<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 June 30, 2000
---------------
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For Quarter Ended Commission File Number
June 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.
<TABLE>
<CAPTION>
Common Stock, $.0001 par value 4,340,305
------------------------------ ---------
<S> <C>
Title of Class Number of Shares outstanding
at August 3, 2000
</TABLE>
Exhibit Index appears on page 19
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE SIX MONTHS ENDED JUNE 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.................................................... 12
Item 2. Management's Discussion and Analysis or Plan of Operation................................. 13
Part II-Other Information......................................................................... 19
Item 1. Legal Proceedings......................................................................... 19
Item 2. Changes in Securities and Use of Proceeds................................................. 19
Item 3. Defaults Upon Senior Securities........................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders....................................... 19
Item 5. Other Information......................................................................... 19
Item 6. Exhibits and Reports on Form 8-K.......................................................... 19
</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>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
------ ------------ --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................................... $66,829 $1,662,894
Marketable securities, Available for sale......................................... 1,091,056 --
Marketable securities, Held to maturity........................................... -- 983,020
Receivables - net of allowance of $57,791 and $55,332, respectively............... 676,363 319,519
Receivable from affiliate......................................................... 533,761 313,761
Inventory......................................................................... 1,157,223 927,591
Deferred income taxes............................................................. 21,937 60,797
Other assets...................................................................... 653,967 187,496
----------- -----------
Total current assets.................................................. 4,201,136 4,455,078
MARKETABLE SECURITIES, Available for sale, at fair value............................ 523,372 1,805,885
MARKETABLE SECURITIES, Held to maturity............................................. 1,706,215 1,290,723
RECEIVABLES......................................................................... 424,690 126,624
PROPERTY AND EQUIPMENT, Net......................................................... 2,571,096 2,202,885
GOODWILL, Net....................................................................... 1,565,372 1,618,826
COVENANTS NOT TO COMPETE, Net....................................................... 399,425 436,845
DEFERRED INCOME TAXES............................................................... 41,333 21,788
OTHER ASSETS........................................................................ 94,694 201,729
----------- -----------
TOTAL............................................................................... $11,527,333 $12,160,383
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable.................................................................. $260,035 $313,492
Accrued commissions and bonuses................................................... 499,779 319,183
Accrued other expenses............................................................ 269,449 807,246
Accrued sales tax liability....................................................... 193,079 218,789
Capital lease obligations......................................................... 94,574 80,843
Total current liabilities............................................. 1,316,916 1,739,553
----------- -----------
LONG-TERM LIABILITIES:
Capital lease obligations......................................................... 189,635 188,847
----------- -----------
Total liabilities.................................................... 1,506,551 1,928,400
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
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
4,767,656 and 4,283,988 shares, outstanding 4,335,339 and 4,082,803 shares,
respectively...................................................................... 477 428
Paid-in capital................................................................... 11,241,793 10,232,700
Notes receivable for exercise of options.......................................... (48,034) (50,999)
Retained earnings................................................................. 971,106 759,692
Accumulated other comprehensive income (loss), net of tax......................... 21,037 (10,531)
----------- -----------
Total capital and retained earnings................................ 12,186,379 10,931,290
Less cost of treasury stock (432,317 and 201,185 shares, common, respectively).... (2,165,597) (699,307)
----------- -----------
Total stockholders' equity......................................... 10,020,782 10,231,983
----------- -----------
TOTAL............................................................................... $11,527,333 $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 JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ------------------------
2000 1999 2000 1999
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales.............................................. $7,004,137 $5,534,666 $14,008,073 $9,926,596
Cost of sales.......................................... 4,768,194 3,838,533 9,460,196 6,851,700
---------- ---------- ----------- ----------
Gross profit....................................... 2,235,943 1,696,133 4,547,877 3,074,896
Marketing, distribution and administrative expenses.... 2,071,476 1,284,927 3,992,245 2,363,212
---------- ---------- ----------- ----------
Income from operations............................. 164,467 411,206 555,632 711,684
Other income (expense):
Interest and dividends, net............................ 69,782 81,826 159,183 152,772
Other income (expense)................................. (106,105) -- (91,968) --
---------- ---------- ----------- ----------
Total other income(expense)........................ (36,323) 81,826 67,215 152,772
---------- ---------- ----------- ----------
INCOME BEFORE TAXES.................................... 128,144 493,032 622,847 864,456
TAX EXPENSE............................................ 48,446 150,017 236,433 291,010
---------- ---------- ----------- ----------
NET INCOME ............................................ $ 79,698 $ 343,015 $ 386,414 $ 573,446
========== ========== =========== ==========
Net income per common share............................ .02 $ .08 $ .09 $ .14
========== ========== =========== ==========
Net income per common share - assuming dilution....... .01 $ .07 $ .06 $ .13
========== ========== =========== ==========
Weighted average common shares outstanding............. 4,322,491 4,141,014 4,319,911 4,141,014
========== ========== =========== ==========
Weighted average common shares outstanding - assuming
dilution............................................... 5,715,513 4,654,114 6,038,590 4,570,855
========== ========== =========== ==========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................... $ 386,414 $ 573,446
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization............................................... 380,451 252,688
Realized loss on sale on marketable securities, available for sale.......... 41,817 --
Deferred taxes.............................................................. 19,315 195,773
Provision for bad debts..................................................... 2,459 5,385
Non cash compensation....................................................... -- 52,600
Changes in assets and liabilities which provided (used) cash:
Receivables and commission advances...................................... (657,369) (84,468)
Inventory................................................................ (229,632) 241,584
Other assets............................................................ (365,501) (30,376)
Accounts payable and accrued expenses.................................... (436,368) 84,993
----------- ----------
Net cash (used in) provided by operating activities................. (858,414) 1,291,625
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................................. (575,629) (366,789)
Purchases of marketable securities, available for sale........................... (2,309,690) --
Sale of marketable securities, available for sale................................ 2,495,575 --
Purchases of marketable securities, held to maturity............................ (415,000) --
Maturities of marketable securities, held to maturity............................ 961,378 --
Advances to affiliate............................................................ (220,000) --
Repayment of receivable from affiliate........................................... -- 34,235
----------- ----------
Net cash used in investing activities ............................. (63,366) (332,554)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes receivable for exercise of stock options..................... 2,965 --
Proceeds from issuance of common stock........................................... 1,009,142 --
Purchase of treasury stock....................................................... (1,466,290) --
Purchase and cancellation of other warrants...................................... (175,000) --
Principal payment on notes payable............................................... -- (123,787)
Principal payment on capital lease obligations................................... (45,102) (52,859)
----------- ----------
Net cash used in financing activities.............................. (674,285) (176,646)
----------- ----------
NET (DECREASE) INCREASE ............................................................ (1,596,065) 782,425
CASH AND CASH EQUIVALENTS, BEGINNING................................................ 1,662,894 5,289,217
----------- ----------
CASH AND CASH EQUIVALENTS, ENDING................................................... $ 66,829 $6,071,642
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest............................................ $ 10,482 $ 10,945
Cash paid during the period for income taxes........................................ 951,720 8,000
Noncash financing and investing activities:
Property and equipment acquired by capital lease............................... 59,621 --
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 5
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 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. 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 securites
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.
The Company has the intent and ability to hold to maturity its
investment in marketable securities classified as held to maturity.
Gain or loss on sale of marketable securities is based upon the
specific identification method. Total comprehensive income for the six
months ended June 30, 2000 was $417,982.
3. 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:
Page 6
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C>
Weighted average common shares outstanding:
For the three months ended June 30, 2000:
Earnings per common share:
Income available to common stockholders ................................ $ 79,698 4,322,491 $.02
----
Earnings per common share - assuming dilution:
Options ............................................................... -- 762,385
Warrants .............................................................. -- 630,637
----------- ---------
Income available to common stockholders plus assumed
conversions .................................................. $ 79,698 5,715,513 $.01
----------- --------- ----
For the three months ended June 30, 1999:
Earnings per common share:
Income available to common stockholders ............................... $ 343,015 4,141,014 $.08
----
Earnings per common share - assuming dilution:
Options ............................................................... -- 513,100
----------- ---------
Income available to common stockholders plus assumed
conversions .................................................. $ 343,015 4,654,114 $.07
----------- --------- ----
Weighted average common shares outstanding:
For the six months ended June 30, 2000:
Earnings per common share:
Income available to common stockholders ................................ $ 386,414 4,319,911 $.09
----
Earnings per common share - assuming dilution:
Options ............................................................... 888,984
Warrants .............................................................. -- 829,695
----------- ---------
Income available to common stockholders plus assumed
conversions .................................................. $ 386,414 6,038,590 $.06
----------- --------- ----
For the six months ended June 30, 1999:
Earnings per common share:
Income available to common stockholders ............................... $ 573,446 4,141,014 $.14
----
Earnings per common share - assuming dilution:
Options ............................................................... -- 429,841
----------- ---------
Income available to common stockholders plus assumed
conversions .................................................. $ 573,446 4,570,855 $.13
----------- --------- ----
</TABLE>
Options to purchase 120,429 shares of common stock ranging from $5.69
to $6.13 per share and 125,000 shares of common stock at $3.60 per
share were outstanding at June 30, 2000 and 1999, respectively, 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. Options to purchase 40,492 shares of common stock
ranging from $5.94 to $6.13 per share and 130,358 shares of common
stock ranging from $2.80 to $3.60 per share were outstanding at June
30, 2000 and 1999, respectfully, but were not included in the
computation of earnings per common share assuming dilution for the six
months ended because the options' exercise prices were greater than
the average market price of the common shares.
Page 7
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
Warrants to purchase 130,000 shares of common stock at $5.40 were
outstanding at June 30, 2000, but were not included in the computation
of earnings per common share - assuming dilution for the three months
ended because the warrants' exercise prices were greater than the
average market price of the common shares. Warrants to purchase
1,962,211 shares of common stock ranging from $3.40 to $5.40 were
outstanding at June 30, 1999, but were not included in the computation
of earnings per common share assuming dilution for the three months
ended because the warrants' exercise prices were greater than the
average market price of the common shares. All outstanding warrants at
June 30, 2000 were included in the computation of earnings per common
share - assuming dilution for the six months ended. Warrants to
purchase 1,962,211 shares of common stock ranging from $3.40 to $5.40
were outstanding at June 30, 1999, but were not included in the
computation of earnings per common share - assuming dilution for the
six months ended because the warrants' exercise prices were greater
than the average market price of the common shares.
4. 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 June 30, 2000, the Company had repurchased 432,317
shares of its common stock for $2,165,597 or an average of $5.01 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 six months ended June 30, 2000:
<TABLE>
<CAPTION>
THREE MONTHS WEIGHTED SIX MONTHS WEIGHTED
ENDED AVERAGE ENDED AVERAGE
JUNE 30, EXERCISE JUNE 30, EXERCISE
2000 PRICE 2000 PRICE
-------------- ----------- --------------- -----------
<S> <C> <C> <C>
Options and other
warrants outstanding,
beginning of period.......... 1,304,818 $2.19 1,769,275 $2.22
Options and other
warrants issued
during the period............ 280,650 4.95 312,404 5.05
Options and other
warrants canceled
during the period............ 4,174 5.75 129,174 3.67
Options and other
warrants exercised
during the period............ 70,900 2.13 427,361 2.17
</TABLE>
Page 8
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS WEIGHTED SIX MONTHS WEIGHTED
ENDED AVERAGE ENDED AVERAGE
JUNE 30, EXERCISE JUNE 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............... 1,510,394 $2.70 1,510,394 $2.70
============= ===========
</TABLE>
COMMON STOCK WARRANTS - The following table summarizes the Company's
common stock warrants and their activity for the three and six months
ended June 30, 2000:
<TABLE>
<CAPTION>
WARRANTS
ISSUED AND EXERCISE
OUTSTANDING PRICE EXERCISE PERIOD
----------- -------- -------------------
<S> <C> <C> <C>
For the three months ended June 30, 2000:
1997-A Warrants, beginning of period.................. 315,056 $3.40 01/31/97 - 11/06/02
1997-A Warrants, exercised during the period.......... (6,288) $3.40
-----------
1997-A Warrants, end of period ....................... 308,768 $3.40
===========
Redeemable Common Stock Purchase Warrants,
beginning of period................................ 1,465,300 $3.40 11/06/97 - 11/06/02
Redeemable Common Stock Purchase Warrants,
exercised during the period........................ (29,300) $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
===========
For the six months ended June 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
Page 9
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
of the Company's common stock and one Redeemable Common Stock Purchase
Warrant.
5. STOCK OPTION PLAN
During 1995, the Company approved the 1995 Stock Option Plan (the
"Plan"). Under this Plan, options available for grant can consist of
(i) nonqualified stock options, (ii) nonqualified stock options with
stock appreciation rights attached, (iii) incentive stock options, and
(iv) incentive stock options with stock appreciation rights attached.
The Company has reserved 1,125,000 shares of the Company's common stock
$.0001 par value, for the Plan. The Plan limits participation to
employees, independent contractors, and consultants. Nonemployee
directors are excluded from Plan participation. The option price for
shares of stock subject to this Plan is set by the Stock Option
Committee of the Board of Directors at a price not less than 85% of the
market value of the stock on the date of grant. No stock options may be
exercised within six months from the date of grant, unless under a Plan
exception, nor more than ten years after the date of grant. The Plan
provides for the grant of stock appreciation rights, which allow the
holder to receive in cash, stock or combination thereof, the difference
between the exercise price and the fair value of the stock at date of
exercise. The fair value of stock appreciation rights is charged to
compensation expense. The stock appreciation right is not separable
from the underlying stock option or incentive stock option originally
granted and can only be exercised in tandem with the stock option. No
stock appreciation rights are attached to any options outstanding.
During the six months ended June 30, 2000 and 1999, the Company granted
312,404 and 68,711 options, respectively, under the Plan. At June 30,
2000 and 1999, the Company had 1,510,394 and 1,708,033, respectively,
stock options outstanding of which only 732,144 and 506,300,
respectively, had been issued pursuant to the Plan.
6. RELATED PARTIES
During the three months ended June 30, 2000 and 1999, the Company
received approximately $1,557 and $1,455, respectively, from Pre-Paid
Legal Services, Inc., a shareholder, for commissions on sales of
memberships for the services provided by Pre-Paid Legal Services, Inc.
During the six months ended June 30, 2000 and 1999, the Company
received $3,038 and $3,253, respectively.
During the three months ended June 30, 2000 and 1999, the Company paid
Pat Dungan, wife of Jimmy L. Dungan, a Director of the Company, sales
commissions of $28,255 and $30,366, respectively. During the six months
ended June 30, 2000 and 1999, the Company paid Pat Dungan sales
commissions of $57,646 and $56,067, 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 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
maturity date on the loans to December 31, 2000. As of June 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.
Page 10
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
7. 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 67.7% and 67.5% of net sales for the six months
ended June 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 July 28, 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 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 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>
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 June 30, 2000, and
the related condensed consolidated statements of income for the three and six
months ended June 30, 2000 and 1999 and of cash flows for the six-month
periods ended June 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
July 28, 2000
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
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.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of our net sales, selected
results of operations for the six months ended June 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 JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------------- ----------------------------------------
2000 1999 2000 1999
------------------- ------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- --------- ---------- --------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $7,004,137 100.0% $5,534,666 100.0% $14,008,073 100.0% $9,926,596 100.0%
---------- --------- ---------- --------- ----------- --------- ---------- ---------
Cost of sales:
Commissions and bonuses.... 2,867,843 40.9 2,319,032 41.9 5,791,079 41.3 4,183,698 42.1
Cost of products........... 1,579,670 22.6 1,250,348 22.6 3,020,659 21.6 2,366,053 23.8
Cost of shipping........... 320,681 4.6 269,153 4.9 648,458 4.6 301,949 3.0
---------- --------- ---------- --------- ----------- --------- ---------- ---------
Total cost of sales...... 4,768,194 68.1 3,838,533 69.4 9,460,196 67.5 6,851,700 69.0
---------- --------- ---------- --------- ----------- --------- ---------- ---------
Gross profit............... 2,235,943 31.9 1,696,133 30.6 4,547,877 32.5 3,074,896 31.0
Marketing, distribution and
administrative expenses... 2,071,476 29.6 1,284,927 23.2 3,992,245 28.5 2,363,212 23.8
---------- --------- ---------- --------- ----------- --------- ---------- ---------
Income from operations..... 164,467 2.3 411,206 7.4 555,632 4.0 711,684 7.2
Other income (expense):
Interest, net................. 69,782 1.0 81,826 1.5 159,183 1.1 152,772 1.5
Other income (expense)........ (106,105) (1.5) -- .0 (91,968) (.7) -- .0
---------- --------- ---------- --------- ----------- --------- ---------- ---------
Total other income
(expense)................. (36,323) (.5) 81,826 1.5 67,215 .5 152,772 1.5
---------- --------- ---------- --------- ----------- --------- ---------- ---------
Income before taxes........... 128,144 1.8 493,032 8.9 622,847 4.4 864,456 8.7
Tax expense................... 48,446 .7 150,017 2.7 236,433 1.7 291,010 2.9
---------- --------- ---------- --------- ----------- --------- ---------- ---------
Net income.................... $ 79,698 1.1% $ 343,015 6.2% $ 386,414 2.8% $ 573,446 5.8%
========== ========= ========== ========= =========== ========= ========== =========
</TABLE>
During the six months ended June 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 MONTHS PERIOD ENDED JUNE 30, 2000
Our net sales during the three months ended June 30, 2000, increased by
$1,469,471, or 26.6% to $7,004,137 from $5,534,666 during the three months
ended June 30, 1999. The increase was principally attributable to expansion
or our network of independent distributors and increased sales of our weight
management, dietary supplement and personal care products. During the three
months ended June 30, 2000, we made aggregate net sales of $6,964,140 to
48,132 distributors, compared to aggregate net sales during the same period
in 1999 of $5,499,615 to 29,562 distributors. At June 30, 2000, we had
approximately 76,100 "active" distributors compared to approximately 46,800
at June 30, 1999. A distributor is considered "active" if he or she has
purchased $15 on autoship or at least $50 if not on autoship of our product
during the previous 12 months. Sales per distributor per month decreased from
$62 to $48 for the three months ended June 30, 2000, compared to the same
period in 1999.
Our cost of sales during the three months ended June 30, 2000, increased by
$929,661 or 24.2%, to $4,768,194 from $3,838,533 during the same period in
1999. This increase was attributable to
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<PAGE>
- an increase of $548,811 in distributor commissions and bonuses due to
the increased level of sales,
- an increase of $329,322 in the cost of products sold due to the
increased level of sales and
- an increase of $51,528 in shipping costs due to the increased level of
sales.
Total cost of sales, as a percentage of net sales decreased to 68.1% during
the three months ended June 30, 2000, from 69.4% during the same period in
1999 due to a decrease in distributor commissions and bonuses as a percentage
of net sales to 40.9% from 41.9% and a decrease in cost of shipping to 4.6%
of net sales from 4.9%.
Our gross profit increased $539,810, or 31.8%, to $2,235,943 for the three
months ended June 30, 2000 from $1,696,133 for the same period in 1999. The
gross profit increased as a percentage of net sales to 31.9% of net sales
from 30.6%.
Marketing, distribution and administrative expenses increased $786,549, or
61.2%, to $2,071,476 during the three months ended June 30, 2000, from
$1,284,927 during the same period in 1999. This increase was attributable to
- an increase in promotional expense designed to increase sales,
- an increase in staffing and related payroll costs necessary to support
the increased level of sales and improve internal programs and
- the higher level of activity and corresponding increases in variable
costs, such as postage, telephone, newsletters, bank card service
charges and supplies.
The marketing, distribution administrative expenses as a percentage of net
sales increased to 29.6% during the three months ended June 30, 2000, from
23.2% during the same period in 1999.
Our other income (expense) decreased by $118,149, or 144.4% to an expense of
$(36,323) during the three months ended June 30, 2000, from $81,826 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 name. 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 three months ended June 30, 2000 and 1999 were
approximately 37.8% and 30.4%, respectively, of income before taxes.
As a result of the items above, our net income decreased $263,317 to $79,698
during the three months ended June 30, 2000, from $343,015 during the same
period in 1999. Sales during the three months ended June 30, 2000 remained
constant with sales during the three months ended March 31, 2000, however,
with the increased expenses related to payroll and computer upgrade, costs
were negatively impacted. The Company committed itself 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 $600,000 over the
next 12 months and will be charged to earnings as the expenses occur.
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Our net sales during the six months ended June 30, 2000, increased by
$4,081,477, or 41.1%, to $14,008,073 from $9,926,596 during the six months
ended June 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 six
months ended June 30, 2000, we made aggregate net sales of $13,924,444
to 60,154 distributors, compared to aggregate net sales during the same
period in 1999 of $9,860,122 to 37,175 distributors. At June 30, 2000, we had
approximately 76,100 "active" distributors compared to approximately
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<PAGE>
46,800 at June 30, 1999. A distributor is considered "active" if he or she
has purchased $15 on autoship or at least $50 if not on autoship of our
product during the previous 12 months. Sales per distributor per month
decreased from $44 to $39 for the six months ended June 30, 2000, compared to
the same period in 1999.
Our cost of sales during the six months ended June 30, 2000, increased by
$2,608,496 or 38.1%, to $9,460,196 from $6,851,700 during the same period in
1999. This increase was attributable to
- an increase of $1,607,381 in distributor commissions and bonuses due to
the increased level of sales,
- an increase of $654,606 in the cost of products sold due to the
increased level of sales and
- an increase of $346,509 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 67.5% during the six months ended June 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 41.3% from 42.1%, a
decrease in cost of products sold to 21.6% of net sales from 23.8% and an
increase in cost of shipping to 4.6% of net sales from 3.0%.
Our gross profit increased $1,472,981, or 47.9%, to $4,547,877 for the six
months ended June 30, 2000 from $3,074,896 for the same period in 1999. The
gross profit increased as a percentage of net sales to 32.5% of net sales
from 31.0%.
Marketing, distribution and administrative expenses increased $1,629,033, or
68.9%, to $3,992,245 during the six months ended June 30, 2000, from
$2,363,212 during the same period in 1999. This increase was attributable to
- an increase in promotional expense designed to increase sales,
- an increase in staffing and related payroll costs necessary to support
the increased level of sales and improve internal programs and
- the higher level of activity and corresponding increases in 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 28.5% during the six months ended June 30, 2000, from
23.8% during the same period in 1999. The Company committed itself 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
$600,000 over the next 12 months and will be charged to earnings as the
expenses occur.
Our other income (expense) decreased by $85,557, or 56% to $67,215 during the
six months ended June 30, 2000, from $152,772 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 name. 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 six months ended June 30, 2000 and 1999 were
approximately 38.0% and 33.7%, respectively, of income before taxes.
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<PAGE>
As a result of the items above, our net income decreased $187,032 to $386,414
during the six months ended June 30, 2000, from $573,446 during the same
period in 1999. Sales during the three months ended June 30, 2000 remained
constant with sales during the three months ended March 31, 2000 however,
with the increased expenses related to payroll and computer upgrade, costs
were negatively impacted.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES," (ASFAS 133") was issued in June 1998.
This Statement establishes accounting and reporting standards for derivative
Instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. The accounting for changes in the fair value
of a derivative (that is, gains and losses) depends on the intended use of
the derivative and the resulting designation. This Statement applies to all
entities and is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. We will adopt SFAS 133 on January 1, 2001 as required.
We believe we hold no material derivative instruments at June 30, 2000.
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 have not determined whether
implementation of SAB 101 will have any significant effect on our financial
statements.
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 67.7% and 67.5% of net sales for the six months ended June 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 July 28, 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
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<PAGE>
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 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 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.
LIQUIDITY AND CAPITAL RESOURCES
Prior to completion of several equity offerings in 1997, our primary source
of liquidity was net cash provided by operating activities and shareholder
loans.
At June 30, 2000, we had working capital of $2,884,220, compared to
$2,715,525 at December 31, 1999. We believe our cash and cash equivalents,
marketable securities of $3,387,472 and cash flows from operations will be
sufficient to fund our working capital needs over the next 12 months. During
the six months ended June 30, 2000, net cash used by operating activities was
$858,414, net cash used in investing activities was $63,366 and net cash used
in financing activities was $674,285. This represented a net decrease in cash
during this period of $1,596,065, primarily as a result of payment of
$951,720 in income taxes as well as our increased staffing levels and the
upgrade of our computer capabilities. Our working capital needs over the next
12 months consist primarily of marketing, distribution and administrative
expenses. Additionally, as we are upgrading our computing capacity, we would
anticipate expenditures of approximately $600,000 to be expensed over the
coming 12 months as these expenses occur.
During the third quarter of 1999 we began purchasing marketable debt and
equity securities. As of June 30, 2000, we had purchased $4,170,643 in
securities. These securities have been classified as $1,614,428 in available
for sale securities and $1,706,215 in held to maturity securities. We have
the intent and ability to hold to maturity our investment in securities
classified as held to maturity.
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 June 30, 2000, we had repurchased
432,317 shares of our common stock for $2,165,597 or an average of $5.01 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 June 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.
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
Page 17
<PAGE>
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.
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<PAGE>
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
None
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.
Form 8-K dated May 23, 2000 reporting resignation of Roger P.
Baresel as President of the Company.
Form 8-K dated June 1, 2000 reporting appointment of Dr. Joseph B.
Williams as President of the Company.
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<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: August 9, 2000 By: /s/ JOSEPH B. WILLIAMS
------------------------------------------
Joseph B. Williams, President, Chief
Financial and Accounting Officer
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