UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 27, 1997.
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 0-21116
USANA, INC.
(Exact name of registrant as specified in its charter)
Utah 87-0500306
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3838 Parkway Blvd.
Salt Lake City, Utah 84120
(Address of principal executive offices, Zip Code)
(801)954-7100
(Registrant's telephone number, including area code)
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 [ ]
The number of shares outstanding of the registrant's common stock as of
October 28, 1997 was 6,384,619.
<PAGE> USANA, INC.
Index to Financial Statements and Exhibits
Filed with the Quarterly Report of the Company on Form 10-Q
For the Quarter and Nine Months Ended September 27, 1997
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page No.
--------------------- --------
Consolidated Balance Sheets 3
Consolidated Statements of Earnings 4-5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13-14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
<PAGE>USANA, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Unaudited
<TABLE>
<CAPTION>
As of September 27, 1997 December 28, 1996
- ----------------- ------------------ -----------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 2,809,793 $ 1,130,487
Accounts receivable, net 166,750 55,149
Income tax receivable - 405,503
Inventories (Note A) 6,122,844 6,399,128
Prepaid expenses and other current assets 1,338,622 661,359
Current maturities of notes receivable 29,322 27,212
Deferred income taxes 386,356 361,000
----------- -----------
Total current assets 10,853,687 9,039,838
Property and equipment, at cost (Note B) 12,898,293 11,549,813
Other assets
Deposits on machinery 556,990 423,319
Notes receivable, less current maturities 23,989 46,252
Other 19,618 19,618
----------- -----------
Total Assets $24,352,577 $21,078,840
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 3,170,061 $ 4,709,028
Line of credit - 1,500,000
Other current liabilities (Note C) 3,698,977 2,373,533
----------- -----------
Total current liabilities 6,869,038 8,582,561
Deferred income taxes 245,057 129,000
Stockholders' equity:
Common stock, no par value:
Authorized -- 50,000,000 shares, issued
and outstanding 6,384,619 as of
September 27, 1997 and 6,351,119 as of
December 28, 1996 7,019,805 6,768,844
Cumulative foreign currency translation
adjustment (10,773) 9,786
Retained earnings 10,229,450 5,588,649
----------- -----------
Total stockholders' equity 17,238,482 12,367,279
----------- -----------
Total liabilities and
stockholders' equity $24,352,577 $21,078,840
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
USANA, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
Unaudited
<TABLE>
<CAPTION>
Quarter Ended September 27, 1997 September 30, 1996
- ---------------------- ------------------ ------------------
<S> <C> <C>
Net sales $22,872,592 $16,098,095
Cost of sales 4,808,903 3,381,640
----------- -----------
Gross profit 18,063,689 12,716,455
Operating Expenses:
Distributor incentives 10,437,691 7,392,919
Selling, general, and administrative 4,273,139 2,840,268
Research and development 385,892 189,956
----------- -----------
Total operating expenses 15,096,722 10,423,143
----------- -----------
Earnings from operations 2,966,967 2,293,312
Other income (expense):
Interest income 54,790 33,883
Interest expense (2,510) (22,046)
(Loss) gain on sale of property
and equipment (11,684) 65,028
Other, net 2,149 7,961
----------- -----------
Total other income 42,745 84,826
----------- -----------
Earnings before income taxes 3,009,712 2,378,138
Income taxes 1,153,886 920,800
----------- -----------
NET EARNINGS $ 1,855,826 $ 1,457,338
=========== ===========
Earnings per common and common
equivalent share (Note D) $ 0.29 $ 0.23
=========== ===========
Weighted average common shares outstanding 6,368,163 6,338,141
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
USANA, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
Unaudited
<TABLE>
<CAPTION>
Nine Months Ended September 27, 1997 September 30, 1996
- ---------------------- ------------------ ------------------
<S> <C> <C>
Net sales $61,572,891 $40,867,037
Cost of sales 12,962,389 8,488,824
----------- -----------
Gross profit 48,610,502 32,378,213
Operating Expenses:
Distributor incentives 28,593,126 18,547,192
Selling, general, and administrative 11,646,499 6,982,037
Research and development 964,961 473,447
----------- -----------
Total operating expenses 41,204,586 28,002,676
----------- -----------
Earnings from operations 7,405,916 6,375,537
Other income (expense):
Interest income 97,978 127,030
Interest expense (10,293) (22,430)
Gain on sale of property and equipment 2,953 70,812
Other, net 15,932 15,508
----------- -----------
Total other income 106,570 186,920
----------- -----------
Earnings before income taxes 7,512,486 6,562,457
Income taxes 2,871,685 2,516,954
----------- -----------
NET EARNINGS $ 4,640,801 $ 4,045,503
=========== ===========
Earnings per common and common
equivalent share $ 0.73 $ 0.64
=========== ===========
Weighted average common shares outstanding 6,357,262 6,301,504
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
USANA, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
<TABLE>
<CAPTION>
Nine Months Ended September 27, 1997 September 30, 1996
- ------------------------------------- ------------------ ------------------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 4,640,801 $ 4,045,503
Adjustments to reconcile net earnings to
net cash provided by (used in)
operating activities:
Depreciation and amortization 1,256,383 467,391
Gain on sale of property and equipment (2,953) (70,812)
Deferred income taxes 90,701 101
Provision for inventory obsolescence 137,826 -
Charitable contributions of equipment 2,974 -
Changes in operating assets and
liabilities:
Accounts receivable (111,601) (20,774)
Income tax receivable 405,503 -
Inventories 138,458 ( 3,410,172)
Prepaid expenses and other assets (810,934) (446,548)
Accounts payable (1,538,967) 2,238,313
Other current liabilities 1,325,444 712,997
----------- -----------
Net cash provided by operating
activities 5,533,635 3,515,999
NET CASH FLOW FROM INVESTING ACTIVITIES:
Principal receipts on notes receivable 20,153 6,233
Issuance of notes receivable - (86,087)
Purchases of property and equipment (3,718,536) (6,159,470)
Proceeds from the sale of property
and equipment 1,113,652 111,000
----------- -----------
Net cash used in investing activities (2,584,731) (6,128,324)
NET CASH FLOW FROM FINANCING ACTIVITIES:
Principal payments on long-term
obligations - (14,819)
Tax benefit of the exercise of stock
options 148,786 -
Proceeds from the exercise of stock
options 102,175 186,050
(Decrease) increase in line of credit (1,500,000) 1,000,000
----------- -----------
Net cash (used in) provided by
financing activities (1,249,039) 1,171,231
Effect of exchange-rate changes on cash and
cash equivalents (20,559) (1,077)
----------- -----------
Net increase (decrease) in cash and cash
equivalents 1,679,306 (1,442,171)
Cash and cash equivalents at beginning of period 1,130,487 2,976,406
----------- -----------
Cash and cash equivalents at end of period $ 2,809,793 $ 1,534,235
=========== ===========
Supplemental disclosures of cash flow
information
Cash paid during the nine-month periods ended
September 27, 1997 and September 30, 1996 for
Interest $ 10,293 $ 22,430
Income taxes 1,983,831 3,289,453
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
<PAGE> PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
Basis of Presentation
The unaudited interim consolidated financial information of USANA, Inc.
and Subsidiary (the "Company" or "USANA") has been prepared in accordance with
Article 10 of Regulation S-X promulgated by the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. In the opinion of management, the accompanying interim
consolidated financial information contains all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the Company's
financial position and results of operations as of September 27, 1997, and for
quarters and nine months ended September 27, 1997, and September 30, 1996.
These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended December 28, 1996. The
results of operations for the quarter and nine months ended September 27, 1997
may not be indicative of the results that may be expected for the fiscal year
ending December 27, 1997.
NOTE A - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 27, 1997 December 28, 1996
------------------ -----------------
<S> <C> <C>
Raw materials $2,488,880 $2,487,907
Work in process 868,058 455,315
Finished goods 2,903,732 3,455,906
Provision for inventory obsolescence (137,826) 0
---------- ---------
$6,122,844 $6,399,128
========== ==========
</TABLE>
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
September 27, 1997 December 28, 1996
------------------ -----------------
Building $ 5,412,527 $ 5,034,304
Land improvements 289,325 285,278
Leasehold improvements 50,898 0
Laboratory and production equipment 1,427,826 2,337,358
Computer equipment 4,437,395 2,347,347
Furniture and fixtures 1,249,753 684,481
Automobiles 285,039 285,039
---------- ----------
13,152,763 10,973,807
Less accumulated depreciation
and amortization 2,027,255 1,196,779
---------- ----------
11,125,508 9,777,028
Land 1,772,785 1,772,785
---------- ----------
$12,898,293 $11,549,813
========== ==========
NOTE C - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
September 27, 1997 December 28, 1996
------------------ -----------------
<S> <C> <C>
Employee compensation and related items $ 440,918 $ 400,623
Distributor incentives 874,228 614,559
Income taxes 390,787 95,851
Sales taxes 689,347 887,487
Deferred revenue 613,432 177,488
Other 690,265 197,525
--------- ---------
$3,698,977 $2,373,533
========= =========
</TABLE>
NOTE D - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per
Share." SFAS No. 128 is effective for financial statements for periods ending
after December 15, 1997, and requires companies to report both "basic" and
"diluted" earnings per share. "Basic" earnings per share does not include the
addition of common stock equivalents to the shares outstanding. "Diluted"
earnings per share requires the addition of common stock equivalents to the
shares outstanding. Average shares outstanding is the denominator used in
"basic" earnings per share calculations. Accordingly, "basic" earnings per
share will be higher than "diluted" earnings per share. This statement
replaces Accounting Principles Board ("APB") Opinion No. 15, "Earnings per
Share." The following table illustrates the effect on the Company of
presenting EPS in accordance with SFAS No. 128.
For the Quarter Ended September 27, 1997
<TABLE>
<CAPTION>
Earnings Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
Earnings available to common
shareholders $ 1,855,826 6,368,163 $0.29
=========
Effect of Dilutive Securities
Stock options - 263,095
----------- ---------
Diluted EPS
Earnings available to common
shareholders $ 1,855,826 6,631,258 $0.28
=========== ========= ========
</TABLE>
Options to purchase 490,000 shares of common stock at $15.66 a share were
outstanding during the quarter. They were not included in the computation of
EPS because their exercise price was greater than the average market price of
the common shares.
<TABLE>
<CAPTION>
For the Quarter Ended September 30, 1996
Earnings Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
Earnings available to common
shareholders $ 1,457,338 6,338,141 $0.23
=====
Effect of Dilutive Securities
Stock options - 494,243
----------- ---------
Diluted EPS
Earnings available to common
shareholders $ 1,457,338 6,832,384 $0.21
=========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 27, 1997
Earnings Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
Earnings available to common
shareholders $ 4,640,801 6,357,262 $0.73
=====
Effect of Dilutive Securities
Stock options - 276,424
----------- ---------
Diluted EPS
Earnings available to common
shareholders $ 4,640,801 6,633,686 $0.70
=========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1996
Earnings Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
Earnings available to common
shareholders $ 4,045,503 6,301,504 $0.64
=====
Effect of Dilutive Securities
Stock options - 352,337
----------- ---------
Diluted EPS
Earnings available to common
shareholders $ 4,045,503 6,653,841 $0.61
=========== ========= =====
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY REPORT ON FORM 10Q
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. THEREFORE, THE COMPANY IS INCLUDING THIS STATEMENT
FOR THE EXPRESS PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF SUCH SAFE
HARBOR WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS IN THIS REPORT REFLECT THE COMPANY'S CURRENT VIEWS
WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED HEREIN, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED. IN THIS REPORT, THE
WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE," "PROJECTED"
AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE
CAUTIONED TO CONSIDER THE SPECIFIC RISK FACTORS DESCRIBED IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996 AND NOT TO
PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH
SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO
PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE HEREOF.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Net sales increased 42.2% and 50.6% to $22.9 million and $61.6 million from
$16.1 million and $40.9 million for the quarter and nine months ended
September 27, 1997, respectively, compared to the same periods in 1996. The
growth in net sales is primarily attributable to two factors. First, the
Company introduced several new products at its Annual International Convention
(the "Convention") held in July 1997. Second, the Company's independent
distributor base continued to grow resulting in a corresponding increase in
unit sales. It should also be noted that a price increase phased in during
the third quarter of 1997 is expected to contribute modestly to sales in the
fourth quarter. Net sales in the US increased 27.0% and 32.0% to $16.0
million and $43.3 million from $12.6 million and $32.8 million for the quarter
and nine months ended September 27, 1997, respectively, compared to the same
periods in 1996. In comparison, net sales in Canada increased 97.1% and
125.9% to $6.9 million and $18.3 million from $3.5 million and $8.1 million
for the quarter and nine months ended September 27, 1997, respectively,
compared to the same periods in 1996.
Cost of sales as a percent of net sales remained constant at 21.0% for the
third quarters ended 1997 and 1996. For the nine-month period ended September
27, 1997, cost of sales increased, as a percent of net sales, to 21.1% as
compared to 20.8% for the same period in 1996. The modest increased in the
cost of sales percentage for the nine months ended September 27, 1997 was
influenced by several events. First, there was an increase in the underlying
cost of materials and direct labor with no accompanying increase in the price
the Company charges for its products; however, a price increase was phased in
during the third quarter of 1997. Price increases effected during the quarter
should offset the aforementioned increase in raw material and direct labor
costs during the fourth quarter. Second, with the introduction of new
products and preparation for international expansion, the cost of sales
percentage has suffered due to customary start-up costs on new products.
Finally, due to the release of new products and modification of existing
products, USANA increased its provision for potential inventory obsolescence.
Distributor incentives as a percent of net sales decreased to 45.6% and
increased to 46.4% from 45.9% and 45.4% for the quarter and nine months ended
September 27, 1997, respectively, for the same periods in 1996. The increase
in distributor incentives for the nine months ended September 27, 1997 as
compared to the same period in 1996 resulted from the continual maturation of
the Company's distributor base. The change in the Company's distributor
incentives in the third quarter of 1997 compared to the third quarter of 1996
can be attributed to several factors. First, the continual maturation of the
Company's distributor base has caused a corresponding increase in the
distributor incentives percentage. Second, during the third quarter of 1997,
USANA introduced a broad repricing strategy across its product line to help
manage distributor incentives. The new price structure creates a spread
between what the distributor pays for the product versus what the distributor
receives towards sales volume. Finally, the Company initiated a change in its
Leadership Bonus Program where leaders bonuses have been increased from 2% to
3% of the sales volume generated in a given week. The combined effect of a
maturing distributor base, the introduction of the new pricing structure and
the change in the Leadership Bonus Program resulted in decreased distributor
incentives of 0.3% in the third quarter of 1997 compared to the same period in
1996. Management believes the changes made in the distributor compensation
plan and the price structure provides an opportunity to better manage
distributor incentives prospectively.
Selling, general and administrative ("SG&A") expenses increased to $4.3
million and $11.6 million from $2.8 million and $7.0 million for the quarter
and nine months ended September 27, 1997, respectively, for the same periods
in 1996. As a percent of net sales, SG&A expenses increased to 18.8% for the
quarter and nine months ended September 27, 1997 from 17.4% and 17.1%,
respectively, for the same periods in 1996. The increase in SG&A costs can be
attributed to several factors. First, the Company acquired, in the second and
third quarter of 1996, significant management talent to facilitate future
growth. Second, there was a need for additional support services and
facilities to accommodate the growth in sales volume and the increased number
of distributors. Third, in the fourth quarter of 1996, the implementation of
new customer service software caused inefficiencies that carried into the
first quarter of 1997. Finally, the Company made significant capital
acquisitions of $1.7 million and $3.7 million during the third quarter and
nine months ended September 27, 1997, respectively. The depreciation on the
aforementioned acquisitions and acquisitions made in mid- to late-1996 had the
effect of increasing SG&A costs as a percent of net sales by approximately
1.0% for the quarter and nine months ended September 27, 1997 over the same
periods in 1996.
Research and development ("R&D") expenditures increased to $385,892 and
$964,961 from $189,956 and $473,447 for the quarter and nine months ended
September 27, 1997, respectively, compared to the same periods in 1996. As a
percent of net sales, R&D expenditures increased to 1.7% and 1.6% from 1.2%
for the quarter and nine months ended September 27, 1997, respectively,
compared to the same periods in 1996. The increase in R&D expenditures is
evidence of the Company's ongoing commitment to remain at the forefront of the
nutritional industry. USANA's team of scientists investigates new
ingredients, develops new products, coordinates clinical trials and keeps
abreast of the latest research in nutrition and degenerative diseases
resulting in the continued development of high quality products.
Net earnings increased to $1.9 million and $4.6 million from $1.5 million and
$4.0 million for the third quarter and nine months ended September 27, 1997,
respectively, compared to the same periods in 1996. Net earnings in the
quarter and nine months ended September 27, 1997 represented record highs for
the Company. Results of operations yielded earnings per common and common
equivalent shares of $0.29 and $0.73 in the third quarter and nine months
ended September 27, 1997 compared to $0.23 and $0.64, respectively, for the
same period in 1996. The increases in net earnings for the quarter and nine
months ended September 27, 1997 as compared to the same periods in 1996 are
due primarily to sales growth.
CONSECUTIVE QUARTER COMPARISON
In the third quarter of 1997, net sales increased to $22.9 million from the
$21.0 million reported in the second quarter of 1997, an increase of 9.0%.
Distributor incentives, as a percent of net sales, decreased to 45.6% in the
third quarter of 1997 from the 46.7% reported in the second quarter of 1997.
Net earnings grew from $1.7 million in the second quarter to $1.9 million in
the third quarter of 1997, an increase of 11.8%. The third quarter of 1997
represents the second consecutive quarter where earnings growth has exceeded
that of sales growth. Earnings growth has outpaced sales growth due to
distributor incentives and SG&A expenditures decreasing as a percentage of net
sales.
RECENT DEVELOPMENTS
At the Convention, held July 17-19, 1997, in Salt Lake City, Utah, the Company
formally announced its plans to expand its presence into the countries of
Australia and New Zealand during fiscal 1998. The Company also intends to
make its products available in the Caribbean in fiscal 1998. Management
believes the expansion into Australia and New Zealand, which offer
considerable market potential and a gateway into Asia, continues on schedule,
with initial sales expected during the first quarter of 1998 and contribution
to earnings expected in late-1998.
Also introduced at the Convention were several distributor retention
programs. These programs should improve the bottom line for both the Company
and its distributors. The programs include a co-branded credit card offered
through MBNA America (bearing USANA's logo) and a telecommunications program
offered through UniDial Communications. A distributor stock purchase plan was
also introduced at the Convention.
The Company has redefined the calculation of its independent distributor
base. The definition of a "current distributor" is one who has made a
purchase in the most recent twelve-month period. Management of the Company
believes the enhanced calculation of its distributors provides a more
meaningful number on which to evaluate the business. At the end of the third
quarter, USANA had approximately 82,000 current distributors compared to
approximately 52,000 as of September 30, 1996. The following table restates
the number of distributors to the approximate number of current distributors
USANA had at the end of each of the last four fiscal years.
As of fiscal year end
--------------------------------------------
12/31/93 12/31/94 12/31/95 12/28/96
-------- -------- -------- --------
As previously reported 10,000 20,000 50,000 92,000
Current Distributors 10,000 16,000 34,000 59,000
As previously discussed above, the Company introduced a new pricing structure
and Leadership Bonus Program during the third quarter of 1997, effective
September 1, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company does not extend credit to its distributors, but requires payment
prior to shipping products. This process eliminates the need to create
receivables for its distributors. Both the growth of the Company and the
nature of its business assists in yielding considerable cash flows from
operations. USANA generated $5.5 million in cash flows from operations during
the first nine months of 1997 as compared to the $3.5 million generated in
1996 for the same period. The increase in cash flows from operations can
primarily be attributed to an increase in net earnings, a rise in non-cash
expenditures, and a benefit realized from the income taxes receivable reported
at the end of 1996.
At September 27, 1997, current assets of the Company were approximately $10.9
million and current liabilities totaled approximately $6.9 million, resulting
in net working capital of $4.0 million compared to net working capital of $.5
million at December 28, 1996, an increase of $3.5 million. The Company's
current ratio was 1.58 to 1 at September 27, 1997, as compared to 1.05 to 1 at
December 28, 1996. Cash and cash equivalents increased from $1.1 million at
December 28, 1996 to $2.8 million as of September 27, 1997, an increase of
$1.7 million.
During the first nine months of 1997, the Company spent approximately $3.7
million on property and equipment. The Company expects to spend an additional
$3.0 million to establish operations in Australia and New Zealand in the
fourth quarter of 1997 and in the first quarter of 1998. The $3.0 million is
targeted for inventory, capital expenditures, and initial operating costs.
During the nine months ended September 27, 1997, inventory decreased by
approximately $300,000 (4.9%) from the amount reported at December 28, 1996 of
$6.4 million to $6.1 million at September 27, 1997. The $6.1 million in
inventory on September 27, 1997 represents an increase of approximately
$800,000 (or 15.1%) from the $5.3 million reported on June 28, 1997. The
increase in inventory was caused by the need to increase levels to accommodate
sales growth, preparation for operations in Australia and New Zealand, and the
introduction of new products in the third quarter of 1997.
On May 30, 1997, the Company re-negotiated its line of credit. The new terms
call for an increase in the available line to $5.0 million form the previously
available $3.5 million. The line of credit agreement expires in May 1998.
The interest rate is computed at the bank's prime rate, or at the option of
the Company, the LIBOR base rate plus 2.25%. Certain receivables,
inventories, and equipment collateralize the line of credit. The line of
credit agreement also contains restrictive covenants requiring the Company to
maintain certain financial ratios. As of September 27, 1997, the Company was
in compliance with these covenants. The Company paid off the balance of $1.5
million that existed at December 28, 1996, and there was no outstanding
balance as of September 27, 1997.
The Company believes that its current cash balances, the available line of
credit, and cash provided by operations will be sufficient to cover its needs
for the next twelve months. In the event the Company experiences an adverse
operating environment or unusual capital expenditure requirements, additional
financing may be required; however, no assurance can be given that additional
financing, if required, would be available on favorable terms.
CERTAIN FACTORS THAT MAY AFFECT OPERATING RESULTS
When used in this report, the terms "believes," "anticipates," "expects," and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation
to publicly release the results of any revisions to forward-looking statements
that may be made to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events. Important factors that may
cause results to differ from expectation were reported in the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 28, 1996. Except as
noted elsewhere in this report, the factors identified in those previously
filed reports continue to be significant considerations for the Company.
PART II. 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 U.S. patent number 4,698,360 (the "'360 patent"). The
complaint, filed in the United States District Court for the District of
Connecticut, alleges that USANA's Proflavanol [R] product violates the
patent. The complaint seeks preliminary and permanent injunctions against
USANA that would prohibit further sales of the Proflavanol [R] 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. Having conducted
a thorough investigation of the patent and the allegations made in the
complaint, USANA believes that its manufacture and sale of the Proflavanol [R]
product does not infringe any valid claim of the asserted patent. USANA
intends to vigorously defend its right to continue providing its Proflavanol
[R] product to its customers and distributors. There can be no assurance,
however, that USANA will succeed in its defense of this matter.
On April 17, 1996, an unidentified party filed a request with the United
States Patent and Trademark Office (PTO) to reexamine the validity of the
patent now being asserted against USANA. The PTO has since confirmed the
validity of each of the patent claims in view of the particular prior art
cited by the unidentified party.
On March 21, 1997, the Federal Judge responsible for the lawsuit ordered that
the action not proceed until another lawsuit in France is resolved. That
lawsuit does not involve USANA, but involves the question of whether INC has
any ownership rights in the '360 patent. On March 25, 1997, the French trial
court ruled in that action that INC does not own the '360 patent. That
decision is now on appeal to the French appellate court. If that ruling is
upheld, INC may be barred from proceeding with the infringement action against
USANA.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Item 601 Exhibit No. and Description
11 Statement re Computations of Per Share Earnings (included in Note
D to the Financial Statements)
27 Financial Data Schedule
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed by the Company during
the quarter ended September 27, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
USANA, INC.
October 31, 1997 By: /s/ Gilbert A. Fuller
- ---------------- --------------------------
Date Gilbert A. Fuller
Vice President of Finance and
Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
company's consolidated financial statements, including consolidated balance
sheets, statements of earnings and statements of cash flows (unaudited) for the
quarter and nine months ended September 27, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> SEP-27-1997
<CASH> 2,809,793
<SECURITIES> 0
<RECEIVABLES> 166,750
<ALLOWANCES> 0
<INVENTORY> 6,122,844
<CURRENT-ASSETS> 10,853,687
<PP&E> 14,925,548
<DEPRECIATION> 2,027,255
<TOTAL-ASSETS> 24,352,577
<CURRENT-LIABILITIES> 6,869,038
<BONDS> 0
0
0
<COMMON> 7,019,805
<OTHER-SE> 10,218,677
<TOTAL-LIABILITY-AND-EQUITY> 24,352,577
<SALES> 61,572,891
<TOTAL-REVENUES> 61,572,891
<CGS> 12,962,389
<TOTAL-COSTS> 54,166,975
<OTHER-EXPENSES> 116,863
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,293
<INCOME-PRETAX> 7,512,486
<INCOME-TAX> 2,871,685
<INCOME-CONTINUING> 4,640,801
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,640,801
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.70
</TABLE>
