respects to the
terms and conditions set forth in the Warrant Agreement (the "Warrant
Agreement"), dated , 1997, by and between the Company and U.S.
Stock Transfer Corp., the Warrant Agent and Transfer Agent and Registrar. The
Warrant Agreement provides, among other things, for adjustments to the Purchase
Price, as that term is hereinafter defined, and the number of shares of Common
Stock which may be purchased upon exercise of the Warrants under certain
circumstances. Each Warrant entitles the Registered Holder thereof after the
Separation Date to purchase one (1) fully paid and nonassessable share of Common
Stock upon presentation and surrender of this Unit Certificate with the
instructions for the registration and delivery of Common Stock filled in at any
time prior to 5:00 p.m. New York City time ("close of business"), on
, 2002, at the Warrant Agent's office in Glendale, California, or the office of
its successor warrant agent or, if there be no successor warrant agent, at the
corporate offices of the Company, and upon payment of $ per share,
subject to adjustment to a purchase price equal to 120 percent of the average
daily closing price of the Common Stock for the 20 trading days following the
Separation Date (the "Purchase Price"), and any applicable taxes paid either in
cash, or by check, payable in lawful money of the United States of America to
the order of the Company. Notwithstanding anything herein to the contrary, the
Warrants shall not be exercisable or separately transferrable from the Common
Stock comprising in part the Units prior to the Separation Date. The number and
kind of securities or other property for which the Warrants are
<PAGE>
exercisable are subject to further adjustment in certain events, such as
mergers, splits, stock dividends, recapitalization and the like.
Upon not less than 30 days' notice (the "Notice Period"), the Company may
at its option redeem all unexercised Warrants for $0.25 per Warrant at any time
after (i) the closing sale price of the Common Stock has exceeded 200 percent of
the Purchase Price during any period of at least consecutive 20 trading days,
(ii) the Company has an effective registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), pertaining to the Common Stock
or other securities underlying the Warrants, and (iii) 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
, 2002.
The Warrants are subject to all of the terms, provisions and conditions of
the Warrant Agreement, dated as of , 1997 (the "Warrant
Agreement"), between the Company and the Warrant Agent, to all of which terms,
provisions and conditions the Registered Holder 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 the Warrants. 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.
The Company shall not be required upon the exercise of the Warrants 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 maintain the
effectiveness of a registration statement during the term of the Warrants with
respect to such sales under the Securities Act 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 its 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 Purchase
Price of such Warrants.
With respect to the Common Stock or any other securities of the Company
which may be issued on the exercise of the Warrants, (i) the Registered Holder,
as the holder of the Warrants, shall not be entitled to vote, receive dividends
or be deemed the holder of the Common Stock or any other securities of the
Company which may at any time be issuable on the exercise of the Warrants for
any purpose whatever and (ii) nothing contained in the Warrant Agreement or
herein be construed to confer upon the Registered Holder, as the holder of the
Warrants, 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 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 Warrant Agreement) or to
receive dividends or subscription rights or otherwise until the Warrants shall
have been exercised and the Common Stock or other securities purchasable upon
the exercise hereof shall have become deliverable as provided in the Warrant
Agreement.
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 until
any tax which may be payable in respect thereof by the Registered Holder
pursuant to the Warrant Agreement shall have been paid, such tax being payable
by the Registered Holder at the time of surrender.
<PAGE>
The Company and the Transfer Agent and Registrar may deem and treat the
Registered Holder as the absolute owner hereof (notwithstanding any notation of
ownership or other writing thereon made by anyone other than the Company or the
Transfer Agent and Registrar) for all purposes whatever, and neither the Company
nor the Transfer Agent and Registrar shall be affected by any notice to the
contrary.
This Unit Certificate shall be governed by and construed in accordance with
the laws of the State of Oklahoma without giving effect to the conflicts of law,
and shall not be valid or obligatory for any purposes until it shall have been
countersigned by the Transfer Agent and Registrar.
WITNESS the facsimile signatures of the officers of the Company.
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:
Transfer Agent and Registrar Authorized Signature
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
The following abbreviations when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM --as tenants in common UNIF GIFT MIN ACT-- Custodian
--------------------
TEN ENT --as tenants by the entireties (Cust) (Minor)
JT TEN --as joint tenants with right of under Uniform Gifts
survivorship and not as to Minors Act_______
tenants in common (State)
Additional abbreviations may also be used though not in the above list.
SUBSCRIPTION
(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO EXERCISE THE WARRANTS IN
WHOLE OR IN PART)
To: ADVANTAGE MARKETING SYSTEMS, INC.
The undersigned Registered Holder ( )
-------------------------------------
(Please insert Social Security or other
identification number of Registered Holder)
hereby irrevocably elects to exercise the right of purchase represented by the
within this Unit 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 Warrants being exercised shall not be all the Warrants
evidenced by this Unit Certificate, that a new Certificate for the balance of
such Warrants as well as the shares of Common Stock represented by this Unit
Certificate be registered in the name of, and delivered to, the Registered
Holder at the address stated below:
Address:_____________________________________________________________________
Dated:_____________, _______ Signature
------------------------------------------
(Signature must conform in all respects to
the name of Registered Holder as specified
in the case of this Unit Certificate in
every particular, without alteration or any
change whatever.)
Signature Guaranteed: ------------------------------------------
ASSIGNMENT
(TO BE SIGNED ONLY UPON ASSIGNMENT)
FOR VALUE RECEIVED, the undersigned Registered Holder ( )
------------------------
(Please insert
Social Security or other
identification number of
Registered Holder)
hereby sells, assigns and transfers unto
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
(Please Print Name and Address including Zip Code)
Warrants evidenced by the within Unit Certificate, and irrevocably constitutes
and appoints
<PAGE>
_______________________________________________________________________Attorney
to transfer this Unit Certificate on the books of Advantage Marketing Systems,
Inc. with the full power of substitution in the premises.
Dated:__________________, ________
Signature Guaranteed:
__________________________________
------------------------------------------
(Signature must conform in all respects to
the name of Registered Holder as specified
on the face of this Unit Certificate in
every particular, without alteration or any
change whatsoever, and the signature must be
guaranteed in the usual manner.)
The signature should be guaranteed by an eligible institution (Banks,
Stockbrokers, Savings and Loan Association and Credit Union with membership in
an approved signature Medallion Program), pursuant to S.E.C. Rule 17Ad-15.
<PAGE>
EXHIBIT 4.11
PROMOTIONAL SHARES ESCROW AGREEMENT
THIS PROMOTIONAL SHARES ESCROW AGREEMENT (this "Agreement") made and
entered into this 31st day of October, 1997, by and between Advantage Marketing
Systems, Inc., an Oklahoma corporation (the "Issuer"), whose principal place of
business is located at 2601 Northwest Expressway, Suite 1210W, Oklahoma City,
Oklahoma 73112-7293, and Robert and Retha H. Nance (the"Depositors") and Liberty
Bank and Trust Company of Oklahoma City, N.A. (the "Escrow Agent"), whose
principal place of business is located at 100 Broadway, Oklahoma City, Oklahoma
73102 (all of whom are collectively referred to as "Signatories").
RECITALS
WHEREAS, the Issuer has filed an application with the Securities
Administrator of the Oklahoma Department of Securities (the "Administrator") to
register the Issuer's offering of (i) 1,495,000 shares of Common Stock, $.0001
par value, and 1,495,000 Redeemable Common Stock Purchase Warrants (the
"Warrants") in units of one share of Common Stock and one Warrant (the "Units")
and 1,495,000 shares of Common Stock underlying the Warrants for sale to public
investors some of whom may be residents of the State of Oklahoma, (ii) 130,000
shares of Common Stock and 130,000 Warrants in units of one share of Common
Stock and one Warrant underlying the warrants granted to Paulson Investment
Company, Inc. and Joseph Charles & Assoc., Inc. the representatives of the
underwriters of the Issuer's offering and (iii) 1,625,000 shares of Common Stock
underlying the Warrants (the "Equity Securities");
WHEREAS, Robert Nance is the owner of 75 shares of Common Stock and stock
options exercisable for the purchase of 54,483 shares of Common Stock; Retha H.
Nance is the owner of 37,750 shares of Common Stock; and Robert Nance and Retha
H. Nance are the joint owners of 103,392 shares of Common Stock;
WHEREAS, Robert Nance and Retha H. Nance propose to deposit in escrow
pursuant to this Agreement (i) 63,392 shares of the Common Stock jointly owned
by them and 30,000 shares of Common Stock owned by Retha H. Nance, for a total
of 93,108 shares of Common Stock and (ii) the stock options exercisable for the
purchase of 54,483 shares of Common Stock (the shares of Common Stock and stock
options are referred to herein as the "Promotional Securities");
WHEREAS, as a condition to registering the Issuer's Equity Securities, the
Depositors, who are security holders of the Issuer and who, for the purposes of
this Agreement, are deemed to be Promoters of the Issuer, have agreed to deposit
the Promotional Securities with the Escrow Agent; and
WHEREAS, the Signatories have agreed to be bound by the terms of this
Agreement.
NOW, THEREFORE, the Signatories agree as follows:
1. DEPOSIT OF PROMOTIONAL SHARES. The Depositors' Promotional Securities have
been deposited into an escrow account (the "escrow") with the Escrow Agent, and
the Escrow Agent hereby acknowledge the receipt thereof.
2. EXERCISE OR CONVERSION OF PROMOTIONAL SHARES. To the extent the
Promotional Shares have or represent exercise rights or conversion rights, the
Escrow Agent shall, upon receipt of the Issuer's written
PROMOTIONAL SHARES ESCROW AGREEMENT Page 1
<PAGE>
request, provide the documents that evidence and/or which are necessary to cause
exercise of the rights or conversion rights. The shares of Common Stock or other
securities of the Issuer issued upon exercise or conversion of the Promotional
Securities shall become and remain in escrow subject to the terms of this
Agreement.
3. TERM. The term of this Agreement and the escrow shall begin on the date
that the public securities offering relating thereto (the "public offering") is
declared effective by the Administrator and shall continue for a period of 36
months thereafter. The Promotional Securities shall be held by the Escrow Agent
pursuant to this Agreement until they are released in accordance with paragraph
4 of this Agreement.
4. RELEASE OF PROMOTIONAL SECURITIES.
(a) In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of the Issuer's assets or securities
(including by way of tender offer), or any other transaction or proceeding
with a person who is not a Promoter, which results in the distribution of
the Issuer's assets or securities ("Distribution"), while this Agreement
remains in effect, the Depositors agree that:
(i) All holders of the Issuer's Equity Securities will initially share
on a pro rata, per share basis in the Distribution, in proportion to
the amount of cash or other consideration that they paid per share for
their Equity Securities (provided that the Administrator has accepted
the value of the other consideration), until the shareholders who
purchased the Issuer's Equity Securities pursuant to the public
offering (the "Public Shareholders") have received, or have had
irrevocably set aside for them, an amount that is equal to 100 percent
of the public offering's price per share times the number of shares of
Equity Securities that they purchased pursuant to the public offering
and which they still hold at the time of the Distribution, adjusted
for stock splits, stock dividends, recapitalization and the like; and
(ii) All holders of the Issuer's Equity Securities shall thereafter
participate on an equal, per share basis times the number of shares of
Equity Securities they hold at the time of the Distribution, adjusted
for stock splits, stock dividends, recapitalization and the like.
(b) The Distribution may proceed on lesser terms and conditions than the
terms and conditions in paragraph 4(a) of this Agreement if a majority of
the Equity Securities that are not held by Depositors, officers, directors,
or Promoters of the Issuer, or their associates or affiliates vote, or
consent by consent procedure, to approve the lesser terms and conditions.
(c) In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of the Issuer's assets or securities
(including by way of tender offer), or any other transaction or proceeding
with a person who is a Promoter, which results in a Distribution while this
Agreement remains in effect, the Depositors' Promotional Securities shall
remain in escrow subject to the terms of this Agreement.
(d) With respect to the 93,108 shares of the Common Stock owned by Robert
and Retha H. Nance (the "Initially Deposited Shares") initially deposited
with the Escrow Agent pursuant to this
PROMOTIONAL SHARES ESCROW AGREEMENT Page 2
<PAGE>
Agreement, during any given three-month period following the date of this
Agreement, Robert and Retha H. Nance shall be entitled to sell that number
of the Initially Deposited Shares equal to one-half of one percent (0.5%)
of the outstanding shares of Common Stock of the Issuer as shown by the
most recent report filed by the Issuer with the United States Securities
and Exchange Commission, the National Association of Securities Dealers,
Inc. pursuant to Rule 10b-17, or statement published by the Issuer, in
which event the Escrow Agent shall release and return to Robert and Retha
H. Nance such number of the Initially Deposited Shares. Notwithstanding any
other provision contained herein, the release of such number of the
Initially Deposited Shares pursuant to this paragraph 4(d) shall not be
required to provide prior notification of the Administrator of such
release, and Escrow Agent shall not be required to receive any form of
approval of release of such Initially Deposited Shares by the
Administrator; however, within 10 days following each release of the
Initially Deposited Shares, the Escrow Agent shall provide the
Administrator notice of such release.
(e) The Depositors' Promotional Shares shall be released from escrow if (i)
the public offering has been terminated, and no securities were sold
pursuant thereto, or (ii) the public offering has been terminated, and all
of the gross proceeds that were derived therefrom have been returned to the
public investors, or (iii) the term of this Agreement shall have expired in
accordance with and pursuant to paragraph 3 of this Agreement.
5. NOTICE OF TERMINATION. Upon expiration of the term of this Agreement, the
Escrow Agent shall notify the Administrator in writing of such termination and
shall not be required to provide the Administrator with any other documentation
of such termination or release of the Promotional Securities.
6. RESTRICTIONS ON TRANSFER, SALE OR DISPOSAL OF PROMOTIONAL SECURITIES.
While this Agreement is in effect, no Promotional Securities, any interest
therein or any right or title thereto, may be sold, transferred, pledged,
assigned, hypothecated or otherwise disposed of ("transfer" or "transferred"),
except as provided below, and the Escrow Agent shall not recognize any transfer
that violates the terms of this Agreement. The Promotional Securities may not
be transferred until the Escrow Agent has received a written statement, signed
by the proposed transferee ("transferee"), which states that the transferee has
full knowledge of the terms of this Agreement, the transferee accepts the
Promotional Securities subject to the terms of this Agreement, and the
transferee realizes that the Promotional Securities shall remain subject to the
terms of the Agreement until they are released pursuant to paragraph 4 of this
Agreement. Notwithstanding the foregoing, (a) Promotional Securities may be
transferred by will, the laws of decent and distribution, operation of law, or
by order of any court of competent jurisdiction and having proper venue and (b)
Promotional Securities of a deceased Depositor may be hypothecated to pay the
expenses of the deceased Depositor's estate. The hypothecated Promotional
Securities shall remain subject to the terms of this Agreement. Promotional
Securities may not be pledged to secure any other debt.
7. VOTING POWER. The Promotional Securities shall have the same voting rights
as similar, non-escrowed Equity Securities. If the Promotional Securities are
registered in the Escrow Agent's name, the Escrow Agent shall vote those
Promotional Securities in accordance with the Depositors' written instructions.
8. DIVIDENDS. Cash dividends and stock dividends, that are granted to the
Depositors, shall be promptly deposited with the Escrow Agent subject to the
terms of this Agreement. The Escrow Agent shall place the cash dividends in an
interest bearing account. The Escrow Agent shall treat the stock
PROMOTIONAL SHARES ESCROW AGREEMENT Page 3
<PAGE>
dividends, cash dividends and the interest earned thereon as assets of the
Issuer which are available for distribution pursuant to paragraphs 4(a) and (b)
of this Agreement, or as assets of the Issuer available for distribution to the
Depositors, upon release of their Promotional Securities pursuant to paragraph 4
of this Agreement, unless they are to be used as compensation to the Escrow
Agent, pursuant to paragraph 10 of this Agreement.
9. STOCK SPLITS AND ADDITIONAL SHARES. Equity Securities received by the
Depositors as a result of stock splits, recapitalization of the Issuer, or the
conversion of the Depositors' convertible securities while their Promotional
Securities are held in escrow, shall be promptly deposited with the Escrow Agent
as Promotional Securities subject to the terms of this Agreement. These
Promotional Securities shall be distributed to the Depositors when their
Promotional Securities are released from escrow pursuant to paragraph 4 of this
Agreement.
10. RELIANCE BY ESCROW AGENT. The Escrow Agent shall be protected if it acts
in good faith upon any statement, certificate, notice, request, consent, order
or other document which it believes to be genuine, conforms with the provisions
of this Agreement and is signed by the proper party. The Escrow Agent's sole
responsibility shall be to act in accordance with the terms expressly set forth
in this Agreement. The Escrow Agent shall be under no obligation to institute
or defend any action, suit or proceeding in connection with this Agreement
unless it receives reasonable indemnification and advancement of fees and costs.
The Escrow Agent may consult counsel with respect to any question arising under
this Agreement. The Escrow Agent shall not be liable for any action taken or
omitted, in good faith, upon the advice of counsel. In performing its duties
hereunder, the Escrow Agent shall not be liable to anyone for any damage, loss,
expense or liability other than for that which arises from the Escrow Agent's
failure to abide by the terms of this Agreement.
11. ESCROW AGENTS COMPENSATION. The Escrow Agent shall be entitled to receive
reasonable compensation from the Issuer for its services. If the Escrow Agent
is required to render additional services that are not expressly set forth
herein, or if it is made a party to or intervenes in any action, suit or
proceeding pertaining to this Agreement ("Additional Services"), it shall be
entitled to receive reasonable compensation from the Issuer and the Depositors.
If Additional Services are provided, the Escrow Agent may deduct reasonable
compensation from the cash dividends, interest and proceeds being held for
distribution pursuant to this Agreement.
12. ESCROW AGENTS INDEMNIFICATION. The Issuer and the Depositors agree to hold
the Escrow Agent harmless from, and indemnify the Escrow Agent for, any cost or
liability regarding any administrative proceeding, investigation, litigation,
interpretation or implementation relating to this Agreement, including release
of Promotional Securities, the Distribution, and the disbursement of dividends,
interest or proceeds, unless the cost or liability arises from the Escrow
Agent's failure to abide by the terms of this Agreement.
13. INDEPENDENCE OF THE ESCROW AGENT. The Issuer hereby represents that all of
its officers, directors and Promoters are listed on Exhibit A attached hereto
and made a part hereof. The Escrow Agent hereby represents that it is not
affiliated with the Issuer, the Depositors, or the Issuer's officers, directors
or Promoters who are named in Exhibit A. For purposes of this Agreement, the
Escrow Agent is not disqualified to act as Escrow Agent merely because the
Issuer, its officers, directors and Promoters are customers of the Escrow Agent.
PROMOTIONAL SHARES ESCROW AGREEMENT Page 4
<PAGE>
14. SCOPE. This Agreement shall inure to the benefit of and be binding upon
the Depositors, their heirs and assignees, and upon the Issuer, Escrow Agent,
and their successors.
15. SUBSTITUTE ESCROW AGENT. The Escrow Agent may, upon not less than 60 days
prior written notice to the Issuer, Depositors, and the Administrator, resign as
the Escrow Agent. The Issuer and the Depositors shall, before the effective
date of the Escrow Agent's resignation, enter into a new identical Escrow
Agreement with a substitute Escrow Agent. If the Issuer and the Depositors fail
to enter into a new Escrow Agreement and appoint a successor Escrow Agent within
60 days after the Escrow Agent has given notice of its resignation, the Escrow
Agent then serving under this Agreement shall retain the Promotional Securities
in escrow until a new, identical Escrow Agreement has been executed and a
successor Escrow Agent has been appointed. The Escrow Agent shall not be liable
for retaining the Promotional Securities in escrow.
16. TERMINATION. Except for the compensation and indemnification provisions of
paragraphs 11 and 12, above, which shall survive until they are satisfied, this
Agreement shall terminate in its entirety when all of the Promotional Securities
have been released, or the Issuer's Equity Securities and/or assets have been
distributed pursuant to paragraph 4 of this Agreement..
17. MISCELLANEOUS PROVISIONS. Pursuant to the requirements of this Agreement,
the Signatories have entered into this Agreement, which may be executed and
written in multiple counterparts and each of which shall be considered an
original.
IN WITNESS WHEREOF, the Signatories have executed this Agreement in the
capacities set for and effective as of the date first above written.
"Issuer" ADVANTAGE MARKETING SYSTEMS, INC.
By:
-------------------------------------
John W. Hail, Chief Executive Officer
Attest:
- ----------------------------------
Roger P. Baresel, Secretary
"Depositors"
--------------------------------------
Robert Nance
--------------------------------------
Retha H. Nance
PROMOTIONAL SHARES ESCROW AGREEMENT Page 5
<PAGE>
"Escrow Agent"
LIBERTY BANK AND TRUST COMPANY OF
OKLAHOMA CITY, N.A.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
PROMOTIONAL SHARES ESCROW AGREEMENT Page 6
<PAGE>
PROMOTIONAL SHARES ESCROW AGREEMENT
THIS PROMOTIONAL SHARES ESCROW AGREEMENT (this "Agreement") made and
entered into this ________________ day of November, 1997, by and between
Advantage Marketing Systems, Inc., an Oklahoma corporation (the "Issuer"), whose
principal place of business is located at 2601 Northwest Expressway, Suite
1210W, Oklahoma City, Oklahoma 73112-7293, and John W. Hail ("Hail"), Curtis H.
Wilson, Sr. ("C. Wilson"), Ruth Wilson ("R. Wilson"), Roger P. Baresel ("R.
Baresel"), Judith A. Baresel ("J. Baresel"), R. Terren Dunlap ("Dunlap"), Pre-
Paid Legal Services, Inc. ("Pre-Paid"), and (Hail, C. Wilson, R. Wilson, R.
Baresel, J. Baresel, Dunlap, and Pre-Paid are collectively referred to as the
"Depositors") and Liberty Bank and Trust Company of Oklahoma City, N.A. (the
"Escrow Agent"), whose principal place of business is located at 100 Broadway,
Oklahoma City, Oklahoma 73102 (all of whom are collectively referred to as
"Signatories").
RECITALS
WHEREAS, the Issuer has filed an application with the Securities
Administrator of the Oklahoma Department of Securities (the "Administrator") to
register the Issuer's offering of (i) 1,495,000 shares of Common Stock, $.0001
par value, and 1,495,000 Redeemable Common Stock Purchase Warrants (the
"Warrants") in units of one share of Common Stock and one Warrant (the "Units")
and 1,495,000 shares of Common Stock underlying the Warrants for sale to public
investors some of whom may be residents of the State of Oklahoma, (ii) 130,000
shares of Common Stock and 130,000 Warrants in units of one share of Common
Stock and one Warrant underlying the warrants granted to Paulson Investment
Company, Inc. and Joseph Charles & Assoc., Inc. the representatives of the
underwriters of the Issuer's offering and (iii) 1,625,000 shares of Common Stock
underlying the Warrants (the "Equity Securities");
WHEREAS, Hail is the owner of 241,641 shares of Common Stock and stock
options exercisable for the purchase of 250,000 shares of Common Stock; C.
Wilson is the owner of 15,607 shares of Common Stock and stock options
exercisable for the purchase of 250,000 shares of Common Stock; R. Wilson is the
owner of 4,338 shares of Common Stock; R. Baresel and J. Baresel are the owners
of 11,500 shares of Common Stock and 1997-A Warrants exercisable for the
purchase of 2,000 shares of Common Stock, and R. Baresel is the owner of stock
options exercisable for the purchase of 35,000 shares of Common Stock; J.
Baresel is the owner of 20,828 shares of Common Stock, stock option exercisable
for the purchase of 87,500 shares of Common Stock, and the custodian holder for
the benefit of the children of R. Baresel and J. Baresel of stock options
exercisable for the purchase of 12,500 shares of Common Stock; Dunlap is the
owner of stock options exercisable for the purchase of 37,500 shares of Common
Stock; and Pre-Paid is the owner of 80,768 shares of Common Stock (the shares of
Common Stock, 1997-A Warrants and stock options are referred to herein as the
"Promotional Securities");
WHEREAS, as a condition to registering the Issuer's Equity Securities, the
Depositors, who are security holders of the Issuer and who, for the purposes of
this Agreement, are deemed to be Promoters of the Issuer, have agreed to deposit
the Promotional Securities with the Escrow Agent; and
WHEREAS, the Signatories have agreed to be bound by the terms of this
Agreement.
NOW, THEREFORE, the Signatories agree as follows:
1. DEPOSIT OF PROMOTIONAL SHARES. The Depositors' Promotional Securities have
been deposited into an escrow account (the "escrow") with the Escrow Agent, and
the Escrow Agent hereby acknowledge the receipt thereof.
2. EXERCISE OR CONVERSION OF PROMOTIONAL SHARES. To the extent the
Promotional Shares have or represent exercise rights or conversion rights, the
Escrow Agent shall, upon receipt of the Issuer's written request, provide the
documents that evidence and/or which are necessary to cause exercise of the
rights or conversion rights. The shares of Common Stock or other securities of
the Issuer issued upon exercise or
PROMOTIONAL SHARES ESCROW AGREEMENT Page 1
<PAGE>
conversion of the Promotional Securities shall become and remain in escrow
subject to the terms of this Agreement.
3. TERM. The term of this Agreement and the escrow shall begin on the date
that the public securities offering relating thereto (the "public offering") is
declared effective by the Administrator and shall continue for a period of 36
months thereafter. The Promotional Securities shall be held by the Escrow Agent
pursuant to this Agreement until they are released in accordance with paragraph
4 of this Agreement.
4. RELEASE OF PROMOTIONAL SECURITIES.
(a) In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of the Issuer's assets or securities
(including by way of tender offer), or any other transaction or proceeding
with a person who is not a Promoter, which results in the distribution of
the Issuer's assets or securities ("Distribution"), while this Agreement
remains in effect, the Depositors agree that:
(i) All holders of the Issuer's Equity Securities will initially
share on a pro rata, per share basis in the Distribution, in
proportion to the amount of cash or other consideration that they
paid per share for their Equity Securities (provided that the
Administrator has accepted the value of the other consideration),
until the shareholders who purchased the Issuer's Equity Securities
pursuant to the public offering (the "Public Shareholders") have
received, or have had irrevocably set aside for them, an amount
that is equal to 100 percent of the public offering's price per
share times the number of shares of Equity Securities that they
purchased pursuant to the public offering and which they still hold
at the time of the Distribution, adjusted for stock splits, stock
dividends, recapitalization and the like; and
(ii) All holders of the Issuer's Equity Securities shall thereafter
participate on an equal, per share basis times the number of shares
of Equity Securities they hold at the time of the Distribution,
adjusted for stock splits, stock dividends, recapitalization and
the like.
(b) The Distribution may proceed on lesser terms and conditions than the
terms and conditions in paragraph 4(a) of this Agreement if a majority of
the Equity Securities that are not held by Depositors, officers, directors,
or Promoters of the Issuer, or their associates or affiliates vote, or
consent by consent procedure, to approve the lesser terms and conditions.
(c) In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of the Issuer's assets or securities
(including by way of tender offer), or any other transaction or proceeding
with a person who is a Promoter, which results in a Distribution while this
Agreement remains in effect, the Depositors' Promotional Securities shall
remain in escrow subject to the terms of this Agreement.
(d) The Depositors' Promotional Securities shall be released from escrow if
(i) the public offering has been terminated, and no securities were sold
pursuant thereto, or (ii) the public offering has been terminated, and all
of the gross proceeds that were derived therefrom have been returned to the
public investors, or (iii) the term of this Agreement shall have expired in
accordance with and pursuant to paragraph 3 of this Agreement.
5. NOTICE OF TERMINATION. Upon expiration of the term of this Agreement, the
Escrow Agent shall notify the Administrator in writing of such termination and
shall not be required to provide the Administrator with any other documentation
of such termination or release of the Promotional Securities.
6. RESTRICTIONS ON TRANSFER, SALE OR DISPOSAL OF PROMOTIONAL SECURITIES.
While this Agreement is in effect, no Promotional Securities, any interest
therein or any right or title thereto, may be sold, transferred,
PROMOTIONAL SHARES ESCROW AGREEMENT Page 2
<PAGE>
pledged, assigned, hypothecated or otherwise disposed of ("transfer" or
"transferred"), except as provided below, and the Escrow Agent shall not
recognize any transfer that violates the terms of this Agreement. The
Promotional Securities may not be transferred until the Escrow Agent has
received a written statement, signed by the proposed transferee ("transferee"),
which states that the transferee has full knowledge of the terms of this
Agreement, the transferee accepts the Promotional Securities subject to the
terms of this Agreement, and the transferee realizes that the Promotional
Securities shall remain subject to the terms of the Agreement until they are
released pursuant to paragraph 4 of this Agreement. Notwithstanding the
foregoing, (a) Promotional Securities may be transferred by will, the laws of
decent and distribution, operation of law, or by order of any court of competent
jurisdiction and having proper venue and (b) Promotional Securities of a
deceased Depositor may be hypothecated to pay the expenses of the deceased
Depositor's estate. The hypothecated Promotional Securities shall remain subject
to the terms of this Agreement. Promotional Securities may not be pledged to
secure any other debt.
7. VOTING POWER. The Promotional Securities shall have the same voting rights
as similar, non-escrowed Equity Securities. If the Promotional Securities are
registered in the Escrow Agent's name, the Escrow Agent shall vote those
Promotional Securities in accordance with the Depositors' written instructions.
8. DIVIDENDS. Cash dividends and stock dividends, that are granted to the
Depositors, shall be promptly deposited with the Escrow Agent subject to the
terms of this Agreement. The Escrow Agent shall place the cash dividends in an
interest bearing account. The Escrow Agent shall treat the stock dividends,
cash dividends and the interest earned thereon as assets of the Issuer which are
available for distribution pursuant to paragraphs 4(a) and (b) of this
Agreement, or as assets of the Issuer available for distribution to the
Depositors, upon release of their Promotional Securities pursuant to paragraph 4
of this Agreement, unless they are to be used as compensation to the Escrow
Agent, pursuant to paragraph 10 of this Agreement.
9. STOCK SPLITS AND ADDITIONAL SHARES. Equity Securities received by the
Depositors as a result of stock splits, recapitalization of the Issuer, or the
conversion of the Depositors' convertible securities while their Promotional
Securities are held in escrow, shall be promptly deposited with the Escrow Agent
as Promotional Securities subject to the terms of this Agreement. These
Promotional Securities shall be distributed to the Depositors when their
Promotional Securities are released from escrow pursuant to paragraph 4 of this
Agreement.
10. RELIANCE BY ESCROW AGENT. The Escrow Agent shall be protected if it acts
in good faith upon any statement, certificate, notice, request, consent, order
or other document which it believes to be genuine, conforms with the provisions
of this Agreement and is signed by the proper party. The Escrow Agent's sole
responsibility shall be to act in accordance with the terms expressly set forth
in this Agreement. The Escrow Agent shall be under no obligation to institute
or defend any action, suit or proceeding in connection with this Agreement
unless it receives reasonable indemnification and advancement of fees and costs.
The Escrow Agent may consult counsel with respect to any question arising under
this Agreement. The Escrow Agent shall not be liable for any action taken or
omitted, in good faith, upon the advice of counsel. In performing its duties
hereunder, the Escrow Agent shall not be liable to anyone for any damage, loss,
expense or liability other than for that which arises from the Escrow Agent's
failure to abide by the terms of this Agreement.
11. ESCROW AGENTS COMPENSATION. The Escrow Agent shall be entitled to receive
reasonable compensation from the Issuer for its services. If the Escrow Agent
is required to render additional services that are not expressly set forth
therein, or if it is made a party to or intervenes in any action, suit or
proceeding pertaining to this Agreement ("Additional Services"), it shall be
entitled to receive reasonable compensation from the Issuer and the Depositors.
If Additional Services are provided, the Escrow Agent may deduct reasonable
compensation from the cash dividends, interest and proceeds being held for
distribution pursuant to this Agreement.
12. ESCROW AGENTS INDEMNIFICATION. The Issuer and the Depositors agree to hold
the Escrow Agent harmless from, and indemnify the Escrow Agent for, any cost or
liability regarding any administrative
PROMOTIONAL SHARES ESCROW AGREEMENT Page 3
<PAGE>
proceeding, investigation, litigation, interpretation or implementation relating
to this Agreement, including release of Promotional Securities, the
Distribution, and the disbursement of dividends, interest or proceeds, unless
the cost or liability arises from the Escrow Agent's failure to abide by the
terms of this Agreement.
13. INDEPENDENCE OF THE ESCROW AGENT. The Issuer hereby represents that all of
its officers, directors and Promoters are listed on Exhibit A attached hereto
and made a part hereof. The Escrow Agent hereby represents that it is not
affiliated with the Issuer, the Depositors, or the Issuer's officers, directors
or Promoters who are named in Exhibit A. For purposes of this Agreement, the
Escrow Agent is not disqualified to act as Escrow Agent merely because the
Issuer, its officers, directors and Promoters are customers of the Escrow Agent.
14. SCOPE. This Agreement shall inure to the benefit of and be binding upon
the Depositors, their heirs and assignees, and upon the Issuer, Escrow Agent,
and their successors.
15. SUBSTITUTE ESCROW AGENT. The Escrow Agent may, upon not less than 60 days
prior written notice to the Issuer, Depositors, and the Administrator, resign as
the Escrow Agent. The Issuer and the Depositors shall, before the effective
date of the Escrow Agent's resignation, enter into a new identical Escrow
Agreement with a substitute Escrow Agent. If the Issuer and the Depositors fail
to enter into a new Escrow Agreement and appoint a successor Escrow Agent within
60 days after the Escrow Agent has given notice of its resignation, the Escrow
Agent then serving under this Agreement shall retain the Promotional Securities
in escrow until a new, identical Escrow Agreement has been executed and a
successor Escrow Agent has been appointed. The Escrow Agent shall not be liable
for retaining the Promotional Securities in escrow.
16. TERMINATION. Except for the compensation and indemnification provisions of
paragraphs 11 and 12, above, which shall survive until they are satisfied, this
Agreement shall terminate in its entirety when all of the Promotional Securities
have been released, or the Issuer's Equity Securities and/or assets have been
distributed pursuant to paragraph 4 of this Agreement..
17. MISCELLANEOUS PROVISIONS. Pursuant to the requirements of this Agreement,
the Signatories have entered into this Agreement, which may be executed and
written in multiple counterparts and each of which shall be considered an
original.
PROMOTIONAL SHARES ESCROW AGREEMENT Page 4
<PAGE>
IN WITNESS WHEREOF, the Signatories have executed this Agreement in the
capacities set for and effective as of the date first above written.
"Issuer" ADVANTAGE MARKETING SYSTEMS, INC.
By:
-----------------------------------------------
John W. Hail, Chief Executive Officer
Attest:
- ---------------------------
Roger P. Baresel, Secretary
"Depositors"
"Hail" -------------------------------------------------
John W. Hail
"C. Wilson" -------------------------------------------------
Curtis H. Wilson, Sr.
"R. Wilson" -------------------------------------------------
Ruth Wilson
"R. Baresel" -------------------------------------------------
Roger P. Baresel
"J. Baresel" -------------------------------------------------
Judith A. Baresel
"Dunlap" -------------------------------------------------
R. Terren Dunlap
"Pre-Paid" PRE-PAID LEGAL SERVICES, INC.
By:
-----------------------------------------------
Harland C. Stonecipher, Chief Executive Officer
Attest:
- --------------------------
Secretary
"Escrow Agent"
LIBERTY BANK AND TRUST COMPANY OF
OKLAHOMA CITY, N.A.
By:
----------------------------------------------
Name:
---------------------------------------------
Title:
--------------------------------------------
PROMOTIONAL SHARES ESCROW AGREEMENT Page 5
<PAGE>
EXHIBIT 23.1
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to the use in this Amendment No. 2 to the Registration Statement of
Advantage Marketing Systems, Inc. on Form SB-2 of our reports on the
consolidated financial statements of Advantage Marketing Systems, Inc. dated
April 4, 1997 and on the combined financial statements of Stay 'N Shape
International, Inc., Now International, Inc., Solution Products, Inc. and Nation
of Winners, Inc., dated April 11, 1997 appearing in the Prospectus, which is a
part of this Registration Statement.
We also consent to the references to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma,
November 3, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF COUNSEL
Dunn Swan & Cunningham, A Professional Corporation, hereby consents to the
use of its name under the heading "Legal Matters" in the Prospectuses
constituting part of this Amendment No. 2 to the Registration Statement on Form
SB-2.
DUNN SWAN & CUNNINGHAM
A Professional Corporation
Oklahoma City, Oklahoma
November 3, 1997
