<PAGE>
As filed with the Securities and Exchange Commission on October 7, 1998
Registration No. 333-47801
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------------------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------------------------
ADVANTAGE MARKETING SYSTEMS, INC.
(Name of small business issuer in its charter)
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<CAPTION>
<S> <C> <C>
OKLAHOMA 7319 73-1323256
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
2601 NORTHWEST EXPRESSWAY, SUITE 1210W JOHN W. HAIL, CHIEF EXECUTIVE OFFICER
OKLAHOMA CITY, OKLAHOMA 73112-7293 ADVANTAGE MARKETING SYSTEMS, INC.
(405) 842-0131 2601 NORTHWEST EXPRESSWAY, SUITE 1210W
(Address and telephone number, OKLAHOMA CITY, OKLAHOMA 73112-7293
including area code, of registrant's (405) 842-0131
principal executive offices) (Name, address and telephone
number, of agent for service)
</TABLE>
------------------------------------------------
Copies To:
MICHAEL E. DUNN, ESQ.
DUNN SWAN & CUNNINGHAM
2800 OKLAHOMA TOWER
210 PARK AVENUE
OKLAHOMA CITY, OKLAHOMA 73102-5604
TELEPHONE: (405) 235-8318
FACSIMILE: (405) 235-9605
------------------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 6 PROSPECTUS
ADVANTAGE MARKETING SYSTEMS, INC.
5,000,000 PARTICIPATION INTERESTS
ADVANTAGE MARKETING SYSTEMS, INC. 1998
DISTRIBUTOR STOCK PURCHASE PLAN
Advantage Marketing Systems, Inc. (the "Company") hereby offers 5,000,000
interests ("Participation Interests") in the Advantage Marketing Systems, Inc.
Distributor Stock Purchase Plan (the "Plan") to the distributors of the
Company's products and services ("Eligible Persons"). An Eligible Person
electing to participate in the Plan (a "Participant") will be entitled through
purchase of the Participation Interests to purchase in the open market through
the Plan shares of Common Stock, $.0001 par value per share (the "Common
Stock"), previously issued by the Company. The Participation Interests are
non-transferrable; therefore, a market for the Participation Interests will
not develop. The proceeds from sale of the Participation Interests will
become the Participants' contributions to the Plan which will be used to
purchase the Common Stock and will not be placed into escrow pending purchase
of the Common Stock. Other than an annual service fee of $5.00 per
Participant and a transaction fee of $1.25 per month, the Company will not
receive any proceeds from the purchase of the Common Stock by the Plan. See
"Description of Plan." The offering price of each Participation Interest is
$1.00, and each Eligible Person is required initially to purchase a minimum
of 25 Participation Interests upon electing to participate in the Plan.
There is no minimum amount of sales of Participation Interests required.
The Common Stock is quoted on the Nasdaq SmallCap Market under the symbol "AMSO"
and is listed on the Boston Stock Exchange and traded under the symbol "AMM."
On October 2, 1998, the closing sale price of the Common Stock on the Nasdaq
SmallCap Market was $2.13. The public offering price of the Participation
Interests has been determined by the Company. See "Plan of Distribution."
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS," BEGINNING AT PAGE 8.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Underwriting
Price to Discounts and Proceeds to
Public Commissions Company(1)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Participation Interest.. $1.00 $ -- $1.00
- ---------------------------------------------------------------------------------
Total....................... $5,000,000 $ -- $5,000,000
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
(1) Before deducting offering expenses payable by the Company estimated to be
$90,000. The Proceeds to Company will be contributed to the Plan for the
account of the Participants to be used to pay the Company certain fees and
for the purchase of Common Stock in the open market. See "Use of
Proceeds."
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the captions "Prospectus Summary," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this Prospectus constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Certain, but not necessarily all, of such forward-looking
statements can be identified by the use of forward-looking terminology such as
"anticipates," "believes," "expects," "may," "will," or "should" or other
variations thereon, or by discussions of strategies that involve risks and
uncertainties. The actual results of the Company or industry results may be
materially different from any future results expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include general economic and business conditions; the ability of the
Company to implement its business and acquisition strategies; changes in the
network marketing industry and changes in consumer preferences; competition;
availability of key personnel; increasing operating costs; unsuccessful
advertising and promotional efforts; changes in brand awareness; acceptance of
new product offerings; and changes in, or the failure to comply with, government
regulations (especially food and drug laws and regulations); the ability of the
Company to obtain financing for future acquisitions; and other factors. See
"Risk Factors."
Chambre-Registered Trademark-, Spark of Life-Registered Trademark-, Young
at Heart-Registered Trademark-, Co-Clenz-Registered Trademark-, Stay 'N
Shape-Registered Trademark-, Sine-eze-Registered Trademark- and
ToppFast-Registered Trademark- are registered trademarks of the Company, and
Choc-Quilizer-TM- is a trademark of Tinos, L.L.C.
-2-
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH IN "RISK FACTORS." ALL REFERENCES IN THIS PROSPECTUS TO
FISCAL YEARS ARE TO THE COMPANY'S FISCAL YEAR ENDED DECEMBER 31 OF EACH YEAR.
EFFECTIVE DECEMBER 11, 1995, ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY PACIFIC
COAST INTERNATIONAL, INC.), A DELAWARE CORPORATION AND THE FORMER PARENT OF THE
COMPANY, MERGED WITH THE COMPANY. THE COMPANY, AN OKLAHOMA CORPORATION WHICH
SUBSEQUENTLY CHANGED ITS NAME FROM "AMS, INC." TO "ADVANTAGE MARKETING SYSTEMS,
INC.," WAS THE SURVIVING CORPORATION. THE COMPANY EXPANDED ITS NETWORK MARKETING
ORGANIZATION WITH THE ACQUISITION OF MIRACLE MOUNTAIN INTERNATIONAL, INC. ON MAY
31, 1996 (THE "MMI ACQUISITION"), CHAMBRE INTERNATIONAL, INC. ON JANUARY 31,
1997 (THE "CII ACQUISITION"), AND THE ACQUISITION OF THE ASSETS OF STAY 'N SHAPE
INTERNATIONAL, INC., SOLUTION PRODUCTS INTERNATIONAL, INC., NATION OF WINNERS,
INC., AND NOW INTERNATIONAL, INC. ON APRIL 16, 1997 (THE "SNSI ASSET PURCHASE").
SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--GENERAL." UNLESS OTHERWISE INDICATED, ALL REFERENCES TO THE COMPANY
INCLUDE ITS FORMER PARENT, ADVANTAGE MARKETING SYSTEMS, INC. AND ITS CURRENT
SUBSIDIARIES. FURTHERMORE, EXCEPT AS OTHERWISE INDICATED, THE INFORMATION
CONTAINED IN THIS PROSPECTUS REFLECTS A ONE-FOR-EIGHT REVERSE SPLIT OF THE
COMPANY'S ISSUED AND OUTSTANDING COMMON STOCK ON OCTOBER 29, 1996, AND ASSUMES
THAT (I) THE OUTSTANDING STOCK OPTIONS AND WARRANTS OF THE COMPANY EXERCISABLE
FOR THE PURCHASE OF COMMON STOCK ARE NOT EXERCISED AND (II) NO ADDITIONAL SHARES
OF COMMON STOCK WILL BE ISSUED IN CONNECTION WITH THE SNSI ASSET PURCHASE.
THE COMPANY
Advantage Marketing Systems, Inc. (the "Company") markets a product line
consisting of approximately 103 products in three categories; weight management,
dietary supplement and personal care products through a network marketing
organization in which independent distributors purchase products for resale to
retail customers as well as for their own personal use. The number of the
Company's active distributors has increased from approximately 10,600 at
December 31, 1996, and 20,400 at December 31, 1997 to approximately 25,100 at
June 30, 1998. An "active" distributor is one who purchased $50 or more of the
Company's products within the preceding 12 months.
The distributors in the Company's network are encouraged to recruit
interested people to become new distributors of the Company's products. New
distributors are placed beneath the recruiting distributor in the "network" and
are referred to by the Company as being in that distributor's "downline"
organization. The Company's marketing plan is designed to provide incentives
for distributors to build, maintain and motivate an organization of recruited
distributors in their downline organization to maximize their earning potential.
Distributors generate income by purchasing the Company's products at wholesale
prices and reselling them at retail prices. Distributors also earn bonuses on
product purchases generated by the distributors in their downline organization.
See "Business--Network Marketing".
The Company's growth strategy is to expand its product line and network of
independent distributors to increase sales. An increase in the number of
distributors generally results in increased sales volume, and new products
create enthusiasm among distributors, serve as a promotional tool in selling
other products, and attract new distributors. Since 1995, the Company has
introduced eight new products to its product line in the weight management and
dietary supplement categories. Through the Chambre' International, Inc. ("CII")
Acquisition, in 1997, the Company added 68 products to its product line in the
personal care category and six products to its product line in the dietary
supplement category. Through the Stay 'N Shape International, Inc. ("SNSI")
Asset Purchase which was consummated on April 16, 1997, the Company added 38
products to its product line in the weight management and dietary supplement
categories and one product to its product line in the personal care category.
During 1998, the Company introduced ToppFast and Dial A Doc, and plans to
introduce several additional products. In connection with the 1996 Miracle
Mountain, Inc. ("MMI") Acquisition, the CII Acquisition and the SNSI Asset
Purchase, the Company acquired approximately 1,690, 2,100 and 3,000 additional
-3-
<PAGE>
distributors, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General" and "Business--Growth
Strategy".
On an ongoing basis management reviews the Company's product line for
duplication and sales movement and makes adjustments accordingly. As of June
30, 1998, the Company's product line consists of (i) seven weight management
products, (ii) 29 dietary supplement products, (iii) 67 personal care products
consisting primarily of cosmetic and skin care products and (iv) Dial A Doc.
The Company's products are manufactured by various manufacturers pursuant to
formulations developed for the Company and are sold to the Company's independent
distributors located in all 50 states and the District of Columbia. The Company
also sells its personal care products to distributors in Greece who do not use
the Company's network marketing system. See "Business--Products".
The Company markets products that it believes will fulfill the needs of its
distributors and their customers, and assist its distributors in building their
own distributor organization. The Company offers individuals the opportunity to
start a home-based business without the significant start-up costs and other
difficulties usually associated with new business ventures. The Company
provides new product development, marketing tools, support services, product
warehousing, distribution and essential record-keeping functions for its
distributors. The Company also provides other support programs to its
distributors, including regular teleconferences, regional seminars, and product
and sales training.
The Company's principal executive offices are located at 2601 Northwest
Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293 and its telephone
number is (405) 842-0131. The Company's site on the World Wide Web on the
Internet is located at http:www.amsonline.com.
THE OFFERING
Securities Offered . . . . . . 5,000,000 interests ("Participation
Interests") in the Advantage Marketing
Systems, Inc. Distributor Stock Purchase Plan
(the "Plan") offered to the distributors of
the Company's products and services ("Eligible
Persons"). An Eligible Person electing to
participate in the Plan (a "Participant") will
be entitled through purchase of the
Participation Interests to purchase in the
open market through the Plan shares of Common
Stock, $.0001 par value per share (the "Common
Stock"), previously issued by the Company.
The Participation Interests are non-
transferrable; therefore, a market for the
Participation Interests will not develop. The
proceeds from sale of the Participation
Interests will become the Participants'
contributions to the Plan which will be used
to purchase the Common Stock and will not be
placed into escrow pending such purchase. The
is no minimum amount of sales of Participation
Interests required. See "Description of
Plan."
Common Stock outstanding....... 4,166,039 shares as of the date of this
Prospectus, assuming no exercise of the
Company's 1,495,000 Redeemable Common Stock
Purchase Warrants, 130,000 warrants (each
exercisable for the purchase of one share of
Common Stock and one Redeemable Common Stock
Purchase Warrant which is also exercisable for
the purchase of one share of Common Stock)
sold to certain underwriters of the Company's
recent stock offerings (the "Underwriters'
Warrants"), 337,211 outstanding 1997-A
Warrants, 1,215,733 outstanding stock options
and other warrants (see "Description of
Securities--Redeemable Common Stock Purchase
Warrants," "--1997-A Warrants" and "--Other
Options and Warrants"), and does not include
1,125,000 shares of
-4-
<PAGE>
Common Stock reserved for issuance pursuant
to the Advantage Marketing Systems, Inc.
1995 Stock Option Plan (the "Stock Option
Plan") under which options granted for the
purchase of 220,044 shares are outstanding
(see "Management--Stock Option Plan"), and
additional shares of Common Stock that may
be issued in connection with the SNSI Asset
Purchase (see "Management's Discussion and
Analysis of Financial Condition and Results
of Operations--General--SNSI Asset
Purchase"). As of the date of this
Prospectus, the aggregate number of shares
of Common Stock that may be issued upon
exercise of outstanding stock options and
warrants is 3,527,988. See "Risk
Factors--Outstanding Stock Options and
Warrants."
Estimated net proceeds . . . . $5,000,000 assuming sale of the Participation
Interests in full. Estimated offering
expenses of $90,000 will be paid by the
Company and will not reduce the Participants'
contributions to the Plan. However, the
Company will receive from the estimated net
proceeds annual service fees of $5.00 per
Participant (the "Annual Service Fees") and
monthly transaction fees of $1.25 per
Participant (the "Transaction Fees") from
which the Company may recoup the estimated
offering expenses at least in part. See "Use
of Proceeds" and "Description of Plan."
Use of proceeds................ The proceeds received by the Company from this
offering will be contributed to the Plan for
the accounts of the Participants to be used to
pay the Company the Annual Service Fees and
Transaction Fees of $5.00 and $1.25 per
Participant, respectively, and for the
purchase of the Company's issued and
outstanding Common Stock in the open market.
The Annual Service Fees and monthly
Transaction Fees to be received by the Company
will be used to reimburse the Company for the
offering expenses of this offering and cost of
administering the Plan. See "Use of Proceeds."
Nasdaq SmallCap symbol......... Common Stock . . . . . . . . . . . AMSO
Boston Exchange symbol......... Common Stock . . . . . . . . . . . AMM
-5-
<PAGE>
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following table sets forth summary historical financial and operating
information of the Company for the six months ended June 30, 1998 and 1997 and
the fiscal years ended December 31, 1997 and 1996. See "Selected Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The financial and operating information for the six
months ended June 30, 1998 and 1997, is derived from the unaudited condensed
consolidated financial statements of the Company appearing elsewhere in this
Prospectus which, in the opinion of management, include all adjustments
(consisting only of normal and recurring adjustments) necessary for a fair
presentation of the financial position and results of operations of the Company
for the unaudited interim periods. The financial and operating information for
the fiscal years ended December 31, 1997 and 1996 is derived from the audited
consolidated financial statements of the Company appearing elsewhere in this
Prospectus. The following information should be read in conjunction with the
consolidated financial statements and the related notes thereto of the Company,
and other information relating to the Company presented elsewhere in this
Prospectus. The statements of operations data for any particular period are not
necessarily indicative of the results of operations for any future period. The
Company expanded its network marketing organization with the acquisition of
Miracle Mountain International, Inc. on May 31, 1996, Chambre International,
Inc. on January 31, 1997, and the acquisition of the assets of Stay 'N Shape
International, Inc., Solution Products International, Inc., Nation of Winners,
Inc., and Now International, Inc. on April 16, 1997. As a result of such
acquisitions, the statements of operations data for the six months ended June
30, 1998 and the year ended December 31, 1998, may not be comparable to the same
period in the preceding year or the preceding year. For the pro forma effect
of such acquisitions, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General" and Note 9. Acquisitions of the
audited consolidated financial statements of the Company as of and for each of
the three years ended December 31, 1997, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEARS ENDED
ENDED JUNE 30, DECEMBER 31,
------------------------ --------------------------
1998 1997 1997 1996
---------- ----------- ----------- ----------
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STATEMENTS OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $5,870,023 $ 4,745,416 $10,192,227 $6,155,073
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . 2,078,787 1,330,330 2,920,567 1,889,168
Income from operations. . . . . . . . . . . . . . . . . . . 327,863 191,191 127,688 327,415
Income before income taxes. . . . . . . . . . . . . . . . . 507,819 196,313 189,722 325,544
Tax (expense) benefit . . . . . . . . . . . . . . . . . . . (193,051) (74,520) (59,696) 499,613
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 314,768 $ 121,793 $ 130,026 $ 825,157
Weighted average common
shares outstanding(1). . . . . . . . . . . . . . . . . . 4,217,894 2,390,692 2,751,771 2,135,097
Net income per common share - Basic . . . . . . . . . . . . $ 0.07 $ 0.05 $ 0.05 $ 0.39
Weighted average common shares outstanding--
assuming dilution . . . . . . . . . . . . . . . . . . . . 4,718,210 3,395,362 3,762,642 3,203,485
Net income per common share - assuming dilution . . . . . . $ 0.04 $ 0.02 $ 0.04 $ 0.26
OPERATING DATA:
Number of active distributors . . . . . . . . . . . . . . . 25,100 19,000 20,400 10,600
Sales per active distributor(2) . . . . . . . . . . . . . . $ 53 $ 59 $ 41 $ 53
Total number of products offered(3) . . . . . . . . . . . . 103 131 101 28
CASH FLOW DATA:
Net cash provided (used) by operating activities. . . . . . $ 918,456 $ (175,924) $ (118,587) $ 426,421
Net cash provided (used) by investing activities . . . . . (629,451) (1,475,862) (1,692,055) (136,937)
Net cash provided (used) by financing activities. . . . . . (437,061) 2,093,858 7,416,349 (232,002)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------ -------------------------
1998 1997 1996
------------ ----------- ----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets . . . . . . . . . . . . . . . . . $ 7,064,703 $ 6,999,364 $ 655,243
Working capital. . . . . . . . . . . . . . . . . 6,110,067 6,143,041 16,353
Total assets . . . . . . . . . . . . . . . . . . 10,434,395 10,336,306 1,790,341
Short-term debt. . . . . . . . . . . . . . . . . 122,430 145,105 76,204
Long-term debt . . . . . . . . . . . . . . . . . 232,269 303,588 230,022
Stockholders' equity . . . . . . . . . . . . . . 9,247,490 9,176,395 921,429
</TABLE>
- ------------------------
(1) Without giving effect to and assuming no exercise of the 1,495,000
outstanding Redeemable Common Stock Purchase Warrants, 130,000
Underwriters' Warrants, the 337,211 outstanding 1997-A Warrants, 1,215,733
outstanding stock options and other warrants (see "Description of
Securities--Redeemable Common Stock Purchase Warrants," "--1997-A Warrants"
and "--Other Options and Warrants"), and does not include 1,125,000 shares
of Common Stock reserved for issuance under the Stock Option Plan under
which options granted for the purchase of 220,044 shares are outstanding
(see "Management--Stock Option Plan"), and additional shares of Common
Stock that may be issued in connection with the SNSI Asset Purchase (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General--SNSI Asset Purchase").
(2) Monthly sales per active distributor for the period presented is computed
using a simple average.
(3) Exclusive of variations in product size, colors or similar variations of
the Company's basic product line.
-7-
<PAGE>
RISK FACTORS
PURCHASE OF PARTICIPATION INTERESTS OFFERED HEREBY AND PURCHASE OF THE
COMMON STOCK THROUGH PARTICIPATION IN THE PLAN INVOLVES A HIGH DEGREE OF RISK.
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED WHEN EVALUATING THE PURCHASE OF THE PARTICIPATION
INTERESTS OFFERED HEREBY AND INVESTMENT IN THE COMMON STOCK THROUGH THE PLAN.
RISKS RELATED TO THE COMPANY
DEPENDENCE ON DISTRIBUTORS. The Company's success and growth depend upon
its ability to attract, retain and motivate its network of independent
distributors who market the Company's products. Distributors are independent
contractors who purchase products directly from the Company for resale and their
own use. Distributors typically offer and sell the Company's products on a
part-time basis and may engage in other business activities, including the sale
of products offered by competitors of the Company. Typically, the Company has
non-exclusive arrangements with its distributors which may be canceled at will
and contain no minimum purchase requirements on the part of each distributor.
While the Company encourages distributors to focus on the purchase and sale of
the Company's products, distributors may give higher priority to other products,
reducing their efforts devoted to marketing the Company's products.
Furthermore, the Company's ability to attract and retain distributors could be
negatively affected by adverse publicity relating to the Company, its products
or its operations. In addition, as a result of the Company's network marketing
system, the distributor downline organizations headed by a relatively small
number of key distributors are responsible for a significant percentage of total
sales. The loss of a significant number of distributors, including any key
distributors, for any reason, could adversely affect the Company's sales and
operating results, and could impair the Company's ability to attract new
distributors. There can be no assurance that the Company's network marketing
program will continue to be successful or that the Company will be able to
retain or expand its current network of independent distributors. See
"Business--Network Marketing."
GOVERNMENT REGULATION. The Company and its operations are subject to and
affected by laws, regulations, administrative determinations, court decisions
and similar constraints at the federal, state and local levels and the laws and
regulations of foreign countries in which the Company's products are or may be
sold. See "Business--Regulation."
PRODUCTS. The formulation, manufacturing, packaging, labeling, advertising,
distribution and sale of the Company's products are subject to regulation by a
number of governmental agencies, the most active of which is the Food and Drug
Administration (the "FDA"), which regulates the Company's products under the
Federal Food, Drug, and Cosmetic Act (the "FDCA") and regulations promulgated
thereunder. The Company's products are also subject to regulation by the
Federal Trade Commission (the "FTC"), the Consumer Product Safety Commission
(the "CPSC"), the United States Department of Agriculture (the "USDA"), and the
Environmental Protection Agency (the "EPA"). The FDCA has been amended several
times with respect to dietary supplements, most recently by the Nutrition
Labeling and Education Act of 1990 (the "NLEA") and the Dietary Supplement
Health and Education Act of 1994 (the "DSHEA"). The Company's products are
generally classified and regulated as dietary supplements under the FDCA, as
amended, and therefore are not subject to pre-market approval by the FDA.
However, these products are subject to extensive labeling regulation by the FDA.
Moreover, if the FDA determines, on the basis of labeling or advertising claims
by the Company, that the "intended use" of any of the Company's products is for
the diagnosis, cure, mitigation, treatment or prevention of disease, the FDA can
regulate those products as drugs and require pre-market clearance for safety and
effectiveness.
On April 10, 1996, the FDA issued a statement warning consumers not to
purchase or ingest natural sources of ephedrine within dietary supplements. On
June 4, 1997, the FDA proposed a regulation that will, if it becomes effective
as proposed, significantly limit the ability of the Company to sell dietary
supplements that contain ephedrine, including the Company's AM-300. For the six
months ended June 30, 1998 and the year ended December 31, 1997, AM-300
represented 42.9 percent and 29.5 percent of the Company's net sales,
respectively. The proposed regulation was subject to comment until December 2,
1997. The proposed regulation will become
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<PAGE>
effective 180 days following issuance of the final regulation by publication
in the Federal Register. Several trade organizations in the dietary
supplement industry have commented on the proposed regulation, requesting
substantial modifications. As of June 30, 1998, the Company cannot predict
whether the FDA will make any material changes to the proposed regulation.
The labeling requirements for dietary supplements have been set forth, in a
final rule issued by the FDA on September 23, 1997, and effective with respect
to labels affixed to containers beginning after March 23, 1999. These final
regulations include how to declare nutrient content information, and the proper
detail and format required for the "Supplemental Facts" box. The new labeling
regulations will require the Company to revise a substantial number of its
labels at an undetermined, but likely immaterial, expense to the Company. Some
of the Company's product labels are being revised now to be in compliance with
the new regulations in advance of March 23, 1999.
In addition, on April 29, 1998 the FDA published a proposed rule offering
guidance and providing limitations on permissible structure/function statements
(claims as to the benefit or effect of a product or an ingredient on the body's
structure or function) to be placed on labels and in brochures. Comments on
this proposed rule are due by August 27, 1998. The Company anticipates that at
least 80 percent of the rule as proposed will become final, but this new
regulation will not significantly change the way that the FDA currently
interprets structure/function statements. Thus, the Company does not expect to
make any substantial label revisions based on any new regulation as to
structure/function statements.
Many states have also recently become active in the regulation of dietary
supplement products and may require the Company to modify the labeling or
formulation of certain products sold in those states. Furthermore; several
states either regulate or are considering regulating ephedrine-containing
products as controlled substances or are prohibiting the sale of such products
by persons other than licensed pharmacists.
Consequently, there is a risk that AM-300 may become subject to further
federal, state, local or foreign laws or regulations. These laws or regulations
could require the Company to (i) withdraw or reformulate its AM-300 product with
reduced ephedrine levels or with a substitute for ephedrine, (ii) relabel its
product with different warnings or revised directions for use, or (iii) not make
certain statements, possibly including weight loss claims, with respect to any
product containing ephedrine. While the Company believes that AM-300 could be
reformulated and relabeled, there can be no assurance in that regard or that
reformulation and relabeling would not have an adverse effect on sales of such
product or related products within the Company's product line even though such
products do not contain ephedra or ephedrine.
The Ephedra Research Foundation (the "Foundation") has contracted with a
consulting firm to carry out a clinical study concerning the safety of ephedrine
when ingested in combination with caffeine as a dietary supplement. This study
is currently being conducted at two sites, Beth Israel-Deaconess Medical Center
in Boston, affiliated with Harvard Medical School, and St. Luke's-Roosevelt
Hospital in New York City, affiliated with Columbia University. Final results
of the study are expected no later than March 1, 1999. See "--Dependence on
AM-300" and "Business--Regulation--Products."
PRODUCT CLAIMS AND ADVERTISING. The FTC and certain states regulate
advertising, product claims, and other consumer matters, including advertising
of the Company's products. In the past several years the FTC has instituted
enforcement actions against several dietary supplement companies for false or
deceptive advertising of certain products. In addition, the FTC has increased
its scrutiny of the use of testimonials, such as those utilized by the Company.
There can be no assurance that the FTC will not question the Company's past or
future advertising or other operations. Moreover, there can be no assurance
that a state will not interpret product claims presumptively valid under federal
law as illegal under that state's regulations. Furthermore, the Company's
distributors and their customers may file actions on their own behalf, as a
class or otherwise, and may file complaints with the FTC or state or local
consumer affairs offices. These agencies may take action on their own
initiative or on a referral from distributors, consumers or others, including
actions resulting in entries of consent decrees and the refund of amounts paid
by the complaining distributor or consumer, refunds to an entire class of
distributors or customers, or other damages, as well as changes in the Company's
method of doing business. A
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complaint because of a practice of one distributor, whether or not that
practice was authorized by the Company, could result in an order affecting
some or all distributors in a particular state, and an order in one state
could influence courts or government agencies in other states. Proceedings
resulting from these complaints may result in significant defense costs,
settlement payments or judgments and could have a material adverse effect on
the Company. See "Business--Regulation--Product Claims and Advertising."
NETWORK MARKETING SYSTEM. The Company's network marketing system is subject
to a number of federal and state laws and regulations administered by the FTC
and various state agencies, including without limitation securities, franchise
investment, business opportunity and criminal laws prohibiting the use of
"pyramid" or "endless chain" types of selling organizations. These regulations
are generally directed at ensuring that product sales are ultimately made to
consumers (as opposed to other distributors) and that advancement within the
network marketing system is based on sales of the Company's products, rather
than investment in the Company or other non-retail sales related criteria. The
compensation structure of a network marketing organization is very complex, and
compliance with all of the applicable regulations and laws is uncertain in light
of evolving interpretations of existing laws and regulations as well as the
enactment of new laws and regulations pertaining in general to network marketing
organizations and product distribution.
The Company has not obtained any no-action letters or advance rulings from
any federal or state securities regulator or other governmental agency
concerning the legality of the Company's operations, and the Company is not
relying on an opinion of counsel to such effect. The Company accordingly is
subject to the risk that its network marketing system could be found to be in
noncompliance with applicable laws and regulations, which could have a material
adverse effect on the Company. See "Business--Network Marketing." Such a
decision could require the Company to modify its network marketing system,
result in negative publicity, or have a negative effect on distributor morale
and loyalty. In addition, the Company's network marketing system will be
subject to regulations in foreign markets administered by foreign agencies
should the Company expand its network marketing organization into such markets.
CIVIL LITIGATION BY DISTRIBUTORS. The Company is subject to the risk of
challenges to the legality of its network marketing organization by the
Company's distributors, both individually and as a class, based on claims that
the Company's network marketing program is operated as an illegal "pyramid
scheme" in violation of federal securities laws, state unfair practice and fraud
laws and the Racketeer Influenced and Corrupt Organizations Act. Generally, an
illegal pyramid scheme is a marketing scheme that promotes "inventory loading"
(I.E., distributors' purchases of large quantities of non-returnable inventory
to obtain the full amount of compensation available under the network marketing
program) and does not encourage retail sales of the products and services to
ultimate consumers. In the event of challenges to the legality of its network
marketing organization by the Company's distributors, there is no assurance that
the Company would be able to demonstrate that its network marketing policies
were enforced and that the network marketing program and distributors'
compensation thereunder serve as safeguards to deter inventory loading and
encourage retail sales to the ultimate consumers. Proceedings resulting from
these claims could result in significant defense costs, settlement payments or
judgments, and could have a material adverse effect on the Company. A competitor
of the Company, Nutrition for Life International, Inc. ("NFLI"), a multi-level
seller of personal care and nutritional supplements, recently announced that it
had settled class action litigation brought by distributors alleging fraud in
connection with the operation of a pyramid scheme. NFLI agreed to pay in excess
of $3 million to settle claims brought on behalf of its distributors and certain
purchasers of its stock.
The Company believes that its marketing program is significantly different
from the program allegedly promoted by NFLI and that the Company's marketing
program is not in violation of anti-pyramid laws or regulations. However, there
can be no assurance that claims similar to the claims brought against NFLI and
other multi-level marketing organizations will not be made against the Company,
or that the Company would prevail in the event any such claims were made.
Furthermore, even if the Company were successful in defending against any such
claims, the costs of conducting such a defense, both in dollars spent and in
management time, could be material and adversely affect the Company's operating
results and financial condition. In addition, the negative
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publicity of such a suit could adversely affect the Company's sales and
ability to attract and retain distributors. See
"Business--Regulation--Network Marketing System."
DEPENDENCE ON AM-300. A significant portion of the Company's net sales has
been, and is expected to continue to be, dependent upon the Company's AM-300
product, which contains an ephedra herb concentrate containing naturally
occurring ephedrine. The Company's net sales of AM-300 represented approximately
42.9 percent, 29.5 percent, and 39.1 percent of net sales for the six months
ended June 30, 1998 and for fiscal years 1997 and 1996, respectively. In the
event the recently proposed FDA regulation related to products containing
ephedrine is issued as a final rule, or such products become subject to further
federal, state or local laws and regulations, the Company could be required to
(i) withdraw or reformulate its AM-300 product, (ii) relabel such product, or
(iii) not make certain statements, possibly including weight management claims,
with respect to such product. Any such event could have a material adverse
effect upon sales and results of operations of the Company. See "--Government
Regulation--Products," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations" and
"Business--Products" and "--Regulation--Products."
COMPETITION. The Company is subject to significant competition in
recruiting distributors from other network marketing organizations, including
those that market weight management, dietary supplement and personal care
products, as well as other types of products. Most of the Company's competitors
are substantially larger, offer a greater variety of products and have
considerably greater financial resources than the Company. The Company's
ability to remain competitive depends, in significant part, on the Company's
success in recruiting and retaining distributors through an attractive bonus
plan and other incentives. There can be no assurance that the Company's
programs for recruitment and retention of distributors will be successful.
In addition, the business of distributing and marketing weight management,
dietary supplements, and personal care products is highly competitive. This
market segment includes numerous manufacturers, other network marketing
companies, catalog companies, distributors, marketers, retailers and physicians
that actively compete for the business of consumers. The Company competes with
other providers of such products, especially retail outlets, based upon
convenience of purchase, price and immediate availability of the purchased
product. For the most part, the Company's competitors offering comparable
products are substantially larger and have available considerably greater
financial resources than the Company. The market is highly sensitive to the
introduction of new products or weight management plans (including various
prescription drugs) that may rapidly capture a significant share of the market.
As a result, the Company's ability to remain competitive depends in part upon
the successful introduction of new products at competitive prices. See
"Business--Competition."
PRODUCT INTRODUCTION, OBSOLESCENCE AND MARKETING. The introduction by the
Company or its competitors of new weight management, nutritional supplement and
personal care products offering increased functionality or enhanced results may
render existing products obsolete and unmarketable. Therefore, the Company's
ability to successfully introduce new products into the market on a timely basis
and achieve acceptable levels of sales has and will continue to be a significant
factor in the Company's ability to grow and remain competitive and profitable.
In addition, the nature and mix of the products offered by the Company are
important factors in attracting and maintaining the Company's network of
independent distributors, which consequently affects demand for the Company's
products. Although the Company seeks to introduce additional products each
year, the success of new products is subject to a number of conditions,
including customer acceptance. There can be no assurance that the Company's
efforts to develop innovative new products will be successful, that customers
will accept new products or that the Company will obtain required regulatory
approvals of such new products. In addition, no assurance can be given that new
products currently experiencing strong popularity and rapid growth will maintain
their sales over time. In the event the Company is unable to successfully
increase the product mix and maintain competitive product replacements or
enhancements in a timely manner in response to the introduction of new products,
competitive or otherwise, the Company's sales and earnings will be materially
and adversely affected. See "Business--Products" and "--Network Marketing."
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PRODUCT LIABILITY. The Company, like other marketers of products that are
intended to be ingested, faces an inherent risk of exposure to product liability
claims in the event that the use of its products results in injury. The Company
generally does not obtain contractual indemnification from parties manufacturing
its products. However, the Company has agreed to indemnify Tinos, L.L.C., the
licensor of Choc-Quilizer, against any product liability claims arising from the
Choc-Quilizer product marketed by the Company, and the Company has agreed to
indemnify Chemins against claims arising from products manufactured by Chemins
and marketed by the Company. Historically, the Company has relied upon its
manufacturer's product liability insurance for coverage. The Company recently
obtained product liability insurance coverage in its own name. The limits on
this coverage are $4,000,000 per occurrence and $5,000,000 aggregate. Although
the Company has never had a product liability claim, such claims against the
Company could result in material losses to the Company. See
"Business--Products--Product Procurement and Distribution."
DEPENDENCE ON KEY PERSONNEL. The Company's growth and future success
depends in part on the continued availability of certain key management
personnel, including John W. Hail, founder, Chief Executive Officer and Chairman
of the Board of the Company, and Roger P. Baresel, President, Chief Financial
Officer and a director of the Company. The Company does not maintain life
insurance covering the executive officers of the Company. The Company's
continued growth and profitability also depends in part on its ability to
attract and retain other management personnel. Although historically the
Company has not had any difficulty in attracting and retaining management
personnel, there can be no assurance that it will continue to be able to do so
in the future. See "Business--Network Marketing" and "Management--Directors and
Executive Officers."
MANAGEMENT OF GROWTH. The Company has experienced substantial growth in
sales, operations, personnel and the number of distributors, which has
challenged and will continue to challenge the Company's management and operating
resources. Continued growth will require the Company to increase its sales and
marketing, support, and administrative personnel, to increase distributor
training and support capabilities and to expand information management systems.
There can be no assurance that the Company will be able to attract and retain
the necessary personnel to accomplish its growth strategies or that it will not
experience constraints that will adversely affect its ability to satisfactorily
support its distributors. If the Company's management were to be unable to
manage growth effectively, the Company's sales and earnings could be materially
adversely affected. See "Business--Growth Strategy."
DEPENDENCE ON THIRD-PARTY MANUFACTURERS. Substantially all of the products
offered and distributed by the Company are manufactured by third-party
manufacturers pursuant to product formulations developed for the Company. The
Company does not have any written contracts with any of its suppliers or
manufacturers or commitments from any of its suppliers or manufacturers to
continue to sell products to the Company. A substantial portion of the products
purchased by the Company have been supplied by Chemins Company, Inc.
("Chemins"), which is a privately held corporation with no affiliation with the
Company. The Company believes that its relationship with Chemins is
satisfactory; however, there can be no assurance that Chemins will continue to
be a reliable supplier to the Company. The Company does not have long-term
supply agreements with Chemins or any other vendor; however, the Company
customarily enters into contracts with such third-party manufacturers to
establish the terms and conditions of product purchases. Accordingly, there is
a risk that any of the Company's suppliers or manufacturers could discontinue
selling their products to the Company for any reason. In the event any of the
third-party manufacturers were to become unable or unwilling to continue to
provide the products in required volumes, the Company would be required to
identify and obtain acceptable replacement manufacturing sources, and no
assurance can be given that any alternative manufacturing sources would become
available to the Company on a timely basis. See "Business--Products--Product
Procurement and Distribution."
EFFECT OF UNFAVORABLE PUBLICITY. The Company believes the weight
management and dietary supplement products market is affected by national media
attention regarding the consumption of such products. There can be no assurance
that future scientific research or publicity will not be unfavorable to the
weight management and dietary supplement markets or any particular product, or
be inconsistent with earlier favorable research or publicity. Future reports of
research that are perceived as less favorable or that question earlier research
could have a material adverse effect on the operations of the Company. Because
of the Company's dependence upon
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consumer perceptions, adverse publicity associated with illness or other
adverse effects resulting from the consumption of the Company's products, or
any similar products distributed by other companies, could have a material
adverse effect on the Company. Such adverse publicity could arise even if
the adverse effects associated with such products result from failure to
consume such products as directed. In addition, the Company may not be able
to counter the effects of negative publicity concerning the efficacy of its
products.
ABSENCE OF CLINICAL STUDIES. Although many of the ingredients in the
Company's products are vitamins, minerals, herbs and other substances for which
there is a long history of human consumption, some of the Company's products
contain ingredients, such as chromium picolinate, shark cartilage,
proanthocyanidins, citrin and colloidal minerals, as to which there is little
history of human consumption. Accordingly, no assurance can be given that the
Company's products, even when used as directed, will have the effects intended.
Although the Company takes steps to ensure that the formulation and production
of its products are safe when consumed as directed, generally the Company has
not sponsored clinical studies on the long-term effect of human consumption.
See "--Effect of Unfavorable Publicity," and "--Product Liability, and
"Business--Regulation--Products."
NON-SPECIFIC ACQUISITION STRATEGY. The Company's business plan includes
expansion and diversification of the Company's network marketing organization
and products through the acquisition of companies engaged in network marketing.
In addition to financial demands, the Company's acquisitions may have adverse
consequences, including the diversion of management's attention to the
assimilation of the acquired companies or assets; adverse effects on the
Company's results of operations, such as the amortization of acquired intangible
assets; and the possibility that the acquired company or assets will not
contribute to the Company's business, cash flows and profitability as expected.
See "Business--Growth Strategy."
RISKS OF THE OFFERING
DOLLAR COST AVERAGING. Through regularly contributing to the Plan by
purchase of the Participation Interests, even in small increments, a Participant
may minimize or maximize the adverse effects of volatile changes in the price of
the Company's Common Stock. As a fixed amount of money is regularly invested
over a long period of time, purchases are made at varying prices as the market
price for the Common Stock fluctuates. Over time, if a uniform number of shares
of stock were purchased each period, the average cost paid per share will
usually be less during lengthy periods of market price appreciation, thus
minimizing the effect of market price fluctuations. Alternatively, during
lengthy periods of market price depreciation, the average cost paid per share
will be usually higher, thus maximizing the effect of market price fluctuations.
There can be no assurance that the average cost paid per share of Common Stock
acquired by a Participant through the Plan will be less than the market price of
the Common Stock at any particular time or that a Participant's investment in
the Common Stock through participation in the Plan will in whole or in part not
be lost due to a number of factors including declining market price of the
Common Stock and general market conditions. Accordingly, there is no assurance
that a Participant's investment in the Common Stock through the Plan will result
in any profit or that a loss will not occur.
STOCK PRICE, SALES AND EARNINGS VOLATILITY. The Participation Interests
are nontransferable and accordingly a market will not develop for the
Participation Interests. However, the Common Stock to be purchased by the Plan
on behalf of purchasers of the Participation Interests is currently included on
the Nasdaq SmallCap Market and listed on the Boston Stock Exchange.
Historically the market for the Common Stock has been limited and subject to low
trading volume. There can be no assurance that an active trading market will be
maintained for the Common Stock at all times. See "Price Range of Common Stock
and Dividends." The Company's sales and earnings and, consequently, the market
price of the Common Stock may be subject to significant potential volatility
based upon, among other things, the adverse effect of non-compliance with
applicable governmental regulations; the negative effect of changes in or
interpretations of regulations that may limit or restrict the sale of certain of
the Company's products; the operation of its network marketing organization; the
expansion of its operations into new markets; the recruitment and retention of
distributors; the inability of the Company to introduce new products or the
introduction of new products by the Company's competitors; general conditions in
the weight management, dietary supplement, and personal care products
industries; and consumer perceptions of the Company's products and operations.
In particular, because the Company's products are ingested by consumers or
applied to their
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bodies, the Company is highly dependent upon consumers' perception of the
safety and quality of the products marketed by the Company. As a result,
substantial negative publicity concerning one or more of the Company's
products, especially the weight management and dietary supplement products,
could adversely affect the Company's sales and earnings as well as the market
price of the Common Stock.
Moreover, the stock market has from time to time experienced extreme price
and volume fluctuations which have particularly affected the market prices for
emerging growth companies and which often have been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock. Volatility in the market
price of a company's securities sometimes results in the filing of class action
lawsuits seeking compensation for alleged securities law violations. There can
be no assurance that such litigation will not occur in the future against the
Company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
on the Company's business and results of operations. Any adverse determination
in such litigation also could subject the Company to significant liabilities.
ACCUMULATED DEFICIT. At June 30, 1998, the Company had an accumulated
deficit of $615,372 representing accumulated losses from operations prior to
1994. See "Selected Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." There is no
assurance that future operating results will eliminate such deficit or that
additional losses from operations will not be sustained by the Company,
resulting in further increase of such accumulated deficit.
DELISTING OF COMMON STOCK; PENNY STOCK TRADING RULES. The Common Stock is
included on the Nasdaq SmallCap Market and is listed on the Boston Stock
Exchange. The continued inclusion and listing of the Common Stock on the Nasdaq
SmallCap Market and the Boston Stock Exchange is subject to certain conditions,
generally including the Common Stock having a certain minimum sale price per
share, the Company having certain minimum levels of assets, stockholders'
equity, number of shareholders, and number of outstanding publicly held shares
of Common Stock. In the event such minimum requirements for inclusion and
listing are not met, the Common Stock will be delisted and will no longer be
included on the Nasdaq SmallCap Market or the Boston Stock Exchange. In such
event, the Common Stock would then be traded in the over-the-counter market and
may become subject to the "penny stock" trading rules. See "Price Range of
Common Stock and Dividend Policy--Penny Stock Trading Rules." The
over-the-counter market is characterized as volatile in that securities traded
in such market are subject to substantial and sudden price increases and
decreases and at times price (bid and asked) information for such securities may
not be available. In addition, when there are only one or two market makers (a
dealer holding itself out as ready to buy and sell the securities on a regular
basis), there is a risk that the dealer or group of dealers may control the
market in the security and set prices that are not based on competitive forces
and the bid and asked quotations of securities traded in the over-the-counter
market may not be reliable.
PENNY STOCK TRADING RULES. In the event the Common Stock is delisted and
no longer included on the Nasdaq SmallCap Market or on the Boston Stock
Exchange, the Common Stock may become subject to the "penny stock" trading
rules. The penny stock trading rules impose additional duties and
responsibilities upon broker-dealers and salespersons effecting purchase and
sale transactions in common stock and other equity securities, including
determination of the purchaser's investment suitability, delivery of certain
information and disclosures to the purchaser, and receipt of a specific purchase
agreement from the purchaser prior to effecting the purchase transaction. In
addition, many broker-dealers will not effect transactions in penny stocks,
except on an unsolicited basis, in order to avoid compliance with the penny
stock trading rules. In the event the Common Stock becomes subject to the penny
stock trading rules, such rules may materially limit or restrict the ability of
a holder to resell such equity securities, and the liquidity typically
associated with other publicly traded equity securities may not exist. See
"Price Range of Common Stock and Dividend Policy--Penny Stock Trading Rules."
POTENTIAL LIABILITY ARISING FROM POSSIBLE RESCISSION RIGHTS OF CERTAIN
SHAREHOLDERS. In 1990, the Company established the AMS Distributor Stock Pool
(the "Pool") under which the Company's independent distributors were permitted
to participate on a voluntary basis and make contributions to the Pool and, from
such
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contributions, the administrator of the Pool purchased on a monthly basis the
Company's Common Stock in the over-the-counter market. All purchase
transactions were executed and effected through a registered broker-dealer.
In September 1995, the Oklahoma Department of Securities initiated an
investigation of the Company and the activities of the Pool. During October
1997, the Company ceased accepting additional contributions to the Pool and
effecting purchase transactions in Common Stock. As of December 31, 1997,
the Pool held approximately 245,000 shares of Common Stock. On November 4,
1997, without admitting or denying violations of the Oklahoma Securities Act,
the Company and certain of its officers and directors entered into an
agreement with the Administrator of the Oklahoma Department of Securities in
settlement of the investigation without any action being taken against the
Company and its officers and directors. See "Business--Litigation."
The agreement with the Administrator of the Oklahoma Department of
Securities does not preclude the rights of Pool participants from asserting
claims seeking and possibly obtaining recovery of their contributions to the
Pool, plus statutory interest; however, such claims are subject to applicable
state and federal statutes of limitation which may effectively eliminate a
portion of such claims. It is the position of the Company that its
administration of the Pool did not constitute the offer and sale of a security
under federal and state securities law; however, there can be no assurance that
a court would find that the Company's administration of the Pool did not
constitute the offer and sale of a security under either or both federal and
state securities laws. Even if the Company were successful in defending any
securities law claims, the assertion of such claims against the Company could
result in costly litigation and diversion of effort by the Company's management.
In addition, the Securities and Exchange Commission and state securities
regulators pursue enforcement action against the Company and its officers and
directors with respect to any violations of the federal securities laws that may
have occurred. There can be no assurance that claims asserting violations of
federal and state securities laws will not be asserted by any of the
participants in the Pool or that such participants will not prevail against the
Company in the assertion of such claims, compelling the Company to repurchase
from such participants their shares of Common Stock and pay statutory interest,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
OUTSTANDING STOCK OPTIONS AND WARRANTS. As of the date of this Prospectus,
there are (i) 1,495,000 outstanding Redeemable Common Stock Purchase Warrants,
each exercisable to purchase one share of Common Stock at an exercise price of
$3.40 on or before November 6, 2002, (ii) 337,211 outstanding 1997-A Warrants,
each exercisable to purchase one share of Common Stock at an exercise price of
$3.40 on or before November 6, 2002, (iii) 130,000 outstanding Underwriters'
Warrants, each exercisable to purchase one share of Common Stock and one
Redeemable Common Stock Purchase Warrant (which is also exercisable for the
purchase of one share of Common Stock) at an aggregate exercise price of $5.40
after November 6, 1998, and on or before November 6, 2002, (iv) 220,044
outstanding stock options granted under the Advantage Marketing Systems, Inc.
1995 Stock Option Plan, each exercisable to purchase one share of Common Stock
at an exercise price of $2.00 to $6.00 per share, and (v) 1,215,733 outstanding
stock options and other warrants, each exercisable to purchase one share of
Common Stock at an exercise price of $1.60 to $6.00 per share during periods
that expire in December 1998 through May 2007. Assuming and giving effect to
the exercise of the outstanding 1,400,777 stock options and warrants (other than
the Redeemable Common Stock Purchase Warrants, the 1997-A Warrants and
Underwriters' Warrants) issued and outstanding as of June 30, 1998, the current
shareholders would experience immediate increase, on a net tangible book value
basis, of $0.17 per share of Common Stock. During the term of the outstanding
warrants and stock options, the holders are given the opportunity to profit from
a rise in the market price of the Common Stock. Exercise of such warrants and
stock options may dilute the net book value per share of outstanding Common
Stock at the time of exercise and may be dilutive on an earnings per share
basis, which may adversely affect the trading price of the Common Stock. The
existence of the warrants and stock options may adversely affect the terms on
which the Company may obtain additional equity financing. Furthermore, the
holders are likely to exercise the warrants and stock options at a time when the
Company would otherwise be able to obtain capital on terms more favorable than
could be obtained through the exercise of such stock options and warrants. See
"Description of Securities-- Redeemable Common Stock Purchase Warrants,"
"--1997-A Warrants" and "--Other Stock Options and Warrants," "Management--Stock
Option Plan" and "Shares Eligible for Future Sale--Lock-Up Agreements" and
"--State Imposed Escrow and Lock-In Arrangements."
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COMMON STOCK ELIGIBLE FOR FUTURE SALE. Sales or availability for sale of
substantial amounts of shares of the Company's Common Stock in the public market
at any time could adversely affect the market price of the Common Stock and,
consequently, the Company's ability to raise additional capital. As of the date
of this Prospectus, the Company has 4,166,039 shares of Common Stock
outstanding, of which 3,292,547 shares are eligible for sale without regard to
volume or other limitations pursuant to Rule 144 ("Rule 144") promulgated by the
Commission under the 1933 Act, except to the extent held by an "affiliate" of
the Company as that term is defined under Rule 144. Furthermore, there are
177,862 shares of the Company's outstanding Common Stock which are "restricted
securities" that may in the future be sold in compliance with Rule 144 and that
are not subject to the lock-up, escrow and lock-in agreements discussed below.
The Company's executive officers and directors, pursuant to certain
agreements covering in the aggregate 580,533 shares of Common Stock and options
and warrants for the purchase of 675,000 shares of Common Stock, have agreed not
to sell or otherwise dispose of such shares for a period ending November 6,
1998, or such options, warrants or shares of Common Stock and all other
securities issuable upon exercise of such options or warrants for a period
ending November 6, 1999. In addition 390,406 of such shares of Common Stock and
662,000 of such options and warrants, as well as those held by certain
shareholders of the Company, are subject to certain escrow and lock-in
arrangements required by the Oklahoma Department of Securities for a period
ending November 6, 2000. Under such arrangements, the executive officers,
directors and such shareholders are not permitted to sell or otherwise dispose
of such shares of Common Stock, stock options, warrants and all other securities
issuable upon exercise of such option or warrants during such period. See
"Security Ownership of Certain Beneficial Owners and Management" and "Shares
Eligible for Future Sale--Lock-Up Agreements" and "--State Imposed Escrow and
Lock-In Arrangements."
ANTI-TAKEOVER PROVISIONS. The Company's Certificate of Incorporation and
Bylaws and the provisions of the Oklahoma General Corporation Act may make it
difficult to effect a change in control of the Company and replace incumbent
management. The Certificate of Incorporation authorizes the issuance of
Preferred Stock in classes or series having voting, redemption and conversion
rights and other rights as determined by the Board of Directors. The issuance
of such Preferred Stock may have the effect of preventing a merger, tender offer
or other takeover attempt that the Company's Board of Directors opposes. The
Company's directors are elected for staggered three-year terms, with
approximately one-third of the Board standing for election each year, which may
make it difficult to effect a change of incumbent management and control. The
Company is subject to the anti-takeover provisions of the Oklahoma General
Corporation Act, which in some circumstances may discourage a person from making
a control share acquisition (generally an acquisition of voting stock having
more than 20 percent of all voting power in the election of directors) without
shareholder approval. See "Description of Securities--Anti-Takeover
Provisions."
USE OF PROCEEDS
All proceeds of sale of the Participation Interests pursuant to this
offering received by the Company will be contributed to the Plan from which the
Annual Service Fees and monthly Transaction Fees of $5.00 and $1.25 per
Participant, respectively, will be paid to the Company and the remaining
proceeds will be utilized for the purchase of the Common Stock in the open
market. In the event the Participation Interests are sold in full, the proceeds
will be $5,000,000. All offering expenses of this offering, which are estimated
to be $90,000, will be paid by the Company without entitlement to reimbursement
from the Plan or the Participants, other than through the Participants' payments
of the Annual Service Fees and Transaction Fees. The Annual Service Fees and
Transaction Fees in excess of the offering expenses of this offering will be
utilized by the Company for payment of the administrative costs of the Plan.
-16-
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock was traded only in the over-the-counter market and was
quoted by the National Quotation Bureau, Incorporated under the symbol "AMSO"
until September 10, 1997, when the Common Stock became listed on the Boston
Stock Exchange under the symbol "AMG," which was subsequently changed to
"AMM." On November 6, 1997, the Common Stock was first included on the Nasdaq
SmallCap Market 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 split of
the outstanding Common Stock on October 29, 1996. The bid quotations reflect
inter-dealer prices without adjustment for retail markups, markdowns or
commissions and may not reflect actual transactions.
<TABLE>
<CAPTION>
Common Stock
Closing Bid Prices
--------------------------
High Low
------ -----
<S> <C> <C>
1998:
First Quarter Ended March 31........................ $ 3.38 $2.13
Second Quarter Ended June 30........................ 4.00 3.00
1997:
First Quarter Ended March 31........................ $ 6.25 $5.50
Second Quarter Ended June 30........................ 8.38 5.69
Third Quarter Ended September 30.................... 9.00 5.00
Fourth Quarter Ended December 31.................... 6.88 2.56
1996:
First Quarter Ended March 31........................ $ 6.48 $5.04
Second Quarter Ended June 30........................ 8.00 5.04
Third Quarter Ended September 30.................... 7.84 5.52
Fourth Quarter Ended December 31.................... 6.50 5.00
1995:
First Quarter Ended March 31........................ $ 2.00 $1.76
Second Quarter Ended June 30........................ 3.76 2.00
Third Quarter Ended September 30.................... 10.00 3.60
Fourth Quarter Ended December 31.................... 7.52 4.48
</TABLE>
On October 2, 1998, the closing sale price on the Nasdaq SmallCap
Market of the Common Stock was $2.13. As of October 2, 1998, there were
approximately 1,874 holders of the Common Stock.
DIVIDEND POLICY
The Company's policy is to retain earnings to support the expansion of
its operations. The Board of Directors of the Company does not intend to pay
cash dividends on the Common Stock in the foreseeable future. Any future cash
dividends will depend on future earnings, capital requirements, the Company's
financial condition and other factors deemed relevant by the Board of
Directors.
PENNY STOCK TRADING RULES
The Common Stock is included on the Nasdaq SmallCap Market, and is
listed on the Boston Stock Exchange. The continued inclusion or listing of
the Common Stock on the Nasdaq SmallCap Market and the Boston Stock Exchange
is subject to certain conditions, generally including the Common Stock having
a certain minimum sale price per share, the Company having certain minimum
levels of assets, stockholders' equity, number of shareholders, and number of
outstanding publicly held shares of Common Stock. In the event requirements
for continued inclusion or listing are not met, the Common Stock will be
delisted and no longer
-17-
<PAGE>
included on the Nasdaq SmallCap Market and the Boston Stock Exchange, will
then be traded in the over-the-counter market and may become subject to the
"penny stock" trading rules.
The penny stock trading rules impose additional duties and
responsibilities upon broker-dealers recommending the purchase of a penny
stock (by a purchaser that is not an accredited investor as defined by Rule
501(a) promulgated under the Securities Act of 1933, as amended) or the sale
of a penny stock. Among such duties and responsibilities, with respect to a
purchaser who has not previously had an established account with the
broker-dealer, the broker-dealer is required to (i) obtain information
concerning the purchaser's financial situation, investment experience, and
investment objectives, (ii) make a reasonable determination that transactions
in the penny stock are suitable for the purchaser and the purchaser (or his
independent adviser in such transactions) has sufficient knowledge and
experience in financial matters and may be reasonably capable of evaluating
the risks of such transactions, followed by receipt of a manually signed
written statement which sets forth the basis for such determination and which
informs the purchaser that it is unlawful to effectuate a transaction in the
penny stock without first obtaining a written agreement to the transaction.
Furthermore, until the purchaser becomes an established customer (I.E.,
having had an account with the dealer for at least one year or the dealer
having effected for the purchaser three sales of penny stocks on three
different days involving three different issuers), the broker-dealer must
obtain from the purchaser a written agreement to purchase the penny stock
which sets forth the identity and number of shares or units of the security
to be purchased prior to confirmation of the purchase. A dealer is obligated
to provide certain information disclosures to the purchaser of a penny stock,
including (i) a generic risk disclosure document which is required to be
delivered to the purchaser before the initial transaction in a penny stock,
(ii) a transaction-related disclosure prior to effecting a transaction in the
penny stock (I.E., confirmation of the transaction) containing bid and asked
information related to the penny stock and the dealer's and salesperson's
compensation (I.E., commissions, commission equivalents, markups and
markdowns) in connection with the transaction, and (iii) the
purchaser-customer must be furnished account statements, generally on a
monthly basis, which include prescribed information relating to market and
price information concerning the penny stocks held in the account. The penny
stock trading rules do not apply to those transactions in which a
broker-dealer or salesperson does not make any purchase or sale
recommendation to the purchaser or seller of the penny stock.
Compliance with the penny stock trading rules may affect the ability to
resell the Common Stock by a holder principally because of the additional
duties and responsibilities imposed upon the broker-dealers and salespersons
recommending and effecting sale and purchase transactions in such securities.
In addition, many broker-dealers will not effect transactions in penny
stocks, except on an unsolicited basis, in order to avoid compliance with the
penny stock trading rules. The penny stock trading rules consequently may
materially limit or restrict the liquidity typically associated with other
publicly traded equity securities. Therefore, the holder of penny stocks may
be unable to obtain on resale the quoted bid price because a dealer or group
of dealers may control the market in such securities and may set prices that
are not based totally on competitive forces. Furthermore, at times there may
be a lack of bid quotes which may mean that the market among dealers is not
active, in which case a holder of penny stocks may be unable to sell such
securities. In addition, because market quotations in the over-the-counter
market are often subject to negotiation among dealers and often differ from
the price at which transactions in securities are effected, the bid and asked
quotations of securities traded in the over-the-counter market may not be
reliable.
-18-
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1998, the actual
capitalization of the Company without giving effect to the agreement of the
Company to issue any additional shares of Common Stock or to make additional
payments in connection with the SNSI Asset Purchase (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--General--SNSI Asset Purchase"). This table should be read in
conjunction with the audited consolidated financial statements and notes
thereto of the Company appearing elsewhere in this Prospectus. See Audited
Consolidated Financial Statements of Advantage Marketing Systems, Inc.
<TABLE>
<CAPTION>
As of June 30, 1998
-------------------
<S> <C>
Current portion of long-term debt . . . . . . . . . . . . . . . . $ 122,430
Long-term debt, net of current portion. . . . . . . . . . . . . . 232,269
Stockholders' equity:
Common Stock, $.0001 par value, authorized 495,000,000
shares; issued 4,261,883 shares. . . . . . . . . . . . . . . . 426
Paid-in capital in excess of par, common stock(1). . . . . . . 10,180,109
Notes receivable for exercise of options . . . . . . . . . . . (74,000)
Retained earnings (deficit). . . . . . . . . . . . . . . . . . (615,372)
Cost of treasury stock, 78,500 shares, common. . . . . . . . . (243,673)
-----------
Total stockholders' equity . . . . . . . . . . . . . . . . . 9,247,490
-----------
Total capitalization . . . . . . . . . . . . . . . . . . $ 9,602,189
-----------
-----------
</TABLE>
- ------------------------
(1) Without giving effect to and assuming no exercise of the 1,495,000
outstanding Redeemable Common Stock Purchase Warrants, the 130,000
Underwriters' Warrants, the 337,211 outstanding 1997-A Warrants, 1,215,733
outstanding stock options and other warrants (see "Description of
Securities-- Redeemable Common Stock Purchase Warrants," "--1997-A
Warrants" and "--Other Options and Warrants"), and does not include
1,125,000 shares of Common Stock reserved for issuance under the Stock
Option Plan under which options granted for the purchase of 220,044 shares
are outstanding (see "Management--Stock Option Plan"), and additional
shares of Common Stock that may be issued in connection with the SNSI Asset
Purchase (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--General--SNSI Asset Purchase").
-19-
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial information is qualified by reference
to, and should be read in conjunction with, the consolidated financial
statements and related notes of Advantage Marketing Systems, Inc. and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this Prospectus. The selected financial
information presented below is not necessarily indicative of the future
results of operations or financial performance of the Company. See "Risk
Factors--Stock Price, Sales and Earnings Volatility." The selected financial
information presented as of and for the six months ended June 30, 1998 and
1997, is derived from the unaudited condensed consolidated financial
statements of the Company, which financial statements are contained elsewhere
in this Prospectus. In the opinion of management of the Company, the
unaudited condensed consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such information. The selected financial information as
of and for the years ended December 31, 1997 and 1996, is derived from the
audited consolidated financial statements of Advantage Marketing Systems,
Inc. contained elsewhere in this Prospectus. The Company expanded its network
marketing organization with the acquisition of Miracle Mountain
International, Inc. on May 31, 1996, Chambre International, Inc. on January
31, 1997, and the acquisition of the assets of Stay 'N Shape International,
Inc., Solution Products International, Inc., Nation of Winners, Inc., and Now
International, Inc. on April 16, 1997. As a result of such acquisitions, the
statements of operations data for the six months ended June 30, 1998 and the
year ended December 31, 1998, may not be comparable to the same period in the
preceding year or the preceding year. For the pro forma effect of the
acquisitions, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General" and Note 9. Acquisitions of the
audited consolidated financial statements of the Company as of and for each
of the three years ended December 31, 1997, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEARS ENDED
ENDED JUNE 30, DECEMBER 31,
--------------------------- ------------------------------
1998 1997 1997 1996
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . $5,870,023 $ 4,745,416 $10,192,227 $6,155,073
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . 3,791,236 3,415,086 7,271,660 4,265,905
---------- ----------- ----------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . . . 2,078,787 1,330,330 2,920,567 1,889,168
Marketing, distribution and
administrative expenses. . . . . . . . . . . . . . . . . . 1,750,924 1,139,139 2,792,879 1,561,753
---------- ----------- ----------- ----------
Income from operations . . . . . . . . . . . . . . . . 327,863 191,191 127,688 327,415
Other income (expense):
Interest, net . . . . . . . . . . . . . . . . . . . . . . . . 139,236 1,007 34,017 (10,538)
Other income. . . . . . . . . . . . . . . . . . . . . . . . . 40,720 4,115 28,017 8,667
---------- ----------- ----------- ----------
Total other income (expense). . . . . . . . . . . . . . 179,956 5,122 62,034 (1,871)
---------- ----------- ----------- ----------
Income before taxes . . . . . . . . . . . . . . . . . . . . . 507,819 196,313 189,722 325,544
Tax (expense) benefit . . . . . . . . . . . . . . . . . . . . (193,051) (74,520) (59,696) 499,613
---------- ----------- ----------- ----------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 314,768 $ 121,793 $ 130,026 $ 825,157
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Weighted average common shares
outstanding(1) . . . . . . . . . . . . . . . . . . . . . . . 4,217,894 2,390,692 2,751,771 2,135,097
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Net income per common share - basic . . . . . . . . . . . . . $ 0.07 $ 0.05 $ 0.05 $ 0.39
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Weighted average common shares outstanding -
assuming dilution . . . . . . . . . . . . . . . . . . . . . 4,718,210 3,395,362 3,762,642 3,203,485
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Net income per common share - assuming dilution . . . . . . . $ 0.04 $ 0.02 $ 0.04 $ 0.26
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEARS ENDED
ENDED JUNE 30, DECEMBER 31,
--------------------------- ------------------------------
1998 1997 1997 1996
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
OPERATING DATA:
Number of active distributors . . . . . . . . . . . . . . . . 25,100 19,000 20,400 10,600
Sales per active distributor(2) . . . . . . . . . . . . . . . $ 53 $ 59 $ 41 $ 53
Total number of products offered(3) . . . . . . . . . . . . . 103 131 101 28
CASH FLOW DATA:
Net cash provided (used) by operating activities. . . . . . . $ 918,456 $ (175,924) $ (118,587) $ 426,421
Net cash provided (used) in investing activities . . . . . . (629,451) (1,475,862) 1,692,055 (136,937)
Net cash provided (used) in financing activities. . . . . . . (437,061) 2,093,858 7,416,349 (232,002)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- ------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,064,703 $ 6,999,364 $ 655,243
Working capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,110,067 6,143,041 16,353
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,434,395 10,336,306 1,790,341
Short-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,430 145,105 76,204
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232,269 303,588 230,022
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 9,247,490 9,176,395 921,429
</TABLE>
- ------------------------
(1) Without giving effect to and assuming no exercise of the 1,495,000
outstanding Redeemable Common Stock Purchase Warrants, 130,000
Underwriters' Warrants, the 337,211 outstanding 1997-A Warrants, 1,215,733
outstanding stock options and other warrants (see "Description of
Securities--Redeemable Common Stock Purchase Warrants," "--1997-A Warrants"
and "--Other Options and Warrants"), and does not include 1,125,000 shares
of Common Stock reserved for issuance under the Stock Option Plan under
which options granted for the purchase of 220,044 are outstanding (see
"Management--Stock Option Plan"), and additional shares of Common Stock
that may be issued in connection with the SNSI Asset Purchase (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General--SNSI Asset Purchase").
(2) Monthly sales per active distributor for the period presented is computed
using a simple average.
(3) Exclusive of variations in product size, colors or similar variations of
the Company's basic product line.
-21-
<PAGE>
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 AND "SELECTED
FINANCIAL INFORMATION".
GENERAL
The Company's business over the last three years has been significantly
affected by the recently completed MMI Acquisition, the CII Acquisition and
the SNSI Asset Purchase. As a result of these acquisitions, the Company
acquired 6,790 distributors and added 114 products to its product line.
MMI ACQUISITION. Effective May 31, 1996, the Company acquired all of
the outstanding capital stock of MMI, and MMI became a wholly-owned
subsidiary of the Company. MMI was a network marketer of various third-party
manufactured nutritional supplement products. In connection with the MMI
Acquisition, the Company issued to the shareholders of MMI 20,000 shares of
Common Stock. The Company added one product to its line and 1,690 additional
distributors as a result of the MMI Acquisition.
CII ACQUISITION. Effective January 31, 1997, the Company acquired all
of the issued and outstanding capital stock of CII, and CII became a
wholly-owned subsidiary of the Company. CII was a network marketer of
various third-party manufactured cosmetics, skin care and hair care products.
In connection with the CII Acquisition, the Company issued 6,482 shares of
Common Stock to the shareholders of CII at closing and issued an additional
7,518 shares of Common Stock to the shareholders of CII on March 31, 1997,
after determination of certain liabilities. The Company added 74 products to
its line, 68 in the personal care category and six in the dietary supplement
category, and 2,100 additional distributors as a result of the CII
Acquisition.
SNSI ASSET PURCHASE. The Company purchased all of the assets, including
the network marketing organizations, of Stay 'N Shape International, Inc.,
Solution Products International, Inc., Nation of Winners, Inc., and Now
International, Inc. pursuant to an Asset Purchase Agreement dated April 16,
1997. In connection with the SNSI Asset Purchase, the Company paid cash of
$1,174,441 and issued 125,984 shares of Common Stock at closing and agreed to
either issue additional shares of the Company's Common Stock having an
aggregate market value equal to, or make a cash payment of, or combination
thereof, $750,000 and $1,050,000 on or before June 29, 1998, and May 30,
1999, respectively, subject to reduction for variance from specified sales
targets. As of June 29, 1998 the specified sales requirement had not been
met, therefore the $750,000 installment payment was reduced to zero and no
payment was required. Based upon current sales levels the Company believes
that the $1,050,000 installment payment will be reduced to zero and no
payment will be required. As a result of the SNSI Asset Purchase, the
Company added 39 products to its line, 38 in the weight management and
dietary supplement categories and one in the personal care category, and
3,000 additional distributors.
TOPPMED ASSET PURCHASE. On July 31, 1998, the Company acquired all
rights, including formulations and customer lists, for the ToppFast,
ToppStamina and ToppFitt products from ToppMed, Inc. of Los Angeles,
California for a total purchase price of $192,000 which was paid at closing.
REPURCHASE OF COMMON STOCK BY THE COMPANY. On March 4, 1998, the
Company announced that it intends to repurchase up to $1 million of the
Common Stock in the open market for cash. In connection with such
repurchase, the Company filed with the Securities and Exchange Commission
pursuant to Section 13(e)(1) of the Securities Exchange Act of 1934, as
amended, an Issuer Tender Offer Statement on March 4, 1998. As of June 30,
1998, the Company had repurchased 78,500 shares of the Common Stock. The
additional number of shares of the Common Stock that may be purchased by the
Company is not determinable as of June 30, 1998 and will depend upon a number
of factors, including the market price of the Common Stock and the amount of
funds utilized for repurchase on each date of repurchase.
UNITS OFFERING. On November 12, 1997, the Company completed the
offering of 1,495,000 units, each consisting of one share of Common Stock and
one Redeemable Common Stock Purchase Warrant (the "Units"), and the Company
received proceeds of $6,050,000 (the "Units Offering"). Accumulated offering
costs of
-22-
<PAGE>
approximately $720,000 were charged against the proceeds of the Units
Offering. In connection with the Units Offering, the Company sold to Paulson
Investment Company, Inc. and Joseph Charles & Assoc., Inc., the
representatives of underwriters of the Units Offering, warrants exercisable
for the purchase of 130,000 Units for $5.40 per Unit (the "Underwriters'
Warrants") after November 6, 1998, and on or before November 6, 2002.
WARRANT MODIFICATION OFFERING AND RIGHTS OFFERING. On January 31, 1997,
the Company distributed, at no cost, non-transferable rights ("Rights") to
the holders of record of shares of its common stock, par value $.0001 per
share. The Rights entitled the holders (the "Rights Holders") to subscribe
for and purchase up to 2,148,191 units (each unit consisting of one share of
common stock and one 1997-A warrant) for the price of $6.80 per unit (the
"Rights Offering"). The record date holders of the Company's common stock
received one Right for each share of common stock held by them as of the
record date. The Rights expired on March 17, 1997. Pursuant to the Rights,
Rights Holders could purchase one unit for each Right held.
Concurrent with the Rights Offering, the Company elected to redeem all
of its outstanding Class A and Class B common stock Purchase Warrants (the
"Public Warrants") for $.0008 per warrant (the "Warrant Redemption") on March
17, 1997. However, in connection with the Warrant Redemption, the Company,
pursuant to modification of the terms of the Public Warrants, offered to the
Public Warrant holders (the "Warrant Holders") the right to exercise the
Public Warrants to purchase units, each comprised of one share of common
stock and one 1997-A warrant, at an exercise price of $6.00 per unit (the
"Warrant Modification Offering").
The share of common stock and 1997-A warrant comprising each unit were
separately transferable immediately after the sale of the units to the Rights
Holders and Warrant Holders. Each 1997-A warrant was 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. As of January 8, 1998, the
Company reduced the exercise price of the 1997-A Warrants from $12.00 to
$3.40 and extended the exercise period from January 31, 1999 to November 6,
2002.
The units in the offering described above were offered on a best efforts
basis by the Company and its officers and directors, without commissions,
selling fees or direct or indirect remuneration. The Rights Holders and
Warrant Holders were not required to pay any brokerage commissions or fees
with respect to the exercise of their Rights or Public Warrants. The Company
paid all charges and expenses of the subscription and warrant agents.
Proceeds to the Company from the Warrant Modification Offering and the
Rights Offering (the "Offerings") were $2,154,357. Accumulated offering
costs of $323,076 were charged against the net proceeds from these offerings.
Pursuant to the Offering the Company issued 337,211 shares of common stock
and a corresponding number of 1997-A warrants.
The following discussion and analysis presents the consolidated results
of operations of the Company and MMI since completion of the MMI Acquisition
on May 31, 1996, and of the Company and CII since completion of the CII
Acquisition on January 31, 1997, and gives effect to the SNSI Asset Purchase,
since its consummation on April 16, 1997.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, selected
results of operations for (i) the six months ended June 30, 1998 and 1997,
which are derived from the unaudited condensed consolidated financial
statements of the Company, which include, in the opinion of management of the
Company, all normal recurring adjustments considered necessary for a fair
statement of results for such periods and (ii) the fiscal years ended
December 31, 1997 and 1996, 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.
-23-
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------- ----------------------------------------------
1998 1997 1997 1996
-------------------- --------------------- --------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ----------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . $5,870,023 100.0% $4,745,416 100.0% $10,192,227 100.0% $6,155,073 100.0%
Cost of sales . . . . . . . . . . . 3,791,236 64.6 3,415,086 72.0 7,271,660 71.3 4,265,905 69.3
---------- ------- ---------- ------- ----------- ------- ---------- -------
Gross profit. . . . . . . . . . 2,078,787 35.4 1,330,330 28.0 2,920,567 28.7 1,889,168 30.7
Marketing, distribution and
administrative expenses. . . . . 1,750,924 29.8 1,139,139 24.0 2,792,879 27.4 1,561,753 25.4
---------- ------- ---------- ------- ----------- ------- ---------- -------
Income from operations . . . . . 327,863 5.6 191,191 4.0 127,688 1.3 327,415 5.3
Other income (expense):
Interest, net . . . . . . . . . . . 139,236 2.4 1,007 .0 34,017 .3 (10,538) (.2)
Other income. . . . . . . . . . . . 40,720 .7 4,115 .1 28,017 .3 8,667 .2
---------- ------- ---------- ------- ----------- ------- ---------- -------
Total other income (expense) . . 179,956 3.1 5,122 .1 62,034 .6 (1,871) --
---------- ------- ---------- ------- ----------- ------- ---------- -------
Income before income taxes. . . . . 507,819 8.7 196,313 4.1 189,722 1.9 325,544 5.3
Tax (expense) benefit . . . . . . . 193,051 3.3 74,520 1.6 (59,696) (.6) 499,613 8.1
---------- ------- ---------- ------- ----------- ------- ---------- -------
Net income. . . . . . . . . . . . . $ 314,768 5.4% $ 121,793 2.6% $ 130,026 1.3% $ 825,157 13.4%
---------- ------- ---------- ------- ----------- ------- ---------- -------
---------- ------- ---------- ------- ----------- ------- ---------- -------
</TABLE>
The following table sets forth, as a percentage of net sales, selected
cost of sales detail for (i) the six months ended June 30, 1998 and 1997,
which are derived from the unaudited condensed consolidated financial
statements of the Company and (ii) the fiscal years ended December 31, 1997
and 1996, which are derived from the audited consolidated financial
statements of the Company.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------- ----------------------------------------------
1998 1997 1997 1996
-------------------- --------------------- --------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ----------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commissions and bonuses . . . . $2,347,168 40.0% $2,200,681 46.4% $2,727,240 44.3% $1,861,264 41.4%
Cost of products. . . . . . . . 1,252,035 21.3 1,018,149 21.5 1,356,367 22.0 1,081,139 24.1
Cost of shipping. . . . . . . . 192,033 3.3 196,256 4.1 182,298 3.0 103,233 2.3
---------- ------- ---------- ------- ----------- ------- ---------- -------
Cost of sales . . . . . . . $3,791,236 64.6% $3,415,086 72.0% $4,265,905 69.3% $3,045,636 67.8%
---------- ------- ---------- ------- ----------- ------- ---------- -------
---------- ------- ---------- ------- ----------- ------- ---------- -------
</TABLE>
During the six months ended June 30, 1998 and 1997, and the years ended
1997 and 1996, the Company experienced increases in net sales compared to the
preceding year. The increases were principally the result of expansion of
the Company's network of independent distributors and additions to the
Company's product line within the weight management, dietary supplement and
personal care categories. The Company expects to continue to expand its
network of independent distributors, which may result in increased sales
volume. However, there is no assurance that increased sales volume will be
achieved through expansion of the Company's network of independent
distributors, or that, if sales volume increases, the Company will realize
increased profitability.
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
Net sales during the six months ended June 30, 1998, increased by $1,124,607,
or 23.7 percent, to $5,870,023 from $4,745,416 during the six months ended
June 30, 1997. The increase was principally attributable to expansion of the
Company's network of independent distributors and increased sales of the
Company's weight management, dietary supplement and personal care products.
Through the CII Acquisition (which was consummated on January 31, 1997) and
the SNSI Asset Purchase (which was consummated on April 16, 1997), the
Company added 113 products to its product line and acquired 5,100
distributors. The distributors acquired in connection with the CII
Acquisition and the SNSI Asset Purchase contributed $344,855 to the increase
between the two periods. During the six months ended June 30, 1998, the
Company made aggregate net sales of $5,810,566 to 18,348 distributors,
compared to aggregate net sales during the same period in 1997 of $4,665,874
to 13,097 distributors. Sales per distributor per month decreased from $59
to $53 for the six months ended June 30, 1998, compared to the same period in
1997.
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<PAGE>
Cost of sales during the six months ended June 30, 1998, increased by
$376,150, or 11.0 percent, to $3,791,236 from $3,415,086 during the same
period in 1997. This increase was attributable to (i) an increase of $146,487
in distributor commissions and bonuses due to the increased level of sales,
(ii) an increase of $233,886 in the cost of products sold due to the
increased level of sales and the increased number of marketing tools made
available and (iii) a decrease of $4,223 in shipping costs due to the
increased level of sales combined with the pass through of shipping costs to
the distributors beginning in February 1998. Total cost of sales, as a
percentage of net sales, decreased to 64.6 percent during the six months
ended June 30, 1998, from 72.0 percent during the same period in 1997 due to
a decrease in distributor commissions and bonuses as a percentage of net
sales to 40.0 percent from 46.4 percent, a decrease in cost of products sold
to 21.3 percent of net sales from 21.5 percent, and a decrease in cost of
shipping to 3.3 percent of net sales from 4.1 percent. During periods of
growth, it is anticipated that the Company will from time to time offer
promotions to distributors to increase sales and their income, which if
successful will result in increases in distributor commissions and bonuses
and temporary increases in cost of sales.
The Company's gross profit increased $748,457, or 56.3 percent, to $2,078,787
for the six months ended June 30, 1998 from $1,330,330 for the same period in
1997. The gross profit increased as a percentage of net sales to 35.4
percent of net sales from 28.0 percent. The increase in the Company's gross
profit margin resulted from the decrease in cost of sales as a percentage of
net sales.
Marketing, distribution and administrative expenses increased $611,785, or
53.7 percent, to $1,750,924 during the six months ended June 30, 1998, from
$1,139,139 during the same period in 1997. This increase was attributable to
the (i) increase in payroll and employee costs related to cost of living
raises and changes in the employee mix and (ii) increase in expenses
involved in expanding investors awareness of the Company and (iii) increased
utilization of outside professional service resources due to increased levels
of activity and (iv) increase in lease expense with the addition of 10,340
square feet of warehouse and distribution space in October 1997. The balance
of the increase in marketing, distribution and administrative expenses
resulted from the higher level of activity and corresponding increases in
variable costs, such as postage, telephone, and supplies.
Income before taxes increased $311,506, or 158.7 percent, to $507,819 during
the six months ended June 30, 1998, from $196,313 during the same period in
1997. Income before taxes as a percentage of net sales increased to 8.7
percent during the six months ended June 30, 1998, from 4.1 percent during
the same period in 1997, primarily as a result of interest earned on the
investment of proceeds received from the Units Offering which was completed
in November 1997 and the increase in the Company's gross profit margin.
Income taxes during the six months ended June 30, 1998 and 1997 were $193,051
and $74,520, respectively.
Net income increased $192,975, or 158.4 percent, to $314,768 during the six
months ended June 30, 1998, from $121,793 during the same period in 1997.
This increase in net income was primarily the result of the interest earned
from the investment of proceeds received from the Units Offering which was
completed in November 1997 and the increase in the Company's gross profit
margin. Net income as a percentage of net sales increased to 5.4 percent
during the six months ended June 30, 1998, from 2.6 percent during the same
period in 1997.
COMPARISON OF 1997 AND 1996
Net sales during the year ended December 31, 1997, increased by
$4,037,154, or 65.6 percent, to $10,192,227 from $6,155,073 during the year
ended December 31, 1996. The increase was principally attributable to
expansion of the Company's network of independent distributors and increased
sales of the Company's product line within the weight management, dietary
supplement and personal care categories. Through the MMI Acquisition (which
was consummated on May 31,1996), CII Acquisition (which was consummated on
January 31, 1997) and the SNSI Asset Purchase (which was consummated on April
16, 1997), the Company added 114 products to its product line and acquired
6,790 distributors. The distributors acquired in connection with the MMI
Acquisition, the CII Acquisition and the SNSI Asset Purchase contributed
$105,290, $435,506 and $1,089,359, respectively, to the increase in net sales
between the two periods. During the year ended December 31, 1997, the Company
made aggregate net sales of $10,030,327 to 20,300 distributors, compared to
aggregate net sales during the same period in 1996 of $6,000,395 to 9,500
distributors. At December 31, 1997, the Company had
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<PAGE>
approximately 23,400 "active" distributors compared to approximately 10,600
at December 31, 1996. A distributor is considered to be "active" if he or
she has made a product purchase of $50 or more from the Company within the
previous 12 months. Sales per distributor decreased from $53 to $41 for the
year ended December 31, 1997, compared to the same period in 1996. This
decrease was due to the increase in the number of active distributors as a
result of the CII Acquisition and SNSI Asset Purchase (which were consummated
on January 31, 1997 and April 16, 1997, respectively), which new distributors
did not contribute sales during the full year ended December 31, 1997.
Cost of sales during the year ended December 31, 1997, increased by
$3,005,755, or 70.5 percent, to $7,271,660 from $4,265,905 during the same
period in 1996, reflecting the increase in sales. The increase was
attributable to an increase of (i) $1,830,115 in distributor bonuses due in
part to special promotions designed to expand the Company's distributor
network, (ii) $904,348 in the cost of products sold due in part to an
improvement in the quality of products, and (iii) $271,292 in shipping costs
due in part to an increase in shipment costs charged by the shipping
companies. Total cost of sales, as a percentage of net sales, increased to
71.3 percent during the year ended December 31, 1997, from 69.3 percent
during the same period in 1996 due to an increase in distributor bonuses as a
percentage of net sales to 44.7 percent from 44.3 percent, an increase in
cost of products sold to 22.2 percent of net sales from 22.0 percent, and an
increase in cost of shipping to 4.5 percent of net sales from 3.0 percent.
During periods of growth, it is anticipated that the Company will from
time-to-time offer promotions to distributors to increase sales and their
income, which if successful will result in increases in distributor bonuses
and temporary increases in cost of sales.
The Company's gross profit increased $1,031,399, or 54.6 percent, to
$2,920,567 for the year ended December 31, 1997 from $1,889,168 for the same
period in 1996. The gross profit decreased as a percentage of net sales to
28.7 percent of net sales from 30.7 percent. The decrease in the Company's
gross profit margin resulted from the increase in cost of sales as a percent
of net sales.
Marketing, distribution and administrative expenses increased
$1,231,126, or 78.8 percent, to $2,792,879 during the year ended December 31,
1997, from $1,561,753 during the same period in 1996. This increase was
attributable to expansion of the Company's administrative infra-structure
necessary to support increased levels of sales and distributors. Payroll and
employee costs increased by $628,568 during the year ended December 31, 1997,
as compared to the same period in 1996, due to the increase in full-time
employees to 30 during the first quarter of 1997, 38 during the second
quarter of 1997, 47 during the third quarter of 1997, and 43 during the
fourth quarter of 1997, as compared to 16, 17, 17 and 24, respectively,
during the same periods in 1996. The balance of the increase in marketing,
distribution and administrative expenses resulted from the higher level of
activity and corresponding increases in variable costs, such as postage,
telephone and supplies.
Income before taxes decreased $135,822, or 41.7 percent, to $189,722
during the year ended December 31, 1997, from $325,544 during the same period
in 1996. Income before taxes as a percentage of net sales decreased to 1.9
percent during the year ended December 31, 1997, from 5.3 percent during the
same period in 1996, primarily as a result of the increase in the Company's
marketing, distribution and administrative expenses. Income taxes were
$59,696 during the year ended December 31, 1997, while during the same period
of 1996 an income tax benefit of $499,613 was recognized. The Company
recognized a one-time tax benefit of $499,613 in 1996 primarily related to
the reversal of a deferred tax valuation allowance related to the expected
future tax benefits to be realized from operating loss carryforwards. As a
result, during 1997 the Company began reporting income tax expense for
financial reporting purposes.
Net income decreased $695,131, or 84.2 percent, to $130,026 during the
year ended December 31, 1997, from $825,157 during the same period in 1996.
This decrease in net income was primarily the result of a decrease in the
Company's gross profit margin combined with the increase in marketing,
distribution and administrative expenses in addition to the recording of
income tax expense for financial reporting purposes during the year ended
December 31, 1997. Net income as a percentage of net sales decreased to 1.3
percent during the year ended December 31, 1997, from 13.4 percent during the
same period in 1996.
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<PAGE>
PRO FORMA EFFECT OF STOCK-BASED COMPENSATION
As a portion of and in lieu of payments of salaries and consulting fees,
the Company has historically used options to attract, retain and compensate
its officers, directors, other employees and consultants. The Company also
believes that linking the compensation of its officers and directors to
increases in the value of the Common Stock achieves improved performance.
During 1997, the Company granted 493,100 options at exercise prices ranging
from $2.70 per share to $6.00 per share. Options were granted primarily for
services rendered and to ensure the future availability of those services to
the Company. Options granted pursuant to the Company's 1995 Stock Option
Plan at December 26, 1997 have a six month vesting period. During 1997,
135,695 options were exercised of which 46,945, 42,500 and 46,250 were
exercised for cash, 15,769 mature shares and notes receivable, respectively.
In addition, during this period 319,250 options were voluntarily surrendered
and canceled by the Company in exchange for an equal number of options at a
lower price, 125,000 options were canceled without exchange for new options
and 2,499 options expired. No options were granted during 1996. During the
twelve months ended December 31, 1995 the Company granted 1,189,819 stock
options (as restated for the one-for-eight reverse split of the Company's
Common Stock in October 1996). In accordance with Accounting Principles
Board Opinion No. 25 of the American Institute of Certified Public
Accountants and related interpretations, the compensation cost of such stock
options was not recognized in the consolidated financial statements of the
Company. The weighted average exercise price and calculated fair value at
the date of grant of the options granted in 1997 were $3.68 and $2.32,
respectively, utilizing the methodology prescribed under Statement of
Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. After giving effect to the weighted average fair value of such
options, the Company would have had a pro forma loss of $337,528 ($.12 per
common share) for the year ended December 31, 1997. The Company did not
grant any such options during 1996 and therefore no pro forma effect on 1996.
The weighted average exercise price and calculated fair value at the date of
grant of the options granted in 1995 were $2.77 and $1.73, respectively.
After giving effect to the weighted average fair value of such options, the
Company would have had a pro forma loss of $1,830,000 ($.86 per common share)
for the year ended December 31, 1995.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In February, 1997, the FASB issued SFAS No. 129, DISCLOSURE OF
INFORMATION ABOUT CAPITAL STRUCTURE. SFAS No. 129 establishes standards for
disclosure of information regarding an entity's capital structure. The
adoption of SFAS No. 129 in 1997 did not affect the Company's capital
structure disclosures.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, which establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and
losses) in financial statements. In addition, SFAS No. 130 requires the
Company to classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other
comprehensive income separately in the stockholders' equity section of the
consolidated balance sheet. The Company adopted SFAS No. 130 on January 1,
1998 as required and has no items of other comprehensive income to disclose.
Also in June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes
reporting standards for public companies concerning annual and interim
financial statements of their operating segments and related information.
Operating segments are components of a company about which separate financial
information is available that is regularly evaluated by the chief operating
decision maker(s) in deciding how to allocate resources and assess
performance. The Standard sets criteria for reporting disclosures about a
company's products and services, geographic areas and major customers. The
Company has only one segment, as that term is defined in SFAS No. 131,
therefore, the adoption of SFAS No. 131 in 1998 did not affect the Company's
disclosures.
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<PAGE>
SEASONALITY
No pattern of seasonal fluctuations exists due to the growth patterns
that the Company is currently experiencing. However, there can be no
assurance that the Company will not become subject to seasonal fluctuations
in operations.
YEAR 2000 COMPUTER SYSTEM COMPLIANCE
The Company has two primary computer systems both of which were
developed employing six digit date structures. Where date logic requires the
year 2000 or beyond, such structures may produce inaccurate results.
Management has substantially completed the implementation of a program to
comply with year 2000 requirements on a system-by-system basis including
information technology ("IT") and non-IT systems (E.G., microcontrollers).
Management expects the program to be complete during 1998 at which time the
Company's computer systems are expected to be year 2000 compliant.
Management has evaluated its in-house supported IT systems and found no
instances of date dependent calculations or operations that are affected by
this six digit date structure. The Company's vendor-supported IT system has
been updated and certified year 2000 compliant by the vendor. Non-IT systems
including all personal computers will be evaluated by a third party
contractor, updated if necessary, and certified as compliant during 1998.
The Company's risks associated with the year 2000 are mainly its ability to
communicate with its distributors, take orders for and ship products and pay
its employees, distributors and vendors. Although management's evaluation is
complete and vendor certifications are being obtained, a failure of the
Company's computer systems or other support systems to function adequately
with respect to year 2000 issues could have a material adverse effect on the
Company's operations. Based on progress to date, there is no need for a
contingency plan and such a plan has not been developed. The Company
estimates that the total cost of its program to make the Company's computer
systems year 2000 compliant is less than $25,000.
The Company is in the early process of contacting its major suppliers to
determine if their systems will be year 2000 compliant on a timely basis. In
the event that the Company experiences product unavailability or supply
interruptions due to year 2000 non-compliance by its suppliers, management
believes that it would be able to obtain alternative sources of its products.
A significant delay or reduction in availability of products, however, could
also have a material adverse effect on the Company's operations.
COMMITMENTS AND CONTINGENCIES
ADDITIONAL TAX LIABILITY - The Company has determined that as a result
of certain changes occurring in 1998 a potential liability for additional
taxes exists. As of the date of this report the Company cannot reasonably
determine the amount of the liability. The amount of the liability will be
determined by the results of certain ongoing negotiations which the Company
anticipates concluding within the next 90 days.
The Company believes that if the negotiations are unsuccessful, the
additional tax liability could have a net adverse impact on the Company's
earnings of as much as $372,000, and would have a material adverse impact on
the Company's results of operations and cash flows for the year ending
December 31, 1998, however the adverse impact on the Company's financial
position and liquidity would not be material.
RECENT REGULATORY DEVELOPMENTS - A significant portion of the Company's
net sales has been, and is expected to continue to be, dependent upon the
Company's AM-300 product. The Company's net sales of AM-300 represented 42.9
percent and 45.1 percent of net sales for the six months ended June 30, 1998
and 1997, respectively. One of the herbal ingredients in AM-300 is ephedra
concentrate, which contains naturally occurring ephedrine. Ephedrine
products have been the subject of adverse publicity in the United States and
other countries relating to alleged harmful effects, including the deaths of
several individuals. Currently, the Company offers AM-300 only in the United
States (except in certain states in which regulations may prohibit or
restrict the sale of such product). On April 10, 1996, the Food and Drug
Administration ("FDA") issued a statement warning consumers not to purchase
or ingest natural sources of ephedrine within dietary supplements claiming to
produce certain effects (none of which claimed for the Company's product).
On June 4, 1997, the FDA proposed a
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<PAGE>
regulation which will, if it becomes effective as proposed, significantly
limit the ability of the Company to sell AM-300 and any other weight
management products which contain ephedra or ephedrine. If the FDA's
proposed regulations were to become effective, management believes that the
impact on the Company's financial statements could be a material reduction in
sales, cost of sales and marketing, distribution and administrative expenses
and could result in material losses to the Company, but would not have a
significant adverse effect on financial position.
PRODUCT LIABILITY - The Company, like other marketers of products that
are intended to be ingested, faces an inherent risk of exposure to product
liability claims in the event that the use of its products results in injury.
The Company generally does not obtain contractual indemnification from
parties manufacturing its products. However, the Company has agreed to
indemnify Tinos, L.L.C., the licensor of Choc-Quilizer, against any product
liability claims arising from the Choc-Quilizer product marketed by the
Company, and the Company has agreed to indemnify Chemins against claims
arising from products manufactured by Chemins and marketed by the Company.
Historically, the Company has relied upon its manufacturer's product
liability insurance for coverage. The Company recently obtained product
liability insurance coverage in its own name. The limits of this coverage
are $4,000,000 per occurrence and $5,000,000 aggregate. Although the Company
has never had a product liability claim, such claims against the Company
could result in material losses to the Company.
Choc-Quilizer Agreement- In the event that the Company fails to achieve
the required contractual sales volumes provided for in the marketing
agreement with Tinos, LLC, the Company will need to (i) renegotiate the
marketing agreement or (ii) give up its marketing rights to Choc-Quilizer.
The Company does not believe that loss of the marketing rights to
Choc-Quilizer will have a material adverse effect on the Company's results of
operations, financial condition or liquidity.
LIQUIDITY AND CAPITAL RESOURCES
Prior to completion of the offerings described below, the Company's
primary source of liquidity was net cash provided by operating activities and
stockholder loans. The Company does not have any significant outside
debt-based liquidity sources.
At June 30, 1998, the Company had working capital of $6,110,067,
compared to $6,143,041 at December 31, 1997. Management believes that its
cash and cash equivalents and cash flows from operations will be sufficient
to fund its working capital needs over the next 12 months. During the six
months ended June 30, 1998, net cash provided by operating activities was
$918,456, net cash used in investing activities was $629,451, and net cash
used in financing activities was $437,061. This represented an average
monthly positive cash flow from operating activities of $153,076. The
Company had a net decrease in cash during this period of $148,056. The
Company's working capital needs over the next 12 months consist primarily of
marketing, distribution and administrative expenses and the repurchase of
common stock.
On March 4, 1998, the Company announced that it intends to repurchase up
to $1 million of the Common Stock in the open market for cash. In connection
with such repurchase, the Company filed with the Securities and Exchange
Commission pursuant to Section 13(e)(1) of the Securities Exchange Act of
1934, as amended, an Issuer Tender Offer Statement on March 4, 1998. As of
June 30, 1998, the Company had repurchased 78,500 shares of the Common Stock.
The additional number of shares of the Common Stock that may be purchased by
the Company is not determinable as of June 30, 1998 and will depend upon a
number of factors, including the market price of the Common Stock and the
amount of funds utilized for repurchase on each date of repurchase.
During the first quarter of 1998, the Company agreed to loan John W.
Hail, the Chief Executive Officer and a major shareholder of the Company, up
to $250,000. Subsequently the Company agreed to loan up to an additional
$75,000. The loan is secured, bears interest at eight percent per annum and
is due on March 31, 1999. As of June 30, 1998, the balance due on this loan
was $305,811 plus interest. The Company believes that the terms of the loan
are comparable with those that could have been obtained from an unaffiliated
lender and the loan was unanimously approved by the Company's board of
directors.
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<PAGE>
The Company made non-interest bearing advances to the John Hail Agency,
Inc. ("JHA"), a company controlled by the Chief Executive Officer of $22,000
and $87,684 during the years ended December 31, 1996 and 1995, respectively.
During the years ended December 31, 1997 and 1996, JHA made repayments to the
Company of $13,042 and $6,141 respectively. Effective June 30, 1996, the
Company adopted a policy to not make any further advances to JHA, and JHA
executed a promissory note payable to the Company with a principal balance of
$73,964, bearing interest at eight percent per annum and payable in 60
installments of $1,499 per month. As of June 30, 1998 the note has been paid
in full.
On November 12, 1997, the Company sold 1,495,000 shares of Common Stock
and 1,495,000 Redeemable Common Stock Purchase Warrants in units consisting
of one share of Common Stock and one Redeemable Common Stock Purchase Warrant
from which the Company received proceeds of $6,050,000. Accumulated offering
costs of approximately $720,000 were charged against the proceeds of the
offering. The Redeemable Common Stock Purchase Warrants are exercisable to
purchase one share of common stock for $3.40 on or before November 6, 2002.
On January 31, 1997, the Company distributed, at no cost, 2,148,191
non-transferable rights ("Rights") to its shareholders of record on such
date. Each of the Rights entitled the holder to purchase one unit
(consisting of one share of Common Stock and one 1997-A Warrant) on or before
March 17, 1997 for $6.80 per unit (the "Rights Offering"). Concurrently with
the Rights Offering, the Company redeemed its outstanding Class A and Class B
Common Stock Purchase Warrants (the "Public Warrants") for $.0008 per warrant
(the "Warrant Redemption") effective on March 17, 1997. In connection with
the Warrant Redemption, the Company modified the terms of the Public Warrants
and offered to holders of the Public Warrants (the "Warrant Holders") the
right to exercise each of the Public Warrants for the purchase of one unit
(consisting of one share of Common Stock and one 1997-A Warrant), at an
exercise price of $6.00 per unit (the "Warrant Modification Offering").
Proceeds to the Company from the Warrant Modification Offering and the Rights
Offering (the "Offerings") were $2,154,357. Accumulated offering costs of
$323,076 were charged against the proceeds of the Offerings. Pursuant to the
Offerings, the Company issued in units 337,211 shares of Common Stock and
337,211 1997-A Warrants. As of January 8, 1998, the Company reduced the
exercise price of the 1997-A Warrants from $12.00 to $3.40 and extended the
exercise period from January 31, 1999 to November 6, 2002.
In connection with the SNSI Asset Purchase, the Company agreed to make
installment purchase price payments of $750,000 and $1,050,000 by June 29,
1998 and May 30, 1999, respectively, either by deliveries of additional
shares of the Company's Common Stock or by cash payments or any combination
thereof. The $750,000 installment payment was to be reduced by the aggregate
amount that gross revenues, net of returns and allowances, during the
12-month period ended April 30, 1998, from (i) sales (other than sales of
Choc-Quilizer) of the purchased network marketing organization, sales to
Market America, Inc. (an unrelated network marketing company) and sales to
retail outlet stores, are less than $2,500,000 and (ii) the Company's sales
of Choc-Quilizer are less than $4,000,000 during such 12-month period. As of
June 29, 1998 the specified sales requirement had not been met, therefore the
$750,000 installment payment was reduced to zero and no payment was required.
Furthermore, the $1,050,000 installment payment shall also be reduced by the
aggregate amount that gross revenues, net of returns and allowances, during
the 12-month period ended March 31, 1999, from such sales are less than
$5,000,000 and less than $8,000,000, respectively, during such 12-month
period. Based upon current sales levels the Company believes that the
$1,050,000 installment payment will be reduced to zero and no payment will be
required. The value of the Common Stock to be issued and delivered, if any,
will be based upon the average of the closing prices of the Common Stock on
the last three trading days of the month preceding the month in which the
applicable 12-month period ends.
DESCRIPTION OF THE PLAN
On February 27, 1998, the Company adopted the Advantage Marketing
Systems, Inc. 1998 Distributor Stock Purchase Plan (the "Plan") to provide
the distributors of the products and services offered by the Company
("Eligible Persons") a simple and convenient method of purchasing shares of
the Company's Common Stock with minimum brokerage commissions or service
charges. The following description of certain matters relating to the Plan is
a summary and is qualified in its entirety by the provisions of the Plan as
of the date of this Prospectus
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<PAGE>
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part. See "Additional Information."
PLAN ADMINISTRATION
The Plan will be administered by the Board of Directors of the Company
or any committee appointed by the Board of Directors to administer the Plan
(the "Plan Administrator"). As of the date of this Prospectus, the Plan is
administered by a committee comprised of John W. Hail, Curtis H. Wilson and
Roger P. Baresel, each of whom is a Director of the Company. The Board of
Directors will appoint a trust company, broker-dealer or a banking instution
to serve as the Custodian of the Plan. The Custodian's duties include (i)
appointment of a member firm of the National Association of Securities
Dealers, Inc. to serve as the broker-dealer of the Plan (the
"Broker-Dealer"), (ii) establishment of the banking account of the Plan for
deposit of Participants' contributions to the Plan, (iii) directing the
designated broker-dealer to make purchases of Common Stock on behalf of the
Participants, (iv) establishing with the Plan Administrator and the
broker-dealer the procedures for withdrawal of Common Stock and, if
applicable, other Company securities from the Plan by Participants, and (v)
holding of the shares of Common Stock in its name or its nominee as so
directed by the Plan Administrator. The Custodian will appoint the
Broker-Dealer, whose duties include (i) establishing and maintaining a
brokerage account for the Plan, (ii) purchasing Common Stock on behalf of the
Participants pursuant to directions of the Custodian, (iii) furnishing to the
Plan Administrator (A) confirmations of each Common Stock purchase
transaction by the Pool and (B) monthly or quarterly account statements, (iv)
holding of the shares of Common Stock in its name or its nominee as so
directed by the Plan Administrator, (v) establishing with the Plan
Administrator and the Custodian the procedures for withdrawal of Common Stock
and other Company securities from the Plan by Participants. The Plan
Administrator will direct the Custodian and Broker-Dealer with regard to
their respective duties under the Plan by means of a written agreement or
directions.
PURPOSE AND ADVANTAGES OF THE PLAN
The Plan provides Eligible Persons electing to participate in the Plan
("Participants") an opportunity and convenient method to acquire a
proprietary interest in the Company through the purchase of Common Stock
utilizing monthly contributions to the Plan. The purpose of the Plan is to
provide an additional incentive to Participants by enabling them to acquire
stock ownership in the Company, to attract and retain persons of ability as
independent distributors of the Company, and to entice such persons to exert
their best efforts on behalf of the Company. The Plan offers Participants an
affordable way to invest, through regularly contributing small amounts into
the Plan through purchase of the Participation Interests and saving on
commissions and fees that would otherwise be associated with purchase of
Common Stock in the open market. Eligible Persons may become a Participant
by completion and delivery of a Stock Purchase Agreement to the Company
containing authorization for drafting of the monthly minimum cash investments
of $25 to purchase Common Stock through the Plan and which may be accompanied
by an initial cash investment in excess of $25. All Contributions by
Participants will be deposited in a single bank account established at the
direction of the Custodian in the name of this Plan and will not be
commingled with funds of the Company.
In addition to the savings on commissions, regularly contributing to the
Plan, even in small increments, permits a Participant to benefit from dollar
cost averaging, which may minimize or maximize the adverse effects of
volatile changes in the price of the Company's Common Stock. As a fixed
amount of money is regularly invested over a long period of time, purchases
are made at varying prices as the market price for the Common Stock
fluctuates. Over time, if a uniform number of shares of stock were purchased
each period, the average cost paid per share will usually be less during
lengthy periods of market price appreciation, thus minimizing the volatility
of price fluctuations. Alternatively, during lengthy periods of market price
depreciation, the average cost paid per share will be usually higher, thus
maximizing the volatility of price fluctuations. There can be no assurance
that the average cost paid per share of Common Stock acquired by a
Participant through the Plan will be less than the market price of the Common
Stock at any particular time or that a Participant's investment in the Common
Stock will in whole or in part not be lost due to a number of factors
including declining market price of the Common Stock and general market
conditions. Accordingly, there is no assurance that a Participant's
investment in the Common Stock through the Plan will result in any profit.
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PARTICIPATION
Participation in the Plan is entirely voluntary. The Company does not
make any recommendation concerning participation in the Plan. Participation
is not required as a requisite for becoming or continuing as a distributor of
the Company's products and services. Any Eligible Person in good standing
may participate in the Plan, provided the Eligible Person completes and
submits the Stock Purchase Agreement and satisfies any other additional
conditions that may be established by the Company following the date of this
Prospectus and as provided in the Stock Purchase Agreement then in use by the
Company.
PARTICIPATION IN THE PLAN
An Eligible Person may become a Participant in the Plan by completing
and delivering a Stock Purchase Agreement to the Company. Stock Purchase
Agreements may be obtained at any time upon written request of the Company.
Participation in the Plan by an eligible distributor will be effective upon
the Company's receipt and acceptance of such Eligible Person's properly
completed and executed Stock Purchase Agreement and shall continue until
terminated in accordance with the provisions of the Plan.
CONTRIBUTIONS TO THE PLAN; ACCOUNTS
Contributions to the Plan will be voluntary and may only be made by
Participants through the purchase of the Participation Interests. For
purposes of this offering, each Contribution to the Plan will constitute the
purchase by the contributing Participant of the number of Participation
Interests equal to the amount of such Contribution. The Company will not
contribute to the Plan. An account ("Participant Account") will be
established and maintained by the Plan Administrator for each Participant in
which such Participant's contributions through purchase of the Participation
Interests and from which purchases of Common Stock by the Plan on behalf of
such Participant will be made and recorded and payment of the Annual Service
Fees and Transaction Fees will be paid to the Company. All contributions to
the Plan will be subject to the following:
(i) Each Participant is required to make minimum monthly contributions
to the Plan of $25.00 by drafting the checking, savings or other form of
account maintained by such Participant at a financial institution pursuant to
the Stock Purchase Agreement or such other appropriate form or authorization
as may be required by the Company or the financial institution until such
time that the Company receives written notification from such Participant of
the revocation or amendment of the Stock Purchase Agreement or such other
form of authorization. Any such revocation or amendment will be effective as
of the first day of the month following the month in which the Company
receives such written notification.
(ii) Each Participant may also elect to make additional contributions to
the Plan through purchase of Participation Interests by having the Company
withhold all or any portion of the such Participant's regular gross
commissions in lieu of otherwise receiving such amount of commissions. Such
election may be made by written notification of the Company indicating the
amount of such contribution. The notification will be effective with respect
to the payment of such commission check or checks only if received by the
Company not less than five days prior to payment of such commissions.
However, the commissions payable to such Participant that may be contributed
to the Plan will first be reduced by any offsets and other reductions,
including without limitation payment of outstanding and unpaid product
purchases and expenses. No Contribution to this Plan payable from a
Participant's commission will be made on behalf of a Participant during any
period that offsets and other reductions exceed the commission payable to
such Participant. All Contributions to the Plan payable for a Participant's
commissions shall be only in $1.00 increments. The election by a Participant
to make contributions to the Plan payable from such Participant's commissions
and the termination of such election must be made in writing and received by
the Company, in accordance with the rules and procedures as shall be
established, including any amendment thereof, by the Company or the Plan
Administrator from time to time.
(iii) A Participant may also make direct contributions to the Plan in
increments of $1.00 through purchase of Participation Interests for the
purchase of Common Stock, subject to the terms and conditions of the Stock
Purchase Agreement and the Plan.
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PURCHASES OF COMMON STOCK
All purchases of Common Stock shall be subject to the following terms as
well as the terms and conditions of the Plan, the agreement with the
Broker-Dealer effecting purchases of the Common Stock and the policies and
procedures that may be adopted and established by the Plan Administrator.
Purchases of Common Stock, utilizing the Participant's contributions to the
Plan, after payment or provision for payment of the Annual Service Fees and
Transaction Fees ("Net Contributions"), received by the Plan during each
month, will be made by the Plan on behalf of Participants during the last
five Trading Days (as defined below) of such month. "Trading Days" means
those days on which securities are traded on the New York Stock Exchange.
Common Stock purchased during a month will be allocated to the each
Participant Account based on the average price paid for all shares of Common
Stock purchased during the month and the Participants' Net Contributions to
the Plan during such month.
The Custodian and Broker-Dealer shall have full discretion as to all
matters relating to purchases of Common Stock, including without limitation,
determining the number of shares of Common Stock, if any, to be purchased on
any day or at any time of that day, the prices paid for such Common Stock,
the markets on which such purchases are made, and the persons (including
other brokers and dealers) from or through whom such purchases are made.
Although not specifically required by the Plan, it is anticipated that the
Custodian and Broker-Dealer shall apply each Participant's Net Contribution
during each month, together with all other Net Contributions of other
Participants, to the purchase on behalf of each Participant the maximum
number of shares of Common Stock that can be purchased with the accumulated
Net Contributions. Common Stock purchased pursuant to the Plan will only be
purchased on the open market. Although not anticipated, any Net Contribution
remaining in the Participant Account of a Participant after the purchase of
such maximum number of shares of Common Stock at the end of each month will
be retained in the Participant Account and treated as a part of the
accumulation of Net Contributions for the following month.
The timing of all purchases and the price to be paid for shares of
Common Stock purchased pursuant to the Plan will be determined solely by the
Custodian and the Broker-Dealer. The Company, the Plan Administrator and the
Participants will not have any control or influence on such purchases.
CERTAIN PROHIBITED ACTIVITIES
Each executive officer, director and "Affiliated Person" (as defined
below) of the Company is prohibited from bidding for, purchasing, attempting
to bid for or purchase, or offering or selling any shares of Common Stock
during the five Trading Days immediately preceding and immediately following
the date on which the Plan purchases any shares of Common Stock, unless the
offer or sale of Common Stock is made pursuant to a registration statement
effective under the Securities Act of 1933, as amended, and pursuant to
registration or exemption from registration under any applicable state
securities laws in which the executive officer, director and/or Affiliated
Person of the Company is named as a selling shareholder. "Affiliated
Person" includes any person that exercises any direct or indirect influence
on, or control over (i) the amounts of Common Stock to be purchased by the
Plan, (ii) the timing of or the manner in which the Common Stock is to be
purchased by the Plan, and (iii) the selection of the Custodian or the
Broker-Dealer through which such purchases are or may be made by the Plan
VOTING OF SHARES; DIVIDENDS
The Company, the Plan Administrator, Custodian or Broker-Dealer will
transmit to each Participant all proxy statements, annual reports, meeting
notices and other shareholder communications with respect to the Common Stock
acquired pursuant to and held under the Plan for and on behalf of the
Participants. Proxies will be voted with respect to full shares of Common
Stock held on behalf of a Participant as reflected in the Participant Account
of such Participant in accordance with each Participant's instructions duly
delivered to and received by the Company or the proxy. If a Participant does
not direct the exercise of such voting rights with respect to any particular
occasion for the exercise thereof, such voting rights will not be exercised
with respect to such occasion.
All cash dividends paid on the Common Stock received in Plan's account
with the Custodian or the Broker-Dealer or its nominee will be reinvested in
additional shares of Common Stock to the extent possible. All
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cash dividends as well as all dividends or other distributions on Common
Stock, including other securities of the Company, shall be allocated among
and credited to the Participants based upon the number of shares of Common
Stock held for their benefit under the Plan on the record date of the of the
dividend or other distribution declaration.
BENEFICIARY DESIGNATION
Each individual Participant may designate his or her Beneficiary on a
beneficiary designation form provided by the Plan Administrator and such
designation may include primary and contingent beneficiaries. The
designation may be changed by a Participant at any time by completing and
delivering a new beneficiary designation form to the Plan Administrator,
which shall only be effective upon receipt by the Plan Administrator of such
form. In the absence of such written designation, the surviving spouse of
the Participant shall be deemed to be the designated beneficiary, if any, and
otherwise the estate of such Participant. In all events, the date of
determination of a Participant's beneficiary shall be the date of death of a
Participant.
PARTICIPANT REPORTS
The Company or Plan Administrator, as the case may be, shall provide
each Participant semi-annual reports on or about January 30 and July 30 of
each year of the number of shares of Common Stock acquired and held for the
Participant under the Plan.
WITHDRAWAL OF COMMON STOCK AND OTHER SECURITIES
Participants may withdraw, for resale or otherwise, at any time all or
any portion of the whole shares of Common Stock and, if applicable, other
securities of the Company held by the Plan for their benefit by providing
written notification to the Company at its offices in Oklahoma City,
Oklahoma. Such notification shall specify the number of whole shares of
Common Stock and, if applicable, other Company securities to be withdrawn
from the Plan and shall be accompanied by payment of the cost of issuance by
the Company's transfer agent of the certificate or certificates evidencing
the shares of Common Stock and other Company securities. Immediately
following receipt of such notification, the Company or Plan Administrator
shall notify the Custodian or Broker-Dealer or its nominee of the
Participant's election to withdraw the shares of Common Stock and, if
applicable, other Company Securities set forth in the notice, and immediately
as soon as practicable following receipt of such notification, the Custodian
or Broker-Dealer or its nominee shall take appropriate action to cause
issuance and delivery of the certificate or certificates evidencing such
shares of Common Stock or other securities.
The procedures for withdrawal of Common Stock and, if applicable, other
Company securities from the Plan shall be established by the Plan
Administrator, the Broker-Dealer and the Custodian setting forth the
additional procedures to be followed by Participants electing to withdraw the
Common Stock and, if applicable, other Company securities held by the Plan
for their benefit. The Plan will not sell or otherwise dispose of the Common
Stock and other Company securities held for the benefit of the Participants.
Any Participant desiring to sell shares of Common Stock or other Company
securities held for the benefit of such Participant must comply with the
withdrawal procedures prior to such sale. Each Participant shall be solely
responsible for the costs and expenses, including without limitation any
commissions, administrative fees, taxes or other costs incurred or payable in
connection with the transfer, sale or other disposition of the shares of
Common Stock and other Company securities held for the benefit of such
Participant.
COSTS AND EXPENSES
Each Participant will be obligated to pay (i) an Annual Service Fee of
$5.00 initially upon electing to participate in the Plan and thereafter
annually on January 31 of each year during which such Participant continues
to participate in the Plan and (ii) a monthly Transaction Fee of $1.25
initially during each month that a Participant makes a contribution to the
Plan. The Annual Service Fees and Transaction Fees will be paid to the
Company from each Participant's contributions to the Plan. In addition, any
brokerage commissions or service charges with respect to the purchase of
Common Stock under the Plan will be allocated to the Participants for which
Common Stock was purchased during the applicable month based upon the number
of shares and fractional shares purchased on behalf of each Participant
during such month. All brokerage commissions or service charges will be paid
from the Participants' contributions to the Plan. It is anticipated that
only discount brokers, such as Charles Schwab & Co., Inc., Waterhouse
Securities Inc., Olde Discount Corporation, will be selected by the Custodian
to effectuate
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purchases of the Common Stock on behalf of the Plan. As an example, the
published or advertised minimum and maximum commission rates of Charles
Schwab & Co., Inc. for transactions in stocks is the greater of $39 per trade
or $55 for the first 100 shares, plus $.55 per share thereafter. The
commission rates of discount brokers varies from broker to broker and size of
the purchase or sale transaction, and are subject to further variation by
changes in previously published commission rates. The Company will pay all
other expenses and costs of administering the Plan. Participants will be
solely responsible for payment of any commissions, fees, administrative
costs, taxes or other expenses with respect to the sale, transfer or other
disposition of shares of Common Stock and, if applicable, other securities of
the Company following their withdrawal by Participants from the Plan.
NON-TRANSFERABILITY OF PARTICIPATION INTERESTS
No rights of a Participant under this Plan, including without limitation
the rights in and to the Participation Interests and the Participant Account
of such Participant, are assignable by the Participant other than by will or
operation of law. Any attempt by a Participant or other person to assign,
alienate, or create a security interest in or otherwise encumber, any of the
Participant's interest under this Plan, or to subject the same to attachment,
execution, garnishment or other legal or equitable process will be void.
TERMINATION OF PARTICIPATION UNDER THE PLAN.
A Participant's participation in this Plan shall immediately terminate
if and when (i) the Participant voluntarily elects to cancel its
participation in this Plan (such cancellation to be effective as of the date
of receipt by the Company of a properly executed termination form evidencing
such termination); or (ii) the Participant ceases to be eligible to
participate in the Plan by reason of the termination of the Participant as an
Eligible Person, the Participant's death (if an individual), dissolution or
liquidation, or otherwise.
Upon any termination of participation (other than by reason of a
Participant's death), any funds contributed by the Participant that remain in
the Participant Account of such Participant will be paid to the Participant,
without payment of interest thereon, and any whole shares of Common Stock
and, if applicable, other securities of the Company held by the Plan for the
benefit of the Participant shall be delivered to the Participant as a
withdrawal of such Common Stock and other securities from the Plan. Upon
termination of participation by reason of a Participant's death, any funds
contributed by the Participant that remain in the Participant Account of such
Participant shall be paid, without payment of interest thereon, and any
shares of Common Stock and, if applicable, other securities of the Company
held by the Plan for the benefit of the Participant will be disbursed and
distributed to the designated beneficiary or beneficiaries of the Participant
or the estate of the Participant. See "--Beneficiary Designation." Any
fractional shares of Common Stock and, if applicable, other securities of the
Company to be delivered to a Participant upon termination of participation
shall be rounded to the next whole share if such fraction is greater than .5
or, if .5 or less, shall be retained by the Plan.
A Participant whose participation in the Plan is terminated may, after a
period of one month from the date participation is terminated, elect to again
participate in this Plan so long as the Participant continues to be an
Eligible Person and completes and delivers to the Company a written request
to resume participation in the Plan.
TERM, MODIFICATION AND TERMINATION OF PLAN
The Plan became effective on February 27, 1998, and will continue in
effect until February 27, 2008, unless earlier terminated by the Company.
The Board of Directors of the Company may at any time and from time to time
amend, extend, modify, suspend or terminate the Plan. No shares of Common
Stock may be purchased pursuant to the Plan subsequent to its termination.
INDEMNIFICATION; LIABILITY LIMITATION
The Company has agreed to indemnify the Plan Administrator and each
member of any committee serving as Plan Administrator and the Custodian
against certain liabilities and expenses by reason of the fact that any one
of them served as Plan Administrator or member of any committee serving as
Plan Administrator or Custodian of the Plan. Each of the Company, the Plan
Administrator and each member serving or having served on a committee acting
as Plan Administrator, the Broker-Dealer and Custodian will not be
responsible or liable for
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any act done in good faith or for any good faith act or omission to act,
including, without limitation, the failure to terminate a Participant's
participation in the Plan upon such Participant's death prior to receipt of
notice in writing of such death, or any act or omission to act with respect
to the prices at which the Common Stock was purchased or the times at which
such purchases were made.
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BUSINESS
The Company markets a product line consisting of approximately 103
products in three categories; weight management, dietary supplement and
personal care products through a network marketing organization in which
independent distributors purchase products for resale to retail customers as
well as for their own personal use. The number of the Company's active
distributors has increased from approximately 10,600 at December 31, 1996,
and 20,400 at December 31, 1997 to approximately 25,100 at June 30, 1998. An
"active" distributor is one who purchased $50 or more of the Company's
products within the preceding 12 months.
The distributors in the Company's network are encouraged to recruit
interested people to become new distributors of the Company's products. New
distributors are placed beneath the recruiting distributor in the "network"
and are referred to by the Company as being in that distributor's "downline"
organization. The Company's marketing plan is designed to provide incentives
for distributors to build, maintain and motivate an organization of recruited
distributors in their downline organization to maximize their earning
potential. Distributors generate income by purchasing the Company's products
at wholesale prices and reselling them at retail prices. Distributors also
earn bonuses on product purchases generated by the distributors in their
downline organization. See "--Network Marketing."
On an ongoing basis management reviews the Company's product line for
duplication and sales movement and makes adjustments accordingly. As of June
30, 1998, the Company's product line consists of (i) seven weight management
products, (ii) 29 dietary supplement products, (iii) 67 personal care
products consisting primarily of cosmetic and skin care products and (iv)
Dial A Doc. The Company's products are manufactured by various manufacturers
pursuant to formulations developed for the Company and are sold to the
Company's independent distributors located in all 50 states and the District
of Columbia. The Company also sells its personal care products to
distributors in Greece who do not use the Company's network marketing system.
See "--Products."
The Company believes that its network marketing system is ideally suited
to marketing weight management, dietary supplement and personal care products
because sales of such products are strengthened by ongoing personal contact
between distributors and their customers. The Company's network marketing
system appeals to a broad cross-section of people, particularly those looking
to supplement family income or who are seeking part-time work. Distributors
are given the opportunity through Company-sponsored events and training
sessions to network with other distributors, develop selling skills and
establish personal goals. The Company supplements monetary incentives with
other forms of recognition in order to motivate distributors further and to
foster an atmosphere of excitement throughout its distributor network.
KEY OPERATING STRENGTHS
The Company believes the source of its success is its support of and
compensation program for its distributors. The Company provides its
distributors with high-quality products and a highly attractive bonus program
along with extensive Company-sponsored training and motivational events and
services. The Company believes that it has established a strong operating
platform to support distributors and facilitate future growth. The key
components of this platform include the following:
- quality products, many of which emphasize herbs and other natural
ingredients to appeal to consumer demand for products that contribute
to a healthy lifestyle;
- a compensation program that permits distributors to earn income from
profits on the resale of products and residual income from reorder
bonuses on product purchases within a distributor's downline
organization, as well as to participate in various non-cash awards,
such as vacations offered through promotional programs;
- a superior communications program that seeks to effectively and
efficiently communicate with distributors by utilizing new
technologies and marketing techniques, as well as motivational events
and training seminars;
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- a continual expansion and improvement of the Company's product line
and marketing plan; and
- employment of computer technology to provide timely and accurate
product order processing, weekly bonus payment processing, detailed
distributor earnings statements and inventory management.
GROWTH STRATEGY
The Company's growth strategy is to expand its product line and network
of independent distributors to increase sales. An increase in the number of
distributors generally results in increased sales volume, and new products
create enthusiasm among distributors, serve as a promotional tool in selling
other products, and attract new distributors. Since 1995, the Company has
introduced eight new products to its product line in the weight management
and dietary supplement categories. Through the Chambre' International, Inc.
("CII") Acquisition, in 1997, the Company added 68 products to its product
line in the personal care category and six products to its product line in
the dietary supplement category. Through the Stay 'N Shape International,
Inc. ("SNSI") Asset Purchase which was consummated on April 16, 1997, the
Company added 38 products to its product line in the weight management and
dietary supplement categories and one product to its product line in the
personal care category. During 1998, the Company introduced ToppFast and Dial
A Doc, and plans to introduce several additional products. In connection
with the 1996 Miracle Mountain, Inc. ("MMI") Acquisition, the CII Acquisition
and the SNSI Asset Purchase, the Company acquired approximately 1,690, 2,100
and 3,000 additional distributors, respectively. See "--Products," "Risk
Factors--Dependence on AM-300," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General".
The Company will also seek to increase sales through initiatives
designed to enhance sales in its existing markets. Such initiatives will
include increasing the number of Company-sponsored training and motivational
events and teleconferences, hiring additional distributor support personnel
and establishing more convenient Regional Success Centers in targeted
geographic markets.
In addition, the Company will seek to grow through acquisition. The
network marketing industry, which has relatively low barriers to entry, is
fragmented and includes a number of small marketing companies, many of which
are being acquired by larger companies. The Company's strategy is to
capitalize on these market characteristics to achieve additional growth, both
in terms of distributors and product line enhancement, through the
acquisition of additional network marketing companies or the assets of such
companies.
The principal objective of the Company's acquisition strategy is to
acquire other network marketing organizations that can be combined with the
Company's network marketing organization, resulting in increased sales volume
with minimal additional administrative cost. The Company will not consummate
an acquisition unless, at the time, it is anticipated that such acquisition
will contribute to profitability and provide positive cash flows from
operations. There can be no assurance, however, that the Company will in the
future be able to acquire other network marketing organizations, or that such
acquisitions will result in increased profitability and cash flows.
The Company's growth strategy will require expanded distributor services
and support, increased personnel, expanded operational and financial systems
and implementation of additional control procedures. There can be no
assurance that the Company will be able to manage expanded operations
effectively. Furthermore, failure to implement financial, information
management, and other systems and to add control procedures could have a
material adverse effect on the Company's results of operations and financial
condition. The Company's acquisitions could involve a number of risks
including the diversion of management's attention to the assimilation of the
acquired companies or assets, adverse short-term effects on the Company's
results of operations, the amortization of acquired intangible assets, and
the possibility that the acquired network marketing organization will not
contribute to the Company's sales, profitability and cash flows, either in
the near or long term, as anticipated.
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Although the Company's business plan includes expansion and enhancement
of the Company's network marketing organization and product line through the
acquisition of businesses engaged in network marketing, there are currently
no specific plans, negotiations, agreements or understandings with respect to
any material acquisition.
Although the Company intends to focus principally on the expansion of
sales within the United States, the Company also intends to expand its sales
activities in Greece. In addition, the Company is considering expansion into
markets in other countries, although the Company has not formalized any such
planned expansion as of June 30, 1998. The Company believes there are
numerous additional international markets in which its network marketing
organization and products could prove successful.
INDUSTRY OVERVIEW
NETWORK MARKETING. The Company believes that network marketing is one
of the fastest growing channels of distribution for certain types of goods
and services.
WEIGHT MANAGEMENT AND DIETARY SUPPLEMENT PRODUCTS. The Company believes
that the weight management and dietary supplement category is expanding
because of heightened public awareness of reports about the positive effects
of weight management and dietary supplements on health. Many individuals
also use dietary supplements as a means of preventative health care. The
Company believes several factors account for the steady growth of the dietary
supplement category, including increased public awareness of the reported
health benefits of dietary supplements and favorable demographic trends
toward older Americans who are more likely to consume dietary supplements.
Over the past several years, widely publicized reports and medical
research findings have suggested a correlation between the consumption of
dietary supplements and the reduced incidence of certain diseases. The
United States government and universities generally have increased
sponsorship of research relating to dietary supplements. In addition,
Congress has established the Office of Alternative Medicine within the
National Institutes of Health to foster research into alternative medical
treatments, which may include natural remedies. Congress also recently
established the Office of Dietary Supplements in the National Institutes of
Health to conduct and coordinate research into the role of dietary
supplements in maintaining health and preventing disease.
In addition, the Company believes that the aging of the United States
population, together with a corresponding increased focus on preventative
health care measures, will continue to result in increased demand for dietary
supplement products. The Company believes these trends have helped fuel the
growth of the dietary supplement category. To meet the increased demand for
dietary supplements, a number of successful dietary supplement products have
been introduced over the past several years by the Company and others,
including function specific products for weight loss, sports nutrition,
menopause, energy and mental alertness. In addition, the use of a number of
ingredients, such as chromium picolinate, shark cartilage, proanthocyanidins,
citrin and colloidal minerals, have created opportunities for the Company and
others to offer new products.
PERSONAL CARE PRODUCTS. The Company believes that the personal care
products market is a mature category that has been historically immune to
swings in the economy. Manufacturers and distributors of personal care
products must continually improve existing products, introduce new products
and communicate product advantages to consumers. With the aging population,
there appears to be a growing demand for a wide spectrum of new products in
the area of skin care.
PRODUCTS
The Company's product line consists of products in the categories of
weight management, dietary supplements and personal care. The Company
currently markets 103 products, exclusive of variations in product size,
colors or similar variations of the Company's basic product line.
WEIGHT MANAGEMENT CATEGORY. During the six months ended June 30, 1998
and the year ended December 31, 1997, 49.0 and 36.7 percent, respectively, of
the Company's net sales were derived from the seven products in
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the weight management category that the Company markets under its Advantage
Marketing Systems label. The following products represent the majority of
the Company's product sales in the weight management category:
- AM-300--A specialized blend of herbs, including an ephedra herb
concentrate and chromium picolinate.
- AS-200--A specialized blend of herbs and nutrients in addition to
citrin and chromium picolinate.
As a result of the SNSI Asset Purchase, the Company added several
additional products to its product line in the weight management category
that are marketed under its Advantage Marketing Systems or Stay 'N Shape
labels, including Choc-Quilizer. Choc-Quilizer is an appetite suppression
product made from a compound which occurs naturally in chocolate. It was
originally developed by Dr. George Kargas to control chocolate cravings, and
is believed by Dr. Kargas to decrease the appetite for other foods as well.
DIETARY SUPPLEMENT CATEGORY. During the six months ended June 30, 1998
and the year ended December 31, 1997, 38.6 and 37.7 percent, respectively, of
the Company's net sales were derived from the 29 products in the dietary
supplement category which contain herbs, vitamins, minerals and other natural
ingredients. They are sold under the Advantage Marketing Systems, Stay 'N
Shape and Chambre' labels. The following products represent the majority of
the Company's product sales in the dietary supplement category:
- Shark Cartilage Complex--Manufactured from shark fin cartilage and a
blend of curcumin, boswellin and vanadium.
- Super Anti-Oxidant--A blend of enzyme-active and phyto-nutrient rich
whole food and herbal antioxidant concentrates including
proanthocyanidins.
- Colloidal Plus--A natural assortment of 77 plant-derived colloidal
minerals in a time release capsule.
- Chlorella--Fresh water green algae containing amino acids of protein,
nucleic acids, fibers, vitamins and minerals.
As a result of the SNSI Asset Purchase, the Company has recently added
several additional products to its line in the dietary supplement category
that are being marketed under its Advantage Marketing Systems or Stay 'N
Shape labels, including Formula of Life Colloidal Minerals, Stress-Eze and
Spark of Life.
PERSONAL CARE CATEGORY. In January 1997, the Company dramatically
expanded and improved its product line by acquiring CII and its line of skin
care, hair care, family care and cosmetic products. CII had been marketing
its products for over 24 years. During the six months ended June 30, 1998
and the year ended December 31, 1997, 2.4 and 3.1 percent of the Company's
net sales were derived from 67 personal care products marketed primarily
under the Chambre label in the personal care category. The following
products represent the majority of the Company's product sales in the
personal care category:
- NH2 Lift System--A three-part skin-care system combining enzymatic
exfoliation and isometric action to firm the skin, build muscle tone
and lift the face.
- Skin Care Collections--Include cleansing lotion, skin freshener,
oatmeal scrub, night treatment, moisturizer and protein or moisture
masque.
- Hair Care Systems--Include keratin shampoo, conditioning rinse,
reconstructor, hair hold, and style and set.
- Chambre Cosmetics--Include foundations, mascara, lipliners, eyeliners,
powder and cream blushes, lip colors and eyeshadows.
DIAL A DOC. Effective May 1, 1998, the Company began offering the Dial
A Doc service to members of its monthly auto-ship program. Dial A Doc is a
24 hour a day service which allows participants to speak with and ask
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questions of board certified, private practice physicians anytime, seven days
a week. Members access the service through a toll-free telephone number and a
personal identification number.
PROMOTIONAL MATERIALS. The Company also derives revenues from the sale
of various educational and promotional materials designed to aid its
distributors in maintaining and building their businesses. Such materials
include various sales aids, informational videotapes and cassette recordings,
and product and marketing brochures.
OTHER PRODUCTS AND SERVICES. Prior to focusing on weight management,
dietary supplement and personal care products in October 1993, the Company
marketed various packages of consumer benefit services provided by
third-party providers. The consumer benefit services consist of a discount
shopping service, a grocery coupon service, a discount travel service,
pre-paid legal services, and a variety of other consumer benefits. The
services under these consumer benefit programs, except for the pre-paid legal
services, are provided by Consumer Benefit Services, Inc. The pre-paid legal
services are provided by Pre-Paid Legal Services, Inc. The Company no longer
actively markets these programs, although it continues to maintain the
existing memberships. These program membership sales represented less than
one percent of the Company's net sales for the the six months ended June 30,
1998 and the year ended December 31, 1997.
NEW PRODUCT IDENTIFICATION. The Company expands its product line
through the development and acquisition of new products. New product ideas
are derived from a number of sources, including trade publications,
scientific and health journals, the Company's management, consultants,
distributors and other outside parties. Potential product acquisitions are
identified in a similar manner. Prior to introducing new products, the
Company investigates product formulation as it relates to regulatory
compliance and other issues. See "--Regulation".
The Company does not maintain its own product development staff, but
relies upon Chemins and other manufacturers, independent researchers, vendor
research departments, and others for such services. When a new product
concept is identified or when an existing product must be reformulated, the
new product concept or reformulation project is generally submitted to
Chemins for technical development and implementation. The Company is
continually reviewing its existing products for potential enhancements to
improve their effectiveness and marketability. While the Company considers
its product formulations to be proprietary trade secrets, such formulations
are not patented and there can be no assurance that another company will not
replicate one or more of the Company's products.
RECENT REGULATORY DEVELOPMENTS. A significant portion of the Company's
net sales has been, and is expected to continue to be, dependent upon the
Company's AM-300 product. The Company's net sales of AM-300 represented 42.9
percent, 29.5 percent, and 39.1 percent of net sales for the six months ended
June 30, 1998 and the years ended 1997 and 1996, respectively. One of the
herbal ingredients in AM-300 is ephedra concentrate, which contains naturally
occurring ephedrine. Ephedrine products have been the subject of adverse
publicity in the United States and other countries relating to alleged
harmful effects, including the deaths of several individuals. Currently, the
Company offers AM-300 only in the United States (except in certain states in
which regulations may prohibit or restrict the sale of such product). On
April 10, 1996, the Food and Drug Administration ("FDA") issued a statement
warning consumers not to purchase or ingest natural sources of ephedrine
within dietary supplements claiming to produce certain effects (none of which
are claimed for the Company's product). On June 4, 1997, the FDA proposed a
regulation which will, if it becomes effective as proposed, significantly
limit the ability of the Company to sell AM-300 and any other weight
management products which contain ephedra or ephedrine. Although the Company
has never had a product liability claim, such claims against the Company
could result in material losses to the Company. See "Risk
Factors--Regulation" and "--Regulation".
PRODUCT PROCUREMENT AND DISTRIBUTION; INSURANCE. Essentially all of the
Company's product line in the weight management and dietary supplement
categories is manufactured by Chemins utilizing the Company's product
formulations. Essentially all of the Company's product line in the personal
care category is manufactured by GDMI, Inc., Custom Cosmetics, Inc. and
Columbia Cosmetics, Inc.
In connection with the SNSI Asset Purchase, the Company succeeded to the
rights and obligations of Nation of Winners International, Inc. under the
Marketing and Distribution Agreement with Tinos, L.L.C. (the
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"Marketing Agreement"), pursuant to which the Company acquired the exclusive
worldwide right to market Choc-Quilizer for the purpose of appetite
suppression and weight control through December 6, 2006. The Marketing
Agreement is subject to termination by Tinos, L.L.C. upon 60 days' written
notice in the event the Company does not obtain a sales volume of 300,000
units of 90 count capsules or caplets of Choc-Quilizer during the period from
the date of the license through December 5, 1998, or reasonable sales volumes
during each 12-month period thereafter. Based upon current sales levels it
appears that the Company will have difficulty meeting the required sales
volume, however, the Company is in the process of evaluating several
alternatives that should increase the likelihood of the Company meeting the
required sales volume.
The Company has not generally entered into long-term supply agreements
with the manufacturers of its product line or the third-party providers of
its consumer benefit services. However, the Company customarily enters into
contracts with its manufacturers and suppliers to establish the terms and
conditions of purchases. The Company's arrangements with Chemins may be
terminated by either party upon the completion of any outstanding purchase
orders. Therefore, there can be no assurance that Chemins will continue to
manufacture products for the Company or provide research, development and
formulation services. In the event the Company's relationship with any of
its manufacturers becomes impaired, the Company would be required to obtain
alternative sources for its products. In such event, there can be no
assurance that the manufacturing processes of the Company's current
manufacturers could be replicated by another manufacturer. Although the
Company has not previously experienced product unavailability or supply
interruptions, the Company believes that it would be able to obtain
alternative sources of its weight management, dietary supplement and personal
care products. A significant delay or reduction in availability of products,
however, could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company, like other marketers of products that are intended to be
ingested, faces an inherent risk of exposure to product liability claims in
the event that the use of its products results in injury. The Company
generally does not obtain contractual indemnification from parties
manufacturing its products. However, the Company has agreed to indemnify
Tinos, L.L.C., the licensor of Choc-Quilizer, against any product liability
claims arising from the Choc-Quilizer product marketed by the Company, and
the Company has agreed to indemnify Chemins against claims arising from
products manufactured by Chemins and marketed by the Company. Historically,
the Company has relied upon its manufacturer's product liability insurance
for coverage. The Company recently obtained product liability insurance
coverage in its own name. The limits on this coverage are $4,000,000 per
occurrence and $5,000,000 aggregate. Although the Company has never had a
product liability claim, such claims against the Company could result in
material losses to the Company.
All of the items in the Company's product line include a customer
satisfaction guarantee. Within 30 days of purchase, any retail customer or
distributor who is not satisfied with a Company product for any reason may
return it or any unused portion to the distributor from whom it was purchased
or to the Company for a full refund or credit toward the purchase of another
Company product. Distributors may obtain replacements from the Company for
products returned to them by retail customers if they return such products to
the Company on a timely basis. Furthermore, in most jurisdictions, the
Company maintains a buy-back program pursuant to which it will repurchase
products sold to a distributor (subject to a 10 percent restocking charge),
provided that the distributor resigns from the Company and returns the
product in marketable condition within 12 months of original purchase, or
longer where required by applicable state law or regulations. The Company
believes this buy-back policy addresses a number of the regulatory compliance
issues pertaining to network marketing systems. For the six months ended
June 30, 1998 and the year ended December 31, 1997, the cost of products
returned to the Company was two and three percent of gross sales,
respectively.
The Company's product line is distributed principally from the Company's
facilities in Oklahoma City or from its Regional Success Centers. Products
are warehoused in Oklahoma City and at selected Regional Success Centers.
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NETWORK MARKETING
The Company markets its product line through independent distributors in
a network marketing organization, which consists of 25,100 "active"
distributors as of June 30, 1998. At December 31, 1997 the Company had 20,400
"active" distributors compared to 10,600 "active" distributors at December
31, 1996. A distributor is considered "active" if the distributor purchased
$50 or more of the Company's products within the preceding 12 months.
Distributors are independent contractors who purchase products directly from
the Company for resale to retail consumers. Distributors may elect to work
on a full-time or part-time basis. The Company believes that its network
marketing system appeals to a broad cross-section of people, particularly
those seeking to supplement family income, start a home business or pursue
employment opportunities other than conventional, full-time employment, and
that a majority of its distributors therefore work on a part-time basis.
Management believes that its network marketing system is ideally suited
to marketing its product line because sales of such products are strengthened
by ongoing personal contact between retail consumers and distributors, many
of whom use the Company's products themselves. Sales are made through direct
personal sales presentations as well as presentations made to groups in a
format known as "opportunity meetings" which are designed to encourage
individuals to purchase the Company's products by informing potential
customers and distributors of the Company's product line and results of
personal use, and the potential financial benefits of becoming a distributor.
The objective of the marketing program is to develop a broad based network
marketing organization of distributors within a relatively short period. The
Company's marketing efforts are typically focused on middle-income families
and individuals.
The Company's network marketing program encourages individuals to
develop their own downline network marketing organizations. Each new
distributor is linked to an existing distributor that personally enrolled the
new distributor into the Company's network marketing organization or is
linked to an existing distributor in the enrolling distributor's downline as
specified by the enrolling distributor at the time of enrollment. Growth of
a distributor's downline organization is dependent on the recruiting and
enrollment of additional distributors by the distributor or the distributors
within such distributor's downline organization.
Distributors are encouraged to assume responsibility for training and
motivation of other distributors within their downline organization and to
conduct opportunity meetings as soon as they are appropriately trained. The
Company strives to maintain a high level of motivation, morale, enthusiasm
and integrity among the members of its network marketing organization. The
Company believes this result is achieved through a combination of products,
sales incentives, personal recognition of outstanding achievement, and
quality promotional materials. Under the Company's network marketing
program, distributors purchase sales aids and brochures from the Company and
assume the costs of advertising and marketing the Company's product line to
their customers as well as the direct cost of recruiting new distributors.
The Company believes that this form of sales organization is cost efficient
for the Company because direct sales expenses are primarily limited to the
payment of bonuses, which are only incurred when products are sold.
The Company continually strives to improve its marketing strategies,
including the compensation structure within its network marketing
organization and the variety and mix of products in its line, to attract and
motivate distributors. These efforts are designed to increase distributors'
monthly product sales and the recruiting of new distributors.
To aid distributors in easily meeting the monthly personal product
purchase requirement to qualify for bonuses, the Company developed the
"Q-Club" in 1994. Under the Q-Club purchasing arrangement, distributors
establish a standing product order for an amount in excess of $50 which is
automatically charged to their credit cards or deducted from their bank
accounts each month prior to shipment of the ordered products. At June 30,
1998 and December 31, 1997 and 1996, the Company had 8,900, 7,000 and 3,800
distributors participating in the Q-Club, respectively.
Growth of the network marketing organization is in part attributable to
the Company's bonus structure which provides for payment of bonuses on
product purchases made by other distributors in a distributor's downline
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organization. Distributors derive income from several sources. First,
distributors earn profits by purchasing from the Company's product line at
wholesale prices (which are discounted up to 40 percent from suggested retail
prices) and selling the Company's product line to customers at retail.
Second, distributors who establish their own downline distributor
organizations may earn bonuses of up to 15 percent on product purchases by
distributors within the first four levels of their downline organization.
Third, distributors who have personally enrolled three active distributors
and have (i) $300 per month of Q-Club product purchases by personally
enrolled distributors on their first level and (ii) $300 per month of Q-Club
product purchases on their second level, become Directors and have the
opportunity to build an additional Director downline organization and receive
additional bonuses of four percent on product purchases by such downline
organization. Fourth, distributors who have personally enrolled six active
distributors and have (i) $600 per month of Q-Club product purchases by
personally enrolled distributors on their first level and (ii) $600 per month
of Q-Club product purchases on their second level, become Silver Directors
and have the opportunity to build an additional Silver Director downline
organization and receive additional bonuses of five percent on product
purchases by such downline organization. Fifth, Silver Directors who have
personally enrolled twelve active distributors and have (i) $1,200 per month
of Q-Club product purchases by personally enrolled distributors on their
first level and (ii) $1,200 per month of Q-Club product purchases on their
second level, become Gold Directors and have the opportunity to receive an
additional bonus of three percent on product purchases by their Silver
Director downline organization. In addition, Gold Directors have the
opportunity to receive generation bonuses of up to three percent on the
product purchases by distributors of Silver Director downline organizations
that originate from their Silver Director downline organization through four
generations. Sixth, Gold Directors who maintain the Gold Director
requirements and develop four Gold Directors, each one from a separate leg of
their downline organization, become Platinum Directors and have the
opportunity to build an additional Platinum Director downline organization
and receive additional bonuses of five percent on product purchases by such
downline organization. Combining these levels of bonuses, the Company's
total "pay-out" on products subject to bonuses is approximately 67 percent of
the bonus value of product sales. However, in the case of a distributor who
is not qualified to receive bonuses (I.E., a distributor who has not
purchased $50 or more of the Company's products during the preceding month),
the bonuses otherwise payable on the first two levels of those distributors'
downline organizations are retained by the Company. Each distributor in the
Company's network marketing organization has a Director, a Silver Director, a
Gold Director and a Platinum Director, and each Director has a Silver
Director, a Gold Director and a Platinum Director, and each Silver Director
has a Gold Director and a Platinum Director, and each Gold Director has a
Platinum Director. As of August 31, 1998, the Company has 106 Silver
Directors, 64 Gold Directors and 11 Platinum Directors.
Under the Company's Regional Success Center Program, the Company, in its
sole discretion, designates distributors to serve as Regional Success Center
Directors, and provides them special training and support. Each Regional
Success Center Director functions as a product distribution center for the
Company. As of Junet 30, 1998, the Company has 39 Regional Success Center
Directors.
The Company maintains a computerized system for processing distributor
orders and calculating bonus payments which enables it to remit such payments
promptly to distributors. The Company believes that prompt and accurate
remittance of bonuses is vital to recruiting and maintaining distributors, as
well as increasing their motivation and loyalty to the Company. The Company
makes bonus payments to its distributors weekly, based upon the previous
week's product purchases, compared to most network marketing companies that
only make monthly bonus payments. During the six months ended June 30, 1998
and the years ended December 31, 1997 and 1996, the Company paid bonuses to
3,990, 4,600 and 3,300 distributors, respectively, in the aggregate amount of
$2,347,168, $4,557,355 and $2,727,240, respectively.
The Company is committed to providing the best possible support to its
distributors. Distributors in the Company's network marketing organization
are provided training guides and are given the opportunity to participate in
Company training programs. The Company sponsors regularly scheduled
conference calls for its distributors which include testimonials from
successful distributors and satisfied customers as well as current product
and promotional information. The Company produces a monthly newsletter which
provides information on the Company, its products and network marketing
system. The newsletter is designed to help recruit new distributors by
answering commonly asked questions and includes product information and
business building
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information. The newsletter also provides a forum for the Company to give
additional recognition to its distributors for outstanding performance. In
addition, the Company regularly sponsors training sessions for its
distributors across the United States, at which distributors are provided the
opportunity to learn more about the Company's product line and selling
techniques so that they can build their businesses more rapidly. The Company
produces comprehensive and attractive four color catalogues and brochures
that display and describe the Company's product line.
Furthermore, in order to facilitate its continued growth and support
distributor activities, the Company continually upgrades its management
information and telecommunications systems. These systems are designed to
provide, among other things, financial and operating data for management,
timely and accurate product ordering, bonus payment processing, inventory
management and detailed distributor records. Since 1994, the Company has
invested more than $500,000 to enhance its computer and telecommunications
systems.
REGULATION
In the United States as well as in any foreign markets in which the
Company may sell its products, the Company will be subject to laws,
regulations, administrative determinations, court decisions and similar
constraints (as applicable, at the federal, state and local levels)
(hereinafter "regulations") including, among others, regulations pertaining
to (i) the formulation, manufacture, packaging, labeling, distribution,
importation, sale and storage of the Company's products, (ii) product claims
and advertising (including direct claims and advertising by the Company as
well as claims and advertising by distributors, for which the Company may be
held responsible), and (iii) the Company's network marketing organization.
PRODUCTS. The formulation, manufacture, packaging, storing, labeling,
advertising, distribution and sale of the Company's products are subject to
regulation by federal agencies, including the FDA, the Federal Trade
Commission (the "FTC"), the Consumer Product Safety Commission (the "CPSC"),
the United States Department of Agriculture (the "USDA"), the Environmental
Protection Agency (the "EPA") and the United States Postal Service. The
Company's activities are also regulated by various agencies of the states,
localities and foreign countries in which the Company's products are or may
be manufactured, distributed and sold. The FDA, in particular, regulates the
formulation, manufacture and labeling of weight management products, dietary
supplements, cosmetics and skin care products, such as those distributed by
the Company. FDA regulations require the Company and its suppliers to meet
relevant regulatory good manufacturing practices for the preparation,
packaging and storage of these products. Good manufacturing practices for
dietary supplements have yet to be promulgated but are expected to be
proposed. The Dietary Supplement Health and Education Act of 1994 (the
"DSHEA") revised the provisions of the Federal Food, Drug and Cosmetic Act (the
"FDCA") concerning the composition and labeling of dietary supplements
and, the Company believes, is generally favorable to the dietary supplement
industry. The DSHEA created a new statutory class of "dietary supplements."
This new class includes vitamins, minerals, herbs, amino acids and other
dietary substances for human use to supplement the diet, and the DSHEA
grandfathered, with certain limitations, dietary ingredients that were on the
market before October 15, 1994. A dietary supplement which contains a new
dietary ingredient (I.E., one not on the market before October 15, 1994) will
require evidence of a history of use or other evidence of safety establishing
that it is reasonably expected to be safe. Manufacturers of dietary
supplements which make a "statement of nutritional support" must have
substantiation that the statement is truthful and not misleading.
The majority of the Company's sales come from products that are
classified as dietary supplements under the FDCA. The labeling requirements
for dietary supplements have been set forth, in a final rule issued by the
FDA on September 23, 1997, and effective with respect to labels affixed to
containers beginning after March 23, 1999. These final regulations include
how to declare nutrient content information, and the proper detail and format
required for the "Supplemental Facts" box. The new labeling regulations will
require the Company to revise a substantial number of its labels at an
undetermined, but likely immaterial, expense to the Company. Some of the
Company's product labels are being revised now to be in compliance with the
new regulations in advance of March 23, 1999, and this effort has not proven
to be overly burdensome. Many states have also recently become active in the
regulation of dietary supplement products, and may require the Company to
modify the labeling or formulation of certain products sold in those states.
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In addition, on April 29, 1998 the FDA published a proposed rule
offering guidance and providing limitations on permissible structure/function
statements (claims as to the benefit or effect of a product or an ingredient
on the body's structure or function) to be placed on labels and in brochures.
Comments on this proposed rule were due by August 27, 1998. The Company
anticipates that at least 80 percent of the rule as proposed will become
final, but this new regulation will not significantly change the way that the
FDA currently interprets structure/function statements. Thus, the Company
does not expect to make any substantial label revisions based on any new
regulation as to structure/function statements.
As a marketer of products that are ingested by consumers, the Company is
subject to the risk that one or more of the ingredients in its products may
become the subject of adverse regulatory action. For example, one of the
ingredients in AM-300 is ephedra, an herb which contains naturally-occurring
ephedrine. The Company's manufacturer uses a powdered extract of that herb
when manufacturing AM-300. The extract is an eight percent extract which
means that every 100 milligrams of the powdered extract contains
approximately eight milligrams of naturally occurring ephedrine alkaloids.
Ephedrine containing products have been the subject of adverse publicity in
the United States and other countries relating to alleged harmful effects,
including the deaths of several individuals.
Many companies distribute products containing various amounts of
ephedrine. The FDA has received approximately 900 reports of adverse
reactions to these products; on April 10, 1996, the FDA issued a statement
warning consumers not to purchase or ingest dietary supplements containing
ephedrine that are claimed to produce such effects as euphoria, heightened
awareness, increased sexual sensations or increased energy, because these
products pose significant adverse health risks, including dizziness,
headache, gastrointestinal distress, irregular heartbeat, heart palpitations,
heart attack, strokes, seizures, psychosis and death. The Company markets
AM-300 principally as an aid in weight management.
On June 4, 1997, the FDA proposed a regulation that will, if it becomes
effective as proposed, significantly limit the ability of the Company to sell
dietary supplements that contain ephedrine, including the Company's AM-300
product. For the six months ended June 30, 1998 and the year ended December
31, 1997, it represented 42.9 percent and 29.5 percent of the Company's net
sales, respectively. The proposed regulation was subject to comment until
December 2, 1997. The proposed regulations will become effective 180 days
following its issuance as a final regulation. Several trade organizations in
the dietary supplement industry have commented on the proposed regulation,
requesting substantial modifications. As of June 30, 1998, it is not
possible to predict whether the FDA will make any material changes to the
proposed regulation.
The Company is a member of a non-profit corporation, The Ephedra
Research Foundation (the "Foundation"), which has contracted with a
consulting firm to carry out a clinical study concerning the safety of
ephedrine when ingested in combination with caffeine as a dietary supplement.
This study is currently being conducted at two sites, Beth Israel-Deaconess
Medical Center in Boston, affiliated with Harvard Medical School, and St.
Luke's-Roosevelt Hospital in New York City, affiliated with Columbia
University. Final results of the study are expected no later than March 1,
1999.
In addition, several states either regulate or are considering
regulating ephedrine-containing products as controlled substances or are
prohibiting the sale of such products by persons other than licensed
pharmacists. There is a risk that the Company's AM-300 product may become
subject to further federal, state, local or foreign laws or regulations.
These regulations could require the Company to (i) withdraw or reformulate
its AM-300 product with reduced ephedrine levels or with a substitute for
ephedra or ephedrine, (ii) relabel its product with different warnings or
revised directions for use, or (iii) not make certain statements, possibly
including weight loss claims, with respect to any product containing ephedra
or ephedrine. Even in the absence of further laws or regulation, the Company
may elect to reformulate or relabel its AM-300 product containing ephedra or
ephedrine. While the Company believes that its AM-300 product could be
reformulated and relabeled, there can be no assurance that reformulation and
relabeling would not have an adverse effect on sales even though such
products or related products would not contain ephedra or ephedrine. See
"--Products--Recent Regulatory Developments".
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In foreign markets, prior to commencing operations and prior to making
or permitting sales of its products, the Company may be required to obtain an
approval, license or certification from the country's ministry of health or
comparable agency. Prior to entering a new market in which a formal
approval, license or certificate is required, the Company will be required to
work extensively with local authorities to obtain the requisite approvals.
The approval process generally requires the Company to present each product
and product ingredient to appropriate regulators and, in some instances,
arrange for testing of products by local technicians for ingredient analysis.
Such approvals may be conditioned on reformulation of the Company's products
or may be unavailable with respect to certain products or ingredients.
PRODUCT CLAIMS AND ADVERTISING. The FTC and certain states regulate
advertising, product claims, and other consumer matters, including
advertising of the Company's products. All advertising, promotional and
solicitation materials used by distributors must be approved by the Company
prior to use. The FTC has in the past several years instituted enforcement
actions against several dietary supplement companies for false and misleading
advertising of certain products. In addition, the FTC has increased its
scrutiny of the use of testimonials, such as those utilized by the Company.
While the Company has not been the target of FTC enforcement action, there
can be no assurance that the FTC will not question the Company's advertising
or other operations in the future. In addition, there can be no assurance
that a state will not interpret product claims presumptively valid under
federal law as illegal under that state's regulations, or that future FTC
regulations or decisions will not restrict the permissible scope of such
claims. The Company also is subject to the risk of claims by distributors
and customers who may file actions on their own behalf, as a class or
otherwise, and may file complaints with the FTC or state or local consumer
affairs offices. These agencies may take action on their own initiative
against the Company for alleged advertising or product claim violations or on
a referral from distributors, consumers or others. Remedies sought in such
actions may include consent decrees and the refund of amounts paid by the
complaining distributor or consumer, refunds to an entire class of
distributors or customers, or other damages, as well as changes in the
Company's method of doing business. A complaint based on a practice of one
distributor, whether or not that practice was authorized by the Company,
could result in an order affecting some or all distributors in a particular
state, and an order in one state could influence courts or government
agencies in other states considering similar matters. Proceedings resulting
from these complaints may result in significant defense costs, settlement
payments or judgements and could have a material adverse effect on the
Company.
COMPLIANCE EFFORTS. The Company retains special legal counsel for
advice on both FDA and FTC legal issues. In particular, the Company works
closely with special legal counsel who specializes in DSHEA regulations, for
label revisions, content of structure/function statements, advertising copy,
and also the FDA's position on ephedra-containing products. This
relationship reflects the Company's good faith effort to stay in full
compliance with all applicable laws governing the manufacture, labeling,
sale, distribution, and advertising of its dietary supplements.
NETWORK MARKETING SYSTEM. The Company's network marketing system is
subject to a number of federal and state regulations administered by the FTC
and various state agencies. Regulations applicable to network marketing
organizations are generally directed at ensuring that product sales are
ultimately made to consumers (as opposed to other distributors) and that
advancement within such organization be based on sales of the organization's
products, rather than investment in the organization or other non-retail
sales related criteria. For instance, in certain markets there are limits on
the extent to which distributors may earn royalties on sales generated by
distributors that were not directly sponsored by the distributor.
The Company's network marketing organization and activities are subject
to scrutiny by various state and federal governmental regulatory agencies to
ensure compliance with various types of laws and regulations, including but
not limited to securities, franchise investment, business opportunity and
criminal laws prohibiting the use of "pyramid" or "endless chain" types of
selling organizations. The compensation structure of such selling
organizations is very complex, and compliance with all of the applicable laws
is uncertain in light of evolving interpretation of existing laws and the
enactment of new laws and regulations pertaining to this type of product
distribution. The Company has an ongoing compliance program with assistance
from counsel experienced in the laws and regulations pertaining to network
sales organizations. The Company is not aware of any legal actions
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pending or threatened by any governmental authority against the Company
regarding the legality of the Company's network marketing operations.
The Company currently has independent distributors in all 50 states and
the District of Columbia. The Company reviews the requirements of various
states as well as seeks legal advice regarding the structure and operation of
its selling organization to ensure that it complies with all of the
applicable laws pertaining to network sales organizations. On the basis of
these efforts and the experience of its management, the Company believes that
it is in compliance with all applicable federal and state regulatory
requirements. Although the Company believes that the structure and operation
of its network marketing organization complies with all of the applicable
laws pertaining to network sales organizations, the Company has not obtained
any no-action letters or advance rulings from any federal or state security
regulator or other governmental agency concerning the legality of the
Company's operations, nor is the Company relying on an opinion of counsel to
such effect. The Company accordingly remains subject to the risk that, in
one or more of its markets, its marketing system could be found to not be in
compliance with applicable regulations. Failure by the Company to comply
with these regulations could have a material adverse effect on the Company in
a particular market or in general.
The Company is subject to the risk of challenges to the legality of its
network marketing organization, including claims by the Company's
distributors, both individually and as a class, that the Company's network
marketing program is operated as an illegal "pyramid scheme" in violation of
federal securities laws, state unfair practice and fraud laws and the
Racketeer Influenced and Corrupt Organizations Act ("RICO"). Two important
FTC cases have established legal precedent for determining whether a network
marketing program constitutes an illegal pyramid scheme. The first, IN RE
KOSCOT INTERPLANETARY, INC., 86 F.T.C. 1106 (1975), set forth a standard for
determining whether a marketing system constituted a pyramid scheme. Under
the KOSCOT standard, a pyramid scheme is characterized by the participants'
payment of money to a company in return for (i) the right to sell a product
and (ii) the right to receive, in return for recruiting other participants
into the program, rewards that are unrelated to sales of the product to
ultimate users. Applying the KOSCOT standard in IN RE AMWAY CORP., 93 F.T.C.
618 (1979), the FTC determined that a company will not be classified as
operating a pyramid scheme if the company adopts and enforces policies that
in fact encourage retail sales to consumers and prevent "inventory loading"
(I.E., distributors' purchases of large quantities of non-returnable
inventory to obtain the full amount of compensation available under the
system). In AMWAY, the FTC found that the marketing system of Amway
Corporation ("Amway") did not constitute a pyramid scheme, noting the
following Amway policies: (i) participants were required to buy back, from
any person they recruited, any saleable, unsold inventory upon the recruit's
leaving Amway; (ii) every participant was required to sell at wholesale or
retail at least 70 percent of the products bought in a given month in order
to receive a bonus for that month; and (iii) in order to receive a bonus in a
month, each participant was required to submit proof of retail sales made to
10 different consumers.
The Company believes that its network marketing system would not be
classified as a pyramid scheme under the standards set forth in KOSCOT,
AMWAY, and other applicable law. In particular, in most jurisdictions, the
Company maintains an inventory buy-back program to address the problem of
"inventory loading." Pursuant to this program, the Company will repurchase
products sold to a distributor (subject to a 10 percent restocking charge)
provided that the distributor resigns from the Company and returns the
product in marketable condition within 12 months of original purchase, or
longer where required by applicable state law or regulations. The Company's
literature provided to distributors describes the Company's buy-back program.
In addition, pursuant to the Company's agreements with its distributors,
each distributor represents that at least 70 percent of the products he or
she buys will be sold to non-distributors. However, as is the case with
other network marketing companies, the bonuses paid by the Company to its
distributors are based on product purchases including purchases of products
that are personally consumed by the downline distributors and such products
may be considered an inventory loading purchase. Furthermore, distributors'
bonuses are based on the wholesale prices received by the Company on product
purchases or, in some cases based upon the particular product purchased, on
prices less than the wholesale prices. In the event of challenges to the
legality of its network marketing organization by distributors, the Company
would be required to demonstrate that the Company's network marketing
policies are enforced, and that the network marketing program and
distributors' compensation thereunder serve as safeguards to deter inventory
loading and encourage retail sales to the ultimate consumers.
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<PAGE>
In a recent case, WEBSTER V. OMNITRITION INTERNATIONAL, INC., 79 F.3d
776 (9th Cir. 1996), the United States Court of Appeals held that a class
action brought against Omnitrition International, Inc. ("Omnitrition"), a
multilevel marketing seller of nutritional supplements and skin care
products, should be allowed to proceed to trial. The plaintiffs, former
distributors of Omnitrition's products, alleged that Omnitrition's selling
program was an illegal pyramid scheme and claimed violations of RICO and
several federal and state fraud and securities laws. Despite evidence that
Omnitrition complied with the AMWAY standards, the court ruled that a jury
would have to decide whether Omnitrition's policies, many of which apparently
were similar to compliance policies adopted by the Company, were adequate to
ensure that Omnitrition's marketing efforts resulted in a legitimate product
marketing and distribution structure and not an illegal pyramid scheme. The
Company believes that its marketing and sales programs differ in significant
respects from those of Omnitrition, and that the Company's marketing program
complies with applicable law. A lesson from the Omnitrition case is that a
selling program which operates to only generate the minimum purchases
necessary to qualify for bonuses is suspect and that a selling program must
operate to generate purchases independently of the payment of bonuses, i.e.
"for intrinsic value", in order to have a legitimate product marketing and
distribution structure. The Company believes that its selling program
operates to generate significant purchases "for intrinsic value" as
demonstrated by its sales figures. During the month of June, 1998, 11,660 of
the Company's distributors placed a total of 14,703 orders averaging $70 in
size while only a single $50 order per month is necessary to qualify for
bonuses. In view of the holding of the court of appeals in the OMNITRITION
case, however, there can be no assurance that, if challenged, the Company
would prevail against private plaintiffs alleging violations of anti-pyramid
and securities laws. A final ruling against the Company in such a suit could
result in the imposition of a material liability against the Company.
Moreover, even if the Company were successful in defending against such suit,
the costs of such defense, both in dollars spent and in management time,
could be material and adversely affect the Company's operating results. In
addition, the negative publicity of such a suit could adversely affect the
Company's sales and ability to attract and retain distributors.
Nutrition for Life International, Inc. ("NFLI"), a competitor of the
Company and a multi-level seller of personal care and nutritional
supplements, recently announced that it had settled class action litigation
brought by distributors alleging fraud in connection with the operation of a
pyramid scheme. NFLI agreed to pay in excess of $3 million to settle claims
brought on behalf of its distributors, and related securities fraud claims
brought on behalf of certain purchasers of its stock. The Company believes
that its marketing program is significantly different from the program
allegedly promoted by NFLI and that the Company's marketing program is not in
violation of anti-pyramid laws or regulations. Two issues in the NFLI matter
were a $1,000 buy-in urged on new recruits, and the paying of commissions on
product vouchers prior to the actual delivery of product. By design, the
Company's marketing program offers no incentive to anyone to make a large
personal purchase nor does the Company use product vouchers. Actual average
order size in June, 1998 was $70. However, there can be no assurance that
claims similar to the claims brought against NFLI and other multi-level
marketing organizations will not be made against the Company, or that the
Company would prevail in the event any such claims were made. Furthermore,
even if the Company were successful in defending against any such claims, the
costs of conducting such a defense, both in dollars spent and in management
time, could be material and adversely affect the Company's operating results
and financial condition. In addition, the negative publicity of such a suit
could adversely affect the Company's sales and ability to attract and retain
distributors.
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<PAGE>
INTELLECTUAL PROPERTY
The Company uses several trademarks and tradenames in connection with
its products and operations. As of June 30, 1998, the Company had seven
federal trademark registrations with the United States Patent and Trademark
Office. The Company relies on common law trademark rights to protect its
unregistered trademarks. Common law trademark rights do not provide the
Company with the same level of protection as afforded by a United States
federal registration of a trademark. Moreover, common law trademark rights
are limited to the geographic area in which the trademark is actually used.
In addition, the Company's product formulations are not protected by patents
and are not patentable. Therefore, there can be no assurance that another
company will not replicate one or more of the Company's products.
COMPETITION
The Company is subject to significant competition in recruiting
distributors from other network marketing organizations, including those that
market products in the weight management, dietary supplement and personal
care categories, as well as other types of products. There are over 300
companies worldwide that utilize network marketing techniques, many of which
are substantially larger, offer a greater variety of products, and have
available considerably greater financial resources than the Company. The
Company's ability to remain competitive depends, in significant part, on the
Company's success in recruiting and retaining distributors through an
attractive bonus plan and other incentives. The Company believes that its
bonus plan and incentive programs provide its distributors with significant
income potential. However, there can be no assurance that the Company's
programs for recruitment and retention of distributors will continue to be
successful.
In addition, the business of marketing products in the weight
management, dietary supplement and personal care categories is highly
competitive. This market segment includes numerous manufacturers, other
network marketing companies, catalog companies, distributors, marketers,
retailers and physicians that actively compete in the sale of such products.
The Company also competes with other providers of such products, especially
retail outlets, based upon convenience of purchase and immediate availability
of the purchased product. The market is highly sensitive to the introduction
of new products or weight management plans (including various prescription
drugs) that may rapidly capture a significant share of the market. As a
result, the Company's ability to remain competitive depends in part upon the
successful introduction and addition of new products to its line.
The Company's network marketing competitors that market products in the
weight management, dietary supplement and personal care categories include
small, privately held companies, as well as larger, publicly held companies
with greater financial resources and greater product and market
diversification and distribution. The Company's competitors include Shaklee
Corporation, The A.L. Williams Corporation, Mary Kay Cosmetics, Inc., Amway
Corporation, Nutrition for Life International, Inc., and Herbalife
International, Inc. See "Risk Factors--Competition".
EMPLOYEES
As of June 30, 1998, the Company had 35 full-time employees, of whom two
were executive officers or directors, 15 were in administrative activities,
six were in marketing activities, five were in customer service activities,
and seven were in shipping activities. The Company's employees are not
represented by a labor organization. The Company considers its employee
relations to be good.
PROPERTIES
The Company maintains its executive office in 7,667 square feet at 2601
Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293 and its
warehouse and distribution center in 10,340 square feet at 4000 North
Lindsay, Oklahoma City, Oklahoma. The premises are occupied pursuant to
long-term leases which expire on May 31, 2003, and which require monthly
rental payments of $6,709 and $5,170, respectively. The Company believes
that the present space will be adequate for the next twelve months.
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<PAGE>
LITIGATION
The Company is not a party to any pending litigation. In September
1995, the Oklahoma Department of Securities commenced an investigation of the
Company related to the AMS Distributor Stock Pool (the "Pool"). The Pool,
under which the Company's independent distributors were permitted to
participant on a voluntary basis, was formed in 1990. Participants made
contributions to the Pool and, from such contributions, the administrator of
the Pool purchased on a monthly basis the Company's Common Stock in the
over-the-counter market for the participants. All purchase transactions were
executed and effected through a registered broker-dealer. All records of
ownership of the Common Stock held by the Pool were maintained at the offices
of the Company. The Pool only purchased shares of Common Stock and did not
sell shares on behalf of the participants. As of December 31, 1997, the Pool
held approximately 245,000 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. The Oklahoma Department of
Securities took the position that the offer and sale of participation rights
in the Pool violated the registration provisions of the Oklahoma Securities
Act. During October 1997, the Company ceased accepting additional
contributions to the Pool and effecting purchase transactions in the Common
Stock. On November 4, 1997, the Company, John W. Hail, Curtis H. Wilson, Sr.
and Roger P. Baresel, directors and executive officers of the Company,
entered into an agreement with the Administrator of the Oklahoma Department
of Securities in settlement of the investigation without any action having
been taken against the Company and its officers and directors. Pursuant to
such agreement, John W. Hail reimbursed the Department its costs of the
investigation without entitlement to reimbursement by the Company or any of
its other officers and directors. Under the terms of such agreement, the
Company and Messrs. Hail, Wilson and Baresel agreed to notify the Department
of any proposed offer or sale of additional securities by the Company or each
of Messrs. Hail, Wilson and Baresel pursuant to any registration exemption
under the Oklahoma Securities Act, for a period of three years ending on
November 6, 2000.
COMPANY HISTORY
EXCHANGE. Pursuant to an Agreement and Plan of Reorganization, dated
May 1, 1989, the shareholders of the Company exchanged their common stock for
800,807 shares of the common stock of Pacific Coast International, Inc., a
Delaware corporation (the "Exchange"). Prior to the Exchange, the trade or
business activities of Pacific Coast International, Inc. had been limited to
those activities associated with a public offering of its securities and
investigation of corporate acquisition alternatives as a "blank check"
company. Upon consummation of the Exchange, (i) the officers and directors of
the Company assumed management of Pacific Coast International, Inc., (ii) the
Company became a wholly owned subsidiary of Pacific Coast International,
Inc., (iii) the Company changed its name from AMS, Inc. to Advantage
Marketing Systems, Inc., (an Oklahoma Corporation) and (iv) Pacific Coast
International, Inc. changed its name to Advantage Marketing Systems, Inc.
("AMS Delaware"). Prior to the Exchange, Pacific Coast International, Inc.
and certain individuals sold, in a public offering, 225,860 shares of Common
Stock and 525,860 Class A Common Stock Purchase Warrants ("Class A Warrants")
and Class B Common Stock Purchase Warrants ("Class B Warrants"). The Class A
Warrants and Class B Warrants were redeemed on March 17, 1997.
REINCORPORATION MERGER. Effective December 11, 1995, AMS Delaware, the
former parent of the Company (formerly Pacific Coast International, Inc.),
merged with the Company pursuant to an Agreement and Plan of Merger (the
"Merger"), with the Company as the surviving corporation. As a result of the
Merger, AMS Delaware ceased to exist, and the Company succeeded to all of its
assets and liabilities. Prior to the Merger, AMS Delaware did not conduct any
business, and all operations were conducted by the Company.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each
executive officer and director of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---------------------------- --- ----------------------------------------
<S> <C> <C>
John W. Hail(1)(2) 67 Chairman of the Board, Chief Executive
Officer and Director
Curtis H. Wilson, Sr.(3) 71 Vice-Chairman of the Board and Director
Roger P. Baresel(1)(2) 42 President, Chief Financial Officer,
Secretary and Director
R. Terren Dunlap(3)(5) 52 Director
Harland C. Stonecipher(4)(5) 58 Director
</TABLE>
- ------------------------
(1) Member of the Stock Option Committee.
(2) Term as a Director expires in 1998.
(3) Term as a Director expires in 2000.
(4) Term as a Director expires in 1999.
(5) Member of Audit Committee.
Pursuant to the terms of the Company's Bylaws, the directors are divided
into three classes. Class I Directors hold office initially for a term
expiring at the annual meeting of shareholders to be held in 1999, Class II
Directors hold office initially for a term expiring at the annual meeting of
shareholders to be held in 2000, and Class III Directors hold office
initially for a term expiring at the annual meeting of shareholders to be
held in 1998. Each director will hold office for the term to which he is
elected and until his successor is duly elected and qualified. At each annual
meeting of the shareholders of the Company, the successor to a member of the
class of directors whose term expires at such meeting will be elected to hold
office for a term expiring at the annual meeting of shareholders held in the
third year following the year of his election. Executive officers are
elected by the Board of Directors and serve at its discretion.
JOHN W. HAIL is the founder of Advantage Marketing Systems, Inc. and has
served as its Chief Executive Officer and Chairman of the Board of Directors
of the Company since its inception in June 1988. During 1987 and through May
1988, Mr. Hail served as Executive Vice President, Director and Agency
Director of Pre-Paid Legal Services, Inc., a public company engaged in the
sale of legal services contracts, and also served as Chairman of the Board of
Directors of TVC Marketing, Inc., the exclusive marketing agent of Pre-Paid
Legal Services, Inc.
CURTIS H. WILSON, SR. has served as Vice-Chairman of the Board of
Directors of the Company since June 1988. From January 1984 to June 1988, Mr.
Wilson was Executive Vice President of TVC Marketing, Inc.
ROGER P. BARESEL has served as Vice President, Chief Financial Officer,
Secretary and a Director of the Company since June 1995, and in July 1995, he
became President. Mr. Baresel is a Certified Public Accountant and holds a
Master of Business Administration degree. From 1988 until joining the Company
full-time in 1995, he maintained an accounting practice, specializing in
providing consulting services to small and growing businesses and provided
consulting services to the Company.
R. TERREN DUNLAP has served as a Director of the Company since June
1995. He is Chief Executive Officer of DuraSwitch Industries, Inc., a company
formed in 1997 that developed and distributes electronic switches. He served
as Vice President-International Development of the Company from June 1995
through March 1996. Mr. Dunlap is a Director and the co-founder, and from
1984 and until March 1994 served as Chief Executive Officer and Chairman of
the Board, of Go-Video, Inc., a developer and distributor of consumer
electronics products.
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<PAGE>
HARLAND C. STONECIPHER has served as a Director of the Company since
August 1995. Mr. Stonecipher has been Chairman of the Board and Chief
Executive Officer of Pre-Paid Legal Services, Inc. since its inception in
1972.
COMPENSATION OF EXECUTIVE OFFICERS
EXECUTIVE OFFICERS OF THE COMPANY. The following table sets forth
certain information relating to compensation for services rendered during the
years ended December 31, 1997, 1996 and 1995, paid to or accrued for John W.
Hail, the Chief Executive Officer. No executive officer of the Company
received total annual salary and bonus in excess of $100,000 during 1997.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
-------------------------
ANNUAL COMPENSATION SECURITIES EXERCISE
------------------------------------------ UNDERLYING OR BASE
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS OTHER(2) OPTIONS PRICE
- ------------------------------- ---- --------- ----- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
John W. Hail. . . . . . . . . . 1997 $56,539 $ -- $ -- 100,000(3) $6.00
Chief Executive Officer 100,000(3) $2.70
1996 -- -- 22,000 -- --
1995 -- -- 87,684 375,000(4) --
</TABLE>
- ------------------------
(1) Dollar value of base salary earned during the year.
(2) The Company furnishes the use of an automobile to Mr. Hail, the value of
which is not greater than $5,000 annually. During 1996 and 1995, the
Company made non-interest bearing advances to the John Hail Agency, Inc.,
an affiliate of Mr. Hail, of $22,000 and $87,684, respectively.
(3) During 1997 the Company granted 100,000 stock options to Mr. Hail pursuant
to the Company's Stock Option Plan, each exercisable for the purchase of
one share of Common Stock at an exercise price of $6.00 per share (the
market value of the Common Stock on the date of grant). These options were
surrendered by Mr. Hail during 1997 in exchange for 100,000 stock options
having the same terms other than an exercise price of $2.70 per share of
Common Stock (which was equal to the fair value of the Common Stock on the
date of exchange). These options became exercisable on June 26, 1998.
(4) Adjusted to give effect to the one-for-eight reverse stock split on October
29, 1996. Of the 375,000 stock options received, Mr. Hail transferred by
gift 225,000 stock options during 1995.
AGGREGATE OPTION GRANTS AND EXERCISES IN 1997 AND YEAR-END OPTION VALUES
STOCK OPTIONS AND OPTION VALUES. During 1997 the Company granted
100,000 stock options to Mr. Hail pursuant to the Company's Stock Option
Plan, each exercisable for the purchase of one share of Common Stock at an
exercise price of $6.00 per share. These options were surrendered by Mr.
Hail in exchange for 100,000 stock options having the same terms other than
an exercise price of $2.70 per share of Common Stock. The following table
sets forth information related to options granted to the named executive
officer during 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------
PERCENT OF
TOTAL OPTIONS
NUMBER GRANTED TO EXERCISE
OF OPTIONS EMPLOYEES PRICE PER EXPIRATION
GRANTED IN 1997 SHARE DATE
---------- ------------- --------- ----------
<S> <C> <C> <C> <C>
John W. Hail, Chief Executive Officer . . . . . 100,000(1) 20.3% $2.70 5/20/07
- ------------------------
</TABLE>
(1) Only includes those stock options that were granted and not surrendered
during 1997.
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<PAGE>
AGGREGATE STOCK OPTION EXERCISE AND YEAR-END AND OPTION VALUES. The
following table sets forth information related to the number and value of
options held by the named executive officer at December 31, 1997. During
1997, no options to purchase Common Stock were exercised by the named
executive officer.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AS OF OPTIONS AS OF
DECEMBER 31, 1997 DECEMBER 31, 1997(1)
---------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John W. Hail, Chief Executive Officer . . . . 150,000 100,000 $112,500 $5,000
</TABLE>
- ----------------
(1) The closing sale price of the Common Stock as reported on the Nasdaq
SmallCap Market on December 31, 1997 was $2.75. The per-share value is
calculated based on the applicable closing highest bid price per share,
minus the exercise price, multiplied by the number of shares of Common
Stock underlying the options.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive $250 for each
Board meeting attended. Directors who are also employees of the Company
receive no additional compensation for serving as Directors. The Company
reimburses its Directors for travel and out-of-pocket expenses in connection
with their attendance at meetings of the Board of Directors. The Company's
Bylaws provide for mandatory indemnification of directors and officers to the
fullest extent permitted by Oklahoma law.
STOCK OPTION PLAN
The Company established the Advantage Marketing Systems, Inc. 1995 Stock
Option Plan (the "Stock Option Plan" or the "Plan") in June 1995. The Plan
provides for the issuance of incentive stock options ("ISO Options") with or
without stock appreciation rights ("SARs") and nonincentive stock options
("NSO Options") with or without SARs to employees and consultants of the
Company, including employees who also serve as Directors of the Company. The
total number of shares of Common Stock authorized for issuance under the Plan
is 1,125,000. As of June 30, 1998, options to purchase a total of 340,350
shares of Common Stock have been granted under the Plan at exercise prices of
$2.70 to $6.00 per share expiring March 2002 through May 2007, of which
141,750 options were surrendered and canceled during 1997. As of June 30,
1998, there are outstanding stock options granted under the Plan exercisable
for the purchase of 198,600 shares of Common Stock and options and warrants
for the purchase of 1,215,733 shares of Common Stock outstanding that were
granted outside of the Stock Option 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 granted
and the terms, restrictions and conditions of the options at the time of
grant. During the one-year period ending November 6, 1998, the Company has
undertaken not to grant (i) any additional options or warrants other than
pursuant to the Plan except in exchange for existing options, (ii) stock
options under the Plan to any officer, director or employee of the Company
and its subsidiaries that have an aggregate exercise price in excess of the
annual salary during the year of such grant of such officer, director or
employee and (iii) John W. Hail, Curtis H. Wilson, Sr. and Roger P. Baresel
any stock options under the Plan without the unanimous approval of the
independent directors of the Company which at all such times shall not be
less than two independent directors.
The option price of the Common Stock is determined by the Stock Option
Committee, provided such price may not be less than 85 percent of the fair
market value of the shares on the date of grant of the option. The fair
market value of a share of the Common Stock is determined by either (i)
averaging the closing high bid and low asked quotations for such share on the
date of grant of the option as reported by the National Quotation Bureau,
Incorporated, or (ii) if not quoted by the National Quotation Bureau,
Incorporated by the Stock Option Committee. Upon the exercise of an option,
the option price must be paid in full, in cash or with an SAR. Subject to the
Stock
-54-
<PAGE>
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, 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 of the
Company, except in the case of death, retirement or disability. Options may
be exercised at any time within three months after the participant's
retirement or within one year after the participant's disability or death,
but not beyond the expiration date of the option. No option may be granted
after April 30, 2005. Options are not transferable except by will or by the
laws of descent and distribution.
OFFICER AND DIRECTOR LIABILITY
As permitted by the provisions of the Oklahoma General Corporation Act,
the Certificate of Incorporation (the "Certificate") eliminates in certain
circumstances the monetary liability of directors of the Company for a breach
of their fiduciary duty as directors. These provisions do not eliminate the
liability of a director for (i) a breach of the director's duty of loyalty to
the Company or its shareholders, (ii) acts or omissions by a director not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) liability arising under Section 1053 of the Oklahoma General
Corporation Act (relating to the declaration of dividends and purchase or
redemption of shares in violation of the Oklahoma General Corporation Act),
or (iv) any transaction from which the director derived an improper personal
benefit. In addition, these provisions do not eliminate liability of a
director for violations of federal securities laws, nor do they limit the
rights of the Company or its shareholders, in appropriate circumstances, to
seek equitable remedies such as injunctive or other forms of non-monetary
relief. Such remedies may not be effective in all cases.
The Certificate of Incorporation and Bylaws of the Company provide that
the Company shall indemnify all directors and officers of the Company to the
fullest extent permitted by the Oklahoma General Corporation Act. Under such
provisions, any director or officer, who in his capacity as such, is made or
threatened to be made, a party to any suit or proceeding, may be indemnified
if the Board of Directors determines such director or officer acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Company. The Certificate and Bylaws and the Oklahoma
General Corporation Act further provide that such indemnification is not
exclusive of any other rights to which such individuals may be entitled under
the Certificate, the Bylaws, an agreement, vote of shareholders or
disinterested directors or otherwise. Insofar as indemnification for
liabilities arising under the Act may be permitted to directors and officers
of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
The Company maintains insurance to protect its directors and officers
against liability asserted against them in their official capacities. Such
insurance protection covers claims and any related defense costs of up to $3
million based on alleged or actual securities law violations, other than
intentional dishonest or fraudulent acts or omissions, or any willful
violation of any statute, rule or law, or claims arising out of any improper
profit, remuneration or advantage derived by an insured director or officer.
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 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.
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<PAGE>
John W. Hail, Chief Executive Officer and Chairman of the Board of
Directors of the Company, is the sole director and shareholder of the John
Hail Agency, Inc. ("JHA"). Pursuant to an unwritten agreement, the Company
provided office space, utilities and supplies, as well as an occasional
part-time administrative staff person, through June 30, 1996, to JHA for a
monthly payment of $1,000 as reimbursement of the Company's costs. In
addition, the Company made non-interest bearing advances to JHA of $22,000
and $87,684 during the years ended December 31, 1996 and 1995, respectively.
Effective June 30, 1996, the Company adopted a policy to not make any further
advances to JHA, and JHA executed a promissory note payable to the Company in
the principal amount of $73,964 bearing interest at eight percent per annum
and payable in 60 installments of $1,499 per month. JHA has made repayments
of these advances of $13,042, $6,141 during the fiscal years ended December
31, 1997 and 1996, respectively. During the six months ended June 30, 1998,
JHA made repayments of $54,780. As of June 30, 1998 the note has been paid
in full.
At December 31, 1995, the balance due on a short-term loan to the
Company from Mr. Hail was $81,929. During 1995, the Company combined interest
payable of approximately $52,000 with the principal due under the loan and
began making weekly interest and principal payments of $1,500. The loan was
unsecured, due on demand and bore interest at 12 percent per annum. As of
December 31, 1996, the loan had been paid in full.
During 1995, John W. Hail individually entered into lease agreements
covering telephone equipment and related software and requiring monthly
rental payments. Such equipment and software are utilized exclusively by the
Company. During the six months ended June 30, 1998 and the years ended
December 31, 1997 and 1996, the Company made aggregate monthly payments
pursuant to such lease agreements of $9,714, $19,427 and $19,427,
respectively.
During the six months ended June 30, 1998 and the years ended December
31, 1997 and 1996, the Company paid Curtis H. Wilson, Sr., a Director of the
Company, sales commissions of $21,103, $32,886 and $38,337, respectively.
These commissions were based upon purchases by Mr. Wilson and his downline
distributors in accordance with the Company's network marketing program in
effect at the time of the sales. See "Business--Network Marketing."
During the first quarter of 1998, the Company agreed to loan John Hail
up to $250,000. Subsequently the Company agreed to loan up to an additional
$75,000. The loan is secured, bears interest at eight percent per annum and
is due on March 31, 1999. As of June 30, 1998, the balance due on this loan
was $305,811 plus interest. The Company believes that the terms of the loan
are comparable with those that could have been obtained from an unaffiliated
lender and the loan was unanimously approved by the Company's board of
directors.
During 1997, pursuant to the Company's Stock Option Plan, the Company
granted Mr. Hail 10-year nontransferable stock options exercisable for the
purchase of 100,000 shares of Common Stock for $6.00 per share. On the date
of grant of these stock option, the exercise price was equal to the fair
value of the Common Stock. These options were surrendered by Mr. Hail in
exchange for 100,000 stock options having the same terms other than an
exercise price of $2.70 per share of Common Stock, which was equal to the
fair value of the Common Stock on the date of exchange. These options became
exercisable on June 26, 1998.
During 1995, the Company granted United Financial Advisors, Inc.
("UFAI") five-year warrants 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 warrants were granted at or above the fair market vale
of the Common Stock on the date of grant. As a result of the grant of these
warrants, UFAI became a greater than five percent beneficial owner of the
Common Stock of the Company. These warrants were not granted pursuant to the
Company's Stock Option Plan. Effective May 30, 1997, pursuant to written
agreement between UFAI and the Company, the warrants exercisable for the
purchase of 125,000 shares of Common Stock for $4.96 were released without
exercise and canceled by the Company, at which time UFAI ceased to be a
greater than five percent beneficial owner of the Common Stock. The
remaining warrants held by UFAI are currently exercisable. In addition,
UFAI received cash compensation of $10,000 and $20,000 from the Company
during 1995 and 1997, respectively, for consulting and financial advisory.
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On December 17, 1996, the Company adopted policies that any loans to
officers, directors and five percent or more shareholders ("affiliates") are
subject to approval by a majority of not less than two of the disinterested
independent directors of the Company and that such loans and other
transactions with affiliates will be on terms no less favorable than could be
obtained from unaffiliated parties and approved by a majority of not less
than two of the disinterested independent directors. As of June 30, 1998,
the Board of Directors is comprised of five members, of which R. Terren
Dunlap and Harland C. Stonecipher are the only independent directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information as to the beneficial
ownership of the Common Stock as of September 9, 1998, of (i) each person who
is known to the Company to be the beneficial owner of more than five percent
thereof, (ii) each director and executive officer of the Company, and (iii)
all executive officers and directors as a group, together with their
percentage holdings of the outstanding shares. For purposes of the following
table, the number of shares and percent of ownership of outstanding Common
Stock that the named person beneficially owns includes shares of Common Stock
that such person has the right to acquire within 60 days of September 9,
1998, upon exercise of options and warrants, but such shares are not included
for the purposes of computing the number of shares beneficially owned and
percent of outstanding Common Stock of any other named person.
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------
SHARES PERCENT OF
BENEFICIALLY SHARE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OUTSTANDING
- ------------------------------------ ------------ -----------
<S> <C> <C>
John W. Hail(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . 577,630 13.07%
Curtis H. Wilson(1)(3) . . . . . . . . . . . . . . . . . . . . . . . 280,945 6.36%
Roger P. Baresel(1)(4) . . . . . . . . . . . . . . . . . . . . . . . 178,690 4.16%
Harland C. Stonecipher(5). . . . . . . . . . . . . . . . . . . . . . 180,768 4.34%
R. Terren Dunlap(1)(6) . . . . . . . . . . . . . . . . . . . . . . . 37,500 .89%
Executive Officers and Directors as a group (five persons)(7). . . . 1,255,533 25.94%
</TABLE>
- ------------------------
(1) A Director or an executive officer of the Company, with a business address
of 2601 Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma
73112-7293.
(2) The number of shares and each percentage presented includes (i) 250,000
shares of Common Stock that are subject to currently exercisable stock
options and 1,000 shares of Common Stock that are subject to currently
exercisable Redeemable Common Stock Purchase Warrants held by Mr. Hail,
(ii) 16,500 shares of Common Stock and 1,000 shares of Common Stock that
are subject to currently exercisable Redeemable Common Stock Purchase
Warrants owned by corporations controlled by Mr. Hail, (iii) 1,000 shares
of Common Stock and 1,000 shares of Common Stock that are subject to
currently exercisable Redeemable Common Stock Purchase Warrants held by
Helen Hail, wife of Mr. Hail, with respect to which Mr. Hail disclaims any
beneficial interest.
(3) The number of shares and each percentage presented includes 250,000 shares
of Common Stock that are subject to currently exercisable stock options
held by Mr. Wilson and 12,338 shares of outstanding Common Stock and 3,000
shares of Common Stock that are subject to currently exercisable Redeemable
Common Stock Purchase Warrants held by Ruth Wilson, wife of Mr. Wilson,
with respect to which Mr. Wilson disclaims any beneficial interest.
(4) The number of shares consist of and each percentage presented includes (i)
7,500 shares of outstanding Common Stock jointly held by Mr. Baresel and
his wife, Judith A. Baresel, (ii) 2,000 shares of Common Stock subject to
currently exercisable 1997-A Warrants and 1,000 shares of Common Stock that
are subject to currently exercisable Redeemable Common Stock Purchase
Warrants held by Mr. Baresel, (iii) 22,500 shares of Common Stock that are
subject to currently exercisable stock options held by Mr. Baresel, (iv)
26,828 shares of outstanding Common Stock held by Mrs. Baresel, (v) 87,500
shares of Common Stock that
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are subject to currently exercisable stock options and 6,000 shares of
Common Stock that are subject to currently exercisable Redeemable Common
Stock Purchase Warrants held by Mrs. Baresel, and (vii) 12,500 shares of
Common Stock that are subject to currently exercisable stock options held
by Mrs. Baresel as the custodian for the benefit of the children of Mr.
and Mrs. Baresel, with respect to which Mr. Baresel disclaims any
beneficial interest.
(5) Mr. Stonecipher is a Director of the Company with a business address of 321
East Main Street, Ada, Oklahoma 74820, and Chairman of the Board and Chief
Executive Officer of Pre-Paid Legal Services, Inc. The number of shares
consist of and each percentage presented is based upon 180,768 shares of
outstanding Common Stock held by Pre-Paid Legal Services, Inc., which may
be deemed to be beneficially owned by Mr. Stonecipher.
(6) The number of shares consist of and each percentage presented is based upon
37,500 shares of Common Stock that are issuable upon exercise of stock
options.
(7) The number of shares and each percentage presented includes 2,000 shares of
Common Stock subject to currently exercisable 1997-A Warrants, 13,000
shares of Common Stock that are subject to currently exercisable Redeemable
Common Stock Purchase Warrants and 660,000 shares of Common Stock that are
issuable upon exercise of other currently exercisable stock options held by
the executive officers and directors as a group.
DESCRIPTION OF SECURITIES
AUTHORIZED AND OUTSTANDING CAPITAL
Pursuant to its Certificate of Incorporation, the Company is currently
authorized to issue up to 495,000,000 shares of Common Stock, $.0001 par
value ("Common Stock"), and 5,000,000 shares of Preferred Stock, $.0001 par
value ("Preferred Stock"). As of the date of this Prospectus, the
outstanding capital stock of the Company consisted of 4,166,039 shares of
Common Stock, assuming the no exercise of the Company's outstanding
Redeemable Common Stock Purchase Warrants, 1997-A Warrants, the Underwriters'
Warrants, stock options and other warrants. See "--Common Stock,"
"--Redeemable Common Stock Purchase Warrants," "--1997-A Warrants," and
"--Other Options and Warrants."
The following description of certain matters relating to the capital
stock and the warrants is a summary of, and is qualified in its entirety by,
the provisions of the Company's Certificate of Incorporation, Bylaws, and the
agreements between the Company and U.S. Stock Transfer Corp. (the "Warrant
Agent"), as amended, related to the outstanding Redeemable Common Stock
Purchase Warrants and the 1997-A Warrants, all of which are filed as exhibits
to or are incorporated by reference in the Registration Statement of which
this Prospectus is a part. See "Additional Information."
COMMON STOCK
The holders of outstanding shares of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time
by the Board of Directors out of assets legally available therefor, subject
to the payment of preferential dividends with respect to any Preferred Stock
that may be outstanding. In the event of liquidation, dissolution and
winding-up of the Company, the holders of outstanding Common Stock are
entitled to share ratably in all assets available for distribution to the
Common Stock shareholders after payment of all liabilities of the Company,
subject to the prior distribution rights of the holders of any outstanding
Preferred Stock. Holders of outstanding Common Stock are entitled to one vote
per share on matters submitted to a vote by the Common Stock shareholders of
the Company. The Common Stock has no preemptive rights and no subscription,
redemption or conversion privileges. The Common Stock does not have
cumulative voting rights, which means that holders of a majority of shares
voting for the election of directors can elect all members of the Board of
Directors. In general, a majority vote of shares represented at a meeting of
Common Stock shareholders at which a quorum (a majority of the outstanding
shares of Common Stock) is present is sufficient for all actions that require
the vote or concurrence of shareholders, subject to and possibly in
connection with the voting rights of the holders of any outstanding Preferred
Stock entitled to vote with the holders of the Common Stock.
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REDEEMABLE COMMON STOCK PURCHASE WARRANTS
As of the date of this Prospectus, there are 1,495,000 Redeemable Common
Stock Purchase Warrants outstanding, each of which was issued with one share
of Common Stock as a unit in connection with the Unit Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General--Units Offering." The terms and conditions of the
Redeemable Common Stock Purchase Warrants are set forth in the Unit and
Warrant Agreement between the Company and U.S. Stock Transfer Corp. dated
November 6, 1997 (the "Redeemable Warrant Agreement"). The following
description of the Redeemable Common Stock Purchase Warrants is not complete
and is qualified in all respects by the Redeemable Warrant Agreement which is
incorporated by reference as an exhibit to the Registration Statement of
which this Prospectus is a part. See "Additional Information."
The holder of each Redeemable Common Stock Purchase Warrant is entitled,
upon payment of the exercise price, to purchase one share of Common Stock.
As of January 6, 1998, the exercise price of the Redeemable Common Stock
Purchase Warrants was adjusted from $5.40 to $3.40 representing 120 percent
of the average daily closing price of the Company's Common Stock for the
preceding 20 day period as prescribed in the prospectus of the Units
Offering. There was no expense recognized in the Company's financial
statements relating to the warrant exercise price reduction as any change only
affects allocations of additional paid-in capital because the Redeemable Common
Stock Purchase Warrants were issued in conjunction with an equity offering.
The number and kind of securities or other property for which the Redeemable
Common Stock Purchase Warrants are exercisable are subject to adjustment in
certain events, such as mergers, reorganizations or stock splits, to prevent
dilution. Unless previously redeemed, the Redeemable Common Stock Purchase
Warrants are exercisable on or before November 6, 2002. A holder will only be
able to exercise the Redeemable Common Stock Purchase Warrants held in the
event (i) a current prospectus under the 1933 Act relating to the shares of
Common Stock issuable upon exercise of the Redeemable Common Stock Purchase
Warrants is then in effect and (ii) such Common Stock is qualified for sale or
exemption from qualification under the applicable securities laws of the states
in which the holder resides.
The Redeemable Common Stock Purchase Warrants are subject to redemption
at any time by the Company, on not less than 30 days' written notice, at a
price of $0.25 per warrant only after the closing sale price per share of the
Common Stock as reported on the Nasdaq SmallCap Market, for a period of 20
consecutive trading days, has been at or above 200 percent of the exercise
price, as adjusted, of the Redeemable Common Stock Purchase Warrants. All of
the outstanding Redeemable Common Stock Purchase Warrants must be redeemed if
any are redeemed.
The Redeemable Common Stock Purchase Warrants may only be redeemable if,
on the date the Redeemable Common Stock Purchase Warrants are called for
redemption, there is an effective registration statement and current
prospectus covering the shares of Common Stock issuable upon exercise of the
Redeemable Common Stock Purchase Warrants. In certain cases, the sale of
securities by the Company upon exercise of the Redeemable Common Stock
Purchase Warrants could violate the securities laws of the United States,
certain states or other jurisdictions. The Company has agreed to maintain an
effective registration under the 1933 Act at its expense with respect to the
securities underlying the Redeemable Common Stock Purchase Warrants (and, if
necessary, to allow their public resale without restriction) at all times
during the period in which the Redeemable Common Stock Purchase Warrants are
exercisable. The Company has agreed to use its best efforts, and to take
such actions under the laws of various states, as may be required to cause
the sale of the securities underlying the Redeemable Common Stock Purchase
Warrants upon their exercise to be lawful. However, the Company will not be
required to honor the exercise of the Redeemable Common Stock Purchase
Warrants if, in the opinion of counsel, the sale of securities upon such
exercise would be unlawful. In certain cases, the Company may, but is not
required to, purchase the Redeemable Common Stock Purchase Warrants submitted
for exercise for a cash price equal to the difference between the market
price of the securities obtainable upon such exercise and the exercise price
of such Redeemable Common Stock Purchase Warrants.
The Redeemable Common Stock Purchase Warrants contain provisions that
protect the holder thereof against dilution by adjustment of the number of
shares of Common Stock or other securities of the Company purchasable upon
exercise of the Redeemable Common Stock Purchase Warrants in certain events,
such as stock
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<PAGE>
dividends, stock splits, mergers, sale of substantially all of the Company's
assets, and for other extraordinary events.
The holders of the Warrants do not possess any rights as shareholders of
the Company unless and until the holders exercise the Redeemable Common Stock
Purchase Warrants and then only as a holder of the Common Stock.
1997-A WARRANTS
As of the date of this Prospectus, there are 337,211 1997-A Warrants
outstanding, all of which were issued in connection with the Warrant
Modification Offering and the Rights Offering. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." The terms and conditions of the 1997-A Warrants are set
forth in the Warrant Agreement between the Company and U.S. Stock Transfer
Corp. dated January 26, 1997, as amended and restated on January 8, 1998 (the
"1997-A Warrant Agreement"). The following description of the 1997-A
Warrants is not complete and is qualified in all respects by the Warrant
Agreement which is incorporated by reference as an exhibit to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."
Each 1997-A Warrant initially entitled the holder to purchase one share
of Common Stock. Pursuant to its rights under the 1997-A Warrant Agreement,
as of January 8, 1998, the Company amended and restated the 1997-A Warrant
Agreement, which (i) extended the exercise period of the 1997-A Warrants to
permit their exercise on or before November 6, 2002 and (ii) reduced the
exercise price of the 1997-A Warrants from $12.00 to $3.40. The purpose of
the amendment was to modify the exercise price and period provisions to make
them identical to those Redeemable Common Stock Purchase Warrants in order to
avoid any differential in the market price of the 1997-A Warrants and the
Redeemable Common Stock Purchase Warrants. The amendment did not have any
material accounting consequences. See "--Redeemable Common Stock Purchase
Warrants." The number and kind of securities or other property for which the
1997-A Warrants are exercisable are subject to adjustment in certain events,
such as mergers, reorganizations or stock splits, to prevent dilution. At
any time, upon 30 days' written notice, the Company may redeem in whole and
not in part, unexercised 1997-A Warrants for $.0001 per warrant. The 1997-A
Warrants not exercised or redeemed will expire on November 6, 2002. Holders
of 1997-A Warrants do not, as such, have any of the rights of shareholders of
the Company unless and until the holders exercise the 1997-A Warrants and
then only as a holder of the Common Stock.
In certain cases, the sale of securities by the Company upon exercise of
1997-A Warrants could violate the securities laws of the United States,
certain states thereof or other jurisdictions. The Company has agreed to use
its best efforts to cause a registration statement with respect to such
securities under the 1933 Act to continue to be effective during the term of
the 1997-A Warrants and to take such other actions under the laws of various
states as may be required to cause the sale of securities upon exercise of
1997-A Warrants to be lawful. However, the Company will not be required to
honor the exercise of 1997-A Warrants if, in the opinion of counsel, the sale
of securities upon such exercise would be unlawful. The Company may, but is
not required to, purchase 1997-A Warrants submitted for exercise for a cash
price equal to the difference between the market price of the securities
obtainable upon such exercise and the exercise price of such 1997-A Warrants.
PREFERRED STOCK
Pursuant to its Certificate of Incorporation, the Company has an
authorized class of Preferred Stock of 5,000,000 shares, $.0001 par value.
There are no shares of Preferred Stock outstanding as of the date of this
Prospectus. The Preferred Stock may be issued from time to time in one or
more series, and the Board of Directors of the Company, without further
approval of its shareholders, is authorized to fix the relative rights,
preferences, privileges and restrictions applicable to each series of
Preferred Stock. Management of the Company believes that having such a class
of Preferred Stock provides the Company with greater flexibility in
financing, acquisitions and other corporate activities. While there are no
current plans, commitments or understandings, written or oral, to issue any
shares of Preferred Stock, in the event of any issuance, the holders of
Common Stock will not have any preemptive or similar rights to acquire any of
such shares of Preferred Stock. Issuance of Preferred Stock could
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adversely affect the voting power of holders of Common Stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying or preventing a change in
control of the Company.
OPTIONS AND OTHER WARRANTS
As of the date of this Prospectus, the Company has outstanding stock
options and other warrants to purchase 1,435,777 shares of Common Stock
during various periods, which expire December 1998 through May 2007, at
exercise prices of $1.60 to $6.00 per share (with a weighted average exercise
price of $2.29). The exercise prices of the stock options and warrants were
equal to or greater than the fair market value of the Common Stock on the
date of the grant of each stock option or warrant. Furthermore, in
connection with the Units Offering, the Company sold to Paulson Investment
Company, Inc. and Joseph Charles & Assoc., Inc., the representatives of
underwriters of the Units Offering, warrants exercisable after November 6,
1998, and on or before November 6, 2002, for the purchase of 130,000 Units
for $5.40 per Unit (the "Underwriters' Warrants"). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--General--Units Offering" and "--Results of Operations--Pro Forma
Effect of Stock-Based Compensation" and "Management--Stock Option Plan."
ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation and Bylaws of the Company and the
Oklahoma General Corporation Act include a number of provisions which may
have the effect of encouraging persons considering unsolicited tender offers
or other unilateral takeover proposals to negotiate with the Board of
Directors rather than pursue non-negotiated takeover attempts. The Company
believes that the benefits of these provisions outweigh the potential
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals might result in an improvement of their terms.
The description below related to provisions of the Certificate of
Incorporation and the Bylaws of the Company is intended as a summary only and
is qualified in its entirety by reference to the Certificate of Incorporation
and the Bylaws of the Company, which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."
PREFERRED STOCK. The Certificate of Incorporation authorizes the
issuance of the Preferred Stock in classes, and the Board of Directors to set
and determine the voting rights, redemption rights, conversion rights and
other rights relating to such class of Preferred Stock, and to issue such
stock in either private or public transactions. In some circumstances, the
Preferred Stock could be issued and have the effect of preventing a merger,
tender offer or other takeover attempt which the Company's Board of Directors
opposes.
STAGGERED BOARD OF DIRECTORS. The Bylaws of the Company provide that
the Board of Directors shall be comprised of three classes of directors, each
class constituting approximately one-third of the total number of directors
with each class serving staggered three-year terms. The classification of
the directors makes it more difficult for shareholders to change the
composition of the Board of Directors. The Company believes, however, that
the longer time required to elect a majority of a classified board of
directors will help ensure continuity and stability of the Company's
management and policies.
The classification provisions may also have the effect of discouraging a
third party from accumulating large blocks of Common Stock or attempting to
obtain control of the Company, even though such an attempt might be
beneficial to the Company and its shareholders. Accordingly, shareholders of
the Company could be deprived of certain opportunities to sell their shares
of Common Stock at a higher market price than might otherwise be the case.
OKLAHOMA ANTI-TAKEOVER STATUTES. The Company is subject to Section
1090.3 and Sections 1145 through 1155 of the Oklahoma General Corporation Act
(the "OGCA").
Subject to certain exceptions, Section 1090.3 of the OGCA prohibits a
publicly-held Oklahoma corporation from engaging in a "business combination"
with an "interested shareholder" for a period of three years after the date
of the transaction in which such person became an interested shareholder,
unless the interested shareholder
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attained such status with approval of the board of directors or the business
combination is approved in a prescribed manner, or certain other conditions
are satisfied. A "business combination" includes mergers, asset sales, and
other transactions resulting in a financial benefit to the interested
shareholder. Subject to certain exceptions, an "interested shareholder" is a
person who, together with affiliates and associates, owns, or did own, within
three years of the proposed combination, 15 percent or more of the
corporation's voting stock.
In general, Sections 1145 through 1155 of the OGCA provide that issued
and outstanding shares ("interested shares") of voting stock acquired (within
the meaning of a "control share acquisition") become nonvoting stock for a
period of three years following such control share acquisition, unless a
majority of the holders of non-interested shares approve a resolution
reinstating the interested shares with the same voting rights that such
shares had before such interested shares became control shares. Any person
("acquiring person") who proposes to make a control share acquisition may, at
the person's election, and any acquiring person who has made a control share
acquisition is required to deliver an acquiring person statement to the
corporation disclosing certain prescribed information regarding the
acquisition. The corporation is required to present to the next annual
meeting of the shareholders the reinstatement of voting rights with respect
to the control shares that resulted in the control share acquisition, unless
the acquiring person requests a special meeting of shareholders for such
purpose and undertakes to pay the costs and expenses of such special meeting.
In the event voting rights of control shares acquired in a control share
acquisition are reinstated in full and the acquiring person has acquired
control shares with a majority or more of all voting power, all shareholders
of the corporation have dissenters' rights entitling them to receive the fair
value of their shares which will not be less than the highest price paid per
share by the acquiring person in the control share acquisition.
A "control share acquisition" includes the acquisition by any person
(including persons acting as a group) of ownership of, or the power to direct
the exercise of voting power with respect to, "control shares" (generally
issued and outstanding shares having more than 20 percent of all voting power
in the election of directors of a publicly held corporation), subject to
certain exceptions including (i) an acquisition pursuant to an agreement of
merger, consolidation, or share acquisition to which the corporation is a
party and is effected in compliance with certain Sections of the OGCA, (ii)
an acquisition by a person of additional shares within the range of voting
power for which such person has received approval pursuant to a resolution by
the majority of the holders of non-interested shares, (iii) an increase in
voting power resulting from any action taken by the corporation, provided the
person whose voting power is thereby affected is not an affiliate of the
corporation, (iv) an acquisition pursuant to proxy solicitation under and in
accordance with the Securities Exchange Act of 1934, as amended, or the laws
of Oklahoma, and (v) an acquisition from any person whose previous
acquisition of shares did not constitute a control share acquisition,
provided the acquisition does not result in the acquiring person holding
voting power within a higher range of voting power than that of the person
from whom the control shares were acquired. The voting rights provisions of
the Sections 1145 through 1155 of the OGCA were declared unconstitutional and
unenforceable in 1987. In 1991, Sections 1145 through 1155 of the OGCA were
amended; however, the constitutionality and enforceability of the voting
rights provisions of such Sections of the OGCA, as amended, have not been
determined as of the date of this Prospectus.
The anti-takeover provisions of the OGCA may have the effect of
discouraging a third party from acquiring large blocks of Common Stock within
a short period or attempting to obtain control of the Company, even though
such an attempt might be beneficial to the Company and its shareholders.
Accordingly, shareholders of the Company could be deprived of certain
opportunities to sell their shares of Common Stock at a higher market price
than might otherwise be the case.
TRANSFER AGENT AND WARRANT AGENT
U.S. Stock Transfer Corp. is the registrar and transfer agent for the
Common Stock and the Warrant Agent for the 1997-A Warrants and the Redeemable
Common Stock Purchase Warrants, whose address is 1745 Gardena Avenue, Suite
200, Glendale, California 91204-2991.
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SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this Prospectus, the Company has 4,166,039 shares of
Common Stock issued and outstanding (assuming no exercise of the outstanding
Redeemable Common Stock Purchase Warrants, 1997-A Warrants, stock options and
other warrants). The Company has reserved 3,307,944 shares of Common Stock for
issuance upon exercise of the Redeemable Common Stock Purchase Warrants, 1997-A
Warrants, the Underwriters' Warrants, stock options and other warrants, and
1,125,000 shares of Common Stock for issuance under the Stock Option Plan. See
"Security Ownership of Certain Beneficial Owners and Management," "Description
of Securities--Redeemable Common Stock Purchase Warrants," "--1997-A Warrants,"
and "--Other Stock Options and Warrants," and "Management--Stock Option Plan."
Additionally, the Company will have 486,401,017 shares of Common Stock available
for issuance at such times and upon such terms as may be approved by the
Company's Board of Directors. No prediction can be made as to the effect, if
any, that future sales or the availability of shares for sale will have on the
market price of the Common Stock prevailing from time to time. See "Risk
Factors--Stock Price, Sales and Earnings Volatility." Nevertheless, sales of
substantial amounts of Common Stock in the public market could adversely affect
the prevailing market price of the Common Stock and could impair the Company's
ability to raise capital through sales of its equity securities. The Company
has undertaken not to issue any options or other securities convertible into
Common Stock, other than options granted under the Company's Stock Option Plan,
for a period of one year ending November 6, 1998.
As of the date of this Prospectus, there are 235,816 shares of Common Stock
(the "Restricted Shares") outstanding which have not been registered under the
1933 Act (of which 57,954 are held by the executive officers, directors and
affiliates of the Company), but may be sold without registration pursuant to
Rule 144 promulgated under the Securities Act of 1933, as amended (the "1933
Act"), subject to the limitations thereunder described below.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including a Company affiliate, who has
beneficially owned Restricted Shares for at least one year is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of (i) one percent of the then outstanding shares of Common Stock or
(ii) an amount equal to the average weekly reported volume of trading in such
shares during the four calendar weeks preceding the date on which notice of such
sale is filed with the Commission. Sales under Rule 144 are also subject to
certain manner of sale limitations, notice requirements and the availability of
current public information about the Company. Restricted Shares properly sold
in reliance on Rule 144 are thereafter freely tradable without restrictions or
registration under the 1933 Act, unless thereafter held by an affiliate of the
Company. In addition, affiliates of the Company must comply with the
restrictions and requirements of Rule 144, other than the one-year holding
period requirement, in order to sell shares of Common Stock which are not
Restricted Shares. As defined in Rule 144, an "affiliate" (as that term is
defined under the 1933 Act) of an issuer is a person that directly, or
indirectly through one or more intermediaries, controls or is controlled by or
is under common control with such issuer.
Furthermore, if two years have elapsed since the later of the date of any
acquisition of Restricted Shares from the Company or from any affiliate of the
Company, and the acquirer or subsequent holder thereof is deemed not to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, such person would be entitled to sell such shares in the public market
pursuant to Rule 144(k) without regard to volume limitations, manner of sale
restrictions, or public information or notice requirements.
Pursuant to Rule 144A promulgated under the 1933 Act, under certain
circumstances qualified institutional buyers, as defined in the rule, are
permitted to more easily acquire and sell "restricted securities." The Company
is unable to predict the effect that Rule 144A has or will have on the
prevailing market price of the Common Stock.
-63-
<PAGE>
OPTIONS
As of the date of this Prospectus, options to purchase a total of 375,350
shares of Common Stock have been granted under the Stock Option Plan of which
141,750 were voluntarily surrendered and canceled by the Company and 220,044 are
still outstanding, and an additional 891,400 shares of Common Stock are
available for further grants under the Stock Option Plan. See
"Management--Stock Option Plan." There are options and warrants for the
purchase of 1,215,733 shares of Common Stock outstanding that were granted
outside the Stock Option Plan.
LOCK-UP AGREEMENTS
The Company's executive officers, directors, who hold in the aggregate
580,533 shares of Common Stock and stock options and warrants exercisable for
the purchase of 675,000 shares of Common Stock, have agreed with Paulson
Investment Company, Inc. and Joseph Charles & Assoc., Inc. not to sell, or
otherwise dispose of such shares for a period ending November 6, 1998, or such
options, warrants or shares of Common Stock and all other securities issuable
upon exercise of such options or warrants for a period of two years ending on
November 6, 1999.
STATE IMPOSED ESCROW ARRANGEMENT
In connection with the registration of the Units Offering, the executive
officers and directors of the Company and Robert and Retha Nance (formerly
greater than five percent shareholders of the Company) deposited 466,790 shares
of Common Stock and stock options exercisable for the purchase of 726,983 shares
of Common Stock in escrow with Liberty Bank and Trust Company of Oklahoma City,
N.A., pursuant to Promotional Shares Escrow Agreements (the "Escrow
Agreements"). Furthermore, the Company, Roger P. Baresel and Judith A. Baresel
entered into a Promotional Shares Lock-In Agreement (the "Lock-In Agreement")
covering 4,000 shares of Common Stock and 2,000 1997-A Warrants held by Mr. and
Mrs. Baresel. The Administrator of the Oklahoma Department of Securities
determined the terms and conditions of the Escrow Agreements and the Lock-In
Agreement that were required as a condition of the registration of the Units
Offering in Oklahoma for the protection and benefit of the initial purchasers of
the Units sold pursuant to that offering. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-- General--Units
Offering." The shares of Common Stock, stock options and 1997-A Warrants, as
well as any shares of Common Stock received upon exercise of the stock options
and warrants will remain subject to the Escrow Agreements and Lock-In Agreement
for a period of three years following November 6, 1997; however, the 93,108
shares of Common Stock deposited in escrow by Robert and Retha Nance may be
released from escrow upon the sale of such shares, such sales being limited
during any three-month period to one-half of one percent of the outstanding
number of shares of Common Stock on the date of such sale. Other than as
mentioned, the shares of Common Stock and stock options subject to the Escrow
Agreements and the Lock-In Agreement may not be sold, transferred, pledged,
assigned, hypothecated or otherwise disposed of, except under limited
circumstances.
PLAN OF DISTRIBUTION
The Participation Interests being offered hereby are offered by those
officers, directors and employees of the Company ("associated person") each of
whom qualifies as an "associated person not deemed to be a broker" within the
meaning of Rule 3a4-1 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Under this Rule, an "associated person not deemed
to be a broker" is the associated person that (i) is not subject to a "statutory
disqualification," as defined in Section 3(a)(39) of the Exchange Act, at the
time of participation in the offering, and (ii) is not compensated in connection
with participation in the offering by payment of commissions or other
remuneration based either directly or indirectly on sales of Participation
Interests, and (iii) is not at the time of participation in the offering an
associated person of a broker or dealer, and (iv) either (A) (x) primarily
performs, or is intended primarily to perform at the end of the offering,
substantial duties for or on behalf of the Company otherwise than in connection
with the offer and sale of the Participation Interests, and (y) has not been a
broker or dealer, or an associated person of a broker or dealer, within the
preceding 12 months, and (z) the associated person does not participate in
selling an offering of securities of the Company or any other issuer of
securities more than once every 12 months, subject to certain limited
participation in the offering of
-64-
<PAGE>
securities through a registered broker or dealer, or (B) restricts
participation in the offering to (aa) preparation of written communications
or delivering such communication through the mails or other means that does
not involve oral solicitation by the associated person of a potential
purchaser (provided, that the content of such communications is approved by
an officer or director of the Company, (bb) responding to inquiries of a
potential purchaser in a communication initiated by the potential purchaser
(provided, that the content of such responses are limited to information
contained in the Registration Statement of which this Prospectus is a part),
or (cc) performing ministerial and clerical work involved in effecting the
sale of the Participation Interests. As of the date of this Prospectus, the
officers and directors of the Company qualify as an "associated person not
deemed to be a broker" within the meaning of Rule 3a4-1.
The Company will pay all administrative costs and expenses associated with
the Plan. Any brokerage commissions and related service charges incurred in
connection with purchases of shares of Common Stock will be paid by the Plan
from the Participants' contributions to the Plan.
LEGAL MATTERS
Certain legal matters related to this offering will be passed upon for the
Company by its counsel, Dunn Swan & Cunningham, A Professional Corporation,
Oklahoma City, Oklahoma.
EXPERTS
The consolidated balance sheets of Advantage Marketing Systems, Inc. and
subsidiaries as of December 31, 1997, and 1996, and the related consolidated
statements of income, stockholders' equity (deficiency), and cash flows for each
of the three years in the period ended December 31, 1997, and the combined
financial statements of Stay 'N Shape International, Inc., Now International,
Inc., Solution Products, Inc. and Nation of Winners, Inc. as of December 31,
1996 and for the years ended December 31, 1996 and 1995, included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein, and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 (No. 333-47801)
(herein, together with all amendments thereto, the "Registration Statement"), of
which this Prospectus constitutes a part, under the 1933 Act, with the
Securities and Exchange Commission (the "Commission"), Washington, D.C., with
respect to the securities offered by this Prospectus. As permitted by the rules
and regulations of the Commission, this Prospectus, filed as part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and in the exhibits thereto. The statements contained in
this Prospectus as to the contents of any contract or other document referenced
herein are not necessarily complete, and in each instance, if the contract or
document was filed or incorporated by reference as an exhibit, reference is
hereby made to the copy of the contract or other document filed or incorporated
by reference as an exhibit to the Registration Statement and each such statement
is qualified in all respects by such reference. The Registration Statement
(including the exhibits thereto) may be inspected without charge at the office
of the Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549-1004 and at the regional offices of the Commission at 7 World Trade
Center, 13th Floor, New York, New York 10048 and at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of the Registration Statement and
the exhibits and schedules thereto may be obtained from the Commission at such
offices, upon payment of prescribed rates. In addition, registration statements
and certain other filings made with the Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's site on the World Wide Web on the Internet, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR. The
Company will provide without charge to each person who receives this Prospectus,
upon written or oral request, a copy of any information incorporated by
reference in this Prospectus (excluding exhibits to information incorporated by
reference unless such exhibits are themselves specifically
-65-
<PAGE>
incorporated by reference). Such requests should be directed to Advantage
Marketing Systems, Inc. at 2601 Northwest Expressway, Suite 1210W, Oklahoma
City, Oklahoma 73112-7293, telephone: (405) 842-0131.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act") as a "small business issuer"
as defined under Regulation S-B promulgated under the 1933 Act. In accordance
with the 1934 Act, the Company files reports and other information with the
Commission (File No. 001-13343), and such reports and other information can be
inspected and copied at, and copies of such materials can be obtained at
prescribed rates from, the Public Reference Section of the Commission in
Washington, D.C.
The Company distributes to its shareholders annual reports containing
consolidated financial statements audited by its independent public accountants
and, upon request, quarterly reports for the first three quarters of each fiscal
year containing unaudited consolidated financial information. Such requests
should be directed to Advantage Marketing Systems, Inc. at 2601 Northwest
Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293, telephone: (405)
842-0131.
-66-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADVANTAGE MARKETING SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 (Unaudited) . . . . . . . . . . . . . . . . . . . F-2
Condensed Consolidated Statements of Income for the Periods Ended
June 30, 1998 and 1997 (Unaudited) . . . . . . . . . . . . . . . . . F-3
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 (Unaudited) . . . . . . . . . . . . . . F-4
Notes to Condensed Consolidated Financial Statements for the Six Months
Ended June 30, 1998 and 1997 (Unaudited) . . . . . . . . . . . . . . . . F-5
ADVANTAGE MARKETING SYSTEMS, INC. AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . F-12
Consolidated Balance Sheets as of December 31, 1997 and 1996. . . . . . . F-13
Consolidated Statements of Income for Years Ended December 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-14
Consolidated Statements of Stockholders' Equity (Deficiency) for Years
Ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . F-15
Consolidated Statements of Cash Flows for Years Ended December 31,
1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . F-16
Notes to Consolidated Financial Statements for Years Ended December 31,
1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . F-17
</TABLE>
F-1
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . $ 5,627,220 $ 5,775,276
Receivables - net of allowance of $31,200 and
$25,800, respectively. . . . . . . . . . . . . . . 193,510 184,915
Receivable from affiliate. . . . . . . . . . . . . . 305,811 14,124
Commission advances. . . . . . . . . . . . . . . . . 10,404 59,268
Inventory. . . . . . . . . . . . . . . . . . . . . . 740,295 812,125
Deferred income taxes. . . . . . . . . . . . . . . . 79,224 85,224
Other assets . . . . . . . . . . . . . . . . . . . . 108,239 68,432
----------- -----------
Total current assets . . . . . . . . . . . . 7,064,703 6,999,364
RECEIVABLES. . . . . . . . . . . . . . . . . . . . . . 66,104 15,079
RECEIVABLE FROM AFFILIATE. . . . . . . . . . . . . . . -- 40,656
PROPERTY AND EQUIPMENT, Net. . . . . . . . . . . . . . 882,267 695,896
GOODWILL, Net. . . . . . . . . . . . . . . . . . . . . 1,650,655 1,700,909
COVENANTS NOT TO COMPETE, Net. . . . . . . . . . . . . 484,572 518,791
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 167,642 354,693
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . 118,452 10,918
----------- -----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . $10,434,395 $10,336,306
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . $ 405,636 $ 202,220
Accrued commissions and bonuses. . . . . . . . . . . 329,492 325,077
Accrued other expenses . . . . . . . . . . . . . . . 97,078 183,921
Notes payable. . . . . . . . . . . . . . . . . . . . 23,987 26,304
Capital lease obligations. . . . . . . . . . . . . . 98,443 118,801
----------- -----------
Total current liabilities. . . . . . . . . . 954,636 856,323
LONG-TERM LIABILITIES:
Notes payable. . . . . . . . . . . . . . . . . . . . 87,446 82,440
Capital lease obligations. . . . . . . . . . . . . . 144,823 221,148
----------- -----------
Total liabilities. . . . . . . . . . . . . . 1,186,905 1,159,911
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock - $.0001 par value; authorized
5,000,000 shares; none issued. . . . . . . . . . . -- --
Common stock - $.0001 par value; authorized
495,000,000 shares; issued 4,261,883 and 4,249,383
shares, respectively . . . . . . . . . . . . . . . 426 425
Paid-in capital. . . . . . . . . . . . . . . . . . . 10,180,109 10,180,109
Notes receivable for exercise of options . . . . . . (74,000) (74,000)
Accumulated deficit (615,372) (930,139)
----------- -----------
Total capital and accumulated deficit. . . . 9,491,163 9,176,395
Less cost of treasury stock (78,500 shares,
common). . . . . . . . . . . . . . . . . . . . . . (243,673) --
----------- -----------
Total stockholders' equity . . . . . . . . . 9,247,490 9,176,395
----------- -----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . $10,434,395 $10,336,306
----------- -----------
----------- -----------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . $5,870,023 $4,745,416
Cost of sales . . . . . . . . . . . . . . . . . . . 3,791,236 3,415,086
---------- ----------
Gross profit. . . . . . . . . . . . . . . . . . 2,078,787 1,330,330
Marketing, distribution and administrative
expenses. . . . . . . . . . . . . . . . . . . . . 1,750,924 1,139,139
---------- ----------
Income from operations. . . . . . . . . . . . . 327,863 191,191
Other income:
Interest, net . . . . . . . . . . . . . . . . . . . 139,236 1,007
Other income. . . . . . . . . . . . . . . . . . . . 40,720 4,115
---------- ----------
Total other income. . . . . . . . . . . . . . . 179,956 5,122
---------- ----------
INCOME BEFORE TAXES . . . . . . . . . . . . . . . . 507,819 196,313
TAX EXPENSE . . . . . . . . . . . . . . . . . . . . 193,051 74,520
---------- ----------
NET INCOME. . . . . . . . . . . . . . . . . . . . . $ 314,768 $ 121,793
---------- ----------
---------- ----------
Net income per common share . . . . . . . . . . . . $ .07 $ .05
---------- ----------
---------- ----------
Net income per common share - assuming dilution . . $ .07 $ .04
---------- ----------
---------- ----------
Weighted average common shares outstanding. . . . . 4,217,894 2,390,692
---------- ----------
---------- ----------
Weighted average common shares outstanding -
assuming dilution. . . . . . . . . . . . . . . 4,596,763 3,357,545
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 314,768 $ 121,793
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 176,025 94,839
Deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,051 72,521
Gain on sale of other assets. . . . . . . . . . . . . . . . . . . . . (35,920) --
Changes in assets and liabilities which provided (used) cash:
Receivables and commission advances. . . . . . . . . . . . . . . . (10,756) (126,340)
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,830 (317,416)
Accounts payable and accrued expenses. . . . . . . . . . . . . . . 209,458 (21,321)
---------- -----------
Net cash provided by (used in) operating activities . . . . . 918,456 (175,924)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . (277,922) (83,531)
Purchase of Chambre' International, Inc. . . . . . . . . . . . . . . . . . -- (51,340)
Purchase of assets pursuant to SNSI Asset Purchase . . . . . . . . . . . . -- (1,274,441)
Advances to affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . (305,811) --
Repayment of receivable from affiliate . . . . . . . . . . . . . . . . . . 54,780 6,390
Purchase of other assets . . . . . . . . . . . . . . . . . . . . . . . . . (100,498) (72,940)
---------- -----------
Net cash used in investing activities. . . . . . . . . . . . (629,451) (1,475,862)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . -- 2,234,357
Proceeds from notes payable. . . . . . . . . . . . . . . . . . . . . . . . 37,727 40,980
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . (243,673) --
Payment of deferred offering costs . . . . . . . . . . . . . . . . . . . . (89,627) (133,862)
Principal payment on notes payable . . . . . . . . . . . . . . . . . . . . (40,416) (5,398)
Principal payment on capital lease obligations . . . . . . . . . . . . . . (101,072) (42,219)
---------- -----------
Net cash (used in) provided by financing activities. . . . . (437,061) 2,093,858
---------- -----------
NET (DECREASE) INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . (148,056) 442,072
CASH AND CASH EQUIVALENTS, BEGINNING. . . . . . . . . . . . . . . . . . . . . 5,775,276 169,569
---------- -----------
CASH AND CASH EQUIVALENTS, ENDING . . . . . . . . . . . . . . . . . . . . . . $5,627,220 $ 611,641
---------- -----------
---------- -----------
(Continued)
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest. . . . . . . . . . . . . . . . . . . . . . . . . $19,691 $ 11,688
Cash paid during the period for income taxes. . . . . . . . . . . . . . . . . . . . . . . -- 1,999
Noncash financing and investing activities:
Property and equipment acquired by capital lease . . . . . . . . . . . . . . . . . . . 4,389 69,094
SNSI Asset Purchase:
Fair value of assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (84,063)
Fair value of covenant not to compete. . . . . . . . . . . . . . . . . . . . . . . . . -- (500,000)
Purchase price in excess of tangible assets acquired and covenant not to compete . . . -- (1,490,378)
Fair value of common stock issuance. . . . . . . . . . . . . . . . . . . . . . . . . . -- 800,000
------- -----------
Cash paid to purchase SNSI assets. . . . . . . . . . . . . . . . . . . . . . . . . . . $ $(1,274,441)
------- -----------
------- -----------
Acquisition of Chambre' International, Inc.:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (84,802)
Fair value of covenant not to compete. . . . . . . . . . . . . . . . . . . . . . . . . -- (20,000)
Purchase price in excess of tangible assets acquired and covenant not to compete . . . -- (179,325)
Fair value of common stock issuance. . . . . . . . . . . . . . . . . . . . . . . . . . -- 84,000
Liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 148,787
------- -----------
Cash paid to purchase Chambre' International, Inc. . . . . . . . . . . . . . . . . . . $ -- $ (51,340)
------- -----------
------- -----------
(Concluded)
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited condensed financial statements and related notes have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. The accompanying condensed
financial statements and related notes should be read in conjunction with
the audited consolidated financial statements of the Company, and notes
thereto, for the year ended December 31, 1997.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented. Operating
results of the interim period are not necessarily indicative of the amounts
that will be reported for the year ending December 31, 1998. Certain
reclassifications have been made to prior period balances to conform with
the presentation for the current period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION- The condensed consolidated financial
statements include the accounts of Advantage Marketing Systems, Inc. and
its wholly owned subsidiaries, Miracle Mountain International, Inc. and
Chambre' International, Inc. (the "Company"). All significant intercompany
accounts have been eliminated.
NATURE OF BUSINESS - The Company markets a product line of consumer
oriented products in the weight management, dietary supplement and personal
care categories that are produced by various manufacturers. The Company
sells its product line through a network of full and part-time independent
distributors developed by the Company.
The Company also sells supplies and materials to its independent
distributors.
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 - The Company recognizes revenue upon shipment of
products, training aids and promotional material to the independent
distributors.
SALES RETURNS - All of the Company's products include a customer
satisfaction guarantee. Company products may be returned within 30 days of
purchase for a full refund or credit toward the purchase of another Company
product. The Company also has a buy-back policy where by it will
repurchase products sold to an independent distributor (subject to a
restocking fee) provided that the distributor resigns from the Company and
returns the product within 12 months of original purchase in marketable
condition. For the six months ended June 30, 1998 and 1997, the cost of
products returned to the Company is included in net sales and was three
percent of gross sales for such periods.
F-6
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
ADVERTISING - The Company expenses advertising related to the Company as
incurred. Total advertising expense for the six months ended June 30, 1998
and 1997 was $7,112 and 14,531, respectively.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of cash in
banks and all short-term investments with initial maturities of three months
or less.
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 distributors. 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 covenants not to
compete. Goodwill represents the excess of cost over the fair value of the
net assets acquired pursuant to the Miracle Mountain International, Inc.
("MMI"), Chambre' International, Inc. ("CII") and Stay 'N Shape
International, Inc. ("SNSI") acquisitions. The Company amortizes goodwill
from the acquisition of MMI over seven years and from the acquisitions of CII
and SNSI over twenty years. Covenants not to compete are being amortized
over the life of the contracts. Goodwill amortization for the six months
ended June 30, 1998 and 1997, was $50,254 and $27,772, respectively. Covenant
amortization for the six months ended June 30, 1998 and 1997, was $32,220 and
$19,211, respectively.
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 seven years. Assets
under capital leases and leasehold improvements are amortized over the lesser
of the term of the lease or the life of the asset.
LONG-LIVED ASSETS - Management of the Company assesses recoverability of its
long-lived assets, including goodwill, whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable through undiscounted future cash flows generated by that asset.
FAIR VALUE DISCLOSURE - The Company's financial instruments include cash and
cash equivalents, receivables, short-term payables, notes payable and capital
lease obligations. The carrying amounts of cash and cash equivalents,
receivables and short-term payables approximate fair value due to their
short-term nature. The carrying amounts of notes payable and capital lease
obligations approximate fair value based on borrowing rates currently
available to the Company.
EARNINGS PER SHARE - In 1997, the Company adopted the Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 128, EARNINGS PER SHARE, and has restated earnings per share for all
periods presented in accordance with that Statement. Earnings per common
share is computed based upon net income divided by the weighted average
number of common shares outstanding during each period. Earnings per common
share - assuming dilution is computed based upon net income divided by the
weighted average number of common shares outstanding during each period
adjusted for the effect of dilutive potential common shares calculated using
the treasury stock method. The following is a reconciliation of the common
shares used in the calculations of earnings per common share and earnings
per common share - assuming dilution:
F-7
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding:
For the six months ended June 30, 1998:
Earnings per common share:
Income available to common stockholders.................. $314,768 4,217,894 $.07
-----
Earnings per common share - assuming dilution:
Options................................................. -- 378,869
-------- ---------
Income available to common stockholders plus assumed
conversions............................................. $314,768 4,596,763 $.07
-------- --------- -----
For the six months ended June 30, 1997:
Earnings per common share:
Income available to common stockholders.................. $121,793 2,390,692 $.05
-----
Earnings per common share - assuming dilution:
Options................................................. -- 948,526
Warrants................................................ -- 18,327
-------- ---------
Income available to common stockholders plus assumed
conversions............................................. $121,793 3,357,545 $.04
-------- --------- -----
</TABLE>
Options to purchase 130,000 shares of common stock ranging from $3.60 to
$6.00 per share were outstanding at June 30, 1998 but were not included in
the computation of earnings per common share - assuming dilution because
the options' exercise price was greater than the average market price of
the common shares during the period. There were no antidilutive options
to purchase shares of common stock at June 30, 1997.
Warrants to purchase 2,092,211 shares ranging from $3.40 to $5.40 were
outstanding at June 30, 1998, but were not included in the computation of
earnings per common share - assuming dilution because the warrants'
exercise price was greater than the average market price of the common
shares during the period. There were no antidilutive warrants to purchase
shares of common stock at June 30, 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS - In February 1998, the FASB issued
SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS, which revises employers' disclosures about pension
and other postretirement benefit plans. The new statement will not have
any impact on the Company's consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGInG ACTIVITIES, which establishes accounting and
reporting standards for derivative instruments. The adoption of SFAS 133
would not have any present impact on the Company's consolidated financial
statements. This statement is effective for all fiscal quarters beginning
after June 15, 1999.
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
F-8
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
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.
3. STOCKHOLDERS' EQUITY
COMMON STOCK - On March 4, 1998, the Company announced that it intends to
repurchase up to $1 million of the Company's Common Stock in the open
market for cash. In connection with such repurchase, the Company filed
with the Securities and Exchange Commission pursuant to Section 13(e)(1) of
the Securities Exchange Act of 1934, as amended, an Issuer Tender Offer
Statement on March 4, 1998. As of June 30, 1998, the Company has
repurchased 78,500 shares of the Common Stock at a total cost of $243,673.
The additional number of shares of the Common Stock that may be purchased
by the Company is not determinable as of June 30, 1998 and will depend upon
a number of factors, including the market price of the Common Stock and the
amount of funds utilized for repurchase on each date of repurchase.
The Company's policy is to retain earnings to support the expansion of its
operations. The Board of Directors of the Company does not intend to pay
cash dividends on the Common Stock in the foreseeable future. Any future
cash dividends will depend on future earnings, capital requirements, the
Company's financial condition and other factors deemed relevant by the
Board of Directors.
F-9
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
COMMON STOCK OPTIONS - The following table summarizes the Company's stock
option activity for the six months ended June 30, 1998:
<TABLE>
<CAPTION>
SIX WEIGHTED-
MONTHS AVERAGE
ENDED EXERCISE
JUNE 30, 1998 PRICE
------------- ---------
<S> <C> <C>
Options outstanding,
beginning of period............................ 1,439,583 $2.28
Options granted
during the period.............................. 24,750 $3.00
Options exercised
during the period.............................. 12,500 $2.00
Options canceled
during the period.............................. 37,500 $2.00
---------
Options outstanding,
end of period................................... 1,414,333 $2.30
---------
---------
</TABLE>
COMMON STOCK WARRANTS - As of January 8, 1998, the Company reduced the
exercise price of the 1997-A Warrants from $12.00 to $3.40 and extended the
exercise period from January 31, 1999 to November 6, 2002, to make them
correspond more closely to the Redeemable Common Stock Purchase Warrants.
As of January 6, 1998, the exercise price of the Redeemable Common Stock
Purchase Warrants was adjusted from $5.40 to $3.40 representing 120 percent
of the average daily closing price of the Company's common stock for the
preceding 20-day period as prescribed in the prospectus of the Units
Offering. There was no expense recognized in the Company's financial
statements relating to either of the warrant exercise price reductions as
the changes only affect allocations of additional paid-in capital bacause
the warrants were issued in conjunction with certain of the Company's
equity offerings.
4. STOCK OPTION PLAN
During 1995, the Company approved the 1995 Stock Option Plan (the "Plan").
Under this Plan, options available for grant can consist of (i)
nonqualified stock options, (ii) nonqualified stock options with stock
appreciation rights attached, (iii) incentive stock options, and (iv)
incentive stock options with stock appreciation rights attached. The
Company has reserved 1,125,000 shares of the Company's common stock $.0001
par value, for the Plan. The Plan limits participation to employees,
independent contractors, and consultants. Nonemployee directors are
excluded from Plan participation. The option price for shares of stock
subject to this Plan is set by the Stock Option Committee of the Board of
Directors at a price not less than 85% of the market value of the stock on
the date of grant. No stock options shall be exercisable within six months
from the date of grant, unless under a Plan exception, nor more than ten
years after the date of grant. The Plan provides for the grant of stock
appreciation rights, which allow the holder to receive in cash, stock or
combination thereof, the difference between the exercise price and the fair
value of the stock at date of exercise. The fair value of stock
appreciation rights is charged to
F-10
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
compensation expense. The stock appreciation right is not separable from
the underlying stock option or incentive stock option originally granted
and can only be exercised in tandem with the stock option. During the
year ended December 31, 1997, the Company granted 173,850 net options
under the Plan. During the six months ended June 30, 1998, the Company
granted 24,750 options under the Plan. No stock appreciation rights are
attached to any options outstanding. At June 30, 1998, the Company had
1,414,333 stock options outstanding of which only 198,600 had been
granted pursuant to his plan.
5. COMMITMENTS AND CONTINGENCIES
ADDITIONAL TAX LIABILITY - The Company has determined that as a result of
certain changes occurring in 1998 a potential liability for additional
taxes exists. As of the date of these financial statements the Company
cannot reasonably determine the amount of the liability. The amount of the
liability will be determined by the results of certain ongoing negotiations
which the Company anticipates concluding within the next 90 days.
The Company believes that if the negotiations are unsuccessful, the
additional tax liability could have a net adverse impact on the Company's
earnings of as much as $372,000, and would have a material adverse impact
on the Company's results of operations and cash flows for the year ending
December 31, 1998, however the adverse impact on the Company's financial
position and liquidity would not be material.
RECENT REGULATORY DEVELOPMENTS - A significant portion of the Company's net
sales has been, and is expected to continue to be, dependent upon the
Company's AM-300 product. The Company's net sales of AM-300 represented
42.9 percent and 45.1 percent of net sales for the six months ended June
30, 1998 and 1997, respectively. One of the herbal ingredients in AM-300
is ephedra concentrate, which contains naturally occurring ephedrine.
Ephedrine products have been the subject of adverse publicity in the United
States and other countries relating to alleged harmful effects, including
the deaths of several individuals. Currently, the Company offers AM-300
only in the United States (except in certain states in which regulations
may prohibit or restrict the sale of such product). On April 10, 1996, the
Food and Drug Administration ("FDA") issued a statement warning consumers
not to purchase or ingest natural sources of ephedrine within dietary
supplements claiming to produce certain effects (none of which are claimed
for the Company's product). On June 4, 1997, the FDA proposed a regulation
which will, if it becomes effective as proposed, significantly limit the
ability of the Company to sell AM-300 and any other weight management
products which contain ephedra or ephedrine. If the FDA's proposed
regulations were to become effective, management believes that the impact
on the Company's financial statements could be a material reduction in
sales, cost of sales and marketing, distribution and administrative
expenses and could result in material losses to the Company, but would not
have a significant adverse effect on financial position.
PRODUCT LIABILITY - The Company, like other marketers of products that are
intended to be ingested, faces an inherent risk of exposure to product
liability claims in the event that the use of its products results in
injury. The Company generally does not obtain contractual indemnification
from parties manufacturing its products. However, the Company has agreed
to indemnify Tinos, L.L.C., the licensor of Choc-Quilizer, against any
product liability claims arising from the Choc-Quilizer product marketed by
the Company, and the Company has agreed to indemnify Chemins against claims
arising from products
F-11
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
manufactured by Chemins and marketed by the Company. Historically, the
Company has relied upon its manufacturer's product liability insurance for
coverage. The Company recently obtained product liability insurance
coverage in its own name. The limits of this coverage are $4,000,000 per
occurrence and $5,000,000 aggregate. Although the Company has never had
a product liability claim, such claims against the Company could result in
material losses to the Company.
6. RELATED PARTY TRANSACTION
During the first quarter of 1998, the Company agreed to loan John W. Hail,
the Chief Executive Officer and a major shareholder of the Company, up to
$250,000. Subsequently the Company agreed to loan up to an additional
$75,000. The loan is secured, bears interest at eight percent per annum
and is due on March 31, 1999. As of June 30, 1998, the balance due on this
loan was $305,811 plus any accrued interest. The loan was unanimously
approved by the Company's board of directors.
7. PENDING REGISTRATION STATEMENT
On March 11, 1998, the Company filed a Registration Statement, file number
333-47801, with the Securities and Exchange Commission pursuant to which
the Company is seeking to register 5,000,000 stock purchase plan
participation interests ("Participation Interests") in the Advantage
Marketing Systems, Inc. Distributor Stock Purchase Plan (the "Plan"). The
Participation Interests will be offered to the distributors of the
Company's products and services ("Eligible Persons"). An Eligible Person
electing to participate in the Plan (a "Participant") will be entitled
through purchase of the Participation Interests to purchase in the open
market through the Plan, shares of common stock, $.0001 par value per share
(the "Common Stock"), previously issued by the Company. The Participation
Interests are non-transferable; therefore, a market for the Participation
Interests will not develop. The proceeds from sale of the Participation
Interests will become the Participants' contributions to the Plan which
will be used to purchase the Common Stock and will not be placed into
escrow pending purchase of the Common Stock. Other than an annual service
fee of $5.00 per Participant and a transaction fee of $1.25 per month, the
Company will not receive any proceeds from the purchase of the Common Stock
by the Plan. The offering price of each Participation Interest will be
$1.00, and each Eligible Person will be required initially to purchase a
minimum of twenty-five Participation Interests upon electing to participate
in the Plan. As of June 30, 1998, the registration statement has not yet
been declared effective. There is no minimum amount of sales of
Participation Interests required.
8. SUBSEQUENT EVENT
On July 31, 1998, the Company acquired all rights, including formulations
and customer lists, for the ToppFast, ToppStamina and ToppFitt products
from ToppMed, Inc. of Los Angeles, California for a total purchase price of
$192,000 which was paid at closing.
* * * * * *
F-12
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Advantage Marketing Systems, Inc. and Subsidiaries
Oklahoma City, Oklahoma
We have audited the accompanying consolidated balance sheets of Advantage
Marketing Systems, Inc. and subsidiaries (the "Company") as of December 31,
1997, and 1996, and the related consolidated statements of income,
stockholders' equity (deficiency), and cash flows for each of the three years
in the period ended December 31, 1997. 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 the Company as of December 31,
1997, and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
March 26, 1998
F-13
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 5,775,276 $ 169,569
Receivables - net of allowance of $25,800 at each period end.......... 184,915 52,013
Receivable from affiliate............................................. 14,124 13,042
Commission advances................................................... 59,268 44,821
Inventory............................................................. 812,125 217,945
Deferred income taxes................................................. 85,224 157,853
Other assets.......................................................... 68,432 --
----------- -----------
Total current assets...................................... 6,999,364 655,243
RECEIVABLES............................................................. 15,079 18,000
RECEIVABLE FROM AFFILIATE .............................................. 40,656 54,780
PROPERTY AND EQUIPMENT, Net............................................. 695,896 377,190
GOODWILL, Net........................................................... 1,700,909 109,232
COVENANTS NOT TO COMPETE, Net........................................... 518,791 52,222
DEFERRED INCOME TAXES................................................... 354,693 341,760
OTHER ASSETS............................................................ 10,918 181,914
----------- -----------
TOTAL................................................................... $10,336,306 $1,790,341
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable...................................................... $ 202,220 $ 268,433
Accrued promotion expense............................................. -- 46,370
Accrued commissions and bonuses....................................... 325,077 172,502
Accrued other expenses................................................ 183,921 75,381
Notes payable......................................................... 26,304 9,446
Capital lease obligations............................................. 118,801 66,758
----------- -----------
Total current liabilities................................. 856,323 638,890
LONG-TERM LIABILITIES:
Notes payable......................................................... 82,440 19,049
Capital lease obligations............................................. 221,148 210,973
----------- -----------
Total liabilities........................................ 1,159,911 868,912
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 12)
STOCKHOLDERS' EQUITY:
Preferred stock - $.0001 par value; authorized
5,000,000 shares; none issued........................................ -- --
Common stock - $.0001 par value; authorized 495,000,000 shares;
issued and outstanding 4,249,383 and 2,157,262 shares,
respectively (See Note 4)............................................ 425 214
Paid-in capital....................................................... 10,180,109 1,981,380
Notes receivable for exercise of options.............................. (74,000) --
Accumulated deficit................................................... (930,139) (1,060,165)
----------- -----------
Total stockholders' equity............................ 9,176,395 921,429
----------- -----------
TOTAL................................................................... $10,336,306 $1,790,341
----------- -----------
----------- -----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-14
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Net sales ............................................... $10,192,227 $6,155,073 $4,492,604
Cost of sales ........................................... 7,271,660 4,265,905 3,045,636
----------- ---------- ----------
Gross profit ........................................ 2,920,567 1,889,168 1,446,968
Marketing, distribution and administrative expenses ..... 2,792,879 1,561,753 1,199,797
----------- ---------- ----------
Income from operations .............................. 127,688 327,415 247,171
Other income (expense):
Interest, net ........................................... 34,017 (10,538) (22,998)
Other income ............................................ 28,017 8,667 25,535
----------- ---------- ----------
Total other income (expense) ........................ 62,034 (1,871) 2,537
----------- ---------- ----------
INCOME BEFORE TAXES ..................................... 189,722 325,544 249,708
TAX (EXPENSE) BENEFIT ................................... (59,696) 499,613 --
----------- ---------- ----------
NET INCOME .............................................. $ 130,026 $ 825,157 $ 249,708
----------- ---------- ----------
----------- ---------- ----------
Net income per common share ............................. $ .05 $ .39 $ .12
----------- ---------- ----------
----------- ---------- ----------
Net income per common share - assuming dilution ......... $ .04 $ .26 $ .09
----------- ---------- ----------
----------- ---------- ----------
Weighted average common shares outstanding .............. 2,751,771 2,135,097 2,121,944
----------- ---------- ----------
----------- ---------- ----------
Weighted average common shares outstanding -
assuming dilution...................................... 3,762,642 3,203,485 2,838,726
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-15
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
NOTES TOTAL
RECEIVABLE STOCKHOLDERS'
SHARES COMMON PAID-IN FOR EXERCISE ACCUMULATED EQUITY
(SEE NOTE 4) STOCK CAPITAL OF OPTIONS DEFICIT (DEFICIENCY)
------------ ------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1995 ............. 2,134,512 $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 ........... 2,137,012 212 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 ........... 2,157,262 214 1,981,380 -- (1,060,165) 921,429
Issuance of stock for
Chambre' acquisition ........ 14,000 1 83,999 -- -- 84,000
Warrants and rights offering,
net ......................... 337,211 34 1,831,247 -- -- 1,831,281
Issuance of stock for
SNSI acquisition ............ 125,984 13 799,987 -- -- 800,000
Options exercised for cash .... 46,945 4 79,996 -- -- 80,000
Options exercised by tendering
mature shares ............... 26,731 4 (4) -- -- --
Options exercised by issuance
of note ..................... 46,250 5 73,995 (74,000) -- --
Common stock offering, net .... 1,495,000 150 5,329,509 -- -- 5,329,659
Net income .................... -- -- -- -- 130,026 130,026
--------- ---- ----------- -------- ----------- -----------
BALANCE,
DECEMBER 31, 1997 ........... 4,249,383 $425 $10,180,109 $(74,000) $ (930,139) $ 9,176,395
--------- ---- ----------- -------- ----------- -----------
--------- ---- ----------- -------- ----------- -----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-16
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 130,026 $ 825,157 $ 249,708
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization ................................... 251,443 65,993 43,310
Deferred taxes .................................................. 59,696 (499,613) --
Provision for bad debts ......................................... -- 4,319 2,000
Write-off of deferred offering costs ............................ -- 15,000 --
Gain on sale of property and equipment .......................... (18,671) (1,572) --
Changes in assets and liabilities which (used) provided cash:
Receivables and commission advances ........................... (167,192) (80,139) 7,280
Inventory ..................................................... (722,806) (119,324) (50,750)
Other assets .................................................. 269,946 -- (40,852)
Accounts payable and accrued expenses ......................... 78,971 216,600 150,149
----------- --------- ---------
Net cash (used in) provided by operating activities ......... (118,587) 426,421 360,845
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................. (312,709) (66,675) (50,105)
Receivable from affiliate ........................................... -- (22,000) (87,684)
Proceeds from sale of property and equipment ........................ 40,196 1,700 --
Repayment of receivable from affiliate .............................. 13,042 6,141 67,401
Purchase of Miracle Mountain International, Inc. .................... -- (56,103) --
Purchase of Chambre International, Inc. ............................. (51,340) -- --
Purchase of SNSI assets ............................................. (1,274,441) -- --
Purchase of other assets ............................................ (106,803) -- --
----------- --------- ---------
Net cash used in investing activities ....................... (1,692,055) (136,937) (70,388)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .............................. 8,284,357 1,500 12,500
Loans from stockholders ............................................. -- -- 31,963
Proceeds from notes payable ......................................... 114,259 -- 39,098
Bank overdraft ...................................................... -- -- (46,663)
Payment of deferred offering costs .................................. (862,967) (125,400) (52,777)
Payment on notes payable - stockholders ............................. -- (81,929) (142,615)
Payment on notes payable ............................................ (34,010) (8,445) (7,985)
Principal payment on capital lease obligations ...................... (85,290) (17,728) (11,891)
----------- --------- ---------
Net cash provided by (used in) financing activities ......... 7,416,349 (232,002) (178,370)
----------- --------- ---------
NET INCREASE IN CASH .................................................. 5,605,707 57,482 112,087
CASH AND CASH EQUIVALENTS, BEGINNING .................................. 169,569 112,087 --
----------- --------- ---------
CASH AND CASH EQUIVALENTS, ENDING ..................................... $ 5,775,276 $ 169,569 $ 112,087
----------- --------- ---------
----------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-17
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION- The consolidated financial statements include
the accounts of Advantage Marketing Systems, Inc. and its wholly owned
subsidiaries, Miracle Mountain International, Inc. and Chambre'
International, Inc. (the "Company"). All significant intercompany accounts
have been eliminated.
NATURE OF BUSINESS - The Company markets a product line of consumer
oriented products in the weight management, dietary supplement and personal
care categories that are produced by various manufacturers. The Company
sells its product line through a network of full and part-time independent
distributors developed by the Company.
The Company also sells supplies and materials to its independent
distributors.
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 - The Company recognizes revenue upon shipment of
products, training aids and promotional material to the independent
distributors.
SALES RETURNS - All of the Company's products include a customer
satisfaction guarantee. Company products may be returned within 30 days of
purchase for a full refund or credit toward the purchase of another Company
product. The Company also has a buy-back policy where by it will
repurchase products sold to an independent distributor (subject to a
restocking fee) provided that the distributor resigns from the Company and
returns the product within 12 months of original purchase in marketable
condition. For the years ended December 31, 1997 and 1996, the cost of
products returned to the Company are included in net sales and was three
and four percent of gross sales, respectively.
ADVERTISING - The Company expenses advertising related to the Company as
incurred. Total advertising expense for 1997, 1996 and 1995 was $28,416,
$26,410 and $16,044, respectively.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of cash in
banks and all short term investments with initial maturities of three
months or less.
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 distributors.
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 covenants not to
compete. Goodwill represents the excess of cost over the fair value of the
net assets acquired pursuant to the Miracle Mountain International, Inc.
("MMI"), Chambre' International, Inc. ("CII") and Stay 'N Shape
International, Inc. ("SNSI") acquisitions (See Note 9). The Company
amortizes goodwill from the acquisition of MMI over seven years and from
the acquisitions of CII and SNSI over twenty years. Covenants not to
compete are being amortized over the life of the contracts. Goodwill
amortization for the years ended December 31, 1997 and
F-18
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1996 was $78,026 and $9,930, respectively. Covenant amortization for the
years ended December 31, 1997 and 1996, was $53,431 and $7,778,
respectively.
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 seven years. Assets under capital leases and leasehold
improvements are amortized over the lesser of the term of the lease or
the life of the asset.
LONG-LIVED ASSETS - Management of the Company assesses recoverability of
its long-lived assets, including goodwill, whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable through future cash flows generated by that asset.
FAIR VALUE DISCLOSURE - The Company's financial instruments include cash
and cash equivalents, receivables, short-term payables, notes payable and
capital lease obligations. The carrying amounts of cash and cash
equivalents, receivables and short-term payables approximate fair value due
to their short-term nature. The carrying amounts of notes payable and
capital lease obligations approximate fair value based on borrowing rates
currently available to the Company.
EARNINGS PER SHARE - In 1997, the Company adopted the Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 128, EARNINGS PER SHARE, and has restated earnings per share
for all periods presented in accordance with that Statement. Earnings per
common share is computed based upon net income divided by the weighted
average number of common shares outstanding during each period. Earnings
per common share - assuming dilution is computed based upon net income
divided by the weighted average number of common shares outstanding during
each period adjusted for the effect of dilutive potential common shares
calculated using the treasury stock method. The following is a
reconciliation of the common shares used in the calculations of earnings
per common share and earnings per common share - assuming dilution:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- -------------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding:
For the year ended December 31, 1997:
Earnings per common share:
Income available to common stockholders ....................... $130,026 2,751,771 $.05
----
Earnings per common share - assuming dilution:
Options ....................................................... -- 825,061
Warrants ...................................................... -- 185,810
-------- ---------
Income available to common stockholders plus assumed
conversions ................................................... $130,026 3,762,642 $.04
-------- --------- ----
-------- --------- ----
For the year ended December 31, 1996:
Earnings per common share:
Income available to common stockholders ......................... $825,157 2,135,097 $.39
----
Earnings per common share - assuming dilution:
Options ....................................................... -- 990,379
F-19
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Warrants ...................................................... -- 78,009
-------- ---------
Income available to common stockholders plus assumed
conversions ................................................... $825,157 3,203,485 $.26
-------- --------- ----
-------- --------- ----
For the year ended December 31, 1995:
Earnings per common share:
Income available to common stockholders ......................... $249,708 2,121,944 $.12
----
Earnings per common share - assuming dilution:
Options ....................................................... -- 716,782
-------- ---------
Income available to common stockholders plus assumed
conversions ................................................. $249,708 2,838,726 $.09
-------- --------- ----
-------- --------- ----
</TABLE>
Options to purchase 5,000 shares of common stock at $6.00 per share
were outstanding at December 31, 1997 but were not included in the
computation of earnings per common share - assuming dilution because
the options' exercise price was greater than the average market price
of the common shares. There were no antidilutive options to purchase
shares of common stock at December 31, 1996 and 1995, respectively.
Warrants to purchase 525,860 shares at $8.00 and 1,050,470 shares ranging
from $6.00 to $8.00 of common stock were outstanding at December 31, 1996
and 1995, respectively, but were not included in the computation of
earnings per common share - assuming dilution because the warrants'
exercise price was greater than the average market price of the common
shares. There were no antidilutive warrants to purchase shares of common
stock at December 31, 1997.
RECENTLY ADOPTED ACCOUNTING STANDARDS - In February, 1997, the FASB issued
SFAS No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. SFAS No.
129 establishes standards for disclosure of information regarding an
entity's capital structure. The adoption of SFAS No. 129 in 1997 did not
affect the Company's capital structure disclosures.
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.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED - In June 1997, the FASB
issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which establishes
standards for reporting and displaying comprehensive income and its
components (revenues, expenses, gains and losses) in financial statements.
In addition, SFAS No. 130 requires the Company to classify items of other
comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately in the
stockholders' equity section of the consolidated balance sheet. The
Company will adopt SFAS No. 130 on January 1, 1998 as required.
Also in June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes
reporting standards for public companies concerning annual and interim
financial statements of their operating segments and related information.
Operating
F-20
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
segments are components of a company about which separate financial
information is available that is regularly evaluated by the chief
operating decision maker(s) in deciding how to allocate resources and
assess performance. The Standard sets criteria for reporting
disclosures about a company's products and services, geographic areas
and major customers. The Company will adopt SFAS No. 131 on January 1,
1998 as required and believes the Company has only one segment, as that
term is defined in SFAS No. 131.
RECLASSIFICATIONS - Certain reclassifications have been made to prior year
balances to conform with the presentation for the current period.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Office furniture, fixtures and equipment ......... $ 954,293 $ 633,086
Automobiles ...................................... 142,055 44,872
Leasehold improvements ........................... 34,388 26,576
---------- ---------
1,130,736 704,534
Accumulated depreciation and amortization ........ (434,840) (327,344)
---------- ---------
Total property and equipment, net ................ $ 695,896 $ 377,190
---------- ---------
---------- ---------
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
was $119,986, $48,285 and $43,310, respectively.
3. LEASE AGREEMENTS
During 1997 and 1996, the Company entered into various capital leases for
office related furniture and equipment. The lease terms range from 24 to
60 months. Additionally, annual lease rental payments for each lease range
from $900 to $40,000 per year. The schedule of future minimum lease
payments below reflects all payments under the leases.
The property and equipment accounts include $449,540 and $306,595 for
leases that have been capitalized at December 31, 1997 and 1996,
respectively. Related accumulated amortization amounted to $109,591 and
$28,864 at December 31, 1997 and 1996, respectively.
The Company leases office space, warehouse space and certain equipment
under noncancelable operating leases.
F-21
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Future annual minimum lease payments under capital leases and noncancelable
operating leases with initial or remaining terms of one year or more at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
-------- --------- ----------
<S> <C> <C> <C>
Year ending:
1998..................................................... $147,129 $136,640 $ 283,769
1999..................................................... 121,819 144,467 266,286
2000..................................................... 72,394 150,886 223,280
2001..................................................... 41,244 156,658 197,902
2002..................................................... 6,955 160,492 167,447
Minimum lease payments thereafter........................ -- 91,897 91,897
-------- -------- ----------
Total minimum lease payments 389,541 $841,040 $1,230,581
-------- ----------
-------- ----------
Less amount representing interest 49,592
--------
Present value of net minimum lease payments 339,949
Less current portion 118,801
--------
Long-term capital lease obligations $221,148
--------
--------
</TABLE>
Rental expense under operating leases for the years ended December 31,
1997, 1996 and 1995 was $88,632, $63,425 and $55,476, respectively
4. STOCKHOLDERS' EQUITY
COMMON STOCK - On January 31, 1997, the Company distributed, at no cost,
2,148,191 non-transferable rights ("Rights") to its shareholders of record
on such date. Each of the Rights entitled the holder to purchase one unit
(consisting of one share of Common Stock and one 1997-A Warrant) on or
before March 17, 1997 for $6.80 per unit (the "Rights Offering").
Concurrently with the Rights Offering, the Company redeemed its outstanding
Class A and Class B Common Stock Purchase Warrants (the "Public Warrants")
for $.0008 per warrant (the "Warrant Redemption") effective on March 17,
1997. In connection with the Warrant Redemption, the Company modified the
terms of the Public Warrants and offered to holders of the Public Warrants
(the "Warrant Holders") the right to exercise each of the Public Warrants
for the purchase of one unit (consisting of one share of Common Stock and
one 1997-A Warrant), at an exercise price of $6.00 per unit (the "Warrant
Modification Offering"). Proceeds to the Company from the Warrant
Modification Offering and the Rights Offering (the "Offerings") were
$2,154,357. Accumulated offering cost s of $323,076 were charged against
the proceeds of the Offerings. Pursuant to the Offerings, the Company
issued in units 337,211 shares of Common Stock and 337,211 1997-A Warrants.
On November 12, 1997, the Company sold 1,495,000 shares of Common Stock and
1,495,000 Redeemable Common Stock Purchase Warrants in units consisting of
one share of Common Stock and one Redeemable Common Stock Purchase Warrant
from which the Company received net proceeds of $6,050,000. Accumulated
offering costs of approximately $720,000 were charged against the proceeds
of the offering (the "Units Offering").
During 1997 in connection with the registration of the Units Offering,
certain officers and shareholders agreed to certain escrow and lock-in
arrangements required by the Oklahoma Department of Securities until
November 6, 2000. The agreement encompasses 390,406 shares of the
Company's common stock and stock options and warrants to purchase 662,000
shares of such common stock and does not permit the
F-22
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
sale or disposition of such securities by these officers and shareholders.
The shares of common stock, stock options and warrants are treated as
outstanding securities for purposes of the Company's earnings per share
calculations.
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 has 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 policy is to retain earnings to support the expansion of its
operations. The Board of Directors of the Company does not intend to pay
cash dividends on the Common Stock in the foreseeable future. Any future
cash dividends will depend on future earnings, capital requirements, the
Company's financial condition and other factors deemed relevant by the
Board of Directors.
COMMON STOCK OPTIONS - During 1997, the Company granted 493,100 options at
exercise prices ranging from $2.70 per share to $6.00 per share. Options
were granted primarily for services rendered and to ensure the future
availability of those services to the Company. Options granted on December
26, 1997 have a six month vesting period. During 1997, 135,695 options
were exercised of which 46,945, 42,500 and 46,250 were exercised for cash,
15,769 mature shares and notes receivable, respectively. In addition,
during this period 319,250 options with a weighted average exercise price
of $4.67 per share were voluntarily surrendered and canceled by the Company
in exchange for an equal number of options , with an exercise price of
$2.70 per share, 125,000 options were canceled without exchange for new
options and 2,499 options expired. The exercise price of the exchanged
option was equal to the market value of the Company's stock on the date of
exchange. There was no expense recognized in the Company's financial
statements relating to the exchange. See Note 5 for the pro forma effects
of SFAS 123.
During 1995, the Company granted 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 options granted during 1995 and
currently outstanding are currently exercisable. See Note 5 for the pro
forma effects of SFAS 123.
The following table summarizes the Company's stock option activity for the
years ended December 31, 1997, 1996 and 1995 (as restated for the
one-for-eight reverse split in October 1996):
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1997 PRICE 1996 PRICE 1995 PRICE
--------- -------- --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 1,528,927 $ 2.49 1,540,177 $ 2.52 350,358 $ 1.66
Options granted
during the year 493,100 3.68 -- -- 1,189,819 2.77
</TABLE>
F-23
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<S> <C> <C> <C> <C> <C>
Options exercised
during the year (135,695) 1.64 -- -- -- --
Options canceled
during the year (444,250) 4.75 -- -- -- --
Options expired
during the year (2,499) 1.60 (11,250) 6.48 -- --
---------- --------- ----------
Options outstanding,
end of year 1,439,583 $ 2.28 1,528,927 $ 2.49 1,540,177 $ 2.52
---------- --------- ----------
---------- --------- ----------
Fair value of options
granted during the
year $ 467,554 -- $2,079,708
---------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ---------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
--------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.60 - 2.70 1,309,583 4.9 years $2.14 963,233 $1.94
$3.60 - 6.00 130,000 2.5 years $3.69 130,000 $3.69
--------- ---------
$1.60 - 6.00 1,439,583 1,093,233
--------- ---------
--------- ---------
</TABLE>
COMMON STOCK WARRANTS - The following table summarizes the Company's common
stock warrants and their activity for the years ended December 31, 1997,
1996 and 1995 (as restated for the one-for-eight reverse split in October
1996):
<TABLE>
<CAPTION>
WARRANTS
ISSUED AND EXERCISE
OUTSTANDING PRICE EXERCISE PERIOD
----------- -------- -----------------
<S> <C> <C> <C>
DECEMBER 31, 1997:
Class A Warrants, beginning of year ............... 524,360 $ 6.00 4/26/89 - 7/26/97
Class A Warrants redeemed during the year ......... (524,360) $ 6.00
----------
Class A Warrants, end of year ..................... --
----------
----------
Class B Warrants, beginning of year ............... 525,860 $ 8.00 4/26/89 - 7/26/97
Class B Warrants redeemed during the year ......... (525,860) $ 8.00
----------
Class B Warrants, end of year ..................... --
----------
----------
1997-A Warrants, beginning of year ................ --
</TABLE>
F-24
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<S> <C> <C> <C>
1997-A Warrants issued during the year ............ 337,211 $12.00 1/31/97 - 1/31/99
----------
1997-A Warrants, end of year ...................... 337,211
----------
----------
Redeemable Common Stock Purchase Warrants,
beginning of year .............................. --
Redeemable Common Stock Purchase Warrants,
issued during the year ......................... 1,495,000 $ 5.40 11/6/97 - 11/6/02
----------
Redeemable Common Stock Purchase Warrants,
end of year .................................... 1,495,000
----------
----------
Underwriters' Warrants, beginning of year ......... --
Underwriters' Warrants issued during the year ..... 130,000 $ 5.40 11/12/98 - 11/12/02
----------
Underwriters' Warrants, end of year ............... 130,000
----------
----------
DECEMBER 31, 1996:
Class A Warrants, beginning of year ............... 524,610 $ 6.00 4/26/89 - 7/26/97
Class A Warrants exercised during the year ........ (250) $ 6.00
----------
Class A Warrants, end of year ..................... 524,360
----------
----------
Class B Warrants .................................. 525,860 $ 8.00 4/26/89 - 7/26/97
----------
----------
DECEMBER 31, 1995:
Class A Warrants, beginning of year ............... 525,860 $ 6.00 4/26/89 - 7/26/97
Class A Warrants exercised during the year ........ (1,250) $ 6.00
----------
Class A Warrants, end of year ..................... 524,610
----------
----------
Class B Warrants .................................. 525,860 $ 8.00 4/26/89 - 7/26/97
----------
----------
</TABLE>
Each warrant entitles the holder to purchase one share of common stock. As
of January 8, 1998, the Company reduced the exercise price of the 1997-A
Warrants from $12.00 to $3.40 and extended the exercise period from January
31, 1999 to November 6, 2002, to make them correspond more closely to the
Redeemable Common Stock Purchase Warrants.
As of January 6, 1998, the exercise price of the Redeemable Common Stock
Purchase Warrants was adjusted from $5.40 to $3.40 representing 120 percent
of the average daily closing price of the Company's Common Stock for the
preceding 20 day period as presecribed in the prospectus of the Units
Offering. There was no expense recognized in the Company's financial
statements relating to the warrant exercise price reductions as the
changes only affect allocations of additional paid-in capital because the
warrants were issued in conjunction with equity offerings of the Company.
The reduced exercise prices exceeded the market value of the Company's
Common Stock on the date of the reductions.
The Redeemable Common Stock Purchase Warrants are subject to redemption by
the Company at a price of $0.25 per warrant. All of the outstanding
Redeemable Common Stock Purchase Warrants must be redeemed if any are
redeemed. The Company may redeem the 1997-A Warrants for $0.0001 per
warrant. Any redemption of unexercised 1997-A Warrants would be for all
such outstanding warrants. The Underwriters' Warrants were issued in
connection with the Company's sale of Common Stock and Redeemable Warrants
in November 1997 and were in addition to other fees paid to the
underwriters. The Underwriters' Warrants entitle the holder to buy one
unit consisting of one share of the Company's Common Stock and one warrant
for the purchase of one other share of the Company's Common Stock for
$3.40.
5. STOCK OPTION PLAN
F-25
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
During 1995, the Company approved the 1995 Stock Option Plan (the "Plan").
Under this Plan, options available for grant can consist of (i)
nonqualified stock options, (ii) nonqualified stock options with stock
appreciation rights attached, (iii) incentive stock options, and (iv)
incentive stock options with stock appreciation rights attached. The
Company has reserved 1,125,000 shares of the Company's common stock $.0001
par value, for the Plan. The Plan limits participation to employees,
independent contractors, and consultants. Nonemployee directors are
excluded from Plan participation. The option price for shares of stock
subject to this Plan is set by the Stock Option Committee of the Board of
Directors at a price not less than 85% of the market value of the stock on
the date of grant. No stock options shall be exercisable within six months
from the date of grant, unless under a Plan exception, nor more than ten
years after the date of grant. The Plan provides for the grant of stock
appreciation rights, which allow the holder to receive in cash, stock or
combination thereof, the difference between the exercise price and the fair
value of the stock at date of exercise. The fair value of stock
appreciation rights is charged to compensation expense. The stock
appreciation right is not separable from the underlying stock option or
incentive stock option originally granted and can only be exercised in
tandem with the stock option. During the year ended December 31, 1997, the
Company granted 173,850 net options under the Plan. No stock appreciation
rights are attached to any options outstanding. At December 31, 1997, the
Company had 1,439,583 stock options outstanding of which only 173,850 had
been issued pursuant to this plan.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock-based compensation awards.
Accordingly, no compensation cost has been recognized in the accompanying
consolidated financial statements. The following pro forma data is
calculated net of tax as if compensation cost for the Company's stock-based
compensation awards (see also Note 4) 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>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Net income as reported .............................................. $ 130,026 $ 825,157 $ 249,708
Adjustment, net of tax ............................................ $ (467,554) -- (2,079,708)
----------- ---------- -----------
Pro forma net income (loss) ......................................... $ (337,528) $ 825,157 $(1,830,000)
Net income per common share as reported ............................. $ .05 $ 0.39 $ 0.12
Adjustment, net of tax ............................................ (0.17) -- (0.98)
----------- ---------- -----------
Pro forma net income (loss) per common share ........................ $ (0.12) $ 0.39 $ ( 0.86)
Pro forma net income (loss) per common share - assuming
dilution .......................................................... $ (0.12) $ 0.26 $ (0.86)
Weighted average common shares outstanding .......................... 2,751,771 2,135,097 2,121,944
Weighted average common shares outstanding - assuming dilution ...... 3,762,642 3,203,485 2,838,726
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997 and 1995, respectively (no option
grants during 1996): risk-free interest rates of 5.93 and 5.94 percent; no
dividend yield or assumed forfeitures; expected lives of 6.7 and 7.3 years;
and volatility of 60 and 59 percent. The pro forma amounts above are not
likely to be representative of future years because there is no assurance
that additional awards will be made each year.
F-26
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. RELATED PARTIES
During 1997, 1996 and 1995, the Company received approximately $7,157,
$9,116 and $16,415, 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 and $87,684 during the years ended December 31, 1996 and 1995,
respectively. JHA made repayments of these advances of $13,042, $6,141 and
$67,401 during the years ended December 31, 1997, 1996 and 1995,
respectively. The Company also provided administrative services for JHA
and recognized revenue from JHA of $6,000 and $12,000 for the years ended
December 31, 1996 and 1995, respectively, and are included in the advances.
The Company ceased providing administrative services for JHA during 1996
and adopted a policy to not make any further advances to JHA. In 1996 JHA
executed a promissory note payable to the Company which had a principal
balance of $54,780 and $67,822 at December 31, 1997 and 1996, respectively,
bearing interest at 8.00% per annum and payable in installments of $1,499
per month.
During 1995, the Company combined interest payable of approximately $52,000
to the Company's Chief Executive Officer with principal due and began
making weekly interest and principal payments of $1,500. The loan was
unsecured, due on demand and bore interest at 12%. The loan had been
repaid as of December 31, 1996.
Certain stockholders receive commissions on revenue of the Company. Such
commissions are recognized as compensation to the stockholders and are
included in selling expense.
During 1995, the Company's Chief Executive Officer individually entered
into lease agreements covering telephone equipment and related software.
Such equipment and software are utilized by the Company. During the years
ended December 31, 1997, 1996 and 1995 the Company made aggregate monthly
payments pursuant to such lease agreements of $19,427, $19,427 and
$14,314, respectively.
During the years ended December 31, 1997, 1996 and 1995, the Company paid a
Director of the Company, sales commissions of $32,886, $38,337 and $51,669,
respectively.
7. 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. Management concluded in 1996 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. The Company's deferred tax assets relate primarily to
net operating loss carryforwards for income tax purposes at December 31,
1997, totaling $1,193,428, which will begin to expire in 2003. The Company
has a net deferred tax asset at December 31, 1997 and 1996, of $439,917 and
$499,613, respectively.
F-27
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
A reconciliation of the statutory Federal income tax rate to the effective
income tax rate for the years ended December 31, 1997, 1996, and 1995 is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ------ -----
<S> <C> <C> <C>
Statutory federal income tax rate .......... 34.0 % 34.0 % 34.0 %
State tax effective rate ................... 4.6 4.3 4.5
Permanent differences ...................... 6.4 0.0 0.0
Benefit of graduated tax rates ............. (4.8) (0.4) (2.1)
Benefit of operating loss carryforwards .... (0.0) (37.9) (36.4)
Change in effective rate ................... (8.7) 0.0 0.0
Reduction in valuation allowance ........... 0.0 (153.5) 0.0
----- ------ -----
Effective income tax rate .................. 31.5 % (153.5)% 0.0 %
----- ------ -----
----- ------ -----
</TABLE>
Deferred tax liabilities and assets at December 31, 1997 and 1996 are
comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.................... $(20,682) $ (850)
-------- --------
Total deferred tax liabilities........ (20,682) (850)
-------- --------
Deferred tax assets:
Net operating loss carryforwards................. 458,796 500,463
Reserves......................................... 1,803 --
-------- --------
Total deferred tax assets............ 460,599 500,463
-------- --------
Net deferred taxes................................. 439,917 499,613
Less current portion of net deferred tax assets.... 85,224 157,853
-------- --------
Noncurrent portion................................. $354,693 $341,760
-------- --------
-------- --------
</TABLE>
8. 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.
9. ACQUISITIONS
Pursuant to a Stock Purchase Agreement having an effective date of January
31, 1997 (the "Purchase Agreement"), the Company acquired all of the issued
and outstanding capital stock of Chambre' International, Inc., a Texas
corporation ("CII"), and CII became a wholly-owned subsidiary of the
Company (the "CII Acquisition"). The CII Acquisition was closed on January
31, 1997, and was accounted for under the purchase method of accounting.
CII is a network marketer of various third-party manufactured cosmetics,
skin care and hair care products. In connection with the CII Acquisitions,
the Company issued 6,482 shares of its common stock to the shareholders of
CII at closing and issued an
F-28
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
additional 7,518 shares of its common stock to the shareholders of CII on
March 31, 1997, after determination of certain liabilities.
In connection with the CII Acquisition , the excess of the purchase price
of $135,340, which includes $3,549 of transaction costs, over the negative
$63,985 fair value of assets of CII acquired, net of liabilities assumed,
has been allocated $179,325 to goodwill and $20,000 to a covenant not to
complete. Goodwill and the covenant not to compete will be amortized over
20 year and 47 month periods, respectively.
Pursuant to an Asset Purchase Agreement having an effective date of April
16, 1997 (the "Purchase Agreement"), the Company acquired all the assets of
Stay 'N Shape International, Inc. ("SNSI"), Solution Products
International, Inc. ("SPII"), Nation of Winners, Inc. ("NWI"), Now
International, Inc. ("NII"), all Georgia corporations, (collectively SNSI,
SPII, NWI and NII are referred to as the "Selling Group"), free and clear
of any lien, charge, claim, pledge, security interest or other encumbrance
of any type or kind whatsoever, known or unknown (the "SNSI" Asset
Purchase"). The SNSI Asset Purchase was closed on April 16, 1997, and was
accounted for under the purchase method of accounting. Each company in the
Selling Group is a network marketer of various third-party manufactured
nutritional supplements and was under common ownership.
In connection with the SNSI Asset Purchase, the Company paid cash of
$1,174,441 and issued 125,984 shares of the Company's common stock at
closing and agreed to either issue additional shares of the Company's
common stock having an aggregate fair value equal to, or make cash payments
of, or at the Company's sole option any combination thereof, $750,000 and
$1,050,000 on or before June 29, 1998, and May 30, 1999, respectively. The
$750,000 aggregate fair value of the additional shares of the Company's
common stock or cash payment shall be reduced by the aggregate amount that
gross revenues, net of returns and allowances, during the 12-month period
ended April 30, 1998, from (i) sales (other than Choc-Quilizer) of the
purchased network marketing organization, sales to Market America, Inc. (an
unrelated network marketing company) and sales to retail outlet stores, are
less than $2,500,000 and (ii) the Company's sales of Choc-Quilizer are less
than $4,000,000 during such 12-month period. Furthermore, the $1,050,000
aggregate fair value of the additional shares of the Company's common stock
or cash payment shall be reduced by the aggregate amount that gross
revenues, net or returns and allowances, during the 12-month period ended
March 31, 1999, from (i) sales (other than Choc-Quilizer) of the purchased
network marketing organization, sales to Market America, Inc. and sales to
retail outlet stores, are less than $5,000,000 and (ii) the Company's sales
of Choc-Quilizer are less than $8,000,000 during such 12-month period. The
fair value of the Company's common stock on the last three trading days of
the month preceding the month in which the applicable 12-month period ends.
In connection with the SNSI Asset Purchase, the excess of the purchase
price of $2,074,441, which included $100,000 of transaction costs, over the
$84,063 fair value of the assets acquired, has been allocated $1,490,378 to
goodwill and $500,000 to two covenants not to compete. Goodwill and the
covenants not to compete will be amortized over 20 and 10 year periods,
respectively.
Pursuant to a Stock Purchase Agreement having an effective date of May 31,
1996 (the "Purchase Agreement"), the Company acquired all of the issued and
outstanding capital stock of Miracle Mountain International, Inc., a
Colorado corporation ("MMI"), and MMI became a wholly owned subsidiary of
the Company (the "MMI Acquisition"). The MMI Acquisition was accounted for
under the purchase method of accounting. MMI is a network marketer of
various third-party manufactured nutritional supplement products. Pursuant
to the Purchase Agreement and in connection with the MMI Acquisition, the
F-29
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Company issued and delivered to the shareholders of MMI 20,000 shares of
the Company's common stock.
In connection with the MMI Acquisition, the excess of the purchase price of
$176,103, which includes $56,103 of transaction costs, over the negative
$3,059 fair value of the assets of MMI acquired, net of liabilities
assumed, has been allocated $119,162 to goodwill and $60,000 to the
covenant not to compete. Goodwill and the covenant not to compete will be
amortized over seven and four and one-half year periods, respectively.
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the acquisitions had occurred at
the beginning of 1997 and 1996, with pro forma adjustments to give effect
to amortization of goodwill together with the related income tax effect.
The unaudited pro forma information is not necessarily indicative of either
the results of operations that would have occurred had the purchases been
made during the periods presented or the future results of the combined
operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
----------- ----------
<S> <C> <C>
Net revenues........................................ $10,776,000 $8,737,000
Net income.......................................... $ 142,000 $ 669,000
Net income per common share......................... $ 0.05 $ 0.29
Net income per common share - assuming dilution..... $ 0.04 $ 0.20
</TABLE>
F-30
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
----------- --------- --------
<S> <C> <C> <C>
Cash paid during the year for:
Interest .................................................... $ 33,012 $ 23,021 $ 27,335
Income taxes ................................................ 2,195 -- --
Noncash financing and investing activities:
Property and equipment acquired by capital lease ................. 147,508 199,131 108,219
Deferred offering costs not yet paid ............................. 180,450 -- --
Reclassify interest payable to
notes payable - stockholders .................................... -- -- 51,806
Fair value of capital stock issued to purchase
Miracle Mountain International Inc. .............................. -- 120,000 --
Acquisition of Chambre International, Inc.:
Fair value of assets acquired .............................. $ (84,802) $ -- $ --
Fair value of covenant not to compete ...................... (20,000) -- --
Purchase price in excess of tangible assets acquired and
covenant not to compete .................................. (179,325) -- --
Fair value of common stock issued .......................... 84,000 -- --
Liabilities assumed ........................................ 148,787 -- --
----------- -------- --------
Cash paid to purchase Chambre International, Inc. .......... $ (51,340) $ -- $ --
----------- -------- --------
----------- -------- --------
SNSI asset purchase:
Fair value of assets acquired .............................. $ (84,063) $ -- $ --
Fair value of covenant not to compete ...................... (500,000) -- --
Purchase price in excess of tangible assets acquired and
covenant not to compete .................................. (1,490,378) -- --
Fair value of common stock issued .......................... 800,000 -- --
----------- -------- --------
Cash paid to purchase SNSI assets .......................... $(1,274,441) $ -- $ --
----------- -------- --------
----------- -------- --------
</TABLE>
11. NOTES PAYABLE
The Company has notes payable of $108,744 and $28,495 for the years ended
December 31, 1997 and 1996, respectively. The current balance of the notes
at December 31, 1997 and 1996 is $26,304 and $9,446, respectively. The
notes were issued to acquire vehicles and equipment to be used by the
Company and are collateralized by such vehicles and equipment for which the
notes were issued to finance. These notes mature ranging from June 1998 to
September 2002 with interest rates on the notes ranging from 9.5 percent to
12.1 percent. Payments of principal and interest are made on the notes
monthly ranging from $300 to $928. Scheduled maturities for 1998 through
2002 are $26,304, $23,202, $25,727, $23,917 and $9,594, respectively.
F-31
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
12. COMMITMENTS AND CONTINGENCIES
RECENT REGULATORY DEVELOPMENTS - A significant portion of the Company's net
sales has been, and is expected to continue to be, dependent upon the
Company's AM-300 product. The Company's net sales of AM-300 represented
29.5 percent, 39.1 percent, and 31.5 percent of net sales for the years
ended 1997, 1996 and 1995, respectively. One of the herbal ingredients in
AM-300 is ephedra concentrate, which contains naturally occurring
ephedrine. Ephedrine products have been the subject of adverse publicity
in the United States and other countries relating to alleged harmful
effects, including the deaths of several individuals. Currently, the
Company offers AM-300 only in the United States (except in certain states
in which regulations may prohibit or restrict the sale of such product).
On April 10, 1996, the Food and Drug Administration ("FDA") issued a
statement warning consumers not to purchase or ingest natural sources of
ephedrine within dietary supplements claiming to produce certain effects
(none of which are claimed for the Company's product). On June 4, 1997,
the FDA proposed a regulation which will, if it becomes effective as
proposed, significantly limit the ability of the Company to sell AM-300 and
any other weight management products which contain ephedra or ephedrine. If
the FDA's proposed regulations were to become effective, management
believes that the impact on the Company's financial statements could be a
material reduction in sales, cost of sales and marketing, distribution and
administrative expenses and could result in material losses to the Company,
but would not have a significant adverse effect on financial position.
PRODUCT LIABILITY - The Company, like other marketers of products that are
intended to be ingested, faces an inherent risk of exposure to product
liability claims in the event that the use of its products results in
injury. The Company generally does not obtain contractual indemnification
from parties manufacturing its products. However, the Company has agreed
to indemnify Tinos, L.L.C., the licensor of Choc-Quilizer, against any
product liability claims arising from the Choc-Quilizer product marketed by
the Company, and the Company has agreed to indemnify Chemins against claims
arising from products manufactured by Chemins and marketed by the Company.
The Company has not maintained any product liability insurance coverage.
Although the Company has never had a product liability claim, such claims
against the Company could result in material losses to the Company.
13. SUBSEQUENT EVENTS
On March 4, 1998, the Company announced that it intends to repurchase up to
$1 million of the Common Stock in the open market for cash. In connection
with such repurchase, the Company filed with the Securities and Exchange
Commission pursuant to Section 13(e)(1) of the Securities Exchange Act of
1934, as amended, an Issuer Tender Offer Statement on March 4, 1998. As of
March 24, 1998, the Company has repurchased $62,000 of the Common Stock.
The additional number of shares of the Common Stock that may be purchased
by the Company is not determinable as of March 24, 1998 and will depend
upon a number of factors, including the market price of the Common Stock
and the amount of funds utilized for repurchase on each date of repurchase.
On March 11, 1998, the Company filed a Registration Statement, file number
333-47801, with the Securities and Exchange Commission pursuant to which
the Company is seeking to register 5,000,000 stock purchase plan
participation interests ("Participation Interests") in the Advantage
Marketing Systems, Inc. Distributor Stock Purchase Plan (the "Plan"). The
Participation Interests will be offered to the distributors of the
Company's products and services ("Eligible Persons"). An Eligible Person
electing to participate in
F-32
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
the Plan (a "Participant") will be entitled through purchase of the
Participation Interests to purchase in the open market through the Plan,
shares of common stock, $.0001 par value per share (the "Common Stock"),
previously issued by the Company. The Participation Interests are
non-transferable; therefore, a market for the Participation Interests will
not develop. The proceeds from sale of the Participation Interests will
become the Participants' contributions to the Plan which will be used to
purchase the Common Stock and will not be placed into escrow pending
purchase of the Common Stock.. Other than an annual service fee of $5.00
per Participant and a transaction fee of $1.25 per month, the Company will
not receive any proceeds from the purchase of the Common Stock by the
Plan. The offering price of each Participation Interest will be $1.00,
and each Eligible Person will be required initially to purchase a minimum
of twenty-five Participation Interests upon electing to participate in the
Plan. There is no minimum amount of sales of Participation Interests
required.
* * * * * *
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Price Range of Common Stock and Dividend Policy. . . . . . . . . . . . 17
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Selected Financial Information . . . . . . . . . . . . . . . . . . . . 20
Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . 22
Description of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 53
Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . 55
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . 56
Shares Eligible for Future Sale. . . . . . . . . . . . . . . . . . . . 60
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . 62
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . 63
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ADVANTAGE MARKETING
SYSTEMS, INC.
5,000,000
PARTICIPATION INTERESTS
IN THE ADVANTAGE
MARKETING SYSTEMS, INC.
1998 DISTRIBUTOR STOCK
PURCHASE PLAN
------------------------
PROSPECTUS
------------------------
REQUESTS FOR GENERAL INFORMATION OR ADDITIONAL
COPIES OF THIS PROSPECTUS SHOULD BE DIRECTED TO
THE COMPANY BY CALLING OR WRITING THE COMPANY AT:
ADVANTAGE MARKETING SYSTEMS, INC.
2601 NORTHWEST EXPRESSWAY, SUITE 1210W
OKLAHOMA CITY, OKLAHOMA 73112-7293
ATTENTION: CORPORATE SECRETARY
TELEPHONE: (405) 842-0131
----------------------
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1031 of the Oklahoma General Corporation Act permits (and the
Registrant's Certificate of Incorporation and Bylaws, which are incorporated
by reference herein, authorize) indemnification of directors and officers of
the Registrant and officers and directors of another corporation,
partnership, joint venture, trust or other enterprise who serve at the
request of the Registrant, against expenses, including attorneys fees,
judgments, fines and amount paid in settlement actually and reasonably
incurred by such person in connection with any action, suit or proceeding in
which such person is a party by reason of such person being or having been a
director or officer of the Registrant or at the request of the Registrant, if
he conducted himself in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Registrant, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The Registrant may not indemnify an
officer or a director with respect to any claim, issue or matter as to which
such officer or director shall have been adjudged to be liable to the
Registrant, unless and only to the extent that the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the court shall deem proper. To the extent that an officer or director
is successful on the merits or otherwise in defense on the merits or
otherwise in defense of any action, suit or proceeding with respect to which
such person is entitled to indemnification, or in defense of any claim, issue
or matter therein, such person is entitled to be indemnified against
expenses, including attorney's fees, actually and reasonably incurred by him
in connection therewith.
The circumstances under which indemnification is granted with an action
brought on behalf of the Registrant are generally the same as those set forth
above; however, expenses incurred by an officer or a director in defending a
civil or criminal action, suit or proceeding may be paid by the Corporation
in advance of final disposition upon receipt of an undertaking by or on
behalf of such officer or director to repay such amount if it is ultimately
determined that such officer or director is not entitled to indemnification
by the Registrant.
These provisions may be sufficiently broad to indemnify such persons for
liabilities arising under the Securities Act of 1933, as amended (the "Act").
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
S.E.C. Registration Fees $1,475.00
N.A.S.D. Filing Fees .00
*State Securities Laws (Blue Sky) Legal Fees 20,000.00
*State Securities Laws Filing Fees 20,000.00
*Printing and Engraving 15,000.00
*Legal Fees 18,525.00
*Accounting Fees and Expenses . . . . . . . . . . . . . 14,000.00
*Transfer and Warrant Agent's Fees and Costs of Certificates 1,000.00
*Miscellaneous. . . . . . . . . . . . . . . . . . . . .00
----------
$90,000.00
----------
----------
</TABLE>
------------------------
*Estimated
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Registrant has sold and issued the securities described below within the
past three years which were not registered under the Act.
<TABLE>
<CAPTION>
DATE OF PURCHASE NUMBER
PURCHASE OR PRICE PER OF SHARES NET
NAME ISSUANCE SHARE PURCHASED PROCEEDS(1) CONSIDERATION
- --------------------- ----------- --------- --------- ----------- -------------
<S> <C> <S> <C> <C> <C>
R. & R. Nance . . . . 2-28-97 2.16 6,945 15,001 Cash
D. Melakayil . . . . 3-18-97 2.00 1,250 2,500 Cash
T. Melakayil . . . . 3-18-97 2.00 1,250 2,500 Cash
M. Walke . . . . . . 5-29-97 1.60 6,250 10,000 Cash
W. Hargrove . . . . . 5-29-97 1.60 25,000 40,000 Cash
M. Steers . . . . . . 5-29-97 1.60 6,250 10,000 Cash
R. Baresel . . . . . 12-28-97 1.60 7,862 12,579 Stock
J. Duncan . . . . . . 12-28-97 1.60 15,000 24,000 Cash
L. Hooter . . . . . . 12-28-97 1.60 11,007 17,611 Stock
D. Huff . . . . . . . 12-28-97 1.60 7,862 12,579 Stock
D. Loney . . . . . . 12-28-97 1.60 6,250 10,000 Cash
D. Morgan . . . . . . 12-28-97 1.60 25,000 40,000 Cash
D. Huff . . . . . . . 5-20-98 2.00 12,500 25,000 Stock
P. Shirley . . . . . 7-21-98 2.70 13,556 39,150 Stock
</TABLE>
- ------------------------
(1) No underwriting discounts or commissions were paid with respect to such
sales.
Pursuant to a Stock Purchase Agreement having an effective date of May
31, 1996, Registrant acquired the issued and outstanding capital stock of
Miracle Mountain International, Inc., a Colorado corporation. On June 20,
1996, Registrant issued 160,000 shares of its Common Stock to the
shareholders of Miracle Mountain International, Inc. pursuant to Rule 506 of
Regulation D.
Pursuant to a Stock Purchase Agreement having an effective date of
January 31, 1997, (the "CII Purchase Agreement"), Registrant acquired the
issued and outstanding capital stock of Chambre International, Inc., a Texas
corporation. Registrant issued and delivered 6,842 shares of Common Stock on
January 31, 1997, and issued and delivered an additional 7,518 shares of
Common Stock to the shareholders of Chambre International, Inc. on March 31,
1997, pending determination of certain liabilities. The shares of Common
Stock were issued pursuant to Rule 506 of Regulation D.
Pursuant to an Asset Purchase Agreement dated April 16, 1997, Registrant
issued and delivered 125,984 shares of Common Stock to Solution Products
International, Inc. for its own account and as agent for and on behalf of
Stay 'N Shape International, Inc., Nation of Winners, Inc., and Now
International, Inc. The shares of Common Stock were issued pursuant to Rule
506 of Regulation D.
The Company relied on Rule 147 and Sections 3 and 4(2) of the Securities
Act of 1933 for exemption from the registration requirements of such Act.
Each investor was furnished with information concerning the formation and
operations of the Registrant, and each had the opportunity to verify the
information supplied. Additionally, Registrant obtained a signed
representation from each of the foregoing persons in connection with the
purchase of the Common Stock of his or her intent to acquire such Common
Stock for the purpose of investment only, and not with a view toward the
subsequent distribution thereof; each of the certificates representing the
Common Stock of the Registrant has been stamped with a legend restricting
transfer of the securities represented thereby, and the Registrant has issued
stop transfer instructions to U.S. Stock Transfer Inc., the Transfer Agent
for the Common Stock of the Company, concerning all certificates representing
the Common Stock issued in the above-described transactions.
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ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S> <C>
2.1 Agreement and Plan of Merger between Registrant and AMS, Inc.(1)
2.2 Certificate of Merger of Advantage Marketing Systems, Inc. (A
Delaware Corporation) with and into Advantage Marketing Systems,
Inc. (An Oklahoma Corporation).(1)
3.1 The Registrant's Certificate of Incorporation.(12)
3.2 The Registrant's Bylaws.(12)
4.1 The Advantage Marketing Systems, Inc. 1998 Distributor Stock
Purchase Plan.
4.2 The form of Advantage Marketing Systems, Inc. 1998 Distributor
Stock Purchase Plan Stock Purchase Agreement.
5.1 Opinion of Dunn Swan & Cunningham, A Professional Corporation,
counsel to Registrant, regarding legality of the securities
covered by this Registration Statement.
10.1 Legal Services Agreement between Registrant and Pre-Paid Legal
Services, dated September 1, 1988.(2)
10.2 Lease Agreement between Registrant and International Business
Machines Corporation, dated May 22, 1989.(2)
10.3 Group Contract between Registrant and Consumer Benefit Services,
Inc., dated April 2, 1989.(2)
10.4 Distribution Agreement between Registrant and Topped, Inc., dated
June 1, 1989.(2)
10.5 Lease Agreement between Registrant and Kaiser Francis Oil
Company, dated June 1, 1993.(3)
10.6 Advantage Marketing Systems, Inc. 1995 Stock Option Plan.(4)
10.7 Agreement between Registrant and Consumer Benefit Services, Inc.,
dated October 20, 1995.(4)
10.8 Agreement between Registrant and Advanced Products, Inc., dated
November 28, 1994.(4)
10.9 Agreement between Registrant and J&K Pharmaceutical Laboratories,
dated April 22, 1996.(5)
10.10 Stock Purchase Agreement having an effective date of May 31,
1996, between Registrant, Miracle Mountain International, Inc.,
Richard Seaton, Gene Burson, Kaye Jennings, Daryl Burson, James
Rogers.(6)
10.11 Stock Purchase Agreement having an effective date of January 31,
1997, among Registrant, Chambre International, Inc., Janet Britt,
Jerry Hampton, Teresa Hampton, James Baria, Florence Baria, Rose
Cashin, Pat Eason, Joseph Williams, Livia Williams, Don Black,
Nadine Black, Lynda Brown, Gary Galindo, Harold Griffin, Linda
Griffin, Iren Van Vlaenderen, Dean Van Vlaenderen, Rose
Hilgedick, Julie Connary, and Royce Britt.(5)
10.12 Asset Purchase Agreement among Registrant, Stay 'N Shape
International, Inc., Solution Products International, Inc.,
Nation of Winners, Inc., Now International, Inc., Carl S. Rainey
and Danny Gibson, dated April 16, 1997.(8)
10.13 Warrant Agreement between Registrant and U.S. Stock Transfer
Inc., dated as of January 20, 1997, as amended and restated
January 8, 1998.(9)
10.14 Unit and Warrant Agreement between Registrant and U.S. Stock
Transfer Inc., dated as of November 6, 1997, as amended and
restated January 8, 1998.(10)
</TABLE>
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<TABLE>
<S> <C>
10.15 The Promotional Shares Escrow Agreement, dated November 4, 1997,
by and between Advantage Marketing Systems, Inc., John W. Hail,
Curtis H. Wilson, Sr., Ruth Wilson, Roger P. Baresel, Judith A.
Baresel, R. Terren Dunlap, Pre-Paid Legal Services, Inc., TVC,
Inc., and Liberty Bank and Trust Company of Oklahoma City, N.A.
10.16 The Promotional Shares Escrow Agreement, dated October 31, 1997,
by and between Advantage Marketing Systems, Inc., Robert and
Retha H. Nance, and Liberty Bank and Trust Company of Oklahoma
City, N.A.
10.17 The Promotional Shares Lock-In Agreement, dated November 5, 1997,
by and between Advantage Marketing Systems, Inc., Roger P.
Baresel, and Judith A. Baresel.
23.1 Independent Auditors' Consent.
23.2 Consent of Counsel.
24.1 Power of Attorney of John Hail.(12)
24.2 Power of Attorney of Curtis H. Wilson, Sr.(12)
24.3 Power of Attorney of Roger P. Baresel.(12)
24.4 Power of Attorney of R. Terren Dunlap.(12)
24.5 Power of Attorney of Harland C. Stonecipher.(12)
</TABLE>
- ------------------------------------------------
(1) Incorporated by reference to Form 8-K, filed with the Commission on
December 11, 1995.
(2) Incorporated by reference to Form 10-K Annual Report for the year ended
December 31, 1989, filed with the Commission on September 18, 1990.
(3) Incorporated by reference to Form 10-K Annual Report for the year ended
December 31, 1993, filed with the Commission on April 14, 1994.
(4) Incorporated by reference to Form SB-2 Registration Statement
(No. 33-80629), filed with the Commission on November 20, 1996.
(5) Incorporated by reference to Amendment No. 3 to Form SB-2 Registration
Statement (No. 33-80629), filed with the Commission on January 14, 1997.
(6) Incorporated by reference to Form 8-K, filed with the Commission on July
12, 1996.
(7) Incorporated by reference to Form 8-K, filed with the Commission on
February 18, 1997.
(8) Incorporated by reference to Form 8-K, filed with the Commission on May 1,
1997.
(9) Incorporated by reference to Amendment No. 2 to Form 8-A Registration
Statement, filed with the Commission on January 13, 1998.
(10) Incorporated by reference to Amendment No. 1 to Form 8-A Registration
Statement, filed with the Commission on January 14, 1998.
(11) To be furnished by amendment.
(12) Previously furnished.
ITEM 28. UNDERTAKINGS
(a) RULE 415 OFFERING.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent
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<PAGE>
a fundamental change in the information in the registration statement; and
(iii) To include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(4) Will supplement the prospectus, after the end of the
subscription period, to include the results of the subscription offer, the
transactions by underwriters during the subscription period, the amount of
unsubscribed securities that the underwriters will purchase and the terms
of any later reoffering.
(5) If the underwriters make any public offering of the securities
on terms different from those on the cover page of the prospectus, file a
post-effective amendment to state the terms of such offering.
(e) REQUEST FOR ACCELERATION OF EFFECTIVE DATE.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(f) RULE 430A.
The Registrant hereby undertakes that it will (i) for determining any
liability under the Securities Act, treat the information omitted from the
form of prospectus filed as a part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant under Rule 424(b)(1), or (4) or 497(h) under the Securities Act
as a part of this Registration Statement as of the time the Commission
declared it effective, and (ii) for determining any liability under the
Securities Act, treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in
the registration statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant hereby certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
Amendment No. 1 to the Registration Statement to be signed on its behalf by
the undersigned in the City of Oklahoma City, State of Oklahoma, on
the 6th day of October, 1998.
ADVANTAGE MARKETING SYSTEMS, INC.
(Registrant)
By: /S/ JOHN W. HAIL
----------------------------------------
John W. Hail, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ JOHN W. HAIL Chairman of the Board, Chief October 6, 1998
- ----------------------------- Executive Officer and Director
John W. Hail
/S/ CURTIS H. WILSION, SR. Vice-Chairman of the Board October 6, 1998
- ----------------------------- and Director
Curtis H. Wilson, Sr.
/S/ ROGER P. BARESEL President, Chief Financial October 6, 1998
- ----------------------------- Officer and Director
Roger P. Baresel
/S/ R. TERREN DUNLAP Director October 6, 1998
- -----------------------------
R. Terren Dunlap
/S/ HARLAND C. STONECIPHER Director October 6, 1998
- -----------------------------
Harland C. Stonecipher
</TABLE>
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EXHIBIT 4.1
ADVANTAGE MARKETING SYSTEMS, INC.
1998 DISTRIBUTOR STOCK PURCHASE PLAN
Advantage Marketing Systems, Inc., an Oklahoma corporation ("AMS" or the
"Company") hereby establishes the Advantage Marketing Systems, Inc. 1998
Distributor Stock Purchase Plan (this "Plan") based upon the terms and
conditions set forth herein.
1. NATURE AND PURPOSE OF THIS PLAN. The purpose of this Plan is to
provide an additional incentive to participating Eligible Persons (as
hereinafter defined) by enabling them to acquire a stock ownership interest in
the Company, to assist the Company in attracting and retaining persons of
ability and commitment as independent distributors of the products and services
offered by the Company, and to entice and encourage such persons to further
employ their best efforts in the marketing and distribution of the Company's
offered products and services.
2. DEFINITIONS. Where the following capitalized terms appear in this
Plan, such terms shall have the respective meanings set forth below, unless
their context clearly indicates to the contrary:
(A) "Affiliated Person" shall mean any person that exercises any direct or
indirect influence on, or control over (i) the amounts of Common Stock to be
purchased by this Plan, (ii) the timing of or the manner in which the Common
Stock is to be purchased by this Plan, and (iii) the selection of the Custodian
or the Broker-Dealer through which such purchases are or may be made by this
Plan.
(B) "Annual Service Fee" shall mean an administrative service fee of $5.00
payable to the Company upon acceptance by the Company of a Participant's Stock
Purchase Agreement and thereafter annually on the 31st day of January of each
year from the Participant Contribution Account of each Participant
(C) "Beneficiary" shall mean any person or entity designated or deemed
designated by a Participant as provided in Section 4.5.1
(D) "Board" shall mean the Board of Directors of the Company.
(E) "Broker-Dealer" shall mean a member firm of the National Association of
Securities Dealers, Inc. that effects purchases of Common Stock on behalf of the
Plan.
(F) "Common Stock" shall mean the Company's Common Stock, $.0001 par value
per share, acquired by the Plan in a transaction not directly or indirectly for
the benefit of the Company.
(G) "Contributions" shall mean the amounts contributed to this Plan by the
Participants pursuant to the provisions of this Plan.
(H) "Custodian" shall mean a Broker-Dealer, national or state banking
association or trust company and any successor thereof appointed by the Board to
make purchases of Common Stock for and on behalf of the Participants and, if
authorized and directed by the Board, to hold the Common Stock purchased for
and on behalf of the Participants in accordance with the Plan.
(I) "Distributor Application" shall mean the official, approved AMS
Distributor Application form in effect and use by the Company from time to time
in the jurisdiction in which an Eligible Person resides.
(J) "Eligible Persons" shall mean those persons, including individuals
(including without limitation employees of the Company and any of its
subsidiaries), partnerships, corporations or other legal entities, that have
completed Distributor Applications which have been received and accepted by the
Company and which continues in full force and effect.
(K) "Executive Officer" shall mean the Company's chief executive officer,
president, any vice president of the Company in charge of a principal business
unit, division or function (such as sales, administration, or finance),
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and any other officer who performs a policy making function or any other
person who performs similar policy making functions for the Company.
(L) "Net Contributions" shall mean the Contributions to this Plan by the
Participants, less the Annual Service Fees and the Transaction Fees.
(M) "Participant" shall mean each Eligible Person that has completed a
Stock Purchase Agreement which has been received and accepted by the Company and
who is participating in the Plan.
(N) "Participant Account" shall mean the account maintained for a
Participant in which such Participant's Contributions and stock purchases are
recorded.
(O) "Plan" shall mean the Advantage Marketing Systems, Inc. 1997 Stock
Purchase Plan, as the same may from time to time be amended.
(P) "Plan Administrator" shall mean either the Board or any committee
appointed by the Board to administer the Plan and comprised of two or more
members of the Board.
(Q) "Stock Purchase Agreement" shall mean the Advantage Marketing Systems,
Inc. Stock Purchase Agreement pursuant to which an Eligible Person elects to
participate in the Plan.
(R) "Trading Days" shall mean those days on which securities are traded on
the New York Stock Exchange.
(S) "Transaction Fee" shall mean the fee of $1.25 payable monthly by a
Participant to the Company from such Participant's Contribution to the Plan
during the applicable month.
(T) "Transfer Agent" shall mean the Company's transfer agent and registrar
of the Common Stock and, if applicable, the Company's other securities.
3. ELIGIBILITY AND PARTICIPATION. Participation in the Plan will be
subject to the following conditions:
3.1 ELIGIBILITY. Each Eligible Person may participate in the Plan;
provided, however, that Contributions to the Plan may only be made by a
Participant if the terms and conditions of the Plan and the Stock Purchase
Agreement are complied with as provided below.
3.2 ELECTION TO PARTICIPATE. Participation in the Plan is entirely
voluntary. Each Eligible Person electing to participate in the Plan must
evidence that election (and any changes thereof, including without
limitation any election to cancel participation in the Plan as provided in
Section 6, below) by completion and execution of a Stock Purchase Agreement
in such form as shall be provided by the Company and in accordance with
such administrative rules and procedures as may be established by the Plan
Administrator.
3.3 EFFECTIVE DATE OF PARTICIPATION. Participation in the Plan by an
Eligible Person shall be effective upon receipt and approval by the Company
of the Eligible Person's completed and executed Stock Purchase Agreement.
3.4 NOTIFICATION OF PARTICIPATION RIGHT. The Company shall notify
the Eligible Persons of the establishment of this Plan, the salient
provisions hereof, and the eligibility of the Eligible Persons to
participate in this Plan.
4. CONTRIBUTIONS TO PLAN; ACCOUNTS. Contributions to the Plan will be
made solely by the Participants. The Company does not have obligation and will
not make any contributions to this Plan. All Contributions will be subject to
the following:
4.1 MINIMUM MANDATORY CONTRIBUTIONS. Each Participant shall be
required to make a minimum monthly Contribution to this Plan of US$25 by
drafting the checking, savings or other form of account maintained by the
Participant at a financial institution pursuant to the Stock Purchase
Agreement or such other appropriate form or authorization as may be
required by the Company and/or the financial institution until such time
that the Company receives written notification from the Participant of the
revocation or
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<PAGE>
amendment of the Stock Purchase Agreement or such other form of
authorization. Any such revocation or amendment shall be effective as
of the first day of the month following the month in which the Company
receives such written notification.
4.2 CONTRIBUTIONS PAYABLE FROM PARTICIPANTS' COMMISSIONS. A
Participant, at the sole election of the Participant and provided the
Participant is otherwise entitled to participate in the Plan in all other
respects under this Plan, may also elect to have an amount withheld from
one or more of such Participant's regular gross Commission Amount (as
defined below) in lieu of otherwise receiving such amount of commission
compensation. Such election shall be made by written notification of the
Company indicating the amount of such Contribution. The notification shall
be effective with respect to the payment of such commission check or checks
only if received by the Company not less than five days prior to payment of
such commissions. The "Commission Amount" shall mean the gross amount,
before deduction of the Contribution to this Plan pursuant to this Section
4.2, and may, as provided in the Distributor Application and in the
Company's Policies and Procedures, be subject to offsets and further
reductions, including without limitation outstanding and unpaid product
purchases and expenses. No Contribution to this Plan payable from a
Participant's commission pursuant to this Section 4.2 shall be made during
any period that the offsets and other reductions exceed the commission
amount payable to the Participant. All Contributions to this Plan pursuant
to this Section 4.2 shall be only in US$1.00 increments. The election by a
Participant to make Contributions to this Plan pursuant to this Section 4.2
and the termination of such election must be made in writing and received
by the Company, in accordance with the rules and procedures as shall be
established, including any amendment thereof, by the Company from time to
time.
4.3 OTHER ADDITIONAL CONTRIBUTIONS. A Participant, at the sole
election of the Participant and provided the Participant is otherwise
entitled to participate in the Plan in all other respects under this Plan,
may also make direct Contributions to this Plan for the purchase of Common
Stock, subject to the terms and conditions of the Stock Purchase Agreement
and this Plan. All Contributions to this Plan pursuant to this Section 4.3
shall be only in US$1.00 increments.
4.4 MAINTENANCE OF PARTICIPANT ACCOUNTS; COMMON STOCK OWNERSHIP AND
PURCHASES.
4.4.1 MAINTENANCE OF PARTICIPANT ACCOUNTS. Upon acceptance and
approval by the Company, the Company shall establish and maintain a
separate Participant Account for each Participant. Each Participant
Account shall be credited or debited as herein provided. All
Contributions by Participants shall not be commingled with funds of
the Company and shall be deposited in a single bank account
established at the direction of the Custodian in the name of this
Plan; however, the Company may commingle such Contributions with the
Contributions of all other Participants eligible to participate to
purchase Common Stock as provided herein. Each Participant's
Contribution to the Plan shall be credited to the Participant Account
of such Participant and shall be debited with all amounts utilized for
(i) the purchase of Common Stock by the Plan on behalf of such
Participant, (ii) payment of the Annual Service Fee and the costs of
issuance of stock certificates upon withdrawal of Common Stock by such
Participant held for the benefit of such Participant, and (iii)
payment of the Transaction Fee.
4.4.2 NOTIFICATION OF AND PURCHASES BY CUSTODIAN. Periodically
during each month but not less often than on or before the last
Trading Day of each month, the Plan Administrator shall notify the
Custodian of the amount of Participant's Contributions available for
purchase of Common Stock. The Custodian shall make all purchases of
Common Stock on behalf of the Participants through the Broker-Dealer.
The Broker-Dealer shall provide to the Custodian and the Company
duplicate (i) confirmations of each Common Stock purchase transaction
by this Plan and (ii) monthly or quarterly statements.
4.4.3 LIMITATION ON USE OF CONTRIBUTIONS. Participant's
Contributions to this Plan (other than for payment of the Annual
Service Fee, the Transaction Fee, and cost of issuance of certificates
of Common Stock to the respective Participants) may only be used for
purchases of the Common
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Stock as provided by this Plan. Other than the securities of the
Company, no securities may be held or acquired by this Plan and
then only for and on behalf the Participants. The relationship
between the Broker-Dealer and this Plan with respect to the account
and any successor account or program and transactions therein will
be governed by a separate written agreement of terms and conditions
between the Broker-Dealer and this Plan (an "Account Agreement").
The Account Agreement will be subject to amendment and modification
in accordance with its terms without notice to or consent from the
Company, the Plan Administrator or Participants.
4.4.4 HOLDING OF COMMON STOCK AND OTHER COMPANY SECURITIES. All
Common Stock and, applicable, other securities of the Company held by
the Broker-Dealer shall be in the name of the Broker-Dealer or its
nominee, unless otherwise directed by the Plan Administrator, in which
case, however, the Participants may be subject to a fee payable to the
Broker-Dealer or the Transfer Agent for any change in the registration
of the Common Stock or such other securities in the name other than
the Broker-Dealer or its nominee.
4.4.5 DIVIDENDS AND OTHER COMPANY DISTRIBUTIONS. All cash
dividends paid on Common Stock received in this Plan's account with
the Broker-Dealer will be reinvested by the Broker-Dealer in
additional shares of Common Stock to the extent possible. All cash
dividends as well as all dividends and distributions on Common Stock,
including other securities of the Company, shall be allocated among
and credited to the Participants based upon the number of shares of
Common Stock held for their benefit under the Plan on the record date
of the of the dividend declaration.
4.4.6 PROXIES, COMPANY REPORTS AND SHAREHOLDER NOTICES. The
Company or the Plan Administrator shall transmit to each Participant
all proxy statements, annual reports, meeting notices and other
shareholder communications received with respect to Common Stock
acquired pursuant to and held under this Plan for and on behalf of the
Participants. Proxies will be voted with respect to full shares of
Common Stock held on behalf of a Participant as reflected in the
Participant Account in accordance with each Participant's instructions
duly delivered to and received by the Company. If a Participant does
not direct the exercise of such voting rights with respect to any
particular occasion for the exercise thereof, such voting rights will
not be exercised with respect to such occasion.
4.5 BENEFICIARY DESIGNATION. Each individual Participant shall
designate his or her Beneficiary on a beneficiary designation form provided
by the Plan Administrator and such designation may include primary and
contingent Beneficiaries. The designation may be changed by a Participant
at any time by completing and delivering a new beneficiary designation form
to the Plan Administrator, which shall only be effective upon receipt by
the Plan Administrator of such form. In the absence of such written
designation, the surviving spouse of the Participant shall be deemed to be
the designated Beneficiary, if any, and otherwise the estate of such
Participant. In all events, the date of determination of a Participant's
Beneficiary shall be the date of death of a Participant.
5. PURCHASES OF COMMON STOCK. All purchases of Common Stock shall be
subject to the following terms as well as the terms and conditions of this Plan,
the agreement with the Broker-Dealer and policies and procedures that may be
adopted and established by the Plan Administrator.
5.1 PERIODIC PURCHASES. Purchases of Common Stock, utilizing Net
Contributions received by this Plan during each month, will be made by this
Plan on behalf of Participants during the last five Trading Days of such
month. The Custodian and Broker-Dealer shall have full discretion as to
all matters relating to purchases of Common Stock, including without
limitation, determining the number of shares of Common Stock, if any, to be
purchased on any day or at any time of that day, the prices paid for such
Common Stock, the markets on which such purchases are made, and the persons
(including other brokers and dealers) from or through whom such purchases
are made.
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5.2 FEES, COMMISSIONS, ETC. No fees, commissions or other charges in
connection with the purchase of Common Stock under the Plan will be paid by
or otherwise charged to Participants, other than the Annual Service Fees,
the Transaction Fees and those fees and commissions or other charges paid
to the Broker-Dealer respecting each purchase of Common Stock, all of which
shall be paid from Participants' Contributions.
5.3 ALLOCATION OF PURCHASES. Common Stock purchased during a month
will be allocated to the each Participant Accounts based on the average
price paid for all shares of Common Stock purchased during the month and
the Participants' Net Contributions to this Plan during such month.
5.4 LIMITATIONS OF PURCHASES. All purchases of Common Stock under
this Plan will be limited to open market purchases. The Company shall not
issue any Common Stock in connection with the purchases of Common Stock by
this Plan. Purchases of Common Stock made on behalf of Participants who
are not residents of the United States will be made only in compliance with
such federal, state or provincial or other governmental rule or regulation
applicable to such purchases.
5.5 TRADING MARKETS AND BROKER. Subject to the foregoing, Common
Stock purchased by the Broker-Dealer on the open market may be made on any
stock exchange in the United States where the Common Stock is traded, in
the over-the-counter market, or by negotiated transactions on such terms as
the Broker-Dealer may reasonably determine at the time of purchase. Any
Common Stock purchased by the Broker-Dealer from an affiliate of the
Company, if permitted hereunder, will be made in accordance with applicable
requirements. Participants will not have any authority or power to direct
the time or the price at which Common Stock will be purchased, or the
selection of the Broker-Dealer or the broker or dealer from whom purchases
are made.
5.6 CERTAIN PROHIBITED ACTIVITIES. Each Executive Officer, director
and Affiliated Person of the Company shall not bid for, purchase, attempt
to bid for or purchase, or offer or sell any shares of Common Stock during
the five Trading Days immediately preceding and immediately following the
date on which this Plan purchases any shares of Common Stock, unless the
offer or sale of Common Stock is made pursuant to a registration statement
effective under the Securities Act of 1933, as amended, and pursuant to
registration or exemption from registration under any applicable state
securities laws in which the Executive Officer, director and/or Affiliated
Person of the Company is named as a selling shareholder.
6. WITHDRAWAL OF COMMON STOCK AND OTHER SECURITIES. Participants may
withdraw, for resale or otherwise, at any time all or any portion of the whole
shares of Common Stock and, if applicable, other securities of the Company held
by this Plan for their benefit by providing written notification to the Company
at its offices in Oklahoma City, Oklahoma. Such notification shall specify the
number of whole shares of Common Stock and other Company securities to be
withdrawn from this Plan and shall be accompanied by payment of the cost of
issuance by the Transfer Agent of the certificate or certificates evidencing the
shares of Common Stock and other Company securities. Immediately following
receipt of such notification, the Company or Plan Administrator shall notify the
Broker-Dealer of the Participant's election to withdraw the shares of Common
Stock and, if applicable, other Company securities set forth in the notice, and
immediately as soon as practicable following the Broker-Dealer receiving such
notification, the Broker-Dealer shall take appropriate action to cause issuance
and delivery of the certificate or certificates evidencing such shares of Common
Stock or other securities. The procedures for withdrawal of Common Stock and
other Company securities from this Plan shall be established by the Plan
Administrator, the Broker-Dealer and the Custodian setting forth the additional
procedures to be followed by Participants electing to withdraw the Common Stock
and, if applicable, other Company securities held by this Pool for their
benefit. This Plan will not sell or otherwise dispose of the Common Stock and
other Company securities held for the benefit of the Participants. Any
Participant desiring to sell shares of Common Stock or other Company securities
held for the benefit of such Participant must comply with the withdrawal
procedures prior to such sale. Each Participant shall be solely responsible for
the costs and expenses, including without limitation any commissions,
administrative fees, taxes or other costs incurred or payable in connection with
the transfer, sale or other disposition of the shares of Common Stock and other
Company securities formerly held for the benefit of such Participant.
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<PAGE>
7. TERMINATION OF PARTICIPATION UNDER THE PLAN.
7.1 VOLUNTARY CANCELLATION; OTHER TERMINATION. A Participant's
participation in this Plan shall immediately terminate if and when:
(i) the Participant voluntarily elects to cancel its
participation in this Plan (such cancellation to be effective as of
the date of receipt by the Company of a properly executed Termination
Form evidencing such termination); or
(ii) the Participant ceases to be eligible to participate in the
Plan by reason of the termination of the Participant as a Distributor,
the Participant's death (if an individual), dissolution or
liquidation, or otherwise.
Upon any termination of participation under this subsection (other
than by reason of a Participant's death), any funds contributed by the
Participant that remain in the Participant Account of such Participant
shall be paid to the Participant, without payment of interest thereon, and
any whole shares of Common Stock and, if applicable, other securities of
the Company held by this Plan for the benefit of the Participant shall be
delivered to the Participant as a withdrawal pursuant to Section 6 hereof.
Upon termination of participation by reason of a Participant's death, any
funds contributed by the Participant that remain in the Participant Account
of such Participant shall be paid, without payment of interest thereon, and
any shares of Common Stock and, if applicable, other securities of the
Company held by this Plan for the benefit of the Participant shall be
disbursed and distributed in accordance with the terms and conditions of
this Plan. Any fractional shares of Common Stock and, if applicable, other
securities of the Company to be delivered to a Participant upon termination
of participation shall be rounded to the next whole share if such fraction
is greater than .5 or, if less .5 or less, shall be retained by this Plan.
7.2 PARTICIPATION FOLLOWING TERMINATION. A Participant whose
participation in this Plan is terminated may, after a period of one (1)
month from the date participation is terminated, elect to again participate
in this Plan so long as the Participant continues to be an Eligible Person
and is otherwise eligible to do so, and completes and delivers to the
Company a new Stock Purchase Agreement.
8. NO ASSIGNMENT OF PLAN INTERESTS. No rights of a Participant under this
Plan, including without limitation the rights in and to the Participant Account
of such Participant, are assignable by the Participant other than by will or
operation of law. Any attempt by a Participant or other person to assign,
alienate, or create a security interest in or otherwise encumber, any of the
Participant's interest under this Plan, or to subject the same to attachment,
execution, garnishment or other legal or equitable process shall be void.
9. RESPONSIBILITY OF THE COMPANY, PLAN ADMINISTRATOR, BROKER-DEALER AND
CUSTODIAN. Each of the Company, the Plan Administrator, member serving or
having served on a committee serving as Plan Administrator, the Broker-Dealer
and Custodian will not be responsible or liable for any act done in good faith
or for any good faith act or omission to act, including, without limitation, the
failure to terminate a Participant's participation in this Plan upon such
Participant's death prior to receipt of notice in writing of such death, or any
act or omission to act with respect to the prices at which the Common Stock was
purchased or the times at which such purchases were made.
10. EXPENSES; REPORTS.
10.1 COSTS AND EXPENSES. Except as otherwise provided herein, all
costs and expenses of administering the Plan, including the maintenance of
Participant Accounts, shall be paid or otherwise borne by the Company. The
Company's incurrence and payment of such costs and expenses shall not be
deemed to be a contribution by the Company to any Participant or to any
Participant Account.
10.2 PARTICIPANT REPORTS. The Company or Plan Administrator, as the
case may be, shall provide each Participant semi-annual reports on or about
January 30 and July 30 of each year of number of shares of Common Stock
acquired and held for the Participant under this Plan.
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<PAGE>
10.3 PARTICIPANT EXPENSES FOLLOWING WITHDRAWAL. Each Participant
shall be solely responsible for the payment of any and all costs and
expenses, including without limitation any commissions or taxes, payable in
connection with the withdrawal of any shares of Common Stock or, if
applicable, other securities of the Company formerly held for the benefit
of such Participant.
11. ADMINISTRATION. This Plan will be administered by the Plan
Administrator, which shall have all of the powers of the Board with respect to
this Plan. Any member of the committee appointed by the Board to serve as Plan
Administrator may be removed at any time, with or without cause, by resolution
of the Board and any vacancy occurring on such committee at any time or from
time to time may be filled by appointment by the Board. Any and all decisions
or determinations of such committee shall be made either (i) by a majority vote
of the members of such committee at a meeting or (ii) without a meeting by the
unanimous written approval of the members of such committee. The Plan
Administrator may, from time to time, adopt rules and regulations for carrying
out the purposes of this Plan. The determinations and interpretation and
construction of any provision of the Plan by the Plan Administrator shall be
final and conclusive. Notwithstanding the foregoing, the Board may (i) appoint
a bank, trust company, registered broker-dealer or other appropriate entity to
serve as Custodian or agent for the Plan Administrator and (ii) remove the
Custodian or agent for the Plan Administrator at any time. The Custodian's
duties shall include (i) appoint a registered broker-dealer to serve as
Broker-Dealer, (ii) establishment of the banking account of this Plan for
deposit of Contributions, (iii) directing the Broker-Dealer to make purchases of
Common Stock on behalf of the Participants, and (iv) establishing with the Plan
Administrator and the Broker-Dealer the procedures for withdrawal of Common
Stock and other Company securities from this Pool by Participants. The
Broker-Dealer's duties shall include (i) establishing and maintaining an account
for this Plan, (ii) purchasing Common Stock on behalf of the Participants
pursuant to directions of the Custodian, (iii) furnishing to the Plan
Administrator (A) confirmations of each Common Stock purchase transaction by
this Plan and (B) monthly or quarterly account statements, (iv) holding of the
shares of Common Stock in its name or its nominee, (v) establishing with the
Plan Administrator and the Custodian the procedures for withdrawal of Common
Stock and other Company securities from this Pool by Participants.
The Plan Administrator shall (i) maintain records of this Plan including
the Participant Accounts, (ii) furnish to Participants the reports required by
this Plan, (iii) direct the Custodian with regard to its duties under this Plan,
but shall do so through a written agreement, (iv) employ accountants, legal
counsel and other agents to assist in the performance of its duties under this
Plan. All reasonable expenses of the Plan Administrator in connection with its
administration of the Plan shall be borne by the Company unless otherwise
provided in this Plan; provided, however, the Company shall be entitled to
receive the Annual Service Fees and the Transaction Fees payable from
Contributions.
12. TRANSFER OF SHARES TO PARTICIPANTS. As a condition to the
purchase of any Common Stock for the benefit of, or the transfer of any
shares of Common Stock to a Participant pursuant to this Plan, the Plan
Administrator may require such agreements or undertakings, if any, as the
Plan Administrator may deem necessary or advisable to assure compliance with
any law or regulation, including, but not limited to a representation,
warranty and/or agreement to be bound by any legends that are, in the opinion
of the Plan Administrator, necessary or appropriate to comply with the
provisions of any securities law deemed by the Plan Administrator to be
applicable to the Participants' acquisition of such Common Stock or other
securities of the Company and are endorsed upon the certificates therefore.
13. INDEMNIFICATION.
13.1 GENERAL INDEMNIFICATION. The Company shall indemnify and hold
harmless any person serving or that served as Plan Administrator (or member
of any committee serving as Plan Administrator) or Custodian (the
"Indemnified Party") to the maximum extent possible under the laws of the
State of Oklahoma, the common law or otherwise, against any and all
liabilities, claims, judgment, fines and amounts paid in settlement and
expenses (including attorneys fees) actually and reasonably incurred by the
Indemnified Party in connection with any claim or any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (including any action by or in the right of
this Plan) to which the Indemnified Party is, was or at any time becomes a
party, or is threatened to be
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<PAGE>
made a party, by reason of the fact that the Indemnified Party is, was or
at any time served as Plan Administrator (or member of any committee
serving as Plan Administrator) or Custodian of this Plan.
13.2 INDEMNIFICATION LIMITATION. No indemnity pursuant to this
Section 13 shall be paid to the Indemnified Party (i) on account of the
Indemnified Party's conduct which is finally adjudged to have been
knowingly fraudulent, deliberately dishonest or willful misconduct, (ii) if
a final decision by a court having jurisdiction in the matter shall have
determined that such indemnification is not lawful, or (iii) on account of
any knowing and willful breach of the Indemnified Party's fiduciary duty to
the Participants resulting in financial injury to the Participants.
13.3 EFFECTIVE PERIOD. The provisions of this Section 13 shall
continue during the period the Indemnified party serves as Plan
Administrator (or member of any committee serving as Plan Administrator) or
Custodian and thereafter so long as the Indemnified Party shall be subject
to any possible claim or threatened, pending or completed action, suit, or
proceeding, whether civil, criminal or investigative, by reason of the fact
that the Indemnified Party served as Plan Administrator (or member of any
committee serving as Plan Administrator) or Custodian.
13.4 NOTIFICATION. Within 30 days after receipt by the Indemnified
Party of notice of the commencement of any action, suit or proceeding in
which the Indemnified Party has a right to indemnification pursuant to this
Section 13, the Indemnified Party shall notify the Company of the
commencement thereof; but the omission to notify by the Indemnified Party
shall not relieve the Company from any liability which the Company may have
to the Indemnified Party otherwise than under this Section 13 or otherwise.
With respect to any such action, suit or proceeding as to which the
Indemnified Party notifies the Company of the commencement thereof:
(i) the Company shall be entitled to participate therein at its
own expense; and
(ii) Except as otherwise provided below, to the extent that it
may wish, the Company shall be entitled to assume defense thereof,
with counsel satisfactory to the Indemnified Party. After notice from
the Company of its election to assume the defense thereof, the Company
will not be liable to the Indemnified Party under this Section 13 for
any legal or other expenses subsequently incurred by the Indemnified
Party in connection with the defense thereof other than costs of
investigation or as otherwise provided below. The Indemnified Party
shall have the right to employ his own counsel in such action, suit or
proceeding; provided, however, that the fees and expenses of such
counsel incurred after notice from the Company of the assumption of
the defense thereof shall be at the expense of the Indemnified Party,
unless (a) the employment of counsel by the Indemnified Party has been
authorized by the Company or the Indemnified Party shall have
reasonably concluded that there may be a conflict of interest between
the Company and the Indemnified Party in the conduct of the defense of
such action, or (b) the Company shall not have employed counsel to
assume the defense of such action, in each of which cases the fees and
expense of counsel shall be at the expense of the Company. The
Company shall not be entitled to assume the defense of any action,
suit or proceeding brought by or on behalf of the Company or as to
which the Indemnified Party shall have made the conclusion provided
for in (a) above.
(iii) The Company shall not be liable to indemnify the
Indemnified Party under this Section 13 for any amount paid in
settlement of any action or claim effected without the Company's
consent. The Company shall not settle any action or claim in any
manner which would impose any obligation, penalty or limitation on the
Indemnified Party without the Indemnified Party's written consent.
Neither the Company nor the Indemnified Party shall unreasonably
withhold its consent to any proposed settlement.
13.5 OBLIGATION OF INDEMNIFICATION REIMBURSEMENT. The Indemnified
Party shall reimburse the Company for all reasonable expenses paid by the
Company in defending any civil or criminal action, suit or proceeding
against the Indemnified Party in the event and only to the extent that it
shall be ultimately
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<PAGE>
determined that the Indemnified Party is not entitled to be indemnified
by the Company for such expenses under this Section 13 or under
applicable law.
13.6 RELIANCE UPON INDEMNIFICATION PROVISIONS. It is hereby
acknowledged that the provisions of this Section 13 are contained in this
Plan to induce the Indemnified Party to act and serve as Plan Administrator
(or member of any committee serving as Plan Administrator) or Custodian and
that the Indemnified Party's agreement to serve as Plan Administrator (or
member of any committee serving as Plan Administrator) or Custodian of this
Plan is, in part, in reliance upon the provisions of this Section 13. In
the event the Indemnified Party is required to bring any action to enforce
the Indemnified Party's right to collect moneys due under this Section 13
and is successful in such action, the Company shall reimburse the
Indemnified Party for all of the Indemnified Party's attorneys fees and
expenses in bringing and pursuing such action.
14. EFFECTIVE DATE; TERMINATION; MODIFICATION.
14.1 EFFECTIVE DATE AND TERM OF PLAN. The effective date of this
Plan is February 27, 1998. The Plan will terminate on February 27, 2008,
the tenth (10th) anniversary of the effective date thereof, unless earlier
terminated in accordance with the following paragraph. No shares of Common
Stock may be purchased pursuant to this Plan subsequent to its termination.
14.2 AMENDMENT. The Board may at any time and from time to time
amend, modify, extend, suspend or terminate this Plan at its sole and
exclusive discretion. Notice of any amendment, modification, extension,
suspension, or termination of this Plan will be sent to all Participants.
14.3 TERMINATION. Promptly after any termination of this Plan, each
Participant will receive any funds contributed by such Participant that
remain in this Plan, and the shares of Common Stock and, if applicable,
other securities of the Company credited to and held for the benefit of
such Participant as of the date of termination without interest thereon and
subject to the additional terms and conditions of this Plan. Any
fractional shares of Common Stock and, if applicable, other securities of
the Company to be delivered to a Participant upon termination of this Plan,
shall be rounded to the next whole share if such fraction is greater than
.5 or, if .5 or less shall be retained by this Plan.
15. INTERPRETATION. If any provision of this Plan should be held
invalid or illegal for any reason, such determination shall not affect the
remaining provisions hereof, but instead the provisions of this Plan shall
be construed and enforced as if such provision had never been included in
this Plan. This Plan shall be governed by the laws of the State of
Oklahoma, United States of America. Headings contained in this Plan are
for convenience only and shall in no manner be construed as part of the
Plan. Any reference to the singular or plural number, or to the masculine,
feminine or neuter gender, shall be a reference to such other number or
gender, as the case may be, as is appropriate.
ADOPTED BY RESOLUTION OF THE BOARD OF DIRECTORS, EFFECTIVE THE 23RD DAY OF
SEPTEMBER 1998.
/s/ ROGER P. BARESEL
---------------------------------------
Roger P. Baresel, Secretary
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<PAGE>
EXHIBIT 4.2
ADVANTAGE MARKETING SYSTEMS, INC.
1998 DISTRIBUTOR STOCK PURCHASE PLAN
STOCK PURCHASE AGREEMENT
PURCHASER INFORMATION Social Security or Employer Identification Number
-------------------------------------------------
NAME_______________ ________________________________________ __________
LAST FIRST M.I.
ADDRESS________________________________________________________________________
STREET (REQUIRED FOR UPS DELIVERY) SUITE/APT.NO.
P.O. BOX_______________________________________________________________________
CITY/STATE/ZIP _______________________________________________________________
BUSINESS PHONE #_____________/_____________
RESIDENCE PHONE #_____________/_____________
SPOUSE SOCIAL SECURITY #____________________
As a Distributor of Advantage Marketing Systems, Inc. ("AMS"), you are entitled
to participate in the Advantage Marketing Systems, Inc.1998 Distributor Stock
Purchase Plan (the "Plan") and through the Plan purchase AMS common stock
initially via a monthly bank draft from your checking account. Accompanying are
the Prospectus, which describes the terms of the Plan, a copy of the Plan, which
sets forth in full the terms and conditions of the Plan. Questions related to
the Plan should be addressed to the Company by contacting AMS at 1-800-426-4267
or by mail at the address set forth below.
YOUR SIGNATURE BELOW INDICATES THAT YOU HAVE ELECTED TO BECOME A PARTICIPANT IN
THE PLAN IN ACCORDANCE WITH THE TERMS AND PROVISIONS THEREOF.
DATE X
------------------------ ---------------------------------------------
I hereby authorize AMS to charge/draft my checking account from the financial
institution listed below in the amount I have indicated below per month and to
make correcting debits to the account as may be required.
THIS AUTHORIZATION IS TO REMAIN IN EFFECT UNTIL AMS RECEIVES WRITTEN
NOTIFICATION FROM ME REVOKING OR AMENDING THE AUTHORIZATION.
BANK DRAFT AMOUNT $
-------------
Enclosed with this agreement is:
Amount equal to monthly amount above $
-------------
Annual service fee $ 5.00
--------
TOTAL AMOUNT ENCLOSED $
-------------
NAME OF BANK
-------------------------------------------------
CITY STATE ZIP
-------------------------- --------- ------------
___ Checking ACCT.
___ Savings NO.___________________
ATTACH VOID CHECK FOR
ACCOUNT TO BE DRAFTED
----------------
MAIL TO: ADVANTAGE MARKETING SYSTEMS, INC.
2601 N.W. EXPRESSWAY, SUITE 1210W
OKLAHOMA CITY, OKLAHOMA 73112
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<PAGE>
EXHIBIT 5.1
DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
2800 OKLAHOMA TOWER 405.235.8318
210 PARK AVENUE TELECOPY 405.235.9605
OKLAHOMA CITY, OKLAHOMA 73102-5604
October 6, 1998
Board of Directors
Advantage Marketing Systems, Inc.
2601 Northwest Expressway, Suite 1210W
Oklahoma City, Oklahoma 73112
Gentlemen:
We have acted as counsel to Advantage Marketing Systems, Inc., an Oklahoma
corporation (the "Company"), in conjunction with the offering of an aggregate of
5,000,000 participation interests (the "Participation Interests").
The offering of the Participation Interests is more fully described in that
certain Registration Statement on Form SB-2 (No. 333-47801), filed by the
Company with the United States Securities and Exchange Commission (the
"Commission") pursuant to the Securities Act of 1933, as amended (the "Act"),
and all amendments thereto (the "Registration Statement"), and the Prospectus in
the form as to be filed with the Commission pursuant to Rule 424(b) of the rules
and regulations of the Commission under the Act (the "Prospectus").
For purposes of this opinion, we have made such investigations as we deem
necessary or appropriate and have reviewed, considered and received such
certificates, documents and materials as we deemed appropriate. In conducting
our examination we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity
with the originals of all documents submitted to us as certified copies. Based
upon our examination and consideration of such documents, certificates, records,
matters and things as we have deemed necessary for the purposes hereof, we are
of the opinion as of the date hereof that:
1. The Company will be duly organized and existing under the laws of the
State of Oklahoma;
2. All of the issued and outstanding shares of the Common Stock of the
Company will have been legally issued, will be fully paid and will not
be liable to further call or assessment;
3. The 5,000,000 Participation Interests to be sold by the Company to the
participants in the Plan against payment therefore in accordance with
the Plan, will be legally issued, fully paid and will not be liable
for further call or assessment;
In arriving at the foregoing opinion, we have relied, among other things,
upon the examination of the corporate records of the Company and certificates of
officers and directors of the Company and of public officials. We hereby
consent to the use of this opinion in the Registration Statement and all
amendments thereto, and to the reference to our firm name under the caption
"Legal Matters" of the Prospectus which is included as a part of the
Registration Statement.
Very truly yours,
DUNN SWAN & CUNNINGHAM
1
<PAGE>
EXHIBIT 10.15
PROMOTIONAL SHARES ESCROW AGREEMENT
THIS PROMOTIONAL SHARES ESCROW AGREEMENT (this "Agreement") made and
entered into this 4th day of November, 1997, by and between Advantage Marketing
Systems, Inc., an Oklahoma corporation (the "Issuer"), whose principal place of
business is located at 2601 Northwest Expressway, Suite 1210W, Oklahoma City,
Oklahoma 73112-7293, and John W. Hail ("Hail"), Curtis H. Wilson, Sr. ("C.
Wilson"), Ruth Wilson ("R. Wilson"), Roger P. Baresel ("R. Baresel"), Judith A.
Baresel ("J. Baresel"), R. Terren Dunlap ("Dunlap"), Pre-Paid Legal Services,
Inc. ("Pre-Paid"), and TVC, Inc. ("TVC") (Hail, C. Wilson, R. Wilson, R.
Baresel, J. Baresel, Dunlap, Pre-Paid and TVC are collectively referred to as
the "Depositors") and Liberty Bank and Trust Company of Oklahoma City, N.A. (the
"Escrow Agent"), whose principal place of business is located at 100 Broadway,
Oklahoma City, Oklahoma 73102 (all of whom are collectively referred to as
"Signatories").
RECITALS
WHEREAS, the Issuer has filed an application with the Securities
Administrator of the Oklahoma Department of Securities (the "Administrator") to
register the Issuer's offering of (i) 1,495,000 shares of Common Stock, $.0001
par value, and 1,495,000 Redeemable Common Stock Purchase Warrants (the
"Warrants") in units of one share of Common Stock and one Warrant (the "Units")
and 1,495,000 shares of Common Stock underlying the Warrants for sale to public
investors some of whom may be residents of the State of Oklahoma, (ii) 130,000
shares of Common Stock and 130,000 Warrants in units of one share of Common
Stock and one Warrant underlying the warrants granted to Paulson Investment
Company, Inc. and Joseph Charles & Assoc., Inc. the representatives of the
underwriters of the Issuer's offering and (iii) 1,625,000 shares of Common Stock
underlying the Warrants (the "Equity Securities");
WHEREAS, Hail is the owner of 241,641 shares of Common Stock and stock
options exercisable for the purchase of 250,000 shares of Common Stock; C.
Wilson is the owner of 15,607 shares of Common Stock and stock options
exercisable for the purchase of 250,000 shares of Common Stock; R. Wilson is the
owner of 4,338 shares of Common Stock; R. Baresel and J. Baresel are the owners
of 7,500 shares of Common Stock, and R. Baresel is the owner of stock options
exercisable for the purchase of 35,000 shares of Common Stock; J. Baresel is the
owner of 20,828 shares of Common Stock, stock option exercisable for the
purchase of 87,500 shares of Common Stock, and the custodian holder for the
benefit of the children of R. Baresel and J. Baresel of stock options
exercisable for the purchase of 12,500 shares of Common Stock; Dunlap is the
owner of stock options exercisable for the purchase of 37,500 shares of Common
Stock; Pre-Paid is the owner of 80,768 shares of Common Stock (of which 56,415
shares are evidenced by pre-stock-reverse-split certificates evidencing 451,318
shares); and TVC is the owner of 3,000 shares of Common Stock (the shares of
Common Stock, 1997-A Warrants and stock options are referred to herein as the
"Promotional Securities");
WHEREAS, as a condition to registering the Issuer's Equity Securities, the
Depositors, who are security holders of the Issuer and who, for the purposes of
this Agreement, are deemed to be Promoters of the Issuer, have agreed to deposit
the Promotional Securities with the Escrow Agent; and
WHEREAS, the Signatories have agreed to be bound by the terms of this
Agreement.
NOW, THEREFORE, the Signatories agree as follows:
1. DEPOSIT OF PROMOTIONAL SHARES. Upon execution and delivery of this
Agreement to the Escrow Agent, Hail deposits 237,434 shares of Common Stock and
stock options exercisable for the purchase of 250,000 shares of Common Stock; C.
Wilson deposits 15,607 shares of Common Stock and stock options exercisable for
the purchase of 250,000 shares of Common Stock; R. Wilson deposits 4,338 shares
of Common Stock;R. Baresel and J. Baresel deposit 7,500 shares of Common Stock;
R. Baresel deposits
<PAGE>
stock options exercisable for the purchase of 35,000 shares of Common Stock;
J. Baresel deposits stock option exercisable for the purchase of 87,500
shares of Common Stock and in her capacity as the custodian holder for the
benefit of the children of R. Baresel and J. Baresel stock options
exercisable for the purchase of 12,500 shares of Common Stock; Dunlap
deposits stock options exercisable for the purchase of 37,500 shares of
Common Stock; Pre-Paid deposits 76,768 shares of Common Stock; and TVC
deposits 1,500 shares of Common Stock. Furthermore, the respective
Depositors named below have requested stock certificates to be issued to
them, each certificate to evidence shares of Common Stock held in street name
as of the date of this Agreement, and promptly upon receipt by each of the
respective stock certificates, J. Baresel hereby agrees to deposit stock
certificate(s) evidencing 20,828 shares of Common Stock, Pre-Paid hereby
agrees to deposit stock certificate(s) evidencing 4,000 shares of Common
Stock, and TVC agrees to deposit stock certificate(s) evidencing 1,500 shares
of Common Stock. Upon completion of the delivery of such stock certificates,
the depositors will have deposited with the Escrow Agent all of the
Promotional Securities. Upon each deposit of the Promotional Securities, the
Escrow Agent shall acknowledge receipt thereof and the deposit into an escrow
account(s) (the "escrow").
2. EXERCISE OR CONVERSION OF PROMOTIONAL SHARES. To the extent the
Promotional Shares have or represent exercise rights or conversion rights, the
Escrow Agent shall, upon receipt of the Issuer's written request, provide the
documents that evidence and/or which are necessary to cause exercise of the
rights or conversion rights. The shares of Common Stock or other securities of
the Issuer issued upon exercise or conversion of the Promotional Securities
shall become and remain in escrow subject to the terms of this Agreement.
3. TERM. The term of this Agreement and the escrow shall begin on the date
that the public securities offering relating thereto (the "public offering") is
declared effective by the Administrator and shall continue for a period of 36
months thereafter. The Promotional Securities shall be held by the Escrow Agent
pursuant to this Agreement until they are released in accordance with paragraph
4 of this Agreement.
4. RELEASE OF PROMOTIONAL SECURITIES.
(a) In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of the Issuer's assets or securities
(including by way of tender offer), or any other transaction or proceeding
with a person who is not a Promoter, which results in the distribution of
the Issuer's assets or securities ("Distribution"), while this Agreement
remains in effect, the Depositors agree that:
(i) All holders of the Issuer's Equity Securities will initially
share on a pro rata, per share basis in the Distribution, in
proportion to the amount of cash or other consideration that they paid
per share for their Equity Securities (provided that the Administrator
has accepted the value of the other consideration), until the
shareholders who purchased the Issuer's Equity Securities pursuant to
the public offering (the "Public Shareholders") have received, or have
had irrevocably set aside for them, an amount that is equal to 100
percent of the public offering's price per share times the number of
shares of Equity Securities that they purchased pursuant to the public
offering and which they still hold at the time of the Distribution,
adjusted for stock splits, stock dividends, recapitalization and the
like; and
(ii) All holders of the Issuer's Equity Securities shall thereafter
participate on an equal, per share basis times the number of shares of
Equity Securities they hold at the time of the Distribution, adjusted
for stock splits, stock dividends, recapitalization and the like.
(b) The Distribution may proceed on lesser terms and conditions than the
terms and conditions in paragraph 4(a) of this Agreement if a majority of
the Equity Securities that are not held by
2
<PAGE>
Depositors, officers, directors, or Promoters of the Issuer, or their
associates or affiliates vote, or consent by consent procedure, to approve
the lesser terms and conditions.
(c) In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of the Issuer's assets or securities
(including by way of tender offer), or any other transaction or proceeding
with a person who is a Promoter, which results in a Distribution while this
Agreement remains in effect, the Depositors' Promotional Securities shall
remain in escrow subject to the terms of this Agreement.
(d) The Depositors' Promotional Securities shall be released from escrow
if (i) the public offering has been terminated, and no securities were sold
pursuant thereto, or (ii) the public offering has been terminated, and all
of the gross proceeds that were derived therefrom have been returned to the
public investors, or (iii) the term of this Agreement shall have expired in
accordance with and pursuant to paragraph 3 of this Agreement.
5. NOTICE OF TERMINATION. Upon expiration of the term of this Agreement, the
Escrow Agent shall notify the Administrator in writing of such termination and
shall not be required to provide the Administrator with any other documentation
of such termination or release of the Promotional Securities.
6. RESTRICTIONS ON TRANSFER, SALE OR DISPOSAL OF PROMOTIONAL SECURITIES.
While this Agreement is in effect, no Promotional Securities, any interest
therein or any right or title thereto, may be sold, transferred, pledged,
assigned, hypothecated or otherwise disposed of ("transfer" or "transferred"),
except as provided below, and the Escrow Agent shall not recognize any transfer
that violates the terms of this Agreement. The Promotional Securities may not
be transferred until the Escrow Agent has received a written statement, signed
by the proposed transferee ("transferee"), which states that the transferee has
full knowledge of the terms of this Agreement, the transferee accepts the
Promotional Securities subject to the terms of this Agreement, and the
transferee realizes that the Promotional Securities shall remain subject to the
terms of the Agreement until they are released pursuant to paragraph 4 of this
Agreement. Notwithstanding the foregoing, (a) Promotional Securities may be
transferred by will, the laws of decent and distribution, operation of law, or
by order of any court of competent jurisdiction and having proper venue and (b)
Promotional Securities of a deceased Depositor may be hypothecated to pay the
expenses of the deceased Depositor's estate. The hypothecated Promotional
Securities shall remain subject to the terms of this Agreement. Promotional
Securities may not be pledged to secure any other debt.
7. VOTING POWER. The Promotional Securities shall have the same voting rights
as similar, non-escrowed Equity Securities. If the Promotional Securities are
registered in the Escrow Agent's name, the Escrow Agent shall vote those
Promotional Securities in accordance with the Depositors' written instructions.
8. DIVIDENDS. Cash dividends and stock dividends, that are granted to the
Depositors, shall be promptly deposited with the Escrow Agent subject to the
terms of this Agreement. The Escrow Agent shall place the cash dividends in an
interest bearing account. The Escrow Agent shall treat the stock dividends,
cash dividends and the interest earned thereon as assets of the Issuer which are
available for distribution pursuant to paragraphs 4(a) and (b) of this
Agreement, or as assets of the Issuer available for distribution to the
Depositors, upon release of their Promotional Securities pursuant to paragraph 4
of this Agreement, unless they are to be used as compensation to the Escrow
Agent, pursuant to paragraph 10 of this Agreement.
9. STOCK SPLITS AND ADDITIONAL SHARES. Equity Securities received by the
Depositors as a result of stock splits, recapitalization of the Issuer, or the
conversion of the Depositors' convertible securities while their Promotional
Securities are held in escrow, shall be promptly deposited with the Escrow Agent
as Promotional Securities subject to the terms of this Agreement. These
Promotional Securities shall be distributed to the Depositors when their
Promotional Securities are released from escrow pursuant to paragraph 4 of this
Agreement.
3
<PAGE>
10. RELIANCE BY ESCROW AGENT. The Escrow Agent shall be protected if it acts
in good faith upon any statement, certificate, notice, request, consent, order
or other document which it believes to be genuine, conforms with the provisions
of this Agreement and is signed by the proper party. The Escrow Agent's sole
responsibility shall be to act in accordance with the terms expressly set forth
in this Agreement. The Escrow Agent shall be under no obligation to institute
or defend any action, suit or proceeding in connection with this Agreement
unless it receives reasonable indemnification and advancement of fees and costs.
The Escrow Agent may consult counsel with respect to any question arising under
this Agreement. The Escrow Agent shall not be liable for any action taken or
omitted, in good faith, upon the advice of counsel. In performing its duties
hereunder, the Escrow Agent shall not be liable to anyone for any damage, loss,
expense or liability other than for that which arises from the Escrow Agent's
failure to abide by the terms of this Agreement.
11. ESCROW AGENTS COMPENSATION. The Escrow Agent shall be entitled to receive
reasonable compensation from the Issuer for its services. If the Escrow Agent
is required to render additional services that are not expressly set forth
therein, or if it is made a party to or intervenes in any action, suit or
proceeding pertaining to this Agreement ("Additional Services"), it shall be
entitled to receive reasonable compensation from the Issuer and the Depositors.
If Additional Services are provided, the Escrow Agent may deduct reasonable
compensation from the cash dividends, interest and proceeds being held for
distribution pursuant to this Agreement.
12. ESCROW AGENTS INDEMNIFICATION. The Issuer and the Depositors agree to hold
the Escrow Agent harmless from, and indemnify the Escrow Agent for, any cost or
liability regarding any administrative proceeding, investigation, litigation,
interpretation or implementation relating to this Agreement, including release
of Promotional Securities, the Distribution, and the disbursement of dividends,
interest or proceeds, unless the cost or liability arises from the Escrow
Agent's failure to abide by the terms of this Agreement.
13. INDEPENDENCE OF THE ESCROW AGENT. The Issuer hereby represents that all of
its officers, directors and Promoters are listed on Exhibit A attached hereto
and made a part hereof. The Escrow Agent hereby represents that it is not
affiliated with the Issuer, the Depositors, or the Issuer's officers, directors
or Promoters who are named in Exhibit A. For purposes of this Agreement, the
Escrow Agent is not disqualified to act as Escrow Agent merely because the
Issuer, its officers, directors and Promoters are customers of the Escrow Agent.
14. SCOPE. This Agreement shall inure to the benefit of and be binding upon
the Depositors, their heirs and assignees, and upon the Issuer, Escrow Agent,
and their successors.
15. SUBSTITUTE ESCROW AGENT. The Escrow Agent may, upon not less than 60 days
prior written notice to the Issuer, Depositors, and the Administrator, resign as
the Escrow Agent. The Issuer and the Depositors shall, before the effective
date of the Escrow Agent's resignation, enter into a new identical Escrow
Agreement with a substitute Escrow Agent. If the Issuer and the Depositors fail
to enter into a new Escrow Agreement and appoint a successor Escrow Agent within
60 days after the Escrow Agent has given notice of its resignation, the Escrow
Agent then serving under this Agreement shall retain the Promotional Securities
in escrow until a new, identical Escrow Agreement has been executed and a
successor Escrow Agent has been appointed. The Escrow Agent shall not be liable
for retaining the Promotional Securities in escrow.
16. TERMINATION. Except for the compensation and indemnification provisions of
paragraphs 11 and 12, above, which shall survive until they are satisfied, this
Agreement shall terminate in its entirety when all of the Promotional Securities
have been released, or the Issuer's Equity Securities and/or assets have been
distributed pursuant to paragraph 4 of this Agreement..
17. MISCELLANEOUS PROVISIONS. Pursuant to the requirements of this Agreement,
the Signatories have entered into this Agreement, which may be executed and
written in multiple counterparts and each of
4
<PAGE>
which shall be considered an original. This Agreement may be executed in
counterparts, including facsimile signatures of the depositors followed by
prompt delivery of the original signature page signed in counterpart, the sum
of which shall constitute the entire agreement.
In Witness Whereof, the Signatories have executed this Agreement in the
capacities set for and effective as of the date first above written.
"Issuer" ADVANTAGE MARKETING SYSTEMS, INC.
By: /s/ JOHN W. HAIL
--------------------------------------------------
John W. Hail, Chief Executive Officer
Attest:
/s/ ROGER P. BARESEL
- --------------------------------
Roger P. Baresel, Secretary
"Depositors"
"Hail" /s/ JOHN W. HAIL
------------------------------------------------------
John W. Hail
"C. Wilson" /s/ CURTIS H. WILSON, SR.
---------------------------------------------
Curtis H. Wilson, Sr.
"R. Wilson" /s/ RUTH WILSON
---------------------------------------------
Ruth Wilson
"R. Baresel" /s/ ROGER P. BARESEL
---------------------------------------------
Roger P. Baresel
"J. Baresel" /s/ JUDITH A. BARESEL
---------------------------------------------
Judith A. Baresel
"Dunlap" /s/ R. TERREN DUNLAP
---------------------------------------------
R. Terren Dunlap
"Pre-Paid" PRE-PAID LEGAL SERVICES, INC.
By: /s/ HARLAND C. STONECIPHER
--------------------------------------------------
Harland C. Stonecipher, Chief Executive Officer
Attest:
- ----------------------------------------------
Secretary
"TVC" TVC, INC.
By: /s/ JOHN W. HAIL
--------------------------------------------------
John W. Hail, President
Attest:
- ----------------------------------------------
Secretary
5
<PAGE>
"Escrow Agent"
LIBERTY BANK AND TRUST COMPANY OF
OKLAHOMA CITY, N.A.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
6
<PAGE>
EXHIBIT 10.16
PROMOTIONAL SHARES ESCROW AGREEMENT
THIS PROMOTIONAL SHARES ESCROW AGREEMENT (this "Agreement") made and
entered into this 31st day of October, 1997, by and between Advantage Marketing
Systems, Inc., an Oklahoma corporation (the "Issuer"), whose principal place of
business is located at 2601 Northwest Expressway, Suite 1210W, Oklahoma City,
Oklahoma 73112-7293, and Robert and Retha H. Nance (the"Depositors") and Liberty
Bank and Trust Company of Oklahoma City, N.A. (the "Escrow Agent"), whose
principal place of business is located at 100 Broadway, Oklahoma City, Oklahoma
73102 (all of whom are collectively referred to as "Signatories").
RECITALS
WHEREAS, the Issuer has filed an application with the Securities
Administrator of the Oklahoma Department of Securities (the "Administrator") to
register the Issuer's offering of (i) 1,495,000 shares of Common Stock, $.0001
par value, and 1,495,000 Redeemable Common Stock Purchase Warrants (the
"Warrants") in units of one share of Common Stock and one Warrant (the "Units")
and 1,495,000 shares of Common Stock underlying the Warrants for sale to public
investors some of whom may be residents of the State of Oklahoma, (ii) 130,000
shares of Common Stock and 130,000 Warrants in units of one share of Common
Stock and one Warrant underlying the warrants granted to Paulson Investment
Company, Inc. and Joseph Charles & Assoc., Inc. the representatives of the
underwriters of the Issuer's offering and (iii) 1,625,000 shares of Common Stock
underlying the Warrants (the "Equity Securities");
WHEREAS, Robert Nance is the owner of 75 shares of Common Stock and stock
options exercisable for the purchase of 54,483 shares of Common Stock; Retha H.
Nance is the owner of 37,750 shares of Common Stock; and Robert Nance and Retha
H. Nance are the joint owners of 103,392 shares of Common Stock;
WHEREAS, Robert Nance and Retha H. Nance propose to deposit in escrow
pursuant to this Agreement (i) 63,392 shares of the Common Stock jointly owned
by them and 30,000 shares of Common Stock owned by Retha H. Nance, for a total
of 93,108 shares of Common Stock and (ii) the stock options exercisable for the
purchase of 54,483 shares of Common Stock (the shares of Common Stock and stock
options are referred to herein as the "Promotional Securities");
WHEREAS, as a condition to registering the Issuer's Equity Securities, the
Depositors, who are security holders of the Issuer and who, for the purposes of
this Agreement, are deemed to be Promoters of the Issuer, have agreed to deposit
the Promotional Securities with the Escrow Agent; and
WHEREAS, the Signatories have agreed to be bound by the terms of this
Agreement.
NOW, THEREFORE, the Signatories agree as follows:
1. DEPOSIT OF PROMOTIONAL SHARES. The Depositors' Promotional Securities have
been deposited into an escrow account (the "escrow") with the Escrow Agent, and
the Escrow Agent hereby acknowledge the receipt thereof.
2. EXERCISE OR CONVERSION OF PROMOTIONAL SHARES. To the extent the
Promotional Shares have or represent exercise rights or conversion rights, the
Escrow Agent shall, upon receipt of the Issuer's written request, provide the
documents that evidence and/or which are necessary to cause exercise of the
rights or conversion rights. The shares of Common Stock or other securities of
the Issuer issued upon exercise or conversion of the Promotional Securities
shall become and remain in escrow subject to the terms of this Agreement.
3. TERM. The term of this Agreement and the escrow shall begin on the date
that the public securities offering relating thereto (the "public offering") is
declared effective by the Administrator and
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shall continue for a period of 36 months thereafter. The Promotional
Securities shall be held by the Escrow Agent pursuant to this Agreement until
they are released in accordance with paragraph 4 of this Agreement.
4. RELEASE OF PROMOTIONAL SECURITIES.
(a) In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of the Issuer's assets or securities
(including by way of tender offer), or any other transaction or proceeding
with a person who is not a Promoter, which results in the distribution of
the Issuer's assets or securities ("Distribution"), while this Agreement
remains in effect, the Depositors agree that:
(i) All holders of the Issuer's Equity Securities will initially
share on a pro rata, per share basis in the Distribution, in
proportion to the amount of cash or other consideration that they paid
per share for their Equity Securities (provided that the Administrator
has accepted the value of the other consideration), until the
shareholders who purchased the Issuer's Equity Securities pursuant to
the public offering (the "Public Shareholders") have received, or have
had irrevocably set aside for them, an amount that is equal to 100
percent of the public offering's price per share times the number of
shares of Equity Securities that they purchased pursuant to the public
offering and which they still hold at the time of the Distribution,
adjusted for stock splits, stock dividends, recapitalization and the
like; and
(ii) All holders of the Issuer's Equity Securities shall thereafter
participate on an equal, per share basis times the number of shares of
Equity Securities they hold at the time of the Distribution, adjusted
for stock splits, stock dividends, recapitalization and the like.
(b) The Distribution may proceed on lesser terms and conditions than the
terms and conditions in paragraph 4(a) of this Agreement if a majority of
the Equity Securities that are not held by Depositors, officers, directors,
or Promoters of the Issuer, or their associates or affiliates vote, or
consent by consent procedure, to approve the lesser terms and conditions.
(c) In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of the Issuer's assets or securities
(including by way of tender offer), or any other transaction or proceeding
with a person who is a Promoter, which results in a Distribution while this
Agreement remains in effect, the Depositors' Promotional Securities shall
remain in escrow subject to the terms of this Agreement.
(d) With respect to the 93,108 shares of the Common Stock owned by Robert
and Retha H. Nance (the "Initially Deposited Shares") initially deposited
with the Escrow Agent pursuant to this Agreement, during any given
three-month period following the date of this Agreement, Robert and Retha
H. Nance shall be entitled to sell that number of the Initially Deposited
Shares equal to one-half of one percent (0.5%) of the outstanding shares of
Common Stock of the Issuer as shown by the most recent report filed by the
Issuer with the United States Securities and Exchange Commission, the
National Association of Securities Dealers, Inc. pursuant to Rule 10b-17,
or statement published by the Issuer, in which event the Escrow Agent shall
release and return to Robert and Retha H. Nance such number of the
Initially Deposited Shares. Notwithstanding any other provision contained
herein, the release of such number of the Initially Deposited Shares
pursuant to this paragraph 4(d) shall not be required to provide prior
notification of the
2
<PAGE>
Administrator of such release, and Escrow Agent shall not be required to
receive any form of approval of release of such Initially Deposited Shares
by the Administrator; however, within 10 days following each release of
the Initially Deposited Shares, the Escrow Agent shall provide the
Administrator notice of such release.
(e) The Depositors' Promotional Shares shall be released from escrow if
(i) the public offering has been terminated, and no securities were sold
pursuant thereto, or (ii) the public offering has been terminated, and all
of the gross proceeds that were derived therefrom have been returned to the
public investors, or (iii) the term of this Agreement shall have expired in
accordance with and pursuant to paragraph 3 of this Agreement.
5. NOTICE OF TERMINATION. Upon expiration of the term of this Agreement, the
Escrow Agent shall notify the Administrator in writing of such termination and
shall not be required to provide the Administrator with any other documentation
of such termination or release of the Promotional Securities.
6. RESTRICTIONS ON TRANSFER, SALE OR DISPOSAL OF PROMOTIONAL SECURITIES.
While this Agreement is in effect, no Promotional Securities, any interest
therein or any right or title thereto, may be sold, transferred, pledged,
assigned, hypothecated or otherwise disposed of ("transfer" or "transferred"),
except as provided below, and the Escrow Agent shall not recognize any transfer
that violates the terms of this Agreement. The Promotional Securities may not
be transferred until the Escrow Agent has received a written statement, signed
by the proposed transferee ("transferee"), which states that the transferee has
full knowledge of the terms of this Agreement, the transferee accepts the
Promotional Securities subject to the terms of this Agreement, and the
transferee realizes that the Promotional Securities shall remain subject to the
terms of the Agreement until they are released pursuant to paragraph 4 of this
Agreement. Notwithstanding the foregoing, (a) Promotional Securities may be
transferred by will, the laws of decent and distribution, operation of law, or
by order of any court of competent jurisdiction and having proper venue and (b)
Promotional Securities of a deceased Depositor may be hypothecated to pay the
expenses of the deceased Depositor's estate. The hypothecated Promotional
Securities shall remain subject to the terms of this Agreement. Promotional
Securities may not be pledged to secure any other debt.
7. VOTING POWER. The Promotional Securities shall have the same voting rights
as similar, non-escrowed Equity Securities. If the Promotional Securities are
registered in the Escrow Agent's name, the Escrow Agent shall vote those
Promotional Securities in accordance with the Depositors' written instructions.
8. DIVIDENDS. Cash dividends and stock dividends, that are granted to the
Depositors, shall be promptly deposited with the Escrow Agent subject to the
terms of this Agreement. The Escrow Agent shall place the cash dividends in an
interest bearing account. The Escrow Agent shall treat the stock dividends,
cash dividends and the interest earned thereon as assets of the Issuer which are
available for distribution pursuant to paragraphs 4(a) and (b) of this
Agreement, or as assets of the Issuer available for distribution to the
Depositors, upon release of their Promotional Securities pursuant to paragraph 4
of this Agreement, unless they are to be used as compensation to the Escrow
Agent, pursuant to paragraph 10 of this Agreement.
9. STOCK SPLITS AND ADDITIONAL SHARES. Equity Securities received by the
Depositors as a result of stock splits, recapitalization of the Issuer, or the
conversion of the Depositors' convertible securities while their Promotional
Securities are held in escrow, shall be promptly deposited with the Escrow Agent
as Promotional Securities subject to the terms of this Agreement. These
Promotional Securities shall be
3
<PAGE>
distributed to the Depositors when their Promotional Securities are released
from escrow pursuant to paragraph 4 of this Agreement.
10. RELIANCE BY ESCROW AGENT. The Escrow Agent shall be protected if it acts
in good faith upon any statement, certificate, notice, request, consent, order
or other document which it believes to be genuine, conforms with the provisions
of this Agreement and is signed by the proper party. The Escrow Agent's sole
responsibility shall be to act in accordance with the terms expressly set forth
in this Agreement. The Escrow Agent shall be under no obligation to institute
or defend any action, suit or proceeding in connection with this Agreement
unless it receives reasonable indemnification and advancement of fees and costs.
The Escrow Agent may consult counsel with respect to any question arising under
this Agreement. The Escrow Agent shall not be liable for any action taken or
omitted, in good faith, upon the advice of counsel. In performing its duties
hereunder, the Escrow Agent shall not be liable to anyone for any damage, loss,
expense or liability other than for that which arises from the Escrow Agent's
failure to abide by the terms of this Agreement.
11. ESCROW AGENTS COMPENSATION. The Escrow Agent shall be entitled to receive
reasonable compensation from the Issuer for its services. If the Escrow Agent
is required to render additional services that are not expressly set forth
herein, or if it is made a party to or intervenes in any action, suit or
proceeding pertaining to this Agreement ("Additional Services"), it shall be
entitled to receive reasonable compensation from the Issuer and the Depositors.
If Additional Services are provided, the Escrow Agent may deduct reasonable
compensation from the cash dividends, interest and proceeds being held for
distribution pursuant to this Agreement.
12. ESCROW AGENTS INDEMNIFICATION. The Issuer and the Depositors agree to hold
the Escrow Agent harmless from, and indemnify the Escrow Agent for, any cost or
liability regarding any administrative proceeding, investigation, litigation,
interpretation or implementation relating to this Agreement, including release
of Promotional Securities, the Distribution, and the disbursement of dividends,
interest or proceeds, unless the cost or liability arises from the Escrow
Agent's failure to abide by the terms of this Agreement.
13. INDEPENDENCE OF THE ESCROW AGENT. The Issuer hereby represents that all of
its officers, directors and Promoters are listed on Exhibit A attached hereto
and made a part hereof. The Escrow Agent hereby represents that it is not
affiliated with the Issuer, the Depositors, or the Issuer's officers, directors
or Promoters who are named in Exhibit A. For purposes of this Agreement, the
Escrow Agent is not disqualified to act as Escrow Agent merely because the
Issuer, its officers, directors and Promoters are customers of the Escrow Agent.
14. SCOPE. This Agreement shall inure to the benefit of and be binding upon
the Depositors, their heirs and assignees, and upon the Issuer, Escrow Agent,
and their successors.
15. SUBSTITUTE ESCROW AGENT. The Escrow Agent may, upon not less than 60 days
prior written notice to the Issuer, Depositors, and the Administrator, resign as
the Escrow Agent. The Issuer and the Depositors shall, before the effective
date of the Escrow Agent's resignation, enter into a new identical Escrow
Agreement with a substitute Escrow Agent. If the Issuer and the Depositors fail
to enter into a new Escrow Agreement and appoint a successor Escrow Agent within
60 days after the Escrow Agent has given notice of its resignation, the Escrow
Agent then serving under this Agreement shall retain the Promotional Securities
in escrow until a new, identical Escrow Agreement has been executed and a
successor Escrow Agent has been appointed. The Escrow Agent shall not be liable
for retaining the Promotional Securities in escrow.
4
<PAGE>
16. TERMINATION. Except for the compensation and indemnification provisions of
paragraphs 11 and 12, above, which shall survive until they are satisfied, this
Agreement shall terminate in its entirety when all of the Promotional Securities
have been released, or the Issuer's Equity Securities and/or assets have been
distributed pursuant to paragraph 4 of this Agreement..
17. MISCELLANEOUS PROVISIONS. Pursuant to the requirements of this Agreement,
the Signatories have entered into this Agreement, which may be executed and
written in multiple counterparts and each of which shall be considered an
original.
IN WITNESS WHEREOF, the Signatories have executed this Agreement in the
capacities set for and effective as of the date first above written.
"Issuer" ADVANTAGE MARKETING SYSTEMS, INC.
By: /s/ JOHN W. HAIL
-------------------------------------------
John W. Hail, Chief Executive Officer
Attest:
/s/ ROGER P. BARESEL
- ----------------------------------
Roger P. Baresel, Secretary
"Depositors"
/s/ ROBERT NANCE
------------------------------------
Robert Nance
/s/ RETHA H. NANCE
------------------------------------
Retha H. Nance
"Escrow Agent"
LIBERTY BANK AND TRUST COMPANY OF
OKLAHOMA CITY, N.A.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
5
<PAGE>
EXHIBIT 10.17
PROMOTIONAL SHARES LOCK-IN AGREEMENT
I. This Promotional Shares Lock-In Agreement ("Agreement"), which was
entered into on the 5th day of November, 1997, by and between Advantage
Marketing Systems, Inc. ("Issuer"), whose principal place of business is
located in Oklahoma City, Oklahoma, and Roger P. Baresel and Judith A.
Baresel ("Security Holder") witnesses that:
A. The Issuer has filed an application with the Securities
Administrator of the State of Oklahoma ("Administrator") to
register certain of its EQUITY SECURITIES for sale to public
investors who are resident of Oklahoma ("Registration");
B. The Security Holder, in addition to the ownership of shares of
common stock or similar securities and/or possesses convertible
securities, warrants, options or rights which may be converted
into, or exercised to purchase shares of common stock or similar
securities of Issuer, is the owner of 4,000 shares of common stock
and 2,000 1997-A Warrants of Issuer held in an Individual
Retirement Account with Charles Schwab & Co., Inc. (the
"PROMOTIONAL SHARES"); and
C. As a condition to Registration, the Issuer and Security Holder
("Signatories") agree to be bound by the terms of this Agreement.
II. THEREFORE, the Security Holder agrees not to sell, pledge, hypothecate,
assign, grant any option for the sale of, or otherwise transfer or dispose
of, whether or not for consideration, directly or indirectly, and all
certificates representing stock dividends, stock splits, recapitalizaitons,
and the like, that are granted to, or received by, the Security Holder
while the PROMOTIONAL SHARES are subject to this Agreement, other than a
transfer resulting from the transfer of the Individual Retirement Account
to a bank, broker-dealer, savings and loan or other institution qualified
to hold, maintain and administer individual retirement accounts, during the
period beginning on the date that the Registration is declared effective
by the Administrator and ending of 36 months thereafter.
III. THEREFORE, the Signatories agree and will cause the following:
A. In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of the Issuer's assets or securities
(including by way of tender offer), or any other transaction or
proceeding with a person who is not a Promoter, which results in the
distribution of the Issuer's assets or securities ("Distribution"),
while this Agreement remains in effect that:
1. All holders of the Issuer's EQUITY SECURITIES will initially
share on a pro rata, per share basis in the Distribution, in
proportion to the amount of cash or other consideration that they
paid per share for their EQUITY SECURITIES (provided that the
Administrator has accepted the value of the other consideration),
until the shareholders who purchased the Issuer's EQUITY
SECURITIES pursuant to the public offering (the "Public
Shareholders") have received, or have had irrevocably set aside
for them, an amount that is equal to 100 percent of the public
offering's price per share times the number of shares of EQUITY
SECURITIES that they purchased pursuant to the public offering
and which they still hold at the time of the Distribution,
adjusted for stock splits, stock dividends, recapitalization and
the like; and
2. All holders of the Issuer's EQUITY SECURITIES shall thereafter
participate on an equal, per share basis times the number of
shares of EQUITY SECURITIES they hold at the time of the
Distribution, adjusted for stock splits, stock dividends,
recapitalization and the like.
3. The Distribution may proceed on lesser terms and conditions than
the terms and conditions stated in paragraphs 1 and 2 above if a
majority of the EQUITY SECURITIES that are not held by Security
Holder, officers, directors, or Promoters of the Issuer, or their
associates or affiliates vote or consent by consent procedure, to
approve the lesser terms and conditions.
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<PAGE>
B. In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of the Issuer's assets or securities
(including by way of tender offer), or any other transaction or
proceeding with a person who is not a Promoter, which results s
Distribution while this Agreement remains in effect, the PROMOTIONAL
SHARES shall remain subject to the terms of this Agreement.
C. Notwithstanding any other provision contained herein, the PROMOTIONAL
SHARES may be transferred by will, the laws of descent and
distribution, the operation of law, or by order of any count of
competent jurisdiction and proper venue.
D. The PROMOTIONAL SHARES of a deceased Security Holder may be
hypothecated to pay the expenses of the deceased Security Holder's
estate. The hypothecated the PROMOTIONAL SHARES shall remain subject
to the terms of this Agreement. The PROMOTIONAL SHARES may not be
pledged to secure any other debt.
E. Notwithstanding any other provision contained herein, the PROMOTIONAL
SHARES may be transferred by gift to the Security Holder's family
members, provided that the PROMOTIONAL SHARES shall remain subject to
the terms of this Agreement.
F. With the exception of paragraph A.3 above, the PROMOTIONAL SHARES
shall have the same voting rights as similar EQUITY SECURITIES not
subject to this Agreement.
G. Charles Schwab & Co., Inc. and each successor holder of the Individual
Retirement Account shall be provided an executed copy of this
Agreement.
H. The term of this Agreement shall begin on the date that the
Registration is declared effective by the Administrator ("Effective
Date") and shall terminate:
1. 36 months thereafter following the Effective Date; or
2. On the date the Registration has been terminated if no securities
were sold pursuant thereto; or
3. If the Registration has been terminated, the date that checks
representing all of the gross proceeds that were derived
therefrom and addressed to the public investors have been placed
in the U.S. Postal Service with first class postage affixed; or
4. On the date the PROMOTIONAL SHARES become "Covered Securities" as
defined under the National Securities Markets Improvement Act of
1996.
J. This Agreement to be modified only after written notice of the
Administrator.
IV. THEREFORE, the Issuer will cause the following:
A. A manually signed copy of this Agreement signed by the Signatories to
be filed with the Administrator prior to the Effective Date;
B. Copies of this Agreement and a statement of the per share initial
public offering price to be provided to the Issuer's stock transfer
agent;
C. Appropriate stock transfer orders to be placed with the Issuer's stock
transfer agent against the sale or transfer of the shares covered by
this Agreement prior to it expiration, except as may otherwise be
provided in this Agreement;
D. Charles Schwab & Co., Inc. shall be provided an executed copy of this
Agreement.
2
<PAGE>
Pursuant to the requirements of this Agreement, the Signatories have entered
into this Agreement, which may be written in multiple counterparts and each of
which shall be considered an original. The Signatories have signed the
Agreement in the capacities, and on the dates, indicated.
IN WITNESS WHEREOF, the Signatories have executed this Agreement.
ADVANTAGE MARKETING SYSTEMS, INC.
By: /s/ JOHN W. HAIL
----------------------------------------------
John W. Hail, Chief Executive Officer
/s/ ROGER P. BARESEL
----------------------------------------------
Roger P. Baresel
/s/ JUDITH A. BARESEL
----------------------------------------------
Judith A. Baresel
3
<PAGE>
EXHIBIT 23.1
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-47801 on Form SB-2 of Advantage Marketing Systems, Inc. of our reports
dated March 26, 1998 appearing in the Prospectus, which is a part os such
Registration Statement, and to the reference to us under the heading
"Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma,
October 6, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF COUNSEL
Dunn Swan & Cunningham, A Professional Corporation, hereby consents to
the use of its name under the heading "Legal Matters" in the Prospectuses
constituting part of this Registration Statement.
DUNN SWAN & CUNNINGHAM
A Professional Corporation
Oklahoma City, Oklahoma
October 6, 1998
