U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] Quarterly report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1996.
[ ] Transition report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
____________.
Commission file number 0-21116
USANA, INC.
(Exact name of small business issuer as specified in its charter)
Utah 87-0500306
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3838 Parkway Blvd.
Salt Lake City, Utah
84120-6336
(Address of principal executive offices, zip code)
(801) 954-7100
(Issuer's telephone number)
4550 South Main Street
Salt Lake City, Utah 84107
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or Section 15(d) of the Exchange Act during the past 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] or No [ ]
The number of shares outstanding of the Company's common stock, no par value,
as of June 30, 1996 was 6,326,619.
Transitional Small Business Disclosure Format
(Check one) Yes [ ] No [X]
<PAGE> PART I
FINANCIAL INFORMATION
Item 1. Bases of presentation
The interim financial statements presented herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB. These
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's annual report on Form 10-KSB for the
year ended December 31, 1995.
In the opinion of management, the accompanying (unaudited) consolidated
financial statements of USANA, Inc. and subsidiary ( the Company or USANA)
contain all adjustments (consisting of only normal recurring adjustments)
necessary to fairly present the Company's financial position as of June 30,
1996 and December 31, 1995 and the results of operations for the three and six
month periods ended June 30, 1996 and 1995, and cash flow for the six month
periods ended June 30, 1996 and 1995. The interim financial statements should
be read in conjunction with the following explanatory notes. The results of
operations for the three and six months ended June 30, 1996 may not be
indicative of the results that may be expected for the year ending December
31, 1996.
Note 1. Property and Equipment
During the month of June 1996, USANA moved the manufacturing and packaging
operations to newly constructed, state-of-the-art facilities. The larger
building will provide USANA with ample room for current operations. The land
on which the new facilities are located will accommodate significant
expansion. The remainder of the operations relocated to the new facility in
July, 1996.
The current estimated total cost for the land, building, and associated
facilities is approximately $7.1 million. In addition the Company expects to
spend approximately $1.7 million for new equipment and furnishings related to
the construction project. The Company has financed the purchase of the land
and construction costs to-date (approximately $6.5 million) through a bank
loan, internally generated funds and from the sale of 964,377 shares of
restricted stock to Gull Holdings, Ltd., the Company's largest shareholder,
wholly-owned by Dr. Myron Wentz, the Company's founder. At June 30, 1996, a
$1,000,000 draw had been taken on the construction loan with Wells Fargo Bank.
USANA has obtained from Wells Fargo Bank a commitment to lend up to
$5,000,000 under a short-term construction loan and to provide permanent
financing on the new headquarters, land and building. The construction loan
is at a variable interest rate of prime plus .25%. The construction loan is
for one year.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three months ended June 30, 1996 and 1995
Net sales for the three months ended June 30, 1996 totaled $14,214,782
compared to net sales of $5,587,461 for the same period in 1995, an increase
of $8,627,321 or 154.4%. Management believes the increase in sales for the
three months is attributable to the growth in the Company's independent
distributor base in the United States and Canada.
The Company's cost of sales as a percentage of sales has decreased for the
three months ended, June 30, 1996 to 21.6% of sales as compared to 24.0% of
sales for the three months ended June 30, 1995. The improvement was due
primarily to increased efficiency of operations, resulting substantially from
larger batch sizes made possible by the significant increase in sales
volume.
Distributor incentives of $6,337,838 ( 44.6% of net sales) during the three
months ended June 30, 1996 represented an increase of $4,080,210 from
$2,257,628 (40.4% of net sales) paid in the same period in 1995. The increase
in distributor incentives was due to significantly higher sales. The increase
as a percent of net sales was due to the maturation of the network marketing
distribution system.
Selling, general and administrative expenses (excluding distributor
incentives) during the three months ended June 30, 1996 totaled $2,304,371 or
16.2% of sales, compared to $1,003,805 or 18.0% of sales for the same period
in 1995. The increase of 129.6% in selling, general and administrative
expenses was due primarily to the need for more support services and
facilities to accommodate the growth in sales volume and the number of
independent distributors. The improvement as a percentage of net sales was
due largely to expected economies of scale, partially offset by the effects
of rapid growth. Management expects these expenses to increase in line with
net sales.
The Company recognized net earnings of $1,469,207 during the three months
ended June 30, 1996, compared to $623,475 during the same period of 1995.
The improvement of 135.6% was due principally to increased sales,
accompanied by a more efficient use of personnel, facilities and other
administrative resources. Net earnings per share during the second quarter of
1996 were $.23 per share, compared to $.12 per share during the second quarter
of 1995.
Six Months Ended June 30, 1996 and 1995
Net sales for the first half of 1996 of $24,768,942 showed an increase of
181.9% over the $8,787,416 recorded in the same period in 1995. Cost of sales
as a percentage of sales reflected an improvement from 24.6% in 1995 to
20.6% in 1996, primarily as a result of the change in product mix towards
higher margin items. Selling, general and administrative expenses of
$4,141,297 as a percentage of sales showed an improvement to 16.7% in 1996
from 18.1% or $1,593,992 in 1995 largely due to economies of scale.
As a result of the Company's growth in Canada, in February 1995, the Company
established USANA Canada Inc. and invested $100,000 in this wholly-owned
subsidiary. Net sales of USANA Canada were $4,625,026 for the first six
months of 1996 (approximately 18.7% of consolidated sales). Canadian sales in
the first six months of 1995 were not material.
Net earnings during the first half of 1996 totaled $2,588,165 an increase of
185.6% over 1995's net earnings of $906,240. Earnings per share increased from
$.17 to $.41 or 141.2% during the same period. The weighted average number
of common and common equivalent shares increased from 5,315,742 at June 30,
1995 to 6,282,984 as of June 30, 1996. The increase was primarily a result
of shares sold to finance the purchase of land and the construction of the
Company's new manufacturing and administrative facilities.
Liquidity and Capital Resources
At June 30, 1996, current assets of the Company were approximately $6.6
million and current liabilities totaled about $5.5 million, resulting in
working capital of $1.1 million compared to working capital of $1.8 million
at December 31, 1995. The Company's current ratio was 1.2 to 1 at June 30,
1996, compared to 1.5 to 1 at December 31, 1995. The decrease in the current
ratio was a result of including a construction loan take down as a current
liability until the Company makes final arrangement regarding permanent
financing. Cash totaling $2.8 million was used to fund the construction of
the Company's new headquarters building during the first six months of 1996.
In addition, other capital expenditures, primarily related to equipment and
costs associated with the new manufacturing and administrative facility,
required the outlay of an additional $960,000.
The Company's total long-term debt of $12,203 consisted of a lease on computer
software.
The Company believes that existing cash balances of approximately $1.9
million, together with borrowings and additional capital sources related to
financing of the Company's new facilities will be adequate to meet the
Company's anticipated cash requirements through June 30, 1997. However, in
the event the Company experiences an adverse operating environment or
unusual capital expenditure requirements, additional financing may be
required. There can be no assurance that additional financing, if required,
would be available on favorable terms.
Material Commitments for capital expenditures
Estimated remaining costs on the construction of the Company's new
headquarters, manufacturing, and distribution facilities described earlier
including equipment and furnishings are approximately $2.3 million. A
commitment for financing of up to $5.0 million on the project has been
received from Wells Fargo Bank, as mentioned above. Management anticipates
permanent financing arrangements will be completed within the next several
months.
Inflation
Inflation has not had a significant impact on the Company's operations in the
past three years and is not expected to have a significant impact in the
foreseeable future.
PART 11 - OTHER INFORMATION
Item 1. Legal Proceedings
On March 6, 1996, International Nutrition Company ("INC") filed a patent
infringement action against eighteen defendants including USANA alleging
infringement of US patent number 4,698,360. The complaint, filed in the
United States District Court for the District of Connecticut, alleges that
USANA's Proflavanol product violates the INC patent. The complaint seeks
preliminary and permanent injunctions against USANA that would prohibit
further sales of the Proflavanol product. INC also seeks monetary damages,
including any profits lost by INC as a result of the alleged infringement,
damages suffered by INC resulting from the alleged infringement, and
attorneys' fees and costs incurred by INC. On June 4, 1996, USANA filed a
Motion to Dismiss INC's action for lack of subject matter jurisdiction, for
failure to state a claim upon which relief can be granted, for lack of
standing, and for failure to join an indispensable party. Having conducted a
thorough investigation of the patent and allegations made in the complaint,
USANA believes that its manufacture and sale of Proflavanol does not infringe
any valid claim of the asserted patent. USANA intends to vigorously defend its
right to continue providing its Proflavanol product to its customers and
distributors. There can be no assurance, however, that USANA will succeed in
its defense of this matter.
On March 22, 1996, USANA filed a lawsuit against INC in the United States
District Court for the District of Utah. This complaint sought a declaratory
judgment that U.S. Patent No. 4,698,360 is invalid, and that USANA's products
do not infringe any valid claim of the patent. On May 16, 1996, USANA
voluntarily dismissed this complaint, and will instead present these defenses,
if needed, in connection with the Connecticut case.
Other than as described herein, the Company is not a party to any material
litigation or proceedings.
Item 2. Changes in Securities
There were no changes in the instruments defining the rights of holders of any
class of registered securities during the quarter.
Item 3. Defaults Upon Senior Securities
There were no defaults in payments of this type during the reporting period.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the period
covered by this report.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 27 -- Financial Data Schedule
Reports on Form 8-K
On July 18, 1996, the Company filed a Report on Form 8-K to report the
appointment of two additional independent directors and the creation of an
audit committee of the Board of Directors as a precursor to the Company's
listing on the NASDAQ National Market System.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
USANA, Inc.
By: /s/ Gilbert A. Fuller
------------------------------------
Gilbert A. Fuller, Vice President of Finance
Dated: August 7, 1996
<TABLE>
USANA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
<CAPTION>
June 30 December 31
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash $ 1,881,370 $ 2,976,406
Accounts receivable, less allowance
for doubtful accounts of $ 0
in 1996 and $ 2,000 in 1995 126,478 11,246
Inventories 4,011,650 2,127,724
Prepaid expenses and other assets 364,912 75,365
Deferred income taxes 170,059 170,000
-------------- --------------
Total current assets 6,554,469 5,360,741
Property and equipment, at cost
Land 1,748,877 1,748,877
Building under construction 4,297,487 1,508,886
Equipment and furniture, net of accumulated
depreciation and amortization of $1,150,463
in 1996 and $ 874,178 in 1995 1,721,059 1,318,343
Other assets
Deposits on Machinery 455,967 186,115
Other 49,952 50,641
-------------- --------------
Total assets $ 14,827,811 $ 10,173,603
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,719,773 $ 1,210,205
Short-term borrowings 1,000,000 -
Accrued liabilities:
Accrued commissions 552,331 231,819
Sales tax payable 565,447 465,830
Income taxes payable 549,433 1,435,469
Accrued compensation and related items 404,460 99,074
Other 366,503 36,744
Unearned revenue 327,486 76,127
Current maturities of long-term obligations 10,909 10,909
-------------- --------------
Total current liabilities 5,496,342 3,566,177
Long-term obligations, less current maturities 1,294 3,910
Deferred income taxes 49,160 49,000
Stockholders' equity
Common stock, no par value, 50,000,000
shares authorized, 6,326,619 and
6,280,119 shares issued and outstanding
at 1996 and 1995, respectively. 6,146,742 6,004,917
Cumulative foreign currency translation adjustment (7,244) (3,752)
Retained earnings 3,141,517 553,351
--------------- --------------
Total stockholders' equity 9,281,015 6,554,516
--------------- --------------
Total liabilities and stockholders' equity $ 14,827,811 $ 10,173,603
=============== ==============
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
<TABLE>
USANA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
<CAPTION>
Six Months Ended
June 30,
-----------------
1996 1995
---------------------------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash
Net earnings $ 2,588,165 $ 906,240
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 285,032 159,304
Gain on sale of property
and equipment (5,784) (104,281)
Deferred income taxes 101 23,000
Changes in assets and liabilities
Receivables (115,232) (9,723)
Inventories (1,883,926) (462,329)
Prepaid expenses and other assets (288,858) (137,111)
Cash overdraft - (275,084)
Accounts payable 509,568 56,071
Accrued liabilities 420,597 612,549
--------------- --------------
Total adjustments (1,078,502) (137,604)
--------------- --------------
Net cash provided by
operating activities 1,509,663 768,636
--------------- --------------
Cash flows from investing activities
Equipment deposits (269,852) (61,790)
Construction in progress of office building (2,788,601)
Purchase of property and equipment (691,362) (259,822)
Proceeds from sale of equipment 9,400 230,700
Advances - related parties 160,000
--------------- --------------
Net cash (used in) provided by
investing activities (3,740,415) 69,088
--------------- --------------
Cash flows from financing activities
Payments on long-term debt (2,616) (17,182)
Short-term borrowings 1,000,000
Common stock issued 141,825
--------------- --------------
Net cash provided by (used in)
financing activities 1,139,209 (17,182)
--------------- --------------
Effect of exchange rate changes on cash (3,493) -
--------------- --------------
Net (decrease) increase in cash
and cash equivalents (1,095,036) 820,542
Cash and cash equivalents at beginning of period 2,976,406 646,904
Cash and cash equivalents at end of period $ 1,881,370 $ 1,467,446
=============== ==============
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
<TABLE>
USANA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Unaudited
<CAPTION>
Three Months Ended
June 30,
---------------------------------
1996 1995
------ -------
<S> <C> <C>
Net sales $ 14,214,782 $ 5,587,461
Cost of sales 3,069,426 1,343,219
--------------- --------------
Gross profit 11,145,356 4,244,242
Expenses
Distributor incentives 6,337,838 2,257,628
Selling, general and administrative 2,304,371 1,003,805
Research and development 155,706 62,260
--------------- --------------
Total operating expenses 8,797,915 3,323,693
--------------- --------------
Earnings from operations 2,347,441 920,549
Other Income (expense)
Interest income 39,313 14,296
Interest expense (472)
Other, net 199 104,281
--------------- --------------
Total other income (expense) 39,040 118,577
--------------- --------------
Earnings before income taxes 2,386,481 1,039,126
Income taxes (917,274) (415,651)
--------------- --------------
NET EARNINGS $ 1,469,207 $ 623,475
=============== ==============
Earnings per common and common equivalent share $ 0.23 $ 0.12
=============== ==============
Weighted average number of common and
common equivalent shares 6,285,850 5,315,742
=============== ==============
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
<TABLE>
USANA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Unaudited
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1996 1995
------ ------
<S> <C> <C>
Net sales $ 24,768,942 $ 8,787,416
Cost of sales 5,107,184 2,158,400
-------------- --------------
Gross profit 19,661,758 6,629,016
Expenses
Distributor incentives 11,154,273 3,611,992
Selling, general and administrative 4,141,297 1,593,992
Research and development 283,491 80,248
-------------- -------------
Total operating expenses 15,579,061 5,286,232
-------------- -------------
Earnings from operations 4,082,697 1,342,784
Other Income (expense)
Interest income 89,147 21,825
Interest expense (856)
Other, net 13,331 104,281
-------------- -------------
Total other income (expense) 101,622 126,106
-------------- -------------
Earnings before income taxes 4,184,319 1,468,890
Income taxes (1,596,154) (562,650)
-------------- -------------
NET EARNINGS $ 2,588,165 $ 906,240
============== =============
Earnings per common and common equivalent share $ 0.41 $ 0.17
============== =============
Weighted average number of common and
common equivalent shares 6,282,984 5,315,742
============== =============
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,881,370
<SECURITIES> 0
<RECEIVABLES> 126,478
<ALLOWANCES> 0
<INVENTORY> 4,011,650
<CURRENT-ASSETS> 6,554,469
<PP&E> 7,767,423
<DEPRECIATION> 1,150,463
<TOTAL-ASSETS> 14,827,811
<CURRENT-LIABILITIES> 5,496,342
<BONDS> 0
0
0
<COMMON> 6,146,742
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,827,811
<SALES> 14,214,782
<TOTAL-REVENUES> 14,214,782
<CGS> 3,069,426
<TOTAL-COSTS> 3,069,426
<OTHER-EXPENSES> 8,797,915
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 472
<INCOME-PRETAX> 2,386,481
<INCOME-TAX> 917,274
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,469,207
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.00
</TABLE>
