UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 30, 2000

For the transition period from                to                

Commission file number: 0-21116

USANA HEALTH SCIENCES, INC.
(Exact name of registrant as specified in its charter)

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)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 Per Share

    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 / /

    Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /

    The aggregate market value of common stock held by non-affiliates of the registrant as of March 20, 2001 was approximately $10,943,872.

    The number of shares outstanding of the registrant's common stock as of March 20, 2001 was 9,682,637.

    Documents incorporated by reference. The registrant incorporates information required by Part III (Items 10, 11, 12 and 13) of this report by reference to the registrant's definitive proxy statement to be filed pursuant to Regulation 14A.

USANA HEALTH SCIENCES, INC.

FORM 10-K

For the Fiscal Year Ended December 30, 2000

INDEX

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PART I

Item 1. Business

General

    USANA Health Sciences, Inc. ("USANA") 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. Independent distributors in USANA's network are referred to as Associates. As of December 30, 2000, we had approximately 93,000 current 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 USANA's products for personal use and do not desire to resell or distribute products. At December 30, 2000, we had approximately 76,000 Preferred Customers worldwide. USANA defines a "current Associate" and a "current Preferred Customer" as one that has purchased product from USANA at any time during the most recent twelve-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 USANA® Nutritionals, LEAN Lifelong™ and Sensè™. The USANA Nutritionals product line accounted for approximately 69% of net sales in 2000. Our top-selling products, USANA® Essentials and Proflavanol®, represented approximately 32% and 13%, respectively, of net sales in 2000. The LEAN Lifelong product line accounted for approximately 12% of net sales in 2000. Sensè 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 skin. Although the Sensè product line wasn't introduced until June 2000, it accounted for approximately 9% of net sales in 2000. High levels of bioavailability, safety and quality characterize all of USANA's products.

    USANA products are distributed 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.

    USANA introduced the Preferred Customer program in 1997 for customers who desire to purchase USANA products for personal use, but do not wish to become Associates. The Preferred Customer program has become an important part of our business. During 2000, Preferred Customer purchases accounted for approximately 17% of net sales.

    The strategic shift in our customer base continued during 2000. In February 2000, USANA introduced a value initiative that decreased prices on our products by an average of approximately 24%. The value initiative reduced the price of our top selling product, the Essentials, by 35% and offers a 10% discount for all customers who are active on the USANA Autoship (standing monthly order) program. These pricing changes were made in an effort to better attract and retain customers.

    North America is the primary market for our products. Sales in the United States and Canada collectively represented approximately 79.3% of net sales in 2000. To manage the combination of low sales and relatively high operating costs in the United Kingdom, we made a decision to service this market at the beginning of the second quarter in 2000 from USANA headquarters in Salt Lake City, Utah. The resale of products exported to the United Kingdom is limited. In September 2000, we began a direct export program for consumers in Japan. Products are exported to Japan on a personal use basis only. Sales to the United Kingdom and Japan, which are shipped directly from USANA headquarters, are included in the total for the United States throughout this report for comparability

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purposes. Sales in the Australia-New Zealand market represented approximately 15.4% of net sales in 2000. Hong Kong, our first market in Asia, accounted for 5.3% of net sales in 2000.

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 coutries), Canada, Australia-New Zealand and Hong Kong. Segment information for each of the last three fiscal years is included in Note L of the audited consolidated financial statements included in this report.

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—which include vitamins, minerals, dietary supplements, herbs, botanicals and compounds derived from these substances,



•

Natural and organic foods—which includes products such as cereals, milk, non-dairy beverages and frozen entreès,



•

Functional foods—any product with added ingredients or fortification specifically for health or performance purposes and



•

Cosmeceuticals—which is defined as nutrition combined with skin care.

    In the Annual Industry Overview 2000, the Nutrition Business Journal stated that its research suggests the overall market for nutritional products in the United States is approximately $44.5 billion per year and growing at an estimated 7% to 8% annual rate. USANA believes the international market for nutritional products to be similar in size to the U.S. market and that it has been growing at a comparable rate. Of the approximate $44.5 billion, functional foods make up 36%, nutritional supplements 35%, natural and organic foods 21%, and cosmeceuticals 8%.

    USANA believes that growth in the nutrition industry is driven by several factors including:

•

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,

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•

Mail order,



•

Practitioners and



•

The Internet.

    USANA distributes its nutritional products through the network marketing distribution channel. According to Salomon Smith Barney, the network marketing industry is $81.9 billion worldwide annually. Salomon Smith Barney also reports that the industry has met with several challenges recently, which include, a strengthening of the U.S. dollar, Asian difficulties, intensified competition and a stricter regulating environment resulting in declining sales growth. These recent challenges have also affected our operating results.

    USANA believes that the Internet is well suited for the network marketing industry and that it presents significant opportunity for efficiency gains for the industry. Business conducted via the Internet continues to increase for USANA and we plan to make decisions that will facilitate the growth of our business over the Internet. For example, we provide technical assistance, for a fee, to our Associates so that they can use the Internet in developing their independent business.

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 research the efficacy of our products.

    In-house Manufacturing.  USANA believes that our ability to manufacture a significant portion of our products is a competitive advantage and contributes to our 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

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•

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 our sales force. We believe the USANA Associate compensation plan is one of the most financially rewarding in the network marketing industry. Associate incentives approximated $47 million and were 38.2% of net sales in 2000. USANA pays Associate incentives on a weekly basis. The USANA compensation plan is a global seamless plan. Associates can recruit and be compensated each week for their business success in any USANA market. USANA sponsors events throughout the year, which offer information about our products and 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.  As of December 30, 2000, USANA had approximately 93,000 current Associates and 76,000 Preferred Customers, compared to approximately 113,000 current Associates and 46,000 Preferred Customers one year ago. The value initiative introduced in February 2000 has changed the customer base and laid the foundation for future Associate growth. This initiative has given Associates more opportunities to have a successful business with three options in recruiting new customers. A prospective customer can become an Associate, a Preferred Customer, or can simply purchase products at retail from the Associate.

    Enter New Markets.  USANA believes that, in addition to the North American market, significant growth opportunities continue to exist in international markets. In September 2000, USANA began a direct export program for consumers in Japan. Under this program, USANA products are exported to Japan on a personal use basis only, and the resale of products is not allowed. USANA plans on a hard launch (establishing a permanent presence) in the Japanese market in the latter part of 2001. The decision to enter new markets is based 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 our 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 product sales on a weekly basis, and not merely local product sales. This seamless downline (sales Associate 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 requalify for higher levels of compensation in newly opened markets. USANA believes this seamless compensation plan significantly enhances our ability to expand internationally and we intend, 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 2000, USANA introduced several new products, including six LEAN Lifelong™ products, and the new personal care line, Sensè™. USANA introduces new products throughout the year, primarily at company-sponsored events.

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    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 USANA® Nutritionals, LEAN Lifelong and Sensè. In each of the last three years, the USANA Nutritionals product line constituted 69% or more of net sales. The principal product lines are briefly described below:

    USANA® 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 USANA® Essentials, which includes Mega Antioxidant and Chelated Mineral, and Proflavanol®, which represented approximately 32% and 13%, respectively, of net sales in 2000. Other products in this line include Body Rox™ (Essentials for Teens), Usanimals™ (Essentials for Kids), Poly C®, Procosamine™, CoQuinone®, Melatonin KL®, BiOmega-3™, Garlic EC™, E-Prime™, Iron 28™, Active Calcium™, PhytoEstrin™, Palmetto Plus™, Ginkgo-PS™, and St. John's Wort.

    LEAN Lifelong™.  This product line includes several completely reformulated food products previously sold under the LEAN or USANA brand names. Nutrimeal™ and Fibergy® drink mixes, OptOmega®, SoyaMax™, 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.

    Sensè™.  This 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 skin. Products in this line include BeautiNutrients™, 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 makes available to Associates a number of materials to assist them in building their business and selling the products. These resource materials or sales aids, which may be purchased from USANA, include product brochures and business forms designed by USANA and printed by outside publishers. Sales aids for each of the major product lines discussed above are incorporated into their respective product lines. From time to time we also contract with authors and publishers to provide books, tapes and other items dealing with health and personal motivation and make these available to Associates. USANA also writes and develops materials for audio and videotapes, which are produced by third parties. We also require new Associates to purchase a starter kit, containing USANA training materials, that assists 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.

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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. We invested approximately $1.4 million in each of the years 1998, 1999 and 2000, on research and development activities. We intend to continue to use our 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 our Salt Lake City headquarters are equipped to conduct analytical testing of new 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 2000, USANA manufactured products that accounted for approximately 68% of net sales at our 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, and



•

Bottling and labeling the finished products.

    USANA uses automatic and semi-automatic equipment to perform most of these manufacturing processes. USANA conducts sample testing of raw materials and finished products for purity, potency and composition conforming to our strict specifications. Constructed in 1996, USANA's production facility is registered with the Food and Drug Administration ("FDA") and Health Canada and has been inspected by and certified by the Australian Therapeutic Goods Administration ("TGA"). Although USANA need only comply with food-level Good Manufacturing Practice regulations ("GMP's") of the FDA, we believe that we are in compliance 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 also contracts with third-party manufacturers and vendors for the production of some of our products, including most of the products in the Sensè™ and LEAN Lifelong™ product lines and certain of the nutritional products. These third-party vendors and manufacturers produce and, in most cases, package USANA products according to formulations developed by or in conjunction with USANA's product development team.

    USANA conducts quality assurance in our 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, USANA scientists test for chemical

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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 in the analytical chemistry laboratories.

    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 when needed and we believe we will be able to do so in the future if the need arises.

    Our manufacturing facility currently produces an average of 30 million tablets a month, using approximately 60% of its manufacturing capacity (assuming two eight-hour shifts per day, five days per week). USANA's packaging equipment fills an average of 413,000 bottles a month, using approximately 50% of its packaging capacity (again assuming two eight-hour shifts per day, five days per week). Currently we are operating two shifts per day in packaging and manufacturing. We expect that growth in new and existing markets will require additional manufacturing, packaging and warehouse capacity. Therefore, during 2000, we began constructing a new warehouse attached to the Salt Lake City location at an approximate cost of $2.5 million. We expect the initial phase of this addition to be completed in the second quarter of 2001.

Distribution and Marketing

    USANA distributes products through a network marketing system. We also sell 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.

    Customers who desire to sell USANA products may become Associates by being sponsored into the program by another Associate and becoming part of the sponsoring Associate's downline. USANA believes many of our Associates are attracted to USANA because of the quality of our products and rewarding compensation plan. New Associates must enter into a written contract, which obligates them to adhere to USANA's Policies and Procedures. Associates are also required to purchase an Associate starter kit that includes a detailed manual of the Policies and Procedures. The cost of this kit to Associates is $49, which approximates our costs of producing and distributing the kit.

    An Associate's business continues until terminated by USANA or voluntarily canceled by the Associate. Initial training of Associates about USANA, its products, the Associate compensation plan, and how to effectively engage in network marketing is provided primarily by an Associate's sponsor and others in their upline (sales Associate organization, including an Associate's sponsor and their sponsors) organization. In addition, USANA develops and sells a variety of training materials and sales aids, as well as a detailed Policies and Procedures manual and description of the Associate compensation plan. USANA also sponsors and conducts regional, national and international Associate events and intensive leadership training seminars. Attendance at these sessions is voluntary, and we undertake 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

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in other network marketing opportunities. USANA also restricts advertising and making representations or claims concerning USANA products or the compensation plan.

    The Associate 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 maintain sales of USANA products to consumers. USANA believes our Associate compensation plan is distinctive for its equitable Associate payouts, which are designed to create appropriate incentives for sales 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 then earn income passively, depending solely on the efforts of these other Associates.

    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 in their downlines, and



•

Participating in a leadership bonus pool paid to Associates who meet 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 our 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 become Associates. 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. Preferred Customers are not eligible to earn commissions unless they become Associates.

    USANA's product return policy allows retail customers to return the unused portion of any product to the Associate and receive a full cash refund. Any Associate who provides a refund to a customer is reimbursed by USANA with product or credit on account upon providing proper documentation and the return of the remaining product.

    Return of unused and resalable products initiated by a customer will be refunded at 100% of the purchase price to the customer, less a 10% restocking fee for up to one year from the date of purchase. Product returned that is unused and resalable within 30 days is refunded without the 10% restocking fee. Product that was damaged during shipment to the customer is also 100% refundable. Product returns valued at $100 or more, other than product that was damaged at the time of receipt by an Associate, may result in termination of the distributorship. Returns as a percentage of net sales were 1.4% in 1998, 1.8% in 1999 and 1.8% in 2000.

    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 of

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their family members from becoming Associates as long as they do not reside in the same household. 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 governing the marketing of our products or representations of 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 our success. Our information technology systems are designed and selected in order to facilitate order entry and customer billing, maintain Associate records, accurately track purchases and Associate incentive payments, manage accounting, finance and manufacturing operations, and provide customer service and technical support. 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 our 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 products is subject to regulation 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.

    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

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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 we currently manufacture our 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 these new GMP's are adopted.

    Other products marketed by USANA include cosmetics, over-the-counter ("OTC") drugs, and medical devices. 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 (e.g., 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 for OTC drug products require an approved New Drug Application ("NDA") before marketing. If the agency finds 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 will 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.

    Most of the USANA medical device products, as currently designed and marketed, do not require pre-market approval or clearance by the FDA. The Medical Device Amendments of 1976 to the FD&C established three regulatory classes for medical devices depending on the degree of control necessary to provide a reasonable assurance of safety and effectiveness. Generally, Class I devices present the least risk to health and Class III devices present the greatest risk to health and the most complex or novel technologies. Some Class I and most Class II devices currently require pre-market notification and clearance by the FDA before marketing under section 510(k) of the FD&C. Devices for which the FDA has not promulgated a classification regulation also require pre-market notification and clearance. Class III devices require pre-market approval before commercial distribution, because the FDA either has promulgated a regulation requiring a pre-market application for a pre-amendments type of device, or a post-amendments device was not found substantially equivalent to a legally marketed device. USANA's toothbrush and floss are currently regulated as Class I devices and do not require pre-market notification or clearance by the agency. USANA's tongue scraper device is as yet unclassified by the FDA and, therefore, the manufacturer received FDA clearance following pre-market notification under section 510(k) before marketing. Modifications to our devices will require a pre-market notification and clearance under section 510(k) before the changed device can be marketed, if the change or modification could significantly affect safety or effectiveness. All of USANA's devices not purchased from an outside vendor, unless specifically exempted by regulation, are subject to the FD&C's general controls, which include, among other things, registration and listing, adherence to Quality System Regulation requirements for manufacturing, Medical Device Reporting, and the potential for voluntary and mandatory recalls.

    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 or the causing to be disseminated of any false advertisement pertaining to drugs or foods, which would include dietary

12

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 these 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. Means available to the FTC include 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 deemed necessary. Violation of these orders could result in substantial financial or other penalties. Any action 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 have been enacted to 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 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 with little or no effort. Generally these laws are directed at ensuring that product sales ultimately are made to consumers and that advancement within these sales organizations is based on sales of the enterprise's products, rather than investments in the organizations or other non-retail sales related criteria. 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 certain 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

13

marketing program presently is in compliance with laws and regulations relating to network marketing activities. 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 we predict what effect additional governmental legislation or regulations, judicial decisions, or administrative orders, when and if promulgated, would have on our 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 in which USANA's leading products compete 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 our 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.

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    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 we offer 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. 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 us 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 our 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 USANA with 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

15

have adequate remedies for any breach or that our trade secrets will not otherwise become known to or independently developed by competitors.

    Patents.  USANA does not own any patents but does have three applications for patents pending. USANA does not believe that the lack of patents in any way will adversely affect our ability to compete in the nutritional supplement, personal care or weight management industries.

    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 30, 2000, 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 serve the needs of USANA's dual role as a manufacturer and a distributor.

Environment

    USANA presently 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, 2001, we had approximately 445 employees (as measured by full time equivalency), as follows: 362 in the United States, 46 in Australia-New Zealand, 17 in Canada, 18 in Hong Kong and 2 in Japan. Of these employees, 183 are involved in customer service and order entry, 97 in manufacturing and shipping, 143 in selling and administration and 22 in research and development and quality control. None of our employees are 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. Properties

    USANA's corporate headquarters are located in Salt Lake City, Utah in a 104,000 square foot building on approximately one-half of a company-owned 16-acre parcel. Of the 104,000 square feet presently occupied, approximately 28,000 square feet are used for manufacturing, packaging and distribution; 26,000 square feet are devoted to warehouse space; and the remaining 50,000 square feet are occupied by executive and administrative personnel, customer services, research and development, and three laboratories. USANA expects that growth in new and existing markets will require additional manufacturing, packaging and warehouse capacity. During 2000, we began constructing a new

16

warehouse attached to the corporate headquarters location. This new warehouse will add an additional 78,000 square feet at an approximate cost of $2.5 million. The initial phase of the new warehouse should be completed in the second quarter of 2001. We believe that the remaining facilities are suitable and adequate in relation to our needs for the foreseeable future.

    The following table summarizes our facilities as of December 30, 2000. Total monthly lease commitments for the properties under lease average approximately $137,000.

    We sold our facility in the United Kingdom during 2000 and we now service this market from our corporate headquarters in the United States.

Item 3. Legal Proceedings

    USANA is party to certain litigation in the United States Federal District Court for the District of Connecticut, which is also affected by two related actions as follows:

    On March 6, 1996, International Nutrition Company ("INC") filed a patent infringement action against eighteen defendants, including USANA, alleging infringement of U.S. patent number 4,698,360. The complaint alleges that USANA's Proflavanol® product violates the patent. USANA believes that its manufacture and sale of the Proflavanol product does not infringe any valid claim of the asserted patent.

    On March 21, 1997, the federal judge in the District Court action ordered that it be stayed until another lawsuit in France was resolved. The French lawsuit did not involve USANA, but involved the question of whether INC has any ownership rights in the patent. On March 25, 1997, the French trial court ruled that INC did not own the patent. INC appealed this decision to the Bordeaux Higher Court of Appeals. On May 28, 1998, the French appellate court rendered a decision and held that INC does not now and never has held any ownership rights in the patent. The appellate court also confirmed that Horphag Research Ltd. ("Horphag") is a one-half owner of the patent.

    On March 18, 2000, the United States District Court granted the defendants' Motion for Summary Judgment holding that even if INC had a one-half ownership in the patent, it could not bring suit to enforce the claims without all the co-owners voluntarily joining as plaintiffs. Consequently, because Horphag, a co-owner refused to voluntarily join as a plaintiff the complaint had to be dismissed. In addition, the District Court concluded that comity should be extended to the decision of the Bordeaux Higher Court of Appeals on the issue of ownership of the patent and therefore held that the purported assignment to INC of an interest in the patent was of no effect and that INC did not own an interest in the patent. The District Court also rejected INC's claim of ownership based on an October 1996 "confirmatory assignment" from the inventor. As a result, the District Court dismissed the first count of the complaint. In addition, the District Court dismissed the second count of the complaint because its unfair competition allegations were predicated on INC's ownership of the patent.

    On May 8, 2000, INC filed an appeal of the District Court's decision with the United States Court of Appeals for the Federal Circuit. The parties have fully briefed the appeal. Oral arguments have not yet been scheduled. Due to the early stage of these proceedings, an estimate of the potential loss and an evaluation of the probability of a favorable outcome cannot presently be estimated.

17

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 30, 2000.

18

PART II

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, 2001, the high and low sales prices of our common stock were $2.50 and $2.16, respectively.

Shareholders

    As of March 20, 2001, we had approximately 511 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 USANA's 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. Selected Financial Data

    The following selected consolidated financial data with respect to USANA's 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

19

Operations," and the audited consolidated financial statements and related notes thereto included in this report.

(1)

The 1997, 1999 and 2000 fiscal years were 52-week years. Fiscal year 1998 was a 53-week year. Fiscal year 1996 began on January 1, 1996 and ended on December 28, 1996. Fiscal year 1997 covered the period December 29, 1996 to December 27, 1997 (hereinafter 1997). Fiscal year 1998 covered the period December 28, 1997 to January 2, 1999 (hereinafter 1998). Fiscal year 1999

20

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).

(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 16 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 on page 21 as well as Note G of the audited consolidated financial statements included elsewhere in this report.

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 30, 2000, USANA had approximately 93,000 current Associates in the United States, Canada, Australia, New Zealand, Hong Kong, Japan and the United Kingdom. Direct export sales to customers in Japan for personal use only were commenced in September 2000.

    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 has 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 offers a Preferred Customer program specifically designed for customers who desire to purchase products for personal consumption, but who choose not to distribute the products. As of December 30, 2000, USANA had approximately 76,000 Preferred Customers.

    USANA recognizes revenue when products are shipped and title passes to Associates and Preferred Customers. In 2000, sales in the four primary markets, the United States, Canada, Australia-New Zealand, and Hong Kong, were 55.6%, 23.7%, 15.4% and 5.3%, 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 2000, products manufactured by USANA accounted for approximately 68% of net sales. As international sales increase as a percentage of net sales, USANA expects that its overall cost of sales could increase slightly, reflecting additional duties, freight and other expenses associated with international expansion.

    Associate incentives are the most significant expense and represented 38.2% of net sales in 2000. Associate incentives include commissions and leadership bonuses, and are paid weekly based on sales

21

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 therefore USANA does not pay commissions 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, while continuing to maintain an appropriate incentive for Associates. For example, in the first quarter of 2000, USANA introduced a value initiative that reduced prices across product lines an average of 24% and decreased the ratio of sales volume points to the wholesale price on products purchased. Among other things, this resulted in a reduction in Associate incentives and an increase in cost of sales as a percentage of net sales.

    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. USANA expects to add human resources and associated infrastructure as operations expand. The President, Chief Executive Officer and Chairman of the Board of Directors of USANA is Myron Wentz Ph.D. 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. There is significant depreciation and amortization expense as a result of substantial investments in computer and telecommunications equipment and systems to support international expansion. 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 capitalizes product development costs after market feasibility is established. These costs are amortized as cost of sales over an average of 12 months, beginning with the month the products become available for sale.

    USANA operates on a 52-53 week year, ending on the Saturday closest to December 31. Fiscal year 1998 covered the period December 28, 1997 to January 2, 1999 (hereinafter 1998). 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).

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Results Of Operations

    The following table summarizes operating results as a percentage of net sales, respectively, for the periods indicated:

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 is a result 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 sales of approximately $600,000 to Japan that were not present in 1999.

23

    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:

Sales By Market
(in thousands)

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 value initiative, which reduced prices by an average of 24%,



•

Inefficiencies in shipping approximately 25% more product as a result of the value initiative,

24

•

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.

    USANA believes that gross profit for 2001 will be similar to results reported for 2000 as a percentage of net sales.

    Associate Incentives.  Associate incentives decreased to 38.2% of net sales in 2000 from 42.5% in 1999. The decrease in Associate incentives relative to net sales can be primarily attributed to 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. USANA believes Associate incentives as a percent of net sales in the foreseeable future will continue to be similar to results reported for 2000.

    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 USANA's newest market, Japan, and in potential future markets and



•

Increased spending on activities related to our 2000 Annual International Convention.

    USANA has taken measures to reduce selling, general and administrative expenses for 2001. However, these expenses will continue to be pressured by the cost of the hard launch in Japan scheduled for late 2001 and as a result of costs to pursue new international opportunities.

    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 United Kingdom operations, liquidation of associated assets in the United Kingdom and reduction of staff outside of the United Kingdom. USANA did not have a similar charge in 2000 and does not expect one in the foreseeable future.

    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", we wrote off the remaining book value of our former 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 USANA's decision to move to 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 as a result of the repurchase of 2.95 million shares of USANA's common stock from Gull Holdings, Ltd., USANA's largest shareholder, and open-market purchases of approximately 531,000 shares 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:

25

•

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 $0.47 in 1999.

Years Ended January 1, 2000 and January 2, 1999

    Net Sales.  Net sales increased 6.4% to $134.3 million in 1999, an increase of $8.0 million from $126.3 million in 1998. The increase in net sales is primarily a result of introducing two new markets—the United Kingdom in December 1998 and Hong Kong in November 1999. Sales growth can also be attributed to a 77% increase in the Preferred Customer base. As of January 1, 2000, USANA had approximately 46,000 Preferred Customers compared to approximately 26,000 Preferred Customers at January 2, 1999. Approximately 90% of the increase in Preferred Customers took place in the North American and Australia-New Zealand markets. As of January 1, 2000, USANA had approximately 113,000 current Associates compared to 116,000 current Associates at January 2, 1999.

    The following tables illustrate the growth (decline) in sales and customers by market for the years ended January 2, 1999 and January 1, 2000:

Current Associates By Market

Preferred Customers By Market

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Total Customers By Market

    Gross Profit.  Gross profit increased to 77.6% of net sales in 1999 from 76.1% in 1998. The increase in gross profit as a percentage of net sales can be attributed to:

•

A change in sales mix to fewer Associate kits, sales aids and logo merchandise, which are sold at a reduced gross profit margin compared to other USANA products, and



•

Increased production and procurement efficiencies.

    Associate Incentives.  As a percentage of net sales, Associate incentives decreased to 42.5% in 1999 from 43.1% in 1998. The decrease in Associate incentives relative to net sales can be attributed to:

•

Continued efforts at managing product pricing, which has created a spread between the wholesale price of the products and the related sales volume points,



•

The introduction of the new level in the Associate compensation plan in early 1999, and



•

Inefficiencies in the Associate network in the United Kingdom and Hong Kong.

    The new level, or position, in the Associate compensation plan represents the earliest level in the network marketing system eligible to receive incentives. USANA believes this new level will assist in Associate retention efforts by paying these Associates earlier on reduced downline requirements; however, this level pays at a lower rate than other levels in the network marketing system.

    Selling, general and administrative.  As a percentage of net sales, selling, general and administrative expenses increased to 23.7% in 1999 from 19.9% in 1998. The increase in selling, general and administrative expenses can be attributed to:

•

Higher relative costs associated with operations in the United Kingdom,



•

Increased spending on sales and marketing efforts,



•

Increased costs including, but not limited to, employee compensation as a result of building infrastructure to meet strategic objectives, and



•

Increased depreciation and amortization expense as a result of substantial investments in current and prior periods in computer and telecommunications equipment to support growth and international expansion.

    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 includes the impact of a substantial reduction in United Kingdom operations, liquidation of associated assets in the United Kingdom and reduction of staff outside of the United Kingdom.

    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," we wrote off the remaining book value of our former custom network marketing system totaling $1.7 million

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($1.0 million after tax) in the third quarter of 1999. This charge was the result of the decision to move to a new custom network marketing system.

    Net Earnings.  Net earnings decreased to 4.4% of net sales in 1999 from 7.5% in 1998. The $4.4 million restructuring and impairment charge ($2.7 million after tax) was the primary contributor to the substantial decrease in net earnings in 1999 when compared to 1998. Additionally, the substantial increase in selling, general and administrative contributed to decreased net earnings in 1999. Diluted earnings per share were $0.47 for 1999, a decrease of $0.21 from $0.68 in 1998.

Quarterly Financial Information

    The table below 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. USANA's 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.

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