<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, 1999
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, 1999 000-22279
- ----------------- ----------------------
ADVANTAGE MARKETING SYSTEMS, INC.
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(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
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(Address of Principal Offices) (Zip Code)
(405) 842-0131
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (i) has filed all reports required
to be filed by Section 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (ii) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $.0001 par value 4,141,014
- ------------------------------ ----------------------------
Title of Class Number of Shares outstanding
at May 5, 1999
Exhibit Index appears on page 18.
Page 1 of 19
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE THREE MONTHS ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
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
Item 2. Management's Discussion and Analysis or Plan of Operation...... 11
Part II - Other Information............................................ 18
</TABLE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the caption "Management's Discussion and Analysis or
Plan of Operation" 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 and its third party providers to adequately address
year 2000 issues; the ability of the Company to obtain financing for future
acquisitions; and other factors.
Chambre-R-, Spark of Life-R-, Young at Heart-R-, Co-Clenz-R-, Stay 'N Shape,
Sine-eze-R- and ToppFast-R- are registered trademarks of the Company, and
Choc-Quilizer-TM- is a trademark of Tinos, L.L.C.
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
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Item 1. FINANCIAL STATEMENTS
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
1999 1998
------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 5,508,710 $ 5,289,217
Receivables - net of allowance of $39,166 and $36,604, respectively........... 324,946 263,503
Receivable from affiliate..................................................... 259,701 293,936
Commission advances........................................................... -- --
Inventory..................................................................... 762,527 1,009,998
Deferred income taxes......................................................... 47,780 93,496
Other assets.................................................................. 100,345 100,345
----------- -----------
Total current assets.............................................. 7,004,009 7,050,495
RECEIVABLES..................................................................... 148,812 129,440
PROPERTY AND EQUIPMENT, Net..................................................... 1,244,206 1,090,280
GOODWILL, Net................................................................... 1,699,007 1,725,734
COVENANTS NOT TO COMPETE, Net................................................... 492,975 511,685
DEFERRED INCOME TAXES........................................................... -- 95,277
OTHER ASSETS.................................................................... 175,038 114,572
----------- -----------
TOTAL........................................................................... $10,764,047 $10,717,483
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 180,861 $ 60,172
Accrued commissions and bonuses............................................... 200,647 156,174
Accrued other expenses........................................................ 203,730 277,651
Accrued sales tax liability................................................... 371,569 616,735
Notes payable................................................................. 30,173 29,476
Capital lease obligations..................................................... 83,778 87,105
----------- -----------
Total current liabilities......................................... 1,070,758 1,227,313
LONG-TERM LIABILITIES:
Notes payable................................................................. 86,502 94,311
Capital lease obligations..................................................... 153,744 173,247
------------ ------------
Total liabilities................................................ 1,311,004 1,494,871
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 6)
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 4,275,514 shares; outstanding 4,141,014 shares ...................... 428 428
Paid-in capital............................................................... 10,180,106 10,180,106
Notes receivable for exercise of options...................................... (63,960) (63,960)
Accumulated deficit........................................................... (285,660) (516,091)
----------- -----------
Total capital and accumulated deficit.......................... 9,830,914 9,600,483
Less cost of treasury stock (134,500 shares, common).......................... (377,871) (377,871)
----------- -----------
Total stockholders' equity...................................... 9,453,043 9,222,612
----------- -----------
TOTAL........................................................................... $10,764,047 $10,717,483
=========== ===========
</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, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
---------------------------
<S> <C> <C>
Net sales................................................................. $ 4,391,930 $ 2,700,731
Cost of sales............................................................. 3,013,167 1,689,820
----------- -----------
Gross profit.......................................................... 1,378,763 1,010,911
Marketing, distribution and administrative expenses....................... 1,078,285 855,701
----------- -----------
Income from operations................................................ 300,478 155,210
Other income:
Interest, net............................................................. 70,946 67,084
Other income.............................................................. -- 2,106
----------- -----------
Total other income.................................................... 70,946 69,190
----------- -----------
INCOME BEFORE TAXES....................................................... 371,424 224,400
TAX EXPENSE............................................................... 140,993 85,182
----------- -----------
NET INCOME................................................................ $ 230,431 $ 139,218
=========== ===========
Net income per common share............................................... $ .06 $ .03
=========== ===========
Net income per common share - assuming dilution.......................... $ .05 $ .03
=========== ===========
Weighted average common shares outstanding................................ 4,141,014 4,249,383
=========== ==========
Weighted average common shares outstanding - assuming dilution............ 4,488,787 4,496,841
=========== ==========
</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, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 230,431 $ 139,218
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........................................... 123,462 86,904
Deferred taxes.......................................................... 140,993 85,182
Provision for bad debts................................................. 2,562 --
Changes in assets and liabilities which provided (used) cash:
Receivables and commission advances.................................. (83,377) 35,559
Inventory............................................................ 247,471 50,476
Other assets......................................................... (63,498) --
Accounts payable and accrued expenses................................ (153,925) 66,456
----------- -----------
Net cash provided by operating activities....................... 444,119 463,795
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................................... (228,919) (113,309)
Receivable from affiliate.................................................... -- (110,963)
Repayment of receivable from affiliate....................................... 34,235 3,426
Purchase of other assets..................................................... -- (118,302)
----------- -----------
Net cash used in investing activities .......................... (194,684) (339,148)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock.................................................. -- (61,880)
Payment of deferred offering costs........................................... -- (88,471)
Payment on notes payable..................................................... (7,112) (7,106)
Principal payment on capital lease obligations............................... (22,830) (29,007)
----------- -----------
Net cash used in financing activities.......................... (29,942) (186,464)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 219,493 (61,817)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................................... 5,289,217 5,775,276
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.......................................... $ 5,508,710 $ 5,713,459
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................ 6,894 10,666
Cash paid during the period for income taxes.................................... 6,000 --
Noncash financing and investing activities:
Property and equipment acquired by capital lease............................. -- 4,389
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 5
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(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 consolidated 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, 1998.
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,
1999.
2. EARNINGS PER SHARE
EARNINGS PER SHARE - 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>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding:
For the three months ended March 31, 1999:
Earnings per common share:
Income available to common stockholders................... $230,431 4,141,014 $.06
----
Earnings per common share - assuming dilution:
Options.................................................. -- 347,773
-------- ---------
Income available to common stockholders plus assumed
conversions..................................... $230,431 4,488,787 $.05
-------- --------- ----
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:
Options.................................................. -- 247,458
-------- ---------
Income available to common stockholders plus assumed
conversions..................................... $139,218 4,496,841 $.03
-------- --------- ----
</TABLE>
Page 6
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
Options to purchase 153,128 shares of common stock ranging from $2.70
to $3.60 per share and 481,708 shares of common stock ranging from
$2.70 to $6.00 per share were outstanding at March 31, 1999 and 1998,
respectively, but were not included in the computation of earnings per
common share - assuming dilution because the options' exercise prices
were greater than the average market price of the common shares.
Warrants to purchase 1,962,211 shares of common stock ranging from
$3.40 to $5.40 were outstanding at March 31, 1999 and 1998, but were
not included in the computation of earnings per common share - assuming
dilution because the warrants' exercise prices were greater than the
average market price of the common shares.
3. STOCKHOLDERS' EQUITY
Common Stock - On March 4, 1998, the Company announced it's intent to
repurchase up to $1 million of the Company's 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 December 31, 1998, the
Company had repurchased 134,500 shares of the Common Stock at a total
cost of $377,871. The Company has ceased making repurchases and the
last repurchase was made December 31, 1998.
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 AND OTHER WARRANTS - The following table
summarizes the Company's stock option and other warrants activity for
the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
THREE THREE
MONTHS WEIGHTED MONTHS WEIGHTED
ENDED AVERAGE ENDED AVERAGE
MARCH 31, EXERCISE MARCH 31, EXERCISE
1999 PRICE 1998 PRICE
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Options and other
warrants outstanding,
beginning of period...... 1,543,322 $2.09 1,439,583 $2.28
Options and other
warrants canceled
during the period......... (4,000) 2.70 -- --
--------- ---------
Options and other
warrants outstanding,
end of period............. 1,539,322 $2.09 1,439,583 $2.28
========== =========
</TABLE>
Page 7
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
COMMON STOCK WARRANTS - The following table summarizes the Company's
common stock warrants and their activity for the three months ended
March 31, 1999 and 1998:
<TABLE>
<CAPTION>
WARRANTS
ISSUED AND EXERCISE
OUTSTANDING PRICE EXERCISE PERIOD
----------- -------- ---------------
<S> <C> <C> <C>
March 31, 1999 and 1998:
1997-A Warrants........................................ 337,211 $3.40 01/31/97 - 11/06/02
=========
Redeemable Common Stock Purchase Warrants............... 1,495,000 $3.40 11/06/97 - 11/06/02
=========
Underwriters' Warrants ................................. 130,000 $5.40 11/12/98 - 11/12/02
---------
</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, to correspond more closely
to the terms of the Redeemable Common Stock Purchase Warrants.
As of January 6, 1998, the exercise price of the Redeemable Common
Stock Purchase Warrants was adjusted from $5.40 to $3.40.
There was no expense recognized in the Company's financial statements
relating to either of the warrant exercise price reductions as the
changes only affected allocations of additional paid-in capital because
the Redeemable Common Stock Purchase Warrants and the 1997-A Warrants
were issued in conjunction with equity offerings of the Company. The
reduced exercise prices exceeded the market value of the Company's
common stock on the date of the reduction.
The Redeemable Common Stock Purchase Warrants are subject to redemption
by the Company at $0.25 per warrant. All of the outstanding Redeemable
Common Stock Purchase Warrants must be redeemed if any are redeemed.
The Company may redeem the 1997-A Warrants for $0.0001 per warrant. Any
redemption of unexercised 1997-A Warrants would be for all such
outstanding warrants. The Underwriters' Warrants were issued in
connection with the sale of common stock and Redeemable Warrants in
November 1997 and were in addition to other fees paid to the
underwriters. The Underwriters' Warrants entitle the holder to purchase
one unit consisting of one share of the Company's common stock and one
Redeemable Common Stock Purchase Warrant.
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 may be
exercised 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
Page 8
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
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. No stock
appreciation rights are attached to any options outstanding. No options
were issued during the three months ended March 31, 1999 and 1998. At
March 31, 1999 and 1998, the Company had 1,539,322 and 1,439,583,
respectively, stock options outstanding of which only 437,589 and
173,850, respectively, had been issued pursuant to the Plan.
5. RELATED PARTIES
During the three months ended March 31, 1999 and 1998, the Company
received approximately $1,798 and $1,978, respectively, from Pre-Paid
Legal Services, Inc., a shareholder, for commissions on sales of
memberships for the services provided by Pre-Paid Legal Services, Inc.
During 1995, John W. Hail, an affiliate, entered into lease agreements
covering telephone equipment and related software and requiring monthly
rental payments. Such equipment and software are utilized exclusively
by the Company. During the three months ended March 31, 1998, the
Company made aggregate monthly payments pursuant to such lease
agreements of $4,857. As of December 31, 1998 the leases had been paid
in full.
On October 8, 1998, John W. Hail voluntarily surrendered an option to
purchase 100,000 shares of the Company's common stock for $2.70 per
share with an expiration date of May 20, 2007 in exchange for an option
having the same terms other than an exercise price of $1.75 per share
of common stock, which was equal to the fair value of the common stock
on the date of exchange. These options will become exercisable on April
8, 1999.
During the three months ended March 31, 1999 and 1998, the Company paid
Curtis H. Wilson, Sr., a Director of the Company, sales commissions of
$23,807 and $5,063, respectively. These commissions were based upon
purchases by Mr. Wilson and his downline distributors in accordance
with the Company's network marketing program in effect at the time of
the sales.
During the first quarter of 1998, the Company agreed to loan John W.
Hail, an affiliate, up to $250,000. Subsequently, the Company agreed to
loan up to an additional $75,000. The loans are secured, bear interest
at 8% per annum, and were due on March 31, 1999. The loans were
extended until March 31, 2000. As of March 31, 1999, the balance due on
these loans was $259,701 plus accrued interest. The loans and extension
were unanimously approved by the Company's board of directors.
6. 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 65.1%, and 37.9% of net sales for the three months ended
march 31, 1999 and 1998, 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
Page 9
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
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. If
the FDA's proposed regulations were to become effective, management
believes that the impact on the Company's financial statements would be
a significant reduction in sales, cost of sales and marketing,
distribution and administrative expenses and could result in material
losses to the Company, but would not result in a significant increase
in sales returns nor have a significant adverse effect on financial
position.
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. Historically, the Company has relied upon its
manufacturer's product liability insurance for coverage. The Company
obtained product liability insurance coverage in its own name in 1997.
The limits of this coverage are $4,000,000 per occurrence and
$5,000,000 aggregate. The Company generally does not obtain contractual
indemnification from parties manufacturing its products. However, all
of the manufacturers of the Company's products carry product liability
insurance which covers the Company's products. 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 claims made by the Company's
distributors for products manufactured by Chemins and marketed by the
Company. Although the Company has never had a product liability claim,
such claims against the Company could result in material losses to the
Company.
7. DISTRIBUTOR STOCK PURCHASE PLAN
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 registered 5,000,000 stock purchase plan
participation interests ("Participation Interests") in the Advantage
Marketing Systems, Inc. 1998 Distributor Stock Purchase Plan (the
"Plan"). The Participation Interests will be offered to the
distributors of the Company's products and services ("Eligible
Persons") in lots of five Participation Interests. An Eligible Person
electing to participate in the Plan (a "Participant") is 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 represent the Participants' contributions
to the Plan which are used to purchase the Common Stock and are not
placed into escrow pending purchase of 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 does not receive any proceeds from the
purchase of the Common Stock by the Plan. The offering price of each
Participation Interest is $1.00, and each Eligible Person will be
required initially to purchase a minimum of 25 Participation Interests
upon electing to participate in the Plan. There is no minimum amount of
sales of Participation Interests required. The Registration Statement
became effective February 19, 1999 under the Securities Act of 1933, as
amended.
* * * * * *
Page 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
The Company's business over the last three years has been significantly
affected by the Miracle Mountain International, Inc "MMI". Acquisition, the
CII Acquisition, the SNSI Asset Purchase and the ToppMed Asset Purchase as
described below. As a result of these acquisitions, the Company acquired
6,790 distributors and added 115 products to its product line. The Company
currently markets approximately 100 products.
MMI ACQUISITION. Effective May 31, 1996, the Company acquired all of the
outstanding capital stock of Miracle Mountain International, Inc. ("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 Chambre' International Inc. ("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 14,000 shares of
Common Stock to the shareholders of CII. 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 (the "SNSI
Asset Purchase"). 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
of June 29, 1998 the specified sales requirement had not been met, therefore the
$750,000 installment payment was reduced to zero and no payment was required.
Based upon current sales levels the Company believes that the $1,050,000
installment payment will be reduced to zero and no payment will be required. 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.
TOPPMED ASSET PURCHASE. On July 31, 1998, the Company acquired all rights,
including formulations and trademarks, for the ToppFast, ToppStamina and
ToppFitt products from ToppMed, Inc. ("TI") of Los Angeles, California for a
total purchase price of $192,000 which was paid at closing.
REPURCHASE OF COMMON STOCK BY THE COMPANY. On March 4, 1998, the Company
announced it's intent 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 December 31, 1998, the Company had repurchased 134,500
shares of the Common Stock for approximately $378,000. The Company has ceased
making repurchases and the last repurchase was made December 31, 1998.
UNITS OFFERING. On November 12, 1997, the Company completed the offering of
1,495,000 units, each consisting of one share of Common Stock and one Redeemable
Common Stock Purchase Warrant (the "Units"), and the Company received gross
proceeds of $6,050,000 (the "Units Offering"). As of January 6, 1998, the
exercise price of the redeemable Common Stock Purchase Warrants was adjusted
from $5.40 to $3.40. The Redeemable Common Stock Purchase Warrants are
exercisable to purchase one share of common stock for $3.40 on or before
November 6, 2002. In connection with the Units Offering, the Company sold to
Paulson Investment Company, Inc. and Joseph Charles & Assoc., Inc., the
representatives of underwriters of the Units Offering, warrants exercisable for
the purchase of 130,000 Units for $5.40 per Unit (the "Underwriters' Warrants")
after November 12, 1998, and on or before November 12, 2002.
Page 11
<PAGE>
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 was 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. 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, to make the terms of
the 1997-A Warrants correspond more closely to the terms of the Redeemable
Common Stock Purchase Warrants.
The units in the offering 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 Offering the Company issued 337,211 shares of common stock and a
corresponding number of 1997-A warrants.
DISTRIBUTOR STOCK PURCHASE PLAN. 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 registered 5,000,000 stock purchase
plan participation interests ("Participation Interests") in the Advantage
Marketing Systems, Inc. 1998 Distributor Stock Purchase Plan (the "Plan"). The
Participation Interests are offered to the distributors of the Company's
products and services ("Eligible Persons") in lots of five Participation
Interests. An Eligible Person electing to participate in the Plan (a
"Participant") is 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 represent the Participants' contributions to the Plan
which are used to purchase the Common Stock and are not be placed into escrow
pending purchase of 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 is $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. There is no minimum amount
of sales of Participation Interests required. The Registration Statement became
effective February 19, 1999 under the Securities Act of 1933, as amended.
Page 12
<PAGE>
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, 1999 and 1998, which are
derived from the unaudited condensed 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>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------------------
1999 1998
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
Net sales.................................. $4,391,930 100.0% $2,700,731 100.0%
Cost of sales.............................. 3,013,167 68.6 1,689,820 62.6
---------- ----- ---------- -----
Gross profit........................... 1,378,763 31.4 1,010,911 37.4
Marketing, distribution and
administrative expenses................. 1,078,285 24.6 855,701 31.7
---------- ----- ---------- -----
Income from operations.................. 300,478 6.8 155,210 5.7
Other income:
Interest, net.............................. 70,946 1.6 67,084 2.5
Other income............................... -- -- 2,106 0.1
---------- ----- ---------- -----
Total other income ..................... 70,946 1.6 69,190 2.6
---------- ----- ---------- -----
Income before income taxes................. 371,424 8.5 224,400 8.3
Tax expense ............................... 140,993 3.2 85,182 3.2
---------- ----- ---------- -----
Net income................................. $ 230,431 5.2% $ 139,218 5.2%
---------- ----- ---------- -----
---------- ----- ---------- -----
</TABLE>
The following table sets forth, as a percentage of net sales, selected cost of
sales detail for the three months ended March 31, 1999 and 1998, which are
derived from the unaudited condensed consolidated financial statements of the
Company.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------------------
1999 1998
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
Commissions and bonuses.................... $1,864,666 42.5% $1,077,191 39.9%
Cost of products........................... 1,115,705 25.4 526,263 19.5
Cost of shipping........................... 32,796 0.7 86,366 3.2
---------- ----- ---------- -----
Cost of sales.......................... $3,013,167 68.6% $1,689,820 62.6%
---------- ----- ---------- -----
---------- ----- ---------- -----
</TABLE>
During the three months ended March 31, 1999 and 1998, 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 increased sales of the Company's weight management, dietary
supplement and personal care products. 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, 1999 AND 1998
Net sales during the three months ended March 31, 1999, increased by $1,691,199,
or 62.6 percent, to $4,391,930 from $2,700,731 during the three months ended
March 31, 1998. 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.
During the three months ended March 31, 1998, the Company made aggregate net
sales of $4,360,509 to 26,805 distributors, compared to aggregate net sales
during the same period in 1998 of $2,672,901 to 11,774 distributors. At March
31, 1999, the Company had approximately 43,300 "active" distributors compared to
approximately 25,300 at March 31, 1998. 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 $76 to $54 for the three months ended March 31, 1999, compared to the same
period in 1998.
Page 13
<PAGE>
Cost of sales during the three months ended March 31, 1999, increased by
$1,323,347 or 78.3 percent, to $3,013,167 from $1,689,820 during the same period
in 1998. This increase was attributable to (i) an increase of $787,475 in
distributor commissions and bonuses due to the increased level of sales, (ii) an
increase of $589,442 in the cost of products sold due to the increased level of
sales and the addition of new products and marketing tools and (iii) a decrease
of $53,570 in shipping costs due to the increased level of sales combined with
the pass through of shipping costs to the distributors beginning in February
1998. Total cost of sales, as a percentage of net sales increased to 68.6
percent during the three months ended March 31, 1999, from 62.6 percent during
the same period in 1998 due to a increase in distributor commissions and bonuses
as a percentage of net sales to 42.5 percent from 39.9 percent, an increase in
cost of products sold to 25.4 percent of net sales from 19.5 percent and a
decrease in cost of shipping to 0.7 percent of net sales from 3.2 percent.
During periods of growth, the Company has and it is anticipated will continue to
offer promotions to distributors to increase sales and their income from time to
time, which if successful will result in increases in distributor commissions
and bonuses and temporary increases in cost of sales.
The Company's gross profit increased $367,852 or 36.4 percent, to $1,378,763 for
the three months ended March 31, 1999 from $1,010,911 for the same period in
1998. The gross profit decreased as a percentage of net sales to 31.4 percent of
net sales from 37.4 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 $222,584, or 26.0
percent, to $1,078,285 during the three months ended March 31, 1999, from
$855,701 during the same period in 1998. This increase was attributable to (i)
increased promotional expense designed to increase sales, (ii) an increase in
expenses involved in expanding investor awareness of the Company, and (iii)
expansion of the Company's administrative infra-structure necessary to support
increased levels of sales. The number of full-time employees increased to 53
during the first quarter of 1999, from 37 during the first quarter of 1998. 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, bank card service charges, and
supplies. The marketing, distribution and administrative expenses as a
percentage of net sales decreased to 24.6 percent during the three months ended
March 31, 1999, from 31.7 percent during the same period in 1998 due to the
increased level of sales.
Income before taxes increased $147,024, or 65.5 percent, to $371,424 during the
three months ended March 31, 1999, from $224,400 during the same period in 1998.
Income before taxes as a percentage of net sales increased to 8.5 percent during
the three months ended March 31, 1999, from 8.3 percent during the same period
in 1998, primarily due to the decrease in the marketing, distribution and
administrative expenses as a percentage of net sales. Income taxes during the
three months ended March 31, 1999 and 1998 were $140,993 and $85,182
respectively.
Net income increased $91,213, or 65.5 percent, to $230,431 during the three
months ended March 31, 1999, from $139,218 during the same period in 1998. This
increase in net income was primarily the result of the decrease in the
marketing, distribution and administrative expenses as a percentage of net
sales. Net income as a percentage of net sales was 5.2 percent during the
periods ended March 31, 1999 and 1998.
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 two primary computer systems both of which were developed
employing six digit date structures. Where date logic requires the year 2000 or
beyond, such structures may produce inaccurate results. Management has
substantially completed the implementation of a program to comply with year 2000
requirements on a system-by-system basis including information technology ("IT")
and non-IT systems (E.G., micro controllers). Management expects the program to
be complete by September 30, 1999 at which time the Company's computer systems
are expected to be year 2000 compliant.
Page 14
<PAGE>
Management has evaluated its in-house supported IT systems and has identified
certain internally written IT system programs that have date dependent
calculations or operations that are affected by this six digit date structure.
The Company's vendor-supported IT system has been updated and certified year
2000 compliant by the vendor. Non-IT systems including all personal computers
will be evaluated by a third party contractor, updated if necessary, and
certified as compliant by September 30, 1999. The Company's risks associated
with the year 2000 are mainly its ability to communicate with its distributors,
take orders for and ship products and pay its employees, distributors and
vendors. Although management's evaluation is complete and vendor certifications
are being obtained, a failure of the Company's computer systems or other support
systems to function adequately with respect to year 2000 issues could have a
material adverse effect on the Company's operations. Based on progress to date
and the limited instances of date sensitive calculations, the Company has
concluded that there is no need for a contingency plan therefore such plan has
not been developed. 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,
however, the Company has not obtained independent verification or validation to
assure the reliability of its cost estimate.
The Company is in the early process of contacting its major suppliers to
determine if their systems will be year 2000 compliant on a timely basis. In the
event that the Company experiences product unavailability or supply
interruptions due to year 2000 non-compliance by its suppliers, management
believes that it would be able to obtain alternative sources of its products. A
significant delay or reduction in availability of products, however, could also
have a material adverse effect on the Company's operations.
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 65.1 percent, and
37.9 percent of net sales for the three months ended March 31, 1999 and 1998,
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 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. If the FDA's proposed regulations
were to become effective, management believes that the impact on the Company's
financial statements could be a material reduction in sales, cost of sales and
marketing, distribution and administrative expenses and could result in material
losses to the Company, but would not have a significant adverse effect on it's
financial position.
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.
Historically, the Company has relied upon its manufacturer's product liability
insurance for coverage. The Company obtained product liability insurance
coverage in its own name in 1997. The limits on this coverage are $4,000,000 per
occurrence and $5,000,000 aggregate. The Company generally does not obtain
contractual indemnification from parties manufacturing its products. However,
all of the manufacturers of the Company's products carry product liability
insurance which covers the Company's products. 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
claims made by the Company's distributors for products manufactured by Chemins
and marketed by the Company. Although the Company has never had a product
liability claim, such claims against the Company could result in material losses
to the Company.
Page 15
<PAGE>
CHOC-QUILIZER AGREEMENT - In the event that the Company fails to achieve the
required contractual sales volumes provided for in the marketing agreement with
Tinos, LLC, the Company will need to (i) renegotiate the marketing agreement or
(ii) give up its marketing rights to Choc-Quilizer. The Company does not believe
that loss of the marketing rights to Choc- Quilizer will have a material adverse
effect on the Company's results of operations, financial condition or liquidity.
LIQUIDITY AND CAPITAL RESOURCES
Prior to completion of the offerings described above, 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, 1999, the Company had working capital of $5,933,251, compared to
$6,119,564 at March 31, 1998. 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, 1999, net cash provided by operating activities was $444,119, net cash
used in investing activities was $194,684, and net cash used in financing
activities was $29,942. This represented an average monthly positive cash flow
from operating activities of $148,040. The Company had a net increase in cash
during this period of $219,493. The Company's working capital needs over the
next 12 months consist primarily of marketing, distribution and administrative
expenses.
On March 4, 1998, the Company announced it's intent 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 December 31, 1998, the
Company had repurchased 134,500 shares of the Common Stock for approximately
$378,000. The Company has ceased making repurchases and the last repurchase was
made December 31, 1998.
During the first quarter of 1998, the Company agreed to loan John W. Hail, the
Chief Executive Officer, Director and a major shareholder of the Company, up to
$250,000. Subsequently, the Company agreed to loan up to an additional $75,000.
The loans are secured, bear interest at 8% per annum and were due on March 31,
1999. The loans have been extended until March 31, 2000. As of March 31, 1999,
the aggregate balance due on these loans was $259,701 plus interest. The loans
and extension were unanimously approved by the Company's board of directors.
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 gross proceeds of $6,050,000. Accumulated offering
costs of approximately $720,000 were charged against the proceeds of the
offering. As of January 6, 1998, the exercise price of the Redeemable Common
Stock Purchase Warrants was adjusted from $5.40 to $3.40 per share The
Redeemable Common Stock Purchase Warrants are exercisable to purchase one share
of common stock on or before November 6, 2002. In connection with the offering,
the Company sold to Paulson Investment Company, Inc. and Joseph Charles &
Assoc., Inc., the representatives of underwriters of the offering, warrants
exercisable for the purchase of 130,000 Units for $5.40 each (the "Underwriters'
Warrants") after November 12, 1998, and on or before November 12, 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 offering costs of $323,076 were charged against the
proceeds of the offerings. Pursuant to the offerings, the Company issued 337,211
shares of Common Stock and
Page 16
<PAGE>
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, to make them correspond more
closely to the terms of the Redeemable Common Stock Purchase Warrants.
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, which
will be accounted for as purchase price adjustments under the purchase method of
accounting. The $750,000 installment payment was to 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. As of June 29, 1998 the specified sales
requirement had not been met, therefore the $750,000 installment payment was
reduced to zero and no payment was 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. Based upon current sales levels the
Company believes that the $1,050,000 installment payment will be reduced to zero
and no payment will be required. 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 AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS 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 Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REGISTRANT:
ADVANTAGE MARKETING SYSTEMS, INC.
Date: May 7, 1999 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-END> MAR-31-1999
<CASH> 5,508,710
<SECURITIES> 0
<RECEIVABLES> 623,813
<ALLOWANCES> 39,166
<INVENTORY> 762,527
<CURRENT-ASSETS> 7,004,009
<PP&E> 1,928,110
<DEPRECIATION> 683,904
<TOTAL-ASSETS> 10,764,047
<CURRENT-LIABILITIES> 1,070,758
<BONDS> 0
0
0
<COMMON> 428
<OTHER-SE> 9,453,043
<TOTAL-LIABILITY-AND-EQUITY> 10,764,047
<SALES> 4,391,930
<TOTAL-REVENUES> 4,469,705
<CGS> 3,013,167
<TOTAL-COSTS> 4,091,452
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,829
<INCOME-PRETAX> 371,424
<INCOME-TAX> 140,993
<INCOME-CONTINUING> 230,431
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230,431
<EPS-PRIMARY> .06
<EPS-DILUTED> .05
</TABLE>
