<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
INSIDER TRADING OFFER STATEMENT
(PURSUANT TO SECTION 13(e)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
ADVANTAGE MARKETING SYSTEMS, INC.
(Name of Issuer)
ADVANTAGE MARKETING SYSTEMS, INC.
(Name of Person Filing Statement)
COMMON STOCK
(Title of Class of Securities)
00756G-20-9
-----------
(CUSIP Number of Class of Securities)
ROGER P. BARESEL, PRESIDENT
ADVANTAGE MARKETING SYSTEMS, INC.
2601 NORTHWEST EXPRESSWAY, SUITE 1210W
OKLAHOMA CITY, OKLAHOMA 73112-0131
TELEPHONE NUMBER: 405-842-0131
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of the Person Filing Statement)
MARCH 3, 1998
(Date Tender Offer First Published, Sent or Given to Security Holders)
Calculation of Filing Fee
Transaction valuation: Common Stock
Last reported sale on February 27, 1998, was $2.438 per share
Transaction valuation: $1,000,000
Amount of Filing Fee: $200.00
/ / Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
<PAGE>
ITEM 1. Security and Issuer
The issuer is Advantage Marketing Systems, Inc. (the "Issuer") and its
principal executive office is at 2601 Northwest Expressway, Suite 1210W,
Oklahoma City, Oklahoma 73102-0131.
At February 27, the Issuer had 4,249,383 shares of common stock, $.0001
par value per share (the "Common Stock"). The Issuer intends to repurchase in
the open market up to $1,000,000 shares of common stock, $.0001 par value per
share (the "Common Stock") or approximately 410,172 shares of Common Stock,
based upon the last reported sales price of $2.438 per share on February 27,
1998. The Issuer will not repurchase any shares of the Common Stock from any
officer, director or affiliate of the Issuer.
The Common Stock is traded on the Nasdaq SmallCap Market and the Boston
Exchange under the symbols "AMSO," and "AMM," respectively. Prior to November
8, 1997, 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."
The following table sets forth, for the periods presented, the high and low
closing bid quotations in the over-the-counter market as quoted by the National
Quotation Bureau, Incorporated, adjusted to give effect to the one-for-eight
reverse stock split on October 29, 1996. The bid quotations reflect inter-
dealer prices without adjustment for retail markups, markdowns or commissions
and may not reflect actual transactions.
<TABLE>
COMMON STOCK
CLOSING BID PRICES
------------------
HIGH LOW
---- ---
<S> <C> <C>
1997:
First Quarter Ended March 31................ $6.25 $5.50
Second Quarter Ended June 30................ 8.38 5.69
Third Quarter Ended September 30............ 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
- ----------------------------------------------------------------------
</TABLE>
ITEM 2. Source and Amount of Funds or Other Consideration
The Issuer has set aside a maximum of $1,000,000 for the purpose of
repurchase of the Common Stock in the open market. Funding of the repurchase
will be from the Issuer's available cash and cash equivalents. The Issuer will
not borrow any funds for purposes of the repurchase.
ITEM 3. Purpose of the Tender Offer and Plans or Proposals of the Issuer or
Affiliate
The purpose of the repurchase or tender offer will be to retire the shares
of the Common Stock purchased, which will result in a reduction of the number of
outstanding shares of the Common Stock. The reduction in the number of
outstanding shares of the Common Stock will result in greater earning and book
value per outstanding share of the Common Stock . However, the reduction in
the repurchase of the Common Stock will result in an increase in the percent of
outstanding shares of the Common Stock beneficially owned by the officers and
directors of the Issuer. The Issuer does not have any plans and there are no
proposals that relate to or would result in (a) the acquisition by any person of
additional securities of the Issuer or the disposition of the repurchased shares
of the Common Stock , (b) an extraordinary corporate transaction involving the
Issuer, (c) the sale or transfer of a material amount of assets of the Issuer or
any of its subsidiaries (other than the utilization of funds to effectuate such
repurchase of the Common Stock), (d) any change in the Board of Directors or
management of the Issuer or change in any material term of the employment
contract of any executive officer of the Issuer, (e) any material change in the
present dividend rate or policy, or indebtedness or capitalization of the
Issuer,
2
<PAGE>
other than the effect of reduction in the number of outstanding shares
of the Common Stock, (f) any other material change in the Issuer's corporate
structure or business, (g) changes in the Issuer's Certificate of Incorporation
and/or Bylaws or other actions which may impede the acquisition of control of
the Issuer by any person, (h) the equity securities of the Issuer ceasing to be
authorized to be quoted in an inter-dealer quotation system of a registered
national securities association, (i) a class of equity security of the Issuer
becoming eligible for termination of registration pursuant to 12(g)(4) of the
Securities Exchange Act of 1934, as amended (the "Act"), or (j) suspension of
the Issuer's obligation to file reports pursuant to Section 15(d) of the Act.
ITEM 4. Interest in Securities of the Issuer
During the 40 business days preceding the filing of this Statement, the
Issuer, its executive officers and directors and the associates and subsidiaries
of the Issuer and the executive officers and directors of such associates or
subsidiaries have effected the following transactions in the Common Stock.
<TABLE>
PRICE
DATE OF TYPE OF NO. OF PER
NAME TITLE TRANSACTION TRANSACTION SHARES SHARE
---- ----- ----------- ----------- ------ -----
<S> <C> <C> <C> <C> <C>
John W. Hail (1) CEO & Director February 26, 1998 Purchase 10,000 $2.50
Curtis H. Wilson (2) Director February 27, 1998 Purchase 5,000 $2.43
Harland C. Stonecipher (3) Director February 3, 1998 Purchase 40,000 $2.47
</TABLE>
- ------------------------------------------------
(1) On February 26, 1998, pursuant to a loan agreement approved previously
by the Issuer's board of directors, the Issuer loaned Mr. Hail
$25,000. The loan is fully collateralized and is on terms comparable
with what Mr. Hail could have obtained from an unaffiliated lender.
(2) The shares were purchased by Ruth Wilson, wife of Mr. Wilson, with
respect to which Mr. Wilson disclaims any beneficial interest.
(3) The shares were purchased by Pre-Paid Legal Services, Inc., of which
Mr. Stonecipher is the Chairman of the Board and Chief Executive
Officer and may be deemed to be beneficially owned by Mr. Stonecipher.
ITEM 5. Contracts, Arrangements, Understandings or Relationships with Respect
to the Issuer's Securities
The Issuer does not have any contract, arrangement, understanding or
relationship relating, directly or indirectly, to the proposed repurchase of the
Common Stock with any of the Issuer's executive officers or directors or any
executive officer and director of an associate or subsidiary of the Issuer.
ITEM 6. Persons Retained, Employed or to Become Compensated
The Issuer has not employed or retained, and has not entered into any
agreement to compensate any person on the Issuer's behalf to make solicitations
or recommendations in connection with the repurchase of the Common Stock. All
repurchases of the Common Stock will be made in the open market through
registered broker-dealers, each of whom will receive commission rates no greater
than is permissible for open market purchase transactions.
ITEM 7. Financial Information
(a) Presented below and appearing elsewhere in this Statement are the
financial data of the Issuer as follows:
(1) Audited financial statements of the Issuer for the fiscal years
ended December 31, 1996 and 1995, appear at pages F-1 through
F-16 of this Statement;
(2) Unaudited financial statements of the Issuer for the nine months
ended September 30, 1997,
3
<PAGE>
appear at pages F-17 through F-24 of this Statement.
(3) The ratio of earnings to fixed charges for the fiscal years ended
December 31, 1996 and 1995 and for the nine months ended
September 30, 1997, are as follows:
Fiscal Year Ended December 31, 1995....... 9.1
Fiscal Year Ended December 31, 1996....... 34.3
Nine Months Ended September 30, 1997.... 5.9
(4) The book value per share of Common Stock for the fiscal years
ended December 31, 1996 and 1995 and for the nine months ended
September 30, 1997, are as follows:
Fiscal Year Ended December 31, 1995 $(.01)
Fiscal Year Ended December 31, 1996 $ .43
Nine Months Ended September 30, 1997 $1.45
(b) Presented below or appearing elsewhere in this Statement are the pro
forma data giving effect to the repurchase of the Common Stock as described
herein.
(1) Unaudited pro forma balance sheet of the Issuer as of December
31, 1996 and September 30, 1997, appear at pages PF-25 and PF-26
of this Statement.
(2) Unaudited pro forma statements of operations and ratio of
earnings to fixed charges of the Issuer for the fiscal year ended
December 31, 1996 and the nine months ended September 30, 1997,
appear at pages PF-27 and PF-28 of this Statement.
(3) The pro forma book value per share of Common Stock for the fiscal
year ended December 31, 1996, and for the nine months ended
September 30, 1997, are as follows:
Fiscal Year Ended December 31, 1996 $2.14
Nine Months Ended September 30, 1997 $2.19
ITEM 8. Additional Information
This item is not applicable because all repurchases of the Common Stock
will be effected through the open market.
ITEM 9. Materials Filed as Exhibits
This item is not applicable.
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this
statement is true, complete and correct.
Date: March 2, 1998 ADVANTAGE MARKETING SYSTEMS, INC.
By: /s/ ROGER P. BARESEL
--------------------------------
Roger P. Baresel, President
4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Advantage Marketing Systems, Inc.
(formerly AMS, Inc.) and Subsidiary
Oklahoma City, Oklahoma
We have audited the accompanying consolidated balance sheets of Advantage
Marketing Systems, Inc. (formerly AMS, Inc.) and subsidiary (the "Company") as
of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity (deficiency), and cash flows for each of the
three years in the period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Advantage Marketing Systems, Inc.
(formerly AMS, Inc.) and subsidiary at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
April 4, 1997
F-1
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
ASSETS 1996 1995
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 169,569 $ 112,087
Receivables - net of allowances of $25,804 and $21,485, respectively . . . 52,013 18,299
Receivable from affiliate. . . . . . . . . . . . . . . . . . . . . . . . . 13,042 51,963
Commission advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,821 2,371
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217,945 98,621
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 157,853 --
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . 655,243 283,341
COMMISSION ADVANCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,341 65
RECEIVABLES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 22,620
RECEIVABLE FROM AFFILIATE . . . . . . . . . . . . . . . . . . . . . . . . . 54,780 --
PROPERTY AND EQUIPMENT, Net. . . . . . . . . . . . . . . . . . . . . . . . . 377,190 159,797
GOODWILL, Net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,232 --
COVENANT NOT TO COMPETE, Net . . . . . . . . . . . . . . . . . . . . . . . . 52,222 --
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 341,760 --
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,573 67,173
----------- -----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,790,341 $ 532,996
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 268,433 $ 91,949
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247,883 151,654
Accrued promotion expense. . . . . . . . . . . . . . . . . . . . . . . . 46,370 99,424
Notes payable:
Stockholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 81,929
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,446 8,440
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . 66,758 20,679
----------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . . 638,890 454,075
LONG-TERM LIABILITIES:
Notes payable - other . . . . . . . . . . . . . . . . . . . . . . . . . . 19,049 28,500
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . 210,973 75,649
----------- -----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 868,912 558,224
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock - $.0001 par value; authorized
5,000,000 shares; none issued. . . . . . . . . . . . . . . . . . . . . -- --
Common stock - $.0001 par value; authorized 495,000,000 shares;
issued and outstanding 2,143,441 and 2,123,191 shares,
respectively (See Note 6). . . . . . . . . . . . . . . . . . . . . . . 214 212
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,981,380 1,859,882
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,060,165) (1,885,322)
----------- -----------
Total stockholders' equity (deficiency). . . . . . . . . . 921,429 (25,228)
----------- -----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,790,341 $ 532,996
----------- -----------
----------- -----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . $6,129,916 $4,492,668 $2,647,322
Cost of sales . . . . . . . . . . . . . . . . . . . . . . 4,531,578 3,150,741 1,930,973
---------- ---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . . . 1,598,338 1,341,927 716,349
Marketing, distribution and administrative expenses. . . . 1,296,080 1,094,756 641,893
---------- ---------- ----------
Income from operations . . . . . . . . . . . . . . . . 302,258 247,171 74,456
Other income (expense):
Interest, net. . . . . . . . . . . . . . . . . . . . . . . (10,538) (22,998) (25,075)
Other income . . . . . . . . . . . . . . . . . . . . . . . 33,824 25,535 30,625
---------- ---------- ----------
Total other income (expense) . . . . . . . . . . . . . 23,286 2,537 5,550
---------- ---------- ----------
INCOME BEFORE TAXES. . . . . . . . . . . . . . . . . . . . 325,544 249,708 80,006
TAX BENEFIT. . . . . . . . . . . . . . . . . . . . . . . . 499,613 -- --
---------- ---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . $ 825,157 $ 249,708 $ 80,006
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding . . . . . . . . 3,770,874 2,662,681 2,119,356
---------- ---------- ----------
---------- ---------- ----------
Net income per common share. . . . . . . . . . . . . . . . $ .29 $ .09 $ .04
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
TOTAL
STOCKHOLDERS
SHARES COMMON PAID-IN ACCUMULATED EQUITY
(SEE NOTE 6) STOCK CAPITAL DEFICIT (DEFICIENCY)
------------ ----- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1994. . . . . . . . . . . . . . . . 2,105,599 $211 $1,823,236 $(2,215,036) $(391,589)
Conversion of payables
into stock . . . . . . . . . . . . . . . . . . 1,342 -- 2,147 -- 2,147
Issuance of stock for
services received. . . . . . . . . . . . . . . 13,750 1 21,999 -- 22,000
Net income . . . . . . . . . . . . . . . . . . . . -- -- -- 80,006 80,006
--------- ---- ---------- ----------- --------
BALANCE,
DECEMBER 31, 1994. . . . . . . . . . . . . . . 2,120,691 212 1,847,382 (2,135,030) (287,436)
Warrants exercised . . . . . . . . . . . . . . . . 1,250 -- 7,500 -- 7,500
Issuance of stock for cash . . . . . . . . . . . . 1,250 -- 5,000 -- 5,000
Net income . . . . . . . . . . . . . . . . . . . . -- -- -- 249,708 249,708
--------- ---- ---------- ----------- --------
BALANCE,
DECEMBER 31, 1995. . . . . . . . . . . . . . . 2,123,191 212 1,859,882 (1,885,322) (25,228)
Issuance of stock for Miracle
Mountain International, Inc.
acquisition . . . . . . . . . . . . . . . . . . 20,000 2 119,998 -- 120,000
Warrants exercised . . . . . . . . . . . . . . . . 250 -- 1,500 -- 1,500
Net income . . . . . . . . . . . . . . . . . . . . -- -- -- 825,157 825,157
--------- ---- ---------- ----------- --------
BALANCE,
DECEMBER 31, 1996. . . . . . . . . . . . . . . 2,143,441 $214 $1,981,380 $(1,060,165) $921,429
--------- ---- ---------- ----------- --------
--------- ---- ---------- ----------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 825,157 $ 249,708 $ 80,006
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 65,993 43,310 33,403
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (499,613) -- --
Provision for bad debts. . . . . . . . . . . . . . . . . . . . . . 4,319 2,000 884
Write-off of deferred offering costs . . . . . . . . . . . . . . . 15,000 -- --
Gain on sale of property and equipment . . . . . . . . . . . . . . (1,572) -- --
Stock issued for services. . . . . . . . . . . . . . . . . . . . . -- -- 22,000
Stock issued for refunds . . . . . . . . . . . . . . . . . . . . . -- -- 2,147
Changes in assets and liabilities which provided (used) cash:
Receivables and advances. . . . . . . . . . . . . . . . . . . . (80,139) 7,280 31,819
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . (119,324) (50,750) (28,854)
Accounts payable and accrued expenses . . . . . . . . . . . . . 216,600 150,149 20,871
Notes payable to associates . . . . . . . . . . . . . . . . . . -- -- (10,728)
Interest payable. . . . . . . . . . . . . . . . . . . . . . . . -- -- 20,860
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . -- (40,852) (63,156)
--------- --------- --------
Net cash provided by operating activities. . . . . . . . . 426,421 360,845 109,252
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . . . (66,675) (50,105) (6,689)
Advances to affiliate . . . . . . . . . . . . . . . . . . . . . . . . . (22,000) (87,684) (66,026)
Proceeds from sale of property and equipment. . . . . . . . . . . . . . 1,700 -- --
Repayment of advances to affiliate. . . . . . . . . . . . . . . . . . . 6,141 67,401 9,069
Purchase of Miracle Mountain International, Inc.. . . . . . . . . . . . (56,103) -- --
--------- --------- --------
Net cash used for investing activities . . . . . . . . . (136,937) (70,388) (63,646)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock. . . . . . . . . . . . . . . . . 1,500 12,500 --
Loans from stockholders . . . . . . . . . . . . . . . . . . . . . . . . -- 31,963 61,374
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 39,098 3,685
Bank overdraft. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (46,663) 13,074
Payment of deferred offering costs. . . . . . . . . . . . . . . . . . . (125,400) (52,777) --
Payment on notes payable - stockholders . . . . . . . . . . . . . . . . (81,929) (142,615) (79,138)
Payment on notes payable - other. . . . . . . . . . . . . . . . . . . . (8,445) (7,985) (4,666)
Principal payment on capital leases . . . . . . . . . . . . . . . . . . (17,728) (11,891) (39,935)
--------- --------- --------
Net cash used in financing activities . . . . . . . . . . (232,002) (178,370) (45,606)
--------- --------- --------
NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,482 112,087 --
BEGINNING CASH BALANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 112,087 -- --
--------- --------- --------
ENDING CASH BALANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 169,569 $ 112,087 $ --
--------- --------- --------
--------- --------- --------
(Continued)
</TABLE>
F-5
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,021 $ 27,335 $ 4,215
Noncash financing and investing activities:
Additions to property and equipment
through capital leases. . . . . . . . . . . . . . . . . . . . . . . . . 199,131 108,219 --
Reclassify interest payable to
notes payable - stockholders. . . . . . . . . . . . . . . . . . . . . . -- 51,806 --
Fair value of capital stock issued to purchase
Miracle Mountain International, Inc.. . . . . . . . . . . . . . . . . . 120,000 -- --
Issuance of common stock in satisfaction of
notes and accounts payable. . . . . . . . . . . . . . . . . . . . . . . -- -- 89,892
(Concluded)
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION- The consolidated financial statements include
the accounts of Advantage Marketing Systems, Inc. (formerly AMS, Inc.), and
its wholly owned subsidiary, Miracle Mountain International, Inc. (the
"Company"). All significant intercompany accounts have been eliminated.
NATURE OF BUSINESS - The Company markets nutritional supplements and weight
management products that are manufactured by various manufacturers. The
Company sells its products and programs through a network of full and
part-time independent distributors developed by the Company.
The Company also sells supplies and materials to its sales associates.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
REVENUE RECOGNITION - Program revenue is recognized when products are
shipped or services are rendered. Sales of training and promotional
material to the sales force are recorded as revenue when the goods are
shipped.
INVENTORY - Inventory consists of consumer product inventory, and training
and promotional material such as video tapes, cassette tapes and paper
supplies held for sale to customers and independent sales associates.
Inventory is stated at the lower of cost or market. Cost is determined on
a first-in, first-out method.
INTANGIBLES - Intangible assets consist of goodwill and a covenant not to
compete. Goodwill represents the excess of cost over the fair value of the
net assets of acquired subsidiaries. The Company amortizes goodwill over
seven years. The covenant not to compete is being amortized over the life
of the contract. The goodwill amortization for the year ended December 31,
1996, was $9,930. Covenant amortization for the year ended December 31,
1996 was $7,778.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost or, in
the case of leased assets under capital leases, at the fair value of the
leased property and equipment, less accumulated depreciation and
amortization. Property and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets of
three to five years. Assets under capital leases and leasehold
improvements are amortized over the lesser of the term of the lease
or the life of the asset.
LONG-LIVED ASSETS - In March 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS"), No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. Effective for fiscal years beginning after
December 15, 1995, SFAS 121 establishes accounting standards for
identifying and calculating the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to such assets. The Company
adopted SFAS 121 in 1996 which did not have a material effect on the
Company's consolidated financial statements. Management of the Company
assesses recoverability of its long-lived assets based on undiscounted cash
flows.
F-7
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
EARNINGS PER SHARE - Earnings per common share are computed by dividing net
income by the weighted average number of shares outstanding during the
period after giving effect to the reverse stock split discussed in Note 6.
Outstanding stock options and warrants are included in the calculation of
primary earnings per share when they meet the criteria for common stock
equivalents and their effect is dilutive. The Company determined 1996
earnings per share using the modified treasury stock method which assumes
changes to interest income and expense as part of the calculation. The
effects of common stock equivalents on the weighted average number of
shares outstanding was an increase of 1,636,000 shares and of assumed
interest changes was an increase in net income of approximately $254,000.
The effect of common stock equivalents on the weighted average number of
shares outstanding at December 31, 1995 and 1994 was an increase in shares
of 538,000 and -0-, respectively. Warrants have not been included in the
earnings per share calculation at December 31, 1995 and 1994 as they do not
meet the criteria for common stock equivalents. No difference exists
between primary and fully diluted earnings per share. In February 1997,
the FASB issued SFAS No. 128, EARNINGS PER SHARE. The Company believes
that adopting SFAS No. 128 will not have a material effect on the Company's
consolidated financial position or results of operations, but will result
in changes in the calculation of earnings per share.
INCOME TAXES - The Company uses an asset and liability approach to account
for income taxes. Deferred income taxes are recognized for the tax
consequences of temporary differences and carryforwards by applying enacted
tax rates applicable to future years to differences between the financial
statement amounts and the tax bases of existing assets and liabilities. A
valuation allowance is established if, in management's opinion, it is more
likely than not that some portion of the deferred tax asset will not be
realized.
FAIR VALUE DISCLOSURES - The Company's financial instruments consist of
accounts receivable, accounts payable, advances due from an affiliate and
current and long-term notes payable. Amounts recorded for accounts
receivable, accounts payable and current notes payable approximate fair
value due to the short duration of such amounts. The interest rates on
advances due from the affiliate and on notes payable reflect current market
rates. Consequently, the carrying value of these instruments approximate
fair value.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED - In February 1997, the
FASB issued SFAS No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL
STRUCTURE. The Company will adopt SFAS No. 129 when required. Management
believes that adoption of this standard will not have a material impact on
the Company's consolidated financial position or results of operations.
STOCK OPTION PLAN - The Company adopted SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION on January 1, 1996, as required. The Company has
elected to continue applying Accounting Principles Board Opinion No. 25 in
accounting for its stock-based compensation awards as permitted under SFAS
No. 123 and to disclose the proforma effects of applying SFAS 123 in the
footnotes. Accordingly, no compensation cost relating to the stock option
plan has been recognized in the accompanying consolidated financial
statements.
RECLASSIFICATIONS - Certain reclassifications have been made to prior year
balances to conform with the presentation for the current period.
2. OTHER ASSETS
F-8
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Other assets consist primarily of the direct costs, mainly legal,
accounting and filing fees, associated with a registration statement
filed by the Company with the Securities and Exchange Commission. The
registration statement was declared effective January 16, 1997. See
discussion of this registration statement at Note 12.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
1996 1995
-------- --------
<S> <C> <C>
Office furniture, fixtures and equipment. . . $633,086 $378,287
Automobiles . . . . . . . . . . . . . . . 44,872 54,056
Leasehold improvements. . . . . . . . . . . . 26,576 22,220
-------- --------
704,534 454,563
Accumulated depreciation and amortization . . (327,344) (294,766)
-------- --------
Total property and equipment, net . . . . . . $377,190 $159,797
-------- --------
-------- --------
</TABLE>
4. NOTES PAYABLE TO STOCKHOLDERS
The Company had a note payable to its major stockholder and chief executive
officer in the amount of $81,929 at December 31, 1995. During 1995, the
Company combined interest payable on the note of approximately $52,000 with
the outstanding principal balance. The principal was due on demand and
bore interest at 12%. During 1996, 1995 and 1994, the Company received
advances of $-0-, $31,963 and $61,374, respectively, and made payments of
$81,929, $127,615 and $79,138, respectively, on this payable. As of
December 31, 1996, the note payable had been paid in full.
During 1994, the Company had a note payable to a stockholder in the amount
of $15,000, bearing interest at 12%. Terms of the note required eight
quarterly payments of principal and interest beginning in the first quarter
of 1995. In 1995, the note was paid in full.
5. LEASE AGREEMENTS
During 1995 and 1996, the Company entered into various capital leases for
office related equipment. The lease terms range from 36 to 60 months.
Additionally, annual lease rental payments for each lease range from $1,300
to $40,000 per year. The schedule of future minimum lease payments below
reflects all payments under the leases.
The property and equipment accounts include $306,595 and $106,269 for
leases that have been capitalized at December 31, 1996 and 1995,
respectively. Related accumulated amortization amounted to $28,864 and
$9,941 at December 31, 1996 and 1995, respectively.
The Company leases office space and certain equipment under noncancellable
operating leases.
F-9
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Future minimum lease payments under capital leases and noncancelable
operating leases with initial or remaining terms of one year or more at
December 31, 1996 are as follows:
<TABLE>
CAPITAL OPERATING
LEASES LEASES TOTAL
-------- --------- -----
<S> <C> <C> <C>
Year ending:
1997 . . . . . . . . . . . . . . . . . . . . . . $ 87,804 $69,535 $157,339
1998 . . . . . . . . . . . . . . . . . . . . . . 87,804 24,235 112,039
1999 . . . . . . . . . . . . . . . . . . . . . . 67,451 -- 67,451
2000 . . . . . . . . . . . . . . . . . . . . . . 42,954 -- 42,954
2001 . . . . . . . . . . . . . . . . . . . . . . 40,272 -- 40,272
-------- ------- --------
Total minimum lease payments . . . . . . . . . . 326,285 $93,770 $420,055
------- --------
------- --------
Less amount representing interest. . . . . . . . 48,554
--------
Present value of net minimum lease payments. . . 277,731
Less current portion . . . . . . . . . . . . . . 66,758
--------
Long-term capital lease obligations. . . . . . . $210,973
--------
--------
</TABLE>
Rental expense under operating leases for the years ended December 31,
1996, 1995 and 1994 was $63,425, $55,476 and $57,458, respectively.
6. STOCKHOLDERS' EQUITY
COMMON STOCK - On October 29, 1996, the Board of Directors of the Company
effected a one-for-eight reverse split of the Company's outstanding common
stock, options and warrants. In addition, the number of the Company's
outstanding options and warrants have been reduced by a factor of eight and
their exercise price has been increased by a factor of eight pursuant to
this action.
This one-for-eight reverse split is reflected in the accompanying
consolidated financial statements and footnotes on a retroactive basis.
The Company's previously reported number of shares of common stock issued
and outstanding at December 31, 1995 and 1994 of 16,985,524 and 16,965,524,
has been adjusted to 2,123,191 and 2,120,691, respectively. Previously
reported weighted average number of outstanding shares of common stock for
the years ended December 31, 1995 and 1994, of 21,301,441 and 16,954,848,
has been adjusted to 2,662,681 and 2,119,356, respectively. Previously
reported earnings per share for the years ended December 31, 1995 and 1994,
of $.01 and NIL has been adjusted to $.09 and $.04, respectively.
The Company has filed a registration statement with the Securities and
Exchange Commission to register common stock to be issued in association
with the redemption of outstanding warrants and distribution of common
stock rights. This registration statement was declared effective on
January 16, 1997. See Note 12.
During 1996, the Company issued 20,000 shares of common stock in exchange
for all of the issued and outstanding capital stock of a similar
multi-level marketing company. See discussion of this acquisition
at Note 11.
During 1994, $2,147 of accounts payable were settled by the Company through
the issuance of 1,342 shares of its common stock with an estimated fair
value as of the date of settlement which equaled the liability. No gain or
loss was recorded as a result of this transaction.
F-10
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
During 1994, the Company issued 7,500 shares of its common stock to a
consultant for services rendered and 6,250 shares of stock for services
performed by individuals primarily involved in marketing the Company's
programs. A charge of $22,000, the estimated fair value of the shares at
the date of issuance, was recorded as selling expense.
COMMON STOCK OPTIONS - The Company issued options in 1995 and 1994
primarily for services rendered. The exercise price of these options was
equal to or in excess of the fair market value of the Company's common
stock at the date these options were issued. See Note 7 for the pro forma
effects of SFAS 123.
During 1995, the Company issued various options at exercise prices ranging
from $2.00 per share to $6.48 per share. Options were granted primarily
for services rendered and to ensure the future availability of those
services to the Company. All of the issued and outstanding options are
currently exercisable.
During 1994, the Company issued options on 34,108 shares of the Company's
common stock at exercise prices of $2.16 and $2.80 per share. These
options are exercisable at any time through December 31, 1999, so long as
the individual is continuing to provide services to the Company at the date
of exercise and vest at 20% per year.
The following table summarizes the Company's stock option activity for the
years ended December 31, 1996, 1995 and 1994 (as restated for the
one-for-eight reverse split in October 1996):
<TABLE>
EXERCISE EXERCISE EXERCISE
1996 PRICE 1995 PRICE 1994 PRICE
--------- ------------ -------- ------------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year . . . . . 1,540,177 $1.60 - 6.48 350,358 $1.60 - 2.80 316,250 $1.60
Options granted
during the year: . . . . . -- -- 706,624 2.00 -- --
-- -- 44,445 2.16 28,750 2.16
-- -- -- -- 5,358 2.80
-- -- 302,500 3.60 -- --
-- -- 125,000 4.96 -- --
-- -- 11,250 6.48 -- --
--------- --------- -------
-- -- 1,189,819 34,108
--------- --------- -------
Options expired
during the year . . . . . . 11,250 6.48 -- --
--------- --------- -------
Options outstanding,
end of year . . . . . . . . 1,528,927 $1.60 - 4.96 1,540,177 $1.60 - 6.48 350,358 $1.60 - 2.80
--------- --------- -------
--------- --------- -------
</TABLE>
COMMON STOCK WARRANTS - The following table summarizes the Company's common
stock warrants and their activity for the years ended December 31, 1996, 1995
and 1994 (as restated for the one-for-eight reverse split in October 1996):
<TABLE>
WARRANTS
ISSUED AND EXERCISE
OUTSTANDING PRICE EXERCISE PERIOD
----------- -------- ----------------
<S> <C> <C> <C>
DECEMBER 31, 1996:
Class A Warrants, beginning of year. . . . . . 524,610 $6.00 4/26/89 - 7/26/97
Class A Warrants exercised during the year . . (250) $6.00
-------
</TABLE>
F-11
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<S> <C> <C> <C>
Class A Warrants, end of year. . . . . . . . . 524,360
-------
-------
Class B Warrants . . . . . . . . . . . . . . . 525,860 $8.00 4/26/89 - 7/26/97
-------
-------
DECEMBER 31, 1995:
Class A Warrants, beginning of year. . . . . . 525,860 $6.00 4/26/89 - 7/26/97
Class A Warrants exercised during the year . . (1,250) $6.00
-------
Class A Warrants, end of year. . . . . . . . . 524,610
-------
-------
Class B Warrants . . . . . . . . . . . . . . . 525,860 $8.00 4/26/89 - 7/26/97
-------
-------
DECEMBER 31, 1994:
Class A Warrants . . . . . . . . . . . . . . . 525,860 $6.00 4/26/89 - 7/26/97
-------
Class B Warrants . . . . . . . . . . . . . . . 525,860 $8.00 4/26/89 - 7/26/97
-------
</TABLE>
Each warrant entitles the holder to purchase one share of common stock.
The Company redeemed all Class A and Class B Warrants in January 1997. See
discussion of the redemption at Note 12.
OFFERING - The Company has signed a letter of intent with an underwriter to
make a firmly underwritten public offering in 1997 of units consisting of
one share of common stock of the Company and a warrant to purchase one
additional such share. The agreement between the Company and the
underwriter includes a provision requiring the Company to grant a warrant
to the underwriter.
7. STOCK OPTION PLAN
During 1995, the Company approved the 1995 Stock Option Plan (the "Plan").
Under this Plan, options available for grant can consist of (i)
nonqualified stock options, (ii) nonqualified stock options with stock
appreciation rights attached, (iii) incentive stock options, and (iv)
incentive stock options with stock appreciation rights attached. The
Company has reserved 1,125,000 shares of the Company's common stock $.0001
par value, for the Plan. The Plan limits participation to employees,
independent contractors, and consultants. Nonemployee directors are
excluded from Plan participation. The option price for shares of stock
subject to this Plan is set by the Stock Option Committee of the Board of
Directors at a price not less than 85% of the market value of the stock on
the date of grant. No stock options shall be exercisable within six months
from the date of grant, unless under a Plan exception, nor more than ten
years after the date of grant. The Plan provides for the grant of stock
appreciation rights, which allow the holder to receive in cash, stock or
combination thereof, the difference between the exercise price and the fair
value of the stock at date of exercise. The fair value of stock
appreciation rights is charged to compensation expense. The stock
appreciation right is not separable from the underlying stock option or
incentive stock options originally granted and can only be exercised in
tandem with the stock option. No options under this Plan have been granted
or exercised as of December 31, 1996.
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its stock-based compensation awards. Accordingly, no
compensation cost has been recognized in the accompanying consolidated
financial statements. The following proforma data is calculated as if
compensation cost for the Company's stock-based compensation awards (see
also Note 6) was determined based upon the fair value at the grant date
consistent with the methodology prescribed under SFAS No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION:
F-12
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
DECEMBER 31,
------------------------
1996 1995
-------- ------------
<S> <C> <C>
Net income as reported . . . . . . . . . . . . . . $825,157 $ 249,708
Proforma net income (loss) . . . . . . . . . . . . $825,157 $(1,830,000)
Net income per common share as reported. . . . . . $ 0.29 $ 0.09
Proforma net income (loss) per common share. . . . $ 0.29 $ (0.69)
</TABLE>
The weighted average exercise price and fair value at the date of grant for
options granted in fiscal year 1995 was $2.77 and $1.75, respectively. This
fair value is estimated using the Black-Scholes option pricing model with
the following assumptions: no dividend yield; volatility of 59%; a weighted
average risk-free interest rate of 6.8%; no assumed forfeitures; and a
weighted average expected life of 7.3 years. The proforma amounts above
are not likely to be representative of future years because options vest
over several years and additional awards are generally made each year.
8. RELATED PARTIES
During 1996, 1995 and 1994, the Company received approximately $9,116,
$16,415 and $71,713, respectively, from Pre-Paid Legal Services, Inc., a
stockholder, for commissions on sales of memberships for the services
provided by Pre-Paid Legal Services, Inc.
The Company made non-interest bearing cash advances to the John Hail
Agency, Inc., ("JHA"), a company of which the Company's Chief Executive
Officer and major shareholder is the sole director and shareholder, of
$22,000, $87,684 and $66,026 during the years ended December 31, 1996, 1995
and 1994, respectively. JHA made repayments of these advances of $6,141,
$67,401 and $9,069 during the years ended December 31, 1996, 1995, 1994,
respectively. The Company also provided administrative services for JHA
and recognized revenue from JHA of $6,000, $12,000 and $12,000 for the
years ended December 31, 1996, 1995, and 1994, respectively, and are
included in the advances. The Company ceased providing administrative
services for JHA during 1996 and adopted a policy to not make any further
advances to JHA. JHA has executed a promissory note payable to the Company
with a principal balance of $67,822 at December 31, 1996, bearing interest
at 8.00% per annum and payable in installments of $1,499 per month.
Certain stockholders receive commissions on revenue of the Company. Such
commissions are recognized as compensation to the stockholders and are
included in selling expense.
9. INCOME TAXES
On a regular basis, management evaluates all available evidence, both
positive and negative, regarding the ultimate realization of the tax
benefits of its deferred tax assets. Based upon the historical trend of
increasing earnings, management has concluded that it is more likely than
not that a tax benefit will be realized from its deferred tax assets and
has therefore eliminated the previously recorded valuation allowance.
The Company's deferred tax assets relate primarily to net operating loss
carryforwards for income tax purposes at December 31, 1996, totaling
approximately $1,346,951, which will begin to expire in 2003. Reduction of
the valuation allowance resulted in a deferred tax asset at December 31,
1996, of $499,613 and a corresponding tax benefit for the year ended
December 31, 1996.
F-13
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
A reconciliation of the statutory Federal income tax rate to the effective
income tax rate for the years ended December 31, 1996, 1995, and 1994 is as
follows:
<TABLE>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate. . . . . . 34.0 % 34.0 % 34.0 %
State tax effective rate . . . . . . . . . . 2.6 3.7 4.8
Benefit of graduated tax rates . . . . . . . (0.5) (2.2) (13.5)
Benefit of operating loss carryforwards. . . (36.1) (35.5) (25.3)
Reduction in valuation allowance . . . . . . (153.5) 0.0 0.0
------- ------ ------
Effective income tax rate. . . . . . . . . . (153.5)% 0.0 % 0.0 %
------- ------ ------
------- ------ ------
</TABLE>
Deferred tax liabilities and assets at December 31, 1996 and 1995 are
comprised of the following:
<TABLE>
DECEMBER 31,
-----------------------
1996 1995
--------- ----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization. . . . . . . . . . $ (850) $ --
--------- ----------
Total deferred tax liabilities. . . . . . (850) --
--------- ----------
Deferred tax assets:
Depreciation and amortization. . . . . . . . . . -- 3,900
Net operating loss carryforwards . . . . . . . . 500,463 566,400
--------- ----------
Total deferred tax assets . . . . . . . . 500,463 570,300
Valuation allowance for deferred tax assets. . . -- (570,300)
--------- ----------
Total net deferred tax assets . . . . . . 500,463 --
--------- ----------
Net deferred taxes . . . . . . . . . . . . . . . 499,613 --
Less current portion of net deferred tax assets. . 157,853 --
--------- ----------
Noncurrent portion . . . . . . . . . . . . . . . $341,760 $ --
--------- ----------
--------- ----------
</TABLE>
10. COMMISSION ADVANCES
Commission advances represent advances to certain associates and are
repayable from future commissions earned by the associates. These advances
do not bear interest and are classified in the accompanying consolidated
balance sheets according to the expected timing of commissions to be earned
by the associates.
11. MIRACLE MOUNTAIN INTERNATIONAL, INC.
Pursuant to a Stock Purchase Agreement having an effective date of May 31,
1996 (the "Purchase Agreement"), the Company acquired all of the issued and
outstanding capital stock of Miracle Mountain International, Inc., a
Colorado corporation ("MMI"), and MMI became a wholly owned subsidiary of
the Company (the "MMI Acquisition"). The MMI Acquisition was accounted for
under the purchase method of accounting. MMI is a network marketer of
various third-party manufactured nutritional supplement products. Pursuant
to the Purchase
F-14
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Agreement and in connection with the MMI Acquisition, the Company issued
and delivered to the shareholders of MMI 20,000 shares of the Company's
common stock.
In connection with the MMI Acquisition, the excess of the purchase price of
$176,103, which includes $56,103 of transaction costs, over the negative
$3,059 fair value of the assets of MMI acquired, net of liabilities
assumed, has been allocated $119,162 to goodwill and $60,000 to the
covenant not to compete. Goodwill and the covenant not to compete will be
amortized over seven and four and one-half year periods, respectively.
The following unaudited pro forma results of operations for the years ended
December 31, 1996 and 1995 are presented as if the MMI Acquisition had been
made at the beginning of each period presented. The unaudited pro forma
information is not necessarily indicative of either the results of
operations that would have occurred had the purchase been made during the
periods presented or the future results of the combined operations.
<TABLE>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Net revenues . . . . . . . . . . . . . . $6,369,000 $4,796,000
Net income . . . . . . . . . . . . . . . $ 794,000 $ 89,000
Net income per common share . . . . . . $ 0.28 $ 0.03
</TABLE>
12. SUBSEQUENT EVENTS
On January 31, 1997, pursuant to a Stock Purchase Agreement (the "Purchase
Agreement"), the Company acquired all of the issued and outstanding capital
stock of Chambre International, Inc., a Texas corporation ("CII"), and CII
became a wholly owned subsidiary of the Company (the "CII Acquisition").
The CII Acquisition will be accounted for under the purchase method of
accounting. CII is a network marketer of various third-party manufactured
cosmetics, skin care and hair care products. Pursuant to the Purchase
Agreement and in connection with the CII Acquisition, the Company issued
and delivered to the shareholders of CII 6,482 shares of common stock at
closing. In addition, the Company issued and delivered an additional 7,518
shares of common stock to the shareholders of CII on March 31, 1997, after
determination of certain liabilities.
In April 1997, the Company acquired all of the assets of Stay 'N Shape
International, Inc., Solution Products International, Inc., Nation of
Winners, Inc., and Now International, Inc. (the "Group"). The Company
purchased all of the assets of the Group, free and clear of all liens and
encumbrances, for a combination of $1,174,441 cash and shares of the
Company's restricted (unregistered) common stock (the "Purchase Price")
with an estimated fair value of up to $2,600,000, dependent upon meeting
certain future sales targets. The cash portion of the Purchase Price was
paid at closing. The stock portion of the Purchase Price will be issued
and delivered over a 25-month period with stock valued at $800,000
delivered at closing, $750,000 due within 14 months of closing, and
$1,050,000 due within 25 months from closing. The Company has the option
of substituting cash for any portion of the remaining purchase price. The
number of shares of common stock to be issued and delivered, if any, is
subject to the market value of the Company's common stock prior to the date
of issuance and delivery as set forth in the purchase agreement. The
Purchase Price is subject to reduction based on sales performance over a
two-year period. The Group acquisition will be accounted for under the
purchase method of accounting. Each company in the Group is a network
marketer of various third-party manufactured nutritional supplements.
On January 31, 1997, at 5:00 p.m. Central Standard Time, the Company
distributed, at no cost, non-transferable rights ("Rights") to the holders
of record of shares of its common stock, par value $.0001 per share. The
Rights entitled the holders (the "Rights Holders") to subscribe for and
purchase up to 2,148,191 units (each unit
F-15
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
consisting of one share of common stock and one 1997-A warrant) for the
price of $6.80 per unit (the "Rights Offering"). The record date
holders of common stock received one Right for each share of common
stock held by them as of the record date. The Rights expired at
5:00 p.m. Central Standard Time, on March 17, 1997. Pursuant to
the Rights, Rights Holders could purchase one unit for each Right held.
The share of common stock and 1997-A warrant comprising each unit were
separately transferable immediately after the sale of the units to the
Rights Holders. Each 1997-A warrant is exercisable at any time 90 days
after January 16, 1997, and on or before January 31, 1999, to purchase one
share of common stock for $12.00, subject to adjustment in certain events,
and may be redeemed by the Company at any time upon 30 days' notice, at a
price of $.0001 per 1997-A warrant.
Concurrent with this Rights Offering, the Company elected to redeem all of
its outstanding Class A and Class B Common Stock Purchase Warrants (the
"Public Warrants") for $.0008 per warrant (the "Warrant Redemption") at
5:00 p.m. Central Standard Time, on March 17, 1997. However, in connection
with the Warrant Redemption, the Company, pursuant to modification of the
terms of the Public Warrants, offered to the Public Warrant holders (the
"Warrant Holders") the right to exercise the Public Warrants to purchase
units, each comprised of one share of common stock and one 1997-A warrant,
at an exercise price of $6.00 per unit (the "Warrant Modification
Offering").
The units in the offerings described above were offered on a best efforts
basis by the Company and its officers and directors, without commissions,
selling fees or direct or indirect remuneration. The Rights and Warrant
Holders were not required to pay any brokerage commissions or fees with
respect to the exercise of their Rights or Public Warrants. The Company
paid all charges and expenses of the subscription and warrant agents.
The Company received proceeds of approximately $2,150,000 from the Warrant
Modification Offering and the Rights Offering and paid costs incurred with
respect to the offerings of approximately $325,000. Deferred offering
costs of $175,848 at December 31, 1996, were charged against the net
proceeds from these offerings.
* * * * * *
F-16
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . $ 357,052 $ 169,569
Receivables - net of allowance of $25,804
at each period end . . . . . . . . . . . . . . 89,199 52,013
Receivable from affiliate. . . . . . . . . . . . 13,846 13,042
Commission advances . . . . . . . . . . . . . . 100,541 44,821
Inventory . . . . . . . . . . . . . . . . . . . 907,567 217,945
Deferred income taxes. . . . . . . . . . . . . . 146,046 157,853
---------- -----------
Total current assets . . . . . . . . . . . . 1,614,251 655,243
COMMISSION ADVANCES . . . . . . . . . . . . . . -- 4,341
RECEIVABLES . . . . . . . . . . . . . . . . . . 18,194 18,000
RECEIVABLE FROM AFFILIATE. . . . . . . . . . . . 44,293 54,780
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $395,869 and $327,344,
respectively . . . . . . . . . . . . . . . . . 629,704 377,190
GOODWILL, Net . . . . . . . . . . . . . . . . . 1,728,073 109,232
COVENANTS NOT TO COMPETE, Net. . . . . . . . . . 535,901 52,222
DEFERRED INCOME TAXES. . . . . . . . . . . . . . 274,385 341,760
DEFERRED OFFERING COSTS. . . . . . . . . . . . . 281,995 175,848
OTHER ASSETS . . . . . . . . . . . . . . . . . . 181,284 1,725
---------- -----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . $5,308,080 $ 1,790,341
---------- -----------
---------- -----------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . $ 352,049 $ 268,433
Accrued commissions and bonuses. . . . . . . . . 357,097 178,597
Accrued other expenses . . . . . . . . . . . . . 243,115 69,286
Accrued promotion expense. . . . . . . . . . . . -- 46,370
Notes payable . . . . . . . . . . . . . . . . . 24,152 9,446
Capital lease obligations. . . . . . . . . . . . 109,446 66,758
---------- -----------
Total current liabilities. . . . . . . . . . 1,085,859 638,890
LONG-TERM LIABILITIES:
Notes payable . . . . . . . . . . . . . . . . . 87,876 19,049
Capital lease obligations. . . . . . . . . . . . 241,943 210,973
---------- -----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . 1,415,678 868,912
---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $.0001 par value;
authorized 5,000,000 shares; none issued . . . -- --
Common stock - $.0001 par value; authorized
495,000,000 shares; issued and outstanding
2,680,081 and 2,143,441, respectively . . . . . 268 214
Paid-in capital . . . . . . . . . . . . . . . . 4,819,816 1,981,380
Accumulated deficit . . . . . . . . . . . . . . (927,682) (1,060,165)
---------- -----------
Total stockholders' equity . . . . . . . . . . . 3,892,402 921,429
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . $5,308,080 $ 1,790,341
---------- -----------
---------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-17
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . $7,635,321 $4,439,042
Cost of sales . . . . . . . . . . . . . . . . . . 5,472,819 3,003,642
---------- ----------
Gross profit . . . . . . . . . . . . . . . . 2,162,502 1,435,400
Marketing, distribution and administrative
expenses . . . . . . . . . . . . . . . . . . . . 1,957,755 1,147,894
---------- ----------
Income from operations . . . . . . . . . . . 204,747 287,506
Other income (expense):
Interest, net . . . . . . . . . . . . . . . . . . 1,810 (9,359)
Other income . . . . . . . . . . . . . . . . . . 7,303 9,507
---------- ----------
Total other income (expense) . . . . . . . . 9,113 148
---------- ----------
INCOME BEFORE TAXES . . . . . . . . . . . . . . . 213,860 287,654
INCOME TAX (EXPENSE) BENEFIT . . . . . . . . . . (81,377) 443,149
---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . $ 132,483 $ 730,803
---------- ----------
---------- ----------
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON EQUIVALENT SHARES . . . . . 3,457,135 3,176,000*
---------- ----------
---------- ----------
NET INCOME PER COMMON SHARE . . . . . . . . . . . $ 0.04 $ 0.23*
---------- ----------
---------- ----------
</TABLE>
* Restated for one-for-eight reverse stock split effective October 29, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
F-18
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
SEPTEMBER 30,
-------------------------
1997 1996
----------- ----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 132,483 $ 730,803
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . 170,078 53,955
Deferred income tax. . . . . . . . . . . . . . . . . . . 79,182 (443,149)
Write off deferred offering costs. . . . . . . . . . . . -- 15,000
Changes in assets and liabilities which provided (used)
cash:
Inventory . . . . . . . . . . . . . . . . . . . . . . . (560,996) (207,183)
Receivables, advances and prepaids . . . . . . . . . . . (58,489) (35,899)
Accounts payable and accrued commissions, bonuses
and expenses . . . . . . . . . . . . . . . . . . . . . 20,465 196,848
----------- ----------
Net cash provided (used) by operating activities . . (217,277) 310,375
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment . . . . . . . . . . . . . (130,568) (62,531)
Purchase of Miracle Mountain International, Inc. . . . . . . -- (56,103)
Purchase of Chambre International, Inc.. . . . . . . . . . . (51,340) --
Purchase of assets pursuant to SNSI Asset Purchase . . . . . (1,274,441) --
Purchase of other assets . . . . . . . . . . . . . . . . . . (106,803) --
Advances to affiliate. . . . . . . . . . . . . . . . . . . . -- (22,000)
Repayment of advances to affiliate . . . . . . . . . . . . . 9,683 3,040
----------- ----------
Net cash (used) by investing activities. . . . . . . (1,553,469) (137,594)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock . . . . . . . . . . . 2,234,357 --
Proceeds from notes payable. . . . . . . . . . . . . . . . . 40,980 --
Payment of deferred offering costs . . . . . . . . . . . . . (240,703) (89,489)
Payment on notes payable . . . . . . . . . . . . . . . . . . (9,194) (3,659)
Principal payment on capital leases. . . . . . . . . . . . . (67,211) (9,484)
Payment on notes payable - stockholder . . . . . . . . . . . -- (64,271)
----------- ----------
Net cash provided (used) by financing activities . . 1,958,229 (166,903)
----------- ----------
NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . 187,483 5,878
BEGINNING CASH BALANCE . . . . . . . . . . . . . . . . . . . 169,569 112,087
----------- ----------
ENDING CASH BALANCE . . . . . . . . . . . . . . . . . . . . $ 357,052 $ 117,965
----------- ----------
----------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest . . . . . . . . . . . $ 21,104 $ 18,414
Cash paid during the year for income taxes . . . . . . . . . 2,195 --
Noncash financing and investing activities:
Property and equipment acquired by capital lease . . . . . 140,869 --
Fair value of capital stock issued to purchase Miracle
Mountain International, Inc. . . . . . . . . . . . . . . -- 120,000
SNSI Asset Purchase: . . . . . . . . . . . . . . . . . . .
Fair value of assets acquired . . . . . . . . . . . . . (84,063) --
Fair value of covenant not to compete . . . . . . . . . (500,000) --
Purchase price in excess of tangible assets acquired
and covenant not to compete . . . . . . . . . . . . . (1,490,378) --
Fair value of common stock issued . . . . . . . . . . . 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 issued . . . . . . . . . . . 84,000 --
Liabilities assumed . . . . . . . . . . . . . . . . . . 148,787 --
----------- ----------
Cash paid to purchase Chambre International, Inc. . . . $ (51,340) $ --
----------- ----------
----------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-19
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial statements and related notes have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. The accompanying financial statements and related
notes should be read in conjunction with the audited consolidated financial
statements of the Company, and notes thereto, for the year ended
December 31, 1996.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented. Operating
results of the interim period are not necessarily indicative of the amounts
that will be reported for the year ending December 31, 1997. Certain
reclassifications have been made to prior period balances to conform with
the presentation for the current period.
2. ACQUISITIONS
Pursuant to a Stock Purchase Agreement having an effective date of
January 31, 1997 (the "Purchase Agreement"), the Company acquired all of
the issued and outstanding capital stock of Chambre International, Inc., a
Texas corporation ("CII"), and CII became a wholly-owned subsidiary of the
Company (the "CII Acquisition"). The CII Acquisition was closed on
January 31, 1997, and was accounted for under the purchase method of
accounting. CII is a network marketer of various third-party manufactured
cosmetics, skin care and hair care products. In connection with the CII
Acquisition, the Company issued 6,482 shares of its common stock to the
shareholders of CII at closing and issued an additional 7,518 shares of its
common stock to the shareholders of CII on March 31, 1997, after
determination of certain liabilities.
In connection with the CII Acquisition, the excess of the purchase price of
$135,340, which includes $3,549 of transaction costs, over the negative
$63,985 fair market value of assets of CII acquired, net of liabilities
assumed, has been allocated $179,325 to goodwill and $20,000 to a covenant
not to compete. Goodwill and the covenant not to compete will be amortized
over 20 year and 47 month periods, respectively.
Pursuant to an Asset Purchase Agreement having an effective date of
April 16, 1997 (the "Purchase Agreement"), the Company acquired all of the
assets of Stay 'N Shape International, Inc. ("SNSI"), Solution Products
International, Inc. ("SPII"), Nation of Winners, Inc. ("NWI"), Now
International, Inc. ("NII"), all Georgia corporations, (collectively SNSI,
SPII, NWI and NII are referred to as the "Selling Group"), free and clear
of any lien, charge, claim, pledge, security interest or other encumbrance
of any type or kind whatsoever, known or unknown (the "SNSI Asset
Purchase"). The SNSI Asset Purchase was closed on April 16, 1997, and was
accounted for under the purchase method of accounting. Each company in the
Selling Group is a network marketer of various third-party manufactured
nutritional supplements and was under common ownership.
In connection with the SNSI Asset Purchase, the Company paid cash of
$1,174,441 and issued 125,984 shares of the Company's common stock at
closing and agreed to either issue additional shares of the Company's
common stock having an aggregate fair value equal to, or make cash payments
of, or at the Company's sole option any
F-20
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
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-TM-) 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-TM- 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 of returns and allowances, during the
12-month period ended March 31, 1999, from (i) sales (other than
Choc-Quilizer-TM-) of the purchased network marketing organization,
sales to Market America, Inc. and sales to retail outlet stores, are
less than $5,000,000 and (ii) the Company's sales of Choc-Quilizer-TM-
are less than $8,000,000 during such 12-month period. The fair value of
the Company's common stock to be issued will be based upon the average
of the closing prices of the Company's common stock on the last three
trading days of the month preceding the month in which the applicable
12-month period ends.
In connection with the SNSI Asset Purchase, the excess of the purchase
price of $2,074,441, which includes $100,000 of transaction costs, over the
$84,063 fair 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.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the company and the Selling Group as
if the acquisition had occurred at the beginning of 1996 and 1997, with pro
forma adjustments to give effect to amortization of goodwill together with
the related income tax effect.
<TABLE>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Net sales. . . . . . . . . . . $8,506,938 $8,218,782
Net earnings . . . . . . . . . 711,006 144,446
Net earnings per share . . . . 0.25 0.04
</TABLE>
3. STOCK OPTIONS
The Company established the Advantage Marketing Systems, Inc. 1995 Stock
Option Plan (the "Plan") in June 1995. The Plan provides for the issuance
of incentive and nonincentive stock options with or without stock
appreciation rights to employees and consultants of the Company, including
employees who also serve as directors of the Company. The total number of
shares of the Company's common stock authorized and reserved for issuance
under the Plan is 1,125,000. During the nine months ended September 30,
1997, the Company issued 146,750 options under the Plan. As of
September 30, 1997, 146,750 options had been granted under the Plan.
The following table summarizes the Company's stock option activity for the
nine months ended September 30, 1997 (as restated for the one-for-eight
reverse split in October 1996):
<TABLE>
1997 EXERCISE PRICE
---- --------------
<S> <C> <C>
Options outstanding beginning of the year. . . . 1,528,927 $1.60 - 6.48
Options granted during the year. . . . . . . . . 146,750 6.00
Options exercised during the year. . . . . . . . 37,500 1.60
2,500 2.00
F-21
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
6,945 2.16
---------
46,945
---------
Options canceled during year . . . . . . . . . . 125,000 4.96
---------
Options outstanding end of year. . . . . . . . . 1,503,732 $1.60 - 6.48
---------
---------
</TABLE>
4. ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128-Earnings Per
Share, which is effective for the Company's year ending December 31, 1997.
The statement establishes standards for computing and presenting earnings
per share. Adoption of SFAS No. 128 will result in changes to the
calculation of earnings per share.
Also in February 1997, the FASB issued SFAS No. 129-Disclosure of
Information about Capital Structure, which is effective for the Company's
year ending December 31, 1997. The statement establishes standards for
disclosing information about a reporting company's capital structure.
Adoption of SFAS No. 129 relates to disclosure within the financial
statements and will not have a material effect on the Company's financial
statements.
In June 1997, the FASB issued SFAS No. 130-Reporting Comprehensive Income
which is effective for the Company's year ending December 31, 1998. The
statement addresses the reporting and displaying of comprehensive income
and its components. Earnings per share will only be reported for net
income and not for comprehensive income. The Company has not had adequate
time to determine the differences between comprehensive income and net
income.
Also in June 1997, the FASB issued SFAS No. 131-Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 modifies current
segment reporting requirements and establishes, for public companies,
criteria for reporting disclosures about a company's products and services,
geographic areas and major customers in annual and interim financial
statements. The Company will adopt SFAS No. 131 for the year ending
December 31, 1998.
5. WARRANT MODIFICATION OFFERING AND RIGHTS OFFERING
On January 31, 1997, the Company distributed, at no cost, non-transferable
rights ("Rights") to the holders of record of shares of its common stock,
par value $.0001 per share. The Rights entitled the holders (the "Rights
Holders") to subscribe for and purchase up to 2,148,191 units (each unit
consisting of one share of common stock and one 1997-A warrant) for the
price of $6.80 per unit (the "Rights Offering"). The record date holders
of the Company's common stock received one Right for each share of common
stock held by them as of the record date. The Rights expired on March 17,
1997. Pursuant to the Rights, 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. As of January 8, 1998, the Company
reduced
F-22
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
the exercise price from $12.00 to $3.40 and extended the exercise
period from January 31, 1999 to November 6, 2002, of the outstanding
337,211 1997-A warrants, each exercisable for the purchase of one share of
common stock. Each 1997-A warrant may be redeemed by the Company at any
time upon 30 days' notice, at a price of $.0001 per 1997-A warrant.
The units in the offerings described above were offered on a best efforts
basis by the Company and its officers and directors, without commissions,
selling fees or direct or indirect remuneration. The Rights Holders and
Warrant Holders were not required to pay any brokerage commissions or fees
with respect to the exercise of their Rights or Public Warrants. The
Company paid all charges and expenses of the subscription and warrant
agents.
Proceeds to the Company from the Warrant Modification Offering and the
Rights Offering (the "Offerings") were $2,154,357. Accumulated offering
costs of $323,076 were charged against the net proceeds from these
offerings. Pursuant to the Offerings the Company issued 337,211 shares of
common stock and a corresponding number of 1997-A warrants.
6. SUBSEQUENT EVENTS
In September 1995, the Oklahoma Department of Securities commenced an
investigation of the Company with respect to a number of issues, the most
prominent of which relates to the AMS Distributor Stock Pool (the "Pool").
The Pool, under which the Company's independent distributors were permitted
to participate 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 October 31, 1997,
the Pool held approximately 224,082 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 from November 6, 1997.
On November 6, 1997, pursuant to a firm underwriting, the Company sold
1,495,000 units each consisting of one share of common stock and one
redeemable common stock purchase warrant (the "Units") at a public offering
price of $4.50 each (the "Units Offering"). Pursuant to the Units
Offering, the Company received net proceeds of approximately $6,050,000.
Accumulated offering costs of approximately $720,000 were charged against
the
F-23
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
proceeds of the Units Offering. On December 8, 1997, the common stock
and redeemable common stock purchase warrants comprising the Units
separated and began trading only as separate securities. Each redeemable
common stock purchase warrant is exercisable for the purchase of one share
of common stock for $3.40 on or before November 6, 2002, unless earlier
redeemed. Each redeemable common stock purchase warrant may be redeemed by
the Company for $0.25, on not less than 30 days' written notice, at any
time that the closing sale price per share of common stock closes at or
above $6.80.
In connection with the Units Offering, the Company sold and issued warrants
to the representatives of the underwriters (the "Representatives'
Warrants"). The Representatives' Warrants are exercisable for the purchase
of up to 130,000 Units at an exercise price of $5.40 per Unit for a
four-year period beginning November 6, 1998.
* * * * * *
F-24
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.) AND SUBSIDIARY
PRO FORMA CONSOLIDATED BALANCE SHEET, DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
HISTORICAL PRO FORMA
1996 ADJUSTMENTS PRO FORMA
---- ----------- ---------
ASSETS (NOTE 2)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 169,569 $(1,000,000)(a) $ 5,232,257
5,330,000 (b)
2,007,129 (c)
(1,274,441)(e)
Receivables - Net. . . . . . . . . . . . . . . . . . . . 52,013 -- 52,013
Receivable from affiliate. . . . . . . . . . . . . . . . 13,042 -- 13,042
Commission advances . . . . . . . . . . . . . . . . . . 44,821 -- 44,821
Inventory. . . . . . . . . . . . . . . . . . . . . . . . 217,945 80,302 (e) 298,247
Deferred income taxes. . . . . . . . . . . . . . . . . . 157,853 -- 157,853
----------- ----------- -----------
Total current assets . . . . . . . . . . . . . . . . 655,243 5,142,990 5,798,233
----------- ----------- -----------
COMMISSION ADVANCES. . . . . . . . . . . . . . . . . . . . . 4,341 -- 4,341
RECEIVABLES. . . . . . . . . . . . . . . . . . . . . . . . . 18,000 -- 18,000
RECEIVABLE FROM AFFILIATE. . . . . . . . . . . . . . . . . . 54,780 -- 54,780
PROPERTY AND EQUIPMENT, Net. . . . . . . . . . . . . . . . . 377,190 3,761 (e) 380,951
GOODWILL, Net. . . . . . . . . . . . . . . . . . . . . . . . 109,232 1,490,378 (e) 1,599,610
COVENANT NOT TO COMPETE, Net . . . . . . . . . . . . . . . . 52,222 500,000 (e) 552,222
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . 341,760 -- 341,760
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 177,573 (175,848)(c) 1,725
----------- ----------- -----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,790,341 $ 6,961,281 $ 8,751,622
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 268,433 $ -- $ 268,433
Accrued expenses . . . . . . . . . . . . . . . . . . . . 294,253 -- 294,253
Notes payable. . . . . . . . . . . . . . . . . . . . . . 9,446 -- 9,446
Current obligations under capital lease. . . . . . . . . 66,758 -- 66,758
----------- ----------- -----------
Total current liabilities. . . . . . . . . . . . . . 638,890 -- 638,890
LONG-TERM LIABILITIES:
Notes payable. . . . . . . . . . . . . . . . . . . . . . 19,049 -- 19,049
Capital lease obligations. . . . . . . . . . . . . . . . 210,973 -- 210,973
----------- ----------- -----------
Total liabilities. . . . . . . . . . . . . . . . . . 868,912 -- 868,912
----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock - $.0001 par value; authorized 5,000,000
shares; none issued . . . . . . . . . . . . . . . . . . -- -- --
Common stock - $.0001 par value; authorized 495,000,000
shares; 2,143,441 shares issued and outstanding,
3,676,104, as adjusted . . . . . . . . . . . . . . . . 214 (43)(a) 368
150 (b)
34 (c)
13 (e)
Paid-in capital. . . . . . . . . . . . . . . . . . . . . 1,981,380 (999,957)(a) 8,942,507
5,329,850 (b)
1,831,247 (c)
799,987 (e)
Accumulated deficit . . . . . . . . . . . . . . . . . . (1,060,165) -- (1,060,165)
----------- ----------- -----------
Total stockholders' equity . . . . . . . . . . . . . 921,429 6,961,281 7,882,710
----------- ----------- -----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,790,341 $ 6,961,281 $ 8,751,622
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.
PF-25
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.) AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEETS, SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
HISTORICAL PRO FORMA
1997 ADJUSTMENTS PRO FORMA
---- ----------- ---------
ASSETS (NOTE 2)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 357,052 $(1,000,000)(a) $4,969,047
5,611,995 (b)
Receivables - Net. . . . . . . . . . . . . . . . . . . . 89,199 -- 89,199
Receivable from affiliate. . . . . . . . . . . . . . . . 13,846 -- 13,846
Commission advances . . . . . . . . . . . . . . . . . . 100,541 -- 100,541
Inventory. . . . . . . . . . . . . . . . . . . . . . . . 907,567 -- 907,567
Deferred income taxes. . . . . . . . . . . . . . . . . . 146,046 -- 146,046
---------- ----------- ----------
Total current assets . . . . . . . . . . . . . . . . 1,614,251 4,611,995 6,226,246
---------- ----------- ----------
RECEIVABLES. . . . . . . . . . . . . . . . . . . . . . . . . 18,194 -- 18,194
RECEIVABLE FROM AFFILIATE. . . . . . . . . . . . . . . . . . 44,293 -- 44,293
PROPERTY AND EQUIPMENT, Net. . . . . . . . . . . . . . . . . 629,704 -- 629,704
GOODWILL, Net. . . . . . . . . . . . . . . . . . . . . . . . 1,728,073 -- 1,728,073
COVENANTS NOT TO COMPETE, Net. . . . . . . . . . . . . . . . 535,901 -- 535,901
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . 274,385 -- 274,385
DEFERRED OFFERING COSTS. . . . . . . . . . . . . . . . . . . 281,995 (281,995)(b) --
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 181,284 -- 181,284
---------- ----------- ----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,308,080 $ 4,330,000 $9,638,080
---------- ----------- ----------
---------- ----------- ----------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 352,049 $ -- $ 352,049
Accrued commissions and bonuses. . . . . . . . . . . . . 357,097 -- 357,097
Accrued other expenses . . . . . . . . . . . . . . . . . 243,115 -- 243,115
Notes payable. . . . . . . . . . . . . . . . . . . . . . 24,152 -- 24,152
Capital lease obligations. . . . . . . . . . . . . . . . 109,446 -- 109,446
---------- ----------- ----------
Total current liabilities. . . . . . . . . . . . . . 1,085,859 -- 1,085,859
LONG-TERM LIABILITIES:
Notes payable. . . . . . . . . . . . . . . . . . . . . . 87,876 -- 87,876
Capital lease obligations. . . . . . . . . . . . . . . . 241,943 -- 241,943
---------- ----------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . 1,415,678 -- 1,415,678
---------- ----------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock - $.0001 par value; authorized 5,000,000
shares; none issued. . . . . . . . . . . . . . . . . . -- -- --
Common stock - $.0001 par value; authorized 495,000,000
shares; 2,680,081 shares issued and outstanding,
3,749,549 as adjusted. . . . . . . . . . . . . . . . . 268 (43)(a) 375
150 (b)
Paid-in capital. . . . . . . . . . . . . . . . . . . . . 4,819,816 (999,957)(a) 9,149,709
5,329,850 (b)
Accumulated deficit . . . . . . . . . . . . . . . . . . (927,682) -- (927,682)
---------- ----------- ----------
Total stockholders' equity . . . . . . . . . . . . . 3,892,402 4,330,000 8,222,402
---------- ----------- ----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,308,080 $ 4,330,000 $9,638,080
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.
PF-26
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.) AND SUBSIDIARY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
STAY'N SHAPE INT.,
INC., NOW INT., INC.,
ADVANTAGE SOLUTION PRODUCTS,
MARKETING INC., NATION OF PRO FORMA
SYSTEMS, INC. WINNERS, INC. ADJUSTMENTS PRO FORMA
------------- ------------- ----------- ---------
(NOTE 2)
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . $6,129,916 $2,377,022 $ -- $8,506,938
Cost of sales. . . . . . . . . . . . . . . . . . . 4,531,578 1,497,811 -- 6,029,389
---------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . . . . . . 1,598,338 879,211 -- 2,477,549
Marketing, distribution and administrative
expenses. . . . . . . . . . . . . . . . . . . . . 1,296,080 937,470 124,519 (e) 2,358,069
---------- ---------- ---------- ----------
Income (loss) from operations. . . . . . . . . 302,258 (58,259) (124,519) 119,480
Other income (expense):
Interest, net. . . . . . . . . . . . . . . . . (10,538) -- -- (10,538)
Other income . . . . . . . . . . . . . . . . . 33,824 -- -- 33,824
---------- ---------- ---------- ----------
Total other income (expense) . . . . . . . 23,286 -- -- 23,286
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE TAXES . . . . . . . . . . . . 325,544 (58,259) (124,519) 142,766
INCOME TAX BENEFIT . . . . . . . . . . . . . . . . 499,613 -- 69,456 (e) 569,069
---------- ---------- ---------- ----------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . $ 825,157 $ (58,259) $ (55,063) $ 711,835
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(425,532)(a)
WEIGHTED AVERAGE NUMBER OF 1,495,000 (b)
COMMON AND COMMON 337,211 (c)
EQUIVALENT SHARES . . . . . . . . . . . . . . . 3,770,874 125,984 (e) 5,303,537
---------- ---------- ----------
---------- ---------- ----------
NET INCOME PER COMMON SHARE. . . . . . . . . . . . $ 0.29 $ 0.13
---------- ----------
---------- ----------
PRO FORMA RATIO OF EARNINGS
TO FIXED CHARGES. . . . . . . . . . . . . . . . 34.3 29.6
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.
PF-27
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.) AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
STAY'N SHAPE INT.,
INC., NOW INT., INC.,
ADVANTAGE SOLUTION PRODUCTS,
MARKETING INC., NATION OF PRO FORMA
SYSTEMS, INC. WINNERS, INC. ADJUSTMENTS PRO FORMA
------------- ------------- ----------- ---------
(NOTE 2)
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . $7,635,321 $583,461 $ -- $8,218,782
Cost of sales. . . . . . . . . . . . . . . . . . . 5,472,819 313,249 -- 5,786,068
---------- -------- ---------- ----------
Gross profit . . . . . . . . . . . . . . . . . 2,162,502 270,212 -- 2,432,714
Marketing, distribution and administrative expenses 1,957,755 230,413 31,130(e) 2,219,298
---------- -------- ---------- ----------
Income (loss) from operations. . . . . . . . . 204,747 39,799 (31,130) 213,416
Other income (expense):
Interest, net. . . . . . . . . . . . . . . . . 1,810 -- -- 1,810
Other income . . . . . . . . . . . . . . . . . 7,303 -- -- 7,303
---------- -------- ---------- ----------
Total other income (expense) . . . . . . . 9,113 -- -- 9,113
---------- -------- ---------- ----------
INCOME (LOSS) BEFORE TAXES . . . . . . . . . . . . 213,860 39,799 (31,130) 222,529
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . 81,377 -- 3,294 (e) 84,671
---------- -------- ---------- ----------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . $ 132,483 $ 39,799 $ (34,424) $ 137,858
---------- -------- ---------- ----------
---------- -------- ---------- ----------
(425,532)(a)
WEIGHTED AVERAGE NUMBER OF 1,495,000 (b)
COMMON AND COMMON 70,252 (c)
EQUIVALENT SHARES . . . . . . . . . . . . . . . . 3,457,135 31,496 (e) 4,628,351
---------- ---------- ----------
---------- ---------- ----------
NET INCOME PER COMMON SHARE. . . . . . . . . . . . $ 0.04 $ 0.03
---------- ----------
---------- ----------
PRO FORMA RATIO OF EARNINGS
TO FIXED CHARGES. . . . . . . . . . . . . . . . . 5.9 6.2
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.
PF-28
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC. (FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS FOR PRESENTATION
The pro forma balance sheets and statements of operations of Advantage
Marketing Systems, Inc. (the "Company") present the pro forma effects of
(i) the repurchase of 425,532 shares of the Company's common stock, $.0001
par value per share (the "Common Stock") in the open market at an assumed
market price of $2.35 per share for a total of $1,000,000 (the "Stock
Repurchase"); (ii) the sale on November 12, 1997 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's receipt of net proceeds
of $6,050,000 (the "Units Offering") and the offset of accumulated offering
costs of approximately $720,000 against the net proceeds; (iii) the sale on
March 17, 1997 of 337,211 units, each consisting of one share of Common
Stock and one 1997-A Warrant, and the Company's receipt of net proceeds of
$2,154,357 (the "Warrant Modification Offering and the Rights Offering")
and the offset of accumulated offering costs of approximately $323,076
against the net proceeds; (iv) the acquisition by the Company on April 16,
1997 of all of the assets of Stay'N Shape International, Inc., a Georgia
corporation ("SNSI"), Solution Products, Inc., a Georgia corporation
("SPI"), Nation of Winners, Inc., a Georgia corporation ("NWI"), Now
International, Inc., a Georgia corporation ("NII"), (collectively, SNSI,
SPI, NWI and NII are referred to as the "Selling Group"), free and clear of
any lien, charge, claim, pledge, security interest or other encumbrance of
any type or kind whatsoever, know or unknown (the "SNSI Asset Purchase").
The SNSI Asset Purchase has been accounted for under the purchase method of
accounting. Each company in the Selling Group was a network marketer of
various third-party manufactured nutritional supplements.
The accompanying unaudited pro forma statements of operations are presented
assuming that all of the transactions in the previous paragraph occurred
or were consummated on the first day of each period presented. The
unaudited pro forma consolidated balance sheets as of December 31, 1996,
and September 30, 1997, are presented assuming that all of the transactions
in the previous paragraph occurred or were consummated as of such date.
The historical information presented for the Company as of and for the
fiscal year ended December 31, 1996, is derived from the audited financial
statements of the Company as of such date and for such fiscal year. The
historical information presented for the Company as of and for the nine
months ended September 30, 1997, is derived from the unaudited financial
statements of the Company as of such date and for such nine-month period.
The pro forma financial information presented in the unaudited pro forma
financial statements is not necessarily indicative of the financial
position and results of operations that would have been achieved had all of
the above-mentioned transactions occurred or been consummated on the first
day of each period that the statements of operations are presented or on
the date of the balance sheets. The results of operations presented in the
unaudited pro forma statements of operations are not necessarily indicative
of the results of future operations of the Company following consummation
of all of the above-mentioned transactions.
2. PRO FORMA ADJUSTMENTS
The accompanying unaudited pro forma consolidated financial statements have
been adjusted to record and give effect to the following:
(a) Repurchase and retirement of 425,532 shares of Common Stock in the
open market at an assumed market price of $2.35 per share for a total
of $1,000,000.
(b) Issuance of 1,495,000 shares of Common Stock and receipt of net
proceeds by the Company pursuant to the Units Offering of $6,050,000.
The net cash proceeds from the Units Offering have been reduced by the
$720,000 cost of the offering less the $281,995 of offering costs
incurred by the Company and recorded as deferred offering costs at
September 30, 1997. The offering costs of $720,000 were recorded as a
reduction of paid-in capital.
(c) Issuance of 337,211 shares of Common Stock and receipt of net proceeds
by the Company pursuant to the Warrant Modification Offering and the
Rights Offering of $2,154,357. The net cash proceeds from these
offerings have been reduced by the $323,076 cost of the offerings less
the $175,848 of offering costs incurred by the Company and recorded as
other assets costs at December 31, 1996. The offering costs of
$323,076 were recorded as a reduction of paid-in capital.
(d) The Company has not recorded any additional interest income that may
have been received after giving effect to any of the above-mentioned
offerings.
PF-29
<PAGE>
(e) In connection with the SNSI Purchase the Company paid cash of
$1,174,441 and issued 125,984 shares of Common Stock at closing in
exchange for all of the assets of 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. In
addition, the Company agreed to either issue additional shares of
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. The excess of
the purchase price of $2,074,441, which includes $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 the covenant
not to compete. Goodwill and the covenant not to compete will be
amortized over 20 and 10 year periods, respectively. The goodwill
amortization for the year ended December 31, 1996, and for the three
months ended March 31, 1997, was $74,519 and $18,630, respectively.
The amortization of the covenant not to compete for the year ended
December 31, 1996, and for the three months ended March 31, 1997, was
$50,000 and $12,500, respectively.
(f) Income taxes are adjusted to reflect the above-mentioned adjustments
for amortization and for the effects of removing the "S Corporation"
election made by the shareholders of the Selling Group.
3. NET INCOME PER SHARE
Pro forma per share calculations for the Company are based upon the number
of shares of common stock to be outstanding after giving effect to all of
the above-mentioned transactions.
PF-30
