<PAGE>
FORM 10-QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For Quarter Ended Commission File Number
September 30, 2000 001-13343
------------------ -----------------------
ADVANTAGE MARKETING SYSTEMS, INC.
-------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Oklahoma 73-1323256
--------------------------- ----------------------------
(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) Number)
2601 N.W. Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112
-------------------------------------------------------------------------------
(Address of principal executive offices)
(405) 842-0131
-------------------------------------------------------------------------------
(Issuer's telephone number)
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 been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of Common
Stock, as of the latest practicable date.
COMMON STOCK, $.0001 PAR VALUE 4,350,379
------------------------------ ------------------------
Title of Class Number of Shares outstanding
at November 7, 2000
Exhibit Index appears on page 20
Page 1 of 21
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets ................... 3
Condensed Consolidated Statements of Income ............. 4
Condensed Consolidated Statements of Cash Flows ......... 5
Notes to Condensed Consolidated Financial Statements .... 6
Independent Accountants' Review Report .................. 13
Item 2. Management's Discussion and Analysis or Plan of Operation .... 14
Part II - Other Information .......................................... 20
Item 1. Legal Proceedings ............................................ 20
Item 2. Changes in Securities and Use of Proceeds .................... 20
Item 3. Defaults Upon Senior Securities .............................. 20
Item 4. Submission of Matters to a Vote of Security Holders .......... 20
Item 5. Other Information ............................................ 20
Item 6. Exhibits and Reports on Form 8-K ............................. 20
</TABLE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the caption "Item 2 - Management's Discussion and
Analysis or Plan of Operation" constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Certain, but not
necessarily all, of such forward-looking statements can be identified by the use
of forward-looking terminology such as "anticipates," "believes," "expects,"
"may," "will," or "should" or other variations thereon, or by discussions of
strategies that involve risks and uncertainties. The actual results of the
Company or industry results may be materially different from any future results
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include general economic and business
conditions; the ability of the Company to implement its business and acquisition
strategies; changes in the network marketing industry and changes in consumer
preferences; competition; availability of key personnel; increasing operating
costs; unsuccessful advertising and promotional efforts; changes in brand
awareness; acceptance of new product offerings; and changes in, or the failure
to comply with, government regulations (especially food and drug laws and
regulations); the ability of the Company to obtain financing for future
acquisitions; and other factors.
AM-300-Registered Trademark-, 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.
Page 2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 2000 1999
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 63,134 $1,662,894
Marketable securities, Available for sale, at fair value ........................... 1,085,384 --
Marketable securities, Held to maturity ............................................ -- 983,020
Receivables - net of allowance of $75,706 and $55,332, respectively ................ 589,802 319,519
Receivable from affiliates ......................................................... 534,072 313,761
Inventory .......................................................................... 1,038,820 927,591
Prepaid income taxes ............................................................... 176,844 --
Deferred income taxes .............................................................. 28,738 60,797
Other assets ....................................................................... 363,584 187,496
----------- -----------
Total current assets ................................................... 3,880,378 4,455,078
MARKETABLE SECURITIES, Available for sale, at fair value ............................. 2,403,402 1,805,885
MARKETABLE SECURITIES, Held to maturity .............................................. -- 1,290,723
RECEIVABLES .......................................................................... 483,262 126,624
RECEIVABLE FROM AFFILIATES ........................................................... 15,455 --
PROPERTY AND EQUIPMENT, Net .......................................................... 2,908,249 2,202,885
GOODWILL, Net ........................................................................ 1,538,645 1,618,826
COVENANTS NOT TO COMPETE, Net ........................................................ 380,716 436,845
DEFERRED INCOME TAXES ................................................................ -- 21,788
OTHER ASSETS ......................................................................... 89,787 201,729
----------- -----------
TOTAL ................................................................................ $11,699,894 $12,160,383
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................................. $ 333,984 $ 313,492
Accrued commissions and bonuses ................................................... 417,413 319,183
Accrued other expenses ............................................................ 233,150 807,246
Accrued sales tax liability ....................................................... 187,110 218,789
Note payable ...................................................................... 8,453 --
Capital lease obligations ......................................................... 155,813 80,843
----------- -----------
Total current liabilities ............................................. 1,335,923 1,739,553
LONG-TERM LIABILITIES:
Note payable ...................................................................... 16,376 --
Deferred income taxes ............................................................. 12,487 --
Capital lease obligations ......................................................... 265,010 188,847
----------- -----------
Total liabilities ..................................................... 1,629,796 1,928,400
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
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
4,821,174 and 4,283,988 shares, outstanding 4,350,379 and 4,082,803 shares,
respectively ...................................................................... 482 428
Paid-in capital ................................................................... 11,373,453 10,232,700
Notes receivable for exercise of options .......................................... (48,034) (50,999)
Retained earnings ................................................................. 1,067,079 759,692
Accumulated other comprehensive loss, net of tax .................................. (16,973) (10,531)
----------- -----------
Total capital and retained earnings ................................... 12,376,007 10,931,290
Less cost of treasury stock (470,795 and 201,185 shares, common, respectively) .... (2,305,909) (699,307)
----------- -----------
Total stockholders' equity ............................................ 10,070,098 10,231,983
----------- -----------
TOTAL ............................................................................... $11,699,894 $12,160,383
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 3
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30
------------------------ ------------------------
2000 1999 2000 1999
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales .............................................. $6,807,883 $6,223,895 $20,815,957 $16,150,491
Cost of sales .......................................... 4,521,392 4,298,324 13,981,588 11,150,024
----------- ---------- ----------- ----------
Gross profit ....................................... 2,286,491 1,925,571 6,834,369 5,000,467
Marketing, distribution and administrative expenses .... 2,229,419 1,362,277 6,221,664 3,725,489
----------- ---------- ----------- ----------
Income from operations ............................. 57,072 563,294 612,705 1,274,978
Other income (expense):
Interest and dividends, net ............................ 88,915 75,993 248,098 228,765
Other income (expense) ................................. 7,326 -- (84,642) --
----------- ---------- ----------- ----------
Total other income (expense) ....................... 96,241 75,993 163,456 228,765
----------- ---------- ----------- ----------
INCOME BEFORE TAXES .................................... 153,313 639,287 776,161 1,503,743
TAX EXPENSE ............................................ 57,341 242,673 293,774 533,683
----------- ---------- ----------- ----------
NET INCOME ............................................. $ 95,972 $ 396,614 $ 482,387 $ 970,060
=========== ========= =========== ==========
Net income per common share ............................ $ .02 $ .10 $ .11 $ .23
=========== ========= =========== ==========
Net income per common share - assuming dilution ....... $ .02 $ .08 $ .08 $ .21
=========== ========= =========== ==========
Weighted average common shares outstanding ............. 4,344,578 4,141,651 4,261,011 4,141,651
=========== ========= =========== ==========
Weighted average common shares outstanding - assuming
dilution ............................................... 5,118,398 5,194,786 5,679,437 4,708,759
=========== ========= =========== ==========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................... $ 482,387 $ 970,060
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ........................................... 613,897 397,828
Loss on sale of property and equipment .................................. 3,120 --
Realized loss on sale of marketable securities .......................... 35,461 --
Deferred taxes .......................................................... 66,334 195,773
Provision for bad debts ................................................. 20,374 47,109
Non cash compensation ................................................... -- 52,600
Changes in assets and liabilities which provided (used) cash:
Receivables and commission advances .................................. (647,295) (132,815)
Inventory ............................................................ (111,229) 380,872
Other assets ......................................................... (268,035) (80,982)
Accounts payable and accrued expenses ................................ (487,053) 316,168
---------- ----------
Net cash (used in) provided by operating activities ............ (292,039) 2,146,613
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .......................................... (908,014) (776,520)
Purchases of marketable securities, available for sale ....................... (1,259,852) (2,009,391)
Sales of marketable securities, available for sale ........................... 1,213,505 --
Purchases of marketable securities, held to maturity ......................... (415,000) (2,001,690)
Maturities of marketable securities, held to maturity ........................ 982,528 --
Advances to affiliates ....................................................... (235,766) (40,000)
Repayment of receivable from affiliates ...................................... -- 35,932
---------- ----------
Net cash used in investing activities .......................... (622,599) (4,791,669)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes receivable for exercise of stock options ................. 2,965 --
Proceeds from issuance of common stock ....................................... 1,140,807 --
Purchase of treasury stock ................................................... (1,606,602) --
Purchase and cancellation of other warrants .................................. (175,000) --
Proceeds from note payable ................................................... 25,549 --
Principal payment on notes payable ........................................... (720) (123,787)
Principal payment on capital lease obligations ............................... (72,121) (71,709)
---------- ----------
Net cash used in financing activities .......................... (685,122) (195,496)
---------- ----------
NET DECREASE .................................................................... (1,599,760) (2,840,552)
CASH AND CASH EQUIVALENTS, BEGINNING ............................................ 1,662,894 5,289,217
---------- ----------
CASH AND CASH EQUIVALENTS, ENDING ............................................... $ 63,134 $ 2,448,665
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ........................................ $ 16,721 $ 14,069
Cash paid during the period for income taxes .................................... 951,720 10,160
Noncash financing and investing activities:
Property and equipment acquired by capital lease ............................. 223,254 --
Reclassification of marketable securities from held
to maturity to available for sale.......................................... 1,706,215 --
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 5
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements and related
notes have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information
and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in
the United States of America have been omitted pursuant to such rules
and regulations. The accompanying condensed consolidated financial
statements and related notes should be read in conjunction with the
audited consolidated financial statements of the Company and notes
thereto, for the year ended December 31, 1999.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a
fair presentation of the results of the interim periods presented.
Operating results of the interim period are not necessarily indicative
of the amounts that will be reported for the year ending December 31,
2000.
2. SIGNIFICANT ACCOUNTING POLICIES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities". In June
2000, the FASB issued SFAS No. 138, which amends certain provisions of
SFAS 133 to clarify four areas causing difficulties in implementation.
The amendment included expanding the normal purchase and sale exemption
for supply contracts, permitting the offsetting of certain intercompany
foreign currency derivatives and thus reducing the number of third
party derivatives, permitting hedge accounting for foreign-currency
denominated assets and liabilities, and redefining interest rate risk
to reduce sources of ineffectiveness. Management beleives
implementation of SFAS 133, as amended by SFAS 138, will not have a
material impact on the Company's consolidated results of operations,
financial position or cash flows.
3. MARKETABLE SECURITIES
Investments in marketable debt and equity securities are identified as
held to maturity and available for sale based on management
considerations of asset/liability strategy, changes in interest rates,
prepayment risk and other factors. Under certain circumstances
(including the deterioration of the issuer's creditworthiness, a change
in tax law, or statutory or regulatory requirements), the Company may
change the marketable security classification. Marketable securities
classified as available for sale are accounted for at fair value with
unrealized gains or losses, net of taxes, excluded from earnings and
reported as a separate component of shareholder's equity. Held to
maturity securities are accounted for at amortized cost.
During the three months ended September 30, 2000, all investments
classified as held to maturity were reclassified as available for sale
based on changes in timing of management's intent to utilize funds
from the investments for expansion. Net unrealized losses of
approximately, $38,000 were included in comprehensive income for the
same period. Realized gain or loss on sale of marketable securities is
based upon the specific identification method. Total comprehensive
income for the nine months ended September 30, 2000 was $475,945.
4. 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
Page 6
<PAGE>
computed based upon net income divided by the weighted average number
of common shares outstanding during each period adjusted for the
effect of dilutive potential common shares calculated using the
treasury stock method. The following is a reconciliation of the common
shares used in the calculations of earnings per common share and
earnings per common share - assuming dilution:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding:
For the three months ended September 30, 2000:
Earnings per common share:
Income available to common stockholders ............... $ 95,972 4,344,578 $.02
Earnings per common share - assuming dilution: ---
Options .............................................. -- 553,233
Warrants ............................................. -- 220,587
-------- ---------
Income available to common stockholders plus assumed
conversions ................................................ $ 95,972 5,118,398 $.02
-------- --------- ---
For the three months ended September 30, 1999:
Earnings per common share:
Income available to common stockholders .............. $ 396,614 4,141,651 $.10
---
Earnings per common share - assuming dilution:
Options .............................................. -- 771,435
Warrants ............................................. -- 281,700
-------- ---------
Income available to common stockholders plus assumed
conversions ................................. $ 396,614 5,194,786 $.08
-------- --------- ---
Weighted average common shares outstanding:
For the nine months ended September 30, 2000:
Earnings per common share:
Income available to common stockholders ............... $ 482,387 4,261,011 $.11
---
Earnings per common share - assuming dilution:
Options .............................................. -- 793,593
Warrants -- 624,833
-------- ---------
Income available to common stockholders plus assumed
conversions ................................. $ 482,387 5,679,437 $.08
-------- --------- ---
For the nine months ended September 30, 1999:
Earnings per common share:
Income available to common stockholders .............. $ 970,060 4,141,651 $.23
---
Earnings per common share - assuming dilution:
Options .............................................. -- 567,108
-------- ---------
Income available to common stockholders plus assumed
conversions ................................. $ 970,060 4,708,759 $.21
-------- --------- ---
</TABLE>
Options to purchase 352,271 shares of common stock ranging from $4.00
to $6.13 per share were outstanding at September 30, 2000, but were not
included in the computation of earnings per common share - assuming
dilution for the three months ended because the options' exercise
prices were greater than the average market price of the common shares.
There were no antidultive options to purchase shares of common stock
for the three months ended September 30, 1999.
Page 7
<PAGE>
Options to purchase 130,914 shares of common stock ranging from $5.25
to $6.13 per share and 152,387 shares of common stock ranging from
$3.60 to $3.75 per share were outstanding at September 30, 2000 and
1999, respectfully, but were not included in the computation of
earnings per common share - assuming dilution for the nine months then
ended because the options' exercise prices were greater than the
average market price of the common shares.
Warrants to purchase 130,000 shares of common stock at $5.40 were
outstanding at September 30, 2000 and 1999, but were not included in
the computation of earnings per common share - assuming dilution for
the three months then ended because the warrants' exercise prices were
greater than the average market price of the common shares. Warrants to
purchase 130,000 shares of common stock at $5.40 and 2,092,211 shares
of common stock ranging from $3.40 to $5.40 were outstanding at
September 30, 2000 and 1999, respectively, but were not included in the
computation of earnings per common share - assuming dilution for the
nine months then ended because the warrants' exercise prices were
greater than the average market price of the common shares.
5. STOCKHOLDERS' EQUITY
COMMON STOCK - In March 1998, the Company announced and began
repurchasing up to $1 million of its common stock in the open market.
Furthermore, on January 12, 2000, the Company announced its intent to
repurchase up to an additional $2 million of its common stock in the
open market. As of September 30, 2000, the Company had repurchased
470,795 shares of its common stock for $2,305,909 or an average of
$4.90 per share.
The Company's policy is to retain earnings to support the expansion of
its operations. The Board of Directors of the Company does not intend
to pay cash dividends on the Common Stock in the foreseeable future.
Any future cash dividends will depend on future earnings, capital
requirements, the Company's financial condition and other factors
deemed relevant by the Board of Directors.
COMMON STOCK OPTIONS AND OTHER WARRANTS - The following table
summarizes the Company's stock option and other warrants activity for
the three and nine months ended September 30, 2000:
<TABLE>
<CAPTION>
THREE MONTHS WEIGHTED NINE MONTHS WEIGHTED
ENDED AVERAGE ENDED AVERAGE
SEPTEMBER 30, EXERCISE SEPTEMBER 30, EXERCISE
2000 PRICE 2000 PRICE
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Options and other
warrants outstanding,
beginning of period ......... 1,510,394 $2.70 1,769,275 $2.22
Options and other
warrants issued
during the period ........... 34,038 3.82 348,927 4.94
Options and other
warrants canceled
during the period ........... 35,710 5.54 164,884 4.08
Options and other
warrants exercised
during the period ........... 51,033 2.46 480,879 2.20
</TABLE>
Page 8
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS WEIGHTED NINE MONTHS WEIGHTED
ENDED AVERAGE ENDED AVERAGE
SEPTEMBER 30, EXERCISE SEPTEMBER 30, EXERCISE
2000 PRICE 2000 PRICE
-------------- -------- ------------ ---------
<S> <C> <C> <C> <C>
Options and other
warrants expired
during the period ............ -- -- 14,750 2.00
---------- ----------
Options and other
warrants outstanding,
end of period ................ 1,457,689 $2.66 1,457,689 $2.67
========== ==========
</TABLE>
COMMON STOCK WARRANTS - The following table summarizes the Company's
common stock warrants and their activity for the three and nine months
ended September 30, 2000:
<TABLE>
<CAPTION>
WARRANTS
ISSUED AND EXERCISE
OUTSTANDING PRICE EXERCISE PERIOD
----------- --------- -------------------
<S> <C> <C> <C>
For the three months ended September 30, 2000:
1997-A Warrants, beginning and end of period ........ 308,768 $3.40 01/31/97 - 11/06/02
=========
Redeemable Common Stock Purchase Warrants,
beginning and end of period ...................... 1,436,000 $3.40 11/06/97 - 11/06/02
=========
Underwriters' Warrants beginning and end of period .. 130,000 $5.40 11/12/98 - 11/12/02
=========
For the nine months ended September 30, 2000:
1997-A Warrants, beginning of period ................ 337,211 $3.40 01/31/97 - 11/06/02
1997-A Warrants, exercised during the period ........ (28,443) $3.40
---------
1997-A Warrants, end of period ...................... 308,768 $3.40
=========
Redeemable Common Stock Purchase Warrants,
beginning of period .............................. 1,495,000 $3.40 11/06/97 - 11/06/02
Redeemable Common Stock Purchase Warrants,
exercised during the period ...................... (59,000) $3.40
---------
Redeemable Common Stock Purchase Warrants,
end of period .................................... 1,436,000 $3.40
=========
Underwriters' Warrants .............................. 130,000 $5.40 11/12/98 - 11/12/02
=========
</TABLE>
The Redeemable Common Stock Purchase Warrants are subject to redemption
by the Company at $0.25 per warrant. All of the outstanding Redeemable
Common Stock Purchase Warrants must be redeemed if any are redeemed.
The Company may redeem the 1997-A Warrants for $0.0001 per warrant. Any
redemption of unexercised 1997-A Warrants would be for all such
outstanding warrants. The Underwriters' Warrants were issued in
connection with the sale of common stock and Redeemable Common Stock
Purchase 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
Page 9
<PAGE>
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 nine months ended September 30,
2000 and 1999, the Company granted 348,927 and 96,098 options,
respectively, under the Plan. At September 30, 2000 and 1999, the
Company had 1,457,689 and 1,730,062 respectively, stock options
outstanding of which only 679,439 and 533,687, respectively, had been
issued pursuant to the Plan.
7. RELATED PARTIES
During the three months ended September 30, 2000 and 1999, the Company
received approximately $1,484 and $1,860, respectively, from Pre-Paid
Legal Services, Inc. ("Pre-Paid Legal"), a shareholder, for commissions
on sales of memberships for the services provided by Pre-Paid Legal.
During the nine months ended September 30, 2000 and 1999, the Company
received $4,522 and $5,113, respectively. As of July 1, 2000, the
Company began offering its employees access to the services provided by
Pre-Paid Legal through an employee benefit option. The Company pays
half the cost for each employee electing to participate in the plan.
During the three months ended September 30, 2000, the Company paid
$2,672 to Pre-Paid Legal for these services.
During the three months ended September 30, 2000 and 1999, the Company
paid Pat Dungan, wife of Jimmy L. Dungan, a Director of the Company,
sales commissions of $27,067 and $31,771, respectively. During the nine
months ended September 30, 2000 and 1999, the Company paid Pat Dungan
sales commissions of $84,908 and $87,838, respectively. These
commissions were based upon purchases by the Dungan's and their
downline distributors in accordance with the Company's network
marketing program in effect at the time of the sales.
During the three months ended September 30, 2000, the Company made
advances totaling $15,776 to an officer of the Company (the "Officer").
The advances are secured, require weekly principal payments, bear
interest at 8% per annum, and are due on April 28, 2004. Also, the
Company has a note receivable from the Officer's wife with an
outstanding balance, as of September 30, 2000, of $18,903. The note is
secured, requires annual principal and interest payments, bears
interest at 8% per annum, and is due on June 30, 2003. In addition, the
Officer and his wife receive sales commissions based upon purchases by
them and their downline distributors in accordance with the Company's
network marketing programs. During the three and nine months ended
September 30, 2000 and 1999, the Company paid the Officer and his wife
sales commissions of $6,124, $15,420, $6,553 and $13,505, respectively.
During the first quarter of 1998, the Company agreed to loan John W.
Hail, an affiliate, up to $250,000. Subsequently, the Company agreed to
loan up to an additional $75,000. The loans are secured, bear interest
at 8% per annum, and were due on March 31, 1999. The loans were
extended until March 31, 2000. During the first quarter of 2000, the
Company agreed to loan up to an additional $225,000 and extended the
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maturity date on the loans to December 31, 2000. As of September 30,
2000, the balance due on these loans was $533,761 plus accrued
interest. The loans and extensions were unanimously approved by the
Company's board of directors.
8. COMMITMENTS AND CONTINGENCIES
RECENT REGULATORY DEVELOPMENTS - A significant portion of the
Company's net sales continues to be dependent upon its AM-300 product.
Net sales of AM-300 represented 62.5% and 65.9% of net sales for the
nine months ended September 30, 2000 and 1999, 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, 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 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 the Company's 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
November 7, 2000, no final regulations have been issued. Several trade
organizations in the dietary supplement industry have commented on the
proposed regulations, requesting substantial modifications. The
Company believes 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 the Company believes casts substantial doubt on
certain provisions of the Food and Drug Administration's proposed
regulations on dietary supplements which contain ephedrine alkaloids.
The Company believes there is a risk that its AM-300 product 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 its 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 operations 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 maintains product liability
insurance coverage with limits of $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>
OTHER - The Company is party to a dispute with a former employee,
who is claiming to be paid post termination salary and benfits.
Management disputes this claim and believes any potential loss to
range between zero and $150,000. Management believes the ultimate
outcome from this claim will not have a material adverse impact on
the Company's consolidated results of operations, financial position
or cash flows.
During 2000 the Company entered into a contract for the design and
construction of a 23,346 square foot distribution and call center
facility in Oklahoma City. The base price of the contract is
approximately, $1,315,000. Of this amount, approximately $980,000 will
be funded through a loan with a bank. Property and liability insurance
coverage is being provided by the building contractor during
construction. Management believes the facility will be completed by
March 2000.
* * * * * *
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
Advantage Marketing Systems, Inc. and Subsidiaries
Oklahoma City, Oklahoma
We have reviewed the accompanying condensed consolidated balance sheet of
Advantage Marketing Systems, Inc. and subsidiaries as of September 30, 2000, and
the related condensed consolidated statements of income for the three and nine
months ended September 30, 2000 and 1999 and of cash flows for the nine-month
periods ended September 30, 2000 and 1999. These financial statements are the
responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States
of America, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States
of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Advantage Marketing Systems, Inc. and subsidiaries as of December 31, 1999, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
March 20, 2000, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1999 is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
November 7, 2000
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
We market a product line consisting of approximately 102 products primarily
consisting of; 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.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of our net sales, selected
results of operations for the three and nine months ended September 30, 2000 and
1999. The selected results of operations are derived from our unaudited
condensed consolidated financial statements. The results of operations for the
periods presented are not necessarily indicative of our future operations.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------------- ------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $6,807,883 100.0% $6,223,895 100.0% $20,815,957 100.0% $16,150,491 100.0%
--------- ----- --------- ----- ---------- ----- ---------- -----
Cost of sales:
Commissions and bonuses 2,739,650 40.2 2,696,538 43.3 8,530,728 41.0 6,880,236 42.6
Cost of products 1,444,906 21.2 1,367,493 22.0 4,465,565 21.5 3,733,546 23.1
Cost of shipping 336,836 5.0 234,293 3.8 985,295 4.7 536,242 3.3
--------- ----- --------- ----- ---------- ----- ---------- -----
Total cost of sales 4,521,392 66.4 4,298,324 69.1 13,981,588 67.2 11,150,024 69.0
--------- ----- --------- ----- ---------- ----- ---------- -----
Gross profit 2,286,491 33.6 1,925,571 30.9 6,834,369 32.8 5,000,467 31.0
Marketing, distribution and
administrative expenses 2,229,419 32.8 1,362,277 21.8 6,221,664 29.9 3,725,489 23.1
--------- ----- --------- ----- ---------- ----- ---------- -----
Income from operations 57,072 0.8 563,294 9.1 612,705 2.9 1,274,978 7.9
Other income (expense):
Interest, net 88,915 1.3 75,993 1.2 248,098 1.2 228,765 1.4
Other income (expense) 7,326 0.1 -- 0.0 (84,642) (0.4) -- 0.0
--------- ----- --------- ----- ---------- ----- ---------- -----
Total other income (expense) 96,241 1.4 75,993 1.2 163,456 0.8 228,765 1.4
--------- ----- --------- ----- ---------- ----- ---------- -----
Income before taxes 153,313 2.2 639,287 10.3 776,161 3.7 1,503,743 9.3
Tax expense 57,341 0.8 242,673 3.9 293,774 1.4 533,683 3.3
--------- ----- --------- ----- ---------- ----- ---------- -----
Net income $ 95,972 1.4% $ 396,614 6.4% $ 482,387 2.3% $ 970,060 6.0%
========= ===== ========= ===== ========== ===== ========== =====
</TABLE>
During the nine months ended September 30, 2000 and 1999, we experienced
increases in net sales compared to the preceding year. The increases were
principally the result of expansion of our network of independent distributors
and increased sales of our weight management, dietary supplement and personal
care products. We expect to continue to expand our network of independent
distributors, which may result in increased sales volume. However, there is no
assurance that increased sales volume will be achieved through expansion of our
network of independent distributors, or that, if sales volume increases, we will
realize increased profitability.
COMPARISON OF THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Our net sales during the three months ended September 30, 2000, increased by
$583,988, or 9.4% to $6,807,883 from $6,223,895 during the three months ended
September 30, 1999. The increase was principally attributable to expansion of
our network of independent distributors and increased sales of our weight
management, dietary supplement and personal care products. During the three
months ended September 30, 2000, we made aggregate net sales of $6,767,542 to
46,663 distributors, compared to aggregate net sales during the same period in
1999 of $6,099,771 to 35,824 distributors. At September 30, 2000, we had
approximately 77,800 "active" distributors compared to approximately 54,200 at
September 30, 1999. A distributor is considered "active" if he or she has
purchased $15 on autoship of our product during the previous 12 months. Sales
per distributor per month decreased from $57 to $48 for the three months ended
September 30, 2000, compared to the same period in 1999.
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<PAGE>
Our cost of sales during the three months ended September 30, 2000, increased by
$223,068 or 5.2%, to $4,521,392 from $4,298,324 during the same period in 1999.
This increase was attributable to
- an increase of $43,112 in distributor commissions and bonuses due to the
increased level of sales,
- an increase of $77,413 in the cost of products sold due to the increased
level of sales and
- an increase of $102,543 in shipping costs due to the increased level of
sales.
Total cost of sales, as a percentage of net sales decreased to 66.4% during the
three months ended September 30, 2000, from 69.1% during the same period in 1999
due to a decrease in distributor commissions and bonuses as a percentage of net
sales to 40.2% from 43.3%, a decrease in cost of products sold as a percentage
of net sales to 21.2% from 22.0% and an increase in cost of shipping to 5.0% of
net sales from 3.8%.
Our gross profit increased $360,920, or 18.7%, to $2,286,491 for the three
months ended September 30, 2000 from $1,925,571 for the same period in 1999. The
gross profit increased as a percentage of net sales to 33.6% of net sales from
30.9%.
Marketing, distribution and administrative expenses increased $867,142, or
63.7%, to $2,229,419 during the three months ended September 30, 2000, from
$1,362,277 during the same period in 1999. This increase was primarily
attributable to
- an increase in annual convention costs of approximately $214,000, and other
promotion costs of approximately $185,000 designed to increase sales,
- an increase in staffing and related payroll costs of approximately $300,000
necessary to support the increased level of sales and improve internal
programs and
- an increase in depreciation expense of approximately $60,000, as well as
higher levels of activity and corresponding increases in other variable
costs, such as postage, telephone, newsletters, bank card service charges
and supplies.
The marketing, distribution and administrative expenses as a percentage of net
sales increased to 32.7% during the three months ended September 30, 2000, from
21.8% during the same period in 1999.
Income taxes during the three months ended September 30, 2000 and 1999 were
approximately 37.4% and 38.0%, respectively, of income before taxes.
As a result of the items above, our net income decreased $300,642 to $95,972
during the three months ended September 30, 2000, from $396,614 during the same
period in 1999.
COMPARISON OF THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Our net sales during the nine months ended September 30, 2000, increased by
$4,665,466, or 28.9%, to $20,815,957 from $16,150,491 during the nine months
ended September 30, 1999. The increase was principally attributable to expansion
of our network of independent distributors and increased sales of our weight
management, dietary supplement and personal care products. During the nine
months ended September 30, 2000, we made aggregate net sales of $20,691,986 to
71,741 distributors, compared to aggregate net sales during the same period in
1999 of $15,959,949 to 50,450 distributors. At September 30, 2000, we had
approximately 77,800 "active" distributors compared to approximately 54,200 at
September 30, 1999. A distributor is considered "active" if he or she has
purchased $15 on autoship of our product during the previous 12 months. Sales
per distributor per month decreased from $35 to $32 for the nine months ended
September 30, 2000, compared to the same period in 1999.
Our cost of sales during the nine months ended September 30, 2000, increased by
$2,831,564 or 25.4%, to $13,981,588 from $11,150,024 during the same period in
1999. This increase was attributable to
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- an increase of $1,650,492 in distributor commissions and bonuses due to the
increased level of sales,
- an increase of $732,019 in the cost of products sold due to the increased
level of sales and
- an increase of $449,053 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 these payments.
Because our shipping costs are no longer reported net of the separately
collected shipping reimbursement, our shipping costs as a percentage of sales
have increased. Total cost of sales, as a percentage of net sales decreased to
67.2% during the nine months ended September 30, 2000, from 69.0% during the
same period in 1999 due to a decrease in distributor commissions and bonuses as
a percentage of net sales to 41.0% from 42.6%, a decrease in cost of products
sold to 21.5% of net sales from 23.1% and an increase in cost of shipping to
4.7% of net sales from 3.3%.
Our gross profit increased $1,833,902, or 36.7%, to $6,834,369 for the nine
months ended September 30, 2000 from $5,000,467 for the same period in 1999. The
gross profit increased as a percentage of net sales to 32.8% of net sales from
31.0%.
Marketing, distribution and administrative expenses increased $2,496,175, or
67.0%, to $6,221,664 during the nine months ended September 30, 2000, from
$3,725,489 during the same period in 1999. This increase was attributable to
- an increase in annual convention costs of approximately $214,000, and other
promotion costs of approximately $740,000 designed to increase sales,
- an increase in staffing and related payroll costs of approximately $975,000
necessary to support the increased level of sales and improve internal
programs and
- an increase in depreciation expense of approximately $170,000, as well as
higher levels of activity and corresponding increases in other variable
costs, such as postage, telephone, newsletters, bank card service charges
and supplies.
The marketing, distribution and administrative expenses as a percentage of net
sales increased to 29.9% during the nine months ended September 30, 2000, from
23.1% during the same period in 1999. We have committed to a complete review
and upgrading of computing capabilities in order to support anticipated
growth and sales and to expand internal management information systems. This
review and upgrade is anticipated to cost approximately $566,000 over the
next 12 months and could continue to cause an increase in this percentage.
Our other income decreased by $65,309, or 28.5% to $163,456 during the nine
months ended September 30, 2000, from $228,765 during the same period in 1999.
The decrease was primarily attributable to two items. We made a marketing
commitment to our field sales force that if certain sales challenges were
achieved, we would make a contribution to the Oklahoma City National Memorial
Fund in their names. The marketing challenge was reached and a contribution of
$59,000 was made. Marketable securities were transferred from one investment
fund to another, thereby creating a realized loss of $50,000.
Income taxes during the nine months ended September 30, 2000 and 1999 were
approximately 37.8% and 35.5%, respectively, of income before taxes.
As a result of the items above, our net income decreased $487,673 to $482,387
during the nine months ended September 30, 2000, from $970,060 during the same
period in 1999.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". In June 2000, the FASB issued SFAS No. 138,
which amends certain provisions of SFAS 133 to clarify four areas causing
difficulties in implementation. The amendment included expanding the normal
purchase and sale exemption for supply contracts, permitting the offsetting of
certain intercompany foreign currency derivatives and thus reducing the number
of third party derivatives, permitting hedge accounting for foreign-currency
denominated assets and liabilities, and redefining interest rate risk to reduce
sources of ineffectiveness. We believe implementation of SFAS 133, as amended
by SFAS 138, will not have a material impact on our consolidated results of
operations, financial position or cash flows.
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," ("SAB 101") was issued December 1999. This staff bulletin
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101 is
effective no later than the fourth fiscal quarter of the fiscal years beginning
after December 15, 1999. We believe implementation of SAB 101 will not have a
material impact on our consolidated results of operations, financial position
or cash flows.
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 62.5% and 65.9% of net sales for the nine months ended September 30,
2000 and 1999, 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 November 7, 2000, no final regulations have been issued. Several
trade organizations in the dietary supplement industry have commented on the
proposed regulations, requesting substantial modifications. We believe 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 we believe casts substantial doubt on
certain provisions of the Food and Drug Administration's proposed regulations on
dietary supplements which contain ephedrine alkaloids. We believe 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, we are unable at the present time to
predict the ultimate resolution of these issues, nor their ultimate impact on
our results of operations or financial position.
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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 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.
OTHER - We are a party to a dispute with a former employee, who is claiming
to be paid post termination salary and benefits. We dispute this claim and
believe any potential loss to range between zero and $150,000. We believe the
ultimate outcome from this claim will not have a material adverse impact on
our consolidated results of operations, financial position or cash flows.
During 2000 we entered into a contract for the design and construction of a
23,346 square foot distribution and call center facility in Oklahoma City. The
base price of the contract is approximately, $1,315,000. Of this amount,
approximately $980,000 will be funded through a loan with a bank. Property
and liability insurance coverage is being provided by the building contractor
during construction. We believe the facility will be completed by March 2000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had working capital of $2,544,455, compared to
$2,715,525 at December 31, 1999. We believe our cash and cash equivalents,
current marketable securities, cash flows from operations and expected cash
flows from financing activities will be sufficient to fund our working capital
needs over the next 12 months. Expected cash flows from financing activities
include proceeds from a note payable to a bank of approximately, $980,000 and
possible proceeds of up to approximately, $4,800,000 from the exercise of
various outstanding warrants as described below. There is no assurance, however,
that any of the outstanding warrants will be exercised. During the nine months
ended September 30, 2000, net cash used by operating activities was $292,039,
net cash used in investing activities was $622,599 and net cash used in
financing activities was $685,122. This represented a net decrease in cash
during this period of $1,599,760, primarily as a result of payment of $951,720
in income taxes as well as our increased staffing levels, upgrade of our
computer capabilities and repurchase of our own common stock. Our working
capital needs over the next 12 months consist primarily of marketing,
distribution and administrative expenses as well as construction costs
associated with our call center and the cost of anticipated acquisitions as
discussed below. Additionally, we are upgrading our computing capacity, and have
incurred expenses of approximately, $34,000 during the nine months ended
September 30, 2000 and anticipate additional expenditures of approximately
$566,000 to be incurred over the next 12 months.
During the third quarter of 1999 we began purchasing marketable debt and equity
securities. At September 30, 2000, we had $3,488,786 in securities. During the
three months ended September 30, 2000, all investments classified as held to
maturity were reclassified as available for sale based on changes in timing of
management's intent to utilize funds from the investments for expansion.
In March 1998, we announced and began repurchasing up to $1 million of our
common stock in the open market. 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. As of September 30, 2000, we had repurchased 470,795 shares of
our common stock for $2,305,909 or an average of $4.90 per share. The Board of
Directors will continue to monitor and review our policy on repurchasing shares
of our common stock.
During the first quarter of 1998, we agreed to loan John W. Hail, our Chief
Executive Officer and a major shareholder, up to $250,000. Subsequently we also
agreed to loan up to an additional $75,000. These loans are secured, bear
interest at 8% per annum and became due on March 31, 1999. The loans were
extended until March 31, 2000. During the first quarter of 2000, we agreed to
loan up to an additional $225,000 and extended the loans until December 31,
2000. As of September 30, 2000, the balance due on these loans was $533,761 plus
interest. The loans and extensions were unanimously approved by our board of
directors.
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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. If called,
the redeemable common stock purchase warrants could provide additional working
capital of up to approximately, $4,800,000. There is no assurance, however,
that any of the outstanding warrants will be exercised.
On October 19, 2000, the Company signed a letter of intent to purchase all of
the outstanding common stock of MTM Marketing and Consulting, Inc., General
Merchandising Corporation, Universal Nutrition Corporation, and Rejuvenation
Products, Inc. (collectively "MTM and affiliates"). The Company will purchase
all of the common stock of MTM and affiliates, free and clear of all liens and
encumbrances, for a combination of cash and shares of the Company's common stock
at closing. The acquisition is subject to execution of a definitive agreement
and approval by the Company's shareholders as well as appropriate due diligence
performed by both parties. MTM and affiliates develop proprietary health, diet
and beauty products sold via direct mail, infomercials and the Internet.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 8, 2000, we held our 2000 Annual Meeting of stockholders at
which the matters set forth below were considered and voted upon. Set
forth below is a summary of the voting results:
1. Re-election of R. Terren Dunlap as a director for a term ending in
the year 2003 and until his successor is duly elected and qualified:
Votes For Withhold Authority
--------- ------------------
3,031,977 1,500
2. Re-election of Jimmy L. Dungan as a director for a term ending in
the year 2001 and until his successor is duly elected and qualified:
Votes For Withhold Authority
--------- ------------------
3,030,989 2,488
Following the Annual Meeting, John Hail, Joseph B. Williams, and
Harland C. Stonecipher, continued to serve as Directors along with R.
Terren Dunlap and Jimmy L. Dungan.
3. Ratification and appointment of Deloitte & Touche LLP as the
Company's independent auditor for the fiscal year ending December 31,
2000.
Votes For Against Abstain
--------- ------- -------
3,028,321 2,609 2,547
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 15 - Letter of independent accountants as to unaudited
interim financial information.
Exhibit 27 - Financial Data Schedule
Page 20
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
REGISTRANT:
ADVANTAGE MARKETING SYSTEMS, INC.
Date: November 7 , 2000 By: /s/ JOSEPH B. WILLIAMS
--------------------------------------
Joseph B. Williams, President,
Chief Financial and Accounting Officer
Page 21
