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)
|
Name
of each exchange on
|
|
Title
of each class
|
which
registered
|
Common
Stock, $0.0001 Par Value
|
American
Stock Exchange
|
Part
I.
|
||
Item
1.
|
3
|
|
Item
2.
|
21
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Item
3.
|
22
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|
Item
4.
|
22
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|
Part
II.
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||
Item
5.
|
23
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|
Item
6.
|
24
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|
Item
7.
|
30
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|
Item
8.
|
30
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Item
8A.
|
31
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|
Item
8B.
|
31
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|
Part
III.
|
**
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|
Item
13.
|
32
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ITEM
1.
|
·
|
22
nutritional products;
|
·
|
5
weight management products; and
|
·
|
31
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.
|
·
|
Quality
control is easier to monitor at established
facilities;
|
·
|
The
market for quality services in the marketplace is competitive and
attractive; and
|
·
|
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.
|
·
|
Milk;
|
·
|
Egg;
|
·
|
Fish
(e.g., bass, flounder or cod);
|
·
|
Crustacean
shellfish (e.g., crab, lobster or
shrimp);
|
·
|
Tree
nuts (e.g., almonds, pecans or
walnuts);
|
·
|
Wheat;
|
·
|
Peanuts;
and
|
·
|
Soybeans.
|
·
|
Continued
controversy over the Plan B birth control pill, including the OTC
version,
and whether FDA is led by science or by
politics;
|
·
|
Continued
regulatory fallout regarding last year’s withdrawal from the market of
Vioxx and other Cox-2 inhibitor
drugs;
|
·
|
Conclusions
in a GAO Report that FDA does not adequately control the pre-market
approval process of drugs, and does not adequately monitor and guarantee
post-market safety of drugs;
|
·
|
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;
|
·
|
Increased
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;
|
|
·
|
Several
outbreaks of E-coli food poisoning from produce (e.g., spinach);
and
|
·
|
Continued
emphasis on food safety, and
counter-bioterrorism.
|
·
|
Throughout
2006, there were numerous import alerts and warnings on supplements
containing drug ingredients, e.g., Yohimbe bark (used to treat male
impotence), or anabolic steroids, or
hormones.
|
·
|
In
March 2006, the FDA requested a seizure of more dietary supplements
containing ephedrine alkaloids.
|
·
|
In
June, FDA warned a candy maker about making unauthorized heart health
claims.
|
·
|
In
July, FDA warned about sexual enhancement supplements containing
dangerous
ingredients.
|
·
|
In
August 2006, the FDA warned again that dietary supplements containing
ephedrine alkaloids are illegal and pose a risk to
consumers.
|
·
|
In
September 2006, U.S. Marshalls seized dietary supplements promoted
as
drugs.
|
·
|
In
March 2006, Garden of Life, a dietary supplement company which in
2005 had
received an extensive FDA Warning Letter, settled FTC charges for
deceptive advertising for its signature product, Primal
Defense.
|
·
|
In
April 2006, sellers of a children’s weight-loss product entered into a
consent order with the FTC prohibiting the sellers from making
unsubstantiated benefits, performance, or efficacy claims for any
dietary
supplement, food, or drug, and prohibiting the sellers from
misrepresenting any test or study.
|
·
|
In
May 2006, weight-loss marketers paid $3 million upon an FTC order
finding
deceptive advertising.
|
·
|
On
July 24, 2006, the FTC announced that the marketer of Seasilver,
an
alleged “phony cure-all”, had been ordered to pay almost $120 million for
failing to comply with an earlier order requiring them to pay $3
million
in consumer redress.
|
·
|
On
November 28, 2006, the FTC announced that a Florida business and
its
owner, who marketed purported height-enhancing pills for children
and
young adults, would pay $375,000 to settle charges that their advertising
claims were false, unsubstantiated, and deceptive. FTC charges were
also
made against a Fat Blocker supplement and a bone improvement
product.
|
·
|
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.
|
·
|
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 Price
|
|||||||
High
|
Low
|
||||||
2006--Calendar
Quarter Ended:
|
|||||||
March
31
|
$
|
0.83
|
$
|
0.53
|
|||
June
30
|
$
|
0.79
|
$
|
0.51
|
|||
September
30
|
$
|
0.77
|
$
|
0.47
|
|||
December
31
|
$
|
0.64
|
$
|
0.42
|
|||
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
|
(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
|
2,465,009
|
$
|
2.60
|
659,991
|
||||||
Equity
compensation plans not approved by security holders
|
250,000
|
0.61
|
-
|
|||||||
Total
|
2,715,009
|
$
|
3.21
|
659,991
|
·
|
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;
|
·
|
Cost
of products, consisting of the prices we pay to our manufacturers
for
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 and
similar expenses.
|
For
the Years Ended December 31,
|
|||||||||||||
2006
|
2005
|
||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||
Net
sales
|
$
|
9,680,592
|
100.00
|
%
|
$
|
12,606,325
|
100.00
|
%
|
|||||
Cost
of Sales:
|
|||||||||||||
Commissions
and bonuses
|
3,240,471
|
33.5
|
5,231,879
|
41.5
|
|||||||||
Cost
of products
|
2,056,581
|
21.2
|
2,877,714
|
22.8
|
|||||||||
Cost
of shipping
|
1,164,669
|
12.0
|
1,407,256
|
11.2
|
|||||||||
Total
cost of sales
|
6,461,721
|
66.7
|
9,516,849
|
75.5
|
|||||||||
Gross
profit
|
3,218,871
|
33.3
|
3,089,476
|
24.5
|
|||||||||
Marketing,
distribution and administrative expenses:
|
|||||||||||||
Marketing
|
689,126
|
7.1
|
1,169,768
|
9.3
|
|||||||||
Distribution
and administrative
|
3,698,384
|
38.2
|
5,247,026
|
41.6
|
|||||||||
Total
marketing, distribution and administrative expenses
|
4,387,510
|
45.3
|
6,416,794
|
50.9
|
|||||||||
Loss
from operations
|
(1,168,639
|
)
|
(12.0
|
)
|
(3,327,318
|
)
|
(26.4
|
)
|
|||||
Other
income (expense):
|
|||||||||||||
Interest
and dividends, net
|
(286,898
|
)
|
(3.0
|
)
|
58,766
|
0.5
|
|||||||
Other
income (expense)
|
52,384
|
0.5
|
147,111
|
1.1
|
|||||||||
Total
other income (expense)
|
(234,514
|
)
|
(2.5
|
)
|
205,877
|
1.6
|
|||||||
Loss
from continuing operations before taxes
|
(1,403,153
|
)
|
(14.5
|
)
|
(3,121,441
|
)
|
(24.8
|
)
|
|||||
Income
tax
|
-
|
-
|
32,835
|
0.2
|
|||||||||
Loss
from continuing operations
|
(1,403,153
|
)
|
(14.5
|
)
|
(3,154,276
|
)
|
(25.0
|
)
|
|||||
Discontinued
operations:
|
|||||||||||||
Loss
from operations of Heartland Cup
|
(812,272
|
)
|
(8.4
|
)
|
(611,807
|
)
|
(4.9
|
)
|
|||||
Income
tax benefit
|
-
|
-
|
-
|
-
|
|||||||||
Total
loss from discontinued operations
|
(812,272
|
)
|
(8.4
|
)
|
(611,807
|
)
|
(4.9
|
)
|
|||||
Net
loss
|
$
|
(2,215,425
|
)
|
(22.9
|
)%
|
$
|
(3,766,083
|
)
|
(29.9
|
)%
|
·
|
A
decrease of approximately $1,991,000 in associate commissions and
bonuses;
|
·
|
A
decrease of approximately $821,000 in the cost of products sold;
and
|
·
|
A
decrease of approximately $243,000 in shipping
costs.
|
·
|
A
decrease in employee costs of approximately $344,000 related to reductions
in staff;
|
·
|
A
decrease in travel costs of approximately $138,000 related to reduced
outside travel of marketing;
|
●
|
A
decrease in promotional expense of approximately $105,000 related
to
associate meeting reimbursements, website expense and promotional
mailings;
|
·
|
A
decrease in professional fees of approximately $27,000 related to
the
maintenance of our websites; and
|
·
|
A
decrease in miscellaneous expense of approximately $45,000 related
to
postage, printing, supplies and telephone
expense.
|
·
|
An
increase in promotional expense of approximately $67,000 related
to the
2006 national convention; and
|
●
|
An
increase in professional fees of approximately $139,000 related to
consulting expense incurred in the development of our new product
line and
sales tools to be unveiled in early 2007.
|
·
|
A
decrease in employee costs of approximately $1,487,000 related to
reductions in staff;
|
·
|
A
decrease in repairs and maintenance expense of approximately
$83,000;
|
·
|
A
decrease in rent expense of approximately $114,000 related to a change
in
insurance carriers;
|
●
|
A
decrease in bad debt expense of approximately $138,000 related to
the
reserves for doubtful accounts related to notes receivable in
2005;
|
·
|
A
decrease in depreciation expense of approximately $12,000 due to
the sale
of a motorcoach, other vehicles, and other assets in 2006;
and
|
·
|
A
decrease in general and administrative expense of approximately $125,000
related to bank charges, supplies, telephone,
etc.
|
·
|
An
increase in promotional expense of approximately $196,000 related
to
website and conference expenses;
and
|
·
|
An
increase in professional fees of approximately $119,000 related to
consulting services and legal
settlements.
|
·
|
An
increase in interest expense of approximately $345,000 related to
the
convertible debt executed in 2006, and capital lease adjustments
in 2005;
and
|
·
|
A
decrease in gain on sale of marketable securities of approximately
$147,000 related to the decrease in marketable
securities.
|
·
|
An
increase in gain on sale of assets of approximately $31,000 related
to the
sale of excess office furniture and supplies and vehicles;
and
|
·
|
An
increase in other income of approximately $30,000 related to the
collection of reserved notes
receivable.
|
·
|
The
increase in gross profit to $3,218,871 during 2006 from $3,089,476
during
2005;
|
·
|
The
decrease in marketing and administrative expense to $4,387,510 during
2006
from $6,416,794 during 2005; and
|
·
|
The
decrease in net other income to expense of ($234,514) during 2006
from
income of $205,877 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 our former 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
|
·
|
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.
|
•
|
The
declaration of dividends;
|
•
|
The
issuance of preferred stock;
|
•
|
The
redemption of preferred stock or other equity
interests;
|
•
|
The
liquidation, dissolution or the material reorganization of us or
our
subsidiaries (other than
Heartland);
|
•
|
The
ability to become subject to agreements restricting the ability of
us or
our subsidiaries (other than Heartland) from performing our obligations
under the Securities Purchase Agreement or any agreement contemplated
thereunder;
|
•
|
The
ability to materially alter or change the scope of our
business;
|
•
|
The
ability to incur debt;
|
•
|
The
ability to forgive indebtedness;
|
•
|
The
ability to guarantee obligations of others;
and
|
•
|
The
ability to create or acquire
subsidiaries.
|
Total
|
Less
than 1 year
|
1
-3 Years
|
3
- 5 Years
|
||||||||||
Long-term
debt
|
$
|
2,165,082
|
$
|
618,673
|
$
|
1,546,409
|
$
|
-
|
|||||
Capital
lease obligations
|
232,987
|
126,389
|
106,598
|
-
|
|||||||||
Operating
leases (1)
|
187,419
|
132,296
|
55,123
|
-
|
|||||||||
Total
|
$
|
2,585,488
|
$
|
877,358
|
$
|
1,708,130
|
$
|
-
|
(1)
|
Includes
abandoned lease at the Oil Center.
|
ITEM
7.
|
ITEM
8A.
|
ITEM
8B.
|
ITEM
13.
|
(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
|
Consolidated
Balance Sheet as of December 31, 2006
|
F-3
|
Consolidated
Statements of Operations for Years Ended December 31, 2006 and 2005
|
F-4
|
Consolidated
Statements of Shareholders’ Equity for Years Ended December 31, 2006 and
2005
|
F-5
|
Consolidated
Statements of Cash Flows for Years Ended December 31, 2006 and
2005
|
F-6
|
Notes
to Consolidated Financial Statements for Years Ended December 31,
2006 and
2005
|
F-7
|
(a)(2)
|
Financial
Statement Schedules
|
Exhibit
No
|
Description
|
3.1
|
The
Registrant's Certificate of Incorporation, incorporated by reference
to
the Registration Statement on Form SB-2 (Registration No. 333-47801)
filed
with the commission on March 11, 1998.
|
3.2
|
The
Registrant's Bylaws, incorporated by reference to the Registration
Statement on Form SB-2 (Registration No. 333-47801) filed with the
commission on March 11, 1998.
|
10.1*
|
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, incorporated by reference to Form 10-KSB
filed
with the Commission on April 3, 2006.
|
10.11*
|
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.
|
10.12
|
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,
|
10.13
|
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.
|
10.14
|
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.
|
10.15
|
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.
|
10.16
|
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.
|
10.17
|
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.
|
10.18
|
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.
|
10.19
|
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.
|
10.20
|
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.
|
10.21
|
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.
|
10.22
|
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.
|
10.23*
|
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.
|
21
|
Subsidiaries,
filed herewith.
|
23.1
|
Consent
of Cole & Reed PC, 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 30, 2007
|
By:
/S/
JERRY W. GRIZZLE .
|
Jerry
W. Grizzle, Chief Executive Officer,
|
|
President
and Chairman of the Board
|
Date:
March 30, 2007
|
By:
/S/
JERRY W. GRIZZLE
|
|
Jerry
W. Grizzle, Chief Executive Officer
|
|
President,
Chairman of the Board and Director
|
Date:
March 30, 2007
|
By:
/S/
ROBIN L. JACOB
|
|
Robin
L. Jacob, Chief Financial Officer, Vice
|
|
President,
Secretary, Treasurer and Director
|
Date:
March 30, 2007
|
By:
/S/
M. THOMAS BUXTON III
|
|
M.
Thomas Buxton III
|
Director
|
|
Date:
March 30, 2007
|
By:
/S/
STEPHEN E. JONES
|
|
Stephen
E. Jones
|
Director
|
|
Date:
March 30, 2007
|
By:
/S/
RICHARD C. WISER
|
Richard
C. Wiser
|
|
Director
|
|
Date:
March 30, 2007
|
By:
/S/
LAWRENCE R. MOREAU
|
Lawrence
R. Moreau
|
|
Director
|
|
Date:
March 30, 2007
|
By:
/S/
JAMES M. LEE
|
James
M. Lee
|
|
Director
|
|
Page
|
|
AMS
HEALTH SCIENCES, INC. AND SUBSIDIARIES
AUDITED
CONSOLIDATED FINANCIAL STATEMENTS:
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheet as of December 31, 2006
|
F-3
|
Consolidated
Statements of Operations for Years Ended December 31, 2006 and 2005
|
F-4
|
Consolidated
Statements of Shareholders’ Equity for Years Ended December 31, 2006 and
2005
|
F-5
|
Consolidated
Statements of Cash Flows for Years Ended December 31, 2006 and
2005
|
F-6
|
Notes
to Consolidated Financial Statements for Years Ended December 31,
2006 and
2005
|
F-7
|
ASSETS
|
2006
|
|||
CURRENT
ASSETS:
|
||||
Cash
|
$
|
269,726
|
||
Marketable
securities, available for sale, at fair value
|
793,183
|
|||
Receivables,
net of allowance of $118,597
|
44,576
|
|||
Inventory,
net
|
700,664
|
|||
Other
assets
|
77,319
|
|||
Current
assets of discontinued operations
|
110,521
|
|||
Total
current assets
|
1,995,989
|
|||
RESTRICTED
SECURITIES
|
78,723
|
|||
RECEIVABLES
|
28,374
|
|||
PROPERTY
AND EQUIPMENT, net
|
2,794,393
|
|||
COVENANTS
NOT TO COMPETE and other intangibles, net
|
324,553
|
|||
OTHER
ASSETS
|
457,344
|
|||
NONCURRENT
ASSETS OF DISCONTINUED OPERATIONS
|
1,253,480
|
|||
TOTAL
|
$
|
6,932,856
|
||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||
CURRENT
LIABILITIES:
|
||||
Accounts
payable
|
$
|
559,920
|
||
Accrued
commissions and bonuses
|
268,717
|
|||
Accrued
other expenses
|
400,204
|
|||
Accrued
sales tax liability
|
200,481
|
|||
Deferred
compensation
|
96,378
|
|||
Notes
payable
|
257,542
|
|||
Capital
lease obligations
|
104,591
|
|||
Current
liabilities of discontinued operations
|
360,582
|
|||
Total
current liabilities
|
2,248,415
|
|||
LONG-TERM
LIABILITIES:
|
||||
Notes
payable
|
625,220
|
|||
Capital
lease obligations
|
95,527
|
|||
Deferred
compensation
|
281,101
|
|||
Lease
abandonment liability
|
55,123
|
|||
Liabilities
of discontinued operations
|
1,570,359
|
|||
Total
liabilities
|
4,875,745
|
|||
COMMITMENT
AND CONTINGENCIES (Note 14)
|
||||
STOCKHOLDERS'
EQUITY
|
||||
Common
stock - $.0001 par value; authorized 495,000,000 shares; issued 9,107,419
shares; outstanding 8,515,824 shares
|
905
|
|||
Paid-in
capital
|
23,609,734
|
|||
Notes
receivable for exercise of options
|
(31,000
|
)
|
||
Accumulated
deficit
|
(18,889,749
|
)
|
||
Accumulated
other comprehensive income (loss), net of tax
|
-
|
|||
Total
capital and accumulated deficit
|
4,689,890
|
|||
Less
cost of treasury stock (591,595 shares)
|
(2,632,779
|
)
|
||
Total
stockholders' equity
|
2,057,111
|
|||
TOTAL
|
$
|
6,932,856
|
2006
|
2005
|
||||||
Net
sales
|
$
|
9,680,592
|
$
|
12,606,325
|
|||
Cost
of sales
|
6,461,721
|
9,516,849
|
|||||
Gross
profit
|
3,218,871
|
3,089,476
|
|||||
Marketing
and administrative expenses:
|
|||||||
Marketing
|
689,126
|
1,169,768
|
|||||
Administrative
|
3,698,384
|
5,247,026
|
|||||
Total
marketing and administrative expenses
|
4,387,510
|
6,416,794
|
|||||
Loss
from operations
|
(1,168,639
|
)
|
(3,327,318
|
)
|
|||
Other
income (expense):
|
|||||||
Interest
and dividends, net
|
(286,898
|
)
|
58,766
|
||||
Other
, net
|
52,384
|
147,111
|
|||||
Total
other income (expense)
|
(234,514
|
)
|
205,877
|
||||
Loss
from continuing operations before taxes
|
(1,403,153
|
)
|
(3,121,441
|
)
|
|||
Income
tax expense (benefit)
|
-
|
32,835
|
|||||
Loss
from continuing operations
|
(1,403,153
|
)
|
(3,154,276
|
)
|
|||
Discontinued
operations (Note 16)
|
|||||||
Loss
from discontinued operations, net of tax
|
(812,272
|
)
|
(611,807
|
)
|
|||
Net
loss:
|
$
|
(2,215,425
|
)
|
$
|
(3,766,083
|
)
|
|
Net
loss per share:
|
|||||||
Basic:
|
|||||||
Loss
from continuing operations
|
$
|
(0.18
|
)
|
$
|
(0.43
|
)
|
|
Loss
from discontinued operations net of tax
|
(0.10
|
)
|
(0.09
|
)
|
|||
Net
loss per share
|
$
|
(0.28
|
)
|
$
|
(0.52
|
)
|
|
Diluted:
|
|||||||
Loss
from continuing operations
|
$
|
(0.18
|
)
|
$
|
(0.43
|
)
|
|
Loss
from discontinued operations net of tax
|
(0.10
|
)
|
$
|
(0.09
|
)
|
||
Net
loss per share
|
$
|
(0.28
|
)
|
$
|
(0.52
|
)
|
|
Shares
used in computing net loss per share:
|
|||||||
Basic
|
7,995,767
|
7,307,455
|
|||||
Diluted
|
7,995,767
|
7,307,455
|
Shares
(See Note 9)
|
Common
Stock
|
Paid-In
Capital
|
Notes
Receivable for Exercise of Options
|
(Accumul-ated
Deficit)
|
Comprehen-sive
Income (Loss)
|
Accumulated
Other Comprehensive Income (Loss), Net of Tax
|
Treasury
Stock
|
Total
Stock-holders' Equity
|
||||||||||||||||||||
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
|
)
|
|||||||||||||||||
Disgorgements
of profits
|
-
|
-
|
7,751
|
-
|
-
|
-
|
-
|
-
|
7,751
|
|||||||||||||||||||
Comprehensive
Loss:
|
||||||||||||||||||||||||||||
Net
Loss
|
-
|
-
|
-
|
-
|
(3,766,083
|
)
|
(3,766,083
|
)
|
-
|
-
|
(3,766,083
|
)
|
||||||||||||||||
Unrealized
loss on 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
|
||||||||||||||||
Stock
option compensation expense
|
-
|
-
|
68,258
|
-
|
-
|
-
|
-
|
-
|
1,738,932
|
|||||||||||||||||||
Discount
on convertible debt
|
649,250
|
60
|
1,613,614
|
- | - | - | - | - | ||||||||||||||||||||
Issuance
of shares for litigation settlement
|
100,000
|
10
|
56,990
|
- | - | - | - | - | ||||||||||||||||||||
Comprehensive
Loss:
|
||||||||||||||||||||||||||||
Net
Loss
|
-
|
-
|
-
|
-
|
(2,215,425
|
)
|
(2,215,425
|
)
|
-
|
-
|
(2,215,425
|
)
|
||||||||||||||||
Realized
loss on available for sale securities, net of tax
|
-
|
-
|
-
|
-
|
-
|
-
|
14,215
|
-
|
14,215
|
|||||||||||||||||||
Comprehensive
loss
|
-
|
-
|
-
|
-
|
-
|
$
|
(2,215,425
|
)
|
-
|
-
|
-
|
|||||||||||||||||
BALANCE,
DECEMBER 31, 2006
|
8,515,824
|
$
|
905
|
$
|
23,609,734
|
$
|
(31,000
|
)
|
$
|
(18,889,749
|
)
|
$
|
-
|
$
|
(2,632,779
|
)
|
$
|
2,057,111
|
2006
|
2005
|
||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|||||||
Net
Loss
|
$
|
(2,215,425
|
)
|
$
|
(3,766,083
|
)
|
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities
|
|||||||
Net
loss from discontinued operations
|
812,272
|
611,807
|
|||||
Depreciation
and amortization
|
722,746
|
759,537
|
|||||
Amortization
of note valuation discount
|
218,791
|
-
|
|||||
Bad
debt expense (recovery)
|
(28,894
|
)
|
147,491
|
||||
Stock
issued for services and legal settlement
|
57,000
|
-
|
|||||
Stock
option compensation expense
|
68,258
|
66,602
|
|||||
Deferred
taxes
|
-
|
32,835
|
|||||
Gain
on sale of assets
|
(36,927
|
)
|
(5,468
|
)
|
|||
Realized
(gain) loss on sale of marketable securities
|
897
|
(123,097
|
)
|
||||
Inventory
obsolescence expense (recovery)
|
(28,050
|
)
|
86,532
|
||||
Changes
in operating assets and liabilities:
|
|||||||
Receivables
|
18,924
|
324,767
|
|||||
Inventory
|
187,926
|
529,896
|
|||||
Other
assets
|
(36,805
|
)
|
(482,544
|
)
|
|||
Accounts
payable and accrued expenses
|
128,847
|
(411,641
|
)
|
||||
Lease
abandonment liability
|
(845
|
)
|
16,852
|
||||
Deferred
compensation
|
(237,822
|
)
|
(56,447
|
)
|
|||
Net
operating activities of discontinued operations
|
(448,734
|
)
|
64,596
|
||||
Net
cash used in operating activities
|
(817,841
|
)
|
(2,204,365
|
)
|
|||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
Purchase
of property and equipment
|
(108,736
|
)
|
(241,269
|
)
|
|||
Sales
of property and equipment
|
87,174
|
283,907
|
|||||
Acquisition
of new business, net of cash acquired
|
-
|
(1,652,481
|
)
|
||||
Receipts
on notes receivable
|
40,882
|
(135,217
|
)
|
||||
Purchase
of marketable securities, available for sale
|
(1,089,020
|
)
|
(3,722,279
|
)
|
|||
Sales
marketable securities, available for sale
|
584,039
|
6,163,527
|
|||||
Net
investing activities of discontinued operations
|
43,926
|
(6,251
|
)
|
||||
Net
cash provided by (used in) investing activities
|
(441,735
|
)
|
689,937
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
Bank
overdrafts
|
-
|
(203,500
|
)
|
||||
Proceeds
from issuance of common stock
|
19,375
|
1,472,503
|
|||||
Net
proceeds from issuance of notes
|
1,897,000
|
-
|
|||||
Principal
payment on capital lease obligations
|
(125,845
|
)
|
(166,334
|
)
|
|||
Deferred
financing fees paid
|
(160,000
|
)
|
-
|
||||
Net
financing activities of discontinued operations
|
(220,033
|
)
|
(58,345
|
)
|
|||
Net
cash provided by financing activities
|
1,410,497
|
1,044,324
|
|||||
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
150,921
|
(470,104
|
)
|
||||
CASH
AND CASH EQUIVALENTS, BEGINNING
|
118,805
|
588,909
|
|||||
CASH
AND CASH EQUIVALENTS, ENDING
|
$
|
269,726
|
$
|
118,805
|
1
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
2006
|
||||
Non-compete
covenants, gross
|
$
|
644,000
|
||
Deferred
acquisition costs, and other intangibles, gross
|
428,338
|
|||
Total
intangibles, gross
|
$
|
1,072,338
|
||
Accumulated
amortization, non-compete covenants
|
$
|
619,283
|
||
Accumulated
amortization, deferred acquisition costs and other
intangibles
|
128,502
|
|||
Total
accumulated amortization
|
$
|
747,785
|
||
Non-compete
covenants, net
|
$
|
24,717
|
||
Deferred
acquisition costs, and other intangibles, net
|
299,836
|
|||
Total
intangibles, net
|
$
|
324,553
|
2006
|
2005
|
||||||
Unrealized
gain (loss) on investment arising during the period
|
$
|
-
|
$
|
(25,892
|
)
|
||
Less
reclassification adjustment for gains (losses) included in net
earnings
|
(14,215
|
)
|
73,376
|
||||
Unrealized
gain (loss) on investment, net of income tax expense (benefit) of
$0 and
$(60,071), respectively
|
$
|
14,215
|
$
|
(99,268
|
)
|
·
|
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 Company’s former 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.
|
Years
Ended December 31,
|
|||||||
2006
|
2005
|
||||||
Expected
volatility
|
77.7
|
%
|
89.0
|
%
|
|||
Expected
term (in years)
|
5
|
5
|
|||||
Risk-free
interest rate
|
4.48
|
%
|
5.34
|
%
|
|||
Expected
dividend yield
|
0
|
%
|
0
|
%
|
Year
Ended
|
||||
December
31,
2005
|
||||
Basic
and diluted:
|
||||
Net
loss as reported
|
$
|
(3,766,083
|
)
|
|
Deduct:
share-based employee compensation, net of income tax
|
(711,123
|
)
|
||
Pro
forma net loss
|
$
|
(4,477,206
|
)
|
|
Net
loss per common share as reported
|
$
|
(0.52
|
)
|
|
Proforma
net loss per common share, basic and diluted
|
$
|
(0.61
|
)
|
|
Weighted
average common shares outstanding, basic and diluted
|
7,307,455
|
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (Years)
|
Aggregate
Intrinsic Value
|
||||||||||
Options
outstanding at December 31, 2005
|
1,950,009
|
$
|
3.13
|
||||||||||
Granted
|
515,000
|
$
|
0.59
|
$
|
41,000
|
||||||||
Granted
outside a stock option plan*
|
250,000
|
$
|
0.61
|
$
|
9,000
|
||||||||
Exercised
|
-
|
-
|
-
|
||||||||||
Canceled
|
-
|
-
|
-
|
||||||||||
Options
outstanding at December 31, 2006
|
2,715,009
|
$
|
2.42
|
4.54
|
$
|
50,000
|
|||||||
Option
exercisable at December 31, 2006
|
2,115,009
|
$
|
2.93
|
4.44
|
$
|
-
|
|||||||
Options
vested and options expected to vest at December 31, 2006
|
2,715,009
|
$
|
2.42
|
4.54
|
$
|
-
|
December
31, 2006
|
|||||||||||||
Cost/
|
Gross
|
Gross
|
Estimated
|
||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||
Type
of investment
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||
Short
term investments - available for sale
|
$
|
793,183
|
$
|
—
|
$
|
—
|
$
|
793,183
|
|||||
Debt
securities - available for sale
|
|||||||||||||
Corporate
Bonds
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
Mutual
Funds
|
—
|
—
|
—
|
—
|
|||||||||
|
$ |
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
Equities
- available for sale
|
|||||||||||||
Mutual
Funds
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
$
|
793,183
|
$
|
—
|
$
|
—
|
$
|
793,183
|
3.
|
RESTRICTED
INVESTMENTS
|
4.
|
INVENTORY
|
2006
|
||||
Raw
materials
|
$
|
328,748
|
||
Finished
goods
|
430,117
|
|||
Obsolescence
reserve
|
(58,201
|
)
|
||
Net
inventory
|
$
|
700,664
|
5
|
PROPERTY
AND EQUIPMENT
|
2006
|
||||
Office
furniture, fixtures and equipment
|
$
|
5,307,936
|
||
Vehicles
|
82,550
|
|||
Leasehold
improvements
|
62,793
|
|||
Building
|
2,296,501
|
|||
Land
|
148,308
|
|||
7,898,088
|
||||
Accumulated
depreciation and amortization
|
(5,103,695
|
)
|
||
Total
property and equipment, net
|
$
|
2,794,393
|
2006
|
||||
Laurus
term note
|
$
|
2,000,000
|
||
Partial
conversion, issuance of 350,000 shares
|
(159,125
|
)
|
||
Valuation
discount
|
(1,176,904
|
)
|
||
Accretion
of discount to interest expense
|
218,791
|
|||
Total
secured financing
|
$
|
882,762
|
||
Current
|
$
|
257,542
|
||
Long-term
|
$
|
625,220
|
7.
|
LEASE
AGREEMENTS
|
Capital
Leases
|
Operating
Leases
|
Total
|
||||||||
Year
ending:
|
||||||||||
2007
|
$
|
126,389
|
$
|
132,296
|
$
|
258,685
|
||||
2008
|
90,165
|
55,123
|
145,288
|
|||||||
2009
|
16,435
|
-
|
16,435
|
|||||||
2010
|
-
|
-
|
-
|
|||||||
2011
and thereafter
|
-
|
-
|
-
|
|||||||
Total
minimum lease payments
|
232,989
|
$
|
187,419
|
$
|
420,408
|
|||||
Less
amount representing interest
|
32,871
|
|||||||||
Present
value of net minimum lease payments
|
200,118
|
|||||||||
Less
current portion
|
104,591
|
|||||||||
Long-term
capital lease obligations
|
$
|
95,527
|
8.
|
LEASE
ABANDONMENT
|
Beginning
liability accrual balance
|
$
|
188,264
|
||
Adjustment
to accrual
|
93,691
|
|||
Total
accrual recorded in expense
|
281,955
|
|||
Payment
of rent, net of sublease revenue
|
(94,536
|
)
|
||
Ending
liability accrual balance
|
$
|
187,419
|
||
Accrual
portion in current liabilities
|
$
|
132,296
|
||
Accrual
portion in long-term liabilities
|
55,123
|
|||
Ending
liability accrual balance
|
$
|
187,419
|
9.
|
SHAREHOLDERS’
EQUITY
|
2006
|
Weighted
Average Exercise Price
|
2005
|
Weighted
Average Exercise Price
|
||||||||||
Options
and other warrants outstanding - beginning of year
|
1,950,009
|
$
|
3.58
|
2,935,334
|
$
|
2.95
|
|||||||
Options
and other warrants issued during the year
|
765,000
|
0.59
|
310,500
|
1.96
|
|||||||||
Options
and other warrants exercised during the year
|
-
|
-
|
(640,918
|
)
|
1.76
|
||||||||
Options
and other warrants cancelled during the year
|
-
|
-
|
(429,907
|
)
|
1.50
|
||||||||
Options
and other warrants expired during the year
|
-
|
-
|
(225,000
|
)
|
2.00
|
||||||||
Options
and other warrants outstanding - end of year
|
2,715,009
|
$
|
2.74
|
1,950,009
|
$
|
3.58
|
Options
and Other Warrants Outstanding
|
Options
and Other Warrants Exercisable
|
|||||||||||||||
Range
of Exercise Prices
|
Number
Outstanding at 12/31/06
|
Weighted
Average Remaining Contractual Life
|
Weighted
Average Exercise Price
|
Number
Exercisable at 12/31/06
|
Weighted
Average Exercise Price
|
|||||||||||
$0.51
- $2.95
|
2,384,652
|
6.03
years
|
$
|
1.60
|
1,784,652
|
$
|
1.94
|
|||||||||
$3.00
- $4.75
|
286,543
|
4.26
years
|
$
|
3.66
|
286,543
|
$
|
3.66
|
|||||||||
$5.25
- $6.13
|
43,814
|
3.24
years
|
$
|
5.75
|
43,814
|
$
|
5.75
|
|||||||||
2,715,009
|
$
|
1.88
|
2,115,009
|
$
|
2.25
|
Warrants
Issued and Outstanding
|
Exercise
Price
|
Exercise
Period
|
||||||||
December
31, 2006:
|
||||||||||
Common
Stock Purchase Warrants, beginning of the year
|
-
|
$
|
-
|
|||||||
Common
Stock Purchase Warrants issued during the year
|
2,272,727
|
$
|
0.53
|
6/28/06
- 6/28/11
|
||||||
Common
Stock Purchase Warrants exercised during the year
|
-
|
$
|
-
|
|||||||
Common
Stock Purchase Warrants, end of the year
|
2,272,727
|
$
|
0.53
|
|||||||
Advisor
Warrants, beginning of the year
|
-
|
$
|
-
|
|||||||
Advisor
Warrants issued during the year
|
495,543
|
$
|
0.51
|
6/28/06
- 6/28/13
|
||||||
Advisor
Warrants exercised during the year
|
-
|
$
|
-
|
|||||||
Advisor
Warrants, end of the year
|
495,543
|
$
|
0.51
|
|||||||
December
31, 2005:
|
||||||||||
Common
Stock Purchase Warrants, beginning of the year
|
-
|
$
|
-
|
|||||||
Common
Stock Purchase Warrants, end of the year
|
-
|
$
|
-
|
|||||||
Underwriters’
Warrants, beginning of the year
|
-
|
$
|
-
|
|||||||
Underwriters’
Warrants, end of the year
|
-
|
$
|
-
|
10.
|
STOCK
OPTION PLANS
|
11.
|
RELATED
PARTIES
|
12.
|
INCOME
TAXES
|
2006
|
2005
|
||||||
Statutory
federal income tax rate
|
(34.0
|
)%
|
(34.0
|
)%
|
|||
State
tax effective rate
|
(4.0
|
)
|
(4.0
|
)
|
|||
Permanent
differences
|
0.3
|
0.9
|
|||||
Benefit
of graduated tax rates
|
-
|
-
|
|||||
Prior
year assessments finalized
|
-
|
-
|
|||||
Increase
in valuation allowance
|
37.7
|
38.0
|
|||||
Other
|
-
|
-
|
|||||
(0.0
|
)%
|
0.9
|
%
|
Depreciation
|
$
|
(269,911
|
)
|
|
Debt
discount amortization
|
(361,549
|
)
|
||
Total
deferred tax liabilities
|
(631,460
|
)
|
||
Deferred
tax assets:
|
||||
Unrealized
losses
|
-
|
|||
Goodwill
impairment and other intangibles
|
870,213
|
|||
Net
operating loss carryforwards
|
5,110,705
|
|||
Deferred
compensation
|
256,019
|
|||
Allowance
for doubtful accounts
|
44,753
|
|||
Inventory
|
15,326
|
|||
Allowance
for obsolete inventory
|
22,001
|
|||
Lease
abandonment
|
70,723
|
|||
Employee
benefit accrual
|
16,952
|
|||
Other
|
52,768
|
|||
Valuation
allowance
|
(5,828,000
|
)
|
||
Total
deferred tax assets
|
631,460
|
|||
Net
deferred taxes
|
-
|
|||
Less
current portion of net deferred tax assets
|
-
|
|||
Long-term
portion of deferred tax asset
|
$
|
-
|
December
31,
|
|||||||
2006
|
2005
|
||||||
Cash
paid (received) during the year for:
|
|||||||
Interest
|
$
|
104,323
|
$
|
78,395
|
|||
Income
taxes paid
|
-
|
-
|
|||||
Noncash
financing and investing activities:
|
|||||||
Property
and equipment acquired by capital lease
|
$
|
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
|
-
|
|||||
Payment
of debt principal and interest through
Issuance
of stock
|
178,500
|
-
|
For
the Years Ended December 31,
|
|||||||
2006
|
2005
|
||||||
Revenues
|
$
|
1,232,610
|
$
|
1,094,999
|
|||
Loss
from operations of discontinued operations
|
(2,024,882
|
)
|
(1,706,806
|
)
|
|||
Estimated
costs to sell
|
(20,000
|
)
|
-
|
||||
Income
tax effect
|
-
|
-
|
|||||
Loss
from operations of discontinued operations, net of tax
|
$
|
(812,272
|
)
|
$
|
(611,807
|
)
|
December
31,
|
||||
2006
|
||||
Current
assets of discontinued operations:
|
||||
Cash
|
$
|
1,252
|
||
Accounts
receivable, net
|
70,245
|
|||
Inventory
|
39,024
|
|||
Total
|
$
|
110,521
|
||
Noncurrent
assets of discontinued operations:
|
||||
Other
assets
|
$
|
15,431
|
||
Property
and equipment, net
|
1,238,049
|
|||
Total
|
$
|
1,253,480
|
||
Current
liabilities of discontinued operations:
|
||||
Accounts
payable
|
$
|
41,105
|
||
Current
portion of long-term debt
|
296,477
|
|||
Other
current liabilities
|
23,000
|
|||
Total
|
$
|
360,582
|
||
Long-term
liabilities of discontinued operations:
|
||||
Long-term
debt
|
$
|
1,570,359
|
Allowance
for doubtful accounts
|
$
|
28,894
|
||
Inventory
write off and obsolescence reserve
|
28,050
|
|||
Total
|
$
|
56,944
|
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, 2006:
|
||||||||||||||||
Reserves
and allowances deducted from asset accounts
|
||||||||||||||||
Allowances
for doubtful accounts
|
$
|
147,491
|
-
|
-
|
(28,894
|
)
|
$
|
118,597
|
||||||||
Allowance
for obsolete inventory
|
86,352
|
-
|
-
|
(28,050
|
)
|
58,302
|
||||||||||
Allowance
for deferred tax assets
|
5,360,573
|
-
|
467,427
|
-
|
5,828,000
|
|||||||||||
YEAR
ENDED DECEMBER 31, 2005:
|
||||||||||||||||
Reserves
and allowances deducted from asset accounts
|
||||||||||||||||
Allowances
for doubtful accounts
|
-
|
147,491
|
-
|
-
|
147,491
|
|||||||||||
Allowance
for obsolete inventory
|
-
|
86,352
|
-
|
-
|
86,352
|
|||||||||||
Allowance
for deferred tax assets
|
3,921,515
|
-
|
1,439,058
|
-
|
5,360,573
|
Exhibit
No
|
Description
|
3.1
|
The
Registrant's Certificate of Incorporation, incorporated by reference
to
the Registration Statement on Form SB-2 (Registration No. 333-47801)
filed
with the commission on March 11, 1998.
|
3.2
|
The
Registrant's Bylaws, incorporated by reference to the Registration
Statement on Form SB-2 (Registration No. 333-47801) filed with the
commission on March 11, 1998.
|
10.1
|
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, incorporated by reference to Form 10-KSB
filed
with the Commission on April 3, 2006.
|
10.11*
|
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.
|
10.12
|
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,
|
10.13
|
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.
|
10.14
|
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.
|
10.15
|
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.
|
10.16
|
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.
|
10.17
|
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.
|
10.18
|
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.
|
10.19
|
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.
|
10.20
|
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.
|
10.21
|
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.
|
10.22
|
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.
|
10.23*
|
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.
|
21
|
Subsidiaries,
filed herewith.
|
23.1
|
Consent
of Cole & Reed PC, 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.
|