<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 March 31, 2000
--------------
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For Quarter Ended Commission File Number
March 31, 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 4,290,446
- ------------------------------ ----------------------------
Title of Class Number of Shares outstanding
at May 8, 2000
Exhibit Index appears on page 18
Page 1 of 18
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE THREE MONTHS ENDED MARCH 31, 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......................... 11
Item 2. Management's Discussion and Analysis or Plan of Operation........ 12
Part II - Other Information............................................... 16
Item 1. Legal Proceedings................................................ 16
Item 2. Changes in Securities and Use of Proceeds........................ 16
Item 3. Defaults Upon Senior Securities.................................. 16
Item 4. Submission of Matters to a Vote of Security Holders.............. 16
Item 5. Other Information................................................ 16
Item 6. Exhibits and Reports on Form 8-K................................. 16
</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 and its third party providers to
adequately address year 2000 issues: the ability of the Company to obtain
financing for future acquisitions; and other factors.
Chambre-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
MARCH 31, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 315,568 $ 1,662,894
Marketable securities, held to maturity........................................... 593,866 983,020
Receivables - net of allowance of $55,332......................................... 868,834 319,519
Receivable from affiliate......................................................... 533,761 313,761
Inventory......................................................................... 901,769 927,591
Deferred income taxes............................................................. 56,726 60,797
Other assets...................................................................... 312,781 187,496
----------- -----------
Total current assets.................................................. 3,583,305 4,455,078
MARKETABLE SECURITIES, Available for sale, at fair value............................ 1,561,026 1,805,885
MARKETABLE SECURITIES, Held to maturity............................................. 1,705,969 1,290,723
RECEIVABLES......................................................................... 130,474 126,624
PROPERTY AND EQUIPMENT, Net......................................................... 2,194,729 2,202,885
GOODWILL, Net....................................................................... 1,592,099 1,618,826
COVENANTS NOT TO COMPETE, Net....................................................... 418,135 436,845
DEFERRED INCOME TAXES............................................................... 20,327 21,788
OTHER ASSETS........................................................................ 213,836 201,729
----------- -----------
TOTAL............................................................................... $11,419,900 $12,160,383
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................. $ 199,134 $ 313,492
Accrued commissions and bonuses................................................... 390,920 319,183
Accrued other expenses............................................................ 387,906 807,246
Accrued sales tax liability....................................................... 218,680 218,789
Capital lease obligations......................................................... 74,015 80,843
----------- -----------
Total current liabilities............................................. 1,270,655 1,739,553
LONG-TERM LIABILITIES:
Capital lease obligations......................................................... 173,384 188,847
----------- -----------
Total liabilities.................................................... 1,444,039 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
4,669,622 and 4,283,988 shares, outstanding 4,289,442 and 4,082,803 shares,
respectively...................................................................... 467 428
Paid-in capital................................................................... 11,013,009 10,232,700
Notes receivable for exercise of options.......................................... (50,999) (50,999)
Retained earnings................................................................. 891,408 759,692
Accumulated other comprehensive loss, net of tax.................................. (1,489) (10,531)
----------- -----------
Total capital and retained earnings................................ 11,852,396 10,931,290
Less cost of treasury stock (380,180 and 201,185 shares, common, respectively).... (1,876,535) (699,307)
----------- -----------
Total stockholders' equity.......................................... 9,975,861 10,231,983
----------- -----------
TOTAL............................................................................... $11,419,900 $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 MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net sales ....................................................... $7,003,936 $4,391,930
Cost of sales ................................................... 4,692,002 3,013,167
---------- ----------
Gross profit ................................................ 2,311,934 1,378,763
Marketing, distribution and administrative expenses ............. 1,920,769 1,078,285
---------- ----------
Income from operations ...................................... 391,165 300,478
Other income (expense):
Interest and dividends, net ..................................... 89,401 70,946
Other income .................................................... 14,137 --
---------- ----------
Total other income(expense) ................................. 103,538 70,946
---------- ----------
INCOME BEFORE TAXES ............................................. 494,703 371,424
TAX EXPENSE ..................................................... 187,987 140,993
---------- ----------
NET INCOME ...................................................... $ 306,716 $ 230,431
========== ==========
Net income per common share ..................................... $ .07 $ .06
========== ==========
Net income per common share - assuming dilution ................. $ .05 $ .05
========== ==========
Weighted average common shares outstanding ...................... 4,191,772 4,141,014
========== ==========
Weighted average common shares outstanding - assuming dilution... 6,163,697 4,488,787
========== ==========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 4
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................... $ 306,716 $ 230,431
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization............................................... 175,866 123,462
Deferred taxes.............................................................. 5,532 140,993
Provision for bad debts..................................................... -- 2,562
Changes in assets and liabilities which provided (used) cash:
Receivables and commission advances...................................... (553,165) (83,377)
Inventory................................................................ 25,822 247,471
Other assets............................................................. (137,392) 63,498
Accounts payable and accrued expenses.................................... (462,070) (153,925)
----------- ----------
Net cash (used in) provided by operating activities................... (638,691) 444,119
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................................. (122,273) (228,919)
Purchases of marketable securities, available for sale........................... (47,484) --
Sale of marketable securities, available for sale................................ 275,293 --
Advances to affiliate............................................................ (220,000) --
Repayment of receivable from affiliate........................................... -- 34,235
----------- ----------
Net cash used in investing activities ................................ (114,464) (194,684)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock........................................... 780,348 --
Purchase of treasury stock....................................................... (1,177,228) --
Purchase and cancellation of other warrants...................................... (175,000) --
Principal payment on notes payable............................................... -- (7,112)
Principal payment on capital lease obligations................................... (22,291) (22,942)
----------- ----------
Net cash used in financing activities................................. (594,171) (29,942)
----------- ----------
NET INCREASE (DECREASE)............................................................. (1,347,326) 219,493
CASH AND CASH EQUIVALENTS, BEGINNING................................................ 1,662,894 5,289,217
----------- ----------
CASH AND CASH EQUIVALENTS, ENDING................................................... $ 315,568 $5,508,710
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest............................................ 4,875 6,894
Cash paid during the period for income taxes........................................ 570,000 6,000
</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 THREE MONTHS ENDED MARCH 31, 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
three months ended March 31, 2000 was $315,758.
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 THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding:
For the three months ended March 31, 2000:
Earnings per common share:
Income available to common stockholders .................... $306,716 4,191,772 $.07
Earnings per common share - assuming dilution:
Options .................................................... -- 1,009,376
Warrants ................................................... -- 962,549
-------- ---------
Income available to common stockholders plus assumed
conversions ............................................ $306,716 6,163,697 $.05
-------- ---------
For the three months ended March 31, 1999:
Earnings per common share:
Income available to common stockholders .................... $230,431 4,141,014 $.06
Earnings per common share - assuming dilution:
Options .................................................... -- 347,773
Warrants ................................................... -- --
-------- ---------
Income available to common stockholders plus assumed
conversions ............................................ $230,431 4,488,787 $.05
-------- ---------
</TABLE>
All outstanding options at March 31, 2000 were included in the
computation of earnings per common share - assuming dilution. Options
to purchase 153,128 shares of common stock ranging from $2.70 to $3.60
per share were outstanding at March 31, 1999 but were not included in
the computation of earnings per common share - assuming dilution
because the options' exercise prices were greater than the average
market price of the common shares.
All outstanding warrants at March 31, 2000 were included in the
computation of earnings per common share - assuming dilution. Warrants
to purchase 1,962,211 shares of common stock ranging from $3.40 to
$5.40 were outstanding at March 31, 1999, but were not included in the
computation of earnings per common share - assuming dilution because
the warrants' exercise prices were greater than the average market
price of the common shares.
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 March 31, 2000, the Company had repurchased 380,180
shares of its common stock for $1,876,535 or an average of $4.94 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 months ended March 31, 2000 and 1999:
Page 7
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS WEIGHTED THREE MONTHS WEIGHTED
ENDED AVERAGE ENDED AVERAGE
MARCH 31, EXERCISE MARCH 31, EXERCISE
2000 PRICE 1999 PRICE
----------- -------- ------------ --------
<S> <C> <C> <C> <C>
Options and other
warrants outstanding,
beginning of period........ 1,769,275 $2.22 1,543,322 $2.09
Options and other
warrants issued
during the period.......... 31,754 $5.92 -- --
Options and other
warrants canceled
during the period.......... (139,750) $3.43 (4,000) $2.70
Options and other
warrants exercised
during the period.......... (356,461) $2.18 -- --
--------- ---------
Options and other
warrants outstanding,
end of period.............. 1,304,818 $2.19 1,539,322 $2.09
========= =========
</TABLE>
COMMON STOCK WARRANTS - The following table summarizes the Company's
common stock warrants and their activity for the three months ended
March 31, 2000 and 1999:
<TABLE>
<CAPTION>
WARRANTS
ISSUED AND EXERCISE
OUTSTANDING PRICE EXERCISE PERIOD
----------- -------- -------------------
<S> <C> <C> <C>
March 31, 2000:
1997-A Warrants, beginning of period................... 337,211 $3.40 01/31/97 - 11/06/02
1997-A Warrants, exercised during the period........... (22,155) $3.40
---------
1997-A Warrants, end of period ........................ 315,056 $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.......................... (29,700) $3.40
---------
Redeemable Common Stock Purchase Warrants,
end of period........................................ 1,465,300 $3.40
=========
Underwriters' Warrants................................. 130,000 $5.40 11/12/98 - 11/12/02
=========
March 31, 1999:
1997-A Warrants........................................ 337,211 $3.40 01/31/97 - 11/06/02
Redeemable Common Stock Purchase Warrants.............. 1,495,000 $3.40 11/06/97 - 11/06/02
Underwriters' Warrants................................. 130,000 $5.40 11/12/98 - 11/12/02
</TABLE>
Page 8
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
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.
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 three months ended March 31, 2000, the Company granted
31,754 options while during the same period in 1999 no options were
granted under the Plan. At March 31, 2000 and 1999, the Company had
1,304,818 and 1,539,322, respectively, stock options outstanding of
which only 514,068 and 437,589, respectively, had been issued pursuant
to the Plan.
6. RELATED PARTIES
During the three months ended March 31, 2000 and 1999, the Company
received approximately $1,481 and $1,978, respectively, from Pre-Paid
Legal Services, Inc., a shareholder, for commissions on sales of
memberships for the services provided by Pre-Paid Legal Services, Inc.
During the three months ended March 31, 2000 and 1999, the Company paid
Pat Dungan, wife of Jimmy L. Dungan, a Director of the Company, sales
commissions of $25,701 and $29,392, 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 March 31, 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 9
<PAGE>
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 63.8% and 65.1% of net sales for the three months
ended March 31, 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
April 30, 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
recently 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.
* * * * * *
Page 10
<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 March 31, 2000, and the
related condensed consolidated statements of income and of cash flows for the
three-month periods ended March 31, 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
May 8, 2000
Page 11
<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.
REPURCHASE OF COMMON STOCK BY THE COMPANY. In March 1998, we announced and began
repurchasing up to $1 million of our common stock in the open market.
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 March 31,
2000, we had repurchased 380,180 shares of our common stock for $1,876,535 or an
average of $4.94 per share.
AMERICAN STOCK EXCHANGE. Our common stock and publicly-held warrants were
approved for listing on the American Stock Exchange and began trading under the
symbol AMM on June 15, 1999.
WARRANT REGISTRATION. On March 22, 2000, our Registration Statement (number
333-31750) was declared effective by the Securities and Exchange Commission.
Under the 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 ut to call the redeemable common stock purchase warrants for
redemption. We also have the right to call the 1997-A warrants for redemption.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of our net sales, selected
results of operations for the three months ended March 31, 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
MARCH 31,
------------------------------------------------------
2000 1999
------------------------ ------------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Net sales ........................ $7,003,936 100.0% $4,391,930 100.0%
Cost of sales:
Commissions and bonuses ....... 2,923,236 41.7 1,864,666 42.5
Cost of products .............. 1,440,989 20.6 1,115,705 25.4
Cost of shipping .............. 327,777 4.7 32,796 0.7
---------- ------ ---------- -----
Total cost of sales ......... 4,692,002 67.0 3,013,167 68.6
---------- ------ ---------- -----
Gross profit .................. 2,311,934 33.0 1,378,763 31.4
Marketing, distribution and
administrative expenses ....... 1,920,769 27.4 1,078,285 24.6
---------- ------ ---------- -----
Income from operations ........ 391,165 5.6 300,478 6.8
Other income (expense):
Interest, net .................... 89,401 1.3 70,946 1.6
Other income (expense) ........... 14,137 .2 -- --
---------- ------ ---------- -----
Total other income (expense)... 103,538 1.5 70,946 1.6
---------- ------ ---------- -----
Income before taxes .............. 494,703 7.1 371,424 8.5
Tax expense ...................... 187,987 2.7 140,993 3.2
---------- ------ ---------- -----
Net income ....................... $ 306,716 4.4% $ 230,431 5.2%
========== ====== ========== =====
</TABLE>
During the three months ended March 31, 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
Page 12
<PAGE>
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 MARCH 31, 2000 AND 1999
Our net sales during the three months ended March 31, 2000, increased by
$2,612,006, or 59.5%, to $7,003,936 from $4,391,930 during the three months
ended March 31, 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 March 31, 2000, we made aggregate net sales of $6,960,304 to 46,604
distributors, compared to aggregate net sales during the same period in 1999 of
$4,360,509 to 26,805 distributors. At March 31, 2000, we had approximately
71,700 "active" distributors compared to approximately 43,300 at March 31, 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 $54 to $50 for the three months
ended March 31, 2000, compared to the same period in 1999.
Our cost of sales during the three months ended March 31, 2000, increased by
$1,678,835, or 55.7%, to $4,692,002 from $3,013,167 during the same period in
1999. This increase was attributable to
- - an increase of $1,058,570 in distributor commissions and bonuses due to
the increased level of sales,
- - an increase of $325,284 in the cost of products sold due to the
increased level of sales and
- - an increase of $294,981 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 cost as a percentage of sales
have increased. Total cost of sales, as a percentage of net sales decreased to
67% during the three months ended March 31, 2000, from 68.6% during the same
period in 1999 due to a decrease in distributor commissions and bonuses as a
percentage of net sales to 41.7% from 42.5%, a decrease in cost of products sold
to 20.6% of net sales from 25.4% and an increase in cost of shipping to 4.7% of
net sales from 0.7%.
Our gross profit increased $933,171, or 67.7%, to $2,311,934 for the three
months ended March 31, 2000 from $1,378,763 for the same period in 1999. The
gross profit increased as a percentage of net sales to 33% of net sales from
31.4%.
Marketing, distribution and administrative expenses increased $842,484, or
78.1%, to $1,920,769 during the three months ended March 31, 2000, from
$1,078,285 during the same period in 1999. This increase was attributable to
increased promotional expense designed to increase sales and expansion of our
administrative infra-structure necessary to support increased levels of sales
The balance of the increase in marketing, distribution and administrative
expenses resulted from the higher level of activity and corresponding increases
in variable costs, such as postage, telephone, bank card service charges and
supplies. The marketing, distribution and administrative expenses as a
percentage of net sales increased to 27.4% during the three months ended March
31, 2000, from 24.6% during the same period in 1999.
Our other income (expense) increased by $32,592, or 45.9% to $103,538 during
the three months ended March 31, 2000, from $70,946 during the same period in
1999. This increase was primarily attributable to increased earnings from our
investment of our excess cash in marketable securities.
Page 13
<PAGE>
Income taxes during the three months ended March 31, 2000 and 1999 were
approximately 38% of income before taxes.
As a result of the items above, our net income increased $76,285 to $306,716
during the three months ended March 31, 2000, from $230,431 during the same
period in 1999.
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 63.8% and 65.9% of net sales for the three months ended March 31,
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 April 30, 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 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.
Page 14
<PAGE>
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.
We do not have any arrangements for significant bank or institutional lending.
At March 31, 2000, we had working capital of $2,312,650, compared to $2,715,525
at December 31, 1999. We believe our cash and cash equivalents and cash flows
from operations will be sufficient to fund our working capital needs over the
next 12 months. During the three months ended March 31, 2000, net cash used by
operating activities was $638,691, net cash used in investing activities was
$114,464 and net cash used in financing activities was $594,171. This
represented a net decrease in cash during this period of $1,347,326. Our working
capital needs over the next 12 months consist primarily of marketing,
distribution and administrative expenses.
During the third quarter of 1999 we began purchasing marketable debt and equity
securities. As of March 31, 2000, we had purchased $4,136,154 in securities.
These securities have been classified as $1,561,026 in available for sale
securities and $2,299,835 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
out intent to repurchase up to an additional $2 million of our common stock in
the open market. As of March 31, 2000, we had repurchased 380,180 shares of our
common stock for $1,876,535 or an average of $4.94 per share.
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 March 31, 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 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.
Page 15
<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.
Page 16
<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: May 11, 2000 By: /s/ ROGER P. BARESEL
-----------------------------------
Roger P. Baresel, President, Chief
Financial and Accounting Officer
Page 17
<PAGE>
EXHIBIT 15
Advantage Marketing Systems, Inc.
2601 N.W. Expressway Suite 1210W
Oklahoma City, Oklahoma 73112
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited
condensed consolidated interim financial information of Advantage Marketing
Systems, Inc. and subsidiaries for the three months ended March 31, 2000 and
1999, as indicated in our report dated May 8, 2000; because we did not
perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above which is included in your
Quarterly Report on Form 10QSB for the three months ended March 31, 2000, is
incorporated by reference in Registration Statement No. 333-304381 (Employee
Stock Option Plan) on Form S-8 and Registration Statement No. 333-91491 (1995
Stock Option Plan) on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act of 1933, is not considered a part of the
registration statements prepared or certified by an accountant or a report
prepared or certified by an accountant within the meaning of Sections 7 and
11 of that Act.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
May 8, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 315,568
<SECURITIES> 593,866
<RECEIVABLES> 924,166
<ALLOWANCES> 55,332
<INVENTORY> 901,769
<CURRENT-ASSETS> 3,583,305
<PP&E> 3,301,426
<DEPRECIATION> 1,106,697
<TOTAL-ASSETS> 11,419,900
<CURRENT-LIABILITIES> 1,270,655
<BONDS> 0
0
0
<COMMON> 467
<OTHER-SE> 9,975,394
<TOTAL-LIABILITY-AND-EQUITY> 11,419,900
<SALES> 7,003,936
<TOTAL-REVENUES> 7,112,349
<CGS> 4,692,002
<TOTAL-COSTS> 6,612,771
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,875
<INCOME-PRETAX> 494,703
<INCOME-TAX> 187,987
<INCOME-CONTINUING> 306,716
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 306,716
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.05
</TABLE>
