<PAGE>
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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 April 1, 2000
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 May
5, 2000 was 9,745,437.
================================================================================
<PAGE>
USANA, INC.
FORM 10-Q
For the Quarterly Period Ended April 1, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets......................................................................... 3
Consolidated Statements of Earnings................................................................. 4
Consolidated Statement of Stockholders' Equity...................................................... 5
Consolidated Statements of Cash Flows............................................................... 6-7
Notes to Consolidated Financial Statements.......................................................... 8-11
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 12-16
Item 3 Quantitative and Qualitative Disclosures About Market Risk............................................. 17
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K....................................................................... 17-18
Signatures....................................................................................................... 19
</TABLE>
2
<PAGE>
USANA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
January 1, April 1,
2000 2000
-------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 1,411 $ 2,393
Accounts receivable, net 534 813
Income taxes receivable 302 439
Current maturities of notes receivable 5 5
Inventories, net (Note A) 9,855 10,716
Prepaid expenses 1,536 1,563
Deferred income taxes 1,405 1,534
-------------- --------------
Total current assets 15,048 17,463
Property and Equipment, net 21,528 21,079
Other Assets 197 194
-------------- --------------
$ 36,773 $ 38,736
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Checks written in excess of cash in bank $ 1,416 $ 1,937
Current maturities of long-term debt 2,000 2,000
Accounts payable 4,060 3,431
Other current liabilities (Note B) 5,201 6,207
Line of credit 1,400 3,925
Restructuring provision (Note D) 2,252 2,006
-------------- --------------
Total current liabilities 16,329 19,506
Deferred Income Taxes 25 2
Long-term Debt, less current portion 7,500 7,000
Stockholders' Equity (Note C)
Common stock, no par value; authorized 50,000 shares, issued and
outstanding 10,169 as of January 1, 2000 and 9,846 as of April 1, 2000 2,877 2,459
Retained earnings 10,078 9,913
Accumulated other comprehensive loss (36) (144)
-------------- --------------
Total stockholders' equity 12,919 12,228
-------------- --------------
$ 36,773 $ 38,736
============== ==============
</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 data)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------
(unaudited)
April 3, April 1,
1999 2000
--------------- ---------------
<S> <C> <C>
Net Sales $31,323 $30,536
Cost of Sales 6,383 6,415
--------------- ---------------
Gross profit 24,940 24,121
Operating Expenses:
Associate incentives 13,909 12,763
Selling, general and administrative 7,244 8,433
Research and development 356 429
--------------- ---------------
Total operating expenses 21,509 21,625
--------------- ---------------
Earnings from Operations 3,431 2,496
Other Income (Expense):
Interest income 47 19
Interest expense (6) (242)
Other, net (7) (2)
--------------- ---------------
Total other income (expense) 34 (225)
--------------- ---------------
Earnings before Income Taxes 3,465 2,271
Income Taxes 1,337 909
--------------- ---------------
Net earnings $ 2,128 $ 1,362
=============== ===============
Earnings per Common Share (Note C)
Basic $ 0.16 $ 0.14
Diluted $ 0.16 $ 0.13
Weighted Average Common and Dilutive Common Equivalent
Shares outstanding (Note C)
Basic 13,050 10,048
Diluted 13,557 10,212
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
USANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Quarters Ended April 3, 1999 and April 1, 2000
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
other
Common Stock Retained comprehensive
Shares Value earnings income (loss) Other Total
----------- --------- ------------ ---------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
For the Quarter Ended April 3, 1999
Balance at January 2, 1999 13,047 $ 9,131 $ 21,668 $ (182) $ (531) $ 30,086
Comprehensive Income -
Net earnings - - 2,128 - - 2,128
Foreign currency translation adjustment - - - 50 - 50
---------
Comprehensive income 2,178
Advances to Related Party - - - - (395) (395)
Common Stock Issued Under Stock Option
Plan, including tax benefit of $13 4 52 - - - 52
--------- -------- ---------- ------------- ----------- ----------
Balance at April 3, 1999 13,051 $ 9,183 $ 23,796 $ (132) $ (926) $ 31,921
========= ======== ========== ============= =========== ==========
For the Quarter Ended April 1, 2000
Balance at January 1, 2000 10,169 $ 2,877 $ 10,078 $ (36) $ - $ 12,919
Comprehensive Income -
Net earnings - - 1,362 - - 1,362
Foreign currency translation adjustment - - - (108) - (108)
---------
Comprehensive income - - - - - 1,254
Shares Repurchased (323) (418) (1,527) - - (1,945)
Common Stock Issued Under Stock Option
Plan, including tax benefit of $0 - - - - - -
--------- -------- ---------- ------------- ----------- ----------
Balance at April 1, 2000 9,846 $ 2,459 $ 9,913 $ (144) $ - $ 12,228
========= ======== ========== ============= =========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
USANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------
April 3, April 1,
1999 2000
-------------- --------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net Earnings $ 2,128 $1,362
Adjustments to reconcile net earnings to net cash provided by
Operating Activities
Depreciation and amortization 1,109 1,140
Restructuring provision - (246)
Gain on sale of property and equipment - (8)
Deferred income taxes 3 (158)
Provision for inventory obsolescence 87 (531)
Provision for losses on receivables 122 1
Changes in operating assets and liabilities:
Accounts receivable (344) (261)
Inventories (76) (484)
Income tax receivable - (140)
Prepaid expenses and other assets (81) 11
Accounts payable (2,617) (621)
Other current liabilities 1,782 1,079
---------- ----------
Total Adjustments (15) (218)
---------- ----------
Net cash provided by operating activities 2,113 1,144
---------- ----------
Cash flows from investing activities
Receipts on notes receivable 8 -
Increase in notes receivable (45) -
Purchases of property and equipment (785) (780)
Proceeds from the sale of property and equipment 22 24
---------- ----------
Net cash used in investing activities (800) (756)
---------- ----------
</TABLE>
(Continued)
The accompanying notes are an integral part of these statements.
6
<PAGE>
USANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------
April 3, April 1,
1999 2000
----------------- ---------------
<S> <C> <C>
Cash flows from financing activities
Increase in cash overdraft $ - $ 527
Net proceeds from the sale of common stock 38 -
Repurchase of common stock - (1,945)
Increase in notes receivable - related party (395) -
Retirement of long-term debt - (500)
Increase (decrease) in line of credit - 2,525
----------- -----------
Net cash (used in) provided by financing activities (357) 607
Effect of Exchange Rate Changes on Cash (197) (13)
----------- -----------
Net increase in cash and cash equivalents 759 982
Cash and Cash Equivalents Beginning of Year 2,617 1,411
----------- -----------
Cash and Cash Equivalents End of Period $ 3,376 $ 2,393
=========== ===========
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------
Cash paid during the year for
Interest $ 6 $ 222
Income taxes 535 378
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
USANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
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
April 1, 2000, and results of operations for the quarters ended April 1, 2000
and April 3, 1999. 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 1, 2000. The
results of operations for the quarter ended April 1, 2000 may not be indicative
of the results that may be expected for the fiscal year ending December 30,
2000.
NOTE A - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
January 1, April 1,
2000 2000
--------------- ---------------
<S> <C> <C>
Raw materials $ 2,344 $ 1,936
Work in Process 1,945 1,504
Finished Goods 6,388 7,564
-------------- ---------------
10,677 11,004
Less allowance for inventory reserve 822 288
-------------- ---------------
$ 9,855 $ 10,716
============== ===============
</TABLE>
NOTE B - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
January 1, April 1,
2000 2000
-------------- ---------------
<S> <C> <C>
Associate incentives $ 1,201 $ 1,009
Accrued compensation 772 928
Sales taxes 692 640
Income taxes 564 1,158
Accrued Associate promotions 478 941
Deferred revenue 35 121
All other 1,459 1,410
-------------- ---------------
$ 5,201 $ 6,207
============== ===============
</TABLE>
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(in thousands, except per share data)
(unaudited)
NOTE C - COMMON STOCK AND EARNINGS PER SHARE
The Company's board of directors approved an open market share
repurchase program in 2000 that will include up to one million shares of its
outstanding common stock. During the first quarter of 2000, the Company had
repurchased 323 shares of common stock under this program.
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
----------------------------
April 3, April 1,
1999 2000
------------ ------------
<S> <C> <C>
Earnings available to common shareholders $ 2,128 $ 1,362
Basic EPS
----------------------------------------------------------------
Shares
Common shares outstanding entire period 13,047 10,169
Weighted average common shares:
Issued during period 3 -
Canceled during period - (121)
------------ ------------
Weighted average common shares outstanding during period 13,050 10,048
============ ============
Earnings per common share - basic $ 0.16 $ 0.14
============ ============
Diluted EPS
----------------------------------------------------------------
Shares
Weighted average shares outstanding during period - basic 13,050 10,048
Dilutive effect of stock options 507 164
------------ ------------
Weighted average shares outstanding during period - diluted 13,557 10,212
============ ============
Earnings per common share - diluted $ 0.16 $ 0.13
============ ============
</TABLE>
Options to purchase 1,354 and 90 shares of stock were not included in
the computation of EPS for the quarters ended April 1, 2000 and April 3, 1999,
respectively, 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)
(unaudited)
NOTE D--RESTRUCTURING
The Company recorded a restructuring charge and reserve totaling $2,700
($1,700 or $0.13 per share, after tax) in the third quarter of 1999. 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
April 1, 2000, approximately $694 was charged against the restructuring reserve.
NOTE E--SEGMENT INFORMATION
The Company has five operating segments. The Company's operating
segments are based on geographic regions. Management considers the geographic
segments of the Company to be the only reportable operating segments. These
operating segments are evaluated regularly by management in determining the
allocation of resources and in assessing the performance of the Company.
Management evaluates performance based on sales revenue and the amount of
operating income or loss.
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 quarters
ended April 3, 1999 and April 1, 2000 is listed below:
<TABLE>
<CAPTION>
Revenues Earnings
from before
External Income Long-lived Total
Customers Taxes Assets Assets
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Quarter ended April 3, 1999:
Domestic $ 17,059 $ 1,623 $ 20,285 $ 32,509
Canada 7,099 1,361 243 2,289
Australia - New Zealand 6,473 1,083 1,020 4,067
United Kingdom 692 (600) 924 2,462
Hong Kong - - - -
All Others - (2) - 6
--------- ---------- ---------- ----------
Totals $ 31,323 $ 3,465 $ 22,472 $ 41,333
========= ========== ========== ==========
</TABLE>
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(in thousands, except per share data)
(unaudited)
NOTE E - SEGMENT INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Revenues Earnings
from before
External Income Long-lived Total
Customers Taxes Assets Assets
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Quarter ended April 1, 2000:
Domestic $ 15,737 $ 1,017 $ 19,077 $ 29,191
Canada 7,270 1,180 256 1,961
Australia - New Zealand 5,051 (14) 740 3,182
United Kingdom 574 (107) 635 1,993
Hong Kong 1,904 (61) 565 2,400
All Others - 256 - 9
--------- ---------- ---------- ----------
Totals $ 30,536 $ 2,271 $ 21,273 $ 38,736
========= ========== ========== ==========
</TABLE>
11
<PAGE>
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 contained in this quarterly
report.
General
USANA develops and manufactures high-quality nutritional, personal care
and weight management products. The Company distributes its products through a
network marketing system. Independent distributors in USANA's network are
referred to by the Company as Associates. As of April 1, 2000, the Company had
approximately 110,000 current Associates in the United States, Canada,
Australia, New Zealand, Hong Kong and the United Kingdom. The Company defines a
current Associate as an Associate who has made a purchase in the most recent
12-month period. The Company also offers a Preferred Customer program
specifically designed for customers who desire to purchase USANA's products for
personal consumption, but choose not to become Associates. As of April 1, 2000,
the Company had approximately 56,000 Preferred Customers.
The Company's three primary product lines consist of nutritional,
personal care and weight management products. Nutritional products accounted for
approximately 81% of the Company's net sales for the quarter ended April 1,
2000. The Company's top selling products, USANA Essentials and Proflavanol(R)
represented approximately 38% and 14%, respectively, of net sales for the
quarter ended April 1, 2000. No other products accounted for more than 10% of
net sales during the first quarter of 2000. 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. 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 quarter ended April 1, 2000.
In February 2000, the Company introduced a value initiative that
decreased prices on its products by an average of approximately 24%. With the
introduction of the value initiative, the Company believes that it will be more
successful in its efforts to attract and retain both Associates and Preferred
Customers by offering high quality products and comprehensive customer support
services at the lowest prices in the Company's history.
The fiscal year end of the Company is the Saturday closest to December
31 of each year. Fiscal year 2000 will end December 30, 2000.
Results of Operations
Quarters Ended April 1, 2000 and April 3, 1999
Net Sales. Net sales decreased 2.5% to $30.5 million for the quarter
ended April 1, 2000, a decrease of $787,000 from the $31.3 million reported for
the comparable quarter in 1999. The decrease in net sales is the result of:
. The introduction of the value initiative, which reduced prices by
an average of approximately 24% and
. Despite an overall 12.2% increase in the customer base the
Associate base in the United States, Canada, Australia and New
Zealand has declined by approximately 14%.
Although it may take some time to generate enough volume to compensate
for the new lower prices, management believes the better value, in the form of
lower prices and moving customers to its autoship program, will benefit both the
Company and its customers as follows:
. The Company is expected to benefit by improving customer loyalty
and retention,
12
<PAGE>
. Preferred Customers will benefit by taking advantage of the
Company's quality products at the new lower prices and
. Associates will have an easier time recruiting Preferred Customers
and other Associates at the new lower prices. Additionally, the
expected improvements in loyalty and retention should assist the
Associates with their business opportunity under the Company's
Associate compensation plan.
The initial enrollment of Preferred Customers under the value initiative has
been strong. Consequently, the Preferred Customer base increased by 86.7% at
April 1, 2000 compared to the levels at April 3, 1999.
The following tables illustrate the change in sales and customers by
market for the quarters ended April 3, 1999 and April 1, 2000:
<TABLE>
<CAPTION>
Sales By Market
(in thousands)
Quarter Ended
-------------------------------------------------------------
Change from Percent
Market April 3, 1999 April 1, 2000 Prior Year Change
------ -------------------------- ----------------------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
United States $ 17,059 54.5% $ 15,737 51.5% $ (1,322) (7.7%)
Canada 7,099 22.6 7,270 23.8 171 2.4%
Australia-New Zealand 6,473 20.7 5,051 16.6 (1,422) (22.0%)
United Kingdom 692 2.2 574 1.9 (118) (17.1%)
Hong Kong - - 1,904 6.2 1,904 -
------------ ----------- ------------- ----------- ------------
Consolidated $ 31,323 100.0% $ 30,536 100.0% $ (787) (2.5%)
============ =========== ============= =========== ============
</TABLE>
<TABLE>
<CAPTION>
Current Associates By Market
As of As of Change from Percent
Market April 3, 1999 April 1, 2000 Prior Year Change
------ -------------------------- --------------------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
United States 58,000 49.1% 50,000 45.5% (8,000) (13.8%)
Canada 31,000 26.3 25,000 22.7 (6,000) (19.4%)
Australia-New Zealand 27,000 22.9 25,000 22.7 (2,000) (7.4%)
United Kingdom 2,000 1.7 3,000 2.7 1,000 50.0%
Hong Kong - - 7,000 6.4 7,000 -
------------ ----------- ------------- ----------- ------------
Consolidated 118,000 100.0% 110,000 100.0% (8,000) (6.8%)
============ =========== ============= =========== ============
</TABLE>
<TABLE>
<CAPTION>
Preferred Customers By Market
As of As of Change from Percent
Market April 3, 1999 April 1, 2000 Prior Year Change
------ -------------------------- --------------------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
United States 18,000 60.0% 31,000 55.4% 13,000 72.2%
Canada 8,000 26.7 14,000 25.0 6,000 75.0%
Australia-New Zealand 4,000 13.3 9,000 16.0 5,000 125.0%
United Kingdom - - 1,000 1.8 1,000 -
Hong Kong - - 1,000 1.8 1,000 -
------------ ----------- ------------- ----------- ------------
Consolidated 30,000 100.0% 56,000 100.0% 26,000 86.7%
============ =========== ============= =========== =============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Total Customers By Market
As of As of Change from Percent
Market April 3, 1999 April 1, 2000 Prior Year Change
------ -------------------------- --------------------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
United States 76,000 51.4% 81,000 48.8% 5,000 6.6%
Canada 39,000 26.3 39,000 23.5 - 0.0%
Australia-New Zealand 31,000 20.9 34,000 20.5 3,000 9.7%
United Kingdom 2,000 1.4 4,000 2.4 2,000 100.0%
Hong Kong - - 8,000 4.8 8,000 -
------------ ----------- ------------- ----------- -------------
Consolidated 148,000 100.0% 166,000 100.0% 18,000 12.2%
============ =========== ============= =========== =============
</TABLE>
Cost of Sales. Cost of sales remained flat at $6.4 million for the
respective quarters. As a percentage of net sales, cost of sales increased to
21.0% for the quarter ended April 1, 2000 from 20.4% for the comparable quarter
in 1999. The increase in cost of sales as a percentage of net sales can be
attributed to the implementation of the value initiative offset partially by
continued improvements in production and procurement efficiencies.
The Company expects that the run rate of cost of sales as a percentage
of net sales will approach 25% by the end of fiscal 2000 as more customers adopt
the lower prices offered by the value initiative.
Associate Incentives. Associate incentives decreased 8.2% to $12.8
million for the quarter ended April 1, 2000, a decrease of $1.1 million from the
$13.9 million reported in the comparable quarter in 1999. As a percentage of net
sales, Associate incentives decreased to 41.8% in the first quarter of 2000 from
44.4% for the comparable quarter in 1999. The decrease in Associate incentives
as a percentage of net sales can primarily be attributed to the introduction of
the value initiative, which decreased the ratio of sales volume points to the
wholesale sales price on products purchased. Associate incentives are paid on
the amount of sales volume points generated.
The Company expects that the run rate of Associate incentives as a
percentage of net sales will approach 37% by the end of fiscal 2000 as more
customers adopt the lower prices and sales volume point ratio offered by the
value initiative.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 16.4% to $8.4 million for the quarter ended
April 1, 2000, an increase of $1.2 million from the $7.2 million reported for
the comparable quarter in 1999. Selling, general and administrative expenses as
a percentage of net sales increased to 27.6% in the first quarter of 2000 from
23.1% for the comparable quarter in 1999. The increase in selling, general and
administrative expenses can be attributed to:
. Spending in the Company's newest market, Hong Kong,
. Spending to promote and support the value initiative,
. Other sales and marketing activities and
. Spending to research and explore new international opportunities.
The Company expects to see continued pressure on selling, general and
administrative expenses in order to promote and support the value initiative. As
unit volume begins to compensate for the decrease in prices, management believes
that selling, general and administrative expenses should decrease as a
percentage of net sales.
Research and Development. Research and development expenses increased
20.5% to $429,000 for the first quarter of 2000, an increase of $73,000 from the
$356,000 reported for the comparable quarter in 1999. As a percentage of net
14
<PAGE>
sales, research and development expenses increased to 1.4% in the first quarter
of 2000 from 1.1% for the comparable period of 1999. 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 36.0% to $1.4 million for the quarter
ended April 1, 2000, a decrease of $766,000 from the $2.1 million for the
comparable quarter in 1999. The decrease in net earnings can primarily be
attributed to:
. Substantially higher selling, general and administrative expenses,
. Lower sales and
. Higher interest expense on debt incurred to fund the repurchase of
common stock in 1999 and early 2000.
Diluted earnings per share decreased $0.03 to $0.13 for the first quarter of
2000 from $0.16 for the comparable quarter in 1999.
Liquidity and Capital Resources
The Company has historically financed its growth primarily from cash
flows from operations. On April 1, 2000, the Company had a negative net working
capital of $2.0 million compared to negative net working capital of $1.3 million
at January 1, 2000. The change in net working capital during the first three
months of 2000 was primarily the result of the repurchase of approximately
323,000 shares of common stock, for a total of $1.9 million. This use of working
capital 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 approximately $780,000 in property and equipment
during the first quarters of both 2000 and 1999. Inventory increased to $10.7
million at April 1, 2000, an increase of $861,000 from $9.9 million at January
1, 2000. The increase in inventory was a direct result of building up reserves
for the value initiative, which the Company anticipated would drive up unit
volume requirements.
During 1999, the Company entered into agreements with a financial
institution to provide up to $25 million in secured credit facilities consisting
of a $10 million 5-year term loan and a $15 million 3-year revolving line of
credit. The credit facilities contain restrictive covenants requiring the
Company to maintain certain financial ratios. The Company was in compliance with
these covenants on April 1, 2000. As of April 1, 2000, $9.0 million was
outstanding on the 5-year term loan and $3.9 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 short
and long-term needs in the ordinary course of business. In the event the Company
experiences an adverse operating environment or unusual capital expenditure
requirements, additional financing may be required. There are not any known
demands, commitments, events, or uncertainties not previously discussed at April
1, 2000 that would adversely affect the Company. 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.
Forward-Looking Statements
The statements contained in this Report 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
15
<PAGE>
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, pages 29 through 36. 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;
. High turnover of Associates,
. Activities of its independent Associates;
. 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. Myron W. Wentz PhD;
. 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 Associate 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
Associate together with a group of leading Associates in that person's
downline;
. The loss of product market share or Associates to competitors;
. Potential adverse effect of taxation and transfer pricing regulation or
exchange rate fluctuations;
. The Company's reliance on outside suppliers for raw materials;
. The Company's business may be subject to particular intellectual
property risks or
. Manufacturers may be subject to product liability claims and other
manufacturing activity risks.
16
<PAGE>
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. The 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 sells its
products. A 10% change in the average foreign currency exchange rates for the
quarter ended April 1, 2000, would have resulted in net sales increasing and
decreasing approximately $1.5 million.
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]
17
<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 no current reports on Form 8-K during the
quarter ended April 1, 2000.
18
<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: May 15, 2000 By: /s/ Gilbert A. Fuller
---------------- ----------------------------
Gilbert A. Fuller
Senior Vice President and
Chief Financial Officer
19
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