U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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Commission File Number: 001-13343
ADVANTAGE MARKETING SYSTEMS, INC.
(Name of small business issuer in its charter)
OKLAHOMA 73-1323256
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2601 Northwest Expressway, Suite 1210W
Oklahoma City, Oklahoma 73112-7293
(Address of principal executive offices)
(405) 842-0131
(Issuer's telephone number)
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange
------------------- on which registered
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Common Stock, $0.0001 Par Value American Stock Exchange
Redeemable Common Stock Purchase Warrants American Stock Exchange
1997-A Warrants American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.0001 Par Value
Redeemable Common Stock Purchase Warrants
1997-A Warrants
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[X]
The issuer's revenues for the year ended December 31, 2001 were $28,440,920.
The aggregate market value of the issuer's common stock, $.0001 par value, held
by non-affiliates of the issuer as of March 29, 2002, was $8,995,133 based on
the closing sale price on that date as reported by the American Stock Exchange.
As of March 29, 2002, 4,409,379 shares of the issuer's common stock, $.0001 par
value, were outstanding.
ADVANTAGE MARKETING SYSTEMS, INC.
FORM 10-KSB
For the Fiscal Year Ended December 31, 2001
TABLE OF CONTENTS
Part I.
Item 1. Description of Business 3
Item 2. Description of Property 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Part II.
Item 5. Market for Common Equity and Related Stockholder Matters 17
Item 6. Management's Discussion and Analysis or Plan of Operation 17
Item 7. Financial Statements 24
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 24
Part III.
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act 25
Item 10. Executive Compensation 26
Item 11. Security Ownership of certain Beneficial Owners and Management 29
Item 12. Certain Relationships and Related Transactions 31
Item 13. Exhibits and Reports on Form 8-K 31
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the captions "Item 1. Description of Business,"
"Item 6. Management's Discussion and Analysis or Plan of Operation," and
elsewhere in this report constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Certain, but not
necessarily all, of such forward-looking statements can be identified by the use
of forward-looking terminology such as "anticipates," "believes," "expects,"
"may," "will," or "should" or other variations thereon, or by discussions of
strategies that involve risks and uncertainties. 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); our ability to
obtain financing for future acquisitions and other factors.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
We market a product line consisting of approximately one hundred 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.
The associates in our network are encouraged to recruit interested people
to become new associates for our products. New associates are placed beneath
the recruiting associate in the "network" and are referred to as being in that
associate's "downline" organization. Our marketing plan is designed to provide
incentives to build, maintain and motivate an organization of recruited
associates in their downline organization to maximize their earning potential.
Associates generate income by purchasing our products at wholesale prices and
reselling them at retail prices. They also earn bonuses on product purchases
generated by the associates in their downline organization. See "--Network
Marketing."
On an ongoing basis, we review our product line for duplication and sales
movement and make adjustments accordingly. As of December 31, 2001, our product
line consisted of (i) nine weight management products, (ii) 38 dietary
supplement products and (iii) 48 personal care products consisting primarily of
skin care products. Our products are manufactured by various manufacturers
pursuant to formulations developed for us and are sold to our independent
associates located in all 50 states, the District of Columbia and Canada.
We believe that our network marketing system is ideally suited to market
weight management, dietary supplement and personal care products because sales
of such products are strengthened by ongoing personal contact between
associates and their customers. Our network marketing system appeals to a broad
cross-section of people, particularly those looking to supplement family income
or seeking part-time work. Associates are given the opportunity through
sponsored events and training sessions to network with other associates, develop
selling skills and establish personal goals. We supplement monetary incentives
with other forms of recognition in order to further motivate and foster an
atmosphere of excitement throughout our associate network.
Key Operating Strengths
We believe the source of our success is our support of and compensation
program for our associates. We provide high-quality products and a highly
attractive bonus program, along with extensive training and motivational events
and services. We believe that we have established a strong operating platform
to support associates and facilitate future growth. The key components of this
platform include the following:
- quality products, many of which emphasize herbs and other natural
ingredients to appeal to consumer demand for products that contribute
to a healthy lifestyle;
- a compensation program that permits associates to earn income from
profits on the resale of products and residual income from reorder
bonuses on product purchases within an associate's downline
organization, as well as to participate in various non-cash awards, such
as vacations offered through promotional programs;
- a superior communications and training program that effectively and
efficiently communicates with associates by utilizing new technologies
and marketing techniques, as well as motivational events and training
seminars, including our industry tailored TRUE Advantage Training; and
- the employment of information technology to provide timely and accurate
product order processing, weekly bonus payment processing, detailed
associate earnings statements, and inventory management.
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Growth Strategy
Our growth strategy is the expansion of our product line and network of
independent associates to increase sales. An increase in the number of
associates generally results in increased sales volume, and new products create
enthusiasm among associates, serve as a promotional tool in selling other
products, and attract new associates. Since 1995, we have introduced many new
products to our product line in the weight management, dietary supplement and
personal care categories, primarily through the acquisition of:
- Miracle Mountain International, Inc. in May 1996;
- Chambre International, Inc. in January 1997;
- the assets of Stay 'N Shape International, Inc., Solution Products
International, Inc., Nation of Winners, Inc., and Now International,
Inc. in April 1997;
- all rights, including formulations and trademarks for the ToppFast,
ToppStamina and ToppFitt products from ToppMed, Inc. in July 1998; and
- proprietary formulations and trademarks for LifeScience Technologies
including the adaptogen products, Prime One and Breckman's Gold in
January 2001.
We also seek to increase sales through initiatives designed to enhance
sales in our existing markets. These initiatives include increasing the number
of training and motivational events and teleconferences, hiring additional
associate support personnel and establishing more convenient regional support
centers in targeted geographic markets.
In addition, we seek to grow through acquisitions. The network marketing
industry is fragmented, has relatively low barriers to entry, and includes a
number of small marketing companies, many of which are being acquired by larger
companies. Our strategy is to capitalize on these market characteristics to
achieve additional growth, both in terms of associates and product line
enhancement, through the acquisition of additional network marketing companies
or the assets of such companies.
The principal objective of our acquisition strategy is to acquire other
network marketing organizations that can be combined with our network marketing
organization, resulting in increased sales volume with minimal additional
administrative cost. We will not consummate an acquisition unless, at the time,
we anticipate that such acquisition will contribute to profitability and provide
positive cash flows from operations. There is no assurance, however, that we
will in the future be able to acquire other network marketing organizations, or
that such acquisitions will result in increased profitability and cash flows.
Our growth strategy requires expanded associate services and support,
increased personnel, expanded operational and financial systems and
implementation of additional control procedures. There is no assurance that we
will be able to manage expanded operations effectively. Furthermore, failure to
implement financial, information management, and other systems and to add
control procedures could have a material adverse effect on our results of
operations and financial condition. Our acquisitions could involve a number of
risks including:
- the diversion of management's attention to the assimilation of the
acquired companies or assets; and
- the possibility that the acquired company or assets will not contribute
to our business cash flows and profitability as expected.
Our business plan includes expansion and diversification of our network
marketing organization and products through the acquisition of companies engaged
in network marketing.
Although we intend to focus principally on the expansion of sales within
the United States, we are preparing for expansion into markets in other
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countries. We have products approved for sale in Japan and are reviewing other
countries, such as the United Kingdom, Australia, the Philippines and Taiwan. We
believe there are numerous additional international markets in which our network
marketing organization and products could prove successful.
Industry Overview
Network Marketing. We believe that network marketing is one of the fastest
growing channels of distribution for certain types of goods and services.
Weight Management and Dietary Supplement Products. We believe that the
weight management and dietary supplement category is expanding because of
heightened public awareness of reports about the positive effects of weight
management and dietary supplements on health. Many individuals also use dietary
supplements as a means of preventative health care. We believe several factors
account for the steady growth of the dietary supplement category, including
increased public awareness of the reported health benefits of dietary
supplements and favorable demographic trends toward older Americans who are more
likely to consume dietary supplements.
Over the past several years, widely publicized reports and medical research
findings have suggested a correlation between the consumption of dietary
supplements and the reduced incidence of certain diseases. The United States
government and universities generally have increased sponsorship of research
relating to dietary supplements. In addition, Congress has established the
Office of Alternative Medicine within the National Institute of Health to foster
research into alternative medical treatments, which may include natural
remedies. Congress also recently established the Office of Dietary Supplements
in the National Institute of Health to conduct and coordinate research into the
role of dietary supplements in maintaining health and preventing disease.
In addition, we believe that the aging of the United States population,
together with an increased focus on preventative health care measures, will
continue to result in increased demand for dietary supplement products. We
believe these trends have helped fuel the growth of the dietary supplement
category. To meet the increased demand for dietary supplements, we and others
have introduced a number of successful dietary supplement products the past
several years, including function specific products for weight loss, sports
nutrition, menopause, energy and mental alertness. In addition, the use of a
number of ingredients, such as chromium picolinate, shark cartilage,
proanthocyanidins, citrin and colloidal minerals, have created opportunities for
us and others to offer new products.
Personal Care Products. We believe that the personal care products market
is a mature category that has been historically immune to swings in the economy.
Manufacturers and associates of personal care products must continually improve
existing products, introduce new products and communicate product advantages to
consumers. With the aging population, there appears to be a growing demand for
a wide spectrum of new products in the area of skin care.
Products
Our product line consists of products in the categories of weight
management, dietary supplements and personal care. We currently market
approximately one hundred products, exclusive of variations in product size,
colors or similar variations of our basic product line.
Weight Management Category. During the years ended December 31, 2001 and
2000, 54.7% and 67.6% of our net sales were derived from the nine products in
the weight management category that we market under the Advantage Marketing
Systems label. The following products represent the majority of our product
sales in the weight management category:
- AM-300--A specialized blend of herbs, including an ephedra herb
concentrate and chromium picolinate; and
- AS-200--A specialized blend of herbs and nutrients in addition to citrin
and chromium picolinate.
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Dietary Supplement Category. During the years ended December 31, 2001 and
2000, 38.9% and 25.3%, of our net sales were derived from the 38 products in the
dietary supplement category which contain herbs, vitamins, minerals and other
natural ingredients. They are sold under the Advantage Marketing Systems label.
The following products represent the majority of our product sales in the
dietary supplement category:
- Prime One and Breckman's Gold--A drink containing natural adaptogens,
considered to be the number one stress reliever in the world;
- Shark Cartilage Complex--Manufactured from shark fin cartilage and a
blend of curcumin, boswellia and vanadium;
- Colloidal Silver--Contains essential elements required by plants,
animals and man that we once naturally obtained from organic soils via
fruits, vegetables, nuts, grains and legumes;
- Spark of Life--A liquid nutritional drink containing a blend of herbs,
vitamins, minerals, amino acids and essential fatty acids; and
- Chlorella--Fresh water green algae containing amino acids of protein,
nucleic acids, fibers, vitamins and minerals.
Personal Care Category. In January 1997, we expanded and improved our
product line by acquiring Chambre International and its line of skin care, hair
care, family care and cosmetic products. Chambre International had been
marketing its products for over 24 years. During the years ended December 31,
2001 and 2000, 1.5% and 1.3% of our net sales were derived from the 48 personal
care products marketed primarily under the Chambre label in the personal care
category. The following products represent the majority of our product sales in
the personal care category:
- NH2 Lift System--A three-part skin-care system combining enzymatic
exfoliation and isometric action to firm the skin, build muscle tone and
lift the face;
- Skin Care Collections--Include cleansing lotion, skin freshener, oatmeal
scrub, night treatment, moisturizer and protein or moisture masque;
and
- Hair Care Systems--Include keratin shampoo, conditioning rinse,
reconstructor, hair hold and style and set.
Promotional Materials. We also derive revenues from the sale of various
educational and promotional materials designed to aid our associates in
maintaining and building their businesses. Such materials include various sales
aids, informational videotapes and cassette recordings, and product and
marketing brochures.
Other Products and Services. Prior to focusing on weight management,
dietary supplement and personal care products in October 1993, we marketed
various packages of consumer benefit services provided by third-party providers.
The only remaining benefit service we offer is a pre-paid legal service. The
pre-paid legal services are provided by Pre-Paid Legal Services, Inc. This
program membership represented less than 1% of our net sales during 2001 and
2000.
New Product Identification. We expand our product line through the
development and acquisition of new products. New product ideas are derived from
a number of sources, including trade publications, scientific and health
journals, our management, consultants, associates and other outside parties.
Potential product acquisitions are identified in a similar manner. Prior to
introducing new products, we investigate product formulation as it relates to
regulatory compliance and other issues.
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We do not maintain a product development staff, but rely upon Chemins
Company, Inc. and other manufacturers, independent researchers, vendor research
departments and others for such services. When a new product concept is
identified or when an existing product must be reformulated, the new product
concept or reformulation project is generally submitted to Chemins for technical
development and implementation. We continually review our existing products for
potential enhancements to improve their effectiveness and marketability. While
we consider our product formulations to be proprietary trade secrets, such
formulations are not patented. Accordingly, there is no assurance that another
company will not replicate one or more of our products.
Product Procurement and Distribution; Insurance. Essentially all of our
product line in the weight management and dietary supplement categories is
manufactured by Chemins Company, Inc. utilizing our product formulations.
Essentially all of our product line in the personal care category is
manufactured by GDMI, Inc. and Columbia Cosmetics, Inc. Our adaptogen product
line from our LifeScience Technologies acquisition is manufactured by Vita Rich
Laboratories.
We have not generally entered into long-term supply agreements with the
manufacturers of our product line or the third-party providers of our consumer
benefit services. However, we customarily enter into contracts with our
manufacturers and suppliers to establish the terms and conditions of purchases.
Our arrangements with Chemins Company, Inc. may be terminated by either party
upon the completion of any outstanding purchase orders. Therefore, there can be
no assurance that Chemins will continue to manufacture our products or provide
research, development and formulation services. In the event the relationship
with any of our manufacturers becomes impaired, we will be required to obtain
alternative manufacturing sources for our products. In such event, there is no
assurance that the manufacturing processes of our current manufacturers can be
replicated by another manufacturer. Although we have not previously experienced
product unavailability or supply interruptions, we believe that we would be able
to obtain alternative sources for our weight management, dietary supplement and
personal care products. A significant delay or reduction in availability of
products, however, could have a material adverse effect on our business,
operating results and financial condition.
We, like other marketers of products that are intended to be ingested, face
an inherent risk of exposure to product liability claims in the event that the
use of our products results in injury. We maintain a claims made policy, with
limited (excluding ephedra, 52% of our 2001 revenue) product liability insurance
with coverage limits of $1,000,000 per occurrence and $4,000,000 in the
aggregate. Although we do not obtain contractual indemnification, our product
manufacturers carry product liability insurance which covers our products. We
have agreed to indemnify Chemins Company, Inc. against claims arising from
claims made by our associates for products manufactured by Chemins and marketed
by us. Product liability claims in excess of insurance coverage may result in
significant losses which would adversely affect product sales, results of our
operations, financial condition and the value of our common stock.
All of the items in our product line include a customer satisfaction
guarantee. Within 30 days of purchase, any retail customer or associate who is
not satisfied with our product for any reason may return it or any unused
portion to the associate from whom it was purchased or to us for a full refund
or credit toward the purchase of another product. Associates may obtain
replacements from us for products returned to them by retail customers if they
return such products on a timely basis. Furthermore, in most jurisdictions, we
maintain a buy-back program. Under this program, we will repurchase products
sold to an associate (subject to a 10% restocking charge), provided the
associate resigns and returns the product in marketable condition within 12
months of original purchase, or longer where required by applicable state law or
regulations. We believe this buy-back program addresses a number of the
regulatory compliance issues pertaining to network marketing systems. For the
years ended December 31, 2001 and 2000, the cost of products returned to us was
1% and 2% percent of gross sales.
Our product line is distributed principally from our facilities in Oklahoma
City or from our regional support centers. Products are warehoused in Oklahoma
City and at selected regional support centers.
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Network Marketing
We market our product line through independent associates in a network
marketing organization. At December 31, 2001, we had approximately 71,597
"active" associates. To be considered "active" an associate must have purchased
$50 in products or $15 on autoship of our products within the preceding 12
months. Our associates are independent contractors who purchase products
directly from us for resale to retail consumers. Associates may elect to work
on a full-time or part-time basis. We believe our network marketing system
appeals to a broad cross-section of people, particularly those seeking to:
- supplement family income;
- start a home business; or
- pursue employment opportunities other than conventional, full-time
employment.
A majority of our associates therefore sell our products on a part-time basis.
We believe that our network marketing system is ideally suited to market
our product line because sales of such products are strengthened by ongoing
personal contact between retail consumers and associates, many of whom use our
products themselves. Sales are made through direct personal sales presentations
as well as presentations made to groups in a format known as "opportunity
meetings." These sales methods are designed to encourage individuals to purchase
our products by informing potential customers and associates of our product line
and results of personal use, and the potential financial benefits of becoming an
associate. The objective of the marketing program is to develop a broad based
network marketing organization within a relatively short period. Our marketing
efforts are typically focused on middle-income families and individuals.
Our network marketing program encourages individuals to develop their own
downline network marketing organizations. Each new associate is either linked
to:
- the existing associate that personally enrolled the new associate into
our network marketing organization; or
- the existing associate in the enrolling associate's downline as
specified at the time of enrollment.
Growth of an associate's downline organization is dependent on the recruiting
and enrollment of additional associates within such associate's downline
organization.
Associates are encouraged to assume responsibility for training and
motivation of others within their downline organization and to conduct
opportunity meetings as soon as they are appropriately trained. We strive to
maintain a high level of motivation, morale, enthusiasm and integrity among the
members of our network marketing organization. We believe this result is
achieved through a combination of products, sales incentives, personal
recognition of outstanding achievement and quality promotional materials. Under
our network marketing program, associates purchase sales aids and brochures from
us and assume the costs of advertising and marketing our product line to their
customers as well as the direct cost of recruiting new associates. We believe
that this form of sales organization is cost efficient because our direct sales
expenses are primarily limited to the payment of bonuses, which are only
incurred when products are sold.
We continually strive to improve our marketing strategies, including the
compensation structure within our network marketing organization and the variety
and mix of products in our line, to attract and motivate associates. These
efforts are designed to increase monthly product sales and the recruiting of new
associates.
To aid associates in easily meeting the monthly personal product purchase
requirement to qualify for bonuses, we developed the "autoship" in 1994. Under
the autoship purchasing arrangement, associates establish a standing product
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order for an amount in excess of $15 which is automatically charged to their
credit cards or deducted from their bank accounts for goods shipped that month.
At December 31, 2001, 2000, and 1999, we had approximately 27,912, 29,761, and
27,600 associates participating in the autoship.
Growth of our network marketing organization is in part attributable to our
bonus structure which provides for payment of bonuses on product purchases made
by other associates in an associate's downline organization. Associates derived
income from several sources:
- First, associates earn profits by purchasing from our product line at
wholesale prices (which are discounted up to 40% from suggested retail
prices) and selling to customers at retail.
- Second, associates who establish their own downline organization may
earn bonuses of up to 40% on product purchases by associates within the
first four levels of their downline organization.
- Third, associates who have personally enrolled three active associates
and have (i) $300 per month of autoship product purchases by personally
enrolled associates on their first level and (ii) $300 per month of
autoship product purchases on their second level, become directors and
have the opportunity to build an additional director downline
organization and receive additional bonuses of 4% on product purchases
by such downline organization.
- Fourth, associates who have personally enrolled six active associates
and have (i) $600 per month of autoship product purchases by personally
enrolled associates on their first level and (ii) $600 per month of
autoship product purchases on their second level and have a total of
$2,500 wholesale volume monthly in their downline, become silver
directors and have the opportunity to build an additional silver
director downline organization and receive additional bonuses of 5% on
product purchases by such downline organization.
- Fifth, silver directors who have personally enrolled 12 active
associates and have (i) $1,200 per month of autoship product purchases
by personally enrolled associates on their first level and (ii) $1,200
per month of autoship product purchases on their second level and have a
total of $5,000 wholesale volume monthly in their downline, become gold
directors and have the opportunity to receive an additional bonus of 3%
on product purchases by their silver director downline organization. In
addition, gold directors have the opportunity to receive generation
bonuses of up to 3% on the product purchases by associates of silver
director downline organizations that originate from their silver
director downline organization through four generations.
- Sixth, gold directors who maintain the gold director requirements and
develop four gold directors, each one from a separate leg of their
downline organization plus $40,000 wholesale volume in downline
organization, become platinum directors and have the opportunity to
build an additional platinum director downline organization and receive
additional bonuses of 5% on product purchases by such downline
organization.
Combining these levels of bonuses, our total "pay-out" on products subject
to bonuses is approximately 67% of the bonus value of product sales.
Each associate in our network marketing organization has a director, a
silver director, a gold director and a platinum director. Each director has a
silver director, a gold director and a platinum director. Each silver director
has a gold director and a platinum director. Each gold director has a platinum
director. As of December 31, 2001, we had 282 silver directors, 194 gold
directors and 47 platinum directors.
Under our regional support center program, we designate associates to serve
as regional support center directors and provide them special training and
support. Each regional support center director functions as a product
distribution center for our products. As of December 31, 2001, we had 73
regional support center directors.
We maintain a computerized system for processing associate orders and
calculating bonus payments which enable us to remit such payments promptly. We
believe that prompt and accurate remittance of bonuses is vital to recruiting
and maintaining associates, as well as increasing their motivation and loyalty
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to us. We make weekly bonus payments based upon the previous week's product
purchases, while most network marketing companies only make monthly bonus
payments. During 2001 and 2000, we paid bonuses to 11,814 and 11,902 associates,
in the aggregate amounts of $11,403,519 and $11,271,109.
We are committed to providing the best possible support to our associates.
Associates in our network marketing organization are provided training guides
and are given the opportunity to participate in our training programs. We
sponsor regularly scheduled conference calls for our platinum directors which
include testimonials from successful associates and satisfied customers as well
as current product and promotional information. We produce a monthly newsletter
which provides information on our products and network marketing system. The
newsletter is designed to help recruit new associates by answering commonly
asked questions and includes product information and business building
information. The newsletter also provides a forum for additional recognition of
associates for outstanding performance. In addition, we regularly sponsor
training sessions for our associates across the United States. At these training
sessions associates are provided the opportunity to learn more about our product
line and selling techniques so they can build their businesses more rapidly. We
produce comprehensive and attractive four color catalogues and brochures that
display and describe our product line. We maintain a web page at
www.amsonline.com, which provides general company information along with product
line and network marketing system information.
Furthermore, in order to facilitate our continued growth and support
associate activities, we continually upgrade our management information and
telecommunications systems. These systems are designed to provide, among other
things, financial and operating data for management, timely and accurate product
ordering, bonus payment processing, inventory management and detailed associate
records. Since 1994, we have invested more than $2,327,071 to enhance our
computer and telecommunications systems.
Regulation
In the United States (as well as in any foreign markets in which we may
sell our products), we are subject to laws, regulations, administrative
determinations, court decisions and similar constraints (as applicable, at the
federal, state and local levels) (hereinafter "regulations"). These regulations
include and pertain to, among other things:
- the formulation, manufacturing, packaging, labeling, advertising,
distribution, importation, sale and storage of our products;
- our product claims and advertising (including direct claims and
advertising as well as claims and advertising by associates, for which
we may be held responsible); and
- our network marketing organization.
Products. The formulation, manufacturing, packaging, labeling, advertising,
distribution and sale and storage of our products are subject to regulation by a
number of governmental agencies. The federal agencies include the Food and Drug
Administration, the Federal Trade Commission, the Consumer Product Safety
Commission, the United States Department of Agriculture and the Environmental
Protection Agency. Our activities are also regulated by various agencies of the
states, localities and foreign countries in which our products are or may be
manufactured distributed and sold. The Food and Drug Administration, in
particular, regulates the formulation, manufacturing and labeling of weight
management products, dietary supplements, cosmetics and skin care products,
including some of our products. Food and Drug Administration regulations require
us and our suppliers to meet relevant regulatory good manufacturing practices
for the preparation, packaging and storage of these products. Good manufacturing
practices for dietary supplements have yet to be promulgated but are expected to
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be proposed. The Dietary Supplement Health and Education Act of 1994 revised the
provisions of the Federal Food, Drug and Cosmetic Act concerning the composition
and labeling of dietary supplements, which we believe is generally favorable to
the dietary supplement industry. The Dietary Supplement Health and Education Act
created a new statutory class of "dietary supplements." This new class includes
vitamins, minerals, herbs, amino acids and other dietary substances for human
use to supplement the diet. However, the Dietary Supplement Health and Education
Act grandfathered, with certain limitations, dietary ingredients that were on
the market before October 15, 1994. A dietary supplement containing a new
dietary ingredient and placed on the market on or after October 15, 1994 must
have a history of use or other evidence establishing a basis for expected
safety. Manufacturers of dietary supplements having a "structure-function"
statement, must have substantiation that the statement is truthful and not
misleading.
The majority of our sales come from products that are classified as dietary
supplements under the Federal Food, Drug and Cosmetic Act. The labeling
requirements for dietary supplements have been set forth in final regulations
with respect to labels affixed to containers beginning after March 23, 1999.
These regulations include how to declare nutrient content information, and
the proper detail and format required for the "supplement facts" box. During
1999, we revised our product labels in compliance with these regulations. Many
states have also recently become active in the regulation of dietary supplement
products. These states may require modification of labeling or formulation of
certain of our products sold in these states.
In addition, on January 6, 2000, the Food and Drug Administration published
a Final Rule on permissible structure/function statements to be placed on labels
and in brochures. Structure/function statements are claims of the benefit or
effect of a product or an ingredient on the body's structure or function. This
new regulation does not significantly change the way that the Food and Drug
Administration interprets structure/function statements. Thus, we did not make
any substantial label revisions based on this regulation regarding any of our
structure/function product statements.
As a marketer of products that are ingested by consumers, we are subject to
the risk that one or more of the ingredients in our products may become the
subject of adverse regulatory action. For example, one of the ingredients in our
AM-300 product is ephedra, an herb which contains naturally-occurring ephedrine.
Our manufacturer uses a powdered extract of that herb when manufacturing AM-300.
We market AM-300 principally as an aid in weight management. The extract is an
8% extract which means that every 100 milligrams of the powdered extract
contains approximately eight milligrams of naturally occurring ephedrine
alkaloids. Ephedrine containing products have been the subject of adverse
publicity in the United States and other countries relating to alleged harmful
effects.
On April 10, 1996, the Food and Drug Administration issued a statement
warning consumers not to purchase or ingest dietary supplements containing
ephedrine that are claimed to produce certain effects. These effects include
euphoria, heightened awareness, increased sexual sensations or increased energy.
The Food and Drug Administration cautions that these products pose significant
adverse health risks, including dizziness, headache, gastrointestinal distress,
irregular heartbeat, heart palpitations, heart attack, strokes, seizures,
psychosis and death. On April 3, 2000, the FDA withdrew most of the provisions
of its proposed rule regarding dietary supplements that contain ephedrine
alkaloids. The proposed rule, which was published on June 4, 1997, would have
significantly limited our ability to sell AM-300 if it had been made effective.
The FDA's withdrawal of the provisions removed most, but not all, of the
limitations. This action was prompted largely by a report issued by the United
States General Accounting Office ("GAO") in which the GAO criticized the
scientific basis for the proposed rule and the FDA's evaluation of approximately
900 reports of adverse events supposedly related to the consumption of dietary
supplements containing ephedrine alkaloids. The FDA made available for public
inspection most of these adverse event reports on April 3, 2000.
On October 25, 2000, several trade organizations for the dietary supplement
industry submitted a petition to the FDA, which concerned the remaining
provisions of the proposed rule regarding dietary supplements that contain
ephedrine alkaloids. The petition requested the FDA to: (1) withdraw the
remaining provisions of the proposed rule; and (2) adopt new standards for
dietary supplements that contain ephedrine alkaloids, which were set forth in
the petition. The FDA has not publicly responded to this petition.
Page 11
The FDA may attempt to issue a new proposed rule with respect to dietary
supplements that contain ephedrine alkaloids. However, it is uncertain what
restrictions the new proposed rule will contain or when a new proposed rule will
be issued. In our opinion, it is unlikely that a final regulation will be
issued by the FDA during 2002 or 2003.
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. Our AM-300 labels comply with this regulation.
In foreign markets, prior to commencing operations and prior to making or
permitting sales of our products, we may be required to obtain an approval,
license or certification from the country's ministry of health or comparable
agency. Prior to entering a new market in which a formal approval, license or
certificate is required, we are required to work extensively with local
authorities to obtain the requisite approvals. The approval process generally
requires us to present each product and product ingredient to appropriate
regulators and, in some instances, arrange for testing of products by local
technicians for ingredient analysis. Such approvals may be conditioned on
reformulation of our products or may be unavailable with respect to certain
products or ingredients.
Product Claims and Advertising. The Federal Trade Commission and certain
states regulate advertising, product claims and other consumer matters,
including advertising of our products. All advertising, promotional and
solicitation materials used by associates require our approval prior to use. The
Federal Trade Commission has instituted enforcement actions against several
dietary supplement companies for false or deceptive advertising, including the
use of testimonials.
We provide no assurance that:
- the Federal Trade Commission will not question our past or future
advertising or other operations; or
- a state will not interpret product claims presumptively valid under
federal law as illegal under that state's regulations.
Also, our associates and their customers may file actions on their own
behalf, as a class or otherwise, and may file complaints with the Federal Trade
Commission or state or local consumer affairs offices. These agencies may take
action on their own initiative or on a referral from associates, consumers or
others. If taken, these actions may result in:
- entries of consent decrees;
- refunds of amounts paid by the complaining associate or consumer;
- refunds to an entire class of associates or customers;
- other damages; and
- changes in our method of doing business.
A complaint based on the practice of one associate, whether or not such
activities were authorized by us, could result in an order affecting some or all
associates in a particular state, and an order in one state could influence
courts or government agencies in other states. Enforcement proceedings resulting
from these complaints may result in significant defense costs, settlement
payments or judgments and could have a material adverse effect on our results of
operations or financial condition.
Compliance Efforts. We attempt to remain in full compliance with all
applicable laws and regulations governing the manufacture, labeling, sale,
distribution, and advertising of our dietary supplements. We retain special
legal counsel for advice on both Food and Drug Administration and Federal Trade
Page 12
Commission legal issues. In particular, we work closely with special legal
counsel who specializes in Dietary Supplement Health and Education Act
regulations for label revisions, content of structure/function statements,
advertising copy, and also the position of the Food and Drug Administration on
ephedra-containing products.
Network Marketing System. Our network marketing system is subject to
federal and state laws and regulations administered by the Federal Trade
Commission and various state agencies. These laws and regulations include
securities, franchise investment, business opportunity and criminal laws
prohibiting the use of "pyramid" or "endless chain" types of selling
organizations. These regulations are generally directed at ensuring that product
sales are ultimately made to consumers (as opposed to other associates) and that
advancement within the network marketing system is based on sales of products,
rather than investment in the company or other non-retail sales related
criteria.
The compensation structure of a network marketing system is very complex.
Compliance with all of the applicable regulations and laws is uncertain because
of the evolving interpretations of existing laws and regulations and the
enactment of new laws and regulations pertaining in general to network marketing
systems and product distribution. We have an ongoing compliance program with
assistance from legal counsel experienced in the laws and regulations pertaining
to network sales organizations. We are not aware of any legal actions pending or
threatened by any governmental authority against us regarding the legality of
our network marketing operations.
We currently have independent associates in all 50 states, the District of
Columbia and Canada. We review the requirements of various states as well as
seek legal advice regarding the structure and operation of our selling
organization to ensure that it complies with all of the applicable laws and
regulations pertaining to network sales organizations. On the basis of these
efforts and the experience of our management, we believe that we are in
compliance with all applicable federal and state regulatory requirements. We
have not obtained any no-action letters or advance rulings from any federal or
state security regulator or other governmental agency concerning the legality of
our operations, nor are we relying on a formal opinion of counsel to this
effect. Accordingly, there is the risk that our network marketing system could
be found to be in noncompliance with applicable laws and regulations, which
could then:
- result in enforcement action and imposition of penalties;
- require modification of our network marketing system;
- result in negative publicity; or
- have a negative effect on associate morale and loyalty.
Any of these consequences could have a material adverse effect on our sales as
well as our financial condition.
We are subject to the risk of challenges to the legality of our network
marketing system by our associates, both individually and as a class. Generally
such challenges would be based on claims that our network marketing system was
operated as an illegal "pyramid scheme" in violation of federal securities
laws, state unfair practice and fraud laws and the Racketeer Influenced and
Corrupt Organizations Act.
Two important Federal Trade Commission cases have established legal
precedent for determining whether a network marketing system constitutes an
illegal pyramid scheme. The first, IN RE KOSCOT INTERPLANETARY, INC., 86 F.T.C.
1106 (1975), set forth a standard for determining whether a marketing system
constituted a pyramid scheme. Under the KOSCOT standard, a pyramid scheme is
characterized by the participants' payment of money to a company in return for:
- the right to sell a product; and
Page 13
- the right to receive, in return for recruiting other participants into
the program, rewards that are unrelated to sales of the product to
ultimate users.
Applying the KOSCOT standard in IN RE AMWAY CORP., 93 F.T.C. 618 (1979), the
Federal Trade Commission determined that a company will not be classified as
operating a pyramid scheme if the company adopts and enforces policies that in
fact encourage retail sales to consumers and prevent "inventory loading".
Inventory loading occurs when associates purchase large quantities of
non-returnable inventory to obtain the full amount of compensation available
under the system. In AMWAY, the Federal Trade Commission found that the
marketing system of Amway Corporation did not constitute a pyramid scheme,
noting the following Amway policies:
- participants were required to buy back, from any person they recruited,
any saleable, unsold inventory upon the recruit's leaving Amway;
- every participant was required to sell at wholesale or retail at least
70% of the products bought in a given month in order to receive a bonus
for that month; and
- in order to receive a bonus in a month, each participant was required to
submit proof of retail sales made to 10 different consumers.
We believe that our network marketing system is not classified as a pyramid
scheme under the standards set forth in KOSCOT, AMWAY, and other applicable law.
In particular, in most jurisdictions, we maintain an inventory buy-back program
to address the problem of inventory loading. Pursuant to this program, we
repurchase products sold to an associate (subject to a 10% restocking charge)
provided that:
- the associate resigns; and
- returns the product in marketable condition within 12 months of original
purchase, or longer where required by applicable state law or
regulations.
Our literature provided to associates describes our buy-back program. In
addition, pursuant to agreements with our associates, each associate represents
that at least 70% of the products he or she buys will be sold to non-associates.
However, as is the case with other network marketing companies, the bonuses paid
by us to our associates are based on product purchases including purchases of
products that are personally consumed by the downline associates. Basing
bonuses on sales of personally consumed products may be considered an inventory
loading purchase. Furthermore, associates' bonuses are based on the wholesale
prices received by us on product purchases or, in some cases based upon the
particular product purchased, on prices less than the wholesale prices.
In the event of challenges to the legality of our network marketing system
by associates, we would be required to:
- demonstrate that our network marketing policies are enforced; and
- that the network marketing system and associates' compensation
thereunder serve as safeguards to deter inventory loading and encourage
retail sales to the ultimate consumers.
In WEBSTER V. OMNITRITION INTERNATIONAL, INC., 79 F.3d 776 (9th Cir. 1996),
the United States Court of Appeals held that a class action brought against
Omnitrition International, Inc., a multilevel marketing seller of nutritional
supplements and skin care products, should be allowed to proceed to trial. The
plaintiffs, former associates of Omnitrition's products, alleged that
Omnitrition's selling program was an illegal pyramid scheme and claimed
violations of Racketeer Influenced and Corrupt Organizations Act and several
federal and state fraud and securities laws. Despite evidence that Omnitrition
complied with the AMWAY standards, the court ruled that a jury would have to
decide whether Omnitrition's policies, many of which apparently were similar to
Page 14
compliance policies adopted by us, were adequate to ensure that Omnitrition's
marketing efforts resulted in a legitimate product marketing and distribution
structure and not an illegal pyramid scheme. We believe that our marketing and
sales programs differ in significant respects from those of Omnitrition, and
that our marketing program complies with applicable law. The two most
significant differences are:
- the Omnitrition marketing plan required associates to purchase $2,000 in
merchandise in order to qualify for bonuses as compared to $15 on
autoship under our marketing program; and
- the Omnitrition inventory repurchase policy was limited to products that
were less than three months old as compared to one year under our
inventory repurchase policy.
A lesson from the OMNITRITION case is that:
- a selling program which operates to generate only the minimum purchases
necessary to qualify for bonuses is suspect; and
- a selling program must operate to generate purchases independently of the
payment of bonuses in order to have a legitimate product
marketing and distribution structure.
We believe that our selling program operates to generate significant purchases
"for intrinsic value" as demonstrated by our sales figures. During the month of
December 2001, 28,052 of our associates placed a total of 30,737 orders
averaging $62 in size while only a single $15 on autoship per month is necessary
to qualify for bonuses. In view of the holding of the court of appeals in the
OMNITRITION case, however, there is no assurance that, if challenged, we would
prevail against private plaintiffs alleging violations of anti-pyramid and
securities laws. A final ruling against us in such a suit could result in the
imposition of a material liability against us. Moreover, even if we were
successful in defending against such suit, the costs of such defense, both in
dollars spent and in management time, could be material and adversely affect our
operating results. In addition, the negative publicity of such a suit could
adversely affect our sales and ability to attract and retain associates.
Nutrition for Life International, Inc., one of our competitors and a
multilevel seller of personal care and nutritional supplements, announced in
January 1997, that it had settled class action litigation brought by
associates alleging fraud in connection with the operation of a pyramid scheme.
Nutrition for Life paid in excess of $3 million to settle claims brought on
behalf of its associates, and related securities fraud claims brought on behalf
of certain purchasers of its stock.
We believe that our marketing program is significantly different from the
program allegedly promoted by Nutrition for Life and that our marketing program
is not in violation of anti-pyramid laws or regulations. Two issues in the
Nutrition for Life matter were a $1,000 buy-in urged on new recruits, and the
paying of commissions on product vouchers prior to the actual delivery of
product. By design, our marketing program offers no incentive to anyone to make
a large personal purchase nor do we use product vouchers. Actual average order
size in December 2001 was $62. However, there is no assurance that claims
similar to the claims brought against Nutrition for Life and other multilevel
marketing organizations will not be brought against us, or that we will prevail
in the event any such claims were made. Furthermore, even if we were successful
in defending against any such claims, the cost of conducting such a defense,
both in dollars spent and in management time, could be material and adversely
affect our operating results and financial condition. In addition, the negative
publicity of such a suit could adversely affect our sales and ability to attract
and retain associates.
Intellectual Property
We use several trademarks and trade names in connection with our products
and operations. As of December 31, 2001, we had 52 federal trademark
registrations with the United States Patent and Trademark Office. We rely on
common law trademark rights to protect our unregistered trademarks. Common law
trademark rights do not provide us with the same level of protection as afforded
by a United States federal registration of a trademark. Also, common law
Page 15
trademark rights are limited to the geographic area in which the trademark is
actually used. In addition, our product formulations are not protected by
patents and are not patentable. Therefore, there can be no assurance that
another company will not replicate one or more of our products.
Competition
We are subject to significant competition in recruiting associates from
other network marketing organizations, including those that market products in
the weight management, dietary supplement and personal care categories, as well
as other types of products. There are over 300 companies worldwide that utilize
network marketing techniques, many of which are substantially larger, offer a
greater variety of products, and have available considerably greater financial
resources than us. Our ability to remain competitive depends, in significant
part, on our success in recruiting and retaining associates through an
attractive bonus plan and other incentives. We believe that our bonus plan and
incentive programs provide our associates with significant income potential.
However, there can be no assurance that our programs for recruitment and
retention of associates will continue to be successful.
In addition, the business of marketing products in the weight management,
dietary supplement and personal care categories is highly competitive. This
market segment includes numerous manufacturers, other network marketing
companies, catalog companies, associates, marketers, retailers and physicians
that actively compete in the sale of such products. We also compete with other
providers of such products, especially retail outlets, based upon convenience of
purchase and immediate availability of the purchased product. The market is
highly sensitive to the introduction of new products or weight management plans
(including various prescription drugs) that may rapidly capture a significant
share of the market. As a result, our ability to remain competitive depends in
part upon the successful introduction and addition of new products to our line.
Our network marketing competitors include small, privately held companies,
as well as larger, publicly held companies with greater financial resources and
greater product and market diversification and distribution. Our competitors
include Shaklee Corporation, Market America, Inc., The A.L. Williams
Corporation, Mary Kay Cosmetics, Inc., Amway Corporation, and Nutrition for Life
International, Inc.
Employees
As of December 31, 2001, we had 67 full-time and 20 part-time employees,
consisting of four executive officers, 29 involved in administrative activities,
13 involved in marketing activities, 21 involved in customer service activities,
and 20 involved in shipping activities. Our employees are not represented by a
labor organization. We consider our employee relations to be good.
ITEM 2. DESCRIPTION OF PROPERTY
We maintain our executive office in 10,003 square feet at 2601 Northwest
Expressway, Suites 1210W and 1120W, Oklahoma City, Oklahoma 73112-7293. These
premises are occupied pursuant to long-term leases which expire on May 31, 2003
and January 31, 2005, and which require monthly rental payments of $7,986 and
$2,530. In addition we have our prior warehouse facility, at 4000 North Lindsay
in Oklahoma City, under a lease expiring May 31, 2003, with monthly lease
payments of $5,601. In April of 2000 we broke ground on our new warehouse and
distribution facility. The 23,346 square foot, $1.3 million facility was
completed in June 2001, and is subject to a mortgage. All our properties are in
good condition.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of our fiscal year ended December 31, 2001.
Page 16
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From November 6, 1997 to June 14, 1999, our common stock was traded on the
Nasdaq SmallCap Market under the symbol "AMSO." On June 15, 1999, our common
stock began trading on the American Stock Exchange under the symbol "AMM."
On March 29, 2002, the closing sale price of our common stock on the
American Stock Exchange was $2.04. We believe there are approximately 2,764
holders of our common stock. The following table sets forth the high and low
closing sale price of our common stock on the American Stock Exchange.
Common Stock
Closing Bid Prices
------------------
High Low
---- ---
2001--Calendar Quarter Ended:
March 31 $3.30 $2.00
June 30 $3.24 $2.50
September 30 . $3.06 $2.70
December 31 $2.99 $2.40
2000--Calendar Quarter Ended:
March 31 $7.63 $5.63
June 30 $6.13 $4.50
September 30 . $4.69 $3.69
December 31 $2.63 $2.25
No cash dividends were declared as of December 31, 2001 or are anticipated.
Equity Compensation Plan Information
(a) (b) (c)
Number of
securities remaining
available for future
issuance under
Number of securities equity
to be issued upon Weighted-average compensation plans
exercise of exercise price of (excluding
outstanding options, outstanding options, securities reflected
Plan Category warrants and rights warrants and rights in column (a))
------------- -------------------- -------------------- --------------------
Equity plans
approved by
security holders 883,505 $3.01 241,495
Equity compensation
plan not approved
by security
holders 673,250 $1.95 -
--------- ----- -------
Total 1,556,755 $2.16 241,495
========= ===== =======
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with our consolidated
financial statements and notes thereto under Item 7 below.
General
Our business and operations during the last five years have been
significantly affected by the acquisitions of Miracle Mountain International,
Inc. in May 1996 (the "Miracle Mountain acquisition"), Chambre International,
Page 17
Inc. in January 1997 (the "Chambre acquisition"), the assets of Stay 'N Shape
International, Inc., Solution Products International, Inc., Nation of Winners,
Inc., and Now International, Inc. in April 1997 (the "Stay 'N Shape
International asset purchase"), ToppMed Inc. in July 1998 (the "ToppMed asset
purchase") and LifeScience Technologies Inc. in January 2001 (the "LifeScience
Technologies acquisition"). As a result of these acquisitions and asset
purchases, we acquired 11,790 associates and added 129 products to our product
line.
Miracle Mountain Acquisition. Effective May 31, 1996, Miracle Mountain
International, Inc. became one of our wholly-owned subsidiaries. Miracle
Mountain was a network marketer of various third-party manufactured nutritional
supplement products. In connection with the Miracle Mountain acquisition, we
issued 20,000 shares of our common stock. As a result of the Miracle Mountain
acquisition, we added one product to our line and 1,690 additional associates.
Chambre Acquisition. Effective January 31, 1997, Chambre International,
Inc. became one of our wholly-owned subsidiaries. Chambre International was a
network marketer of various third-party manufactured cosmetic, skin care and
hair care products. In connection with the Chambre acquisition, we issued 14,000
shares of our common stock. As a result of the Chambre acquisition, we added 74
products to our line, 68 in the personal care category and six in the dietary
supplement category, and 2,100 additional associates.
Stay 'N Shape International Asset Purchase. We purchased all of the assets,
including the network marketing organizations, of Stay 'N Shape International,
Inc., Solution Products International, Inc., Nation of Winners, Inc., and Now
International, Inc. on April 16, 1997. In connection with this asset purchase,
we paid cash of $1,174,441 and issued 125,984 shares of our common stock. As a
result of this asset purchase, we added 39 products to our line, 38 in the
weight management and dietary supplement categories and one in the personal care
category, and 3,000 additional associates.
ToppMed Asset Purchase. On July 31, 1998, we acquired all rights, including
formulations and trademarks, for the ToppFast, ToppStamina and ToppFitt products
from ToppMed, Inc. for $192,000.
LifeScience Technologies Acquisition. On January 4, 2001, we purchased the
LifeScience Technologies ("LST") group of companies for $1.2 million and a five
year payment of $41,667 per month or 5% of the gross sales of LifeScience
Technologies products whichever is greater. The seller has the option to take up
to 860,000 shares of common stock in lieu of cash at an option price of $3.00
per share. As a result of this acquisition we added 14 products and over 5,000
associates.
Repurchase of Our Common Stock. In March 1998, we announced and began
repurchasing up to $1 million of our common stock in the open market. As of
December 31, 1999, we had repurchased 201,185 shares of our common stock for
$699,307 or an average of $3.48 per share and as of December 31, 2000, we had
repurchased 472,795 shares of our common stock for $2,311,364 or an average of
$4.75 per share. This program was discontinued as of January 1, 2001.
Units Offering. On November 12, 1997, we completed the offering of
1,495,000 units, each consisting of one share of common stock and one redeemable
common stock purchase warrant. As a result of this offering, we received
proceeds of $6,050,000. Each redeemable common stock purchase warrant is
exercisable for the purchase of one share of our common stock for $3.40 on or
before November 6, 2002. In connection with this offering, we sold to the
underwriters, Paulson Investment Company, Inc. and Joseph Charles & Assoc.,
Inc., warrants exercisable for the purchase of 130,000 units for $5.40 per unit
on or before November 6, 2002.
Warrant Modification Offering and Rights Offering. In January 1997, we
distributed non-transferable rights to our common stock shareholders. These
rights entitled the holders to subscribe for and purchase up to 2,148,191 units
(each unit consisting of one share of our common stock and one 1997-A warrant)
for the price of $6.80 per unit.
Concurrently, we called and redeemed our outstanding class A and class B
common stock purchase warrants for $.0008 per warrant on March 17, 1997.
Page 18
However, in connection with the warrant redemption, we offered to the holders of
the class A and class B warrants the right to purchase units, each comprised of
one share of common stock and one 1997-A warrant, at an exercise price of $6.00
per unit.
Each 1997-A warrant is exercisable on or before November 6, 2002, to
purchase one share of common stock for $3.40, subject to adjustment in certain
events. We may redeem the 1997-A warrants at any time upon 30 days notice, at a
price of $.0001 per 1997-A warrant.
We received proceeds from these two offerings of $2,154,357. Accumulated
offering costs of $323,076 were charged against the net proceeds from these
offerings. Pursuant to these offerings we issued 337,211 shares of common stock
and the same number of 1997-A warrants.
Associate Stock Purchase Plan. On February 19, 1999, our Registration
Statement, (number 333-47801) was declared effective by the Securities and
Exchange Commission. Under this registration statement, we registered 5,000,000
stock purchase plan participation interests ("Participation Interests") in the
Advantage Marketing Systems, Inc. 1998 Associate Stock Purchase Plan (the
"Plan"). The Participation Interests will be offered to the associates of our
products and services ("Eligible Persons") in lots of five Participation
Interests. An Eligible Person electing to participate in the Plan (a
"Participant") is entitled through purchase of the Participation Interests to
purchase in the open market through the Plan, shares of our common stock. The
Participation Interests are non-transferable. Other than an annual service fee
of $5.00 per Participant and a transaction fee of $1.25 per month, we do not
receive any proceeds from the purchase of the common stock by the Plan. The
offering price of each Participation Interest is $1.00, and each Eligible Person
is to be required initially to purchase a minimum of 25 Participation Interests
upon electing to participate in the Plan.
Warrant Registration. On March 22, 2000, our Registration Statement (number
333-31750) was declared effective by the Securities and Exchange Commission.
Under this Registration Statement, we registered 2,092,211 shares of stock
underlying our outstanding 1997-A warrants, redeemable common stock purchase
warrants and underwriter warrants. During the first quarter of 2000, the closing
sale price of our common stock for 20 consecutive trading days exceeded $6.80,
which permits us to call the redeemable common stock purchase warrants for
redemption.
Results of Operations
The following table sets forth, as a percentage of net sales, selected
results of our operations for the years ended December 31, 2001, 2000 and 1999.
The selected results of operations are derived from our audited consolidated
financial statements. The results of operations for the periods presented are
not necessarily indicative of our future operations.
19
For the Years Ended December 31,
--------------------------------
2001 2000 1999
---- ---- ----
Amount Percent Amount Percent Amount Percent
----------- ------- ----------- ------- ----------- -------
Net sales $28,440,920 100.0% $26,707,936 100.0% $22,427,551 100.0%
----------- ------ ----------- ------ ----------- ------
Cost of sales:
Commissions and bonuses 11,699,293 41.1 10,973,686 41.1 9,691,239 43.2
Cost of products 5,466,694 19.2 5,687,197 21.3 5,140,375 22.9
Cost of shipping 2,065,162 7.3 1,268,818 4.8 779,237 3.5
----------- ------ ----------- ------ ----------- ------
Total cost of sales 19,231,150 67.6 17,929,701 67.1 15,610,941 69.6
----------- ------ ----------- ------ ----------- ------
Gross profit 9,209,770 32.4 8,778,235 32.9 6,816,610 30.4
Marketing, distribution and
administrative expenses 9,180,793 32.3 8,057,808 30.2 5,236,938 23.4
----------- ------ ----------- ------ ----------- ------
Income from operations 28,977 0.1 720,427 2.7 1,579,672 7.0
Other income (expense):
Interest and dividends, net (31,800) (0.1) 310,599 1.2 364,270 1.6
Other income (expenses) 16,841 0.0 (81,560) (.3) 7,866 -
----------- ------ ----------- ------ ----------- ------
Total other income (expense) (14,959) (0.1) 229,039 .9 372,136 1.7
----------- ------ ----------- ------ ----------- ------
Income before income taxes 14,018 0.0 949,466 3.6 1,951,808 8.7
Income Taxes . 5,467 0.0 456,532 1.7 676,025 3.0
----------- ------ ----------- ------ ----------- ------
Net income . $ 8,551 0.0% $ 492,934 1.8% $ 1,275,783 5.7%
=========== ====== =========== ====== =========== =====
During the years 2001, 2000 and 1999, we experienced increases in net sales
compared to each preceding year. The increases were principally the result of
increased sales per associate and/or expansion of our network of independent
associates. In June, 2001, we began separately charging associates for shipping
costs, which increased sales per associate. We expect to expand our network of
independent associates, 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 associates, or that, if sales volume
increases, we will realize increased profitability.
Comparison of 2001 and 2000
Our net sales during the year ended December 31, 2001, increased by
$1,732,984, or 6.5%, to $28,440,920 from $26,707,936 during the year ended
December 31, 2000. During 2001, we made sales to 71,597 associates, compared to
sales during 2000 to 79,500 associates. At December 31, 2001, we had
approximately 69,700 "active" associates compared to approximately 76,600 at
December 31, 2000. An associate is considered to be "active" if he or she has
made a product purchase of $50 or more from us or is enrolled in our autoship
program within the previous 12 months. Sales per associate per month increased
from $28 to $33 for 2001, compared to 2000.
Our cost of sales during 2001 increased by $1,301,449, or 7.3%, to
$19,231,150 from $17,929,701 during 2000. This increase was attributable to:
- an increase of 725,608 in associate commissions and bonuses due to
increased sales;
- a decrease of $220,503 in the cost of products sold due to the
consolidation of product lines; and
- an increase of $796,344 in shipping costs primarily due to increased
shipping rates by U.P.S. and U.S. P.S..
Total cost of sales, as a percentage of net sales increased to 67.6% during
the year ended December 31, 2001, from 67.1% during the same period in 2000 due
to an increase in cost of shipping to 7.3% of net sales from 4.8%, due to
increased rates, partially offset by a decrease in cost of products sold to
19.2% of net sales from 21.3% due to efficiency in inventory purchasing and
carrying cost.
Page 20
Our gross profit increased $431,535, or 4.9%, to $9,209,770 during 2001
from $8,778,235 during 2000. The gross profit increased as a percentage of net
sales to 32.4% of net sales from 32.9%, reflected in our cost of goods sold
decrease.
Marketing, distribution and administrative expenses increased $1,122,985,
or 13.9%, to $9,180,793 during the year ended December 31, 2001, from $8,057,810
during the same period in 2000. This increase was primarily attributable to:
- a decrease in promotion costs of approximately $460,000;
- an increase in staffing and related payroll cost of approximately
$375,000 necessary to support our expected increase in sales activity
and improve internal programs;
- non-recurring expenses of approximately $255,000 related to the
operation of the LifeScience Technologies California warehouse in
January and February of 2001, which facilities have now been closed,
plus the transition costs related to the LifeScience Technologies
acquisition in January 2001;
- an increase in depreciation and amortization expense of approximately
$335,000, including amortization of goodwill resulting from the
LifeScience Technologies acquisition in the amount of $125,440;
- an increase in professional services cost of $120,500 due to the buyout
of options;
- an increase in contract services of $245,000 incurred to supplement our
technical staff during the LifeScience Technologies acquisition
transition; and
- an increase in insurance expense of $245,000 due to policy premium
increases on general liability and director and officer insurance, as
well as higher levels of activity and corresponding increases in other
variable costs, such as postage, telephone, newsletter, bank card
service charges and supplies.
The marketing, distribution and administrative expenses as a percentage of
net sales increased to 32.3% in 2001, from 30.2% in 2000.
Our other income (reduced by other expense) decreased by $243,998 to net
other expense of $14,959 during 2001, from a net other income of $229,039 during
the same period in 2000. This decrease was primarily attributable to a decrease
in investment income of approximately $131,000 related to marketable securities,
along with an increase in interest expense of $144,000 related to the LST note
payable.
Our income before taxes decreased $935,447, or 98.5%, to $38,019 during
2001, from $949,466 during 2000. Income before taxes as a percentage of net
sales was 0.0% and 3.6% during 2001 and 2000. Income taxes during 2001 and 2000
were $5,467 and $456,532. Our net income decreased $484,383, or 98.3%, to $8,551
during 2001, from $492,934 during 2000. This decrease in net income was
attributable to:
- the decrease in interest income net of interest expense of $243,998, or
14.7%, to net other expense of $14,959 during 2001 from net other income
of $229,039 during 2000;
- the increase in the marketing, distribution and administrative expenses;
and
- the increase in gross profit of $431,535 to $9,209,770 during 2001 from
$8,778,235 during 2000.
Net income as a percentage of net sales decreased to 0.0% during 2001, from 1.8%
during 2000.
Page 21
Comparison of 2000 and 1999
Our net sales during the year ended December 31, 2000, increased by
$4,280,385, or 19.1%, to $26,707,936 from $22,427,551 during the year ended
December 31, 1999. The increase was principally attributable to expansion of our
network of independent associates and increased sales of our weight management,
dietary supplement and personal care products. During 2000, we made aggregate
net sales of $26,707,936 to 79,500 associates, compared to aggregate net sales
during 1999 of $22,218,379 to 63,200 associates. At December 31, 2000, we had
approximately 76,600 "active" associates compared to approximately 61,200 at
December 31, 1999. An associate is considered to be "active" if he or she has
made a product purchase of $50 or more from us or is enrolled in our autoship
program within the previous 12 months. Sales per associate per month decreased
from $30 to $28 for 2000, compared to 1999.
Our cost of sales during 2000 increased by $2,318,760, or 14.9%, to
$17,929,701 from $15,610,941 during 1999. This increase was attributable to:
- an increase of $1,282,447 in associate commissions and bonuses due to the
increased level of sales and increased promotions;
- an increase of $546,822 in the cost of products sold due to the increased
level of sales and the addition of new products and marketing tools; and
- an increase of $489,491 in shipping costs due to the increased level of
sales and the effect of our modified pricing structure.
Effective April 1, 1999, we modified our pricing structure to include shipping
costs in our product prices. Previously shipping costs had been calculated
separately on each order and we reported shipping costs net of payments for
shipping received from customers. Because our shipping costs are no longer
reported net of the separately collected shipping reimbursement, our shipping
cost as a percentage of sales appears to have increased. Total cost of sales, as
a percentage of net sales decreased to 67.1% during the year ended December 31,
2000, from 69.6% during the same period in 1999 due to a decrease in associate
commissions and bonuses as a percentage of net sales to 41.1% from 43.2%, a
decrease in cost of products sold to 21.3% of net sales from 22.9% due to
efficiency in inventory purchasing and carrying cost, partially offset by an
increase in cost of shipping to 4.8% of net sales from 3.5%, due to UPS and USPS
rate increase.
Our gross profit increased $1,961,625, or 28.8%, to $8,778,235 during 2000
from $6,816,610 during 1999. The gross profit increased as a percentage of net
sales to 32.9% of net sales from 30.4%, reflected in our cost of goods sold
decrease.
Marketing, distribution and administrative expenses increased $2,820,872,
or 53.9%, to $8,057,810 during the year ended December 31, 2000, from $5,236,938
during the same period in 1999. This increase was attributable to expansion of
our administrative infra-structure necessary to support increased levels of
sales and increased promotional expense designed to increase sales. The number
of full-time employees increased to 70 during the first quarter of 2000, 76
during the second quarter of 2000, declined to 74 during the third quarter of
2000 and declined to 72 during the fourth quarter of 2000 as compared to 53, 54,
49 and 75, during the same periods of 1999. The balance of the increase in
marketing, distribution and administrative expenses resulted from the higher
level of activity and corresponding increases in variable costs, including
professional services, telephone, bank card service charges and equipment and
vehicle repair and maintenance. The marketing, distribution and administrative
expenses as a percentage of net sales increased to 30.2% during 2000, from 23.3%
during 1999 due to the increased level of sales.
Our other income (reduced by other expense) decreased by $143,097 to net
other income of $229,039 during 2000, from a net income of $372,136 during the
same period in 1999. This decrease was primarily attributable to the one-time
contribution to the OKC Memorial Fund during the second quarter in 2000 of
$59,500. Additionally, as the result of a decision of management to transfer the
Page 22
company's marketable security investments to Bank Trust during the second
quarter in 2000 we realized an approximate $51,000 loss on the sale of
marketable securities. We believe these were one-time nonrecurring charges and
will have no further adverse impact on our future results of operations.
Our income before taxes decreased $1,002,342, or 51.4%, to $949,466 during
2000, from $1,951,808 during 1999. Income before taxes as a percentage of net
sales was 3.6% and 8.7% during 2000 and 1999, respectively. Income taxes during
2000 and 1999 were $456,532 and $676,025 respectively. Our net income decreased
$782,849, or 61.4%, to $492,934 during 2000, from $1,275,783 during 1999. This
decrease in net income was attributable to:
- the decrease in interest income net of interest expense of $53,671, or
14.7%, to $310,599 during 2000 from $364,270 during 1999;
- the increase in the marketing, distribution and administrative expenses;
and
- the increase in other expenses due to the one-time contribution of
$59,500 to the OKC Memorial Fund and the approximately $51,000 realized
loss on the sale of marketable securities during the second quarter
of 2000.
Net income as a percentage of net sales decreased to 1.8% during 2000, from
5.7% during 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 52.0% and 63.8% of net sales for the years ended December 31, 2001
and 2000. One of the ingredients in our AM-300 products is ephedra, an herb
which contains naturally-occurring ephedrine. Our manufacturer uses a powdered
extract of that herb when manufacturing AM-300. We market AM-300 principally as
an aid in weight management. The extract is an 8% extract which means that
every 100 milligrams of the powdered extract contains approximately eight
milligrams of naturally occurring ephedrine alkaloids. Ephedrine containing
products have been the subject of adverse publicity in the United States and
other countries relating to alleged harmful effects.
On April 3, 2000, the FDA withdrew most of the provisions of its proposed
rule regarding dietary supplements that contain ephedrine alkaloids. The
proposed rule, which was published on June 4, 1997, would have significantly
limited our ability to sell AM-300 if it had been made effective. The FDA's
withdrawal of the provisions removed most, but not all, of the limitations. This
action was prompted largely by a report issued by the GAO in which the GAO
criticized the scientific basis for the proposed rule and the FDA's evaluation
of approximately 900 reports of adverse events supposedly related to the
consumption of dietary supplements containing ephedrine alkaloids. The FDA made
available for public inspection most of the adverse event reports on April 3,
2000.
On October 25, 2000, several trade organizations for the dietary supplement
industry submitted a petition to the FDA, which concerned the remaining
provisions of the proposed rule regarding dietary supplements that contain
ephedrine alkaloids. The petition requested the FDA to: (1) withdraw the
remaining provisions of the proposed rule, and (2) adopt new standards for
dietary supplements that contain ephedrine alkaloids, which were set forth in
the petition. The FDA has not publicly responded to this petition.
The FDA may attempt to issue a new proposed rule with respect to dietary
supplements that contain ephedrine alkaloids. However, it is uncertain what
restrictions the new proposed rule will contain or when a new proposed rule will
Page 23
be issued. In our opinion, it is unlikely that a final regulation will be
issued by the FDA during 2002 or 2003. Consequently, management is unable at
the present time to predict the ultimate resolution of these issues, nor their
ultimate impact on our results of operations or financial condition.
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 limited
(excluding ephedra, 52% of our 2001 revenue) product liability insurance
coverage with limits of $1,000,000 per occurrence and $4,000,000 in the
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 also have agreed to indemnify
Chemins against claims arising from claims made by our associates for products
manufactured by Chemins and marketed by us. A product liability claim could
result in material losses.
Liquidity and Capital Resources
Our primary source of liquidity has been cash provided by sales of our
common stock, marketable securities and operating activities. 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 are with Bank One Oklahoma, N.A. and accrue interest at an annual of
..25% under prime rate.
At December 31, 2001, we had working capital of $3,125,247 compared to
$5,218,790 at December 31, 2000. We believe our cash and cash equivalents and
cash flows from operations will be sufficient to fund our working capital needs
over the next 12 months. During the year ended December 31, 2001, net cash
provided by operating activities was $1,508,177, net cash used in investing
activities was $1,383,960, and net cash provided by financing activities was
$781,284. We had a net increase in cash during this period of $905,501,
primarily as a result of the sale of certain marketable securities for the LST
acquisition and the proceeds from borrowings related to the construction of our
warehouse and distribution facility. Our working capital needs over the next 12
months consist primarily of marketing, distribution and administrative expenses.
At December 31, 2001, we had marketable debt and equity securities of
$1,663,650 compared to $3,502,514 at December 31, 2000. All of our securities
are unrestricted investments.
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. In 2000, an additional $200,000 was
approved. On January 1, 2001 the outstanding balance on all the notes plus
interest were combined into one note payable in monthly installments. The loans
and extension were unanimously approved by our board of directors. These loans
are collateralized by stock and property, and bear interest at 8% per annum. As
of December 31, 2001, the balance due on these loans plus interest was $533,035.
ITEM 7. FINANCIAL STATEMENTS
Our consolidated financial statements are set forth beginning on page F-1
hereof.
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 10, 2001, upon the recommendation of our audit committee and with
the approval of our board of directors, we dismissed our principal accountant,
Deloitte & Touche LLP, in order to institute certain cost saving measures. On
the same date, we engaged Grand Thornton LLP as our principal accountant.
At no time did any report by Deloitte & Touche on our financial statements
contain an adverse opinion or a disclaimer of opinion; nor was any such report
qualified or modified as to uncertainty, audit scope or accounting principles.
Page 24
Also, at no time did we have any disagreements with Deloitte & Touche on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Deloitte & Touche, would have caused Deloitte & Touche to
reference the subject matter of the disagreement in connection with their report
on our financial statements.
We have not consulted with Grant Thornton during our two most recent fiscal
years and any subsequent interim period prior to engaging Grant Thornton
regarding either (i) the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on our financial statements; or (ii) any matter that was
either the subject of a disagreement or a reportable event, as those terms are
defined in Item 304(a) of Regulation S-K.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Our Directors and Executive Officers
Pursuant to our bylaws, our directors are divided into three classes. Class
I directors hold office initially for a term expiring at the annual meeting of
shareholders to be held in 2003. Class II directors hold office initially for a
term expiring at the annual meeting of shareholders to be held in 2004. Class
III directors hold office initially for a term expiring at the annual meeting of
shareholders to be held in 2002. Each director will hold office for the term
elected and until his successor is duly elected and qualified. At each annual
shareholders meeting, the successor to a member of the class of directors whose
term expires at such meeting is elected to hold office for a term expiring at
the annual meeting of shareholders held in the third year following the year of
his election. Executive officers are elected by our board of directors and serve
at our discretion. The following table sets forth certain information with
respect to our executive officers and directors.
Name Age Position with Us
---- --- ----------------
John W. Hail(1)(2)(5) 71 Chairman of the Board, Chief Executive
Officer and Director
Craig Case 47 President
Dennis Loney(5) 47 Chief Operations Officer
Reggie Cook(1) 47 Chief Financial Officer, Secretary and
Treasurer
R. Terren (Terry) Dunlap(3) 57 Director and Member of Audit Committee
Harland C. Stonecipher(4) 63 Director and Member of Audit Committee
M. Thomas Buxton III(2) 52 Director and Member of Audit Committee
--------------------------
(1) Member of the Stock Option Committee.
(2) Term as a Director expires in 2004.
(3) Term as a Director expires in 2003.
(4) Term as a Director expires in 2002.
(5) Mr. Loney is the son-in-law of Mr. Hail.
John W. Hail is our founder and has served as our Chief Executive Officer
and Chairman of the Board of Directors since our inception in June 1988. During
1987 and through May 1988, Mr. Hail served as Executive Vice President, Director
and Agency Director of Pre-Paid Legal Services, Inc., a public company engaged
in the sale of legal services contracts, and also served as Chairman of the
Board of Directors of TVC Marketing, Inc., the exclusive marketing agent of
Pre-Paid Legal Services, Inc. Since 1998, Mr. Hail has served as a Director of
Pre-Paid Legal Services, Inc. In March 1999, Mr. Hail became a director of
DuraSwitch Industries, Inc., a company that developes and distributes electronic
switches.
R. Terren Dunlap is Director and Chief Executive Officer for Ultra-Scan
Corp, a privately-held high-tech biometrics security company. Mr. Dunlap joined
Ultra-Scan in January 2002, previously having served as Chief Executive Officer
for Duraswitch Industries, Inc., a company he co-founded in 1997. From 1983 to
Page 25
March 1994, Mr. Dunlap served as Chairman and Chief Executive Office of
Go-Video, Inc. (later called Sensory Science Corp.), a publicly held
manufacturer of consumer electronic video products that he also founded. From
April 1994 to October 1999, Mr. Dunlap served as a consultant to Sensory Science
Corp, which has since been sold to SONICblue Incorporated. Mr. Dunlap currently
serves as Chairman of the Board for Duraswitch and as director for Winland
Electronics, Inc.
Harland C. Stonecipher has served as one of our directors since August
1995. Mr. Stonecipher has been Chairman of the Board and Chief Executive Officer
of Pre-Paid Legal Services, Inc. since its inception in 1972.
M. Thomas Buxton III has served as one of our directors since June 2001.
Mr. Buxton has practiced as a CPA in the Oklahoma City area and has been a
shareholder in Buxton and Cloud, CPA's since 1982. He also serves as Chief
Financial Officer of Sooner Holdings, Inc. Mr. Buxton is a serving lieutenant
colonel in the Untied States Army Reserve.
Craig Case has served as President of AMS since December 2001. Previously,
Mr. Case founded and managed the direct selling division of FranklinCovey, an
international consulting firm. Mr. Case also served for two years as an
exclusive consultant to Internet direct sales companies.
Dennis Loney is Chief Operations Officer. Mr. Loney has served as Vice
President since July 1995. Prior to his current position, Mr. Loney served as
the Vice President of Administration of TVC Marketing, Inc. Mr. Loney brings
over 20 years of business and 14 years of network marketing experience.
Reggie Cook has served as Vice President and Chief Financial Officer since
November 2000. From 1994 to 2000, Mr. Cook served as Chief Financial Officer of
Sequoiah Fuels Corporation, a former subsidiary of Kerr McGee Corporation.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and officers, and persons who own more than 10 percent of a
registered class of our equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than 10% shareholders are required to furnish us with
copies of all Section 16(a) forms they file.
Based solely on our review of the copies of the forms we received covering
purchase and sale transactions in our equity securities during 2001, we believe
that each person who, at any time during 2001 was a director, officer or
beneficial owner of more than 10% of our common stock complied with all Section
16(a) filing requirements during 2001.
ITEM 10. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
relating to compensation for services rendered during the years ended December
31, 2001, 2000 and 1999, paid to or accrued for John W. Hail, our Chief
Executive Officer and each of our executive officers whose 2001 salary and
bonus, pursuant to a recurring arrangement, exceed $100,000.
Page 26
Long-Term
Compensation Awards
-------------------
Securities Exercise
Annual Compensation Underlying Or Base
-------------------
Name and Principal Position Year Salary (1) Bonus Other Options Price
--------------------------- ---- ---------- ----- ----- ---------- --------
John W. Hail 2001 $315,506 $ - $ - 100,000 $2.65
Chief Executive Officer 2000 $281,640 $ - $ - - $ -
1999 $236,801 $ - $ - - $ -
Reggie Cook 2001 $194,700 $ - $ - 50,000 $2.65
Vice President and
Chief Financial 2000 $ - $ - $ - - $ -
Offcier 1999 $ - $ - $ - - $ -
Dennis Loney 2001 $158,700 $ - $ - 50,000 $2.65
Vice President and
Chief Operating 2000 $ - $ - $ - - $ -
Officer 1999 $ - $ - $ - - $ -
(1) Dollar value of base salary earned during the year, including the use of
automobiles for Messrs. Hail, Cook, and Loney, the value of which is
included in their annual compensation.
Aggregate Option Grants and Exercises in 2001 and Year End Option Values
Stock Options and Option Values. The following table set forth information
related to the grant of stock options during 2001.
Stock Options Granted
Percentage of
Number of Total Options
Shares Granted to
Underlying Employees in Exercise Expiration
Options 2001 Price Date
----------- --------------------- -------- -----------
John W. Hail . 100,000 26% $2.65 May 7, 2006
Chief Executive Officer
Reggie Cook . 50,000 13% $2.65 May 7, 2006
Vice President and
Chief Financial Officer
Dennis Loney 50,000 13% $2,65 May 7, 2006
Vice President and
Chief Operating Officer
Aggregate Stock Option Exercises in 2001 and Year End Option Values. The
following table sets forth information related to the exercise of stock options
during 2001 and the number and value of options held by the named executive
officers at December 31, 2001.
Page 27
Stock Option Exercises and Year End Option Value Table
Value of Unexercised
Number of Unexercised In-the-Money
Shares Options as of Options as of
Acquired on Value December 31, 2001 December 31, 2001(1)
----------------- --------------------
Exercise Realized Exercisable Unexercisable Exercisable Unexerciable
----------- -------- ----------- ------------- ----------- ------------
John W. Hail . - $ - 575,000(2) - $286,250 $ -
Chief Executive Officer
Reggie Cook . - $ - 76,119 - $ - $ -
Vice President and
Chief Financial Officer
Dennis Loney - $ - 64,100 - $ - $ -
Vice President and
Chief Operating Officer
(1) The closing sale price of our common stock as reported on the American
Stock Exchange on December 31, 2001 was $2.55. The per-share value is
calculated based on the applicable closing price per share, minus the
exercise price, multiplied by the number of shares of our common stock
underlying the options.
(2) Includes 225,000 options given by John Hail as a gift to certain members
of his family in 1995.
Compensation of Directors
Directors who are not our employees receive $250 for each board meeting
attended. Directors who are also our employees receive no additional
compensation for serving as directors. We reimburse our directors for travel and
out-of-pocket expenses in connection with their attendance at meetings of our
board of directors. Our bylaws provide for mandatory indemnification of
directors and officers to the fullest extent permitted by Oklahoma law.
Stock Option Plan
We established the Advantage Marketing Systems, Inc. 1995 Stock Option Plan
in June 1995. This plan provides for the issuance of incentive stock options
with or without stock appreciation rights and nonincentive stock options with or
without stock appreciation rights to our employees and consultants, including
employees who also serve as a director. The total number of shares of our common
stock authorized for issuance under this stock option plan is 1,125,000. As of
March 29, 2002, options to purchase a total of 883,505 shares of our common
stock have been granted under the plan of which 810,838 were outstanding.
Outstanding options are exercisable for $1.75 to $6.13 per share and expire May
2002 through May 2007. Also, at March 29, 2002, there were outstanding stock
options and warrants (in addition to the 1997-A warrants, the redeemable common
stock purchase warrants and the underwriter warrants) exercisable for the
purchase of 673,250 shares of our common stock granted outside of the plan.
The stock option committee, which is currently comprised of Messrs. Hail
and Cook, administers and interprets the stock option plan and has authority to
grant options to all eligible employees and determine the types of options
granted and the terms, restrictions and conditions of the options at the time of
grant.
The option price of our common stock is determined by the stock option
committee, provided such price may not be less than 85% of the fair market value
of the shares on the date of grant of the option. The fair market value of a
share of our common stock is determined by the last reported sale price on the
date of grant of the option. Upon the exercise of an option, the option price
must be paid in full, in cash, tendering mature shares or with a stock
appreciation right. Subject to the stock option committee's approval, upon
Page 28
exercise of an option with a stock appreciation right attached, a participant
may receive cash, shares of our common stock or a combination of both, in an
amount or having a fair market value equal to the excess of the fair market
value, on the date of exercise, of the shares for which the option and stock
appreciation right are exercised, over the option exercise price.
Options granted under the stock option plan may not be exercised until six
months after the date of the grant, except in the event of death or disability
of the participant. Incentive stock options and any stock appreciation rights
are exercisable only by participants while actively employed as our employee or
a consultant, except in the case of death, retirement or disability. Options may
be exercised at any time within three months after the participant's retirement
or within one year after the participant's disability or death, but not beyond
the expiration date of the option. No option may be granted after April 30,
2005. Options are not transferable except by will or by the laws of descent and
distribution.
Officer and Director Liability
As permitted by the provisions of the Oklahoma General Corporation Act, our
certificate of incorporation eliminates in certain circumstances the monetary
liability of our directors for a breach of their fiduciary duty as directors.
These provisions and applicable laws do not eliminate the liability of one of
our directors for:
- a breach of the director's duty of loyalty to us or our shareholders;
- acts or omissions by a director not in good faith or which involve
intentional misconduct or a knowing violation of law;
- liability arising under the Oklahoma General Corporation Act relating to
the declaration of dividends and purchase or redemption of shares of our
common stock in violation of the Oklahoma General Corporation Act;
- any transaction from which the director derived an improper personal
benefit; or
- violations of federal securities laws.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and officers to the fullest extent permitted by the Oklahoma
General Corporation Act. Under such provisions, any director or officer, who in
his capacity as such, is made or threatened to be made, a party to any suit or
proceeding, may be indemnified if our board of directors determines such
director or officer acted in good faith and in a manner he reasonably believed
to be in or not opposed to our best interests.
Our certificate of incorporation and bylaws and the Oklahoma General
Corporation Act further provide that such indemnification is not exclusive of
any other rights to which such individuals may be entitled under our
certificate, our bylaws, an agreement, vote of shareholders or disinterested
directors or otherwise. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to our directors and officers
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy and is, therefore, unenforceable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information as to the beneficial
ownership of our common stock as of March 29, 2002, of:
- each person who is known to us to be the beneficial owner of more than 5%
of our common stock;
- each of our directors and named executive officers;
- our executive officers and directors as a group; and
Page 29
- their percentage holdings of our outstanding shares of common stock.
For purposes of the following table, the number of shares and percent of
ownership of our outstanding common stock that the named person beneficially
owned at March 29, 2002, includes shares of our common stock that such person
has the right to acquire within 60 days of this date of this form 10-KSB, upon
exercise of options and warrants. However, such shares are not included for the
purposes of computing the number of shares beneficially owned and percent of
outstanding common stock of any other named person.
Common Stock
------------
Shares Percent of
Beneficially Shares
Name and Address of Beneficial Owner Owned Outstanding
------------------------------------ ------------ -----------
John W. Hail(1)(2) . 699,625 15.9%
Harland C. Stonecipher(3) 180,768 4.1%
R. Terren Dunlap(1) 17,500 . .4%
M. Thomas Buxton, III (1) - -
Reggie B. Cook(1) . 76,716 1.7%
Dennis P. Loney(1)(4) 190,426 4.3%
Executive Officers and Directors as a group
(six persons) . 1,222,727 27.7%
--------------------------------------
(1) A director or an executive officer with a business address of 2601
Northwest Expressway, Suite 1210W, Oklahoma City, Oklahoma 73112-7293.
(2) The number of shares and each percentage presented includes:
- 350,000 shares of our common stock that are subject to currently
exercisable stock options, 100 shares of our common stock subject to
currently exercisable 1997-A warrants and 1,100 shares of our common
stock that are subject to currently exercisable redeemable common stock
purchase warrants held by Mr. Hail;
- 29,663 shares of our common stock and 1,000 shares of our common stock
that are subject to currently exercisable redeemable common stock
purchase warrants owned by corporations controlled by Mr. Hail; and
- 4,846 shares of our common stock and 1,000 shares of our common stock
that are subject to currently exercisable redeemable common stock
purchase warrants held by Helen Hail, wife of Mr. Hail, with respect
to which Mr. Hail disclaims any beneficial interest.
(3) Mr. Stonecipher is a director with a business address of 321 East Main
Street, Ada, Oklahoma 74820, and Chairman of the Board and Chief Executive
Officer of Pre-Paid Legal Services, Inc. The number of shares consist of
and each percentage presented is based upon 180,768 shares of our
outstanding common stock held by Pre-Paid Legal Services, Inc., which may
be deemed to be beneficially owned by Mr. Stonecipher.
(4) The number of shares and each percentage presented includes:
- 89,725 shares of our common stock that are subject to currently
exercisable stock options held by Mr. Loney; and
- 79,000 shares of our common stock that are subject to currently
exercisable stock options held by Denise Loney, wife of Mr. Loney,
with respect to which Mr. Loney disclaims any beneficial ownership.
Page 30
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below is a description of transactions entered into between us
and certain of our officers, directors and shareholders during the last two
years. Certain of these transactions may result in conflicts of interest between
us and such individuals. Although these persons have fiduciary duties to us and
our shareholders, there can be no assurance that conflicts of interest will
always be resolved in our favor or in favor of our shareholders.
During 2001 and 2000, we received approximately $15,231 and $5,931, from
Pre-Paid Legal Services, Inc., a shareholder, for commissions on sales of
memberships for the services provided by Pre-Paid Legal. As of July 1, 2000, we
began offering our employees access to the services provided by Pre-Paid Legal
through an employee benefit option. We pay half the cost for each employee
electing to participate in the plan. During 2001 and 2000, we paid $7,593 and
$5,157, to Pre-Paid Legal for these services. Our Chairman of the Board and
Chief Executive Officer, John W. Hail, is a director of Pre-Paid Legal and the
Chairman of the Board and Chief Executive Officer of Pre-Paid Legal, Harland
Stonecipher, is our director.
During the first quarter of 1998, we agreed to loan John W. Hail, the Chief
Executive Officer and a major shareholder, up to $250,000. Subsequently, we
agreed to loan up to an additional $75,000. In 2000, an additional $200,000 was
approved. On January 1, 2001 the outstanding balance on all the notes were
combined into one note payable in monthly installments. The loans and extension
were unanimously approved by our board of directors. These loans are
collateralized by stock and property, and bear interest at 8% per annum. As of
December 31, 2001, the balance due on these loans plus interest was $533,035.
During 2000, we made advances totaling $50,424 to Dennis Loney, our Chief
Operating Officer. The advances were due April 28, 2004, and were paid in full
by Mr. Loney as of February 2001. Also during 2001 and 2000, we paid Mr. Loney
and his wife sales commissions of $38,028 and $24,709, respectively. These
commissions were based upon purchases by them and their downline associates in
accordance with our network marketing program applicable to all independent
associates in effect at the time of the sales. Mr. Loney's wife is the daughter
of John W. Hail.
On December 17, 1996, we adopted policies that:
- any loans to officers, directors and 5% or more shareholders
("affiliates") are subject to approval by a majority of not less than
two of our disinterested independent directors; and
- such loans and other transactions with affiliates will be on terms no
less favorable than could be obtained from unaffiliated parties and
approved by a majority of not less than two of the disinterested
independent directors.
Our board of directors is comprised of four members, three of which, R. Terren
Dunlap, Harland C. Stonecipher and M. Thomas Buxton III are independent
directors.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
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.
Page 31
3.2 The Registrant's Bylaws, incorporated by reference to the
Registration Statement on Form SB-2 (Registration No.
333-47801) filed with the commission on March 11, 1998.
10.1 Warrant Agreement between Registrant and U.S. Stock Transfer
Inc., dated as of January 20, 1997, as amended and restated
January 8, 1998, incorporated by reference to Amendment No. 2
to Form 8-A Registration Statement, filed with the Commission
on January 13, 1998.
10.2 Unit and Warrant Agreement between Registrant and U.S. Stock
Transfer Inc., dated as of November 6, 1997, as amended and
restated January 8, 1998, incorporated by reference to
Amendment No. 1 to Form 8-A Registration Statement, filed with
the Commission on January 14, 1998.
10.3 * The Advantage Marketing Systems, Inc. 1998 Associate Stock
Purchase Plan, incorporated by reference to Amendment No. 1 to
Registration Statement on Form SB-2 (Registration No.
333-47801) filed with the commission on October 7, 1998.
10.4 The form of Advantage Marketing Systems, Inc. 1998 Associate
Stock Purchase Plan Stock Purchase Agreement, incorporated by
reference to Amendment No. 1 to Registration Statement on Form
SB-2 (Registration No. 333-47801) filed with the commission
on October 7, 1998.
10.5 Purchase and Assignment Agreement by and among Advantage
Marketing Systems, Inc., LifeScience Technologies Holdings,
Inc., GHI Holdings, Inc., LifeScience Technologies, Inc. and
RMS Limited Partnership, dated as of January 3, 2001,
incorporated by reference to Form 8-K filed with the
Commission on January 8, 2001.
10.6 Promissory Note dated January 3, 2001, to RMS Limited
Partnership by Advantage Marketing Systems, Inc., LifeScience
Technologies Holdings, Inc., LifeScience Technologies Holdings
Limited Partnership, LifeScinece Technologies Holdings, Inc.,
LifeScience Technologies of Japan and LST Fulfillemnt Limited
Partnership, incorporated by reference to Form 8-K filed with
the Commission on January 8, 2001.
10.7 Stock Option Agreement of Advantage Marketing Systems dated
January 3, 2001, incorporated by reference to Form 8-K filed
with the Commission on January 8, 2001.
21 Subsidiaries, incorporated by reference to Form 10-K filed
with the Commission on April 17, 2001.
23.1 Consent of Grant Thornton LLP and Deloitte & Touche LLP, filed
herewith.
23.2 Consent of Deloitte & Touche, LLP, filed herewith.
* Designates a compensatory plan.
(b) Reports on Form 8-K.
None
Page 32
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
REGISTRANT:
ADVANTAGE MARKETING SYSTEMS, INC.
Date: April 1, 2002 By:/S/ JOHN W. HAIL
-----------------------------------------
John W. Hail, Chief Executive Officer,
Chairman of the Board and Director
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
19
Date: April 1, 2001 By:/S/ JOHN W. HAIL
-----------------------------------------
John W. Hail, Chief Executive Officer,
Chairman of the Board and Director
Date: April 1, 2001 By:/S/ DENNIS LONEY
-----------------------------------------
Dennis Loney, Chief Operational Officer
Date: April 1, 2001 By:/S/ REGGIE COOK
-----------------------------------------
Reggie Cook, Chief Financial Officer
and Secretary Treasurer
Date: April 1, 2001 By:/S/ M. THOMAS BUXTON III
-----------------------------------------
M. Thomas Buxton III, Director
Date: April 1, 2001 By:/S/ R. TERREN DUNLAP
-----------------------------------------
R. Terren Dunlap, Director
Date: April 1, 2001 By:/S/ HARLAND C. STONECIPHER
-----------------------------------------
Harland C. Stonecipher, Director
33
INDEX TO FINANCIAL STATEMENTS
Page
----
ADVANTAGE MARKETING SYSTEMS, INC. AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants F-2
Independent Auditor's Report F-3
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-4
Consolidated Statements of Income for Years Ended
December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Stockholders' Equity for Years
Ended December 31, 2001, 2000 and 1999 F-6
Consolidated Statements of Cash Flows for Years Ended
December 31, 2001, 2000 and 1999 F-7
Notes to Consolidated Financial Statements for Years
Ended December 31, 2001 2000 and 1999 F-8
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Advantage Marketing Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Advantage
Marketing Systems, Inc. and subsidiaries (the "Company") as of December 31,
2001, and the related consolidated statements of income, stockholders' equity,
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advantage Marketing
Systems, Inc. and subsidiaries as of December 31, 2001, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 22, 2002
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Advantage Marketing Systems, Inc. and Subsidiaries
Oklahoma City, Oklahoma
We have audited the accompanying consolidated balance sheet of Advantage
Marketing Systems, Inc. and subsidiaries (the "Company") as of December 31,
2000, and the related consolidated statements of income, stockholders' equity,
and cash flows for the years ended December 31, 2000 and 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2000, and the results of its operations and its cash flows for the years ended
December 31, 2000 and 1999, in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
April 12, 2001
F-3
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
ASSETS 2001 2000
------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 982,188 $ 76,687
Marketable securities, available for sale,
at fair value 1,663,650 3,502,514
Receivable - net of allowance of $92,931 and
$157,804 respectively 331,961 371,397
Receivable from affiliates - Current Portion 100,000 594,395
Prepaid taxes 99,120 282,361
Inventory 1,335,451 1,007,934
Deferred income taxes . 65,546 64,772
Other assets 81,830 305,721
----------- -----------
Total current assets 4,659,746 6,205,781
RECEIVABLES, Net 850,371 515,764
PROPERTY AND EQUIPMENT, Net 4,345,374 2,979,003
GOODWILL and other intangibles, Net 4,195,295 1,511,918
COVENANTS NOT TO COMPETE, Net 306,717 363,117
DEFERRED INCOME TAXES - 12,291
OTHER ASSETS 314,901 102,376
----------- -----------
TOTAL $14,672,404 $11,690,250
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 29,509 $ 191,620
Accrued commissions and bonuses 438,515 230,563
Accrued other expenses 147,044 217,748
Accrued income tax . - 72,791
Accrued sales tax liability 244,485 140,513
Notes payable 579,860 8,472
Capital lease obligations 109,726 125,284
----------- -----------
Total current liabilities 1,549,139 986,991
LONG-TERM LIABILITES:
Notes payable 2,320,063 14,251
Capital lease obligations 234,385 265,103
Deferred tax 23,639 -
----------- -----------
Total liabilities 4,127,226 1,266,345
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Common stock - $.0001 par value; authorized
495,000,000 shares; issued 4,882,174 and
4,821,174 shares; outstanding 4,409,379 and
4,348,379 shares, respectively 488 482
Paid-in capital 11,764,182 11,642,183
Notes receivable for exercise of options (31,088) (31,088)
Retained earnings 1,086,178 1,077,627
Accumulated other comprehensive income (loss),
net of tax . (30,106) (20,828)
----------- -----------
Total capital and retained earnings 12,789,654 12,668,381
Less cost of treasury stock (472,795 and 472,795
shares, respectively) (2,244,476) (2,244,476)
----------- -----------
Total stockholders' equity 10,545,178 10,423,905
----------- -----------
TOTAL $14,672,404 $11,690,250
=========== ===========
See notes to consolidated financial statements.
F-4
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
----------- ----------- -----------
Net sales $28,440,920 $26,707,936 $22,427,551
Cost of sales 19,231,150 17,929,701 15,610,941
----------- ----------- -----------
Gross profit 9,209,770 8,778,235 6,816,610
Marketing, distribution and
administrative expenses 9,180,793 8,057,808 5,236,938
----------- ----------- -----------
Income from operations 28,977 720,427 1,579,672
Other income (expense):
Interest and dividends, net (31,800) 310,599 364,270
Other income (expense), net 16,841 (81,560) 7,866
----------- ----------- -----------
Total other income (expense) (14,959) 229,039 372,136
----------- ----------- -----------
INCOME BEFORE TAXES 14,018 949,466 1,951,808
INCOME TAX EXPENSE 5,467 456,532 676,025
----------- ----------- -----------
NET INCOME $ 8,551 $ 492,934 $ 1,275,783
=========== =========== ===========
Net income per common share - basic $ - $ .12 $ .31
=========== =========== ===========
Net income per common share -
assuming dilution $ - $ .09 $ .27
=========== =========== ===========
Weighted average common shares
outstanding - basic 4,379,486 4,283,461 4,139,706
=========== =========== ===========
Weighted average common shares -
assuming dilution 4,692,298 5,476,277 4,778,576
=========== =========== ===========
See notes to consolidated financial statements.
F-5
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Accumu-
lated
Notes Retained OtherCom-
prehensive
Receivable Earnings Income Total
Shares for (Accumu- Compre- (Loss), Stock-
(See Common Paid-In Exercise lated hensive Net Treasury holders'
Note 5) Stock Capital of Options Deficit) Income of Tax Stock Equity
--------- ------ ----------- ---------- ----------- ----------- ---------- ------------ -----------
BALANCE,
JANUARY 1, 1999 4,141,014 $ 428 $10,180,106 $ (63,960) $ (519,091) $ - $ - $ (377,871) 9,222,612
Payments on notes
receivable - - - 12,961 - - - - 12,961
Stock option issued - - 52,600 - - - - - 52,600
Options exercised by
tendering mature
shares, net 8,474 - (6) - - - - - (6)
Purchases of treasury
stock, at cost (66,685) - - - - - - (321,436) (321,436)
Comprehensive Income:
Net income - - - - 1,275,783 1,275,783 - - 1,275,783
Unrealized loss on
available for sale
securities, net of
tax - - - - - (10,531) (10,531) - (10,531)
----------
Comprehensive income. - - - - - $1,265,252 - - -
--------- ----- ----------- --------- ----------- ========== -------- ----------- -----------
BALANCE,
DECEMBER 31, 1999 4,082,803 428 10,232,700 (50,999) 759,692 (10,531) (699,307) 10,231,983
Payments on notes
receivable - - - 19,911 - - - - 19,911
Options exercised
with cash 373,504 37 843,480 - - - - - 843,517
Options exercised by
tendering mature
shares, net 76,239 8 - - - - - - 8
1997-A Warrants
exercised 28,443 3 96,703 - - - - - 96,706
Redeemable common
stock purchase
warrants exercised 59,000 6 200,594 - - - - - 200,600
Purchases of treasury
stock, at cost (271,610) - - - - - - (1,545,169) (1,545,169)
Tax benefit from
exercise of
non-qualified
options - - 268,711 - - - - - 268,711
Purchase and
cancellation
of warrants - - - - (174,999) - - - (174,999)
Comprehensive Income:
Net Income - - - - 492,934 492,934 - - 492,934
Unrealized loss on
available for sale
securities, net of
tax . - - - - - (10,297) (10,297) - (10,297)
---------
Comprehensive income - - - - - $ 482,637 - - -
--------- ----- ----------- --------- ----------- ========== -------- ----------- -----------
BALANCE,
DECEMBER 31, 2000 4,348,379 $ 482 $11,642,188 $ (31,088) $ 1,077,627 $(20,828) $(2,244,476) $10,423,905
Options exercised
with cash 61,000 6 121,994 - - - - - 122,000
Comprehensive Income:
Net Income . - - - - 8,551 8,551 - - 8,551
Unrealized loss on
available for sale
of securities, net
of tax . - - - - - (9,278) (9,278) - (9,278)
----------
Comprehensive Income . - - - - - $ (727) - - -
--------- ----- ----------- --------- ----------- ========== -------- ----------- -----------
BALANCE,
DECEMBER 31, 2001 4,409,379 $ 488 $11,764,182 $ (31,088) $ 1,086,178 $(30,106) $(2,244,476) $10,545,178
========= ===== =========== ========= =========== ======== =========== ===========
See notes to consolidated financial statements.
F-6
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
CASH FLOWS OPERATING ACTIVITES:
Net income $ 8,551 $ 492,934 $ 1,275,783
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,112,870 799,969 527,054
Deferred taxes 43,189 5,522 112,631
Provision for bad debts - 102,472 18,728
Non-cash compensation - - 52,600
Gain on sale of assets (7,904) (3,120) -
Realized (gain) loss on sale of
marketable securities (3,714) 34,369 -
Changes in assets and liabilities
which provided (used) cash:
Receivables 57,561 (543,490) (71,934)
Inventory 466,112 (80,343) 82,407
Prepaid taxes 183,241 (13,650) -
Other assets (764) (51,668) (174,308)
Accounts payable and accrued
expenses (350,965) (805,475) 547,978
----------- ----------- -----------
Net cash provided by (used in)
operating activities 1,508,177 (62,480) 2,370,939
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,798,899) (1,164,945) (1,378,830)
Sales of property and equipment 26,442 - -
Advances to affiliates - (280,670) (40,000)
Advances to notes receivable (24,864) - -
Receipts on notes receivable 105,167 - -
Proceeds from sale of assets - 29,826 -
Repayment of receivable from affiliates 61,360 36 20,175
Purchase of marketable securities,
available for sale (15,259) (1,510,538) (1,822,860)
Purchase of marketable securities,
held to maturity - (1,301,151) (2,251,690)
Sale of marketable securities,
available for sale 1,840,067 1,956,092 -
Maturity of marketable securities,
held to maturity - 1,386,000 -
Purchase of other intangibles (428,338) - -
Acquisition of new business,
net of cash acquired (1,149,636) - -
----------- ----------- -----------
Net cash used in investing
activities (1,383,960) (885,350) (5,473,205)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
common stock 122,000 1,140,823 -
Proceeds from notes payable 1,146,216 25,248 -
Purchase of treasury stock - (1,545,169) (321,436)
Purchase and cancellation of
other warrants - (174,999) -
Repayments of notes receivable for
exercise of stock options - 19,911 12,961
Payment of notes payable . (348,454) (2,826) (123,787)
Principal payment on capital
lease obligations (138,478) (101,674) (91,795)
----------- ---------- -----------
Net cash provided by (used in)
financing activities 781,284 (638,377) (524,057)
----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 905,501 (1,586,207) (3,626,323)
CASH AND CASH EQUIVALENTS, BEGINNING 76,687 1,662,894 5,289,217
----------- ---------- -----------
CASH AND CASH EQUIVALENTS, ENDING $ 982,188 $ 76,687 $ 1,662,894
=========== ========== ===========
See notes to consolidated financial statements.
F-7
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include
the accounts of Advantage Marketing Systems, Inc. and its wholly owned
subsidiaries, Miracle Mountain International, Inc. and Chambre'
International, Inc. (the "Company"). All significant intercompany accounts
have been eliminated.
Nature of Business - The Company markets a product line of consumer
oriented products in the weight management, dietary supplement and personal
care categories that are produced by various manufacturers. The Company
sells its product line through a network of full and part-time independent
associates developed by the Company.
The Company also sells supplies and materials to its independent
associates.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition - The Company recognizes revenue upon shipment of
products, training aids and promotional material to the independent
associates.
Sales Returns - All of the Company's products include a customer
satisfaction guarantee. Company products may be returned within 30 days of
purchase for a full refund or credit toward the purchase of another Company
product. The Company also has a buy-back program whereby it will repurchase
products sold to an independent associate (subject to a restocking fee)
provided that the associate terminates his/her associateship agreement with
the Company and returns the product within 12 months of original purchase
in marketable condition. For the years ended December 31, 2001, 2000 and
1999, the cost of products returned to the Company is included in net sales
and was one, two and three percent of gross sales, respectively.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash in
banks and all short term investments with initial maturities of three
months or less. The Company maintains its cash and cash equivalents in
accounts which may not be federally insured. The Company has not
experienced any losses in such accounts and believes it is not exposed to
any significant credit risk.
Marketable Securities - At December 31, 2001 all of the Company's
marketable securities are classified as available for sale and reported at
fair value. The related unrealized gains and losses are excluded from
earnings and reported net of income tax as a separate component of
stockholders' equity until realized. Realized gains and losses on sales of
securities are based on the specific identification method. Declines in the
fair value of investment securities below their carrying value that are
other than temporary are recognized in earnings.
Inventory - Inventory consists of consumer product inventory and training
and promotional material such as video tapes, cassette tapes and paper
supplies held for sale to customers and independent associates. Inventory
is stated at the lower of cost or market. Cost is determined on a first-in,
first-out method.
F-8
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Shipping and Handling Costs - Shipping and handling costs are included as a
component of cost of goods sold. Fees charged to customers are included in
sales.
Intangibles - Intangible assets consist of goodwill, other intangibles and
covenants not to compete. Goodwill represents the excess of cost over the
fair value of the net assets acquired pursuant to the Miracle Mountain
International, Inc. ("MMI"), Chambre' International, Inc. ("CII"), Stay 'N
Shape International, Inc. ("SNSI"), ToppMed, Inc. ("TI") and LifeScience
Technologies, Inc. ("LST") acquisitions. The Company amortizes goodwill
from the acquisition of MMI over seven years and from the acquisitions of
CII, SNSI, TI and LST over 20 years. Covenants not to compete are being
amortized over the life of the contracts. At December 31, 2001 the net
amount of goodwill arising from the MMI, CII, SNSI, TI and LST acquisitions
was $24,116, $135,242, $1,139,518, $106,133 and $2,383,365, respectively,
and at December 31, 2000, the net amount of goodwill from the MMI, CII,
SNSI and TI acquisitions was $41,139, $144,208, $1,214,038 and $112,533,
respectively. Goodwill amortization for the years ended December 31, 2001,
2000 and 1999 was $232,349, $106,908 and $106,908, respectively. Covenant
amortization for the years ended December 31, 2001, 2000 and 1999, was
$56,400, $73,729 and $74,840, respectively.
Property and Equipment - Property and equipment are stated at cost or, in
the case of leased assets under capital leases, at the fair value of the
leased property and equipment, less accumulated depreciation and
amortization. Property and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets of three
to 20 years. Assets under capital leases and leasehold improvements are
amortized over the lesser of the term of the lease or the life of the
asset.
Long-Lived Assets - Management of the Company assesses recoverability of
its long-lived assets, including goodwill, whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable through future cash flows generated by that asset.
Recoverability is assessed and measured on long-lived assets using an
estimate of the undiscounted future cash flows attributable to the asset.
Impairment is measured based on future cash flows discounted at an
appropriate rate.
Fair Value Disclosure - The Company's financial instruments include cash
and cash equivalents, marketable securities, receivables, short-term
payables, notes payable and capital lease obligations. The carrying amounts
of cash and cash equivalents, receivables and short-term payables
approximate fair value due to their short-term nature. Marketable
securities held for sale are carried at fair value. The carrying amounts of
notes payable and capital lease obligations approximate fair value based on
borrowing rates currently available to the Company.
Earnings per Share - Earnings per common share is computed based upon net
income divided by the weighted average number of common shares outstanding
during each period. Earnings per common share-assuming dilution is computed
based upon net income divided by the weighted average number of common
shares outstanding during each period adjusted for the effect of dilutive
potential common shares calculated using the treasury stock method. The
following is a reconciliation of the common shares used in the calculations
of earnings per common share and earnings per common share - assuming
dilution:
F-9
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
For the year ended December 31, 2001:
Earnings per common share:
Income available to common
stockholders $ 8,551 $ - $ -
Weighted average common shares =====
outstanding - 4,379,486
Earnings per common share -
assuming dilution:
Options - 312,812
Warrants - -
---------- -----------
Income available to common
stockholders plus assumed
conversions . $ 8,551 4,692,298 $ -
========== ========== =====
For the year ended December 31, 2000:
Earnings per common share:
Income available to common
stockholders . $ 492,934 $ .12
Weighted average common =====
shares outstanding 4,283,461
Earnings per common share -
assuming dilution:
Options - 706,786
Warrants - 486,030
---------- -----------
Income available to common
stockholders plus
assumed conversions $ 492,934 5,476,277 $ .09
========== ========== =====
For the year ended December 31, 1999:
Earnings per common share:
Income available to common
stockholders . $1,275,783 $ .31
Weighted average common
shares outstanding 4,139,706
Earnings per common share -
assuming dilution:
Options - 624,805
Warrants - 14,065
---------- ----------
Income available to common
stockholders plus
assumed conversions $1,275,783 4,778,576 $ .27
========== ========== =====
Options to purchase 1,193,691 shares of common stock at exercise prices
ranging from $2.95 to $6.13 per share were outstanding at December 31, 2001
but were not included in the computation of earnings per common
share-assuming dilution because the options' exercise price was greater
than the average market price of the common shares. At December 31, 2001,
693,332 common shares issuable pursuant to the terms of a convertible
acquisition note payable were excluded from the determination of diluted
earnings per share under the if converted method because the effect of
inclusion was antidilutive.
Options to purchase 138,005 shares of common stock at exercise prices
ranging from $4.75 to $6.13 per share were outstanding at December 31, 2000
but were not included in the computation of earnings per common share -
assuming dilution because the options' exercise price was greater than the
average market price of the common shares.
Options to purchase 213,875 shares of common stock at exercise prices
ranging from $3.44 to $4.75 per share were outstanding at December 31,
1999, but were not included in the computation of earnings per common
share-assuming dilution because the options' exercise price was greater
than the average market price of the common shares. Options to purchase
100,000 shares of common stock at $2.56 per share were outstanding at
December 31, 1999 but were not included in the computation of earnings per
common share-assuming dilution because the options were based on a
condition which had not yet been met.
F-10
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Warrants to purchase 1,874,768 shares of common stock at exercise prices
ranging from $3.40 to $5.40 per share at December 31, 2001, and warrants to
purchase 130,000 shares of common stock at $5.40 per share at December 31,
2000 and 1999, respectively, were outstanding but were not included in the
computation of earnings per common share-assuming dilution because the
warrants' exercise price was greater than the average market price of the
common shares.
Accounting Standards Yet to be Adopted - In August 2001, SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", was
issued and is effective for fiscal years beginning after December 15, 2001.
SFAS No. 144 addresses accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and Accounting Principles Board ("APB") Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business". SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 and expands the reporting of discontinued
operations to include all components of an entity with operations that can
be distinguished from the rest of the entity and that will be eliminated
from the ongoing operations of the entity in a disposal transaction. The
Company estimates that SFAS No. 144 will not have a material impact on its
financial statements but is still in the process of evaluating the
impact on its financial statements.
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets". These standards prohibit the
application of the pooling-of interests method of accounting for business
combinations effective June 30, 2001 and require companies to stop
amortizing existing goodwill and intangible assets with indefinite lives
effective January 1, 2002. In addition, any goodwill or indefinite life
intangible assets acquired between July 1, 2001 and December 31, 2001 would
not be amortized. Under the new rules, companies would only adjust the
carrying amount of goodwill or indefinite life intangible assets upon an
impairment of the goodwill or indefinite life intangible assets. The
Company recorded $232,349, $106,908 and $106,908, respectively, of
amortization expense related to its goodwill for the years ended December
31, 2001, 2000 and 1999. The Company will be required to implement these
standards effective January 1, 2002. The Company is in the process of
evaluating the impact on its financial statements.
Comprehensive Income - The Company classifies other comprehensive income
items by their nature in the financial statements and displays the
accumulated balance of other comprehensive income separately in the
stockholders' equity section of the balance sheet. The Company's only other
comprehensive income item is related to unrealized gains on investment
securities classified as available for sale.
2001 2000 1999
---- ---- ----
Unrealized gain (loss) on
investment arising during
the period . $(5,564) $ 44,666 $(10,531)
Less reclassification adjustment
for gains (losses) including
in net earnings 3,714 54,369 -
------- -------- --------
Unrealized gain (loss) on
investment, net $(9,278) $(10,297) $(10,531)
======= ======== ========
Income Taxes - The Company uses an asset and liability approach to account
for income taxes. Deferred income taxes are recognized for the tax
consequences of temporary differences and carryforwards by applying enacted
tax rates applicable to future years to differences between the financial
F-11
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
statement amounts and the tax bases of existing assets and liabilities. A
valuation allowance is established if, in management's opinion, it is more
likely than not that some portion of the deferred tax asset will not be
realized.
Reclassifications - Certain reclassifications have been made to prior year
balances to conform with the presentation for the current period.
2. MARKETABLE SECURITIES
Investments in securities are summarized as follows:
December 31, 2001
-----------------
Cost/ Gross Gross
Amortized Unrealized Unrealized Fair
Type of investment: Cost Gains Losses Value
---- ----- ------ -----
Short term investments -
available for sale $ 975,835 $ - $ - $ 975,835
========== ======== ========= ==========
Debt securities -
available for sale
U.S. Treasury and other
U.S. government
corporations and agencies $ 393,339 $ 12,424 $ - $ 405,763
Foreign bonds, notes and
debentures 24,930 - (728) 24,202
---------- -------- --------- ----------
$ 418,269 $ 12,424 $ (728) $ 429,965
========== ======== ========= ==========
Equities - available for sale
Preferred Stock $ 43,669 $ 2,774 $ (2,553) $ 43,890
Mutual Funds 278,636 7,145 (71,821) 213,960
---------- -------- --------- ----------
$ 322,305 $ 9,919 $ (74,374) $ 257,850
========== ======== ========= ==========
$1,716,409 $ 22,343 $ (75,102) $1,663,650
========== ======== ========= ==========
December 31, 2000
-----------------
Cost/ Gross Gross
Amortized Unrealized Unrealized Fair
Type of investment: Cost Gains Losses Value
---- ----- ------ -----
Available for sale Securities $3,536,086 $ 16,230 $ (49,802) $3,502,514
========== ======== ========= ==========
The amortized cost and estimated fair values of debt securities, by
contractual maturity, at December 31, 2001 are shown below. Actual
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call
prepayment penalties.
Available for sale
------------------
Amortized Estimated
Cost Fair Value
---- -----------
Due within one year . $192,839 $200,387
Due one to five years 225,430 229,578
-------- --------
$418,269 $429,965
======== ========
Proceeds from sales of available for sale securities were approximately
$1,840,000 for 2001. Gross gains of $10,031 and gross losses of $6,317 for
2001 were realized on those sales.
F-12
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2001 2000
---------- ----------
Office furniture, fixtures and equipment $4,069,450 $3,075,661
Vehicles 801,109 807,317
Leasehold improvements . 62,793 62,793
Building 1,521,083 409,853
Land 148,308 148,308
---------- ---------
6,602,743 4,503,932
Accumulated depreciation and amortization (2,257,369) (1,524,929)
---------- ----------
Total property and equipment, net $4,345,374 $2,979,003
========== ==========
Depreciation expense for the years ended December 31, 2001, 2000 and 1999
was $790,115, $548,661, and $367,357, respectively.
During 2001, the Company completed construction of a state-of-the-art
distribution and call center facility in Oklahoma City. The 23,346 square
foot facility has the capability of handling warehouse volumes of up to
$100 million in annual sales, and up to 100 employees in the call center.
The Company funded this project, in part, with bank loans of $980,000 for
the land and building and $166,216 for warehouse equipment. The interest
rate on both loans is the Prime Rate minus .25%, which was 4.5% as of
December 31, 2001, and requires 60 monthly principal payments of $23,000
plus interest payable monthly.
4. DEBT
Notes Payable and long-term debt consisted of the following at December 31:
2001 2000
---------- -------
Note payable to bank, with interest at
prime less .25% (4.5% at December 31,
2001), payable in monthly installments of
principal and interest, due on September 30,
2006, collateralized by warehouse and equipment $ 967,559 $ -
Note payable to bank, with interest at
prime less .25% (4.5% at December 31, 2001),
payable in monthly installments of principal
and interest, due on September 30, 2006,
collateralized by certain assets 164,106 -
Note payable to RMS Limited Partnership, 7.5%
effective rate, payable in 60 monthly
installments net of discount of $287,676 at
December 31, 2001 (See Note 10) 1,754,007 -
9% note payable to Ford Credit, payable in
monthly installments of $720.13 14,251 22,723
---------- -------
2,899,923 22,723
Less current maturities 579,860 8,472
---------- -------
$2,320,063 $14,251
========== =======
F-13
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Interest expense for the year ended December 31, 2001, was approximately
$199,000. Under the bank notes, the Company is subject to various
covenants, which include minimum tangible net worth, minimum debt service
coverage ratio, and maximum debt to EBITDA ratio requirements.
Future maturities of long-term debt consists of the following at December
31, 2001:
2002 $ 579,860
2003 645,355
2004 682,061
2005 . 727,428
2006 . 265,219
----------
$2,899,923
==========
5. LEASE AGREEMENTS
The Company has various capital leases for office equipment. The lease
terms range from 24 to 60 months. Additionally, annual lease rental
payments for each lease range from $700 to $40,000 per year. The schedule
of future minimum lease payments below reflects all payments under the
leases.
The property and equipment accounts include $690,547 for leases that have
been capitalized at December 31, 2001 and 2000. Related accumulated
amortization amounted to $337,461 and $276,697 at December 31, 2001 and
2000, respectively.
The Company leases office and warehouse space under noncancellable
operating leases.
Future annual minimum lease payments under capital leases and
noncancellable operating leases with initial or remaining terms of one year
or more at December 31, 2001 are as follows:
Capital Operating
Leases Leases Total
-------- -------- --------
Year ending:
2002 $145,295 $192,534 $337,829
2003 143,344 99,375 242,719
2004 61,824 32,607 94,431
2005 44,402 2,724 47,126
-------- -------- --------
Total minimum lease payments . $394,865 $134,706 $722,105
======== ========
Less amount representing interest 50,754
--------
Present value of net minimum lease payments 344,111
Less current portion 109,726
--------
Long-term capital lease obligations $234,385
========
Rental expense under operating leases for the years ended December 31,
2001, 2000 and 1999 was $202,951, $218,738, and $167,831, respectively.
6. STOCKHOLDERS' EQUITY
Common Stock - On March 4, 1998, the Company announced its intent to
repurchase up to $1 million of the Company's common stock in the open
market for cash. In connection with such repurchase, the Company filed with
the Securities and Exchange Commission pursuant to Section 13(e)(1) of the
F-14
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Securities Exchange Act of 1934, as amended, an Issuer Tender Offer
Statement on March 4, 1998. As of December 31, 2001, the Company had
repurchased 472,795 shares of the common stock at a total cost of
$2,244,476.
Common Stock Options and Other Warrants - During 2001, the Company granted
388,694 options to employees at exercise prices ranging from $2.60 per
share to $3.00 per share. Options were granted primarily for services
rendered and to ensure the future availability of those services to the
Company. None of the options granted during 2001 were exercisable at
December 31, 2001 due to a one year minimum vesting period. During 2001,
61,000 prior options were exercised for cash. In addition, during the
period 257,976 options were canceled and no options expired.
During 2000, the Company granted 428,450 options at exercise prices ranging
from $2.75 per share to $6.13 per share. Options were granted primarily for
services rendered and to ensure the future availability of those services
to the Company. A total of 122,750 and 100,000 of the options granted
during 2000 were unexercisable at December 31, 2000 due to a six month
vesting period and a contingency requirement, respectively. During
2000,107,375 options were exercised with 31,136 mature shares (shares owned
by the optionee in excess of six months as of the date of exercise). In
addition, during the period, 215,059 options were canceled and 14,750
options expired.
During 1999, the Company granted 291,461 options at exercise prices ranging
from $2.00 per share to $4.75 per share. Options were granted primarily for
services rendered and to ensure the future availability of those services
to the Company. A total of 122,750 and 100,000 of the options granted
during 1999 were unexercisable at December 31, 1999 due to a six month
vesting period and a contingency requirement, respectively. During 1999,
15,358 options were exercised for 6,884 mature shares (shares owned by the
optionee in excess of six months as of the date of exercise). In addition,
during this period, 31,400 options were canceled and 18,750 options
expired. See Note 6 for the proforma effects of SFAS 123 Accounting for
Stock-Based Compensation ("SFAS 123").
F-15
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
The following table summarizes the Company's employee stock option and
other warrants activity for the years ended December 31, 2001, 2000 and
1999:
Weighted Weighted Weighted
Average Average Averages
Exercise Exercise Exercise
2001 Price 2000 Price 1999 Price
---- -------- ---- -------- ---- --------
Options and other
warrants outstanding
beginning of year 1,487,037 $2.22 1,769,275 $2.22 1,543,322 $2.09
Options and other
warrants issued
during the year 388,694 2.71 428,450 4.57 291,461 2.92
Options and other
warrants exercised
during the year (61,000) 2.00 (480,879) 2.20 (15,358) 2.28
Option and other
warrants canceled
during the year (257,976) 3.40 (215,059) 4.16 (31,400) 2.09
Options and other
warrants expired
during the year - - (14,750) 2.00 (18,750) 2.16
--------- ----- --------- ----- --------- -----
Options and other
warrants outstanding,
end of year 1,556,755 $2.16 1,487,037 $2.62 1,769,275 $2.22
========= ===== ========= ===== ========= =====
The weighted average grant-date fair value of options and other warrants
granted during 2001, 2000 and 1999 was $1.80, $2.83 and $1.39 per share,
respectively.
Options and Other Warrants Options and Other Warrants
Outstanding Exercisable
----------- -----------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/01 Life Price at 12/31/01 Price
--------------- ----------- ----------- --------- ----------- ---------
$1.75 - $2.95 1,159,349 2.56 years $2.12 532,786 $1.95
$3.00 - $4.75 976,620 3.55 years $3.20 27,651 $3.56
$5.25 - $6.13 56,426 3.58 years $5.82 11,285 $5.82
--------- -------
2,192,395 571,722 $2.10
========= =======
F-16
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Common Stock Warrants - The following table summarizes the Company's common
stock warrants and their activity for the years ended December 31, 2001,
2000 and 1999:
Warrants
Issued and Exercise
Outstanding Price Exercise Period
----------- -------- -----------------
December 31, 2001:
1997-A Warrants, beginning of the year 308,768 $3.40 1/31/97-11/06/02
1997-A Warrants, exercised during the
year -
---------
1997-A Warrants, end of the year 308,768 $3.40 1/31/97-11/06/02
=========
Redeemable Common Stock Purchase
Warrants, beginning of the year 1,436,000 $3.40 11/06/97-11/06/02
Redeemable Common Stock Purchase
Warrants, exercised during the year -
---------
Redeemable Common Stock Purchase
Warrants, end of the year 1,436,000 $3.40 11/06/97-11/06/02
=========
Underwriters' Warrants 130,000 $5.40 11/12/98-11/12/02
=========
December 31, 2000:
1997-A Warrants 308,768 $3.40 1/31/97-11/06/02
=========
Redeemable Common Stock Purchase
Warrants 1,436,000 $3.40 11/06/97-11/06/02
=========
Underwriters' Warrants 130,000 $5.40 11/12/98-11/12/02
=========
December 31, 1999:
1997-A Warrants 337,211 $3.40 1/31/97-11/06/02
=========
Redeemable Common Stock Purchase
Warrants 1,495,000 $3.40 11/06/97-11/06/02
=========
Underwriters' Warrants 130,000 $5.40 11/12/98-11/12/02
=========
Each warrant entitles the holder to purchase one share of common stock. As
of January 8, 1998, the Company reduced the exercise price of the 1997-A
Warrants from $12.00 to $3.40 and extended the exercise period from January
31, 1999 to November 6, 2002, to correspond more closely to the terms of
the Redeemable Common Stock Purchase Warrants.
As of January 6, 1998, the exercise price of the Redeemable Common Stock
Purchase Warrants was adjusted from $5.40 to $3.40.
There was no expense recognized in the Company's financial statements
relating to either of the warrant exercise price reductions as the changes
only affected allocations of additional paid-in capital because the
Redeemable Common Stock Purchase Warrants and the 1997-A Warrants were
issued in conjunction with an equity offering of the Company. The reduced
exercise prices exceeded the market value of the Company's common stock on
the date of the reduction.
The Redeemable Common Stock Purchase Warrants are subject to redemption by
the Company at $0.25 per warrant. All of the outstanding Redeemable Common
Stock Purchase Warrants must be redeemed if any are redeemed. The Company
may redeem the 1997-A Warrants for $0.0001 per warrant. Any redemption of
unexercised 1997-A Warrants would be for all such outstanding warrants. The
Underwriters' Warrants were issued in connection with the sale of common
stock and Redeemable Warrants in November 1997 and were in addition to
other fees paid to the underwriters. The Underwriters' Warrants entitle the
holder to purchase one unit consisting of one share of the Company's common
stock and one Redeemable Common Stock Purchase Warrant.
F-17
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
7. 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. Non-employee directors are
excluded from Plan participation. The option price for shares of stock
subject to this Plan is set by the Stock Option Committee of the Board of
Directors at a price not less than 85% of the market value of the stock on
the date of grant. No stock options may be exercised within six months
from the date of grant, unless under a Plan exception, nor more than ten
years after the date of grant. The Plan provides for the grant of stock
appreciation rights, which allow the holder to receive in cash, stock or
combination thereof, the difference between the exercise price and the fair
value of the stock at date of exercise. The fair value of stock
appreciation rights is charged to compensation expense. The stock
appreciation right is not separable from the underlying stock option or
incentive stock option originally granted and can only be exercised in
tandem with the stock option. No stock appreciation rights are attached to
any options outstanding. During the years ended December 31, 2001 and 2000
the Company issued 388,694 and 428,450 options, respectively under the
Plan. At December 31, 2001 and 2000, the Company had 1,556,755 and
1,487,037, respectively, stock options outstanding of which only 883,505
and 708,707, respectively, were issued pursuant to the plan.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock-based compensation awards.
Accordingly, no compensation cost has been recognized for stock options
granted in the accompanying consolidated financial statements. The
following proforma data is calculated net of tax as if compensation cost
for the Company's stock-based compensation awards (see also Note 6) was
determined based upon the fair value at the grant date consistent with the
methodology prescribed under SFAS No. 123.
Years Ended December 31,
2001 2000 1999
---- ---- ----
Net income as reported $ 8,551 $ 492,934 $1,275,783
Adjustment, net of tax (426,941) (167,293) (113,466)
---------- ---------- ----------
Proforma net income (loss) $ (418,390) $ 325,641 $1,162,317
Net income (loss) per common
share as reported $ .00 $ .12 $ .31
Adjustment, net of tax (.10) (.04) (.03)
---------- ---------- ----------
Proforma net income (loss) per
common share $ (.10) $ .08 $ .28
Proforma net income (loss) per
common share - assuming dilution $ (.09) $ .06 $ .24
Weighted average common shares
outstanding 4,379,486 4,283,461 4,139,706
Weighted average common shares
outstanding - assuming dilution 4,379,486 5,476,277 4,778,576
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 2001, 2000 and 1999, respectively: risk-free
interest rates of 4.86, 6.14 and 5.41 percent; no dividend yield or assumed
forfeitures; expected lives of 5.0, 5.0 and 3.7 years; and volatility of
63, 66 and 60 percent. The pro forma amounts above are not likely to be
representative of future years because there is no assurance that
additional awards will be made each year.
F-18
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
8. RELATED PARTIES
During 2001 and 2000, the Company received approximately $15,231 and
$5,931, respectively, from Pre-Paid Legal Services, Inc. ("Pre-Paid
Legal"), a shareholder, for commissions on sales of memberships for the
services provided by Pre-Paid Legal. As of July 1, 2000, the Company began
offering the Company's employees access to the services provided by
Pre-Paid Legal through an employee benefit option. The Company pays half of
the cost for each employee electing to participate in the plan. During 2001
and 2000, the Company paid $7,593 and $5,157, respectively, to Pre-Paid
Legal for these services. The Company's Chairman of the Board and Chief
Executive Officer, John W. Hail, is a director of Pre-Paid Legal.
On October 8, 1998, John W. Hail, an affiliate, surrendered an option to
purchase 100,000 shares of the Company's common stock for $2.70 per share
with an expiration date of May 20, 2007 in exchange for an option having
the same terms other than an exercise price of $1.75 per share of common
stock, which was equal to the fair value of the common stock on the date of
exchange. These options became exercisable on April 8, 1999.
During the first quarter of 1998, the Company agreed to loan John W. Hail
up to $250,000. Subsequently the Company also agreed to loan up to an
additional $75,000. In 2000, an additional $200,000 was approved. On
January 1, 2001 the outstanding balance on all the notes were combined into
one note payable in monthly installments. The loans and extension were
unanimously approved by the board of directors. These loans are
collateralized by stock and property, and bear interest at 8% per annum. As
of December 31, 2001, the balance due on these loans was $533,035 plus
interest, which is included in receivables from affiliate - current portion
and non-current receivables.
During 2000, the Company made advances totaling $50,424 to Dennis Loney,
the Company's Chief Operating Officer. The advances were due April 28, 2004
and were paid in full by Mr. Loney as of February 2001. Also during 2001
and 2000, the Company paid Mr. Loney and his wife sales bonuses of $38,028
and $24,709, respectively. These bonuses were based upon purchases by them
and their downline associates in accordance with the Company's network
marketing program applicable to all independent associates in effect at the
time of the sales. Mr. Loney's wife is the daughter of John W. Hail.
9. INCOME TAXES
Income taxes for 2001, 2000 and 1999 are comprised of current tax (benefit)
expense of $(37,722), $444,710 and $563,394 and deferred taxes of $43,189,
$11,822 and $112,631, respectively. A reconciliation of the statutory
Federal income tax rate to the effective income tax rate for the years
ended December 31, 2001, 2000, and 1999 is as follows:
2001 2000 1999
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% 34.0%
State tax effective rate 4.0 4.0 4.0
Permanent differences 2.1 8.9 1.1
Benefit of graduated tax rates - (0.6) 0.0
Prior year assessments finalized (1.5) 7.0 0.0
Other .4 (5.2) (4.5)
---- ---- ----
39.0% 48.1% 34.6%
==== ==== ====
F-19
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
The change in the total deferred tax net assets from December 31, 2000 to
December 31, 2001 was $35,156. This difference is allocated as $43,189
included in tax expense reduced by $8,033 classified in stockholders'
equity, respectively.
Deferred tax liabilities and assets at December 31, 2001 and 2000 are
comprised of the following:
December 31,
------------
2001 2000
---- ----
Deferred tax liabilities:
Depreciation and amortization . $(147,742) $ (66,926)
Other (27,605) (19,663)
--------- ---------
Total deferred tax liabilities (175,347) (86,589)
--------- ---------
Deferred tax assets:
Net operating loss carryforwards 87,806 86,136
Receivables 35,072 28,868
Inventory 30,474 35,904
Unrealized losses 20,778 12,744
Other 43,124 -
--------- ---------
Total deferred tax assets 217,254 163,652
--------- ---------
Net deferred taxes 41,907 77,063
Less current portion of net deferred
tax assets 65,546 64,772
--------- ---------
Noncurrent portion of deferred tax
asset (liability) (23,639) $ 12,291
========= =========
On a regular basis, management evaluates all available evidence, both
positive and negative, regarding the ultimate realization of the tax
benefits of its deferred tax assets. Management has concluded that it is
more likely than not that a tax benefit will be realized from its deferred
tax assets. The Company has net operating loss carryforwards $196,246
available to reduce future taxable income, which will begin to expire in
2009. Net operating loss carryforward of $191,822 are limited in usage.
10. ACQUISITIONS
On January 4, 2001, the Company and one of its wholly owned subsidiaries,
LifeScience Technologies Holdings, acquired LifeScience Technologies
Holding Limited Partnership, LifeScience Technologies Limited, LifeScience
Technologies of Japan, LST Fulfillment limited Partnership and LifeScience
Technologies of Canada, Inc. (the "LifeScience Technologies Acquisition").
The purchase price to the Company was approximately $1.2 million cash plus
$41,667 per month or 5% of LifeScience Technology product sales, whichever
is greater, payable for 60 months commencing in January 2001. The seller,
at its option, has the right to take shares of the Company's common stock
at an option price of $3.00 per share in lieu of cash for the monthly
payment. However, such option is limited to a total of 860,000 shares and
shares not taken in a month are not cumulative.
The LifeScience Technologies Acquisition was accounted for as a purchase
under Accounting Principles Board Opinion No. 16 ("APB No. 16"). In
accordance with APB No. 16, the company allocated the purchase price of the
LifeScience Technologies acquisition based on the fair value of the assets
acquired and liabilities assumed. Goodwill and other intangibles resulting
from the LifeScience Technologies acquisition are amortized over the
estimated life of 20 years.
F-20
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
The following summarized pro forma unaudited information assumes the acquisition
occurred on January 1, 2000.
Year Ended December 31, 2000
----------------------------
Revenues $33,588,695
Loss (802,790)
Loss per share, basic and diluted (.19)
The estimated fair value of assets acquired and liabilities assumed at
acquisition are as follows:
Estimated Fair value of assets
Cash $ 76,760
Inventory 793,629
Property and equipment 283,924
Goodwill and other intangibles 2,508,805
-----------
Total fair value of assets 3,663,118
Liabilities assumed
Accounts payable 126,060
Accounts expenses 151,223
-----------
Estimated fair value of acquisition $ 3,305,835
===========
11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Cash paid during the year for:
Interest $ 198,740 $ 33,339 $ 18,381
Income taxes - net of refund . (288,598) 480,000 12,020
Noncash financing and investing
activities:
Property and equipment acquired by
capital lease 92,202 89,894 101,133
LifeScience Technologies Acquisition:
Fair value of tangible net
assets acquired $ 797,030 $ - $ -
Purchase price in excess of
tangible net assets acquired 2,508,805 - -
Present value of future payments
required (2,079,439) - -
Cash included in tangible net
assets acquired (76,760) - -
---------- -------- --------
Cash paid for acquisition, net
of cash acquired $1,149,636 $ - $ -
========== ======== ========
12. COMMITMENTS AND CONTINGENCIES
Recent Regulatory Developments - A significant portion of the Company's net
sales continues to be dependent upon the Company's AM-300 product. The
Company's net sales of AM-300 represented 52.0% and 63.8% of net sales for
the years ended December 31, 2001 and 2000, respectively. One of the
ingredients in the Company's AM-300 products is ephedra, an herb which
contains naturally-occurring ephedrine. The Company's manufacturer used a
powdered extract of that herb when manufacturing AM-300. The Company
markets AM-300 principally as an aid in weight management. The extract is
an 8% extract which means that every 100 milligrams of the powdered extract
contains approximately eight milligrams of naturally occurring ephedrine
alkaloids. Ephedrine containing products have been the subject of adverse
publicity in the United States and other countries relating to alleged
harmful effects.
F-21
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
On April 3, 2000, the Food and Drug Administration (FDA) withdrew most of
the provisions of its proposed rule regarding dietary supplements that
contain ephedrine alkaloids. The proposed rule, which was published on June
4, 1997, would have significantly limited the Company's ability to sell
AM-300 if it had been made effective. The FDA's withdrawal of the
provisions removed most, but not all, of the limitations. This action was
prompted largely by a report issued by the United States General Accounting
Office ("GAO") in which the GAO criticized the scientific basis for the
proposed rule and the FDA's evaluation of approximately 900 reports of
adverse events supposedly related to the consumption of dietary supplements
containing ephedrine alkaloids. The FDA made available for public
inspection most of the adverse event reports on April 3, 2000.
On October 25, 2000, several trade organizations for the dietary supplement
industry submitted petition to the FDA which concerned the remaining
provisions of the proposed rule regarding dietary supplements that contain
ephedrine alkaloids. The petition requested the FDA to: (1) withdraw the
remaining provisions of the proposed rule, and (2) adopt new standards for
dietary supplements that contain ephedrine alkaloids, which were set forth
in the petition. The FDA has not publicly responded to this petition.
The FDA will, most likely, attempt to issue a new proposed rule with
respect to dietary supplements that contain ephedrine alkaloids. However,
it is uncertain what restrictions the new proposed rule will contain or
when a new proposed rule will be issued. In the Company's opinion, it is
unlikely that a final regulation will be issued by the FDA during 2002.
Consequently, management is unable at the present time to predict the
ultimate resolution of these issues, nor their ultimate impact on the
Company's results of operations or financial position.
Product Liability - The Company, like other marketers of products that are
intended to be ingested, faces an inherent risk of exposure to product
liability claims in the event that the use of its products results in
injury. We maintain a claims made policy, with has limited (excluding
ephedra, 52% of the Company's 2001 revenue) liability insurance coverage.
The limits of this coverage are $1,000,000 per occurrence and $4,000,000 in
the 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 a supplier against claims arising from claims made by the
Company's associates for products manufactured by a supplier 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.
* * * * * *
F-22
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
------------ -----------
3.1 The Registrant's Certificate of Incorporation, incorporated by
reference to the Registration Statement on Form SB-2
(Registration No. 333-47801) filed with the commission on
March 11, 1998.
3.2 The Registrant's Bylaws, incorporated by reference to the
Registration Statement on Form SB-2 (Registration No.
333-47801) filed with the commission on March 11, 1998.
10.1 Warrant Agreement between Registrant and U.S. Stock Transfer
Inc., dated as of January 20, 1997, as amended and
restated January 8, 1998, incorporated by reference to
Amendment No. 2 to Form 8-A Registration Statement, filed with
the Commission on January 13, 1998.
10.2 Unit and Warrant Agreement between Registrant and U.S. Stock
Transfer Inc., dated as of November 6, 1997, as amended and
restated January 8, 1998, incorporated by reference to
Amendment No. 1 to Form 8-A Registration Statement, filed with
the Commission on January 14, 1998.
10.3 * The Advantage Marketing Systems, Inc. 1998 Associate Stock
Purchase Plan, incorporated by reference to Amendment No. 1 to
Registration Statement on Form SB-2 (Registration No.
333-47801) filed with the commission on October 7, 1998.
10.4 The form of Advantage Marketing Systems, Inc. 1998 Associate
Stock Purchase Plan Stock Purchase Agreement, incorporated by
reference to Amendment No. 1 to Registration Statement on Form
SB-2 (Registration No. 333-47801) filed with the commission
on October 7, 1998.
10.5 Purchase and Assignment Agreement by and among Advantage
Marketing Systems, Inc., LifeScience Technologies Holdings,
Inc., GHI Holdings, Inc., LifeScience Technologies, Inc. and
RMS Limited Partnership, dated as of January 3, 2001,
incorporated by reference to Form 8-K filed with the
Commission on January 8, 2001.
10.6 Promissory Note dated January 3, 2001, to RMS Limited
Partnership by Advantage Marketing Systems, Inc., LifeScience
Technologies Holdings, Inc., LifeScience Technologies Holdings
Limited Partnership, LifeScinece Technologies Holdings, Inc.,
LifeScience Technologies of Japan and LST Fulfillment Limited
Partnership, incorporated by reference to Form 8-K filed with
the Commission on January 8, 2001.
10.7 Stock Option Agreement of Advantage Marketing Systems dated
January 3, 2001, incorporated by reference to Form 8-K filed
with the Commission on January 8, 2001.
21 Subsidiaries, incorporated by reference to Form 10-K filed
with the Commission on April 17, 2001.
F-23
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
23.1 Consent of Grant Thornton LLP, filed herewith.
23.2 Consent of Deloitte & Touche LLP, filed herewith.
* Designates a compensatory plan.
(b) Reports on Form 8-K.
None
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 22, 2002, accompanying the consolidated
financial statements included in the Annual Report of Advantage Marketing
Systems, Inc. on Form 10-KSB for the year ended December 31, 2001. We hereby
consent to the incorporation by reference of said report in the Registration
Statements of Advantage Marketing Systems Inc. on Forms S-8 (File No. 333-30438,
effective February 15, 2000 and File No. 333-91401, effective November 23,
1999).
GRANT THORNTON LLP
Oklahoma City, Oklahoma
April 1, 2002
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in:
(i) Registration Statement No. 333-30438 (Employee Stock Option Plan) on
Form S-8, and
(ii) Registration Statement No. 333-91491 (1995 Stock Option Plan) on Form
S-8
of our report dated April 3, 2002, appearing in this Annual Report on Form
10-KSB of Advantage Marketing Systems, Inc. for the year ended December 31,
2001.
Deloitte & Touche LLP
Oklahoma City, Oklahoma
April 1, 2002
F-24