<PAGE>
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 June 30, 1997
----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File Number
June 30, 1997 0-22279
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ADVANTAGE MARKETING SYSTEMS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Oklahoma 73-1323256
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(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
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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 2,680,081
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Title of Class Number of Shares outstanding
at June 30, 1997
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 JUNE 30, 1997
-----------------------------------
Table of Contents
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Part I - Financial Information
Consolidated Balance Sheets....................... 3
Consolidated Statements of Income................. 4
Consolidated Statements of Cash Flows............. 5
Notes to Consolidated Financial Statements........ 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 10
Part II - Other Information................................. 14
Page 2
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ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1997 1996
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash.............................................................. $ 611,641 $ 169,569
Receivables - net of allowance of $25,804......................... 121,867 52,013
Receivable from affiliate......................................... 13,573 13,042
Commission advances............................................... 131,032 44,821
Inventory......................................................... 663,987 217,945
Deferred income taxes............................................. 149,791 157,853
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Total current assets.......................................... 1,691,891 655,243
COMMISSION ADVANCES............................................... 4,341 4,341
RECEIVABLES....................................................... 18,545 18,000
RECEIVABLE FROM AFFILIATE......................................... 47,859 54,780
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $375,199 and $327,344, respectively........... 491,929 377,190
GOODWILL, Net..................................................... 1,753,201 109,232
COVENANTS NOT TO COMPETE, Net..................................... 553,011 52,222
DEFERRED INCOME TAXES............................................. 277,301 341,760
OTHER ASSETS...................................................... 163,817 177,573
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Total Assets.................................................. $5,001,895 $ 1,790,341
========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
CURRENT LIABILITIES:
Accounts payable.................................................. $ 367,848 $ 268,433
Accrued expenses.................................................. 383,652 247,883
Accrued promotion expense......................................... -- 46,370
Notes payable..................................................... 17,516 9,446
Capital lease obligations......................................... 82,709 66,758
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Total current liabilities..................................... 851,725 638,890
LONG-TERM LIABILITIES:
Notes payable..................................................... 46,561 19,049
Capital lease obligations......................................... 221,897 210,973
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TOTAL LIABILITIES................................................. 1,120,183 868,912
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $.0001 par value;
authorized 5,000,000 shares; none issued........................ -- --
Common stock - $.0001 par value; authorized 495,000,000 shares;
issued and outstanding 2,680,081 and 2,143,441, respectively.... 268 214
Paid-in capital................................................... 4,819,816 1,981,380
Accumulated deficit............................................... (938,372) (1,060,165)
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Total stockholders' equity........................................ 3,881,712 921,429
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Total liabilities and stockholders' equity.................... $5,001,895 $ 1,790,341
========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
Page 3
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ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales........................................... $2,696,645 $1,474,419 $4,736,408 $2,797,284
Cost of sales....................................... 1,948,424 1,047,191 3,502,298 2,002,060
---------- ---------- ---------- ----------
Gross profit.................................... 748,221 427,228 1,234,110 795,224
Marketing, distribution and administrative expenses
647,019 327,464 1,051,927 615,981
---------- ---------- ---------- ----------
Income from operations.......................... 101,202 99,764 182,183 179,243
Other income (expense):
Interest, net....................................... 5,183 (3,232) 1,007 (7,863)
Other income........................................ 3,463 3,403 13,123 10,259
---------- ---------- ---------- ----------
Total other income (expense).................... 8,646 171 14,130 2,396
---------- ---------- ---------- ----------
INCOME BEFORE TAXES................................. 109,848 99,935 196,313 181,639
INCOME TAX EXPENSE.................................. 41,698 -- 74,520 --
---------- ---------- ---------- ----------
NET INCOME.......................................... $ 68,150 $ 99,935 $ 121,793 $ 181,639
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES................................ 3,296,474 3,363,000* 3,296,474 3,363,000*
NET INCOME PER COMMON SHARE......................... $ .03 $ .03* $ .04 $ .05*
</TABLE>
* Restated for one-for-eight reverse stock split effective October 29, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
Page 4
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ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................ $ 121,793 $ 181,639
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization..................................................... 94,839 30,965
Deferred income tax............................................................... 72,521 --
Changes in assets and liabilities which provided (used) cash:
Inventory.......................................................................... (317,416) (190,940)
Receivables, advances and prepaids................................................. (126,340) (19,774)
Accounts payable and accrued expenses.............................................. (21,321) 317,303
----------- ---------
Net cash provided (used) by operating activities............................... (175,924) 319,193
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................................................ (83,531) (57,635)
Purchase of Miracle Mountain International, Inc........................................... -- (56,103)
Purchase of Chambre International, Inc.................................................... (51,340) --
Purchase of assets pursuant to SNSI Asset Purchase........................................ (1,274,441) --
Purchase of other assets.................................................................. (72,940) (64,689)
Advances to affiliate..................................................................... -- (22,000)
Repayment of advances to affiliate........................................................ 6,390 --
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Net cash used by investing activities............................................. (1,475,862) (200,427)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................................................... 2,234,357 --
Proceeds from notes payable............................................................... 40,980 --
Payment of deferred offering costs........................................................ (133,862) --
Payment on notes payable.................................................................. (5,398) (4,104)
Principal payment on capital leases....................................................... (42,219) (3,721)
Payment on notes payable - stockholder.................................................... -- (41,229)
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Net cash provided (used) by financing activities.................................. 2,093,858 (49,054)
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NET INCREASE IN CASH...................................................................... 442,072 69,712
BEGINNING CASH BALANCE.................................................................... 169,569 112,087
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ENDING CASH BALANCE....................................................................... $ 611,641 $ 181,799
=========== =========
</TABLE>
(Continued)
Page 5
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ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1996
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<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest....................................................... $ 11,688 $ 13,701
Cash paid during the year for taxes.......................................................... 1,999 --
Noncash financing and investing activities:
Property and equipment acquired by capital lease......................................... 69,094 6,700
Fair value of capital stock issued to purchase Miracle Mountain International, Inc....... -- 120,000
SNSI Asset Purchase:
Fair value of assets acquired..................................................... (84,063) --
Fair value of covenant not to compete............................................. (500,000) --
Purchase price in excess of tangible assets acquired and covenant not to compete.. (1,490,378) --
Fair value of common stock issuance............................................... 800,000 --
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Cash paid to purchase SNSI assets................................................. (1,274,441) --
=========== ==========
Acquisition of Chambre International, Inc.:
Fair value of assets acquired..................................................... (84,802) --
Fair value of covenant not to compete............................................. (20,000) --
Purchase price in excess of tangible assets acquired and covenant not to compete.. (179,325) --
Fair value of common stock issuance............................................... 84,000 --
Liabilities assumed............................................................... 148,787 --
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Cash paid to purchase Chambre International, Inc.................................. $ (51,340) $ --
=========== ==========
</TABLE>
(Concluded)
SEE NOTES TO FINANCIAL STATEMENTS.
Page 6
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ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
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 consolidated financial
statements of the Company, and notes thereto, for the year ended December
31, 1996.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented. Operating
results of the interim period are not necessarily indicative of the amounts
that will be reported for the year ending December 31, 1997. Certain
reclassifications have been made to prior period balances to conform with
the presentation for the current period.
2. ACQUISITIONS
Pursuant to a Stock Purchase Agreement having an effective date of January
31, 1997 (the "Purchase Agreement"), the Company acquired all of the issued
and outstanding capital stock of Chambre International, Inc., a Texas
corporation ("CII"), and CII became a wholly-owned subsidiary of the
Company (the "CII Acquisition"). The CII Acquisition was closed on January
31, 1997, and was accounted for under the purchase method of accounting.
CII is a network marketer of various third-party manufactured cosmetics,
skin care and hair care products. In connection with the CII Acquisition,
the Company issued 6,482 shares of its common stock to the shareholders of
CII at closing and issued an additional 7,518 shares of its common stock to
the shareholders of CII on March 31, 1997, after determination of certain
liabilities.
In connection with the CII Acquisition, the excess of the purchase price of
$135,340, which includes $3,549 of transaction costs, over the negative
$63,985 fair market value of assets of CII acquired, net of liabilities
assumed, has been allocated $179,325 to goodwill and $20,000 to a covenant
not to compete. Goodwill and the covenant not to compete will be amortized
over 20 year and 47 month periods, respectively.
Pursuant to an Asset Purchase Agreement having an effective date of April
16, 1997 (the "Purchase Agreement"), the Company acquired all of the assets
of Stay 'N Shape International, Inc. ("SNSI"), Solution Products
International, Inc. ("SPII"), Nation of Winners, Inc. ("NWI"), Now
International, Inc. ("NII"), all Georgia corporations, (collectively SNSI,
SPII, NWI and NII are referred to as the "Selling Group"), free and clear
of any lien, charge, claim, pledge, security interest or other encumbrance
of any type or kind whatsoever, known or unknown (the "SNSI Asset
Purchase"). The SNSI Asset Purchase was closed on April 16, 1997, and was
accounted for under the purchase method of accounting. Each company in the
Selling Group is a network marketer of various third-party manufactured
nutritional supplements and was under common ownership.
In connection with the SNSI Asset Purchase, the Company paid cash of
$1,174,441 and issued 125,984 shares of the Company's common stock at
closing and agreed to either issue additional shares of the Company's
common stock having an aggregate market value equal to, or make cash
payments of, or at the Company's sole option any combination thereof,
$750,000 and $1,050,000 on or before June 29, 1998, and May 30, 1999,
respectively. The $750,000 aggregate market value of the additional shares
of the Company's common stock or cash payment shall be reduced by the
aggregate amount that gross revenues, net of returns and allowances, during
the 12-month period ended April 30, 1998, from (i) sales (other than
Choc-Quilizer/TM/) of the purchased network marketing organization, sales
to Market America, Inc. (an unrelated network marketing company) and sales
to retail outlet stores, are less than $2,500,000 and (ii) the Company's
sales of Choc-Quilizer/TM/ are less than $4,000,000 during such 12-month
period. Furthermore, the $1,050,000 aggregate market value of the
additional shares of the
Page 7
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Company's common stock or cash payment shall be reduced by the aggregate
amount that gross revenues, net of returns and allowances, during the 12-
month period ended March 31, 1999, from (i) sales (other than Choc-
Quilizer/TM/) of the purchased network marketing organization, sales to
Market America, Inc. and sales to retail outlet stores, are less than
$5,000,000 and (ii) the Company's sales of Choc-Quilizer/TM/ are less than
$8,000,000 during such 12-month period. The value of the Company's common
stock to be issued will be based upon the average of the closing prices of
the Company's common stock on the last three trading days of the month
preceding the month in which the applicable 12-month period ends.
In connection with the SNSI Asset Purchase, the excess of the purchase
price of $2,074,441, which includes $100,000 of transaction costs, over the
$84,063 fair market value of the assets acquired, has been allocated
$1,490,378 to goodwill and $500,000 to two covenants not to compete.
Goodwill and the covenants not to compete will be amortized over 20 and 10
year periods, respectively.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the company and the Selling Group as
if the acquisition had occurred at the beginning of 1996 and 1997, with pro
forma adjustments to give effect to amortization of goodwill together with
the related income tax effect.
<TABLE>
<CAPTION>
-------------------------------------------------------------
Year Ended Six Months Ended
December 31, 1996 June 30, 1997
-------------------------------------------------------------
<S> <C> <C>
Net sales................. $8,506,938 $5,319,869
Net earnings.............. 711,006 127,168
Net earnings per share.... 0.25 0.04
-------------------------------------------------------------
</TABLE>
3. STOCK OPTIONS
The Company established the Advantage Marketing Systems, Inc. 1995 Stock
Option Plan (the "Plan") in June 1995. The Plan provides for the issuance
of incentive and nonincentive stock options with or without stock
appreciation rights to employees and consultants of the Company, including
employees who also serve as directors of the Company. The total number of
shares of the Company's common stock authorized and reserved for issuance
under the Plan is 1,125,000. During the six months ended June 30, 1997, the
Company issued 146,750 options under the Plan. As of June 30, 1997, 146,750
options had been granted under the Plan.
4. ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128-Earnings Per
Share, which is effective for the Company's year ending December 31, 1997.
The statement establishes standards for computing and presenting earnings
per share. Adoption of SFAS No. 128 is not expected to have a material
effect on the Company's consolidated financial position or results of
operations, but will result in changes to the calculation of earnings per
share.
Also in February 1997, the FASB issued SFAS No. 129-Disclosure of
Information about Capital Structure, which is effective for the Company's
year ending December 31, 1997. The statement establishes standards for
disclosing information about a reporting company's capital structure.
Adoption of SFAS No. 129 relates to disclosure within the financial
statements and will not have a material effect on the Company's financial
statements.
In June 1997, the FASB issued SFAS No. 130-Reporting Comprehensive Income
which is effective for the Company's year ending December 31, 1998. The
statement addresses the reporting and displaying of comprehensive income
and its components. Earnings per share will only be reported for net
income and not for comprehensive income. The Company has not had adequate
time to determine the differences between comprehensive income and net
income.
Also in June 1997, the FASB issued SFAS No. 131-Disclosures about Segments
of an Enterprise and Related
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Information. SFAS No. 131 modifies current segment reporting requirements
and establishes, for public companies, criteria for reporting disclosures
about a company's products and services, geographic areas and major
customers in annual and interim financial statements. The Company will
adopt SFAS No. 131 for the year ending December 31, 1998.
5. WARRANT MODIFICATION OFFERING AND RIGHTS OFFERING
On January 31, 1997, the Company distributed, at no cost, non-transferable
rights ("Rights") to the holders of record of shares of its common stock,
par value $.0001 per share. The Rights entitled the holders (the "Rights
Holders") to subscribe for and purchase up to 2,148,191 units (each unit
consisting of one share of common stock and one 1997-A warrant) for the
price of $6.80 per unit (the "Rights Offering"). The record date holders
of the Company's common stock received one Right for each share of common
stock held by them as of the record date. The Rights expired on March 17,
1997. Pursuant to the Rights, Rights Holders could purchase one unit for
each Right held.
Concurrent with the Rights Offering, the Company elected to redeem all of
its outstanding Class A and Class B common stock Purchase Warrants (the
"Public Warrants") for $.0008 per warrant (the "Warrant Redemption") on
March 17, 1997. However, in connection with the Warrant Redemption, the
Company, pursuant to modification of the terms of the Public Warrants,
offered to the Public Warrant holders (the "Warrant Holders") the right to
exercise the Public Warrants to purchase units, each comprised of one share
of common stock and one 1997-A warrant, at an exercise price of $6.00 per
unit (the "Warrant Modification Offering").
The share of common stock and 1997-A warrant comprising each unit were
separately transferable immediately after the sale of the units to the
Rights Holders and Warrant Holders. Each 1997-A warrant is exercisable at
any time 90 days after January 16, 1997, and on or before January 31, 1999,
to purchase one share of common stock for $12.00, subject to adjustment in
certain events, and may be redeemed by the Company at any time upon 30
days' notice, at a price of $.0001 per 1997-A warrant.
The units in the offerings described above were offered on a best efforts
basis by the Company and its officers and directors, without commissions,
selling fees or direct or indirect remuneration. The Rights Holders and
Warrant Holders were not required to pay any brokerage commissions or fees
with respect to the exercise of their Rights or Public Warrants. The
Company paid all charges and expenses of the subscription and warrant
agents.
Proceeds to the Company from the Warrant Modification Offering and the
Rights Offering (the "Offerings") were $2,154,357. Accumulated offering
costs of $323,076 were charged against the net proceeds from these
offerings. Pursuant to the Offerings the Company issued 337,211 shares of
common stock and a corresponding number of 1997-A warrants.
* * * * * *
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
COMPARISON OF SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
- ------------------------------------------------------------
Net sales during the six months ended June 30, 1997 increased by $1,939,000, or
69.3 percent, to $4,736,000 from $2,797,000 during the six months ended June 30,
1996. The increase was principally attributable to expansion of the Company's
network of independent distributors and increased sales of the Company's weight
management, dietary supplement and personal care products. Through the Miracle
Mountain International, Inc. ("MMI") Acquisition (which was consummated on May
31,1996), CII Acquisition (which was consummated on January 31, 1997) and the
SNSI Asset Purchase (which was consummated on April 16, 1997), the Company added
74 products to its product line and acquired 6,790 distributors. The
distributors acquired in connection with the MMI Acquisition, the CII
Acquisition and the SNSI Asset Purchase contributed $216,000, $257,000 and
$361,000, respectively, to the increase between the two periods. During the six
months ended June 30, 1997, the Company made aggregate net sales of $4,651,000
to 13,100 active distributors, compared to aggregate sales during the same
period in 1996 of $2,422,000 to 6,000 active distributors. At June 30, 1997,
the Company had approximately 19,000 "active" distributors compared to
approximately 10,100 at June 30, 1996. A distributor is considered to be
"active" if he or she has made a product purchase of $60 or more from the
Company within the previous 12 months. Sales per distributor decreased from $46
to $42 for the six months ended June 30, 1997, compared to the same period in
1996. This decrease was due to the increase in the number of active
distributors as a result of the CII Acquisition and SNSI Asset Purchase (which
were consummated on January 31, 1997 and April 16, 1997, respectively), which
new distributors did not contribute sales during the full six months ended June
30, 1997.
Cost of sales during the six months ended June 30, 1997, increased by
$1,500,200, or 74.9 percent, to $3,502,200 from $2,002,000 during the same
period in 1996. This increase was attributable to an increase of (i) $977,800
in distributor bonuses due to special promotions designed to expand the
Company's distributor network, (ii) $392,800 in the cost of products sold, and
(iii) $129,600 in shipping costs. Total cost of sales, as a percentage of net
sales, increased to 73.9 percent during the six months ended June 30, 1997, from
71.6 percent during the same period in 1996 due to an increase in distributor
bonuses as a percentage of net sales to 46.5 percent from 43.7 percent, offset
by a decrease in cost of products sold to 23.3 percent of net sales from 25.5
percent due to price reductions obtained from manufacturers of the Company's
products. During periods of growth, it is anticipated that the Company will
from time to time offer promotions to distributors to increase sales and their
income, which if successful will result in increases in distributor bonuses and
temporary increases in cost of sales.
The Company's gross profit increased $439,000, or 55.2 percent, to $1,234,000
for the six months ended June 30, 1997 from $795,000 for the same period in
1996. The gross profit decreased as a percentage of net sales to 26.1 percent
of net sales from 28.4 percent. The decrease in the Company's gross profit
margin resulted from the increase in distributor bonuses during the more recent
period which increased at a faster rate than net sales.
Marketing, distribution and administrative expenses increased $436,000, or 70.8
percent, to $1,052,000 during the six months ended June 30, 1997, from $616,000
during the same period in 1996. This increase was attributable to expansion of
the Company's administrative infra-structure necessary to support increased
levels of sales. Payroll and employee costs increased by $255,000 during the
six months ended June 30, 1997, as compared to the same period in 1996, due to
the increase in full-time employees to 31 during the last quarter of 1996, as
compared to 16 full-time employees during the first quarter of 1996. The
balance of the increase in marketing, distribution and administrative expenses
resulted from the higher level of activity and corresponding increases in
variable costs, such as postage, telephone, and supplies.
Income before taxes increased $14,700, or 8.1 percent, to $196,300 during the
six months ended June 30, 1997, from $181,600 during the same period in 1996.
Income before taxes as a percentage of net sales decreased to 4.1 percent during
the six months ended June 30, 1997, from 6.5 percent during the same period in
1996, primarily as a result of the decline in the Company's gross profit margin.
Income taxes were $74,520 during the six months ended June 30, 1997, while
during the same period of 1996 there was no income tax expense. The Company
recognized a one-time tax benefit of approximately
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$500,000 in 1996 primarily related to the reversal of a deferred tax valuation
allowance related to the expected future tax benefits to be realized from
operating loss carryforwards. As a result, the Company has begun reporting
income tax expense for financial reporting purposes.
Net income decreased $59,800, or 32.9 percent, to $121,800 during the six months
ended June 30, 1997, from $181,600 during the same period in 1996. This
decrease in net income was primarily the result of the decrease in the Company's
gross profit margin combined with the recording of income tax expense for
financial reporting purposes during the six months ended June 30, 1997. Net
income as a percentage of net sales decreased to 2.5 percent during the six
months ended June 30, 1997, from 6.5 percent during the same period in 1996.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
- --------------------------------------------------------------
Net sales during the three months ended June 30, 1997, increased by $1,223,000
or 83.0 percent to $2,697,000 from $1,474,000 during the three months ended June
30, 1996. The increase was principally attributable to expansion of the
Company's network of independent distributors and increased sales of the
Company's weight management, dietary supplement and personal care products.
Through the MMI Acquisition (which was consummated on May 31,1996), CII
Acquisition (which was consummated on January 31, 1997) and the SNSI Asset
Purchase (which was consummated on April 16, 1997), the Company added 74
products to its product line and acquired 6,790 distributors. The distributors
acquired in connection with the MMI Acquisition, the CII Acquisition and the
SNSI Asset Purchase contributed $102,000, $180,000 and $361,000, respectively,
to the increase between the two periods. During the three months ended June 30,
1997, the Company made aggregate sales of these products of $2,657,000 to 11,200
active distributors, compared to aggregate sales during the same period in 1996
of $1,279,000 to 5,400 active distributors. At June 30, 1997, the Company had
19,000 "active" independent distributors compared to 10,100 at June 30, 1996. A
distributor is considered to be "active" if he or she has made a product
purchase of $60 or more from the Company within the previous 12 months. Sales
per distributor decreased from $49 to $47 for the three months ended June 30,
1997 compared to the same period in 1996. This decrease was due to the increase
in the number of active distributors as a result of the SNSI Acquisition (which
was consummated on April 16, 1997), while the Company did not have the benefit
of the sales of such distributors during the full three months ended June 30,
1997.
Cost of sales during the three months ended June 30, 1997, increased by $901,200
or 86.1 percent to $1,948,000 from $1,047,000 during the same period in 1996.
This increase was attributable to an increase of (i) $551,900 in distributor
bonuses due to special promotions designed to expand the Company's distributor
network, and (ii) $257,300 in the cost of products sold, and (iii) $92,000 in
shipping costs. Total cost of sales, as a percentage of net sales, increased to
72.3 percent during the three months ended June 30, 1997, from 71.0 percent
during the same period in 1996 due to an increase in distributor bonuses as a
percentage of net sales to 44.3 percent from 43.6 percent as a result of various
promotions designed to expand the Company's distributor network, offset by a
decrease in cost of products sold to 23.4 percent from 25.4 percent due to price
reductions obtained from manufacturers of the Company's products. During
periods of growth, it is anticipated that the Company will from time to time
offer promotions to distributors to increase sales and their income, which if
successful will result in increases in distributor bonuses.
The Company's gross profit increased $321,000 or 75.2 percent to $748,000 for
the three months ended June 30, 1997, from $427,000 for the same period in 1996.
The gross profit decreased as a percentage of net sales to 27.7 percent from
29.0 percent. The decrease in the Company's gross profit margin resulted from
the increase in cost of sales as a percentage of net sales.
Marketing, distribution and administrative expenses increased $320,000 or 97.9
percent to $647,000 during the three months ended June 30, 1997, from $327,000
during the same period in 1996. This increase was attributable to expansion of
the Company's administrative infra-structure necessary to support increased
levels of sales. Payroll and employee costs increased by $161,00 during the
three months ended June 30, 1997, as compared to the same period in 1996, due to
the increase in full-time employees to 31 during the last quarter of 1996, as
compared to 16 full-time employees during the same period in 1996. The balance
of the increase in marketing, distribution and administrative expenses resulted
from the higher level of activity and corresponding increases in variable costs,
such as postage, telephone, and supplies.
Page 11
<PAGE>
Income before taxes increased $9,900 or 9.9 percent to $109,800 during the three
months ended June 30, 1997, from $99,900 during the same period in 1996. Income
before taxes as a percentage of net sales decreased to 4.1 percent during the
three months ended June 30, 1997, from 6.8 percent during the same period in
1996, primarily as a result of the decline in the Company's gross profit margin.
Income taxes were $41,698 during the three months ended June 30, 1997, while
during the same period of 1996 there was no income tax expense. The Company
recognized a one-time tax benefit of approximately $500,000 in 1996 primarily
related to the reversal of a deferred tax valuation allowance related to the
expected future tax benefits to be realized from operating loss carryforwards.
As a result, the Company has begun reporting income tax expense for financial
reporting purposes.
Net income decreased $31,800 or 31.8 percent to $68,100 during the three months
ended June 30, 1997, from $99,900 during the same period in 1996. This decrease
in net income was primarily the result of the decrease in the Company's gross
profit margin combined with the recording of income tax expense for financial
reporting purposes during the three months ended June 30, 1997. Net income as a
percentage of net sales decreased to 2.5 percent during the three months ended
June 30, 1997, from 6.8 percent during the same period in 1996.
Accounting Standards Issued But Not Yet Adopted
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128-Earnings Per Share,
which is effective for the Company's year ending December 31, 1997. The
statement establishes standards for computing and presenting earnings per share.
Adoption of SFAS No. 128 is not expected to have a material effect on the
Company's consolidated financial position or results of operations, but will
result in changes to the calculation of earnings per share.
Also in February 1997, the FASB issued SFAS No. 129-Disclosure of Information
about Capital Structure, which is effective for the Company's year ending
December 31, 1997. The statement establishes standards for disclosing
information about a reporting company's capital structure. Adoption of SFAS No.
129 relates to disclosure within the financial statements and will not have a
material effect on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 130-Reporting Comprehensive Income which
is effective for the Company's year ending December 31, 1998. The statement
addresses the reporting and displaying of comprehensive income and its
components. Earnings per share will only be reported for net income and not for
comprehensive income. The Company has not had adequate time to determine the
differences between comprehensive income and net income.
Also in June 1997, the FASB issued SFAS No. 131-Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 modifies current segment
reporting requirements and establishes, for public companies, criteria for
reporting disclosures about a company's products and services, geographic areas
and major customers in annual and interim financial statements. The Company
will adopt SFAS No. 131 for the year ending December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Prior to completion of the offerings described below, the Company's primary
source of liquidity was net cash provided by operating activities and
shareholder loans. The Company does not have any outside debt-based liquidity
sources.
On January 31, 1997, the Company distributed, at no cost, 2,148,191 non-
transferable rights ("Rights") to its shareholders of record on such date. Each
of the Rights entitled the holder to purchase one unit (consisting of one share
of Common Stock and one 1997-A Warrant) on or before March 17, 1997 for $6.80
per unit (the "Rights Offering"). Concurrently with the Rights Offering, the
Company redeemed its outstanding Class A and Class B Common Stock Purchase
Warrants (the "Public Warrants") for $.0008 per warrant (the "Warrant
Redemption") effective on March 17, 1997. In connection with the Warrant
Redemption, the Company modified the terms of the Public Warrants and offered to
holders of the Public Warrants (the "Warrant Holders") the right to exercise
each of the Public Warrants for the purchase of one unit (consisting of one
share of Common Stock and one 1997-A Warrant), at an exercise price of $6.00 per
unit (the "Warrant Modification Offering"). Proceeds to the Company from the
Warrant Modification Offering and the Rights Offering (the "Offerings") were
$2,154,357. Accumulated offering costs of $323,076 were charged against the
proceeds of the Offerings. Pursuant to the
Page 12
<PAGE>
Offerings, the Company issued 337,211 units, consisting of shares of Common
Stock and 1997-A Warrants.
At June 30, 1997, the Company had working capital of $840,200, compared to
$16,000 at December 31, 1996. The increase was primarily related to the net
proceeds from the Offerings. Management believes that its cash and cash
equivalents and cash flows from operations will be sufficient to fund its
working capital needs over the next 12 months. During the six months ended June
30, 1997, net cash used by operating activities was $175,900, net cash used by
investing activities was $1,475,900 (consisting primarily of the SNSI Asset
Purchase), and net cash provided by financing activities was $2,093,900
(consisting primarily of proceeds from the Offerings less payment of deferred
offering costs). This represents an average monthly negative cash flow from
operating activities of $29,300. The Company had a net increase in cash during
this period of $442,100. The Company's working capital needs over the next 12
months consist primarily of marketing, distribution and administrative expenses.
The Company made non-interest bearing advances to the John Hail Agency, Inc.
("JHA"), a company controlled by John W. Hail, the Chief Executive Officer and a
major shareholder of the Company, of $22,000 during the year ended December 31,
1996. During the six months ended June 30, 1997 and the year ended December 31,
1996, JHA made repayments to the Company of $6,390 and $6,141, respectively.
Effective June 30, 1996, the Company adopted a policy to not make any further
advances to JHA, and JHA executed a promissory note payable to the Company in
the principal amount of $73,964, bearing interest at eight percent per annum and
payable in 60 installments of $1,499 per month, including interest.
In connection with the SNSI Asset Purchase, the Company agreed to make
installment purchase price payments of $750,000 and $1,050,000 by June 29, 1998
and May 30, 1999, respectively, either by deliveries of additional shares of the
Company's Common Stock or by cash payments or any combination thereof. The
$750,000 installment payment shall be reduced by the aggregate amount that gross
revenues, net of returns and allowances, during the 12-month period ended April
30, 1998, from (i) sales (other than sales of Choc-Quilizer) of the purchased
network marketing organization, sales to Market America, Inc. (an unrelated
network marketing company) and sales to retail outlet stores, are less than
$2,500,000 and (ii) the Company's sales of Choc-Quilizer are less than
$4,000,000 during such 12-month period. Furthermore, the $1,050,000 installment
payment shall also be reduced by the aggregate amount that gross revenues, net
of returns and allowances, during the 12-month period ended March 31, 1999, from
such sales are less than $5,000,000 and less than $8,000,000, respectively,
during such 12-month period. The value of the Common Stock to be issued and
delivered, if any, will be based upon the average of the closing prices of the
Common Stock on the last three trading days of the month preceding the month in
which the applicable 12-month period ends.
Page 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
-----------------
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
EXHIBITS: None.
REPORTS ON FORM 8-K:
The Company filed a Form 8-K with the Commission on May 1, 1997.
Included in the report was "Item 2. Acquisition or Disposition of
Assets". The Company acquired all of the assets of Stay 'N Shape
International, Inc., Now International, Inc., Solution Products
International, Inc., and Nation of Winners, Inc., all Georgia
corporations, free and clear of any lien, charge, claim, pledge,
security interest or other encumbrance of any type on April 16, 1997.
The Company filed a Form 8-K/A Amendment No. 1 on June 25, 1997, which
contained audited combined financial statements for the years ended
December 31, 1996 and 1995, unaudited combined financial statements for
the three months ended March 31, 1997 and 1996, and unaudited pro forma
financial information for Stay 'N Shape International, Inc., Now
International, Inc., Solution Products, Inc. and Nation of Winners,
Inc.
The Company filed a Form 8-K with the Commission on June 25, 1997.
Included in the report was "Item 5. Other Events". The Company included
within this Report the unaudited consolidated balance sheet of the
Company at April 30, 1997 and unaudited consolidated statement of
income for the four months ended April 30, 1997, and unaudited notes to
the consolidated financial statements.
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: August 13, 1997 By: /s/ Roger P. Baresel
------------------ -----------------------------
Roger P. Baresel
President
Page 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 611,641
<SECURITIES> 0
<RECEIVABLES> 227,648
<ALLOWANCES> 25,804
<INVENTORY> 663,987
<CURRENT-ASSETS> 1,691,891
<PP&E> 867,128
<DEPRECIATION> 375,199
<TOTAL-ASSETS> 5,001,895
<CURRENT-LIABILITIES> 851,725
<BONDS> 268,458
0
0
<COMMON> 268
<OTHER-SE> 3,881,444
<TOTAL-LIABILITY-AND-EQUITY> 5,001,895
<SALES> 4,736,408
<TOTAL-REVENUES> 4,751,240
<CGS> 3,502,298
<TOTAL-COSTS> 4,554,225
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,825
<INCOME-PRETAX> 196,313
<INCOME-TAX> 74,520
<INCOME-CONTINUING> 121,793
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 121,793
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
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