UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended July 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number: 0-21116
______________________
USANA HEALTH SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Utah 87-0500306
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3838 West Parkway Blvd., Salt Lake City, Utah 84120
(Address of principal executive offices, Zip Code)
(801) 954-7100
(Registrant's telephone number, including area code)
USANA, INC.
-----------
(Former name)
-------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of August
8, 2000 was 9,682,637.
In June 2000, the Company adopted an amendment to its Articles of Incorporation
to increase the par value of its common stock from no par to $0.001 per share
(see Exhibit 3.3). Previously reported numbers contained in this quarterly
report have been restated to reflect the change in par value.
USANA HEALTH SCIENCES, INC.
FORM 10-Q
For the Quarterly Period Ended July 1, 2000
INDEX
Page
----
PART I . FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets............................................................................. 3
Consolidated Statements of Earnings - Quarter Ended..................................................... 4
Consolidated Statements of Earnings - Six Months Ended.................................................. 5
Consolidated Statements of Stockholders' Equity......................................................... 6
Consolidated Statements of Cash Flows................................................................... 7-8
Notes to Consolidated Financial Statements.............................................................. 9-12
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 13-19
Item 3 Quantitative and Qualitative Disclosures About Market Risk................................................ 19
PART II. OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds................................................................. 19
Item 4 Submission of Matters to a Vote of Security Holders....................................................... 20
Item 5 Other Information......................................................................................... 21
Item 6 Exhibits and Reports on Form 8-K.......................................................................... 21-22
Signatures ....................................................................................................... 23
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
January 1, July 1,
2000 2000
------------ ------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 1,411 $ 3,956
Accounts recievable, net 534 524
Income taxes receivable 302 2,283
Current maturities of notes receivable 5 -
Inventories, net (Note A) 9,855 11,924
Prepaid expenses 1,536 1,810
Deferred income taxes 1,405 1,001
------------ ------------
Total current assets 15,048 21,498
Property and Equipment, net (Note B) 21,528 16,953
Other Assets 197 193
------------ ------------
$ 36,773 $38,644
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Checks written in excess of cash in bank $ 1,416 $ 957
Current maturities of long-term debt 2,000 2,000
Accounts payable 4,060 5,368
Other current liabilites (Note C) 5,201 5,632
Line of credit 1,400 6,150
Restructuring provision (Note E) 2,252 164
------------ ------------
Total current liabilities 16,329 20,271
Deferred Income Taxes 25 99
Long-term Debt, less current maturities 7,500 6,500
Stockholders' Equity (Note D)
Common stock, $0.001 par value; authorized 50,000 shares, issued and
oustanding 10,169 as of January 1, 2000 and 9,683 as of July 1, 2000 10 10
Additional paid-in capital 2,867 2,339
Retained earnings 10,078 9,491
Accumulated other comprehensive loss (36) (66)
------------ ------------
Total stockholders' equity 12,919 11,774
------------ ------------
$ 36,773 $38,644
============ ============
The accompanying notes are an integral part of these statements.
3
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
Quarter Ended
-----------------------------
(unaudited)
July 3, July 1,
1999 2000
------------- -------------
Net Sales $ 32,478 $ 30,112
Cost of Sales 6,340 8,112
------------- -------------
Gross profit 26,138 22,000
Operating Expenses:
Associate incentives 14,437 11,947
Selling, general and administrative 7,741 8,743
Research and development 329 364
------------- -------------
Total operating expenses 22,507 21,054
------------- -------------
Earnings from Operations 3,631 946
Other Income (Expense):
Interest income 68 32
Interest expense - (328)
Other, net (78) 43
------------- -------------
Total other income (expense) (10) (253)
------------- -------------
Earnings before Income Taxes 3,621 693
Income Taxes 1,377 277
------------- -------------
Net earnings $ 2,244 $ 416
============= =============
Earnings per Common Share (Note D)
Basic $ 0.17 $ 0.04
Diluted $ 0.17 $ 0.04
Weighted Average Common and Dilutive Common Equivalent
Shares Oustanding (Note D)
Basic 12,946 9,733
Diluted 13,252 9,847
The accompanying notes are an integral part of these statements.
4
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
Six Months Ended
-----------------------------
(unaudited)
July 3, July 1,
1999 2000
------------- -------------
Net Sales $ 63,801 $ 60,648
Cost of Sales 12,724 14,527
------------- -------------
Gross profit 51,077 46,121
Operating Expenses:
Associate incentives 28,346 24,710
Selling, general and administrative 14,985 17,177
Research and development 684 792
------------- -------------
Total operating expenses 44,015 42,679
------------- -------------
Earnings from Operations 7,062 3,442
Other Income (Expense):
Interest income 122 51
Interest expense (12) (570)
Other, net (86) 41
------------- -------------
Total other income (expense) 24 (478)
------------- -------------
Earnings before Income Taxes 7,086 2,964
Income Taxes 2,714 1,186
------------- -------------
Net earnings $ 4,372 $ 1,778
============= =============
Earnings per Common Share (Note D)
Basic $ 0.34 $ 0.18
Diluted $ 0.33 $ 0.18
Weighted Average Common and Dilutive Common Equivalent
Shares Oustanding (Note D)
Basic 12,998 9,891
Diluted 13,404 10,040
The accompanying notes are an integral part of these statements.
5
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended July 3, 1999 and July 1, 2000
(in thousands)
(unaudited)
Accumulated
Additional Other
Common Stock Paid-in Retained Comprehensive
Shares Value Capital Earnings Income (loss) Other Total
---------- --------- --------- ---------- --------------- --------- ---------
For the Six Months Ended July 3, 1999
Balance at January 2, 1999 13,047 $ 13 $ 9,118 $ 21,668 $ (182) $ (531) $ 30,086
Comprehensive Income -
Net earnings - - - 4,372 - - 4,372
Foreign currency translation adjustment - - - - 177 - 177
---------
Comprehensive income 4,549
Advances to Related Party - - - - - (3,418) (3,418)
Common Stock Retired and Advances to
Related Party (300) - (846) (2,267) - 3,113 -
Common Stock Issued Under Stock Option
Plan, including tax benefit of $98 40 - 193 - - - 193
---------- --------- --------- ---------- --------------- --------- ---------
Balance at July 3, 1999 12,787 $ 13 $ 8,465 $ 23,773 $ (5) $ (836) $ 31,410
========== ========= ========= ========== =============== ========= =========
For the Six Months Ended July 1, 2000
Balance at January 1, 2000 10,169 $ 10 $ 2,867 $ 10,078 $ (36) $ - $ 12,919
Comprehensive Income -
Net earnings - - - 1,778 - - 1,778
Foreign currency translation adjustment - - - - (30) - (30)
---------
Comprehensive income - - - - - - 1,748
Shares Repurchased (531) - (625) (2,365) - - (2,990)
Common Stock Issued Under Stock Option
Plan, including tax benefit of $29 45 - 97 - - - 97
---------- --------- --------- ---------- --------------- --------- ---------
Balance at July 1, 2000 9,683 $ 10 $ 2,339 $ 9,491 $ (66) $ - $ 11,774
========== ========= ========= ========== =============== ========= =========
The accompanying notes are an integral part of these statements.
6
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
(unaudited)
Six Months Ended
----------------------------
July 3, July 1,
1999 2000
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net Earnings $ 4,372 $ 1,778
Adjustments to reconcile net earnings to net cash provided by
Operating Activities
Depreciation and amortization 2,236 2,119
Gain on sale of property and equipment - (4)
Deferred income taxes (146) 472
Provision for inventory obsolescence 204 (54)
Provision for losses on receivables (34) 20
Changes in operating assets and liabilities:
Accounts receivable (910) 5
Inventories 849 (2,259)
Income tax receivable - (2,017)
Prepaid expenses and other assets (834) (561)
Accounts payable (1,335) 1,321
Other current liabilities 756 1,315
Restructuring provision - (268)
------------ ------------
Total Adjustments 786 89
------------ ------------
Net cash provided by operating activities 5,158 1,867
------------ ------------
Cash flows from investing activities
Receipts on notes receivable 14 5
Purchases of property and equipment (2,365) (2,373)
Proceeds from the sale of property and equipment 22 2,772
------------ ------------
Net cash used in investing activities (2,329) 404
------------ ------------
(Continued)
The accompanying notes are an integral part of these statements.
7
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
(unaudited)
Six Months Ended
----------------------------
July 3, July 1,
1999 2000
------------ ------------
Cash flows from financing activities
Decrease in cash overdraft $ - $ (451)
Net proceeds from the sale of common stock 95 69
Repurchase of common stock - (2,989)
Increase in notes receivable - related party (3,418) -
Principal payments of long-term debt - (1,000)
Increase (decrease) in line of credit - 4,750
------------ ------------
Net cash (used in) provided by financing activities (3,323) 379
Effect of Exchange Rate Changes on Cash 111 (105)
------------ ------------
Net increase in cash and cash equivalents (383) 2,545
Cash and Cash Equivalents Beginning of Year 2,617 1,411
------------ ------------
Cash and Cash Equivalents End of Period $ 2,234 $ 3,956
============ ============
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------
Cash paid during the year for:
Interest $ 13 $ 531
Income taxes 3,154 3,175
Non-cash operating activities:
Loss on sale and disposition of plant and equipment
against the restructuring and impairment provision $ - $ 1,820
The accompanying notes are an integral part of these statements.
8
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
Basis of Presentation
The unaudited interim consolidated financial information of USANA Health
Sciences, Inc. (formerly USANA, Inc.) and Subsidiaries (the "Company" or
"USANA") has been prepared in accordance with Article 10 of Regulation S-X
promulgated by the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
the accompanying interim consolidated financial information contains all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the Company's financial position as of July 1, 2000, and results of
operations for the quarters and six months ended July 1, 2000 and July 3, 1999.
These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended January 1, 2000. The results of
operations for the quarter and six months ended July 1, 2000 may not be
indicative of the results that may be expected for the fiscal year ending
December 30, 2000.
NOTE A - INVENTORIES
Inventories consist of the following:
January 1, July 1,
2000 2000
------------------- -------------------
Raw materials $ 2,344 $ 2,842
Work in Process 1,945 1,549
Finished Goods 6,388 8,297
------------------- -------------------
10,677 12,688
Less allowance for inventory reserve 822 764
------------------- -------------------
$ 9,855 $11,924
=================== ===================
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
January 1, July 1,
2000 2000
------------------- -------------------
Buildings $ 7,422 $ 5,663
Laboratory and production equipment 2,926 3,120
Computer equipment and software 11,629 12,045
Furniture and fixtures 2,132 1,904
Automobiles 323 320
Leasehold improvements 769 685
Land improvements 542 289
------------------- -------------------
25,743 24,026
Less accumulated depreciation and amortization 9,158 10,733
------------------- -------------------
16,585 13,293
Land 2,548 1,773
Deposits and projects in process 2,395 1,887
------------------- -------------------
$21,528 $16,953
=================== ===================
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(in thousands, except per share data)
(unaudited)
NOTE C - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
January 1, July 1,
2000 2000
------------------- -------------------
Associate incentives $1,201 $1,185
Accrued compensation 772 738
Sales taxes 692 1,209
Income taxes 564 -
Accrued Associate promotions 478 675
Deferred revenue 35 172
All other 1,459 1,653
------------------- -------------------
$5,201 $5,632
=================== ===================
NOTE D - COMMON STOCK AND EARNINGS PER SHARE
The Company adopted an amendment to its Articles of Incorporation to
increase the par value of its common stock from no par to $0.001 per share
during the second quarter of 2000 (see Exhibit 3.3). Previously reported
numbers contained in this quarterly report have been restated to reflect the
change in par value.
Basic earnings per share are based on the weighted average number of shares
outstanding for each period. Shares redeemed have been included in the
calculation of weighted average shares outstanding for basic earnings per share.
Diluted earnings per common share are based on shares outstanding (computed
under basic EPS) and potentially dilutive shares. Potential shares included in
dilutive earnings per share calculations include stock options granted but not
exercised.
For the Quarter Ended
----------------------------
July 3, July 1,
1999 2000
------------ ------------
Earnings available to common shareholders $ 2,244 $ 416
Basic EPS
- ----------------------------------------------------------------
Shares
Common shares outstanding entire period 13,047 10,169
Weighted average common shares:
Issued during period 31 30
Canceled during period (132) (466)
------------ ------------
Weighted average common shares outstanding during period 12,946 9,733
============ ============
Earnings per common share - basic $ 0.17 $ 0.04
============ ============
Diluted EPS
- ----------------------------------------------------------------
Shares
Weighted average shares outstanding during period - basic 12,946 9,733
Dilutive effect of stock options 306 114
------------ ------------
Weighted average shares outstanding during period - diluted 13,252 9,847
============ ============
Earnings per common share - diluted $ 0.17 $ 0.04
============ ============
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(in thousands, except per share data)
(unaudited)
NOTE D - COMMON STOCK AND EARNINGS PER SHARE - (continued)
Options to purchase 1,994 and 540 shares of stock were not included in the
computation of EPS for the quarters ended July 1, 2000 and July 3, 1999,
respectively, because their exercise price was greater than the average market
price of the shares.
For the Six Months Ended
----------------------------
July 3, July 1,
1999 2000
------------ ------------
Earnings available to common shareholders $ 4,372 $ 1,778
Basic EPS
- ----------------------------------------------------------------
Shares
Common shares outstanding entire period 13,047 10,169
Weighted average common shares:
Issued during period 17 15
Canceled during period (66) (293)
------------ ------------
Weighted average common shares outstanding during period 12,998 9,891
============ ============
Earnings per common share - basic $ 0.34 $ 0.18
============ ============
Diluted EPS
- ----------------------------------------------------------------
Shares
Weighted average shares outstanding during period - basic 12,998 9,891
Dilutive effect of stock options 406 149
------------ ------------
Weighted average shares outstanding during period - diluted 13,404 10,040
============ ============
Earnings per common share - diluted $ 0.33 $ 0.18
============ ============
Options to purchase 1,674 and 320 shares of stock were not included in the
computation of EPS for the six months ended July 1, 2000 and July 3, 1999,
respectively, because their exercise price was greater than the average market
price of the shares.
The Company's board of directors approved an open market share repurchase
program in 2000 that could include up to one million shares of its outstanding
common stock. During the first six months of 2000, the Company had repurchased
531 shares of common stock under this program.
NOTE E--RESTRUCTURING
The Company recorded a restructuring charge and reserve totaling $2,700
($1,700 or $0.13 per share, after tax) in the third quarter of 1999. The
Company sold its facility and related assets in the United Kingdom during the
second quarter of 2000 and expects that all activities associated with the
Company's restructuring initiative will be completed by the end of the third
quarter of 2000. As of July 1, 2000, approximately $2.5 million was charged
against the restructuring reserve.
NOTE F--SEGMENT INFORMATION
The Company has five operating segments. Since the beginning of the second
quarter of 2000, the Company's United Kingdom market has been serviced from the
United States and is no longer considered an operating segment of
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(in thousands, except per share data)
(unaudited)
NOTE F--SEGMENT INFORMATION - (continued)
the Company. The Company's operating 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 and includes a management fee charged by the domestic operation to
each of the foreign entities. All other intersegment transactions are eliminated
from the following segment information. Interest revenues and expenses, income
taxes and equity in the earnings of subsidiaries, while significant, are not
included in the Company's determination of segment profit or loss in assessing
the performance of a segment.
Financial information summarized by geographic segment for the six months
ended July 3, 1999 and July 1, 2000 is listed below:
Revenues Earnings
from before
External Income Long-lived Total
Customers Taxes Assets Assets
------------ ------------ ------------ ------------
Six Months ended July 3, 1999:
Domestic $ 34,046 $ 3,040 $ 20,868 $ 31,613
Canada 14,815 2,730 235 2,230
Australia - New Zealand 13,573 2,354 1,017 4,190
United Kingdom 1,367 (1,036) 842 2,105
Hong Kong - - - -
All Others - (2) - 6
------------ ------------ ------------ ------------
Totals $ 63,801 $ 7,086 $ 22,962 $ 40,144
============ ============ ============ ============
Revenues Earnings
from before
External Income Long-lived Total
Customers Taxes Assets Assets
------------ ------------ ------------ ------------
Six Months ended July 1, 2000:
------------ ------------ ------------ ------------
Domestic $ 32,627 $ 524 $ 15,751 $ 29,395
Canada 14,248 2,441 233 3,777
Australia - New Zealand 9,738 210 642 3,242
United Kingdom 574 (107) - -
Hong Kong 3,461 (195) 520 2,177
All Others - 91 - 53
------------ ------------ ------------ ------------
Totals $ 60,648 $ 2,964 $ 17,146 $ 38,644
============ ============ ============ ============
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Consolidated
Financial Statements and Notes thereto contained in this quarterly report.
General
USANA develops and manufactures high-quality nutritional, personal care and
weight management products. The Company distributes its products through a
network marketing system. Independent distributors in USANA's network are
referred to by the Company as Associates. As of July 1, 2000, the Company had
approximately 103,000 current Associates in the United States, Canada,
Australia, New Zealand, Hong Kong and the United Kingdom. The Company defines a
current Associate as an Associate who has made a purchase in the most recent 12-
month period. The Company also offers a Preferred Customer program specifically
designed for customers who desire to purchase USANA's products for personal
consumption, but choose not to become Associates. As of July 1, 2000, the
Company had approximately 65,000 Preferred Customers.
The Company recently reorganized its product groupings to encompass new
products and a new marketing focus. The Company's three primary product lines
consist of USANA(R) Nutritionals, LEAN Lifelong Foods(TM) and Sense(TM) personal
care products. The USANA Nutritionals product line accounted for approximately
74% of the Company's net sales for the six months ended July 1, 2000. The
Company's top selling products, USANA Essentials and Proflavanol represented
approximately 34% and 14%, respectively, of net sales for the six months ended
July 1, 2000. The LEAN Lifelong Foods product line accounted for approximately
13% of the Company's net sales for the six months ended July 1, 2000. The LEAN
Lifelong Foods product line includes several completely reformulated food
products previously sold under the LEAN or USANA brand names. Nutrimeal(TM) and
Fibergy(R) drink mixes and bars, a LEAN Formula for weight management and
several other related products for healthy diets are now included in the LEAN
Lifelong Foods product line. No other products or product groups accounted for
more than 10% of net sales during the first six months of 2000. Sense is a
completely new line of 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 cells. In addition to its primary
product lines, the Company also sells distributor kits and sales aids, which
accounted for approximately 4% of the Company's net sales for the six months
ended July 1, 2000.
At its annual international convention ("Convention") in the second quarter
of 2000, the Company introduced several new products, including 6 LEAN Lifelong
Foods products, and the new personal care line, Sense. There were approximately
4,000 customers from around the world in attendance. This was the Company's most
successful convention ever with sales of $1.1 million, due largely to the
introduction of the new product lines.
In the first quarter of 2000, the Company introduced a value initiative
that decreased prices on its products by an average of approximately 24%. The
Company believes that the value initiative will make it more successful in
attracting and retaining Associates and Preferred Customers by offering high
quality products and comprehensive customer support services at the lowest
prices in the Company's history.
The fiscal year end of the Company is the Saturday closest to December 31
of each year. Fiscal year 2000 will end on December 30, 2000.
Results of Operations
Quarters Ended July 1, 2000 and July 3, 1999
Net Sales. Net sales decreased 7.3% to $30.1 million for the quarter ended
July 1, 2000, a decrease of $2.4 million from the $32.5 million reported for the
comparable quarter in 1999. The decrease in net sales is the result of:
13
. The value initiative, which reduced prices by an average of 24% and
. A 20% decline in the Associate base in the United States, Canada,
Australia and New Zealand.
The decrease in sales was partially offset by strong enrollments of
Preferred Customers and product sales from the Convention. The Preferred
Customer base increased 75.7% at July 1, 2000 compared to the levels at July 3,
1999. Product sales from the Company's Convention totaled $1.1 million, which
represent the best year ever for Convention product sales.
The following tables illustrate the change in sales and customers by market
for the quarters ended July 3, 1999 and July 1, 2000:
Sales By Market
(in thousands)
Quarter Ended
-------------------------------------------------------------
Change from Percent
Market July 3, 1999 July 1, 2000 Prior Year Change
------ ----------------------------- ----------------------------- ------------- -------------
United States $ 17,662 54.4% $ 16,890 56.1% $ (772) (4.4%)
Canada 7,716 23.7% 6,978 23.2% (738) (9.6%)
Australia-New Zealand 7,100 21.9% 4,688 15.6% (2,412) (34.0%)
Hong Kong - - 1,556 5.1% 1,556 -
------------- ------------- ------------- ------------- -------------
Consolidated $ 32,478 100.0% $ 30,112 100.0% $ (2,366) (7.3%)
============= ============= ============= ============= =============
Current Associates By Market
As of As of Change from Percent
Market July 3, 1999 July 1, 2000 Prior Year Change
------ ----------------------------- ----------------------------- ------------- -------------
United States 60,000 50.9% 48,000 46.6% (12,000) (20.0%)
Canada 30,000 25.4% 24,000 23.3% (6,000) (20.0%)
Australia-New Zealand 28,000 23.7% 23,000 22.3% (5,000) (17.9%)
Hong Kong - - 8,000 7.8% 8,000 -
------------- ------------- ------------- ------------- -------------
Consolidated 118,000 100.0% 103,000 100.0% (15,000) (12.7%)
============= ============= ============= ============= =============
Preferred Customers By Market
As of As of Change from Percent
Market July 3, 1999 July 1, 2000 Prior Year Change
------ ----------------------------- ----------------------------- ------------- -------------
United States 22,000 59.5% 37,000 56.9% 15,000 68.2%
Canada 10,000 27.0% 17,000 26.2% 7,000 70.0%
Australia-New Zealand 5,000 13.5% 10,000 15.4% 5,000 100.0%
Hong Kong - - 1,000 1.5% 1,000 -
------------- ------------- ------------- ------------- -------------
Consolidated 37,000 100.0% 65,000 100.0% 28,000 75.7%
============= ============= ============= ============= =============
14
Total Customers By Market
As of As of Change from Percent
Market July 3, 1999 July 1, 2000 Prior Year Change
------ ----------------------------- ----------------------------- ------------- -------------
United States 82,000 52.9% 85,000 50.6% 3,000 3.7%
Canada 40,000 25.8% 41,000 24.4% 1,000 2.5%
Australia-New Zealand 33,000 21.3% 33,000 19.6% - 0.0%
Hong Kong - - 9,000 5.4% 9,000 -
------------- ------------- ------------- ------------- -------------
Consolidated 155,000 100.0% 168,000 100.0% 13,000 8.4%
============= ============= ============= ============= =============
Cost of Sales. Cost of sales increased 27.9% to $8.1 million for the
quarter ended July 1, 2000, an increase of $1.8 million from the $6.3 million
reported in the comparable quarter in 1999. As a percentage of net sales, cost
of sales increased to 26.9% for the quarter ended July 1, 2000 from 19.5% for
the comparable quarter in 1999. The increase in cost of sales as a percentage of
net sales can be attributed to:
. The value initiative, which reduced prices by an average of 24%,
. Products sold at reduced gross profit margins at the Convention and
. Obsolete inventory disposed of as a result of the introduction of the
new products and product lines.
Associate Incentives. Associate incentives decreased 17.2% to $11.9 million
for the quarter ended July 1, 2000, a decrease of $2.5 million from the $14.4
million reported in the comparable quarter in 1999. As a percentage of net
sales, Associate incentives decreased to 39.7% in the second quarter of 2000
from 44.5% for the comparable quarter in 1999. The decrease in Associate
incentives as a percentage of net sales can primarily be attributed to the value
initiative, which decreased the ratio of sales volume points to the wholesale
price on products purchased. Associate incentives are paid on the amount of
sales volume points generated. To a lesser extent, Associate incentives
decreased as a result of the sales mix and an additional reduction of the ratio
of sales volume points to wholesale price for products sold at the Convention.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 12.9% to $8.7 million for the quarter ended
July 1, 2000, an increase of $1.0 million from the $7.7 million reported for the
comparable quarter in 1999. Selling, general and administrative expenses as a
percentage of net sales increased to 29.0% in the second quarter of 2000 from
23.8% for the comparable quarter in 1999. The increase in selling, general and
administrative expenses can be attributed to:
. Activities associated with the Convention,
. Sales and marketing activities to promote and support the value
initiative,
. Researching and exploring new international opportunities and
. Spending in the Company's newest market, Hong Kong.
Research and Development. Research and development expenses increased 10.6%
to $364,000 for the second quarter of 2000, an increase of $35,000 from the
$329,000 reported for the comparable quarter in 1999. As a percentage of net
sales, research and development expenses increased to 1.2% in the second quarter
of 2000 from 1.0% for the comparable period of 1999. The Company continues to
keep abreast of the latest research in nutrition and degenerative diseases and
is committed to developing new products, reformulating existing products and
maintaining its involvement in numerous clinical studies.
15
Net Earnings. Net earnings decreased 81.5% to $416,000 for the quarter ended
July 1, 2000, a decrease of $1.8 million from the $2.2 million for the
comparable quarter 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 decreased $0.13 to $0.04 for the second quarter of
2000 from $0.17 for the comparable quarter in 1999.
Six Months Ended July 1, 2000 and July 3, 1999
Net Sales. Net sales decreased 4.9% to $60.6 million for the six months
ended July 1, 2000, a decrease of $3.2 million from the $63.8 million reported
for the comparable period in 1999. The reasons for the decrease in net sales
are the same as those for the quarter and are discussed on page 14 in the
quarterly "Results of Operations" section.
The following tables illustrate the change in sales by market for the six
months ended July 3, 1999 and July 1, 2000:
Sales By Market
(in thousands)
Six Months Ended
------------------------------------------------------------- Change from Percent
Market July 3, 1999 July 1, 2000 Prior Year Change
------ ----------------------------- ----------------------------- ------------- -----------
United States $ 35,413 55.5% $ 33,201 54.7% $ (2,212) (6.2%)
Canada 14,815 23.2% 14,248 23.5% (567) (3.8%)
Australia-New Zealand 13,573 21.3% 9,738 16.1% (3,835) (28.3%)
Hong Kong - - 3,461 5.7% 3,461 -
------------- ------------- ------------- ------------- -------------
Consolidated $ 63,801 100.0% $ 60,648 100.0% $ (3,153) (4.9%)
============= ============= ============= ============= =============
Cost of Sales. Cost of sales increased 14.2% to $14.5 million for the six
months ended July 1, 2000, an increase of $1.8 million from the $12.7 million
reported in the comparable period in 1999. As a percentage of net sales, cost
of sales increased to 24.0% for the six months ended July 1, 2000 from 19.9% for
the comparable period in 1999. Reasons for the increase in cost of sales as a
percentage of net sales are the same as those for the quarter and are discussed
on page 15 in the quarterly "Results of Operations" section.
Associate Incentives. Associate incentives decreased 12.8% to $24.7
million for the six months ended July 1, 2000, a decrease of $3.6 million from
the $28.3 million reported in the comparable period in 1999. As a percentage of
net sales, Associate incentives decreased to 40.7% for the six months ended July
1, 2000 from 44.4% for the comparable period in 1999. Reasons for the decrease
in Associate incentives as a percentage of net sales are the same as those for
the quarter and are discussed on page 15 in the quarterly "Results of
Operations" section.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 14.6% to $17.2 million for the six months
ended July 1, 2000, an increase of $2.2 million from the $15.0 million reported
for the comparable period in 1999. Selling, general and administrative expenses
as a percentage of net sales increased to 28.3% for the first six months of 2000
from 23.5% for the comparable six months in 1999. Reasons for the increase in
selling, general and administrative expenses are are the same as those for the
quarter and discussed on page 15 in the quarterly "Results of Operations"
section.
16
Research and Development. Research and development expenses increased 15.8%
to $792,000 for the first six months of 2000, an increase of $108,000 from the
$684,000 reported for the comparable six months in 1999. As a percentage of net
sales, research and development expenses increased to 1.3% in the first six
months of 2000 from 1.1% for the comparable period in 1999.
Net Earnings. Net earnings decreased 59.3% to $1.8 million for the six
months ended July 1, 2000, a decrease of $2.6 million from the $4.4 million for
the comparable period in 1999. Reasons for the decrease in net earnings are are
the same as those for the quarter and discussed on page 16 in the quarterly
"Results of Operations" section.
Diluted earnings per share decreased $0.15 to $0.18 for the first six
months of 2000 from $0.33 for the comparable period in 1999.
Liquidity and Capital Resources
The Company has historically financed its growth with cash flows from
operations. On July 1, 2000, the Company had net working capital of $1.2
million compared to negative net working capital of $1.3 million at January 1,
2000. The change in net working capital during the first six months of 2000 can
be attributed to proceeds received from the sale of plant and equipment in the
United Kingdom and, consequently, a substantial reduction in the restructuring
provision.
The Company does not extend credit to its customers, but requires payment
prior to shipping, which eliminates significant receivables.
The Company invested approximately $2.4 million in property and equipment
during both six month periods reported. Inventory increased to $11.9 million at
July 1, 2000, an increase of $2.0 million from the $9.9 million at January 1,
2000. The increase in inventory can be attributed to building up reserves for
the value initiative, which the Company anticipated would drive up unit volume
requirements and for the new products introduced at our annual convention.
During 1999, the Company entered into agreements with a financial
institution to provide up to $25 million in secured credit facilities consisting
of a $10 million 5-year term loan and a $15 million 3-year revolving line of
credit. The credit facilities contain restrictive covenants requiring the
Company to maintain certain financial ratios. The Company was in compliance with
these covenants on July 1, 2000. As of July 1, 2000, $8.5 million was
outstanding on the 5-year term loan and $6.2 million was outstanding on the line
of credit.
The Company believes that its current cash balance, the available line of
credit, cash provided by operations and potential additional debt financing will
be sufficient to cover its short and long-term needs in the ordinary course of
business. In the event the Company experiences an adverse operating environment
or unusual capital expenditure requirements, additional financing may be
required. There are not any known demands, commitments, events, or uncertainties
not previously discussed at July 1, 2000 that would adversely affect the
Company. There can be no assurance that additional financing, if required, would
be available on favorable terms. The Company may also require or seek additional
financing, including through the sale of its equity securities to finance future
expansion into new markets, capital acquisitions associated with the growth of
the Company and for other reasons. Any financing which involves the sale of
equity securities or instruments convertible into such securities could result
in immediate and possibly significant dilution to existing shareholders.
Outlook
Management believes that sales will increase modestly over the next six
months as a result of new products introduced at the Convention and the expected
launch of a direct export program for consumers in Japan. Products will be
exported to Japan on a personal use basis only, and no resale of products will
be allowed until local operations begin. Direct exporting is expected to
commence in September 2000, with the Company planning to open a Japan-based
operation in the latter half of 2001.
17
Cost of sales and Associate incentives are expected to remain at levels,
relative to net sales, consistent with those reported for the second quarter of
2000.
Selling, general and administrative expenses will continue to be pressured
by sales and marketing efforts to promote the Company's new products and also as
a result of costs to pursue new international opportunities.
Forward-Looking Statements
The statements contained in this Report that are not purely historical are
considered to be "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and Section 21E of the Securities
Exchange Act. These statements represent the Company's expectations, hopes,
beliefs, anticipations, commitments, intentions and strategies regarding the
future. They may be identified by the use of words or phrases such as
"believes," "expects," "anticipates," "should," "plans," "estimates," and
"potential," among others. Forward-looking statements include, but are not
limited to, statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations regarding the Company's financial
performance, revenue and expense levels in the future and the sufficiency of its
existing assets to fund future operations and capital spending needs. Readers
are cautioned that actual results could differ materially from the anticipated
results or other expectations expressed in such forward-looking statements for
the reasons detailed in the Company's Annual Report on Form 10-K, pages 29
through 36. The fact that some of the risk factors may be the same or similar
to the Company's past reports filed with the Securities and Exchange Commission
means only that the risks are present in multiple periods. The Company believes
that many of the risks detailed here and in the Company's SEC filings are part
of doing business in the industry in which the Company operates and competes and
will likely be present in all periods reported. The fact that certain risks are
endemic to the industry does not lessen their significance. The forward-looking
statements contained in this Report are made as of the date of this Report and
the Company assumes no obligation to update them or to update the reasons why
actual results could differ from those projected in such forward-looking
statements. Among others, risks and uncertainties that may affect the business,
financial condition, performance, development and results of operations of the
Company include:
. The Company's dependence upon a network marketing system to distribute
its products;
. High turnover of Associates,
. Activities of its independent Associates;
. Rigorous government scrutiny of network marketing practices;
. Potential effects of adverse publicity regarding nutritional supplements
or the network marketing industry;
. Reliance on key management personnel, including the Company's President,
Chief Executive Officer and Chairman of the Board of Directors, Myron W.
Wentz, Ph.D;
. Extensive government regulation of the Company's products and
manufacturing;
. Risks related to the Company's expansion into international markets;
. Failure of the Company to sustain or manage growth including the failure
to continue to develop new products;
. The possible adverse effects of increased Associate incentives as a
percentage of net sales;
. The Company's reliance on information technology;
18
. The adverse effect of the Company's loss of a high level sponsoring
Associate together with a group of leading Associates in that person's
downline;
. The loss of product market share or Associates to competitors;
. Potential adverse effect of taxation and transfer pricing regulation or
exchange rate fluctuations;
. The Company's reliance on outside suppliers for raw materials;
. The Company's business may be subject to particular intellectual
property risks or
. Manufacturers may be subject to product liability claims and other
manufacturing activity risks.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company conducts its business in several countries and intends to
continue to expand its foreign operations. Earnings are affected by fluctuations
in interest rates, currency exchange rates and other uncertainties inherent in
doing business and selling product in more than one currency. In addition, the
operations of the Company are exposed to significant risks associated with
changes in social, political and economic conditions inherent in foreign
operations, including changes in the laws and policies that govern foreign
investment in countries where it has operations as well as, to a lesser extent,
changes in U.S. laws and regulations relating to foreign trade and investment.
A significant portion of the Company's revenue and expenses are recognized
outside the United States with primarily all inventory purchases transacted in
U.S. dollars from vendors in the United States. The local currency in each
subsidiary is considered the functional currency with all revenue and expenses
translated at weighted average exchange rates for reported periods.
Consequently, the Company's reported sales and earnings are impacted positively
by a weakening and negatively by a strengthening of the U.S. dollar.
The Company cannot estimate the effect exchange rate fluctuations will have
on future business given the uncertainties. However, a hypothetical 10 percent
change in the average foreign currency exchange rates for the six months ended
July 1, 2000, would not have resulted in a significant change in earnings.
To protect against these risks, the Company enters into forward and option
contracts to hedge certain commitments denominated in foreign currency,
including intercompany cash transfers. Transaction hedging activities seek to
protect operating results and cash flows from the potentially adverse effects of
currency exchange fluctuations. The Company believes that its cash management
and investment policies have minimized these risks. However, there can be no
assurance that these practices will be successful in eliminating all or
substantially all of the risks encountered by the Company in connection with its
foreign currency transactions.
The Company is currently carrying $14.7 million in short and long-term
debt. This debt is subject to interest rate risk as the interest rate is
computed on a variable basis. The Company does not use derivative instruments
to hedge its interest rate risk. If market interest rates were to increase
immediately and uniformly by 10 percent from levels at July 1, 2000, the effect
on earnings would not be a material amount.
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company amended its Articles of Incorporation in July 2000 to increase
the par value of the Company's common stock from no par to $0.001 par value per
share. This change did not affect the number of shares outstanding and it did
not have any adverse effect on the holders of the Company's securities. The
amendment was approved by a vote of the shareholders of the Company at its
Annual Meeting.
19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At its Annual Meeting of Shareholders on May 24, 2000, the following
actions were submitted and approved by vote of the majority of the issued and
outstanding shares of the Company:
(1) Election of five directors,
(2) Selection of Grant Thornton LLP as the Company's independent certified
public accountants and
(3) Amendment of the articles of incorporation to increase the par value
of common stock.
A total of 8,093,919 shares (approximately 83%) of the issued and outstanding
shares of the Company were represented by proxy or in person at the meeting.
These shares were voted on the matters described above as follows:
1. For the directors as follows:
- ----------------------------------------------------------------------------------------------------
Name Number of Number of Number of Shares
Shares For Shares Against Abstaining/Withheld
- ----------------------------------------------------------------------------------------------------
Myron W. Wentz, PhD 8,069,756 24,163 None
- ----------------------------------------------------------------------------------------------------
David A. Wentz 8,069,756 24,163 None
- ----------------------------------------------------------------------------------------------------
Ronald S. Poelman 8,069,756 24,163 None
- ----------------------------------------------------------------------------------------------------
Robert Anciaux 8,069,756 24,163 None
- ----------------------------------------------------------------------------------------------------
Denis E. Waitley, PhD 8,069,756 24,163 None
- ----------------------------------------------------------------------------------------------------
2. For the ratification of the Board's selection of Grant Thornton LLP as the
independent certified public accountants of the Company as follows:
- ------------------------------------------------------------------
Number of Number of Number of Shares
Shares For Shares Against Abstaining/Withheld
- ------------------------------------------------------------------
8,082,102 6,513 5,304
- ------------------------------------------------------------------
3. For amending the articles of incorporation to increase the par value of
common stock to $.001 per share:
- ------------------------------------------------------------------
Number of Number of Number of Shares
Shares For Shares Against Abstaining/Withheld
- ------------------------------------------------------------------
8,079,667 11,402 2,850
- ------------------------------------------------------------------
Subsequent action taken by written consent of the shareholders approved the
change of the corporate name of the Company to USANA Health Sciences, Inc. as
follows:
- ------------------------------------------------------------------
Number of Number of Number of Shares
Shares For Shares Against Abstaining/Withheld
- ------------------------------------------------------------------
8,647,406 50,608 3,345
- ------------------------------------------------------------------
20
Item 5. OTHER INFORMATION
In July 2000, the Company filed an amendment to its Articles of
Incorporation to effect the name change and increase in par value approved at
the Annual Meeting of Shareholders and the Consent Resolution adopted by the
shareholders subsequent to the Annual Meeting. A copy of the amendment has been
filed as an Exhibit to this report with the Securities and Exchange Commission.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description
- ------------- -----------------------------------------------------------------
3.1 Articles of Incorporation [Incorporated by reference to the
Company's Registration Statement on Form 10, File No. 0-21116,
effective April 16, 1993]
3.2 Bylaws [Incorporated by reference to the Company's Registration
Statement on Form 10, File No. 0-21116, effective April 16, 1993]
3.3 Amendment to Articles of Incorporation to change name and
increase par value
4.1 Specimen Stock Certificate for Common Stock, no par value
[Incorporated by reference to the Company's Registration
Statement on Form 10, File No. 0-21116, effective April 16, 1993]
10.1 Business Loan Agreement by and between Bank of America National
Trust and Savings Association, d/b/a Seafirst Bank ("Seafirst
Bank") and the Company [Incorporated by reference to the
Company's Report on Form 10-Q for the period ended June 27, 1998]
10.2 Loan Modification Agreement by and between Seafirst Bank and the
Company [Incorporated by reference to the Company's Report on
Form 10-Q for the period ended June 27, 1998]
10.3 Employment Agreement dated June 1, 1997 by and between the
Company and Gilbert A. Fuller [Incorporated by reference to the
Company's Report on Form 10-Q for the period ended June 27, 1998]
10.4 Amended and Restated Long-Term Stock Investment and Incentive
Plan [Incorporated by reference to the Company's Report on Form
10-Q for the period ended June 27, 1998]
10.5 Promissory Note and Redemption Agreement dated April 28, 1999
[Incorporated by reference to the Company's Report on Form 10-Q
for the period ended April 3, 1999]
10.6 Stock Pledge Agreement dated April 28, 1999 [Incorporated by
reference to the Company's Report on Form 10-Q for the period
ended April 3, 1999]
10.7 Redemption Agreement dated July 30, 1999 [Incorporated by
reference to the Company's Report on Form 8-K, filed September
24, 1999]
21
10.8 Term Note dated September 20, 1999 [Incorporated by reference to the
Company's Report on Form 8-K, filed September 24, 1999]
10.9 Revolving Note dated September 20, 1999 [Incorporated by reference to
the Company's Report on Form 8-K, filed September 24, 1999]
10.10 Credit Agreement dated September 20, 1999 [Incorporated by reference
to the Company's Report on Form 8-K, filed September 24, 1999]
11.1 Computation of Net Income per Share (included in Notes to Consolidated
Financial Statements)
27.1 Financial Data Schedule
99.1 Press Release dated September 21, 1999. [Incorporated by reference to
the Company's Report on Form 8-K, filed September 24, 1999]
(b) Reports on Form 8-K.
The Company filed no current reports on Form 8-K during the quarter
ended July 1, 2000.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USANA HEALTH SCIENCES, INC.
Date: August 14, 2000 By: /s/ Gilbert A. Fuller
--------------- ----------------------
Gilbert A. Fuller
Senior Vice President and
Chief Financial Officer
23