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PROSPECTUS
MARCH 22, 2000
ADVANTAGE MARKETING SYSTEMS, INC.
2,092,211 SHARES OF COMMON STOCK
UNDERLYING 1997-A WARRANTS, REDEEMABLE COMMON STOCK
PURCHASE WARRANTS AND UNDERWRITER WARRANTS
We are offering 1,832,211 shares of Common Stock to the holders of 1997-A
warrants and redeemable common stock purchase warrants. The selling shareholders
are offering 260,000 shares of Common Stock. These shares of common stock may
be, but do not have to be, sold by the selling shareholders.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS,"
BEGINNING AT PAGE 4.
------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS 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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PRICE TO PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO
DISCOUNTS AND COMPANY SELLING
COMMISSIONS SHAREHOLDERS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $3.40 $ -- $3.40 $ --
(underlying 1997-A warrants
and redeemable common stock warrants)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Common Stock $6.63 $ -- $ -- $6.63
(offered by selling shareholders)
- --------------------------------------------------------------------------------------------------------------------
Total $7,953,318 $ -- $6,229,518 $1,723,800
====================================================================================================================
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TABLE OF CONTENTS
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Prospectus Summary ................................................................... 1
Advantage Marketing Systems, Inc. .................................................. 1
The Offering ....................................................................... 2
Summary Financial and Operating Information ........................................ 2
Risk Factors ......................................................................... 4
Use of Proceeds ...................................................................... 11
Security Ownership of Certain Beneficial Owners, Management and Selling
Shareholders ........................................................................ 12
Plan of Distribution ................................................................. 14
Liability Limitations and Indemnification of Officers, Directors, Employees
and Agents .......................................................................... 17
Legal Matters ........................................................................ 16
Experts .............................................................................. 16
Where to Find Additional Information ................................................. 17
Cautionary Statement Relating to Forward Looking Information ......................... 18
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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."
We call this document a prospectus. It covers shares of our common
stock which are offered by us and the selling shareholders to you and others.
This offering to you and others is referred to as the offering. These shares
of our common stock have been registered with the United States Securities
and Exchange Commission.
We recommend that you especially consider that information contained
in "Risk Factor" (page ). All references in this prospectus to fiscal years
are to our fiscal year ended December 31 of each year.
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 54,200 at
September 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.
We review on an ongoing basis our product line for duplication and
sales movement and make adjustments accordingly. As of September 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.
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THE OFFERING
Common stock outstanding
as of March 22, 2000 ................................. 4,237,587 shares
Common stock offered:
By Advantage Marketing Systems ....................... 1,832,211 shares
By the selling shareholders .......................... 260,000 shares
----------------
Total ................................................ 2,092,211 shares
Common stock to be outstanding after
the offering assuming all shares of common
stock are issued pursuant to exercise of
the outstanding warrants ............................. 6,329,798 shares
Use of proceeds ........................................ We intend to use the estimated net
proceeds of $7,323,518 that we will
receive from this offering to expand
sales and for general corporate purposes.
These purposes include working capital
and general administrative overhead and
may include expansion of our U.S.
distributor network and expansion and
enhancement of our product line.
We will have broad discretion to
determine the use of a substantial
portion of the proceeds of the offering
based upon our determination of the
business need.
American Stock Exchange symbol ......................... common stock ................. AMM
1997-A warrants .............. AMMWSA
redeemable common stock
purchase warrants .......... AMMWS
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SUMMARY FINANCIAL AND OPERATING INFORMATION
The following table sets forth our summary historical financial and
operating information for
- - the nine months ended September 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-12.
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.
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FOR THE NINE MONTHS FOR THE YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
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1999 1998 1998 1997
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<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales $ 16,150,491 $9,500,936 $13,287,824 $10,192,227
Gross profit 5,000,467 3,237,161 4,288,595 2,920,567
Income from operations 1,274,978 565,829 739,823 127,688
Income before income taxes 1,503,743 397,197 667,388 189,722
Tax expense 533,683 150,776 253,340 59,696
Net income 970,060 246,421 414,048 130,026
Weighted average common
shares outstanding 4,141,651 4,201,954 4,191,760 2,751,771
Net income per common share - basic $ .23 $ .06 $ .10 $ .05
Weighted average common shares outstanding -
assuming dilution 4,708,759 4,538,783 4,503,411 3,762,642
Net income per common share - assuming dilution $ .21 $ .05 $ .09 $ .04
OPERATING DATA:
Number of active distributors 54,200 30,400 33,000 20,400
Average sales per active distributor $ 35 $ 39 $ 33 $ 41
Total number of products offered (exclusive of
size, color and other product variations) 100 102 100 101
CASH FLOW DATA:
Net cash provided (used) by operating activities $ 2,146,613 $1,229,836 $ 1,242,254 $ (118,587)
Net cash (used) by investing activities (4,791,669) (880,055) (996,283) (1,692,055)
Net cash (used) provided by financing activities (195,496) (544,635) (732,030) 7,416,349
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
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1999 1998 1997
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BALANCE SHEET DATA:
Current assets $ 4,922,715 $ 7,050,495 $6,999,364
Working capital 3,431,724 5,823,182 6,143,041
Total assets 11,834,571 10,717,483 10,336,306
Short-term debt 64,091 116,581 145,105
Long-term debt 131,552 267,558 303,588
Stockholders' equity 10,212,028 9,222,612 9,176,395
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RISK FACTORS
THE PURCHASE OF THE SHARES OF OUR COMMON STOCK INVOLVES A HIGH
DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS, YOU SHOULD CONSIDER THE FOLLOWING FACTORS AND THE MATTERS
DISCUSSED ELSEWHERE IN THIS PROSPECTUS WHEN EVALUATING AN INVESTMENT IN OUR
COMMON STOCK. MANY OF THE FACTORS DISCUSSED BELOW ARE NOT WITHIN OUR CONTROL.
WE PROVIDE NO ASSURANCE THAT ONE OR MORE OF THESE FACTORS
- - will not adversely affect
- THE MARKET PRICE OF OUR COMMON STOCK,
- OUR FUTURE OPERATIONS, AND
- OUR BUSINESS,
- FINANCIAL CONDITION, OR
- RESULTS OF OPERATIONS
- - REQUIRING SIGNIFICANT REDUCTION OR DISCONTINUANCE OF OUR OPERATIONS,
- - REQUIRING US TO SEEK A MERGER PARTNER OR
- - REQUIRING US TO SELL ADDITIONAL STOCK ON TERMS THAT ARE HIGHLY DILUTIVE
TO OUR SHAREHOLDERS.
OUR PRODUCTS SALE REVENUES ARE DEPENDENT ON OUR INDEPENDENT DISTRIBUTORS,
WHOSE REDUCED SALES EFFORTS OR TERMINATION AS A DISTRIBUTOR MAY RESULT IN
SIGNIFICANT LOSS OF SALES REVENUES.
Our success and growth depend upon our ability to attract, retain
and motivate our network of independent distributors who market our products.
Our distributors typically offer and sell our products on a part-time basis
and may engage in other business activities. 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. Under our network marketing system, the distributor downline
organizations are headed by a relatively small number of key distributors who
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 sale revenues and
operating results, and could impair our ability to attract new distributors.
OUR FAILURE TO COMPLY WITH GOVERNMENT REGULATION OF OUR PRODUCTS AND SALES
THROUGH OUR DISTRIBUTOR NETWORK MAY RESULT IN SIGNIFICANT PENALTIES OR
CLAIMS, ANY OF WHICH MAY RESULT IN ENFORCEMENT ACTION BY THE REGULATORY
AGENCY AND IMPOSITION OF PENALTIES AND LOSS OF SALES, ANY OF WHICH COULD HAVE
AN ADVERSE EFFECT OUR FINANCIAL CONDITION.
The formulation, manufacturing, packaging, labeling, advertising,
distribution and sale of our products are subject to regulation by a number
of governmental agencies. The federal 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. Our products and distributor network are
also subject to state and local laws and regulations, as well as those of
foreign countries in which our products are sold. Our failure to comply with
these regulations may adversely affect the continuing ability to offer our
products, the imposition of substantial penalties or result in significant
claims, any of which may result in loss or reduction of sales and adversely
affect our financial condition and the value of our common stock.
OUR FAILURE TO COMPLY WITH THE FOOD AND DRUG ADMINISTRATION REGULATION
OF OUR DIETARY AND COSMETIC PRODUCTS MAY REQUIRE SIGNIFICANT COMPLIANCE
COST OR DISCONTINUANCE OF PRODUCT SALES AND RESULT IN SIGNIFICANT LOSS
OF SALES REVENUE.
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. Most of our products are classified and regulated as dietary
supplements or cosmetics. These products are not subject to pre-market
approval by the Food and Drug Administration. However, these products are
subject to extensive labeling regulation. 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
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regulate those products as drugs and require pre-market clearance for safety
and effectiveness. In this event, the sales of the subject product would be
discontinued. If required, pre-market clearance would be expensive and take a
substantial period of time to complete. Discontinuance of product sales could
have an adverse effect on sales revenues and may eventually adverse affect
our financial condition and the value of our common stock.
IF PROPOSED EPHEDRINE REGULATIONS ARE ENACTED, WE MAY BE REQUIRED TO
END SALES OF OUR AM-300 DIETARY SUPPLEMENT PRODUCT, WHICH GENERATED A
MAJORITY OF OUR REVENUES DURING RECENT YEARS.
The Food and Drug Administration has issued a consumer warning
regarding and proposed regulations covering, dietary supplements that contain
ephedrine. In addition, many states have proposed regulations restricting the
promotion and distribution of ephedrine-containing products. If the Food and
Drug Administration regulations are adopted as proposed or state regulations are
adopted that classify ephedrine-containing products as controlled substances or
prohibit the distribution by persons other than licensed pharmacist, our ability
to sell our AM-300 product will be significantly limited. For the nine months
ended September 30, 1999 and the year ended December 31, 1998, AM-300
represented 67.5% and 49.7% of our net sales, respectively. As of the date of
this prospectus, we cannot predict whether these regulations will be adopted as
proposed or additional regulations will not be adopted which will adversely
affect our continued ability to sell our AM-300 product.
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.
OUR FAILURE TO COMPLY WITH FEDERAL TRADE COMMISSION AND STATE
REGULATIONS COVERING OUR PRODUCT CLAIMS AND ADVERTISING MAY RESULT IN
ENFORCEMENT ACTION AND IMPOSITION OF PENALTIES AND GIVE RISE TO CLAIMS.
The Federal Trade Commission and certain states regulate advertising,
product claims, and other consumer matters, including advertising of our
products. The Federal Trade Commission has instituted enforcement actions
against several dietary supplement companies for false or deceptive advertising,
including the use of testimonials. 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. Enforcement proceedings resulting
from these complaints may result in significant defense costs, settlement
payments or judgments and
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could have a material adverse effect on our financial condition.
THE FAILURE OF OUR NETWORK MARKETING ORGANIZATION TO COMPLY WITH
FEDERAL AND STATE REGULATION COULD RESULT IN ENFORCEMENT ACTION AND
IMPOSITION OF PENALTIES, REQUIRE MODIFICATION OF OUR NETWORK MARKETING
SYSTEM AND NEGATIVE PUBLICITY, ANY OF WHICH COULD ADVERSELY AFFECT
REVENUES AND OUR FINANCIAL CONDITION.
Our network marketing organization is subject to 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.
Accordingly there is the risk that our network marketing system could
be found to be in noncompliance with applicable laws and regulations, which
could then
- - result in enforcement action and imposition of penalties,
- - require modification of our network marketing system,
- - result in negative publicity, or
- - have a negative effect on distributor morale and loyalty.
Any of these consequences could have a material adverse effect on our sales as
well as our financial condition.
THE LEGALITY OF OUR NETWORK MARKETING PROGRAM IS SUBJECT TO CHALLENGE
BY OUR DISTRIBUTORS, WHICH COULD RESULT IN SIGNIFICANT DEFENSE COSTS,
SETTLEMENT PAYMENTS OR JUDGMENTS, AND COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR SALES AND FINANCIAL CONDITION.
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 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.
OUR PRODUCTS ARE SUBJECT TO OBSOLESCENCE AND OUR ABILITY TO INTRODUCE NEW
PRODUCTS AND SUCCESSFULLY MARKET OUR PRODUCTS ARE SOME OF THE KEY ELEMENTS FOR
OUR ABILITY TO GROW AND REMAIN COMPETITIVE AND PROFITABLE.
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
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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. 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, there is no assurance that new products currently experiencing
strong popularity and rapid growth, like our AM-300 product, 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 ASSOCIATED WITH THE USE AND
CONSUMPTION OF OUR WEIGHT MANAGEMENT, DIETARY SUPPLEMENT AND PERSONAL CARE
PRODUCTS, WHICH IF EXCEEDING INSURANCE COVERAGE WOULD HAVE A MATERIAL ADVERSE
EFFECT ON SALES, RESULTS OF OPERATIONS, FINANCIAL CONDITION AND THE VALUE OF OUR
COMMON STOCK.
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 limited product liability
insurance with coverage limits of $4 million per occurrence and $5 million
aggregate. Although we do not obtain contractual indemnification, 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. Product liability claims in
excess of insurance coverage may result in significant losses which adversely
affect product sales, results of our operations, financial condition and the
value of our common stock.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO RETAIN KEY PERSONNEL.
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.
BECAUSE THE COMPETITION FOR QUALIFIED EMPLOYEES IS INTENSE, WE MAY NOT BE ABLE
TO ATTRACT, MOTIVATE AND RETAIN PERSONNEL WITH THE SKILLS AND EXPERIENCE NEEDED
TO SUCCESSFULLY MANAGE AND GROW OUR BUSINESS AND OPERATIONS.
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 and the market value of
our common stock.
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BECAUSE WE DO NOT MANUFACTURE OUR WEIGHT MANAGEMENT, DIETARY SUPPLEMENT AND
PERSONAL CARE PRODUCTS, WE ARE DEPENDENT UPON INDEPENDENT THIRD PARTIES FOR
THE MANUFACTURE AND SUPPLY OF THESE PRODUCTS.
Substantially all of our weight management, dietary supplement and
personal care products are manufactured by third-party manufacturers pursuant
to product formulations developed for us. We do not have any written
contracts with any of our suppliers or manufacturers or their commitments to
continue to sell products to us. There is no assurance that these third-party
manufacturers will continue to reliably supply products to us. 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. An extended interruption in the supply of our products,
especially AM-300 and any other high sales volume product, would result in
loss of sale revenues and adversely affect the results of operations, which
most likely would adversely affect the value of our common stock.
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.
There is significant national media attention regarding the
consumption of products like our weight management and dietary supplement
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 or question earlier favorable
research or publicity. 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 GROWTH STRATEGY INCLUDES THE POSSIBLE ACQUISITION OF INTERESTS IN OTHER
BUSINESSES, WHICH MAY RESULT IN FINANCIAL DEMANDS AND THE ACQUIRED BUSINESS
INTEREST MAY NOT CONTRIBUTE TO OUR BUSINESS GROWTH, CASH FLOWS AND
PROFITABILITY AS EXPECTED .
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.
THE MARKET PRICE AND TRADING VOLUME OF OUR COMMON STOCK MAY HAVE EXTREME
FLUCTUATIONS.
Although our common stock is 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;
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- - 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.
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 this exchange 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 event such minimum requirements for inclusion and
listing are not met, our common stock will be delisted and will no longer be
listed on this exchange. 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
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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. 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. The distributors that participated through contributions
to the pool have the right to assert claims seeking recovery of their
contributions to the pool, plus statutory interest. However, these claims are
subject to applicable state and federal statutes of limitation which may
effectively eliminate all or a portion of these 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
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 and financial
condition, which would adversely affect the value of our common stock.
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 564,846 shares of our common stock at $1.75 to $6.00 per
share; and
- - other outstanding stock options and warrants exercisable for the
purchase of 1,345,318 shares of our common stock at exercise prices of
$1.75 to $6.13 per share (with a weighted average exercise price of
$2.19 per share) during periods that expire in March 2000 through July
2005.
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,
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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 March 22, 2000, we have 4,237,587 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.
377,682 shares of our common stock and options and warrants exercisable
for the purchase of 674,500 shares of commons stock 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, the executive officers, directors and such
shareholders are not permitted before November 6, 2000, 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.
THERE ARE CERTAIN PROVISIONS IN OUR CORPORATE CHARTER AND BYLAWS THAT MAKE IT
DIFFICULT FOR A THIRD PARTY TO ACQUIRE CONTROL OF US, WHICH MAY SERVE TO LIMIT
THE MARKET VALUE OF OUR COMMON STOCK.
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
If all of the shares of common stock offered pursuant to this offering
are issued pursuant to exercise of the 1997-A warrants, redeemable common stock
purchase warrants and underwriter warrants, we will receive estimated net
proceeds of $7,323,518. Warrant exercise, however, is at the option of the
warrant holders. Some or all of the warrant holders may decide not to exercise
their warrants. If warrant holders choose not to exercise their warrants, we
will not receive proceeds from these holders, and we will therefore receive less
than $7,323,518 in net proceeds. Pending the following uses, we will invest the
net proceeds in government securities and other short-term, investment-grade,
interest-bearing instruments. The proceeds received from the exercise of the
warrants will be used entirely by us and will not benefit parties affiliated
with us. We anticipate that these estimated net proceeds will be expended for
general corporate purposes. These purposes include working capital and general
administrative overhead and may include
- - expansion of our U.S. distributor network by
- enhancing our marketing efforts and improving our marketing
material,
- increasing the number of our training and motivational events,
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- hiring additional distributor support personnel,
- establishing more convenient regional success centers in
targeted geographical markets, and
- investing in our computerized information management system;
- - expansion and enhancement of our product line by
- developing new products,
- enhancing the packaging of our existing products, and
- maintaining higher inventory levels at our regional success
centers.
We will have broad discretion to determine the use of a substantial
portion of the proceeds of the offering based upon our determination of the
business need. Any allocation will be at the discretion of our board of
directors.
We believe that the net proceeds of the offering, combined with the
cash and cash equivalents, will be sufficient to fund our budgeted capital and
operating requirements for the next 12 months. We will not receive any proceeds
from the sale of the common stock by the selling shareholders.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
MANAGEMENT AND SELLING SHAREHOLDERS
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
- - each of the selling shareholders.
The percent owned by each named person of the outstanding shares
beneficially owned is based on 4,237,587 outstanding shares on March 22, 2000
and 6,329,798 shares of our common stock outstanding immediately following
completion of this offering. The number of shares outstanding following this
offering assumes issuance of 2,092,211 shares of common stock pursuant to
exercise of the warrants that these shares underlie.
Furthermore, 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 March 22, 2000, 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.
We have been informed that the individuals named in the following table
as members of the selling shareholders had a direct or indirect business
relationship with Paulson Investment Company, Inc. Paulson Investment Company,
Inc. and Joseph Charles & Assoc., Inc. served as the underwriters of our public
offering that was completed in November 1997.
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<TABLE>
<CAPTION>
SHARES OWNED SHARES OWNED
DIRECTORS, OFFICERS AND PRIOR TO THE OFFERING AFTER THE OFFERING(2)
---------------------- SHARES ----------------------
5% OR GREATER SHAREHOLDERS: NUMBER PERCENT OFFERED(1) NUMBER PERCENT
- --------------------------- -------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
John W. Hail(3)(4) 609,354 13.6 -- 609,354 9.3
Curtis H. Wilson(5) 258,088 5.8 -- 258,088 3.9
Roger P. Baresel(3)(6) 175,728 4.0 -- 175,724 2.7
Harland C. Stonecipher(7) 180,768 4.3 -- 180,768 2.9
R. Terren Dunlap(3) 17,500 * -- 17,500 *
Jimmy L. Dungan(3)(8) 9,774 * -- 9,774 *
Executive officers and directors as a group
(five persons)(9) 993,131 21.5 -- 993,131 15.0
SELLING SHAREHOLDERS:
Paulson Investment Company, Inc. 131,040 3.0 131,040 -- --
Chester Paulson 18,720 * 18,720 -- --
Wayne Hamersly 30,000 * 30,000 -- --
Lorraine Maxfield 9,360 * 9,360 -- --
Scott Hamersly 6,400 * 6,400 -- --
Trent Davis 4,160 * 4,160 -- --
Glen Davis 4,160 * 4,160 -- --
Tracy Parker 4,160 * 4,160 -- --
Joseph Charles & Assoc., Inc. 52,000 1.2 52,000 -- --
- ------------------------
</TABLE>
*Less than 1%.
(1) There is no assurance that the selling shareholders will sell any or
all of these shares.
(2) Assumes that all 1997-A warrants, redeemable common stock purchase
warrants, and underwriter's warrants are exercised and that the
officers, directors, 5% or greater shareholders and the selling
shareholders acquire no additional shares of our common stock prior to
completion of this offering and that the shares of our common stock
which are not being offered pursuant to this prospectus are not sold by
the holder.
(3) A director or an executive officer with a business address of 2601
Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293.
(4) 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,
- 11,728 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
- 1,640 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.
(5) 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 3,000 shares of our outstanding common stock held by Ruth Wilson,
wife of Mr. Wilson, with respect to which Mr. Wilson disclaims any
beneficial interest.
(6) The number of shares consist of and each percentage presented includes
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- 7,500 shares of our outstanding common stock jointly held by
Mr. Baresel and his wife, Judith Baresel,
- 2,000 shares of our common stock subject to currently
exercisable 1997-A warrants, 1,000 shares of our common stock
that are subject to currently exercisable redeemable common
stock purchase warrants and 12,500 shares of our common stock
that are subject to currently exercisable stock options held
by Mr. Baresel,
- 31,528 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, 100 shares of our common
stock subject to currently exercisable 1997-A warrants, and
6,100 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.
(7) 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.
(8) The shares are held by Pat Dungan, wife of Mr. Dungan.
(9) The number of shares and each percentage presented includes
- 2,375 shares of our common stock subject to currently
exercisable 1997-A warrants,
- 10,200 shares of our common stock that are subject to
currently exercisable redeemable common stock purchase
warrants, and
- 362,500 shares of our common stock that are issuable upon
exercise of other currently exercisable stock options.
PLAN OF DISTRIBUTION
ADVANTAGE MARKETING SYSTEMS
On our behalf, our officers and other employees ("associated person")
are offering the 1,832,211 shares of common stock issuable upon exercise of the
1997-A warrants and the redeemable common stock purchase warrants if and when
they are exercised by their holders. Holders of these warrants who exercise
their warrants while the registration statement of which this prospectus is a
part is effective under the Securities Act of 1933 may freely resell the shares
of common stock issuable upon exercise, except for holders who are our
"affiliates" (generally, executive officers, directors and 10% or greater
shareholders) within the meaning of Rule 144 promulgated under the Securities
Act. We have not used an underwriter with respect to the exercise of any of
these warrants, and we will not pay any fees when these warrants are exercised.
All proceeds received upon exercise of these warrants will be used for general
corporate purposes.
Each of our officers 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. 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 our common stock pursuant to exercise of the
applicable warrants, and
- - 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,
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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 qualify as an "associated person
not deemed to be a broker" within the meaning of Rule 3a4-1.
SELLING SHAREHOLDERS
We will receive from the selling shareholders the exercise price of the
underwriter warrants that are exercisable for the purchase of 260,000 shares of
our common stock, if these warrants are exercised in full, but will receive no
proceeds from the resale of these shares which may be offered as part of this
offering by the selling shareholders. The shares of common stock offered may be
sold by the selling shareholders, or by pledgees, donees, transferees or other
successors in interest that receive the shares as a gift, partnership
distribution or other non-sale related transfer, from time to time in
transactions on the American Stock Exchange, in negotiated transactions, or a
combination of such methods of sale, at prices related to the prevailing market
prices or negotiated prices. The selling shareholders may effect such
transactions by selling the shares to or through broker-dealers, and the
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling shareholder and/or the purchasers of the shares
from whom the broker-dealers may act as agent or to whom they sell as
principals, or both (which compensation as to a particular broker-dealer might
be in excess of customary commissions).
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in jurisdictions only through registered or
licensed brokers or dealers. In addition, in some states the shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or in compliance with the available registration or qualification
exemption.
The selling shareholders and any broker-dealers or agents that
participate with the selling shareholders in the distribution of the shares may
be deemed to be "underwriters" within the meaning of the Securities act, and any
commissions received by them and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the shares may not simultaneously engage
in market making activities with respect to our common stock during the period
beginning one or five business days prior to commencement of such distribution.
In addition and without limiting the foregoing, each selling shareholder will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including Rule 102, which provision may limit the timing
of purchases and sales of shares of our common stock by the selling shareholder.
We will pay all costs and expenses incurred in connection with the
registration under the Securities Act of the shares offered in this offering.
These costs and expenses include all registration and filing fees, printing
expenses, fees and disbursement of our counsel and accountants and counsel for
the holders of the underwriter warrants, any brokerage fees and commissions
associated with exercise of the 1997-A warrants and redeemable common stock
purchase warrants, fees and disbursements of counsel for the holders of the
underwriter warrants, and stock transfer and other taxes attributable to
exercise of the warrants that the shares underlie. The selling shareholders will
bear all commissions and discounts, if any, associated with the sale of their
shares of common stock.
The holders of the warrants that the shares of common stock underlie
and that are offered in this offering are under no obligation to sell all or any
of the
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shares. The selling shareholders are not restricted as to the prices at which
they may sell their shares of common stock and sales of these shares at less
than market price may depress the market price of the common stock.
LIABILITY LIMITATIONS AND INDEMNIFICATION
OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
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
- - 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.
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 are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
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WHERE TO FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form S-3 (No. 333-31750)
of which this prospectus is a part, under the Securities Act of 1933, as
amended, with the Securities and Exchange Commission, Washington, D.C. 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 following locations of the
Securities and Exchange Commission
Public Relations Room
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549-1004
New York Regional Office
7 World Trade Center, 13th Floor
New York, New York 10048
Chicago Regional Office
500 West Madison Street, Suite 1400
Chicago, Illinois 60661.
Copies of the registration statement and the exhibits and schedules thereto may
be obtained from the Commission at such offices, upon payment of prescribed
rates. You may obtain additional information regarding operation of the
reference rooms by calling the Securities and Exchange Commission at
1-800-SEC-0330. 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 have recently filed the following documents with the Securities and
Exchange Commission under the Exchange Act, each of which is incorporated by
reference in this prospectus:
- - our definitive proxy statement for the annual meeting of shareholders
held on July 16, 1999;
- - our Annual Report on Form 10-KSB for the year ended December 31, 1998;
- - our Quarterly Report on Form 10-QSB for the fiscal quarter ended
March 31, 1999;
- - our Quarterly Report on Form 10-QSB for the fiscal quarter ended
June 30, 1999;
- - our Quarterly Report on Form 10-QSB for the fiscal quarter ended
September 30, 1999; and
- - the description of our common stock, 1997-A warrants, and redeemable
common stock purchase warrants on Form 8-A.
In addition, all reports and other documents filed with the Securities and
Exchange Commission under the Exchange Act prior to termination of this offering
are incorporated by reference into this prospectus.
We distribute to the holders of our securities 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
-17-
<PAGE>
Advantage Marketing Systems, Inc. at 2601 Northwest Expressway, Suite 1210W,
Oklahoma City, Oklahoma 73112-7293, telephone: (405) 842-0131.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING INFORMATION
We have included some forward-looking statements in this section and
other places in the prospectus regarding our expectations after completion of
this offering. These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, levels of
activity, performance or achievements, or industry results, to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. Some of
these forward-looking statements can be identified by the use of forward-looking
terminology including "believes," "expects," "may," "will," "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategies that involve risks and
uncertainties. You should read statements that contain these words carefully
because they:
- - discuss our future expectations;
- - contain projections of our future operating results or of our future
financial condition; or
- - state other "forward-looking" information.
We believe it is important to communicate our expectations to you, but
events may occur in the future over which we have no control and which we are
not accurately able to predict.
-18-
<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 September 30, 1999
and December 31, 1998 (Unaudited) .................................F-2
Condensed Consolidated Statements of Income for the Nine Months
Ended September 30, 1999 and 1998 (Unaudited) .....................F-3
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998 (Unaudited) ..............F-4
Notes to Condensed Consolidated Financial Statements for the
Nine Months Ended September 30, 1999 and 1998 (Unaudited) .........F-6
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report .........................................F-12
Consolidated Balance Sheets, December 31, 1998 and 1997 ..............F-13
Consolidated Statements of Income , Years Ended December 31, 1998,
1997 and 1996 ....................................................F-14
Consolidated Statements of Stockholders' Equity (Deficiency),
Years Ended December 31, 1998, 1997 and 1996 .....................F-15
Consolidated Statements of Cash Flows, Years Ended
December 31, 1998, 1997 and 1996 .................................F-16
Notes to Consolidated Financial Statements, Years Ended
December 31, 1998, 1997 and 1996 .................................F-17
</TABLE>
F-1
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
----------------
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 2,448,665 $5,289,217
Marketable securities, held to maturity......................................... 961,378 --
Receivables - net of allowance of $83,713 and $25,800, respectively............. 370,875 263,503
Receivable from affiliate....................................................... 298,004 293,936
Inventory....................................................................... 629,126 1,009,998
Deferred income taxes........................................................... -- 93,496
Other assets.................................................................... 214,667 100,345
----------- ----------
Total current assets....................................................... 4,922,715 7,050,495
MARKETABLE SECURITIES, Available for sale, at fair value.......................... 1,955,807 --
MARKETABLE SECURITIES, Held to maturity........................................... 1,040,312 --
RECEIVABLES....................................................................... 107,774 129,440
PROPERTY AND EQUIPMENT, Net....................................................... 1,614,380 1,090,280
GOODWILL, Net..................................................................... 1,645,553 1,725,734
COVENANTS NOT TO COMPETE, Net..................................................... 455,555 511,685
DEFERRED INCOME TAXES............................................................. 13,340 95,277
OTHER ASSETS...................................................................... 72,135 114,572
----------- -----------
TOTAL............................................................................. $11,827,571 $10,717,483
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable................................................................ $ 172,837 $ 60,172
Accrued commissions and bonuses................................................. 395,487 156,174
Accrued other expenses.......................................................... 504,435 277,651
Accrued sales tax liability..................................................... 354,141 616,735
Notes payable................................................................... -- 29,476
Capital lease obligations....................................................... 64,091 87,105
----------- -----------
Total current liabilities.................................................. 1,490,991 1,227,313
LONG-TERM LIABILITIES:
Notes payable................................................................... -- 94,311
Capital lease obligations....................................................... 124,552 173,247
----------- -----------
Total liabilities.......................................................... 1,615,543 1,494,871
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
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 4,277,584 and 4,275,514 shares, respectively.............................. 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)......................................... 453,969 (516,091)
Accumulated other comprehensive loss, net of tax................................ (33,244) --
----------- -----------
Total capital and retained earnings (accumulated deficit).................. 10,589,899 9,600,483
Less cost of treasury stock (134,500 shares, common)............................ (377,871) (377,871)
----------- -----------
Total stockholders' equity................................................. 10,212,028 9,222,612
----------- -----------
TOTAL............................................................................. $11,827,571 $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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
----------- ----------
<S> <C> <C>
Net sales $16,150,491 $9,500,936
Cost of sales 11,150,024 6,263,775
----------- ----------
Gross profit 5,000,467 3,237,161
Marketing, distribution and administrative expenses 3,725,489 2,671,332
----------- ----------
Income from operations 1,274,978 565,829
Other income (expense):
Interest and dividends, net 228,765 213,509
Other income (expense) -- 39,482
Settlement of additional tax liability (Note 6) -- (421,623)
----------- ----------
Total other income (expense) 228,765 (168,632)
----------- ----------
INCOME (LOSS) BEFORE TAXES 1,503,743 397,197
TAX EXPENSE (BENEFIT) 533,683 150,776
----------- ----------
NET INCOME (LOSS) $ 970,060 $ 246,421
=========== ==========
Net income (loss) per common share $ .23 $ .06
=========== ==========
Net income (loss) per common share - assuming dilution $ .21 $ .05
=========== ==========
Weighted average common shares outstanding 4,141,651 4,201,954
=========== ==========
Weighted average common shares outstanding - assuming dilution 4,708,759 4,538,783
=========== ==========
</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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................... $ 970,060 $ 246,421
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization....................................................... 397,828 267,703
Deferred taxes...................................................................... 195,773 148,580
Gain on sale of other assets........................................................ -- (35,920)
Provision for bad debts............................................................. 47,109 --
Non cash compensation............................................................... 52,600 --
Changes in assets and liabilities which provided (used) cash:
Receivables and commission advances............................................... (132,815) (66,528)
Inventory......................................................................... 380,872 (24,201)
Other assets...................................................................... (80,982) --
Accounts payable and accrued expenses............................................. 316,168 693,781
---------- ----------
Net cash provided by operating activities...................................... 2,146,613 1,229,836
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................................................. (776,520) (365,334)
Purchase of ToppMed Assets -- (192,000)
Purchases of marketable securities, available for sale............................... (2,009,391) --
Purchases of marketable securities, held to maturity................................. (2,001,690) --
Advances to affiliate................................................................ (40,000) (293,936)
Repayment of receivable from affiliate............................................... 35,932 54,780
Purchase of other assets............................................................. -- (83,565)
---------- ----------
Net cash used in investing activities.......................................... (4,791,669) (880,055)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.......................................................... -- 62,727
Purchase of treasury stock........................................................... -- (306,993)
Payment of deferred offering costs................................................... -- (112,610)
Principal payment on notes payable................................................... (123,787) (40,821)
Principal payment on capital lease obligations....................................... (71,709) (146,938)
---------- ----------
Net cash used in financing activities.......................................... (195,496) (544,635)
---------- ----------
NET DECREASE IN CASH.................................................................. (2,840,552) (194,854)
CASH AND CASH EQUIVALENTS, BEGINNING.................................................. 5,289,217 5,775,276
---------- ----------
CASH AND CASH EQUIVALENTS, ENDING..................................................... $2,448,665 $5,580,422
========== ==========
(Continued)
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
---------- ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 14,069 $ 27,186
Cash paid during the period for income taxes 10,160 --
Noncash financing and investing activities:
Property and equipment acquired by capital lease -- 4,389
Acquisition of ToppMed, Inc.:
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)
========== ==========
(Concluded)
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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. MARKETABLE SECURITIES
During the third quarter 1999, management invested in marketable
securities using cash and cash equivalents. Such investments include US
government securities, corporate bonds, preferred stock and mutual
funds. Marketable securities held at September 30, 1999 consist of the
following:
<TABLE>
<CAPTION>
COST GAINS LOSSES FAIR VALUE
---------- ------- -------- ----------
<S> <C> <C> <C> <C>
HELD TO MATURITY:
Federal Home Loan Notes $ 961,378 $4,437 $ -- $ 965,815
Federal Home Loan Bonds 1,040,313 -- (9,188) 1,031,125
---------- ------ ------- ----------
Total $2,001,691 $4,437 $(9,188) $1,996,940
========== ====== ======= ==========
FAIR VALUE
----------
AVAILABLE FOR SALE:
Money Market Funds $ 569,974
Mutual Funds 966,315
US Corporate Preferred Stocks 123,973
International Corporate Bonds 35,511
US Corporate Bonds 260,034
----------
Total $1,955,807
==========
</TABLE>
Investments in marketable debt and equity securities are identified as
held to maturity and available for sale based on management
considerations of asset/liability strategy, changes in interest rates,
prepayment risk and other factors. Under certain circumstances
(including the deterioration of the issuer's creditworthiness, a change
in tax law, or statutory or regulatory requirements), the Company may
change the marketable security classification. Marketable securities
classified as available for sale are accounted for at fair value with
unrealized gains or losses, net of taxes, excluded from earnings and
reported as a separate component of shareholder's equity. Held to
maturity securities are accounted for at amortized cost.
The Company has the intent and ability to hold to maturity its
investment in marketable securities classified as held to maturity.
Gain or loss on sale of marketable securities is based upon the
specific identification method. The unrealized loss of $53,584 on
available for sale securities is included with net income in total
comprehensive income, net of tax of $20,340. Total comprehensive income
for the nine months ended September 30, 1999 was $936,816.
F-6
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
3. 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 potentially dilutive 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 nine months ended September 30, 1999:
Earnings per common share:
Income available to common stockholders ................ $970,060 4,141,651 $ .23
-----
Earnings per common share - assuming dilution:
Options ................................................. -- 567,108
-------- ---------
Income available to common stockholders plus assumed
conversions ........................................... $970,060 4,708,759 $ .21
-------- --------- -----
For the nine months ended September 30, 1998:
Earnings per common share:
Income available to common stockholders ................ $246,421 4,201,954 $ .06
-----
Earnings per common share - assuming dilution:
Options ................................................. -- 336,829
-------- ---------
Income available to common stockholders plus assumed
conversions ........................................... $246,421 4,538,783 $.05
-------- --------- ----
</TABLE>
Options to purchase 152,387 shares of common stock ranging from $3.60
to $3.75 per share and 154,750 shares of common stock ranging from
$3.00 to $6.00 were outstanding at September 30, 1999 and 1998,
respectively, but were not included in the computation of earnings per
common share - assuming dilution for the nine months ended because the
options' exercise prices were greater than the average market price of
the common shares.
Warrants to purchase 2,092,211 shares ranging from $3.40 to $5.40 were
outstanding at September 30, 1999 and 1998 but were not included in the
computation of earnings per common share - assuming dilution for the
nine months ended because the warrants' exercise prices were greater
than the average market price of the common shares.
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 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
F-7
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
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 nine months ended September 30, 1999:
<TABLE>
<CAPTION>
NINE WEIGHTED-
MONTHS ENDED AVERAGE
SEPTEMBER 30, EXERCISE
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 ............. 196,098 2.57
Options and other warrants
exercised during the period .......... (5,358) 2.80
Options and other warrants
canceled during the period ........... (4,000) 2.70
---------
Options and other warrants
outstanding, end of period ........... 1,730,062 $2.14
=========
</TABLE>
COMMON STOCK WARRANTS - The following table summarizes the Company's
common stock warrants and their activity for the nine months ended
September 30, 1999:
<TABLE>
<CAPTION>
WARRANTS
ISSUED AND EXERCISE
OUTSTANDING PRICE EXERCISE PERIOD
----------- -------- --------------------
<S> <C> <C> <C>
September 30, 1999:
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.
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
F-8
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
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.
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 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 nine months ended September 30, 1999 and 1998, the Company
issued 96,098 and 59,750 options, respectively, under the Plan. At
September 30, 1999 and 1998, the Company had 1,730,062 and 1,435,777,
respectively, stock options outstanding of which only 533,687 and
220,044, respectively, were issued pursuant to the plan.
6. 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 had an adverse impact on the
Company's earnings, net of the related tax effect, of $256,300 or $.06
per share. Management believes the liability was 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 expense to the Company but instead is a pass through item
with no income statement effect.
7. RELATED PARTIES
During the nine months ended September 30, 1999 and 1998, the Company
received $5,113 and $5,165, 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 nine months ended September 30, 1998, the
Company made aggregate monthly payments pursuant to such lease
agreements of $14,570. As of December 31, 1998 the leases had been paid
in full.
F-9
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 30, 1999 and 1998, the Company
paid Curtis H. Wilson, Sr., sales commissions of $86,826 and $38,537,
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 September 30, 1999, the balance
due on these loans was $298,004 plus accrued interest. The loans and
extension were unanimously approved by the Company's board of
directors.
8. 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 65.9% and 45.3% of net sales for the nine months ended
September 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, 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 regulations which will, if adopted as proposed, significantly
limit the ability of the Company to sell AM-300 and any other weight
management products which contain ephedra or ephedrine. 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 FDA 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 proposed regulations. The Company does not know the effect such
report will have on the proposed regulations. There is a risk that
AM-300 may become subject to further federal, state, local or foreign
laws or regulations. These regulations could require the Company to (i)
withdraw or reformulate its AM-300 product with reduced ephedrine
levels or with a substitute for ephedra or ephedrine, (ii) relabel its
product with different warnings or revised directions for use, or (iii)
not make certain statements, possibly including weight loss claims,
with respect to any product containing ephedra or ephedrine. Even in
the absence of further laws or regulation, the Company may elect to
reformulate or relabel its AM-300 product containing ephedra or
ephedrine. While the Company believes that its AM-300 product could be
reformulated and relabeled, there is no assurance that such
reformulation and relabeling will not adversely affect sales.
Consequently, management is unable at the present time to predict the
ultimate resolution of these issues, nor their ultimate impact on the
Company's results of operation or financial position.
F-10
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
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 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.
* * * * * *
F-11
<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-12
<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-13
<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-14
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
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-15
<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-16
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $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.
F-17
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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>
<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
-------- --------- ----
</TABLE>
F-18
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<S> <C> <C> <C>
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.
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>
F-19
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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.
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
F-20
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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 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
F-21
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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.
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-22
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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.
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
F-23
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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.
<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>
F-24
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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 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.
F-25
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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>
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.
F-26
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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.
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.
F-27
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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 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) $ --
========= ========= =========
</TABLE>
F-28
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
--------- ----------- -------
<S> <C> <C> <C>
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>
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
F-29
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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
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>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF OUR COMMON STOCK ONLY IN THOSE JURISDICTIONS WHERE OFFERS AND
SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF
THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
------------
ADVANTAGE MARKETING
SYSTEMS, INC.
2,092,211
SHARES OF COMMON STOCK
UNDERLYING 1977- A WARRANTS
REDEEMABLE COMMON STOCK
PURCHASE WARRANTS
AND UNDERWRITER WARRANTS
------------
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
-----------
March 22, 2000
