Item 1. Business
General
USANA Health Sciences, Inc. (“USANA” or the “Company”)
is a Utah corporation that develops and manufactures high-quality nutritional,
personal care and weight management products.
We distribute our products through a network marketing system. USANA refers to its independent distributors
as Associates. As of December 29, 2001,
we had approximately 86,000 Associates in the United States, Canada, Australia,
New Zealand, Hong Kong, Japan and the United Kingdom (hereinafter includes The
Netherlands). We also offer a Preferred
Customer program specifically designed for customers who desire to purchase
products for personal use and do not desire to resell or distribute products. As of December 29, 2001, we had
approximately 77,000 Preferred Customers worldwide. Sales to Preferred Customers accounted for approximately 19% of
net sales during the year ended December 29, 2001. For purposes of this report, USANA counts as Associates and
Preferred Customers only those that have purchased product from USANA at any
time during the most recent 12-month period.
Founded in 1992 by Myron W. Wentz, Ph.D., USANA is
committed to continuous product innovation and sound scientific research. Our three primary product lines consist of
USANAâ Nutritionals,
LEAN LifelongÔ and SenséÔ. The USANA Nutritionals product line
accounted for approximately 67% of net sales in 2001. Our top-selling products, USANAâ
Essentials and Proflavanolâ, represented
approximately 28% and 12%, respectively, of net sales in 2001. The LEAN Lifelong product line accounted for
approximately 10% of net sales in 2001.
The Sensé product line accounted for approximately 13% of net sales in
2001. High levels of bioavailability,
safety and quality characterize all of USANA’s products.
USANA distributes its products through a network
marketing system. We believe that
network marketing is an effective way to distribute our products because
network marketing allows person-to-person product education, which is not
readily available through traditional distribution channels. Network marketing appeals to a broad
cross-section of people, particularly those seeking to supplement income, start
a home-based business or pursue entrepreneurial opportunities other than
conventional full-time employment. We
consider the rewarding compensation program and weekly Associate incentive
payments to be attractive components of the USANA network marketing system.
North America is our primary market. Sales in the United States and Canada
collectively accounted for approximately 82.4% of net sales in 2001. Sales to the United Kingdom, which are
shipped directly from USANA headquarters in the United States, are included in
the total for the United States throughout this report for comparability purposes. Sales in the Australia-New Zealand market
represented approximately 12.5% of net sales in 2001. Hong Kong, our first market in Asia, accounted for 4.6% of net
sales in 2001.
We began full-scale operations in our newest Asian
market, Japan, in October 2001.
Customers in Japan may now purchase product directly from local
operations or through the direct export program from USANA headquarters. Sales under the direct export program
totaling $2.6 million in 2001are included in the total for the United States
and products may be purchased in that program for personal use only. Local operations in Japan generated sales of
$620,000 for the three-month period ended December 29, 2001.
Financial Information by Business
Segment
USANA is principally engaged in a single line of
business: the development, manufacture and distribution of nutritional,
personal care and weight management products.
Our reportable business segments are distinguished by geography and
include the United States (including direct export sales to customers in the
United Kingdom, Japan and various Caribbean countries), Canada, Australia-New
Zealand, Hong Kong and Japan. Segment
information for each of the last three fiscal years is included in Note K of
the audited consolidated financial statements included in this report.
Recent Developments
On March 21, 2002, USANA entered into an agreement
with USANA Acquisition Corp. (“UAC”), a Utah corporation wholly owned by Gull
Holdings, under which USANA will sell and UAC will purchase substantially all
of the operating assets and assume substantially all of the liabilities of
USANA (the sale and assignment is referred to as the “Transaction”). The purchase price for the acquired assets
is approximately $25 million. In
addition to the assumption of liabilities, the consideration paid by UAC will
be (1) assigning for redemption, at a price of $1.60 per share, 4,786,282
shares of USANA common stock owned by Gull Holdings, (a total value of
approximately $7.7 million), and (2) issuing a promissory note payable to USANA
in the principal amount of $5.0 million.
The employees, Associates and customers of USANA will be assumed by UAC
and UAC will change its name to USANA Health Sciences, Inc. and carry on the business
currently conducted by the Company. The
Company will change its name to Innova Ventures, Inc. and will follow a
business plan to pursue acquisitions and similar transactions. For a period of three years following the
closing of the Transaction, Innova would be prohibited from competing with UAC.
Innova will retain some assets in the Transaction,
including cash of $3.0 million, real estate, and other property. The real estate, including the USANA
headquarters building, will be leased to UAC on a long-term lease at a minimum
annual rental of $1.32 million and increased annually coincident at the
consumer price index. UAC will have an
exclusive option to purchase the real estate for three years and a right of
first refusal to purchase the real estate thereafter for the remaining term of
the lease. The parties intend that the
lease will be structured as an operating lease. The promissory note delivered as partial payment of the purchase
price will be for a five-year term, with interest at 14% per annum, payable in
equal monthly installments of principal and interest over the term of the
note. The note will be secured by a
lien on all assets acquired in the Transaction and by a pledge of all shares of
UAC. UAC is required to meet financial
covenants that are substantially similar to those imposed by its senior
lender. Excluded liabilities are
estimated to be approximately $8.0 million, and will be secured by a mortgage
on the retained real estate, renegotiated or refinanced before closing of the
Transaction.
UAC will take final possession of the business at the
closing and will be responsible for all expenses and other liabilities of the
business from that date forward. The
parties intend that the net cash (after payment of current taxes due in
connection with the Transaction and expenses related to the Transaction,
including professional fees) retained by the Company at closing will be
approximately $1.4 million, and that the net tangible book value of the other
retained assets will be approximately $8.5 million.
Under the asset purchase agreement, USANA has agreed
that it will not, directly or indirectly, take or permit to be taken, certain
actions regarding other acquisition or similar transaction proposals. Among other things, USANA may not take any
action to solicit, initiate or encourage such a proposal, or engage in
negotiations with, or disclose any nonpublic information relating to USANA or
afford access to its properties, books or records to any person that may be
considering making, or has made, such a proposal. This covenant does not prohibit USANA and its board of directors
from (1) taking and disclosing a position with respect to a tender offer by a
third party pursuant to Rules 14d-9 and 14e-2 (a) promulgated by the SEC under
the Exchange Act, or (2) furnishing information, including without limitation
nonpublic information to, or entering into negotiations with, any person or
entity that has indicated its willingness to make an unsolicited bona fide
proposal to acquire USANA pursuant to a merger, consolidation, share exchange,
purchase of a substantial portion of the assets, business combination or other
similar transaction, if, and only to the extent that, (A) the unsolicited bona
fide proposal is made by a third party that the board of directors in good
faith determines has the good faith intent to proceed with negotiations to
consider, and financial capability to consummate, such a proposal, and (B) the
board of directors, after duly considering the written advice of outside legal
counsel, determines in good faith that response to the proposal is required for
the board of directors to comply with its fiduciary duties to shareholders
imposed by applicable law. USANA is
required contemporaneously with furnishing information to, or entering into
discussions or negotiations with, such a person or entity to provide written
notice to UAC and Gull Holdings to the effect that it is furnishing information
to, or entering into discussions or negotiations with, such person or entity. USANA must also use all reasonable efforts
to keep UAC and Gull Holdings informed in all material respects of the status
and terms of those negotiations or discussions (including without limitation
the identity of the person or entity with whom such negotiations or discussions
are being held) and provides UAC and Gull Holdings with copies of any written
proposals, as amended. In such an
event, USANA and Gull Holdings would enter into a confidentiality agreement with
respect to any such information delivered to them.
The Transaction will result in management changes in
the Company. Dr. Wentz and David Wentz
will resign from the Company at the closing to permit them to assume the
management and control of UAC and preserve the continuity of the business of
developing, manufacturing and distributing the current product line through the
existing network marketing system. UAC
will assume all benefit and welfare plans, including the 401(k) savings plan,
cafeteria plan, medical, dental, term life and disability insurance plans
currently in effect at the Company.
UAC also will assume assignment of the entire network
marketing distribution system, including all Associate agreements, Associate
compensation obligations, and all Preferred Customer accounts. All Associate downlines and sales networks
will remain intact as at the date of closing.
It is anticipated that there will be no interruption in the sales or
payment cycles for Associates or in the delivery of product. Telephone numbers, Internet URLs, e-mail addresses
and other contact information for the business will be assigned to UAC and will
continue without change after the Transaction.
Gilbert A. Fuller and John B. McCandless will be the
only employees of the Company that remain following the closing of the
Transaction. The board of directors
will accept the resignations of Dr. Wentz, David Wentz, and Denis Waitley (who
is expected to continue his consulting functions with UAC following the
closing). Mr. Fuller and Mr. McCandless
will be appointed to the board of directors to fill the vacancies created by
these resignations. The other members
of the board of directors will be Robert Anciaux, Jerry McClain, and Ronald
Poelman, all of who currently serve as directors of the Company. Mr. Fuller will be appointed CEO and Mr.
McCandless will be appointed President.
The Transaction was approved on behalf of the Company
by a Special Committee of the board of directors, comprised of Messrs. Anciaux,
McClain, and Poelman. The Special
Committee obtained an opinion of an independent valuation expert, Houlihan
Valuation Advisors, that the Transaction is fair to the Company and its
shareholders. The Special Committee
also approved the Transaction subject to approval by a majority of the issued
and outstanding shares of the Company and by approval of the disinterested
shareholders, as determined by the Special Committee. A Special Meeting of Shareholders will be held, to obtain the
vote of the shareholders. The record
date for determining those shareholders who will receive notice of and who may
vote at the Special Meeting is March 20, 2002.
The Company will file a proxy statement regarding the Special Meeting
and will mail information to shareholders in connection with the Special
Committee’s recommendation that the shareholders approve the
Transaction. The proxy statement will
contain a more complete description of the proposed Transaction and its terms,
including a copy of the relevant agreements.
Industry
Overview
The nutrition industry includes many small- and
medium-sized companies that manufacture and distribute products generally
intended to enhance the body’s performance and wellness. The four major product categories within the
nutrition industry are:
• Nutritional
Supplements - products such as vitamins, minerals, dietary supplements, herbs,
botanicals and compounds derived from these substances,
• Natural and
Organic Foods - products such as cereals, milk, non-dairy beverages and frozen
entrées,
• Functional
Foods - products with added ingredients or fortification specifically for
health or performance purposes, and
• Cosmeceuticals
- products combining nutrition with skin care.
In the Annual Industry Overview 2001 the Nutrition
Business Journal (“NBJ”) stated that its research suggests the overall
market for nutritional products in the United States is approximately $49.5
billion per year and growing at an estimated 6.4% annual rate. NBJ also stated that the global nutritional
industry is estimated to be $140 billion.
According to NBJ, of the approximate $49.5 billion sold in the United
States, functional foods make up 35%, nutritional supplements 34%, natural and
organic foods 23%, and cosmeceuticals 8%.
USANA believes that the following factors drive growth
in the nutrition industry:
• The general
public’s heightened awareness and understanding of the connection between diet
and health,
• The aging
population, particularly the baby-boomer generation, which tends to use more
nutritional supplementation as it ages,
• The
worldwide trend toward preventive health care, and
• Product
introductions in response to new scientific research.
Nutritional products are distributed through six major
sales channels. Each channel has
changed in recent years primarily due to advances in technology and
communications resulting in improved product distribution and faster
dissemination of information. The major
sales channels are as follows:
• Network
marketing,
• Mass market
retailers, including mass merchandisers, drug stores, supermarkets and discount
stores,
• Natural
health food retailers,
• Mail order,
• Practitioners,
and
• The
Internet.
USANA primarily produces nutritional supplement
products and distributes all products through the network marketing
distribution channel. During 2001,
there was a general weakness in the U.S. economy. An industry reporting source, Information Resources, Inc.,
disclosed an industry-wide decrease in the nutritional supplement segment in
2001. Following the terrorist attacks
in the United States and related events that occurred in September 2001, most
sales channels declined further as consumer confidence continued to
weaken. However, we believe that USANA
was not directly adversely affected as a result of the events in September
2001.
Operating Strengths
USANA’s objective is to be a leading developer,
manufacturer and distributor of science-based health products. We believe that we will be able to continue
to grow and achieve this objective by capitalizing on the following operating
strengths:
Science-based
Products. USANA has developed a line of high-quality health
products based upon a combination of published research, in vitro testing, in-house
clinical studies and sponsored research.
We believe that the identification and delivery of essential vitamins,
minerals and other supplements will help individuals achieve and maintain
lifelong health.
Strong
Research and Development. USANA’s research and development
effort is directed by Dr. Wentz and is supported by a team of 22 scientists and
researchers, including five scientists holding Ph.D. degrees. In its research and development laboratory,
USANA’s scientists and researchers:
• Investigate
in vitro
activity of new natural extracts,
• Identify
and research combinations of nutrients that may be candidates for new products,
• Study the
metabolic activity of existing and newly identified nutritional supplements,
• Enhance
existing products as new discoveries in nutrition are made and as required to
enter international markets, and
• Formulate
products to meet regulatory requirements of international markets.
USANA also performs retrospective analyses of
anecdotal information provided by consumers of its products. In addition, we continue to perform
double-blind, placebo-controlled clinical studies intended to further evaluate
the efficacy of our products.
In-house
Manufacturing. USANA believes that its ability to manufacture
a significant portion of its products is a competitive advantage and
contributes to its ability to provide high-quality products for several
reasons:
• USANA is
able to better control the quality of raw materials and the purity and potency
of finished products,
• USANA can
more reliably monitor the manufacturing process to reduce the risk of product
contamination, and
• USANA
believes it can continually improve the underlying costs associated with
manufacturing nutritional supplements.
Attractive
Associate Compensation Plan and Benefits. USANA is committed
to providing a highly competitive compensation plan to attract and retain
Associates, who constitute its sales force.
We believe the USANA Associate compensation plan is one of the most
financially rewarding in the network marketing industry. Associate incentives totaled approximately
$44 million or 38.4% of net sales in 2001. USANA pays Associate incentives
weekly. The USANA compensation plan is
a global seamless plan, meaning that Associates can recruit and be compensated each
week for their business success in any USANA market. To support the Associates, USANA sponsors events throughout the
year, which offer information about products and the network marketing system. These meetings are designed to assist
Associates in business development and to provide a forum for interaction with
successful Associates and USANA management.
Experienced
Management Team.
USANA’s management team includes individuals with expertise in various
scientific and managerial disciplines, including nutrition, product research
and development, marketing, customer network development, information
technology, finance, operations and manufacturing. The current executive management team has been in place for several
years and has been responsible for strengthening our internal controls,
financial condition and infrastructure to support growth and international
expansion.
Growth
Strategy
Attract
and Retain Associates and Preferred Customers. USANA
recognizes the need to continue to attract and retain Associates. As of December 29, 2001, USANA had
approximately 86,000 Associates and 77,000 Preferred Customers, compared to
93,000 Associates and 76,000 Preferred Customers at the end of 2000. USANA believes that the decline in the
number of Associates is due in part to the adoption of the value initiative
introduced in February 2000, which resulted in a shift in the customer base to
a larger percentage of Preferred Customers.
That trend continued during 2001.
In response to this change in the customer base, USANA declared 2001 as,
“The Year of the Business”, and determined to place greater focus on building
the Associate base and assisting the Associates in building their
business. This focus included holding
large quarterly meetings in four different cities in the United States and
Canada and introducing “Health & Freedom Thursdays”. The intent of these meetings was to provide
additional training and resources for Associates to build a successful business
with USANA. We believe this renewed
emphasis on Associate building will improve the retention rate for Associates.
Enter
New Markets. USANA believes that, in addition to the North
American market, significant growth opportunities continue to exist in
international markets. In October 2001,
USANA began local operations for consumers in Japan. USANA bases the decision to enter Japan or any other new market
on an assessment of several factors, including market size, anticipated demand
for USANA products, receptivity to network marketing, ease of entry, including
possible regulatory restrictions on the products or marketing system. USANA has begun to register certain products
with regulatory and government agencies in order to prepare for further
international expansion.
USANA will, wherever possible, continue to seamlessly integrate the
Associate compensation plan in each market to allow Associates to receive
commissions for global and not merely local product sales. This seamless downline (Associate’s sales
organization, including the Associate’s recruits and their recruits) structure
is designed to allow an Associate to build a global network by creating
downlines across national borders. Associates are not required to establish new
downlines or to re-qualify for higher levels of compensation in newly opened
markets. USANA believes this seamless
compensation plan can significantly enhance its ability to expand
internationally and intends, where permitted, to integrate future markets into
the plan.
Introduce
New Products. USANA uses its research and development
capabilities to introduce innovative products and to continuously enhance
existing products. During 2001, USANA
introduced several new products. USANA
introduces new products throughout the year, primarily at Company-sponsored
events.
Pursue
Strategic Acquisitions. USANA believes that attractive
acquisition opportunities may arise in the future. We intend to pursue strategic acquisition opportunities that
would expand product lines, enhance manufacturing and technical expertise,
allow vertical integration or otherwise complement our business or further our
strategic goals.
Products
USANA’s primary product lines consist of USANAâ
Nutritionals, LEAN LifelongÔ and SenséÔ. In each of the last three years, the USANA
Nutritionals product line constituted 67% or more of net sales. The principal product lines are briefly
described below:
USANAâ
Nutritionals. This product line includes antioxidants, minerals,
vitamins and other nutritional supplements.
USANA’s nutritional supplement products are designed to provide optimal
absorption, bioavailability and efficacy.
The top-selling products are the USANAâ
Essentials, which include Mega Antioxidant and Chelated Mineral, and
Proflavanolâ, which totaled approximately 28% and 12%,
respectively, of net sales in 2001.
Other products in this line include Body RoxÔ
(Essentials for Teens), UsanimalsÔ (Essentials for
Kids), Poly Câ, Procosamine IIÔ,
CoQuinone 30â, BiOmega-3Ô,
E-PrimeÔ, Active CalciumÔ,
PhytoEstrinÔ, Palmetto PlusÔ,
and Ginkgo-PSÔ.
LEAN
LifelongÔ. This product line includes several
completely reformulated food products previously sold under the LEAN or USANA
brand names. NutrimealÔ
and Fibergyâ drink mixes, OptOmegaâ,
SoyaMaxÔ, Nutribar and Fibergy bar, a LEAN Formula for
weight management and several other related products for healthy diets are now
included in this product line. USANA
has developed a LEAN Team program to provide a comprehensive approach to weight
management, proper diet and nutrition, and healthy living. The program’s underlying principles, Lifestyle,
Education,
Activity
and Nutrition,
literally spell out the LEAN philosophy.
Developed with the assistance of health, nutrition and fitness experts,
the USANA LEAN program seeks to use the latest developments in nutritional
science, psychology and exercise physiology to promote lifelong health, fitness
and wellness.
SenséÔ.
This product line includes scientifically developed natural products designed
to support healthy skin and hair by providing protection and nourishment on
both the inside and outside of the dermal layers of skin. Products in this line include
BeautiNutrientsÔ, Gentle Daily Cleanser, Hydrating Toner, Daytime
Protective Emulsion SPF 15, Eye Nourisher, Night Renewal (Replenishing Crème),
Serum Intensive (Skin Revival Complex), Rice Bran Polisher, Nutritious Crème
Masque, Revitalizing Shampoo, Nourishing Conditioner, Firming Body Nourisher
and Energizing Shower Gel.
In addition to these three principal product lines,
USANA has developed and sells to Associates materials designed to assist in
building their business and selling the products. These resource materials or sales aids include product brochures
and business forms designed by USANA and printed by outside publishers. USANA also contracts periodically with
authors and publishers to produce or provide books, tapes and other items
dealing with health topics and personal motivation, which are made available to
Associates. USANA also writes and develops its own materials for audio and
videotapes, which are produced by third parties. New Associates are required to purchase a starter kit containing
USANA training materials that assist the Associates in starting and growing
their business. Affinity and identity
are also furthered through the sale of logo merchandise such as clothing, caps,
mugs, and other products. Associates do
not earn commissions on sales aids, starter kits or logo merchandise.
Research and Development
USANA is committed to continuous product innovation
and improvement through sound scientific research. The mission of the research and development team is to develop,
for all age groups, advanced health products that reduce the risk of chronic
degenerative disease and promote life-long health. The research efforts of USANA are enhanced using a combination of
published research, in vitro testing, in-house clinical
studies and sponsored research. USANA
periodically consults with a panel of physicians who provide advice on product
development. Research and development
expenditures totaled $1.4 million in each of the years 1999, 2000, and $1.1
million in 2001. We intend to continue
to dedicate resources for the research and development of new products and
reformulation of existing products.
USANA maintains a research and development program
based upon established scientific research methodologies. These modern research facilities located at
Salt Lake City headquarters are equipped to conduct analytical testing of raw
ingredients, raw material extraction research, in vitro testing, cell
culture procedures and human bioavailability studies. Anecdotal information from customers is reviewed and
retrospective analyses are performed on this data. In-house clinical studies are conducted on selected existing
products for which the retrospective analysis has demonstrated a positive
effect, and also on new products to investigate efficacy.
Manufacturing and Quality Assurance
During 2001, USANA manufactured products that
accounted for approximately 63% of net sales at its Salt Lake City, Utah,
manufacturing facility. The production
process includes the following steps:
• Identifying
and evaluating suppliers of raw materials,
• Acquiring
premium-quality raw materials,
• Weighing or
otherwise measuring the raw materials,
• Mixing raw
materials into batches,
• Forming the
mixtures into tablets,
• Coating and
sorting the tablets,
• Bottling
and labeling the finished products, and
• Forming
pouches and filling into boxes.
USANA’s manufacturing process uses automatic and
semi-automatic equipment. USANA
conducts sample testing of raw materials and finished products for purity,
potency and composition conforming to strict specifications. Constructed in
1996, the production facility is registered with the Food and Drug
Administration (“FDA”) and Health Canada and has been inspected and certified
by the Australian Therapeutic Goods Administration (“TGA”). The manufacture of nutritional supplements
and related products requires compliance with food-level Good Manufacturing
Practice regulations (“GMP’s”) of the FDA, however USANA believes that its
processes comply with that agency’s more demanding drug-level GMP’s. The certification by the TGA also applies to
that agency’s drug-level GMP’s.
USANA contracts with third-party manufacturers and
vendors for the production of some of its products. These third-party vendors and manufacturers produce and, in most
cases, package these products according to formulations developed by or in
conjunction with USANA’s product development team.
USANA conducts quality assurance in its two
laboratories located in Salt Lake City, Utah.
In the microbiology laboratory, quality assurance personnel test for
biological contamination of raw materials and finished goods. In the analytical chemistry laboratory,
scientists test for chemical contamination and accurate active ingredient
levels of raw materials and finished products and conduct stability tests on
finished products. Our scientific staff
also performs chemical assays on vitamins and mineral constituents under United
States Pharmacopoeia and other validated methods.
Most of the raw ingredients used in the manufacture of
our products are available from a number of suppliers. USANA has not generally experienced
difficulty in obtaining necessary quantities of raw ingredients. When supplies of certain raw materials have
tightened, we have been able to find alternative sources of raw materials as
needed and believe we will be able to do so in the future if the need arises.
Our manufacturing facility currently produces an
average of 35 million tablets a month, using approximately 60% of capacity
(assuming two eight-hour shifts per day, five days per week). Our packaging equipment fills an average of
450,000 bottles a month, using approximately 50% of capacity (again assuming
two eight-hour shifts per day, five days per week).
Distribution and Marketing
USANA distributes products through a network marketing
system and sells directly to Preferred Customers. Network marketing is a form of person-to-person direct selling
through a network of vertically organized independent Associates who purchase
products at wholesale prices from the manufacturer and then make retail sales
to consumers. The emergence of readily
available means of mass communication such as personal computers, facsimiles,
low-cost long distance telephone services, satellite conferencing and the
Internet have contributed to the rapid growth of network marketing. The concept of network marketing is based on
the strength of personal
recommendations that frequently come from friends, neighbors, relatives
and close acquaintances. USANA believes
that network marketing is an effective way to distribute its products because
it allows person-to-person product education, which is not as readily available
through other distribution channels.
Individuals who desire to sell USANA products become
Associates by being sponsored into the program by another Associate and are
then part of the sponsoring Associate’s downline. New Associates must sign a written contract and agree to adhere
to USANA’s Policies and Procedures.
Associates are also required to purchase a starter kit that includes a
detailed manual of Policies and Procedures.
The purchase price of this kit is $49, which approximates its production
and distribution cost.
An Associate may continue to distribute products until
they are terminated by USANA or they voluntarily withdraw. Initial training of Associates about USANA,
its products, the compensation plan, and network marketing is provided
primarily by an Associate’s sponsor and others in their “upline” sales organization’. In addition, USANA develops and sells
training materials and sales aids to assist in building the business and
periodically, sponsors and conducts regional, national and international
Associate events and intensive leadership training seminars. Attendance at these sessions is voluntary,
and USANA undertakes no generalized effort to provide individualized training
to Associates, although experience shows that the most effective and successful
Associates participate in training activities.
Associates may not sell competitive products to other USANA Associates
or solicit USANA Associates to participate in other network marketing
opportunities. USANA also restricts
Associates’ advertising and representations or claims concerning USANA products
or the compensation plan.
The compensation plan provides several opportunities
for Associates to earn compensation, provided they are willing to consistently
work at building, training and retaining their downline organizations to sell
USANA products to consumers. USANA believes its compensation plan is
distinctive for its weekly distributions and equitable payouts, which are
designed to create appropriate incentives for the sale of USANA products. Each Associate must purchase and sell
products in order to earn commissions and bonuses. Associates cannot simply
recruit others for the purpose of developing a downline and earn income
passively, depending solely on the efforts of the downline.
Associates can earn compensation in three ways:
• Purchasing
products at wholesale prices from USANA and selling them to consumers at higher
retail prices,
• Generating
sales volume points based on the sales activity of their downlines, and
• Participating
in a leadership bonus pool based on certain performance requirements.
USANA seamlessly integrates the Associate compensation
plan across all markets in which USANA products are sold, allowing Associates
to receive commissions for global and not merely local, product sales. This seamless downline structure is designed
to allow an Associate to build a global network by creating downlines across
national borders. Associates may expand
their downline organizations into new markets without establishing new
downlines or requalifying for higher levels of compensation in the newly opened
markets. USANA believes this seamless compensation plan significantly enhances
its ability to expand internationally and we intend, where permitted, to
continue to integrate new markets into this plan.
USANA offers a Preferred Customer program designed for
consumers who desire to purchase USANA products for their personal use, but who
choose not to resell or distribute the products. We believe this program gives USANA access to a market that would
otherwise be missed by targeting customers who enjoy USANA products, but prefer
a mail order type relationship to a sales, distribution or other business
relationship with USANA. Preferred
Customers may not engage in retail sales of products purchased through the
program, although they may enroll as Associates at any time if they
desire. Only Associates are eligible to
participate in the compensation plan.
USANA’s product return policy allows retail customers
to return the unused portion of any product to the Associate who sold them the
product for a full cash refund. USANA
reimburses the Associate with product or credit on account upon receipt of
proper documentation and the return of the remaining product.
All returned product within the
first 30 days following purchase will be refunded at 100% of the sales price to
all non-Associate customers. This 30-day return policy is offered to Associates
only on their first order. All other
returned product that is unused and resalable is refunded up to one year from
the date of purchase at 100% of the sales price less a 10% restocking fee. Returned product that was damaged during
shipment to the customer is 100% refundable.
Return of product that was not damaged at the time of receipt by the
Associate will result in cancellation of the Associate’s distributorship
according to the terms of the Associate Agreement. Returns as a percentage of net sales were 1.7% in 1999, 1.5% in
2000 and 1.4% in 2001.
Substantially all of our sales are made to Preferred
Customers and through independent Associates.
No single Associate accounted for 5% or more of net sales in any of the
last three fiscal years. Associates are independent contractors and are not
agents, employees, or legal representatives of USANA. USANA employees and affiliates cannot be Associates, although
there is no prohibition on
family members becoming Associates as long as they do not reside in the
same household as the employee or affiliate.
Associates may sell products only in markets where USANA has approved
the sale of its products.
From time to time Associates fail to adhere to the
USANA Policies and Procedures, including those governing the marketing of our
products or making representations regarding the compensation plan. We systematically review reports of alleged
Associate misbehavior. If we determine
that an Associate has violated any of USANA’s Policies and Procedures, we may
take a number of disciplinary actions.
For example, we may terminate the Associate’s purchase and distribution
rights completely or impose sanctions such as warnings, fines, or
probation. We may also withdraw or deny
awards, suspend privileges, withhold commissions until specific conditions are
satisfied, or take other appropriate actions at our discretion. An in-house
compliance officer and a commission auditor also routinely review Associate
activities. Infractions of the Policies
and Procedures are reported to a compliance committee that determines what
disciplinary action may be warranted in each case.
Information Technology
USANA believes that the ability to efficiently manage
distribution, compensation, manufacturing, inventory control and communications
functions through the use of sophisticated and dependable information
processing systems is critical to its success.
During 2001, USANA developed and placed into service a new Java-based
system that integrated a Web-enabled order-entry system with its inventory,
production planning, fulfillment and financial systems. USANA’s information systems are maintained
by in-house staff and outside consultants.
Regulatory Matters
Product
Regulation. Manufacturing, packaging, labeling, advertising,
promoting, distributing, and the selling of USANA products are subject to
regulation by numerous governmental agencies in the United States and other
countries. In the United States, the
FDA regulates USANA’s products under the Food, Drug, and Cosmetic Act
(“FD&C”) and regulations promulgated under that act. USANA products are
also subject to regulation by, among others, the Consumer Product Safety
Commission, the US Department of Agriculture, and the Environmental Protection
Agency. Advertising of our products is
regulated by the Federal Trade Commission (“FTC”) under the FTC Act. The manufacturing, labeling, and advertising
of products are also regulated by various governmental agencies in each foreign
country in which we distribute products.
The majority of USANA’s products are regulated as
dietary supplements under the FD&C.
Dietary supplements are also regulated under the Dietary Supplement
Health and Education Act of 1994 (“DSHEA”).
We believe DSHEA is favorable to the dietary supplement industry. Some of our drinks, food bar and other
products are regulated as foods under the Nutrition Labeling and Education Act
of 1990 (“NLEA”). The NLEA establishes
requirements for ingredient and nutritional labeling and labeling claims for
foods. Although we believe our product
claims comply with the law, we may need to revise some product labeling at a
future date.
Under these regulations, a dietary supplement that
contains a new dietary ingredient (defined as an ingredient not on the market
before October 15, 1994) must have a history of use or other evidence of safety
establishing that it is reasonably expected to be safe. The manufacturer must notify the FDA at
least 75 days before marketing products containing new dietary ingredients and
provide the FDA with the information upon which the manufacturer based its
conclusion that the product has a reasonable expectation of safety.
The FDA issued final dietary supplement labeling
regulations in 1997 that required a new format for product labels and
necessitated revising dietary supplement product labels by March 23, 1999. All companies in the dietary supplement
industry were required to comply with these new regulations. USANA updated
product labels in 1997 in response to these new regulations. The FDA also announced that it is
considering the adoption of new GMP’s specific to dietary supplements. These GMP’s, if promulgated, may be
significantly more rigorous than currently applicable GMP’s. USANA believes that it currently
manufactures its dietary supplement products according to the standards of the
FDA’s drug-level GMP’s. However, we may
be required to expend additional capital and resources on manufacturing
controls in the future in order to comply with the law if new GMP’s are
adopted.
Other products marketed by USANA include cosmetics and
products deemed to be over-the-counter (“OTC”) drugs. In general, our cosmetic products currently are not subject to
pre-market approval by the FDA.
However, cosmetics are subject to regulation by the FDA under the
FD&C adulteration and misbranding provisions. Cosmetics also are subject to specific labeling regulations,
including warning statements if the safety of a cosmetic is not adequately
substantiated or if the product may be hazardous, as well as ingredient
statements and other packaging requirements under the Fair Packaging and
Labeling Act. Cosmetics that meet the
definition of a drug (i.e., that are intended to treat or prevent disease or
affect the structure or function of the body), such as our sunscreens and
anti-cavity dental treatment gel, are regulated as drugs. OTC drug products may be marketed if they
conform to the requirements of the OTC monograph that is applicable to that
drug. Drug products not conforming to monograph requirements require an
approved New Drug Application (“NDA”) before marketing. Under these provisions, if the agency were
to find that a product or ingredient of one of our OTC drug products is not
generally recognized as safe and effective or does not include it in a final
monograph applicable to one of our OTC drug products, we will have to
reformulate or cease marketing that product until it is the subject of an
approved NDA or until the time, if ever, that the monograph is amended to
include the product. If the rule
becomes final, we would have to stop marketing the product as
currently formulated. Whether
or not an OTC drug product conforms to a monograph or is subject to an approved
NDA, the drug must comply with other requirements under the FD&C including
GMP’s, labeling, and the FD&C’s misbranding and adulteration provisions.
Advertising of products is subject to regulation by
the FTC under the FTC Act. Section 5 of the FTC Act prohibits unfair methods of
competition and unfair or deceptive acts or practices in or affecting
commerce. Section 12 of the FTC Act
provides that the dissemination of or causing to be disseminated any false
advertisement pertaining to drugs or foods, which would include dietary
supplements, is an unfair or deceptive act or practice. Under the FTC’s Substantiation Doctrine, an
advertiser is required to have a “reasonable basis” for all objective product
claims before the claims are made.
Failure to adequately substantiate claims may be considered either
deceptive or unfair practices. Pursuant
to this FTC requirement, USANA is required to have adequate substantiation for
all material advertising claims made for our products.
In recent years the FTC has initiated numerous
investigations of and actions against dietary supplement, weight management,
and cosmetic products and companies.
The FTC has issued a guidance document to assist companies in
understanding and complying with the substantiation requirement. We have organized the documentation to
support our advertising and promotional practices in compliance with the
guidelines.
The FTC may enforce compliance with the law in a
variety of ways, both administratively and judicially, using compulsory
process, cease and desist orders, and injunctions. FTC enforcement can result in orders requiring, among other
things, limits on advertising, corrective advertising, consumer redress,
divestiture of assets, rescission of contracts, and such other relief as the
agency deems necessary to protect the public.
Violation of these orders could result in substantial financial or other
penalties. USANA has not been the
subject of any action by the FTC, but any action in the future by the FTC could
materially adversely affect USANA’s ability to successfully market its
products.
In markets outside the United States, prior to
commencing operations or marketing products, USANA may be required to obtain
approvals, licenses, or certifications from a country’s ministry of health or
comparable agency. Approvals or
licensing may be conditioned on reformulation of USANA products for the market
or may be unavailable with respect to certain products or product ingredients.
USANA must also comply with local product labeling and packaging regulations
that vary from country to country.
USANA cannot predict the nature of any future laws,
regulations, interpretations, or applications, nor can we determine what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on our business in the future. They could include,
however, requirements for the reformulation of certain products to meet new
standards, the recall or discontinuation of certain products that cannot be
reformulated, additional record keeping, expanded documentation of the
properties of certain products, expanded or different labeling, and additional
scientific substantiation. Any or all
of these requirements could have a material adverse effect on our business,
financial condition and results of operations.
Network
Marketing Regulation. Other laws and regulations affecting
USANA prevent the use of deceptive or fraudulent practices that have sometimes
been inappropriately associated with legitimate direct selling and network
marketing activities. These include anti-pyramiding, securities, lottery,
referral selling, anti-fraud and business opportunity statutes, regulations and
court cases. Illegal schemes, typically referred to as “pyramid,” “chain
distribution,” or “endless chain” schemes, compensate participants primarily or
solely for the introduction or enrollment of additional participants into the
scheme. Often, these schemes are
characterized by large up-front entry or sign-up fees, over-priced products of
low value, little or no emphasis on the sale or use of products, high-pressure
recruiting tactics and claims of huge and quick financial rewards requiring
little or no effort. Generally these
laws are directed at ensuring that product sales ultimately are made to
consumers and that advancement within sales organizations is based on sales of
the enterprise’s products, rather than investments in the organizations or
other non-retail sales related criteria or activity. Where required by law, USANA obtains regulatory approval of its
network marketing system, or, where approval is not required or available, the
favorable opinion of local counsel as to regulatory compliance.
USANA occasionally receives requests to supply
information regarding its network marketing plan to regulatory agencies.
Although we have from time to time modified our network marketing system to
comply with interpretations of various regulatory authorities, we believe that
the network marketing program is in compliance with laws and regulations
relating to network marketing activities in our current markets. Nevertheless, we remain subject to the risk
that, in one or more of our present or future markets, the marketing system or
the conduct of certain Associates could be found not to be in compliance with
applicable laws and regulations.
Failure by USANA or an Associate to comply with these laws and
regulations could have an adverse material effect on USANA in a particular
market or in general. Any or all of
these factors could adversely affect the way USANA does business and could
affect our ability to attract potential Associates or enter new markets. In the United States, the FTC has been
active in its enforcement efforts against both pyramid schemes and legitimate
network marketing organizations with certain legally problematic components,
having instituted several enforcement actions resulting in signed settlement
agreements and payment of large fines.
Although USANA has not been the target of an FTC investigation, there
can be no assurance that the FTC will not investigate USANA in the future.
USANA cannot predict the nature of any future law,
regulation, interpretation or application, nor can it predict what effect
additional governmental legislation or regulations, judicial decisions, or
administrative orders, when and if promulgated, would have on its
business in the future. It is
possible that future developments may require revisions to our network
marketing program. Any or all of these
requirements could have a material adverse effect on our business, results of
operations and financial condition.
Competition
The business of developing and distributing
nutritional, personal care and weight management products such as those offered
by USANA is highly competitive.
Numerous manufacturers, distributors and retailers compete for consumers
and, in the case of other network marketing companies, for Associates. USANA competes directly with other entities
that develop, manufacture, market and distribute products in each of our
product lines. USANA competes with
these entities by emphasizing the underlying science, value and high quality of
products as well as the convenience and financial benefits afforded by the
network marketing system. However, many
of our competitors are substantially larger than USANA and have greater
financial resources and broader name recognition. USANA’s markets are highly sensitive to the introduction of new
products that may rapidly capture a significant share of those markets.
The nutritional supplement market is characterized by:
• Large
selections of essentially similar products that are difficult to differentiate,
• Retail
consumer emphasis on value pricing,
• Constantly
changing formulations based on evolving scientific research,
• Low entry
barriers resulting from low brand loyalty, rapid change, widely available
manufacturing, low regulatory requirements and ready access to large
distribution channels, and
• A lack of
uniform standards regarding product ingredient sources, potency, purity,
absorption rate and form.
Similar factors are also characteristic of products
comprising USANA’s other product lines.
There can be no assurance that USANA will be able to effectively compete
in this intensely competitive environment.
In addition, nutritional, personal care and weight management products
can be purchased in a wide variety of channels of distribution, including
retail stores. USANA’s product offerings
in each product category are relatively few compared to the wide variety of
products offered by many of its competitors and are often premium priced. As a result, our ability to remain
competitive depends in part upon the successful introduction of new products
and enhancements of existing products.
USANA also competes with other network marketing
organizations for the time, attention and commitment of new and current
Associates. Our ability to remain
competitive depends, in significant part, on our success in recruiting and
retaining Associates. USANA believes
that it offers a rewarding Associate compensation plan and attractive Associate
benefits and services. To the extent
practicable, our Associate compensation plan is designed to be seamless,
permitting international expansion without re-qualification or re-entry
requirements. We pay Associate
incentives weekly, reducing the time an Associate must wait between purchase
and sale of products and payment of commissions. There can be no assurance that our programs for recruiting and
retaining Associates will be successful.
We also compete for the time, attention and commitment of this
independent Associate force. The pool
of individuals interested in the business opportunities presented by network
marketing tends to be limited in each market and is reduced to the extent other
network marketing companies successfully recruit these individuals into their
businesses. Our Associate base has
declined in each of the last three years.
Although we believe that USANA offers an attractive opportunity for
Associates, there can be no assurance that other network marketing companies
will not be able to recruit our existing Associates or deplete the pool of
potential Associates in a given market.
USANA believes that the leading network marketing
company in the world, based on total sales, is Amway Corporation and its
affiliates, and that Avon Products, Inc. is the leading direct seller of beauty
and related products worldwide. Leading
competitors in the nutritional network marketing and nutritional product
markets include Herbalife International, Inc., Nature’s Sunshine Products,
Inc., Twinlab Corporation, Weider Nutrition, NBTY and Nu Skin International,
Inc. USANA believes there are other manufacturers of competing product lines
that may or will launch direct selling enterprises, which will compete with
USANA in certain product lines and for Associates. There can be no assurance that we will be able to successfully
meet the challenges posed by this increased competition.
Intellectual Property
Product names used in this report are, in certain
cases, trademarks and are also the property of USANA.
Trademarks.
USANA uses registered trademarks in its business, particularly relating to the
corporate and product names. We own 12
trademarks registered with the United States Patent and Trademark Office. We also have five pending applications to
register trademarks in the United States. Federal registration of a trademark
enables the registered owner of the mark to bar the unauthorized use of the
registered mark in connection with a similar product in the same channels of
trade by any third party anywhere in the United States, regardless of whether
the registered owner has ever used the trademark in the area where the
unauthorized use occurs. We also have
filed applications and own trademark registrations, and we intend to register
additional trademarks, in foreign countries where USANA products
are or may be sold in the future.
Protection afforded registered trademarks in some jurisdictions may not
be as extensive as the protection available in the United States.
USANA also claims certain product names, unregistered
trademarks and service marks under common law.
Common law trademark rights do not provide the same level of protection
afforded by registration of a trademark.
In addition, common law trademark rights are limited to the geographic
area in which the trademark is actually used.
USANA believes these trademarks, whether registered or claimed under
common law, constitute valuable assets, adding to recognition of USANA and the
marketing of USANA products. We
therefore believe that these proprietary rights have been and will continue to
be important in enabling USANA to compete.
Trade
Secrets. USANA owns certain trade secrets that it seeks to
protect, in part, through confidentiality agreements with employees and other
parties. Certain of our employees
involved in research and development activities have not entered into these
agreements. Even where these agreements
exist, there can be no assurance that these agreements will not be breached,
that we would have adequate remedies for any breach or that our trade secrets
will not otherwise become known to or independently developed by competitors.
Patents. USANA has applied for and been given
official notice for the allowance of two patents in 2001. We expect that these patents will issue
during early 2002, after which the patents will continue in force for 17 years
from the date of issue. These patents
are process patents and relate to the method of extracting an antioxidant from
olives and the waste products of olive oil production. We are currently discussing licensing
agreements with several vendors to make olive extract using our patented
process. At this stage, it is very
difficult to determine the exact future benefit of these patents to USANA. However, we believe that the patents have
the potential for significant revenue in the future through new product
development and royalties from licensing.
USANA intends to protect its legal rights concerning
intellectual property by all appropriate legal action. USANA may become involved from time to time
in litigation to determine the enforceability, scope and validity of any of the
foregoing proprietary rights. Any
patent litigation could result in substantial cost and divert the efforts of
USANA’s management and technical personnel.
Seasonality
USANA 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 our business.
Backlog
USANA typically ships products within 72 hours after
the receipt of the order. As of December 29, 2001, there was no significant
backlog.
Working Capital Practices
USANA maintains significant amounts of inventory in
stock in order to provide a high level of service to its Associates and
Preferred Customers. Substantial
inventories are required to meet the needs of USANA’s dual role as a
manufacturer and a distributor.
Environment
USANA is not aware of any instance in which it has
contravened federal, state or local provisions enacted for or relating to
protection of the environment or in which it otherwise may be subject under
environmental laws to liability for environmental conditions that could
materially affect operations.
Employees
As of March 20, 2002, we had 459 employees (as
measured by full time equivalency), as follows: 362 in the United States, 46 in
Australia-New Zealand, 18 in Canada, 18 in Hong Kong and 15 in Japan. Of these employees, 195 are involved in
customer service and order entry, 90 in manufacturing and shipping, 149 in
selling and administration and 25 in research and development and quality
control. Our employees are not
represented by a collective bargaining agreement and we have not experienced
work stoppages as a result of labor disputes.
USANA believes its relationship with its employees is good.
Item
2.
Item
2. Properties
USANA’s corporate headquarters are located in Salt
Lake City, Utah in a building of 184,000 square feet on a company-owned 16-acre
parcel. The allocation of this space
includes approximately 44,000 square feet for manufacturing, packaging and
distribution; 73,000 square feet of warehouse space; and 67,000 square feet
occupied by executive and administrative personnel, customer services, research
and development, and three laboratories.
During 2001, we completed construction on a new warehouse that added
80,000 square feet.
We believe that our facilities are suitable and
adequate in relation to our needs for the foreseeable future. Total monthly lease commitments for the
properties under lease average approximately $150,000. The following table summarizes our
facilities as of December 29, 2001.
Item 3.
Item 3. Legal Proceedings
There are various lawsuits and claims against USANA
that arise in the normal course of business.
Management believes based upon the opinion of company counsel, that as
of December 29, 2001, there are no actions that will result in a material
adverse effect on USANA’s consolidated financial position.
Item 4.
Item 4. Submission of Matters to a
Vote of Security Holders
No matters were submitted to a vote of shareholders
during the quarter ended December 29, 2001.
PART II
Item
5.
Item
5. Market for Registrant’s Common Equity and Related Stockholder Matters
Market
Information
USANA’s common stock trades on the Nasdaq Stock Market
under the symbol “USNA.” The following
table contains the reported high and low sale prices for our common stock as
reported on the Nasdaq Stock Market for the periods indicated:
On March 20, 2002, the high and low sales prices of
our common stock were $1.50 and $1.31, respectively.
Shareholders
As of March 20, 2002, we had approximately 645 holders
of record of the common stock and an estimated 5,000 beneficial owners,
including shares of common stock held in street name.
Dividends
USANA has never declared or paid cash dividends on its
common stock. USANA currently intends to retain future earnings, if any, to
fund the development and growth of its business and does not anticipate paying
any cash dividends in the foreseeable future.
Future cash dividends, if any, will be determined by the Board of
Directors and will be based on earnings, capital, financial condition and other
factors deemed relevant by the Board of Directors. USANA’s credit facility contains restrictions on the ability to
declare cash dividends on its capital stock or redeem or retire that stock
without the lender’s written consent.
Item
6.
Item
6. Selected Financial Data
The following page of selected consolidated financial
data with respect to the consolidated statements of earnings and consolidated
balance sheets for each of the last five fiscal years are derived from USANA’s
audited consolidated financial statements for the relevant periods. The data should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and the audited consolidated financial statements and related notes
thereto included in this report.
(1) The 1997, 1999,
2000 and 2001 fiscal years were 52-week years. Fiscal year 1998 was a 53-week
year. Fiscal year 1997 covered the
period December 29, 1996 to December 27, 1997.
Fiscal year 1998 covered the period December 28, 1997 to January 2,
1999. Fiscal year 1999 covered the
period January 3, 1999 to January 1, 2000.
Fiscal year 2000 covered the period January 2, 2000 to December 30,
2001. Fiscal year 2001 covered the
period December 31, 2000 to December 29, 2001.
(2) The financial
results for the years ended above are adjusted to reflect the Financial
Accounting Standards Board guidelines on revenue recognition pursuant to
Emerging Issues Task Force No 00-10 (“EITF 00-10”). For additional information on EITF 00-10, see page 17 in the
“Overview” section and Note A of the audited consolidated financial statements
included in this report.
(3) For information on
the restructuring and impairment charge during 1999, see the “Results of
Operations” section of Item 7
Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of financial
condition and results of operations should be read in conjunction with the
audited consolidated financial statements and notes thereto appearing elsewhere
in this report.
Overview
USANA develops and manufactures high-quality
nutritional, personal care and weight management products. USANA distributes its products through a
network marketing system. As of
December 29, 2001, USANA had approximately 86,000 Associates in the United States,
Canada, Australia, New Zealand, Hong Kong, Japan and the United Kingdom.
The financial results for any quarter and year
included in this report, as reported, have been adjusted to reflect the
Financial Accounting Standards Board guidelines on revenue recognition pursuant
to Emerging Issues Task Force No 00-10 (“EITF 00-10”). Under EITF 00-10 guidelines, historical and
future revenue relating to amounts billed to a customer for shipping and
handling should be classified as revenue.
The corresponding expenses are reported as cost of sales. Prior to 2000, we reported freight income
and expense as a net amount within selling, general and administrative expense.
Net sales are primarily dependent upon the efforts of
a network of independent Associates who purchase products and sales
materials. USANA also sells products
directly to Preferred Customers who desire to purchase products for personal
use and are not permitted to resell or distribute the products. As of December 29, 2001, USANA had
approximately 77,000 Preferred Customers.
USANA recognizes revenue when products are shipped and
title passes to the customer. In 2001,
sales in the five primary markets, the United States (which includes direct
sales into Japan and the United Kingdom), Canada, Australia-New Zealand, Hong
Kong and Japan, were 57.9%, 24.5%, 12.5%, 4.6% and 0.5%, respectively, of net
sales. As USANA expands into additional
international markets, it expects international operations to account for an
increasing percentage of 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 products and sales materials as well as
duties and taxes associated with product exports. In 2001, products manufactured by USANA accounted for
approximately 63% of net sales. As
international sales increase as a percentage of net sales, USANA expects that
the overall cost of sales could increase slightly, reflecting additional
duties, freight and other expenses associated with international expansion.
Associate incentives are USANA’s most significant
expense and were 38.4% of net sales in 2001.
Associate incentives include commissions and leadership bonuses, and are
paid weekly based on sales volume points.
Most products are assigned a sales volume point value independent of the
product’s price. Associates earn
commissions based on sales volume points generated in their downline.
Generally, Associate kits, sales aids and logo merchandise, such as items of
clothing and luggage, have no sales volume point value and commissions are not
paid on the sale of these items.
USANA closely monitors the amount of Associate
incentives paid as a percentage of net sales and may from time to time adjust
its Associate compensation plan to prevent Associate incentives from having a
significant adverse effect on earnings.
This must be done while continuing to maintain an appropriate incentive
for Associates.
Selling, general and administrative expenses include
wages and benefits, depreciation and amortization, rents and utilities,
Associate 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. Myron
Wentz Ph.D. is the President, Chief Executive Officer and Chairman of the Board
of Directors of USANA. Dr. Wentz does
not receive a salary and USANA does not anticipate that he will take a salary
for the foreseeable future. However, if
Dr. Wentz were to take a salary, or if a new President or Chief Executive
Officer were retained and paid a customary salary and benefits, selling,
general and administrative expenses would increase as a result of the
compensation paid. As a result of substantial
investments in a new order-entry system, computer and telecommunications
equipment and systems to support international expansion, USANA has significant
depreciation and amortization expense.
USANA anticipates that additional capital investments will be required
in future periods to promote and support growth in sales and the increasing
size of the customer base, which includes both Associates and Preferred
Customers.
Research and development expenses include costs
incurred in developing new products, supporting and enhancing existing products
and reformulating products for introduction in international markets.
USANA operates on a 52-53 week year, ending on the
Saturday closest to December 31. Fiscal
year 1999 covered the period January 3, 1999 to January 1, 2000. Fiscal year 2000 covered the period January
2, 2000 to December 30, 2001. Fiscal
year 2001 covered the period December 31, 2000 to December 29, 2001. Fiscal year 2002 will cover the period December
30, 2001 to December 28, 2002.
Results of Operations
The following table summarizes operating results as a
percentage of net sales, respectively, for the periods indicated:
Years Ended December 29, 2001 and
December 30, 2000
Net
Sales. Net sales
decreased 7.2% to $114.3 million in 2001, a decrease of $8.9 million from
$123.2 million in 2000. The decrease in
net sales is a result of an overall 7.5% decline in the Associate base and
weaker foreign currencies relative to the U.S. dollar, which negatively
affected the translation of sales in foreign markets.
During the fourth quarter of 2001, we began serving
customers directly from our operations in Japan. Sales in our Japan market have yet to reach expected levels. Despite the disappointment with the current
level of sales in Japan, we are still optimistic that sales levels will
continue to improve and remain committed to this market. Sales to Japan under our direct export
program, which are included in the United States results, totaled $2.6 million
in 2001 compared to $711,000 in 2000.
The following tables illustrate the growth (decline)
in net sales and customers by market for the years ended December 30, 2000 and
December 29, 2001. Sales data for the
United States includes products shipped directly from the U.S. headquarters to
customers in the United Kingdom and Japan:
Current
Associates By Market
Preferred Customers By Market
Total
Customers By Market
Gross
Profit. Gross profit increased to 71.3% of net sales in 2001
from 70.5% in 2000. The increase in gross profit as a percentage of net sales
can be attributed to:
• A change in
our pricing on new products introduced during 2001,
• Improved
procurement efficiencies and inventory management, and
• A decrease
in product devel0opment costs in 2001, resulting from new products introduced
during 2000.
The change in pricing was intended to make it easier
for Associates to build their business.
New products have better gross margins and pay Associates at a higher
rate. The increase in gross profit was
partially offset by the compression of gross margins as a result of weaker
foreign currencies relative to the U. S. dollar. USANA believes that gross profit for 2002 will continue to
improve in relation to net sales as a result of the change in pricing.
Associate
Incentives. Associate
incentives increased to 38.4% of net sales in 2001 from 38.2% in 2000. The increase in Associate incentives
relative to net sales can primarily be attributed to the change in pricing on
new products introduced in 2001.
Selling,
General and Administrative.
Selling, general and administrative expenses increased to 28.3% of net
sales in 2001 from 26.8% in 2000. This
increase as a percentage of net sales is a direct result of declining sales and
the expenses incurred in connection with the new operations in Japan. USANA made a company-wide effort to better
manage costs and was able to reduce selling, general and administrative expenses
in absolute terms during 2001 by $4.1 million, excluding the costs associated
with the Japan market.
USANA will continue to search for ways to reduce
selling, general and administrative expenses for 2002. However, these expenses are expected to
continue at a high level due to the first full year of operations in Japan and
as a result of potential costs to pursue new international opportunities.
Other
Income (Expense).
Interest expense decreased $397,000 in 2001 when compared to 2000. This decrease is a result of lower interest
rates and reduced debt levels throughout 2001.
Additional changes in other income (expense) include:
• A
difference of $665,000 from a foreign currency exchange gain of $417,000 in 2000 to a loss of $248,000 in
2001, and
• A $151,000
one-time benefit resulting from dissolving the operating entity in the United
Kingdom.
Net
Earnings. Net
earnings decreased to 1.9% of net sales in 2001 from 2.3% in 2000. The decrease in net earnings can primarily
be attributed to:
• Lower sales
in 2001, and
• Costs
associated with establishing operations in Japan.
Diluted earnings per share were $0.23 for 2001, a decrease of $0.06
from diluted earnings of $0.29 per share in 2000.
Years Ended December 30, 2000 and
January 1, 2000
Net
Sales. Net sales
decreased 8.3% to $123.2 million in 2000, a decrease of $11.1 million from
$134.3 million in 1999. The decrease in
net sales was primarily the result of:
• The impact
of the value initiative, introduced in February 2000, which reduced prices by
an average of 24%,
• An overall
18% decline in the Associate base,
• Weaker
foreign currencies relative to the U.S. dollar, which negatively affected the
translation of sales in foreign markets, and
• The
negative impact of the introduction of a Goods and Service Tax in Australia.
The decrease in the Associate base was partially
offset by strong enrollments of Preferred Customers. The Preferred Customer base increased 65% from the 1999
levels. During 2000, USANA also had
direct export sales of approximately $600,000 to customers in Japan, compared
to no sales in Japan in 1999.
The following tables illustrate the growth (decline)
in net sales and customers by market for the years ended January 1, 2000 and
December 30, 2000:
Current Associates By Market
Preferred Customers By Market
Total Customers By Market
Gross
Profit. Gross profit decreased to 70.5% of net sales in 2000
from 77.6% in 1999. The decrease in gross profit as a percentage of net sales
can be attributed to:
• The impact
of the value initiative, which reduced prices by an average of 24%,
• Inefficiencies
in shipping approximately 25% more product as a result of the value initiative,
• The
compressions of gross margins as a result of the weakening of foreign
currencies relative to the U.S. dollar,
• The
operating of production at less than capacity near the end of 2000 to reduce
inventory levels, which resulted in overhead and direct labor costs flowing
directly through cost of sales instead of being capitalized as a component of
inventory, and
• Product
development costs resulting from new products introduced during 2000.
Associate
Incentives. Associate
incentives decreased to 38.2% of net sales in 2000 from 42.5% in 1999. The decrease in Associate incentives as a
percentage of net sales can be primarily attributed to the impact of the value
initiative, which decreased the ratio of sales volume points to the wholesale
price on customer product purchases.
Associate incentives are paid on the amount of sales volume points
generated.
Selling,
General and Administrative.
Selling, general and administrative expenses increased to 26.8% of net
sales from 23.7% in 1999. The increase
in selling, general and administrative expenses can be attributed to:
• Sales and
marketing activities to promote and support the value initiative,
• Inefficiencies
in customer service expenses dealing with customer issues from a larger and
changing customer base as a result of the value initiative,
• Spending in
Japan, and in potential future markets, and
• Increased
spending on activities related to the 2000 Annual International Convention.
Restructuring. USANA recorded a restructuring charge and
reserve totaling $2.7 million ($1.7 million after tax) in the third quarter of
1999. The restructuring charge included
the impact of a substantial reduction in the United Kingdom operations,
liquidation of associated assets in the United Kingdom and a reduction of staff
outside of the United Kingdom. USANA
did not have a similar charge in 2000.
Impairment. 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”, USANA wrote off the remaining book value
of a custom network marketing system totaling $1.7 million ($1.0 million after
tax) in the third quarter of 1999. This charge was the result of the decision
to replace the system with a new custom network marketing system. This was a one-time charge in 1999 and did
not affect 2000 results.
Interest
Expense. Interest
expense increased substantially to 1.0% of net sales from 0.2% in 1999 as a
result of the debt incurred during 1999 and early 2000. The debt was incurred to effect the
repurchase of 2.95 million shares of common stock from Gull Holdings, Ltd.,
USANA’s largest shareholder, and open-market purchases of approximately 531,000
shares of common stock under a share repurchase program.
Net
Earnings. Net
earnings decreased to 2.3% of net sales in 2000 from 4.4% in 1999. The decrease in net earnings can primarily
be attributed to:
• Lower than
expected sales,
• Substantially
higher selling, general and administrative expenses, and
• Higher
interest expense on debt incurred to fund the repurchase of common stock in
1999 and early 2000.
Diluted earnings per share were $0.29 for 2000, a decrease of $0.18
from diluted earnings of $0.47 per share in 1999.
Quarterly Financial Information
The table on the following page sets forth unaudited
quarterly operating results for each of the last eight fiscal quarters as well
as certain of the data expressed as a percentage of net sales for the periods
indicated. This information has been
prepared by USANA on a basis consistent with the consolidated financial
statements and includes all adjustments, consisting only of normal recurring
adjustments, that management considers necessary for a fair presentation of the
data. Quarterly results are not
necessarily indicative of future results of operations. This information should be read in conjunction
with the audited consolidated financial statements and notes thereto included
elsewhere in this report.
USANA may experience variations in its results of operations from
quarter to quarter as a result of factors that include the following:
• The timing
of Company-sponsored Associate events,
• The
recruiting and retention of Associates,
• Fluctuations
in currency exchange rates,
• The opening
of new markets,
• New product
introductions,
• The timing
of holidays, especially in the fourth quarter, which may reduce the amount of
time Associates spend selling products or recruiting new Associates,
• The
operation of the network marketing system,
• The
negative impact of changes in or interpretations of regulations that may limit
or restrict the sale of certain products,
• The adverse
effect of a failure by USANA or an Associate, or allegations of a failure, to
comply with applicable governmental regulations,
• The
integration and operation of new information technology systems,
• The
inability to introduce new products or the introduction of new products by
competitors,
• Availability
of raw materials,
• General
conditions in the nutritional supplement, personal care and weight management
industries or the network marketing industry, and
• Consumer
perceptions of USANA’s products and operations.
Because USANA’s products are ingested by consumers or
applied to their bodies, USANA is highly dependent upon consumers’ perception
of the safety, quality and efficacy of its products. As a result, substantial negative publicity, whether founded or
unfounded, concerning one or more products or other products similar to the
products could adversely affect our business, financial condition and results
of operations.
As a result of these and other factors quarterly revenues,
expenses and results of operations could vary significantly in the future, and
period-to-period comparisons should not be relied upon as indications of future
performance. There can be no assurance
that USANA will be able to increase its revenues in future periods or be able
to sustain its level of revenue or its rate of revenue growth on a quarterly or
annual basis. Furthermore, no
assurances can be given that revenue growth rate in new markets where operations
have not commenced will follow this pattern.
Due to the foregoing factors, future results of operations could be
below the expectations of public market analysts and investors. If that occurred, the market price of our
common stock would likely be materially adversely affected.
Liquidity and Capital Resources
USANA has historically financed growth primarily with
cash flows from operations. In 2001,
operations generated net cash of $10.0 million compared to $4.1 million in
2000. Cash and cash equivalents
decreased to $2.5 million at December 29, 2001 from $2.9 million at December
30, 2000.
On December 29, 2001, USANA had net working capital of
$350,000 compared to $2.3 million at December 30, 2000. The change in net working capital was
primarily the result of investments in property and equipment and a $2.0
million increase in current maturities of long-term debt.
USANA invested $6.6 million in property and equipment
in 2001 compared to $5.3 million in 2000.
Expanded warehouse space, improved technology systems, and investments
related to newly opened operations in Japan comprise the majority of the
investment in property and equipment in 2001.
USANA plans on spending significantly less on property and equipment in
2002 in comparison to 2001.
USANA does not extend credit to its customers, but
requires payment prior to shipping, which eliminates significant receivables.
During 1999, USANA entered into agreements with a
financial institution to provide up to $25 million in secured credit facilities
consisting of a $10 million five year term loan and a $15 million three year
revolving line of credit. The credit
facilities were amended in March 2001 and reduced the revolving line of credit
to $12.5 million and did not require USANA to make quarterly principal payments
on the term loan until March 2002. Four
principal payments of $500,000 per quarter will commence on March 1, 2002, and
seven principal payments of $857,000 per quarter will commence on March 1,
2003, resulting in full repayment of the term loan on September 1, 2004. The revolving line of credit expires on
September 1, 2002.
The credit facilities contain restrictive covenants
requiring USANA to maintain certain financial ratios. As of December 29, 2001, USANA was in compliance with these
covenants. As of December 29, 2001,
$8.0 million was outstanding on the 5-year term loan and $4.1
million was outstanding on the line of credit. For additional information on debt and
operating lease commitments, see Notes E and I of the audited consolidated
financial statements included elsewhere in this report.
USANA believes that its current cash balances, the
available line of credit and cash provided by operations will be sufficient to
cover its needs in the ordinary course of business for the foreseeable
future. If USANA experiences an adverse
operating environment or unusual capital expenditure requirements, additional
financing may be required. However, no
assurance can be given that additional financing, if required, would be
available on favorable terms. USANA may
also require or seek additional financing, including through the sale of its
equity securities to finance future expansion into new markets, finance capital
acquisitions associated with growth and for other reasons. Any financing which involves the sale of
equity securities or instruments convertible into equity securities could
result in immediate and possibly significant dilution to existing shareholders.
Inflation
USANA does not believe that inflation has had a
material impact on its historical operations or profitability.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We conduct business in several countries and intend to
continue to expand our foreign operations.
Net sales, earnings from operations and net earnings are affected by
fluctuations in currency exchange rates, interest rates and other uncertainties
inherent in doing business and selling product in more than one currency. In addition, our operations are exposed to
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 United States laws and regulations relating to
foreign trade and investment.
Foreign Currency Risks. Sales outside the United States represented
45.5%, 44.4% and 42.1% of net sales in 1999, 2000, and 2001, respectively.
Inventory purchases are transacted primarily in U.S. dollars from vendors
located in the United States. The local
currency of each international subsidiary is considered the functional currency
with all revenue and expenses translated at weighted average exchange rates for
reported periods. Consequently, USANA’s
reported sales and earnings are affected positively by a weakening of the U.S.
dollar and negatively by a strengthening of the U.S. dollar. Given the uncertainty of exchange rate
fluctuations, we cannot estimate the effect of these fluctuations on our future
business, product pricing, results of operations or financial condition. Changes in currency exchange rates affect
the relative prices at which USANA sells its products.
USANA seeks to reduce its exposure to fluctuations in
foreign exchange rates by creating offsetting positions through the use of
foreign currency exchange contracts. We
do not use derivative financial instruments for trading or speculative
purposes. We regularly monitor our
foreign currency risks and periodically take measures to reduce the impact of
foreign exchange fluctuations on USANA’s operating results. As of December 29, 2001 and during the
entire year of 2001, USANA had no hedging instruments in place to offset exposure
to the Canadian Dollar, Australian Dollar, New Zealand Dollar, Hong Kong
Dollar, Japanese Yen, British Pound or Euro, to which, in aggregate, USANA had
significant exposure. In future years,
when USANA has foreign currency exchange contracts in place at year-end, we
will present the required information in tabular form.
As a last recourse for hedging currency risk, USANA
may elect to adjust prices in non-U.S. markets to reflect changes in foreign
currency exchange rates. However, there
can be no assurance that these practices will be successful in eliminating all
or substantially all of the risks encountered in connection with its foreign
currency transactions.
Interest Rate Risks. USANA currently carries $8.0 million in
long-term debt with a bank at an effective interest rate of 4.3875%. This long-term debt matures at the rate of
$2.0 million in 2002, $3.4 million in 2003 and $2.6 million in 2004. USANA also has a revolving line of credit
with a bank with $4.1 million outstanding at December 29, 2001 with a weighted
average interest rate of 4.103%. The
interest rate is computed at the bank’s Prime Rate or LIBOR adjusted by
features specified in the loan agreements, with fixed rate term options of up
to six months. A hypothetical 100 basis
point increase in interest rates on all of the above debt would result in an
annual after tax increase of interest expense of approximately $76,000, or
approximately $0.01 per diluted share.
Forward-Looking
Statements and Certain Risks
The statements contained in this report that are not
purely historical are “forward-looking statements” within the meaning of
Section 21E of the Securities Exchange Act.
These statements regard our expectations, hopes, beliefs, 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 “Business” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” regarding our financial performance,
revenue and expense levels in the future and the sufficiency of our existing
assets to fund future operations and capital spending needs. Actual results could differ materially from
the anticipated results or other expectations expressed in these
forward-looking statements or for the reasons discussed below. The fact that some of the risk factors may
be the same or similar to past reports we have
filed with the Securities and Exchange Commission means only that the
risks are present in multiple periods.
We believe that many of the risks detailed here are part of doing
business in the industry in which we operate and compete 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
we assume no obligation to update them or to update the reasons why actual
results could differ from those projected in these forward-looking
statements. Among others, risks and
uncertainties that may affect our business, financial condition, performance,
development, and results of operations include the following:
We have
recently announced that we intend to sell our business, including substantially
all operating assets and liabilities, to our founder and CEO, Dr. Wentz. This transaction is not
without risk, including the fact that if approved, you will no longer have any
interest in the business now conducted by USANA; you will own shares of a
company with a business plan that contemplates the purchase of other businesses
and similar transactions, none of which are presently identified. See “Recent Developments” in, “Item 1.
Business”, for a summary description of the proposed transaction. More details will be mailed to shareholders
after a definitive proxy can be filed with the Securities and Exchange
Commission. The transaction is subject
to shareholder approval. You should
carefully read the proxy statement, including all of the exhibits and
attachments that accompany it, before you decide how you will vote. These transactions are often challenged by
legal action. If a lawsuit is filed in
connection with the proposed transaction, the Company will incur expense to
defend the lawsuit, which could be a substantial expense. The transaction is also subject to
conditions and covenants, including a covenant that limits the Company’s
ability to pursue acquisitions and business opportunities in industries or
marketing channels that would compete with the purchaser’s business. There is no assurance the Company will
succeed in identifying suitable acquisition targets or that the transactions it
enters into or the businesses it acquires will be successful. These and other risks arising out of the
proposed transaction and from the business proposed to be conducted by the
Company after the closing of the transaction may adversely affect the value of
our common stock.
As a network marketing company, we do not have direct control
over the marketing of our products. We
rely on non-employee, independent Associates to purchase, market and sell our
products. Associates are independent
contractors who purchase products directly for their own use or for
resale. Associates typically work at
the distribution of the products on a part-time basis and may and likely will
engage in other business activities, some of which may compete with us. We have a large number of Associates and a
relatively small corporate staff to implement our marketing programs and
provide motivational support to our Associates. We undertake no effort to provide individual training to
Associates. Associates may voluntarily terminate their agreements with us at
any time. There is typically
significant turnover in Associates from year to year. Because of this high
turnover, we must continually recruit new Associates. Our net sales are directly dependent upon the efforts of these
non-employee, independent Associates and future growth in sales volume will
depend in large part upon our success in increasing the number of new
Associates and improving productivity of the Associates.
We do not directly control the independent acts of Associates
and the violation of applicable laws in the sale of our products or the
promotion of our compensation plan could adversely affect our business. Associates are required to sign and adhere
to a written agreement and policies and procedures. Although these policies and procedures prohibit Associates from
making certain claims regarding products or income potential from the
distribution of the products, Associates may from time to time create promotional
materials or otherwise provide information that does not accurately describe
our marketing program. They also may
make statements regarding potential earnings, product claims or other matters
in violation of our policies or applicable laws and regulations concerning
these matters. Such violations may
result in legal action by regulatory agencies.
Future legal actions against Associates or others associated with us
could lead to increased regulatory scrutiny of our business, including our
network marketing system. We take what
we believe to be commercially reasonable steps to monitor Associate activities
to guard against misrepresentation and other illegal or unethical conduct by
Associates and to assure that the terms of our compensation plan are observed. There can be no assurance, however, that our
efforts in this regard will be sufficient to accomplish this objective. Publicity resulting from these Associate
activities can also make it more difficult for us to attract and retain
Associates and may have an adverse effect on our business, financial condition
and results of operations.
Network marketing is subject to intense government scrutiny
and regulation, which adds to the expense of doing business and the possibility
that changes in the law might adversely affect our ability to market some of
our products in certain markets. Network marketing systems such as ours are frequently subject to
laws and regulations directed at ensuring that product sales are made to
consumers of the products and that compensation, recognition and advancement
within the marketing organization are based on the sale of products rather than
investment in the sponsoring company.
In the United States, these laws and regulations include the federal and
state securities laws, the regulation of the offer and sale of franchises and
business opportunities, regulations and statutes administered by the FTC and
various state anti-pyramid and business opportunity laws that target direct
selling businesses that promise quick rewards for little or no effort, require
high entry costs, use high pressure recruiting methods or do not involve
legitimate products. Similar laws
govern our activities in foreign countries where it presently has operations or
may have operations in the future. We
are subject to the risk that, in one or more of our present or future markets,
our marketing system could be found not to comply with these laws and
regulations or may be prohibited.
Failure to comply with these laws and regulations or such a prohibition
could have a material adverse effect on our business, financial condition and
results of operations. Further we may
simply be prohibited from distributing products through a network-marketing
channel in some foreign countries.
Our business is subject to the effects of adverse publicity
and negative public perception. Our ability to attract and retain Associates and to sustain and
enhance sales through our Associates can be affected by adverse publicity or
negative public perception
regarding our industry, our competition or our business generally. This negative public perception may include
publicity regarding the legality of network marketing, the quality or efficacy
of nutritional supplement products or ingredients in general or our products or
ingredients specifically, and regulatory investigations of, regardless of
whether those investigations involve us or our Associates or the business
practices or products of our competitors or other network marketing
companies. There can be no assurance
that we will not be subject to adverse publicity or negative public perception
in the future or that such adverse publicity will not have a material adverse
effect on our business, financial condition and results of operations.
The loss of key management personnel would adversely affect
our business. We
depend on the services of our founder, Dr. Wentz, who serves as our President,
Chief Executive Officer and Chairman of the Board. We also rely on our other executive officers. Dr. Wentz is a
highly visible spokesman for our products and our business, and we believe our
success depends in large part on the continued visibility and reputation of Dr.
Wentz, which helps distinguish us from our competitors. Dr. Wentz is not a permanent resident of the
United States and will likely spend no more than four months per year in the
United States, however he devotes a majority of his time to our business and
travels outside the United States to direct and promote our international
expansion. The loss or limitation of
Dr. Wentz’s services as the lead spokesman for our business or our products, as
a key developer of those products or as one of our executive officers could
have a material adverse effect upon our business, financial condition and
results of operations.
Our executive officers other than Dr. Wentz are
primarily responsible for our day-to-day operations, and we believe our success
depends in part on our ability to retain our executive officers and to continue
to attract additional qualified individuals to our management team. We do not maintain a key man life insurance
policy on Dr. Wentz or any of our other officers, nor do we have an employment
agreement with any of our officers. The
loss or limitation of the services of any of our executive officers or the
inability to attract additional qualified management personnel could have a
material adverse effect on our business, financial condition and results of
operations.
The ownership of a significant percentage of our common stock
gives Dr. Wentz effective control and limits the influence of other
shareholders on important policy and management issues. Gull Holdings, Ltd., which is solely owned
and controlled by Dr. Wentz, owned 49.5% of our outstanding common stock at
December 29, 2001. By virtue of this
stock ownership, Gull Holdings, Ltd. may be able to exert significant influence
over the election of the members of our Board of Directors and to exert
significant influence over our affairs.
This concentration of ownership could also have the effect of delaying,
deterring or preventing a change in control that might otherwise be beneficial
to stockholders. In addition, Dr. Wentz
and his son David Wentz currently serve on the Board of Directors. There can be no assurance that conflicts of
interest will not arise with respect to these directors or that conflicts will
be resolved in a manner favorable to us.
There is no assurance of future industry growth. There can be no assurance that the
nutritional supplement market is as large as reported or that projected or
expected growth will occur or continue.
Market data and projections, such as those presented in this report, are
inherently uncertain and subject to change.
In addition, the underlying market conditions are subject to change
based on economic conditions, consumer references and other factors that are
beyond our control. Recently, various
publicly traded nutritional supplement companies, as well as industry analysts,
have announced that there is a slow-down in sales of nutritional
supplements. There can be no assurance
that an adverse change in size or growth rate of this market will not have a
material adverse effect on our business, financial condition or results of
operations.
Our products and manufacturing activities are subject to
extensive government regulation. The manufacture, packaging, labeling, advertising, promotion,
distribution and sale of our products are subject to regulation by numerous
national and local governmental agencies in the United States and other
countries. Details of these regulations
are contained in “Business - Regulatory Matters.”
Failure to comply with applicable FDA regulatory
requirements may result in, among other things, injunctions, product
withdrawals, recalls, product seizures, fines, and criminal prosecutions. Any action of this type by the FDA could
materially adversely affect our ability to successfully market our
products. In addition, if the FTC has
reason to believe the law is being violated (e.g., we do not possess adequate
substantiation for product claims), it can initiate an enforcement action. The FTC has a variety of processes and
remedies available to it for enforcement, both administratively and judicially,
including compulsory process authority, cease and desist orders and
injunctions. FTC enforcement could
result in orders requiring, among other things, limits on advertising, consumer
redress, divestiture of assets, rescission of contracts, and such other relief
as may be deemed necessary. Violation
of these orders could result in substantial financial or other penalties. Any
action by the FTC could materially adversely affect our ability to successfully
market our products.
In markets outside the United States, prior to
commencing operations or marketing our products, we may be required to obtain
approvals, licenses or certifications from a country’s ministry of health or
comparable agency. For example, our
manufacturing facility has been registered with the FDA and Health Canada and is
certified by Australia’s TGA. Approvals
or licensing may be conditioned on reformulation of products or may be
unavailable with respect to certain products or product ingredients. We must also comply with product labeling
and packaging regulations that vary from country to country. These activities are also subject to
regulation by various agencies or the countries in which our products are sold.
We cannot predict the nature of any future laws,
regulations, interpretations, or applications, nor can we determine what effect
additional governmental regulations or administrative orders, when and
if promulgated, would have on our business in the future. They could include, however, requirements
for the reformulation of certain products to meet new standards, the recall or
discontinuance of certain products, additional record keeping, expanded
documentation of the properties of certain products, expanded or different
labeling, and additional scientific substantiation. Any or all of these requirements could have a material adverse
effect on us.
Our business expansion into foreign markets is subject to
risks. We commenced
operations in Australia and New Zealand in February 1998, in the United Kingdom
in December 1998 and in Hong Kong in November 1999. In 2000 we began limited business activity in Japan and launched
more formal operations there in October 2001.
We ceased operations in the United Kingdom at the end of the first
quarter of 2000. We believe that our
ability to achieve future growth is dependent in part on our ability to
continue our international expansion efforts.
However, there can be no assurance that we will be able to grow in our
existing international markets, enter new international markets on a timely
basis or that new markets will be profitable.
We must overcome significant regulatory and legal barriers before we can
begin marketing in any foreign market.
Also, before marketing commences it is difficult to assess the extent to
which our products and sales techniques will be accepted or successful in any
given country. In addition to
significant regulatory barriers, we may also encounter problems conducting
operations in new markets with different cultures and legal systems from those
encountered elsewhere. We may be
required to reformulate certain of our products before commencing sales in a
given country. Once we have entered a market, we must adhere to the regulatory
and legal requirements of that market.
No assurance can be given that we will be able to successfully
reformulate our products in any of our current or potential international
markets to meet local regulatory requirements or attract local customers. The failure to do so would have a material
adverse effect on our business, financial condition and results of
operations. There can be no assurance
that we will be able to obtain and retain necessary permits and approvals or
that we will have sufficient capital to finance our expansion efforts in a
timely manner. In many market areas,
other network marketing companies already have significant market penetration,
the effect of which could be to desensitize the local Associate population to a
new opportunity such as USANA, or to make it more difficult for us to recruit qualified
Associates. There can be no assurance
that, even if we are able to commence operations in foreign countries, there
will be a sufficiently large population of persons inclined to participate in a
network marketing system such as ours. We believe our future success will
depend in part on our ability to seamlessly integrate our Associate
compensation plan across all markets in which our products are sold. There can be no assurance that we will be
able to further develop and maintain a seamless compensation program.
An increase in the amount of incentives paid to Associates
would reduce profitability.
An increase in the
amount of incentives paid to Associates would reduce profitability. A significant expense to USANA is the
payment of incentives to Associates.
These incentives include commissions and leadership bonuses. From time to time we have changed our
Associate compensation plan to better manage these incentives as a percentage
of net sales. For example, during the
third quarter of 1997, we introduced a broad re-pricing strategy across our
product lines, creating a spread between the price the Associate pays for the
product and the sales volume point value associated with the product. At the same time, we changed our leadership
bonus program, increasing the payout from 2.0% to 3.0% of total sales volume
points. In February 2000, we introduced
a broad re-pricing initiative reducing the average price of our products by
approximately 24%. This initiative
actually decreased the amount of incentives as a percentage of net sales. Management closely monitors the amount of
Associate incentives paid as a percentage of net sales and may adjust our
Associate compensation plan to prevent Associate incentives from having a
significant adverse effect on earnings.
There can be no assurance that these changes or future changes to the
Associate compensation plan or product pricing will be successful in
maintaining the level of Associate incentives expense as a percentage of net
sales. Furthermore, these changes may
make it difficult to recruit and retain qualified and motivated
Associates. An increase in incentive
payments to Associates as a percentage of net sales would reduce the
profitability of USANA.
We rely on and are subject to risks associated with our
reliance upon information technology systems. Our success is dependent on the accuracy,
reliability and proper use of sophisticated and dependable information
processing systems and management information technology. Our information technology systems are
designed and selected in order to facilitate order entry and customer billing,
maintain Associate and Preferred Customer records, accurately track purchases
and incentive payments, manage accounting, finance and manufacturing
operations, generate reports and provide customer service and technical
support. Any interruption in these
systems could have a material adverse effect on our business, financial
condition and results of operations. We
recognize the need to regularly upgrade our management information systems to
most effectively manage our operations and Associate database.
The loss of a significant Associate or downline organization
could adversely affect our business. We
rely on the successful efforts of certain Associates. Our Associate compensation
plan is designed to permit Associates to sponsor new Associates, creating
multiple “business centers,” or levels in the marketing structure. Sponsored Associates are referred to as
“downline” Associates within the sponsoring Associate’s “downline
network.” If these downline Associates
in turn sponsor new Associates, additional business centers are created, with
the new downline Associates becoming part of the original sponsor’s downline
network. As a result of this network
marketing system, Associates develop business relationships with other
Associates. We believe our revenue is
generated by thousands of Associates.
Consequently, the loss of a key Associate or group of Associates, large
turnovers or decreases in the size of the Associate force, seasonal or other
decreases in purchase volume, sales volume reduction and the costs associated
with training new Associates and other related expenses may adversely affect
our business, financial condition and results of operations. Moreover, the ability to continue to attract
and retain Associates can be affected by a number of factors, some of which are
beyond our control, including:
• General
business and economic conditions,
• Public
perceptions about network marketing programs,
• High-visibility
investigations or legal proceeding against network marketing companies by
federal or state authorities or private citizens, and
• Public
perceptions about the value and efficacy of nutritional, personal care or
weight management products generally.
There can be no assurance that we will be able to
continue to attract and retain Associates in numbers sufficient to sustain
future growth or to maintain present growth levels, which could have a material
adverse effect on our business, financial condition and results of operations.
Our business is subject to the risks associated with intense
competition from larger, wealthier and more established competitors. We face intense competition in the business
of distributing and marketing nutritional supplements, vitamins and minerals,
personal care products, weight management items, and other nutritional products
as described in greater detail in “Business - Competition.” Numerous manufacturers, distributors and
retailers compete actively for consumers and, in the case of other network
marketing companies, for Associates.
There can be no assurance that we will be able to compete in this
intensely competitive environment. In addition, nutrition, personal care and
weight management products can be purchased in a wide variety of channels of
distribution including retail stores.
Our product offerings in each product category are also relatively small
compared to the wide variety of products offered by many other companies.
We are also subject to significant competition from
other network marketing organizations for the time, attention and commitment of
new and existing Associates. Our
ability to remain competitive depends, in significant part, on our success in
recruiting and retaining Associates.
There can be no assurance that our programs for recruiting and retaining
Associates will be successful. The pool
of individuals interested in the business opportunities presented by direct
selling tends to be limited in each market, and it is reduced to the extent
other network marketing companies successfully recruit these individuals into
their businesses. Although we believe
we offer an attractive opportunity for Associates, there can be no assurance
that other network marketing companies will not be able to recruit our existing
Associates or deplete the pool of potential Associates in a given market.
Our foreign expansion subjects our business to the increased
expense and risks associated with foreign duties and import restrictions. At present, most of our products are
manufactured in the United States and are exported to the countries in which
they ultimately are sold. The countries
in which we operate may impose various legal restrictions on imports. In most cases, permits or licenses are
required to import particular types of goods, including products of the type we
manufacture and sell. Duties of varying
amounts are imposed based on the values or quantities of the goods imported. In
certain countries and jurisdictions, nutritional and other products are subject
to significant import duties. Certain
products that we export from the United States, notably products in the
personal care line are subject to foreign health and safety regulations. Certain nutritional products may also be
subject to governmental regulations regarding food and drugs, which regulations
may limit our ability to sell some of our products in some countries and
jurisdictions. To date, we have not
experienced any difficulty in obtaining or maintaining import licenses, but
there can be no assurance that we will be able to maintain these licenses or
obtain the necessary licenses to enter new markets. In addition, new regulations may be adopted or any of the
existing regulations could be changed at any time in a manner that could have a
material adverse effect on our business, financial condition and results of
operations. Duties on imports could be
changed in a manner that would be materially adverse to our sales and our
competitive position compared to locally produced goods. In addition, import restrictions in certain
countries and jurisdictions may prevent the importation of U.S.-manufactured
products altogether.
Taxation and transfer pricing considerations affect our
foreign operations.
Our principal domicile is the United States. Sales in the United States,
Canada, Australia-New Zealand, Hong Kong, and Japan represented 57.9%, 24.5%,
12.5%, 4.6% and 0.5% of total sales in 2001, respectively. We are subject to income taxes at an effective
rate of 37%, 45%, 30%, 33%, 16% and 42% in the United States, Canada,
Australia, New Zealand, Hong Kong and Japan, respectively. Under tax treaties, we are eligible to
receive foreign tax credits in the United States for taxes actually paid
abroad. As our operations expand
outside the United States, taxes paid to foreign taxing authorities may exceed
amounts of the credits available to us, resulting in the payment of a higher
overall effective tax rate on our worldwide operations. We have adopted transfer pricing agreements
with our subsidiaries to regulate intercompany transfers, which agreements are
subject to transfer pricing laws that regulate the flow of funds between the
subsidiaries and the parent corporation for product purchases, management
services and contractual obligations such as the payment of Associate
incentives. If the United States
Internal Revenue Service or the taxing authorities of any other jurisdiction
were to successfully challenge these agreements or require changes in our
transfer pricing practices, we could become subject to higher taxes and our
earnings would be adversely affected.
We believe that we operate in compliance with all applicable foreign
exchange control and transfer pricing laws.
However, there can be no assurance that we will continue to be found to
be operating in compliance with foreign exchange control and transfer pricing
laws, or that those laws will not be modified, which, as a result, may require
changes in our operating procedures.
Exchange rate fluctuations affect foreign operations. Over the past several
years, a significant amount of our net sales have been generated outside the
United States. We intend to continue to
expand our foreign operations, exposing us to risks of changes in
social, political and economic conditions in foreign countries,
including changes in the laws and policies that govern foreign investment in
countries where we have operations.
Since a significant portion of our sales is in foreign countries,
exchange rate fluctuations may have a significant effect on our sales and gross
margins. Further, if exchange rates
fluctuate dramatically, it may become uneconomical for us to establish or
continue activities in certain countries.
For instance, changes in currency exchange rates may affect the relative
prices at which foreign competitors and we sell similar products in the same
market. As our business expands outside
the United States, an increasing share of our net sales and cost of sales will
be transacted in currencies other than the U.S. dollar. Accounting practices require that our
non-U.S. sales and selling, general and administrative expenses be converted to
U.S. dollars for reporting purposes.
Consequently, our reported net earnings may be significantly affected by
fluctuations in currency exchange rates, with earnings generally increasing
with a weaker U.S. dollar and decreasing with a strengthening U.S. dollar. Product purchases by our foreign
subsidiaries are transacted in U.S. dollars.
As operations expand in countries where foreign currency transactions
may be made, our operating results will be increasingly subject to the risks of
exchange rate fluctuations and we may not be able to accurately estimate the impact
of these changes on our future business, product pricing, results of operations
or financial condition. In addition,
the value of the U.S. dollar in relation to other currencies may also adversely
affect our sales to customers outside the United States. We enter into forward foreign exchange
contracts to hedge certain commitments denominated in foreign currency,
including intercompany cash transfers.
We generally do not use derivative instruments to manage currency
fluctuations. There can be no assurance
that hedging transactions will protect operating results and cash flows from
potentially adverse effects of currency exchange fluctuations. Those adverse effects would also adversely
affect our business, financial condition and results of operations.
The inability to obtain adequate supplies of raw materials
for products at favorable prices, or at all, could have a material adverse
effect on our business, financial condition and results of operations. We depend on outside suppliers for raw materials.
We acquire all of our raw materials for the manufacture of our products from
third-party suppliers. Normally,
materials used in manufacturing our products are purchased on account or by
purchase order. We have very few
long-term agreements for the supply of these materials. There is a risk that any of our suppliers or
manufacturers could discontinue selling their products to us. Although we believe that we could establish
alternate sources for most of our products, any delay in locating and establishing
relationships with other sources could result in product shortages and back
orders for the products, with a resulting loss of net sales. In certain situations we may be required to
alter our products or to substitute different products from another
source. In addition, we rely on
third-party manufacturers for several of our products, including our food bars
and drink mixes. We have in the past
discontinued or temporarily stopped sales of certain products manufactured by
third parties while those products were on back order. There can be no assurance that suppliers
will provide the raw materials needed by us in the quantities requested or at a
price we are willing to pay. Because we
do not control the actual production of these raw materials, we are also
subject to delays caused by interruption in production of materials based on
conditions not within our control, including weather, crop conditions,
transportation interruptions, strikes by supplier employees and natural
disasters or other catastrophic events.
Nutritional supplement products may be supported by only
limited availability of conclusive clinical studies. Our products include nutritional supplements
that are made from vitamins, minerals, herbs and other substances for which
there is a long history of human consumption. Some of our products contain
innovative ingredients or combinations of ingredients. Although we believe all of our products to
be safe when taken as directed, there is little long-term experience with human
consumption of certain of these product ingredients or combinations of
ingredients in concentrated form. We
conduct research and test the formulation and production of our products, but
we have performed or sponsored only limited clinical studies. Furthermore, because we are highly dependent
on consumers’ perception of the efficacy, safety and quality of our products,
as well as similar products distributed by other companies, we could be
adversely affected in the event those products should prove or be asserted to be
ineffective or harmful to consumers or in the event of adverse publicity
associated with illness or other adverse effects resulting from consumers’ use
or misuse of our products or a competitor’s similar products.
As a manufacturer we may be subject to product liability
claims. As a
manufacturer and a distributor of products for human consumption and topical
application, we could become exposed to product liability claims and litigation
to prosecute such claims. Additionally, the manufacture and sale of these
products involves the risk of injury to consumers as a result of tampering by
unauthorized third parties or product contamination. To date, we have not been party to any product liability
litigation, although certain individuals have asserted that they have suffered
adverse consequences as a result of using our nutritional products. These matters historically have been settled
to our satisfaction and have not resulted in material payments. We are aware of no instance in which any of
our products are or have been defective in any way that could give rise to
material losses or expenditures related to product liability claims. Although we maintain product liability
insurance, which we believe to be adequate for our needs, there can be no
assurance that we will not be subject to claims in the future or that our
insurance coverage will be adequate or that we will be able to maintain
adequate insurance coverage.
Our business is subject to particular intellectual property
risks. Most of our
products are not protected by patents.
The labeling regulations governing our nutritional supplements require
that the ingredients of such products be precisely and accurately indicated on
product containers. Accordingly, patent
protection for nutritional supplements often is impractical given the large
number of manufacturers who produce nutritional supplements having many active
ingredients in common. Additionally,
the nutritional supplement industry is characterized by rapid change and
frequent reformulations of products as the body of scientific research and
literature refines current understanding of the application and efficacy of
certain substances and interactions among various substances. In this respect, we maintain an active
research and development program that is devoted to developing better, purer
and more effective formulations of our
nutritional or other products.
We protect our investment in research, as well as the techniques we use
to improve the purity and effectiveness of our products by relying on trade
secret laws, although we have not to date entered into confidentiality
agreements with certain of our employees involved in research and development
activities. Additionally, we endeavor
to seek, to the fullest extent permitted by applicable law, trademark and trade
dress protection for our products, which protection has been sought in the
United States, Canada and many of the other countries in which we are either
presently operating or plan to commence operations in the near future. Notwithstanding our efforts as described
above, there can be no assurance that these efforts to protect our trade
secrets and trademarks will be successful.
Nor can there be any assurance that third parties will not assert claims
against us for infringement of the proprietary rights of others. If an infringement claim is asserted, we may
be required to obtain a license of such rights, pay royalties on a
retrospective or prospective basis or terminate our manufacturing and marketing
of our products that are alleged to have infringed. Litigation with respect to
such matters could result in substantial costs and diversion of management and
other resources and could have a material adverse effect on our business, financial
condition and operating results. There
can be no assurance, however, that third-party claims will not in the future
adversely affect our business, financial condition and results of operations.
Our manufacturing activity is subject to certain risks. Our results of operations are dependent upon
the continued operation of our manufacturing facility in Salt Lake City,
Utah. The operation of a nutritional
supplement manufacturing facility involves many risks, including power
failures, the breakdown, failure or substandard performance of equipment, the
improper installation or operation of equipment, natural or other disasters and
the need to comply with the requirements or directives of government agencies,
including the FDA. There can be no
assurance that the occurrence of these or any other operational problems at our
facility would not have a material adverse effect on our business, financial
condition and results of operations. We
are subject to a variety of environmental laws relating to the storage,
discharge, handling, emission, generation, manufacture, use and disposal of
chemicals, solid and hazardous waste and other toxic and hazardous
materials. Our manufacturing operations
presently do not result in the generation of material amounts of hazardous or
toxic substances. Nevertheless,
complying with new or more stringent laws or regulations, or more vigorous
enforcement of current or future policies of regulatory agencies, could require
substantial expenditures and could have a material adverse effect on our
business, financial condition and results of operations. Environmental laws and regulations require
us to maintain and comply with a number of permits, authorizations and
approvals and to maintain and update training programs and safety data
regarding materials used in our processes.
Violations of those requirements could result in financial penalties and
other enforcement actions, and could require us to halt one or more portions of
our operations until a violation is cured.
The combined costs of curing incidents of non-compliance, resolving
enforcement actions that might be initiated by government authorities or
satisfying business requirements following any period affected by the need to
take such actions could have a material adverse effect on our business,
financial condition and results of operations.
Our stock price has been volatile and subject to various
market conditions. There
can be no assurance that an active market in our stock will be sustained. The
trading price of the common stock has been subject to wide fluctuations. The price of the common stock may fluctuate
in the future in response to quarter-to-quarter variations in operating
results, material announcements by us or our competitors, governmental
regulatory action, conditions in the nutritional supplement industry, or other
events or factors, many of which are beyond our control. In addition, the stock market has
historically experienced significant price and volume fluctuations, which have
particularly affected the market prices of many dietary and nutritional,
supplement companies and which have, in certain cases, not had a strong
correlation to the operating performance of these companies. Our operating results in future quarters may
be below the expectations of securities analysts and investors. If that were to occur, the price of our
common stock would likely decline, perhaps substantially.
Item 8.
Item 8.
Financial Statements and Supplementary Data
The Financial Statements and Supplementary Data
required by this Item are set forth at the pages indicated at Item 14.
Item 9.
Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10.
Directors and Executive Officers of the Registrant
The directors and executive officers of USANA at
December 29, 2001 were:
The following sets forth the name, age, business
experience for the last five years, selected biographical information and
period of service for each of the Directors and executive officers of USANA at
December 29, 2001. Each director holds
office until his successor is duly elected and qualified or until his
resignation or removal, if earlier.
Executive officers serve at the will of the board of directors.
Myron W. Wentz, Ph.D., 61, founded USANA in
1992 and has served as the President, Chief Executive Officer and Chairman of
the Board since its inception. In 1974,
Dr. Wentz founded Gull Laboratories, Inc., a developer and manufacturer of
medical diagnostic test kits and the former parent of USANA. Dr. Wentz served as Chairman of Gull from
1974 until 1998. In 1998, Dr. Wentz
founded Sanoviv, S.A. de C.V. (“Sanoviv”), a health and wellness center located
near Rosarito, Mexico. From 1969 to
1973, Dr. Wentz served as Director of Microbiology for Methodist Medical
Center, Proctor Community Hospital, and Pekin Memorial Hospital, all of which
are located in Peoria, Illinois. Dr.
Wentz received a B.S. in Biology from North Central College, Naperville,
Illinois, a M.S. in Microbiology from the University of North Dakota, and a
Ph.D. in Microbiology with an emphasis in Immunology from the University of
Utah.
David A. Wentz, 31, joined USANA as a
part-time employee in 1992. He has been
a full-time employee since March 1994 and a member of the USANA’s board of
directors since 1993. Mr. Wentz was
appointed to the position of Executive Vice President of USANA in October
2001. He served as the Senior Vice
President of Strategic Development from June 1999 to October 2001 and as the
Vice President of Strategic Development from August 1996 to June 1999. Mr. Wentz received a B.S. degree in
Bioengineering from the University of California, San Diego. Mr. Wentz is the son of Dr. Wentz.
Gilbert A. Fuller, 61, joined USANA in May
1996 as the Vice President of Finance.
Mr. Fuller served in this role from May 1996 to June 1999, when he was
appointed Senior Vice President. Mr.
Fuller has been the Chief Financial Officer since October 1997. From January 1994 to May 1996, Mr. Fuller
was the Executive Vice President of Winder Dairy, Inc., a regional commercial
dairy operation. From May 1991 through
October 1993, Mr. Fuller was Chief Administrative Officer and Treasurer of
Melaleuca, Inc., a manufacturer and network marketer of personal care products. From July 1984 through January 1991, Mr.
Fuller was the Vice President and Treasurer of Norton Company, a multinational
manufacturer of ceramics and abrasives. Mr. Fuller is a Certified Public
Accountant and received a B.S. in Accounting and an MBA from the University of
Utah.
John B. McCandless IV, 54, joined USANA in
October 1995 as the Director of Scientific Operations and served as Vice
President of Operations from June 1996 to June 1999, when he was appointed
Senior Vice President. Mr. McCandless
has been the Chief Operating Officer since October 1997. From October 1995 to June 1996, he was the
Director of Scientific Operations. From
January 1994 to October 1995, he was a consultant with Apogee Strategic
Services. From September 1987 to
December 1993, Mr. McCandless was the President of Utah Biomedical Testing
Laboratory, where he supervised that company’s business of contract research
and scientific testing. He also served
in managerial positions in toxicology at both Atlantic Richfield Company and
Biodynamics, Inc. Mr. McCandless
received a B.A. in Zoology from the University of California, Santa Barbara, an
M.S. in Pathology from the University of Utah, and M.A. and M.B.A. degrees from
The Claremont Graduate School in California.
Ronald S. Poelman, 48, has served as a
director of USANA since 1995. Since
1994, he has been a partner in the Salt Lake City, Utah law firm of Jones,
Waldo, Holbrook & McDonough, where he is head of the Corporate Finance
Group. From 1990 to 1993, Mr. Poelman
was a stockholder of the Salt Lake City law firm of Parsons, Behle &
Latimer. Mr. Poelman received a B.A. in
English from Brigham Young University and a J.D. from the University of
California, Berkeley.
Robert
Anciaux, 56, has served as a director of USANA since July
1996. Since 1990, he has been the
Managing Director of S.E.I. s.a., a consulting and investment management firm
in Brussels, Belgium. From 1982 to
1990, Mr. Anciaux was self-employed as a venture capitalist in Europe,
investing in various commercial, industrial and real estate venture
companies. In some of these privately
held
companies Mr. Anciaux also serves as a director. Mr. Anciaux received
an Ingénieur
Commercial degré from Ecole de Commerce Solvay Université Libre de Bruxelles.
Denis E. Waitley, Ph.D., 68, has served as a
director of USANA since May 2000. Dr. Waitley has served as a consultant
to and a spokesperson for USANA since September 1996. Since 1980, Dr. Waitley has been President of the Waitley
Institute, a corporate leadership-training firm he founded to provide
professional and personal development skills for business executives. Dr. Waitley also serves as President of
International Learning Technologies, Inc., a company he founded in 1989 that
produces educational audio/visual materials for companies and individuals. During the 1980’s, Dr. Waitley served as
Chairman of Psychology for the U.S. Olympic Committee’s Sports Medicine
Council, responsible for the performance enhancement of all American Olympic
athletes. He is the author of several
national best selling non-fiction books and audio programs on personal
excellence. Dr. Waitley received a B.S.
from the U.S. Naval Academy at Annapolis, an M.A. in Organizational Development
from the Naval Post Graduate School in Monterrey, California and a Ph.D. in
Human Behavior from La Jolla University.
Jerry G.
McClain, 61, has served as a director of USANA since June
2001. Mr. McClain has been the Chief
Financial Officer of Cerberian, Inc., a privately held company established in
August 2000 and headquartered in Salt Lake City, Utah. From 1998 to 2000, Mr. McClain was the Chief
Financial Officer and Sr. Vice President of Assentive Solutions, Inc., a
company he also co-founded. From 1997
to 1998, Mr. McClain was the Chief Financial Officer for the Salt Lake
Organizing Committee for the 2002 Winter Olympic Games. Prior to 1997, Mr. McClain served as a key
financial advisor to many companies as a Senior Partner of Ernst & Young
LLP, where for 35 years he served in several cities throughout the world. Mr. McClain is a CPA and a graduate from the
University of Southern Mississippi and Oklahoma State University where he
received a B.S. in accounting and an M.B.A., respectively.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934
requires the Company’s officers and directors, and persons who beneficially own
more than 10% of the Company’s common stock to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers, directors and
greater-than-ten-percent shareholders are also required by regulation of the
Securities and Exchange Commission to furnish the Company with copies of all
Section 16(a) forms that they file.
Based solely upon a review of the forms furnished to it, and
representations made by certain persons subject to this obligation that such
filing were not required to be made, USANA believes that all reports required
by these individuals and persons under Section 16(a) were filed in 2001. The filing of all such reports was timely,
with the exception of a report of Gull Holdings, Ltd. and Dr. Wentz in
connection with the purchase of common stock, which was filed two months late.
Item 11.
Item 11. Executive Compensation
The following table summarizes the compensation of the
Chief Executive Officer of USANA and its four most highly paid executive
officers at December 29, 2001, other than the Chief Executive Officer, whose
salary and bonus exceeded $100,000 during the year then ended (collectively the
“Named Executive Officers”) and the amounts earned by each of them during the
past three fiscal years:
Summary
Compensation Table
(1) Bonuses
were paid to the Named Executives Officers in 1999 based upon the results of
operations in 1998.
(2) Includes
the approximate value of executive’s use of a Company-owned car, employer’s matching
contribution to the executive’s 401(k) plan, and the gain realized upon the
exercise of stock options.
(3) Shares
subject to issuance upon exercise of options granted under a compensation plan.
(4) Dr.
Wentz does not take any compensation for services provided to USANA.
There were no stock option grants to the Named
Executive Officers during the year ended December 29, 2001. David Wentz and Gilbert Fuller consented to
the cancellation of a total of 200,000 stock options previously granted and
held, prior to expiration or exercise in 2001.
There is no agreement that new options will be issued to replace those
that were cancelled.
Aggregated Option Exercises and Fiscal Year-end
Option Value
The following table sets forth information with
respect to the exercise of stock options by the Named Executive Officers during
the year ended December 29, 2001, as well as the aggregate number and value of
unexercised options held by all Named Executive Officers as of such date.
Aggregated
Option Exercises in Last Fiscal Year
And
Fiscal Year-End Option Values
(1) All options had an exercise
price in excess of the market price of $1.26 at December 29, 2001.
Employment Contracts and Other Arrangements
There are currently no employment agreements with any
of the named executive officers.
Compensation of Directors
As of December 29, 2001, each director that is not an
employee of USANA receives $5,000 per year for his service on the board. We also have a policy of reimbursing
directors for their out-of-pocket expenses incurred in connection with their
services as directors.
Mr. Poelman and Mr. Anciaux received a grant of
options to purchase 125,000 shares of common stock in 1995 and 1996,
respectively, under USANA’s Stock Incentive and Option Plan when they joined
the board. The options vested at the
rate of 25,000 per year for five years, so long as the recipient remained a
director. The exercise price of the
options was the fair market price on the date of grant.
Board of
Directors Committees
The board of directors has established an Executive
Committee and an Audit Committee.
Subject to certain restrictions, the Executive Committee possesses and
exercises the powers of the board of directors during the intervals between
regular meetings of the board. Among
other things, the Executive Committee is responsible for and reviews and
recommends to the board of directors the salaries, bonuses and other forms of
compensation and benefit plans for management and administers the USANA Stock
Option Plan. The members of the
Executive Committee are Dr. Myron Wentz, David A. Wentz and Ronald S. Poelman.
Meetings
of the Board
During the year ended December 29, 2001, the board of
directors met in four regular and no special meetings. No director attended fewer than 75% of these
meetings. The board also conducted
business on occasion during the year by written unanimous consent as permitted
by Utah law and by the bylaws of USANA.
Compensation Committee Interlocks and
Insider Participation
The Executive Committee of the board (which performs
the function of the compensation committee) for the year ended December 29,
2001, was comprised of Dr. Myron Wentz, David Wentz, and Ronald Poelman. Dr. Wentz has served as the Chief Executive
Officer of USANA since its inception.
David Wentz, who is the son of Dr. Wentz, is also a Named Executive
Officer during 2001.
Compensation Committee Report on Executive Compensation
Compensation Policy
The Compensation Committee’s policy with respect to
executive compensation has been designed to:
• Adequately
and fairly compensate executive officers in relation to their responsibilities,
capabilities and contributions to USANA and in a manner that is commensurate
with compensation paid by companies of comparable size or industry;
• Reward
executive officers for the achievement of key operating objectives and for the
enhancement of the long-term value of USANA; and
• Align the
interests of the executive officers with those of the shareholders.
The components of compensation paid to executive
officers consist of: (a) base salary,
(b) incentive compensation in the form of stock options awarded under the Stock
Option Plan and (c) certain other benefits.
In 1998, the Committee adopted a cash bonus program as an additional
component of executive compensation. A
similar bonus program was adopted in 1999, 2000 and 2001; however, no bonus was
paid under either program for years after 1998.
Components of Compensation
The primary components of compensation paid to
executive officers and senior management personnel, and the relationship of
these components of compensation to USANA’s performance, are discussed below:
• Base
Salary. The Committee periodically reviews and approves the base salary
paid to executive officers and members of the senior management team.
Adjustments to base salaries are determined based upon a number of factors,
including USANA’s performance (to the extent such performance can fairly be
attributed or related to each executive’s performance), as well as the nature
of each executive’s responsibilities, capabilities and contributions. In
addition, the Committee periodically reviews the base salaries of senior
management personnel in an attempt to ascertain whether those salaries fairly
reflect job responsibilities and prevailing market conditions and rates of pay.
The Committee believes that base salaries for USANA’s executive officers have
historically been reasonable, when considered together with other elements of
compensation (such as stock options and the bonus plans) in relation to its
size and performance and in comparison with the compensation paid by similarly
sized companies or companies within the industry.
• Incentive
Compensation. As discussed above, a
substantial portion of each executive officer’s compensation package is in the
form of incentive compensation designed to reward the achievement of key
operating objectives and long-term increases in shareholder value. The
Committee believes that the stock options granted under the Stock Option Plan
reward executive officers only to the extent that shareholders have benefited
from increases in the value of the common stock.
• Other
Benefits. USANA maintains certain other plans and arrangements for the
benefit of its executive officers and members of senior management. USANA
believes these benefits are reasonable in relation to the executive
compensation practices of other similarly sized companies or companies within
the industry.
Compensation of the Chief Executive Officer
Myron W. Wentz has served as the Chief Executive
Officer of USANA since its inception.
Dr. Wentz does not receive any compensation for his services and he has
in the past declined to accept any options or other awards under any stock
option or stock incentive plan that he might otherwise have been entitled to
receive as an executive officer or director.
Respectfully submitted,
Dr. Myron W. Wentz
David A. Wentz
Ronald S. Poelman
Stock Performance Graph
The following graph compares the yearly cumulative
total returns from USANA’s common stock, the Total Return Index for the Nasdaq
Stock Market, and ten companies selected in good faith by USANA from its
industry (the “Peer Group”). Each of the
companies included in the Peer Group markets or manufactures products similar
to USANA’s products or markets its products through a similar marketing
channel. The Peer Group comprises the
following companies: NBTY, Inc.
(Nasdaq: NBTY), Nature’s Sunshine Products, Inc. (Nasdaq: NATR), Avon Products,
Inc. (NYSE: AVP), Herbalife International, Inc. (Nasdaq: HERBA), Natural
Alternatives International, Inc. (Nasdaq: NAII), Perrigo Company (Nasdaq:
PRGO), Reliv International, Inc. (Nasdaq: RELV), Hain Celestial Group (Nasdaq:
HAIN), Lifeway Foods, Inc. (Nasdaq: LWAY) and Chattem, Inc. (Nasdaq: CHTT).
USANA’s shares commenced trading in May 1993. The graph assumes an investment on December
30, 1996 of $100 and reinvestment of all dividends into additional shares of
the same class of equity, if applicable to the stock or index.
Item 12.
Item 12. Security Ownership of
Certain Beneficial Owners and Management
The following table sets forth, as of March 20, 2002, the
number of shares of common stock, par value $0.001, owned by 1) each person
known to be the beneficial owner of more than 5% of the issued and outstanding
common stock, 2) by the executive officers and directors of the Company
individually, and 3) by the executive officers and directors as a group. Except as indicated in the footnotes below,
each of the persons listed exercises sole voting and investment power over the
shares of common stock listed for such individual or entity as listed in the
table. Unless otherwise indicated, the
mailing address of the shareholder is the address of USANA, 3838 West Parkway
Blvd., Salt Lake City, Utah 84120.
* Less than one percent.
(1) All entries exclude beneficial
ownership of shares issuable pursuant to options that have not vested or that
are not otherwise exercisable as of the date hereof and which will not become
vested or exercisable within 60 days of the date of this Report.
(2) Percentages rounded to nearest one-tenth
of one percent. Percentages are based
on 9,663,837 shares outstanding. Shares
of common stock subjected to options that are presently exercisable or
exercisable within 60 days are deemed to be beneficially owned by the person
holding the options for the purpose of computing the percentage ownership of
that person, but are not treated as outstanding for the purpose of computing
the percentage of any other person.
(3) All shares shown are held of record
by Gull Holdings, Ltd., an Isle of Man company 100% owned by Dr. Wentz. Because
of his control of Gull Holdings, Ltd, Dr. Wentz is deemed to be the beneficial
owner of the shares owned of record by Gull Holdings, Ltd.
(4) Includes 60,000 shares issuable
pursuant to options which are presently exercisable or which become exercisable
within 60 days of the date of this Report, 50,000 shares held of record and
3,486 shares held in the executive’s 401(k) account.
(5) Includes 10,000 shares issuable
pursuant to options which are presently exercisable or which become exercisable
within 60 days of the date of this Report, 800 shares held of record and 4,545
shares held in the executive’s 401(k) account.
(6) Includes 190,000 shares issuable
pursuant to options which are presently exercisable or which become exercisable
within 60 days of the date of this Report and 4,078 shares held in the
executive’s 401(k) account.
(7) All shares shown are issuable
pursuant to exercise of stock options which are presently exercisable or which
become exercisable within 60 days of the date of this Report.
(8) All shares shown are
held of record.
Item 13.
Item 13.
Certain Relationships and Related Transactions
USANA’s President, CEO and Chairman of the Board,
Myron W. Wentz, is the sole beneficial owner of the single largest shareholder,
Gull Holdings, Ltd. Dr. Wentz has devoted much of his personal time,
expertise and resources to a number of business and professional activities
outside of USANA.
The most significant of these is the ownership and
operation of Sanoviv. Dr. Wentz
describes Sanoviv as a unique, fully integrated health and wellness center.
Sanoviv is located near Rosarito, Mexico, and is owned in equal shares by Dr.
Wentz and his son, David A. Wentz, an executive officer and director of the
Company. Dr. Wentz is sole administrator of Sanoviv. USANA has periodically
advanced funds to pay expenses incurred by Dr. Wentz for Sanoviv and has
provided certain services for Sanoviv. These expenses and the value of the
services rendered by USANA totaled approximately $87,000 in 2001 and were
billed to and reimbursed by Sanoviv. As of December 29, 2001, there were
no outstanding amounts due to USANA from Sanoviv or Dr. Wentz. USANA has no
commitment or obligation to continue to provide additional funding or support
to Sanoviv.
During 2001, Gull Holdings, Ltd. purchased 92,000
common shares of USANA in the open market, bringing its ownership of USANA to
49.5% as of December 29, 2001.
Denis E. Waitley, Ph.D., a director of USANA, has
served as a consultant to and spokesperson for USANA since September 1996.
During 2001 USANA paid consulting fees and royalties totaling $158,000 to
Dr. Waitley. The consulting contract between USANA and Dr. Waitley
pays him $150,000 per year and expires in September 2003.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this
Form:
1. Financial Statements
Report
of Independent Certified Public Accountants
Consolidated Balance Sheets
Consolidated
Statements of Earnings
Consolidated
Statements of Stockholders’ Equity.
Consolidated
Statements of Cash Flows.
Notes to
the Consolidated Financial Statements.
Quarterly Financial Data (unaudited) (included in Note
M of the Notes to the Consolidated Financial Statements)
2. Financial Statement Schedules.
[Those that are required are included in the
Consolidated Financial Statements or Notes thereto.]
3. Exhibits.
Exhibit
Number
Description
3.1
Articles of Incorporation [Incorporated by reference
to Registration Statement on Form 10, File No. 0-21116, effective April 16,
1993]
3.2
Bylaws [Incorporated by reference to Registration
Statement on Form 10, File No. 0-21116, effective April 16, 1993]
3.3
Amendment to Articles of Incorporation to change
name and increase par value [Incorporated by reference to Report on Form 10-Q
for the period ended July 1, 2000]
4.1
Specimen Stock Certificate for Common Stock, no par
value [Incorporated by reference to 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 USANA [Incorporated by reference to Report on Form 10-Q
for the period ended June 27, 1998]
10.2
Loan Modification Agreement by and between Seafirst
Bank and USANA [Incorporated by reference to Report on Form 10-Q for the
period ended June 27, 1998]
10.3
Employment Agreement dated June 1, 1997 by and
between USANA and Gilbert A. Fuller, expired May 31, 2000 [Incorporated by
reference to 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 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 Report on Form 10-Q for the period
ended April 3, 1999]
10.6
Stock Pledge Agreement dated April 28, 1999
[Incorporated by reference to Report on Form 10-Q for the period ended April
3, 1999]
10.7
Redemption Agreement dated July 30, 1999
[Incorporated by reference to Report on Form 8-K, filed September 24, 1999]
10.8
Amended Term Note dated March 26, 2001 [Incorporated
by reference to Report on Form 10-K, filed March 30, 2001]
10.9
Amended Revolving Note dated March 26, 2001
[Incorporated by reference to Report on Form 10-K, filed March 30, 2001]
10.10
Amended Credit Agreement dated March 26, 2001
[Incorporated by reference to Report on Form 10-K, filed March 30, 2001]
11.1
Computation of Net Income per Share (included in
Note N of the Notes to Consolidated Financial Statements)
Subsidiaries
99.1
Press Release dated September 21, 1999.
[Incorporated by reference to the Report on Form 8-K, filed September 24,
1999]
(b)
Reports on Form 8-K.
USANA filed no current reports on Form 8-K during
the quarter ended December 29, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature
Title
Date
/s/ Myron W.
Wentz
Chairman, President (Principal Executive Officer)
March 20, 2002
Myron W. Wentz, PhD
/s/ Ronald S.
Poelman
Director
March 20, 2002
Ronald S. Poelman
/s/ Robert
Anciaux
Director
March 20, 2002
Robert Anciaux
/s/ Denis E.
Waitley
Director
March 20, 2002
Denis E. Waitley, PhD
/s/ David A.
Wentz
Director
March 20, 2002
David A. Wentz
/s/ Jerry g.
Mcclain
Director
March 20, 2002
Jerry G. McClain
/s/ Gilbert
A. Fuller
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
March 20, 2002
Gilbert A. Fuller
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
USANA Health Sciences, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of USANA
Health Sciences, Inc. and Subsidiaries (the Company) as of December 30, 2000
and December 29, 2001 and the related consolidated statements of earnings,
stockholders’ equity and cash flows for each of the three years in the period
ended December 29, 2001. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of USANA
Health Sciences, Inc. and Subsidiaries as of December 30, 2000 and December 29,
2001 and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 29, 2001,
in conformity with accounting principles generally accepted in the United
States of America.
USANA
HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes
are an integral part of these statements.
CONSOLIDATED
STATEMENTS OF EARNINGS
The accompanying notes
are an integral part of these statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Years
ended January 1, 2000, December 30, 2000 and December 29, 2001
The accompanying notes
are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Non-cash activities
During 1999, the Company
repurchased shares of common stock from a related party for $23,556 and
settlement of
a $531 note owed to the
Company from the related party.
During 2000, the Company
sold and disposed of property and equipment in relation to the closing of the
United Kingdom
operations for a loss of
$1,811 that was charged against the restructuring provision.
During 2001, the Company
prepaid certain operating lease obligations by transferring to the lessor
equipment with a
book value of $428.
The accompanying notes
are an integral part of these statements.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except per share data)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial statements
follow.
1. Financial
statement presentation
The accounting and reporting policies of USANA Health
Sciences, Inc. and Subsidiaries (the Company) conform with accounting
principles generally accepted in the United States of America (US GAAP) and
general practices in the manufacturing industry.
2. Principles of consolidation
The consolidated financial statements include the
accounts and operations of USANA Health Sciences, Inc. and its wholly owned
subsidiaries in Canada, Australia, New Zealand, the United Kingdom, Hong Kong
and Japan. All significant intercompany accounts and transactions have been
eliminated in consolidation.
3. Business activity
The Company develops and manufactures nutritional,
personal care and weight management products that are distributed through a
network marketing system throughout the United States, Canada, Australia, New
Zealand, the United Kingdom hereinafter includes the Netherlands), Hong Kong
and Japan. The Company began processing
orders from its Japan office in October 2001.
Additionally, the Company supports a direct export program into both the
United Kingdom and Japan. All United
Kingdom operations are serviced from the United States.
4. Fiscal year
The Company operates on a 52-53 week year, ending on
the Saturday closest to December 31.
Fiscal years 1999, 2000 and 2001 were 52-week years. Fiscal year 1999 covered the period January
3, 1999 to January 1, 2000 (hereinafter 1999). Fiscal year 2000 covered the
period January 2, 2000 to December 30, 2000 (hereinafter 2000). Fiscal year 2001 covered the period December
31, 2000 to December 29, 2001 (hereinafter 2001).
5. Cash and cash equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
6. Internal software development costs
Software development costs for internally used
software are capitalized beginning when adequate funds are committed and
technological feasibility for the project is established up to the time the
product is ready for use. Amortization
of capitalized costs begins when the software is ready for its intended use and
after substantially all tests to determine whether the software is operational
have been completed. Internally
developed software is amortized over 3-5 years.
7. Inventories
Inventories are stated at the lower of cost or market using
the first-in, first-out method.
8. Depreciation and amortization
Depreciation is provided in
amounts sufficient to relate the cost of depreciable assets to operations over
the estimated useful lives. Leasehold
improvements are amortized over the shorter of the life of the respective lease
or the service life of the improvements. The straight-line method of
depreciation and amortization is followed for financial reporting purposes.
Maintenance, repairs and renewals, which neither materially add to the value of
the property nor appreciably prolong its life, are charged to expense as
incurred. Gains or losses on
dispositions of property and equipment are included in earnings. The Company capitalizes assets with a cost
in excess of one thousand dollars.
9. Revenue recognition and deferred revenue
The Company receives payment for
the sale of products at the time Associates and Preferred Customers place
orders. Sales are recorded when the
product is shipped and title passes to the customer. Payments received for
unshipped products are recorded as deferred revenue and are included in other
current liabilities.
10. Income taxes
The Company utilizes the
liability method of accounting for income taxes. Under the liability method, deferred income tax assets and
liabilities are provided based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the currently
enacted tax rates in effect for the years in which these differences are
expected to reverse. Deferred tax
expense or benefit is the result of changes in deferred tax assets and
liabilities. An allowance against
deferred tax assets is recorded in whole or in part when it is more likely than
not that such tax benefits will not be realized.
11. Product return policy
All returned product within the
first 30 days of purchase will be refunded at 100 percent of the sales price to
all non-Associate customers. This 30 day return policy is offered to Associates
only on their first order. All other
returned product that is unused and resalable will be refunded up to one year
from the date of purchase at 100 percent of the sales price less a 10 percent
restocking fee. Returned product that
was damaged during shipment to the customer is 100 percent refundable. Return of product by an Associate other than
that which was damaged at the time of receipt will constitute cancellation of
the distributorship according to the terms of the Associate Agreement. Product
returns have not been significant.
12. Research and development
Research and development costs
are charged to expense as incurred.
13. Earnings per share
Basic earnings per common share
(EPS) are based on the weighted average number of common shares outstanding
during each period. Diluted earnings
per common share are based on shares outstanding (computed as under basic EPS)
and potentially dilutive common shares.
Potential common shares included in the diluted earnings per share
calculation include in-the-money stock options granted but not exercised.
14. Fair value of financial instruments
The carrying value of the Company’s cash and cash
equivalents, accounts receivable, payables and line of credit approximate fair
values due to the short-term maturity of the instruments. The carrying value of long-term obligations
approximates the fair value based on the effective interest rates compared to
current market rates.
15. Translation of foreign currencies
The Company’s foreign subsidiaries’ asset and
liability accounts, which are originally recorded in the appropriate local
currency, are translated for consolidated financial reporting purposes, into
U.S. dollar amounts at period-end exchange rates. Revenue and expense accounts are translated at the weighted-average
rates for the period. Foreign currency
translation adjustments are accumulated as a component of other comprehensive
income (loss).
16. Common stock
The Company follows the practice of recording amounts
received upon the exercise of options by crediting common stock and additional
paid in capital. No charges are
reflected in the consolidated statements of earnings as a result of the grant
or exercise of stock options. The
Company realizes an income tax benefit from the exercise of certain stock
options. This benefit results in a decrease in current income taxes payable and
an increase in common stock and additional paid in capital.
17. Segment
information
The Company’s operations involve
a single industry segment; the development, manufacturing and distribution of
nutritional,
personal care and weight
management products. The Company
operates in five geographic segments.
No Associate accounted
for more than ten percent of net
sales for the years ended January 1, 2000, December 30, 2000 or December 29,
2001.
18. Use of estimates
The preparation of financial
statements in conformity with US GAAP requires management to make estimates and
assumptions
that affect the amounts reported
in the consolidated financial statements and the related notes. Actual results
could differ from
those estimates.
19. Foreign currency contracts
Gains and losses on forward and
option contracts that qualify as hedges are deferred and recognized as an
adjustment of the carrying amount of the hedged asset, liability, or
identifiable foreign currency firm commitment.
Gains and losses on foreign currency exchange and option contracts that
do not qualify as hedges are recognized in income based on the fair market
value of the contracts.
20. Certain reclassifications
Certain nonmaterial
reclassifications have been made to the 1999 financial statements to conform to
the presentation for fiscal years 2000 and 2001. Specifically, the financial
results for any quarter and year ended within this report, as reported, are
adjusted to reflect the Financial Accounting Standards Board guidelines on
revenue recognition pursuant to Emerging Issues Task Force No 00-10 (“EITF
00-10”). Under EITF 00-10 guidelines,
historical and future revenue relating to amounts billed to a customer for
shipping and handling should be classified as revenue. The corresponding expenses are reported as
cost of sales. Historically, USANA
reported freight income and expense as a net amount within selling, general and
administrative expense.
NOTE B -
INVENTORIES
Inventories
consist of the following:
The history of the provision for inventory obsolescence is as follows:
NOTE C - PREPAID EXPENSES AND OTHER
CURRENT ASSETS
Prepaid expenses and other current assets consist of
the following:
NOTE D - PROPERTY AND EQUIPMENT
Cost of property and equipment and their astimated
useful lives as follows:
NOTE E - LONG TERM DEBT AND LINE OF
CREDIT
During 1999, the Company entered into agreements with
a financial institution to provide up to $25,000 in secured credit facilities
(“Credit Facilities”) consisting of a $10,000 5-year term loan and a $15,000
3-year revolving line of credit. The
Credit Facilities were amended in March of 2001. The amended Credit Facilities reduced the revolving line of
credit to $12,500 and did not require the Company to make quarterly principal payments
on the term loan for the next five quarters.
Four principal payments of $500 per quarter will
commence on March 1, 2002, and seven principal payments of $857 will commence
on March 1, 2003, resulting in full repayment of the term loan on September 1,
2004. The term loan also requires
quarterly interest payments at the London Interbank Offered Rate (LIBOR) plus a
margin adjusted by features specified in the Credit Facilities or, at the
option of the Company, the Prime Rate plus a margin adjusted by features
specified in the Credit Facilities. At
December 29, 2001, the interest rate in effect for the $8,000 outstanding on
the term loan was 4.3875%.
Maturities of long-term debt are as follows:
At December 29, 2001, the Company had $8,402 available
under the line of credit, which expires September 1, 2002. The interest rate is computed at the bank’s
Prime Rate or LIBOR adjusted by features specified in the Credit
Facilities. The Company may choose to
borrow at the bank’s publicly announced Prime 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 or more for
specific periods ranging from one to six months, at LIBOR plus a margin
specified in the Credit Facilities. At
December 29, 2001, the interest rate on the $4,098 outstanding on the revolving
line of credit was 4.103% using both LIBOR and Prime Rate features.
Real estate, receivables, inventories and equipment
secure the Credit Facilities. The
amended Credit Facilities also prohibit all stock repurchases. The amended Credit Facilities contain
restrictive covenants requiring the Company to maintain certain financial
ratios. As of December 29, 2001, the
Company was in compliance with the covenants specified in the amended Credit
Facilities.
NOTE F - OTHER CURRENT LIABILITIES
Other current liabilities consist
of the following:
NOTE G - RESTRUCTURING AND IMPAIRMENT
Restructuring
The Company recorded a restructuring charge and
reserve totaling $2,700 ($1,700 after tax) in the third quarter of 1999. The restructuring charge included 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. Approximately $448 and
$2,252 were charged against the reserve in 1999 and 2000, respectively.
All activities associated with the Company’s
restructuring initiative were completed during 2000.
Impairment
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 off the remaining book value of
its custom network marketing system totaling $1,700 ($1,000 after tax) in the
third quarter of 1999. This charge was
the result of the Company’s decision to move to anew custom network marketing
system.
NOTE H - INCOME TAXES
Income tax expense (benefit)
consists of the following:
The income tax provision reconciled to the tax
computed at the federal statutory rate of 35 percent for 1999,
and 34 percent for 2000 and 2001 is as follows:
Deferred tax assets and liabilities consist of the
following:
A valuation allowance of $979 was
provided for the foreign tax credit carryforward because management believes it
is more likely than not that it will not be recovered prior to expiration. The $979 carryforward is comprised of $643
that will expire in three years, $218 that will expire in four years, and $118
that will expire in five years.
NOTE I - COMMITMENTS AND CONTINGENCIES
1. Operating leases
The Company currently conducts
its Canada, Australia, New Zealand, Hong Kong and Japan operations in leased
facilities. Each of the facility lease agreements is a
noncancelable operating lease and expire through 2004. The Company utilizes
equipment under noncancelable operating
leases expiring through 2006. The
minimum rental commitments under operating leases at December 29, 2001 are as
follows:
The leases generally provide that property taxes,
insurance, and maintenance expenses are the responsibility of the Company. It
is expected that in the normal course of business, operating leases that
expire will be renewed or replaced by leases on other properties. The total
rent expense for the years ended January 1, 2000, December 30, 2000, and
December 29, 2001 was approximately
$545, $487 and $1,895, respectively.
2. Contingencies
The Company is involved in
various lawsuits and disputes arising in the normal course of business. In the opinion of management, based upon advice of counsel, the ultimate outcome of
these lawsuits will not have a material impact on the Company’s financial position or results of operations.
3. Employee Benefit Plan
The Company has an employee
benefit plan under Section 401(k) of the Internal Revenue Code. This plan covers employees who are at least 18 years of age and have been
employed by the Company longer than three months. The Company makes matching contributions of 50 cents on each one
dollar of contribution up to six percent of the participating employees
compensation. In addition, the Company
may make a discretionary contribution based on earnings. The Company’s matching contributions vest at
25 percent per year beginning with the first year. Total contributions by the Company to the plan for the years
ended January 1, 2000, December 30, 2000, and December 29, 2001 were $245,
$221, and $218, respectively.
4. Foreign currency contracts
In order to reduce the impact of
changes in foreign exchange rates on consolidated results of operations and
foreign currency denominated cash
flows, the Company has historically been a party to various forward exchange
and option contracts. At no time during
the year ended December 29, 2001, was the Company party to any forward exchange
or option contracts.
NOTE J - STOCK OPTIONS
Under the Company’s Long-Term
Stock Investment and Incentive Plan (the Plan), 4,000 shares have been reserved
for grant. Accordingly, the Board of Directors has approved the granting of
options under the Plan as follows:
As of December 29, 2001, Company directors, officers
and key employees have been granted options to acquire 3,472 shares of common stock that vest periodically through
June 2006. The options have been
granted at prices ranging from $1.53 to $15.48 per share, which were the market prices of the Company’s shares on
the dates granted. The options expire upon the earlier of an expiration date fixed by the committee
responsible for administering the Plan or ten years from the date of grant.
The Company has adopted only the disclosure provisions
of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS
123). Therefore, the Company continues
to account for stock based compensation under
Accounting Principles Board Opinion No. 25, under which no compensation
cost has been recognized. Had
compensation cost for the stock based
compensation been determined consistent with SFAS 123, the Company’s net
earnings and earnings per share would have been changed to the following pro
forma amounts:
The fair value of these options was estimated at the
date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions;
expected volatility of 62 percent for 1999, 63 percent for 2000, and 68 percent
for 2001; average risk-free interest
rate of 5.50 percent for 1999, 6.46 percent for 2000 and 6.38 percent for 2001;
average expected life is equal to the
actual life for 1999, 2000, and 2001.
Dividends were assumed as not being paid during the period of calculation.
The weighted- average fair value of options granted was $9.34, $4.74, and $2.11
in 1999, 2000 and 2001, respectively.
Option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Also, the
Company’s employee stock options have characteristics
significantly different from those of traded options including long-
vesting schedules and changes in the subjective input
assumptions that can materially affect the fair value estimate. Management
believes the best assumptions available were used to
value the options and the resulting option values are reasonable.
Changes in the Company’s stock options are as follows:
Additional information about stock options outstanding
and exercisable at December 29, 2001 is summarized as follows:
NOTE K - SEGMENT INFORMATION
The Company has five geographic operating segments.
Since the second quarter of 2000, the United Kingdom market has been serviced from the United States and is now
considered a part of the domestic operating segment of the Company. Accordingly, all previously reported financial information for the United
Kingdom has been included in the domestic segment for comparability urposes.
Additionally, the Company has a direct export program for customers in
Japan. These results are also
incorporated in the domestic
segment. The Japan segment contains all
the results from local operations and began during 2001.
The Company’s segments are based on operating
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.
Interest income and expense as well as
income taxes, 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 years ended 1999, 2000, and 2001 is listed below:
(1) Unallocated
and Other includes certain corporate items and eliminations that are not
allocated to the operating segments.
NOTE L - RELATED PARTY TRANSACTIONS
The Company’s President, CEO and Chairman of the
Board, Myron W. Wentz, is the sole beneficial owner of the single largest shareholder of the Company, Gull
Holdings, Ltd. Dr. Wentz has devoted much of his personal time, expertise
and resources to a number of business
and professional activities outside of the Company.
The most significant of these is the ownership and
operation of Sanoviv. Dr. Wentz
describes Sanoviv as a unique, fully
integrated health and wellness center. Sanoviv is located near Rosarito,
Mexico, and is owned in equal shares by Dr. Wentz and his son, David, an
executive officer and director of the Company. Dr. Wentz is sole
administrator of Sanoviv. USANA has periodically advanced funds to pay expenses
incurred by Dr. Wentz for Sanoviv and has provided certain services for
Sanoviv. These expenses and the value of the services rendered by USANA totaled
approximately $445 in 1999, $337 in 2000, and $87 in 2001 and were billed to
and reimbursed by Dr. Wentz. As of December 29, 2001, there were no
outstanding amounts due to USANA from Sanoviv or Dr. Wentz. USANA has no
commitment or obligation to continue to provide additional funding or support
to Sanoviv.
On September 21, 1999, USANA completed the
repurchase of 2,650 shares of its common stock from Gull Holdings, Ltd. An
earlier purchase of 300 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
45.7% of the issued and outstanding capital stock of USANA as of
January 1, 2000. The transactions
were privately negotiated and approved by the independent directors of USANA.
The aggregate purchase price of the 300 and 2,650 shares was $23,556 and
settlement of a $531 note owed the Company. During 2000, Gull
Holdings, Ltd. purchased 45 common shares of USANA in the open market.
During 2001, Gull Holdings, Ltd. purchased an additional 92 common shares
of USANA in the open market, bringing its ownership of USANA to 49.5% as of
December 29, 2001.
Denis E. Waitley, Ph.D., a director of USANA, has
served as a consultant to and spokesperson for USANA since September 1996.
During 1999, 2000, and 2001 USANA paid consulting fees and royalties totaling
$151, $171, and $158, respectively, to Dr. Waitley. The consulting
contract between USANA and Dr. Waitley pays him $150 per year and expires
in September 2003.
NOTE M - QUARTERLY FINANCIAL RESULTS (Unaudited)
Summarized quarterly financial information for fiscal
years 2000 and 2001 is as follows:
NOTE N -
EARNINGS PER SHARE
The following data was used in computing earnings per
share:
NOTE O -
SUBSEQUENT EVENTS
On March 21, 2002, USANA entered into an agreement
with USANA Acquisition Corp. (“UAC”), a Utah corporation wholly owned by Gull
Holdings, under which USANA will sell and UAC will purchase substantially all
of the operating assets and assume substantially all of the liabilities of
USANA (the sale and assignment is referred to as the “Transaction”). The purchase price for the acquired assets
is approximately $25 million. In
addition to the assumption of liabilities, the consideration paid by UAC will
be (1) assigning for redemption, at a price of $1.60 per share, 4,786,282
shares of USANA common stock owned by Gull Holdings, (a total value of
approximately $7.7 million), and (2) issuing a promissory note payable to USANA
in the principal amount of $5.0 million.
The employees, Associates and customers of USANA will be assumed by UAC
and UAC will change its name to USANA Health Sciences, Inc. and carry on the
business currently conducted by the Company.
The Company will change its name to Innova Ventures, Inc. and will
follow a business plan to pursue acquisitions and similar transactions. For a period of three years following the
closing of the Transaction, Innova would be prohibited from competing with UAC. The Transaction is subject to shareholder
approval.