<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 JULY 3, 1999
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 (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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares outstanding of the registrant's common stock as of
August 6, 1999 was 12,787,238.
<PAGE>
USANA, INC.
FORM 10-Q
For the Quarterly Period Ended July 3, 1999
INDEX
Page
----
PART I . FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets.................................... 3
Consolidated Statements of Earnings - Quarter Ended............ 4
Consolidated Statements of Earnings - Six Months Ended......... 5
Consolidated Statements of Stockholders' Equity................ 6
Consolidated Statements of Cash Flows.......................... 7
Notes to Consolidated Financial Statements..................... 8-11
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 11-19
Item 3 Quantitative and Qualitative Disclosures About Market Risk....... 19-20
PART II. OTHER INFORMATION
Item 1 Legal Proceedings................................................ 20
Item 4 Submission of Matters to a Vote of Security Holders.............. 20
Item 5 Other Information................................................ 21
Item 6 Exhibits and Reports on Form 8-K................................. 22
Signatures............................................................... 23
2
<PAGE>
USANA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
Unaudited
---------
January 2, July 3,
1999 1999
---------- ---------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.................................................................... $ 2,617 $ 2,234
Accounts receivable, net..................................................................... 294 1,274
Current maturities of notes receivable....................................................... 16 1
Inventories, net (Note A)................................................................... 10,543 9,750
Prepaid expenses and other current assets.................................................... 1,912 2,548
Deferred income taxes........................................................................ 1,233 1,375
------- -------
Total current assets...................................................................... 16,615 17,182
Property and Equipment, net (Note B)......................................................... 22,751 22,905
Notes Receivable, less current maturities...................................................... 5 5
Other Assets................................................................................... 55 52
------- -------
$39,426 $40,144
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable............................................................................. $ 4,211 $ 2,884
Other current liabilities (Note C).......................................................... 4,505 5,273
------- -------
Total current liabilities................................................................. 8,716 8,157
Deferred Income Taxes.......................................................................... 624 577
Stockholders' Equity
Common stock, no par value; authorized 50,000 shares; issued and outstanding
13,047 shares at January 2, 1999 and 12,787 shares at July 3, 1999......................... 9,131 8,478
Retained earnings............................................................................ 21,668 23,773
Notes receivable - related party............................................................. (531) (836)
Accumulated other comprehensive loss......................................................... (182) (5)
------- -------
Total stockholders' equity................................................................ 30,086 31,410
------- -------
$39,426 $40,144
======= =======
</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
-------------
June 27, July 3,
1998 1999
---------------- --------------
<S> <C> <C>
Net sales................................................................................... $30,913 $32,478
Cost of sales............................................................................... 6,408 6,340
------- -------
Gross profit.............................................................................. 24,505 26,138
Operating expenses
Distributor incentives.................................................................... 13,930 14,437
Selling, general and administrative....................................................... 6,318 7,741
Research and development.................................................................. 373 329
------- -------
Total operating expenses............................................................... 20,621 22,507
------- -------
Earnings from operations.................................................................... 3,884 3,631
Other income (expense)
Interest income, net...................................................................... 62 68
Other, net................................................................................ (41) (78)
------- -------
Total other income (expense)........................................................... 21 (10)
------- -------
Earnings before income taxes................................................................ 3,905 3,621
Income taxes................................................................................ 1,501 1,377
------- -------
NET EARNINGS.............................................................................. $ 2,404 $ 2,244
======= =======
Earnings per share (Note D)
Earnings per share--basic................................................................. $ 0.19 $ 0.17
======= =======
Weighted average shares outstanding--basic................................................ 12,895 12,946
======= =======
Earnings per share--diluted............................................................... $ 0.17 $ 0.17
======= =======
Weighted average shares outstanding--diluted.............................................. 14,064 13,252
======= =======
</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
---------------------------------------
Six Months Ended
----------------
June 27, July 3,
1998 1999
------------------ ----------------
<S> <C> <C>
Net sales................................................................................... $57,077 $63,801
Cost of sales............................................................................... 11,894 12,724
------- -------
Gross profit.............................................................................. 45,183 51,077
Operating expenses
Distributor incentives.................................................................... 25,692 28,346
Selling, general and administrative....................................................... 11,751 14,985
Research and development.................................................................. 727 684
------- -------
Total operating expenses............................................................... 38,170 44,015
------- -------
Earnings from operations.................................................................... 7,013 7,062
Other income (expense)
Interest income, net...................................................................... 104 110
Other, net................................................................................ (37) (86)
------- -------
Total other income (expense)........................................................... 67 24
------- -------
Earnings before income taxes................................................................ 7,080 7,086
Income taxes................................................................................ 2,740 2,714
------- -------
NET EARNINGS.............................................................................. $ 4,340 $ 4,372
======= =======
Earnings per share (Note D)
Earnings per share--basic................................................................. $ 0.34 $ 0.34
======= =======
Weighted average shares outstanding--basic................................................ 12,842 12,998
======= =======
Earnings per share--diluted............................................................... $ 0.31 $ 0.33
======= =======
Weighted average shares outstanding--diluted.............................................. 13,902 13,404
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
USANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended June 27, 1998 and July 3, 1999
(In thousands)
<TABLE>
<CAPTION>
Common stock Accumulated Other
----------------------- Retained Comprehensive
Shares Amount Earnings Income/loss Other Total
---------- ----------- ------------ -------------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended June 27, 1998
Balance at December 27, 1997 12,812 $7,167 $12,171 $ (80) $ -- $19,258
Comprehensive income
Net earnings -- -- 4,340 -- -- 4,340
Foreign currency translation adjustment -- -- -- (399) -- (399)
-------
Comprehensive income 3,941
Notes receivable - related party -- -- -- -- (206) (206)
Common stock issued under stock option plan
155 856 -- -- -- 856
------ ------ ------- ----- ------- -------
Balance at June 27, 1998 12,967 $8,023 $16,511 $(479) $ (206) $23,849
====== ====== ======= ===== ======= =======
For the Six Months Ended July 3, 1999
Balance at January 2, 1999 13,047 $9,131 $21,668 $(182) $ (531) $30,086
Comprehensive income
Net earnings -- -- 4,372 -- -- 4,372
Foreign currency translation adjustment -- -- -- 177 -- 177
-------
Comprehensive income 4,549
Notes receivable - related party -- -- -- -- (3,418) (3,418)
Shares retired 1 (300) (846) (2,267) -- 3,113 --
Common stock issued under stock option
plan, including tax benefit of $98 40 193 -- -- -- 193
------ ------ ------- ------ ------- -------
Balance at July 3, 1999 12,787 $8,478 $23,773 $ (5) $ (836) $31,410
====== ====== ======= ====== ======= =======
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ - 300,000 shares were redeemed and subsequently retired under the terms of
the "Promissory Note and Redemption Agreement"
The accompanying notes are an integral part of these statements.
6
<PAGE>
USANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Unaudited
-------------------------------------
Six Months Ended
--------------------------------------
June 27, July 3,
1998 1999
---------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings.............................................................................. $ 4,340 $ 4,372
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities
Depreciation and amortization........................................................ 1,839 2,236
Loss on sales of property and equipment.............................................. 42 --
Deferred income taxes................................................................ (274) (146)
Provision for inventory obsolescence................................................. (70) 204
Provision for doubtful accounts...................................................... 141 (34)
Changes in assets and liabilities
Accounts receivables............................................................... (195) (910)
Inventories........................................................................ (2,142) 849
Prepaid expenses and other assets.................................................. 163 (834)
Accounts payable................................................................... 355 (1,335)
Other current liabilities.......................................................... 2,622 756
------- -------
Total adjustments................................................................ 2,481 786
------- -------
Net Cash Provided By Operating Activities................................................. 6,821 5,158
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Receipts on notes receivable.............................................................. 15 14
Increase in notes receivable.............................................................. (6) --
Purchase of property and equipment........................................................ (4,171) (2,365)
Proceeds from sale of property and equipment.............................................. 51 22
------- -------
Net Cash Used In Investing Activities..................................................... (4,111) (2,329)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes receivable - related party.............................................. (206) (3,418)
Net proceeds from sale of common stock.................................................... 856 95
------- -------
Net Cash Provided By (Used In) Financing Activities....................................... 650 (3,323)
Effect of exchange rate changes on cash..................................................... (159) 111
------- -------
Net increase (decrease) in cash and cash equivalents...................................... 3,201 (383)
Cash and cash equivalents at beginning of year.............................................. 2,608 2,617
------- -------
Cash and cash equivalents at end of year.................................................... $ 5,809 $ 2,234
======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest............................................................................... $ 6 $ 13
Income taxes........................................................................... 2,861 3,154
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
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 July 3, 1999, and results of operations for the
quarters and six months ended July 3, 1999 and June 27, 1998. 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 January 2, 1999. The results of operations for the quarter
and six months ended July 3, 1999 may not be indicative of the results that may
be expected for the fiscal year ending January 1, 2000.
NOTE A - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
January 2, July 3,
1999 1999
------------- --------------
<S> <C> <C>
Raw materials........................................................ $ 3,043 $ 2,486
Work in process...................................................... 1,534 2,497
Finished goods....................................................... 6,592 5,599
------------- --------------
11,169 10,582
Less allowance for inventory obsolescence............................ 626 832
------------- --------------
$ 10,543 $ 9,750
============= ==============
</TABLE>
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
January 2, July 3,
1999 1999
------------- --------------
<S> <C> <C>
Buildings............................................................ $ 7,414 $ 7,421
Laboratory and production equipment.................................. 2,697 2,830
Computer equipment and software...................................... 11,075 12,061
Furniture and fixtures............................................... 2,024 2,102
Automobiles.......................................................... 320 323
Leasehold improvements............................................... 461 490
Land improvements.................................................... 542 542
------------- --------------
24,533 25,769
Less accumulated depreciation and amortization....................... 5,681 7,946
------------- --------------
18,852 17,823
Land................................................................. 2,548 2,548
Deposits and projects in process..................................... 1,351 2,534
------------- --------------
$ 22,751 $ 22,905
============= ==============
</TABLE>
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(In thousands, except per share data)
NOTE C - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
January 2, July 3,
1999 1999
------------- -------------
<S> <C> <C>
Accrued compensation and related items............................... $ 964 $ 666
Distributor incentives............................................... 1,140 1,316
Income taxes......................................................... 429 116
Sales taxes.......................................................... 845 808
Deferred revenue..................................................... 34 68
All other............................................................ 1,093 2,299
------------- -------------
$ 4,505 $ 5,273
============= =============
</TABLE>
NOTE D - EARNINGS PER SHARE
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 June 27, 1998
-------------------------------------------
Earnings Shares Earnings
(Numerator) (Denominator) Per Share
------------ ------------ ---------
<S> <C> <C> <C>
Basic EPS
Net earnings.................................... $ 2,404 12,895 $ 0.19
=========
Effect of dilutive securities
Stock options................................... - 1,169
------------ ------------
Diluted EPS
Net earnings.................................... $ 2,404 14,064 $ 0.17
============ ============= =========
</TABLE>
<TABLE>
<CAPTION>
For the Quarter Ended July 3, 1999
-------------------------------------------
Earnings Shares Earnings
(Numerator) (Denominator) Per Share
----------- ------------ ---------
<S> <C> <C> <C>
Basic EPS
Net earnings.................................... $ 2,244 12,946 $ 0.17
=========
Effect of dilutive securities
Stock options................................... - 306
----------- ------------
Diluted EPS
Net earnings.................................... $ 2,244 13,252 $ 0.17
=========== ============ =========
</TABLE>
Options to purchase 540 shares of stock at an average price of $10.64 were
not included in the computation of EPS for the quarter ended July 3, 1999,
because their exercise price was greater than the average market price of the
shares.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Six Months Ended June 27, 1998
-------------------------------------------
Earnings Shares Earnings
(Numerator) (Denominator) Per Share
----------- ------------ ---------
<S> <C> <C> <C>
Basic EPS
Net earnings.................................... $ 4,340 12,842 $ 0.34
=========
Effect of dilutive securities
Stock options................................... - 1,060
----------- ------------
Diluted EPS
Net earnings.................................... $ 4,340 13,902 $ 0.31
=========== ============ =========
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended July 3, 1999
-------------------------------------------
Earnings Shares Earnings
(Numerator) (Denominator) Per Share
----------- ------------ ---------
<S> <C> <C> <C>
Basic EPS
Net earnings.................................... $4,372 12,998 $0.34
=========
Effect of dilutive securities
Stock options................................... - 406
----------- ------------
Diluted EPS
Net earnings.................................... $ 4,372 13,404 $ 0.33
=========== ============ =========
</TABLE>
Options to purchase 320 shares of stock at an average price of $11.61 were
not included in the computation of EPS for the six months ended July 3, 1999,
because their exercise price was greater than the average market price of the
shares.
NOTE E--SEGMENT INFORMATION
The Company's chief operating decision makers utilize information about
geographic operations in determining the allocation of resources and in
assessing the performance of the Company. Management considers the geographic
segments of the Company to be the only reportable operating segments.
Segment profit or loss is based on profit or loss from operations before
income taxes and includes a management fee charged by the domestic operation to
each of the foreign entities. All other intersegment transactions are eliminated
from the following segment information.
Interest revenues and expenses, income taxes and equity in the earnings of
subsidiaries, while significant, are not included in the Company's determination
of segment profit or loss in assessing the performance of a segment.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(In thousands, except per share data)
Financial information summarized by geographic segment for the six months
ended June 27, 1998 and July 3, 1999 is listed below:
<TABLE>
<CAPTION>
Australia/
Six Months Ended New United All
June 27, 1998 Domestic Canada Zealand Kingdom Others Totals
---------------- -------- -------- ---------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers.................................. $34,645 $16,310 $6,122 $ -- $ -- $57,077
Earnings before income taxes...................................... $ 4,227 $ 1,897 $ 956 $ -- $ -- $ 7,080
Long-lived assets................................................. $15,086 $ 277 $1,018 $ -- $ -- $16,381
Total assets...................................................... $28,212 $ 1,423 $4,246 $ -- $ -- $33,881
</TABLE>
<TABLE>
<CAPTION>
Australia/
Six Months Ended New United All
July 3, 1999 Domestic Canada Zealand Kingdom Others Totals
---------------- -------- -------- ---------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers.................................. $34,046 $14,815 $13,573 $ 1,367 $ -- $ 63,801
Earnings before income taxes...................................... $ 3,040 $ 2,730 $ 2,354 $(1,036) $ (2) $ 7,086
Long-lived assets................................................. $20,868 $ 235 $ 1,017 $ 842 $ -- $ 22,962
Total assets...................................................... $31,613 $ 2,230 $ 4,190 $ 2,105 $ 6 $ 40,144
</TABLE>
Item 2. 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 July 3, 1999, the Company had approximately
118,000 current distributors in the United States, Canada, Australia, New
Zealand and the United Kingdom. The Australia-New Zealand and the United Kingdom
markets initiated operations on February 12, 1998 and November 30, 1998,
respectively. The Company defines a current distributor as a distributor who has
made a purchase in the most recent twelve-month period. The Company also offers
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 July 3, 1999, the Company had approximately
37,000 Preferred Customers.
The Company has experienced significant growth since its inception. From
1993 to 1998, net sales of the Company grew from $3.9 million to $121.6 million,
while net earnings increased from a loss of $312,000 to net earnings of $9.5
million.
The Company's three primary product lines consist of nutritional, personal
care and weight management products. Nutritional products accounted for
approximately 78% of the Company's net sales for the quarter ended July 3, 1999.
The Company's top selling products, USANA Essentials and Proflavanol,
represented approximately 42% and 16%, respectively, of net sales for the six
months ended July 3, 1999. No other products accounted for more than 10% of net
sales during the first six months of 1999. USANA's personal care line includes
skin, hair and body, and dental care products. The Company's weight management
line includes a dietary supplement tablet, food bars, meal entrees,
instructional videos and other products developed to provide a comprehensive
approach to weight management, proper diet, nutrition and healthy
11
<PAGE>
living. The Company introduced its weight management line in its Australia-New
Zealand market in February 1999. In addition to its primary product lines, the
Company also sells distributor kits and sales aids, which accounted for
approximately 3% of the Company's net sales for the six months ended July 3,
1999.
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. The Company recognizes revenue when products are
shipped and title passes to independent distributors and Preferred Customers.
During the first six months of 1999, sales in the Company's four primary
markets, the United States, Canada, Australia-New Zealand and the United
Kingdom, were 53.4%, 23.2%, 21.3% and 2.1%, 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 expenses related to 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. In the first six months of 1999, 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 cost 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 44.4% of net sales for the six months ended July 3, 1999.
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 in their
downline. Generally, distributor kits, sales aids and logo merchandise, such as
items of clothing and luggage, have no sales volume point value and therefore
the Company pays no commissions on the sale of these items.
The Company closely monitors the amount of distributor incentives paid as a
percentage of net sales and may from time to time 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.
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. 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
increasing size of the distributor and Preferred Customer base. The President,
Chief Executive Officer and Chairman of the Board of Directors of the Company,
Myron W. Wentz, PhD, 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 or other compensation, selling,
general and administrative expenses would increase.
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 as cost of sales over an average of 12 months, beginning with the
month the products become available for sale.
The fiscal year end of the Company is the Saturday closest to December 31 of
each year.
12
<PAGE>
Results Of Operations
Quarters Ended July 3, 1999 and June 27, 1998
Net Sales. Net sales increased 5.1% to $32.5 million for the quarter ended
July 3, 1999, an increase of $1.6 million from the $30.9 million reported for
the comparable quarter in 1998. The increase in net sales is primarily the
result of a 31.4% increase in the Company's customer base. Customers of the
Company include both independent distributors and Preferred Customers. The
Company's current distributor base increased 15.7% to 118,000 at July 3, 1999
compared to 102,000 at June 27, 1998, with all of the growth occurring in the
Company's Australia-New Zealand and United Kingdom markets. Preferred Customers
grew 131.3% to 37,000 at July 3, 1999 compared to 16,000 at June 27, 1998. Net
sales during the quarter ended June 27, 1998 included approximately $1 million
from product sales incident to the Company's annual international convention in
June 1998. No convention sales are included in the results for quarter ended
July 3, 1999, as the 1999 annual convention was held during the third quarter.
The following tables illustrate the growth in sales and customers by market
for the quarters ended June 27, 1998 and July 3, 1999:
<TABLE>
<CAPTION>
SALES BY MARKET
(in millions)
Quarter Ended
------------------------------------------------------------
Growth over %
Market June 27, 1998 July 3, 1999 Prior Year Growth
- ------ ---------------------------- ----------------------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States.................. $ 18.0 58.3% $ 17.0 52.3% $ (1.0) (5.8%)
Canada......................... 8.3 27.0 7.7 23.8 (0.6) (7.5%)
Australia-New Zealand.......... 4.6 14.7 7.1 21.9 2.5 56.2%
United Kingdom................. - - 0.7 2.1 0.7 -
----------- ------------ ----------- ------------ --------------
Consolidated................... $ 30.9 100.0% $ 32.5 100.0% $ 1.6 5.1%
=========== ============ =========== ============ ==============
</TABLE>
<TABLE>
<CAPTION>
CURRENT DISTRIBUTORS BY MARKET
As of As of Growth over %
Market June 27, 1998 July 3, 1999 Prior Year Growth
- ------ ---------------------------- ----------------------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States.................. 58,000 56.9% 57,000 48.3% (1,000) (1.7%)
Canada......................... 32,000 31.4 30,000 25.4 (2,000) (6.3%)
Australia-New Zealand.......... 12,000 11.8 28,000 23.7 16,000 133.3%
United Kingdom................. - - 3,000 2.5 3,000 -
----------- ------------ ------------ ------------ --------------
Consolidated................... 102,000 100.0% 118,000 100.0% 16,000 15.7%
=========== ============ ============ ============ ==============
</TABLE>
<TABLE>
<CAPTION>
PREFERRED CUSTOMERS BY MARKET
As of As of Growth over %
Market June 27, 1998 July 3, 1999 Prior Year Growth
- ------ ---------------------------- ----------------------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States.................. 10,000 62.5% 21,000 56.8% 11,000 110.0%
Canada......................... 5,000 31.3 10,000 27.0 5,000 100.0%
Australia-New Zealand.......... 1,000 6.3 5,000 13.5 4,000 400.0%
United Kingdom................. - - 1,000 2.7 1,000 -
----------- ------------ ------------ ------------ --------------
Consolidated................... 16,000 100.0% 37,000 100.0% 21,000 131.3%
=========== ============ ============ ============ ==============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
TOTAL CUSTOMERS BY MARKET
As of As of Growth over %
Market June 27, 1998 July 3, 1999 Prior Year Growth
- ------ ---------------------------- ----------------------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States.................. 68,000 57.6% 78,000 50.3% 10,000 14.7%
Canada......................... 37,000 31.4 40,000 25.8 3,000 8.1%
Australia-New Zealand.......... 13,000 11.0 33,000 21.3 20,000 153.8%
United Kingdom................. - - 4,000 2.6 4,000 -
----------- ------------ ------------ ------------ --------------
Consolidated................... 118,000 100.0% 155,000 100.0% 37,000 31.4%
=========== ============ ============ ============ ==============
</TABLE>
Cost of Sales. Cost of sales decreased 1.1% to $6.3 million for the second
quarter ended July 3, 1999, a decrease of $68,000 from the $6.4 million
reported for the comparable quarter in 1998. As a percentage of net sales, cost
of sales decreased to 19.5% for the second quarter ended July 3, 1999 from 20.7%
for the comparable quarter in 1998. The decrease in cost of sales as a
percentage of net sales can be primarily attributed to:
. A change in sales mix to fewer distributor kits, sales aids and logo
merchandise, which are sold at a reduced gross profit margin compared to
other USANA products and
. Volume-based efficiencies in production and procurement activities.
Distributor Incentives. Distributor incentives increased 3.6% to $14.4
million for the second quarter ended July 3, 1999, an increase of $0.5 million
from the $13.9 million reported for the comparable quarter in 1998. The
increase in distributor incentives for the second quarter of 1999 can be
attributed to an increase in commissionable sales. As a percentage of net
sales, distributor incentives decreased to 44.5% in the second quarter of 1999
from 45.1% for the comparable quarter in 1998. The decrease in distributor
incentives as a percentage of net sales can primarily be attributed to three
factors:
. The introduction of a new level in the distributor compensation plan,
. A decreased proportion of sales volume points relative to net sales and
. Inefficiencies in the distributor network in the United Kingdom.
The new level in the distributor compensation plan is now the lowest compensated
level in the Company's network marketing system. The Company believes this new
level will assist in distributor retention efforts by paying these distributors
earlier on reduced downline requirements; however, this level does pay at a
lower rate than other levels in the Company's network marketing system.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 22.5% to $7.7 million for the quarter ended
July 3, 1999, an increase of $1.4 million from the $6.3 million reported for the
comparable quarter in 1998. As a percentage of net sales, selling, general and
administrative expenses increased to 23.8% in the second quarter of 1999 from
20.4% for the comparable quarter in 1998. The increase in selling, general and
administrative expenses can be attributed to several factors:
. Higher relative costs associated with operations in the United Kingdom,
. Increased spending on sales and marketing efforts,
. Increased costs including, but not limited to, employee compensation as
a result of building the Company's infrastructure to meet strategic
objectives and
14
<PAGE>
. Increased depreciation and amortization expense as a result of
substantial investments in current and prior periods in computer and
telecommunications equipment to support growth and international
expansion.
The Company expects these factors to continue to put pressure on selling,
general and administrative expenses as a percentage of net sales throughout
1999.
Research and Development. Research and development expenses decreased
11.8% to $329,000 for the quarter ended July 3, 1999 compared to $373,000 for
the comparable quarter in 1998. As a percentage of net sales, research and
development expenses decreased to 1.0% in the second quarter of 1999 from 1.2%
for the comparable period in 1998. The Company continues to keep abreast of the
latest research in nutrition and degenerative diseases and is committed to
developing new products, reformulating existing products and maintaining its
involvement in numerous clinical studies.
Net Earnings. Net earnings decreased 6.7% to $2.2 million for the quarter
ended July 3, 1999, a decrease of $0.2 million from the $2.4 million reported
for the comparable quarter in 1998. The decrease in net earnings reflects the
combined effect of increased selling, general and administrative expenses,
decreased cost of sales and decreased distributor incentives relative to net
sales, which resulted in a 6.9% profit margin in the second quarter of 1999
compared to 7.8% for the comparable quarter in 1998. Diluted earnings per share
remained flat at $0.17 for the quarters ended July 3, 1999 and June 27, 1998.
Six Months Ended July 3, 1999 and June 27, 1998
Net Sales. Net sales increased 11.8% to $63.8 million for the six months
ended July 3, 1999, an increase of $6.7 million from the $57.1 million reported
for the comparable period in 1998. The increase in net sales is primarily the
result of a 31.4% increase in the Company's customer base. Customers of the
Company include both independent distributors and Preferred Customers. The
Company's current distributor base increased 15.7% to 118,000 at July 3, 1999
compared to 102,000 at June 27, 1998, with all of the growth occurring in the
Company's Australia-New Zealand and United Kingdom markets. Preferred Customers
grew 131.3% to 37,000 at July 3, 1999 compared to 16,000 at June 27, 1998. Net
sales during the six months ended June 27, 1998 included approximately $1
million from product sales incident to the Company's annual international
convention in June 1998. No convention sales are included in the results for
the six months ended July 3, 1999, as the 1999 annual convention was held during
the third quarter.
The following tables illustrate the growth in sales by market for the six
months ended June 27, 1998 and July 3, 1999:
<TABLE>
<CAPTION>
SALES BY MARKET
(in millions)
Six Months Ended
------------------------------------------------------------
Growth over %
Market June 27, 1998 July 3, 1999 Prior Year Growth
- ------ ---------------------------- ----------------------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States.................. $34.6 60.7% $34.0 53.4% $(0.6) (1.7%)
Canada......................... 16.3 28.6 14.8 23.2 (1.5) (9.2%)
Australia-New Zealand.......... 6.2 10.7 13.6 21.3 7.4 121.7%
United Kingdom................. - - 1.4 2.1 1.4 -
----------- ------------ ----------- ------------ --------------
Consolidated................... $57.1 100.0% $63.8 100.0% $ 6.7 11.8%
=========== ============ =========== ============ ==============
</TABLE>
Cost of Sales. Cost of sales increased 7.0% to $12.7 million for the six
months ended July 3, 1999, an increase of $0.8 million from the $11.9 million
reported for the comparable period in 1998. As a percentage of net sales, cost
of sales decreased to 19.9% for the first six months of 1999 from 20.8% for the
comparable period in 1998. The decrease in cost of sales as a percentage of net
sales can be primarily attributed to:
. A change in sales mix to fewer distributor kits, sales aids and logo
merchandise, which are sold at a reduced gross profit margin compared to
other USANA products and
15
<PAGE>
. Volume-based efficiencies in production and procurement activities.
Distributor Incentives. Distributor incentives increased 10.3% to $28.3
million for the six months ended July 3, 1999, an increase of $2.6 million from
the $25.7 million reported for the comparable period in 1998. The increase in
distributor incentives for the first six months of 1999 can be attributed to an
increase in commissionable sales. As a percentage of net sales, distributor
incentives decreased to 44.4% in the first six months of 1999 from 45.0% for the
comparable period in 1998. The decrease in distributor incentives as a
percentage of net sales can primarily be attributed to three factors:
. The introduction of a new level in the distributor compensation plan,
. A decreased proportion of sales volume points relative to net sales and
. Inefficiencies in the distributor network in the United Kingdom, which
was opened in November 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 27.5% to $15.0 million for the six months
ended July 3, 1999, an increase of $3.2 million from the $11.8 million reported
for the comparable period in 1998. As a percentage of net sales, selling,
general and administrative expenses increased to 23.5% in the first six months
of 1999 from 20.6% for the comparable period in 1998. The increase in selling,
general and administrative expenses can be attributed to several factors:
. Higher relative costs associated with operations in the United Kingdom,
. Increased spending on sales and marketing efforts,
. Increased costs including, but not limited to, employee compensation as
a result of building the Company's infrastructure to meet strategic
objectives and
. Increased depreciation and amortization expense as a result of
substantial investments in current and prior periods in computer and
telecommunications equipment to support growth and international
expansion.
The Company expects to see continued pressure on selling, general and
administrative expenses as a percentage of net sales throughout 1999,
particularly as new markets are opened during the third and fourth quarters of
the year. The Company is planning to enter the Netherlands and Hong Kong in the
third and fourth quarter, respectively, of 1999.
Research and Development. Research and development expenses decreased 5.9%
to $684,000 for the six months ended July 3, 1999 compared to $727,000 for the
comparable period in 1998. As a percentage of net sales, research and
development expenses decreased to 1.1% in the first six months of 1999 from 1.3%
for the comparable period in 1998. The Company continues to keep abreast of the
latest research in nutrition and degenerative diseases and is committed to
developing new products, reformulating existing products and maintaining its
involvement in numerous clinical studies.
Net Earnings. Net earnings increased 0.7% to $4.4 million for the six
months ended July 3, 1999, an increase of $32,000 from the $4.3 million reported
for the comparable period in 1998. The increase in net earnings can primarily be
attributed to the increase in net sales. The increase in net earnings reflects
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 6.9% profit margin for the first six months of 1999
compared to 7.6% for the comparable period in 1998. Diluted earnings per share
increased 6.5% to $0.33 for the six months ended July 3, 1999 from $0.31 for the
comparable period in 1998.
16
<PAGE>
Liquidity and Capital Resources
The Company has financed its growth primarily from cash flows from
operations. During the first six months of 1999, the Company generated net cash
from operations of $5.2 million compared to $6.8 million for the comparable
period in 1998. Cash and cash equivalents decreased to $2.2 million at July 3,
1999 from $2.6 million at January 2, 1999. Working capital totaled $9.0 million
at July 3, 1999 compared to $7.9 million at January 2, 1999. The Company does
not extend credit to its customers, but requires payment prior to shipping,
which eliminates significant receivables.
The Company invested $2.4 million in property and equipment during the six
months ended July 3, 1999 compared to $4.2 million during the comparable period
in 1998. Inventory decreased to $9.8 million at July 3, 1999 from $10.5 million
at fiscal year end 1998.
At July 3, 1999 the Company had $10.0 million available under its line of
credit which expires May 31, 2000. The interest rate is computed at the bank's
prime rate, or at the option of the Company, the LIBOR base rate plus 2.0%.
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 July 3, 1999, the Company
was in compliance with these covenants. There was no outstanding balance on the
line of credit as of July 3, 1999.
During 1998 and the first six months of 1999, the Company advanced funds to
its President, CEO and Chairman, Dr. Wentz. On April 28, 1999, the Company
entered into an arrangement with Dr. Wentz to provide up to $5.0 million,
including all amounts advanced to date. The obligation is evidenced by a
promissory note and redemption agreement. The obligations of Dr. Wentz are
secured by the pledge of shares of the Company's common stock. The arrangement
calls for repayment of the borrowed amounts to be made by redemption of the
pledged shares of common stock. All shares redeemed through this arrangement
will be cancelled. The Company's redemption of these shares pursuant to the
agreement will reduce the number of shares outstanding, resulting in higher
earnings per share than would have otherwise been achieved. This arrangement
also allows Dr. Wentz to achieve some liquidity in his beneficial ownership
interest in the Company without creating an oversupply of available shares in
the market. Substantially all of the funds available under the Promissory Note
and Redemption Agreement had been advanced as of July 3, 1999. Additional funds
may be advanced to Dr. Wentz under terms yet to be determined. See Item 5,
Other Information, below.
The Company believes that its current cash balance, 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 millennium
(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 also includes 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
17
<PAGE>
Company is also determining 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 will use, if
necessary, both internal and external resources to reprogram, or replace and
test its software for Year 2000 acceptability. 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 Year 2000 problems.
Independent of the Year 2000 problem, the Company determined in late 1997
that the purchase and installation of an Enterprise Resource Planning system
(ERP system) could assist in achieving overall efficiencies. 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 first quarter of 2000. 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 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 represent 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. Readers
are cautioned that 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 many of the risks
detailed
18
<PAGE>
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;
. Reliance on key management personnel, including the Company's President,
Chief Executive Officer and Chairman of the Board of Directors, Dr.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company conducts its business in several countries and intends to
continue to expand its foreign operations. Recently the Company announced it
would open new markets in the Netherlands and Hong Kong later this year. Sales
outside the United States represented 21.1%, 30.8%, 42.5% and 46.6% of the
Company's net sales in 1996, 1997, 1998 and for the six months ended July 3,
1999, respectively. Net sales are affected by fluctuations in interest rates,
currency exchange rates and other uncertainties inherent in doing business and
selling product in more than one currency. In addition, the operations of the
Company are exposed to significant 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.
Fluctuations in foreign currency exchange rates may favorably or
adversely affect the Company's reported earnings and, accordingly, the
comparability of its period-to-period results of operations. Changes in currency
exchange rates may
19
<PAGE>
affect the relative prices at which the Company and foreign competitors sell
their products in the same market. When the value of the U.S. dollar is high in
comparison with the other currencies in which sales are made, this will have a
negative impact on net sales.
To protect against these risks, 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 cash management
and investment policies have minimized these risks. However, there can be no
assurance that these practices will be successful in eliminating all or
substantially all of the risks encountered by the Company in connection with its
foreign currency transactions.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is party to certain litigation in the United States Federal
District Court for the District of Connecticut involving the Company's rights to
continue to sell is popular Proflavanol product. These actions have been
disclosed by the Company in its reports filed with the SEC in prior periods,
more specifically in the Company's Annual Report on Form 10-K for the year ended
January 2, 1999 and its Form 10-Q for the quarterly period ended April 3, 1999.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At its Annual Meeting of Shareholders on May 27, 1999, the following
actions were submitted and approved by vote of the majority of the issued and
outstanding shares of the Company:
(1) Election of five directors and
(2) Selection of Grant Thornton LLP as the Company's independent certified
public accountants.
A total of 11,858,674 shares (approximately 91%) of the issued and
outstanding shares of the Company were represented by proxy or in person at the
meeting. These shares were voted on the matters described above as follows:
1. For the directors as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Number of Number of Number of Shares
Name Shares For Shares Against Abstaining/Withheld
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dr. Myron W. Wentz 11,837,610 21,064 -
- -------------------------------------------------------------------------------------------------------------
David A. Wentz 11,837,610 21,064 -
- -------------------------------------------------------------------------------------------------------------
Ronald S. Poelman 11,837,610 21,064 -
- -------------------------------------------------------------------------------------------------------------
Dr. Ned M. Weinshenker 11,837,610 21,064 -
- -------------------------------------------------------------------------------------------------------------
Robert Anciaux 11,837,610 21,064 -
- -------------------------------------------------------------------------------------------------------------
</TABLE>
2. For the ratification of the Board's selection of Grant Thornton LLP as the
independent certified accountants of the Company as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Number of Number of Number of Shares
Shares For Shares Against Abstaining/Withheld
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
11,826,603 17,509 14,562
- ------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
Item 5. Other Information
Transactions with the President and CEO
On April 28, 1999, the Company agreed to provide up to $5.0 million to its
President, CEO and Chairman, Dr. Wentz, pursuant to a Promissory Note and
Redemption Agreement ("Agreement"). Repayment of amounts advanced under the
Agreement, together with interest at prime rate, will be made through the
surrender and redemption of shares of the Company's common stock beneficially
owned by Dr. Wentz, held by Gull Holdings Ltd. ("Gull"). Dr. Wentz is the sole
shareholder of Gull. Gull has pledged shares to secure the payment and
redemption as contemplated by the Agreement. Payment must be made by redemption
of shares by August 31, 1999 in the amount of $2.5 million. The balance of
unpaid principal and accrued interest will be paid by redemption by December 31,
1999. Dr. Wentz may make up to two interim payments by redemption of shares
prior to August 31, 1999. Up to two additional interim payments may also be
made during the period from September 1, 1999 to December 31, 1999. The number
of shares subject to redemption at the time of each payment will be determined
by the average closing price of the Company's common stock as reported by NASDAQ
for the five trading days preceding a payment date. The total $5.0 million
available under the Promissory Note and Redemption Agreement had been advanced
to Dr. Wentz as of August 6, 1999. On May 24, 1999, the Company redeemed
300,000 shares of its common stock beneficially owned by Dr. Wentz for $3.1
million. Additional funds may be advanced to Dr. Wentz under terms yet to be
determined.
Redemption of shares in satisfaction of the Agreement will be anti-dilutive
to other shareholders, reducing the total number of issued and outstanding
shares by the number of shares redeemed. This arrangement also provides some
liquidity of Dr. Wentz's investment in the Company without creating an overhang
in the market and without increasing the supply of available shares when such an
act may otherwise drive down the market price of the Company's common stock.
The arrangement was reviewed by the Audit Committee and approved by the
independent directors of the Company.
21
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description
- ------- -----------
3.1 Articles of Incorporation [Incorporated by reference to the Company's
Registration Statement on Form 10, File No. 0-21116, effective April
16, 1993]
3.2 Bylaws [Incorporated by reference to the Company's Registration
Statement on Form 10, File No. 0-21116, effective April 16, 1993]
4.1 Specimen Stock Certificate for Common Stock, no par value
[Incorporated by reference to the Company's Registration Statement on
Form 10, File No. 0-21116, effective April 16, 1993]
10.1 Business Loan Agreement by and between Bank of America National Trust
and Savings Association, d/b/a Seafirst Bank ("Seafirst Bank") and
the Company [Incorporated by reference to the Company's Report on
Form 10-Q for the period ended June 27, 1998]
10.2 Loan Modification Agreement by and between Seafirst Bank and the
Company [Incorporated by reference to the Company's Report on Form
10-Q for the period ended June 27, 1998]
10.3 Employment Agreement dated June 1, 1997 by and between the Company
and Gilbert A. Fuller [Incorporated by reference to the Company's
Report on Form 10-Q for the period ended June 27, 1998]
10.4 Amended and Restated Long-Term Stock Investment and Incentive Plan
[Incorporated by reference to the Company's Report on Form 10-Q for
the period ended June 27, 1998]
10.5 Promissory Note and Redemption Agreement dated April 28, 1999
[Incorporated by reference to the Company's Report on Form 10-Q for
the period ended April 3, 1999]
10.6 Stock Pledge Agreement dated April 28, 1999 [Incorporated by
reference to the Company's Report on Form 10-Q for the period ended
April 3, 1999]
11.1 Computation of Net Income per Share (included in Notes to
Consolidated Financial Statements)
22.1 Subsidiaries of the Company [Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended January 2,
1999]
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed no current reports on Form 8-K during the quarter
ended July 3, 1999.
22
<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.
Date: August 16, 1999 By: /s/ Gilbert A. Fuller
--------------- --------------------------
Gilbert A. Fuller
Senior Vice President and
Chief Financial Officer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000896264
<NAME> USANA, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-03-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,234
<SECURITIES> 0
<RECEIVABLES> 1,495
<ALLOWANCES> 221
<INVENTORY> 9,750
<CURRENT-ASSETS> 17,182
<PP&E> 30,851
<DEPRECIATION> 7,946
<TOTAL-ASSETS> 40,144
<CURRENT-LIABILITIES> 8,157
<BONDS> 0
0
0
<COMMON> 8,478
<OTHER-SE> 22,932
<TOTAL-LIABILITY-AND-EQUITY> 40,144
<SALES> 63,801
<TOTAL-REVENUES> 63,801
<CGS> 12,724
<TOTAL-COSTS> 44,015
<OTHER-EXPENSES> (24)
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> 7,086
<INCOME-TAX> 2,714
<INCOME-CONTINUING> 4,372
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,372
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.33
</TABLE>
