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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
---------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File Number
September 30, 1996 33-25701
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ADVANTAGE MARKETING SYSTEMS, INC.
---------------------------------
(Exact Name of Registrant as Specified in its Charter)
Oklahoma 33-0296193
- --------------------------------- ------------------------------
(State or Other Jurisdiction (IRS Employer Identification
of Incorporation or Organization) Number)
2601 N.W. Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112
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(Address of Principal Offices) (Zip Code)
(405) 842-0131
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (i) has filed all reports required
to be filed by Section 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (ii) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- _________
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $.0001 par value 2,143,191
- ------------------------------ ---------------------------------------
Title of Class Number of Shares outstanding at
September 30, 1996 (retroactively
restated for a reverse stock split)
Exhibit Index appears on page 14 .
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Page 1 of 15
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ADVANTAGE MARKETING SYSTEMS, INC.
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QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
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Table of Contents
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Part I - Financial Information
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II - Other Information 14
Page 2
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ADVANTAGE MARKETING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS, SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
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SEPT. 30, DEC. 31,
ASSETS 1996 1995
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<S> <C> <C>
CURRENT ASSETS:
Cash $ 117,965 $ 112,087
Receivables - net of allowance
of $25,804 and $27,434 12,774 18,299
Receivable from affiliate - 51,963
Inventory 305,804 98,621
Prepaid expenses 18,257 2,371
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Total current assets 454,800 283,341
COMMISSION ADVANCES TO RELATED PARTIES - NONCURRENT 29,481 65
RECEIVABLES - NONCURRENT 18,742 22,620
RECEIVABLE FROM AFFILIATE 70,923 -
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $326,002 and $280,606 176,932 159,797
GOODWILL 113,488 -
COVENANT NOT TO COMPETE 55,556 -
DEFERRED TAXES 438,349 -
OTHER ASSETS 156,662 67,173
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TOTAL ASSETS $1,514,933 $ 532,996
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIENCY)
- -----------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 206,634 $ 91,949
Accrued expenses 276,379 151,654
Accrued promotion expense 56,862 99,424
Notes payable:
Stockholder 17,658 81,929
Other 9,401 8,440
Current obligations under capital lease 25,032 20,679
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Total current liabilities 591,966 454,075
LONG-TERM LIABILITIES:
Notes payable - other 23,880 28,500
Capital lease 61,812 75,649
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Total long-term liabilities 85,692 104,149
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TOTAL LIABILITIES 677,658 558,224
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STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock - $.0001 par value;
authorized 5,000,000 shares; none issued - -
Common stock - $.0001 par value; authorized
495,000,000 shares; 2,143,191 and 2,123,191
shares issued and outstanding, respectively 214 212
Paid-in capital 1,981,380 1,859,882
Accumulated deficit (1,144,319) (1,885,322)
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Total stockholders' equity (deficiency) 837,275 (25,228)
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TOTAL $ 1,514,933 $ 532,996
========== ==========
</TABLE>
See notes to financial statements.
Page 3
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ADVANTAGE MARKETING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUE:
Sale of programs $1,515,154 $1,307,355 $4,186,404 $3,155,934
Sale of promotional material 108,701 38,348 234,735 88,893
Other 21,227 8,582 37,471 17,797
--------- ---------- ---------- ----------
Total 1,645,082 1,354,285 4,458,610 3,262,624
--------- ---------- ---------- ----------
EXPENSES:
Cost of programs 334,189 375,534 968,635 906,935
Cost of promotional material 64,458 27,062 142,610 69,395
Selling 819,273 628,196 2,235,879 1,495,084
Interest expense 5,574 8,124 19,422 20,335
General and administrative 300,573 241,452 789,410 593,273
--------- ---------- ---------- ----------
Total 1,524,067 1,280,368 4,155,956 3,085,022
--------- ---------- ---------- ----------
INCOME BEFORE TAXES 121,015 73,917 302,654 177,602
TAX BENEFIT 438,349 - 438,349 -
--------- ---------- ---------- ----------
NET INCOME $ 559,364 $ 73,917 $ 741,003 $ 177,602
========= ========== ========== ==========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES (thousands) 3,176 2,121 3,176 2,121
NET INCOME PER
COMMON SHARE $ .18 $ .03 $ .23 $ .08
------ ------ ------ ------
</TABLE>
See notes to financial statements.
Page 4
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ADVANTAGE MARKETING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
(UNAUDITED)
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<TABLE>
<CAPTION>
SEPT. 30, SEPT. 30,
1996 1995
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 741,003 $ 177,602
Adjustments to reconcile net profit to net
cash provided (used) by operating activities:
Depreciation and amortization 53,955 29,149
Changes in assets and liabilities
which provided (used) cash:
Receivables, advances and prepaids (35,899) 1,204
Inventory (207,183) (11,000)
Deferred taxes (438,349) -
Other assets (18,082)
Checks outstanding - (46,663)
Accounts payable and accrued
expenses 196,848 106,861
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Net cash provided by operating activities 310,375 239,071
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (62,531) (4,072)
Advances to affiliate (22,000) -
Repayment of advances to affiliate 3,040 -
Purchase of Miracle Mountain International, Inc. (56,103) -
Purchase of other assets (89,489) -
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Net cash used by investing activities (227,083) (4,072)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans from stockholders - 46,244
Payment on capital leases (9,484) (9,050)
Payment on notes payable (3,659) (2,088)
Payment on notes payable - stockholders (64,271) (111,150)
--------- ---------
Net cash provided (used) by financing activities (77,414) (76,044)
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NET INCREASE IN CASH 5,878 158,955
BEGINNING CASH BALANCE 112,087 -
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ENDING CASH BALANCE $ 117,965 $ 158,955
========= =========
Reclassify interest payable to notes payable -
stockholders $ - $ 51,806
========= =========
Property and equipment acquired by capital lease $ - $ 91,263
========= =========
Fair value of capital stock issued to purchase
Miracle Mountain International, Inc. $ 120,000 $ -
========= =========
</TABLE>
See notes to financial statements.
Page 5
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ADVANTAGE MARKETING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial statements and related notes have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. The
accompanying financial statements and related notes should be read in
conjunction with the audited financial statements of the Company, and notes
thereto, for the fiscal year ended December 31, 1995.
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 fiscal year ending December 31, 1996. See Note 5 regarding
reverse stock split.
2. MIRACLE MOUNTAIN INTERNATIONAL, INC.
Pursuant to a stock purchase agreement having an effective date of May 31, 1996
(the "Purchase Agreement"), the Company acquired all of the issued and
outstanding capital stock of Miracle Mountain International, Inc., a Colorado
corporation ("MMI"), and MMI became a wholly-owned subsidiary of the Company
(the "MMI Acquisition"). MMI is a multi-level 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 common stock. In
addition, the Company agreed to issue and deliver an additional 5,000 shares of
common stock to the shareholders of MMI on or before December 17, 1996, pending
determination of certain liabilities.
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 market value of assets of MMI, net of liabilities, 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 a 7 and 4.5 year period,
respectively. The fair market value of the assets of MMI, net of liabilities,
declined from $16,690 to negative $3,059 between March 31, 1996 and May 31,
1996.
3. INCOME TAXES
On a regular basis, management evaluates all available evidence, both positive
and negative, regarding the ultimate realization of the tax benefits of its
deferred tax assets. Based upon the historical trend of increasing earnings,
management has concluded that it is more likely than not that a tax benefit will
be realized from its deferred tax assets and has therefore eliminated the
previously recorded valuation allowance for its deferred tax assets.
Page 6
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The Company's deferred tax assets consist primarily of net operating loss
carryforwards for income tax purposes at September 30, 1996 totaling
approximately $1,369,841, which will begin to expire in 2003. Elimination of
the valuation allowance results in a deferred tax asset at September 30, 1996,
of $438,349 and a corresponding tax benefit for the quarter ending September 30,
1996.
4. RECEIVABLE FROM AFFILIATE
The Company made advances to the John Hail Agency, Inc. ("JHA"), a company of
which the Company's Chief Executive Officer and major shareholder is the sole
director and shareholder, of $22,000, and $87,684 during the nine months ended
September 30, 1996, and the year ended December 31, 1995, respectively. During
the nine months ended September 30, 1996, JHA has made repayments of $3,040.
JHA has made repayments of these advances of $67,401 during the year ended
December 31, 1995. Furthermore, effective June 30, 1996, the Company adopted a
policy to not make any further advances to JHA, and JHA executed a promissory
note payable to the Company in the principal amount of $73,964 bearing interest
at eight percent per annum and payable in 60 installments of $1,499 per month.
5. SUBSEQUENT EVENTS
On October 29, 1996, the Board of Directors of the Company approved a one-for-
eight reverse split of the Company's outstanding common stock, options and
warrants effective as of 5:00 p.m. New York City time on October 29, 1996. In
addition, the number of the Company's outstanding options and warrants have been
reduced by a factor of eight and their exercise price has been increased by a
factor of eight pursuant to this action.
This one-for-eight reverse split is reflected in the accompanying financial
statements on a retroactive basis. The Company's previously reported number of
outstanding shares of common stock at September 30, 1996 and December 31, 1995,
of 17,145,524 and 16,985,524, has been adjusted to 2,143,191 and 2,123,191,
respectively. Previously reported weighted average number of outstanding shares
of common stock for the three months ended September 30, 1995 and the nine
months ended September 30, 1995, of 16,966,000 has been adjusted to 2,121,000.
Previously reported earnings per share for the three months ended September 30,
1995 and the nine months ended September 30, 1995, of NIL and $.01,
respectively, have been revised to $.03 and $.08, respectively.
Page 7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Liquidity and Capital Resources
- -------------------------------
The Company had a deficit working capital of approximately $137,166 at September
30, 1996, as compared to a deficit of approximately $170,700 at December 31,
1995. Of this $137,166 deficit, approximately $17,658 represents amounts owed
to the Company's chief executive officer and major stockholder which is
classified as a current liability, however, the Company makes payments on this
loan only when there is sufficient working capital. Management believes that
cash flows from operations will be sufficient to fund its working capital needs
over the next twelve months. During the nine months ended September 30, 1996,
net cash provided by operating activities was $310,375 of which $227,083 was
used in investing activities, and $77,414 was used in financing activities
(consisting primarily of repayments to the Company's Chief Executive Officer and
major stockholder). The Company had a net increase in cash during this period
of $5,878. The Company's working capital needs over the next twelve months
consist primarily of administrative and operating overhead. For the three
months ended September 30, 1996, the Company's administrative and operating
overhead averaged approximately $100,000 per month. The Company anticipates
that this level of administrative and operating overhead will continue over the
next twelve months.
At September 30, 1996, and December 31, 1995, the balance due on a short-term
loan from the Company's Chief Executive Officer and major shareholder was
$17,658 and $81,929, respectively. During 1995, the Company combined interest
payable of approximately $52,000 with the principal due under the loan and began
making weekly interest and principal payments of $1,500. During the nine months
ended September 30, 1996, the Company did not receive any advances under the
loan, while during 1995, the Company received aggregate advances of $31,963
under the loan. During the nine months ended September 30, 1996 and the year
ended December 31, 1995, the Company made principal payments of $64,271 and
$127,615, respectively, thereon to the Company's Chief Executive Officer and
major shareholder. The outstanding balance of the loan bears interest at 12
percent per annum, is unsecured and is due on demand.
The Company made advances to the John Hail Agency, Inc. ("JHA"), a company of
which the Company's Chief Executive Officer and major shareholder is the sole
director and shareholder, of $22,000, and $87,684 during the nine months ended
September 30, 1996, and the year ended December 31, 1995, respectively. During
the nine months ended September 30, 1996, JHA has made repayments of $3,040.
JHA has made repayments of these advances of $67,401 during the year ended
December 31, 1995. Furthermore, effective June 30, 1996, the Company adopted a
policy to not make any further advances to JHA, and JHA executed a promissory
note payable to the Company in the principal amount of $73,964 bearing interest
at eight percent per annum and payable in 60 installments of $1,499 per month.
The Company's primary source of liquidity is net cash provided by operating
activities. Other than loans made available to the Company by
8
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its Chief Executive Officer and major shareholder, the Company does not have any
outside liquidity sources. As of September 30, 1996, the Company did not have
any material commitments for capital expenditures.
On October 29, 1996, the Board of Directors of the Company approved an one-for-
eight reverse split of the Company's outstanding common stock, options and
warrants effective as of 5:00 p.m. New York City time on October 29, 1996. In
addition, the number of the Company's outstanding options and warrants have been
reduced by a factor of eight and their exercise price has been increased by a
factor of eight pursuant to this action.
This one-for-eight reverse split is reflected in the accompanying financial
statements on a retroactive basis. The Company's previously reported number of
outstanding shares of common stock at September 30, 1996 and December 31, 1995,
of 17,145,524 and 16,985,524, has been adjusted to 2,143,191 and 2,123,191,
respectively. Previously reported weighted average number of outstanding shares
of common stock for the three months ended September 30, 1995 and the nine
months ended September 30, 1995, of 16,966,000 has been adjusted to 2,121,000.
Previously reported earnings per share for the three months ended September 30,
1995 and the nine months ended September 30, 1995, of NIL and $.01,
respectively, have been revised to $.03 and $.08, respectively.
The Company is attempting to raise funds through the simultaneous sale of Units
pursuant to the exercise of Public Warrants and Rights. The Company has filed a
registration statement with the Securities and Exchange Commission to redeem the
outstanding Class A and Class B Warrants at $.0008 per warrant. In connection
with the redemption, the Company will offer to temporarily reduce the exercise
price of Class B Warrants to $6.00 and will offer upon exercise of each Class A
and Class B Warrant one share of common stock plus one new 1996-A Warrant. Each
1996-A Warrant will be exercisable at $12.00 per share at any time 90 days after
the date of the associated prospectus and on or before November 30, 1998 to
purchase one share of common stock. The proposed redemption will be limited to
a specific time period after the declaration of effectiveness of the related
registration statement filed by the Company with the Securities and Exchange
Commission.
In addition, the registration statement includes the Company's intention to
distribute nontransferable rights to purchase a unit consisting of one share of
common stock and one new 1996-A Warrant to existing shareholders of record. The
rights will be offered at no cost and will allow shareholders of record to
purchase one unit for every previous common share held. The rights exercise
period will be limited to a specific time period after the declaration of
effectiveness of the related registration statement filed by the Company with
the Securities and Exchange Commission.
The net proceeds to be received by the Company from these offerings will be
dependent upon the number of Units purchased by the holders of the Public
Warrants and the recipients of the Rights. Therefore, the net proceeds of these
offerings are not determinable at this time. There is no assurance that all or
any portion of the Units will be purchased
9
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pursuant to these offerings.
The net proceeds from these offerings will be used for general corporate
purposes, including working capital and to fund the Company's efforts to expand
sales and marketing activities. The Company estimates that it will use
approximately $1.5 million for expansion of its U.S. distributor network and
enhancement of its marketing materials. The Company intends to use
approximately $.5 million to develop new products and enhance the packaging of
its existing products. The Company will devote approximately $1.0 million for
the expansion into and development of international markets. In the event the
Company raises less than $3.0 million the funds will be devoted to each of these
areas in the order in which they have been presented. The Company does not
intend to use any of the proceeds to discharge existing debt. Pending use of
the net proceeds, they will be invested by the Company in investment grade,
short-term, interest-bearing securities.
In connection with these offerings the Company has incurred certain direct costs
consisting primarily of legal, accounting and filing fees. These costs totalled
approximately $153,000 and $53,000 at September 30, 1996, and December 31, 1995,
respectively, and are reflected in the Company's financial statements under the
caption "Other Assets".
Furthermore, the Company signed a letter of intent on May 24, 1996, with an
underwriter which sets forth in principle the terms and conditions pursuant to
which investment banking services are to be provided and, subject to a number of
conditions, Common Stock is to be purchased from the Company and sold to the
public by the underwriter during 1996. Until a definitive underwriting
agreement is executed with the underwriter, which generally will be following
the declaration of effectiveness of the registration statement filed by the
Company with the Securities and Exchange Commission covering the Common Stock,
the underwriter will have no obligation to purchase the Common Stock.
Therefore, there is no assurance that this offering will be completed.
In the event that the Company does not obtain any net proceeds from these
offerings it anticipates that it will be able to continue to operate on
internally generated cash. During the nine months ended September 30, 1996, the
Company had an average monthly positive cash flow from operating activities of
approximately $34,000, and an average monthly net positive cash flow of
approximately $650, after investing and financing activities.
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"). MMI is a multi-level 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 common stock. In addition, the Company
agreed to issue and deliver an additional 5,000 shares of common stock to the
shareholders of MMI on or before December 17, 1996, pending determination of
certain liabilities.
10
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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 market value of assets of MMI, net of liabilities, 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 a 7 and 4.5 year period,
respectively. The fair market value of the assets of MMI, net of liabilities,
declined from $16,690 to negative $3,059 between March 31, 1996 and May 31,
1996.
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
- -----------------------------------------------------
During 1996, total revenues increased $1,195,986 (a 36.7 percent increase) as
compared to 1995. The increase was primarily attributable to the increased
sales volume of the Company's NewTrition Plan, which was introduced in October
1993, and expansion of the Company's network of its independent distributors.
At September 30, 1996, the Company had 9,214 "active" independent distributors
compared to 6,447 at September 30, 1995. A distributor is considered to be
"active" if he or she has made a product purchase from the Company within the
previous 12 months. During 1996, the Company made aggregate sales under its
NewTrition Plan of $4,146,316 to 7,016 distributors, compared to aggregate sales
in 1995 of $2,748,876 to 4,639 distributors. Promotional material revenue
increased $145,842 (a 164.1 percent increase) to $234,735 in 1996 from $88,893
in 1995. In addition, other revenue increased by $19,674 (a 110.5 percent
increase) from $17,797 in 1995 to $37,471 in 1996, as a result of increased
interest income during 1996.
Total costs and expenses of programs, promotional material and selling during
1996 increased by $875,710 (a 35.4 percent increase) to $3,347,124 from
$2,471,414 during 1995. This increase was attributable to an increase of (i)
$61,700 (a 6.8 percent increase) in costs of programs and (ii) $740,795 (a 49.5
percent increase) in selling expenses, while promotional material expenses
increased $73,215 (a 105.5 percent increase). The costs and expenses of
programs, promotional materials and selling, as a percentage of program sales
revenue, increased from 78.3 percent during 1995 to 80.0 percent during 1996 due
to an increase in selling costs as a percentage of program sale revenue from
47.4 percent to 53.4 percent, offset by a decrease in the costs of programs as a
percentage of program sale revenue from 28.7 percent to 23.1 percent as a
result of price reductions obtained from vendors on the program costs associated
with the Company's NewTrition Plan. The Company achieved a net profit on sales
of promotional materials of $92,125 during 1996 compared to a net profit of
$19,498 during 1995 as a result of the Company's curtailed practice of providing
promotional materials at reduced cost during special promotions.
The Company's gross profit on program and promotional material revenues (program
and promotional material revenue less program costs, promotional material costs
and selling expenses) increased $300,602 (a 38.9 percent increase) to $1,074,015
in 1996 from $773,413 in 1995. The gross profit on program and promotional
material revenues increased as a percentage of total revenue from 23.7 percent
in 1995 to 24.1 percent in 1996. The
11
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increase in the Company's gross profit margin on program and promotional
material revenues resulted from the combination of a decrease in program and
promotional materials costs as a percentage of programs and promotional material
revenues, offset by an increase in selling costs and expenses as a percentage of
programs and promotional material revenues.
General and administrative expenses increased $196,137 (a 33.1 percent increase)
to $789,410 during 1996 from $593,273 during 1995. This increase was
attributable to the Company's administrative infra-structure necessary to
support increased levels of sales. The Company expanded its administrative
infra-structure by hiring seven additional employees. Consequently, payroll and
employee costs increased by $184,055 during 1996 as the Company increased its
number of employees from ten to 17. Interest expense during 1996 decreased $913
(a 4.5 percent decrease) to $19,422 from $20,335 during 1995.
Income before taxes increased $125,052 (a 70.4 percent increase) to $302,654
during 1996 from $177,602 during 1995. Income before taxes as a percentage of
total revenue increased from 5.4 percent during 1995 to 6.8 percent during 1996.
Net income increased $563,401 (a 317.2 percent increase) to $741,003 during 1996
from $177,602 during 1995. Net income as a percentage of total revenue
increased from 5.4 percent during 1995 to 16.6 percent during 1996. This
increase was primarily the result of the Company recording the tax benefits of
its net operating loss carryforwards for income tax purposes at September 30,
1996. The Company has net operating loss carryforwards for income tax purposes
at September 30, 1996 totaling approximately $1,369,841, which will begin to
expire in 2003. The valuation allowance recorded at December 31, 1995 was
reversed at September 30, 1996 as management has concluded that it is more
likely than not that a tax benefit will be realized from the related deferred
tax assets.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
- ------------------------------------------------------
During 1996, total revenues increased $290,797 (a 21.5 percent increase) as
compared to 1995. The increase was primarily attributable to the increased
sales volume of the Company's NewTrition Plan, which was introduced in October
1993, and expansion of the Company's network of its independent distributors.
At September 30, 1996, the Company had 9,214 "active" independent distributors
compared to 6,447 at September 30, 1995. A distributor is considered to be
"active" if he or she has made a product purchase from the Company within the
previous 12 months. During 1996, the Company made aggregate sales under its
NewTrition Plan of $1,558,906 to 5,058 distributors, compared to aggregate sales
in 1995 of $1,131,759 to 3,229 distributors. Promotional material revenue
increased $70,353 (a 183.4 percent increase) to $108,701 in 1996 from $38,348 in
1995. In addition, other revenue increased by $12,645 (a 147.4 percent
increase) from $8,582 in 1995 to $21,227 in 1996, as a result of increased
interest income during 1996.
Total costs and expenses of programs, promotional material and selling during
1996 increased by $187,128 (a 18.2 percent increase) to $1,217,920 from
$1,030,792 during 1995. This increase was attributable to an increase of (i)
$191,077 (a 30.4 percent increase) in selling expenses,
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and (ii) $37,396 (a 138.2 percent increase) in promotional material expenses,
while costs of programs decreased $41,345 (an 11.0 percent decrease). The costs
and expenses of programs, promotional materials and selling, as a percentage of
program sales revenue, increased from 78.8 percent during 1995 to 80.4 percent
during 1996 due to an increase in selling costs as a percentage of program sale
revenue from 48.1 percent to 54.1 percent, offset by a decrease in the costs of
programs as a percentage of program sale revenue from 28.7 percent to 22.1
percent as a result of price reductions obtained from vendors on the program
costs associated with the Company's NewTrition Plan. The Company achieved a net
profit on sales of promotional materials of $44,243 during 1996 compared to a
net profit of $11,286 during 1995 as a result of the Company's curtailed
practice of providing promotional materials at reduced cost during special
promotions.
The Company's gross profit on program and promotional material revenues (program
and promotional material revenue less program costs, promotional material costs
and selling expenses) increased $91,204 (a 28.9 percent increase) to $405,935 in
1996 from $314,911 in 1995. The gross profit on program and promotional
material revenues increased as a percentage of total revenue from 23.3 percent
in 1995 to 24.7 percent in 1996. The increase in the Company's gross profit
margin on program and promotional material revenues resulted from the
combination of a decrease in program and promotional materials costs as a
percentage of programs and promotional material revenues, offset by an increase
in selling costs and expenses as a percentage of programs and promotional
material revenues.
General and administrative expenses increased $59,121 (a 24.5 percent increase)
to $300,573 during 1996 from $241,452 during 1995. This increase was
attributable to the Company's administrative infra-structure necessary to
support increased levels of sales. The Company expanded its administrative
infra-structure by hiring seven additional employees. Consequently, payroll and
employee costs increased by $35,839 during 1996 as the Company increased its
number of employees from ten to 17. Interest expense during 1996 decreased
$2,550 (a 31.4 percent decrease) to $5,574 from $8,124 during 1995.
Interest before taxes increased $47,098 (a 63.7 percent increase) to $121,015
during 1996 from $73,917 during 1995. Income before taxes as a percentage of
total revenue increased from 5.5 percent during 1995 to 7.4 percent during 1996.
Net income increased $485,447 (a 656.7 percent increase) to $559,364 during 1996
from $73,917 during 1995. Net income as a percentage of total revenue increased
from 5.5 percent during 1995 to 34.0 percent during 1996. This increase was
primarily the result of the Company recording the tax benefits of its net
operating loss carryforwards for income tax purposes at September 30, 1996. The
Company has net operating loss carryforwards for income tax purposes at
September 30, 1996 totaling approximately $1,369,841, which will begin to expire
in 2003. The valuation allowance recorded at December 31, 1995 was reversed at
September 30, 1996 as management has concluded that it is more likely than not
that a tax benefit will be realized from the related deferred tax assets.
13
<PAGE>
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. LEGAL PROCEEDINGS
-----------------
None
Item 2. CHANGES IN SECURITIES
---------------------
None
Item 3. DEFAULTS IN SECURITIES
----------------------
None
Item 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
--------------------------------------------------
None
Item 5. OTHER INFORMATION
-----------------
On October 29, 1996, the Company's Board of Directors unanimously
approved an one-for-eight reverse split of the Company's outstanding
common stock, options and warrants effective as of 5:00 p.m. New York
City time on October 29, 1996.
As a result of this one-for-eight reverse split (i) the number of
issued and outstanding shares of the Company's common stock was reduced
from 17,145,524 shares to 2,143,191, (ii) the number of the Company's
outstanding "A" and "B" common stock purchase warrants was reduced from
4,196,876 and 4,206,876, respectively to 524,610 and 525,860,
respectively, (iii) the exercise price for the Company's outstanding
"A" and "B" common stock purchase warrants was increased from $.75 and
$1.00, respectively to $6.00 and $8.00, respectively, (iv) the
aggregate number of the Company's granted or issued and outstanding
stock options and non-certificated warrants (each exercisable for the
purchase of one share of common stock of the Company) was reduced from
12,321,412 to 1,540,177 and their respective exercise prices were
increased by a factor of eight so that their aggregate exercise price
remained the same at $3,874,250, (v) the number of shares of common
stock covered by the Company's 1995 Stock Option Plan was reduced from
9,000,000 shares to 1,125,000 shares.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
EXHIBITS: None.
REPORTS ON FORM 8-K: No.
Page 14
<PAGE>
SIGNATURES
----------
- --------------------------------------------------------------------------------
Pursuant to the requirements 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.
Date: November 6, 1996 By: /s/ John W. Hail
------------------- ---------------------------------
John Hail
Chief Executive Officer
Date: November 6, 1996 By: /s/ Roger P. Baresel
------------------- ---------------------------------
Roger P. Baresel
Chief Financial Officer
Page 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 117,965
<SECURITIES> 0
<RECEIVABLES> 38,578
<ALLOWANCES> 25,804
<INVENTORY> 305,804
<CURRENT-ASSETS> 454,800
<PP&E> 502,934
<DEPRECIATION> 326,002
<TOTAL-ASSETS> 1,514,933
<CURRENT-LIABILITIES> 591,966
<BONDS> 85,692
0
0
<COMMON> 214
<OTHER-SE> 837,275
<TOTAL-LIABILITY-AND-EQUITY> 1,514,933
<SALES> 4,186,404
<TOTAL-REVENUES> 4,458,610
<CGS> 3,347,124
<TOTAL-COSTS> 4,136,534
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,422
<INCOME-PRETAX> 302,654
<INCOME-TAX> (438,349)
<INCOME-CONTINUING> 741,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 741,003
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
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