<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 March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File Number
March 31, 1998 33-80629
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 4,249,383
Title of Class Number of Shares outstanding
at March 31, 1998
<PAGE>
Exhibit Index appears on page 18.
ADVANTAGE MARKETING SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE THREE MONTHS ENDED MARCH 31, 1998
Table of Contents
-----------------
<TABLE>
<S> <C>
Part I - Financial Information
Condensed Consolidated Balance Sheets. . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income. . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows. . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . 6
Management s Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . 13
Part II -Other Information. . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Certain, but not necessarily all, of such forward-looking statements
can be identified by the use of forward-looking terminology such as
"anticipates," "believes," "expects," "may," "will," or "should" or other
variations thereon, or by discussions of strategies that involve risks and
uncertainties. The actual results of the Company or industry results may be
materially different from any future results expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include general economic and business conditions; the ability of
the Company to implement its business and acquisition strategies; changes in
the network marketing industry and changes in consumer preferences;
competition; availability of key personnel; increasing operating costs;
unsuccessful advertising and promotional efforts; changes in brand awareness;
acceptance of new product offerings; and changes in, or the failure to comply
with, government regulations (especially food and drug laws and regulations);
the ability of the Company to obtain financing for future acquisitions; and
other factors.
Chambre-Registered Trademark-, Spark of Life-Registered Trademark-, Young at
Heart-Registered Trademark-, Co-Clenz-Registered Trademark-, Stay 'N
Shape-Registered Trademark- and Sine-eze-Registered Trademark- are registered
trademarks of the Company, and Choc-Quilizer-TM- is a trademark of Tinos,
L.L.C.
Page 2
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
March 31, December 31,
ASSETS 1998 1997
------ ----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . $ 5,713,459 $ 5,775,276
Receivables - net of allowance of $28,500 and
$25,800, respectively . . . . . . . . . . . . 163,410 184,915
Receivables from affiliates. . . . . . . . . . 125,371 14,124
Commission advances. . . . . . . . . . . . . . 35,260 59,268
Inventory. . . . . . . . . . . . . . . . . . . 761,649 812,125
Deferred income taxes. . . . . . . . . . . . . 82,224 85,224
Other assets . . . . . . . . . . . . . . . . . 75,041 68,432
----------- ------------
Total current assets . . . . . . . 6,956,414 6,999,364
RECEIVABLES. . . . . . . . . . . . . . . . . . . 25,033 15,079
RECEIVABLES FROM AFFILIATES. . . . . . . . . . . 36,945 40,656
PROPERTY AND EQUIPMENT, Net. . . . . . . . . . . 768,929 695,896
GOODWILL, Net. . . . . . . . . . . . . . . . . . 1,675,782 1,700,909
COVENANTS NOT TO COMPETE, Net. . . . . . . . . . 501,681 518,791
DEFERRED INCOME TAXES. . . . . . . . . . . . . . 272,511 354,693
OTHER ASSETS . . . . . . . . . . . . . . . . . . 122,611 10,918
----------- ------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . $10,359,906 $10,336,306
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . $ 273,823 $ 202,220
Accrued commissions and bonuses. . . . . . . . 219,419 325,077
Accrued other expenses . . . . . . . . . . . . 195,961 183,921
Notes payable. . . . . . . . . . . . . . . . . 24,776 26,304
Capital lease obligations. . . . . . . . . . . 122,871 118,801
----------- ------------
Total current liabilities. . . . . 836,850 856,323
LONG-TERM LIABILITIES:
Notes payable. . . . . . . . . . . . . . . . . 76,862 82,440
Capital lease obligations. . . . . . . . . . . 192,461 221,148
----------- ------------
Total liabilities . . . . . . . . 1,106,173 1,159,911
----------- ------------
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
4,249,383 and 4,249,383 shares, respectively 425 425
Paid-in capital. . . . . . . . . . . . . . . . 10,180,109 10,180,109
Notes receivable for exercise of options . . . (74,000) (74,000)
Accumulated deficit. . . . . . . . . . . . . . (790,921) (930,139)
----------- ------------
Total capital and accumulated deficit. . 9,315,613 9,176,395
----------- ------------
Less cost of treasury stock (20,000
shares, common) . . . . . . . . . . . . . . . (61,880) --
----------- ------------
Total stockholders' equity . . . . . . . 9,253,733 9,176,395
----------- ------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . $10,359,906 $10,336,306
----------- ------------
----------- ------------
</TABLE>
See notes to condensed consolidated financial statements.
Page 3
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
Three Months Ended
March 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . $2,700,731 $2,048,771
Cost of sales. . . . . . . . . . . . . . . . . . 1,689,820 1,464,828
---------- ----------
Gross profit . . . . . . . . . . . . . . . . 1,010,911 583,943
Marketing, distribution and administrative
expenses . . . . . . . . . . . . . . . . . . . 855,701 493,954
---------- ----------
Income from operations . . . . . . . . . . . 155,210 89,989
Other income (expense):
Interest, net. . . . . . . . . . . . . . . . . . 67,084 (4,176)
Other income . . . . . . . . . . . . . . . . . . 2,106 652
---------- ----------
Total other income (expense) . . . . . . . . 69,190 (3,524)
---------- ----------
INCOME BEFORE TAXES. . . . . . . . . . . . . . . 224,400 86,465
TAX EXPENSE. . . . . . . . . . . . . . . . . . . 85,182 32,822
---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . $ 139,218 $ 53,643
---------- ----------
---------- ----------
Net income per common share. . . . . . . . . . . $ .03 $ .02
---------- ----------
---------- ----------
Net income per common share - assuming dilution. $ .03 $ .02
---------- ----------
---------- ----------
Weighted average common shares outstanding . . . 4,249,383 2,160,550
---------- ----------
---------- ----------
Weighted average common shares outstanding -
assuming dilution . . . . . . . . . . . . . . . 4,496,841 3,112,978
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
Page 4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
March 31, March 31,
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 139,218 $ 53,643
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . 86,904 32,794
Deferred taxes . . . . . . . . . . . . . . . . . . . . . 85,182 32,822
Changes in assets and liabilities which (used)
provided cash:
Receivables and commission advances . . . . . . . . . 35,559 (36,302)
Inventory . . . . . . . . . . . . . . . . . . . . . . 50,476 (23,459)
Accounts payable and accrued expenses . . . . . . . . 66,456 45,410
---------- ---------
Net cash provided by operating activities. . . . . 463,795 104,908
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . (113,309) --
Advances to affiliates. . . . . . . . . . . . . . . . . . . . (110,963) (751)
Repayment of receivables from affiliates. . . . . . . . . . . 3,426 9,118
Purchase of other assets. . . . . . . . . . . . . . . . . . . (118,302) --
---------- ---------
Net cash (used in) provided by investing
activities . . . . . . . . . . . . . . . . . . . (339,148) 8,367
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock. . . . . . . . . . . . -- 726,361
Purchase of common stock. . . . . . . . . . . . . . . . . . . (61,880) --
Payment of deferred offering costs. . . . . . . . . . . . . . (88,471) (147,228)
Payment on notes payable. . . . . . . . . . . . . . . . . . . (7,106) (2,896)
Principal payment on capital lease obligations. . . . . . . . (29,007) (16,278)
---------- ---------
Net cash (used in) provided by financing
activities . . . . . . . . . . . . . . . . . . . (186,464) 559,959
---------- ---------
NET (DECREASE) INCREASE IN CASH. . . . . . . . . . . . . . . . . (61,817) 673,234
CASH AND CASH EQUIVALENTS, BEGINNING . . . . . . . . . . . . . . 5,775,276 169,568
---------- ---------
CASH AND CASH EQUIVALENTS, ENDING. . . . . . . . . . . . . . . . $5,713,459 $ 842,802
---------- ---------
---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest . . . . . . . . . . . . 10,666 3,674
Cash paid during the period for income taxes . . . . . . . . . . -- --
Noncash financing and investing activities:
Proceeds from offerings held in escrow by stock transfer
agent . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,464,032
Property and equipment acquired by capital lease. . . . . . . 4,389 --
Acquisition of Chambre' International, Inc.:
Fair value of assets acquired . . . . . . . . . . . . . . . . -- (63,985)
Common stock issuance, advances and transaction
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (135,341)
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited condensed 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 condensed
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, 1997.
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, 1998. Certain
reclassifications have been made to prior period balances to conform with
the presentation for the current period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION-The condensed consolidated financial statements
include the accounts of Advantage Marketing Systems, Inc. and its wholly
owned subsidiaries, Miracle Mountain International, Inc. and Chambre'
International, Inc. (the "Company"). All significant intercompany accounts
have been eliminated.
NATURE OF BUSINESS -The Company markets a product line of consumer oriented
products in the weight management, dietary supplement and personal care
categories that are produced by various manufacturers. The Company sells
its product line through a network of full and part-time independent
distributors developed by the Company.
The Company also sells supplies and materials to its independent
distributors.
USE OF ESTIMATES -The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
REVENUE RECOGNITION -Program revenue is recognized when products are
shipped or services are rendered. Sales of training and promotional
material to the sales force are recorded as revenue when the goods are
shipped.
SALES RETURNS -All of the Company's products include a customer
satisfaction guarantee. Company products may be returned within 30 days of
purchase for a full refund or credit toward the purchase of another Company
product. The Company also has a buy-back policy where by it will
repurchase products sold to an independent distributor (subject to a
restocking fee) provided that the distributor resigns from the Company and
returns the product within 12 months of original purchase in marketable
condition. For the
Page 6
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
three months ended March 31, 1998 and 1997, the cost of products returned
to the Company is included in net sales and at each period was three
percent of gross sales.
CASH AND CASH EQUIVALENTS -Cash and cash equivalents consist of cash in
banks and all short term investments with initial maturities of three
months or less.
INVENTORY -Inventory consists of consumer product inventory, and training
and promotional material such as video tapes, cassette tapes and paper
supplies held for sale to customers and independent distributors.
Inventory is stated at the lower of cost or market. Cost is determined on
a first-in, first-out method.
INTANGIBLES -Intangible assets consist of goodwill and covenants not to
compete. Goodwill represents the excess of cost over the fair value of the
net assets acquired pursuant to the Miracle Mountain International, Inc.
("MMI"), Chambre' International, Inc. ("CII") and Stay 'N Shape
International, Inc. ("SNSI") acquisitions. The Company amortizes goodwill
from the acquisition of MMI over seven years and from the acquisitions of
CII and SNSI over twenty years. Covenants not to compete are being
amortized over the life of the contracts. Goodwill amortization for the
three months ended March 31, 1998 and 1997 was $25,127 and $5,750,
respectively. Covenant amortization for the three months ended March 31,
1998 and 1997, was $17,110 and $4,184, respectively.
PROPERTY AND EQUIPMENT -Property and equipment are stated at cost or, in
the case of leased assets under capital leases, at the fair value of the
leased property and equipment, less accumulated depreciation and
amortization. Property and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets of three
to seven years. Assets under capital leases and leasehold improvements are
amortized over the lesser of the term of the lease or the life of the
asset.
LONG-LIVED ASSETS -Management of the Company assesses recoverability of its
long-lived assets, including goodwill, whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable through future cash flows generated by that asset.
EARNINGS PER SHARE -In 1997, the Company adopted the Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 128, EARNINGS PER SHARE, and has restated earnings per share
for all periods presented in accordance with that Statement. Earnings per
common share is computed based upon net income divided by the weighted
average number of common shares outstanding during each period. Earnings
per common share -assuming dilution is computed based upon net income
divided by the weighted average number of common shares outstanding during
each period adjusted for the effect of dilutive potential common shares
calculated using the treasury stock method. The following is a
reconciliation of the common shares used in the calculations of earnings
per common share and earnings per common share -assuming dilution:
<TABLE>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Weighted average common shares
outstanding:
For the three months ended March 31, 1998:
Earnings per common share:
Income available to common stockholders . . $139,218 4,249,383 $.03
Earnings per common share - assuming dilution: ----
Page 7
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
Options. . . . . . . . . . . . . . . . . . 247,458
Warrants . . . . . . . . . . . . . . . . . -- --
-------- ---------
Income available to common stockholders plus
assumed conversions. . . . . . . . . . . . $139,218 4,496,841 $.03
-------- --------- -----
For the three months ended March 31, 1997:
Earnings per common share:. . . . . . . . . .
Income available to common stockholders . . $ 53,643 2,160,550 $.02
-------- --------- -----
Earnings per common share - assuming dilution:
Options. . . . . . . . . . . . . . . . . . -- 927,866
Warrants . . . . . . . . . . . . . . . . . -- 24,561
-------- ---------
Income available to common stockholders
plus assumed conversions. . . . . . . . . . $ 53,643 3,112,978 $.02
-------- --------- -----
</TABLE>
Options to purchase 481,708 shares of common stock ranging from $2.70 to
$6.00 per share were outstanding at March 31, 1998 but were not included in
the computation of earnings per common share -assuming dilution because the
options' exercise price was greater than the average market price of the
common shares during the period. There were no antidilutive options to
purchase shares of common stock at March 31, 1997.
Warrants to purchase 1,832,211 shares at $3.40 were outstanding at March
31, 1998, but were not included in the computation of earnings per common
share -assuming dilution because the warrants' exercise price was greater
than the average market price of the common shares during the period.
There were no antidilutive warrants to purchase shares of common stock at
March 31, 1997.
RECENTLY ADOPTED ACCOUNTING STANDARDS -In February, 1997, the FASB issued
SFAS No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. SFAS No.
129 establishes standards for disclosure of information regarding an
entity's capital structure. The adoption of SFAS No. 129 in 1997 did not
affect the Company's capital structure disclosures.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
which establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in
financial statements. In addition, SFAS No. 130 requires the Company to
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately in the stockholders' equity section of the consolidated balance
sheet. The Company adopted SFAS No. 130 on January 1, 1998 as required and
has no items of other comprehensive income to disclose.
Also in June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes
reporting standards for public companies concerning annual and interim
financial statements of their operating segments and related information.
Operating segments are components of a company about which separate
financial information is available that is regularly evaluated by the chief
operating decision maker(s) in deciding how to allocate resources and
assess performance. The Standard sets criteria for reporting disclosures
about a company's products and services, geographic areas and major
customers. The Company has only one segment, as that term is
Page 8
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
defined in SFAS No. 131, therefore, the adoption of SFAS No. 131 in 1998
did not affect the Company's disclosures.
INCOME TAXES -The Company uses an asset and liability approach to account
for income taxes. Deferred income taxes are recognized for the tax
consequences of temporary differences and carryforwards by applying enacted
tax rates applicable to future years to differences between the financial
statement amounts and the tax bases of existing assets and liabilities. A
valuation allowance is established if, in management's opinion, it is more
likely than not that some portion of the deferred tax asset will not be
realized.
3. STOCKHOLDERS' EQUITY
COMMON STOCK -On March 4, 1998, the Company announced that it intends to
repurchase up to $1 million of the Common Stock in the open market for
cash. In connection with such repurchase, the Company filed with the
Securities and Exchange Commission pursuant to Section 13(e)(1) of the
Securities Exchange Act of 1934, as amended, an Issuer Tender Offer
Statement on March 4, 1998. As of March 31, 1998, the Company has
repurchased 20,000 shares of the Common Stock. The additional number of
shares of the Common Stock that may be purchased by the Company is not
determinable as of March 31, 1998 and will depend upon a number of factors,
including the market price of the Common Stock and the amount of funds
utilized for repurchase on each date of repurchase.
On November 12, 1997, the Company sold 1,495,000 shares of Common Stock and
1,495,000 Redeemable Common Stock Purchase Warrants in units consisting of
one share of Common Stock and one Redeemable Common Stock Purchase Warrant
from which the Company received net proceeds of $6,050,000. Accumulated
offering costs of approximately $720,000 were charged against the proceeds
of the offering.
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 in units 337,211 shares of Common Stock and 337,211 1997-A Warrants.
The Company's policy is to retain earnings to support the expansion of its
operations. The Board of Directors of the Company does not intend to pay
cash dividends on the Common Stock in the foreseeable future. Any future
cash dividends will depend on future earnings, capital requirements, the
Company's financial condition and other factors deemed relevant by the
Board of Directors.
COMMON STOCK OPTIONS -The following table summarizes the Company's stock
option activity for the three months ended March 31, 1998:
Page 9
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
Weighted-
Average
Exercise
1998 Price
--------- ---------
<S> <C> <C>
Options outstanding,
beginning of period. . . . . . . . . . . . . 1,439,583 $2.28
Options granted,
during the period. . . . . . . . . . . . . . --
---------
Options outstanding,
end of period . . . . . . . . . . . . . . . . 1,439,583 $2.28
---------
---------
</TABLE>
<TABLE>
Options Outstanding Options Exercisable
--------------------------------------- -------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 3/31/98 Life Price at 3/31/98 Price
- --------------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.60 - 2.70 1,309,583 4.9 years $2.14 963,233 $1.94
$3.60 - 6.00 130,000 2.5 years $3.69 130,000 $3.69
--------- ---------
$1.60 - 6.00 1,439,583 1,093,233
--------- ---------
--------- ---------
</TABLE>
COMMON STOCK WARRANTS -The following table summarizes the Company's common
stock warrants and their activity for the three months ended March 31,
1998:
<TABLE>
Warrants
Issued and Exercise
Outstanding Price Exercise Period
----------- -------- ---------------
<S> <C> <C> <C>
MARCH 31, 1998:
1997-A Warrants, beginning of period . . . . . . . . . . 337,211 $3.40 1/31/97 - 11/06/02
1997-A Warrants issued during the period . . . . . . . . --
---------
1997-A Warrants, end of period . . . . . . . . . . . . . 337,211
---------
---------
Redeemable Common Stock Purchase Warrants,
beginning of period . . . . . . . . . . . . . . . . . 1,495,000 $3.40 11/06/97 - 11/06/02
Redeemable Common Stock Purchase Warrants,
issued during the period. . . . . . . . . . . . . . . --
---------
Redeemable Common Stock Purchase Warrants,
end of period . . . . . . . . . . . . . . . . . . . . 1,495,000
---------
---------
</TABLE>
Each warrant entitles the holder to purchase one share of common stock. As
of January 8, 1998, the Company reduced the exercise price of the 1997-A
Warrants from $12.00 to $3.40 and extended the exercise period from January
31, 1999 to November 6, 2002.
Page 10
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
4. STOCK OPTION PLAN
During 1995, the Company approved the 1995 Stock Option Plan (the "Plan").
Under this Plan, options available for grant can consist of (I)
nonqualified stock options, (ii) nonqualified stock options with stock
appreciation rights attached, (iii) incentive stock options, and (iv)
incentive stock options with stock appreciation rights attached. The
Company has reserved 1,125,000 shares of the Company's common stock $.0001
par value, for the Plan. The Plan limits participation to employees,
independent contractors, and consultants. Nonemployee directors are
excluded from Plan participation. The option price for shares of stock
subject to this Plan is set by the Stock Option Committee of the Board of
Directors at a price not less than 85% of the market value of the stock on
the date of grant. No stock options shall be exercisable within six months
from the date of grant, unless under a Plan exception, nor more than ten
years after the date of grant. The Plan provides for the grant of stock
appreciation rights, which allow the holder to receive in cash, stock or
combination thereof, the difference between the exercise price and the fair
value of the stock at date of exercise. The fair value of stock
appreciation rights is charged to compensation expense. The stock
appreciation right is not separable from the underlying stock option or
incentive stock option originally granted and can only be exercised in
tandem with the stock option. During the year ended December 31, 1997, the
Company granted 173,850 net options under the Plan. No stock appreciation
rights are attached to any options outstanding. At March 31, 1998, the
Company had 1,439,583 stock options outstanding of which only 173,850 had
been issued pursuant to this plan.
5. COMMITMENTS AND CONTINGENCIES
RECENT REGULATORY DEVELOPMENTS - A significant portion of the Company's net
sales has been, and is expected to continue to be, dependent upon the
Company's AM-300 product. The Company's net sales of AM-300 represented
37.8 percent and 32.7 percent of net sales for the three months ended March
31, 1998 and 1997, respectively. One of the herbal ingredients in AM-300
is ephedra concentrate, which contains naturally occurring ephedrine.
Ephedrine products have been the subject of adverse publicity in the United
States and other countries relating to alleged harmful effects, including
the deaths of several individuals. Currently, the Company offers AM-300
only in the United States (except in certain states in which regulations
may prohibit or restrict the sale of such product). On April 10, 1996, the
Food and Drug Administration ("FDA") issued a statement warning consumers
not to purchase or ingest natural sources of ephedrine within dietary
supplements claiming to produce certain effects (none of which are claimed
for the Company's product). On June 4, 1997, the FDA proposed a regulation
which will, if it becomes effective as proposed, significantly limit the
ability of the Company to sell AM-300 and any other weight management
products which contain ephedra or ephedrine.
PRODUCT LIABILITY -The Company, like other marketers of products that are
intended to be ingested, faces an inherent risk of exposure to product
liability claims in the event that the use of its products results in
injury. The Company generally does not obtain contractual indemnification
from parties manufacturing its products. However, the Company has agreed
to indemnify Tinos, L.L.C., the licensor of Choc-Quilizer, against any
product liability claims arising from the Choc-Quilizer product marketed by
the Company, and the Company has agreed to indemnify Chemins against claims
arising from products manufactured by Chemins and marketed by the Company.
Historically, the Company has relied upon its manufacturer's product
liability insurance for coverage. The Company recently obtained product
liability insurance coverage in its own name. The limits of this coverage
are $4,000,000 per occurrence and $5,000,000
Page 11
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
aggregate. Although the Company has never had a product liability claim,
such claims against the Company could result in material losses to the
Company.
6. RELATED PARTY TRANSACTION
During the first quarter of 1998, the Company agreed to loan John W. Hail,
the Chief Executive Officer and a major shareholder of the Company, up to
$250,000. The loan is secured, bears interest at eight percent per annum
and is due on March 31, 1999. As of March 31, 1998, the balance due on
this loan was $110,963 plus interest. The Company believes that the terms
of the loan are comparable with those that could have been obtained from an
unaffiliated lender and the loan was unanimously approved by the Company's
board of directors.
7. PENDING REGISTRATION STATEMENT
On March 11, 1998, the Company filed a Registration Statement, file number
333-47801, with the Securities and Exchange Commission pursuant to which
the Company is seeking to register 5,000,000 stock purchase plan
participation interests ("Participation Interests") in the Advantage
Marketing Systems, Inc. Distributor Stock Purchase Plan (the "Plan"). The
Participation Interests will be offered to the distributors of the
Company's products and services ("Eligible Persons"). An Eligible Person
electing to participate in the Plan (a "Participant") will be entitled
through purchase of the Participation Interests to purchase in the open
market through the Plan, shares of common stock, $.0001 par value per share
(the "Common Stock"), previously issued by the Company. The Participation
Interests are non-transferable; therefore, a market for the Participation
Interests will not develop. The proceeds from sale of the Participation
Interests will become the Participants' contributions to the Plan which
will be used to purchase the Common Stock. Other than an annual service
fee of $5.00 per Participant and a transaction fee of $1.25 per month, the
Company will not receive any proceeds from the purchase of the Common Stock
by the Plan. The offering price of each Participation Interest will be
$1.00, and each Eligible Person will be required initially to purchase a
minimum of twenty-five Participation Interests upon electing to participate
in the Plan. As of March 31, 1998, the registration statement has not yet
been declared effective.
* * * * * *
Page 12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's business over the last three years has been significantly
affected by the recently completed MMI Acquisition, the CII Acquisition and
the SNSI Asset Purchase. As a result of these acquisitions, the Company
acquired 6,790 distributors and added 114 products to its product line.
MMI ACQUISITION. Effective May 31, 1996, the Company acquired all of the
outstanding capital stock of MMI, and MMI became a wholly-owned subsidiary of
the Company. MMI was a network marketer of various third-party manufactured
nutritional supplement products. In connection with the MMI Acquisition, the
Company issued to the shareholders of MMI 20,000 shares of Common Stock. The
Company added one product to its line and 1,690 additional distributors as a
result of the MMI Acquisition.
CII ACQUISITION. Effective January 31, 1997, the Company acquired all of the
issued and outstanding capital stock of CII, and CII became a wholly-owned
subsidiary of the Company. CII was 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 Common Stock to the
shareholders of CII at closing and issued an additional 7,518 shares of
Common Stock to the shareholders of CII on March 31, 1997, after
determination of certain liabilities. The Company added 74 products to its
line, 68 in the personal care category and six in the dietary supplement
category, and 2,100 additional distributors as a result of the CII
Acquisition.
SNSI ASSET PURCHASE. The Company purchased all of the assets, including the
network marketing organizations, of Stay 'N Shape International, Inc.,
Solution Products International, Inc., Nation of Winners, Inc., and Now
International, Inc. pursuant to an Asset Purchase Agreement dated April 16,
1997. In connection with the SNSI Asset Purchase, the Company paid cash of
$1,174,441 and issued 125,984 shares of 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 a cash payment of, or combination
thereof, $750,000 and $1,050,000 on or before June 29, 1998, and May 30,
1999, respectively, subject to reduction for variance from specified sales
targets. As a result of the SNSI Asset Purchase, the Company added 39
products to its line, 38 in the weight management and dietary supplement
categories and one in the personal care category, and 3,000 additional
distributors.
The following discussion and analysis presents the consolidated results of
operations of the Company and MMI since completion of the MMI Acquisition on
May 31, 1996, and of the Company and CII since completion of the CII
Acquisition on January 31, 1997, and gives effect to the SNSI Asset Purchase,
since its consummation on April 16, 1997.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, selected
results of operations for the three months ended March 31, 1998 and 1997,
which are derived from the unaudited consolidated financial statements of the
Company. The results of operations for the periods presented are not
necessarily indicative of the Company's future operations.
<TABLE>
For the Three Months Ended March 31,
------------------------------------------
1998 1997
-------------------- -------------------
Amount Percent Amount Percent
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . $2,700,731 100.0% $2,048,771 100.0%
Cost of sales. . . . . . . . . . . . 1,689,820 62.6 1,464,828 71.5
---------- ----- ---------- -----
Gross profit . . . . . . . . . . 1,010,911 37.4 583,943 28.5
Marketing, distribution and
administrative expenses . . . . . 855,701 31.7 493,954 24.1
---------- ----- ---------- -----
Income from operations. . . . . . 155,210 5.7 89,989 4.4
Page 13
<PAGE>
Other income (expense):. . . . . . .
Interest, net. . . . . . . . . . . . 67,084 2.5 (4,176) (.2)
Other income . . . . . . . . . . . . 2,106 .1 652 .0
---------- ----- ---------- -----
Total other income (expense). . . 69,190 2.6 (3,524) .2
---------- ----- ---------- -----
Income before income taxes . . . . . 224,400 8.3 86,465 4.2
Tax expense. . . . . . . . . . . . . 85,182 3.2 32,822 1.6
---------- ----- ---------- -----
Net income . . . . . . . . . . . . . $ 139,218 5.2% $ 53,643 2.6%
---------- ----- ---------- -----
---------- ----- ---------- -----
</TABLE>
The following table sets forth, as a percentage of net sales, selected cost of
sales detail for the three months ended March 31, 1998 and 1997, which are
derived from the unaudited consolidated financial statements of the Company.
<TABLE>
For the Three Months Ended March 31,
------------------------------------------
1998 1997
-------------------- -------------------
Amount Percent Amount Percent
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Commissions and bonuses. . . . . . . $1,077,191 39.9% $1,006,310 49.1%
Cost of products . . . . . . . . . . 526,263 19.5 385,122 18.8
Cost of shipping . . . . . . . . . . 86,366 3.2 73,396 3.6
---------- ----- ---------- -----
Cost of sales. . . . . . . . . . $1,689,820 62.6% $1,464,828 71.5%
---------- ----- ---------- -----
---------- ----- ---------- -----
</TABLE>
During 1998 and 1997, the Company experienced increases in net sales compared
to the preceding year. The increases were principally the result of
expansion of the Company's network of independent distributors and additions
to the Company's product line within the weight management, dietary
supplement and personal care categories. The Company expects to continue to
expand its network of independent distributors, which may result in increased
sales volume. However, there is no assurance that increased sales volume
will be achieved through expansion of the Company's network of independent
distributors, or that, if sales volume increases, the Company will realize
increased profitability.
COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
Net sales during the three months ended March 31, 1998, increased by
$651,960, or 31.8 percent, to $2,700,731 from $2,048,771 during the three
months ended March 31, 1997. 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 CII Acquisition (which was consummated on January
31, 1997) and the SNSI Asset Purchase (which was consummated on April 16,
1997), the Company added 113 products to its product line and acquired 5,100
distributors. The distributors acquired in connection with the CII
Acquisition and the SNSI Asset Purchase contributed $281,025 to the increase
between the two periods. During the three months ended March 31, 1998, the
Company made aggregate net sales of $2,672,901 to 11,774 distributors,
compared to aggregate net sales during the same period in 1997 of $2,017,105
to 7,549 distributors. At March 31, 1998, the Company had 25,300 "active"
distributors compared to 16,200 at March 31, 1997. A distributor is
considered to be "active" if he or she has made a product purchase of $50 or
more from the Company within the previous 12 months. Sales per distributor
per month decreased from $89 to $76 for the three months ended March 31,
1998, compared to the same period in 1997.
Cost of sales during the three months ended March 31, 1998, increased by
$224,992, or 15.4 percent, to $1,689,820 from $1,464,828 during the same
period in 1997. This increase was attributable to an increase of (i) $70,881
in distributor bonuses due to the increased level of sales, (ii) $141,141 in
the cost of products sold due to the increased level of sales, and (iii)
$12,970 in shipping costs due to the increased level of sales. Total cost of
sales, as a percentage of net sales, decreased to 62.6 percent during the
three months ended March 31, 1998, from 71.5 percent during the same period
in 1997 due to a decrease in distributor bonuses as a percentage of net sales
to 39.9 percent from 49.1 percent, an increase in cost of products sold to
19.5 percent of net sales from 18.8
Page 14
<PAGE>
percent, and a decrease in cost of shipping to 3.2 percent of net sales from
3.6 percent. During the three months ended March 31, 1997, the Company
offered significantly greater special promotions to distributors to increase
sales and their income, which resulted in increased distributor bonuses
compared to the three months ended March 31, 1998. 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 $426,968, or 73.1 percent, to $1,010,911
for the three months ended March 31, 1998 from $583,943 for the same period
in 1997. The gross profit increased as a percentage of net sales to 37.4
percent of net sales from 28.5 percent. The increase in the Company's gross
profit margin resulted from the decrease in cost of sales as a percentage of
net sales.
Marketing, distribution and administrative expenses increased $361,747, or
73.2 percent, to $855,701 during the three months ended March 31, 1998, from
$493,954 during the same period in 1997. 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
$120,440 during the three months ended March 31, 1998, as compared to the
same period in 1997, due to the increase in full-time employees to 37 during
the first quarter of 1998, from 30 during the first quarter of 1997. 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 $137,935, or 159.5 percent, to $224,400 during
the three months ended March 31, 1998, from $86,465 during the same period in
1997. Income before taxes as a percentage of net sales increased to 8.3
percent during the three months ended March 31, 1998, from 4.2 percent during
the same period in 1997, primarily as a result of the increase in the
Company's gross profit margin. Income taxes during the three months ended
March 31, 1998 and 1997 were $85,182 and $32,822, respectively.
Net income increased $85,575, or 159.5 percent, to $139,218 during the three
months ended March 31, 1998, from $53,643 during the same period in 1997.
This increase in net income was primarily the result of the increase in the
Company's gross profit margin. Net income as a percentage of net sales
increased to 5.2 percent during the three months ended March 31, 1998, from
2.6 percent during the same period in 1997.
SEASONALITY
No pattern of seasonal fluctuations exists due to the growth patterns that
the Company is currently experiencing. However, there can be no assurance
that the Company will not become subject to seasonal fluctuations in
operations.
YEAR 2000 COMPUTER SYSTEM COMPLIANCE
The Company has numerous computer systems which were developed employing six
digit data structures. Where date logic requires the year 2000 or beyond,
such data 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 during 1998, at which time management believes
the Company's computer systems will be year 2000 compliant. A failure of the
Company to ensure that its computer systems are year 2000 compliant could
have a material adverse effect on the Company's operations. The Company
estimates that the total cost of its program to make the Company's computer
systems year 2000 compliant is less than $25,000. The Company is in the
process of contacting its major suppliers to determine if their systems will
be year 2000 compliant on a timely basis.
Page 15
<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
stockholder loans. The Company does not have any significant outside
debt-based liquidity sources.
At March 31, 1998, the Company had working capital of $6,119,564, compared to
$6,143,041 at December 31, 1997. 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 three months ended
March 31, 1998, net cash provided by operating activities was $463,795, net
cash used in investing activities was $339,148, and net cash used in
financing activities was $186,464. This represented an average monthly
positive cash flow from operating activities of $154,598. The Company had a
net decrease in cash during this period of $61,817. The Company's working
capital needs over the next 12 months consist primarily of marketing,
distribution and administrative expenses and the repurchase of common stock.
On March 4, 1998, the Company announced that it intends to repurchase up to
$1 million of the Common Stock in the open market for cash. In connection
with such repurchase, the Company filed with the Securities and Exchange
Commission pursuant to Section 13(e)(1) of the Securities Exchange Act of
1934, as amended, an Issuer Tender Offer Statement on March 4, 1998. As of
March 31, 1998, the Company had repurchased 20,000 shares of the Common
Stock. The additional number of shares of the Common Stock that may be
purchased by the Company is not determinable as of March 31, 1998 and will
depend upon a number of factors, including the market price of the Common
Stock and the amount of funds utilized for repurchase on each date of
repurchase.
During the first quarter of 1998, the Company agreed to loan John W. Hail,
the Chief Executive Officer and a major shareholder of the Company, up to
$250,000. The loan is secured, bears interest at eight percent per annum and
is due on March 31, 1999. As of March 31, 1998, the balance due on this loan
was $110,963 plus interest. The Company believes that the terms of the loan
are comparable with those that could have been obtained from an unaffiliated
lender and the loan was unanimously approved by the Company's board of
directors.
The Company made non-interest bearing advances to the John Hail Agency, Inc.
("JHA"), a company controlled by the Chief Executive Officer of $22,000 and
$87,684 during the years ended December 31, 1996 and 1995, respectively.
During the years ended December 31, 1997 and 1996, JHA made repayments to the
Company of $13,042 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 with a principal balance of
$73,964, bearing interest at eight percent per annum and payable in 60
installments of $1,499 per month. The remaining principal balance of the
note at March 31, 1998 is $51,354.
On November 12, 1997, the Company sold 1,495,000 shares of Common Stock and
1,495,000 Redeemable Common Stock Purchase Warrants in units consisting of
one share of Common Stock and one Redeemable Common Stock Purchase Warrant
from which the Company received proceeds of $6,050,000. Accumulated offering
costs of approximately $720,000 were charged against the proceeds of the
offering. The Redeemable Common Stock Purchase Warrants are exercisable to
purchase one share of common stock for $3.40 on or before November 6, 2002.
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
Page 16
<PAGE>
offering costs of $323,076 were charged against the proceeds of the
Offerings. Pursuant to the Offerings, the Company issued in units 337,211
shares of Common Stock and 337,211 1997-A Warrants. As of January 8, 1998,
the Company reduced the exercise price of the 1997-A Warrants from $12.00 to
$3.40 and extended the exercise period from January 31, 1999 to November 6,
2002.
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 will 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. Based
upon current sales levels the Company believes that the $750,000 installment
payment will be reduced to zero and no payment will be required.
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 17
<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
None
Page 18
<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.
REGISTRANT:
ADVANTAGE MARKETING SYSTEMS, INC.
Date: May 13, 1998 By: /S/ ROGER P. BARESEL
------------------------------------
Roger P. Baresel, President,
Chief Financial and Accounting
Officer
Page 19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,713,459
<SECURITIES> 0
<RECEIVABLES> 191,910
<ALLOWANCES> 28,500
<INVENTORY> 761,649
<CURRENT-ASSETS> 6,956,414
<PP&E> 1,248,435
<DEPRECIATION> 479,506
<TOTAL-ASSETS> 10,359,906
<CURRENT-LIABILITIES> 836,850
<BONDS> 269,323
0
0
<COMMON> 425
<OTHER-SE> 9,253,308
<TOTAL-LIABILITY-AND-EQUITY> 10,359,906
<SALES> 2,700,731
<TOTAL-REVENUES> 2,779,269
<CGS> 1,689,820
<TOTAL-COSTS> 2,545,521
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,347
<INCOME-PRETAX> 224,400
<INCOME-TAX> 85,182
<INCOME-CONTINUING> 139,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 139,218
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 6-MOS
9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996
DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996
JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996
SEP-30-1996
<CASH> 112,087 169,569 223,775 181,799
117,965
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 39,784 77,817 49,799 42,701
38,578
<ALLOWANCES> 21,485 25,804 27,434 25,804
25,804
<INVENTORY> 98,621 217,945 160,572 289,561
305,804
<CURRENT-ASSETS> 283,341 655,243 471,279 574,389
454,800
<PP&E> 454,563 704,534 459,181 498,038
502,934
<DEPRECIATION> 294,766 327,344 300,045 311,174
326,002
<TOTAL-ASSETS> 532,996 1,790,341 737,325 1,104,207
1,504,733
<CURRENT-LIABILITIES> 454,075 638,890 580,352 732,980
591,966
<BONDS> 104,149 230,022 100,497 92,919
85,692
0 0 0 0
0
0 0 0 0
0
<COMMON> 212 214 1,698 1,714
214
<OTHER-SE> (25,440) 921,215 54,778 276,594
826,861
<TOTAL-LIABILITY-AND-EQUITY> 532,996 1,790,341 737,325 1,104,207
1,504,733
<SALES> 4,382,935 5,785,841 1,255,889 2,671,250
4,186,404
<TOTAL-REVENUES> 4,518,203 6,163,740 1,332,449 2,813,528
4,458,610
<CGS> 3,387,754 4,689,002 1,021,788 2,129,119
3,347,124
<TOTAL-COSTS> 4,245,497 5,827,658 1,243,386 2,617,644
4,151,534
<OTHER-EXPENSES> 0 0 0 0
0
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 22,998 10,538 7,359 13,848
19,422
<INCOME-PRETAX> 249,708 325,544 81,704 182,036
287,654
<INCOME-TAX> 0 (499,613) 0 0
(443,149)
<INCOME-CONTINUING> 249,708 825,157 81,704 182,036
730,803
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 249,708 825,157 81,704 182,036
730,803
<EPS-PRIMARY> .12 .39 .04 .09
.34
<EPS-DILUTED> .09 .26 .03 .06
.23
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<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 842,802 611,641 357,052
<SECURITIES> 0 0 0
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<ALLOWANCES> 25,804 25,804 25,804
<INVENTORY> 289,728 663,987 907,567
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<PP&E> 421,155 867,128 1,025,573
<DEPRECIATION> 350,204 375,199 395,869
<TOTAL-ASSETS> 4,033,782 5,001,895 5,308,080
<CURRENT-LIABILITIES> 853,213 851,725 1,085,859
<BONDS> 254,217 268,458 329,819
0 0 0
0 0 0
<COMMON> 253 268 268
<OTHER-SE> 2,926,099 3,881,444 3,892,402
<TOTAL-LIABILITY-AND-EQUITY> 4,033,782 5,001,895 5,308,080
<SALES> 1,950,134 4,736,408 7,635,321
<TOTAL-REVENUES> 2,052,795 4,751,240 7,666,825
<CGS> 1,575,270 3,502,298 5,472,819
<TOTAL-COSTS> 1,958,782 4,554,225 7,430,574
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 7,548 13,825 22,345
<INCOME-PRETAX> 86,465 196,313 213,860
<INCOME-TAX> 32,822 74,520 81,377
<INCOME-CONTINUING> 53,643 121,793 132,483
<DISCONTINUED> 0 0 0
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<CHANGES> 0 0 0
<NET-INCOME> 53,643 121,793 132,483
<EPS-PRIMARY> .02 .05 .05
<EPS-DILUTED> .02 .04 .04
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