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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,
1999
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Commission File Number: 001-13343
ADVANTAGE MARKETING SYSTEMS, INC.
(Name of small business issuer in its Charter)
OKLAHOMA 73-1323256
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2601 NORTHWEST EXPRESSWAY, SUITE 1210W
OKLAHOMA CITY, OKLAHOMA 73112-7293
(Address of principal executive offices)
(405) 842-0131
(Issuer's telephone number)
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Common Stock, $0.0001 Par Value American Stock Exchange
Redeemable Common Stock American Stock Exchange
Purchase Warrants American Stock Exchange
1997-A Warrants
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $0.0001 PAR VALUE
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
1997-A WARRANTS
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
subject to such filing requirements for the past 90 days. Yes X No
---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB./ /
The issuer's revenues for the year ended December 31, 1999 were $22,427,551.
The aggregate market value of the issuer's common stock, $.0001 par value, held
by non-affiliates of the issuer as of March 15, 2000, was $22,817,006 based on
the closing sale price on that date as reported by the American Stock Exchange.
As of March 15, 2000, 4,237,587 shares of the issuer's common stock, $.0001 par
value, were outstanding.
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ADVANTAGE MARKETING SYSTEMS, INC.
FORM 10-KSB
For the Fiscal Year Ended December 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I.
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Item 1. Description of Business.................................................................... 3
Item 2. Description of Property.................................................................... 17
Item 3. Legal Proceedings.......................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders........................................ 17
Part II.
Item 5. Market for Common Equity and Related Stockholder Matters................................... 18
Item 6. Management's Discussion and Analysis or Plan of Operation.................................. 18
Item 7. Financial Statements ...................................................................... 24
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure....... 25
Part III.
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section
16(a) of the Exchange Act.................................................................. 26
Item 10. Executive Compensation..................................................................... 27
Item 11. Security Ownership of Certain Beneficial Owners and Management............................. 29
Item 12. Certain Relationships and Related Transactions............................................. 31
Item 13. Exhibits and Reports on Form 8-K........................................................... 32
SIGNATURES............................................................................................... 34
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the captions "Item 1. Description of
Business," "Item 6. Management's Discussion and Analysis or Plan of
Operation," and elsewhere in this report constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Certain, but not necessarily all, of such forward-looking statements
can be identified by the use of forward-looking terminology such as
"anticipates," "believes," "expects," "may," "will," or "should" or other
variations thereon, or by discussions of strategies that involve risks and
uncertainties. The actual results of the Company or industry results may be
materially different from any future results expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include general economic and business conditions; the ability of
the Company to implement its business and acquisition strategies; changes in
the network marketing industry and changes in consumer preferences;
competition; availability of key personnel; increasing operating costs;
unsuccessful advertising and promotional efforts; changes in brand awareness;
acceptance of new product offerings; and changes in, or the failure to comply
with, government regulations (especially food and drug laws and regulations);
the ability of the Company to obtain financing for future acquisitions; and
other factors.
Chambre-Registered Trademark-, Spark of Life-Registered Trademark-,
Young at Heart-Registered Trademark-, Co-Clenz-Registered Trademark-, Stay 'N
Shape-Registered Trademark-, Sine-eze-Registered Trademark-, and
ToppFast-Registered Trademark-, are registered trademarks of the Company, and
Choc-Quilizer-TM- is a trademark of Tinos, L.L.C.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
We market a product line consisting of approximately 101 products in
three categories; weight management, dietary supplement and personal care
products. These products are marketed through a network marketing organization
in which independent distributors purchase products for resale to retail
customers as well as for their own personal use. The number of our active
distributors has increased from approximately 20,400 at December 31, 1997, and
approximately 33,000 at December 31, 1998, to approximately 61,200 at December
31, 1999. An "active" distributor is one who purchased $15 on autoship or a
least $50 if not on autoship of our products within the preceding 12 months.
The distributors in our network are encouraged to recruit interested
people to become new distributors of our products. New distributors are placed
beneath the recruiting distributor in the "network" and are referred to as being
in that distributor's "downline" organization. Our marketing plan is designed to
provide incentives for distributors to build, maintain and motivate an
organization of recruited distributors in their downline organization to
maximize their earning potential. Distributors generate income by purchasing our
products at wholesale prices and reselling them at retail prices. Distributors
also earn bonuses on product purchases generated by the distributors in their
downline organization. See "--Network Marketing."
On an ongoing basis we review our product line for duplication and
sales movement and make adjustments accordingly. As of December 31, 1999, our
product line consisted of (i) eight weight management products, (ii) 28 dietary
supplement products, (iii) 63 personal care products consisting primarily of
cosmetic and skin care products and (iv) Dial A Doc. Our products are
manufactured by various manufacturers pursuant to formulations developed for us
and are sold to our independent distributors located in all 50 states and the
District of Columbia. We also sell our personal care products to distributors in
Greece who do not use our network marketing system.
We believe that our network marketing system is ideally suited to
marketing weight management, dietary supplement and personal care products
because sales of such products are strengthened by ongoing personal contact
between distributors and their customers. Our network marketing system appeals
to a broad cross-section of people, particularly those looking to supplement
family income or who are seeking part-time work. Distributors are given the
opportunity through our sponsored events and training sessions to network with
other distributors, develop selling skills and establish personal goals. We
supplement monetary incentives with other forms of recognition in order to
motivate distributors further and to foster an atmosphere of excitement
throughout our distributor network.
KEY OPERATING STRENGTHS
We believe the source of our success is our support of and compensation
program for our distributors. We provide our distributors with high-quality
products and a highly attractive bonus program along with extensive training and
motivational events and services. We believe that we have established a strong
operating platform to support distributors and facilitate future growth. The key
components of this platform include the following:
- - quality products, many of which emphasize herbs and other natural
ingredients to appeal to consumer demand for products that contribute
to a healthy lifestyle;
- - a compensation program that permits distributors to earn income from
profits on the resale of products and residual income from reorder
bonuses on product purchases within a distributor's downline
organization, as well as to participate in various non-cash awards,
such as vacations offered through promotional programs;
- - a superior communications program that seeks to effectively and
efficiently communicate with distributors by utilizing new technologies
and marketing techniques, as well as motivational events and training
seminars;
- - a continual expansion and improvement of our product line and
marketing plan; and
- - employment of computer technology to provide timely and accurate
product order processing, weekly bonus payment processing, detailed
distributor earnings statements, and inventory management.
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GROWTH STRATEGY
Our growth strategy is expansion of our product line and network of
independent distributors to increase sales. An increase in the number of
distributors generally results in increased sales volume, and new products
create enthusiasm among distributors, serve as a promotional tool in selling
other products, and attract new distributors. Since 1995, we have introduced 11
new products to our product line in the weight management and dietary supplement
categories. Through the
- - acquisition of Miracle Mountain International, Inc. in May 1996,
- - Chambre International, Inc. in January 1997,
- - the acquisition of the assets of Stay 'N Shape International, Inc.,
Solution Products International, Inc., Nation of Winners, Inc., and
Now International, Inc. in April 1997, we acquired 6,790 distributors
and added 114 products to our product line, and
- - acquisition of all rights, including formulations and trademarks for
the ToppFast, Topp Stamina and ToppFast products from ToppMed, Inc.
in July 1998.
During 1999, we introduced Nature Flex, St. Johns Wort and B-Complex.
We will also seek to increase sales through initiatives designed to
enhance sales in our existing markets. These initiatives include increasing the
number of our training and motivational events and teleconferences, hiring
additional distributor support personnel and establishing more convenient
regional support centers in targeted geographic markets.
In addition, we seek to grow through acquisition. The network marketing
industry, which has relatively low barriers to entry, is fragmented and includes
a number of small marketing companies, many of which are being acquired by
larger companies. Our strategy is to capitalize on these market characteristics
to achieve additional growth, both in terms of distributors and product line
enhancement, through the acquisition of additional network marketing companies
or the assets of such companies.
The principal objective of our acquisition strategy is to acquire other
network marketing organizations that can be combined with our network marketing
organization, resulting in increased sales volume with minimal additional
administrative cost. We will not consummate an acquisition unless, at the time,
we anticipate that such acquisition will contribute to profitability and provide
positive cash flows from operations. There is no assurance, however, that we
will in the future be able to acquire other network marketing organizations, or
that such acquisitions will result in increased profitability and cash flows.
Our growth strategy requires expanded distributor services and support,
increased personnel, expanded operational and financial systems and
implementation of additional control procedures. There is no assurance that we
will be able to manage expanded operations effectively. Furthermore, failure to
implement financial, information management, and other systems and to add
control procedures could have a material adverse effect on our results of
operations and financial condition.
Our acquisitions could involve a number of risks including
- - the diversion of management's attention to the assimilation of the
acquired companies or assets,
- - adverse effects on our results of operations, such as the amortization
of acquired intangible assets; and
- - the possibility that the acquired company or assets will not
contribute to our business cash flows and profitability as expected.
Although our business plan includes expansion and diversification of
our network marketing organization and products through the acquisition of
companies engaged in network marketing, there are currently no specific plans,
negotiations, agreements or understandings with respect to any material
acquisition.
Although we intend to focus principally on the expansion of sales
within the United States, we also intend to expand our sales activities in
Greece. In addition, we are considering expansion into markets in other
countries, although we have not
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formalized any such planned expansion. We believe there are numerous additional
international markets in which our network marketing organization and products
could prove successful.
INDUSTRY OVERVIEW
NETWORK MARKETING. We believe that network marketing is one of the
fastest growing channels of distribution for certain types of goods and
services.
WEIGHT MANAGEMENT AND DIETARY SUPPLEMENT PRODUCTS. We believe that the
weight management and dietary supplement category is expanding because of
heightened public awareness of reports about the positive effects of weight
management and dietary supplements on health. Many individuals also use dietary
supplements as a means of preventative health care. We believe several factors
account for the steady growth of the dietary supplement category, including
increased public awareness of the reported health benefits of dietary
supplements and favorable demographic trends toward older Americans who are more
likely to consume dietary supplements.
Over the past several years, widely publicized reports and medical
research findings have suggested a correlation between the consumption of
dietary supplements and the reduced incidence of certain diseases. The United
States government and universities generally have increased sponsorship of
research relating to dietary supplements. In addition, Congress has established
the Office of Alternative Medicine within the National Institutes of Health to
foster research into alternative medical treatments, which may include natural
remedies. Congress also recently established the Office of Dietary Supplements
in the National Institutes of Health to conduct and coordinate research into the
role of dietary supplements in maintaining health and preventing disease.
In addition, we believe that the aging of the United States population,
together with a corresponding increased focus on preventative health care
measures, will continue to result in increased demand for dietary supplement
products. We believe these trends have helped fuel the growth of the dietary
supplement category. To meet the increased demand for dietary supplements, we
and others have introduced a number of successful dietary supplement products
the past several years, including function specific products for weight loss,
sports nutrition, menopause, energy and mental alertness. In addition, the use
of a number of ingredients, such as chromium picolinate, shark cartilage,
proanthocyanidins, citrin and colloidal minerals, have created opportunities for
us and others to offer new products.
PERSONAL CARE PRODUCTS. We believe that the personal care products
market is a mature category that has been historically immune to swings in the
economy. Manufacturers and distributors of personal care products must
continually improve existing products, introduce new products and communicate
product advantages to consumers. With the aging population, there appears to be
a growing demand for a wide spectrum of new products in the area of skin care.
PRODUCTS
Our product line consists of products in the categories of weight
management, dietary supplements and personal care. We currently market
approximately 101 products, exclusive of variations in product size, colors or
similar variations of our basic product line.
WEIGHT MANAGEMENT CATEGORY. During the years ended December 31, 1999
and 1998, 70.9% and 55.5%, respectively, of our net sales were derived from the
eight products in the weight management category that we market under the
Advantage Marketing Systems label. The following products represent the majority
of our product sales in the weight management category:
- - AM-300--A specialized blend of herbs, including an ephedra herb
concentrate and chromium picolinate; and
- - AS-200--A specialized blend of herbs and nutrients in addition to
citrin and chromium picolinate.
As a result of the Stay 'N Shape asset purchase, we added several
additional products to our product line in the weight management category that
are marketed under the Advantage Marketing Systems label, including
Choc-Quilizer. Choc-Quilizer is an appetite suppression product made from a
compound which occurs naturally in chocolate. It was originally developed by Dr.
George Kargas to control chocolate cravings, and is believed by Dr. Kargas to
decrease the appetite for other foods as well.
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DIETARY SUPPLEMENT CATEGORY. During the years ended December 31, 1999
and 1998, 23.4% and 33.9%, respectively, of our net sales were derived from the
28 products in the dietary supplement category which contain herbs, vitamins,
minerals and other natural ingredients. They are sold under the Advantage
Marketing Systems label. The following products represent the majority of our
product sales in the dietary supplement category:
- - Shark Cartilage Complex--Manufactured from shark fin cartilage and a
blend of curcumin, boswellia and vanadium; and
- - Super Anti-Oxidant--A blend of enzyme-active and phyto-nutrient rich
whole food and herbal antioxidant concentrates including
proanthocyanidins;
- - Spark of Life--A liquid nutritional drink containing a blend of herbs,
vitamins, minerals, amino acids and essential fatty acids.
- - Chlorella--Fresh water green algae containing amino acids of protein,
nucleic acids, fibers, vitamins and minerals.
As a result of the SNSI asset purchase, we added several additional
products to our line in the dietary supplement category that are being marketed
under the Advantage Marketing Systems label, including Formula of Life Colloidal
Minerals, Stress-Eze and Spark of Life.
PERSONAL CARE CATEGORY. In January 1997, we dramatically expanded and
improved our product line by acquiring Chambre International and its line of
skin care, hair care, family care and cosmetic products. Chambre International
had been marketing its products for over 24 years. During the years ended
December 31, 1999 and 1998, 2.7% and 2.1% of our net sales were derived from the
63 personal care products marketed primarily under the Chambre label in the
personal care category. The following products represent the majority of our
product sales in the personal care category:
- - NH2 Lift System--A three-part skin-care system combining enzymatic
exfoliation and isometric action to firm the skin, build muscle tone
and lift the face.
- - Skin Care Collections--Include cleansing lotion, skin freshener,
oatmeal scrub, night treatment, moisturizer and protein or moisture
masque.
- - Hair Care Systems--Include keratin shampoo, conditioning rinse,
reconstruction, hair hold, and style and set.
- - Chambre Cosmetics--Include foundations, mascara, lipliners, eyeliners,
powder and cream blushes, lip colors and eyeshadows.
DIAL A DOC. Effective May 1, 1998, we began offering the Dial A Doc
service to members of our monthly auto-ship program. Dial A Doc is a 24-hour
service which allows participants to speak with and ask questions of board
certified, private practice physicians anytime, seven days a week. Members
access the service through a toll-free telephone number and a personal
identification number.
PROMOTIONAL MATERIALS. We also derive revenues from the sale of various
educational and promotional materials designed to aid our distributors in
maintaining and building their businesses. Such materials include various sales
aids, informational videotapes and cassette recordings, and product and
marketing brochures.
OTHER PRODUCTS AND SERVICES. Prior to focusing on weight management,
dietary supplement and personal care products in October 1993, we marketed
various packages of consumer benefit services provided by third-party providers.
The consumer benefit services consist of
- - a discount shopping service,
- - a grocery coupon service,
- - a discount travel service,
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- - pre-paid legal services, and
- - a variety of other consumer benefits.
The services under these consumer benefit programs, except for the pre-paid
legal services, are provided by Consumer Benefit Services, Inc. The pre-paid
legal services are provided by Pre-Paid Legal Services, Inc. We no longer
actively market these programs, although we continue to maintain the existing
memberships. These program membership sales represented less than 1% of our net
sales during 1999 and 1998.
NEW PRODUCT IDENTIFICATION. We expand our product line through the
development and acquisition of new products. New product ideas are derived from
a number of sources, including trade publications, scientific and health
journals, our management, consultants, distributors and other outside parties.
Potential product acquisitions are identified in a similar manner. Prior to
introducing new products, we investigate product formulation as it relates to
regulatory compliance and other issues.
We do not maintain a product development staff, but rely upon Chemins
Company, Inc. and other manufacturers, independent researchers, vendor research
departments, and others for such services. When a new product concept is
identified or when an existing product must be reformulated, the new product
concept or reformulation project is generally submitted to Chemins for technical
development and implementation. We continually review our existing products for
potential enhancements to improve their effectiveness and marketability. While
we consider our product formulations to be proprietary trade secrets, such
formulations are not patented. Accordingly, there is no assurance that another
company will not replicate one or more of our products.
RECENT REGULATORY DEVELOPMENTS. A significant portion of our net sales
continue to be dependent upon our AM-300 product. Our net sales of AM-300
represented 66.6%, 49.7% and 29.5% of our net sales during 1999, 1998 and 1997,
respectively. One of the herbal ingredients in AM-300 is ephedra concentrate,
which contains naturally occurring ephedrine. Ephedrine products have been the
subject of adverse publicity in the United States and other countries relating
to alleged harmful effects, including the deaths of several individuals.
Currently, 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. Although we have not had a product
liability claim, such claims could result in material losses.
PRODUCT PROCUREMENT AND DISTRIBUTION; INSURANCE. Essentially all of
our product line in the weight management and dietary supplement categories
is manufactured by Chemins Company, Inc. utilizing our product formulations.
Essentially all of our product line in the personal care category is
manufactured by GDMI, Inc. and Columbia Cosmetics, Inc.
In connection with the Stay 'N Shape asset purchase, we succeeded to
the rights and obligations of Nation of Winners International, Inc. under a
marketing and distribution agreement with Tinos, L.L.C. Pursuant to this
agreement we acquired the exclusive worldwide right to market Choc-Quilizer for
the purpose of appetite suppression and weight control through December 6, 2006.
This agreement is subject to termination by Tinos, L.L.C. upon 60 days' written
notice in the event we do not obtain a sales volume of 300,000 units of 90 count
capsules or caplets of Choc-Quilizer during the period from the date of the
license through December 5, 1998, or reasonable sales volumes during each
12-month period thereafter. We did not meet the required sales volume through
December 5, 1998, and the agreement could be subject to cancellation upon 60
days written notice, however, we have received no indication from Tinos that it
has any intention of terminating the agreement.
We have not generally entered into long-term supply agreements with the
manufacturers of our product line or the third-party providers of our consumer
benefit services. However, we customarily enter into contracts with our
manufacturers and suppliers to establish the terms and conditions of purchases.
Our arrangements with Chemins Company, Inc. may be terminated by either party
upon the completion of any outstanding purchase orders. Therefore, there can be
no assurance that Chemins will continue to manufacture our products or provide
research, development and formulation services. In the event the relationship
with any of our manufacturers becomes impaired, we will be required to obtain
alternative manufacturing sources for our products. In such event, there is no
assurance that the manufacturing processes of our current manufacturers
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can be replicated by another manufacturer. Although we have not previously
experienced product unavailability or supply interruptions, we believe that we
would be able to obtain alternative sources of our weight management, dietary
supplement and personal care products. A significant delay or reduction in
availability of products, however, could have a material adverse effect on our
business, operating results and financial condition.
We, like other marketers of products that are intended to be
ingested, face an inherent risk of exposure to product liability claims in the
event that the use of our products results in injury. We maintain limited
product liability insurance with coverage limits of $4 million per occurrence
and $5 million aggregate. Although we do not obtain contractual indemnification,
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. Also we have agreed to indemnify Chemins
Company, Inc. against claims arising from claims made by our distributors for
products manufactured by Chemins and marketed by us. Product liability claims in
excess of insurance coverage may result in significant losses which adversely
affect product sales, results of our operations, financial condition and the
value of our common stock.
All of the items in our product line include a customer satisfaction
guarantee. Within 30 days of purchase, any retail customer or distributor who is
not satisfied with our product for any reason may return it or any unused
portion to the distributor from whom it was purchased or to us for a full refund
or credit toward the purchase of another product. Distributors may obtain
replacements from us for products returned to them by retail customers if they
return such products on a timely basis. Furthermore, in most jurisdictions, we
maintain a buy-back program. Under this program we will repurchase products sold
to a distributor (subject to a 10% restocking charge), provided that the
distributor resigns as a distributor and returns the product in marketable
condition within 12 months of original purchase, or longer where required by
applicable state law or regulations. We believe this buy-back policy addresses a
number of the regulatory compliance issues pertaining to network marketing
systems. For the years ended December 31, 1999 and 1998, the cost of products
returned to us was three percent and two percent of gross sales, respectively.
Our product line is distributed principally from our facilities in
Oklahoma City or from our Regional Support Centers. Products are warehoused in
Oklahoma City and at selected Regional Support Centers.
NETWORK MARKETING
We market our product line through independent distributors in a
network marketing organization. At December 31, 1999, we had approximately
61,200 "active" distributors. We had approximately 33,000, and 20,400 "active"
distributors at December 31, 1998 and 1997, respectively. To be considered
"active" a distributor must have purchased $50 or more of our products within
the preceding 12 months. Our distributors are independent contractors who
purchase products directly from us for resale to retail consumers. Distributors
may elect to work on a full-time or part-time basis. We believe our network
marketing system appeals to a broad cross-section of people, particularly those
seeking to
- - supplement family income,
- - start a home business or
- - pursue employment opportunities other than conventional, full-time
employment.
A majority of our distributors therefore sell our products on a part-time basis.
We believe that our network marketing system is ideally suited to
marketing our product line because sales of such products are strengthened by
ongoing personal contact between retail consumers and distributors, many of whom
use our products themselves. Sales are made through direct personal sales
presentations as well as presentations made to groups in a format known as
"opportunity meetings." These sales methods are designed to encourage
individuals to purchase our products by informing potential customers and
distributors of our product line and results of personal use, and the potential
financial benefits of becoming a distributor. The objective of the marketing
program is to develop a broad based network marketing organization of
distributors within a relatively short period. Our marketing efforts are
typically focused on middle-income families and individuals.
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Our network marketing program encourages individuals to develop their
own downline network marketing organizations. Each new distributor is either
linked to
- - the existing distributor that personally enrolled the new distributor
into our network marketing organization or
- - the existing distributor in the enrolling distributor's downline as
specified by the enrolling distributor at the time of enrollment.
Growth of a distributor's downline organization is dependent on the recruiting
and enrollment of additional distributors by the distributor or the distributors
within such distributor's downline organization.
Distributors are encouraged to assume responsibility for training and
motivation of other distributors within their downline organization and to
conduct opportunity meetings as soon as they are appropriately trained. We
strive to maintain a high level of motivation, morale, enthusiasm and integrity
among the members of our network marketing organization. We believe this result
is achieved through a combination of products, sales incentives, personal
recognition of outstanding achievement, and quality promotional materials. Under
our network marketing program, distributors purchase sales aids and brochures
from us and assume the costs of advertising and marketing our product line to
their customers as well as the direct cost of recruiting new distributors. We
believe that this form of sales organization is cost efficient because our
direct sales expenses are primarily limited to the payment of bonuses, which are
only incurred when products are sold.
We continually strive to improve our marketing strategies, including
the compensation structure within our network marketing organization and the
variety and mix of products in our line, to attract and motivate distributors.
These efforts are designed to increase distributors' monthly product sales and
the recruiting of new distributors.
To aid distributors in easily meeting the monthly personal product
purchase requirement to qualify for bonuses, we developed the "autoship" in
1994. Under the autoship purchasing arrangement, distributors establish a
standing product order for an amount in excess of $15 which is automatically
charged to their credit cards or deducted from their bank accounts each month
prior to shipment of the ordered products. At December 31, 1999, 1998 and 1997,
we had approximately 27,600, 13,000 and 7,000 distributors participating in the
autoship, respectively.
Growth of our network marketing organization is in part attributable
to our bonus structure which provides for payment of bonuses on product
purchases made by other distributors in a distributor's downline
organization. Distributors derive income from several sources.
- - First, distributors earn profits by purchasing from our product line at
wholesale prices (which are discounted up to 40% from suggested retail
prices) and selling our product line to customers at retail.
- - Second, distributors who establish their own downline distributor
organizations may earn bonuses of up to 15% on product purchases by
distributors within the first four levels of their downline
organization.
- - Third, distributors who have personally enrolled three active
distributors and have (i) $300 per month of autoship product purchases
by personally enrolled distributors on their first level and (ii) $300
per month of autoship product purchases on their second level, become
directors and have the opportunity to build an additional director
downline organization and receive additional bonuses of 4% on product
purchases by such downline organization.
- - Fourth, distributors who have personally enrolled six active
distributors and have (i) $600 per month of autoship product purchases
by personally enrolled distributors on their first level and (ii) $600
per month of autoship product purchases on their second level, become
silver directors and have the opportunity to build an additional silver
director downline organization and receive additional bonuses of 5% on
product purchases by such downline organization.
- - Fifth, silver directors who have personally enrolled twelve active
distributors and have (i) $1,200 per month of autoship product
purchases by personally enrolled distributors on their first level and
(ii) $1,200 per month of autoship product purchases on their second
level, become gold directors and have the opportunity to receive an
additional bonus of 3% on product purchases by their silver director
downline organization. In addition, gold directors have the opportunity
to receive generation bonuses of up to 3% on the product purchases by
distributors of silver
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director downline organizations that originate from their silver
director downline organization through four generations.
- - Sixth, gold directors who maintain the gold director requirements and
develop four gold directors, each one from a separate leg of their
downline organization, become platinum directors and have the
opportunity to build an additional platinum director downline
organization and receive additional bonuses of 5% on product purchases
by such downline organization.
Combining these levels of bonuses, our total "pay-out" on products
subject to bonuses is approximately 67% of the bonus value of product sales.
However, in the case of a distributor who is not qualified to receive bonuses,
we retain the bonuses otherwise payable on the first two levels of those
distributors' downline organizations. A distributor who has not purchased $15 on
autoship or at least $50 if not on autoship of our products during the preceding
month is not qualified to receive bonuses.
Each distributor in our network marketing organization has a director,
a silver director, a gold director and a platinum director. Each director has a
silver director, a gold director and a platinum director. Each silver director
has a gold director and a platinum director. Each gold director has a platinum
director. As of December 31, 1999, we had 227 silver directors, 190 gold
directors and 23 platinum directors.
Under our regional support center program, we designate distributors to
serve as regional support center directors and provide them special training and
support. Each regional support center director functions as a product
distribution center for our products. As of December 31, 1999, we had 54
regional support center directors.
We maintain a computerized system for processing distributor orders and
calculating bonus payments which enable us to remit such payments promptly to
distributors. We believe that prompt and accurate remittance of bonuses is vital
to recruiting and maintaining distributors, as well as increasing their
motivation and loyalty to us. We make weekly bonus payments based upon the
previous week's product purchases, while most network marketing companies only
make monthly bonus payments. During 1999 and 1998, we paid bonuses to 8,500 and
5,400 distributors, respectively, in the aggregate amounts of $9,677,476 and
$5,487,418 , respectively.
We are committed to providing the best possible support to our
distributors. Distributors in our network marketing organization are provided
training guides and are given the opportunity to participate in our training
programs. We sponsor regularly scheduled conference calls for our platinum
distributors which include testimonials from successful distributors and
satisfied customers as well as current product and promotional information. We
produce a monthly newsletter which provides information on us, our products and
network marketing system. The newsletter is designed to help recruit new
distributors by answering commonly asked questions and includes product
information and business building information. The newsletter also provides a
forum for us to give additional recognition to our distributors for outstanding
performance. In addition, we regularly sponsor training sessions for our
distributors across the United States. At these training sessions distributors
are provided the opportunity to learn more about our product line and selling
techniques so that they can build their businesses more rapidly. We produce
comprehensive and attractive four color catalogues and brochures that display
and describe our product line. We maintain a web page which provides information
on us, our products and our network marketing system at www.amsonline.com.
Furthermore, in order to facilitate our continued growth and support
distributor activities, we continually upgrade our management information and
telecommunications systems. These systems are designed to provide, among other
things, financial and operating data for management, timely and accurate product
ordering, bonus payment processing, inventory management and detailed
distributor records. Since 1994, we have invested more than $1,600,000 to
enhance our computer and telecommunications systems.
REGULATION
In the United States (as well as in any foreign markets in which we may
sell our products), we are subject to laws, regulations, administrative
determinations, court decisions and similar constraints (as applicable, at the
federal, state and local levels) (hereinafter "regulations"). These regulations
include and pertain to, among other things,
- - the formulation, manufacture, packaging, labeling, distribution,
importation, sale and storage of our products,
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- - our product claims and advertising (including direct claims and
advertising as well as claims and advertising by distributors, for
which we may be held responsible), and
- - our network marketing organization.
PRODUCTS. The formulation, manufacturing, packaging, labeling,
advertising, distribution and sale of our products are subject to regulation by
a number of governmental agencies. The federal agencies include the Food and
Drug Administration the Federal Trade Commission, the Consumer Product Safety
Commission, the United States Department of Agriculture, and the Environmental
Protection Agency. Our activities are also regulated by various agencies of the
states, localities and foreign countries in which our products are or may be
manufactured, distributed and sold. The Food and Drug Administration, in
particular, regulates the formulation, manufacture and labeling of weight
management products, dietary supplements, cosmetics and skin care products,
including some of our products. Food and Drug Administration regulations require
us and our suppliers to meet relevant regulatory good manufacturing practices
for the preparation, packaging and storage of these products. Good manufacturing
practices for dietary supplements have yet to be promulgated but are expected to
be proposed. The Dietary Supplement Health and Education Act of 1994 revised the
provisions of the Federal Food, Drug and Cosmetic Act concerning the composition
and labeling of dietary supplements, which we believe is generally favorable to
the dietary supplement industry. The Dietary Supplement Health and Education Act
created a new statutory class of "dietary supplements." This new class includes
vitamins, minerals, herbs, amino acids and other dietary substances for human
use to supplement the diet. However, the Dietary Supplement Health and Education
Act grandfathered, with certain limitations, dietary ingredients that were on
the market before October 15, 1994. A dietary supplement containing a new
dietary ingredient and placed on the market on or after October 15, 1994 must
have a history of use or other evidence establishing a basis for expected
safety. Manufacturers of dietary supplements having a "structure-function"
statement, must have substantiation that the statement is truthful and not
misleading.
The majority of our sales come from products that are classified as
dietary supplements under the Federal Food, Drug and Cosmetic Act. The labeling
requirements for dietary supplements have been set forth in a final regulations
with respect to labels affixed to containers beginning after March 23, 1999.
These regulations include how to declare nutrient content information, and the
proper detail and format required for the "supplemental facts" box. During 1999,
we revised our product labels in compliance with these regulations. The costs of
product relabling were immaterial. Many states have also recently become active
in the regulation of dietary supplement products. These states may require
modification of labeling or formulation of certain of our products sold in these
states.
In addition, on January 6, 2000, the Food and Drug Administration
published a Final Rule on permissible structure/function statements to be placed
on labels and in brochures. Structure/function statements are claims of the
benefit or effect of a product or an ingredient on the body's structure or
function. This new regulation does not significantly change the way that the
Food and Drug Administration interprets structure/function statements. Thus, we
do not expect to make any substantial label revisions based on this regulation
regarding any of our structure/function product statements.
As a marketer of products that are ingested by consumers, we are
subject to the risk that one or more of the ingredients in our products may
become the subject of adverse regulatory action. For example, one of the
ingredients in our AM-300 product is ephedra, an herb which contains
naturally-occurring ephedrine. Our manufacturer uses a powdered extract of that
herb when manufacturing AM-300. The extract is an 8% extract which means that
every 100 milligrams of the powdered extract contains approximately eight
milligrams of naturally occurring ephedrine alkaloids. Ephedrine containing
products have been the subject of adverse publicity in the United States and
other countries relating to alleged harmful effects.
Many companies distribute products containing various amounts of
ephedrine. The Food and Drug Administration has received approximately 900
reports of adverse reactions to these products. On April 10, 1996, the Food and
Drug Administration issued a statement warning consumers not to purchase or
ingest dietary supplements containing ephedrine that are claimed to produce
certain effects. These effects include euphoria, heightened awareness, increased
sexual sensations or increased energy. The Food and Drug Administration cautions
that these products pose significant adverse health risks, including dizziness,
headache, gastrointestinal distress, irregular heartbeat, heart palpitations,
heart attack, strokes, seizures, psychosis and death. We market AM-300
principally as an aid in weight management.
On June 4, 1997, the Food and Drug Administration proposed regulations
that will, if adopted as proposed, significantly limit our ability to sell
dietary supplements that contain ephedrine, including our AM-300 product. During
1999 and 1998, sales of AM-300 represented 66.6% and 49.7% of our net sales,
respectively. The proposed regulations were
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subject to comment until December 2, 1997. The proposed regulations will become
effective 180 days following their issuance as final regulations. Several trade
organizations in the dietary supplement industry have commented on the proposed
regulations, requesting substantial modifications. It is probable that the Food
and Drug Administration will make material changes to the proposed regulations
prior to adoption. Relatedly, the United States General Accounting Office issued
a report dated July 2, 1999 to a committee of the U.S. House of Representatives
that casts substantial doubt on certain provisions of the Food and Drug
Administration's proposed regulations on dietary supplements which contain
ephedrine alkaloids. We do not know the effect such report will have on the
proposed regulations. The FDA has indicated it is withdrawing portions of the
proposed rule. The agency has also indicated that it is giving high priority in
fiscal year 2000 to developing a strategy following review, evaluation and
public availability of new safety information available since publication of the
1997 proposed rule.
We are a member of a non-profit corporation, The Ephedra Research
Foundation (the "Foundation"), which has contracted with a consulting firm to
conduct a clinical study concerning the safety of ephedrine when ingested in
combination with caffeine as a dietary supplement. This study is currently being
conducted at two sites, Beth Israel-Deaconess Medical Center in Boston,
affiliated with Harvard Medical School, and St. Luke's-Roosevelt Hospital in New
York City, affiliated with Columbia University. We have been informed that the
final results of this study will be published in the fourth quarter of 2000.
In addition, several states either regulate or are considering
regulating ephedrine-containing products as controlled substances or are
prohibiting the sale of such products by persons other than licensed
pharmacists. Consequently, there is a risk that AM-300 may become subject to
further federal, state, local or foreign laws or regulations. These laws or
regulations could require us to
- - withdraw or reformulate our AM-300 product with reduced ephedrine
levels or with a substitute for ephedrine,
- - relabel our products with different warnings or revised directions
for use, or
- - not make certain statements, possibly including weight loss claims,
with respect to any product containing ephedrine.
Even in the absence of further laws or regulation, we may elect to reformulate
or relabel our AM-300 product containing ephedra or ephedrine. While we believe
that AM-300 could be reformulated and relabeled, there can be no assurance in
that regard or that reformulation and relabeling would not have an adverse
affect on sales of such product or related products within our product line even
though such products do not contain ephedra or ephedrine.
The Texas Department of Health recently issued new regulations, which
became effective November 1, 1999. These regulations significantly restrict the
promotion and distribution of dietary supplements in the state of Texas which
contain ephedra or ephedrine alkaloids. These regulations do not limit the
quantity of ephedrine alkaloids on a per-capsule, per-tablet, or per-daily
basis, but do mandate several warnings to consumers on the labels of such
products. Additionally, these regulations require us to incorporate five
specific provisions in the contracts with our distributors. Also, we are
required to submit all labels, advertising and promotional materials to the
Texas Department of Health. We took the necessary steps to comply with these
regulations. Sales of our AM-300 product in Texas represented approximately 8.4%
and 5.0% of our net sales during the years ended December 31, 1999 and 1998,
respectively.
The Texas Department of Health has recently proposed a new regulation,
to become effective January 1, 2001 if adopted, that would require a label
warning indicating that sale of ephedra-containing products to persons 17 years
of age or younger is prohibited.
The California State Assembly is presently considering legislation that
would impose by statute the same restrictions and requirements concerning
ephedra and ephedrine-containing products imposed by the Texas Regulation that
became effective on November 1, 1999.
In foreign markets, prior to commencing operations and prior to making
or permitting sales of our products, we may be required to obtain an approval,
license or certification from the country's ministry of health or comparable
agency. Prior to entering a new market in which a formal approval, license or
certificate is required, we will be required to work extensively with local
authorities to obtain the requisite approvals. The approval process generally
will require us to present each product and product ingredient to appropriate
regulators and, in some instances, arrange for testing of products by local
technicians for
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ingredient analysis. Such approvals may be conditioned on reformulation of
our products or may be unavailable with respect to certain products or
ingredients.
PRODUCT CLAIMS AND ADVERTISING. The Federal Trade Commission and
certain states regulate advertising, product claims, and other consumer matters,
including advertising of our products. All advertising, promotional and
solicitation materials used by distributors require our approval prior to use.
The Federal Trade Commission has instituted enforcement actions against several
dietary supplement companies for false or deceptive advertising, including the
use of testimonials.
We provide no assurance that
- - the Federal Trade Commission will not question our past or future
advertising or other operations or
- - a state will not interpret product claims presumptively valid under
federal law as illegal under that state's regulations.
Also, our distributors and their customers may file actions on their
own behalf, as a class or otherwise, and may file complaints with the Federal
Trade Commission or state or local consumer affairs offices. These agencies may
take action on their own initiative or on a referral from distributors,
consumers or others. If taken, these actions may result in
- - entries of consent decrees,
- - refunds of amounts paid by the complaining distributor or consumer
- - refunds to an entire class of distributors or customers, or
- - other damages, and
- - changes in our method of doing business.
A complaint based on the practice of one distributor, whether or not
such activities were authorized by us, could result in an order affecting some
or all distributors in a particular state, and an order in one state could
influence courts or government agencies in other states. Enforcement proceedings
resulting from these complaints may result in significant defense costs,
settlement payments or judgements and could have a material adverse effect on
our financial condition.
COMPLIANCE EFFORTS. We attempt to remain in full compliance with all
applicable laws and regulations governing the manufacture, labeling, sale,
distribution, and advertising of our dietary supplements. We retain special
legal counsel for advice on both Food and Drug Administration and Federal Trade
Commission legal issues. In particular, we work closely with special legal
counsel who specializes in Dietary Supplement Health and Education Act
regulations for label revisions, content of structure/function statements,
advertising copy, and also the position of the Food and Drug Administration on
ephedracontaining products.
NETWORK MARKETING SYSTEM. Our network marketing organization is subject
to federal and state laws and regulations administered by the Federal Trade
Commission and various state agencies. These laws and regulations include
securities, franchise investment, business opportunity and criminal laws
prohibiting the use of "pyramid" or "endless chain" types of selling
organizations. These regulations are generally directed at ensuring that product
sales are ultimately made to consumers (as opposed to other distributors) and
that advancement within the network marketing system is based on sales of
products, rather than investment in the company or other non-retail sales
related criteria.
The compensation structure of a network marketing organization is very
complex. Compliance with all of the applicable regulations and laws is uncertain
because of the evolving interpretations of existing laws and regulations and the
enactment of new laws and regulations pertaining in general to network marketing
organizations and product distribution. We have an ongoing compliance program
with assistance from legal counsel experienced in the laws and regulations
pertaining to network sales organizations. We are not aware of any legal actions
pending or threatened by any governmental authority against us regarding the
legality of our network marketing operations.
We currently have independent distributors in all 50 states and the
District of Columbia. We review the requirements of various states as well as
seek legal advice regarding the structure and operation of our selling
organization to ensure that it
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complies with all of the applicable laws and regulations pertaining to network
sales organizations. On the basis of these efforts and the experience of our
management, we believe that we are in compliance with all applicable federal and
state regulatory requirements. We have not obtained any no-action letters or
advance rulings from any federal or state security regulator or other
governmental agency concerning the legality of our operations, nor are we
relying on a formal opinion of counsel to this effect. Accordingly, there is the
risk that our network marketing system could be found to be in noncompliance
with applicable laws and regulations, which could then
- - result in enforcement action and imposition of penalties,
- - require modification of our network marketing system,
- - result in negative publicity, or
- - have a negative effect on distributor morale and loyalty.
Any of these consequences could have a material adverse effect on our sales as
well as our financial condition.
We are subject to the risk of challenges to the legality of our network
marketing organization, by our distributors, both individually and as a class.
Generally such challenges would be based on claims that our network marketing
program was operated as an illegal "pyramid scheme" in violation of federal
securities laws, state unfair practice and fraud laws and the Racketeer
Influenced and Corrupt Organizations Act.
Two important Federal Trade Commission cases have established legal
precedent for determining whether a network marketing program constitutes an
illegal pyramid scheme. The first, IN RE KOSCOT INTERPLANETARY, INC., 86 F.T.C.
1106 (1975), set forth a standard for determining whether a marketing system
constituted a pyramid scheme. Under the KOSCOT standard, a pyramid scheme is
characterized by the participants' payment of money to a company in return for
- - the right to sell a product and
- - the right to receive, in return for recruiting other participants into
the program, rewards that are unrelated to sales of the product to
ultimate users.
Applying the KOSCOT standard in IN RE AMWAY CORP., 93 F.T.C. 618 (1979), the
Federal Trade Commission determined that a company will not be classified as
operating a pyramid scheme if the company adopts and enforces policies that in
fact encourage retail sales to consumers and prevent "inventory loading."
Inventory loading occurs when distributors' purchase large quantities of
non-returnable inventory to obtain the full amount of compensation available
under the system. In AMWAY, the Federal Trade Commission found that the
marketing system of Amway Corporation did not constitute a pyramid scheme,
noting the following Amway policies:
- - participants were required to buy back, from any person they recruited,
any saleable, unsold inventory upon the recruit's leaving Amway;
- - every participant was required to sell at wholesale or retail at least
70% of the products bought in a given month in order to receive a bonus
for that month; and
- - in order to receive a bonus in a month, each participant was required
to submit proof of retail sales made to 10 different consumers.
We believe that our network marketing system is not classified as a
pyramid scheme under the standards set forth in KOSCOT, AMWAY, and other
applicable law. In particular, in most jurisdictions, we maintain an inventory
buy-back program to address the problem of "inventory loading." Pursuant to this
program, we repurchase products sold to a distributor (subject to a 10%
restocking charge) provided that
- - the distributor resigns as a distributor and
- - returns the product in marketable condition within 12 months of
original purchase, or longer where required by applicable state law or
regulations.
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Our literature provided to distributors describes our buy-back program. In
addition, pursuant to agreements with our distributors, each distributor
represents that at least 70% of the products he or she buys will be sold to
non-distributors. However, as is the case with other network marketing
companies, the bonuses paid by us to our distributors are based on product
purchases including purchases of products that are personally consumed by the
downline distributors. Basing bonuses on sales of personally consumed products
may be considered an inventory loading purchase. Furthermore, distributors'
bonuses are based on the wholesale prices received by us on product purchases
or, in some cases based upon the particular product purchased, on prices less
than the wholesale prices.
In the event of challenges to the legality of our network marketing
organization by distributors, we would be required to
- - demonstrate that our network marketing policies are enforced, and
- - that the network marketing program and distributors' compensation
thereunder serve as safeguards to deter inventory loading and encourage
retail sales to the ultimate consumers.
In WEBSTER V. OMNITRITION INTERNATIONAL, INC., 79 F.3d 776 (9th Cir.
1996), the United States Court of Appeals held that a class action brought
against Omnitrition International, Inc. , a multilevel marketing seller of
nutritional supplements and skin care products, should be allowed to proceed to
trial. The plaintiffs, former distributors of Omnitrition's products, alleged
that Omnitrition's selling program was an illegal pyramid scheme and claimed
violations of Racketeer Influenced and Corrupt Organizations Act and several
federal and state fraud and securities laws. Despite evidence that Omnitrition
complied with the AMWAY standards, the court ruled that a jury would have to
decide whether Omnitrition's policies, many of which apparently were similar to
compliance policies adopted by us, were adequate to ensure that Omnitrition's
marketing efforts resulted in a legitimate product marketing and distribution
structure and not an illegal pyramid scheme. We believe that our marketing and
sales programs differ in significant respects from those of Omnitrition, and
that our marketing program complies with applicable law. The two most
significant differences are
- - the Omnitrition marketing plan required distributors to purchase $2,000
in merchandise in order to qualify for bonuses as compared to $15 on
autoship or $50 if not on autoship under our marketing program and
- - the Omnitrition inventory repurchase policy was limited to products
that were less than three months old as compared to one year under our
inventory repurchase policy.
A lesson from the OMNITRITION case is that
- - a selling program which operates to only generate the minimum
purchases necessary to qualify for bonuses is suspect and
- - a selling program must operate to generate purchases independently of
the payment of bonuses in order to have a legitimate product marketing
and distribution structure.
We believe that our selling program operates to generate significant purchases
"for intrinsic value" as demonstrated by our sales figures. During the month of
December 1999, 32,135 of our distributors placed a total of 36,954 orders
averaging $58 in size while only a single $50 order or $15 on autoship per month
is necessary to qualify for bonuses. In view of the holding of the court of
appeals in the OMNITRITION case, however, there is no assurance that, if
challenged, we would prevail against private plaintiffs alleging violations of
anti-pyramid and securities laws. A final ruling against us in such a suit could
result in the imposition of a material liability against us. Moreover, even if
we were successful in defending against such suit, the costs of such defense,
both in dollars spent and in management time, could be material and adversely
affect our operating results. In addition, the negative publicity of such a suit
could adversely affect our sales and ability to attract and retain distributors.
Nutrition for Life International, Inc., one of our competitors and a
multi-level seller of personal care and nutritional supplements, announced in
January 1997, that it had settled class action litigation brought by
distributors alleging fraud in connection with the operation of a pyramid
scheme. Nutrition for Life paid in excess $3 million to settle claims brought on
behalf of its distributors, and related securities fraud claims brought on
behalf of certain purchasers of its stock.
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We believe that our marketing program is significantly different from
the program allegedly promoted by Nutrition for Life and that our marketing
program is not in violation of anti-pyramid laws or regulations. Two issues in
the Nutrition for Life matter were a $1,000 buy-in urged on new recruits, and
the paying of commissions on product vouchers prior to the actual delivery of
product. By design, our marketing program offers no incentive to anyone to make
a large personal purchase nor do we use product vouchers. Actual average order
size in December 1999 was $58. However, there is no assurance that claims
similar to the claims brought against Nutrition for Life and other multi-level
marketing organizations will not be brought against us, or that we will prevail
in the event any such claims were made. Furthermore, even if we were successful
in defending against any such claims, the costs of conducting such a defense,
both in dollars spent and in management time, could be material and adversely
affect our operating results and financial condition. In addition, the negative
publicity of such a suit could adversely affect our sales and ability to attract
and retain distributors.
INTELLECTUAL PROPERTY
We use several trademarks and trade names in connection with our
products and operations. As of December 31, 1999, we had seven federal trademark
registrations with the United States Patent and Trademark Office. We rely on
common law trademark rights to protect our unregistered trademarks. Common law
trademark rights do not provide us with the same level of protection as afforded
by a United States federal registration of a trademark. Also, common law
trademark rights are limited to the geographic area in which the trademark is
actually used. In addition, our product formulations are not protected by
patents and are not patentable. Therefore, there can be no assurance that
another company will not replicate one or more of our products.
COMPETITION
We are subject to significant competition in recruiting distributors
from other network marketing organizations, including those that market products
in the weight management, dietary supplement and personal care categories, as
well as other types of products. There are over 300 companies worldwide that
utilize network marketing techniques, many of which are substantially larger,
offer a greater variety of products, and have available considerably greater
financial resources than us. Our ability to remain competitive depends, in
significant part, on our success in recruiting and retaining distributors
through an attractive bonus plan and other incentives. We believe that our bonus
plan and incentive programs provide our distributors with significant income
potential. However, there can be no assurance that our programs for recruitment
and retention of distributors will continue to be successful.
In addition, the business of marketing products in the weight
management, dietary supplement and personal care categories is highly
competitive. This market segment includes numerous manufacturers, other network
marketing companies, catalog companies, distributors, marketers, retailers and
physicians that actively compete in the sale of such products. We also compete
with other providers of such products, especially retail outlets, based upon
convenience of purchase and immediate availability of the purchased product. The
market is highly sensitive to the introduction of new products or weight
management plans (including various prescription drugs) that may rapidly capture
a significant share of the market. As a result, our ability to remain
competitive depends in part upon the successful introduction and addition of new
products to our line.
Our network marketing competitors include small, privately held
companies, as well as larger, publicly held companies with greater financial
resources and greater product and market diversification and distribution. Our
competitors include Shaklee Corporation, The A.L. Williams Corporation, Mary Kay
Cosmetics, Inc., Amway Corporation, Nutrition for Life International, Inc., and
Herbalife International, Inc.
EMPLOYEES
As of December 31, 1999, we had 66 full-time and 27 part-time
employees, consisting of 2 executive officers, 26 involved in administrative
activities, 15 involved in marketing activities, 26 involved in customer service
activities, and 24 involved in shipping activities. Our employees are not
represented by a labor organization. We consider our employee relations to be
good.
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ITEM 2. DESCRIPTION OF PROPERTY
We maintain our executive office in 10,003 square feet at 2601
Northwest Expressway, Suites 1210W and 1120W, Oklahoma City, Oklahoma
73112-7293, our warehouse and distribution center in 10,340 square feet at 4000
North Lindsay, Oklahoma City, Oklahoma, and our support center in 1,300 square
feet at 214 Quadrum Drive, Oklahoma City, Oklahoma. These premises are occupied
pursuant to long-term leases which expire on May 31, 2003, January 31, 2005, May
31, 2003 and January 31, 2002, respectively, and which require monthly rental
payments of $7,028, $2,336, $5,385 and $813, respectively.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending litigation. In September 1995, the
Oklahoma Department of Securities commenced an investigation of us and the AMS
Distributor Stock Pool related to the availability of exemptions under the
Oklahoma Business Opportunity Act with respect to our network marketing
activities and programs, the offer and sale of unregistered securities by us and
the sale thereof by our officers, directors and employees without registration
as broker-dealers, the purchase and resale of our common stock by our officers
and directors in the public market. As the investigation progressed, it narrowed
to focus on the activities associated and related to the pool. The pool, under
which our independent distributors were permitted to participant on a voluntary
basis, was formed in 1990. Participants made contributions to the pool and, from
such contributions, the administrator of the pool purchased on a monthly basis
our common stock in the over-the-counter market for the participants. All
purchase transactions were executed and effected through a registered
broker-dealer. All records of ownership of the common stock held by the pool
were maintained at our offices. The pool only purchased shares of our common
stock and did not sell shares on behalf of the participants. As of December 31,
1997, the pool held approximately 245,000 shares of common stock for and on
behalf of the participants. Each participant has sole voting rights with respect
to those shares of common stock held for such participant's benefit. In the
event a participant desires to sell the common stock held for the participant's
benefit by the pool, certificates representing such shares are delivered to such
participant for the purpose of effecting such sale.
The Oklahoma Department of Securities took the position that the offer
and sale of participation rights in the pool violated the registration
provisions of the Oklahoma Securities Act. During October 1997, we ceased
accepting additional contributions to the pool and effecting purchase
transactions in our common stock. On November 4, 1997, we and our then executive
officers and directors, John W. Hail, Curtis H. Wilson, Sr. and Roger P.
Baresel, entered into an agreement with the Administrator of the Oklahoma
Department of Securities in settlement of the investigation. The Oklahoma
Department of Securities settled without taking any action against us and our
executive officers and directors. Pursuant to such agreement, John W. Hail
reimbursed the Department its costs of the investigation without entitlement to
reimbursement by us or any of our other officers and directors. Under the terms
of such agreement, we and Messrs. Hail, Wilson and Baresel agreed to notify the
Department of any proposed offer or sale of additional securities by us or each
of Messrs. Hail, Wilson and Baresel pursuant to any registration exemption under
the Oklahoma Securities Act, for the three-year period ending on November 6,
2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of our fiscal year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock was traded in the over-the-counter market and was
quoted by the National Quotation Bureau, Incorporated under the symbol "AMSO."
On September 10, 1997, our common stock became listed on the Boston Stock
Exchange under the symbol "AMG," which was subsequently changed to "AMM." On
November 6, 1997, our Common Stock was first included on the Nasdaq SmallCap
Market under the symbol "AMSO." On June 15, 1999, our common stock became listed
on the American Stock Exchange under the symbol "AMM."
On March 15, 2000, the closing sale price of our common stock on the
American Stock Exchange was $6.313. We believe there are approximately 1,658
holders of our common stock.
The following table sets forth, for the periods prior to June 15, 1999,
the high and low closing bid quotations of our common stock. These bid
quotations reflect inter-dealer prices without adjustment for retail markups,
markdowns or commissions and may not reflect actual transactions. For the
periods subsequent to June 15, 1999 the table sets forth the high and low
closing sale price of our common stock on the American Stock Exchange.
<TABLE>
<CAPTION>
COMMON STOCK
CLOSING BID PRICES
------------------
HIGH LOW
------ -----
1999 --CALENDAR QUARTER ENDED:
<S> <C> <C>
March 31...................................................... $ 3.00 $ 2.19
June 30....................................................... 4.00 1.94
September 30.................................................. 4.56 3.25
December 31................................................... 5.56 3.13
1998 --CALENDAR QUARTER ENDED:
March 31...................................................... $ 3.38 $ 2.13
June 30....................................................... 4.00 3.00
September 30.................................................. 4.00 1.88
December 31................................................... 2.41 1.50
1997--CALENDAR QUARTER ENDED:
March 31...................................................... $ 6.25 $ 5.50
June 30....................................................... 8.38 5.69
September 30.................................................. 9.00 5.00
December 31................................................... 6.88 2.56
</TABLE>
SALES OF UNREGISTERED SECURITIES
On July 9, 1999, we issued 2,070 shares of our common stock to Bob
Nance pursuant to exercise of a stock option that was exercisable for 5,358
shares of common stock. In connection with this option exercise, Mr. Nance used
shares of our common stock that he had held for more than six months to pay the
exercise price of the stock option. Accordingly, we did not receive any cash
proceeds from this option exercise.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO BEGINNING ON PAGE F-1.
GENERAL
Our business and operations during the last four years have been
significantly affected by the acquisitions of Miracle Mountain International,
Inc. in May 1996 (the "Miracle Mountain acquisition"), Chambre International,
Inc. in January 1997 (the "Chambre 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 "Stay 'N Shape
International asset purchase") and ToppMed Inc. in July 1998 (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 101 products.
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<PAGE>
MIRACLE MOUNTAIN ACQUISITION. Effective May 31, 1996, Miracle
Mountain International, Inc. 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 Miracle Mountain
acquisition, we issued 20,000 shares of our common stock. As a result of the
Miracle Mountain acquisition, we added one product to our line and 1,690
additional distributors.
CHAMBRE ACQUISITION. Effective January 31, 1997, Chambre International,
Inc. 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 acquisition, we issued 14,000
shares of our common stock. As a result of the Chambre acquisition, 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.
STAY 'N SHAPE INTERNATIONAL 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 this
asset purchase, we paid cash of $1,174,441 and issued 125,984 shares of our
common stock. As a result of this asset purchase, we 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 OUR COMMON STOCK. In March 1998, we announced and began
repurchasing up to $1 million of our common stock in the open market. As of
December 31, 1999, we had repurchased 201,185 shares of our common stock for
$699,307 or an average of $3.48 per share. Furthermore, on January 12, 2000, we
announced our intent to repurchase up to an additional $2 million of our common
stock in the open market for cash.
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 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 of
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.
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 February 19, 1999, our Registration
Statement, (number 333-47801) was declared effective by the Securities and
Exchange Commission. Under this registration statement, we 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 our
products and services ("Eligible Persons") in lots of five Participation
Interests. An Eligible Person electing to participate in the Plan (a
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<PAGE>
"Participant") is entitled through purchase of the Participation Interests to
purchase in the open market through the Plan, shares of our common stock. The
Participation Interests are non-transferable. Other than an annual service fee
of $5.00 per Participant and a transaction fee of $1.25 per month, 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, and each Eligible Person
is be required initially to purchase a minimum of twenty-five Participation
Interests upon electing to participate in the Plan.
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.
WARRANT REGISTRATION. On March 22, 2000, our Registration Statement
(number 333-31750) was declared effective by the Securities and Exchange
Commission. Under this Registration Statement, we registered 2,092,211 shares of
stock underlying our outstanding 1997-A warrants, redeemable common stock
purchase warrants and underwriter warrants. During the first quarter of 2000,
the closing sale price of our common stock for 20 consecutive trading days
exceeded $6.80, which permits us to call the redeemable common stock purchase
warrants for redemption.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, selected
results of our operations for the years ended December 31, 1999, 1998 and 1997.
The selected results of operations are derived from our audited consolidated
financial statements. The results of operations for the periods presented are
not necessarily indicative of our future operations.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Net sales................................... $22,427,551 100.0% $13,287,824 100.0% $ 10,192,227 100.0%
----------- ------- ----------- ------- ------------ -------
Cost of sales:
Commissions and bonuses................. 9,691,239 43.2 5,487,418 41.3 4,557,355 44.7
Cost of products........................ 5,140,375 22.9 3,146,765 23.7 2,260,715 22.2
Cost of shipping........................ 779,327 3.5 365,046 2.7 433,590 4.5
----------- ------- ----------- ------- ------------ -------
Total cost of sales......................... 15,610,941 69.6 8,999,229 67.7 7,271,660 71.3
----------- ------- ----------- ------- ------------ -------
Gross profit............................ 6,816,610 30.4 4,288,595 32.3 2,920,567 28.7
Marketing, distribution and
administrative expenses................. 5,236,938 23.4 3,548,772 26.7 2,792,879 27.4
----------- ------- ----------- ------- ------------ -------
Income from operations.................. 1,579,672 7.0 739,823 5.6 127,688 1.3
Other income (expense):
Interest and dividends, net................. 364,270 1.6 309,908 2.3 34,017 .3
Other income................................ 7,866 -- 39,280 .3 28,017 .3
Settlement of additional tax liability..... -- -- (421,623) (3.2) --
----------- ------- ----------- ------- ------------
Total other income (expense)................ 372,136 1.7 (72,435) (.6) 62,034 .6
----------- ------- ----------- ------- ------------ -------
Income before income taxes.................. 1,951,808 8.7 667,388 5.0 189,722 1.9
Income Taxes................................ 676,025 3.0 253,340 1.9 59,696 .6
----------- ------- ----------- ------- ------------ -------
Net income.................................. $ 1,275,783 5.7% $ 414,048 3.1% $ 130,026 1.3%
=========== ======= =========== ======= ============ =======
</TABLE>
During the years 1999, 1998 and 1997, we experienced increases in net
sales compared to each 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 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 1999 AND 1998
Our net sales during the year ended December 31, 1999, increased by
$9,139,727, or 68.8%, to $22,427,551 from $13,287,824 during the year ended
December 31, 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 1999, we made
aggregate net sales of $22,218,379 to 63,200 distributors, compared to aggregate
net sales during 1998
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of $13,159,821 to 33,700 distributors. At December 31, 1999, we had
approximately 61,200 "active" distributors compared to approximately 33,000
at December 31, 1998. A distributor is considered to be "active" if he or she
has made a product purchase of $50 or more from us within the previous 12
months. Sales per distributor per month decreased from $33 to $30 for 1999,
compared to 1998.
Our cost of sales during 1999 increased by $6,611,712, or 73.5%, to
$15,610,941 from $8,999,229 during 1998. This increase was attributable to
- - an increase of $4,203,821 in distributor commissions and bonuses due
to the increased level of sales and increased promotions,
- - an increase of $1,993,610 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 $414,281 in shipping costs due to the increased level of
sales and 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 payments for
shipping received from customers. 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 69.6% during the year ended December 31,
1999, from 67.7% during the same period in 1998 due to an increase in
distributor commissions and bonuses as a percentage of net sales to 43.2 % from
41.3%, a decrease in cost of products sold to 22.9% of net sales from 23.7% and
an increase in cost of shipping to 3.5% of net sales from 2.7%.
Our gross profit increased $2,528,015, or 58.9%, to $6,816,610 during
1999 from $4,288,595 during 1998. The gross profit decreased as a percentage of
net sales to 30.4% of net sales from 32.3%.
Marketing, distribution and administrative expenses increased
$1,688,166, or 47.6%, to $5,236,938 during the year ended December 31, 1999,
from $3,548,772 during the same period in 1998. This increase was attributable
to expansion of our administrative infra-structure necessary to support
increased levels of sales and increased promotional expense designed to increase
sales. The number of full-time employees increased to 53 during the first
quarter of 1999, 54 during the second quarter of 1999, declined to 49 during the
third quarter of 1999 and rose to 75 during the fourth quarter of 1999 as
compared to 37, 35, 47 and 46, 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, including postage, telephone, bank card service charges and
supplies. The marketing, distribution and administrative expenses as a
percentage of net sales decreased to 23.4% during 1999, from 26.7% during 1998
due to the increased level of sales.
Our other income (reduced by other expense) increased by $444,571 to
net other income of $372,136 during 1999, from a net expense of $72,435 during
the same period in 1998. This increase was primarily attributable to the
one-time expense in 1998 of the settlement of additional tax liability of
$421,623 ($256,300 net of related tax effect). During 1998, in an effort to
facilitate the growth of our distributor network, we voluntarily began
contacting all of the state tax authorities to enter into agreements with them
under which we assumed the responsibility for collecting and remitting sales and
use taxes on behalf of our independent distributors. Certain states had
requirements which resulted in an additional tax liability as a condition of
entering into the agreement. We believe the liability was a one-time
nonrecurring charge and will have no further adverse impact on our future
results of operations because the ongoing collection and remittance of sales and
use tax represents neither additional income nor additional expense to us but
instead is a pass through item with no income statement effect.
Our income before taxes increased $1,284,420, or 192.5%, to $1,951,808
during 1999, from $667,388 during 1998. Income before taxes as a percentage of
net sales was 8.7% and 5.0% during 1999 and 1998, respectively. Income taxes
during 1999 and 1998 were $676,025 and $253,340, respectively. Our net income
increased $861,735, or 208.1%, to $1,275,783 during 1999, from $414,048 during
1998. This increase in net income was attributable to
- - the increased level of sales,
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<PAGE>
- - the decrease in the marketing, distribution and administrative
expenses as a percentage of net sales and
- - the increase in other income due to the one-time expense of the
settlement of additional tax liability of $421,623 ($256,300 net of
the related tax effect) taken in 1998.
Net income as a percentage of net sales increased to 5.7% during 1999,
from 3.1% during 1998.
COMPARISON OF 1998 AND 1997
Our net sales during the year ended December 31, 1998, increased by
$3,095,597, or 30.4%, to $13,287,824 from $10,192,227 during the year ended
December 31, 1997. 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. Through the CII
Acquisition (which was consummated on January 31, 1997) and the SNSI Asset
Purchase (which was consummated on April 16, 1997), we added 113 products to its
product line and acquired 5,100 distributors. The distributors acquired in
connection with the CII Acquisition and the SNSI Asset Purchase contributed
$1,121,173 to the increase between the two periods. During 1998, we made
aggregate net sales of $13,159,821 to 33,700 distributors, compared to aggregate
net sales during 1997 of $10,030,327 to 20,300 distributors. At December 31,
1998, we had approximately 33,000 "active" distributors compared to
approximately 20,400 at December 31, 1997. A distributor is considered to be
"active" if he or she has made a product purchase of $50 or more from us within
the previous 12 months. Sales per distributor per month decreased from $41 to
$33 during 1998, compared to 1997.
Our cost of sales during 1998, increased by $1,727,569 , or 23.8%, to
$8,999,229 from $7,271,660 during 1997. This increase was attributable to
- - an increase of $930,063 in distributor commissions and bonuses due to
the increased level of sales,
- - an increase of $886,050 in the cost of products sold due to the
increased level of sales and the increased quality of marketing tools
made available and
- - a decrease of $88,544 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, decreased to 67.7%
during 1998, from 71.3% during 1997 due to a decrease in distributor commissions
and bonuses as a percentage of net sales to 41.3% from 44.7%, an increase in
cost of products sold to 23.7% of net sales from 22.2% and a decrease in cost of
shipping to 2.7% of net sales from 4.5%.
Our gross profit increased $1,368,028, or 46.8%, to $4,288,595 during
1998 from $2,920,567 during 1997. The gross profit increased as a percentage of
net sales to 32.3% of net sales from 28.7%.
Marketing, distribution and administrative expenses increased $755,893,
or 27.1%, to $3,548,772 during 1998, from $2,792,879 during 1997. This increase
was attributable to (i) increased promotional expense designed to increase
sales, (ii) an increase in expenses involved in expanding investor awareness of
us, (iii) increased payroll and employee costs related to cost of living
adjustments and employee mix and (iv) an increase in lease expense from the
addition of 10,340 square feet of warehouse and distribution space in October,
1997. The balance of the increase in marketing, distribution and administrative
expenses resulted from the higher level of activity and corresponding increases
in variable costs, including postage, telephone, bank card service charges, and
supplies.
Our other income (reduced by other income) decreased by $134,469 to a
net expense of $72,435 during 1998, from $62,034 during 1997. This decrease was
attributable to the one-time expense attributable to the settlement of
additional tax liability of $421,623 ($256,300 net of related tax effect).
During 1998, in an effort to facilitate the growth of our distributor network,
we voluntarily began contacting all of the state tax authorities to enter into
agreements with them under which we assumed the responsibility for collecting
and remitting sales and use taxes on behalf of our independent distributors.
Certain states had requirements which resulted in an additional tax liability as
a condition of entering into the agreement. We believe the liability was a
one-time nonrecurring charge and will have no further adverse impact on our
future results of operations because the ongoing collection and remittance of
sales and use tax represents neither additional income nor additional expense to
us but instead is a pass through item with no income statement effect.
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<PAGE>
Our income before taxes increased $477,666, or 251.8%, to $667,388
during 1998, from $189,722 during 1997. Income before taxes as a percentage of
net sales was 5.1% and 1.9% during 1998 and 1997, respectively. Income taxes
during 1998 and 1997 were $253,340 and $59,696, respectively. Our net income
increased $284,022, or 218.4%, to $414,049 during 1998, from $130,026 during
1997. This increase in net income was primarily the result of the increase in
our gross profit margin and offset by the increase of other expenses due to the
one time expense of the settlement of the additional tax liability of $421,623
($256,300 net of the related tax effect).
Net income as a percentage of net sales increased to 3.1% during 1998,
from 1.3% during 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, which establishes accounting and reporting standards for
derivative instruments. The impact on our consolidated financial statements from
the adoption of SFAS 133 has not yet been determined. This statement is
effective for all fiscal quarters beginning January 1, 2001.
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.
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 66.6% and 49.7% of net sales for the years ended December 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. 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 regulations which will, if adopted as
proposed, significantly limit our ability to sell AM-300 and any other weight
management products which contain ephedra or ephedrine. The proposed regulations
were subject to comment until December 2, 1997. The proposed regulations will
become effective 180 days following their issuance as final regulations.
However, as of March 15, 2000, no final regulations have been issued. Several
trade organizations in the dietary supplement industry have commented on the
proposed regulations, requesting substantial modifications. It is probable that
the Food and Drug Administration will make material changes to the proposed
regulations prior to adoption. Relatedly, the United States General Accounting
Office recently issued a report dated July 2, 1999 to a committee of the U.S.
House of Representatives that casts substantial doubt on certain provisions of
the Food and Drug Administration's proposed regulations on dietary supplements
which contain ephedrine alkaloids. We do not know the effect such report will
have on the proposed regulations. There is a risk that our AM-300 product may
become subject to further federal, state, local or foreign laws or regulations.
These regulations could require us to (i) withdraw or reformulate our AM-300
product with reduced ephedrine levels or with a substitute for ephedra or
ephedrine, (ii) relabel our product with different warnings or revised
directions for use, or (iii) not make certain statements, possibly including
weight loss claims, with respect to any product containing ephedra or ephedrine.
Even in the absence of further laws or regulation, we may elect to reformulate
or relabel our AM-300 product containing ephedra or ephedrine. While we believe
that our AM-300 product could be reformulated and relabeled, there is no
assurance that such reformulation and relabeling will not adversely affect our
sales. Consequently, management is unable at the present time to predict the
ultimate resolution of these issues, nor their ultimate impact on the Company's
results of operation or financial position.
PRODUCT LIABILITY - We, like other marketers of products that are
intended to be ingested, face 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
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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
Other than the offer and sale of our common stock and other securities
during 1997, our primary source of liquidity has been cash provided by operating
activities and shareholder loans. We do not have any arrangements for
significant bank or institutional lending.
At December 31, 1999, we had working capital of $2,715,525 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 year ended December 31, 1999, net cash
provided by operating activities was $2,370,939, net cash used in investing
activities was $5,473,205, and net cash used in financing activities was
$524,057. This represented an average monthly positive cash flow from operating
activities of $197,578. We had a net decrease in cash during this period of
$3,626,323, primarily as a result of our purchase of certain marketable
securities for investment purposes. Our working capital needs over the next 12
months consist primarily of marketing, distribution and administrative expenses.
During the third quarter of 1999 we began purchasing marketable debt
and equity securities. As of December 31, 1999, we had purchased $4,074,550 in
securities. These securities have been classified as $1,805,885 in available for
sale securities and $2,273,743 in held to maturity securities. We have the
intent and ability to hold to maturity our investment in securities classified
as held to maturity.
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,
1999, we had repurchased 201,185 shares of our common stock for $699,307 for an
average per share price of $3.48. Furthermore, on January 12, 2000, we announced
our intent to repurchase up to an additional $2 million of our common stock in
the open market for cash.
During the first quarter of 1998, we agreed to loan John W. Hail, our
the 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 December 31, 1999, the
balance due on these loans was $313,761 plus interest. The loans and extension
were unanimously approved by our board of directors.
On March 22, 2000, our Registration Statement (number 333-31750) was
declared effective by the Securities and Exchange Commission. Under this
Registration Statement, we registered 2,092,211 shares of stock underlying our
outstanding 1997-A warrants, redeemable common stock purchase warrants and
underwriter warrants. During the first quarter of 2000, the closing sale price
of our common stock for 20 consecutive trading days exceeded $6.80, which
permits us to call the redeemable common stock purchase warrants for redemption.
The 1997-A warrants and redeemable common stock purchase warrants are
exercisable on or before November 6, 2002, for the purchase of 1,832,211 shares
of our common stock for $3.40 per share and the underwriter warrants are
exercisable on or before November 12, 2002, for the purchase of 130,000
units(consisting of one share of our common stock and one redeemable common
stock purchase warrant) for $5.40 per unit. These common stock purchase warrants
are exercisable for the purchase of 130,000 shares of our common stock for $3.40
per share.
ITEM 7. FINANCIAL STATEMENTS
Our consolidated financial statements are set forth beginning on page
F-1 hereof.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements concerning matters of accounting
principle or financial statement disclosure between us and our independent
accountants of the type requiring disclosure hereunder.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
OUR DIRECTORS AND EXECUTIVE OFFICERS
Pursuant to our bylaws, our directors are divided into three classes.
Class I directors hold office initially for a term expiring at the annual
meeting of shareholders to be held in 2002. Class II directors hold office
initially for a term expiring at the annual meeting of shareholders to be held
in 2000. Class III directors hold office initially for a term expiring at the
annual meeting of shareholders to be held in 2001. Each director will hold
office for the term elected and until his successor is duly elected and
qualified. At each annual shareholders meeting, the successor to a member of the
class of directors whose term expires at such meeting is elected to hold office
for a term expiring at the annual meeting of shareholders held in the third year
following the year of his election. Executive officers are elected by our board
of directors and serve at our discretion. The following table sets forth certain
information with respect to our executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH US
---- --- ----------------
<S> <C> <C>
John W. Hail(1)(2) 70 Chairman of the Board, Chief Executive Officer and Director
Roger P. Baresel(1)(2) 45 President, Chief Financial Officer, Secretary and Director
R. Terren Dunlap(3) 55 Director and Member of Audit Committee
Harland C. Stonecipher(4) 61 Director and Member of Audit Committee
Jimmy L. Dungan (3) 54 Director
</TABLE>
- ------------------------
(1) Member of the Stock Option Committee.
(2) Term as a Director expires in 2001.
(3) Term as a Director expires in 2000.
(4) Term as a Director expires in 2002.
JOHN W. HAIL is our founder and has served as our Chief Executive
Officer and Chairman of the Board of Directors since our inception in June 1988.
During 1987 and through May 1988, Mr. Hail served as Executive Vice President,
Director and Agency Director of Pre-Paid Legal Services, Inc., a public company
engaged in the sale of legal services contracts, and also served as Chairman of
the Board of Directors of TVC Marketing, Inc., the exclusive marketing agent of
Pre-Paid Legal Services, Inc. Since 1998, Mr. Hail has served as a Director of
Pre-Paid Legal Services, Inc. In March 1999, Mr. Hail became a director of
DuraSwitch Industries, Inc., a company that developed and distributes electronic
switches.
ROGER P. BARESEL has served as our Vice President, Chief Financial
Officer, Secretary and a Director since June 1995. In July 1995, he became our
President. Mr. Baresel is a Certified Public Accountant and holds a Master of
Business Administration degree. From 1988 until joining us full-time in 1995, he
maintained an accounting practice, specializing in providing consulting services
to small and growing businesses and provided consulting services to us.
R. TERREN DUNLAP has served as one of our directors since June 1995. He
is Chief Executive Officer of DuraSwitch Industries, Inc., a company formed in
1997 that developed and distributes electronic switches. He served as our Vice
President-International Development from June 1995 through March 1996. Mr.
Dunlap is a Director and the co-founder, and from 1984 and until March 1994
served as Chief Executive Officer and Chairman of the Board, of Go-Video, Inc.,
a developer and distributor of consumer electronics products.
HARLAND C. STONECIPHER has served as one of our directors since August
1995. Mr. Stonecipher has been Chairman of the Board and Chief Executive
Officer of Pre-Paid Legal Services, Inc. since its inception in 1972.
JIMMY L. DUNGAN has served as one of our directors since October 1999.
Mr. Dungan has been actively working full time to develop an Advantage Marketing
Systems distributorship with his wife, Pat, since August 1995. The Dungans have
been Platinum Distributors since November 1998 and achieved Double Platinum
status in October 1999.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our directors and officers, and persons who own more than 10 percent
of a registered class of our equity securities, to file reports of ownership
and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than 10% shareholders are required to furnish
us with copies of all Section 16(a) forms they file.
Based solely on our review of the copies of the forms we received
covering purchase and sale transactions in our equity securities during 1999,
we believe that each person who, at any time during 1999, was a director,
officer or beneficial owner of more than 10% of our Common Stock complied
with all Section 16(a) filing requirements during 1999, except Jimmy L.
Dungan and his wife Pat Dungan were late in filing of their initial reports
upon Mr. Dungan becoming a Director in October 1999 and two reports covering
small purchase transactions by Mr. Dungan during 1999.
-26-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
relating to compensation for services rendered during the years ended December
31, 1999, 1998 and 1997, paid to or accrued for John W. Hail, our Chief
Executive Officer and each of our executive officers whose 1999 salary and
bonus, pursuant to a recurring arrangement, exceed $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
------------------------
ANNUAL COMPENSATION SECURITIES EXERCISE
--------------------------------- UNDERLYING OR BASE
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS OTHER(2) OPTIONS PRICE
- --------------------------- ------ --------------------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
John W. Hail................................ 1999 $236,801 $ -- $ -- -- $ --
Chief Executive Officer 1998 $ 60,000 $16,565 $ -- 100,000(3) $1.75
1997 $ 56,539 $ -- $ -- 100,000(3) $6.00
100,000(3) $2.70
Roger P. Baresel............................ 1999 $146,049 $ -- $ -- -- $ --
President and Chief Financial 1998 $ 96,304 $25,000(5) $ -- 10,000(4) $2.00
and Accounting Officer 43,750(4) $2.00
1997 $ 91,484 $ 2,500 $ -- 43,750(4) $2.70
</TABLE>
- ------------------------
(1) Dollar value of base salary earned during the year.
(2) We provide use of an automobile to Messrs. Hail and Baresel, the value
of which is not greater than $5,000 annually.
(3) During 1997, we granted 100,000 stock options to Mr. Hail pursuant to
our stock option plan, each exercisable for the purchase of one share
of common stock at an exercise price of $6.00 per share (the market
value of the common stock on the date of grant). The exercise price on
these options was reduced to $2.70 pursuant to regrant during 1997
(which was equal to the fair value of the common stock on the date of
regrant). On October 8, 1998 the exercise price on these options was
reduced to of $1.75 per share pursuant to regrant (which was equal
to the fair value of the common stock on the date of regrant).
(4) During 1994, we granted 10,000 stock options to Mr. Baresel, each
exercisable for the purchase of one share of common stock at an
exercise price of $2.16 per share (the market value of the common stock
on the date of grant). The exercise price on these options was reduced
to $2.00 per share pursuant to regrant (which was equal to the fair
value of the common stock on the date of regrant). During 1995, we
granted 43,750 stock options to Mr. Baresel, each exercisable for the
purchase of one share of common stock at an exercise price of $3.60 per
share (the market value of the common stock on the date of grant).
During 1995, Mr. Baresel gave these options as a gift to certain
members of his family. The exercise price on these options was reduced
to $2.00 per share pursuant to regrant during 1997 (which was equal to
the fair value of the common stock on the date of regrant). On November
18, 1998, the exercise price on these options was reduced to $2.00 per
share of common stock (which was equal to the fair value of the common
stock on the date of regrant).
(5) Represents a one-time non-recurring payment.
AGGREGATE OPTION GRANTS AND EXERCISES IN 1999 AND YEAR-END OPTION VALUES
STOCK OPTIONS AND OPTION VALUES. No options were granted to Messrs.
Hail and Baresel during 1999.
AGGREGATE STOCK OPTION EXERCISES IN 1999 AND YEAR-END AND OPTION
VALUES. The following table sets forth information related to the exercise of
stock options during 1999 and the number and value of options held by the named
executive officer at December 31, 1999.
-27-
<PAGE>
STOCK OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AS OF OPTIONS AS OF
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999(1)
ACQUIRED ON VALUE -------------------------- --------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John W. Hail........................... -- $ -- 475,000(2) -- $1,716,000 $ --
Chief Executive Officer
Roger P. Baresel....................... 10,000 $35,600 168,750(3) -- $ 600,750 $ --
President and Chief Financial
and Accounting Officer
</TABLE>
- ------------------------
(1) The closing sale price of our common stock as reported on the American
Stock Exchange on December 31, 1999 was $5.56. The per-share value is
calculated based on the applicable closing highest bid price per share,
minus the exercise price, multiplied by the number of shares of our
common stock underlying the options.
(2) Includes 225,000 options given by John Hail as a gift to certain
members of his family in 1995.
(3) Includes 156,250 options given by Roger Baresel as a gift to certain
members of his family in 1995.
COMPENSATION OF DIRECTORS
Directors who are not our employees receive $250 for each board meeting
attended. Directors who are also our employees receive no additional
compensation for serving as directors. We reimburse our directors for travel and
out-of-pocket expenses in connection with their attendance at meetings of our
board of directors. Our Bylaws provide for mandatory indemnification of
directors and officers to the fullest extent permitted by Oklahoma law.
STOCK OPTION PLAN
We established the Advantage Marketing Systems, Inc. 1995 Stock Option
Plan in June 1995. This plan provides for the issuance of incentive stock
options with or without stock appreciation rights and nonincentive stock options
with or without stock appreciation rights to our employees and consultants,
including employees who also serve as a director. The total number of shares of
our common stock authorized for issuance under this stock option plan is
1,125,000. As of March 15, 2000, options to purchase a total of 1,054,884 shares
of our common stock have been granted under the plan of which 514,068 were
outstanding. These options are exercisable for $1.75 to $6.13 per share and
expire March 2002 through May 2007. Also, at March 15, 2000, there were
outstanding stock options and warrants (in addition to the 1997-A warrants, the
redeemable common stock purchase warrants and the underwriter warrants)
exercisable for the purchase of 790,750 shares of our common stock granted
outside of the plan.
The stock option committee, which is currently comprised of Messrs.
Hail and Baresel, administers and interprets the stock option plan and has
authority to grant options to all eligible employees and determine the types
of options granted and the terms, restrictions and conditions of the options
at the time of grant.
The option price of our common stock is determined by the stock option
committee, provided such price may not be less than 85% of the fair market value
of the shares on the date of grant of the option. The fair market value of a
share of our common stock is determined by the last report sale price on the
date of grant of the option. Upon the exercise of an option, the option price
must be paid in full, in cash or with a stock appreciation right. Subject to the
stock option committee's approval, upon exercise of an option with a stock
appreciation right attached, a participant may receive cash, shares of our
common stock or a combination of both, in an amount or having a fair market
value equal to the excess of the fair market value, on the date of exercise, of
the shares for which the option and stock appreciation right are exercised, over
the option exercise price.
Options granted under the stock option plan may not be exercised until
six months after the date of the grant, except in the event of death or
disability of the participant. Incentive stock options and any stock
appreciation rights are exercisable only by participants while actively employed
as our employee or a consultant, except in the case of death, retirement or
disability. Options may be exercised at any time within three months after the
participant's retirement or within one year after the participant's disability
or death, but not beyond the expiration date of the option. No option may be
granted after April 30, 2005. Options are not transferable except by will or by
the laws of descent and distribution.
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<PAGE>
OFFICER AND DIRECTOR LIABILITY
As permitted by the provisions of the Oklahoma General Corporation Act,
our certificate of incorporation eliminates in certain circumstances the
monetary liability of our directors for a breach of their fiduciary duty as
directors. These provisions and applicable laws do not eliminate the liability
of one of our directors for
- - a breach of the director's duty of loyalty to us or our shareholders,
- - acts or omissions by a director not in good faith or which involve
intentional misconduct or a knowing violation of law,
- - liability arising under the Oklahoma General Corporation Act relating
to the declaration of dividends and purchase or redemption of shares of
our common stock in violation of the Oklahoma General Corporation Act,
- - any transaction from which the director derived an improper personal
benefit,
- - violations of federal securities laws, or
- - limit our rights or those of our shareholders, in appropriate
circumstances, to seek equitable remedies such as injunctive or other
forms of non-monetary relief; however, such remedies may not be
effective in all cases.
Our certificate of incorporation and bylaws provide that we will
indemnify our directors and officers to the fullest extent permitted by the
Oklahoma General Corporation Act. Under such provisions, any director or
officer, who in his capacity as such, is made or threatened to be made, a party
to any suit or proceeding, may be indemnified if our board of directors
determines such director or officer acted in good faith and in a manner he
reasonably believed to be in or not opposed to our best interests.
Our certificate of incorporation and bylaws and the Oklahoma General
Corporation Act further provide that such indemnification is not exclusive of
any other rights to which such individuals may be entitled under our
certificate, our bylaws, an agreement, vote of shareholders or disinterested
directors or otherwise. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to our directors and officers
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy and is, therefore, unenforceable.
We maintain insurance to protect our directors and officers against
liability asserted against them in their official capacities. Such insurance
protection covers claims and any related defense costs of up to $3 million based
on alleged or actual securities law violations, other than intentional dishonest
or fraudulent acts or omissions, or any willful violation of any statute, rule
or law, or claims arising out of any improper profit, remuneration or advantage
derived by an insured director or officer
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information as to the beneficial
ownership of our common stock as of March 15, 2000, of
- - each person who is known to us to be the beneficial owner of more than
5% of our common stock,
- - each of our directors and executive officers,
- - our executive officers and directors as a group, and
- - their percentage holdings of our outstanding shares of common stock.
For purposes of the following table, the number of shares and percent of
ownership of our outstanding common stock that the named person beneficially
owned at March 15, 2000, including shares of our common stock that such person
has the right to acquire within 60 days of this date of this prospectus, upon
exercise of options and warrants. However, such shares are not
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<PAGE>
included for the purposes of computing the number of shares beneficially owned
and percent of outstanding our common stock of any other named person.
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------
SHARES PERCENT OF
BENEFICIALLY SHARE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OUTSTANDING
- ------------------------------------ ------------ -----------
<S> <C> <C>
John W. Hail (1)(2)................................................................................. 609,354 13.6%
Curtis H.Wilson (3)................................................................................. 258,242 5.8%
Roger P. Baresel (1)(4)............................................................................. 175,728 4.0%
Harland C. Stonecipher (5).......................................................................... 180,768 4.3%
R. Terren Dunlap (1)................................................................................ 17,500 .4%
Jimmy L. Dungan (1)(6).............................................................................. 9,781 .2%
Executive Officers and Directors as a group
(five persons)(7)................................................................................ 993,131 21.5%
</TABLE>
- ------------------------
(1) A director or an executive officer with a business address of 2601
Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293.
(2) The number of shares consist of and each percentage presented includes
- 250,000 shares of our common stock that are subject to currently
exercisable stock options, 100 shares of our common stock subject
to currently exercisable 1997-A warrants and 1,100 shares of our
common stock that are subject to currently exercisable redeemable
common stock purchase warrants held by Mr. Hail,
- 11,728 shares of our common stock and 1,000 shares of our common
stock that are subject to currently exercisable redeemable common
stock purchase warrants owned by corporations controlled by Mr.
Hail, and
- 1,640 shares of our common stock and 1,000 shares of our common
stock that are subject to currently exercisable redeemable common
stock purchase warrants held by Helen Hail, wife of Mr. Hail, with
respect to which Mr. Hail disclaims any beneficial interest.
(3) A former director, with a business address of 10121 NW 7th Street,
Plantation, Florida 33324. The number of shares and each percentage
presented includes
- 250,000 shares of our common stock that are subject to currently
exercisable stock options held by Mr. Wilson and
- 3,000 shares of our outstanding common stock and 3,000 shares of
our common stock that are subject to currently exercisable
redeemable common stock purchase warrants held by Ruth Wilson, wife
of Mr. Wilson, with respect to which Mr. Wilson disclaims any
beneficial interest.
(4) The number of shares consist of and each percentage presented includes
- 7,500 shares of our outstanding common stock jointly held by Mr.
Baresel and his wife, Judith A. Baresel,
- 2,000 shares of our common stock subject to currently exercisable
1997-A warrants and 1,000 shares of our common stock that are
subject to currently exercisable redeemable common stock purchase
warrants held by Mr. Baresel,
- 12,500 shares of our common stock that are subject to currently
exercisable stock options held by Mr. Baresel,
- 31,528 shares of our outstanding common stock held by Mrs. Baresel,
- 100 shares of our common stock subject to currently exercisable
1997-A warrants held by Mrs. Baresel,
- 87,500 shares of our common stock that are subject to currently
exercisable stock options,
- 6,100 shares of our common stock that are subject to currently
exercisable redeemable common stock purchase warrants held by Mrs.
Baresel, and
- 12,500 shares of Common Stock that are subject to currently
exercisable stock options held by Mrs. Baresel as the custodian for
the benefit of the children of Mr. and Mrs. Baresel, with respect
to which Mr. Baresel disclaims any beneficial interest.
(5) Mr. Stonecipher is a director with a business address of 321 East Main
Street, Ada, Oklahoma 74820, and Chairman of the Board and Chief
Executive Officer of Pre-Paid Legal Services, Inc. The number of shares
consist of and each percentage presented is based upon 180,768 shares
of our outstanding common stock held by Pre-Paid Legal Services, Inc.,
which may be deemed to be beneficially owned by Mr. Stonecipher.
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<PAGE>
(6) The number of shares and each percentage presented includes
- 9,606 shares of our common stock held by Pat Dungan, wife of Mr.
Dungan, and
- 175 shares of our common stock subject to currently exercisable
1995-A warrants held by Mrs. Dungan.
(7) The number of shares and each percentage presented includes
- 2,375 shares of our common stock subject to currently exercisable
1997-A warrants,
- 10,200 shares of our common stock that are subject to currently
exercisable redeemable common stock purchase warrants, and
- 362,500 shares of our common stock that are issuable upon exercise
of other currently exercisable stock options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below is a description of transactions entered into between
us and certain of our officers, directors and shareholders during the last
two years. Certain of these transactions may result in conflicts of interest
between us and such individuals. Although these persons have fiduciary duties
to us and our shareholders, there can be no assurance that conflicts of
interest will always be resolved in our favor or in favor of our shareholders.
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 us. During
1998 and 1997, we made aggregate payments pursuant to such lease agreements of
$17,939 and $19,427, respectively. As of December 31, 1998 these leases had
terminated.
During the first quarter of 1998, we agreed to loan John Hail, an
affiliate, 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 become due on March 31, 2000. As of December 31, 1999, the aggregate
outstanding principal balance of these loans was $313,761 plus interest. We
believe that the terms of these loans are comparable with those that could
have been obtained from an unaffiliated lender. These loans were unanimously
approved by our board of directors.
During 1999 and 1998, we paid Curtis H. Wilson, a former director and
greater than 5% shareholder, sales commissions of $128,700 and $62,555,
respectively. These commissions are based on purchases by Mr. Wilson and his
downline distributors in accordance with our network marketing program in effect
at the time of the sales. See "Item 1. Description of Business - Network
Marketing".
During 1999 and 1998, we paid Pat Dungan, wife of Jimmy L. Dungan, a
Director of the Company, sales commissions of $119,626 and $76,696,
respectively. These commissions were based on purchases by the Dungans and their
downline distributors in accordance with our network marketing program in effect
at the time of the sales. See "Item 1. Description of Business - Network
Marketing".
During 1997, pursuant to our Stock Option Plan, we granted Mr. Hail
10-year nontransferable stock options exercisable for the purchase of 100,000
shares of our common stock for $6.00 per share. On the date of grant of these
stock option, the exercise price was equal to the fair value of our common
stock. These options were exchanged by Mr. Hail for 100,000 stock options having
the same terms other than an exercise price of $2.70 per share of common stock,
which was equal to the fair value of the common stock on the date of exchange.
Subsequently, these options were exchanged by Mr. Hail on October 8, 1998 for
100,000 stock options 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.
On December 17, 1996, we adopted policies that
- - any loans to officers, directors and 5% or more shareholders
("affiliates") are subject to approval by a majority of not less than
two of our disinterested independent directors and
- - such loans and other transactions with affiliates will be on terms no
less favorable than could be obtained from unaffiliated parties and
approved by a majority of not less than two of the disinterested
independent directors.
Our board of directors is comprised of five members, two of which, R. Terren
Dunlap and Harland C. Stonecipher, are independent directors.
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<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 The Registrant's Certificate of Incorporation, incorporated by
reference to the Registration Statement on Form SB-2
(Registration No. 333-47801) filed with the commission on
March 11, 1998.
3.2 The Registrant's Bylaws, incorporated by reference to the
Registration Statement on Form SB-2 (Registration No.
333-47801) filed with the commission on March 11, 1998.
10.1 Warrant Agreement between Registrant and U.S. Stock Transfer
Inc., dated as of January 20, 1997, as amended and restated
January 8, 1998, incorporated by reference to Amendment No. 2
to Form 8-A Registration Statement, filed with the Commission
on January 13, 1998.
10.2 Unit and Warrant Agreement between Registrant and U.S. Stock
Transfer Inc., dated as of November 6, 1997, as amended and
restated January 8, 1998, incorporated by reference to
Amendment No. 1 to Form 8-A Registration Statement, filed with
the Commission on January 14, 1998.
10.3 The Promotional Shares Escrow Agreement, dated November 4,
1997, by and between Advantage Marketing Systems, Inc., John
W. Hail, Curtis H. Wilson, Sr., Ruth Wilson, Roger P. Baresel,
Judith A. Baresel, R. Terren Dunlap, Pre-Paid Legal Services,
Inc., TVC, Inc., and Liberty Bank and Trust Company of
Oklahoma City, N.A., incorporated by reference to Amendment
No. 2 to Registration Statement on Form SB-2 (Registration No.
333-34885) filed with the commission on November 3, 1997.
10.4 The Promotional Shares Escrow Agreement, dated October 31,
1997, by and between Advantage Marketing Systems, Inc., Robert
and Retha H. Nance, and Liberty Bank and Trust Company of
Oklahoma City, N.A., incorporated by reference to Amendment
No. 2 to Registration Statement on Form SB-2 (Registration No.
333-47801)filed with the commission on November 3, 1997.
10.5 The Promotional Shares Lock-In Agreement, dated November 5,
1997, by and between Advantage Marketing Systems, Inc., Roger
P. Baresel, and Judith A. Baresel, incorporated by reference
to Amendment No. 2 to Registration Statement on Form SB-2
(Registration No. 333-47801)filed with the commission on
November 3, 1997.
10.6 Legal Services Agreement between Registrant and Pre-Paid Legal
Services, dated September 1, 1988, incorporated by reference
to Form 10-K Annual Report for the year ended December 31,
1989, filed with the Commission on September 18, 1990.
10.7 Lease Agreement between Registrant and International Business
Machines Corporation, dated May 22, 1989, incorporated by
reference to Form 10-K Annual Report for the year ended
December 31, 1989, filed with the Commission on September 18,
1990.
10.8 Group Contract between Registrant and Consumer Benefit
Services, Inc., dated April 2, 1989, incorporated by reference
to Form 10-K Annual Report for the year ended December 31,
1989, filed with the Commission on September 18, 1990.
10.9 Distribution Agreement between Registrant and Topped, Inc.,
dated June 1, 1989, incorporated by reference to Form 10-K
Annual Report for the year ended December 31, 1989, filed with
the Commission on September 18, 1990.
10.10 Lease Agreement between Registrant and Kaiser Francis Oil
Company, dated June 1, 1993, incorporated by reference to Form
10-K Annual Report for the year ended December 31, 1993, filed
with the Commission on April 14, 1994.
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<PAGE>
10.11 Advantage Marketing Systems, Inc. 1995 Stock Option Plan,
incorporated by reference to Form SB-2 Registration Statement
(No. 33-80629), filed with the Commission on November 20,
1996.
10.12 Agreement between Registrant and Consumer Benefit Services,
Inc., dated October 20, 1995, incorporated by reference to
Form SB-2 Registration Statement (No. 33-80629), filed with
the Commission on November 20, 1996.
10.13 Agreement between Registrant and Advanced Products, Inc.,
dated November 28, 1994, incorporated by reference to Form
SB-2 Registration Statement (No. 33-80629), filed with the
Commission on November 20, 1996.
10.14 Agreement between Registrant and J&K Pharmaceutical
Laboratories, dated April 22, 1996, incorporated by reference
to Amendment No. 3 to Form SB-2 Registration Statement (No.
33-80629), filed with the Commission on January 14, 1997.
10.15 Stock Purchase Agreement having an effective date of May 31,
1996, between Registrant, Miracle Mountain International,
Inc., Richard Seaton, Gene Burson, Kaye Jennings, Daryl
Burson, James Rogers, incorporated by reference to Form 8-K,
filed with the Commission on July 12, 1996.
10.16 Stock Purchase Agreement having an effective date of January
31, 1997, among Registrant, Chambre International, Inc., Janet
Britt, Jerry Hampton, Teresa Hampton, James Baria, Florence
Baria, Rose Cashin, Pat Eason, Joseph Williams, Livia
Williams, Don Black, Nadine Black, Lynda Brown, Gary Galindo,
Harold Griffin, Linda Griffin, Iren Van Vlaenderen, Dean Van
Vlaenderen, Rose Hilgedick, Julie Connary, and Royce Britt,
incorporated by reference to Amendment No. 3 to Form SB-2
Registration Statement (No. 33-80629), filed with the
Commission on January 14, 1997.
10.17 Asset Purchase Agreement among Registrant, Stay 'N Shape
International, Inc., Solution Products International, Inc.,
Nation of Winners, Inc., Now International, Inc., Carl S.
Rainey and Danny Gibson, dated April 16, 1997, incorporated by
reference to Form 8-K, filed with the Commission on May 1,
1997.
10.18 The Advantage Marketing Systems, Inc. 1998 Distributor Stock
Purchase Plan, incorporated by reference to Amendment No. 1 to
Registration Statement on Form SB-2 (Registration No.
333-47801) filed with the commission on October 7, 1998.
10.19 The form of Advantage Marketing Systems, Inc. 1998 Distributor
Stock Purchase Plan Stock Purchase Agreement, incorporated by
reference to Amendment No. 1 to Registration Statement on Form
SB-2 (Registration No. 333-47801)filed with the commission on
October 7, 1998.
23 Consent of Independent Public Accountants, dated March 30, 2000.
27 Financial Data Schedule
</TABLE>
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<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: March 30, 2000 By: /s/ JOHN W. HAIL
-----------------------------------------------
John W. Hail, Chief Executive Officer
Date: March 30, 2000 By: /s/ ROGER P. BARESEL
-----------------------------------------------
Roger P. Baresel, President, Chief Financial
and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 30, 2000 By: /s/ JOHN W. HAIL
----------------------------------------------
John W. Hail, Chief Executive Officer,
Chairman of the Board and Director
Date: March 30, 2000 By: /s/ ROGER P. BARESEL
----------------------------------------------
Roger P. Baresel, President, Chief Financial
Officer and Director
Date: March 30, 2000 By: /s/ JIMMY L. DUNGAN
----------------------------------------------
Jimmy L. Dungan, Director
Date: March 30, 2000 By: /s/ R. TERREN DUNLAP
----------------------------------------------
R. Terren Dunlap, Director
Date: March 30, 2000 By: /s/ HARLAND C. STONECIPHER
----------------------------------------------
Harland C. Stonecipher, Director
-34-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ADVANTAGE MARKETING SYSTEMS, INC. AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report .......................................................................................F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998........................................................F-3
Consolidated Statements of Income for Years Ended December 31, 1999, 1998 and 1997..................................F-4
Consolidated Statements of Stockholders' Equity for Years Ended December 31, 1999, 1998 and 1997....................F-5
Consolidated Statements of Cash Flows for Years Ended December 31, 1999, 1998 and 1997..............................F-6
Notes to Consolidated Financial Statements for Years Ended December 31, 1999 1998 and 1997..........................F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Advantage Marketing Systems, Inc. and Subsidiaries
Oklahoma City, Oklahoma
We have audited the accompanying consolidated balance sheets of Advantage
Marketing Systems, Inc. and subsidiaries (the "Company") as of December 31,
1999, and 1998, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
March 20, 2000
F-2
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 1,662,894 $ 5,289,217
Marketable securities, held to maturity....................................... 983,020 --
Receivables - net of allowance of $55,332 and $36,604, respectively........... 319,519 263,503
Receivable from affiliate..................................................... 313,761 293,936
Inventory..................................................................... 927,591 1,009,998
Deferred income taxes......................................................... 60,797 93,496
Other assets.................................................................. 187,496 100,345
----------- -----------
Total current assets.............................................. 4,455,078 7,050,495
MARKETABLE SECURITIES, available for sale, at fair value........................ 1,805,885 --
MARKETABLE SECURITIES, held to maturity......................................... 1,290,723 --
RECEIVABLES..................................................................... 126,624 129,440
PROPERTY AND EQUIPMENT, Net..................................................... 2,202,885 1,090,280
GOODWILL, Net................................................................... 1,618,826 1,725,734
COVENANTS NOT TO COMPETE, Net................................................... 436,845 511,685
DEFERRED INCOME TAXES........................................................... 21,788 95,277
OTHER ASSETS.................................................................... 201,729 114,572
----------- -----------
TOTAL........................................................................... $12,160,383 $10,717,483
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 313,492 $ 60,172
Accrued commissions and bonuses............................................... 319,183 156,174
Accrued other expenses........................................................ 807,246 277,651
Accrued sales tax liability................................................... 218,789 616,735
Notes payable................................................................. -- 29,476
Capital lease obligations..................................................... 80,843 87,105
----------- -----------
Total current liabilities......................................... 1,739,553 1,227,313
LONG-TERM LIABILITIES:
Notes payable................................................................. -- 94,311
Capital lease obligations..................................................... 188,847 173,247
----------- -----------
Total liabilities................................................ 1,928,400 1,494,871
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 12)
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 4,283,988 and 4,275,514 shares; outstanding 4,082,803 and 4,141,014
shares, respectively ........................................................ 428 428
Paid-in capital............................................................... 10,232,700 10,180,106
Notes receivable for exercise of options...................................... (50,999) (63,960)
Retained earnings (accumulated deficit)....................................... 759,692 (516,091)
Accumulated other comprehensive income, net of tax............................ (10,531) --
----------- -----------
Total capital and retained earnings (accumulated deficit)...... 10,931,290 9,600,483
Less cost of treasury stock (201,185 and 134,500 shares, common, respectively) (699,307) (377,871)
----------- -----------
Total stockholders' equity...................................... 10,231,983 9,222,612
----------- -----------
TOTAL........................................................................... $12,160,383 $10,717,483
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales.......................................................... $ 22,427,551 $ 13,287,824 $ 10,192,227
Cost of sales...................................................... 15,610,941 8,999,229 7,271,660
------------ ------------ ------------
Gross profit................................................... 6,816,610 4,288,595 2,920,567
Marketing, distribution and administrative expenses................ 5,236,938 3,548,772 2,792,879
------------ ------------ ------------
Income from operations......................................... 1,579,672 739,823 127,688
Other income (expense):
Interest and dividends, net........................................ 364,270 309,908 34,017
Other income....................................................... 7,866 39,280 28,017
Settlement of additional tax liability (Note 11)................... -- (421,623) --
------------ ------------ ------------
Total other income (expense)................................... 372,136 (72,435) 62,034
------------ ------------ ------------
INCOME BEFORE TAXES................................................ 1,951,808 667,388 189,722
TAX EXPENSE ....................................................... 676,025 253,340 59,696
------------ ------------ ------------
NET INCOME......................................................... $ 1,275,783 $ 414,048 $ 130,026
============ ============ ============
Net income per common share........................................ $ .31 $ .10 $ .05
============ ============ ============
Net income per common share - assuming dilution................... $ .27 $ .09 $ .04
============ ============ ============
Weighted average common shares outstanding......................... 4,139,706 4,191,760 2,751,771
============ ============ ============
Weighted average common shares outstanding - assuming dilution..... 4,778,576 4,503,411 3,762,642
============ ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMU-
LATED
NOTES RETAINED OTHER COM-
RECEIVABLE EARNINGS PREHENSIVE TOTAL
SHARES FOR (ACCUMU COMPRE- INCOME, STOCK-
(SEE COMMON PAID-IN EXERCISE LATED HENSIVE NET TREASURY HOLDERS'
NOTE 5) STOCK CAPITAL OF OPTIONS DEFICIT) INCOME OF TAX STOCK EQUITY
--------- ------ ----------- ---------- ----------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1997............... 2,157,262 $214 $ 1,981,380 $ -- $(1,060,165) $ -- $ -- $ 921,429
Issuance of stock for
Chambre' acquisition......... 14,000 1 83,999 -- -- -- -- -- 84,000
Warrants and rights offering,
net.......................... 337,211 34 1,831,247 -- -- -- -- -- 1,831,281
Issuance of stock for
SNSI acquisition............. 125,984 13 799,987 -- -- -- -- -- 800,000
Options exercised for cash..... 46,945 4 79,996 -- -- -- -- -- 80,000
Options exercised by tendering
mature shares, net........... 26,731 4 (4) -- -- -- -- -- --
Options exercised by issuance
of note...................... 46,250 5 73,995 (74,000) -- -- -- -- --
Common stock offering, net..... 1,495,000 150 5,329,509 -- -- -- -- -- 5,329,659
Comprehensive Income:
Net income................... -- -- -- -- 130,026 $130,026 -- -- 130,026
--------- ------ ----------- ---------- ----------- ========== ---------- --------- ----------
BALANCE,
DECEMBER 31, 1997............ 4,249,383 425 10,180,109 (74,000) (930,139) -- -- -- 9,176,395
Payments on notes receivable... -- -- -- 10,040 -- -- -- -- 10,040
Options exercised by
tendering mature shares, net. 26,131 3 (3) -- -- -- -- -- --
Purchases of treasury stock, at
cost......................... (134,500) -- -- -- -- -- -- (377,871) (377,871)
Comprehensive Income:
Net income................... -- -- -- -- 414,048 $414,048 -- -- 414,048
--------- ------ ----------- ---------- ----------- ========== ---------- --------- ----------
BALANCE,
DECEMBER 31, 1998............ 4,141,014 428 10,180,106 (63,960) (516,091) -- -- (377,871) 9,222,612
Payments on notes receivable... -- -- -- 12,961 -- -- -- -- 12,961
Stock option issued............ -- -- 52,600 -- -- -- -- -- 52,600
Options exercised by
tendering mature shares, net. 8,474 -- (6) -- -- -- -- -- (6)
Purchases of treasury stock, at
cost......................... (66,685) -- -- -- -- -- -- (321,436) (321,436)
Comprehensive Income:
Net income................... -- -- -- -- 1,275,783 1,275,783 -- -- 1,275,783
Unrealized loss on available
for sale securities, net of
tax........................ -- -- -- -- -- (10,531) (10,531) -- (10,531)
Comprehensive income........... -- -- -- -- -- $1,265,252 -- -- --
--------- ------ ----------- ---------- ----------- ========== ----------- --------- -----------
BALANCE,
DECEMBER 31, 1999............ 4,082,803 $428 $10,232,700 $(50,999) $ 759,692 $ (10,531) $(699,307) $10,231,983
========= ====== =========== ========== =========== ========== ========= ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income............................................................. $ 1,275,783 $ 414,048 $ 130,026
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization..................................... 527,054 387,160 251,443
Deferred taxes.................................................... 112,631 251,144 59,696
Provision for bad debts........................................... 18,728 10,804 --
Non-cash compensation............................................. 52,600 -- --
Gain on sale of assets............................................ -- (35,329) (18,671)
Changes in assets and liabilities which provided (used) cash:
Receivables and commission advances............................ (71,934) (144,485) (167,192)
Inventory...................................................... 82,407 (197,873) (722,806)
Other assets................................................... (174,308) (23,179) 269,946
Accounts payable and accrued expenses.......................... 547,978 579,964 78,971
----------- ---------- -----------
Net cash provided by (used in) operating activities....... 2,370,939 1,242,254 (118,587)
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................................... (1,378,830) (547,592) (312,709)
Advances to affiliate.................................................. (40,000) (293,936) --
Proceeds from sale of assets........................................... -- 125,340 40,196
Repayment of receivable from affiliate................................. 20,175 54,780 13,042
Purchase of marketable securities, available for sale.................. (1,822,860) -- --
Purchase of marketable securities, held to maturity.................... (2,251,690) -- --
Purchase of Chambre International, Inc................................. -- -- (51,340)
Purchase of assets pursuant to SNSI Asset Purchase..................... -- -- (1,274,441)
Purchase of ToppMed, Inc. Assets....................................... -- (192,000) --
Purchase of other assets............................................... -- (142,875) (106,803)
----------- ---------- -----------
Net cash used in investing activities ................... (5,473,205) (996,283) (1,692,055)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock................................. -- -- 8,284,357
Proceeds from notes payable............................................ -- 62,727 114,259
Purchase of treasury stock............................................. (321,436) (377,871) --
Payment of deferred offering costs..................................... -- (180,450) (862,967)
Repayments of notes receivable for exercise of stock options........... 12,961 10,040 --
Payment of notes payable............................................... (123,787) (47,684) (34,010)
Principal payment on capital lease obligations......................... (91,795) (198,792) (85,290)
----------- ---------- -----------
Net cash (used in) provided by financing activities...... $ (524,057) (732,030) 7,416,349
----------- ---------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................... (3,626,323) (486,059) 5,605,707
CASH AND CASH EQUIVALENTS, BEGINNING...................................... 5,289,217 5,775,276 169,569
----------- ---------- -----------
CASH AND CASH EQUIVALENTS, ENDING......................................... $ 1,662,894 $5,289,217 $ 5,775,276
=========== ========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Advantage Marketing Systems, Inc. and its
wholly owned subsidiaries, Miracle Mountain International, Inc. and
Chambre' International, Inc. (the "Company"). All significant
intercompany accounts have been eliminated.
NATURE OF BUSINESS - The Company markets a product line of consumer
oriented products in the weight management, dietary supplement and
personal care categories that are produced by various manufacturers.
The Company sells its product line through a network of full and
part-time independent distributors developed by the Company.
The Company also sells supplies and materials to its independent
distributors.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION - The Company recognizes revenue upon shipment of
products, training aids and promotional material to the independent
distributors.
SALES RETURNS - All of the Company's products include a customer
satisfaction guarantee. Company products may be returned within 30 days
of purchase for a full refund or credit toward the purchase of another
Company product. The Company also has a buy-back policy where by it
will repurchase products sold to an independent distributor (subject to
a restocking fee) provided that the distributor terminates his/her
distributorship agreement with the Company and returns the product
within 12 months of original purchase in marketable condition. For the
years ended December 31, 1999, 1998 and 1997, the cost of products
returned to the Company are included in net sales and was three, two
and three percent of gross sales, respectively.
ADVERTISING - The Company expenses advertising as incurred. Total
advertising expense for 1999, 1998, and 1997 was $17,818, $16,459, and
$28,416, respectively.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of cash
in banks and all short term investments with initial maturities of
three months or less.
MARKETABLE SECURITIES -At the time of purchase, investments in debt
securities that the Company has the positive intent and ability to hold
to maturity are classified as held to maturity and reported at
amortized cost; all other debt securities are reported at fair value.
Securities not classified as held to maturity are classified as
available for sale, with the related unrealized gains and losses
excluded from earnings and reported net of income tax as a separate
component of stockholders' equity until realized. Realized gains and
losses on sales of securities are based on the specific identification
method. Declines in the fair value of investment securities below their
carrying value that are other than temporary are recognized in
earnings.
INVENTORY - Inventory consists of consumer product inventory and
training and promotional material such as video tapes, cassette tapes
and paper supplies held for sale to customers and independent
distributors. Inventory is stated at the lower of cost or market. Cost
is determined on a first-in, first-out method.
INTANGIBLES - Intangible assets consist of goodwill and covenants not
to compete. Goodwill represents the excess of cost over the fair value
of the net assets acquired pursuant to the Miracle Mountain
International, Inc. ("MMI"),
F-7
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Chambre' International, Inc. ("CII"), Stay 'N Shape International, Inc.
("SNSI") and ToppMed, Inc. ("TI") acquisitions. The Company amortizes
goodwill from the acquisition of MMI over seven years and from the
acquisitions of CII, SNSI, and TI over twenty years. Covenants not to
compete are being amortized over the life of the contracts. At December
31, 1999 the net amount of goodwill arising from the MMI, CII, SNSI and
TI acquisitions was $58,162, $153,174, $1,288,556 and $118,934,
respectively, and at December 31, 1998 was $75,186, $162,140,
$1,363,075 and $125,333, respectively. Goodwill amortization for the
years ended December 31, 1999, 1998 and 1997 was $106,908, $103,175 and
$78,026, respectively. Covenant amortization for the years ended
December 31, 1999, 1998 and 1997, was $74,840, $71,106 and $53,431,
respectively.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost or,
in the case of leased assets under capital leases, at the fair value of
the leased property and equipment, less accumulated depreciation and
amortization. Property and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets of
three to 20 years. Assets under capital leases and leasehold
improvements are amortized over the lesser of the term of the lease or
the life of the asset.
LONG-LIVED ASSETS - Management of the Company assesses recoverability
of its long-lived assets, including goodwill, whenever events or
changes in circumstances indicate that the carrying value of the asset
may not be recoverable through future cash flows generated by that
asset. Recoverability is assessed and measured on long-lived assets
using an estimate of the undiscounted future cash flows attributable to
the asset. Impairment is measured based on future cash flows discounted
at an appropriate rate.
FAIR VALUE DISCLOSURE - The Company's financial instruments include
cash and cash equivalents, receivables, short-term payables, notes
payable and capital lease obligations. The carrying amounts of cash and
cash equivalents, receivables and short-term payables approximate fair
value due to their short-term nature. The carrying amounts of notes
payable and capital lease obligations approximate fair value based on
borrowing rates currently available to the Company.
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>
For the year ended December 31, 1999:
Earnings per common share:
Income available to common stockholders.................. $1,275,783 $.31
====
Weighted average common shares outstanding............... 4,139,706
Earnings per common share - assuming dilution:
Options.................................................. -- 624,805
Warrants................................................. -- 14,065
---------- ---------
Income available to common stockholders plus assumed
conversions..................................... $1,275,783 4,778,576 $.27
========== ========= ====
</TABLE>
F-8
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
For the year ended December 31, 1998:
Earnings per common share:
Income available to common stockholders.................. $ 414,048 $.10
====
Weighted average common shares outstanding............... 4,191,760
Earnings per common share - assuming dilution:
Options.................................................. -- 311,651
---------- ----------
Income available to common stockholders plus assumed
conversions..................................... $ 414,048 4,503,411 $.09
========== ========== ====
For the year ended December 31, 1997:
Earnings per common share:
Income available to common stockholders.................. $ 130,026 $.05
====
Weighted average common shares outstanding............... 2,751,771
Earnings per common share - assuming dilution:
Options.................................................. -- 825,061
Warrants................................................. -- 185,810
---------- ----------
Income available to common stockholders plus assumed
conversions..................................... $ 130,026 3,762,642 $.04
========== ========== ====
</TABLE>
Options to purchase 213,875 shares of common stock at exercise prices
ranging from $3.44 to $4.75 per share were outstanding at December 31,
1999 but were not included in the computation of earnings per common
share - assuming dilution because the options' exercise price was
greater than the average market price of the common shares. Options to
purchase 100,000 shares of common stock at $2.56 per share were
outstanding at December 31, 1999 but were not included in the
computation of earnings per common share - assuming dilution because
the options were based on a condition which had not yet been met.
Options to purchase 130,358 shares of common stock at exercise prices
ranging from $2.80 to $3.60 per share and 5,000 shares of common stock
at $6.00 per share were outstanding at December 31, 1998 and 1997,
respectively, but were not included in the computation of earnings per
common share - assuming dilution because the options' exercise price
was greater than the average market price of the common shares.
Warrants to purchase 130,000 shares of common stock at $5.40 per share
and 1,962,211 shares of common stock at exercise prices ranging from
$3.40 to $5.40 were outstanding at December 31, 1999 and 1998,
respectively, but were not included in the computation of earnings per
common share - assuming dilution because the warrants' exercise price
was greater than the average market price of the common shares. There
were no antidulitive warrants to purchase shares of common stock at
December 31, 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS - In 1998, the FASB issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
which establishes accounting and reporting standards for derivative
instruments. The impact on the Company's consolidated financial
statements from the adoption of SFAS NO. 133 has not yet been
determined. This statement is effective for all fiscal quarters
beginning after January 1, 2001. The Company will adopt SFAS No. 133 on
January 1, 2001 as required.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, which establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and
losses) in financial statements. In addition, SFAS No. 130 requires the
Company to classify items of other comprehensive income by their nature
in a financial statement and display the accumulated balance of other
comprehensive income separately in
F-9
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
the stockholders' equity section of the consolidated balance sheet.
The Company has adopted SFAS No. 130 as required.
INCOME TAXES - The Company uses an asset and liability approach to
account for income taxes. Deferred income taxes are recognized for the
tax consequences of temporary differences and carryforwards by applying
enacted tax rates applicable to future years to differences between the
financial statement amounts and the tax bases of existing assets and
liabilities. A valuation allowance is established if, in management's
opinion, it is more likely than not that some portion of the deferred
tax asset will not be realized.
RECLASSIFICATIONS - Certain reclassifications have been made to prior
year balances to conform with the presentation for the current period.
2. MARKETABLE SECURITIES
A summary of the amortized cost, unrealized gains and losses and fair
values of marketable securities at December 31, 1999 follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
Available-for-Sale: COST GAINS LOSSES VALUE
----------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Other Securities............................... $ 1,822,860 $ 43,100 $ (60,075) $1,805,885
=========== ======== ========= ==========
Held-to-Maturity:
U.S. Government obligations.................... $ 2,273,743 $ -- $ (39,129) $2,234,614
=========== ======== ========= ==========
</TABLE>
A comparison of the amortized cost and fair value of the Company's
marketable debt securities at December 31, 1999 by maturity date
follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
FAIR VALUE AMORTIZED COST
------------------ -----------------
<S> <C> <C>
One year or less........................................... $ $14,625 $ 983,020
Two years through five years............................... 105,453 300,000
Five years through ten years............................... 110,963 990,723
More than ten years........................................ 137,814 --
------------------ -----------------
Total...................................................... $ 368,$55 $ 2,273,743
================== =================
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
--------------------------
<S> <C> <C>
Office furniture, fixtures and equipment..................... $ 2,403,535 $1,466,273
Vehicles..................................................... 717,862 193,982
Leasehold improvements....................................... 57,756 38,936
----------- ----------
3,179,153 1,699,191
Accumulated depreciation and amortization.................... (976,268) (608,911)
----------- ----------
Total property and equipment, net............................ $ 2,202,885 $1,090,280
=========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and
1997 was $367,357, $203,972, and $119,986, respectively.
F-10
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
4. LEASE AGREEMENTS
During 1999 and 1998, the Company entered into various capital leases
for office equipment. The lease terms range from 24 to 60 months.
Additionally, annual lease rental payments for each lease range from
$700 to $40,000 per year. The schedule of future minimum lease payments
below reflects all payments under the leases.
The property and equipment accounts include $453,768 and $422,616 for
leases that have been capitalized at December 31, 1999 and 1998,
respectively. Related accumulated amortization amounted to $171,420 and
$128,338 at December 31, 1999 and 1998, respectively.
The Company leases office and warehouse space under noncancellable
operating leases.
Future annual minimum lease payments under capital leases and
noncancellable operating leases with initial or remaining terms of one
year or more at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
--------- --------- -----------
<S> <C> <C> <C>
Year ending:
2000............................................................. $ 99,429 $ 188,458 $ 287,887
2001............................................................. 92,389 196,470 288,859
2002............................................................. 57,019 192,534 249,553
2003............................................................. 59,493 99,375 158,868
2004............................................................. 2,815 32,607 35,422
Minimum lease payments thereafter................................ -- 2,724 2,724
--------- --------- ----------
Total minimum lease payments..................................... $ 311,145 $ 712,168 $1,023,313
========= =========
Less amount representing interest................................ 41,455
---------
Present value of net minimum lease payments...................... 269,690
Less current portion............................................. 80,843
---------
Long-term capital lease obligations.............................. $ 188,847
=========
</TABLE>
Rental expense under operating leases for the years ended December 31,
1999, 1998 and 1997 was $167,831, $147,166, and $88,632, respectively.
5. 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, 1999 and
1998, the Company had repurchased 201,185 and 134,500 shares of the
Common Stock at a total cost of $699,307 and $377,871, respectively.
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
F-11
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Public Warrants for the purchase of one unit (consisting of one share
of Common Stock and one 1997-A Warrant), at an exercise price of $6.00
per unit (the "Warrant Modification Offering"). Proceeds to the Company
from the Warrant Modification Offering and the Rights Offering (the
"Offerings") were $2,154,357. Accumulated offering costs of $323,076
were charged against the proceeds of the Offerings. Pursuant to the
Offerings, the Company issued in units 337,211 shares of Common Stock
and 337,211 1997-A Warrants.
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 (the "Units Offering").
During 1997 in connection with the registration of the Units Offering,
certain officers and shareholders agreed to certain escrow and lock-in
arrangements required by the Oklahoma Department of Securities until
November 6, 2000. The agreement encompasses 377,682 shares of the
Company's common stock and stock options and warrants to purchase
674,500 shares of such common stock and does not permit the sale or
disposition of such securities by these officers and shareholders.
There are no conditions under which these shares of common stock, stock
options and warrants would be required to be returned to the Company
and they are treated as outstanding securities for purposes of the
Company's earnings per share calculations.
COMMON STOCK OPTIONS AND OTHER WARRANTS - During 1999, the Company
granted 291,461 options at exercise prices ranging from $2.00 per share
to $4.75 per share. Options were granted primarily for services
rendered and to ensure the future availability of those services to the
Company. During 1999 the Company recognized $52,600 in compensation
expense related to the issuance of stock options. A total of 122,750
and 100,000 of the options granted during 1999 were unexercisable at
December 31, 1999 due to a six month vesting period and a contingency
requirement, respectively. During 1999, 15,358 options were exercised
with 6,884 mature shares (shares owned by the optionee in excess of six
months as of the date of exercise). In addition, during the period
31,400 options were canceled and 18,750 options expired.
During 1998, the Company granted 809,819 options at exercise prices
ranging from $1.75 per share to $3.00 per share. Options were granted
primarily for services rendered and to ensure the future availability
of those services to the Company. A total of 418,819 of the options
granted during 1998 were unexercisable at December 31, 1998 due to a
six month vesting period. During 1998, 57,306 options were exercised
for 31,025 mature shares. In addition, during this period 519,944
options with a weighted average exercise price of $2.32 per share were
voluntarily surrendered and canceled by the Company in exchange for an
equal number of options, with a weighted average exercise price of
$1.82 and 97,580 other options were canceled without exchange for new
options. The exercise price of the exchanged options was equal to the
market value of the Company's stock on the date of exchange. There was
no expense recognized in the Company's financial statements relating to
the exchange. See Note 6 for the pro forma effects of SFAS 123
ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS 123").
During 1997, the Company granted 493,100 options at exercise prices
ranging from $2.70 per share to $6.00 per share. Options were granted
primarily for services rendered and to ensure the future availability
of those services to the Company. Options granted on December 26, 1997
have a six month vesting period. During 1997, 135,695 options were
exercised of which 46,945, 42,500 and 46,250 were exercised for cash,
15,769 mature shares and notes receivable, respectively. In addition,
during this period 319,250 options with a weighted average exercise
price of $4.67 per share were voluntarily surrendered and canceled by
the Company in exchange for an equal number of options, with an
exercise price of $2.70 per share, 125,000 other warrants were canceled
without exchange for new warrants or options and 2,499 options expired.
The exercise price of the exchanged option was equal to the market
F-12
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
value of the Company's stock on the date of exchange. There was no
expense recognized in the Company's financial statements relating to
the exchange. See Note 6 for the pro forma effects of SFAS 123.
The following table summarizes the Company's stock option and other
warrants activity for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1999 PRICE 1998 PRICE 1997 PRICE
--------- ------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options and other
warrants outstanding,
beginning of year..... 1,543,322 $2.09 1,439,583 $2.28 1,528,927 $2.49
Options and other
warrants issued
during the year....... 291,461 2.92 809,819 1.93 493,100 3.68
Options and other
warrants exercised
during the year........ (15,358) 2.28 (57,306) 2.17 (135,695) 1.64
Options and other
warrants cancelled
during the year........ (31,400) 2.09 (617,524) 2.35 (444,250) 4.75
Options and other
warrants expired
during the year........ (18,750) 2.16 (31,250) 1.60 (2,499) 1.60
-------- --------- ---------
Options and other
warrants outstanding,
end of year............ 1,769,275 $2.22 1,543,322 $2.09 1,439,583 $2.28
========= ========= =========
</TABLE>
The weighted average grant-date fair value of options and other
warrants granted during 1999, 1998 and 1997 was $1.39, $1.05 and $1.20
per share, respectively.
<TABLE>
<CAPTION>
OPTIONS AND OTHER WARRANTS OPTIONS AND OTHER WARRANTS
OUTSTANDING EXERCISABLE
-------------------------------------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/99 LIFE PRICE AT 12/31/99 PRICE
--------------- ---------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.75 - $4.75 1,769,275 3.7 years $2.22 1,546,525 $2.09
</TABLE>
F-13
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COMMON STOCK WARRANTS - The following table summarizes the Company's
common stock warrants and their activity for the years ended December
31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
WARRANTS
ISSUED AND EXERCISE
OUTSTANDING PRICE EXERCISE PERIOD
----------- -------- -------------------
<S> <C> <C> <C>
December 31, 1999:
1997-A Warrants......................................... 337,211 $3.40 1/31/97 - 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
===========
December 31, 1998:
1997-A Warrants......................................... 337,211 $3.40 1/31/97 - 1/31/02
===========
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
===========
December 31, 1997:
Class A Warrants, beginning of year..................... 524,360 $6.00 4/26/89 - 7/26/97
Class A Warrants redeemed during the year............... (524,360) $6.00
-----------
Class A Warrants, end of year........................... --
-----------
Class B Warrants, beginning of year..................... 525,860 $8.00 4/26/89 - 7/26/97
Class B Warrants redeemed during the year............... (525,860) $8.00
-----------
Class B Warrants, end of year........................... --
===========
1997-A Warrants, beginning of year...................... --
1997-A Warrants issued during the year.................. 337,211 $12.00 1/31/97 - 11/06/02
-----------
1997-A Warrants, end of year............................ 337,211
===========
Redeemable Common Stock Purchase Warrants,
beginning of year.................................... --
Redeemable Common Stock Purchase Warrants,
issued during the year............................... 1,495,000 $5.40 11/06/97 - 11/06/02
-----------
Redeemable Common Stock Purchase Warrants,
end of year.......................................... 1,495,000
===========
Underwriters' Warrants, beginning of year............... --
Underwriters' Warrants issued during the year........... 130,000 $5.40 11/12/98 - 11/12/02
-----------
Underwriters' Warrants, end of year..................... 130,000
===========
</TABLE>
Each warrant entitles the holder to purchase one share of common stock.
As of January 8, 1998, the Company reduced the exercise price of the
1997-A Warrants from $12.00 to $3.40 and extended the exercise period
from January 31, 1999 to November 6, 2002, 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 an 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
F-14
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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.
6. 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 years ended December 31, 1999 and 1998 the Company issued
160,061 and 281,295 options, respectively under the Plan. At
December 31, 1999 and 1998, the Company had 1,769,275 and 1,543,322,
respectively, stock options outstanding of which only 591,650 and
441,589, respectively, were issued pursuant to the plan.
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock-based compensation
awards. Accordingly, no compensation cost has been recognized in the
accompanying consolidated financial statements. The following pro forma
data is calculated net of tax as if compensation cost for the Company's
stock-based compensation awards (see also Note 5) was determined based
upon the fair value at the grant date consistent with the methodology
prescribed under SFAS No. 123.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Net income as reported............................ $1,275,783 $ 414,04 $ 130,026
Adjustment, net of tax.......................... (113,466) (233,329) (467,554)
---------- ----------- ---------
Pro forma net income (loss)....................... $1,162,317 $ 180,719 $(337,528)
Net income per common share as reported........... $ .31 $ .10 $ .05
Adjustment, net of tax.......................... (.03) (.06) (0.17)
---------- ------------ ---------
Pro forma net income (loss) per common share...... $ .28 $ .04 $ (0.12)
Pro forma net income (loss) per common share -
assuming dilution............................... $ .24 $ .04 $ (0.12)
Weighted average common shares outstanding........ 4,139,706 4,191,760 2,751,771
Weighted average common shares outstanding -
assuming dilution............................... 4,778,576 4,503,411 2,751,771
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1999, 1998 and 1997,
respectively: risk-free interest rates of 5.41, 4.50 and 5.93 percent;
no dividend yield or assumed forfeitures; expected lives of 3.7, 5.4
and 6.7 years;
F-15
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
and volatility of 60, 59 and 60 percent. The pro forma amounts above
are not likely to be representative of future years because there is no
assurance that additional awards will be made each year.
7. RELATED PARTIES
During 1999, 1998 and 1997, the Company received $6,724, $6,822 and
$7,157, 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 years ended December 31, 1998 and 1997 the
Company made aggregate monthly payments pursuant to such lease
agreements of $17,939 and $19,427, respectively. As of December 31,
1998 the leases had terminated.
On October 8, 1998, John W. Hail, an affiliate, 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 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 eight percent per annum, and were due on March 31, 1999. The loans
were extended until March 31, 2000. As of December 31, 1999, the
balance due on these loans was $313,761 plus accrued interest. The
loans and extension were unanimously approved by the Company's board of
directors.
During the years ended December 31, 1999 and 1998, the Company paid Pat
Dungan, wife of Jimmy L. Dungan, a Director of the Company, sales
commissions of $119,626 and $76,696, respectively. These commissions
were based on purchases by the Dungans and their downline distributors
in accordance with the Company's network marketing program in effect at
the time of the sales.
8. INCOME TAXES
On a regular basis, management evaluates all available evidence, both
positive and negative, regarding the ultimate realization of the tax
benefits of its deferred tax assets. Management has concluded that it
is more likely than not that a tax benefit will be realized from its
deferred tax assets. The Company's deferred tax assets relate primarily
to net operating loss carryforwards for income tax purposes at December
31, 1999, totaling approximately $210,000, which are limited as to use
and will begin to expire in 2010. The Company has a net deferred tax
asset at December 31, 1999 and 1998, of $82,585 and $188,773,
respectively.
Income taxes for 1999 and 1998 are comprised of current taxes of
$563,394 and $2,196 and deferred taxes of $112,631 and $251,144,
respectively. Income taxes for 1997 are comprised of deferred taxes. A
reconciliation of the statutory Federal income tax rate to the
effective income tax rate for the years ended December 31, 1999, 1998,
and 1997 is as follows:
F-16
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate................... 34.0% 34.0% 34.0%
State tax effective rate............................ 4.0 4.0 4.6
Permanent differences............................... 1.1 2.3 6.4
Benefit of graduated tax rates...................... 0.0 0.0 (4.8)
Change in effective rate............................ 0.0 0.0 (8.7)
Other............................................... (4.5) (2.3) 0.0
---- ---- ----
Effective income tax rate........................... 34.6% 38.0% 31.5%
==== ==== ====
</TABLE>
The change in the total deferred tax net assets from December 31, 1998
to December 31, 1999 was $106,188. This difference is allocated as
$112,631 and $6,444 to December 31, 1999 net income and stockholder's
equity, respectively. Deferred tax liabilities and assets at December
31, 1999 and 1998 are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization................................ $(48,717) $ (38,037)
-------- ---------
Total deferred tax liabilities.................... (48,717) (38,037)
--------
Deferred tax assets:
Net operating loss carryforwards............................. 79,209 160,889
Reserves..................................................... 39,785 49,404
Other........................................................ 12,308 16,517
-------- ---------
Total deferred tax assets........................ 131,302 226,810
-------- ---------
Net deferred taxes............................................. 82,585 188,773
Less current portion of net deferred tax assets................ 60,797 93,496
-------- ---------
Noncurrent portion............................................. $ 21,788 $ 95,277
======== =========
</TABLE>
9. ACQUISITIONS
On July 31, 1998, the Company acquired all rights, including
formulations and trademarks, for the ToppFast, ToppStamina and ToppFitt
products from ToppMed, Inc. of Los Angeles, California for a total
purchase price of $192,000 which was paid at closing.
Pursuant to a Stock Purchase Agreement having an effective date of
January 31, 1997 (the "Purchase Agreement"), the Company acquired
all of the issued and outstanding capital stock of Chambre'
International, Inc., a Texas corporation ("CII"), and CII became a
wholly-owned subsidiary of the Company (the "CII Acquisition"). The
CII Acquisition was closed on January 31, 1997, and was accounted
for under the purchase method of accounting. CII is a network
marketer of various third-party manufactured cosmetics, skin care
and hair care products. In connection with the CII Acquisitions, the
Company issued 6,482 shares of its common stock to the shareholders
of CII at closing and issued an additional 7,518 shares of its
common stock to the shareholders of CII on March 31, 1997, after
determination of certain liabilities.
In connection with the CII Acquisition, the excess of the purchase
price of $135,340, which includes $3,549 of transaction costs, over
the negative $63,985 fair value of assets of CII acquired, net of
liabilities assumed, has been allocated $179,325 to goodwill and
$20,000 to a covenant not to complete. Goodwill and the covenant not
to compete dwill be amortized over 20 year and 47 month periods,
respectively.
F-17
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Pursuant to an Asset Purchase Agreement having an effective date of
April 16, 1997 (the "Purchase Agreement"), the Company acquired all
the assets of Stay 'N Shape International, Inc. ("SNSI"), Solution
Products International, Inc. ("SPII"), Nation of Winners, Inc.
("NWI"), Now International, Inc. ("NII"), all Georgia corporations,
(collectively SNSI, SPII, NWI and NII are referred to as the
"Selling Group"), free and clear of any lien, charge, claim, pledge,
security interest or other encumbrance of any type or kind
whatsoever, known or unknown (the "SNSI" Asset Purchase"). The SNSI
Asset Purchase was closed on April 16, 1997, and was accounted for
under the purchase method of accounting. Each company in the Selling
Group is a network marketer of various third-party manufactured
nutritional supplements and was under common ownership.
The Company purchased all of the assets, including the network
marketing organizations, of Stay 'N Shape International, Inc.,
Solution Products International, Inc., Nation of Winners, Inc., and
Now International, Inc. pursuant to an Asset Purchase Agreement
dated April 16, 1997. In connection with the SNSI Asset Purchase,
the Company paid cash of $1,174,441 and issued 125,984 shares of
Common Stock at closing. 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.
In connection with the SNSI Asset Purchase, the excess of the
purchase price of $2,074,441, which included $100,000 of transaction
costs, over the $84,063 fair value of the assets acquired, has been
allocated $1,490,378 to goodwill and $500,000 to two covenants not
to compete. Goodwill and the covenants not to compete will be
amortized over 20 and 10 year periods, respectively.
Pursuant to a Stock Purchase Agreement having an effective date of
May 31, 1996 (the "Purchase Agreement"), the Company acquired all of
the issued and outstanding capital stock of Miracle Mountain
International, Inc., a Colorado corporation ("MMI"), and MMI became
a wholly owned subsidiary of the Company (the "MMI Acquisition").
The MMI Acquisition was accounted for under the purchase method of
accounting. MMI is a network marketer of various third-party
manufactured nutritional supplement products. Pursuant to the
Purchase Agreement and in connection with the MMI Acquisition, the
Company issued and delivered to the shareholders of MMI 20,000
shares of the Company's common stock.
In connection with the MMI Acquisition, the excess of the purchase
price of $176,103, which includes $56,103 of transaction costs, over
the negative $3,059 fair value of the assets of MMI acquired, net of
liabilities assumed, has been allocated $119,162 to goodwill and
$60,000 to the covenant not to compete. Goodwill and the covenant
not to compete will be amortized over seven and four and one-half
year periods, respectively.
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the acquisitions had
occurred at the beginning of 1998 and 1997, with pro forma
adjustments to give effect to amortization of goodwill together with
the related income tax effect. The unaudited pro forma information
is not necessarily indicative of either the results of operations
that would have occurred had the purchases been made during the
periods presented or the future results of the combined operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
Net revenues................................... $13,228,000 $10,776,000
Net income..................................... $ 397,000 $ 142,000
Net income per common share.................... $ .09 $ .05
Net income per common share - assuming dilution $ .09 $ .04
</TABLE>
F-18
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------------ --------- --------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest....................................... $ 18,381 $ 34,663 $ 33,012
Income taxes................................... 12,020 -- 2,196
Noncash financing and investing activities:
Property and equipment acquired by capital lease 101,133 99,007 147,508
Deferred offering costs not yet paid........... -- -- 180,450
Acquisition of Chambre' International, Inc.:
Fair value of assets acquired................. $ -- $ -- $ (84,802)
Fair value of covenant not to compete......... -- -- (20,000)
Purchase price in excess of tangible assets
acquired and covenant not to compete........ -- -- (179,325)
Fair value of common stock issuance........... -- -- 84,000
Liabilities assumed........................... -- -- 148,787
------------ --------- --------------
Cash paid to purchase Chambre' International,
Inc........................................ $ -- $ -- $ (51,340)
------------ --------- --------------
SNSI asset purchase:
Fair value of assets acquired................. $ -- $ -- $ (84,063)
Fair value of covenant not to compete......... -- -- (500,000)
Purchase price in excess of tangible assets
acquired and covenant not to compete....... -- -- (1,490,378)
Fair value of common stock issuance........... -- -- 800,000
------------ --------- --------------
Cash paid to purchase SNSI assets............. $ -- $ -- $ (1,274,441)
------------ --------- --------------
ToppMed, Inc. asset purchase:
Fair value of covenant not to compete......... $ -- $ (64,000) $ --
Purchase price in excess of tangible assets
acquired and covenant not to compete....... -- (128,000) --
------------ --------- --------------
Cash paid to purchase ToppMed, Inc. assets.... $ -- $(192,000) $ --
------------ --------- --------------
</TABLE>
11. ADDITIONAL TAX LIABILITY
During 1998, in an effort to facilitate the growth of its
distributor network, the Company voluntarily began contacting all of
the state sales and use tax authorities to enter into agreements
with them whereby the Company would assume the responsibility for
collecting and remitting sales and use taxes on behalf of its
independent distributors. Certain states had requirements which
resulted in an additional tax liability for the Company as a
condition of entering into the agreement. The liability has an
adverse impact on the Company's earnings, net of the related tax
effect, of $256,300 or $.06 per share. Management believes the
liability was a one time nonrecurring charge and will have no
further adverse impact on the Company's future results of operations
because the ongoing collection and remittance of sales and use tax
represents neither additional income nor additional expense to the
Company but instead is a pass through item with no income statement
effect.
12. 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 66.6 percent, 49.7 percent, and 29.5 percent
of net sales for the years ended 1999, 1998 and 1997, respectively.
One of the herbal ingredients in AM-300 is ephedra concentrate,
which contains naturally occurring ephedrine. Ephedrine products
F-19
<PAGE>
have been the subject of adverse publicity in the United States and
other countries relating to alleged harmful effects. 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
regulations which will, if adopted as proposed, significantly limit
the ability of the Company to sell AM-300 and any other weight
management products which contain ephedra or ephedrine. The proposed
regulations were subject to comment until December 2, 1997. The
proposed regulations will become effective 180 days following their
issuance as final regulations. Several trade organizations in the
dietary supplement industry have commented on the proposed
regulations, requesting substantial modifications. It is probable
that the FDA will make material changes to the proposed regulations
prior to adoption. Relatedly, the United States General Accounting
Office recently issued a report dated July 2, 1999 to a committee of
the U.S. House of Representatives. The Company does not know the effect
such report will have on the proposed regulations. There is a risk that
AM-300 may become subject to further federal, state, local or foreign
laws or regulations. These regulations could require the Company to (i)
withdraw or reformulate its AM-300 product with reduced ephedrine
levels or with a substitute for ephedra or ephedrine, (ii) relabel its
product with different warnings or revised directions for use, or (iii)
not make certain statements, possibly including weight loss claims,
with respect to any product containing ephedra or ephedrine. Even in
the absence of further laws or regulation, the Company may elect to
reformulate or relabel its AM- 300 product containing ephedra or
ephedrine. While the Company believes that its AM-300 product could be
reformulated and relabeled, there is no assurance that such
reformulation and relabeling will not adversely affect sales.
Consequently, management is unable at the present time to predict the
ultimate resolution of these issues, nor their ultimate impact on the
Company's results of operation or 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. The Company has liability insurance
coverage. 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.
* * * * * *
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<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in:
(i) Registration Statement No. 333-30438 (Employee Stock Option Plan) on
Form S-8, and
(ii) Registration Statement No. 333-91491 (1995 Stock Option Plan) on Form
S-8
of our report dated March 20, 2000, appearing in this Annual Report on Form
10-KSB of Advantage Marketing Systems, Inc. for the year ended December 31,
1999.
Oklahoma City, Oklahoma
March 30, 2000
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,662,894
<SECURITIES> 983,020
<RECEIVABLES> 374,851
<ALLOWANCES> 55,332
<INVENTORY> 927,591
<CURRENT-ASSETS> 4,455,078
<PP&E> 3,179,153
<DEPRECIATION> 976,268
<TOTAL-ASSETS> 12,160,383
<CURRENT-LIABILITIES> 1,739,553
<BONDS> 0
0
0
<COMMON> 428
<OTHER-SE> 10,231,555
<TOTAL-LIABILITY-AND-EQUITY> 12,160,383
<SALES> 22,427,551
<TOTAL-REVENUES> 22,821,188
<CGS> 15,610,941
<TOTAL-COSTS> 20,851,064
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<INCOME-PRETAX> 1,951,808
<INCOME-TAX> 676,025
<INCOME-CONTINUING> 1,275,783
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<EXTRAORDINARY> 0
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<NET-INCOME> 1,275,783
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