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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended December 27, 1997
[ ] 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 (I.R.S. Employer
of 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
no par value
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [X]
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 25, 1998 was approximately $66,973,581.
The number of shares outstanding of the registrant's common stock as of March
25, 1998 was 6,417,119.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive Proxy Statement for the registrant's 1998 Annual Meeting
of Shareholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this Form 10-K
are incorporated by reference into Part III of this Form 10-K Annual Report.
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USANA, INC.
FORM 10-K
For the Fiscal Year Ended December 27, 1997
INDEX
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Part I
Item 1 Business 1
Item 2 Properties 12
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 14
Part II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters 14
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition 16
Item 8 Financial Statements and Supplementary Data 32
Item 9 Changes in and Disagreements with Accountants and Financial Disclosure 33
Part III
Item 10 Directors and Executive Officers of the Registrant 33
Item 11 Executive Compensation 34
Item 12 Security Ownership of Certain Beneficial Owners and Management 34
Item 13 Certain Relationships and Related Transactions 34
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 35
Signatures
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
USANA, Inc. ("USANA") was incorporated in Utah on July 20, 1992, as a
wholly-owned subsidiary of Gull Laboratories, Inc. ("Gull"). Initially, the
Company operated as Gull "Health Products Division," which performed contract
manufacturing and packaging of natural products. Gull divested itself of USANA
in 1993 by distributing the Common Stock of USANA as a dividend to Gull's
shareholders in exchange for the assets owned by Gull and used in the operations
of the Health Products Division. USANA's primary markets have been in the United
States and Canada. The Company recently commenced operations in the Caribbean,
Australia and New Zealand. USANA manufactures and distributes nutritional,
health, personal and skin care products that meet the needs of the human body
through increased efficacy, unqualified safety and outstanding quality and is
committed to continuous product innovation and improvement through sound
scientific research and to rewarding its distributors.
Myron Wentz, Ph.D., a recognized expert in viral disease diagnosis and cell
culture, and a pioneer in the development of viral diagnostic testing
procedures, founded the Company. Dr. Wentz also founded Gull in 1974 and
developed the first commercially-available laboratory test kit for the diagnosis
of Epstein-Barr Virus infections. In 1990, Dr. Wentz launched the Gull Health
Products Division to provide testing services and manufacturing of herbal and
other natural products. Based on his experience in cellular nutrition and
analysis of available human nutrition products, he created USANA to develop,
manufacture and distribute its own line of natural nutritional products. A
unique network marketing program was established and began selling
the newly developed products in September 1992. With the spin-off of USANA from
Gull, USANA inherited the biochemical analytical laboratory and health
supplement manufacturing equipment. Initial working capital following the
spin-off was provided by Dr. Wentz.
USANA's principal executive office and manufacturing facility are located
at 3838 West Parkway Boulevard, Salt Lake City, Utah 84120. Its telephone number
is (801) 954-7100.
USANA has four wholly-owned subsidiary corporations: USANA Canada, Inc.
("USANA Canada"), incorporated February 3, 1995; USANA Australia Pty Ltd ("USANA
Australia") incorporated March 25, 1997; USANA New Zealand Limited ("USANA New
Zealand") incorporated March 18, 1997; and USANA Trading Co., Inc., a foreign
sales corporation, incorporated on September 1, 1997. As used in this report,
the term "Company" refers collectively to USANA and its subsidiaries.
<PAGE>
FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company is principally engaged in a single business segment; the
manufacture and distribution of nutritional, personal care, skin care, and
weight management products. Information for each of the Company's most recent
five fiscal years, with respect to the amounts of revenue from sales to
unaffiliated customers, operating profit and identifiable assets of this segment
is set forth under Item 6 of this Report.
DISTRIBUTION AND MARKETING
USANA products are marketed and distributed through an expanding and
committed network marketing organization. The distribution of products through
network marketing and direct selling channels is a rapidly growing industry.
According to industry reports, the worldwide distribution of goods and services
through these channels exceeded $80 billion in 1997. The emergence of readily
available means of mass communication such as personal computers, facsimiles,
satellite conferencing, and the Internet have contributed to the rapid growth of
direct selling.
Generally speaking, network marketing is "word-of-mouth" direct selling
through a network of vertically organized distributors who purchase products at
wholesale from the manufacturer and then make retail sales to consumers. Network
marketing is gaining in popularity in the Unites States, Canada, Mexico, and
Pacific Rim countries as a viable alternative to traditional retail and mail
order marketing. The concept of network marketing is based on the strength of
personal recommendations that frequently come from friends, neighbors, relatives
and close acquaintances. Many persons whose first contact is as retail consumers
become distributors themselves, forming the "downline" of the distributor
introducing the company and its products to them.
The Company believes it is well situated to compete successfully in both
the nutritional supplement and network marketing industries. The Company
considers its strong, high-quality product line and its unique distributor
compensation plan (the "Plan") to be the primary reasons for its current and
future success. The Company spends between 1.0% and 1.5% of sales annually for
research and development efforts led by a team of scientists committed to
differentiating USANA's products through their efficacy and quality. USANA's
Compensation Plan, a variation of the "binary concept," is distinctive for its
equitable distributor payouts, creating appropriate incentives for sales of the
Company's products.
The Plan provides several opportunities for distributors to earn
compensation, provided that they are willing to continuously work at building
and training their downline organization(s) to attain and maintain sales of the
Company's products to end users. Each distributor must purchase and sell
product in order to earn commissions and bonuses; therefore, a distributor
cannot simply recruit others for the purpose of developing a downline and earn
income passively. There are three methods for distributors to earn compensation
under the Plan: (1) through retail markup on product sales; (2) earning
commissions by generating commissionable sales volume ("sales volume points") in
their downline(s); and (3) participating in the Leadership Bonus pool that is
paid to distributors who meet the Company leadership requirements.
<PAGE>
The primary participant in the Company's network marketing program is the
distributor. Virtually any person or entity can be a distributor. Individuals
who are exposed to one or more of the Company's products and who desire either
to purchase more products for personal consumption or to sell those products to
others become distributors by being "sponsored" into the program by another
distributor. The Company believes many of its distributors are experienced
network marketing participants who have left other opportunities in favor of the
Company because of (i) the exceptional quality of the Company's products, (ii)
the fair and comparatively generous compensation plan, and (iii) the weekly
payments of commissions and bonuses rather than the monthly system employed by
many network marketing programs. An individual can become a distributor by
completing a distributor application and purchasing a distributor kit from the
Company.
Once the distributorship is established and recognized by the Company, the
distributor can order product directly from the Company, subject to certain
limitations and restrictions. For example, a distributor may not purchase more
products during any four-week period than the distributor can reasonably expect
to sell or personally consume during that same period. Once established, a
distributorship continues until terminated by either the Company or the
distributor. Training distributors about the Company, its products, the Plan,
and how to effectively and legally engage in network marketing is provided
primarily by a distributor's sponsor and others in the "upline." To facilitate
such training, the Company has prepared a variety of training materials and
sales aids, as well as a detailed policies and procedures manual and a
description of the Company's Plan. Although the Company sponsors and conducts
regional, national and international distributor conventions and intensive
leadership training seminars, it undertakes no effort to provide individualized
training to any of its distributors. Distributors may not sell competitive
products to other USANA distributors or solicit USANA distributors to
participate in another network marketing opportunity. There are also
restrictions on advertising and making representations or claims concerning the
products or the compensation programs of USANA.
The Company systematically reviews alleged reports of distributor
misbehavior. If USANA determines that a distributor has violated any of the
distributor policies and procedures, it may either terminate the distributor's
rights completely or impose sanctions such as warnings, probation, withdrawal or
denial of an award, suspension of privileges of a distributorship, withholding
commissions until specific conditions are satisfied, or other appropriate
injunctions at the Company's discretion.
The Company revised the criteria it uses to define its independent
distributor base in the third quarter of 1997. A "current distributor" is one
who has made a purchase in the most recent twelve-month period. Management
believes the new definition of current distributors provides a more meaningful
basis on which to evaluate the Company's business. As of December 27, 1997, the
Company had approximately 84,000 "current" distributors throughout the United
States, Canada, Puerto Rico, and the Caribbean.
In the third quarter of 1997, the Company introduced three new distributor
benefit programs designed to strengthen distributor affinity for the Company and
its products. First, the Company began enrolling distributors in its
Distributor Stock Purchase Plan (DSPP). The DSPP allows distributors to
purchase the Company's stock at market prices through commission deductions; the
plan is administered by a registered broker-dealer. Second, the Company
contracted with a long distance carrier to provide long distance, calling card
service and residential toll free service to its distributors at competitive
rates. Presently, distributors in the U.S. and parts of Canada who otherwise
may qualify,
<PAGE>
may participate in the DSPP and the telecommunications program. Third, the
Company introduced in the U.S. a co-branded credit card, issued by a large
credit card processor, with competitive terms to its distributors. Distributors
who are enrolled in the credit card and long distance programs can earn
additional commissionable sales volume on purchases made by their downline(s).
Since its inception, the Company has experienced a continual increase, as a
percent of net sales, in the amount of commissions and bonuses (distributor
incentives) paid to its distributors. To better manage distributor incentives,
the Company introduced a re-pricing strategy in the third quarter of 1997. The
new price structure creates a spread between the price the distributor pays for
the product and the sales volume points associated with the product. At the same
time, the Leadership Bonus pool was increased from 2% to 3% of total sales
volume points. Management continues to monitor the amount of distributor
incentives paid as a percent of net sales and will, when necessary, adjust the
Plan to prevent distributor incentives from exceeding acceptable levels or
having a significant adverse effect on earnings.
The Company also introduced a Preferred Customer Program in the third
quarter of 1997. The Preferred Customer Program was specifically designed for
customers who desire to purchase the Company's products for themselves, while
choosing not to become independent distributors. To become a Preferred Customer,
a customer must: (1) pay a one-time account set up fee of $5; (2) execute a
USANA Preferred Customer Agreement; and (3) agree to purchase a minimum of $20
of the Company's products each four-week rolling period. The Company believes
this program gives it access to a market that would otherwise be missed by
targeting customers who enjoy USANA products but prefer a mail order type
relationship with the Company. Preferred Customers may not engage in retail
sales of products purchased through the program, although they may become
distributors at any time if they desire. Preferred Customers are not eligible to
earn commissions. The Company had approximately 9,000 Preferred Customers at
December 27, 1997.
MANUFACTURING
In contrast to many of its competitors, the Company has its own
manufacturing facilities. USANA's manufacturing and packaging operations are
housed in the Company's new 98,000 square foot facility in Salt Lake City, Utah.
USANA's production facility is registered with the U.S. Food and Drug
Administration ("FDA"), the Canadian Health Protection Branch ("HPB"), and
Australia's Therapeutic Goods Administration ("TGA"). The Company voluntarily
complies with pharmaceutical level Good Manufacturing Practices ("GMPs").
The Company's manufacturing facility currently produces an average of more
than 30 million tablets a month using approximately 50% of equipment capacity.
The Company's packaging facility currently fills an average of more than 300,000
bottles a month using approximately 60% of equipment capacity. The packaging
facility also packages the Company's skin care products into tubes. Production
capacity is dependent on (1) equipment capacity, (2) personnel of the Company,
and (3) its ability to employ these resources in an effective and efficient
manner. Current capacity should be sufficient to meet the Company's needs and
accommodate growth for the next 12 months.
SOURCE AND AVAILABILITY OF RAW MATERIALS
The vast majority of raw materials used in manufacturing the Company's
products are available from a number of suppliers. Increasing demand caused a
worldwide shortage of natural Vitamin E powder in 1996. This shortage continued
throughout 1997 and still exists in 1998. The Company handled the shortage
initially by manufacturing and supplying a separate natural Vitamin E
<PAGE>
tablet and then providing its customers with a natural Vitamin E gel tab. In
1997, the Company introduced new products that contain a more readily available
natural Vitamin E powder. The Company continues to work with suppliers in an
attempt to secure long-term agreements for dependable natural Vitamin E
delivery. USANA attempts to assure the availability of many of its raw materials
by contracting in advance for its annual requirements. All suppliers of the
Company are evaluated to ensure compliance with stringent internal requirements.
As evidenced by the natural Vitamin E powder shortage, the Company has been able
to find alternative sources of raw materials when needed and believes it will be
able to do so in the future.
RESEARCH, DEVELOPMENT, AND QUALITY CONTROL
The Company carries on a significant program of research and development
predicated upon proven scientific research methodologies and employing qualified
scientists and researchers. In 1997, the Company invested approximately $1.3
million, or 1.5% of net sales, in research and development activities. The
Company will continue to employ its resources in the research and development of
new products and the reformulation of existing products. The mission of the
Company'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.
USANA has three laboratories in its facility, a microbiological testing
laboratory, an analytical chemistry laboratory, and a research and development
laboratory. The microbiological laboratory is the primary quality control
facility that tests for product contamination in both raw materials and finished
goods. In the Company's analytical chemistry laboratory, scientists perform
tests on the chemical composition of both raw materials and finished products
and conduct stability tests on finished products. Chemical assays for vitamins
and mineral constituents are performed under United States Pharmacopeia ("USP")
or other validated methods. The R&D laboratory is fully equipped to handle
analytical testing of new raw ingredients, raw material extraction research, in
--
vitro antioxidant testing, cell-culture procedures and human bio-availability
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studies. The Company continues to acquire additional instrumentation enhancing
its ability to perform these tests.
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, 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 permit
substantiated, truthful and non-misleading statements of nutritional support to
be included on labels. These statements include describing general well being
from consumption of a dietary ingredient in affecting or maintaining structure
or function of the body.
<PAGE>
Other laws and regulations are intended to prevent the use of deceptive or
fraudulent practices that have sometimes been inappropriately associated with
legitimate 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, little or no emphasis on
the sale of products, high-pressure recruiting tactics, 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
requirements in other countries. These requirements may differ considerably
from those previously encountered and 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.
PRODUCT GROUPS
The Company's current product lines can be separated into five general
categories: (1) nutritionals; (2) skin and personal care; (3) weight management;
(4) sales aids; and (5) other. In 1997, the nutritionals product line
constituted approximately 82% of the Company's consolidated sales. USANA
Essentials and Proflavanol(R) accounted for approximately 41% and 22%,
respectively, of consolidated sales in 1997. Both USANA Essentials and
Proflavanol(R) are classified within the nutritionals product line. No other
products or product lines account for more than 10% of consolidated sales.
The following product descriptions are of U.S. products. Canadian,
Australian, and New Zealand products may differ due to local regulatory
statutes.
Nutritional Products
USANA's nutritional product line includes antioxidants, minerals, vitamins,
other nutritional supplements, meal replacement drinks, fiber drinks, and an
energy bar. USANA's nutritional products are formulated to provide optimal
absorption, assimilation, and efficacy. The principal products in the USANA
nutritionals line include the Mega Antioxidant, Chelated Mineral,
Proflavanol(R), PolyC, CalMag Plus, Melatonin KL, OptOmega, Nutrimeal, Fibergy,
Cranberry Drink, Kids Choo-ables and Gold Bars.
Skin Care Products
USANA's Skin Care line incorporates several products designed as a total
skin protection system. Natural oils, emollients, antioxidants and botanical
extracts are the main focus of the skin care formulations. The USANA Skin Care
Line consists of 5-Step Antioxidant Skin Care System, Vital Zomes(R) Serum
Replenisher, Revitalizing Hydrating Treatment and USANA(R) Sunscreen. 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. The Company subcontracts with third-party
manufacturers to produce and package the Personal Care product line according to
formulations developed by USANA.
<PAGE>
Weight Management Products
USANA's LEAN Program provides a comprehensive approach to weight loss and
healthy living. Its underling principles, Lifestyle management, Education,
Activity, and Nutrition literally spell out the LEAN philosophy. Under the
direction of world-renown experts, the USANA LEAN Program utilizes the latest
discoveries in biochemistry, psychology, and exercise physiology.
The complete USANA LEAN Program comes in a custom gym bag complete with a
program guide; a physical activity guide and videos; a motivational audio
cassette series; a recipe book; calipers to accurately measure body fat; USANA
LEAN Nutrimeal; and the USANA LEAN Formula - a unique combination of botanical
extracts that helps expedite the conversion of fat to muscle.
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 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
videotapes, which are produced by third parties.
<PAGE>
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 any of the last three fiscal years. 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.
GROWTH STRATEGY
In addition to its continuing mission to introduce new, innovative and
scientifically sound products, attract new distributors and increase awareness
of the Company's product line and compensation program, the Company intends to
build on its strong performance in the United States and Canada to become a
leading distributor of nutritional, health and personal care products worldwide.
The Company's strengths in science, management and quality products will be the
basis for this expansion. The Company has considered international expansion
and determined that its first move outside North America would be to Australia
and New Zealand. The Company began marketing products through independent
distributors in Australia and New Zealand during the first quarter of fiscal
year 1998. This initial international expansion effort will be followed by
marketing launches in other nations as regulatory and legal preparations can be
made and as appropriate infrastructure can be established.
INTERNATIONAL OPERATIONS
USANA Canada's operations consist mainly of a warehouse and distribution
facility. USANA Canada receives product shipments and stores them in inventory.
Orders are received at the Company's order entry call center facilities in Salt
Lake City or Tooele, Utah. Orders are then printed, packed and shipped by USANA
Canada. All systems, product formulations, order entry, customer service,
research and development, accounting, general management, and most sales and
marketing functions are provided for USANA Canada out of Salt Lake City, Utah,
by the Company. USANA Canada both sells its product and pays commissions in
U.S. dollars.
Canada has become a significant growth market for the Company, in part
because of the similar language and cultural backgrounds, geographic proximity,
and environmental concerns shared by Canada and the U.S. In fiscal year 1997,
the Company experienced 118.3% growth in sales in Canada compared to 32.0% in
the USA. USANA Canada accounted for approximately 50% of the growth in
consolidated net sales in 1997. Sales in Canada represented 30.8% and 21.2% of
consolidated sales in fiscal 1997 and 1996, respectively.
The Company commenced operations in Australia and New Zealand in February
1998. The Company does not expect its total investment in the Australia and New
Zealand operations to exceed $3.5 million.
The Company anticipates that, as the scope of its international operations
is expanded, it may form additional subsidiaries to facilitate such
international operations as circumstances may dictate. Transactions between the
parent and subsidiaries are made at cost or transferred according to prices
established by the Company.
<PAGE>
Information for each of the Company's last three fiscal years with respect
to the amounts of revenue, operating income, and identifiable assets attributed
to domestic and international operations, is set forth in Note L of the Notes to
Consolidated Financial Statements appearing in Item 8 of this Report, and such
information is incorporated herein by reference and made part hereof.
COMPETITION
USANA competes with many other companies in the business of manufacturing
and distributing 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
the successful introduction of new products. Some of the Company's competitors
are larger and more established than the Company and possess greater financial
and other resources than the Company. Moreover, many competing products are sold
through 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
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 Amway
Corporation, Avon Products, Herbalife International, Interior Design
Nutritionals (NuSkin), Nature's Sunshine, and Rexall Showcase International. See
"Risk Factors -Competition."
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. The Company does
not own any patents or patent applications and has no immediate plans to seek
patent protection of any of its products in the foreseeable future, although it
will do so when appropriate. The Company does not believe that the lack of
patents in any way will adversely affect the Company's ability to compete in the
nutritional supplement or personal care industry.
SEASONALITY AND INFLATION
The business of the Company is not subject to significant seasonality.
Inflation did not have a material effect on the Company's business or results of
operations in the past year.
<PAGE>
BACKLOG
The Company typically ships product within 72 hours after the receipt of
the order. As of December 27, 1997, there was no significant backlog.
WORKING CAPITAL PRACTICES
The Company maintains significant amounts of inventory in stock in order to
provide a high level of service to its independent distributors and preferred
customers. Substantial inventories are required to serve the needs of USANA's
dual role as manufacturer and distributor.
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 24, 1998, the Company had approximately 359 employees. None
of the Company's employees are represented by a collective bargaining agreement
and the Company has experienced no work stoppages. The Company believes its
relationship with its employees is good and does not foresee a shortage in
qualified personnel to operate the business.
Item 2. PROPERTIES
USANA's general corporate, executive, administrative, manufacturing,
warehousing, and research functions occupy a 98,000 square foot structure on 16
acres in Salt Lake, Utah. The Company's headquarters occupy 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 feet are occupied by executive and administrative
personnel, distributor services, research and development, and three scientific
laboratories. The Company believes that its headquarters facility and the
available property at this site (consisting of 8 unimproved acres) will prove to
be adequate for anticipated growth. Administrative space in the building is
almost fully utilized and production capacity is currently running at 50%.
<PAGE>
In addition to its corporate headquarters, the following table summarizes,
as of March 13, 1998, the Company's leased office and distribution facilities in
each country where the Company currently has operations.
Approximate
Location Function Square Feet
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Tooele, Utah, USA Call center 11,200
Ontario, Canada Warehouse/distribution center/office 17,876
Sydney, Australia Central office/call center/
warehouse/distribution center 20,000
Auckland, New Zealand Warehouse/distribution center/office 3,801
The Company leases these facilities on terms that reflect the standard
commercial rates in the locations indicated. All leases are with unaffiliated
third parties and the terms of such lease agreements are deemed by the Company
to be commercially reasonable. Total monthly lease commitments for these
properties average approximately $33,000 and the Company is in compliance with
all terms of the several agreements. The Company considers these facilities to
be adequate to accommodate the needs of the Company, including anticipated
growth, for at least the next 12 months.
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 "`360 patent"). The
complaint, filed in the United States District Court for the District of
Connecticut, alleges that USANA's Proflavanol(R) product violates the patent.
The complaint seeks preliminary and permanent injunctions against USANA that
would prohibit further sales of the Proflavanol(R) product. INC also seeks
monetary damages, including any profits lost by INC as a result of the alleged
infringement, damages suffered by INC resulting from the alleged infringement,
and attorneys' fees and costs incurred by INC. Having conducted a thorough
investigation of the patent and the allegations made in the complaint, USANA
believes that its manufacture and sale of the Proflavanol(R) product does not
infringe any valid claim of the asserted patent. USANA intends to vigorously
defend its right to continue providing its Proflavanol(R) product to its
customers and distributors. There can be no assurance, however, that USANA will
succeed in its defense of this matter.
On April 17, 1996, an unidentified party filed a request with the United
States Patent and Trademark Office (PTO) to reexamine the validity of the patent
now being asserted against USANA. The PTO has since confirmed the validity of
each of the patent claims in view of the particular prior art cited by the
unidentified party.
<PAGE>
On March 21, 1997, the Federal Judge responsible for the lawsuit ordered
that the action not proceed until another lawsuit in France is resolved. That
lawsuit does not involve USANA, but involves the question of whether INC has any
ownership rights in the `360 patent. On March 25, 1997, the French trial court
in that action ruled that INC does not own the `360 patent. That decision is
now on appeal to the French appellate court. If that ruling is upheld, INC may
be barred from proceeding with the patent infringement action against USANA.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's shares are traded on the Nasdaq Stock Market under the symbol
USNA. The following table shows the range of high and low sales prices for the
Company's stock as quoted by Nasdaq for fiscal 1997 and the third and fourth
quarters of 1996 and as quoted by the Electronic Bulletin Board for the first
and second quarters of 1996.
MARKET PRICES 1997 1996
---------------------------------------------------------------------
High Low High Low
---- --- ---- ---
1st Quarter $20.50 $14.125 $12.00 $ 8.75
2nd Quarter 17.75 9.25 31.25 11.125
3rd Quarter 20.00 12.00 29.25 18.75
4th Quarter 21.50 17.00 25.50 16.25
On March 25, 1998, the high and low sales prices of the Company's common
stock were $28.25 and $25, respectively.
SHAREHOLDERS
The approximate number of record and beneficial holders of the Company's
common stock was 343 and 3,500, respectively, as of January 31, 1998.
DIVIDENDS
The Company has not paid cash dividends on its common stock since
inception, and the Company does not anticipate paying dividends in the near
future.
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived from the
consolidated financial statements of the Company. The data set forth should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and notes thereto.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS In thousands, except per share data
- --------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended: 12/27/97 12/28/96 12/31/95 12/31/94 12/31/93
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 85,206 $ 56,700 $ 24,541 $ 7,317 $ 3,869
Earnings from operations $ 10,532 $ 7,901 $ 3,536 $ 395 $ (282)
Net earnings $ 6,582 $ 5,035 $ 2,305 $ 325 $ (312)
Earnings per common share-diluted $ 0.99 $ 0.76 $ 0.40 $ 0.06 $ (0.06)
Weighted Average shares
outstanding-diluted 6,660 6,663 5,795 5,316 5,316
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------
As of: 12/27/97 12/28/96 12/31/95 12/31/94 12/31/93
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 2,608 $ 1,130 $ 2,976 $ 647 $ 288
Current assets $ 11,273 $ 9,040 $ 5,361 $ 1,839 $ 756
Total assets $ 26,369 $ 21,079 $ 10,174 $ 2,790 $ 1,890
Long-term obligations,
less current maturities $ - $ - $ 4 $ 7 $ 15
Stockholders' equity $ 19,258 $ 12,367 $ 6,555 $ 1,722 $ (2,077)
</TABLE>
<PAGE>
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Consolidated Financial
Statements and the related notes thereto which are included in this report.
GENERAL
USANA develops, manufactures, distributes and sells high quality,
scientifically innovative, nutritional, personal and skin care products. The
Company's products are marketed and distributed through a growing network of
independent distributors. The Company's primary markets have been in the United
States, Canada, and certain U.S. possessions, including Puerto Rico. The Company
recently has commenced operations in the countries of Australia and New Zealand.
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 Saturday closest to December 31.
The Company's current product lines can be separated into five general
categories: (1) nutritionals; (2) skin and personal care; (3) weight management;
(4) sales aids; and (5) other. In 1997, the nutritionals product line
constituted approximately 82% of the Company's consolidated sales. USANA
Essentials and Proflavanol(R) accounted for approximately 41% and 22%,
respectively, of consolidated sales in 1997. Both USANA Essentials and
Proflavanol(R) are classified within the nutritionals product line.
Net sales of the Company are primarily dependent upon the efforts of a
network of independent distributors and preferred customers who purchase
products and sales materials and constitute the Company's customers. The Company
recognizes revenue when products are shipped and title passes to the independent
distributors. Net sales generated in the United States and Canada represented
69.2% and 30.8%, respectively, of the consolidated net sales in 1997.
Cost of sales primarily consists of raw materials, overhead, and labor that
are directly associated with the procurement and production of USANA's products
and sales materials as well as duties and taxes associated with product imports.
Distributor commissions and bonuses (distributor incentives) are paid
weekly based on commissionable sales volume (sales volume points) generated by
their independently owned distribution network as determined by the Company's
Compensation Plan (the Plan). Distributor incentives are the Company's most
significant expense and represent approximately 50% of commissionable sales
volume. In general, sales volume points are not associated with the sale of
starter kits, sales aids, or logo merchandise. As a percent of net sales,
quarterly distributor incentives have ranged from approximately 44.6% to 47.3%
since December 31, 1995. Management believes distributor incentives as a percent
of net sales will range from about 45.0% to 46.0% in 1998. Management continues
to monitor the amount of distributor incentives paid as a percent of net sales
and will, when necessary, adjust the Plan to prevent distributor incentives from
exceeding acceptable levels or having a significant adverse effect on earnings.
<PAGE>
In the third quarter of 1997, the Company revised the criteria it uses to
define its independent distributor base. A "current distributor" is one who has
made a purchase in the most recent twelve-month period. Management believes the
new definition of current distributors provides a more meaningful basis on which
to evaluate the Company's business. The following table restates the number of
distributors to the approximate number of current distributors USANA had at the
end of each of the last five fiscal years:
<TABLE>
<CAPTION>
As of As
Fiscal Year previously Current
Ended reported Distributors
-------- -------- ------------
<S> <C> <C>
12/27/97 N/A 84,000
12/28/96 92,000 59,000
12/31/95 50,000 34,000
12/31/94 20,000 16,000
12/31/93 10,000 10,000
</TABLE>
Selling, general, and administrative expenses include wages and benefits,
rents and utilities, travel and entertainment, promotion and advertising and
professional fees along with other marketing and administrative expenses.
The Company's R&D expenses represent only research and development
activities. After development activities reach a point of market feasibility
with respect to any individual project, the Company capitalizes the associated
costs of the project and amortizes these costs over the project's estimated
economic life.
RESULTS OF OPERATIONS
The following tables summarize operating results (in millions except per
share data), and operating results as a percent of net sales, respectively, for
the periods indicated:
Fiscal Year Ended 12/27/97 12/28/96 12/31/95
--------- --------- ---------
NET SALES $ 85.2 $ 56.7 $ 24.5
COST OF SALES 17.9 11.6 5.7
--------- --------- ---------
Gross profit 67.3 45.1 18.8
OPERATING EXPENSES
Distributor incentives 39.5 25.9 10.8
SG&A 16.0 10.5 4.2
R&D 1.3 0.8 0.3
--------- --------- ----------
Earnings from operations 10.5 7.9 3.5
OTHER INCOME 0.2 0.2 0.2
--------- --------- ----------
Earnings before income taxes 10.7 8.1 3.7
INCOME TAXES 4.1 3.1 1.4
--------- --------- ---------
<PAGE>
NET EARNINGS $6.6 $5.0 $2.3
========= ========= =========
Earnings per common
share--diluted $0.99 $0.76 $0.40
Fiscal Year Ended 12/27/97 12/28/96 12/31/95
--------- --------- ---------
NET SALES 100.0% 100.0% 100.0%
COST OF SALES 21.0 20.5 23.3
--------- --------- ---------
Gross profit 79.0 79.5 76.7
OPERATING EXPENSES:
Distributor incentives 46.4 45.7 44.1
SG&A 18.8 18.5 17.1
R&D 1.5 1.4 1.2
--------- --------- ---------
Earnings from
operations 12.3 13.9 14.3
OTHER INCOME 0.2 0.4 0.8
--------- --------- ---------
Earnings before
income taxes 12.5 14.3 15.1
INCOME TAXES 4.8 5.5 5.7
--------- --------- ---------
NET EARNINGS 7.7% 8.8% 9.4%
========= ========= =========
1997 COMPARED TO 1996
Net sales climbed to $85.2 million during 1997, an increase of $28.5
million or 50.3% from the $56.7 million recorded during 1996. The increase in
net sales is primarily the result of a 42.4% increase in the Comp any's
independent distributor base and the introduction of the Preferred Customer
Program. As of December 27, 1997, the Company had approximately 84,000 current
distributors compared to approximately 59,000 current distributors at December
28, 1996. The Company also introduced its Preferred Customer Program during the
third quarter of 1997. This program is specifically designed for customers who
desire to purchase USANA's products for themselves, while choosing not to become
independent distributors. Approximately 9,000 participants enrolled in the
Preferred Customer Program in 1997. Successful regional conventions, new product
introductions, and the Company's first widespread price increase also
contributed to sales growth in 1997. This increase, which was phased in
beginning in the third quarter of 1997, accounted for less than two percent of
net sales in 1997.
Approximately fifty percent of the sales growth in 1997 resulted from
Canadian operations. Canadian sales were $26.2 million during 1997, an increase
of $14.2 million or 118.3% from the $12.0 million recorded during 1996. Net
sales in the United States increased 32.0% to $59.0 million during 1997 from the
$44.7 million recorded during 1996.
Cost of sales totaled $17.9 million during 1997, an increase of $6.3
million or 54.3% from the $11.6 million recorded during 1996. Cost of sales as a
percent of net sales experienced a small increase, growing 0.5% to 21.0% in 1997
from 20.5% in 1996. The increase in cost of sales can primarily be attributed to
sales growth; however, several other factors contributed to higher cost of
sales. First, there was a modest increase in the underlying cost
<PAGE>
of materials with no accompanying price increase until the third quarter of
1997. Second, inefficiencies arose that can be attributed to new product
introduction and product preparation for international growth. Finally, the
Company established a provision for inventory obsolescence of $220,000 during
1997. This provision was established to offset the risk of potential inventory
obsolescence attributed to new product introduction and the modification of
existing products.
Distributor incentives totaled $39.5 million during 1997, an increase of
$13.6 million or 52.5% from the $25.9 million recorded during 1996. Distributor
incentives as a percent of net sales increased 0.7% to 46.4% in 1997 from 45.7%
in 1996. The increase in distributor incentives is primarily attributable to
increased commissionable product sales growth; however, several other factors
contributed to the increase in distributor incentives. First, the independent
distributor network continued to mature, thus, distributor incentives
represented a higher percentage of commissionable sales volume generated.
Second, the Company changed its Leadership Bonus Program, increasing the payout
from 2.0% to 3.0% of commissionable sales volume. Finally, to better manage
distributor incentives, the Company introduced a broad re-pricing strategy
across its product lines. The new price structure creates a spread between the
price a distributor pays for the product and the sales volume points associated
with the sale. The new pricing structure and the change in the Leadership Bonus
Program were introduced in the third quarter of 1997. Although total distributor
incentives increased in 1997, distributor incentives declined as a percent of
net sales in both the third and the fourth quarter of 1997 when compared to the
same periods in 1996.
Selling, general and administrative (SG&A) expenses totaled $16.0 million
in 1997, an increase of $5.5 million or 52.4% from the $10.5 million recorded in
1996. SG&A expense as a percent of net sales increased 0.3% to 18.8% in 1997
from 18.5% in 1996. Increases in SG&A can primarily be attributed to two
factors. First, variable SG&A expenses such as discount fees on credit cards and
customer service wages increased to accommodate the demands of sales growth and
the increased number of distributors. Second, as a result of substantial
investments in computer and production equipment in late 1996 and throughout
1997, depreciation and amortization expense as a component of SG&A increased by
more than $0.8 million in 1997, compared to 1996.
Research and development (R&D) expenditures totaled $1.3 million in 1997,
an increase of $0.5 million or 62.5% from the $0.8 million recorded during 1996.
R&D expense as a percent of net sales remained relatively flat at 1.5% in 1997
compared to 1.4% in 1996. Increases in R&D expense are primarily the result of
new product development and, to a lesser extent, the reformulation of existing
products. USANA's team of scientists investigates new ingredients, develops new
products, coordinates clinical studies and keeps abreast of the latest research
in nutrition and degenerative diseases.
Operations resulted in net earnings of $6.6 million in 1997, an increase of
$1.6 million or 32.0% from the $5.0 million recorded during 1996. The increase
in net earnings was a result of higher sales. The Company's profit margin was
7.7% in 1997, a decrease of 1.1% from the 8.8% reported in 1996. The decrease in
the Company's profit margin can primarily be attributed to increases in cost of
sales, distributor incentives, and SG&A expense as a percent of net sales.
Growth in diluted earnings per share paralleled growth in earnings by climbing
to $0.99 in 1997, an increase of 30.3% compared to $0.76 in 1996.
<PAGE>
1996 COMPARED TO 1995
Net sales rose to $56.7 million during 1996, an increase of $32.2 million
or 131.4% from the $24.5 million recorded during 1995. The increase in net sales
is primarily the result of a 73.5% increase in the Company's independent
distributor network. As of December 28, 1996, the Company had approximately
59,000 current distributors compared to approximately 34,000 current
distributors at December 31, 1995. In addition to the increase in the
distributor network, net sales growth can also be attributed to the continued
successful implementation and expansion of the Company's marketing program and
introduction of new product lines.
Approximately 28.0% of the 1996 sales growth resulted from Canadian
operations. Canadian sales were $12.0 million during 1996, an increase of $9.0
million or 300.0% from the $3.0 million recorded during 1995. Net sales in the
United States increased 107.9% to $44.7 million during 1996 from the $21.5
million recorded during 1995.
Cost of sales totaled $11.6 million during 1996, an increase of 103.5% from
the $5.7 million reported in 1995. Cost of sales as a percent of net sales
decreased 2.8% to 20.5% in 1996 from 23.3% in 1995. The decrease in cost of
sales can be attributed to two factors. First, there was a shift in sales mix to
higher gross profit margin products in 1996. Second, the Company realized
increased efficiencies of operations resulting substantially from larger batch
sizes made possible by the significant increase in sales.
Distributor incentives totaled $25.9 million during 1996, an increase of
$15.1 million or 139.8% from the $10.8 million recorded during 1995. Distributor
incentives as a percent of net sales increased 1.6% to 45.7% in 1996 from 44.1%
in 1995. The increase in the amount of distributor incentives paid was
essentially a function of increased sales. The increase in distributor
incentives as a percent of net sales can primarily be attributed to the
maturation of the Company's independent distributor network, and to a lesser
extent, a change in the sales mix to a higher proportion of sales volume points.
A portion of the increase in distributor incentives in 1996 can also be
attributed to inefficiencies the Company encountered in converting to a new
customer service computer system.
SG&A expenses totaled $10.5 million during 1996, an increase of $6.3
million or 150.0% from the $4.2 million recorded during 1995. SG&A expense as a
percent of net sales increased 1.4% to 18.5% in 1996 from 17.1% in 1995. The
increase in SG&A expense was primarily a result of the need for more support
services and facilities to accommodate the growth in sales and the increased
number of distributors. These increases in SG&A expense were compounded by
difficulties in the conversion of the customer service computer system in the
fourth quarter of 1996.
R&D expenditures totaled $0.8 million during 1996, an increase of 166.7%
from the $0.3 million recorded during 1995. R&D expense as a percent of sales
increased 0.2% to 1.4% in 1996 from 1.2% in 1995. The increase in R&D expense
can be attributed to new product development.
Operations resulted in net earnings of $5.0 million during 1996, an
increase of $2.7 million or 117.4% from the $2.3 million recorded during 1995.
The increase in net earnings was a result of higher sales. The Company's profit
margin decreased 0.6% to 8.8% in 1996 from 9.4% in 1995. The decrease in profit
margin in 1996 resulted primarily from a decrease in other income in 1996 (0.4%
<PAGE>
as a percent of net sales), and to a lesser extent, the combination of increased
distributor incentives and SG&A expenditures offset by efficiencies realized in
cost of sales. Diluted earnings per share grew to $0.76 in 1996, an increase of
90.0% compared to $0.40 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company does not extend credit to its distributors, but requires
payment prior to shipping. This process eliminates the need to create
receivables from its distributors. The Company has generated substantial cash
flows from operations due to its significant growth and solid margins. During
the year ended December 27, 1997, the Company generated $7.1 million from
operations compared to $4.2 million and $3.9 million in 1996 and 1995,
respectively. Cash and cash equivalents at December 27, 1997 were $2.6 million
compared to $1.1 million and $3.0 million in 1996 and 1995, respectively. As of
December 27, 1997, working capital was $4.6 million compared to $0.5 million and
$1.8 million in 1996 and 1995, respectively. During 1996, working capital was
employed in the construction of the Company's new facility, reducing reported
working capital levels. The Company invested $5.3 million in property and
equipment during 1997 compared to $7.8 million and $4.2 million in 1996 and
1995, respectively. The Company expects to invest approximately $6.0 million in
property and equipment in 1998. The Company invested approximately $1.2 million
in 1997 to fund the establishment of operations in Australia and New Zealand.
The Company does not expect its total investment in the Australia and New
Zealand operations to exceed $3.5 million.
On May 30, 1997, the Company re-negotiated its line of credit. The new
terms increase the available bank 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 December 27, 1997, the Company was in compliance with
these covenants. The Company paid off the balance of $1.5 million that existed
at December 28, 1996, and there was no outstanding balance as of December 27,
1997.
The Company believes that its current cash balances, the available line of
credit, and cash provided by operations will be sufficient to cover its needs
for the next twelve months. In the event the Company experiences an adverse
operating environment or unusual capital expenditure requirements, additional
financing may be required; however, no assurance can be given that additional
financing, if required, would be available on favorable terms.
OUTLOOK
Management believes sales growth will continue at a robust rate in 1998.
Increasing revenues will be driven by the opening of the Australia and New
Zealand markets along with continued growth in the Company's existing North
American markets. The following table highlights the growth rate in North
America over the last several years:
(Dollars in Millions)
Fiscal years ended 1997 1996 1995 1994 1993
------ ------ ------ ------ -----
United States $59.0 $44.7 $21.5 $ 7.3 $ 3.9
<PAGE>
% growth over
prior year 32% 108% 195% 87% N/A
Canada $26.2 $12.0 $3.0 N/A N/A
% growth over
prior year 118% 300% N/A N/A N/A
Management believes that cost of sales will increase modestly as a percent
of sales in the first quarter of 1998. The expected increase in cost of sales
can be attributed primarily to duties and taxes on Australian and New Zealand
product imports, and to a lesser extent, a temporary change in sales mix to
lower gross margin products. Management believes that increases in production
efficiencies will offset the impact of duties and taxes by the third quarter of
1998.
Distributor incentives as a percent of net sales has increased every year
of the Company's existence; however, distributor incentives exhibited
improvement as a percent of net sales in both the third and the fourth quarter
of 1997 when compared to the same periods in 1996. The improvement in
distributor incentives in the third and fourth quarters of 1997 resulted from a
change in the Company's pricing structure that was phased in beginning in the
third quarters of 1997. The new price structure creates a spread between the
price a distributor pays for the product and the sales volume points associated
with the sale. The Company prices its products to achieve a desired contribution
margin (sales less cost of sales and distributor incentives). As cost of sales
increase, management will price products such that fewer commissions are paid
out on net sales generated. Therefore, management believes that distributor
incentives will decline modestly as a percent of net sales in 1998 when compared
to 1997.
Management believes that SG&A expenditures will increase as a percent of
net sales during 1998. The expected increase can primarily be attributed to
standard start-up costs related to international expansion. The Australia and
New Zealand operations will be burdened initially by relatively high SG&A
expenses. SG&A expense as a percent of net sales should improve throughout 1998
as sales increase. Consistent with the Company's growth strategies, management
intends to invest additional SG&A dollars to research markets for future
international expansion.
<PAGE>
RISK FACTORS
Important factors that may cause results of the Company's operations 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. As
part of the process of enrolling new distributors in its program, the Company
enters into independent distributor agreements with every person or entity that
becomes a distributor. Distributors typically work at the distribution of the
Company's products on a part-time basis and may and likely will 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 undertakes no effort to provide individual
training to its distributors. 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. 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. Consequently, the loss of a key distributor or group of
distributors, turnovers or decreases in the size of the distributor force,
seasonal or other decreases in purchase volume, sales volume reduction costs
associated with training new distributors and other related expenses may combine
to reduce or adversely affect the revenues and profitability of the Company.
Moreover, the Company's ability to continue to attract and keep new distributors
can be affected by a number of factors, some of which are beyond the control of
the Company, including general business and economic conditions, public
perception about direct or network marketing programs in general, high-
visibility investigations or legal proceedings against direct or network
marketing companies by federal or state authorities or private citizens, public
perceptions about the value and efficacy of vitamin or nutritional supplement
products generally. There can be no assurance that the Company will be able to
continue to attract new distributors and retain distributors in numbers
sufficient to sustain the Company's future growth or to maintain present growth
levels, which inabilities could materially and adversely affect the Company's
operations and financial condition. Additionally, although the Company
presently intends to expand its international operations into new market
opportunities, all of the markets for the Company's products, international or
domestic, are characterized by finite populations in defined geographic areas.
In many of these areas, direct and network marketing companies other than the
Company already have significant market penetration, the effect of which could
be to desensitize the local distributor population to a new opportunity such as
the Company, or to make it more difficult for the Company to recruit qualified
distributors.
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 that target direct selling businesses that promise quick rewards for little
or no effort, require high entry costs, use high pressure recruiting methods
and/or do not involve legitimate products. Similar laws also may govern the
Company's activities in foreign countries. Based on its experience to date and
research conducted in opening its existing markets (including assistance from
local counsel), the Company believes that it is in compliance with all such laws
and regulations where its products are sold. Nevertheless, 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.
Potential Effects of Adverse Publicity, Negative Public Perception. The
Company's ability to attract and maintain distributors and to sustain and
enhance end-user sales through its distributors, as well as its overall
financial condition can be impacted by adverse publicity regarding the Company
or its competitors, particularly competitors or other network marketing
companies with global operations, including publicity regarding the legality of
network marketing, the quality or efficacy of nutritional supplement products or
ingredients in general or the Company's products or ingredients specifically,
regulatory investigations of the Company or its competitors or other network
marketing companies and their products, distributor actions and the public's
<PAGE>
perception of the Company's distributors or the network or direct marketing
industry in general. There can be no assurance that the Company will not be
subject to adverse publicity or negative public perception in the future as a
result of regulatory investigations or actions, whether of the Company or other
network marketing companies, distributor actions or other factors, or that such
adverse publicity will not have a material adverse effect on the Company's
business, operations and financial condition.
Distributors' Independent Actions. The Company's distributors are
required to sign the Company's Distributor Application and Agreement which
requires them to abide by USANA Policies and Procedures. Although these
Policies and Procedures prohibit distributors from making certain claims
regarding the Company's 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
no action has been taken against the Company by regulatory authorities to date,
legal actions against distributors or others associated 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 monitor distributor activities
to the extent possible to guard against misrepresentation and other illegal or
unethical conduct by distributors. In this regard, it is the Company's policy
to promptly and appropriately follow-up on any consumer complaints or inquiries
about distributor conduct. The Company also has in place certain systems and
methods for monitoring distributor performance and involvement to assure that
the terms of its compensation plan are being observed. There can be no
assurance, however, 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 attract and
retain distributors or may adversely affect the Company's ability to expand into
new markets or in other ways.
Increased Distributor Compensation Expense. Under the Company's
distributor compensation plan, distributor incentives have increased from 44.1%
of net sales in 1995 to 46.4% in 1997. In July 1997, the Company amended its
distributor compensation program and product pricing structure for the first
time since its inception. As a result of these changes, the prices of the
Company's most popular products were increased and commissionable sales volume
was adjusted with the objective of decreasing distributor incentives as a
percent of net sales. Subsequent to these changes, the Company experienced
improvement in distributor incentives as a percent of net sales in both the
third and fourth quarter of 1997 when compared to the same periods in 1996.
Although these changes were initially successful, no assurance can be given that
these changes in the Company's distributor compensation plan will continue to
offset the risk of excessive distributor incentives in the future.
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 FTC, the Consumer Product Safety
Commission, the United States Department of Agriculture, the United States
Postal Service and the United States Environmental Protection Agency ("EPA").
These activities are also subject to regulation by various agencies of the
countries, states and other
<PAGE>
localities in which the Company's products are sold. In October 1994, the
"Dietary Supplement Health and Education Act of 1994" ("DSHEA") 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. 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 drug GMP's. The
Company currently manufactures its dietary supplement products pursuant to the
rigorous standards of the existing drug 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, any of which consequences could result in additional
expenditures by the Company that individually or cumulatively could have a
material adverse effect on the Company and its financial condition. 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 and/or litigation to prosecute such
claims. The Company has not been party to any product liability litigation to
date, although certain individuals have asserted that they have suffered adverse
consequences as a result of using the Company's nutritional products. These
matters have historically been settled to the Company's management's
satisfaction and have not to date resulted in material payments by the Company.
The Company's management is aware of no respect in which any of its products are
or have been defective in any way that could give rise to material losses or
expenditures related to product liability claims. Moreover, the Company is
aware of no respect in which the use of nutritional supplement or vitamin
products such as those manufactured and sold by the Company have caused adverse
reactions on anything but a statistically insignificant and highly isolated
basis. 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, in the case of other network marketing companies,
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 underlying science, 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
<PAGE>
capture a significant share of the market. The vitamin/nutritional supplement
market in which the Company's leading products compete is characterized by (i)
large selection of essentially similar products that are difficult to
differentiate, (ii) retail consumer emphasis on value pricing, (iii) constantly
changing formulations based on evolving scientific research, (iv) low entry
barriers resulting from low brand loyalty, rapid change, widely available
manufacturing outsourcing, low regulatory requirements, and ready access to
large distribution channels, and (v) a lack of uniform standards regarding
product ingredient source, potency, purity, absorption rate and form. There can
be no assurance that the Company will be able to compete in this intensely
competitive environment. In addition, personal care and nutritional products can
be purchased in a wide variety of channels of distribution. The Company's
product offerings in each product category are also relatively small compared to
the wide variety of products offered by many other nutritional and personal care
product companies. 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 network 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.
The leading network marketing company is Amway Corporation and its
affiliates. Avon Products is the leading direct seller of beauty and related
products in 125 countries worldwide. Leading competitors in the nutritional
products and nutritional direct selling markets include Herbalife International,
Nature's Sunshine Products, Rexall Sundown, Inc. and its direct selling division
Rexall Showcase International, Twinlab Corporation, and NuSkin International.
The Company believes there are other manufacturers of competing product lines
that may or will launch direct selling enterprises which will compete with the
Company in certain of its product lines and for distributors. There can be no
assurance that the Company will be able to successfully meet the challenges
posed by this increased competition.
Expansion Into Foreign Markets. The Company recently commenced
operations in Australia and New Zealand and intends on continuing its
international expansion efforts; 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 accepted or successful in any given country. In
addition to significant regulatory barriers, the Company may also expect
problems related to entering new markets with different cultures 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.
<PAGE>
Foreign Duties and Import Restrictions. At present, most of the Company's
products are manufactured in the United States and are imported into the
countries in which they are ultimately sold. The countries in which the Company
conducts business impose various legal restrictions on imports. In most cases,
permits or licenses are required to import particular types of goods, including
nutritional supplements and personal care products. Duties of varying amounts
are imposed based on the values or quantities of the goods imported. In certain
countries and jurisdictions, cosmetic and nutritional products are subject to
significant import duties. Other products that the Company imports, notably
products in the personal care line, may be subject to health and safety
regulations. Certain products in the nutritional line may also be subject to
governmental regulation regarding food and drugs, which regulations have had the
effect of limiting the Company's ability to sell some of its products in some
countries and jurisdictions. Certain of the Company's products which may be
deemed in certain countries to be "pharmaceutical" in nature and may therefore
not be permitted to be sold through network marketing channels in those
countries. The Company has not to date experienced any difficulty in obtaining
or maintaining import licenses, but there can be no assurance that it will not
experience difficulties in the future in connection with its nutritional
products in certain countries. Many products require reformulation to comply
with local requirements. In addition, new regulations may be adopted or any of
the existing regulations could be changed at any time in a manner that could
have a material adverse effect on the Company's business and results of
operations. Duties on imports are a component of national trade and economic
policy and could be changed in a manner that would be materially adverse to the
Company's sales and its competitive position compared to locally-produced goods.
In addition, import restrictions in certain countries and jurisdictions may
prevent the importation of U.S.-manufactured products altogether. Present or
future health and safety or food and drug regulations could delay or prevent the
introduction of new products into a given country or marketplace or suspend or
prohibit the sale of existing products in such country or marketplace.
Taxation and Transfer Pricing Considerations. The Company's principal
domicile is the United States, where it is also incorporated. The Company is
subject to taxation in the United States at an effective rate ranging from 37%
to 38%. In addition, the Company's Canadian subsidiary is subject to taxation
in Canada, at an effective rate ranging from 44% to 45%. Tax rates applicable
to operations in New Zealand and Australia will be approximately 36% and 33%,
respectively. Under tax treaties, the Company is eligible to receive foreign
tax credits in the United States for taxes actually paid abroad. As the
Company's operations expand outside the United States, taxes paid to foreign
taxing authorities may exceed amounts of the credits available to the Company,
resulting in the Company's paying a higher overall effective tax rate on its
worldwide operations. The Company has adopted "transfer pricing agreements"
with its subsidiaries to regulate intercompany transfers, which agreements are
subject to transfer pricing laws that regulate the flow of funds between the
subsidiaries and the Company for product purchases, management services, and
contractual obligations such as the payment of distributor commissions. If the
U.S. Internal Revenue Service or the taxing authorities of any other
jurisdiction were to successfully challenge these agreements or require changes
in the Company's transfer pricing practices, the Company could become subject to
higher taxes and its earnings would be adversely affected. The Company
believes that it operates in compliance with all applicable foreign exchange
control and transfer pricing laws. However, there can be no assurance that the
Company will continue to be found to be operating in compliance with foreign
exchange control and transfer pricing laws, or that such laws will not be
modified, which, as a result, may require changes in the Company's operating
procedures.
Risks Associated With Rapid Growth. Since 1993, the Company has
experienced rapid growth. The management challenges encountered by the Company
as a result of
<PAGE>
this growth include a significant increase in the number of employees and
distributors, needed expansion of facilities, acquisition of capital equipment
and information systems to accommodate growth, 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.
Raw Materials. 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, since the fourth quarter of fiscal year
1996 and continuing intermittently during 1997, the Company experienced
difficulty in obtaining sufficient quantities of natural Vitamin E powder, an
ingredient required for the manufacture of several of its products. It is
expected that the supplier's shortage could continue in 1998. 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.
Reliance on Key Management Personnel. The Company depends on the services
of several key executive officers, including, but not limited to its founder,
Dr. Myron Wentz, who serves as the Chairman of the Company's Board of Directors
as well as its Chief Executive Officer and President. Other executive officers
of the Company also make significant contributions to the Company's success,
including Gilbert Fuller (Vice President of Finance and Chief Financial
Officer), Dallin Larsen (Vice President of Sales), Jeb McCandless (Vice
President and Chief Operating Officer) and David Wentz (Vice President of
Strategic Development). Dr. Wentz's duties for the Company and his other
professional responsibilities often require him to travel for extended periods
of time, and he resides outside of Utah. Additionally, Dr. Wentz is a highly
visible spokesman for the Company and the efficacy and potency of the Company's
products. The loss of the services of Dr. Wentz or of any of the executive
officers could have an adverse effect upon the Company's business, financial
condition and operating results. The Company does not maintain a key man life
insurance policy on Dr. Wentz and there can be no assurance that such a policy
will be obtained in the future or that if obtained that the proceeds from such
policy would adequately compensate the Company for the loss of Dr. Wentz.
<PAGE>
Effect of Exchange Rate Fluctuations. The Company has several foreign
subsidiaries 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. As the
Company's business expands outside the United States, an increasing share of its
revenues and expenses will be transacted in currencies other than its base
currency, the U.S. dollar. Accounting practices require that the Company's non-
U.S. sales and selling, general and administrative expenses be converted to U.S.
dollars for reporting purposes. Consequently, the reported earnings of the
Company in future periods may be significantly affected by fluctuations in
currency exchange rates, generally increasing with a weaker U.S. dollar and
decreasing with a strengthening U.S. dollar. Products purchased from the
Company by the Company's foreign subsidiaries are transacted in U.S. dollars.
As operations expand to Australia, New Zealand and other countries where foreign
currency transactions may be made, the Company's operating results will be
subject to the risks of exchange rate fluctuations and the Company may not be
able to accurately estimate the impact of such changes on its future business,
product pricing, results of operations or financial condition.
Absence of Dividends. The Company has never declared dividends and it
does not anticipate that any dividends will be declared on its Common Stock in
the immediate future. The Company may from time to time re-evaluate this policy
based on its net income and alternative uses for retained earnings, if any. Any
future declarations of dividends will be subject to the discretion of the Board
of Directors of the Company and subject to certain limitations under the Utah
Revised Business Corporation Act. The timing, amount and form of dividends, if
any, will depend, among other things, on the Company's results of operations,
financial condition, cash requirements and other factors deemed relevant by the
Board of Directors. There can be no assurance regarding the timing or payment
of any future dividends of the Company. See "Dividend Policy."
Utah Control Shares Act. 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
<PAGE>
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.
Intellectual Property. The Company owns no patents, has filed no patent
applications and does not intend in the immediate future to file a patent
application covering any of the formulations of its nutritional or other
products. The labeling regulations to which the Company's nutritional
supplements are subject require that the ingredients of such products be
precisely and accurately indicated on product containers. Accordingly, patent
protection for nutritional product supplements is impractical, if not impossible
given the large number of manufacturers who produce nutritional supplements and
vitamins having many active ingredients in common. Additionally, the
nutritional supplement industry is characterized by rapid change and frequent
re-formulations of products as the body of scientific research and literature
refines current understanding of the application and efficacy of certain
substances and interactions among various substances. In this respect, the
Company maintains an active research and development program that is devoted to
developing better, purer and more effective formulations of its nutritional
products. The Company protects its investment in research, as well as the
techniques it uses to improve the purity and effectiveness of its products by
relying on trade secret laws and by having certain of its employees enter into
confidentiality, non-disclosure and non-compete agreements. Additionally, it is
the Company's practice to seek, to the fullest extent permitted by applicable
law, trademark and trade dress protection for its products, which protection has
been sought in the United States, Canada and many of the other countries in
which the Company is either presently operating or plans to commence operations
in the near future. The Company's R&D efforts may at some future time result in
patentable products, in which case patents would be sought; however, no
assurance can be given that patents would be obtained. Notwithstanding the
Company's efforts as described above, there can be no assurance that the
Company's efforts to protect its trade secrets and trademarks will be
successful. Nor can there be any assurance that third parties will not assert
claims against the Company for infringement of the proprietary rights of others.
If an infringement claim is asserted, the Company may be required to obtain a
license of such rights. There can be no assurance that any such license would
be available on reasonable terms, if at all. Litigation with respect to such
matters could result in substantial costs and diversion of management and other
resources and could have a material adverse effect on the Company's business,
financial condition and operating results. For example, since 1996 the Company
has been engaged in defending litigation involving, among other things, claims
of patent infringement relating to one of its most popular products. (See
"Legal Proceedings.") Although the Company disputes the claims of the plaintiff
in this case, the litigation has continued for nearly two years and the Company
has expended approximately $140,000 in its defense of such claims. An adverse
ruling in the case could have materially adverse effects on the earnings of the
Company. Production of the Company's products has not ever been adversely
affected by the unavailability of raw materials as a result of infringement or
other similar claims or royalty claims from third parties. There can be no
assurance, however, that such third party claims will not in the future
adversely affect the Company's operations and financial condition.
Year 2000 Risks. Since its inception, the Company has attempted to
leverage technology, including increasingly sophisticated computer hardware and
software, in managing the Company's business and operations. Historically, the
Company has implemented computer systems for accounting and financial
management, manufacturing, purchasing, inventory and warehouse management,
shipping, and management of the distributor commission and compensation program.
The Company
<PAGE>
also has relied on third-parties to facilitate its business including, for
example, major credit card companies that process the vast majority of payments
for the Company's products, major shipping companies located in the U.S., Canada
and elsewhere through which the Company ships its products to distributors,
financial institutions that provide commercial banking and other financial
services to the Company, and the Nasdaq Stock Market, on which the Company's
Common Stock is traded. The computer industry recently has recognized that many
existing computer programs, many of which are large, custom-programmed mainframe
applications that have continuously been written and amended over a long time
period and by a variety of different programmers, use only two digits to
identify a year in the date field. Such programs were designed, developed and
modified without considering the impact of the upcoming change in the century.
If not corrected, many such computer applications could fail or create erroneous
results by or at the Year 2000 by erroneously identifying the year "00" as 1900,
rather than 2000. Correcting a Year 2000 problem on a large mainframe or network
application, however, can be difficult and expensive. In many cases, the
original developer of the subject software is either defunct or unwilling to
address the problem. Moreover, because many individuals may have programmed
different pieces of a program, and some of them may have died or cannot be
located, many companies will be forced to review the code comprising their
software on a line-by-line basis, which can take enormous amounts of time and
significant financial resources. The Year 2000 issue affects virtually all
companies and organizations, including the Company. If a company does not
successfully address its Year 2000 issues, it may face material adverse
consequences.
The Company is in the process of insuring that its internal computer
systems are Year 2000 compliant. Independent of those efforts, the Company's
management determined in late 1997 that overall efficiencies could be achieved
by the purchase and installation of an integrated enterprise resource planning
("ERP") system. The ERP system will replace all of the Company's existing
resource planning systems except for the Company's proprietary, custom-
programmed distributor billing and compensation program (the "Distributor
System"). Management has negotiated the terms of and is in the process of
finalizing its plans to install the ERP system through a third-party provider of
software and consulting services, and management expects the installation to be
complete no later than the first quarter of fiscal 1999. The third-party vendor
of the ERP system has represented to the Company that the ERP system will be
certified as Year 2000 compliant by the Information Technology Association of
America. Therefore, assuming the successful installation of the ERP system, the
Company does not expect any material Year 2000 compliance issues to arise
related to its primary internal business information systems. The Company
intends to integrate the Distributor System with the ERP system at some point in
the future. Prior to that integration, and during fiscal 1998, the Company
intends to have the Distributor System audited for Year 2000 compliance, and to
correct any problems identified by such audit. With respect to third-party
providers whose services are critical to the Company, the Company intends to
monitor the efforts of such providers as they become Year 2000 compliant.
Management is presently not aware of any Year 2000 issues that have been
encountered by any such third-party which could materially affect the Company's
operations. Notwithstanding the foregoing, there can be no assurance that the
Company will not experience operational difficulties as a result of Year 2000
issues, either arising out of internal operations, or caused by third-party
service providers, which individually or collectively could have an adverse
impact on business operations or require the Company to incur unanticipated
expenses to remedy any problems.
Environmental Regulations. The Company is subject to a variety of
environmental laws relating to the storage, discharge, handling, emission,
generation, manufacture, use and disposal of chemicals, solid and hazardous
waste and other toxic and hazardous materials used to manufacture, or resulting
from the
<PAGE>
process of manufacturing, the Company's products. The Company cannot predict the
nature, scope or effect of future legislation or regulatory requirements to
which its operations might be subject or the manner in which existing or future
laws or regulations will be administered or interpreted, including whether they
will be applied in the future to materials, products or activities to which they
have not been applied previously. Complying with new or more stringent laws or
regulations, or to more vigorous enforcement of the current or future policies
of regulatory agencies, could require substantial expenditures by the Company
and could have a material adverse effect on its business, financial condition
and operating results. Environmental laws and regulations require the Company to
maintain and comply with a number of permits, authorizations and approvals and
to maintain and update training programs and safety data regarding materials
used in its processes. Violations of those requirements could result in
financial penalties and other enforcement actions, and could require the Company
to halt one or more portions of its operations until a violation is cured.
Although the Company works to operate in compliance with these environmental
laws, there can be no assurance that the Company will succeed in that effort at
all times. The combined costs of curing incidents of non-compliance, resolving
enforcement actions that might be initiated by government authorities or
satisfying business requirements following any period affected by the need to
take such actions could have a material adverse effect on the Company's
business, financial condition and operating results. See "Business-Environmental
Regulations."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein under "Management's Discussion and
Analysis of Financial Condition and Results of Operations and Outlook",
including statements concerning (i) the Company's strategy, (ii) the Company's
expansion plans, (iii) the market for the Company's products and services, (iv)
the effects of government regulation of the Company's products, (v) the
development and launch of new products and the results of research and
development efforts, and (vi) the growth of the Company's business, contain
certain forward-looking statements concerning the Company's operations, economic
performance and financial condition. Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause such
differences include, but are not necessarily limited to, those discussed under
the heading "Risk Factors" above.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data of the Company required
by this Item are set forth at the pages indicated at Item 14.
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information required by Part III is omitted from this Report in
that the Company intends to file its definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information herein is
incorporated by reference.
Information with respect to directors may be found under the caption
"Election of Directors and Management Information" in the Company's Proxy
Statement. Such information is incorporated herein by reference.
The executive officers of the Company as of March 25, 1998 were as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Myron Wentz, Ph.D. 57 President and Chief Executive Officer
David A. Wentz 27 Vice President of Strategic Development
Gilbert A. Fuller 57 Vice President and Chief Financial Officer
Dallin A. Larsen 38 Vice President of Sales
John B. McCandless, IV 50 Vice President and Chief Operating Officer
</TABLE>
The executive officers of the Company are elected annually and serve at the
pleasure of the Board of Directors.
Myron Wentz, Ph.D., has been the President, CEO 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, with an emphasis in 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 1974, 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.
Gilbert A. Fuller is Vice President of Finance and Chief Financial Officer
of the Company and has been with 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 an M.B.A. degree from the University of Utah.
<PAGE>
Dallin A. Larsen is the Company's Vice President 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.
John B. ("Jeb") McCandless is Vice President and Chief Operating Officer,
and has been in management with the Company since 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 The Claremont Graduate School in California.
The information required by this item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to information set forth in the Proxy Statement under the heading
"Executive Compensation."
Item 11. EXECUTIVE COMPENSATION
The information in the Proxy Statement under the captions "Executive
Compensation" and "Board of Director Committees and Compensation" is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Beneficial Ownerships of
Principal Shareholders, Directors and Management" in the Proxy Statement is
incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Certain
Relationships and Related Transactions."
<PAGE>
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
1. Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets F-1
Consolidated Statements of Earnings F-2
Consolidated Statements of Stockholders' Equity F-3
Consolidated Statements of Cash Flows F-4
Notes to the Consolidated Financial Statements F-6
2. Supplementary Data
Quarterly Financial Data (unaudited)
(included in the Notes to the Consolidated Financial Statements)
3. Financial Statement Schedules
[Those that are required are included in the
Consolidated Financial Statements or Notes thereto.]
4. Exhibits
See Index to Exhibits
(b) Reports on Form 8-K
None.
Form 10-K
For Year Ended December 27, 1997
Exhibit Index
Exhibit
Number Description
- ------ -----------
11.1 Computation of Net Income per Share
(included in Notes to Consolidated Financial Statements)
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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, on this 3rd day of April, 1998:
USANA, INC.
By: /s/ Dr. Myron Wentz
-------------------
Dr. Myron Wentz, President and Chairman
Date: April 3, 1998
--------------
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 April 3, 1998
- -------------------------- --------------
Dr. Myron Wentz, Chairman, President Date
(Principal Executive Officer)
/s/ Gilbert A. Fuller April 3, 1998
- -------------------------- --------------
Gilbert A. Fuller, Vice President Date
And Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
/s/ David Wentz April 3, 1998
- -------------------------- --------------
David Wentz, Director Date
/s/ Ronald S. Poelman April 3, 1998
- -------------------------- --------------
Ronald S. Poelman, Director Date
/s/ Dr.Suzanne Winters April 3, 1998
- -------------------------- --------------
Dr. Suzanne Winters, Director Date
/s/ Robert Anciaux April 3, 1998
- -------------------------- --------------
Robert Anciaux, Director Date
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
USANA, Inc. and Subsidiaries
We have audited the consolidated balance sheets of USANA, Inc. and
Subsidiaries (the Company) as of December 27, 1997 and December 28, 1996 and the
related consolidated statements of earnings, stockholders' equity and cash flows
for the years then ended and for the year ended December 31, 1995. 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 Subsidiaries as of December 27, 1997 and December 28, 1996 and the
consolidated results of their operations and their consolidated cash flows for
the years then ended and for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ Grant Thornton LLP
Salt Lake City, Utah
January 30, 1998
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 27, December 28,
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,608,315 $ 1,130,487
Accounts receivable, net of allowance
for doubtful accounts of $138,886 in
1997, and none in 1996 (Notes D and F) 98,362 55,149
Current maturities of note
receivable (Note D) 30,061 27,212
Income tax receivable - 405,503
Inventories (Notes B and F) 6,515,297 6,399,128
Prepaid expenses 594,930 389,424
Deferred income taxes (Note H) 856,000 361,000
Other current assets (Note E) 569,574 271,935
------------ ------------
Total current assets 11,272,539 9,039,838
PROPERTY AND EQUIPMENT,
AT COST (Notes C and F) 13,910,996 11,549,813
NOTE RECEIVABLE, LESS CURRENT
MATURITIES (Note D) 16,191 46,252
OTHER ASSETS (Note E) 1,169,639 442,937
------------ ------------
$ 26,369,365 $ 21,078,840
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,211,749 $ 4,709,028
Line of credit (Note F) - 1,500,000
Other current liabilities (Note G) 3,492,361 2,373,533
------------ ------------
Total current liabilities 6,704,110 8,582,561
DEFERRED INCOME TAXES (Note H) 407,000 129,000
COMMITMENTS AND CONTINGENCIES (Note J) - -
STOCKHOLDERS' EQUITY (Note K)
Common stock, no par value; authorized
50,000,000 shares; issued and
outstanding 6,405,619 shares in 1997
and 6,351,119 shares in 1996 7,166,742 6,768,844
Cumulative foreign currency
translation adjustment (79,422) 9,786
Retained earnings 12,170,935 5,588,649
------------ ------------
Total stockholders' equity 19,258,255 12,367,279
------------ ------------
$ 26,369,365 $ 21,078,840
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
December 27, December 28, December 31,
Year ended 1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
NET SALES $ 85,205,504 $ 56,700,122 $ 24,541,306
COST OF SALES 17,852,316 11,595,830 5,703,409
------------ ------------- ------------
Gross profit 67,353,188 45,104,292 18,837,897
OPERATING EXPENSES
Distributor incentives 39,536,132 25,890,347 10,800,330
Selling, general and
administrative 16,039,711 10,515,205 4,245,542
Research and development 1,245,405 797,785 255,779
------------ ------------- ------------
Earnings from operations 10,531,940 7,900,955 3,536,246
OTHER INCOME (expense)
Interest income 156,808 164,629 111,738
Interest expense (15,538) (6,915) (2,231)
Other, net 25,076 89,629 81,495
------------ ------------- ------------
Earnings before
income taxes 10,698,286 8,148,298 3,727,248
Income taxes (Note H) 4,116,000 3,113,000 1,422,000
------------ ------------- ------------
NET EARNINGS $ 6,582,286 $ 5,035,298 $ 2,305,248
============ ============ ============
Earnings per common share--basic $ 1.03 $ 0.80 $ 0.41
Weighted average shares
outstanding--basic 6,370,508 6,313,476 5,639,232
Earnings per common
share--diluted $ 0.99 $ 0.76 $ 0.40
Weighted average shares
outstanding--diluted 6,659,665 6,662,853 5,794,521
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Common Stock foreign Retained
------------ currency earnings
Number translation (accumulated
of shares Amount adjustment deficit) Total
----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 5,315,742 $ 3,473,429 $ -- $ (1,751,897) $ 1,721,532
Shares issued for (Note I):
Property 11,996 31,488 -- -- 31,488
Cash 952,381 2,500,000 -- -- 2,500,000
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 (Note K) 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
=========== ============ ============ ============ ============
Sale of common stock
under stock option
plan, net (Note K) 54,500 166,225 -- -- 166,225
Tax benefit from
exercise of
stock options -- 231,673 -- -- 231,673
Foreign currency translation
adjustment -- -- (89,208) -- (89,208)
Net earnings for the year -- -- -- 6,582,286 6,582,286
----------- ------------ ------------ ------------ ------------
Balance at
December 27, 1997 6,405,619 $ 7,166,742 $ (79,422) $ 12,170,935 $ 19,258,255
=========== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 27, December 28, December 31,
Year ended 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 6,582,286 $ 5,035,298 $ 2,305,248
Adjustments to reconcile net
earnings to net cash provided
by operating activities
Depreciation and
amortization 2,215,685 921,846 291,493
Gain on sale of property
and equipment (3,161) (69,020) (66,863)
Charitable contribution of
property and equipment 2,590 -- --
Provision for doubtful accounts 138,886 (2,000) 10,279
Provision for inventory obsolescence 220,000 -- --
Deferred income taxes (217,000) (111,000) (75,000)
Changes in assets and liabilities
Receivables (182,099) (41,903) 11,104
Income tax receivable 405,503 (405,503) --
Inventories (336,169) (4,271,404) (1,240,792)
Prepaid expenses and
other assets (1,617,479) (938,202) (209,079)
Accounts payable (1,497,279) 3,498,823 850,664
Other current liabilities 1,350,501 620,939 1,994,042
----------- ----------- -----------
Total adjustments 479,978 (797,424) 1,565,848
----------- ----------- -----------
Net cash provided by
operating activities 7,062,264 4,237,874 3,871,096
=========== =========== ===========
CASH FLOWS FROM INVESTING ACTIVITIES
Receipts on notes receivable 27,212 12,623 --
Increase in notes receivable -- (86,087) --
Purchase of property and equipment (5,299,158) (7,800,906) (4,157,805)
Proceeds from sale of property
and equipment
1,110,493 120,400 235,600
Collection of related party advances -- -- 160,000
----------- ----------- -----------
Net cash used in investing activities (4,161,453) (7,753,970) (3,762,205)
=========== =========== ===========
</TABLE>
(continued)
<PAGE>
<TABLE>
<CAPTION>
December 27, December 28, December 31,
Year ended 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
(continued)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in cash overdraft $ -- $ -- $ (275,084)
Proceeds from issuance of
long-term obligations -- -- 20,652
Principal payments of
long-term obligations -- (14,819) (21,205)
Net proceeds from sale of
common stock 166,225 171,458 2,500,000
Increase in line of credit 605,000 1,500,000 --
Decrease in line of credit (2,105,000) -- --
----------- ----------- -----------
Net cash (used in) provided
by financing activities (1,333,775) 1,656,639 2,224,363
=========== =========== ===========
Effect of exchange rate
changes on cash (89,208) 13,538 (3,752)
----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents 1,477,828 (1,845,919) 2,329,502
Cash and cash equivalents at
beginning of year 1,130,487 2,976,406 646,904
----------- ----------- -----------
Cash and cash equivalents at
end of year $ 2,608,315 $ 1,130,487 $ 2,976,406
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 15,500 $ 22,800 $ 2,200
Income taxes $ 3,888,800 $ 4,375,000 $ 64,300
----------- ----------- -----------
</TABLE>
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.
The accompanying notes are an integral part of these statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Subsidiaries (the
Company) conform with generally accepted accounting principles and with general
practices in the manufacturing and distribution industry. 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.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and operations
of USANA, Inc. and its wholly-owned subsidiaries, USANA Canada, Inc., USANA
Australia Pty Ltd, USANA New Zealand Limited, and USANA Trading Company, 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. USANA Australia Pty Ltd, and USANA New Zealand Limited were incorporated
in March of 1997, USANA Trading Company, Inc. was incorporated in September of
1997. These three subsidiaries had not begun operations as of December 27, 1997.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
3. 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. Direct selling began in
Australia and New Zealand in February 1998.
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 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.
6. OTHER CURRENT ASSETS
Start-up costs incurred by the Company's subsidiaries are capitalized as
incurred. These start-up costs are amortized over 12 months or less beginning on
the date the subsidiaries begin operations. Product development costs are
capitalized and amortized over an average of 12 months.
7. INTERNAL SOFTWARE DEVELOPMENT COSTS
Software development costs for internally used software are capitalized
beginning when adequate funds are committed and technological feasibility for
the project is established up to the time the product is ready for use.
<PAGE>
Amortization of the capitalized costs will begin when the software is ready for
its intended use, after substantially all tests to determine whether the
software is operational have been completed. No amortization has been taken as
of December 27, 1997.
8. INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out method.
9. 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.
Maintenance, repairs, and renewals which neither materially add to the value of
the property nor appreciably prolong its life are charged to expense as
incurred. Gains or losses on dispositions of property and equipment are included
in earnings.
10. REVENUE RECOGNITION AND DEFERRED REVENUE
The Company receives payment for the sales price of its products at the
time orders are made by a distributor. Sales are recorded when the product is
shipped. Payments received for unshipped products are recorded as deferred
revenue and are included in other current liabilities.
11. 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.
12. PRODUCT RETURN POLICY
Returned product that is unused and resalable 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.
13. RESEARCH AND DEVELOPMENT
Research and development costs have been charged to expense as incurred.
14. EARNINGS PER SHARE
Basic earnings per common share are based on the weighted average number of
common shares outstanding during each period. Diluted earnings per common share
are based on shares outstanding (computed as under basic EPS) and potentially
dilutive common shares. Potential common shares included in the dilutive
earnings per share calculation include stock options granted.
15. 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
approximates carrying values due to the short-term maturity of the instruments.
<PAGE>
16. TRANSLATION OF FOREIGN CURRENCIES
The foreign subsidiaries' 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.
17. 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.
18. CERTAIN RECLASSIFICATIONS
Certain nonmaterial reclassifications have been made to the 1996 and 1995
financial statements to conform with the 1997 presentation.
19. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Comprehensive income
In September 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income." SFAS 130 requires entities presenting a complete set of
financial statements to include details of comprehensive income that arise in
the reporting period. Comprehensive income consists of net earnings or loss for
the current period and other comprehensive income, which consists of revenues,
expenses, gains, and losses that bypass the statement of earnings and are
reported directly in a separate component of equity. Other comprehensive income
includes, for example, foreign currency items, minimum pension liability
adjustments, and unrealized gains and losses on certain investment securities.
SFAS 130 requires that components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement is effective for fiscal years beginning
after December 15, 1997 and requires restatement of prior period financial
statements presented for comparative purposes.
Disclosure of segments
Also in September 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and
Related Information." This statement requires an entity to report financial and
descriptive information about their reportable operating segments. An operating
segment is a component of an entity for which financial information is developed
and evaluated by the entity's chief operating decision maker to assess
performance and to make decisions about resource allocation. Entities are
required to report segment profit or loss, certain specific revenue and expense
items and segment assets based on financial information used internally for
evaluating performance and allocating resources. This statement is effective for
fiscal years beginning after December 15, 1997 and requires restatement of prior
period financial statements presented for comparative purposes.
Management does not believe that the adoption of SFAS 130 and SFAS 131 will
have a material effect on the Company's consolidated financial statements.
<PAGE>
NOTE B-INVENTORIES
Inventories consist of the following:
1997 1996
----------- -----------
Raw materials $ 2,312,557 $ 2,487,907
Work in progress 903,915 455,315
Finished goods 3,518,825 3,455,906
----------- -----------
6,735,297 6,399,128
Less allowance for
inventory obsolescence 220,000 -
----------- -----------
$ 6,515,297 $ 6,399,128
=========== ===========
NOTE C-PROPERTY AND EQUIPMENT
Cost of property and equipment and their estimated useful lives consist of the
following:
Years 1997 1996
----- ----------- -----------
Building 40 $ 5,437,484 $ 5,034,304
Laboratory and production equipment 5-7 1,479,881 2,337,358
Computer equipment 3-5 5,808,929 2,347,347
Furniture and fixtures 3-5 1,312,699 684,481
Automobiles 3-5 320,920 285,039
Leasehold improvements 3-5 86,308 -
Land improvements 15 289,325 285,278
----------- -----------
14,735,546 10,973,807
Less accumulated depreciation
and amortization 2,597,335 1,196,779
----------- -----------
12,138,211 9,777,028
Land 1,772,785 1,772,785
----------- -----------
$13,910,996 $11,549,813
=========== ===========
NOTE D-RECEIVABLES
Accounts receivable consist of the following:
1997 1996
--------- --------
Trade receivables $ 230,941 $ 55,149
Other receivables 6,307 -
--------- --------
237,248 55,149
Less allowance for
doubtful accounts 138,886 -
--------- --------
$ 98,362 $ 55,149
========= ========
<PAGE>
The history of the allowance for doubtful accounts is as follows:
1997 1996 1995
-------- -------- --------
Balance at beginning
of the year $ - $ 2,000 $106,698
Provisions 138,886 - 10,279
Write-offs - 2,000 114,977
-------- -------- --------
Balance at end of the year $138,886 $ - $ 2,000
======== ======== ========
Note receivable consists of the following:
1997 1996
-------- --------
10% note receivable from a
company, due over three years,
collateralized by equipment $ 46,252 $ 73,464
Less current maturities 30,061 27,212
-------- --------
$ 16,191 $ 46,252
======== ========
NOTE E-OTHER ASSETS
Other current assets consist of the following:
1997 1996
---------- ---------
Capitalized start-up costs $ 216,746 $ -
Product development costs 769,661 367,963
Other 116,827 50,000
---------- ---------
1,103,234 417,963
Less accumulated amortization 533,660 146,028
---------- ---------
$ 569,574 $ 271,935
========== =========
Other long-term assets consist of the following:
1997 1996
---------- ---------
Internal software
development costs $ 757,378 $ 183,758
Deposits on equipment 336,061 239,561
Other 76,200 19,618
---------- ---------
$1,169,639 $ 442,937
========== =========
Amortization expense was $387,632 and $146,027 in 1997 and 1996, respectively.
<PAGE>
NOTE F-LINE OF CREDIT
The Company has a $5 million line of credit expiring 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 December 27, 1997, the Company was in compliance with
the covenants. The Company paid off the balance of $1.5 million that existed at
December 28, 1996, and there was no outstanding balance as of December 27, 1997.
NOTE G-OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
1997 1996
---------- ----------
Accrued compensation and related items $ 762,983 $ 400,623
Distributor incentives 684,569 614,559
Income taxes 728,570 95,851
Sales taxes 658,269 887,487
Deferred revenue 165,376 177,488
All other 492,594 197,525
---------- ----------
$3,492,361 $2,373,533
========== ==========
NOTE H-INCOME TAXES
Income tax expense (benefit) consists of the following:
1997 1996 1995
---------- ----------- -----------
CURRENT
Federal and State $3,866,000 $ 3,114,000 $ 1,497,000
Foreign 467,000 110,000 -
---------- ----------- -----------
4,333,000 3,224,000 1,497,000
DEFERRED (217,000) (111,000) (75,000)
Federal and State ---------- ----------- -----------
$4,116,000 $ 3,113,000 $ 1,422,000
========== =========== ===========
The income tax provision reconciled to the tax computed at the federal statutory
rate of 34% is as follows:
1997 1996 1995
----------- ----------- -----------
Federal income taxes
at statutory rate $ 3,637,000 $ 2,770,000 $ 1,265,000
State income taxes,
<PAGE>
net of federal tax
benefit 369,000 269,000 143,000
Difference between
U.S. statutory rate
and foreign rate 110,000 26,000 -
All other - 48,000 14,000
----------- ----------- -----------
$ 4,116,000 $ 3,113,000 $ 1,422,000
=========== =========== ===========
Deferred tax assets and liabilities consist of the following:
1997 1996
---------- ---------
DEFERRED TAX ASSETS
Inventory capitalization $ 415,000 $ 324,000
Intercompany sales 220,000 -
All other 221,000 37,000
---------- ---------
$ 856,000 $ 361,000
========== =========
DEFERRED TAX LIABILITIES
Accumulated depreciation $ (310,000) $(129,000)
All other (97,000) -
---------- ---------
$ (407,000) $(129,000)
========== =========
NOTE I-RELATED PARTY TRANSACTIONS
In July 1995, the Company issued 11,996 shares of common stock to Gull
Holdings, Limited (owned by the Company's CEO) 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 Gull Holdings, Limited for $2.5 million.
NOTE J-COMMITMENTS AND CONTINGENCIES
1. OPERATING LEASES
The Company currently conducts its Canadian operations in leased facilities
and has entered into lease commitments for its Australian and New Zealand
subsidiaries. Each of the lease agreements are noncancelable operating leases
and expire through 2003. The Company utilizes equipment under a noncancelable
operating lease expiring in 1999. The minimum rental commitments under operating
leases are as follows:
Year ending
December Facilities Equipment Total
- --------------------------------------------------------------------------
1998 $ 373,119 $ 397,111 $ 770,230
1999 399,223 405,955 805,178
2000 322,926 66,875 389,801
2001 290,144 - 290,144
2002 267,344 - 267,344
Thereafter 24,580 - 24,580
---------- --------- -----------
$1,677,336 $ 869,941 $ 2,547,277
========== ========= ===========
<PAGE>
The leases generally provide that property taxes, insurance, and
maintenance expenses are obligations of the Company. It is expected that in the
normal course of business, operating leases that expire will be renewed or
replaced by leases on other properties. Rent expense for operating leases in
1997 was $373,494 ($232,000 in 1996 and $179,000 in 1995).
2. SALE-LEASEBACK
During 1997, the Company entered into an agreement for the sale and
leaseback of certain production equipment. The Company has purchase and lease
renewal options at the projected fair market value under the agreement. The
lease is classified as an operating lease.
As of December 27, 1997, production equipment with a book value
totaling approximately $1,000,000 has been removed from the balance sheet. The
annual lease payments, over the three year life of the lease, total
approximately $390,837 in 1998; $401,250 in 1999; and $66,875 in 2000. These
amounts are included in the table above.
3. 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.
4. EMPLOYEE BENEFIT PLAN
The Company has 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 earnings. The Company's matching
contributions vest at 20% per year beginning with the second year. The Company
contributed $132,757 to the plan during the year ended December 27, 1997,
$32,750 for 1996 and $13,912 for 1995.
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
Officers and key employees have been granted options to acquire 864,500
shares of common stock that vest periodically through October 2002. 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. Subsequent to the
original grant date, the exercise prices of certain options were changed to
$15.66 per share. 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
<PAGE>
Company directors have been granted options to acquire 250,000 shares
of common stock that vest periodically through August 2001. 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. Subsequent to the original
grant date, the exercise price of these options was changed to $15.66 per share.
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:
1997 1996 1995
-------- -------- --------
NET EARNINGS:
As reported $ 6,582,286 $ 5,035,298 $ 2,305,248
Pro forma $ 5,541,313 $ 3,834,104 $ 2,222,798
-------- -------- --------
EARNINGS PER SHARE-BASIC
As reported $ 1.03 $ 0.80 $ 0.41
Pro forma $ 0.87 $ 0.61 $ 0.40
-------- -------- --------
EARNINGS PER SHARE - DILUTED
As reported $ 0.99 $ 0.76 $ 0.40
Pro forma $ 0.83 $ 0.58 $ 0.38
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; expected volatility of 62 percent for 1997 and 46 percent for 1996
and 1995; risk-free interest rate of 6.13 for 1997 and 6.19 percent for 1996 and
1995; and expected life of 8.22 for 1997 and 8.94 for 1996 and 1995. Dividends
were assumed not to be paid during the period of calculation. The weighted
average fair value of options granted was $12.85, $15.45 and $5.37 in 1997,
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 from both plans are as follows:
Weighted
average
Stock Exercise exercise
options price price
-------- -------- --------
Outstanding at
December 31, 1995 653,500 $ 3.05-9.75 $ 5.37
<PAGE>
-------- -------- --------
Granted 550,000 11.93-21.04 19.98
Less:
Exercised 71,000 3.05 3.05
Canceled or expired 104,000 3.05-9.70 9.44
-------- -------- --------
Outstanding at
December 28, 1996 1,028,500 $ 3.05-21.04 $ 13.31
======== ======== ========
Granted 95,000 15.66-17.50 16.82
Less:
Exercised 54,500 3.05 3.05
Canceled or expired 80,000 3.05-15.66 11.54
-------- -------- --------
Outstanding at
December 27, 1997 989,000 $ 3.05-17.50 $ 10.98
======== ======== ========
Exercisable at
December 27, 1997 189,000 $ 3.05-17.50 $ 9.03
======== ======== ========
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 years ended December
27, 1997, December 28, 1996 and December 31, 1995 are as follows: Prior to 1995,
the Company had no international operations.
<TABLE>
<CAPTION>
New USANA Trading
1997 Domestic Canada Australia/(1)/ Zealand/(1)/ Company/(1)/ Consolidation
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales-
unaffiliated customers $58,975,432 $26,230,072 $ - $ - $ - $85,205,504
Earnings from
operations (2) $9,483,250 $1,048,690 $ - $ - $ - $10,531,940
Identifiable assets $23,808,797 $1,381,403 $1,116,732 $62,433 $ - $26,369,365
- -------------------------------------------------------------------------------------------------------------------
New USANA Trading
1996 Domestic Canada Australia/(1)/ Zealand/(1)/ Company/(1)/ Consolidation
- -------------------------------------------------------------------------------------------------------------------
Net sales-
unaffiliated customers $44,720,207 $11,979,915 $ - $ - $ - $56,700,122
Earnings from
operations (2) $7,657,378 $243,577 $ - $ - $ - $7,900,955
Identifiable assets $20,627,987 $450,853 $ - $ - $ - $21,078,840
- -------------------------------------------------------------------------------------------------------------------
New USANA Trading
1995 Domestic Canada Australia/(1)/ Zealand/(1)/ Company/(1)/ Consolidation
- -------------------------------------------------------------------------------------------------------------------
Net sales-
unaffiliated customers $21,529,993 $3,011,313 $ - $ - $ - $24,541,306
Earnings from
operations (2) $3,508,834 $27,412 $ - $ - $ - $3,536,246
Identifiable assets $9,814,094 $359,509 $ - $ - $ - $10,173,603
</TABLE>
<PAGE>
(1) USANA Australia Pty Ltd, USANA New Zealand Limited and USANA Trading
Company, Inc. were incorporated during 1997 but had not begun operations as of
December 27, 1997.
(2) Intercompany transfers between geographic areas are not material.
NOTE M-QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Summarized quarterly financial results for fiscal years 1997 and 1996 is as
follows (in thousands, except per share data):
1997 quarter: First Second Third Fourth
- ---------------------------------------------------------------------------
Net sales $ 17,654 $ 21,046 $22,873 $ 23,633
Gross Profit $ 13,895 $ 16,652 $ 18,064 $18,742
Net Earnings $ 1,123 $ 1,662 $ 1,856 $ 1,941
Earnings per common
share-diluted $0.17 $0.25 $0.28 $0.29
- ---------------------------------------------------------------------------
1997 quarter: First Second Third Fourth
- ---------------------------------------------------------------------------
Net sales $ 10,554 $ 14,215 $ 16,098 $ 15,833
Gross Profit $ 8,516 $ 11,145 $ 12,716 $ 12,727
Net Earnings $ 1,119 $ 1,469 $1,457 $ 990
Earnings per common
share-diluted $ 0.17 $ 0.22 $0.21 $ 0.15
- ---------------------------------------------------------------------------
EXHIBIT 11-EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
Year ended December 27, 1997 December 28, 1996 December 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS AVAILABLE TO
COMMON SHAREHOLDERS $6,582,286 $5,035,298 $2,305,248
- --------------------------------------------------------------------------------
BASIC EPS
- --------------------------------------------------------------------------------
SHARES
Common shares outstanding
entire period 6,351,119 6,280,119 5,315,742
Weighted average common
shares issued
during period 19,389 33,357 323,490
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding
during period 6,370,508 6,313,476 5,639,232
- --------------------------------------------------------------------------------
Earnings per common share-basic $1.03 $0.80 $0.41
- --------------------------------------------------------------------------------
DILUTED EPS
- --------------------------------------------------------------------------------
SHARES
Weighted average
common shares
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
outstanding during
period-basic 6,370,508 6,313,476 5,639,232
Dilutive effect of
stock options 289,157 349,377 155,289
- --------------------------------------------------------------------------------
Weighted average
common shares outstanding
during period-diluted 6,659,665 6,662,853 5,794,521
- --------------------------------------------------------------------------------
Earnings per common share-diluted $0.99 $0.76 $0.40
- --------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000896264
<NAME> USANA, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> DEC-27-1997
<CASH> 2,608,315
<SECURITIES> 0
<RECEIVABLES> 237,248
<ALLOWANCES> 138,886
<INVENTORY> 6,515,297
<CURRENT-ASSETS> 11,272,539
<PP&E> 16,508,331
<DEPRECIATION> 2,597,335
<TOTAL-ASSETS> 26,369,365
<CURRENT-LIABILITIES> 6,704,110
<BONDS> 0
0
0
<COMMON> 7,166,742
<OTHER-SE> 12,091,513
<TOTAL-LIABILITY-AND-EQUITY> 26,369,365
<SALES> 85,205,504
<TOTAL-REVENUES> 85,205,504
<CGS> 17,852,316
<TOTAL-COSTS> 56,821,248
<OTHER-EXPENSES> (166,346)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,538
<INCOME-PRETAX> 10,698,286
<INCOME-TAX> 4,116,000
<INCOME-CONTINUING> 6,582,286
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,582,286
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 0.99
</TABLE>
