<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File Number
June 30, 1999 001-13343
- ----------------- ----------------------
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 4,141,014
- ------------------------------ ----------------------------
Title of Class Number of Shares outstanding
at August 9, 1999
Exhibit Index appears on page 19.
----
Page 1 of 20
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE THREE MONTHS ENDED JUNE 30, 1999
TABLE OF CONTENTS
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........... 12
Part II - Other Information................................................. 19
Item 1. Legal Proceedings................................................... 19
Item 2. Changes in Securities and Use of Proceeds........................... 19
Item 3. Defaults in Securities.............................................. 19
Item 4. Submission of Matters to a Vote of Security Holders................. 19
Item 5. Other Information................................................... 19
Item 6. Exhibits and Reports on Form 8-K.................................... 19
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the caption "Item 2 - 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 1 - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1. FINANCIAL STATEMENTS
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS JUNE 30, DECEMBER 31,
1999 1998
--------------- ----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 6,071,642 $ 5,289,217
Receivables - net of allowance of $41,989 and $36,604, respectively........... 310,147 263,503
Receivable from affiliate..................................................... 259,701 293,936
Inventory..................................................................... 768,414 1,009,998
Deferred income taxes......................................................... -- 93,496
Other assets.................................................................. 132,905 100,345
-------------- --------------
Total current assets.............................................. 7,542,809 7,050,495
RECEIVABLES..................................................................... 161,879 129,440
PROPERTY AND EQUIPMENT, Net..................................................... 1,301,320 1,090,280
GOODWILL, Net................................................................... 1,672,280 1,725,734
COVENANTS NOT TO COMPETE, Net................................................... 474,265 511,685
DEFERRED INCOME TAXES........................................................... -- 95,277
OTHER ASSETS.................................................................... 106,323 114,572
-------------- --------------
TOTAL........................................................................... $11,258,876 $10,717,483
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 234,458 $ 60,172
Accrued commissions and bonuses............................................... 245,630 156,174
Accrued other expenses........................................................ 362,930 277,651
Accrued sales tax liability................................................... 352,707 616,735
Notes payable................................................................. -- 29,476
Capital lease obligations..................................................... 68,603 87,105
-------------- --------------
Total current liabilities......................................... 1,264,328 1,227,313
LONG-TERM LIABILITIES:
Notes payable................................................................. -- 94,311
Capital lease obligations..................................................... 138,890 173,247
Deferred income taxes......................................................... 7,000 --
-------------- --------------
Total liabilities................................................. 1,410,218 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............................................................... 10,232,706 10,180,106
Notes receivable for exercise of options...................................... (63,960) (63,960)
Retained earnings (accumulated deficit) ...................................... 57,355 (516,091)
-------------- --------------
Total capital and retained earnings (accumulated deficit)......... 10,226,529 9,600,483
Less cost of treasury stock (134,500 shares, common).......................... (377,871) (377,871)
-------------- --------------
Total stockholders' equity........................................ 9,848,658 9,222,612
-------------- --------------
TOTAL........................................................................... $11,258,876 $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 JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales............................................. $5,534,666 $3,169,292 $9,926,596 $5,870,023
Cost of sales......................................... 3,838,533 2,101,416 6,851,700 3,791,236
----------- ----------- ----------- -----------
Gross profit...................................... 1,696,133 1,067,876 3,074,896 2,078,787
Marketing, distribution and administrative expenses... 1,284,927 895,224 2,363,212 1,750,924
----------- ------------ ----------- -----------
Income from operations............................ 411,206 172,652 711,684 327,863
Other income:
Interest, net......................................... 81,826 72,152 152,772 139,236
Other income.......................................... -- 38,614 -- 40,720
----------- ------------ ----------- -----------
Total other income................................ 81,826 110,766 152,772 179,956
----------- ------------ ----------- -----------
INCOME BEFORE TAXES................................... 493,032 283,418 864,456 507,819
TAX EXPENSE........................................... 150,017 107,868 291,010 193,051
----------- ------------ ----------- -----------
NET INCOME............................................ $ 343,015 $ 175,550 $ 573,446 $ 314,768
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Net income per common share........................... $ .08 $ .04 $ .14 $ .07
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Net income per common share - assuming dilution....... $ .07 $ .04 $ .13 $ .07
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Weighted average common shares outstanding............ 4,141,014 4,188,509 4,141,014 4,217,894
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Weighted average common shares outstanding -
assuming dilution..................................... 4,654,114 4,718,210 4,570,855 4,596,763
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
---------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 573,446 $ 314,768
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........................................... 252,688 176,025
Deferred taxes.......................................................... 195,773 193,051
Gain on sale of other assets............................................. -- (35,920)
Provision for bad debts.................................................. 5,385 --
Non cash compensation.................................................... 52,600 --
Changes in assets and liabilities which provided (used) cash:
Receivables and commission advances.................................. (84,468) (10,756)
Inventory............................................................ 241,584 71,830
Other assets......................................................... (30,376) --
Accounts payable and accrued expenses................................ 84,993 209,458
------------ ------------
Net cash provided by operating activities........................ 1,291,625 918,456
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................................... (366,789) (277,922)
Advances to affiliate........................................................ -- (305,811)
Repayment of receivable from affiliate....................................... 34,235 54,780
Purchase of other assets..................................................... -- (100,498)
------------ ------------
Net cash used in investing activities ......................... (332,554) (629,451)
------------ ------------
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.................................................. -- 37,727
Purchases of treasury stock.................................................. -- (243,673)
Payment of deferred offering costs........................................... -- (89,627)
Principal payment on notes payable........................................... (123,787) (40,416)
Principal payment on capital lease obligations............................... (52,859) (101,072)
------------ ------------
Net cash used in financing activities.......................... (176,646) (437,061)
------------ ------------
NET INCREASE (DECREASE) IN CASH ................................................ 782,425 (148,056)
CASH AND CASH EQUIVALENTS, BEGINNING............................................ 5,289,217 5,775,276
------------ ------------
CASH AND CASH EQUIVALENTS, ENDING............................................... $6,071,642 $5,627,220
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................ $ 10,945 $ 19,691
Cash paid during the period for income taxes.................................... 8,000 --
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
FOR THE SIX MONTHS ENDED JUNE 30, 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 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 June 30, 1999:
Earnings per common share:
Income available to common stockholders................... $343,015 4,141,014 $.08
-----
Earnings per common share - assuming dilution:
Options.................................................. -- 513,100
--------- ---------
Income available to common stockholders plus assumed
conversions.............................................. $343,015 4,654,114 $.07
--------- --------- -----
For the three months ended June 30, 1998:
Earnings per common share:
Income available to common stockholders................... $175,550 4,188,509 $.04
-----
Earnings per common share - assuming dilution:
Options.................................................. -- 529,701
--------- ---------
Income available to common stockholders plus assumed
conversions.............................................. $175,550 4,718,210 $.04
--------- --------- -----
</TABLE>
Page 6
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding:
For the six months ended June 30, 1999:
Earnings per common share:
Income available to common stockholders................... $573,446 4,141,014 $.14
-----
Earnings per common share - assuming dilution:
Options.................................................. -- 429,841
--------- ---------
Income available to common stockholders plus assumed
conversions.............................................. $573,446 4,570,855 $.13
--------- --------- -----
For the six months ended June 30, 1998:
Earnings per common share:
Income available to common stockholders................... $314,768 4,217,894 $.07
-----
Earnings per common share - assuming dilution:
Options.................................................. -- 378,869
--------- ---------
Income available to common stockholders plus assumed
conversions.............................................. $314,768 4,596,763 $.07
--------- --------- -----
</TABLE>
Options to purchase 130,358 shares of common stock ranging from $2.80
to $3.60 per share and 130,000 shares of common stock ranging from
$3.60 to $6.00 per share were outstanding at June 30, 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 ranging from $3.40 to $5.40 were
outstanding at June 30, 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.
Page 7
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
COMMON STOCK OPTIONS AND OTHER WARRANTS - The following table
summarizes the Company's stock option and other warrant activity for
the three months and six months ended June 30, 1999:
<TABLE>
<CAPTION>
THREE WEIGHTED- SIX WEIGHTED-
MONTHS AVERAGE MONTHS AVERAGE
ENDED EXERCISE ENDED EXERCISE
JUNE 30, 1999 PRICE JUNE 30, 1999 PRICE
------------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Options and other warrants
outstanding, beginning of period.... 1,539,322 $2.09 1,543,322 $2.09
Options and other warrants
issued during the period........... 168,711 2.39 168,711 2.39
Options and other warrants
canceled during the period......... -- -- (4,000) 2.70
--------- ---------
Options and other warrants
outstanding, end of period......... 1,708,033 $2.12 1,708,033 $2.12
--------- ---------
--------- ---------
</TABLE>
COMMON STOCK WARRANTS - The following table summarizes the Company's
common stock warrants and their activity for the three months and six
months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
WARRANTS
ISSUED AND EXERCISE
OUTSTANDING PRICE EXERCISE PERIOD
----------- -------- -------------------
<S> <C> <C> <C>
June 30, 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'
Page 8
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
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 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.
During the six months ended June 30, 1999 and 1998, the Company issued
68,711 and 24,750 options, respectively, under the Plan. At June 30,
1999 and 1998, the Company had 1,708,033 and 1,414,333, respectively,
stock options outstanding of which only 506,300 and 198,600,
respectively, were issued pursuant to the plan.
5. RELATED PARTIES
During the three months ended June 30, 1999 and 1998, the Company
received $1,455 and $1,607, 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 the six
months ended June 30, 1999 and 1998, the Company received $3,253 and
$3,586, respectively.
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 and six months ended June 30,
1998, the Company made aggregate monthly payments pursuant to such
lease agreements of $4,857 and $9,714, respectively. 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 became exercisable on April 8,
1999.
During the three months ended June 30, 1999 and 1998, the Company paid
Curtis H. Wilson, Sr., a Director of the Company, sales commissions of
$25,501 and $14,182, respectively. During the six months ended June 30,
1999 and 1998, the Company paid Curtis H. Wilson, Sr., sales
commissions of $49,308 and $19,245, 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
Page 9
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
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 June 30, 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 67.5% and 42.9% of net sales for the six months ended June
30, 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 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
Page 10
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
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 11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
At Advantage Marketing Systems, Inc., our business and operations during the
last three years have been significantly affected by the acquisitions of Miracle
Mountain International, Inc. in May 1996 (the "MMI acquisition"), Chambre
International, Inc. in January 1997 (the "CII acquisition"), the assets of Stay
'N Shape International, Inc., Solution Products International, Inc., Nation of
Winners, Inc., and Now International, Inc. in April 1997 (the "SNSI ssset
purchase") and ToppMed Inc. (the "ToppMed asset purchase"). As a result of these
acquisitions and asset purchases, we acquired 6,790 distributors and added 115
products to our product line. We currently market approximately 100 products.
MMI ACQUISITION. Effective May 31, 1996, Miracle Mountain International became
one of our wholly-owned subsidiaries. Miracle Mountain was a network marketer of
various third-party manufactured nutritional supplement products. In connection
with the MMI acquisition, we issued 20,000 shares of our common stock. As a
result of the MMI acquisition, we added one product to our line and 1,690
additional distributors.
CII ACQUISITION. Effective January 31, 1997, Chambre International became one of
our wholly-owned subsidiaries. Chambre International was a network marketer of
various third-party manufactured cosmetics, skin care and hair care products. In
connection with the Chambre International acquisition, we issued 15,000 shares
of our common stock. We added 74 products to our line, 68 in the personal care
category and six in the dietary supplement category, and 2,100 additional
distributors as a result of the Chambre International acquisition.
SNSI ASSET PURCHASE. We 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. on
April 16, 1997. In connection with the SNSI asset purchase, we paid cash of
$1,174,441 and issued 125,984 shares of our common stock. The SNSI asset
purchase added 39 products to our 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, we acquired all rights, including
formulations and trademarks, for the ToppFast, ToppStamina and ToppFitt products
from ToppMed, Inc. for $192,000.
REPURCHASE OF COMMON STOCK BY THE COMPANY. In March 1998, we announced and began
repurchasing up to $1 million of our common stock in the open market. In
December 1998 we ceased repurchasing our common stock. As of December 31, 1998,
we had repurchased 134,500 shares of our common stock for $377,871 or an average
of $2.81 per share.
UNITS OFFERING. On November 12, 1997, we completed the offering of 1,495,000
units, each consisting of one share of common stock and one redeemable common
stock purchase warrant. As a result of this offering, we received proceeds of
$6,050,000. Each redeemable common stock purchase warrant is exercisable for the
purchase of one share of our common stock for $3.40 on or before November 6,
2002. In connection with this offering, we sold to the underwriters, Paulson
Investment Company, Inc. and Joseph Charles & Assoc., Inc., warrants exercisable
for the purchase of 130,000 units for $5.40 per unit on or before November 6,
2002.
WARRANT MODIFICATION OFFERING AND RIGHTS OFFERING. In January 1997, we
distributed non-transferable rights ("rights") to our common stock shareholders.
These rights entitled the holders to subscribe for and purchase up to 2,148,191
units (each unit consisting of one share of our common stock and one 1997-A
warrant) for the price of $6.80 per unit. Concurrently, we called and redeemed
our outstanding class A and class B common stock purchase warrants for $.0008
per warrant on March 17, 1997. However, in connection with the warrant
redemption, we offered to the holders the Class A and class B warrants the right
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.
Each 1997-A warrant is exercisable on or before November 6, 2002, to purchase
one share of common stock for $3.40, subject to adjustment in certain events. We
may redeem the 1997-A warrants at any time upon 30 days' notice, at a price of
$.0001 per 1997-A warrant.
Page 12
<PAGE>
We received proceeds from these two offerings of $2,154,357. Accumulated
offering costs of $323,076 were charged against the net proceeds from these
offerings. Pursuant to these offerings we issued 337,211 shares of common stock
and the same number of 1997-A warrants
DISTRIBUTOR STOCK PURCHASE PLAN. On March 11, 1998, we filed a Registration
Statement, file number 333-47801, with the Securities and Exchange Commission
registering 5,000,000 stock purchase plan participation interests
("participation interests") in our 1998 Distributor Stock Purchase Plan (the
"plan"). The participation interests are offered to the distributors of our
products and services in lots of five participation interests. A distributor
electing to participate in the plan (a "participant") is entitled through
purchase of the participation interests to shares in the plan's purchase in the
open market of our outstanding common stock. 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 a $5.00 annual service fee per participant and a $1.25 monthly transaction
fee per participant, we do not receive any proceeds from the purchase of the
common stock by the plan. The offering price of each participation interest is
$1.00. Each participating distributor is required initially to purchase a
minimum of 25 participation interests upon electing to participate in the plan.
The registration statement became effective February 19, 1999 under the
Securities Act of 1933, as amended.
AMERICAN STOCK EXCHANGE. Our common stock and publicly-held warrants were
approved for listing on the American Stock Exchange and began trading under the
symbol AMM on June 15, 1999.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of our net sales, selected
results of operations for the three months and the six months ended June 30,
1999 and 1998. The selected results of operations are derived from our unaudited
condensed consolidated financial statements. The results of operations for the
periods presented are not necessarily indicative of our future operations.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------------- ------------------------------------------
1999 1998 1999 1998
------------------- ------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $5,534,666 100.0% $3,169,292 100.0% $9,926,596 100.0% $5,870,023 100.0%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Cost of sales:
Commissions and bonuses.... 2,319,032 41.9 1,269,977 40.1 4,183,698 42.1 2,347,168 40.0
Cost of products........... 1,250,348 22.6 725,772 22.9 2,366,053 23.8 1,252,035 21.3
Cost of shipping........... 269,153 4.9 105,667 3.3 301,949 3.0 192,033 3.3
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total cost of sales..... 3,838,533 69.4 2,101,416 66.3 6,851,700 69.0 3,791,236 64.6
---------- ----- ---------- ----- ---------- ----- ---------- -----
Gross profit.............. 1,696,133 30.6 1,067,876 33.7 3,074,896 31.0 2,078,787 35.4
Marketing, distribution a
administrative expenses.... 1,284,927 23.2 895,224 28.3 2,363,212 23.8 1,750,924 29.8
---------- ----- ---------- ----- ---------- ----- ---------- -----
Income from operations..... 411,206 7.4 172,652 5.4 711,684 7.2 327,863 5.6
Other income:
Interest, net................. 81,826 1.5 72,152 2.3 152,772 1.5 139,236 2.4
Other income.................. -- .0 38,614 1.2 -- .0 40,720 .7
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total other income......... 81,826 1.5 110,766 3.5 152,772 1.5 179,956 3.1
---------- ----- ---------- ----- ---------- ----- ---------- -----
Income before income taxes.... 493,032 8.9 283,418 8.9 864,456 8.7 507,819 8.7
Tax expense .................. 150,017 2.7 107,868 3.4 291,010 2.9 193,051 3.3
---------- ----- ---------- ----- ---------- ----- ---------- -----
Net income.................... $ 343,015 6.2% $ 175,550 5.5% $ 573,446 5.8% $ 314,768 5.4%
---------- ----- ---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- ----- ---------- -----
</TABLE>
During the three months and six months ended June 30, 1999 and 1998, we
experienced increases in net sales compared to the preceding year. The increases
were principally the result of expansion of our network of independent
distributors and increased sales of our weight management, dietary supplement
and personal care products. We expect to continue to expand our network of
independent distributors, which may result in increased
Page 13
<PAGE>
sales volume. However, there is no assurance that increased sales volume will be
achieved through expansion of our network of independent distributors, or that,
if sales volume increases, we will realize increased profitability.
COMPARISON OF THE THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
Our net sales during the three months ended June 30, 1999, increased by
$2,365,374, or 74.6%, to $5,534,666 from $3,169,292 during the three months
ended June 30, 1998 The increase was principally attributable to expansion of
our network of independent distributors and increased sales of our weight
management, dietary supplement and personal care products. During the three
months ended June 30, 1999, we made aggregate net sales of $5,499,615 to 29,562
distributors, compared to aggregate net sales during the same period in 1998 of
$3,137,664 to 15,119 distributors. At June 30, 1999, we had approximately 46,800
"active" distributors compared to approximately 27,900 at June 30, 1998. A
distributor is considered "active" if he or she has purchased $50 or more of our
product during the previous 12 months. Sales per distributor per month decreased
from $69 to $62 for the three months ended June 30, 1999, compared to the same
period in 1998.
Our cost of sales during the three months ended June 30, 1999, increased by
$1,737,117, or 82.7%, to $3,838,533 from $2,101,416 during the same period in
1998. This increase was attributable to
- - an increase of $1,049,055 in distributor commissions and bonuses due to
the increased level of sales,
- - an increase of $524,576 in the cost of products sold due to the
increased level of sales and
- - an increase of $163,486 in shipping costs due to the effect of our
modified pricing structure.
Effective April 1, 1999, we modified our pricing structure to include shipping
costs in our product prices. Previously shipping costs had been calculated
separately on each order and we reported shipping costs net of these payments.
Because our shipping costs are no longer reported net of the separately
collected shipping reimbursement our shipping cost as a percentage of sales
appears to have increased. Total cost of sales, as a percentage of net sales
increased to 69.4% during the three months ended June 30, 1999, from 66.3%
during the same period in 1998 due to an increase in distributor commissions and
bonuses as a percentage of net sales to 41.9% from 40.1%, a decrease in cost of
products sold to 22.6% of net sales from 22.9% and an increase in cost of
shipping to 4.9% of net sales from 3.3%. During periods of growth, we anticipate
continuing 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.
Our gross profit increased $628,257, or 58.8%, to $1,696,133 for the three
months ended June 30, 1999 from $1,067,876 for the same period in 1998. The
gross profit decreased as a percentage of net sales to 30.6% of net sales from
33.7%. The decrease in our gross profit margin resulted from the increase in our
cost of sales as a percentage of net sales.
Marketing, distribution and administrative expenses increased $389,703, or
43.5%, to $1,284,927 during the three months ended June 30, 1999, from $895,224
during the same period in 1998. This increase was attributable to our expansion
of the administrative infra-structure necessary to support increased levels of
sales. The number of full-time employees increased to 54 during the second
quarter of 1999, from 35 during the same period 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 23.2% during the three months ended June 30, 1999, from 28.3% during the same
period in 1998 due to the increased level of sales.
Our income before taxes increased $209,614, or 74.0%, to $493,032 during the
three months ended June 30, 1999, from $283,418 during the same period in 1998.
Income before taxes as a percentage of net sales was 8.9% during the three
months ended June 30, 1999 and 1998. Income taxes during the three months ended
June 30, 1999 and 1998 were $150,017 and $107,868, respectively.
Page 14
<PAGE>
Our net income increased $167,465, or 95.4%, to $343,015 during the three months
ended June 30, 1999, from $175,550 during the same period in 1998. This increase
in net income was primarily the result of the increased level of sales and the
decrease in the marketing, distribution and administrative expenses as a
percentage of net sales. Net income as a percentage of net sales increased to
6.2% during the three months ended June 30, 1999, from 5.5% during the same
period in 1998.
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
Our net sales during the six months ended June 30, 1999, increased by
$4,056,573, or 69.1%, to $9,926,596 from $5,870,023 during the six months ended
June 30, 1998. The increase was principally attributable to expansion of our
network of independent distributors and increased sales of our weight
management, dietary supplement and personal care products. During the six months
ended June 30, 1999, we made aggregate net sales of $9,860,122 to 37,175
distributors, compared to aggregate net sales during the same period in 1998 of
$5,810,566 to 18,348 distributors. Sales per distributor per month decreased
from $53 to $44 for the six months ended June 30, 1999, compared to the same
period in 1998.
Our cost of sales during the six months ended June 30, 1999, increased by
$3,060,464, or 80.7%, to $6,851,700 from $3,791,236 during the same period in
1998. This increase was attributable to
- - an increase of $1,836,530 in distributor commissions and bonuses due to
the increased level of sales,
- - an increase of $1,114,018 in the cost of products sold due to the
increased level of sales and the addition of new products and marketing
tools and
- - an increase of $109,916 in shipping costs due to the effect of our
modified pricing structure.
Effective April 1, 1999, we modified our pricing structure to include shipping
costs in our product prices. Previously shipping costs had been calculated
separately on each order and we reported shipping costs net of these payments.
Because our shipping costs are no longer reported net of the separately
collected shipping reimbursement our shipping cost as a percentage of sales
appears to have increased. Total cost of sales, as a percentage of net sales,
increased to 69.0% during the six months ended June 30, 1999, from 64.6% during
the same period in 1998 due to an increase in distributor commissions and
bonuses as a percentage of net sales to 42.1% from 40.0%, an increase in cost of
products sold to 23.8% of net sales from 21.3%, and a decrease in cost of
shipping to 3.0% of net sales from 3.3%. During periods of growth, we anticipate
continuing 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.
Our gross profit increased $996,109, or 47.9%, to $3,074,896 for the six months
ended June 30, 1999 from $2,078,787 for the same period in 1998. The gross
profit decreased as a percentage of net sales to 31.0% of net sales from 35.4%.
The decrease in our gross profit margin resulted from the increase in cost of
sales as a percentage of net sales.
Marketing, distribution and administrative expenses increased $612,288, or
35.0%, to $2,363,212 during the six months ended June 30, 1999, from $1,750,924
during the same period in 1998. This increase was attributable to an increase in
expenses involved in expanding investor awareness of us and expansion of our
administrative infra- structure necessary to support increased levels of sales.
The number of our full-time employees increased to 53 during the first quarter
of 1999 and 54 during the second quarter of 1999 as compared to 37 and 35,
respectively during the same periods 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 23.8% during the six months ended June 30, 1999, from 29.8% during the same
period in 1998 due to the increased level of sales.
Our income before taxes increased $356,637, or 70.2%, to $864,456 during the six
months ended June 30, 1999, from $507,819 during the same period in 1998. Income
before taxes as a percentage of net sales was 8.7% during
Page 15
<PAGE>
the six months ended June 30, 1999 and 1998. Income taxes during the six months
ended June 30, 1999 and 1998 were $291,010 and $193,051, respectively.
Our net income increased $258,678, or 82.2%, to $573,446 during the six months
ended June 30, 1999, from $314,768 during the same period in 1998. This increase
in net income was primarily the result of the increased level of sales and the
decrease in the marketing, distribution and administrative expenses as a
percentage of net sales. Net income as a percentage of net sales increased to
5.8% during the six months ended June 30, 1999, from 5.4% during the same period
in 1998.
SEASONALITY
No pattern of seasonal fluctuations exists due to the growth patterns that we
are currently experiencing. However, there is no assurance that we will not
become subject to seasonal fluctuations in operations.
YEAR 2000 COMPUTER SYSTEM COMPLIANCE
We have 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. We have 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 our computer systems are expected to be year
2000 compliant.
We have evaluated our in-house supported IT systems and have identified certain
internally written IT system programs that have date dependent calculations or
operations that are affected by this six digit date structure. Our
vendor-supported IT system has been updated and certified year 2000 compliant by
the vendor. Non-IT systems including all personal computers were evaluated by a
third party contractor and have been updated and certified year 2000 compliant.
Our risks associated with the year 2000 are mainly our ability to communicate
with our distributors, take orders for and ship products and pay our employees,
distributors and vendors. Although our evaluation is complete and vendor
certifications have been obtained, a failure of our computer systems or other
support systems to function adequately with respect to year 2000 issues could
have a material adverse effect on our operations. Based on progress to date and
the limited instances of date sensitive calculations, we have concluded that
there is no need for a contingency plan therefore such plan has not been
developed. We estimate that the total cost of our program to make our computer
systems year 2000 compliant is less than $25,000. However, we have not obtained
independent verification or validation to assure the reliability of our cost
estimate.
We have contacted our major suppliers and have determined their systems will be
year 2000 compliant on a timely basis. In the event we experience product
unavailability or supply interruptions due to year 2000 non-compliance by our
suppliers, we believe that we will be able to obtain alternative sources of our
products. A significant delay or reduction in availability of products, however,
could also have a material adverse effect on our operations.
COMMITMENTS AND CONTINGENCIES
RECENT REGULATORY DEVELOPMENTS - A significant portion of our net sales
continues to be dependent upon our AM-300 product. Our net sales of AM-300
represented 67.5% and 42.9% of net sales for the six months ended June 30, 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, we offer 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 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 our product). On June 4, 1997, the Food and Drug Administration
proposed a regulation which will, if it becomes effective as proposed,
significantly limit our ability to sell AM-300 and any other weight management
products which contain ephedra or ephedrine. If proposed regulations becomes
effective, we believe that a material reduction in sales and related costs would
occur and could result in a substantial loss from operations, but would not have
an immediate significant adverse effect on our financial position.
Page 16
<PAGE>
PRODUCT LIABILITY - We, like other marketers of products that are intended to be
ingested, face the the inherent risk of exposure to product liability claims in
the event that the use of our products results in injury. We maintain product
liability insurance coverage with limits of $4,000,000 per occurrence and
$5,000,000 aggregate. We generally do not obtain contractual indemnification
from our product manufacturers. However, all of our product manufacturers carry
product liability insurance which covers our products. We have 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 us. We also
have agreed to indemnify Chemins against claims arising from claims made by our
distributors for products manufactured by Chemins and marketed by us. Although a
product liability claim has not been asserted against us, such claims could
result in material losses.
CHOC-QUILIZER AGREEMENT - In the event we fail to achieve the required
contractual sales volumes provided for in the marketing agreement with Tinos,
LLC, we will need to either renegotiate the marketing agreement or give up our
rights to market Choc-Quilizer. We do not believe that loss of the marketing
rights to Choc-Quilizer will have a material adverse effect on our results of
operations, financial condition or liquidity.
LIQUIDITY AND CAPITAL RESOURCES
Prior to completion of the offerings described above, our primary source of
liquidity was net cash provided by operating activities and shareholder loans.
We do not have any arrangements for significant bank or institutional lending.
At June 30, 1999, we had working capital of $6,278,481, compared to $5,823,182
at December 31, 1998. We believe our cash and cash equivalents and cash flows
from operations will be sufficient to fund our working capital needs over the
next 12 months. During the six months ended June 30, 1999, net cash provided by
operating activities was $1,291,625, net cash used in investing activities was
$332,554 and net cash used in financing activities was $176,646. This
represented an average monthly positive cash flow from operating activities of
$215,271. We had a net increase in cash during this period of $782,425. Our
working capital needs over the next 12 months consist primarily of marketing,
distribution and administrative expenses.
On March 4, 1998, we announced our intent to repurchase up to $1 million of our
common stock in the open market for cash. As of December 31, 1998, we had
repurchased 134,500 shares of our common stock for $377,871 for an average per
share price of $2.81. We ceased making repurchases and the last repurchase was
made December 31, 1998.
During the first quarter of 1998, we agreed to loan John W. Hail, our Chief
Executive Officer and a major shareholder, up to $250,000. Subsequently we also
agreed to loan up to an additional $75,000. These loans are secured, bear
interest at 8% per annum and became due on March 31, 1999. The loans have been
extended until March 31, 2000. As of June 30, 1999, the balance due on these
loans was $259,701 plus interest. The loans and extension were unanimously
approved by our board of directors.
On November 12, 1997, we sold 1,495,000 shares of our common stock and 1,495,000
redeemable common stock purchase warrants in units consisting of one share of
stock and one warrant from which we received gross proceeds of $6,050,000.
Accumulated offering costs of approximately $720,000 were charged against the
proceeds of this offering. These warrants are exercisable to purchase one share
of our common stock on or before November 6, 2002 for $3.40. In connection with
the offering, we sold to Paulson Investment Company, Inc. and Joseph Charles &
Assoc., Inc., the representatives of the underwriters of this offering, warrants
exercisable for the purchase of 130,000 units for $5.40 each on or before
November 12, 2002.
On January 31, 1997, we distributed, at no cost, 2,148,191 non-transferable
rights to our shareholders of record on such date. Each of the rights entitled
the holder to purchase one unit (consisting of one share of our common stock and
one 1997-A warrant) on or before March 17, 1997 for $6.80 per unit.
Concurrently, we also redeemed our outstanding class A and class B common stock
purchase warrants for $.0008 per warrant effective on March 17, 1997. In
connection with the warrant redemption, we modified the terms of the warrants
and offered to holders the right to exercise each of the warrants for the
purchase of one unit, at an exercise price of $6.00 per unit. We received
$2,154,357 proceeds from sale of the units pursuant to the offerings.
Accumulated offering costs of
Page 17
<PAGE>
$323,076 were charged against these proceeds. Pursuant to the offerings, we
issued 337,211 shares of our common stock and 337,211 1997-A warrants. Each
1997-A warrant is exercisable for the purchase of one share of our common stock
for $3.40 on or before November 6, 2002.
Page 18
<PAGE>
PART II - OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 1. LEGAL PROCEEDINGS
-----------------
None
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
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 19
<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: August 13, 1999 By: /S/ ROGER P. BARESEL
--------------- -----------------------------
Roger P. Baresel, President,
Chief Financial
and Accounting Officer
Page 20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 6,071,642
<SECURITIES> 0
<RECEIVABLES> 611,837
<ALLOWANCES> 41,989
<INVENTORY> 768,414
<CURRENT-ASSETS> 7,542,809
<PP&E> 2,065,979
<DEPRECIATION> 764,659
<TOTAL-ASSETS> 11,258,876
<CURRENT-LIABILITIES> 1,264,328
<BONDS> 0
0
0
<COMMON> 428
<OTHER-SE> 9,848,230
<TOTAL-LIABILITY-AND-EQUITY> 11,258,876
<SALES> 5,534,666
<TOTAL-REVENUES> 5,620,543
<CGS> 3,838,533
<TOTAL-COSTS> 5,123,460
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,052
<INCOME-PRETAX> 493,032
<INCOME-TAX> 150,017
<INCOME-CONTINUING> 343,015
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 343,015
<EPS-BASIC> .08
<EPS-DILUTED> .07
</TABLE>
