U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1997
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to .
Commission file No. 0-18476
AMRION, INC.
(Exact name of Registrant as specified in its charter)
Colorado 84-1050628
(State or other jurisdiction (IRS Employer ID No.)
of incorporation or organization)
6565 Odell Place, Boulder, CO 80301
(Address of principal executive offices) (Zip Code)
303-530-2525
(Telephone Number)
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
Common stock, par value $.0011 per share: 5,255,514 shares outstanding as of
June 30, 1997.
1
PART 1. FINANCIAL
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
2
AMRION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
June 30, December 31,
1997 1996
(Unaudited) (Audited)
Assets
Current:
Cash and cash equivalents $ 345,864 $ 2,277,469
Accounts receivable, less allowance
of $19,000 and $28,000
for possible losses 1,367,379 1,991,772
Inventories 14,359,264 7,727,315
Mail supplies 1,279,387 893,268
Deferred promotional mailing costs, net 1,582,740 1,375,625
Other 885,820 811,997
----------- -----------
Total current assets 19,820,454 15,077,446
----------- -----------
Property and equipment, net 8,047,248 5,272,940
----------- -----------
Other assets:
Marketable securities available for sale 2,548,630 6,895,214
Mailing lists, net 2,893,792 2,876,748
Intangible assets, net 92,486 92,917
----------- -----------
Total other assets 5,534,908 9,864,879
----------- -----------
Total assets $33,402,610 $30,215,265
=========== ===========
See accompanying notes to the consolidated financial statements
3
AMRION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
June 30, December 31,
1997 1996
(Unaudited) (Audited)
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 3,946,417 $ 3,093,739
Accrued liabilities 1,905,259 1,223,758
Income taxes payable 666,493 -
---------- ----------
Total current liabilities 6,518,169 4,317,497
Deferred income taxes 280,179 280,000
---------- ----------
Total liabilities 6,798,348 4,597,497
---------- ----------
Minority interest 6,933 41,973
Stockholders' equity:
Common stock, $.0011 par value - shares
authorized, 10,000,000; issued 5,255,514
and 5,326,814 5,781 5,860
Additional paid-in capital 11,245,105 13,176,747
Retained earnings 15,575,857 12,610,602
Marketable securities valuation
allowance (229,414) (217,414)
---------- ----------
Total stockholders' equity 26,597,329 25,575,795
---------- ----------
$33,402,610 $30,215,265
=========== ===========
See accompanying notes to the consolidated financial statements
4
AMRION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX AND THREE-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
Six months Three months
ended ended
June 30, June 30,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales $35,232,650 $25,253,287 $16,875,906 $11,871,331
----------- ----------- ----------- -----------
Cost of sales:
Cost of products 14,264,439 10,797,795 6,581,751 4,858,266
Cost of mailing 6,322,610 4,776,405 2,881,177 1,893,097
----------- ----------- ----------- -----------
Cost of sales 20,587,049 15,574,200 9,462,928 6,751,363
----------- ----------- ----------- -----------
Gross profit 14,645,601 9,679,087 7,412,978 5,119,968
Operating expenses -
Selling, general and
administration 10,361,856 7,117,079 5,491,440 3,732,661
----------- ----------- ----------- -----------
Income from operations 4,283,745 2,562,008 1,921,538 1,387,307
----------- ----------- ----------- -----------
Other income, net 230,111 326,496 138,446 167,358
----------- ----------- ----------- -----------
Income before taxes
on income 4,513,856 2,888,504 2,059,984 1,554,665
Taxes on income 1,548,600 790,801 728,600 380,052
----------- ----------- ----------- -----------
Net income $2,965,256 $2,097,703 $1,331,384 $ 1,174,613
=========== =========== =========== ===========
Net income per common
and equivalent share $ .55 $ .40 $ .25 $ .22
=========== =========== =========== ===========
Weighted average number
of common shares and
equivalents
outstanding 5,358,791 5,204,476 5,328,413 5,257,962
=========== =========== =========== ===========
See accompanying notes to the consolidated financial statements
5
AMRION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX AND THREE-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
Six Months Three Months
ended ended
June 30, June 30,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $2,965,256 $2,097,703 $1,331,384 $1,174,613
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 974,654 682,650 508,875 382,857
Changes in operating assets and liabilities:
Accounts receivable 624,393 (191,029) 790,760 (119,565)
Inventories (6,631,949) (3,205,235) (3,194,917) (282,795)
Mailing supplies (386,119) 303,583 (102,603) 136,241
Deferred promotional mailing costs (207,115) 69,817 (217,712) (386,997)
Other assets (73,823) 75,750 47,022 106,889
Accounts payable 852,678 (1,003,480) (1,435,879) (2,367,655)
Accrued liabilities 681,680 287,123 197,855 269,733
Income taxes payable 666,493 39,940 (143,507) (197,917)
----------- ----------- ----------- -----------
Cash used in operating activities (533,852) (843,178) (2,218,722) (1,284,596)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Sales of marketable securities
available for sale 4,334,584 479,815 3,761,950 288,502
Purchase of property and equipment (3,278,359) (732,192) (1,332,980) (514,603)
Purchase of mailing lists and intangible
assets (522,257) (669,305) (319,938) (327,329)
----------- ----------- ----------- -----------
Cash provided by (used in)
investing activities 533,968 (921,682) 2,109,032 (553,430)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common
stock - net 255,675 1,061,139 36,079 1,008,114
Purchase of company stock (2,187,396) - - -
----------- ----------- ----------- -----------
Cash provided by (used in)
financing activities (1,931,721) 1,061,139 36,079 1,008,114
----------- ----------- ----------- ----------
Net decrease in cash and cash equivalents (1,931,605) (703,721) (73,611) (829,912)
Cash and cash equivalents,
at beginning of period 2,277,469 831,544 419,475 957,735
----------- ----------- ----------- ----------
Cash and cash equivalents,
at end of period $ 345,864 $ 127,823 $ 345,864 $ 127,823
=========== =========== =========== ==========
See accompanying notes to the consolidated financial statements
6
AMRION, INC. AND SUBSIDIARY
Summary of Accounting Policies
Organization and Business
The unaudited consolidated financial statements and related notes have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
The accompanying financial statements and related notes should be read in
conjunction with the audited financial statements of the Company, and notes
thereto, for the year ended December 31, 1996.
The unaudited consolidated financial statements include the accounts of Amrion,
Inc. ("Amrion") and those of its 94%-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 print 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 Gingko Biloba
which comprised 39% of the Company's net sales for the quarter ended June 30,
1997.
The financial statements reflect all adjustments which are, in the opinion of
management, necessary for a fair statement of the results for the periods
presented. All significant intercompany accounts and transactions have been
eliminated in consolidation.
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
customer 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.
7
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.
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.
Income Taxes
The Company accounts for income taxes in accordance with SFAS N. 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 statements and tax bases of assets
and liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse.
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.
8
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 stock equivalents when
dilutive.
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 the estimates.
Revenue Recognition
Revenue is recognized upon shipments 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 the
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.
New Accounting Pronouncements
On March 3, 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS
No. 128). This pronouncement provides a different method of calculating earnings
per share than is currently used in accordance with Accounting Board Opinion
(APB) No. 15, "Earnings Per Share." SFAS 128 provides for the calculation of
"Basic" and "Diluted" earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to fully diluted earnings per share.
The Company will adopt SFAS No. 128 in 1997 and its implementation is not
expected to have a material effect on the consolidated financial statements.
9
PART I FINANCIAL
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Period from January 1, 1997,
to June 30, 1997.
The following review concerns the three and six-month periods ended June 30,
1997, and June 30, 1996, which should be read in conjunction with the financial
statements and notes thereto presented in this Form 10-Q.
The information set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" below includes "forward looking statements"
within the meaning of Section 27A of the Securities Act, and is subject to the
safe harbor created by that section. Factors that could cause actual results to
differ materially from those contained in the forward looking statements are set
forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Results of Operations
For the three and six-month periods ended June 30, 1997 and June 30, 1996.
Net sales for the three months ended June 30, 1997 were $16,876,000, an increase
of $5,005,000 (42%) over the same period in 1996. Net sales for the six months
ended June 30, 1997 were $35,233,000, an increase of $9,980,000 (40%) over the
same period in 1996. The continued growth in net sales for the quarter and six
months ended June 30, 1997, was a direct result of the Company's ability to
expand sales through larger and more frequent customer acquisition mailings,
advertisements in magazines and newspapers, and through the nationwide trend
towards preventative health care as a viable alternative to traditional medical
treatment. Additionally, a portion of the increase in net sales is attributable
to continued growth in international and mass market (Natrix) distribution
channels and improvements in customer segmentation mailing programs within the
existing customer base.
The Company intends to continue to implement new customer acquisition programs
through mailings, telemarketing, print advertisements and expanded retail and
mass market distribution programs. The Company plans to add 50 new products and
approximately 76,000 new customers through these scheduled marketing programs
during the remainder of 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 or new customers acquired.
Cost of products increased to $6,582,000 and $14,264,000 for the three and
six-month periods ended June 30, 1997, compared to $4,858,000 and $10,798,000,
respectively, for the same periods in 1996. As a percentage of net sales, cost
of products over the three and six-month periods decreased 2% from the prior
year, due to continued reductions in product costs from in-house manufacturing
and lower products prices through volume discounts and expanded direct sourcing
of raw materials.
10
Cost of mailings increased to $2,881,000 and $6,323,000 for the three and
six-month periods ended June 30, 1997, compared to $1,893,000 and $4,776,000,
respectively, for the same periods in 1996. As a percentage of net sales, cost
of mailings decreased to 18% for the six-month period ended June 30, 1997, from
19% for the same six-month period one year ago. The decrease as a percentage of
net sales was due to the Company's increased use of targeted customer and
acquisition mailings. Additionally, the Company has continued to implement new
design guidelines for the Company's marketing materials that have led to an
overall decrease in mailing costs. However, until alternative customer
acquisition strategies continue to prove successful, cost of mailings as a
percentage of sales may be higher due to the lack of experience regarding these
strategies and the continued reliance of the Company's direct mail efforts for
customer acquisition.
During the three months ended June 30, 1997, selling, general and administrative
expenses ("SG&A") increased by $1,758,000 (47%) to $5,491,000 from the same
period in the prior year. SG&A for the six months ended June 30, 1997 increased
by $3,245,000 (46%) to $10,362,000, compared to $7,117,000 for the six months
ended June 30, 1996. This significant increase of SG&A was due to increased
market development costs of $454,000 by Natrix International, the Company's
majority-owned subsidiary. Further increases were due to the Company's sales
growth, which necessitated additional staffing and general administrative costs
of approximately $1,010,000 and substantial increases in product marketing and
development expenses of approximately $1,781,000 for the six months ended June
30, 1997. SG&A as a percentage of net sales increased by 1% over the same period
in 1996 to 29% for the six months ended June 30, 1997.
Liquidity and Capital Resources
The Company used $534,000 and $843,000 in cash from operating activities during
the six months ended June 30, 1997 and 1996, respectively. The use of cash from
operating activities during the six months ended June 30, 1997 was due to the
increase in product inventories, mailing supplies and deferred promotional
mailing costs by $6,632,000, $386,000 and $207,000, respectively. The
significant increase in these inventories was necessary to allow the Company to
respond to anticipated future demand for its products and continued sales growth
during the balance of 1997. These cash outflows were offset by net income of
$2,965,000, depreciation and amortization of $975,000 and an increase of
$1,534,000 in accounts payable and accrued liabilities from December 31, 1996.
Cash flows provided by investing activities totaled $534,000 during the six
months ended June 30, 1997. The Company generated cash of $4,335,000 from sales
of marketable securities and used cash of $3,278,000 for the purchase of
machinery and equipment to significantly expand the Company's manufacturing
capacity and for the purchase of additional computer equipment and software.
Additionally, the Company used $522,000 to purchase mailing lists and other
intangible assets. 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.
11
Cash flows generated by financing activities during the six months ended June
30, 1997 totaled $255,000 as a result of the exercise of stock options that were
granted to directors and employees during 1996, 1995, 1994, 1993 and 1992.
Additionally, during March 1997 the Company used $2,187,000 to repurchase
111,800 shares of its stock according to a stock buy-back program authorized by
the Board of Directors.
The Company accounts for marketable securities in accordance with Statements 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 June 30, 1997, the Company recorded a
marketable securities valuation allowance for an unrealized loss of $229,000 as
a component of stockholders' equity. At June 30, 1997, 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 with
be realized.
The Company has a $1,000,000 revolving line of credit agreement with a bank
which bears interest at 1% over the bank's prime lending rate and expires in
July 1998. No amounts were outstanding at December 31, 1996 or June 30, 1997.
12
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Claim of Former Investment Banker
On August 5, 1997, Amrion's former investment banker commenced litigation
against Amrion and Mark S. Crossen for breach of contract and other claims
arising out of Amrion's failure to pay a fee to this investment banker in
connection with the Merger. The litigation, filed in the District Court for the
City and County of Denver, Colorado, and captioned "The Wallach Company, Inc. v.
Amrion, Inc. and Mark S. Crossen," seeks unspecified damages. Amrion believes
The Wallach Company's assertions are without merit and intends to vigorously
defend this action.
Item 4. Submission of Matters to a Vote of Security Holders.
On June 27, 1997, the Company held its 1996 Annual Meeting of Shareholders. The
following matters, and the shareholder vote on each matter, were considered by
the Company's shareholders:
1. To elect five (5) Directors to serve until the next Annual Meeting
of Shareholders and until their successors shall have been elected and
qualified.
FOR AGAINST ABSTAIN
Mark S. Crossen 3,363,492 4,901
Jeffrey S. Williams 3,363,492 4,901
Theodore W. Brin 3,355,989 4,901
David E. Houseman 3,355,989 12,404
Leslie G. Taylor 3,355,989 12,404
2. To ratify the appointment of BDO Seidman, LLP as the Company's
independent public accountants.
3,315,174 shares voted for the proposal
42,350 shares voted against the proposal; and
10,869 shares abstained (including broker non-votes).
Item 5. Other Information
Agreement with Whole Foods Market, Inc.
On June 9, 1997, the Company entered into an agreement with Whole Foods Market,
Inc. ("Whole Foods") whereby a wholly-owned subsidiary of Whole Foods will merge
into the Company and the Company will become a wholly-owned subsidiary of Whole
Foods (the "Merger"). Under the terms of the proposed Merger, each share of the
Company's issued and outstanding common stock will be converted into .87 shares
of Whole Foods common stock.
13
The Company has called a special meeting of its shareholders to be held on
September 11, 1997, to consider and approve the proposed Merger (the "Special
Meeting"). If the Merger is approved by the Company's shareholders at the
Special Meeting, the Merger will be consummated on or about September 11, 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number: Description:
2 Agreement and Plan of Merger Among
Whole Foods Market, Inc., Nutrient
Acquisition Corp., and Amrion, Inc.
Dated June 9, 1997
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ending June
30, 1997.
No other information is required to be included in response to Items 1-6 under
Part II of this form 10-Q.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AMRION, INC.
Date: August 14, 1997
by: /s/ Jeffrey S. Williams
Jeffrey S. Williams, Chief Financial Officer
15