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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X)QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
or
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 001-13343
ADVANTAGE MARKETING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1323256
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
711 NE 39th Street
Oklahoma City, Oklahoma 73105
(Address of principal executive offices) (Zip Code)
(405) 842-0131
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer as defined
in Rule 12b-2 of the Exchange Act.
Yes ( ) No (X)
On April 30, 2004, we had outstanding 6,736,856 shares of our common stock,
$.0001 par value.
1
ADVANTAGE MARKETING SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2004
Table of Contents
Part I - Financial Information........................................................ 3
Item 1. Financial Statements.......................................................... 3
Consolidated Balance Sheets................................................... 3
Consolidated Statements of Operations......................................... 4
Consolidated Statements of Cash Flows......................................... 5
Notes to Consolidated Financial Statements.................................... 6
Report of Independent Certified Public Accountants............................ 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results 14
of Operations.............................................................
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................... 18
Item 4. Controls and Procedures....................................................... 18
Part II - Other Information........................................................... 19
Item 1. Legal Proceedings............................................................. 19
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities.......................................................... 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
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the caption "Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations" 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. Our actual results 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; our ability to implement our 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; changes in, or
the failure to comply with, government regulations (especially food and drug
laws and regulations); product liability matters; our ability to obtain
financing for future acquisitions and other factors.
2
PART I -FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND DECEMBER 31, 2003
MARCH 31, DECEMBER 31,
2004 2003
------------ --------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................................... $ 870,810 $ 2,309,281
Marketable securities, available for sale, at fair value ...................... 5,434,191 1,876,978
Receivables ................................................................... 174,934 416,919
Prepaid taxes and income tax receivable ....................................... 464,975 464,975
Inventory ..................................................................... 887,801 901,529
Deferred income taxes ......................................................... 4,854 4,854
Other assets .................................................................. 266,969 41,212
------------ --------------
Total current assets ............................................. 8,104,534 6,015,748
RECEIVABLES .................................................................... 237,780 232,809
PROPERTY AND EQUIPMENT, net .................................................... 3,486,359 3,461,733
COVENANTS NOT TO COMPETE and other intangibles, net ............................ 538,550 558,004
DEFERRED INCOME TAXES .......................................................... 1,832,553 1,883,172
OTHER ASSETS ................................................................... 49,520 52,553
------------ --------------
TOTAL ......................................................................... $ 14,249,296 $ 12,204,019
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................................................. $ 200,721 $ 357,696
Accrued commissions and bonuses ............................................... 326,350 215,062
Accrued other expenses ........................................................ 182,925 328,136
Accrued sales tax liability ................................................... 123,763 130,185
Notes payable ................................................................. --- 485,161
Capital lease obligations ..................................................... 69,462 78,954
------------ --------------
Total current liabilities ............................................ 903,221 1,595,194
LONG-TERM LIABILITIES:
Notes payable ................................................................. --- 1,504,009
Capital lease obligations ..................................................... 133,395 142,880
Deferred compensation ......................................................... 668,073 668,073
------------ --------------
Total liabilities ..................................................... 1,704,689 3,910,156
------------ --------------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY (NOTE 9)
Common stock - $.0001 par value; authorized 495,000,000 shares; issued
7,163,265 and 5,905,307 shares, outstanding 6,690,470 and 5,432,512
shares, respectively ..................................................... 716 590
Paid-in capital ............................................................... 19,330,207 15,160,183
Notes receivable for exercise of options ...................................... (31,000) (31,000)
Accumulated deficit ........................................................... (4,633,650) (4,687,718)
Accumulated other comprehensive gain, net of tax .............................. 122,810 96,284
------------ --------------
Total capital and accumulated deficit ................................ 14,789,083 10,538,339
Less cost of treasury stock (472,795 shares, common) .......................... (2,244,476) (2,244,476)
------------ --------------
Total stockholders' equity ........................................... 12,544,607 8,293,863
------------ --------------
TOTAL .......................................................................... $ 14,249,296 $ 12,204,019
============ ==============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------ -------------
2004 2003
------------ -------------
Net sales .................................................... $ 4,473,249 $ 4,614,153
Cost of sales ................................................ 2,823,629 3,226,525
------------ ------------
Gross profit ............................................ 1,649,620 1,387,628
Marketing, distribution and administrative expenses:
Marketing .................................................. 225,221 391,525
Distribution and administrative ............................ 1,392,276 1,395,949
------------ ------------
Total marketing, distribution and administrative ...........
expenses 1,617,497 1,787,474
------------ ------------
Income (loss) from operations ........................... 32,123 (399,846)
Other income (expense):
Interest and dividends, net .................................. 46,099 (22,692)
Other, net ................................................... 10,414 (21,298)
------------ ------------
Total other income (expense) ............................ 56,513 (43,990)
------------ ------------
Income (loss) before taxes ................................... 88,636 (443,836)
Income tax expense (benefit) ................................. 34,568 (173,096)
------------ ------------
Net income (loss) ............................................ $ 54,068 $ (270,740)
============ ============
Net income (loss) per common share - basic ................... $ 0.01 $ (.06)
============ ============
Net income (loss) per common share - assuming dilution ....... $ 0.01 $ (.06)
============ ============
Weighted average common shares outstanding - basic ........... 6,487,463 4,424,314
============ ============
Weighted average common shares outstanding - assuming dilution 7,957,966 4,424,314
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
MARCH 31, MARCH 31,
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................................................. $ 54,068 $ (270,740)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization ........................................... 220,991 242,820
Gain (loss) on sale of assets ........................................... (8,703) 8,877
Realized loss on sale of marketable securities .......................... 3,757 17,093
Deferred taxes .......................................................... 34,568 (173,096)
Stock issued for services ............................................... 14,000 --
Employee compensation recognized upon exercise of stock options ......... 25,062 --
Changes in assets and liabilities which provided (used) cash:
Receivables ........................................................... 257,930 122,929
Inventory ............................................................. 13,728 94,904
Other assets .......................................................... (225,758) (281,318)
Accounts payable and accrued expenses ................................. (197,319) 236,847
------------- -------------
Net cash provided by (used in) operating activities .............. 192,324 (1,684)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................ (247,627) (245,253)
Sales of property and equipment ................................................ 33,199 4,422
Receipts on notes receivable ................................................... (20,915) --
Purchases of marketable securities, available for sale ......................... (7,032,864) (500,906)
Sales of marketable securities, available for sale ............................. 3,514,472 491,857
Payments on advances to affiliates ............................................. -- 13,935
------------- -------------
Net cash used in investing activities ............................. (3,753,735) (235,945)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ......................................... 152,870 --
Proceeds from exercise of warrants ............................................. 3,978,217 --
Principal payment on notes payable ............................................. (1,989,170) (119,658)
Principal payment on capital lease obligations ................................. (18,977) (33,280)
------------- -------------
Net cash provided by (used in) financing activities .............. 2,122,940 (152,938)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ........................................ (1,438,471) (390,567)
CASH AND CASH EQUIVALENTS, BEGINNING ............................................. 2,309,281 1,207,299
------------- -------------
CASH AND CASH EQUIVALENTS, ENDING ................................................ $ 870,810 $ 816,732
============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited consolidated financial statements and related notes have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). 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 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, 2003.
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, 2004.
2. SIGNIFICANT ACCOUNTING POLICIES
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities" (VIEs), which is an interpretation of Accounting Research
Bulletin (ARB) No. 51, "Consolidated Financial Statements." FIN 46, as
revised by FIN 46 (R), addresses the application of ARB No. 51 to VIEs,
and generally would require that assets, liabilities and results of the
activity of a VIE be consolidated into the financial statements of the
enterprise that is considered the primary beneficiary. This interpretation
applies immediately to VIEs created after January 31, 2003, and to VIEs in
which a company obtains an interest after that date. The Company has not
created or obtained an interest in any VIEs. In addition, the
interpretation became applicable on December 31, 2003 for special purpose
entities (SPEs) created prior to February 1, 2003. As of March 31, 2004,
the Company had no SPEs for which it was considered the primary
beneficiary. For non-SPEs in which a company holds a variable interest
that it acquired before February 1, 2003, the FASB has postponed the date
on which the interpretation will become applicable to March 31, 2004. The
Company has determined the adoption of the provisions of FIN 46, as
revised by FIN 46 (R), does not have a material effect on its financial
condition or results of operations.
In December 2003, the Staff of the SEC issued Staff Accounting Bulletin
(SAB) No. 104, "Revenue Recognition," which supersedes SAB No. 101. The
primary purpose of SAB No. 104 is to rescind accounting guidance contained
in SAB No. 101 and the SEC's "Revenue Recognition in Financial Statements
Frequently Asked Questions and Answers" related to multiple element
revenue arrangements in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and
SEC rules and regulations. The Company does not expect the issuance of SAB
No. 104 to significantly impact its current revenue recognition policies.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", which amended SFAS
No. 123, "Accounting for Stock-Based Compensation". The standard provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
compliance with SFAS No. 148, the Company elected to continue to follow
the intrinsic value method in accounting for its stock-based employee
compensation arrangement as defined by APB No. 25. Accordingly, no
compensation cost has been recognized for stock options granted in the
accompanying consolidated financial statements. The following pro forma
data is calculated net of tax as if compensation cost for the Company's
stock-based compensation awards was determined based upon the fair value
at the grant date consistent with the methodology prescribed under SFAS
No. 123.
6
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------ ------------
2004 2003
------------ ------------
Net income (loss) as reported ................... $ 54,068 $ (270,740)
Adjustment, net of tax ........................ (56,134) (37,792)
------------ ------------
Proforma net loss ............................... $ (2,066) $ (308,532)
============ ============
Net income (loss) per common share as
reported ........................................ $ .01 $ (.06)
Adjustment, net of tax ........................ (.01) (.01)
------------ ------------
Proforma net income (loss) per common
share ......................................... $ --- $ (.07)
============ ============
Proforma net income (loss) per common share -
assuming dilution ............................. $ --- $ (.07)
============ ============
Weighted average common shares
outstanding ................................... 6,487,463 4,424,314
============ ============
Weighted average common shares
outstanding - assuming dilution .............. 7,957,966 4,424,314
============ ============
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 2004 and 2003,
respectively: risk-free interest rates of 2.72 and 2.77 percent; no
dividend yield or assumed forfeitures; an expected life of five years; and
volatility of 82.1 and 64.0 percent. The pro forma amounts above are not
likely to be representative of future years because there is no assurance
that additional awards will be made each year. In January 2003, the
Company adopted a new stock incentive plan, under which options were
issued in the first quarter of 2004. This plan was approved at the 2003
annual meeting of shareholders.
3. MARKETABLE SECURITIES
Securities are classified as available for sale with the related
unrealized gains and losses excluded from earnings and reported net of
income tax as a separate component of stockholders' equity until realized.
Realized gains and losses on sales of securities are based on the specific
identification method. Declines in the fair value of investment securities
below their carrying value that are other than temporary are recognized in
earnings.
Net unrealized gains, net of tax, of approximately $27,000 were
included in accumulated other comprehensive gain/loss for the three months
ended March 31, 2004 and net unrealized losses, net of tax, of
approximately $8,285 were included in accumulated other comprehensive loss
for the three months ended March 31, 2003. Total comprehensive income for
the three months ended March 31, 2004 was $96,645, and total comprehensive
loss for the three months ended March 31, 2003 was $284,038.
7
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
4. NOTES PAYABLE
Notes payable consists of the following:
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Note payable to bank, with interest at prime less .25% (3.75% at
December 31, 2003), payable in monthly installments of principal and
interest, due on September 30, 2006, collateralized by warehouse
and equipment ................................................................. $ ---- $ 853,270
Note payable to bank, with interest at prime less .25% (3.75% at
December 31, 2003), payable in monthly installments of principal and
interest, due on September 30, 2006, collateralized by certain assets .......... ---- 145,950
Note payable to RMS Limited Partnership, 7.5% effective rate, payable in 60
monthly installments net of discount of $80,069 at December 31, 2003 .......... ---- 961,606
5.0% note payable to Lexus Motor Credit, payable in monthly installments of
$588.59 ....................................................................... ---- 28,344
------------ ------------
---- 1,989,170
Less current maturities ..................................................... ---- 485,161
------------ ------------
$ ---- $ 1,504,009
============ ============
All of the notes payable and long-term debt was paid in full in January
2004, using proceeds from the exercise of outstanding warrants.
5. INCOME (LOSS) PER SHARE
Income (loss) per common share - basic is computed based upon net
income (loss) divided by the weighted average number of common shares
outstanding during each period. Income (loss) per common share - assuming
dilution is computed based upon net income (loss) 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 income (loss) per common share - basic and income (loss)
per common share - assuming dilution:
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ----------
Weighted average common shares outstanding: For the
three months ended March 31, 2004:
Income per common share:
Income available to common stockholders.......................... $ 54,068 6,487,463 $ 0.01
==========
Income per common share - assuming dilution:
Options.......................................................... -- 1,470,503
------------- ----------
Income available to common stockholders plus
assumed conversions........................................... $ 54,068 7,957,966 $ 0.01
============= ========== ==========
For the three months ended March 31, 2003:
Loss per common share:
Loss available to common stockholders............................ $ (270,740) 4,424,314 $ (.06)
==========
Loss per common share - assuming dilution:
Options.......................................................... -- --
------------- ----------
Loss available to common stockholders plus
assumed conversions........................................... $ (270,740) 4,424,314 $ (.06)
============= ========== ==========
Options to purchase 143,925 shares of common stock at exercise
prices ranging from $4.50 to $6.13 per share were outstanding for the
three months ended March 31, 2004, but were not included in the
8
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
computation of income (loss) per common share - assuming dilution because
inclusion of the options was antidilutive.
Options to purchase 2,620,115 shares of common stock at exercise
prices ranging from $1.31 to $6.13 per share were outstanding for the
three months ended March 31, 2003, but were not included in the
computation of income (loss) per common share - assuming dilution because
there was a net loss for the quarter.
Warrants to purchase 1,874,768 shares of common stock at exercise
prices ranging from $3.40 to $5.40 per share were outstanding at March 31,
2003, but were not included in the computation of earnings per common
share - assuming dilution because there was a net loss for the quarter.
As part of the LifeScience Technologies Acquisition, the sellers
received monthly cash payments in an amount equal to the greater of
$41,667 or 5% of LifeScience Technologies product sales. The sellers had
the election to take each monthly payment in shares of common stock rather
than cash at $3.00 per share exercise price, but could not acquire more
than 860,000 shares pursuant to elections. None of the shares of common
stock subject to this election right were included in the computation of
earnings (loss) per common share - assuming dilution for the three months
ended March 31, 2003 because there was a net loss for the quarter. The
balance of the acquisition price, including interest, was paid in full on
January 29, 2004.
6. DEFERRED TAXES
On a regular basis, management evaluates all available evidence,
both positive and negative, regarding the ultimate realization of the tax
benefits of its deferred tax assets. Valuation allowances have been
established for certain operating loss and credit carryforwards that
reduce deferred tax assets to an amount that will, more likely than not,
be realized. Uncertainties that may affect the realization of these assets
include tax law changes and the future level of product prices and costs.
The outlook for determination of this allowance is calculated on the
Company's historical taxable income, its expectations for the future based
on a rolling twelve quarters, and available tax-planning strategies. Based
on this determination, management expects that the net deferred tax assets
will be realized as offsets to reversing deferred tax liabilities and as
offsets to the tax consequences of future taxable income. The Company has
net operating loss carryforwards of $2,514,000 available to reduce future
taxable income, which will begin to expire in 2023.
7. COMMITMENTS AND CONTINGENCIES
RECENT REGULATORY DEVELOPMENTS - As a marketer of products that are
ingested by consumers, the Company is subject to the risk that one or more
of the ingredients in its products may become the subject of adverse
regulatory action. On February 11, 2004, the Food and Drug Administration,
or FDA, issued and published in the Federal Register its Final Rule on
Ephedrine-containing Supplements, stating that since an "unreasonable
risk" had been determined, such supplements would be considered
"adulterated" under the Federal Food, Drug and Cosmetic Act, or FFDCA, and
thus may not be sold. In essence, this Final Rule (or regulation) imposes
a national ban on ephedrine supplements.
The effective date of this regulation was April 12, 2004. The
Company complied, and ceased all sales and advertisement of AM-300 and any
other ephedra-containing supplement on April 12, 2004. The FDA has
indicated that it will now consider whether alternatives to Ephedra and
other weight loss and energy stimulants (such as bitter orange) similarly
carry an unreasonable risk. These proposals to
9
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
limit stimulant ingredients, if finalized, may necessitate reformulations
of some of the Company's weight loss products.
Finally, as the press, the FDA, and members of Congress and of the
supplement industry have all predicted, the very issuance of the Final
Rule on Ephedra may cause Congress to rethink and amend The Dietary
Supplement Health and Education Act of 1994, or DSHEA, as to how safety in
supplements may be ensured. In particular, there is growing sentiment
(including from one herbal trade association) to make Adverse Event
Reporting mandatory for all manufacturers and marketers of dietary
supplements, so that FDA may take action more quickly than it did on
Ephedra, when a harmful herb or other ingredient is suspected. The
Company's regulatory counsel will keep it apprised of any challenges to
DSHEA, especially any proposed bills that would amend this Act.
The Texas Department of Health promulgated a new regulation, which
became effective on January 1, 2001. The regulation requires a warning to
appear on the product label indicating that the sale of ephedra-containing
products to minors is illegal. The Company's AM-300 labels comply with
this regulation. Again, after April 12, 2004 no sales of
ephedrine-containing supplements were allowed nationally, and thus state
regulations such as this are superceded and moot.
Manufacturing. On March 13, 2003, the FDA published a proposed rule in the
Federal Register which proposes comprehensive requirements for the
manufacturing, packing and holding dietary supplements, also known as good
manufacturing practices, or GMPs. The FDA accepted public comments on the
proposed GMPs until June 11, 2003; final GMPs will be promulgated after
the FDA has reviewed the public comments. Once final GMP regulations
become effective, the Company's manufacturer will be required to adhere to
them. The FDA will most likely institute an effective date for the GMPs
which will allow the Company's manufacturer a reasonable amount of time to
conduct this review and, if necessary, revise its manufacturing operations
to comply with the final GMP regulations.
Advertising and Website. The FDA considers website promotional content to
constitute "labeling," and thus the Company's website must not contain
disease claims or drug claims, but only permissible structure/function
claims. The Federal Trade Commission, or FTC, governs the advertising of
dietary supplements, in any medium or vehicle--print ads, radio spots,
infomercials, etc.--including on Internet ads and websites. The
fundamental FTC rule is that all material advertising claims, whether
express (direct) or implied, must be substantiated by reliable and
competent scientific evidence. Because the Company's website must comply
with both FDA and FTC regulations, management routinely asks its
regulatory compliance counsel to review certain web pages, especially the
content of new product promotions. When necessary, regulatory counsel also
reviews the scientific substantiation for particular claims (again,
especially for new products such as Prime One, an anti-stress and weight
loss product) to determine if it is sufficient, and also that there are no
disease claims present, the main FDA issue. Any major website revision
will be reviewed by counsel.
Finally, the Company wanted to address a potential liability or
exposure problem stemming from some of its independent associates creating
their own websites, which had not been subject to regulatory review. The
Company was concerned that these "renegade" websites could contain
impermissible disease claims as to dietary supplements, or false,
unsubstantiated or misleading promotional claims in violation of the FTC.
The solution, proposed and drafted by the Company's regulatory counsel,
was that on February 24, 2004, the Company sent a notice to associates
clearly stating that the policy of the Company is to be in full compliance
with all applicable FDA and FTC regulations, and that to ensure Internet
compliance, associates should simply copy or link to the corporate
website. This Policy letter further stated that any independent websites
were absolutely
10
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
unauthorized, and their creators would be solely liable for defending any
regulatory enforcement actions.
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 a claims made policy, with limited
liability insurance coverage. The limits of this coverage are $1,000,000
per occurrence and $2,000,000 in the aggregate. Products containing
ephedra, which represented approximately 31.0% of the Company's first
quarter 2004 net revenue, are not covered by the Company's product
liability insurance. 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. Although the Company has
never had a product liability claim, such claims against the Company could
result in material losses to the Company.
LEGAL PROCEEDINGS - The Company is currently involved in five
products liability suits related to the ingestion of its ephedra-based
products. Answers to these petitions have been or soon will be filed, and
written discovery and responses have been or soon will be exchanged. The
Company has denied, and will continue to deny, any wrongdoing and intends
to vigorously defend against the claims. The amounts of damages sought are
unknown, but include compensatory and punitive damages.
8. DEFERRED COMPENSATION
On November 4, 2003 the Company entered into a written employment
agreement with John W. Hail, Chief Executive Officer, or the Executive.
The contract is for an initial two-year term, commencing November 4, 2003,
and may be extended for up to five successive one-year terms if the
Company and the Executive agree in writing. The contract calls for a base
salary of $249,600 per year, a monthly variable salary equal to one
percent (1%) of the Company's gross revenues, and a discretionary year-end
bonus determined by a majority vote of the Board of Directors. The
agreement also contains provisions for graduated severance payments if the
Company terminates the Executive without cause. In addition, if the
employment period is extended beyond November 11, 2005, the monthly
variable salary will cease and be replaced by a fixed supplemental payment
to the Executive, which will be in a gross amount necessary to cover all
federal, state and local taxes and all employment taxes, and pay a net
amount of $7,000 per month. At March 31, 2004, the discounted value of
those fixed supplemental payments was approximately $668,000.
9. CHANGES IN STOCKHOLDERS' EQUITY
The following table sets forth changes in stockholder equity between
December 31, 2003 and March 31, 2004:
March 31, 2004 December 31, 2003
-----------------------------------------------------
Common Stock $ 716 $ 590
Paid in Capital 19,330,207 15,160,183
Common stock increased $126, or 21.4% to $716 at March 31, 2004 from
$590 at December 31, 2003, due to the issuance of 5,000 shares of common
stock for consulting services, the exercise of approximately 90,000 stock
options and the exercise of approximately 1,170,000 outstanding warrants.
Paid in capital increased $4,170,024, or 27.5% to $19,330,207 at
March 31, 2004 from $15,160,183 at December 31, 2003. The increase in paid
in capital was due to:
11
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
- Approximately $14,000 related to issuance of stock for services;
- Approximately $178,000 related to exercise of stock options; and
- Approximately $4,000,000 related to the exercise of outstanding
warrants.
******
12
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Advantage Marketing Systems, Inc.
We have reviewed the accompanying consolidated balance sheet of Advantage
Marketing Systems, Inc. and Subsidiaries as of March 31, 2004, and the related
consolidated statements of operations and cash flows for the three months ended
March 31, 2004 and 2003. These financial statements are the responsibility of
the Company's management.
We conducted our reviews 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 reviews, we are not aware of any material modifications that
should be made to the consolidated financial statements, as of March 31, 2004
and for the periods ended March 31, 2004 and 2003, 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,
2003 and the consolidated statements of operations, stockholders' equity and
cash flows for the year then ended (not presented herein) and, in our report
dated February 17, 2004, we expressed an unqualified opinion on those
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2003 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
April 21, 2004
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
We market a product line consisting of approximately sixty products in
three categories; weight management, dietary supplement and personal care
products. These products are marketed through a network marketing organization
in which independent associates purchase products for resale to retail customers
as well as for their own personal use.
Critical Accounting Policies. We prepare our consolidated financial
statements in conformity with accounting principles generally accepted in the
United States, which require us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the year. Actual results could differ
from those estimates. We consider the following policies to be most critical in
understanding the judgments that are involved in preparing our financial
statements and the uncertainties that could impact our results of operations,
financial condition and cash flows.
Throughout this report, "net sales" represents the gross sales amounts
reflected on our invoices to our associates, including freight income, less
associate discounts and sales returns. All of our products include a customer
satisfaction guarantee. Our products may be returned within 30 days of purchase
for a full refund or credit toward the purchase of another product. We also have
a buy-back program whereby we repurchase products sold to an independent
associate (subject to a restocking fee), provided the associate terminates
his/her associateship agreement with us and returns the product within 12 months
of original purchase in marketable condition. We receive our net sales price in
cash or through credit card payments upon receipt of orders from associates.
Our "gross profit" consists of net sales less:
- Commissions and bonuses, consisting of commission payments to
associates based on their current associate level within their
organization, and other one-time incentive cash bonuses to
qualifying associates;
- Cost of products, consisting of the prices we pay to our
manufacturers for products and royalty overrides earned by
qualifying associates on sales within their associate organizations;
and
- Cost of shipping, consisting of costs related to shipments, duties
and tariffs, freight expenses relating to shipment of products to
associates, and similar expenses.
We recognize revenue upon shipment of products, training aids and
promotional materials to the independent associates. All of our customers pay
for sales in advance of shipment. As such, we have no trade receivables. Loans
to associates are repayable in five years or less; are secured by commissions
controlled by us; and are no longer allowed. Interest rates on loans are
typically two percent or more above the prime rate and are fixed. All loans and
receivables are secured by guaranteed payment sources that are within our
control. As such, we believe there is no need for an allowance for doubtful
accounts.
We write down our inventory to provide for estimated obsolete or unsalable
inventory based on assumptions about future demand for our products and market
conditions. If future demand and market conditions are less favorable than
management's assumptions, additional inventory write-downs could be required.
Likewise, favorable future demand and market conditions could positively impact
future operating results if written-off inventory is sold.
We account for contingencies in accordance with SFAS No. 5, "Accounting
for Contingencies". SFAS 5 requires that we record an estimated loss from a loss
contingency when information available prior to issuance of our financial
statements indicates that it is probable that an asset has been impaired or a
liability has been incurred at the date of the financial statements and the
amount of the loss can be reasonably estimated. Accounting for contingencies
such as legal and income tax matters requires us to use our judgment. Many legal
and tax contingencies can take years to resolve. Generally, as the time period
increases over which the uncertainties are resolved, the likelihood of changes
to the estimate of the ultimate outcome increases. However, an adverse outcome
in these matters could have a material impact on our results of operations,
financial condition and cash flows. No amounts were accrued for such
uncertainties as of March 31, 2004.
14
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, 2004 and 2003. The
selected results of operations are derived from our unaudited consolidated
financial statements. The results of operations for the periods presented are
not necessarily indicative of our future operations.
FOR THE THREE MONTHS ENDED
-------------------------------------------------
MARCH 31,
-------------------------------------------------
2004 2003
----------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT
------------- ------- ----------- -------
Net sales .............................. $ 4,473,249 100.0% $ 4,614,153 100.0%
------------- ----- ------------- -----
Cost of sales:
Commissions and
bonuses ........................... 1,771,856 39.6 2,038,236 44.2
Cost of products ..................... 713,029 15.9 780,133 16.9
Cost of shipping ..................... 338,744 7.6 408,156 8.8
------------- ----- ------------- -----
Total cost of sales ................ 2,823,629 63.1 3,226,525 69.9
------------- ----- ------------- -----
Gross profit ......................... 1,649,620 36.9 1,387,628 30.1
Marketing, distribution
and administrative expenses:
Marketing ............................ 225,221 5.1 391,525 8.5
Distribution and administrative ...... 1,392,276 31.1 1,395,949 30.2
------------- ----- ------------- -----
Total marketing, distribution and
administrative expenses .............. 1,617,497 36.2 1,787,474 38.7
------------- ----- ------------- -----
Income (loss) from operations ........ 32,123 0.7 (399,846) (8.6)
Other income (expense):
Interest, net .......................... 46,099 1.0 (22,692) (0.5)
Other, net ............................. 10,414 0.3 (21,298) (0.5)
------------- ----- ------------- -----
Total other income (expense) ........... 56,513 1.3 (43,990) (1.0)
------------- ----- ------------- -----
Income (loss) before taxes ............. 88,636 2.0 (443,836) (9.6)
Tax expense (benefit) .................. 34,568 0.8 (173,096) (3.7)
------------- ----- ------------- -----
Net income (loss) ...................... $ 54,068 1.2% $ (270,740) (5.9)%
============= ===== ============= =====
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Our net sales during the three months ended March 31, 2004 decreased by
$140,904, or 3.1%, to $4,473,249 from $4,614,153 during the three months ended
March 31, 2003. The sales decrease is due to the decrease in number of associate
autoships experienced by us in late 2003. We have historically earned a material
portion of our revenues from our AM-300 product, which contains ephedra. In
2003, the FDA banned the use of ephedra in nutritional supplements. This ban was
effective April 12, 2004. Sales of our AM-300 product totaled approximately $1.4
million in the first quarter of 2004, as compared to sales of approximately $1.9
million in the same period of 2003. While the FDA's decision had an adverse
effect on our 2003 revenues, we had been preparing for this contingency. Over
the last several years, through strategic acquisitions, product redevelopment
and refocus of weight loss products, we have built a multi-product peak
performance, weight loss and nutritional product line that is predominately
non-ephedra. We have seen positive results in converting our AM-300 customers to
AM-300 Ephedra Free or other weight loss products in states like New York,
Illinois and California that have previously banned ephedra. A majority of the
customers in those states have chosen one or more of our other performance-based
weight loss and nutritional products. We anticipate the same positive results
with our remaining AM-300 customers. As a result, we do not anticipate that the
FDA ban on ephedra will materially impact our financial condition or results of
operations.
On March 6, 2004, we announced the launch of our three-phase 2004 mass
marketing preferred customer acquisition program using a free trial format. The
three products, Prime One, AM-300 fat burning solution and the ToppFast meal
replacement shake, are packaged in two free trial programs and represent the
Company's core
15
adaptogen and weight loss products, targeting consumer demand for increased
energy, reduced belly fat and recognizable weight loss.
On April 5, 2004, we announced March results of our new customer
acquisition program totaling 2,813 new preferred customers, far surpassing the
initial projection of 1,500. The customer acquisition program is in the early
stage of phase I of a three-phase rollout that will continue throughout 2004.
Phase I started with the rollout of the program to the sales associates followed
by phase II, a pending full Internet release and phase III, a mass marketing
media campaign which the Company is currently exploring.
Product autoships from new associates increased 460% in March 2004 over
February 2004. Also in March, 3,516 new sales associates and preferred customers
joined AMS, compared to 743 in February 2004 and 979 in March 2003. Total sales
for March were up 13% over the prior month and 3% over the same period in the
prior year.
Our cost of sales during the three months ended March 31, 2004 decreased
by $402,896, or 12.5%, to $2,823,629 from $3,226,525 during the same period in
2003. Total cost of sales, as a percentage of net sales, decreased to 63.1%
during the three months ended March 31, 2004 from 69.9% during the same period
in 2003. The decrease in cost of sales was attributable to:
- A decrease of $266,380 in associate commissions and bonuses,
primarily due to a change in the compensation plan to accommodate
the addition of bonus pools, along with the greater sales from newer
downline business versus older downline business, which pays less
commissions;
- A decrease of $67,104 in the cost of products sold due to the
implementation of a perpetual inventory system in the second quarter
of 2003 and decreased sales; and
- A decrease of $69,412 in shipping costs primarily due to decreased
sales.
The factors discussed above resulted in an increase in gross profit of
$261,992, or 18.9%, to $1,649,620 for the three months ended March 31, 2004 from
$1,387,628 for the same period in 2003.
Marketing expenses decreased $166,304, or 42.5%, to $225,221 during the
three months ended March 31, 2004, from $391,525 during the same period in 2003.
The decrease in expense was primarily attributable to:
- A decrease in employee costs of approximately $30,000;
- A decrease in promotion expenses of approximately $51,000;
- A decrease in travel costs of approximately $37,000 related to less
outside travel of executives and our nutition expert; and
- A decrease in general expenses such as postage, telephone expense,
and office supplies of approximately $18,000.
Distribution and administrative expense was virtually flat at $1,392,276
for the three months ended March 31, 2004 compared to $1,395,949 for the three
months ended March 31, 2003. The marketing, distribution and administrative
expenses as a percentage of net sales decreased to 36.2% during the three months
ended March 31, 2004 from 38.7% during the same period in 2003.
Management expects marketing, distribution and administrative expenses to
continue at or near the current dollar level.
Our net other income (reduced by other expense) increased by $100,503 to
net other income of $56,513 at March 31, 2004, from a net other expense of
$43,990 during the same period in 2003, primarily due to a decrease in interest
expense, related to the repayment of all outstanding debt in January 2004.
Our income (loss) before taxes increased $532,472 to income of $88,636 for
the first three months of 2004, compared to a loss of $443,836 during the same
period in 2003. Income (loss) before taxes as a percentage of net sales was 2.0%
and (9.6%) for the three months ended March 31, 2004 and 2003, respectively.
Income tax expense (benefit) for the first quarter 2004 and 2003 was $34,568 and
($173,096). Our net income (loss) increased $324,808, to net
16
income of $54,068 for the three months ended March 31, 2004, from a net loss of
$270,740 for the same period in 2003. This increase was attributable to:
- The increase in gross profit to $1,649,620 during 2004 from
$1,387,628 during 2003;
- The decrease in marketing, distribution and administrative expense
to $1,617,497 during 2004 from $1,787,474 during 2003; and
- The increase in net other income to $56,513 during 2004 from net
other expense of $43,990 during 2003.
Net income (loss) as a percentage of net sales increased to 1.2% for the three
months ended March 31, 2004, from (5.9%) during the same period in 2003.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities"
(VIEs), which is an interpretation of Accounting Research Bulletin (ARB) No. 51,
"Consolidated Financial Statements." FIN 46, as revised by FIN 46 (R), addresses
the application of ARB No. 51 to VIEs, and generally would require that assets,
liabilities and results of the activity of a VIE be consolidated into the
financial statements of the enterprise that is considered the primary
beneficiary. This interpretation applies immediately to VIEs created after
January 31, 2003, and to VIEs in which a company obtains an interest after that
date. We have not created or obtained an interest in any VIEs. In addition, the
interpretation becomes applicable on December 31, 2003 for special purpose
entities (SPEs) created prior to February 1, 2003. As of March 31, 2004, we had
no SPEs for which we were considered the primary beneficiary. For non-SPEs in
which a company holds a variable interest that it acquired before February 1,
2003, the FASB has postponed the date on which the interpretation will become
applicable to March 31, 2004. We have determined the adoption of the provisions
of FIN 46, as revised by FIN 46 (R), does not have a material effect on our
financial condition or results of operations.
In December 2003, the Staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition,"
which supersedes SAB No. 101. The primary purpose of SAB No. 104 is to rescind
accounting guidance contained in SAB No. 101 and the SEC's "Revenue Recognition
in Financial Statements Frequently Asked Questions and Answers" (the FAQ)
related to multiple element revenue arrangements in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. We do not expect the issuance
of SAB No. 104 to significantly impact our current revenue recognition policies.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity has been cash provided by sales of our
marketable securities and our operating activities. In January 2004, we added
cash of approximately $1.2 million from the exercise of outstanding warrants.
Using a portion of the proceeds from the exercise of warrants, we repaid all
debt, totaling $1,504,009, resulting in a decrease in interest expense of
approximately $60,000. At March 31, 2004, we had working capital of $7,201,313,
compared to $4,420,554 at December 31, 2003. Our working capital needs over the
next 12 months consist primarily of marketing, distribution and administrative
expenses, and will be provided by our operating activities and existing cash and
cash equivalents. During the three months ended March 31, 2004, net cash
provided by operating activities was $192,324, net cash used in investing
activities was $3,753,735 and net cash provided by financing activities was
$2,122,940. This represented a net decrease in cash during this period of
$1,438,471.
In 2001, we completed construction of a 23,346 square foot distribution
and call center facility in Oklahoma City. This project was funded, in part,
with bank loans of $980,000 for the land and building and $166,216 for the
warehouse equipment. Both loans were with Bank One Oklahoma, N.A. and accrued
interest at an annual rate of .25% under the prime rate. The loans were retired
in January 2004. As of January 31, 2004, we had no long-term debt outstanding.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our balance sheet includes marketable securities, which we believe are
conservative blends of income and growth investments resulting in moderate
market risk. We invest in equity marketable securities to generate capital
growth, and fixed-income marketable securities to provide current income.
Because of the nature of these investments, total return and risk will be
affected by both current interest rates and equity market movements. Our fixed
income investments of approximately $2,600,000 are subject to interest risk
only. We have approximately $2,800,000 of equity investments that are exposed to
market risk.
INTEREST RATE RISK. We currently maintain an investment portfolio of
high-quality fixed-income marketable securities. All securities are available
for sale and recorded in the balance sheet at fair value with fluctuations in
fair value reported as a component of accumulated other comprehensive income in
stockholders equity. We do not hedge our investment portfolio. Fixed-income
investments with a maturity date of three months or less at the date of purchase
are deemed to be cash equivalents. Any remaining fixed-income securities are
considered short-term and mainly consist of investments in U.S. Treasury notes
and bonds.
The following table lists our cash equivalents and our short-term
fixed-income marketable securities at March 31, 2004 and December 31, 2003:
MARCH 31, 2004 DECEMBER 31, 2003
--------------------------------------------- -----------------------------------------
AVERAGE FAIR AVERAGE FAIR
INTEREST RATE COST VALUE INTEREST RATE COST VALUE
------------- ------------ -------------- ------------- ----------- -----------
Cash equivalents... -- $ 18,922 $ 18,922 -- $ 17,709 $ 17,709
Short-term
Investments...... -- 2,642,270 2,642,238 -- 787,551 786,855
------------ ------------ ----------- ---------
$ 2,661,192 $ 2,661,160 $ 805,260 $ 804,564
============ ============ =========== =========
The fair value of the cash equivalents and fixed-income marketable
securities increased $1,856,596 during the three months ended March 31, 2004 to
$2,661,192 from $804,564 at December 31, 2003. This increase was primarily due
to the purchase of fixed-income securities of approximately $1,800,000,
purchased with cash from the exercise of our outstanding warrants.
EQUITY MARKET RISKS. We currently maintain an investment portfolio of
equity securities. All securities are available for sale and recorded in the
balance sheet at fair value with fluctuations in fair value reported as a
component of accumulated other comprehensive income in stockholders equity. We
do not engage in hedging our equity portfolio or otherwise purchase derivative
securities. Because of the quality of our portfolio and liquid nature of our
equity investments, we do not consider the market risk related to these
investments to be material. At March 31, 2004, our equity investments had a
value of $2,773,031 compared to $1,072,414 at December 31, 2003, primarily due
to the purchase of mutual fund equity investments, purchased with cash from the
exercise of our outstanding warrants.
We attempt to manage our interest and market risk by evaluating and
purchasing what we believe to be the best investment securities and rates of
return available.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was
carried out under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934) as required by Rule 13a-15(b). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the design and
operation of these disclosure controls and procedures were effective. Our Chief
Executive Officer and Chief Financial Officer have also concluded that there
have not been any changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 5, 2004, we were sued in Ross v. Advantage Marketing
Systems, Inc., Superior Court of the State of California for the
County of Los Angeles, Case No. BC 309118. No answer or other
responsive pleading has yet been filed. The plaintiff alleges that
she took AM-300, which contains ephedra, and was injured as a
result. She seeks actual, compensatory and punitive damages, plus an
accounting and disgorgement of profits we purportedly earned as a
result of allegedly illegal conduct. We intend to vigorously defend
the case.
On March 8, 2004, we were sued in Purcell v. Advantage Marketing
Systems, Inc. and The Chemins Company, Inc., District Court in and
for Pontotoc County, State of Oklahoma, Case No. C-04-127. No answer
or other responsive pleading has yet been filed. The plaintiff
alleges that he took AM-300, which contains ephedra, and was injured
as a result. He seeks actual and punitive damages in an amount in
excess of $10,000. We intend to vigorously defend the case.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
On December 10, 2003, our Board of Directors authorized the
redemption of all of our outstanding 1997-A warrants, Redeemable
Common Stock Purchase Warrants and Underwriter's Warrants. We
completed the redemption of our outstanding 1997-A warrants,
Redeemable Common Stock Purchase Warrants and Underwriter's Warrants
on January 16, 2004.
- ----------------------------- ------------------------------------------------- ----------------------
(a) Total (c) Total Number of (d) Maximum Number (or
Number of (b) Shares (or Units) Approximate dollar Value) of
Shares (or Average Price Purchased as Part of Shares (or Units) that May Yet be
Units) Paid per Share Publicly Announced Purchased Under the Plans or
Period Purchased (or Unit) Plans or Programs Programs
- ------------------------------------------------------------------------------------------------------
Month #1
01/01/2004
through
01/31/2004 147,049 $ 0.081 147,049 ---
- ------------------------------------------------------------------------------------------------------
Month #2
02/01/2004
through
02/29/2004 --- $ --- --- ---
- ------------------------------------------------------------------------------------------------------
Month #3
03/01/2004
through
03/31/2004 --- $ --- --- ---
- ------------------------------------------------------------------------------------------------------
On January 14, 2004, we sold 5,000 shares of common stock to a consultant in
exchange for approximately $14,000 of services. The sale was exempt from
registration pursuant to Section 4(2) of the Securities Exchange Act of 1933.
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
(a) Exhibits
19
3.1 The Registrant's Certificate of Incorporation, incorporated by reference
to the Registration Statement on Form SB-2 (Registration No. 333-47801)
filed with the commission on March 11, 1998.
3.2 The Registrant's Bylaws, incorporated by reference to the Registration
Statement on Form SB-2 (Registration No. 333-47801) filed with the
commission on March 11, 1998.
15 Letter of independent accountants as to unaudited interim financial
information, filed herewith.
31.1 Rule 13a-14(a) Certification by our Chairman and Chief Executive Officer,
filed herewith.
31.2 Rule 13a-14(a) Certification by our Chief Financial Officer, filed
herewith.
32.1 Section 1350 Certification of our Chief Executive Officer, filed herewith.
32.2 Section 1350 Certification of our Chief Financial Officer, filed herewith.
(b) Form 8-K
We filed the following Form 8-Ks during the first quarter of 2004:
- March 25, 2004 - Item 7, Item 9 and Item 12 filing disclosing
the press release and earnings call script announcing
financial results of the year ended December 31, 2003
- January 27, 2004 - Item 5 and Item 7 filing disclosing the
press release announcing completion of the outstanding warrant
redemption.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REGISTRANT:
ADVANTAGE MARKETING SYSTEMS, INC.
Dated: May 7, 2004
By: /S/ REGGIE B. COOK
-----------------------------
Reggie B. Cook, Vice President and
Chief Financial Officer
(Duly Authorized Officer of
Registrant and Principal
Financial Officer)
21
Index of Exhibits
3.1 The Registrant's Certificate of Incorporation, incorporated by reference
to the Registration Statement on Form SB-2 (Registration No. 333-47801)
filed with the commission on March 11, 1998.
3.2 The Registrant's Bylaws, incorporated by reference to the Registration
Statement on Form SB-2 (Registration No. 333-47801) filed with the
commission on March 11, 1998.
15 Letter of independent accountants as to unaudited interim financial
information, filed herewith.
31.1 Rule 13a-14(a) Certification by our Chairman and Chief Executive Officer,
filed herewith.
31.2 Rule 13a-14(a) Certification by our Chief Financial Officer, filed
herewith.
32.1 Section 1350 Certification of our Chief Executive Officer, filed herewith.
32.2 Section 1350 Certification of our Chief Financial Officer, filed herewith.
22