U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September
30, 1996.
[ ] Transition report under 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 small business issuer as specified in its charter)
Utah 87-0500306
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3838 Parkway Blvd.
Salt Lake City, UT 84120
(Address of principal executive offices)
(801) 954-7100
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or Section 15(d) of the Exchange Act during the past 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] or No [ ]
The number of shares outstanding of the Company's common stock, no
par value, as of June 30, 1996 was 6,326,619.
Transitional Small Business Disclosure Format
(Check one) Yes [ ] No [X]
USANA, INC.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Bases of presentation
The interim financial statements presented herein are unaudited and have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required for complete audited financial statements. These statements
should be read in conjunction with the audited financial statements and
notes thereto included in the Company's annual report on Form 10-KSB for
the year ended December 31, 1995.
In the opinion of management, the accompanying unaudited consolidated
financial statements of USANA, Inc. and subsidiary ( the Company or USANA)
contain all adjustments (consisting of only normal recurring adjustments)
necessary to fairly present the Company's financial position as of
September 30, 1996 and December 31, 1995 and the results of operations for
the three and nine month periods ended September 30, 1996 and 1995, and
cash flow for the nine month periods ended September 30, 1996 and 1995.
The interim financial statements should be read in conjunction with the
following explanatory notes. The results of operations for the three and
nine month periods ended September 30, 1996 may not be indicative of the
results that may be expected for the fiscal year ending December 28,1996.
Note 1. Property and Equipment
During the month of June 1996, USANA moved the manufacturing and packaging
operations to newly constructed, state-of-the-art facilities. The larger
building will provide USANA with ample room for current operations. The
land on which the new facilities are located will accommodate significant
expansion. The remainder of the operations relocated to the new facility
in July, 1996.
The current estimated total cost for the land, building, and associated
facilities is approximately $7.6 million. In addition the Company expects to
spend a total of approximately $1.4 million for new equipment and
furnishings related to the construction project. The Company has financed
the purchase of the land and construction costs to-date through a bank loan,
internally generated funds and from the sale of 964,377 shares of restricted
stock to Gull Holdings, Ltd., the Company's largest shareholder, wholly-owned
by Dr. Myron Wentz, the Company's founder. At September 30, 1996, a
$1,000,000 draw had been taken on the construction loan with Wells Fargo Bank.
USANA has obtained from Wells Fargo Bank a commitment to lend up to
$5,000,000 under a short-term construction loan and to provide permanent
financing on the new headquarters, land and building. The construction
loan is at a variable interest rate of prime plus .25%. The construction
loan is for one year.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three months ended September 30, 1996 and 1995
Net sales for the three months ended September 30, 1996 totaled $16,098,095
compared to net sales of $7,318,487 for the same period in 1995, an
increase of $8,779,608 or 120.0% . Management believes the increase in
sales for such three month period is attributable to the growth in the
Company's independent distributor base in the United States and Canada.
The Company's cost of sales as a percentage of net sales has decreased for
the three months ended, September 30, 1996 to 21.0% of sales as compared to
24.6 % of sales for the three months ended September 30, 1995. The
improvement was due primarily to increased efficiency of operations,
resulting substantially from larger batch sizes made possible by the
significant increase in sales volume.
Distributor incentives of $7,392,919 (45.9% of net sales) paid during the
three months ended September 30, 1996 represented an increase of
$4,075,916 from $3,317,003 (45.3% of net sales) paid in the same period in
1995. The increase in distributor incentives was due to significantly
higher sales. Distributors are paid incentives based on the volume of
sales generated by their independently owned distribution network, as
provided by the Company's distribution plan. Incentives are paid weekly.
Selling, general and administrative expenses (excluding distributor
incentives) during the three months ended September 30, 1996 totaled
$2,840,268 or 17.6% of sales, compared to $1,271,260 or 17.4% of sales for
the same period in 1995. The increase of 123.4% in selling, general and
administrative expenses was due primarily to the need for more support
services and facilities to accommodate the growth in sales volume and the
number of independent distributors. Management expects these expenses to
increase in line with net sales.
The Company recognized net earnings of $1,457,338 during the three months
ended September 30, 1996, compared to $526,301 during the same period of
1995. The improvement of 176.9 % was due principally to increased sales,
accompanied by more efficient use of personnel, facilities and other
administrative resources. Net earnings per share during the third quarter
of 1996 were $.23 per share, compared to $.09 per share during the third
quarter of 1995.
The Company's quarter to quarter (June 30, 1996 to September 30, 1996)
sales comparison equated to a 13% increase with third quarter sales
increasing about $1,883,000 to $16,098,095. Third quarter earnings
remained level as compared to second quarter results at $.23 per share.
Flat earnings growth in the quarter was attributed to a number of strategic
investment costs. These costs were associated with the relocation of the
Company's manufacturing, research and development, and administrative
operations to its new, state-of-the-art headquarters; the initial stages of
a major computer hardware and software upgrade; and the substantial
recruitment of senior management talent. These investments may contribute
to a slower bottom-line growth in the near term but should facilitate the
Company's future growth and international expansion.
Nine Months Ended September 30, 1996 and 1995
Net sales for the first nine months of 1996 of $40,867,037 showed an
increase of 153.7% over the $16,105,904 recorded in the same period in
1995. Cost of sales as a percentage of sales reflected an improvement
from 24.6% in 1995 to 20.8% in 1996, primarily as a result of the change
in product mix towards higher margin items. Distributor incentives were
$6,929,395 or 43.0% of net sales in 1995 and $18,547,192 or 45.4% of net
sales in 1996. The increase as a percentage of net sales was due to the
maturation of the network marketing distribution system. Selling, general
and administrative expenses of $6,982,037 as a percentage of sales showed
an improvement to 17.1% in 1996 from 17.9% or $2,882,840 in 1995 largely
due to economies of scale.
In February 1995, as a result of the Company's growth in Canada, the
Company established USANA Canada Inc. and invested $100,000 in this
wholly-owned subsidiary. Net sales of USANA Canada were $8,120,704 for the
first nine months of 1996 (approximately 19.9% of consolidated sales).
Canadian sales in the first nine months of 1995 were $1,642,960 or
approximately 10.2% of consolidated sales.
Net earnings during the first nine months of 1996 totaled $4,045,503 an
increase of 182.4% over 1995's net earnings of $1,432,541. Earnings per
share increased from $.26 to $.64 or 146.2% during the same period. The
weighted average number of common and common equivalent shares increased
from 5,604,233 at September 30, 1995 to 6,296,633 as of September 30,
1996. The increase was primarily a result of shares sold to finance the
purchase of land and the construction of the Company's new manufacturing
and administrative facilities.
Liquidity and Capital Resources
At September 30, 1996, current assets of the Company were approximately
$7.8 million and current liabilities totaled about $7.5 million, resulting
in working capital of $300,000 compared to working capital of $1.8 million
at December 31, 1995. The Company's current ratio was 1.04 to 1 at
September 30, 1996, compared to 1.5 to 1 at December 31, 1995. The
decrease in the current ratio was a result of investing short term assets
in the construction of the Company's new manufacturing and administrative
facilities. Cash totaling $4.0 million was used to fund the construction
of the Company's new headquarters building during the first nine months of
1996.
The Company believes that existing cash balances of approximately $1.5
million, together with borrowings and additional capital sources related to
financing of the Company's new facilities will be adequate to meet the
Company's anticipated cash requirements through September 30, 1997.
However, in the event the Company experiences an adverse operating
environment or unusual capital expenditure requirements, additional
financing may be required. There can be no assurance that additional
financing, if required, would be available on favorable terms.
Material Commitments for capital expenditures
Estimated remaining costs on the construction of the Company's new
headquarters, manufacturing, and distribution facilities described earlier
including equipment and furnishings are approximately $440,000. A
commitment for financing of up to $5.0 million on the project has been
received from Wells Fargo Bank, as mentioned above. Management anticipates
long-term or permanent financing arrangements will be completed within the
next several months.
Inflation
Inflation has not had a significant impact on the Company's operations in
the past three years and is not expected to have a significant impact in
the foreseeable future.
Forward Looking Statements
From time to time, the Company may publish forward-looking
statements relating, among other things, to such matters as anticipated
financial performance, business prospects, new products, research and
development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward looking-
statements under federal law. In order to comply with the terms of the
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 on other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect
the operations, performance, development and results of the Company's
business include, but are not limited to the Company's ability to obtain
raw materials, its legal rights to continue selling Proflavanol, and other
regulatory, environmental and economic risks typical of all businesses in
the nutritional (see discussion in Item 1 of Part II) products industry.
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 complaint, filed in the
United States District Court for the District of Connecticut, alleges that
USANA's Proflavanol product violates the INC patent. The complaint seeks
preliminary and permanent injunctions against USANA that would prohibit
further sales of the Proflavanol 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. On June 4, 1996, USANA filed a
Motion to Dismiss INC's action for lack of subject matter jurisdiction, for
failure to state a claim upon which relief can be granted, for lack of
standing, and for failure to join an indispensable party. As of November
6, 1996, the Court had not yet ruled on that motion. Having conducted a
thorough investigation of the patent and allegations made in the complaint
and having consulted with patent council, USANA believes that its
manufacture and sale of Proflavanol does not infringe any valid claim of
the asserted patent. USANA intends to vigorously defend its right to
continue providing its Proflavanol product to its customers and
distributors. There can be no assurance, however, that USANA will succeed
in its defense of this matter.
On April 17, 1996, an unidentified party filed a request with the United
States Patent and Trademark Office (PTO) to reexamine the validity of
the patent now being asserted against USANA. On June 27, 1996 the PTO
granted that request, and stated that a substantial new question of
patentability had been raised. The PTO is currently re-evaluating the
validity of the patent. The outcome of that reexamination proceeding,
while unknown at this time, may affect INC's ability to proceed with its
lawsuit against USANA.
Other than as described herein, the Company is not a party to any
material litigation or proceedings.
Item 2. Changes in Securities
There were no changes in the instruments defining the rights of holders of
any class of registered securities during the quarter.
Item 3. Defaults Upon Senior Securities
There were no defaults in payments of this type during the reporting
period.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the period
covered by this report.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 11 -- Computation of Earnings Per Share
Exhibit 27 -- Financial Data Schedule
Reports on Form 8-K
On July 18, 1996, the Company filed a Report on Form 8-K to
report the appointment of two additional independent directors and the
creation of an audit committee of the Board of Directors as a precursor to
the Company's listing on the NASDAQ National Market System.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
USANA, Inc.
By: /s/ Gilbert A. Fuller
--------------------------------
Gilbert A. Fuller, Vice President of Finance
Dated: November 13, 1996
USANA, INC. & SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
September 30 December 31
1996 1995
--------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 1,534,235 $ 2,976,406
Accounts receivable, net 32,020 11,246
Inventories 5,537,894 2,127,724
Prepaid expenses and other assets 473,296 75,365
Notes receivable, current portion 26,543 -
Deferred income taxes 170,059 170,000
--------------- --------------
Total current assets 7,774,047 5,360,741
Property and equipment, at cost
Land 1,748,877 1,748,877
Building under construction 5,939,365 1,508,886
Equipment and furniture, net of accumulated
depreciation and amortization of $917,826
in 1996 and $ 874,178 in 1995 2,539,757 1,318,343
Other assets
Deposits on machinery 240,700 186,115
Notes receivable, less current portion 53,311 -
Other 44,673 50,641
---------------- --------------
Total assets $ 18,340,730 $ 10,173,603
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,448,518 $ 1,210,205
Short-term borrowings 1,000,000 -
Accrued liabilities
Accrued commissions 628,932 231,819
Sales tax payable 664,267 465,830
Income taxes payable 663,326 1,435,469
Accrued compensation and related items 442,583 99,074
Other 394,976 36,744
Unearned revenue 263,976 76,127
Current maturities of long-term obligations - 10,909
--------------- --------------
Total current liabilities 7,506,578 3,566,177
Long-term obligations, less current maturities - 3,910
Deferred income taxes 49,160 49,000
Stockholders' equity
Common stock, no par value, 50,000,000 shares authorized
6,341,119 and 6,280,119 shares issued and outstanding
at 1996 and 1995, respectively 6,190,967 6,004,917
Cumulative foreign currency translation adjustment (4,829) (3,752)
Retained earnings 4,598,854 553,351
--------------- --------------
Total stockholders' equity 10,784,992 6,554,516
--------------- --------------
Total liabilities and stockholders' equity $ 18,340,730 $ 10,173,603
=============== ==============
The accompanying notes are an integral part of these statements
USANA, INC. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Unaudited
Three Months Ended
September 30,
----------------------------------
1996 1995
-------------- --------------
Net sales $ 16,098,095 $ 7,318,487
Cost of sales 3,381,640 1,803,412
-------------- --------------
Gross profit 12,716,455 5,515,075
Operating expenses
Distributor incentives 7,392,919 3,317,003
Selling, general and administrative 2,840,268 1,271,260
Research and development 189,956 56,213
-------------- --------------
Total operating expenses 10,423,143 4,644,476
-------------- --------------
Earnings from operations 2,293,312 870,599
Other Income (expense)
Interest income 33,883 49,249
Interest expense (22,046) (1,198)
Gain on sale of property and equipment 65,028 -
Other, net 7,961 28
-------------- --------------
Total other income 84,826 48,079
-------------- --------------
Earnings before income taxes 2,378,138 918,678
Income taxes (920,800) (392,377)
-------------- --------------
NET EARNINGS $ 1,457,338 $ 526,301
============== ==============
Earnings per common and common equivalent share $ 0.23 $ 0.09
============== ==============
Weighted average number of common and
common equivalent shares 6,338,141 5,641,167
============== ==============
The accompanying notes are an integral part of these statements
USANA, INC. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Unaudited
Nine Months Ended
September 30,
----------------------------------
1996 1995
-------------- --------------
Net sales $ 40,867,037 $ 16,105,904
Cost of sales 8,488,824 3,961,812
-------------- --------------
Gross profit 32,378,213 12,144,092
Operating expenses
Distributor incentives 18,547,192 6,929,395
Selling, general and administrative 6,982,037 2,882,840
Research and development 473,447 118,473
-------------- --------------
Total operating expenses 26,002,676 9,930,708
-------------- --------------
Earnings from operations 6,375,537 2,213,384
Other Income (expense)
Interest income 123,030 71,850
Interest expense (22,430) (1,975)
Gain on Sale of Equipment 70,812 104,281
Other, net 15,508 28
-------------- --------------
Total other income 186,920 174,184
-------------- --------------
Earnings before income taxes 6,562,457 2,387,568
Income taxes (2,516,954) (955,027)
-------------- --------------
NET EARNINGS $ 4,045,503 $ 1,432,541
============== ==============
Earnings per common and common equivalent share $ 0.64 $ 0.26
============== ==============
Weighted average number of common and
common equivalent shares 6,296,633 5,604,233
============== ==============
The accompanying notes are an integral part of these statements
USANA, INC. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
Nine Months Ended
September 30,
----------------------------------
1996 1995
-------------- --------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings $ 4,045,503 $ 1,432,541
Adjustments to reconcile net earnings
to net cash provided by operating
activities
Depreciation and amortization 467,391 214,581
Gain on sale of property
and equipment (70,812) (104,281)
Deferred income taxes 101 23,000
Changes in assets and liabilities
Receivables (20,774) (1,354)
Inventories (3,410,172) (646,216)
Prepaid expenses and other assets (391,963) (168,511)
Cash overdraft - (275,084)
Accounts payable 2,238,313 124,462
Accrued liabilities 712,997 1,312,593
-------------- --------------
Total adjustments (474,919) 479,190
-------------- --------------
Net cash provided by
operating activities 3,570,584 1,911,731
-------------- ---------------
Cash flows from investing activities
Deposits on machinery (54,585) (39,619)
Purchase of land - (1,741,743)
Building under construction (4,430,480) -
Purchase of property and equipment (1,728,990) (793,706)
Proceeds from the sale of property and equipment 111,000 230,800
Issuance of notes receivable (86,087) -
Collection on notes receivable 6,233 -
Advances - related parties - 160,000
-------------- ---------------
Net cash used in
investing activities (6,182,909) (2,184,268)
-------------- ---------------
Cash flows from financing activities
Principal payments on long-term obligations (14,819) (19,721)
Proceeds from issuance of long-term obligations - 20,652
Proceeds from short-term borrowings 1,000,000 -
Common stock issued 186,050 2,531,488
-------------- ---------------
Net cash provided by
financing activities 1,171,231 2,532,419
-------------- ---------------
Effect of exchange rate changes on cash (1,077) -
-------------- ---------------
Net (decrease) increase in cash and cash equivalents (1,442,171) 2,259,882
Cash and cash equivalents at beginning of period 2,976,406 646,904
-------------- ---------------
Cash and cash equivalents at end of period $ 1,534,235 $ 2,906,786
============== ===============
The accompanying notes are an integral part of these statements