<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 September 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
September 30, 1997 0-22279
- ------------------ ----------------------
ADVANTAGE MARKETING SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Oklahoma 73-1323256
- ---------------------------- ----------------------------
(State or Other Jurisdiction (IRS Employer Identification
of Incorporation or Organization) Number)
2601 N.W. Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112
- --------------------------------------------------------------------------------
(Address of Principal Offices) (Zip Code)
(405) 842-0131
- --------------------------------------------------------------------------------
(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 2,680,081
- ------------------------------ -----------------------------
Title of Class Number of Shares outstanding
at September 30, 1997
Exhibit Index appears on page 17.
--
Page 1 of 18
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ADVANTAGE MARKETING SYSTEMS, INC.
---------------------------------
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
----------------------------------------
Table of Contents
-----------------
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.......................... 12
Part II - Other Information............................................ 17
Page 2
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
------ ------------------ ----------------
<S> <C> <C>
CURRENT ASSETS:
Cash............................................................................ $ 357,052 $ 169,569
Receivables - net of allowance of $25,804 at each period end.................... 89,199 52,013
Receivable from affiliate....................................................... 13,846 13,042
Commission advances............................................................. 100,541 44,821
Inventory....................................................................... 907,567 217,945
Deferred income taxes........................................................... 146,046 157,853
---------- -----------
Total current assets........................................................ 1,614,251 655,243
COMMISSION ADVANCES............................................................. -- 4,341
RECEIVABLES..................................................................... 18,194 18,000
RECEIVABLE FROM AFFILIATE....................................................... 44,293 54,780
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $395,869 and $327,344, respectively......................... 629,704 377,190
GOODWILL, Net................................................................... 1,728,073 109,232
COVENANTS NOT TO COMPETE, Net................................................... 535,901 52,222
DEFERRED INCOME TAXES........................................................... 274,385 341,760
DEFERRED OFFERING COSTS......................................................... 281,995 175,848
OTHER ASSETS.................................................................... 181,284 1,725
---------- -----------
Total Assets................................................................ $5,308,080 $ 1,790,341
========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
CURRENT LIABILITIES:
Accounts payable................................................................ $ 352,049 $ 268,433
Accrued commissions and bonuses................................................. 357,097 178,597
Accrued other expenses.......................................................... 243,115 69,286
Accrued promotion expense....................................................... -- 46,370
Notes payable................................................................... 24,152 9,446
Capital lease obligations....................................................... 109,446 66,758
---------- -----------
Total current liabilities................................................... 1,085,859 638,890
LONG-TERM LIABILITIES:
Notes payable................................................................... 87,876 19,049
Capital lease obligations....................................................... 241,943 210,973
---------- -----------
Total Liabilities............................................................... 1,415,678 868,912
---------- -----------
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............................................................. (927,682) (1,060,165)
---------- -----------
Total stockholders' equity...................................................... 3,892,402 921,429
---------- -----------
Total liabilities and stockholders' equity.................................. $5,308,080 $ 1,790,341
========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
Page 3
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -------------------------------
1997 1996 1997 1996
------------ -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net sales....................................... $2,889,906 $1,640,501 $7,635,321 $4,439,042
Cost of sales................................... 2,057,733 1,104,500 5,472,819 3,003,642
---------- ---------- ---------- ----------
Gross profit................................ 832,173 536,001 2,162,502 1,435,400
Marketing, distribution and administrative
expenses....................................... 818,616 428,994 1,957,755 1,147,894
---------- ---------- ---------- ----------
Income from operations...................... 13,557 107,007 204,747 287,506
Other income (expense):
Interest, net................................... 803 (1,496) 1,810 (9,359)
Other income.................................... 3,188 504 7,303 9,507
---------- ---------- ---------- ----------
Total other income (expense)................ 3,991 (992) 9,113 148
---------- ---------- ---------- ----------
INCOME BEFORE TAXES............................. 17,548 106,015 213,860 287,654
INCOME TAX EXPENSE (BENEFIT).................... 6,857 (443,149) 81,377 (443,149)
---------- ---------- ---------- ----------
NET INCOME...................................... $ 10,691 $ 549,164 $ 132,483 $ 730,803
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES........................... 3,457,135 3,176,000* 3,457,135 3,176,000*
NET INCOME PER COMMON SHARE..................... $ NIL $ .17* $ .04 $ .23*
</TABLE>
* Restated for one-for-eight reverse stock split effective October 29, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
Page 4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1997 1996
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................................... $ 132,483 $ 730,803
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization............................................... 170,078 53,955
Deferred income tax......................................................... 79,182 (443,149)
Write off deferred offering costs........................................... -- 15,000
Changes in assets and liabilities which provided (used) cash:
Inventory................................................................... (560,996) (207,183)
Receivables, advances and prepaids.......................................... (58,489) (35,899)
Accounts payable and accrued commissions, bonuses, and expenses............. 20,465 196,848
----------- ---------
Net cash (used) provided by operating activities......................... (217,277) 310,375
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................................................. (130,568) (62,531)
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............................................................ (106,803) --
Advances to affiliate............................................................... -- (22,000)
Repayment of advances to affiliate.................................................. 9,683 3,040
----------- ---------
Net cash used by investing activities.................................... (1,553,469) (137,594)
----------- ---------
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.................................................. (240,703) (89,489)
Payment on notes payable............................................................ (9,194) (3,659)
Principal payment on capital leases................................................. (67,211) (9,484)
Payment on notes payable - stockholder.............................................. -- (64,271)
----------- ---------
Net cash provided (used) by financing activities......................... 1,958,229 (166,903)
----------- ---------
NET INCREASE IN CASH................................................................ 187,483 5,878
BEGINNING CASH BALANCE.............................................................. 169,569 112,087
----------- ---------
ENDING CASH BALANCE................................................................. $ 357,052 $ 117,965
=========== =========
</TABLE>
(Continued)
Page 5
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1997 1996
----------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.............................................. $ 21,104 $ 18,414
Cash paid during the year for income taxes.......................................... 2,195 --
Noncash financing and investing activities:
Property and equipment acquired by capital lease................................ 140,869 --
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 issued........................................ 800,000 --
----------- --------
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 (179,325) --
compete.................................................................
Fair value of common stock issued........................................ 84,000 --
Liabilities assumed...................................................... 148,787 --
----------- --------
Cash paid to purchase Chambre International, Inc......................... $ (51,340) $ --
=========== ========
</TABLE>
(Concluded)
SEE NOTES TO FINANCIAL STATEMENTS.
Page 6
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
(FORMERLY AMS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 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 fair 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
Page 7
<PAGE>
May 30, 1999, respectively. The $750,000 aggregate fair 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) 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 aggregate fair 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 March 31, 1999, from (i) sales
(other than Choc-Quilizer) 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 are less than
$8,000,000 during such 12-month period. The fair 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 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>
------------------------------------------------------------------------------
Nine Months Ended
Year Ended September 30,
December 31, 1996 1997
-----------------------------------------------------------------------------
<S> <C> <C>
Net sales $8,506,938 $8,218,782
Net earnings 711,006 144,446
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 nine months ended September 30,
1997, the Company issued 146,750 options under the Plan. As of September
30, 1997, 146,750 options had been granted under the Plan.
Page 8
<PAGE>
The following table summarizes the Company's stock option activity for the
nine months ended September 30, 1997 (as restated for the one-for-eight
reverse split in October 1996):
<TABLE>
<CAPTION>
1997 EXERCISE PRICE
<S> <C> <C>
Options outstanding,
beginning of year 1,528,927 $1.60 - 6.48
Options granted
during the year 146,750 6.00
Options exercised
during the year 37,500 1.60
2,500 2.00
6,945 2.16
---------
46,945
---------
Options cancelled
during the year 125,000 4.96
---------
Options outstanding,
end of year 1,503,732 $1.60 - 6.48
---------
</TABLE>
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 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.
Page 9
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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.
6. SUBSEQUENT EVENTS
In September 1995, the Oklahoma Department of Securities commenced an
investigation of the Company with respect to a number of issues, the most
prominent of which relates to the AMS Distributor Stock Pool (the "Pool").
The Pool, under which the Company's independent distributors were permitted
to participate on a voluntary basis, was formed in 1990. Participants made
contributions to the Pool and, from such contributions, the administrator
of the Pool purchased on a monthly basis the Company's Common Stock in the
over-the-counter market for the participants. All purchase transactions
were executed and effected through a registered broker-dealer. All records
of ownership of the Common Stock held by the Pool were maintained at the
offices of the Company. The Pool only purchased shares of Common Stock and
did not sell shares on behalf of the participants. As of October 31, 1997,
the Pool held approximately 224,082 shares of Common Stock for and on
behalf of the participants. Each Participant has sole voting rights with
respect to those shares of Common Stock held for such participant's
benefit. In the event a participant desires to sell the Common Stock held
for his benefit by the Pool, certificates representing such shares are
delivered to such participant for the purpose of effecting such sale. The
Oklahoma Department of Securities took the position that the offer and sale
of participation rights in the Pool violated the registration provisions of
the Oklahoma Securities Act. During October 1997, the Company ceased
accepting
Page 10
<PAGE>
additional contributions to the Pool and effecting purchase transactions in
the Common Stock. On November 4, 1997, the Company, John W. Hail, Curtis H.
Wilson, Sr. and Roger P. Baresel, directors and executive officers of the
Company, entered into an agreement with the Administrator of the Oklahoma
Department of Securities in settlement of the investigation without any
action having been taken against the Company and its officers and
directors. Pursuant to such agreement, John W. Hail reimbursed the
Department its costs of the investigation without entitlement to
reimbursement by the Company or any of its other officers and directors.
Under the terms of such agreement, the Company and Messrs. Hail, Wilson and
Baresel agreed to notify the Department of any proposed offer or sale of
additional securities by the Company or each of Messrs. Hail, Wilson and
Baresel pursuant to any registration exemption under the Oklahoma
Securities Act, for a period of three years from November 6, 1997.
On November 6, 1997, pursuant to a firm underwriting, the Company sold
1,495,000 Units. The public offering price on each Unit was $4.50. Each
Unit consists of one share of the Company's Common Stock, $.0001 par value
per share, (the "Common Stock") and one Redeemable Common Stock Purchase
Warrant (the "Warrants") exercisable to purchase one share of Common Stock.
The Common Stock and Warrants comprising the Units will separate on
December 8, 1997, or such later date as determined in the sole discretion
of Paulson Investment Company, Inc. (the "Separation Date"), following
appropriate prior notice by the Company to the holders of the Units. Prior
to the Separation Date, each share of Common Stock and each Warrant
comprising a Unit will trade only as a Unit. On and after the Separation
Date, the Common Stock and Warrants comprising the Units will trade only as
separate securities. Each Warrant initially entitles the holder thereof to
purchase one share of Common Stock for an exercise price of $5.40. The
Warrant exercise price will be adjusted on the 20th trading day following
the Separation Date to 120 percent of the average of the daily closing sale
prices of the Common Stock as reported on the Nasdaq SmallCap Market during
the 20-day period, subject to adjustment in certain events. Unless earlier
redeemed, the Warrants will be exercisable at any time on and after the
Separation Date until November 6, 2002. The outstanding Warrants may be
redeemed by the Company after the Separation Date, for $0.25 per Warrant,
on not less than 30 days' written notice, at any time that the closing sale
price per share of Common Stock, as reported on the Nasdaq SmallCap Market,
closes at or above 200 percent of the Warrant exercise price, as adjusted,
for a period of 20 consecutive trading days.
As of November 13, 1997, there are 337,211 1997-A Warrants outstanding,
all of which were issued in connection with the Company's Warrant
Modification Offering and the Rights Offering which closed on March 17,
1997. The Company anticipates that, pursuant to its rights under the 1997-
A Warrant Agreement, the Company will (i) extend the exercise period of the
1997-A Warrants to permit their exercise on or before the period ending
November 6, 2002, and (ii) reduce the exercise price of the 1997-A Warrants
to the same exercise price of the Warrants comprising in part the Units.
The Units in the offering described above were offered by several
Underwriters represented by Paulson Investment Company, Inc. and Joseph
Charles & Assoc., Inc. (the "Representatives") in return for an
underwriting discount and commission of eight percent. In addition, the
Company sold and issued to the Representatives the Representatives'
Warrants. The Representatives' Warrants are exercisable for a period of
four years beginning one year from November 6, 1997. The Representatives'
Warrants are exercisable to purchase up to 130,000 Units at a price of
$5.40 per Unit. The Representatives' Warrants are nontransferable except
to one of the Underwriters or to any individual who is either a partner or
an officer of an Underwriter, or by will or the laws of descent and
distribution. Paulson Investment Company, Inc. was paid at closing a non-
accountable expense allowance equal to two percent of the aggregate price
to the public of the Units sold in this offering.
Proceeds to the Company from this offering were approximately $6,050,000.
The Company will charge the accumulated offering costs of the offering
against the net proceeds from the offering. The Company estimates that the
accumulated offering costs will be approximately $800,000.
* * * * * *
Page 11
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
- ------------------------------------------------------------------
Net sales during the nine months ended September 30, 1997, increased by
$3,196,000, or 72.0 percent, to $7,635,000 from $4,439,000 during the nine
months ended September 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 $140,000, $390,000
and $755,000, respectively, to the increase between the two periods. During the
nine months ended September 30, 1997, the Company made aggregate net sales of
$7,530,000 to 17,300 distributors, compared to aggregate net sales during the
same period in 1996 of $4,317,000 to 8,100 distributors. At September 30, 1997,
the Company had approximately 20,600 "active" distributors compared to
approximately 8,800 at September 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 per month
decreased from $59 to $48 for the nine months ended September 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
nine months ended September 30, 1997.
Cost of sales during the nine months ended September 30, 1997, increased by
$2,469,200, or 82.2 percent, to $5,472,800 from $3,003,600 during the same
period in 1996. This increase was attributable to an increase of (i) $1,505,600
in distributor bonuses due to special promotions designed to expand the
Company's distributor network, (ii) $750,900 in the cost of products sold due to
an improvement in the quality of products, and (iii) $212,700 in shipping costs
due to an increase from the shipping company. Total cost of sales, as a
percentage of net sales, increased to 71.7 percent during the nine months ended
September 30, 1997, from 67.7 percent during the same period in 1996 due to an
increase in distributor bonuses as a percentage of net sales to 45.3 percent
from 43.9 percent, an increase in cost of products sold to 22.0 percent of net
sales from 20.9 percent, and an increase in cost of shipping to 4.4 percent of
net sales from 2.8 percent. 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 $727,000, or 50.7 percent, to $2,162,000
for the nine months ended September 30, 1997 from $1,435,000 for the same period
in 1996. The gross profit decreased as a percentage of net sales to 28.3
percent of net sales from 32.3 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 $810,000, or 70.6
percent, to $1,958,000 during the nine months ended September 30, 1997, from
$1,148,000 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 $503,000
during the nine months ended September 30, 1997, as compared to the same period
in 1996, due to the increase in full-time employees to 30 during the first
quarter of 1997, 38 during the second quarter of 1997 and 47 during the third
quarter of 1997 as compared to 16, 17 and 17 respectively during the same
periods 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.
Page 12
<PAGE>
Income before taxes decreased $73,800, or 25.7 percent, to $213,900 during the
nine months ended September 30, 1997, from $287,700 during the same period in
1996. Income before taxes as a percentage of net sales decreased to 2.8 percent
during the nine months ended September 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 $81,377 during the nine months ended September
30, 1997, while during the same period of 1996 there was an income tax benefit
of $443,149. 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 $598,300, or 81.9 percent, to $132,500 during the nine
months ended September 30, 1997, from $730,800 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 nine months ended September 30, 1997
versus a tax benefit for the same period in 1996. Net income as a percentage of
net sales decreased to 1.7 percent during the nine months ended September 30,
1997, from 16.5 percent during the same period in 1996.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
- -------------------------------------------------------------------
Net sales during the three months ended September 30, 1997, increased by
$1,249,000 or 76.1 percent to $2,890,000 from $1,641,000 during the three months
ended September 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 a total of $496,000 to the increase between the
two periods. During the three months ended September 30, 1997, the Company made
aggregate net sales of these products of $2,855,000 to 12,400 distributors,
compared to aggregate net sales during the same period in 1996 of $1,599,000 to
5,754 distributors. At September 30, 1997, the Company had 20,600 "active"
independent distributors compared to 8,800 at September 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 per
month decreased from $93 to $77 for the three months ended September 30, 1997
compared to the same period in 1996. This decrease was due to an increase in
the percent of the Company's distributors participating in the Company's auto-
ship plan. During the three months ended September 30, 1997, the Company had
8,500 distributors on the auto-ship plan compared to 3,800 during the same
period in 1996.
Cost of sales during the three months ended September 30, 1997, increased by
$953,200 or 86.3 percent to $2,057,700 from $1,104,500 during the same period
in 1996. This increase was attributable to an increase of (i) $527,700 in
distributor bonuses due to special promotions designed to expand the Company's
distributor network, and (ii) $342,400 in the cost of products sold due to an
improvement in the quality of products, and (iii) $83,100 in shipping costs due
to an increase from the shipping company. Total cost of sales, as a percentage
of net sales, increased to 71.2 percent during the three months ended September
30, 1997, from 67.3 percent during the same period in 1996 due to an increase in
cost of products sold to 22.9 percent from 19.5 percent, an increase in shipping
costs to 4.9 percent from 3.5 percent and a decrease in distributor bonuses to
43.5 percent from 44.4 percent during the same period in 1996.
The Company's gross profit increased $296,000 or 55.2 percent to $832,000 for
the three months ended September 30, 1997, from $536,000 for the same period in
1996. The gross profit decreased as a percentage of net sales to 28.8 percent
from 32.7 percent. The decrease in the Company's gross profit margin resulted
from the increase in cost of sales as a percentage of net sales.
Page 13
<PAGE>
Marketing, distribution and administrative expenses increased $390,000 or 90.9
percent to $819,000 during the three months ended September 30, 1997, from
$429,000 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 $217,000
during the three months ended September 30, 1997, as compared to the same period
in 1996, due to the increase in full-time employees to 47 during the third
quarter of 1997, as compared to 17 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.
Income before taxes decreased $88,500 or 83.4 percent to $17,500 during the
three months ended September 30, 1997, from $106,000 during the same period in
1996. Income before taxes as a percentage of net sales decreased to 0.6 percent
during the three months ended September 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 and partially due to the increased cost of the Company's infra-
structure. Income taxes were $6,857 during the three months ended September 30,
1997, while during the same period of 1996 there was an income tax benefit of
$443,149. 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 $538,500 or 98.1 percent to $10,700 during the three months
ended September 30, 1997, from $549,200 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 September 30, 1997.
Net income as a percentage of net sales decreased to 0.4 percent during the
three months ended September 30, 1997, from 33.5 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.
Page 14
<PAGE>
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 Offerings, the Company issued
337,211 units, consisting of shares of Common Stock and 1997-A Warrants.
On November 6, 1997, pursuant to a firm underwriting, the Company sold 1,495,000
Units. The public offering price on each Unit was $4.50. Each Unit consists of
one share of the Company's Common Stock, $.0001 par value per share, (the
"Common Stock") and one Redeemable Common Stock Purchase Warrant (the
"Warrants") exercisable to purchase one share of Common Stock. The Common Stock
and Warrants comprising the Units will separate on December 8, 1997, or such
later date as determined in the sole discretion of Paulson Investment Company,
Inc. (the "Separation Date"), following appropriate prior notice by the Company
to the holders of the Units. Prior to the Separation Date, each share of Common
Stock and each Warrant comprising a Unit will trade only as a Unit. On and
after the Separation Date, the Common Stock and Warrants comprising the Units
will trade only as separate securities. Each Warrant initially entitles the
holder thereof to purchase one share of Common Stock for an exercise price of
$5.40. The Warrant exercise price will be adjusted on the 20th trading day
following the Separation Date to 120 percent of the average of the daily closing
sale prices of the Common Stock as reported on the Nasdaq SmallCap Market during
the 20-day period, subject to adjustment in certain events. Unless earlier
redeemed, the Warrants will be exercisable at any time on and after the
Separation Date until November 6, 2002. The outstanding Warrants may be
redeemed by the Company after the Separation Date, for $0.25 per Warrant, on not
less than 30 days' written notice, at any time that the closing sale price per
share of Common Stock, as reported on the Nasdaq SmallCap Market, closes at or
above 200 percent of the Warrant exercise price, as adjusted, for a period of 20
consecutive trading days.
As of November 13, 1997, there are 337,211 1997-A Warrants outstanding, all of
which were issued in connection with the Company's Warrant Modification Offering
and the Rights Offering which closed on March 17, 1997. The Company anticipates
that, pursuant to its rights under the 1997-A Warrant Agreement, the Company
will (i) extend the exercise period of the 1997-A Warrants to permit their
exercise on or before the period ending November 6, 2002, and (ii) reduce the
exercise price of the 1997-A Warrants to the same exercise price of the Warrants
comprising in part the Units.
The Units in the offering described above were offered by several Underwriters
represented by Paulson Investment Company, Inc. and Joseph Charles & Assoc.,
Inc. (the "Representatives") in return for an underwriting discount and
commission of eight percent. In addition, the Company sold and issued to the
Representatives the Representatives' Warrants. The Representatives' Warrants
are exercisable for a period of four years beginning one year from November 6,
1997. The Representatives' Warrants are exercisable to purchase up to 130,000
Units at a price of $5.40 per Unit. The Representatives' Warrants are
nontransferable except to one of the Underwriters or to any individual who is
either a partner or an officer of an Underwriter, or by will or the laws of
descent and distribution. Paulson Investment Company, Inc. was paid at closing
a non-accountable expense allowance equal to two percent of the aggregate price
to the public of the Units sold in this offering.
Page 15
<PAGE>
Proceeds to the Company from this offering were approximately $6,050,000. The
Company will charge the accumulated offering costs of the offering against the
net proceeds from the offering. The Company estimates that the accumulated
offering costs will be approximately $800,000.
At September 30, 1997, the Company had working capital of $528,000, compared to
$16,000 at December 31, 1996. The increase was primarily related to the net
proceeds from the Offerings. During the nine months ended September 30, 1997,
net cash used by operating activities was $217,200, net cash used by investing
activities was $1,553,500 (consisting primarily of the SNSI Asset Purchase), and
net cash provided by financing activities was $1,958,200 (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
$24,100. The Company had a net increase in cash during this period of $187,500.
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 nine months ended September 30, 1997 and the year ended
December 31, 1996, JHA made repayments to the Company of $9,683 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.
The Company has numerous computer systems which were developed employing six
digit date structures. Where date logic requires the year 2000 or beyond, such
date structures may produce inaccurate results. Management has implemented a
program to comply with year 2000 requirements on a system-by-system basis. The
program includes extensive systems testing and is expected to be completed by
June of 1998, at which time the Company's computer systems will be year 2000
compliant. Each of the systems has a solution that is potentially unique and
often dependent on third-party software and developers. A failure on the part
of the Company to ensure that its computer systems are year 2000 compliant could
have a material adverse effect on the Company's operation.
Page 16
<PAGE>
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. LEGAL PROCEEDINGS
-----------------
In September 1995, the Oklahoma Department of Securities commenced an
investigation of the Company with respect to a number of issues, the
most prominent of which relates to the AMS Distributor Stock Pool (the
"Pool"). The Pool, under which the Company's independent distributors
were permitted to participate on a voluntary basis, was formed in 1990.
Participants made contributions to the Pool and, from such
contributions, the administrator of the Pool purchased on a monthly
basis the Company's Common Stock in the over-the-counter market for the
participants. All purchase transactions were executed and effected
through a registered broker-dealer. All records of ownership of the
Common Stock held by the Pool were maintained at the offices of the
Company. The Pool only purchased shares of Common Stock and did not
sell shares on behalf of the participants. As of October 31, 1997, the
Pool held approximately 224,082 shares of Common Stock for and on
behalf of the participants. Each Participant has sole voting rights
with respect to those shares of Common Stock held for such
participant's benefit. In the event a participant desires to sell the
Common Stock held for his benefit by the Pool, certificates
representing such shares are delivered to such participant for the
purpose of effecting such sale. The Oklahoma Department of Securities
took the position that the offer and sale of participation rights in
the Pool violated the registration provisions of the Oklahoma
Securities Act. During October 1997, the Company ceased accepting
additional contributions to the Pool and effecting purchase
transactions in the Common Stock. On November 4, 1997, the Company,
John W. Hail, Curtis H. Wilson, Sr. and Roger P. Baresel, directors and
executive officers of the Company, entered into an agreement with the
Administrator of the Oklahoma Department of Securities in settlement of
the investigation without any action having been taken against the
Company and its officers and directors. Pursuant to such agreement,
John W. Hail reimbursed the Department its costs of the investigation
without entitlement to reimbursement by the Company or any of its other
officers and directors. Under the terms of such agreement, the Company
and Messrs. Hail, Wilson and Baresel agreed to notify the Department of
any proposed offer or sale of additional securities by the Company or
each of Messrs. Hail, Wilson and Baresel pursuant to any registration
exemption under the Oklahoma Securities Act, for a period of three
years from November 6, 1997.
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
--------------------------------
None
Page 17
<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 13, 1997 By: /s/ Roger P. Baresel
------------------------- ------------------------------
Roger P. Baresel
President
Page 18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 357,052
<SECURITIES> 0
<RECEIVABLES> 191,336
<ALLOWANCES> 25,804
<INVENTORY> 907,567
<CURRENT-ASSETS> 1,614,251
<PP&E> 1,025,573
<DEPRECIATION> 395,869
<TOTAL-ASSETS> 5,308,080
<CURRENT-LIABILITIES> 1,085,859
<BONDS> 329,819
0
0
<COMMON> 268
<OTHER-SE> 3,892,402
<TOTAL-LIABILITY-AND-EQUITY> 5,308,080
<SALES> 7,635,321
<TOTAL-REVENUES> 7,666,825
<CGS> 5,472,819
<TOTAL-COSTS> 7,430,574
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,345
<INCOME-PRETAX> 213,860
<INCOME-TAX> 81,377
<INCOME-CONTINUING> 132,483
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 132,483
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
