UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended December 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-18476
AMRION, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1050628
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
6565 Odell Place Boulder, Colorado 80301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 530-2525
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0011 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 24, 1997, the aggregate market value of the voting stock held by
non-affiliates was approximately $76,216,526 based upon the last transaction in
the common stock known to the registrant.
The number of shares of the Registrant's $.0011 par value common stock
outstanding as of March 24, 1997 was 5,251,514.
Documents Incorporated By Reference:
The information required in Part III of this Form 10-K has been incorporated by
reference to the Registrant's definitive proxy statement on Schedule 14A to be
filed with the Commission on or before April 30, 1997.
Part I
Statements and information presented within this Annual Report on Form 10-K for
Amrion, Inc. and its 93% owned subsidiary, Natrix International, LLC
(collectively the "Company") contain "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements can be identified by the use of predictive,
future-tense or forward-looking terminology, such as "believes," "anticipates,"
"expects," "estimates," "may," "will" or similar terms. Forward-looking
statements also include projections of financial performance, statements
regarding management's plans and objectives and statements concerning any
assumptions relating to the foregoing. Certain important factors regarding the
Company's business, operations and competitive environment which may cause
actual results to vary materially from these forward-looking statements
accompany such statements.
ITEM I: Business
GENERAL
The Company is engaged in developing, producing and marketing innovative, safe,
high quality nutriceuticals and nutritional supplements. The Company's products,
which are guaranteed for potency and purity, include nutriceuticals, herbs,
herbal formulas, vitamins, minerals and homeopathic medicinals.
The Company currently markets and sells approximately 670 items under
Company-owned trademarks through four principal divisions, utilizing five
distribution channels which include direct marketing, specialty retail and mass
merchandising, health care professionals and international sales. The Company
operates in one segment with four separate marketing divisions. Each division
employs a combination of marketing strategies which may include catalog and
direct mailings, print advertising, free standing inserts, package insert
programs, retail merchandising, radio, television, coupons, point of sale
materials and customer service calls. The Company does not depend on a few major
customers and the loss of any single customer would not have an adverse effect
on the Company's sales.
The Company's direct marketing sales are conducted by the Direct Marketing
Division (the "DMD") through two product lines. The Specialty Products Division
markets nutritional supplement products primarily to health food stores, retail
outlets, general sporting goods stores and independent distributors. The Health
Care Professional Division was established to market nutritional supplements
exclusively to health care professionals for dispensing to patients under
professional supervision. The Company's International Division markets the
Company's product lines primarily through distributors in Barbados, Hong Kong,
Italy, Mexico, Malaysia, Portugal, Russia, Saudi Arabia and Taiwan. The
Company's subsidiary, Natrix International, markets a line of nutritional
supplements through mass merchandisers.
In 1994, the Company established its own manufacturing facility and is currently
producing approximately 65% of its products, which account for nearly 95% of the
Company's sales. The establishment of its own manufacturing facility enhanced
the Company's current operations by providing it the ability to better control
and reduce turnaround time from order to delivery, reduce inventory levels,
increase quality control and increase profit margins through the reduction of
product costs.
HISTORY
The Company was formed on January 21, 1987 under the name Herbs of China, Ltd.
and was primarily engaged in the sale of Chinese herbal formulas to athletes. On
August 18, 1988, the Company acquired 100% of the outstanding shares of
Bioenergy Nutrients, Inc., a private Colorado corporation formed by the
Company's President, Mark S. Crossen, which engaged in the development and
marketing of nutritional supplements. Subsequently, Bioenergy Nutrients, Inc.
was merged into the Company. In October 1988, the Company changed its name to
Bioenergy Nutrients, Inc. to reflect the merger and in March 1993, the Company's
name was changed to Amrion, Inc. to more adequately reflect its diverse
operations.
On October 17, 1989, the Company completed a public offering of 341,772 shares
of Common Stock through a warrant conversion program at a price of $1.47 per
share. The net proceeds to the Company from the offering were approximately
$446,000. The proceeds from this offering were used to expand the markets served
by the Company, develop the Company's product lines and fulfill working capital
requirements.
On November 2, 1993, the Company completed a public offering of 1,520,000 shares
of Common Stock and 380,000 shares were sold by a shareholder at a price of
$6.75 per share. On December 17, 1993 an additional 285,000 shares of Common
Stock were sold at $6.75 through the Underwriter's 45-day option to cover
over-allotments. The net proceeds to the Company from the stock offering were
$11,004,000 after expenses of $1,179,000. The net proceeds from this offering
were used to establish and equip a manufacturing facility, develop and market
new products for retail distribution and fulfill working capital needs.
In connection with this offering, the Company sold to John G. Kinnard,
Incorporated, as representative of the Underwriters (the "Underwriter"), for
$50, a five-year warrant to purchase 190,000 shares of Common Stock exercisable
at $8.10. During August 1996, the Underwriter exchanged outstanding warrants to
purchase 87,510 shares of common stock to effect the exercise of warrants for
102,490 shares of the Company's common stock in a cashless exercise.
INDUSTRY OVERVIEW
According to industry analysts' reports, the retail market for vitamin and
nutritional supplements has grown dramatically from $3.5 billion in 1991 to an
estimated $6.5 billion in 1996 and is currently growing at 13% to 15% annually.
By the year 2001, retail sales are expected to exceed $12 billion. The growth to
date is largely a result of an increased national interest in preventative
health choices; favorable consumer attitude shifts toward natural health care;
increased consumer willingness toward self-care in resistance to rising health
care costs; and a rapidly growing demographic segment of the population over 40
years old concerned with aging and disease. However, there is no assurance that
consumer attitudes will continue to shift toward natural health care, and that
the 40+ population segment will continue to embrace self-care and use
supplements at the same rate.
Recent estimates indicate that 54% of the U.S. population uses nutritional
supplements at least occasionally in some form (tablet, capsule or liquid).
Aging baby boomers and seniors are more likely to be heavy consumers of
nutritional supplements. Approximately 7% of the U.S. adult population are
considered to be heavy consumers of supplements, taking them more than once a
day. Heavy users of supplements are more likely college graduates, females and
professionals. The greatest incidence of use is among those living on the west
coast.
Mass market retailers (drug, grocery and discount stores) accounted for
approximately 45% of dietary supplement sales in 1996 and health and natural
food stores accounted for more than 38% of industry sales. Mail order sales
represented 3.4%.
Public awareness of the positive effects of vitamins and other nutritional
supplements on health has been heightened by widely publicized reports of
favorable research findings. Such reports have cited a correlation between the
consumption of micro-nutrients such as beta carotene, vitamins C and E
(antioxidant vitamins) and reduced incidence of diseases such as heart disease,
cancer and stroke. In February 1995, the University of Southern California
School of Medicine reported that vitamin E reduces arterial plaque buildup in
people with diagnosed coronary artery disease. In October 1995, the Journal of
The American Medical Association reported on research which suggests that higher
blood levels of folic acid could lead to a lower level of vascular disease.
Coincident with the proliferation of published studies revealing the potential
health benefits of nutritional supplements, has been an increase in physician
recommendations to patients of antioxidants. USA Today reported that a survey
conducted in 1996 at an American Heart Association conference found that the
number of physicians recommending antioxidant vitamins had increased 42% over
the previous year.
While the vast majority of studies continue to suggest that vitamin intake can
have positive effects on long-term health, there are occasional studies that
find negative relationships between vitamin intake and health. One of the more
significant negative studies was the "Finnish" study released in the Spring of
1994. This study examined the impact of beta carotene and vitamin A on a group
of middle-aged, long-term Finnish smokers. The study suggested that beta
carotene and vitamin A were not effective in reducing lung cancer.
Based upon increased consumer awareness, the Company anticipates that the market
for vitamins and other nutritional supplements will continue to increase.
However, there can be no assurance that the absence of media attention or the
publication of adverse reports regarding vitamins and other nutritional
supplements or reports regarding the Company's primary products will not have a
material adverse effect on the market for such products or on the Company's
sales or income.
SALES AND MARKETING
The Company utilizes direct mail of Company designed catalogs, brochures and
individual mail pieces which highlight product lines and current promotional
activities. The Company complements its direct mail activities with print
advertising, free standing inserts, package insert programs and television.
Finally, the Company uses outbound courtesy sales calls designed to identify
specific customer groups, provide market research data on customer needs and
satisfaction and assist in monitoring sales by product line or user group.
Additionally, the Company's retail and health care professional divisions, which
target health food stores, health care providers and mass merchandisers, utilize
marketing strategies which include direct mail, telemarketing contact, personal
visits from sales representatives, consumer and trade advertising, point of sale
materials, free standing inserts with coupons in newspapers and radio
advertising.
Direct Marketing Division
The Direct Marketing Division (DMD) accounted for 87% of the Company's net sales
during 1996 and markets the Bioenergy Nutrients (BN) and HealthSmart Vitamins
(HSV) product lines. The BN line consists of approximately 250 nutritional
supplement products and several homeopathic remedies which are marketed to
consumers nationwide through direct mail (catalogs, mini-catalogs, and other
direct mail programs), outbound telephone sales and magazine and newspaper
advertisements. In July 1994, the Direct Marketing Division introduced
HealthSmart Vitamins, a line of value-priced nutritional supplements. This line
presently consists of approximately 135 vitamin and nutritional supplement
products which are marketed to nutritionally-aware consumers nationwide through
direct mail.
The Company's success in direct marketing has been accomplished through the
development of sophisticated and proprietary information systems capable of
capturing, storing, retrieving, reporting and interpreting buying patterns and
customer sales data to evaluate product and promotional activities. In this
regard, the Company utilizes several fundamental aspects and internally
developed proprietary methods of database marketing in both its direct mail
customer acquisition programs and customer maintenance programs.
The Direct Marketing Division acquires customers through two primary mediums: 1)
direct mail, and 2) print advertising. The primary method of customer
acquisition is direct mail, whereby the Company rents other companies' customer
lists, and in return it is necessary to allow those companies to rent the
Company's customer list. As the Company expands its customer acquisition
programs, it believes that the need to rent its customer list on a reciprocal
basis will diminish.
The Company plans to continue to study, test and evaluate new marketing
techniques, such as direct response television, radio, free standing inserts and
mini-catalogs. The Company also places advertising in magazines and professional
journals in an attempt to add new customers to its mailing list. However, the
Company has not determined the viability or proven the success of its
alternative customer acquisition programs.
Specialty Products Division
The Specialty Products Division markets the BioDynamax line of nutritional herbs
and formula supplements to health food store retailers and accounted for 3% of
the Company's net sales during 1996.
The BioDynamax line of nutritional supplements is comprised of 90 products,
including Guaranteed Potency Herbs, specialty nutrients and condition-specific
formulas, each scientifically formulated to be the highest quality supplements
in the retail health food industry. The BioDynamax line utilizes direct mail
promotions supported by field sales representatives and telesales to acquire new
health food store customers.
BioDynamax' Guaranteed Potency Herbs include the most popular herbal extracts
available in health food stores. Each extract is standardized to a specific
level of active constituents, and this standardization is verified by
independent third-party laboratory analysis.
Health Care Professional Division
The Health Care Professional Division markets the PhysioLogics product line of
nutritional supplements and homeopathic medicinals exclusively to health care
professionals, primarily chiropractors, for dispensing to patients in clinics
and offices under professional supervision. This division accounted for 3% of
the Company's net sales during 1996.
The general marketing goals adopted for the Division during 1996 focused on
providing specialized service and product selection to the existing PhysioLogics
doctor account base and a concentrated effort toward the acquisition of new
accounts. The PhysioLogics product line includes 95 separate products.
The PhysioLogics line has traditionally been marketed directly to health care
professionals, primarily chiropractors. Direct mail promotions supported by
telesales will continue to be the primary vehicle for acquiring sales in 1997.
In addition, further market expansion into alternative medicine practices will
be initiated.
Cevan International
The Company organized its Cevan International Division in 1993 to pursue
international sales of the Company's product lines. The Division was developed
to leverage the Company's strength in product development and marketing to gain
a presence in markets outside the United States.
Cevan International experienced significant sales growth in 1996 with net sales
of $2.7 million (5% of the Company's net sales) compared to net sales of
$899,000 in 1995. Cevan International currently markets its products through
distributors in 20 countries including Barbados, Hong Kong, Italy, Mexico,
Malaysia, Portugal, Russia, Saudi Arabia and Taiwan. Throughout 1996, Cevan
International focused on managing its existing accounts while acquiring new
accounts and assisting current distributors with growing their businesses.
During 1997, Cevan International will focus on increasing sales to existing
accounts by developing effective marketing materials to assist with product
promotion.
Natrix International, LLC - majority-owned subsidiary
Natrix International was formed as a Colorado limited liability company in
February 1994 by two member organizations; Amrion, Inc. and Indena Spa. Natrix
was established to develop the North American mass market for herbal based
health maintenance products. It is the Company's intention to expand this
business opportunity by establishing the leading brand of natural products in
each targeted category within the health and beauty sector. The Natrix product
line consists of six proprietary formulas and is sold through food and drug
chains and discount mass merchandisers. The specially formulated botanical
extracts are positioned as stand-alone brands in their respective categories and
target the same channels of distribution, utilize the same management team, and
generally target the same customer profile.
The product line is supported in the retail market with a comprehensive
advertising and promotional marketing program. The emphasis will be on gaining
full distribution in existing markets and evaluation of the marketing elements.
Chain specific programs will be developed to support expansion through major
drug chains. Natrix International accounted for 2% of the Company's net sales
during 1996.
In 1997, Natrix will focus on gaining new production distribution within the top
30 national and regional accounts, expand current production distribution within
existing accounts, incorporate account-specific promotional vehicles and trade
advertising into the overall marketing strategy and develop an effective
national broker network.
MANUFACTURING
The Company purchased a 31,000 square foot building for its manufacturing
operations in Longmont, Colorado in March 1994. The finished area provides
approximately 5,000, 12,000 and 14,000 square feet for administrative,
manufacturing and distribution needs, respectively. The Company also leases an
additional 18,000 square feet of warehouse space from a non-affiliated party,
which lease expires in October 1998. The manufacturing operation is currently
producing approximately 65% of the Company's products, representing nearly 95%
of total net sales. The Company purchases the balance of its products from its
existing third party manufacturers.
The establishment of its own manufacturing facility enhanced the Company's
current operations by increasing its profit margins, reducing its need for
private contractors and increasing its ability to control the quality and the
supply of its products. In addition, inventory turns and product mix have been
improved. The Company seeks to maintain a sufficient level of product inventory
to meet customer demand in the event of manufacturing delays or supply
shortages.
Through education, training and supervision, the Company places a strong
emphasis on quality control, and all raw materials and finished products are
subject to sample testing for weight and purity. By May 1997, a fully
operational analytical laboratory will be completed. This laboratory will allow
in-house analyses of microbial content and concentrations of active
phytochemical constituents to better guarantee the quality, safety and efficacy
of the Company's products. As the Company continues to expand its product lines
and increase its vertical integration, quality assurance will continue to be a
major emphasis. The Company will focus on expanding its process and
manufacturing controls in 1997.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company currently imports approximately 75% of its raw materials from
various foreign countries. The raw materials are sent to the Company's
manufacturing facility or various independent third party manufacturers who are
contracted for blending, mixing, tableting, encapsulating, liquid preparation
and bottling. Due to the increase in demand for the Company's products from the
overall growth in the natural products industry, Amrion has developed strategic
partnerships with key domestic and international raw material suppliers. These
written supply contracts between Amrion and principal raw material suppliers are
negotiated during the fourth quarter of each year for the following year and
provide reasonable assurance that the Company's supply of raw materials will not
be interrupted. However, alternative sources of the Company's materials are
available in the event a supplier is unable to deliver as specified in the
written supply contract. The termination of supply by one or more of its vendors
could have a temporary adverse effect on the Company's sales.
The cost incurred by the Company for its raw materials could rise due to the
possible continued deterioration of the value of the U.S. Dollar against the
foreign currencies of the Company's suppliers. Further cost increases could
result due to the increase in demand relative to the supply of these products
from the overall growth in the natural products industry.
DESCRIPTION OF MATERIAL PRODUCTS
The Company's products are dietary nutritional supplements; they are not
pharmaceutical or medicinal products. As such, the Company makes no specific
claims of efficacy regarding treatment of any disease. The Company's nutritional
supplements have been found effective by the Company's customers, and the
Company markets its products to satisfy the nutritional needs of those
customers.
The Company has not conducted its own scientific research of its product
components; however, it has made a thorough investigation of American and
international scientific and medical studies and has concluded that there is
general scientific support for the nutritional benefits associated with its
products.
Coenzyme Q10
Coenzyme Q10 (CoQ10) was discovered in 1957 at the University of Wisconsin
Enzyme Institute. CoQ10 is a naturally occurring nutrient. Its crucial function
is to act as a "spark plug" within the body's cells, igniting enzymes to
manufacture pure energy in the form of ATP (adenosine triphosphate). Studies
support CoQ10's ability to help nutritionally support the cardiovascular system,
revitalize the body's natural defense system, energize the body's cells to
increase stamina and endurance and minimize the effects of "free radical" damage
through its antioxidant properties. Proponents further believe that, in some
circumstances, CoQ10 can help improve metabolism, nutritionally support healthy
gums and help to nutritionally support healthy blood pressure. CoQ10 is imported
as a raw material powder in kilograms. CoQ10 is encapsulated and packaged at
the Company's manufacturing facility.
Bilberry
Known scientifically as Vacciunium Myrtillus, the Bilberry bush belongs to the
family of Ericaceae. It is a shrubby perennial plant that grows in the woods of
northern Europe and the sandy areas of northern America and Canada. Clinical
studies indicate that Bilberry can help nutritionally support the tiny
capillaries that feed eye muscles and nerves, and by this action, can help
inhibit the damage caused by blood vessel deterioration. Bilberry is perceived
by its users to: 1) offer nutritional support for healthy eye function in
fighting blurred vision, eye strain and near-sightedness, 2) help extend the
range of vision and promote the sharpness of images, and 3) aid the eye's
ability to focus and adapt to the dark. Bilberry is imported as a raw material
powder in kilograms and is encapsulated and packaged at the Company's
manufacturing facility.
Ginkgo Biloba
Ginkgo Biloba Extract (GBE) comes from the extract of the leaves of the
Ginkgo tree. European clinical studies support GBE's ability to: 1) enhance
intracellular energy production, 2) increase cellular glucose uptake,
3) improve vascular cellular health, 4) demonstrate free radical
scavenging activity (attack substances that can cause tissue damage and
inflammation), and 5) help improve blood flow to the brain and
peripheral extremities, although some of these perceived benefits have not
been clinically proven. GBE is imported as a raw material powder in
kilograms and is encapsulated and packaged at the Company's manufacturing
facility.
MARKET DEVELOPMENT ACTIVITIES
During 1996 and 1995 the Company spent $3,175,000 and $2,204,000 on product
marketing and development expenses, including costs associated with development
of its retail products divisions and its subsidiary Natrix International. The
Company has continued to engage in an expansive market research program to
enlarge and diversify its product lines and expand its customer base beyond
direct marketing. These efforts led to an introduction of approximately 145 new
products and the discontinuance of 75 products for a net addition of 70
products, totaling 670 products at year-end, December 31, 1996.
COMPETITION
The business of developing, manufacturing and marketing vitamins, minerals and
other nutritional supplements is highly competitive. It is not possible to
accurately assess the number and size of competitors, as the nutritional
supplement industry is fragmented by many small companies, many of which are
privately-held and do not publish sales and marketing figures. The Company
believes that its competitive pricing, quality of advertising, comprehensive
lines of quality products and customer service commitment enable it to compete
favorably with other companies.
The DMD uses direct marketing offerings of nutritional supplements in an effort
to be more price competitive than companies selling similar products through
retail outlets. The DMD believes that it competes favorably with other direct
market sellers of similar products on the basis of price, reputation and
customer service, including speed of delivery and new product offerings.
Similarly, the Company believes its Retail Products and Health Care Professional
Divisions, which sell to retailers and alternative doctors, can compete
favorably with other companies on the basis of price, reputation, customer
service and other provided services. The sales strategy will emphasize the
unique design, quality and efficacy of the product lines while maintaining a
highly trained sales force. Primary positioning in all sales efforts will focus
on standardization of high quality herbal products, scientifically researched
for efficacy and safety.
Mass market retailers (drug, grocery and discount stores) account for
approximately 45% of dietary supplement sales and health and natural food stores
account for approximately 38% of industry sales. Industry analysts predict
significant growth in sales of vitamins and nutritional supplements through
these distribution channels. Less than 4% of vitamin and dietary supplement
sales are derived from direct marketing methods. In an effort to increase market
share, the Company has entered the mass market through its retail divisions and
subsidiary.
TRADEMARKS AND COPYRIGHTS
The Company owns common law trademarks and has obtained 114 trademark
registrations on its product names from the United States Patent and Trademark
Office.
Fifteen additional applications have been made and are pending before the U.S.
Patent and Trademark Office. The Company has not applied for trademark
protection in any foreign jurisdictions. During the remainder of 1997, the
Company anticipates an additional 40 federal applications will be filed with
respect to the addition of new products. Federally registered trademarks have
perpetual life, provided they are renewed by the holder on a timely basis and
properly used as a trademark, subject to the rights of third parties to seek
cancellation of the trademark. Additionally, the Company will apply to register
approximately 75 copyrights on advertising literature, product catalogs and
trade secrets with the United States Copyright Office.
GOVERNMENT REGULATION
The processing, formulation, labeling, distribution and advertising of the
Company's products are subject to regulation by several federal agencies,
including the United States Food and Drug Administration ("FDA"), the Federal
Trade Commission ("FTC"), the Consumer Product Safety Commissions, the United
States Department of Agriculture, the Occupational Safety and Health
Administration, the United States Environmental Protection Agency, and the
United States Postal Service ("USPS"). The Company's products are also subject
to regulatory preview of various state and local agencies.
On October 25, 1994, President Clinton signed the Dietary Supplement Health and
Education Act of 1994 ("DSHEA") into law. In passing DSHEA, Congress acquiesced
to the sentiment and will of the American public and acknowledged "the
importance of nutrition and the benefit of dietary supplements to health
promotion and disease prevention." Congress noted "a link between the ingestion
of certain nutrients or dietary supplements and the prevention of chronic
diseases." Perhaps the most compelling provision of DSHEA is the assertion that
"preventative health measures, including education, good nutrition, and
appropriate use of safe nutritional supplements will limit the incidence of
chronic diseases and reduce long-term health care expenditures."
Arguably, the provision of DSHEA with the greatest impact on the nutritional
supplement industry is the legislative establishment and legal definition of a
separate class of substances known as "dietary supplements." This definition
eliminates much of the legal limbo and regulatory uncertainty that existed under
the previously established categories: food, food additive and drug. A dietary
supplement will require evidence of a history of use or other evidence of safety
establishing that it will reasonably be expected to be safe. Such evidence must
be provided by the manufacturer or distributor to the appropriate authority
before it may be marketed. The legislation allows for the dissemination of
information about the benefits of supplementation, as long as that information
is not false or misleading. The information must present a balanced view of
available scientific information on a dietary supplement. DSHEA expressly
permits manufacturers of dietary supplements to make "structure/function"
statements of nutritional support in advertising and on labels. Such statements
may explain how a nutrient or dietary supplement affects the structure or
function of the body. The statements may also document the mechanism by which a
vitamin or other dietary ingredient maintains that structure or function.
However, DSHEA fails to establish complete guidelines for allowable claims,
delegating that function to the Commission on Dietary Supplement Labels. The
appointment of the Commission members was completed in October 1995. The
Commission was required under DSHEA, but failed to submit a report to the
President by October 25, 1996. Respected industry analysts anticipate that the
Commission will delay its report until October 1997. The Company believes its
products, advertising and labeling are consistent with the spirit and intent of
the DSHEA and responsive to the desires and needs of customers to place
substantiated structure/function and nutritional support statements on the
labels of products.
The Company will continue to refine its policies and systems to effectively
communicate truthful information about dietary and nutritional supplements while
ensuring compliance with applicable federal, state and local regulations.
EMPLOYEES
The Company employs approximately 301 full-time persons, of whom 75 are employed
in executive, accounting, information technology, administrative and marketing
support functions; 138 in sales, customer relations and marketing positions; 24
in product development, purchasing and quality control functions; and 64 in
shipping, receiving and manufacturing positions. Also, the Company is currently
utilizing temporary contract employees from outside employment agencies. These
individuals are primarily engaged in the manufacturing, shipping and receiving
departments of the Company. None of the Company's employees are represented by a
collective bargaining unit. The Company believes that its relationship with its
employees is good.
INDUSTRY SEGMENTS
The Company operates in a single Industry Segment.
ITEM 2: Properties
PROPERTY, PLANT AND EQUIPMENT
In March 1994, the Company purchased a 31,000 square foot manufacturing facility
and a 64,500 square foot adjacent lot for future expansion for a total cost of
$1,020,000. The Company used a portion of the net proceeds obtained from its
November 2, 1993 stock offering to purchase the facility and land. The cash
outlay for this manufacturing facility did not significantly affect the
Company's working capital position. Approximately 12,000 square feet (39%) is
utilized for manufacturing operations, with the remaining balance used for
administrative, distribution and warehousing needs. In March 1997, the company
leased an additional 18,000 square feet of warehouse space from a non-affiliated
party, which lease expires in October, 1998.
The Company also owns a 20,000 square foot office building located in Boulder,
Colorado, which was acquired in April 1993 to house the Company's
administrative, marketing and sales personnel. The Company leases additional
4,400, 3,750 and 5,227 square feet of office space from non-affiliated third
parties, with leases expiring in November 1997, February 1999 and October 1998,
respectively. These facilities consist of administrative, marketing and sales
offices.
The Company believes its facilities will need to be expanded in 1998 to meet its
growth needs for administration, marketing and manufacturing functions. The
Company is currently investigating a "build to suit" and subsequent lease
arrangement with a local developer. Sufficient acreage of land and at least
100,000 square feet of facilities space will need to be acquired and leased
accordingly. The Company maintains general commercial/casualty insurance on its
properties, which it deems to be adequate for its present needs.
ITEM 3: Legal Proceedings
From time to time the Company is a party to litigation arising in the ordinary
course of business. The Company has never been the subject of a suit for product
liability, although the marketing and sale of nutritional supplements exposes
the Company to the risk of product liability suits. The Company currently has
its own product liability insurance of $10,000,000 and is an additional insured
on all of the policies of its manufacturers.
On June 24, 1994, the Company and its President resolved an investigation
commenced by the federal Food and Drug Administration by consenting to the entry
of an injunction against them. In its consent, neither the Company nor its
President admitted or denied the facts alleged by the FDA. In the consent
decree, the court enjoined the Company and its President from misbranding any of
its dietary supplement products and from selling and distributing any drug
products without complying with applicable federal laws. The decree provides
that the Company may petition the federal court in Denver to dissolve the Decree
if the FDA has not notified the Company by June 24, 1999 that there has been a
significant violation of the Decree. To date, the Company has not received any
such notice. As part of the same matter, the Company entered into a Plea
Agreement with the United States of America in which the Company, on June 22,
1994, agreed to plead guilty to one count of selling, on or about July 12, 1989,
misbranded bottles of Coenzyme Q10. Subsequently, the Company was fined $46,000.
ITEM 4: Submission of Matters To a Vote of Security Holders
None.
Part II
ITEM 5: Market for Registrant's Common Equity and Related Stockholder Matters
(a) Principal Market or Markets. The Company's common stock is traded
in the over-the-counter market on the NASDAQ National Market System
under the symbol "AMRI."
The following table sets forth quarter-by-quarter data for 1995 and 1996. The
range of high and low representative bid quotations are for the Company's Common
Stock as quoted by NASDAQ National Market System.
Bid
High Low
Calendar Year 1995
First Quarter $9.63 $6.50
Second Quarter 10.38 8.75
Third Quarter 12.50 9.38
Fourth Quarter 12.38 9.88
Calendar Year 1996
First Quarter $15.38 S10.38
Second Quarter 18.50 14.50
Third Quarter 22.00 14.88
Fourth Quarter 26.25 19.00
(b) Approximate Number of Holders of Common Stock. The number of holders of
record of the Company's $0.0011 par value Common Stock at March 24, 1997, was
approximately 795. This does not include an indeterminate number of shareholders
whose shares are held by brokers in street name.
(c) Dividends. Holders of Common Stock are entitled to receive such dividends as
may be declared by the Company's Board of Directors. No dividends have been paid
with respect to the Company's Common Stock and no dividends are anticipated to
be paid in the foreseeable future.
ITEM 6: Selected Financial Data
The following table sets forth certain selected financial data with respect to
the Company, and is qualified in its entirety by reference to the financial
statements and notes thereto.
Balance Sheet Data: 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92
- ------------------ -------- -------- -------- -------- --------
Working capital $10,760,000 $5,271,000 $4,265,000 $ 6,694,000 $1,324,000
Total assets 30,215,000 23,600,000 19,033,000 15,523,000 2,631,000
Current liabilities 4,317,000 3,744,000 2,823,000 1,045,000 588,000
Stockholders' equity 25,576,000 19,719,000 16,127,000 14,425,000 1,995,000
Operations Data: 1996 1995 1994 1993 1992
- --------------- ---- ---- ---- ---- ----
Net sales $54,255,000 $38,756,000 $25,244,000 $16,418,000 $10,606,000
Cost of products 22,595,000 16,311,000 10,786,000 7,286,000 4,901,000
Net income 4,520,000 3,111,000 2,137,000 1,426,000 795,000
Net income per common
share .86 .60 .42 .41 .26
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following review concerns the three years ended December 31, 1996, 1995 and
1994, which should be read in conjunction with the financial statements and
notes thereto presented in this 10-K. Statements regarding future economic
performance contained within Management's Discussion and Analysis of Financial
Condition and Results of Operations, constitute forward-looking statements.
Certain factors regarding the Company's business, operations and competitive
environment which may cause actual results to vary materially from these
forward-looking statements accompany such statements.
General
Over the last three years, the Company's net sales and net income have grown
substantially. Net sales have increased to $54,255,000 in 1996 from $38,756,000
in 1995 and $25,244,000 in 1994. Similarly, net income has increased to
$4,520,000 in 1996 from $3,111,000 in 1995 and $2,137,000 in 1994. Management
believes this growth is the result of being market driven, adaptive to industry
trends and responsive to its customers' needs, as well as a proficiency to
maintain disciplined financial controls. The Company financed this growth
primarily through cash flow from operations. However, a public offering of the
Company's Common Stock was completed in the fourth quarter of 1993 (net proceeds
of $11,004,000) that significantly strengthened the Company's financial
structure. There is no seasonality in the Company's business.
See Liquidity and Capital Resources on page 12 for future trends due to the
establishment of manufacturing capabilities and new marketing programs.
Results of Operations
Net sales for the twelve months ended December 31, 1996 were $54,255,000, an
increase of $15,499,000 (40%) from $38,756,000 for the same period one year ago.
Net sales for the twelve months ended December 31, 1995 increased by $13,512,000
(54%) compared to net sales of $25,244,000 during the twelve months ended
December 31, 1994. This represents a growth in net sales of more than $29
million, or 115%, for the two years ended December 31, 1996.
Continued growth in net sales for the twelve months ended December 31, 1996, was
a direct result of the Company's marketing programs which increased the number
of new customers by 34% and the Company's diversification of its product base
with the introduction of approximately 145 new products, which generated
$5,943,000 in net sales. The increase in net sales during the year ended
December 31, 1995, as compared to December 31, 1994 was due to a 65% increase in
new customers and the introduction of 50 new products which generated $2,200,000
in net sales.
The Company has been able to expand sales through larger and more frequent
customer acquisition mailings, advertisements in magazines and newspapers and,
it believes, through the nationwide trend towards preventive health care as a
viable alternative to traditional medical treatment. A portion of the increase
in net sales is attributable to improvements in customer segmentation mailing
programs within the existing customer base. Such mailings have generated
excellent sales response rates on smaller and more targeted mailings to existing
customers.
The Company intends to continue to implement new customer acquisition programs
through mailings, telemarketing, print advertisements, direct response
television, field sales representatives and expanded retail distribution
programs. The Company plans to add 75-100 new products and approximately 115,000
new customers through these scheduled marketing programs in 1997. However,
difficulties or delays in the development, production, testing and marketing of
products, including a failure to ship new products when anticipated, failure of
customers to accept these products, and a failure of manufacturing economies to
develop when planned may reduce the number of new products introduced.
Cost of products was $22,595,000, $16,311,000 and $10,786,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. This represents 42%, 42%
and 43% of net sales for the twelve months ended December 31, 1996, 1995 and
1994, respectively. During the years ended December 31, 1996 and 1995,
cost of products as a percentage of net sales remained the same over the prior
year due to continued reductions in product costs (approximately 2% of net
sales) from in-house manufacturing and lower product prices through volume
discounts and expanded direct sourcing of raw materials. However, this reduction
was offset by a 2% increase as a percentage of net sales in the cost of
products from the continued use of product promotionals as part of the
Company's marketing strategies. During the years ended December 31, 1995 and
1994, cost of products as a percentage of net sales decreased by 1% due t
reductions in product costs from in-house manufacturing.
Cost of mailings was $10,274,000, $7,118,000, and $4,003,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. This represents 19%, 18% and 16%
of net sales for the twelve months ended December 31, 1996, 1995 and 1994,
respectively. The 3% increase as a percentage of net sales in cost of mailings
from the year ended December 31, 1996 compared to the year ended December 31,
1994 was due to the increased use of customer acquisition mailings. These
mailings are more expensive due to increased costs associated with acquiring
each new customer and such mailings typically have lower response rates than
mailings to existing customers. However, the Company is expecting these costs to
remain constant in 1997 and is estimating the cost of mailings to be 19% of net
sales for the twelve months ended December 31, 1997. However, cost of mailings
may be higher due to the Company's lack of experience regarding alternative
customer acquisition programs. Until alternative customer acquisition strategies
prove successful, the Company will continue to rely on its direct mail efforts,
which could contribute to an increase in cost of mailings due to uncertainty
regarding response and retention rates of such mailings.
In the year ended December 31, 1996, selling, general and administrative (SG&A)
expenses increased by $4,176,000 or 37% to $15,499,000 from the prior year. In
the year ended December 31, 1995, SG&A expenses increased by $3,289,000 or 41%
to $11,323,000 from the same period one year ago. This significant increase in
SG&A in 1996 was primarily due to the market development costs of $1,289,000 by
Natrix International, the Company's majority owned subsidiary. Further increases
were due primarily to the Company's sales growth, which necessitated additional
staffing requirements of approximately $1,389,000 in 1996 and $1,685,000 in 1995
and substantial increases in product marketing and development expenses of
approximately $971,000 in 1996 and $636,000 in 1995.
SG&A as a percentage of net sales was 29%, 29% and 32% for the years ended
December 31, 1996, 1995 and 1994, respectively. SG&A as a percentage of net
sales in 1994 was higher than in 1996 and 1995, due to the substantial start-up
and market development costs incurred by the Company and its subsidiary, Natrix
International, during 1994.
For the years ended December 31, 1996, 1995 and 1994, the Company generated
interest income of $414,000, $365,000 and $359,000 and produced rental income on
its customer list of $144,000, $125,000 and $114,000 respectively.
Net income as a percentage of net sales was 8.3%, 8.0% and 8.5% for the three
years ended December 31, 1996, 1995 and 1994, respectively. Net income for 1996
increased by $1,409,000 (45%) from the prior year. Net income for 1995 increased
by $974,000 (46%) to $3,111,000 compared to net income of $2,137,000 in 1994.
Overall, for the two years ended December 31, 1996 net income increased by
$2,383,000 (111%) due to the Company's increased sales, cost control efforts and
lower product costs during a period of significant expenditures on product and
market development in the Company's newer retail product lines.
Liquidity and Capital Resources
On November 2, 1993, the Company completed a public offering of its Common
Stock. The net proceeds to the Company from the stock offering were $11,004,000.
During 1996 and 1995, the Company spent approximately $1 and $2 million,
respectively, to add capacity to its manufacturing facility and continue the
development of the Natrix line to be sold in the retail mass market. Despite
these significant expenditures, the Company generated enough cash from internal
cash flows in 1996 and 1995 to have a cash and marketable securities balance of
$9,173,000 at December 31, 1996, with no long-term debt.
The Company has generated cash from operating activities of $2,396,000 and
$3,736,000 during the years ended December 31, 1996 and 1995, respectively. The
generation of cash from operating activities of $2,396,000 during the twelve
months ended December 31, 1996 is primarily due to net income of $4,520,000, an
increase of $1,409,000 from net income of $3,111,000 in 1995, and an increase of
$888,000 in accounts payable and accrued liabilities from December 31, 1995.
These cash sources were offset by accounts receivables increasing by $1,368,000
in 1996 due to the Company's sales expansion into the retail mass markets on net
30 day payment terms and by product inventories increasing by $2,691,000 in 1996
compared to increases of $331,000 during 1995. Additionally, the Company's
deferred promotional mailing costs increased by $272,000 in 1996 compared to
increases of $217,000 for the same period in 1995. The increases in accounts
receivable, inventory and deferred promotional mailing costs were necessary to
support continued sales growth and expanding product lines.
Cash flows used by investing activities totaled $2,171,000 during the year ended
December 31, 1996 versus $3,276,000 for the same period in 1995. The continued
use of cash in investing activities resulted from the purchase of machinery and
equipment for the manufacturing facility and computer equipment and software for
a total cost of $1,576,000. Additionally, the Company used $1,480,000 to
purchase mail lists and used $103,000 in cash to purchase other fixed and
intangible assets. Finally, the Company generated cash of $988,000 from the sale
of marketable securities. The Company believes the cash invested in marketable
securities combined with its current working capital position will be adequate
to meet future operating needs. However, as significant expenses are incurred
for marketing distribution development, facility expansion and product
development, the Company may be required to seek additional funding.
Cash flows provided by financing activities totaled $1,221,000 during the year
ended December 31, 1996 as a result of stock options being exercised that
generated $1,188,000 in cash. These stock options were granted to employees and
directors during 1995, 1994, 1993 and 1992.
The Company accounts for marketable securities in accordance with Statement of
Financial Accounting Standards No. 115. Accordingly, these securities are stated
at fair value with unrealized gains and losses included as a component of
stockholders' equity until realized. At December 31, 1996, the Company recorded
a marketable securities valuation allowance for an unrealized loss of $217,000
as a component of stockholders' equity. At December 31, 1996, the Company
recorded a valuation allowance equal to the deferred tax effects of the
marketable securities net unrealized loss as management of the Company has not
been able to determine that it is more likely than not that the unrealized
capital loss will be realized.
The Company has a $650,000 revolving line of credit agreement with a bank which
bears interest at 1% over the bank's prime lending rate and expires in June 1997
and no amounts were outstanding at December 31, 1996.
The Company is currently investigating a "build-to-suit" and subsequent lease
arrangement with a local developer. Sufficient acreage of land and at least
100,000 square feet of facilities space will need to be acquired and leased
accordingly.
ITEM 8: Financial Statements and Supplementary Data
The report of independent certified public accountants appears on page F-1 and
the financial statements, notes to financial statements and schedule appear on
pages F-2 through F-19 hereof.
ITEM 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
The information required by Part III of Form 10-K is incorporated herein by
reference to Registrant's definitive Proxy Statement to be filed in connection
with the 1997 Annual Meeting of Shareholders to be held on June 27, 1997.
PART IV
ITEM 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following consolidated financial statements are filed as part of
this report:
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-2 - F-3
Consolidated Statements of Income for each of the Three Years Ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity for each of the Three Years
Ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for each of the Three Years Ended
December 31, 1996, 1995 and 1994 F-6
Summary of Accounting Policies F-7 - F-9
Notes to Consolidated Financial Statements F-10 -F-19
Schedule 11 - Valuation and Qualifying Accounts F-20
(b) There were no Form 8-K's filed for the Registrant during the Quarter
ended December 31, 1996.
(c) The following Exhibits are filed as part of this report:
Exhibit
No Document
3.0 Amended and Restated Articles of Incorporation (1)
3.1 Bylaws (2)
23 Consent of BDO Seidman, LLP*
27 Financial Data Schedule*
*Filed herewith
(1) Incorporated by reference from the Company's Registration Statement
No. 333-15939, on Form S-8 as filed with the Securities and Exchange
Commission on December 4, 1996.
(2) Incorporated by reference from the Company's Post Effective Amendment
to Registration Statement No.33 13345-D on Form S-18.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
AMRION, INC.
Date: April 8, 1997 /s/ Mark S. Crossen
Mark S. Crossen, Chief Executive Officer
& President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Mark S. Crossen Chairman of the Board of April 8, 1997
- ------------------- Directors and Principal Executive
Mark S. Crossen Officer
/s/ Jeffrey S. Williams Director, Principal April 8, 1997
- ----------------------- Financial and Accounting
Jeffrey S. Williams Officer
/s/ Theodore W. Brin Director April 8, 1997
- ---------------------
Theodore W. Brin
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
Amrion, Inc. and Subsidiary
Boulder, Colorado
We have audited the accompanying consolidated balance sheets of Amrion, Inc. and
subsidiary as of December 31, 1996 and 1995 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. We have also audited the schedule
listed in the accompanying index. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Amrion, Inc. and
subsidiary at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO SEIDMAN, LLP
Denver, Colorado
March 14, 1997
F-1
Amrion, Inc.
Consolidated Balance Sheets
December 31, 1996 1995
Assets
Current:
Cash and cash equivalents $ 2,277,469 $ 831,544
Accounts receivable, less allowance of
$28,000 and $48,000 for possible losses (Note 4) 1,991,772 624,006
Inventories (Notes 1 and 4) 7,727,315 5,035,872
Mail supplies 893,268 1,026,463
Deferred promotional mailing costs, net 1,375,625 1,103,987
Other 811,997 393,273
Total current assets 15,077,446 9,015,145
Property and equipment, net of accumulated
depreciation (Notes 2 and 4) 5,272,940 4,368,672
Other assets:
Marketable securities available for sale (Note 3) 6,895,214 7,934,514
Mailing lists, net of accumulated amortization
of $1,797,810 and $1,083,229 2,876,748 2,111,556
Intangible assets, net of accumulated amortization
of $114,291 and $72,945 92,917 170,429
Total other assets 9,864,879 10,216,499
$30,215,265 $23,600,316
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-2
Amrion, Inc.
Consolidated Balance Sheets
December 31, 1996 1995
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 3,093,739 $ 3,094,662
Accrued liabilities:
Payroll and payroll taxes 365,928 275,195
Income taxes - 193,255
Other 857,830 180,988
Total current liabilities 4,317,497 3,744,100
Deferred income taxes (Note 5) 280,000 104,000
Total liabilities 4,597,497 3,848,100
Minority interest 41,973 32,865
Commitments (Note 7)
Stockholders' equity (Note 6):
Common stock, $.0011 par value - shares authorized,
10,000,000; issued 5,326,814 and 5,026,813 5,860 5,529
Additional paid-in capital 13,176,747 11,788,856
Retained earnings 12,610,602 8,090,756
Marketable securities valuation allowance (Note 3) (217,414) (165,790)
Total stockholders' equity 25,575,795 19,719,351
$ 30,215,265 $23,600,316
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-3
Amrion, Inc.
Consolidated Statements of Income
Years Ended December 31, 1996 1995 1994
Net sales $ 54,255,321 $ 38,756,288 $ 25,244,237
Cost of sales:
Cost of products 22,595,323 16,311,467 10,786,215
Cost of mailings 10,274,262 7,118,374 4,002,900
Cost of sales 32,869,585 23,429,841 14,789,115
Gross profit 21,385,736 15,326,447 10,455,122
Operating expenses - selling, general
and administration 15,499,257 11,322,857 8,033,599
Income from operations 5,886,479 4,003,590 2,421,523
Other income (expense):
Interest income 413,628 365,184 359,159
Other, net 202,667 229,861 326,663
Total other income 616,295 595,045 685,822
Income before taxes on income and minority
interest in loss of subsidiary 6,502,774 4,598,635 3,107,345
Taxes on income (Note 5) 2,007,000 1,552,000 1,060,000
Minority interest in loss of subsidiary 24,072 64,637 89,319
Net income $ 4,519,846 $ 3,111,272 $ 2,136,664
Net income per common and
common share equivalent $ .86 $ .60 $ .42
Weighted average number of common
shares and common share equivalents
outstanding 5,268,140 5,146,572 5,031,721
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-4
Amrion, Inc.
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1996, 1995 and 1994
Marketable
Common Stock Additional Securities Total
----------------------- Paid-In Retained Treasury
Valuation Stockholders'
Shares Amount Capital Earnings Stock Allowance Equity
Balance, January 1, 1994 4,930,915 $ 5,424 $ 11,626,968 $ 2,842,820 $ (50,000) $ - $ 14,425,212
Marketable securities
valuation allowance - - - - - (484,388) (484,388)
Costs associated with prior
year public offering - - (35,050) - - - (35,050)
Sale of stock through options
exercised (Note 6) 50,181 55 84,963 - - - 85,018
Net income - - - 2,136,664 - - 2,136,664
Balance, December 31, 1994 4,981,096 5,479 11,676,881 4,979,484 (50,000) (484,388) 16,127,456
Marketable securities
valuation allowance - - - - - 318,598 318,598
Sale of stock through
options exercised (Note 6) 45,717 50 161,975 - - - 162,025
Retirement of Treasury
Stock (Note 6) - - (50,000) - 50,000 - -
Net income - - - 3,111,272 - - 3,111,272
Balance, December 31, 1995 5,026,813 5,529 11,788,856 8,090,756 - (165,790) 19,719,351
Marketable securities
valuation allowance - - - - - (51,624) (51,624)
Sale of stock through
options exercised (Note 6) 197,511 218 1,388,004 - - - 1,388,222
Exercise of warrants in
cashless exercise (Note 6) 102,490 113 (113) - - - -
Net income - - - 4,519,846 - - 4,519,846
Balance, December 31, 1996 5,326,814 $ 5,860 $ 13,176,747 $12,610,602 $ - $ (217,414) $ 25,575,795
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
Amrion, Inc.
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Years Ended December 31, 1996 1995 1994
Cash flows from operating activities:
Net income $ 4,519,846 $ 3,111,272 $ 2,136,664
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 1,427,757 934,456 558,623
Deferred tax expense (benefit) 264,000 50,000 (19,000)
Provision for losses on accounts
receivable - (12,000) 49,000
Minority interest share in loss
of subsidiary (24,072) (64,637) (89,319)
Changes in operating assets and
liabilities:
Accounts receivable (1,367,766) (72,705) (292,902)
Inventories (2,691,443) (331,101) (2,739,086)
Mailing supplies 133,195 (437,752) (163,199)
Deferred promotional mailing costs (271,638) (217,078) (670,811)
Other assets (482,392) (146,100) (224,809)
Accounts payable 254,817 542,670 1,673,688
Accrued liabilities 633,320 378,724 103,692
Cash provided by operating activities 2,395,624 3,735,749 322,541
Cash flows from investing activities:
Purchase of marketable securities available
for sale - (120,147) (2,074,482)
Proceeds from the sale of marketable securities
available for sale 987,676 - -
Purchase of property and equipment (1,576,087) (1,481,112) (2,338,115)
Purchase of mail lists and intangible assets (1,582,690) (1,674,723) (682,042)
Cash used in investing activities (2,171,101) (3,275,982) (5,094,639)
Cash flows from financing activities:
Proceeds from issuance of common
stock - net 1,188,222 162,025 49,968
Minority interest contributions 33,180 88,821 98,000
Cash provided by financing
activities 1,221,402 250,846 147,968
Net increase (decrease) in cash
and cash equivalents 1,445,925 710,613 (4,624,130)
Cash and cash equivalents, beginning of year 831,544 120,931 4,745,061
Cash and cash equivalents, end of year $ 2,277,469 $ 831,544 $ 120,931
See accompanying summary of accounting policies and notes to consolidated
financial statements
F-6
Amrion, Inc.
Summary of Accounting Policies
Organization and Business
The consolidated financial statements include the accounts of Amrion, Inc.
("Amrion") and those of its 93% owned subsidiary, Natrix International, LLC
("Natrix"), a Colorado Limited Liability Corporation (collectively the
"Company"). Amrion markets nutritional supplements principally throughout the
United States, with the balance to customers in the Far East, Europe and Mexico,
using a combination of direct mail, telemarketing and space advertising. Natrix
is engaged in the marketing and distribution of proprietary herbal based health
maintenance products to food and drug chains and discount mass merchandisers.
The Company's primary products are Coenzyme Q10, Bilberry and Ginkgo Biloba
which comprised 39% of the Company's net sales for the year ended December 31,
1996.
Principles of Consolidation
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Concentrations of Credit Risk
The Company's financial instruments exposed to concentrations of credit risk
consist primarily of accounts receivable, cash equivalents and marketable
securities.
Concentrations of credit risk with respect to such accounts receivable are
limited due to the large number of customers, generally short payment terms, and
their dispersion across geographic areas.
The Company's cash equivalents are high quality money market accounts placed
with major financial institutions. Marketable securities consist primarily of
preferred stock and AAA rated tax-exempt municipal bonds. The investment policy
limits the Company's exposure to concentrations of credit risk.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined using
the standard cost method, which approximates the weighted average cost method.
F-7
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method based on the estimated useful lives of related assets
generally 3 to 31.5 years. Maintenance and repair costs are expensed as
incurred.
Marketable Securities
The Company accounts for marketable securities in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS"), "Accounting for Certain
Investments in Debt and Equity Securities". All marketable equity and debt
securities have been categorized as available for sale as the Company does not
have the positive intent to hold to maturity or does not intend to trade
actively. These securities are stated at fair value with unrealized gains and
losses included as a component of stockholders' equity until realized.
Advertising
The Company expenses the production costs of advertising the first time the
advertising takes place, except for direct-response advertising, which is
capitalized and amortized over its expected period of future benefits.
Direct response advertising consists primarily of direct mail advertising,
including deferred promotional mailing costs, of the Company's products. The
capitalized costs of mailed promotional materials are amortized over the
expected promotional benefit period of three months.
Advertising expense for the years ended December 31, 1996, 1995 and 1994 was
$10,867,000, $7,702,000 and $4,607,000.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" which requires the use of the "liability method".
Accordingly, deferred tax liabilities and assets are determined based on the
temporary differences between the financial statement and tax bases of assets
and liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse.
F-8
Intangible Assets
Purchased mailing lists, trademarks and copyrights are amortized by the
straight-line method over their estimated useful lives which range from five to
ten years. On an ongoing basis the Company reviews the recoverability and
amortization periods of intangible assets taking into consideration any events
or circumstances which could impair the assets carrying value and records
adjustments when necessary.
Income Per Common and Common Share Equivalent
Income per common and common share equivalent is based on the weighted average
number of common shares outstanding during each of the periods presented.
Options to purchase stock are included as common share equivalents when
dilutive. In 1996, 1995 and 1994, options representing common share equivalents
of 88,781, 124,942 and 67,920 shares, respectively, are included in the weighted
average number of common shares and common share equivalents outstanding.
Cash Equivalents
The Company considers cash and all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized upon shipment of goods to the customer.
Stock Option Plans
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees",
and related Interpretations in accounting for all stock option plans. Under APB
Opinion 25, no compensation cost has been recognized for stock options issued to
employees as the exercise price of the Company's stock options granted equals or
exceeds the market price of the underlying common stock on the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation", requires the Company to
provide pro forma information regarding net income as if compensation cost for
the Company's stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123.
Reclassifications
Certain items included in prior years financial statements have been
reclassified to conform to current year presentation.
F-9
Amrion, Inc.
Notes to Consolidated Financial Statements
1. Inventories
Inventories consisted of the following:
December 31, 1996 1995
Finished goods $ 3,019,080 $ 2,071,756
Work in process 434,133 1,111,137
Raw materials 4,274,102 1,852,979
$ 7,727,315 $ 5,035,872
2. Property and Equipment
Property and equipment consisted of the following:
December 31, 1996 1995
Land $ 326,000 $ 326,000
Building and leasehold improvements 2,081,769 1,967,495
Computer equipment and software 1,981,424 1,218,686
Machinery and equipment 1,841,826 1,109,731
Furniture and equipment 390,770 293,263
Equipment not yet in service 432,904 563,431
7,054,693 5,478,606
Less accumulated depreciation 1,781,753 1,109,934
Net property and equipment $5,272,940 $ 4,368,672
Depreciation expense for the years ended December 31, 1996, 1995 and 1994 was
approximately $742,000, $446,000 and $322,000.
F-10
3. Marketable Securities
Marketable securities consisted of the following:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1996:
Debt Securities -
Municipal securities $ 5,922,292 $ 5,336 $ (139,776) $ 5,787,852
Equity Securities -
Preferred stock 1,190,336 5,274 (88,248) 1,107,362
$ 7,112,628 $ 10,610 $ (228,024) $ 6,895,214
December 31, 1995:
Debt Securities -
Municipal securities $ 7,052,722 $ 27,605 $ (144,768) $ 6,935,559
Equity Securities -
Preferred stock 1,047,582 3,361 (51,988) 998,955
$ 8,100,304 $ 30,966 $ (196,756) $ 7,934,514
Contractual maturities of debt securities available for sale at December 31,
1996 are as follows:
Amortized Fair
Cost Value
Maturities within one year $ 2,401,272 $2,339,359
Maturities after one year and within five years 3,521,020 3,448,493
$ 5,922,292 $5,787,852
F-11
4. Financing Agreement
The Company has a $650,000 line-of-credit agreement with a bank. The line bears
interest at 1% over the bank's prime lending rate (9.25% at December 31, 1996).
The line expires in June 1997 and is secured by inventories, accounts
receivable, furniture, fixtures, and equipment. There were no amounts
outstanding under the line of credit at December 31, 1996 and 1995.
5. Taxes on Income
Taxes on income consisted of the following components:
Year Ended December 31, 1996 1995 1994
Current:
Federal $ 1,502,000 $ 1,286,000 $ 922,000
State 241,000 216,000 157,000
1,743,000 1,502,000 1,079,000
Deferred (reduction):
Federal 243,000 46,000 (17,000)
State 21,000 4,000 (2,000)
264,000 50,000 (19,000)
$2,007,000 $1,552,000 $1,060,000
F-12
The components of the net deferred tax assets and liabilities are shown below.
December 31, 1996 1995
Accumulated depreciation and amortization $ (280,000) $ (105,000)
Marketable securities net unrealized loss 81,000 62,000
Allowance for product returns 41,000 39,000
Accrued payroll costs 21,000 21,000
Other, net 40,000 (10,000)
(97,000) 7,000
Valuation allowance (81,000) (62,000)
Net deferred income tax liabilities $(178,000) $ (55,000)
Deferred tax assets of $102,000 and $49,000 as of December 31, 1996 and 1995 are
included in other current assets.
At December 31, 1996 and 1995, the Company recorded a valuation allowance equal
to the deferred tax effects of the marketable securities net unrealized loss as
management of the Company has not been able to determine that it is more likely
than not that the net unrealized capital loss will be realized.
A reconciliation of the effective tax rates with the federal statutory rate is
shown below:
Year Ended December 31, 1996 1995 1994
Federal income tax computed at statutory rate $2,219,000 $1,585,000 $1,057,000
State income taxes, net of federal benefit 159,000 135,000 104,000
Tax-exempt interest income (99,000) (131,000) (97,000)
Other (272,000) (37,000 (4,000)
Taxes on income $2,007,000 $1,552,000 $1,060,000
F-13
6. Stockholders' Equity
Stock Options
At December, 1996, the Company has two stock option plans, which are described
below. The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees", and related Interpretations accounting for the plans. Under APB
Opinion 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation cost has been recognized.
Non-Qualified Stock Option Plan
The Company has a Non-Qualified Stock Option Plan (the Plan), expiring
December 30, 1999, reserving for issuance 511,000 shares of the Company's common
stock. The Plan provides for grants to either employees, officers or employee
directors, at the discretion of the compensation committee of the Board of
Directors, stock options to purchase common stock of the Company at a price not
less than 80% of the fair market value, as defined, on the date of grant.
Options granted primarily vest ratably on an annual basis over a five year
period. Any options granted under the Plan must be exercised within five years
of the date they were granted.
Non-Employee Director Stock Option Plan
The Company has a Non-Employee Director Stock Option Plan (the "Director Plan"),
expiring January 13, 2000, reserving for issuance 70,000 shares of the Company's
common stock. The Director Plan provides that each person who was a non-employee
director of the Company on December 31, 1994 and who is a non-employee director
of the Company on December 31st of each succeeding year shall be granted, each
year, a five-year option to purchase up to 3,000 shares of common stock of the
Company at an exercise price based upon the fair market value, as defined, on
the date of grant. Options issued under the Director Plan are fully exercisable
on the date of grant. Any options granted under the Director Plan must be
exercised within five years of the date they were granted.
F-14
Other Stock Options
During 1996, 1995 and 1994, the Company granted various options to purchase
shares of its common stock to directors and employees for services rendered.
Under the terms of the options, employees and directors may exercise their
options at prices ranging from $3.33 to $13.50 (which approximated the fair
market value at the date of grant) per share over a four to six year period
beginning on the grant date, provided they remain directors or employees of the
Company.
FASB Statement 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
requires the Company to provide pro forma information regarding net loss and net
loss per share as if compensation costs for the Company's stock option plans and
other stock awards had been determined in accordance with the fair value based
method prescribed in SFAS No. 123. The Company estimates the fair value of each
stock award at the grant date by using the Black-Scholes option-pricing model
with the following weighted-average assumptions used respectively: dividend
yield of 0 percent for all years; expected volatility of 42 to 54 percent;
risk-free interest rates of 6.43 to 7.66 percent; and expected lives of one
year.
Under the accounting provisions for SFAS No. 123, the Company's net income per
share would have been decreased by the pro forma amounts indicated below:
1996 1995
Net income
As reported $ 4,519,846 $ 3,111,272
Pro forma $ 4,241,008 $ 2,832,880
Net income per share
As reported $ .86 $ .60
Pro forma $ .81 $ .55
During the initial phase-in period of SFAS 123, the effect on pro forma results
are not likely to be representative of the effects on pro forma results in
future years since options vest over several years and additional awards could
be made each year.
F-15
A summary of the status of the Company's stock option plans and outstanding
warrants as of December 31, 1996, 1995 and 1994 and changes during the years
ending on those date is presented below:
1996 1995
------------------------------- ---------------------
Weighted
Average
Range of Exercise Range of Exercise
Shares Price Shares Prices
Outstanding, beginning of year 644,961 $ 6.17 686,476 $ 1.47 - 6.20
Granted 42,800 13.02 25,500 7.00 - 10.88
Cancelled (127,750) 6.20 (21,298) 1.47 - 6.20
Exercised (197,511) 6.00 (45,717) 1.47 - 6.20
Outstanding, end of year 362,500 $ 7.07 644,961 $ 1.47 - 10.88
Options exercisable, end of year 144,200 $ 8.18 246,961 $ 1.47 - 10.88
Weighted average fair value of options
granted during the year $ 7.59 $ 3.23
The following table summarizes information about stock options and warrants
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
---------------------------- ------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/96 Life Price at 12/31/96 Price
$ 3.33 - 6.20 302,700 7.9 years $ 6.16 93,200 $ 5.90
6.80 - 9.00 21,000 3.2 8.01 21,000 8.01
9.13 - 13.50 29,800 5.5 11.03 21,000 11.67
22.40 9,000 5.0 22.40 9,000 22.40
F-16
Warrants
In connection with the 1993 public offering, the Company had issued to the
underwriter a five-year warrant to purchase 190,000 shares of common stock at an
exercise price of $8.10. During August 1996, the underwriter in a cash-less
exercise exchanged outstanding warrants to purchase 87,510 shares of common
stock to effect the exercise of warrants for 102,490 shares of common stock.
Treasury Stock
In 1995 the Company retired its treasury stock as a result of a change in the
Colorado Business Corporation Act.
7. Commitments
Self-Insurance
The Company is partially self insured for employee medical liabilities which
covers risk up to $12,500 per individual covered under the plan. The Company has
purchased excess medical liability coverage for individual claims in excess of
$12,500 and aggregate claims in excess of approximately $250,000 annually with a
national medical insurance carrier. Premiums and claim expenses associated with
the medical self insurance program are included in the accompanying statements
of income.
Supplier Agreements
The Company has agreements to purchase certain raw materials from
vendors through December 31, 1997. The maximum commitment by the Company is
$1,725,000.
The Company currently imports approximately 75% of its product ingredients from
various foreign countries. While the Company does not have supply contracts with
all of its vendors, alternative sources of the Company's materials are
available. The termination of supply by one or more of its vendors could have a
temporary adverse effect on the Company's sales.
F-17
Lease Agreements
The Company leases office and warehouse space under various operating leases. As
of December 31, 1996, remaining minimum annual rental commitments under
noncancelable operating leases are as follows:
Year ended December 31, Total
1997 $ 153,000
1998 125,000
1999 5,000
$ 283,000
Rent expense for the years ended December 31, 1996 and 1995 was approximately
$39,000 and $3,000. There was no rent expense for the year ended December 31,
1994.
8. Subsequent Events
In March 1997, the Company began a stock buy-back program authorized by
the Board of Directors. Through March 19, 1997, the Company repurchased
111,800 shares at a cost of approximately $2,184,000.
F-18
9. Selected Quarterly Financial Data (Unaudited)
1st 2nd 3rd 4th
Year ended December 31, 1996:
Net sales $ 13,381,956 $ 11,871,331 $ 14,063,408 $ 14,938,626
Gross profit 4,559,119 5,119,968 5,574,394 6,132,255
Income from operations 1,174,701 1,387,307 1,679,842 1,644,629
Net income 923,090 1,174,613 1,154,682 1,267,461
Net income per common
and common equivalent share .18 .22 .22 .24
Year ended December 31, 1995:
Net sales 10,131,780 8,810,143 10,738,458 9,075,907
Gross profit 3,741,886 3,282,684 4,043,192 4,258,685
Income from operations 1,101,483 507,333 1,153,365 1,241,409
Net income 793,129 492,982 865,077 960,084
Net income per common and
common equivalent share .16 .10 .17 .17
10. Supplemental Disclosures of Cash Flow Information
Year Ended December 31, 1996 1995 1994
Cash paid during the period for:
Income taxes $1,594,000 $ 1,207,000 $1,032,000
Interest $ 2,000 $ 6,000 $ 19,000
F-19
Amrion, Inc
Schedule II - Valuation and Qualifying Accounts
Accounts Receivable - Allowance for possible losses
Additions
Balance Charged to Balance
at Beginning Costs and at End
of Period Expenses Deductions of Period
Year Ended December 31, 1996 $ 48,000 $ - $ 20,000 $ 28,000
Year Ended December 31, 1995 60,000 59,754 71,754 48,000
Year Ended December 31, 1994 39,000 34,968 13,968 60,000
F-20