Yes
|
X
|
No
|
Yes
|
No
|
X
|
Yes
|
No
|
X
|
Part
I Financial Information
|
3
|
Item
1. Financial Statements
|
3
|
Consolidated
Balance Sheets
|
3
|
Consolidated
Statements of Operations
|
4
|
Consolidated
Statements of Cash Flows
|
5
|
Notes
to Consolidated Financial Statements
|
6
|
Report
of Independent Registered Public Accounting Firm
|
20
|
Item
2. Management’s Discussion and Analysis or Plan of
Operation
|
21
|
Item
3. Controls and Procedures
|
29
|
Part
II -Other Information
|
30
|
Item
1. Legal Proceedings
|
30
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
30
|
Item
3. Defaults Upon Senior Securities
|
30
|
Item
4. Submission of Matters to a Vote of Security Holders
|
31
|
Item
5. Other Information
|
31
|
Item
6. Exhibits
|
31
|
September
30,
|
December
31,
|
||||||
ASSETS
|
2006
|
2005
|
|||||
(Unaudited)
|
|||||||
CURRENT
ASSETS:
|
|||||||
Cash
|
$
|
454,330
|
$
|
118,805
|
|||
Marketable
securities, available for sale, at fair value
|
931,158
|
278,131
|
|||||
Receivables
|
71,284
|
59,846
|
|||||
Inventory
|
776,053
|
860,540
|
|||||
Other
assets
|
62,225
|
24,542
|
|||||
Current
assets of discontinued operations
|
377,395
|
507,831
|
|||||
Total
current assets
|
2,672,445
|
1,849,695
|
|||||
RESTRICTED
SECURITIES
|
76,734
|
75,477
|
|||||
RECEIVABLES
|
36,045
|
44,016
|
|||||
PROPERTY
AND EQUIPMENT, net
|
2,954,798
|
3,131,092
|
|||||
COVENANTS
NOT TO COMPETE and other intangibles, net
|
344,007
|
402,370
|
|||||
OTHER
ASSETS
|
503,816
|
26,793
|
|||||
NONCURRENT
ASSETS OF DISCONTINUED OPERATIONS
|
1,310,948
|
1,375,792
|
|||||
TOTAL
|
$
|
7,898,793
|
$
|
6,905,235
|
|||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
CURRENT
LIABILITIES:
|
|||||||
Accounts
payable
|
$
|
288,482
|
$
|
391,615
|
|||
Bank
overdraft
|
-
|
203,500
|
|||||
Accrued
commissions and bonuses
|
253,792
|
254,828
|
|||||
Accrued
other expenses
|
514,980
|
355,398
|
|||||
Accrued
sales tax liability
|
146,115
|
40,980
|
|||||
Deferred
compensation
|
127,447
|
-
|
|||||
Note
payable
|
250,000
|
-
|
|||||
Capital
lease obligations
|
124,832
|
76,650
|
|||||
Current
liabilities of discontinued operations
|
520,724
|
592,317
|
|||||
Total
current liabilities
|
2,226,372
|
1,915,288
|
|||||
LONG-TERM
LIABILITIES:
|
|||||||
Note
payable
|
676,053
|
-
|
|||||
Capital
lease obligations
|
126,257
|
74,320
|
|||||
Deferred
compensation
|
446,065
|
615,301
|
|||||
Lease
abandonment liability
|
52,843
|
110,249
|
|||||
Liabilities
of discontinued operations
|
1,492,860
|
1,670,688
|
|||||
Total
liabilities
|
5,020,450
|
4,385,846
|
|||||
COMMITMENTS
AND CONTINGENCIES (NOTE 8)
|
|||||||
STOCKHOLDERS’
EQUITY
|
|||||||
Common
stock - $.0001 par value; authorized 495,000,000 shares; issued
|
|||||||
8,632,053
and 8,344,803 shares, outstanding 8,053,824 and 7,766,574 shares,
respectively
|
860
|
835
|
|||||
Paid-in
capital
|
23,320,702
|
21,870,872
|
|||||
Notes
receivable for exercise of options
|
(31,000
|
)
|
(31,000
|
)
|
|||
Accumulated
deficit
|
(17,779,440
|
)
|
(16,674,324
|
)
|
|||
Accumulated
other comprehensive income, net of tax
|
-
|
(14,215
|
)
|
||||
Total
capital and accumulated deficit
|
5,511,122
|
5,152,168
|
|||||
Less
cost of treasury stock (591,595 shares)
|
(2,632,779
|
)
|
(2,632,779
|
)
|
|||
Total
stockholders’ equity
|
2,878,343
|
2,519,389
|
|||||
TOTAL
|
$
|
7,898,793
|
$
|
6,905,235
|
Three
Months Ended
|
|
Nine
Months Ended
|
||||||||||||||
September
30,
|
|
September
30,
|
||||||||||||||
2006
|
2005
|
2006
|
2005
|
|||||||||||||
Net
sales
|
$
|
2,323,583
|
$
|
2,626,762
|
$
|
7,073,271
|
$
|
10,175,839
|
||||||||
Cost
of sales
|
1,422,788
|
1,765,727
|
4,475,427
|
7,700,535
|
||||||||||||
Gross
profit
|
900,795
|
861,035
|
2,597,844
|
2,475,304
|
||||||||||||
Marketing
and administrative expenses:
|
||||||||||||||||
Marketing
|
211,127
|
150,254
|
454,122
|
735,210
|
||||||||||||
Administrative
|
1,134,913
|
1,210,891
|
2,589,997
|
4,394,192
|
||||||||||||
Total
marketing and administrative expenses
|
1,346,040
|
1,361,145
|
3,044,119
|
5,129,402
|
||||||||||||
Income
(loss) from operations
|
(445,245
|
)
|
(500,110
|
)
|
(446,275
|
)
|
(2,654,098
|
)
|
||||||||
Other
income (expense):
|
||||||||||||||||
Interest
and dividends, net
|
(145,095
|
)
|
17,304
|
(136,007
|
)
|
39,861
|
||||||||||
Other,
net
|
7,041
|
3,071
|
51,000
|
27,996
|
||||||||||||
Total
other income (expense)
|
(138,054
|
)
|
20,375
|
(85,007
|
)
|
67,857
|
||||||||||
Loss
from continuing operations before taxes
|
(583,299
|
)
|
(479,735
|
)
|
(531,282
|
)
|
(2,586,241
|
)
|
||||||||
Income
tax benefit
|
-
|
(17,833
|
)
|
-
|
(16,470
|
)
|
||||||||||
Loss
from continuing operations
|
(583,299
|
)
|
(461,902
|
)
|
(531,282
|
)
|
(2,569,771
|
)
|
||||||||
Discontinued
Operations (Note 13)
|
||||||||||||||||
Loss
from discontinued operations, net of tax
|
(52,475
|
)
|
(51,966
|
)
|
(573,707
|
)
|
(51,966
|
)
|
||||||||
Net
loss
|
$
|
(635,774
|
)
|
$
|
(513,868
|
)
|
$
|
(1,104,989
|
)
|
$
|
(2,621,737
|
)
|
||||
Net
Loss per share:
|
||||||||||||||||
Basic:
|
||||||||||||||||
Loss
from continuing operations
|
$
|
(.07
|
)
|
$
|
(.06
|
)
|
$
|
(.07
|
)
|
$
|
(.35
|
)
|
||||
Loss
from discontinued operations, net of tax
|
(.01
|
)
|
(.01
|
)
|
(.07
|
)
|
(.01
|
)
|
||||||||
Net
loss per share
|
$
|
(.08
|
)
|
$
|
(.07
|
)
|
$
|
(.14
|
)
|
$
|
(.36
|
)
|
||||
Diluted:
|
||||||||||||||||
Income
(loss) from continuing operations
|
$
|
(.07
|
)
|
$
|
(.06
|
)
|
$
|
(.07
|
)
|
$
|
(.35
|
)
|
||||
Loss
from discontinued operations, net of tax
|
(.01
|
)
|
(.01
|
)
|
(.07
|
)
|
(.01
|
)
|
||||||||
Net
loss per share
|
$
|
(.08
|
)
|
$
|
(.07
|
)
|
$
|
(.14
|
)
|
$
|
(.36
|
)
|
||||
Shares
used in computing net loss per share:
|
||||||||||||||||
Basic
|
7,828,322
|
7,472,039
|
7,819,072
|
7,226,969
|
||||||||||||
Diluted
|
7,828,322
|
7,472,039
|
7,819,072
|
7,226,969
|
||||||||||||
Nine
months ended
|
|||||||
September
30,
|
|||||||
2006
|
2005
|
||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
Net
loss
|
($1,104,989
|
)
|
($2,621,737
|
)
|
|||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|||||||
Net
loss from discontinued operations
|
573,707
|
51,966
|
|||||
Depreciation
and amortization
|
533,110
|
591,631
|
|||||
Amortization
of note valuation discount
|
102,956
|
||||||
Bad
debt expense (recovery)
|
(27,789
|
)
|
-
|
||||
Employee
compensation recognized upon exercise or grant of stock
options
|
14,682
|
66,602
|
|||||
Gain
on sale of assets
|
(36,927
|
)
|
(5,468
|
)
|
|||
(Gain)/Loss
on sale of marketable securities
|
108
|
(9,804
|
)
|
||||
Deferred
taxes
|
-
|
(16,469
|
)
|
||||
Changes
in operating assets and liabilities :
|
|||||||
Receivables
|
(17,738
|
)
|
119,615
|
||||
Inventory
|
84,487
|
605,531
|
|||||
Other
assets
|
(27,776
|
)
|
(6,850
|
)
|
|||
Accounts
payable and accrued expenses
|
159,298
|
(489,720
|
)
|
||||
Lease
abandonment liability
|
(56,156
|
)
|
33,836
|
||||
Deferred
compensation
|
(41,789
|
)
|
33,466
|
||||
Net
operating activities of discontinued operations
|
(520,464
|
)
|
(294,744
|
)
|
|||
Net
cash used in operating activities
|
(365,280
|
)
|
(1,942,145
|
)
|
|||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
Purchases
of property and equipment
|
(149,097
|
)
|
(212,437
|
)
|
|||
Sales
of property and equipment
|
84,512
|
283,907
|
|||||
Receipts
of notes receivable
|
42,060
|
7,001
|
|||||
Acquisition
of new business, net of cash acquired
|
-
|
(974,351
|
)
|
||||
Purchases
of marketable securities, available for sale
|
(1,062,666
|
)
|
(2,575,193
|
)
|
|||
Sales
of marketable securities, available for sale
|
422,488
|
4,215,524
|
|||||
Net
investing activities of discontinued operations
|
43,926
|
(85,161
|
)
|
||||
Net
cash provided by (used in) investing activities
|
(618,777
|
)
|
659,290
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
Bank
overdraft
|
(203,500
|
)
|
(395,936
|
)
|
|||
Proceeds
from issuance of common stock
|
-
|
1,146,752
|
|||||
Deferred
financing fees paid
|
(160,000
|
)
|
-
|
||||
Net
proceeds from issuance of notes
|
1,897,000
|
-
|
|||||
Principal
payment on capital lease obligations
|
(62,480
|
)
|
(149,547
|
)
|
|||
Net
financing activities of discontinued operations
|
(151,438
|
)
|
379,905
|
||||
Net
cash provided by financing activities
|
1,319,582
|
981,174
|
|||||
NET
DEC/INC IN CASH AND CASH EQUIVALENTS
|
335,525
|
(301,681
|
)
|
||||
CASH
AND CASH EQUIVALENTS, BEGINNING
|
118,805
|
588,909
|
|||||
CASH
AND CASH EQUIVALENTS, ENDING
|
454,330
|
287,228
|
|||||
SUPPLEMENTAL
DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
|||||||
Fixed
assets acquired through capital lease financing
|
178,261
|
-
|
|||||
Value
of warrants issued to lenders recorded as debt discount
|
588,452
|
-
|
|||||
Value
of beneficial conversion feature of notes issued recorded as
debt
discount
|
588,452
|
-
|
|||||
Value
of warrants issued to advisor recorded as deferred financing
costs
|
130,770
|
-
|
|||||
Issuance
of common stock recorded as deferred financing costs
|
127,500
|
-
|
1.
|
UNAUDITED
INTERIM FINANCIAL
STATEMENTS
|
2.
|
SHARE-BASED
COMPENSATION
|
Three
months ended September 30,
|
Nine
months ended September 30,
|
|||
2006
|
2005
|
2006
|
2005
|
|
Expected
volatility
|
77.0%
|
78.0%
|
76.10%
|
78.0%
|
Expected
term (in years)
|
5
|
5
|
5
|
5
|
Risk-free
interest rate
|
4.52%
|
3.34%
|
4.68%
|
5.34%
|
Expected
dividend yield
|
0%
|
0%
|
0%
|
0%
|
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
||||||
2006
|
2006
|
||||||
Distribution
and administrative expenses
|
$
|
16,210
|
$
|
24,069
|
|||
Income
tax effect
|
6,322
|
9,387
|
|||||
Total
share-based compensation
|
$
|
9,888
|
$
|
14,682
|
Three
months ended
|
Nine
months ended
|
||||||
|
September 30, 2005 |
September
30, 2005
|
|||||
Basic
and diluted:
|
|||||||
Net
loss as reported
|
$
|
(513,868
|
)
|
$
|
(2,621,737
|
)
|
|
Deduct:
share-based employee compensation, net of income tax
|
(361,322
|
)
|
(653,981
|
)
|
|||
Pro
forma net loss
|
$
|
(875,190
|
)
|
$
|
(3,275,718
|
)
|
|
Net
loss per share:
|
|||||||
Basic
- as reported
|
$
|
(0.07
|
)
|
$
|
(0.36
|
)
|
|
Basic
- proforma
|
$
|
(0.12
|
)
|
$
|
(0.45
|
)
|
|
Diluted
- as reported
|
$
|
(0.07
|
)
|
$
|
(0.36
|
)
|
|
Diluted
- proforma
|
$
|
(0.12
|
)
|
$
|
(0.45
|
)
|
|
Shares
outstanding - basic
|
7,472,039
|
7,226,969
|
|||||
Shares
outstanding - diluted
|
7,472,039
|
7,226,969
|
Weighted
|
|||||||||||||
Average
|
|||||||||||||
Weighted
|
Remaining
|
||||||||||||
Average
|
Contractual
|
Aggregate
|
|||||||||||
Exercise
|
Term
|
Intrinsic
|
|||||||||||
Shares
|
Price
|
(Years)
|
Value
|
||||||||||
Options
outstanding at December 31, 2005
|
1,950,009
|
$
|
3.13
|
||||||||||
Granted
|
550,000
|
0.62
|
$
|
24,000
|
|||||||||
Exercised
|
-
|
-
|
$
|
-
|
|||||||||
Canceled
|
-
|
-
|
|||||||||||
Options
outstanding at September 30, 2006
|
2,500,009
|
$
|
2.58
|
4.89
|
$
|
24,000
|
|||||||
Options
exercisable at September 30, 2006
|
1,950,009
|
$
|
3.13
|
4.59
|
$
|
-
|
|||||||
Options
vested and options expected to vest at September 30, 2006
|
1,950,009
|
$
|
3.13
|
4.59
|
$
|
-
|
3.
|
MARKETABLE
SECURITIES
|
4.
|
RESTRICTED
SECURITIES
|
5. | ACQUISITION |
6. | DEBT |
September
30, 2006
|
December
31, 2005
|
||||||
Laurus
term note
|
$
|
2,000,000
|
$
|
-
|
|||
Valuation
discount
|
(1,176,903
|
)
|
-
|
||||
Accretion
of discount to interest expense
|
102,956
|
-
|
|||||
Total
Secured Financing
|
$
|
926,053
|
$
|
-
|
|||
Current
|
$
|
250,000
|
$
|
-
|
|||
Long-term
|
$
|
676,053
|
$
|
-
|
7.
|
SHAREHOLDER’S
EQUITY
|
8.
|
LOSS
PER SHARE
|
Income
(Loss)
|
Shares
|
Per
Share
|
|||||||||||
(Numerator)
|
(Denominator)
|
Amount
|
|||||||||||
Weighted
average common shares outstanding:
|
|||||||||||||
For
the three months ended September 30, 2006:
|
|||||||||||||
Loss
per common share:
|
|||||||||||||
Loss
available to common stockholders
|
$
|
(635,774
|
)
|
7,828,322
|
$
|
(0.08
|
)
|
||||||
Loss
per common share - assuming dilution:
|
|||||||||||||
Options
|
-
|
-
|
|||||||||||
Loss
available to common stockholders plus assumed conversions
|
$
|
(635,774
|
)
|
7,828,322
|
$
|
(0.08
|
)
|
||||||
For
the three months ended September 30, 2005:
|
|||||||||||||
Loss
per common share:
|
|||||||||||||
Loss
available to common stockholders
|
$
|
(513,868
|
)
|
7,472,039
|
$
|
(0.07
|
)
|
||||||
Loss
per common share - assuming dilution:
|
|||||||||||||
Options
|
-
|
-
|
|||||||||||
Loss
available to common stockholders plus assumed conversions
|
$
|
(513,868
|
)
|
7,472,039
|
$
|
(0.07
|
)
|
||||||
For
the nine months ended September 30, 2006:
|
|||||||||||||
Loss
per common share:
|
|||||||||||||
Loss
available to common stockholders
|
$
|
(1,104,989
|
)
|
7,819,072
|
$
|
(0.14
|
)
|
||||||
Loss
per common share - assuming dilution:
|
|||||||||||||
Options
|
-
|
-
|
|||||||||||
Loss
available to common stockholders plus assumed conversions
|
$
|
(1,104,989
|
)
|
7,819,072
|
$
|
(0.14
|
)
|
||||||
For
the nine months ended September 30, 2005:
|
|||||||||||||
Loss
per common share:
|
|||||||||||||
Loss
available to common stockholders
|
$
|
(2,621,737
|
)
|
7,226,969
|
$
|
(0.36
|
)
|
||||||
Loss
per common share - assuming dilution:
|
|||||||||||||
Options
|
-
|
-
|
|||||||||||
Loss
available to common stockholders plus assumed conversion
|
$
|
(2,621,737.
|
)
|
7,226,969
|
$
|
(0.36
|
)
|
||||||
Warrants
outstanding, January 1, 2006
|
-
|
|
Warrants
granted
|
2,768,270
|
|
Warrants
outstanding, September 30, 2006
|
2,768,270
|
9.
|
DEFERRED
TAXES
|
10.
|
COMMITMENTS
AND CONTINGENCIES
|
11.
|
DEFERRED
COMPENSATION AND CONSULTING
AGREEMENT
|
12.
|
LEASE
ABANDONMENT
|
13.
|
DISCONTINUED
OPERATIONS
|
Three
Months
|
Nine
Months
|
||||||
Ended
|
Ended
|
||||||
September
30, 2006
|
September
30, 2006
|
||||||
Revenues
|
$
|
335,774
|
$
|
1,056,990
|
|||
Loss
from operations of discontinued operations
|
$
|
(52,475
|
)
|
$
|
(553,707
|
)
|
|
Estimated
costs to sell
|
-
|
(20,000
|
)
|
||||
Income
tax effect
|
-
|
-
|
|||||
Loss
from operations of discontinued operations, net of tax
|
$
|
(52,475
|
)
|
$
|
(573,707
|
)
|
September
30, 2006
|
||||
Current
assets of discontinued operations:
|
||||
Cash
|
$
|
1,271
|
||
Accounts
receivable, net
|
121,193
|
|||
Inventory
|
254,931
|
|||
Total
|
$
|
377,395
|
||
Noncurrent
assets of discontinued operations:
|
||||
Other
assets
|
$
|
47,303
|
||
Property
and equipment, net
|
1,263,645
|
|||
Total
|
$
|
1,310,948
|
||
Current
liabilities of discontinued operations:
|
||||
Accounts
payable
|
$
|
54,798
|
||
Current
portion of long-term debt
|
442,571
|
|||
Other
current liabilities
|
23,355
|
|||
Total
|
$
|
520,724
|
||
Long-term
liabilities of discontinued operations:
|
||||
Long-term
debt
|
$
|
1,492,860
|
15.
|
CURRENT
FINANCIAL CONDITION
|
·
|
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 and a continuing
excess of
monthly operating expenses over revenues;
and
|
·
|
Declining
net income, due to the FDA’s ban on ephedra
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.
|
16.
|
RECLASSIFICATIONS
|
·
|
Sell
Heartland Cup
|
· | Use additional capital to build a foundation that will allow us to grow. Because of our consecutive years of losses, we have not had the funds to develop marketing, training and support tools, and programs to support our independent associates’ efforts in the field. On June 28, 2006, we raised $2,000,000 in additional financing. We intend to use these funds to begin an aggressive sales and marketing campaign, which we believe will increase our top line revenues. We intend to produce better product videos, business builder videos, printed material and other materials for use by our independent associates in their marketing efforts. In addition we intend to upgrade our back office to provide our independent associates with the most current management tools available in network marketing. |
· | Establish a new binary commission system and allow our independent associates to choose to use our existing commission system or the new binary commission system depending on their primary method of generating revenues. This will allow our independent associates to tailor their commission system to their operating methods. |
· | Enter the international markets. |
·
|
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.
|
For
the Three Months Ended
|
For
the Nine Months Ended
|
||||||||||||||||||||||||
September
30,
|
September
30,
|
||||||||||||||||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||||||
Net
sales
|
$
|
2,323,583
|
100.0
|
%
|
$
|
2,626,762
|
100.0
|
%
|
$
|
7,073,271
|
100.0
|
%
|
$
|
10,175,839
|
100.0
|
%
|
|||||||||
Cost
of sales:
|
|||||||||||||||||||||||||
Commissions
and bonuses
|
793,570
|
34.2
|
|
966,403
|
36.8
|
|
2,353,968
|
33.3
|
|
4,342,590
|
42.7
|
|
|||||||||||||
Cost
of products
|
298,023
|
12.8
|
|
550,375
|
21.0
|
|
1,219,027
|
17.2
|
|
2,263,228
|
22.2
|
|
|||||||||||||
Cost
of shipping
|
331,195
|
14.2
|
|
248,949
|
9.4
|
|
902,432
|
12.8
|
|
1,094,717
|
10.8
|
|
|||||||||||||
Total
cost of sales
|
1,422,788
|
61.2
|
|
1,765,727
|
67.2
|
|
4,475,427
|
63.3
|
|
7,700,535
|
75.7
|
|
|||||||||||||
Gross
profit
|
900,795
|
38.8
|
|
861,035
|
32.8
|
|
2,597,844
|
36.7
|
|
2,475,304
|
24.3
|
|
|||||||||||||
Marketing
and administrative expense:
|
|||||||||||||||||||||||||
Marketing
|
211,127
|
9.1
|
|
150,254
|
5.7
|
|
454,122
|
6.4
|
|
735,210
|
7.2
|
|
|||||||||||||
Administrative
|
1,134,913
|
48.8
|
|
1,210,891
|
46.1
|
|
2,589,997
|
36.6
|
|
4,394,192
|
43.2
|
|
|||||||||||||
Total
marketing, and administrative expense
|
1,346,040
|
57.9
|
|
1,361,145
|
51.8
|
|
3,044,119
|
43.0
|
|
5,129,402
|
50.4
|
|
|||||||||||||
Loss
from operations
|
(445,245
|
)
|
-19.1
|
(500,110
|
)
|
-19.0
|
|
(446,275
|
)
|
-6.3
|
|
(2,654,098
|
)
|
-26.1
|
|
||||||||||
Other
income (expense):
|
|||||||||||||||||||||||||
Interest,
net
|
(145,095
|
)
|
-6.2
|
|
17,304
|
0.7
|
|
(136,007
|
)
|
-1.9
|
|
39,861
|
0.4
|
|
|||||||||||
Other,
net
|
7,041
|
0.3
|
|
3,071
|
0.1
|
|
51,000
|
0.7
|
|
27,996
|
0.3
|
|
|||||||||||||
Total
other income (expense)
|
(138,054
|
)
|
-5.9
|
|
20,375
|
0.8
|
|
(85,007
|
)
|
-1.2
|
|
67,857
|
0.7
|
|
|||||||||||
Loss
from continuing operations before taxes
|
(583,299
|
)
|
-25.1
|
|
(479,735
|
)
|
-18.3
|
|
(531,282
|
)
|
-7.5
|
|
(2,586,241
|
)
|
-25.4
|
|
|||||||||
Tax
benefit
|
0
|
0.0
|
|
(17,833
|
)
|
-0.7
|
|
0
|
0.0
|
|
(16,470
|
)
|
-0.2
|
|
|||||||||||
Loss
from continuing operations
|
(583,299
|
)
|
-25.1
|
|
(461,902
|
)
|
-17.6
|
|
(531,282
|
)
|
-7.5
|
|
(2,569,771
|
)
|
-25.2
|
|
|||||||||
Discontinued
operations:
|
|||||||||||||||||||||||||
Loss
from operations of Heartland Cup
|
(52,475
|
)
|
-2.3
|
|
(51,966
|
)
|
-2.0
|
|
(573,707
|
)
|
-8.1
|
|
(51,966
|
)
|
-0.5
|
|
|||||||||
Income
tax benefit
|
0
|
0.0
|
|
0
|
0.0
|
|
0
|
0.0
|
|
0
|
0.0
|
|
|||||||||||||
Total
loss on discontinued operations
|
(52,475
|
)
|
-2.3
|
|
(51,966
|
)
|
-2.0
|
|
(573,707
|
)
|
-8.1
|
|
(51,966
|
)
|
-0.5
|
|
|||||||||
Net
loss
|
($635,774
|
)
|
-27.3
|
%
|
($513,868
|
)
|
-19.6
|
%
|
($1,104,989
|
)
|
-15.6
|
|
($2,621,737
|
)
|
-25.7
|
|
·
|
A
decrease of approximately $173,000 in associate commissions and
bonuses;
and
|
·
|
A
decrease of approximately $252,000 in the cost of products
sold.
|
·
|
An
increase of approximately $82,000 in shipping costs related primarily
to
changes in product packaging.
|
·
|
An
increase in promotional cost of approximately $118,000, related
primarily
to the 2006 national convention;
and
|
·
|
An
increase in professional services of approximately $35,000 related
to
sales tools upgrades.
|
●
|
A
decrease in employee costs of approximately $68,000 related to
reductions
in staff;
|
●
|
A
decrease in travel costs of approximately $12,000 related to
outside
travel of marketing; and
|
·
|
A
decrease in miscellaneous expense of approximately $16,000 related
to
postage, printing, and supplies.
|
·
|
A
decrease in employee costs of approximately $215,000 related
to reductions
in staff;
|
●
|
A
decrease in travel costs of approximately $32,000 related to
reduction of
outside travel;
|
·
|
A
decrease in repairs and maintenance expense of approximately
$6,000;
and
|
·
|
A
decrease in general and administrative expense of approximately
$42,000
related to bank charges, supplies, telephone,
etc.
|
●
|
An
increase in professional expenses of approximately $111,000 related
to
increased legal fees and consulting related to the new marketing
campaign;
|
●
|
An
increase in amortization expense of approximately $11,000 due
to deferred
financing costs related to the
debt;
|
●
|
An
increase in rent and insurance expense of approximately $16,000
related to
adjustments to our lease abandonment accrual and change in insurance
carriers;
|
●
|
An
increase in shareholder relations of approximately $48,000; and
|
●
|
An
increase in promotional expenses of approximately $32,000 related
to
website expenses.
|
·
|
A
decrease in gain on sale of assets of approximately $4,000 related
to the
sale of excess vehicles, office furniture and supplies;
|
●
|
A
decrease in gain on sale of marketable securities of approximately
$2,000
related to the decrease of marketable
securities;
|
●
|
A
decrease in interest income of approximately $10,000 related
to the
decrease of marketable securities;
|
●
|
An
increase in other income of approximately $13,000 related to
the
collection of reserved notes receivable;
and
|
·
|
An
increase in interest expense of approximately $163,000 related
to the
Laurus debt executed in 2006.
|
·
|
The
increase in gross profit to $900,795 during 2006 from $861,035
during
2005; and
|
·
|
The
decrease in marketing and administrative expense to $1,346,040
during 2006
from $1,361,145 during 2005; and
|
●
|
The
increase in other income (expense) to ($138,054) during 2006
from $20,375
during 2005.
|
·
|
A
decrease of approximately $1,989,000 in associate commissions
and
bonuses;
|
·
|
A
decrease of approximately $1,044,000 in the cost of products
sold;
and
|
·
|
A
decrease of approximately $192,000 in shipping
costs.
|
·
|
A
decrease in employee costs of approximately $285,000, related
to
reductions in staff;
|
·
|
A
decrease in travel costs of approximately $15,000 related to
reduced
outside travel of marketing;
|
·
|
A
decrease in professional services of approximately $42,000 related
to
maintenance of our websites; and
|
·
|
A
decrease in miscellaneous expense of approximately $37,000 related
to
postage, printing, supplies and telephone
expense.
|
●
|
An
increase in promotional expense of approximately $93,000 related
to the
2006 national convention.
|
·
|
A
decrease in employee costs of approximately $1,264,000 related
to
reductions in staff;
|
·
|
A
decrease in professional services of approximately $17,000 related
to
decreased consulting and legal fees and less use of temporary
employees;
|
·
|
A
decrease in rent and insurance expense of approximately $171,000
related
to adjustments to our lease abandonment accrual and a change
in insurance
carriers resulting in better rates;
|
·
|
A
decrease in repairs and maintenance expense of approximately
$76,000;
|
·
|
A
decrease in shareholder relations of approximately
$4,000;
|
●
|
A
decrease in travel costs of approximately $55,000 related to
reduced
outside travel;
|
·
|
A
decrease in depreciation expense of approximately $34,000 due
to the sale
of the motorcoach, vehicles, and other assets in 2006;
and
|
● |
A decrease in general and administrative expense of approximately $237,000 related to bank charges, supplies, telephone, etc. |
●
|
An
increase in website expenses of
$55,000.
|
·
|
An
increase in other income of approximately $24,000 related to
the
collection of reserved notes
receivable;
|
·
|
An
increase in gain on sale of assets of approximately $31,000 related
to the
sale of excess office furniture and supplies and vehicles;
|
●
|
An
increase in interest expense of approximately $165,000 related
to the
Laurus debt executed in 2006, and capital lease adjustments in
2005;
|
●
|
A
decrease in interest income of approximately $11,000 related
to the
decrease of marketable securities, capital lease adjustment made
in 2005
and interest recorded on notes receivable;
and
|
·
|
A
decrease in gain on sale of marketable securities of approximately
$32,000
related to the decrease of marketable
securities.
|
·
|
The
increase in gross profit to $2,597,844 during 2006 from $2,475,304
during
2005;
|
·
|
The
decrease in marketing and administrative expense to $3,044,119
during 2006
from $5,129,402 during 2005; and
|
·
|
The
decrease in net other income to ($85,007) during 2006 from $67,857
during
2005.
|
·
|
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 and a continuing
excess of
monthly operating expenses over revenues;
and
|
·
|
Recurring
losses due to the FDA’s ban on ephedra
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.
|
Votes
For
|
Withheld
|
Broker
Non-Votes
|
|
Director:
|
|||
Steven
M. Dickey
|
5,274,103
|
175,510
|
-
|
Robin
L. Jacob
|
5,342,765
|
106,848
|
-
|
Votes
For
|
Votes
Against
|
Abstentions
|
Broker
Non-Votes
|
5,374,203
|
60,120
|
15,290
|
-
|
Votes
For
|
Votes
Against
|
Abstentions
|
Broker
Non-Votes
|
873,239
|
357,588
|
16,563
|
4,202,223
|
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 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.
|
10.4*
|
Employment
Agreement by and between Jerry W. Grizzle and Registrant dated
effective
as of January 25, 2006, incorporated by reference to Form 10-KSB
filed
with the Commission on April 3,
2006.
|
10.5*
|
Employment
Agreement by and between Robin L. Jacob and Registrant dated
effective as
of February 12, 2006, incorporated by reference to Form 8-K filed
with the
Commission on April 12, 2006.
|
10.6
|
Consulting
Agreement by and between TVC Consulting and Registrant dated
effective as
of March 1, 2006, incorporated by reference to Form 10-QSB filed
with the
Commission on May 15, 2006
|
10.7
|
Securities
Purchase Agreement dated June 28, 2006 by and between the Company
and
Laurus Master Fund, Ltd., incorporated by reference to the Form
10-QSB
filed with the Commission on August 14,
2006.
|
10.8
|
Secured
Convertible Term Note dated June 28, 2006 by the Company in favor
of
Laurus Master Fund, Ltd., incorporated by reference to the Form
10-QSB
filed with the Commission on August 14,
2006.
|
10.9
|
Common
Stock Purchase Warrant dated June 29, 2006 by the Company in
favor of
Laurus Master Fund, Ltd., incorporated by reference to the Form
10-QSB
filed with the Commission on August 14,
2006.
|
10.10
|
Registration
Rights Agreement dated June 28, 2006 by and between the Company
and Laurus
Master Fund, Ltd., incorporated by reference to the Form 10-QSB
filed with
the Commission on August 14, 2006.
|
10.11
|
Stock
Pledge Agreement dated June 28, 2006 by and among the Company,
AMS
Manufacturing, Inc. and Laurus Master Fund, Ltd., incorporated
by
reference to the Form 10-QSB filed with the Commission on August
14,
2006.
|
10.12
|
Master
Security Agreement dated June 28, 2006 by and among the Company,
AMS
Manufacturing, Inc. and Laurus Master Fund, Ltd., incorporated
by
reference to the Form 10-QSB filed with the Commission on August
14,
2006.
|
10.13
|
Mortgage
dated June 28, 2006 by and between the Company and Laurus Master
Fund,
Ltd., incorporated by reference to the Form 10-QSB filed with
the
Commission on August 14, 2006.
|
10.14
|
Grant
of Security Interest in Patents and Trademarks dated June 28,
2006 by and
between the Company and Laurus Master Fund, Ltd., incorporated
by
reference to the Form 10-QSB filed with the Commission on August
14,
2006.
|
10.15
|
Common
Stock Purchase Warrant dated June 28, 2006 by the Company in
favor of
Ascendiant Securities, LLC, incorporated by reference to the
Form 10-QSB
filed with the Commission on August 14,
2006.
|
10.16
|
Engagement
Letter between the Company and Ascendiant Securities, LLC, incorporated
by
reference to the Form 10-QSB filed with the Commission on August
14,
2006.
|
10.17*
|
Employment
Agreement by and between Dennis P. Loney and Registrant dated
effective as
of September 19, 2006, incorporated by reference to Form 8-K
filed with
the Commission on September 25,
2006.
|
15
|
Letter
of independent accountants as to unaudited interim financial
information,
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.
|
REGISTRANT:
|
|
AMS
HEALTH SCIENCES, INC.
|
|
By:
/S/
ROBIN L. JACOB
|
|
Dated:
November 14, 2006
|
Robin L. Jacob, Vice President and Chief Financial
Officer
|
(Duly Authorized Officer of Registrant and Principal
Financial Officer)
|
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 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.
|
10.4*
|
Employment
Agreement by and between Jerry W. Grizzle and Registrant dated
effective
as of January 25, 2006, incorporated by reference to Form 10-KSB
filed
with the Commission on April 3,
2006.
|
10.5*
|
Employment
Agreement by and between Robin L. Jacob and Registrant dated
effective as
of February 12, 2006, incorporated by reference to Form 8-K filed
with the
Commission on April 12, 2006.
|
10.6
|
Consulting
Agreement by and between TVC Consulting and Registrant dated
effective as
of March 1, 2006, incorporated by reference to Form 10-QSB filed
with the
Commission on May 15, 2006.
|
10.7
|
Securities
Purchase Agreement dated June 28, 2006 by and between the Company
and
Laurus Master Fund, Ltd., incorporated by reference to the Form
10-QSB
filed with the Commission on August 14,
2006.
|
10.8
|
Secured
Convertible Term Note dated June 28, 2006 by the Company in favor
of
Laurus Master Fund, Ltd., incorporated by reference to the Form
10-QSB
filed with the Commission on August 14,
2006.
|
10.9
|
Common
Stock Purchase Warrant dated June 29, 2006 by the Company in
favor of
Laurus Master Fund, Ltd., incorporated by reference to the Form
10-QSB
filed with the Commission on August 14,
2006.
|
10.10
|
Registration
Rights Agreement dated June 28, 2006 by and between the Company
and Laurus
Master Fund, Ltd., incorporated by reference to the Form 10-QSB
filed with
the Commission on August 14, 2006.
|
10.11
|
Stock
Pledge Agreement dated June 28, 2006 by and among the Company,
AMS
Manufacturing, Inc. and Laurus Master Fund, Ltd., incorporated
by
reference to the Form 10-QSB filed with the Commission on August
14,
2006.
|
10.12
|
Master
Security Agreement dated June 28, 2006 by and among the Company,
AMS
Manufacturing, Inc. and Laurus Master Fund, Ltd., incorporated
by
reference to the Form 10-QSB filed with the Commission on August
14,
2006.
|
10.13
|
Mortgage
dated June 28, 2006 by and between the Company and Laurus Master
Fund,
Ltd., incorporated by reference to the Form 10-QSB filed with
the
Commission on August 14, 2006.
|
10.14
|
Grant
of Security Interest in Patents and Trademarks dated June 28,
2006 by and
between the Company and Laurus Master Fund, Ltd., incorporated
by
reference to the Form 10-QSB filed with the Commission on August
14,
2006.
|
10.15
|
Common
Stock Purchase Warrant dated June 28, 2006 by the Company in
favor of
Ascendiant Securities, LLC, incorporated by reference to the
Form 10-QSB
filed with the Commission on August 14,
2006.
|
10.16
|
Engagement
Letter between the Company and Ascendiant Securities, LLC, incorporated
by
reference to the Form 10-QSB filed with the Commission on August
14,
2006.
|
10.17*
|
Employment
Agreement by and between Dennis P. Loney and Registrant dated
effective as
of September 19, 2006, incorporated by reference to Form 8-K
filed with
the Commission on September 25,
2006.
|
15
|
Letter
of independent accountants as to unaudited interim financial
information,
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.
|