Item 1. Business
Formation
UST Private Equity Investors Fund, Inc. (the "Company" or the "Registrant") is a Maryland corporation organized on September 16, 1994. The Fund is a non-diversified, closed-end management investment company operating as a business development company under the Investment Company Act of 1940 and has registered its shares under the Securities Act of 1933. The Company's investment objective is to achieve long-term capital appreciation by investing in private later-stage venture capital and private middle-market companies and in certain venture capital, buyout and private equity funds that the Managing Investment Adviser (defined herein) believes offer significant long-term capital appreciation.
United States Trust Company of New York (the "Managing Investment Adviser" or "U.S. Trust") provides investment management services to the Company pursuant to a management agreement dated December 9, 1994, as amended (the "Management Agreement"), between the Managing Investment Adviser and the Company. The Managing Investment Adviser is a subsidiary of U.S. Trust Corporation. All officers of the Company are employees and/or officers of the Managing Investment Adviser. The Managing Investment Adviser is responsible for performing the management and administrative services necessary for the operation of the Company.
Pursuant to a Registration Statement on Form N-2 (File No. 33-84290) which was declared effective on December 16, 1994, the Company publicly offered up to 50,000 shares of common stock (the "Shares") at $1,000 per Share. The Company held its initial and final closings on July 31, 1995, and October 31, 1995, respectively. The Company sold a total of 40,463 Shares in the public offering for gross proceeds totaling $40,463,000 (after taking into account the 1 Share purchased for $1,000 on September 16, 1994, by David I. Fann, the Company's President). Shares of the Company were made available through U.S. Trust Company of California, N.A. (the "Selling Agent") to clients of U.S. Trust and its affiliates who meet the Company's investor suitability standards.
In connection with the public offering of its Shares, the Managing Investment Adviser paid to the Selling Agent a commission totaling $10,000. The Company incurred offering and organizational costs associated with the public offering totaling $374,891. Net proceeds to the Company from the public offering, after offering and organizational costs, totaled $40,117,109.
The Company's articles of incorporation provide that the duration of the Company will be ten years from the final closing of the sale of the Shares, subject to the rights of the Managing Investment Adviser and the investors to extend the term of the Company. Additional characteristics of the Company's business are discussed in the "Company", "Risk Factors" and "Investment Objective and Policies" sections of the Prospectus, which sections are incorporated herein by reference.
Portfolio Investments
The Company commenced investment operations on August 1, 1995 and during the year ended October 31, 1995 ("fiscal 1995"), the Company was invested only in temporary investments in accordance with the terms and conditions outlined in the Prospectus. At October 31, 1995, the Company's investment portfolio consisted of marketable securities with an aggregate cost of $29,563,366 and a fair value of $29,556,406.
A description of the Company's investments as of October 31, 1995 is set forth in Item 8.
Competition
The Company encounters competition from other entities and individuals having similar investment objectives. Primary competition for desirable investments comes from investment partnerships, venture capital affiliates of large industrial and financial companies, investment companies and wealthy individuals. Some of the competing entities and individuals have investment managers or advisers with greater experience, resources and managerial capabilities than the Company and may therefore be in a stronger position than the Company to obtain access to attractive investments. To the extent that the Company can compete for such investments, it may not be able to do so on terms as favorable as those obtained by larger, more established investors.
Employees
At October 31, 1995, the Company had no full-time employees. All personnel of the Company are employed by and compensated by the Managing Investment Adviser pursuant to the Management Agreement.
Item 2.

Item 2. Properties.
The Company does not own or lease physical properties.
Item 3.

Item 3. Legal Proceedings.
The Company is not party to any material pending legal proceedings.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
(Page> PART II
Item 5.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company has 100,000 Shares authorized, of which 40,463 Shares were issued and outstanding on October 31, 1995. On October 31, 1995, the Company declared a dividend payable to shareholders of record on October 27, 1995 in the amount of $11.84 per share.
There is no established public trading market for the Company's Shares.
Item 6.

Item 6. Selected Financial Data.
All selected financial data for the year ended October 31, 1995 may be found in the financial statements. See Item 8.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources
During fiscal 1995, the Company focused on raising capital. The Company began the initial public offering of its Shares on December 16, 1994. At the end of July 1995, the Company held the first closing on its Shares, representing over $28.0 million. An extension of the offering period for the Shares was approved and at the end of October 1995, the Company held its second and final closing for an additional $12.4 million. The Company sold a total of 40,463 Shares at $1,000 per Share in the public offering (after taking into account the 1 Share purchased for $1,000 on September 16, 1994, by David I. Fann, the Company's President). Gross proceeds received by the Company for the sale of its Shares during 1995 totaled $40,463,000 and net proceeds after the payment of offering and organizational expenses totaled $40,117,109. With a total capitalization of $40,463,000, the Company expects to have access to a greater number of investment opportunities.
At October 31, 1995, the Company held $10,977,421 in cash and $29,556,406 in investments. Funds needed to cover future operating expenses and portfolio investments will be obtained from the Company's existing cash reserves, from interest income and from proceeds received from the sale of current investments.
Results of Operations
The Company commenced investment operations on August 1, 1995, subsequent to the first closing of its Shares. During the period from August 1, 1995 to October 31, 1995, the Company was invested in temporary investments in accordance with the terms and conditions outlined in its Prospectus.
During fiscal 1995, the managers of the Company worked to develop the Company's presence in the private equity markets with respect to investment opportunities in (1) other venture capital and leveraged buyout funds; (2) later-stage venture capital situations; and (3) middle-market buyouts. The Company reviewed over 167 investment opportunities in fiscal 1995. Of those opportunities evaluated, 10 were selected for serious consideration.
Investment Income and Expenses
For fiscal 1995, the Company had net investment income of $374,371, attributable to interest on the Company's portfolio of investments, and total operating expenses of $176,351. Operating expenses in the amount of $140,226 were reimbursed by the Managing Investment Adviser, resulting in net operating expenses of $36,125. The net operating expenses of $36,125 represent the management fee pursuant to the Management Agreement.
Net Assets
The Company completed the public offering of its Shares in two separate closings in July and October 1995. The Company sold a total of 40,463 Shares at a cost of $1,000 per Share, resulting in gross proceeds raised in the offering of $40,463,000 (after taking into account the 1 Share purchased for $1,000 on September 16, 1994, by David I. Fann, the Company's President).
For fiscal 1995, the Company had a net increase in net assets resulting from operations of $367,411 ($12.69 per Share), comprised of net investment income totaling $374,371 ($12.86 per Share) and net unrealized depreciation of $6,960 ($0.17 per Share). Net assets were reduced by offering costs of $344,891 ($8.53 per Share) and distributions to shareholders of $333,081 ($11.84 per Share).
Item 8.

Item 8. Financial Statements and Supplementary Data.
UST PRIVATE EQUITY INVESTORS FUND, INC.
INDEX
Portfolio of Investments as of October 31, 1995
Statement of Assets and Liabilities as of October 31, 1995
Statement of Operations for the period ended October 31, 1995
Statement of Changes in Net Assets for the period ended October 31, 1995
Financial Highlights -- Selected Per Share Data and Ratios
Notes to Financial Statements
Independent Auditors' Report
Note - All other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or the notes thereto.
UST PRIVATE EQUITY INVESTORS FUND, INC. PORTFOLIO OF INVESTMENTS OCTOBER 31, 1995
* Aggregate cost for Federal tax and book purposes. `D' Floating rate security -- rate disclosed is as of October 31, 1995.
See Notes to Financial Statements
UST PRIVATE EQUITY INVESTORS FUND, INC. STATEMENT OF ASSETS AND LIABILITIES
See Notes to Financial Statements
UST PRIVATE EQUITY INVESTORS FUND, INC. STATEMENT OF OPERATIONS
* Commencement of operations
See Notes to Financial Statements
UST PRIVATE EQUITY INVESTORS FUND, INC. STATEMENT OF CHANGES IN NET ASSETS
* Commencement of operations
See Notes to Financial Statements
UST PRIVATE EQUITY INVESTORS FUND, INC. FINANCIAL HIGHLIGHTS -- SELECTED PER SHARE DATA AND RATIOS
* Commencement of operations ** Annualized `D' Total investment return based on per share net asset value reflects the effects of changes in net asset value based on the performance of the Fund during the period, and assumes dividends and distributions, if any, were reinvested. The Fund's shares were issued in a private placement and are not traded, therefore market value total investment return is not calculated. Total return for periods of less than one year are unannualized.
`D'`D' Expense ratio before waiver of fees and reimbursement of expenses by adviser.
See Notes to Financial Statements
UST PRIVATE EQUITY INVESTORS FUND, INC NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
UST Private Equity Investors Fund, Inc. ('the Fund') was incorporated under the laws of the State of Maryland on September 16, 1994 and is registered under the Securities Act of 1933, as amended, as a non-diversified, closed-end management investment company which has elected to be treated as a business development company under the Investment Company Act of 1940, as amended.
The following is a summary of the Fund's significant accounting policies.
(A) PORTFOLIO VALUATION:
The Fund values portfolio securities quarterly and at other such times as in the Board of Directors' view, as circumstances warrant. Investments in securities that are traded on a recognized stock exchange or on the national securities market are valued at the last sale price for such securities on the valuation date. Short-term debt instruments with remaining maturities of 60 days or less are valued at amortized cost, which approximates market value. Securities and other assets for which market quotations are not readily available are valued, pursuant to guidelines adopted by the Investment Adviser, under the supervision of the Board of Directors.
(B) SECURITY TRANSACTIONS AND INVESTMENT INCOME:
Security transactions are recorded on a trade date basis. Realized gains and losses on investments sold are recorded on the basis of identified cost. Interest income, adjusted for amortization of premiums and, when appropriate, discounts on investments, is earned from settlement date and is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date.
(C) REPURCHASE AGREEMENTS:
The Fund enters into agreements to purchase securities and to resell them at a future date. It is the Fund's policy to take custody of securities purchased and to ensure that the market value of the collateral including accrued interest is sufficient to protect the Fund from losses incurred in the event the counterparty does not repurchase the securities. If the seller defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.
(D) FEDERAL INCOME TAXES:
It is the policy of the Fund to continue to qualify as a 'regulated investment company' under Subchapter M of the Internal Revenue Code and distribute substantially all of its taxable income to its shareholders. Therefore, no federal income or excise tax provision is required.
Dividends from net investment income are declared and paid at least annually. Any net realized capital gains, unless offset by any available capital loss carryforward, are distributed to shareholders at least annually. Dividends and distributions are determined in accordance with Federal income tax regulations which may differ from generally accepted accounting principles. These 'book/tax' differences are either considered temporary or permanent. To the extent these differences are permanent, such amounts are reclassified within the capital accounts based on their federal tax basis treatment; temporary differences do not require reclassification.
The Fund had permanent book/tax differences primarily attributable to deferred organizational costs. To reflect reclassifications arising from permanent book/tax differences as of October 31, 1995, accumulated undistributed net investment income was credited and paid in capital was charged $1,512.
At October 31, 1995 the tax basis of the Fund's investments for Federal income tax purposes amounted to $29,563,366. The net unrealized depreciation amounted to $6,960, which is comprised of gross unrealized appreciation of $537 and aggregate gross unrealized depreciation of $7,497.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE, AND RELATED PARTY TRANSACTIONS
Pursuant to an Investment Management Agreement ('Agreement'), United States Trust Company of New York ('U.S. Trust') serves as the Managing Investment Adviser to the Fund. Under the Agreement, for the services provided U.S. Trust is entitled to receive a fee, at the annual rate of 1.50% of the net assets of the Fund, determined as of the end of each fiscal quarter, that are invested or committed to be invested in Portfolio Companies or Private Funds and equal to an annual rate of 0.50% of the net assets of the Fund, determined as of the end of each fiscal quarter, that are invested in short-term investments and are not committed to Portfolio Companies or Private Funds.
In addition to the management fee, the Fund has agreed to pay U.S. Trust an incentive fee in an amount equal to 10% of the cumulative realized capital gains (net of realized capital losses and unrealized net capital depreciation), less the aggregate amount of incentive fee payments in prior years. If the amount of the incentive fee in any year is a negative number, or cumulative net realized gains less net unrealized capital depreciation at the end of any year is less than such amount calculated at the end of the previous year U.S. Trust will be required to repay the Fund all or a portion of the incentive fee previously paid.
U.S. Trust has voluntarily agreed to waive or reimburse other operating expenses of the Fund, exclusive of management fees, to the extent they exceed 0.42% of the Fund's net assets, and U.S. Trust will waive or reimburse, exclusive of management fees, all such expenses with respect to that portion of the Fund's net assets, determined as of the end of each fiscal quarter, that is invested in short-term investments.
Each Director of the Fund receives an annual fee of $9,000, plus a meeting fee of $1,500 for each meeting attended, and is reimbursed for expenses incurred for attending meetings. No person who is an officer, director or employee of U.S. Trust, or of any parent or subsidiary thereof, who serves as an officer, director or employee of the Fund receives any compensation from the Fund.
3. PURCHASES AND SALES OF SECURITIES
Purchases of securities, excluding short-term investments, for the Fund aggregated $1,280,913. There were no long-term sales.
4. ORGANIZATION COSTS:
The Fund has borne all costs in connection with the initial organization of the Fund. All such costs are being amortized on a straight-line basis over a period of five years from the date on which the Fund commenced operations.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors UST Private Equity Investors Fund, Inc.
We have audited the accompanying statement of assets and liabilities of UST Private Equity Investors Fund, Inc. including the portfolio of investments, as of October 31, 1995, and the related statements of operations and changes in net assets, and financial highlights for the period from August 1, 1995 (commencement of operations) to October 31, 1995. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 1995 by correspondence with the custodian and others. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of UST Private Equity Investors Fund, Inc. at October 31, 1995, the results of its operations, the changes in its net assets, and the financial highlights for the period from August 1, 1995 to October 31, 1995 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York November 22, 1995
Item 9.

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant.
Set forth below are names, ages, positions and certain other information concerning the current directors and executive officers of the Company as of October 31, 1995.
Served in Present Name and Age Position Capacity Since - ------------ -------- -----------------
David I. Fann [31] President; Chief September 16, 1994 Executive Officer
Douglas A. Lindgren [33] Executive July 6, 1995 Vice President
Lisa A. Cummings [32] Treasurer; Treasurer Vice President since September 16, 1994; Vice President since July 6, 1995
Ronald A. Schwartz [47] Secretary September 16, 1994
Edith A. Cassidy* [42] Director September 16, 1994
Gene M. Bernstein [48] Director December 1, 1994
Stephen V. Murphy [50] Director December 1, 1994
*Indicates director who is an "interested person" of the Company within the meaning of the Investment Company Act of 1940.
Additional information concerning the directors and executive officers of the Company is incorporated herein by reference from the section entitled "Management -- Directors, Officers and Investment Professionals" in the Prospectus as modified by the Supplement dated August 28, 1995.
Item 11.

Item 11. Executive Compensation.
At October 31, 1995, the Company had no full-time employees. Pursuant to the Management Agreement, the Managing Investment Adviser employs and compensates all of the personnel of the Company, and also furnishes all office facilities, equipment, management and other administrative services required for the operation of the Company. In consideration of the services rendered by the Managing Investment Adviser, the Company pays a management fee based upon a percentage of the net assets of the Company invested or committed to be invested in certain types of investments and an incentive fee based in part on a percentage of realized capital gains of the Company, For fiscal 1995, the Managing Investment Adviser reimbursed $140,226 to the Company, representing operating expenses (excluding its management fee of $36,125). Additional information with respect to the management fee payable to the Managing Investment Adviser is set forth in the "Management" section of the Prospectus, as modified by the supplement thereto dated October 31, 1995, which section is incorporated herein by reference.
The disinterested directors receive compensation of $9,000 on an annual basis and $1,500 for each Board of Directors' meeting attended plus reasonable expenses. For fiscal 1995, and for the period from September 16, 1994 (organization of the Company) to October 31, 1994, the disinterested directors of the Company each received compensation totaling $15,000.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management.
Not applicable. As of October 31, 1995, no person or group is known by the Company to be the beneficial owner of more than 5% of the aggregate number of Shares held by all shareholders. David I. Fann, Chief Executive Officer of the Company, owns 22 Shares. The directors and officers of the Company as a group own 251 Shares.
The Company is not aware of any arrangement which may, at a subsequent date, result in a change of control of the Company.
Item 13.

Item 13. Certain Relationships and Related Transactions.
The Company has engaged in no transactions with the executive officers or directors other than as described above, in the notes to the financial statements, or in the Prospectus.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements
Portfolio of Investments as of October 31, 1995
Statement of Assets and Liabilities as of October 31, 1995
Statement of Operations for the period ended October 31, 1995
Statement of Changes in Net Assets for the period ended October 31, 1995
Financial Highlights -- Selected Per Share Data and Ratios
Notes to Financial Statements
Independent Auditors' Report
2. Exhibits
(3)(a) Articles of Incorporation of the Company (1)
(3)(b) Amended and Restated By-Laws of the Company (1)
(10)(a) Management Agreement(1)
(10)(b) Transfer Agency and Custody Agreement(1)
(23) Consent of Independent Auditors
(27) Financial Data Schedule
(29) Prospectus of the Company dated December 16, 1994, filed with the Securities and Exchange Commission, as supplemented by supplements thereto dated August 28, 1995 and October 31, 1995(1)
(b) No reports on Form 8-K have been filed during the last quarter of the period for which this report is filed.
(1) Incorporated by reference to the Company's Form N-2, as amended, filed September 22, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By /s/ David I. Fann David I. Fann, President and Chief Executive Officer
By /s/ Lisa A. Cummings Lisa A. Cummings, Treasurer and Vice President
By /s/ Edith A. Cassidy Edith A. Cassidy, Director
By /s/ Gene M. Bernstein Gene M. Bernstein, Director
By /s/ Stephen V. Murphy Stephen V. Murphy, Director
Date: January 29, 1996


ITEM 1. BUSINESS
History and Organization
The Company was organized under the laws of the State of Delaware on August 1, 1986 under the name Michigan Ventures, Inc., and changed its name to AmeriMark Corp. in November, 1987 and changed its name to AmeriShop Corp. in July, 1992 after merging with its subsidiary AmeriShop, Inc. The Company was organized for the purpose of creating a corporate vehicle to seek, investigate and, if such investigation warranted, acquire an interest in business opportunities presented to it by persons or firms who or which desired to employ the Company's funds in their business or to seek the perceived advantages of a publicly-held corporation. On October 27, 1987, the Company acquired the businesses previously operated by Network Direct, Inc., a privately held Kansas corporation ("NDI") for 14,967,180 shares of the Company's Common Stock and America's Buyers, Inc., a privately held Michigan Corporation ("ABI") for 11,225,385 shares of the Company's Common Stock. The acquisitions were effected by the Company creating two new subsidiaries into which the acquired companies were merged. Effective April 1, 1991, the Company sold Network Direct, Inc. in exchange for 8,967,180 shares of the Company. On July 6, 1992, the Company effected a 1 for 10 reverse split of its outstanding capital stock resulting in total issued and outstanding Common Stock on that date of 2,393,827 shares. AmeriShop, Inc. was formed on February 8, 1988 as a subsidiary of the Company to pursue marketing of a mass market, low price, high volume telephone buying service membership. Effective January 1, 1990, AmeriShop, Inc. was merged into ABI and ABI simultaneously changed its name to AmeriShop Inc. ("AmeriShop").
Description of Business
Company Overview
AmeriShop Corp. is a marketer of computerized merchandising systems providing an on-line data base of over 60,000 current brand name consumer products (with total access to approximately 250,000 products) representing over 550 manufacturers. The database is a proprietary software system designed, maintained and operated exclusively by the Company providing the user/consumer the ability to price compare and purchase merchandise from the manufacturers or distributors which carry their products on the database. Access to the database is done via a toll-free telephone call to an AmeriShop personal shopping assistant. The uniqueness of the Company's computerized merchandising system gives the Company the ability to market its services to the premium incentive industry, to individual or group users, on an annual membership basis and through direct response catalogs such as airline in-flight catalogs, and credit card merchandise fliers. The principal client base for the Company's merchandising capabilities are virtually any corporation or organization interested in motivating or "incentifying" their employees, sales force, or customers to perform better or purchase more. The Company has entered into, and continues to add on a monthly basis, purchase agreements to provide its various merchandising services throughout the continental United States and Latin America. The premium incentive industry sells merchandise and travel services to client companies who in turn use them as awards for outstanding achievement or participation in or use of some other service or product. A typical incentive program has at its base a set of rules which outlines a specific goal, i.e., to increase sales. By properly structuring these rules, a company can motivate its work force to go above and beyond what they might normally do. In the case of salespeople, they will tend to sell more of a specific product, if by selling that product, they are offered an award. For incentive programs with many participants, the awards tend to be shown in a 4-color catalog consisting of approximately 1,000 items.
AmeriShop is unique in that not only does it have a 4-color catalog with 1,000+ items, but it also offers companies participating in an incentive program the option to choose items from our database of 60,000 items. With the wide diversity of participants, especially in larger programs, Management believes offering them such a large choice gives AmeriShop a competitive edge in attracting new clients. AmeriShop provides a variety of functions in a typical Incentive Program. After the AmeriShop salesperson has "sold" the program, a "kit" of material is produced by AmeriShop. This kit consists of a 4-color catalog that contains a wide variety of items at various prices, an order form and program rules. The program rules outline what goals need to be met in order for the program participant to receive award points. As the participant receives award points throughout the program, progress statements are sent out indicating the cumulative total of the participants' awards points. Along with this "statement," a company will typically take the opportunity to promote a new product in order to help "stimulate" sales. The accumulated award points are turned in at the end of the program for merchandise chosen out of the catalog or, at the participant's option, AmeriShop's database. This is done by the participant filling out the Award Order form provided in the program kit. The form is then sent to AmeriShop for processing. AmeriShop will verify that the participant truly has the stated amount of points needed for the merchandise selected. Internally at AmeriShop, the ordering processing center notifies the appropriate manufacturer of the selected merchandise, making the necessary order. The manufacturer will tell AmeriShop the approximate time to deliver and that information is passed along to the participant by AmeriShop in the form of an Order Verification letter. Once the merchandise has been shipped, AmeriShop invoices the client based on an agreed upon dollar value per award point redeemed. The manufacturer invoices AmeriShop at a previously agreed price which is lower than that charged to the client. The Company has approximately 50 corporate premium incentive clients as of August 31, 1995. The Company also utilizes its product database to market and fulfill consumer shopping club memberships. By subscribing to AmeriShop's services and paying the current fee, a person can call a toll-free number to obtain pricing information and/or purchase
merchandise from the Company at prices not generally available to the public. Such sales are generally at a price slightly above that paid by the Company. The Company's shopping service business has been primarily a fulfillment of third party private label programs. AmeriShop receives varying service fees from the marketing companies depending upon how the shopping service is sold to the consumer. The shopping service is often combined with other services by the marketing company. As of August 31, 1995, the Company services about 14 private label programs in addition to its own programs with a total membership base of approximately 135,000 members. The products on the data base are maintained with a product description, customer price delivered and suggested retail price with corresponding award point equivalents for the premium incentive program. Additionally, the data base maintains a customer file which contains customer/member I.D. number, purchase history and credit card number, if available. The Company is continually adding new products to its data base. The manufacturers/vendors must agree to individually drop ship products. In some cases, the Company has a written contract for merchandise fulfillment from the manufacturer. However, in many circumstances, the relationship is an oral agreement based upon the manufacturer's agreed upon price and ability to drop ship. Once a merchandise order has been placed with the vendor, the Company's Customer Service Department sends the customer an order acknowledgement form notifying them that their order has been placed. All products are shipped directly to the member and come with full manufacturers' warranties. However, if there is a problem with goods arriving damaged, the Company's Customer Service Department will act on the consumer's behalf, contacting the manufacturer or shipper to determine responsibility for the damaged goods and rectifying the situation to the customer's satisfaction. The Company utilizes an IBM System 36 computer that can handle approximately five (5) times the number of transactions it is presently handling with additional memory and storage upgrades. Processing systems are continually upgraded internally to improve efficiency. The telephone system can handle over 2010 operators and associated toll-free telephone lines with 55 lines currently in operation.
NDI
As noted above, NDI was sold effective April 1, 1991. NDI was originally incorporated in 1971 as Modern Guide to Buying. NDI markets telephone buying service memberships through a direct sales force selling individual memberships primarily on a one-on-one basis. NDI does not have the ability to service its own buying service memberships. Since July, 1987, NDI has had an exclusive contract with AmeriShop which was renewed on April 1, 1991 for a period of five years. The service contract gives NDI members access to the Company's database for price comparisons and product purchases. NDI is excluded from utilizing other shopping service companies, however, AmeriShop is not excluded from providing its services to other sales organizations. The service agreement was amended July 1, 1995 for three years. NDI paid the Company $175,000 to renegotiate the agreement early. The new agreement calls for a 15% reduction in service fees paid to the Company for the first 4,000 new members added each year and a 50% reduction in fees for new members in excess of 4,000 per year. The majority of permanent memberships were sold on an installment basis, through financing sources utilized by NDI, with an additional annual renewal fee. NDI normally collects a small down payment with the balance of this initial fee paid monthly. NDI was able to pledge these installment receivables and borrow up to 70% of the balances due from its financing sources.
Backlog and Seasonality The Company typically realizes approximately 90% of its total membership sales during its last three fiscal quarters. As of June 30, 1995, unfilled merchandise orders in its backlog totaled $281,881. The Company also reflects revenue on certain membership agreements over the 12-month life of the membership. At June 30, 1995, the balance of deferred revenue which will be recognized into income during the year ending June 1996 was approximately $559,000 [see note 1 to financial statements included at Item 14].
Employees As of August 24, 1995, the Company had 18 full-time employees, of which 4 were engaged in management and administrative functions, 3 in sales, 9 in clerical functions and 2 phone operators. In addition, the Company has 2 part-time clerical workers and 6 part-time phone operators. At any given time, 3 to 6 phone operators are on duty. Competition The premium incentive industry is highly competitive with a few large companies (Maritz, Inc., Carlson Marketing Group, Inc., BI Performance Services, ITA Group) and thousands of medium to small companies. The Company believes that it can effectively compete in this industry because of its ability to charge a lower price than its large competitors and provide greater administration services than its smaller competitors. The marketing and operation of telephone buying services as offered by AmeriShop is highly competitive. No specific figures are available, but the Company estimates that it has approximately four direct competitors in that area. The Company is not aware of any other entity marketing individual permanent telephone buying service memberships as NDI does. In addition to directly competitive operations, however, the Company's competition could be considered to include mail order catalog discount operations, televised shopping services and catalog showrooms. Many of these competitors are larger and better financed than the Company.
ITEM 2.

ITEM 2. PROPERTIES The Company leases approximately 9,200 square feet of office space in Grand Rapids, Michigan for a term expiring August 31, 2001. In addition, the Company leases computer and telephone equipment, subject to purchase options, and owns office equipment with a net combined book value of $25,873 as of June 30, 1995. The Company considers its leased and owned facilities and equipment to be modern and adequate for the conduct of its business.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS The Company is not presently involved in any litigation other than ordinary, routine litigation incidental to its operations.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company commenced its initial public offering on November 12, 1986 and sold 3,725,385 units which included one share of Common stock and warrants. The initial price to the public was $.10 per share. The stock is traded on a limited basis. The following table sets forth, for the periods indicated, the range of bid quotations as reported by National Quotation Bureau, Inc. while the stock was included in the "pink sheets." These quotations may reflect inter-dealer prices without retail mark-up, mark-down or commission allowances and may not represent actual transactions.
As of June 30, 1995, the Company's Common Stock was held by approximately 182 holders of record.
Subsequent to the initial public offering, additional shares were issued in private offerings and a reverse split of 10 to 1 was effected on July 6, 1992 resulting in 2,393,827 shares issued and outstanding.
DIVIDEND POLICY The Company has no dividend paying history and does not expect to pay any dividends on its Common Stock for the foreseeable future.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
Statement of Operations Data For the years ended June 30, 1995, 1994, 1993, 1992, and 1991
Balance Sheet as of June 30
* Includes revenues and income from sale of subsidiary of $1,840,081. ** Adjusted to reflect 1 for 10 reverse stock split on July 6, 1992.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This analysis should be read in conjunction with the Consolidated Financial Statements and accompanying Notes thereto, contained herein.
General The Company was originally incorporated as Michigan Ventures, Inc., a Delaware corporation, on August 1, 1986. On October 27, 1987, the Company acquired the businesses of America's Buyers, Inc. ("ABI") and Network Direct, Inc. ("NDI"). On November 26, 1987 the name of the Company was officially changed to AmeriMark Corp. by majority vote of the shareholders. In July 1992, the Company changed its name to AmeriShop Corp.
Liquidity and Capital Resources The Company has a working capital deficit of approximately $2.88 million at June 30, 1995. A major portion of this deficit relates to convertible debentures, short term notes payable and accrued interest totaling $1.97 million due to an investment fund partnership.
Management is currently working with the investment group to extend this debt and/or covert it into equity. If the debt can be deferred or converted, the Company is left with a $900,000 working capital deficit as of June 30, 1995, of which $559,000 represents deferred membership and non-compete revenue. The deferred revenue will be liquidated through amortization into income over the next twelve months and therefore will not require the use of cash resources. The remaining working capital deficit of $341,000 should be covered through $175,000 received on the NDI contract re-negotiation and an additional $200,000 loan from the investment fund partnership of which $125,000 was received in August, 1995. The Company has an arrangement with an investment fund partnership, as noted above, which has provided $2.0 million in long-term debenture financing. These funds were received by the Company in various amounts from July, 1992 through August, 1993. The Company is in default of its loan covenants regarding current ratio and positive cash flow from operations. It is also in default of its monthly interest installments since May 1, 1994. The covenants and the default from nonpayment of interest have been waived through July 1, 1996. The debentures require principal redemption of $20,000 per month commencing on August 1, 1995 until maturity on July 1, 1999. The remaining principal balance plus any unpaid interest or other expenses are due and payable in one lump sum on July 1, 1999. Management anticipates that the Company must either obtain additional financing to meet these principal payment obligations or the debentures must be converted to equity in order to eliminate the obligations. The Company received approximately $300,000 in short-term loans during fiscal 1995. As of June 30, 1995, the balance of these loans totaled $1,428,445 and was due on July 1, 1995. The Company had a deficiency in stockholders equity of $4,835,325 as of June 30, 1995 and its continuation is dependent upon meeting its obligations as they become due and attaining profitable operations. Management believes that it can obtain profitable operations in the future through its merchandise premium incentive programs which it continues to actively market and through budget reductions established for 1996. The
Company has continued to increase its level of incentive merchandise sales as well as its overall gross profit on these sales as documented below in the discussion of Results of Operations. The Company has shown a cash shortfall from operations of approximately $570,000 for fiscal year 1995. Management believes that it will substantially improve these results and possibly reach breakeven in fiscal 1996 if anticipated sales are realized. Fiscal 1996 budgeted operating expenses have been reduced by approximately 20% from 1995 primarily through staff and management reductions. Fiscal 1995 premium incentive sales increased from 9% from 1994 to over $2.25 million. Management anticipates similar improvement in fiscal 1996 based upon programs currently in process and new programs that it believes can be obtained during the coming months. For the long term, the Company continues to add new premium incentive business which will improve its results from operations. However, the Company requires additional in-house sales representatives to generate substantial growth in this business. Management believes that adding up to six sales representatives disbursed over several regions within the United States would be sufficient to increase accelerated sales. There is a delay between hiring sales representatives and realizing the sales from their efforts. This is due to a period of time necessary to develop and sell programs (6 to 12 months), then once the program is sold, it takes 6 to 12 months, generally, for the participants to earn the awards before they are redeemed. It is Management's intent initially to hire experienced individuals already in the premium incentive industry in order to accelerate the sales effort. Because of this, it is anticipated that salary, benefits, travel and other expenses for these sales persons could be as high as $100,000 per year each. Since the sales generated by the new sales representatives will not be realized for 12 to 18 months, the Company will require additional equity financing to cover these expenses. Management continues to pursue this financing primarily through private placement funding. The Company currently has three sales persons in-house and about 30 independent agents. Management believes that it must increase its in-house sales force to provide it with more control over its sales efforts since independent agents utilize other suppliers in
addition to AmeriShop. Also, sales costs, primarily commissions, are substantially lower with in-house agents providing the Company with higher gross profit margins. In its shopping service membership business, the Company has taken steps to create further growth through two recent contractual agreements. On July 1, 1995, the Company re-negotiated a new three year membership fulfillment agreement with Network Direct, Inc. (NDI). This extension solidifies the Company's long-standing relationship with NDI to continue membership fulfillment for their customers. Furthermore, the Company received a $175,000 up front, one-time cash fee from NDI. This fee was consideration for re-negotiating the new agreement 11 months prior to the expiration of the current term of the NDI/AmeriShop agreement (April 1, 1996) with the new agreement extended to July 1, 1998. The new agreement calls for a 15% reduction in service fees paid to the Company for the first 4,000 new members added each year and a 50% reduction in fees for new members in excess of 4,000 per year. NDI had a strong membership year providing the Company $635,000 in membership fees in fiscal 1995. NDI's goals for fiscal 1996 are to exceed fiscal 1995's memberships which should also aid the Company's cash flow and profits. In addition to the three year NDI extension agreement, the Company also signed a new two year test marketing membership agreement with the Safecard ("Safecard") Services, Inc. division of Ideon Group, Inc. (NYSE:IQ) to market the Company's Shopping Service membership program. In aligning itself with Safecard, the Company affords itself the opportunity to be involved in an arrangement with the largest provider of credit card registration protection programs serving over 13 million credit card holders. The Company and Safecard will commence test marketing an annual Shopping Club membership service under a joint venture, profit sharing agreement in fiscal 1996. The Company will provide its 60,000 item consumer merchandise data base to create and fulfill the annual shopping service. Safecard will market the shopping service utilizing its extensive credit card relationships. The joint goal is to begin building a high volume, renewable shopping service membership base over the next 12 to 24 months. If successful, this will establish the foundation to substantially improve the Company's revenue growth and earnings.
The Company is at the stage where it needs to restructure its balance sheet, primarily converting into equity its long and short term debt with Renaissance Capital, the Company's investment fund partner. As discussed above, the Renaissance Capital financing is currently carried on the balance sheet as debt that is accruing interest month-to-month. The Company has taken budgetary cuts to attain profitability and positive cash flow in fiscal 1996 that would allow Renaissance Capital to convert its debentures into equity, thereby eliminating the Company's existing debt structure and interest payments. The subsequent improvement in the balance sheet will position the Company to actively pursue a new common stock issuance in either a public or private offering. Management believes it needs to obtain a minimum of $5,000,000 in net proceeds to adequately enhance its shareholder equity position, hire additional sales representatives and cover operating expense shortfalls until sales are sufficient to generate profits. In the short term, Management believes it can attain profitable results in the next 12 to 18 months. Management's goal over the next three years is to continue to shift the merchandise sales mix from the fiscal 1995 mix of 40% member and 60% incentive to 10% member and 90% incentive. Premium incentive sales for the fourth quarter of 1995 exceeded the same period in 1994 by $211,000 resulting in a higher accounts receivable balance at June 30, 1995 compared to June 30, 1994. There were no material write-offs of receivables against bad debts during fiscal 1995 or 1994. To increase sales substantially, the Company must continue to add salaried representatives to its sales force. To accomplish this, it is necessary for the Company to obtain additional equity financing.
Results of Operations - Year Ended June 30, 1995 For the year ended June 30, 1995, the Company experienced a loss of $698,285 compared to a loss of $993,047 in the prior year; an improvement of $294,762 (30%). Loss from operations (exclusive of other income, interest income and interest expense) was $269,661 and $700,273 for 1995 and 1994, respectively; an improvement of $430,612 (61%). However, of the 1995 operating loss of $269,661, approximately $40,000 is attributable to organizational charges in personnel reductions taken in June 1995. The improved operating
results were primarily due to increased gross profit from merchandise, promotional programs and an increase in membership fee revenues. Membership fee revenues increased by 17% over the prior year due to increased volume from third party membership programs. The Company did not actively market any new retail shopping service members in 1995 and its existing base has been slowly declining over the last few years. The Company continues to service Network Direct, Inc. (NDI) members and gross new member and renewal receipts totaled approximately $635,000 in fiscal 1995 compared to $597,000 in fiscal 1994. NDI membership receipts represented 84% and 82% of total membership receipts for 1995 and 1994, respectively. Overall, merchandise sales decreased in total by 13% from the prior year to $3.9 million as a result of a $543,000 decrease in direct response merchandise sales, and a $218,000 decline in merchandise sales to shopping service members. However, merchandise incentives sales increased by 9% to $2.25 million in 1995 versus $2.07 million in 1994. The Company has been focusing its efforts on increasing its merchandise incentive sales which provide higher gross profit margins (20%-30% after commissions) than member merchandise sales (approximately 2%). Merchandise incentives sales represented 58% and 46% of total merchandise sales in 1995 and 1994, respectively. Promotional expense decreased by $54,000 from the prior year as a result of a reduction in catalog costs related to a bank card insert program which was discontinued in fiscal 1994. Selling, general and administrative expenses decreased by $295,000 (or 14%) over the prior year which resulted from budget cuts.
Results of Operations - Year Ended June 30, 1994 For the year ended June 30, 1994, the Company experienced a loss of $993,047 compared to a loss of $1,069,087 in the prior year. Loss from operations (exclusive of other income, interest income and interest expense) was $700,273 and $915,747 for 1994 and 1993 respectively; an improvement of 24%. The improved operating results were primarily due to increased gross profit from merchandise and travel programs and a decrease in promotional expenses.
Membership fees decreased by 7% from the prior year. The Company did not actively market any new retail shopping service members in 1994 and its existing base has been slowly declining over the last few years. The Company continues to service Network Direct, Inc. (NDI) members and gross new member and renewal receipts totaled approximately $597,000 in fiscal 1994 compared to $553,000 in fiscal 1993. NDI membership receipts represented 82% and 86% of total membership receipts for 1994 and 1993, respectively. Merchandise sales increased in total by 4% over the prior year to $4.5 million as a result of a $1,065,000 increase in merchandise incentive sales and a $900,000 decline in merchandise sales to shopping service members. The Company has been focusing its efforts on increasing its merchandise incentive sales which provide higher gross profit margins (20%-30% after commencement) than member merchandise sales (approximately 2%). Merchandise incentives sales represented 47% and 25% of total merchandise sales in 1994 and 1993 respectively. Promotional materials expense decreased by $200,000 from the prior year as a result of a reduction in catalog costs related to an airline in-flight catalog program which was discontinued in January, 1994. Selling, general and administrative expenses increased by $68,000 (or 3%) over the prior year which resulted from increased sales volume.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Registrant hereby incorporates the financial information required by this item by reference to Item 14 hereof.
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None
PART III ITEM 10.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors and Executive Officers The Directors and Executive Officers of the Company are as follows:
Name Age Position ---- --- -------- Joseph B. Preston 48 President, Chairman, Chief Executive Officer and Director
Steven Salasky 33 Secretary/Treasurer
James W. Kenney 54 Director
Joseph B. Preston has served as a director of the Company and as its President and Chief Executive Officer since October 27, 1987. He has been Chairman of the Company since March, 1991. He served as President of ABI from May 1, 1986 to October 27, 1987. From December, 1984 to April 30, 1986, Mr. Preston was President of Preston Marketing Group, Inc., a consulting firm specializing in marketing and general management consulting. Prior to owning his own consulting firm, Mr. Preston was Vice President of Sales/Marketing for Root-Lowell Manufacturing Corporation from October, 1983 to December, 1984. Mr. Preston was also with Amway Corporation from February, 1978 to October, 1983 as Senior Manager of International Marketing handling development of Amway's product lines for all its international markets. Mr. Preston served in the U.S. Navy as a Naval Flight Officer for five (5) years following completion of his M.B.A. in Marketing and B.S. degree in Packaging Engineering both from Michigan State University. Steven Salasky has served as Controller since August, 1994 and as Secretary/Treasurer since July, 1995. He graduated from Michigan State University with a B.A. in Accounting. He gained his public accounting experience at Egly, Brink & Co.
which is a regional public accounting firm located in Kalamazoo, Michigan, and was certified in 1989. Mr. Salasky joined AmeriShop in September 1989 as the Accounting Manager. James W. Kenney has been a Director since September, 1992. He is currently associated with San Jacinto Securities, Inc. as Executive Vice President and owner. From February, 1992 to June, 1993 he served as Vice President of Investments for Renaissance Capital Group, Inc. From October, 1989 to February, 1992 he served as Senior Vice President, Director of Trading and Syndicates for Capital Institutional Services. From February, 1987 to October, 1989, he served as Senior Vice President for retail sales for Rauscher Pierce Refsnes, Inc. Mr. Kenney received a B.A. degree in economics from the University of Colorado in Boulder, Colorado. Mr. Kenney also currently serves on the Board of Directors of the following companies: Consolidated Health Care Associates, Inc., CCC Coded Communications Corp., Industrial Holdings, Inc., Prism Group, Inc., Scientific Measurement Systems, Appoint Technologies, Tecnal Medical Products, Inc., and Tricom Corporation.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth the cash compensation paid by the Company to each of its executive officers for services rendered during the fiscal year ended June 30, 1995, whose cash compensation for that period exceeded $100,000.
Incentive Stock Option Plan. On October 1, 1992, the Company amended its Incentive Stock Option Plan (the "Plan") under which options granted are intended to qualify as "incentive stock options" under Section 422A of the Internal Revenue Code of 1986, as amended, (the "Code"). Pursuant to the Plan, options to purchase up to 600,000 shares of the Company's common stock may be granted to employees of the Company. The Plan is administered by the Board of Directors, which is empowered to determine the terms and conditions of each option, subject to the limitation that the exercise price cannot be less than the market value of the common stock on the date of the grant and no option can have a term in excess of ten (10) years. Options to purchase 492,800 shares are outstanding under this plan as of June 30, 1995. Options totalling 81,500, 29,800, 181,500 and 200,000 shares may be exercised at $.30, $.75, $1.00, and $1.10 per share respectively. No options have been exercised as of the date of this report.
Compensation Committee Interlocks and Insider Participation. The Company's Board of Directors does not have a compensation committee nor any other committee performing such function. During the year, Mr. Preston participated in all Board of Directors' deliberations concerning executive compensation.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date of this Form 10-K, the stock ownership of each person known by the Company to be the beneficial owner of five percent or more of the Company's Common Stock, all Directors individually and all Directors and Officers of the Company as a group. Each person has sole voting and investment power with respect to the shares shown. When calculating percentage ownership for each person, options held by that person are considered exercised but are not considered exercised when calculating percentage ownership for others.
___________________________
(1) Totals include shares which may be acquired through exercise of options granted as follows: Mr. Preston, 200,000 shares; Mr. Salasky, 17,000 shares; and Mr. Kenney, 15,000 shares.
(2) For purposes of calculating the percentage of outstanding shares owned by each person and the indicated group, these shares are deemed to be outstanding.
(3) Mr. Kenney has a 14-1/2% interest in the general partner of Renaissance Capital Partners, II, Ltd., a limited partnership. This general partner has a 20% interest in the profits of that limited partnership above a formula return to the limited partners. The assets of the limited partnership include an option to purchase 3,551,830 shares of the Company's Common Stock (see footnote 5, below). This interest is, therefore, not determinable at this point and is not included with Mr. Kenney's beneficial ownership.
(4) Includes 3,551,830 shares that this entity may acquire upon conversion of amounts loaned by it to Company.
(5) Does not include 144,749 shares (2.3%) owned by Francis Hamlin, mother of W. Stephen Hamlin, beneficial ownership of which is disclaimed by W. Stephen Hamlin.
(6) Mr. Preston's beneficial ownership includes 384,260 shares owned by W. Stephen Hamlin which he has full voting rights based upon a settlement and option agreement between the Company and Mr. Hamlin. Mr. Hamlin's beneficial ownership includes 275,000 shares which the Company has an option to purchase.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On April 1, 1991, the Company renewed its ongoing Shopping Service fulfillment agreement with Network Direct, Inc. (NDI). The agreement was renewed for a five year term. Under the agreement the Company received $635,350 from NDI during fiscal year 1995. Messrs. Stearns and Lyons are each a 50% owner, an officer and an employee of NDI. On July 1, 1995, the Company amended its service agreement with NDI through July 1, 1998. In exchange for $175,000 in cash, the Company renegotiated its existing agreement which was scheduled to run until April 1, 1996. Under the terms of the new agreement, the service fee paid by NDI for new memberships serviced by the Company were reduced by 15% for the first 4,000 members per year and by 50% for any new memberships added in excess of 4,000 per year. NDI has not submitted over 4,000 members in any single year in the 8-year relationship with the Company. The Company also extended its agreement not to compete against NDI for certain types of membership programs through July 1, 1998. On December 14, 1994, the Company entered into a settlement, release and option agreement with W. Stephen Hamlin whereby Mr. Hamlin granted options to purchase 275,000 shares of the Company's common stock for $2.00 per share in exchange for the Company's release of any and all rights or claims that it may have had against him arising from his resignation from the Company and subsequent employment in a related field. The options are exercisable in whole or in part for a three year period and, with respect to 137,500 shares, for an additional year. In addition to the options, Mr. Hamlin appointed the Company's President, Joseph B. Preston, with full power of substitution to vote all of the
stock the Company held by Mr. Hamlin, currently 384,260 shares during the four year term of the option agreement. On July 10, 1992, the Company entered into a convertible debenture loan agreement with Renaissance Capital Partners Limited II (RCP) whereby RCP agreed to provide up to $1,500,000 of convertible debenture financing to the Company. The agreement provided for an initial loan of $750,000 which was closed on July 10, 1992 and three standby loan commitments of $250,000 each which were closed September 30, December 31, 1992 and March 31, 1993, respectively. On July 8, 1993, the convertible debenture loan agreement was modified to provide for up to $2,000,000 of financing. The additional debentures of $250,000 each were issued on July 8, 1993 and August 2, 1993. The terms of the seven year debentures require that the Company make interest only payments for the first three years and principal and interest for the remaining four years with a balloon payment due at maturity. RCP has the right at any time to convert any issued debenture into the Common Stock of the Company at $0.56309 per share. The debenture can be redeemed by the Company at any time after the third year at varying premium rates above par. The debentures are secured by all of the assets of the Company, including its software, data files, trademarks and trade names.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K - INDEX
(a) The following documents are filed as part of this report:
AMERISHOP CORP.
FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 1995, 1994, AND 1993 AND INDEPENDENT AUDITORS' REPORT
AMERISHOP CORP.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders AmeriShop Corp. Grand Rapids, Michigan
We have audited the accompanying balance sheets of AmeriShop Corp. as of June 30, 1995 and 1994, and the related statements of operations, changes in shareholders' equity (deficiency in assets) and cash flows for each of the three years in the period ended June 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of AmeriShop Corp. as of June 30, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1995 in conformity with generally accepted accounting principles.
The accompanying financial statements as of and for each of the three years in the period ended June 30, 1995, have been prepared assuming that the Company will continue as a going concern. As discussed in Note 11 to the financial statements, the Company's recurring losses from operations and shareholders' capital deficiency raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are described in Note 11. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
September 6, 1995
AMERISHOP CORP.
BALANCE SHEETS JUNE 30, 1995 AND 1994
See notes to financial statements.
AMERISHOP CORP.
STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1995, 1994 AND 1993
See notes to financial statements.
AMERISHOP CORP.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY IN ASSETS) YEARS ENDED JUNE 30, 1995, 1994 AND 1993
See notes to financial statements.
AMERISHOP CORP.
STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1995, 1994 AND 1993
(Continued)
AMERISHOP CORP.
STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1995, 1994 AND 1993
See notes to financial statements. (Concluded)
AMERISHOP CORP.
NOTES TO FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1995, 1994 AND 1993 - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Effective July 6, 1992, the Company's subsidiary, AmeriShop, Inc. was merged into AmeriMark Corp. which then changed its name to AmeriShop Corp. The Company operates a computerized merchandising system and services customers through discount shopping memberships, merchandise and travel incentive award programs, and direct response merchandise catalogs. Sales to one major customer for the years ended June 30, 1995, 1994 and 1993 accounted for approximately 25%, 18% and 12%, respectively, of the Company's total revenues.
REVENUE RECOGNITION - Membership fees allow members to use services provided by the Company. These fees are generally assessed annually although some programs provide for multi-year fees. Fees are recorded as deferred revenue when received and recognized as income on the straight-line basis over the service period.
Merchandise sales are recorded when the merchandise is shipped to the customer.
Travel revenue is recognized after the travel event has been completed.
CASH EQUIVALENTS - Cash and cash equivalents consist of cash and highly-liquid investments purchased with an original maturity of three months or less.
ACCOUNTS RECEIVABLE - Accounts receivable represent current amounts due from customers for merchandise, travel programs, catalogs and other printed materials, program administration fees and membership fees. The majority of receivables are from corporate customers. Bad debts are recognized as incurred. A reserve for uncollectible accounts has not been established since the Company's history of charge-offs has been negligible.
EQUIPMENT AND DEPRECIATION - Equipment is stated at cost less accumulated depreciation. Improvements and betterments are capitalized; maintenance and repairs are charged to expense as incurred. Depreciation is provided by the use of the straight-line method over the estimated useful life of the related equipment which ranges from 3 to 8 years.
LOSS PER SHARE - The loss per common share is based upon the weighted average number of shares outstanding of 2,516,327, 2,516,327 and 2,487,464 for the years ended June 30, 1995, 1994 and 1993, respectively. The weighted average number of shares outstanding is based upon the revised number of shares after the 1 for 10 reverse stock split which was effective July 6, 1992.
TAXES ON INCOME - Taxes on income are provided based upon Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Prior to the year ended June 30, 1994, deferred taxes on income were recognized for the tax effects of items which enter in the determination of income for financial reporting purposes in different periods than for tax purposes.
2. SALE OF SUBSIDIARY
On April 1, 1991, the Company sold a wholly-owned subsidiary, Network Direct, Inc. (NDI) to its two former owners in exchange for 8,967,180 shares of AmeriShop Corp. common stock.
At the time of the sale of the subsidiary, the Company owed NDI $550,000. Subsequent to the sale, the Company and NDI entered into an agreement whereby the $550,000 was transferred to a non-refundable membership advance. The membership advance is being amortized into income on a straight-line basis over the five year service agreement period. At June 30, 1995 and 1994, $110,000 and $220,000, respectively, is included in deferred membership revenue on the balance sheets.
In a related transaction, the Company entered into a five-year non-compete agreement with NDI which calls for the Company to receive $250,000 and the right to be the sole service fulfillment company for NDI in exchange for not competing in professional shopping network programs which sell memberships for a price in excess of $150. The $250,000 is being amortized into income on a straight-line basis over the five-year period of the agreement. At June 30, 1995 and 1994, $37,483 and $87,487, respectively, is included in deferred non-compete agreement on the balance sheets.
The Company also entered into option agreements with the two former owners to repurchase an additional 1,000,000 pre-reverse split shares of AmeriShop Corp. common stock from each individual. The agreements were amended in July 1992 to provide for a price of $.15 per share (pre-reverse split price). Effective July 11, 1995, the options expired unexercised.
The Company is related to NDI by common ownership. The Company receives enrollment and membership fees which are amortized into income over the period of service. The following is a summary of these transactions with NDI:
On July 1, 1995, the Company amended its service agreement with NDI through July 1, 1998. In exchange for $175,000 in cash, the Company modified its existing agreement which was scheduled to run until April 1, 1996. Under the terms of the revised agreement, the service fees paid by NDI for new memberships serviced by the Company were reduced by 15% for the first 4,000 memberships per year and by 50% for any new memberships in excess of 4,000 per year.
In accordance with this amendment, the Company also extended the term of the non-compete agreement with NDI for a three-year period expiring on July 1, 1998.
3. INCOME TAXES
For tax purposes, the Company has net operating loss carryforwards of approximately $4,218,000 at June 30, 1995. The net operating loss carryforwards will expire as follows:
The provisions of SFAS 109, effective July 1, 1993, were adopted prospectively and accordingly, earnings for 1993 have not been restated. The cumulative effect of adopting SFAS No. 109 was not material.
Deferred tax assets resulting from carryforwards are as follows at June 30, 1995:
4. EQUIPMENT
Equipment consists of the following:
5. NOTE PAYABLE
Note payable represents borrowings from an investment fund partnership. Effective September 30, 1994, the Company consolidated the four separate notes payable to the partnership with an aggregate principal balance of $1,235,000 plus accrued interest on the notes and the convertible debenture (see Note 6) into a single demand note requiring monthly interest payments of 12.5% per annum. The Company has defaulted on its monthly interest installments on the note.
6. LONG-TERM DEBT
Long-term debt consists of the following:
The convertible debenture loan requires the Company, among other things, to maintain a ratio of current assets to current liabilities of not less than 1.0 to 1.0 and to maintain a positive average monthly cash flow. The Company was in violation of these covenants at June 30, 1995. In addition, since May 1, 1994, the Company has failed to make certain scheduled interest and principal payments as they became due. The covenant violations and the default from nonpayment have been waived through July 1, 1996.
The investment fund partnership has the right at any time to convert any issued debenture into the common stock of the Company at $0.56309 per share. The debenture can be redeemed by the Company at any time after July 1995 at varying premium rates above par.
The Company is leasing its office space under a lease that requires reduced rentals in the early years of the agreement. The total amount due under the lease is being expensed ratably over the lease term. The resulting accrued rent will be repaid beginning September 1994 (see Note 7).
The following is a schedule of estimated maturities of long-term debt:
7. LEASES
The Company leases a vehicle, office equipment, furniture and fixtures and data processing equipment under capital leases. The assets and liabilities under the capital leases are recorded at the lower of the present value of the minimum lease payments at the inception of the lease or the fair value of the assets. The assets are amortized over the shorter of their
lease terms or their estimated useful lives. Amortization of assets under capital leases of $19,851, $32,499, and $50,435 is included in depreciation expense for 1995, 1994 and 1993, respectively.
The following is a summary of equipment held under capital leases:
Minimum future lease payments under capital leases as of June 30, 1995 are as follows:
Effective interest rates on capital leases range from 4.9% to 27.3%. The Company also leases office space and equipment under operating leases. Rent expense under these leases for the years ended June 30, 1995, 1994 and 1993 was $175,886, $185,223 and $195,938, respectively. The leases have expiration dates through 2001. Future minimum rental obligations at June 30, 1995 for all noncancellable operating leases are as follows:
8. PREFERRED STOCK
The preferred stock may be issued by the Board of Directors in one or more series. The Board shall determine the distinguishing features of each, including preferences, rights and restrictions, upon the establishment of such series.
9. STOCK OPTION PLAN
On October 1, 1992, the Company amended its Incentive Stock Option Plan (the "Plan") under which options granted are intended to qualify as "incentive stock options" under Section 422A of the Internal Revenue Code of 1986 as amended. Pursuant to the Plan, options to purchase up to 600,000 shares of the Company's common stock may be granted to employees of the Company. The Plan is administered by the Company's Board of Directors, which is empowered to determine the terms and conditions of each option, subject to the limitation that the exercise price cannot be less than the market value of the common stock on the date of the grant and no option can have a term in excess of 10 years.
Options to purchase 492,800 shares have been issued under the Plan as of June 30, 1995. Options totaling 81,500, 29,800, 181,500 and 200,000 shares may be exercised at $.30, $.75, $1.00 and $1.10 per share, respectively. No options have been exercised as of the date of this report.
10. RELATED PARTY TRANSACTIONS
On June 18, 1992, the Board of Directors approved the sale of 1,500,000 pre-split shares of treasury stock to certain officers of the Company at a price of $.02 per share. On August 1, 1992, 97,500 post-split shares were purchased. An additional 25,000 post-split shares were paid as a finders fee related to the debenture financing. The remaining 127,500 post-split shares were cancelled and retired.
11. MANAGEMENT'S PLANS REGARDING FUTURE OPERATIONS AND GOING CONCERN
For the year ended June 30, 1995, the Company experienced a loss of $698,285 compared to a loss of $993,047 in the prior year. Loss from operations (exclusive of other income, interest income and interest expense) was $269,661 and $700,273 for 1995 and 1994, respectively; an improvement of 61%. The improved operating results were primarily due to increased gross profit from merchandise and promotional programs and an increase in membership fee revenues.
The Company has a working capital deficit of approximately $2,871,000 at June 30, 1995. Included in this deficit is $559,193 of deferred membership and non-compete revenue. The deferred revenue will be liquidated through amortization into income over the next 12 months and therefore will not require the use of cash resources.
The Company has shown a cash shortfall from operations of approximately $572,000 for fiscal year 1995. In response to the continued losses from operations and negative cash flows, management has reduced fiscal year 1996 budgeted operating expenses by approximately 20% from 1995, primarily through staff reductions made in May 1995.
To address short-term liquidity needs, the Company modified its existing service agreement with NDI in exchange for $175,000 in cash (see Note 2). In addition, the Company received $125,000 from an investment fund partnership in August 1995 and anticipates the receipt of an additional $75,000 in September 1995 in return for the issuance of term notes payable due March 31, 1996.
Management anticipates continuing increases in its premium incentive merchandise sales along with improved gross profits. Management believes that these increases, combined with the expense reductions should provide for substantially improved operating results in the coming fiscal year.
At the present time, the Company's office space, telephone system and computer system capabilities are underutilized. Management anticipates that a substantial number of new members and merchandise incentive programs can be added without significant capital expenditures. By adding new memberships and merchandise incentive programs, management believes there will be an improvement in operating results by more fully utilizing the Company's facilities.
12. RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1993 financial statements to conform to the classifications used in 1995.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERISHOP CORP.
By: /s/ Joseph B. Preston -------------------------------------- Joseph B. Preston, Chairman, President and Chief Executive Officer
By: /s/ Steven Salasky -------------------------------------- Steven Salasky, Secretary, Treasurer and Principal Accounting Officer Dated: September 28, 1995 ---------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature and Title Date ------------------- ----
By: Joseph B. Preston September 28, 1995 -------------------------------------------- ------------------ Joseph B. Preston, Director
By: James W. Kenney September 28, 1995 -------------------------------------------- ------------------ James W. Kenney, Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO 15(d) OF THE ACT BY REGISTRANT WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT:
No annual report or proxy material has been sent to security holders.