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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 28, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-21116
USANA, INC.
(Exact name of registrant as specified in its charter)
UTAH 87-0500306
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
3838 WEST PARKWAY BLVD.
SALT LAKE CITY, UTAH 84120
(Address of principal executive offices, Zip Code)
(801) 954-7100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
The number of shares outstanding of the registrant's common stock as of May 8,
1998 was 6,449,119.
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USANA, INC.
Index to Financial Statements and Exhibits
Filed with the Quarterly Report of the Company on Form 10-Q
For the Quarter Ended March 28, 1998
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PART I. FINANCIAL INFORMATION
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Page
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ITEM 1. FINANCIAL STATEMENTS:
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CONSOLIDATED BALANCE SHEETS 3
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CONSOLIDATED STATEMENTS OF EARNINGS 4
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CONSOLIDATED STATEMENTS OF CASH FLOWS 5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-12
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PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS 13
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
13
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SIGNATURES 14
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2
USANA, Inc. and Subsidiaries
Consolidated Balance Sheets
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(Unaudited)
As of March 28, 1998 December 27, 1997
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ASSETS
Current assets
Cash and cash equivalents $3,984,734 $2,608,315
Accounts receivable, net 104,485 98,362
Inventories (Note A) 8,557,028 6,515,297
Prepaid expenses and other current assets 1,590,360 1,164,504
Current maturities of notes receivable 182,764 30,061
Deferred income taxes 986,254 856,000
-------------------- ---------------------
Total current assets 15,405,625 11,272,539
Property and equipment, at cost (Note B) 15,535,830 13,910,996
Other assets
Deposits on machinery 475,033 1,093,439
Notes receivable, less current maturities 8,196 16,191
Other 79,655 76,200
-------------------- ---------------------
Total assets 31,504,339 26,369,365
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 4,573,331 3,211,749
Other current liabilities (Note C) 5,214,785 3,492,361
-------------------- ---------------------
Total current liabilities 9,788,116 6,704,110
Deferred income taxes 407,000 407,000
Stockholders' equity
Common stock, no par value:
Authorized -- 50,000,000 shares, issued and
outstanding 6,417,119 as of March 28, 1998
and 6,405,619 as of December 27, 1997 7,247,332 7,166,742
Cumulative foreign currency translation adjustment (44,907) (79,422)
Retained earnings 14,106,798 12,170,935
-------------------- ---------------------
Total stockholders' equity 21,309,223 19,258,255
-------------------- ---------------------
Total liabilities and stockholders' equity 31,504,339 $26,369,365
==================== =====================
The accompanying notes are an integral part of these statements.
3
USANA, Inc. and Subsidiaries
Consolidated Statements of Earnings
(Unaudited)
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Quarters Ended March 28, 1998 March 29, 1997
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Net sales $26,163,846 $17,654,299
Cost of sales 5,485,675 3,759,050
------------------ -----------------
Gross profit 20,678,171 13,895,249
Operating Expenses
Distributor incentives 11,762,141 8,348,321
Selling, general, and administrative 5,432,121 3,402,603
Research and development 354,438 280,234
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Total operating expenses 17,548,700 12,031,158
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Earnings from operations 3,129,471 1,864,091
Other income (expense)
Interest income 47,876 11,628
Interest expense (6,227) (7,550)
Other, net 4,036 17,878
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Total other income 45,685 21,956
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Earnings before income taxes 3,175,156 1,886,047
Income taxes 1,239,293 762,764
------------------ -----------------
NET EARNINGS $1,935,863 $1,123,283
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Earnings per common share - basic $0.30 $0.18
================== =================
Weighted average shares outstanding - basic 6,413,608 6,351,119
================== =================
Earnings per common share - diluted $0.28 $0.17
================== =================
Weighted average shares outstanding - diluted 6,885,517 6,727,532
================== =================
The accompanying notes are an integral part of these statements.
4
USANA, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
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Quarter Ended March 28, 1998 March 29, 1997
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NET CASH FLOW FROM OPERATING ACTIVITIES
Net earnings $1,935,863 $1,123,283
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities
Depreciation and amortization 798,236 410,419
Gain on sale of property and equipment - (7,571)
Deferred income taxes (130,254) (4,246)
Provision for inventory obsolescence (170,000) -
Changes in operating assets and liabilities
Accounts receivable (6,123) 21,620
Income tax receivable - 405,503
Inventories (1,871,731) 944,439
Prepaid expenses and other assets 103,617 334,930
Accounts payable 1,361,582 (1,012,644)
Other current liabilities 1,722,424 (15,633)
----------------- ------------------
Total Adjustments 1,807,751 1,076,817
----------------- ------------------
Net cash provided by operating activities 3,743,614 2,200,100
NET CASH FLOW FROM INVESTING ACTIVITIES
Receipts on notes receivable 7,237 6,551
Increase in notes receivable (151,945) -
Purchases of property and equipment (2,337,592) (1,549,952)
Proceeds from the sale of property and equipment - 1,057,389
----------------- ------------------
Net cash used in investing activities (2,482,300) (486,012)
NET CASH FLOW FROM FINANCING ACTIVITIES
Net proceeds from the sale of common stock 80,590 -
Increase in line of credit - 605,000
Decrease in line of credit - (2,105,000)
----------------- ------------------
Net cash provided by (used in) financing activities 80,590 (1,500,000)
Effect of exchange-rate changes on cash and cash equivalents 34,515 (3,989)
----------------- ------------------
Net increase in cash and cash equivalents 1,376,419 210,099
Cash and cash equivalents at beginning of period 2,608,315 1,130,487
----------------- ------------------
Cash and cash equivalents at end of period $3,984,734 $1,340,586
================= ==================
The accompanying notes are an integral part of these elements.
5
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The unaudited interim consolidated financial information of USANA, Inc. and
Subsidiaries (the "Company" or "USANA") has been prepared in accordance with
Article 10 of Regulation S-X promulgated by the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying interim
consolidated financial information contains all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the Company's
financial position as of March 28, 1998, and results of operations for the
quarters ended March 28, 1998 and March 29, 1997. 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 27, 1997, as amended. The results of operations for the
quarter ended March 28, 1998 may not be indicative of the results that may be
expected for the fiscal year ending January 2, 1999.
GENERAL
USANA develops, manufactures, distributes and sells high quality,
scientifically innovative, nutritional, personal and skin care products. The
Company's products are marketed and distributed through a growing network of
independent distributors. The Company's primary markets have been in the United
States and Canada; however, the Company commenced operations in the countries of
Australia and New Zealand in February 1998. The Company has four wholly owned
subsidiaries; USANA Canada, Inc., USANA New Zealand Limited, USANA Australia Pty
Ltd and USANA Trading Co., Inc.
The Company is principally engaged in a single business segment. The
Company's current product lines can be separated into five general categories:
(1) nutritionals; (2) skin and personal care; (3) weight management; (4) sales
aids; and (5) other. In the first quarter of 1998, the nutritionals product
line constituted approximately 81% of the Company's consolidated sales. USANA
Essentials and Proflavanol accounted for approximately 41% and 21%,
respectively, of consolidated sales in the first quarter of 1998. Both USANA
Essentials and Proflavanol are classified within the nutritionals product line.
No other products or product lines account for more than 10% of consolidated
sales.
Net sales of the Company are primarily dependent upon the efforts of a
network of independent distributors and preferred customers who purchase
products and sales materials and constitute the Company's customers. The Company
recognizes revenue when products are shipped and title passes to the independent
distributors.
Cost of sales primarily consists of raw materials, overhead, and labor that
are directly associated with the procurement and production of USANA's products
and sales materials as well as duties and taxes associated with product imports.
Distributor commissions and bonuses (distributor incentives) are paid
weekly based on commissionable sales volume (sales volume points) generated by
their independently owned distribution network as determined by the Company's
Compensation Plan (the Plan). Distributor incentives are the Company's most
significant expense and represent approximately 51% of commissionable sales
volume. In general, sales volume points are not associated with the sale of
starter kits, sales aids, or logo merchandise. Management continues to monitor
the amount of distributor incentives paid as a percent of net sales, and will,
when necessary, adjust the Plan to prevent distributor incentives from exceeding
acceptable levels or having a significant adverse effect on earnings.
6
In the third quarter of 1997, the Company revised the criteria it uses to
define its independent distributor base. A "current distributor" is one who has
made a purchase in the most recent twelve-month period. Management believes the
new definition of current distributors provides a more meaningful basis on which
to evaluate the Company's business. As of March 28, 1998, the Company had
approximately 92,000 current distributors. Management estimates that the current
distributor base was approximately 67,000 as of March 29, 1997.
Selling, general, and administrative expenses include wages and benefits,
rents and utilities, travel and entertainment, promotion and advertising and
professional fees along with other marketing and administrative expenses.
The Company's R&D expenses represent only research and development
activities. After development activities reach a point of market feasibility
with respect to any individual project, the Company capitalizes the associated
costs of the project and amortizes these costs over the project's estimated
economic life.
NOTE A - INVENTORIES
Inventories consist of the following:
March 28, 1998 December 27, 1997
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Raw materials $2,677,635 $2,312,557
Work in process 1,507,480 903,915
Finished goods 4,421,913 3,518,825
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8,607,028 6,735,297
Less provision for inventory obsolescence 50,000 220,000
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$8,557,028 $6,515,297
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NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 28, 1998 December 27, 1997
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Building $ 5,449,278 $ 5,437,484
Laboratory and production equipment 1,658,071 1,479,881
Computer equipment 7,709,704 5,808,929
Furniture and fixtures 1,371,967 1,312,699
Automobiles 351,738 320,920
Leasehold improvements 243,055 86,308
Land improvements 289,325 289,325
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17,073,138 14,735,546
Less accumulated depreciation and amortization 3,310,093 2,597,335
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13,763,045 12,138,211
Land 1,772,785 1,772,785
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$15,535,830 $13,910,996
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7
NOTE C - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
March 28, 1998 December 27, 1997
----------------------------------------------------
Employee compensation and related items $ 559,360 $ 762,983
Distributor incentives 1,093,836 684,569
Income taxes 1,772,717 728,570
Sales taxes 664,832 658,269
Deferred revenue 383,745 165,376
All other 740,295 492,594
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$5,214,785 $3,492,361
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NOTE D - EARNINGS PER SHARE
Basic earnings per common share are based on the weighted average number of
common shares outstanding during each period. Diluted earnings per common share
are based on shares outstanding (computed under basic EPS) and potentially
dilutive common shares. Potential common shares included in dilutive earnings
per share calculations include stock options granted but not exercised.
FOR THE QUARTER ENDED MARCH 28, 1998
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Earnings Shares Earnings
(Numerator) (Denominator) Per-Share
------------------------- ----------------------- ------------------
BASIC EPS
Net earnings $1,935,863 6,413,608 $0.30
============
EFFECT OF DILUTIVE SECURITIES
Stock options - 471,909
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DILUTED EPS
Net earnings $1,935,863 6,885,517 $0.28
=================== ================= ============
FOR THE QUARTER ENDED MARCH 29, 1997
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Earnings Shares Earnings
(Numerator) (Denominator) Per-Share
------------------------- ----------------------- ------------------
BASIC EPS
Net earnings $1,123,283 6,351,119 $0.18
============
EFFECT OF DILUTIVE SECURITIES
Stock options - 376,413
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DILUTED EPS
Net earnings $1,123,283 6,727,532 $0.17
=================== ================= ============
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following tables summarize operating results (in millions except per share
data), and operating results as a percent of net sales, respectively, for the
periods indicated:
Quarter Ended 3/28/98 3/29/97
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NET SALES $26.2 $17.7
COST OF SALES 5.5 3.8
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Gross profit 20.7 13.9
OPERATING EXPENSES
Distributor incentives 11.8 8.3
SG&A 5.4 3.4
R&D 0.4 0.3
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Earnings from operations 3.1 1.9
OTHER INCOME 0.0 0.0
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Earnings before income taxes 3.1 1.9
INCOME TAXES 1.2 0.8
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NET EARNINGS $ 1.9 $ 1.1
============== ==============
Earnings per common share - diluted $0.28 $0.17
============== ==============
Quarter Ended 3/28/98 3/29/97
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NET SALES 100.0% 100.0%
COST OF SALES 21.0% 21.5%
-------------- --------------
Gross profit 79.0% 78.5%
OPERATING EXPENSES
Distributor incentives 45.0% 46.9%
SG&A 20.6% 19.2%
R&D 1.5% 1.7%
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Earnings from operations 11.9% 10.7%
OTHER INCOME 0.0% 0.0%
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Earnings before income taxes 11.9% 10.7%
INCOME TAXES 4.6% 4.5%
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NET EARNINGS 7.3% 6.2%
============== ==============
9
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
NET SALES increased to $26.2 million during the quarter ended March 28, 1998, an
increase of $8.5 million or 48.0% from the $17.7 million recorded during the
same period in 1997. The increase in net sales is primarily the result of a
37.3% increase in the Company's independent distributor base and continued
growth in its Preferred Customer Program. As of March 28, 1998, the Company had
approximately 92,000 current distributors compared to approximately 67,000 at
March 29, 1997. About half of the growth in the distributor base was associated
with the opening of the Australia and New Zealand markets. The Company opened
these markets in February 1998. Approximately 12,000 participants have enrolled
in the Preferred Customer Program since its introduction in the third quarter of
1997. Continued success at regional conventions, new product introductions in
the third quarter of 1997, and the Company's first widespread price increase in
the third quarter of 1997 also contributed to first quarter sales growth in
1998. The price increase accounted for approximately 5.0% of the sales growth
in 1998 while the remainder of the 48.0% growth can be attributed to increases
in unit sales.
The following table illustrates the changes in sales by region for the quarters
ended March 28, 1998 and March 29, 1997:
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USANA, INC. AND SUBSIDIARIES -- SALES AND SALES GROWTH BY REGION
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QUARTER ENDED QUARTER ENDED GROWTH OVER % % OF CONSOLIDATED
REGION 28-MAR-98 27-MAR-97 PRIOR YEAR GROWTH SALES
- ---------------------------------------------------------------------------------------------------------
United States (in Mil$)/1/ $16.6 $12.7 $3.9 30.7% 63.4%
Canada (in Mil$)/1/ $ 8.0 $ 5.0 $3.0 60.0% 30.5%
Australia /
New Zealand (in Mil$)/1/ $ 1.6 N/A $1.6 N/A 6.1%
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Consolidated/1/ $26.2 $17.7 $8.5 48.0% 100.0%
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/1/ - All amounts in U.S. dollars.
COST OF SALES totaled $5.5 million during the first quarter of 1998, an increase
of $1.7 million or 44.7% from the $3.8 million recorded during the same period
in 1997. Cost of sales as a percent of net sales experienced a modest decrease,
declining 0.5% to 21.0% in the first quarter of 1998 compared to 21.5% in the
first quarter of 1997. The $1.7 million increase in cost of sales can primarily
be attributed to sales growth. The 0.5% decrease in cost of sales relative to
net sales can be attributed to two factors. First, the price increase in the
third quarter of 1997 added strength to the Company's gross profit margin.
Second, the Company took advantage of scale economies to realize production and
procurement efficiencies. However, these benefits realized in the first quarter
of 1998 were partially offset by the additional costs such as freight and duties
associated with importing products into Australia and New Zealand.
DISTRIBUTOR INCENTIVES totaled $11.8 million during the first quarter ended
March 28, 1998, an increase of $3.5 million or 42.2% from the $8.3 million
recorded during the first quarter of 1997. The $3.5 million increase in
distributor incentives is primarily the result of increases in commissionable
sales volume generated and the increase in the Company's Leadership Bonus
Program. The Company changed its Leadership Bonus Program in the third quarter
of 1997, increasing the payout from 2.0% to 3.0% of commissionable sales
10
volume. Distributor incentives as a percent of net sales decreased 1.9% to 45.0%
in the first quarter of 1998 from 46.9% in the first quarter of 1997. The
decrease in distributor incentives can primarily be attributed to two factors.
First, to better manage distributor incentives, the Company introduced a broad
re-pricing strategy across its product lines in the third quarter of 1997. The
new price structure creates a spread between the price a distributor pays for
the product and the sales volume points associated with the sale. Second, a
change in the sales mix occurred in the first quarter of 1998 that can primarily
be attributed to the sale of starter kits in the Company's newly opened
Australia and New Zealand market. Commissionable sales volume represented 87.9%
of consolidated net sales in the first quarter of 1998 compared to 93.9% for the
same period in 1997, a decrease of 6.0%.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) expenses totaled $5.4 million in the
first quarter of 1998, an increase of $2.0 million or 58.8% from the $3.4
million recorded during the first quarter of 1997. SG&A expense as a percent of
net sales increased 1.4% to 20.6% in the first quarter of 1998 from 19.2% in the
first quarter of 1997. The increase in SG&A expense can be attributed to
several factors. First, variable SG&A expenses such as discount fees on credit
cards and customer service wages increased to accommodate the demands of sales
growth and the increased number of distributors and preferred customers.
Second, as a result of continued substantial investments in computer and
telecommunications equipment, depreciation and amortization expense as a
component of SG&A increased by more than $300,000 in the first quarter of 1998
compared to the same period in 1997. Third, the Company began amortizing the
costs associated with launching the Australia and New Zealand market.
RESEARCH AND DEVELOPMENT (R&D) expenditures totaled $354,438 in the first
quarter of 1998, an increase of $74,204 or 26.5% from the $280,234 recorded in
the first quarter of 1997. Increases in R&D expense are primarily the result
of new product development and, to a lesser extent, the reformulation of
existing products. USANA's team of scientists investigates new ingredients,
develops new products, coordinates clinical studies and keeps abreast of the
latest research in nutrition and degenerative diseases.
Operations resulted in NET EARNINGS of $1.9 million in the first quarter of
1998, an increase of $0.8 million or 72.7% from the $1.1 million recorded in the
first quarter of 1997. The combined effect of increased sales, decreased cost
of sales and distributor incentives relative to net sales, and increased SG&A
expense relative to net sales resulted in a 7.3% profit margin in the first
quarter of 1998 compared to 6.2% in the first quarter of 1997. Diluted earnings
per share climbed to $0.28 in the first quarter of 1998, an increase of $0.11 or
64.7% from the $0.17 recorded during the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company does not extend credit to its distributors, but requires payment
prior to shipping. This process eliminates the need to create significant
receivables from its distributors. The Company has generated substantial cash
flows from operations due to its significant growth and solid margins. During
the quarter ended March 28, 1998, the Company generated $3.7 million from
operations compared to $2.2 million during the first quarter of 1997. Cash and
cash equivalents at March 28, 1998 were $4.0 million compared to $2.6 million at
December 27, 1997. Working capital was $5.6 million at March 28, 1998 compared
to $4.6 million at December 27, 1997.
The Company invested $2.3 million in property and equipment during the first
quarter of 1998 compared to $1.5 million during the first quarter of 1997. The
Company's inventory increased by approximately $2.1 million to $8.6 million in
the first quarter of 1998 from the $6.5 million reported at December 27, 1997.
The increase in inventory can primarily be attributed to extended transit times
of shipments to Australia and, to a lesser extent, preparation for the Company's
1998 Annual International Convention. The Company has invested a total of
approximately $3.2 million to fund the establishment of operations in Australia
and New Zealand.
11
The Company has $5.0 million of availability under its line of credit. This
bank line is renewed annually in May; the Company anticipates no difficulty in
renewing the credit line each year with increases as may be desired to support
growth. The interest rate is computed at the bank's prime rate, or at the
option of the Company, the LIBOR base rate plus 2.25%. Certain receivables,
inventories, and equipment collateralize the line of credit. The line-of-credit
agreement also contains restrictive covenants requiring the Company to maintain
certain financial ratios. As of March 28, 1998, the Company was in compliance
with these covenants. There was no outstanding balance as of March 28, 1998.
The Company believes that its current cash balances, the available line of
credit, and cash provided by operations will be sufficient to cover its needs
for the next twelve months. In the event the Company 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.
Year 2000 Risks. The Company is in the process of ensuring that its internal
computer systems are Year 2000 compliant. The Company does not expect any
material Year 2000 compliance issues to arise related to its primary internal
business information systems. With respect to third-party providers whose
services are critical to the Company, the Company intends to monitor the efforts
of such providers as they become Year 2000 compliant. Management is presently
not aware of any Year 2000 issues that have been encountered by any such third-
party providers that could materially affect the Company's operations.
Notwithstanding the foregoing, there can be no assurance that the Company will
not experience operational difficulties as a result of Year 2000 issues, either
arising out of internal operations, or caused by third-party service providers,
which individually or collectively could have an adverse impact on business
operations or require the Company to incur unanticipated expenses to remedy such
problems. A more complete discussion of Year 2000 issues and how they affect
the Company is included in the Company's Annual Report on Form 10-K under the
caption "Risk Factors".
Forward-Looking Statements
Certain statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations and certain other sections of this Quarterly
Report are forward-looking. These may be identified by the use of forward-
looking words or phrases such as "believes," "expects," "anticipates," "should,"
"plans," "estimates," and "potential," among others. These forward-looking
statements are based on the Company's reasonable current expectations. The
Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for
such forward-looking statements. In order to comply with the terms of safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in such forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development, and
results of the Company include: (1) the complexity and uncertainty regarding the
development of new products; (2) the loss of market share through competition;
(3) the introduction of competing products by other companies; (4) pricing
pressures from competitors and/or customers; (5) changes in the network
marketing, nutrition, health, personal, skin and weight management industries
and markets; (6) the Company's inability to protect proprietary information and
technology or to obtain necessary licenses on commercially reasonable terms; (7)
the Company's inability to complete the implementation of its Year 2000 plans
timely; (8) the loss of key employees to competitors or elsewhere; and (9)
fluctuations in foreign currency exchange rates. A more complete discussion of
risk factors is included in the Company's Annual Report on Form 10-K under the
caption "Risk Factors".
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 " `360 patent"). The
complaint, filed in the United States District Court for the District of
Connecticut, alleges that USANA's Proflavanol(R) product violates the patent.
The complaint seeks preliminary and permanent injunctions against USANA that
would prohibit further sales of the Proflavanol(R) product. INC also seeks
monetary damages, including any profits lost by INC as a result of the alleged
infringement, damages suffered by INC resulting from the alleged infringement,
and attorneys' fees and costs incurred by INC. Having conducted a thorough
investigation of the patent and the allegations made in the complaint, USANA
believes that its manufacture and sale of the Proflavanol(R) product does not
infringe any valid claim of the asserted patent. USANA intends to vigorously
defend its right to continue providing its Proflavanol(R) product to its
customers and distributors. There can be no assurance, however, that USANA will
succeed in its defense of this matter.
On March 21, 1997, the Federal Judge responsible for the lawsuit ordered that
the action not proceed until another lawsuit in France is resolved. That
lawsuit does not involve USANA, but involves the question of whether INC has any
ownership rights in the `360 patent. On March 25, 1997, the French trial court
in that action ruled that INC does not own the `360 patent. That decision is
now on appeal to the French appellate court. If that ruling is upheld, INC may
be barred from proceeding with the patent infringement action against USANA.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Item 601 Exhibit No. and Description
11 Statement re Computations of Per Share Earnings
(included in Note D to the Financial Statements)
27 Financial Data Schedule
(b) Reports on Form 8-K.
No Current reports on Form 8-K were filed by the Company during
the quarter ended March 28, 1998.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USANA, INC.
Date: May 12, 1998 By: /s/ Gilbert A. Fuller
------------ ----------------------
Gilbert A. Fuller
Vice President and Chief
Financial Officer
14