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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
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ACT OF 1934 [FEE REQUIRED]
For fiscal year ended December 31, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____ to _____.
Commission File Number: 33-80629
Advantage Marketing Systems, Inc.
(Exact Name of Registrant as Specified in its Charter)
Oklahoma 73-1323256
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2601 N.W. Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (405) 842-0131
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
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The aggregate market value of the registrant's Common Stock, $.0001 par value,
held by non-affiliates of the registrant as of March 31, 1997, was $13,292,075
based on the closing bid price on that date as reported by the National Daily
Quotation Bureau, Inc. As of March 31, 1997, 2,481,237 shares of the
registrant's Common Stock, $.0001 par value, were outstanding.
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ADVANTAGE MARKETING SYSTEMS, INC.
FORM 10-KSB
For the Fiscal Year Ended December 31, 1996
TABLE OF CONTENTS
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Page
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PART I
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Item 1. Business............................................................................. 3
Item 2. Properties........................................................................... 9
Item 3. Legal Proceedings.................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders.................................. 10
PART II
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Item 5. Market for the Company's Common Equity and Related Stockholder Matters............... 10
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 12
Item 7. Financial Statements and Supplementary Data.......................................... 17
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................... 17
PART III
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Item 9. Directors and Executive Officers of the Registrant................................... 17
Item 10. Executive Compensation............................................................... 18
Item 11. Security Ownership of Certain Beneficial Owners and Management....................... 22
Item 12. Certain Relationships and Related Transactions....................................... 23
PART IV
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Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... 25
SIGNATURES...................................................................................... 27
SUPPLEMENTAL INFORMATION........................................................................ 28
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PART I
ITEM 1. BUSINESS.
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The Company
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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, cosmetics and skin care products.
These programs represent the Company's one main class of products and services
and account for over 94 percent of its revenues.
The Company's executive offices are located at 2601 Northwest Expressway,
Suite 1210W, Oklahoma City, Oklahoma 73112-7293 with a telephone number of (405)
842-0131.
Background
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Exchange. Pursuant to an Agreement and Plan of Reorganization, dated May 1,
1989, the shareholders of the Company exchanged their common stock for 800,807
shares of the common stock of Pacific Coast International, Inc., a Delaware
corporation (the "Exchange"). Prior to the Exchange, the trade or business
activities of Pacific Coast International, Inc. had been limited to those
activities associated with a public offering of its securities and investigation
of corporate acquisition alternatives as a "blank check" company. Upon
consummation of the Exchange, (i) the officers and directors of the Company
assumed management of Pacific Coast International, Inc., (ii) the Company became
a wholly owned subsidiary of Pacific Coast International, Inc., (iii) the
Company changed its name from AMS, Inc. to Advantage Marketing Systems, Inc.,
and (iv) Pacific Coast International, Inc. changed its name to Advantage
Marketing Systems, Inc. The Exchange was accounted for as a reverse acquisition
of the Company.
Initial Issuance of Public Warrants. Prior to the Exchange, Advantage
Marketing Systems, Inc. (formerly Pacific Coast International, Inc. and parent
of the Company) sold, in a public offering, 225,860 shares of Common Stock,
Class A Common Stock Purchase Warrants (the "Class A Warrants") and Class B
Common Stock Purchase Warrants (the "Class B Warrants") in units, each unit
consisting of one share of Common Stock, one Class A Warrant and one Class B
Warrant. The net proceeds from this offering were approximately $838,290.
Furthermore, in conjunction with such offering, the holders of 300,000 Class A
Warrants and Class B Warrants sold such Public Warrants. As of December 31,
1996, there were 524,360 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 an 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
entitled 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 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
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effective date of May 31, 1996 (the
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"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.
CII Acquisition. Pursuant to a Stock Purchase Agreement having an
effective date of January 31, 1997 (the "Purchase Agreement"), the Company
acquired all of the issued and outstanding capital stock of Chambre
International, Inc., a Texas corporation ("CII"), and CII became a wholly-owned
subsidiary of the Company (the "CII Acquisition"). The CII Acquisition was
accounted for under the purchase method of accounting. CII is a multi-level
marketer of various third-party manufactured cosmetics, skin care and hair care
products. Pursuant to the Purchase Agreement and in connection with the CII
Acquisition, the Company issued and delivered to the shareholders of CII 6,482
shares of Common Stock. In addition, the Company agreed to issue and deliver an
additional 7,518 shares of Common Stock to the shareholders of CII on or before
May 31, 1997, pending determination of certain liabilities.
Dividend Distribution of Subscription Rights to Shareholders and Rights
Offering. The Company distributed at no cost non-transferable rights (the
"Rights") to the holders of record at 5:00 p.m., Central Standard Time, on
January 31, 1997 (the "Record Date") of shares of its common stock, par value
$.0001 per share (the "Common Stock"). The Rights entitled the holders (the
"Rights Holders") to subscribe for and purchase in the aggregate up to 2,148,191
units (each unit consisting of one share of Common Stock and one 1997-A Warrant)
(the "Units") for the price of $6.80 per Unit (the "Subscription Price"). The
Record Date holders of Common Stock (the "Record Date Holders") received one
Right for each share of Common Stock held by them as of the Record Date. The
Rights expired at 5:00 p.m., Central Standard Time, on March 17, 1997. Pursuant
to the Rights, Rights Holders could purchase one Unit for each Right held (the
"Subscription Privilege").
The Units were offered on a best efforts basis by the Company and its
officers and directors, without commissions, selling fees or direct or indirect
remuneration. The Rights Holders were not required to pay any brokerage
commissions or fees with respect to the exercise of their Rights. The Company
paid all charges and expenses of the Subscription Agent.
The Share of Common Stock and 1997-A Warrant comprising each Unit were
separately transferable immediately after the sale of the Units to the Rights
Holders. Each 1997-A Warrant is exercisable at any time 90 days after January
16, 1997 and on or before January 31, 1999, to purchase one share of Common
Stock for $12.00, subject to adjustment in certain events, and may be redeemed
by the Company at any time upon 30 days' notice, at a price of $.0001 per 1997-A
Warrant. The rights offering was part of a plan of financing pursuant to which
the Company raised additional capital through the issuance of the Units.
Concurrently with this offering, the Company offered to the holders of its Class
A Common Stock Purchase Warrants (the "Class A Warrants") and Class B Common
Stock Purchase Warrants (the "Class B Warrants") the right to purchase 1,050,220
Units (the "Warrant Modification Offering").
Warrant Modification Offering. The Company elected to redeem its
outstanding 524,360 Class A Common Stock Purchase Warrants and 525,860 Class B
Common Stock Purchase Warrants for $.0008 per warrant (the "Warrant Redemption")
at 5:00 p.m., Central Standard Time, on March 17, 1997 (the "Redemption Date").
However, in connection with the Warrant Redemption, the Company, pursuant to
modification of the terms of the Class A Common Stock Purchase Warrants and the
Class B Common Stock Purchase Warrants ("Public Warrants"), offered to the
Public Warrant holders (the "Warrant Holders") the right to exercise the Public
Warrants to purchase units (the "Warrant Offering Units"), each comprised of one
share of Common Stock and one 1997-A Warrant, at an exercise price of $6.00 per
Warrant Offering Unit (the "Warrant Modification Offering").
Holders of the Public Warrants were not required to pay any brokerage
commissions or fees with respect to the exercise of their Public Warrants. The
Company paid all charges and expenses of the Warrant Agent.
The Units were offered on a best efforts basis by the Company and its
officers and directors, without right offering commissions, selling fees or
direct or indirect remuneration. From the proceeds of the Warrant Modification
Offer and the
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Rights Offering, which are estimated to be approximately $2,000,000, the Company
will pay the costs incurred with respect to the offerings, which are estimated
to be $250,000. Offers were limited to holders of the Public Warrants and Rights
residing in those states in which the Units were registered or qualified to be
offered and sold.
Group Asset Acquisition. On March 31, 1997, the Company signed a letter
of intent to purchase all of the assets of Stay 'N Shape International, Inc.,
Solution Products International, Inc., Nation of Winners, Inc., and Now
International, Inc. (the "Group"). The Company will purchase all of the assets
of the Group, free and clear of all liens and encumbrances, for a combination of
$1,200,000 cash and shares of the Company's restricted (unregistered) common
stock (the "Purchase Price") with an estimated fair value of up to $2,700,000,
dependent upon meeting certain future sales targets. The cash portion of the
Purchase Price will be payable at closing. The stock portion of the Purchase
Price will be issued and delivered over a 25-month period with stock valued at
$800,000 due at closing, $750,000 due within 14 months of closing, and
$1,150,000 due within 25 months from closing. The number of shares of common
stock to be issued is subject to the market value of the Company's common stock
at date of issuance and delivery. The Purchase Price is subject to adjustment
based on sales performance over a two-year period. The Group acquisition will be
accounted for under the purchase method of accounting. Each company in the Group
is a multi-level marketer of various third-party manufactured nutritional
supplements.
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.
Business Activities - General
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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, cosmetics and skin care products. These programs represent the
Company's one main class of products and services and account for over 93
percent of its revenues during 1996. 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, cosmetics and skin care
programs. 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, cosmetics and skin care programs 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 2.4 and 8.2 percent for the years ending December 31,
1996, and 1995, respectively. The percentage of total revenue contributed from
the Company's nutritional supplement program was 91.4 and 89.9 percent for the
years ending December 31, 1996 and 1995, respectively.
Products and Services of the Company
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In January 1993, the Company introduced the "Infinity Plan" which is made
up of packages of consumer benefit services provided by third party providers.
In addition, in 1993, the Company began marketing of pre-paid legal services.
The consumer benefit services are provided by third party providers and consist
of (i) discount shopping service which provides access to a wide range of
merchandise at discount through a toll free "800" number, (ii) grocery coupon
service which provides access to money saving coupons on major name brand
products, (iii) discount travel service which provides access to guaranteed
lowest airfares, with five percent cash rebates on air, hotel, cruise and
vacation packages, (iv) pre-paid legal services which include four basic
benefits which provide coverage for a broad range of preventive and litigation
related
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legal expenses, and/or (v) a variety of other consumer benefits including
savings on prescriptions, eye care, magazines and books. The services under
these consumer benefit programs, except for the pre-paid legal services, are
provided by Consumer Benefit Services, Inc. of Naperville, Illinois. The pre-
paid legal services are provided by Pre-Paid Legal Services, Inc. of Ada,
Oklahoma.
Individuals purchase memberships in the Company's Infinity Plan. They
normally pay for their memberships on a monthly basis. Payment of their monthly
membership fee entitles the member to have access to a variety of consumer
benefit services provided by third party providers. The Company pays these
third party providers a fee based upon the number of active memberships that are
in place each month. The Company recognizes the revenues and expenses related
to the Infinity Plan on a monthly basis as the members pay their membership fees
to the Company, and the Company in turn pays a fee to the third-party providers,
thus allowing the members to have access to the consumer benefit services.
In October of 1993, the Company introduced the "NewTrition Plan" which
allows plan members to purchase a variety of dietary and nutritional supplements
designed to assist with healthy diet and weight management programs. Through the
"NewTrition Plan" the Company offers the following products which represent the
majority of the Company's nutritional supplement program sales:
. AM-300 - A weight management supplement containing a unique blend of
specialized herbs plus the patented ingredient, Chromium Picolinate.
. Shark Cartilage - A nutritional supplement manufactured from 100%
shark fin cartilage.
. Super Anti-Oxidant - An exclusive blend of enzyme-active and phyto-
nutrient rich whole food and herbal antioxidant concentrates.
As a result of the acquisition of Chambre International, Inc. on January
31, 1997, a line of cosmetics, skin care and hair care products were added to
the NewTrition Plan.
The nutritional supplements are manufactured by J&K Pharmaceutical
Laboratories. The cosmetics, skin care and hair care products are manufactured
by GDMI, Custom Cosmetics and Columbia Cosmetics. The Company and its affiliates
have no other relationships with Consumer Benefit Services, Inc., J&K
Pharmaceutical Laboratories, GDMI, Custom Cosmetics and Columbia Cosmetics, or
their affiliates. Pre-Paid Legal Services, Inc. is a shareholder of the Company
and Harland Stonecipher, the founder and Chief Executive Officer of Pre-Paid
Legal Services, was elected to the Company's Board of Directors on August 25,
1995.
Other Products and Services
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As of March 31, 1997, the Company has not determined the other services and
products it may desire to market; other than as mentioned above in connection
with the CII & Group Asset Acquisitions, 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
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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 encourage
individuals to sell the various consumer products and services offered under the
program and allow individuals to recruit and develop their own sales
organizations. Commissions are paid only on sales of products and services.
Commissions are paid to the sales associate making the sale, and to other
associates who are in the line of associates who directly or indirectly
recruited the selling associate. For the years ended December 31, 1996 and
1995, the Company paid commissions to 3,270 and 1,863 individuals in the
aggregate amount of $2,727,330 and $1,823,058, 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.
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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 training
programs. All advertising, promotional and solicitation materials used by sales
associates must be approved by the Company prior to use. A substantial number
of the Company's sales associates market the Company programs on a part-time
basis only. At December 31, 1996, the Company had 13,795 "active" sales
associates compared to 7,617 "active" sales associates at December 31, 1995. 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. For the years ended December 31, 1996 and 1995, the Company received
one-time distributor and associate fees totaling $475,184 and $261,043,
respectively. The Company did not begin charging a monthly $4.00 administrative
fee until the second quarter of 1995. For the years ended December 31, 1996 and
1995, the Company received administrative fees totaling $19,493 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 who, in
turn, are encouraged to become sales associates for the Company. 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. An individual distributor's 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 those people has sponsored and so on until they reach
six distributors or associates away from the original distributor or associate.
As an additional incentive for top producing distributors and sales
associates, a commission override program is available for those who meet
specified qualifications. This override program provides for the payment on
sales that extend beyond the sixth level of an individual's commission
organization.
Sales associates are encouraged to assume responsibility for training and
motivation of other sales associates within their organization and to conduct
opportunity meetings as soon as they are trained to do so. The Company strives
to maintain a high level of motivation, morale, enthusiasm and integrity among
the members of its independent sales organization. This is done through a
combination of quality products, sales incentives, personal recognition of
outstanding achievement, and
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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,
cosmetic and skin care 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,
1996, the Company had marketing materials and product inventories of $66,917 and
$151,028, respectively. At December 31, 1995, the Company had marketing
materials and product inventories of $46,440 and $52,181, respectively.
Operations
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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
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As of March 31, 1997, the consumer benefit services offered and distributed
by the Company are provided by Consumer Benefit Services, Inc. and Pre-Paid
Legal Services, Inc. The Company has non-exclusive contractual 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 and the Chemins Company, Inc. The cosmetics, skin
care and hair care products sold and distributed by the Company are manufactured
by GDMI, Custom Cosmetics and Columbia Cosmetics. 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,
cosmetic and skin care 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.
Competition
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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 those which are offered by
the Company. Many of these companies have substantially greater financial
resources than the Company. The Company
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also 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 and services 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 personnel are often attracted to sell new or different
products being distributed by companies whose compensation plans are the most
lucrative, and consequently, are frequently 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 and compensation program, and
will be able to recruit and retain new and existing direct sales personnel to
sell the Company's consumer services, nutritional supplements and skin care
products, there is no guarantee that its independent selling organization will
ultimately be successful.
Government Regulation
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The Company markets and sells its consumer services, nutritional
supplements and skin care products programs through independent sales
distributors in a multi-level direct selling organization established 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 all 50
states. The Company has reviewed the requirements of various states as well as
sought legal advice regarding the structure and operation of its selling
organization to insure that it complies with all of the applicable laws
pertaining to multi-level sales organizations in those states in which the
Company is engaged in business. On the basis of these efforts and the experience
of its management, the Company believes that it is in compliance with all
applicable requirements. Although the Company believes that the structure and
operation of its selling organization complies with all of the applicable laws
pertaining to multi-level sales organizations in those states in which the
Company is engaged in business, the Company has not obtained any no-action
letters or advance rulings from any federal or state security regulator or other
governmental agency concerning the legality of the Company's operations, nor is
the Company relying on an opinion of counsel to such effect.
In addition, the operations of the Company are also subject to various
federal, state and local requirements which affect businesses generally, such as
taxes, postal regulations, labor laws, and zoning ordinances.
Employees
- ---------
As of March 31, 1997, the Company had 31 full-time employees, of whom three
were executive officers, ten were engaged in administrative activities, seven
were engaged in marketing activities, five were engaged in customer service
activities, and six 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.
ITEM 2. 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 expires on
-9-
<PAGE>
May 31, 1998, and the monthly rental payment is $4,469. 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.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
Other than as set forth hereinbelow, the Company does not have any pending
litigation. The Company is currently under investigation by the Oklahoma
Department of Securities with respect to the AMS Associate Stock Pool (the
"Pool"). As of March 31, 1997, 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 participate 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 March
31, 1997, the pool holds 203,437 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 Report,
the investigation is in the discovery stage, legal counsel cannot express an
opinion regarding the ultimate outcome of the investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
--------------------------------------------------------------
MATTERS.
-------
The Company's Common Stock is traded in the over-the-counter market and is
quoted by the National Daily Quotation Bureau, Inc. under the symbol "AMSO".
The following table sets forth, for the periods presented, the high and low
closing bid quotations in the over-the-counter market as quoted by the National
Quotation Bureau, Incorporated, 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>
COMMON STOCK
CLOSING BID
---------------
HIGH LOW
------ -------
<S> <C> <C>
1997:
First Quarter March 31, 1997.......... $ 6.25 $5.50
1996:
First Quarter Ended March 31.......... $ 6.48 $5.04
Second Quarter Ended June 30.......... $ 8.00 $5.04
Third Quarter Ended September 30...... $ 7.84 $5.52
Fourth Quarter Ended December 31...... $ 6.50 $5.00
1995:
First Quarter Ended March 31.......... $ 2.00 $1.76
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Second Quarter Ended June 30............... $ 3.76 $2.00
Third Quarter Ended September 30........... $10.00 $3.60
Fourth Quarter Ended December 31........... $ 7.52 $4.48
</TABLE>
The number of holders of record of the Company's Common Stock as of March
31, 1997, was approximately 1,563. This number does not include an
indeterminate number of shareholders whose shares are held in "street accounts"
of securities brokers.
The Company has not paid a dividend with respect to its common stock. The
Company expects to reinvest any earnings for expansion of its operations and
does not intend to pay a dividend in the foreseeable future.
Penny Stock Trading Rules
- -------------------------
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 Company's Common Stock 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., has had an account with the dealer for at least one
year or, the dealer had effected three sales of penny stocks on three different
days involving three different issuers), the broker-dealer must obtain from the
purchaser a written agreement to purchase the penny stock which sets forth the
identity and number of shares or units of the security to be purchased prior to
confirmation of the purchase. A dealer is obligated to provide certain
information disclosures to the purchaser of a penny stock, including (i) a
generic risk disclosure document which is required to be delivered to the
purchaser before the initial transaction in a penny stock, (ii) a transaction-
related disclosure prior to effecting a transaction in the penny stock (i.e.,
confirmation of the transaction) containing bid and asked information related to
the penny stock and the dealer's and salesperson's compensation (i.e.,
commissions, commission equivalents, markups and markdowns) in connection with
the transaction, and (iii) the purchaser-customer must be furnished account
statements, generally on a monthly basis, which include prescribed information
relating to market and price information concerning the penny stocks held in his
account. The penny stock trading rules do not apply to those transactions in
which a broker-dealer or salesperson does not make any purchase or sale
recommendation to the purchaser or seller of the penny stock.
Required compliance with the penny stock trading rules affects the ability
to resell the Company's Common Stock and 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, a
holder of the Company's Common Stock and 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 the Company's Common Stock and 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 Company's Common Stock and 1997-A Warrants may not be reliable.
-11-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto of the Company appearing
elsewhere in this report.
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. AMS Delaware did not have any other operating
activities. Following the Merger Reincorporation, all operating activities of
AMS Delaware and the Company 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.
The following table sets forth selected results of operations for the
fiscal years ended December 31, 1996, 1995 and 1994, which are derived from the
audited consolidated financial statements of the Company. The results of
operations for the periods presented are not necessarily indicative of the
Company's future operations.
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------
1996 1995 1994
------------------- ----------------- -----------------
Amount % Amount % Amount %
---------- ------- ---------- ----- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Programs.................. $5,785,841 93.9% $4,382,935 97.0% $2,564,542 95.8%
Promotional material...... 344,075 5.6 109,733 2.4 82,780 3.1
Other..................... 33,824 .5 25,535 .6 30,625 1.1
--------- ----- --------- ----- --------- -----
Total revenues........... 6,163,740 100.0 4,518,203 100.0 2,677,947 100.0
--------- ----- --------- ----- --------- -----
Costs and Expenses
Programs.................. 1,285,689 20.8 1,094,157 24.2 684,128 25.6
Promotional material...... 336,351 5.5 92,087 2.1 83,964 3.1
Selling................... 3,066,962 49.7 2,201,510 48.7 1,289,616 48.2
General & administrative.. 1,138,656 18.5 857,743 19.0 515,158 19.2
Interest expense.......... 10,538 .2 22,998 .5 25,075 .9
--------- ----- --------- ----- --------- -----
Total expenses........... 5,838,196 94.7 4,268,495 94.5 2,597,941 97.0
--------- ----- --------- ----- --------- -----
Income before taxes........ 325,544 5.3 249,708 5.5 80,006 3.0
Tax Benefit................ 499,613 8.1 - - - -
--------- ----- --------- ----- --------- -----
Net income................. $ 825,157 13.4% $ 249,708 5.5% $ 80,006 3.0%
========= ===== ========= ===== ========= =====
</TABLE>
During 1996, 1995 and 1994, the Company experienced increases in revenues
from programs and net income compared to the preceding year. The increases were
principally the result of introduction of the Company's NewTrition Plan in
October 1993 and expansion of the Company's network of its independent sales
representatives and associates, which resulted in achieving substantial
increased sales volume of the NewTrition Plan. The Company expects to continue
to expand its network of independent sales representatives and associates, which
is in part dependent upon the market demand for the consumer products and
services offered by the Company through its various purchasing programs, and
such expansion should result in increased sales volume.
However, there is no assurance that increased sales volume will be achieved
through expansion of the selling network of the Company's programs, or that, if
sales volume increases, the Company will realize increased profitability due to
the costs and expenses associated with increased sales and the general and
administrative expenses.
Comparison of Fiscal 1996 and 1995
- ----------------------------------
During 1996, total revenues increased $1,645,537 (a 36.4 percent increase)
to $6,163,740 in 1996 from $4,518,203 in 1995. 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
-12-
<PAGE>
representatives and associates. During 1996 the Company made aggregate sales
under its NewTrition Plan of $5,785,370 to 9,024 distributors, compared to
aggregate sales in 1995 of $4,064,216 to 5,783 distributors. Promotional
material revenue increased $234,342 (a 213.6 percent increase) to $344,075 in
1996 from $109,733 in 1995. The increase was attributable to an expansion of the
product line, additional distributors and the addition of sales through the
acquisition of MMI. In addition, other revenue increased by $8,289 (a 32.5
percent increase) to $33,824 in 1996 from $25,535 in 1995, as a result of
additional interest income and promotional items.
During 1996, total costs and expenses of programs, promotional material and
selling increased $1,301,248 (a 38.4 percent increase) to $4,689,002 in 1996
from $3,387,754 during 1995. This increase was attributable to an increase of
(i) $191,532 (a 17.5 percent increase) in programs expenses and (ii) $244,264 (a
265.3 percent increase) in promotional material expenses, while selling expenses
increased $865,452 (a 39.3 percent increase). The costs and expenses of
programs, promotional materials and selling, as a percentage of program sales
revenue increased from 77.3 percent during 1995 to 81 percent during 1996. This
increase resulted from an increase in selling costs as a percentage of program
sale revenue from 50.2 percent to 53 percent offset by a decrease in the costs
of programs as a percentage of programs revenue from 25 percent to 22.2 percent
due to improved price negotiations with suppliers associated with the Company's
NewTrition Plan. The Company provides promotional material to its distributors
at or near cost. The increased volume of activity in 1996 is reflective of an
increased distribution network for the Companies products and services.
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 $336,000 (a 30.4 percent
increase) to $1,440,914 in 1996 from $1,104,914 in 1995. The gross profit on
program and promotional material revenues decreased as a percentage of total
revenue to 23.4 percent in 1996 from 24.5 percent in 1995. The decrease in the
Company's gross profit margin on program and promotional material revenues
resulted from a combination of a decrease in programs costs as a percentage of
programs revenues, offset by an increase in selling costs and expenses as a
percentage of programs revenues.
General and administrative expenses increased $280,913 (a 32.8 percent
increase) to $1,138,656 during 1996 from $857,743 during 1995. This increase
was attributable to the Company's administrative infra-structure necessary to
support increased levels of sales. The Company expanded its administrative
infra-structure by hiring additional full-time employees. Consequently, payroll
and employee costs increased by $253,580 during 1996 as the Company increased
its number of full-time employees from 14 to 31. The balance of the increase
resulted from increases in supplies, postage and other operating expenses
associated with the increased sales levels. Interest expense during 1996
decreased $12,460 (a 54.2 percent decrease) to $10,538 in 1996 from $22,998
during 1995.
Income before taxes increased $75,836 (a 30.4 percent increase) to $325,544
during 1996 from $249,708 during 1995. Income before taxes as a percentage of
total revenue decreased to 5.3 percent during 1996 from 5.5 percent during 1995.
The Company recognized a one time tax benefit of $499,613 in 1996 primarily
related to the recognition of expected future tax benefits to be realized from
operating loss carryforwards. Combined with income from operations, total net
income increased $575,449 (a 230.4 percent increase) to $825,157 in 1996 from
$249,708 in 1995.
Comparison of Fiscal 1995 and 1994
- ----------------------------------
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. 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,
-13-
<PAGE>
while promotional material expenses increased $8,123 (a 9.7 percent increase).
The costs and expenses of programs, promotional materials and selling, as a
percentage of program sales revenue, decreased from 80.2 percent during 1994 to
77.3 percent during 1995 which resulted from a decrease in the costs of programs
as a percentage of program sale revenue from 26.7 percent to 25.0 percent due to
increased program costs associated with the Company's NewTrition Plan, offset by
a decline in selling costs as a percentage of program sale revenue from 50.3
percent to 50.2 percent. The Company achieved a net profit on sales of
promotional materials of $17,646 during 1995 compared to a net loss of $1,184
during 1994 as a result of the Company's curtailed practice of providing
promotional materials at reduced cost during special promotions periods.
The Company's gross profit on program and promotional material revenues
(program and promotional material revenue less program costs, promotional
material costs and selling expenses) increased $515,300 (an 87.4 percent
increase) to $1,104,914 in 1995 from $589,614 in 1994. The gross profit on
program and promotional material revenues increased as a percentage of total
revenue from 22 percent in 1994 to 24.5 percent in 1995. The increase in the
Company's gross profit margin on program and promotional material revenues
resulted from the combination of an increase in program and promotional
materials costs as a percentage of programs and promotional material revenues,
offset by a decrease in selling costs and expenses as a percentage of programs
and promotional material revenues.
General and administrative expenses increased $342,585 (a 66.5 percent
increase) to $857,743 during 1995 from $515,158 during 1994. This increase was
attributable to the Company's administrative infra-structure necessary to
support increased levels of sales. The Company expanded its administrative
infra-structure by hiring eight additional employees. Consequently, payroll and
employee costs increased by $208,169 during 1995 as the Company increased its
number of employees from six to 14. The balance of the increase resulted from
increases in supplies, postage and other operating expenses associated with the
increased sales levels. Interest expense during 1995 decreased $2,077 (an 8.3
percent decrease) to $22,998 from $25,075 during 1994.
Net income increased $169,702 (a 212.1 percent increase) to $249,708 during
1995 from $80,006 during 1994. Net income as a percentage of total revenue
increased from three percent during 1994 to 5.5 percent during 1995.
Quarterly Results of Operations
- -------------------------------
The Company's operations appear not to be significantly affected by
seasonal trends. No pattern of seasonal fluctuation exists due to the 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 the current patterns will continue and 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 December 31, 1996 totalling
approximately $1,350,000 which will begin to expire in 2003. On a regular
basis, management evaluates all available evidence, both positive and negative,
regarding the ultimate realization of the tax benefits of its deferred tax
assets. Based upon the historical trend of increasing earnings management 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 December 31, 1996, of
approximately $500,000 and a corresponding tax benefit for the fiscal year ended
December 31, 1996.
Liquidity and Capital Resources
- -------------------------------
The Company had working capital of approximately $16,353 at December 31,
1996, as compared to a deficit of approximately $171,000 at December 31, 1995.
Management believes that cash flows from operations will be sufficient to fund
its working capital needs over the next twelve months. During 1996, net cash
provided by operating activities was $426,421, of which $136,937 was used for
investing activities (consisting primarily of the purchase of property,
equipment, advances to affiliates, and the acquisition of Miracle Mountain
International, Inc.), and $232,002 was used in financing
-14-
<PAGE>
activities (consisting primarily of payment of deferred offering costs and
repayments to the Company's Chief Executive Officer and major shareholder). The
Company had a net increase in cash during this period of $57,482. The Company's
working capital needs over the next twelve months consist primarily of
administrative and operating overhead. For the three months ended March 31,
1997, the Company's administrative and operating overhead averaged approximately
$135,000 per month. The Company anticipates that this level of administrative
and operating overhead will continue over the next twelve months.
At December 31, 1996 and 1995, the balance due on a short-term loan from
the Company's Chief Executive Officer and major shareholder was $-0- 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. During the year ended December 31,
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 years ended December 31, 1996 and 1995, the Company made principal payments
of $81,929 and $60,094, respectively, thereon to the Company's Chief Executive
Officer and major shareholder. The loan was unsecured, due on demand and bore
interest at 12 percent per annum.
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 $22,000 and $87,684 during
the years ended December 31, 1996 and 1995, respectively. During the year ended
December 31, 1996 and 1995, JHA made repayments of $6,141 and $67,401,
respectively. Furthermore during 1996, the Company adopted a policy to not make
any further advances to JHA, and JHA executed a promissory note payable to the
Company with a principal balance of $67,822, at December 31, 1996, bearing
interest at eight percent per annum and payable in installments of $1,499 per
month.
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 connection with the MMI Acquisition, the excess of the purchase price of
$176,103, which includes $56,103 of transaction costs, over the negative $3,059
fair market value of assets of MMI, net of liabilities, has been allocated
$119,162 to goodwill and $60,000 to the covenant not to compete. Goodwill and
the covenant not to compete will be amortized over a seven and four and one
half-year period, respectively. The fair market value of the assets of MMI, net
of liabilities, declined from $16,690 to a negative $3,059 between March 31,
1996 and May 31, 1996.
Pursuant to a Stock Purchase Agreement having an effective date of
January 31, 1997 (the "Purchase Agreement"), the Company acquired all of the
issued and outstanding capital stock of Chambre International, Inc., a Texas
corporation ("CII"), and CII became a wholly-owned subsidiary of the Company
(the "CII Acquisition"). The CII Acquisition was accounted for under the
purchase method of accounting. CII is a multi-level marketer of various third-
party manufactured cosmetics, skin care and hair care products. Pursuant to the
Purchase Agreement and in connection with the CII Acquisition, the Company
issued and delivered to the shareholders of CII 6,482 shares of Common Stock.
In addition, the Company agreed to issue and deliver an additional 7,518 shares
of Common Stock to the shareholders of CII on or before May 31, 1997, pending
determination of certain liabilities.
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 December 31, 1996, the Company did not have any
material commitments for capital expenditures.
On January 31, 1997, at 5:00 p.m. Central Standard Time, the Company
distributed, at no cost, non-transferable rights ("Rights") to the holders of
record of shares of its common stock, par value $.0001 per share. The Rights
entitled the holders (the "Rights Holders") to subscribe for and purchase up to
2,148,191 units (each unit consisting of one share of common stock and one 1997-
A warrant) for the price of $6.80 per unit (the "Rights Offering"). The record
date holders of
-15-
<PAGE>
common stock received one Right for each share of common stock held by them as
of the record date. The Rights expired at 5:00 p.m. Central Standard Time, on
March 17, 1997. Pursuant to the Rights, Rights Holders could purchase one unit
for each Right held.
The share of common stock and 1997-A warrant comprising each unit were
separately transferable immediately after the sale of the units to the Rights
Holders. Each 1997-A warrant is exercisable at any time 90 days after January
16, 1997, and on or before January 31, 1999, to purchase one share of common
stock for $12.00, subject to adjustment in certain events, and may be redeemed
by the Company at any time upon 30 days' notice, at a price of $.0001 per 1997-A
warrant.
Concurrent with this Rights Offering, the Company elected to redeem all of
its outstanding Class A and Class B Common Stock Purchase Warrants (the "Public
Warrants") for $.0008 per warrant (the "Warrant Redemption") at 5:00 p.m.
Central Standard Time, on March 17, 1997. However, in connection with the
Warrant Redemption, the Company, pursuant to modification of the terms of the
Public Warrants, offered to the Public Warrant holders (the "Warrant Holders")
the right to exercise the Public Warrants to purchase units, each comprised of
one share of common stock and one 1997-A warrant, at an exercise price of $6.00
per unit (the "Warrant Modification Offering").
The units in the offerings described above were offered on a best efforts
basis by the Company and its officers and directors, without commissions,
selling fees or direct or indirect remuneration. The Rights and Warrant Holders
were not required to pay any brokerage commissions or fees with respect to the
exercise of their Rights or Public Warrants. The Company paid all charges and
expenses of the subscription and warrant agents.
From the proceeds of the Warrant Modification Offering and the Rights
Offering, which are estimated at $2,000,000, the Company will pay the costs
incurred with respect to the offerings, which are estimated to be $250,000.
Deferred offering costs of $175,848 at December 31, 1996, will be charged
against the net proceeds from these offerings.
In the event that the Company does not obtain any net proceeds from its
stock offering, it is anticipated that the Company will be able to continue to
operate on internally generated cash. During the year ended December 31, 1996,
the Company had an average monthly positive cash flow from operating activities
of approximately $35,500, and an average monthly net positive cash flow of
approximately $4,800, after investing and financing activities.
In connection with the equity offerings the Company has incurred certain
direct costs consisting primarily of legal, accounting and filing fees. These
deferred offering costs totaled approximately $175,848 and $53,000 at December
31, 1996 and 1995, respectively, and are included in other assets in the
Company's financial statements. During the year ended December 31, 1996, the
Company wrote off $15,000 of these costs which were determined to no longer have
value. The remainder of these costs will be charged against the net proceeds of
the offerings.
On March 31, 1997, the Company signed a letter of intent to purchase all
of the assets of Stay 'N Shape International, Inc., Solution Products
International, Inc., Nation of Winners, Inc., and Now International, Inc. (the
"Group"). The Company will purchase all of the assets of the Group, free and
clear of all liens and encumbrances, for a combination of $1,200,000 cash and
shares of the Company's restricted (unregistered) common stock (the "Purchase
Price") with an estimated fair value of up to $2,700,000, dependent upon meeting
certain future sales targets. The cash portion of the Purchase Price will be
payable at closing. The stock portion of the Purchase Price will be issued and
delivered over a 25-month period with stock valued at $800,000 due at closing,
$750,000 due within 14 months of closing, and $1,150,000 due within 25 months
from closing. The number of shares of common stock to be issued is subject to
the market value of the Company's common stock at date of issuance and delivery.
The Purchase Price is subject to adjustment based on sales performance over a
two-year period. The Group acquisition will be accounted for under the purchase
method of accounting. Each company in the Group is a multi-level marketer of
various third-party manufactured nutritional supplements.
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
-16-
<PAGE>
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.
Accounting Standards Issued But Not Yet Adopted
- -----------------------------------------------
In February 1997, the FASB issued SFAS No. 128, Earnings per Share. The
Company believes that adopting SFAS No. 128 will not have a material effect on
the Company's consolidated financial position or results of operations, but will
result in changes in the calculation of earnings per share.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
About Capital Structure. The Company will adopt SFAS No. 129 when required.
Management believes that adoption of this standard will not have a material
impact on the Company's consolidated financial position or results of
operations.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
The financial statements of the Company prepared in accordance with Regulation
S-B are set forth beginning on page F-1 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
--------------------
There have been no disagreements concerning matters of accounting principle
or financial statement disclosure between the Company and its independent
accountants of the type requiring disclosure hereunder.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Current Directors and Executive Officers
- ----------------------------------------
The following table sets forth certain information with respect to each
executive officer and director of the Company. 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.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John W. Hail(1)(2) 66 Chairman of the Board, Chief Executive Officer
and Director
Curtis H. Wilson, Sr.(3) 70 Vice-Chairman of the Board and Director
Roger P. Baresel(1)(2) 41 President, Chief Financial Officer, Secretary
and Director
R. Terren Dunlap(3) 51 Director
Harland C. Stonecipher(4) 57 Director
</TABLE>
_________________________
(1) Member of the Stock Option committee.
(2) Term as a Director expires in 1998.
(3) Term as a Director expires in 1997.
-17-
<PAGE>
(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 its inception in 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 maintained an accounting practice for ten
years specializing in providing consulting services to small and growing
businesses and provided consulting services to the Company from 1988 until
joining the Company as a full-time employee on June 1, 1995.
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.
ITEM 10. EXECUTIVE COMPENSATION.
----------------------
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.
-18-
<PAGE>
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual compensation Award of Options
----------------------------------------
Name & Principal Position Year Salary(1) Bonus(2) Other Number of Shares
- ------------------------- ---- --------- -------- --------- ----------------
<S> <C> <C> <C> <C> <C>
John W. Hail 1996 $ - $ - $22,000(3) -
Chief Executive Officer 1995 $ - $ - $87,684(3) 375,000(4)
1994 $ - $ - $66,026(3) -
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 advances to the John Hail Agency, Inc., an affiliate of Mr.
Hail, of $22,000, $87,684, and $66,026, respectively. See "Part III, Item
12. Certain Relationships and Related 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 156,250 of the stock
options that he received in 1995.
(5) The Company furnishes the use of an automobile to Mr. Baresel, the value of
which is not greater than $5,000 annually. During 1995 and 1994, the
Company paid accounting and consulting service fees to Mr. Baresel prior to
Mr. Baresel becoming an executive officer of the Company on June 1, 1995.
See "Part III, Item 12. Certain Relationships and Related Transactions".
(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.
Aggregate Option Grants and Exercises in 1996 and 1995 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 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>
Individual Grants
-----------------------------------------
Percent Potential Realizable Value at
of Total Assumed Rates of Stock
Options Price Appreciation for
Number Granted to Exercise or Option Term(1)
--------------------------------------
of Options Employees Base Price Expiration Five Ten
Name Granted 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 Feb. 23, 2005 $471,671 $1,195,307
Chief Executive Officer
Roger P. Baresel(4) 125,000 16.8% $2.00 Feb. 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 exercise of the options immediately
prior to the expiration of their term, assuming the specified compound
rates of appreciation of the Common Stock over the term of the options.
These amounts do not take into consideration
-19-
<PAGE>
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-for-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>
Number of Unexercised Value of Unexercised
Options as of In-the-Money 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 $ -
Chief Executive Officer 1995 150,000(2) - $600,000 $ -
Roger P. Baresel............ 1996 35,000 - $134,650 $ -
President and Secretary 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 at December 31, 1996 and 1995 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 was $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, was $515,938 and $555,000, respectively.
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 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
- -----------------
-20-
<PAGE>
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 March 31, 1997, 21,000 options had 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% of the fair market value
of the shares on the date of grant of the option. The fair market value of a
share of the Common Stock is determined by averaging the closing high bid and
low asked quotations for such share on the date of grant of the option as
reported by the National Quotation Bureau, Incorporated or, if not quoted, is
determined by the Stock Option Committee. Upon the exercise of an option, the
option price must be paid in full, in cash or with an SAR. Subject to the Stock
Option Committee's approval, upon exercise of an option with an SAR attached, a
participant may receive cash, shares of Common Stock or a combination of both,
in an amount or having a fair market value equal to the excess of the fair
market value, on the date of exercise, of the shares for which the option and
SAR are exercised, over the option exercise price.
Options granted under the Plan may not be exercised until six months after
the date of the grant and rights under an SAR may not be exercised until six
months after the SAR is attached to an option, if not attached at the time of
the grant of the option, except in the event of death or disability of the
participant. ISO Options and any SARs are exercisable only by participants
while actively employed as an employee or a consultant by the Company, except in
the case of death, retirement or disability. Options may be exercised at any
time within three months after the participant's retirement or within one year
after the participant's disability or death, but not beyond the expiration date
of the option. No option may be granted after April 30, 2005. Options are not
transferable except by will or by the laws of descent and distribution.
Officer and Director Liability
- ------------------------------
As permitted by the provisions of the Oklahoma General Corporation Act, the
Certificate of Incorporation (the "Certificate") eliminates in certain
circumstances the monetary liability of directors of the Company for a breach of
their fiduciary duty as directors. These provisions do not eliminate the
liability of a director for (i) a breach of the director's duty of loyalty to
the Company or its shareholders, (ii) acts or omissions by a director not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) liability arising under Section 1053 of the Oklahoma General
Corporation Act (relating to the declaration of dividends and purchase or
redemption of shares in violation of the Oklahoma General Corporation Act), or
(iv) any transaction from which the director derived an improper personal
benefit. In addition, these provisions do not eliminate liability of a director
for violations of federal securities laws, nor do they limit the rights of the
Company or its shareholders, in appropriate circumstances, to seek equitable
remedies such as injunctive or other forms of non-monetary relief. Such
remedies may not be effective in all cases.
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.
-21-
<PAGE>
The Company may enter into indemnity agreements with each of its directors
and executive officers. Under each indemnity agreement, it is anticipated that
the Company will pay on behalf of the indemnitee, and his executors,
administrators and heirs, any amount which he is or becomes legally obligated to
pay because of (i) any claim or claims from time to time threatened or made
against him by any person because of any act or omission or neglect or breach of
duty, including any actual or alleged error or misstatement or misleading
statement, which he commits or suffers while acting in his capacity as a
director and/or officer of the Company or its affiliate or (ii) being a party,
or being threatened to be made a party, to any threatened, pending or
contemplated action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was an officer, director,
employee or agent of the Company or its affiliate or is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. It is
anticipated that the payments which the Company will be obligated to make
thereunder shall include, inter alia, damages, charges, judgments, fines,
penalties, settlements and cost of investigation and costs of defense of legal,
equitable or criminal actions, claims or proceedings and appeals therefrom, and
costs of attachment, supersedeas, bail, surety or other bonds.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------------------------------------------------------------
The following table sets forth as of March 31, 1997, information regarding
ownership of Common Stock of (i) each person who is known to the Company to be
the beneficial owner of more than five percent thereof, (ii) each director and
executive officer of the Company, and (iii) all executive officers and directors
as a group, together with their percentage holdings of the outstanding shares.
All persons named 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 March 31,
1997, pursuant to the exercise of the 1997-A 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>
Percentage
Name & Address of Number of of Shares
Beneficial Owner Shares Owned(1) Outstanding
- ----------------- --------------- ------------
<S> <C> <C>
John W. Hail(2)(3)................ 395,237 15.02%
Curtis H. Wilson, Sr.(2)(4)....... 272,603 9.98%
United Financial(5)............... 250,000 9.15%
Robert & Retha Nance(6)........... 193,094 7.61%
Roger P. Baresel(2)(7)............ 167,250 6.39%
Harland C. Stonecipher(8)......... 56,415 2.27%
Pre-Paid Legal Services, Inc.(8).. 56,415 2.27%
R. Terren Dunlap(2)(9)............ 37,500 1.49%
All Current Officers and
Directors as a Group
(5 persons)(3)(4)(7)(8)(9)(10).... 929,005 30.40%
</TABLE>
___________________________
(1) Shares of Common Stock which an individual or group has a right to acquire
within 60 days pursuant to the exercise of options or warrants are deemed
to be outstanding for the purposes of computing the percentage ownership of
such individual or group, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person shown in
the table.
(2) A Director and an executive officer of the Company, with a business address
of 2601 Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112.
(3) The shares and percentage include 245,237 shares of outstanding Common
Stock held by Mr. Hail and 150,000 shares of Common Stock which are subject
to currently exercisable stock options granted in 1995 to and held by Mr.
Hail.
-22-
<PAGE>
(4) The shares consist of and the percentage is based upon 17,065 shares of
outstanding Common Stock held by Mr. Wilson and 250,000 shares of Common
Stock which are subject to currently exercisable stock options granted to
and held by Mr. Wilson (of which 125,000 were granted in 1995), and
includes 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.
(5) The business address of United Financial Advisors, Inc. is 1601 NW
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.
(6) Mr. and Mrs. Nance are husband and wife and their business address is Post
Office Box 405, Wheatland, Oklahoma 73097. The shares consist of and the
percentage is based upon (i) 7,020 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) 54,483 shares of Common Stock which are subject to
currently exercisable stock options granted to and held by Mr. Nance.
(7) The shares consist of and the percentage is based upon (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 were granted in 1992, 1994 and 1995,
respectively, (iii) 17,750 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) 2,000 shares of Common
Stock issuable upon exercise of 1997-A Warrants held by Mrs. Baresel, (vi)
12,500 shares of Common Stock which are subject to currently exercisable
stock options held by Mrs. Baresel as the custodian for the benefit of the
children of Mr. and Mrs. Baresel, and with respect to which Mr. Baresel
disclaims any beneficial interest.
(8) 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 consist of
and the percentage is based upon 56,415 shares of outstanding Common Stock
held by Pre-Paid Legal Services, Inc.
(9) The shares consist of and the percentage is based upon 37,500 shares of
Common Stock which are subject to currently exercisable stock options
granted in 1995 to and held by Mr. Dunlap.
(10) The shares and percentage include (i) 354,505 shares of outstanding Common
Stock, (ii) 572,500 shares of Common Stock which are subject to currently
exercisable stock options and warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
Except as described below, no executive officer, director, stockholder
known to the Company to own of record or beneficially more than five percent of
the Company's common stock, or any member of the immediate family of any of
those persons has engaged since the beginning of the Company's last fiscal year
or proposes to engage in the future in any transaction or series of similar
transactions with the Company, directly or indirectly through a separate entity,
in which the amount involved exceeded or will exceed $60,000.
Except as described below, no business relationship between the Company and
any business or professional entity, for which a director of the Company has
served during the last fiscal year or currently owns a 10 percent record or
beneficial interest, has existed since the beginning of the Company's last
fiscal year or currently exists and which represented or will represent payments
for property or services in excess of five percent of the Company's gross
revenues for its last full fiscal year or of the other entity's consolidated
gross revenues for its last full fiscal year. In addition, except as described
below, the Company did not owe at the end of its last fiscal period any business
or professional entity, for which a director of the Company has served during
the last fiscal year or currently serves as an executive officer or in which a
director of the
-23-
<PAGE>
Company has owned during the last fiscal year or currently owns a 10 percent
record or beneficial interest, an aggregate amount in excess of five percent of
the Company's total assets at the end of its last fiscal period.
No director of the Company has served during the last fiscal year or
currently serves as a partner or executive officer of any investment banking
firm that performed services for the Company during the last fiscal year or that
the company proposes to have perform services during the current year. The
Company knows of no other relationship between a director of the Company and the
Company that are not substantially similar in nature and scope to those
described above.
Except as noted below, no executive officer, director, any member of the
immediate family of any of those persons, any corporation or organization for
which any of the above-listed persons serve as an executive officer or partner
or which they own directly or indirectly 10 percent or more of its equity
securities, or any trust or other estate in which any of the Company's executive
officers, directors or nominees for election as directors, have a substantial
beneficial interest or for which they serve as a trustee or in a similar
capacity has owed the Company at any time since the beginning of its last fiscal
year more than $60,000.
On November 6, 1990, John W. Hail, Chief Executive Officer and Chairman of
the Board of Directors of the Company, formed the John Hail Agency, Inc.
("JHA"). Mr. Hail is the sole director and shareholder of JHA. Pursuant to an
unwritten agreement, the Company provided office space, utilities and supplies,
as well as an occasional part-time administrative staff person, 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 years ended December 31, 1996,
1995 and 1994, respectively. JHA has made repayments of these advances of
$6,141, $67,401 and $9,069 during the fiscal years ended December 31, 1996, 1995
and 1994, respectively. At December 31, 1996, JHA was indebted to the Company
in the amount of $67,822. During 1996, the Company adopted a policy to not
make any further advances to JHA, and JHA executed a promissory note payable to
the Company with a principal balance of $67,822 at December 31, 1996 bearing
interest at eight percent per annum and payable in 60 installments of $1,499 per
month.
At December 31, 1996 and 1995, the balance due on a short-term loan from
the Company's Chief Executive Officer and major shareholder was $-0- 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 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 years ended December
31, 1996 and 1995, the Company made principal payments of $81,929 and $127,615,
respectively, thereon to the Company's Chief Executive Officer and major
shareholder. The loan was unsecured, due on demand and bore interest at 12
percent per annum.
During the five months ended May 31, 1995, and the fiscal year ended
December 31, 1994, Roger P. Baresel provided accounting and consulting services
to the Company and for such services Mr. Baresel was paid $13,500 and $19,500,
respectively. On June 1, 1995, Mr. Baresel ceased providing accounting and
consulting services to the Company and became an executive officer and a
Director of the Company.
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 years ended
December 31, 1996 and 1995, the Company received commissions from PPL on these
sales totaling $9,116 and $16,415, respectively.
During the years ended December 31, 1996 and 1995, the Company paid Curtis
H. Wilson, Sr., a Director of the Company, sales commissions of $38,337, and
$51,669, respectively. During the years ended December 31, 1996 and 1995, the
Company paid William A. LaReese, a greater than five percent beneficial owner of
the Company's Common Stock, sales commissions of $9,101, and $10,662,
respectively. During the years ended December 31, 1996 and 1995, 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 $749, and
$12,433, respectively. In addition, during the year ended December 31, 1996 and
1995,
-24-
<PAGE>
the Company paid jointly Roger P. Baresel, an executive officer of the Company,
and his wife, Judith A. Baresel, sales commissions of $6 and $672, respectively.
During 1995, the Company granted Roger P. Baresel, an executive officer and
Director of the Company, 10-year, transferrable stock options exercisable for
the purchase of 125,000 and 43,750 shares of Common Stock for $2.00 and $3.60
per share, respectively. During 1995, Mr. Baresel transferred by gift 156,250
of such stock options to third parties, including 87,500 to his wife, Judith A.
Baresel, and 12,500 to Mrs. Baresel in her capacity as guardian for the benefit
of their children. In addition, during 1994, the Company granted Mr. Baresel
five-year stock options exercisable for the purchase of 10,000 shares of Common
Stock for $2.16 per share. All of the stock options were granted at the fair
market value of the Common Stock on the date of grant and are currently
exercisable.
During 1995, the Company granted John M. Hail, an executive officer and
Director of the Company, 10-year, transferrable stock options exercisable for
the purchase of 375,000 shares of Common Stock for $2.00 per share. During
1995, Mr. Hail transferred by gift 225,000 of these stock options to third
parties. All of the stock options were granted at the fair market value of the
Common Stock on the date of grant and are currently exercisable.
During 1995, the Company granted Curtis H. Wilson, Sr., a Director of the
Company, six-year stock options exercisable for the purchase of 125,000 shares
of Common Stock for $3.60 per share. All of the stock options were granted at
the fair market value of the Common Stock on the date of grant and are currently
exercisable.
During 1995, the Company granted R. Terren Dunlap, a Director and 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.
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 report, the Board of Directors is comprised
of five members of which two are independent directors.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
----------------------------------------------------------------
-25-
<PAGE>
The following documents are filed as part of this report:
1. Financial Statements appearing at pages F-2 through F-18:
Report of Independent Certified Public Accountants.
Consolidated Balance Sheets - December 31, 1996 and 1995.
Consolidated Statements of Operations - For The Years Ended December 31,
1996, 1995, and 1994.
Consolidated Statements of Stockholders' Equity (Deficiency) - For The
Years Ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows - For The Years Ended December 31,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
2. Exhibits.
The following exhibits are filed with or incorporated by reference into
this Form 10-KSB.
2.1 Agreement and Plan of Reorganization dated May 1,1989, between Pacific
Coast International, Inc., Advantage Marketing Systems, Inc. and the
stockholders of Advantage Marketing Systems, Inc. (1)
2.2 Agreement and Plan of Merger between AMS, Inc. and Advantage Marketing
Systems, Inc. (7)
2.3 Certificate of Merger of Advantage Marketing Systems, Inc. (A Delaware
Corporation) with and into Advantage Marketing Systems, Inc. (An
Oklahoma Corporation). (7)
3.1 Amended and Restated Certificate of Incorporation of Advantage
Marketing Systems, Inc. (7)
3.2 By-Laws (7)
4.1 Warrant Agreement and between the Registrant and U.S. Stock Transfer
Corp. and amendment thereto (8)
4.2 Class A Common Stock Purchase Warrant Certificate (8)
4.3 Class B Common Stock Purchase Warrant Certificate (8)
10.1 Lease of Registrant's corporate offices located at 2601 N.W.
Expressway, Suite 1210W, Oklahoma City (6)
10.2 Lease of Registrant's computer equipment with IBM Credit Corporation
(3)
10.3 Legal Services Agreement between Registrant and Pre-Paid Legal
Services, Inc. (3)
10.4 Group Contract between Registrant and Consumer Benefit Services, Inc.
(3)
10.5 Distributor Agreement between Registrant and ToppMed, Inc.(3)
10.6 Letter of Intent between Registrant and CUC International(3)
-26-
<PAGE>
10.7 Letter of Agreement between Registrant and Coupon Exchange Club (3)
10.8 Agreement Number 1 between Registrant and TMS, Inc.(3)
10.9 Agreement Number 2 between Registrant and TMS, Inc.(3)
10.10 Agreement between Registrant and Innovative Benefits, Inc.(4)
10.11 Agreement between Registrant and Mr. Jim Gabler (4)
10.12 Agreement between Registrant and Health Management Systems, Inc. (4)
10.13 Agreement between Registrant and Consumer's Choice Association (5)
10.14 Agreement between Registrant and Innovative Benefits, Inc.(5)
10.15 Secondary Public Offering Letter of Intent.
22 Subsidiaries of the Registrant (3)
- ------------------
(1) Filed as an exhibit to Registrant's Form 8-K dated May 19, 1989, which is
incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Form S-1 Registration Statement (No.
33-25701) which is incorporated herein by reference.
(3) Filed as an exhibit to Registrant's Form 10-K for the year ending December
31, 1989, which is incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Form 10-K for the year ending December
31, 1990, which is incorporated herein by reference.
(5) Filed as an exhibit to Registrant's Form 10-K for the year ending December
31, 1991, which is incorporated herein by reference.
(6) Filed as an exhibit to Registrant's Form 10-KSB for the year ending
December 31, 1993, which is incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Form 8-K filed December 11, 1995, which
is incorporated herein by reference.
(8) Filed as exhibits to Registrant's Registration Statement on Form SB-2, as
filed with the Commission on December 18, 1995, and as amended pursuant to
Amendment No. 1 as filed with the Commission on July 1, 1996.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
REGISTRANT:
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.)
Date: April 12, 1997 By: /S/ John W. Hail
--------------------------------------------
John W. Hail, Chief Executive Officer
Date: April 12, 1997 By: /S/ Roger P. Baresel
--------------------------------------------
Roger P. Baresel, President, Chief
Financial and Accounting Officer
-27-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: April 12, 1997 By: /S/ John W. Hail
------------------------------------------
John W. Hail, Chief Executive
Officer, Chairman of the Board
and Director
Date: April 12, 1997 By: /S/ Curtis H. Wilson, Sr.
------------------------------------------
Curtis H. Wilson, Sr., Vice-
Chairman of the Board and Director
Date: April 12, 1997 By: /S/ Roger P. Baresel
------------------------------------------
Roger P. Baresel, Chief Financial
Officer and Director
Date: April 12, 1997 By: /S/ R. Terren Dunlap
-----------------------------------------
R. Terren Dunlap, Director
Date: April 12, 1997 By: /S/ Harland C. Stonecipher
-----------------------------------------
Harland C. Stonecipher, Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
- -------------------------------------------------------------------------------
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
- --------------------------------------------------------------------------------
SECTION 12 OF THE ACT.
- ---------------------
(A)(1) No annual report for the fiscal year ended December 31, 1996, has been
sent to the Registrant's security holders.
(A)(2) The notice of annual meeting, proxy statement and form of proxy sent
to the Registrant's security holders of record on June 28, 1996, with
respect to the annual meeting held on August 9, 1996, appear at pages
P-1 through P-12.
-28-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ADVANTAGE MARKETING SYSTEMS, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report ............................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 ............................... F-3
Consolidated Statements of Operations for Years Ended December 31, 1996, 1995 and 1994 ..... F-4
Consolidated Statements of Stockholders' Equity (Deficiency) for Years Ended
December 31, 1996, 1995 and 1994 ................................................. F-5
Consolidated Statements of Cash Flows for Years Ended December 31, 1996, 1995 and 1994 ..... F-6
Notes to Consolidated Financial Statements for Years Ended December 31, 1996, 1995 and 1994. F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Advantage Marketing Systems, Inc.
(formerly AMS, Inc.) and Subsidiary
Oklahoma City, Oklahoma
We have audited the accompanying consolidated balance sheets of Advantage
Marketing Systems, Inc. (formerly AMS, Inc.) and subsidiary (the "Company") as
of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity (deficiency), and cash flows for each of the
three years in the period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Advantage Marketing Systems, Inc.
(formerly AMS, Inc.) and subsidiary at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
April 4, 1997
F-2
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash $ 169,569 $ 112,087
Receivables - net of allowances of $25,804 and $21,485, respectively 52,013 18,299
Receivable from affiliate 13,042 51,963
Commission advances 44,821 2,371
Inventory 217,945 98,621
Deferred income taxes 157,853 -
----------- -----------
Total current assets 655,243 283,341
COMMISSION ADVANCES - NONCURRENT 4,341 65
RECEIVABLES - NONCURRENT 18,000 22,620
RECEIVABLE FROM AFFILIATE - NONCURRENT 54,780 -
PROPERTY AND EQUIPMENT, Net 377,190 159,797
GOODWILL, Net 109,232 -
COVENANT NOT TO COMPETE, Net 52,222 -
DEFERRED INCOME TAXES 341,760 -
OTHER ASSETS 177,573 67,173
----------- -----------
TOTAL $ 1,790,341 $ 532,996
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable $ 268,433 $ 91,949
Accrued expenses 247,883 151,654
Accrued promotion expense 46,370 99,424
Notes payable:
Stockholders - 81,929
Other 9,446 8,440
Capital lease obligations 66,758 20,679
----------- -----------
Total current liabilities 638,890 454,075
LONG-TERM LIABILITIES:
Notes payable - other 19,049 28,500
Capital lease obligations 210,973 75,649
----------- -----------
Total liabilities 868,912 558,224
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock - $.0001 par value; authorized 5,000,000 shares, none issued - -
Common stock - $.0001 par value; authorized 495,000,000 shares; issued and
outstanding 2,143,441 and 2,123,191 shares, respectively (See Note 6) 214 212
Paid-in capital 1,981,380 1,859,882
Accumulated deficit (1,060,165) (1,885,322)
----------- -----------
Total stockholders' equity (deficiency) 921,429 (25,228)
----------- -----------
TOTAL $ 1,790,341 $ 532,996
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
REVENUES:
Programs $ 5,785,841 $ 4,382,935 $ 2,564,542
Promotional material 344,075 109,733 82,780
Other 33,824 25,535 30,625
----------- ----------- -----------
Total revenues 6,163,740 4,518,203 2,677,947
----------- ----------- -----------
COSTS AND EXPENSES:
Programs 1,285,689 1,094,157 684,128
Promotional material 336,351 92,087 83,964
Selling 3,066,962 2,201,510 1,289,616
General and administrative 1,138,656 857,743 515,158
Interest expense 10,538 22,998 25,075
----------- ----------- -----------
Total expenses 5,838,196 4,268,495 2,597,941
----------- ----------- -----------
INCOME BEFORE TAXES 325,544 249,708 80,006
TAX BENEFIT 499,613 - -
----------- ----------- -----------
NET INCOME $ 825,157 $ 249,708 $ 80,006
=========== =========== ===========
Weighted average common shares
outstanding 3,770,874 2,662,681 2,119,356
Net income per common share $ .29 $ .09 $ .04
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
SHARES COMMON PAID-IN ACCUMULATED EQUITY
(SEE NOTE 6) STOCK CAPITAL DEFICIT (DEFICIENCY)
<S> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1994 2,105,599 $ 211 $ 1,823,236 $(2,215,036) $ (391,589)
Conversion of payables
into stock 1,342 - 2,147 - 2,147
Issuance of stock for
services received 13,750 1 21,999 - 22,000
Net income - - - 80,006 80,006
---------- ------ ----------- ----------- -----------
BALANCE,
DECEMBER 31, 1994 2,120,691 212 1,847,382 (2,135,030) (287,436)
Warrants exercised 1,250 - 7,500 - 7,500
Issuance of stock for cash 1,250 - 5,000 - 5,000
Net income - - - 249,708 249,708
---------- ------ ----------- ----------- -----------
BALANCE,
DECEMBER 31, 1995 2,123,191 212 1,859,882 (1,885,322) (25,228)
Issuance of stock for Miracle
Mountain International, Inc.
acquisition 20,000 2 119,998 - 120,000
Warrants exercised 250 - 1,500 - 1,500
Net income - - - 825,157 825,157
---------- ------ ----------- ----------- -----------
BALANCE,
DECEMBER 31, 1996 2,143,441 $ 214 $ 1,981,380 $(1,060,165) $ 921,429
========== ====== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 825,157 $ 249,708 $ 80,006
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization 65,993 43,310 33,403
Deferred taxes (499,613) - -
Provision for bad debts 4,319 2,000 844
Write-off of deferred offering costs 15,000 - -
Gain on sale of property and equipment (1,572) - -
Stock issued for services - - 22,000
Stock issued for refunds - - 2,147
Changes in assets and liabilities which provided (used) cash:
Receivables and advances (80,139) 7,280 31,819
Inventory (119,324) (50,750) (28,854)
Accounts payable and accrued expenses 216,600 150,149 20,871
Notes payable to associates - - (10,728)
Interest payable - - 20,860
Deferred revenue - (40,852) (63,156)
--------- --------- ---------
Net cash provided by operating activities 426,421 360,845 109,252
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (66,675) (50,105) (6,689)
Advances to affiliate (22,000) (87,684) (66,026)
Proceeds from sale of property and equipment 1,700 - -
Repayment of advances to affiliate 6,141 67,401 9,069
Purchase of Miracle Mountain International, Inc. (56,103) - -
--------- --------- ---------
Net cash used for investing activities (136,937) (70,388) (63,646)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,500 12,500 -
Loans from stockholders - 31,963 61,374
Other loans - 39,098 3,685
Bank overdraft - (46,663) 13,074
Payment of deferred offering costs (125,400) (52,777) -
Payment on notes payable - stockholders (81,929) (142,615) (79,138)
Payment on notes payable - other (8,445) (7,985) (4,666)
Principal payment on capital leases (17,728) (11,891) (39,935)
--------- --------- ---------
Net cash used in financing activities (232,002) (178,370) (45,606)
--------- --------- ---------
NET INCREASE IN CASH 57,482 112,087 -
BEGINNING CASH BALANCE 112,087 - -
--------- --------- ---------
ENDING CASH BALANCE $ 169,569 $ 112,087 $ -
========= ========= =========
</TABLE>
(Continued)
F-6
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 23,021 $ 27,335 $ 4,215
Noncash financing and investing activities:
Additions to property and equipment
through capital leases 199,131 108,219 -
Reclassify interest payable to
notes payable - stockholders - 51,806 -
Fair value of capital stock issued to purchase
Miracle Mountain International, Inc. 120,000 - -
Issuance of common stock in satisfaction of
notes and accounts payable - - 89,892
</TABLE>
(Concluded)
See notes to consolidated financial statements.
F-7
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Advantage Marketing Systems, Inc. (formerly AMS, Inc.), and
its wholly owned subsidiary, Miracle Mountain International, Inc. (the
"Company"). All significant intercompany accounts have been eliminated.
NATURE OF BUSINESS - The Company 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.
INTANGIBLES - Intangible assets consist of goodwill and a covenant not to
compete. Goodwill represents the excess of cost over the fair value of the
net assets of acquired subsidiaries. The Company amortizes goodwill over
seven years. The covenant not to compete is being amortized over the life
of the contract. The goodwill amortization for the year ended December 31,
1996 was $9,930. Covenant amortization for the year ended December 31, 1996
was $7,778.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost or, in
the case of leased assets under capital leases, at the fair value of the
leased property and equipment, less accumulated depreciation and
amortization. Property and equipment are depreciated using the straight-
line method over the estimated useful lives of the assets of three to five
years. Assets under capital leases and leasehold improvements are amortized
over the lesser of the term of the lease or the life of the asset.
F-8
<PAGE>
LONG-LIVED ASSETS - In March 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. Effective for fiscal years beginning after
December 15, 1995, SFAS 121 establishes accounting standards for
identifying and calculating the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to such assets. The Company
adopted SFAS 121 in 1996 which did not have a material effect on the
Company's consolidated financial statements. Management of the Company
assesses recoverability of its long-lived assets based on undiscounted cash
flows.
EARNINGS PER SHARE - Earnings per common share are computed by dividing net
income by the weighted average number of shares outstanding during the
period after giving effect to the reverse stock split discussed in Note 6.
Outstanding stock options and warrants are included in the calculation of
primary earnings per share when they meet the criteria for common stock
equivalents and their effect is dilutive. The Company determined 1996
earnings per share using the modified treasury stock method which assumes
changes to interest income and expense as part of the calculation. The
effects of common stock equivalents on the weighted average number of
shares outstanding was an increase of 1,636,000 shares and of assumed
interest changes was an increase in net income of approximately $254,000.
The effect of common stock equivalents on the weighted average number of
shares outstanding at December 31, 1995 and 1994 was an increase in shares
of 538,000 and -0-, respectively. Warrants have not been included in the
earnings per share calculation at December 31, 1995 and 1994 as they do not
meet the criteria for common stock equivalents. No difference exists
between primary and fully diluted earnings per share. In February 1997, the
FASB issued SFAS No. 128, Earnings per Share. The Company believes that
adopting SFAS No. 128 will not have a material effect on the Company's
consolidated financial position or results of operations, but will result
in changes in the calculation of earnings per share.
INCOME TAXES - The Company uses an asset and liability approach to account
for income taxes. Deferred income taxes are recognized for the tax
consequences of temporary differences and carryforwards by applying enacted
tax rates applicable to future years to differences between the financial
statement amounts and the tax bases of existing assets and liabilities. A
valuation allowance is established if, in management's opinion, it is more
likely than not that some portion of the deferred tax asset will not be
realized.
FAIR VALUE DISCLOSURES - The Company's financial instruments consist of
accounts receivable, accounts payable, advances due from an affiliate and
current and long-term notes payable. Amounts recorded for accounts
receivable, accounts payable and current notes payable approximate fair
value due to the short duration of such amounts. The interest rates on
advances due from the affiliate and on notes payable reflect current market
rates. Consequently, the carrying value of these instruments approximate
fair value.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED - In February 1997, the
FASB issued SFAS No. 129, Disclosure of Information About Capital
Structure. The Company will adopt SFAS No. 129 when required. Management
believes that adoption of this standard will not have a material impact on
the Company's consolidated financial position or results of operations.
STOCK OPTION PLAN - The Company adopted SFAS No. 123, Accounting for Stock-
Based Compensation on January 1, 1996, as required. The Company has elected
to continue applying Accounting Principles Board Opinion No. 25 in
accounting for its stock-based compensation awards as permitted under SFAS
F-9
<PAGE>
No. 123 and to disclose the proforma effects of applying SFAS 123 in the
footnotes. Accordingly, no compensation cost relating to the stock option
plan has been recognized in the accompanying consolidated financial
statements.
RECLASSIFICATIONS - Certain reclassifications have been made to prior year
balances to conform with the presentation for the current period.
2. OTHER ASSETS
Other assets consist primarily of the direct costs, mainly legal,
accounting and filing fees, associated with a registration statement filed
by the Company with the Securities and Exchange Commission. The
registration statement was declared effective January 16, 1997. See
discussion of this registration statement at Note 12.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Office furniture, fixtures, and equipment $ 633,086 $ 378,287
Automobiles 44,872 54,056
Leasehold improvements 26,576 22,220
--------- ---------
704,534 454,563
Accumulated depreciation and amortization (327,344) (294,766)
--------- ---------
Total property and equipment, net $ 377,190 $ 159,797
========= =========
</TABLE>
4. NOTES PAYABLE TO STOCKHOLDERS
The Company had a note payable to its major stockholder and chief executive
officer in the amount of $81,929 at December 31, 1995. During 1995, the
Company combined interest payable on the note of approximately $52,000. The
principal was due on demand and bore interest at 12%. During 1996, 1995 and
1994, the Company received advances of $-0-, $31,963 and $61,374,
respectively, and made payments of $81,929, $127,615 and $79,138,
respectively, on this payable. As of December 31, 1996, the note payable
had been paid in full.
During 1994, the Company had a note payable to a stockholder in the amount
of $15,000, bearing interest at 12%. Terms of the note required eight
quarterly payments of principal and interest beginning in the first quarter
of 1995. In 1995, the note was paid in full.
5. LEASE AGREEMENTS
During 1995 and 1996, the Company entered into various capital leases for
office related equipment. The lease terms range from 36 to 60 months.
Additionally, annual lease rental payments for each lease range from $1,300
to $40,000 per year. The schedule of future minimum lease payments below
reflects all payments under the leases.
F-10
<PAGE>
The property and equipment accounts include $306,595 and $106,269 for
leases that have been capitalized at December 31, 1996 and 1995,
respectively. Related accumulated amortization amounted to $28,864 and
$9,941 at December 31, 1996 and 1995, respectively.
The Company leases office space and certain equipment under noncancelable
operating leases.
Future minimum lease payments under capital leases and noncancelable
operating leases with initial or remaining terms of one year or more at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
Year ending: LEASES LEASES TOTAL
<S> <C> <C> <C>
1997 $ 87,804 $ 69,535 $ 157,339
1998 87,804 24,235 112,039
1999 67,451 - 67,451
2000 42,954 - 42,954
2001 40,272 - 40,272
--------- --------- ----------
Total minimum lease payments 326,285 $ 93,770 $ 420,055
========= ==========
Less amount representing interest 48,554
---------
Present value of net minimum lease payments 277,731
Less current portion 66,758
---------
Long-term capital lease obligations $ 210,973
---------
</TABLE>
Rental expense under operation leases for the years ended December 31,
1996, 1995 and 1994 was $63,425, $55,476 and $57,458, respectively.
6. STOCKHOLDERS' EQUITY
COMMON STOCK - On October 29, 1996, the Board of Directors of the Company
effected a one-for-eight reverse split of the Company's outstanding common
stock, options and warrants. In addition, the number of the Company's
outstanding options and warrants have been reduced by a factor of eight and
their exercise price has been increased by a factor of eight pursuant to
this action.
This one-for-eight reverse split is reflected in the accompanying
consolidated financial statements and footnotes on a retroactive basis. The
Company's previously reported number of shares of common stock issued and
outstanding at December 31, 1995 and 1994 or 16,985,524 and 16,965,524, has
been adjusted to 2,123,191 and 2,120,691, respectively. Previously reported
weighted average number of outstanding shares of common stock for the years
ended December 31, 1995 and 1994, of 21,301,441 and 16,954,848, has been
adjusted to 2,662,681 and 2,119,356, respectively. Previously reported
earnings per share for the years ended December 31, 1995 and 1994, of $.01
and NIL has been adjusted to $.09 and $.04, respectively.
The Company has filed a registration statement with the Securities and
Exchange Commission to register common stock to be issued in association
with the redemption of outstanding warrants and distribution of common
stock rights. This registration statement was declared effective on January
16, 1997. See Note 12.
F-11
<PAGE>
During 1996, the Company issued 20,000 shares of common stock in exchange
for all of the issued and outstanding capital stock of a similar multi-
level marketing company. See discussion of this acquisition at Note 11.
During 1994, $2,147 of accounts payable were settled by the Company through
the issuance of 1,342 shares of its common stock with an estimated fair
value as of the date of settlement which equaled the liability. No gain or
loss was recorded as a result of this transaction.
During 1994, the Company issued 7,500 shares of its common stock to a
consultant for services rendered and 6,250 shares of stock for services
performed by individuals primarily involved in marketing the Company's
programs. A charge of $22,000, the estimated fair value of the shares at
the date of issuance, was recorded as selling expense.
COMMON STOCK OPTIONS - The Company issued options in 1995 and 1994
primarily for services rendered. The exercise price of these options was
equal to or in excess of the fair market value of the Company's common
stock at the date these options were issued. See Note 7 for the pro forma
effects of SFAS 123.
During 1995, the Company issued various options at exercise prices ranging
from $2.00 per share to $6.48 per share. Options were granted primarily for
services rendered and to ensure the future availability of those services
to the Company. All of the issued and outstanding options are currently
exercisable.
During 1994, the Company issued options on 34,108 shares of the Company's
common stock at exercise prices of $2.16 and $2.80 per share. These options
are exercisable at any time through December 31, 1999, so long as the
individual is continuing to provide services to the Company at the date of
exercise and vest at 20% per year.
The following table summarizes the Company's stock option activity for the
years ended December 31, 1996, 1995 and 1994 (as restated for the one-for-
eight reverse split in October 1996):
<TABLE>
<CAPTION>
EXERCISE EXERCISE EXERCISE
1996 PRICE 1995 PRICE 1994 PRICE
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 1,540,177 $1.60-6.48 350,358 $1.60-2.80 316,250 $1.60
Options granted
during the year: - - 706,624 2.00 - -
- - 44,445 2.16 28,750 2.16
- - - - 5,358 2.80
- - 302,500 3.60 - -
- - 125,000 4.96 - -
- - 11,250 6.48 - -
--------- --------- ---------
- 1,189,819 34,108
--------- --------- ---------
Options expired
during the year 11,250 6.48 - -
--------- --------- ---------
Options outstanding,
end of year 1,528,927 $1.60-6.48 1,540,177 $1.60-6.48 350,358 $1.60-2.80
--------- --------- ---------
</TABLE>
F-12
<PAGE>
COMMON STOCK WARRANTS - The following table summarizes the Company's common
stock warrants and their activity for the years ended December 31, 1996,
1995 and 1994 (as restated for the one-for-eight reserve split in October
1996):
<TABLE>
<CAPTION>
WARRANTS
ISSUED AND EXERCISE
DECEMBER 31 1996: OUTSTANDING PRICE EXERCISE PERIOD
<S> <C> <C> <C>
Class A Warrants, beginning of year 524,610 $ 6.00 4/26/89 - 7/26/97
Class A Warrants exercised
during the year (250) $ 6.00
-------
Class A Warrants, end of year 524,360
-------
Class B Warrants 524,860 $ 8.00 4/26/89 - 7/26/97
=======
DECEMBER 31, 1995:
Class A Warrants, beginning of year 525,860 $ 6.00 4/26/89 - 7/26/97
Class A Warrants exercised
during the year (1,250) $ 6.00
-------
Class A Warrants, end of year 524,610
=======
Class B Warrants 525,860 $ 8.00 4/26/89 - 7/26/97
-------
DECEMBER 31, 1994:
Class A Warrants 525,860 $ 6.00 4/26/89 - 7/26/97
-------
Class B Warrants 525,860 $ 8.00 4/26/89 - 7/26/97
-------
</TABLE>
Each warrant entitles the holder to purchase one share of common stock. The
Company redeemed all Class A and B Warrants in January 1997. See
discussion of the redemption at Note 12.
OFFERING - The Company has signed a letter of intent with an underwriter to
make a firmly underwritten public offering in 1997 of units consisting of
one share of common stock of the Company and a warrant to purchase one
additional such share. The agreement between the Company and the
underwriter includes a provision requiring the Company to grant a warrant
to the underwriter.
7. STOCK OPTION PLAN
During 1995, the Company approved the 1995 Stock Option Plan (the "Plan").
Under this Plan, options available for grant can consist of (i)
nonqualified stock options, (ii) nonqualified stock options with stock
appreciation rights attached, (iii) incentive stock options, and (iv)
incentive stock options with stock appreciation rights attached. The
Company has reserved 1,125,000 shares of the Company's common stock, $.0001
par value, for the Plan. The Plan limits participation to employees,
independent contractors, and consultants. Nonemployee directors are
excluded from Plan participation. The option
F-13
<PAGE>
price for shares of stock subject to this Plan is set by the Stock Option
Committee of the Board of Directors at a price not less than 85% of the
market value of the stock on the date of grant. No stock options shall be
exercisable within six months from the date of grant, unless under a Plan
exception, nor more than ten years after the date of grant. The Plan
provides for the grant of stock appreciation rights, which allow the holder
to receive in cash, stock or combination thereof, the difference between
the exercise price and the fair value of the stock at date of exercise. The
fair value of stock appreciation rights is charged to compensation expense.
The stock appreciation right is not separable from the underlying stock
option or incentive stock options originally granted. Options can only be
exercised in tandem and only be exercised when the market price of the
Company's common stock exceeds the exercise price. No options under this
Plan have been granted or exercised as of December 31, 1996.
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its stock-based compensation awards. Accordingly no
compensation cost has been recognized in the accompanying consolidated
financial statements. The following proforma data is calculated as if
compensation cost for the Company's stock-based compensation awards (see
also Note 6) was determined based upon the fair value at the grant date
consistent with the methodology prescribed under SFAS No. 123, Accounting
for Stock-Based Compensation:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1995
<S> <C> <C>
Net income as reported $825,157 $249,708
Proforma net income (loss) $825,157 $(1,830,000)
Net income per common share as reported $0.29 $ 0.09
Proforma net income (loss) per common share $0.29 $(0.69)
</TABLE>
The weighted average fair value at the date of grant for options granted in
fiscal year 1995 was $2.73. This fair value is estimated using the Black-
Scholes option pricing model with the following assumptions: no dividend
yield; volatility of 59%; a weighted average risk-free interest rate of
6.8%; no assumed forfeitures; and a weighted average expected life of 7.3
years. The proforma amounts above are not likely to be representative of
future years because options vest over several years and additional awards
are generally made each year.
8. RELATED PARTIES
During 1996, 1995 and 1994, the Company received approximately $9,116,
$16,415 and $71,713, respectively, from Pre-Paid Legal Services, Inc., a
stockholder, for commissions on sales of memberships for the services
provided by Pre-Paid Legal Services, Inc.
The Company made non-interest bearing cash advances to the John Hail
Agency, Inc. ("JHA"), a company of which the Company's Chief Executive
Officer and major shareholder is the sole director and shareholder, of
$22,000, $87,684 and $66,026 during the years ended December 31, 1996, 1995
and 1994, respectively. JHA made repayments of these advances of $6,141,
$67,401 and $9,069 during the years ended December 31, 1996, 1995 and 1994,
respectively. The Company also provided administrative services for JHA and
recognized revenue from JHA of $6,000, $12,000 and $12,000 for the years
ended December 31, 1996, 1995 and 1994, respectively, and are included in
the advances. The Company ceased providing administrative services for JHA
during 1996 and adopted a policy to not make
F-14
<PAGE>
any further advances to JHA. JHA has executed a promissory note payable to
the Company with a principal balance of $67,822 at December 31, 1996,
bearing interest at 8.00% per annum and payable in installments of $1,499
per month.
Certain stockholders receive commissions on revenue of the Company. Such
commissions are recognized as compensation to the stockholders and are
included in selling expense.
9. INCOME TAXES
On a regular basis, management evaluates all available evidence, both
positive and negative, regarding the ultimate realization of the tax
benefits of its deferred tax assets. Based upon the historical trend of
increasing earnings, management has concluded that it is more likely than
not that a tax benefit will be realized from its deferred tax assets and
has therefore eliminated the previously recorded valuation allowance.
The Company's deferred tax assets relate primarily to net operating loss
carryforwards for income tax purposes at December 31, 1996, totaling
approximately $1,346,951, which will begin to expire in 2003. Reduction on
the valuation allowance resulted in a deferred tax asset at December 31,
1996, of $499,613 and a corresponding tax benefit for the year ended
December 31, 1996.
A reconciliation of the statutory Federal income tax rate to the effective
income tax rate for the years ended December 31, 1996, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Statutory Federal income tax rate 34.0% 34.0% 34.0%
State tax effective rate 2.6 3.7 4.8
Benefit of graduated tax rates (0.5) (2.2) (13.5)
Benefit of operating loss carryforwards (36.1) (35.5) (25.3)
Reduction in valuation allowance (153.5) 0.0 0.0
------ ----- -----
Effective income tax rate (153.5)% 0.0% 0.0%
====== ===== =====
</TABLE>
F-15
<PAGE>
Deferred tax liabilities and assets at December 31, 1996 and 1995 are
comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1995
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $ (850) $ -
-------- ---------
Total deferred tax liabilities (850) -
-------- ---------
Deferred tax assets:
Depreciation and amortization - 3,900
Net operating loss carryforwards 500,463 566,400
-------- ---------
Total deferred tax assets 500,463 570,300
Valuation allowance for deferred tax assets - (570,300)
-------- ---------
Total net deferred tax assets 500,463 -
-------- ---------
Net deferred taxes 499,613 -
Less current portion of net deferred tax asset 157,853 -
-------- ---------
Noncurrent portion $341,760 $ -
======== =========
</TABLE>
10. COMMISSION ADVANCES
Commission advances represent advances to certain associates and are
repayable from future commissions earned by the associates. These advances
do not bear interest and are classified in the accompanying consolidated
balance sheets according to the expected timing of commissions to be earned
by the associates.
11. MIRACLE MOUNTAIN INTERNATIONAL, INC.
Pursuant to a Stock Purchase Agreement having an effective date of May 31,
1996 (the "Purchase Agreement"), the Company acquired all of the issued and
outstanding capital stock of Miracle Mountain International, Inc., a
Colorado corporation ("MMI"), and MMI became a wholly owned subsidiary of
the Company (the "MMI Acquisition"). The MMI Acquisition was accounted for
under the purchase method of accounting. MMI is a 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
the Company's common stock.
In connection with the MMI Acquisition, the excess of the purchase price of
$176,103, which includes $56,103 of transaction costs, over the negative
$3,059 fair value of the assets of MMI acquired, net of liabilities
assumed, has been allocated $119,162 to goodwill and $60,000 to the
covenant not to compete. Goodwill and the covenant not to compete will be
amortized over seven and four and one-half year periods, respectively.
F-16
<PAGE>
The following unaudited pro forma results of operations for the years ended
December 31, 1996 and 1995 are presented as if the MMI Acquisition had been
made at the beginning of each period presented. The unaudited pro forma
information is not necessarily indicative of either the results of
operations that would have occurred had the purchase been made during the
periods presented or the future results of the combined operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
<S> <C> <C>
Net revenues $6,369,000 $4,796,000
Net income $ 794,000 $ 89,000
Net income per common share $0.28 $0.03
</TABLE>
12. SUBSEQUENT EVENTS
On January 31, 1997, pursuant to a Stock Purchase Agreement (the "Purchase
Agreement"), the Company acquired all of the issued and outstanding capital
stock of Chambre International, Inc., a Texas corporation ("CII"), and CII
became a wholly owned subsidiary of the Company (the "CII Acquisition").
The CII Acquisition will be accounted for under the purchase method of
accounting. CII is a multi-level marketer of various third-party
manufactured cosmetics, skin care and hair care products. Pursuant to the
Purchase Agreement and in connection with the CII Acquisition, the Company
issued and delivered to the shareholders of CII 6,482 shares of common
stock. In addition, the Company agreed to issue and deliver an additional
7,518 shares of common stock to the shareholders of CII on or before May
31, 1997, pending determination of certain liabilities.
On March 31, 1997, the Company signed a letter of intent to purchase all of
the assets of Stay 'N Shape International, Inc., Solution Products
International, Inc., Nation of Winners, Inc., and Now International, Inc.
(the "Group"). The Company will purchase all of the assets of the Group,
free and clear of all liens and encumbrances, for a combination of
$1,200,000 cash and shares of the Company's restricted (unregistered)
common stock (the "Purchase Price") with an estimated fair value of up to
$2,700,000, dependent upon meeting certain future sales targets. The cash
portion of the Purchase Price will be payable at closing. The stock portion
of the Purchase Price will be issued and delivered over a 25-month period
with stock valued at $800,000 due at closing, $750,000 due within 14 months
of closing, and $1,150,000 due within 25 months from closing. The number of
shares of common stock to be issued is subject to the market value of the
Company's common stock at date of issuance and delivery. The Purchase Price
is subject to adjustment based on sales performance over a two-year period.
The Group acquisition will be accounted for under the purchase method of
accounting. Each company in the Group is a multi-level marketer of various
third-party manufactured nutritional supplements.
On January 31, 1997, at 5:00 p.m. Central Standard Time, the Company
distributed, at no cost, non-transferable rights ("Rights") to the holders
of record of shares of its common stock, par value $.0001 per share. The
Rights entitled the holders (the "Rights Holders") to subscribe for and
purchase up to 2,148,191 units (each unit consisting of one share of common
stock and one 1997-A warrant) for the price of $6.80 per unit (the "Rights
Offering"). The record date holders of common stock received one Right for
each share of common stock held by them as of the record date. The Rights
expired at 5:00 p.m. Central Standard Time, on March 17, 1997. Pursuant to
the Rights, Rights Holders could purchase one unit for each Right held.
F-17
<PAGE>
The share of common stock and 1997-A warrant comprising each unit were
separately transferable immediately after the sale of the units to the
Rights Holders. Each 1997-A warrant is exercisable at any time 90 days
after January 16, 1997 and on or before January 31, 1999, to purchase one
share of common stock for $12.00, subject to adjustment in certain events,
and may be redeemed by the Company at any time upon 30 days' notice, at a
price of $.0001 per 1997-A warrant.
Concurrent with this Rights Offering, the Company elected to redeem all of
its outstanding Class A and Class B Common Stock Purchase Warrants (the
"Public Warrants") for $.0008 per warrant (the "Warrant Redemption") at
5:00 p.m. Central Standard Time, on March 17, 1997. However, in connection
with the Warrant Redemption, the Company, pursuant to modification of the
terms of the Public Warrants, offered to the Public Warrant holders (the
"Warrant Holders") the right to exercise the Public Warrants to purchase
units, each comprised of one share of common stock and one 1997-A warrant,
at an exercise price of $6.00 per unit (the "Warrant Modification
Offering").
The units in the offerings described above were offered on a best efforts
basis by the Company and its officers and directors, without commissions,
selling fees or direct or indirect remuneration. The Rights and Warrant
Holders were not required to pay any brokerage commissions or fees with
respect to the exercise of their Rights or Public Warrants. The Company
paid all charges and expenses of the subscription and warrant agents.
From the proceeds of the Warrant Modification Offering and the Rights
Offering, which are estimated at $2,000,000, the Company will pay the costs
incurred with respect to the offerings, which are estimated to be $250,000.
Deferred offering costs of $175,848 at December 31, 1996, will be charged
against the net proceeds from these offerings.
* * * * * *
F-18
<PAGE>
[LETTERHEAD OF ADVANTAGE MARKETING SYSTEMS, INC. APPEARS HERE]
- --------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING
TO THE SHAREHOLDERS:
The Annual Meeting of the Shareholders of Advantage Marketing Systems,
Inc., an Oklahoma corporation (the "Company"), will be held at the Waterford
Hotel, 6300 Waterford Boulevard (Corner of Pennsylvania and NW 63rd), in
Oklahoma City, Oklahoma, on August 9, 1996, commencing at 4:00 p.m., Central
Daylight-Savings Time, and thereafter as it may be adjourned from time to time,
for the following purposes:
1. To elect one director of the Company to hold office until the 1999 annual
meeting of shareholders and until his successor shall have been duly
elected and qualified;
2. To consider and act upon a proposal to ratify the appointment of Deloitte &
Touche as the independent auditor of the Company for 1996; and
3. To transact such other business as may properly come before the meeting or
any adjournment thereof.
Holders of record of Common Stock at the close of business on June 28,
1996, are entitled to notice of and to vote at the meeting or any adjournment
thereof, notwithstanding transfer of any stock on the books of the Company after
such record date. The accompanying Proxy Statement contains information
regarding the matters to be considered at the Annual Meeting. Copies of this
Notice and the accompanying Proxy Statement were first mailed to Shareholders on
or about July 9, 1996. For reasons outlined in the attached Proxy Statement, the
Board of Directors recommends a vote "FOR" the matters being voted upon.
YOUR ATTENDANCE OR PROXY IS IMPORTANT TO ASSURE A QUORUM AT THE ANNUAL
MEETING. SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON
ARE REQUESTED TO COMPLETE AND RETURN THE ENCLOSED PROXY, USING THE ENVELOPE
PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED FROM WITHIN THE UNITED STATES. ANY
PERSON GIVING A PROXY HAS THE POWER TO REVOKE IT AT ANY TIME PRIOR TO ITS
EXERCISE AND, IF PRESENT AT THE ANNUAL MEETING, MAY WITHDRAW IT AND VOTE IN
PERSON. ATTENDANCE AT THE ANNUAL MEETING IS LIMITED TO SHAREHOLDERS, THEIR
PROXIES AND INVITED GUESTS OF THE COMPANY. ALL SHAREHOLDERS ARE CORDIALLY
INVITED TO ATTEND THE ANNUAL MEETING.
BY ORDER OF THE BOARD OF DIRECTORS:
Roger P. Baresel, Corporate Secretary
Oklahoma City, Oklahoma
July 9, 1996
P-1
<PAGE>
PROXY STATEMENT
__________
ADVANTAGE MARKETING SYSTEMS, INC.
2601 NORTHWEST EXPRESSWAY, SUITE 1210W
OKLAHOMA CITY, OKLAHOMA 73112
(405) 842-0131
__________
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 9, 1996
SOLICITATION AND REVOCATION OF PROXIES
This Proxy Statement is furnished to the shareholders of Advantage
Marketing Systems, Inc. (the "Company") in connection with an Annual Meeting
(the "Annual Meeting") of the holders of the Common Stock of the Company (the
"Shareholders") to be held at 4:00 p.m., Central Daylight-Savings Time, on
August 9, 1996, at the Waterford Hotel, 6300 Waterford Boulevard (Corner of
Pennsylvania and NW 63rd) in Oklahoma City, Oklahoma, and any adjournment
thereof. This Proxy Statement and the accompanying Notice of Annual Meeting of
shareholders and Proxy were first mailed on or about July 9, 1996, to
Shareholders of record on June 28, 1996.
If the accompanying Proxy is properly executed and returned, the shares of
Common Stock represented by the Proxy will be voted at the Annual Meeting. If a
Shareholder indicates in his, her or its Proxy a choice with respect to any
matter to be acted upon, that Shareholder's shares will be voted in accordance
with such choice. If no choice is indicated, such shares will be voted "FOR" the
election of the nominee for director listed below and the ratification of the
appointment of the independent auditor. The Shareholders will also consider and
vote upon such other business as may properly come before the Annual Meeting or
any adjournment thereof. The Board of Directors of the Company knows of no
business that will be presented for consideration at the Annual Meeting, other
than matters described in this Proxy Statement. A Shareholder giving a Proxy may
revoke it by giving written notice of revocation to the Secretary of the Company
at any time before the Proxy is voted, by executing another valid proxy bearing
a later date and delivering such proxy to the Secretary of the Company prior to
or at the Annual Meeting, or by attending the Annual Meeting and voting in
person.
Neither the corporate laws of the state of Oklahoma, the state in which the
Company is currently incorporated, nor the Company's Certificate of
Incorporation or Bylaws have any provisions regarding the treatment of
abstentions and broker non-votes. It is the Company's policy (i) to count
abstentions or broker non-votes for purposes of determining the presence of a
quorum at the Annual Meeting, (ii) to treat abstentions as votes not cast but to
treat them as shares represented at the Annual Meeting for determining results
on actions requiring a majority vote, and (iii) to consider neither abstentions
nor broker non-votes in determining results of plurality votes.
The expenses of this proxy solicitation, including the cost of preparing
and mailing this Proxy Statement and accompanying proxy will be borne by the
Company, which are estimated to be $2,000. Such expenses will also include the
charges and expenses of banks, brokerage firms, and other custodians, nominees
or fiduciaries for forwarding solicitation material regarding the Annual Meeting
to beneficial owners of the Company's
P-2
<PAGE>
Common Stock. Solicitation of proxies may be made by mail, telephone, personal
interviews or by other means by the Board of Directors or employees of the
Company who will not be additionally compensated therefor, but who may be
reimbursed for their out-of-pocket expenses in connection therewith.
SHAREHOLDERS ENTITLED TO VOTE
The Shareholders entitled to vote at the Annual Meeting are the holders of
record, at the close of business on June 28, 1996 (the "Record Date"), of the
16,985,524 shares of Common Stock then outstanding. Each holder of a share of
Common Stock outstanding on the Record Date will be entitled to one vote on each
matter presented at the Annual Meeting for each share held. The Company's
officers and directors own a total of 3,422,642 shares, or 20.15 percent of the
issued and outstanding Common Stock and intend to vote all of such shares in
favor of the matters to be voted upon at the Annual Meeting. There is no
cumulative voting with respect to the election of directors. The presence in
person or by proxy of the holders of a majority of the shares of Common Stock
issued and outstanding at the Annual Meeting will constitute a quorum for the
transaction of business. All matters to be brought before the Annual Meeting
will require the affirmative vote of a majority of the shares of Common Stock
present at the Annual Meeting in person and by proxy and entitled to vote. Votes
will be tabulated by an inspector of election appointed by the Board of
Directors of the Company.
THIS PROXY STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF THESE TRANSACTIONS NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IN UNLAWFUL.
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED WITH THE STATE OF NEW HAMPSHIRE, NOR THAT FACT THAT A
SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OR NEW
HAMPSHIRE, CONSTITUTES A FINDING BY THE DIRECTOR OF THE OFFICE OF SECURITIES
REGULATION THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT
MISLEADING, NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS
AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE DIRECTOR OF THE OFFICE
OF SECURITIES REGULATION HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS
OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT
IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER
OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
GENERAL
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<PAGE>
The following table presents certain information as to the beneficial
ownership of the Common Stock as of June 28, 1996 by (i) the only persons known
by the Company to own beneficially more than five percent thereof, (ii) each
Director and nominee for Director of the Company, (iii) the executive officers
of the Company, and (iv) the Executive Officers and Directors as a group,
together with their percentage holdings of the outstanding shares. All persons
listed have sole voting and investment power with respect to their shares unless
otherwise indicated. 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 June 28, 1996, 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>
SHARES PERCENT OF
NAME AND ADDRESS OF BENEFICIALLY OUTSTANDING
BENEFICIAL OWNER OWNED SHARES
- ------------------- ------------ -----------
<S> <C> <C>
John W. Hail(1)(2)................................. 3,676,237 20.22%
Bruce Greene(3).................................... 2,978,000 15.16%
Curtis H. Wilson, Sr.(1)(4)........................ 2,185,087 11.51%
United Financial Advisory Services(5).............. 2,000,000 10.53%
William A. LaReese(6).............................. 1,730,000 9.55%
Robert and Retha Nance(7).......................... 1,588,137 9.06%
Roger P. Baresel(1)(8)............................. 1,290,000 7.18%
Harland C. Stonecipher(9).......................... 451,318 2.66%
R. Terren Dunlap(1)(10)............................ 300,000 1.74%
Executive Officers and
Directors as a group
(five persons)(2)(4)(8)(9)(10)(11)............... 7,902,642 36.82%
</TABLE>
____________
(1) A Director and an executive officer of the Company, with a business address
of 2601 Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112.
(2) The shares and percentage include 1,200,000 shares of Common Stock that
are subject to currently exercisable stock options granted in 1995 to and
held by Mr. Hail.
(3) Mr. Greene's business address is 1465 Greenbrier Drive Green Oaks, Illinois
60048. The shares and percentage include 2,652,000 shares of Common Stock
that are subject to currently exercisable Warrants held by Mr. Greene.
(4) The shares and percentage include 2,000,000 shares of Common Stock that are
subject to currently exercisable stock options granted to and held by Mr.
Wilson (1,000,000 of which were granted in 1995), and 44,300 shares of
Common Stock held by Ruth Wilson, wife of Mr. Wilson, and with respect to
which Mr. Wilson disclaims any beneficial interest.
-3-
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<PAGE>
(5) The business address of United Financial Advisors, Inc. is 1601 Northwest
Expressway, Suite 2101, Oklahoma City, Oklahoma 73118. The shares and
percentage include 2,000,000 shares of Common Stock that are subject to
currently exercisable warrants.
(6) Mr. LaReese's business address is 2239 Northwest 30th Street, Oklahoma
City, Oklahoma 73112. The shares and percentage include 1,130,000 shares of
Common Stock that are subject to currently exercisable Public Warrants.
(7) 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) 725 shares owned by Mr. Nance, (ii) 302,000 shares owned by
Mrs. Nance, (iii) 750,000 shares owned jointly, and (iv) 527,412 and 8,000
shares of Common Stock that are subject to currently exercisable stock
options granted to and held by Mr. and Mrs. Nance, respectively.
(8) The shares and percentages include (i) 280,000 shares of Common Stock that
are subject to currently exercisable stock options granted to and held by
Mr. Baresel, of which 100,000, 80,000 and 100,000 options were granted in
1992, 1994 and 1995, respectively, (ii) 210,000 shares of Common Stock held
by Judith A. Baresel, wife of Mr. Baresel, (iii) 600,000 shares of Common
Stock that are subject to currently exercisable stock options held by
Judith A. Baresel, and (iv) 100,000 shares of Common Stock that are subject
to currently exercisable stock options held by Mrs. Baresel as the
custodian for the benefit of the children of Mr. and Mrs. Baresel, and with
respect to which Mr. Baresel disclaims any beneficial interest.
(9) A Director with a business address of 321 East Main Street, Ada, Oklahoma
74820. The shares and percentages include 451,318 shares of Common Stock
held by Pre-Paid Legal Services, Inc. of which Mr. Stonecipher is Chairman
of the Board and Chief Executive Officer and is therefore deemed to
beneficially own all shares of Common Stock beneficially owned by Pre-Paid
Legal Services, Inc.
(10) The shares and percentages include 300,000 shares of Common Stock which are
subject to a currently exercisable stock options granted in 1995 to and
held by Mr. Dunlap.
(11) The shares and percentage include 4,480,000 shares of Common Stock that are
subject to currently exercisable stock options.
PROPOSAL ONE
ELECTION OF DIRECTOR
The Bylaws of the Company provide that the Board of Directors of the
Company (the "Board of Directors") shall consist of not less than one nor more
than twelve directors, as determined from time to time by resolution of the
Board of Directors. The number of directors is currently fixed at five. Pursuant
to the terms of the Company's Bylaws, the directors are divided into three
classes. Class I Directors hold office initially for a term expiring at the
annual meeting of shareholders to be held in 1996, Class II Directors hold
office initially for a term expiring at the annual meeting of shareholders to be
held in 1997, and Class III Directors hold office initially for a term expiring
at the annual meeting of shareholders to be held in 1998. Each director will
hold office for the term to which he is elected and until his successor is duly
elected and qualified. Mr. Stonecipher
-4-
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<PAGE>
is serving as a Class I Director under a term expiring in 1996, Messrs. Wilson
and Dunlap are serving as Class II Directors under terms expiring in 1997, and
Messrs. Hail and Baresel are serving as Class III Directors under terms expiring
in 1998. At each annual meeting of the shareholders of the Company, the
successor to a member of the class of directors whose term expires at such
meeting will be elected to hold office for term expiring at the annual meeting
of shareholders held in the third year following the year of his election.
The Board of Directors has nominated Harland C. Stonecipher for re-election
as a director for a term ending in 1999 and until his successor shall have been
duly elected and qualified. The persons named as proxies in the accompanying
Proxy, who have been designated by the Board of Directors, intend to vote,
unless otherwise instructed in the Proxy, for the election of Mr. Stonecipher.
Should the nominee named herein become unable for any reason to stand for
election as a director of the Company, it is intended that the persons named in
the Proxy will vote for the election of such other person as the Board of
Directors may recommend. The Company knows of no reason why the nominee will be
unavailable or unable to serve.
The affirmative vote of the holders of a majority of the shares of Common
Stock present in person or by proxy at the Annual Meeting and entitled to vote,
is required for the election of the director. An abstention from voting and
broker non-votes will be tabulated as a vote withheld on the election, but will
be included in computing the number of shares present for purposes of
determining the presence of a quorum for the Annual Meeting and whether the
nominee has received the vote of a majority of the shares present at the Annual
Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RE-ELECTION OF MR.
STONECIPHER TO THE BOARD OF DIRECTORS. PROXIES SOLICITED BY THE BOARD OF
DIRECTORS OF THE COMPANY WILL BE SO VOTED UNLESS SHAREHOLDERS SPECIFY A CONTRARY
CHOICE.
INFORMATION ABOUT EACH DIRECTOR OF ADVANTAGE MARKETING SYSTEMS, INC.
John W. Hail, age 65, 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., age 69, 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, age 40, has served as Vice President, Chief Financial
Officer 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.
-5-
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<PAGE>
R. Terren Dunlap, age 50, has served as Vice President-International
Division and a Director since June 1, 1995. Mr. Dunlap is the co-founder and a
Director since 1984 and until March 1994 served as Chief Executive Officer and
Chairman of the Board, of Go-Video, Inc., an American Stock Exchange company,
and developer and distributor of consumer electronics products. He is an
inventor and has received 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, age 56, has served as a Director since August 25,
1995. He 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.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During 1995, the Board of Directors held eleven meetings. All of the
directors were present at all of the meetings except Harland C. Stonecipher and
R. Terren Dunlap. Harland C. Stonecipher missed one meeting and R. Terren Dunlap
missed three meetings. The Board of Directors does not have any standing
nominating committee or any other committees. Nominations of candidates for
election as directors of the Company may be made at a meeting of Shareholders by
or at the direction of the Board of Directors or by any Shareholder entitled to
vote at such meeting. The Company's Bylaws provide that the annual meeting of
Shareholders will be fixed by the Board of Directors.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
Executive Officers of the Company. The following table sets forth certain
information relating to compensation paid to or accrued for the Chief Executive
Officer for services rendered during the years ended December 31, 1993, 1994 an
1995.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION(4)
----------------
ANNUAL COMPENSATION AWARD OF OPTIONS
--------------------------------- ----------------
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) OTHER(3) NUMBER OF SHARES
- --------------------------- ---- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
John W. Hail(5)................... 1995....... $ - $ - $ - 3,000,000
Chief Executive Officer 1994....... $ - $ - $ - -
1993....... $ - $ - $ - -
</TABLE>
____________________
(1) Dollar value of base salary (both cash and non-cash)earned during the
year.
(2) Dollar value of bonus (both cash and non-cash) earned during the year.
(3) The Company furnishes the use of an automobile to Mr. Hail, the value of
which is not greater than $5,000 annually.
(4) No awards of restricted stock or payments under long-term incentive plans
were made by the Company to the Chief Executive Officer during 1993 and
1994.
-6-
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<PAGE>
(5) During the fiscal year ended December 31, 1995, 1994 and 1993, the Company
made loan repayments to Mr. Hail totalling $127,615, $79,138 and $33,122,
respectively.
Mr. Hail has been willing to serve as the Company's Chief Executive Officer
without compensation to protect and enhance the value of his large stock
ownership position, and to increase the likelihood of repayment of the
significant cash advances he has made to the Company, as well as due to his
desire to see the Company he founded become successful.
AGGREGATE OPTION GRANTS AND EXERCISES IN 1995 AND YEAR-END OPTION VALUES
Stock Options and Option Values. The following table sets forth
information related to options granted to the Chief Executive Officer during
1995.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
----------------------------------------------- --------------------------
PERCENT OF TOTAL
NUMBER OPTIONS GRANTED EXERCISE OR
OF OPTIONS TO EMPLOYEES IN BASE PRICE
NAME GRANTED 1995 PER SHARE EXPIRATION DATE FIVE PERCENT TEN PERCENT
- ---- ---------- ----------- --------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
John W. Hail.......... 3,000,000 50.3% $.25 Feb.23, 2005 $375,000 $1,500,000
</TABLE>
_______
(1) The potential realizable value portion of the foregoing table illustrates
the value that might be realized upon exercise of the options immediately
prior to the expiration of their term, assuming the specified compound
rates of appreciation of the Common Stock over the term of the options.
These amounts do not take into consideration provisions restricting
transferability and represent certain assumed rates of appreciation only.
Actual gains on stock option exercises are dependent on the future
performance of the Common Stock and overall stock market conditions. There
can be no assurance that the potential values reflected in this table will
be achieved. All amounts have been rounded to the nearest whole dollar
amount.
Aggregate Stock Option Exercise and Year-End and Option Values. The
following table sets forth information related to the number of options
exercised in 1995 and the value realized by the Chief Executive Officer, as well
as, information related to the number and value of options held by the Chief
Executive Officer at the end of 1995. During 1995, there were no options to
purchase Common Stock exercised by the Chief Executive Officer.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-MONEY
AS OF DECEMBER 31, 1995 OPTIONS AS OF DECEMBER 31, 1995(1)
----------------------------- ----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
John W. Hail.......... 1,200,000 - $636,000 $ -
</TABLE>
_____
(1) The closing highest bid price of the Common Stock as quoted on National
Quotation Bureau, Incorporated on December 29, 1995, the last trading day
of 1995, was $.78. Value is calculated on the basis of the remainder of
$.78 minus the exercise price multiplied by the number of shares of Common
Stock underlying the options.
COMPENSATION OF DIRECTORS
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<PAGE>
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.
PROPOSAL TWO
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR
The Board of Directors has appointed Deloitte & Touche as the independent
auditor of the Company for the fiscal year ending December 31, 1996. Deloitte &
Touche has been the independent auditor of the Company since 1990, and, prior to
its merger with Touche Ross & Co., Deloitte, Haskins & Sells had been the
independent auditor of the Company since its inception. A proposal will be
presented at the Annual Meeting asking the Shareholders to ratify the
appointment of Deloitte & Touche as the Company's independent auditor. If the
Shareholders do not ratify the appointment of Deloitte & Touche, the Board of
Directors will reconsider the appointment. The affirmative vote of a majority of
the shares present in person or by proxy at the Annual Meeting and voting on
this proposal is required for the adoption of this proposal. Abstentions and
broker non-votes will not be tabulated as negative votes on this proposal, but
will be included in computing the number of shares present for purposes of
determining the presence of a quorum for the Annual Meeting and whether this
proposal has received the vote of a majority of the shares present at the Annual
Meeting.
A representative of Deloitte & Touche will be present at the Annual
Meeting. Such representative will be given the opportunity to make a statement
if he desires to do so and will be available to respond to appropriate
questions.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE "FOR" RATIFICATION
OF THE APPOINTMENT OF THE INDEPENDENT AUDITOR. PROXIES SOLICITED BY THE BOARD OF
DIRECTORS OF THE COMPANY WILL BE SO VOTED UNLESS SHAREHOLDERS SPECIFY A CONTRARY
CHOICE.
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 and may result
in conflicts of interest between the Company and such individuals. Although
these persons have fiduciary duties to the Company and its shareholders, there
can be no assurance that conflicts of interest will always be resolved in favor
of the Company.
On November 6, 1990, John W. Hail, Chief Executive Officer and Chairman of
the Board of Directors of the Company, formed the John Hail Agency, Inc.
("JHA"). Mr. Hail is the sole director and shareholder of JHA. Pursuant to an
unwritten agreement, the Company provides office space, utilities and supplies
as well as administrative and managerial services to JHA for a monthly payment
of $1,000 as reimbursement of the Company's costs. In addition, the Company made
advances to JHA of $13,400, $87,684 and $66,026 during the three months ended
March 31, 1996, and the years ended December 31, 1995 and 1994, respectively.
The Company made advances to the JHA with the expectation that they would be
repaid and that the Company would derive additional revenues by providing
administrative and managerial services and renting office space to JHA.
-8-
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<PAGE>
JHA has made repayments of these advances of $67,401 and $9,069 during the
fiscal years ended December 31, 1995 an 1994, respectively. During the three
months ended March 31, 1996, JHA has not made any repayments. At March 31, 1996,
JHA was indebted to the Company in the amount of $65,363. As a result of JHA's
inability to generate significant levels of sales, the Company does not expect
to derive substantial revenues from its relationship with JHA; however, the
Company does anticipate continuing to receive the monthly reimbursements.
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 a
commission on these sales. PPL owns 451,318 shares of the Company's Common Stock
and Harland C. Stonecipher, the founder and Chief Executive Officer of PPL is a
Director of the Company. During the three months ended March 31, 1996, and the
years ended December 31, 1995 and 1994, the Company received commissions from
PPL on these sales totalling $2,559, $16,415 and $71,713, respectively.
The Board of Directors of Company believes that the terms of the
transactions described above were at least as favorable as could be obtained
from unaffiliated third parties. The Company has adopted policies that any loans
to officers, directors and five percent or more shareholders ("affiliates") are
subject to approval by a majority of the disinterested independent directors of
the Company and that further transactions with affiliates will be on terms on
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
Proxy Statement, the Board of Directors is comprised of the five members of
which one is an independent director.
OTHER BUSINESS TO BE BROUGHT BEFORE THE MEETING
The Board of Directors knows of no business which will be presented for
action at the Annual Meeting other than that described in the Notice of Annual
Meeting of Shareholders and this Proxy Statement. However, if any other matters
should properly come before the Annual Meeting, it is the intention of the
persons named in the accompanying Proxy to vote such Proxies as they deem
advisable in accordance with their best judgment.
SHAREHOLDER PROPOSALS FOR 1997 ANNUAL MEETING
Under the existing rules of the Securities and Exchange Commission, any
shareholder of the Company may present proposals on any matter which is a proper
subject for consideration by the shareholders at the 1997 Annual Meeting of
Shareholders, which the Company currently anticipates will be held on or before
August 30, 1997. In order to be included in the proxy statement (or disclosure
statement in the event proxies are not solicited by the Board of Directors of
the Company) for the 1997 Annual Meeting of Shareholders, a proposal must be
received by May 1, 1997. It is suggested that a Shareholder desiring to submit a
proposal do so by sending the proposal certified mail, return receipt requested,
addressed to the Secretary of the Company at its principal office, 2601
Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112. Detailed
information for submitting proposals will be provided upon written request,
addressed to the Secretary of the Company.
-9-
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<PAGE>
Your cooperation in giving this matter your immediate attention and in
returning your Proxy promptly will be appreciated.
BY ORDER OF THE BOARD OF DIRECTORS
Roger P. Baresel
Corporate Secretary
July 9, 1996
A COPY OF THE COMPANY'S ANNUAL REPORT, WHICH INCLUDES ITS FORM 10-KSB FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1995, IS ENCLOSED HEREWITH, AND THE COMPANY'S
QUARTERLY REPORTS ON FORM 10-QSB FOR THE FISCAL QUARTERS ENDED MARCH 31 AND JUNE
30, 1996, EXCLUDING CERTAIN OF THE EXHIBITS, MAY BE OBTAINED WITHOUT CHARGE BY
WRITING ADVANTAGE MARKETING SYSTEMS, INC., 2601 NORTHWEST EXPRESSWAY, SUITE
1210W, OKLAHOMA CITY, OKLAHOMA 73112, ATTENTION: CORPORATE SECRETARY.
-10-
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<PAGE>
________________________________________________________________________________
PROXY PROXY
ADVANTAGE MARKETING SYSTEMS, INC.
2601 Northwest Expressway, Suite 1210W
Oklahoma City, Oklahoma 73112
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF ADVANTAGE MARKETING SYSTEMS, INC.
The undersigned hereby appoints John W. Hail and Roger P. Baresel as
Proxies, each with the power to appoint his substitute, and hereby appoints and
authorizes either of them to represent and vote as designated below, all the
shares of Common Stock, $.0001 par value, of Advantage Marketing Systems, Inc.
(the "Company") held of record by the undersigned on June 28, 1996, at the
annual meeting of shareholders to be held on Friday, August 9, 1996, or any
adjournment thereof.
1. To consider and act upon the re-election of Harland C. Stonecipher for
the election as a director for a term ending in 1999 and until his successor
shall have been duly elected and qualified. A Vote "For" will represent a vote
for such the nominee director.
Harland C. Stonecipher [_]FOR [_]AGAINST [_]ABSTAIN
2. To consider and act upon the ratification and the appointment of
Deloitte & Touche as the Company's independent auditor for the fiscal year
ending December 31, 1996. A vote "For" will represent a vote for such
ratification and appointment.
[_]FOR [_]AGAINST [_]ABSTAIN
3. To transact such other business as may properly come before the meeting
or any adjournment thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER, IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2.
Please sign exactly as the name appears to left.
When shares are held by joint tenants, both should
sign. When signing as attorney, as executor,
administrator, trustee or guardian, please give
full title as such. If a corporation, please sign
in full corporate name by president or other
authorized officer. If a partnership, please sign
in partnership name by authorized person.
Date:_________________________, 1996
____________________________________
Signature
____________________________________
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY
PROMPTLY USING THE ENCLOSED ENVELOPE.
P-12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION SEQUENTIALLY NUMBERED PAGE
- ----- ----------- --------------------------
<S> <C> <C>
2.1 AGREEMENT AND PLAN OF INCORPORATED HEREIN BY
REORGANIZATION DATED REFERENCE TO EXHIBIT NO. 2.1
MAY 1, 1989, BETWEEN TO REGISTRANT'S FORM 8-K
PACIFIC COAST DATED MAY 19, 1989.
INTERNATIONAL, INC.,
ADVANTAGE MARKETING
SYSTEMS, INC. AND THE
STOCKHOLDERS OF
ADVANTAGE MARKETING
SYSTEMS, INC.
2.2 AGREEMENT AND PLAN OF INCORPORATED HEREIN BY
MERGER BETWEEN AMS, REFERENCE TO EXHIBIT NO. 2.1
INC. AND ADVANTAGE TO REGISTRANT'S FORM 8-K
MARKETING SYSTEMS, DATED DECEMBER 11, 1995.
INC.
2.3 CERTIFICATE OF MERGER INCORPORATED HEREIN BY
OF ADVANTAGE MARKETING REFERENCE TO EXHIBIT NO. 2.2
SYSTEMS, INC. (A TO REGISTRANT'S FORM 8-K
DELAWARE CORPORATION) DATED DECEMBER 11, 1995.
WITH AND INTO ADVANTAGE
MARKETING SYSTEMS, INC.
(AN OKLAHOMA CORPORATION)
3.1 AMENDED AND RESTATED INCORPORATED HEREIN BY
CERTIFICATE OF INCORPORATION REFERENCE TO EXHIBIT 3.1 TO
OF THE REGISTRANT. REGISTRANT'S FORM SB-2
REGISTRATION STATEMENT (NO.
33-80629).
3.2 BYLAWS OF THE REGISTRANT. INCORPORATED HEREIN BY
REFERENCE TO EXHIBIT 3.2 TO
REGISTRANT'S FORM SB-2
REGISTRATION STATEMENT (NO.
33-80629).
4.1 WARRANT AGREEMENT AND INCORPORATED HEREIN BY
AMENDMENTS BETWEEN THE REFERENCE TO EXHIBITS 4.6 THROUGH
REGISTRANT AND THE WARRANT 4.12 TO REGISTRANT'S FORM SB-2
AGENT. REGISTRATION STATEMENT (NO.
33-80629) AS FILED WITH THE
COMMISSION ON DECEMBER 18, 1995
AND AMENDMENT NO. 1 THERETO AS
FILED WITH THE COMMISSION ON JULY 1,
1996.
</TABLE>
1
<PAGE>
<TABLE>
<S> <C> <C>
4.2 FORM OF CLASS A COMMON STOCK INCORPORATED HEREIN BY REFERENCE
PURCHASE WARRANT CERTIFICATE. EXHIBIT 4.2 OF AMENDMENT NO. 1
TO FORM SB-2 REGISTRATION STATEMENT
(NO.33-80629) AS FILED WITH THE
COMMISSION ON JULY 1, 1996.
4.3 FORM OF CLASS B COMMON STOCK INCORPORATED HEREIN BY REFERENCE
PURCHASE WARRANT CERTIFICATE. TO EXHIBIT 4.3 OF REGISTRANT'S
AMENDMENT NO. 1 TO FORM SB-2
REGISTRATION STATEMENT (NO.33-80629)
AS FILED WITH THE COMMISSION ON
JULY 1, 1996.
10.1 LEASE OF REGISTRANT'S INCORPORATED HEREIN BY
CORPORATE OFFICES. REFERENCE TO EXHIBIT 10.1 TO
REGISTRANT'S FORM 10-KSB FOR
THE YEAR ENDING DECEMBER 31,
1993.
10.2 LEASE OF COMPUTER INCORPORATED HEREIN BY
EQUIPMENT. REFERENCE TO EXHIBIT 10.2 TO
REGISTRANT'S FORM 10-K FOR
THE YEAR ENDING DECEMBER 31,
1989.
10.3 LEGAL SERVICES AGREEMENT INCORPORATED HEREIN BY
WITH PRE-PAID LEGAL REFERENCE TO EXHIBIT 10.3 TO
SERVICES, INC. REGISTRANT'S FORM 10-K FOR
THE YEAR ENDING DECEMBER 31,
1989.
10.4 GROUP CONTRACT WITH INCORPORATED HEREIN BY
CONSUMER BENEFIT REFERENCE TO EXHIBIT 10.4 TO
SERVICES, INC. REGISTRANT'S FORM 10-K FOR
THE YEAR ENDING DECEMBER 31,
1989.
10.5 DISTRIBUTOR AGREEMENT INCORPORATED HEREIN BY
WITH TOPPMED, INC. REFERENCE TO EXHIBIT 10.5 TO
REGISTRANT'S FORM 10-K FOR
THE YEAR ENDING DECEMBER 31,
1989.
10.6 LETTER OF INTENT WITH INCORPORATED HEREIN BY
CUC INTERNATIONAL. REFERENCE TO EXHIBIT 10.6 TO
REGISTRANT'S FORM 10-K FOR THE
YEAR ENDING DECEMBER 31, 1989.
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
10.7 LETTER AGREEMENT WITH INCORPORATED HEREIN BY
COUPON EXCHANGE CLUB. REFERENCE TO EXHIBIT 10.7 TO
REGISTRANT'S FORM 10-K FOR THE
YEAR ENDING DECEMBER 31,1989.
10.8 AGREEMENT NUMBER 1 WITH INCORPORATED HEREIN BY
TMS, INC. REFERENCE TO EXHIBIT 10.8 TO
REGISTRANT'S FORM 10-K FOR THE
YEAR ENDING DECEMBER 31, 1989.
10.9 AGREEMENT NUMBER 2 WITH INCORPORATED HEREIN BY
TMS, INC. REFERENCE TO EXHIBIT 10.9 TO
REGISTRANT'S FORM 10-K FOR THE
YEAR ENDING DECEMBER 31, 1989.
10.10 AGREEMENT WITH INCORPORATED HEREIN BY
INNOVATIVE BENEFITS, REFERENCE TO EXHIBIT 10.10 TO
REGISTRANT'S FORM 10-K FOR THE
YEAR ENDING DECEMBER 31, 1990.
10.11 AGREEMENT WITH MR. JIM INCORPORATED HEREIN BY
GABLER. REFERENCE TO EXHIBIT 10.11
TO REGISTRANT'S FORM 10-K
FOR THE YEAR ENDING DECEMBER
31, 1990.
10.12 AGREEMENT WITH HEALTH INCORPORATED HEREIN BY
MANAGEMENT SYSTEMS, INC. REFERENCE TO EXHIBIT 10.12
TO REGISTRANT'S FORM 10-K
FOR THE YEAR ENDING DECEMBER
31, 1990.
10.13 AGREEMENT WITH CONSUMER'S INCORPORATED HEREIN BY
CHOICE ASSOCIATION REFERENCE TO EXHIBIT 10.13
TO REGISTRANT'S FORM 10-K
FOR THE YEAR ENDING DECEMBER
31, 1991.
10.14 AGREEMENT WITH INNOVATIVE INCORPORATED HEREIN BY
BENEFITS, INC. REFERENCE TO EXHIBIT 10.14
TO REGISTRANT'S FORM 10-K
FOR THE YEAR ENDING DECEMBER
31, 1991.
10.15 SECONDARY PUBLIC OFFERING INCORPORATED HEREIN BY
LETTER OF INTENT REFERENCE TO EXHIBIT 10.15
TO REGISTRANT'S FORM 10-K
FOR THE YEAR ENDING DECEMBER
31, 1995.
22 LIST OF SUBSIDIARIES OF INCORPORATED HEREIN BY
THE REGISTRANT. REFERENCE TO EXHIBIT 22 TO
REGISTRANT'S FORM 10-K FOR
THE YEAR ENDING DECEMBER 31,
1989.
</TABLE>
3
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<PAGE>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 169,569
<SECURITIES> 0
<RECEIVABLES> 77,817
<ALLOWANCES> 25,804
<INVENTORY> 217,945
<CURRENT-ASSETS> 655,243
<PP&E> 704,534
<DEPRECIATION> 327,344
<TOTAL-ASSETS> 1,790,341
<CURRENT-LIABILITIES> 638,890
<BONDS> 230,022
0
0
<COMMON> 214
<OTHER-SE> 921,215
<TOTAL-LIABILITY-AND-EQUITY> 1,790,341
<SALES> 5,785,841
<TOTAL-REVENUES> 6,163,740
<CGS> 4,689,002
<TOTAL-COSTS> 5,827,658
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,538
<INCOME-PRETAX> 325,544
<INCOME-TAX> (499,613)
<INCOME-CONTINUING> 825,157
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 825,157
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
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