U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] for the fiscal year ended December 28, 1996.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from
__________ to __________
Commission file number 0-21116
USANA, INC.
(Name of small business issuer in its charter)
Utah 87-0500306
(State of incorporation) (I.R.S. Employer Identification No.)
3838 West Parkway Blvd.
Salt Lake City, Utah 84120
(Address of principal executive offices and Zip Code)
(Issuer's telephone number) (801)954-7100
Securities registered pursuant to Section 12(b) of the Act: None
Name of each exchange on which registered: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock. no
par value
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or Section 15(d) of the Securities 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 [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to the Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $56,700,122.
The aggregate market value of the voting stock of the issuer held by
non-affiliates on March 26, 1997 was approximately $37,584,048.
The number of shares outstanding of the Company's common stock as of March 24,
1997 was 6,351,119 shares.
Transitional Small Business Disclosure
Format (Check one):
Yes [ ] No [X]
<PAGE>
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-KSB
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, AND THE COMPANY DESIRES TO TAKE
ADVANTAGE OF THE "SAFE HARBOR" PROVISIONS THEREOF. 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 BELOW [SEE ITEM 6. MANAGEMENT'S PLAN OF OPERATIONS -- FACTORS THAT
COULD AFFECT THE COMPANY'S ABILITY TO ACHIEVE ITS OBJECTIVES] 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.
PART I
Item 1. Description of Business
USANA, Inc. ("USANA" or the "Company"), a Utah corporation, develops,
manufactures, packages and markets its own line of nutritionals, antioxidants,
weight management, and non-toxic skin and hair care products.
USANA products are distributed through a rapidly growing network
marketing organization. As of December 28, 1996, USANA had approximately
92,000 independent distributors in all 50 states of the U.S., and Canada.
The business of the Company was commenced in 1992 under the direction of
Dr. Myron Wentz, an internationally-recognized pioneer in the development of
human cell-culture technology and disease diagnosis. In 1973, Dr. Wentz
founded Gull Laboratories, Inc. (AMEX:GUL) and developed the first
commercially-available test kit for the diagnosis of the Epstein-Barr virus.
Dr. Wentz redirected his talents to the nutritional requirements of the
human body and the products that would help improve health and the quality of
life. Through analytical testing, Dr. Wentz discovered that many nutritional
and health supplements were not only nutritionally unbalanced but had
incorrect and misleading labels and occasionally contained toxic substances.
Dr. Wentz's objective in forming USANA was to develop a line of nutritional
products and a new approach to manufacturing that would ensure the highest
quality products.
Distribution
USANA distributes its products through a network marketing organization.
The concept of network marketing is based on the strength of the
recommendation created when one who has a favorable experience with a product
recommends that product to family and friends. The recommendation, being
based on personal experience, is given more weight than a recommendation from
a stranger. This happens for two reasons: the first is that the conviction
and enthusiasm are genuine, they are based on personal experience; the second
is that family and friends trust the integrity of the person giving the
recommendation. The marketing and distribution of products and services
through network marketing and other direct selling channels has experienced
significant growth in the past few years. According to industry reports, the
direct distribution of goods and services through these channels worldwide
reached approximately $75 billion in 1995. The emergence of the Internet,
increased and improved methods of rapid communication, e.g., personal
computers, fax machines, satellite conferencing, etc., have also aided the
rapid growth of direct selling.
The Company believes its ability to successfully compete in this market
is in part due to its compensation plan and the highly natural and scientific
quality of its products. The compensation plan (the "Cellular Compensation
Plan") developed by the Company provides several opportunities for
distributors to earn compensation. Each distributor must purchase and sell
product in order to earn any compensation. Therefore, a distributor may not
simply develop a "downline" and earn income "passively." The first method of
earning compensation under the Cellular Compensation Plan is through retail
markup on product sales. The second is through earning commissions on sales
volume generated by one's downline, which can be earned by sponsoring as few
as two additional distributors and meeting certain personal sales volumes.
The third method of earning compensation is by qualifying for the Company's
Leadership Bonus pool. Distributors are paid incentives based on volume of
sales generated by their independently owned distribution networks, as provided
by the Cellular Compensation Plan. Incentives are paid to distributors weekly.
The Company's compensation plan departs from traditional network
marketing plans that typically impose requirements of heavy sponsoring of
downline distributors and large group purchase volumes that are necessary for
financial success under such plans.
The Company's products have been developed using the most up-to-date
scientific research. USANA develops its nutritional products based on
knowledge acquired from superior cell culture experience to assist the body to
maintain proper cell function and to defend against the harmful aspects of our
environment through proper nutritional balance. Through Dr. Wentz's
influence, the Company is committed to use the best science available to
develop products that use nature to improve health and the quality of life.
Organization
USANA, Inc. was incorporated July 20, 1992 as a wholly-owned subsidiary
of Gull Laboratories, Inc., a Utah corporation ("Gull"). From 1990 until
USANA was incorporated, the Gull "Health Products Division," developed medical
products and performed contract manufacturing and packaging of natural and
herbal products. On August 31, 1992 the assets owned by Gull, and used in the
operation of the Health Products Division. USANA was subsequently spun off
from Gull as a separate corporation in January 1993. The Company's principal
office is currently located at 3838 West Parkway Boulevard, Salt Lake City,
Utah 84120 in a newly constructed 98,000 square foot facility on 16 acres.
Its telephone number is (801) 954-7100.
USANA sells only to distributors. The Company has no in-house sales
force. When the Company's growth expanded to include distributors in Canada,
USANA did not at first establish a subsidiary, but instead shipped product
directly to the Canadian distributors. Because of the delays in getting
product through customs to its distributors, the Company established a
subsidiary corporation with its own inventory in Canada to reduce or eliminate
delays in providing products to distributors there.
USANA Canada, Inc. ("USANA Canada") was formed February 3, 1995 as a
wholly-owned subsidiary of the Company to better serve the expanding volume of
distributors and sales in Canada. USANA Canada's operation consists mainly of
a warehouse and distribution facility. USANA Canada receives product shipments
and stores them in inventory. As orders are received and printed on the
warehouse printer, orders are picked, shipped and then recorded as en route in
the computer. All systems, product formulations, order entry, customer
service, research & development, accounting, general management, and sales and
marketing functions are provided for USANA Canada and the U.S. operations out
of Salt Lake City, Utah, by the Company. As a separate company operating in a
foreign country, transactions between USANA Canada and the Company are made at
cost or transferred according to prices established by the Company.
Canada has become a significant growth market for the Company, in part
because of the similar cultural backgrounds, geographic proximity, and
environmental concerns shared by Canada and the U.S.
Manufacturing and Research and Development
USANA's manufacturing and packaging operations are now housed in the
Company's new state-of-the-art facilities in Salt Lake City, Utah. The
facilities are registered with the U.S. Food and Drug Administration ("FDA")
and all work is done in compliance with the FDA's Good Manufacturing Practice
("GMP") regulation. Because USANA sells nutritionals, dietary and cosmetic
products, it is not subject to the complex regulations of the FDA that apply
to the manufacture of pharmaceutical products. USANA voluntarily complies with
the FDA's GMP's.
Manufacturing
The Company's manufacturing equipment is capable of producing up to
4,800,000 tablets in two eight-hour shifts, given the current sales mix. The
packaging operation has a fully-automated, bottle-filling line capable of
filling up to 35,000 bottles in two eight-hour shifts. The packaging facility
is also able to pack and shrink-wrap for final boxing and shipping. The
packaging facility also packages the skin care product into tubes at the rate
of 20,000 in two eight-hour shifts. The vast majority of raw materials used
in the production of USANA's products are readily available from numerous
suppliers; however, a world-wide shortage of Vitamin E-Succinate powder
occurred in 1996. The Company has handled this shortage first by manufacturing
and supplying a Vitamin E-Acetate tablet and then by providing its customers
with a Vitamin E-Succinate gel tab. The Company is working with suppliers to
reach a long-term agreement to ensure the dependable delivery of Vitamin E-
Succinate powder. A major supplier is expected to have an extraction plant
completed and fully operational by the second quarter of 1997; USANA management
believes the completion of this plant will remedy the Vitamin E-Succinate
shortage for the Company. As of January 31, 1997, the Company's manufacturing
equipment was operating at approximately 62% of capacity, given both current
sales mix and the assumption of two eight-hour shifts. The Company presently
operates with one shift.
Research and Development
USANA has, in house, both a microbiological testing laboratory and an
analytical chemistry laboratory. The microbiological laboratory tests for
product contamination (e.g., E-coli, Salmonella, Staphylococcus aureus, total
counts of bacteria, yeasts and molds) on both raw materials and finished
products. USANA's analytical chemistry laboratory performs tests on the
chemical composition of both raw materials and finished products and stability
tests on finished products. During the course of 1996, the analytical
laboratory obtained additional instrumentation enhancing its ability to
perform these tests. Among the capabilities of this laboratory are high
pressure liquid chromatography, inductively-coupled plasma spectrometry
("ICP"), atomic absorption, and ultra violet ("UV") spectrometry.
The Company also carries on a significant program of research and
development. In 1996, the Company expended approximately $800,000 for
research and development, which represented about 1.4% of its net sales. In
1995, research and development expenditures totaled approximately $260,000 or
1.0% of net sales. The Company will continue to use its resources for
research and development of new products and for the continued upgrading of
existing products. The mission of USANA's research and development team is to
develop and support superior nutritional and health care products that meet
the needs of customers through proven efficacy, unqualified safety, superior
formulation, and outstanding quality. The Company's commitment is to
continuous product innovation and improvement through sound scientific
research.
Government Regulation
The Company's business activities are subject to regulation by federal
agencies including the FDA, the Federal Trade Commission ("FTC"), the Consumer
Product Safety Commission, the United States Postal Service, and the United
States Environmental Protection Agency ("EPA"). Such regulations govern
various functions, including: (i) product formulation, labeling, packaging and
importation, (ii) product claims and advertising (including claims and
advertising by distributors), and (iii) fair trade practices and distributor
marketing activities.
In October, 1994, the Dietary Supplement Health and Education Act of 1994
("DSHEA") was enacted. Among other things, the DSHEA defines dietary
supplements (which include vitamins, minerals, nutritional supplements and
herbs) and provides a regulatory framework intended to ensure the safety and
quality of dietary supplements and dissemination of accurate product
information. Specific labeling requirements defined in DSHEA went into effect
January 1, 1997. These regulations permit substantiated, truthful and
non-misleading statements of nutritional support to be included on labels,
such as statements describing general well-being from consumption of a dietary
ingredient in affecting or maintaining structure or function of the body.
Other laws and regulations are intended to prevent the use of deceptive
or fraudulent practices that have sometimes been associated with direct
selling and network marketing activities. The illegal schemes, typically
referred to as "chain sales" or "pyramid" schemes, are characterized by high
up-front entry or sign-up fees, high-pressure recruiting tactics, mandatory
sponsorship and sales volume requirements, and claims of huge and quick
financial rewards with little or no effort.
The Company believes it is in compliance with all applicable government
regulations concerning its business. However, there can be no assurance that
future regulatory action or changes in regulations or legislation will not
have an adverse effect on the Company and its operations. Furthermore, the
expansion of operations outside North America will subject the Company to
regulatory schemes in other countries that may differ from those encountered
in different markets and which in any event, could add to the expense of
doing business in such countries and/or limit the ability of the Company to
move quickly into such markets.
Products
The Company's products consist of vitamins, minerals, antioxidants, and
other nutritional products; skin care products; weight loss products; personal
care products; and sales aids to benefit distributors in their sales efforts.
Vitamins, minerals, and antioxidants are developed, manufactured and packaged
by the Company. Some nutritional products, as well as the skin care and
personal care products are manufactured to USANA's specifications by
third-party vendors. These other products may be packaged by the Company or
by the third-party manufacturers.
Nutritional Products
USANA's nutritional products include a megavitamin, a chelated mineral,
antioxidants, other health supplements, meal replacement drinks, fiber
drinks, and an energy bar. USANA's products are formulated to provide optimal
absorption, assimilation, and effectiveness. Listed below is a brief
description of USANA's nutritional products. A complete listing of the
components and their amounts can be found on the product labels or in product
brochures.
MegaVitamin - USANA's MegaVitamin is formulated to provide all the
vitamins considered essential for good health. The MegaVitamin includes beta
carotene, vitamins D, E and C (USANA's Poly C [TM]), and the complete vitamin
B complex. Other components include choline, citrus bioflavonoids, inositol,
PABA, quercitin, bromelin, and vitamin K.
Chelated Mineral - USANA's Chelated Mineral is formulated to provide all
minerals and trace minerals considered essential for good health. Chelated
minerals are those that are attached to an organic substance usually an
amino acid. This makes the minerals more bioavailable and, therefore, more
readily absorbed in the intestines. The major minerals provided by Chelated
Mineral include: calcium, chromium, magnesium, molybdenum, copper, manganese,
iron, iodine, selenium, zinc, and boron. In addition to these major essential
minerals, this product is formulated in a base of 72 trace elements.
Antioxidant - USANA's Antioxidant is formulated to help counteract the
damaging effects of free radicals which result from normal metabolism,
environmental pollution, cigarette smoke, and many other sources. USANA's
Antioxidant contains, megadose amounts of beta carotene, vitamin E and
vitamin C (as Poly C) which are known to have antioxidant activity. Other
components include vitamin B complex, rutin, cruciferous extract,
N-acetyl-L-cysteine, and glutathione.
Proflavanol [TM] - Proflavanol contains proanthocyanidins extracted from
grape seeds, and Poly C which is formulated to provide additional antioxidant
protection against free radical damage. Proanthocyanidins are in a class of
naturally occurring compounds called bioflavonoids and, like vitamins E and C
and beta carotene, have antioxidant activity. Proanthocyanidins also show
distinct anti-inflammatory and capillary protective action.
CalMag Plus - USANA's CalMag Plus is formulated to supplement daily
intake of calcium and magnesium, which are important in aiding the prevention
of osteoporosis, normal nerve and muscle function, and normal blood clotting.
Additional components in CalMag Plus include vitamin D, boron, and silica.
Poly C [TM] - USANA's Poly C is a blend of calcium, potassium, magnesium
and zinc ascorbates. It is less acidic than ascorbic acid, the most commonly
used form of vitamin C. Mineral ascorbates have different solubilities and
retention times in the body which help maintain vitamin C levels in the body
and minimizes rapid excretion.
Kids choo-ables [TM] - USANA's Kids choo-ables are formulated to provide
essential vitamins and minerals to children. Many of the same components
found in USANA's MegaVitamin are present in the Kids choo-ables, but at
different levels. USANA chose not to include iron in the Kids choo-ables
because iron supplementation in children is very sensitive and should be
controlled by a physician.
Nutrimeal - USANA's Nutrimeal is a balanced drink of complex
carbohydrates, proteins and other nutrients and is designed as a meal
replacement. It is available in several flavors, including non-dairy and
sugar-free formulas.
Fibergy[R]- USANA's Fibergy is formulated to supplement dietary fiber
intake. Fibergy contains 15 different fiber sources, including soluble and
insoluble fiber, which takes advantage of the different actions of these
various forms of fiber on the body. Fibergy is available in two flavors,
including a non-dairy formula.
Gold Bars[TM] - USANA's Gold Bar is an energy bar containing complex
carbohydrates, protein and fiber. Gold Bars are designed to supply a quick
source of energy. The carbohydrate and protein sources are from whole grains,
fruits and spices.
Skin Care Products
USANA's Skin Care line incorporates several products designed as a total
skin protection system. Only natural oils, emollients, antioxidants and
botanical extracts are used in the skin care formulations. Listed below is a
brief description of USANA's Skin Care Products. A complete listing of the
components and their amounts can be found on the product labels or in product
brochures.
5-Step Antioxidant Skin Care System - The Antioxidant Skin Care System
includes five products which are designed to cleanse, restore, tone,
moisturize, and repair the skin and to protect the skin from the damaging
effects of free radicals. The System comes in two formulations: one for
normal-to-dry skin and the other for normal-to-oily skin.
Vital Zomes[R] Serum Replenisher - USANA's Vital Zomes is a moisture
booster which contains liposomes which aid in supplying nutrients to the
skin. It is designed to instantly hydrate, retexturize and strengthen the
upper cell layers of the skin.
Revitalizing Hydrating Treatment - USANA's Revitalizing Hydrating
Treatment is designed to soothe both dry and oily skin. The ingredients
impart a tingling, cooling sensation.
USANA[R] Sunscreen - USANA's Sunscreen is designed to protect skin from
overexposure to the sun. The ingredients in the Sunscreen absorb UVA-UVB and
infrared radiation and disperse heat. The Sunscreen also contains
antioxidants and a liposome delivery system for controlled release of active
ingredients onto the skin.
USANA manufactures a number of its products including: MegaVitamin,
Chelated Mineral, Antioxidant, Kids choo-ables, CalMag Plus, Poly C, and
Proflavanol. The formulations for these products were developed by the
Company. The Company subcontracts with third-party manufacturers to produce
and package the Nutrimeals, Fibergy Drinks, and Gold Bars, according to
formulations developed by the Company in conjunction with the manufacturers.
Skin care products are produced according to USANA formulations by
third-party manufacturers. Formulations sold in tubes are purchased in bulk
and packaged by the Company.
Personal Care Products
USANA's Personal Care System was designed to use pure, natural substances
instead of inexpensive, synthetic substances, that may eventually cause cell
damage. The Company's Personal Care System consists of Shampoo, Conditioner,
Hand & Body Lotion, and Shower Gel. Listed below is a brief description of
USANA's Personal Care System. A complete listing of components and their
amounts can be found on the product labels and in product brochures.
Shampoo and Conditioner - The USANA Shampoo improves the appearance of
chemically damaged hair and helps restore its natural beauty and luster. To
stimulate blood flow to the hair follicles which promotes growth of existing
hair. The Shampoo contains an extract of Arnica. Kameria Triandra Extract is
added to protect the hair from damage caused by the sun's harmful rays. Used
with the Shampoo, the USANA Conditioner contains natural extracts of Cherry
Bark, Chamomile, and Horsetail. The USANA Conditioner adds body, a
healthy-looking luster, and works to naturally de-tangle hair during combing.
Hand & Body Lotion - The USANA Hand & Body Lotion is extensive moisture
therapy that is completely absorbed by the skin in moments. Each ingredient
was chosen for its safety, health-promoting properties, and ability to keep
skin supple and soft. The Hand & Body Lotion helps to even out the
complexion, especially on the hands, and helps to fade age spots.
Shower Gel - USANA Shower Gel, with a new class of cleaning agents, is
a safer way to cleanse, leaving your skin with a soft, silky feeling. Shower
Gel's natural botanical extracts also provide antioxidant properties to
protect your skin, and promote healing, and are safe for the cells of your
skin. Natural botanical oils are carefully blended to provide an added
dimension in skin moisturizing.
The Company subcontracts with third-party manufacturers to produce and
package the Personal Care product line according to formulations developed by
USANA.
Weight Control Products
The USANA L*E*A*N Program is a scientific system that enables people to
defeat the causes of excess body fat. Under the direction of world-renown
experts, the USANA L*E*A*N Program utilizes the latest discoveries in
biochemistry, psychology, and exercise science.
The complete USANA L*E*A*N Program comes in a custom gym bag complete
with a program guide; an exercise guide and videos; a motivational audio
cassette series; a recipe book; calipers to accurately measure body fat; USANA
L*E*A*N Nutrimeal; and the USANA L*E*A*N Formula - a unique, multiple-acting,
fat-loss formula.
Sales Aids
The Company provides a number of materials to assist distributors in
building their businesses and selling the Company's products.
Resource materials include advertising information; product brochures;
information about the Company and the Cellular Compensation Plan; audio and
video tapes introducing the Company, explaining the products, providing
distributor training, and describing the business opportunity; and business
forms to aid in taking orders and otherwise developing their businesses. No
compensation is paid to distributors on purchases of sales aids.
From time to time, the Company contracts with authors and publishers to
provide books, tapes and pamphlets dealing with health issues. The Company
also develops and designs product brochures and business forms, which are
printed by outside printers. The Company also scripts and develops materials
for audio and video tapes, which are produced by third parties.
Customers
Substantially all of the Company's sales are made through independent
distributors. No single distributor accounted for 10% or more of the gross
revenues in 1996, 1995 or 1994. Distributors submit signed application and
agreement forms to the Company, which the distributors agree to follow.
Distributors are independent contractors and are not agents, employees, or
legal representatives of USANA. Distributors may sell products anywhere the
sale of products has been approved by the Company.
Competition
USANA competes with many other companies in the business of
manufacturing and distributing natural nutritional products. There is
considerable competition in this industry. The market is highly sensitive to
the introduction of new products and name recognition. The Company's ability
to remain competitive depends in part on its ability to successfully introduce
new products. Many of the Company's competitors are larger, more established
than the Company and possess larger financial and other resources than the
Company. Moreover, many of the Company's competitors have better-established
retail systems and are not dependent on the network distribution system on
which the Company relies. The Company's ability to remain competitive also
depends, in significant part, on its ability to recruit and retain
distributors. The Company competes for time, attention and commitment of its
independent sales force. Although the Company believes its products are
superior and that its Cellular Compensation Plan offers an attractive
opportunity for distributors, there can be no assurance it can continue to
compete effectively. The Company is also subject to significant competition
from other direct marketing organizations for the recruiting of distributors.
The Company is not aware of any data that would indicate how much of the
market is controlled by the Company or any of its competitors. The Company
believes its principal competitors include Body Wise, Enrich International,
Interior Design Nutritionals (NuSkin), Melaleuca, Nature's Sunshine, Nutrition
for Life, Reliv International, and Rexall Showcase.
Proprietary Rights
The Company uses registered trademarks in its business, particularly
relating to its corporate and product names. The Company believes proprietary
rights have been and will continue to be important in enabling the Company to
compete in its industry. The Company also relies on trade secrets that it
seeks to protect, in part, through confidentiality agreements with employees
and other parties. There can be no assurance that these agreements will not
be breached, that the Company would have adequate remedies for any breach or
that the Company's trade secrets will not otherwise become known to or
independently developed by competitors. The Company may become involved from
time to time in litigation to determine the enforceability, scope and validity
of proprietary rights. Any such litigation could result in substantial cost
to the Company and divert the efforts of its management and technical
personnel.
Environment
The Company presently is not aware of any instance in which it has
contravened federal, state or local provisions enacted for or relating to
protection of the environment or in which it otherwise may be subject under
such laws to liability for environmental conditions that materially could
affect the Company's operations.
Employees
As of January 31, 1997, the Company had a total of 317 employees,
compared with 135 at March 31, 1996 and 49 at March 31, 1995. Of these, 303
are full-time employees. Eighty-six are engaged in the manufacturing,
packaging, and distribution of the Company's products; 25 are engaged in
laboratory research and quality assurance support; 145 are engaged in customer
service; and 61 are involved in accounting, management information systems,
and general management.
Item 2. Description of Properties
USANA's manufacturing, warehousing, administrative, and research
functions occupy a newly constructed 98,000 square foot structure on 16 acres
in Salt Lake, Utah. This structure replaced approximately 35,000 square feet
of leased space previously occupied by the Company at 4500 South Main Street
in Salt Lake City, which the Company had outgrown.
The Company moved into its new facilities between June and August of
1996. The new facility project cost approximately $1.8 million for the land,
$300,000 for land improvements, and $5.0 million for the building. The
Company financed the construction of the building using internally-generated
funds, and an open line of credit for up to $2.5 million, bearing interest at
LIBOR rate plus 2.25% or prime at the Company's option, secured by accounts
receivable, inventory and equipment. As of December 28, 1996, the Company
had an outstanding balance of $1.5 million on the line of credit.
The new headquarters building occupies approximately half of the 16-acre
lot owned by the Company. The remaining space is being reserved for future
expansion. Of the 98,000 square feet presently occupied by the Company,
approximately 28,000 square feet are used for manufacturing, packaging and
distribution; 26,000 square feet are used for warehouse space; and the
remaining 44,000 square are occupied by administrative personnel, distributor
services, research and development, and two scientific laboratories.
The Company believes that its new facility and the remaining unimproved
property at this site will prove to be adequate for anticipated growth. The
building is approximately 80% utilized (relating to floor space), and
production capacity is approximately 62% utilized, given two eight-hour shifts
per day. The Company maintains general commercial/casualty insurance on its
properties, which it deems to be adequate for its present needs.
Item 3. 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 complaint, filed in the
United States District Court for the District of Connecticut, alleges that
USANA's Proflavanol product violates the 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 failure to join an indispensable party. As of February 11,
1997, the Court had not yet ruled on that motion. Having conducted a thorough
investigation of the patent and the allegations made in the complaint, USANA
believes, based on advice from legal counsel, that its manufacture and sale of
the Proflavanol product does not infringe any valid claim of the asserted
patent.
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 which is the basis for INC's claims now being asserted against USANA
and the other defendants. On June 27, 1996 the PTO granted that request, and
stated that a substantial new question of patentability had been raised. On
January 13, 1997, the Patent Examiner responsible for the reexamination issued
a preliminary written Office Action rejecting the validity of each of the
claims of the patent based on a number of grounds. INC will have an
opportunity to formally respond to those rejections, and thus a final
determination as to the validity of the patent has not yet been officially
determined by the PTO. However, if the PTO's rejection of the patent stands,
INC would be precluded from proceeding with its lawsuit against USANA. If the
pending motions fail or if INC successfully overcomes the actions of the
examiner, 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.
Item 4. Submission of Matters to a Vote of Security Holders
At its Annual Meeting of Shareholders on October 24, 1996, the following
actions were submitted and approved by vote of the majority of the issued and
outstanding shares of the Company:
(1) Election of directors;
(2) Ratification of an amendment to the Directors' 1995 Stock Option
Plan and the Long Term Incentive to increase the number of shares
available to be issued pursuant to grants and awards made under
each plan to 600,000 and 1,400,000 shares, respectively; and
(3) Approval of the Board of Directors' selection of Grant Thornton
LLP, as the Company's independent certified public accountants.
A total of 5,475,447 shares (approximately 86%) of the issued and
outstanding shares of the Company were represented by proxy or in person at
the meeting. These shares were voted on the matters described above as
follows:
1. For the directors as follows:
<TABLE>
<CAPTION>
Name # Shares For # Shares Against No. Shares Abstaining/Withheld
- ----------------------- ------------ ---------------- ------------------------------
<S> <C> <C> <C>
Dr. Myron Wentz 5,465,487 0 125/0
David Wentz 5,465,487 0 125/0
Ronald S. Poelman 5,465,487 0 125/0
Dr. Suzanne Winters 5,465,487 0 125/0
Robert Anciaux 5,465,487 0 125/0
</TABLE>
2. For the ratification of the plan amendments as follows:
<TABLE>
<CAPTION>
# Shares For # Shares Against No. Shares Abstaining
------------ ---------------- ---------------------
<S> <C> <C>
4,381,641 111,615 13,519
</TABLE>
3. For the ratification of Grant Thornton LLP as independent
certified accountants of the Company as follows:
<TABLE>
<CAPTION>
# Shares For # Shares Against No. Shares Abstaining
------------ ---------------- ---------------------
<S> <C> <C>
5,448,922 6,200 11,365
</TABLE>
Broker non-votes were counted as abstentions on matters 2 and 3 above.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Market Information
From the effective date of its spin-off until July 24, 1996, the common
stock of the Company traded on the over-the-counter market (symbol "USNA") and
was quoted on the National Association of Securities Dealers Electronic
Bulletin Board. On July 25, 1996, the Company's shares were approved for
inclusion on the NASDAQ Stock Market National Market System ("NMS"). The
following table shows the range of high and low bid information for the
Company's common stock as quoted on the NASDAQ NMS for the third and fourth
quarters of fiscal 1996 and the Electronic Bulletin Board for the first and
second quarters of 1996 and all of 1995. The quotations reflect inter-dealer
bid prices, without retail mark-up, mark-down or commissions and may not
represent actual transactions.
Fiscal 1996 Bid Prices
High Low
-------- --------
1st Quarter $12.000 $ 8.750
2nd Quarter 31.250 11.125
3rd Quarter 29.250 18.750
4th Quarter 25.500 16.250
Fiscal 1995 Bid Prices
High Low
------- --------
1st Quarter $ 5.250 $ 0.875
2nd Quarter 5.125 3.000
3rd Quarter 12.000 3.875
4th Quarter 12.500 8.500
Shareholders. The approximate number of record holders as of March 17, 1996
of the Company's common stock, no par value, was 318. This total does not
include the number of beneficial owners of common stock held in "nominee" or
"street" name, as to which number the Company has not attempted to speculate.
Dividends. The Company has not paid cash dividends on its common stock since
inception. At the present time, the Company's anticipated capital
requirements are such that it intends to follow a policy of retaining any
earnings in order to finance the development of its business. The Company
does not anticipate paying dividends in the near future.
Item 6. Management's Discussion and Analysis or Plan of Operation [1]
Results of Operations
Year Ended December 28, 1996 Compared to Year Ended December 31, 1995
[NOTE: In 1996, the Company adopted a 52/53 week fiscal year. Commencing
with fiscal year 1996, the fiscal year end of the Company was changed from
December 31 of each year to the last Saturday closest to December 31. The
fiscal year end for 1996 was, therefore, changed from December 31 to December
28, 1996. Fiscal year 1997 commenced on December 29, 1996 and will end
Saturday, December 27, 1997.]
Net sales for the year ended December 28, 1996 were $56,700,122, an
increase of $32,158,816 or approximately 131% over total sales of $24,541,306
for the year ended December 31, 1995. Management believes the increase in
sales for the period is attributable to the growth in the
<PAGE>
Company's independent distributor base in the United States and Canada. By
the end of 1996, the Company had approximately 92,000 distributors of its
products in all 50 states of the U.S. and Canada. In addition to the expanded
distributor base, an increase in net sales can be attributed to the continued
successful implementation and expansion of the Company's network marketing
program and introduction of new product lines.
Net earnings for fiscal 1996 were $5,035,298 ($.80 per share) compared to
net earnings during fiscal 1995 of $2,305,248 ($.41 per share). Net
earnings for this period increased significantly because of the substantial
increase in sales and increased efficiency from larger batch sizes.
Cost of sales as a percentage of net sales decreased to 20.5 % of net
sales in 1996, compared to 23.0% of net sales in 1995. This decrease in cost
of sales as a percentage of net sales was due primarily to sales mix and
increased efficiency of operations resulting substantially from larger batch
sizes made possible by the significant increase in sales.
Distributor incentives of $25,890,347 (45.7% of net sales) in 1996
represented an increase of $15,090,017 over the $10,800,330 (44.0% of net
sales) paid in 1995. The increase in the amount of incentives paid was
substantially a function of increased sales and the addition of a significant
number of distributors. There were approximately 92,000 distributors at
December 28, 1996, compared to approximately 50,000 at the end of fiscal
1995. The increase in distributor incentives as a percentage of net sales
was due in part to the maturation of the network marketing distribution system
and also due to changes in sales mix, increasing the proportion of
commissionable products. Distributors are paid incentives based on volume of
sales generated by their independently owned distribution network, as provided
by the Company's distribution plan. Incentives are paid to distributors on a
weekly basis.
Selling, general and administrative ("SG&A") expense for fiscal 1996 of
$10,515,205 (18.5% of net sales) increased $6,269,663 or 147.7% over fiscal
1995's expenditures of $4,245,542 (17.3% of net sales). The increased cost
was primarily a result of the need for more support services and facilities to
accommodate the growth in sales volume and the increased number of independent
distributors; the required increase was exacerbated by difficulties in the
conversion of the customer service computer system.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales for the year ended December 31, 1995 were $24,541,306, an
increase of $17,224,315 or approximately 235% over total sales of $7,316,991
for the year ended December 31, 1994. The increase in net sales was due
primarily to the continued successful implementation and expansion of the
Company's network marketing program. By the end of 1995, the Company had
approximately 50,000 distributors of its products in all 50 states of the U.S.
and in Canada.
Net earnings for 1995 were $2,305,248 ($0.41 per share) compared to net
earnings during 1994 of $325,339 ($0.06 per share). This change resulted
primarily from a substantial increase in sales that, in turn, resulted in
additional revenues and increased efficiency from larger batch sizes.
Cost of sales as a percentage of net sales decreased to 23.2% of net
sales in 1995, compared to 30.6% of net sales in 1994. This decrease in cost
of sales as a percentage of net sales was due primarily to continued
improvements in manufacturing efficiencies and to change in sales mix.
Distributor incentives of $10,800,330 (44.0% of net sales) in 1995
represented an increase of $7,734,506 over the $3,065,824 (41.9% of net sales)
paid in 1994. The increase in the amount of incentives paid was substantially
a function of increased sales and the addition of a significant number of
distributors. There were approximately 50,000 distributors at December 31,
1995, compared to approximately 20,000 at the end of fiscal 1994. The
increase in distributor incentives as a percentage of net sales was also due
in part to the maturation of the network marketing distribution system.
SG&A expense for 1995 of $4,245,542 (17.0% of net sales) increased
$2,681,167 or 171% over 1994's expenditures of $1,564,375 (21.0% of net
sales). The increased cost was due to increased sales and the increased
number of distributors which increased expenses incurred to service
distributors. The improvement of SG & A expenses as a percent of net sales
was due largely to economies of scale, partially offset by the effects of
rapid growth.
Liquidity and Capital Resources
During 1996, in order to support strategic, long-term growth, the Company
employed much of its working capital in fixed assets. A new office,
manufacturing and warehouse facility of 98,000 square feet was completed
during the first quarter of 1997. Upon completion of the building, the
Company's working capital can be expected to improve quarter to quarter.
Working capital decreased to $457,277 at December 28, 1996, representing a
74.5% decrease from working capital of $1,794,564 at December 31, 1995. Cash
totaling $3,834,604 was used to purchase the land and fund the construction of
the Company's new headquarters building in 1996. Other capital expenditures
during 1996 required the outlay of an additional $3,966,302 of cash. These
expenditures included laboratory and production equipment, furniture and
fixtures, and automotive equipment.
At December 28, 1996, the Company's current ratio was 1.05 to 1, compared
to a current ratio of 1.50 to 1 at December 31, 1995. The reduction in the
current ratio was due primarily to the amounts paid for the Company's new
headquarters as well as additional capital expenditures on laboratory and
production equipment, furniture and fixtures, and automotive equipment.
On February 5, 1997, the Company's available line of credit was increased
from $2,500,000 to $3,500,000. 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 12 months.
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, including
those discussed below. 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 result of any
revisions to forward-looking statements that may be made to reflect events or
circumstances after the date hereof or 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 expectations include
the following:
Reliance Upon Independent Distributor Network. The Company's products are
distributed exclusively through an extensive network marketing system of
independent distributors. These distributors are independent contractors who
purchase products directly from the Company for their own use or for resale at
retail prices. Distributors typically work at the distribution of the
Company's products on a part-time basis and may engage in other business
activities. The Company has a large number of distributors and a relatively
small corporate staff to implement its marketing programs and provide
motivational support. The Company's continued growth and success depends to a
significant degree on its ability to retain and motivate its distributors and
to attract new distributors by continuing to offer new products of superior
quality and new marketing programs.
Distributor agreements with the Company may be voluntarily terminated by
distributors at any time. There is typically significant turnover in
distributors from year to year. Because the Company's revenue is directly
dependent upon the efforts of non-employee, independent distributors and
future growth in sales volume will depend in large part upon an increase in
the number of new distributors and/or improved productivity of the Company's
distributors, turnovers, decreases in the size of the distributor force,
seasonal or other decreases in purchase volume, costs associated with training
new distributors and other expenses associated with these problems, may
combine to reduce the revenues and profitability of the Company.
Government Scrutiny of Network Marketing Practices. Network marketing
systems such as the Company's are frequently subject to laws and regulations
directed at ensuring that product sales are made to consumers of the products
and that compensation, recognition and advancement within the marketing
organization are based on the sale of products rather than "investment" in the
sponsoring company. In the U.S., these laws and regulations include the
federal securities laws, regulations and statutes administered by the Federal
Trade Commission ("FTC") and various state anti-pyramid and business
opportunity laws. Similar laws may also govern the Company's activities in
foreign countries. Although the Company believes that it is in compliance
with all such laws and regulations, the Company remains subject to the risk
that, in one or more of its present or future markets, its marketing system
could be found not to be in compliance with applicable laws or regulations.
Failure by the Company to comply with these laws and regulations could have an
adverse material effect on the Company or a distributor in a particular market
or in general.
Distributors' Actions. The Company's distributors are required to sign
the Company's Distributor Application and Agreement which requires them to
abide by the USANA Policies and Procedures. Although these Policies and
Procedures prohibit distributors from making certain claims regarding the
products or income potential from the distribution of those products,
nonetheless, in certain instances distributors may from time to time create
promotional materials which do not accurately describe the Company's marketing
program or may make statements regarding potential earnings, product claims or
other matters not in accordance with the Company's policies or contrary to
applicable laws and regulations concerning these matters. Although the
Company has not been sued by regulatory authorities, legal actions against
distributors or others affiliated with the Company could lead to increased
regulatory scrutiny of the Company and its network marketing system. In order
to assure itself that its Policies and Procedures and the practices of its
independent distributors conform to law and fairly protect the interests of
consumers, the Company attempts to carefully monitor against
misrepresentations by distributors. There can be no assurance that the
Company will be able to completely accomplish this objective. In addition,
distributors could make predictive statements about the Company's operations
or other unauthorized remarks regarding USANA which the Company may be unable
to control. Publicity resulting from such activities of distributors can also
make it more difficult for the Company to sponsor and retain distributors or
may adversely affect the Company's ability to expand into new markets or in
other ways.
Government Regulation-Products and Manufacturing. The manufacturing,
processing, formulation, packaging, labeling and advertising of the Company's
products are subject to regulation by federal agencies, including the Food and
Drug Administration (the "FDA"), the Federal Trade Commission, the Consumer
Product Safety Commission, the United States Department of Agriculture, the
United States Postal Service and the United States Environmental Protection
Agency. These activities are also subject to regulation by various agencies
of the countries, states and other localities in which the Company's products
are sold. In October 1994 the "Dietary Supplement Health and Education Act of
1994" was enacted. The DSHEA defines dietary supplements (which include
vitamins, minerals, nutritional supplements and herbs) and provides a
regulatory framework to ensure safe, quality dietary supplements, and the
dissemination of accurate information about such products. Dietary
supplements are regulated as foods under the DSHEA and the FDA is generally
prohibited from regulating the active ingredients in dietary supplements as
food additives, or as drugs unless product claims trigger drug status. The
DSHEA provides for specific nutritional labeling requirements for dietary
supplements effective January 1, 1997. The DSHEA permits substantiated,
truthful and non-misleading statements of nutritional support to be made in
labeling, such as statements describing general well-being from consumption of
a dietary ingredient or the role of a nutrient or dietary ingredient in
affecting or maintaining structure or function of the body. In addition, the
DSHEA authorizes the FDA to promulgate current Good Manufacturing Practices
("GMP") specific to the manufacture of dietary supplements to be modeled after
food GMPs. The Company currently manufactures its dietary supplement products
pursuant to food GMP's.
The Company cannot determine what effect currently proposed FDA
regulations or changed or amended regulations, when and if promulgated, will
have on its business in the future. Such regulations could, among other
things, require expanded or different labeling, the recall or discontinuance
of certain products, additional record keeping and expanded documentation of
the properties of certain products and scientific substantiation. In
addition, the Company cannot predict whether new legislation regulating its
activities will be enacted, which new legislation could have a material
adverse effect on the Company.
Product Liability. As a manufacturer and distributor, the Company could
become exposed to product liability claims. The Company has not had any such
claims to date. Although the Company maintains product liability insurance
which it believes to be adequate for its needs, there can be no assurance that
the Company will not be subject to claims in the future or that its insurance
coverage will be adequate.
Competition. The business of distributing and marketing nutritional
supplements, vitamins and minerals, personal care products, weight management
items, and other nutritional products offered by the Company is highly
competitive. Numerous manufacturers, distributors and retailers compete
actively for consumers and for distributors. The Company competes directly
with other entities that manufacture, market and distribute nutritional and
personal care products in each of its product lines. The Company competes
with these entities by emphasizing the value and high quality of its products
as well as the convenience and financial benefits afforded by its network
marketing system. However, many of the Company's competitors are
substantially larger than the Company and have greater financial resources and
broader name recognition. The market is highly sensitive to the introduction
of new products that may rapidly capture a significant share of the market.
As a result, the Company's ability to remain competitive depends in part upon
the successful introduction of new products. The Company is also subject to
significant competition from other marketing organizations for the recruitment
of distributors. The Company's ability to remain competitive depends, in
significant part, on the Company's success in recruiting and retaining
distributors. There can be no assurance that the Company's programs for
recruiting and retaining distributors will be successful. The Company
competes for the time, attention and commitment of its independent distributor
force. The pool of individuals interested in the business opportunities
presented by direct selling tends to be limited in each market, and it is
reduced to the extent other network marketing companies successfully recruit
these individuals into their businesses. Although management believes the
Company offers an attractive opportunity for distributors, there can be no
assurance that other marketing companies will not be able to recruit the
Company's existing distributors or deplete the pool of potential distributors
in a given market.
Expansion Into Foreign Markets. The Company has announced its intentions
to expand into markets outside North America. However, there can be no
assurance that the Company can open markets on a timely basis or that such new
markets will prove to be profitable. Significant regulatory and legal
barriers must be overcome before marketing can begin in any foreign market.
Also, before marketing has commenced, it is difficult to assess the extent to
which the Company's products and sales techniques will be successful in any
given country. In addition to significant regulatory barriers, the Company
may also expect problems related to entering new markets with different
cultural bases and legal systems from those encountered elsewhere. Expansion
of the Company's operations into new markets may require substantial working
capital and capital requirements associated with regulatory compliance. There
can be no assurance that the Company will be able to obtain necessary permits
and approvals or that it will have sufficient capital to finance its expansion
efforts in a timely manner.
Risks Associated With Rapid Growth. Since commencing operations after
the spin-off from Gull in 1992, the Company has experienced rapid growth. The
management challenges imposed by, and encountered by the Company as a result
of this growth include significant growth in the number of employees and
distributors, needed expansion of facilities and acquisition of capital
equipment and information systems to accommodate growth and additions and
modifications to the Company's product lines, and expansion into new markets.
To effectively manage these and other changes resulting from rapid growth, the
Company may be required to hire additional management and operations personnel
and to improve its operational, financial, information and management
systems. If the Company is unable to manage growth effectively or to hire or
retain qualified personnel, its business and results of operations may be
adversely affected. Moreover, the capital expenditures and personnel expenses
associated with such growth may adversely affect the Company's results of
operations.
Risks Associated with Material Supplies. The Company has short term
contracts with some suppliers of raw material used in its products. Normally,
materials used in manufacturing the Company's products are purchased on
account or by purchase order. The Company has very few long term agreements
for the supply of such materials. There is a risk that any of the Company's
suppliers or manufacturers could discontinue selling their products to the
Company. Although the Company believes that it could establish alternate
sources for most of its products, any delay in locating and establishing
relationships with other sources could result in product shortages and back
orders for the products, with a resulting loss of revenues to the Company.
For example, in the fourth quarter of 1996, the Company experienced difficulty
in obtaining sufficient quantities of Vitamin E Succinate Powder, an
ingredient required for the manufacture of several of its products. It is
expected that the supplier's shortage will continue during 1997. As a
consequence, the Company has been required to alter its product or to
substitute a different product from another source. This and similar future
product or ingredient shortages may adversely affect the Company's results of
operations.
Control by Principal Shareholder. Gull Holdings, Ltd., an Isle of Man
limited company wholly-owned by Dr. Wentz, is the beneficial owner of
approximately 63% of the issued and outstanding shares of common stock of the
Company. There are no cumulative voting rights under the Company's Articles
of Incorporation and, therefore, this shareholder possesses the ability to
elect all of the directors of the Company, to increase its authorized capital,
to dissolve or merge the Company or to sell its assets and generally to exert
substantial control over the business and operations of the Company.
Reliance on Personnel. The Company's success depends to a significant
extent upon certain members of senior management, including Dr. Wentz, Jeb
McCandless, Dallin Larsen, Gilbert Fuller, Mark Peterson and David Wentz.
The Company does not maintain key man life insurance policies on any of
these persons and there can be no assurance that such policies will be
obtained in the future or that if obtained they can adequately compensate
the Company for the loss of such individuals. The Company has no
employment contracts with any of these persons. The loss of any senior
manager or other key employee could have an adverse effect upon the
Company's business, financial condition and operating results.
Effect of Exchange Rate Fluctuations. The Company has a Canadian
subsidiary and has commenced efforts to expand its marketing organization into
other foreign countries. As a result, exchange rate fluctuations may have a
significant effect on its sales and the Company's gross margins. Further, if
exchange rates fluctuate dramatically, it may become uneconomical for the
Company to establish or continue activities in certain countries.
Anti-Takeover Protection. The Utah Control Shares Act (the "Control
Shares Act") provides that any person or entity that acquires 20% or more of
the outstanding voting shares of a publicly-held Utah corporation is denied
voting rights with respect to the acquired shares, unless a majority of the
disinterested shareholders of the corporation elects to restore such voting
rights. The provisions of the Control Shares Act may discourage companies or
persons interested in acquiring a significant interest in or control of the
Company, regardless of whether such acquisition may be in the interest of the
Company's shareholders.
Item 7. Financial Statements
Financial statements, with the reports of the Company's auditors, follow
immediately and are listed in Item 13 of Part III of this Annual Report on
Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
In July 1995, the Company changed its accountants from Tanner & Co. to
Grant Thornton LLP. This change was approved by the Board of Directors of the
Company.
The report of Tanner & Co., on the Company's financial statements as of
December 31, 1994, and the two years then ended did not contain an adverse
opinion, or a disclaimer of opinion, nor was its report qualified or modified
as to uncertainty, audit scope, or accounting principles. During the
engagement of Tanner & Co., there were no disagreements on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure with disagreements, if not resolved to the
satisfaction of Tanner & Co., would have caused it to make reference to the
subject matter of the disagreements in connection with its reports.
The Company was not advised by Tanner & Co. that internal controls
necessary for the Company to develop reliable financial statements did not
exist nor that information came to its attention that led it to no longer be
able to rely on management's representations or that made it unwilling to be
associated with the financial statements prepared by management. The Company
was not advised by Tanner & Co. of the need to expand significantly the scope
of the Company's audit, nor was the Company advised that any information came
to the attention of Tanner & Co. that on further investigation may (i)
materially impact the fairness or reliability of either a previously issued
audit report or the underlying financial statements, or the financial
statements issued or to be issued covering the fiscal period subsequent to the
date of the most recent financial statements covered by an audit report, or
(ii) cause Tanner & Co. to be unwilling to rely on management's
representations or be associated with the Company's financial statements. The
Company provided its former auditors, Tanner & Co. with a copy of the
foregoing disclosures. The Company has filed a concurrence of the former
auditors with the foregoing statements as an exhibit to its reports filed with
the Securities and Exchange Commission.
The Company did not consult Grant Thornton LLP prior to its appointment
regarding the application of accounting principles to a specific completed
transaction, the type of audit opinion, or other accounting advice that was
considered by the Company in reaching a decision as to an accounting,
auditing, or financial reporting issue.
The Company and its current auditors have not disagreed on any items of
accounting treatment or financial disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters, and Control
Persons; Compliance with Section 16(a) of the Exchange Act
The following table sets forth certain information concerning the
executive officers and directors of the Company as of December 28, 1996:
<TABLE>
<CAPTION>
Name Age Position
- -------------------- ------- -----------------------
<S> <C> <C>
Dr. Myron Wentz 56 Chairman of the Board, President
David A. Wentz 26 Vice President, Strategic
Development, Director
Dallin Larsen 37 Vice President, Sales
John ("Jeb") McCandless, IV 48 Vice President, Operations
Gilbert A. Fuller 55 Vice President, Finance
Mark Petersen 46 Vice President, International
Development
Dr. Suzanne Winters 42 Director
Ronald S. Poelman 43 Director
Robert Anciaux 51 Director
</TABLE>
All directors of the Company hold office until the next annual meeting of
the stockholders of the Company and until their successors have been elected
and qualified. The executive officers of the Company are elected annually and
serve at the pleasure of the Board of Directors.
Dr. Myron Wentz has been the President and Chairman of the Board of
Directors of the Company since its inception. From 1969 to 1973, Dr. Wentz
served as Director of Microbiology for Methodist Medical Center, Proctor
Community Hospital, and Pekin Memorial Hospital, all in Peoria, Illinois. Dr.
Wentz received a Ph.D. in Microbiology and Immunology from the University of
Utah, an M.S. in Microbiology from the University of North Dakota, and a B.S.
in Biology from North Central College, Naperville, Illinois. Dr. Wentz
founded Gull, the former parent of USANA, in 1973, and retains the position of
Chairman of the Board of that company. Gull develops, manufactures and sells
medical diagnostic test kits and related products.
David A. Wentz received a B.S. degree in Bioengineering from the
University of California, San Diego in 1993. Mr. Wentz served with the
Company first on a part-time basis and then was employed by the Company full
time in 1994. He has served as a director of the Company since its spin-off
from Gull in 1993. From 1994 until 1995, he served as Vice President and
Executive Vice President of the Company. David A. Wentz is the son of Dr.
Myron Wentz.
John ("Jeb") McCandless, IV was employed as the Director of Scientific
Operations of the Company in October, 1995. Before joining the Company, he
was a consultant with Apogee Strategic Services, of Sandy, Utah from January
1994. From September 1987 to December 1993, Mr. McCandless was the President
of Utah Biomedical Test Laboratory, located in Salt Lake City, Utah, where he
supervised that company's business of contract research and scientific
testing. He also served in Managerial positions in toxicology at both Atlantic
Richfield Company in Los Angeles and at Biodynamics, Inc. in New Jersey. Mr.
McCandless received a B.A. degree in Zoology from the University of
California, Santa Barbara, an M.S. in Pathology from the University of Utah,
and M.A. and M.B.A. degrees from Claremont Graduate School in California.
Gilbert A. Fuller has served as the Vice President of Finance of the
Company since June 1996. Prior to joining the Company, Mr. Fuller was the
Executive Vice President of Winder Dairy, Inc., a regional commercial dairy
operation located in Utah. From May 1991 through October 1993, Mr. Fuller was
Chief Administrative Officer and Treasurer of Melaleuca, Inc., a manufacturer
and network marketing distributor of personal care products located in Idaho.
From July 1984 through January 1991, Mr. Fuller was the Vice President and
Treasurer of Norton Company of Worcester, Massachusetts, a multi-national
manufacturer of ceramics and abrasives. Mr. Fuller is a Certified Public
Accountant and holds a B.S. degree in Accounting and a M.B.A. degree from the
University of Utah.
Mark Petersen was promoted to the position of Vice President of
International Development in October 1996. He has worked with Carlson
Financial Services in Denver, Colorado, NuSkin International, Inc., Provo,
Utah and most recently as International Vice President of Franklin Quest, Co.,
Salt Lake City, Utah. At NuSkin and Franklin Quest, Mr. Petersen was
involved with creating, building and managing corporate operations in Asia,
Europe, Canada, Latin America and the South Pacific. Mr. Petersen holds a
B.A. degree from the University of Colorado and a J.D. degree from Brigham
Young University.
Dallin Larsen is the Company's Vice President of Sales. He has been
employed by the Company since January 1993. He has been actively involved in
network marketing since 1989 and, for seven years, served as president of a
corporation that owned weight-loss clinics in several states. Mr. Larsen
graduated from Brigham Young University with a B.S. degree in Finance in 1986.
Dr. Suzanne Winters, Ph.D. joined the Board of Directors in July, 1996.
Dr. Winters has been the State Science Advisor for the State of Utah since
1993. In that capacity, Dr. Winters advises the Governor and the State
Legislature on matters related to science and technology and their
applications to government, industry and public issues. From 1990 to 1993,
Dr. Winters was the President of MC2 - Membranes and Coatings Consultants,
Inc., a Salt Lake City, Utah-based business providing management services with
respect to research and development for implantable, continuous,
self-calibrating blood gas, pH, and electrolyte sensors and intravenous bubble
oxygenators, and other technology-related management services. Dr. Winters
received a doctorate degree in Pharmaceutics from the University of Utah in
1986.
Ronald S. Poelman has been a member of the Company's Board of Directors
since 1995. He currently is a partner in the Salt Lake City, Utah law firm of
Jones, Waldo, Holbrook & McDonough, where he is head of the Corporate Finance
Group. Prior to joining Jones, Waldo, Holbrook & McDonough in 1993, Mr.
Poelman was a shareholder at the Salt Lake City law firm of Parsons, Behle &
Latimer from 1989 to 1992. His specialty is corporate and securities law.
Mr. Poelman received a B.A. in English from Brigham Young University and a
J.D. from the University of California, Berkeley.
Robert Anciaux is a resident of Brussels, Belgium. Mr. Anciaux was
appointed to the Board in July, 1996. Since 1982, Mr. Anciaux has been
self-employed as a venture capitalist in Europe, investing in various
commercial, industrial and real estate venture companies in Belgium and
abroad. Mr. Anciaux has been involved for a number of years as a shareholder
of various companies that manage institutional or private investment funds.
In some of these privately-held companies, Mr. Anciaux has also served as a
director.
In addition to the directors and executive officers identified above, the
following individuals are significant employees who supervise or oversee
research and development and marketing of products.
Dr. Timothy Wood is Director of Research and Development for USANA. In
this position, he coordinates the Company's activities in product development
and technical product support. Dr. Wood holds a Ph.D. in Biology from Yale
University and an MBA in Technology Management from the Gore School of
Business at Westminster College.
Dr. John McDonald is Senior Scientist at the Company and is responsible
for new product formulation, research and provides expert advise to technical
services. He has been with the Company since its inception as a Gull division
in 1990. Dr. McDonald holds a Ph.D. from the University of Utah in
Experimental Biology, and received his training from the Department of
Pathology at the University of Utah Medical School.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who beneficially own more than
ten percent of the Company's common stock to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than ten percent shareholders are also required by
regulation of the Securities and Exchange Commission to furnish the Company
with copies of all Section 16(a) forms which they file.
Based solely upon a review of the forms and amendments thereto furnished
to the Company under Rule 16a-3(e) during the fiscal year ended December 28,
1996, and with respect to such year, as well as certain representations of the
officers and directors specified by such rule, the Company believes that all
reports required to be filed pursuant to Section 16(a) were timely filed
during the fiscal year ended December 28, 1996.
Item 10. Executive Compensation
The Company's president, Dr. Myron Wentz, has served in that position
since 1992. Dr. Wentz receives no salary or other compensation for his
services to the Company. In 1993, Dr. Wentz did receive a bonus payment of
$16,733. The following table summarizes the compensation of the Chief
Executive Officer during 1996 and all executive officers of the Company who
earned $100,000 or more during the last fiscal year of the Company and the
amounts earned during the past three fiscal years:
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Other Long-term
Name Annual Compensation All other
and Compensa- Awards of Compensa-
Principal Salary Bonus tion Stock Options tion
Position Year ($) ($) ($) (#) ($)
- ----------------- ----- -------- -------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dr. Myron Wentz
CEO/President 1994 0 0 0 0 0
1995 0 0 0 0 0
1996 0 0 0 0 0
Dallin Larsen
Vice President 1994 89,113 200 0 0 1,625[3]
Sales 1995 131,834 9,849 5,354[1] 140,000[2] 3,125[3]
1996 134,615 8,678 6,757[1] 0 3,125[3]
</TABLE>
- ----------------
[1] Represents the approximate value of the employee's use of
a Company-owned car.
[2] Shares subject to issuance upon exercise of options granted
under a compensation plan.
[3] Represents the Company's matching contribution to employee's
401(k) plan.
Stock Option Grants in Fiscal 1996
The Company did not grant any stock options or stock appreciation rights
("SARs") to the above named executive officers in fiscal 1996.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Fiscal Year 1996
and Fiscal Year-End Option Values
(a) (b) (c) (d) (e)
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options At Options At
Shares Value December 28, 1996 December 28, 1996
Acquired on Realized (#) ($)
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---------------------- ------------ --------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Dr. Myron Wentz 0 0 0/0 0/0
Dallin Larsen 20,000 459,000 0/120,000 0/1,778,400[1]
</TABLE>
- --------------
(1) The aggregate dollar value of the in-the-money unexercised options
held at December 28, 1996 is calculated as the difference between the
fair market value of the securities underlying such options at
December 28, 1996 ($17.87 per share) and the exercise price of $3.05
per share.
Compensation Plans
At the Annual Meeting of shareholders in 1995, the Company's shareholders
approved the Company's 1995 Long-Term Stock Investment and Incentive Plan (the
"Incentive Plan") and the Director's Stock Option Plan.
1995 Long-Term Stock Investment and Incentive Plan
The Company's 1995 Long-Term Stock Investment and Incentive Plan (the
"Plan") provides for the award of incentive stock options to key employees and
the award of nonqualified stock options, stock appreciation rights, bonus
rights, and other incentive grants to employees and certain non-employees (but
not Directors who also serve as members of the committee that administers the
Plan) who have important relationships with the Company or its subsidiaries.
1,400,000 shares are available for issuance pursuant to awards granted under
the Plan.
Stock Option Grants The Plan Committee may grant Incentive Stock
Options ("ISOs") and Non-Statutory Stock Options ("NSOs") under the Plan.
With respect to each option grant, the Plan Committee will determine the
number of shares subject to the option, the option price, the period of the
option, the time or times at which the option may be exercised (including
whether the option will be subject to any vesting requirements and whether
there will be any conditions precedent to exercise of the option), and the
other terms and conditions of the option.
Stock Appreciation Rights ("SARs") may be granted under the Plan. Each
SAR entitles the holder, upon exercise, to receive from the Company an amount
equal to the excess of the fair market value on the date of exercise of one
share of Common Stock of the Company over its fair market value on the date of
grant (or, in the case of a SAR granted in connection with an option, the
excess of the fair market value of one share of Common Stock of the Company
over the option price per share under the option to which the SAR relates),
multiplied by the number of shares covered by the SAR, may be made in Common
Stock, in cash, or in any combination of Common Stock and cash. No SARs have
been granted under the Plan.
Restricted Stock The Plan Committee may issue shares of Common Stock
under the Plan subject to the terms, conditions, and restrictions determined
thereby. Upon the issuance of restricted stock the number of shares reserved
for issuance under the Plan will be reduced by the number of shares issued.
No restricted shares have been granted under the Plan.
Cash Bonus Rights. The Plan Committee may grant cash bonus rights under
the Plan in connection with (i) options granted or previously granted, (ii)
SARs granted or previously granted, (iii) stock bonuses awarded or previously
awarded or previously awarded and (iv) shares issued under the Plan. No bonus
rights have been granted under the Plan.
Changes in Capital Structure. The Plan provides that if the outstanding
Common Stock of the Company is increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of the
Company or of another corporation by reason of any recapitalization, stock
split or certain other transactions, appropriate adjustment will be made by
the Plan Committee in the number and kind of shares available for grants under
the Plan. In addition, the Plan Committee will make appropriate adjustments
in the number and kind of shares as to which outstanding options will be
exercisable. In the event of a merger, consolidation or other fundamental
corporate transformation, the Board may, in its sole discretion, permit
outstanding options to remain in effect in accordance with their terms; to be
converted into options to purchase stock in the surviving or acquiring
corporation in the transaction; or to be exercised, to the extent then
exercisable, during a period prior to the consummation of the transaction
established by the Plan Committee or as may otherwise be provided in the Plan.
During the fiscal year ended December 28, 1996, the Company granted
options to employees under the plan for the purchase of a total of 496,000
shares of stock. As of the end of fiscal 1996, there were options outstanding
under this plan for the purchase of an aggregate of 832,500 shares of stock.
Remuneration of Directors
Directors' Stock Option Plan
The Directors' Stock Option Plan (the "Director Plan") provides for the
award of options to purchase Common Stock to directors of the Company to
attract, reward, and retain the best available personnel to serve as directors
and to provide added incentive to such persons by increasing their ownership
interest in the Company.
Administration The Director Plan is administered by a committee of
Directors of the Company (the "Committee"). Subject to the requirements of
the Director Plan, the Committee has the authority to, among other things,
interpret the Director Plan and prescribe, amend, and rescind rules and
regulations relating thereto, and make all determinations deemed necessary or
advisable to administer the Director Plan. The Committee presently is
comprised of Dr. Wentz and David Wentz. No Director may vote on any action by
the Board with respect to any matter relating to an award held by such
Director. The Director Plan is intended to comply with and is administered in
accordance with Rule 16b-3 adopted under the Exchange Act.
Eligibility Options may be awarded under the Director Plan only to
directors of the Company.
Shares Available The total number of shares of Common Stock that may be
issued pursuant to options under the Director Plan may not exceed 600,000
shares. If any option awarded under the Director Plan is forfeited or not
exercised, the shares that would have been issued upon the exercise of such
option will again be available for purposes of the Director Plan.
Term Unless earlier suspended or terminated by the Board, the Director
Plan will continue in effect until the earlier of : ( i) ten years from the
date on which it is adopted by the Board, and (ii) the date on which all
shares available for issuance under the Director Plan have been issued.
Initial Award Persons who become or became directors after the Effective
Date of the Director Plan will receive an option to purchase 62,500 shares of
Common Stock (the "Initial Award") upon such person's first election or
appointment to the Board. A director may decline the award at his or her sole
discretion.
Vesting and Forfeiture. Options granted pursuant to an Initial Award
vest at the rate of 12,500 shares per year over 5 years, beginning on the
first anniversary after the date of the Initial Award. If a director is
unable to continue his or her service as a director as a result of disability
or death, unvested shares of such director immediately become vested as of
the date of disability or death. In the event of a merger, consolidation or
plan of exchange to which the Company is a party and in which the Company is
not the survivor, or a sale of all or substantially all of the Company's
assets, any unvested options will vest automatically upon the closing of such
transaction.
Status Before Exercise. The holder of an option will not be a
shareholder of record with respect to any shares associated with an option
until the exercise of such option. No director may transfer any option except
by will or the laws of succession.
During the fiscal year ended December 28, 1996, the Company's directors
were not paid for attendance at director's meetings or otherwise compensated
for their services as directors, except for the stock option grants described
above under the Directors' Stock Option Plan. The Company pays all expenses
incurred by directors in connection with their attendance at or participation
in board meetings or otherwise incurred in the scope of their duties. During
1996, options were granted under the plan to the new directors, Dr. Winters
and Mr. Anciaux under the Initial Award as described above.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 16, 1997, the number of
shares of the Company's common stock, no par value, of all persons known to
the Company to be beneficial owners of more than five percent of the Company's
voting securities and by the executive officers and directors of the Company
individually and as a group. Except as indicated in the footnotes below, each
of the persons listed exercises sole voting and investment power over the
shares of the Company's common stock listed for such person in the table.
<TABLE>
<CAPTION>
Name/Address of 5% Number of Shares Percent of Class(1)
Beneficial Owner,
Director, Officer
- ------------------------------ --------------------- ------------------
<S> <C> <C>
Dr. Myron Wentz, Director/CEO 3,957,116 [2] 62.3%
3838 West Parkway Blvd.
Salt Lake City, Utah 84120
Gull Holdings, Ltd. 3,957,116 62.3
4 Finch Road
Douglas, Isle of Man
David Wentz, Director/VP 18,500[3] *
3838 West Parkway Blvd.
Salt Lake City, Utah 84120
Ronald S. Poelman, Director 12,500[3] *
170 South Main Street, Suite 1500
Salt Lake City, Utah 84101
Dr. Suzanne Winters, Director 0 -
Office of Planning and Budget
116 State Capitol Building
Salt Lake City, Utah 84114
Robert Anciaux, Director 0 -
S.E.I.
Av Du Manoir 30
1410 Waterloo, Belgium
John ("Jeb") McCandless, IV/VP 20,000[3] *
3838 W. Parkway Blvd.
Salt Lake City, Utah 84120
Gilbert A. Fuller, VP 0 -
3838 W. Parkway Blvd.
Salt Lake City, Utah 84120
Dallin Larsen, Vice President 26,000[3] *
3838 West Parkway Blvd.
Salt Lake City, Utah 84120
Mark Petersen, VP 0 -
3838 W. Parkway Blvd.
Salt Lake City, Utah 84120
Officers and Directors
as a group (9 persons) 4,034,116[3] 63.5%
_________________________
</TABLE>
* Less than one percent. Officer and Director group total does
not include duplicate entries.
(1) Percentages rounded to nearest one-tenth of one percent.
(2) All shares held of record by Gull Holdings, Ltd. ("Holdings"),
an Isle of Man company owned 100% by Dr. Wentz. Because of
his control of Holdings, Dr. Wentz is deemed to be the
beneficial owner of the shares owned of record by Holdings.
(3) Includes shares issuable pursuant to options which are
presently exercisable or which become exercisable within 60 days
of the date of this annual report.
Item 12. Certain Relationships and Related Transactions
In June 1995, Gull Holdings Ltd., an Isle of Man company ("Holdings")
that is the Company's majority shareholder, agreed to arrange up to $2.5
million in financing to the Company to facilitate the purchase of real
property and construction of the Company's new corporate headquarters and
manufacturing facility. Pursuant to its agreement with the Company, Holdings
agreed to provide direct funding and to secure a $3.0 million letter of
credit to facilitate additional bank funding for the Company. In
consideration for its capital contribution and assistance, Holdings was issued
952,381 shares of the Company's restricted common stock. Holdings assistance
was required by the bank due to the Company's limited operating history.
Holdings is owned by Dr. Wentz. The Company also paid a $45,000 fee
associated with the letter of credit.
On July 27, 1995, Dr. Wentz conveyed to the Company a condominium
property located in Salt Lake City, Utah (the "Condominium") in exchange for
11,996 shares of the Company's restricted common stock valued at approximately
$31,500. The Company believes that such value constituted the fair value of
the Company's restricted stock at that time.
In August 1995, the Company sold the Condominium to David Wentz for the
purchase price of $101,500, which was, in the Company's belief, the fair
market value of the Condominium.
In 1994, the Company engaged in certain transactions with Dr. Wentz
involving the transfer and exchange of certain leased and purchased
transportation equipment owned by the Company and Dr. Wentz and the repayment
of two short-term loans, which resulted in Dr. Wentz transferring cash of
$147,000 to the Company. In a separate transaction, $160,000 was paid on a
line of credit owned by Dr. Wentz, which has since been repaid.
Item 13. Exhibits, Financial Statement Schedules and Report on Form 8-K
(a) Documents filed as part of Form 10-KSB:
(1) Financial Statements (included in Part II, Item 7):
Report of Grant Thornton LLP, independent
certified public accountants on the December 28,
1996 and December 31, 1995 financial statements
Report of Tanner & Company, independent certified
public accountants on the December 31, 1994
financial statements
Consolidated financial statements:
Consolidated Balance Sheets as of December 28,
1996 and December 31, 1995
Consolidated Statements of Earnings for the years
ended December 28, 1996, December 31, 1995 and
1994
Consolidated Statements of Stockholders' Equity for
the years ended December 28, 1996, December 31, 1995
and 1994
Consolidated Statements of Cash Flows for the years
ended December 28, 1996, December 31, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Regulation S-B Exhibits
(3)(i) Articles of Incorporation of the Company, as
amended, which are incorporated by reference from the
Company's Registration Statement on Form 10 dated April
8, 1993
(3)(ii) The Company's Bylaws which are incorporated
by reference from the Company's Registration
Statement of Form 10 dated April 8, 1993
(4) Description of the Company's common stock
incorporated by reference from the Company's
Registration Statement (Item 11) on Form 10, dated April
8, 1993
(10) Material Contracts
Contract for purchase of real estate
(corporate headquarters), incorporated by
reference from the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995
Agreement with bank for construction financing,
which is incorporated by reference from the Company's
Annual Report for the fiscal year ended December 31,
1995 on Form 10-KSB
Securities Purchase Agreement between the Company
and Gull Holdings, Ltd., which is incorporated
by reference from the Company's Annual Report
for the fiscal year ended December 31, 1995 on Form
10-KSB
(21) List of the Company's subsidiaries, the states of
incorporation of those subsidiaries and the names
under which the subsidiaries do business, which is
incorporated by reference from the Company's Annual
Report for the fiscal year ended December 31, 1995 on
Form 10-KSB
(b) Reports on Form 8-K: During the fourth quarter of fiscal year 1996, the
Company filed one current report on Form 8-K, filed November 8, 1996. The
purpose of that current report was to disclose a change in the fiscal
year end of the Company.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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/ Dr. Myron Wentz
---------------------------------
Dr. Myron Wentz, President and Chairman
Date: March 27, 1997
------------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
/s/ Dr. Myron Wentz March 27, 1997
- ------------------------------------ --------------
Dr. Myron Wentz, Chairman, President Date
(Principal Executive Officer)
/s/ Gilbert A. Fuller March 28, 1997
- ------------------------------------ --------------
Gilbert A. Fuller, Vice President Date
Finance (Principal Financial Officer
and Principal Accounting Officer)
/s/ David Wentz March 27, 1997
- ------------------------------------ --------------
Dr. Myron Wentz, Chairman, President Date
(Principal Executive Officer)
/s/ Ronald S. Poelman March 28, 1997
- ------------------------------------ --------------
Ronald S. Poelman, Director Date
/s/ Dr. Suzanne Winters March 27, 1997
- ------------------------------------ --------------
Dr. Suzanne Winters, Director Date
- ------------------------------------ --------------
Robert Anciaux, Director Date
<PAGE>
USANA, Inc. and Subsidiary
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-----
Report of Grant Thornton LLP, independent certified public accountants
on the December 28, 1996 and December 31, 1995 financial statements F-2
Report of Tanner & Company, independent certified public accountants
on the December 31, 1994 financial statements F-3
Consolidated financial statements:
Consolidated Balance Sheets as of December 28, 1996 and
December 31, 1995 F-4
Consolidated Statements of Earnings for the years ended
December 28, 1996, December 31, 1995 and 1994 F-6
Consolidated Statements of Stockholders' Equity for the years ended
December 28, 1996, December 31, 1995 and 1994 F-7
Consolidated Statements of Cash Flows for the years ended
December 28, 1996, December 31, 1995 and 1994 F-8
Notes to Consolidated Financial Statements F-10
F-1
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
USANA, Inc. and Subsidiary
We have audited the consolidated balance sheets of USANA, Inc. and Subsidiary
(the Company) as of December 28, 1996 and December 31, 1995 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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 are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of USANA, Inc. and
Subsidiary as of December 28, 1996 and December 31, 1995 and the consolidated
results of their operations and their consolidated cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/S/ GRANT THORNTON LLP
GRANT THORNTON LLP
Salt Lake City, Utah
February 21, 1997
F-2
<PAGE>
USANA, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 28, December 31,
1996 1995
-------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,130,487 $ 2,976,406
Accounts receivable, net of allowance for
doubtful accounts of $0 in 1996,
and $2,000 in 1995 (Note E) 55,149 11,246
Current maturities of notes receivable (Note D) 27,212 -
Income tax receivable 405,503 -
Inventories (Notes B and E) 6,399,128 2,127,724
Prepaid expenses and other assets 661,359 75,365
Deferred income taxes (Note H) 361,000 170,000
-------------- --------------
Total current assets 9,039,838 5,360,741
PROPERTY AND EQUIPMENT, AT COST
(Notes C, E and I) 11,549,813 4,576,106
NOTES RECEIVABLE, LESS CURRENT MATURITIES
(Note D) 46,252 -
OTHER ASSETS 442,937 236,756
-------------- --------------
$ 21,078,840 $ 10,173,603
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
USANA, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 28, December 31,
1996 1995
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 4,709,028 $ 1,210,205
Line of credit (Note E) 1,500,000 -
Other current liabilities (Note F) 2,373,533 2,345,063
Current maturities of long-term
obligations (Note G) - 10,909
-------------- --------------
Total current liabilities 8,582,561 3,566,177
LONG-TERM OBLIGATIONS, less current
maturities (Note G) - 3,910
DEFERRED INCOME TAXES (Note H) 129,000 49,000
COMMITMENTS AND CONTINGENCIES (Note J) - -
STOCKHOLDERS' EQUITY (Notes I and K)
Common stock, no par value; authorized
50,000,000 shares; issued and outstanding
6,351,119 shares in 1996 and 6,280,119
shares in 1995 6,768,844 6,004,917
Cumulative foreign currency translation
adjustment 9,786 (3,752)
Retained earnings 5,588,649 553,351
-------------- --------------
Total stockholders' equity 12,367,279 6,554,516
-------------- --------------
$ 21,078,840 $ 10,173,603
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
USANA, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year ended
---------------------------------------------------
December 28, December 31,
---------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales $ 56,700,122 $ 24,541,306 $ 7,316,991
Cost of sales 11,595,830 5,703,409 2,237,609
-------------- -------------- --------------
Gross profit 45,104,292 18,837,897 5,079,382
Operating expenses
Distributor incentives 25,890,347 10,800,330 3,065,824
Selling, general and administrative 10,515,205 4,245,542 1,564,375
Research and development 797,785 255,779 53,803
-------------- -------------- --------------
Earnings from operations 7,900,955 3,536,246 395,380
Other income (expense)
Interest income 164,629 111,738 9,860
Interest expense (6,915) (2,231) (1,513)
Other, net 89,629 81,495 (52,388)
-------------- -------------- --------------
Earnings before income taxes 8,148,298 3,727,248 351,339
Income taxes (Note H) 3,113,000 1,422,000 26,000
-------------- -------------- --------------
NET EARNINGS $ 5,035,298 $ 2,305,248 $ 325,339
============== ============== ==============
Earnings per common and common
equivalent share $ 0.80 $ 0.41 $ 0.06
============== ============== ==============
Weighted average number of common
and common equivalent shares
outstanding 6,320,987 5,580,142 5,315,742
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
USANA, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 28, 1996 and December 31, 1995 and 1994
<TABLE>
<CAPTION>
Cumulative
Common Stock foreign Retained
--------------------------------- currency earnings
Number of translation (accumulated
shares Amount adjustment deficit) Total
-------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at
January 1, 1994 5,315,742 $ 3,473,429 $ - $ (2,077,236) $ 1,396,193
Net earnings for the year - - - 325,339 325,339
-------------- -------------- ------------- -------------- --------------
Balance at
December 31, 1994 5,315,742 3,473,429 - (1,751,897) 1,721,532
Shares issued for (Note I):
Cash 952,381 2,500,000 - - 2,500,000
Property 11,996 31,488 - - 31,488
Foreign currency
translation adjustment - - (3,752) - (3,752)
Net earnings for the year - - - 2,305,248 2,305,248
------------- -------------- ------------- -------------- --------------
Balance at
December 31, 1995 6,280,119 6,004,917 (3,752) 553,351 6,554,516
Sale of common stock
under stock option plan, net 71,000 171,458 - - 171,458
Tax benefit from exercise
of stock options - 592,469 - - 592,469
Foreign currency translation
adjustment - - 13,538 - 13,538
Net earnings for the year - - - 5,035,298 5,035,298
-------------- -------------- -------------- ------------- ---------------
Balance at
December 28, 1996 6,351,119 $ 6,768,844 $ 9,786 $ 5,588,649 $ 12,367,279
============== ============== ============== ============= ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
USANA, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
----------------------------------------------------
December 28, December 31,
---------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Increase in cash and cash equivalents
Cash flows from operating activities
Net earnings $ 5,035,298 $ 2,305,248 $ 325,339
Adjustments to reconcile net earnings
to net cash provided by operating activities
Depreciation and amortization 775,819 291,493 283,380
(Gain) loss on sale of property and
equipment (69,020) (66,863) 52,387
Provision for doubtful accounts (2,000) 10,279 320
Deferred income taxes (111,000) (75,000) (46,000)
Changes in assets and liabilities
Receivables 145,063 11,104 134,372
Inventories (4,271,404) (1,240,792) (586,020)
Prepaid expenses and other assets (792,175) (209,079) (62,596)
Accounts payable 3,498,823 850,664 226,789
Other current liabilities 28,470 1,994,042 194,688
-------------- -------------- --------------
Total adjustments (797,424) 1,565,848 197,320
-------------- -------------- --------------
Net cash provided by
operating activities 4,237,874 3,871,096 522,659
-------------- -------------- --------------
Cash flows from investing activities
Receipts on notes receivable 12,623 - -
Increase in notes receivable (86,087) - -
Purchase of land - (1,748,877) -
Construction in progress of office building - (1,508,886) -
Purchase of property and equipment (7,800,906) (900,042) (218,969)
Proceeds from sale of property and equipment 120,400 235,600 129,278
Collection (advances to) of related party
advances - 160,000 (160,000)
-------------- -------------- --------------
Net cash used in
investing activities (7,753,970) (3,762,205) (249,691)
-------------- -------------- --------------
</TABLE>
(Continued)
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
USANA, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Year ended
----------------------------------------------------
December 28, December 31,
---------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from financing activities
(Decrease) increase in cash overdraft - (275,084) 93,001
Proceeds from issuance of long-term obligations - 20,652 -
Principal payments of long-term obligations (14,819) (21,205) (7,011)
Net proceeds from sale of common stock 171,458 2,500,000 -
Increase in line of credit 1,500,000 - -
-------------- -------------- --------------
Net cash provided by
financing activities 1,656,639 2,224,363 85,990
Effect of exchange rate changes on cash 13,538 (3,752) -
-------------- -------------- --------------
Net (decrease) increase in
cash and cash equivalents (1,845,919) 2,329,502 358,958
Cash and cash equivalents at beginning of year 2,976,406 646,904 287,946
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 1,130,487 $ 2,976,406 $ 646,904
============== ============== ==============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 22,800 $ 2,200 $ 1,500
Income taxes 4,375,000 64,300 -
Noncash financing and investing activities
During 1995, the Company acquired real property from a shareholder in exchange for 11,996 shares of common stock
valued at $31,488.
</TABLE>
The accompanying notes are an integral part of these statements.
F-9
<PAGE>
USANA, INC. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1996 and December 31, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the
preparation of the accompanying financial statements follows:
1. Financial statement presentation
The accounting and reporting policies of USANA, Inc. and Subsidiary
(the Company) conform with generally accepted accounting principles
and with general practices in the manufacturing and distribution
industry.
2. Business activity
The Company is engaged in the manufacturing and distribution of
nutritional and personal care products which are sold through a direct
selling marketing system throughout the United States and Canada.
3. Principles of consolidation
The consolidated financial statements include the accounts and operations
of USANA, Inc. and its wholly-owned Canadian subsidiary, USANA Canada,
Inc. USANA, Inc. was incorporated in July of 1992 under the laws of the
State of Utah. USANA Canada, Inc. was incorporated and began operations
in February of 1995. All significant intercompany accounts and
transactions have been eliminated in consolidation.
4. Fiscal year
In 1996, the Company changed its fiscal year to a 52-53 week year, ending
on the Saturday closest to December 31. This change had no material
effect on the 1996 financial statements.
5. Cash and cash equivalents
For financial statement purposes, the Company considers all highly liquid
investments with an original maturity of three months or less when
purchased to be cash equivalents.
F-10
<PAGE>
USANA, INC. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1996 and December 31, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
6. Use of estimates
In preparing the Company's financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ significantly from those estimates.
7. Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method.
8. Depreciation and amortization
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives.
Leasehold improvements are amortized over the shorter of the life of the
respective lease or the service life of the improvements. The straight-
line method of depreciation and amortization is followed for financial
reporting purposes.
9. Revenue recognition and deferred revenue
The Company receives payment for the sales price of its products in cash,
credit card and electronic debit, at the time orders are made by a
distributor. Sales are generally recorded when the product is shipped.
Payments received for unshipped products are recorded as deferred revenue
and are included in other current liabilities.
10. Deferred income taxes
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred income tax assets and liabilities
are provided based on the difference between the financial statement and
tax bases of assets and liabilities as measured by the currently enacted
tax rates in effect for the years in which these differences are expected
to reverse. Deferred tax expense or benefit is the result of changes in
deferred tax assets and liabilities. An allowance against deferred tax
assets is recorded when it is more likely than not that such tax benefits
will not be realized.
F-11
<PAGE>
USANA, INC. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1996 and December 31, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
11. Product return policy
The Company's refund policy provides that a distributor may return
product and sales aids according to the Company's guidelines and
procedures. Returned product that is unused and resaleable will be
refunded at 100% of sales price to the distributor less a 10% restocking
fee up to one year from the date of purchase. Returned product that was
damaged during shipment to the distributor is 100% refundable. Return of
product other than that which was damaged at the time of receipt by the
distributor constitutes potential cancellation of the distributorship.
Product returns are not significant.
12. Research and development
Research and development costs have been charged to expense as incurred.
13. Earnings per share
Earnings per common and common equivalent share are based on the weighted
average number of common and common equivalent shares outstanding during
each period.
14. Fair value of financial instruments
The carrying value of the Company's cash and cash equivalents, notes
receivable, trade receivables, payables and line of credit obligation
approximate their fair values.
15. Translation of foreign currencies
The foreign subsidiary's asset and liability accounts, which are
originally recorded in the appropriate local currency, are translated for
consolidated financial reporting purposes, into U.S. dollar amounts at
period-end exchange rates. Revenue and expense accounts are translated
at the average rates for the period. Transaction gains and losses, the
amounts of which are not material, are included in other income and
expense. Foreign currency translation adjustments are accumulated as a
separate component of stockholders' equity.
16. Common stock
The Company follows the practice of recording amounts received upon
the exercise of options by crediting common stock. No charges are
reflected in the consolidated statements of earnings as a result of
the grant or exercise of stock options. The Company realizes an
income tax benefit from the exercise of certain stock options. This
benefit results in a decrease in current income taxes payable and an
increase in common stock.
F-12
<PAGE>
USANA, INC. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1996 and December 31, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
17. Reclassifications - not material
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform with the 1996 presentation.
NOTE B - INVENTORIES
Inventories consist of the following:
1996 1995
-------------- --------------
Raw materials $ 2,487,907 $ 838,128
Work in progress 455,315 143,942
Finished goods 2,457,529 892,465
Sales aids 998,377 253,189
-------------- --------------
$ 6,399,128 $ 2,127,724
============== ==============
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment and their estimated useful lives consist of the
following:
Years 1996 1995
-------- ------------ -----------
Building 40 $ 5,034,304 $ -
Laboratory and production equipment 5-7 2,337,358 1,188,958
Computer equipment 3-5 2,347,347 542,398
Furniture and fixtures 3-5 684,481 30,805
Automobiles 3-5 285,039 257,435
Leasehold improvements 3-5 - 172,925
------------ -----------
10,688,529 2,192,521
Less accumulated depreciation
and amortization 1,196,779 874,178
------------ -----------
9,491,750 1,318,343
Construction in progress - 1,508,886
Land 1,772,785 1,748,877
Land improvements 285,278 -
------------ -----------
$ 11,549,813 $ 4,576,106
============ ===========
F-13
<PAGE>
USANA, INC. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1996 and December 31, 1995 and 1994
NOTE D - RECEIVABLES
Long-term receivables consist of the following:
1996 1995
------------- -------------
10% note receivable from a company,
due over three years, collateralized
by equipment $ 73,464 $ -
Less current maturities 27,212 -
------------- -------------
$ 46,252 $ -
============= =============
NOTE E - LINE OF CREDIT
In November of 1996, the Company entered into a line of credit agreement
with a bank for $2,500,000. The interest rate is computed at the bank's
prime rate (8.25% at December 28, 1996), or at the option of the
borrower, the LIBOR base rate plus 2.25% (7.88% at December 28, 1996).
The Company had drawn $1,500,000 against the line at December 28, 1996.
The line of credit is collateralized by certain receivables, inventories
and equipment. The line of credit agreement contains restrictive
covenants requiring the Company to maintain certain financial ratios. As
of December 28, 1996, the Company is in compliance with these covenants.
The line of credit agreement expires in May 1997.
NOTE F - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
1996 1995
-------------- --------------
Wages and vacations $ 400,623 $ 99,074
Distributor incentives 614,559 231,819
Income taxes 95,851 1,435,469
Sales taxes 887,487 465,830
Deferred revenue 177,488 76,203
All other 197,525 36,668
-------------- --------------
$ 2,373,533 $ 2,345,063
============== ==============
F-14
<PAGE>
USANA, INC. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1996 and December 31, 1995 and 1994
NOTE G - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
1996 1995
-------------- --------------
11% note payable to a vendor, in
monthly installments of $1,000,
including interest; paid in full
during 1996 $ - $ 14,819
Less current maturities - 10,909
-------------- --------------
$ - $ 3,910
============== ==============
NOTE H - INCOME TAXES
Income taxes (benefit) consist of the following:
1996 1995 1994
-------------- -------------- -------------
Current
Federal and State $ 3,114,000 $ 1,497,000 $ 72,000
Foreign 110,000 - -
-------------- -------------- -------------
3,224,000 1,497,000 72,000
Deferred
Federal and State (111,000) (75,000) (46,000)
-------------- -------------- -------------
$ 3,113,000 $ 1,422,000 $ 26,000
============== ============== =============
The income tax provision reconciled to the tax computed at the federal
statutory rate is as follows:
<TABLE>
<CAPTION
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Federal income taxes at statutory rates $ 2,770,000 $ 1,265,000 $ 119,000
State income taxes, net of federal
tax benefits 269,000 143,000 (16,000)
Difference between U.S. statutory rate
and foreign rate 26,000 - -
Change in valuation allowance - - (70,000)
All other 48,000 14,000 (7,000)
-------------- -------------- --------------
$ 3,113,000 $ 1,422,000 $ 26,000
============== ============== ==============
</TABLE>
F-15
<PAGE>
USANA, INC. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1996 and December 31, 1995 and 1994
NOTE H - INCOME TAXES - CONTINUED
Deferred tax assets and liabilities consist of the following:
1996 1995
-------------- --------------
Deferred tax assets
Allowance for doubtful accounts $ - $ 1,000
Inventory capitalization 324,000 152,000
Sales taxes 37,000 17,000
-------------- --------------
$ 361,000 $ 170,000
Deferred tax liabilities
Accumulated depreciation $ (129,000) $ (49,000)
============== ==============
NOTE I - RELATED PARTY TRANSACTIONS
In July 1995, 11,996 shares were issued to the Company's president in
exchange for certain real property and its associated outstanding
mortgage. The real property received by the Company was then sold and the
corresponding mortgage was paid in full prior to December 31, 1995. In
September of 1995, the Company sold 952,381 shares of its common stock to
a company owned by the Company's president for $2,500,000.
F-16
<PAGE>
USANA, INC. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1996 and December 31, 1995 and 1994
NOTE J - COMMITMENTS AND CONTINGENCIES
1. Operating leases
The Company conducts its Canadian operations in leased facilities under
noncancelable operating leases expiring during January of 1998. The
Company utilizes equipment under a noncancelable operating lease expiring
in October of 1999. The minimum rental commitments under operating
leases are as follows:
Year ending December Facilities Equipment Total
-------------------- ------------- ------------- -------------
1997 $ 64,279 $ 6,274 $ 70,553
1998 5,357 6,274 11,631
1999 - 4,705 4,705
Thereafter - - -
------------- ------------- -------------
$ 69,636 $ 17,253 $ 86,889
============= ============= =============
Rent expense for operating leases in 1996 was $232,000 ($179,000 in 1995
and $114,000 in 1994).
2. Contingencies
The Company is involved in various lawsuits and disputes as plaintiff or
defendant arising in the normal course of business. In the opinion of
management, based upon advice of counsel, the ultimate outcome of these
lawsuits will not have a material impact on the Company's financial
position or results of operations.
3. Employee Benefit Plan
In July, 1994, the Company established an employee benefit plan under
Section 401(k) of the Internal Revenue Code. This plan covers employees
who are at least 18 years of age and have been employed by the Company
longer than three months. The Company makes matching contributions of
$.50 on each $1.00 of contribution up to 6% of the participating
employees compensation. In addition, the Company may make a discretionary
contribution based on profits. The Company's matching contributions vest
at 20% per year beginning with the second year. The Company contributed
$32,750 to the plan during the year ended December 28, 1996, $13,912 for
1995 and zero for 1994.
4. Construction in progress
The Company has entered into contracts for completion of the third floor
of its new facilities. Commitments for these contracts were
approximately $500,000 at December 28, 1996. Construction was completed
in February of 1997.
F-17
<PAGE>
USANA, INC. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1996 and December 31, 1995 and 1994
NOTE K- STOCK OPTIONS
During 1995, the Company adopted the USANA, Inc. Long-Term Stock
Investment and Incentive Plan and the USANA, Inc. Directors' Stock Option
Plan (the Option Plans). The Company reserved 1,400,000 shares and
600,000 shares respectively under the Option Plans. Accordingly, the
Board of Directors has approved the granting of options under the Option
Plans as follows:
Long-Term Stock Investment and Incentive Plan
During 1996 and 1995 officers and key employees have been granted options
to acquire 853,500 shares of common stock. The options were granted at
prices ranging from $3.05 to $21.04 per share, which were the market
prices of the Company's shares on the dates granted. The options vest
periodically through May of 2002. The options expire upon the earlier of
an expiration date fixed by the committee responsible for the
administering of the Plan or ten years from the date of the grant.
Directors' Stock Option Plan
During 1996 and 1995 Company directors have been granted options to
acquire 250,000 shares of common stock. The options were granted at
prices ranging from $3.05 to $21.04 per share, which were the market
prices of the Company's shares on the dates granted. The options vest
periodically through August of 2001. The options expire upon the earlier
of an expiration date fixed by the committee responsible for the
administering of the Plan or ten years from the date of the grant.
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
(FAS 123). Therefore, the Company continues to account for stock
based compensation under Accounting Principles Board Opinion No. 25,
under which no compensation cost has been recognized. Had
compensation cost for the stock based compensation been determined
consistent with FAS 123, the Company's net earnings and earnings per
share would have been reduced to the following pro forma amounts:
1996 1995
-------------- --------------
Net earnings: As reported $ 5,035,298 $ 2,305,248
============== ==============
Pro forma $ 3,834,104 $ 2,124,115
============== ==============
Earnings per share As reported $ 0.80 $ 0.41
============== ==============
Pro forma $ 0.61 $ 0.38
============== ==============
F-18
<PAGE>
USANA, INC. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1996 and December 31, 1995 and 1994
NOTE K - STOCK OPTIONS - CONTINUED
The fair value of these options was estimated at the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1996 and 1995, expected volatility of
46 percent; risk-free interest rate of 6.19 percent; and expected life
of 8.94 years. Dividends were assumed not to be paid during the
period of calculation. The weighted average fair value of options
granted was $19.98 and $5.37 in 1996 and 1995, respectively.
Option pricing models require the input of highly subjective
assumptions including the expected stock price volatility. Also, the
Company's employee stock options have characteristics significantly
different from those of traded options, and changes in the subjective
input assumptions can materially affect the fair value estimate.
Management believes the best input assumptions available were used to
value the options and the resulting option values are reasonable.
Changes in the Company's stock options are as follows:
<TABLE>
<CAPTION>
Weighted
average
Stock Exercise exercise
options price price
------------ ------------ ------------
<S> <C> <C> <C>
Outstanding at January 1, 1995 - $ - $ -
Granted 553,500 3.05-9.75 5.37
Exercised - - -
Canceled or expired - - -
------------
Outstanding at December 31, 1995 553,500 3.05-9.75 5.37
Granted 550,000 11.93-21.04 19.98
Exercised 71,000 3.05 3.05
Canceled or expired - - -
------------
Outstanding at December 28, 1996 1,032,500 3.05-21.04 13.31
============
Exercisable at December 28, 1996 41,500 3.05-9.75 9.39
============
</TABLE>
The options granted during 1996, excluding one individual's options
which expire during 2003, expire during 2006; all previous options
expire during 2005.
F-19
<PAGE>
USANA, INC. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1996 and December 31, 1995 and 1994
NOTE L - INTERNATIONAL OPERATIONS
The Company's operations involve a single industry segment, the
manufacturing and distribution of nutritional and personal care
products. Financial information summarized by geographic area for the
year ended December 28, 1996 is as follows: Prior to 1995, the
Company had no international operations.
<TABLE>
<CAPTION>
1996 Domestic Canada Consolidation
----------------------------------- -------------- -------------- -------------
<S> <C> <C> <C>
Net sales - unaffiliated customers $ 44,720,207 $ 11,979,915 $ 56,700,122
============== ============== =============
Earnings from operations (1) $ 7,657,378 $ 243,577 $ 7,900,955
============== ============== =============
Identifiable assets $ 20,627,987 $ 450,853 $ 21,078,840
============== ============== =============
1995 Domestic Canada Consolidation
----------------------------------- -------------- -------------- -------------
Net sales - unaffiliated customers $ 21,529,993 $ 3,011,313 $ 24,541,306
============== ============== =============
Earnings from operations (1) $ 3,508,834 $ 27,412 $ 3,536,246
============== ============== =============
Identifiable assets $ 9,814,094 $ 359,509 $ 10,173,603
============== ============== =============
</TABLE>
(1) Intercompany transfers between geographic areas are not material.
F-20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 28, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000896264
<NAME> USANA,INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> DEC-28-1996
<CASH> $1,130,487
<SECURITIES> $0
<RECEIVABLES> $128,613
<ALLOWANCES> $0
<INVENTORY> $6,399,128
<CURRENT-ASSETS> $9,039,838
<PP&E> $12,746,592
<DEPRECIATION> $1,196,779
<TOTAL-ASSETS> $21,078,840
<CURRENT-LIABILITIES> $8,582,561
<BONDS> $0
$0
$0
<COMMON> 6,768,844
<OTHER-SE> $9,786
<TOTAL-LIABILITY-AND-EQUITY> $21,078,840
<SALES> $56,700,122
<TOTAL-REVENUES> $56,700,122
<CGS> $11,595,830
<TOTAL-COSTS> $37,203,337
<OTHER-EXPENSES> $247,343
<LOSS-PROVISION> $0
<INTEREST-EXPENSE> $6,915
<INCOME-PRETAX> $8,148,298
<INCOME-TAX> $3,113,000
<INCOME-CONTINUING> $5,035,298
<DISCONTINUED> $0
<EXTRAORDINARY> $0
<CHANGES> $0
<NET-INCOME> $5,035,298
<EPS-PRIMARY> $.80
<EPS-DILUTED> $.80
</TABLE>
