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PROSPECTUS
ADVANTAGE MARKETING SYSTEMS, INC.
4,715,513 PARTICIPATION INTERESTS
ADVANTAGE MARKETING SYSTEMS, INC. 1998
DISTRIBUTOR STOCK PURCHASE PLAN
ADVANTAGE MARKETING SYSTEMS, INC.:
2601 Northwest Expressway, Suite 1210W
Oklahoma City, Oklahoma 73112-7293
Telephone: (405) 842-0131
We are offering 4,715,513 interests ("participation interests") in the
Advantage Marketing Systems, Inc. 1998 Distributor Stock Purchase Plan
to the distributors of our products and services in lots of five
participation interests.
The participation interests are non-transferrable; therefore, a market
for the participation interests will not develop.
The proceeds from sale of the participation interests will become the
participants' contributions to the plan which will be used to purchase
our common stock and will not be placed into escrow pending purchase of
the common stock.
Other than an annual service fee of $5.00 per participant and a
transaction fee of $1.25 per month, we will not receive any proceeds
from the sale of the participation interests or purchase of our common
stock by the plan.
The offering price of each participation interest is $1.00, and each
distributor is required initially to purchase a minimum of 25
participation interests upon electing to participate in the plan.
There is no minimum amount of sales of participation interests
required.
Our common stock is listed on the American Stock Exchange under the
symbol "AMM."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS,"
BEGINNING AT PAGE 5.
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THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
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Per participation interest.............. $1.00 $ -- $1.00
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Total................................... $4,715,513 $ -- $4,715,513
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THE DATE OF THIS PROSPECTUS IS SEPTEMBER 1, 1999
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the captions "Prospectus Summary," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus
constitute "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of forward-looking
terminology such as "anticipates," "believes," "expects," "may," "will," or
"should" or other variations thereon, or by discussions of strategies that
involve risks and uncertainties. Our actual results or industry results may
be materially different from any future results expressed or implied by such
forward-looking statements. Factors that could cause our actual results to
differ materially include general economic and business conditions; our
ability to implement our business and acquisition strategies; changes in the
network marketing industry and changes in consumer preferences; competition;
availability of key personnel; increasing operating costs; unsuccessful
advertising and promotional efforts; changes in brand awareness; acceptance
of new product offerings; and changes in, or the failure to comply with,
government regulations (especially food and drug laws and regulations); our
ability to adequately address year 2000 issues; our ability to obtain
financing for future acquisitions; and other factors.
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Chambre-Registered Trademark-, Spark of Life-Registered Trademark-,
Young at Heart-Registered Trademark-, Co-Clenz-Registered Trademark-, Stay 'N
Shape-Registered Trademark-, Sine-eze-Registered Trademark- and
ToppFast-Registered Trademark- are our registered trademarks, and
Choc-Quilizer-TM- is a trademark of Tinos, L.L.C.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY.................................................................. -1-
RISK FACTORS........................................................................ -5-
USE OF PROCEEDS..................................................................... -14-
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY..................................... -14-
CAPITALIZATION...................................................................... -16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................... -16-
DESCRIPTION OF THE PLAN............................................................. -25-
BUSINESS............................................................................ -31-
MANAGEMENT.......................................................................... -45-
CERTAIN TRANSACTIONS................................................................ -49-
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................... -50-
DESCRIPTION OF SECURITIES........................................................... -52-
SHARES ELIGIBLE FOR FUTURE SALE..................................................... -56-
PLAN OF DISTRIBUTION................................................................ -58-
LEGAL MATTERS....................................................................... -59-
EXPERTS............................................................................. -59-
WHERE TO FIND ADDITIONAL INFORMATION................................................ -59-
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PROSPECTUS SUMMARY
This summary highlights selected information appearing elsewhere in
this document. It does not contain all the information that is or may be
important to you. You should read this entire document carefully. For additional
information, see "Where You Can Find Additional Information" (page 59).
We call this document a prospectus. It covers the participation
interests in our 1998 Distributor Stock Purchase Plan which are offered by us to
you and other distributors of our products. This offering to you and others is
referred to as the offering. The participation interests have been registered
with the United States Securities and Exchange Commission.
All references in this Prospectus to fiscal years are to our fiscal
year ended December 31 of each year.
Effective December 11, 1995, our parent Delaware corporation also named
Advantage Marketing Systems, Inc. merged into us. Following the merger, we
survived and our name was changed from "AMS, Inc." to "Advantage Marketing
Systems, Inc."
We have expanded our network marketing organization with the
acquisition of
- - Miracle Mountain International, Inc. on May 31, 1996 (the "Miracle
Mountain acquisition"),
- - Chambre International, Inc. on January 31, 1997 (the "Chambre
International acquisition"),
- - the assets of Stay 'N Shape International, Inc., Solution Products
International, Inc., Nation of Winners, Inc., and Now International,
Inc. on April 16, 1997 (the "Stay 'N Shape International asset
purchase"), and
- - all rights, including formulations and trademarks, for the ToppFast,
ToppStamina and ToppFitt products from ToppMed, Inc. on July 31, 1998
(the "TI" asset purchase").
Except as otherwise indicated, the information contained in this
prospectus assumes that our outstanding stock options and warrants at June 30,
1999, exercisable for the purchase of 3,293,944 shares of our common stock, are
not exercised.
ADVANTAGE MARKETING SYSTEMS, INC.
We market a product line consisting of approximately 101 products in
three categories; weight management, dietary supplement and personal care
products through a network marketing organization in which independent
distributors like yourself purchase products for resale to retail customers as
well as for their own personal use. The number of our active distributors has
increased from approximately 10,600 at December 31, 1996, 20,400 at December 31,
1997 and 33,000 at December 31, 1998, to approximately 46,800 at June 30, 1999.
An "active" distributor is one who purchased $50 or more of our products within
the preceding 12 months.
The distributors in our network are encouraged to recruit interested
people to become new distributors of our products. New distributors are placed
beneath the recruiting distributor in the "network" and are referred to as being
in that distributor's "downline" organization. Our marketing plan is designed to
provide incentives for distributors to build, maintain and motivate an
organization of recruited distributors in their downline organization to
maximize their earning potential. Distributors generate income by purchasing our
products at wholesale prices and reselling them at retail prices. Distributors
also earn bonuses on product purchases generated by the distributors in their
downline organization.
Our growth strategy is to expand our product line and network of
independent distributors to increase sales. An increase in the number of
distributors generally results in increased sales volume, and new products
create enthusiasm among distributors, serve as a promotional tool in selling
other products, and attract new distributors. Since 1995, we have introduced
eight new products to our product line in the weight management and dietary
supplement categories. Through the 1997 acquisition of Chambre International,
Inc., we added 68 products to our product line in the personal care category and
six products to our product line in the dietary supplement category. Through the
1997 Stay 'N Shape International asset purchase, we added 38 products to our
product line in the weight management and dietary supplement categories and one
product to our product line in the personal care category. During
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1998, we introduced ToppFast and Dial A Doc. In connection with these
acquisitions, we acquired approximately 6,790 additional distributors.
We review on an ongoing basis our product line for duplication and
sales movement and make adjustments accordingly. As of June 30, 1999, our
product line consisted of
- - eight weight management products,
- - 27 dietary supplement products,
- - 65 personal care products consisting primarily of cosmetic and skin
care products and
- - Dial A Doc.
Our products are manufactured by various manufacturers pursuant to formulations
developed for us and are sold to our independent distributors located in all 50
states and the District of Columbia. We also sell our personal care products to
distributors in Greece who do not use our network marketing system.
We market products that we believe will fulfill the needs of our
distributors and their customers, and assist our distributors in building their
own distributor organization. We offer individuals the opportunity to start a
home-based business without the significant start-up costs and other
difficulties usually associated with new business ventures. We provide new
product development, marketing tools, support services, product warehousing,
distribution and essential record-keeping functions for our distributors. We
also provide other support programs to our distributors, including regular
teleconferences, regional seminars, and product and sales training.
Our principal executive offices are located at 2601 Northwest
Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293 and our telephone
number is (405) 842-0131. Our site on the World Wide Web on the Internet is
located at http:www.amsonline.com.
THE OFFERING
Securities offered.............. 4,715,513 interests ("participation
interests") in the Advantage Marketing
Systems, Inc. 1998 Distributor Stock
Purchase Plan (the "plan") offered to the
distributors of our products and services in
lots of five participation interests. We
refer to a distributor electing to
participate in the plan as a "participant."
The participation interests are
non-transferrable; therefore, a market for
the participation interests will not
develop.
Common Stock outstanding........ 4,141,014 shares as of the date of this
prospectus.
Estimated net proceeds.......... $4,715,513 assuming sale of the offered
participation interests in full. Estimated
offering expenses of $90,000 will be paid by
us and will not reduce the participants'
contributions to the plan. However, we will
receive from the estimated net proceeds
annual service fees of $5.00 per participant
and monthly transaction fees of $1.25 per
participant.
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Use of proceeds................. The proceeds received from sale of the
participation interests will be contributed
to the plan for the accounts of the
participants. Such proceeds will be used to
- pay the annual service fees and
transaction fees of $5.00 and $1.25
per participant, respectively, and
- purchase our previously issued and
outstanding common stock in the
open market.
The annual service fees and monthly
transaction fees will be used to reimburse
us for the offering expenses of this
offering and cost of administering the plan.
American Stock Exchange symbol.. Common Stock........... AMM
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following table sets forth our summary historical financial and
operating information for
- - the six months ended June 30, 1999 and 1998 derived from our unaudited
condensed consolidated financial statements beginning on page F-2 and
- - the fiscal years ended December 31, 1998 and 1997 derived from our
audited consolidated financial statements beginning on page F-11.
The following information should be read in conjunction with our consolidated
financial statements and the related notes thereto, and other information
presented in this prospectus. The statements of operations data for any
particular year or period are not necessarily indicative of the results of
operations for any future period.
We expanded our network marketing organization with the acquisition of
Chambre International, Inc. on January 31, 1997, and the acquisition of the
assets of Stay 'N Shape International, Inc., Solution Products International,
Inc., Nation of Winners, Inc., and Now International, Inc. on April 16, 1997. As
a result of these acquisitions, the statements of operations data for 1998 may
not be comparable to 1997.
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FOR THE SIX MONTHS FOR THE YEARS ENDED
ENDED JUNE 30, DECEMBER 31,
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1999 1998 1998 1997
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STATEMENTS OF OPERATIONS DATA:
Net sales ........................................... $ 9,926,596 $ 5,870,023 $ 13,287,824 $ 10,192,227
Gross profit ........................................ 3,074,896 2,078,787 4,288,595 2,920,567
Income from operations .............................. 711,684 327,863 739,823 127,688
Income before income taxes .......................... 864,456 507,819 667,388 189,722
Tax expense ......................................... 291,010 193,051 253,340 59,696
Net income .......................................... $ 573,446 $ 314,768 $ 414,048 $ 130,026
Weighted average common
shares outstanding ............................... 4,141,014 4,217,894 4,191,760 2,751,771
Net income per common share - basic ................. $ .14 $ .07 $ .10 $ 0.05
Weighted average common shares outstanding -
assuming dilution ................................. 4,570,855 4,596,763 4,503,411 3,762,642
Net income per common share - assuming dilution ..... $ .13 $ .07 $ .09 $ 0.04
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FOR THE SIX MONTHS FOR THE YEARS ENDED
ENDED JUNE 30, DECEMBER 31,
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1999 1998 1998 1997
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OPERATING DATA:
Number of active distributors ....................... 46,800 27,900 33,000 20,400
Average sales per active distributor ................ $ 44 $ 53 $ 33 $ 41
Total number of products offered (exclusive of
size, color and other product variations) ....... 101 102 100 101
CASH FLOW DATA:
Net cash provided (used) by operating activities .... $ 1,291,625 $ 918,456 $ 1,242,254 $ (118,587)
Net cash (used) by investing activities ............ (332,554) (629,451) (996,283) (1,692,055)
Net cash (used) provided by financing activities .... (176,646) (437,061) (732,030) 7,416,349
JUNE 30, DECEMBER 31,
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1999 1998 1997
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BALANCE SHEET DATA:
Current assets.................................................... $7,542,809 $ 7,050,495 $ 6,999,364
Working capital .................................................. 6,278,481 5,823,182 6,143,041
Total assets...................................................... 11,258,876 10,717,483 10,336,306
Short-term debt................................................... 68,603 116,581 145,105
Long-term debt.................................................... 138,890 267,558 303,588
Stockholders' equity ............................................. 9,848,658 9,222,612 9,176,395
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RISK FACTORS
PURCHASE OF PARTICIPATION INTERESTS OFFERED HEREBY AND PURCHASE OF OUR
COMMON STOCK THROUGH PARTICIPATION IN THE PLAN INVOLVES A HIGH DEGREE OF RISK.
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED WHEN EVALUATING THE PURCHASE OF THE PARTICIPATION
INTERESTS OFFERED HEREBY AND INVESTMENT IN OUR COMMON STOCK THROUGH THE PLAN.
MANY OF THE FACTORS DISCUSSED BELOW ARE NOT WITHIN OUR CONTROL. WE PROVIDE NO
ASSURANCE THAT ONE OR MORE OF SUCH FACTORS WILL NOT HAVE A MATERIAL ADVERSE
EFFECT ON OUR FUTURE OPERATIONS AND, CONSEQUENTLY, ON OUR BUSINESS, FINANCIAL
CONDITION, RESULTS OF OPERATIONS OR THE MARKET PRICE OF OUR COMMON STOCK.
WE ARE DEPENDENT ON OUR DISTRIBUTORS.
Our success and growth depend upon our ability to attract, retain and
motivate our network of independent distributors who market our products.
Distributors are independent contractors who purchase products directly from us
for resale and their own use. Distributors typically offer and sell our products
on a part-time basis and may engage in other business activities, including the
sale of products offered by our competitors. Typically, we have non-exclusive
arrangements with our distributors which may be canceled at will and contain no
minimum purchase requirements by the distributors. While we encourage
distributors to focus on the purchase and sale of our products, distributors may
give higher priority to other products, reducing their efforts devoted to
marketing our products. Also, our ability to attract and retain distributors
could be negatively affected by adverse publicity relating to us, our products
or our operations. In addition, as a result of our network marketing system, the
distributor downline organizations headed by a relatively small number of key
distributors are responsible for a significant percentage of total sales.
The loss of a significant number of distributors, including any key
distributors, for any reason, could adversely affect our sales and operating
results, and could impair our ability to attract new distributors. There is no
assurance that our network marketing program will continue to be successful or
that we will be able to retain or expand our current network of independent
distributors.
WE ARE SUBJECT TO GOVERNMENT REGULATION.
Our operations are subject to and affected by laws, regulations,
administrative determinations, court decisions and similar constraints at the
federal, state and local levels and the laws and regulations of foreign
countries in which our products are or may be sold. The formulation,
manufacturing, packaging, labeling, advertising, distribution and sale of our
products are subject to regulation by a number of governmental agencies. These
agencies include the Food and Drug Administration, the Federal Trade Commission,
the Consumer Product Safety Commission, the United States Department of
Agriculture, and the Environmental Protection Agency.
MANY OF OUR PRODUCTS ARE REGULATED BY THE FOOD AND DRUG ADMINISTRATION.
The most active governmental agency regulating our products is the Food
and Drug Administration. Our products are subject to regulation under the
Federal Food, Drug, and Cosmetic Act and regulations promulgated thereunder.
The Federal Food, Drug, and Cosmetic Act has been amended several times
with respect to dietary supplements, most recently by the Nutrition Labeling and
Education Act of 1990 and the Dietary Supplement Health and Education Act of
1994. Our products are generally classified and regulated as dietary supplements
under the Federal Food, Drug, and Cosmetic Act, as amended. Our products are not
subject to pre-market approval by the Food and Drug Administration. However,
these products are subject to extensive labeling regulation by the Food and Drug
Administration. Moreover, if the Food and Drug Administration determines, on the
basis of labeling or advertising claims by us, that the "intended use" of any of
our products is for the diagnosis, cure, mitigation, treatment or prevention of
disease, the Food and Drug Administration can regulate those products as drugs
and require pre-market clearance for safety and effectiveness.
On April 10, 1996, the Food and Drug Administration issued a statement
warning consumers not to purchase or ingest natural sources of ephedrine within
dietary supplements. On June 4, 1997, the Food and Drug Administration proposed
regulations that will, if they become effective as proposed, significantly limit
our ability to sell dietary supplements that contain ephedrine, including our
AM-300. For the six months ended June 30, 1999 and the year ended December 31,
1998, AM-300
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represented 67.5% and 49.7% of our net sales, respectively. The
proposed regulations will become effective 180 days following issuance of the
final regulations by publication in the Federal Register. Several trade
organizations in the dietary supplement industry have commented on the proposed
regulations, requesting substantial modifications. As of the date of this
prospectus, we cannot predict whether the Food and Drug Administration will make
any material changes to these proposed regulations.
The Food and Drug Administration labeling requirements for dietary
supplements are set forth in final regulations that are effective with respect
to labels affixed to containers after March 23, 1999. These final regulations
include how to declare nutrient content information, and the proper detail and
format required for the "Supplemental Facts" box. Our product labeling have been
revised to comply with these regulations.
In addition, on April 29, 1998 the Food and Drug Administration
published proposed regulations offering guidance and providing limitations on
permissible "structure-function" statements (claims as to the benefit or effect
of a product or an ingredient on the body's structure or function) to be placed
on labels and in brochures. We anticipate that some of these proposed
regulations as proposed will become final; however, we believe these new
regulations will not significantly change the way that the Food and Drug
Administration currently interprets "structure-function" statements. Thus, we do
not expect to make any substantial label revisions based on these regulations.
Many states have also recently become active in the regulation of
dietary supplement products and may require us to modify the labeling or
formulation of certain products sold in those states. Furthermore; several
states either regulate or are considering regulating ephedrine-containing
products as controlled substances or are prohibiting the sale of such products
by persons other than licensed pharmacists.
The Texas Board of Health recently issued new regulations, which become
effective November 1, 1999. These regulations significantly restrict the
promotion and distribution of dietary supplements in the state of Texas which
contain ephedra or ephedrine alkaloids. These regulations
- - do not limit the quantity of ephedrine alkaloids on a per-capsule,
per-tablet, or per-daily basis,
- - do mandate several warnings to consumers on the labels of such
products,
- - require us to incorporate five specific provisions in the contracts
with our distributors, and
- - require us to submit all labels, advertising and promotional materials
to the Texas Department of Health.
We are taking the necessary steps to comply with these regulations and believe
we will be compliant prior to the November 1, 1999 effective date. Sales of our
AM-300 product in Texas represented approximately 6.0% of our net sales during
the six months ended June 30, 1999 and approximately 5.0% of our net sales
during 1998.
Consequently, there is a risk that AM-300 may become subject to further
federal, state, local or foreign laws or regulations. These laws or regulations
could require us to
- - withdraw or reformulate our AM-300 product with reduced ephedrine
levels or with a substitute for ephedrine,
- - relabel our products with different warnings or revised directions for
use, or
- - not make certain statements, possibly including weight loss claims,
with respect to any product containing ephedrine.
While we believe that AM-300 could be reformulated and relabeled, there can be
no assurance in that regard or that reformulation and relabeling would not have
an adverse effect on sales of such product or related products within our
product line even though such products do not contain ephedra or ephedrine.
The Ephedra Research Foundation has contracted with a consulting firm
to carry out a clinical study concerning the safety of ephedrine when ingested
in combination with caffeine as a dietary supplement. This study is currently
being conducted at two sites, Beth Israel-Deaconess Medical Center in Boston,
affiliated with Harvard Medical School, and St. Luke's-Roosevelt Hospital in New
York City, affiliated with Columbia University. We have been informed that the
final results of this study will be published in the last quarter of this year.
THE FEDERAL TRADE COMMISSION AND CERTAIN STATES REGULATE OUR PRODUCT
CLAIMS AND ADVERTISING.
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The Federal Trade Commission and certain states regulate advertising,
product claims, and other consumer matters, including advertising of our
products. In the past several years the Federal Trade Commission has instituted
enforcement actions against several dietary supplement companies for false or
deceptive advertising of certain products. In addition, the Federal Trade
Commission has increased its scrutiny of the use of testimonials, such as those
we have utilized. We provide no assurance that
- - the Federal Trade Commission will not question our past or future
advertising or other operations or
- - a state will not interpret product claims presumptively valid under
federal law as illegal under that state's regulations.
Also, our distributors and their customers may file actions on their own behalf,
as a class or otherwise, and may file complaints with the Federal Trade
Commission or state or local consumer affairs offices. These agencies may take
action on their own initiative or on a referral from distributors, consumers or
others. If taken, such actions may result in
- - entries of consent decrees,
- - refunds of amounts paid by the complaining distributor or consumer,
- - refunds to an entire class of distributors or customers, or
- - other damages, and
- - changes in our method of doing business.
A complaint based on the activities of one distributor, whether or not such
activities were authorized by us, could result in an order affecting some or all
distributors in a particular state, and an order in one state could influence
courts or government agencies in other states. Proceedings resulting from these
complaints may result in significant defense costs, settlement payments or
judgments and could have a material adverse effect on us.
OUR NETWORK MARKETING SYSTEM IS SUBJECT TO FEDERAL AND STATE
REGULATION.
Our network marketing system is subject to a number of federal and
state laws and regulations administered by the Federal Trade Commission and
various state agencies. These laws and regulations include securities, franchise
investment, business opportunity and criminal laws prohibiting the use of
"pyramid" or "endless chain" types of selling organizations. These regulations
are generally directed at ensuring that product sales are ultimately made to
consumers (as opposed to other distributors) and that advancement within the
network marketing system is based on sales of products, rather than investment
in the company or other non-retail sales related criteria.
The compensation structure of a network marketing organization is very
complex. Compliance with all of the applicable regulations and laws is uncertain
because of
- - the evolving interpretations of existing laws and regulations and
- - the enactment of new laws and regulations pertaining in general to
network marketing organizations and product distribution.
We have not obtained any no-action letters or advance rulings from any
federal or state securities regulator or other governmental agency concerning
the legality of our operations. Also, we are not relying on a formal opinion of
counsel to such effect. Accordingly there is the risk that our network marketing
system could be found to be in noncompliance with applicable laws and
regulations, which could have a material adverse effect on us. Such a decision
could
- - require modification of our network marketing system,
- - result in negative publicity, or
- - have a negative effect on distributor morale and loyalty.
In addition, our network marketing system will be subject to regulations in
foreign markets administered by foreign agencies should we expand our network
marketing organization into such markets.
THE LEGALITY OF OUR NETWORK MARKETING PROGRAM IS SUBJECT TO CHALLENGE
BY OUR DISTRIBUTORS.
We are subject to the risk of challenges to the legality of our network
marketing organization by our distributors, both individually and as a class.
Generally such challenges would be based on claims that our network marketing
program was operated as an illegal "pyramid scheme" in violation of federal
securities laws, state unfair practice and fraud laws and the Racketeer
Influenced and Corrupt
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Organizations Act. An illegal pyramid scheme is generally a marketing scheme
that promotes "inventory loading" and does not encourage retail sales of the
products and services to ultimate consumers. Inventory loading occurs when
distributors purchase large quantities of non-returnable inventory to obtain
the full amount of compensation available under the network marketing
program. In the event of challenges to the legality of our network marketing
organization by our distributors, there is no assurance that we will be able
to demonstrate that
- - our network marketing policies were enforced and
- - the network marketing program and distributors' compensation thereunder
serve as safeguards to deter inventory loading and encourage retail
sales to the ultimate consumers.
Proceedings resulting from these claims could result in significant defense
costs, settlement payments or judgments, and could have a material adverse
effect on us. One of our competitors, Nutrition for Life International, Inc., a
multi-level seller of personal care and nutritional supplements, recently
announced that it had settled class action litigation brought by distributors
alleging fraud in connection with the operation of a pyramid scheme. Nutrition
for Life International agreed to pay in excess of $3 million to settle claims
brought on behalf of its distributors and certain purchasers of its stock.
We believe that our marketing program is significantly different from
the program allegedly promoted by Nutrition for Life International and that our
marketing program is not in violation of anti-pyramid laws or regulations.
However, there can be no assurance that claims similar to the claims brought
against Nutrition for Life International and other multi-level marketing
organizations will not be made against us, or that we would prevail in the event
any such claims were made. Furthermore, even if we were successful in defending
against any such claims, the costs of conducting such a defense, both in dollars
spent and in management time, could be material and adversely affect our
operating results and financial condition. In addition, the negative publicity
of such a suit could adversely affect our sales and ability to attract and
retain distributors.
A LARGE PORTION OF OUR NET SALES ARE ATTRIBUTABLE TO OUR
AM-300 PRODUCT.
A significant portion of our net sales have been, and is expected to
continue to be, dependent upon our AM-300 product. AM-300 contains an ephedra
herb concentrate containing naturally occurring ephedrine. Our net sales of
AM-300 represented approximately 67.5%, 49.7%, and 29.5% of our net sales for
the six months ended June 30, 1999 and for the years 1998 and 1997,
respectively. In the event the recently proposed Food and Drug Administration
regulation related to products containing ephedrine is issued as a final
rule, or such products become subject to further federal, state or local laws
and regulations, we could be required to
- - withdraw or reformulate our AM-300 product,
- - relabel such product, or
- - not make certain statements, possibly including weight management
claims, with respect to such product.
Any such event could have a material adverse effect upon our sales and results
of operations.
COMPETITION FOR DISTRIBUTORS AND IN THE MARKETING OF OUR PRODUCTS
IS INTENSE.
We are subject to significant competition in recruiting distributors
from other network marketing organizations. Most of our competitors are
substantially larger, offer a greater variety of products and have
considerably greater financial resources. Our ability to remain competitive
depends, in significant part, on our success in recruiting and retaining
distributors through an attractive bonus plan and other incentives. We
provide no assurance that our programs for recruitment and retention of
distributors will be successful.
The business of distributing and marketing weight management,
dietary supplement, and personal care products is highly competitive. This
market segment includes numerous manufacturers, other network marketing
companies, catalog companies, distributors, marketers, retailers and
physicians that actively compete for the business of consumers. We compete
with other providers of such products, especially retail outlets, based upon
convenience of purchase, price and immediate availability of the purchased
product. Our market is highly sensitive to the introduction of new products
or weight management plans (including various prescription drugs) that may
rapidly capture a significant share of the market. As a result, our ability
to remain competitive depends in part upon the successful
-8-
<PAGE>
introduction of new products at competitive prices.
OUR PRODUCTS ARE SUBJECT TO OBSOLESCENCE.
The introduction by us or our competitors of new weight management,
nutritional supplement and personal care products offering increased
functionality or enhanced results may render existing products obsolete and
unmarketable. Therefore, our ability to successfully introduce new products into
the market on a timely basis and achieve acceptable levels of sales has and will
continue to be a significant factor in our ability to grow and remain
competitive and profitable. In addition, the nature and mix of our products are
important factors in attracting and maintaining our network of independent
distributors, which consequently affects demand for our products. Although we
seek to introduce additional products each year, the success of new products is
subject to a number of conditions, including customer acceptance. There can be
no assurance that
- - our efforts to develop innovative new products will be successful,
- - customers will accept new products or
- - that we will obtain required regulatory approvals of such new products.
In addition, no assurance can be given that new products currently experiencing
strong popularity and rapid growth will maintain their sales over time. In the
event we are unable to successfully increase the product mix and maintain
competitive product replacements or enhancements in a timely manner in response
to the introduction of new products, competitive or otherwise, our sales and
earnings will be materially and adversely affected.
WE ARE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS.
We, like other marketers of products that are intended to be ingested,
face an inherent risk of exposure to product liability claims in the event that
the use of our products results in injury. We maintain product liability
insurance with coverage limits of $4,000,000 per occurrence and $5,000,000
aggregate. We generally do not obtain contractual indemnification from parties
manufacturing our products. However, all of the manufacturers of our products
carry product liability insurance which covers our products.
We have agreed to indemnify Tinos, L.L.C., the licensor of
Choc-Quilizer, against any product liability claims arising from the
Choc-Quilizer product marketed by us. Also we have agreed to indemnify Chemins
Company, Inc. against claims arising from claims made by our distributors for
products manufactured by Chemins and marketed by us. Although we have never had
a product liability claim, such claims could cause us to have material losses.
WE ARE DEPENDENT UPON OUR EXECUTIVE OFFICERS.
Our growth and future success depends in part on the continued
availability of certain key management personnel, including John W. Hail, our
founder, Chief Executive Officer and Chairman of the Board, and Roger P.
Baresel, our President, Chief Financial Officer and one of our directors. We
do not maintain life insurance covering our executive officers.
Our continued growth and profitability also depends in part on our
ability to attract and retain other management personnel. Although
historically we have not had any difficulty in attracting and retaining
management personnel, there can be no assurance that we will continue to be
able to do so in the future.
MANAGEMENT OF OUR GROWTH MAY PROVIDE CHALLENGES.
We have experienced substantial growth in sales, operations, personnel
and the number of distributors, which has challenged and will continue to
challenge our management and operating resources. Continued growth will require
us to
- - increase our sales and marketing, support, and administrative
personnel,
- - increase our distributor training and support capabilities and
- - expand our information management systems.
There is no assurance that we will be able to attract and retain the
necessary personnel to accomplish our growth strategies or that we will not
experience constraints that will adversely affect our ability to
satisfactorily support our distributors. If our management is unable to
manage growth effectively, our sales and earnings may be materially adversely
affected.
WE DEPEND SOLELY ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS.
Substantially all of our products are manufactured by third-party
manufacturers pursuant to product formulations developed for us. We do not
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have any written contracts with any of our suppliers or manufacturers or
their commitments to continue to sell products to us. A substantial portion
of our products have been supplied by Chemins Company, Inc., which is a
privately held corporation with no affiliation with us. We believe that our
relationship with Chemins is satisfactory. However, there can be no assurance
that Chemins will continue to reliably supply products to us. We do not have
long-term supply agreements with Chemins or any other vendor. However, we
customarily enter into contracts with such third-party manufacturers to
establish the terms and conditions of product purchases. Accordingly, there
is a risk that any of our suppliers or manufacturers could discontinue
selling their products to us for any reason. In the event any of our
third-party manufacturers were to become unable or unwilling to continue to
provide the products in required volumes, we would be required to identify
and obtain acceptable replacement manufacturing sources. There is no
assurance that we will be able to obtain alternative manufacturing sources on
a timely basis.
OUR BUSINESS IS SUBJECT TO UNFAVORABLE PUBLICITY.
We believe the weight management and dietary supplement products
market is affected by national media attention regarding the consumption of
such products. There is no assurance that future scientific research or
publicity will be favorable to the weight management and dietary supplement
markets or any particular product, or be consistent with earlier favorable
research or publicity. Future reports of research that are perceived as less
favorable or that question earlier research could have a material adverse
effect on our operations. Because of our dependence upon consumer
perceptions, adverse publicity associated with illness or other adverse
effects resulting from the consumption of our products, or any similar
products distributed by other companies, could have a material adverse effect
on us. Such adverse publicity could arise even if the adverse effects
associated with such products result from failure to consume such products as
directed. Also, we may not be able to counter the effects of negative
publicity concerning the efficacy of our products.
OUR PRODUCTS AND SOME OF THE INGREDIENTS IN OUR PRODUCTS HAVE NOT UNDERGONE
CLINICAL STUDY.
Many of the ingredients in our products are vitamins, minerals,
herbs and other substances for which there is a long history of human
consumption. However, some of our products contain ingredients that have
little history of human consumption. These ingredients include chromium
picolinate, shark cartilage, proanthocyanidins, citrin and colloidal
minerals. Accordingly, no assurance can be given that our products, even when
used as directed, will have the effects intended. We will continue to take
steps to ensure that the formulation and production of our products are safe
when consumed as directed. However, generally we have not sponsored clinical
studies on the long-term effect of human consumption of our products.
WE MAY ACQUIRE INTERESTS IN OTHER BUSINESSES AS PART OF OUR GROWTH STRATEGY.
Our business plan includes expansion and diversification of our
network marketing organization and products through the acquisition of
companies engaged in network marketing. In addition to financial demands,
these acquisitions may have adverse consequences, including
- - the diversion of management's attention to the assimilation of the
acquired companies or assets;
- - adverse effects on our results of operations, such as the amortization
of acquired intangible assets; and
- - the possibility that the acquired company or assets will not contribute
to our business, cash flows and profitability as expected.
MONTHLY PURCHASES OF THE PARTICIPATION INTERESTS WILL RESULT IN DOLLAR COST
AVERAGING OF PURCHASES OF COMMON STOCK THROUGH THE PLAN.
Through regularly contributing to the plan by purchase of the
participation interests, even in small increments, a participant may minimize
or maximize the adverse effects of volatile changes in the market price of
our common stock. As a fixed amount of money is regularly invested over a
long period of time, purchases are made at varying prices as the market price
for the common stock fluctuates. Over time, if a uniform number of shares of
stock were purchased each period, the average cost paid per share will
usually be less during lengthy periods of market price increase, thus
minimizing the effect of market price fluctuations. Alternatively, during
lengthy periods of market price decrease, the average cost paid per share
will be usually higher, thus maximizing the effect of market price
fluctuations.
There is no assurance that
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- - the average cost paid per share of common stock acquired by you as a
participant through the plan will be less than the market price of our
common stock at any particular time or
- - your investment in the common stock through participation in the plan
will in whole or in part not be lost due to a number of factors or
- - your investment in the common stock through the plan will result in any
profit.
THE MARKET PRICE AND TRADING VOLUME OF OUR COMMON STOCK MAY HAVE EXTREME
FLUCTUATIONS.
The participation interests are nontransferable. A market will not
develop for the participation interests. However, our common stock to be
purchased by the plan on behalf of purchasers of the participation interests
is currently listed on the American Stock Exchange. Historically the market
for our common stock has been limited and subject to low trading volume.
There is no assurance that an active trading market will be maintained for
our common stock at all times.
Our sales and earnings and, consequently, the market price of our
common stock may be subject to significant potential volatility based upon,
among other things,
- - the adverse effect of non-compliance with applicable governmental
regulations;
- - the negative effect of changes in or interpretations of regulations
that may limit or restrict the sale of certain of our products;
- - the operation of our network marketing organization;
- - the expansion of our operations into new markets;
- - the recruitment and retention of distributors;
- - the inability to introduce new products or the introduction of new
products by our competitors;
- - general conditions in the weight management, dietary supplement, and
personal care products industries; and
- - consumer perceptions of our products and operations.
In particular, because our products are ingested by consumers or applied to
their bodies, we are highly dependent upon consumers' perception of the
safety and quality of our products marketed. As a result, substantial
negative publicity concerning one or more of our products, especially the
weight management and dietary supplement products, could adversely affect our
sales and earnings as well as the market price of our common stock.
Also, the stock market has from time to time experienced extreme
price and volume fluctuations. These fluctuations have particularly affected
the market prices for emerging growth companies stock, which often have been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely affect the market price of our common stock.
Volatility in the market price of a company's securities sometimes results in
the filing of class action lawsuits seeking compensation for alleged
securities law violations. We may become subject to such litigation. Such
litigation could result in substantial costs and a diversion of our attention
and resources, which could have a material adverse effect on our business and
results of operations. Any adverse determination in such litigation also
could subject us to significant liabilities.
WE HAVE A HISTORY OF NEGATIVE CASH FLOWS AND LOSSES FROM OPERATIONS AND AN
ACCUMULATED DEFICIT UNTIL THIS YEAR.
At December 31, 1998, we had an accumulated deficit of $516,091
representing accumulated losses from operations prior to 1994. At June 30,
1999, as a result of operations, we had eliminated the accumulated deficit
and had retained earnings of $57,355. There is no assurance that our future
operating results will be profitable and losses from operations will not be
sustained, resulting in elimination of our retained earnings and again result
in an accumulated deficit.
OUR COMMON STOCK COULD BE DELISTED FROM THE AMERICAN STOCK EXCHANGE WHICH
WOULD MAKE THE SALE OF OUR COMMON STOCK MORE DIFFICULT.
Our common stock is listed on the American Stock Exchange. The
continued listing of our common stock on these exchanges is subject to
certain conditions, generally including our common stock having a certain
minimum sale price per share, maintenance of certain minimum levels of
assets, stockholders' equity, number of shareholders, and number of
outstanding publicly held shares of our common stock. In the
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event such minimum requirements for inclusion and listing are not met, our
common stock will be delisted and will no longer be listed on these
exchanges. In such event, our common stock would then be traded in the
over-the-counter market and may become subject to the "penny stock" trading
rules.
The over-the-counter market is characterized as volatile in that
securities traded in such market are subject to substantial and sudden price
increases and decreases and at times price (bid and asked) information for
such securities may not be available. In addition, when there are only one or
two market makers (a dealer holding itself out as ready to buy and sell the
securities on a regular basis), there is a risk that the dealer or group of
dealers may control the market in the security and set prices that are not
based on competitive forces and the bid and asked quotations of securities
traded in the over-the-counter market may not be reliable.
OUR COMMON STOCK MAY BECOME SUBJECT TO THE "PENNY STOCK" RULES WHICH WOULD
IMPOSE SIGNIFICANT RESTRICTIONS ON THE BROKER-DEALERS AND MAY AFFECT THE
RESALE OF OUR COMMON STOCK.
In the event our common stock is delisted and no longer included on
the American Stock Exchange, our common stock may become subject to the
"penny stock" rules. A "penny stock" is generally a stock that
- - is not listed on a national securities exchange or Nasdaq,
- - is listed in "pink sheets" or on the NASD OTC Bulletin Board,
- - has a price per share of less than $5.00 and
- - is issued by a company with net tangible assets less than $5 million.
The penny stock trading rules impose additional duties and responsibilities
upon broker-dealers and salespersons effecting purchase and sale transactions
in common stock and other equity securities, including
- - determination of the purchaser's investment suitability,
- - delivery of certain information and disclosures to the purchaser, and
- - receipt of a specific purchase agreement from the purchaser prior to
effecting the purchase transaction.
Many broker-dealers will not effect transactions in penny stocks, except on
an unsolicited basis, in order to avoid compliance with the penny stock
trading rules.
In the event our common stock becomes subject to the penny stock
trading rules,
- - such rules may materially limit or restrict the ability to resell our
common stock, and
- - the liquidity typically associated with other publicly traded equity
securities may not exist.
WE HAVE POTENTIAL LIABILITY ARISING FROM POSSIBLE RESCISSION RIGHTS OF CERTAIN
SHAREHOLDERS.
In 1990, we established the AMS Distributor Stock Pool under which
our independent distributors were permitted to participate on a voluntary
basis and make contributions to the pool and, from such contributions, the
administrator of the pool purchased on a monthly basis our common stock in
the over-the-counter market. All purchase transactions were executed and
effected through a registered broker-dealer. In September 1995, the Oklahoma
Department of Securities initiated an investigation of us and the activities
of the pool. During October 1997, we ceased accepting additional
contributions to the pool and effecting purchase transactions in our common
stock. As of December 31, 1997, the pool held approximately 245,000 shares of
common stock. On November 4, 1997, without admitting or denying violations of
the Oklahoma Securities Act, we and certain of our officers and directors
entered into an agreement with the Administrator of the Oklahoma Department
of Securities in settlement of the investigation without any action being
taken against us and our officers and directors. This agreement does not
preclude the rights of pool participants from asserting claims seeking and
possibly obtaining recovery of their contributions to the pool, plus
statutory interest. However, such claims are subject to applicable state and
federal statutes of limitation which may effectively eliminate a portion of
such claims.
It is our position that our administration of the pool did not
constitute the offer and sale of a security under federal and state
securities law. However, there is no assurance that a court would find that
our administration of the pool did not constitute the offer and sale of a
security under either or both federal and state securities laws. Even if we
were
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successful in defending any securities law claims, the assertion of such
claims against us could result in costly litigation and diversion of effort
by our management. In addition, the Securities and Exchange Commission and
state securities regulators could pursue enforcement action against us and
our officers and directors with respect to any violations of the federal
securities laws that may have occurred. There is no assurance that
- - claims asserting violations of federal and state securities laws will
not be asserted by any of the participants in the pool or
- - such participants will not prevail against us in the assertion of such
claims, compelling us to repurchase from such participants their shares
of common stock and pay statutory interest.
Such events could have a material adverse effect on our business, financial
condition and results of operations.
THE EXERCISE OF OUR OUTSTANDING STOCK OPTIONS AND WARRANTS MAY RESULT IN
SUBSTANTIAL DILUTION TO OUR SHAREHOLDERs AND MAY ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK.
As of the date of this prospectus, we have outstanding the following
warrants and stock options:
- - publicly traded warrants exercisable on or before November 6, 2002 for
the purchase of 1,832,211 shares of our common stock at $3.40 per
share;
- - warrants exercisable on or before November 6, 2002 for the purchase of
130,000 shares of our common stock and 130,000 warrants (each of which
is also exercisable for the purchase of one share of common stock at
$3.40 on or before November 6, 2002) at an aggregate exercise price of
$5.40;
- - stock options granted under our stock option plan exercisable for the
purchase of 506,300 shares of our common stock at $1.75 to $2.70 per
share; and
- - other outstanding stock options and warrants exercisable for the
purchase of 1,201,733 shares of our common stock at $1.75 to $3.60 per
share during periods that expire in October 1999 through May 2007.
During the term of the outstanding warrants and stock options, the
holders are given the opportunity to profit from a rise in the market price of
our common stock. Exercise of such warrants and stock options may
- - dilute the net book value per share of our outstanding common stock at
the time of exercise and
- - may be dilutive on an earnings per share basis,
which may adversely affect the trading price of our common stock. The
existence of the warrants and stock options may adversely affect the terms on
which we may obtain additional equity financing. Also, the holders are likely
to exercise the warrants and stock options at a time when we would otherwise
be able to obtain capital on terms more favorable than could be obtained
through the exercise of such stock options and warrants.
THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE DUE TO THE FUTURE
SALE OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK.
Sales or availability for sale of substantial amounts of shares of
our common stock in the public market at any time could adversely affect the
market price of our common stock and, consequently, our ability to raise
additional capital. As of the date of this prospectus, we have 4,141,014
shares of our common stock outstanding. Of these outstanding shares,
3,690,929 shares are eligible for sale without regard to volume or other
limitations pursuant to Rule 144 promulgated by the U.S. Securities and
Exchange Commission under the 1933 Act, except to the extent held by our
"affiliate"as that term is defined under Rule 144.
Our executive officers and directors have entered into agreements
covering options and warrants exercisable for the purchase of 675,000 shares
of our common stock. These executive officers and directors agreed not to
sell or otherwise dispose of such options, warrants or shares of our common
stock and all other securities issuable upon exercise of such options or
warrants for a period ending November 6, 1999.
Also, 377,682 of such shares of our common stock and 674,500 of such
options and warrants beneficially owned by our executive officers and
directors, as well as those held by two of our shareholders, are subject to
certain escrow and lock-in arrangements until November 6, 2000. These
arrangements were imposed by the Oklahoma Department of Securities. Under
these arrangements,
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the executive officers, directors and such shareholders are not permitted to
sell or otherwise dispose of such shares of our common stock, stock options,
warrants and all other securities issuable upon exercise of such option or
warrants during such period.
THERE ARE CERTAIN PROVISIONS IN OUR CORPORATE CHARTER AND BYLAWS THAT MAKE IT
DIFFICULT FOR A THIRD PARTY TO ACQUIRE CONTROL OF US.
Our certificate of incorporation and bylaws and the provisions of the
Oklahoma General Corporation Act may make it difficult for a third party to
acquire us or gain control of us and replace our management. Our certificate of
incorporation authorizes the issuance of our preferred stock in classes or
series having voting, redemption and conversion rights and other rights as
determined by our board of directors. The issuance of such preferred stock may
have the effect of preventing a merger, tender offer or other takeover attempt
that our board of directors opposes. Our directors are elected for staggered
three-year terms, with approximately one-third of our board standing for
election each year, which may make it difficult to effect a change of incumbent
management and control. We are subject to the anti-takeover provisions of the
Oklahoma General Corporation Act. Such provisions in some circumstances may
discourage a person from making a control share acquisition (generally an
acquisition of voting stock having more than 20 percent of all voting power in
the election of directors) without shareholder approval.
USE OF PROCEEDS
All proceeds of sale of the participation interests pursuant to the
offering will be contributed to the plan from which the annual service fees and
monthly transaction fees of $5.00 and $1.25 per participant, respectively, will
be paid to us. The remaining proceeds will be utilized for the purchase of our
common stock in the open market. In the event the participation interests are
sold in full, the proceeds will be $4,715,513.
As of July 31, 1999, we had sold 284,487 participation interests for
proceeds of $284,487. During the period commencing on February 19, 1999 and
ending on July 31, 1999,
- - we were paid annual service fees of $3,505 and monthly transaction fees
of $2,904,
- - 77,585 shares of our common stock had been purchased by the plan on
behalf of the participants,
- - the average price per share of our common stock purchased was $3.55 and
- - commissions of $2,514 were paid to the broker-dealer.
We pay all expenses of the offering, which are estimated to be $90,000,
without entitlement to reimbursement from the plan or the participants, other
than through receipt of the annual service fees and monthly transaction fees.
The annual service fees and monthly transaction fees in excess of the expenses
of the offering is and will be utilized by us for payment of the administrative
costs of the plan.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock was traded in the over-the-counter market and was
quoted by the National Quotation Bureau, Incorporated under the symbol
"AMSO." On September 10, 1997, our common stock became listed on the Boston
Stock Exchange under the symbol "AMG," which was subsequently changed to
"AMM." On November 6, 1997, our Common Stock was first included on the Nasdaq
SmallCap Market under the symbol "AMSO." On July 15, 1999, our common stock
became listed on the American Stock Exchange under the symbol "AMM."
On September 1, 1999, the closing sale price of our common stock on
the American Stock Exchange was $3.87. We believe there are approximately
1,874 holders of our common stock.
The following table sets forth, for the periods presented, the high
and low closing bid quotations of our common stock. The bid quotations
reflect inter-dealer prices without adjustment for retail markups, markdowns
or commissions and may not reflect actual transactions.
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<TABLE>
<CAPTION>
COMMON STOCK
CLOSING BID PRICES
------------------
HIGH LOW
------ -----
<S> <C> <C>
1999 --CALENDAR QUARTER ENDED:
March 31....................... $ 3.00 $2.19
June 30........................ 4.00 1.94
1998 --CALENDAR QUARTER ENDED:
March 31....................... $3.38 $2.13
June 30........................ 4.00 3.00
September 30................... 4.00 1.88
December 31.................... 2.41 1.50
1997--CALENDAR QUARTER ENDED:
March 31....................... $6.25 $5.50
June 30........................ 8.38 5.69
September 30................... 9.00 5.00
December 31.................... 6.88 2.56
------------------
</TABLE>
DIVIDEND POLICY
Our policy is to retain earnings to support the expansion of our
operations. Our board of directors does not intend to pay cash dividends on
our common stock in the foreseeable future. Any future cash dividends will
depend on future earnings, capital requirements, our financial condition and
other factors deemed relevant by our board of directors.
PENNY STOCK TRADING RULES
Our common stock is listed on the American Stock Exchange. The
continued listing of our common stock on these exchanges is subject to
certain conditions, generally including
- - our common stock having a certain minimum sale price per share,
- - our continuing to have certain minimum levels of assets, stockholders'
equity, number of shareholders, and number of outstanding publicly held
shares.
In the event requirements for continued listing are not met, our common stock
- - will be delisted and no longer included on these exchanges,
- - will then be traded in the over-the-counter market and
- - may become subject to the "penny stock" trading rules.
The penny stock trading rules impose additional duties and
responsibilities upon broker-dealers recommending the purchase of a penny
stock (by a purchaser that is not an accredited investor as defined by Rule
501(a) promulgated under the Securities Act of 1933, as amended) or the sale
of a penny stock. Among such duties and responsibilities, with respect to a
purchaser who has not previously had an established account with the
broker-dealer, the broker-dealer is required to
- - obtain information concerning the purchaser's financial situation,
investment experience, and investment objectives,
- - make a reasonable determination that transactions in the penny stock
are suitable for the purchaser and
- - determine that the purchaser (or his independent adviser in such
transactions) has sufficient knowledge and experience in financial
matters and may be reasonably capable of evaluating the risks of such
transactions,
- - obtain a manually signed written statement which sets forth the basis
for the foregoing determination and which informs the purchaser that it
is unlawful to effectuate a transaction in the penny stock without
first obtaining a written agreement to the transaction.
Also, until the purchaser becomes an "established customer," the broker-dealer
is required to
- - obtain from the customer a written agreement to purchase the penny
stock which sets forth the identity and number of shares or units of
the security to be purchased prior to confirmation of the purchase,
and
- - provide to the customer a generic risk disclosure document which is
required to be delivered to the customer before the initial purchase
transaction in a penny stock.
An established customer is one that has had an account with the dealer for at
least one year or the dealer has previously effected for the purchaser three
sales of penny stocks on three different days involving three different issuers.
A dealer is obligated to provide certain information disclosures to the
purchaser of a penny stock, including
- - a generic risk disclosure document which is required to be delivered
to the purchaser before the initial transaction in a penny stock,
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- - a transaction-related disclosure prior to effecting a transaction in
the penny stock containing bid and asked information related to the
penny stock and the dealer's and salesperson's compensation (including
commissions, commission equivalents, markups and markdowns) in
connection with the transaction, and
- - the purchaser-customer must be furnished account statements, generally
on a monthly basis, which include prescribed information relating to
market and price information concerning the penny stocks held in the
account.
The penny stock trading rules do not apply to those transactions in which a
broker-dealer or salesperson does not make any purchase or sale recommendation
to the purchaser or seller of the penny stock. Many broker-dealers will not
effect transactions in penny stocks, except on an unsolicited basis, in order to
avoid compliance with the penny stock trading rules.
Compliance with the penny stock trading rules may adversely affect the
ability to resell our common stock and may materially limit or restrict the
liquidity typically associated with other publicly traded equity securities.
Therefore, the holder of penny stocks may be unable to obtain on resale the
quoted bid price because a dealer or group of dealers may control the market in
such securities and may set prices that are not based totally on competitive
forces. Furthermore, at times there may be a lack of bid quotes which may mean
that the market among dealers is not active, in which case a holder of penny
stocks may be unable to sell such securities. In addition, because market
quotations in the over-the-counter market are often subject to negotiation among
dealers and often differ from the price at which transactions in securities are
effected, the bid and asked quotations of securities traded in the
over-the-counter market may not be reliable.
CAPITALIZATION
The following table sets forth as of June 30, 1999, our actual
capitalization. This table should be read in conjunction with our unaudited
consolidated financial statements and notes thereto appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1999
-------------
<S> <C>
Current portion of lease obligations..... $ 68,603
Long-term capital lease obligations, net. 138,890
Stockholders' equity:
Common Stock ........................... 428
Paid-in capital......................... 10,232,706
Notes receivable for exercise of options (63,960)
Retained earnings....................... 57,355
Cost of treasury stock.................. (377,871)
-------------
Total stockholders' equity............. 9,848,658
-------------
Total capitalization.............. $10,056,151
-------------
-------------
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO BEGINNING ON PAGE F-2.
GENERAL
Our business and operations during the last three years have been
significantly affected by the acquisitions of Miracle Mountain International,
Inc. in May 1996 (the "Miracle Mountain acquisition"), Chambre International,
Inc. in January 1997 (the "Chambre acquisition"), the assets of Stay 'N Shape
International, Inc., Solution Products International, Inc., Nation of
Winners, Inc., and Now International, Inc. in April 1997 (the "Stay 'N Shape
International asset purchase") and ToppMed Inc. in July 1998 (the "ToppMed
asset purchase"). As a result of these acquisitions and asset purchases, we
acquired 6,790 distributors and added 115 products to our product line. We
currently market approximately 100 products.
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MIRACLE MOUNTAIN ACQUISITION. Effective May 31, 1996, Miracle
Mountain International became one of our wholly-owned subsidiaries. Miracle
Mountain was a network marketer of various third-party manufactured
nutritional supplement products. In connection with the Miracle Mountain
acquisition, we issued 20,000 shares of our common stock. As a result of the
Miracle Mountain acquisition, we added one product to our line and 1,690
additional distributors.
CHAMBRE ACQUISITION. Effective January 31, 1997, Chambre
International became one of our wholly-owned subsidiaries. Chambre
International was a network marketer of various third-party manufactured
cosmetics, skin care and hair care products. In connection with the Chambre
acquisition, we issued 15,000 shares of our common stock. As a result of the
Chambre acquisition, we added 74 products to our line, 68 in the personal
care category and six in the dietary supplement category, and 2,100
additional distributors.
STAY 'N SHAPE INTERNATIONAL ASSET PURCHASE. We purchased all of the
assets, including the network marketing organizations, of Stay 'N Shape
International, Inc., Solution Products International, Inc., Nation of
Winners, Inc., and Now International, Inc. on April 16, 1997. In connection
with this asset purchase, we paid cash of $1,174,441 and issued 125,984
shares of our common stock. As a result of this asset purchase, we added 39
products to our line, 38 in the weight management and dietary supplement
categories and one in the personal care category, and 3,000 additional
distributors.
TOPPMED ASSET PURCHASE. On July 31, 1998, we acquired all rights,
including formulations and trademarks, for the ToppFast, ToppStamina and
ToppFitt products from ToppMed, Inc. for $192,000.
REPURCHASE OF OUR COMMON STOCK. In March 1998, we announced and
began repurchasing up to $1 million of our common stock in the open market.
In December 1998 we ceased repurchasing our common stock. As of December 31,
1998, we had repurchased 134,500 shares of our common stock for $377,871 or
an average of $2.81 per share.
UNITS OFFERING. On November 12, 1997, we completed the offering of
1,495,000 units, each consisting of one share of common stock and one
redeemable common stock purchase warrant. As a result of this offering, we
received proceeds of $6,050,000. Each redeemable common stock purchase
warrant is exercisable for the purchase of one share of our common stock for
$3.40 on or before November 6, 2002. In connection with this offering, we
sold to the underwriters, Paulson Investment Company, Inc. and Joseph Charles
& Assoc., Inc., warrants exercisable for the purchase of 130,000 units for
$5.40 per unit on or before November 6, 2002.
WARRANT MODIFICATION OFFERING AND RIGHTS OFFERING. In January 1997,
we distributed non-transferable rights to our common stock shareholders.
These rights entitled the holders to subscribe for and purchase up to
2,148,191 units (each unit consisting of one share of our common stock and
one 1997-A warrant) for the price of $6.80 per unit.
Concurrently, we called and redeemed our outstanding class A and
class B common stock purchase warrants for $.0008 per warrant on March 17,
1997. However, in connection with the warrant redemption, we offered to the
holders of the Class A and class B warrants the right 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.
Each 1997-A warrant is exercisable on or before November 6, 2002, to
purchase one share of common stock for $3.40, subject to adjustment in
certain events. We may redeem the 1997-A warrants at any time upon 30 days'
notice, at a price of $.0001 per 1997-A warrant.
We received proceeds from these two offerings of $2,154,357.
Accumulated offering costs of $323,076 were charged against the net proceeds
from these offerings. Pursuant to these offerings we issued 337,211 shares of
common stock and the same number of 1997-A warrants.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, selected
results of our operations for
- - the six months ended June 30, 1999 and 1998, which are derived from our
unaudited condensed consolidated financial statements and
- - the years ended December 31, 1998 and 1997, which are derived from our
audited consolidated financial statements.
The results of operations for the periods presented are not necessarily
indicative of our future operations.
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<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------ -------------------------------------------------
1999 1998 1998 1997
---------------------- ---------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ------------ ------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales .................. $9,926,596 100.0% $5,870,023 100.0% $13,287,824 100.0% $10,192,227 100.0%
------------ ------- ------------ ------- ------------ ------- ------------ -------
Commissions and bonuses .... 4,183,698 42.1 2,347,168 40.0 5,487,418 41.3 4,557,355 44.7
Cost of products ........... 2,366,053 23.8 1,252,035 21.3 3,146,765 23.7 2,260,715 22.2
Cost of shipping ........... 301,949 3.0 192,033 3.3 365,046 2.7 433,590 4.5
------------ ------- ------------ ------- ------------ ------- ------------ -------
Cost of sales ........... 6,851,700 69.0 3,791,236 64.6 8,999,229 67.7 7,271,660 71.3
------------ ------- ------------ ------- ------------ ------- ------------ -------
Gross profit ......... 3,074,896 31.0 2,078,787 35.4 4,288,595 32.3 2,920,567 28.7
Marketing, distribution and
administrative expenses.. 2,363,212 23.8 1,750,924 29.8 3,548,772 26.7 2,792,879 27.4
------------ ------- ------------ ------- ------------ ------- ------------ -------
Income from operations .. 711,684 7.2 327,863 5.6 739,823 5.6 127,688 1.3
Other income (expense):
Interest, net .............. 152,722 1.5 139,236 2.4 309,908 2.3 34,017 .3
Other income (expense) ..... -- -- 40,720 0.7 39,280 .3 28,017 .3
Settlement of additional
tax liability ............ -- -- -- -- (421,623) (3.2) -- --
------------ ------- ------------ ------- ------------ ------- ------------ -------
Total other income
(expense) ................ 152,772 1.5 179,956 3.1 (72,435) (.6) 62,034 .6
------------ ------- ------------ ------- ------------ ------- ------------ -------
Income before income
taxes ................... 864,456 8.7 507,819 8.7 667,388 5.0 189,722 1.9
Tax expense ................ 291,010 2.9 193,051 3.3 253,340 1.9 59,696 .6
------------ ------- ------------ ------- ------------ ------- ------------ -------
Net income ................. $ 573,446 5.8% $ 314,768 5.4% $ 414,048 3.1% $ 130,026 1.3%
------------ ------- ------------ ------- ------------ ------- ------------ -------
------------ ------- ------------ ------- ------------ ------- ------------ -------
</TABLE>
During the six months ended June 30, 1999 and 1998, and the years ended
1998 and 1997, we experienced increases in net sales compared to the preceding
year. These increases were principally the result of expansion of our network of
independent distributors and additions to our product line within the weight
management, dietary supplement and personal care categories. We expect continued
expansion of our network of independent distributors, which may result in
increased sales volume. However, there is no assurance that increased sales
volume will be achieved through expansion of our network of independent
distributors, or that, if sales volume increase, we will realize increased
profitability.
COMPARISON OF THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
Our net sales during the six months ended June 30, 1999, increased
by $4,056,573, or 69.1%, to $9,926,596 from $5,870,023 during the six months
ended June 30, 1998. The increase was principally attributable to expansion
of our network of independent distributors and increased sales of our weight
management, dietary supplement and personal care products. During the six
months ended June 30, 1999, we made aggregate net sales of $9,860,122 to
37,175 distributors, compared to aggregate net sales during the same period
in 1998 of $5,810,566 to 18,348 distributors. Sales per distributor per month
decreased from $53 to $44 for the six months ended June 30, 1999, compared to
the same period in 1998.
Our cost of sales during the six months ended June 30, 1999,
increased by $3,060,464, or 80.7%, to $6,851,700 from $3,791,236 during the
same period in 1998. This increase was attributable to
- - an increase of $1,836,530 in distributor commissions and bonuses due to
the increased level of sales,
- - an increase of $1,114,018 in the cost of products sold due to the
increased level of sales and the addition of new products and marketing
tools and
- - an increase of $109,916 in shipping costs due to the effect of our
modified pricing structure.
Effective April 1, 1999, we modified our pricing structure to
include shipping costs in our product prices. Previously shipping costs had
been calculated separately on each order and we reported shipping costs net
of these payments. Because our shipping costs are no longer reported net of
the separately collected shipping reimbursement our shipping cost as a
percentage of sales appears to have increased. Total cost of sales, as a
percentage of net sales, increased to 69.0% during the six months ended June
30, 1999, from 64.6% during the same period in 1998 due to an increase in
distributor commissions
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<PAGE>
and bonuses as a percentage of net sales to 42.1% from 40.0%, an increase in
cost of products sold to 23.8% of net sales from 21.3%, and a decrease in
cost of shipping to 3.0% of net sales from 3.3%. During periods of growth, we
anticipate continuing to offer promotions to distributors to increase sales
and their income from time to time, which if successful will result in
increases in distributor commissions and bonuses and temporary increases in
cost of sales.
Our gross profit increased $996,109, or 47.9%, to $3,074,896 for the
six months ended June 30, 1999 from $2,078,787 for the same period in 1998.
The gross profit decreased as a percentage of net sales to 31.0% of net sales
from 35.4%. The decrease in our gross profit margin resulted from the
increase in cost of sales as a percentage of net sales.
Marketing, distribution and administrative expenses increased
$612,288, or 35.0%, to $2,363,212 during the six months ended June 30, 1999,
from $1,750,924 during the same period in 1998. This increase was
attributable to an increase in expenses involved in expanding investor
awareness of us and expansion of our administrative infra-structure necessary
to support increased levels of sales.
The number of our full-time employees increased to 52 during the
first six months of 1999 as compared to 37 during the same periods of 1998.
The balance of the increase in marketing, distribution and administrative
expenses resulted from the higher level of activity and corresponding
increases in variable costs, such as postage, telephone, bank card service
charges and supplies. The marketing, distribution and administrative expenses
as a percentage of net sales decreased to 23.8% during the six months ended
June 30, 1999, from 29.8% during the same period in 1998 due to the increased
level of sales.
Our income before taxes increased $356,637, or 70.2%, to $864,456
during the six months ended June 30, 1999, from $507,819 during the same
period in 1998. Income before taxes as a percentage of net sales was 8.7%
during the six months ended June 30, 1999 and 1998. Income taxes during the
six months ended June 30, 1999 and 1998 were $291,010 and $193,051,
respectively.
Our net income increased $258,678, or 82.2%, to $573,446 during the
six months ended June 30, 1999, from $314,768 during the same period in 1998.
This increase in net income was primarily the result of the increased level
of sales and the decrease in the marketing, distribution and administrative
expenses as a percentage of net sales. Net income as a percentage of net
sales increased to 5.8% during the six months ended June 30, 1999, from 5.4%
during the same period in 1998.
COMPARISON OF 1998 AND 1997
Our net sales during the year ended December 31, 1998, increased by
$3,095,597, or 30.4%, to $13,287,824 from $10,192,227 during the year ended
December 31, 1997. The increase was principally attributable to expansion of
our network of independent distributors and increased sales of our weight
management, dietary supplement and personal care products. Through the
Chambre International acquisition (which was consummated on January 31, 1997)
and the Stay 'N Shape International asset purchase (which was consummated on
April 16, 1997), we added 113 products to our product line and acquired 5,100
distributors. The distributors acquired in connection with the Chambre
International acquisition and the Stay 'N Shape International asset purchase
contributed $1,121,173 to the increase between the two periods. During 1998,
we made aggregate net sales of $13,159,821 to 33,700 distributors, compared
to aggregate net sales in 1997 of $10,030,327 to 20,300 distributors. At
December 31, 1998, we had approximately 33,000 "active" distributors compared
to approximately 23,400 at December 31, 1997. Sales per distributor per month
decreased from $41 to $33 for 1998 compared to 1997.
Our cost of sales during 1998 increased by $1,727,569 or 23.8%, to
$8,999,229 from $7,271,660 during 1997. This increase was attributable to
- - an increase of $930,063 in distributor commissions and bonuses due to
the increased level of sales,
- - an increase of $886,050 in the cost of products sold due to the
increased level of sales and the increased quality of marketing tools
made available, and
- - a decrease of $88,544 in shipping costs due to the increased level of
sales combined with the pass through of shipping costs to the
distributors beginning in February 1998.
Total cost of sales, as a percentage of net sales, decreased to 67.7% during
1998, from 71.3% during 1997 due to a decrease in distributor commissions and
bonuses as a percentage of net sales to 41.3% from
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<PAGE>
44.7%, an increase in cost of products sold to 23.7% of net sales from 22.2%
and a decrease in cost of shipping to 2.7% of net sales from 4.5%. During
periods of growth, we anticipate continuing to offer promotions to
distributors to increase sales and their income from time to time, which if
successful will result in increases in distributor commissions and bonuses
and temporary increases in cost of sales.
Our gross profit increased $1,368,028 or 46.8%, to $4,288,595 for
1998 from $2,920,567 for 1997. The gross profit increased as a percentage of
net sales to 32.3% of net sales from 28.7%. The increase in our gross profit
margin resulted from the decrease in cost of sales as a percentage of net
sales.
Marketing, distribution and administrative expenses increased
$755,893, or 27.1%, to $3,548,772 during 1998 from $2,792,879 during 1997.
This increase was attributable to
- - increased promotional expense designed to increase sales,
- - an increase in expenses involved in expanding investor awareness of us,
- - increased payroll and employee costs related to cost of living and
employee mix, and
- - an increase in lease expense from the addition of 10,340 square feet of
warehouse and distribution space in October, 1997.
The balance of the increase in marketing, distribution and administrative
expenses resulted from our higher level of activity and corresponding
increases in variable costs, such as postage, telephone, bank card service
charges, and supplies.
We had other expenses of $72,435(net of interest income of $309,908
and other income of $39,280) in 1998 compared to other income (net of
interest income of $34,017 and other income of $28,017) of $62,034 in 1997.
The other net expense in 1998 was principally attributable to the one-time
expense of the settlement of the additional tax liability of $421,623
($256,300 net of the related tax effect). During 1998, in an effort to
facilitate the growth of our distributor network we voluntarily began
contacting all of the state sales and use tax authorities to enter into
agreements with them whereby we would assume the responsibility for
collecting and remitting sales and use taxes on behalf of our independent
distributors. However, certain states required as a condition of settlement
us to pay the additional tax liability. We believe the liability is a
one-time nonrecurring charge and will have no further adverse impact on our
future results of operations. We now collect the sales and use tax as a cost
of our products and remit the tax to the appropriate taxing authorities.
Therefore, the sales and use tax represents neither additional income nor
additional expense but instead is a pass through item with no income
statement effect.
Our income before taxes increased $477,666, or 251.8%, to $667,388
during 1998 from $189,722 during 1997. Income before taxes as a percentage of
net sales increased to 5.0% during 1998 from 1.9% during 1997. This
percentage increase was primarily due to the increase in our gross profit
margin and offset by the increase of other expenses which included the
one-time expense of the settlement of use and sales tax liability. Income
taxes during 1998 and 1997 were $253,340 and $59,696 respectively.
Our net income increased $284,022, or 218.4%, to $414,048 during1998
from $130,026 during 1997. This increase in net income was primarily the
result of the increase in our gross profit margin and offset by the increase
of other expenses due to the one-time expense of the sales and use tax
settlement. Net income as a percentage of net sales increased to 3.1% during
1998 from 1.3% during 1997.
COMPARISON OF 1997 AND 1996
Our net sales during the year ended December 31, 1997, increased by
$4,037,154, or 65.6%, to $10,192,227 from $6,155,073 during the year ended
December 31, 1996. The increase was principally attributable to expansion of
our network of independent distributors and increased sales of our product
line within the weight management, dietary supplement and personal care
categories. Through the Miracle Mountain acquisition (which was consummated
on May 31,1996), Chambre International acquisition (which was consummated on
January 31, 1997) and the Stay 'N Shape International asset purchase (which
was consummated on April 16, 1997), we added 114 products to our product line
and acquired 6,790 distributors. The distributors acquired in connection with
the Miracle Mountain acquisition, the Chambre International acquisition and
the Stay 'N Shape International asset purchase contributed $105,290, $435,506
and $1,089,359, respectively, to the increase in our net sales between the
two periods. During 1997, we made aggregate net sales of
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<PAGE>
$10,030,327 to 20,400 distributors, compared to aggregate net sales during
1996 of $6,000,395 to 9,500 distributors. At December 31, 1997, we had
approximately 20,400 "active" distributors compared to approximately 10,600
at December 31, 1996. A distributor is considered to be "active" if he or she
purchased $50 or more of our products during the previous 12 months. Sales
per distributor decreased from $53 to $41 for 1997, compared to 1996. This
decrease was due to the increase in the number of active distributors as a
result of the Chambre International acquisition and the SNSI asset purchase
(which were consummated on January 31, 1997 and April 16, 1997,
respectively), which new distributors contribute to sales during only a
portion of 1997.
Our cost of sales during 1997 increased by $3,005,755, or 70.5%, to
$7,271,660 from $4,265,905 during 1996, reflecting the increase in sales. The
increase was attributable to an increase of
- - $1,830,115 in distributor bonuses due in part to special promotions
designed to expand our distributor network,
- - $904,348 in the cost of products sold due in part to an improvement in
the quality of products, and
- - $271,292 in shipping costs due in part to an increase in shipment costs
charged by the shipping companies.
Our total cost of sales, as a percentage of net sales, increased to 71.3%
during 1997, from 69.3% during 1996 due to an increase in
- - distributor bonuses as a percentage of net sales to 44.7% from 44.3%,
- - cost of products sold to 22.2% of net sales from 22.0%, and
- - cost of shipping to 4.5% of net sales from 3.0%.
During periods of growth, we anticipate that from time-to-time we will offer
promotions to distributors to increase sales and their income, which if
successful will result in increases in distributor bonuses and temporary
increases in our cost of sales.
Our gross profit increased $1,031,399, or 54.6%, to $2,920,567 for
1997 from $1,889,168 for 1996. The gross profit decreased as a percentage of
net sales to 28.7% of net sales from 30.7%. The decrease in our gross profit
margin resulted from the increase in cost of sales as a percent of net sales.
Our marketing, distribution and administrative expenses increased
$1,231,126, or 78.8%, to $2,792,879 during 1997 from $1,561,753 during 1996.
This increase was attributable to expansion of our administrative
infra-structure necessary to support increased levels of sales and
distributors. Our payroll and employee costs increased by $628,568 during
1997 compared 1996 due to the increase in full-time employees to 30 during
the first quarter of 1997, 38 during the second quarter of 1997, 47 during
the third quarter of 1997, and 43 during the fourth quarter of 1997, as
compared to 16, 17, 17 and 24, respectively, during the same periods in 1996.
The balance of the increase in marketing, distribution and administrative
expenses resulted from the higher level of activity and corresponding
increases in variable costs, such as postage, telephone and supplies.
Our income before taxes decreased $135,822, or 41.7%, to $189,722
during 1997 from $325,544 during 1996. Income before taxes as a percentage of
net sales decreased to 1.9% during 1997 from 5.3% during 1996, primarily as a
result of the increase in our marketing, distribution and administrative
expenses. Income taxes were $59,696 during 1997. In comparison, during 1996
we recognized a one-time tax benefit of $499,613 primarily related to the
reversal of a deferred tax valuation allowance related to the expected future
tax benefits to be realized from operating loss carryforwards. Consequently,
during 1997 we began reporting income tax expense for financial reporting
purposes.
Our net income decreased $695,131, or 84.2%, to $130,026 during 1997
from $825,157 during 1996. This decrease in net income was primarily the
result of a decrease in our gross profit margin combined with the increase in
marketing, distribution and administrative expenses in addition to the
recording of income tax expense for financial reporting purposes during 1997.
Net income as a percentage of net sales decreased to 1.3% during 1997 from
13.4% during 1996.
PRO FORMA EFFECT OF STOCK-BASED COMPENSATION
As a portion of and in lieu of payments of salaries and consulting
fees, we have historically used options to attract, retain and compensate our
officers, directors, other employees and consultants. We believe that linking
the compensation of our officers and directors to increases in the value of
our common stock achieves improved performance. During 1998,
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we granted 809,819 options at exercise prices ranging from $1.75 per share to
$3.00 per share. Options were granted primarily for services rendered and to
ensure the future availability of those services to us. A total of 418,819 of
the options granted during 1998 are unexercisable at December 31, 1998 due to
a six month-vesting period. During 1998, 57,306 options were exercised for
31,025 mature shares. In addition, during this period 519,944 options with a
weighted average exercise price of $2.32 per share were voluntarily
surrendered and canceled by us in exchange for an equal number of options,
with weighted average exercise price of $1.82 and 128,830 other options were
canceled without exchange for new options. The exercise price of the
exchanged options was equal to the market value of our common stock on the
date of exchange. We did not recognize any expense as a result of this
exchange.
During 1997, we granted 493,100 options at exercise prices ranging
from $2.70 per share to $6.00 per share. Options were granted primarily for
services rendered and to ensure the future availability of those services to
us. Options granted pursuant to our stock option plan at December 26, 1997
had a six-month vesting period. During 1997, 135,695 options were exercised
of which 46,945, 42,500 and 46,250 were exercised for cash, 15,769 mature
shares and notes receivable, respectively. In addition, during this period
319,250 options were voluntarily surrendered and canceled in exchange for an
equal number of options at a lower price, 125,000 options were canceled
without exchange for new options and 2,499 options expired. No options were
granted during 1996.
The weighted average exercise price and calculated fair value at the
date of grant of the options granted in 1998 were $1.93 and $.42,
respectively, utilizing the methodology prescribed under Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation. After giving effect to the weighted average fair value of such
options, we would have had a pro forma net income of $180,719 ($.04 per
common share) for 1998. The weighted average exercise price and calculated
fair value at the date of grant of the options granted in 1997 were $3.68 and
$2.32, respectively. After giving effect to the weighted average fair value
of such options, we would have had a pro forma loss of $337,528 ($.12 per
common share) for 1997. Because we did not grant any such options during
1996, there was no pro forma effect in 1996.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 132, EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, which revises employers'
disclosures about pension and other postretirement benefit plans. The new
statement will not have any impact on our consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting and
reporting standards for derivative instruments. The impact on our
consolidated financial statements from the adoption of SFAS 133 has not yet
been determined. This statement is effective for all fiscal quarters
beginning after June 15, 1999.
SEASONALITY
No pattern of seasonal fluctuations exists due to the growth
patterns that we are currently experiencing. However, there is no assurance
that we will not become subject to seasonal fluctuations in operations.
YEAR 2000 COMPUTER SYSTEM COMPLIANCE
We have two primary computer systems both of which were developed
employing six digit date structures. Where date logic requires the year 2000
or beyond, such structures may produce inaccurate results. We have
substantially completed the implementation of a program to comply with year
2000 requirements on a system-by-system basis including information
technology ("IT") and non-IT systems (E.G., micro controllers). Management
expects the program to be complete by September 30, 1999 at which time our
computer systems are expected to be year 2000 compliant.
We have evaluated our in-house supported IT systems and have
identified certain internally written IT system programs that have date
dependent calculations or operations that are affected by this six digit date
structure. Our vendor-supported IT system has been updated and certified year
2000 compliant by the vendor. Non-IT systems including all personal computers
were evaluated by a third party contractor and have been updated and
certified year 2000 compliant. Our risks associated with the year 2000 are
mainly our ability to communicate with our
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distributors, take orders for and ship products and pay our employees,
distributors and vendors. Although our evaluation is complete and vendor
certifications have been obtained, a failure of our computer systems or other
support systems to function adequately with respect to year 2000 issues could
have a material adverse effect on our operations. Based on progress to date
and the limited instances of date sensitive calculations, we have concluded
that there is no need for a contingency plan therefore such plan has not been
developed. We estimate that the total cost of our program to make our
computer systems year 2000 compliant is less than $25,000. However, we have
not obtained independent verification or validation to assure the reliability
of our cost estimate.
We have contacted our major suppliers and have determined their
systems will be year 2000 compliant on a timely basis. In the event we
experience product unavailability or supply interruptions due to year 2000
non-compliance by our suppliers, we believe that we will be able to obtain
alternative sources of our products. A significant delay or reduction in
availability of products, however, could also have a material adverse effect
on our operations.
COMMITMENTS AND CONTINGENCIES
RECENT REGULATORY DEVELOPMENTS. A significant portion of our net
sales will continue to be, dependent upon our AM-300 product. Our net sales
of AM-300 represented 67.5% and 42.9% of net sales for the six months ended
June 30, 1999 and 1998, respectively. One of the herbal ingredients in AM-300
is ephedra concentrate, which contains naturally occurring ephedrine.
Ephedrine products have been the subject of adverse publicity in the United
States and other countries relating to alleged harmful effects. Currently, we
offer AM-300 only in the United States (except in certain states in which
regulations may prohibit or restrict the sale of such product). On April 10,
1996, the Food and Drug Administration issued a statement warning consumers
not to purchase or ingest natural sources of ephedrine within dietary
supplements claiming to produce certain effects (none of which are claimed for
our product). On June 4, 1997, the Food and Drug Administration proposed a
regulation which will, if it becomes effective as proposed, significantly
limit our ability to sell AM-300 and any other weight management products
which contain ephedra or ephedrine. If the proposed regulation becomes
effective, we believe that a material reduction in sales and related costs
would occur which would have a material adverse effect on the results of
operations, but would not have an immediate significant adverse effect on our
financial position.
PRODUCT LIABILITY. We, like other marketers of products that are
intended to be ingested, face the inherent risk of exposure to product
liability claims in the event that the use of our products results in injury.
We maintain product liability insurance coverage with limits of $4,000,000
per occurrence and $5,000,000 aggregate. We generally do not obtain
contractual indemnification from our product manufacturers. However, all of
our product manufacturers carry product liability insurance which covers our
products.
We have agreed to indemnify Tinos, L.L.C., the licensor of
Choc-Quilizer, against any product liability claims arising from the
Choc-Quilizer product marketed by us. Also, we have agreed to indemnify
Chemins Company, Inc. against claims arising from claims made by our
distributors for products manufactured by Chemins and marketed by us.
Although we have not had a product liability claim asserted against
us, such claims could result in material losses. For more information
regarding product liability see "Business--Products--Product Procurement and
Distribution."
CHOC-QUILIZER AGREEMENT. In the event that we fail to achieve the
required contractual sales volumes provided for in the marketing agreement
with Tinos, LLC, we will need to (i) renegotiate the marketing agreement or
(ii) give up our marketing rights to Choc-Quilizer. We believe that loss of
the marketing rights to Choc-Quilizer will not have a material adverse effect
on our results of operations, financial condition or liquidity.
FUTURE ASSESSMENT OF RECOVERABILITY AND IMPAIRMENT OF GOODWILL AND COVENANTS
In connection with our various acquisitions, we recorded
- - goodwill, which is being amortized on a straight-line basis over
periods of 7 to 20 years, and
- - covenants not to compete which are being amortized on a straight-line
basis over the life of the contractual covenants
(the estimated periods that we will be benefitted by such goodwill and
covenants). At June 30, 1999, the unamortized portions of the goodwill was
$1,672,280
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(which represented 14.9% of total assets and 17.0% of stockholders' equity)
and covenants not to compete was $474,265 (which represented 4.2% of total
assets and 4.8% of stockholders' equity). Goodwill arises when an acquirer
pays more for a business than the fair value of the tangible and separately
measurable intangible net assets (such as covenants not to compete). For
financial reporting purposes, goodwill and all other intangible assets are
amortized over the period benefitted. We have determined the life for
amortizing goodwill based upon several factors, the most significant of which
are
- - the size of the distributor network being acquired and
- - the length of the time the network has been in existence.
We determined the period to be no less than seven years for the Miracle
Mountain acquisition and no less than 20 years for the Chambre International
acquisition, and the asset purchases.
We periodically review carrying value and recoverability of our
unamortized goodwill and covenants not to compete. If the facts and
circumstances suggest that the goodwill or covenant may be impaired, the
carrying value of goodwill or covenant will be adjusted. This adjustment will
result in an immediate charge against income during the period of the
adjustment or the length of the remaining amortization period may be
shortened, which will result in an increase in the amount of goodwill or
covenant amortization during the period of adjustment and each period
thereafter until fully amortized. Following an adjustment, additional
adjustments may be required in future periods for impairment and
recoverability. Of the various factors we considered in assessing the
impairment or recoverability of goodwill or covenant, the most significant are
- - losses from operations,
- - loss of distributors and customers,
- - industry developments, including our inability to maintain our market
share,
- - development of competitive products, and
- - imposition of additional regulatory requirements.
In the event we determine that goodwill or the covenants not to compete have
become impaired, the adjustment for impairment and recoverability will most
likely occur during a period of operations in which we have sustained losses
or have only marginal profitability from operations. If so, the impairment or
increased amortization amount will either increase such losses from
operations or further reduce profitability.
LIQUIDITY AND CAPITAL RESOURCES
Prior to completion of the offerings described above, our primary
source of liquidity was net cash provided by operating activities and
shareholder loans. We do not have any arrangements for significant bank or
institutional lending.
At June 30, 1999, we had working capital of $6,278,481, compared to
$5,823,182 at December 31, 1998. We believe our cash and cash equivalents and
cash flows from operations will be sufficient to fund our working capital
needs over the next 12 months. During the six months ended June 30, 1999, net
cash provided by operating activities was $1,291,625, net cash used in
investing activities was $332,554, and net cash used in financing activities
was $176,646. This represented an average monthly positive cash flow from
operating activities of $215,271. We had a net increase in cash during this
period of $782,425. Our working capital needs over the next 12 months consist
primarily of marketing, distribution and administrative expenses.
On March 4, 1998, we announced our intent to repurchase up to $1
million of our common stock in the open market for cash. As of December 31,
1998, we had repurchased 134,500 shares of our common stock for $377,871 for
an average per share price of $2.81. We ceased making repurchases and the
last repurchase was made December 31, 1998.
During the first quarter of 1998, we agreed to loan John W. Hail,
our the Chief Executive Officer and a major shareholder, up to $250,000.
Subsequently we also agreed to loan up to an additional $75,000. These loans
are secured, bear interest at 8% per annum and became due on March 31, 1999.
The loans have been extended until March 31, 2000. As of June 30, 1999, the
balance due on these loans was $259,701 plus interest. The loans and
extension were unanimously approved by our board of directors.
On November 12, 1997, we sold 1,495,000 shares of our common stock
and 1,495,000 redeemable common stock purchase warrants in units consisting
of one share of stock and one warrant from which we
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received gross proceeds of $6,050,000. Accumulated offering costs of
approximately $720,000 were charged against the proceeds of this offering.
These warrants are exercisable to purchase one share of our common stock on
or before November 6, 2002 for $3.40. In connection with the offering, we
sold to Paulson Investment Company, Inc. and Joseph Charles & Assoc., Inc.,
the representatives of underwriters of this offering, warrants exercisable
for the purchase of 130,000 units for $5.40 each on or before November 12,
2002.
On January 31, 1997, we distributed, at no cost, 2,148,191
non-transferable rights to our shareholders of record on such date. Each of
the rights entitled the holder to purchase one unit (consisting of one share
of our common stock and one 1997-A warrant) on or before March 17, 1997 for
$6.80 per unit. Concurrently, we also redeemed our outstanding class A and
class B common stock purchase warrants for $.0008 per warrant effective on
March 17, 1997. In connection with the warrant redemption, we modified the
terms of the warrants and offered to holders the right to exercise each of
the warrants for the purchase of one unit, at an exercise price of $6.00 per
unit. We received $2,154,357 proceeds from sale of the units pursuant to the
offerings. Accumulated offering costs of $323,076 were charged against these
proceeds. Pursuant to the offerings, we issued 337,211 shares of our common
stock and 337,211 1997-A warrants. Each 1997-A warrant is exercisable for the
purchase of one share of our common stock for $3.40 on or before November 6,
2002.
DESCRIPTION OF THE PLAN
On February 27, 1998, we adopted the Advantage Marketing Systems,
Inc. 1998 Distributor Stock Purchase Plan to provide and offer our product
distributors ("eligible persons") a simple and convenient method of
purchasing shares of our common stock with minimum brokerage commissions or
service charges. The following description of certain matters relating to the
plan is a summary and is qualified in its entirety by the provisions of the
plan which is filed as an exhibit to the registration statement of which this
prospectus is a part. See "Where You Can Find Additional Information."
HOW IS THE PLAN ADMINISTERED?
The plan is administered by our board of directors or if appointed
by the board a committee (the "plan administrator"), except as otherwise
indicated below. The plan is currently administered by a committee comprised
of our executive officers and directors, John W. Hail and Roger P. Baresel.
Our board of directors has appointed UMB Oklahoma Bank to serve as the
custodian of the plan. The custodian's duties include
- - appointment of a member firm of the National Association of Securities
Dealers, Inc. to serve as the broker-dealer of the plan,
- - establishment of the banking account of the plan for deposit of
participants' contributions to the plan through purchase of the
participation interests,
- - directing the designated broker-dealer to make purchases of our common
stock on behalf of the participants,
- - establishing with the plan administrator and the broker-dealer the
procedures for withdrawal of common stock and, if applicable, other
company securities from the plan by participants, and
- - holding of the shares of common stock in its name or its nominee as so
directed by the plan administrator.
The custodian will appoint the broker-dealer, whose duties include
- - establishing and maintaining a brokerage account for the plan,
- - purchasing our common stock on behalf of the participants pursuant to
directions of the custodian,
- - furnishing to the plan administrator (i) confirmations of each common
stock purchase transaction by the plan and (ii) monthly or quarterly
account statements,
- - holding of the shares of our common stock in its name or its nominee as
so directed by the plan administrator,
- - establishing with the plan administrator and the custodian the
procedures for withdrawal
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of common stock and other securities from the plan by participants.
The plan administrator directs the custodian and broker-dealer with regard to
their respective duties under the plan by means of a written agreement or
directions.
WHAT ARE THE PURPOSES AND ADVANTAGES OF THE PLAN?
The plan provides distributors or eligible persons electing to
participate in the plan ("participants") an opportunity and convenient method
to acquire a proprietary interest in us through the purchase of our common
stock utilizing monthly contributions to the plan. The purpose of the plan is
to
- - provide an additional incentive to participants by enabling them to
acquire stock ownership in us,
- - attract and retain persons of ability as our independent distributors,
and
- - entice such persons to exert their best efforts on our behalf.
The plan offers participants
- - an affordable way to invest, through regularly contributing small
amounts into the plan through purchase of the participation interests
and
- - savings on commissions and fees that would otherwise be associated with
purchase of our common stock in the open market.
Distributors or eligible persons may become a participant by completion and
delivery of a stock purchase agreement to us containing authorization for
drafting of the monthly minimum cash investments of $25 to purchase our
common stock through the plan and which may be accompanied by an initial cash
investment in excess of $25. All contributions by participants through
purchase of the participation interest are deposited in a single bank account
established at the direction of the custodian in the name of this plan and
will not be commingled with our funds.
In addition to the savings on commissions, regularly contributing to
the plan, even in small increments, permits a participant to benefit from
dollar cost averaging, which may minimize or maximize the adverse effects of
volatile changes in the price of our common stock. As a fixed amount of money
is regularly invested over a period of time, purchases are made at varying
prices as the market price for our common stock fluctuates. Over time, if a
uniform number of shares of our common stock were purchased each period, the
average cost paid per share will usually be less during periods of market
price increase, thus minimizing the volatility of price fluctuations.
Alternatively, during lengthy periods of market price decrease, the average
cost paid per share will be usually higher, thus maximizing the volatility of
price fluctuations. There can be no assurance that the average cost paid per
share of our common stock acquired by a participant through the plan will be
less than the market price of our common stock at any particular time or that
a participant's investment in our common stock will in whole or in part not
be lost due to a number of factors including declining market price and
general market conditions. Accordingly, there is no assurance that a
participant's investment in our common stock through the plan will result in
any profit.
WHAT ARE THE REQUIREMENTS TO PARTICIPATE IN THE PLAN?
Participation in the plan is entirely voluntary. We do not make any
recommendation concerning participation in the plan. Participation is not
required as a requisite for becoming or continuing as a distributor of our
products and services. Any distributor in good standing is an eligible person
and may participate in the plan, provided the eligible person completes and
submits a stock purchase agreement and satisfies any other conditions that we
may establish and as provided in the stock purchase agreement.
HOW DOES AN ELIGIBLE PERSON ELECT TO PARTICIPATE?
An eligible person may become a plan participant by completing and
delivering a stock purchase agreement to us. Stock purchase agreements may be
obtained at any time from us upon request. Participation is effective upon
our receipt and acceptance of an eligible person's properly completed and
executed stock purchase agreement. Participation will continue until
terminated in accordance with the provisions of the plan.
HOW ARE CONTRIBUTIONS MADE TO THE PLAN AND ACCOUNTED FOR UNDER THE PLAN?
Contributions to the plan are voluntary and may only be made by
participants through the purchase of the participation interests. For
purposes of the offering, each contribution to the plan will
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constitute the purchase by the contributing participant of the number of
participation interests equal to the amount of such contribution. We will not
contribute to the plan. A participant account is established and maintained
by the plan administrator for each participant. Entries to such accounts
record
- - the participant's contributions through purchase of the participation
interests,
- - purchases of our common stock by the plan on behalf of such
participant, and
- - payment of the $5.00 annual service fee and the $1.25 monthly
transaction fees paid to us.
All contributions to the plan will be subject to the following:
(i) Each participant is required to make minimum monthly
contributions to the plan of $25.00. The minimum monthly contributions must
be made by authorized draft on the checking, savings or other form of
financial institution account maintained. Such authorization is pursuant to
the participant's stock purchase agreement or such other appropriate form or
authorization that we or the financial institution may require. The drafting
authorization will continue until we receive written notification from the
participant of the revocation or amendment of the stock purchase agreement or
such other form of authorization. Any such revocation or amendment will be
effective as of the first day of the month following the month in which we
receive such written notification.
(ii) Each Participant may also elect to make additional
contributions to the plan. Additional contributions are made through purchase
of participation interests by our withholding of all or a portion of the
participant's regular gross commissions in lieu of otherwise receiving such
amount of commissions. Such election may be made by written notification to
us indicating the amount of such contribution. This notification will be
effective with respect to the payment of such commission check or checks only
if received by us not less than five days prior to payment of such
commissions. However, the commissions payable to such participant that may be
contributed to the plan will first be reduced by any offsets and other
reductions, including without limitation payment of outstanding and unpaid
product purchases and expenses. No contribution to the plan payable from a
participant's commission will be made on behalf of a participant during any
period that offsets and other reductions exceed the commission payable to
such participant. All contributions to the plan payable from a participant's
commissions will only be in $1.00 increments. The election by a participant
to make contributions to the plan payable from the participant's commissions
and the termination of such election must be made in writing and received by
us, in accordance with the rules and procedures established, including any
amendment thereof, by us or the plan administrator from time to time.
(iii) A Participant may also make direct contributions to the plan
in increments of $1.00 through purchase of participation interests, subject
to the terms and conditions of the stock purchase agreement and the plan.
WHAT ARE THE PARAMETERS FOR COMMON STOCK PURCHASES?
All purchases of our common stock are subject to the following
described terms as well as
- - the terms and conditions of the plan,
- - the agreement with the broker-dealer effecting purchases of the common
stock,
- - and the policies and procedures that may be adopted and established by
the Plan Administrator.
From participant's contributions to the plan through purchase of the
participation interests, we are paid the annual service fee and the monthly
transaction fees. The balance of a participant's contribution to the plan (or
net contribution) is used to purchase our common stock in the open market. Such
purchases are made during the last five "trading days" (as defined below) of
each month. "Trading days" means those days on which securities are traded on
the New York Stock Exchange. The shares of our common stock purchased during a
month are allocated among the participant accounts based on the average price
paid for all shares of our common stock purchased during the month and the
participants' net contributions to the plan during such month.
The custodian and broker-dealer have full discretion as to all
matters relating to purchases of our common stock, including without
limitation,
- - determining the number of shares of common stock, if any, to be
purchased on any day or at any time of that day,
- - the prices paid for such common stock,
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- - the markets on which such purchases are made, and
- - the persons (including other brokers and dealers) from or through whom
such purchases are made.
Although not specifically required by the plan, we anticipate that the
custodian and broker-dealer will continue to purchase the maximum number of
shares of our common stock that may be purchased utilizing the participant's
net contribution during each month. Our common stock purchased pursuant to
the plan will only be purchased on the open market. Although not anticipated,
any net contribution remaining in the participant account (after the purchase
of such maximum number of shares of Common Stock at the end of each month)
will be retained in the participant account and treated as a part of the
accumulation of net contributions for the following month.
The timing of all purchases and the price to be paid for shares of
our common stock purchased pursuant to the plan will be determined solely by
the custodian and the broker-dealer. We, the plan administrator, and the
participants will not have any control or influence on such purchases.
ARE THERE ANY PLAN PROVISIONS LIMITING THE SALE OF OUR COMMON STOCK BY OUR
OFFICERS AND DIRECTORS AHEAD OF STOCK PURCHASES BY THE PLAN?
Our executive officers and directors and each "affiliated person"
(as defined below) are prohibited from bidding for, purchasing, attempting to
bid for or purchase, or offering or selling any shares of common stock. These
restrictions apply during the five trading days immediately preceding and
immediately following the date on which the plan purchases any shares of our
common stock, unless
- - the offer or sale of our common stock is made pursuant to a
registration statement effective under the Securities Act of 1933, as
amended,
- - pursuant to registration or exemption from registration under any
applicable state securities laws
- - the executive officer, director and/or affiliated person is named as a
selling shareholder in the registration statement.
"Affiliated person" includes any person that exercises any direct or indirect
influence on, or control over
- - the amounts of our common stock to be purchased by the plan,
- - the timing of or the manner in which our common stock is to be
purchased by the plan, and
- - the selection of the custodian or the broker-dealer through which such
purchases are or may be made by the plan.
HOW ARE VOTING RIGHTS AND DIVIDENDS HANDLED?
We, the plan administrator, custodian or broker-dealer will transmit
to each participant all proxy statements, annual reports, meeting notices and
other shareholder communications with respect to our common stock acquired
pursuant to and held under the plan. Proxies will be voted
- - with respect to full shares of common stock held on behalf of a
participant as reflected in the participant account of such participant
and
- - in accordance with each participant's instructions duly delivered to
and received by us or the proxy.
If a participant does not direct the exercise of such voting rights with
respect to any particular occasion for the exercise thereof, such voting
rights will not be exercised with respect to such occasion.
All cash dividends paid on the common stock received in plan's
account with the custodian or the broker-dealer or its nominee will be
reinvested in additional shares of our common stock. All cash dividends as
well as all dividends or other distributions on our common stock, including
our other securities, shall be allocated among and credited to the
participants based upon the number of shares of our common stock held for
their benefit under the plan. Such allocation will be made on the record date
of the of the dividend or other distribution declaration.
MAY A PARTICIPANT DESIGNATE A BENEFICIARY IN THE EVENT OF DEATH?
Each individual participant may designate his or her beneficiary on
a beneficiary designation form provided by the plan administrator and such
designation may include primary and contingent beneficiaries. The designation
may be changed by a participant at any time by completing and delivering a
new beneficiary designation form to the plan administrator. A changed
beneficiary designation is
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only effective upon receipt by the plan administrator of such form. In the
absence of such written designation, the surviving spouse of the participant
is deemed the designated beneficiary, if any, and otherwise the estate of
such Participant. In all events, the date of determination of a participant's
beneficiary is the date of death of a participant.
ARE PARTICIPANTS PROVIDED REPORTS?
We or the plan administrator provide each participant semi-annual
reports on or about January 30 and July 30 of each year. These reports
reflect the number of shares of our common stock acquired and held for the
participant under the plan.
MAY A PARTICIPANT WITHDRAWAL THE COMMON STOCK FROM THE PLAN?
Participants may withdraw, for resale or otherwise, at any time all
or any portion of the whole shares of our common stock and, if applicable,
other securities held by the Plan for their benefit. Withdrawal may be made
by delivering a written notification to our offices in Oklahoma City,
Oklahoma. Such notification must specify the number of whole shares of our
common stock and, if applicable, other securities to be withdrawn from the
plan. Also such notification must be accompanied by payment of the cost of
issuance by our transfer agent of the certificate or certificates evidencing
the shares of common stock and other securities.
Immediately following receipt of such notification, we or the plan
administrator will notify the custodian or broker-dealer or its nominee of
the participant's election to withdraw as set forth in the notice.
Immediately as soon as practicable following receipt of such notification,
the custodian or broker-dealer or its nominee will take appropriate action to
cause issuance and delivery of the certificate or certificates evidencing
such shares of common stock or other securities being withdrawn. The
additional procedures for withdrawal are established by the plan
administrator, the broker-dealer and the custodian.
The plan will not sell or otherwise dispose of our common stock and
other securities held for the benefit of the participants. Any Participant
desiring to sell our common stock or other securities held for the benefit of
such participant must comply with the withdrawal procedures prior to such
sale. Each participant is solely responsible for the costs and expenses,
including without limitation any commissions, administrative fees, taxes or
other costs incurred or payable in connection with the transfer, sale or
other disposition of the shares of our common stock and other held for the
benefit of such participant.
HOW MUCH DOES PARTICIPATION IN THE PLAN COST?
Each participant is obligated to pay
- - a $5.00 annual service fee upon electing to participate in the plan
and thereafter annually on January 31 of each year during which such
participant continues to participate in the Plan and
- - a $1.25 monthly transaction fee during each month that a participant
makes a contribution to the plan.
The annual service fees and transaction fees will be paid to us from each
participant's contributions to the plan. In addition, any brokerage
commissions or service charges with respect to the purchase of common stock
under the plan is allocated to those participants for whom common stock was
purchased during the applicable month. This allocation is based upon the
number of shares and fractional shares purchased on behalf of each
participant during such month.
All brokerage commissions or service charges will be paid from the
participants' contributions to the plan. We anticipate that only discount
brokers, such as Charles Schwab & Co., Inc., Waterhouse Securities Inc., Olde
Discount Corporation, will be selected by the custodian to effectuate
purchases of our common stock. As an example, the published or advertised
minimum and maximum commission rates of Charles Schwab & Co., Inc. for
transactions in stocks is the greater of $39 per trade or $55 for the first
100 shares, plus $.55 per share thereafter. The commission rates of discount
brokers varies from broker to broker and size of the purchase or sale
transaction, and are subject to further variation by changes in previously
published commission rates. We will pay all other expenses and costs of
administering the plan. Participants will be solely responsible for payment
of any commissions, fees, administrative costs, taxes or other expenses with
respect to the sale, transfer or other disposition of shares of our common
stock and, if applicable, other securities following their withdrawal from
the plan.
WHAT ARE THE TRANSFER RESTRICTIONS ON THE PARTICIPATION INTERESTS?
No rights of a participant under the plan are assignable by the
participant other than by will or
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operation of law. This restriction on transfer includes any attempt by a
participant or other person to
- - assign, alienate, or create a security interest in or otherwise
encumber, any of the participant's interest under the plan, or
- - subject the interest to attachment, execution, garnishment or other
legal or equitable process.
Any such transfer, attempted transfer and encumbrance is void.
HOW MAY PARTICIPATION IN THE PLAN BE TERMINATED?
A participant's participation in the plan immediately terminates if
and when
- - the participant voluntarily elects to cancel its participation in the
plan (such cancellation to be effective as of the date of our receipt
of a properly executed termination form evidencing such termination) or
- - the participant ceases to be a distributor in good standing;
- - the death (if an individual), dissolution or liquidation, or otherwise
of the participant.
Upon any termination of participation (other than by reason of a
participant's death),
- - any contributions that remain in the participant account of the
participant is paid to the participant, without payment of interest
thereon, and
- - any whole shares of our common stock and, if applicable, other
securities held by the plan for the benefit of the participant is
delivered to the participant as a withdrawal.
Upon termination of participation by reason of a death,
- - any contributions that remain in the participant account of such
participant is paid, without payment of interest thereon, and
- - any shares of our common stock and, if applicable, other securities
held by the plan for the benefit of the participant
are distributed to the designated beneficiary or beneficiaries of the
participant or the estate of the participant. Any fractional shares of our
common stock and, if applicable, other securities to be delivered to a
participant upon termination of participation are rounded to the next whole
share if such fraction is greater than .5 or, if .5 or less, shall be
retained by the plan.
A participant whose participation in the plan is terminated may,
after a period of one month from the date participation is terminated, and,
if eligible, elect to again participate in the plan.
HOW LONG WILL THE PLAN REMAIN IN EFFECT AND MAY IT BE MODIFIED AND TERMINATED?
The plan became effective on February 27, 1998, and will continue in
effect until February 27, 2008, unless we terminate it sooner. Our board of
directors may amend, extend, modify, suspend or terminate the plan. No shares
of our common stock may be purchased pursuant to the plan subsequent to its
termination.
ARE THERE ANY INDEMNIFICATION PROVISIONS PROTECTING CONTRIBUTIONS FROM CLAIMS?
We agreed to indemnify the plan administrator and each member of any
committee serving as plan administrator and the custodian against certain
liabilities and expenses by reason of the fact that any one of them served as
plan administrator or member of any committee serving as plan administrator or
custodian of the plan. We, the plan administrator and each member serving or
having served on a committee acting as plan administrator, the broker-dealer and
custodian are not responsible or liable for any act done in good faith or for
any good faith act or omission to act. These acts or omissions include
- - the failure to terminate a participant's participation in the plan upon
such participant's death or prior to receipt of notice in writing of
such death, or
- - those acts and omissions relate to the prices at which our common stock
is purchased or the times at which such purchases are made.
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BUSINESS
We market a product line consisting of approximately 101 products in
three categories; weight management, dietary supplement and personal care
products. These products are marketed through a network marketing
organization in which independent distributors purchase products for resale
to retail customers as well as for their own personal use. The number of our
active distributors has increased from approximately 10,600 at December 31,
1996, to approximately 46,800 at June 30, 1999. An "active" distributor is
one who purchased $50 or more of our products within the preceding 12 months.
The distributors in our network are encouraged to recruit interested
people to become new distributors of our products. New distributors are
placed beneath the recruiting distributor in the "network" and are referred
to as being in that distributor's "downline" organization. Our marketing plan
is designed to provide incentives for distributors to build, maintain and
motivate an organization of recruited distributors in their downline
organization to maximize their earning potential. Distributors generate
income by purchasing our products at wholesale prices and reselling them at
retail prices. Distributors also earn bonuses on product purchases generated
by the distributors in their downline organization. See "--Network Marketing."
On an ongoing basis we review our product line for duplication and
sales movement and make adjustments accordingly. As of June 30, 1999, our
product line consists of (i) eight weight management products, (ii) 27
dietary supplement products, (iii) 65 personal care products consisting
primarily of cosmetic and skin care products and (iv) Dial A Doc. Our
products are manufactured by various manufacturers pursuant to formulations
developed for us and are sold to our independent distributors located in all
50 states and the District of Columbia. We also sell our personal care
products to distributors in Greece who do not use our network marketing
system.
We believe that our network marketing system is ideally suited to
marketing weight management, dietary supplement and personal care products
because sales of such products are strengthened by ongoing personal contact
between distributors and their customers. Our network marketing system
appeals to a broad cross-section of people, particularly those looking to
supplement family income or who are seeking part-time work. Distributors are
given the opportunity through our sponsored events and training sessions to
network with other distributors, develop selling skills and establish
personal goals. We supplement monetary incentives with other forms of
recognition in order to motivate distributors further and to foster an
atmosphere of excitement throughout our distributor network.
KEY OPERATING STRENGTHS
We believe the source of our success is our support of and
compensation program for our distributors. We provide our distributors with
high-quality products and a highly attractive bonus program along with
extensive training and motivational events and services. We believe that we
have established a strong operating platform to support distributors and
facilitate future growth. The key components of this platform include the
following:
- - quality products, many of which emphasize herbs and other natural
ingredients to appeal to consumer demand for products that contribute
to a healthy lifestyle;
- - a compensation program that permits distributors to earn income from
profits on the resale of products and residual income from reorder
bonuses on product purchases within a distributor's downline
organization, as well as to participate in various non-cash awards,
such as vacations offered through promotional programs;
- - a superior communications program that seeks to effectively and
efficiently communicate with distributors by utilizing new technologies
and marketing techniques, as well as motivational events and training
seminars;
- - a continual expansion and improvement of our product line and marketing
plan; and
- - employment of computer technology to provide timely and accurate
product order processing, weekly bonus payment processing, detailed
distributor earnings statements, and inventory management.
GROWTH STRATEGY
Our growth strategy is expansion of our product line and network of
independent distributors to increase sales. An increase in the number of
distributors generally results in increased sales volume, and new products
create enthusiasm among distributors, serve as a promotional tool in selling
other products, and attracting new distributors. Since
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1995, we have introduced eight new products to our product line in the weight
management and dietary supplement categories. Through the
- - acquisition of Miracle Mountain International, Inc. in May 1996,
- - Chambre International, Inc. in January 1997 , and
- - the acquisition of the assets of Stay 'N Shape International, Inc.,
Solution Products International, Inc., Nation of Winners, Inc., and Now
International, Inc. in April 1997,
we acquired 6,790 distributors and added 114 products to our product line.
During 1998, we introduced ToppFast and Dial A Doc.
We will also seek to increase sales through initiatives designed to
enhance sales in our existing markets. Such initiatives will include
increasing the number of our training and motivational events and
teleconferences, hiring additional distributor support personnel and
establishing more convenient regional success centers in targeted geographic
markets.
In addition, we will seek to grow through acquisition. The network
marketing industry, which has relatively low barriers to entry, is fragmented
and includes a number of small marketing companies, many of which are being
acquired by larger companies. Our strategy is to capitalize on these market
characteristics to achieve additional growth, both in terms of distributors
and product line enhancement, through the acquisition of additional network
marketing companies or the assets of such companies.
The principal objective of our acquisition strategy is to acquire
other network marketing organizations that can be combined with our network
marketing organization, resulting in increased sales volume with minimal
additional administrative cost. We will not consummate an acquisition unless,
at the time, we anticipate that such acquisition will contribute to
profitability and provide positive cash flows from operations. There is no
assurance, however, that we will in the future be able to acquire other
network marketing organizations, or that such acquisitions will result in
increased profitability and cash flows.
Our growth strategy will require expanded distributor services and
support, increased personnel, expanded operational and financial systems and
implementation of additional control procedures. There is no assurance that
we will be able to manage expanded operations effectively. Furthermore,
failure to implement financial, information management, and other systems and
to add control procedures could have a material adverse effect on our results
of operations and financial condition. Our acquisitions could involve a
number of risks including
- - the diversion of management's attention to the assimilation of the
acquired companies or assets,
- - adverse short-term effects on our results of operations,
- - the amortization of acquired intangible assets, and
- - the possibility that the acquired network marketing organization will
not contribute to our sales, profitability and cash flows, either in
the near or long term, as anticipated.
Although our business plan includes expansion and enhancement of our
network marketing organization and product line through the acquisition of
businesses engaged in network marketing, there are currently no specific plans,
negotiations, agreements or understandings with respect to any material
acquisition.
Although we intend to focus principally on the expansion of sales
within the United States, we also intend to expand our sales activities in
Greece. In addition, we are considering expansion into markets in other
countries, although we have not formalized any such planned expansion. We
believe there are numerous additional international markets in which our network
marketing organization and products could prove successful.
INDUSTRY OVERVIEW
NETWORK MARKETING. We believe that network marketing is one of the
fastest growing channels of distribution for certain types of goods and
services.
WEIGHT MANAGEMENT AND DIETARY SUPPLEMENT PRODUCTS. We believe that
the weight management and dietary supplement category is expanding because of
heightened public awareness of reports about the positive effects of weight
management and dietary
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supplements on health. Many individuals also use dietary supplements as a
means of preventative health care. We believe several factors account for the
steady growth of the dietary supplement category, including increased public
awareness of the reported health benefits of dietary supplements and
favorable demographic trends toward older Americans who are more likely to
consume dietary supplements.
Over the past several years, widely publicized reports and medical
research findings have suggested a correlation between the consumption of
dietary supplements and the reduced incidence of certain diseases. The United
States government and universities generally have increased sponsorship of
research relating to dietary supplements. In addition, Congress has
established the Office of Alternative Medicine within the National Institutes
of Health to foster research into alternative medical treatments, which may
include natural remedies. Congress also recently established the Office of
Dietary Supplements in the National Institutes of Health to conduct and
coordinate research into the role of dietary supplements in maintaining
health and preventing disease.
In addition, we believe that the aging of the United States
population, together with a corresponding increased focus on preventative
health care measures, will continue to result in increased demand for dietary
supplement products. We believe these trends have helped fuel the growth of
the dietary supplement category. To meet the increased demand for dietary
supplements, we and others have introduced a number of successful dietary
supplement products the past several years, including function specific
products for weight loss, sports nutrition, menopause, energy and mental
alertness. In addition, the use of a number of ingredients, such as chromium
picolinate, shark cartilage, proanthocyanidins, citrin and colloidal
minerals, have created opportunities for us and others to offer new products.
PERSONAL CARE PRODUCTS. We believe that the personal care products
market is a mature category that has been historically immune to swings in
the economy. Manufacturers and distributors of personal care products must
continually improve existing products, introduce new products and communicate
product advantages to consumers. With the aging population, there appears to
be a growing demand for a wide spectrum of new products in the area of skin
care.
PRODUCTS
Our product line consists of products in the categories of weight
management, dietary supplements and personal care. We currently market
approximately 101 products, exclusive of variations in product size, colors
or similar variations of our basic product line.
WEIGHT MANAGEMENT CATEGORY. During the six months ended June 30,
1999 and the year ended December 31, 1998, 68.2% and 55.5%, respectively, of
our net sales were derived from the eight products in the weight management
category that we market under the Advantage Marketing Systems label. The
following products represent the majority of our product sales in the weight
management category:
- - AM-300--A specialized blend of herbs, including an ephedra herb
concentrate and chromium picolinate; and
- - AS-200--A specialized blend of herbs and nutrients in addition to
citrin and chromium picolinate.
As a result of the Stay 'N Shape asset purchase, we added several
additional products to our product line in the weight management category
that are marketed under the Advantage Marketing Systems or Stay 'N Shape
labels, including Choc-Quilizer. Choc-Quilizer is an appetite suppression
product made from a compound which occurs naturally in chocolate. It was
originally developed by Dr. George Kargas to control chocolate cravings, and
is believed by Dr. Kargas to decrease the appetite for other foods as well.
DIETARY SUPPLEMENT CATEGORY. During the six months ended June 30,
1999 and the year ended December 31, 1998, 23.7% and 33.9%, respectively, of
our net sales were derived from the 27 products in the dietary supplement
category which contain herbs, vitamins, minerals and other natural
ingredients. They are sold under the Advantage Marketing Systems, Stay 'N
Shape and Chambre labels. The following products represent the majority of
our product sales in the dietary supplement category:
- - Shark Cartilage Complex--Manufactured from shark fin cartilage and a
blend of curcumin, boswellin and vanadium; and
- - Super Anti-Oxidant--A blend of enzyme-active and phyto-nutrient rich
whole food and herbal antioxidant concentrates including
proanthocyanidins;
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- - Colloidal Plus--A natural assortment of 77 plant-derived colloidal
minerals in a time release capsule; and
- - Chlorella--Fresh water green algae containing amino acids of protein,
nucleic acids, fibers, vitamins and minerals.
As a result of the SNSI asset purchase, we added several additional
products to our line in the dietary supplement category that are being
marketed under the Advantage Marketing Systems or Stay 'N Shape labels,
including Formula of Life Colloidal Minerals, Stress-Eze and Spark of Life.
PERSONAL CARE CATEGORY. In January 1997, we dramatically expanded and
improved our product line by acquiring Chambre International and our line of
skin care, hair care, family care and cosmetic products. Chambre International
had been marketing our products for over 24 years. During the six months ended
June 30, 1999 and the year ended December 31, 1998, 1.5% and 2.1% of our net
sales were derived from the 65 personal care products marketed primarily under
the Chambre label in the personal care category. The following products
represent the majority of our product sales in the personal care category:
- - NH2 Lift System--A three-part skin-care system combining enzymatic
exfoliation and isometric action to firm the skin, build muscle tone
and lift the face.
- - Skin Care Collections--Include cleansing lotion, skin freshener,
oatmeal scrub, night treatment, moisturizer and protein or moisture
masque.
- - Hair Care Systems--Include keratin shampoo, conditioning rinse,
reconstruction, hair hold, and style and set.
- - Chambre Cosmetics--Include foundations, mascara, lipliners, eyeliners,
powder and cream blushes, lip colors and eyeshadows.
DIAL A DOC. Effective May 1, 1998, we began offering the Dial A Doc
service to members of our monthly auto-ship program. Dial A Doc is a 24-hour
service which allows participants to speak with and ask questions of board
certified, private practice physicians anytime, seven days a week. Members
access the service through a toll-free telephone number and a personal
identification number.
PROMOTIONAL MATERIALS. We also derive revenues from the sale of
various educational and promotional materials designed to aid our
distributors in maintaining and building their businesses. Such materials
include various sales aids, informational videotapes and cassette recordings,
and product and marketing brochures.
OTHER PRODUCTS AND SERVICES. Prior to focusing on weight management,
dietary supplement and personal care products in October 1993, we marketed
various packages of consumer benefit services provided by third-party
providers. The consumer benefit services consist of
- - a discount shopping service,
- - a grocery coupon service,
- - a discount travel service,
- - pre-paid legal services, and
- - a variety of other consumer benefits.
The services under these consumer benefit programs, except for the pre-paid
legal services, are provided by Consumer Benefit Services, Inc. The pre-paid
legal services are provided by Pre-Paid Legal Services, Inc. We no longer
actively market these programs, although we continue to maintain the existing
memberships. These program membership sales represented less than 1% of our
net sales for the six months ended June 30, 1999 and the year ended December
31, 1998.
NEW PRODUCT IDENTIFICATION. We expand our product line through the
development and acquisition of new products. New product ideas are derived from
a number of sources, including trade publications, scientific and health
journals, our management, consultants, distributors and other outside parties.
Potential product acquisitions are identified in a similar manner. Prior to
introducing new products, we investigate product formulation as it relates to
regulatory compliance and other issues.
We do not maintain a product development staff, but rely upon Chemins
Company, Inc. and other manufacturers, independent researchers, vendor research
departments, and others for such services. When a new product concept is
identified or when an existing product must be reformulated, the new product
concept or reformulation project is generally submitted to Chemins for technical
development and implementation. We continually review our existing
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products for potential enhancements to improve their effectiveness and
marketability. While we consider our product formulations to be proprietary
trade secrets, such formulations are not patented. Accordingly, there is no
assurance that another company will not replicate one or more of our products.
RECENT REGULATORY DEVELOPMENTS. A significant portion of our net sales
continue to be dependent upon our AM-300 product. Our net sales of AM-300
represented 67.5%, 49.7% and 29.5% of our net sales for the six months ended
June 30, 1999 and the years ended December 31, 1998 and 1997, respectively. One
of the herbal ingredients in AM-300 is ephedra concentrate, which contains
naturally occurring ephedrine. Ephedrine products have been the subject of
adverse publicity in the United States and other countries relating to alleged
harmful effects, including the deaths of several individuals. Currently, we
offer AM-300 only in the United States (except in certain states in which
regulations may prohibit or restrict the sale of such product).
On April 10, 1996, the Food and Drug Administration issued a
statement warning consumers not to purchase or ingest natural sources of
ephedrine within dietary supplements claiming to produce certain effects
(none of which are claimed for our product). On June 4, 1997, the Food and
Drug Administration proposed a regulation which will, if it becomes effective
as proposed, significantly limit our ability to sell AM-300 and any other
weight management products which contain ephedra or ephedrine. Although we
have not had a product liability claim, such claims could result in material
losses.
PRODUCT PROCUREMENT AND DISTRIBUTION; INSURANCE. Essentially all of
our product line in the weight management and dietary supplement categories
is manufactured by Chemins Company, Inc. utilizing our product formulations.
Essentially all of our product line in the personal care category is
manufactured by GDMI, Inc. and Columbia Cosmetics, Inc.
In connection with the Stay 'N Shape asset purchase, we succeeded to
the rights and obligations of Nation of Winners International, Inc. under a
marketing and distribution agreement with Tinos, L.L.C. Pursuant to this
agreement we acquired the exclusive worldwide right to market Choc-Quilizer
for the purpose of appetite suppression and weight control through December
6, 2006. This agreement is subject to termination by Tinos, L.L.C. upon 60
days' written notice in the event we do not obtain a sales volume of 300,000
units of 90 count capsules or caplets of Choc-Quilizer during the period from
the date of the license through December 5, 1998, or reasonable sales volumes
during each 12-month period thereafter. Based upon current sales levels it
appears that we will have difficulty meeting the required sales volume,
however, we are in the process of evaluating several alternatives that should
increase the likelihood of our meeting the required sales volume.
We have not generally entered into long-term supply agreements with
the manufacturers of our product line or the third-party providers of our
consumer benefit services. However, we customarily enter into contracts with
our manufacturers and suppliers to establish the terms and conditions of
purchases. Our arrangements with Chemins Company, Inc. may be terminated by
either party upon the completion of any outstanding purchase orders.
Therefore, there can be no assurance that Chemins will continue to
manufacture our products or provide research, development and formulation
services. In the event the relationship with any of our manufacturers becomes
impaired, we will be required to obtain alternative manufacturing sources for
our products. In such event, there is no assurance that the manufacturing
processes of our current manufacturers can be replicated by another
manufacturer. Although we have not previously experienced product
unavailability or supply interruptions, we believe that we would be able to
obtain alternative sources of our weight management, dietary supplement and
personal care products. A significant delay or reduction in availability of
products, however, could have a material adverse effect on our business,
operating results and financial condition.
We, like other marketers of products that are intended to be
ingested, face the inherent risk of exposure to product liability claims in
the event that the use of our products results in injury. We maintain product
liability insurance coverage with coverage limits of $4,000,000 per
occurrence and $5,000,000 aggregate. We generally do not obtain contractual
indemnification from parties manufacturing our products. However, all of the
manufacturers of our products carry product liability insurance which covers
our products. We have agreed to indemnify Tinos, L.L.C., the licensor of
Choc-Quilizer, against any
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product liability claims arising from the Choc-Quilizer product marketed by
us. We have also agreed to indemnify Chemins against claims arising from
claims made by our distributors for products manufactured by Chemins and
marketed by us. Although we have never had a product liability claim, such
claims could result in material losses.
All of the items in our product line include a customer satisfaction
guarantee. Within 30 days of purchase, any retail customer or distributor who
is not satisfied with our product for any reason may return it or any unused
portion to the distributor from whom it was purchased or to us for a full
refund or credit toward the purchase of another product. Distributors may
obtain replacements from us for products returned to them by retail customers
if they return such products on a timely basis. Furthermore, in most
jurisdictions, we maintain a buy-back program. Under this program we will
repurchase products sold to a distributor (subject to a 10% restocking
charge), provided that the distributor resigns as a distributor and returns
the product in marketable condition within 12 months of original purchase, or
longer where required by applicable state law or regulations. We believe this
buy-back policy addresses a number of the regulatory compliance issues
pertaining to network marketing systems. For the six months ended June 30,
1999 and the year ended December 31, 1998, the cost of products returned to
us was 2% of gross sales.
Our product line is distributed principally from our facilities in
Oklahoma City or from our Regional Success Centers. Products are warehoused
in Oklahoma City and at selected Regional Success Centers.
NETWORK MARKETING
We market our product line through independent distributors in a
network marketing organization. At June 30, 1999, we had approximately 46,800
"active" distributors. We had approximately 33,000, 20,400 and 10,600
"active" distributors at December 31, 1998, 1997 and 1996, respectively. To
be considered "active" a distributor must have purchased $50 or more of our
products within the preceding 12 months. Our distributors are independent
contractors who purchase products directly from us for resale to retail
consumers. Distributors may elect to work on a full-time or part-time basis.
We believe our network marketing system appeals to a broad cross-section of
people, particularly those seeking to
- - supplement family income,
- - start a home business or
- - pursue opportunities other than conventional, full-time employment.
a majority of our distributors therefore sell our products on a part-time basis.
We believe that our network marketing system is ideally suited to
marketing our product line because sales of such products are strengthened by
ongoing personal contact between retail consumers and distributors, many of
whom use our products themselves. Sales are made through direct personal
sales presentations as well as presentations made to groups in a format known
as "opportunity meetings." These sales methods are designed to encourage
individuals to purchase our products by informing potential customers and
distributors of our product line and results of personal use, and the
potential financial benefits of becoming a distributor. The objective of the
marketing program is to develop a broad based network marketing organization
of distributors within a relatively short period. Our marketing efforts are
typically focused on middle-income families and individuals.
Our network marketing program encourages individuals to develop
their own downline network marketing organizations. Each new distributor is
either linked to
- - the existing distributor that personally enrolled the new distributor
into our network marketing organization or
- - the existing distributor in the enrolling distributor's downline as
specified by the enrolling distributor at the time of enrollment.
Growth of a distributor's downline organization is dependent on the
recruiting and enrollment of additional distributors by the distributor or
the distributors within such distributor's downline organization.
Distributors are encouraged to assume responsibility for training
and motivation of other distributors within their downline organization and
to conduct opportunity meetings as soon as they are appropriately trained. We
strive to maintain a high level of motivation, morale, enthusiasm and
integrity
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among the members of our network marketing organization. We believe this
result is achieved through a combination of products, sales incentives,
personal recognition of outstanding achievement, and quality promotional
materials. Under our network marketing program, distributors purchase sales
aids and brochures from us and assume the costs of advertising and marketing
our product line to their customers as well as the direct cost of recruiting
new distributors. We believe that this form of sales organization is cost
efficient because our direct sales expenses are primarily limited to the
payment of bonuses, which are only incurred when products are sold.
We continually strive to improve our marketing strategies, including
the compensation structure within our network marketing organization and the
variety and mix of products in our line, to attract and motivate
distributors. These efforts are designed to increase distributors' monthly
product sales and the recruiting of new distributors.
To aid distributors in easily meeting the monthly personal product
purchase requirement to qualify for bonuses,we developed the "Q-Club" in
1994. Under the Q-Club purchasing arrangement, distributors establish a
standing product order for an amount in excess of $50 which is automatically
charged to their credit cards or deducted from their bank accounts each month
prior to shipment of the ordered products. At June 30, 1999 and December 31,
1998 and 1997, we had approximately , 18,000, 13,000 and 7,000 distributors
participating in the Q-Club, respectively.
Growth of our network marketing organization is in part attributable
to our bonus structure which provides for payment of bonuses on product
purchases made by other distributors in a distributor's downline
organization. Distributors derive income from several sources.
- - First, distributors earn profits by purchasing from our product line
at wholesale prices (which are discounted up to 40% from suggested
retail prices) and selling our product line to customers at retail.
- - Second, distributors who establish their own downline distributor
organizations may earn bonuses of up to 15% on product purchases by
distributors within the first four levels of their downline
organization.
- - Third, distributors who have personally enrolled three active
distributors and have (i) $300 per month of Q-Club product purchases
by personally enrolled distributors on their first level and (ii) $300
per month of Q-Club product purchases on their second level, become
directors and have the opportunity to build an additional director
downline organization and receive additional bonuses of 4% on product
purchases by such downline organization.
- - Fourth, distributors who have personally enrolled six active
distributors and have (i) $600 per month of Q-Club product purchases
by personally enrolled distributors on their first level and (ii) $600
per month of Q-Club product purchases on their second level, become
silver directors and have the opportunity to build an additional
silver director downline organization and receive additional bonuses
of 5% on product purchases by such downline organization.
- - Fifth, silver directors who have personally enrolled twelve active
distributors and have (i) $1,200 per month of Q-Club product purchases
by personally enrolled distributors on their first level and (ii)
$1,200 per month of Q-Club product purchases on their second level,
become gold directors and have the opportunity to receive an
additional bonus of 3% on product purchases by their silver director
downline organization. In addition, gold directors have the
opportunity to receive generation bonuses of up to 3% on the product
purchases by distributors of silver director downline organizations
that originate from their silver director downline organization
through four generations.
- - Sixth, gold directors who maintain the gold director requirements and
develop four gold directors, each one from a separate leg of their
downline organization, become platinum directors and have the
opportunity to build an additional platinum director downline
organization and receive additional bonuses of 5% on product purchases
by such downline organization.
Combining these levels of bonuses, our total "pay-out" on products subject to
bonuses is approximately 67% of the bonus value of product sales. However, in
the
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case of a distributor who is not qualified to receive bonuses, we retain the
bonuses otherwise payable on the first two levels of those distributors'
downline organizations. A distributor who has not purchased $50 or more of
our products during the preceding month is not qualified to receive bonuses.
Each distributor in our network marketing organization has a
director, a silver director, a gold director and a platinum director. Each
director has a silver director, a gold director and a platinum director. Each
silver director has a gold director and a platinum director. Each gold
director has a platinum director. As of June 30, 1999, we had 151 silver
directors, 137 gold directors and 22 platinum directors.
Under our regional success center program, we designate distributors
to serve as regional success center directors and provide them special
training and support. Each regional success center director functions as our
product distribution center. As of June 30, 1999, we had 51 regional success
center directors.
We maintain a computerized system for processing distributor orders
and calculating bonus payments which enable us to remit such payments
promptly to distributors. We believe that prompt and accurate remittance of
bonuses is vital to recruiting and maintaining distributors, as well as
increasing their motivation and loyalty to us. We make weekly bonus payments
based upon the previous week's product purchases, while most network
marketing companies only make monthly bonus payments. During the six months
ended June 30, 1999 and the years ended December 31, 1998 and 1997, we paid
bonuses to 4,600, 5,400 and 4,600 distributors, respectively, in the
aggregate amounts of $4,183,698, $5,487,418 and $4,557,355, respectively.
We are committed to providing the best possible support to our
distributors. Distributors in our network marketing organization are provided
training guides and are given the opportunity to participate in our training
programs. We sponsor regularly scheduled conference calls for our
distributors which include testimonials from successful distributors and
satisfied customers as well as current product and promotional information.
We produce a monthly newsletter which provides information on us, our
products and network marketing system. The newsletter is designed to help
recruit new distributors by answering commonly asked questions and includes
product information and business building information. The newsletter also
provides a forum for us to give additional recognition to our distributors
for outstanding performance. In addition, we regularly sponsor training
sessions for our distributors across the United States. At these training
sessions distributors are provided the opportunity to learn more about our
product line and selling techniques so that they can build their businesses
more rapidly. We produce comprehensive and attractive four color catalogues
and brochures that display and describe our product line.
Furthermore, in order to facilitate our continued growth and support
distributor activities, we continually upgrade our management information and
telecommunications systems. These systems are designed to provide, among
other things, financial and operating data for management, timely and
accurate product ordering, bonus payment processing, inventory management and
detailed distributor records. Since 1994, we have invested more than $700,000
to enhance our computer and telecommunications systems.
REGULATION
In the United States (as well as in any foreign markets in which we
may sell our products), we are subject to laws, regulations, administrative
determinations, court decisions and similar constraints (as applicable, at
the federal, state and local levels) (hereinafter "regulations"). These
regulations include and pertain to, among others,
- - the formulation, manufacture, packaging, labeling, distribution,
importation, sale and storage of our products,
- - our product claims and advertising (including direct claims and
advertising as well as claims and advertising by distributors, for
which we may be held responsible), and
- - our network marketing organization.
PRODUCTS. The formulation, manufacture, packaging, storing,
labeling, advertising, distribution and sale of our products are subject to
regulation by federal agencies, including the Food and Drug Administration,
the Federal Trade Commission, the Consumer Product Safety Commission, the
United States Department of Agriculture, the Environmental Protection Agency,
and the United States Postal Service. Our activities are also regulated by
various agencies of the states, localities and foreign countries
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in which our products are or may be manufactured, distributed and sold. The
Food and Drug Administration, in particular, regulates the formulation,
manufacture and labeling of weight management products, dietary supplements,
cosmetics and skin care products, including some of our products. Food and
Drug Administration regulations require us and our suppliers to meet relevant
regulatory good manufacturing practices for the preparation, packaging and
storage of these products. Good manufacturing practices for dietary
supplements have yet to be promulgated but are expected to be proposed. The
Dietary Supplement Health and Education Act of 1994 revised the provisions of
the Federal Food, Drug and Cosmetic Act concerning the composition and
labeling of dietary supplements, which we believe is generally favorable to
the dietary supplement industry. The Dietary Supplement Health and Education
Act created a new statutory class of "dietary supplements." This new class
includes vitamins, minerals, herbs, amino acids and other dietary substances
for human use to supplement the diet. However, the Dietary Supplement Health
and Education Act grand fathered, with certain limitations, dietary
ingredients that were on the market before October 15, 1994. A dietary
supplement containing a new dietary ingredient and placed on the market on or
after October 15, 1994 must have a history of use or other evidence
establishing a basis for expected safety. Manufacturers of dietary
supplements having a "structure-function" statement, must have substantiation
that the statement is truthful and not misleading.
The majority of our sales come from products that are classified as
dietary supplements under the Federal Food, Drug and Cosmetic Act. The
labeling requirements for dietary supplements have been set forth in a final
regulations with respect to labels affixed to containers beginning after
March 23, 1999. These regulations include how to declare nutrient content
information, and the proper detail and format required for the "supplemental
facts" box. We revised our product labels in compliance with these
regulations. The costs of product relabling were immaterial. Many states have
also recently become active in the regulation of dietary supplement products.
These states may require modification of labeling or formulation of certain
of our products sold in these states.
In addition, on April 29, 1998 the Food and Drug Administration
published a proposed regulation offering guidance and providing limitations
on permissible structure/function statements to be placed on labels and in
brochures. Structure/function statements are claims of the benefit or effect
of a product or an ingredient on the body's structure or function. The
proposed regulation has not been finalized. We anticipate that some of the
regulation as proposed will become final, but this new regulation will not
significantly change the way that the Food and Drug Administration currently
interprets structure/function statements. Thus, we do not expect to make any
substantial label revisions based on this proposed regulation regarding any
of our structure/function product statements.
As a marketer of products that are ingested by consumers, we are
subject to the risk that one or more of the ingredients in our products may
become the subject of adverse regulatory action. For example, one of the
ingredients in our AM-300 product is ephedra, an herb which contains
naturally-occurring ephedrine. Our manufacturer uses a powdered extract of
that herb when manufacturing AM-300. The extract is an 8% extract which means
that every 100 milligrams of the powdered extract contains approximately
eight milligrams of naturally occurring ephedrine alkaloids. Ephedrine
containing products have been the subject of adverse publicity in the United
States and other countries relating to alleged harmful effects, including the
deaths of several individuals.
Many companies distribute products containing various amounts of
ephedrine. The Food and Drug Administration has received approximately 900
reports of adverse reactions to these products. On April 10, 1996, the Food
and Drug Administration issued a statement warning consumers not to purchase
or ingest dietary supplements containing ephedrine that are claimed to
produce certain effects. These effects include euphoria, heightened
awareness, increased sexual sensations or increased energy. The Food and Drug
Administration cautions that these products pose significant adverse health
risks, including dizziness, headache, gastrointestinal distress, irregular
heartbeat, heart palpitations, heart attack, strokes, seizures, psychosis and
death. We market AM-300 principally as an aid in weight management.
On June 4, 1997, the Food and Drug Administration proposed regulations
that will, if
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adopted as proposed, significantly limit our ability to sell dietary
supplements that contain ephedrine, including our AM-300 product. For the six
months ended June 30, 1999 and the year ended December 31, 1998, sales of
AM-300 represented 67.5% and 49.7% of our net sales, respectively. The
proposed regulations were subject to comment until December 2, 1997. The
proposed regulations will become effective 180 days following their issuance
as final regulations. Several trade organizations in the dietary supplement
industry have commented on the proposed regulations, requesting substantial
modifications. It is probable that the Food and Drug Administration will make
material changes to the proposed regulations prior to adoption. Relatedly,
the United States General Accounting Office recently issued a report dated
July 2, 1999 to a committee of the U.S. House of Representatives that casts
substantial doubt on certain provisions of the Food and Drug Administration's
proposed regulations on dietary supplements which contain ephedrine
alkaloids. We do not know the effect such report will have on the proposed
regulations.
We are a member of a non-profit corporation, The Ephedra Research
Foundation (the "Foundation"), which has contracted with a consulting firm to
conduct a clinical study concerning the safety of ephedrine when ingested in
combination with caffeine as a dietary supplement. This study is currently
being conducted at two sites, Beth Israel-Deaconess Medical Center in Boston,
affiliated with Harvard Medical School, and St. Luke's-Roosevelt Hospital in
New York City, affiliated with Columbia University. We have been informed
that the final results of this study will be published in the fourth quarter
of this year.
In addition, several states either regulate or are considering
regulating ephedrine-containing products as controlled substances or are
prohibiting the sale of such products by persons other than licensed
pharmacists. There is a risk that our AM-300 product may become subject to
further federal, state, local or foreign laws or regulations. These
regulations could require us to
- - withdraw or reformulate our AM-300 product with reduced ephedrine
levels or with a substitute for ephedra or ephedrine,
- - relabel our product with different warnings or revised directions for
use, or
- - not make certain statements, possibly including weight loss claims,
with respect to any product containing ephedra or ephedrine.
Even in the absence of further laws or regulation, we may elect to
reformulate or relabel our AM-300 product containing ephedra or ephedrine.
While we believe that our AM-300 product could be reformulated and relabeled,
there is no assurance that such reformulation and relabeling will not
adversely affect our sales.
The Texas Board of Health recently issued new regulations, which
become effective November 1, 1999. These regulations significantly restrict
the promotion and distribution of dietary supplements in the state of Texas
which contain ephedra or ephedrine alkaloids. These regulations do not limit
the quantity of ephedrine alkaloids on a per-capsule, per-tablet, or
per-daily basis, but do mandate several warnings to consumers on the labels
of such products. Additionally, these regulations require us to incorporate
five specific provisions in the contracts with our distributors. Also, we are
required to submit all labels, advertising and promotional materials to the
Texas Department of Health. We are taking the necessary steps to comply with
these regulations and believe we will be compliant prior to the November 1,
1999 effective date. Sales of our AM-300 product in Texas represented
approximately 6.0% of our net sales during the six months ended June 30, 1999
and approximately 5.0% of our net sales during 1998.
In foreign markets, prior to commencing operations and prior to
making or permitting sales of our products, we may be required to obtain an
approval, license or certification from the country's ministry of health or
comparable agency. Prior to entering a new market in which a formal approval,
license or certificate is required, we will be required to work extensively
with local authorities to obtain the requisite approvals. The approval
process generally will require us to present each product and product
ingredient to appropriate regulators and, in some instances, arrange for
testing of products by local technicians for ingredient analysis. Such
approvals may be conditioned on reformulation of our products or may be
unavailable with respect to certain products or ingredients.
PRODUCT CLAIMS AND ADVERTISING. The Federal Trade Commission and
certain states regulate advertising, product claims, and other consumer
matters, including advertising of our products. All advertising, promotional
and solicitation materials
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used by distributors require our approval prior to use. The Federal Trade
Commission has in the past several years instituted enforcement actions
against several dietary supplement companies for false and misleading
advertising of certain products. In addition, the Federal Trade Commission
has increased its scrutiny of the use of testimonials, including those used
by us and our distributors. We we have not been the target of Federal Trade
Commission enforcement action.
There is no assurance that
- - the Federal Trade Commission will not question our advertising or
other operations in the future,
- - a state will not interpret product claims presumptively valid under
federal law as illegal under that state's regulations, or
- - future Federal Trade Commission regulations or decisions will not
restrict the permissible scope of such claims.
We are also subject to the risk of claims by distributors and their
customers who may file actions on their own behalf, as a class or otherwise,
and may file complaints with the Federal Trade Commission or state or local
consumer affairs offices. These agencies may take action on their own
initiative against us for alleged advertising or product claim violations or
on a referral from distributors, consumers or others. Remedies sought in such
actions may include consent decrees and the refund of amounts paid by the
complaining distributor or consumer, refunds to an entire class of
distributors or customers, or other damages, as well as changes in our method
of doing business. A complaint based on the practice of one distributor,
whether or not we authorized the practice, could result in an order affecting
some or all distributors in a particular state. Also, an order in one state
could influence courts or government agencies in other states considering
similar matters. Proceedings resulting from these complaints may result in
significant defense costs, settlement payments or judgements and could have a
material adverse effect on us.
COMPLIANCE EFFORTS. We attempt to remain in full compliance with all
applicable laws and regulations governing the manufacture, labeling, sale,
distribution, and advertising of our dietary supplements. We retain special
legal counsel for advice on both Food and Drug Administration and Federal Trade
Commission legal issues. In particular, we work closely with special legal
counsel who specializes in Dietary Supplement Health and Education Act
regulations for label revisions, content of structure/function statements,
advertising copy, and also the position of the Food and Drug Administration on
ephedra-containing products.
NETWORK MARKETING SYSTEM. Our network marketing system is subject to
a number of federal and state regulations administered by the Federal Trade
Commission and various state agencies. These regulations are generally
directed at ensuring that product sales are ultimately made to consumers (as
opposed to other distributors) and that advancement within such organization
be based on sales of the organization's products, rather than investment in
the organization or other non-retail sales related criteria. For instance, in
certain markets there are limits on the extent to which distributors may earn
royalties on sales generated by distributors that were not directly sponsored
by the distributor.
Our network marketing organization and activities are subject to
scrutiny by various state and federal governmental regulatory agencies to
ensure compliance with various types of laws and regulations. These laws and
regulations include securities, franchise investment, business opportunity
and criminal laws prohibiting the use of "pyramid" or "endless chain" types
of selling organizations. The compensation structure of such selling
organizations is very complex, and compliance with all of the applicable laws
is uncertain in light of evolving interpretation of existing laws and the
enactment of new laws and regulations pertaining to this type of product
distribution. We have an ongoing compliance program with assistance from
legal counsel experienced in the laws and regulations pertaining to network
sales organizations. We are not aware of any legal actions pending or
threatened by any governmental authority against us regarding the legality of
our network marketing operations.
We currently have independent distributors in all 50 states and the
District of Columbia. We review the requirements of various states as well as
seek legal advice regarding the structure and operation of our selling
organization to ensure that it complies with all of the applicable laws and
regulations pertaining to network sales organizations. On the basis of these
efforts and the experience of our management, we believe that we are in
compliance with all applicable federal and state regulatory requirements. We
have
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not obtained any no-action letters or advance rulings from any federal or
state security regulator or other governmental agency concerning the legality
of our operations, nor are we relying on a formal opinion of counsel to such
effect. We accordingly are subject to the risk that, in one or more of our
markets, our marketing system could be found to not comply with applicable
laws and regulations. Our failure to comply with these regulations could have
a material adverse effect on us in a particular market or in general.
We are subject to the risk of challenges to the legality of our
network marketing organization, including claims by our distributors, both
individually and as a class. Most likely these claims would be based on our
network marketing program allegedly being operated as an illegal "pyramid
scheme" in violation of federal securities laws, state unfair practice and
fraud laws and the Racketeer Influenced and Corrupt Organizations Act.
Two important Federal Trade Commission cases have established legal
precedent for determining whether a network marketing program constitutes an
illegal pyramid scheme. The first, IN RE KOSCOT INTERPLANETARY, INC., 86
F.T.C. 1106 (1975), set forth a standard for determining whether a marketing
system constituted a pyramid scheme. Under the KOSCOT standard, a pyramid
scheme is characterized by the participants' payment of money to a company in
return for
- - the right to sell a product and
- - the right to receive, in return for recruiting other participants into
the program, rewards that are unrelated to sales of the product to
ultimate users.
Applying the KOSCOT standard in IN RE AMWAY CORP., 93 F.T.C. 618 (1979), the
Federal Trade Commission determined that a company will not be classified as
operating a pyramid scheme if the company adopts and enforces policies that
in fact encourage retail sales to consumers and prevent "inventory loading."
Inventory loading occurs when distributors' purchase large quantities of
non-returnable inventory to obtain the full amount of compensation available
under the system. In AMWAY, the Federal Trade Commission found that the
marketing system of Amway Corporation did not constitute a pyramid scheme,
noting the following Amway policies:
- - participants were required to buy back, from any person they
recruited, any saleable, unsold inventory upon the recruit's leaving
Amway;
- - every participant was required to sell at wholesale or retail at
least 70% of the products bought in a given month in order to receive
a bonus for that month; and
- - in order to receive a bonus in a month, each participant was required
to submit proof of retail sales made to 10 different consumers.
We believe that our network marketing system is not classified as a
pyramid scheme under the standards set forth in KOSCOT, AMWAY, and other
applicable law. In particular, in most jurisdictions, we maintain an
inventory buy-back program to address the problem of "inventory loading."
Pursuant to this program, we repurchase products sold to a distributor
(subject to a 10% restocking charge) provided that
- - the distributor resigns as a distributor and
- - returns the product in marketable condition within 12 months of
original purchase, or longer where required by applicable state law or
regulations.
Our literature provided to distributors describes our buy-back program. In
addition, pursuant to agreements with our distributors, each distributor
represents that at least 70% of the products he or she buys will be sold to
non-distributors. However, as is the case with other network marketing
companies, the bonuses paid by us to our distributors are based on product
purchases including purchases of products that are personally consumed by the
downline distributors. Basing bonuses on sales of personally consumed
products may be considered an inventory loading purchase. Furthermore,
distributors' bonuses are based on the wholesale prices received by us on
product purchases or, in some cases based upon the particular product
purchased, on prices less than the wholesale prices.
In the event of challenges to the legality of our network marketing
organization by distributors, we would be required to
- - demonstrate that our network marketing policies are enforced, and
- - that the network marketing program and distributors' compensation
thereunder serve as safeguards to deter inventory loading and
encourage retail sales to the ultimate
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consumers.
In WEBSTER V. OMNITRITION INTERNATIONAL, INC., 79 F.3d 776 (9th Cir.
1996), the United States Court of Appeals held that a class action brought
against Omnitrition International, Inc. , a multilevel marketing seller of
nutritional supplements and skin care products, should be allowed to proceed to
trial. The plaintiffs, former distributors of Omnitrition's products, alleged
that Omnitrition's selling program was an illegal pyramid scheme and claimed
violations of Racketeer Influenced and Corrupt Organizations Act and several
federal and state fraud and securities laws. Despite evidence that Omnitrition
complied with the AMWAY standards, the court ruled that a jury would have to
decide whether Omnitrition's policies, many of which apparently were similar to
compliance policies adopted by us, were adequate to ensure that Omnitrition's
marketing efforts resulted in a legitimate product marketing and distribution
structure and not an illegal pyramid scheme. We believe that our marketing and
sales programs differ in significant respects from those of Omnitrition, and
that our marketing program complies with applicable law. The two most
significant differences are
- - the Omnitrition marketing plan required distributors to purchase
$2,000 in merchandise in order to qualify for bonuses as compared to
$50 under our marketing program and
- - the Omnitrition inventory repurchase policy was limited to products
that were less than three months old as compared to one year under our
inventory repurchase policy.
A lesson from the OMNITRITION case is that
- - a selling program which operates to only generate the minimum
purchases necessary to qualify for bonuses is suspect and
- - a selling program must operate to generate purchases independently of
the payment of bonuses in order to have a legitimate product marketing
and distribution structure.
We believe that our selling program operates to generate significant
purchases "for intrinsic value" as demonstrated by our sales figures. During
the month of June 1999, 22,953 of our distributors placed a total of 28,822
orders averaging $70 in size while only a single $50 order per month is
necessary to qualify for bonuses. In view of the holding of the court of
appeals in the OMNITRITION case, however, there is no assurance that, if
challenged, we would prevail against private plaintiffs alleging violations
of anti-pyramid and securities laws. A final ruling against us in such a suit
could result in the imposition of a material liability against us. Moreover,
even if we were successful in defending against such suit, the costs of such
defense, both in dollars spent and in management time, could be material and
adversely affect our operating results. In addition, the negative publicity
of such a suit could adversely affect our sales and ability to attract and
retain distributors.
Nutrition for Life International, Inc., one of our competitors and a
multi-level seller of personal care and nutritional supplements, recently
announced that it had settled class action litigation brought by distributors
alleging fraud in connection with the operation of a pyramid scheme.
Nutrition for Life agreed to pay in excess of $3 million to settle claims
brought on behalf of its distributors, and related securities fraud claims
brought on behalf of certain purchasers of its stock. We believe that our
marketing program is significantly different from the program allegedly
promoted by Nutrition for Life and that our marketing program is not in
violation of anti-pyramid laws or regulations. Two issues in the Nutrition
for Life matter were a $1,000 buy-in urged on new recruits, and the paying of
commissions on product vouchers prior to the actual delivery of product. By
design, our marketing program offers no incentive to anyone to make a large
personal purchase nor do we use product vouchers. Actual average order size
in June 1999 was $70. However, there is no assurance that claims similar to
the claims brought against Nutrition for Life and other multi-level marketing
organizations will not be brought against us, or that we will prevail in the
event any such claims were made. Furthermore, even if we were successful in
defending against any such claims, the costs of conducting such a defense,
both in dollars spent and in management time, could be material and adversely
affect our operating results and financial condition. In addition, the
negative publicity of such a suit could adversely affect our sales and
ability to attract and retain distributors.
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INTELLECTUAL PROPERTY
We use several trademarks and trade names in connection with our
products and operations. As of June 30, 1999, we had seven federal trademark
registrations with the United States Patent and Trademark Office. We rely on
common law trademark rights to protect our unregistered trademarks. Common
law trademark rights do not provide with the same level of protection as
afforded by a United States federal registration of a trademark. Also, common
law trademark rights are limited to the geographic area in which the
trademark is actually used. In addition, our product formulations are not
protected by patents and are not patentable. Therefore, there can be no
assurance that another company will not replicate one or more of our products.
COMPETITION
We are subject to significant competition in recruiting distributors
from other network marketing organizations, including those that market
products in the weight management, dietary supplement and personal care
categories, as well as other types of products. There are over 300 companies
worldwide that utilize network marketing techniques, many of which are
substantially larger, offer a greater variety of products, and have available
considerably greater financial resources than us. Our ability to remain
competitive depends, in significant part, on our success in recruiting and
retaining distributors through an attractive bonus plan and other incentives.
We believe that our bonus plan and incentive programs provide our
distributors with significant income potential. However, there can be no
assurance that our programs for recruitment and retention of distributors
will continue to be successful.
In addition, the business of marketing products in the weight
management, dietary supplement and personal care categories is highly
competitive. This market segment includes numerous manufacturers, other
network marketing companies, catalog companies, distributors, marketers,
retailers and physicians that actively compete in the sale of such products.
We also compete with other providers of such products, especially retail
outlets, based upon convenience of purchase and immediate availability of the
purchased product. The market is highly sensitive to the introduction of new
products or weight management plans (including various prescription drugs)
that may rapidly capture a significant share of the market. As a result, our
ability to remain competitive depends in part upon the successful
introduction and addition of new products to our line.
Our network marketing competitors include small, privately held
companies, as well as larger, publicly held companies with greater financial
resources and greater product and market diversification and distribution.
Our competitors include Shaklee Corporation, The A.L. Williams Corporation,
Mary Kay Cosmetics, Inc., Amway Corporation, Nutrition for Life
International, Inc., and Herbalife International, Inc.
EMPLOYEES
As of June 30, 1999, we had 52 full-time employees, consisting of
two executive officers, 21 involved in administrative activities, 10 involved
in marketing activities, 13 involved in customer service activities, and
eight involved in shipping activities. Our employees are not represented by a
labor organization. We consider our employee relations to be good.
PROPERTIES
We maintain our executive office in 7,667 square feet at 2601
Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293 and our
warehouse and distribution center in 10,340 square feet at 4000 North
Lindsay, Oklahoma City, Oklahoma. These premises are occupied pursuant to
long-term leases which expire on May 31, 2003, and which require monthly
rental payments of $6,709 and $5,170, respectively. We believe that these
leased premises will be adequate for our needs during the next 12 months.
LITIGATION
We are not a party to any pending litigation. In September 1995, the
Oklahoma Department of Securities commenced an investigation of us and the
AMS Distributor Stock Pool related to the availability of exemptions under
the Oklahoma Business Opportunity Act with respect to our network marketing
activities and programs, the offer and sale of unregistered securities by us
and the sale thereof by our officers, directors and employees without
registration as broker-dealers, the purchase and resale of our common stock
by our officers and directors in the public market. As the investigation
progressed, it narrowed to focus on the activities associated and related to
the pool. The pool, under which our independent distributors were permitted
to participant
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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 our 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 our offices. The pool only
purchased shares of our common stock and did not sell shares on behalf of the
participants. As of December 31, 1997, the pool held approximately 245,000
shares of common stock for and on behalf of the participants. Each
participant has sole voting rights with respect to those shares of common
stock held for such participant's benefit. In the event a participant desires
to sell the common stock held for the participant's 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, we ceased
accepting additional contributions to the pool and effecting purchase
transactions in our common stock. On November 4, 1997, we and our then
executive officers and directors, John W. Hail, Curtis H. Wilson, Sr. and
Roger P. Baresel, entered into an agreement with the Administrator of the
Oklahoma Department of Securities in settlement of the investigation. The
Oklahoma Department of Securities settled without taking any action against
us and our executive officers and directors. Pursuant to such agreement, John
W. Hail reimbursed the Department its costs of the investigation without
entitlement to reimbursement by us or any of our other officers and
directors. Under the terms of such agreement, we and Messrs. Hail, Wilson and
Baresel agreed to notify the Department of any proposed offer or sale of
additional securities by us or each of Messrs. Hail, Wilson and Baresel
pursuant to any registration exemption under the Oklahoma Securities Act, for
the three-year period ending on November 6, 2000.
COMPANY HISTORY
EXCHANGE. Pursuant to an Agreement and Plan of Reorganization, dated
May 1, 1989, our shareholders exchanged their common stock for 800,807 shares
of the common stock of Pacific Coast International, Inc., a Delaware
corporation. Prior to this exchange, the trade or business activities of
Pacific Coast International had been limited to those activities associated
with a public offering of our securities and investigation of corporate
acquisition alternatives as a "blank check" company. Upon consummation of the
exchange,
- - our officers and directors assumed management of Pacific Coast
International,
- - we became a wholly owned subsidiary of Pacific Coast International,
Inc.,
- - we changed our name from AMS, Inc. to Advantage Marketing Systems,
Inc., (an Oklahoma Corporation) and
- - Pacific Coast International changed its name to Advantage Marketing
Systems, Inc.
Prior to this exchange, Pacific Coast International and certain individuals
sold, in a public offering, 225,860 shares of our common stock and 525,860
class A common stock purchase warrants and class B common stock purchase
warrants. These warrants were redeemed on March 17, 1997.
REINCORPORATION MERGER. Effective December 11, 1995, our former
parent corporation (then also named Advantage Marketing Systems, Inc. and
before that named Pacific Coast International, Inc.), merged with us. As a
result of the merger,
- - we were the surviving corporation,
- - our former parent corporation ceased to exist and
- - we succeeded to all of our assets and liabilities of our former
parent.
Prior to this merger, our parent corporation did not conduct any business,
all of its operations were conducted by us.
MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
Pursuant to the terms of our bylaws, our directors are divided into
three classes. Class I directors hold office initially for a term expiring at
the annual meeting of shareholders to be held in 2002.
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Class II directors hold office initially for a term expiring at the annual
meeting of shareholders to be held in 2000. Class III directors hold office
initially for a term expiring at the annual meeting of shareholders to be
held in 2001. Each director will hold office for the term to which he is
elected and until his successor is duly elected and qualified. At each annual
shareholders meeting, the successor to a member of the class of directors
whose term expires at such meeting will be elected to hold office for a term
expiring at the annual meeting of shareholders held in the third year
following the year of his election. Executive officers are elected by our
board of directors and serve at our discretion. The following table sets
forth certain information with respect to our executive officers and
directors.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH US
---- --- ----------------
<S> <C> <C>
John W. Hail(1)(2) 69 Chairman of the Board, Chief Executive Officer and Director
Roger P. Baresel(1)(2) 44 President, Chief Financial Officer, Secretary and Director
R. Terren Dunlap(3) 54 Director and Member of Audit Committee
Harland C. Stonecipher(4) 60 Director and Member of Audit Committee
</TABLE>
- ------------------------
(1) Member of the Stock Option Committee.
(2) Term as a Director expires in 2001.
(3) Term as a Director expires in 2000.
(4) Term as a Director expires in 2002.
JOHN W. HAIL is our founder and has served as our Chief Executive
Officer and Chairman of the Board of Directors since our inception in June
1988. During 1987 and through May 1988, Mr. Hail served as Executive Vice
President, Director and Agency Director of Pre-Paid Legal Services, Inc., a
public company engaged in the sale of legal services contracts, and also
served as Chairman of the Board of Directors of TVC Marketing, Inc., the
exclusive marketing agent of Pre-Paid Legal Services, Inc. Since 1998, Mr.
Hail has served as a Director of Pre-Paid Legal Services, Inc. In March 1999,
Mr. Hail became a Director of DuraSwitch Industries, Inc., a company that
develops and distributes electronic switches.
ROGER P. BARESEL has served as our Vice President, Chief Financial
Officer, Secretary and a Director since June 1995. In July 1995, he became
our President. Mr. Baresel is a Certified Public Accountant and holds a
Master of Business Administration degree. From 1988 until joining us
full-time in 1995, he maintained an accounting practice, specializing in
providing consulting services to small and growing businesses and provided
consulting services to us.
R. TERREN DUNLAP has served as one of our directors since June 1995.
He is Chief Executive Officer of DuraSwitch Industries, Inc., a company
formed in 1997 that developed and distributes electronic switches. He served
as our Vice President-International Development from June 1995 through March
1996. Mr. Dunlap is a Director and the co-founder, and from 1984 and until
March 1994 served as Chief Executive Officer and Chairman of the Board, of
Go-Video, Inc., a developer and distributor of consumer electronics products.
HARLAND C. STONECIPHER has served as one of our directors since
August 1995. Mr. Stonecipher has been Chairman of the Board and Chief
Executive Officer of Pre-Paid Legal Services, Inc. since its inception in
1972.
COMPENSATION OF EXECUTIVE OFFICERS
The following Summary Compensation Table sets forth certain
information relating to compensation for services rendered during the years
ended December 31, 1998, 1997 and 1996, paid to or accrued for John W. Hail,
our Chief Executive Officer. None of our executive officers received total
annual salary and bonus pursuant to a recurring arrangement in excess of
$100,000 during 1998, 1997 or 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
-----------------------
SECURITIES EXERCISE
ANNUAL COMPENSATION UNDERLYING OR BASE
----------------------------------------
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NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS OTHER(2) OPTIONS PRICE
- --------------------------- ---- --------- ----- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
John W. Hail............................. 1998 $60,000 $16,565 $ -- 100,000(3) $1.75
Chief Executive Officer 1997 $56,539 $ -- $ -- 100,000(3) $6.00
1996 $ -- $ -- $ 22,000 100,000(3) $2.70
</TABLE>
- ------------------------
(1) Dollar value of base salary earned during the year.
(2) We provide use of an automobile to Mr. Hail, the value of which is not
greater than $5,000 annually. During 1996, we made non-interest
bearing advances to the John Hail Agency, Inc., an affiliate of Mr.
Hail, of $22,000.
(3) During 1997, we granted 100,000 stock options to Mr. Hail pursuant to
our stock option plan, each exercisable for the purchase of one share
of common stock at an exercise price of $6.00 per share (the market
value of the common stock on the date of grant). These options were
surrendered by Mr. Hail during 1997 in exchange for 100,000 stock
options having the same terms other than an exercise price of $2.70
per share of common stock (which was equal to the fair value of the
common stock on the date of exchange). These options were surrendered
by Mr. Hail on October 8, 1998 in exchange for 100,000 stock options
having the same terms other than an exercise price of $1.75 per share
of common stock (which was equal to the fair value of the common stock
on the date of exchange).
AGGREGATE OPTION GRANTS AND EXERCISES IN 1998 AND YEAR-END OPTION VALUES
STOCK OPTIONS AND OPTION VALUES. During 1997 we granted 100,000
stock options to Mr. Hail pursuant to our stock option plan, each exercisable
for the purchase of one share of our common stock at an exercise price of
$6.00 per share. These options were surrendered by Mr. Hail in exchange for
100,000 stock options having the same terms other than an exercise price of
$2.70 per share of common stock. These options were surrendered by Mr. Hail
on October 8, 1998 in exchange for 100,000 stock options having the same
terms other than an exercise price of $1.75 per share of common stock. The
following Option Grants and Year-End Value Table sets forth information
related to options granted to the named executive officer during 1998.
OPTION GRANTS TABLE
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------
PERCENT OF
TOTAL OPTIONS
NUMBER GRANTED TO EXERCISE
OF OPTIONS EMPLOYEES PRICE PER EXPIRATION
GRANTED IN 1998 SHARE DATE
---------- ------------- --------- ----------
<S> <C> <C> <C> <C>
John W. Hail, Chief Executive Officer............. 100,000(1) 13.1% $1.75 5/20/07
</TABLE>
- ------------------------
(1) Only includes those stock options that were granted and not
surrendered during 1998.
AGGREGATE STOCK OPTION EXERCISE AND YEAR-END AND OPTION VALUES. The
following table sets forth information related to the number and value of
options held by the named executive officer at December 31, 1998. During 1998,
no options to purchase our common stock were exercised by the named executive
officer.
YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AS OF OPTIONS AS OF
DECEMBER 31, 1998 DECEMBER 31, 1998(1)
----------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John W. Hail, Chief Executive Officer.......... 150,000 100,000 $ -0- $25,000
</TABLE>
- ------------------------
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(1) The closing sale price of our common stock as reported on the Nasdaq
SmallCap Market on December 31, 1998 was $2.00. The per-share value is
calculated based on the applicable closing highest bid price per share,
minus the exercise price, multiplied by the number of shares of our
common stock underlying the options.
COMPENSATION OF DIRECTORS
Directors who are not our employees receive $250 for each board meeting
attended. Directors who are also our employees receive no additional
compensation for serving as directors. We reimburse our directors for travel and
out-of-pocket expenses in connection with their attendance at meetings of our
board of directors. Our Bylaws provide for mandatory indemnification of
directors and officers to the fullest extent permitted by Oklahoma law.
STOCK OPTION PLAN
We established the Advantage Marketing Systems, Inc. 1995 Stock Option
Plan in June 1995. This plan provides for the issuance of incentive stock
options with or without stock appreciation rights and nonincentive stock options
with or without stock appreciation rights to our employees and consultants,
including employees who also serve as a director. The total number of shares of
our common stock authorized for issuance under this stock option plan is
1,125,000. As of June 30, 1999, options to purchase a total of 900,380 shares of
our common stock have been granted under the plan of which 506,300 were
outstanding. These options are exercisable for $1.75 to $2.70 per share and
expire March 2002 through May 2007. Also, at June 30, 1999, there were
outstanding stock options and warrants exercisable for the purchase of 1,201,733
shares of our common stock granted outside of the plan.
The stock option committee, which is currently comprised of Messrs.
Hail and Baresel, administers and interprets the stock option plan and has
authority to grant options to all eligible employees and determine the types of
options granted and the terms, restrictions and conditions of the options at the
time of grant.
The option price of our common stock is determined by the stock option
committee, provided such price may not be less than 85% of the fair market value
of the shares on the date of grant of the option. The fair market value of a
share of our common stock is determined by the last report sale price on the
date of grant of the option. Upon the exercise of an option, the option price
must be paid in full, in cash or with a stock appreciation right. Subject to the
stock option committee's approval, upon exercise of an option with a stock
appreciation right attached, a participant may receive cash, shares of our
common stock or a combination of both, in an amount or having a fair market
value equal to the excess of the fair market value, on the date of exercise, of
the shares for which the option and stock appreciation right are exercised, over
the option exercise price.
Options granted under the stock option plan may not be exercised
until six months after the date of the grant, except in the event of death or
disability of the participant. Incentive stock options and any stock
appreciation rights are exercisable only by participants while actively
employed as our employee or a consultant, except in the case of death,
retirement or disability. Options may be exercised at any time within three
months after the participant's retirement or within one year after the
participant's disability or death, but not beyond the expiration date of the
option. No option may be granted after April 30, 2005. Options are not
transferable except by will or by the laws of descent and distribution.
OFFICER AND DIRECTOR LIABILITY
As permitted by the provisions of the Oklahoma General Corporation Act,
our Certificate of Incorporation eliminates in certain circumstances the
monetary liability of our directors for a breach of their fiduciary duty as
directors. These provisions and applicable laws do not eliminate the liability
of one of our directors for
- - a breach of the director's duty of loyalty to us or our shareholders,
- - acts or omissions by a director not in good faith or which involve
intentional misconduct or a knowing violation of law,
- - liability arising under the Oklahoma General Corporation Act relating
to the declaration of dividends and purchase or redemption of shares of
our common stock in violation of the Oklahoma General Corporation Act,
- - any transaction from which the director derived an improper personal
benefit,
- - violations of federal securities laws, or
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- - limit our rights or those of our shareholders, in appropriate
circumstances, to seek equitable remedies such as injunctive or other
forms of non-monetary relief; however, such remedies may not be
effective in all cases.
Our Certificate of Incorporation and bylaws provide that we will
indemnify our directors and officers to the fullest extent permitted by the
Oklahoma General Corporation Act. Under such provisions, any director or
officer, who in his capacity as such, is made or threatened to be made, a party
to any suit or proceeding, may be indemnified if our board of directors
determines such director or officer acted in good faith and in a manner he
reasonably believed to be in or not opposed to our best interests.
Our Certificate of Incorporation and bylaws and the Oklahoma General
Corporation Act further provide that such indemnification is not exclusive of
any other rights to which such individuals may be entitled under our
Certificate, our bylaws, an agreement, vote of shareholders or disinterested
directors or otherwise. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to our directors and officers
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy and is, therefore, unenforceable.
We maintain insurance to protect our directors and officers against
liability asserted against them in their official capacities. Such insurance
protection covers claims and any related defense costs of up to $3 million based
on alleged or actual securities law violations, other than intentional dishonest
or fraudulent acts or omissions, or any willful violation of any statute, rule
or law, or claims arising out of any improper profit, remuneration or advantage
derived by an insured director or officer.
CERTAIN TRANSACTIONS
Set forth below is a description of transactions entered into between
us and certain of our officers, directors and shareholders during the last two
years. Certain of these transactions may result in conflicts of interest between
us and such individuals. Although these persons have fiduciary duties to us and
our shareholders, there can be no assurance that conflicts of interest will
always be resolved in our favor or in favor of our shareholders.
John W. Hail, our Chief Executive Officer and Chairman of the Board of
Directors, is the sole director and shareholder of the John Hail Agency, Inc.
Pursuant to an unwritten agreement, we provided office space, utilities and
supplies, as well as an occasional part-time administrative staff person,
through June 30, 1996, to the John Hail Agency for a monthly payment of $1,000
as reimbursement of our costs. In addition, we made non-interest bearing
advances to the John Hail Agency of $22,000 and $87,684 during the years ended
December 31, 1996 and 1995, respectively. Effective June 30, 1996, we adopted a
policy to not make any further advances to the John Hail Agency. Also, the
John Hail Agency executed a promissory note payable to us in the principal
amount of $73,964 bearing interest at 8% per annum and payable in 60
installments of $1,499 per month. As of December 31, 1998, the note was paid
in full.
During 1995, John W. Hail individually entered into lease agreements
covering telephone equipment and related software and requiring monthly rental
payments. Such equipment and software are utilized exclusively by us. During the
years ended December 31, 1998 and 1997, we made aggregate payments pursuant to
such lease agreements of $17,939 and $19,427, respectively. As of December 31,
1998 these leases had terminated.
During the six months ended June 30, 1999, and the years of 1998 and
1997, we paid Curtis H. Wilson, Sr., a past director, sales commissions of
$49,308, $61,527 and $32,886, respectively. These commissions were based upon
purchases by Mr. Wilson and his downline distributors in accordance with our
network marketing program in effect at the time of the sales.
During the first quarter of 1998, we agreed to loan John Hail up to
$250,000. Subsequently we also agreed to loan up to an additional $75,000. These
loans are secured, bear interest at 8% per annum and become due on March 31,
2000. As of June 30, 1999, the aggregate outstanding principal balance of these
loans was $259,701 plus interest. We believe that the terms of these loans are
comparable with those that could have been obtained from an unaffiliated lender.
These loans were unanimously approved by our board
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of directors.
During 1997, pursuant to our Stock Option Plan, we granted Mr. Hail
10-year nontransferable stock options exercisable for the purchase of 100,000
shares of our common stock for $6.00 per share. On the date of grant of these
stock option, the exercise price was equal to the fair value of our common
stock. These options were exchanged by Mr. Hail for 100,000 stock options having
the same terms other than an exercise price of $2.70 per share of common stock,
which was equal to the fair value of the common stock on the date of exchange.
Subsequently, these options were exchanged by Mr. Hail on October 8, 1998 for
100,000 stock options having the same terms other than an exercise price of
$1.75 per share of common stock, which was equal to the fair value of the common
stock on the date of exchange.
During 1995, we granted United Financial Advisors, Inc. five-year
warrants exercisable for the purchase of 125,000 shares of Common Stock for
$3.60 per share and 125,000 shares of Common Stock for $4.96 per share. All of
the warrants were granted at or above the fair market vale of our common stock
on the date of grant. As a result of the grant of these warrants, United
Financial Advisors became a greater than 5% beneficial owner of our common.
These warrants were not granted pursuant to our stock option plan. Effective May
30, 1997, pursuant to written agreement, United Financial Advisors released the
warrants exercisable for the purchase of 125,000 shares of our common stock for
$4.96. At that time United Financial Advisors ceased to be a greater than 5%
beneficial owner of our common stock. The remaining warrants held by United
Financial Advisors are currently exercisable. In addition, we paid United
Financial Advisors $10,000 and $20,000 during 1995 and 1997, respectively, for
consulting and financial advisory services.
On December 17, 1996, we adopted policies that
- - any loans to officers, directors and 5% or more shareholders
("affiliates") are subject to approval by a majority of not less than
two of our disinterested independent directors and
- - such loans and other transactions with affiliates will be on terms no
less favorable than could be obtained from unaffiliated parties and
approved by a majority of not less than two of the disinterested
independent directors.
Our board of directors is comprised of four members, two of which, R. Terren
Dunlap and Harland C. Stonecipher, are independent directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information as to the beneficial
ownership of our common stock as of the date of this prospectus, of
- - each person who is known to us to be the beneficial owner of more than
5% of our common stock,
- - each of our directors and executive officers,
- - our executive officers and directors as a group, and
- - their percentage holdings of our outstanding shares of common stock.
For purposes of the following table, the number of shares and percent of
ownership of our outstanding common stock that the named person beneficially
owns includes shares of our common stock that such person has the right to
acquire within 60 days of the date of this prospectus, upon exercise of options
and warrants. However, such shares are not included for the purposes of
computing the number of shares beneficially owned and percent of outstanding our
common stock of any other named person.
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<TABLE>
<CAPTION>
COMMON STOCK
------------------------
SHARES PERCENT OF
BENEFICIALLY SHARE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OUTSTANDING
- ------------------------------------ ---------- -----------
<S> <C> <C>
John W. Hail(1)(2)............................................................... 595,334 13.6%
Curtis H. Wilson(3).............................................................. 281,870 6.4%
Roger P. Baresel(1)(4)........................................................... 178,885 4.2%
Harland C. Stonecipher(5)........................................................ 180,768 4.4%
R. Terren Dunlap(1)(6)........................................................... 37,500 .9%
Executive Officers and Directors as a group
(four persons)(7)............................................................. 1,274,357 26.5%
- ------------------------
</TABLE>
(1) A director or an executive officer with a business address of 2601
Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293.
(2) The number of shares and each percentage presented includes
- 250,000 shares of our common stock that are subject to
currently exercisable stock options, 100 shares of our common
stock subject to currently exercisable 1997-A warrants and
1,100 shares of our common stock that are subject to currently
exercisable redeemable common stock purchase warrants held by
Mr. Hail,
- 19,444 shares of our common stock and 1,000 shares of our
common stock that are subject to currently exercisable
redeemable common stock purchase warrants owned by
corporations controlled by Mr. Hail, and
- 1,024 shares of our common stock and 1,000 shares of our
common stock that are subject to currently exercisable
redeemable common stock purchase warrants held by Helen Hail,
wife of Mr. Hail, with respect to which Mr. Hail disclaims any
beneficial interest.
(3) A former director, with a business address of 3205 Northeast 138th
Street, Edmond, Oklahoma 73013. The number of shares and each
percentage presented includes
- 250,000 shares of our common stock that are subject to
currently exercisable stock options held by Mr. Wilson and
- 12,338 shares of our outstanding common stock and 3,000 shares
of our common stock that are subject to currently exercisable
redeemable common stock purchase warrants held by Ruth Wilson,
wife of Mr. Wilson, with respect to which Mr. Wilson disclaims
any beneficial interest.
(4) The number of shares consist of and each percentage presented includes
- 7,500 shares of our outstanding common stock jointly held by
Mr. Baresel and his wife, Judith A. Baresel,
- 2,000 shares of our common stock subject to currently
exercisable 1997-A warrants and 1,000 shares of our common
stock that are subject to currently exercisable redeemable
common stock purchase warrants held by Mr. Baresel,
- 12,500 shares of our common stock that are subject to
currently exercisable stock options held by Mr. Baresel,
- 24,885 shares of our outstanding common stock held by Mrs.
Baresel,
- 87,500 shares of our common stock that are subject to
currently exercisable stock options
- 6,000 shares of our common stock that are subject to currently
exercisable redeemable common stock purchase warrants held by
Mrs. Baresel, and
- 12,500 shares of Common Stock that are subject to currently
exercisable stock options held by Mrs. Baresel as the
custodian for the benefit of the children of Mr. and Mrs.
Baresel, with respect to which Mr. Baresel disclaims any
beneficial interest.
(5) Mr. Stonecipher is a director with a business address of 321 East Main
Street, Ada, Oklahoma 74820, and Chairman of the Board and Chief
Executive Officer of Pre-Paid Legal Services, Inc. The number of shares
consist of and each percentage presented is based upon 180,768 shares
of outstanding Common Stock held by Pre-Paid Legal Services, Inc.,
which may be deemed to be beneficially owned by Mr. Stonecipher.
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(6) The number of shares consist of and each percentage presented is based
upon 37,500 shares of Common Stock that are issuable upon exercise of
stock options.
(7) The number of shares and each percentage presented includes
- 2,100 shares of our common stock subject to currently
exercisable 1997-A warrants,
- 13,100 shares of our common stock that are subject to
currently exercisable redeemable common stock purchase
warrants, and
- 660,000 shares of our common stock that are issuable upon
exercise of other currently exercisable stock options.
DESCRIPTION OF SECURITIES
AUTHORIZED AND OUTSTANDING CAPITAL
Pursuant to our Certificate of Incorporation, we are authorized to issue
up to 495,000,000 shares of common stock, $.0001 par value per share, and
5,000,000 shares of preferred stock, $.0001 par value per share. As of the date
of this Prospectus, our outstanding capital stock consisted of 4,141,014 shares
of our common stock, assuming no exercise of our outstanding warrants and stock
options.
The following description of certain matters relating to our capital
stock and outstanding warrants is a summary. This summary is qualified in its
entirety by, the provisions of our Certificate of Incorporation, bylaws, and our
agreements with UMB Bank, N.A., as amended, related to our outstanding
redeemable common stock purchase warrants and our 1997-A warrants, all of which
are filed as exhibits to or are incorporated by reference in the registration
statement of which this prospectus is a part. See "Where You Can Find Additional
Information."
COMMON STOCK
Our authorized and outstanding shares of common stock, in general, have
the rights, privileges, disabilities and restrictions as follows:
- - the right to receive ratably such dividends, if any, as may be declared
from time to time by the board of directors out of assets legally
available therefor, subject to the payment of preferential dividends
with respect to our then outstanding preferred stock;
- - the right to share ratably in all assets available for distribution to
our common stock shareholders after payment of our liabilities in the
event of our liquidation, dissolution and winding-up, subject to the
prior distribution rights of the holders of our then outstanding
preferred stock;
- - the right to one vote per share on matters submitted to a vote by our
common stock shareholders;
- - no preferential or preemptive right and no subscription, redemption or
conversion privilege with respect to the issuance of additional shares
of our common stock; and
- - no cumulative voting rights, which means that the holders of a majority
of shares voting for the election of directors can elect all members of
our board of directors then subject to election.
In general, a majority vote of shares represented at a meeting of common stock
shareholders at which a quorum (a majority of the outstanding shares of common
stock) is present, is sufficient for all actions that require the vote or
concurrence of shareholders. However, such voting rights the holders of our then
outstanding preferred stock may have that entitle them to vote with the holders
of our common stock.
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
As of the date of this prospectus, there are 1,495,000 redeemable
common stock purchase warrants outstanding. The terms and conditions of the
redeemable common stock purchase warrants are set forth in the Unit and Warrant
Agreement with U.S. Stock Transfer Corp. dated November 6, 1997. The Unit and
Warrant Agreement is incorporated by reference as an exhibit to the registration
statement of which this prospectus is a part. See "Where You Can Find Additional
Information." The following description of the redeemable common stock purchase
warrants is not complete and is qualified in all respects by the Unit and
Warrant Agreement.
The holder of each redeemable common stock purchase warrant is
entitled, upon payment of the exercise price, to purchase one share of our
common stock. As of January 6, 1998, the exercise price of the redeemable common
stock purchase warrants was adjusted from $5.40 to $3.40. There was no expense
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recognized in our financial statements relating to the warrant exercise price
reduction as any change only affects allocations of additional paid-in capital
because these warrants were issued in conjunction with an equity offering. The
number and kind of securities or other property for which the redeemable common
stock purchase warrants are exercisable are subject to adjustment in certain
events, such as mergers, reorganizations or stock splits, to prevent dilution.
Unless previously redeemed, the redeemable common stock purchase warrants are
exercisable on or before November 6, 2002.
A warrant holder will only be able to exercise the redeemable common
stock purchase warrants held in the event
- - a current prospectus under the Securities Act of 1933 relating to the
shares of our common stock issuable upon exercise of the redeemable
common stock purchase warrants is then in effect and
- - such common stock is qualified for sale or exemption from qualification
under the applicable securities laws of the states in which the holder
resides.
We may redeem the redeemable common stock purchase warrants at any time
on not less than 30 days' written notice, at a price of $0.25 per warrant, but
only after the closing sale price per share of our common stock for 20
consecutive trading days is $6.80 or more. All of the outstanding redeemable
common stock purchase warrants must be redeemed if any are redeemed.
The redeemable common stock purchase warrants may only be redeemable
if, on the date the redeemable common stock purchase warrants are called for
redemption, there is an effective registration statement and current prospectus
covering the shares of our common stock issuable upon exercise of the redeemable
common stock purchase warrants. In certain cases, our sale of securities upon
exercise of the redeemable common stock purchase warrants could violate the
securities laws of the United States, certain states or other jurisdictions. We
have agreed to maintain an effective registration under the Securities Act of
1933 at our expense with respect to the securities underlying the redeemable
common stock purchase warrants (and, if necessary, to allow their public resale
without restriction) until such warrants are exercised, redeemed or expire. We
have agreed to use our best efforts, and to take such actions under the laws of
various states, as may be required to cause the sale of the securities
underlying the redeemable common stock purchase warrants upon their exercise
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to be lawful. However, we will not be required to honor the exercise of the
redeemable common stock purchase warrants if, in the opinion of our counsel,
the sale of securities upon such exercise would be unlawful. In certain
cases, we may purchase the redeemable common stock purchase warrants
submitted for exercise for a cash price equal to the difference between the
market price of the securities obtainable upon such exercise and the exercise
price of such redeemable common stock purchase warrants.
The redeemable common stock purchase warrants contain provisions that
protect the holders thereof against dilution. The number of shares of our common
stock or other securities purchasable upon exercise of the redeemable common
stock purchase warrants is adjusted for stock dividends, stock splits, mergers,
sale of substantially all of our assets, and for other extraordinary events. The
holders of these warrants do not possess any rights as shareholders.
1997-A WARRANTS
We have 337,211 of our 1997-A warrants outstanding. The terms and
conditions of the 1997-A warrants are set forth in our Warrant Agreement with
U.S. Stock Transfer Corp. dated January 26, 1997, as amended and restated on
January 8, 1998. This agreement was filed as an exhibit to the registration
statement of which this prospectus is a part. See "Where You Can Find Additional
Information." The following description of the 1997-A warrants is not complete
and is qualified in all respects by this agreement.
Each 1997-A warrant initially entitled the holder to purchase one share
of our common stock. As of January 8, 1998, we amended and restated the terms of
1997-A warrants to
- - extend the exercise period to November 6, 2002 and
- - reduced the exercise price from $12.00 to $3.40.
The purpose of the amendment was to modify the exercise price and period
provisions to make them identical to our redeemable common stock purchase
warrants in order to avoid any differential in the market price of the 1997-A
warrants and the redeemable common stock purchase warrants. The amendment did
not have any material accounting consequences.
The number and kind of securities or other property for which the
1997-A warrants are exercisable are subject to adjustment in certain events,
such as mergers, reorganizations or stock splits, to prevent dilution. At any
time, upon 30 days' written notice, we may redeem in whole and not in part,
unexercised 1997-A warrants for $.0001 per warrant. Those 1997-A warrants not
exercised or redeemed expire on November 6, 2002. Holders of 1997-A warrants do
not, as such, have any of the rights of shareholders.
In certain cases, our sale of securities upon exercise of 1997-A
warrants could violate the securities laws of the United States, certain states
thereof or other jurisdictions. We have agreed to use our best efforts to cause
a registration statement with respect to such securities under the Securities
Act of 1933 to continue to be effective during the term of the 1997-A warrants
and to take such other actions under the laws of various states as may be
required to cause the sale of securities upon exercise of 1997-A warrants to be
lawful. However, we are not required to honor the exercise of 1997-A warrants
if, in the opinion of our legal counsel, the sale of securities upon such
exercise would be unlawful. We may, but are not required to, purchase 1997-A
warrants submitted for exercise for a cash price equal to the difference between
the market price of the securities obtainable upon such exercise and the
exercise price of such 1997-A warrants.
PREFERRED STOCK
There are no shares of our authorized preferred stock outstanding. Our
5,000,000 shares of authorized preferred stock may be issued from time to time
in one or more series. Our board of directors, without further approval of our
common stock shareholders, is authorized to fix the relative rights,
preferences, privileges and restrictions applicable to each series of our
preferred stock. We believe that having such a class of preferred stock provides
greater flexibility in financing, acquisitions and other corporate activities.
While there are no current plans, commitments or understandings, written or
oral, to issue any of our preferred stock, in the event of any issuance, our
common stock shareholders will not have any preemptive or similar rights to
acquire any of such preferred stock. Issuance of preferred stock could adversely
affect
- - the voting power of the holders of our then outstanding common stock,
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- - the likelihood that such holders will receive dividend payments and
payments upon liquidation, and
- - could have the effect of delaying or preventing a change in shareholder
and management control.
OPTIONS AND OTHER WARRANTS
As of the date of this prospectus, we have outstanding stock options
and other warrants exercisable for the purchase 1,708,022 shares of our common
stock during various periods, which expire October 1999 through May 2007, at
exercise prices of $1.75 to $3.60 per share (with a weighted average exercise
price of $2.12). The exercise prices of the stock options and warrants were
equal to or greater than the fair market value of our common stock on the date
of the grant of each stock option or warrant. Furthermore, in connection with
the offering of units completed in 1997, we sold to Paulson Investment Company,
Inc. and Joseph Charles & Assoc., Inc. warrants exercisable on or before
November 6, 2002, for the purchase of 130,000 units for $5.40 per unit. Each
unit consists of one share of our common stock and one redeemable common stock
purchase warrant.
ANTI-TAKEOVER PROVISIONS
Our Certificate of Incorporation and bylaws and the Oklahoma General
Corporation Act include a number of provisions which may have the effect of
encouraging persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with our board of directors rather than pursue
non-negotiated takeover attempts. We believe that the benefits of these
provisions outweigh the potential disadvantages of discouraging such proposals
because, among other things, negotiation of such proposals might result in an
improvement of their terms. The description below related to provisions of our
Certificate of Incorporation and bylaws is intended as a summary only and is
qualified in its entirety by reference to our Certificate of Incorporation and
bylaws filed as an exhibit to the registration statement of which this
Prospectus is a part. See "Where You Can Find Additional Information."
PREFERRED STOCK. Our Certificate of Incorporation authorizes the
issuance of the preferred stock in classes. Our board of directors is authorized
to set and determine the voting rights, redemption rights, conversion rights and
other rights relating to such class of preferred stock. In some circumstances,
the preferred stock could be issued and have the effect of preventing a merger,
tender offer or other takeover attempt which our board of directors opposes.
STAGGERED BOARD OF DIRECTORS. Our bylaws provide that our board of
directors shall be comprised of three classes of directors, each class
constituting approximately one-third of the total number of directors with each
class serving staggered three-year terms. The classification of the directors
makes it more difficult for shareholders to change the composition of our board
of directors. We believe, however, that the longer time required to elect a
majority of a classified board of directors will help ensure continuity and
stability of our management and policies.
The classification provisions may also have the effect of discouraging
a third party from accumulating large blocks of our common stock or attempting
to obtain control of us, even though such an attempt might be beneficial to us
and our shareholders. Accordingly, our shareholders could be deprived of certain
opportunities to sell their shares of our common stock at a higher market price
than might otherwise be the case.
OKLAHOMA ANTI-TAKEOVER STATUTES. We are subject to Section 1090.3 and
Sections 1145 through 1155 of the Oklahoma General Corporation Act.
Subject to certain exceptions, Section 1090.3 of the Oklahoma General
Corporation Act prohibits a publicly-held Oklahoma corporation from engaging in
a "business combination" with an "interested shareholder." This prohibition is
for three years following the date of the transaction in which such person
became an interested shareholder. This prohibition does not apply to a
transaction if the interested shareholder attained such status with approval of
our board of directors or the business combination is approved in a prescribed
manner, or certain other conditions are satisfied. A "business combination"
includes mergers, asset sales, and other transactions resulting in a financial
benefit to the interested shareholder. Subject to certain exceptions, an
"interested shareholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of our common
stock.
In general, Sections 1145 through 1155 of the Oklahoma General
Corporation Act provide that shares ("interested shares") of voting stock
acquired (within the meaning of a "control share acquisition") become nonvoting
stock for the three-year period
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following such control share acquisition. This loss of voting rights does not
apply if a majority of the holders of non-interested shares approve a
resolution reinstating the interested shares with the same voting rights that
such shares had before such interested shares became control shares.
Any person ("acquiring person") who proposes to make a control share
acquisition may, at the person's election, and any acquiring person who has made
a control share acquisition is required to deliver an acquiring person statement
to us disclosing certain prescribed information regarding the acquisition. We
are required to present to the next annual meeting of our shareholders the
reinstatement of voting rights with respect to the control shares that resulted
in the control share acquisition. Alternatively, an acquiring person may request
a special meeting of our shareholders for such purpose; however, the acquiring
person must undertake to pay the costs and expenses of such special meeting. In
the event voting rights of control shares acquired in a control share
acquisition are reinstated in full and the acquiring person has acquired control
shares with a majority or more of all voting power, our shareholders will have
dissenters' rights entitling them to receive the fair value of the shares of our
common stock held. In such case, the fair value will not be less than the
highest price paid per share by the acquiring person in the control share
acquisition.
A "control share acquisition" includes the acquisition by any person
(including persons acting as a group) of ownership of, or the power to direct
the exercise of voting power with respect to, control shares (generally shares
having more than 20% of all voting power in the election of directors of a
publicly held corporation), subject to certain exceptions including
- - an acquisition pursuant to an agreement of merger, consolidation, or
share acquisition to which we are a party and is effected in compliance
with certain provisions of the Oklahoma General Corporation Act,
- - an acquisition by a person of additional shares within the range of
voting power for which such person has received approval pursuant to a
resolution by the majority of the holders of non-interested shares,
- - an increase in voting power resulting from any action taken by us,
provided the person whose voting power is thereby affected is not our
affiliate,
- - an acquisition pursuant to proxy solicitation under and in accordance
with the Securities Exchange Act of 1934, as amended, or the laws of
Oklahoma, and
- - an acquisition from any person whose previous acquisition of shares did
not constitute a control share acquisition, provided the acquisition
does not result in the acquiring person holding voting power within a
higher range of voting power than that of the person from whom the
control shares were acquired.
The anti-takeover provisions of the Oklahoma General Corporation Act
may have the effect of discouraging a third party from acquiring large blocks of
our common stock within a short period or attempting to obtain control of us,
even though such an attempt might be beneficial to us and our shareholders.
Accordingly, our shareholders could be deprived of certain opportunities to sell
the shares of our common stock held at a higher market price than might
otherwise be the case.
TRANSFER AGENT AND WARRANT AGENT
UMB Bank, N.A. is the successor to our former registrar and transfer
agent of our common stock and warrant agent of our 1997-A warrants and
redeemable common stock purchase warrants. UMB Bank's address is Security Trust
Division, 928 Grand Boulevard, 13th Floor, Kansas City, Kansas 64106-1745. UMB
Bank, N.A. is the successor to U.S. Stock Transfer Corp., our former registrar,
transfer agent and warrant agent.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this Prospectus, we have 4,141,014 shares of our
common stock issued and outstanding. We have reserved 3,293,944 shares of our
common stock for issuance upon exercise of outstanding warrants and stock
options and 1,111,444 shares of common stock for issuance under our stock option
plan. Also, we will have 486,453,598 shares of our common stock available for
issuance at such times and upon such terms as may be approved by our board of
directors. No prediction can be made as to the effect, if any, that future sales
or the availability of shares for sale will have on the market price of our
-56-
<PAGE>
common stock prevailing from time to time. Nevertheless, sales of substantial
amounts of our common stock in the public market could adversely affect the
prevailing market price of our common stock and could impair our ability to
raise capital through sales of our equity securities.
As of the date of this prospectus, we do not have any outstanding
shares of common stock that are "restricted shares" within the meaning of Rule
144 promulgated under the Securities Act of 1933. However, we may issue
restricted shares in the future.
In general, under Rule 144 a person (or persons whose shares are
aggregated), including any of our affiliates, who has beneficially owned
restricted shares for at least one year is entitled to sell within any
three-month period a number of shares that does not exceed the greater of
- - 1% of the then outstanding shares of our common stock or
- - an amount equal to the average weekly reported volume of trading in
such shares during the four calendar weeks preceding the date on which
notice of such sale is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are also subject to certain manner of sale limitations,
notice requirements and the availability of current public information about us.
Restricted shares properly sold in reliance on Rule 144 are thereafter freely
tradable without restrictions or registration under the Securities Act of 1933,
unless thereafter held by an affiliate of ours. In addition, our affiliates must
comply with the restrictions and requirements of Rule 144, other than the
one-year holding period requirement, in order to sell shares of our common stock
which are not restricted shares. As defined in Rule 144, an "affiliate" of an
issuer is a person that directly, or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with
such issuer.
Furthermore, different rules apply if two years have elapsed since the
later of the date of any acquisition of restricted shares from us or our
affiliate. Under these rules if the acquirer or subsequent holder thereof is
deemed not to have been our affiliate at any time during the 90 days preceding a
sale, such person may sell such shares in the public market pursuant to Rule
144(k) without regard to volume limitations, manner of sale restrictions, or
public information or notice requirements.
Pursuant to Rule 144A promulgated under the Securities Act of 1933,
under certain circumstances qualified institutional buyers, as defined in the
rule, are permitted to more easily acquire and sell "restricted securities." We
are unable to predict the effect that Rule 144A has or will have on the
prevailing market price of our common stock.
OPTIONS
As of June 30, 1999, options to purchase a total of 506,300 shares of
our common stock have been granted under our stock option plan and were
outstanding. Also, there were stock options and warrants for the purchase of
1,201,733 shares of our common stock outstanding that were granted outside our
stock option plan.
LOCK-UP AGREEMENTS
Our current and former executive officers and directors, who hold in
the aggregate stock options and warrants exercisable for the purchase of 675,000
shares of our common stock, agreed with Paulson Investment Company, Inc. and
Joseph Charles & Assoc., Inc. to not sell or otherwise dispose of such options,
warrants or shares of our common stock and all other securities issuable upon
exercise of such
-57-
<PAGE>
options or warrants for a period of two years ending on November 6, 1999.
STATE IMPOSED ESCROW ARRANGEMENT
In connection with the registration of securities in 1997, our then
executive officers and directors (and their wives) and Robert and Retha Nance
(formerly our greater than 5% shareholders) deposited 466,790 shares of our
common stock and stock options exercisable for the purchase of 726,983 shares of
our common stock in escrow with BankOne, N.A. (formerly Liberty Bank and Trust
Company of Oklahoma City, N.A.), pursuant to Promotional Shares Escrow
Agreements. Furthermore, we, Roger P. Baresel and Judith A. Baresel entered into
a Promotional Shares Lock-In Agreement covering 4,000 shares of our common stock
and 2,000 1997-A warrants held by Mr. and Mrs. Baresel. The Administrator of the
Oklahoma Department of Securities determined the terms and conditions of the
escrow agreements and the lock-in agreement. These agreements were required as a
condition of the registration of our securities in Oklahoma for the protection
and benefit of the initial purchasers of units sold pursuant to our 1997
offering (the "public shareholders").
In event of a distribution (as defined below) respecting the common
stock, 1997-A warrants and stock options (the "subject securities") covered by
these agreements, the public shareholders will initially share on a pro rata,
per share basis in the distribution to the exclusion of the owners of the
subject securities, in proportion to the public offering prices of the units
until the public shareholders have received, or have had irrevocably set aside
for them, an amount equal to the aggregate public offering prices of the units.
Thereafter, the owners of the deposited common stock, stock options and warrants
and the other holders of our equity securities (including the Public
Shareholders) will participate on an equal, per share basis in the remaining
amount of the distribution. The distribution may proceed on lesser terms and
conditions if a majority of the holders of our common stock and redeemable
common stock purchase warrants formerly comprising the units (that are not held
by our officers or directors or their associates or affiliates) vote or consent
by consent procedure to approve the lesser terms and conditions. A
"distribution" under these agreements means a distribution of our assets or
securities to our shareholders as a result of our dissolution, liquidation,
merger, consolidation or reorganization or the sale or exchange of our assets or
securities (including by way of tender offer), or any other transaction or
proceeding with a person other than the owners of the common stock, stock
options and warrants covered by these agreements. Participants in the plan
electing to purchase participation interests are not beneficiaries of these
agreements. Accordingly, participants in the plan will not be benefitted or
adversely affected by the provisions of these agreement, other than possibly
benefitting from the restrictions on transferability of the common stock covered
by the agreements.
The shares of common stock, stock options and warrants, as well as
any shares of common stock received upon exercise of the stock options and
warrants, will remain subject to these agreements until November 6, 2000.
However, the 93,108 shares of common stock deposited in escrow by Robert and
Retha Nance may be released from escrow upon the sale of such shares, if such
sales are limited during any three-month period to 0.5% of the outstanding
number of shares of our common stock on the date of such sale. Other than as
mentioned, the shares of common stock, 1997-A warrants and stock options
subject to the Escrow Agreements and the Lock-In Agreement may not be sold,
transferred, pledged, assigned, hypothecated or otherwise disposed of, except
under limited circumstances.
PLAN OF DISTRIBUTION
Our officers and other employees ("associated person") are offering
the participation interests for us. Each of these officers, directors and
employees qualify as an "associated person not deemed to be a broker" within
the meaning of Rule 3a4-1 promulgated under the Securities Exchange Act of
1934, as amended. Under this Rule, an "associated person not deemed to be a
broker" is the associated person that
- - is not subject to a "statutory disqualification," as defined in Section
3(a)(39) of the Securities Exchange Act, and
- - is not compensated in connection with participation in the offering by
payment of commissions or other remuneration based either directly or
indirectly on sales of Participation Interests, and
-58-
<PAGE>
- - is not at the time of participation in the offering an associated
person of a broker or dealer, and either
- - (i) primarily performs, or is intended primarily to perform at the end
of the offering, substantial duties for or on our behalf otherwise than
in connection with the offer and sale of the participation interests,
and (ii) has not been a broker or dealer, or an associated person of a
broker or dealer, within the preceding 12 months, and (iii) the
associated person has not participated in selling an offering of
securities more than once every 12 months, subject to certain limited
participation in the offering of securities through a registered broker
or dealer, or
- - restricts participation in the offering to (i) preparation of written
communications or delivering such communication through the mails or
other means that do not involve oral solicitation by the associated
person of a potential purchaser (provided, that the content of such
communications is approved by one of our officers or directors), (ii)
responding to inquiries of a potential purchaser in a communication
initiated by the potential purchaser (provided, that the content of
such responses is limited to information contained in the registration
statement of which this prospectus is a part), or (iii) performing
ministerial and clerical work involved in effecting the sale of the
participation interests.
As of the date of this prospectus, our officers and directors qualify as an
"associated person not deemed to be a broker" within the meaning of Rule 3a4-1.
We will pay all administrative costs and expenses associated with the
plan. Any brokerage commissions and related service charges incurred in
connection with purchases of shares of our common stock will be paid by the plan
from the participants' contributions to the plan.
LEGAL MATTERS
Certain legal matters related to this offering will be passed upon for
us by our counsel, Dunn Swan & Cunningham, A Professional Corporation, Oklahoma
City, Oklahoma.
EXPERTS
The consolidated balance sheets of Advantage Marketing Systems, Inc.
and subsidiaries as of December 31, 1998, and 1997, and the related consolidated
statements of income, stockholders' equity (deficiency), and cash flows for each
of the three years in the period ended December 31, 1998 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
WHERE TO FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2 (No. 333-47801) of
which this prospectus is a part, under the Securities Act of 1933, as amended,
with the Securities and Exchange Commission, Washington, D.C., with respect to
the participation interests. As permitted by the rules and regulations, this
prospectus does not contain all of the information set forth in the registration
statement, including the exhibits thereto. The statements contained in this
prospectus as to the contents of any contract or other document referenced
herein are not necessarily complete. In each instance, if the contract or
document was filed or incorporated by reference as an exhibit to the
registration statement, reference is made to the contract or other document
filed or incorporated by reference as an exhibit to the registration statement.
Accordingly, each such reference made to the contract or other document is
qualified in all respects by such reference. The registration statement
(including the exhibits thereto) may be inspected without charge at the office
of the Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549-1004 and at the regional offices of the Commission at 7 World Trade
Center, 13th Floor, New York, New York 10048 and at 500 West Madison Street,
Suite 1400, Chicago, Illinois
-59-
<PAGE>
60661. Copies of the registration statement and the exhibits and schedules
thereto may be obtained from the Commission at such offices, upon payment of
prescribed rates. In addition, registration statements and certain other
filings made with the Commission through its Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system are publicly available through the
Commission's site on the World Wide Web on the Internet, located at
http://www.sec.gov. The registration statement, including all exhibits
thereto and amendments thereof, has been filed with the Commission through
EDGAR. We will provide without charge to each person who receives this
prospectus, upon written or oral request, a copy of any information
incorporated by reference in this prospectus (excluding exhibits to
information incorporated by reference unless such exhibits are themselves
specifically incorporated by reference). Such requests should be directed to
Advantage Marketing Systems, Inc. at 2601 Northwest Expressway, Suite 1210W,
Oklahoma City, Oklahoma 73112-7293, telephone: (405) 842-0131.
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act") as a "small business issuer"
as defined under Regulation S-B promulgated under the 1933 Act. In accordance
with the 1934 Act, we file reports and other information with the Commission
(File No. 001-13343), and such reports and other information can be inspected
and copied at, and copies of such materials can be obtained at prescribed rates
from, the Public Reference Section of the Commission in Washington, D.C.
We distribute to our shareholders annual reports containing
consolidated financial statements audited by our independent public accountants
and, upon request, quarterly reports for the first three quarters of each fiscal
year containing unaudited condensed consolidated financial information. Such
requests should be directed to Advantage Marketing Systems, Inc. at 2601
Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293,
telephone: (405) 842-0131.
-60-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ADVANTAGE MARKETING SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
----
<S> <C>
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 (Unaudited) ..F-2
Condensed Consolidated Statements of Income for the Six Months Ended
June 30, 1999 and 1998 (Unaudited)...................................................F-3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998 (Unaudited)...................................................F-4
Notes to Condensed Consolidated Financial Statements for the Six Months Ended
June 30, 1999 and 1998 (Unaudited)...................................................F-5
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report ................................................................F-10
Consolidated Balance Sheets as of December 31, 1998 and 1997.................................F-11
Consolidated Statements of Income for Years Ended December 31, 1998, 1997 and 1996...........F-12
Consolidated Statements of Stockholders' Equity (Deficiency) for Years Ended
December 31, 1998, 1997 and 1996....................................................F-13
Consolidated Statements of Cash Flows for Years Ended December 31, 1998, 1997 and 1996.......F-14
Notes to Consolidated Financial Statements for Years Ended December 31, 1998, 1997 and 1996..F-15
</TABLE>
F-1
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................................................. $ 6,071,642 $ 5,289,217
Receivables - net of allowance of $41,989 and $36,604, respectively .................... 310,147 263,503
Receivable from affiliate .............................................................. 259,701 293,936
Inventory .............................................................................. 768,414 1,009,998
Deferred income taxes .................................................................. -- 93,496
Other assets ........................................................................... 132,905 100,345
------------ ------------
Total current assets ....................................................... 7,542,809 7,050,495
RECEIVABLES .............................................................................. 161,879 129,440
PROPERTY AND EQUIPMENT, Net .............................................................. 1,301,320 1,090,280
GOODWILL, Net ............................................................................ 1,672,280 1,725,734
COVENANTS NOT TO COMPETE, Net ............................................................ 474,265 511,685
DEFERRED INCOME TAXES .................................................................... -- 95,277
OTHER ASSETS ............................................................................. 106,323 114,572
------------ ------------
TOTAL .................................................................................... $ 11,258,876 $ 10,717,483
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................................................... $ 234,458 $ 60,172
Accrued commissions and bonuses ........................................................ 245,630 156,174
Accrued other expenses ................................................................. 362,930 277,651
Accrued sales tax liability ............................................................ 352,707 616,735
Notes payable .......................................................................... -- 29,476
Capital lease obligations .............................................................. 68,603 87,105
------------ ------------
Total current liabilities .................................................. 1,264,328 1,227,313
LONG-TERM LIABILITIES:
Notes payable .......................................................................... -- 94,311
Capital lease obligations .............................................................. 138,890 173,247
Deferred income taxes .................................................................. 7,000 --
------------ ------------
Total liabilities ......................................................... 1,410,218 1,494,871
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock - $.0001 par value; authorized 5,000,000 shares; none issued . ......... -- --
Common stock - $.0001 par value; authorized 495,000,000 shares;
issued 4,275,514 shares; outstanding 4,141,014 shares ................................. 428 428
Paid-in capital ........................................................................ 10,232,706 10,180,106
Notes receivable for exercise of options ............................................... (63,960) (63,960)
Retained earnings (accumulated deficit) ................................................ 57,355 (516,091)
------------ ------------
Total capital and retained earnings (accumulated deficit) ............... 10,226,529 9,600,483
Less cost of treasury stock (134,500 shares, common) ................................... (377,871) (377,871)
------------ ------------
Total stockholders' equity ............................................... 9,848,658 9,222,612
------------ ------------
TOTAL .................................................................................... $ 11,258,876 $ 10,717,483
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net sales ............................................. $9,926,596 $5,870,023
Cost of sales ......................................... 6,851,700 3,791,236
---------- ----------
Gross profit ...................................... 3,074,896 2,078,787
Marketing, distribution and administrative expenses ... 2,363,212 1,750,924
---------- ----------
Income from operations ............................ 711,684 327,863
Other income:
Interest, net ......................................... 152,772 139,236
Other income .......................................... -- 40,720
---------- ----------
Total other income ................................ 152,772 179,956
---------- ----------
INCOME BEFORE TAXES ................................... 864,456 507,819
TAX EXPENSE ........................................... 291,010 193,051
---------- ----------
NET INCOME ............................................ $ 573,446 $ 314,768
---------- ----------
---------- ----------
Net income per common share ........................... $ .14 $ .07
---------- ----------
---------- ----------
Net income per common share - assuming dilution ....... $ .13 $ .07
---------- ----------
---------- ----------
Weighted average common shares outstanding ............ 4,141,014 4,217,894
---------- ----------
---------- ----------
Weighted average common shares outstanding -
assuming dilution ..................................... 4,570,855 4,596,763
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................ $ 573,446 $ 314,768
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ..................................... 252,688 176,025
Deferred taxes .................................................... 195,773 193,051
Gain on sale of other assets ...................................... -- (35,920)
Provision for bad debts ........................................... 5,385 --
Non cash compensation ............................................. 52,600 --
Changes in assets and liabilities which provided (used) cash:
Receivables and commission advances ........................... (84,468) (10,756)
Inventory ..................................................... 241,584 71,830
Other assets .................................................. (30,376) --
Accounts payable and accrued expenses ......................... 84,993 209,458
----------- -----------
Net cash provided by operating activities ................. 1,291,625 918,456
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .................................... (366,789) (277,922)
Advances to affiliate ................................................. -- (305,811)
Repayment of receivable from affiliate ................................ 34,235 54,780
Purchase of other assets .............................................. -- (100,498
----------- -----------)
Net cash used in investing activities ................... (332,554) (629,451)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable ........................................... -- 37,727
Purchases of treasury stock ........................................... -- (243,673)
Payment of deferred offering costs .................................... -- (89,627)
Principal payment on notes payable .................................... (123,787) (40,416)
Principal payment on capital lease obligations ........................ (52,859) (101,072)
----------- -----------
Net cash used in financing activities ................... (176,646) (437,061)
----------- -----------
NET INCREASE (DECREASE) IN CASH .......................................... 782,425 (148,056)
CASH AND CASH EQUIVALENTS, BEGINNING ..................................... 5,289,217 5,775,276
----------- -----------
CASH AND CASH EQUIVALENTS, ENDING ........................................ $ 6,071,642 $ 5,627,220
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ................................. $ 10,945 $ 19,691
Cash paid during the period for income taxes ............................. 8,000 --
Noncash financing and investing activities:
Property and equipment acquired by capital lease ..................... -- 4,389
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited condensed financial statements and related notes have
been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The accompanying
condensed financial statements and related notes should be read in
conjunction with the audited consolidated financial statements of the
Company and notes thereto, for the year ended December 31, 1998.
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,
1999.
2. EARNINGS PER SHARE
EARNINGS PER SHARE - Earnings per common share is computed based upon
net income divided by the weighted average number of common shares
outstanding during each period. Earnings per common share - assuming
dilution is computed based upon net income divided by the weighted
average number of common shares outstanding during each period adjusted
for the effect of dilutive potential common shares calculated using the
treasury stock method. The following is a reconciliation of the common
shares used in the calculations of earnings per common share and
earnings per common share - assuming dilution:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding:
For the six months ended June 30, 1999:
Earnings per common share:
Income available to common stockholders.................. $573,446 4,141,014 $.14
Earnings per common share - assuming dilution: ---------
Options................................................. -- 429,841
----------- -------------
Income available to common stockholders plus assumed
conversions............................................. $573,446 4,570,855 $.13
----------- ------------- ---------
For the six months ended June 30, 1998:
Earnings per common share:
Income available to common stockholders.................. $314,768 4,217,894 $.07
Earnings per common share - assuming dilution: ---------
Options................................................. -- 378,869
----------- -------------
Income available to common stockholders plus assumed
conversions............................................. $314,768 4,596,763 $.07
----------- ------------- ---------
</TABLE>
Options to purchase 130,358 shares of common stock ranging from $2.80
to $3.60 per share and 130,000 shares of common stock ranging from
$3.60 to $6.00 per share were outstanding at June 30, 1999 and 1998,
respectively, but were not included in the computation of earnings per
common share -assuming dilution because the options' exercise prices
were greater than the average market price of the common shares.
F-5
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
Warrants to purchase 1,962,211 shares ranging from $3.40 to $5.40 were
outstanding at June 30, 1999 and 1998, but were not included in the
computation of earnings per common share - assuming dilution because
the warrants' exercise prices were greater than the average market
price of the common shares.
3. STOCKHOLDERS' EQUITY
COMMON STOCK - On March 4, 1998, the Company announced it's intent to
repurchase up to $1 million of the Company's Common Stock in the open
market for cash. In connection with such repurchase, the Company filed
with the Securities and Exchange Commission pursuant to Section
13(e)(1) of the Securities Exchange Act of 1934, as amended, an Issuer
Tender Offer Statement on March 4, 1998. As of December 31, 1998, the
Company had repurchased 134,500 shares of the Common Stock at a total
cost of $377,871. The Company has ceased making repurchases and the
last repurchase was made December 31, 1998.
The Company's policy is to retain earnings to support the expansion of
its operations. The Board of Directors of the Company does not intend
to pay cash dividends on the Common Stock in the foreseeable future.
Any future cash dividends will depend on future earnings, capital
requirements, the Company's financial condition and other factors
deemed relevant by the Board of Directors.
COMMON STOCK OPTIONS AND OTHER WARRANTS - The following table
summarizes the Company's stock option and other warrant activity for
the six months ended June 30, 1999:
<TABLE>
<CAPTION>
SIX WEIGHTED-
MONTHS AVERAGE
ENDED EXERCISE
JUNE 30, 1999 PRICE
------------- ---------
<S> <C> <C>
Options and other warrants
outstanding, beginning of period........ 1,543,322 $2.09
Options and other warrants
issued during the period............... 168,711 2.39
Options and other warrants
canceled during the period............. (4,000) 2.70
-------------
Options and other warrants
outstanding, end of period............. 1,708,033 $2.12
-------------
-------------
</TABLE>
COMMON STOCK WARRANTS - The following table summarizes the Company's
common stock warrants and their activity for the six months ended
June 30, 1999 and 1998:
<TABLE>
<CAPTION>
WARRANTS
ISSUED AND EXERCISE
OUTSTANDING PRICE EXERCISE PERIOD
----------- --------- -------------------
<S> <C> <C> <C>
June 30, 1999 and 1998:
1997-A Warrants................................. 337,211 $3.40 01/31/97 - 11/06/02
---------
---------
Redeemable Common Stock Purchase Warrants........ 1,495,000 $3.40 11/06/97 - 11/06/02
---------
---------
Underwriters' Warrants .......................... 130,000 $5.40 11/12/98 - 11/12/02
---------
---------
</TABLE>
Each warrant entitles the holder to purchase one share of common stock.
As of January 8, 1998, the Company reduced the exercise price of the
1997-A Warrants from $12.00 to $3.40 and extended the exercise period
from January 31, 1999 to November 6, 2002, to correspond more closely
to the terms of the Redeemable Common Stock Purchase Warrants.
F-6
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
As of January 6, 1998, the exercise price of the Redeemable Common
Stock Purchase Warrants was adjusted from $5.40 to $3.40.
There was no expense recognized in the Company's financial statements
relating to either of the warrant exercise price reductions as the
changes only affected allocations of additional paid-in capital because
the Redeemable Common Stock Purchase Warrants and the 1997-A Warrants
were issued in conjunction with equity offerings of the Company. The
reduced exercise prices exceeded the market value of the Company's
common stock on the date of the reduction.
The Redeemable Common Stock Purchase Warrants are subject to redemption
by the Company at $0.25 per warrant. All of the outstanding Redeemable
Common Stock Purchase Warrants must be redeemed if any are redeemed.
The Company may redeem the 1997-A Warrants for $0.0001 per warrant. Any
redemption of unexercised 1997-A Warrants would be for all such
outstanding warrants. The Underwriters' Warrants were issued in
connection with the sale of common stock and Redeemable Warrants in
November 1997 and were in addition to other fees paid to the
underwriters. The Underwriters' Warrants entitle the holder to purchase
one unit consisting of one share of the Company's common stock and one
Redeemable Common Stock Purchase Warrant.
4. STOCK OPTION PLAN
During 1995, the Company approved the 1995 Stock Option Plan (the
"Plan"). Under this Plan, options available for grant can consist of
(i) nonqualified stock options, (ii) nonqualified stock options with
stock appreciation rights attached, (iii) incentive stock options, and
(iv) incentive stock options with stock appreciation rights attached.
The Company has reserved 1,125,000 shares of the Company's common stock
$.0001 par value, for the Plan. The Plan limits participation to
employees, independent contractors, and consultants. Nonemployee
directors are excluded from Plan participation. The option price for
shares of stock subject to this Plan is set by the Stock Option
Committee of the Board of Directors at a price not less than 85% of the
market value of the stock on the date of grant. No stock options may be
exercised within six months from the date of grant, unless under a Plan
exception, nor more than ten years after the date of grant. The Plan
provides for the grant of stock appreciation rights, which allow the
holder to receive in cash, stock or combination thereof, the difference
between the exercise price and the fair value of the stock at date of
exercise. The fair value of stock appreciation rights is charged to
compensation expense. The stock appreciation right is not separable
from the underlying stock option or incentive stock option originally
granted and can only be exercised in tandem with the stock option. No
stock appreciation rights are attached to any options outstanding.
During the six months ended June 30, 1999 and 1998, the Company issued
68,711 and 24,750 options, respectively, under the Plan. At June 30,
1999 and 1998, the Company had 1,708,033 and 1,414,333, respectively,
stock options outstanding of which only 506,300 and 198,600,
respectively, were issued pursuant to the plan.
5. RELATED PARTIES
During the six months ended June 30, 1999 and 1998, the Company
received $3,253 and $3,586, respectively, from Pre-Paid Legal Services,
Inc., a shareholder, for commissions on sales of memberships for the
services provided by Pre-Paid Legal Services, Inc.
During 1995, John W. Hail, an affiliate, entered into lease agreements
covering telephone equipment and related software and requiring monthly
rental payments. Such equipment and software are utilized exclusively
by the Company. During the six months ended June 30, 1998, the Company
made aggregate monthly payments pursuant to such lease agreements of
$9,714. As of December 31, 1998 the leases had been paid in full.
F-7
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
On October 8, 1998, John W. Hail voluntarily surrendered an option to
purchase 100,000 shares of the Company's common stock for $2.70 per
share with an expiration date of May 20, 2007 in exchange for an option
having the same terms other than an exercise price of $1.75 per share
of common stock, which was equal to the fair value of the common stock
on the date of exchange. These options became exercisable on April 8,
1999.
During the six months ended June 30, 1999 and 1998, the Company paid
Curtis H. Wilson, Sr., sales commissions of $49,308 and $19,245,
respectively. These commissions were based upon purchases by Mr.
Wilson and his downline distributors in accordance with the Company's
network marketing program in effect at the time of the sales.
During the first quarter of 1998, the Company agreed to loan John W.
Hail, an affiliate, up to $250,000. Subsequently, the Company agreed to
loan up to an additional $75,000. The loans are secured, bear interest
at 8% per annum, and were due on March 31, 1999. The loans were
extended until March 31, 2000. As of June 30, 1999, the balance due on
these loans was $259,701 plus accrued interest. The loans and extension
were unanimously approved by the Company's board of directors.
6. COMMITMENTS AND CONTINGENCIES
RECENT REGULATORY DEVELOPMENTS - A significant portion of the Company's
net sales has been, and is expected to continue to be, dependent upon
the Company's AM-300 product. The Company's net sales of AM-300
represented 67.5% and 42.9% of net sales for the six months ended June
30, 1999 and 1998, respectively. One of the herbal ingredients in
AM-300 is ephedra concentrate, which contains naturally occurring
ephedrine. Ephedrine products have been the subject of adverse
publicity in the United States and other countries relating to alleged
harmful effects, including the deaths of several individuals.
Currently, the Company offers AM-300 only in the United States (except
in certain states in which regulations may prohibit or restrict the
sale of such product). On April 10, 1996, the Food and Drug
Administration ("FDA") issued a statement warning consumers not to
purchase or ingest natural sources of ephedrine within dietary
supplements claiming to produce certain effects (none of which are
claimed for the Company's product). On June 4, 1997, the FDA proposed a
regulation which will, if it becomes effective as proposed,
significantly limit the ability of the Company to sell AM-300 and any
other weight management products which contain ephedra or ephedrine. If
the FDA's proposed regulations were to become effective, management
believes that the impact on the Company's financial statements would be
a significant reduction in sales, cost of sales and marketing,
distribution and administrative expenses and could result in material
losses to the Company, but would not result in a significant increase
in sales returns nor have a significant adverse effect on financial
position.
PRODUCT LIABILITY - The Company, like other marketers of products that
are intended to be ingested, faces an inherent risk of exposure to
product liability claims in the event that the use of its products
results in injury. Historically, the Company has relied upon its
manufacturer's product liability insurance for coverage. The Company
obtained product liability insurance coverage in its own name in 1997.
The limits of this coverage are $4,000,000 per occurrence and
$5,000,000 aggregate. The Company generally does not obtain contractual
indemnification from parties manufacturing its products. However, all
of the manufacturers of the Company's products carry product liability
insurance which covers the Company's products. The Company has agreed
to indemnify Tinos, L.L.C., the licensor of Choc-Quilizer, against any
product liability claims arising from the Choc-Quilizer product
marketed by the Company, and the Company has agreed to indemnify
Chemins against claims arising from claims made by the Company's
F-8
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
distributors for products manufactured by Chemins and marketed by the
Company. Although the Company has never had a product liability claim,
such claims against the Company could result in material losses to the
Company.
7. DISTRIBUTOR STOCK PURCHASE PLAN
On March 11, 1998, the Company filed a Registration Statement, file
number 333-47801, with the Securities and Exchange Commission pursuant
to which the Company registered 5,000,000 stock purchase plan
participation interests ("Participation Interests") in the Advantage
Marketing Systems, Inc. 1998 Distributor Stock Purchase Plan (the
"Plan"). The Participation Interests will be offered to the
distributors of the Company's products and services ("Eligible
Persons") in lots of five Participation Interests. An Eligible Person
electing to participate in the Plan (a "Participant") is entitled
through purchase of the Participation Interests to purchase in the open
market through the Plan, shares of common stock, $.0001 par value per
share (the "Common Stock"), previously issued by the Company. The
Participation Interests are non-transferable; therefore, a market for
the Participation Interests will not develop. The proceeds from sale of
the Participation Interests represent the Participants' contributions
to the Plan which are used to purchase the Common Stock and are not
placed into escrow pending purchase of the Common Stock. Other than an
annual service fee of $5.00 per Participant and a transaction fee of
$1.25 per month, the Company does not receive any proceeds from the
purchase of the Common Stock by the Plan. The offering price of each
Participation Interest is $1.00, and each Eligible Person will be
required initially to purchase a minimum of 25 Participation Interests
upon electing to participate in the Plan. There is no minimum amount of
sales of Participation Interests required. The Registration Statement
became effective February 19, 1999 under the Securities Act of 1933, as
amended.
* * * * * *
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Advantage Marketing Systems, Inc. and Subsidiaries
Oklahoma City, Oklahoma
We have audited the accompanying consolidated balance sheets of Advantage
Marketing Systems, Inc. and subsidiaries (the "Company") as of December 31,
1998, and 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1998, and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
March 19, 1999
F-10
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................... $ 5,289,217 $ 5,775,276
Receivables - net of allowance of $36,604 and $25,800, respectively .......... 263,503 184,915
Receivable from affiliate .................................................... 293,936 14,124
Commission advances .......................................................... -- 59,268
Inventory .................................................................... 1,009,998 812,125
Deferred income taxes ........................................................ 93,496 85,224
Other assets ................................................................. 100,345 68,432
------------ ------------
Total current assets ............................................. 7,050,495 6,999,364
RECEIVABLES .................................................................... 129,440 15,079
RECEIVABLE FROM AFFILIATE ...................................................... -- 40,656
PROPERTY AND EQUIPMENT, Net .................................................... 1,090,280 695,896
GOODWILL, Net .................................................................. 1,725,734 1,700,909
COVENANTS NOT TO COMPETE, Net .................................................. 511,685 518,791
DEFERRED INCOME TAXES .......................................................... 95,277 354,693
OTHER ASSETS ................................................................... 114,572 10,918
------------ ------------
TOTAL .......................................................................... $ 10,717,483 $ 10,336,306
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................. $ 60,172 $ 202,220
Accrued commissions and bonuses .............................................. 156,174 325,077
Accrued other expenses ....................................................... 277,651 183,921
Accrued sales tax liability .................................................. 616,735 --
Notes payable ................................................................ 29,476 26,304
Capital lease obligations .................................................... 87,105 118,801
------------ ------------
Total current liabilities ........................................ 1,227,313 856,323
LONG-TERM LIABILITIES:
Notes payable ................................................................ 94,311 82,440
Capital lease obligations .................................................... 173,247 221,148
------------ ------------
Total liabilities ............................................... 1,494,871 1,159,911
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY:
Preferred stock - $.0001 par value; authorized 5,000,000 shares; none issued.. -- --
Common stock - $.0001 par value; authorized 495,000,000 shares;
issued 4,275,514 and 4,249,383 shares; outstanding 4,141,014 and 4,249,383
shares, respectively ........................................................ 428 425
Paid-in capital .............................................................. 10,180,106 10,180,109
Notes receivable for exercise of options ..................................... (63,960) (74,000)
Accumulated deficit .......................................................... (516,091) (930,139)
------------ ------------
Total capital and accumulated deficit ......................... 9,600,483 9,176,395
Less cost of treasury stock (134,500 shares, common) ......................... (377,871) --
------------ ------------
Total stockholders' equity ..................................... 9,222,612 9,176,395
------------ ------------
TOTAL .......................................................................... $ 10,717,483 $ 10,336,306
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-11
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ....................................................... $ 13,287,824 $ 10,192,227 $ 6,155,073
Cost of sales ................................................... 8,999,229 7,271,660 4,265,905
------------ ------------ ------------
Gross profit ................................................ 4,288,595 2,920,567 1,889,168
Marketing, distribution and administrative expenses ............. 3,548,772 2,792,879 1,561,753
------------ ------------ ------------
Income from operations ...................................... 739,823 127,688 327,415
Other income (expense):
Interest, net ................................................... 309,908 34,017 (10,538)
Other income .................................................... 39,280 28,017 8,667
Settlement of additional tax liability (Note12) ................. (421,623) -- --
------------ ------------ ------------
Total other income (expense) ................................ (72,435) 62,034 (1,871)
------------ ------------ ------------
INCOME BEFORE TAXES ............................................. 667,388 189,722 325,544
TAX EXPENSE (BENEFIT) ........................................... 253,340 59,696 (499,613)
------------ ------------ ------------
NET INCOME ...................................................... $ 414,048 $ 130,026 $ 825,157
------------ ------------ ------------
------------ ------------ ------------
Net income per common share ..................................... $ .10 $ .05 $ .39
------------ ------------ ------------
------------ ------------ ------------
Net income per common share - assuming dilution ................ $ .09 $ .04 $ .26
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares outstanding ...................... 4,191,760 2,751,771 2,135,097
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares outstanding - assuming dilution .. 4,503,411 3,762,642 3,203,485
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-12
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
NOTES
RECEIVABLE TOTAL
SHARES COMMON PAID-IN FOR EXERCISE ACCUMULATED TREASURY STOCKHOLDERS'
(SEE NOTE 4) STOCK CAPITAL OF OPTIONS DEFICIT STOCK EQUITY
------------ ------ ------------ ------------ ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1996 ..................... 2,137,012 $ 212 $ 1,859,882 $ -- $ (1,885,322) $ -- $ (25,228)
Issuance of stock for Miracle
Mountain International, Inc.
acquisition ........................ 20,000 2 119,998 -- -- -- 120,000
Warrants exercised ................... 250 -- 1,500 -- -- -- 1,500
Net income ........................... -- -- -- -- 825,157 -- 825,157
------------ ------ ------------ ------------ ------------ -------- -------------
BALANCE,
DECEMBER 31, 1996 .................. 2,157,262 214 1,981,380 -- (1,060,165) -- 921,429
Issuance of stock for
Chambre' acquisition ............... 14,000 1 83,999 -- -- -- 84,000
Warrants and rights offering,
net ................................ 337,211 34 1,831,247 -- -- -- 1,831,281
Issuance of stock for
SNSI acquisition ................... 125,984 13 799,987 -- -- -- 800,000
Options exercised for cash ........... 46,945 4 79,996 -- -- -- 80,000
Options exercised by tendering
mature shares, net ................. 26,731 4 (4) -- -- -- --
Options exercised by issuance
of note ............................ 46,250 5 73,995 (74,000) -- -- --
Common stock offering, net ........... 1,495,000 150 5,329,509 -- -- -- 5,329,659
Net income ........................... -- -- -- -- 130,026 -- 130,026
------------ ------ ------------ ------------ ------------ -------- -------------
BALANCE,
DECEMBER 31, 1997 .................. 4,249,383 425 10,180,109 (74,000) (930,139) -- 9,176,395
Payments on notes receivable ......... -- -- -- 10,040 -- -- 10,040
Options exercised by tendering
mature shares, net ................. 26,131 3 (3) -- -- -- --
Purchases of treasury stock, at cost . (134,500) -- -- -- -- (377,871) (377,871)
Net income ........................... -- -- -- -- 414,048 -- 414,048
------------ ------ ------------ ------------ ------------ -------- -------------
BALANCE,
DECEMBER 31, 1998 .................. 4,141,014 $ 428 $ 10,180,106 $ (63,960) $ (516,091) $(377,871) $ 9,222,612
------------ ------ ------------ ------------ ------------ -------- -------------
------------ ------ ------------ ------------ ------------ -------- -------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-13
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................... $ 414,048 $ 130,026 $ 825,157
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization ................................... 387,160 251,443 65,993
Deferred taxes .................................................. 251,144 59,696 (499,613)
Provision for bad debts ......................................... 10,804 -- 4,319
Write-off of deferred offering costs ............................ -- -- 15,000
Gain on sale of assets .......................................... (35,329) (18,671) (1,572)
Changes in assets and liabilities which provided (used) cash:
Receivables and commission advances .......................... (144,485) (167,192) (80,139)
Inventory .................................................... (197,873) (722,806) (119,324)
Other assets ................................................. (23,179) 269,946 --
Accounts payable and accrued expenses ........................ 579,964 78,971 216,600
----------- ----------- -----------
Net cash provided by (used in) operating activities ..... 1,242,254 (118,587) 426,421
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .................................. (547,592) (312,709) (66,675)
Receivable from affiliate ............................................ (293,936) -- (22,000)
Proceeds from sale of assets ......................................... 125,340 40,196 1,700
Repayment of receivable from affiliate ............................... 54,780 13,042 6,141
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 ToppMed, Inc. Assets ..................................... (192,000) -- --
Purchase of other assets ............................................. (142,875) (106,803) --
----------- ----------- -----------
Net cash used in investing activities .................. (996,283) (1,692,055) (136,937)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............................... -- 8,284,357 1,500
Proceeds from notes payable .......................................... 62,727 114,259 --
Purchases of treasury stock .......................................... (377,871) -- --
Payment of deferred offering costs ................................... (180,450) (862,967) (125,400)
Repayments of notes receivable for exercise of stock options ......... 10,040 -- --
Payment on notes payable - stockholders .............................. -- -- (81,929)
Payment on notes payable ............................................. (47,684) (34,010) (8,445)
Principal payment on capital lease obligations ....................... (198,792) (85,290) (17,728)
----------- ----------- -----------
Net cash (used in) provided by financing activities .... (732,030) 7,416,349 (232,002)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... (486,059) 5,605,707 57,482
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............................ 5,775,276 169,569 112,087
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR .................................. $ 5,289,217 $ 5,775,276 $ 169,569
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-14
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION- The consolidated financial statements
include the accounts of Advantage Marketing Systems, Inc. and its
wholly owned subsidiaries, Miracle Mountain International, Inc. and
Chambre' International, Inc. (the "Company"). All significant
intercompany accounts have been eliminated.
NATURE OF BUSINESS - The Company markets a product line of consumer
oriented products in the weight management, dietary supplement and
personal care categories that are produced by various manufacturers.
The Company sells its product line through a network of full and
part-time independent distributors developed by the Company.
The Company also sells supplies and materials to its independent
distributors.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION - The Company recognizes revenue upon shipment of
products, training aids and promotional material to the independent
distributors.
SALES RETURNS - All of the Company's products include a customer
satisfaction guarantee. Company products may be returned within 30 days
of purchase for a full refund or credit toward the purchase of another
Company product. The Company also has a buy-back policy where by it
will repurchase products sold to an independent distributor (subject to
a restocking fee) provided that the distributor terminates his/her
distributorship agreement with the Company and returns the product
within 12 months of original purchase in marketable condition. For the
years ended December 31, 1998, 1997 and 1996, the cost of products
returned to the Company are included in net sales and was two, three
and four percent of gross sales, respectively.
ADVERTISING - The Company expenses advertising as incurred. Total
advertising expense for 1998, 1997, and 1996 was $16,459, $28,416 and
$26,410, respectively.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of cash
in banks and all short term investments with initial maturities of
three months or less.
INVENTORY - Inventory consists of consumer product inventory and
training and promotional material such as video tapes, cassette tapes
and paper supplies held for sale to customers and independent
distributors. Inventory is stated at the lower of cost or market. Cost
is determined on a first-in, first-out method.
INTANGIBLES - Intangible assets consist of goodwill and covenants not
to compete. Goodwill represents the excess of cost over the fair value
of the net assets acquired pursuant to the Miracle Mountain
International, Inc. ("MMI"), Chambre' International, Inc. ("CII"), Stay
'N Shape International, Inc. ("SNSI") and ToppMed, Inc. ("TI")
acquisitions. The Company amortizes goodwill from the acquisition of
MMI over seven years and from the acquisitions of CII, SNSI, and TI
over twenty years. Covenants not to compete are being amortized over
the life of the contracts. The net amount of goodwill arising from the
MMI, CII, SNSI and TI acquisitions at December 31, 1998 was $75,186,
$162,140, $1,363,075 and
F-15
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
$125,333, respectively. The net amount of goodwill arising from the
MMI, CII and SNSI acquisitions at December 31, 1997 was $92,208,
$171,107 and $1,437,594, respectively. Goodwill amortization for the
years ended December 31, 1998, 1997 and 1996 was $103,175, $78,026 and
$9,930, respectively. Covenant amortization for the years ended
December 31, 1998, 1997 and 1996, was $71,106, $53,431 and $7,778,
respectively.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost or,
in the case of leased assets under capital leases, at the fair value of
the leased property and equipment, less accumulated depreciation and
amortization. Property and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets of
three to seven years. Assets under capital leases and leasehold
improvements are amortized over the lesser of the term of the lease or
the life of the asset.
LONG-LIVED ASSETS - Management of the Company assesses recoverability
of its long-lived assets, including goodwill, whenever events or
changes in circumstances indicate that the carrying value of the asset
may not be recoverable through future cash flows generated by that
asset. Recoverability is assessed and measured on long-lived assets
using an estimate of the undiscounted future cash flows attributable to
the asset. Impairment is measured based on future cash flows discounted
at an appropriate rate.
FAIR VALUE DISCLOSURE - The Company's financial instruments include
cash and cash equivalents, receivables, short-term payables, notes
payable and capital lease obligations. The carrying amounts of cash and
cash equivalents, receivables and short-term payables approximate fair
value due to their short-term nature. The carrying amounts of notes
payable and capital lease obligations approximate fair value based on
borrowing rates currently available to the Company.
EARNINGS PER SHARE - In 1997, the Company adopted the Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings Per Share, and has restated
earnings per share for all periods presented in accordance with that
Statement. Earnings per common share is computed based upon net income
divided by the weighted average number of common shares outstanding
during each period. Earnings per common share - assuming dilution is
computed based upon net income divided by the weighted average number
of common shares outstanding during each period adjusted for the effect
of dilutive potential common shares calculated using the treasury stock
method. The following is a reconciliation of the common shares used in
the calculations of earnings per common share and earnings per common
share - assuming dilution:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding:
For the year ended December 31, 1998:
Earnings per common share:
Income available to common stockholders .................... $ 414,048 4,191,760 $ .10
-------
Earnings per common share - assuming dilution:
Options -- 311,651
---------- ----------
Income available to common stockholders plus assumed
conversions ...................................... $ 414,048 4,503,411 $ .09
---------- ----------
For the year ended December 31, 1997:
Earnings per common share:
Income available to common stockholders ................... $ 130,026 2,751,771 $ .05
-------
Earnings per common share - assuming dilution:
Options.................................................... -- 825,061
</TABLE>
F-16
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
<S> <C> <C> <C>
Warrants ........................................................ -- 185,810
---------- ----------
Income available to common stockholders plus assumed
conversions ............................................ $ 130,026 3,762,642 $ .04
-------
For the year ended December 31, 1996:
Earnings per common share:
Income available to common stockholders .......................... $ 825,157 2,135,097 $ .39
-------
Earnings per common share - assuming dilution:
Options ......................................................... -- 990,379
Warrants ........................................................ -- 78,009
---------- ----------
Income available to common stockholders plus assumed
conversions ............................................ $ 825,157 3,203,485 $ .26
---------- ---------- -------
</TABLE>
Options to purchase 130,358 shares of common stock ranging from $2.80
to $3.60 per share and 5,000 shares of common stock at $6.00 per share
were outstanding at December 31, 1998 and 1997, respectively, but were
not included in the computation of earnings per common share - assuming
dilution because the options' exercise price was greater than the
average market price of the common shares. There were no antidilutive
options to purchase shares of common stock at December 31, 1996.
Warrants to purchase 1,962,211 shares of common stock ranging from
$3.40 to $5.40 and 525,860 shares of common stock at $8.00 were
outstanding at December 31, 1998 and 1996, respectively, but were not
included in the computation of earnings per common share - assuming
dilution because the warrants' exercise price was greater than the
average market price of the common shares. There were no antidilutive
warrants to purchase shares of common stock at December 31, 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS - In February 1998, the FASB
issued SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS, which revises employers' disclosures about
pension and other postretirement benefit plans. The new statement will
not have any impact on the Company's consolidated financial statements,
as the Company does not offer postretirement benefits.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting and
reporting standards for derivative instruments. The impact on the
Company's consolidated financial statements from the adoption of SFAS
No. 133 has not yet been determined. This statement is effective for
all fiscal quarters beginning after June 15, 1999. The Company will
adopt SFAS No. 133 on January 1, 2000 as required.
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.
RECLASSIFICATIONS - Certain reclassifications have been made to prior
year balances to conform with the presentation for the current period.
F-17
<PAGE>
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Office furniture, fixtures and equipment...................................... $1,466,273 $ 954,293
Vehicles..................................................................... 193,982 142,055
Leasehold improvements....................................................... 38,936 34,388
----------- -----------
1,699,191 1,130,736
Accumulated depreciation and amortization.................................... (608,911) (434,840)
----------- -----------
Total property and equipment, net............................................ $1,090,280 $ 695,896
----------- -----------
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997 and
1996 was $203,972, $119,986 and $48,285, respectively.
3. LEASE AGREEMENTS
During 1998 and 1997, the Company entered into various capital leases
for office equipment. The lease terms range from 24 to 60 months.
Additionally, annual lease rental payments for each lease range from
$700 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 $422,616 and $449,540 for
leases that have been capitalized at December 31, 1998 and 1997,
respectively. Related accumulated amortization amounted to $128,338 and
$109,591 at December 31, 1998 and 1997, respectively.
The Company leases office and warehouse space under noncancellable
operating leases.
Future annual minimum lease payments under capital leases and
noncancellable operating leases with initial or remaining terms of one
year or more at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
-------- --------- -------
<S> <C> <C> <C>
Year ending:
1999................................................ $101,013 $145,426 $246,439
2000................................................ 71,212 151,844 223,056
2001................................................ 61,576 157,617 219,193
2002................................................ 26,206 161,450 187,656
2003................................................ 30,763 67,937 98,700
------- --------- ---------
Total minimum lease payments........................ 290,770 $684,274 $975,044
--------- ---------
--------- ---------
Less amount representing interest................... 30,418
--------
Present value of net minimum lease payments......... 260,352
Less current portion................................ 87,105
--------
Long-term capital lease obligations................. $173,247
--------
--------
</TABLE>
Rental expense under operating leases for the years ended December 31,
1998, 1997 and 1996 was $147,166, $88,632 and $63,425, respectively.
F-18
<PAGE>
4.
STOCKHOLDERS' EQUITY
COMMON STOCK - On March 4, 1998, the Company announced it's intent to
repurchase up to $1 million of the Company's Common Stock in the open
market for cash. In connection with such repurchase, the Company filed
with the Securities and Exchange Commission pursuant to Section
13(e)(1) of the Securities Exchange Act of 1934, as amended, an Issuer
Tender Offer Statement on March 4, 1998. As of December 31, 1998, the
Company has repurchased 134,500 shares of the Common Stock at a total
cost of $377,871. The Company has ceased making repurchases and the
last repurchase was made December 31, 1998.
On January 31, 1997, the Company distributed, at no cost, 2,148,191
non-transferable rights ("Rights") to its shareholders of record on
such date. Each of the Rights entitled the holder to purchase one unit
(consisting of one share of Common Stock and one 1997-A Warrant) on or
before March 17, 1997 for $6.80 per unit (the "Rights Offering").
Concurrently with the Rights Offering, the Company redeemed its
outstanding Class A and Class B Common Stock Purchase Warrants (the
"Public Warrants") for $.0008 per warrant (the "Warrant Redemption")
effective on March 17, 1997. In connection with the Warrant Redemption,
the Company modified the terms of the Public Warrants and offered to
holders of the Public Warrants (the "Warrant Holders") the right to
exercise each of the Public Warrants for the purchase of one unit
(consisting of one share of Common Stock and one 1997-A Warrant), at an
exercise price of $6.00 per unit (the "Warrant Modification Offering").
Proceeds to the Company from the Warrant Modification Offering and the
Rights Offering (the "Offerings") were $2,154,357. Accumulated offering
costs of $323,076 were charged against the proceeds of the Offerings.
Pursuant to the Offerings, the Company issued in units 337,211 shares
of Common Stock and 337,211 1997-A Warrants.
On November 12, 1997, the Company sold 1,495,000 shares of Common Stock
and 1,495,000 Redeemable Common Stock Purchase Warrants in units
consisting of one share of Common Stock and one Redeemable Common Stock
Purchase Warrant from which the Company received proceeds of
$6,050,000. Accumulated offering costs of approximately $720,000 were
charged against the proceeds of the offering (the "Units Offering").
During 1997 in connection with the registration of the Units Offering,
certain officers and shareholders agreed to certain escrow and lock-in
arrangements required by the Oklahoma Department of Securities until
November 6, 2000. The agreement encompasses 377,682 shares of the
Company's common stock and stock options and warrants to purchase
674,500 shares of such common stock and does not permit the sale or
disposition of such securities by these officers and shareholders.
There are no conditions under which these shares of common stock, stock
options and warrants would be required to be returned to the Company
and they are treated as outstanding securities for purposes of the
Company's earnings per share calculations.
On October 29, 1996, the Board of Directors of the Company effected a
one-for-eight reverse split of the Company's outstanding common stock,
options and warrants. In addition, the number of the Company's
outstanding options and warrants has been reduced by a factor of eight
and their exercise price has been increased by a factor of eight
pursuant to this action. This one-for-eight reverse split is reflected
in the accompanying consolidated financial statements and footnotes on
a retroactive basis.
The Company's policy is to retain earnings to support the expansion of
its operations. The Board of Directors of the Company does not intend
to pay cash dividends on the Common Stock in the foreseeable
F-19
<PAGE>
future. Any future cash dividends will depend on future earnings,
capital requirements, the Company's financial condition and other
factors deemed relevant by the Board of Directors.
COMMON STOCK OPTIONS AND OTHER WARRANTS - During 1998, the Company
granted 809,819 options at exercise prices ranging from $1.75 per share
to $3.00 per share. Options were granted primarily for services
rendered and to ensure the future availability of those services to the
Company. A total of 418,819 of the options granted during 1998 are
unexercisable at December 31, 1998 due to a six month vesting period.
During 1998, 57,306 options were exercised for 31,025 mature shares. In
addition, during this period 519,944 options with a weighted average
exercise price of $2.32 per share were voluntarily surrendered and
canceled by the Company in exchange for an equal number of options,
with a weighted average exercise price of $1.82 and 128,830 other
options were canceled without exchange for new options. The exercise
price of the exchanged options was equal to the market value of the
Company's stock on the date of exchange. There was no expense
recognized in the Company's financial statements relating to the
exchange. See Note 5 for the pro forma effects of SFAS 123 ACCOUNTING
FOR STOCK-BASED COMPENSATION ("SFAS 123").
During 1997, the Company granted 493,100 options at exercise prices
ranging from $2.70 per share to $6.00 per share. Options were granted
primarily for services rendered and to ensure the future availability
of those services to the Company. Options granted on December 26, 1997
have a six month vesting period. During 1997, 135,695 options were
exercised of which 46,945, 42,500 and 46,250 were exercised for cash,
15,769 mature shares and notes receivable, respectively. In addition,
during this period 319,250 options with a weighted average exercise
price of $4.67 per share were voluntarily surrendered and canceled by
the Company in exchange for an equal number of options, with an
exercise price of $2.70 per share, 125,000 other warrants were canceled
without exchange for new warrants or options and 2,499 options expired.
The exercise price of the exchanged option was equal to the market
value of the Company's stock on the date of exchange. There was no
expense recognized in the Company's financial statements relating to
the exchange. See Note 5 for the pro forma effects of SFAS 123.
F-20
<PAGE>
The following table summarizes the Company's stock option and other
warrants activity for the years ended December 31, 1998, 1997 and 1996
(as restated for the one-for-eight reverse split in October 1996):
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1998 PRICE 1997 PRICE 1996 PRICE
----------- ---------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options and other
warrants outstanding,
beginning of year ..... 1,439,583 $ 2.28 1,528,927 $ 2.49 1,540,177 $ 2.52
Options and other
warrants granted
during the year ....... 809,819 1.93 493,100 3.68 -- --
Options exercised
during the year ........ (57,306) 2.17 (135,695) 1.64 -- --
Options and other
warrants canceled
during the year ........ (617,524) 2.35 (444,250) 4.75 -- --
Options expired
during the year ........ (31,250) 1.60 (2,499) 1.60 (11,250) 6.48
----------- ------------ -----------
Options and other
warrants outstanding,
end of year ............ 1,543,322 $ 2.09 1,439,583 $ 2.28 1,528,927 $ 2.49
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
The weighted average grant-date fair value of options and other
warrants granted during 1998 and 1997 was $1.05 and $1.20 per share,
respectively. There were no options granted during 1996.
<TABLE>
<CAPTION>
OPTIONS AND OTHER WARRANTS OPTIONS AND OTHER WARRANTS
OUTSTANDING EXERCISABLE
------------------------------- -------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
----------------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.75 - 3.60 1,543,322 4.8 years $2.09 1,124,503 $2.15
</TABLE>
F-21
<PAGE>
COMMON STOCK WARRANTS - The following table summarizes the Company's
common stock warrants and their activity for the years ended December
31, 1998, 1997 and 1996 (as restated for the one-for-eight reverse
split in October 1996):
<TABLE>
<CAPTION>
WARRANTS
ISSUED AND EXERCISE
OUTSTANDING PRICE EXERCISE PERIOD
----------- ---------- ------------------
<S> <C> <C> <C>
DECEMBER 31, 1998:
1997-A Warrants 337,211 $ 3.40 1/31/97 - 1/31/99
-----------
-----------
Redeemable Common Stock Purchase Warrants 1,495,000 $ 3.40 11/06/97 - 11/06/02
-----------
-----------
Underwriters' Warrants 130,000 $ 5.40 11/12/98 - 11/12/02
-----------
-----------
DECEMBER 31, 1997:
Class A Warrants, beginning of year 524,360 $ 6.00 4/26/89 - 7/26/97
Class A Warrants redeemed during the year (524,360) $ 6.00
-----------
-----------
Class A Warrants, end of year --
-----------
-----------
Class B Warrants, beginning of year 525,860 $ 8.00 4/26/89 - 7/26/97
Class B Warrants redeemed during the year (525,860) $ 8.00
-----------
Class B Warrants, end of year --
-----------
-----------
1997-A Warrants, beginning of year --
1997-A Warrants issued during the year 337,211 $ 12.00 1/31/97 - 1/31/99
-----------
1997-A Warrants, end of year 337,211
-----------
-----------
Redeemable Common Stock Purchase Warrants,
beginning of year --
Redeemable Common Stock Purchase Warrants,
issued during the year 1,495,000 $ 5.40 11/6/97 - 11/6/02
-----------
Redeemable Common Stock Purchase Warrants,
end of year 1,495,000
-----------
-----------
Underwriters' Warrants, beginning of year --
Underwriters' Warrants issued during the year 130,000 $ 5.40 11/12/98 - 11/12/02
-----------
Underwriters' Warrants, end of year 130,000
-----------
-----------
DECEMBER 31, 1996:
Class A Warrants, beginning of year 524,610 $ 6.00 4/26/89 - 7/26/97
Class A Warrants exercised during the year (250) $ 6.00
------------
Class A Warrants, end of year 524,360
-----------
-----------
Class B Warrants 525,860 $ 8.00 4/26/89 - 7/26/97
-----------
-----------
</TABLE>
Each warrant entitles the holder to purchase one share of common stock.
As of January 8, 1998, the Company reduced the exercise price of the
1997-A Warrants from $12.00 to $3.40 and extended the exercise period
from January 31, 1999 to November 6, 2002, to make them correspond more
closely to the Redeemable Common Stock Purchase Warrants.
As of January 6, 1998, the exercise price of the Redeemable Common
Stock Purchase Warrants was adjusted from $5.40 to $3.40 representing
120 percent of the average daily closing price of the Company's Common
Stock for the preceding 20 day period as prescribed in the prospectus
of the Units Offering.
F-22
<PAGE>
There was no expense recognized in the Company's financial statements
relating to either of the warrant exercise price reduction as the
change only affects allocations of additional paid-in capital because
the Redeemable Common Stock Purchase Warrants were issued in
conjunction with an equity offering of the Company. The reduced
exercise prices exceeded the market value of the Company's Common Stock
on the date of the reduction.
The Redeemable Common Stock Purchase Warrants are subject to redemption
by the Company at a price of $0.25 per warrant. All of the outstanding
Redeemable Common Stock Purchase Warrants must be redeemed if any are
redeemed. The Company may redeem the 1997-A Warrants for $0.0001 per
warrant. Any redemption of unexercised 1997-A Warrants would be for all
such outstanding warrants. The Underwriters' Warrants were issued in
connection with the Company's sale of Common Stock and Redeemable
Warrants in November 1997 and were in addition to other fees paid to
the underwriters. The Underwriters' Warrants entitle the holder to buy
one unit consisting of one share of the Company's Common Stock and one
warrant for the purchase of one other share of the Company's Common
Stock for $3.40.
5. STOCK OPTION PLAN
During 1995, the Company approved the 1995 Stock Option Plan (the
"Plan"). Under this Plan, options available for grant can consist of
(i) nonqualified stock options, (ii) nonqualified stock options with
stock appreciation rights attached, (iii) incentive stock options, and
(iv) incentive stock options with stock appreciation rights attached.
The Company has reserved 1,125,000 shares of the Company's common stock
$.0001 par value, for the Plan. The Plan limits participation to
employees, independent contractors, and consultants. Nonemployee
directors are excluded from Plan participation. The option price for
shares of stock subject to this Plan is set by the Stock Option
Committee of the Board of Directors at a price not less than 85% of the
market value of the stock on the date of grant. No stock options shall
be exercisable within six months from the date of grant, unless under a
Plan exception, nor more than ten years after the date of grant. The
Plan provides for the grant of stock appreciation rights, which allow
the holder to receive in cash, stock or combination thereof, the
difference between the exercise price and the fair value of the stock
at date of exercise. The fair value of stock appreciation rights is
charged to compensation expense. The stock appreciation right is not
separable from the underlying stock option or incentive stock option
originally granted and can only be exercised in tandem with the stock
option. During the years ended December 31, 1998 and 1997 the Company
granted 281,295 and 173,850 net options under the Plan, respectively.
No stock appreciation rights are attached to any options outstanding.
At December 31, 1998 and 1997, the Company had 1,543,322 and 1,439,583
stock options outstanding of which only 441,589 and 173,850 had been
issued pursuant to this plan, respectively.
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock-based compensation
awards. Accordingly, no compensation cost has been recognized in the
accompanying consolidated financial statements. The following pro forma
data is calculated net of tax as if compensation cost for the Company's
stock-based compensation awards (see also Note 4) was determined based
upon the fair value at the grant date consistent with the methodology
prescribed under SFAS No. 123.
F-23
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
---------- ------------ ------------
<S> <C> <C> <C>
Net income as reported...................................... $ 414,048 $ 130,026 $ 825,157
Adjustment, net of tax.................................... (233,329) (467,554) --
---------- ------------ ------------
Pro forma net income (loss)................................. $ 180,719 $ (337,528) $ 825,157
Net income per common share as reported..................... $.10 $.05 $ 0.39
Adjustment, net of tax.................................... (.06) (0.17) --
------ ------------ ------------
Pro forma net income (loss) per common share................ $.04 $ (0.12) $ 0.39
Pro forma net income (loss) per common share - assuming
dilution.................................................. $.04 $ (0.12) $ 0.26
Weighted average common shares outstanding.................. 4,191,760 2,751,771 2,135,097
Weighted average common shares outstanding - assuming
dilution.................................................. 4,503,411 2,751,771 3,203,485
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1998 and 1997,
respectively (no option grants during 1996): risk-free interest rates
of 4.50 and 5.93 percent; no dividend yield or assumed forfeitures;
expected lives of 5.4 and 6.7 years; and volatility of 59 and 60
percent. The pro forma amounts above are not likely to be
representative of future years because there is no assurance that
additional awards will be made each year.
6. RELATED PARTIES
During 1998, 1997 and 1996, the Company received approximately $6,822,
$7,157 and $9,116, 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.
John W. Hail, Chief Executive Officer and Chairman of the Board of
Directors of the Company, is the sole director and shareholder of the
John Hail Agency, Inc. ("JHA"). Pursuant to an unwritten agreement, the
Company provided office space, utilities and supplies, as well as an
occasional part-time administrative staff person, through June 30,
1996, to JHA for a monthly payment of $1,000 as reimbursement of the
Company's costs. In addition, the Company made non-interest bearing
advances to JHA of $22,000 and $87,684 during the years ended December
31, 1996 and 1995, respectively. Effective June 30, 1996, the Company
adopted a policy to not make any further advances to JHA, and JHA
executed a promissory note payable to the Company in the principal
amount of $73,963 bearing interest at eight percent per annum and
payable in 60 installments of $1,499 per month. JHA has made repayments
of these advances of $13,042, $6,141 during the fiscal years ended
December 31, 1997 and 1996, respectively. During the year ended
December 31, 1998, JHA made repayments of $54,780. As of June 30, 1998
the note has been paid in full.
During 1995, John W. Hail individually entered into lease agreements
covering telephone equipment and related software and requiring monthly
rental payments. Such equipment and software are utilized exclusively
by the Company. During the years ended December 31, 1998, 1997 and
1996, the Company
F-24
<PAGE>
made aggregate monthly payments pursuant to such lease agreements
of $17,939, $19,427 and $19,427, respectively.
On October 8, 1998, John W. Hail voluntarily surrendered an option to
purchase 100,000 shares of the Company's common stock for $2.70 per
share with an expiration date of May 20, 2007 in exchange for an option
having the same terms other than an exercise price of $1.75 per share
of common stock, which was equal to the fair value of the common stock
on the date of exchange. These options will become exercisable on April
8, 1999.
During the years ended December 31, 1998, 1997 and 1996, the Company
paid Curtis H. Wilson, Sr., a Director of the Company, sales
commissions of $62,555, $32,886 and $38,337, respectively. These
commissions were based upon purchases by Mr. Wilson and his downline
distributors in accordance with the Company's network marketing program
in effect at the time of the sales.
During the first quarter of 1998, the Company agreed to loan John W.
Hail, the Chief Executive Officer and a major shareholder of the
Company, up to $250,000. Subsequently the Company agreed to loan up to
an additional $75,000. The loan is secured, bears interest at eight
percent per annum and is due on March 31, 1999. The loan has been
extended until March 31, 2000. As of December 31, 1998, the balance due
on this loan was $293,936. The loan was unanimously approved by the
Company's board of directors.
7. INCOME TAXES
On a regular basis, management evaluates all available evidence, both
positive and negative, regarding the ultimate realization of the tax
benefits of its deferred tax assets. Management concluded in 1996 that
it is more likely than not that a tax benefit will be realized from its
deferred tax assets and therefore eliminated the previously recorded
valuation allowance. The Company's deferred tax assets relate primarily
to net operating loss carryforwards for income tax purposes at December
31, 1998, totaling $531,856 , which will begin to expire in 2003. The
Company has a net deferred tax asset at December 31, 1998 and 1997, of
$188,773 and $439,917, respectively.
Income taxes for 1998 were comprised of current taxes of $2,196 and
deferred taxes of $251,144. Income taxes for 1997 and 1996 were
comprised of deferred taxes. A reconciliation of the statutory Federal
income tax rate to the effective income tax rate for the years ended
December 31, 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate ............... 34.0% 34.0% 34.0%
State tax effective rate ........................ 4.0 4.6 4.3
Permanent differences ........................... 2.3 6.4 0.0
Benefit of graduated tax rates .................. 0.0 (4.8) (0.4)
Benefit of operating loss carryforwards ......... 0.0 (0.0) (37.9)
Change in effective rate ........................ 0.0 (8.7) 0.0
Other ........................................... (2.3) 0.0 0.0
Reduction in valuation allowance ................ 0.0 0.0 (153.5)
------ ------ ------
Effective income tax rate ....................... 38.0% 31.5% (153.5)%
------ ------ ------
------ ------ ------
</TABLE>
F-25
<PAGE>
Deferred tax liabilities and assets at December 31, 1998 and 1997 are
comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization ....................... $ (38,037) $ (20,682)
----------- ----------
Total deferred tax liabilities ........... (38,037) (20,682)
----------- ----------
Deferred tax assets:
Net operating loss carryforwards .................... 160,889 458,796
Reserves ............................................ 49,404 1,803
Other ............................................... 16,517 --
----------- ----------
Total deferred tax assets ............... 226,810 460,599
----------- ----------
Net deferred taxes .................................... 188,773 439,917
Less current portion of net deferred tax assets ....... 93,496 85,224
----------- ----------
Noncurrent portion .................................... $ 95,277 $ 354,693
----------- ----------
----------- ----------
</TABLE>
8 COMMISSION ADVANCES
Commission advances represent advances to certain associates and are
repayable from future commissions earned by the associates. These
advances do not bear interest and are classified in the accompanying
consolidated balance sheets according to the expected timing of
commissions to be earned by the associates.
9 ACQUISITIONS
On July 31, 1998, the Company acquired all rights, including
formulations and trademarks, for the ToppFast, ToppStamina and ToppFitt
products from ToppMed, Inc. of Los Angeles, California for a total
purchase price of $192,000 which was paid at closing.
Pursuant to a Stock Purchase Agreement having an effective date of
January 31, 1997 (the "Purchase Agreement"), the Company acquired all
of the issued and outstanding capital stock of Chambre' International,
Inc., a Texas corporation ("CII"), and CII became a wholly-owned
subsidiary of the Company (the "CII Acquisition"). The CII Acquisition
was closed on January 31, 1997, and was accounted for under the
purchase method of accounting. CII is a network marketer of various
third-party manufactured cosmetics, skin care and hair care products.
In connection with the CII Acquisitions, the Company issued 6,482
shares of its common stock to the shareholders of CII at closing and
issued an additional 7,518 shares of its common stock to the
shareholders of CII on March 31, 1997, after determination of certain
liabilities.
In connection with the CII Acquisition , the excess of the purchase
price of $135,340, which includes $3,549 of transaction costs, over the
negative $63,985 fair value of assets of CII acquired, net of
liabilities assumed, has been allocated $179,325 to goodwill and
$20,000 to a covenant not to complete. Goodwill and the covenant not to
compete will be amortized over 20 year and 47 month periods,
respectively.
F-26
<PAGE>
Pursuant to an Asset Purchase Agreement having an effective date of
April 16, 1997 (the "Purchase Agreement"), the Company acquired all the
assets of Stay 'N Shape International, Inc. ("SNSI"), Solution Products
International, Inc. ("SPII"), Nation of Winners, Inc. ("NWI"), Now
International, Inc. ("NII"), all Georgia corporations, (collectively
SNSI, SPII, NWI and NII are referred to as the "Selling Group"), free
and clear of any lien, charge, claim, pledge, security interest or
other encumbrance of any type or kind whatsoever, known or unknown (the
"SNSI" Asset Purchase"). The SNSI Asset Purchase was closed on April
16, 1997, and was accounted for under the purchase method of
accounting. Each company in the Selling Group is a network marketer of
various third-party manufactured nutritional supplements and was under
common ownership.
The Company purchased all of the assets, including the network
marketing organizations, of Stay 'N Shape International, Inc., Solution
Products International, Inc., Nation of Winners, Inc., and Now
International, Inc. pursuant to an Asset Purchase Agreement dated April
16, 1997. In connection with the SNSI Asset Purchase, the Company paid
cash of $1,174,441 and issued 125,984 shares of Common Stock at closing
and agreed to either issue additional shares of the Company's Common
Stock having an aggregate market value equal to, or make a cash payment
of, or combination thereof, $750,000 and $1,050,000 on or before June
29, 1998, and May 30, 1999, respectively, subject to reduction for
variance from specified sales targets. As of June 29, 1998 the
specified sales requirement had not been met, therefore the $750,000
installment payment was reduced to zero and no payment was required.
Based upon current sales levels the Company believes that the
$1,050,000 installment payment will be reduced to zero and no payment
will be required. As a result of the SNSI Asset Purchase, the Company
added 39 products to its line, 38 in the weight management and dietary
supplement categories and one in the personal care category, and 3,000
additional distributors.
In connection with the SNSI Asset Purchase, the excess of the purchase
price of $2,074,441, which included $100,000 of transaction costs, over
the $84,063 fair value of the assets acquired, has been allocated
$1,490,378 to goodwill and $500,000 to two covenants not to compete.
Goodwill and the covenants not to compete will be amortized over 20 and
10 year periods, respectively.
Pursuant to a Stock Purchase Agreement having an effective date of May
31, 1996 (the "Purchase Agreement"), the Company acquired all of the
issued and outstanding capital stock of Miracle Mountain International,
Inc., a Colorado corporation ("MMI"), and MMI became a wholly owned
subsidiary of the Company (the "MMI Acquisition"). The MMI Acquisition
was accounted for under the purchase method of accounting. MMI is a
network marketer of various third-party manufactured nutritional
supplement products. Pursuant to the Purchase Agreement and in
connection with the MMI Acquisition, the Company issued and delivered
to the shareholders of MMI 20,000 shares of the Company's common stock.
In connection with the MMI Acquisition, the excess of the purchase
price of $176,103, which includes $56,103 of transaction costs, over
the negative $3,059 fair value of the assets of MMI acquired, net of
liabilities assumed, has been allocated $119,162 to goodwill and
$60,000 to the covenant not to compete. Goodwill and the covenant not
to compete will be amortized over seven and four and one-half year
periods, respectively.
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the acquisitions had occurred
at the beginning of 1998 and 1997, with pro forma adjustments to give
effect to amortization of goodwill together with the related income tax
effect. The unaudited pro forma
F-27
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
information is not necessarily indicative of either the results of
operations that would have occurred had the purchases been made during
the periods presented or the future results of the combined operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net revenues ......................................... $ 13,228,000 $ 10,776,000
Net income ........................................... $ 397,000 $ 142,000
Net income per common share .......................... $ .09 $ .05
Net income per common share - assuming dilution ...... $ .09 $ .04
</TABLE>
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest .................................................... $ 34,663 $ 33,012 $ 23,021
Income taxes ................................................ -- 2,196 --
Noncash financing and investing activities:
Property and equipment acquired by capital lease ............ 99,007 147,508 199,131
Deferred offering costs not yet paid ........................ -- 180,450 --
Fair value of capital stock issued to purchase
Miracle Mountain International Inc. .............................. -- -- 120,000
Acquisition of Chambre' International, Inc.:
Fair value of assets acquired .............................. $ -- $ (84,802) $ --
Fair value of covenant not to compete ...................... -- (20,000) --
Purchase price in excess of tangible assets acquired and
covenant not to compete .................................. -- (179,325) --
Fair value of common stock issuance ........................ -- 84,000 --
Liabilities assumed ........................................ -- 148,787 --
------------ ------------ ------------
Cash paid to purchase Chambre' International, Inc. ......... $ -- $ (51,340) $ --
------------ ------------ ------------
------------ ------------ ------------
SNSI asset purchase:
Fair value of assets acquired .............................. $ -- $ (84,063) $ --
Fair value of covenant not to compete ...................... -- (500,000) --
Purchase price in excess of tangible assets acquired and
covenant not to compete ................................. -- (1,490,378) --
Fair value of common stock issuance ........................ -- 800,000 --
------------ ------------ ------------
Cash paid to purchase SNSI assets .......................... $ -- $(1,274,441) $ --
------------ ------------ ------------
------------ ------------ ------------
ToppMed, Inc. asset purchase:
Fair value of assets acquired .............................. $ -- $ -- $ --
Fair value of covenant not to compete ...................... (64,000) -- --
Purchase price in excess of tangible assets acquired and
covenant not to compete ................................. (128,000) -- --
------------ ------------ ------------
Cash paid to purchase ToppMed, Inc. ........................ $ (192,000) $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-28
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
11. NOTES PAYABLE
The Company has notes payable of $123,787 and $108,744 for the years
ended December 31, 1998 and 1997, respectively. The current balance of
the notes at December 31, 1998 and 1997 is $29,476 and $26,304,
respectively. The notes were issued to acquire vehicles to be used by
the Company and are collateralized by such vehicles for which the notes
were issued to finance. These notes mature ranging from June 2001 to
September 2003 with interest rates on the notes ranging from 8.25
percent to 10.98 percent. Payments of principal and interest are made
on the notes monthly ranging from $425 to $928. Scheduled maturities
for 1999 through 2003 are $29,476, $32,371, $30,946, $22,035 and
$8,957, respectively.
12. ADDITIONAL TAX LIABILITY
During 1998, in an effort to facilitate the growth of its distributor
network, the Company voluntarily began contacting all of the state
sales and use tax authorities to enter into agreements with them
whereby the Company would assume the responsibility for collecting and
remitting sales and use taxes on behalf of its independent
distributors. Certain states had requirements which resulted in an
additional tax liability for the Company as a condition of entering
into the agreement. The liability has an adverse impact on the
Company's earnings, net of the related tax effect, of $261,400 or $.06
per share. Management believes the liability is a one time nonrecurring
charge and will have no further adverse impact on the Company's future
results of operations because the ongoing collection and remittance of
sales and use tax represents neither additional income nor additional
expense to the Company but instead is a pass through item with no
income statement effect.
13. COMMITMENTS AND CONTINGENCIES
RECENT REGULATORY DEVELOPMENTS - A significant portion of the Company's
net sales has been, and is expected to continue to be, dependent upon
the Company's AM-300 product. The Company's net sales of AM-300
represented 49.7 percent, 29.5 percent, and 39.1 percent of net sales
for the years ended 1998, 1997 and 1996, respectively. One of the
herbal ingredients in AM-300 is ephedra concentrate, which contains
naturally occurring ephedrine. Ephedrine products have been the subject
of adverse publicity in the United States and other countries relating
to alleged harmful effects, including the deaths of several
individuals. Currently, the Company offers AM-300 only in the United
States (except in certain states in which regulations may prohibit or
restrict the sale of such product). On April 10, 1996, the Food and
Drug Administration ("FDA") issued a statement warning consumers not to
purchase or ingest natural sources of ephedrine within dietary
supplements claiming to produce certain effects (none of which are
claimed for the Company's product). On June 4, 1997, the FDA proposed a
regulation which will, if it becomes effective as proposed,
significantly limit the ability of the Company to sell AM-300 and any
other weight management products which contain ephedra or ephedrine. If
the FDA's proposed regulations were to become effective, management
believes that the impact on the Company's financial statements would be
a significant reduction in sales, cost of sales and marketing,
distribution and administrative expenses and could result in material
losses to the Company, but would not result in a significant increase
in sales returns nor have a significant adverse effect on financial
position.
PRODUCT LIABILITY - The Company, like other marketers of products that
are intended to be ingested, faces an inherent risk of exposure to
product liability claims in the event that the use of its products
results in injury. Historically, the Company has relied upon its
manufacturer's product liability insurance for coverage. The Company
obtained product liability insurance coverage in its own name in 1997.
The limits of this coverage are $4,000,000 per occurrence and
$5,000,000 aggregate. The Company generally does not obtain
F-29
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
contractual indemnification from parties manufacturing its products.
However, all of the manufacturers of the Company's products carry
product liability insurance which covers the Company's products. The
Company has agreed to indemnify Tinos, L.L.C., the licensor of
Choc-Quilizer, against any product liability claims arising from the
Choc-Quilizer product marketed by the Company, and the Company has
agreed to indemnify Chemins against claims arising from claims made
by the Company's distributors for products manufactured by Chemins
and marketed by the Company. Although the Company has never had a
product liability claim, such claims against the Company could
result in material losses to the Company.
14. SUBSEQUENT EVENTS
On March 11, 1998, the Company filed a Registration Statement, file
number 333-47801, with the Securities and Exchange Commission pursuant
to which the Company is seeking to register 5,000,000 stock purchase
plan participation interests ("Participation Interests") in the
Advantage Marketing Systems, Inc. Distributor Stock Purchase Plan (the
"Plan"). The Participation Interests are also being registered in
accordance with the Oklahoma Securities Act. The Participation
Interests will be offered to the distributors of the Company's products
and services ("Eligible Persons") in lots of five Participation
Interests. An Eligible Person electing to participate in the Plan (a
"Participant") will be entitled through purchase of the Participation
Interests to purchase in the open market through the Plan, shares of
common stock, $.0001 par value per share (the "Common Stock"),
previously issued by the Company. The Participation Interests are
non-transferable; therefore, a market for the Participation Interests
will not develop. The proceeds from sale of the Participation Interests
will become the Participants' contributions to the Plan which will be
used to purchase the Common Stock and will not be placed into escrow
pending purchase of the Common Stock. Other than an annual service fee
of $5.00 per Participant and a transaction fee of $1.25 per month, the
Company will not receive any proceeds from the purchase of the Common
Stock by the Plan. The offering price of each Participation Interest
will be $1.00, and each Eligible Person will be required initially to
purchase a minimum of twenty-five Participation Interests upon electing
to participate in the Plan. There is no minimum amount of sales of
Participation Interests required. The registration statement became
effective February 19, 1999.
* * * * * *
F-30
<PAGE>
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No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company or by any of the Underwriters.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, by any person in any jurisdiction in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such an offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstance, create
any implication that there has been no change in the affairs of the Company
since the date hereof.
-------------------
-------------------
ADVANTAGE MARKETING
SYSTEMS, INC.
4,715,513
PARTICIPATION INTERESTS
IN THE ADVANTAGE
MARKETING SYSTEMS, INC.
1998 DISTRIBUTOR STOCK
PURCHASE PLAN
------------------------
PROSPECTUS
------------------------
Requests for general information or additional
copies of this Prospectus should be directed to
us by calling or writing us at:
ADVANTAGE MARKETING SYSTEMS, INC.
2601 Northwest Expressway, Suite 1210W
Oklahoma City, Oklahoma 73112-7293
Attention: Corporate Secretary
Telephone: (405) 842-0131
----------------------
SEPTEMBER 1, 1999
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