e10vq
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2005
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 001-13343
AMS HEALTH SCIENCES, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Oklahoma
(State or other jurisdiction of
incorporation or organization)
|
|
73-1323256
(I.R.S. Employer
Identification No.) |
|
|
|
711 NE 39th Street
Oklahoma City, Oklahoma
(Address of principal executive offices)
|
|
73105
(Zip Code) |
(405) 842-0131
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of
the Exchange Act.
Yes o No þ
On
August 4, 2005, we had outstanding 7,464,563 shares of our common stock, $.0001 par value.
AMS HEALTH SCIENCES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 2005
Table of Contents
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the caption Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Certain, but not necessarily all, of such forward-looking statements can
be identified by the use of forward-looking terminology such as anticipates, believes,
expects, may, will, or should or other variations thereon, or by discussions of strategies
that involve risks and uncertainties. Our actual results or industry results may be materially
different from any future results expressed or implied by such forward-looking statements. Factors
that could cause actual results to differ materially include general economic and business
conditions; our ability to implement our business and acquisition strategies; changes in the
network marketing industry and changes in consumer preferences; competition; availability of key
personnel; increasing operating costs; unsuccessful advertising and promotional efforts; changes in
brand awareness; acceptance of new product offerings; changes in, or the failure to comply with,
government regulations (especially food and drug laws and regulations); product liability matters;
our ability to obtain financing for future acquisitions and other factors.
2
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AMS HEALTH SCIENCES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND DECEMBER 31, 2004
|
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|
June 30, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
(Unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
569,205 |
|
|
$ |
588,909 |
|
Marketable securities, available for sale, at fair value |
|
|
2,017,233 |
|
|
|
2,803,863 |
|
Receivables |
|
|
52,781 |
|
|
|
236,318 |
|
Inventory |
|
|
860,433 |
|
|
|
1,476,968 |
|
Other assets |
|
|
104,740 |
|
|
|
50,739 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
3,604,392 |
|
|
|
5,156,797 |
|
RECEIVABLES |
|
|
192,022 |
|
|
|
204,584 |
|
PROPERTY AND EQUIPMENT, net |
|
|
3,393,723 |
|
|
|
3,862,111 |
|
COVENANTS NOT TO COMPETE and other intangibles, net |
|
|
441,279 |
|
|
|
480,187 |
|
OTHER ASSETS |
|
|
32,857 |
|
|
|
38,924 |
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
7,664,273 |
|
|
$ |
9,742,603 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
228,456 |
|
|
$ |
326,784 |
|
Bank overdraft |
|
|
|
|
|
|
395,936 |
|
Accrued commissions and bonuses |
|
|
269,168 |
|
|
|
345,062 |
|
Accrued other expenses |
|
|
382,351 |
|
|
|
587,173 |
|
Accrued sales tax liability |
|
|
46,871 |
|
|
|
128,493 |
|
Capital lease obligations |
|
|
76,261 |
|
|
|
111,430 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,003,107 |
|
|
|
1,894,878 |
|
LONG-TERM LIABILITIES: |
|
|
|
|
|
|
|
|
Capital lease obligations |
|
|
106,979 |
|
|
|
205,874 |
|
Deferred compensation |
|
|
693,878 |
|
|
|
671,748 |
|
Lease abandonment liability |
|
|
144,403 |
|
|
|
171,412 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,948,367 |
|
|
|
2,943,912 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (NOTE 7) |
|
|
|
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|
|
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STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Common stock $.0001 par value; authorized 495,000,000 shares; issued
8,048,658 and 7,496,385 shares, outstanding 7,457,063 and 6,904,790 shares,
respectively |
|
|
805 |
|
|
|
750 |
|
Paid-in capital |
|
|
21,404,141 |
|
|
|
20,331,852 |
|
Notes receivable for exercise of options |
|
|
(31,000 |
) |
|
|
(31,000 |
) |
Accumulated deficit |
|
|
(13,063,055 |
) |
|
|
(10,955,185 |
) |
Accumulated other comprehensive gain, net of tax |
|
|
37,794 |
|
|
|
85,053 |
|
|
|
|
|
|
|
|
|
|
Total capital and accumulated deficit |
|
|
8,348,685 |
|
|
|
9,431,470 |
|
Less cost of treasury stock (591,595 shares, common) |
|
|
(2,632,779 |
) |
|
|
(2,632,779 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
5,715,906 |
|
|
|
6,798,691 |
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
7,664,273 |
|
|
$ |
9,742,603 |
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
3
AMS HEALTH SCIENCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
|
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|
|
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|
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|
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|
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|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net sales |
|
$ |
3,528,319 |
|
|
$ |
4,257,340 |
|
|
$ |
7,549,077 |
|
|
$ |
8,730,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
2,392,676 |
|
|
|
3,526,988 |
|
|
|
5,934,808 |
|
|
|
6,350,616 |
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,135,643 |
|
|
|
730,352 |
|
|
|
1,614,269 |
|
|
|
2,379,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
322,357 |
|
|
|
264,240 |
|
|
|
634,478 |
|
|
|
489,461 |
|
Administrative |
|
|
1,624,270 |
|
|
|
1,683,657 |
|
|
|
3,133,779 |
|
|
|
3,075,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketing and administrative
expenses |
|
|
1,946,627 |
|
|
|
1,947,897 |
|
|
|
3,768,257 |
|
|
|
3,565,394 |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(810,984 |
) |
|
|
(1,217,545 |
) |
|
|
(2,153,988 |
) |
|
|
(1,185,422 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividends, net |
|
|
14,988 |
|
|
|
29,164 |
|
|
|
22,557 |
|
|
|
75,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net |
|
|
4,094 |
|
|
|
(26,903 |
) |
|
|
24,925 |
|
|
|
(16,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
19,082 |
|
|
|
2,261 |
|
|
|
47,482 |
|
|
|
58,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes |
|
|
(791,902 |
) |
|
|
(1,215,284 |
) |
|
|
(2,106,506 |
) |
|
|
(1,126,648 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
(22,456 |
) |
|
|
(272,910 |
) |
|
|
1,363 |
|
|
|
(238,342 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(769,446 |
) |
|
$ |
(942,374 |
) |
|
$ |
(2,107,869 |
) |
|
$ |
(888,306 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share basic |
|
$ |
(.11 |
) |
|
$ |
(.14 |
) |
|
$ |
(.30 |
) |
|
$ |
(.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share assuming
dilution |
|
$ |
(.11 |
) |
|
$ |
(.14 |
) |
|
$ |
(.30 |
) |
|
$ |
(.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
basic |
|
|
7,187,171 |
|
|
|
6,770,556 |
|
|
|
7,088,773 |
|
|
|
6,628,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding -
assuming dilution |
|
|
7,187,171 |
|
|
|
6,770,556 |
|
|
|
7,088,773 |
|
|
|
6,628,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
4
AMS HEALTH SCIENCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,107,869 |
) |
|
$ |
(888,306 |
) |
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net
cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
402,768 |
|
|
|
438,064 |
|
(Gain)/Loss on sale of assets |
|
|
(7,073 |
) |
|
|
17,516 |
|
Realized (gain)/loss on sale of marketable securities |
|
|
(14,228 |
) |
|
|
10,536 |
|
Deferred taxes |
|
|
1,361 |
|
|
|
(238,342 |
) |
Stock issued for services |
|
|
|
|
|
|
14,000 |
|
Employee compensation recognized upon exercise of stock
options |
|
|
66,602 |
|
|
|
198,423 |
|
Changes in assets and liabilities which provided (used) cash: |
|
|
|
|
|
|
|
|
Receivables |
|
|
180,939 |
|
|
|
226,555 |
|
Inventory |
|
|
616,535 |
|
|
|
(262,284 |
) |
Other assets |
|
|
(41,870 |
) |
|
|
(233,929 |
) |
Accounts payable and accrued expenses |
|
|
(460,663 |
) |
|
|
(63,002 |
) |
Lease abandonment liability |
|
|
22,130 |
|
|
|
|
|
Deferred compensation |
|
|
(27,009 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(1,368,377 |
) |
|
|
(780,769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(177,301 |
) |
|
|
(375,297 |
) |
Sales of property and equipment |
|
|
282,836 |
|
|
|
315,898 |
|
Receipts (extensions) on notes receivable |
|
|
15,160 |
|
|
|
(11,912 |
) |
Purchases of marketable securities, available for sale |
|
|
(1,596,214 |
) |
|
|
(7,076,803 |
) |
Sales of marketable securities, available for sale |
|
|
2,348,450 |
|
|
|
3,532,654 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
872,931 |
|
|
|
(3,615,460 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Bank overdraft |
|
|
(395,936 |
) |
|
|
|
|
Proceeds from issuance of common stock |
|
|
1,005,742 |
|
|
|
572,470 |
|
Proceeds from exercise of warrants |
|
|
|
|
|
|
3,978,218 |
|
Payment of notes payable |
|
|
|
|
|
|
(1,989,170 |
) |
Principal payment on capital lease obligations |
|
|
(134,064 |
) |
|
|
(37,065 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
475,742 |
|
|
|
2,524,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH
EQUIVALENTS |
|
|
(19,704 |
) |
|
|
(1,871,776 |
) |
CASH AND CASH EQUIVALENTS, BEGINNING |
|
|
588,909 |
|
|
|
2,309,281 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, ENDING |
|
$ |
569,205 |
|
|
$ |
437,505 |
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
5
AMS HEALTH SCIENCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
1. |
|
UNAUDITED INTERIM FINANCIAL STATEMENTS |
The unaudited consolidated financial statements and related notes have been
prepared pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant to such rules and
regulations. The accompanying consolidated financial statements and related notes
should be read in conjunction with the audited consolidated financial statements of the
Company, and notes thereto, for the year ended December 31, 2004.
The information furnished reflects, in the opinion of management, all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of the
results of the interim periods presented. Operating results of the interim period are
not necessarily indicative of the amounts that will be reported for the year ending
December 31, 2005.
2. |
|
SIGNIFICANT ACCOUNTING POLICIES |
In December 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, which amended SFAS No. 123, Accounting for
Stock-Based Compensation. The standard provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based employee
compensation. In compliance with SFAS No. 148, the Company elected to continue to
follow the intrinsic value method in accounting for its stock-based employee
compensation arrangement as defined by APB No. 25. Accordingly, no compensation cost
has been recognized for stock options granted in the accompanying consolidated financial
statements. The following pro forma data is calculated net of tax as if compensation
cost for the Companys stock-based compensation awards was determined based upon the
fair value at the grant date consistent with the methodology prescribed under SFAS No.
123.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net loss as reported |
|
$ |
(769,446 |
) |
|
$ |
(942,374 |
) |
|
$ |
(2,107,869 |
) |
|
$ |
(888,306 |
) |
Less: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects |
|
|
(213,574 |
) |
|
|
(316,736 |
) |
|
|
(232,637 |
) |
|
|
(557,253 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma net loss |
|
$ |
(983,020 |
) |
|
$ |
(1,259,110 |
) |
|
$ |
(2,340,506 |
) |
|
$ |
(1,445,559 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share as reported |
|
$ |
(.11 |
) |
|
$ |
(.14 |
) |
|
$ |
(.30 |
) |
|
$ |
(.13 |
) |
Adjustment, net of tax |
|
|
(.03 |
) |
|
|
(.05 |
) |
|
|
(.03 |
) |
|
|
(.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma net loss per common share |
|
$ |
(.14 |
) |
|
$ |
(.19 |
) |
|
$ |
(.33 |
) |
|
$ |
(.22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma net loss per common share
assuming dilution |
|
$ |
(.14 |
) |
|
$ |
(.19 |
) |
|
$ |
(.33 |
) |
|
$ |
(.22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding |
|
|
7,187,171 |
|
|
|
6,770,556 |
|
|
|
7,088,773 |
|
|
|
6,628,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding assuming dilution |
|
|
7,187,171 |
|
|
|
6,770,556 |
|
|
|
7,088,773 |
|
|
|
6,628,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2005 and 2004, respectively: risk-free interest rates of 3.95 and 2.72
percent; no dividend yield or assumed forfeitures;
6
AMS HEALTH SCIENCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
an expected life of five years; and volatility of 62.2 and 82.1 percent. The pro forma
amounts above are not likely to be representative of future years because there is no
assurance that additional awards will be made each year. In April 2003, the board of
directors of the Company adopted the Advantage Marketing Systems, Inc. 2003 Stock
Incentive Plan, which the shareholders approved at the 2003 annual meeting of
shareholders. The Company issued shares under this Plan in the first and second
quarters of 2005 and 2004.
In December 2004, the FASB issued SFAS No. 123(R), Share Based Payment, which
revised SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R)
requires entities to measure the fair value of equity share-based payments (stock
compensation) at grant date, and recognize the fair value over the period during which
an employee is required to provide services in exchange for the equity instrument as a
component of the income statement. SFAS No. 123(R) for public companies is effective
for the first fiscal year beginning after June 15, 2005. This would require the Company
to adopt FAS 123(R) effective January 1, 2006. The Company has not evaluated the impact
of adoption of SFAS No.123(R) on its financial statements, but adoption could have a
material impact on financial position and results of operations.
Securities are classified as available for sale with the related unrealized gains
and losses excluded from earnings and reported net of income tax as a separate component
of stockholders equity until realized. Realized gains and losses on sales of
securities are based on the specific identification method. Declines in the fair value
of investment securities below their carrying value that are other than temporary are
recognized in earnings.
Net unrealized losses, net of tax, of approximately $8,000 and $47,000, including
approximately $26,000 and $6,000 reclassified to earnings, were included in accumulated
other comprehensive income for the three and six months ended June 30, 2005 and net
unrealized gains, net of tax, of approximately $4,000 and $30,000 were included in
accumulated other comprehensive income for the three and six months ended June 30, 2004.
Total comprehensive loss for the three and six months ended June 30, 2005 was
approximately $781,000 and $2,159,000, and total comprehensive loss for the three and
six months ended June 30, 2004 was approximately $939,000 and $858,000.
Loss per common share basic is computed based upon net loss divided by the
weighted average number of common shares outstanding during each period. Loss per
common share assuming dilution is computed based upon net loss divided by the weighted
average number of common shares outstanding during each period adjusted for the effect
of dilutive potential common shares, calculated using the treasury stock method.
The following is a reconciliation of the common shares used in the calculations of
loss per common share basic and loss per common share assuming dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss |
|
Shares |
|
Per Share |
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders |
|
$ |
(769,446 |
) |
|
|
7,187,171 |
|
|
$ |
(.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share assuming dilution: |
|
|
|
|
|
|
|
|
|
|
|
|
7
AMS HEALTH SCIENCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss |
|
Shares |
|
Per Share |
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders plus
assumed
conversions |
|
$ |
(769,446 |
) |
|
|
7,187,171 |
|
|
$ |
(.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders |
|
$ |
(942,374 |
) |
|
|
6,770,556 |
|
|
$ |
(.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share assuming dilution: |
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders plus
assumed conversions |
|
$ |
(942,374 |
) |
|
|
6,770,556 |
|
|
$ |
(.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share: |
|
$ |
(2,107,869 |
) |
|
|
7,088,773 |
|
|
$ |
(.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share assuming dilution: |
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders plus
assumed conversions |
|
$ |
(2,107,869 |
) |
|
|
7,088,773 |
|
|
$ |
(.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders |
|
$ |
(888,306 |
) |
|
|
6,628,247 |
|
|
$ |
(.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share assuming dilution: |
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders plus
assumed conversions |
|
$ |
(888,306 |
) |
|
|
6,628,247 |
|
|
$ |
(.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 2,044,315 shares of common stock at exercise prices ranging
from $1.30 to $6.00 per share were outstanding for the three and six months ended June
30, 2005, but were not included in the computation of loss per common share
assuming dilution for the three or six months ended because there was a net loss for the
periods then ended.
Options to purchase 2,533,394 shares of common stock at exercise prices ranging
from $1.30 to $6.13 per share were outstanding for the three and six months ended June
30, 2004, but were not included in the computation of loss per common share
assuming dilution for the three or six months ended because there was a net loss for the
periods then ended.
On a regular basis, management evaluates all available evidence,
both positive and negative, regarding the ultimate realization of the tax benefits of
its deferred tax assets. Valuation allowances have been established for certain
operating loss and credit carryforwards that reduce deferred tax assets to an amount
that will, more likely than not, be realized. Uncertainties that may affect the
realization of these assets include tax law changes and the future level of product
prices and costs. The outlook for determination of this allowance is calculated on the
Companys historical taxable income, its expectations for the future based on a rolling
twelve quarters, and available tax-planning strategies. Based on this determination,
management does not expect that the net deferred tax assets will be realized as offsets
to reversing deferred tax liabilities and as offsets to the tax consequences of future
taxable income. As such, a valuation allowance was provided for the entire deferred tax
asset of approximately $4,700,000 at June 30, 2005. The Companys effective tax rate
differs from its statutory tax rate for 2005 due to the tax valuation
8
AMS HEALTH SCIENCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
allowance. The Company has net operating loss carryforwards of approximately $9,200,000
available to reduce future taxable income, which will begin to expire in 2021.
6. |
|
COMMITMENTS AND CONTINGENCIES |
Recent Regulatory Developments - As a marketer of products that are ingested by
consumers, the Company is subject to the risk that one or more of the ingredients
in its products may become the subject of adverse regulatory action. For example,
one of the ingredients in the Companys prior AM-300 product was ephedra, an herb
that contains naturally-occurring ephedrine alkaloids. The Companys manufacturer
used a powdered extract of that herb when manufacturing AM-300. The Company
marketed AM-300, principally as an aid in weight management. The extract was an 8%
extract, which means that every 100 milligrams of the powdered extract contains
approximately eight milligrams of naturally occurring ephedrine alkaloids.
On February 11, 2004, the FDA issued and published in the Federal Register its
final rule on ephedrine-containing supplements, stating that since an unreasonable
risk had been determinedunder a risk/benefit analysis (previously applied only to
drugs)such supplements would be considered adulterated under the Federal Food, Drug
and Cosmetic Act, or FFDCA, and thus may not be sold. In essence, this final rule (or
regulation) imposed a national ban on ephedrine supplements.
The effective date of this regulation was April 12, 2004. The Company complied
with the new regulation and ceased all sales and advertisement of AM-300 and any other
ephedra-containing supplement as of April 12, 2004. Two supplement companies challenged
the FDA, in the Utah trial courts, alleging that the Agency had not shown an
unreasonable risk for low dose (10 mg amounts) ephedra. When the plaintiffs
prevailed, low dose ephedra supplements became legal in Utah; the FDA is appealing. The
Company did not formulate or market a 10 mg ephedra supplement, and does not plan to do
so, regardless of the ultimate outcome of this litigation. For the future, the FDA and
also Congress have indicated that they will consider whether alternatives to ephedra,
other weight loss and energy stimulants (such as bitter orange) carry a similar
unreasonable risk. These proposals to limit stimulant ingredients, if finalized, may
necessitate reformulations of some of the Companys weight loss products.
Also, in the aftermath of the ephedra ban, on April 22, 2004, in comments before a
scientific meeting, then acting FDA Commissioner, Lester Crawford (now the confirmed
Commissioner), outlined what an FDA press release termed a science-based plan for
dietary supplement enforcement. This press release went on to say that the agency
would soon provide further details about its plan to ensure that the consumer
protection provisions of the Dietary Supplement Health and Education Act of 1994, or
DSHEA, are used effectively and appropriately. Referring to its recent rulemaking on
ephedra, the FDA also stated that it expects to evaluate the available pharmacology,
published literature ..., evidence-based reviews, and adverse event information of
individual dietary supplements.
Soon afterwards, this promised FDA document was issued, with the title Regulatory
Strategy for the Further Implementation and Enforcement of the Dietary Supplement Health
and Education Act of 1994. No new regulations or proposed rules pursuant to this
strategy have yet been issued, except that the FDA has recently welcomed and received
comments from the industry for a better procedure for the FDA to review a companys
safety information as to a new dietary ingredient, or NDI, in an NDI Notification. At
this time, NDI Notifications are not required for any AMS products.
9
AMS HEALTH SCIENCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
Anti-DSHEA Proposed Legislation. Finally, as the press, the FDA, and members of
Congress and of the supplement industry had all predicted, the very issuance of the
final rule on ephedra has caused Congress to rethink DSHEA, specifically as to how
safety in supplements may be ensured, and also as to whether specific categories of
dietary ingredients should not be permitted at all. In particular, there is growing
sentiment (including from one herbal trade association) to make Adverse Event Reporting
(AERs) mandatory for all manufacturers and marketers of dietary supplements. This would
allow the FDA to take action more quickly than it did on ephedra, when a harmful herb or
other ingredient is suspected. Currently, collection and reporting of AERs are not
required of supplement manufacturers or marketers.
Since February of 2003, there have been several bills proposed in Congress that
would amend DSHEA, make safety safeguards stricter, even approaching the rigor and
reporting required for FDA-regulated drugs. Some examples are as follows:
S. 722 The Dietary Supplement Safety Act was introduced by Senator Richard
Durbin in March 2003, and would greatly undermine DSHEA, especially Section 4 regarding
safety, and give the FDA new powers of oversight and blanket authority over whole
categories of supplements, including stimulants. Stimulants are used in many weight
loss products, including some of the Companys supplements. To the best of the
Companys knowledge, this bill and the bill described below (though perhaps under
different numbers) are still pending.
H.R. 3377: Beginning on October 28, 2003, Senator McCain chaired Senate
Hearings on whether DSHEA adequately protects consumers. Also on October 28, Rep. Susan
Davis and Rep. Henry Waxman introduced The Dietary Supplement Access and Awareness Act,
H.R. 3377, purporting to be about safety and access for consumers to supplements, but
actually recommending severe restrictions and dramatic redefinitions of what constitutes
a dietary supplement. This bill would impose several requirements for supplements,
including unprecedented FDA pre-approval, as well as strict AER reporting, and
excludes only vitamins and minerals from such new requirements. Like S. 722, this bill
would reverse the safety burden of proof in Section 4 of DSHEA (one of the industrys
victories in 1994), and instead require the manufacturer to demonstrate safety, rather
than the burden being on the FDA to show imminent hazard or unreasonable risk.
H.R. 3156: Apparently in reaction to the Utah ephedra case, a new bill was
introduced on June 30, 2005 that would codify the FDAs risk/benefit analysis for the
safety of supplements (as used for the ephedra ban), but without regard to the amount of
the ingredient. Called the Dietary Supplement Access and Awareness Act, this bill was
introduced by Rep. Susan Davis of California, a known skeptic as to the benefits of
supplements. Industry analysts rate the chances of passage of this new proposed
amendment to DSHEA as unlikely.
With the help of the Companys regulatory attorney, the Company will continue to
monitor these anti-DSHEA bills, and determine if any of them become
a serious threat to
its business. In addition, the two major trade associations of the dietary supplement
industrythe American Herbal Products Association, or AHPA, and the National Natural
Foods Association, or NNFAhave both been actively lobbying against any bills that would
require or lead to unreasonable restraints on the manufacture and marketing of dietary
supplements.
International Developments. In the past quarter, there have been two major regulatory
developments from non-U.S. bodies as to supplements. On July 4, 2005, the 85 countries
of the international organization Codex Alimentarius (whose mission is to harmonize
various food codes or laws) unanimously adopted standards for the international
regulation of vitamins and minerals. These new Codex supplement standards specify that
maximum safe levels for vitamins and minerals used in
10
AMS HEALTH SCIENCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
supplements be established through scientific evaluation of risk assessment, rather than
via recommended dietary allowances (as in the U.S. currently).
On July 12, 2005, the European Chief Judge validated the EU Directive on Food
Supplements, which has been developed by the European Union over the past few years.
Not applying to herbal and other forms of supplements, this Directive approves a
positive list of 160 vitamins and minerals. Effective August 1, only these vitamins
and minerals may be used in food supplements in EU countries. These two actions above
are not binding in the U.S., and do not apply to supplements sold overseas via the
Internet. Thus, currently, regulation of supplements is much less restrictive in the
U.S. than in the EU.
While the Company does not expect that these two non-U.S. directives will directly
undermine DSHEA, some industry analysts are predicting that pharmaceutical companies or
other groups could use these legal actions as leverage to lobby for tighter regulation
of supplements in the U.S., perhaps toward harmonizing with other countries. The
Companys regulatory counsel will be monitoring the effects and impacts of these
international regulatory developments and will keep AMS apprised of any challenges to
current U.S. law.
Manufacturing. Pursuant to current law, dietary supplements are manufactured using food
GMPs, which stands for good manufacturing practices. DSHEA empowered the FDA to issue
specialized GMPs for dietary supplements, but several years passed before the FDA took
the next step in the rule-making process. On March 13, 2003, the FDA published a
proposed rule in the Federal Register which proposes comprehensive GMPs. The FDA
accepted public comments on the proposed GMPs until June 11, 2003; final GMPs for
supplements will be promulgated after the FDA has reviewed the public comments. Once
final GMP regulations become effective, the Companys manufacturer will be required to
adhere to them. The FDA will most likely institute an effective date for the GMPs,
which will allow the Companys manufacturer a reasonable amount of time to conduct this
review and, if necessary, revise its manufacturing operations to comply with the final
GMP regulations. Typically, the effective date for new manufacturing and labeling
regulations is 12 months after the promulgation of the Final Rule or new regulation. As
of July 26, 2005, the FDA had not yet published this Final Rule (binding regulation) on
GMPs.
Advertising and Website. The FDA considers website promotional content to constitute
labeling, and thus the AMS website must not contain disease claims or drug claims, but
only permissible structure/function claims. The FTC governs the advertising of dietary
supplements, in any medium or vehicleprint ads, radio spots, infomercials,
etc.-including Internet ads and websites. The fundamental FTC rule is that all material
advertising claims, whether express (direct) or implied, must be substantiated by
reliable and competent scientific evidence. Because the Companys website must comply
with both FDA and FTC regulations, the Company routinely asks its regulatory compliance
counsel to review certain web pages, especially the content of new product promotions.
When necessary, the Companys regulatory counsel also reviews the scientific
substantiation for particular claims (again, especially for newer products such as Prime
One, an anti-stress and weight loss product) to determine if it is sufficient, and also
that there are no disease claims present, the main FDA issue.
AMS also requires associate websites to be in compliance with FDA and FTC
regulations. As such, and to ensure Internet compliance, associates may only copy or
link to the Companys corporate website. Any independent websites are absolutely
unauthorized, and their creators are solely liable for defending any regulatory
enforcement actions. Violation of this policy may result in termination of the
associate by AMS. This policy was explicitly conveyed to all associates via a formal
letter/ notice,
11
AMS HEALTH SCIENCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
prepared by the Companys Chief Financial Officer (CFO) and its regulatory counsel,
and signed by the CFO.
Product Liability - The Company, like other marketers of products that
are intended to be ingested, faces an inherent risk of exposure to product liability
claims in the event that the use of its products results in injury. The Company
maintains a claims made policy, with limited liability insurance coverage. The limits
of this coverage are $1,000,000 per occurrence and $2,000,000 in the aggregate.
Products containing ephedra, which represented approximately 19.2% of the Companys net
revenue for the first six months of 2004, were not covered by the Companys product
liability insurance. The Company generally does not obtain contractual indemnification
from parties manufacturing its products. However, all of the manufacturers of the
Companys products carry product liability insurance, which covers the Companys
products. Such product claims against the Company could result in material losses to
the Company.
Legal Proceedings - The Company is currently involved in three products
liability suits related to the ingestion of its ephedra-based products. Answers to
these petitions have been filed and written discovery and responses have been exchanged.
The Company has denied, and will continue to deny, any wrongdoing, and intends to
vigorously defend against the claims. The amounts of damages sought are unknown, but
include compensatory and punitive damages.
Employment Agreement - In November 2004, the Company entered into a written
employment agreement with David J. DArcangelo, the Companys President. The contract
was for a one-year term, commencing November 25, 2004, to be reviewed annually unless
either party elected not to renew. The contract called for a base salary of $230,000
per year. The employment agreement also contained provisions for graduated severance
payments of up to 12 months of base pay, based on length of employment, if the Company
terminates Mr. DArcangelo without cause, disability payments, and a non-competition
agreement preventing Mr. DArcangelo from engaging in a business deemed similar to the
Companys for a period of one year from the cessation of his employment. On May 10, Mr.
DArcangelo resigned as President of the Company.
On November 4, 2003 the Company entered into a written employment agreement with
John W. Hail, Chief Executive Officer, or the Executive. The contract is for an
initial two-year term, commencing November 4, 2003, and may be extended for up to five
successive one-year terms if the Company and the Executive agree in writing. The
contract calls for a base salary of $249,600 per year, a monthly variable salary equal
to one percent (1%) of the Companys gross revenues, and a discretionary year-end bonus
determined by a majority vote of the Board of Directors. In April 2005, Mr. Hail waived
his variable salary as part of the expense reductions implemented by the Company. The
agreement also contains provisions for graduated severance payments if the Company
terminates the Executive without cause. In addition, if the employment period is
extended beyond November 11, 2005, the monthly variable salary will cease and be
replaced by a fixed supplemental payment to the Executive, which will be in a gross
amount necessary to cover all federal, state and local taxes and all employment taxes,
and pay a net amount of $7,000 per month. At June 30, 2005, the discounted value of
those fixed supplemental payments was approximately $694,000. The Company accrues this
expense in administrative expense.
In January 2004, the Company commenced a relocation of its corporate headquarters
from 2601 NW Expressway (the Oil Center), Oklahoma City, Oklahoma to its warehouse and
distribution facility. A
12
AMS HEALTH SCIENCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
portion of the Oil Center was maintained for storage, a portion was maintained for
possible relocation of Company personnel due to expansion of the business and a portion
was subleased to a third party under a short-term lease. In September 2004, the Company
purchased an existing building adjacent to its corporate headquarters to be used for
additional office, warehouse and storage space. Company management believes the
purchased building is sufficient to meet expansion needs, and as such, abandoned the Oil
Center location. In determining lease abandonment, management assumed the continuation
of the existing sublease at the current rate. In addition, a discount rate of 6.5% was
used to calculate the present value of current lease payments less sublease revenue. At
June 30, 2005, the lease abandonment accrual was approximately $222,000.
9. |
|
CHANGES IN STOCKHOLDERS EQUITY |
The following table sets forth changes in stockholders equity between December 31,
2004 and June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
December 31, 2004 |
Common Stock |
|
$ |
805 |
|
|
$ |
750 |
|
Paid in Capital |
|
|
21,404,141 |
|
|
|
20,331,852 |
|
Common stock increased $55, or 7.3% to $805 at June 30, 2005 from $750 at December
31, 2004, due to the exercise of approximately 552,000 stock options.
Paid in capital increased $1,072,289, or 5.3% to $21,404,141 at June 30, 2005 from
$20,331,852 at December 31, 2004. The increase in paid in capital was due to the
exercise of stock options.
******
13
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
AMS Health Sciences, Inc. and Subsidiaries
We have reviewed the accompanying consolidated balance sheet of AMS Health Sciences, Inc. and
Subsidiaries as of June 30, 2005, and the related consolidated statements of operations for the
three and six months ended June 30, 2005, and the consolidated statement of cash flows for six
months ended June 30, 2005. These financial statements are the responsibility of the Companys
management.
We conducted our review in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the
consolidated financial statements, as of and for the period ended June 30, 2005, for them to be in
conformity with accounting principles generally accepted in the United States of America.
/S/ COLE & REED P.C.
Oklahoma City, Oklahoma
August 4, 2005
14
|
|
|
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |
|
|
General
We market a product line consisting of approximately seventy products in three categories;
weight management, dietary supplement and personal care products. These products are marketed
through a network marketing organization in which independent associates purchase products for
resale to retail customers as well as for their own personal use.
Critical Accounting Policies. We prepare our consolidated financial statements in
conformity with accounting principles generally accepted in the United States of America, which
require us to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the year. Actual results could
differ from those estimates. We consider the following policies to be most critical in
understanding the judgments that are involved in preparing our financial statements and the
uncertainties that could impact our results of operations, financial condition and cash flows.
Throughout this report, net sales represents the gross sales amounts reflected on our
invoices to our associates, less associate discounts and sales returns. All of our products
include a customer satisfaction guarantee. Our products may be returned within 30 days of purchase
for a full refund or credit toward the purchase of another product. We also have a buy-back
program whereby we repurchase products sold to an independent associate (subject to a restocking
fee), provided the associate terminates his/her associateship agreement with us and returns the
product within 12 months of original purchase in marketable condition. We receive our net sales
price in cash or through credit card payments upon receipt of orders from associates.
Our gross profit consists of net sales less:
|
|
|
Commissions and bonuses, consisting of commission payments to associates based on
their current associate level within their organization, and other one-time incentive
cash bonuses to qualifying associates; |
|
|
|
|
Cost of products, consisting of the prices we pay to our manufacturers for products,
and royalty overrides earned by qualifying associates on sales within their associate
organizations; and |
|
|
|
|
Cost of shipping, consisting of costs related to shipments, duties and tariffs,
freight expenses relating to shipment of products to associates and similar expenses. |
We recognize revenue upon shipment of products, training aids and promotional material to our
independent associates. All of our customers pay for sales in advance of shipment. As such, we
have no trade receivables. We used to make loans to associates, which were repayable in five years
or less, and which were secured by commissions controlled by us. Associate loans are no longer
allowed. Interest rates on loans were typically two percent or more above the Prime rate and were
fixed. All loans were secured by guaranteed payment sources that were within our control. As
such, there was no need for an allowance for doubtful accounts. We were still collecting on prior
associate loans as of June 30, 2005 in the total amount of approximately $222,000.
We use 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 statement amounts and the
tax bases of existing assets and liabilities. A valuation allowance is established if, in
managements opinion, it is more likely than not that some portion of the deferred tax asset will
not be realized. All evidence, both positive and negative, is considered to determine whether a
valuation allowance is needed for some or all of a deferred tax asset. Judgment must be used in
considering the relative impact of negative and positive evidence. The more negative evidence that
exists, (a) the more positive evidence is necessary and (b) the more difficult it is to support a
conclusion that a valuation allowance is not needed. Based on the above factors and managements
evaluation at December 31, 2004, we determined that a valuation allowance should be established for
the entire deferred tax asset, and such valuation allowance was established at that time. At June
30, 2005, our deferred tax asset was approximately $4,700,000.
15
We write down our inventory to provide for estimated obsolete or unsalable inventory based on
assumptions about future demand for our products and market conditions. If future demand and
market conditions are less favorable than managements assumptions, additional inventory
write-downs could be required. Likewise, favorable future demand and market conditions could
positively impact future operating results if written-off inventory is sold.
We account for contingencies in accordance with SFAS No. 5, Accounting for Contingencies.
SFAS 5 requires that we record an estimated loss from a loss contingency when information available
prior to issuance of our financial statements indicates that it is probable than an asset has been
impaired or a liability has been incurred at the date of the financial statements, and the amount
of the loss can be reasonable estimated. Accounting for contingencies such as legal and income tax
matters requires us to use our judgment. Many legal and tax contingencies can take years to
resolve. Generally, as the time period increases over which the uncertainties are resolved, the
likelihood of changes to the estimate of the ultimate outcome increases. However, an adverse
outcome in these matters could have a material impact on our results of operations, financial
condition and cash flows.
Results of Operations
The following table sets forth, as a percentage of our net sales, selected results of
operations for the three and six months ended June 30, 2005 and 2004. The selected results of
operations are derived from our unaudited consolidated financial statements. The results of
operations for the periods presented are not necessarily indicative of our future operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Net sales |
|
$ |
3,528,319 |
|
|
|
100.0 |
% |
|
$ |
4,257,340 |
|
|
|
100.0 |
% |
|
$ |
7,549,077 |
|
|
|
100.0 |
% |
|
$ |
8,730,588 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and
bonuses |
|
|
1,317,561 |
|
|
|
37.3 |
|
|
|
2,022,434 |
|
|
|
47.5 |
|
|
|
3,376,188 |
|
|
|
44.7 |
|
|
|
3,794,290 |
|
|
|
43.5 |
|
Cost of products |
|
|
735,784 |
|
|
|
20.9 |
|
|
|
1,060,404 |
|
|
|
24.9 |
|
|
|
1,712,852 |
|
|
|
22.7 |
|
|
|
1,773,433 |
|
|
|
20.3 |
|
Cost of shipping |
|
|
339,331 |
|
|
|
9.6 |
|
|
|
444,150 |
|
|
|
10.4 |
|
|
|
845,768 |
|
|
|
11.2 |
|
|
|
782,893 |
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
2,392,676 |
|
|
|
67.8 |
|
|
|
3,526,988 |
|
|
|
82.8 |
|
|
|
5,934,808 |
|
|
|
78.6 |
|
|
|
6,350,616 |
|
|
|
72.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,135,643 |
|
|
|
32.2 |
|
|
|
730,352 |
|
|
|
17.2 |
|
|
|
1,614,269 |
|
|
|
21.4 |
|
|
|
2,379,972 |
|
|
|
27.2 |
|
Marketing and
administrative
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
322,357 |
|
|
|
9.1 |
|
|
|
264,240 |
|
|
|
6.2 |
|
|
|
634,478 |
|
|
|
8.4 |
|
|
|
489,461 |
|
|
|
5.6 |
|
Administrative |
|
|
1,624,270 |
|
|
|
46.0 |
|
|
|
1,683,657 |
|
|
|
39.6 |
|
|
|
3,133,779 |
|
|
|
41.5 |
|
|
|
3,075,933 |
|
|
|
35.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketing,
and administrative
expenses |
|
|
1,946,627 |
|
|
|
55.1 |
|
|
|
1,947,897 |
|
|
|
45.8 |
|
|
|
3,768,257 |
|
|
|
49.9 |
|
|
|
3,565,394 |
|
|
|
40.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(810,984 |
) |
|
|
(22.9 |
) |
|
|
(1,217,545 |
) |
|
|
(28.6 |
) |
|
|
(2,153,988 |
) |
|
|
(28.5 |
) |
|
|
(1,185,422 |
) |
|
|
(13.6 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net |
|
|
14,988 |
|
|
|
0.4 |
|
|
|
29,164 |
|
|
|
0.7 |
|
|
|
22,557 |
|
|
|
0.3 |
|
|
|
75,263 |
|
|
|
0.9 |
|
Other, net |
|
|
4,094 |
|
|
|
0.1 |
|
|
|
(26,903 |
) |
|
|
(0.6 |
) |
|
|
24,925 |
|
|
|
0.3 |
|
|
|
(16,489 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
(expense) |
|
|
19,082 |
|
|
|
0.5 |
|
|
|
2,261 |
|
|
|
0.1 |
|
|
|
47,482 |
|
|
|
0.6 |
|
|
|
58,774 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes |
|
|
(791,902 |
) |
|
|
(22.4 |
) |
|
|
(1,215,284 |
) |
|
|
(28.5 |
) |
|
|
(2,106,506 |
) |
|
|
(27.9 |
) |
|
|
(1,126,648 |
) |
|
|
(12.9 |
) |
Tax benefit |
|
|
(22,456 |
) |
|
|
(0.6 |
) |
|
|
(272,910 |
) |
|
|
(6.4 |
) |
|
|
1,363 |
|
|
|
0.0 |
|
|
|
(238,342 |
) |
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(769,446 |
) |
|
|
(21.8 |
)% |
|
$ |
(942,374 |
) |
|
|
(22.1 |
)% |
|
$ |
(2,107,869 |
) |
|
|
(27.9 |
)% |
|
$ |
(888,306 |
) |
|
|
(10.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the Three Months ended June 30, 2005 and 2004
Our net sales during the three months ended June 30, 2005 decreased by $729,021, or 17.1%, to
$3,528,319 from $4,257,340 during the three months ended June 30, 2004. We have
historically earned a material portion of our revenues from our AM-300 product, which contains
ephedra. Effective April 12, 2004, the FDA banned the use of ephedra in nutritional supplements.
Sales of our AM-300 product totaled approximately $287,000 in the second quarter of 2004. Over the
last several years, through strategic acquisitions, product redevelopment and refocus of weight
loss products, we have built a multi-product peak performance, weight loss and nutritional product
line that is predominately non-ephedra. We have seen positive results in converting our AM-300
customers to AM-300 Ephedra Free or other weight
16
loss products. A majority of the customers have chosen one or more of our other
performance-based weight loss and nutritional products.
On April 5, 2005, we announced that we were transitioning the free trial program from a highly
capital intensive program, to a program that is profitable on a per transaction basis.
Transitioning the free trial sign up momentum with a refined free product program will deliver
reduced enrollment expense and higher monthly product autoship retention. In connection with this,
on April 20, 2005, we announced the implementation of expense reductions designed to better align
expenses with revenue. We expect these changes to result in an approximate 20% reduction in cost
of sales and operating expenses.
Our cost of sales during the three months ended June 30, 2005 decreased by $1,134,312, or
32.2%, to $2,392,676 from $3,526,988 during the same period in 2004. Total cost of sales, as a
percentage of net sales, decreased to 67.8% during the three months ended June 30, 2005 from 82.8%
during the same period in 2004. The decrease in cost of sales was attributable to:
|
|
|
A decrease of $704,873 in commissions and bonuses due to cessation of our free trial program; |
|
|
|
|
A decrease of $324,620 in the cost of products sold due to cessation of our free trial program; and |
|
|
|
|
A decrease of $104,819 in shipping costs primarily due to cessation of our free trial program. |
The factors discussed above resulted in an increase in gross profit of $405,291, or 55.5%, to
$1,135,643 for the three months ended June 30, 2005 from $730,352 for the same period in 2004.
Marketing expenses increased $58,117, or 22.0%, to $322,357 during the three months ended June
30, 2005, from $264,240 during the same period in 2004. The increase in expense was primarily
attributable to:
|
|
|
An increase in employee costs of approximately $50,000; and |
|
|
|
|
An increase in promotion expenses of approximately $16,000; |
The increase in marketing expenses was partially offset by:
|
|
|
A decrease in travel costs of approximately $7,000 related to less outside travel of
executives and our nutrition expert; |
|
|
|
|
A decrease in general marketing expenses such as postage, and office supplies of
approximately $4,000. |
Administrative expense decreased $59,387, or 3.5%, to $1,624,270 for the three months ended
June 30, 2005 compared to $1,683,657 for the three months ended June 30, 2004. The decrease in
expense was primarily attributable to:
|
|
|
A decrease in employee costs of approximately $58,000 due primarily to expense
reductions in the second quarter; |
|
|
|
|
A decrease in legal expense of approximately $20,000 related to ephedra lawsuits in the prior year; |
|
|
|
|
A decrease in rent expense of approximately $19,000 related to our abandoned corporate office lease; |
|
|
|
|
A decrease in vehicle expense of approximately $16,000; and |
|
|
|
|
A decrease in depreciation expense of approximately $13,000 related to the sale of assets. |
The decrease in administrative expenses was partially offset by:
|
|
|
An increase in shareholder relations of approximately $22,000 related to the engagement
of an investment firm; |
|
|
|
|
An increase in utilities expense of approximately $36,000 related to the settlement of a
disputed telephone bill; and |
|
|
|
|
An increase in general administrative expenses such as postage and office supplies of
approximately $8,000. |
17
The marketing and administrative expenses as a percentage of net sales increased to 55.1%
during the three months ended June 30, 2005 from 45.8% during the same period in 2004. Management
expects marketing and administrative expenses to continue to decrease from the current dollar level
based on expense reductions implemented.
Our net other income (reduced by other expense) increased by $16,821 to net other income of
$19,082 at June 30, 2005, from net other income of $2,261 during the same period in 2004, primarily
due to an increase in the gain on the sale of assets of approximately $33,000, partially offset by
a decrease of approximately $16,000 related to income on our marketable securities.
Our loss before taxes decreased $423,382 to a loss of $791,902 for the three months ended June
30, 2005, compared to a loss of $1,215,284 during the same period in 2004. Loss before taxes as a
percentage of net sales was (22.4)% and (28.5)% for the three months ended June 30, 2005 and 2004,
respectively. Income tax benefit for the three months ended June 30, 2005 and 2004 was $22,456 and
$272,910. Our net loss decreased $172,928 to $769,446 for the three months ended June 30, 2005,
from $942,374 for the same period in 2004. This decrease was attributable to:
|
|
|
The increase in gross profit to $1,135,643 during 2005 from $730,352 during 2004; |
|
|
|
|
The decrease in marketing and administrative expense to $1,946,627 during 2005 from
$1,947,897 during 2004; and |
|
|
|
|
The increase in net other income to $19,082 during 2005 from $2,261 during 2004. |
Net loss as a percentage of net sales decreased to (21.8%) for the three months ended June 30,
2005, from (22.1%) during the same period in 2004, due to the factors discussed above.
Comparison of the Six Months ended June 30, 2005 and 2004
Our net sales during the six months ended June 30, 2005 decreased by $1,181,511, or 13.5%, to
$7,549,077 from $8,730,588 during the six months ended June 30, 2004. We have
historically earned a material portion of our revenues from our AM-300 product, which contains
ephedra. Effective April 12, 2004, the FDA banned the use of ephedra in nutritional supplements.
Sales of our AM-300 product totaled approximately $1,700,000 in the first six months of 2004. Over
the last several years, through strategic acquisitions, product redevelopment and refocus of weight
loss products, we have built a multi-product peak performance, weight loss and nutritional product
line that is predominately non-ephedra. We have seen positive results in converting our AM-300
customers to AM-300 Ephedra Free or other weight loss products. A majority of the customers have
chosen one or more of our other performance-based weight loss and nutritional products.
On April 5, 2005, we announced that we were transitioning the free trial program from a highly
capital intensive program, to a program that is profitable on a per transaction basis.
Transitioning the free trial sign up momentum with a refined free product program will deliver
reduced enrollment expense and higher monthly product autoship retention. In connection with this,
on April 20, 2005, we announced the implementation of expense reductions designed to better align
expenses with revenue. These changes are expected to result in an approximate 20% reduction in
cost of sales and operating expenses.
Our cost of sales during the six months ended June 30, 2005 decreased by $415,808, or 6.5%, to
$5,934,808 from $6,350,616 during the same period in 2004. Total cost of sales, as a percentage of
net sales, increased to 78.6% during the six months ended June 30, 2005, from 72.8% during the same
period in 2004. The decrease in cost of sales dollars was attributed to:
|
|
|
A decrease of $418,102 in associate commissions and bonuses due to cessation of our free trial program; |
|
|
|
|
A decrease of $60,581 in the cost of products sold due to cessation of our free trial program; and |
|
|
|
|
An increase of $62,875 in shipping costs. |
18
The factors discussed above resulted in a decrease in gross profit of $765,703, or 32.2%, to
$1,614,269 for the six months ended June 30, 2005 from $2,379,972 for the same period in 2004.
Marketing expense increased $145,017, or 29.6%, to $634,478 during the six months ended June
30, 2005, from $489,461 during the same period in 2004. The increase in expense was primarily
attributable to:
|
|
|
An increase in employee costs of approximately $131,000; |
|
|
|
|
An increase in promotion expenses of approximately $19,000; and |
|
|
|
|
An increase in professional services of approximately $13,000. |
This increase in marketing expense was partially offset by:
|
|
|
A decrease in vehicle expense of approximately $14,000 due to the sale of our boats; and |
|
|
|
|
A decrease in general marketing expenses such as postage, office supplies and utilities
of approximately $6,000. |
Administrative expense increased $57,846, or 1.9%, to $3,133,779 for the six months ended June
30, 2005 compared to $3,075,933 for the six months ended June 30, 2004. The increase in expense
was primarily attributable to:
|
|
|
An increase in employee costs of approximately $40,000; |
|
|
|
|
An increase in shareholder relation expense of approximately $18,000 related to the
engagement of an investment firm; and |
|
|
|
|
An increase in professional services of approximately $66,000 related primarily to
contract employees and consulting. |
This increase in administrative expense was partially offset by:
|
|
|
A decrease in depreciation of approximately $48,000 resulting from the sale of our boats; and |
|
|
|
|
A decrease in general administrative expenses such as postage and supplies of approximately $24,000. |
The marketing and administrative expenses as a percentage of net sales increased to 49.9%
during the six months ended June 30, 2005 from 40.8% during the same period in 2004. Management
expects marketing and administrative expenses to continue to decrease from the current dollar level
based on expense reductions implemented.
Our net other income (reduced by other expense) decreased by $11,292 to net other income of
$47,482 for the six months ended June 30, 2005, from net other income of $58,774 during the same
period in 2004, primarily due to a decrease in interest expense, related to adjustment of our
capital leases.
Our loss before taxes increased $979,858 to a loss of $2,106,506 for the six months ended June
30, 2005, compared to a loss of $1,126,648 during the same period in 2004. Loss before taxes as a
percentage of net sales was (27.9%) and (12.9%) for the six months ended June 30, 2005 and 2004,
respectively. Income tax expense (benefit) for the six months ended June 30, 2005 and 2004 was
$1,363 and ($238,342). Our net loss increased $1,219,563 to $2,107,869 for the six months ended
June 30, 2005, from $888,306 for the same period in 2004. This increase was attributable to:
|
|
|
The decrease in gross profit to $1,614,269 during 2005 from $2,379,972 during 2004; |
|
|
|
|
The increase in marketing and administrative expense to $3,768,257 during 2005 from
$3,565,394 during 2004; and |
|
|
|
|
The decrease in net other income to $47,482 during 2005 from $58,774 during 2004. |
19
Seasonality
No pattern of seasonal fluctuations exists due to the patterns that we are currently
experiencing. However, there is no assurance that we will not become subject to seasonal
fluctuations in operations.
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123(R), Share Based Payment, which revised SFAS
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) requires entities to measure
the fair value of equity share-based payments (stock compensation) at grant date, and recognize the
fair value over the period during which an employee is required to provide services in exchange for
the equity instrument as a component of the income statement. SFAS No. 123(R) for public companies
is effective for the first fiscal year beginning after June 15, 2005. This would require the
Company to adopt FAS 123(R) effective January 1, 2006. The Company has not evaluated the impact of
adoption of SFAS No.123(R) on its financial statements, but adoption could have a material impact
on financial position and results of operations.
Liquidity and Capital Resources
Our primary source of liquidity has been cash provided by sales of our common stock,
marketable securities and our operating activities. At June 30, 2005, we had working capital of
$2,601,285, compared to $3,261,919 at December 31, 2004. Our working capital needs over the next
12 months consist primarily of marketing and administrative expenses, and will be provided by our
operating activities, existing cash and cash equivalents and sales of marketable securities. During
the six months ended June 30, 2005, net cash used in operating activities was $1,368,377, net cash
provided by investing activities was $872,931 and net cash provided by financing activities was
$475,742. This represented a net decrease in cash during the period of $19,704.
In 2001, we completed construction of a 23,346 square foot distribution and call center
facility in Oklahoma City. This project was funded, in part, with bank loans of $980,000 for the
land and building and $166,216 for the warehouse equipment. Both loans were with Bank One
Oklahoma, N.A. and accrued interest at an annual rate of .25% under the prime rate. The loans were
retired in January 2004. As of January 31, 2004, we had no long-term debt outstanding.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our balance sheet includes marketable securities, which we believe are conservative blends of
income and growth investments resulting in moderate market risk. We invest in equity marketable
securities to generate capital growth, and fixed-income marketable securities to provide current
income. Because of the nature of these investments, total return and risk will be affected by both
current interest rates and equity market movements. Our fixed income investments, including
corporate bonds, of approximately $1,000,000 are subject to interest risk only. We have
approximately $1,000,000 of equity investments that are exposed to market risk.
Interest Rate Risk. We currently maintain an investment portfolio of high-quality
fixed-income marketable securities. All securities are available for sale and recorded in the
balance sheet at fair value with fluctuations in fair value reported as a component of accumulated
other comprehensive income in stockholders equity. We do not hedge our investment portfolio.
Fixed-income investments with a maturity date of three months or less at the date of purchase are
deemed to be cash equivalents. Any remaining fixed-income securities are considered short-term and
mainly consist of investments in U.S. Treasury notes and bonds.
20
The following table lists our investments at June 30, 2005 and December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
December 31, 2004 |
|
|
|
|
|
|
Fair |
|
|
|
|
|
Fair |
|
|
Cost |
|
Value |
|
Cost |
|
Value |
Cash
equivalents |
|
$ |
80,828 |
|
|
$ |
80,828 |
|
|
$ |
31,358 |
|
|
$ |
31,358 |
|
Certificates of
deposit |
|
|
100,000 |
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
Corporate
bonds |
|
|
194,512 |
|
|
|
188,555 |
|
|
|
194,513 |
|
|
|
192,062 |
|
Fixed-income
mutual funds |
|
|
634,230 |
|
|
|
624,292 |
|
|
|
1,187,352 |
|
|
|
1,172,074 |
|
Equity mutual
funds |
|
|
921,767 |
|
|
|
1,023,558 |
|
|
|
1,258,567 |
|
|
|
1,408,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,931,337 |
|
|
$ |
2,017,233 |
|
|
$ |
2,671,790 |
|
|
$ |
2,803,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of the cash equivalents, certificates of deposit, corporate bonds and fixed-income
marketable securities decreased $401,819 during the six months ended June 30, 2005 to $993,675 from
$1,395,494 at December 31, 2004. This decrease was primarily due to the sale of fixed-income
securities.
Equity Market Risks. We currently maintain an investment portfolio of equity securities. All
securities are available for sale and recorded in the balance sheet at fair value with fluctuations
in fair value reported as a component of accumulated other comprehensive income in stockholders
equity. We do not engage in hedging our equity portfolio or otherwise purchase derivative
securities. Because of the quality of our portfolio and liquid nature of our equity investments,
we do not consider the market risk related to these investments to be material. Fair value of our
equity investments decreased $384,811 during the six months ended June 30, 2005 to $1,023,558 from
$1,408,369 at December 31, 2004, primarily due to the sale of mutual fund equity investments.
We attempt to manage our interest and market risk by evaluating and purchasing what we believe
to be the best investment securities and rates of return available.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was carried out under the
supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as
required by Rule 13a-15(b). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure controls and
procedures were effective. Our Chief Executive Officer and Chief Financial Officer have also
concluded that there have not been any changes in our internal control over financial reporting
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
21
PART II. OTHER INFORMATION
|
|
|
Item 1. LEGAL PROCEEDINGS |
|
|
In November 2004, we were sued in Jones v. Metabolife International, Inc. and Advantage
Martketing Systems, Inc., in the District Court of Oklahoma County, Oklahoma. An answer has
been filed. The plaintiff alleges that she took products containing ephedra, which were
manufactured by the defendants, and was injured as a result. She seeks actual and punitive
damages in excess of $10,000. Written discovery and responses have been exchanged and
several depositions have been taken. No trial date is set. Plaintiff recently voluntarily
dismissed Metabolife without prejudice to refiling her claim against Metabolife. We have
denied any wrongdoing and intend to vigorously defend the case. This case was dismissed
with prejudice in June 2004.
On March 5, 2004, we were sued in Ross v. Advantage Marketing Systems, Inc., Superior
Court of the State of California for the County of Los Angeles, Case No. BC 309118. An
answer has been filed. The case was removed to the United States District Court for the
Central District of California and then transferred to the United States District Court for
the Southern District of New York as part of the multi-district federal ephedra litigation.
The plaintiff alleges that she took AM-300, which contains ephedra, and was injured as a
result. The amount of damages sought by plaintiff is unknown at this time, but includes
actual, compensatory and punitive damages, plus an accounting and disgorgement of profits we
purportedly earned as a result of allegedly illegal conduct. Written discovery has been
exchanged by the parties. We have denied any wrongdoing and intend to vigorously defend the
case.
The case of Ronald Potter et al v. Advantage Marketing Systems, Inc. et al, a products
liability claim, was filed in the Oklahoma County District Court in March 2003. The
Plaintiffs allege that the ingestion of ephedra included in AM-300 resulted in the death of
Pamela Sue Potter. We have filed an answer to the petition. Written discovery and responses
have been exchanged, and a limited number of depositions have been taken. We have denied any
wrongdoing and intend to vigorously defend the claim. The amount of damages sought is
unknown, but includes compensatory and punitive damages.
On May 18, 2004, we were sued in Hearn v. Advantage Marketing Systems, Inc. and the Chemins
Company, Inc., District Court in and for Choctaw County, State of Oklahoma, Case No.
CJ-04-52. An answer has been filed. The Plaintiff alleges that she took AM-300, which
contains ephedra, and was injured as a result. She seeks actual and punitive damages in an
amount in excess of $10,000. Written discovery has been exchanged by the parties. We have
denied any wrongdoing and intend to vigorously defend the case.
|
|
|
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASE OF EQUITY SECURITIES |
|
|
None
|
|
|
Item 3. DEFAULTS UPON SENIOR SECURITIES |
|
|
None
|
|
|
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
|
|
None
|
|
|
Item 5. OTHER INFORMATION |
|
|
None
3.1 |
|
The Registrants 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 Registrants 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 16,
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 15,
1998. |
22
|
|
|
10.3
|
|
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. |
|
|
|
10.4
|
|
Promissory Note dated January 3, 2001, to RMS Limited Partnership by Advantage Marketing
Systems, Inc., LifeScience Technologies Holdings, Inc., LifeScience Technologies Holdings
Limited Partnership, LifeScience 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. |
|
|
|
10.5
|
|
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. |
|
|
|
10.6
|
|
Joint Marketing Agreement with PrimeBuy Network.com, Inc., dated August 30, 2002,
incorporated by reference to Form 10-Q filed with the Commission on November 1, 2002. |
|
|
|
10.7
|
|
Promissory Note executed by PrimeBuy Network.com, Inc., dated August 2, 2002, incorporated by
reference to Form 10-Q filed with the Commission on November 1, 2002. |
|
|
|
10.8 *
|
|
The Advantage Marketing Systems, Inc. 1995 Stock Option Plan, incorporated by reference
to Form SB-2 Registration Statement (No. 33-80629), filed with the Commission on November 20,
1996. |
|
|
|
10.9 *
|
|
Employment Agreement by and between David DArcangelo and Registrant dated effective as of
November 25, 2002, incorporated by reference to Form 10-K/A filed with the Commission on March
31, 2003. |
|
|
|
10.10 *
|
|
Non-Qualified Stock Option Agreement by and between David DArcangelo and Registrant dated
effective as of December 2, 2002, incorporated by reference to Form 10-K/A filed with the
Commission on March 31, 2003. |
|
|
|
10.11 *
|
|
The Advantage Marketing Systems, Inc. 2003 Stock Incentive Plan, incorporated by reference
to Form S-8 Registration Statement (No. 333-109093), filed with the Commission on September
24, 2003. |
|
|
|
10.12
|
|
Fulfillment Services Agreement with Vita Sales & Distribution Multi-Country, dated
January 19, 2004, incorporated by reference to Form 10-K filed with the Commission on March
29, 2004. |
|
|
|
10.13 *
|
|
Employment Agreement by and between John W. Hail and Registrant dated effective as of
November 4, 2003, incorporated by reference to Form 10-K filed with the Commission on March
29, 2004. |
|
|
|
10.14
|
|
Commercial Industrial Real Estate Purchase Contract dated August 12, 2004 by and
between Registrant and Keltronics Corporation, incorporated by reference to Form 10-Q, filed
with the commission on November 12, 2004. |
|
|
|
10.15 *
|
|
Employment Agreement by and between David DArcangelo and Registrant dated effective as of
November 25, 2004, incorporated by reference to Form 10-Q,filed with the commission on May 5,
2005. |
|
|
|
15
|
|
Letter of independent accountants as to unaudited interim financial information, filed herewith. |
|
|
|
31.1
|
|
Rule 13a-14(a) Certification by our Chairman and Chief Executive Officer, filed herewith. |
|
|
|
31.2
|
|
Rule 13a-14(a) Certification by our Chief Financial Officer, filed herewith. |
|
|
|
32.1
|
|
Section 1350 Certification of our Chief Executive Officer, filed herewith. |
|
|
|
32.2
|
|
Section 1350 Certification of our Chief Financial Officer, filed herewith. |
|
|
|
* |
|
Designates a compensatory plan. |
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
REGISTRANT: |
|
|
AMS HEALTH SCIENCES, INC. |
|
|
|
Dated: August 9, 2005
|
|
By:
|
|
/s/ REGGIE B. COOK |
|
|
|
|
|
|
|
|
|
Reggie B. Cook, Vice President and |
|
|
|
|
Chief Financial Officer |
|
|
|
|
(Duly Authorized Officer of |
|
|
|
|
Registrant and Principal Financial Officer) |
24
Index of Exhibits
|
|
|
3.1
|
|
The Registrants 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 Registrants 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 16,
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 15,
1998. |
|
|
|
10.3
|
|
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. |
|
|
|
10.4
|
|
Promissory Note dated January 3, 2001, to RMS Limited Partnership by Advantage Marketing
Systems, Inc., LifeScience Technologies Holdings, Inc., LifeScience Technologies Holdings
Limited Partnership, LifeScience 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. |
|
|
|
10.5
|
|
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. |
|
|
|
10.6
|
|
Joint Marketing Agreement with PrimeBuy Network.com, Inc., dated August 30, 2002,
incorporated by reference to Form 10-Q filed with the Commission on November 1, 2002. |
|
|
|
10.7
|
|
Promissory Note executed by PrimeBuy Network.com, Inc., dated August 2, 2002, incorporated by
reference to Form 10-Q filed with the Commission on November 1, 2002. |
|
|
|
10.8 *
|
|
The Advantage Marketing Systems, Inc. 1995 Stock Option Plan, incorporated by reference
to Form SB-2 Registration Statement (No. 33-80629), filed with the Commission on November 20,
1996. |
|
|
|
10.9 *
|
|
Employment Agreement by and between David DArcangelo and Registrant dated effective as of
November 25, 2002, incorporated by reference to Form 10-K/A filed with the Commission on March
31, 2003. |
|
|
|
10.10 *
|
|
Non-Qualified Stock Option Agreement by and between David DArcangelo and Registrant dated
effective as of December 2, 2002, incorporated by reference to Form 10-K/A filed with the
Commission on March 31, 2003. |
|
|
|
10.11 *
|
|
The Advantage Marketing Systems, Inc. 2003 Stock Incentive Plan, incorporated by reference
to Form S-8 Registration Statement (No. 333-109093), filed with the Commission on September
24, 2003. |
|
|
|
10.12
|
|
Fulfillment Services Agreement with Vita Sales & Distribution Multi-Country, dated
January 19, 2004, incorporated by reference to Form 10-K filed with the Commission on March
29, 2004. |
|
|
|
10.13 *
|
|
Employment Agreement by and between John W. Hail and Registrant dated effective as of
November 4, 2003, incorporated by reference to Form 10-K filed with the Commission on March
29, 2004. |
|
|
|
10.14
|
|
Commercial Industrial Real Estate Purchase Contract dated August 12, 2004 by and
between Registrant and Keltronics Corporation, incorporated by reference to Form 10-Q, filed
with the commission on November 12, 2004. |
25
|
|
|
10.15 *
|
|
Employment Agreement by and between David DArcangelo and Registrant dated effective as of
November 25, 2004, incorporated by reference to Form 10-Q,filed with the commission on May 5,
2005. |
|
|
|
15
|
|
Letter of independent accountants as to unaudited interim financial information, filed
herewith. |
|
|
|
31.1
|
|
Rule 13a-14(a) Certification by our Chairman and Chief Executive Officer, filed
herewith. |
|
|
|
31.2
|
|
Rule 13a-14(a) Certification by our Chief Financial Officer, filed herewith. |
|
|
|
32.1
|
|
Section 1350 Certification of our Chief Executive Officer, filed herewith. |
|
|
|
32.2
|
|
Section 1350 Certification of our Chief Financial Officer, filed herewith. |
|
|
|
* |
|
Designates a compensatory plan. |
26