============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-21116
USANA, INC.
(Exact name of registrant as specified in its charter)
UTAH 87-0500306
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3838 West Parkway Blvd.
Salt Lake City, Utah 84120
(Address of principal executive offices, Zip Code)
(801) 954-7100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
The number of shares outstanding of the registrant's common stock as of
August 6, 1997 was 6,367,119.
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<PAGE>
USANA, INC.
Index to Financial Statements and Exhibits
Filed with the Quarterly Report of the Company on Form 10-Q
For the Quarter and Six Months Ended June 28, 1997
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page No.
Consolidated Balance Sheets 3
Consolidated Statements of Earnings - Quarter Ended 4
Consolidated Statements of Earnings - Six Months Ended 5
Consolidated Statements of Cash Flow Six Months Ended 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
PART II. OTHER INFORMATION
Item 1.Legal Proceedings 13-14
Item 4.Submission of Matters to a Vote of Security Holders 14
Item 6.Exhibits and Reports on Form 8-K 14
Signatures 15
2
<PAGE>
USANA, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Unaudited
<TABLE>
<CAPTION>
As of June 28, 1997 December 28, 1996
-------------- -----------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 2,189,172 $ 1,130,487
Accounts receivable, net 33,504 55,149
Income tax receivable - 405,503
Inventories (Note A) 5,285,615 6,399,128
Prepaid expenses and other current assets 1,125,030 661,359
Current maturities of notes receivable 28,601 27,212
Deferred income taxes 233,710 361,000
-------------- -----------------
Total current assets 8,895,632 9,039,838
Property and equipment, at cost (Note B) 11,758,525 11,549,813
Other assets
Deposits on machinery 769,205 423,319
Notes receivable, less current maturities 31,596 46,252
Other 19,618 19,618
-------------- -----------------
Total Assets $ 21,474,576 $ 21,078,840
============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 3,052,350 $ 4,709,028
Line of credit - 1,500,000
Other current liabilities (Note C) 3,102,904 2,373,533
-------------- -----------------
Total current liabilities 6,155,254 8,582,561
Deferred income taxes 180,630 129,000
Stockholders' equity:
Common stock, no par value:
Authorized -- 50,000,000 shares, issued and
outstanding 6,354,119 as of June 28, 1997
and 6,351,119 as of December 28, 1996 6,777,994 6,768,844
Cumulative foreign currency translation adjustment (12,926) 9,786
Retained earnings 8,373,624 5,588,649
-------------- -----------------
Total stockholders' equity 15,138,692 12,367,279
-------------- -----------------
Total liabilities and stockholders' equity $ 21,474,576 $ 21,078,840
============== =================
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
USANA, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
Unaudited
<TABLE>
<CAPTION>
Quarter Ended June 28, 1997 June 30, 1996
--------------- ---------------
<S> <C> <C>
Net sales $ 21,046,000 $ 14,214,782
Cost of sales 4,394,436 3,069,426
--------------- ---------------
Gross profit 16,651,564 11,145,356
Operating Expenses:
Distributor incentives 9,807,114 6,337,838
Selling, general, and administrative 3,970,757 2,304,371
Research and development 298,835 155,706
--------------- ---------------
Total operating expenses 14,076,706 8,797,915
--------------- ---------------
Earnings from operations 2,574,858 2,347,441
Other income (expense):
Interest income 31,560 39,313
Interest expense (233) (472)
Gain on sale of property and equipment 7,066 5,784
Other, net 3,476 (5,585)
--------------- ---------------
Total other income 41,869 39,040
--------------- ---------------
Earnings before income taxes 2,616,727 2,386,481
Income taxes 955,035 917,274
--------------- ---------------
NET EARNINGS $ 1,661,692 $ 1,469,207
=============== ===============
Earnings per common share (Note D) $ 0.26 $ 0.23
=============== ===============
Earnings per common share - assuming dilution (Note D) $ 0.25 $ 0.22
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
USANA, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
Unaudited
<TABLE>
<CAPTION>
Six Months Ended June 28, 1997 June 30, 1996
--------------- ---------------
<S> <C> <C>
Net sales $ 38,700,299 $ 24,768,942
Cost of sales 8,153,486 5,107,184
--------------- ---------------
Gross profit 30,546,813 19,661,758
Operating Expenses:
Distributor incentives 18,155,435 11,154,273
Selling, general, and administrative 7,373,360 4,141,297
Research and development 579,069 283,491
--------------- ---------------
Total operating expenses 26,107,864 15,579,061
--------------- ---------------
Earnings from operations 4,438,949 4,082,697
Other income (expense):
Interest income 43,188 89,147
Interest expense (7,783) (856)
Gain on sale of property and equipment 14,637 5,784
Other, net 13,783 7,547
--------------- ---------------
Total other income 63,825 101,622
--------------- ---------------
Earnings before income taxes 4,502,774 4,184,319
Income taxes 1,717,799 1,596,154
--------------- ---------------
NET EARNINGS $ 2,784,975 $ 2,588,165
=============== ===============
Earnings per common share (Note D) $ 0.44 $ 0.41
=============== ===============
Earnings per common share - assuming dilution (Note D) $ 0.42 $ 0.39
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
USANA, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
<TABLE>
<CAPTION>
SIX MONTHS ENDED June 28, 1997 June 30, 1996
--------------- ---------------
<S> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings $ 2,784,975 $ 2,588,165
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 795,283 285,032
Gain on sale of property and equipment (14,637) (5,784)
Deferred income taxes 178,920 101
Reserve for inventory obsolescence 65,000 -
Changes in operating assets and liabilities:
Accounts receivable 21,645 (115,232)
Income tax receivable 405,503 -
Inventories 1,048,513 (1,883,926)
Prepaid expenses and other assets (809,557) (558,710)
Accounts payable (1,656,678) 509,568
Other current liabilities 729,371 420,597
--------------- ---------------
Net cash provided by operating activities 3,548,338 1,239,811
NET CASH FLOW FROM INVESTING ACTIVITIES:
Principal receipts on notes receivable 13,267 -
Purchases of property and equipment (2,048,872) (3,479,963)
Proceeds from the sale of property and equipment 1,059,514 9,400
--------------- ---------------
Net cash used in investing activities (976,091) (3,470,563)
NET CASH FLOW FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations - (2,616)
Proceeds from the exercise of stock options 9,150 141,825
Increase (decrease) in line of credit (1,500,000) 1,000,000
--------------- ---------------
Net cash provided by (used in) financing activities (1,490,850) 1,139,209
Effect of exchange-rate changes on cash and cash equivalents (22,712) (3,493)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 1,058,685 (1,095,036)
Cash and cash equivalents at beginning of period 1,130,487 2,976,406
--------------- ---------------
Cash and cash equivalents at end of period $ 2,189,172 $ 1,881,370
=============== ===============
Supplemental disclosures of cash flow information
- -------------------------------------------------
Cash paid during the six months ended June 28, 1997 for
Interest $ 7,783 $ 856
Income Taxes 1,364,458 2,482,190
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
Basis of Presentation
The unaudited interim consolidated financial information of USANA, Inc.
and Subsidiary (the "Company" or "USANA") has been prepared in accordance with
Article 10 of Regulation S-X promulgated by the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. In the opinion of management, the accompanying interim
consolidated financial information contains all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the Company's
financial position as of June 28, 1997, and for the quarters and six-month
periods ended June 28, 1997, and June 30, 1996. These financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 28, 1996. The results of operations for
the quarter and six months ended June 28, 1997 may not be indicative of the
results that may be expected for the fiscal year ending December 27, 1997.
NOTE A - INVENTORIES
Inventories consist of the following:
June 28, 1997 December 28, 1996
--------------- -------------------
Raw materials $ 1,440,664 $ 2,487,907
Work in process 814,836 455,315
Finished goods 3,095,115 3,455,906
Reserve for obsolescence (65,000) 0
--------------- -------------------
$ 5,285,615 $ 6,399,128
=============== ===================
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
June 28, 1997 December 28, 1996
-------------- ------------------
Building $ 5,402,931 $ 5,034,304
Laboratory and production equipment 1,315,596 2,337,358
Computer equipment 3,150,792 2,347,347
Furniture and fixtures 1,201,341 684,481
Automobiles 285,039 285,039
-------------- ------------------
11,355,699 10,688,529
Less accumulated depreciation and
amortization 1,659,284 1,196,779
-------------- ------------------
9,696,415 9,491,750
Land 1,772,785 1,772,785
Land improvements 289,325 285,278
-------------- ------------------
$11,758,525 $11,549,813
============== ==================
7
<PAGE>
NOTE C - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
June 28, 1997 December 28, 1996
--------------- -----------------
Employee compensation and
related items $ 524,555 $ 400,623
Distributor incentives 773,796 614,559
Income taxes 449,192 95,851
Sales taxes 555,367 887,487
Deferred revenue 119,157 177,488
Other 680,837 197,525
-------------- -----------------
$3,102,904 $2,373,533
============== =============
NOTE D - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per
Share." SFAS No. 128 is effective for financial statements for periods
ending after December 15, 1997, and requires companies to report both "basic"
and "diluted" earnings per share. A "Basic" earnings per share does not
include the addition of common stock equivalents to the shares outstanding.
"Diluted" earnings per share requires the addition of common stock
equivalents to the shares outstanding. Average shares outstanding is the
denominator used in "basic" earnings per share calculations. Accordingly,
"basic" earnings per share will be higher than "diluted" earnings per share.
This statement replaces Accounting Principles Board ("APB") Opinion No. 15,
"Earnings per Share." The following table illustrates the effect on the
Company of adopting SFAS No. 128.
<TABLE>
<CAPTION>
For the Quarter Ended June 28, 1997
Earnings Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- -------------
<S> <C> <C> <C>
Basic EPS
Earnings available to common shareholders $ 1,661,692 6,352,504 $0.26
=============
Effect of Dilutive Securities
Stock options - 290,186
------------ -------------
Diluted EPS
Earnings available to common shareholders $ 1,661,692 6,642,690 $0.25
============ ============= =============
</TABLE>
Options to purchase 525,000 shares of common stock at $15.66 a share
were outstanding during the quarter. They were not included in the
computation of EPS because their exercise price was greater than the average
market price of the common shares.
<TABLE>
<CAPTION>
For the Quarter Ended June 30, 1996
Earnings Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- -------------
<S> <C> <C> <C>
Basic EPS
Earnings available to common shareholders $ 1,469,207 6,285,850 $0.23
=============
Effect of Dilutive Securities
Stock options - 361,185
------------ -------------
Diluted EPS
Earnings available to common shareholders $ 1,469,207 6,647,035 $0.22
============ ============= =============
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 28, 1997
Earnings Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- -------------
<S> <C> <C> <C>
Basic EPS
Earnings available to common shareholders $ 2,784,975 6,351,811 $0.44
=============
Effect of Dilutive Securities
Stock options - 320,970
------------ -------------
Diluted EPS
Earnings available to common shareholders $ 2,784,975 6,672,781 $0.42
============ ============= =============
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1996
Earnings Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- -------------
<S> <C> <C> <C>
Basic EPS
Earnings available to common shareholders $ 2,588,165 6,282,984 $0.41
=============
Effect of Dilutive Securities
Stock options - 313,681
------------ -------------
Diluted EPS
Earnings available to common shareholders $ 2,588,165 6,596,665 $0.39
============ ============= =============
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY REPORT ON FORM 10Q
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF 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 PART I ITEM 2. MANAGMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CERTAIN FACTORS THAT MAY
AFFECT OPERATING RESULTS] 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.
9
<PAGE>
Results of Operations
Quarters Ended June 28, 1997 and June 30, 1996
Net sales for the quarter ended June 28, 1997 totaled $21.0 million as
compared to $14.2 million for the quarter ended June 30, 1996, an increase
of $6.8 million or 47.9%. The sales growth is primarily the result of an
increase in the number of independent distributors in the United States and
Canada.
Cost of sales, as a percent of net sales, decreased to 20.9% in the second
quarter of 1997 from 21.6% in the second quarter of 1996. The improvement
in the cost of sales percentage is attributed to achieving efficiencies
derived from increased sales (enabling the use of larger batch sizes) and
the ability to utilize more of the Company's previously idle capacity.
Distributor incentives of $9.8 million (46.7% of net sales) for the quarter
ended June 28, 1997 represented an increase of $3.5 million, or 55.6% as
compared to the same quarter in 1996. The increase in the amount of
distributor incentives paid by USANA is primarily the result of a
corresponding increase in commissionable sales. As a percent of net sales,
distributor incentives increased 2.3% to 46.7% in the second quarter of 1997
compared to 44.4% for the quarter ended June 30, 1996. Higher distributor
incentives as a percent of net sales was partially due to sales mix changes
which included a decreased proportion of sales aids (i.e. audio tapes, video
tapes, brochures, miscellaneous literature, and other promotional type
materials), on which no commissions are paid, and also a general maturation
of the Company's distributor network. Management believes that in recent
quarters the total distributor incentives paid, as a percentage of net
sales, have modestly exceeded a level that will enable the Company to reach
profitability objectives. As described below (see Recent Developments), the
Company has adjusted its prices so as to increase the contribution margin of
its sales after cost of sales and distributor incentives.
Selling, general and administrative expenses, during the quarter ended June
28, 1997, totaled $4.0 million or 19.0% of net sales, compared to $2.3
million or 16.2% of net sales in the same quarter of 1996. The $1.7 million
dollar increase in selling, general and administrative expenses is a
function of the Company's sales growth and, to a lesser extent, preparation
for further international expansion. In anticipation of such expansion,
USANA made significant investments in hiring management talent in the third
and fourth quarters of 1996. The Company believes such expenditures are a
primary component to its future growth strategy, both domestically and
internationally.
Research and development expenditures of $298,835 or 1.4% of net sales, for
the quarter ended June 28, 1997 represented an increase of $143,129 (91.9%)
over similar expenditures incurred for the same quarter in 1996. The
increase in research and development expenditures is driven primarily by the
preparation of new products introduced at the Company's annual international
convention (the "Convention") and driven secondarily by the cost of
developing formulations of both new and existing products for new markets.
For the most recent quarter, USANA posted record net earnings of $1.7
million or $0.26 per common share on record revenue of $21.0 million versus
net earnings of $1.5 million or $0.23 earnings per common share on revenue
of $14.2 million for the second quarter of 1996. Net earnings for the
second quarter of 1997 represented 7.9% of net sales as compared to a profit
margin of 10.3% for the same period in 1996. The decrease in profitability
is the result of increased distributor incentives and SG&A expenditures (as
described above).
Quarter-to-quarter (June 28, 1997 versus March 29, 1997) growth evidenced
significant progress. Second quarter per-share earnings increased 44.4%
over the $0.18 per share generated in the first three months of 1997, with
revenue up 18.6% to $21.0 million versus the $17.7 million reported in the
first quarter.
10
<PAGE>
Six Months Ended June 28, 1997 and June 30, 1996
Net sales, for the six months ended June 28, 1997, totaled $38.7 million, an
increase of $13.9 million or 56.0%, over the $24.8 million for the same
period in 1996. The increase can be attributed primarily to an increase of
the Company's independent distributor base in United States and Canada.
Cost of sales, as a percent of net sales, increased to 21.1% for the six
months ended June 28, 1997 from 20.6% for same period in 1996. The increase
in the cost of sales percentage is primarily attributed to the rising costs
of underlying raw materials and direct labor with no accompanying increase
in the price the Company charges for its products.
The Company's distributor incentives of $18.2 million (47.0% of net sales)
for the six months ended June 28, 1997 represented an increase of $7.0
million, or 62.5% as compared to the six months ended June 30, 1996. The
increase in the amount of distributor incentives paid by USANA is primarily
the result of a corresponding increase in commissionable sales. As a
percent of net sales, distributor incentives increased 1.8% to 47.0% for the
six months ended June 30, 1997 when compared to 45.2% for the same period in
1996. Higher distributor incentives as a percent of net sales resulted from
a change in the sales mix, which included a decreased proportion of sales
aids (on which no commissions are paid), and also a general maturation of
the Company's distributor network. Management believes that, in recent
quarters, the total distributor incentives paid, as a percentage of net
sales, have modestly exceeded a level that will enable the Company to reach
profitability objectives. As described below (see Recent Developments) the
Company has adjusted its prices so as to increase the contribution margin of
its sales after cost of sales and distributor incentives.
Selling, general and administrative expenses, during the first six months of
1997, totaled $7.4 million or 19.1% of net sales, compared to $4.1 million
or 16.5% of net sales in the same quarter of 1996. The $3.3 million
increase in selling, general and administrative expenses is a function of
the Company's sales growth and, to a lesser extent, preparation for
international expansion. Management believes the investments the Company
has made in selling, general and administrative type expenditures in the
first six months of 1997 to be key contributing factors to its future
success both domestically and internationally.
Research and development expenditures of $579,069 or 1.5% of net sales for
the six months ended June 28, 1997 represented an increase of $295,578
(104.3%) over similar expenditures incurred for the same period in 1996. The
increase in research and development expenditures is driven primarily by the
preparation of new products introduced at the Convention and driven
secondarily by the cost of developing formulations of both new and existing
products for new markets.
For the most recent six-month period, USANA reported net earnings of $2.8
million or $0.44 per common share on revenue of $38.7 million. In
comparison, the Company posted net earnings of $2.6 million or $0.41 per
common share on revenue of $24.8 million for the first six months of 1996.
Recent Developments
At the Convention, held July 17-19, 1997, in Salt Lake City, Utah, the
Company formally announced its plans to expand its presence into the
countries of Australia and New Zealand during fiscal 1998. Management
believes the market potential of Australia and New Zealand, the relative
ease of entry into the two countries, and their gateway position into Asia
combine to make expansion into Australia and New Zealand an attractive
option. The Company also intends to make its products available in the
Caribbean in fiscal 1998.
11
<PAGE>
At the Convention, the Company also introduced a broad repricing strategy
across its product line, structured so as to improve its overall product
contribution margins. Under the new price structure, the Company has
increased prices on certain of its products while reducing prices on others.
These announced price changes are the first in the Company's five-year
history. Management does not anticipate that the price changes will have an
adverse effect on unit sales growth or the Company's distributor base.
Also introduced at the Convention were several distributor retention
programs. These programs should improve the bottom line for both the
Company and its distributors. The programs include a co-branded credit card
offered through MBNA America (bearing USANA's logo) and a telecommunications
program offered through UniDial Communications. A distributor stock
purchase plan was also launched at the convention.
The Company distributes the majority of its products via United Parcel
Service ("UPS"). On August 4, 1997, UPS union workers initiated a strike.
The Company believes it can continue effectively distributing its products
for the duration of the strike; however, no assurance can be given that the
distribution alternatives available to the Company will fulfill its long-
term needs. On July 30, 1997, in anticipation of the UPS strike, the
Company began using the United States Postal Service to distribute its
products in the United States. There can be no assurance that the Company
will not suffer materially adverse consequences as a result of the UPS
strike.
Liquidity and Capital Resources
At June 28, 1997, current assets of the Company were approximately $8.9
million and current liabilities totaled approximately $6.2 million,
resulting in net working capital of $2.7 million compared to net working
capital of $.5 million at December 28, 1996, an increase of $2.2 million.
The Company's current ratio was 1.44 to 1 at June 28, 1997, as compared to
1.05 to 1 at December 28, 1996. Cash and cash equivalents increased from
$1.1 million at December 28, 1996 to $2.2 million as of June 28, 1997, an
increase of $1.1 million. The increase in cash and the Company's current
ratio is primarily the result of cash generated from operations.
During the first six months of 1997, the Company spent approximately $2.0
million on property and equipment. To assist the Company in funding the
acquisitions, USANA entered into a sale leaseback agreement with an
unrelated, third party leasing company. The agreement called for the sale
of approximately $1,000,000 of book value of equipment held by the Company.
Proceeds of one million dollars were received on March 13, 1997.
During the six months ended June 28, 1997, the Company's management
demonstrated progress in its efforts to decrease inventory levels.
Inventory decreased by $1.1 million (17.4%) from the amount reported at
December 28, 1996 of $6.4 million to $5.3 million at June 28, 1997.
On May 30, 1997, the Company re-negotiated its line of credit. The new
terms call for an increase in the available line to $5.0 million from the
previously available $3.5 million. The line of credit agreement expires in
May 1998. The interest rate is computed at the bank's prime rate, or at the
option of the Company, the LIBOR base rate plus 2.25%. Certain receivables,
inventories, and equipment collateralize the line of credit. The line of
credit agreement also contains restrictive covenants requiring the Company
to maintain certain financial ratios. As of June 28, 1997, the Company was
in compliance with these convenants. The Company paid off the balance of
$1.5 million that existed at December 28, 1996, and there was no outstanding
balance as of June 28, 1997.
12
<PAGE>
The Company expects to spend between $750,000 and $1.0 million in the third
quarter of 1997 on administrative and production software and hardware as
well as peripheral expenditures such as vendor training.
The Company believes that its current cash balances, the available line of
credit, and cash provided by operations will be sufficient to cover its
needs for the next twelve months. In the event the Company experiences an
adverse operating environment or unusual capital expenditure requirements,
additional financing may be required; however, no assurance can be given
that additional financing, if required, would be available on favorable
terms.
Certain Factors That May Affect Operating Results
When used in this report, the terms "believes," "anticipates," "expects," and
similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revisions to forward-
looking statements that may be made to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
Important factors that may cause results to differ from expectations were
reported in the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 28, 1996 and in the Quarterly Report on Form 10-Q for the
quarter ended March 27, 1997. Except as noted elsewhere in this report
(such as the recent UPS strike), the factors identified in those previously
filed reports continue to be significant considerations for the Company.
PART II. OTHER INFORMATION
Item 1.LEGAL PROCEEDINGS
On March 6, 1996, International Nutrition Company ("INC") filed a patent
infringement action against eighteen defendants, including USANA, alleging
infringement of U.S. patent number 4,698,360. The 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. Having conducted a thorough
investigation of the patent and the allegations made in the complaint, USANA
believes that its manufacture and sale of the Proflavanol product does not
infringe any valid claim of the asserted patent. USANA intends to
vigorously defend its right to continue providing its Proflavanol product
to its customers and distributors. There can be no assurance, however, that
USANA will succeed in its defense of this matter.
On April 17, 1996, an unidentified party filed a request with the United
States Patent and Trademark Office (PTO) to reexamine the validity of the
patent now being asserted against USANA. 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 written Office Action rejecting the validity of
each of the claims of the patent based on a number of grounds. The owner of
the patent has denied those rejections, and a final determination as to the
patent's validity has not yet been issued by the PTO. However, if the PTO's
rejection of the patent stands, INC would be precluded from proceeding with
its lawsuit against USANA.
13
<PAGE>
On March 21, 1997, the Federal Judge responsible for the lawsuit stayed the
action until the PTO rules on the validity of the patent. Also, the Judge
stayed the action until another lawsuit in France is resolved. That lawsuit
does not involve USANA, but involves the question of whether INC has any
ownership rights in the '360 patent. On March 25, 1997, the French court in
that action ruled that INC does not own the '360 patent. If that ruling is
upheld, INC may be barred from proceeding with the patent infringement
action against USANA.
Item 4. Submission of Matters to a Vote of Security Holders
At its Annual Meeting of Shareholders on May 29, 1997, 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) Approval of the Board of Directors' selection of Grant Thornton
LLP, as the Company's independent certified public accountants.
A total of 5,362,661 shares (approximately 84%) 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:
# Shares Abstaining/
Name # Shares For # Shares Against Withheld
- ------------------- ------------ ---------------- -------------------
Dr. Myron Wentz 5,359,660 0 1,750
David Wentz 5,354,555 25 6,730
Ronald S. Poelman 5,359,535 25 1,750
Dr. Suzanne Winters 5,359,560 0 1,750
Robert Anciaux 5,359,435 25 1,850
2. For the ratification of Grant Thornton LLP as the independent
certified accountants of the Company as follows:
# Shares For # Shares Against # Shares Abstaining
------------ ---------------- -------------------
5,357,803 2,400 1,750
Broker non-votes were counted as abstentions on matter 2 above.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Item 601 Exhibit No. and Description
11 Statement re Computations of Per Share Earnings (included
in Note D to interim financial statements)
27 Financial Data Schedule
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 7, 1997 /s/ Gilbert A. Fuller
- ------------------------- -----------------------------
Date Gilbert A. Fuller
Vice President of Finance and
Principal Financial Officer
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