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


FORM 10-Q

(Mark One)


/x/

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2001

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
(State or other jurisdiction
of incorporation or organization)
  87-0500306
(IRS Employer
Identification No.)

3838 West Parkway Blvd., Salt Lake City, Utah 84120
(Address of principal executive offices, Zip Code)


(801) 954-7100
(Registrant's telephone number, including area code)

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]  No []

    The number of shares outstanding of the registrant's common stock as of May 8, 2001 was 9,682,637.




USANA HEALTH SCIENCES, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2001
INDEX

 
   
  Page

PART I. FINANCIAL INFORMATION

Item 1

 

Financial Statements

 

 

 

 

  Consolidated Balance Sheets

 

3

 

 

  Consolidated Statements of Earnings

 

4

 

 

  Consolidated Statement of Stockholders' Equity

 

5

 

 

  Consolidated Statements of Cash Flows

 

6

 

 

  Notes to Consolidated Financial Statements

 

7-10

Item 2

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

11-15

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

15-16

PART II. OTHER INFORMATION

Item 6

 

Exhibits and Reports on Form 8-K

 

17

Signatures

 

18

2



USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 
  December 30,
2000

  March 31,
2001

 
 
   
  (unaudited)

 
ASSETS              
Current assets              
  Cash and cash equivalents   $ 2,900   $ 2,460  
  Accounts recievable, net     362     184  
  Income taxes receivable     1,401     237  
  Inventories, net (Note A)     10,880     9,668  
  Prepaid expenses     654     849  
  Deferred income taxes     730     626  
   
 
 
      Total current assets     16,927     14,024  

Property and equipment, net (Note C)

 

 

17,614

 

 

19,247

 

Other assets

 

 

 

 

 

 

 
  Deferred taxes     27     96  
  Other     924     850  
   
 
 
    $ 35,492   $ 34,217  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities              
  Current maturities of long-term debt   $   $ 500  
  Accounts payable     3,352     3,511  
  Other current liabilites (Note B)     4,098     5,159  
  Line of credit     7,169     4,516  
   
 
 
      Total current liabilities     14,619     13,686  

Long-term debt, less current maturities

 

 

8,000

 

 

7,500

 
Stockholders' equity (Note D)              
  Common stock, $0.001 par value; authorized 50,000 shares, issued and oustanding 9,683 as of December 30, 2000 and March 31, 2001     10     10  
  Additional paid-in capital     2,364     2,364  
  Retained earnings     10,581     11,052  
  Accumulated other comprehensive loss     (82 )   (395 )
   
 
 
    Total stockholders' equity     12,873     13,031  
   
 
 
    $ 35,492   $ 34,217  
   
 
 

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
 
 
  April 1,
2000

  March 31,
2001

 
 
  (unaudited)

 
Net sales   $ 31,672   $ 27,614  
Cost of sales     7,667     7,982  
   
 
 
    Gross profit     24,005     19,632  

Operating expenses:

 

 

 

 

 

 

 
  Associate incentives     12,763     10,503  
  Selling, general and administrative     8,317     7,574  
  Research and development     429     285  
   
 
 
    Total operating expenses     21,509     18,362  
   
 
 
Earnings from operations     2,496     1,270  

Other income (expense):

 

 

 

 

 

 

 
  Interest income     19     35  
  Interest expense     (242 )   (261 )
  Other, net     (2 )   (290 )
   
 
 
    Total other expense     (225 )   (516 )
   
 
 
Earnings before income taxes     2,271     754  

Income taxes

 

 

909

 

 

283

 
   
 
 
  Net earnings   $ 1,362   $ 471  
   
 
 

Earnings per common share (Note D)

 

 

 

 

 

 

 
  Basic   $ 0.14   $ 0.05  
  Diluted   $ 0.13   $ 0.05  

Weighted average common and dilutive common equivalent shares oustanding (Note D)

 

 

 

 

 

 

 
  Basic     10,048     9,683  
  Diluted     10,212     9,733  

The accompanying notes are an integral part of these statements.

4



USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

Quarters Ended April 1, 2000 and March 31, 2001

(in thousands)
(unaudited)

 
  Common Stock
   
   
  Accumulated
Other
Comprehensive
Loss

   
 
 
  Additional
Paid-in
Capital

  Retained
Earnings

   
 
 
  Shares
  Value
  Total
 
For the Quarter Ended April 1, 2000                                    

Balance at January 1, 2000

 

10,169

 

$

10

 

$

2,867

 

$

10,078

 

$

(36

)

$

12,919

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Net earnings               1,362         1,362  
  Foreign currency translation adjustment                   (108 )   (108 )
                               
 
      Comprehensive income                                 1,254  

Common stock retired and advances to related party

 

(323

)

 


 

 

(418

)

 

(1,527

)

 


 

 

(1,945

)
   
 
 
 
 
 
 
Balance at April 1, 2000   9,846   $ 10   $ 2,449   $ 9,913   $ (144 ) $ 12,228  
   
 
 
 
 
 
 

For the Quarter Ended March 31, 2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 30, 2000

 

9,683

 

$

10

 

$

2,364

 

$

10,581

 

$

(82

)

$

12,873

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Net earnings               471         471  
  Foreign currency translation adjustment                   (313 )   (313 )
                               
 
    Comprehensive income                                 158  
   
 
 
 
 
 
 
Balance at March 31, 2001   9,683   $ 10   $ 2,364   $ 11,052   $ (395 ) $ 13,031  
   
 
 
 
 
 
 

The accompanying notes are an integral part of this statement.

5



USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except per share data)
(unaudited)

 
  Quarter Ended
 
 
  April 1,
2000

  March 31,
2001

 
Increase (decrease) in cash and cash equivalents              
  Cash flows from operating activities              
    Net earnings   $ 1,362   $ 471  
    Adjustments to reconcile net earnings to net cash provided by Operating activities              
      Depreciation and amortization     1,140     1,007  
      Gain on sale of property and equipment     (8 )    
      Deferred income taxes     (158 )   (15 )
      Provision for inventory obsolescence     67     174  
      Provision for losses on receivables     2     18  
      Changes in operating assets and liabilities:              
        Accounts receivable     (262 )   154  
        Inventories     (1,082 )   743  
        Income taxes receivable     (140 )   1,112  
        Prepaid expenses and other assets     11     235  
        Accounts payable     (621 )   199  
        Other current liabilities     1,079     1,164  
        Restructuring provision     (246 )    
   
 
 
        Total adjustments     (218 )   4,791  
   
 
 
        Net cash provided by operating activities     1,144     5,262  
   
 
 
Cash flows from investing activities              
  Purchases of property and equipment     (780 )   (2,712 )
  Proceeds from the sale of property and equipment     24      
   
 
 
        Net cash used in investing activities     (756 )   (2,712 )
   
 
 
Cash flows from financing activities              
  Repurchase of common stock     (1,945 )    
  Principal payments of long-term debt     (500 )    
  Increase (decrease) in line of credit     3,052     (2,653 )
   
 
 
        Net cash provided by (used in) financing activities     607     (2,653 )
Effect of exchange rate changes on cash     (13 )   (337 )
   
 
 
        Net increase (decrease) in cash and cash equivalents     982     (440 )
Cash and cash equivalents beginning of period     1,411     2,900  
   
 
 
Cash and cash equivalents end of period   $ 2,393   $ 2,460  
   
 
 
Supplemental disclosures of cash flow information              
  Cash paid during the period for:              
    Interest   $ 222   $ 368  
    Income taxes     378     180  

The accompanying notes are an integral part of these statements.

6


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. 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 accounting principles generally accepted in the United States of America 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 March 31, 2001, and results of operations for the quarters March 31, 2001 and April 1, 2000. 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 December 30, 2000. The results of operations for the quarter ended March 31, 2001 may not be indicative of the results that may be expected for the fiscal year ending December 29, 2001.

NOTE A—INVENTORIES

    Inventories consist of the following:

 
  December 30,
2000

  March 31,
2001

Raw materials   $ 1,837   $ 1,608
Work in progress     2,138     1,786
Finished goods     7,562     7,105
   
 
      11,537     10,499
Less allowance for inventory obsolescence     657     831
   
 
    $ 10,880   $ 9,668
   
 

NOTE B—OTHER CURRENT LIABILITIES

    Other current liabilities consist of the following:

 
  December 30,
2000

  March 31,
2001

Associate incentives   $ 703   $ 949
Accrued compensation     843     902
Sales taxes     490     503
Accrued Associate promotions     46     430
Deferred revenue     304     450
All other     1,712     1,925
   
 
    $ 4,098   $ 5,159
   
 

7


NOTE C—PROPERTY AND EQUIPMENT

    Cost of property and equipment and their estimated useful lives is as follows:

 
  Years
  December 30,
2000

  March 31,
2001

Building   40   $ 5,787   $ 5,787
Laboratory and production equipment   5-7     3,926     3,914
Computer equipment and software   3-5     12,370     12,819
Furniture and fixtures   3-5     1,888     1,937
Automobiles   3-5     318     314
Leasehold improvements   3-5     667     972
Land improvements   15     688     688
       
 
          25,644     26,431
Less accumulated depreciation and amortization         12,681     13,377
       
 
          12,963     13,054
Land         1,773     1,773
Deposits and projects in process         2,878     4,420
       
 
        $ 17,614   $ 19,247
       
 

NOTE D—COMMON STOCK AND EARNINGS PER SHARE

   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

 
  April 1,
2000

  March 31,
2001

Earnings available to common shareholders   $ 1,362   $ 471
Basic EPS      
Shares            
  Common shares outstanding entire period     10,169     9,683
  Weighted average common shares:            
    Issued during period        
    Canceled during period     (121 )  
   
 
  Weighted average common shares outstanding during period     10,048     9,683
   
 
Earnings per common share - basic   $ 0.14   $ 0.05
   
 
Diluted EPS      
Shares            
  Weighted average shares outstanding during period - basic     10,048     9,683
  Dilutive effect of stock options     164     50
   
 
  Weighted average shares outstanding during period - diluted     10,212     9,733
   
 
Earnings per common share - diluted   $ 0.13   $ 0.05
   
 

8


    Options to purchase 1,354 and 1,741 shares of stock were not included in the computation of EPS for the quarters ended April 1, 2000 and March 31, 2001, respectively, due to their exercise price being greater than the average market price of the shares.

NOTE E—SEGMENT INFORMATION

    The Company has four operating segments. Since the beginning of the second quarter of 2000, the United Kingdom (hereinafter includes The Netherlands) market has been serviced from the United States and is considered a part of the domestic operating segment of the Company. Accordingly, all previously reported financial information for the United Kingdom has been included in the domestic segment for comparability purposes. Additionally, the Company began its direct export program into Japan during the third quarter of 2000. These results are also incorporated in the domestic segment. 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. Interest income and expense as well as income taxes, while significant, are not included in the Company's determination of segment profit or loss in assessing the performance of a segment.

    Financial information summarized by geographic segment for the quarters ended April 1, 2000 and March 31, 2001 is listed below:

 
  Revenues from
External
Customers

  Intersegment
Revenues

  Earnings
before Income
Taxes

  Long-lived
Assets

  Total Assets
 
Quarter ended April 1, 2000:                                
  United States   $ 16,975   $ 4,396   $ 3,084   $ 21,958   $ 35,117  
  Canada     7,542         (56 )   256     1,963  
  Australia - New Zealand     5,236     273     (375 )   733     1,947  
  Hong Kong     1,919         (343 )   565     1,293  
   
 
 
 
 
 
    Reportable Segments Total     31,672     4,669     2,310     23,512     40,320  
  Unallocated and Other(1)         (4,669 )   (39 )   (2,239 )   (1,584 )
   
 
 
 
 
 
      Consolidated Total   $ 31,672   $   $ 2,271   $ 21,273   $ 38,736  
   
 
 
 
 
 

9


 
  Revenues from
External
Customers

  Intersegment
Revenues

  Earnings
beforeIncome Taxes

  Long-lived
Assets

  Total Assets
 
Quarter ended March 31, 2001:                                
  United States   $ 16,051   $ 2,728   $ 1,482   $ 27,480   $ 38,357  
  Canada     6,807         (179 )   161     2,037  
  Australia - New Zealand     3,467     222     (512 )   321     2,235  
    Hong Kong     1,289         (122 )   393     583  
   
 
 
 
 
 
      Reportable Segments Total     27,614     2,950     669     28,355     43,212  
    Unallocated and Other(1)         (2,950 )   85     (8,162 )   (8,995 )
   
 
 
 
 
 
      Consolidated Total   $ 27,614   $   $ 754   $ 20,193   $ 34,217  
   
 
 
 
 
 

(1)
Unallocated and Other includes certain corporate items and eliminations that are not allocated to the operating segments.

10



Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    The following discussion and analysis of USANA'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. USANA distributes its products through a network marketing system. USANA refers to its independent distributors as Associates. As of March 31, 2001, we had approximately 88,000 current Associates in the United States, Canada, Australia, New Zealand, Hong Kong, Japan and the United Kingdom. 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. As of March 31, 2001, we had approximately 80,000 Preferred Customers worldwide. Sales to Preferred Customers accounted for approximately 19% of net sales during the first quarter of 2001. USANA defines its Associates and Preferred Customers, within this document, as those who have purchased product from USANA at any time during the most recent 12-month period.

    The financial results for any quarter 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.

    USANA's three primary product lines consist of USANA® Nutritionals, LEAN Lifelong™ and Sensé™. The USANA Nutritionals product line accounted for approximately 66% of net sales for the quarter ended March 31, 2001. USANA's top selling products, USANA® Essentials and Proflavanol® represented approximately 29% and 12%, respectively, of net sales for the quarter ended March 31, 2001. The LEAN Lifelong product line accounted for approximately 11% of net sales for the quarter ended March 31, 2001. The LEAN Lifelong product line includes several completely reformulated food products previously sold under the LEAN or USANA brand names. Nutrimeal™ and Fibergy® drink mixes, Nutribar and Fibergy bar, a LEAN Formula for weight management and several other related products for healthy diets are included in the LEAN Lifelong product line. The Sensé product line consists 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 the skin. The Sensé product line accounted for approximately 13% of net sales for the quarter ended March 31, 2001.

    In addition to these three principal product lines, USANA develops 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. Each major product line incorporates specifically designed sales aids. From time to time we 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. New Associates are required to purchase a starter kit, containing USANA training materials, that assists them 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.

    The fiscal year end of USANA is the Saturday closest to December 31 of each year. Fiscal year 2001 will end on December 29, 2001. Fiscal year 2000 ended on December 30, 2000.

11


Results of Operations

Quarters Ended March 31, 2001 and April 1, 2000

    Net Sales.  Net sales decreased 12.8% to $27.6 million for the quarter ended March 31, 2001, a decrease of $4.1 million from the $31.7 million reported for the comparable quarter in 2000. The decrease in net sales is the result of:

    The value initiative was introduced in February 2000 and late March 2000 in the North American and Australia-New Zealand markets, respectively. The decrease in the Associate base was partially offset by strong enrollments of Preferred Customers. The Preferred Customer base increased 42.9% at March 31, 2001 compared to the levels at April 1, 2000. In September 2000, we began a direct export program for consumers in Japan. Sales to Japan under the direct export program totaled approximately $477,000 during the quarter ended March 31, 2001.

    The following tables illustrate the change in sales and customers by market for the quarters ended April 1, 2000 and March 31, 2001 (sales and customer information for the United Kingdom and Japan are incorporated in the numbers for the United States):

 
  Sales By Market
(in thousands)
Quarter Ended

   
   
 
Market

  As of
April 1, 2000

  As of
March 31, 2001

  Change from
Prior Year

  Percent
Change

 
United States   $ 16,975   53.6 % $ 16,051   58.1 % $ (924 ) (5.4 %)
Canada     7,542   23.8 %   6,807   24.7 %   (735 ) (9.7 %)
Australia - New Zealand     5,236   16.5 %   3,467   12.5 %   (1,769 ) (33.8 %)
Hong Kong     1,919   6.1 %   1,289   4.7 %   (630 ) (32.8 %)
   
 
 
 
 
 
 
Consolidated   $ 31,672   100.0 % $ 27,614   100.0 % $ (4,058 ) (12.8 %)
   
 
 
 
 
 
 
 
  Associates by Market

   
   
 
Market

  As of
April 1, 2000

  As of
March 31, 2001

  Change from
Prior Year

  Percent
Change

 
United States   53,000   48.2 % 42,000   47.7 % (11,000 ) (20.8 %)
Canada   25,000   22.7 % 21,000   23.9 % (4,000 ) (16.0 %)
Australia - New Zealand   25,000   22.7 % 17,000   19.3 % (8,000 ) (32.0 %)
Hong Kong   7,000   6.4 % 8,000   9.1 % 1,000   14.3 %
   
 
 
 
 
 
 
Consolidated   110,000   100.0 % 88,000   100.0 % (22,000 ) (20.0 %)
   
 
 
 
 
 
 
 
  Preferred Customers By Market

   
   
 
Market

  As of
April 1, 2000

  As of
March 31, 2001

  Change from
Prior Year

  Percent
Change

 
United States   32,000   57.1 % 47,000   58.8 % 15,000   46.9 %
Canada   14,000   25.0 % 20,000   25.0 % 6,000   42.9 %
Australia - New Zealand   9,000   16.1 % 11,000   13.7 % 2,000   22.2 %
Hong Kong   1,000   1.8 % 2,000   2.5 % 1,000   100.0 %
   
 
 
 
 
 
 
Consolidated   56,000   100.0 % 80,000   100.0 % 24,000   42.9 %
   
 
 
 
 
 
 

12


 
  Total Customers By Market

   
   
 
Market

  As of
April 1, 2000

  As of
March 31, 2001

  Change from
Prior Year

  Percent
Change

 
United States   85,000   51.2 % 89,000   53.0 % 4,000   4.7 %
Canada   39,000   23.5 % 41,000   24.4 % 2,000   5.1 %
Australia - New Zealand   34,000   20.5 % 28,000   16.7 % (6,000 ) (17.6 %)
Hong Kong   8,000   4.8 % 10,000   5.9 % 2,000   25.0 %
   
 
 
 
 
 
 
Consolidated   166,000   100.0 % 168,000   100.0 % 2,000   1.2 %
   
 
 
 
 
 
 

    Gross Profit.  Gross profit decreased to 71.1% of net sales for the quarter ended March 31, 2001 from 75.8% for the comparable quarter in 2000. The decrease in gross profit can be attributed to:

    Associate Incentives.  Associate incentives decreased to 38.0% of net sales for the quarter ended March 31, 2001 from 40.3% for the comparable quarter in 2000. The decrease in Associate incentives as a percentage of net sales can primarily be attributed to the value initiative. In addition to reducing prices by an average of 24%, the value initiative also incorporated a reduction in the ratio of sales volume points to the wholesale price on customer product purchases. Associate incentives are paid on the amount of sales volume points generated.

    Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased to 27.4% of net sales for the quarter ended March 31, 2001 from 26.3% for the comparable quarter in 2000. The increase in selling, general and administrative expenses as a percentage of net sales can be primarily attributed to lower sales in the first quarter of 2001 compared to the same period in 2000. USANA was able to reduce selling, general and administrative expenses in absolute terms during the first quarter of 2001 by $743,000. However, we expect that selling, general and administrative expenses will be pressured for the remainder of 2001 by costs associated with establishing operations in Japan, which is scheduled to open in late 2001.

    Other Income (Expense).  Foreign currency exchange losses (a component of Other, net) reached $376,000 for the quarter ended March 31, 2001 from $10,000 for the comparable quarter in 2000. The increase is due to the negative effect of weakening foreign currencies on intercompany loans with our foreign subsidiaries. Additional discussion on our foreign currency risk is included in Item 3, "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK," on page 16.

    Net Earnings.  Net earnings decreased to 1.7% of net sales for the quarter ended March 31, 2001 from 4.3% for the comparable quarter in 2000. The decrease in net earnings can be attributed to:

    Diluted earnings per share decreased $0.08 to $0.05 for the first quarter of 2001 from $0.13 for the comparable quarter in 2000.

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Liquidity and Capital Resources

    USANA has historically financed growth with cash flows from operations. In the first quarter of 2001, USANA generated net cash flows from operations of $5.3 million compared to $1.1 million for the first quarter in 2000. Cash and cash equivalents decreased to $2.5 million at March 31, 2001 from $2.9 million at December 30, 2000.

    On March 31, 2001, USANA had net working capital of $338,000 compared to net working capital of $2.3 million at December 30, 2000. The change in net working capital was primarily the result of investments in property and equipment.

    USANA invested $2.7 million in property and equipment during the first quarter of 2001 compared to $780,000 in the first quarter of 2000. We are currently working on two significant projects that comprise the majority of the $2.7 million invested in property and equipment during the first quarter of 2001. The following table highlights, in millions, the estimated total, historical and future investment required for these projects:

Project

  Estimated
Total Project
Cost

  Spent in
Fiscal Year
2000

  Spent in Q1
2001

  Future
Amounts to be
Paid

Expanded Warehouse Space   $ 2.5   $ 0.3   $ 1.2   $ 1.0
Improved Technology Systems   $ 3.0   $ 2.3   $ 0.4   $ 0.3

    USANA does not extend credit to its customers, but requires payment prior to shipping, which eliminates significant receivables.

    During 1999, USANA entered into agreements with a financial institution to provide up to $25 million in secured credit facilities consisting of a $10 million 5-year term loan and a $15 million 3-year revolving line of credit. The credit facilities were amended in March 2001. The amended credit facilities reduced the revolving line of credit to $12.5 million and do not require USANA to make quarterly principal payments on the term loan until March 2002. The credit facilities contain restrictive covenants requiring USANA to maintain certain financial ratios. As of March 31, 2001, we were in compliance with these covenants. As of March 31, 2001, $8.0 million was outstanding on the 5-year term loan and $4.5 million was outstanding on the line of credit.

    USANA believes that its current cash balances, the available line of credit and cash provided by operations will be sufficient to cover its needs in the ordinary course of business for the foreseeable future. If USANA experiences an adverse operating environment or unusual capital expenditure requirements, additional financing may be required. However, no assurance can be given that additional financing, if required, would be available on favorable terms. USANA may also require or seek additional financing, including through the sale of its equity securities to finance future expansion into new markets, finance capital acquisitions associated with the growth of USANA and for other reasons. Any financing which involves the sale of equity securities or instruments convertible into equity securities would result in immediate and possibly significant dilution to existing shareholders.

Forward-Looking Statements

    The statements contained in this Report that are not purely historical are considered to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act. These statements represent our 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 our financial performance, revenue and expense levels in the future and the sufficiency of our existing assets to fund future operations and capital spending needs. Readers are

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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 our most recent Annual Report on Form 10-K, pages 25 through 30. The fact that some of the risk factors may be the same or similar to our past reports filed with the Securities and Exchange Commission means only that the risks are present in multiple periods. We believe that many of the risks detailed here and in the Company's SEC filings are part of doing business in the industry in which we operate and compete and will likely be present in all periods reported. The fact that certain risks are endemic to the industry does not lessen their significance. The forward-looking statements contained in this Report are made as of the date of this Report and we assume no obligation to update them or to update the reasons why actual results could differ from those projected in such forward-looking statements. Among others, risks and uncertainties that may affect our business, financial condition, performance, development and results of operations include:


Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    We conduct our business in several countries and intend to continue to expand our foreign operations. Net sales, earnings from operations and net earnings are affected by fluctuations in currency exchange rates, interest rates and other uncertainties inherent in doing business and selling product in more than one currency. In addition, USANA's operations are exposed to risks associated with changes in social, political and economic conditions inherent in foreign operations, including changes in the laws and policies that govern foreign investment in countries where it has operations as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.

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    Foreign Currency Risks.  USANA conducts business in several countries and intends to continue to expand its foreign operations. Sales outside the United States represented 46.4% and 41.9% of net sales for the quarters ended April 1, 2000 and March 31, 2001, respectively. Inventory purchases are transacted primarily in U.S. dollars from vendors located in the United States. The local currency of each international subsidiary is considered the functional currency with all revenue and expenses translated at weighted average exchange rates for reported periods. Consequently, USANA's reported sales and earnings are impacted positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar. Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations or financial condition. Changes in currency exchange rates affect the relative prices at which USANA sells its products.

    USANA seeks to reduce its exposure to fluctuations in foreign exchange rates by creating offsetting positions through the use of foreign currency exchange contracts. We do not use such derivative financial instruments for trading or speculative purposes. We regularly monitor our foreign currency risks and periodically take measures to reduce the impact of foreign exchange fluctuations on our operating results. As of March 31, 2001 and during the quarter then ended, USANA had no hedging instruments in place to offset exposure to the Canadian Dollar, Australian Dollar, New Zealand Dollar, Hong Kong Dollar, Japanese Yen, British Pound or Euro, to which, in aggregate, USANA had significant exposure. In future periods, when USANA has foreign currency exchange contracts in place, we will present the required information in tabular form.

    As a last recourse for hedging currency risk, USANA may elect to adjust prices in non-U.S. markets to reflect changes in foreign currency exchange rates. However, there can be no assurance that these practices will be successful in eliminating all or substantially all of the risks encountered in connection with our foreign currency transactions.

    Interest Rate Risks.  USANA currently carries $8.0 million in long-term debt at an effective interest rate of 6.98%. This long-term debt matures at the rate of $2.0 million in 2002, $3.4 million in 2003 and $2.6 million in 2004. We also have a revolving line of credit with $4.5 million outstanding at March 31, 2001 with a weighted average interest rate of 6.98%. The interest rate is computed at the bank's Prime Rate or LIBOR adjusted by features specified in our loan agreements, with fixed rate term options of up to six months. A hypothetical 100 basis point increase in interest rates on all of the above debt would result in an annual after tax increase of interest expense of approximately $78,000, which would not materially affect earnings.

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PART II. OTHER INFORMATION

Item 6. EXHIBITS AND REPORTS ON FORM 8-K


Exhibit
Number

  Description

 3.1

 

Articles of Incorporation [Incorporated by reference to Registration Statement on Form 10, File No. 0-21116, effective April 16, 1993]

 3.2

 

Bylaws [Incorporated by reference to Registration Statement on Form 10, File No. 0-21116, effective April 16, 1993]

 3.3

 

Amendment to Articles of Incorporation to change name and increase par value [Incorporated by reference to Report on Form 10-Q for the period ended July 1, 2000]

 4.1

 

Specimen Stock Certificate for Common Stock, no par value [Incorporated by reference to Registration Statement on Form 10, File No. 0-21116, effective April 16, 1993]

10.1

 

Business Loan Agreement by and between Bank of America National Trust and Savings Association, d/b/a Seafirst Bank ("Seafirst Bank") and the Company [Incorporated by reference to Report on Form 10-Q for the period ended June 27, 1998]

10.2

 

Loan Modification Agreement by and between Seafirst Bank and the Company [Incorporated by reference to Report on Form 10-Q for the period ended June 27, 1998]

10.3

 

Employment Agreement dated June 1, 1997 by and between the Company and Gilbert A. Fuller [Incorporated by reference to Report on Form 10-Q for the period ended June 27, 1998]

10.4

 

Amended and Restated Long-Term Stock Investment and Incentive Plan [Incorporated by reference to Report on Form 10-Q for the period ended June 27, 1998]

10.5

 

Promissory Note and Redemption Agreement dated April 28, 1999 [Incorporated by reference to Report on Form 10-Q for the period ended April 3, 1999]

10.6

 

Stock Pledge Agreement dated April 28, 1999 [Incorporated by reference to Report on Form 10-Q for the period ended April 3, 1999]

10.7

 

Redemption Agreement dated July 30, 1999 [Incorporated by reference to Report on Form 8-K, filed September 24, 1999]

10.8

 

Amended Term Note dated March 26, 2001 [Incorporated by reference to Report on Form 10-K, filed March 30, 2001]

10.9

 

Amended Revolving Note dated March 26, 2001 [Incorporated by reference to Report on Form 10-K, filed March 30, 2001]

10.10

 

Amended Credit Agreement dated March 26, 2001 [Incorporated by reference to Report on Form 10-K, filed March 30, 2001]

11.1

 

Computation of Net Earnings per Share (included in Notes to Consolidated Financial Statements)

99.1

 

Press Release dated September 21, 1999. [Incorporated by reference to Report on Form 8-K, filed September 24, 1999]

    The Company filed no current reports on Form 8-K during the quarter ended March 31, 2001.

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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: May 10, 2001

 

By:

 

/s/ 
GILBERT A. FULLER   
Gilbert A. Fuller
Senior Vice President and
Chief Financial Officer

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PART II. OTHER INFORMATION
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