<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
INSIDER TRADING OFFER STATEMENT
(Pursuant to Section 13(e)(1) of the Securities Exchange Act of 1934)
ADVANTAGE MARKETING SYSTEMS, INC.
(Name of Issuer)
ADVANTAGE MARKETING SYSTEMS, INC.
(Name of Person Filing Statement)
CLASS A COMMON STOCK PURCHASE WARRANTS
(Title of Class of Securities)
00756G 11 8 and 00756G 13 4
(CUSIP Number of Class of Securities)
CLASS B COMMON STOCK PURCHASE WARRANTS
00756G 12 6 and 00756G 14 2
(CUSIP Number of Class of Securities)
ROGER P. BARESEL, PRESIDENT
ADVANTAGE MARKETING SYSTEMS, INC.
2601 NORTHWEST EXPRESSWAY, SUITE 1210W
OKLAHOMA CITY, OKLAHOMA 73112-0131
TELEPHONE NUMBER: 405-842-0131
(Name, Address and Telephone Number of Person Authorized to Receive Notices and
Communications on Behalf of the Person Filing Statement)
JANUARY 24, 1997
Calculation of Filing Fee
Transaction valuation: 524,610 Class A Common Stock Purchase Warrants
Last reported sale on January 20, 1997, was $.625 per
Warrant Transaction valuation: $327,881.25
525,860 Class B Common Stock Purchase Warrants
Lasted reported sale on January 16, 1997, was $.50 per
Warrant Transaction valuation: $262,930
Amount of Filing Fee: $393.87
X Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and
identify the filing with which the offsetting fee was previously paid. Identify
the previous filing by registration statement number, or the Form or Schedule
and the date of its filing.
Amount Previously Paid: $2,173.38.
Form SB-2 Registration Statement (Registration No.: 33-80629).
Filing Party: Advantage Marketing Systems, Inc.
Date Filed: December 18, 1995.
<PAGE>
ITEM 1. SECURITY AND ISSUER
The issuer is Advantage Marketing Systems, Inc. (the "Issuer") and its
principal executive office is at 2601 Northwest Expressway, Suite 1210W,
Oklahoma City, Oklahoma 73102-0131.
Pursuant to a Prospectus comprising in part Registration Statement on Form
SB-2 (No. 33-80629) (the "Registration Statement"), the Issuer is notifying the
holders (the "Warrant Holders") of the 524,610 outstanding Class A Common Stock
Purchase Warrants (the "Class A Warrants") and the 525,860 outstanding Class B
Common Stock Purchase Warrants (the "Class B Warrants") as of January 31, 1997
(the "Record Date"), of the election of the Issuer to redeem (the "Warrant
Redemption") the Class A Warrants and Class B Warrants (collectively the "Public
Warrants") for $.0008 per warrant (the "Redemption Price") at 5:00 p.m., Central
Standard Time, on March 17, 1997 (the "Redemption Date"), unless extended by the
Issuer to a date not later than April 30, 1997. The Warrant Redemption is in
accordance with the terms of the Class A Warrants and Class B Warrants. Each of
the Class A Warrants and Class B Warrants is exercisable for the purchase of one
share of Common Stock of the Issuer for $6.00 or $8.00, respectively (the
"Warrant Exercise Price"), on or before expiration of the Redemption Date.
In conjunction with the Warrant Redemption, the Issuer is modifying the
terms of the Class A Warrants and the Class B Warrants (the "Warrant
Modification Offer"), until expiration of the Redemption Date (the "Special
Exercise Period"), to (i) reduce the Warrant Exercise Price of the Class B
Warrants from $8.00 to $6.00 and (ii) to provide that each Public Warrant will
be exercisable to purchase one unit consisting of one share of Common Stock and
one 1997-A Warrant (the "Unit") for $6.00. The Redemption Date may be extended
by the Issuer such number of times as determined in the sole discretion of the
Issuer to a date that is not later than April 30, 1997. In connection with the
Warrant Modification Offer, the Issuer is offering to the holders of the Class A
Warrants an aggregate of 524,610 Units and to the holders of the Class B
Warrants an aggregate of 525,860 Units, each of the Class A Warrants and Class B
Warrants being exercisable for the purchase of one Unit prior to the Redemption
Date or expiration of the Special Exercise Period. The exercise of the Public
Warrants pursuant to the Warrant Modification Offer may be withdrawn by the
Warrant Holders at any time prior to the Redemption Date. After the Redemption
Date, the exercise of the Public Warrants by the Warrant Holders will be
irrevocable, except the Warrant Holders may withdraw the exercised Public
Warrant after March 19, 1997, unless previously accepted by the Issuer.
Each 1997-A Warrant comprising in part the Unit entitles the holder to
purchase one share of Common Stock at any time after April 16, 1997 (90 days
after the date of the Prospectus pursuant to which the Warrant Modification
Offer is being made) and on or before January 31, 1999, for an exercise price of
$12.00. 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 Issuer may redeem in whole and not in part,
unexercised 1997-A Warrants for $.0001 per warrant at any time. If any 1997-A
Warrants called for redemption are not exercised by such time, such 1997-A
Warrants will cease to be exercisable, and the holders thereof will be entitled
only to receive the redemption price. All 1997-A Warrants not exercised or
redeemed will expire on January 31, 1999, subject to extension by the Issuer.
Holders of 1997-A Warrants will not, as such, have any of the rights of
shareholders of the Issuer.
In certain cases, the sale of Common Stock by the Issuer upon exercise of
1997-A Warrants could violate the securities laws of the United States, certain
states thereof or other jurisdictions. The Issuer has agreed to use its best
efforts to cause a registration statement with respect to such securities under
the Securities Act of 1933, as amended (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 Issuer
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.
In certain cases, the Issuer 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.
- -2-
<PAGE>
The Public Warrants may only be exercised by a Warrant Holder in the event
the Registration Statement is effective with the Securities and Exchange
Commission and the Units (or Common Stock and 1997-A Warrants) are qualified for
sale in the state of residence of the Warrant Holder. Subject to the foregoing,
the Class A Warrants and Class B Warrants are exercisable at any time by the
Warrant Holders prior to the Redemption Date by delivery of the warrant
certificate evidencing the Public Warrant to U.S. Stock Transfer Corporation
(the "Warrant Agent") at 1745 Gardena Avenue, Glendale, California 91204, with
the "Form of Election to Purchase" on the reverse of the certificate duly
completed and signed, accompanied with payment of the Warrant Exercise Price in
cash or check payable to the order of the Issuer.
As of the date of this Statement, the officers and directors of the Issuer
do not hold any of the Class A Warrants or the Class B Warrants. Mr. Bruce
Greene, an affiliate of the Issuer, holds 331,500 of the Public Warrants and
William A. LaReese, an affiliate of the Issuer, holds 141,250 Public Warrants.
Both of Messrs. Greene and LaReese have reserved all rights with respect to
exercise of the Public Warrants and have not committed to exercise all or any
portion of the Public Warrants. In the event either or both of Messrs. Greene
and LaReese exercise their Public Warrants, such exercise will be on the same
terms and conditions that all other Warrant Holders may exercise their Public
Warrants, and the Issuer will amend this Statement to disclose and the details
of such exercise or exercises.
The Common Stock, Class A Warrants and Class B Warrants are traded in the
over-the-counter market and are quoted by the National Quotation Bureau,
Incorporated under the symbols "AMSO," "AMSOW" and "AMSOZ," respectively. The
following table sets forth, for the periods presented, the high and low closing
bid quotations in the over-the-counter market as quoted by the National
Quotation Bureau, Incorporated, adjusted to give effect to the one-for-eight
reverse stock split on October 29, 1996. The bid quotations reflect inter-dealer
prices without adjustment for retail markups, markdowns or commissions and may
not reflect actual transactions.
<TABLE>
<CAPTION>
CLASS CLASS B
COMMON STOCK WARRANTS WARRANTS
---------------- ----------------- -------------
CLOSING BID CLOSING BID CLOSING BID
---------------- ----------------- --------------
HIGH LOW HIGH LOW HIGH LOW
------ ----- ------ ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
1996:
First Quarter Ended
March 31............... $ 6.48 $5.04 $ .48 $.24 $ .48 $.24
Second Quarter Ended
June 30................ $ 8.00 $5.04 $1.04 $.24 $ 1.04 $.24
Third Quarter Ended
September 30........... $ 7.84 $5.52 $1.00 $.24 $ 1.00 $.24
Fourth Quarter Ended
December 31............. $ 6.50 $5.00 $ .24 $.13 $ .24 $.13
1995:
First Quarter Ended
March 31............... $ 2.00 $1.76 $ .16 $.16 $ .08 $.08
Second Quarter Ended
June 30................ $ 3.76 $2.00 $ .16 $.16 $ .08 $.08
Third Quarter Ended
September 30........... $10.00 $3.60 $1.04 $.48 $ .24 $.08
Fourth Quarter Ended
December 31............ $ 7.52 $4.48 $ .48 $.24 $ .08 $.08
</TABLE>
- -3-
<PAGE>
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
In connection with the Warrant Modification Offer, the Issuer is offering
to the holders of the Class A Warrants a maximum of 524,610 Units and to the
holders of the Class B Warrants a maximum of 525,860 Units, each of the Class A
Warrants and Class B Warrants being exercisable for the purchase of one Unit
prior to the Redemption Date or expiration of the Special Exercise Period. The
Units will be the only consideration to be received by the Warrant Holders upon
exercise of the Class A Warrants and the Class B Warrants.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE
The purposes of the Warrant Modification Offer are to (i) encourage the
exercise of the Public Warrants prior to redemption, (ii) strengthen the
Issuer's capital structure by increasing stockholders' equity and current
assets, and (iii) provide the Issuer greater financial flexibility. The net
proceeds of the Warrant Modification Offer will give the Issuer greater
financial flexibility in that the Issuer otherwise would be required to rely on
debt or other sources of capital to expand its sales and marketing activities.
It is the Issuer's belief that the availability of the 1997-A Warrant and the
reduction of the exercise price of the Class B Warrants to $6.00 will induce the
Warrant Holders to exercise their Public Warrants as opposed to receiving $.0008
per Warrant upon redemption. Those Class A Warrants and Class B Warrants that
are exercised, as well as those Class A Warrants and Class B Warrants that are
redeemed by the Issuer, will be canceled and cease to be issued and outstanding.
The Issuer does not have any plans and there are no proposals that relate
to or would result in (a) the acquisition by any person of additional securities
of the Issuer (other than those Warrant Holders that exercise the Public
Warrants and receive Units pursuant to the Warrant Modification Offer) or the
disposition of securities of the Issuer, (b) an extraordinary corporate
transaction involving the Issuer, (c) the sale or transfer of a material amount
of assets of the Issuer or any of its subsidiaries, (d) any change in the Board
of Directors or management of the Issuer or change in any material term of the
employment contract of any executive officer of the Issuer, (e) any material
change in the present dividend rate or policy, or indebtedness or capitalization
of the Issuer, other than the issuance of the Common Stock and 1997-A Warrants
comprising the Units to be issued in connection with the exercise of the Public
Warrants pursuant to and in accordance with the Warrant Modification Offer, (f)
any other material change in the Issuer's corporate structure or business, other
than those changes associated with the issuance of the Common Stock and 1997-A
Warrants comprising the Units to be issued in connection with the exercise of
the Public Warrants pursuant to and in accordance with the Warrant Modification
Offer and receipt of the net proceeds from exercise of the Public Warrants, as
described below, (g) changes in the Issuer's Certificate of Incorporation and/or
Bylaws or other actions which may impede the acquisition of control of the
Issuer by any person, (h) the equity securities of the Issuer ceasing to be
authorized to be quoted in an inter-dealer quotation system of a registered
national securities association, (i) a class of equity security of the Issuer
becoming eligible for termination of registration pursuant to 12(g)(4) of the
Securities Exchange Act of 1934, as amended (the "Act"), or (j) suspension of
the Issuer's obligation to file reports pursuant to Section 15(d) of the Act.
The net proceeds of the Warrant Modification Offer and exercise of the
Public Warrants pursuant thereto to be received by the Issuer will be dependent
upon the number of Units purchased by the Warrant Holders pursuant to exercise
of the Public Warrants during the Special Exercise Period. Therefore, the net
proceeds to be received by the Issuer pursuant to the Warrant Modification Offer
are not determinable as of the date of this Statement. In the event the Public
Warrants are exercised in full the net proceeds to the Issuer, after deduction
of $100,000 of estimated offering costs, will be $6,202,820. There is no
assurance that all or any portion of the Public Warrants will be exercised
pursuant to the Warrant Modification Offer, in which case the Issuer will not
receive any net proceeds pursuant to the Warrant Modification Offer.
- -4-
<PAGE>
The net proceeds received by the Issuer pursuant to the exercise of Public
Warrants will be used for general corporate purposes, including working capital
and to fund the Issuer's efforts to expand sales and marketing activities. The
Issuer estimates that it will use approximately $1.5 million for expansion of
its U.S. distributor network and enhancement of its marketing materials. The
Issuer intends to use approximately $.5 million to develop new products and
enhance the packaging of its existing products. The Issuer will devote
approximately $1 million for the expansion into and development of international
markets. In the event the Issuer raises less than $3.0 million, the net proceeds
will be devoted to each of these areas in the order in which they are presented.
Net proceeds in excess of $3.0 million will be devoted to general corporate
purposes including further expansion of the Issuer's distributor network and
enhancement of its marketing materials, development of new products and
enhancement of packaging of its existing products and expansion into and
development of international markets.
The Issuer does not intend to use any of the net proceeds to discharge
existing debt. Pending use of the net proceeds, they will be invested by the
Issuer in investment grade, short-term, interest-bearing securities.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER
During the 40 business days preceding the filing of this Statement, the
Issuer, its executive officers and directors have not effected any transactions
in the Class A Warrants and the Class B Warrants.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO ISSUER'S SECURITIES
The Issuer does not have any contract, arrangement, understanding or
relationship relating, directly or indirectly, to the Warrant Modification Offer
with any executive officer or director of the Issuer.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
The Issuer has not employed or retained, and has not entered into any
agreement to compensate any person on the Issuer's behalf to make solicitations
or recommendations in connection with the Warrant Modification Offer.
ITEM 7. FINANCIAL INFORMATION
(a) Presented below or appearing elsewhere in this Statement are the
financial data of the Issuer.
(1) Audited financial statements of the Issuer for the fiscal years ended
December 31, 1995 and 1994, appear at pages F-7 through F-18 of the Prospectus
filed as Exhibit 9.2 to this Statement.
(2) Unaudited financial statements of the Issuer for the nine months ended
September 30, 1996, appear at pages F-2 through F-6 of the Prospectus filed as
Exhibit 9.2 to this Statement.
(3) The ratio of earnings to fixed charges for the fiscal years ended
December 31, 1995 and 1994 and for the nine months ended September 30, 1996, are
as follows:
Fiscal Year Ended December 31, 1995 10.86
Fiscal Year Ended December 31, 1994 3.19
Nine Months Ended September 31, 1996 14.81
(4) The book value per share of Common Stock for the fiscal years ended
December 31, 1995 and 1994 and for the nine months ended September 30, 1996, are
as follows:
Fiscal Year Ended December 31, 1995 $(.01)
Fiscal Year Ended December 31, 1994 $(.14)
Nine Months Ended September 31, 1996 $ .39
- -5-
<PAGE>
(b) Presented below or appearing elsewhere in this Statement are the pro
forma data giving effect to the Warrant Modification Offer, assuming the Class A
Warrants and the Class B Warrants are exercised in full.
(1) Unaudited pro forma balance sheet of the Issuer as of December 31, 1995
and September 30, 1996, appear at pages PF-1 and PF-2 of this Statement.
(2) Unaudited pro forma statement of operations and ratio of earnings to
fixed charges of the Issuer for the fiscal year ended December 31, 1995 and the
nine months ended September 30, 1996, appear at pages PF-3 and PF-4 of this
Statement.
(3) The pro forma book value per share of Common Stock for the fiscal year
ended December 31, 1995, and for the nine months ended September 30, 1996, are
as follows:
Fiscal Year Ended December 31, 1995 $1.92
Nine Months Ended September 31, 1996 $2.18
ITEM 8. ADDITIONAL INFORMATION
The Warrant Modification Offer will be made pursuant to the Prospectus that
comprises in part the Registration Statement, the Prospectus is filed herewith
as Exhibit 9.2.
ITEM 9. MATERIAL FILED AS EXHIBITS
Exhibit 9.1 Opinion of Dunn Swan & Cunningham, A Professional Corporation.
Exhibit 9.2 Prospectus dated January 16, 1997.
Exhibit 9.3 Chief Executive Officer's letter to the holders of the Class A
Common Stock Purchase Warrants and Class B Common Stock Purchase Warrants.
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Date: January 24, 1997 ADVANTAGE MARKETING SYSTEMS, INC.
By: /S/ ROGER P. BARESEL
Roger P. Baresel, President
- -6-
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (Formerly AMS, Inc.)
PRO FORMA CONSOLIDATED BALANCE SHEET, DECEMBER 31, 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Historical Pro Forma
1995 Adjustments Pro Forma
---------- ----------- ----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .......................................................... $ 112,087 $6,229,320(a) $6,341,407
Receivables - net of allowance of $27,434 ..................... 18,299 -- 18,299
Receivables from affiliate .................................... 51,963 -- 51,963
Inventory ..................................................... 98,621 -- 98,621
Prepaid expenses .............................................. 2,371 -- 2,371
---------- ---------- ----------
Total current assets ....................................... 283,341 6,229,320 6,512,661
---------- ---------- ----------
COMMISSION ADVANCES TO RELATED
PARTIES -- NONCURRENT .......................................... 65 -- 65
RECEIVABLES -- NON CURRENT ...................................... 22,620 -- 22,620
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $280,606 ...................................... 159,797 -- 159,797
OTHER ASSETS .................................................... 67,173 (26,500)(b) 40,673
---------- ---------- ----------
TOTAL ASSETS .................................................... $ 532,996 $6,202,820 $6,735,816
========== ========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable .............................................. $ 91,949 -- $ 91,949
Accrued expenses .............................................. 151,654 -- 151,654
Accrued promotion expense ..................................... 99,424 -- 99,424
Notes payable;
Stockholder ................................................ 81,929 -- 81,929
Other ...................................................... 8,440 -- 8,440
Current obligations under capital lease ....................... 20,679 -- 20,679
---------- ---------- ----------
Total current liabilities ................................ 454,075 -- 454,075
LONG-TERM LIABILITIES:
Notes payable - other ......................................... 28,500 -- 28,500
Capital lease ................................................. 75,649 -- 75,649
---------- ---------- ----------
Total long-term liabilities .............................. 104,149 -- 104,149
---------- ---------- ----------
TOTAL LIABILITIES ............................................... 558,224 -- 558,224
---------- ---------- ----------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock - $.0001 par value; authorized 5,000,000 shares;
non issued .................................................. -- -- --
Common stock - $.0001 par value; authorized 495,000,000
shares; 2,123,191 and 3,173,661 shares issued and
outstanding, respectively ................................... 212 105(c) 317
Paid-in capital ............................................... 1,859,882 6,202,715(c) 8,062,597
Accumulated deficit ........................................... (1,885,322) -- (1,885,322)
---------- ---------- ----------
Total stockholders' equity (deficiency) ..................... (25,228) 6,202,820 6,177,592
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................... $ 532,996 $6,202,802 $6,735,816
========== ========== ==========
</TABLE>
See notes to financial statements
PF-1
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (Formerly AMS, Inc.)
PRO FORMA CONSOLIDATED BALANCE SHEETS, SEPTEMBER 30, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Historical Pro Forma
1996 Adjustments Pro Forma
---------- ---------- ----------
(Note 2)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ..................................................... $ 117,965 $6,271,820(a) $6,389,785
Receivables - net of allowance of $25,804 ................ 12,774 -- 12,774
Inventory ................................................ 305,804 -- 305,804
Prepaid expenses ......................................... 18,257 -- 18,257
---------- ---------- ----------
Total current assets .................................. 454,800 6,271,820 6,726,620
---------- ---------- ----------
COMMISSION ADVANCES TO RELATED
PARTIES -- NONCURRENT ..................................... 29,481 -- 29,481
RECEIVABLE FROM AFFILIATE .................................. 70,923 -- 70,923
RECEIVABLES -- NONCURRENT .................................. 18,742 -- 18,742
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $326,002 ................................. 176,932 -- 176,932
GOODWILL ................................................... 113,488 -- 113,488
COVENANT NOT TO COMPETE .................................... 55,556 -- 55,556
DEFERRED TAXES ............................................. 443,149 -- 443,149
OTHER ASSETS ............................................... 141,662 (69,000)(b) 72,662
---------- ---------- ----------
TOTAL ASSETS ............................................... $1,504,733 $6,202,820 $7,707,553
========== ========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Account payable .......................................... $ 206,634 -- $ 206,634
Accrued expenses ......................................... 276,379 -- 276,379
Accrued promotion expense ................................ 56,862 -- 56,862
Notes payable:
Stockholder ............................................ 17,658 -- 17,658
Other .................................................. 9,401 -- 9,401
Current obligations under capital lease .................. 25,032 -- 25,032
---------- ---------- ----------
Total current liabilities ............................ 591,966 -- 591,966
LONG-TERM LIABILITIES
Notes payable - other .................................... 23,880 -- 23,880
Capital lease ............................................ 61,812 -- 61,812
---------- ---------- ----------
Total long-term liabilities .......................... 85,692 -- 85,692
---------- ---------- ----------
TOTAL LIABILITIES .......................................... 677,658 -- 677,658
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock - $.0001 par value; authorized 5,000,000
shares; none issued .................................... -- -- --
Common stock - $.0001 par value; authorized
495,000,000 shares; 2,143,191 and 3,193,661
shares issued and outstanding, respectively ............ 214 105(c) 319
Paid-in capital .......................................... 1,981,380 6,202,715(c) 8,184,095
Accumulated deficit ...................................... (1,154,519) -- (1,154,519)
---------- ---------- ----------
Total stockholders' equity ............................. 827,075 6,202,820 $7,029,895
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................. $1,504,733 $6,202,820 $7,707,553
========== ========== ==========
</TABLE>
See notes to financial statements.
PF-2
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (Formerly AMS, Inc.)
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Historical
-------------------------------
Miracle
Advantage Mountain
Marketing International,
Systems, Inc. Inc. Pro Forma Pro Forma
1995 1995 Adjustments Combined
------------- -------------- ----------- ------------
(Note 2)
<S> <C> <C> <C> <C>
REVENUE:
Sale of programs....................... $4,382,935 $ 277,366 $ -- $4,660,301
Sale of promotional material........... 109,733 -- -- 109,733
Other.................................. 25,535 -- -- 25,535
--------- --------- -------- ---------
Total................................ 4,518,203 277,366 -- 4,795,569
--------- --------- -------- ---------
EXPENSES:
Cost of programs....................... 1,094,157 103,217 -- 1,197,374
Cost of promotional material........... 92,087 -- -- 92,087
Selling................................ 2,201,510 145,650 -- 2,347,160
General and administrative............. 857,743 157,725 30,356(e) 1,045,824
Interest expense....................... 22,998 1,403 -- 24,401
--------- --------- -------- ---------
Total................................ 4,268,495 407,995 30,356 4,706,846
--------- --------- -------- ---------
INCOME BEFORE TAXES...................... 249,708 -- -- 249,708
TAX BENEFIT.............................. -- -- -- --
--------- --------- -------- ---------
NET INCOME (LOSS)........................ $ 249,708 $(130,629) $(30,356) $ 88,723
========= ========= ======== =========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES (thousands)............. 2,663 531(c) 3,194
========= ======== =========
(e)
NET INCOME PER COMMON SHARES............. $ .09 $ .03
========= =========
PRO FORMA RATIO OF EARNINGS TO FIXED
CHARGES.................................. 10.86 10.86
========= =========
</TABLE>
See notes to financial statements.
PF-3
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (Formerly AMS, Inc.)
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Historical
-------------------------------
Miracle
Mountain
Advantage International
Marketing Inc.
Systems, Inc. Pre-Acquisition
For the Nine Period
Months Ended For the Five
September 30, Months Ended Pro Forma Pro Forma
1996 May 31, 1996 Adjustments Combined
------------- ------------ ----------- ---------
(Note 2)
<S> <C> <C> <C> <C>
REVENUE:
Sale of programs.............................. $4,186,404 $ 205,112 $ -- $4,391,516
Sale of promotional material.................. 234,735 -- -- 234,735
Other......................................... 37,471 -- -- 37,471
---------- --------- -------- ----------
Total....................................... 4,458,610 205,112 -- 4,663,722
---------- --------- -------- ----------
EXPENSES:
Cost of programs.............................. 968,635 54,743 -- 1,023,378
Cost of promotional material.................. 142,610 -- -- 142,610
Selling....................................... 2,235,879 129,758 -- 2,365,637
General and administrative.................... 804,410 49,188 12,648 (e) 866,246
Interest expense.............................. 19,422 2,110 -- 21,532
---------- --------- -------- ----------
Total 4,170,956 235,799 12,648 4,419,403
---------- --------- -------- ----------
INCOME BEFORE TAXES............................. 287,654 (30,687) (12,648) 244,319
TAX BENEFIT..................................... 443,149 -- -- 443,149
---------- --------- -------- ----------
NET INCOME...................................... $ 730,803 $ (30,687) $(12,648) $ 687,468
========== ========= ======== ==========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES (thousands)................... 3,176 27 (c) 3,203
========= ======== ==========
(e)
NET INCOME PER COMMON SHARES.................... $ .23 $ .21
========= ==========
PRO FORMA RATIO OF EARNINGS TO FIXED
CHARGES........................................ 14.81 14.81
========= ==========
</TABLE>
See notes to financial statements.
PF-4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (Formerly AMS, Inc.)
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS FOR PRESENTATION
The pro forma balance sheets and statements of income of Advantage
Marketing Systems, Inc. (the "Company") present the pro forma effect of
(i) the Warrant Modification Offer, assuming the Class A Common Stock
Purchase Warrants and the Class B Common Stock Purchase Warrants are
exercised in full and (ii) the acquisition by the Company of the issued
and outstanding capital stock of Miracle Mountain International, Inc., a
Colorado corporation, ("MMI"), and MMI became a wholly-owned subsidiary
of the Company (the "MMI Acquisition"), pursuant to a Stock Purchase
Agreement with an effective date of May 31, 1996, (the "Purchase
Agreement"). The MMI Acquisition was accounted for under the purchase
method of accounting. MMI is a multi-level marketer of various third-
party manufactured nutritional supplement products. Pursuant to the
Purchase Agreement and in connection with the MMI Acquisition, the
Company issued and delivered to the shareholders of MMI 20,000 shares of
common stock. In addition, the Company agreed to issue and deliver an
additional 5,000 shares of common stock to the shareholders of MMI on or
before February 15, 1997, pending determination of certain liabilities.
The accompanying unaudited pro forma statements of operations are
presented assuming the Warrant Modification Offer and MMI Acquisition
occurred or were consummated on the first day of each period presented.
The unaudited pro forma consolidated balance sheets as of December 31,
1995, and September 30, 1996, are presented assuming the Warrant
Modification Offer and MMI Acquisition occurred or were consummated as
of such date. The historical information presented for the Company as of
and for the fiscal year ended December 31, 1995, is derived from the
audited financial statements of the Company as of such date and for such
fiscal year. The historical information presented for MMI for the fiscal
year ended December 31, 1995, is derived from the audited financial
statements of MMI for such fiscal year. MMI started in business in 1995.
During the first three months of 1995 MMI primarily paid start-up
expenses relating to organization and recruitment of sales associates.
MMI did not have significant sales until April 1995; consequently, MMI
has only one year of financial statements. The historical information
presented for the Company as of and for the nine months ended September
30, 1996, is derived from the unaudited financial statements of the
Company as of such date and for such nine-month period. The historical
information presented for MMI for the five months ended May 31, 1996, is
derived from the unaudited financial statements of MMI and for such
five-month period.
The pro forma financial information presented in the unaudited pro forma
financial statements is not necessarily indicative of the financial
position and results of operations that would have been achieved had the
Warrant Modification Offer and MMI Acquisition occurred or been
consummated on the first day of each period that the statements of
operations are presented or on the date of the balance sheets. The
results of operations presented in the unaudited pro forma statements of
operations are not necessarily indicative of the results of future
operations of the Company following consummation of the Warrant
Modification Offer and the MMI Acquisition.
2. PRO FORMA ADJUSTMENTS
The accompanying unaudited pro forma consolidated financial statements
have been adjusted to record and give effect to the following:
(a) The net proceeds to the Company of the Warrant Modification Offer,
after deduction of $100,000 of offering costs, are $6,202,820;
(b) The cash proceeds from the Warrant Modification Offer have been
reduced by the $100,000 cost of the offering less the $26,500 and
$69,000 of offering costs incurred by the Company and recorded as
other assets at December 31, 1995, and September 30, 1996,
respectively. The offering costs of $100,000 were recorded as a
reduction of paid-in capital.
(c) Issuance of 1,050,470 shares of common stock upon exercise of the
Class A Common Stock Purchase
PF-5
<PAGE>
Warrants and Class B Common Stock Purchase Warrants.
(d) The Company has not recorded any additional interest income that
may have been received after giving effect to the Warrant
Modification Offer.
(e) The excess of the purchase price of $176,103, which includes
$56,103 of transaction costs, over the negative $3,059 fair market
value of the assets of MMI, net of liabilities, has been allocated
$119,162 to goodwill and $60,000 to the covenant not to compete.
Goodwill and the covenant not to compete will be amortized over a
seven year and four and one-half year period, respectively. The
goodwill amortization for the year ended December 31, 1995, and
the five months ended May 31, 1996, was $17,023 and $7,093,
respectively. Covenant amortization for the year ended December
31, 1995, and for the five months ended May 31, 1996, was $13,333
and $5,555, respectively. Pursuant to the Purchase Agreement and
in connection with the MMI Acquisition, the Company issued and
delivered to the shareholders of MMI 20,000 shares of common
stock. In addition, the Company agreed to issue and deliver an
additional 5,000 shares of common stock to the shareholders of MMI
on or before February 15, 1997, pending determination of certain
liabilities.
3. NET INCOME PER SHARE
Pro forma per share calculations for the Company are based upon the
number of shares of common stock to be outstanding after giving effect to the
Warrant Modification Offer and the MMI Acquisition.
PF-6
<PAGE>
EXHIBIT 9.1
DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
2800 OKLAHOMA TOWER 405.235.8318
210 PARK AVENUE TELECOPY 405.235.9605
OKLAHOMA CITY, OKLAHOMA 73102-5604
January 13, 1997
Board of Directors
Advantage Marketing Systems, Inc.
2601 Northwest Expressway, Suite 1210W
Oklahoma City, Oklahoma 73112-7293
Re: Warrant Redemption, Warrant Modification Offer and Exercise of Class
A Common Stock Purchase Warrants and Class B Common Stock Purchase
Warrants; Stock Rights Distribution and Exercise of Stock Rights
Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of the following:
(i) the redemption (the "Warrant Redemption") by Advantage Marketing
Systems, Inc. (the "Company") of its issued and outstanding Class A Common
Stock Purchase Warrants and Class B Common Stock Purchase Warrants (the
"Public Warrants") and in connection with the Warrant Redemption and the
offer by the Company (the "Warrant Modification Offer") to reduce the
exercise price of the Class B Common Stock Purchase Warrants and upon
exercise of the Public Warrants each holder thereof will become entitled to
receive one unit consisting of one share of Common Stock and one 1997-A
Warrant (the "Unit") (the "Warrant Modification Offer"); and
(ii) the distribution of non-transferrable rights (the "Rights") to
the holders of the Common Stock of the Company (the "Rights Distribution")
and upon exercise of the Rights each holder there will become entitled to
purchase one Unit (the "Rights Offering").
Reference is made to the Registration Statement on Form SB-2, and all
amendment thereto (the "Registration Statement") filed by Company with the
United States Securities and Exchange Commission (the "Commission") with respect
to the proposed offer for sale by the Company of (i) 1,050,470 Units in
connection with the Warrant Modification Offer and exercise of the Public
Warrants pursuant to the Warrant Modification Offer Prospectus contained in the
Registration Statement, and (ii) 2,148,191 Units pursuant to exercise of the
Rights in connection with the Rights Offering pursuant to the Rights Offering
Prospectus contained in the Registration Statement. Unless otherwise defined
herein, the definitions of terms used herein are the same as those defined in
the Warrant Modification Offer Prospectus and/or the Rights Offering Prospectus.
In connection with our consideration of the federal income tax consequences
of the Warrant Redemption and Warrant Modification Offer, and Rights
Distribution and Rights Offering, the opinions expressed herein are premised
upon various facts with respect to the Warrant Redemption and Warrant
Modification Offer, and Rights Distribution and Rights Offering and the Warrant
Holders and Rights Holders. In addition, the Company has made, on the date
hereof, the following representations and warranties to us with respect to
certain factual matters, as follows:
<PAGE>
DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
Board of Directors
Advantage Marketing Systems, Inc.
January 13, 1997
Page 2
1. That the Warrant Redemption and Warrant Modification Offer, and Rights
Distribution and Rights Offering will be made and conducted in accordance with
and as described in the Warrant Modification Offer Prospectus and Rights
Offering Prospectus;
2. That all Units will be offered for sale and sold in accordance with and
pursuant to delivery of the Warrant Modification Offer Prospectus and/or the
Rights Offering Prospectus, and all Public Warrants accepted for exercise will
be on or prior to the Redemption Date in accordance with the Warrant
Modification Offer Prospectus and all Rights accepted for exercise will be on or
prior to the Expiration Date in accordance with the Rights Offering;
3. That the Company will have duly performed, complied with and satisfied
in all material respects all covenants, agreements and conditions as
contemplated by the Warrant Modification Offer Prospectus and Rights Offering
Prospectus to be performed, complied with or satisfied by the Company at or
prior to the acceptance of the Public Warrants and/or Rights for exercise;
4. That each copy of the Certificate of Incorporation and the Bylaws of the
Company attached as an exhibit to the Registration Statement is a true, correct
and complete copy of the Certificate of Incorporation or Bylaws of the Company
as in effect on the date hereof and as will be in effect on the date of
acceptance of the exercise of the Public Warrants and the Rights;
5. That the Company has and will have all requisite power and authority to
consummate the Warrant Modification Offer as contemplated in the Warrant
Modification Offer Prospectus and the Rights Offering and as contemplated in the
Rights Offering Prospectus and all necessary corporate proceedings of the
Company have been taken to authorize the issuance and delivery of the Units as
contemplated in the Warrant Modification Offer Prospectus and the Rights
Offering Prospectus, and upon acceptance of the exercise of the Public Warrants
and Rights, such acceptances will be legal, valid, and binding obligations of
the Company enforceable as to the Company in accordance with the terms and
conditions of the Warrant Modification Offer and the Rights Offering as set
forth in the Warrant Modification Offer Prospectus and Rights Offering
Prospectus; and
6. That upon acceptance of the exercise of the Public Warrants and Rights,
there shall not have been the happening of any event which would cause any
statement of a material fact to be untrue in the Warrant Modification Offer
Prospectus and Rights Offering Prospectus or constitute an omission to state a
material fact therein or which would require to be stated in the Warrant
Modification Offer Prospectus and Rights Offering Prospectus or necessary to
make the statements therein not misleading in light of the circumstances under
which they were made.
We have reviewed and assisted in the preparation of the information in the
Warrant Modification Offer Prospectus and the Rights Offering Prospectus in the
sections entitled "Certain Federal Income Tax Consequences." To the extent such
information constitutes matters of law or legal conclusions, we are of the
opinion that it is correct in all material respects.
The discussion and the opinions set forth in the sections of the Warrant
Modification Offer Prospectus and the Rights Offering Prospectus entitled
"Certain Federal Income Tax Consequences" relate solely to the
<PAGE>
DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
Board of Directors
Advantage Marketing Systems, Inc.
January 13, 1997
Page 3
principal federal income tax consequences of Warrant Redemption and Warrant
Modification Offer, and the Rights Distribution and the Rights Offering with
respect to United States resident individuals and is based upon the existing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and
Treasury Regulations thereunder (including temporary and proposed regulations),
current official published Internal Revenue Service administrative
interpretations and existing court decisions on the date of the Warrant
Modification Offer Prospectus and Rights Offering Prospectus.
In preparation of our opinion, we have considered the standards of conduct
provided in Formal Opinion 346 (Revised) of the American Bar Association
Standing Committee on Ethics and Professional Responsibility issued January 29,
1982 and the guidelines provided in amendments to Circular 230, Rules for
Practice Before the Internal Revenue Service, 45 Fed. Reg. 58.594 (1980), Treas.
Reg. 10.33 ("Circular 230"). The standards and guidelines established by both
Formal Opinion 346 and Circular 230 apply only to opinions relating to an
investment deemed to be a "tax shelter," which is not applicable to our opinion.
Thus, in our opinion, the standards and guidelines of Formal Opinion 346 and
Circular 230 are not applicable to the opinions expressed herein and in the
Warrant Modification Offer Prospectus and the Rights Offer Prospectus with
respect to the federal income tax consequences of the Warrant Redemption and
Warrant Modification Offer, and the Rights Distribution and the Rights Offering.
However, we believe that an opinion has been provided on each "tax issue"
that, in our opinion, is "material" with respect to the Warrant Redemption and
Warrant Modification Offer, and the Rights Distribution and Rights Offering and
the federal income tax consequences of the Warrant Redemption and the Rights
Distribution and exercise of the Public Warrants and Rights. The discussion of a
tax issue in the Warrant Modification Offer Prospectus and the Rights Offer
Prospectus is not intended and should not be construed as an admission that such
item would be deemed "material" or a "material tax issue" for purposes of Formal
Opinion 346 or Circular 230.
Very truly yours,
DUNN SWAN & CUNNINGHAM
A Professional Corporation
<PAGE>
EXHIBIT 9.2
PROSPECTUS
ADVANTAGE MARKETING SYSTEMS, INC.
[LOGO OF ADVANTAGE MARKETING SYSTEMS, INC. APPEAR HERE]
1,050,470 UNITS
(EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE 1997-A WARRANT)
ISSUABLE UPON EXERCISE OF CLASS A AND CLASS B COMMON STOCK PURCHASE WARRANTS
NOTICE OF REDEMPTION OF
CLASS A AND CLASS B COMMON STOCK PURCHASE WARRANTS
Advantage Marketing Systems, Inc., an Oklahoma corporation (the "Company"),
hereby notifies the holders (the "Warrant Holders") as of January 31, 1997
(the "Record Date") of the Company's election to redeem (the "Warrant
Redemption") the outstanding Class A Common Stock Purchase Warrants (the
"Class A Warrants") and the Class B Common Stock Purchase Warrants (the "Class
B Warrants") at $.0008 per warrant (the "Redemption Price") at 5:00 p.m.,
Central Standard Time, on March 17, 1997, unless extended to a date not later
than April 30, 1997 (the "Redemption Date"). Each of the Class A Warrants and
Class B Warrants is exercisable at $6.00 or $8.00, respectively (the "Warrant
Exercise Prices") to purchase one share of the Company's common stock, par
value $.0001 per share (the "Common Stock") at any time on or before the
Redemption Date. The Company's right to redeem the Class A Warrants and the
Class B Warrants (the "Public Warrants") is exercisable without restriction
and is not subject to any conditions other than the required notice which is
made pursuant hereto. The Redemption Price will be paid to the holder of an
unexercised Class A Warrant or Class B Warrant within not less than 15 days
following expiration of the Redemption Date.
In connection with the Warrant Redemption, the Company offers in accordance
with the terms hereof (the "Warrant Modification Offer") to reduce the
exercise price (the "Warrant Exercise Price") of the Class B Warrants to $6.00
and, upon exercise, each Class A Warrant and Class B Warrant will entitle the
Warrant Holder to receive one unit consisting of one share of Common Stock and
one 1997-A Warrant (the "Unit") of the Company, from the date hereof until
expiration of the Redemption Date (the "Special Exercise Period"). See "Terms
of the Warrant Modification Offer" and "Description of Securities--Public
Warrants."
(Continued on inside cover)
----------------
SEE "RISK FACTORS," BEGINNING AT PAGE 14, FOR A DISCUSSION OF CERTAIN
MATERIAL RISKS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE UNITS OFFERED HEREBY.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-TIES
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS COMPANY(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit.................................. $6.00 -- $6.00
- --------------------------------------------------------------------------------
Total..................................... $6,302,820 -- $6,302,820
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Before deducting offering expenses payable by the Company estimated to be
$100,000. See "Use of Proceeds."
----------------
It is expected that delivery of the certificates representing the Common
Stock and 1997-A Warrants comprising the Units will be made immediately
following exercise of the Public Warrants, payment of the Warrant Exercise
Price and acceptance thereof and expiration of the Redemption Date.
January 16, 1997
<PAGE>
(Continued from front cover)
The share of Common Stock and 1997-A Warrant comprising each Unit will be
separately transferable immediately after the sale of the Units to the Warrant
Holders. Each 1997-A Warrant is exercisable at any time 90 days after the date
of this Prospectus 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 Warrant Modification Offer is part of a plan of
financing pursuant to which the Company intends to raise additional capital
through the issuance of the Units. As part of such plan of financing, and
concurrently with the Warrant Modification Offer, the Company is distributing
2,148,191 rights to its shareholders which will entitle each of its
shareholders to purchase one Unit (the "Rights Offering Units") for $6.80 each
(the "Rights Offering"). See "Use of Proceeds" and "Description of
Securities--Common Stock--Rights Offering."
Warrant Holders electing not to exercise the Public Warrants pursuant to the
Warrant Modification Offer on or before expiration of the Redemption Date will
be entitled to receipt of the Redemption Price per Public Warrant.
The Common Stock, Class A Warrants and Class B Warrants are quoted by the
National Daily Quotation Bureau, Incorporated under the symbols "AMSO,"
"AMSOW" and "AMSOZ," respectively. On January 10, 1997, the closing high bid
prices of the Common Stock, Class A Warrants and Class B Warrants were $5.63,
$.13 and $.13, respectively. As of the date of this Prospectus, there is no
public market for the Units or the 1997-A Warrants, and none may develop. The
Company has applied for quotation of the 1997-A Warrants by the National
Quotation Bureau, Incorporated to be quoted under the symbol "AMSOL." See
"Description of Securities."
Unless other exemptions become available in the future, any time that the
bid price of the Common Stock in the over-the-counter market is less than
$5.00, the Company's equity securities will be subject to the "penney stock"
trading rules. The "penny stock" trading rules impose additional duties and
responsibilities upon broker-dealers and salespersons effecting purchase and
sale transactions in such equity securities of the Company, including
determination of the purchaser's investment suitability, delivery of certain
information and disclosures to the purchaser, and receipt of a specific
purchase agreement from the purchaser prior to effecting the purchase
transaction, all of which affect or will affect the ability to resell the
Common Stock, Class A Warrants, Class B Warrants, and 1997-A Warrants. See
"Risk Factors--Over-the-Counter Market; Penny Stock Trading Rules," and "Price
Range of Common Stock and Public Warrants--Penny Stock Trading Rules."
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 14
The Company..................................... 19
Use of Proceeds................................. 21
Price Range of Common Stock and
Public Warrants and Dividends.................. 22
Capitalization.................................. 24
Selected Financial Information.................. 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.................................. 26
Unaudited Pro Forma Consolidated
Financial Information of the
Company........................................ 31
Public Warrant Redemption....................... 34
Purposes of the Warrant Modification Offer...... 34
Terms of the Warrant Modification Offer......... 35
Certain Federal Income Tax Consequences......... 41
Business........................................ 44
Management...................................... 50
Certain Transactions............................ 54
Security Ownership of Certain Beneficial Owners
and Management................................. 57
Description of Securities....................... 59
Shares Eligible for Future Sale................. 64
Legal Matters................................... 65
Experts......................................... 65
Additional Information.......................... 66
Index to Financial Statements................... F-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. Prospective investors should carefully consider the
information set forth in "Risk Factors." All references in this Prospectus to
fiscal years are to the Company's fiscal year ended December 31 of each year.
Unless otherwise indicated, all information in this Prospectus gives effect to
the issuance of an additional 5,000 shares of Common Stock by February 15,
1997, in connection with the acquisition by the Company of Miracle Mountain
International, Inc. and the reverse stock split of one for eight on October 29,
1996.
THE COMPANY
Advantage Marketing Systems, Inc., an Oklahoma corporation (the "Company"),
was organized in 1988 under the name AMS, Inc. and since that time has been a
marketer of consumer oriented services and products which are packaged together
in special programs and sold to independent sales associates who use the
products and services themselves and also sell them to others. The programs
consist of various services which provide savings on items such as merchandise,
groceries and travel, and legal benefits furnished by certain third party
providers as well as nutritional supplements. These programs represent the
Company's one main class of products and services and account for over 94
percent of its revenues. See "The Company" and "Business."
Pursuant to an Agreement and Plan of Reorganization, dated May 1, 1989, the
shareholders of the Company exchanged their common stock for 800,807 shares of
the common stock of Pacific Coast International, Inc., a Delaware corporation
(the "Exchange"). Prior to the Exchange, the trade or business activities of
Pacific Coast International, Inc. had been limited to those activities
associated with a public offering of its securities and investigation of
corporate acquisition alternatives as a "blank check" company. Upon
consummation of the Exchange, (i) the officers and directors of the Company
assumed management of Pacific Coast International, Inc., (ii) the Company
became a wholly owned subsidiary of the Pacific Coast International, Inc.,
(iii) the Company changed its name from AMS, Inc. to Advantage Marketing
Systems, Inc. See "The Company--Background--Exchange."
Prior to the Exchange, Advantage Marketing Systems, Inc. (formerly Pacific
Coast International, Inc. and parent of the Company) sold, in a public
offering, 225,860 shares of Common Stock, Class A Warrants and Class B Warrants
in units, each unit consisting of one share of Common Stock, one Class A
Warrant and one Class B Warrant. See "Description of Securities." The net
proceeds from this offering were approximately $838,290. Furthermore, in
conjunction with such offering, the holders of 300,000 Class A Warrants and
Class B Warrants sold such Public Warrants. As of the date of this Prospectus,
there are 524,610 outstanding Class A Warrants and 525,860 outstanding Class B
Warrants (collectively, the "Public Warrants"), all of which were issued in
connection with the initial public offering of Pacific Coast International,
Inc. that was completed in 1989. Pursuant to amendment of the Warrant
Agreement, the period of exercise of the Class A Warrants and the Class B
Warrants was extended to July 26, 1997. Each Class A Warrant and Class B
Warrant entitles the holder thereof to purchase one share of Common Stock at an
exercise price of $6.00 and $8.00, respectively, without giving effect to the
Warrant Modification Offer. See "The Company--Background--Initial Issuance of
Public Warrants."
Effective December 11, 1995, Advantage Marketing Systems, Inc., the parent of
the Company (formerly Pacific Coast International, Inc.), merged with the
Company pursuant to an Agreement and Plan of Merger (the "Merger"), and the
Company was the surviving corporation. As a result of the Merger, Advantage
Marketing Systems, Inc., the parent of the Company (formerly Pacific Coast
International, Inc.) ceased to exist, and the Company succeeded to all of its
rights, privileges, powers, franchises, obligations, assets and properties. The
Merger was accounted for as a reorganization of entities under common control
and was recorded at historical cost. All references to the Company include its
former parent, Advantage Marketing Systems, Inc., unless otherwise indicated.
See "The Company--Background--Merger Reincorporation."
3
<PAGE>
Pursuant to a Stock Purchase Agreement having an effective date of May 31,
1996 (the "Purchase Agreement"), the Company acquired all of the issued and
outstanding capital stock of Miracle Mountain International, Inc., a Colorado
corporation ("MMI"), and MMI became a wholly-owned subsidiary of the Company
(the "MMI Acquisition"). The MMI Acquisition was accounted for under the
purchase method of accounting. MMI is a multi-level marketer of various third-
party manufactured nutritional supplement products. Pursuant to the Purchase
Agreement and in connection with the MMI Acquisition, the Company issued and
delivered to the shareholders of MMI 20,000 shares of Common Stock. In
addition, the Company agreed to issue and deliver an additional 5,000 shares of
Common Stock to the shareholders of MMI on or before February 15, 1997, pending
determination of certain liabilities. See "The Company--Background--MMI
Acquisition."
The Company's principal executive offices are located at 2601 Northwest
Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293 and its telephone
number is (405) 842-0131.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN
EVALUATING THE COMPANY AND ITS BUSINESS.
PUBLIC WARRANT REDEMPTION
Pursuant to this Prospectus, the Company is notifying the holders (the
"Warrant Holders") of the Class A Common Stock Purchase Warrants (the "Class A
Warrants") and the Class B Common Stock Purchase Warrants (the "Class B
Warrants") as of January 31, 1997 (the "Record Date"), of the election of the
Company to redeem (the "Warrant Redemption") the Class A Warrants and Class B
Warrants (collectively the "Public Warrants") for $.0008 per warrant (the
"Redemption Price") at 5:00 p.m., Central Standard Time, on March 17, 1997 (the
"Redemption Date"). Each of the Class A Warrants and Class B Warrants is
exercisable for the purchase of one share of Common Stock for $6.00 or $8.00,
respectively (the "Warrant Exercise Price"), on or before expiration of the
Redemption Date, without giving effect to the Warrant Modification Offer. See
"--Warrant Modification Offer." Pursuant to the Warrant Modification Offer,
from the date hereof until expiration of the Redemption Date (the "Special
Exercise Period"), the Warrant Exercise Price of the Class B Warrants is
reduced from $8.00 to $6.00 and each Public Warrant will be exercisable to
purchase one unit consisting of one share of Common Stock and one 1997-A
Warrant ("Unit") for $6.00. The Redemption Date may be extended by the Company
such number of times as determined in the sole discretion of the Company to a
date not later than April 30, 1997. See "Public Warrant Redemption" and "Terms
of the Warrant Modification Offer."
The Public Warrants may only be exercised by a Warrant Holder in the event
the Registration Statement of which this Prospectus is a part is effective with
the Securities and Exchange Commission and the Units (or Common Stock and 1997-
A Warrant) are qualified for sale in the state of residence of the Warrant
Holder. See "Risk Factors--Securities Laws Restrictions on Exercise of
Warrants," "Terms of Warrant Modification Offer--Acceptance of Public Warrants;
Delivery of Units," and "Description of Securities--Public Warrants." Subject
to the foregoing, the Class A Warrants and Class B Warrants are exercisable at
any time by the Warrant Holders prior to the Redemption Date by delivery of the
warrant certificate evidencing the Public Warrant to U.S. Stock Transfer
Corporation (the "Warrant Agent") at 1745 Gardena Avenue, Glendale, California
91204, with the "Form of Election to Purchase" on the reverse of the
certificate duly completed and signed, accompanied with payment of the Warrant
Exercise Price in cash or by check payable to the order of the Company.
PURPOSE OF THE WARRANT MODIFICATION OFFER
The purposes of the Warrant Modification Offer are to (i) strengthen the
Company's capital structure by increasing stockholders' equity and current
assets, (ii) provide the Company greater financial flexibility and (iii)
encourage the exercise of the Public Warrants prior to their redemption. See
"Use of Proceeds."
4
<PAGE>
RIGHTS OFFERING TO SHAREHOLDERS
Concurrently with the Warrant Modification Offer, pursuant to a separate
prospectus included within the Registration Statement of which this Prospectus
is a part, the Company will issue 2,148,191 non-transferable rights ("Rights")
to its shareholders, each Right is exercisable to purchase one unit consisting
of one share of Common Stock and one 1997-A Warrant (the "Rights Offering
Unit") at $6.80 (the "Rights Offering"). The Rights will be issued as a
dividend to the holders of Common Stock (the "Shareholders") on January 31,
1997 (the "Record Date"), on the basis of one Right per share of Common Stock
outstanding on the Record Date. The Rights are exercisable on or before March
17, 1997, subject to extension by the Company (the "Rights Exercise Date"). See
"Description of Securities--Common Stock--Rights Offering." Warrant Holders
exercising their Public Warrants after the Record Date will not be entitled to
receive any Rights as a shareholder of the Company.
THE WARRANT MODIFICATION OFFER
In connection with the Warrant Redemption, the Company offers pursuant hereto
to reduce the Warrant Exercise Price of the Class B Warrants and upon exercise
of the Public Warrants (the Class A Warrants and the Class B Warrants) prior to
March 17, 1997, subject to extension to a date not later than April 30, 1997,
in lieu of receipt of one share of Common Stock, the holders of each Public
Warrant will receive one Unit (one share of Common Stock and one 1997-A
Warrant) per Public Warrant. The Units are being offered on a best efforts
basis by the Company and its officers and directors, without commissions,
selling fees or direct or indirect remuneration. Holders of the Public Warrants
will not be required to pay any brokerage commissions or fees with respect to
the exercise of their Public Warrants. The Company will pay all charges and
expenses of the Warrant Agent. See "The Warrant Modification Offer--Plan of
Distribution" and "--Acceptance of Public Warrants; Delivery of Units."
THIS OFFERING
The Warrant Modification
Offer...................... The Warrant Exercise Price of the Class B War-
rants has been reduced from $8.00 to $6.00 from
the date hereof until the Redemption Date (the
"Special Exercise Period"). Upon exercise of ei-
ther the Class A Warrant or Class B Warrant (col-
lectively, the "Public Warrants") during the Spe-
cial Exercise Period, the Company will issue and
deliver one Unit per Public Warrant in separate
certificates of one share of Common Stock and one
1997-A Warrant.
Expiration Date of the
Offer...................... The Warrant Modification Offer will expire on the
Redemption Date, subject to extension. The
Company as reserved the right, exercisable in its
sole discretion, to extend the Redemption Date
and effectively extend the Special Exercise
Period, in the event any of the conditions
specified in "Terms of the Warrant Modification
Offer--Conditions of the Warrant Modification
Offer" are not met or waived by the Company and
so long as Public Warrants have not theretofore
been accepted for exercise, as well as for any
other reason based upon factors and
considerations that exist and that the Company
deems material and appropriate at that time,
which as of the date of this Prospectus are
undeterminable. See "--Conditions of the Warrant
Modification Offer," below and "Terms of the
Warrant Modification Offer--Expiration;
Extensions; Termination; Amendment."
Securities Offered.......... 1,050,470 Units issuable upon exercise of the
Public Warrants during the Special Exercise
Period, each Unit consisting of one
5
<PAGE>
share of Common Stock and one 1997-A Warrant,
each share of Common Stock and each 1997-A
Warrant comprising the Units will be immediately
transferable after issuance and delivery of the
Units to the Warrant Holders. Each 1997-A Warrant
is exercisable at any time 90 days after the date
of this Prospectus 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. See "Description of Securities--
Common Stock" and "--1997-A Warrants."
Exercise Price.............. $6.00 per Public Warrant during the Special
Exercise Period.
Securities outstanding:
Common Stock............ 2,148,191 shares of Common Stock are outstanding
as of the date of this Prospectus.
After giving effect to this offering and the
Warrant Modification Offer and assuming the
exercise of the Public Warrants in full and the
issuance pursuant thereto of 1,050,470 Units
(1,050,470 shares of Common Stock and 1,050,470
1997-A Warrants), there will be 3,198,661
outstanding shares of Common Stock and 1,050,470
1997-A Warrants outstanding; however, there is no
assurance than any of the Public Warrants will be
exercised.
In addition, after giving effect to the issuance
of the Rights and assuming the exercise of the
Rights in full and the issuance of 2,148,191
Rights Offering Units (2,148,191 shares of Common
Stock and 2,148,191 1997-A Warrants) pursuant
thereto, there will be 5,346,852 shares of Common
Stock outstanding and 3,198,661 1997-A Warrants
outstanding; however, there is no assurance than
any of the Rights will be exercised.
Furthermore, after giving effect to (i) this
offering and the Warrant Modification Offer and
assuming the exercise of the Public Warrants in
full and the issuance of 1,050,470 Units
(1,050,470 shares of Common Stock and 1,050,470
1997-A Warrants), (ii) the issuance of the Rights
and assuming the exercise of the Rights in full
and the issuance of 2,148,191 Rights Offering
Units (2,148,191 shares of Common Stock and
2,148,191 1997-A Warrants) pursuant thereto and
(iii) exercise of the 1997-A Warrants in full,
the issued and outstanding capital stock of the
Company will consist of 8,545,513 shares of
Common Stock; however, there is no assurance that
any of the 1997-A Warrants will be exercised. See
"Warrant Modification Offer" and "Description of
Securities--Common Stock," "--Common Stock--
Rights Offering," and "--1997-A Warrants."
The forgoing does not include (i) 1,540,177
shares reserved for issuance to holders of
outstanding stock options and other warrants and
(ii) 1,125,000 shares reserved for issuance
pursuant to the
6
<PAGE>
Advantage Marketing Systems, Inc. 1995 Stock
Option Plan (the "Stock Option Plan"). See
"Management--Stock Option Plan" and "Description
of Securities--Other Stock Options and Warrants."
Class A Warrants........ 524,610 as of the date of this Prospectus; none
after the Redemption Date.
Class B Warrants........ 525,860 as of the date of this Prospectus; none
after the Redemption Date.
1997-A Warrants......... 1,050,470 will be outstanding assuming exercise
of the Public Warrants in full during the Special
Exercise Period pursuant to the Warrant Modifica-
tion Offer; however, there is no assurance that
any of the Public Warrants will be exercised.
Furthermore, assuming and giving effect to the
issuance of the Rights and exercise of the Rights
in full, the number of outstanding 1997-A War-
rants will be 3,198,661; however, there is no as-
surance than any of the Rights will be exercised.
See "Description of Securities--Common Stock--
Warrants."
Net proceeds
indeterminable............. $6,202,820 after deduction of offering expenses
estimated at $100,000, assuming exercise of the
Public Warrants in full. However, there is no
assurance that any of the Public Warrants will be
exercised pursuant to the Warrant Modification
Offer, in which case the Company will not receive
any proceeds from this offering and the Warrant
Modification Offer.
Use of proceeds............. Assuming exercise of the Public Warrants in full
pursuant to the Warrant Modification Offer, the
estimated net proceeds to the Company would be
$6,202,820; however, there is no assurance that
any of the Public Warrants will be exercised in
which case there will not be any net proceeds
from this offering received by the Company. See
"Use of Proceeds" and "Warrant Modification
Offer." Concurrently with this offering and the
Warrant Modification Offer, the Company is
distributing 2,148,191 Rights to its shareholders
each of which will entitle the shareholder to
purchase one Unit (the "Rights Offering Units")
for $6.80 each (the "Rights Offering"). See "--
Rights Offering to Shareholders," below, and
"Description of Securities--Common Stock--Rights
Offering." Assuming exercise of the Rights in
full, the estimated net proceeds to the Company
from the Rights Offering would be $14,507,699
after reduction by estimated offering expenses of
$100,000; however, there is no assurance that any
of the Rights will be exercised in which case
there will not be any net proceeds from the
Rights Offering received by the Company.
The net proceeds received by the Company from
this offering and the Rights Offering will be
used for general corporate purposes, including
working capital and to fund the Company's efforts
to expand sales and marketing activities. The
Company estimates that
7
<PAGE>
it will use approximately (i) $1.5 million for
expansion of its U.S. distributor network and
enhancement of its marketing materials, (ii) $.5
million to develop new products and enhance the
packaging of its existing products and (iii) $1
million for the expansion into and development of
international markets. In the event the Company
receives combined net proceeds of less than $3.0
million pursuant to this offering and the Rights
Offering, the net proceeds will be devoted to
each of these purposes in the order in which
presented. Combined net proceeds in excess of
$3.0 million will be devoted to general corporate
purposes including further expansion of the
Company's distributor network and enhancement of
its marketing materials, development of new
products and enhancement of the packaging of its
existing products and expansion into and
development of international markets. The Company
does not intend to use any of the proceeds to
discharge existing debt. Pending use of the net
proceeds, they will be invested by the Company in
investment grade, short-term, interest-bearing
securities. See "Use of Proceeds."
Consequences to Non-
Exercising Warrant
Holders.................... The Public Warrants not exercised or that are not
exercisable because of securities laws
restrictions or limitations (see "--Acceptance of
Public Warrants," below, and "Risk Factors--
Securities Laws Restrictions on Exercise of
Warrants" and "Terms of the Warrant Modification
Offer--Acceptance of Public Warrants; Delivery of
Units") prior to the Redemption Date will be
redeemed by the Company at $.0008 per Public
Warrant. See "Terms of the Warrant Modification
Offer--Advantages and Disadvantages of Public
Warrant Exercise."
How to Exercise Public
Warrants................... Any holder of the Public Warrants electing
exercise of the Public Warrants should either (i)
fill out the "Form to Exercise for Purchase" on
the back of the Public Warrant certificate and
forward it along with cash or check in the amount
of the proper exercise price and any other
required documents to the Warrant Agent, or (ii)
request a broker or bank to effect the
transaction. Holders of Public Warrants
registered in the name of a broker, dealer, bank,
trust company or nominee should instruct such
institutions to tender the Public Warrants. See
"Terms of the Warrant Modification Offer--How to
Exercise."
Acceptance of Public
Warrants................... The Company will accept any and all Public
Warrants duly exercised and not withdrawn on or
prior to the Redemption Date, subject to certain
conditions. In certain cases, the sale of the
Units (and the shares of Common Stock and 1997-A
Warrants comprising the Units) pursuant to
exercise of the Public Warrants could violate the
securities laws of certain states or other
jurisdictions. The Company has undertaken
registration or qualification of the Units for
sale in California, Colorado, Georgia, Kentucky,
Illinois, Louisiana, New Hampshire, New York,
Ohio, Oklahoma,
8
<PAGE>
Pennsylvania, Tennessee, Texas, Virginia,
Washington and Wisconsin; however, there is no
assurance that such registration or qualification
will become effective in any such states. In
addition, the Company may undertake registration
of the Units in additional states as determined
in the sole discretion of the Company. Those
Warrant Holders residing in states in which the
Units have not been registered or otherwise
qualified for sale in such state, will not be
permitted to exercise their Public Warrants.
Prior to tendering of Public Warrants for
exercise, the Warrant Holder should either
contact the Company or the Warrant Agent to
determine whether the Units have been registered
or qualified in the state of such Warrant
Holder's residence. The Company has used and will
continue to use its best efforts to cause the
sale of the Units and shares of Common Stock to
be lawful. See "Terms of the Warrant Modification
Offer--Acceptance of Public Warrants; Delivery of
Units."
The Company is not required to accept the
exercise of the Warrants, if, in the opinion of
counsel, the sale of Units or Common Stock upon
such exercise would be unlawful. In such cases,
the Public Warrants will not be accepted for
exercise, and the Warrant Holder will be required
to sell such warrants in the open market, subject
to the "penny stock" rules (see "Price Range of
Common Stock and Public Warrants and Dividends--
Penny Stock Rules"), or hold such warrants until
the Redemption Date and receive the Redemption
Price per warrant. See "Risk Factors--Securities
Laws Restrictions on Exercise of Warrants,"
"Public Warrant Redemption," "Terms of the
Warrant Modification Offer--Conditions of the
Warrant Modification Offer" and "--Acceptance of
Public Warrants; Delivery of Units" and
"Description of Securities--Public Warrants."
Conditions of the Warrant
Modification Offer......... The Company has reserved certain rights and
imposed certain conditions with respect to the
Warrant Modification Offer and the Company's
obligations associated therewith, including any
prohibitive injunction, suspension of trading of
the Common Stock and enactment of any statute or
regulation prohibiting, materially restricting or
delaying consummation of the Warrant Modification
Offer. See "Terms of the Warrant Modification
Offer--Conditions of the Warrant Modification
Offer."
Delivery of Securities...... The Company will deliver the certificates for the
shares of Common Stock and the 1997-A Warrants
comprising the Units issuable upon exercise of
the Public Warrants, as promptly as practicable
after the Redemption Date. See "Terms of the
Warrant Modification Offer--Acceptance of Public
Warrants; Delivery of Units."
Withdrawal Rights........... Exercise of Public Warrants pursuant to the
Warrant Modification Offer may be withdrawn prior
to the Redemption Date. After the Redemption
Date, such tenders will be irrevocable, except
that they
9
<PAGE>
may be withdrawn after March 19, 1997, unless
previously accepted by the Company. See "Terms of
the Warrant Modification Offer--Withdrawal
Rights."
Tax Consequences............ The Company's tax counsel is of the opinion that
there is a lack of definitive authority
addressing the tax consequences to the Warrant
Holders of the Warrant Modification Offer, and
there exists several reasonable and diverse
reporting positions. Given the unclear state of
the law in this area, and the technical
intricacies of the available reporting positions,
it is particularly important that Warrant Holders
consult their own tax advisors regarding the tax
consequences to them of the Warrant Modification
Offer and exercise or nonexercise of the Public
Warrants. For tax purposes only, the Warrant
Modification Offer may be viewed as the grant of
additional rights to the Warrant Holders which
merely modify the securities to be delivered upon
exercise of the Public Warrants and with respect
to the Class B Warrants a reduction modification
of the Exercise Price of the Public Warrants.
Pursuant to this theory, the Public Warrants
would be valued as of the date the Company
announced the Warrant Modification Offer and that
value would be reported by the Warrant Holders as
ordinary income. Alternatively, the Warrant
Modification Offer constitutes the grant of
additional separate and independent warrants to
the Warrant Holders. Under this theory, the
Public Warrants would be deemed to have lapsed,
which would give rise to a loss to the Warrant
Holders on the Redemption Date. In addition, the
Warrant Holders would be required to recognize
ordinary income as a result of receipt of the new
warrant. Another alternative is that the Warrant
Modification Offer constitutes an exchange of the
Public Warrants as constituted prior to the
Warrant Modification Offer for the Public
Warrants as modified by the Warrant Modification
Offer. Under this theory, in the event the amount
realized as a result of the transaction (i.e.,
the trading price of the Public Warrants as
modified pursuant to the Warrant Modification
Offer) exceeds the Warrant Holder's tax basis in
the Public Warrant, the Warrant Holder would be
required to recognize taxable gain in the amount
of such excess. Another alternative is that the
reduction in the Warrant Exercise Price of the
Class B Warrants pursuant to the Warrant
Modification Offer constitutes a dividend taxable
to each holder of the Class B Warrants (whether
or not the Warrant Modification Offer is accepted
by exercising the Class B Warrants) and which
would entitle each such Warrant Holder to a
corresponding increase in the tax basis of the
Class B Warrants. The proper date or dates for
recognition and measurement of income possibly
recognizable by the Warrant Holders or loss
becoming available to the Warrant Holders is
uncertain, and is, in part, dependent upon
whether the Public Warrants are sold, exchanged,
lapse or are otherwise disposed of and the timing
of when those events occur or are deemed to
occur. See "Certain Federal Income Tax
Consequences" for a more complete discussion. In
the opinion of the Company's tax counsel, based
on information provided by the
10
<PAGE>
Company with respect to the ownership of the
shares of Common Stock and the Public Warrants,
the Warrant Modification Offer will not adversely
affect the Company's ability to preserve and
utilize it net operating loss carryforwards.
Warrant Agent............... U.S. Stock Transfer Corporation. The Warrant
Agent may be contacted at the address and
telephone number set forth on the back cover of
this Prospectus.
Additional Information...... The Company may be contacted at the address and
telephone number set forth on the back cover of
this Prospectus.
National Daily Quotation
Bureau symbols:............ Common Stock..................................AMSO
Class A Warrant..............................AMSOW
Class B Warrant..............................AMSOZ
1997-A Warrant...............................AMSOL
11
<PAGE>
SUMMARY HISTORICAL FINANCIAL AND OPERATING INFORMATION OF THE COMPANY
The following table sets forth summary historical financial and operating
information of the Company for the fiscal years ended December 31, 1994 and
1995, and the nine months ended September 30, 1995 and 1996. See "Selected
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The financial and operating information
for the fiscal years ended December 31, 1994 and 1995, is derived from the
audited financial statements of the Company appearing elsewhere in this
Prospectus. The financial and operating information for the nine months ended
September 30, 1995 and 1996, is derived from the unaudited financial statements
of the Company appearing elsewhere in this Prospectus which, in the opinion of
management, include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial position and
results of operations of the Company for the unaudited interim periods. The
following information should be read in conjunction with the financial
statements and the related notes thereto of the Company, and other information
relating to the Company presented elsewhere in this Prospectus. The statements
of operations information for any particular period is not necessarily
indicative of the results of operation for any future period.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
---------------------- ----------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Programs.................... $2,564,542 $4,382,935 $3,155,934 $4,186,404
Promotional material........ 82,780 109,733 88,893 234,735
Other....................... 30,625 25,535 17,797 37,471
---------- ---------- ---------- ----------
Total revenues............ 2,677,947 4,518,203 3,262,624 4,458,610
---------- ---------- ---------- ----------
Cost and expenses:
Programs.................... 684,128 1,094,157 906,935 968,635
Promotional material........ 83,964 92,087 69,395 142,610
Selling..................... 1,289,616 2,201,510 1,495,084 2,235,879
General and administrative.. 515,158 857,743 593,273 804,410
Interest expense.............. 25,075 22,998 20,335 19,422
---------- ---------- ---------- ----------
Total expenses............ 2,597,941 4,268,495 3,085,022 4,170,956
---------- ---------- ---------- ----------
Income before income taxes.... 80,006 249,708 177,602 287,654
Tax benefit................... -- -- -- 443,149
---------- ---------- ---------- ----------
Net income.................... $ 80,006 $ 249,708 $ 177,602 $ 730,803
========== ========== ========== ==========
Weighted average common shares
outstanding(1)............... 2,119,356 2,662,681 2,121,524 3,175,551
Net income per common share... $ .04 $ .09 $ .08 $ .23
CASH FLOW DATA:
Net cash provided by operating
activities................... $ 109,252 $ 337,241 $ 239,071 $ 310,375
Net cash used in investing
activities................... (63,646) (99,561) (4,072) (137,594)
Net cash used in financing
activities................... (45,606) (125,593) (76,044) (166,903)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.............................. $ 117,796 $ 283,341 $ 454,800
Working capital deficiency.................. (338,662) (170,734) (137,166)
Total assets................................ 176,969 532,996 1,504,733
Short-term debt............................. 138,655 111,048 52,091
Long-term debt.............................. 7,947 104,149 85,692
Stockholders' equity (deficiency)........... (287,436) (25,228) 827,075
</TABLE>
- --------
(1) Without giving effect to exercise of the Public Warrants pursuant to the
Warrant Modification Offer and exercise of the Rights pursuant to the
Rights Offering and the issuance of an additional 5,000 shares in
connection with the MMI Acquisition, and does not include 1,125,000 shares
reserved for issuance pursuant to the Stock Option Plan. See "Terms of the
Warrant Modification," "Description of Securities--Common Stock--Rights
Offering," and "--Other Options and Warrants" and "Management--Stock Option
Plan."
12
<PAGE>
SELECTED PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following table presents selected pro forma information for the Company
on the assumption that the MMI Acquisition occurred at the beginning of each
period for which results of operations are presented. The information presented
below is derived from and should be read in conjunction with, the consolidated
financial statements of the Company and MMI, the unaudited pro forma
consolidated statements of operations and other information related to the
Company and MMI, all presented elsewhere in this Prospectus. The pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the results of operations that would have been achieved if the
MMI Acquisition had been consummated in accordance with the assumptions set
forth in the notes to the unaudited pro forma consolidated statements of
operations of the Company, nor is it necessarily indicative of future operating
results. See "Unaudited Pro Forma Consolidated Financial Information of the
Company."
<TABLE>
<CAPTION>
PRO FORMA COMBINED
--------------------------
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................................ $4,795,569 $4,663,722
Costs and expenses.................................. 4,706,846 4,419,403
Net Income.......................................... 88,723 687,468
Weighted average common shares outstanding(1)....... 2,682,681 3,195,551
Net income per common share......................... .03 .22
</TABLE>
- --------
(1) Without giving effect to exercise of the Public Warrants pursuant to the
Warrant Modification Offer and exercise of the Rights pursuant to the
Rights Offering and the issuance of an additional 5,000 shares in
connection with the MMI Acquisition, and does not include 1,125,000 shares
reserved for issuance pursuant to the Stock Option Plan. See "Terms of the
Warrant Modification Offer," "Description of Securities--Common Stock--
Rights Offering," and "--Other Options and Warrants" and "Management--Stock
Option Plan."
13
<PAGE>
RISK FACTORS
Purchase of Units pursuant to exercise of the Public Warrants, offered
hereby involves a high degree of risk. In addition to the other information
set forth elsewhere in this Prospectus, the following factors relating to the
Company and exercise of the Public Warrants should be considered when
evaluating exercise of the Public Warrants and investment in the Units offered
hereby.
SECURITIES LAWS RESTRICTIONS ON EXERCISE OF WARRANTS. In certain cases, the
sale of the Units and the Common Stock and 1997-A Warrants comprising the
Units by the Company upon exercise of Public Warrants could violate the
securities laws of certain states or other jurisdictions. The Company has used
and will continue to use its best efforts to cause the Registration Statement
of which this Prospectus is a part to be declared effective under the laws of
various states as may be required to cause the sale of securities upon
exercise of Public Warrants and the 1997-A Warrants to be lawful. However, the
Company is not required to accept the exercise of the Public Warrants, if, in
the opinion of counsel, the sale of Units and Common Stock and 1997-A Warrants
comprising the Units upon such exercise would be unlawful. In such cases, the
Public Warrants will not be accepted for exercise, and the holder of the
Public Warrants will be required to sell the Public Warrants in the open
market, if such market is available, or hold such warrants until expiration or
redemption. See "Warrant Redemption," and "Description of Securities--Public
Warrants."
CONSEQUENCES TO NON-EXERCISING WARRANT HOLDERS. The Public Warrants that are
not exercised by a Warrant Holder prior to the Redemption Date (or that are
not exercisable because of securities laws restrictions or limitations) will
be redeemed by the Company at $.0008 per Public Warrant. The Warrant Holder
will be required to sell such Public Warrants in the open market, if such
market is available, or hold such Public Warrants and receive the Redemption
Price. See "Terms of the Warrant Modification Offer--Advantages and
Disadvantages of Public Warrant Exercise."
ABSENCE OF PRIOR PUBLIC MARKET FOR UNITS AND 1997-A WARRANTS; POSSIBLE
VOLATILITY OF STOCK PRICE. Although the Common Stock is currently traded in
the over-the-counter market, there currently is no public market for the Units
or the 1997-A Warrants offered pursuant to the Warrant Modification Offer, and
there is no assurance that a market will develop or be sustained. See "Price
Range of Common Stock and Public Warrants and Dividends." The market price of
the Common Stock (as well as the 1997-A Warrants, if a market develops) may be
significantly affected by factors such as announcements of new products,
product lines or marketing strategies offered by the Company or its
competitors, increase or decrease in membership and sales associates of the
network purchasing programs offered by the Company, quarter-to-quarter
variations in the Company's anticipated or actual results of operations and
conditions in the marketing of products and product lines.
1997-A WARRANT EXERCISE AND REDEMPTION PROVISIONS. Each 1997-A Warrant
entitles the holder to purchase one share of Common Stock, subject to certain
anti-dilution adjustments, at a price of $12.00 per share, on 90 days after
the date of this Prospectus and/or before January 31, 1999. See "Description
of Securities--1997-A Warrants." Holders of 1997-A Warrants may exercise such
warrants only with respect to shares of Common Stock that are registered or
qualified for sale under the state securities laws of the states in which the
holders of the 1997-A Warrants reside. There can be no assurance that the
Company will maintain effectiveness, under the state securities laws of the
states in which the holders of the 1997-A Warrants reside, of this Prospectus
or any other prospectus covering the shares underlying the 1997-A Warrants at
all times that the 1997-A Warrants are outstanding. However, the Company will
make a good faith effort to maintain an effective registration statement and
current prospectus in such states at such times, if ever, that the price of
the Common Stock exceeds the 1997-A Warrant exercise price. The 1997-A
Warrants may be deprived of any value in the event this Prospectus or another
prospectus covering the shares issuable upon exercise of the 1997-A Warrants
is not kept effective in the states in which the holders of the 1997-A
Warrants reside. The 1997-A Warrants will initially be sold and issued only in
those jurisdictions that 1997-A Warrants are registered or otherwise qualified
in connection with the Warrant Modification Offer, which may not include a
jurisdiction in which the holder of
14
<PAGE>
a 1997-A Warrant currently resides and in which the Units (and the share of
Common Stock and 1997-A Warrant comprising each Unit) offered pursuant to this
Prospectus are registered or qualified. If the Company is unable or chooses
not to register or qualify or maintain the registration or qualification of
the Units (and the shares of Common Stock and 1997-A Warrant comprising each
Unit) offered pursuant to this Prospectus for sale in a state in which holders
of a 1997-A Warrant resides, the Company will not permit such 1997-A Warrants
to be exercised, and such holders may have no choice but to either sell their
Warrants in the open market or let them be redeemed. A holder of 1997-A
Warrants and other interested persons who wish to know whether the Common
Stock underlying such warrants may be issued to the holder, upon the exercise,
in a particular state, should send a written inquiry to the Company.
Additionally, the 1997-A Warrants may be redeemed by the Company, in whole but
not in part, upon not less than 30 days' prior written notice at a price of
$.0001 per 1997-A Warrant at any time. See "Description of Securities--1997-A
Warrants."
MANAGEMENT DISCRETION OVER APPLICATION OF PROCEEDS. The Company will
allocate the net proceeds of exercise of the Public Warrants to general
corporate purposes and working capital. See "Use of Proceeds." The application
of such proceeds will be at the sole discretion of management of the Company.
Individual shareholders will have no control over decisions regarding the
application or use of the net proceeds obtained pursuant to exercise of the
Public Warrants.
OVER-THE-COUNTER MARKET; PENNY STOCK TRADING RULES. The Common Stock, Class
A Warrants and Class B Warrants are and it is anticipated, although there is
no assurance a market will develop, that the 1997-A Warrants will also be
traded in the over-the-counter market and will be subject to the "penny stock"
trading rules. See "Price Range of Common Stock and Public Warrants and
Dividends--Penny Stock Trading Rules." The over-the-counter market is
characterized as volatile in that securities traded in such market are subject
to substantial and sudden price increases and decreases and at times price
(bid and asked) information for such securities may not be available. In
addition, when there are only one or two market makers (a dealer holding
itself out as ready to buy and sell the securities on a regular basis), there
is a risk that the dealer or group of dealers may control the market in the
security and set prices that are not based on competitive forces and the
available offered price may be substantially below the quoted bid price. There
is no assurance that immediately following exercise of a Public Warrant, the
Warrant Holder will be able to resell the Common Stock and/or 1997-A Warrant
or if sold whether a profit will be realized (i.e., sale of the Common Stock
or 1997-A Warrant at a price, after dealer compensation or markdown, in excess
of the exercise price of the Public Warrant allocable to the Common Stock or
the 1997-A Warrant).
Unless other available exemptions become available in the future, at any
time the bid price of the Common Stock in the over-the-counter market is less
than $5.00, the Company's equity securities will be subject to the "penny
stock" trading rules, unless the Company meets certain other exemptions under
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 such equity securities of the Company,
including determination of the purchaser's investment suitability, delivery of
certain information and disclosures to the purchaser, and receipt of a
specific purchase agreement from the purchaser prior to effecting the purchase
transaction. Required compliance with the penny stock trading rules affect or
will affect the ability to resell the Common Stock, Class A Warrants, Class B
Warrants, or 1997-A Warrants by a holder principally because of the additional
duties and responsibilities imposed upon the broker-dealers and salespersons
recommending and effecting sale and purchase transactions in such securities.
In addition, many broker-dealers will not effect transactions in penny stocks,
except on an unsolicited basis, in order to avoid compliance with the penny
stock trading rules. The penny stock trading rules consequently may materially
limit or restrict the ability of a holder to resell the Company's equity
securities, and the liquidity typically associated with other publicly traded
equity securities may not exist. Therefore, a Warrant Holder electing to
exercise a Public Warrant may be required to hold the Common Stock and/or
1997-A Warrant for an indefinite time and even then may realize a loss, which
loss could be substantial. See "Price Range of Common Stock and Public
Warrants and Dividends--Penny Stock Trading Rules."
15
<PAGE>
RIGHTS OFFERING. Concurrently with the Warrant Modification Offer, pursuant
to a separate prospectus included within the Registration Statement of which
this Prospectus is a part, the Company will issue 2,148,191 non-transferable
rights (the "Rights") to its shareholders, each Right exercisable to purchase
one unit comprised of one share of Common Stock and one 1997-A Warrant (the
"Rights Offering Unit") at $6.80 (the "Rights Offering"). The Rights will be
issued as a dividend to the holders of Common Stock (the "Rights Holders") on
January 31, 1997 (the "Record Date"), on the basis of one Right per share of
Common Stock outstanding on the Record Date. The Rights are exercisable on or
before March 17, 1997, subject to extension by the Company to a date not later
than April 30, 1997. See "Description of Securities--Common Stock--Rights
Offering." Warrant Holders exercising their Public Warrants after the Record
Date will not be entitled to receive any Rights as a shareholder of the
Company. Although there is no assurance that any of the Rights will be
exercised, in the event of exercise of all or any portion of the Rights,
additional shares of Common Stock and 1997-A Warrants will be issued and
outstanding, which may be diluting on an earnings per share basis and in such
case may adversely affect the public market trading price of the Common Stock.
See "Description of Securities--Common Stock--Rights Offering."
OUTSTANDING STOCK OPTIONS AND WARRANTS; OPTION AND WARRANT OFFERING. As of
the date of this Prospectus, there are 1,540,177 outstanding stock options and
other warrants (of which 572,500 are held by current management of the
Company) exercisable to purchase Common Stock at an exercise price of from
$1.60 to $6.48 per share during periods that expire in February 1997 through
July 2005. See "Description of Securities--Other Stock Options and Warrants."
During the term of the outstanding stock options and other warrants, the
holders are given the opportunity to profit from a rise in the market price of
the Common Stock. Exercise of such stock options and warrants may dilute the
net book value per share of outstanding Common Stock at the time of exercise
and will be diluting on an earnings per share basis, which may adversely
affect the public market trading price of the Common Stock. The existence of
these stock options and warrants may adversely affect the terms on which the
Company may obtain additional equity financing. Furthermore, the holders are
likely to exercise their stock options or warrants at a time when the Company
would otherwise be able to obtain capital on terms more favorable than could
be obtained through the exercise of such stock options and warrants. See
"Description of Securities--Other Stock Options and Warrants."
COMMON STOCK ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Common Stock in the public market following completion of the Warrant
Modification Offer and the Rights Offering could adversely affect the market
price of the Common Stock. See "Shares Eligible for Future Sale." As of the
date of this Prospectus, there are 627,834 shares of the Company's outstanding
Common Stock which are "restricted securities" that may in the future be sold
in compliance with Rule 144 as promulgated by the Commission pursuant to the
1933 Act. Rule 144 generally provides that beneficial owners of shares who
have held such shares for two years may sell within a three-month period a
number of shares not exceeding one percent of the total outstanding shares or
the average trading volume of the shares during the four calendar weeks
preceding such sale. See "Shares Eligible for Future Sale."
The shares of Common Stock held by the executive officers and directors of
the Company, who in the aggregate hold of record 350,505 shares as of the date
of this Prospectus (see "Security Ownership of Certain Beneficial Owners and
Management"), are eligible for sale in the open market pursuant to an
effective registration statement under the 1933 Act or upon satisfaction of
the applicable holding period and other requirements of Rule 144. Subject to
the Rule 144 sale limitations, 627,834 outstanding shares of Common Stock are
eligible for sale under Rule 144 as of the date of this Prospectus. Future
sales of substantial amounts of Common Stock in the public market following
completion of the Warrant Modification Offer and could adversely affect the
market price of the Common Stock. See "Shares Eligible for Future Sale."
DEFICIT WORKING CAPITAL; FUTURE OPERATING RESULTS. At September 30, 1996,
the Company had a deficit working capital of $137,166. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Capital Resources and Liquidity." There is no assurance that revenues from
operations will be sufficient to cover the deficit working capital.
16
<PAGE>
The Company's expense levels are based, in part, on its expectations as to
future revenue levels, which can be difficult to predict due in part to the
Company's strategy of developing product marketing programs and the success of
such programs, which is also dependent upon the market demand developed for
such products through the marketing programs. If revenue levels are below
expectations, operating results will be adversely affected. In addition, the
Company's operating results may fluctuate as a result of many factors,
including price reductions, delays in the introduction of new products, delays
in purchase decisions due to new product announcements by the Company or its
competitors, increased competition by providers of marketing programs, failure
to reduce product costs or maintain product quality, cancellations or delays
of orders, interruptions or delays in supply of key components, changes in
customer base or product mix and seasonal patterns of customer spending. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FLUCTUATIONS IN OPERATING RESULTS. Demand for the products offered through
the Company's network purchasing programs is dependent on general economic
conditions. Recessionary periods generally result in fewer members
participating in the purchasing programs, and, therefore, may lead to a
reduction in membership in the respective network purchasing programs and the
membership fee revenues as well as less product purchasing which affect
revenues as well as the ability of the Company to introduce new products into
the market place through the purchasing programs. Because expenses associated
with maintaining the Company's administrative staff are relatively fixed over
the short term (which averaged approximately $100,000 during each of the three
months ended September 30, 1996), the Company's net income tends to fluctuate
in periods of increased or decreased membership and product sales volume.
These fluctuations are not always readily predictable and most are not within
the control of the Company. During 1994 and 1995 and the nine months ended
September 30, 1996, the Company's total revenues were $2,677,947, $4,518,203
and $4,458,610, respectively, while during such periods net income was
$80,006, $249,708, and $730,803, respectively. Although the Company has not
experienced declining revenues and reduced net income during such periods of
operations, such results of operations are not necessarily indicative of
future operation results, and there is no assurance that such revenues and net
income will continue to increase or that the current levels of revenues and
net income will be maintained. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Results of Operations."
DEPENDENCE ON KEY PERSONNEL. The Company's future success depends on the
continued availability of certain key management personnel, including John W.
Hail, founder, chief executive officer and director of the Company, and Roger
P. Baresel, president, chief financial officer and director of the Company.
The Company does not maintain any life insurance covering the executive
officers of the Company. The Company's continued growth and profitability also
depends on its ability to attract and retain other management personnel and
sales associates. The Company has not had any difficulty to date in attracting
and retaining management personnel and sales associates, although there can be
no assurance it will continue to be successful in this regard in the future.
See "Business--Marketing" and "Management--Directors and Executive Officers."
PRODUCT INTRODUCTION, OBSOLESCENCE AND MARKETING. The marketing for products
with respect to which the Company develops marketing programs is in most cases
characterized by introduction of competing products. Product introductions are
generally characterized by increased functionality or enhanced results
achieved by use of the product compared to existing competitive products. The
introduction of products embodying increased functionality or enhanced results
from product use may render existing products obsolete and unmarketable. The
Company's ability to successfully develop a marketing introduction into the
market place of new products on a timely basis and achieve adequate levels of
market demand will be a significant factor in the Company's ability to grow
and remain competitive and profitable. In addition, the nature and mix of the
products comprising the available products within the Company's various
product purchasing and distribution programs is a most important factor. The
nature, assortment and mix of products available for purchase through the
Company's marketing program networks affects membership maintenance and
development within the various marketing programs of the Company, which
consequently affects demand for the products offered within each such program.
In the event the Company is unable to successfully increase the product
assortment and mix and maintain competitive product replacement of the
products in a timely manner in response to changes in and
17
<PAGE>
introduction of new products, competitive or otherwise, offered to members of
a marketing program the Company's business and operating results will be
materially and adversely affected. See "Business--Products and Services of the
Company" and "--Marketing."
NETWORK PURCHASING PROGRAMS; LOSS OF SALES ASSOCIATES. The Company relies on
the members of its network purchasing programs and member sales associates for
the distribution and sale of the products offered pursuant to such programs. A
reduction in the membership of the network purchasing programs and loss of
member sales associates could have a material adverse effect on the Company's
business and operating results. Certain of the sales associates also represent
or may in the future represent other lines of products which are complementary
to or competitive with those offered through the Company's network purchasing
programs. While the Company attempts to encourage sales associates to focus on
selling the products through the Company's network purchasing programs, there
is a risk that these sales associates may give higher priority to other
products, reducing their efforts devoted to selling the products offered
through the Company's network purchasing programs. Typically, the Company has
non-exclusive arrangements with its sales associates which may be canceled by
either party at will and contain no minimum purchase requirements on the part
of the sales associates. There can be no assurance that the Company's network
purchasing programs will continue to be successful or that the Company will be
able to retain or increase its current network purchasing membership or retain
its sales associates, or retain or increase the various product lines offered
to the members of the purchasing programs. See "Business--Products and
Services of the Company" and "--Marketing."
DEPENDENCY ON THIRD-PARTY PROVIDERS; AVAILABILITY OF PRODUCT
SOURCES. Substantially all of the services and products offered and
distributed by the Company are provided by unrelated third-party providers
over whom the Company does not have control. In turn, such unrelated third-
party providers may be dependent upon other unrelated manufacturers or vendors
to provide components for manufacture or services. The Company does not
generally enter into long-term purchase commitments with respect to the
consumer services of third-party providers or the nutritional supplement
products offered and distributed by the Company; however, the Company
customarily enters into contracts with such third-party providers to establish
the terms and conditions of service and/or product sales made by the Company
through its distributors and program participants. See "Business--Products and
Services of the Company" and "--Contractual Arrangements."
Although the Company believes it would be able to obtain alternative sources
of its services and products, because the Company's services and products are
only available through single source or limited source third- party providers,
any future difficulty in obtaining any of the key services or products offered
and distributed by the Company could have a material adverse effect on the
Company's results of operations. In addition, the unavailability of or
interruptions in access to the services and products provided by third-party
providers involves certain risks, although the Company has not previously
experienced such unavailability or interruptions. In the event any of the
third-party providers, especially the provider of nutritional supplement
products, were to become unable or unwilling to continue to provide the
services or products in required volumes, the Company would be required to
identify and obtain acceptable replacements, which could be lengthy and no
assurance can be given that any additional sources would become available to
the Company on a timely basis. A delay or reduction in availability of the
services and/or products offered and distributed by the Company could
materially and adversely affect the Company's business, operating results and
financial condition. See "Business--Contractual Arrangements."
MULTI-LEVEL MARKETING REGULATION. The Company is required to comply with
state and federal laws governing the Company's multi-level marketing
activities. See "Business--Government Regulation." These laws generally relate
to unfair or deceptive trade practices, lotteries, business opportunities and
securities. The Company has not experienced any material problems with
marketing compliance. However, multi-level marketing regulation at the state
and federal level is subject to change through enactment of additional
legislation and adoption of regulations which may adversely affect the
marketing activities of the Company. The Company cannot predict with any
accuracy if such legislation or regulation will be enacted or adopted or the
ultimate effect thereof on Company operations, but expects to continue to
fully comply with the legal requirements of multi-level marketing to minimize
any undesirable impact on the Company and its operations.
18
<PAGE>
COMPETITION. Providers of product marketing services compete primarily on
the basis of marketing strategies, product advertising and packaging
development and cost of services. The Company believes it competes favorably
in each of these categories. The Company competes with a variety and number of
companies offering marketing programs and purchasing networks including
discount catalog companies, direct product purchasing, and retail discount
stores, many of which have greater financial resources than the Company. In
addition, in some cases the products offered through the Company's network
purchasing programs are not exclusively offered through such programs. See
"Business--Competition."
LACK OF DIVIDENDS. The Company does not anticipate paying any cash dividends
on its Common Stock in the foreseeable future. The Company intends to retain
profits, if any, to fund growth and expansion in the future. See "Price Range
of Common Stock and Dividends."
ANTI-TAKEOVER PROVISIONS. The Company's Certificate of Incorporation and
Bylaws and the provisions of the Oklahoma General Corporation Act may make it
difficult to effect a change in control of the Company and replace incumbent
management. See "Description of Securities--Anti-Takeover Provisions." The
Certificate of Incorporation authorizes the issuance of Preferred Stock in
classes or series, and the Board of Directors to set and determine voting,
redemption and conversion rights and other rights related to such class or
series of Preferred Stock, which in some circumstances, the Preferred Stock
could be issued and have the effect of preventing a merger, tender offer or
other takeover attempt which the Company's Board of Directors opposes. See
"Description of Securities--Anti-Takeover Provisions--Preferred Stock" and
"Description of Securities--Preferred Stock." The Company's directors are
elected for three-year terms, with approximately one-third of the Board
standing for election each year, which may make it difficult to effect a
change of incumbent management and control. See "Description of Securities--
Anti-Takeover Provisions--Classified Board." Following the Warrant
Modification Offer or at some time in the future, the Company may become
subject to the anti-takeover provisions of the Oklahoma General Corporation
Act, which in such case and in some circumstances may discourage a person from
making a control share acquisition (generally an acquisition of voting stock
having more than 20 percent of all voting power in the election of directors)
without shareholder approval. See "Description of Securities--Anti-Takeover
Provisions--Oklahoma Anti-Takeover Statutes."
THE COMPANY
Advantage Marketing Systems, Inc., an Oklahoma corporation (the "Company"),
was organized in 1988 under the name AMS, Inc. and since that time has been a
marketer of consumer oriented services and products which are packaged
together in special programs and sold to independent sales associates who use
the products and services themselves and also sell them to others. The
programs consist of various services which provide savings on items such as
merchandise, groceries and travel, and legal benefits furnished by certain
third party providers as well as nutritional supplements. These programs
represent the Company's one main class of products and services and account
for over 94 percent of its revenues. See "Business."
The Company's executive offices are located at 2601 Northwest Expressway,
Suite 1210W, Oklahoma City, Oklahoma 73112-7293 with a telephone number of
(405) 842-0131.
BACKGROUND
EXCHANGE. Pursuant to an Agreement and Plan of Reorganization, dated May 1,
1989, the shareholders of the Company exchanged their common stock for 800,807
shares of the common stock of Pacific Coast International, Inc., a Delaware
corporation (the "Exchange"). Prior to the Exchange, the trade or business
activities of Pacific Coast International, Inc. had been limited to those
activities associated with a public offering of its securities and
investigation of corporate acquisition alternatives as a "blank check"
company. Upon consummation of the Exchange, (i) the officers and directors of
the Company assumed management of Pacific Coast International, Inc., (ii) the
Company became a wholly owned subsidiary of the Pacific Coast International,
Inc., (iii) the Company changed its name from AMS, Inc. to Advantage Marketing
Systems, Inc., and (iv) Pacific
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<PAGE>
Coast International, Inc. changed its name to Advantage Marketing Systems,
Inc. The Exchange was accounted for as a reverse acquisition of the Company.
INITIAL ISSUANCE OF PUBLIC WARRANTS. Prior to the Exchange, Advantage
Marketing Systems, Inc. (formerly Pacific Coast International, Inc. and parent
of the Company) sold, in a public offering, 225,860 shares of Common Stock,
Class A Warrants and Class B Warrant in units, each unit consisting of one
share of Common Stock, one Class A Warrant and one Class B Warrant. See
"Description of Securities." The net proceeds from this offering were
approximately $838,290. Furthermore, in conjunction with such offering, the
holders of 300,000 Class A Warrants and Class B Warrants sold such Public
Warrants. As of the date of this Prospectus, there are 524,610 outstanding
Class A Warrants and 525,860 outstanding Class B Warrants (collectively, the
"Public Warrants"), all of which were issued in connection with initial public
offering of Pacific Coast International, Inc. that was completed in 1989. The
Class A Warrants and the Class B Warrants were issued pursuant to a Warrant
Agreement with the Warrant Agent dated as of January 26, 1989. Pursuant to
amendment of the Warrant Agreement, the period of exercise of the Class A
Warrants and the Class B Warrants was extended to July 26, 1997. A copy of the
Warrant Agreement and the amendments thereto were filed as an exhibit to the
Registration Statement of the which this Prospectus is a part. A copy of the
Warrant Agreement and the amendments thereto may be examined at the offices,
or a copy may be obtained by written request, of the Company or the Warrant
Agent. Each Class A Warrant and Class B Warrant entitles the holder thereof to
purchase one share of Common Stock at an exercise price of $6.00 and $8.00,
respectively, without giving effect to the Warrant Modification Offer.
MERGER REINCORPORATION. Effective December 11, 1995, Advantage Marketing
Systems, Inc., the former parent of the Company (formerly Pacific Coast
International, Inc.), merged with the Company pursuant to an Agreement and
Plan of Merger (the "Merger"), and the Company was the surviving corporation.
As a result of the Merger, Advantage Marketing Systems, Inc., the parent of
the Company (formerly Pacific Coast International, Inc.) ceased to exist, and
the Company succeeded to all of its rights, privileges, powers, franchises,
obligations, assets and properties. Prior to the Merger, Advantage Marketing
Systems, Inc. did not conduct any operations, all operations were conducted by
the Company, and its parent only served as a holding company of the Company.
The Merger was accounted for as a reorganization of entities under common
control and was recorded at historical cost. All references to the Company
include its former parent, Advantage Marketing Systems, Inc., unless otherwise
indicated.
MMI ACQUISITION. Pursuant to a Stock Purchase Agreement having an effective
date of May 31, 1996 (the "Purchase Agreement"), the Company acquired all of
the issued and outstanding capital stock of Miracle Mountain International,
Inc., a Colorado corporation ("MMI"), and MMI became a wholly-owned subsidiary
of the Company (the "MMI Acquisition"). The MMI Acquisition was accounted for
under the purchase method of accounting. MMI is a multi-level marketer of
various third- party manufactured nutritional supplement products. Pursuant to
the Purchase Agreement and in connection with the MMI Acquisition, the Company
issued and delivered to the shareholders of MMI 20,000 shares of Common Stock.
In addition, the Company agreed to issue and deliver an additional 5,000
shares of Common Stock to the shareholders of MMI on or before February 15,
1997, pending determination of certain liabilities.
UNDERWRITING LETTER OF INTENT. The Company signed a letter of intent on May
24, 1996, with an underwriter which sets forth in principle the terms and
conditions pursuant to which investment banking services are to be provided
and, subject to a number of conditions, Common Stock is to be purchased from
the Company and sold to the public by the underwriter during 1997. Until a
definitive underwriting agreement is executed with the underwriter, which
generally will be following the declaration of effectiveness of the
registration statement filed by the Company with the Securities and Exchange
Commission covering the Common Stock, the underwriter will have no obligation
to purchase the Common Stock. Therefore, there is no assurance that this
offering will be completed.
20
<PAGE>
USE OF PROCEEDS
The net proceeds of this offering to be received by the Company will be
dependent upon the number of Units purchased by the holders of the Public
Warrants pursuant to exercise of the Public Warrants during the Special
Exercise Period pursuant to the Warrant Modification Offer. Therefore, the net
proceeds of this offering are not determinable as of the date of this
Prospectus. In the event the Public Warrants are exercised in full the net
proceeds to the Company, after deduction of $100,000 estimated offering costs,
will be $6,202,820. There is no assurance that all or any portion of the
Public Warrants will be exercised pursuant to the Warrant Modification Offer,
in which case the Company will not receive any net proceeds from this
offering. See "Warrant Modification Offer."
Concurrently with this offering and the Warrant Modification Offer, pursuant
to a separate prospectus which is a part of the Registration Statement of
which this Prospectus is a part, the Company is making the Rights Offering.
The net proceeds of the Rights Offering to be received by the Company will be
dependent upon the number of Rights Offering Units purchased by the holders of
the Rights pursuant to exercise of the Rights pursuant to the Rights Offering.
In the event the Rights are exercised in full pursuant to the Rights Offering,
the net proceeds to the Company, after deduction of $100,000 estimated
offering costs, will be $14,507,699. See "Description of Securities--Common
Stock--Rights Offering." There is no assurance that all or any portion of the
Rights to be distributed to the Company's shareholders will be exercised
pursuant to the Rights Offering, in which case the Company will not received
any net proceeds from the Rights Offering.
The net proceeds received by the Company from the concurrent offering for
sale of the Units and Rights Offering Units pursuant to the exercise of Public
Warrants and Rights will be used for general corporate purposes, including
working capital and to fund the Company's efforts to expand sales and
marketing activities. The Company estimates that it will use approximately
$1.5 million for expansion of its U.S. distributor network and enhancement of
its marketing materials. The Company intends to use approximately $.5 million
to develop new products and enhance the packaging of its existing products.
The Company will devote approximately $1 million for the expansion into and
development of international markets. In the event the Company raises less
than $3.0 million, the net proceeds will be devoted to each of these areas in
the order in which they are presented. See "Business." Combined net proceeds
in excess of $3.0 million will be devoted to general corporate purposes
including further expansion of the Company's distributor network and
enhancement of its marketing materials, development of new products and
enhancement of packaging of its existing products and expansion into and
development of international markets.
The Company does not intend to use any of the net proceeds to discharge
existing debt. Pending use of the net proceeds, they will be invested by the
Company in investment grade, short-term, interest-bearing securities.
In the event that the Company does not obtain any net proceeds from these
offerings, it anticipates that it will be able to continue to operate on
internally generated cash. During the nine months ended September 30, 1996,
the Company had an average monthly positive cash flow from operating
activities of approximately $34,400, and an average monthly net positive cash
flow of approximately $600, after investing and financing activities. See
"Business" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
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<PAGE>
PRICE RANGE OF COMMON STOCK AND PUBLIC WARRANTS AND DIVIDENDS
The Common Stock, Class A Warrants and Class B Warrants are traded in the
over-the-counter market and are quoted by the National Quotation Bureau,
Incorporated under the symbols "AMSO," "AMSOW" and "AMSOZ," respectively. The
following table sets forth, for the periods presented, the high and low
closing bid quotations in the over-the-counter market as quoted by the
National Quotation Bureau, Incorporated, adjusted to give effect to the one
for eight reverse stock split on October 29, 1996. The bid quotations reflect
inter-dealer prices without adjustment for retail markups, markdowns or
commissions and may not reflect actual transactions.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK WARRANTS WARRANTS
------------ ------------ ------------
CLOSING BID CLOSING BID CLOSING BID
------------ ------------ ------------
HIGH LOW HIGH LOW HIGH LOW
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1996:
First Quarter Ended March 31.......... $ 6.48 $5.04 $ .48 $ .24 $ .48 $ .24
Second Quarter Ended June 30.......... $ 8.00 $5.04 $ 1.04 $ .24 $ 1.04 $ .24
Third Quarter Ended September 30...... $ 7.84 $5.52 $ 1.00 $ .24 $ 1.00 $ .24
Fourth Quarter Ended December 31,
1996................................. $ 6.50 $5.00 $ .24 $ .13 $ .24 $ .13
1995:
First Quarter Ended March 31.......... $ 2.00 $1.76 $ .16 $ .16 $ .08 $ .08
Second Quarter Ended June 30.......... $ 3.76 $2.00 $ .16 $ .16 $ .08 $ .08
Third Quarter Ended September 30...... $10.00 $3.60 $ 1.04 $ .48 $ .24 $ .08
Fourth Quarter Ended December 31...... $ 7.52 $4.48 $ .48 $ .24 $ .08 $ .08
1994:
First Quarter Ended March 31.......... $ 1.52 $1.04 $ .16 $ .16 $ .08 $ .08
Second Quarter Ended June 30.......... $ 2.00 $1.52 $ .16 $ .16 $ .08 $ .08
Third Quarter Ended September 30...... $ 2.00 $1.52 $ .16 $ .16 $ .08 $ .08
Fourth Quarter Ended December 31...... $ 2.48 $1.52 $ .16 $ .16 $ .08 $ .08
</TABLE>
On January 10, 1997, the closing bid and asked prices, as quoted by the
National Quotation Bureau, Incorporated, of the Common Stock were $5.63, and
$6.25, respectively, the Class A Warrants were $.13, and $.38, respectively,
and the Class B Warrants were $.13 and $.38, respectively. On January 10,
1997, there were approximately 1,070, 338 and 269 holders of the Common Stock,
the Class A Warrants and Class B Warrants, respectively.
PENNY STOCK TRADING RULES
Unless other exemptions become available in the future, in the event the bid
price of the Common Stock in the over-the-counter market is less than $5.00,
the Common Stock, Class A Warrants, Class B Warrants and 1997-A Warrants will
be subject to the "penny stock" trading rules. The penny stock trading rules
impose additional duties and responsibilities upon broker-dealers recommending
the purchase of a penny stock (by a purchaser that is not an accredited
investor as defined by Rule 501(a) promulgated by the Commission under the
1933 Act) or the sale of a penny stock. Among such duties and
responsibilities, with respect to a purchaser who has not previously had an
established account with the broker-dealer, the broker-dealer is required to
(i) obtain information concerning the purchaser's financial situation,
investment experience, and investment objectives, (ii) make a reasonable
determination that transactions in the penny stock are suitable for the
purchaser and the purchaser (or his independent adviser in such transactions)
has sufficient knowledge and experience in financial matters and may be
reasonably capable of evaluating the risks of such transactions, followed by
receipt of a manually signed written statement which sets forth the basis for
such determination and which informs the purchaser that it is unlawful to
effectuate a transaction in the penny stock without first obtaining a written
agreement to the transaction. Furthermore, until the purchaser becomes an
established customer (i.e., have had an account with the dealer for at least
one year or, the dealer had effected three sales of penny stocks on three
different days involving three different issuers), the broker-dealer must
obtain from the purchaser a written
22
<PAGE>
agreement to purchase the penny stock which sets forth the identity and number
of shares or units of the security to be purchased prior to confirmation of
the purchase. A dealer is obligated to provide certain information disclosures
to the purchaser of a penny stock, including (i) a generic risk disclosure
document which is required to be delivered to the purchaser before the initial
transaction in a penny stock, (ii) a transaction-related disclosure prior to
effecting a transaction in the penny stock (i.e., confirmation of the
transaction) containing bid and asked information related to the penny stock
and the dealer's and salesperson's compensation (i.e., commissions, commission
equivalents, markups and markdowns) in connection with the transaction, and
(iii) the purchaser-customer must be furnished account statements, generally
on a monthly basis, which include prescribed information relating to market
and price information concerning the penny stocks held in his account. The
penny stock trading rules do not apply to those transactions in which a
broker-dealer or salesperson does not make any purchase or sale recommendation
to the purchaser or seller of the penny stock.
Required compliance with the penny stock trading rules affect or will affect
the ability to resell the Common Stock, Class A Warrants, Class B Warrants, or
1997-A Warrants by a holder principally because of the additional duties and
responsibilities imposed upon the broker-dealers and salespersons recommending
and effecting sale and purchase transactions in such securities. In addition,
many broker-dealers will not effect transactions in penny stocks, except on an
unsolicited basis, in order to avoid compliance with the penny stock trading
rules. The penny stock trading rules consequently may materially limit or
restrict the liquidity typically associated with other publicly traded equity
securities. In this connection, the holder of Common Stock, Class A Warrants,
Class B Warrants, or 1997-A Warrants may be unable to obtain on resale the
quoted bid price because a dealer or group of dealers may control the market
in such securities and may set prices that are not based on competitive
forces. Furthermore, at times there may be a lack of bid quotes which may mean
that the market among dealers is not active, in which case a holder of Common
Stock, Class A Warrants, Class B Warrants, or 1997-A Warrants may be unable to
sell such securities. Because market quotations in the over-the-counter market
are often subject to negotiation among dealers and often differ from the price
at which transactions in securities are effected, the bid and asked quotations
of the Common Stock, Class A Warrants, Class B Warrants, or 1997-A Warrants
may not be reliable.
DIVIDEND POLICY
The Company's dividend policy is to retain its earnings to support the
expansion of its operations. The Board of Directors of the Company does not
intend to pay cash dividends on the Common Stock in the foreseeable future.
Any future cash dividends will depend on future earnings, capital
requirements, the Company's financial condition and other factors deemed
relevant by the Board of Directors. See "Risk Factors--Deficit Working
Capital; Future Operating Results," and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
23
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996, without giving effect to or assuming exercise of the
Public Warrants pursuant to the Warrant Modification Offer or the Rights
pursuant to the Rights Offering and without giving effect to the issuance of
the additional 5,000 shares of Common Stock in connection with the MMI
Acquisition (see "The Company--Background--MMI Acquisition"). This table
should be read in conjunction with the unaudited consolidated financial
statements and notes thereto of the Company appearing elsewhere in this
Prospectus. See "Unaudited Pro Forma Consolidated Financial Information of the
Company."
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1996
-------------
<S> <C>
Current portion of long-term debt................................ $ 52,091
-----------
Long-term debt, net of current portion........................... 85,692
-----------
Stockholders' equity:
Preferred Stock, $.0001 par value, 5,000,000 authorized; none
outstanding................................................... --
Common Stock, $.0001 par value, 495,000,000 shares authorized;
2,143,191 shares issued and outstanding at September 30,
1996.......................................................... 214
Paid-in capital in excess of par, common stock................. 1,981,380
Retained earnings (deficit).................................... (1,154,519)
-----------
Total stockholders' equity................................... 827,075
-----------
Total capitalization............................................. $ 964,858
===========
</TABLE>
24
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial information is qualified by reference to,
and should be read in conjunction with, the financial statements and related
notes of Advantage Marketing Systems, Inc. (formerly AMS, Inc.) and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere herein. The selected financial information
presented below is not necessarily indicative of the future results of
operations or financial performance of the Company. See "Risk Factors--Deficit
Working Capital; Future Operating Results." The selected financial information
as of and for the years ended December 31, 1994 and 1995, is derived from the
audited financial statements of Advantage Marketing Systems, Inc. (formerly
AMS, Inc.) contained elsewhere in this Prospectus. The selected financial
information presented as of and for the nine months ended September 30, 1995
and 1996, is derived from the unaudited financial statements of the Company,
which financial statements are contained elsewhere in this Prospectus. In the
opinion of management of the Company, the unaudited financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such information.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
---------------------- ----------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Programs.................... $2,564,542 $4,382,935 $3,155,934 $4,186,404
Promotional material........ 82,780 109,733 88,893 234,735
Other....................... 30,625 25,535 17,797 37,471
---------- ---------- ---------- ----------
Total revenues............ 2,677,947 4,518,203 3,262,624 4,458,610
---------- ---------- ---------- ----------
Cost and expenses:
Programs.................... 684,128 1,094,157 906,935 968,635
Promotional material........ 83,964 92,087 69,395 142,610
Selling..................... 1,289,616 2,201,510 1,495,084 2,235,879
General and administrative.. 515,158 857,743 593,273 804,410
Interest expense............ 25,075 22,998 20,335 19,422
---------- ---------- ---------- ----------
Total expenses............ 2,597,941 4,268,495 3,085,022 4,170,956
---------- ---------- ---------- ----------
Income before income taxes.... 80,006 249,708 177,602 287,654
Tax benefit................... -- -- -- 443,149
---------- ---------- ---------- ----------
Net income.................... $ 80,006 $ 249,708 $ 177,602 $ 730,803
========== ========== ========== ==========
Weighted average common shares
outstanding(1)............... 2,119,356 2,662,681 2,121,524 3,175,551
Net income per common share... $ .04 $ .09 $ .08 $ .23
CASH FLOW DATA:
Net cash provided by operating
activities................... $ 109,252 $ 337,241 $ 239,071 $ 310,375
Net cash used in investing
activities................... (63,646) (99,561) (4,071) (137,594)
Net cash used in financing
activities................... (45,606) (125,593) (76,044) (166,903)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.............................. $ 117,796 $ 283,341 $ 454,800
Working capital deficiency.................. (338,662) (170,734) (137,166)
Total assets................................ 176,969 532,996 1,504,733
Short-term debt............................. 138,655 111,048 52,091
Long-term debt.............................. 7,947 104,149 85,692
Stockholders' equity (deficiency)........... (287,436) (25,228) 827,075
</TABLE>
- --------
(1) Without giving effect to exercise of the Public Warrants pursuant to the
Warrant Modification Offer and exercise of the Rights pursuant to the
Rights Offering and the issuance of an additional 5,000 shares in
connection with the MMI Acquisition, and does not include 1,125,000 shares
reserved for issuance pursuant to the Stock Option Plan. See "Terms of the
Warrant Modification Offer," "Description of Securities--Common Stock--
Rights Offering," and "--Other Options and Warrants" and "Management--
Stock Option Plan."
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto of the Company and "Selected Financial
Information" appearing elsewhere in this Prospectus.
Effective December 11, 1995, Advantage Marketing Systems, Inc., a Delaware
corporation ("AMS Delaware") and the former parent of the Company, merged with
and into the Company, with the Company being the surviving corporation (the
"Merger Reincorporation"). Prior to the Merger Reincorporation, all operations
of AMS (Delaware) were conducted solely as a holding company of the Company as
its wholly-owned subsidiary, and AMS (Delaware) did not have any other
operating activities. Following the Merger Reincorporation, all operating
activities of AMS Delaware and the Company as its wholly-owned subsidiary,
were continued by the Company. The following discussion and analysis of
results of operations of the Company are the consolidated results of
operations of AMS Delaware and the Company prior to the Merger
Reincorporation, the predecessor of the Company. See "The Company--
Background--Merger Reincorporation."
RESULTS OF OPERATIONS
The following table sets forth selected results of operations for (i) the
fiscal years ended December 31, 1994 and 1995, which are derived from the
audited consolidated financial statements of the Company, and (ii) for the
nine months ended September 30, 1995 and 1996, which are derived from the
unaudited consolidated financial statements of the Company, which include, in
the opinion of management of the Company, all normal recurring adjustments
considered necessary for a fair statement of results for such periods. The
results of operations for the periods presented are not necessarily indicative
of the Company's future operations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- ----------------------------------------------
1994 1995 1995 1996
------------------ ------------------ ----------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ------------ ---------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Programs.............. $2,564,542 95.8% $4,382,935 97.0% $ 3,155,934 96.7% $ 4,186,404 93.9%
Promotional material.. 82,780 3.1 109,733 2.4 88,893 2.7 234,735 5.3
Other................. 30,625 1.1 25,535 .6 17,797 .6 37,471 .8
---------- ----- ---------- ----- ------------ ------- ------------ -------
Total revenues.......... 2,677,947 100.0 4,518,203 100.0 3,262,624 100.0 4,458,610 100.0
---------- ----- ---------- ----- ------------ ------- ------------ -------
Costs and Expenses
Programs.............. 684,128 25.6 1,094,157 24.2 906,935 27.8 968,635 21.7
Promotional material.. 83,964 3.1 92,087 2.1 69,395 2.2 142,610 3.3
Selling............... 1,289,616 48.2 2,201,510 48.7 1,495,084 45.8 2,235,879 50.1
General and
administrative....... 515,158 19.2 857,743 19.0 593,273 18.2 804,410 18.0
Interest Expense...... 25,075 .9 22,998 .5 20,335 .6 19,422 .4
---------- ----- ---------- ----- ------------ ------- ------------ -------
Total expenses.......... 2,597,941 97.0 4,268,495 94.5 3,085,022 94.6 4,170,956 93.5
---------- ----- ---------- ----- ------------ ------- ------------ -------
Income before taxes..... 80,006 3.0 249,708 5.5 177,602 5.4 287,654 6.5
Tax benefit............. -- -- -- -- -- -- 443,149 9.9
---------- ----- ---------- ----- ------------ ------- ------------ -------
Net income.............. $ 80,006 3.0% $ 249,708 5.5% $ 177,602 5.4% $ 730,803 16.4%
========== ===== ========== ===== ============ ======= ============ =======
</TABLE>
During 1994, 1995 and the nine months ended September 30, 1996, the Company
experienced increases in revenues from programs and net income compared to the
preceding year or period. The increases were
26
<PAGE>
principally the result of introduction of the Company's NewTrition Plan in
October 1993 and expansion of the Company's network of its independent sales
representatives and associates, which resulted in achieving substantial
increased sales volume of the NewTrition Plan. The Company expects to continue
to expand its network of independent sales representatives and associates,
which is in part dependent upon the market demand for the consumer products
and services offered by the Company through its various purchasing programs,
and such expansion should result in increased sales volume. However, there is
no assurance that increased sales volume will be achieved through expansion of
the selling network of the Company's programs, or that, if sales volume
increases, the Company will realize increased profitability due to the costs
and expenses associated with increased sales and the general and
administrative expenses.
Comparison of Nine Month Period Ended September 30, 1995 and 1996
During 1996, total revenues increased $1,195,986 (a 36.7 percent increase)
as compared to 1995. The increase was primarily attributable to the increased
sales volume of the Company's NewTrition Plan, which was introduced in October
1993, and expansion of the Company's network of its independent distributors.
At September 30, 1996, the Company had 9,214 "active" independent distributors
compared to 6,447 at September 30, 1995. A distributor is considered to be
"active" if he or she has made a product purchase from the Company within the
previous 12 months. During 1996, the Company made aggregate sales under its
NewTrition Plan of $4,146,316 to 7,016 distributors, compared to aggregate
sales in 1995 of $2,748,876 to 4,639 distributors. Promotional material
revenue increased $145,842 (a 164.1 percent increase) to $234,735 in 1996 from
$88,893 in 1995. In addition, other revenue increased by $19,674 (a 110.5
percent increase) from $17,797 in 1995 to $37,471 in 1996, as a result of
increased interest income during 1996.
Total costs and expenses of programs, promotional material and selling
during 1996 increased by $875,710 (a 35.4 percent increase) to $3,347,124 from
$2,471,414 during 1995. This increase was attributable to an increase of (i)
$61,700 (a 6.8 percent increase) in costs of programs and (ii) $740,795 (a
49.5 percent increase) in selling expenses, while promotional material
expenses increased $73,215 (a 105.5 percent increase). The costs and expenses
of programs, promotional materials and selling, as a percentage of program
sales revenue, increased from 78.3 percent during 1995 to 80.0 percent during
1996 due to an increase in selling costs as a percentage of program sale
revenue from 47.4 percent to 53.4 percent, offset by a decrease in the costs
of programs as a percentage of program sale revenue from 28.7 percent to 23.1
percent as a result of price reductions obtained from vendors on the program
costs associated with the Company's NewTrition Plan. The Company achieved a
net profit on sales of promotional materials of $92,125 during 1996 compared
to a net profit of $19,498 during 1995 as a result of the Company's curtailed
practice of providing promotional materials at reduced cost during special
promotions.
The Company's gross profit on program and promotional material revenues
(program and promotional material revenue less program costs, promotional
material costs and selling expenses) increased $300,602 (a 38.9 percent
increase) to $1,074,015 in 1996 from $773,413 in 1995. The gross profit on
program and promotional material revenues increased as a percentage of total
revenue from 23.7 percent in 1995 to 24.1 percent in 1996. The increase in the
Company's gross profit margin on program and promotional material revenues
resulted from the combination of a decrease in program and promotional
materials costs as a percentage of programs and promotional material revenues,
offset by an increase in selling costs and expenses as a percentage of
programs and promotional material revenues.
General and administrative expenses increased $211,137 (a 35.6 percent
increase) to $804,410 during 1996 from $593,273 during 1995. This increase was
principally attributable to the Company's administrative infra- structure
necessary to support increased levels of sales. The Company expanded its
administrative infra-structure by hiring seven additional employees.
Consequently, payroll and employee costs increased by $184,055 during 1996 as
the Company increased its number of employees from ten to 17. Interest expense
during 1996 decreased $913 (a 4.5 percent decrease) to $19,422 from $20,335
during 1995.
27
<PAGE>
Income before taxes increased $110,052 (a 62 percent increase) to $287,654
during 1996 from $177,602 during 1995. Income before taxes as a percentage of
total revenue increased from 5.4 percent during 1995 to 6.5 percent during
1996.
Net income increased $553,201 (a 311.5 percent increase) to $730,803 during
1996 from $177,602 during 1995. Net income as a percentage of total revenue
increased from 5.4 percent during 1995 to 16.4 percent during 1996. This
increase was primarily the result of the Company recording the tax benefits of
its net operating loss carryforwards for income tax purposes at September 30,
1996. The Company has net operating loss carryforwards for income tax purposes
at September 30, 1996 totaling approximately $1,384,841, which will begin to
expire in 2003. The valuation allowance recorded at December 31, 1995 was
reversed at September 30, 1996 as management has determined that it is more
likely than not that a tax benefit will be realized from the related deferred
tax assets.
Comparison of Fiscal 1994 and 1995
During 1995, total revenues increased $1,840,256 (a 68.7 percent increase)
as compared to 1994. The increase was principally attributable to the
increased sales volume of the Company's NewTrition Plan, which was introduced
in October 1993, and expansion of the Company's network of its independent
sales representatives and associates. During 1995 the Company made aggregate
sales under its NewTrition Plan of $4,064,216 to 5,783 distributors, compared
to aggregate sales in 1994 of $1,817,947 to 2,650 distributors. Promotional
material revenue increased $26,953 (a 32.6 percent increase) to $109,733 in
1995 from $82,780 in 1994. In addition, other revenue decreased by $5,090 (a
16.6 percent decrease) from $30,625 in 1994 to $25,535 in 1995, as a result of
a special promotion during 1994 that was not repeated in 1995.
Total costs and expenses of programs, promotional material and selling
during 1995 increased by $1,330,046 (a 64.6 percent increase) to $3,387,754
from $2,057,708 during 1994. This increase was attributable to an increase of
(i) $410,029 (a 59.9 percent increase) in costs of programs and (ii) $911,894
(a 70.7 percent increase) in selling expenses, while promotional material
expenses increased $8,123 (a 9.7 percent increase). The costs and expenses of
programs, promotional materials and selling, as a percentage of program sales
revenue, decreased from 80.2 percent during 1994 to 77.3 percent during 1995
which resulted from a decrease in the costs of programs as a percentage of
program sale revenue from 26.7 percent to 25 percent due to increased program
costs associated with the Company's NewTrition Plan, offset by a decline in
selling costs as a percentage of program sale revenue from 50.3 percent to
50.2 percent. The Company achieved a net profit on sales of promotional
materials of $17,646 during 1995 compared to a net loss of $1,184 during 1994
as a result of the Company's curtailed practice of providing promotional
materials at reduced cost during special promotions periods.
The Company's gross profit on program and promotional material revenues
(program and promotional material revenue less program costs, promotional
material costs and selling expenses) increased $515,308 (an 87.4 percent
increase) to $1,104,914 in 1995 from $589,614 in 1994. The gross profit on
program and promotional material revenues increased as a percentage of total
revenue from 22 percent in 1994 to 24.5 percent in 1995. The increase in the
Company's gross profit margin on program and promotional material revenues
resulted from the combination of an increase in program and promotional
materials costs as a percentage of programs and promotional material revenues,
offset by a decrease in selling costs and expenses as a percentage of programs
and promotional material revenues.
General and administrative expenses increased $342,585 (a 66.5 percent
increase) to $857,743 during 1995 from $515,158 during 1994. This increase was
attributable to the Company's administrative infra-structure necessary to
support increased levels of sales. The Company expanded its administrative
infra-structure by hiring eight additional employees. Consequently, payroll
and employee costs increased by $208,169 during 1995 as the Company increased
its number of employees from six to 14. The balance of the increase resulted
from increases in supplies, postage and other operating expenses associated
with the increased sales levels. Interest expense during 1995 decreased $2,077
(an 8.3 percent decrease) to $22,998 from $25,075 during 1994.
28
<PAGE>
Net income increased $169,702 (a 212.1 percent increase) to $249,708 during
1995 from $80,006 during 1994. Net income as a percentage of total revenue
increased from three percent during 1994 to 5.5 percent during 1995.
Quarterly Results of Operations
The Company's operations appear not to be significantly affected by seasonal
trends. No pattern of seasonal fluctuations exists due to the growth patterns
that the Company is currently experiencing. However, there can be no assurance
that once the Company's current growth patterns peak that the company will not
be subject to seasonal fluctuations in operations.
Income Taxes
The Company's deferred tax assets relate primarily to net operating loss
carryforwards for income tax purposes at September 30, 1996 totaling
approximately $1,384,841, which will begin to expire in 2003. During 1995, the
Company's deferred tax assets and valuation allowance were decreased by
approximately $120,700 and $116,200, respectively.
On a regular basis, management evaluates all available evidence, both
positive and negative, regarding the ultimate realization of the tax benefits
of its deferred tax assets. Based upon the historical trend of increasing
earnings management has concluded that it is more likely than not that a tax
benefit will be realized from its deferred tax assets and therefore eliminated
the previously recorded valuation allowance for its deferred tax assets.
Elimination of the valuation allowance resulted in a deferred tax asset at
September 30, 1996, of $443,149 and a corresponding tax benefit for the
quarter ending September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a deficit working capital of approximately $137,166 at
September 30, 1996, as compared to a deficit of approximately $170,700 at
December 31, 1995. Of this $137,166 deficit, approximately $17,658 represents
amounts owed to the Company's chief executive officer and major stockholder
which is classified as a current liability; however, the Company makes
payments on this loan only when there is sufficient working capital.
Management believes that cash flows from operations will be sufficient to fund
its working capital needs over the next twelve months. During the nine months
ended September 30, 1996, net cash provided by operating activities was
$310,375 of which $137,594 was used in investing activities, and $166,903 was
used in financing activities (consisting primarily of repayments to the
Company's Chief Executive Officer and major stockholder and payment of
deferred offering costs). The Company had a net increase in cash during this
period of $5,878. The Company's working capital needs over the next twelve
months consist primarily of administrative and operating overhead. For the
three months ended September 30, 1996, the Company's administrative and
operating overhead averaged approximately $100,000 per month. The Company
anticipates that this level of administrative and operating overhead will
continue over the next twelve months.
At September 30, 1996, and December 31, 1995, the balance due on a short-
term loan from the Company's Chief Executive Officer and major shareholder was
$17,658 and $81,929, respectively. During 1995, the Company combined interest
payable of approximately $52,000 with the principal due under the loan and
began making weekly interest and principal payments of $1,500. During the nine
months ended September 30, 1996, the Company did not receive any advances
under the loan, while during 1995, the Company received aggregate advances of
$31,963 under the loan. During the nine months ended September 30, 1996 and
the year ended December 31, 1995, the Company made principal payments of
$64,271 and $127,615, respectively, thereon to the Company's Chief Executive
Officer and major shareholder. The loan is unsecured, due on demand and bears
interest at 12 percent per annum, and as of the date of this Prospectus the
Company is making weekly principal and interest payments of $1,500. See
"Certain Transactions."
The Company made non-interest bearing 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
29
<PAGE>
$22,000, and $87,684 during the nine months ended September 30, 1996, and the
year ended December 31, 1995. During the nine months ended September 30, 1996,
JHA made repayments of $3,040. JHA made repayments of these advances of
$67,401 during the fiscal year ended December 31, 1995. Furthermore, effective
June 30, 1996, the Company adopted a policy to not make any further advances
to JHA, and JHA executed a promissory note payable to the Company in the
principal amount of $73,964, bearing interest at eight percent per annum and
payable in 60 installments of $1,499 per month. See "Certain Transactions."
The Company's primary source of liquidity is net cash provided by operating
activities. Other than loans made available to the Company by its Chief
Executive Officer and major shareholder, the Company does not have any outside
liquidity sources. As of September 30, 1996, the Company did not have any
material commitments for capital expenditures.
In the event that the Company does not obtain any net proceeds from this
offering and the Rights Offering, it is anticipated that the Company will be
able to continue to operate on internally generated cash. During the nine
months ended September 30, 1996, the Company had an average monthly positive
cash flow from operating activities of approximately $34,000, and an average
monthly net positive cash flow of approximately $650, after investing and
financing activities.
In connection with these offerings the Company has incurred certain direct
costs consisting primarily of legal, accounting and filing fees. These
deferred offering costs totaled approximately $138,000 and $53,000 at
September 30, 1996, and December 31, 1995, respectively, and are included in
other assets. During the three months ended September 30, 1996, the Company
wrote off $15,000 of these costs which were determined to no longer have
value.
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 multi-level marketer of various third-
party manufactured nutritional supplement products. Pursuant to the Purchase
Agreement and in connection with the MMI Acquisition, the Company issued and
delivered to the shareholders of MMI 20,000 shares of common stock. In
addition, the Company agreed to issue and deliver an additional 5,000 shares
of common stock to the shareholders of MMI on or before February 15, 1997,
pending determination of certain liabilities.
In connection with the MMI Acquisition, the excess of the purchase price of
$176,103, which includes $56,103 of transaction costs, over a negative $3,059
fair market value of assets of MMI, net of liabilities, has been allocated
$119,162 to goodwill and $60,000 to the covenant not to compete. Goodwill and
the covenant not to compete will be amortized over a seven and four and one-
half year period, respectively. The fair market value of the assets of MMI,
net of liabilities, declined from $16,690 to a negative $3,059 between March
31, 1996 and May 31, 1996.
EFFECT OF INFLATION
As the costs of products and services and other expenses of the Company have
increased, the Company has been generally able to increase the selling prices
of the products and services marketed by the Company; therefore, in the view
of management, inflation has not had a significant effect on gross margins. In
periods of high inflation, the costs and expenses of the products and services
marketed by the Company could adversely affect the Company's profitability.
30
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
Set forth below are certain unaudited pro forma consolidated statements of
operations of the Company, presenting the pro forma effects of the MMI
Acquisition, assuming the MMI Acquisition occurred at the beginning of each
period for which results of operations are presented. The MMI Acquisition was
accounted for using the purchase method of accounting. The information
presented below is derived from, and should be read in conjunction with, the
financial statements of the Company and MMI presented elsewhere in this
Prospectus. The pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the results of operations that would
have been achieved if the transactions included in the pro forma adjustments
had been consummated in accordance with the assumptions set forth below, nor
is it necessarily indicative of future operating results.
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ADVANTAGE MIRACLE
MARKETING MOUNTAIN
SYSTEMS, INC. INTERNATIONAL, INC.
DECEMBER 31, DECEMBER 31, PRO FORMA PRO FORMA
1995 1995 ADJUSTMENTS COMBINED
------------- ------------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Programs.............. $4,382,935 $ 277,366 $ -- $4,660,301
Promotional material.. 109,733 -- -- 109,733
Other................. 25,535 -- -- 25,535
---------- --------- -------- ----------
Total revenues...... 4,518,203 277,366 -- 4,795,569
---------- --------- -------- ----------
Costs and Expenses:
Programs.............. 1,094,157 103,217 -- 1,197,374
Promotional material.. 92,087 -- -- 92,087
Selling............... 2,201,510 145,650 -- 2,347,160
General and
administration....... 857,743 157,725 30,356 (a) 1,045,824
Interest expense...... 22,998 1,403 -- 24,401
---------- --------- -------- ----------
Total expenses...... 4,268,495 407,995 30,356 4,706,846
---------- --------- -------- ----------
Net Income (Loss)... $ 249,708 $(130,629) $(30,356) $ 88,723
========== ========= ======== ==========
Weighted average common
shares outstanding..... 2,662,681 20,000 2,682,681
========== ======== ==========
Net income per common
share.................. $ .09 $ .03
========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Statements.
31
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
MIRACLE
ADVANTAGE MOUNTAIN
MARKETING INTERNATIONAL, INC.
SYSTEMS, INC. PRE-ACQUISITION
FOR THE NINE PERIOD
MONTHS ENDED FOR THE FIVE
SEPTEMBER 30, MONTHS ENDED PRO FORMA PRO FORMA
1996 MAY 31, 1996 ADJUSTMENTS COMBINED
------------- ------------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Programs.............. $4,186,404 $205,112 $ -- $4,391,516
Promotional material.. 234,735 -- -- 234,735
Other................. 37,471 -- -- 37,471
---------- -------- --------- ----------
Total revenues...... 4,458,610 205,112 -- 4,663,722
---------- -------- --------- ----------
Costs and Expenses:
Programs.............. 968,635 54,743 -- 1,023,378
Promotional material.. 142,610 -- -- 142,610
Selling............... 2,235,879 129,758 -- 2,365,637
General and
administration....... 804,410 49,188 12,648(a) 866,246
Interest expense...... 19,422 2,110 -- 21,532
---------- -------- --------- ----------
Total expenses...... 4,170,956 235,799 12,648 4,419,403
---------- -------- --------- ----------
Income (Loss) Before
Taxes.................. 287,654 (30,687) (12,648) 244,319
Tax Benefit............. 443,149 -- -- 443,149
---------- -------- --------- ----------
Net Income (Loss)....... $ 730,803 $(30,687) $ (12,648) $ 687,468
========== ======== ========= ==========
Weighted average common
shares outstanding..... 3,175,551 20,000 3,195,551
========== ========= ==========
Net income per common
share.................. $ .23 $ .22
========== =========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Statements.
32
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS FOR PRESENTATION
The pro forma balance sheet and statement of income present the pro forma
effects of the acquisition by the Company of the issued and outstanding
capital stock of Miracle Mountain International, Inc., a Colorado corporation
("MMI"), and MMI became a wholly-owned subsidiary of the Company (the "MMI
Acquisition"), pursuant to a Stock Purchase Agreement with an effective date
of May 31, 1996, (the "Purchase Agreement"). The MMI Acquisition was accounted
for under the purchase method of accounting. MMI is a multi-level marketer of
various third-party manufactured nutritional supplement products. Pursuant to
the Purchase Agreement and in connection with the MMI Acquisition, the Company
issued and delivered to the shareholders of MMI 20,000 shares of Common Stock.
In addition, the Company agreed to issue and deliver an additional 5,000
shares of Common Stock to the shareholders of MMI on or before February 15,
1997, pending determination of certain liabilities.
The accompanying unaudited pro forma statement of income is presented
assuming the MMI Acquisition occurred or was consummated on the first day of
the period presented. The historical information presented for the Company and
MMI as of December 31, 1995, is derived from the audited financial statements
of the Company and MMI as of such date. MMI started in business in 1995.
During the first three months of 1995 MMI primarily paid start-up expenses
relating to organization and recruitment of sales associates. MMI did not have
significant sales until April 1995. Consequently, MMI has only one year of
financial statements.
The pro forma financial information presented in the unaudited pro forma
financial statements is not necessarily indicative of the results of
operations that would have been achieved had the operations been those of a
single corporate entity. The results of operations presented in the unaudited
pro forma statement of income are not necessarily indicative of the
consolidate results of future operations of the Company following consummation
of the MMI Acquisition.
2. ADJUSTMENTS
The accompanying unaudited pro forma consolidated financial statements have
been adjusted to record and give effect to the following:
(a) The excess of the purchase price of $176,103, which includes $56,103
of transaction costs, over the negative $3,059 fair market value of the
assets of MMI, net of liabilities, has been allocated $119,162 to goodwill
and $60,000 to the covenant not to compete. Goodwill and the covenant not
to compete will be amortized over a seven year and four and one-half year
period, respectively. The goodwill amortization for the year ended December
31, 1995, and the five months ended May 31, 1996, was $17,023 and $7,093,
respectively. Covenant amortization for the year ended December 31, 1995,
and for the five months ended May 31, 1996, was $13,333 and $5,555,
respectively.
3. NET INCOME PER SHARE
Pro forma per share calculations for the Company are based upon the number
of shares of Common Stock to be outstanding after giving effect to the MMI
Acquisition.
33
<PAGE>
PUBLIC WARRANT REDEMPTION
Pursuant to this Prospectus, the Company is notifying the holders (the
"Warrant Holders") of the Class A Common Stock Purchase Warrants (the "Class A
Warrants") and the Class B Common Stock Purchase Warrants (the "Class B
Warrants") as of January 31, 1997 (the "Record Date"), of the election of the
Company to redeem (the "Warrant Redemption") the Class A Warrants and Class B
Warrants (collectively the "Public Warrants") for $.0008 per warrant (the
"Redemption Price") at 5:00 p.m., Central Standard Time, on March 17, 1997
(the "Redemption Date"). Each of the Class A Warrants and Class B Warrants is
exercisable for the purchase of one share of Common Stock for $6.00 or $8.00,
respectively (the "Warrant Exercise Price"), on or before expiration of the
Redemption Date, without giving effect to the Warrant Modification Offer. See
"Terms of the Warrant Modification Offer." Pursuant to the Warrant
Modification Offer, during the Special Exercise Period, each Public Warrant
will be exercisable to purchase one Unit (consisting of one share of Common
Stock and one 1997-A Warrant) for $6.00, on or before the Redemption Date. The
Redemption Date may be extended by the Company to a date not later than April
30, 1997. See "Terms of the Warrant Modification Offer--Expiration;
Extensions; Termination; Amendments."
The Public Warrants may only be exercised by a Warrant Holder in the event
the Registration Statement of which this Prospectus is a part is effective
with the Securities and Exchange Commission and the Units (or Common Stock and
1997-A Warrants comprising the Units) are qualified for sale in the state of
residence of the Warrant Holder. See "Risk Factors--Securities Laws
Restrictions on Exercise of Warrants," "Terms of Warrant Modification Offer--
Acceptance of Public Warrants; Delivery of Units," and "Description of
Securities--Public Warrants." Subject to the foregoing, the Class A Warrants
and Class B Warrants are exercisable at any time by the Warrant Holders prior
to the Redemption Date by delivery of the warrant certificate evidencing the
Public Warrant to U.S. Stock Transfer Corporation (the "Warrant Agent") at
1745 Gardena Avenue, Glendale, California 91204, with the "Form of Election to
Purchase" on the reverse of the certificate duly completed and signed,
accompanied with payment of the Warrant Price in cash or by check payable to
the order of the Company. See "Terms of the Warrant Modification Offer--How to
Exercise."
PURPOSES OF THE WARRANT MODIFICATION OFFER
The purposes of the Warrant Modification Offer are to (i) encourage the
exercise of the Public Warrants prior to redemption, (ii) strengthen the
Company's capital structure by increasing stockholders' equity and current
assets, and (iii) provide the Company greater financial flexibility. The net
proceeds of this offering and the Warrant Modification Offer will give the
Company greater financial flexibility in that the Company otherwise would be
required to rely on debt or other sources of capital to expand its sales and
marketing activities. See "Use of Proceeds." It is the Company's belief that
the availability of the 1997-A Warrant and the reduction of the exercise price
of the Class B Warrants to $6.00 will induce Class A and B Warrant holders to
exercise their Public Warrants as opposed to receiving $.0008 per Warrant upon
redemption.
Concurrently with this offering and the Warrant Modification Offer, the
Company is distributing the Rights to its shareholders and offering 2,148,191
Units pursuant to the Rights Offering. See "Description of Securities--Common
Stock--Rights Offering." In the event the Public Warrants are exercised in
full the net proceeds to the Company, after deduction of $100,000 offering
costs, will be $6,202,820, and in the event the Rights are exercised in full
pursuant to the Rights Offering, the net proceeds to the Company, after
deduction of $100,000 offering costs will be $14,507,699. See "Use of
Proceeds." However, there is no assurance that any of the Public Warrants will
be exercised pursuant to the Warrant Modification Offer or that any of the
Rights will be exercised.
34
<PAGE>
TERMS OF THE WARRANT MODIFICATION OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions
herein set forth, to reduce the Warrant Exercise Price of the Class B Warrants
to $6.00 from the current $8.00 exercise price during the period commencing on
the date of this Prospectus until the Redemption Date (5:00 p.m. Central
Standard Time on March 17, 1997, which may be extended by the Company to a
date not later than April 30, 1997 (the "Special Exercise Period"). In
addition, the Company will issue as soon as practicable after expiration of
the Special Exercise Period (the "Expiration Date") one Unit (one share of
Common Stock and one 1997-A Warrant) for each Public Warrant effectively
exercised, and not withdrawn, on or prior to the Redemption Date, subject to
certain conditions as set forth herein. The Company's obligation to consummate
the Warrant Modification Offer is not subject to the exercise of any minimum
number of Public Warrants. All Public Warrants properly tendered for exercise,
and not withdrawn, on or prior to the Expiration Date, will be accepted by the
Company upon the terms and subject to the conditions set forth herein.
Those Public Warrants not exercised on or prior to the Redemption Date will
be redeemed on the Redemption Date for $.0008 per warrant. No dissenters'
rights of appraisal exist with respect to the Warrant Modification Offer.
PLAN OF DISTRIBUTION
The Units are being offered on a best efforts basis by the Company and its
officers and directors, without commissions, selling fees or direct or
indirect remuneration. From the proceeds of the Warrant Modification Offer and
the offering, the Company will pay the costs incurred with respect to the
offering, which are estimated to be $100,000. Offers will be limited to the
holders of the Public Warrants residing in those states in which the Units are
registered or qualified to be offered and sold.
Holders of the Public Warrants will not be required to pay any brokerage
commissions or fees with respect to the exercise of their Public Warrants. The
Company will pay all charges and expenses of the Warrant Agent. See "--
Acceptance of Public Warrants; Delivery of Units," below.
EXPIRATION; EXTENSIONS; TERMINATION; AMENDMENTS
The Warrant Modification Offer will expire on the Redemption Date (at 5:00
p.m., Central Standard Time, on March 17, 1997), unless and until the Company
extends the Redemption Date (to a date not later than April 30, 1997), in
which event the Warrant Modification Offer will expire at the latest time and
date to which the Redemption Date is extended. The Special Exercise Period
will commence on the date of this Prospectus and will expire on the Redemption
Date. The Company expressly reserves the right at any time and from time to
time, regardless of whether or not any of the conditions specified in
"Conditions of the Warrant Modification Offer" below have been satisfied, (i)
to extend the Redemption Date, which will also extend the Special Exercise
Period during which the Warrant Modification Offer may be accepted and the
Public Warrants may be exercised by giving oral or written notice to the
Warrant Agent and by making a public announcement of such extension or (ii) to
amend the Warrant Modification Offer in any respect not materially adverse to
the Warrant Holders by making public announcement of such amendment. The
Company's decision regarding the advisability of extending the Redemption Date
(and effectively extending the Special Exercise Period) will be based upon
factors and considerations that exist and that the Company deems material and
appropriate at that time. As of the date of this Prospectus, such factors and
considerations are undeterminable. There can be no assurance that the Company
will exercise its right to extend or amend the Warrant Modification Offer and
there is no limit on the number of times the Company may extend the Redemption
Date.
Furthermore, the Company reserves the right, in its sole discretion, in the
event any of the conditions set forth below under "--Conditions of the Warrant
Modification Offer" are not met or waived by the Company and so long as the
Public Warrants have not theretofore been accepted for exercise pursuant to
the Warrant
35
<PAGE>
Modification Offer, to delay (except as otherwise required by applicable law)
acceptance for exercise of any Public Warrants exercised pursuant to the
Warrant Modification Offer or to terminate the Warrant Modification Offer and
not accept for exercise any such Public Warrants. Any extension, termination
or amendment of the Warrant Modification Offer will be followed as promptly as
practicable by notification thereof in a manner reasonably calculated to
inform the Warrant Holders of such extension, termination or amendment.
Without limiting the manner in which the Company may choose to make any public
announcement, the Company will not, unless otherwise required by applicable
law, have any obligation to publish, advertise or otherwise communicate any
such public announcement other than by making a release to the Dow Jones News
Service. In the case of an extension of the Redemption Date and the Warrant
Modification Offer, Securities and Exchange Commission regulations require a
public announcement of such extension no later than 9:00 a.m., New York City
time, on the next business day after the previously scheduled Redemption Date.
In the event the Company decides to waive, modify or amend a material
provision of the Warrant Modification Offer, it may do so at any time or from
time to time, provided that it gives notice thereof in the manner specified
above and extends the Redemption Date and the Warrant Modification Offer to
the extent required by the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). With respect to a change in the Warrant Exercise Price of the
Public Warrants and/or the Units issuable upon exercise of the Public
Warrants, Rule 13e-4(f)(1) under the Exchange Act generally requires that a
tender offer remain open for at least 10 business days from the date that
notice of such change is first published or sent or given to the Warrant
Holders. The minimum period during which an offer must remain open following
other material changes in the terms of the offer or information concerning the
offer will depend upon the facts and circumstances, including the relative
materiality of the change in the terms or information. Any amendment to the
Warrant Modification Offer will apply to all Public Warrants tendered for
exercise pursuant thereto, regardless of when or in what order the Public
Warrants are tendered. The term "business day" shall mean a day other than
Saturday, Sunday or a federal holiday and shall consist of the time period
from 12:01 a.m. through 12:00 midnight Eastern Time.
CONDITIONS OF THE WARRANT MODIFICATION OFFER
Notwithstanding any other provisions of the Warrant Modification Offer, the
Company may cancel, modify or terminate the Warrant Modification Offer and is
not required to accept for exercise any Public Warrants exercised pursuant
thereto if, prior to the Redemption Date:
(i) there shall be in effect any injunction prohibiting, restricting or
delaying consummation of the Warrant Modification Offer;
(ii) there shall have occurred any general suspension of trading in, or
limitation of prices for, securities in the over-the-counter markets; or
(iii) any statute, rule or regulation shall have been enacted, or any
action shall have been taken by any governmental authority, which would
prohibit or materially restrict or delay consummation of the Warrant
Modification Offer.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
conditions or may be waived by the Company in whole or in part at any time and
from time to time, in its sole discretion. Each right of the Company in
connection with the foregoing conditions will be deemed an ongoing right that
may be asserted any time and from time to time. The failure by the Company, at
any time, to exercise its rights with respect to any of these conditions will
not be deemed a waiver of any such conditions. Any determination by the
Company concerning applicability of the conditions to the events set forth
herein will be final and binding upon all parties.
The Company expressly reserves the right to terminate or amend the Warrant
Modification Offer and not accept for exercise any Public Warrants pursuant to
the Warrant Modification Offer if any of the foregoing conditions are not
satisfied. The Company confirms that its reservation of the right to delay
acceptance of tendered Public Warrants is subject to the provisions of Rule
13e-4(f)(5) and Rule 14e-1(c) under the Exchange
36
<PAGE>
Act, which provide that the Company shall either deliver the Units or return
the tendered Public Warrants promptly after the termination or withdrawal of
the Warrant Modification Offer.
ADVANTAGES AND DISADVANTAGES OF PUBLIC WARRANT EXERCISE
Exercise of the Public Warrants prior to the Redemption Date by the Warrant
Holders may have both significant adverse and advantageous consequences for
Warrant Holders. The adverse consequences to the Warrant Holders who do not
exercise their Public Warrants include (i) the Public Warrants ceasing to be
issued and outstanding, (ii) the Public Warrants becoming worthless resulting
in a loss to the Warrant Holders to the extent of their investments in the
Public Warrants in excess of the $.0008 Redemption Price per Public Warrant,
(iii) loss of any potential appreciation in the Public Warrants as a result of
an increase in the trading market value of the Units purchasable upon exercise
of the Public Warrants pursuant to the Warrant Modification Offer, and (iv)
loss of the ability to sell the Public Warrants as a tradable security. The
advantageous consequences for those Warrant Holders that fail to exercise the
Public Warrants will be entitlement to receipt of the $.0008 Redemption Price
per Public Warrant. See "Public Warrant Redemption."
The advantageous consequences of exercise of the Public Warrants and receipt
of the Units include (i) acquisition and receipt of equity ownership of the
Company represented by the shares of Common Stock and the 1997-A Warrants
(each of which will entitle the holder to purchase an additional share of
Common Stock at an exercise price of $12.00, subject to adjustment in certain
events and possible redemption by the Company at $.0001) comprising the Units,
(ii) participation in future growth of the Company and any potential market
value appreciation of the Common Stock and, if a market develops, the 1997-A
Warrant, and (iii) receive any investment liquidity that the Common Stock has
or may have in the future as well as any such liquidity the 1997-A Warrant may
come to have in the event a public market develops. Although there may be
advantages offered by exercise of the Public Warrants, the Warrant Holders
should also understand and be aware that (i) exercise of the Public Warrants
will constitute an additional investment requiring payment of the $6.00 per
Unit Exercise Price of the Public Warrants in order to receive the Units (and
the Common Stock and 1997-A Warrants comprising the Units), (ii) there are
various risks associated with such investment as disclosed in this Prospectus
(see "Risk Factors"), (iii) there is no assurance that a market will develop
for the 1997-A Warrants, (iv) the issuance of Units, Rights Offering Units,
Common Stock, and 1997-A Warrants pursuant to the Warrant Modification Offer
and the Rights Offering, and the exercise of outstanding stock options and
other warrants may have an adverse effect upon the public trading price of the
Common Stock, and (v) the Common Stock and, if a market develops, the 1997-A
Warrants are or will be traded in the over-the-counter market which typically
is volatile in nature (see "Risk Factors--Over-the-Counter Market; Penny Stock
Trading Rules" and "Price Range of Common Stock and Dividends--Penny Stock
Trading Rules"). See "Risk Factors" and "Description of Securities--Common
Stock--Rights Offering," "--1997-A Warrants" and "--Other Options and
Warrants."
HOW TO EXERCISE
The acceptance by a Warrant Holder of the Warrant Modification Offer
pursuant to one of the procedures set forth below will constitute an agreement
between the Warrant Holder and the Company in accordance with the terms and
subject to the conditions set forth herein.
For effective exercise, the "Form of Election To Purchase" on the reverse
side of each Public Warrant certificate must be completed and executed as
indicated thereon, and the Public Warrant must be accompanied by payment of
the aggregate Warrant Exercise Price in cash or check made payable to
Advantage Marketing Systems, Inc., together with any other required documents.
The warrant certificate and payment must be transmitted to and received by the
Warrant Agent at its address set forth on the back cover of this Prospectus on
or before the Redemption Date, if the Public Warrant is being exercised.
However, in lieu of the foregoing, a holder may either (i) tender the Public
Warrants to be exercised pursuant to the procedure for book-entry tender set
forth below (and a confirmation of such book-entry tender must be received by
the Warrant Agent on or before the Redemption Date) or (ii) comply with the
guaranteed delivery procedure set forth below. The
37
<PAGE>
beneficial holders of Public Warrants that are held by or registered in the
name of a broker, dealer, commercial bank, trust company or other nominee or
custodian are urged to contact such entity promptly if they wish to exercise
the Public Warrants. The Public Warrants certificates, together with the cash
or check and any other required documents to be delivered, should be delivered
only by hand or by courier, or transmitted by mail, and only to the Warrant
Agent and not to the Company. The method of delivery of the Public Warrants
and all other required documents to the Warrant Agent is at the election and
risk of the Warrant Holder, but if such delivery is by mail it is suggested
that the Warrant Holder use properly insured, registered mail with return
receipt requested, and that the mailing be made sufficiently in advance of the
Redemption Date to permit delivery to the Warrant Agent prior to the
Redemption Date.
Each signature of the Warrant Holders on the "Form of Election to Purchase"
of a Public Warrant certificate must be guaranteed by a member firm of any
registered national securities exchange or of the National Association of
Securities Dealers, Inc., or by a commercial bank or trust company having an
office or correspondent in the United States (collectively, "Eligible
Institutions").
In the event the certificates for the Public Warrants are registered in the
name of a person other than the person executing the "Form of Election to
Purchase" of such Public Warrants, or if Public Warrants that are not accepted
for exercise are to be returned to a person other than the registered owner,
then the "Assignment" on the reverse side of the Public Warrant certificates
must be endorsed or accompanied by an appropriate instrument of transfer,
signed exactly as the name of the registered owner appears on the
certificates, with the signatures on the "Assignment" or instruments of
transfer guaranteed by an Eligible Institution.
Book Entry Tender Procedure. Within 10 business days after the date hereof,
the Warrant Agent will establish accounts with respect to the Public Warrants
at the Depository Trust Company (the "Book-Entry Transfer Facility") for
purposes of the Warrant Modification Offer. Any financial institution that is
a participant in a Book-Entry Transfer Facility's system may make book-entry
delivery of the Public Warrants by causing the Book-Entry Transfer Facility to
transfer the same into the Warrant Agent's account at such Book-Entry Transfer
Facility in accordance with such Book-Entry Transfer Facility's procedure for
such transfer and to confirm such transfer to the Warrant Agent in writing.
Any tender of Public Warrants to be effected through book-entry delivery at a
Book-Entry Transfer Facility must have either (i) the Public Warrant executed
by the holder of record, together with signature guarantees, and delivered to
a Book-Entry Transfer Facility and the cash or check, together with all other
documents required, transmitted to and received by the Warrant Agent at its
address set forth on the back cover of this Prospectus on or before the
Redemption Date or (ii) complied with the guaranteed delivery procedure set
forth below. Delivery of documents to a Book-Transfer Facility in accordance
with such Book-Entry Transfer Facility's procedure does not constitute
delivery to the Warrant Agent.
Guaranteed Delivery Procedure. In the event a Warrant Holder desires to
exercise such Public Warrants (pursuant to the Warrant Modification Offer or
otherwise) but is unable either to deliver his certificates, the cash or check
and all other required documents to the Warrant Agent on or before the
Redemption Date or to comply with the procedure for book-entry tender on a
timely basis, such Public Warrants may nevertheless be tendered for exercise,
provided that all of the following conditions are satisfied:
(i) such tenders are made by or through an Eligible Institution;
(ii) prior to the Redemption Date, a properly completed and duly executed
Notice of Guaranteed Delivery (by telegram, telex, facsimile transmission,
mail or hand delivery) setting forth the name and address of the Warrant
Holders and the number of Public Warrants exercised, stating that the
exercise is being made thereby and guaranteeing that within three New York
Stock Exchange trading days after the Redemption Date, the Public Warrants
and the cash or check, together with all other documents required, will be
deposited by the Eligible Institution with the Warrant Agent; and
(iii) the certificates for all exercised Public Warrants in proper form
for transfer (or a written confirmation of book-entry transfer into the
Warrant Agent's account at a Book-Entry Transfer Facility as described
above) and the cash or check, together with all other documents required,
are received by the Warrant Agent within three New York Stock Exchange
trading days after the Expiration Date or the Redemption Date.
38
<PAGE>
The issuance of Units (the Common Stock and the 1997-A Warrants) in exchange
for Public Warrants exercised will be made only after timely receipt by the
Warrant Agent of the certificates for such Public Warrants (or a confirmation
of a book-entry transfer of such Public Warrants into the Warrant Agent's
account at one of the Book-Entry Transfer Facilities as described above) and
the cash or check, together with all other documents required. If less than
the entire number of Public Warrants evidenced by a submitted certificate are
to be exercised, the tendering Warrant Holder should indicate on the "Form of
Election to Purchase," appearing on the reverse side of the certificate, the
number of Public Warrants being tendered for exercise.
WITHDRAWAL RIGHTS
The Public Warrants tendered pursuant to the Warrant Modification Offer may
be withdrawn, subject to the procedures described below, at any time before
the Redemption Date. After the Redemption Date, such tenders will be
irrevocable, except that they may be withdrawn after March 19, 1997, unless
theretofore accepted for exercise as provided in this Prospectus. In the event
the Company (i) extends the Redemption Date and the Special Exercise Period
during which the Warrant Modification Offer is open, (ii) is delayed in its
acceptance of Public Warrants for exercise or (iii) is unable to accept Public
Warrants for exercise pursuant to the Warrant Modification Offer for any
reason, in such event, without prejudice to the Company's rights under the
Warrant Modification Offer, the Warrant Agent may, on behalf of the Company,
retain all Public Warrants tendered, and such Public Warrants may not be
withdrawn except as otherwise provided herein, subject to Rule 13e-4(f)(5) and
Rule 14e-1(c) under the Exchange Act.
To be effective, a written, telegraphic or facsimile transmission of a
notice of withdrawal must (i) be timely received by the Warrant Agent at its
address specified on the back cover page of this Prospectus before the Warrant
Agent receives notice of acceptance by the Company of the Public Warrants,
(ii) specify the name of the person who tendered the Public Warrants, (iii) if
the Public Warrants have been deposited with or otherwise identified to the
Warrant Agent, contain the description of the Public Warrants to be withdrawn
and indicate the certificate numbers shown on the certificates evidencing such
Public Warrants (except in the case of book-entry tenders) and (iv) be
executed by the holder of the Public Warrants in the same manner as the
original Public Warrant or be accompanied by evidence satisfactory to the
Company that the person withdrawing the tender has succeeded to the beneficial
ownership of the Public Warrants. If the Public Warrants have been tendered
for exercise pursuant to the book-entry tender, a notice of withdrawal must
specify, in lieu of certificate numbers, the name and account number at a
Book-Entry Transfer Facility to be credited with the withdrawn Public
Warrants.
VALIDITY OF EXERCISE
All questions with respect to the validity, form, eligibility (including
time of receipt) and acceptance for exercise of the Public Warrants will be
determined by the Company, in its sole discretion, which determination will be
final and binding upon the Warrant Holder and the Company. The Company
reserves the absolute right to reject any and all tenders of Public Warrants
which it determines not to be in proper form, or the acceptance or exercise of
which would, in the opinion of the Company's counsel, be unlawful. The Company
also reserves the absolute right to waive any defect or irregularity in the
exercise of the Public Warrants. The Company, Warrant Agent, or any other
person will not be under any duty to give notification of any defects or
irregularities in exercise, nor will they incur any liability for failure to
give such notification. Exercise of the Public Warrants will not be deemed to
have been properly made until any irregularities have been waived by, or cured
to the satisfaction of, the Company. The Company's interpretation of the terms
and conditions of the Warrant Modification Offer will be final and binding
upon the Warrant Holders and the Company.
ACCEPTANCE OF PUBLIC WARRANTS; DELIVERY OF UNITS
Public Warrants properly tendered for exercise and not withdrawn will be
accepted for exercise on or promptly after the Redemption Date. The Company
will be deemed to have accepted for exercise properly tendered Public Warrants
when, as and if the Company has given oral or written notice thereof to the
Warrant
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Agent. All tendering Warrant Holders of Public Warrants will be deemed to have
waived any right to receive notice of the acceptance of their Public Warrants.
Certificates for Common Stock and 1997-A Warrants will be issued as promptly
as practicable after the Redemption Date. Any Public Warrants not exercised
before the Redemption Date will be redeemed.
In certain cases, the sale of the Units by the Company upon exercise of
Public Warrants could violate the securities laws of certain states or other
jurisdictions. The Company has undertaken registration or qualification of the
Units (or the Common Stock and 1997-A Warrants comprising the Units) for sale
in California, Colorado, Georgia, Kentucky, Illinois, Louisiana, New
Hampshire, New York, Ohio, Oklahoma, Pennsylvania, Tennessee, Virginia, Texas,
Washington and Wisconsin; however, there is no assurance that such
registration will become effective in such states. In addition, the Company
may undertake registration of the Units (or the Common Stock and 1997-A
Warrants comprising the Units) in additional states as determined in the sole
discretion of the Company. Those Warrant Holders residing in states in which
the Units have not been registered or otherwise qualified for sale in such
state, will not be permitted to exercise their Public Warrants. Prior to
tendering of Public Warrants for exercise, the Warrant Holder should either
contact the Company or the Warrant Agent to determine whether the Units have
been registered or qualified in the state of such Warrant Holder's residence.
The Company has used and will continue to use its best efforts to cause the
Registration Statement of which this Prospectus is a part to be declared
effective under the laws of various states as may be required to cause the
sale of Units (or the Common Stock and 1997-A Warrants comprising the Units)
upon exercise of Public Warrants to be lawful. However, the Company is not
required to accept the exercise of the Public Warrants, if, in the opinion of
counsel, the sale of the Units (or the Common Stock and 1997-A Warrants
comprising the Units) upon such exercise would be unlawful. In such cases, the
Public Warrants not accepted for exercise will be subject to redemption. See
"Public Warrant Redemption."
The Warrant Agent will act as agent for the tendering Warrant Holders of the
Public Warrants for the purposes of receiving from the Company the Common
Stock and 1997-A Warrants comprising the Units, and transmitting such
securities to the Warrant Holders. Tendered Public Warrants not accepted for
exercise by the Company will be returned and redeemed on the Redemption Date.
See "Public Warrant Redemption."
In the event the Company (i) extends the Special Exercise Period (by
extension of the Redemption Date) during which the Warrant Modification Offer
is open, (ii) is delayed in its acceptance for exercise, or (iii) is unable to
accept for exercise any Public Warrants for any reason, in such event, without
prejudice to the Company's right hereunder, the Warrant Agent, at the request
of the Company, may nevertheless retain Public Warrants tendered for exercise
together with any cash or check and any other required documents, subject to
the withdrawal rights of the Warrant Holder thereof as set forth herein and
applicable securities laws.
TRANSFER TAXES
The Company will pay all transfer taxes applicable to exercise of the Public
Warrants for Units pursuant to the Warrant Modification Offer, except in the
case of deliveries of shares of Common Stock and/or 1997-A Warrants that are
not to be made to any person other than a registered holder of the Public
Warrants.
MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES
Any holder whose certificates evidencing Public Warrants have been
mutilated, lost, stolen or destroyed should contact the Warrant Agent at its
address or telephone number indicated on the back cover page of this
Prospectus for further instructions.
EXPENSES
The Company will pay the Warrant Agent reasonable and customary fees for
their services and will reimburse them for their reasonable out-of-pocket
expenses in connection therewith. The Company will also reimburse custodians,
nominees and fiduciaries for reasonable out-of-pocket expenses incurred by
them in
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forwarding copies of this Prospectus and related documents to the beneficial
owners of Public Warrants and in handling or forwarding tenders on behalf of
their customers. The Company will also pay legal, accounting, printing,
listing, filing and other similar fees and expenses in connection with the
securities offered pursuant to this Prospectus.
PROHIBITION AGAINST TRADING BY INTERESTED PERSONS
Pursuant to Section 10b of the Exchange Act and Rule 10b-6 thereunder,
subject to certain exceptions, it is unlawful for the Company, any underwriter
and broker-dealer that participates or agrees to participate in the
distribution of the Units (each referred to as a "Distribution Participant"),
and an "affiliated purchaser" (within the meaning of Rule 10b-6(c)(6) under
the Exchange Act), directly or indirectly, either alone or with one or more
other persons, until completion of the distribution of the Units, or its or
his participation in the distribution of the Units, to (i) bid for or purchase
for any account in which it or he has a beneficial interest in the Units,
Common Stock, the Public Warrants, 1997-A Warrants, Rights, stock options or
other warrants, or any right to purchase any such securities, or (ii) induce
any person to purchase any such security or right. However, the Company and
any other Distribution Participant and affiliated purchaser, if not engaged in
for the purpose of creating actual or apparent active trading in or raising
the price of the Common Stock, Public Warrants, Units, 1997-A Warrants or
Rights, are not prohibited from effecting certain transactions in the
Company's securities, including (i) unsolicited privately negotiated block
purchases not effected through a broker-dealer and (ii) the exercise of any
right (options, warrants, etc.) to acquire the securities directly from the
Company.
For purposes of the foregoing, "affiliated purchaser" includes (i) any
person, directly or indirectly, acting in concert with a Distribution
Participant in connection with the acquisition or distribution of the Units,
Common Stock, 1997-A Warrants, or the Public Warrants, stock options, other
warrants or any other right to purchase the Units, Common Stock or 1997-A
Warrants, (ii) an affiliate who, directly or indirectly, controls the
purchases of the Units, Common Stock, and 1997-A Warrants by a Distribution
Participant, whose purchases are controlled by a Distribution Participant, or
whose purchases under common control with those of a Distribution Participant,
(iii) an affiliate that is a broker-dealer, subject to a limited exception, or
(iv) an affiliate (other than a broker- dealer) that regularly purchases
securities, through a broker-dealer or otherwise, for its own account, for the
account of others, or recommends or exercises investment discretion with
respect to the purchase or sale of securities, other than an affiliate that is
a separate and distinct organizational entity from, with no officers (or
persons performing similar functions) or employees (other than clerical,
ministerial, or support personnel) in common with, the Distribution
Participant, and the affiliate and the Distribution Participant have separate
employee compensation arrangements and the affiliate's bids for, purchases of,
and inducements to purchase the securities are made in the ordinary course of
its business.
DELIVERIES AND ADDITIONAL INFORMATION
All deliveries, correspondence and questions sent or presented to the
Company or the Warrant Agent relating to the Warrant Modification Offer and
exercise and redemption of the Public Warrants should be directed to the
Company or the Warrant Agent at their respective addresses or telephone
numbers set forth on the back cover of this Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
INTRODUCTION. The following summary is a general discussion of the federal
income tax consequences to the Warrant Holders and the Company of the Warrant
Modification Offer and exercise of the Public Warrants. The legal conclusions
expressed in the summary are the opinion of Dunn Swan & Cunningham, A
Professional Corporation, tax counsel to the Company ("Counsel"). The summary
is based upon the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations thereunder, rulings and other pronouncements, and
reported decisions as of the date of this Prospectus, all of which are subject
to change. Furthermore, the following discussion is limited to the material
federal income tax aspects of the Warrant Modification Offer to Warrant
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Holders who hold the Public Warrants as "capital assets" (generally, property
held for investment as compared to property held for sale to customers as
inventory) within the meaning of Section 1221 of the Code. The summary does
not discuss all aspects of federal income taxation that may be relevant to a
Warrant Holder exercising the Public Warrants in light of such Warrant
Holder's personal investment circumstances or to certain types of person
subject to special treatment under the federal income tax laws (for example,
trusts, life insurance companies, tax-exempt organizations, financial
institutions, or S corporations) and does not discuss any aspects of
applicable state, local or foreign tax laws.
WARRANT MODIFICATION OFFER. Counsel has concluded that there exists a lack
of authority addressing the tax consequences of the Warrant Modification Offer
(and amendment of the terms and provisions of Warrant Agreement pursuant to
which the Public Warrants were issued by the Company), and thus Counsel's
opinion is that there exists several reasonable and diverse reporting
positions for federal income tax purposes. Given the unclear state of the law
in this area, and the technical intricacies of the available reporting
positions, it is particularly important that Warrant Holders consult their own
tax advisors regarding the federal income tax consequences to them relating to
the Warrant Modification Offer.
Counsel has concluded that there exists no conclusive authority which would
indicate whether, for federal income tax purposes, the Warrant Modification
Offer is (i) merely the grant of additional rights to the Warrant Holders
which merely modify the securities to be delivered upon exercise of the Public
Warrants and with respect to the Class B Warrants a reduction modification of
the Exercise Price of such Public Warrants, (ii) the grant of additional
separate and independent warrants to the Warrant Holders, (iii) the exchange
of the Public Warrants as constituted prior to the Warrant Modification Offer
for the Public Warrants as modified by the Warrant Modification Offer, or (iv)
with respect to the Class B Warrants and reduction of the Exercise Price, a
dividend distribution to the holders thereof. Because of the lack of authority
addressing the issue, Counsel has concluded that any of such theories could be
applicable to the Warrant Holders.
Grant of Additional Rights. If the Warrant Modification Offer was determined
by the Internal Revenue Service (the "IRS") to be merely the grant of
additional rights to the Warrant Holders (which merely modify the securities
to be delivered upon exercise of the Public Warrants and with respect to the
Class B Warrants a reduction modification of the Exercise Price of the Public
Warrants), the Warrant Holders would not recognize any loss as a result of the
Warrant Modification Offer until expiration of the Redemption Date and then
only if the Public Warrants are not exercised. Pursuant to this theory the
Warrant Modification Offer would be valued as of the date the Company
announced the Warrant Modification Offer and that value would be reported by
the Warrant Holders as ordinary income. The value of the rights represented by
the Warrant Modification Offer would be determined by comparing the trading
prices of the Class A Warrants and the Class B Warrants immediately before and
subsequent to the announcement of the Warrant Modification Offer. If the
trading prices of the Class A Warrants and the Class B Warrants immediately
subsequent to announcement of the Warrant Modification Offer do not increase
above the trading prices immediately before the announcement of the Warrant
Modification Offer, the Warrant Holders will not be required to report any
income due to the Warrant Modification Offer. Alternatively, if the trading
prices of the Class A Warrants and the Class B Warrants immediately subsequent
to announcement of the Warrant Modification Offer increase above the trading
prices immediately before the announcement of the Warrant Modification Offer,
the Warrant Holders will be required to report the amount of the increase as
income due to the Warrant Modification Offer.
Grant of Additional Warrants. In the event the Warrant Modification Offer is
determined by the IRS for income tax purposes to constitute the grant of
additional, separate and independent warrants, each Warrant Holder would be
deemed to hold two warrants, the Public Warrants as constituted prior to the
Warrant Modification Offer (the "Original Warrants") and the Public Warrants
as modified by the Warrant Modification Offer (the "Modified Warrants"), both
of which will be deemed to expire on the Redemption Date. In such case, the
expiration of the Public Warrants (i.e., the Original Warrants and the
Modified Warrants) on the Redemption Date would entitle the Warrant Holder to
claim a loss in an amount equal to the Warrant Holder's tax basis in the
Original Warrants and the Modified Warrants. Such loss would be a capital loss
if the Public
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Warrants (i.e., Original Warrants and Modified Warrants) were held as a
capital asset, and the capital loss would be treated as a long-term loss if
the Warrant Holder's holding period of the Original Warrants was more than one
year, or short-term loss if the Warrant Holder's holding period of the Public
Warrants (i.e., Original Warrants or Modified Warrants) was one year or less.
Furthermore, pursuant to this theory that the Warrant Modification Offer
constituted the grant of new additional warrants (i.e., Modified Warrants),
there are two possible appropriate dates for measuring the amount of income to
recognized by each Warrant Holder. These dates are the date on which the
Warrant Modification Offer was announced and the date on which the Public
Warrants (i.e., Modified Warrant) are exercised, sold, exchanged or otherwise
disposed of by gift or charitable contribution. In the event the date of
announcement of the Warrant Modification Offer is treated as the correct date
for recognizing income to the Warrant Holders, the amount of the income would
be measured by the difference between the trading prices of the Public
Warrants immediately before, and the Public Warrants (as modified by the
Warrant Modification Offer) immediately after, the date of announcement. In
the event the correct date for measuring the income to the Warrant Holders is
deemed to be the date on which the Public Warrants (i.e., the Original
Warrants and Modified Warrants) are exercised, sold, exchanged or otherwise
disposed of by the Warrant Holder, under this theory such Warrant Holder would
recognize income equal to the trading prices of the Public Warrants at the
date the Public Warrants were exercised, sold, exchanged or otherwise disposed
of. Under this theory, no income would be recognized in the event the Public
Warrants are held by the Warrant Holder until the Redemption Date and are not
exercised.
In any case in which income is realized and recognized the income
attributable to the Public Warrants as modified pursuant to the Warrant
Modification Offer would be ordinary income and not capital gain. Any income
recognized by a Warrant Holder would be reflected, as appropriate, in the
Warrant Holder's tax basis in the Public Warrants.
Taxable Exchange. Another theory is that the Warrant Modification Offer is a
material change in the terms of the Public Warrants, resulting in an exchange
of the Public Warrants for new warrants on the date of announcement of the
Warrant Modification Offer. Under this theory, in the event the amount
realized as a result of the transaction (i.e., the trading price of the Public
Warrants as modified pursuant to the Warrant Modification Offer) exceeds the
Warrant Holder's tax basis in the Public Warrant, the Warrant Holder would be
required to recognize taxable gain in the amount of such excess. Such gain
would probably be treated as capital gain, but there is a risk such gain would
be treated as ordinary income. If, instead, the fair market value of the
Public Warrant as modified and deemed received in the exchange is less than
the Warrant Holder's tax basis in the Public Warrant (as constituted prior to
modification), the Warrant Holder would probably recognize a loss, likely
characterized as capital in nature, but there is a risk such loss would be
disallowed. If a Warrant Holder recognizes gain (or loss), his or her tax
basis in the Public Warrant would be increased (or reduced) by the amount of
such gain (or loss), and the holding period for the Public Warrant (as
modified) would begin on the day after the Warrant Modification Offer
commenced.
Dividend Distribution. Furthermore, another theory is that the reduction in
the Warrant Exercise Price of the Class B Warrants pursuant to the Warrant
Modification Offer constitutes a dividend under Section 305 of the Code, which
would be taxable to each holder of the Class B Warrants in the current year
(whether or not he or she accepts the Warrant Modification Offer by exercising
the Class B Warrant) and which would entitle each such Warrant Holder to a
corresponding increase in the tax basis of the Class B Warrants. Under this
theory, the amount of the dividend would probably be equal to the increase in
the trading price of the Class B Warrants immediately before and immediately
after announcement of the Warrant Modification Offer. The Company does not
intend to report the reduction in the Warrant Exercise Price as a taxable
dividend distribution.
EXERCISE OF PUBLIC WARRANTS. Warrant Holders will not recognize any gain or
loss upon the exercise of their Public Warrants. The adjusted tax basis of the
Unit received on the exercise of a Public Warrant will equal the sum of the
exercising Warrant Holder's tax basis in the Public Warrant exercised and the
Warrant Exercise Price paid. The Warrant Holder's tax basis in the Units
received upon exercise of the Public Warrants must be
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allocated between the share of Common Stock and one 1997-A Warrant comprising
the Unit in proportion to their respective fair market values (trading value)
at the time of issuance. The amount allocated to each component of the Unit
will constitute the tax basis of that component. Upon exercise of a 1997-A
Warrant, the basis of the 1997-A Warrant and the amount paid on the exercise
thereof will be the tax basis of the share of Common Stock issued with respect
thereto.
TAX CONSEQUENCE TO THE COMPANY. No gain or loss will be recognized by the
Company as a result of the Warrant Modification Offer or exercise of the
Public Warrants.
Based upon calculations performed by the Company, Counsel is of the opinion
that the Warrant Modification Offer will not adversely affect the Company's
ability to preserve and utilize its net operation loss carryforwards for
federal income tax purposes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--Income
Taxes."
BUSINESS
GENERAL
The Company is a marketer of consumer oriented services and products which
are packaged together in special programs and sold to independent sales
representatives and associates who use the products and services themselves
and also sell them to others. The programs consist of various services which
provide savings on items such as merchandise, groceries and travel, and legal
benefits furnished by certain third party providers as well as nutritional
supplements. These programs represent the Company's one main class of products
and services and account for over 94 percent of its revenues. The Company
generates revenue through the sale of memberships in its consumer benefit
services programs and through the sale of products in its nutritional
supplement program. Membership sales revenues are recognized when the member
remits payment for the membership and the Company provides the services under
the program, generally on a monthly basis. Revenues through the sale of
products in its nutritional supplement program are recognized when the
products are paid for and shipped to the purchaser.
The percentage of total revenue contributed from the Company's consumer
benefit services programs was 1.9, 8.2 and 30 percent for the three months
ended September 30, 1996, and the year ended December 31, 1995 and 1994,
respectively, and 2.8 and 9.3 percent for the nine months ended September 30,
1996 and 1995, respectively. The percentage of total revenue contributed from
the Company's nutritional supplement program was 96.7, 89.9 and 69.3 for the
nine months ended September 30, 1996, and the year ended December 31, 1995 and
1994, respectively.
PRODUCTS AND SERVICES OF THE COMPANY
In January 1993, the Company introduced the "Infinity Plan" which is made up
of packages of consumer benefit services provided by third party providers. In
addition, in 1993, the Company began marketing of pre-paid legal services. The
consumer benefit services are provided by third party providers and consist of
(i) discount shopping service which provides access to a wide range of
merchandise at a discount through a toll free "800" number, (ii) grocery
coupon service which provides access to money saving coupons on major name
brand products, (iii) discount travel service which provides access to
guaranteed lowest airfares, with five percent cash rebates on air, hotel,
cruise and vacation packages, (iv) pre-paid legal services which include four
basic benefits which provide coverage for a broad range of preventive and
litigation related legal expenses, and/or (v) a variety of other consumer
benefits including savings on prescriptions, eye care, magazines and books.
The services under these consumer benefit programs, except for the pre-paid
legal services, are provided by Consumer Benefit Services, Inc. of Naperville,
Illinois. The pre-paid legal services are provided by Pre-Paid Legal Services,
Inc. of Ada Oklahoma.
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Individuals purchase memberships in the Company's Infinity Plan. They
normally pay for their memberships on a monthly basis. Payment of their
monthly membership fee entitles the member to have access to a variety of
consumer benefit services provided by third party providers. The Company pays
these third party providers a fee based upon the number of active memberships
that are in place each month. The Company recognizes the revenues and expenses
related to the Infinity Plan on a monthly basis as the members pay their
membership fees to the Company, and the Company in turn pays a fee to the
third-party providers, thus allowing the members to have access to the
consumer benefit services.
In October of 1993, the Company introduced the "NewTrition Plan" which
allows plan members to purchase a variety of dietary and nutritional
supplements designed to assist with healthy diet and weight management
programs. Through the "NewTrition Plan" the Company offers the following
products which represent the majority of the Company's nutritional supplement
program sales:
.AM-300--A weight management supplement containing a unique blend of
specialized herbs plus the patented ingredient, Chromium
Picolinate.
.Shark Cartilage--A nutritional supplement manufactured from 100% shark fin
cartilage.
.Super Anti-Oxidant--An exclusive blend of enzyme-active and phyto-nutrient
rich whole food and herbal antioxidant concentrates.
These nutritional supplements are manufactured by J&K Pharmaceutical
Laboratories. The Company and its affiliates have no other relationships with
Consumer Benefit Services, Inc., J&K Pharmaceutical Laboratories, or their
affiliates. Pre-Paid Legal Services, Inc. is a shareholder of the Company, and
Harland Stonecipher the founder and Chief Executive Officer of Pre-Paid Legal
Services, Inc. was elected to the Company's Board of Directors on August 25,
1995.
OTHER PRODUCTS AND SERVICES. As of the date of this Prospectus the Company
has not determined the other services and products it may desire to market;
however, it is continually searching for new services and products to offer
its members. The Company anticipates it will continue to market the above-
mentioned programs in the near term. Also, contracts which the Company may
establish with its suppliers may contain restrictions on the other products
and services the Company may sell.
MARKETING
The Company markets its products and services directly to consumers through
independent sales distributors or sales associates in a multi-level direct
selling organization. The Company's multi-level marketing programs encourages
individuals to sell the various consumer products and services offered under
the program and allows individuals to recruit and develop their own sales
organizations. Commissions are paid only on sales of products and services.
Commissions are paid to the sales associate making the sale, and to other
associates who are in the line of associates who directly or indirectly
recruited the selling associate. For the nine months ended September 30, 1996,
and the year ended December 31, 1995 and 1994, the Company paid commissions to
2,059, 1,863 and 1,871 individuals in the aggregate amount of $1,915,367,
$1,823,058 and $927,422, respectively. Each sales associate is responsible for
monitoring the progress and sales practices of the associates recruited by the
sales associate. The Company provides training materials, organizes area
training meetings and designates personnel specifically trained to answer
questions and inquiries from sales associates.
Multi-level marketing is primarily used for product and services marketing
based on personal sales which encourages individual or group face-to-face
meetings with prospective purchasers of the products and services in
connection with a program and has the potential of attracting a large number
of sales personnel within a short period of time. The Company's marketing
efforts toward individuals typically target middle income families or
individuals and seek to educate potential members concerning the benefits of
program membership.
Sales associates under the Company's multi-level marketing system are
generally engaged as independent contractors and are provided with training
guides and are given the opportunity to participate in Company
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training programs. All advertising, promotional and solicitation materials
used by sales associates must be approved by the Company prior to use. A
substantial number of the Company's sales associates market the Company
programs on a part-time basis only. At September 30, 1996, the Company had
9,214, "active" sales associates compared to 7,617 and 6,447 "active" sales
associates at December 31, 1995 and September 30, 1995, respectively. A sales
associate is considered to be "active" if he or she has originated at least
one new program member or participant and/or made a product purchase from the
Company within the previous 12 months.
The principal source of the Company's revenues and profits is from the sale
of products to independent sales distributors and the sale of memberships to
participants in its consumer benefit services plan. The Company derives
additional revenues from services provided to its multi-level marketing sales
force, from a one-time membership fee of approximately $139 from each new
sales associate and the sale of marketing supplies and promotional materials
to associates, as well as a monthly $4.00 administrative fee for associates
receiving commissions during a month. The one-time membership fee is intended
to offset the Company's direct costs of the materials contained in the sales
kit provided to the new distributor or associate. The administrative fee is
intended to offset the Company's direct and indirect costs incurred in
tracking sales activity and generating the commission checks for all of the
Company's independent distributors and associates. Amounts collected from
distributors and sales associates through these fees and the sale of marketing
supplies and promotional materials are not intended to generate material
profits for the Company. During the nine months ended September 30, 1996, and
the years ended December 31, 1995 and 1994, the Company received one-time
distributor and associate fees totaling $398,767, $261,043 and $222,880,
respectively. The Company did not begin charging a monthly $4.00
administrative fee until the second quarter of 1995. During the nine months
ended September 30, 1996 and the year ended December 31, 1995, the Company
received administrative fees totaling $12,754 and $15,018, respectively.
The marketing plan provides various levels of commissions based on a sales
associate's ability to produce personal sales. In addition, commissions on the
sale by other members of a sales associate's organization may be earned by the
sales associate. Sales are made through direct personal sales presentations as
well as presentations made to groups in a format known as "opportunity
meetings" which are designed to encourage individuals to subscribe for program
membership as well as to become sales associates. These new sales associates
are likewise encouraged to sell the Company's products and services to new
members and are, in turn, encouraged to become sales associates for the
Company, and so on. The effect is to create a "multi-level" sales
organization. The growth of the organization is provided for by a compensation
system which provides for payment of sales commissions not only on direct
sales made by a sales associate but also on sales made by other sales
associates in his or her commission organization. The direct "commission
organization" consists of six levels in depth and unlimited width. Each new
distributor or associate that joins the Company's sales organization is linked
to an existing distributor or associate that sponsored them into the business.
As a result each individual distributor's or associate's personal sales
organization grows based on this sponsorship by people they personally sponsor
and by people that are sponsored by people they personally sponsored and so
on. An individual distributor or associate's "commission organization"
consists of all distributors or associates they have personally sponsored into
the business and everyone that each of those people has sponsored and everyone
that each of these people has sponsored and so on until you reach six
distributor or associates away from the original distributor or associate.
As an additional incentive for top producers, a commission override program
is available for those who meet specified qualifications. This override
program provides for the payment on sales that extend beyond the sixth level
of an individual's "commission organization."
Sales associates are encouraged to assume responsibility for training and
motivation of other sales associates within their organization and to conduct
opportunity meetings as soon as they are trained to do so. The Company strives
to maintain a high level of motivation, morale, enthusiasm and integrity among
the members of its independent sales organization. This is done through a
combination of quality products, sales incentives, personal
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recognition of outstanding achievement, and promotional materials. The Company
believes that this form of sales organization is cost efficient since direct
sales expenses are primarily limited to the payment of commissions and thus
are only incurred when a membership is sold. Under the Company's multi-level
marketing system the Company's distributors and associates purchase sales aids
and brochures from the Company and assume the costs of advertising and
marketing the Company's products to retail consumers as well as recruiting new
distributors and associates.
The Company's inventories consist of marketing materials and nutrition
products. The Company's marketing materials inventory consists primarily of
sales aids, training, marketing and promotional materials such as product and
marketing brochures, video and audio cassette tapes, training manuals,
distributor applications, order forms and other paper supplies that the
Company sells to its distributors and associates. At December 31, 1994, the
Company had marketing materials and product inventories of $29,215 and
$18,656, respectively. At December 31, 1995, the Company had marketing
materials and product inventories of $46,440 and $52,181, respectively. At
September 30, 1996, the Company had marketing materials and product
inventories of $132,492 and $173,312, respectively.
OPERATIONS
The operations of the Company involve processing membership applications,
processing data on new and existing sales associates, computing commission
data, general accounting, and other operations generally related to the
maintenance and operation of a direct sales organization. Due to the multi-
level structure of the Company's sales organization and the complexity of its
sales commission system, it is extremely important for the Company to promptly
and accurately carry out its operations.
The Company's computerized management information system permits management
of accounts, maintenance of members, programs, and order information,
inventory control, processing of credit card orders, and calculation of and
control of sales commissions and assignments thereof, as well as maintenance
of accounting information.
The Company's corporate office in Oklahoma City, Oklahoma, also has
departments which deal directly with sales associates, provide marketing
support and personal assistance, fulfill supply orders and communicate with
state regulatory agencies.
CONTRACTUAL ARRANGEMENTS
As of the date of this Prospectus, the consumer benefit services offered and
distributed by the Company are provided by Consumer Benefit Services, Inc.
("CBS") and Pre-Paid Legal Services, Inc. The Company has non-exclusive
contractual arrangements with the providers of the consumer benefit services
offered pursuant to its Infinity Plan. Pursuant to these arrangements the
Company provides information on its active memberships to the providers on a
monthly basis and pays a fee for each active membership. The Company
recognizes these costs on a monthly basis at the same time it recognizes the
corresponding revenue received from its members. The nutritional supplement
products sold and distributed by the Company in conjunction with its
"NewTrition Plan" are manufactured by J&K Pharmaceutical Laboratories. The
Company does not generally enter into long-term purchase commitments with
respect to the consumer benefit services of third-party providers or the
nutritional supplement products offered and distributed by the Company;
however, the Company customarily enters into contracts with such third-party
providers to establish the terms and conditions of service and/or product
sales made by the Company through its distributors and program participants.
Although the Company believes it would be able to obtain alternative sources
of services and products, because the Company's services and products are only
available through single source or limited source third- party providers, any
future difficulty in obtaining any of the key services or products offered and
distributed by the Company could have a material adverse effect on the
Company's results of operations. In addition, the unavailability of or
interruptions in access to the services and products provided by third-party
providers involves
47
<PAGE>
certain risks, although the Company has not previously experienced such
unavailability or interruptions. In the event any of the third-party
providers, especially the provider of nutritional supplement products, were to
become unable or unwilling to continue to provide the services or products in
required volumes, the Company would be required to identify and obtain
acceptable replacements, which could be lengthy and no assurance can be given
that any additional sources would become available to the Company on a timely
basis. A delay or reduction in availability of the services and/or products
offered and distributed by the Company could materially and adversely affect
the Company's business, operating results and financial condition.
COMPETITION
The marketing industry in which the Company is involved is highly
competitive. Some of the better known companies that have achieved significant
levels of success utilizing a form of multi-level marketing would include
Amway Corporation, Mary Kay Cosmetics, Inc., Shaklee Corporation and The A.L.
Williams Corporation. The Company is aware of several companies utilizing a
multi-level marketing organization to market services similar to that which
are offered by the Company. Many of these companies have substantially greater
financial resources than the Company. The Company competes with numerous
businesses that market products and services similar to those of the Company
through direct mail solicitations, direct sales in the field and sales out of
established business locations.
Not only do the companies in the direct sales segment of the industry
compete with each other as to the different products offered by each company,
these companies also compete very vigorously to recruit new sales persons and
to retain experienced and successful direct sales personnel. Successful direct
sales persons are often attracted to sell new or different products being
distributed by companies whose compensation plans are the most lucrative, and
consequently frequently are willing to leave their existing companies (even if
these companies have a superior product) for the opportunity to earn increased
compensation. Although the Company believes that it has been able to design an
attractive sales organization program, and will be able to recruit and retain
new and existing direct sales personnel to sell the Company's consumer
services and nutritional supplement programs, there is no guarantee that its
independent selling organization will ultimately be successful.
GOVERNMENT REGULATION
The Company markets and sells its consumer service and nutritional
supplement programs through independent sales distributors in a multi-level
direct selling organization organized by the Company. All multi-level direct
selling organizations are subject to careful scrutiny by various state and
federal governmental regulatory agencies to ensure compliance with various
types of laws, rules and regulations, including but not limited to securities,
franchise investment, business opportunity and criminal laws prohibiting the
use of "pyramid" or "endless chain" types of selling organizations. The design
of the structure and implementation of the various elements of such selling
organizations, primarily relating to compensation payable to independent sales
distributors and the fees and expenses charged to sponsoring and sponsored
participants are very complex, and compliance with all of the applicable laws
may to some degree be uncertain in light of evolving interpretation of
existing laws and the enactment of new laws, rules and regulations pertaining
to this type of product distribution and these types of selling organizations.
The Company has an ongoing compliance program with assistance from counsel
experienced in the laws and regulations pertaining to multi-level sales
organizations. The Company is not aware of any legal actions pending or
threatened by any governmental authority against the Company regarding the
legality of the Company's operations.
The Company currently has independent distributors or associates in 50
states. The Company has reviewed the requirements of various states as well as
sought legal advice regarding the structure and operation of its selling
organization to insure that it complies with all of the applicable laws
pertaining to multi-level sales organizations in those states in which the
Company is engaged in business. On the basis of these efforts and the
experience of its management, the Company believes that it is in compliance
with all applicable requirements. Although the Company believes that the
structure and operation of its selling organization complies with all of the
applicable laws pertaining to multi-level sales organizations in those states
in which the Company is engaged
48
<PAGE>
in business, the Company has not obtained any no-action letters or advance
rulings from any federal or state security regulator or other governmental
agency concerning the legality of the Company's operations, nor is the Company
relying on an opinion of counsel to such effect.
In addition, the operations of the Company are also subject to various
federal, state and local requirements which affect businesses generally, such
as taxes, postal regulations, labor laws, and zoning ordinances.
EMPLOYEES
As of September 30, 1996, the Company had 17 full-time, of whom three were
executive officers, seven were engaged in administrative activities, two were
engaged in marketing activities, three were engaged in customer service
activities, and two were engaged in shipping activities. None of the Company's
employees is represented by a labor organization. The Company considers its
employee relations to be good.
PROPERTIES
The Company maintains its executive office in 6,303 square feet at 2601
Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293. The
office premises are occupied pursuant to a long-term lease which terminates on
May 31, 1998, and the monthly rental payment is $4,432. The Company considers
such space to be adequate for its current needs. In the event the Company is
required to relocate its office upon termination of the existing lease, the
Company believes other office space is available under favorable leasing terms
in the Oklahoma City area.
LITIGATION
Other than as set forth hereinbelow, the Company does not have any pending
litigation. The Company is currently under investigation by the Oklahoma
Department of Securities with respect to the AMS Associate Stock Pool (the
"Pool"). As of the date of this Prospectus, the investigation is in the
discovery stage. The Pool, under which the independent distributors of the
Company's marketing programs and products are permitted to participant on a
voluntary basis, was formed in 1990. Participants make contributions to the
Pool and, from such contributions, the administrator of the Pool purchases on
a monthly basis the Company's Common Stock in the open market for the
participants. All purchase transactions are executed and effected through a
market maker in the Company's Common Stock. All records of ownership of the
Common Stock held by the Pool are maintained at the offices of the Company.
The Pool only purchases shares of Common Stock and does not sell shares on
behalf of the participants. As of the date of this Prospectus, the Pool holds
185,858 shares of Common Stock for and on behalf of the participants. Each
Participant has sole voting rights with respect to those shares of Common
Stock held for such participant's benefit. In the event a participant desires
to sell the Common Stock held for his benefit by the Pool, certificates
representing such shares are delivered to such participant for the purpose of
effecting such sale. Although its investigation is currently general in
nature, the Oklahoma Department of Securities may take the position that the
offer and sale of participation rights in the Pool violates the registration
provisions of the Oklahoma Securities Act.
The Company is currently cooperating and intends to continue such
cooperation with the Oklahoma Department of Securities in its investigation
through the Company's legal counsel. Because, as of the date of this
Prospectus, the investigation is in the discovery stage, legal counsel cannot
express an opinion regarding the ultimate outcome of the investigation.
49
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each
executive officer and director of the Company. Directors are generally elected
at the annual shareholders' meeting and hold office until the annual
shareholders' meeting three years after election or until their successors are
elected and qualified. Executive officers are elected by the Board of
Directors and serve at its discretion. The Company's Bylaws authorize the
Board of Directors to be constituted of not less than one and such number as
the Board of Directors may from time to time determine by resolution or
election. The Board currently consists of five members. Directors are elected
for three year terms, with approximately one-third of the Board standing for
election each year. The term of office of one class of directors expires each
year in rotation so that one class is elected at each annual meeting of
shareholders for a full three-year term. The terms of John W. Hail and Roger
P. Baresel expire in 1998, the terms of Curtis H. Wilson, Sr. and R. Terren
Dunlap expire in 1997, and the term of Harland C. Stonecipher expires in 1999.
Messrs. Hail, Wilson and Baresel devote their full-time to business of the
Company. See "--Board of Directors."
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
John W. Hail(1)(2)................. 65 Chairman of the Board, Chief Executive
Officer, and Director
Curtis H. Wilson, Sr.(3)........... 69 Vice-Chairman of the Board and Director
Roger P. Baresel(1)(2)............. 40 President, Chief Financial Officer,
Secretary and Director
R. Terren Dunlap(3)................ 50 Director
Harland C. Stonecipher(4).......... 56 Director
</TABLE>
- --------
(1) Member of the Stock Option Committee. See "--Stock Option Plan," below.
(2) Term as a Director expires in 1998.
(3) Term as a Director expires in 1997.
(4) Term as a Director expires in 1999.
The following is a brief description of the business background of the
executive officers and directors of the Company:
John W. Hail is the founder of Advantage Marketing Systems, Inc. and has
served as its Chief Executive Officer and Chairman of the Board of Directors
since its inception in June 1988. During 1987 and through June 1, 1988, Mr.
Hail served as Executive Vice President, Director and Agency Director of Pre-
Paid Legal Services, Inc., a public company engaged in the selling of legal
services contracts, and during this period, Mr. Hail also served as Chairman
of the Board of directors of TVC Marketing, Inc., the exclusive marketing
agent of Pre-Paid Legal Services, Inc.
Curtis H. Wilson, Sr. has served as Vice-Chairman of the Board of Directors
of the Company since June 1988. From January 1984 to June 1988, Mr. Wilson was
Executive Vice President of TVC Marketing, Inc., the exclusive marketing agent
of Pre-Paid Legal Services, Inc. From March 1983 to January 1984, Mr. Wilson
was a sales associate of TVC Marketing, Inc. Mr. Wilson retired in April 1982
after having been employed for 26 years as a salesman, Vice President and
ultimately President of V.J. McGanahan, Inc., a television and appliance
wholesale distributor in Dayton, Ohio.
Roger P. Baresel has served as Vice President, Chief Financial Officer,
Secretary and a Director since June 1, 1995, and on July 1, 1995, Mr. Baresel
became President. Mr. Baresel is a Certified Public Accountant and holds a
Master of Business Administration. He has maintained an accounting practice
since 1985 specializing in providing consulting services to small and growing
businesses. Since 1988, he has provided consulting services on a part-time
basis to the Company. Effective June 1, 1995, Mr. Baresel became a full time
employee of the Company.
50
<PAGE>
R. Terren Dunlap has served as a Director since June 1, 1995. He served as
Vice President--International Development from June 1995 through March 1996.
Mr. Dunlap is the co-founder and a Director since 1984 and until March 1994
served as Chief Executive Officer and Chairman of the Board, of Go-Video,
Inc., an American Stock Exchange company, and developer and distributor of
consumer electronics products. He is an inventor and has received several
patents for consumer electronics products, including the Dual Deck VCR, and is
a member of the Electronics Industry Association and the Arizona State
University West Advisory Board, and has served on the national board of the
American Electronics Association. Mr. Dunlap holds a Juris Doctorate from Ohio
Northern University and a Bachelor of Science Degree in Business
Administration from Ashland University.
Harland C. Stonecipher has served as a Director since August 25, 1995. Mr.
Stonecipher has been Chairman of the Board and Chief Executive Officer of Pre-
Paid Legal Services, Inc. since its inception in 1972. Pre-Paid Legal
Services, Inc., an American Stock Exchange company, is the first company in
the United States organized solely to design, underwrite and market legal
expense plans.
COMPENSATION OF EXECUTIVE OFFICERS
Executive Officers of the Company. The following table sets forth certain
information relating to compensation paid to or accrued for the named
executive officers for services rendered during the years ended December 31,
1996, 1995 and 1994.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------
ANNUAL COMPENSATION AWARD OF OPTIONS
--------------------------- ----------------
NAME AND PRINCIPAL
POSITION YEAR SALARY(1) BONUS(2) OTHER(3) NUMBER OF SHARES
- ------------------ ---- --------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
John W. Hail............. 1996 $ -- $ -- $22,000 --
Chief Executive Officer 1995 -- -- 87,684 375,000(4)
1994 -- -- 66,026 --
Roger P. Baresel......... 1996 $91,413 $ -- $ -- --
President and Secretary 1995 37,692 -- 13,500(5) 168,750(6)
1994 -- -- 19,500(5) 10,000(6)
</TABLE>
- --------
(1) Dollar value of base salary (both cash and non-cash) earned during the
year.
(2) Dollar value of bonus (both cash and non-cash) earned during the year.
(3) The Company furnishes the use of an automobile to Mr. Hail, the value of
which is not greater than $5,000 annually. During 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."
(4) Adjusted to give effect to the one-for-eight reverse stock split on
October 29, 1996. During 1995, Mr. Hail transferred by gift 225,000 of the
stock options that he received during 1995.
(5) 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 to Mr. Baresel
the use of an automobile, the value of which is not greater than $5,000
annually.
(6) Adjusted to give effect to the one-for-eight reverse stock split on
October 29, 1996. During 1995, Mr. Baresel transferred by gift 156,250 of
the stock options that he received during 1995.
51
<PAGE>
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 granted in lieu of payment of additional salary and cash bonus
compensation for services rendered. During 1996, the Company did not grant any
stock options. The following table sets forth information related to options
granted to the named executive officers during 1995.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
------------------------------------- -------------------------------------
PERCENT OF
TOTAL OPTIONS
NUMBER GRANTED TO EXERCISE OR
OF OPTIONS EMPLOYEES BASE PRICE EXPIRATION FIVE TEN
GRANTED(2) IN 1995 PER SHARE(2) DATE PERCENT PERCENT
---------- ------------- ------------ ----------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
John W. Hail(3)......... 375,000 50.3% $2.00 February 23, 2005 $471,671 $1,195,307
Chief Executive Officer
Roger P. Baresel(4)..... 125,000 16.8% $2.00 February 23, 2005 $157,224 $ 398,436
President and Secretary 43,750 5.9% $3.60 July 5, 2005 $ 99,051 $ 251,014
</TABLE>
- --------
(1) The potential realizable value portion of the foregoing table illustrates
the value that might be realized upon rates of appreciation of the Common
Stock over the term of the options. These amounts do not take into
consideration provisions restricting transferability and represent certain
assumed rates of appreciation only. Actual gains on stock option exercises
are dependent on the future performance of the Common Stock and overall
stock market conditions. There can be no assurance that the potential
values reflected in this table will be achieved. All amounts have been
rounded to the nearest whole dollar amount.
(2) Adjusted to give effect to the one-to-eight reverse stock split on October
29, 1996.
(3) Of the 375,000 stock options received, Mr. Hail transferred by gift
225,000 stock options during 1995.
(4) Of the 168,750 stock options received, Mr. Baresel transferred by gift
156,250 stock options during 1995.
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 executive officers at December 31, 1996 and 1995.
During 1996 and 1995, no options to purchase Common Stock were exercised by
the named executive officers.
<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 on 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. Value is calculated on the basis of the remainder of $5.75
and $6.00, respectively, 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 exercisable stock
options. The in-the-money value of the transferred options as of December
31, 1996 and 1995, were $843,750 and $900,000, respectively.
(3) During 1995, Mr. Baresel transferred by gift 156,250 exercisable stock
options. The in-the-money value of the transferred options as of December
31, 1996 and 1995, were $515,938 and $555,000, respectively.
52
<PAGE>
BOARD OF DIRECTORS
Pursuant to the terms of the Company's Bylaws, the directors are divided
into three classes. Class I Directors hold office initially for a term
expiring at the annual meeting of shareholders to be held in 1999, Class II
Directors hold office initially for a term expiring at the annual meeting of
shareholders to be held in 1997, and Class III Directors hold office initially
for a term expiring at the annual meeting of shareholders to be held in 1998.
Each director will hold office for the term to which he is elected and until
his successor is duly elected and qualified. Mr. Stonecipher is serving as a
Class I Director under a term expiring in 1999, Messrs. Wilson and Dunlap are
serving as Class II Directors under terms expiring in 1997, and Messrs. Hail
and Baresel are serving as Class III Directors under terms expiring in 1998.
At each annual meeting of the shareholders of the Company, the successor to a
member of the class of directors whose term expires at such meeting will be
elected to hold office for a term expiring at the annual meeting of
shareholders held in the third year following the year of his election.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive $250 for each Board
meeting attended. Directors who are also employees of the Company receive no
additional compensation for serving as Directors. The Company reimburses its
Directors for travel and out-of-pocket expenses in connection with their
attendance at meetings of the Board of Directors. The Company's Bylaws provide
for mandatory indemnification of directors and officers to the fullest extent
permitted by Oklahoma law.
STOCK OPTION PLAN
The Company established the Advantage Marketing Systems, Inc. 1995 Stock
Option Plan (the "Stock Option Plan" or the "Plan") in June 1995. The Plan
provides for the issuance of incentive stock options ("ISO Options") with or
without stock appreciation rights ("SARs") and nonincentive stock options
("NSO Options") with or without SARs to employees and consultants of the
Company, including employees who also serve as Directors of the Company. The
total number of shares of Common Stock authorized and reserved for issuance
under the Plan is 1,125,000. As of the date of this Prospectus, options have
not been granted under the Plan.
The Stock Option Committee, which is currently comprised of Messrs. Hail and
Baresel, administers and interprets the Plan and has authority to grant
options to all eligible employees and determine the types of options, with or
without SARs, granted, the terms, restrictions and conditions of the options
at the time of grant, and whether SARs, if granted, are exercisable at the
time of exercise of the Option to which the SAR is attached.
The option price of the Common Stock is determined by the Stock Option
Committee, provided such price may not be less than 85 percent of the fair
market value of the shares on the date of grant of the option. The fair market
value of a share of the Common Stock is determined by averaging the closing
high bid and low asked quotations for such share on the date of grant of the
option as reported by the National Quotation Bureau, Incorporated or, if not
quoted, is determined by the Stock Option Committee. Upon the exercise of an
option, the option price must be paid in full, in cash or with an SAR. Subject
to the Stock Option Committee's approval, upon exercise of an option with an
SAR attached, a participant may receive cash, shares of Common Stock or a
combination of both, in an amount or having a fair market value equal to the
excess of the fair market value, on the date of exercise, of the shares for
which the option and SAR are exercised, over the option exercise price.
Options granted under the Plan may not be exercised until six months after
the date of the grant and rights under an SAR may not be exercised until six
months after the SAR is attached to an option, if not attached at the time of
the grant of the option, except in the event of death or disability of the
participant. ISO Options and any SARs are exercisable only by participants
while actively employed as an employee or a consultant by the Company, except
in the case of death, retirement or disability. Options may be exercised at
any time within three months after the participant's retirement or within one
year after the participant's disability or death, but not beyond the
expiration date of the option. No option may be granted after April 30, 2005.
Options are not transferable except by will or by the laws of descent and
distribution.
53
<PAGE>
OFFICER AND DIRECTOR LIABILITY
As permitted by the provisions of the Oklahoma General Corporation Act, the
Certificate of Incorporation (the "Certificate") eliminates in certain
circumstances the monetary liability of directors of the Company for a breach
of their fiduciary duty as directors. These provisions do not eliminate the
liability of a director for (i) a breach of the director's duty of loyalty to
the Company or its shareholders, (ii) acts or omissions by a director not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) liability arising under Section 1053 of the Oklahoma General
Corporation Act (relating to the declaration of dividends and purchase or
redemption of shares in violation of the Oklahoma General Corporation Act), or
(iv) any transaction from which the director derived an improper personal
benefit. In addition, these provisions do not eliminate liability of a
director for violations of federal securities laws, nor do they limit the
rights of the Company or its shareholders, in appropriate circumstances, to
seek equitable remedies such as injunctive or other forms of non-monetary
relief. Such remedies may not be effective in all cases.
The Certificate of Incorporation and Bylaws of the Company provide that the
Company shall indemnify all directors and officers of the Company to the full
extent permitted by the Oklahoma General Corporation Act. Under such
provisions, any director or officer, who in his capacity as such, is made or
threatened to be made, a party to any suit or proceeding, may be indemnified
if the Board of Directors determines such director or officer acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interest of the Company. The Certificate and Bylaws and the Oklahoma
General Corporation Act further provide that such indemnification is not
exclusive of any other rights to which such individuals may be entitled under
the Certificate, the Bylaws, an agreement, vote of shareholders or
disinterested directors or otherwise. Insofar as indemnification for
liabilities arising under the Act may be permitted to directors and officers
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable.
The Company may enter into indemnity agreements with each of its directors
and executive officers. Under each indemnity agreement, it is anticipated that
the Company will pay on behalf of the indemnitee, and his executors,
administrators and heirs, any amount which he is or becomes legally obligated
to pay because of (i) any claim or claims from time to time threatened or made
against him by any person because of any act or omission or neglect or breach
of duty, including any actual or alleged error or misstatement or misleading
statement, which he commits or suffers while acting in his capacity as a
director and/or officer of the Company or its affiliate or (ii) being a party,
or being threatened to be made a party, to any threatened, pending or
contemplated action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was an
officer, director, employee or agent of the Company or its affiliate or is or
was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise. It is anticipated that the payments which the Company will be
obligated to make thereunder shall include, inter alia, damages, charges,
judgments, fines, penalties, settlements and cost of investigation and costs
of defense of legal, equitable or criminal actions, claims or proceedings and
appeals therefrom, and costs of attachment, supersedeas, bail, surety or other
bonds.
CERTAIN TRANSACTIONS
Set forth below is a description of transactions entered into between the
Company and certain of its officers, directors and shareholders during the
last two years. Certain of these transactions will continue in effect during
and following completion of the Warrant Modification Offer and may result in
conflicts of interest between the Company and such individuals. Although these
persons have fiduciary duties to the Company and its shareholders, there can
be no assurance that conflicts of interest will always be resolved in favor of
the Company.
On November 6, 1990, John W. Hail, Chief Executive Officer and Chairman of
the Board of Directors of the Company, formed the John Hail Agency, Inc.
("JHA"). Mr. Hail is the sole director and shareholder of JHA.
54
<PAGE>
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, $87,684 and $66,026 during the
nine months ended September 30, 1996, and the years ended December 31, 1995
and 1994, respectively. JHA has made repayments of these advances of $67,401
and $9,069 during the fiscal years ended December 31, 1995 and 1994,
respectively. During the nine months ended September 30, 1996, JHA made
repayments of $3,040. At September 30, 1996, JHA was indebted to the Company
in the amount of $70,923. Effective June 30, 1996, the Company adopted a
policy to not make any further advances to JHA, and JHA executed a promissory
note payable to the Company in the principal amount of $73,964 bearing
interest at eight percent per annum and payable in 60 installments of $1,499
per month.
At September 30, 1996, and December 31, 1995, the balance due on a short-
term loan from the Company's Chief Executive Officer and major shareholder was
$17,658 and $81,929, respectively. During 1995, the Company combined interest
payable of approximately $52,000 with the principal due under the loan and
began making weekly interest and principal payments of $1,500. During the nine
months ended September 30, 1996, the Company did not receive any advances
under the loan, while during 1995, the Company received aggregate advances of
$31,963 under the loan. During the nine months ended September 30, 1996 and
the year ended December 31, 1995, the Company made principal payments of
$64,271 and $127,615, respectively, thereon to the Company's Chief Executive
Officer and major shareholder. The loan is unsecured, due on demand and bears
interest at 12 percent per annum, and as of the date of this Prospectus the
Company is making weekly principal and interest payments of $1,500.
During the five months ended May 31, 1995, and the fiscal year ended
December 31, 1994, Roger P. Baresel provided accounting and consulting
services to the Company and for such services Mr. Baresel was paid $13,500 and
$19,500, respectively. On June 1, 1995, Mr. Baresel ceased providing
accounting and consulting services to the Company and became an executive
officer and a Director of the Company.
Included among the consumer benefits sold by the Company are legal services
provided by Pre-Paid Legal Services, Inc. ("PPL"). Purchasers of these legal
services make payments directly to PPL and PPL in turn pays the Company
commissions on these sales. Harland C. Stonecipher, the founder and Chief
Executive Officer of PPL is a Director of the Company. During the nine months
ended September 30, 1996, and the years ended December 31, 1995 and 1994, the
Company received commissions from PPL on these sales totaling $7,063, $16,415
and $71,713, respectively.
During the nine months ended September 30, 1996 and during the years ended
December 31, 1995 and 1994, the Company paid Curtis H. Wilson, Sr., a Director
of the Company, sales commissions of $32,064, $51,669, and $26,791,
respectively. During the nine months ended September 30, 1996 and during the
years ended December 31, 1995 and 1994, the Company paid William A. LaReese, a
greater than five percent beneficial owner of the Company's Common Stock,
sales commissions of $7,547, $10,662, and $10,398, respectively. During the
nine months ended September 30, 1996 and during years ended December 31, 1995
and 1994, the Company paid jointly Robert and Retha Nance, who are greater
than five percent beneficial owners of the Company's Common Stock, sales
commissions of $791, $12,433, and $10,000, respectively. In addition, during
the nine months ended September 30, 1996 and during the year ended December
31, 1995, the Company paid jointly Roger P. Baresel, an executive officer of
the Company, and his wife, Judith A. Baresel, sales commissions of $254 and
$672, respectively.
During 1995, the Company granted Roger P. Baresel, an executive officer and
Director of the Company, 10-year, transferrable stock options exercisable for
the purchase of 125,000 and 43,750 shares of Common Stock for $2.00 and $3.60
per share, respectively. During 1995, Mr. Baresel transferred by gift 156,250
of such stock options to third parties, including 87,500 to his wife, Judith
A. Baresel, and 12,500 to Mrs. Baresel in her capacity as guardian for the
benefit of their children. In addition, during 1994, the Company granted Mr.
Baresel five-year stock options exercisable for the purchase of 10,000 shares
of Common Stock for $2.16 per share. All
55
<PAGE>
of the stock options were granted at the fair market value of the Common Stock
on the date of grant and are currently exercisable.
During 1995, the Company granted John M. Hail, an executive officer and
Director of the Company, 10-year, transferrable stock options exercisable for
the purchase of 375,000 shares of Common Stock for $2.00 per share. During
1995, Mr. Hail transferred by gift 225,000 of these stock options to third
parties. All of the stock options were granted at the fair market value of the
Common Stock on the date of grant and are currently exercisable.
During 1995, the Company granted Curtis H. Wilson, Sr., a Director of the
Company, six-year stock options exercisable for the purchase of 125,000 shares
of Common Stock for $3.60 per share. All of the stock options were granted at
the fair market value of the Common Stock on the date of grant and are
currently exercisable.
During 1995, the Company granted R. Terren Dunlap, a Director and former
executive officer of the Company, five-year stock options exercisable for the
purchase of 37,500 shares of Common Stock for $2.16 per share. All of the
stock options were granted at the fair market value of the Common Stock on the
date of grant and are currently exercisable.
During 1995, the Company granted United Financial Advisory Services, Inc.
five-year stock options exercisable for the purchase of 125,000 shares of
Common Stock for $3.60 per share and 125,000 shares of Common Stock for $4.96
per share. All of the stock options were granted at or above the fair market
value of the Common Stock on the date of grant and are currently exercisable.
As a result of the grant of these stock options, United Financial Advisory
Services, Inc. became a greater than five percent beneficial owner of the
Common Stock of the Company.
During 1995, the Company granted Robert Nance, a greater than five percent
beneficial owner of the Common Stock of the Company, five-year stock options
exercisable for the purchase of 49,125 shares of Common Stock for $2.00 per
share and two-year stock options exercisable for the purchase of 6,945 shares
of Common Stock for $2.16 per share. Furthermore, during 1994, Mr. Nance was
granted five-year stock options exercisable for the purchase of 5,358 shares
of Common Stock for $2.80 per share. All of the stock options were granted at
or above the fair market value of the Common Stock on the date of grant and
are currently exercisable.
During 1995, Gene Burson, a director and shareholder of Miracle Mountain
International, Inc. ("MMI"), advanced $56,253 to MMI pursuant to a demand note
bearing nine percent interest. During 1995, MMI did not make any principal or
interest payments on this note. In accordance with the terms of the Stock
Purchase Agreement pursuant to which the Company acquired MMI, Mr. Burson
contributed the note to MMI as additional capitalization of MMI. See "The
Company--Background--MMI Acquisition."
The Board of Directors of the Company believes that the terms of the
transactions described above were at least as favorable as could be obtained
from unaffiliated third parties. The Company has adopted policies that any
loans to officers, directors and five percent or more shareholders
("affiliates") are subject to approval by a majority of the disinterested
independent directors of the Company and that further transactions with
affiliates will be on terms no less favorable than could be obtained from
unaffiliated parties and approved by a majority of the disinterested
independent directors. As of the date of this Prospectus, the Board of
Directors is comprised of the five members of which two are independent
directors.
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<PAGE>
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 January 10, 1997, and the beneficial
ownership of the Common Stock, as adjusted to give effect to the Warrant
Modification Offer (assuming the exercise of the Public Warrants in full and
the issuance of 1,050,470 shares of Common Stock pursuant thereto) and the
Rights Offering (assuming the exercise of the Rights in full and the issuance
of 2,148,191 shares of Common Stock pursuant thereto), of (i) each person who
is known to the Company to be the beneficial owner of more than five percent
thereof, (ii) each director and executive officer of the Company, and (iii)
all executive officers and directors as a group, together with their
percentage holdings of the outstanding shares, and, as adjusted, after giving
effect to completion of the Warrant Modification Offer. All persons listed
have sole voting and investment power with respect to their shares unless
otherwise indicated, and there are no family relationships between the
executive officers and directors of the Company. For purposes of the following
table, the number of shares and percent of ownership of outstanding Common
Stock that the named person beneficially owned includes shares of Common Stock
that such person has the right to acquire within 60 days of January 10, 1997,
pursuant to exercise of the Public Warrants, options and other warrants, as
well as any other rights to acquire, and are deemed to be outstanding, but are
not deemed to be outstanding for the purposes of computing the number of
shares beneficially owned and percent of outstanding Common Stock of any other
named person.
<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING BENEFICIALLY
OWNED SHARES AFTER GIVING EFFECT TO
-------------------------------------
WARRANT
PERCENT OF SHARES MODIFICATION
OUTSTANDING BENEFICIALLY OFFER(2)
SHARES BENEFICIALLY OWNED AFTER WARRANT AND
NAME AND ADDRESS BENEFICIALLY OWNED DISTRIBUTION MODIFICATION RIGHTS RIGHTS
BENEFICIAL OWNER OWNED SHARES OF RIGHTS(1) OFFER(2) OFFERING(3) OFFERING(3)
- ---------------- ------------ ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
John W. Hail(4)(5)...... 395,237 17.24% 640,474 11.82% 14.44% 11.67%
Bruce Greene(6)......... 331,500 13.40% 331,500 10.38% 7.18% 6.21%
Curtis H. Wilson,
Sr.(4)(7).............. 272,603 11.39% 295,206 7.92% 6.51% 5.28%
United Financial
Advisory Services(8)... 250,000 10.45% 250,000 7.26% 5.51% 4.47%
William A. LaReese(9)... 216,541 9.48% 291,832 6.78% 6.59% 5.47%
Robert and Retha
Nance(10).............. 193,094 8.76% 324,760 5.93% 7.47% 6.02%
Roger P.
Baresel(4)(11)......... 161,250 7.08% 187,500 4.84% 4.24% 3.43%
Pre-Paid Legal Services,
Inc.(12)............... 56,415 2.63% 112,830 1.77% 2.63% 2.11%
Harland C.
Stonecipher(12)........ 56,415 2.63% 112,830 1.77% 2.63% 2.11%
R. Terren
Dunlap(4)(13).......... 37,500 1.72% 37,500 1.16% .87% .70%
Executive Officers and
Directors as a group
(five persons)(5)(7)
(11)(12)(13)(14)....... 923,005 33.99% 1,273,510 24.51% 26.21% 21.55%
</TABLE>
- --------
(1) Assumes the distribution of 2,148,191 Rights to the shareholders of the
Company.
(2) Assumes the exercise of the Public Warrants in full and the issuance
pursuant thereto of 1,050,470 shares of Common Stock comprising in part
the Units. See "Warrant Modification Offer."
(3) Assumes exercise of the Rights in full and issuance pursuant thereto of
2,148,191 shares of Common Stock comprising in part the Rights Offering
Units pursuant to the Rights Offering. See "Description of Securities--
Common Stock--Rights Offering."
(4) A Director and an executive officer of the Company, with a business
address of 2601 Northwest Expressway, Suite 1210W, Oklahoma City,
Oklahoma 73112.
(5) The shares and percentage include (i) 245,237 shares of outstanding
Common Stock held by Mr. Hail, (ii) 150,000 shares of Common Stock which
are subject to currently exercisable stock options granted in 1995 to and
held by Mr. Hail, and, after distribution of the Rights in connection
with the Rights Offering, (iii) 245,237 shares of Common Stock issuable
upon exercise of the Rights. As of the date of this Prospectus, Mr. Hail
has reserved all rights with respect to the Rights to be distributed
pursuant to the Rights Offering and has not committed to exercise all or
any portion of the Rights.
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<PAGE>
(6) Mr. Greene's business address is 1465 Greenbrier Drive Green Oaks,
Illinois 60048. The shares consist of and percentages are based on
331,500 shares of Common Stock which are subject to currently exercisable
Public Warrants held by Mr. Greene. As of the date of this Prospectus,
Mr. Greene has reserved all rights with respect to the Public Warrants
and has not committed to exercise all or any portion of the Public
Warrants.
(7) The shares and percentage include (i) 17,065 shares of outstanding Common
Stock held by Mr. Wilson, (ii) 250,000 shares of Common Stock which are
subject to currently exercisable stock options granted to and held by Mr.
Wilson (125,000 of which were granted in 1995), and (iii) 5,538 shares of
outstanding Common Stock held by Ruth Wilson, wife of Mr. Wilson and with
respect to which Mr. Wilson disclaims any beneficial interest, and after
distribution of the Rights in connection with the Rights Offering, (iv)
17,065 shares of Common Stock issuable upon exercise of the Rights by Mr.
Wilson, and (v) 5,538 shares of Common Stock issuable upon exercise of
the Rights by Mrs. Wilson. As of the date of this Prospectus, Mr. and
Mrs. Wilson have reserved all rights with respect to the Rights to be
distributed pursuant to the Rights Offering and have not committed to
exercise all or any portion of the Rights.
(8) The business address of United Financial Advisors, Inc. is 1601 Northwest
Expressway, Suite 2101, Oklahoma City, Oklahoma 73118. The shares consist
of and the percentage is based upon 250,000 shares of Common Stock which
are subject to currently exercisable warrants.
(9) Mr. LaReese's business address is 2239 Northwest 30th Street, Oklahoma
City, Oklahoma 73112. The shares and percentage include (i) 75,291 shares
of outstanding Common Stock held by Mr. LaReese, (ii) 141,250 shares of
Common Stock that are subject to currently exercisable Public Warrants,
and, after distribution of the Rights in connection with the Rights
Offering, (iii) 75,291 shares of Common Stock issuable upon exercise of
the Rights. As of the date of this Prospectus, Mr. LaReese has reserved
all rights with respect to the Public Warrants and the Rights to be
distributed pursuant to the Rights Offering and has not committed to
exercise all or any portion of the Public Warrants or Rights.
(10) Mr. and Mrs. Nance are husband and wife and their business address is
Post Office Box 405, Wheatland, Oklahoma 73097. The shares and percentage
include (i) 75 shares of outstanding Common Stock held by Mr. Nance, (ii)
37,750 shares of outstanding Common Stock owned by Mrs. Nance, (iii)
93,841 shares of outstanding Common Stock owned jointly by Mr. and Mrs.
Nance, (iv) 61,428 shares of Common Stock which are subject to currently
exercisable stock options granted to and held by Mr. Nance, and, after
distribution of the Rights in connection with the Rights Offering, (v)
131,666 shares of Common Stock issuable upon exercise of the Rights. As
of the date of this Prospectus, Mr. and Mrs. Nance have reserved all
rights with respect to the Rights to be distributed pursuant to the
Rights Offering and have not committed to the exercise of all or any
portion of the Rights.
(11) The shares and percentages include (i) 12,500 shares of outstanding
Common Stock jointly held by Mr. Baresel and his wife, Judith A. Baresel,
(ii) 35,000 shares of Common Stock which are subject to currently
exercisable stock options granted to and held by Mr. Baresel, of which
12,500, 10,000 and 12,500 options were granted in 1992, 1994 and 1995,
respectively, (iii) 13,750 shares of outstanding Common Stock held by
Mrs. Baresel, (iv) 87,500 shares of Common Stock which are subject to
currently exercisable stock options held by Mrs. Baresel, (v) 12,500
shares of Common Stock which are subject to currently exercisable stock
options held as the custodian for the benefit of the children of Mr. and
Mrs. Baresel, and with respect to which Mr. Baresel disclaims any
beneficial interest, and, after distribution of the Rights in connection
with the Rights Offering, (vi) 26,250 shares of Common Stock issuable
upon exercise of the Rights. As of the date of this Prospectus, Mr. and
Mrs. Baresel have reserved all rights with respect to the Rights to be
distributed pursuant to the Rights Offering and have not committed to
exercise all or any portion of the Rights.
(12) Mr. Stonecipher is a Director of the Company with a business address of
321 East Main Street, Ada, Oklahoma 74820 and Chairman of the Board and
Chief Executive Officer of Pre-Paid Legal Services, Inc. The shares and
percentages include (i) 56,415 shares of outstanding Common Stock held by
Pre-Paid Legal Services, Inc. and, after distribution of the Rights in
connection with the Rights Offering, (ii) 56,415 shares of Common Stock
issuable upon exercise of the Rights. As of the date of this Prospectus,
Pre-Paid Legal Services, Inc. has reserved all rights with respect to the
Rights to be distributed pursuant to the Rights Offering and has not
committed to exercise all or any portion of the Rights.
58
<PAGE>
(13) The shares and percentages include 37,500 shares of outstanding Common
Stock which are subject to a currently exercisable stock options granted
in 1995.
(14) The shares and percentage include (i) 350,505 shares of outstanding
Common Stock, (ii) 572,500 shares of Common Stock which are subject to
currently exercisable stock options and, after distribution of the Rights
in connection with the Rights Offering, (ii) 350,505 shares of Common
Stock issuable upon exercise of the Rights.
DESCRIPTION OF SECURITIES
Pursuant to its Certificate of Incorporation, the Company is currently
authorized to issue up to 495,000,000 shares of Common Stock, $.0001 par value
("Common Stock"), and 5,000,000 shares of Preferred Stock, $.0001 par value
("Preferred Stock"). As of the date of this Prospectus, the outstanding
capital stock of the Company consisted of 2,148,191 shares of Common Stock.
Pursuant to the Warrant Modification Offer, the Company is offering pursuant
to this Prospectus 1,050,470 Units, each consisting of one share of Common
Stock and one 1997-A Warrant. See "Warrant Modification Offer." Concurrently
with this offering and the Warrant Modification Offer, pursuant to the Rights
Offering, the Company is distributing 2,148,191 Rights to its shareholders and
is offering pursuant to a separate prospectus 2,148,191 Rights Offering Units
(each consisting of one share of Common Stock and one 1997-A Warrant) pursuant
to exercise of the Rights. See "--Common Stock--Rights Offering," below. The
share of Common Stock and the 1997-A Warrant comprising each Unit and Rights
Offering Unit will be immediately detachable and separately tradeable upon
issuance and the 1997-A Warrants will be exercisable 90 days after the date of
this Prospectus.
After giving effect to (i) this offering and the Warrant Modification Offer
and assuming the exercise of the Public Warrants in full and the issuance of
1,050,470 Units (1,050,470 shares of Common Stock and 1,050,470 1997-A
Warrants), and (ii) the issuance of the Rights and assuming the exercise of
the Rights in full and the issuance of 2,148,191 Rights Offering Units
(2,148,191 shares of Common Stock and 2,148,191 1997-A Warrants) pursuant
thereto, the issued and outstanding capital stock of the Company will consist
of 5,346,852 shares of Common Stock, without giving any effect to exercise of
the 1997-A Warrants. Furthermore, after giving effect to (i) this offering and
the Warrant Modification Offer and assuming the exercise of the Public
Warrants in full and the issuance of 1,050,470 Units (1,050,470 shares of
Common Stock and 1,050,470 1997-A Warrants), (ii) the issuance of the Rights
and assuming the exercise of the Rights in full and the issuance of 2,148,191
Rights Offering Units (2,148,191 shares of Common Stock and 2,148,191 1997-A
Warrants) pursuant thereto and (iii) exercise of the 1997-A Warrants in full,
the issued and outstanding capital stock of the Company will consist of
8,545,513 shares of Common Stock. See "Warrant Modification Offer" and "--
Common Stock," "--Common Stock--Rights Offering," and "--1997-A Warrants,"
below.
The following description of certain matters relating to the capital stock,
Public Warrants and the 1997-A Warrants is a summary and is qualified in its
entirety by the provisions of the Company's Certificate of Incorporation,
Bylaws, the Warrant Agreements between the Company and U.S. Stock Transfer
Corp. (the "Warrant Agent"), as amended, related to the Public Warrants and
the 1997-A Warrants, and the Rights Agreement between the Company and U.S.
Stock Transfer Corp. (the "Subscription Agent"), all of which are filed as
exhibits to the Registration Statement of which this Prospectus is a part. See
"Additional Information."
COMMON STOCK
Pursuant to its Certificate of Incorporation, the Company is authorized to
issue up to 495,000,000 shares of Common Stock. The holders of outstanding
shares of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of assets
legally available therefor, subject to the payment of preferential dividends
with respect to any Preferred Stock that may be outstanding. In the event of
liquidation, dissolution and winding-up of the Company, the holders of
outstanding Common Stock are entitled to share ratably in all assets available
for distribution to the Common Stock shareholders after payment of all
liabilities of the Company, subject to the prior distribution rights of the
holders
59
<PAGE>
of any Preferred Stock that may be outstanding at that time. Holders of
outstanding Common Stock are entitled to one vote per share on matters
submitted to a vote by the Common Stock shareholders of the Company. The
Common Stock has no preemptive rights and no subscription, redemption or
conversion privileges. The Common Stock does not have cumulative voting
rights, which means that holders of a majority of shares voting for the
election of directors can elect all members of the Board of Directors subject
to election. In general, a majority vote of shares represented at a meeting of
Common Stock shareholders at which a quorum (a majority of the outstanding
shares of Common Stock) is present is sufficient for all actions that require
the vote or concurrence of shareholders, subject to and possibly in connection
with the voting rights of the holders of any Preferred Stock that from time to
time may be outstanding and entitled to vote with the holders of the Common
Stock. Upon issuance of the Common Stock as a component of the Units pursuant
to the Warrant Modification Offer, all of the outstanding shares of Common
Stock will be fully paid and nonassessable.
RIGHTS OFFERING. Pursuant to a separate prospectus included within the
Registration Statement of which this Prospectus is a part, the Company will
issue 2,148,191 non-transferrable rights ("Rights") to its shareholders, each
Right exercisable to purchase one unit consisting of one share of Common Stock
and one 1997-A Warrant (the "Rights Offering Units") at $6.80 per share (the
"Rights Offering"). The Rights will be issued as a dividend to the holders
(the "Shareholders") on January 31, 1997 (the "Record Date"), on the basis of
one Right per share of Common Stock ("Share") outstanding on the Record Date.
The Rights are exercisable on or before March 17, 1997, subject to extension
by the Company to a date not later than April 30, 1997 (the "Rights Exercise
Date"), for the purchase of one Rights Offering Unit (consisting of one share
of Common Stock and one 1997-A Warrant). Those Rights not exercised on or
before the Rights Exercise Date will expire and cease to be outstanding.
PUBLIC WARRANTS
As of the date of this Prospectus, there are 524,610 Class A Common Stock
Purchase Warrants (the "Class A Warrants") and 525,860 Class B Common Stock
Purchase Warrants (the "Class B Warrants") issued and outstanding. The terms
and conditions of the Class A Warrants and the Class B Warrants (collectively,
the "Public Warrants") are set forth in the Warrant Agreement between the
Company and the Warrant Agent, dated January 26, 1989, as amended providing
for extension of the respective periods during which the Public Warrants may
be exercised. Pursuant to amendment of the Warrant Agreement, the period of
exercise of the Class A Warrants and the Class B Warrants was extended to July
26, 1997. The Public Warrants are evidenced by warrant certificates in
registered form.
Each Public Warrant entitles the holder to purchase one share of Common
Stock. The number and kind of securities or other property for which the
Public Warrants are exercisable are subject to adjustments in certain events,
such as mergers, reorganizations or stock splits, to prevent dilution. Since
issuance of the Public Warrants and without giving effect to the Warrant
Modification Offer, there have not been any events resulting in adjustment in
the number and kind of securities or other property required to be delivered
by the Company upon exercise of the Public Warrants. The Class A Warrants and
Class B Warrants are exercisable on or before July 26, 1997, for the purchase
of one share of Common Stock for $6.00 and $8.00 per share (the "Warrant
Exercise Prices"), respectively, before giving effect to the Warrant
Modification Offer. The Company has exercised its right to redeem (the
"Warrant Redemption") the Public Warrants, by notice pursuant to and in
accordance with this Prospectus, at 5:00 p.m., Central Standard Time, on March
17, 1997, subject to extension by the Company to a date not later than April
30, 1997 (the "Redemption Date"), for $.0008 per warrant (the "Redemption
Price"). Pursuant to agreement with the Warrant Agent, the Company has
unilaterally reduced the Warrant Exercise Price of the Class B Warrants to
$6.00 per share for the purchase of a Unit through the Redemption Date. See
"Warrant Modification Offer." Following expiration of the Redemption Date, the
unexercised Public Warrants will expire and cease to be issued and
outstanding, and the registered holders of the unexercised Public Warrants on
the Redemption Date will be entitled to receive the Redemption Price per
warrant.
In certain cases, the sale of the Units by the Company upon exercise of
Public Warrants could violate the securities laws of certain states or other
jurisdictions. The Company has used and will continue to use its best
60
<PAGE>
efforts to cause the Registration Statement of which this Prospectus is a part
to be declared effective under the laws of various states as may be required
to cause the sale of securities upon exercise of Public Warrants to be lawful.
However, the Company is not be required to accept the exercise of the Public
Warrants, if, in the opinion of counsel, the sale of securities upon such
exercise would be unlawful. In such cases, the Public Warrants not accepted
for exercise will be subject to redemption. See "Warrant Redemption."
The Public Warrants may be exercised by completing and signing the "Form of
Election to Purchase" on the reverse side of the warrant certificate
evidencing the Public Warrant and mailing or delivering the certificate to the
Warrant Agent in time to reach the Warrant Agent by the Redemption Date,
accompanied by payment in full of the Warrant Exercise Price for the Public
Warrants being exercised in United States funds (in cash or by check payable
to the order of the Company). Common Stock certificates and 1997-A Warrant
certificates will be issued, as fully paid and non-assessable, as soon as
practicable after exercise and payment of the Warrant Exercise Price as
described above.
1997-A WARRANTS
The Board of Directors of the Company has authorized the issuance and sale
of 3,198,661 1997-A Warrants to be issued as components of the Units, and
Rights Offering Units (one 1997-A Warrant per Unit and Rights Offering Unit)
to be offered to the Warrant Holders pursuant to the Warrant Modification
Offer and Rights Holders pursuant to the Rights Offering. See "Warrant
Modification Offer" and "--Common Stock--Rights Offering," above. The 1997-A
Warrants will be issued subject to the terms and conditions of the Warrant
Agreement between the Company and the Warrant Agent.
Each 1997-A Warrant entitles the holder to purchase one share of Common
Stock at any time 90 days after the date of this Prospectus and on or before
January 31, 1999, subject to extension by the Company, for an exercise price
of $12.00. The number and kind of securities or other property for which the
1997-A Warrants are exercisable are subject to adjustments in certain events,
such as mergers, reorganizations or stock splits, to prevent dilution. At any
time, upon 30 days' written notice, the Company may redeem in whole and not in
part, unexercised 1997-A Warrants for $.0001 per warrant at any time. If any
1997-A Warrants called for redemption are not exercised by such time, such
1997-A Warrants will cease to be exercisable, and the holders thereof will be
entitled only to receive the redemption price. All 1997-A Warrants not
exercised or redeemed will expire on January 31, 1999, subject to extension by
the Company. Holders of 1997-A Warrants will not, as such, have any of the
rights of shareholders of the Company.
In certain cases, the sale of securities by the Company upon exercise of
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. In certain cases, 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.
The 1997-A Warrants may be exercised by filling out and signing the
appropriate form on the reverse side of the warrant certificate and mailing or
delivering the warrant certificate to the Warrant Agent in time to reach the
Warrant Agent by the expiration or any redemption date, accompanied by payment
in full of the exercise price for the 1997-A Warrants being exercised in
United States funds (in cash or by check payable to the order of the Company).
Common Stock certificates will be issued as soon as practicable after exercise
and payment of the exercise price as described above.
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<PAGE>
PREFERRED STOCK
Pursuant to its Certificate of Incorporation, the Company has an authorized
class of Preferred Stock of 5,000,000 shares, $.0001 par value. The Preferred
Stock may be issued from time to time in one or more series, and the Board of
Directors of the Company, without further approval of its shareholders, is
authorized to fix the relative rights, preferences, privileges and
restrictions applicable to each series of Preferred Stock. Management of the
Company believes that having such a class of Preferred Stock provides the
Company with greater flexibility in financing, acquisitions and other
corporate activities. While there are no current plans, commitments or
understandings, written or oral, to issue any shares of Preferred Stock, in
the event of any issuance, the holders of Common Stock will not have any
preemptive or similar rights to acquire any of such Preferred Stock.
The Board of Directors has the authority to issue shares of Preferred Stock
and to determine its rights and preferences to eliminate delays associated
with a shareholder vote on specific issuances. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions
and other corporate purposes, could adversely affect the voting power of
holders of Common Stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation and could have the effect of
delaying, deferring or preventing a change in control of the Company.
OTHER OPTIONS AND WARRANTS
As of the date of this Prospectus, the Company has granted stock options and
other warrants to purchase 1,540,177 shares of Common Stock during various
periods, which expire February 1997 through July 2005, at exercise prices of
$1.60 to $6.48 per share. The average exercise price of the stock options is
$2.48, and the exercise prices of the stock options and warrants were equal to
the fair market value of the Common Stock on the date of the grant of each
stock option or warrant. In addition, the Board of Directors is authorized to
issue options and other stock purchase rights pursuant to the Advantage
Marketing Systems, Inc. 1995 Stock Option Plan. As of the date of this
Prospectus, options under such Stock Option Plan have not been granted. See
"Management--Stock Option Plan."
During 1995, the Company issued options to certain officers and directors in
return for services rendered as a means of retaining their services to the
Company. In lieu of payments of salaries and consulting fees, the Company has
historically used options to attract, retain and compensate its consultants,
officers and directors. The Company also believes that linking the
compensation of its officers and directors to increases in the value of the
Common Stock achieves improved performance.
ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation and Bylaws of the Company and the Oklahoma
General Corporation Act include a number of provisions which may have the
effect of encouraging persons considering unsolicited tender offers or other
unilateral takeover proposals to negotiate with the Board of Directors rather
than pursue non-negotiated takeover attempts. The Company believes that the
benefits of these provisions outweigh the potential disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals might result in an improvement of their terms. The description below
related to provisions of the Certificate of Incorporation and the Bylaws of
the Company is intended as a summary only and is qualified in its entirety by
reference to the Certificate of Incorporation and the Bylaws of the Company,
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. See "Additional Information."
Preferred Stock. The Certificate of Incorporation authorizes the issuance of
the Preferred Stock in classes, and the Board of Directors to set and
determine the voting rights, redemption rights, conversion rights and other
rights relating to such class of Preferred Stock, and to issue such stock in
either private or public transactions. In some circumstances, the Preferred
Stock could be issued and have the effect of preventing a merger, tender offer
or other takeover attempt which the Company's Board of Directors opposes.
62
<PAGE>
Classified Board of Directors. The Bylaws of the Company provide that the
Board of Directors shall be comprised of three classes of directors, each
class constituting approximately one-third of the total number of directors
with each class serving staggered three-year terms. The classification of the
directors make it more difficult for shareholders to change the composition of
the Board of Directors. The Company believes, however, that the longer time
required to elect a majority of a classified board of directors will help
ensure continuity and stability of the Company's management and policies.
The classification provisions may also have the effect of discouraging a
third party from accumulating large blocks of Common Stock or attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its shareholders. Accordingly, shareholders of the Company
could be deprived of certain opportunities to sell their shares of Common
Stock at a higher market price than might otherwise be the case.
Oklahoma Anti-Takeover Statutes. Following completion of this offering and
the Warrant Modification Offer, the Company may become subject to Section
1090.3 and Sections 1145 through 1155 of the Oklahoma General Corporation Act
(the "OGCA").
Subject to certain exceptions, Section 1090.3 of the OGCA prohibits a
publicly-held Oklahoma corporation from engaging in a "business combination"
with an "interested shareholder" for a period of three years after the date of
the transaction in which such person became an interested shareholder, unless
the interested shareholder attained such status with approval of the board of
directors or the business combination is approved in a prescribed manner, or
certain other conditions are satisfied. A "business combination" includes
mergers, asset sales, and other transactions resulting in a financial benefit
to the interested shareholder. Subject to certain exceptions, an "interested
shareholder" is a person who, together with affiliates and associates, owns,
or within three years did own, 15 percent or more of the corporation's voting
stock.
In general, Sections 1145 through 1155 of the OGCA provide that issued and
outstanding shares ("interested shares") of voting stock acquired (within the
meaning of a "control share acquisition") become nonvoting stock for a period
of three years following such control share acquisition, unless a majority of
the holders of non-interested shares approve a resolution reinstating the
interested shares with the same voting rights that such shares had before such
interested shares became control shares. Any person ("acquiring person") who
proposes to make a control share acquisition may, at the person's election,
and any acquiring person who has made a control share acquisition is required
to deliver an acquiring person statement to the corporation disclosing certain
prescribed information regarding the acquisition. The corporation is required
to present to the next annual meeting of the shareholders the reinstatement of
voting rights with respect to the control shares that resulted in the control
share acquisition, unless the acquiring person requests a special meeting of
shareholders for such purpose and undertakes to pay the costs and expenses of
such special meeting. In the event voting rights of control shares acquired in
a control share acquisition are reinstated in full and the acquiring person
has acquired control shares with a majority or more of all voting power, all
shareholders of the corporation have dissenters' rights entitling them to
receive the fair value of their shares which will not be less than the highest
price paid per share by the acquiring person in the control share acquisition.
A "control share acquisition" includes the acquisition by any person
(including persons acting as a group) of ownership of, or the power to direct
the exercise of voting power with respect to, "control shares" (generally
issued and outstanding shares having more than 20 percent of all voting power
in the election of directors of a publicly held corporation), subject to
certain exceptions including (i) an acquisition pursuant to an agreement of
merger, consolidation, or share acquisition to which the corporation is a
party and is effected in compliance with certain Sections of the OGCA, (ii) an
acquisition by a person of additional shares within the range of voting power
for which such person has received approval pursuant to a resolution by the
majority of the holders of non-interested shares, (iii) an increase in voting
power resulting from any action taken by the corporation, provided the person
whose voting power is thereby affected is not an affiliate of the corporation,
(iv) an acquisition pursuant to proxy solicitation under and in accordance
with the Securities Exchange Act of 1934, as
63
<PAGE>
amended, or the laws of Oklahoma, and (v) an acquisition from any person whose
previous acquisition of shares did not constitute a control share acquisition,
provided the acquisition does not result in the acquiring person holding
voting power within a higher range of voting power than that of the person
from whom the control shares were acquired. The issuance of the shares of
Common Stock comprising in part the Units in connection with this offering and
issuance of shares of Common Stock in connection with the exercise of the
1997-A Warrants will not constitute "control shares" within the meaning of
Section 1146 of the OGCA because the resulting increase, if any, in voting
power of a Warrant Holder as a result of exercise of the Public Warrants will
result from the actions taken by the Company in the making of the Warrant
Modification Offer. Therefore, the receipt of such shares by the holders of
Public Warrants or by the holders of the 1997-A Warrants will not constitute a
share acquisition within the meaning of Sections 1145 through 115 of the OGCA.
Furthermore, the voting rights provisions of the Sections 1145 through 1155 of
the OGCA were declared unconstitutional and unenforceable in 1987. In 1991,
Sections 1145 through 1155 of the OGCA were amended; however, the
constitutionality and enforceability of the voting rights provisions of such
Sections of the OGCA, as amended, have not been determined as of the date of
this Prospectus.
The anti-takeover provisions of the OGCA may have the effect of discouraging
a third party from acquiring large blocks of Common Stock within a short
period or attempting to obtain control of the Company, even though such an
attempt might be beneficial to the Company and its shareholders. Accordingly,
shareholders of the Company could be deprived of certain opportunities to sell
their shares of Common Stock at a higher market price than might otherwise be
the case.
TRANSFER AGENT AND WARRANT AGENT
U.S. Stock Transfer Corp. is the registrar and transfer agent for the Common
Stock and the Warrant Agent for the Public Warrants and the 1997-A Warrants,
whose address is 1745 Gardena Avenue, Suite 200, Glendale, California 91204-
2991.
SHARES ELIGIBLE FOR FUTURE SALE
Upon issuance of the Units pursuant to the Warrant Modification Offer (and
assuming and giving effect to the exercise of the Public Warrants in full and
issuance of 1,050,470 shares of Common Stock as components of the Units
pursuant thereto) and upon issuance of the Rights (and assuming and giving
effect to the exercise of the Rights in full and the issuance of 2,148,191
Rights Offering Units, and shares of Common Stock underlying such units,
pursuant thereto), the Company will have outstanding 5,346,852 shares of
Common Stock. The Company has reserved 3,198,661 shares of Common Stock for
issuance upon exercise of the 1997-A Warrants, 1,540,177 shares of Common
Stock for exercise of outstanding stock options and certain other warrants,
and 1,125,000 shares of Common Stock for issuance under the Stock Option Plan.
See "Security Ownership of Certain Beneficial Owners and Management,"
"Description of Securities--1997-A Warrants," and "Management--Stock Option
Plan." Additionally, the Company will have 483,789,310 shares of Common Stock
available for issuance at such times and upon such terms as may be approved by
the Company's Board of Directors. No prediction can be made as to the effect,
if any, that future sales or the availability of shares for sale will have on
the market price of the Common Stock prevailing from time to time. Also see
"Risk Factors--Absence of Prior Public Market for Units and 1997-A Warrants;
Possible Volatility of Stock Price." Nevertheless, sales of substantial
amounts of Common Stock in the public market could adversely affect the
prevailing market price of the Common Stock and could impair the Company's
ability to raise capital through sales of its equity securities.
The Units (and the component one share of Common Stock and one 1997-A
Warrant) issued pursuant to the Warrant Modification Offer and Rights Offering
Units (and the component one share of Common Stock and one 1997-A Warrant)
issued pursuant to exercise of the Rights pursuant to the Rights Offering,
will be immediately eligible for resale in the public market without
restriction or further registration under the 1933 Act, except for Units,
Common Stock, and 1997-A Warrants purchased by an "affiliate" (as that term is
defined
64
<PAGE>
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 627,834 shares of Common Stock (the
"Restricted Shares") outstanding which have not been registered under the 1933
Act (of which 350,505 were held by the executive officers, directors and
affiliates of the Company), but may be sold without registration pursuant to
Rule 144 promulgated under the 1933 Act, subject to the limitations thereunder
described below.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned Restricted Shares for at least two years is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (i)
one percent of the then outstanding shares of Common Stock or (ii) an amount
equal to the average weekly reported volume of trading in such shares during
the four calendar weeks preceding the date on which notice of such sale is
filed with the Commission. Sales under Rule 144 are also subject to certain
manner of sale limitations, notice requirements and the availability of
current public information about the Company. Restricted Shares properly sold
in reliance on Rule 144 are thereafter freely tradable without restrictions or
registration under the 1933 Act, unless thereafter held by an affiliate of the
Company. In addition, affiliates of the Company must comply with the
restrictions and requirements of Rule 144, other than the two-year holding
period requirement, in order to sell shares of Common Stock which are not
Restricted Shares (such as shares of Common Stock acquired by affiliates of
the Company pursuant to exercise of the Public Warrants). As defined in Rule
144, an "affiliate" of an issuer is a person that directly, or indirectly
through one or more intermediaries, controls or is controlled by or is under
common control with such issuer.
Furthermore, if three years have elapsed since the later of the date of any
acquisition of Restricted Shares from the Company or from any affiliate of the
Company, and the acquiror or subsequent holder thereof is deemed not to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, such person would be entitled to sell such shares in the public market
pursuant to Rule 144(k) without regard to volume limitations, manner of sale
restrictions, or public information or notice requirements. The Securities and
Exchange Commission has recently proposed an amendment to Rule 144 which would
reduce the three-year holding period to two years. The Commission is currently
awaiting comments on proposed amendment. It is anticipated that the proposed
amendment will be adopted, although there can be no assurance that the
proposed amendment will be adopted as proposed or that additional conditions
may not be imposed to permit the sale by non-affiliates after such two year
holding period pursuant to Rule 144.
Pursuant to Rule 144A promulgated under the 1933 Act, under certain
circumstances qualified institutional buyers, as defined in the rule, are
permitted to more easily acquire and sell "restricted securities." The Company
is unable to predict the effect that Rule 144A has or will have on the
prevailing market price of the Common Stock.
LEGAL MATTERS
Certain legal matters in connection with the Units offered hereby are be
passed upon for the Company by its counsel, Dunn Swan & Cunningham, A
Professional Corporation.
EXPERTS
The financial statements of Advantage Marketing Systems, Inc. (formerly AMS,
Inc.) as of December 31, 1995 and 1994, and for each of the two years in the
period ended December 31, 1995, and for Miracle Mountain International, Inc.
as of December 31, 1995, and the year then ended included in this Prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein, and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
65
<PAGE>
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 (No. 33-80629)
(herein, together with all amendments thereto, the "Registration Statement"),
of which this Prospectus constitutes a part, under the Securities Act of 1933,
as amended (the "1933 Act"), with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., with respect to the securities offered by
this Prospectus. As permitted by the rules and regulations of the Commission,
this Prospectus, filed as part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and in the
exhibits thereto. The statements contained in this Prospectus as to the
contents of any contract or other document referenced herein are not
necessarily complete, and in each instance, if the contract or document was
filed as an exhibit, reference is hereby made to the copy of the contract or
other document filed as an exhibit to the Registration Statement and each such
statement is qualified in all respects by such reference. The Registration
Statement (including the exhibits thereto) may be inspected without charge at
the office of the Commission, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004 and at the regional offices of the Commission at 7
World Trade Center, 13th Floor, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the
Registration Statement and the exhibits and schedules thereto may be obtained
from the Commission at such offices, upon payment of prescribed rates. In
addition, registration statements and certain other filings made with the
Commission through its Electronic Data Gathering, Analysis and Retrieval
("EDGAR") system are publicly available through the Commission's site on the
World Wide Web on the Internet, located at http://www.sec.gov. The
Registration Statement, including all exhibits thereto and amendments thereof,
has been filed with the Commission through EDGAR. The Company will provide
without charge to each person who receives this Prospectus, upon written or
oral request, a copy of any information incorporated by reference in this
Prospectus (excluding exhibits to information incorporated by reference unless
such exhibits are themselves specifically incorporated by reference). Such
requests should be directed to Advantage Marketing Systems, Inc. at 2601
Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293,
telephone: (405) 842-0131.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act") as a "small business issuer"
as defined under Regulation S-B promulgated under the 1933 Act. In accordance
with the 1934 Act, the Company files reports and other information with the
Commission (File No. 33-25701), and such reports and other information can be
inspected and copied at, and copies of such materials can be obtained at
prescribed rates from, the Public Reference Section of the Commission in
Washington, D.C.
The Company distributes to its shareholders annual reports containing
financial statements audited by its independent public accountants and, upon
request, quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information. Such requests should
be directed to Advantage Marketing Systems, Inc. at 2601 Northwest Expressway,
Suite 1210W, Oklahoma City, Oklahoma 73112-7293, telephone: (405) 842-0131.
66
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ADVANTAGE MARKETING SYSTEMS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.) UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS:
Unaudited Pro Forma Consolidated Statement of Operations for the Year
Ended December 31, 1995................................................ 31
Unaudited Pro Forma Consolidated Statement of Operations for the Nine
Months Ended September 30, 1996........................................ 32
Notes to Unaudited Pro Forma Consolidated Financial Statements.......... 33
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.) UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 1996 and December 31,
1995 (Unaudited)....................................................... F-2
Consolidated Statements of Operations for the Nine Months Ended
September 30, 1996 and 1995 (Unaudited)................................ F-3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1996 and 1995 (Unaudited)................................ F-4
Notes to Consolidated Financial Statements for the Nine Months Ended
September 30, 1996 and 1995 (Unaudited)................................ F-5
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.) AUDITED
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report............................................ F-7
Consolidated Balance Sheets as of December 31, 1995 and 1994............ F-8
Consolidated Statements of Operations for Years Ended December 31, 1995
and 1994............................................................... F-9
Consolidated Statements of Stockholders' Deficiency for Years Ended
December 31, 1995 and 1994............................................. F-10
Consolidated Statements of Cash Flows for Years Ended December 31, 1995
and 1994............................................................... F-11
Notes to Consolidated Financial Statements for Years Ended December 31,
1995 and 1994.......................................................... F-12
MIRACLE MOUNTAIN INTERNATIONAL, INC. AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report............................................ F-19
Balance Sheet as of December 31, 1995................................... F-20
Statement of Operations for the Year Ended December 31, 1995............ F-21
Statement of Stockholders' Deficiency for the Year Ended December 31,
1995................................................................... F-22
Statement of Cash Flows for the Year Ended December 31, 1995............ F-23
Notes to Financial Statements for the Year Ended December 31, 1995...... F-24
MIRACLE MOUNTAIN INTERNATIONAL, INC. UNAUDITED FINANCIAL STATEMENTS:
Balance Sheets as of May 31, 1996 and December 31, 1995 (Unaudited)..... F-26
Statements of Operations for the Five Months Ended May 31, 1996 and 1995
(Unaudited)............................................................ F-27
Consolidated Statements of Cash Flows for the Five Months Ended May 31,
1996 and 1995 (Unaudited).............................................. F-28
Notes to Consolidated Financial Statements (Unaudited).................. F-29
</TABLE>
F-1
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
CONSOLIDATED BALANCE SHEETS, SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................. $ 117,965 $ 112,087
Receivables--net of allowance of $25,804 in 1996
and $27,434 in 1995............................. 12,774 18,299
Receivable from affiliate........................ -- 51,963
Inventory........................................ 305,804 98,621
Prepaid expenses................................. 18,257 2,371
----------- -----------
Total current assets......................... 454,800 283,341
----------- -----------
COMMISSION ADVANCES TO RELATED PARTIES--
NONCURRENT........................................ 29,481 65
RECEIVABLE FROM AFFILIATE.......................... 70,923 --
RECEIVABLES--NONCURRENT............................ 18,742 22,620
PROPERTY AND EQUIPMENT, net of accumulated depreci-
ation of $326,002 in 1996 and $280,606 in 1995.... 176,932 159,797
GOODWILL........................................... 113,488 --
COVENANT NOT TO COMPETE............................ 55,556 --
DEFERRED TAXES..................................... 443,149 --
OTHER ASSETS....................................... 141,662 67,173
----------- -----------
TOTAL ASSETS....................................... $ 1,504,733 $ 532,996
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable................................. $ 206,634 $ 91,949
Accrued expenses................................. 276,379 151,654
Accrued promotion expense........................ 56,862 99,424
Notes payable:
Stockholder.................................... 17,658 81,929
Other.......................................... 9,401 8,440
Current obligations under capital lease.......... 25,032 20,679
Total current liabilities.................... 591,966 454,075
LONG-TERM LIABILITIES:
Notes payable--other............................. 23,880 28,500
Capital lease.................................... 61,812 75,649
----------- -----------
Total long-term liabilities.................. 85,692 104,149
----------- -----------
TOTAL LIABILITIES.................................. 677,658 558,224
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock--$.0001 par value; authorized
5,000,000 shares; none issued................... -- --
Common stock--$.0001 par value; authorized
495,000,000 shares; 2,143,191 and 2,123,191
shares issued and outstanding, respectively..... 214 212
Paid-in capital.................................. 1,981,380 1,859,882
Accumulated deficit.............................. (1,154,519) (1,885,322)
----------- -----------
Total stockholders' equity (deficiency)...... 827,075 (25,228)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $ 1,504,733 $ 532,996
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
------------ ------------
<S> <C> <C>
REVENUE:
Sale of programs.................................. $ 4,186,404 $ 3,155,934
Sale of promotional material...................... 234,735 88,893
Other............................................. 37,471 17,797
------------ ------------
Total........................................... 4,458,610 3,262,624
------------ ------------
EXPENSES:
Cost of programs.................................. 968,635 906,935
Cost of promotional material...................... 142,610 69,395
Selling........................................... 2,235,879 1,495,084
Interest expense.................................. 19,422 20,335
General and administrative........................ 804,410 593,273
------------ ------------
Total........................................... 4,170,956 3,085,022
------------ ------------
INCOME BEFORE TAXES................................. 287,654 177,602
TAX BENEFIT......................................... 443,149 --
------------ ------------
NET INCOME.......................................... $ 730,803 $ 177,602
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES (thou-
sands)............................................. 3,176 2,121
============ ============
NET INCOME PER COMMON SHARE......................... $ .23 $ .08
============ ============
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income........................................ $ 730,803 $ 177,602
Adjustments to reconcile net income to net cash
provided (used) by
operating activities:
Depreciation and amortization................... 53,955 29,149
Write off deferred offering costs............... 15,000 --
Changes in assets and liabilities which provided
(used) cash:
Inventory..................................... (207,183) (11,000)
Receivables, advances and prepaids............ (35,899) 1,204
Deferred taxes................................ (443,149) --
Other assets.................................. -- (18,082)
Checks outstanding............................ -- (46,663)
Accounts payable and accrued expenses......... 196,848 106,861
--------- ---------
Net cash provided (used) by operating
activities..................................... 310,375 239,071
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................ (62,531) (4,072)
Advances to affiliate............................. (22,000) --
Repayment of advances to affiliate................ 3,040 --
Purchase of Miracle Mountain International, Inc... (56,103) --
--------- ---------
Net cash used by investing activities........... (137,594) (4,072)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans from stockholders........................... -- 46,244
Payment of deferred offering costs................ (89,489) --
Payment on notes payable.......................... (3,659) (2,088)
Payment on capital leases......................... (9,484) (9,050)
Payment on notes payable--stockholders............ (64,271) (111,150)
--------- ---------
Net cash used by financing activities........... (166,903) (76,044)
--------- ---------
NET INCREASE IN CASH.............................. 5,878 158,955
BEGINNING CASH BALANCE............................ 112,087 --
--------- ---------
ENDING CASH BALANCE............................... $ 117,965 $ 158,955
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Reclassify interest payable to notes payable--
stockholders..................................... $ -- $ 51,806
========= =========
Property and equipment acquired by capital lease.. $ -- $ 91,263
========= =========
Fair value of capital stock issued to purchase
Miracle Mountain
International, Inc............................... $ 120,000 $ --
========= =========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial statements and related notes have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations. The accompanying financial statements and related notes should be
read in conjunction with the audited financial statements of the Company, and
notes thereto, for the fiscal year ended December 31, 1995.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented. Operating
results of the interim period are not necessarily indicative of the amounts
that will be reported for the fiscal year ending December 31, 1996. See Note 6
regarding the reverse stock split.
2. MIRACLE MOUNTAIN INTERNATIONAL, INC.
Pursuant to a Stock Purchase Agreement having an effective date of May 31,
1996 (the "Purchase Agreement"), the Company acquired all of the issued and
outstanding capital stock of Miracle Mountain International, Inc., a Colorado
corporation ("MMI"), and MMI became a wholly-owned subsidiary of the Company
(the "MMI Acquisition"). The MMI Acquisition was accounted for under the
purchase method of accounting. MMI is a multi-level marketer of various third-
party manufactured nutritional supplement products. Pursuant to the Purchase
Agreement and in connection with the MMI Acquisition, the Company issued and
delivered to the shareholders of MMI 20,000 shares of common stock. In
addition, the Company agreed to issue and deliver an additional 5,000 shares
of common stock to the shareholders of MMI on or before February 15, 1997,
pending determination of certain liabilities.
In connection with the MMI Acquisition, the excess of the purchase price of
$176,103, which includes $56,103 of transaction costs, over the negative
$3,059 fair market value of the assets of MMI, net of liabilities, has been
allocated $119,162 to goodwill and $60,000 to the covenant not to compete.
Goodwill and the covenant not to compete will be amortized over a 7 and 4.5
year period, respectively. The fair market value of the assets of MMI, net of
liabilities, declined from $16,690 to negative $3,059 between March 31, 1996
and May 31, 1996.
3. INCOME TAXES
On a regular basis, management evaluates all available evidence, both
positive and negative, regarding the ultimate realization of the tax benefits
of its deferred tax assets. Based upon the historical trend of increasing
earnings, management has concluded that it is more likely than not that a tax
benefit will be realized from its deferred tax assets and has therefore
eliminated the previously recorded valuation allowance for its deferred tax
assets.
The Company's deferred tax assets relate primarily to net operating loss
carryforwards for income tax purposes at September 30, 1996, totaling
approximately $1,384,841, which will begin to expire in 2003. Elimination of
the valuation allowance results in a deferred tax asset at September 30, 1996,
of $443,149 and a corresponding tax benefit for the quarter ended September
30, 1996.
4. RECEIVABLE FROM AFFILIATE
The Company made non-interest bearing 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
F-5
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
$22,000 and $87,684 during the nine months ended September 30, 1996, and the
year ended December 31, 1995, respectively. During the nine months ended
September 30, 1996, JHA made repayments of $3,040. JHA made repayments of
these advances of $67,401 during the year ended December 31, 1995.
Furthermore, effective June 30, 1996, the Company adopted a policy to not make
any further advances to JHA, and JHA executed a promissory note payable to the
Company in the principal amount of $73,964, bearing interest at eight percent
per annum and payable in 60 installments of $1,499 per month.
5. OTHER ASSETS
Other assets consists primarily of direct incremental costs, mainly legal,
accounting and filing fees, associated with a registration statement filed by
the Company with the Securities and Exchange Commission. These deferred
offering costs totaled approximately $138,000 at September 30, 1996. Pursuant
to this registration statement the Company intends to redeem its outstanding
Class A Common Stock Purchase Warrants and Class B Common Stock Purchase
Warrants and distribute non-transferrable rights to purchase a unit consisting
of one share of common stock and one new 1997-A Warrant to existing
shareholders of record. The proposed redemption and rights exercise periods
will be limited to specific time periods after declaration of effectiveness of
said registration statement. During the three months ended September 30, 1996,
the Company wrote off $15,000 of these costs which were determined to no
longer have value.
6. SUBSEQUENT EVENTS
On October 29, 1996, the Board of Directors of the Company approved a one-
for-eight reverse split of the Company's issued and outstanding common stock,
options and warrants, effective as of 5:00 p.m. New York City time on October
29, 1996. In addition, the number of the Company's issued and outstanding
options and warrants have been reduced by a factor of eight and their exercise
price per share has been increased by a factor of eight pursuant to this
action.
This one-for-eight reverse split is reflected in the accompanying financial
statements on a retroactive basis. The Company's previously reported number of
shares of common stock issued and outstanding at September 30, 1996 and
December 31, 1995, of 17,145,524 and 16,985,524 has been adjusted to 2,143,191
and 2,123,191, respectively. Previously reported weighted average number of
outstanding shares of common stock for the nine months ended September 30,
1995, of 16,966,000 has been adjusted to 2,121,000. Previously reported
earnings per share for the nine months ended September 30, 1995, of $.01 has
been restated to $.08.
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Advantage Marketing Systems, Inc. (formerly AMS, Inc.)
Oklahoma City, Oklahoma
We have audited the accompanying consolidated balance sheets of Advantage
Marketing Systems, Inc. (formerly AMS, Inc.) (the "Company") as of December
31, 1995 and 1994, and the related consolidated statements of operations,
stockholders' deficiency, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Advantage Marketing Systems,
Inc. (formerly AMS, Inc.) at December 31, 1995 and 1994 and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Oklahoma City, Oklahoma
March 29, 1996, except as to Note 11,
for which the date is October 29, 1996
F-7
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................... $ 112,087 $ --
Receivables--net of allowances of $21,485 and
$19,485, respectively............................. 18,299 33,887
Receivable from affiliate.......................... 51,963 31,680
Inventory.......................................... 98,621 47,871
Prepaid commissions................................ 2,371 4,358
Total current assets........................... 283,341 117,796
COMMISSION ADVANCES TO RELATED PARTIES--NONCURRENT... 65 14,390
RECEIVABLES--NONCURRENT.............................. 22,620 --
PROPERTY AND EQUIPMENT, Net.......................... 159,797 44,783
OTHER ASSETS......................................... 67,173 --
----------- -----------
TOTAL................................................ $ 532,996 $ 176,969
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable................................... $ 91,949 $ 79,415
Accrued expenses................................... 151,654 92,067
Accrued promotion expense.......................... 99,424 7,000
Interest payable................................... -- 51,806
Bank overdraft..................................... -- 46,663
Deferred revenue................................... -- 40,852
Notes payable:
Stockholders..................................... 81,929 132,828
Other............................................ 8,440 5,827
Capital lease obligation........................... 20,679 --
----------- -----------
Total current liabilities...................... 454,075 456,458
LONG-TERM LIABILITIES:
Notes payable:
Stockholder...................................... -- 7,947
Other............................................ 28,500 --
Capital lease obligation........................... 75,649 --
----------- -----------
Total liabilities.............................. 558,224 464,405
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock--$.0001 par value; authorized
5,000,000 shares; none issued..................... -- --
Common stock--$.0001 par value; authorized
495,000,000 shares; issued and outstanding
2,123,191 and 2,120,691 shares, respectively (see
Note 11).......................................... 212 212
Paid-in capital.................................... 1,859,882 1,847,382
Accumulated deficit................................ (1,885,322) (2,135,030)
----------- -----------
Total stockholders' deficiency................... (25,228) (287,436)
----------- -----------
TOTAL................................................ $ 532,996 $ 176,969
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
REVENUES:
Programs............................................... $4,382,935 $2,564,542
Promotional material................................... 109,733 82,780
Other.................................................. 25,535 30,625
---------- ----------
Total revenues..................................... 4,518,203 2,677,947
---------- ----------
COSTS AND EXPENSES:
Programs............................................... 1,094,157 684,128
Promotional material................................... 92,087 83,964
Selling................................................ 2,201,510 1,289,616
General and administration............................. 857,743 515,158
Interest expense....................................... 22,998 25,075
---------- ----------
Total expenses..................................... 4,268,495 2,597,941
---------- ----------
NET INCOME............................................... $ 249,708 $ 80,006
========== ==========
Weighted average common shares outstanding............... 2,662,681 2,119,356
Net income per common share.............................. $ .09 $ .04
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES STOCK CAPITAL DEFICIT DEFICIENCY
--------- ------ ---------- ----------- -------------
(NOTE 11)
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1994................... 2,105,598 $211 $1,823,236 $(2,215,036) $(391,589)
Conversion of payables
into stock............. 1,343 -- 2,147 -- 2,147
Issuance of capital
stock for services re-
ceived................. 13,750 1 21,999 -- 22,000
Net income for the year
ended
December 31, 1994...... -- -- -- 80,006 80,006
--------- ---- ---------- ----------- ---------
BALANCE, DECEMBER 31,
1994................... 2,120,691 212 1,847,382 (2,135,030) (287,436)
Warrants exercised...... 1,250 -- 7,500 -- 7,500
Issuance of capital
stock for cash......... 1,250 -- 5,000 -- 5,000
Net income for the year
ended
December 31, 1995...... -- -- -- 249,708 249,708
--------- ---- ---------- ----------- ---------
BALANCE, DECEMBER 31,
1995................... 2,123,191 $212 $1,859,882 $(1,885,322) $ (25,228)
========= ==== ========== =========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income.............................................. $ 249,708 $ 80,006
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization......................... 43,310 33,403
Provision for bad debts............................... -- 884
Stock issued for services............................. -- 22,000
Stock issued for refunds.............................. -- 2,147
Changes in assets and liabilities which provided
(used) cash:
Receivables and advances............................ 7,293 7,545
Inventory........................................... (50,750) (28,854)
Prepaid expenses.................................... 1,859 --
Prepaid commissions................................. 128 24,274
Accounts payable and accrued expenses............... 126,545 20,871
Notes payable to associates......................... -- (10,728)
Interest payable.................................... -- 20,860
Deferred revenue.................................... (40,852) (63,156)
--------- --------
Net cash provided by operating activities......... 337,241 109,252
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment..................... (50,105) (6,689)
Advances to affiliate................................... (87,684) (66,026)
Repayment of advances to affiliate...................... 67,401 9,069
Purchase of other assets................................ (29,173) --
--------- --------
Net cash used for investing activities............ (99,561) (63,646)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................. 12,500 --
Loans from stockholders................................. 31,963 61,374
Other loans............................................. 39,098 3,685
Bank overdraft.......................................... (46,663) 13,074
Payment on notes payable--stockholders.................. (142,615) (79,138)
Payment on notes payable--other......................... (7,985) (4,666)
Principal payment on capital leases..................... (11,891) (39,935)
--------- --------
Net cash used in by financing activities.......... (125,593) (45,606)
--------- --------
NET INCREASE IN CASH...................................... 112,087 --
BEGINNING CASH BALANCE.................................... -- --
--------- --------
ENDING CASH BALANCE....................................... $ 112,087 $ --
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................. $ 27,335 $ 4,215
Noncash financing and investing activities:
Purchase of property and equipment by entering into
capital leases....................................... 108,219 --
Reclassify interest payable to notes payable--
stockholders......................................... 51,806 --
Issuance of common stock for notes and accounts
payable.............................................. -- 89,892
</TABLE>
See Notes to Consolidated Financial Statements.
F-11
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS--The Company is engaged in marketing consumer products
and services. The Company has negotiated marketing agreements with various
providers to market nutritional supplements and service contracts through a
multi-level sales organization of independent sales associates developed by
the Company.
The Company also sells supplies and materials to its sales associates.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION--Program revenue is recognized when products are shipped
or services are rendered. Sales of training and promotional material to the
sales force are recorded as revenue when the goods are shipped.
INVENTORY--Inventory consists of consumer product inventory, and training
and promotional material such as video tapes, cassette tapes and paper
supplies held for sale to customers and independent sales associates.
Inventory is stated at the lower of cost or market. Cost is determined on a
first-in, first-out method.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost or, in
the case of leased assets under capital leases, at the fair value of the
property and equipment. Property and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets of three to
five years. Leased assets under capital leases and leasehold improvements are
amortized over the term of the lease.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Effective
for fiscal years beginning after December 15, 1995, SFAS 121 establishes
accounting standards for impairment of long-lived assets, certain identifiable
intangibles and goodwill related to such assets. The Company will adopt SFAS
121 in 1996. Management does not believe this pronouncement will have a
material effect on the Company's consolidated financial statements.
EARNINGS PER SHARE--Earnings per common share were computed by dividing net
income by the weighted average number of shares outstanding during the period
after giving effect to the reverse stock split discussed in Note 11.
Outstanding stock options have been included in primary earnings per share, as
the criteria for classification as a common stock equivalent has been met in
1995. The effect of these common stock equivalents on the weighted average
number of shares outstanding was an approximate increase in shares of 539,500.
Warrants have not been considered as their effect is anti-dilutive. No
difference exists between primary and fully dilutive earnings per share.
INCOME TAXES--The Company recognizes an asset and liability approach for
accounting for income taxes. Deferred income taxes are recognized for the tax
consequences of temporary differences and carryforwards by applying enacted
tax rates applicable to future years to differences between the financial
statement amounts and the tax bases of existing assets and liabilities. A
valuation allowance is to be established if, in management's opinion, it is
more likely than not that some portion of the deferred tax asset will not be
realized.
F-12
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Office furniture, fixtures, and equipment........... $ 378,287 $ 265,504
Automobile.......................................... 54,056 9,184
Leasehold improvements.............................. 22,220 21,552
--------- ---------
454,563 296,240
Accumulated depreciation and amortization........... (294,766) (251,457)
--------- ---------
Total property, net................................. $ 159,797 $ 44,783
========= =========
</TABLE>
3. NOTES PAYABLE TO STOCKHOLDERS
The Company has a note payable to its major stockholder and chief executive
officer in the amount of $81,929 and $125,775 as of December 31, 1995 and
1994, respectively. This note is due on demand and bears interest at 12%.
During 1995, the Company combined interest payable on the note of
approximately $52,000 with the principal and began making weekly payments of
principal and interest. Also during 1995, the Company received advances of
$31,963 and made payments of $127,615 on this payable.
During 1994, the Company had a note payable to a stockholder in the amount
of $15,000, bearing interest at 12%. Terms of the note required eight
quarterly payments of principal and interest beginning in the first quarter of
1995. In 1995 the note was paid in full.
4. LEASE AGREEMENTS
During 1995, the Company entered into various capital leases for office
related equipment. The lease terms range from 36 to 60 months. Additionally,
annual lease rental payments for each lease range from $1,300 to $14,000 per
year. The schedule of minimum lease payments below reflects all payments under
the leases.
The property and equipment accounts include $96,328 for leases that have
been capitalized at December 31, 1995. Related accumulated depreciation
amounted to $9,941 at December 31, 1995.
The Company leases office space and transportation equipment under a
noncancellable operating lease. Rental commitments are listed below.
F-13
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
Future minimum lease payments under capital leases and noncancellable
operating leases with initial or remaining terms of one year or more at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING: LEASES LEASES TOTAL
------------ -------- --------- --------
<S> <C> <C> <C>
1996....................................... $ 35,151 $ 52,990 $ 88,141
1997....................................... 35,760 54,523 90,283
1998....................................... 35,760 22,984 58,744
1999....................................... 20,014 -- 20,014
2000....................................... 2,682 -- 2,682
-------- -------- --------
Total minimum lease payments............... 129,367 $130,497 $259,864
======== ======== ========
Less amount representing interest.......... (33,039)
--------
Present value of net minimum lease pay-
ments..................................... 96,328
Less current portion....................... (20,679)
--------
Long-term capital lease obligations........ $ 75,649
========
</TABLE>
Rental expense under operating leases for the years ended December 31, 1995
and 1994 was $55,476 and, $57,458, respectively.
5. STOCKHOLDERS' EQUITY
See related information concerning the October 29, 1996, reverse stock split
in Note 11. All shares and per share information has been restated
retroactively to give effect to the stock split.
COMMON STOCK--During 1994, $2,147 of accounts payable were settled by the
Company through the issuance of 1,343 shares of its common stock with an
estimated fair value as of the date of settlement which equaled the liability.
No gain or loss was recorded as a result of this transaction.
During 1994, the Company issued 7,500 shares of its common stock to a
consultant for services rendered and 6,250 shares of stock for services
performed by individuals primarily involved in marketing the Company's
programs. A charge of $22,000, the estimated fair value of the shares at the
date of issuance, was recorded as selling expense.
The Company plans to effect a public offering of common stock in 1996. See
discussion of this offering at Proposed Redemption and Offerings below.
COMMON STOCK OPTIONS--The Company has issued options in 1995 and 1994
primarily for services rendered. The exercise price of these options was equal
to or in excess of the fair market value of the common stock at the date of
grant.
During 1995, the Company issued various options at exercise prices ranging
from $2.00 per share to $6.48 per share. Options were granted primarily for
services rendered and to ensure the future availability of those services to
the Company. Various options are subject to certain requirements including
vesting limits, employment requirements, and future events. The majority of
options granted to officers of the Company contain no conditional terms other
than the period of exercise.
F-14
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
During 1994, the Company issued options on 34,108 shares of the Company's
common stock at exercise prices ranging from $2.16 per share to $2.80 per
share. These options are exercisable at any time through December 31, 1999 so
long as the individual is continuing to provide services to the Company at the
date of exercise. The options vest at 20% per year. The vested options are not
subject to the continuing service requirement.
The following table summarizes the Company's stock option activity for the
years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
EXERCISE EXERCISE
1995 PRICE 1994 PRICE
--------- ------------ ------- ------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year............ 350,358 $1.60 - 2.80 316,250 $ 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 outstanding at end of
year......................... 1,540,177 $1.60 - 6.48 350,358 $1.60 - 2.80
========= =======
</TABLE>
The Company has filed a registration statement with the Securities and
Exchange Commission to register common stock to be issued in association with
a planned redemption of outstanding warrants, distribution of common stock
rights. See discussion at Proposed Redemption and Offerings below.
COMMON STOCK WARRANTS--The following table summarizes the Company's common
stock warrants activity for the years ended December 31, 1995 and 1994. The
Company plans to redeem all Class A and Class B Warrants in 1996. See
discussion of the planned redemption at Proposed Redemption and Offerings
below.
<TABLE>
<CAPTION>
WARRANTS
ISSUED/ EXERCISE
OUTSTANDING PRICE EXERCISE PERIOD
----------- -------- -----------------
<S> <C> <C> <C>
December 31, 1995:
Class A Warrants at beginning of
year................................. 525,860 $6.00 4/26/89 - 7/26/96
Class A Warrants exercised during the
year................................. (1,250) $6.00
-------
Class A Warrants at end of year....... 524,610
=======
Class B Warrants...................... 525,860 $8.00 4/26/89 - 7/26/97
=======
During 1995, Class A and B warrants
exercise periods were extended by one
year to 1996 and 1997, respectively,
by Board of Director approval.
December 31, 1994:
Class A Warrants...................... 525,860 $6.00 4/26/89 - 7/26/95
=======
Class B Warrants...................... 525,860 $8.00 4/26/89 - 7/26/96
=======
During 1994, Class A and B warrants
exercise periods were extended by one
year to 1995 and 1996, respectively,
by Board of Director approval.
</TABLE>
F-15
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
Each warrant entitles the holder to purchase one share of common stock. The
Company may redeem the warrants at any time at a price of $.0008 per warrant.
PROPOSED REDEMPTION AND OFFERINGS--The Company has filed a registration
statement with the Securities and Exchange Commission to redeem the
outstanding Class A and Class B Warrants at the redemption price noted above.
In connection with the redemption, the Company will offer to temporarily
reduce the exercise price of Class B Warrants and will offer upon exercise of
each Class A and Class B Warrant one share of common stock plus one new 1996-A
Warrant. Each 1996-A Warrant will be exercisable at any time 90 days after the
date of the associated prospectus and on or before November 30, 1998, to
purchase one share of common stock at $12.00 per share. The proposed
redemption will be limited to a specific time period after the declaration of
effectiveness of the related registration statement filed by the Company with
the Securities and Exchange Commission.
In addition, the registration statement includes the Company's intention to
distribute nontransferable rights to purchase a unit consisting of one share
of common stock and one new 1996-A Warrant to existing shareholders of record.
The rights will be offered at no cost and will allow shareholders of record to
purchase one unit for every previous common share held. In connection with
these offerings, the Company has incurred certain direct costs consisting
primarily of legal, accounting and filing fees. These costs totaled
approximately $53,000 at December 31, 1995, and are included in other assets
in the Company's financial statements. The rights exercise period will be
limited to a specific time period after the declaration of effectiveness of
the related registration statement filed by the Company with the Securities
and Exchange Commission.
Also, the Company has signed a letter of intent with an underwriter to
effect a public offering of additional common stock in 1996. The Company plans
to coordinate the offering with the notification to redeem outstanding
warrants and distribute rights mentioned above. The agreement between the
Company and the underwriter includes a provision requiring the Company to
grant various options and sell various warrants to the underwriters.
6. STOCK OPTION PLAN
See related information concerning the October 29, 1996, reverse stock split
in Note 11. All shares and per share information has been restated
retroactively to give effect to the stock split.
During 1995, the Company approved the 1995 Stock Option Plan (the "Plan").
Under this Plan, options available for granting consist of (i) nonqualified
stock options, (ii) nonqualified stock options with stock appreciation rights
attached, (iii) incentive stock options, and (iv) incentive stock options with
stock appreciation rights attached. Shares of stock covered by this Plan shall
consist of 1,125,000 shares of the common stock, $.0001 par value, of the
Company. The Plan limits participation to employees, independent contractors,
and consultants. Non-employee directors are excluded from Plan participation.
The option price for shares of stock subject to this Plan are set by the Stock
Option Committee of the Board of Directors at a price not less than 85% of the
market value of the stock on the date of grant. No stock options shall be
exercisable within six months from the date of grant, unless under a Plan
exception, nor more than ten years after the date of grant. The Plan provides
for the grant of stock appreciation rights, which allow the holder to receive
in cash, stock or combination thereof, the difference between the exercise
price and the fair market value of the stock at date of exercise. The value of
stock appreciation rights is charged to compensation expense. The stock
appreciation right is not separable from the underlying stock option or
incentive stock options originally granted. Options can only be exercised in
tandem, and can only be exercised when a positive spread exists between the
fair market value and exercise price. No options under this Plan have been
granted or exercised as of December 31, 1995.
F-16
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-
Based Compensation, effective for fiscal years beginning after December 15,
1995. SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages, but does not require, compensation
costs to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25,
which recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock-based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share.
7. DEFERRED REVENUE
During 1994, the Company received advance annual payments for certain
program memberships. Receipts representing payment for future months' programs
services are deferred and recognized over the twelve month period covered by
the membership. Prepaid commissions represent commissions paid on these
memberships and are amortized over the twelve-month period covered by the
memberships. There were no deferred revenues received or recorded during 1995.
8. RELATED PARTIES
During 1995 and 1994, the Company received approximately $16,415 and
$71,713, 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. At December 31, 1995 and 1994, $-0- and $5,603,
respectively, has been recorded as deferred revenue in the accompanying
balance sheet.
The Company makes advances to an affiliate, the John Hail Insurance Agency,
which is owned by the chief executive officer and major stockholder of the
Company. These advances have no specific repayment terms. Total advances to
the affiliate were $87,684 and $66,026 in 1995 and 1994 and repayments
received were $67,401 and $9,069 in 1995 and 1994, respectively. The amount
receivable from the affiliate at December 31, 1995 and 1994 was $51,963 and
$31,680, respectively. Revenue from the affiliate in 1995 and 1994 included
$12,000 earned for providing administrative services for each of the two
years.
Certain stockholders receive commissions on revenue of the Company. Such
commissions are recognized as compensation to the stockholders and are
included in selling expense.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes
primarily for depreciation and prepaid commissions, and (b) operating loss and
tax credit carryforwards.
A reconciliation of the statutory Federal income tax rate to the effective
income tax rate for the years ended December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Statutory Federal income tax rate........................... 34.0% 34.0%
Benefit of graduated tax rates.............................. (2.2) (15.3)
Benefit of operating loss carryforwards..................... (31.8) (18.7)
----- -----
Effective income tax rate................................. 0.0% 0.0%
===== =====
</TABLE>
F-17
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
Deferred tax liabilities and assets at December 31, 1995 and 1994 are
comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Commissions advanced............................. $ -- $ (4,500)
--------- ---------
Total deferred tax liabilities..................... -- (4,500)
--------- ---------
Deferred tax assets:
Depreciation and amortization.................... 3,900 1,000
Net operating loss carryforward.................. 566,400 690,000
--------- ---------
Total deferred tax assets.......................... 570,300 691,000
Valuation allowance for deferred tax assets...... (570,300) (686,500)
--------- ---------
Total net deferred tax assets...................... -- 4,500
--------- ---------
Net deferred taxes................................. $ -- $ --
========= =========
</TABLE>
The Company has net operating loss carryforwards for income tax purposes at
December 31, 1995 totaling approximately $1,780,000 which will begin to expire
in 2003. Management has determined that it is not more likely than not that
the Company will be able to realize the tax benefits from the net operating
loss carryforwards.
10. COMMISSION ADVANCES TO RELATED PARTIES--NONCURRENT
Noncurrent commission advances represent advances to certain individuals and
are repayable from future commissions earned by the individuals. These
advances do not bear interest and are not expected to be repaid in 1995. In
1994, the amounts advanced include approximately $9,600 and $4,700 advanced to
a director and an officer, respectively.
11. SUBSEQUENT EVENTS
On October 29, 1996, the Board of Directors of the Company approved a one-
for-eight reverse split of the Company's outstanding common stock, options and
warrants, effective as of 5:00 p.m. New York City time on October 29, 1996. In
addition, the number of the Company's outstanding options and warrants have
been reduced by a factor of eight and their exercise price per share has been
increased by a factor of eight pursuant to this action.
This one-for-eight reverse split is reflected in the accompanying financial
statements on a retroactive basis. The Company's previously reported number of
shares of common stock issued and outstanding at December 31, 1995 and 1994,
of 16,985,524 and 16,965,524 has been adjusted to 2,123,191 and 2,120,691,
respectively. Previously reported weighted average number of outstanding
shares of common stock for the years ended December 31, 1995 and 1994, of
21,301,441 and 16,954,848 have been adjusted to 2,662,681 and 2,119,356,
respectively. Previously reported earnings per share for the years ended
December 31, 1995 and 1994 of $.01 and NIL have been adjusted to $.09 and
$.04, respectively.
* * * * * *
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Miracle Mountain International, Inc.
Colorado Springs, Colorado
We have audited the accompanying balance sheet of Miracle Mountain
International, Inc. (the "Company") as of December 31, 1995 and the related
statements of operations, stockholders' deficiency and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Miracle Mountain International, Inc. at
December 31, 1995 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Oklahoma City, Oklahoma
June 21, 1996
F-19
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash.............................................................. $ 3,334
Inventory......................................................... 2,186
---------
Total current assets............................................ 5,520
PROPERTY AND EQUIPMENT, net......................................... 39,898
OTHER ASSETS........................................................ 725
---------
TOTAL............................................................... $ 46,143
=========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable.................................................. 1,558
Accrued commissions............................................... 16,477
Accrued payroll taxes............................................. 2,346
Interest payable.................................................. 1,318
Notes payable to related parties.................................. 62,418
---------
Total current liabilities....................................... 84,117
STOCKHOLDERS' DEFICIENCY:
Common stock--no par value; authorized 1,000,000 shares; issued
and outstanding 200,000 shares................................... 92,655
Accumulated deficit............................................... (130,629)
---------
Total stockholders' deficiency.................................. (37,974)
---------
TOTAL............................................................... $ 46,143
=========
</TABLE>
See Notes to Financial Statements.
F-20
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
TOTAL REVENUE....................................................... $ 277,366
---------
COSTS AND EXPENSES:
Programs.......................................................... 103,217
Selling........................................................... 145,650
General and administrative........................................ 157,725
Interest expense.................................................. 1,403
---------
Total expenses.................................................. 407,995
---------
NET LOSS............................................................ $(130,629)
=========
</TABLE>
See Notes to Financial Statements.
F-21
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDERS'
SHARES STOCK DEFICIT DEFICIENCY
------- ------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995............. -- $ -- $ -- $ --
Capital contributions................ 200,000 92,655 -- 92,655
Net loss for the year ended December
31, 1995............................ -- -- (130,629) (130,629)
------- ------- --------- ---------
BALANCE, DECEMBER 31, 1995........... 200,000 $92,655 $(130,629) $ (37,974)
======= ======= ========= =========
</TABLE>
See Notes to Financial Statements.
F-22
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss.......................................................... $(130,629)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization................................... 1,926
Changes in assets and liabilities which provided (used) cash:
Inventory..................................................... (2,186)
Other assets.................................................. (725)
Accounts payable.............................................. 1,558
Accrued expenses.............................................. 18,823
Interest payable.............................................. 1,318
---------
Net cash used in operating activities....................... (109,915)
---------
CASH FLOWS FROM INVESTING ACTIVITIES--
Purchases of property and equipment............................... (41,824)
---------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from capital contributions............................... 92,655
Proceeds from notes payable....................................... 65,253
Payment on notes payable.......................................... (2,835)
---------
Net cash provided by financing activities................... 155,073
---------
NET INCREASE IN CASH................................................ 3,334
BEGINNING CASH BALANCE.............................................. --
---------
ENDING CASH BALANCE................................................. $ 3,334
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest............................ $ 85
=========
</TABLE>
See Notes to Financial Statements.
F-23
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS--The Company is engaged in marketing nutritional
supplements through a multi-level sales organization of independent sales
associates developed by the Company. The Company started in business in 1995.
During the first three months of 1995 the Company primarily paid start-up
expenses relating to organization and recruitment of sales associates. The
Company did not have significant sales until April 1995. Consequently, the
Company has only one year of financial statements.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION--Revenue is recognized when goods are shipped.
INVENTORY--Inventory consists of consumer product inventory. Inventory is
stated at the lower of cost or market. Cost is determined on a first-in,
first-out method.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Property and equipment are depreciated over five years using a straight-line
basis.
INCOME TAXES--The Company recognizes an asset and liability approach for
accounting for income taxes. Deferred income taxes are recognized for the tax
consequences of temporary differences and carryforwards by applying enacted
tax rates applicable to future years to differences between the financial
statement amounts and the tax bases of existing assets and liabilities. A
valuation allowance is to be established if it is more likely than not that
some portion of the deferred tax asset will not be realized.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1995:
<TABLE>
<S> <C>
Office furniture, fixtures, and equipment........................ $41,824
Accumulated depreciation and amortization........................ (1,926)
-------
Total property, net.............................................. $39,898
=======
</TABLE>
3. NOTES PAYABLE TO STOCKHOLDERS
The Company has a note payable to a stockholder and director in the amount
of $56,253 as of December 31, 1995. This note is due on demand and bears
interest at 9.0%. No principal or interest payments were made on the note
during the year ended December 31, 1995.
The Company is also making note payments to a bank on behalf of a
stockholder and director in exchange for an advance of $9,000. The principal
balance of the note at December 31, 1995 is $6,165. Payments of principal and
interest totaling $2,835 and $85, respectively, were made during the year. No
written agreement exists between the parties.
4. LEASE AGREEMENTS
The Company leases office space under a cancelable operating lease. The
Company can cancel the lease with 30 days written notice. The lease terms
provide for monthly payments of $825.
F-24
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1995
Additionally, the Company leases office equipment under separate operating
leases. The leases are cancelable at any time by the Company. The lease terms
provide for combined monthly payments of $441.
Rental expense under operating leases for the year ended December 31, 1995
was $16,535.
5. RELATED PARTIES
Certain stockholders and directors receive commissions on revenue of the
Company. Such commissions are recognized as compensation to the stockholders
and directors and are included in selling expense. Total commissions paid to
stockholders and directors during 1995 totaled approximately $27,000.
6. INCOME TAXES
The Company experienced a net loss for the year ended December 31, 1995 and
consequently paid no income tax.
The Company has a net operating loss carryforward at December 31, 1995
totaling approximately $130,000 which is available to reduce Federal income
tax in future periods and will expire in 2010. Management has determined that
it is not more likely than not that the Company will be able to realize the
tax benefits from the net operating loss carryforward and has, therefore,
provided a valuation allowance of approximately $44,000 to fully reserve the
net deferred tax asset.
7. SUBSEQUENT EVENTS
On June 20, 1996, the Company's stockholders exchanged 100% of their
outstanding stock in the Company for a total of 200,000 shares of common stock
of Advantage Marketing Systems, Inc. ("AMS"). As part of the agreement, AMS
withheld 40,000 shares which will be delivered 120 days after closing,
provided that liabilities of the Company, which will be assumed by AMS, do not
exceed $19,000. Upon delivery, the shares withheld will be reduced by one
share for every $.88 of liabilities in excess of $19,000. Also, the agreement
provides that certain officers, directors and stockholders will not compete
with AMS for a limited time.
* * * * * *
F-25
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
BALANCE SHEETS, MAY 31, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................. $ -- $ 3,334
Inventory............................................ 3,320 2,186
--------- ---------
Total current assets................................... 3,320 5,520
--------- ---------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $5,411 in 1996 and 1,926 in 1995................... 36,413 39,898
OTHER ASSETS........................................... 725 725
--------- ---------
TOTAL ASSETS........................................... $ 40,458 $ 46,143
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Bank overdrafts...................................... $ 11,067 $ --
Accounts payable..................................... 8,646 1,558
Accrued expenses..................................... -- --
Accrued commissions.................................. 22,623 16,477
Accrued payroll taxes................................ 2,025 2,346
Interest payable..................................... 2,340 1,318
Notes payable to related parties..................... 62,418 62,418
--------- ---------
Total current liabilities.......................... 109,119 84,117
--------- ---------
STOCKHOLDERS' DEFICIENCY:
Common stock--no par value; authorized 1,000,000
shares; issued and outstanding 200,000 shares....... 92,655 92,655
Accumulated deficit.................................. (161,316) (130,629)
--------- ---------
Total stockholders' deficiency......................... (68,661) (37,974)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $ 40,458 $ 46,143
========= =========
</TABLE>
See Notes to Financial Statements.
F-26
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
FOR THE FIVE MONTHS ENDED MAY 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS
ENDED MAY 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
REVENUE.................................................. $ 205,112 $ 64,839
EXPENSES:
Products............................................... 54,743 9,274
Selling................................................ 129,758 21,343
General and administrative............................. 49,188 29,272
Interest expense....................................... 2,110 197
---------- ---------
Total................................................ 235,799 60,086
---------- ---------
NET INCOME (LOSS)........................................ $ (30,687) $ 4,753
========== =========
</TABLE>
See Notes to Financial Statements.
F-27
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FIVE MONTHS ENDED MAY 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 31, MAY 31,
1996 1995
-------- --------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(30,687) $ 4,753
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization........................... 3,485 545
Changes in assets and liabilities which provided (used)
cash:
Inventory............................................. (1,134) (19,440)
Commissions advances.................................. -- (13,257)
Other assets.......................................... -- (725)
Checks outstanding.................................... 11,067 --
Interest payable...................................... 1,022 332
Accounts payable and accrued expenses................. 12,913 2,007
-------- --------
Net cash used by operating activities................... (3,334) (25,785)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................ -- (3,022)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable............................... -- 7,000
Payment on note payable................................... -- --
Proceeds from capital contributions....................... -- 32,655
-------- --------
Net cash provided by financing activities............... -- 39,655
-------- --------
NET INCREASE (DECREASE) IN CASH........................... (3,334) 10,848
BEGINNING CASH BALANCE.................................... 3,334 --
-------- --------
ENDING CASH BALANCE....................................... $ -- $ 10,848
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Property and equipment acquired by capital lease.......... $ 6,700 $ 42,815
======== ========
</TABLE>
See Notes to Financial Statements.
F-28
<PAGE>
MIRACLE MOUNTAIN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial statements and related notes have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations. The accompanying financial statements and related notes should be
read in conjunction with the audited financial statements of the Company, and
notes thereto, for the fiscal year ended December 31, 1995.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented. Operating
results of the interim period are not necessarily indicative of the amounts
that will be reported for the fiscal year ended December 31, 1996.
2. ACCOUNTING POLICIES ADOPTED
The Company has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-
Based Compensation. SFAS 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages, but does not require,
compensation costs to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply APB
Opinion No. 25, which recognizes compensation cost based on the intrinsic
value of the equity instrument awarded. The Company will continue to apply APB
Opinion No. 25 to its stock-based compensation awards to employees and will
disclose the required pro forma effect on net income and earnings per share.
No options or warrants were issued during the first quarter of 1996.
The Company has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
SFAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to such assets.
Management does not believe this pronouncement will have a material effect on
the Company's financial statements.
3. SUBSEQUENT EVENTS
Pursuant to a Stock Purchase Agreement having an effective date of May 31,
1996 (the "Purchase Agreement"), the Company was acquired by Advantage
Marketing Systems, Inc., an Oklahoma corporation ("AMS"), and became a wholly-
owned subsidiary of AMS. All liabilities of the Company, other than
commissions payable to associates, were assumed by certain of the Company's
former shareholders, and certain officers, directors and stockholders were
required to sign agreements not to compete with AMS.
F-29
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------
THE WARRANT AGENT FOR THE WARRANT MODIFICATION OFFER OR THE WARRANT REDEMP-
TION IS:
U. S. STOCK TRANSFER CORP.
1745 GARDENA AVENUE, SUITE 200
GLENDALE, CALIFORNIA 91204-2991
TELEPHONE: (818) 502-1404
---------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO OF ADVANTAGE MARKETING SYSTEMS, INC. APPEARS HERE]
ADVANTAGE MARKETINGSYSTEMS, INC.
1,050,470 UNITS
(EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE 1997-A WARRANT)
ISSUABLE UPON EXERCISE OF CLASS A AND CLASS B COMMON STOCK PURCHASE WARRANTS
---------------
PROSPECTUS
---------------
Holders of Class A Common Stock Purchase Warrants and/or Class B Common Stock
Purchase Warrants who require information about procedures for exercise should
contact the Warrant Agent.
Requests for general information or additional copies of this Prospectus
should be directed to the Company by calling or by writing the Company at:
ADVANTAGE MARKETING SYSTEMS, INC.
2601 NORTHWEST EXPRESSWAY, SUITE 1210W
OKLAHOMA CITY, OKLAHOMA 73112-7293
ATTENTION: CORPORATE SECRETARY
TELEPHONE: (405) 842-0131
JANUARY 16, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[LOGO AND LETTERHEAD OF ADVANTAGE MARKETING, INC. APPEAR HERE]
January 31, 1997
Dear AMS Warrant Holder:
Congratulations upon your decision to become a warrant holder of Advantage
Marketing Systems, Inc. This past year has been a very exciting time for your
Company. With the acquisition of Miracle Mountain International, Inc., and the
continued growth of the AMS base, your Company has continued to set new records.
Through September 30, 1996, we achieved the following results as compared to the
previous year:
Net Income - Increased 317%! Total Assets - Increased 218%!
Shareholders' Equity - Increased 862%
We are pleased to be able to offer you the opportunity to participate in what we
believe is a once in a lifetime opportunity. We have modified the terms of our
"A" and "B" warrants as follows:
1) Lowered the exercise price on the "B" warrant from $8.00 to $6.00.
2) Upon exercise, in addition to a share of common stock, you will receive
a new 1997-A warrant that will allow you to purchase an additional share
of common stock between April 16, 1997 and January 31, 1999.
You must act quickly to take advantage of this opportunity. Any "A" or "B"
warrants not exercised by March 17, 1997, will be redeemed for $.0008 per
warrant. Exercise of your warrants will not only allow you to increase your
equity investment in AMS without paying any broker's commissions, but it will
also provide needed capital for AMS to continue to expand.
Please review the enclosed Prospectus carefully before making your decision. To
take advantage of this opportunity simply fill out the back of your warrant
certificate and mail it with a check payable to Advantage Marketing Systems,
Inc. for the appropriate amount to U.S. Stock Transfer Corp., 1745 Gardena
Avenue, Suite 200, Glendale, California 91204.
In this world there are no guarantees, however, we are very optimistic about the
future of our Company! If you have any questions, please don't hesitate to call
me, Curt Wilson or Roger Baresel at (800) 426-4267.
Sincerely,
JOHN W. HAIL
Founder & CEO
