<PAGE>
As filed with the Securities and Exchange Commission on October 19, 2000.
Registration No. 333-47801
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
POST EFFECTIVE
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ADVANTAGE MARKETING SYSTEMS, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
OKLAHOMA 7319 73-1323256
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
2601 NORTHWEST EXPRESSWAY, SUITE 1210W JOHN W. HAIL, CHIEF EXECUTIVE OFFICER
OKLAHOMA CITY, OKLAHOMA 73112-7293 ADVANTAGE MARKETING SYSTEMS, INC.
(405) 842-0131 2601 NORTHWEST EXPRESSWAY, SUITE 1210W
OKLAHOMA CITY, OKLAHOMA 73112-7293
(Address and telephone number, including area code, of registrant's (405) 842-0131
principal executive offices) (Name, address and telephone number, of agent for service)
</TABLE>
------------------------
Copies To:
MICHAEL E. DUNN, ESQ.
DUNN SWAN & CUNNINGHAM
2800 OKLAHOMA TOWER
210 PARK AVENUE
OKLAHOMA CITY, OKLAHOMA 73102-5604
TELEPHONE: (405) 235-8318
FACSIMILE: (405) 235-9605
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE
TO THE PUBLIC: As soon as practicable after this
Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ___________________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
<PAGE>
WE WILL AMEND AND COMPLETE THE INFORMATION CONTAINED IN THIS PROSPECTUS.
ALTHOUGH WE ARE PERMITTED BY U.S. FEDERAL SECURITIES LAWS TO OFFER THESE
SECURITIES USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO
BUY THEM UNTIL DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES
HAS BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO
SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE>
SUBJECT TO COMPLETION, DATED , 2000
PROSPECTUS
3,545,091 PARTICIPATION INTERESTS
ADVANTAGE MARKETING SYSTEMS, INC. 1998
DISTRIBUTOR STOCK PURCHASE PLAN
ADVANTAGE MARKETING SYSTEMS, INC.
2601 NORTHWEST EXPRESSWAY, SUITE 1210W
OKLAHOMA CITY, OKLAHOMA 73112-7293
TELEPHONE: (405) 842-0131
We are offering 3,545,091 interests ("participation interests") in the
Advantage Marketing Systems, Inc. 1998 Distributor Stock Purchase Plan to the
distributors of our products and services in lots of five participation
interests.
The participation interests are non-transferrable; therefore, a market for the
participation interests will not develop.
The proceeds from sale of the participation interests will become the
participants' contributions to the plan which will be used to purchase our
common stock and will not be placed into escrow pending purchase of the common
stock.
Other than an annual service fee of $5.00 per participant and a transaction
fee of $1.25 per month, we will not receive any proceeds from the sale of the
participation interests or purchase of our common stock by the plan.
The offering price of each participation interest is $1.00, and each
distributor is required initially to purchase a minimum of 25 participation
interests upon electing to participate in the plan.
There is no minimum amount of sales of participation interests required.
Our common stock is listed on the American Stock Exchange under the symbol
"AMM."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING AT PAGE 4.
------------------------
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per participation interest.................. $1.00 $-- $1.00
-------------------------------------------------------------------------------------------------------------------
Total....................................... $3,545,091 $-- $3,545,091
===================================================================================================================
</TABLE>
THE DATE OF THIS PROSPECTUS IS ___________________, 2000
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the captions "Prospectus Summary," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Certain, but not necessarily all, of such forward-looking statements
can be identified by the use of forward-looking terminology such as
"anticipates," "believes," "expects," "may," "will," or "should" or other
variations thereon, or by discussions of strategies that involve risks and
uncertainties. Our actual results or industry results may be materially
different from any future results expressed or implied by such forward-looking
statements. Factors that could cause our actual results to differ materially
include general economic and business conditions; our ability to implement our
business and acquisition strategies; changes in the network marketing industry
and changes in consumer preferences; competition; availability of key personnel;
increasing operating costs; unsuccessful advertising and promotional efforts;
changes in brand awareness; acceptance of new product offerings; and changes in,
or the failure to comply with, government regulations (especially food and drug
laws and regulations); our ability to obtain financing for future acquisitions;
and other factors.
------------------------
Chambre-Registered Trademark-, Spark of Life-Registered Trademark-,
Young at Heart-Registered Trademark-, Co-Clenz-Registered Trademark-, Stay 'N
Shape-Registered Trademark-, Sine-eze-Registered Trademark-, ToppFast-Registered
Trademark- and AM300-Registered Trademark- are our registered trademarks.
------------------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY..........................................................-1-
RISK FACTORS................................................................-4-
USE OF PROCEEDS............................................................-12-
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY............................-13-
CAPITALIZATION.............................................................-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................-15-
DESCRIPTION OF THE PLAN....................................................-21-
BUSINESS...................................................................-26-
MANAGEMENT.................................................................-40-
CERTAIN TRANSACTIONS.......................................................-44-
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............-45-
DESCRIPTION OF SECURITIES..................................................-46-
SHARES ELIGIBLE FOR FUTURE SALE............................................-50-
PLAN OF DISTRIBUTION.......................................................-52-
LEGAL MATTERS..............................................................-53-
EXPERTS....................................................................-53-
WHERE TO FIND ADDITIONAL INFORMATION.......................................-53-
-i-
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information appearing elsewhere in
this document. It does not contain all the information that is or may be
important to you. You should read this entire document carefully. For additional
information, see "Where You Can Find Additional Information" (page 53).
We call this document a prospectus. It covers the participation
interests in our 1998 Distributor Stock Purchase Plan which are offered by us to
you and other distributors of our products. This offering to you and others is
referred to as the offering. The participation interests have been registered
with the United States Securities and Exchange Commission.
All references in this Prospectus to fiscal years are to our fiscal
year ended December 31 of each year.
Effective December 11, 1995, our parent Delaware corporation also named
Advantage Marketing Systems, Inc. merged into us. Following the merger, we
survived and our name was changed from "AMS, Inc." to "Advantage Marketing
Systems, Inc."
We have expanded our network marketing organization with the
acquisition of
- Miracle Mountain International, Inc. on May 31, 1996 (the "Miracle
Mountain acquisition"),
- Chambre International, Inc. on January 31, 1997 (the "Chambre
International acquisition"),
- the assets of Stay 'N Shape International, Inc., Solution Products
International, Inc., Nation of Winners, Inc., and Now International,
Inc. on April 16, 1997 (the "Stay 'N Shape International asset
purchase"), and
- all rights, including formulations and trademarks, for the ToppFast,
ToppStamina and ToppFitt products from ToppMed, Inc. on July 31, 1998
(the "TI" asset purchase").
Except as otherwise indicated, the information contained in this
prospectus assumes that our outstanding stock options and warrants at September
30, 2000, exercisable for the purchase of 3,462,457 shares of our common stock,
are not exercised.
ADVANTAGE MARKETING SYSTEMS, INC.
We market a product line consisting of approximately 102 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 20,400 at December 31, 1997, 33,000 at December 31,
1998, and 61,200 at December 31, 1999 to approximately 76,100 at June 30, 2000.
An "active" distributor is one who purchased at least $15 under our autoship
program or at least $50 if not under our autoship program during the preceding
12 months.
The distributors in our network are encouraged to recruit interested
people to become new distributors of our products. New distributors are placed
beneath the recruiting distributor in the "network" and are referred to as being
in that distributor's "downline" organization. Our marketing plan is designed to
provide incentives for distributors to build, maintain and motivate an
organization of recruited distributors in their downline organization to
maximize their earning potential. Distributors generate income by purchasing our
products at wholesale prices and reselling them at retail prices. Distributors
also earn bonuses on product purchases generated by the distributors in their
downline organization.
Our growth strategy is to expand our product line and network of
independent distributors to increase sales. An increase in the number of
distributors generally results in increased sales volume, and new products
create enthusiasm among distributors, serve as a promotional tool in selling
other products, and attract new distributors. Since 1995, we have introduced
eight new products to our product line in the weight management and dietary
supplement categories. Through the 1997 acquisition of Chambre International,
Inc., we added 68 products to our product line in the personal care category and
six products to our product line in the dietary supplement category. Through the
1997 Stay 'N Shape International asset purchase, we added 38 products to our
product line in the weight management and dietary supplement categories and one
product to our product line in the personal care category. During 1998, we
introduced ToppFast and Dial A Doc. In connection with these acquisitions, we
acquired approximately 6,790 additional distributors.
We review on an ongoing basis our product line for duplication and
sales movement and make adjustments accordingly. As of June 30, 2000, our
product line consisted of
-1-
<PAGE>
- seven weight management products,
- 28 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.
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Securities offered.............. 3,545,091 interests ("participation
interests") in the Advantage Marketing
Systems, Inc. 1998 Distributor Stock
Purchase Plan (the "plan") offered to the
distributors of our products and services in
lots of five participation interests. We
refer to a distributor electing to
participate in the plan as a "participant."
The participation interests are
non-transferrable; therefore, a market for
the participation interests will not
develop.
Common Stock outstanding........ 4,350,379 shares as of the date of this
prospectus.
Estimated net proceeds.......... $3,545,091 assuming sale of the offered
participation interests in full. Estimated
offering expenses of $90,000 will be paid by
us and will not reduce the participants'
contributions to the plan. However, we will
receive from the estimated net proceeds
annual service fees of $5.00 per participant
and monthly transaction fees of $1.25 per
participant.
Use of proceeds................. The proceeds received from sale of the
participation interests will be contributed
to the plan for the accounts of the
participants. Such proceeds will be used to
- pay the annual service fees and
transaction fees of $5.00 and $1.25 per
participant, respectively, and
- purchase our previously issued and
outstanding common stock in the open
market.
The annual service fees and monthly
transaction fees will be used to reimburse
us for the offering expenses of this
offering and cost of administering the plan.
-2-
<PAGE>
American Stock Exchange symbol.. Common Stock............... AMM
</TABLE>
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following table sets forth our summary historical financial and
operating information for
- the six months ended June 30, 2000 and 1999 derived from our unaudited
condensed consolidated financial statements beginning on page F-2 and
- the fiscal years ended December 31, 1999 and 1998 derived from our
audited consolidated financial statements beginning on page F-11.
The following information should be read in conjunction with our consolidated
financial statements and the related notes thereto, and other information
presented in this prospectus. The statements of operations data for any
particular year or period are not necessarily indicative of the results of
operations for any future period.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEARS ENDED
ENDED JUNE 30, DECEMBER 31,
--------------------------- ---------------------------
2000 1999 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales............................................ $14,008,073 $9,926,596 $22,427,551 $13,287,824
Gross profit......................................... 4,547,877 3,074,896 6,816,610 4,288,595
Income from operations............................... 555,632 711,684 1,579,672 739,823
Income before income taxes........................... 622,847 864,456 1,951,808 667,388
Income taxes......................................... 236,433 291,010 676,025 253,340
Net income........................................... 386,414 573,446 1,275,783 414,048
Weighted average common
shares outstanding................................ 4,319,911 4,141,014 4,139,706 4,191,760
Net income per common share - basic.................. $ .09 $ .14 $ .31 $ .10
Weighted average common shares outstanding -
assuming dilution.................................. 6,038,590 4,570,855 4,778,576 4,503,411
Net income per common share - assuming dilution...... $ .06 $ .13 $ .27 $ .09
OPERATING DATA:
Number of active distributors (approximate).......... 76,100 46,800 61,200 33,000
Average sales per active distributor................. $ 39 $ 44 $ 30 $ 33
Total number of products offered (exclusive of
size, color and other product variations)........ 102 101 101 100
CASH FLOW DATA:
Net cash provided (used) by operating activities..... $ (858,414) $1,291,625 $2,370,939 $1,242,254
Net cash used in investing activities............... (63,366) (332,554) (5,473,205) (996,283)
Net cash (used in) provided by financing activities.. (674,285) (176,646) (524,057) (732,030)
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
2000 1999 1998
------------ ---------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.................................................... $ 4,201,136 $ 4,455,078 $ 7,050,495
Working capital .................................................. 2,884,220 2,715,525 5,823,182
Total assets...................................................... 11,527,333 12,160,383 10,717,483
Short-term debt................................................... 94,574 80,843 116,581
Long-term debt.................................................... 189,635 188,847 267,558
Stockholders' equity ............................................. 10,020,782 10,231,983 9,222,612
</TABLE>
-3-
<PAGE>
RISK FACTORS
PURCHASE OF PARTICIPATION INTERESTS OFFERED HEREBY AND PURCHASE OF OUR
COMMON STOCK THROUGH PARTICIPATION IN THE PLAN INVOLVES A HIGH DEGREE OF RISK.
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED WHEN EVALUATING THE PURCHASE OF THE PARTICIPATION
INTERESTS OFFERED HEREBY AND INVESTMENT IN OUR COMMON STOCK THROUGH THE PLAN.
MANY OF THE FACTORS DISCUSSED BELOW ARE NOT WITHIN OUR CONTROL. WE PROVIDE NO
ASSURANCE THAT ONE OR MORE OF SUCH FACTORS WILL NOT HAVE A MATERIAL ADVERSE
EFFECT ON OUR FUTURE OPERATIONS AND, CONSEQUENTLY, ON OUR BUSINESS, FINANCIAL
CONDITION, RESULTS OF OPERATIONS OR THE MARKET PRICE OF OUR COMMON STOCK.
WE ARE DEPENDENT ON OUR DISTRIBUTORS.
Our success and growth depend upon our ability to attract, retain and
motivate our network of independent distributors who market our products.
Distributors are independent contractors who purchase products directly from us
for resale and their own use. Distributors typically offer and sell our products
on a part-time basis and may engage in other business activities, including the
sale of products offered by our competitors. Typically, we have non-exclusive
arrangements with our distributors which may be canceled at will and contain no
minimum purchase requirements by the distributors. While we encourage
distributors to focus on the purchase and sale of our products, distributors may
give higher priority to other products, reducing their efforts devoted to
marketing our products. Also, our ability to attract and retain distributors
could be negatively affected by adverse publicity relating to us, our products
or our operations. In addition, as a result of our network marketing system, the
distributor downline organizations headed by a relatively small number of key
distributors are responsible for a significant percentage of total sales.
The loss of a significant number of distributors, including any key
distributors, for any reason, could adversely affect our sales and operating
results, and could impair our ability to attract new distributors. There is no
assurance that our network marketing program will continue to be successful or
that we will be able to retain or expand our current network of independent
distributors.
WE ARE SUBJECT TO GOVERNMENT REGULATION.
Our operations are subject to and affected by laws, regulations,
administrative determinations, court decisions and similar constraints at the
federal, state and local levels and the laws and regulations of foreign
countries in which our products are or may be sold. The formulation,
manufacturing, packaging, labeling, advertising, distribution and sale of our
products are subject to regulation by a number of governmental agencies. These
agencies include the Food and Drug Administration, the Federal Trade Commission,
the Consumer Product Safety Commission, the United States Department of
Agriculture, and the Environmental Protection Agency.
MANY OF OUR PRODUCTS ARE REGULATED BY THE FOOD AND DRUG ADMINISTRATION.
The most active governmental agency regulating our products is the Food
and Drug Administration. Our products are subject to regulation under the
Federal Food, Drug, and Cosmetic Act and regulations promulgated thereunder.
The Federal Food, Drug, and Cosmetic Act has been amended several times
with respect to dietary supplements, most recently by the Nutrition Labeling and
Education Act of 1990 and the Dietary Supplement Health and Education Act of
1994. Our products are generally classified and regulated as dietary supplements
under the Federal Food, Drug, and Cosmetic Act, as amended. Our products are not
subject to pre-market approval by the Food and Drug Administration. However,
these products are subject to extensive labeling regulation by the Food and Drug
Administration. Moreover, if the Food and Drug Administration determines, on the
basis of labeling or advertising claims by us, that the "intended use" of any of
our products is for the diagnosis, cure, mitigation, treatment or prevention of
disease, the Food and Drug Administration can regulate those products as drugs
and require pre-market clearance for safety and effectiveness.
On April 10, 1996, the Food and Drug Administration issued a statement
warning consumers not to purchase or ingest natural sources of ephedrine within
dietary supplements. On June 4, 1997, the Food and Drug Administration proposed
regulations that will, if they become effective as proposed, significantly limit
our ability to sell dietary supplements that contain ephedrine, including our
AM-300. For the six months ended June 30, 2000 and the year ended December 31,
1999, AM-300
-4-
<PAGE>
represented 67.7% and 66.6% of our net sales, respectively. The proposed
regulations will become effective 180 days following issuance of the final
regulations by publication in the Federal Register. Several trade organizations
in the dietary supplement industry have commented on the proposed regulations,
requesting substantial modifications. As of the date of this prospectus, we
cannot predict whether the Food and Drug Administration will make any material
changes to these proposed regulations.
The Food and Drug Administration labeling requirements for dietary
supplements are set forth in final regulations that are effective with respect
to labels affixed to containers after March 23, 1999. These final regulations
include how to declare nutrient content information, and the proper detail and
format required for the "Supplemental Facts" box. Our product labeling have been
revised to comply with these regulations.
In addition, on April 29, 1998 the Food and Drug Administration
published proposed regulations offering guidance and providing limitations on
permissible "structure-function" statements (claims as to the benefit or effect
of a product or an ingredient on the body's structure or function) to be placed
on labels and in brochures. We anticipate that some of these proposed
regulations as proposed will become final; however, we believe these new
regulations will not significantly change the way that the Food and Drug
Administration currently interprets "structure-function" statements. Thus, we do
not expect to make any substantial label revisions based on these regulations.
Many states have also recently become active in the regulation of
dietary supplement products and may require us to modify the labeling or
formulation of certain products sold in those states. Furthermore; several
states either regulate or are considering regulating ephedrine-containing
products as controlled substances or are prohibiting the sale of such products
by persons other than licensed pharmacists.
Consequently, there is a risk that AM-300 may become subject to further
federal, state, local or foreign laws or regulations. These laws or regulations
could require us to
- withdraw or reformulate our AM-300 product with reduced ephedrine
levels or with a substitute for ephedrine,
- relabel our products with different warnings or revised directions for
use, or
- not make certain statements, possibly including weight loss claims,
with respect to any product containing ephedrine.
While we believe that AM-300 could be reformulated and relabeled, there can be
no assurance in that regard or that reformulation and relabeling would not have
an adverse effect on sales of such product or related products within our
product line even though such products do not contain ephedra or ephedrine.
The Ephedra Research Foundation has contracted with a consulting firm
to carry out a clinical study concerning the safety of ephedrine when ingested
in combination with caffeine as a dietary supplement. This study is currently
being conducted at two sites, Beth Israel-Deaconess Medical Center in Boston,
affiliated with Harvard Medical School, and St. Luke's-Roosevelt Hospital in New
York City, affiliated with Columbia University. We have been informed that the
final results of this study will be published in the fourth quarter of 2000.
THE FEDERAL TRADE COMMISSION AND CERTAIN STATES REGULATE OUR PRODUCT
CLAIMS AND ADVERTISING.
The Federal Trade Commission and certain states regulate advertising,
product claims, and other consumer matters, including advertising of our
products. In the past several years the Federal Trade Commission has instituted
enforcement actions against several dietary supplement companies for false or
deceptive advertising of certain products. In addition, the Federal Trade
Commission has increased its scrutiny of the use of testimonials, such as those
we have utilized. We provide no assurance that
- the Federal Trade Commission will not question our past or future
advertising or other operations or
- a state will not interpret product claims presumptively valid under
federal law as illegal under that state's regulations.
Also, our distributors and their customers may file actions on their own behalf,
as a class or otherwise, and may file complaints with the Federal Trade
Commission or state or local consumer affairs offices. These agencies may take
action on their own initiative or on a referral from distributors, consumers or
others. If taken, such actions may result in
- entries of consent decrees,
-5-
<PAGE>
- refunds of amounts paid by the complaining distributor or consumer,
- refunds to an entire class of distributors or customers, or
- other damages, and
- changes in our method of doing business.
A complaint based on the activities of one distributor, whether or not such
activities were authorized by us, could result in an order affecting some or all
distributors in a particular state, and an order in one state could influence
courts or government agencies in other states. Proceedings resulting from these
complaints may result in significant defense costs, settlement payments or
judgments and could have a material adverse effect on us.
OUR NETWORK MARKETING SYSTEM IS SUBJECT TO FEDERAL AND STATE
REGULATION.
Our network marketing system is subject to a number of federal and
state laws and regulations administered by the Federal Trade Commission and
various state agencies. These laws and regulations include securities, franchise
investment, business opportunity and criminal laws prohibiting the use of
"pyramid" or "endless chain" types of selling organizations. These regulations
are generally directed at ensuring that product sales are ultimately made to
consumers (as opposed to other distributors) and that advancement within the
network marketing system is based on sales of products, rather than investment
in the company or other non-retail sales related criteria.
The compensation structure of a network marketing organization is very
complex. Compliance with all of the applicable regulations and laws is uncertain
because of
- the evolving interpretations of existing laws and regulations and
- the enactment of new laws and regulations pertaining in general to
network marketing organizations and product distribution.
We have not obtained any no-action letters or advance rulings from any
federal or state securities regulator or other governmental agency concerning
the legality of our operations. Also, we are not relying on a formal opinion of
counsel to such effect. Accordingly there is the risk that our network marketing
system could be found to be in noncompliance with applicable laws and
regulations, which could have a material adverse effect on us. Such a decision
could
- require modification of our network marketing system,
- result in negative publicity, or
- have a negative effect on distributor morale and loyalty.
In addition, our network marketing system will be subject to regulations in
foreign markets administered by foreign agencies should we expand our network
marketing organization into such markets.
THE LEGALITY OF OUR NETWORK MARKETING PROGRAM IS SUBJECT TO CHALLENGE
BY OUR DISTRIBUTORS.
We are subject to the risk of challenges to the legality of our network
marketing organization by our distributors, both individually and as a class.
Generally such challenges would be based on claims that our network marketing
program was operated as an illegal "pyramid scheme" in violation of federal
securities laws, state unfair practice and fraud laws and the Racketeer
Influenced and Corrupt Organizations Act. An illegal pyramid scheme is generally
a marketing scheme that promotes "inventory loading" and does not encourage
retail sales of the products and services to ultimate consumers. Inventory
loading occurs when distributors purchase large quantities of non-returnable
inventory to obtain the full amount of compensation available under the network
marketing program. In the event of challenges to the legality of our network
marketing organization by our distributors, there is no assurance that we will
be able to demonstrate that
- our network marketing policies were enforced and
- the network marketing program and distributors' compensation thereunder
serve as safeguards to deter inventory loading and encourage retail
sales to the ultimate consumers.
Proceedings resulting from these claims could result in significant defense
costs, settlement payments or judgments, and could have a material adverse
effect on us. One of our competitors, Nutrition for Life International, Inc., a
multi-level seller of personal care and nutritional supplements, recently
announced that it had settled class action litigation brought by distributors
alleging fraud in connection with the
-6-
<PAGE>
operation of a pyramid scheme. Nutrition for Life International agreed to pay in
excess of $3 million to settle claims brought on behalf of its distributors and
certain purchasers of its stock.
We believe that our marketing program is significantly different from
the program allegedly promoted by Nutrition for Life International and that our
marketing program is not in violation of anti-pyramid laws or regulations.
However, there can be no assurance that claims similar to the claims brought
against Nutrition for Life International and other multi-level marketing
organizations will not be made against us, or that we would prevail in the event
any such claims were made. Furthermore, even if we were successful in defending
against any such claims, the costs of conducting such a defense, both in dollars
spent and in management time, could be material and adversely affect our
operating results and financial condition. In addition, the negative publicity
of such a suit could adversely affect our sales and ability to attract and
retain distributors.
A LARGE PORTION OF OUR NET SALES ARE ATTRIBUTABLE TO OUR AM-300
PRODUCT.
A significant portion of our net sales have been, and is expected to
continue to be, dependent upon our AM-300 product. AM-300 contains an ephedra
herb concentrate containing naturally occurring ephedrine. Our net sales of
AM-300 represented approximately 67.6%, 66.6% and 49.7% of our net sales for the
six months ended June 30, 2000 and for the years 1999 and 1998, respectively. In
the event the recently proposed Food and Drug Administration regulation related
to products containing ephedrine is issued as a final rule, or such products
become subject to further federal, state or local laws and regulations, we could
be required to
- withdraw or reformulate our AM-300 product,
- relabel such product, or
- not make certain statements, possibly including weight management
claims, with respect to such product.
Any such event could have a material adverse effect upon our sales and results
of operations.
COMPETITION FOR DISTRIBUTORS AND IN THE MARKETING OF OUR PRODUCTS IS INTENSE.
We are subject to significant competition in recruiting distributors
from other network marketing organizations. Most of our competitors are
substantially larger, offer a greater variety of products and have considerably
greater financial resources. Our ability to remain competitive depends, in
significant part, on our success in recruiting and retaining distributors
through an attractive bonus plan and other incentives. We provide no assurance
that our programs for recruitment and retention of distributors will be
successful.
The business of distributing and marketing weight management, dietary
supplement, and personal care products is highly competitive. This market
segment includes numerous manufacturers, other network marketing companies,
catalog companies, distributors, marketers, retailers and physicians that
actively compete for the business of consumers. We compete with other providers
of such products, especially retail outlets, based upon convenience of purchase,
price and immediate availability of the purchased product. Our market is highly
sensitive to the introduction of new products or weight management plans
(including various prescription drugs) that may rapidly capture a significant
share of the market. As a result, our ability to remain competitive depends in
part upon the successful introduction of new products at competitive prices.
OUR PRODUCTS ARE SUBJECT TO OBSOLESCENCE.
The introduction by us or our competitors of new weight management,
nutritional supplement and personal care products offering increased
functionality or enhanced results may render existing products obsolete and
unmarketable. Therefore, our ability to successfully introduce new products into
the market on a timely basis and achieve acceptable levels of sales has and will
continue to be a significant factor in our ability to grow and remain
competitive and profitable. In addition, the nature and mix of our products are
important factors in attracting and maintaining our network of independent
distributors, which consequently affects demand for our products. Although we
seek to introduce additional products each year, the success of new products is
subject to a number of conditions, including customer acceptance. There can be
no assurance that
- our efforts to develop innovative new products will be successful,
- customers will accept new products or
- that we will obtain required regulatory approvals of such new products.
In addition, no assurance can be given that new
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<PAGE>
products currently experiencing strong popularity and rapid growth will maintain
their sales over time. In the event we are unable to successfully increase the
product mix and maintain competitive product replacements or enhancements in a
timely manner in response to the introduction of new products, competitive or
otherwise, our sales and earnings will be materially and adversely affected.
WE ARE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS.
We, like other marketers of products that are intended to be ingested,
face an inherent risk of exposure to product liability claims in the event that
the use of our products results in injury. We maintain product liability
insurance with coverage limits of $4,000,000 per occurrence and $5,000,000
aggregate. We generally do not obtain contractual indemnification from parties
manufacturing our products. However, all of the manufacturers of our products
carry product liability insurance which covers our products.
We have agreed to indemnify Tinos, L.L.C., the licensor of
Choc-Quilizer, against any product liability claims arising from the
Choc-Quilizer product marketed by us. Also we have agreed to indemnify Chemins
Company, Inc. against claims arising from claims made by our distributors for
products manufactured by Chemins and marketed by us. Although we have never had
a product liability claim, such claims could cause us to have material losses.
WE ARE DEPENDENT UPON OUR EXECUTIVE OFFICERS.
Our growth and future success depends in part on the continued
availability of certain key management personnel, including John W. Hail, our
founder, Chief Executive Officer and Chairman of the Board, and Dr. Joseph B.
Williams, our President, Chief Financial Officer and one of our directors. We do
not maintain life insurance covering our executive officers.
Our continued growth and profitability also depends in part on our
ability to attract and retain other management personnel. Although historically
we have not had any difficulty in attracting and retaining management personnel,
there can be no assurance that we will continue to be able to do so in the
future.
MANAGEMENT OF OUR GROWTH MAY PROVIDE CHALLENGES.
We have experienced substantial growth in sales, operations, personnel
and the number of distributors, which has challenged and will continue to
challenge our management and operating resources. Continued growth will require
us to
- increase our sales and marketing, support, and administrative
personnel,
- increase our distributor training and support capabilities and
- expand our information management systems.
There is no assurance that we will be able to attract and retain the necessary
personnel to accomplish our growth strategies or that we will not experience
constraints that will adversely affect our ability to satisfactorily support our
distributors. If our management is unable to manage growth effectively, our
sales and earnings may be materially adversely affected.
WE DEPEND SOLELY ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS.
Substantially all of our products are manufactured by third-party
manufacturers pursuant to product formulations developed for us. We do not have
any written contracts with any of our suppliers or manufacturers or their
commitments to continue to sell products to us. A substantial portion of our
products have been supplied by Chemins Company, Inc., which is a privately held
corporation with no affiliation with us. We believe that our relationship with
Chemins is satisfactory. However, there can be no assurance that Chemins will
continue to reliably supply products to us. We do not have long-term supply
agreements with Chemins or any other vendor. However, we customarily enter into
contracts with such third-party manufacturers to establish the terms and
conditions of product purchases. Accordingly, there is a risk that any of our
suppliers or manufacturers could discontinue selling their products to us for
any reason. In the event any of our third-party manufacturers were to become
unable or unwilling to continue to provide the products in required volumes, we
would be required to identify and obtain acceptable replacement manufacturing
sources. There is no assurance that we will be able to obtain alternative
manufacturing sources on a timely basis.
OUR BUSINESS IS SUBJECT TO UNFAVORABLE PUBLICITY.
We believe the weight management and dietary supplement products market
is affected by national media attention regarding the consumption of such
products. There is no assurance that future scientific research or publicity
will be favorable to the weight management and dietary supplement markets or any
-8-
<PAGE>
particular product, or be consistent with earlier favorable research or
publicity. Future reports of research that are perceived as less favorable or
that question earlier research could have a material adverse effect on our
operations. Because of our dependence upon consumer perceptions, adverse
publicity associated with illness or other adverse effects resulting from the
consumption of our products, or any similar products distributed by other
companies, could have a material adverse effect on us. Such adverse publicity
could arise even if the adverse effects associated with such products result
from failure to consume such products as directed. Also, we may not be able to
counter the effects of negative publicity concerning the efficacy of our
products.
OUR PRODUCTS AND SOME OF THE INGREDIENTS IN OUR PRODUCTS HAVE NOT UNDERGONE
CLINICAL STUDY.
Many of the ingredients in our products are vitamins, minerals, herbs
and other substances for which there is a long history of human consumption.
However, some of our products contain ingredients that have little history of
human consumption. These ingredients include chromium picolinate, shark
cartilage, proanthocyanidins, citrin and colloidal minerals. Accordingly, no
assurance can be given that our products, even when used as directed, will have
the effects intended. We will continue to take steps to ensure that the
formulation and production of our products are safe when consumed as directed.
However, generally we have not sponsored clinical studies on the long-term
effect of human consumption of our products.
WE MAY ACQUIRE INTERESTS IN OTHER BUSINESSES AS PART OF OUR GROWTH STRATEGY.
Our business plan includes expansion and diversification of our network
marketing organization and products through the acquisition of companies engaged
in network marketing. In addition to financial demands, these acquisitions may
have adverse consequences, including
- the diversion of management's attention to the assimilation of the
acquired companies or assets;
- adverse effects on our results of operations, such as the amortization
of acquired intangible assets; and
- the possibility that the acquired company or assets will not contribute
to our business, cash flows and profitability as expected.
MONTHLY PURCHASES OF THE PARTICIPATION INTERESTS WILL RESULT IN DOLLAR COST
AVERAGING OF PURCHASES OF COMMON STOCK THROUGH THE PLAN.
Through regularly contributing to the plan by purchase of the
participation interests, even in small increments, a participant may minimize or
maximize the adverse effects of volatile changes in the market price of our
common stock. As a fixed amount of money is regularly invested over a long
period of time, purchases are made at varying prices as the market price for the
common stock fluctuates. Over time, if a uniform number of shares of stock were
purchased each period, the average cost paid per share will usually be less
during lengthy periods of market price increase, thus minimizing the effect of
market price fluctuations. Alternatively, during lengthy periods of market price
decrease, the average cost paid per share will be usually higher, thus
maximizing the effect of market price fluctuations.
There is no assurance that
- the average cost paid per share of common stock acquired by you as a
participant through the plan will be less than the market price of our
common stock at any particular time or
- your investment in the common stock through participation in the plan
will in whole or in part not be lost due to a number of factors or
- your investment in the common stock through the plan will result in any
profit.
THE MARKET PRICE AND TRADING VOLUME OF OUR COMMON STOCK MAY HAVE EXTREME
FLUCTUATIONS.
The participation interests are nontransferable. A market will not
develop for the participation interests. However, our common stock to be
purchased by the plan on behalf of purchasers of the participation interests is
currently listed on the American Stock Exchange. Historically the market for our
common stock has been limited and subject to low trading volume. There is no
assurance that an active trading market will be maintained for our common stock
at all times.
Our sales and earnings and, consequently, the market price of our
common stock may be subject to significant potential volatility based upon,
among other things,
- the adverse effect of non-compliance with
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applicable governmental regulations;
- the negative effect of changes in or interpretations of regulations
that may limit or restrict the sale of certain of our products;
- the operation of our network marketing organization;
- the expansion of our operations into new markets;
- the recruitment and retention of distributors;
- the inability to introduce new products or the introduction of new
products by our competitors;
- general conditions in the weight management, dietary supplement, and
personal care products industries; and
- consumer perceptions of our products and operations.
In particular, because our products are ingested by consumers or applied to
their bodies, we are highly dependent upon consumers' perception of the safety
and quality of our products marketed. As a result, substantial negative
publicity concerning one or more of our products, especially the weight
management and dietary supplement products, could adversely affect our sales and
earnings as well as the market price of our common stock.
Also, the stock market has from time to time experienced extreme price
and volume fluctuations. These fluctuations have particularly affected the
market prices for emerging growth companies stock, which often have been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely affect the market price of our common stock.
Volatility in the market price of a company's securities sometimes results in
the filing of class action lawsuits seeking compensation for alleged securities
law violations. We may become subject to such litigation. Such litigation could
result in substantial costs and a diversion of our attention and resources,
which could have a material adverse effect on our business and results of
operations. Any adverse determination in such litigation also could subject us
to significant liabilities.
WE HAVE A HISTORY OF NEGATIVE CASH FLOWS AND LOSSES FROM OPERATIONS AND AN
ACCUMULATED DEFICIT.
At December 31, 1998, we had an accumulated deficit of $516,091
representing accumulated losses from operations prior to 1994. At June 30, 2000,
as a result of operations, we had eliminated the accumulated deficit and had
retained earnings of $971,106. There is no assurance that our future operating
results will be profitable and losses from operations will not be sustained,
resulting in elimination of our retained earnings and again result in an
accumulated deficit.
OUR COMMON STOCK COULD BE DELISTED FROM THE AMERICAN STOCK EXCHANGE WHICH WOULD
MAKE THE SALE OF OUR COMMON STOCK MORE DIFFICULT.
Our common stock is listed on the American Stock Exchange. The
continued listing of our common stock on these exchanges is subject to certain
conditions, generally including our common stock having a certain minimum sale
price per share, maintenance of certain minimum levels of assets, stockholders'
equity, number of shareholders, and number of outstanding publicly held shares
of our common stock. In the event such minimum requirements for inclusion and
listing are not met, our common stock will be delisted and will no longer be
listed on these exchanges. In such event, our common stock would then be traded
in the over-the-counter market and may become subject to the "penny stock"
trading rules.
The over-the-counter market is characterized as volatile in that
securities traded in such market are subject to substantial and sudden price
increases and decreases and at times price (bid and asked) information for such
securities may not be available. In addition, when there are only one or two
market makers (a dealer holding itself out as ready to buy and sell the
securities on a regular basis), there is a risk that the dealer or group of
dealers may control the market in the security and set prices that are not based
on competitive forces and the bid and asked quotations of securities traded in
the over-the-counter market may not be reliable.
OUR COMMON STOCK MAY BECOME SUBJECT TO THE "PENNY STOCK" RULES WHICH WOULD
IMPOSE SIGNIFICANT RESTRICTIONS ON THE BROKER-DEALERS AND MAY AFFECT THE RESALE
OF OUR COMMON STOCK.
In the event our common stock is delisted and no longer included on the
American Stock Exchange, our common stock may become subject to the "penny
stock" rules. A "penny stock" is generally a stock that
- is not listed on a national securities exchange or Nasdaq,
- is listed in "pink sheets" or on the NASD OTC Bulletin Board,
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<PAGE>
- has a price per share of less than $5.00 and
- is issued by a company with net tangible assets less than $5 million.
The penny stock trading rules impose additional duties and responsibilities upon
broker-dealers and salespersons effecting purchase and sale transactions in
common stock and other equity securities, including
- determination of the purchaser's investment suitability,
- delivery of certain information and disclosures to the purchaser, and
- receipt of a specific purchase agreement from the purchaser prior to
effecting the purchase transaction.
Many broker-dealers will not effect transactions in penny stocks, except on an
unsolicited basis, in order to avoid compliance with the penny stock trading
rules.
In the event our common stock becomes subject to the penny stock
trading rules,
- such rules may materially limit or restrict the ability to resell our
common stock, and
- the liquidity typically associated with other publicly traded equity
securities may not exist.
WE HAVE POTENTIAL LIABILITY ARISING FROM POSSIBLE RESCISSION RIGHTS OF CERTAIN
SHAREHOLDERS.
In 1990, we established the AMS Distributor Stock Pool under which our
independent distributors were permitted to participate on a voluntary basis and
make contributions to the pool and, from such contributions, the administrator
of the pool purchased on a monthly basis our common stock in the
over-the-counter market. All purchase transactions were executed and effected
through a registered broker-dealer. In September 1995, the Oklahoma Department
of Securities initiated an investigation of us and the activities of the pool.
During October 1997, we ceased accepting additional contributions to the pool
and effecting purchase transactions in our common stock. As of December 31,
1997, the pool held approximately 245,000 shares of common stock. On November 4,
1997, without admitting or denying violations of the Oklahoma Securities Act, we
and certain of our officers and directors entered into an agreement with the
Administrator of the Oklahoma Department of Securities in settlement of the
investigation without any action being taken against us and our officers and
directors. This agreement does not preclude the rights of pool participants from
asserting claims seeking and possibly obtaining recovery of their contributions
to the pool, plus statutory interest. However, such claims are subject to
applicable state and federal statutes of limitation which may effectively
eliminate a portion of such claims.
It is our position that our administration of the pool did not
constitute the offer and sale of a security under federal and state securities
law. However, there is no assurance that a court would find that our
administration of the pool did not constitute the offer and sale of a security
under either or both federal and state securities laws. Even if we were
successful in defending any securities law claims, the assertion of such claims
against us could result in costly litigation and diversion of effort by our
management. In addition, the Securities and Exchange Commission and state
securities regulators could pursue enforcement action against us and our
officers and directors with respect to any violations of the federal securities
laws that may have occurred. There is no assurance that
- claims asserting violations of federal and state securities laws will
not be asserted by any of the participants in the pool or
- such participants will not prevail against us in the assertion of such
claims, compelling us to repurchase from such participants their shares
of common stock and pay statutory interest.
Such events could have a material adverse effect on our business, financial
condition and results of operations.
THE EXERCISE OF OUR OUTSTANDING STOCK OPTIONS AND WARRANTS MAY RESULT IN
SUBSTANTIAL DILUTION TO OUR SHAREHOLDERS AND MAY ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK.
As of the date of this prospectus, we have outstanding the following
warrants and stock options:
- publicly traded warrants exercisable on or before November 6, 2002 for
the purchase of 1,744,768 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
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November 6, 2002) at an aggregate exercise price of $5.40;
- stock options granted under our stock option plan exercisable for the
purchase of 689,439 shares of our common stock at $1.75 to $6.13 per
share; and
- other outstanding stock options and warrants exercisable for the
purchase of 768,250 shares of our common stock at $1.75 to $2.00 per
share during periods that expire in October 1999 through May 2007.
During the term of the outstanding warrants and stock options, the
holders are given the opportunity to profit from a rise in the market price of
our common stock. Exercise of such warrants and stock options may
- dilute the net book value per share of our outstanding common stock at
the time of exercise and
- may be dilutive on an earnings per share basis,
which may adversely affect the trading price of our common stock. The existence
of the warrants and stock options may adversely affect the terms on which we may
obtain additional equity financing. Also, the holders are likely to exercise the
warrants and stock options at a time when we would otherwise be able to obtain
capital on terms more favorable than could be obtained through the exercise of
such stock options and warrants.
THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE DUE TO THE FUTURE SALE OF
SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK.
Sales or availability for sale of substantial amounts of shares of our
common stock in the public market at any time could adversely affect the market
price of our common stock and, consequently, our ability to raise additional
capital. As of the date of this prospectus, we have 4,350,379 shares of our
common stock outstanding. Of these outstanding shares, 3,821,286 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.
325,409 shares of our outstanding common stock and our outstanding
options and warrants exercisable for the purchase of 287,500 shares of our
common stock beneficially owned by our executive officers and directors, as well
as those held by three 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 to sell or otherwise
dispose of such shares of our common stock, stock options, warrants and all
other securities issuable upon exercise of such option or warrants during this
period.
THERE ARE CERTAIN PROVISIONS IN OUR CORPORATE CHARTER AND BYLAWS THAT MAKE IT
DIFFICULT FOR A THIRD PARTY TO ACQUIRE CONTROL OF US.
Our certificate of incorporation and bylaws and the provisions of the
Oklahoma General Corporation Act may make it difficult for a third party to
acquire us or gain control of us and replace our management. Our certificate of
incorporation authorizes the issuance of our preferred stock in classes or
series having voting, redemption and conversion rights and other rights as
determined by our board of directors. The issuance of such preferred stock may
have the effect of preventing a merger, tender offer or other takeover attempt
that our board of directors opposes. Our directors are elected for staggered
three-year terms, with approximately one-third of our board standing for
election each year, which may make it difficult to effect a change of incumbent
management and control. We are subject to the anti-takeover provisions of the
Oklahoma General Corporation Act. Such provisions in some circumstances may
discourage a person from making a control share acquisition (generally an
acquisition of voting stock having more than 20 percent of all voting power in
the election of directors) without shareholder approval.
USE OF PROCEEDS
All proceeds of sale of the participation interests pursuant to the
offering will be contributed to the plan from which the annual service fees and
monthly transaction fees of $5.00 and $1.25 per participant, respectively, will
be paid to us. The remaining proceeds will be utilized for the purchase of our
common stock in the open market. In the event the participation interests are
sold in full, the proceeds will be $3,545,091.
As of September 30, 2000, we had sold 1,454,909 participation interests
for proceeds of $1,454,909.
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During the period commencing on February 19, 1999 and ending on September 30,
2000,
- we were paid annual service fees of $10,405 and monthly transaction
fees of $20,413,
- 324,601 shares of our common stock had been purchased by the plan on
behalf of the participants,
- the average price per share of our common stock purchased was $4.49 and
- commissions of $16,942 were paid to the broker-dealer.
We pay all expenses of the offering, which are estimated to be
$90,000, without entitlement to reimbursement from the plan or the
participants, other than through receipt of the annual service fees and
monthly transaction fees. The annual service fees and monthly transaction fees
in excess of the expenses of the offering is and will be utilized by us for
payment of the administrative costs of the plan.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
On November 6, 1997, our Common Stock was first included on the
Nasdaq SmallCap Market under the symbol "AMSO." On July 15, 1999, our common
stock became listed on the American Stock Exchange under the symbol "AMM."
On October 12, 2000, the closing sale price of our common stock on
the American Stock Exchange was $3.13. We believe there were approximately
1650 holders of our common stock on September 30, 2000.
The following table sets forth, for the periods presented, the high
and low closing bid quotations of our common stock. The bid quotations reflect
inter-dealer prices without adjustment for retail markups, markdowns or
commissions and may not reflect actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
CLOSING SALE PRICES
-------------------
HIGH LOW
---- ---
<S> <C> <C>
2000--CALENDAR QUARTER ENDED:
March 31..................... $7.63 $5.63
June 30...................... 6.13 4.50
September 30................. 4.69 3.06
1999--CALENDAR QUARTER ENDED:
March 31..................... $3.00 $2.19
June 30...................... 4.00 1.94
September 30................. 4.56 3.25
December 31.................. 5.56 3.13
1998--CALENDAR QUARTER ENDED:
March 31..................... $3.38 $2.13
June 30...................... 4.00 3.00
September 30................. 4.00 1.88
December 31.................. 2.41 1.50
</TABLE>
DIVIDEND POLICY
Our policy is to retain earnings to support the expansion of our
operations. Our board of directors does not intend to pay cash dividends on
our common stock in the foreseeable future. Any future cash dividends will
depend on future earnings, capital requirements, our financial condition and
other factors deemed relevant by our board of directors.
PENNY STOCK TRADING RULES
Our common stock is listed on the American Stock Exchange. The
continued listing of our common stock on these exchanges is subject to certain
conditions, generally including
- our common stock having a certain minimum sale price per share,
- our continuing to have certain minimum levels of assets, stockholders'
equity, number of shareholders, and number of outstanding publicly held
shares.
In the event requirements for continued listing are not met, our common stock
- will be delisted and no longer included on these exchanges,
- will then be traded in the over-the-counter market and
- may become subject to the "penny stock" trading rules.
The penny stock trading rules impose additional duties and
responsibilities upon broker-dealers recommending the purchase of a penny
stock (by a purchaser that is not an accredited investor as defined by Rule
501(a) promulgated under the Securities Act of 1933, as amended) or the sale
of a penny stock. Among such duties and responsibilities, with respect to a
purchaser who has not previously had an established account with the
broker-dealer, the broker-dealer is required to
- obtain information concerning the purchaser's financial situation,
investment experience, and investment objectives,
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- make a reasonable determination that transactions in the penny stock
are suitable for the purchaser,
- determine that the purchaser (or his independent adviser in such
transactions) has sufficient knowledge and experience in financial
matters and may be reasonably capable of evaluating the risks of such
transactions, and
- obtain a manually signed written statement which sets forth the basis
for the foregoing determination and which informs the purchaser that it
is unlawful to effectuate a transaction in the penny stock without
first obtaining a written agreement to the transaction.
Also, until the purchaser becomes an "established customer," the broker-dealer
is required to
- obtain from the customer a written agreement to purchase the penny
stock which sets forth the identity and number of shares or units of
the security to be purchased prior to confirmation of the purchase, and
- provide to the customer a generic risk disclosure document which is
required to be delivered to the customer before the initial purchase
transaction in a penny stock
An established customer is one that has had an account with the dealer for at
least one year or the dealer has previously effected for the purchaser three
sales of penny stocks on three different days involving three different
issuers. A dealer is obligated to provide certain information disclosures to
the purchaser of a penny stock, including
- a generic risk disclosure document which is required to be delivered to
the purchaser before the initial transaction in a penny stock,
- a transaction-related disclosure prior to effecting a transaction in
the penny stock containing bid and asked information related to the
penny stock and the dealer's and salesperson's compensation (including
commissions, commission equivalents, markups and markdowns) in
connection with the transaction, and
- the purchaser-customer must be furnished account statements, generally
on a monthly basis, which include prescribed information relating to
market and price information concerning the penny stocks held in the
account.
The penny stock trading rules do not apply to those transactions in which a
broker-dealer or salesperson does not make any purchase or sale recommendation
to the purchaser or seller of the penny stock. Many broker-dealers will not
effect transactions in penny stocks, except on an unsolicited basis, in order
to avoid compliance with the penny stock trading rules.
Compliance with the penny stock trading rules may adversely affect
the ability to resell our common stock and may materially limit or restrict
the liquidity typically associated with other publicly traded equity
securities. Therefore, the holder of penny stocks may be unable to obtain on
resale the quoted bid price because a dealer or group of dealers may control
the market in such securities and may set prices that are not based totally on
competitive forces. Furthermore, at times there may be a lack of bid quotes
which may mean that the market among dealers is not active, in which case a
holder of penny stocks may be unable to sell such securities. In addition,
because market quotations in the over-the-counter market are often subject to
negotiation among dealers and often differ from the price at which
transactions in securities are effected, the bid and asked quotations of
securities traded in the over-the-counter market may not be reliable.
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CAPITALIZATION
The following table sets forth as of June 30, 2000, our actual
capitalization. This table should be read in conjunction with our unaudited
consolidated financial statements and notes thereto appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 2000
<S> <C>
Current portion of lease obligations......................... $ 94,574
Long-term capital lease obligations, net..................... 189,635
Stockholders' equity:
Common Stock .............................................. 477
Paid-in capital............................................ 11,241,793
Notes receivable for exercise of options................... (48,034)
Retained earnings.......................................... 971,106
Accumulated other comprehensive
income, net of tax...................................... 21,037
------------
Total capital and retained earnings........................ 12,186,379
------------
Less cost of treasury stock.................................. (2,165,597)
------------
Total stockholders' equity........................... 10,020,782
------------
Total capitalization.............. $ 10,304,991
============
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO BEGINNING ON PAGE F-2.
GENERAL
Our business and operations during the last five years have been
significantly affected by the acquisitions of Miracle Mountain International,
Inc. in May 1996 (the "Miracle Mountain acquisition"), Chambre International,
Inc. in January 1997 (the "Chambre acquisition"), the assets of Stay 'N Shape
International, Inc., Solution Products International, Inc., Nation of Winners,
Inc., and Now International, Inc. in April 1997 (the "Stay 'N Shape
International asset purchase") and ToppMed Inc. in July 1998 (the "ToppMed asset
purchase"). As a result of these acquisitions and asset purchases, we acquired
6,790 distributors and added 115 products to our product line. We currently
market approximately 102 products.
TOPPMED ASSET PURCHASE. On July 31, 1998, we acquired all rights,
including formulations and trademarks, for the ToppFast, ToppStamina and
ToppFitt products from ToppMed, Inc. for $192,000.
REPURCHASE OF OUR COMMON STOCK. In March 1998, we announced and began
repurchasing up to $1 million of our common stock in the open market.
Furthermore, in January 2000, we announced our intent to repurchase up to an
additional $2 million of our common stock in the open market. As of June 30,
2000, we had repurchased 432,317 shares of our common stock for $2,165,597 or an
average of $5.01 per share.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, selected
results of our operations for
- the six months ended June 30, 2000 and 1999, which are derived from our
unaudited condensed consolidated financial statements and
- the years ended December 31, 1999 and 1998, which are derived from our
audited consolidated financial statements.
The results of operations for the periods presented are not necessarily
indicative of our future operations.
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<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
2000 1999 1999 1998
----------------------------------------- ---------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... $14,008,073 100.0% $9,926,596 100.0% $22,427,551 100.0% $13,287,824 100.0%
----------- ----- ---------- ----- ----------- ----- ----------- -----
Cost of sales:
Commissions and bonuses......... 5,791,079 41.3 4,183,698 42.1 9,691,239 43.2 5,487,418 41.3
Cost of products................ 3,020,659 21.6 2,366,053 23.8 5,140,375 22.9 3,146,765 23.7
Cost of shipping................ 648,458 4.6 301,949 3.0 779,327 3.5 365,046 2.7
----------- ----- ---------- ----- ----------- ----- ----------- -----
Total cost of sales........... 9,460,196 67.5 6,851,700 69.0 15,610,941 69.6 8,999,229 67.7
----------- ----- ---------- ----- ----------- ----- ----------- -----
Gross profit.................... 4,547,877 32.5 3,074,896 31.0 6,816,610 30.4 4,288,595 32.3
Marketing, distribution and
administrative expenses........ 3,992,245 28.5 2,363,212 23.8 5,236,938 23.4 3,548,772 26.7
----------- ----- ---------- ----- ----------- ----- ----------- -----
Income from operations.......... 555,632 4.0 711,684 7.2 1,579,672 7.0 739,823 5.6
Other income (expense):
Interest and dividends, net...... 159,183 1.1 152,772 1.5 364,270 1.6 309,908 2.3
Other income (expense)........... (91,968) (.7) -- .0 7,866 -- 39,280 .3
Settlement of additional
tax liability.................. -- -- -- -- -- -- (421,623) (3.2)
----------- ----- ---------- ----- ----------- ----- ----------- -----
Total other income (expense)... 67,215 .5 152,772 1.5 372,136 1.7 (72,435) (.6)
----------- ----- ---------- ----- ----------- ----- ----------- -----
Income before income taxes......... 622,847 4.4 864,456 8.7 1,951,808 8.7 667,388 5.0
Tax expense........................ 236,433 1.7 291,010 2.9 676,025 3.0 253,340 1.9
----------- ----- ---------- ----- ----------- ----- ----------- -----
Net income......................... $ 386,414 2.8% $ 573,446 5.8% $ 1,275,783 5.7% $ 414,048 3.1%
=========== ===== ========== ===== =========== ===== =========== =====
</TABLE>
During the six months ended June 30, 2000 and 1999, and the years ended
1999 and 1998, we experienced increases in net sales compared to the preceding
year. These increases were principally the result of expansion of our network of
independent distributors and additions to our product line within the weight
management, dietary supplement and personal care categories. We expect continued
expansion of our network of independent distributors, which may result in
increased sales volume. However, there is no assurance that increased sales
volume will be achieved through expansion of our network of independent
distributors, or that, if sales volume increase, we will realize increased
profitability.
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Our net sales during the six months ended June 30, 2000, increased by
$4,081,477, or 41.1%, to $14,008,073 from $9,926,596 during the six months ended
June 30, 1999. The increase was principally attributable to expansion of our
network of independent distributors and increased sales of our weight
management, dietary supplement and personal care products. During the six months
ended June 30, 2000, we made aggregate net sales of $13,924,444 to 60,154
distributors, compared to aggregate net sales during the same period in 1999 of
$9,860,122 to 37,175 distributors. At June 30, 2000, we had approximately 76,100
"active" distributors compared to approximately 46,800 at June 30, 1999. A
distributor is considered "active" if he or she has purchased $15 on autoship or
at least $50 if not on autoship of our product during the previous 12 months.
Sales per distributor per month decreased from $44 to $39 for the six months
ended June 30, 2000, compared to the same period in 1999.
Our cost of sales during the six months ended June 30, 2000, increased
by $2,608,496 or 38.1%, to $9,460,196 from $6,851,700 during the same period in
1999. This increase was attributable to
- an increase of $1,607,381 in distributor commissions and bonuses due to
the increased level of sales,
- an increase of $654,606 in the cost of products sold due to the
increased level of sales and
- an increase of $346,509 in shipping costs due to the increased level of
sales and the effect of our modified pricing structure.
Effective April 1, 1999, we modified our pricing structure to include shipping
costs in our product prices. Previously shipping costs had been calculated
separately on each order and we reported shipping costs net of these payments.
Because our shipping costs are no longer reported net of the separately
collected shipping reimbursement, our shipping costs as a percentage of sales
have increased. Total cost of sales, as a percentage of net sales decreased to
67.5% during the six months ended June 30, 2000, from 69.0% during the same
period in 1999 due to a decrease in distributor commissions and bonuses as a
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percentage of net sales to 41.3% from 42.1%, a decrease in cost of products sold
to 21.6% of net sales from 23.8% and an increase in cost of shipping to 4.6% of
net sales from 3.0%.
Our gross profit increased $1,472,981, or 47.9%, to $4,547,877 for the
six months ended June 30, 2000 from $3,074,896 for the same period in 1999. The
gross profit increased as a percentage of net sales to 32.5% of net sales from
31.0%.
Marketing, distribution and administrative expenses increased
$1,629,033, or 68.9%, to $3,992,245 during the six months ended June 30, 2000,
from $2,363,212 during the same period in 1999. This increase was attributable
to
- an increase in promotional expense designed to increase sales,
- an increase in staffing and related payroll costs necessary to support
the increased level of sales and improve internal programs and
- the higher level of activity and corresponding increases in variable
costs, such as postage, telephone, newsletters, bank card service
charges and supplies.
The marketing, distribution and administrative expenses as a percentage of net
sales increased to 28.5% during the six months ended June 30, 2000, from 23.8%
during the same period in 1999.
Our other income (expense) decreased by $85,557, or 56% to $67,215
during the six months ended June 30, 2000, from $152,772 during the same period
in 1999. This decrease was primarily attributable to two items. We made a
marketing commitment to our field sales force that if certain sales challenges
were achieved, we would make a contribution to the Oklahoma City National
Memorial in their names. This marketing challenge was reached and a contribution
of $59,000 was made. Marketable securities were transferred from one investment
fund to another, thereby creating a realized loss of $50,000.
Income taxes during the six months ended June 30, 2000 and 1999 were
approximately 38.0% and 33.7%, respectively, of income before taxes.
As a result of the items above, our net income decreased $187,032 to
$386,414 during the six months ended June 30, 2000, from $573,446 during the
same period in 1999.
COMPARISON OF 1999 AND 1998
Our net sales during the year ended December 31, 1999, increased by
$9,139,727, or 68.8%, to $22,427,551 from $13,287,824 during the year ended
December 31, 1998. The increase was principally attributable to expansion of our
network of independent distributors and increased sales of our weight
management, dietary supplement and personal care products. During 1999, we made
aggregate net sales of $22,218,379 to 63,200 distributors, compared to aggregate
net sales during 1998 of $13,159,821 to 33,700 distributors. At December 31,
1999, we had approximately 61,200 "active" distributors compared to
approximately 33,000 at December 31, 1998. An "active" distributor is one who
purchased at least $50 from us within the previous 12 months. Sales per
distributor per month decreased from $33 to $30 for 1999, compared to 1998.
Our cost of sales during 1999 increased by $6,611,712, or 73.5%, to
$15,610,941 from $8,999,229 during 1998. This increase was attributable to
- an increase of $4,203,821 in distributor commissions and bonuses due to
the increased level of sales and increased promotions,
- an increase of $1,993,610 in the cost of products sold due to the
increased level of sales and the addition of new products and marketing
tools and
- an increase of $414,281 in shipping costs due to the increased level of
sales and the effect of our modified pricing structure.
Effective April 1, 1999, we modified our pricing structure to include shipping
costs in our product prices. Previously shipping costs had been calculated
separately on each order and we reported shipping costs net of these payments.
Because our shipping costs are no longer reported net of the separately
collected shipping reimbursement, our shipping cost as a percentage of sales
appears to have increased. Total cost of sales, as a percentage of net sales
increased to 69.6% during 1999, from 67.7% during 1998 due to an increase in
distributor commissions and bonuses as a percentage of net sales to 43.2 % from
41.3%, a decrease in cost of products sold to 22.9% of net sales from 23.7% and
an increase in cost of shipping to 3.5% of net sales from 2.7%.
Our gross profit increased $2,528,015, or 58.9%, to $6,816,610 during
1999 from $4,288,595 during 1998. The gross profit decreased as a percentage of
net sales to 30.4% of net sales from 32.3%.
Marketing, distribution and administrative expenses increased
$1,688,166, or 47.6%, to $5,236,938 during 1999, from $3,548,772 during 1998.
This increase was attributable to expansion of
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our administrative infra-structure necessary to support increased levels of
sales and increased promotional expense designed to increase sales. The number
of full-time employees increased to 53 during the first quarter of 1999, 54
during the second quarter of 1999, 49 during the third quarter of 1999 and 75
during the fourth quarter of 1999 as compared to 37, 35, 47 and 46,
respectively, during the same periods of 1998. The balance of the increase in
marketing, distribution and administrative expenses resulted from the higher
level of activity and corresponding increases in variable costs, including
postage, telephone, bank card service charges and supplies. The marketing,
distribution and administrative expenses as a percentage of net sales decreased
to 23.4% during 1999, from 26.7% during 1998 due to the increased level of
sales.
Our other income (reduced by other expense) increased by $444,571 to
net income of $372,136 during 1999, from a net expense of $(72,435) during 1998.
This increase was primarily attributable to the one-time expense in 1998 of the
settlement of additional tax liability of $421,623 ($256,300 net of related tax
effect). During 1998, in an effort to facilitate the growth of our distributor
network, we voluntarily began contacting all of the state tax authorities to
enter into agreements with them under which we assumed the responsibility for
collecting and remitting sales and use taxes on behalf of our independent
distributors. Certain states had requirements which resulted in an additional
tax liability as a condition of entering into the agreement. We believe the
liability was a one-time nonrecurring charge and will have no further adverse
impact on our future results of operations because the ongoing collection and
remittance of sales and use tax represents neither additional income nor
additional expense to us but instead is a pass through item with no income
statement effect.
Our income before taxes increased $1,284,420, or 192.5%, to $1,951,808
during 1999, from $667,388 during 1998. Income before taxes as a percentage of
net sales was 8.7% and 5.0% during 1999 and 1998, respectively. Income taxes
during 1999 and 1998 were $676,025 and $253,340, respectively. Our net income
increased $861,735, or 208.1%, to $1,275,783 during 1999, from $414,048 during
1998. This increase in net income was attributable to
- the increased level of sales,
- the decrease in the marketing, distribution and administrative expenses
as a percentage of net sales and
- the increase in other income due to the one-time expense of the
settlement of additional tax liability of $421,623 ($256,300 net of the
related tax effect) taken in 1998.
Net income as a percentage of net sales increased to 5.7% during 1999,
from 3.1% during 1998.
PRO FORMA EFFECT OF STOCK-BASED COMPENSATION
As a portion of and in lieu of payments of salaries and consulting
fees, we have historically used options to attract, retain and compensate our
officers, directors, other employees and consultants. We believe that linking
the compensation of our officers and directors to increases in the value of our
common stock achieves improved performance. During 1999, we granted 291,461
options at exercise prices ranging from $2.00 per share to $4.75 per share.
Options were granted primarily for services rendered and to ensure the future
availability of those services to us. A total of 222,750 of the options granted
during 1999 were unexercisable at December 31, 1999, all of which will become
exercisable in 2000. During 1999, 15,358 options were exercised for 6,884 mature
shares, 31,400 options were canceled and 18,750 options expired.
During 1998, we granted 809,819 options at exercise prices ranging from
$1.75 per share to $3.00 per share. Options were granted primarily for services
rendered and to ensure the future availability of those services to us. During
1998, 57,306 options were exercised, 31,025 mature shares of our common stock
was used to pay the exercise price of these options. In addition, during 1998
519,944 options with a weighted average exercise price of $2.32 per share were
voluntarily surrendered and canceled by us in exchange for an equal number of
options, with weighted average exercise price of $1.82 and 97,580 other options
were canceled without exchange for new options. The exercise price of the
exchanged options was equal to the market value of our common stock on the date
of exchange. We did not recognize any expense as a result of this exchange.
The weighted average exercise price and calculated fair value at the
date of grant of the options granted in 1999 were $2.92 and $1.39, respectively,
utilizing the methodology prescribed under Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. After
giving effect to the weighted average fair value of such options, we would have
had a pro forma net income of $1,162,317 ($.28 per common share) for 1999. The
weighted average exercise price and calculated fair value at the date of grant
of the options granted in 1998 were $1.93 and $1.05, respectively. After giving
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effect to the weighted average fair value of such options, we would have had a
pro forma net income of $180,719 ($.04 per common share) for 1998.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," ("SFAS 133") was issued in June
1998. This Statement establishes accounting and reporting standards for
derivative Instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. This Statement applies to all entities
and is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. We will adopt SFAS 133 on January 1, 2001 as required. We believe we
hold no material derivative instruments at June 30, 2000.
SEC Staff Accounting Bulletin No. 101, "REVENUE RECOGNITION IN FINANCIAL
STATEMENTS," ("SAB 101") was issued December 1999. This staff bulletin
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101 is
effective no later than the fourth fiscal quarter of the fiscal years beginning
after December 15, 1999. We have not determined whether implementation of SAB
101 will have any significant effect on our financial statements.
SEASONALITY
No pattern of seasonal fluctuations exists due to the growth patterns
that we are currently experiencing. However, there is no assurance that we will
not become subject to seasonal fluctuations in operations.
COMMITMENTS AND CONTINGENCIES
RECENT REGULATORY DEVELOPMENTS - A significant portion of our net sales
continues to be dependent upon our AM-300 product. Our net sales of AM-300
represented 67.7% and 67.5% of net sales for the six months ended June 30, 2000
and 1999, respectively. Our net sales of AM-300 represented 66.6% and 49.7% of
our net sales during 1999 and 1998, respectively. One of the herbal ingredients
in AM-300 is ephedra concentrate, which contains naturally occurring ephedrine.
Ephedrine products have been the subject of adverse publicity in the United
States and other countries relating to alleged harmful effects. Currently, we
offer AM-300 only in the United States (except in certain states in which
regulations may prohibit or restrict the sale of such product).
On April 10, 1996, the Food and Drug Administration issued a statement
warning consumers not to purchase or ingest natural sources of ephedrine within
dietary supplements claiming to produce certain effects (none of which are
claimed for our product). On June 4, 1997, the Food and Drug Administration
proposed regulations that will, if adopted as proposed, significantly limit our
ability 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. However, as of September 30,
2000, no final regulations have been issued. Several trade organizations in the
dietary supplement industry have commented on the proposed regulations,
requesting substantial modifications. We believe it is probable that the Food
and Drug Administration will make material changes to the proposed regulations
prior to adoption. Relatedly, the United States General Accounting Office issued
a report dated July 2, 1999 to a committee of the U.S. House of Representatives
that we believe casts substantial doubt on certain provisions of the Food and
Drug Administration's proposed regulations on dietary supplements which contain
ephedrine alkaloids.
We believe there is a risk that our AM-300 product may become subject
to further federal, state, local or foreign laws or regulations. These
regulations could require us to (i) withdraw or reformulate our AM-300 product
with reduced ephedrine levels or with a substitute for ephedra or ephedrine,
(ii) relabel our 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, we may elect to reformulate or relabel our AM-300
product containing ephedra or ephedrine. While we believe that our AM- 300
product could be reformulated and relabeled, there is no assurance that such
reformulation and relabeling will not adversely affect our sales. Consequently,
we are unable at the present time to predict the ultimate resolution of these
issues, nor their ultimate impact on our results of operation or financial
position.
PRODUCT LIABILITY - We, like other marketers of products that are intended to be
ingested, face the inherent risk of exposure to product liability claims in
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the event that the use of our products results in injury. We maintain product
liability insurance coverage with limits of $4,000,000 per occurrence and
$5,000,000 aggregate. We generally do not obtain contractual indemnification
from our product manufacturers. However, all of our product manufacturers carry
product liability insurance which covers our products. We have agreed to
indemnify Tinos, L.L.C., the licensor of Choc-Quilizer, against any product
liability claims arising from the Choc-Quilizer product formerly marketed by us.
We also have agreed to indemnify Chemins against claims arising from claims made
by our distributors for products manufactured by Chemins and marketed by us.
Although a product liability claim has not been asserted against us, such claims
could result in material losses.
FUTURE ASSESSMENT OF RECOVERABILITY AND IMPAIRMENT OF GOODWILL AND COVENANTS
In connection with our various acquisitions, we recorded
- goodwill, which is being amortized on a straight- line basis over
periods of 7 to 20 years, and
- covenants not to compete which are being amortized on a straight-line
basis over the life of the contractual covenants
(the estimated periods that we will be benefitted by such goodwill and
covenants). At June 30, 2000, the unamortized portions of the goodwill was
$1,565,372 (which represented 13.6% of total assets and 15.6% of stockholders'
equity) and covenants not to compete was $399,425 (which represented 3.5% of
total assets and 4% of stockholders' equity). Goodwill arises when an acquirer
pays more for a business than the fair value of the tangible and separately
measurable intangible net assets (such as covenants not to compete). For
financial reporting purposes, goodwill and all other intangible assets are
amortized over the period benefitted. We have determined the life for amortizing
goodwill based upon several factors, the most significant of which are
- the size of the distributor network being acquired and
- the length of the time the network has been in existence.
We determined the period to be no less than seven years for the Miracle Mountain
acquisition and no less than 20 years for the Chambre International acquisition,
and the asset purchases.
We periodically review carrying value and recoverability of our
unamortized goodwill and covenants not to compete. If the facts and
circumstances suggest that the goodwill or covenant may be impaired, the
carrying value of goodwill or covenant will be adjusted. This adjustment will
result in an immediate charge against income during the period of the adjustment
or the length of the remaining amortization period may be shortened, which will
result in an increase in the amount of goodwill or covenant amortization during
the period of adjustment and each period thereafter until fully amortized.
Following an adjustment, additional adjustments may be required in future
periods for impairment and recoverability. Of the various factors we considered
in assessing the impairment or recoverability of goodwill or covenant, the most
significant are
- losses from operations,
- loss of distributors and customers,
- industry developments, including our inability to maintain our market
share,
- development of competitive products, and
- imposition of additional regulatory requirements.
In the event we determine that goodwill or the covenants not to compete have
become impaired, the adjustment for impairment and recoverability will most
likely occur during a period of operations in which we have sustained losses or
have only marginal profitability from operations. If so, the impairment or
increased amortization amount will either increase such losses from operations
or further reduce profitability.
LIQUIDITY AND CAPITAL RESOURCES
Prior to completion of several equity offerings in 1997, our primary
source of liquidity was net cash provided by operating activities and
shareholder loans.
At June 30, 2000, we had working capital of $2,884,220, compared to
$2,715,525 at December 31, 1999. We believe our cash and cash equivalents,
marketable securities of $3,387,472 and cash flows from operations will be
sufficient to fund our working capital needs over the next 12 months. During the
six months ended June 30, 2000, net cash used by operating activities was
$858,414, net cash used in investing activities was $63,366 and net cash used in
financing activities was $674,285. This represented a net decrease in cash
during this period of $1,596,065, primarily as a result of payment of $951,720
in income taxes as well as our increased staffing levels and the upgrade of our
computer capabilities. Our working capital needs over the next 12 months consist
primarily of marketing, distribution and administrative
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expenses. Additionally, as we are upgrading our computing capacity, we would
anticipate expenditures of approximately $600,000 to be expensed over the coming
12 months as these expenses occur.
In March 1998, we announced and began repurchasing up to $1 million of
our common stock in the open market. Furthermore, on January 12, 2000, we
announced our intent to repurchase up to an additional $2 million of our common
stock in the open market. As of June 30, 2000, we had repurchased 432,317 shares
of our common stock for $2,165,597 or an average of $5.01 per share. Our Board
of Directors will continue to monitor or review our policy on repurchasing
shares of our common stock.
During the first quarter of 1998, we agreed to loan John W. Hail, our
Chief Executive Officer and a major shareholder, up to $250,000. Subsequently we
also agreed to loan up to an additional $75,000. These loans are secured, bear
interest at 8% per annum and became due on March 31, 1999. The loans were
extended until March 31, 2000. During the first quarter of 2000, we agreed to
loan up to an additional $225,000 and extended the loans until December 31,
2000. As of June 30, 2000, the balance due on these loans was $533,761 plus
interest. The loans and extensions were unanimously approved by our board of
directors.
On March 22, 2000, our Registration Statement (number 333-31750) was
declared effective by the Securities and Exchange Commission. Under this
Registration Statement, we registered 2,092,211 shares of stock underlying our
outstanding 1997-A warrants, redeemable common stock purchase warrants and
underwriter warrants. During the first quarter of 2000, the closing sale price
of our common stock for 20 consecutive trading days exceeded $6.80, which
permits us to call the redeemable common stock purchase warrants for redemption.
The 1997-A warrants and redeemable common stock purchase warrants are
exercisable on or before November 6, 2002, for the purchase of 1,832,211 shares
of our common stock for $3.40 per share and the underwriter warrants are
exercisable on or before November 12, 2002, for the purchase of 130,000 units
(consisting of one share of our common stock and one redeemable common stock
purchase warrant) for $5.40 per unit. These common stock purchase warrants are
exercisable for the purchase of 130,000 shares of our common stock for $3.40 per
share.
DESCRIPTION OF THE PLAN
On February 27, 1998, we adopted the Advantage Marketing Systems, Inc.
1998 Distributor Stock Purchase Plan to provide and offer our product
distributors ("eligible persons") a simple and convenient method of purchasing
shares of our common stock with minimum brokerage commissions or service
charges. The following description of certain matters relating to the plan is a
summary and is qualified in its entirety by the provisions of the plan which is
filed as an exhibit to the registration statement of which this prospectus is a
part. See "Where You Can Find Additional Information."
HOW IS THE PLAN ADMINISTERED?
The plan is administered by our board of directors or if appointed by
the board a committee (the "plan administrator"), except as otherwise indicated
below. The plan is currently administered by a committee comprised of our
executive officers and directors, John W. Hail, Dr. Joseph B. Williams and
Dennis P. Loney. Our board of directors has appointed UMB Oklahoma Bank to serve
as the custodian of the plan. The custodian's duties include
- appointment of a member firm of the National Association of Securities
Dealers, Inc. to serve as the broker-dealer of the plan,
- establishment of the banking account of the plan for deposit of
participants' contributions to the plan through purchase of the
participation interests,
- directing the designated broker-dealer to make purchases of our common
stock on behalf of the participants,
- establishing with the plan administrator and the broker-dealer the
procedures for withdrawal of common stock and, if applicable, other
company securities from the plan by participants, and
- holding of the shares of common stock in its name or its nominee as so
directed by the plan administrator.
The custodian will appoint the broker-dealer, whose duties include
- establishing and maintaining a brokerage account for the plan,
- purchasing our common stock on behalf of the participants pursuant to
directions of the custodian,
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- furnishing to the plan administrator (i) confirmations of each common
stock purchase transaction by the plan and (ii) monthly or quarterly
account statements,
- holding of the shares of our common stock in its name or its nominee as
so directed by the plan administrator,
- establishing with the plan administrator and the custodian the
procedures for withdrawal of common stock and other securities from the
plan by participants.
The plan administrator directs the custodian and broker-dealer with regard to
their respective duties under the plan by means of a written agreement or
directions.
WHAT ARE THE PURPOSES AND ADVANTAGES OF THE PLAN?
The plan provides distributors or eligible persons electing to
participate in the plan ("participants") an opportunity and convenient method to
acquire a proprietary interest in us through the purchase of our common stock
utilizing monthly contributions to the plan. The purpose of the plan is to
- provide an additional incentive to participants by enabling them to
acquire stock ownership in us,
- attract and retain persons of ability as our independent distributors,
and
- entice such persons to exert their best efforts on our behalf.
The plan offers participants
- an affordable way to invest, through regularly contributing small
amounts into the plan through purchase of the participation interests
and
- savings on commissions and fees that would otherwise be associated with
purchase of our common stock in the open market.
Distributors or eligible persons may become a participant by completion and
delivery of a stock purchase agreement to us containing authorization for
drafting of the monthly minimum cash investments of $25 to purchase our common
stock through the plan and which may be accompanied by an initial cash
investment in excess of $25. All contributions by participants through purchase
of the participation interest are deposited in a single bank account established
at the direction of the custodian in the name of this plan and will not be
commingled with our funds.
In addition to the savings on commissions, regularly contributing to
the plan, even in small increments, permits a participant to benefit from dollar
cost averaging, which may minimize or maximize the adverse effects of volatile
changes in the price of our common stock. As a fixed amount of money is
regularly invested over a period of time, purchases are made at varying prices
as the market price for our common stock fluctuates. Over time, if a uniform
number of shares of our common stock were purchased each period, the average
cost paid per share will usually be less during periods of market price
increase, thus minimizing the volatility of price fluctuations. Alternatively,
during lengthy periods of market price decrease, the average cost paid per share
will be usually higher, thus maximizing the volatility of price fluctuations.
There can be no assurance that the average cost paid per share of our common
stock acquired by a participant through the plan will be less than the market
price of our common stock at any particular time or that a participant's
investment in our common stock will in whole or in part not be lost due to a
number of factors including declining market price and general market
conditions. Accordingly, there is no assurance that a participant's investment
in our common stock through the plan will result in any profit.
WHAT ARE THE REQUIREMENTS TO PARTICIPATE IN THE PLAN?
Participation in the plan is entirely voluntary. We do not make any
recommendation concerning participation in the plan. Participation is not
required as a requisite for becoming or continuing as a distributor of our
products and services. Any distributor in good standing is an eligible person
and may participate in the plan, provided the eligible person completes and
submits a stock purchase agreement and satisfies any other conditions that we
may establish and as provided in the stock purchase agreement.
HOW DOES AN ELIGIBLE PERSON ELECT TO PARTICIPATE?
An eligible person may become a plan participant by completing and
delivering a stock purchase agreement to us. Stock purchase agreements may be
obtained at any time from us upon request. Participation is effective upon our
receipt and acceptance of an eligible person's properly completed and executed
stock purchase agreement. Participation will continue until terminated in
accordance with the provisions of the plan.
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HOW ARE CONTRIBUTIONS MADE TO THE PLAN AND ACCOUNTED FOR UNDER THE PLAN?
Contributions to the plan are voluntary and may only be made by
participants through the purchase of the participation interests. For purposes
of the offering, each contribution to the plan will constitute the purchase by
the contributing participant of the number of participation interests equal to
the amount of such contribution. We will not contribute to the plan. A
participant account is established and maintained by the plan administrator for
each participant. Entries to such accounts record
- the participant's contributions through purchase of the participation
interests,
- purchases of our common stock by the plan on behalf of such
participant, and
- payment of the $5.00 annual service fee and the $1.25 monthly
transaction fees paid to us.
All contributions to the plan will be subject to the following:
(i) Each participant is required to make minimum monthly contributions
to the plan of $25.00. The minimum monthly contributions must be made by
authorized draft on the checking, savings or other form of financial institution
account maintained. Such authorization is pursuant to the participant's stock
purchase agreement or such other appropriate form or authorization that we or
the financial institution may require. The drafting authorization will continue
until we receive written notification from the participant of the revocation or
amendment of the stock purchase agreement or such other form of authorization.
Any such revocation or amendment will be effective as of the first day of the
month following the month in which we receive such written notification.
(ii) Each Participant may also elect to make additional contributions
to the plan. Additional contributions are made through purchase of participation
interests by our withholding of all or a portion of the participant's regular
gross commissions in lieu of otherwise receiving such amount of commissions.
Such election may be made by written notification to us indicating the amount of
such contribution. This notification will be effective with respect to the
payment of such commission check or checks only if received by us not less than
five days prior to payment of such commissions. However, the commissions payable
to such participant that may be contributed to the plan will first be reduced by
any offsets and other reductions, including without limitation payment of
outstanding and unpaid product purchases and expenses. No contribution to the
plan payable from a participant's commission will be made on behalf of a
participant during any period that offsets and other reductions exceed the
commission payable to such participant. All contributions to the plan payable
from a participant's commissions will only be in $1.00 increments. The election
by a participant to make contributions to the plan payable from the
participant's commissions and the termination of such election must be made in
writing and received by us, in accordance with the rules and procedures
established, including any amendment thereof, by us or the plan administrator
from time to time.
(iii) A Participant may also make direct contributions to the plan in
increments of $1.00 through purchase of participation interests, subject to the
terms and conditions of the stock purchase agreement and the plan.
WHAT ARE THE PARAMETERS FOR COMMON STOCK PURCHASES?
All purchases of our common stock are subject to the following
described terms as well as
- the terms and conditions of the plan,
- the agreement with the broker-dealer effecting purchases of the common
stock,
- and the policies and procedures that may be adopted and established by
the Plan Administrator.
From participant's contributions to the plan through purchase of the
participation interests, we are paid the annual service fee and the monthly
transaction fees. The balance of a participant's contribution to the plan (or
net contribution) is used to purchase our common stock in the open market. Such
purchases are made during the last five "trading days" (as defined below) of
each month. "Trading days" means those days on which securities are traded on
the New York Stock Exchange. The shares of our common stock purchased during a
month are allocated among the participant accounts based on the average price
paid for all shares of our common stock purchased during the month and the
participants' net contributions to the plan during such month.
The custodian and broker-dealer have full discretion as to all matters
relating to purchases of our common stock, including without limitation,
- determining the number of shares of common stock, if any, to be
purchased on any day or at any time of that day,
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- the prices paid for such common stock,
- the markets on which such purchases are made, and
- the persons (including other brokers and dealers) from or through whom
such purchases are made.
Although not specifically required by the plan, we anticipate that the custodian
and broker-dealer will continue to purchase the maximum number of shares of our
common stock that may be purchased utilizing the participant's net contribution
during each month. Our common stock purchased pursuant to the plan will only be
purchased on the open market. Although not anticipated, any net contribution
remaining in the participant account (after the purchase of such maximum number
of shares of Common Stock at the end of each month) will be retained in the
participant account and treated as a part of the accumulation of net
contributions for the following month.
The timing of all purchases and the price to be paid for shares of our
common stock purchased pursuant to the plan will be determined solely by the
custodian and the broker-dealer. We, the plan administrator, and the
participants will not have any control or influence on such purchases.
ARE THERE ANY PLAN PROVISIONS LIMITING THE SALE OF OUR COMMON STOCK BY OUR
OFFICERS AND DIRECTORS AHEAD OF STOCK PURCHASES BY THE PLAN?
Our executive officers and directors and each "affiliated person" (as
defined below) are prohibited from bidding for, purchasing, attempting to bid
for or purchase, or offering or selling any shares of common stock. These
restrictions apply during the five trading days immediately preceding and
immediately following the date on which the plan purchases any shares of our
common stock, unless
- the offer or sale of our common stock is made pursuant to a
registration statement effective under the Securities Act of 1933, as
amended,
- pursuant to registration or exemption from registration under any
applicable state securities laws
- the executive officer, director and/or affiliated person is named as a
selling shareholder in the registration statement.
"Affiliated person" includes any person that exercises
any direct or indirect influence on, or control over
- the amounts of our common stock to be purchased by the plan,
- the timing of or the manner in which our common stock is to be
purchased by the plan, and
- the selection of the custodian or the broker-dealer through which such
purchases are or may be made by the plan.
HOW ARE VOTING RIGHTS AND DIVIDENDS HANDLED?
We, the plan administrator, custodian or broker-dealer will transmit to
each participant all proxy statements, annual reports, meeting notices and other
shareholder communications with respect to our common stock acquired pursuant to
and held under the plan. Proxies will be voted
- with respect to full shares of common stock held on behalf of a
participant as reflected in the participant account of such participant
and
- in accordance with each participant's instructions duly delivered to
and received by us or the proxy.
If a participant does not direct the exercise of such voting rights with respect
to any particular occasion for the exercise thereof, such voting rights will not
be exercised with respect to such occasion.
All cash dividends paid on the common stock received in plan's account
with the custodian or the broker-dealer or its nominee will be reinvested in
additional shares of our common stock. All cash dividends as well as all
dividends or other distributions on our common stock, including our other
securities, shall be allocated among and credited to the participants based upon
the number of shares of our common stock held for their benefit under the plan.
Such allocation will be made on the record date of the of the dividend or other
distribution declaration.
MAY A PARTICIPANT DESIGNATE A BENEFICIARY IN THE EVENT OF DEATH?
Each individual participant may designate his or her beneficiary on a
beneficiary designation form provided by the plan administrator and such
designation may include primary and contingent beneficiaries. The designation
may be changed by a participant at any time by completing and delivering a new
beneficiary designation form to the plan administrator. A changed beneficiary
designation is only effective upon receipt by the plan administrator of such
form. In the absence of such written designation, the surviving spouse of the
participant is deemed the designated beneficiary, if any, and otherwise the
estate of such Participant. In all events, the date of determination of a
participant's beneficiary is the date of death of a participant.
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ARE PARTICIPANTS PROVIDED REPORTS?
We or the plan administrator provide each participant semi-annual
reports on or about January 30 and July 30 of each year. These reports reflect
the number of shares of our common stock acquired and held for the participant
under the plan.
MAY A PARTICIPANT WITHDRAW THE COMMON STOCK FROM THE PLAN?
Participants may withdraw, for resale or otherwise, at any time all or
any portion of the whole shares of our common stock and, if applicable, other
securities held by the Plan for their benefit. Withdrawal may be made by
delivering a written notification to our offices in Oklahoma City, Oklahoma.
Such notification must specify the number of whole shares of our common stock
and, if applicable, other securities to be withdrawn from the plan. Also such
notification must be accompanied by payment of the cost of issuance by our
transfer agent of the certificate or certificates evidencing the shares of
common stock and other securities.
Immediately following receipt of such notification, we or the plan
administrator will notify the custodian or broker-dealer or its nominee of the
participant's election to withdraw as set forth in the notice. Immediately as
soon as practicable following receipt of such notification, the custodian or
broker-dealer or its nominee will take appropriate action to cause issuance and
delivery of the certificate or certificates evidencing such shares of common
stock or other securities being withdrawn. The additional procedures for
withdrawal are established by the plan administrator, the broker-dealer and the
custodian.
The plan will not sell or otherwise dispose of our common stock and
other securities held for the benefit of the participants. Any Participant
desiring to sell our common stock or other securities held for the benefit of
such participant must comply with the withdrawal procedures prior to such sale.
Each participant is solely responsible for the costs and expenses, including
without limitation any commissions, administrative fees, taxes or other costs
incurred or payable in connection with the transfer, sale or other disposition
of the shares of our common stock and other held for the benefit of such
participant.
HOW MUCH DOES PARTICIPATION IN THE PLAN COST?
Each participant is obligated to pay
- a $5.00 annual service fee upon electing to participate in the plan and
thereafter annually on January 31 of each year during which such
participant continues to participate in the Plan and
- a $1.25 monthly transaction fee during each month that a participant
makes a contribution to the plan.
The annual service fees and transaction fees will be paid to us from each
participant's contributions to the plan. In addition, any brokerage commissions
or service charges with respect to the purchase of common stock under the plan
is allocated to those participants for whom common stock was purchased during
the applicable month. This allocation is based upon the number of shares and
fractional shares purchased on behalf of each participant during such month.
All brokerage commissions or service charges will be paid from the
participants' contributions to the plan. We anticipate that only discount
brokers, such as Charles Schwab & Co., Inc., Waterhouse Securities Inc., Olde
Discount Corporation, will be selected by the custodian to effectuate purchases
of our common stock. As an example, the published or advertised minimum and
maximum commission rates of Charles Schwab & Co., Inc. for transactions in
stocks is the greater of $39 per trade or $55 for the first 100 shares, plus
$.55 per share thereafter. The commission rates of discount brokers varies from
broker to broker and size of the purchase or sale transaction, and are subject
to further variation by changes in previously published commission rates. We
will pay all other expenses and costs of administering the plan. Participants
will be solely responsible for payment of any commissions, fees, administrative
costs, taxes or other expenses with respect to the sale, transfer or other
disposition of shares of our common stock and, if applicable, other securities
following their withdrawal from the plan.
WHAT ARE THE TRANSFER RESTRICTIONS ON THE PARTICIPATION INTERESTS?
No rights of a participant under the plan are assignable by the
participant other than by will or operation of law. This restriction on transfer
includes any attempt by a participant or other person to
- assign, alienate, or create a security interest in or otherwise
encumber, any of the participant's interest under the plan, or
- subject the interest to attachment, execution, garnishment or other
legal or equitable process.
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Any such transfer, attempted transfer and encumbrance is void.
HOW MAY PARTICIPATION IN THE PLAN BE TERMINATED?
A participant's participation in the plan immediately terminates if and
when
- the participant voluntarily elects to cancel its participation in the
plan (such cancellation to be effective as of the date of our receipt
of a properly executed termination form evidencing such termination) or
- the participant ceases to be a distributor in good standing;
- the death (if an individual), dissolution or liquidation, or otherwise
of the participant.
Upon any termination of participation (other than by reason of a participant's
death),
- any contributions that remain in the participant account of the
participant is paid to the participant, without payment of interest
thereon, and
- any whole shares of our common stock and, if applicable, other
securities held by the plan for the benefit of the participant is
delivered to the participant as a withdrawal.
Upon termination of participation by reason of a death,
- any contributions that remain in the participant account of such
participant is paid, without payment of interest thereon, and
- any shares of our common stock and, if applicable, other securities
held by the plan for the benefit of the participant
are distributed to the designated beneficiary or beneficiaries of the
participant or the estate of the participant. Any fractional shares of our
common stock and, if applicable, other securities to be delivered to a
participant upon termination of participation are rounded to the next whole
share if such fraction is greater than .5 or, if .5 or less, shall be retained
by the plan.
A participant whose participation in the plan is terminated may, after
a period of one month from the date participation is terminated, and, if
eligible, elect to again participate in the plan.
HOW LONG WILL THE PLAN REMAIN IN EFFECT AND MAY IT BE MODIFIED AND TERMINATED?
The plan became effective on February 27, 1998, and will continue in
effect until February 27, 2008, unless we terminate it sooner. Our board of
directors may amend, extend, modify, suspend or terminate the plan. No shares of
our common stock may be purchased pursuant to the plan subsequent to its
termination.
ARE THERE ANY INDEMNIFICATION PROVISIONS PROTECTING CONTRIBUTIONS FROM CLAIMS?
We agreed to indemnify the plan administrator and each member of any
committee serving as plan administrator and the custodian against certain
liabilities and expenses by reason of the fact that any one of them served as
plan administrator or member of any committee serving as plan administrator or
custodian of the plan. We, the plan administrator and each member serving or
having served on a committee acting as plan administrator, the broker-dealer and
custodian are not responsible or liable for any act done in good faith or for
any good faith act or omission to act. These acts or omissions include
- the failure to terminate a participant's participation in the plan upon
such participant's death or prior to receipt of notice in writing of
such death, or
- those acts and omissions relate to the prices at which our common stock
is purchased or the times at which such purchases are made.
BUSINESS
We market a product line consisting of approximately 102 products in
three categories; weight management, dietary supplement and personal care
products. These products are marketed through a network marketing organization
in which independent distributors purchase products for resale to retail
customers as well as for their own personal use. The number of our active
distributors has increased from approximately 20,400 at December 31, 1997, to
approximately 76,100 at June 30, 2000. An "active" distributor is one who
purchased at least $15 under our autoship program or at least $50 if not under
our autoship program during the preceding 12 months.
The distributors in our network are encouraged to recruit interested
people to become new distributors of
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our products. New distributors are placed beneath the recruiting distributor in
the "network" and are referred to as being in that distributor's "downline"
organization. Our marketing plan is designed to provide incentives for
distributors to build, maintain and motivate an organization of recruited
distributors in their downline organization to maximize their earning potential.
Distributors generate income by purchasing our products at wholesale prices and
reselling them at retail prices. Distributors also earn bonuses on product
purchases generated by the distributors in their downline organization. See
"--Network Marketing."
On an ongoing basis we review our product line for duplication and
sales movement and make adjustments accordingly. As of June 30, 2000, our
product line consisted of (i) seven weight management products, (ii) 28 dietary
supplement products, (iii) 65 personal care products consisting primarily of
cosmetic and skin care products, and (iv) Dial A Doc. Our products are
manufactured by various manufacturers pursuant to formulations developed for us
and are sold to our independent distributors located in all 50 states and the
District of Columbia. We also sell our personal care products to distributors in
Greece who do not use our network marketing system.
We believe that our network marketing system is ideally suited to
marketing weight management, dietary supplement and personal care products
because sales of such products are strengthened by ongoing personal contact
between distributors and their customers. Our network marketing system appeals
to a broad cross-section of people, particularly those looking to supplement
family income or who are seeking part-time work. Distributors are given the
opportunity through our sponsored events and training sessions to network with
other distributors, develop selling skills and establish personal goals. We
supplement monetary incentives with other forms of recognition in order to
motivate distributors further and to foster an atmosphere of excitement
throughout our distributor network.
KEY OPERATING STRENGTHS
We believe the source of our success is our support of and compensation
program for our distributors. We provide our distributors with high-quality
products and a highly attractive bonus program along with extensive training and
motivational events and services. We believe that we have established a strong
operating platform to support distributors and facilitate future growth. The key
components of this platform include the following:
- quality products, many of which emphasize herbs and other natural
ingredients to appeal to consumer demand for products that contribute
to a healthy lifestyle;
- a compensation program that permits distributors to earn income from
profits on the resale of products and residual income from reorder
bonuses on product purchases within a distributor's downline
organization, as well as to participate in various non-cash awards,
such as vacations offered through promotional programs;
- a superior communications program that seeks to effectively and
efficiently communicate with distributors by utilizing new technologies
and marketing techniques, as well as motivational events and training
seminars;
- a continual expansion and improvement of our product line and marketing
plan; and
- employment of computer technology to provide timely and accurate
product order processing, weekly bonus payment processing, detailed
distributor earnings statements, and inventory management.
GROWTH STRATEGY
Our growth strategy is expansion of our product line and network of
independent distributors to increase sales. An increase in the number of
distributors generally results in increased sales volume, and new products
create enthusiasm among distributors, serve as a promotional tool in selling
other products, and attract new distributors. Since 1995, we have introduced 11
new products to our product line in the weight management and dietary supplement
categories. Through the
- acquisition of Miracle Mountain International, Inc. in May 1996,
- Chambre International, Inc. in January 1997 , and
- the acquisition of the assets of Stay 'N Shape International, Inc.,
Solution Products International, Inc., Nation of Winners, Inc., and Now
International, Inc. in April 1997, we acquired 6,790 distributors and
added 114 products to our product line.
During 1999, we introduced Nature Flex, St. Johns Wort, and B-Complex. During
2000, we introduced MSM Complex and updated our cosmetic and skin care products.
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We will also seek to increase sales through initiatives designed to
enhance sales in our existing markets. These initiatives include increasing the
number of our training and motivational events and teleconferences, hiring
additional distributor support personnel and establishing more convenient
regional support centers in targeted geographic markets.
In addition, we seek to grow through acquisition. The network marketing
industry, which has relatively low barriers to entry, is fragmented and includes
a number of small marketing companies, many of which are being acquired by
larger companies. Our strategy is to capitalize on these market characteristics
to achieve additional growth, both in terms of distributors and product line
enhancement, through the acquisition of additional network marketing companies
or the assets of such companies.
The principal objective of our acquisition strategy is to acquire other
network marketing organizations that can be combined with our network marketing
organization, resulting in increased sales volume with minimal additional
administrative cost. We will not consummate an acquisition unless, at the time,
we anticipate that such acquisition will contribute to profitability and provide
positive cash flows from operations. There is no assurance, however, that we
will in the future be able to acquire other network marketing organizations, or
that such acquisitions will result in increased profitability and cash flows.
Our growth strategy requires expanded distributor services and support,
increased personnel, expanded operational and financial systems and
implementation of additional control procedures. There is no assurance that we
will be able to manage expanded operations effectively. Furthermore, failure to
implement financial, information management, and other systems and to add
control procedures could have a material adverse effect on our results of
operations and financial condition. Our acquisitions could involve a number of
risks including
- the diversion of management's attention to the assimilation of the
acquired companies or assets,
- adverse 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.
Although our business plan includes expansion and diversification of
our network marketing organization and products through the acquisition of
companies engaged in network marketing, there are currently no specific plans,
negotiations, agreements or understandings with respect to any material
acquisition.
Although we intend to focus principally on the expansion of sales
within the United States, we also intend to expand our sales activities in
Greece. In addition, we are considering expansion into markets in other
countries, although we have not formalized any such planned expansion. We
believe there are numerous additional international markets in which our network
marketing organization and products could prove successful.
INDUSTRY OVERVIEW
NETWORK MARKETING. We believe that network marketing is one of the
fastest growing channels of distribution for certain types of goods and
services.
WEIGHT MANAGEMENT AND DIETARY SUPPLEMENT PRODUCTS. We believe that the
weight management and dietary supplement category is expanding because of
heightened public awareness of reports about the positive effects of weight
management and dietary supplements on health. Many individuals also use dietary
supplements as a means of preventative health care. We believe several factors
account for the steady growth of the dietary supplement category, including
increased public awareness of the reported health benefits of dietary
supplements and favorable demographic trends toward older Americans who are more
likely to consume dietary supplements.
Over the past several years, widely publicized reports and medical
research findings have suggested a correlation between the consumption of
dietary supplements and the reduced incidence of certain diseases. The United
States government and universities generally have increased sponsorship of
research relating to dietary supplements. In addition, Congress has established
the Office of Alternative Medicine within the National Institutes of Health to
foster research into alternative medical treatments, which may include natural
remedies. Congress also recently established the Office of Dietary Supplements
in the National Institutes of Health to conduct and coordinate research into the
role of dietary supplements in maintaining health and preventing disease.
In addition, we believe that the aging of the United States population,
together with a corresponding increased focus on preventative health care
measures, will continue to result in increased
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demand for dietary supplement products. We believe these trends have helped fuel
the growth of the dietary supplement category. To meet the increased demand for
dietary supplements, we and others have introduced a number of successful
dietary supplement products the past several years, including function specific
products for weight loss, sports nutrition, menopause, energy and mental
alertness. In addition, the use of a number of ingredients, such as chromium
picolinate, shark cartilage, proanthocyanidins, citrin and colloidal minerals,
have created opportunities for us and others to offer new products.
PERSONAL CARE PRODUCTS. We believe that the personal care products
market is a mature category that has been historically immune to swings in the
economy. Manufacturers and distributors of personal care products must
continually improve existing products, introduce new products and communicate
product advantages to consumers. With the aging population, there appears to be
a growing demand for a wide spectrum of new products in the area of skin care.
PRODUCTS
Our product line consists of products in the categories of weight
management, dietary supplements and personal care. We currently market
approximately 102 products, exclusive of variations in product size, colors or
similar variations of our basic product line.
WEIGHT MANAGEMENT CATEGORY. During the six months ended June 30, 2000,
and the years ended December 31, 1999 and 1998, 71.0%, 70.9% and 55.5%,
respectively, of our net sales were derived from the seven products in the
weight management category that we market under the Advantage Marketing Systems
label. The following products represent the majority of our product sales in the
weight management category:
- AM-300--A specialized blend of herbs, including an ephedra herb
concentrate and chromium picolinate; and
- AS-200--A specialized blend of herbs and nutrients in addition to
citrin and chromium picolinate.
As a result of the Stay 'N Shape asset purchase, we added several
additional products to our product line in the weight management category that
are marketed under the Advantage Marketing Systems label.
DIETARY SUPPLEMENT CATEGORY. During the six months ended June 30, 2000,
and the years ended December 31, 1999 and 1998, 24.7%, 23.4% and 33.9%,
respectively, of our net sales were derived from the 28 products in the dietary
supplement category which contain herbs, vitamins, minerals and other natural
ingredients. They are sold under the Advantage Marketing Systems label. The
following products represent the majority of our product sales in the dietary
supplement category:
- Shark Cartilage Complex--Manufactured from shark fin cartilage and a
blend of curcumin, boswellia and vanadium; and
- Super Anti-Oxidant--A blend of enzyme-active and phyto-nutrient rich
whole food and herbal antioxidant concentrates including
proanthocyanidins;
- Colloidal Plus--A natural assortment of 77 plant-derived colloidal
minerals in a time release capsule; and
- Chlorella--Fresh water green algae containing amino acids of protein,
nucleic acids, fibers, vitamins and minerals.
As a result of the SNSI asset purchase, we added several additional
products to our line in the dietary supplement category that are being marketed
under the Advantage Marketing Systems label, including Formula of Life Colloidal
Minerals, Stress-Eze and Spark of Life.
PERSONAL CARE CATEGORY. In January 1997, we dramatically expanded and
improved our product line by acquiring Chambre International and our line of
skin care, hair care, family care and cosmetic products. Chambre International
had been marketing our products for over 24 years. During the six months ended
June 30, 2000, and the years ended December 31, 1999 and 1998, 2.3%, 2.7% and
2.1% of our net sales were derived from the 65 personal care products marketed
primarily under the Chambre label in the personal care category. The following
products represent the majority of our product sales in the personal care
category:
- NH2 Lift System--A three-part skin-care system combining enzymatic
exfoliation and isometric action to firm the skin, build muscle tone
and lift the face.
- Skin Care Collections--Include cleansing lotion, skin freshener,
oatmeal scrub, night treatment, moisturizer and protein or moisture
masque.
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- Hair Care Systems--Include keratin shampoo, conditioning rinse,
reconstruction, hair hold, and style and set.
- Chambre Cosmetics--Include foundations, mascara, lipliners, eyeliners,
powder and cream blushes, lip colors and eyeshadows.
DIAL A DOC. Effective May 1, 1998, we began offering the Dial A Doc
service to members of our monthly auto-ship program. Dial A Doc is a 24-hour
service which allows participants to speak with and ask questions of board
certified, private practice physicians anytime, seven days a week. Members
access the service through a toll-free telephone number and a personal
identification number.
PROMOTIONAL MATERIALS. We also derive revenues from the sale of various
educational and promotional materials designed to aid our distributors in
maintaining and building their businesses. Such materials include various sales
aids, informational videotapes and cassette recordings, and product and
marketing brochures.
OTHER PRODUCTS AND SERVICES. Prior to focusing on weight management,
dietary supplement and personal care products in October 1993, we marketed
various packages of consumer benefit services provided by third-party providers.
The consumer benefit services consist of
- a discount shopping service,
- a grocery coupon service,
- a discount travel service,
- pre-paid legal services, and
- a variety of other consumer benefits.
The services under these consumer benefit programs, except for the pre-paid
legal services, are provided by Consumer Benefit Services, Inc. The pre-paid
legal services are provided by Pre-Paid Legal Services, Inc. We no longer
actively market these programs, although we continue to maintain the existing
memberships. These program membership sales represented less than 1% of our net
sales during the six months ended June 30, 2000 and during 1999 and 1998.
NEW PRODUCT IDENTIFICATION. We expand our product line through the
development and acquisition of new products. New product ideas are derived from
a number of sources, including trade publications, scientific and health
journals, our management, consultants, distributors and other outside parties.
Potential product acquisitions are identified in a similar manner. Prior to
introducing new products, we investigate product formulation as it relates to
regulatory compliance and other issues.
We do not maintain a product development staff, but rely upon Chemins
Company, Inc. and other manufacturers, independent researchers, vendor research
departments, and others for such services. When a new product concept is
identified or when an existing product must be reformulated, the new product
concept or reformulation project is generally submitted to Chemins for technical
development and implementation. We continually review our existing products for
potential enhancements to improve their effectiveness and marketability. While
we consider our product formulations to be proprietary trade secrets, such
formulations are not patented. Accordingly, there is no assurance that another
company will not replicate one or more of our products.
RECENT REGULATORY DEVELOPMENTS. A significant portion of our net sales
continue to be dependent upon our AM-300 product. Our net sales of AM-300
represented 67.6%, 66.6% and 49.7% of our net sales during the six months ended
June 30, 2000, the years ended December 31, 1999 and 1998, respectively. One of
the herbal ingredients in AM-300 is ephedra concentrate, which contains
naturally occurring ephedrine. Ephedrine products have been the subject of
adverse publicity in the United States and other countries relating to alleged
harmful effects, including the deaths of several individuals. Currently, we
offer AM-300 only in the United States (except in certain states in which
regulations may prohibit or restrict the sale of such product).
On April 10, 1996, the Food and Drug Administration issued a statement
warning consumers not to purchase or ingest natural sources of ephedrine within
dietary supplements claiming to produce certain effects (none of which are
claimed for our product). On June 4, 1997, the Food and Drug Administration
proposed a regulation which will, if it becomes effective as proposed,
significantly limit our ability to sell AM-300 and any other weight management
products which contain ephedra or ephedrine. Although we have not had a product
liability claim, such claims could result in material losses.
PRODUCT PROCUREMENT AND DISTRIBUTION; INSURANCE. Essentially all of our
product line in the weight management and dietary supplement categories is
manufactured by Chemins Company, Inc. utilizing
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our product formulations. Essentially all of our product line in the personal
care category is manufactured by GDMI, Inc. and Columbia Cosmetics, Inc.
We have not generally entered into long-term supply agreements with the
manufacturers of our product line or the third-party providers of our consumer
benefit services. However, we customarily enter into contracts with our
manufacturers and suppliers to establish the terms and conditions of purchases.
Our arrangements with Chemins Company, Inc. may be terminated by either party
upon the completion of any outstanding purchase orders. Therefore, there can be
no assurance that Chemins will continue to manufacture our products or provide
research, development and formulation services. In the event the relationship
with any of our manufacturers becomes impaired, we will be required to obtain
alternative manufacturing sources for our products. In such event, there is no
assurance that the manufacturing processes of our current manufacturers can be
replicated by another manufacturer. Although we have not previously experienced
product unavailability or supply interruptions, we believe that we would be able
to obtain alternative sources of our weight management, dietary supplement and
personal care products. A significant delay or reduction in availability of
products, however, could have a material adverse effect on our business,
operating results and financial condition.
We, like other marketers of products that are intended to be ingested,
face 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.
All of the items in our product line include a customer satisfaction
guarantee. Within 30 days of purchase, any retail customer or distributor who is
not satisfied with our product for any reason may return it or any unused
portion to the distributor from whom it was purchased or to us for a full refund
or credit toward the purchase of another product. Distributors may obtain
replacements from us for products returned to them by retail customers if they
return such products on a timely basis. Furthermore, in most jurisdictions, we
maintain a buy-back program. Under this program we will repurchase products sold
to a distributor (subject to a 10% restocking charge), provided that the
distributor resigns as a distributor and returns the product in marketable
condition within 12 months of original purchase, or longer where required by
applicable state law or regulations. We believe this buy-back policy addresses a
number of the regulatory compliance issues pertaining to network marketing
systems. During the six months ended June 30, 2000, and the years ended December
31, 1999 and 1998, the cost of products returned to us was 3%, 3% and 2% of
gross sales, respectively.
Our product line is distributed principally from our facilities in
Oklahoma City or from our Regional Support Centers. Products are warehoused in
Oklahoma City and at selected Regional Support Centers.
NETWORK MARKETING
We market our product line through independent distributors in a
network marketing organization. At June 30, 2000, December 31, 1999 and 1998, we
had approximately 76,100, 61,200 and 33,000 "active" distributors. An "active"
distributor is one who purchased at least $15 under our autoship program or at
least $50 if not under our autoship program during the preceding 12 months. Our
distributors are independent contractors who purchase products directly from us
for resale to retail consumers. Distributors may elect to work on a full-time or
part-time basis. We believe our network marketing system appeals to a broad
cross-section of people, particularly those seeking to
- supplement family income,
- start a home business or
- pursue employment opportunities other than conventional, full-time
employment.
A majority of our distributors therefore sell our products on a part-time basis.
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We believe that our network marketing system is ideally suited to
marketing our product line because sales of such products are strengthened by
ongoing personal contact between retail consumers and distributors, many of
whom use our products themselves. Sales are made through direct personal sales
presentations as well as presentations made to groups in a format known as
"opportunity meetings." These sales methods are designed to encourage
individuals to purchase our products by informing potential customers and
distributors of our product line and results of personal use, and the
potential financial benefits of becoming a distributor. The objective of the
marketing program is to develop a broad based network marketing organization
of distributors within a relatively short period. Our marketing efforts are
typically focused on middle-income families and individuals.
Our network marketing program encourages individuals to develop their
own downline network marketing organizations. Each new distributor is either
linked to
- the existing distributor that personally enrolled the new distributor
into our network marketing organization or
- the existing distributor in the enrolling distributor's downline as
specified by the enrolling distributor at the time of enrollment.
Growth of a distributor's downline organization is dependent on the recruiting
and enrollment of additional distributors by the distributor or the
distributors within such distributor's downline organization.
Distributors are encouraged to assume responsibility for training and
motivation of other distributors within their downline organization and to
conduct opportunity meetings as soon as they are appropriately trained. We
strive to maintain a high level of motivation, morale, enthusiasm and
integrity among the members of our network marketing organization. We believe
this result is achieved through a combination of products, sales incentives,
personal recognition of outstanding achievement, and quality promotional
materials. Under our network marketing program, distributors purchase sales
aids and brochures from us and assume the costs of advertising and marketing
our product line to their customers as well as the direct cost of recruiting
new distributors. We believe that this form of sales organization is cost
efficient because our direct sales expenses are primarily limited to the
payment of bonuses, which are only incurred when products are sold.
We continually strive to improve our marketing strategies, including
the compensation structure within our network marketing organization and the
variety and mix of products in our line, to attract and motivate distributors.
These efforts are designed to increase distributors' monthly product sales and
the recruiting of new distributors.
To aid distributors in easily meeting the monthly personal product
purchase requirement to qualify for bonuses, we developed the "autoship" in
1994. Under the autoship purchasing arrangement, distributors establish a
standing product order for an amount in excess of $15 which is automatically
charged to their credit cards or deducted from their bank accounts each month
prior to shipment of the ordered products. At June 30, 2000, December 31, 1999
and 1998, we had approximately 31,500, 27,600, and 13,000 distributors
participating in the autoship, respectively.
Growth of our network marketing organization is in part attributable
to our bonus structure which provides for payment of bonuses on product
purchases made by other distributors in a distributor's downline organization.
Distributors derive income from several sources.
- First, distributors earn profits by purchasing from our product line at
wholesale prices (which are discounted up to 40% from suggested retail
prices) and selling our product line to customers at retail.
- Second, distributors who establish their own downline distributor
organizations may earn bonuses of up to 15% on product purchases by
distributors within the first four levels of their downline
organization.
- Third, distributors who have personally enrolled three active
distributors and have (i) $300 per month of autoship product purchases
by personally enrolled distributors on their first level and (ii) $300
per month of autoship product purchases on their second level, become
directors and have the opportunity to build an additional director
downline organization and receive additional bonuses of 4% on product
purchases by such downline organization.
- Fourth, distributors who have personally enrolled six active
distributors and have (i) $600 per
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month of autoship product purchases by personally enrolled distributors
on their first level and (ii) $600 per month of autoship product
purchases on their second level, become silver directors and have the
opportunity to build an additional silver director downline
organization and receive additional bonuses of 5% on product purchases
by such downline organization.
- Fifth, silver directors who have personally enrolled twelve active
distributors and have (i) $1,200 per month of autoship product
purchases by personally enrolled distributors on their first level and
(ii) $1,200 per month of autoship product purchases on their second
level, become gold directors and have the opportunity to receive an
additional bonus of 3% on product purchases by their silver director
downline organization. In addition, gold directors have the opportunity
to receive generation bonuses of up to 3% on the product purchases by
distributors of silver director downline organizations that originate
from their silver director downline organization through four
generations.
- Sixth, gold directors who maintain the gold director requirements and
develop four gold directors, each one from a separate leg of their
downline organization, become platinum directors and have the
opportunity to build an additional platinum director downline
organization and receive additional bonuses of 5% on product purchases
by such downline organization.
Combining these levels of bonuses, our total "pay-out" on products
subject to bonuses is approximately 67% of the bonus value of product sales.
However, in the case of a distributor who is not qualified to receive bonuses,
we retain the bonuses otherwise payable on the first two levels of those
distributors' downline organizations. A distributor who has not purchased $50
or more of our products during the preceding month is not qualified to receive
bonuses.
Each distributor in our network marketing organization has a
director, a silver director, a gold director and a platinum director. Each
director has a silver director, a gold director and a platinum director. Each
silver director has a gold director and a platinum director. Each gold
director has a platinum director. As of June 30, 2000, we had 262 silver
directors, 233 gold directors and 34 platinum directors.
Under our regional support center program, we designate distributors
to serve as regional support center directors and provide them special
training and support. Each regional support center director functions as our
product distribution center. As of June 30, 2000, we had 67 regional support
center directors.
We maintain a computerized system for processing distributor orders
and calculating bonus payments which enable us to remit such payments promptly
to distributors. We believe that prompt and accurate remittance of bonuses is
vital to recruiting and maintaining distributors, as well as increasing their
motivation and loyalty to us. We make weekly bonus payments based upon the
previous week's product purchases, while most network marketing companies only
make monthly bonus payments. During the six months ended June 30, 2000, and
the years ended December 31, 1999 and 1998, we paid bonuses to 9,800, 8,500
and 5,400 distributors, respectively, in the aggregate amounts of $5,791,079,
$9,691,239 and $5,487,418, respectively.
We are committed to providing the best possible support to our
distributors. Distributors in our network marketing organization are provided
training guides and are given the opportunity to participate in our training
programs. We sponsor regularly scheduled conference calls for our distributors
which include testimonials from successful distributors and satisfied
customers as well as current product and promotional information. We produce a
monthly newsletter which provides information on us, our products and network
marketing system. The newsletter is designed to help recruit new distributors
by answering commonly asked questions and includes product information and
business building information. The newsletter also provides a forum for us to
give additional recognition to our distributors for outstanding performance.
In addition, we regularly sponsor training sessions for our distributors
across the United States. At these training sessions distributors are provided
the opportunity to learn more about our product line and selling techniques so
that they can build their businesses more rapidly. We produce comprehensive
and attractive four color catalogues and brochures that display and describe
our product line. We maintain a web page which provides information on us, our
products and our network marketing system at www.amsonline.com.
Furthermore, in order to facilitate our continued growth and support
distributor activities, we continually upgrade our management information and
telecommunications systems. These systems are designed to provide, among other
things, financial and
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operating data for management, timely and accurate product ordering, bonus
payment processing, inventory management and detailed distributor records.
Since 1994, we have invested more than $1,800,000 to enhance our computer and
telecommunications systems. We have committed to a complete review and
upgrading of our computing capabilities in order to support anticipated growth
and sales and to expand internal management information systems. This review
and upgrade is anticipated to cost approximately $600,000 over the next 12
months and will be charged to earnings as the expenses are incurred.
REGULATION
In the United States (as well as in any foreign markets in which we
may sell our products), we are subject to laws, regulations, administrative
determinations, court decisions and similar constraints (as applicable, at the
federal, state and local levels) (hereinafter "regulations"). These
regulations include and pertain to, among others,
- the formulation, manufacture, packaging, labeling, distribution,
importation, sale and storage of our products,
- our product claims and advertising (including direct claims and
advertising as well as claims and advertising by distributors, for
which we may be held responsible), and
- our network marketing organization.
PRODUCTS. The formulation, 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 activities are also regulated by various
agencies of the states, localities and foreign countries in which our products
are or may be manufactured, distributed and sold. The Food and Drug
Administration, in particular, regulates the formulation, manufacture and
labeling of weight management products, dietary supplements, cosmetics and
skin care products, including some of our products. Food and Drug
Administration regulations require us and our suppliers to meet relevant
regulatory good manufacturing practices for the preparation, packaging and
storage of these products. Good manufacturing practices for dietary
supplements have yet to be promulgated but are expected to be proposed. The
Dietary Supplement Health and Education Act of 1994 revised the provisions of
the Federal Food, Drug and Cosmetic Act concerning the composition and
labeling of dietary supplements, which we believe is generally favorable to
the dietary supplement industry. The Dietary Supplement Health and Education
Act created a new statutory class of "dietary supplements." This new class
includes vitamins, minerals, herbs, amino acids and other dietary substances
for human use to supplement the diet. However, the Dietary Supplement Health
and Education Act grandfathered, with certain limitations, dietary ingredients
that were on the market before October 15, 1994. A dietary supplement
containing a new dietary ingredient and placed on the market on or after
October 15, 1994 must have a history of use or other evidence establishing a
basis for expected safety. Manufacturers of dietary supplements having a
"structure-function" statement, must have substantiation that the statement is
truthful and not misleading.
The majority of our sales come from products that are classified as
dietary supplements under the Federal Food, Drug and Cosmetic Act. The
labeling requirements for dietary supplements have been set forth in final
regulations with respect to labels affixed to containers beginning after March
23, 1999. These regulations include how to declare nutrient content
information, and the proper detail and format required for the "supplemental
facts" box. During 1999, we revised our product labels in compliance with
these regulations. The costs of product relabling were immaterial. Many states
have also recently become active in the regulation of dietary supplement
products. These states may require modification of labeling or formulation of
certain of our products sold in these states.
In addition, on April 29, 1998 the Food and Drug Administration
published a proposed regulation offering guidance and providing limitations on
permissible structure/function statements to be placed on labels and in
brochures. Structure/function statements are claims of the benefit or effect
of a product or an ingredient on the body's structure or function. The
proposed regulation has not been finalized. We anticipate that some of the
regulation as proposed will become final, but this new regulation will not
significantly change the way that the Food and Drug Administration currently
interprets structure/function statements. Thus, we do not expect to make any
substantial label revisions based on this
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proposed regulation regarding any of our structure/function product statements.
As a marketer of products that are ingested by consumers, we are
subject to the risk that one or more of the ingredients in our products may
become the subject of adverse regulatory action. For example, one of the
ingredients in our AM-300 product is ephedra, an herb which contains
naturally-occurring ephedrine. Our manufacturer uses a powdered extract of
that herb when manufacturing AM-300. The extract is an 8% extract which means
that every 100 milligrams of the powdered extract contains approximately eight
milligrams of naturally occurring ephedrine alkaloids. Ephedrine containing
products have been the subject of adverse publicity in the United States and
other countries relating to alleged harmful effects.
Many companies distribute products containing various amounts of
ephedrine. The Food and Drug Administration has received approximately 900
reports of adverse reactions to these products. On April 10, 1996, the Food
and Drug Administration issued a statement warning consumers not to purchase
or ingest dietary supplements containing ephedrine that are claimed to produce
certain effects. These effects include euphoria, heightened awareness,
increased sexual sensations or increased energy. The Food and Drug
Administration cautions that these products pose significant adverse health
risks, including dizziness, headache, gastrointestinal distress, irregular
heartbeat, heart palpitations, heart attack, strokes, seizures, psychosis and
death. We market AM-300 principally as an aid in weight management.
On June 4, 1997, the Food and Drug Administration proposed
regulations that will, if adopted as proposed, significantly limit our ability
to sell dietary supplements that contain ephedrine, including our AM-300
product. During the six months ended June 30, 2000 and the years ended
December 31, 1999 and 1998, sales of AM-300 represented 67.7%, 66.6% and 49.7%
of our net sales, respectively. The proposed regulations were subject to
comment until December 2, 1997. The proposed regulations will become effective
180 days following their issuance as final regulations. Several trade
organizations in the dietary supplement industry have commented on the
proposed regulations, requesting substantial modifications. It is probable
that the Food and Drug Administration will make material changes to the
proposed regulations prior to adoption. Relatedly, the United States General
Accounting Office recently issued a report dated July 2, 1999 to a committee
of the U.S. House of Representatives that casts substantial doubt on certain
provisions of the Food and Drug Administration's proposed regulations on
dietary supplements which contain ephedrine alkaloids. We do not know the
effect such report will have on the proposed regulations.
We are a member of a non-profit corporation, The Ephedra Research
Foundation (the "Foundation"), which has contracted with a consulting firm to
conduct a clinical study concerning the safety of ephedrine when ingested in
combination with caffeine as a dietary supplement. This study is currently
being conducted at two sites, Beth Israel-Deaconess Medical Center in Boston,
affiliated with Harvard Medical School, and St. Luke's-Roosevelt Hospital in
New York City, affiliated with Columbia University. We have been informed that
the final results of this study will be published in the fourth quarter of
2000.
In addition, several states either regulate or are considering
regulating ephedrine-containing products as controlled substances or are
prohibiting the sale of such products by persons other than licensed
pharmacists. 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.
Even in the absence of further laws or regulation, we may elect to reformulate
or relabel our AM-300 product containing ephedra or ephedrine. While we
believe that 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 affect on sales of such product or related products within our
product line even though such products do not contain ephedra or ephedrine.
In foreign markets, prior to commencing operations and prior to
making or permitting sales of our products, we may be required to obtain an
approval, license or certification from the country's ministry of health or
comparable agency. Prior to entering a new market in which a formal approval,
license or certificate is required, we will be required to
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work extensively with local authorities to obtain the requisite approvals. The
approval process generally will require us to present each product and product
ingredient to appropriate regulators and, in some instances, arrange for
testing of products by local technicians for ingredient analysis. Such
approvals may be conditioned on reformulation of our products or may be
unavailable with respect to certain products or ingredients.
PRODUCT CLAIMS AND ADVERTISING. The Federal Trade Commission and
certain states regulate advertising, product claims, and other consumer
matters, including advertising of our products. All advertising, promotional
and solicitation materials used by distributors require our approval prior to
use. 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, these 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 practice 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 judgements and could have a material adverse
effect on our financial condition.
COMPLIANCE EFFORTS. We attempt to remain in full compliance with all
applicable laws and regulations governing the manufacture, labeling, sale,
distribution, and advertising of our dietary supplements. We retain special
legal counsel for advice on both Food and Drug Administration and Federal
Trade Commission legal issues. In particular, we work closely with special
legal counsel who specializes in Dietary Supplement Health and Education Act
regulations for label revisions, content of structure/function statements,
advertising copy, and also the position of the Food and Drug Administration on
ephedra-containing products.
NETWORK MARKETING SYSTEM. Our network marketing 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. We have
an ongoing compliance program with assistance from legal counsel experienced
in the laws and regulations pertaining to network sales organizations. We are
not aware of any legal actions pending or threatened by any governmental
authority against us regarding the legality of our network marketing
operations.
We currently have independent distributors in all 50 states and the
District of Columbia. We review the requirements of various states as well as
seek legal advice regarding the structure and operation of our selling
organization to ensure that it complies with all of the applicable laws and
regulations pertaining to network sales organizations. On the basis of these
efforts and the experience of our management, we
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believe that we are in compliance with all applicable federal and state
regulatory requirements. We have not obtained any no-action letters or advance
rulings from any federal or state security regulator or other governmental
agency concerning the legality of our operations, nor are we relying on a formal
opinion of counsel to this effect. Accordingly, there is the risk that our
network marketing system could be found to not comply 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.
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.
Two important Federal Trade Commission cases have established legal
precedent for determining whether a network marketing program constitutes an
illegal pyramid scheme. The first, IN RE KOSCOT INTERPLANETARY, INC., 86
F.T.C. 1106 (1975), set forth a standard for determining whether a marketing
system constituted a pyramid scheme. Under the KOSCOT standard, a pyramid
scheme is characterized by the participants' payment of money to a company in
return for
- the right to sell a product and
- the right to receive, in return for recruiting other participants into
the program, rewards that are unrelated to sales of the product to
ultimate users.
Applying the KOSCOT standard in IN RE AMWAY CORP., 93 F.T.C. 618 (1979), the
Federal Trade Commission determined that a company will not be classified as
operating a pyramid scheme if the company adopts and enforces policies that in
fact encourage retail sales to consumers and prevent "inventory loading."
Inventory loading occurs when distributors' purchase large quantities of
non-returnable inventory to obtain the full amount of compensation available
under the system. In AMWAY, the Federal Trade Commission found that the
marketing system of Amway Corporation did not constitute a pyramid scheme,
noting the following Amway policies:
- participants were required to buy back, from any person they recruited,
any saleable, unsold inventory upon the recruit's leaving Amway;
- every participant was required to sell at wholesale or retail at least
70% of the products bought in a given month in order to receive a bonus
for that month; and
- in order to receive a bonus in a month, each participant was required
to submit proof of retail sales made to 10 different consumers.
We believe that our network marketing system is not classified as a
pyramid scheme under the standards set forth in KOSCOT, AMWAY, and other
applicable law. In particular, in most jurisdictions, we maintain an inventory
buy-back program to address the problem of "inventory loading." Pursuant to
this program, we repurchase products sold to a distributor (subject to a 10%
restocking charge) provided that
- the distributor resigns as a distributor and
- returns the product in marketable condition within 12 months of
original purchase, or longer where required by applicable state law or
regulations.
Our literature provided to distributors describes our buy-back program. In
addition, pursuant to agreements with our distributors, each distributor
represents that at least 70% of the products he or she buys will be sold to
non-distributors. However, as is the case with other network marketing
companies, the bonuses paid by us to our distributors are based on product
purchases including purchases of products that are personally consumed by the
downline distributors. Basing bonuses on sales of personally consumed products
may be considered an inventory loading purchase. Furthermore, distributors'
bonuses are based on the wholesale prices received by us on product purchases
or, in some cases based upon the particular product purchased, on prices less
than the wholesale prices.
In the event of challenges to the legality of our network marketing
organization by distributors, we would be required to
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- demonstrate that our network marketing policies are enforced, and
- that the network marketing program and distributors' compensation
thereunder serve as safeguards to deter inventory loading and encourage
retail sales to the ultimate consumers.
In WEBSTER V. OMNITRITION INTERNATIONAL, INC., 79 F.3d 776 (9th Cir.
1996), the United States Court of Appeals held that a class action brought
against Omnitrition International, Inc., a multilevel marketing seller of
nutritional supplements and skin care products, should be allowed to proceed
to trial. The plaintiffs, former distributors of Omnitrition's products,
alleged that Omnitrition's selling program was an illegal pyramid scheme and
claimed violations of Racketeer Influenced and Corrupt Organizations Act and
several federal and state fraud and securities laws. Despite evidence that
Omnitrition complied with the AMWAY standards, the court ruled that a jury
would have to decide whether Omnitrition's policies, many of which apparently
were similar to compliance policies adopted by us, were adequate to ensure
that Omnitrition's marketing efforts resulted in a legitimate product
marketing and distribution structure and not an illegal pyramid scheme. We
believe that our marketing and sales programs differ in significant respects
from those of Omnitrition, and that our marketing program complies with
applicable law. The two most significant differences are
- the Omnitrition marketing plan required distributors to purchase $2,000
in merchandise in order to qualify for bonuses as compared to $50 under
our marketing program and
- the Omnitrition inventory repurchase policy was limited to products
that were less than three months old as compared to one year under our
inventory repurchase policy.
A lesson from the OMNITRITION case is that
- a selling program which operates to only generate the minimum purchases
necessary to qualify for bonuses is suspect and
- a selling program must operate to generate purchases independently of
the payment of bonuses in order to have a legitimate product marketing
and distribution structure.
We believe that our selling program operates to generate significant purchases
"for intrinsic value" as demonstrated by our sales figures. During June 2000,
36,178 of our distributors placed a total of 41,910 orders averaging $57 in
size while only $15 on autoship purchaser or a single $50 order per month is
necessary to qualify for bonuses. In view of the holding of the court of
appeals in the OMNITRITION case, however, there is no assurance that, if
challenged, we would prevail against private plaintiffs alleging violations of
anti-pyramid and securities laws. A final ruling against us in such a suit
could result in the imposition of a material liability against us. Moreover,
even if we were successful in defending against such suit, the costs of such
defense, both in dollars spent and in management time, could be material and
adversely affect our operating results. In addition, the negative publicity of
such a suit could adversely affect our sales and ability to attract and retain
distributors.
Nutrition for Life International, Inc., one of our competitors and a
multi-level seller of personal care and nutritional supplements, recently
announced that it had settled class action litigation brought by distributors
alleging fraud in connection with the operation of a pyramid scheme. Nutrition
for Life agreed to pay in excess of $3 million to settle claims brought on
behalf of its distributors, and related securities fraud claims brought on
behalf of certain purchasers of its stock.
We believe that our marketing program is significantly different from
the program allegedly promoted by Nutrition for Life and that our marketing
program is not in violation of anti-pyramid laws or regulations. Two issues in
the Nutrition for Life matter were a $1,000 buy-in urged on new recruits, and
the paying of commissions on product vouchers prior to the actual delivery of
product. By design, our marketing program offers no incentive to anyone to
make a large personal purchase nor do we use product vouchers. Actual average
order size in June 2000 was $57. However, there is no assurance that claims
similar to the claims brought against Nutrition for Life and other multi-level
marketing organizations will not be brought against us, or that we will
prevail in the event any such claims were made. Furthermore, even if we were
successful in defending against any such claims, the costs of conducting such
a defense, both in dollars spent and in management time, could be material and
adversely affect our operating results and financial condition. In addition,
the negative publicity of such a suit could adversely affect our sales and
ability to attract and retain distributors.
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<PAGE>
INTELLECTUAL PROPERTY
We use several trademarks and trade names in connection with our
products and operations. As of June 30, 2000, we had seven federal trademark
registrations with the United States Patent and Trademark Office. We rely on
common law trademark rights to protect our unregistered trademarks. Common law
trademark rights do not provide the same level of protection as afforded by a
United States federal registration of a trademark. Also, common law trademark
rights are limited to the geographic area in which the trademark is actually
used. In addition, our product formulations are not protected by patents and
are not patentable. Therefore, there can be no assurance that another company
will not replicate one or more of our products.
COMPETITION
We are subject to significant competition in recruiting distributors
from other network marketing organizations, including those that market
products in the weight management, dietary supplement and personal care
categories, as well as other types of products. There are over 300 companies
worldwide that utilize network marketing techniques, many of which are
substantially larger, offer a greater variety of products, and have available
considerably greater financial resources than us. Our ability to remain
competitive depends, in significant part, on our success in recruiting and
retaining distributors through an attractive bonus plan and other incentives.
We believe that our bonus plan and incentive programs provide our distributors
with significant income potential. However, there can be no assurance that our
programs for recruitment and retention of distributors will continue to be
successful.
In addition, the business of marketing products in the weight
management, dietary supplement and personal care categories is highly
competitive. This market segment includes numerous manufacturers, other
network marketing companies, catalog companies, distributors, marketers,
retailers and physicians that actively compete in the sale of such products.
We also compete with other providers of such products, especially retail
outlets, based upon convenience of purchase and immediate availability of the
purchased product. The market is highly sensitive to the introduction of new
products or weight management plans (including various prescription drugs)
that may rapidly capture a significant share of the market. As a result, our
ability to remain competitive depends in part upon the successful introduction
and addition of new products to our line.
Our network marketing competitors include small, privately held
companies, as well as larger, publicly held companies with greater financial
resources and greater product and market diversification and distribution. Our
competitors include Shaklee Corporation, The A.L. Williams Corporation, Mary
Kay Cosmetics, Inc., Amway Corporation, Nutrition for Life International,
Inc., and Herbalife International, Inc.
EMPLOYEES
As of June 30, 2000, we had 71 full-time employees, consisting of 3
executive officers, 26 involved in administrative activities, 20 involved in
marketing activities, 10 involved in customer service activities, and 12
involved in shipping activities. Our employees are not represented by a labor
organization. We consider our employee relations to be good.
PROPERTIES
We maintain our executive office in 10,003 square feet at 2601
Northwest Expressway, Suites 1210W and 1120W, Oklahoma City, Oklahoma
73112-7293, our warehouse and distribution center in 10,340 square feet at
4000 North Lindsay, Oklahoma City, Oklahoma, and our support center in 1,300
square feet at 214 Quadrum Drive, Oklahoma City, Oklahoma. These premises are
occupied pursuant to long-term leases which expire on May 31, 2003, January
31, 2005, May 31, 2003 and January 31, 2002, respectively, and which require
monthly rental payments of $7,348, $2,336, $5,385 and $904, respectively.
LITIGATION
We are not a party to any pending litigation. In September 1995, the
Oklahoma Department of Securities commenced an investigation of us and the AMS
Distributor Stock Pool related to the availability of exemptions under the
Oklahoma Business Opportunity Act with respect to our network marketing
activities and programs, the offer and sale of unregistered securities by us
and the sale thereof by our officers, directors and employees without
registration as broker-dealers, the purchase and resale of our common stock by
our officers and directors in the public market. As the investigation
progressed, it narrowed to focus on the activities associated and related to
the pool. The pool, under which our independent distributors were permitted to
participant
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<PAGE>
on a voluntary basis, was formed in 1990. Participants made contributions to
the pool and, from such contributions, the administrator of the pool purchased
on a monthly basis our common stock in the over-the-counter market for the
participants. All purchase transactions were executed and effected through a
registered broker-dealer. All records of ownership of the common stock held by
the pool were maintained at our offices. The pool only purchased shares of our
common stock and did not sell shares on behalf of the participants. As of
December 31, 1997, the pool held approximately 245,000 shares of common stock
for and on behalf of the participants. Each participant has sole voting rights
with respect to those shares of common stock held for such participant's
benefit. In the event a participant desires to sell the common stock held for
the participant's benefit by the pool, certificates representing such shares
are delivered to such participant for the purpose of effecting such sale.
The Oklahoma Department of Securities took the position that the
offer and sale of participation rights in the pool violated the registration
provisions of the Oklahoma Securities Act. During October 1997, we ceased
accepting additional contributions to the pool and effecting purchase
transactions in our common stock. On November 4, 1997, we and our then
executive officers and directors, John W. Hail, Curtis H. Wilson, Sr. and
Roger P. Baresel, entered into an agreement with the Administrator of the
Oklahoma Department of Securities in settlement of the investigation. The
Oklahoma Department of Securities settled without taking any action against us
and our executive officers and directors. Pursuant to such agreement, John W.
Hail reimbursed the Department its costs of the investigation without
entitlement to reimbursement by us or any of our other officers and directors.
Under the terms of such agreement, we and Messrs. Hail, Wilson and Baresel
agreed to notify the Department of any proposed offer or sale of additional
securities by us or each of Messrs. Hail, Wilson and Baresel pursuant to any
registration exemption under the Oklahoma Securities Act, for the three-year
period ending on November 6, 2000.
MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
Pursuant to the terms of our bylaws, our directors are divided into
three classes. Class I directors hold office initially for a term expiring at
the annual meeting of shareholders to be held in 2002. Class II directors hold
office initially for a term expiring at the annual meeting of shareholders to
be held in 2003. Class III directors hold office initially for a term expiring
at the annual meeting of shareholders to be held in 2001. Each director will
hold office for the term to which he is elected and until his successor is
duly elected and qualified. At each annual shareholders meeting, the successor
to a member of the class of directors whose term expires at such meeting will
be elected to hold office for a term expiring at the annual meeting of
shareholders held in the third year following the year of his election.
Executive officers are elected by our board of directors and serve at our
discretion. The following table sets forth certain information with respect to
our executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH US
---- --- ----------------
<S> <C> <C>
John W. Hail(1)(2).......................... 70 Chairman of the Board, Chief Executive Officer and Director
Joseph B. Williams, D.B.A.(1)(2)............ 62 President, Chief Financial Officer, Secretary and Director
Dennis P. Loney............................. 46 Vice President and Chief Operating Officer
R. Terren Dunlap(3)......................... 55 Director and Member of Audit Committee
Harland C. Stonecipher(4)................... 61 Director and Member of Audit Committee
Jimmy L. Dungan(3).......................... 54 Director
</TABLE>
------------------------
(1) Member of the Stock Option Committee.
(2) Term as a Director expires in 2001.
(3) Term as a Director expires in 2003.
(4) Term as a Director expires in 2002.
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<PAGE>
JOHN W. HAIL is our founder and has served as our Chief Executive
Officer and Chairman of the Board of Directors since our inception in June
1988. During 1987 and through May 1988, Mr. Hail served as Executive Vice
President, Director and Agency Director of Pre-Paid Legal Services, Inc., a
public company engaged in the sale of legal services contracts, and also
served as Chairman of the Board of Directors of TVC Marketing, Inc., the
exclusive marketing agent of Pre-Paid Legal Services, Inc. Since 1998, Mr.
Hail has served as a Director of PrePaid Legal Services, Inc. In March 1999,
Mr. Hail became a director of DuraSwitch Industries, Inc., a company that
developed and distributes electronic switches. Mr. Hail is the father-in-law
of Dennis P. Loney, our Chief Operating Officer and Vice President.
JOSEPH B. WILLIAMS, D.B.A. has served as our President, Chief
Financial Officer, Secretary and a Director since June 2000. Dr. Williams
holds a Doctorate of Business Administration in International Management, a
Masters in Management and a Bachelor in Accounting. Dr. Williams has 30 years
of direct selling experience and since 1980 has maintained a consulting
service in international start-ups to leading direct selling companies
including Oriflamme International, CUTCO/ALCAS and Stanhome International.
From March 1996 until joining us Dr. Williams served as Vice President
International for Jeunique International.
DENNIS P. LONEY has served as our Chief Operating Officer since April
2000. Mr. Loney has been with us since April 1995 and served as Vice President
since July 1995. Prior to joining us he served as the Vice President of
Administration of TVC Marketing, Inc. Mr. Loney has over 20 years of business
experience, including 14 years of network marketing.
R. TERREN DUNLAP has served as one of our directors since June 1995.
He is Chief Executive Officer of DuraSwitch Industries, Inc., a company formed
in 1997 that developed and distributes electronic switches. He served as our
Vice President-International Development from June 1995 through March 1996.
Mr. Dunlap is a Director and the co-founder, and from 1984 and until March
1994 served as Chief Executive Officer and Chairman of the Board, of Go-Video,
Inc., a developer and distributor of consumer electronics products.
HARLAND C. STONECIPHER has served as one of our directors since
August 1995. Mr. Stonecipher has been Chairman of the Board and Chief
Executive Officer of Pre-Paid Legal Services, Inc. since its inception in 1972.
JIMMY L. DUNGAN has served as one of our directors since October 1999.
Mr. Dungan has been actively working full time to develop an Advantage Marketing
Systems distributorship with his wife, Pat, since August 1995. The Dungans have
been Platinum Distributors since November 1998 and achieved Double Platinum
status in October 1999.
COMPENSATION OF EXECUTIVE OFFICERS
The following Summary Compensation Table sets forth certain
information relating to compensation for services rendered during the years
ended December 31, 1999, 1998 and 1997, paid to or accrued for John W. Hail,
our Chief Executive Officer and each of our executive officers whose 1999
salary and bonus exceed $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
------------------------
ANNUAL COMPENSATION SECURITIES EXERCISE
------------------------------------- UNDERLYING OR BASE
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS OTHER(2) OPTIONS PRICE
--------------------------- ------ ----------- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
John W. Hail.................................... 1999 $236,801 $ -- $ -- -- $ --
Chief Executive Officer 1998 60,000 16,565 $ -- 100,000(3) $1.75
1997 56,539 -- $ -- 100,000(3) $6.00
100,000(3) $2.70
Roger P. Baresel................................ 1999 $146,049 $ -- $ -- -- $ --
President and Chief Financial 1998 96,304 25,000(5) $ -- 10,000(4) $2.00
and Accounting Officer 43,750(4) $2.00
1997 91,484 2,500 $ -- 43,750(4) $2.70
</TABLE>
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<PAGE>
------------------------
(1) Dollar value of base salary earned during the year.
(2) We provide use of an automobile to Messrs. Hail and Baresel, the value
of which is not greater than $5,000 annually.
(3) During 1997, we granted 100,000 stock options to Mr. Hail pursuant to
our stock option plan, each exercisable for the purchase of one share
of common stock at an exercise price of $6.00 per share (the market
value of the common stock on the date of grant). The exercise price of
these option was reduced to $2.70 per share pursuant to regrant during
1997 (which was equal to the fair value of the common stock on the date
of regrant). On October 8, 1998, the exercise price on these options
was reduced to $1.75 per share pursuant to regrant (which was equal to
the fair value of the common stock on the date of regrant).
(4) During 1994, we granted 10,000 stock options to Mr. Baresel (a former
executive officer), each exercisable for the purchase of one share of
common stock at an exercise price of $2.16 per share (the fair value of
the common stock on the date of grant). The exercise price of these
options was reduced to $2.00 per share pursuant to regrant (which was
equal to the fair value of the common stock on the date of regrant).
During 1995, Mr. Baresel gave these options as a gift to certain
members of his family. The exercise price of these options was reduced
to $2.70 per share pursuant to regrant during 1997 (which was equal to
the fair value of the common stock on the date of regrant). On November
18, 1998, the exercise price of these options was reduced to $2.00 per
share (which was equal to the fair value of the common stock on the
date of regrant).
(5) This bonus compensation represented a one-time non-recurring payment.
AGGREGATE OPTION GRANTS AND EXERCISES IN 1999 AND YEAR-END OPTION VALUES
STOCK OPTIONS AND OPTION VALUES. No options were granted to Messrs.
Hail and Baresel during 1999.
AGGREGATE STOCK OPTION EXERCISES IN 1999 AND YEAR-END OPTION VALUES.
The following table sets forth information related to the exercise of stock
options during 1999 and the number and value of options held by the named
executive officer at December 31, 1999.
<TABLE>
<CAPTION>
STOCK OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AS OF OPTIONS AS OF
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999(1)
ACQUIRED ON VALUE ---------------------------- ------------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John W. Hail.......................... -- $ -- 475,000(2) -- $1,716,000 $ --
Chief Executive Officer
Roger P. Baresel...................... 10,000 $35,600 168,750(3) -- $600,750 $ --
President and Chief Financial
and Accounting Officer
</TABLE>
------------------------
(1) The closing sale price of our common stock as reported on the American
Stock Exchange on December 31, 1999 was $5.56. The per-share value is
calculated based on the applicable closing highest bid price per share,
minus the exercise price, multiplied by the number of shares of our
common stock underlying the options.
(2) Includes 225,000 options given by John W. Hail as a gift to certain
members of his family in 1995.
(3) Includes 156,250 options given by Roger P. Baresel as a gift to certain
members of his family in 1995.
COMPENSATION OF DIRECTORS
Directors who are not our employees receive $250 for each board
meeting attended. Directors who are also our employees receive no additional
compensation for serving as directors. We reimburse our directors for travel
and out-of-pocket expenses in connection with their attendance at meetings of
our board of directors. Our Bylaws provide for mandatory indemnification of
directors and officers to the fullest extent permitted by Oklahoma law.
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<PAGE>
STOCK OPTION PLAN
We established the Advantage Marketing Systems, Inc. 1995 Stock Option
Plan in June 1995. This plan provides for the issuance of incentive stock
options with or without stock appreciation rights and nonincentive stock options
with or without stock appreciation rights to our employees and consultants,
including employees who also serve as a director. The total number of shares of
our common stock authorized for issuance under this stock option plan is
1,125,000. As of June 30, 2000, options exercisable for the purchase of 732,144
shares of our common stock outstanding. These options are exercisable for $1.75
to $6.13 per share and expire October 2001 through May 2007. Also, at June 30,
2000, there were outstanding stock options and warrants (in addition to the
1997-A warrants, the common stock purchase warrants and the underwriter
warrants) exercisable for the purchase of 778,250 shares of our common stock
granted outside of the plan.
The stock option committee, which is currently comprised of Messrs.
Hail, Williams and Loney, administers and interprets the stock option plan and
has authority to grant options to all eligible employees and determine the types
of options granted and the terms, restrictions and conditions of the options at
the time of grant.
The option price of our common stock is determined by the stock
option committee, provided such price may not be less than 85% of the fair
market value of the shares on the date of grant of the option. The fair market
value of a share of our common stock is determined by the last reported sale
price on the date of grant of the option. Upon the exercise of an option, the
option price must be paid in full, in cash or with a stock appreciation right.
Subject to the stock option committee's approval, upon exercise of an option
with a stock appreciation right attached, a participant may receive cash,
shares of our common stock or a combination of both, in an amount or having a
fair market value equal to the excess of the fair market value, on the date of
exercise, of the shares for which the option and stock appreciation right are
exercised, over the option exercise price.
Options granted under the stock option plan may not be exercised
until six months after the date of the grant, except in the event of death or
disability of the participant. Incentive stock options and any stock
appreciation rights are exercisable only by participants while actively
employed as our employee or a consultant, except in the case of death,
retirement or disability. Options may be exercised at any time within three
months after the participant's retirement or within one year after the
participant's disability or death, but not beyond the expiration date of the
option. No option may be granted after April 30, 2005. Options are not
transferable except by will or by the laws of descent and distribution.
OFFICER AND DIRECTOR LIABILITY
As permitted by the provisions of the Oklahoma General Corporation
Act, our Certificate of Incorporation eliminates in certain circumstances the
monetary liability of our directors for a breach of their fiduciary duty as
directors. These provisions and applicable laws do not eliminate the liability
of one of our directors for
- a breach of the director's duty of loyalty to us or our shareholders,
- acts or omissions by a director not in good faith or which involve
intentional misconduct or a knowing violation of law,
- liability arising under the Oklahoma General Corporation Act relating
to the declaration of dividends and purchase or redemption of shares of
our common stock in violation of the Oklahoma General Corporation Act,
- any transaction from which the director derived an improper personal
benefit,
- violations of federal securities laws, or
- 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
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<PAGE>
any other rights to which such individuals may be entitled under our
Certificate, our bylaws, an agreement, vote of shareholders or disinterested
directors or otherwise. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to our directors and
officers pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy and is, therefore, unenforceable.
We maintain insurance to protect our directors and officers against
liability asserted against them in their official capacities. Such insurance
protection covers claims and any related defense costs of up to $3 million
based on alleged or actual securities law violations, other than intentional
dishonest or fraudulent acts or omissions, or any willful violation of any
statute, rule or law, or claims arising out of any improper profit,
remuneration or advantage derived by an insured director or officer.
CERTAIN TRANSACTIONS
Set forth below is a description of transactions entered into between
us and certain of our officers, directors and shareholders during the last two
years. Certain of these transactions may result in conflicts of interest
between us and such individuals. Although these persons have fiduciary duties
to us and our shareholders, there can be no assurance that conflicts of
interest will always be resolved in our favor or in favor of our shareholders.
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 us. During 1998 and 1997, we made aggregate payments pursuant to such lease
agreements of $17,939 and $19,427, respectively. As of December 31, 1998 these
leases had terminated.
During the first quarter of 1998, we agreed to loan John Hail, an
affiliate, up to $250,000. Subsequently, we also agreed to loan up to an
additional $75,000. These loans are secured, bear interest at 8% per annum and
were to become due on March 31, 2000. During the first quarter of 2000, we
agreed to loan up to an additional $225,000 and extended the maturity date on
the loans to December 31, 2000. As of June 30, 2000, the aggregate outstanding
principal balance of these loans was $533,761 plus interest. These loans and
extensions were unanimously approved by our board of directors.
During the six months ended June 30, 2000 and the years of 1999 and
1998, we paid Pat Dungan, wife of Jimmy L. Dungan, a Director of the Company,
sales commissions of $57,646, $119,626 and $76,696, respectively. These
commissions were based on purchases by the Dungans and their downline
distributors in accordance with our network marketing program in effect at the
time of the sales. See "Item 1. Description of Business - Network Marketing".
During 1997, pursuant to our Stock Option Plan, we granted Mr. Hail
10-year nontransferable stock options exercisable for the purchase of 100,000
shares of our common stock for $6.00 per share. On the date of grant of these
stock option, the exercise price was equal to the fair value of our common
stock. During 1997 and on October 8, 1998, the exercise price of these options
was reduced to $2.70 and $1.75 per share, respectively, pursuant to regrant
(which was equal to the fair value of the common stock on the date of each
regrant).
On December 17, 1996, we adopted policies that
- any loans to officers, directors and 5% or more shareholders
("affiliates") are subject to approval by a majority of not less than
two of our disinterested independent directors and
- such loans and other transactions with affiliates will be on terms no
less favorable than could be obtained from unaffiliated parties and
approved by a majority of not less than two of the disinterested
independent directors.
Our board of directors is comprised of five members, two of which, R. Terren
Dunlap and Harland C. Stonecipher, are independent directors.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information as to the beneficial
ownership of our common stock as of September 30, 2000, of
- each person who is known to us to be the beneficial owner of more than
5% of our common stock,
- each of our directors and executive officers,
- our executive officers and directors as a group, and
- their percentage holdings of our outstanding shares of common stock.
For purposes of the following table, the number of shares and percent of
ownership of our outstanding common stock that the named person beneficially
owns as well as the shares of our common stock that the named person has the
right to acquire on or before November 30, 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.
<TABLE>
<CAPTION>
COMMON STOCK
------------
SHARES PERCENT OF
BENEFICIALLY SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OUTSTANDING
------------------------------------ ----- -----------
<S> <C> <C>
John W. Hail(1)(2)..................................................................... 652,406 14.2%
Gary E. Bryant(3)...................................................................... 337,900 7.7%
Curtis H. Wilson(4).................................................................... 258,718 5.6%
Dennis P. Loney(1)(5).................................................................. 131,031 2.9%
Harland C. Stonecipher(6).............................................................. 180,768 4.2%
R. Terren Dunlap(1).................................................................... 17,500 *
Jimmy L. Dungan(1)(7).................................................................. 11,591 *
Joseph B. Williams, D.B.A.(1).......................................................... 381 *
Executive Officers and Directors as a group
(six persons)(8).................................................................... 993,677 21.1%
</TABLE>
------------------------
* Percent of shares outstanding less than 1%.
(1) A director or an executive officer with a business address of 2601
Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293.
(2) The number of shares and each percentage presented includes
- 250,000 shares of our common stock that are subject to
currently exercisable stock options, 100 shares of our common
stock subject to currently exercisable 1997-A warrants and
1,100 shares of our common stock that are subject to currently
exercisable redeemable common stock purchase warrants held by
Mr. Hail,
- 16,739 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
- 2,299 shares of our common stock and 1,000 shares of our
common stock that are subject to currently exercisable
redeemable common stock purchase warrants held by Helen Hail,
wife of Mr. Hail, with respect to which Mr. Hail disclaims any
beneficial interest.
(3) Mr. Bryant's business address is 3 Gavina, Monarch Beach, California
92629. The number of shares and the percentage presented includes
- 31,000 shares of our common stock that are subject to
currently exercisable warrants,
- 3,900 shares of our common stock held by Kiowa Corporation,
- 4,000 shares of our common stock and 1,500 shares of our
common stock that are subject to currently exercisable
warrants held by Southwest Product Corporation,
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<PAGE>
- 4,100 shares held by Newport Underwriters, Corp.,
- 129,800 shares of our common stock held by Newport Capital
Consultants,
- 39,350 shares of our common stock and 2,000 shares of our
common stock that are subject to currently exercisable
warrants held by Suzanne Bryant, wife of Mr. Bryant,
- 2,000 shares of our common stock held for the benefit of Mr.
Bryant in the Anderson Bryant Profit Sharing Plan, and
- 1,000 shares of our common stock held by Mr. Bryant as
custodian for the benefit of Jan Cecil Bryant.
(4) A former director, with a business address of 10121 Northwest 7th
Street, Plantation, Florida 33324. The number of shares and 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 and 3,000 shares
of our common stock that are subject to currently exercisable
redeemable common stock purchase warrants held by Ruth Wilson,
wife of Mr. Wilson, with respect to which Mr. Wilson disclaims
any beneficial interest.
(5) The number of shares consist of and each percentage presented includes
108,725 shares of our common stock that are subject to currently
exercisable stock options.
(6) 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.
(7) The number of shares and each percentage presented includes 175 shares
of our common stock that are subject to currently exercisable 1997-A
warrants.
(8) The number of shares and each percentage presented includes
- 275 shares of our common stock subject to currently
exercisable 1997-A warrants,
- 3,100 shares of our common stock that are subject to currently
exercisable redeemable common stock purchase warrants, and
- 358,725 shares of our common stock that are issuable upon
exercise of other currently exercisable stock options.
DESCRIPTION OF SECURITIES
AUTHORIZED AND OUTSTANDING CAPITAL
Pursuant to our Certificate of Incorporation, we are authorized to
issue up to 495,000,000 shares of common stock, $.0001 par value per share, and
5,000,000 shares of preferred stock, $.0001 par value per share. As of the date
of September 30, 2000, our outstanding capital stock consisted of 4,350,379
shares of our common stock, assuming no exercise of our outstanding warrants and
stock options.
The following description of certain matters relating to our capital
stock and outstanding warrants is a summary. This summary is qualified in its
entirety by, the provisions of our Certificate of Incorporation, bylaws, and
our agreements with UMB Bank, N.A., as amended, related to our outstanding
redeemable common stock purchase warrants and our 1997-A warrants, all of
which are filed as exhibits to or are incorporated by reference in the
registration statement of which this prospectus is a part. See "Where You Can
Find Additional Information."
COMMON STOCK
Our authorized and outstanding shares of common stock, in general,
have the rights, privileges, disabilities and restrictions as follows:
- the right to receive ratably such dividends, if any, as may be declared
from time to time by the board of directors out of assets legally
available therefor, subject to the payment of preferential dividends
with respect to our then outstanding preferred stock;
- the right to share ratably in all assets available for distribution to
our common stock shareholders after payment of our liabilities in the
event of our liquidation, dissolution and winding-up, subject to the
prior distribution rights of the holders of our then outstanding
preferred stock;
- the right to one vote per share on matters submitted to a vote by our
common stock shareholders;
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- no preferential or preemptive right and no subscription, redemption or
conversion privilege with respect to the issuance of additional shares
of our common stock; and
- no cumulative voting rights, which means that the holders of a majority
of shares voting for the election of directors can elect all members of
our board of directors then subject to election.
In general, a majority vote of shares represented at a meeting of common stock
shareholders at which a quorum (a majority of the outstanding shares of common
stock) is present, is sufficient for all actions that require the vote or
concurrence of shareholders. However, such voting rights the holders of our
then outstanding preferred stock may have that entitle them to vote with the
holders of our common stock.
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
As of September 30, 2000, there are 1,436,000 redeemable common stock
purchase warrants outstanding. The terms and conditions of the redeemable
common stock purchase warrants are set forth in the Unit and Warrant Agreement
with U.S. Stock Transfer Corp. dated November 6, 1997. The Unit and Warrant
Agreement is incorporated by reference as an exhibit to the registration
statement of which this prospectus is a part. See "Where You Can Find
Additional Information." The following description of the redeemable common
stock purchase warrants is not complete and is qualified in all respects by
the Unit and Warrant Agreement.
The holder of each redeemable common stock purchase warrant is
entitled, upon payment of the exercise price, to purchase one share of our
common stock. As of January 6, 1998, the exercise price of the redeemable
common stock purchase warrants was adjusted from $5.40 to $3.40. There was no
expense recognized in our financial statements relating to the warrant
exercise price reduction as any change only affects allocations of additional
paid-in capital because these warrants were issued in conjunction with an
equity offering. The number and kind of securities or other property for which
the redeemable common stock purchase warrants are exercisable are subject to
adjustment in certain events, such as mergers, reorganizations or stock
splits, to prevent dilution. Unless previously redeemed, the redeemable common
stock purchase warrants are exercisable on or before November 6, 2002.
A warrant holder will only be able to exercise the redeemable common
stock purchase warrants held in the event
- a current prospectus under the Securities Act of 1933 relating to the
shares of our common stock issuable upon exercise of the redeemable
common stock purchase warrants is then in effect and
- such common stock is qualified for sale or exemption from qualification
under the applicable securities laws of the states in which the holder
resides.
We may redeem the redeemable common stock purchase warrants at any
time on not less than 30 days' written notice, at a price of $0.25 per
warrant, but only after the closing sale price per share of our common stock
for 20 consecutive trading days is $6.80 or more. All of the outstanding
redeemable common stock purchase warrants must be redeemed if any are redeemed.
The redeemable common stock purchase warrants may only be redeemable
if, on the date the redeemable common stock purchase warrants are called for
redemption, there is an effective registration statement and current
prospectus covering the shares of our common stock issuable upon exercise of
the redeemable common stock purchase warrants. In certain cases, our sale of
securities upon exercise of the redeemable common stock purchase warrants
could violate the securities laws of the United States, certain states or
other jurisdictions. We have agreed to maintain an effective registration
under the Securities Act of 1933 at our expense with respect to the securities
underlying the redeemable common stock purchase warrants (and, if necessary,
to allow their public resale without restriction) until such warrants are
exercised, redeemed or expire. We have agreed to use our best efforts, and to
take such actions under the laws of various states, as may be required to
cause the sale of the securities underlying the redeemable common stock
purchase warrants upon their exercise to be lawful. However, we will not be
required to honor the exercise of the redeemable common stock purchase
warrants if, in the opinion of our counsel, the sale of securities upon such
exercise would be unlawful. In certain cases, we may purchase the redeemable
common stock purchase warrants submitted for exercise for a cash price equal
to the difference between the market price of the securities
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obtainable upon such exercise and the exercise price of such redeemable common
stock purchase warrants.
The redeemable common stock purchase warrants contain provisions that
protect the holders thereof against dilution. The number of shares of our
common stock or other securities purchasable upon exercise of the redeemable
common stock purchase warrants is adjusted for stock dividends, stock splits,
mergers, sale of substantially all of our assets, and for other extraordinary
events. The holders of these warrants do not possess any rights as
shareholders.
1997-A WARRANTS
At September 30, 2000, we had 1997-A warrants outstanding exercisable
for the purchase of 308,768 shares of our common stock. The terms and conditions
of the 1997-A warrants are set forth in our Warrant Agreement with U.S. Stock
Transfer Corp. dated January 26, 1997, as amended and restated on January 8,
1998. This agreement was filed as an exhibit to the registration statement of
which this prospectus is a part. See "Where You Can Find Additional
Information." The following description of the 1997-A warrants is not complete
and is qualified in all respects by this agreement.
Each 1997-A warrant initially entitled the holder to purchase one
share of our common stock. As of January 8, 1998, we amended and restated the
terms of 1997-A warrants to
- extend the exercise period to November 6, 2002 and
- reduced the exercise price from $12.00 to $3.40.
The purpose of the amendment was to modify the exercise price and period
provisions to make them identical to our redeemable common stock purchase
warrants in order to avoid any differential in the market price of the 1997-A
warrants and the redeemable common stock purchase warrants. The amendment did
not have any material accounting consequences.
The number and kind of securities or other property for which the
1997-A warrants are exercisable are subject to adjustment in certain events,
such as mergers, reorganizations or stock splits, to prevent dilution. At any
time, upon 30 days' written notice, we may redeem in whole and not in part,
unexercised 1997-A warrants for $.0001 per warrant. Those 1997-A warrants not
exercised or redeemed expire on November 6, 2002. Holders of 1997-A warrants
do not, as such, have any of the rights of shareholders.
In certain cases, our sale of securities upon exercise of 1997-A
warrants could violate the securities laws of the United States, certain
states thereof or other jurisdictions. We have agreed to use our best efforts
to cause a registration statement with respect to such securities under the
Securities Act of 1933 to continue to be effective during the term of the
1997-A warrants and to take such other actions under the laws of various
states as may be required to cause the sale of securities upon exercise of
1997-A warrants to be lawful. However, we are not required to honor the
exercise of 1997-A warrants if, in the opinion of our legal counsel, the sale
of securities upon such exercise would be unlawful. We may, but are not
required to, purchase 1997-A warrants submitted for exercise for a cash price
equal to the difference between the market price of the securities obtainable
upon such exercise and the exercise price of such 1997-A warrants.
PREFERRED STOCK
There are no shares of our authorized preferred stock outstanding.
Our 5,000,000 shares of authorized preferred stock may be issued from time to
time in one or more series. Our board of directors, without further approval
of our common stock shareholders, is authorized to fix the relative rights,
preferences, privileges and restrictions applicable to each series of our
preferred stock. We believe that having such a class of preferred stock
provides greater flexibility in financing, acquisitions and other corporate
activities. While there are no current plans, commitments or understandings,
written or oral, to issue any of our preferred stock, in the event of any
issuance, our common stock shareholders will not have any preemptive or
similar rights to acquire any of such preferred stock. Issuance of preferred
stock could adversely affect
- the voting power of the holders of our then outstanding common stock,
- the likelihood that such holders will receive dividend payments and
payments upon liquidation, and
- could have the effect of delaying or preventing a change in shareholder
and management control.
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OPTIONS AND OTHER WARRANTS
At September 30, 2000, we had outstanding stock options and other
warrants exercisable for the purchase 1,457,689 shares of our common stock
during various periods, which expire January 2001 through May 2007, at exercise
prices of $1.75 to $6.13 per share (with a weighted average exercise price of
$2.67). The exercise prices of the stock options and warrants were equal to or
greater than the fair market value of our common stock on the date of the grant
of each stock option or warrant. Furthermore, in connection with the offering of
units completed in 1997, we sold to Paulson Investment Company, Inc. and Joseph
Charles & Assoc., Inc. warrants exercisable on or before November 6, 2002, for
the purchase of 130,000 units for $5.40 per unit. Each unit consists of one
share of our common stock and one redeemable common stock purchase warrant. As
of September 30, 2000, these outstanding warrants were exercisable for the
purchase of 130,000 shares of common stock and 130,000 redeemable common stock
purchase warrants.
ANTI-TAKEOVER PROVISIONS
Our Certificate of Incorporation and bylaws and the Oklahoma General
Corporation Act include a number of provisions which may have the effect of
encouraging persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with our board of directors rather than pursue
non-negotiated takeover attempts. We believe that the benefits of these
provisions outweigh the potential disadvantages of discouraging such proposals
because, among other things, negotiation of such proposals might result in an
improvement of their terms. The description below related to provisions of our
Certificate of Incorporation and bylaws is intended as a summary only and is
qualified in its entirety by reference to our Certificate of Incorporation and
bylaws filed as an exhibit to the registration statement of which this
Prospectus is a part. See "Where You Can Find Additional Information."
PREFERRED STOCK. Our Certificate of Incorporation authorizes the
issuance of the preferred stock in classes. Our board of directors is
authorized to set and determine the voting rights, redemption rights,
conversion rights and other rights relating to such class of preferred stock.
In some circumstances, the preferred stock could be issued and have the effect
of preventing a merger, tender offer or other takeover attempt which our board
of directors opposes.
STAGGERED BOARD OF DIRECTORS. Our bylaws provide that our board of
directors shall be comprised of three classes of directors, each class
constituting approximately one-third of the total number of directors with
each class serving staggered three-year terms. The classification of the
directors makes it more difficult for shareholders to change the composition
of our board of directors. We believe, however, that the longer time required
to elect a majority of a classified board of directors will help ensure
continuity and stability of our management and policies.
The classification provisions may also have the effect of
discouraging a third party from accumulating large blocks of our common stock
or attempting to obtain control of us, even though such an attempt might be
beneficial to us and our shareholders. Accordingly, our shareholders could be
deprived of certain opportunities to sell their shares of our common stock at
a higher market price than might otherwise be the case.
OKLAHOMA ANTI-TAKEOVER STATUTES. We are subject to Section 1090.3 and
Sections 1145 through 1155 of the Oklahoma General Corporation Act.
Subject to certain exceptions, Section 1090.3 of the Oklahoma General
Corporation Act prohibits a publicly-held Oklahoma corporation from engaging
in a "business combination" with an "interested shareholder." This prohibition
is for three years following the date of the transaction in which such person
became an interested shareholder. This prohibition does not apply to a
transaction if the interested shareholder attained such status with approval
of our board of directors or the business combination is approved in a
prescribed manner, or certain other conditions are satisfied. A "business
combination" includes mergers, asset sales, and other transactions resulting
in a financial benefit to the interested shareholder. Subject to certain
exceptions, an "interested shareholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
our common stock.
In general, Sections 1145 through 1155 of the Oklahoma General
Corporation Act provide that shares ("interested shares") of voting stock
acquired (within the meaning of a "control share acquisition") become
nonvoting stock for the three-year period following such control share
acquisition. This loss of voting rights does not apply if a majority of the
holders of non-interested shares approve a resolution
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reinstating the interested shares with the same voting rights that such shares
had before such interested shares became control shares.
Any person ("acquiring person") who proposes to make a control share
acquisition may, at the person's election, and any acquiring person who has
made a control share acquisition is required to deliver an acquiring person
statement to us disclosing certain prescribed information regarding the
acquisition. We are required to present to the next annual meeting of our
shareholders the reinstatement of voting rights with respect to the control
shares that resulted in the control share acquisition. Alternatively, an
acquiring person may request a special meeting of our shareholders for such
purpose; however, the acquiring person must undertake to pay the costs and
expenses of such special meeting. In the event voting rights of control shares
acquired in a control share acquisition are reinstated in full and the
acquiring person has acquired control shares with a majority or more of all
voting power, our shareholders will have dissenters' rights entitling them to
receive the fair value of the shares of our common stock held. In such case,
the fair value will not be less than the highest price paid per share by the
acquiring person in the control share acquisition.
A "control share acquisition" includes the acquisition by any person
(including persons acting as a group) of ownership of, or the power to direct
the exercise of voting power with respect to, control shares (generally shares
having more than 20% of all voting power in the election of directors of a
publicly held corporation), subject to certain exceptions including
- an acquisition pursuant to an agreement of merger, consolidation, or
share acquisition to which we are a party and is effected in compliance
with certain provisions of the Oklahoma General Corporation Act,
- an acquisition by a person of additional shares within the range of
voting power for which such person has received approval pursuant to a
resolution by the majority of the holders of non-interested shares,
- an increase in voting power resulting from any action taken by us,
provided the person whose voting power is thereby affected is not our
affiliate,
- an acquisition pursuant to proxy solicitation under and in accordance
with the Securities Exchange Act of 1934, as amended, or the laws of
Oklahoma, and
- an acquisition from any person whose previous acquisition of shares did
not constitute a control share acquisition, provided the acquisition
does not result in the acquiring person holding voting power within a
higher range of voting power than that of the person from whom the
control shares were acquired.
The anti-takeover provisions of the Oklahoma General Corporation Act
may have the effect of discouraging a third party from acquiring large blocks
of our common stock within a short period or attempting to obtain control of
us, even though such an attempt might be beneficial to us and our
shareholders. Accordingly, our shareholders could be deprived of certain
opportunities to sell the shares of our common stock held at a higher market
price than might otherwise be the case.
TRANSFER AGENT AND WARRANT AGENT
UMB Bank, N.A. is the successor to our former registrar and transfer
agent of our common stock and warrant agent of our 1997-A warrants and
redeemable common stock purchase warrants. UMB Bank's address is Security
Trust Division, 928 Grand Boulevard, 13th Floor, Kansas City, Kansas 64106-
1745. UMB Bank, N.A. is the successor to U.S. Stock Transfer Corp., our former
registrar, transfer agent and warrant agent.
SHARES ELIGIBLE FOR FUTURE SALE
As of September 30, 2000, we had 4,350,379 shares of our common stock
issued and outstanding. We have reserved 3,462,457 shares of our common stock
for issuance upon exercise of outstanding warrants and stock options and 689,439
shares of common stock for issuance under our stock option plan. Also, we will
have 486,986,413 shares of our common stock available for issuance at such times
and upon such terms as may be approved by our board of directors. No prediction
can be made as to the effect, if any, that future sales or the availability of
shares for sale will have on the market price of our common stock prevailing
from time to time. Nevertheless, sales of substantial amounts of our common
stock in the
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public market could adversely affect the prevailing market price of our common
stock and could impair our ability to raise capital through sales of our
equity securities.
As of September 30, 2000, we had 100,000 outstanding shares of common
stock that are "restricted shares" within the meaning of Rule 144 promulgated
under the Securities Act of 1933. In the future, we may issue additional
restricted shares.
In general, under Rule 144 a person (or persons whose shares are
aggregated), including any of our affiliates, who has beneficially owned
restricted shares for at least one year is entitled to sell within any
three-month period a number of shares that does not exceed the greater of
- 1% of the then outstanding shares of our common stock or
- an amount equal to the average weekly reported volume of trading in
such shares during the four calendar weeks preceding the date on which
notice of such sale is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are also subject to certain manner of sale limitations,
notice requirements and the availability of current public information about
us. Restricted shares properly sold in reliance on Rule 144 are thereafter
freely tradable without restrictions or registration under the Securities Act
of 1933, unless thereafter held by an affiliate of ours. In addition, our
affiliates must comply with the restrictions and requirements of Rule 144,
other than the one-year holding period requirement, in order to sell shares of
our common stock which are not restricted shares. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly, or indirectly through one
or more intermediaries, controls or is controlled by or is under common
control with such issuer.
Furthermore, different rules apply if two years have elapsed since
the later of the date of any acquisition of restricted shares from us or our
affiliate. Under these rules if the acquirer or subsequent holder thereof is
deemed not to have been our affiliate at any time during the 90 days preceding
a sale, such person may sell such shares in the public market pursuant to Rule
144(k) without regard to volume limitations, manner of sale restrictions, or
public information or notice requirements.
Pursuant to Rule 144A promulgated under the Securities Act of 1933,
under certain circumstances qualified institutional buyers, as defined in the
rule, are permitted to more easily acquire and sell "restricted securities."
We are unable to predict the effect that Rule 144A has or will have on the
prevailing market price of our common stock.
OPTIONS
As of September 30, 2000, outstanding options granted under our stock
option plan were exercisable for the purchase of 689,439 shares of our common
stock. Also, there were stock options and warrants for the purchase of 768,250
shares of our common stock outstanding that were granted outside our stock
option plan.
STATE IMPOSED ESCROW ARRANGEMENT
In connection with the registration of securities in 1997, our then
executive officers and directors (and their wives) and Robert and Retha Nance
(formerly our greater than 5% shareholders) deposited 466,790 shares of our
common stock and stock options exercisable for the purchase of 726,983 shares
of our common stock in escrow with BankOne, N.A. (formerly Liberty Bank and
Trust Company of Oklahoma City, N.A.), pursuant to Promotional Shares Escrow
Agreements. Furthermore, we, Roger P. Baresel and Judith A. Baresel entered
into a Promotional Shares Lock-In Agreement covering 4,000 shares of our
common stock and 2,000 1997-A warrants held by Mr. and Mrs. Baresel. The
Administrator of the Oklahoma Department of Securities determined the terms
and conditions of the escrow agreements and the lock-in agreement. These
agreements were required as a condition of the registration of our securities
in Oklahoma for the protection and benefit of the initial purchasers of units
sold pursuant to our 1997 offering (the "public shareholders").
In event of a distribution (as defined below) respecting the common
stock, 1997-A warrants and stock options (the "subject securities") covered by
these agreements, the public shareholders will initially share on a pro rata,
per share basis in the distribution to the exclusion of the owners of the
subject securities, in proportion to the public offering prices of the units
until the public shareholders have received, or have had irrevocably set aside
for them, an amount equal to the aggregate public offering prices of the
units. Thereafter, the owners of the deposited common stock, stock options and
warrants and the other holders of our equity securities (including the Public
Shareholders) will participate on an equal, per share
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basis in the remaining amount of the distribution. The distribution may
proceed on lesser terms and conditions if a majority of the holders of our
common stock and redeemable common stock purchase warrants formerly comprising
the units (that are not held by our officers or directors or their associates
or affiliates) vote or consent by consent procedure to approve the lesser
terms and conditions. A "distribution" under these agreements means a
distribution of our assets or securities to our shareholders as a result of
our dissolution, liquidation, merger, consolidation or reorganization or the
sale or exchange of our assets or securities (including by way of tender
offer), or any other transaction or proceeding with a person other than the
owners of the common stock, stock options and warrants covered by these
agreements. Participants in the plan electing to purchase participation
interests are not beneficiaries of these agreements. Accordingly, participants
in the plan will not be benefitted or adversely affected by the provisions of
these agreement, other than possibly benefitting from the restrictions on
transferability of the common stock covered by the agreements.
The shares of common stock, stock options and warrants, as well as
any shares of common stock received upon exercise of the stock options and
warrants, will remain subject to these agreements until November 6, 2000.
However, the 93,108 shares of common stock deposited in escrow by Robert and
Retha Nance may be released from escrow upon the sale of such shares, if such
sales are limited during any three-month period to 0.5% of the outstanding
number of shares of our common stock on the date of such sale. Other than as
mentioned, the shares of common stock, 1997-A warrants and stock options
subject to the Escrow Agreements and the Lock-In Agreement may not be sold,
transferred, pledged, assigned, hypothecated or otherwise disposed of, except
under limited circumstances.
PLAN OF DISTRIBUTION
Our officers and other employees ("associated person") are offering
the participation interests for us. Each of these officers, directors and
employees qualify as an "associated person not deemed to be a broker" within
the meaning of Rule 3a4-1 promulgated under the Securities Exchange Act of
1934, as amended. Under this Rule, an "associated person not deemed to be a
broker" is the associated person that
- is not subject to a "statutory disqualification," as defined in Section
3(a)(39) of the Securities Exchange Act, and
- is not compensated in connection with participation in the offering by
payment of commissions or other remuneration based either directly or
indirectly on sales of Participation Interests, and
- is not at the time of participation in the offering an associated
person of a broker or dealer, and either
- (i) primarily performs, or is intended primarily to perform at the end
of the offering, substantial duties for or on our behalf otherwise than
in connection with the offer and sale of the participation interests,
and (ii) has not been a broker or dealer, or an associated person of a
broker or dealer, within the preceding 12 months, and (iii) the
associated person has not participated in selling an offering of
securities more than once every 12 months, subject to certain limited
participation in the offering of securities through a registered broker
or dealer, or
- restricts participation in the offering to (i) preparation of written
communications or delivering such communication through the mails or
other means that do not involve oral solicitation by the associated
person of a potential purchaser (provided, that the content of such
communications is approved by one of our officers or directors), (ii)
responding to inquiries of a potential purchaser in a communication
initiated by the potential purchaser (provided, that the content of
such responses is limited to information contained in the registration
statement of which this prospectus is a part), or (iii) performing
ministerial and clerical work involved in effecting the sale of the
participation interests.
As of the date of this prospectus, our officers and directors qualify as an
"associated person not deemed to be a broker" within the meaning of Rule 3a4-1.
We will pay all administrative costs and expenses associated with the
plan. Any brokerage
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commissions and related service charges incurred in connection with purchases
of shares of our common stock will be paid by the plan from the participants'
contributions to the plan.
LEGAL MATTERS
Certain legal matters related to this offering will be passed upon
for us by our counsel, Dunn Swan & Cunningham, A Professional Corporation,
Oklahoma City, Oklahoma.
EXPERTS
The consolidated balance sheets of Advantage Marketing Systems, Inc.
and subsidiaries as of December 31, 1999, and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999 included in this prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
WHERE TO FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2 (No. 333-47801)
of which this prospectus is a part, under the Securities Act of 1933, as
amended, with the Securities and Exchange Commission, Washington, D.C., with
respect to the participation interests. As permitted by the rules and
regulations, this prospectus does not contain all of the information set forth
in the registration statement, including the exhibits thereto. The statements
contained in this prospectus as to the contents of any contract or other
document referenced herein are not necessarily complete. In each instance, if
the contract or document was filed or incorporated by reference as an exhibit
to the registration statement, reference is made to the contract or other
document filed or incorporated by reference as an exhibit to the registration
statement. Accordingly, each such reference made to the contract or other
document is qualified in all respects by such reference. The registration
statement (including the exhibits thereto) may be inspected without charge at
the office of the Commission, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004 and at the regional offices of the Commission at 7
World Trade Center, 13th Floor, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the
registration statement and the exhibits and schedules thereto may be obtained
from the Commission at such offices, upon payment of prescribed rates. In
addition, registration statements and certain other filings made with the
Commission through its Electronic Data Gathering, Analysis and Retrieval
("EDGAR") system are publicly available through the Commission's site on the
World Wide Web on the Internet, located at http://www.sec.gov. The
registration statement, including all exhibits thereto and amendments thereof,
has been filed with the Commission through EDGAR. We will provide without
charge to each person who receives this prospectus, upon written or oral
request, a copy of any information incorporated by reference in this
prospectus (excluding exhibits to information incorporated by reference unless
such exhibits are themselves specifically incorporated by reference). Such
requests should be directed to Advantage Marketing Systems, Inc. at 2601
Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293,
telephone: (405) 842-0131.
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act") as a "small business issuer"
as defined under Regulation S-B promulgated under the 1933 Act. In accordance
with the 1934 Act, we file reports and other information with the Commission
(File No. 001-13343), and such reports and other information can be inspected
and copied at, and copies of such materials can be obtained at prescribed
rates from, the Public Reference Section of the Commission in Washington, D.C.
We distribute to our shareholders annual reports containing
consolidated financial statements audited by our independent public
accountants and, upon request, quarterly reports for the first three quarters
of each fiscal year containing unaudited condensed consolidated financial
information. Such requests should be directed to Advantage Marketing Systems,
Inc. at 2601 Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma
73112-7293, telephone: (405) 842-0131.
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INDEX TO FINANCIAL STATEMENTS
ADVANTAGE MARKETING SYSTEMS, INC. AND SUBSIDIARIES
PAGE
----
<S> <C>
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 (Unaudited) ............................................................F-2
Condensed Consolidated Statements of Income for the Six Months Ended
June 30, 2000 and 1999 (Unaudited)............................................................F-3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 (Unaudited)............................................................F-4
Notes to Condensed Consolidated Financial Statements for the Six Months
Ended June 30, 2000 and 1999 (Unaudited)......................................................F-5
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report .........................................................................F-10
Consolidated Balance Sheets as of December 31, 1999 and 1998..........................................F-11
Consolidated Statements of Income for Years Ended December 31, 1999,
1998 and 1997................................................................................F-12
Consolidated Statements of Stockholders' Equity (Deficiency) for Years Ended
December 31, 1999, 1998 and 1997.............................................................F-13
Consolidated Statements of Cash Flows for Years Ended December 31, 1999,
1998 and 1997................................................................................F-14
Notes to Consolidated Financial Statements for Years Ended December 31, 1999,
1998 and 1997................................................................................F-15
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 66,829 $ 1,662,894
Marketable securities, Available for sale......................................... 1,091,056 --
Marketable securities, Held to maturity........................................... -- 983,020
Receivables - net of allowance of $57,791 and $55,332, respectively............... 676,363 319,519
Receivable from affiliate......................................................... 533,761 313,761
Inventory......................................................................... 1,157,223 927,591
Deferred income taxes............................................................. 21,937 60,797
Other assets...................................................................... 653,967 187,496
----------- ------------
Total current assets.................................................. 4,201,136 4,455,078
MARKETABLE SECURITIES, Available for sale, at fair value............................ 523,372 1,805,885
MARKETABLE SECURITIES, Held to maturity............................................. 1,706,215 1,290,723
RECEIVABLES......................................................................... 424,690 126,624
PROPERTY AND EQUIPMENT, Net......................................................... 2,571,096 2,202,885
GOODWILL, Net....................................................................... 1,565,372 1,618,826
COVENANTS NOT TO COMPETE, Net....................................................... 399,425 436,845
DEFERRED INCOME TAXES............................................................... 41,333 21,788
OTHER ASSETS........................................................................ 94,694 201,729
----------- ------------
TOTAL............................................................................... $ 11,527,333 $ 12,160,383
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................. $ 260,035 $ 313,492
Accrued commissions and bonuses................................................... 499,779 319,183
Accrued other expenses............................................................ 269,449 807,246
Accrued sales tax liability....................................................... 193,079 218,789
Capital lease obligations......................................................... 94,574 80,843
----------- ------------
Total current liabilities............................................. 1,316,916 1,739,553
LONG-TERM LIABILITIES:
Capital lease obligations......................................................... 189,635 188,847
----------- ------------
Total liabilities.................................................... 1,506,551 1,928,400
----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
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
4,767,656 and 4,283,988 shares, outstanding 4,335,339 and 4,082,803 shares,
respectively...................................................................... 477 428
Paid-in capital................................................................... 11,241,793 10,232,700
Notes receivable for exercise of options.......................................... (48,034) (50,999)
Retained earnings................................................................. 971,106 759,692
Accumulated other comprehensive income (loss), net of tax......................... 21,037 (10,531)
----------- ------------
Total capital and retained earnings................................ 12,186,379 10,931,290
Less cost of treasury stock (432,317 and 201,185 shares, common, respectively).... (2,165,597) (699,307)
----------- ------------
Total stockholders' equity.......................................... 10,020,782 10,231,983
----------- ------------
TOTAL............................................................................... $ 11,527,333 $ 12,160,383
=========== ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
2000 1999
----------- ----------
<S> <C> <C>
Net sales.......................................................................... $14,008,073 $9,926,596
Cost of sales...................................................................... 9,460,196 6,851,700
----------- ----------
Gross profit................................................................... 4,547,877 3,074,896
Marketing, distribution and administrative expenses................................ 3,992,245 2,363,212
----------- ----------
Income from operations......................................................... 555,632 711,684
Other income (expense):
Interest and dividends, net........................................................ 159,183 152,772
Other income (expense)............................................................. (91,968) --
----------- ----------
Total other income(expense).................................................... 67,215 152,772
----------- ----------
INCOME BEFORE TAXES................................................................ 622,847 864,456
TAX EXPENSE........................................................................ 236,433 291,010
----------- ----------
NET INCOME ........................................................................ $ 386,414 $ 573,446
=========== ==========
Net income per common share........................................................ $ .09 $ .14
=========== ==========
Net income per common share - assuming dilution.................................... $ .06 $ .13
=========== ==========
Weighted average common shares outstanding......................................... 4,319,911 4,141,014
=========== ==========
Weighted average common shares outstanding - assuming dilution..................... 6,038,590 4,570,855
=========== ==========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................... $ 386,414 $ 573,446
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization............................................... 380,451 252,688
Realized loss on sale on marketable securities, available for sale.......... 41,817 --
Deferred taxes.............................................................. 19,315 195,773
Provision for bad debts..................................................... 2,459 5,385
Non cash compensation....................................................... -- 52,600
Changes in assets and liabilities which provided (used) cash:
Receivables and commission advances...................................... (657,369) (84,468)
Inventory................................................................ (229,632) 241,584
Other assets............................................................. (365,501) (30,376)
Accounts payable and accrued expenses.................................... (436,368) 84,993
----------- ----------
Net cash (used in) provided by operating activities................. (858,414) 1,291,625
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................................. (575,629) (366,789)
Purchases of marketable securities, available for sale........................... (2,309,690) --
Sale of marketable securities, available for sale................................ 2,495,575 --
Purchases of marketable securities, held to maturity............................ (415,000) --
Maturities of marketable securities, held to maturity............................ 961,378 --
Advances to affiliate............................................................ (220,000) --
Repayment of receivable from affiliate........................................... -- 34,235
----------- ----------
Net cash used in investing activities ............................. (63,366) (332,554)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes receivable for exercise of stock options..................... 2,965 --
Proceeds from issuance of common stock........................................... 1,009,142 --
Purchase of treasury stock....................................................... (1,466,290) --
Purchase and cancellation of other warrants...................................... (175,000) --
Principal payment on notes payable............................................... -- (123,787)
Principal payment on capital lease obligations................................... (45,102) (52,859)
----------- ----------
Net cash used in financing activities.............................. (674,285) (176,646)
----------- ----------
NET (DECREASE) INCREASE ............................................................ (1,596,065) 782,425
CASH AND CASH EQUIVALENTS, BEGINNING................................................ 1,662,894 5,289,217
----------- ----------
CASH AND CASH EQUIVALENTS, ENDING................................................... $ 66,829 $6,071,642
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest............................................ $ 10,482 $ 10,945
Cash paid during the period for income taxes........................................ 951,720 8,000
Noncash financing and investing activities:
Property and equipment acquired by capital lease............................... 59,621 --
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited condensed consolidated 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 accounting principles generally accepted in
the United States of America have been omitted pursuant to such rules
and regulations. The accompanying condensed consolidated 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, 1999.
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,
2000.
2. MARKETABLE SECURITIES
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. Total comprehensive income for the six
months ended June 30, 2000 was $417,982.
3. EARNINGS PER SHARE
Earnings per common share is computed based upon net income divided by
the weighted average number of common shares outstanding during each
period. Earnings per common share - assuming dilution is computed based
upon net income divided by the weighted average number of common shares
outstanding during each period adjusted for the effect of dilutive
potential common shares calculated using the treasury stock method. The
following is a reconciliation of the common shares used in the
calculations of earnings per common share and earnings per common share
- assuming dilution:
F-5
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding:
For the six months ended June 30, 2000 --
Earnings per common share:
Income available to common stockholders........... $ 386,414 4,319,911 $.09
----
Earnings per common share - assuming dilution:
Options........................................... 888,984
Warrants.......................................... -- 829,695
---------- ---------
Income available to common stockholders
plus assumed conversions...................... $ 386,414 6,038,590 $.06
---------- --------- ----
For the six months ended June 30, 1999 --
Earnings per common share:
Income available to common stockholders........... $ 573,446 4,141,014 $.14
----
Earnings per common share - assuming dilution:
Options............................................ -- 429,841
---------- ---------
Income available to common stockholders
plus assumed conversions....................... $ 573,446 4,570,855 $.13
---------- --------- ----
</TABLE>
Options to purchase 40,492 shares of common stock ranging from $5.94 to
$6.13 per share and 130,358 shares of common stock ranging from $2.80
to $3.60 per share were outstanding at June 30, 2000 and 1999,
respectfully, but were not included in the computation of earnings per
common share - assuming dilution for the six months ended because the
options' exercise prices were greater than the average market price of
the common shares.
All outstanding warrants at June 30, 2000 were included in the
computation of earnings per common share - assuming dilution for the
six months ended. Warrants to purchase 1,962,211 shares of common stock
ranging from $3.40 to $5.40 were outstanding at June 30, 1999, but were
not included in the computation of earnings per common share - assuming
dilution for the six months ended because the warrants' exercise prices
were greater than the average market price of the common shares.
4. STOCKHOLDERS' EQUITY
COMMON STOCK -In March 1998, the Company announced and began
repurchasing up to $1 million of its common stock in the open market.
Furthermore, on January 12, 2000, the Company announced its intent to
repurchase up to an additional $2 million of its common stock in the
open market. As of June 30, 2000, the Company had repurchased 432,317
shares of its common stock for $2,165,597 or an average of $5.01 per
share.
The Company's policy is to retain earnings to support the expansion of
its operations. The Board of Directors of the Company does not intend
to pay cash dividends on the Common Stock in the foreseeable future.
Any future cash dividends will depend on future earnings, capital
requirements, the Company's financial condition and other factors
deemed relevant by the Board of Directors.
COMMON STOCK OPTIONS AND OTHER WARRANTS - The following table
summarizes the Company's stock option and other warrants activity for
the three and six months ended June 30, 2000:
F-6
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS WEIGHTED
ENDED AVERAGE
JUNE 30, EXERCISE
2000 PRICE
--------- --------
<S> <C> <C>
Options and other warrants outstanding, beginning of period............... 1,769,275 $2.22
Options and other warrants issued during the period....................... 312,404 5.05
Options and other warrants canceled during the period..................... 129,174 3.67
Options and other warrants exercised during the period.................... 427,361 2.17
Options and other warrants expired during the period...................... 14,750 2.00
---------
Options and other warrants outstanding, end of period.................... 1,510,394 $2.70
=========
</TABLE>
COMMON STOCK WARRANTS - The following table summarizes the Company's
common stock warrants and their activity for the three and six months
ended June 30, 2000:
<TABLE>
<CAPTION>
WARRANTS
ISSUED AND EXERCISE
OUTSTANDING PRICE EXERCISE PERIOD
----------- -------- -------------------
<S> <C> <C> <C>
For the six months ended June 30, 2000:
1997-A Warrants, beginning of period................... 337,211 $3.40 01/31/97 - 11/06/02
1997-A Warrants, exercised during the period........... (28,443) $3.40
---------
1997-A Warrants, end of period ........................ 308,768 $3.40
=========
Redeemable Common Stock Purchase Warrants,
beginning of period................................. 1,495,000 $3.40 11/06/97 - 11/06/02
Redeemable Common Stock Purchase Warrants,
exercised during the period......................... (59,000) $3.40
---------
Redeemable Common Stock Purchase Warrants,
end of period....................................... 1,436,000 $3.40
=========
Underwriters' Warrants................................. 130,000 $5.40 11/12/98 - 11/12/02
=========
</TABLE>
The Redeemable Common Stock Purchase Warrants are subject to redemption
by the Company at $0.25 per warrant. All of the outstanding Redeemable
Common Stock Purchase Warrants must be redeemed if any are redeemed.
The Company may redeem the 1997-A Warrants for $0.0001 per warrant. Any
redemption of unexercised 1997-A Warrants would be for all such
outstanding warrants. The Underwriters' Warrants were issued in
connection with the sale of common stock and Redeemable Common Stock
Purchase 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
F-7
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
stock $.0001 par value, for the Plan. The Plan limits participation to
employees, independent contractors, and consultants. Nonemployee
directors are excluded from Plan participation. The option price for
shares of stock subject to this Plan is set by the Stock Option
Committee of the Board of Directors at a price not less than 85% of the
market value of the stock on the date of grant. No stock options may be
exercised within six months from the date of grant, unless under a Plan
exception, nor more than ten years after the date of grant. The Plan
provides for the grant of stock appreciation rights, which allow the
holder to receive in cash, stock or combination thereof, the difference
between the exercise price and the fair value of the stock at date of
exercise. The fair value of stock appreciation rights is charged to
compensation expense. The stock appreciation right is not separable
from the underlying stock option or incentive stock option originally
granted and can only be exercised in tandem with the stock option. No
stock appreciation rights are attached to any options outstanding.
During the six months ended June 30, 2000 and 1999, the Company granted
312,404 and 68,711 options, respectively, under the Plan. At June 30,
2000 and 1999, the Company had 1,510,394 and 1,708,033, respectively,
stock options outstanding of which only 732,144 and 506,300,
respectively, had been issued pursuant to the Plan.
6. RELATED PARTIES
During the six months ended June 30, 2000 and 1999, the Company
received $3,038 and $3,253, 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 the six months ended June 30, 2000 and 1999, the Company paid
Pat Dungan, wife of Jimmy L. Dungan, a Director of the Company, sales
commissions of $57,646 and $56,067, respectively. These commissions
were based upon purchases by the Dungan's and their 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. During the first quarter of 2000, the
Company agreed to loan up to an additional $225,000 and extended the
maturity date on the loans to December 31, 2000. As of June 30, 2000,
the balance due on these loans was $533,761 plus accrued interest. The
loans and extensions were unanimously approved by the Company's board
of directors.
7. COMMITMENTS AND CONTINGENCIES
RECENT REGULATORY DEVELOPMENTS - A significant portion of the Company's
net sales continues to be dependent upon its AM-300 product. Net sales
of AM-300 represented 67.7% and 67.5% of net sales for the six months
ended June 30, 2000 and 1999, 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 issued a statement warning consumers not
to purchase or ingest natural sources of ephedrine within dietary
supplements claiming to produce certain effects (none of which are
claimed for our product). On June 4, 1997, the Food and Drug
Administration proposed regulations which will, if adopted as proposed,
significantly limit the Company's ability 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
F-8
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
their issuance as final regulations. However, as of July 28, 2000, no
final regulations have been issued. Several trade organizations in the
dietary supplement industry have commented on the proposed regulations,
requesting substantial modifications. The Company believes it is
probable that the Food and Drug Administration will make material
changes to the proposed regulations prior to adoption. Relatedly, the
United States General Accounting Office issued a report dated July 2,
1999 to a committee of the U.S. House of Representatives that the
Company believes casts substantial doubt on certain provisions of the
Food and Drug Administration's proposed regulations on dietary
supplements which contain ephedrine alkaloids. The Company believes
there is a risk that its AM-300 product may become subject to further
federal, state, local or foreign laws or regulations. These regulations
could require the Company to (i) withdraw or reformulate its AM-300
product with reduced ephedrine levels or with a substitute for ephedra
or ephedrine, (ii) relabel its product with different warnings or
revised directions for use, or (iii) not make certain statements,
possibly including weight loss claims, with respect to any product
containing ephedra or ephedrine. Even in the absence of further laws or
regulation, the Company may elect to reformulate or relabel its AM-300
product containing ephedra or ephedrine. While the Company believes
that its AM-300 product could be reformulated and relabeled, there is
no assurance that such reformulation and relabeling will not adversely
affect its 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.
PRODUCT LIABILITY - The Company, like other marketers of products that
are intended to be ingested, faces an inherent risk of exposure to
product liability claims in the event that the use of its products
results in injury. The Company maintains product liability insurance
coverage with limits of $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-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Advantage Marketing Systems, Inc. and Subsidiaries
Oklahoma City, Oklahoma
We have audited the accompanying consolidated balance sheets of Advantage
Marketing Systems, Inc. and subsidiaries (the "Company") as of December 31,
1999, and 1998, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. 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 auditing standards generally accepted
in the United States of America. 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, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
March 20, 2000
F-10
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ ------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 1,662,894 $ 5,289,217
Marketable securities, held to maturity....................................... 983,020 --
Receivables - net of allowance of $55,332 and $36,604, respectively........... 319,519 263,503
Receivable from affiliate..................................................... 313,761 293,936
Inventory..................................................................... 927,591 1,009,998
Deferred income taxes......................................................... 60,797 93,496
Other assets.................................................................. 187,496 100,345
------------ -----------
Total current assets.............................................. 4,455,078 7,050,495
MARKETABLE SECURITIES, available for sale, at fair value........................ 1,805,885 --
MARKETABLE SECURITIES, held to maturity......................................... 1,290,723 --
RECEIVABLES..................................................................... 126,624 129,440
PROPERTY AND EQUIPMENT, Net..................................................... 2,202,885 1,090,280
GOODWILL, Net................................................................... 1,618,826 1,725,734
COVENANTS NOT TO COMPETE, Net................................................... 436,845 511,685
DEFERRED INCOME TAXES........................................................... 21,788 95,277
OTHER ASSETS.................................................................... 201,729 114,572
------------ -----------
TOTAL........................................................................... $12,160,383 $10,717,483
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 313,492 $ 60,172
Accrued commissions and bonuses............................................... 319,183 156,174
Accrued other expenses........................................................ 807,246 277,651
Accrued sales tax liability................................................... 218,789 616,735
Notes payable................................................................. -- 29,476
Capital lease obligations..................................................... 80,843 87,105
------------ -----------
Total current liabilities......................................... 1,739,553 1,227,313
LONG-TERM LIABILITIES:
Notes payable................................................................. -- 94,311
Capital lease obligations..................................................... 188,847 173,247
------------ -----------
Total liabilities................................................ 1,928,400 1,494,871
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Preferred stock - $.0001 par value; authorized 5,000,000 shares; none issued.. -- --
Common stock - $.0001 par value; authorized 495,000,000 shares;
issued 4,283,988 and 4,275,514 shares; outstanding 4,082,803 and 4,141,014
shares, respectively ........................................................ 428 428
Paid-in capital............................................................... 10,232,700 10,180,106
Notes receivable for exercise of options...................................... (50,999) (63,960)
Retained earnings (accumulated deficit)....................................... 759,692 (516,091)
Accumulated other comprehensive income, net of tax............................ (10,531) --
------------ -----------
Total capital and retained earnings (accumulated deficit)...... 10,931,290 9,600,483
Less cost of treasury stock (201,185 and 134,500 shares, common, respectively) (699,307) (377,871)
------------ -----------
Total stockholders' equity...................................... 10,231,983 9,222,612
------------ -----------
TOTAL........................................................................... $12,160,383 $10,717,483
============ ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-11
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Net sales.......................................................... $ 22,427,551 $ 13,287,824 $ 10,192,227
Cost of sales...................................................... 15,610,941 8,999,229 7,271,660
------------- ------------ ------------
Gross profit................................................... 6,816,610 4,288,595 2,920,567
Marketing, distribution and administrative expenses................ 5,236,938 3,548,772 2,792,879
------------- ------------ ------------
Income from operations......................................... 1,579,672 739,823 127,688
Other income (expense):
Interest and dividends, net........................................ 364,270 309,908 34,017
Other income....................................................... 7,866 39,280 28,017
Settlement of additional tax liability (Note 11)................... -- (421,623) --
------------- ------------ ------------
Total other income (expense)................................... 372,136 (72,435) 62,034
------------- ------------ ------------
INCOME BEFORE TAXES................................................ 1,951,808 667,388 189,722
TAX EXPENSE ....................................................... 676,025 253,340 59,696
------------- ------------ ------------
NET INCOME......................................................... $ 1,275,783 $ 414,048 $ 130,026
============= ============ ============
Net income per common share........................................ $ .31 $ .10 $ .05
============= ============ ============
Net income per common share - assuming dilution................... $ .27 $ .09 $ .04
============= ============ ============
Weighted average common shares outstanding......................... 4,139,706 4,191,760 2,751,771
============= ============ ============
Weighted average common shares outstanding - assuming dilution..... 4,778,576 4,503,411 3,762,642
============= ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-12
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMU-
NOTES LATED
RECEIVABLE RETAINED OTHER COM-
FOR EARNINGS PREHENSIVE TOTAL
SHARES EXERCISE (ACCUMU- COMPRE- INCOME, STOCK-
(SEE COMMON PAID-IN OF LATED HENSIVE NET TREASURY HOLDERS'
NOTE 5) STOCK CAPITAL OPTIONS DEFICIT) INCOME OF TAX STOCK EQUITY
------- ------ ------- ---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1997 ................. 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
Comprehensive Income:
Net income ..................... -- -- -- -- 130,026 $ 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)
Comprehensive Income:
Net income ..................... -- -- -- -- 414,048 $ 414,048 -- -- 414,048
--------- ---- ----------- -------- ---------- ========== -------- --------- -----------
BALANCE,
DECEMBER 31, 1998 .............. 4,141,014 428 10,180,106 (63,960) (516,091) -- -- (377,871) 9,222,612
Payments on notes receivable ..... -- -- -- 12,961 -- -- -- -- 12,961
Stock option issued .............. -- -- 52,600 -- -- -- -- -- 52,600
Options exercised by
tendering mature shares, net ... 8,474 -- (6) -- -- -- -- -- (6)
Purchases of treasury stock,
at cost ........................ (66,685) -- -- -- -- -- -- (321,436) (321,436)
Comprehensive Income:
Net income ..................... -- -- -- -- 1,275,783 1,275,783 -- -- 1,275,783
Unrealized loss on available for
sale securities, net of tax .. -- -- -- -- -- (10,531) (10,531) -- (10,531)
Comprehensive income ............. -- -- -- -- -- $1,265,252 -- -- --
--------- ---- ----------- -------- ---------- ========== -------- --------- -----------
BALANCE,
DECEMBER 31, 1999 .............. 4,082,803 $428 $10,232,700 $(50,999) $ 759,692 $(10,531) $(699,307) $10,231,983
========= ==== =========== ======== ========== ======== ========= ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-13
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income.............................................................. $ 1,275,783 $ 414,048 $ 130,026
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization...................................... 527,054 387,160 251,443
Deferred taxes..................................................... 112,631 251,144 59,696
Provision for bad debts............................................ 18,728 10,804 --
Non-cash compensation.............................................. 52,600 -- --
Gain on sale of assets............................................. -- (35,329) (18,671)
Changes in assets and liabilities which provided (used) cash:
Receivables and commission advances............................. (71,934) (144,485) (167,192)
Inventory....................................................... 82,407 (197,873) (722,806)
Other assets.................................................... (174,308) (23,179) 269,946
Accounts payable and accrued expenses........................... 547,978 579,964 78,971
---------- ---------- ----------
Net cash provided by (used in) operating activities........ 2,370,939 1,242,254 (118,587)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment..................................... (1,378,830) (547,592) (312,709)
Advances to affiliate................................................... (40,000) (293,936) --
Proceeds from sale of assets............................................ -- 125,340 40,196
Repayment of receivable from affiliate.................................. 20,175 54,780 13,042
Purchase of marketable securities, available for sale................... (1,822,860) -- --
Purchase of marketable securities, held to maturity..................... (2,251,690) -- --
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 .................... (5,473,205) (996,283) (1,692,055)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................................. -- -- 8,284,357
Proceeds from notes payable............................................. -- 62,727 114,259
Purchase of treasury stock.............................................. (321,436) (377,871) --
Payment of deferred offering costs...................................... -- (180,450) (862,967)
Repayments of notes receivable for exercise of stock options............ 12,961 10,040 --
Payment of notes payable................................................ (123,787) (47,684) (34,010)
Principal payment on capital lease obligations.......................... (91,795) (198,792) (85,290)
---------- ---------- ----------
Net cash (used in) provided by financing activities....... (524,057) (732,030) 7,416,349
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS..................... (3,626,323) (486,059) 5,605,707
CASH AND CASH EQUIVALENTS, BEGINNING....................................... 5,289,217 5,775,276 169,569
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, ENDING.......................................... $1,662,894 $5,289,217 $5,775,276
========== ========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-14
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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, 1999, 1998 and 1997, the cost of products
returned to the Company are included in net sales and was three, two
and three percent of gross sales, respectively.
ADVERTISING - The Company expenses advertising as incurred. Total
advertising expense for 1999, 1998, and 1997 was $17,818, $16,459, and
$28,416, 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.
MARKETABLE SECURITIES - At the time of purchase, investments in debt
securities that the Company has the positive intent and ability to hold
to maturity are classified as held to maturity and reported at
amortized cost; all other debt securities are reported at fair value.
Securities not classified as held to maturity are classified as
available for sale, with the related unrealized gains and losses
excluded from earnings and reported net of income tax as a separate
component of stockholders' equity until realized. Realized gains and
losses on sales of securities are based on the specific identification
method. Declines in the fair value of investment securities below their
carrying value that are other than temporary are recognized in
earnings.
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.
F-15
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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. At December 31, 1999 the net amount of
goodwill arising from the MMI, CII, SNSI and TI acquisitions was
$58,162, $153,174, $1,288,556 and $118,934, respectively, and at
December 31, 1998 was $75,186, $162,140, $1,363,075 and $125,333,
respectively. Goodwill amortization for the years ended December 31,
1999, 1998 and 1997 was $106,908, $103,175 and $78,026, respectively.
Covenant amortization for the years ended December 31, 1999, 1998 and
1997, was $74,840, $71,106 and $53,431, respectively.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost or,
in the case of leased assets under capital leases, at the fair value of
the leased property and equipment, less accumulated depreciation and
amortization. Property and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets of
three to 20 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 - 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>
For the year ended December 31, 1999: Earnings per common share:
Income available to common stockholders.................. $1,275,783 $.31
===
Weighted average common shares outstanding............... 4,139,706
Earnings per common share - assuming dilution:
Options.................................................. -- 624,805
Warrants................................................. -- 14,065
--------- ---------
Income available to common stockholders plus assumed
conversions..................................... $1,275,783 4,778,576 $.27
========= ========= ===
</TABLE>
F-16
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
For the year ended December 31, 1998:
Earnings per common share:
Income available to common stockholders.................. $ 414,048 $.10
===
Weighted average common shares outstanding............... 4,191,760
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 $.05
===
Weighted average common shares outstanding............... 2,751,771
Earnings per common share - assuming dilution:
Options.................................................. -- 825,061
Warrants................................................. -- 185,810
--------- ---------
Income available to common stockholders plus assumed
conversions..................................... $ 130,026 3,762,642 $.04
========= ========= ===
</TABLE>
Options to purchase 213,875 shares of common stock at exercise prices
ranging from $3.44 To $4.75 per share were outstanding at December 31,
1999 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. Options to
purchase 100,000 shares of common stock at $2.56 per share were
outstanding at December 31, 1999 but were not included in the
computation of earnings per common share - assuming dilution because
the options were based on a condition which had not yet been met.
Options to purchase 130,358 shares of common stock at exercise prices
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.
Warrants to purchase 130,000 shares of common stock at $5.40 Per share
and 1,962,211 shares of common stock at exercise prices ranging from
$3.40 To $5.40 Were outstanding at December 31, 1999 and 1998,
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 antidulitive warrants to purchase shares of common stock at
December 31, 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS - In 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 January 1, 2001. The Company will adopt SFAS No. 133 on
January 1, 2001 as required.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, which establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and
losses) in financial statements. In addition, SFAS NO. 130 requires the
Company to classify
F-17
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive
income separately in the stockholders' equity section of the
consolidated balance sheet. The Company has adopted SFAS No. 130 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. MARKETABLE SECURITIES
A summary of the amortized cost, unrealized gains and losses and fair
values of marketable securities at December 31, 1999 follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- -------- --------- ----------
<S> <C> <C> <C> <C>
Available-for-Sale:
Other Securities...................................... $ 1,822,860 $ 43,100 $ (60,075) $1,805,885
========= ====== ======= =========
Held-to-Maturity:
U.S. Government obligations........................... $ 2,273,743 $ -- $ (39,129) $2,234,614
========= ====== ======= =========
</TABLE>
A comparison of the amortized cost and fair value of the Company's
marketable debt securities at December 31, 1999 by maturity date
follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
------------------ ----------------
FAIR VALUE AMORTIZED COST
------------------ ----------------
<S> <C> <C>
One year or less........................................ $ 14,625 $ 983,020
Two years through five years............................ 105,453 300,000
Five years through ten years............................ 110,963 990,723
More than ten years..................................... 137,814 --
------- ---------
Total................................................... $368,855 $2,273,743
======= =========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Office furniture, fixtures and equipment................................................ $2,403,535 $1,466,273
Vehicles................................................................................ 717,862 193,982
Leasehold improvements.................................................................. 57,756 38,936
---------- ----------
3,179,153 1,699,191
Accumulated depreciation and amortization............................................... (976,268) (608,911)
---------- ----------
Total property and equipment, net....................................................... $2,202,885 $1,090,280
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and
1997 was $367,357, $203,972, and $119,986, respectively.
F-18
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
4. LEASE AGREEMENTS
During 1999 and 1998, 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 $453,768 and $422,616 for
leases that have been capitalized at December 31, 1999 and 1998,
respectively. Related accumulated amortization amounted to $171,420 and
$128,338 at December 31, 1999 and 1998, 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, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
--------- -------- ----------
<S> <C> <C> <C>
Year ending:
2000........................................................... $ 99,429 $188,458 $ 287,887
2001........................................................... 92,389 196,470 288,859
2002........................................................... 57,019 192,534 249,553
2003........................................................... 59,493 99,375 158,868
2004........................................................... 2,815 32,607 35,422
Minimum lease payments thereafter.............................. -- 2,724 2,724
--------- -------- ----------
Total minimum lease payments................................... $ 311,145 $712,168 $1,023,313
======== ==========
Less amount representing interest.............................. 41,455
---------
Present value of net minimum lease payments.................... 269,690
Less current portion........................................... 80,843
---------
Long-term capital lease obligations............................ $ 188,847
=========
</TABLE>
Rental expense under operating leases for the years ended December 31,
1999, 1998 and 1997 was $167,831, $147,166, and $88,632, respectively.
5. 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, 1999 and
1998, the Company had repurchased 201,185 and 134,500 shares of the
Common Stock at a total cost of $699,307 and $377,871, respectively.
On January 31, 1997, the Company distributed, at no cost, 2,148,191
non-transferable rights ("Rights") to its shareholders of record on
such date. Each of the Rights entitled the holder to purchase one unit
(consisting of one share of Common Stock and one 1997-A Warrant) on or
before March 17, 1997 for $6.80 per unit (the "Rights Offering").
Concurrently with the Rights Offering, the Company redeemed its
outstanding Class A and Class B Common Stock Purchase Warrants (the
"Public Warrants") for $.0008 per warrant (the "Warrant Redemption")
effective on March 17, 1997. In connection with the Warrant Redemption,
the Company modified the terms of the Public Warrants and offered to
holders of the Public Warrants (the "Warrant Holders") the right to
exercise each of the Public Warrants for the purchase of one unit
(consisting of one share of Common Stock and one 1997-A Warrant), at an
exercise price of
F-19
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
$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 gross 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.
COMMON STOCK OPTIONS AND OTHER WARRANTS - During 1999, the Company
granted 291,461 options at exercise prices ranging from $2.00 per share
to $4.75 per share. Options were granted primarily for services
rendered and to ensure the future availability of those services to the
Company. During 1999 the Company recognized $52,600 in compensation
expense related to the issuance of stock options. A total of 122,750
and 100,000 of the options granted during 1999 were unexercisable at
December 31, 1999 due to a six month vesting period and a contingency
requirement, respectively. During 1999, 15,358 options were exercised
with 6,884 mature shares (shares owned by the optionee in excess of six
months as of the date of exercise). In addition, during the period
31,400 options were canceled and 18,750 options expired.
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 were 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 97,580 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 6 for the pro forma effects of SFAS 123
ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS 123").
During 1997, the Company granted 493,100 options at exercise prices
ranging from $2.70 per share to $6.00 per share. Options were granted
primarily for services rendered and to ensure the future availability
of those services to the Company. Options granted on December 26, 1997
have a six month vesting period. During 1997, 135,695 options were
exercised of which 46,945, 42,500 and 46,250 were exercised for cash,
15,769 mature shares and notes receivable, respectively. In addition,
during this period 319,250 options with a weighted average exercise
price of $4.67 per share were voluntarily surrendered and canceled by
the Company in exchange for an equal number of options, with an
exercise price of $2.70 per share, 125,000 other warrants were canceled
without exchange for new warrants or options and 2,499 options expired.
The exercise price of the exchanged option was equal to the market
value of the
F-20
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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 6 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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1999 PRICE 1998 PRICE 1997 PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options and other
warrants outstanding,
beginning of year..... 1,543,322 $2.09 1,439,583 $2.28 1,528,927 $2.49
Options and other
warrants issued
during the year....... 291,461 2.92 809,819 1.93 493,100 3.68
Options and other
warrants exercised
during the year........ (15,358) 2.28 (57,306) 2.17 (135,695) 1.64
Options and other
warrants cancelled
during the year........ (31,400) 2.09 (617,524) 2.35 (444,250) 4.75
Options and other
warrants expired
during the year........ (18,750) 2.16 (31,250) 1.60 (2,499) 1.60
--------- --------- ---------
Options and other
warrants outstanding,
end of year............ 1,769,275 $2.22 1,543,322 $2.09 1,439,583 $2.28
========= ========= =========
</TABLE>
The weighted average grant-date fair value of options and other
warrants granted during 1999, 1998 and 1997 was $1.39, $1.05 and $1.20
per share, respectively.
<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 12/31/99 LIFE PRICE AT 12/31/99 PRICE
--------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.75 - $4.75 1,769,275 3.7 years $2.22 1,546,525 $2.09
</TABLE>
F-21
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COMMON STOCK WARRANTS - The following table summarizes the Company's
common stock warrants and their activity for the years ended December
31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
WARRANTS
ISSUED AND EXERCISE
OUTSTANDING PRICE EXERCISE PERIOD
----------- -------- ---------------
<S> <C> <C> <C>
December 31, 1999:
1997-A Warrants........................................ 337,211 $3.40 1/31/97 - 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
=========
December 31, 1998:
1997-A Warrants........................................ 337,211 $3.40 1/31/97 - 1/31/02
=========
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
=========
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 - 11/06/02
---------
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 11/06/97 - 11/06/02
---------
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
=========
</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 an equity offerings of the Company. The
reduced exercise prices exceeded the market value of the Company's
common stock on the date of the reduction.
The Redeemable Common Stock Purchase Warrants are subject to redemption
by the Company at $0.25 per warrant. All of the outstanding Redeemable
Common Stock Purchase Warrants must be redeemed if any are redeemed.
The Company may redeem the 1997-A Warrants for $0.0001 per warrant. Any
redemption of unexercised 1997-A Warrants would be for all such
outstanding warrants. The Underwriters' Warrants were issued in
connection with the sale of common stock and Redeemable Warrants in
November 1997 and were in addition to other fees paid to the
underwriters. The
F-22
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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.
6. 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 years ended December 31, 1999 and 1998 the Company issued
160,061 and 281,295 options, respectively under the Plan. At December
31, 1999 and 1998, the Company had 1,769,275 and 1,543,322,
respectively, stock options outstanding of which only 591,650 and
441,589, respectively, were issued pursuant to the plan.
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock-based compensation
awards. Accordingly, no compensation cost has been recognized in the
accompanying consolidated financial statements. The following pro forma
data is calculated net of tax as if compensation cost for the Company's
stock-based compensation awards (see also Note 5) 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,
------------------------------------
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Net income as reported....................................... $1,275,783 $ 414,048 $ 130,026
Adjustment, net of tax..................................... (113,466) (233,329) (467,554)
---------- ----------- -----------
Pro forma net income (loss).................................. $1,162,317 $ 180,719 $ (337,528)
Net income per common share as reported...................... $ .31 $ .10 $ .05
Adjustment, net of tax..................................... (.03) (.06) (0.17)
---------- ----------- -----------
Pro forma net income (loss) per common share................. $ .28 $ .04 $ (0.12)
Pro forma net income (loss) per common share - assuming
dilution................................................... $ .24 $ .04 $ (0.12)
Weighted average common shares outstanding................... 4,139,706 4,191,760 2,751,771
Weighted average common shares outstanding - assuming
dilution................................................... 4,778,576 4,503,411 2,751,771
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1999, 1998 and 1997,
respectively: risk-free interest rates of 5.41, 4.50 and 5.93 percent;
no dividend yield or assumed forfeitures; expected lives of 3.7, 5.4
and 6.7 years; and volatility of 60, 59 and 60 percent. The pro forma
F-23
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
amounts above are not likely to be representative of future years
because there is no assurance that additional awards will be made each
year.
7. RELATED PARTIES
During 1999, 1998 and 1997, the Company received $6,724, $6,822 and
$7,157, respectively, from PrePaid 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 years ended December 31, 1998 and 1997 the
Company made aggregate monthly payments pursuant to such lease
agreements of $17,939 and $19,427, respectively. As of December 31,
1998 the leases had terminated.
On October 8, 1998, John W. Hail, an affiliate, 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 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 eight percent per annum, and were due on March 31, 1999. The loans
were extended until March 31, 2000. As of December 31, 1999, the
balance due on these loans was $313,761 plus accrued interest. The
loans and extension were unanimously approved by the Company's board of
directors.
During the years ended December 31, 1999 and 1998, the Company paid Pat
Dungan, wife of Jimmy L. Dungan, a Director of the Company, sales
commissions of $119,626 and $76,696, respectively. These commissions
were based on purchases by the Dungans and their downline distributors
in accordance with the Company's network marketing program in effect at
the time of the sales.
8. 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 has concluded that it
is more likely than not that a tax benefit will be realized from its
deferred tax assets. The Company's deferred tax assets relate primarily
to net operating loss carryforwards for income tax purposes at December
31, 1999, totaling approximately $210,000, which are limited as to use
and will begin to expire in 2010. The Company has a net deferred tax
asset at December 31, 1999 and 1998, of $82,585 and $188,773,
respectively.
Income taxes for 1999 and 1998 are comprised of current taxes of
$563,394 and $2,196 and deferred taxes of $112,631 and $251,144,
respectively. Income taxes for 1997 are 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, 1999, 1998,
and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate .......... 34.0% 34.0% 34.0%
State tax effective rate ................... 4.0 4.0 4.6
Permanent differences ...................... 1.1 2.3 6.4
Benefit of graduated tax rates ............. 0.0 0.0 (4.8)
Change in effective rate ................... 0.0 0.0 (8.7)
Other ...................................... (4.5) (2.3) 0.0
------ ------ ------
Effective income tax rate .................. 34.6% 38.0% 31.5%
====== ====== ======
</TABLE>
F-24
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The change in the total deferred tax net assets from December 31, 1998
to December 31, 1999 was $106,188. This difference is allocated as
$112,631 and $6,444 to December 31, 1999 net income and stockholder's
equity, respectively. Deferred tax liabilities and assets at December
31, 1999 and 1998 are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.............................................. $(48,717) $(38,037)
--------- ---------
Total deferred tax liabilities.................................. (48,717) (38,037)
--------- ---------
Deferred tax assets:
Net operating loss carryforwards........................................... 79,209 160,889
Reserves................................................................... 39,785 49,404
Other...................................................................... 12,308 16,517
--------- ---------
Total deferred tax assets...................................... 131,302 226,810
--------- ---------
Net deferred taxes........................................................... 82,585 188,773
Less current portion of net deferred tax assets.............................. 60,797 93,496
--------- ---------
Noncurrent portion........................................................... $ 21,788 $ 95,277
========= =========
</TABLE>
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
F-25
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
SNSI Asset Purchase, the Company paid cash of $1,174,441 and issued
125,984 shares of Common Stock at closing. As a result of the SNSI
Asset Purchase, the Company added 39 products to its line, 38 in the
weight management and dietary supplement categories and one in the
personal care category, and 3,000 additional distributors.
In connection with the SNSI Asset Purchase, the excess of the purchase
price of $2,074,441, which included $100,000 of transaction costs, over
the $84,063 fair value of the assets acquired, has been allocated
$1,490,378 to goodwill and $500,000 to two covenants not to compete.
Goodwill and the covenants not to compete will be amortized over 20 and
10 year periods, respectively.
Pursuant to a Stock Purchase Agreement having an effective date of May
31, 1996 (the "Purchase Agreement"), the Company acquired all of the
issued and outstanding capital stock of Miracle Mountain International,
Inc., a Colorado corporation ("MMI"), and MMI became a wholly owned
subsidiary of the Company (the "MMI Acquisition"). The MMI Acquisition
was accounted for under the purchase method of accounting. MMI is a
network marketer of various third-party manufactured nutritional
supplement products. Pursuant to the Purchase Agreement and in
connection with the MMI Acquisition, the Company issued and delivered
to the shareholders of MMI 20,000 shares of the Company's common stock.
In connection with the MMI Acquisition, the excess of the purchase
price of $176,103, which includes $56,103 of transaction costs, over
the negative $3,059 fair value of the assets of MMI acquired, net of
liabilities assumed, has been allocated $119,162 to goodwill and
$60,000 to the covenant not to compete. Goodwill and the covenant not
to compete will be amortized over seven and four and one-half year
periods, respectively.
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the acquisitions had occurred
at the beginning of 1998 and 1997, with pro forma adjustments to give
effect to amortization of goodwill together with the related income tax
effect. The unaudited pro forma 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. 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>
F-26
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
------------- ---------- ------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest..................................................... $ 18,381 $ 34,663 $ 33,012
Income taxes................................................. 12,020 -- 2,196
Noncash financing and investing activities:
Property and equipment acquired by capital lease............. 101,133 99,007 147,508
Deferred offering costs not yet paid............................. -- -- 180,450
Acquisition of Chambre' International, Inc.:
Fair value of assets acquired................................ $ -- $ -- $ (84,802)
Fair value of covenant not to compete........................ -- -- (20,000)
Purchase price in excess of tangible assets acquired and
covenant not to compete.................................. -- -- (179,325)
Fair value of common stock issuance.......................... -- -- 84,000
Liabilities assumed.......................................... -- -- 148,787
------------- ---------- ------------
Cash paid to purchase Chambre' International, Inc............ $ -- $ -- $ (51,340)
============= ========== ============
SNSI asset purchase:
Fair value of assets acquired................................ $ -- $ -- $ (84,063)
Fair value of covenant not to compete........................ -- -- (500,000)
Purchase price in excess of tangible assets acquired and
covenant not to compete.................................. -- -- (1,490,378)
Fair value of common stock issuance.......................... -- -- 800,000
------------- ---------- ------------
Cash paid to purchase SNSI assets............................ $ -- $ -- $(1,274,441)
============= ========== ============
ToppMed, Inc. asset purchase:
Fair value of 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. assets................... $ -- $(192,000) $ --
============= ========== ============
</TABLE>
11. 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 $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 additional expense to the Company but instead is a
pass through item with no income statement effect.
12. COMMITMENTS AND CONTINGENCIES
RECENT REGULATORY DEVELOPMENTS - A significant portion of the Company's
net sales has been, and is expected to continue to be, dependent upon the
Company's AM-300 product. The Company's net sales of AM-300 represented
66.6 percent, 49.7 percent, and 29.5 percent of net sales for the years
ended 1999, 1998 and 1997, respectively. One of the herbal ingredients in
AM-300 is ephedra concentrate, which contains naturally occurring
ephedrine. Ephedrine products have been the subject of adverse publicity
in the United States and other countries relating to alleged harmful
effects. Currently, the Company offers AM-300 only
F-27
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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. 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.
PRODUCT LIABILITY - The Company, like other marketers of products that
are intended to be ingested, faces an inherent risk of exposure to
product liability claims in the event that the use of its products
results in injury. The Company has liability insurance coverage. 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-28
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company or by any of the Underwriters.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, by any person in any jurisdiction in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such an offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstance, create
any implication that there has been no change in the affairs of the Company
since the date hereof.
------------
------------
ADVANTAGE MARKETING
SYSTEMS, INC.
3,545,091
PARTICIPATION INTERESTS
IN THE ADVANTAGE
MARKETING SYSTEMS, INC.
1998 DISTRIBUTOR STOCK
PURCHASE PLAN
------------
PROSPECTUS
------------
REQUESTS FOR GENERAL INFORMATION OR ADDITIONAL
COPIES OF THIS PROSPECTUS SHOULD BE DIRECTED TO
US BY CALLING OR WRITING US AT:
ADVANTAGE MARKETING SYSTEMS, INC.
2601 NORTHWEST EXPRESSWAY, SUITE 1210W
OKLAHOMA CITY, OKLAHOMA 73112-7293
ATTENTION: CORPORATE SECRETARY
TELEPHONE: (405) 842-0131
-----------
, 2000
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1031 of the Oklahoma General Corporation Act permits (and the
Registrant's Certificate of Incorporation and Bylaws, which are incorporated
by reference herein, authorize) indemnification of directors and officers of
the Registrant and officers and directors of another corporation, partnership,
joint venture, trust or other enterprise who serve at the request of the
Registrant, against expenses, including attorneys fees, judgments, fines and
amount paid in settlement actually and reasonably incurred by such person in
connection with any action, suit or proceeding in which such person is a party
by reason of such person being or having been a director or officer of the
Registrant or at the request of the Registrant, if he conducted himself in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Registrant, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
The Registrant may not indemnify an officer or a director with respect to any
claim, issue or matter as to which such officer or director shall have been
adjudged to be liable to the Registrant, unless and only to the extent that
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. To the extent
that an officer or director is successful on the merits or otherwise in
defense on the merits or otherwise in defense of any action, suit or
proceeding with respect to which such person is entitled to indemnification,
or in defense of any claim, issue or matter therein, such person is entitled
to be indemnified against expenses, including attorney's fees, actually and
reasonably incurred by him in connection therewith.
The circumstances under which indemnification is granted with an
action brought on behalf of the Registrant are generally the same as those set
forth above; however, expenses incurred by an officer or a director in
defending a civil or criminal action, suit or proceeding may be paid by the
Corporation in advance of final disposition upon receipt of an undertaking by
or on behalf of such officer or director to repay such amount if it is
ultimately determined that such officer or director is not entitled to
indemnification by the Registrant.
These provisions may be sufficiently broad to indemnify such persons
for liabilities arising under the Securities Act of 1933, as amended (the
"Act").
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
S.E.C. Registration Fees $ 1,475
N.A.S.D. Filing Fees -
*State Securities Laws (Blue Sky) Legal Fees 20,000
*State Securities Laws Filing Fees 20,000
*Printing and Engraving 15,000
*Legal Fees 18,525
*Accounting Fees and Expenses....................................................... 14,000
*Transfer and Warrant Agent's Fees and Costs of Certificates........................ 1,000
*Miscellaneous...................................................................... -
----------
$90,000
==========
</TABLE>
------------------------
*Estimated
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Registrant has sold and issued the securities described below within
the past three years which were not registered under the Act.
<TABLE>
<CAPTION>
NUMBER
OF SHARES
DATE OF PURCHASE OF COMMON
PURCHASE OR PRICE PER STOCK NET
NAME ISSUANCE SHARE PURCHASED PROCEEDS(1) CONSIDERATION
-------------------------- ------------- ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
D. Huff................ 5-20-98 2.00 12,500 25,000 Stock
P. Shurley............. 7-21-98 2.70 13,556 36,150 Stock
R. Sanders............ 7-21-98 2.00 31,250 62,500 Stock
</TABLE>
------------------------
(1) No underwriting discounts or commissions were paid with respect to such
sales.
Each of the foregoing named individuals were or are officers,
directors, employees or greater than five percent shareholders of the Company.
The Common Stock purchased by each was issued pursuant to Rule 506 of Regulation
D in connection with the exercise of stock options.
Pursuant to a Stock Purchase Agreement having an effective date of May
31, 1996, Registrant acquired the issued and outstanding capital stock of
Miracle Mountain International, Inc., a Colorado corporation. On June 20, 1996,
Registrant issued 160,000 shares of its Common Stock to the shareholders of
Miracle Mountain International, Inc. pursuant to Rule 506 of Regulation D.
Pursuant to a Stock Purchase Agreement having an effective date of
January 31, 1997, (the "CII Purchase Agreement"), Registrant acquired the issued
and outstanding capital stock of Chambre International, Inc., a Texas
corporation. Registrant issued and delivered 6,842 shares of Common Stock on
January 31, 1997, and issued and delivered an additional 7,518 shares of Common
Stock to the shareholders of Chambre International, Inc. on March 31, 1997,
pending determination of certain liabilities. The shares of Common Stock were
issued pursuant to Rule 506 of Regulation D.
Pursuant to an Asset Purchase Agreement dated April 16, 1997,
Registrant issued and delivered 125,984 shares of Common Stock to Solution
Products International, Inc. for its own account and as agent for and on behalf
of Stay 'N Shape International, Inc., Nation of Winners, Inc., and Now
International, Inc. The shares of Common Stock were issued pursuant to Rule 506
of Regulation D.
Registrant relied on 4(2) of the Securities Act of 1933 for exemption
from the registration requirements of such Act. Each investor was furnished with
information concerning the formation and operations of the Registrant, and each
had the opportunity to verify the information supplied. Additionally, Registrant
obtained a signed representation from each of the foregoing persons in
connection with the purchase of the Common Stock of his or her intent to acquire
such Common Stock for the purpose of investment only, and not with a view toward
the subsequent distribution thereof; each of the certificates representing the
Common Stock of the Registrant has been stamped with a legend restricting
transfer of the securities represented thereby, and the Registrant has issued
stop transfer instructions to UMB Bank, N.A., the transfer agent for the common
stock of Registrant, concerning all certificates representing the Common Stock
issued in the above-described transactions.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NO.
-----------
2.1 Agreement and Plan of Merger between Registrant and AMS, Inc.,
incorporated by reference to Form 8-K, filed with the
Commission on December 11, 1995.
2.2 Certificate of Merger of Advantage Marketing Systems, Inc. (a
Delaware corporation) with and into Advantage Marketing
Systems, Inc. (an Oklahoma corporation), incorporated by
reference to Form 8-K, filed with the Commission on December
11, 1995.
3.1 The Registrant's Certificate of Incorporation.(1)
3.2 The Registrant's Bylaws.(1)
II-2
<PAGE>
4.1 The Advantage Marketing Systems, Inc. 1998 Distributor Stock
Purchase Plan.(1)
4.2 The form of Advantage Marketing Systems, Inc. 1998 Distributor
Stock Purchase Plan Stock Purchase Agreement.(1)
5.1 Opinion of Dunn Swan & Cunningham, A Professional Corporation,
counsel to Registrant, regarding legality of the securities
covered by this Registration Statement.
10.1 Legal Services Agreement between Registrant and Pre-Paid Legal
Services, dated September 1, 1988, incorporated by reference
to Form 10-K Annual Report for the year ended December 31,
1989, filed with the Commission on September 18, 1990.
10.2 Lease Agreement between Registrant and International Business
Machines Corporation, dated May 22, 1989, incorporated by
reference to Form 10-K Annual Report for the year ended
December 31, 1989, filed with the Commission on September 18,
1990.
10.3 Group Contract between Registrant and Consumer Benefit
Services, Inc., dated April 2, 1989, incorporated by reference
to Form 10-K Annual Report for the year ended December 31,
1989, filed with the Commission on September 18, 1990.
10.4 Distribution Agreement between Registrant and Topped, Inc.,
dated June 1, 1989, incorporated by reference to Form 10-K
Annual Report for the year ended December 31, 1989, filed with
the Commission on September 18, 1990.
10.5 Lease Agreement between Registrant and Kaiser Francis Oil
Company, dated June 1, 1993, incorporated by reference to Form
10-K Annual Report for the year ended December 31, 1993, filed
with the Commission on April 14, 1994.
10.6 Advantage Marketing Systems, Inc. 1995 Stock Option Plan,
incorporated by reference to Form SB-2 Registration Statement
(No. 33-80629), filed with the Commission on November 20,
1996.
10.7 Agreement between Registrant and Consumer Benefit Services,
Inc., dated October 20, 1995, incorporated by reference to
Form SB-2 Registration Statement (No. 33-80629), filed with
the Commission on November 20, 1996.
10.8 Agreement between Registrant and Advanced Products, Inc.,
dated November 28, 1994, incorporated by reference to Form
SB-2 Registration Statement (No. 33-80629), filed with the
Commission on November 20, 1996.
10.9 Agreement between Registrant and J&K Pharmaceutical
Laboratories, dated April 22, 1996, incorporated by reference
to Amendment No. 3 to Form SB-2 Registration Statement (No.
33-80629), filed with the Commission on January 14, 1997.
10.10 Stock Purchase Agreement having an effective date of May 31,
1996, between Registrant, Miracle Mountain International,
Inc., Richard Seaton, Gene Burson, Kaye Jennings, Daryl
Burson, James Rogers, incorporated by reference to Form 8-K,
filed with the Commission on July 12, 1996.
10.11 Stock Purchase Agreement having an effective date of January
31, 1997, among Registrant, Chambre International, Inc., Janet
Britt, Jerry Hampton, Teresa Hampton, James Baria, Florence
Baria, Rose Cashin, Pat Eason, Joseph Williams, Livia
Williams, Don Black, Nadine Black, Lynda Brown, Gary Galindo,
Harold Griffin, Linda Griffin, Iren Van Vlaenderen, Dean Van
Vlaenderen, Rose Hilgedick, Julie Connary, and Royce Britt,
incorporated by reference to Amendment No. 3 to Form SB-2
Registration Statement (No. 33-80629), filed with the
Commission on January 14, 1997.
10.12 Asset Purchase Agreement among Registrant, Stay 'N Shape
International, Inc., Solution Products International, Inc.,
Nation of Winners, Inc., Now International, Inc., Carl S.
Rainey and Danny Gibson, dated April 16, 1997, incorporated by
reference to Form 8-K, filed with the Commission on May 1,
1997.
10.13 Warrant Agreement between Registrant and U.S. Stock Transfer
Inc., dated as of January 20,
II-3
<PAGE>
1997, as amended and restated January 8, 1998, incorporated by
reference to Amendment No. 2 to Form 8-A Registration
Statement, filed with the Commission on January 13, 1998.
10.14 Unit and Warrant Agreement between Registrant and U.S. Stock
Transfer Inc., dated as of November 6, 1997, as amended and
restated January 8, 1998, incorporated by reference to
Amendment No. 1 to Form 8-A Registration Statement, filed with
the Commission on January 14, 1998.
10.15 The Promotional Shares Escrow Agreement, dated November 4,
1997, by and between Advantage Marketing Systems, Inc., John
W. Hail, Curtis H. Wilson, Sr., Ruth Wilson, Roger P. Baresel,
Judith A. Baresel, R. Terren Dunlap, Pre-Paid Legal Services,
Inc., TVC, Inc., and Liberty Bank and Trust Company of
Oklahoma City, N.A.
10.16 The Promotional Shares Escrow Agreement, dated October 31,
1997, by and between Advantage Marketing Systems, Inc., Robert
and Retha H. Nance, and Liberty Bank and Trust Company of
Oklahoma City, N.A.
10.17 The Promotional Shares Lock-In Agreement, dated November 5,
1997, by and between Advantage Marketing Systems, Inc., Roger
P. Baresel, and Judith A. Baresel.
23.1 Independent Auditors' Consent.
23.2 Consent of Counsel.
24.1 Power of Attorney of John Hail.(1)
24.2 Power of Attorney of Curtis H. Wilson, Sr.(1)
24.3 Power of Attorney of Roger P. Baresel.(1)
24.4 Power of Attorney of R. Terren Dunlap.(1)
24.5 Power of Attorney of Harland C. Stonecipher.(1)
------------------------------------------------------
(1) Previously furnished.
ITEM 28. UNDERTAKINGS
(a) RULE 415 OFFERING.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change in the
information in the registration statement; and
(iii) To include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at that time
to be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(4) Will supplement the prospectus, after the end of the
subscription period, to include the results of the subscription offer,
the transactions by underwriters during the subscription period, the
amount of unsubscribed securities that the underwriters will purchase
and the terms of any later reoffering.
II-4
<PAGE>
(5) If the underwriters make any public offering of the
securities on terms different from those on the cover page of the
prospectus, file a post-effective amendment to state the terms of such
offering.
(e) REQUEST FOR ACCELERATION OF EFFECTIVE DATE.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(f) RULE 430A.
The Registrant hereby undertakes that it will (i) for determining any
liability under the Securities Act, treat the information omitted from
the form of prospectus filed as a part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed
by the Registrant under Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as a part of this Registration Statement as of the time
the Commission declared it effective, and (ii) for determining any
liability under the Securities Act, treat each post-effective amendment
that contains a form of prospectus as a new registration statement for
the securities offered in the registration statement, and that offering
of the securities at that time as the initial bona fide offering of
those securities.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant hereby certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this Post
Effective Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned in the City of Oklahoma City, State of Oklahoma, on
the 17 day of October, 2000.
ADVANTAGE MARKETING SYSTEMS, INC.
(Registrant)
By: /s/ JOHN W. HAIL
------------------------------------------------
John W. Hail, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Post
Effective Amendment No. 2 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN W. HAIL Chairman of the Board, Chief October 17, 2000
------------------------------------ Executive Officer and Director
John W. Hail
/s/ JOSEPH B. WILLIAMS President, Chief Financial October 17, 2000
------------------------------------ Officer and Director
Joseph B. Williams
/s/ R. TERREN DUNLAP Director October 17, 2000
------------------------------------
R. Terren Dunlap
/s/ HARLAND C. STONECIPHER Director October 17, 2000
------------------------------------
Harland C. Stonecipher
/s/ JIMMY L. DUNGAN Director October 17, 2000
------------------------------------
Jimmy L. Dungan
</TABLE>
II-6
