<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21116
----------------
USANA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
UTAH 87-0500306
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3838 WEST PARKWAY BLVD.
SALT LAKE CITY, UTAH 84120
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
(801) 954-7100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AS OF
OCTOBER 31, 1998 WAS 13,042,238.
ON JULY 21, 1998, THE REGISTRANT DECLARED A TWO-FOR-ONE STOCK SPLIT OF ITS
COMMON STOCK, NO PAR VALUE, THAT WAS DISTRIBUTED IN THE FORM OF A STOCK
DIVIDEND ON AUGUST 3, 1998 TO SHAREHOLDERS OF RECORD AS OF JULY 31, 1998.
OUTSTANDING COMMON STOCK DATA IN THIS REPORT HAVE BEEN ADJUSTED TO REFLECT THE
STOCK SPLIT.
- -------------------------------------------------------------------------------
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<PAGE>
USANA, INC.
INDEX TO FINANCIAL STATEMENTS AND EXHIBITS
FILED WITH THE QUARTERLY REPORT OF THE COMPANY ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 26, 1998
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS........................................... 3
CONSOLIDATED STATEMENTS OF EARNINGS-- QUARTER ENDED................... 4
CONSOLIDATED STATEMENTS OF EARNINGS-- NINE MONTHS ENDED............... 5
CONSOLIDATED STATEMENTS OF CASH FLOWS................................. 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................ 7-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................... 10-16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................... 16
ITEM 5. OTHER INFORMATION............................................... 16-17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 17
SIGNATURES.............................................................. 18
</TABLE>
2
<PAGE>
USANA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
-------------
AS OF AS OF
DECEMBER 27, SEPTEMBER 26,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.......................... $ 2,608 $ 3,281
Accounts receivable, net........................... 98 291
Inventories (Note A)............................... 6,516 9,549
Prepaid expenses and other current assets.......... 1,165 2,218
Current maturities of notes receivable............. 30 554
Deferred income taxes.............................. 856 1,440
------- -------
Total current assets.............................. 11,273 17,333
Property and equipment, at cost (Note B)............ 13,911 18,809
Other assets
Deposits on machinery.............................. 1,093 817
Notes receivable, less current maturities.......... 16 5
Other.............................................. 76 162
------- -------
Total assets...................................... $26,369 $37,126
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................... $ 3,212 $ 3,480
Other current liabilities (Note C)................. 3,492 6,090
------- -------
Total current liabilities......................... 6,704 9,570
Deferred income taxes............................... 407 356
Stockholders' equity
Common stock, no par value:
Authorized--50,000 shares, issued and outstanding
12,812 as of December 27, 1997 and 12,991 as of
September 26, 1998................................ 7,167 8,761
Cumulative foreign currency translation
adjustment........................................ (80) (602)
Retained earnings.................................. 12,171 19,041
------- -------
Total stockholders' equity........................ 19,258 27,200
------- -------
Total liabilities and stockholders' equity........ $26,369 $37,126
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
USANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNAUDITED
---------------------------
QUARTER ENDED QUARTER ENDED
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
------------- -------------
<S> <C> <C>
Net sales......................................... $22,873 $32,123
Cost of sales..................................... 4,809 6,725
------- -------
Gross profit.................................. 18,064 25,398
Operating Expenses:
Distributor incentives.......................... 10,438 14,312
Selling, general and administrative............. 4,273 6,705
Research and development........................ 386 405
------- -------
Total operating expenses...................... 15,097 21,422
------- -------
Earnings from operations........................ 2,967 3,976
Other income (expense):
Interest income................................. 53 88
Other, net...................................... (10) 25
------- -------
Total other income............................ 43 113
------- -------
Earnings before income taxes.................... 3,010 4,089
Income taxes...................................... 1,154 1,559
------- -------
Net Earnings.................................. $ 1,856 $ 2,530
======= =======
Earnings per share--basic (Note D)................ $ 0.15 $ 0.19
======= =======
Weighted average shares outstanding--basic (Note
D)............................................... 12,736 12,987
======= =======
Earnings per share--diluted (Note D).............. $ 0.14 $ 0.18
======= =======
Weighted average shares outstanding--diluted (Note
D)............................................... 13,263 14,190
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
USANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNAUDITED
---------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
------------- -------------
<S> <C> <C>
Net sales......................................... $61,573 $89,200
Cost of sales..................................... 12,962 18,619
------- -------
Gross profit.................................. 48,611 70,581
Operating Expenses:
Distributor incentives.......................... 28,593 40,004
Selling, general and administrative............. 11,647 18,456
Research and development........................ 965 1,132
------- -------
Total operating expenses...................... 41,205 59,592
------- -------
Earnings from operations........................ 7,406 10,989
Other income (expense):
Interest income................................. 88 192
Other, net...................................... 19 (12)
------- -------
Total other income............................ 107 180
------- -------
Earnings before income taxes.................... 7,513 11,169
Income taxes...................................... 2,872 4,299
------- -------
Net Earnings.................................. $ 4,641 $ 6,870
======= =======
Earnings per share--basic (Note D)................ $ 0.37 $ 0.53
======= =======
Weighted average shares outstanding--basic (Note
D)............................................... 12,715 12,904
======= =======
Earnings per share--diluted (Note D).............. $ 0.35 $ 0.49
======= =======
Weighted average shares outstanding--diluted (Note
D)............................................... 13,267 13,980
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
USANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
---------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
------------- -------------
<S> <C> <C>
Increase in cash and cash equivalents
Cash flows from operating activities
Net earnings...................................... $ 4,641 $ 6,870
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization.................... 1,257 2,845
(Gain)/loss on sale of property and equipment.... (3) 17
Provision for doubtful accounts.................. -- 256
Provision for inventory obsolescence............. 138 (70)
Charitable contributions of equipment............ 3 --
Deferred income taxes............................ 91 (635)
Changes in assets and liabilities:
Receivables..................................... (112) (457)
Income tax receivable........................... 406 --
Inventories..................................... 138 (3,161)
Prepaid expenses and other assets............... (811) (1,420)
Accounts payable................................ (1,539) 297
Other current liabilities....................... 1,474 3,282
------- -------
Total adjustments.............................. 1,042 954
------- -------
Net cash provided by operating activities...... 5,683 7,824
Cash flows from investing activities
Receipts on notes receivable...................... 20 22
Increase in notes receivable...................... -- (534)
Purchase of property and equipment................ (3,719) (7,574)
Proceeds from the sale of property and equipment.. 1,114 75
------- -------
Net cash used in investing activities.......... (2,585) (8,011)
Cash flows from financing activities
Net proceeds from the sale of common stock........ 102 989
Increase in line of credit........................ 605 --
Decrease in line of credit........................ (2,105) --
------- -------
Net cash (used in) provided by financing
activities.................................... (1,398) 989
Effect of exchange rate changes on cash............ (20) (129)
------- -------
Net increase in cash and cash equivalents...... 1,680 673
Cash and cash equivalents at beginning of period... 1,130 2,608
------- -------
Cash and cash equivalents at end of period......... $ 2,810 $ 3,281
======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest......................................... $ 10 $ 7
Income taxes..................................... $ 1,984 $ 4,247
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The unaudited interim consolidated financial information of USANA, Inc. and
Subsidiaries (the "Company" or "USANA") has been prepared in accordance with
Article 10 of Regulation S-X promulgated by the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying interim
consolidated financial information contains all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the Company's
financial position as of September 26, 1998, and results of operations for the
quarters and nine months ended September 26, 1998 and September 27, 1997.
These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 27, 1997, as amended.
The results of operations for the quarter and nine months ended September 26,
1998 may not be indicative of the results that may be expected for the fiscal
year ending January 2, 1999.
NOTE A--INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 27, SEPTEMBER 26,
1997 1998
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials..................................... $2,313 $2,807
Work in process................................... 904 1,629
Finished goods.................................... 3,519 5,263
------ ------
6,736 9,699
Less allowance for inventory obsolescence......... 220 150
------ ------
$6,516 $9,549
====== ======
</TABLE>
NOTE B--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 27, SEPTEMBER 26,
1997 1998
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Buildings........................................ $ 5,437 $ 7,387
Laboratory and production equipment.............. 1,480 1,946
Computer equipment............................... 5,809 9,298
Furniture and fixtures........................... 1,313 1,508
Automobiles...................................... 321 316
Leasehold improvements........................... 86 393
Land improvements................................ 289 289
------- -------
14,735 21,137
Less accumulated depreciation and amortization... 2,597 4,925
------- -------
12,138 16,212
Land............................................. 1,773 2,597
------- -------
$13,911 $18,809
======= =======
</TABLE>
7
<PAGE>
NOTE C--OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 27, SEPTEMBER 26,
1997 1998
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Employee compensation and related items........... $ 763 $ 834
Distributor incentives............................ 685 1,598
Income taxes...................................... 729 707
Sales taxes....................................... 658 762
Deferred revenue.................................. 165 260
All other......................................... 492 1,929
------ ------
$3,492 $6,090
====== ======
</TABLE>
NOTE D--EARNINGS PER SHARE
On July 21, 1998, the Company announced that its Board of Directors approved
a 2-for-1 stock split effected in the form of a stock dividend that was
distributed on August 3, 1998 to all shareholders of record on July 31, 1998.
All stock option agreements and commitments of the Company payable in stock
provide for the issuance of additional shares in the event of a stock split or
similar event. This action did not change the par value of the Common Stock or
the total number of shares the Company is authorized to issue. No amendment to
the Company's Articles of Incorporation was required.
Basic earnings per share are based on the weighted average number of shares
outstanding for each period. Diluted earnings per common share are based on
shares outstanding (computed under basic EPS) and potentially dilutive shares.
Potential shares included in dilutive earnings per share calculations include
stock options granted but not exercised.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED SEPTEMBER 27, 1997
-----------------------------------------
EARNINGS (000'S) SHARES (000'S) EARNINGS
(NUMERATOR) (DENOMINATOR) PER SHARE
---------------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Net earnings...................... $1,856 12,736 $0.15
=====
Effect of dilutive securities
Stock options..................... -- 527
------ ------
Diluted EPS
Net earnings...................... $1,856 13,263 $0.14
====== ====== =====
During the third quarter of 1997, options to purchase 980,000 shares of
stock at $7.83 a share were outstanding. They were not included in the
computation of EPS for such period because their exercise price was greater
than the average market price of the shares.
<CAPTION>
FOR THE QUARTER ENDED SEPTEMBER 26, 1998
-----------------------------------------
EARNINGS (000'S) SHARES (000'S) EARNINGS
(NUMERATOR) (DENOMINATOR) PER SHARE
---------------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Net earnings...................... $2,530 12,987 $0.19
=====
Effect of dilutive securities
Stock options..................... -- 1,203
------ ------
Diluted EPS
Net earnings...................... $2,530 14,190 $0.18
====== ====== =====
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 27, 1997
-----------------------------------------
EARNINGS (000'S) SHARES (000'S) EARNINGS
(NUMERATOR) (DENOMINATOR) PER SHARE
---------------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Net earnings...................... $4,641 12,715 $0.37
=====
Effect of dilutive securities
Stock options..................... -- 552
------ ------
Diluted EPS
Net earnings...................... $4,641 13,267 $0.35
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 26, 1998
-----------------------------------------
EARNINGS (000'S) SHARES (000'S) EARNINGS
(NUMERATOR) (DENOMINATOR) PER SHARE
---------------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Net earnings...................... $6,870 12,904 $0.53
=====
Effect of dilutive securities
Stock options..................... -- 1,076
------ ------
Diluted EPS
Net earnings...................... $6,870 13,980 $0.49
====== ====== =====
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q.
GENERAL
USANA develops and manufactures high-quality nutritional, personal care and
weight management products. The Company distributes its products through a
network marketing system. As of September 26, 1998, the Company had
approximately 110,000 current distributors in the United States, Canada,
Australia and New Zealand. The Company defines a current distributor as a
distributor who has made a purchase in the most recent twelve-month period.
From 1993 to 1997, net sales of the Company grew from $3.9 million to $85.2
million, while net earnings increased from a loss of $312,000 to net earnings
of $6.6 million.
The Company's three primary product lines are nutritional, personal care and
weight management products. Nutritional supplements accounted for
approximately 81% of the Company's net sales during the nine months ended
September 26, 1998. The Company's top selling products, USANA Essentials and
Proflavanol(R), represented approximately 42% and 19%, respectively, of net
sales during the nine months ended September 26, 1998. USANA's personal care
line includes skin, hair and body, and dental care products. The Company's
weight management line includes a dietary supplement in tablet form, food
bars, meal entrees, instructional videos and other products developed to
provide a comprehensive approach to weight management, proper diet, nutrition
and healthy living. In June 1998, the Company introduced several new products,
including CoQuinone(TM), Procosamine(TM), the USANA Dental Care System and an
in-home water distillation system. In addition to its primary product lines,
the Company also sells distributor kits and sales aids, which accounted for
approximately 4% of the Company's net sales for the nine months ended
September 26, 1998.
Net sales of the Company are produced primarily through the efforts of a
network of independent distributors who purchase products and sales materials.
The Company also promotes a Preferred Customer program specifically designed
for customers who desire to purchase USANA's products for personal
consumption, while choosing not to become independent distributors. As of
September 26, 1998, the Company had approximately 22,000 Preferred Customers.
The Company recognizes revenue when products are shipped and title passes to
independent distributors and Preferred Customers. During the nine months ended
September 26, 1998, sales in the Company's three primary markets, the United
States, Canada and Australia/New Zealand, were 58.5%, 27.8% and 13.7%,
respectively, of net sales of the Company. As the Company expands into
additional international markets, the Company expects international operations
to account for an increasing percentage of its net sales.
Cost of sales primarily consists of raw materials, labor, quality assurance
and overhead directly associated with the procurement and production of
USANA's products and sales materials as well as duties and taxes associated
with product exports. For the nine months ended September 26, 1998, products
manufactured by the Company accounted for approximately 75% of its net sales.
As international sales increase as a percentage of net sales, the Company
expects that its overall costs of sales could increase slightly, reflecting
additional duties, freight and other expenses associated with international
expansion.
Distributor incentives are the Company's most significant expense and
represented 44.8% of net sales for the nine months ended September 26, 1998.
Distributor incentives include commissions and leadership bonuses, and are
paid weekly based on sales volume points. Each product sold by the Company is
assigned a sales volume point value independent of the product's price.
Distributors earn commissions based on sales volume points generated by their
downline. Generally, distributor kits, sales aids and logo merchandise, such
as hats, t-shirts and luggage, have no sales volume point value and therefore
the Company pays no commissions for the sale of those items. The Company
believes distributor incentives will remain relatively constant as a
percentage of net sales for the remainder of 1998.
10
<PAGE>
The Company closely monitors the amount of distributor incentives paid as a
percentage of net sales and may adjust its distributor compensation plan to
prevent distributor incentives from having a significant adverse effect on
earnings, while continuing to maintain an appropriate incentive for its
distributors. For example, in the third quarter of 1997, the Company
introduced a repricing strategy across its product lines that created a spread
between the price a distributor pays for the product and the sales volume
point value associated with the product. This new price strategy had the
effect of reducing the amount of total distributor incentives paid as a
percentage of net sales. At the same time, the Company changed its leadership
bonus program, increasing the payout from 2.0% to 3.0% of total sales volume
points.
Selling, general and administrative expenses include wages and benefits,
depreciation and amortization, rents and utilities, distributor events,
promotion and advertising and professional fees along with other marketing and
administrative expenses. Wages and benefits represent the largest component of
selling, general and administrative expenses. The Company expects to add human
resources and associated infrastructure as operations expand. The President,
Chief Executive Officer and Chairman of the Board of Directors of the Company,
Dr. Wentz, does not receive a salary, and the Company does not anticipate that
Dr. Wentz will take a salary for the foreseeable future. However, if Dr. Wentz
were to take a salary, selling, general and administrative expenses would
increase. Depreciation and amortization expense has increased as a result of
substantial investments in computer and telecommunications equipment and
systems to support international expansion. The Company anticipates that
additional capital investments will be required in future periods to promote
and support growth in sales and the size of the Company's distributor base.
Research and development expenses include costs incurred in developing new
products, supporting and enhancing existing products and reformulating
products for introduction in international markets. The Company capitalizes
product development costs after market feasibility is established. These costs
are amortized over an average of 12 months, beginning with the month these
products are available for sale.
In 1996, the Company adopted a 52-53 week fiscal year. The Company's current
fiscal year ends January 2, 1999, and on the Saturday closest to December 31
of each fiscal year thereafter. References to a particular fiscal year are to
the fiscal year ending on such Saturday for fiscal years 1996 and later, and
to the year ended December 31 for fiscal years 1995 and earlier.
RESULTS OF OPERATIONS
QUARTERS ENDED SEPTEMBER 26, 1998 AND SEPTEMBER 27, 1997
Net Sales. Net sales increased 40.4% to $32.1 million during the quarter
ended September 26, 1998, an increase of $9.2 million from $22.9 million
during the comparable period in 1997. Approximately 90% of the growth in net
sales for this period was attributable to increases in total unit sales. New
product introductions in the second quarter of 1998 and the product price
increase in the third quarter of 1997 also contributed to sales growth for the
third quarter of 1998. The increase in unit sales is primarily the result of a
34.1% increase in the Company's independent distributor base and continued
growth in its Preferred Customer program, which was introduced in the third
quarter of 1997. As of September 26, 1998, the Company had approximately
110,000 current distributors compared to an estimated 82,000 current
distributors at September 27, 1997. Approximately 67% of the growth in the
distributor base can be associated with the opening of the Australia/New
Zealand market in February 1998. As of September 26, 1998, the Company had
approximately 22,000 Preferred Customers.
Net sales during the quarter ended September 27, 1997 included approximately
$800,000 from product sales incident to the Company's annual international
convention in July 1997. The convention was held during the second quarter of
1998 and sales incident to the 1998 convention were not included in the
results of operations of the Company for the quarter ended September 26, 1998.
11
<PAGE>
The following table illustrates the growth in sales by region for the
quarters ended September 27, 1997 and September 26, 1998:
SALES GROWTH BY REGION
(IN MILLIONS)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------
SEPTEMBER SEPTEMBER GROWTH OVER %
REGION 27, 1997 26, 1998 PRIOR YEAR GROWTH
- ------ ----------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
United States...................... $16.0 70.0% $17.6 54.7% $1.6 9.7%
Canada............................. 6.9 30.0% 8.4 26.3% 1.5 23.1%
Australia/New Zealand.............. -- -- 6.1 19.0% 6.1 --
----- ----- ----- ----- ----
$22.9 100.0% $32.1 100.0% $9.2 40.4%
===== ===== ===== ===== ====
</TABLE>
Cost of Sales. Cost of sales increased 39.8% to $6.7 million for the quarter
ended September 26, 1998, an increase of $1.9 million from $4.8 million during
the comparable period in 1997. As a percentage of net sales, cost of sales
decreased slightly to 20.9% during the quarter ended September 26, 1998 from
21.0% in the comparable period in 1997. The decrease in cost of sales as a
percentage of net sales can be attributed primarily to the price increase
introduced in the third quarter of 1997 and volume-based efficiencies in
production and procurement activities. These factors were partially offset by
additional costs such as freight and duties associated with exporting products
to Australia/New Zealand, and, to a lesser extent, a change in the sales mix
to include a higher percentage of distributor kits which have a significantly
lower gross profit margin. When a new market is opened, the Company initially
experiences a higher demand for distributor kits in that market.
Distributor Incentives. Distributor incentives increased 37.1% to $14.3
million for the quarter ended September 26, 1998, an increase of $3.9 million
from $10.4 million for the comparable period in 1997. As a percentage of net
sales, distributor incentives decreased to 44.6% for the quarter ended
September 26, 1998 from 45.6% in the comparable period in 1997. The decrease
in distributor incentives as a percentage of net sales can be attributed
primarily to the implementation of the Company's repricing strategy and a
change in the sales mix that resulted from increased demand for distributor
kits in the Australia/New Zealand market. The decrease in distributor
incentives as a percentage of net sales was partially offset by an increase in
the Company's leadership bonus program from 2.0% to 3.0% of the sales volume
points generated.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 56.9% to $6.7 million for the quarter ended
September 26, 1998, an increase of $2.4 million from $4.3 million for the
comparable period in 1997. As a percentage of net sales, selling, general and
administrative expenses increased to 20.9% for the quarter ended September 26,
1998 from 18.7% for the comparable period in 1997. The increase in selling,
general and administrative expenses can be attributed primarily to three
factors: (i) higher variable expenses such as increases in customer service
staffing levels and discount fees on credit cards in association with growth
in sales and the number of distributors and Preferred Customers; (ii)
increased depreciation and amortization expense of approximately 1% as a
percentage of net sales as a result of substantial investments in prior
periods in computer and telecommunications equipment to support growth and
international expansion; and (iii) higher relative costs associated with
international expansion.
Research and Development. Research and development expenses increased 4.9%
to $405,000 for the quarter ended September 26, 1998, an increase of $19,000
from $386,000 in the comparable period of 1997. Increases in research and
development expenses for the quarter ended September 26, 1998 were primarily
the result of new product development, ongoing clinical studies and the
reformulation of existing products.
Net Earnings. Net earnings increased 36.3% to $2.5 million for the quarter
ended September 26, 1998, an increase of $0.6 million from $1.9 million for
the comparable period in 1997. The increase in net earnings is primarily the
result of higher sales. Net earnings reflect the combined effect of decreased
cost of sales, decreased distributor incentives, and increased selling,
general and administrative expenses relative to net sales, which
12
<PAGE>
resulted in a 7.9% profit margin for the quarter ended September 26, 1998
compared to 8.1% for the comparable period of 1997. Diluted earnings per share
increased 28.6% to $0.18 for the quarter ended September 26, 1998, an increase
of $0.04 compared to $0.14 per share for the comparable period in 1997.
NINE MONTHS ENDED SEPTEMBER 26, 1998 AND SEPTEMBER 27, 1997
Net Sales. Net sales increased 44.9% to $89.2 million during the nine months
ended September 26, 1998, an increase of $27.6 million from $61.6 million
during the comparable period in 1997. Approximately 90% of the growth in net
sales for this period was attributable to increases in total unit sales. New
product introductions in the second quarter of 1998 and the product price
increase in the third quarter of 1997 also contributed to sales growth for the
third quarter of 1998. The increase in unit sales is primarily the result of a
34.1% increase in the Company's independent distributor base and continued
growth in its Preferred Customer program, which was introduced in the third
quarter of 1997. As of September 26, 1998, the Company had approximately
110,000 current distributors compared to an estimated 82,000 current
distributors at September 27, 1997. Approximately 67% of the growth in the
distributor base can be associated with the opening of the Australia/New
Zealand market in February 1998. As of September 26, 1998, the Company had
approximately 22,000 Preferred Customers.
The following table illustrates the growth in sales by region for the nine
months ended September 27, 1997 and September 26, 1998:
SALES GROWTH BY REGION
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 27, SEPTEMBER 26, GROWTH OVER %
REGION 1997 1998 PRIOR YEAR GROWTH
- ------ ------------- ------------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
United States.................. $ 43.3 70.3% $ 52.2 58.5% $ 8.9 20.6%
Canada......................... 18.3 29.7% 24.8 27.8% 6.5 35.4%
Australia/New Zealand.......... -- -- 12.2 13.7% 12.2 --
------ ------ ------ ------ -----
$ 61.6 100.0% $ 89.2 100.0% $27.6 44.9%
====== ====== ====== ====== =====
</TABLE>
Cost of Sales. Cost of sales increased 43.6% to $18.6 million for the nine
months ended September 26, 1998, an increase of $5.6 million from $13.0
million for the comparable period in 1997. As a percentage of net sales, cost
of sales decreased slightly to 20.9% for the nine months ended September 26,
1998 from 21.1% in the comparable period in 1997. The decrease in cost of
sales as a percentage of net sales can be attributed primarily to the price
increase introduced in the third quarter of 1997 and volume-based efficiencies
in production and procurement activities. These factors were partially offset
by additional costs such as freight and duties associated with exporting
products to Australia/New Zealand, and a change in the sales mix to include a
higher percentage of distributor kits which have a significantly lower gross
profit margin. When a new market is opened, the Company initially experiences
a higher demand for distributor kits in that market.
Distributor Incentives. Distributor incentives increased 39.9% to $40.0
million for the nine months ended September 26, 1998, an increase of $11.4
million from $28.6 million for the comparable period in 1997. As a percentage
of net sales, distributor incentives decreased to 44.8% for the nine months
ended September 26, 1998 from 46.4% in the comparable period in 1997. The
decrease in distributor incentives as a percentage of net sales can be
attributed primarily to the implementation of the Company's repricing strategy
and a change in the sales mix that resulted from increased demand for
distributor kits in the Australia/New Zealand market. The decrease in
distributor incentives as a percentage of net sales was partially offset by an
increase in the Company's leadership bonus program from 2.0% to 3.0% of the
sales volume points generated.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 58.5% to $18.5 million for the nine months
ended September 26, 1998, an increase of $6.9 million from $11.6
13
<PAGE>
million for the comparable period in 1997. As a percentage of net sales,
selling, general and administrative expenses increased to 20.7% for the nine
months ended September 26, 1998 from 18.9% for the comparable period in 1997.
The increase in selling, general and administrative expenses can be attributed
primarily to three factors: (i) higher variable expenses such as increases in
customer service staffing levels and discount fees on credit cards in
association with growth in sales and the number of distributors and Preferred
Customers; (ii) increased depreciation and amortization expense of
approximately 1% as a percentage of net sales as a result of substantial
investments in prior periods in computer and telecommunications equipment to
support growth and international expansion; and (iii) higher relative costs
associated with international expansion.
Research and Development. Research and development expenses increased 17.3%
to $1,132,000 for the nine months ended September 26, 1998, an increase of
$167,000 from $965,000 in the comparable period of 1997. Increases in research
and development expenses for the nine months ended September 26, 1998 were
primarily the result of new product development, ongoing clinical studies and
the reformulation of existing products.
Net Earnings. Net earnings increased 48.0% to $6.9 million for the nine
months ended September 26, 1998, an increase of $2.3 million from $4.6 million
for the comparable period in 1997. The improvement in net earnings is
primarily the result of higher sales. Net earnings reflect the combined effect
of decreased cost of sales, decreased distributor incentives, and increased
selling, general and administrative expenses relative to net sales, which
resulted in a 7.7% profit margin for the nine months ended September 26, 1998
compared to 7.5% for the comparable period of 1997. Diluted earnings per share
increased 40.0% to $0.49 for the nine months ended September 26, 1998, an
increase of $0.14 compared to $0.35 per share for the comparable period in
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth primarily from cash flows from
operations. For the nine months ended September 26, 1998, the Company
generated net cash from operations of $7.8 million compared to $5.7 million
for the comparable period in 1997. Cash and cash equivalents at September 26,
1998 were $3.3 million compared to $2.6 million at December 27, 1997. Working
capital was $7.8 million at September 26, 1998 compared to $4.6 million at
December 27, 1997. The Company does not extend credit to its customers, but
requires payment prior to shipping, which eliminates significant receivables.
The Company invested $7.6 million in property and equipment for the nine
months ended September 26, 1998 compared to $3.7 million for the comparable
period in 1997. The Company invested $2.7 million in land and building in the
United Kingdom in the third quarter of 1998. This 23,500 square foot facility
will contain a warehouse, administrative offices, a retail store for
distributors and Preferred Customers, and a call center to service orders from
England, Scotland, Wales and Northern Ireland. Inventory increased $3.0
million to $9.5 million at September 26, 1998 from $6.5 million at December
27, 1997. The increase in inventory can primarily be attributed to the
commencement of operations in the Australia/New Zealand market, including the
extended transit times of shipments to this market, and preparation for the
commencement of operations in the United Kingdom. As of September 26, 1998,
the Company had invested approximately $3.4 million to fund operations in the
United Kingdom. Operations in the United Kingdom are expected to commence in
the late fourth quarter of 1998.
At September 26, 1998 the Company had $5.0 million available under its line
of credit which expires May 31, 1999. The interest rate is computed at the
bank's prime rate, or at the option of the Company, the LIBOR base rate plus
2.25%. Certain receivables, inventories, and equipment collateralize the line
of credit. The line-of-credit agreement also contains restrictive covenants
requiring the Company to maintain certain financial ratios. As of September
26, 1998, the Company was in compliance with these covenants. There was no
outstanding balance on the line of credit as of September 26, 1998.
A significant percentage of the Company's net sales are generated from the
sale of products outside the United States. The Company intends to continue to
expand its foreign operations. The Company is exposed to
14
<PAGE>
risks associated with changes in social, political and economic conditions
inherent in foreign operations, including changes in the laws and policies
that govern foreign investment in countries where it has operations as well
as, to a lesser extent, changes in U.S. laws and regulations relating to
foreign trade and investment. In addition, the Company's results of operations
and the value of its foreign assets are affected by fluctuations in foreign
currency exchange rates, which may favorably or adversely affect reported
earnings and, accordingly, the comparability of period-to-period results of
operations. Changes in currency exchange rates may affect the relative prices
at which the Company and foreign competitors sell their products in the same
market. Sales outside the United States represented 12.3%, 21.1%, 30.8% and
41.5% of the Company's net sales in 1995, 1996, 1997 and for the nine months
ended September 26, 1998, respectively. The Company enters into forward and
option contracts to hedge certain commitments denominated in foreign currency,
including intercompany cash transfers. Transaction hedging activities seek to
protect operating results and cash flows from the potentially adverse effects
of currency exchange fluctuations.
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
in the ordinary course of business for the next 12 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. The Company may also require or seek additional
financing, including through the sale of its equity securities to finance
future expansion into new markets, capital acquisitions associated with the
growth of the Company, and for other reasons. Any financing which involves the
sale of equity securities or instruments convertible into such securities
could result in immediate and possibly significant dilution to existing
shareholders.
YEAR 2000 ISSUES
The Company is aware of the risks associated with the operation of
information technology and non-information technology systems as the millenium
(year 2000) approaches. The "Year 2000" problem is pervasive and complex, with
the possibility that it will affect many technology systems and is the result
of the rollover of the two digit year value from "99" to "00". Systems that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company is in the process of assessing its state of readiness, including
the readiness of third parties with which the Company interacts, with respect
to the Year 2000 problem. The assessment will also include an evaluation of
the costs to the Company to correct Year 2000 problems related to its own
systems, which, if uncorrected, could have a material adverse effect on the
business, financial condition or results of operations of the Company. As a
part of this assessment, the Company will also determine the known risks
related to the consequences of failure to correct any Year 2000 problems
identified by the Company and contingency plans, if any, that should be
adopted by the Company should any identified Year 2000 problems not be
corrected. The Company intends to use both internal and external resources to
reprogram, or replace and test its software for Year 2000 modifications.
However, if such modifications or conversions are not made, or are not
completed timely, the Year 2000 problem could have a material impact on the
operations of the Company. The Company has initiated formal communications
with all of its significant suppliers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
2000 problems.
Independent of the Year 2000 problem, the Company determined in late 1997
that overall efficiencies could be achieved by the purchase and installation
of an ERP system. The ERP system will replace all of the Company's existing
resource planning systems except for the Distribution System. The Company has
begun installing the ERP system and expects the installation to be complete
during the second quarter of 1999. The third-party vendor of the ERP system
has certified that its software is Year 2000 compliant according to 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 related to its primary internal
15
<PAGE>
business information systems. The Company intends to replace the Distribution
System with two new systems in 1999 and to integrate it with the ERP system.
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.
The Company 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. Based on the most recent assessment, the Company
believes that with modifications to existing software and conversions to new
software, any Year 2000 problems that it may have with its own systems can be
mitigated. 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.
INFLATION
The Company does not believe that inflation has had a material impact on its
historical operations or profitability.
SEASONALITY
The Company believes that the impact of seasonality on its results of
operations is not material, although historically, growth has been slower in
the fourth quarter of each year. This could change as new markets are opened
and become a more significant part of the Company's business. In addition, the
significant growth experienced by the Company since its inception may make it
difficult to accurately determine seasonal trends.
FORWARD-LOOKING STATEMENTS
The statements contained in this Report on Form 10-Q that are not purely
historical are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and Section 21E of the Securities
Exchange Act. These statements regard the Company's expectations, hopes,
beliefs, anticipations, commitments, intentions and strategies regarding the
future. They may be identified by the use of words or phrases such as
"believes," "expects," "anticipates," "should," "plans," "estimates," and
"potential," among others. Forward-looking statements include, but are not
limited to, statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations regarding the Company's
financial performance, revenue and expense levels in the future and the
sufficiency of its existing assets to fund future operations and capital
spending needs. Actual results could differ materially from the anticipated
results or other expectations expressed in such forward-looking statements for
the reasons detailed in the Company's Annual Report on Form 10-K under the
headings "Description of Business" and "Risk Factors." The fact that some of
the risk factors may be the same or similar to the Company's past reports
filed with the Securities and Exchange Commission means only that the risks
are present in multiple periods. The Company believes that may of the risks
detailed here and in the Company's SEC filings are part of doing business in
the industry in which the Company operates and competes and will likely be
present in all periods reported. The fact that certain risks are endemic to
the industry does not lessen their significance. The forward-looking
statements contained in this report are made as of the date of this Report and
the Company assumes no obligation to update them or to update the reasons why
actual results could differ from those projected in such forward-looking
statements. Among others, risks and uncertainties that may affect the
business, financial condition, performance, development, and results of
operations of the Company include:
. the Company's dependence upon a network marketing system to distribute
its products;
. activities of its independent distributors;
. rigorous government scrutiny of network marketing practices;
. potential effects of adverse publicity regarding nutritional supplements
or the network marketing industry;
16
<PAGE>
. reliance on key management personnel, including the Company's President,
Chief Executive Officer and Chairman of the Board of Directors, Dr.
Myron Wentz;
. extensive government regulation of the Company's products and
manufacturing;
. risks related to the Company's expansion into international markets;
. failure of the Company to sustain or manage growth including the failure
to continue to develop new products;
. the possible adverse effects of increased distributor incentives as a
percentage of net sales;
. the Company's reliance on information technology;
. the adverse effect of the Company's loss of a high level sponsoring
distributor together with a group of leading distributors in that
person's downline;
. the loss of product market share or distributors to competitors;
. potential adverse effect of taxation and transfer pricing regulation or
exchange rate fluctuations; or
. the Company's inability or failure to identify and to manage its Year
2000 risks.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As reported in prior periods, the Company is party to certain litigation
related to the use of grape seed extract in its Proflavanol (R) product in the
United States Federal District Court for the District of Connecticut initiated
in March 1996 by International Nutrition Company ("INC"). INC has alleged
claims of patent infringement against a number of defendants, including USANA,
involving U.S. patent number 4,698,360.
On July 10, 1998, USANA filed a motion to dismiss the INC complaint as to
USANA. No hearing has been set on USANA's motion to dismiss, although INC has
indicated it will oppose the motion.
ITEM 5. OTHER INFORMATION
STOCK SPLIT
The Company's Board of Directors authorized a two-for-one stock dividend,
wherein one share of Common Stock was issued on August 3, 1998 to shareholders
of record for each share of Common Stock outstanding as of July 31, 1998.
INTERNATIONAL EXPANSION
The Company has announced plans to enter the European market with initial
operations in the United Kingdom expected to commence in the late fourth
quarter of 1998. Initially, the Company will market 17 products in the United
Kingdom from its nutritional and personal care product lines.
The Company invested $2.7 million in a facility in Milton Keynes, which is
north of London. The 23,500 square foot building is expected to be adequate
for the foreseeable growth of the Company in the United Kingdom. The facility
will contain a warehouse, administrative offices, a retail store for
distributors and Preferred Customers, and a call center to service orders from
England, Scotland, Wales and Northern Ireland.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<C> <S>
Item 601 Exhibit No. and Description
27 Financial Data Schedule
</TABLE>
(b) Report on Form 8-K.
The Company filed no current reports on Form 8-K during the quarter ended
September 26, 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USANA, INC.
/s/ Gilbert A. Fuller
By___________________________________
Gilbert A. Fuller
Vice President and Chief
Financial Officer
Date: November 9, 1998
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000896264
<NAME> USANA, INC.
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<PERIOD-START> DEC-28-1997
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