<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 OCTOBER 2, 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 November
12, 1999 was 10,165,238.
================================================================================
<PAGE>
USANA, INC.
FORM 10-Q
For the Quarterly Period Ended October 2, 1999
INDEX
<TABLE>
<CAPTION>
Page
--------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1 Financial Statements
Consolidated Balance Sheets ...................................................................... 3
Consolidated Statements of Operations - Quarter Ended ........................................... 4
Consolidated Statements of Earnings - Nine Months Ended ......................................... 5
Consolidated Statements of Stockholders' Equity .................................................. 6
Consolidated Statements of Cash Flows ............................................................ 7-8
Notes to Consolidated Financial Statements ....................................................... 9-13
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 13-21
Item 3 Quantitative and Qualitative Disclosures About Market Risk ......................................... 21-22
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K .................................................................. 22-23
Signatures ......................................................................................................... 24
</TABLE>
2
<PAGE>
USANA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Unaudited
---------
January 2, October 2,
1999 1999
------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.................................................................... $ 2,617 $ 1,522
Accounts receivable, net..................................................................... 294 1,019
Current maturities of notes receivable....................................................... 16 --
Income tax receivable........................................................................ -- 996
Inventories, net (Note A)................................................................... 10,543 10,210
Prepaid expenses and other current assets.................................................... 1,912 2,232
Deferred income taxes........................................................................ 1,233 1,794
------- -------
Total current assets...................................................................... 16,615 17,773
Property and Equipment, net (Note .)........................................................... 22,751 21,035
Notes Receivable, less current maturities...................................................... 5 5
Other Assets................................................................................... 55 515
------- -------
$39,426 $39,328
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Checks written in excess of cash in bank..................................................... $ -- $ 1,598
Current maturities of long-term debt......................................................... -- 2,000
Accounts payable............................................................................. 4,211 3,769
Other current liabilities (Note C)........................................................... 4,505 5,831
Restructuring provision (Note E)............................................................. -- 2,614
Line of credit............................................................................... -- 4,350
------- -------
Total current liabilities................................................................. 8,716 20,162
Long-term Debt, less current maturities........................................................ -- 8,000
Deferred Income Taxes.......................................................................... 624 634
Stockholders' Equity
Common stock, no par value; authorized 50,000 shares; issued and outstanding
13,047 shares at January 2, 1999 and 10,155 shares at October 2, 1999 (Note D)............. 9,131 2,806
Retained earnings............................................................................ 21,668 7,828
Notes receivable - related party............................................................. (531) --
Accumulated other comprehensive loss......................................................... (182) (102)
------- -------
Total stockholders' equity................................................................ 30,086 10,532
------- -------
$39,426 $39,328
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
USANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Unaudited
---------------------------------------
Quarter Ended
-------------
September 26, October 2,
1998 1999
------------------ ----------------
<S> <C> <C>
Net sales.............................................................................. $32,123 $32,359
Cost of sales.......................................................................... 6,725 6,316
------- -------
Gross profit......................................................................... 25,398 26,043
Operating expenses
Distributor incentives............................................................... 14,312 14,286
Selling, general and administrative.................................................. 6,705 8,405
Restructuring and impairment (Note E)................................................ -- 4,400
Research and development............................................................. 405 343
------- -------
Total operating expenses.......................................................... 21,422 27,434
------- -------
Earnings (loss) from operations........................................................ 3,976 (1,391)
Other income (expense)
Interest income...................................................................... 89 96
Interest expense..................................................................... (1) (9)
Other, net........................................................................... 25 110
------- -------
Total other income................................................................ 113 197
------- -------
Earnings (loss) before income taxes.................................................... 4,089 (1,194)
Income tax expense (benefit)........................................................... 1,559 (444)
------- -------
NET EARNINGS (LOSS).................................................................. $ 2,530 $ (750)
======= =======
Earnings (loss) per share (Note D)
Earnings (loss) per share--basic..................................................... $ 0.19 $ (0.06)
======= =======
Weighted average shares outstanding--basic........................................... 12,987 12,473
======= =======
Earnings (loss) per share--diluted................................................... $ 0.18 $ (0.06)
======= =======
Weighted average shares outstanding--diluted......................................... 14,190 12,473
======= =======
</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 Ended
-----------------
September 26, October 2,
1998 1999
---------------- ----------------
<S> <C> <C>
Net sales................................................................ $89,200 $96,160
Cost of sales............................................................ 18,619 19,038
------- -------
Gross profit........................................................... 70,581 77,122
Operating expenses
Distributor incentives................................................. 40,004 42,633
Selling, general and administrative.................................... 18,456 23,390
Restructuring and impairment (Note E).................................. -- 4,400
Research and development............................................... 1,132 1,027
------- -------
Total operating expenses............................................ 59,592 71,450
------- -------
Earnings from operations................................................. 10,989 5,672
Other income (expense)
Interest income........................................................ 199 218
Interest expense....................................................... (7) (22)
Other, net............................................................. (12) 24
------- -------
Total other income.................................................. 180 220
------- -------
Earnings before income taxes............................................. 11,169 5,892
Income taxes............................................................. 4,299 2,270
------- -------
NET EARNINGS........................................................... $ 6,870 $ 3,622
======= =======
Earnings per share (Note D)
Earnings per share--basic.............................................. $ 0.53 $ 0.28
======= =======
Weighted average shares outstanding--basic............................. 12,904 12,823
======= =======
Earnings per share--diluted............................................ $ 0.49 $ 0.28
======= =======
Weighted average shares outstanding--diluted........................... 13,980 13,158
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
USANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 26, 1998 and October 2, 1999
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Common stock Retained Comprehensive
--------------
Shares Amount Earnings Income/loss Other Total
------- -------- -------- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
For the Nine Months Ended September 26,
1998
Balance at December 27, 1997 12,812 $ 7,167 $ 12,171 $ (80) $ -- $ 19,258
Comprehensive income
Net earnings -- -- 6,870 -- -- 6,870
Foreign currency translation adjustment -- -- -- (522) -- (522)
--------
Comprehensive income 6,348
Notes receivable - related party -- -- -- -- (402) (402)
Common stock issued under stock option
Plan 179 1,594 -- -- -- 1,594
------ ------- -------- -------- ------- --------
Balance at September 26, 1998 12,991 $ 8,761 $ 19,041 $ (602) $ (402) $ 26,798
====== ======= ======== ======== ======= ========
For the Nine Months Ended October 2, 1999
Balance at January 2, 1999 13,047 $ 9,131 $ 21,668 $ (182) $ (531) $ 30,086
Comprehensive income
Net earnings -- -- 3,622 -- -- 3,622
Foreign currency translation adjustment -- -- -- 80 -- 80
--------
Comprehensive income 3,702
Common stock retired and advances to
related party (2,950) (6,585) (17,462) -- 531 (23,516)
Common stock issued under stock option
plan, including tax benefit of $105 58 260 -- -- -- 260
------ ------- -------- -------- ------- --------
Balance at October 2, 1999 10,155 $ 2,806 $ 7,828 $ (102) $ -- $ 10,532
====== ======= ======== ======== ======= ========
</TABLE>
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
---------------------------------
Nine Months Ended
-----------------
September 26, October 2,
1998 1999
--------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings.................................................................... $ 6,870 $ 3,622
Adjustments to reconcile net earnings to net cash provided by
Operating activities
Depreciation and amortization.............................................. 2,845 3,441
Loss on restructuring and impairment....................................... -- 4,278
Loss on sale of property and equipment..................................... 17 3
Deferred income taxes...................................................... (635) (942)
Provision for inventory obsolescence....................................... (70) (171)
Provision for doubtful accounts............................................ 256 (29)
Changes in assets and liabilities
Accounts receivable...................................................... (457) (654)
Inventories.............................................................. (3,161) 745
Income tax receivable.................................................... -- (996)
Prepaid expenses and other assets........................................ (1,420) (678)
Accounts payable......................................................... 297 (449)
Other current liabilities................................................ 3,282 1,359
------- -------
Total adjustments...................................................... 954 5,907
------- -------
Net Cash Provided By Operating Activities....................................... 7,824 9,529
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Receipts on notes receivable.................................................... 22 16
Increase in notes receivable.................................................... (132) --
Purchase of property and equipment.............................................. (7,574) (3,412)
Proceeds from sale of property and equipment.................................... 75 84
------- -------
Net Cash Used In Investing Activities........................................... (7,609) (3,312)
------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
USANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
<TABLE>
<CAPTION>
Unaudited
-------------------------------------
Nine Months Ended
-----------------
September 26, October 2,
1998 1999
---------------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Checks written in excess of cash in bank.................................... -- 1,598
Net proceeds from the sale of common stock.................................. 989 155
Common stock retired and advances to related party.......................... (402) (23,516)
Proceeds from the issuance of long-term debt................................ -- 10,000
Increase in line of credit.................................................. -- 4,350
------ --------
Net Cash Provided By (Used In) Financing Activities......................... 587 (7,413)
Effect of exchange rate changes on cash....................................... (129) 101
------ --------
Net increase (decrease) in cash and cash equivalents........................ 673 (1,095)
Cash and cash equivalents at beginning of year................................ 2,608 2,617
------ --------
Cash and cash equivalents at end of year...................................... $3,281 $ 1,522
====== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest................................................................. $ 7 $ 22
Income taxes............................................................. 4,247 4,076
Non-cash financing activities
Repurchase of common stock by cancellation of note....................... $ -- $ 531
</TABLE>
The accompanying notes are an integral part of these statements.
8
<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
October 2, 1999, and results of operations for the quarters and nine months
ended October 2, 1999 and September 26, 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 nine months
ended October 2, 1999 may not be indicative of the results that may be expected
for the fiscal year ending January 1, 2000.
NOTE A - INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following:
January 2, October 2,
1999 1999
------------------- -------------------
<S> <C> <C>
Raw materials........................................................ $ 3,043 $ 2,881
Work in process...................................................... 1,534 1,689
Finished goods....................................................... 6,592 6,113
------------------- -------------------
11,169 10,683
Less allowance for inventory obsolescence............................ 626 473
------------------- -------------------
$10,543 $10,210
=================== ===================
</TABLE>
NOTE B - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consist of the following:
January 2, October 2,
1999 1999
------------------- -------------------
<S> <C> <C>
Buildings............................................................ $ 7,414 $ 7,421
Laboratory and production equipment.................................. 2,697 2,926
Computer equipment and software...................................... 11,075 11,130
Furniture and fixtures............................................... 2,024 2,122
Automobiles.......................................................... 320 324
Leasehold improvements............................................... 461 505
Land improvements.................................................... 542 542
------------------- -------------------
24,533 24,970
Less accumulated depreciation and amortization....................... 5,681 8,104
------------------- -------------------
18,852 16,866
Land................................................................. 2,548 2,548
Deposits and projects in process..................................... 1,351 1,621
------------------- -------------------
$22,751 $21,035
=================== ===================
</TABLE>
9
<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, October 2,
1999 1999
------------------- -------------------
<S> <C> <C>
Employee compensation and related items.............................. $ 964 $ 954
Distributor incentives............................................... 1,140 1,421
Income taxes......................................................... 429 505
Sales taxes.......................................................... 845 794
Deferred revenue..................................................... 34 126
All other............................................................ 1,093 2,031
------------------- -------------------
$4,505 $5,831
=================== ===================
</TABLE>
NOTE D - COMMON STOCK AND EARNINGS (LOSS) PER SHARE
On September 21, 1999, the Company repurchased 2,650,000 shares of its
common stock from Gull Holdings, Ltd., in a privately negotiated transaction.
An earlier purchase of 300,000 shares was made on May 24, 1999, pursuant to an
agreement entered into on April 28, 1999. The series of related transactions
reduced the ownership of Gull Holdings, Ltd. from 58.2% to 45.9% of the issued
and outstanding common stock of the Company. Gull Holdings, Ltd. is an Isle of
Man company owned and controlled by Myron W. Wentz, Ph.D., the founder,
Chairman, President and CEO of the Company. Shares redeemed were subsequently
cancelled and, therefore, are not included in the Company's issued or
outstanding shares.
Basic earnings per share are based on the weighted average number of shares
outstanding for each period. Shares redeemed have been included in the
calculation of weighted average shares outstanding for basic earnings per share.
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 26, 1998
---------------------------------------------------------------------
Earnings Shares 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>
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(In thousands, except per share data)
NOTE D - COMMON STOCK AND EARNINGS (LOSS) PER SHARE - (continued)
<TABLE>
<CAPTION>
For the Quarter Ended October 2, 1999
---------------------------------------------------------------------
Loss Shares Loss
(Numerator) (Denominator) Per Share
--------------------- ------------------- -----------------
<S> <C> <C> <C>
Basic EPS
Net loss .................................. $(750) 12,473 $(0.06)
-----------------
Effect of dilutive securities
Stock options.............................. - -
--------------------- -------------------
Diluted EPS
Net loss................................... $(750) 12,473 $(0.06)
===================== =================== =================
</TABLE>
In the money options totaling 683 at an average price of $3.13 are omitted
from the diluted per share calculation because the net loss in the third quarter
of 1999 has an anti-dilutive impact.
<TABLE>
<CAPTION>
For the Nine Months Ended September 26, 1998
---------------------------------------------------------------------
Earnings Shares 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>
<TABLE>
<CAPTION>
For the Nine Months Ended October 2, 1999
---------------------------------------------------------------------
Earnings Shares Earnings
(Numerator) (Denominator) Per Share
--------------------- ------------------- -----------------
<S> <C> <C> <C>
Basic EPS
Net earnings............................... $3,622 12,823 $0.28
-----------------
Effect of dilutive securities
Stock options.............................. - 335
--------------------- -------------------
Diluted EPS
Net earnings............................... $3,622 13,158 $0.28
===================== =================== =================
</TABLE>
Options to purchase 330 shares of stock at an average price of $11.46 were
not included in the computation of EPS for the nine months ended October 2,
1999, because their exercise price was greater than the average market price of
the shares.
NOTE E--RESTRUCTURING AND IMPAIRMENT
Restructuring. The Company recorded a restructuring charge and reserve
totaling $2.7 million ($1.7 million after tax, or $0.13 per share) in the third
quarter of 1999. Management decided to take action after actual sales growth in
the United Kingdom fell significantly short of expectations. After carefully
monitoring actual results and looking forward, management of the Company decided
to take action to reduce inefficiencies primarily in the United Kingdom and, to
a lesser extent, in the Company's other markets.
11
<PAGE>
The restructuring charge includes the impact of a substantial reduction in
United Kingdom operations, liquidation of associated assets in the United
Kingdom and reduction of staff outside of the United Kingdom. Charges
incorporated into the Company's restructuring initiative includes $900,000 for
non-voluntary employee termination benefits, $1.4 million for the liquidation of
associated assets used in United Kingdom operations and $400,000 for other exit
costs. The Company expects that all activities associated with the Company's
restructuring initiative will be completed by the end of the third quarter of
2000.
As of October 2, 1999, approximately $100,000 was charged against the
restructuring reserve. These charges were primarily the result of writing assets
in the United Kingdom down to their net realizable value. Management believes
the impact of the restructuring and impairment will lower relative operating
costs by approximately $3.5 million (before tax) per year.
Impairment. The Company recorded a loss on impairment of assets totaling
$1.7 million ($1.1 million after tax, or $0.09 per share) in the third quarter
of 1999. The Company formalized its decision to move to a new custom network
marketing computer system in the third quarter of 1999. This new system will
move the Company's primary operating systems to an Oracle platform and better
enable it to communicate with other computer software systems throughout the
Company. Additionally, the Company plans on launching an e-commerce web site in
mid-2000, which will be integrated seamlessly into the new custom network
marketing computer system. Other expected benefits include the ability to reduce
the number of staff taking orders over the phone, relationship data tracking and
other enhanced customer service features. This new system is expected to be
implemented by the beginning of fiscal 2000 and should facilitate additional
operational savings.
In accordance with Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," the Company wrote down the affected assets to their net realizable value.
NOTE F--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.
Financial information summarized by geographic segment for the nine months
ended September 26, 1998 and October 2, 1999 is listed below:
<TABLE>
<CAPTION>
Australia/
Nine Months Ended New United All
September 26, 1998 Domestic Canada Zealand Kingdom Others Totals
------------------ -------- -------- ---------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers.................................. $52,215 $24,743 $12,242 $ -- $ -- $89,200
Earnings before income taxes...................................... $ 6,141 $ 3,206 $ 1,822 $ -- $ -- $11,169
Long-lived assets................................................. $18,416 $ 271 $ 960 $ 146 $ -- $19,793
Total assets...................................................... $30,199 $ 2,094 $ 4,142 $ 289 $ -- $36,724
</TABLE>
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Australia/
Nine Months Ended New United All
October 2, 1999 Domestic Canada Zealand Kingdom Others Totals
--------------- -------- -------- ---------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers.................................. $51,550 $22,349 $20,264 $ 1,997 $ -- $96,160
Earnings before income taxes...................................... $ 1,000 $ 4,043 $ 3,236 $(2,387) $ -- $ 5,892
Long-lived assets................................................. $19,478 $ 284 $ 964 $ 813 $ 16 $21,555
Total assets...................................................... $30,422 $ 2,310 $ 3,523 $ 1,753 $1,320 $39,328
</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 October 2, 1999, the Company had approximately
113,000 current distributors in the United States, Canada, Australia, New
Zealand and the United Kingdom. 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 October 2, 1999,
the Company had approximately 41,000 Preferred Customers.
The Australia-New Zealand and the United Kingdom markets initiated
operations on February 12, 1998 and November 30, 1998, respectively. The Company
began selling products into the Netherlands in the third quarter of 1999. The
Netherlands will be serviced by the Company's United Kingdom administrative
facility. The Company opened its newest market, Hong Kong, on November 2, 1999.
The Company has experienced significant growth in net sales 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 80% of the Company's net sales for the quarter ended October 2,
1999. The Company's top selling products, USANA Essentials and Proflavanol
represented approximately 40% and 14%, respectively, of net sales for the nine
months ended October 2, 1999. No other products accounted for more than 10% of
net sales during the first nine 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 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 nine months ended October 2, 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 nine months of 1999, sales in the Company's four primary
markets, the United States, Canada, Australia-New Zealand and the United
Kingdom, were
13
<PAGE>
53.6%, 23.2%, 21.1% 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 nine 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 44.3% of net sales for the nine months ended October 2, 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 will manage its human
resources and associated infrastructure to current business activity levels.
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, Ph.D., 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. Fiscal year 1999 will end January 1, 2000.
Results Of Operations
Quarters Ended October 2, 1999 and September 26, 1998
Net Sales. Net sales increased 0.7% to $32.4 million for the quarter ended
October 2, 1999, an increase of $236,000 from the $32.1 million reported for the
comparable quarter in 1998. The increase in net sales is primarily the result of
a 15.8% 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 1.8% to 113,000 at October 2, 1999 compared
to 111,000 at September 26, 1998, with all of the growth occurring in the
Company's Australia-New Zealand and United Kingdom markets. The number of
Preferred Customers grew 86.4% to 41,000 at October 2, 1999 compared to 22,000
at September 26, 1998. Net sales during the quarter ended October 2, 1999
included approximately
14
<PAGE>
$750K from product sales incident to the Company's annual international
convention in July 1999. No convention sales are included in the results for the
quarter ended September 26, 1998, as the 1998 annual convention was held during
the second quarter.
The following tables illustrate the growth in sales and customers by market
for the quarters ended September 26, 1998 and October 2, 1999:
SALES BY MARKET
<TABLE>
<CAPTION>
(in thousands)
Quarter Ended
-----------------------------------------------
Growth over %
Market September 26, 1998 October 2, 1999 Prior Year Growth
- - ------ ------------------------ -------------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
United States.................. $17,570 54.7% $17,506 54.1% $ (64) (0.4%)
Canada......................... 8,433 26.3 7,533 23.3 (900) (10.7%)
Australia-New Zealand.......... 6,120 19.0 6,690 20.7 570 9.3%
United Kingdom................. - - 630 1.9 630 -
-------- ------- -------- ------ ------------
Consolidated................... $32,123 100.0% $32,359 100.0% $ 236 0.7%
======== ======= ======== ====== ============
</TABLE>
CURRENT DISTRIBUTORS BY MARKET
<TABLE>
<CAPTION>
As of As of Growth over %
Market September 26, 1998 October 2, 1999 Prior Year Growth
- - ------ ------------------------ -------------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
United States.................. 59,000 53.2% 54,000 47.8% (5,000) (8.5%)
Canada......................... 33,000 29.7 28,000 24.8 (5,000) (15.2%)
Australia-New Zealand.......... 19,000 17.1 28,000 24.8 9,000 47.4%
United Kingdom................. - - 3,000 2.6 3,000 -
-------- ------- -------- ------ ------------
Consolidated................... 111,000 100.0% 113,000 100.0% 2,000 1.8%
======== ======= ======== ====== ============
</TABLE>
PREFERRED CUSTOMERS BY MARKET
<TABLE>
<CAPTION>
As of As of Growth over %
Market September 26, 1998 October 2, 1999 Prior Year Growth
- - ------ ------------------------ -------------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
United States.................. 14,000 63.6% 23,000 56.1% 9,000 64.3%
Canada......................... 6,000 27.3 10,000 24.4 4,000 66.7%
Australia-New Zealand.......... 2,000 9.1 7,000 17.1 5,000 250.0%
United Kingdom................. - - 1,000 2.4 1,000 -
-------- ------- -------- ------ ------------
Consolidated................... 22,000 100.0% 41,000 100.0% 19,000 86.4%
======== ======= ======== ====== ============
</TABLE>
TOTAL CUSTOMERS BY MARKET
<TABLE>
<CAPTION>
As of As of Growth over %
Market September 26, 1998 October 2, 1999 Prior Year Growth
- - ------ ------------------------ -------------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
United States.................. 73,000 54.9% 77,000 50.0% 4,000 5.5%
Canada......................... 39,000 29.3 38,000 24.7 (1,000) (2.6%)
Australia-New Zealand.......... 21,000 15.8 35,000 22.7 14,000 66.7%
United Kingdom................. - - 4,000 2.6 4,000 -
-------- ------- -------- ------ ------------
Consolidated................... 133,000 100.0% 154,000 100.0% 21,000 15.8%
======== ======= ======== ====== ============
</TABLE>
15
<PAGE>
Cost of Sales. Cost of sales decreased 6.1% to $6.3 million for the third
quarter ended October 2, 1999, a decrease of $0.4 million from the $6.7 million
reported for the comparable quarter in 1998. As a percentage of net sales, cost
of sales decreased to 19.5% for the third quarter ended October 2, 1999 from
20.9% for the comparable quarter in 1998. The decrease in cost of sales as a
percentage of net sales can be 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
. Increased production and procurement efficiencies.
Distributor Incentives. Distributor incentives remained flat at $14.3
million for the quarters ended October 2, 1999 and September 26, 1999. As a
percentage of net sales, distributor incentives decreased to 44.1% in the third
quarter of 1999 from 44.6% for the comparable quarter in 1998. The decrease in
distributor incentives as a percentage of net sales can primarily be attributed
to three factors:
. Continued efforts at managing pricing of the Company's products, which
has created a spread between the wholesale price of the products and
the associated sales volume points,
. The introduction of a new level in the distributor compensation plan
and
. Inefficiencies in the distributor network in the United Kingdom.
The new level, or position, in the distributor compensation plan represents the
earliest level in the Company's network marketing system eligible to receive
incentives. 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 25.4% to $8.4 million for the quarter ended
October 2, 1999, an increase of $1.7 million from the $6.7 million reported for
the comparable quarter in 1998. As a percentage of net sales, selling, general
and administrative expenses increased to 26.0% in the second quarter of 1999
from 20.9% 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 including a $300,000
increase in costs above 1998 levels related to the Company's annual
international convention held in July 1999,
. 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 the impact of these factors on the Company's selling,
general and administrative expenses to be reduced as a result of actions taken
through the restructuring and impairment initiative, which was announced on
September 21, 1999.
Research and Development. Research and development expenses decreased 15.3%
to $343,000 for the quarter ended October 2, 1999 compared to $405,000 for the
comparable quarter in 1998. As a percentage of net sales, research and
development expenses decreased to 1.1% in the third quarter of 1999 from 1.3%
for the comparable period in 1998. Although current research and development
spending is down, the Company continues to keep abreast of the latest research
16
<PAGE>
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 (Loss). Operations coupled with the restructuring and
impairment yielded a net loss of $750,000 for the quarter ended October 2, 1999.
Net earnings for the third quarter of the prior year totaled $2.5 million. The
$4.4 million restructuring and impairment charge ($2.8 million after tax, or
$0.22 per share) was the primary contributor to the net loss in the third
quarter of 1999. Substantial increases in selling, general and administrative
expenses also contributed to the net loss for the third quarter of 1999. Diluted
earnings per share decreased $0.24 to a net per share loss of $0.06 for the
third quarter of 1999 from a positive $0.18 for the comparable quarter in 1998.
Nine Months Ended October 2, 1999 and September 26, 1998
Net Sales. Net sales increased 7.8% to $96.2 million for the nine months
ended October 2, 1999, an increase of $7.0 million from the $89.2 million
reported for the comparable period in 1998. The increase in net sales is
primarily the result of a 15.8% 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 1.8% to 113,000 at
October 2, 1999 compared to 111,000 at September 26, 1998, with all of the
growth occurring in the Company's Australia-New Zealand and United Kingdom
markets. The number of Preferred Customers grew 86.4% to 41,000 at October 2,
1999 compared to 21,000 at September 26, 1998.
The following tables illustrate the growth in sales by market for the nine
months ended September 26, 1998 and October 2, 1999:
SALES BY MARKET
<TABLE>
<CAPTION>
(in thousands)
Nine Months Ended
-----------------------------------------------
Growth over %
Market September 26, 1998 October 2, 1999 Prior Year Growth
- - ------ ------------------------ -------------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
United States.................. $52,215 58.5% $51,550 53.6% $ (665) (1.3%)
Canada......................... 24,743 27.8 22,349 23.2 (2,394) (9.7%)
Australia-New Zealand.......... 12,242 13.7 20,264 21.1 8,022 65.5%
United Kingdom................. - - 1,997 2.1 1,997 -
-------- ------- -------- ------ ------------
Consolidated................... $89,200 100.0% $96,160 100.0% $ 6,960 7.8%
-------- ------- -------- ------ ------------
</TABLE>
Cost of Sales. Cost of sales increased 2.3% to $19.0 million for the nine
months ended October 2, 1999, an increase of $0.4 million from the $18.6 million
reported for the comparable period in 1998. As a percentage of net sales, cost
of sales decreased to 19.8% for the first nine months of 1999 from 20.9% 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
. Increased production and procurement efficiencies.
Distributor Incentives. Distributor incentives increased 6.6% to $42.6
million for the nine months ended October 2, 1999, an increase of $2.6 million
from the $40.0 million reported for the comparable period in 1998. The increase
in distributor incentives for the first nine months of 1999 can be attributed to
an increase in commissionable sales. As a percentage of net sales, distributor
incentives decreased to 44.3% in the first nine months of 1999 from 44.8% for
the comparable period in 1998. The decrease in distributor incentives as a
percentage of net sales can primarily be attributed to three factors:
17
<PAGE>
. Continued efforts at managing pricing of the Company's products, which
has created a spread between the wholesale price of the products and
the associated sales volume points,
. The introduction of a new level in the distributor compensation plan
and
. Inefficiencies in the distributor network in the United Kingdom.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 26.7% to $23.4 million for the nine months
ended October 2, 1999, an increase of $4.9 million from the $18.5 million
reported for the comparable period in 1998. As a percentage of net sales,
selling, general and administrative expenses increased to 24.3% in the first
nine months of 1999 from 20.7% 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 including a $300,000
increase in costs above 1998 levels related to the Company's annual
international convention held in July 1999,
. 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 the impact of these factors on the Company's selling,
general and administrative expenses to be reduced as a result of actions taken
through the restructuring and impairment initiative, which was announced on
September 21, 1999.
Research and Development. Research and development expenses decreased 9.3%
to $1.0 million for the nine months ended October 2, 1999 compared to $1.1
million for the comparable period in 1998. As a percentage of net sales,
research and development expenses decreased to 1.1% in the first nine months of
1999 from 1.3% for the comparable period in 1998. Although current research and
development spending is down, 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 47.3% to $3.6 million for the nine
months ended October 2, 1999, a decrease of $3.3 million from the $6.9 million
reported for the comparable period in 1998. The $4.4 million restructuring and
impairment charge ($2.8 million after tax, or $0.22 per share) was the primary
contributor to the substantial decrease in net earnings for the nine months
ended October 2, 1999 when compared to the same period in 1998. Substantial
increases in selling, general and administrative expenses also contributed to
decreased net earnings in the first nine months of 1999. Diluted earnings per
share decreased to $0.28 for the nine months ended October 2, 1999 from $0.49
for the comparable period in 1998.
Liquidity and Capital Resources
The Company has financed its growth primarily from cash flows from
operations. During the first nine months of 1999, the Company generated net cash
from operations of $9.5 million compared to $7.8 million for the comparable
period in 1998. Cash and cash equivalents decreased to $1.5 million at October
2, 1999 from $2.6 million at January 2, 1999. Checks written in excess of cash
in bank totaled $1.6 million at October 2, 1999.
18
<PAGE>
On October 2, 1999, the Company was in a negative $2.4 million net working
capital position compared to a positive position of $7.9 million at January 2,
1999. The change in net working capital during the first nine months of 1999
was primarily the result of redeeming common stock and advancing funds to a
related party, which totaled $23.5 million during this period. This use of
working capital for long-term purposes will provide earnings per share benefits
in future periods. Furthermore, the Company has substantial, unused
availability under its line of credit.
The Company does not extend credit to its customers, but requires payment
prior to shipping, which eliminates significant receivables.
The Company invested $3.4 million in property and equipment during the nine
months ended October 2, 1999 compared to $7.6 million during the comparable
period in 1998. Inventory decreased to $10.2 million at October 2, 1999 from
$10.5 million at fiscal year end 1998.
On September 21, 1999, the Company completed the repurchase of 2,650,000
shares of its common stock from Gull Holdings, Ltd. An earlier purchase of
300,000 shares was made on May 24, 1999, pursuant to an agreement entered into
on April 28, 1999. The series of related transactions reduced the ownership of
Gull Holdings, Ltd. from 58.2% to 45.9% of the issued and outstanding capital
stock of the Company. Gull Holdings, Ltd. is an Isle of Man company owned and
controlled by Myron W. Wentz, Ph.D., the founder, Chairman, President and CEO of
the Company. The transactions were privately negotiated, reviewed by the Audit
Committee of the Board of Directors and approved by the independent directors of
the Company. The aggregate purchase price of the 2.65 million shares was
$20,935,000 and was financed by existing cash balances and borrowings of
approximately $18 million under a new credit agreement with Bank of America in
the form of a $10 million term loan and a $15 million revolving line of credit.
The revolving line replaces a revolving credit facility with the same
institution that made $10 million available to the Company. The Company expects
to retire debt related to this transaction before the end of fiscal 2001.
During September 1999, the Company entered into agreements with Bank of
America that made available $25 million in secured credit facilities ("Credit
Facilities"). A $10 million 5-year term loan and a $15 million 3-year revolving
line of credit comprise these facilities. At October 2, 1999, the Company had
$10.65 million available under the line of credit, which expires September 1,
2002. The interest rate is computed at the bank's prime rate or the London
Interbank Offered Rate (LIBOR) base rate adjusted by features specified in the
Credit Facilities. The Company may choose to borrow at the bank's publicly
announced Reference Rate plus a margin per annum as specified in the Credit
Facilities or, at the option of the Company, loans within the approved
commitment may be available in minimum amounts of $100,000 or more for specific
periods ranging from one to six months, at LIBOR plus a margin as specified in
the Credit Facilities. Receivables, inventories and equipment secure the Credit
Facilities. The Credit Facilities contain restrictive covenants requiring the
Company to maintain certain financial ratios. As of October 2, 1999, the
Company was in compliance with these covenants. As of October 2, 1999, $10
million was outstanding on the 5-year term loan and $4.35 million was
outstanding on the line of credit.
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. If the Company
experiences an adverse operating environment or unusual capital expenditure
requirements, additional financing may be required. There can be no assurance
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
19
<PAGE>
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 continues to assess its state of readiness and the readiness of
third parties with which the Company interacts, with respect to the Year 2000
problem. The assessment 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 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. Based on completed assessments of internal risks, the
expenditures to date have been immaterial and have involved primarily the time
of an employee assigned to coordinate Year 2000 assessments in the Company and
the replacement or updating of certain non-critical computer systems and
software packages to resolve identified 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 will integrate a new
Distribution System, which will be Year 2000 compliant, with the new 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 third party, which could materially affect the Company's
operations. Based on the most recent assessment of its own readiness and that of
its business partners, the Company does not anticipate any material interruption
to its business as a result of the Year 2000 change. The implementation of the
new order entry system at the end of the fiscal year will provide for a natural
backup to the existing system, should problems develop in the current software
used for this function. The Company believes that its safety stock of inventory
at the end of calendar 1999 will be sufficient to allow for the alternative
sourcing of key ingredients if Year 2000 or other problems result in a
disruption in supply. The Company has obtained statements of readiness or
commitments to be ready from more than 80% of its trading partners. The Company
is diligently pursuing a commitment from trading partners that have not yet
responded. 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 considered to be "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,"
20
<PAGE>
"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 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 opened new
markets in the Netherlands and Hong Kong. Sales outside the United States
represented 21.1%, 30.8%, 42.5% and 46.4% of the Company's net sales in 1996,
1997, 1998 and for the nine months ended October 2,
21
<PAGE>
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 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 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]
22
<PAGE>
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]
10.7 Redemption Agreement dated July 30, 1999 [Incorporated by
reference to the Company's Report on Form 8-K, filed September
24, 1999]
10.8 Term Note dated September 20, 1999 [Incorporated by reference to
the Company's Report on Form 8-K, filed September 24, 1999]
10.9 Revolving Note dated September 20, 1999 [Incorporated by
reference to the Company's Report on Form 8-K, filed September
24, 1999]
10.10 Credit Agreement dated September 20, 1999 [Incorporated by
reference to the Company's Report on Form 8-K, filed September
24, 1999]
11.1 Computation of Net Income per Share (included in Notes to
Consolidated Financial Statements)
27.1 Financial Data Schedule
99.1 Press Release dated September 21, 1999. [Incorporated by
reference to the Company's Report on Form 8-K, filed September
24, 1999]
(b) Reports on Form 8-K.
The Company filed a Form 8-K on September 24, 1999 to report the
redemption of 2.65 million shares from a company owned and
controlled by its founder, Chairman, President and CEO, Myron
Wentz.
23
<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: November 16, 1999 By: /s/ Gilbert A. Fuller
----------------- -----------------------------
Gilbert A. Fuller
Senior Vice President and
Chief Financial Officer
24
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