Oklahoma
|
73-1016728
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
711
N.E. 39th
Street
|
|
Oklahoma
City, Oklahoma
|
73105
|
(Address
of principal executive offices)
|
(Zip
code)
|
Title
of each class
|
Name
of each exchange on which registered
|
Common
Stock, $0.0001 Par Value
|
American
Stock Exchange
|
Part
I.
|
||
Item
1.
|
Description
of Business
|
3
|
Item
2.
|
Description
of Property
|
19
|
Item
3.
|
Legal
Proceedings
|
20
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
20
|
Part
II.
|
||
Item
5.
|
Market
for Common Equity, Related Shareholder Matters and Small Business
Issuer
Repurchases of Equity Securities
|
20
|
Item
6.
|
Management’s
Discussion and Analysis or Plan of Operation
|
21
|
Item
7.
|
Financial
Statements
|
29
|
Item
8.
|
Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
|
29
|
Item
8A.
|
Controls
and Procedures
|
29
|
Item
8B.
|
Other
Information
|
30
|
Part
III.
|
**
|
|
Item
13.
|
Exhibits
|
30
|
·
|
24
nutritional products;
|
·
|
5
weight management products; and
|
·
|
33
personal care products consisting primarily of skin care products.
|
·
|
Investigates
health, performance and industry trends for new natural extracts
and
formulated products;
|
·
|
Searches
for formulations and ingredients that may be candidates for new
products;
|
·
|
Identifies
and compares existing and newly identified nutritional
supplements;
|
·
|
Updates
and improves existing products as new discoveries in nutrition are
made;
and
|
·
|
Prepares
products to comply with regulatory requirements of international
markets
we enter.
|
·
|
We
believe our financial resources are better allocated to product
development, marketing services and sales
support.
|
·
|
Nutritional
Supplements
-
products such as vitamins and minerals, sports performance enhancers,
meal
replacements, dietary supplements, herbs and botanicals, and compounds
derived from these substances;
|
·
|
Natural
and Organic Foods
-
products such as cereals, milk, non-dairy beverages, and frozen
entrees;
|
·
|
Functional
Foods
-
products with added ingredients or fortification specifically for
health
or performance purposes; and
|
·
|
Personal
Care
-
products combining nutrition with skin
care.
|
·
|
The
public’s exposure to more widely accepted natural and homeopathic
alternatives;
|
·
|
The
generation of baby-boomers’ desire to slow down the aging
process;
|
·
|
The
national and worldwide trend toward preventive health care combining
Eastern and Western medicine; and
|
·
|
The
rapid product introductions taking place in response to scientific
research fueled by new demand.
|
·
|
Mass
market retailers, including mass merchandisers, drug stores, supermarkets
and discount stores;
|
·
|
Natural
health food retailers;
|
·
|
Network
marketing;
|
·
|
Mail
order;
|
·
|
Healthcare
professionals and practitioners;
and
|
·
|
The
Internet.
|
·
|
Supplement
family income;
|
·
|
Start
a home business; or
|
·
|
Pursue
employment opportunities other than conventional, full-time
employment.
|
·
|
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.
|
·
|
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 earn profits from the products sold in the sign-up of
new
associates from our enroller and coding bonuses, which are tied to
the
downline organization;
|
·
|
Third,
associates who establish their own downline organization may earn
bonuses
of up to 36% of bonus value on product purchases by associates within
the
first four levels of their downline
organization;
|
·
|
Fourth,
associates who have $600 per month of product purchases on their
first and
second levels combined, become directors and have the opportunity
to build
an additional director downline organization and receive additional
bonuses of 4% of bonus value on product purchases by such downline
organization;
|
·
|
Fifth,
associates who have $1,200 per month of product purchases on their
first
and second levels combined, two director legs and $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% of bonus value on product purchases
by such downline organization;
|
·
|
Sixth,
associates who have $1,800 per month of product purchases on their
first
level and second levels combined, two silver legs 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% of
bonus
value on product purchases by their silver director downline organization.
In addition, gold directors have the opportunity to receive additional
bonuses of up to 3% of bonus value on the product purchases by associates
of silver director downline organizations that originate from their
silver
director downline organization through four generations;
and
|
·
|
Seventh,
associates who maintain the gold director requirements and develop
three
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% of bonus value on product purchases by such downline
organization.
|
·
|
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 earn profits from the products sold in the sign-up of
new
associates from our enroller bonuses and weekly bonuses of 10% of
bonus
value on the pay side volume;
|
·
|
Third,
associates who establish their own downline organization may earn
the
weekly bonus on the pay side volume, and a 50% matching bonus on
the
weekly bonuses of the first generation recruits in their downline
organization;
|
·
|
Fourth,
associates who have $5,000 per month of product purchases in their
pay
side volume, and have four personally enrolled active associates,
become
directors and have the opportunity to build an additional director
downline organization and receive additional matching bonuses of
20% of
the weekly bonuses of the second generation in their downline
organization;
|
·
|
Fifth,
associates who have $25,000 per month of product purchases in their
pay
side volume, and have four personally enrolled active associates,
become
silver directors and have the opportunity to build an additional
silver
director downline organization and receive additional matching bonuses
of
10% of the weekly bonuses of the third generation in their downline
organization;
|
·
|
Sixth,
associates who have $50,000 per month of product purchases in their
pay
side volume, and have four personally enrolled active associates,
become
gold directors and have the opportunity to build an additional gold
director downline organization and receive additional matching bonuses
of
10% of the weekly bonuses of the fourth generation in their downline
organization; and
|
·
|
Seventh,
associates who have $100,000 per month of product purchases in their
pay
side volume, and have four personally enrolled active associates,
become
platinum directors and have the opportunity to build an additional
platinum director downline organization and receive additional matching
bonuses of 10% of the weekly bonuses of the fifth generation in their
downline organization.
|
·
|
The
formulation, manufacturing, packaging, labeling, advertising,
distribution, importation, sale and storage of our
products;
|
·
|
Our
product claims and advertising, including label claims, direct claims
and
advertising, websites and testimonials, as well as claims and advertising
by associates, for which we may be held responsible;
and
|
·
|
Our
network marketing organization and
activities.
|
·
|
Controversy
over the Plan B birth control pill, including the OTC
version
|
·
|
Withdrawal
from the market of Vioxx and other Cox-2 inhibitor
drugs
|
·
|
Consequently,
a renewed urging from Congress to install an independent agency,
separate
from the FDA’s drug approval division (CDER), for the post-market
monitoring of drug safety
|
·
|
Concern
regarding the possible spread of avian flu to human to human contagion
and
the beginning of a pandemic, combined with insufficient or unreliable
prevention and treatment
|
·
|
Continued
emphasis on food safety, and
counter-bioterrorism
|
·
|
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.
|
·
|
The
right to sell a product; and
|
·
|
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.
|
·
|
Participants
were required to buy back, from any person they recruited, any salable,
unsold inventory upon the recruit 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.
|
·
|
Resigns;
and
|
·
|
Returns
the product in marketable condition within 12 months of original
purchase,
or longer where required by applicable state law or
regulations.
|
·
|
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.
|
·
|
The
Omnitrition marketing plan required associates to purchase $2,000
in
merchandise in order to qualify for bonuses as compared to $22 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.
|
·
|
Lessons
from the OMNITRITION
case are 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.
|
·
|
Large
selections of essentially similar products that are difficult to
differentiate;
|
·
|
Retail
consumer emphasis on value pricing;
|
·
|
Constantly
changing formulations based on evolving scientific
research;
|
·
|
Low
entry barriers resulting from low brand loyalty, rapid change, widely
available manufacturing, low regulatory requirements, and ready access
to
large distribution channels; and
|
·
|
A
lack of uniform standards regarding product ingredient sources, potency,
purity, absorption rate, and form.
|
Common
Stock Sales Prices
|
|||||||
High
|
Low
|
||||||
2005--Calendar
Quarter Ended:
|
|||||||
March
31
|
$
|
5.75
|
$
|
2.59
|
|||
June
30
|
$
|
2.63
|
$
|
1.64
|
|||
September
30
|
$
|
2.90
|
$
|
1.71
|
|||
December
31
|
$
|
1.59
|
$
|
0.63
|
|||
2004--Calendar
Quarter Ended:
|
|||||||
March
31
|
$
|
5.33
|
$
|
3.66
|
|||
June
30
|
$
|
6.34
|
$
|
5.12
|
|||
September
30
|
$
|
6.50
|
$
|
2.87
|
|||
December
31
|
$
|
5.98
|
$
|
2.66
|
(a)
|
(b)
|
(c)
|
||||||||
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants
and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|||||||
Equity
compensation plans approved by security holders
|
1,950,009
|
$
|
3.58
|
1,174,991
|
||||||
Equity
compensation plans not approved by security holders
|
---
|
---
|
---
|
|||||||
Total
|
1,950,009
|
$
|
3.58
|
1,174,991
|
·
|
Commissions
and bonuses, consisting of commission payments to associates based
on
their current associate level within their organization, other one-time
incentive cash bonuses to qualifying associates, and commission payments
to manufacturing sales
representives;
|
·
|
Cost
of products, consisting of the prices we pay to our manufacturers
for
marketing products, raw materials, research and development, supplies
for
the factory, factory employee costs 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 or
manufacturing customers and similar
expenses.
|
For
the Years Ended December 31,
|
|||||||||||||||||||
2005
|
2004
|
2003
|
|||||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||
Net
sales
|
$
|
13,701,324
|
100.0
|
%
|
$
|
18,203,497
|
100.0
|
%
|
$
|
18,486,178
|
100.0
|
%
|
|||||||
Cost
of sales:
|
|||||||||||||||||||
Commissions
and bonuses
|
5,234,414
|
38.2
|
8,470,653
|
46.5
|
7,797,448
|
42.2
|
|||||||||||||
Cost
of products
|
3,783,130
|
27.6
|
4,154,968
|
22.8
|
3,423,006
|
18.5
|
|||||||||||||
Cost
of shipping
|
1,418,512
|
10.4
|
1,962,900
|
10.8
|
1,529,882
|
8.3
|
|||||||||||||
Total
cost of sales
|
10,436,056
|
76.2
|
14,588,521
|
80.1
|
12,750,336
|
69.0
|
|||||||||||||
Gross
profit
|
3,265,268
|
23.8
|
3,614,976
|
19.9
|
5,735,842
|
31.0
|
|||||||||||||
Marketing,
distribution and
|
|||||||||||||||||||
administrative
expenses:
|
|||||||||||||||||||
Marketing
|
1,169,768
|
8.5
|
1,536,777
|
8.4
|
1,538,981
|
8.3
|
|||||||||||||
Distribution
and administrative
|
5,972,700
|
43.6
|
6,684,801
|
36.7
|
7,124,894
|
38.5
|
|||||||||||||
Total
marketing, distribution and
|
|||||||||||||||||||
administrative
expenses
|
7,142,468
|
52.1
|
8,221,578
|
45.2
|
8,663,875
|
46.9
|
|||||||||||||
Loss
from operations
|
(3,877,200
|
)
|
(28.3
|
)
|
(4,606,602
|
)
|
(25.3
|
)
|
(2,928,033
|
)
|
(15.8
|
)
|
|||||||
Other
income (expense):
|
|||||||||||||||||||
Interest
and dividends, net
|
(3,159
|
)
|
(0.0
|
)
|
162,161
|
0.9
|
(74,704
|
)
|
(0.4
|
)
|
|||||||||
Other
income (expenses
|
147,111
|
1.0
|
113,236
|
0.6
|
(156,963
|
)
|
(0.8
|
)
|
|||||||||||
Total
other income (expense
|
143,952
|
1.0
|
275,397
|
1.5
|
(231,667
|
)
|
(1.3
|
)
|
|||||||||||
Loss
before income taxes
|
(3,733,248
|
)
|
(27.3
|
)
|
(4,331,205
|
)
|
(23.8
|
)
|
(3,159,700
|
)
|
(17.1
|
)
|
|||||||
Income
tax
|
32,835
|
0.2
|
1,936,262
|
10.6
|
(590,839
|
)
|
(3.2
|
)
|
|||||||||||
Net
loss
|
$
|
(3,766,083
|
)
|
(27.5)%
|
$
|
(6,267,467
|
)
|
(34.4)%
|
$
|
(2,568,861
|
)
|
(13.9)%
|
·
|
a
decrease of approximately $3,236,000 in associate commissions and
bonuses
due to the cessation of our free trial program and lower sales
volume;
|
·
|
a
decrease of approximately $372,000 in the cost of products sold due
to the
cessation of our free trial program and lower sales volume, offset
by
approximately $892,000 cost of products from our manufacturing operations;
and
|
·
|
a
decrease of approximately $544,000 in shipping costs primarily due
to
cessation of our free trial program and lower sales
volume.
|
·
|
a
decrease in staffing and related payroll cost of approximately
$483,000;
|
·
|
a
decrease in professional services of approximately $346,000 related
to
legal expense, consulting expense and temporary
employees;
|
·
|
a
decrease in rent expense of approximately $339,000 related to the
recording of a lease abandonment accrual in
2004;
|
·
|
a
decrease in vehicle and equipment expense of approximately $119,000
related primarily to lower repair and maintenance
costs;
|
·
|
a
decrease in depreciation and amortization of approximately $106,000
related to the sale of various assets in 2004 and early 2005;
and
|
·
|
a
decrease in administrative expense of approximately $248,000 primarily
due
to lower bank service charges, employee relations expenses and sales
tax
expenses.
|
·
|
an
increase in bad debt expense of approximately $175,000 related to
the
reserves for doubtful accounts related to accounts and notes
receivable;
|
·
|
an
increase in shareholder relations of approximately $48,000;
and
|
·
|
administrative
expenses from our manufacturing operations of approximately $698,000,
consisting primarily of approximately $170,000 in employee costs
and
approximately $379,000 in utility
expense.
|
·
|
a
decrease in gain on sale of marketable securities of approximately
$11,000
related to the sales of marketable securities in 2005;
and
|
·
|
net
other expense of approximately $62,000 related to our manufacturing
operations.
|
·
|
The
decrease in marketing, distribution and administrative expense to
$7,142,468 during 2005 from $8,221,578 during 2004;
and
|
·
|
The
decrease in tax expense of approximately $3,400,000 due to the write
off
of the deferred tax asset in 2004.
|
·
|
An
increase of approximately $673,000 in associate commissions and
bonuses;
|
·
|
An
increase of approximately $732,000 in the cost of products sold;
and
|
·
|
An
increase of approximately $433,000 in shipping
costs.
|
·
|
An
decrease in employee costs of approximately $670,000 due to the 2003
accrual of deferred compensation;
|
·
|
An
decrease in shareholder relations of approximately $108,000 related
to the
redemption of our warrants in 2003;
and
|
·
|
A
decrease in depreciation expense of approximately $123,000 due to
asset
sales during the year.
|
·
|
An
increase in employee costs of approximately $180,000 related to increase
in personnel expense and benefits;
|
·
|
An
increase in professional fees of approximately $183,000 due to legal
fees
related to ephedra lawsuits and consulting fees related to internal
control documentation and testing;
and
|
·
|
An
increase in rent expense of approximately $182,000 related to the
lease
abandonment accrual for our previous corporate
offices.
|
·
|
An
increase in investment income of approximately $80,000 related to
marketable securities;
|
·
|
A
decrease in interest expense of approximately $160,000 due to the
extinguishment of debt;
|
·
|
A
decrease in loss on sale of assets of approximately $92,000;
and
|
·
|
A
gain on sale of marketable securities of
$143,000.
|
·
|
The
decrease in gross profit to $3,614,976 during 2004 from $5,735,842
during
2003; and
|
·
|
The
write off of the deferred tax asset in 2004 of approximately $3,400,000,
partially offset by:
|
·
|
The
decrease in marketing, distribution and administrative expense to
$8,221,578 during 2004 from $8,663,875 during
2003.
|
·
|
The
impact of several material non-recurring events, including the one-time
impairment of goodwill, the accrual of deferred compensation related
to
the employment contract of our founder and then CEO, the implementation
of
a free trial program, the write off of our deferred tax asset, and
a lease
abandonment charge related to the abandonment of the executive
offices;
|
·
|
Excessive
expenses incurred in the Heartland operations, resulting from expenditures
over and above what was represented, and a continuing excess of monthly
operating expenses over revenues;
and
|
·
|
Declining
net income, due to the FDA’s ban on ephedra products, and the replacement
of new products.
|
·
|
Reductions
in force, encompassing all departments within the
Company;
|
·
|
The
termination of a discount sales program, designed to give customers
a cash
discount after purchasing a certain dollar amount of product;
and
|
·
|
The
termination of several extra employee benefits, including vehicle
allowances and social and country-club
privileges.
|
Total
|
Less
than 1 Year
|
1
- 3 Years
|
3
- 5 Years
|
||||||||||
Long-term
debt
|
$
|
2,083,369
|
$
|
523,115
|
$
|
962,033
|
$
|
598,221
|
|||||
Capital
lease obligations
|
174,551
|
89,775
|
73,553
|
11,223
|
|||||||||
Operating
leases (1)
|
307,310
|
108,127
|
199,183
|
---
|
|||||||||
Total
|
$
|
2,565,230
|
$
|
721,017
|
$
|
1,234,769
|
$
|
609,444
|
(1)
|
Includes
abandoned lease at the Oil Center.
|
(a)(1
|
The
following financial statements of AMS Health Sciences, Inc. are included
in Item 8:
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Report
of Independent Registered Public Accounting Firm
|
F-3
|
Consolidated
Balance Sheets as of December 31, 2005 and 2004
|
F-4
|
Consolidated
Statements of Operations for Years Ended December 31, 2005, 2004
and
2003
|
F-5
|
Consolidated
Statements of Shareholders’ Equity for Years Ended December 31, 2005, 2004
and 2003
|
F-6
|
Consolidated
Statements of Cash Flows for Years Ended December 31, 2005, 2004
and
2003
|
F-7
|
Notes
to Consolidated Financial Statements for Years Ended December 31,
2005,
2004 and 2003
|
F-8
|
(a)(2)
|
Financial
Statement Schedules
|
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 | 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. |
10.2* | 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. |
10.3* | Employment Agreement by and between David D’Arcangelo 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. |
10.4* | Non-qualified Stock Option Agreement by and between David D’Arcangelo 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. |
10.5* | 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. |
10.6 | 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. |
10.7* | 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. |
10.8 | 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. |
10.9* | Employment Agreement by and between Steven G. Kochen and Registrant dated effective as of August 9, 2005, incorporated by reference to Form 8-K filed with the Commission on August 12, 2005. |
10.10* | Employment Agreement by and between Jerry W. Grizzle and Registrant dated effective as of January 25, 2006, filed herewith. |
21 | Subsidiaries, filed herewith. |
23.1 | Consent of Cole & Reed PC, filed herewith. |
23.2 | Consent of Grant Thornton LLP, filed herewith. |
31.1 | Chief Executive Officer Certification, filed herewith. |
31.2 | Chief Financial Officer Certification, 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. |
REGISTRANT:
|
|
AMS
HEALTH SCIENCES, INC.
|
|
Date:
March 31, 2006
|
By:
/S/
JERRY W. GRIZZLE .
|
Jerry W. Grizzle
|
|
Chief Executive Officer, President, Chairman of the Board, and
Director
|
Date:
March 31, 2006
|
By:
/S/
JERRY W. GRIZZLE
|
|
Jerry W. Grizzle
|
|
Chief Executive Officer, President, Chairman of the Board and
Director
|
Date:
March 31, 2006
|
By:
/S/
ROBIN L. JACOB
|
|
Robin L. Jacob
|
|
Chief Financial Offdicer, Vice President, Secretary, Treasurer and
Director
|
Date:
March 31, 2006
|
By:
/S/
M. THOMAS BUXTON III
|
|
M. Thomas Buxton III
|
Director
|
|
Date:
March 31, 2006
|
By:
/S/
STEVEN M. DICKEY
|
|
Steven M. Dickey
|
Director
|
|
Date:
March 31, 2006
|
By:
/S/
STEPHEN E. JONES
|
|
Stephen E. Jones
|
Director
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Report
of Independent Registered Public Accounting Firm
|
F-3
|
Consolidated
Balance Sheets as of December 31, 2005 and 2004
|
F-4
|
Consolidated
Statements of Operations for Years Ended December 31, 2005, 2004
and
2003
|
F-5
|
Consolidated
Statements of Shareholders’ Equity for Years Ended December 31, 2005, 2004
and 2003
|
F-6
|
Consolidated
Statements of Cash Flows for Years Ended December 31, 2005, 2004
and
2003
|
F-7
|
Notes
to Consolidated Financial Statements for Years Ended December 31,
2005,
2004 and 2003
|
F-8
|
ASSETS
|
2005
|
2004
|
|||||
CURRENT
ASSETS:
|
|||||||
Cash
and cash equivalents
|
$
|
120,309
|
$
|
588,909
|
|||
Marketable
securities, available for sale, at fair value
|
278,131
|
2,803,863
|
|||||
Receivables,
net of allowance of $175,172 and $0 respectively
|
404,682
|
236,318
|
|||||
Inventory,
net
|
1,022,031
|
1,476,968
|
|||||
Other
assets
|
24,542
|
50,739
|
|||||
Total
current assets
|
1,849,695
|
5,156,797
|
|||||
RESTRICTED
SECURITIES
|
75,477
|
—
|
|||||
RECEIVABLES
|
44,016
|
204,584
|
|||||
PROPERTY
AND EQUIPMENT, net
|
4,506,884
|
3,862,111
|
|||||
COVENANTS
NOT TO COMPETE and other intangibles, net
|
402,370
|
480,187
|
|||||
OTHER
ASSETS
|
26,795
|
38,924
|
|||||
TOTAL
|
$
|
6,905,237
|
$
|
9,742,603
|
|||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
CURRENT
LIABILITIES:
|
|||||||
Accounts
payable
|
$
|
537,422
|
$
|
326,784
|
|||
Bank
overdraft
|
203,500
|
395,936
|
|||||
Accrued
commissions and bonuses
|
254,828
|
345,062
|
|||||
Accrued
other expenses
|
385,729
|
587,173
|
|||||
Accrued
sales tax liability
|
40,980
|
128,493
|
|||||
Notes
payable
|
412,681
|
—
|
|||||
Capital
lease obligations
|
80,150
|
111,430
|
|||||
Total
current liabilities
|
1,915,290
|
1,894,878
|
|||||
LONG-TERM
LIABILITES:
|
|||||||
Notes
payable
|
1,670,688
|
—
|
|||||
Capital
lease obligations
|
74,320
|
205,874
|
|||||
Deferred
compensation
|
615,301
|
671,748
|
|||||
Lease
abandonment liability
|
110,249
|
171,412
|
|||||
Total
liabilities
|
4,385,848
|
2,943,912
|
|||||
COMMITMENTS
AND CONTINGENCIES (Notes 7 and 14)
|
|||||||
SHAREHOLDERS’
EQUITY:
|
|||||||
Common
stock - $.0001 par value; authorized 495,000,000 shares; issued 8,344,803
and 7,496,385 shares; outstanding 7,766,574 and6,904,790 shares,
respectively
|
835
|
750
|
|||||
Paid-in
capital
|
21,870,872
|
20,331,852
|
|||||
Notes
receivable for exercise of options
|
(31,000
|
)
|
(31,000
|
)
|
|||
Accumulated
deficit
|
(16,674,324
|
)
|
(10,955,185
|
)
|
|||
Accumulated
other comprehensive income (loss), net of tax
|
(14,215
|
)
|
85,053
|
||||
Total
capital and accumulated deficit
|
5,152,168
|
9,431,470
|
|||||
Less
cost of treasury stock (591,595 shares)
|
(2,632,779
|
)
|
(2,632,779
|
)
|
|||
Total
shareholders’ equity
|
2,519,389
|
6,798,691
|
|||||
TOTAL
|
$
|
6,905,237
|
$
|
9,742,603
|
2005
|
2004
|
2003
|
||||||||
Net
sales
|
$
|
13,701,324
|
$
|
18,203,497
|
$
|
18,486,178
|
||||
Cost
of sales
|
10,436,056
|
14,588,521
|
12,750,336
|
|||||||
Gross
profit
|
3,265,268
|
3,614,976
|
5,735,842
|
|||||||
Marketing,
distribution and administrative expenses:
|
||||||||||
Marketing
|
1,169,768
|
1,536,777
|
1,538,981
|
|||||||
Distribution
and administration
|
5,972,700
|
6,684,801
|
7,124,894
|
|||||||
Total
marketing, distribution and administrative expenses
|
7,142,468
|
8,221,578
|
8,663,875
|
|||||||
Loss
from operations
|
(3,877,200
|
)
|
(4,606,602
|
)
|
(2,928,033
|
)
|
||||
Other
income (expense):
|
||||||||||
Interest
and dividends, net
|
(3,159
|
)
|
162,161
|
(74,704
|
)
|
|||||
Other
income (expense), net
|
147,111
|
113,236
|
(156,963
|
)
|
||||||
Total
other income (expense)
|
143,952
|
275,397
|
(231,667
|
)
|
||||||
Loss
before taxes
|
(3,733,248
|
)
|
(4,331,205
|
)
|
(3,159,700
|
)
|
||||
Income
tax expense (benefit)
|
32,835
|
1,936,262
|
(590,839
|
)
|
||||||
NET
LOSS
|
$
|
(3,766,083
|
)
|
$
|
(6,267,467
|
)
|
$
|
(2,568,861
|
)
|
|
Net
loss per common share - basic
|
$
|
(.52
|
)
|
$
|
(.90
|
)
|
$
|
(.57
|
)
|
|
Net
loss per common share - assuming dilution
|
$
|
(.52
|
)
|
$
|
(.90
|
)
|
$
|
(.57
|
)
|
|
Weighted
average common shares outstanding - basic
|
7,307,455
|
6,946,085
|
4,508,986
|
|||||||
Weighted
average common shares - assuming dilution
|
7,307,455
|
6,946,085
|
4,508,986
|
Shares
(See Note
9)
|
Common
Stock
|
Paid-In
Capital
|
Notes
Receivable for Exercise of Options
|
(Accumulated
Deficit)
|
Comprehensive
Income
(Loss)
|
Accumulated
Other Comprehensive Income (Loss), Net of
Tax
|
Treasury
Stock
|
Total
Share holders’ Equity
|
||||||||||||||||||||
BALANCE,JANUARY
1, 2003
|
4,424,314
|
$
|
490
|
$
|
11,793,240
|
$
|
(31,000
|
)
|
$
|
(2,118,857
|
)
|
$
|
(68,968
|
)
|
$
|
(2,244,476
|
)
|
$
|
7,330,429
|
|||||||||
Options
exercised with cash
|
369,838
|
37
|
1,090,483
|
—
|
—
|
—
|
—
|
—
|
1,090,520
|
|||||||||||||||||||
Warrants
exercised with cash
|
581,575
|
58
|
2,131,217
|
—
|
—
|
—
|
—
|
—
|
2,131,275
|
|||||||||||||||||||
Stock
issued
|
56,785
|
5
|
145,243
|
—
|
—
|
—
|
—
|
—
|
145,248
|
|||||||||||||||||||
Comprehensive
Income (loss):
|
||||||||||||||||||||||||||||
Net
Loss
|
—
|
—
|
—
|
—
|
(2,568,861
|
)
|
(2,568,861
|
)
|
—
|
—
|
(2,568,861
|
)
|
||||||||||||||||
Unrealized
gain available for sale securities, net of tax
|
—
|
—
|
—
|
—
|
—
|
165,252
|
165,252
|
—
|
165,252
|
|||||||||||||||||||
Comprehensive
loss
|
—
|
—
|
—
|
—
|
—
|
$
|
(2,403,609
|
)
|
—
|
—
|
—
|
|||||||||||||||||
BALANCE,
DECEMBER 31, 2003
|
5,432,512
|
590
|
15,160,183
|
(31,000
|
)
|
(4,687,718
|
)
|
96,284
|
(2,244,476
|
)
|
8,293,863
|
|||||||||||||||||
Options
exercised with cash
|
416,014
|
42
|
1,177,994
|
—
|
—
|
—
|
—
|
—
|
1,178,036
|
|||||||||||||||||||
Warrants
exercised with cash
|
1,170,064
|
117
|
3,978,101
|
—
|
—
|
—
|
—
|
—
|
3,978,218
|
|||||||||||||||||||
Stock
issued
|
5,000
|
1
|
13,999
|
—
|
—
|
—
|
—
|
—
|
14,000
|
|||||||||||||||||||
Disgorgement
of profits
|
—
|
—
|
1,575
|
—
|
—
|
—
|
—
|
—
|
1,575
|
|||||||||||||||||||
Purchase
of Treasury Stock
|
(118,800
|
)
|
—
|
—
|
—
|
—
|
—
|
—
|
(388,303
|
)
|
(388,303
|
)
|
||||||||||||||||
Comprehensive
Loss:
|
||||||||||||||||||||||||||||
Net
Loss
|
—
|
—
|
—
|
—
|
(6,267,467
|
)
|
(6,267,467
|
)
|
—
|
—
|
(6,267,467
|
)
|
||||||||||||||||
Unrealized
loss available for sale securities, net of tax
|
—
|
—
|
—
|
—
|
—
|
(11,231
|
)
|
(11,231
|
)
|
—
|
(11,231
|
)
|
||||||||||||||||
Comprehensive
loss
|
—
|
—
|
—
|
—
|
—
|
$
|
(6,278,698
|
)
|
—
|
—
|
—
|
|||||||||||||||||
BALANCE,
DECEMBER 31, 2004
|
6,904,790
|
$
|
750
|
$
|
20,331,852
|
$
|
(31,000
|
)
|
$
|
(10,955,185
|
)
|
$
|
85,053
|
$
|
(2,632,779
|
)
|
$
|
6,798,691
|
||||||||||
Options
exercised with cash
|
640,918
|
64
|
1,194,327
|
—
|
—
|
—
|
—
|
—
|
1,194,391
|
|||||||||||||||||||
Stock
issued
|
20,866
|
1
|
18,962
|
—
|
—
|
—
|
—
|
—
|
18,963
|
|||||||||||||||||||
Acquisition
|
200,000
|
20
|
317,980
|
—
|
(1,953,056
|
)
|
—
|
—
|
—
|
(1,635,056
|
)
|
|||||||||||||||||
Disgorgement
of profits
|
—
|
—
|
7,751
|
—
|
—
|
—
|
—
|
—
|
7,751
|
|||||||||||||||||||
Comprehensive
Loss:
|
||||||||||||||||||||||||||||
Net
Loss
|
—
|
—
|
—
|
—
|
(3,766,083
|
)
|
(3,766,083
|
)
|
—
|
—
|
(3,766,083
|
)
|
||||||||||||||||
Unrealized
loss available for sale securities, net of tax
|
—
|
—
|
—
|
—
|
—
|
(99,268
|
)
|
(99,268
|
)
|
—
|
(99,268
|
)
|
||||||||||||||||
Comprehensive
loss
|
—
|
—
|
—
|
—
|
—
|
$
|
(3,865,351
|
)
|
—
|
—
|
—
|
|||||||||||||||||
BALANCE,
DECEMBER 31, 2005
|
7,766,574
|
$
|
835
|
$
|
21,870,872
|
$
|
(31,000
|
)
|
$
|
(16,674,324
|
)
|
$
|
(14,215
|
)
|
$
|
(2,632,779
|
)
|
$
|
2,519,389
|
2005
|
2004
|
2003
|
||||||||
CASH
FLOWS FROM OPERATING ACTIVITES:
|
||||||||||
Net
loss
|
$
|
(3,766,083
|
)
|
$
|
(6,267,467
|
)
|
$
|
(2,568,861
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||
Depreciation
and amortization
|
820,746
|
865,436
|
982,168
|
|||||||
Bad
debt expense
|
175,172
|
|||||||||
Stock
issued for services
|
18,963
|
14,000
|
73,600
|
|||||||
Employee
compensation recognized upon exercise of stock options
|
66,602
|
205,923
|
282,653
|
|||||||
Deferred
taxes
|
32,835
|
1,894,822
|
(590,839
|
)
|
||||||
Loss
(gain) on sale of assets
|
(5,468
|
)
|
25,719
|
117,273
|
||||||
Realized
(gain) loss on sale of marketable securities
|
(123,098
|
)
|
(122,165
|
)
|
52,557
|
|||||
Inventory
obsolescence expense
|
86,352
|
—
|
—
|
|||||||
Changes
in assets and liabilities which provided (used) cash:
|
||||||||||
Receivables
|
58,574
|
204,458
|
(310,645
|
)
|
||||||
Inventory
|
642,051
|
(575,439
|
)
|
(103,377
|
)
|
|||||
Prepaid
taxes and income tax receivable
|
—
|
464,975
|
—
|
|||||||
Other
assets
|
26,198
|
(8,028
|
)
|
2,478
|
||||||
Accounts
payable and accrued expenses
|
(548,532
|
)
|
356,432
|
352,330
|
||||||
Lease
abandonment liability
|
16,852
|
171,412
|
—
|
|||||||
Deferred
compensation
|
(56,447
|
)
|
3,675
|
668,073
|
||||||
Net
cash used in operating activities
|
(2,555,283
|
)
|
(2,766,247
|
)
|
(1,042,590
|
)
|
||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||
Purchases
of property and equipment
|
(247,520
|
)
|
(1,322,873
|
)
|
(406,891
|
)
|
||||
Sales
of property and equipment
|
283,906
|
307,696
|
25,678
|
|||||||
Acquisition
of new business, net of cash acquired
|
(1,203,587
|
)
|
—
|
—
|
||||||
Receipts
on notes receivable
|
12,274
|
4,369
|
123,593
|
|||||||
Repayment
of related party receivables
|
—
|
—
|
63,562
|
|||||||
Purchase
of marketable securities, available for sale
|
(4,708,594
|
)
|
(8,342,687
|
)
|
(1,240,980
|
)
|
||||
Sale
of marketable securities, available for sale
|
7,149,842
|
7,519,941
|
1,197,841
|
|||||||
Net
cash provided by (used in) in investing activities
|
1,286,321
|
(1,833,554
|
)
|
(237,197
|
)
|
|||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||
Overdrafts
|
(203,500
|
)
|
395,936
|
—
|
||||||
Proceeds
from issuance of common stock
|
1,228,540
|
973,687
|
879,515
|
|||||||
Proceeds
from exercise of warrants
|
—
|
3,978,218
|
2,131,275
|
|||||||
Purchases
of treasury stock
|
—
|
(388,303
|
)
|
—
|
||||||
Payment
of notes payable
|
(57,207
|
)
|
(1,989,170
|
)
|
(486,586
|
)
|
||||
Principal
payment on capital lease obligations
|
(167,471
|
)
|
(90,939
|
)
|
(142,435
|
)
|
||||
Net
cash provided by financing activities
|
800,362
|
2,879,429
|
2,381,769
|
|||||||
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
(468,600
|
)
|
(1,720,372
|
)
|
1,101,982
|
|||||
CASH
AND CASH EQUIVALENTS, BEGINNING
|
588,909
|
2,309,281
|
1,207,299
|
|||||||
CASH
AND CASH EQUIVALENTS, ENDING
|
$
|
120,309
|
$
|
588,909
|
$
|
2,309,281
|
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
For
the Year Ended December 31,
|
||||||||||
2005
|
2004
|
2003
|
||||||||
Non-compete
covenants, gross
|
$
|
644,000
|
$
|
644,000
|
$
|
644,000
|
||||
Deferred
acquisition costs, and other intangibles, gross
|
428,338
|
428,338
|
428,338
|
|||||||
Total
intangibles, gross
|
$
|
1,072,338
|
$
|
1,072,338
|
$
|
1,072,338
|
||||
Accumulated
amortization, non-compete covenants
|
$
|
562,883
|
$
|
506,483
|
$
|
450,083
|
||||
Accumulated
amortization, deferred acquisition costs and other
intangibles
|
107,085
|
85,668
|
64,251
|
|||||||
Total
accumulated amortization.
|
$
|
669,968
|
$
|
592,151
|
$
|
514,334
|
||||
Non-compete
covenants, net
|
$
|
81,117
|
$
|
137,517
|
$
|
193,917
|
||||
Deferred
acquisition costs, and other intangibles, net
|
321,253
|
342,670
|
364,087
|
|||||||
Total
intangibles, net
|
$
|
402,370
|
$
|
480,187
|
$
|
558,004
|
2005
|
2004
|
2003
|
||||||||
Unrealized
gain (loss) on investment arising during the period
|
$
|
(25,892
|
)
|
$
|
63,373
|
$
|
120,915
|
|||
Less
reclassification adjustment for gains (losses) included in net
earnings
|
73,376
|
74,604
|
(44,337
|
)
|
||||||
Unrealized
gain (loss) on investment, net of income tax expense (benefit) of
$(60,071), $(6,796) and $100,000, respectively
|
$
|
(99,268
|
)
|
$
|
(11,231
|
)
|
$
|
165,252
|
·
|
The
impact of several material non-recurring events, including the one-time
impairment of goodwill, the accrual of deferred compensation related
to
the employment contract of the Company’s founder and then CEO, the
implementation of a free trial program, the write off of the Company’s
deferred tax asset, and a lease abandonment charge related to the
abandonment of the executive
offices;
|
·
|
Excessive
expenses incurred in the Heartland operations, resulting from expenditures
over and above what was represented, and a continuing excess of monthly
operating expenses over revenues;
and
|
·
|
Declining
net income, due to the FDA’s ban on ephedra products, and the replacement
of new products.
|
·
|
Reductions
in force, encompassing all departments within the
Company;
|
·
|
The
termination of a discount sales program, designed to give customers
a cash
discount after purchasing a certain dollar amount of product;
and
|
·
|
The
termination of several extra employee benefits, including vehicle
allowances and social and country-club
privileges.
|
Years
Ended December 31,
|
||||||||||
2005
|
2004
|
2003
|
||||||||
Net
loss as reported
|
$
|
(3,766,083
|
)
|
$
|
(6,267,467
|
)
|
$
|
(2,568,861
|
)
|
|
Less:
Total stock-based employee compensation expense determined under
fair
value based method for all awards, net of related tax
effects
|
(711,123
|
)
|
(1,648,652
|
)
|
(622,275
|
)
|
||||
Proforma
net loss
|
$
|
(4,477,206
|
)
|
$
|
(7,916,119
|
)
|
$
|
(3,191,136
|
)
|
|
Net
loss per common share as reported
|
$
|
(.52
|
)
|
$
|
(.90
|
)
|
$
|
(.57
|
)
|
|
Proforma
net loss per common share, basic and diluted
|
$
|
(.61
|
)
|
$
|
(1.14
|
)
|
$
|
(.71
|
)
|
|
Weighted
average common shares outstanding, basic and diluted
|
7,307,455
|
6,946,085
|
4,508,986
|
2. | MARKETABLE SECURITIES |
December
31, 2005
|
|||||||||||||
Cost/
|
Gross
|
Gross
|
Estimated
|
||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||
Type
of investment
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||
Short
term investments - available for sale
|
$
|
278,131
|
$
|
—
|
$
|
—
|
$
|
278,131
|
Debt
securities - available for sale
|
|||||||||||||
Corporate
Bonds
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
Mutual
Funds
|
—
|
—
|
—
|
—
|
|||||||||
|
$ | __ |
$
|
—
|
$
|
—
|
$
|
—
|
|||||
Equities
- available for sale
|
|||||||||||||
Mutual
Funds
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
$
|
278,131
|
$
|
—
|
$
|
—
|
$
|
278,131
|
December
31, 2004
|
|||||||||||||
Cost/
|
Gross
|
Gross
|
Estimated
|
||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||
Type
of investment
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||
Short
term investments - available for sale
|
$
|
31,358
|
$
|
—
|
$
|
—
|
$
|
31,358
|
Debt
securities - available for sale
|
|||||||||||||
Corporate
Bonds
|
$
|
194,513
|
$
|
—
|
$
|
(2,451
|
)
|
$
|
192,062
|
||||
Mutual
Funds
|
1,187,352
|
—
|
(15,278
|
)
|
1,172,074
|
||||||||
|
1,381,865
|
$
|
—
|
$
|
(17,729
|
)
|
$
|
1,364,136
|
|||||
Equities
- available for sale
|
|||||||||||||
Mutual
Funds
|
$
|
1,258,567
|
$
|
149,802
|
$
|
—
|
$
|
1,408,369
|
|||||
$
|
2,671,790
|
$
|
149,802
|
$
|
(17,729
|
)
|
$
|
2,803,863
|
3. | RESTRICTED INVESTMENTS |
4. | INVENTORY |
2005
|
2004
|
||||||
Raw
materials
|
$
|
360,888
|
$
|
382,534
|
|||
Finished
goods
|
747,495
|
1,094,434
|
|||||
Obsolescence
reserve
|
(86,352
|
)
|
—
|
||||
Net
inventory
|
$
|
1,022,031
|
$
|
1,476,968
|
5. | PROPERTY AND EQUIPMENT |
2005
|
2004
|
||||||
Office
furniture, fixtures and equipment
|
$
|
6,555,786
|
$
|
5,027,281
|
|||
Vehicles
|
343,771
|
556,009
|
|||||
Leasehold
improvements
|
62,793
|
62,793
|
|||||
Building
|
2,316,966
|
2,275,300
|
|||||
Land
|
148,308
|
148,308
|
|||||
9,427,624
|
8,069,691
|
||||||
Accumulated
depreciation and amortization
|
(4,920,740
|
)
|
(4,207,580
|
)
|
|||
Total
property and equipment, net
|
$
|
4,506,884
|
$
|
3,862,111
|
6. | DEBT |
2005
|
2004
|
||||||
Note
payable to bank, with interest adjusted annually (7.00% at December
31,
2005), collateralized with the Company’s executive offices, payable in
monthly installments of $12,875
|
$
|
650,000
|
$
|
—
|
|||
Note
payable to bank, with interest adjusted annually (7.00% at December
31,
2005), collateralized by equipment, inventory and furniture and fixtures
of Heartland, payable in monthly installments of $7,251
|
563,229
|
—
|
|||||
Note
payable to Rural Enterprises of Oklahoma, with a 4.30% effective
rate,
collateralized by equipment, inventory and furniture and fixtures
of
Heartland, payable in monthly installments of $4,864
|
399,074
|
—
|
|||||
Note
payable to bank, collateralized by inventory of Heartland, balloon
note
due and payable May 8, 2006
|
200,000
|
—
|
|||||
Note
payable to bank, with interest at 8.00%, collateralized by the Company’s
offices and warehouse, payable in monthly installments of
$3,735
|
182,307
|
—
|
|||||
Note
payable to Rural Enterprises of Oklahoma, with interest at 7.50%,
payable
in monthly installments of $950
|
73,458
|
—
|
|||||
Note
payable to bank for 2003 one-ton truck, with interest at 6.50%, payable
in
monthly installments of $471
|
15,301
|
—
|
|||||
2,083,369
|
|||||||
Less
current maturities
|
412,681
|
—
|
|||||
$
|
1,670,688
|
$
|
—
|
7. | LEASE AGREEMENTS |
Capital
Leases
|
Operating
Leases
|
Total
|
||||||||
Year
ending:
|
||||||||||
2006
|
$
|
89,775
|
$
|
108,127
|
$
|
197,902
|
||||
2007
|
56,999
|
118,541
|
175,540
|
|||||||
2008
|
16,554
|
71,266
|
87,820
|
|||||||
2009
|
9,012
|
9,375
|
18,387
|
|||||||
2010
|
2,211
|
----
|
2,211
|
|||||||
Total
minimum lease payments
|
174,551
|
$
|
307,309
|
$
|
481,860
|
|||||
Less
amount representing interest
|
20,081
|
|||||||||
Present
value of net minimum lease payments
|
154,470
|
|||||||||
Less
current portion
|
80,150
|
|||||||||
Long-term
capital lease obligations
|
$
|
74,320
|
2006
|
$
|
54,000
|
||
2007
|
54,000
|
|||
2008
|
22,500
|
|||
Total
|
$
|
130,500
|
8. | LEASE ABONDONMENT |
Liability
accrued at December 31, 2004
|
$
|
249,354
|
||
Adjustment
to accrual
|
28,797
|
|||
Total
accrual recorded in expense
|
278,151
|
|||
Payment
of rent, net of sublease revenue
|
(89,887
|
)
|
||
Ending
liability accrual balance
|
$
|
188,264
|
||
Accrual
portion in current liabilities
|
$
|
78,015
|
||
Accrual
portion in long-term liabilities
|
110,249
|
|||
Ending
liability accrual balance
|
$
|
188,264
|
9. | SHAREHOLDERS' EQUITY |
2005
|
Weighted
Average
Exercise
Price
|
2004
|
Weighted
Average
Exercise
Price
|
2003
|
Weighted
Average
Exercise
Price
|
||||||||||||||
Options
and other warrants outstanding beginning of year
|
2,935,334
|
$
|
2.95
|
2,691,808
|
$
|
2.04
|
1,756,653
|
$
|
2.36
|
||||||||||
Options
and other warrants issued during the year
|
310,500
|
1.96
|
667,370
|
2.61
|
1,348,151
|
1.64
|
|||||||||||||
Options
and other warrants exercised during the year
|
(640,918
|
)
|
1.76
|
(416,014
|
)
|
2.25
|
(369,838
|
)
|
2.18
|
||||||||||
Option
and other warrants cancelled during the year
|
(429,907
|
)
|
1.50
|
(7,830
|
)
|
3.19
|
(43,158
|
)
|
3.04
|
||||||||||
Options
and other warrants expired during the year
|
(225,000
|
)
|
2.00
|
—
|
—
|
—
|
—
|
||||||||||||
Options
and other warrants outstanding end of year
|
1,950,009
|
$
|
3.58
|
2,935,334
|
$
|
2.95
|
2,691,808
|
$
|
2.04
|
Options
and Other Warrants Outstanding
|
Options
and Other Warrants Exercisable
|
||||
Range
of
Exercise
Prices
|
Number
Outstanding
at
12/31/05
|
Weighted-Average
Remaining
Contractual
Life
|
Weighted-Average
Exercise
Price
|
Number
Exercisable
at
12/31/05
|
Weighted-Average
Exercise
Price
|
$1.30
- $2.95
|
1,619,652
|
6.76
years
|
$2.09
|
1,619,652
|
$2.09
|
$3.00
- $4.75
|
286,543
|
5.26
years
|
$3.66
|
286,543
|
$3.66
|
$5.25
- $6.13
|
43,814
|
4.24
years
|
$5.75
|
43,814
|
$5.75
|
1,950,009
|
$2.40
|
1,950,009
|
$2.40
|
Warrants
Issued
and
Outstanding
|
Exercise
Price
|
Exercise
Period
|
||||||||
December
31, 2004:
|
||||||||||
1997-A
Warrants, beginning of the year
|
303,315
|
$
|
3.40
|
1/31/97-11/06/04
|
||||||
1997-A
Warrants, exercised during the year
|
204,805
|
$
|
3.40
|
|||||||
1997-A Warrants, redeemed during the year
|
98,510
|
$
|
0.00025
|
|||||||
1997-A
Warrants, end of the year
|
---
|
$
|
---
|
|||||||
Redeemable Common Stock Purchase Warrants, beginning of the
year
|
1,013,798
|
$
|
3.40
|
11/06/97-11/06/04
|
||||||
Common Stock Purchase Warrants, exercised during the year
|
965,259
|
$
|
3.40
|
|||||||
Redeemable Common Stock Purchase Warrants, redeemed during the
year
|
48,539
|
$
|
0.24455
|
|||||||
Redeemable
Common Stock Purachse Warrants, end of the year
|
---
|
$
|
---
|
|||||||
Underwriters' Warrants, beginning of the year
|
35,960
|
$
|
5.40
|
11/12/98-11/12/04
|
||||||
Underwriters' Warrants, exercised during the year
|
35,960
|
$
|
5.40
|
|||||||
Underwriters’
Warrants, end of the year
|
---
|
$
|
---
|
|||||||
December
31, 2003:
|
||||||||||
1997-A Warrants, beginning of the year
|
308,768
|
$
|
3.40
|
1/31/97-11/06/04
|
||||||
1997-A Warrants, exercised during the year
|
5,453
|
$
|
3.40
|
|||||||
1997-A
Warrants, end of the year
|
303,315
|
$
|
3.40
|
|||||||
Redeemable Common Stock Purchase Warrants, beginning of the
year
|
1,436,000
|
$
|
3.40
|
11/06/97-11/06/04
|
||||||
Redeemable Common Stock Purchase Warrants, exercised during the
year
|
422,202
|
$
|
3.40
|
|||||||
Redeemable
Common Stock Purchase Warrants, end of the year
|
1,013,798
|
$
|
3.40
|
|||||||
Underwriters' Warrants, beginning of the year
|
130,000
|
$
|
5.40
|
11/12/98-11/12/04
|
||||||
Underwriters' Warrants, exercised during the year
|
94,040
|
$
|
5.40
|
|||||||
Underwriters’
Warrants, end of the year
|
35,960
|
$
|
5.40
|
10. | STOCK OPTION PLANS |
11. | RELATED PARTIES |
12. | INCOME TAXES |
|
2005
|
2004
|
2003
|
|||||||
Statutory
federal income tax rate
|
(34.0
|
)%
|
(34.0
|
)%
|
(34.0
|
)%
|
||||
State
tax effective rate
|
(4.0
|
)
|
(4.0
|
)
|
(4.0
|
)
|
||||
Permanent
differences
|
0.9
|
2.7
|
7.5
|
|||||||
Benefit
of graduated tax rates
|
-
|
0.2
|
0.2
|
|||||||
Prior
year assessments finalized
|
-
|
0.9
|
(2.4
|
)
|
||||||
Increase
in valuation allowance
|
38.0
|
80.4
|
14.0
|
|||||||
Other
|
-
|
(1.5
|
)
|
-
|
||||||
0.9
|
%
|
44.7
|
%
|
(18.7
|
)%
|
December
31,
|
|||||||
2005
|
2004
|
||||||
Deferred
tax liabilities:
|
|||||||
Depreciation
|
$
|
(207,028
|
)
|
$
|
(424,722
|
)
|
|
Unrealized gains | - | (49,844 | ) | ||||
Total
deferred tax liabilities
|
(207,028
|
)
|
(474,566
|
)
|
|||
Deferred
tax assets:
|
|||||||
Unrealized
losses
|
10,284
|
-
|
|
||||
Goodwill
impairment and other intangibles
|
969,620
|
1,282,569
|
|||||
Net
operating loss carryforwards
|
4,068,173
|
2,647,973
|
|||||
Deferred
compensation
|
246,732
|
253,488
|
|||||
Allowance
for doubtful accounts
|
55,655
|
- | |||||
Inventory
|
70,696
|
41,471
|
|||||
Allowance
for obsolete inventory
|
32,585
|
- | |||||
Lease
abandonment
|
41,603
|
94,095
|
|||||
Employee
benefit accrual
|
24,687
|
35,573
|
|||||
Other
|
47,566
|
40,912
|
|||||
Valuation
allowance
|
(5,360,573
|
)
|
(3,921,515
|
)
|
|||
Total
deferred tax assets
|
207,028
|
474,566
|
|||||
Net
deferred taxes
|
-
|
-
|
|||||
Less
current portion of net deferred tax assets
|
-
|
-
|
|||||
Noncurrent
portion of deferred tax asset
|
$
|
-
|
$
|
-
|
13. | SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
Year
Ended December 31,
|
||||||||||
2005
|
2004
|
2003
|
||||||||
Cash
paid (received) during the year for:
|
||||||||||
Interest
|
$
|
78,395
|
$
|
8,536
|
$
|
140,232
|
||||
Income
taxes refund
|
—
|
(423,535
|
)
|
—
|
||||||
Noncash
financing and investing activities:
|
||||||||||
Property
and equipment acquired by capital lease
|
—
|
186,409
|
131,807
|
|||||||
Note
payable for purchase of vehicle
|
—
|
—
|
31,128
|
|||||||
14. | COMMITMENTS, CONTINGENCIES AND GUARANTEES |
15. | DEFERRED COMPENSATION |
16. | ACQUISITIONS |
PRO
FORMA CONSOLIDATED BALANCE SHEET
|
|||||||||||||
AT
DECEMBER 31, 2005
|
|||||||||||||
Pro
Forma
|
|||||||||||||
AMS
|
Heartland
|
Adjustments
|
Consolidated
|
||||||||||
ASSETS
|
|||||||||||||
CURRENT
ASSETS:
|
|||||||||||||
Cash
and cash equivalents
|
$
|
118,805
|
$
|
1,504
|
$
|
—
|
$
|
120,309
|
|||||
Marketable
securities, available for sale, at fair value
|
278,131
|
—
|
—
|
278,131
|
|||||||||
Receivables
- net of allowance for doubtful accounts
|
59,845
|
344,837
|
—
|
404,682
|
|||||||||
Inventory
|
860,541
|
161,490
|
—
|
1,022,031
|
|||||||||
Other
assets
|
24,542
|
—
|
—
|
24,542
|
|||||||||
Total
current assets
|
1,341,864
|
507,831
|
—
|
1,849,695
|
|||||||||
RESTRICTED
SECURITIES
|
75,477
|
—
|
—
|
75,477
|
|||||||||
RECEIVABLES
|
44,016
|
—
|
—
|
44,016
|
|||||||||
PROPERTY
AND EQUIPMENT, net
|
3,131,092
|
1,375,792
|
—
|
4,506,884
|
|||||||||
INVESTMENT
IN SUBSIDIARY
|
533,000
|
—
|
|
(533,000
|
)
|
—
|
|||||||
INTERCOMPANY
|
1,652,481
|
—
|
(1,652,481
|
)
|
—
|
||||||||
COVENANTS
NOT TO COMPETE and other intangibles, net
|
402,370
|
—
|
-- |
402,370
|
|||||||||
OTHER
ASSETS
|
26,795
|
—
|
—
|
26,795
|
|||||||||
TOTAL
|
$
|
7,207,095
|
$
|
1,883,623
|
$
|
(2,185,481
|
)
|
$
|
6,905,237
|
||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||||||||
CURRENT
LIABILITIES:
|
|||||||||||||
Accounts
payable
|
$
|
391,615
|
$
|
145,807
|
$
|
—
|
$
|
537,422
|
|||||
Bank
overdraft
|
203,500
|
—
|
—
|
203,500
|
|||||||||
Accrued
commissions and bonuses
|
254,828
|
—
|
—
|
254,828
|
|||||||||
Accrued
other expenses
|
355,400
|
30,329
|
—
|
385,729
|
|||||||||
Accrued
sales tax liability
|
40,980
|
—
|
—
|
40,980
|
|||||||||
Notes
payable
|
—
|
412,681
|
—
|
412,681
|
|||||||||
Capital
lease obligations
|
76,650
|
3,500
|
—
|
80,150
|
|||||||||
Total
current liabilities
|
1,322,973
|
592,317
|
—
|
1,915,290
|
|||||||||
LONG-TERM
LIABILITIES:
|
|||||||||||||
Notes
payable
|
—
|
1,670,688
|
—
|
1,670,688
|
|||||||||
Capital
lease obligations
|
74,320
|
—
|
—
|
74,320
|
|||||||||
Deferred
compensation
|
615,301
|
—
|
—
|
615,301
|
|||||||||
Lease
abandonment liability
|
110,249
|
—
|
—
|
110,249
|
Intercompany
|
—
|
1,652,481
|
|
(1,652,481
|
)
|
—
|
|||||||
Total
liabilities
|
2,122,844
|
3,915,485
|
(1,652,481
|
)
|
4,385,848
|
||||||||
COMMITMENTS
AND CONTENGENCIES
|
|||||||||||||
SHAREHOLDERS’
EQUITY:
|
|||||||||||||
Common
stock
|
835
|
225,000
|
(225,000
|
)
|
835
|
||||||||
Paid-in
capital
|
21,870,872
|
—
|
—
|
21,870,872
|
|||||||||
Notes
receivable for exercise of options
|
(31,000
|
)
|
—
|
—
|
(31,000
|
)
|
|||||||
Accumulated
deficit
|
(14,109,461
|
)
|
(2,256,863
|
)
|
(308,000
|
)
|
(16,674,324
|
)
|
|||||
Accumulated
other comprehensive gain, net of tax
|
(14,215
|
)
|
—
|
-- |
(14,215
|
)
|
|||||||
Total
capital and accumulated deficit
|
7,717,031
|
(2,031,863
|
)
|
(533,000
|
)
|
5,152,168
|
|||||||
Less:
cost of treasury stock
|
(2,632,779
|
)
|
—
|
—
|
(2,632,779
|
)
|
|||||||
Total
shareholders’ equity
|
5,084,252
|
(2,031,863
|
)
|
(533,000
|
)
|
2,519,389
|
|||||||
TOTAL
|
$
|
7,207,095
|
$
|
1,883,623
|
$
|
(2,185,481
|
)
|
$
|
6,905,237
|
PRO
FORMA CONSOLIDATED STATEMENT OF OPERATIONS
|
|||||||||||||
FOR
THE YEAR ENDED DECEMBER 31, 2005
|
|||||||||||||
Pro
Forma
|
|||||||||||||
Revenues:
|
AMS
|
Heartland
|
Adjustments
|
Consolidated
|
|||||||||
Net
marketing sales
|
$
|
12,606,325
|
$
|
—
|
$
|
—
|
$
|
12,606,325
|
|||||
Net
manufacturing sales
|
—
|
2,147,388
|
—
|
2,147,388
|
|||||||||
Total
net revenues
|
12,606,325
|
2,147,388
|
—
|
14,753,713
|
|||||||||
Cost
of sales:
|
|||||||||||||
Marketing
cost of sales
|
9,516,849
|
—
|
—
|
9,516,849
|
|||||||||
Manufacturing
cost of sales
|
—
|
1,931,630
|
—
|
1,931,630
|
|||||||||
Total
cost of sales
|
9,516,849
|
1,931,630
|
—
|
11,448,479
|
|||||||||
Gross
profit
|
3,089,476
|
215,758
|
—
|
3,305,234
|
|||||||||
Marketing,
distribution and administrative expenses:
|
|||||||||||||
Marketing
|
1,169,768
|
—
|
—
|
1,169,768
|
|||||||||
Distribution
and administrative
|
5,247,026
|
1,618,121
|
—
|
6,865,147
|
|||||||||
Total
marketing, distribution and administrative expenses
|
6,416,794
|
1,618,121
|
—
|
8,034,915
|
|||||||||
Loss
from operations
|
(3,327,318
|
)
|
(1,402,363
|
)
|
—
|
(4,729,681
|
)
|
||||||
Other
income (expense):
|
|||||||||||||
Interest and dividends, net
|
58,766
|
(106,909
|
)
|
—
|
(48,143
|
)
|
|||||||
Other income (expense)
|
147,111
|
—
|
—
|
147,111
|
|||||||||
Total
other income (expense)
|
205,877
|
(106,909
|
)
|
—
|
98,968
|
||||||||
Loss
before taxes
|
(3,121,441
|
)
|
(1,509,272
|
)
|
—
|
(4,630,713
|
)
|
||||||
Income
tax expense
|
32,835
|
—
|
—
|
32,835
|
|||||||||
NET
LOSS
|
$
|
(3,154,276
|
)
|
$
|
(1,509,272
|
)
|
$
|
—
|
$
|
(4,663,548
|
)
|
17. | REPORTABLE SEGMENTS |
Marketing
|
Manufacturing
|
Total
|
||||||||
For
the year ended December 31, 2005:
|
||||||||||
Revenue
from external customers
|
$
|
12,606,325
|
$
|
1,094,999
|
$
|
13,701,324
|
||||
Interest
income
|
72,978
|
-
|
72,978
|
|||||||
Interest
expense
|
14,212
|
61,925
|
76,137
|
|||||||
Depreciation
and amortization
|
759,198
|
36,952
|
796,150
|
|||||||
Segment
losses
|
3,154,276
|
611,807
|
3,766,083
|
|||||||
Segment
assets
|
5,021,614
|
1,883,623
|
6,905,237
|
|||||||
Expenditures
for segment assets
|
220,269
|
416,371
|
636,640
|
Revenue
|
||||
Total
revenue for reportable segments
|
$
|
13,701,324
|
||
Elimination
of intersegment revenue
|
-
|
|||
Total
consolidated revenue
|
$
|
13,701,324
|
||
Net
loss
|
||||
Total
loss for reportable segments
|
$
|
3,766,083
|
||
Elimination
of intersegment losses
|
-
|
|||
Total
consolidated net loss
|
$
|
3,766,083
|
||
Assets
|
||||
Total
assets for segment reporting
|
$
|
6,905,237
|
||
Other
assets not included in segment reporting
|
-
|
|||
Total
consolidated assets
|
$
|
6,905,237
|
18. | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) |
2005
|
|||||||||||||
December
31
|
September
30
|
June
30
|
March
31
|
||||||||||
Revenues
|
$
|
3,285,771
|
$
|
2,866,476
|
$
|
3,528,319
|
$
|
4,020,758
|
|||||
Costs
and expenses
|
4,380,812
|
3,398,176
|
4,320,221
|
5,335,363
|
|||||||||
Loss
before income taxes
|
(1,095,041
|
)
|
(531,700
|
)
|
(791,902
|
)
|
(1,314,605
|
)
|
Income
tax expense (benefit)
|
49,305
|
(17,832
|
)
|
(22,456
|
)
|
23,818
|
|||||||
Net
loss
|
$
|
(1,144,346
|
)
|
$
|
(513,868
|
)
|
$
|
(769,446
|
)
|
$
|
(1,338,423
|
)
|
|
Net
loss per common share - basic
|
$
|
(0.15
|
)
|
$
|
(0.07
|
)
|
$
|
(0.11
|
)
|
$
|
(0.19
|
)
|
|
Net
loss per common share - assuming dilution
|
$
|
(0.15
|
)
|
$
|
(0.07
|
)
|
$
|
(0.11
|
)
|
$
|
(0.19
|
)
|
2004
|
|||||||||||||
December
31
|
September
30
|
June
30
|
March
31
|
||||||||||
Revenues
|
$
|
4,950,225
|
$
|
4,522,683
|
$
|
4,257,340
|
$
|
4,473,249
|
|||||
Costs
and expenses
|
6,669,372
|
6,008,093
|
5,472,624
|
4,384,613
|
|||||||||
Income
(loss) before income taxes
|
(1,719,147
|
)
|
(1,485,410
|
)
|
(1,215,284
|
)
|
88,636
|
||||||
Income
tax expense (benefit)
|
2,638,357
|
(463,753
|
)
|
(272,910
|
)
|
34,568
|
|||||||
Net
income (loss)
|
$
|
(4,357,504
|
)
|
$
|
(1,021,657
|
)
|
$
|
(942,374
|
)
|
$
|
54,068
|
||
Net
income (loss) per common share - basic
|
$
|
(0.64
|
)
|
$
|
(0.15
|
)
|
$
|
(0.14
|
)
|
$
|
0.01
|
||
Net
income (loss) per common share - assuming dilution
|
$
|
(0.64
|
)
|
$
|
(0.15
|
)
|
$
|
(0.14
|
)
|
$
|
0.01
|
19. | YEAR-END ADJUSTMENTS |
Allowance
for doubtful accounts
|
$
|
175,172
|
||
Inventory
write off and obsolescence reserve
|
153,913
|
|||
$
|
329,085
|
20. | VALUATION AND QUALIFYING ACCOUNTS |
Additions
|
||||||||||||||||
Description
|
Balance
at Beginning of Period
|
Charged
to Costs and Expenses
|
Charged
to Other Accounts
|
Deductions
|
Balance
at End of Period
|
|||||||||||
YEAR
ENDED DECEMBER 31, 2005:
|
||||||||||||||||
Reserves
and allowances deducted from asset accounts:
|
||||||||||||||||
Allowance
for doubtful accounts
|
$
|
—
|
$
|
175,172
|
$
|
—
|
$
|
—
|
$
|
175,172
|
||||||
Allowance
for obsolete inventory
|
—
|
153,913
|
—
|
—
|
153,913
|
|||||||||||
Allowance
for deferred tax assets
|
3,921,515
|
—
|
1,439,058
|
—
|
5,360,573
|
|||||||||||
YEAR
ENDED DECEMBER 31, 2004:
|
||||||||||||||||
Reserves
and allowances deducted from asset accounts:
|
||||||||||||||||
Allowance
for deferred tax assets
|
441,000
|
3,480,515
|
—
|
—
|
3,921,515
|
|||||||||||
YEAR
ENDED DECEMBER 31, 2003:
|
||||||||||||||||
Reserves
and allowances deducted from asset accounts:
|
||||||||||||||||
Allowance
for obsolete inventory
|
116,143
|
—
|
—
|
$
|
116,143
|
—
|
||||||||||
Allowance
for deferred tax assets
|
—
|
441,000
|
—
|
—
|
441,000
|
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 (registsration No. 333-47801), filed with the Commission on March 11, 1998. |
10.1 | Stock Option Agreement of Advantage Marketing Systems dated January 3, 2001, cinorporated by reference to Form 8-K filed with the Commission on January 8, 2001. |
10.2* | 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. |
10.3* | Employment Agreement by and between David D'Arcangelo and Registrant dated effective as of November 25, 2002, incorporated by reference to From 10-K/A, filed with the Commission on March 31, 2003. |
10.4* | Non-qualified Stock Option Agreement by and between David D'Arcangelo 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. |
10.5* | 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. |
10.6 | Fulfillment Services Agreement with Vita Sales & Distribution Multi-Country, dated January 19, 2004, incorporated by reference to From 10-K, filed with the Commission on March 29, 2004. |
10.7* | Employment Agreement by and between John W. Hail and Registrant dated effective as of November 4, 2003, incorporatedby reference to Form 10-K, filed with the Commission on March 29, 2004. |
10.8 | 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. |
10.9* | Employment Agreement by and between Steven G. Kochen and Registrant dated effective as of August 9, 2005, incorporated by reference to Form 8-K, filed with the Commission on August 12, 2005. |
10.10* | Employment Agreement by and between Jerry W. Gizzle and Registrant dated effective as of January 25, 2006, filed herewith. |
21 | Subsidiaries, filed herewith. |
23.1 | Consent of Cole & Reed PC, filed herewith. |
23.2 | Consent of Grant Thornton LLP, 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. |