Item 1. Business
General
USANA Health Sciences, Inc. was founded in 1992 by Myron W. Wentz, Ph.D. We develop and manufacture high-quality,
science-based nutritional and personal care products with a primary focus on promoting long-term health and reducing the risk of chronic degenerative disease. In so doing, we are committed
to continuous product innovation and sound scientific research. We have operations in 18 markets worldwide where we distribute and sell our products by way of direct selling. Our net sales in fiscal
year 2012 were $648.7 million, of which 76.5% were in markets outside of the United States. As a U.S.-based multi-national company with an expanding international presence, our operating
results are becoming more sensitive to currency fluctuations, as well as economic and political conditions in markets throughout the world. Additionally, we are subject to the various laws and
regulations unique both to the products that we sell and to our method of distribution.
Our
customer base comprises two types of customers: "Associates" and "Preferred Customers." Associates are independent distributors of our products, who also purchase our products for
personal use. Preferred Customers purchase our products strictly for personal use and are not permitted to resell or to distribute the products. As of December 29, 2012, we had 247,000 active
Associates and 64,000 active Preferred Customers worldwide.
Recent Developments
During 2012, we executed several strategies designed to grow our business. These strategies are discussed in the following
categories:
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Personalization.
We officially launched our global
marketing strategy, which focuses on personalizing our product and incentive offerings to our customer base around the world. Under this strategy, we expanded the availability of our flagship
MyHealthPak product to all of our international markets. MyHealthPak is a fully personalized supplement pack that can include any of our Essential and Optimizer products. Under this
strategy, we also introduced two proprietary
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health
assessment applications for our Associates and Preferred Customers called True Health Assessment and True Health Companion. These applications are designed for use on iPads and other platforms
through the web and are intended to provide our Associates with a new and personalized way to market USANA to potential customers. We launched these new applications at our 2012 International
Convention and also gave every Associate in attendance a free iPad with a pre-loaded version of the True Health Assessment. Personalization will be our marketing and operating strategy
over the next several years. We believe this strategy will facilitate our short-and long-term growth objectives, which include: (i) returning our North America region to
growth; (ii) growing our business in Greater China, and (iii) international expansion.
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North America Growth Strategy.
In North America/Europe, we
continued to execute our growth strategy, which focuses on strengthening our partnership with our Associate sales force, introducing North America-specific incentives, and innovating to develop new
products and technologies. During 2012, we held an increased number of meetings and events where members of our management team worked closely with our Associate Leaders to grow our business. We also
launched our new Lifetime Matching Bonus, which was well received by our Associates and provides us with the flexibility to offer other incentives specifically for North America. We also offered a new
bonus for our Associates in Mexico periodically during 2012, which helped drive results in that market and North America in general. Finally, in 2012, we hired a new executive to lead our Research and
Development group who shares our passion for innovation. With his leadership, we plan to launch a variety of new products and technologies under our personalization strategy over the next several
years.
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China-Growth Strategy.
We continued our efforts to grow
our Greater China region in 2012 and are encouraged by the results in that region. This strategy included integrating our mainland China ("China" or "PRC") operations and systems, to the extent
possible, with our worldwide operations. It also included educating our Associates on the USANA products that we have introduced in China, as well as on our China business opportunity. Additionally,
we opened a new branch office in Shenzhen, which is a key city for our business in southern China, and held our Annual Celebration where new products and sales tools were introduced. During 2013, we
plan to continue to execute our strategy in Greater China, or more specifically China. This strategy will continue to focus on educating Associates and opening a new branch office, and will also
include registering for additional provincial licenses. Notably, subsequent to December 29, 2012, we received three additional provincial direct selling licenses in China. We now have direct
selling licenses in Beijing, Jiangsu, Shaanxi, and Tianjin.
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International Expansion.
We increased our international
expansion efforts in 2012 by commencing operations in Thailand, France and Belgium. Each of these markets is heavily consumer focused, which means that it will take time for our Associate leaders to
develop entrepreneurs to grow these markets. We continue to believe that Thailand, France and Belgium will be successful markets for USANA and we will continue to support the efforts of our Associates
to grow these markets. In 2013, we will continue our international expansion efforts by opening a new market around the middle of the year.
In
2013, our primary objective will be to strengthen and grow our Active Associate counts throughout the world. To this end, we will continue to execute each of the strategies mentioned
above, as well as introduce additional market-specific strategies. For example, beginning in January 2013 we implemented a pricing initiative in several of our mature markets, which includes price
reductions in certain markets. This pricing initiative is intended to make our products more consistently priced for our Associates and Preferred Customers in all of our markets. Our launch of this
initiative may create some short-term pressure on our net sales and earnings in these markets. We believe, however, that this strategy will create greater long-term customer
growth in these markets.
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Products
The following table summarizes our product lines.
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Product Line/Category
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Description
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Percent of
Product Sales
by Fiscal Year
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Product examples
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USANA® Nutritionals
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Essentials
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Includes core vitamin and mineral supplements that provide a foundation of advanced total body nutrition for every age group beginning with children 13 months of age.
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201030%
201129%
201228%
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USANA® Essentials
HealthPak 100
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Optimizers
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|
Consists of targeted supplements designed to meet individual health and nutritional needs. These products support needs such as
cardiovascular health, skeletal/structural health, and digestive health, and are intended to be used in conjunction with the Essentials.
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201047%
201150%
201252%
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Proflavanol
CoQuinone® 30
BiOmega-3
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Foods
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Includes low-glycemic meal replacement shakes, snack bars, and other related products that provide optimal macro-nutrition
(complex carbohydrates, complete proteins, and beneficial fats) in great tasting and convenient formats. These products can be used along with Essentials and Optimizers to provide a complete and healthy diet, and sustained energy throughout the
day.
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201012%
201111%
201211%
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Nutrimeal
Fibergy
RESET weight-management program and accompanying RESET kit
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Sensébeautiful science®
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Includes premium, science-based, personal care products that support healthy skin and hair by providing advanced topical
nourishment, moisturization, and protection. These products are designed to complement inner nutrition for the skin provided by the USANA Nutritionals and are manufactured with our patented, self-preserving technology, which uses a unique blend of
botanicals, antioxidants, and active ingredients to keep products fresh without adding traditional chemical preservatives.
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20108%
20117%
20127%
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Daytime Protective Emulsion
Night Renewal
Perfecting Essence
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All Other
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Includes materials and online tools that are designed to assist our Associates in building their businesses and in marketing our
products.
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20103%
20113%
20122%
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Associate Starter Kit
Product Brochures
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In addition to the products described above, we offer products designed specifically for prenatal, infant, and young child age groups in China. As
we continue to increase our focus on personalization and innovation, we will look for product opportunities such as our MyHealthPak product.
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The
approximate percentage of total product sales represented by our top-selling products for the last three fiscal years is as follows:
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Year Ended
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Top-selling products
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2010
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2011
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2012
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USANA® Essentials
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18
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%
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18
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%
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19
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%
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Proflavanol®
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11
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%
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12
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%
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12
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%
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HealthPak 100
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10
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%
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9
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%
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7
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%
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Geographic Presence
Our products are distributed and sold in 18 markets. We have organized our markets into two geographic regions: North America/Europe
and Asia Pacific, with three sub-regions under Asia Pacific.
North America / Europe
North America / Europe is our most mature region and includes the United States (including direct sales from the United States to the
United Kingdom and the
Netherlands), Canada, Mexico, France and Belgium. We commenced operations in France and Belgium during 2012. North America has been our most challenging region. Our North America growth strategy,
which is discussed elsewhere in this report, is intended to improve our operating trend in this region and generate growth.
Asia Pacific
Asia Pacific is organized into three sub-regions: Southeast Asia Pacific, Greater China, and North Asia. Markets included
in each of these sub-regions are as follows:
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Southeast Asia PacificAustralia, New Zealand, Singapore, Malaysia, the Philippines and Thailand.
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Greater ChinaHong Kong, Taiwan, and China(1)
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North AsiaJapan and South Korea
Growth
in our Asia Pacific region over the last several years has been led by the Philippines and Hong Kong. Our most recent market expansions in this region include our entry into
Thailand in 2012 and our entry into mainland China in 2010 through our acquisition of BabyCare. Going forward, we anticipate that growth in this region will continue to be led by the Philippines and
China, but we expect other markets in this region to grow as well.
Net Sales by Region
The following table shows net sales by geographic region for our last three fiscal years. We report net sales in a geographic region if
a product shipment originates in that geographic region. Additional
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(1)
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Our
business in China is that of BabyCare, our wholly-owned subsidiary.
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financial
information relating to our geographic regions can be found in Note L to the Consolidated Financial Statements included in this report.
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Years Ended
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Region
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2010
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2011
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2012
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(in thousands)
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North America/Europe
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$
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242,147
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46.8
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%
|
$
|
236,386
|
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40.6
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%
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$
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244,333
|
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37.7
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%
|
Asia Pacific
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Southeast Asia Pacific
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99,311
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19.2
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%
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111,447
|
|
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19.2
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%
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139,651
|
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21.5
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%
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Greater China
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152,280
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29.4
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%
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204,822
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35.2
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%
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235,626
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36.3
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%
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North Asia
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23,906
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4.6
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%
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29,284
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5.0
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%
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29,116
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4.5
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%
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Asia Pacific Total
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275,497
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53.2
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%
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345,553
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59.4
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%
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404,393
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62.3
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%
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|
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|
|
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$
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517,644
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100.0
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%
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$
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581,939
|
|
|
100.0
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%
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$
|
648,726
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|
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100.0
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%
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Research and Development
Our research and development efforts are focused on developing and providing high-quality, science-based products that
promote long-term health and reduce the risk of chronic degenerative disease. Our research and development activities include developing products that are new to USANA and new to the
industry, updating existing formulas to keep them current with the latest science, and adapting existing formulas to meet ever-changing regulations in new and existing international
markets. Our scientific staff includes experts on human nutrition, cellular biology, biochemistry, natural product chemistry, and clinical research. These experts continually review the latest
published research on nutrition, attend scientific conferences, and work with a number of third-party research institutions and researchers to identify possible new products and opportunities to
reformulate our existing products.
In
2012, we continued our relationship with the Linus Pauling Institute ("LPI") at Oregon State University. Our goal is to better determine and understand the function and role of
micronutrients such as vitamins, minerals, and antioxidants in promoting optimal health and preventing disease. As part of this relationship, our in-house research team works closely
with LPI on nutritional and
clinical research. In 2013, we plan to continue our research efforts with LPI and maintain our ongoing nutrition research in preventing oxidative stress, glycemic stress, and chronic
inflammation.
Our
goal is to maintain a sharp focus on nutritionboth inside and outside the bodyin promoting health and preventing chronic degenerative disease. Because we
believe in focusing primarily on key health issues within our society rather than on fads, we typically do not introduce a new product unless we believe that it can provide health benefits to a
significant number of our customers. As a result, we maintain a focused and compact line of products, which we believe simplifies the selling and buying process for our Associates and Preferred
Customers.
We
follow pharmaceutical standards established by the U.S. Pharmacopeia and other pharmacopeias in the development and formulation of our products. Our ingredients are selected to meet a
number of criteria, including, but not limited to: safety, potency, purity, stability, bio-availability, and efficacy. We control the quality of our products beginning at the formulation
stage, and we maintain our quality control through controlled sourcing of raw ingredients, manufacturing, packaging, and labeling. In fiscal years 2010, 2011, and 2012 we expended $3.8 million,
$4.1 million, and $4.7 million, respectively, on product research and development activities. Going forward, we intend to increase our spending and resources for research and development
in connection with our personalization strategy.
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Manufacturing and Quality Assurance
We conduct nearly all of the manufacturing, production and quality control operations for our nutritional and personal care products
in-house. We have established and maintain a manufacturing and quality control facility in Salt Lake City, Utah. BabyCare manufactures and produces nearly all of its products
in-house and maintains manufacturing and quality control facilities in Beijing, China and Tianjin, China. Additional information about our U.S. manufacturing, production and quality
control operations is set out below.
Tablet Manufacturing
Tablet manufacturing is conducted at our Salt Lake City, Utah manufacturing facility. Our tablet production process uses automatic and
semi-automatic equipment and includes the following activities: identifying and evaluating suppliers of raw materials, acquiring raw materials, analyzing raw material quality, weighing or
otherwise measuring raw materials, mixing raw materials into batches, forming mixtures into tablets, coating and sorting the tablets, analyzing tablet quality, packaging finished products, and
analyzing finished product quality. We conduct sample testing of raw materials, in-process materials, and finished products for purity, potency, and composition to determine whether our
products conform to our internal specifications, and we maintain complete documentation for each of these tests. We employ a qualified staff of professionals to develop, implement and maintain a
quality system designed to assure that our products are manufactured to our internal and applicable regulatory agency specifications.
Our
Salt Lake City manufacturing facility is registered with the U.S. Food and Drug Administration ("FDA"), Health Canada Natural Health Products Directorate, the Australian Therapeutic
Goods Administration ("TGA"), and other governmental agencies, as required. This facility is audited regularly by various organizations and government agencies to assess, among other things,
compliance with Good Manufacturing Practice regulations ("GMPs") and with labeling claims. Based on these audits, our Salt Lake City manufacturing facility has received and maintains certifications
from the Islamic Foods and Nutrition Counsel of America in compliance with Halal, NSF International in compliance with product testing and GMPs, and the TGA in compliance with the Therapeutic Goods
Act of 1989.
The
manufacture of nutritional or dietary supplements and related products in the United States requires compliance with dietary supplement GMPs, which are based on the
food-model GMPs and pharmaceutical GMPs, with additional requirements that are specific to dietary supplements. We believe our manufacturing processes comply with the GMPs for dietary
supplements.
Personal Care Manufacturing
Historically, we have manufactured the majority of our personal care products at our Draper, Utah manufacturing facility. In 2011, we
moved the manufacturing of our personal care products to our Salt Lake City facility to maximize efficiency and reduce costs on these items. The production process for personal care products includes
identifying and evaluating suppliers of raw materials, acquiring raw materials, analyzing raw material quality, weighing or otherwise measuring the raw materials, mixing raw materials into batches,
analyzing liquid batch quality, packaging finished products, and analyzing finished product quality. We conduct sample testing of raw materials, in-process materials, and finished products
for purity, potency, and composition to determine whether our products conform to our internal specifications, and we maintain complete documentation for each of these tests.
At
our Salt Lake City facility, we have standard technology for producing batches of personal care items, and we have semi-automatic packaging equipment for packaging end
products. We employ qualified staff to develop, implement, and maintain a quality system. Although the FDA has not promulgated GMPs for personal care items, it has issued guidelines for manufacturing
personal care products. We voluntarily maintain compliance with the guidance established by FDA and the Personal Care Products Council.
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Third-Party Suppliers and Manufacturers
We contract with third-party suppliers and manufacturers for the production of some of our products, which account for approximately
25% of our product sales. These third-party suppliers and manufacturers produce and, in most cases, package these products according to formulations that have been developed by, or in conjunction
with, our in-house product development team. These products include most of our gelatin-capsulated supplements, Rev3 Energy Drink, Probiotic, our powdered drink mixes and
nutrition bars, and certain of our personal care products. Products manufactured at these locations must also go through quality control and assurance procedures to ensure they are manufactured in
conformance with our specifications.
Quality Control/Assurance
We conduct quality control processes in two in-house laboratories that are located in Salt Lake City, Utah. In our
microbiology laboratory, scientists test for biological contamination of raw materials and finished goods. In our analytical chemistry laboratory, scientists test for chemical contamination and
accurate levels of active ingredients in both raw materials and finished products. Both laboratories conduct stability tests on finished products to determine the shelf life of our products. Our
laboratory staff also performs chemical assays on vitamin and mineral constituents, using United States Pharmacopoeia methods and other internally validated methods. In addition to our quality control
and clinical laboratories, our headquarters facility also houses a laboratory designated for research and development. We also perform processes similar to those described above at our labs in China.
Raw Materials
Most of the raw ingredients that are used in the manufacture of our products are available from a number of suppliers. We have not
generally experienced difficulty in obtaining necessary quantities of raw ingredients. When supplies of certain raw materials have tightened, we have been able to find alternative sources of raw
materials, and believe we will be able to do so in the future, if the need arises. Accordingly, we are not subject to a single-source supplier for our required supplies of raw ingredients. Our raw
material suppliers must demonstrate stringent process and quality control before we use their products in our manufacturing process.
Distribution and Marketing
General
We distribute our products internationally through a network marketing system, which is a form of
person-to-person direct selling. Under this system, distributors purchase products at wholesale prices from the manufacturer for resale to consumers and for personal
consumption. The concept of network marketing is based on the strength
of personal recommendations that frequently come from friends, neighbors, relatives, and close acquaintances. We believe that network marketing is an effective way to distribute our products because
it allows person-to-person product education and testimonials as well as higher levels of customer service, all of which are not as readily available through other distribution
channels.
Structure of Network Marketing Program
Associates.
A person who wishes to sell USANA products must join our independent sales force as an Associate. A person becomes an
Associate by
completing an application under the sponsorship of an existing Associate. The new Associate then becomes part of the sponsoring Associate's "down-line" sales organization. New Associates
sign a written contract and agree to adhere to the USANA policies and procedures. Under the policies and procedures, Associates may not, among other things: (i) use deceptive or unlawful
practices to sell USANA products; (ii) make deceptive or unlawful claims or
10
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representations
concerning our products or Compensation Plan; or (iii) sell competitive products to other USANA Associates or solicit USANA Associates to participate in other network marketing
opportunities. New Associates are required to purchase a starter kit that includes a detailed manual describing our business and products as well as our policies and procedures. We sell these kits at
a nominal cost averaging $30 in each of our markets. No other investment is required to become an Associate.
Once
a person becomes an Associate, he or she may purchase products directly from us at wholesale prices for personal use and resale to customers. Our Associates are also entitled to
build sales organizations by attracting and enrolling new Associates and establishing a network of product users. The sponsoring of new Associates results in the creation of multiple levels within our
network marketing structure. Sponsored Associates are referred to as part of the "down-line" of the sponsoring Associate. Down-line Associates may also sponsor new Associates,
creating additional levels in their network, but also forming a part of the same down-line as the original sponsoring Associate. As outlined below, Associates who are interested in earning
additional income must successfully sell USANA products and establish a business network/down-line in order to qualify for commissions, including bonuses. Subject to
payment of a minimal annual account renewal fee, Associates may continue to distribute or consume our products as long as they adhere to our policies and procedures.
Individuals
who reside in China and who are interested in being part of USANA's organization in China may do so by joining BabyCare as an Associate. The process for joining BabyCare is
very similar to the process for joining USANA and requires an initial Associate application and an agreement by the Associate to adhere to the policies and procedures in China. Much like our
operations in other markets, an Associate in China is provided with opportunities to build a sales organization and receive compensation for sales generated by that organization. Associates in China
do not participate in USANA's Compensation Plan and, therefore, are compensated under the plan created and implemented by BabyCare specifically for China.
Preferred Customers.
We also sell directly to customers who purchase products only for personal use. This program is our "Preferred
Customer"
program. Preferred Customers may not resell or distribute our products. We believe this program gives us access to a market that would otherwise be missed, by targeting customers who enjoy USANA
products, but who prefer not to maintain a distribution relationship with us. Although our policies prohibit Preferred Customers from engaging in retail sales of products, they may enroll as
Associates at any time, if they desire. Preferred Customers are not eligible to earn commissions or to participate in our Compensation Plan. Our China operations also utilize a Preferred Customer
program, which is similar to USANA's Preferred Customer program in its other markets.
Associate Training and Motivation
Initial training of Associates about the products, the Compensation Plan, network marketing, and USANA is provided primarily by an
Associate's sponsor and others in their sales organization. We develop and sell training materials and sales tools to assist Associates in building their businesses, as well as provide reprints from
other commercial publications that feature USANA and may be used as sales tools. We also sponsor and conduct regional, national, and international Associate events, as well as intensive leadership
training seminars. Attendance at these sessions is voluntary, and we undertake no generalized effort to provide individualized training to Associates, although experience shows that the most effective
and successful Associates participate in training activities. Although we provide leadership training and sales tools, we ultimately rely on our Associates to: sell our products, attract new
Associates and Preferred Customers to purchase our products, and educate and train new Associates regarding our products and Compensation Plan.
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Associate Compensation
As outlined below, our Compensation Plan provides several opportunities for Associates to earn compensation, provided they are willing
to consistently work at building, training, and retaining their down-line organizations to sell USANA products to consumers. The purpose behind each form of compensation under our
Compensation Plan is to reward Associates for generating product sales either directly or indirectly through their down-line sales organization and network of product consumers. We believe
our Compensation Plan is distinctive for its weekly payouts to Associates.
Associates
can earn compensation in four ways:
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-
Commissions.
The primary way an Associate is compensated
is through earning commissions. Associates earn commissions through generating sales volume points, which are a measure of the product sales of their down-line sales organization. Sales
volume points are assigned to each of our products and comprise a certain percent of the product price in U.S. dollars. To be eligible to earn commissions, an Associate must sell a certain amount of
product each month ("Qualifying Sales"). Qualifying Sales may include product that the Associates use personally or that they resell to consumers. Associates do not earn commissions on these
Qualifying Sales. Associates may earn commissions on their sale of products above the Qualifying Sales as well as the sale of products by Associates in their down-line organization and
Preferred Customers. Additionally, Associates do not earn commissions for simply recruiting and enrolling others in their down-line organization. Commissions are paid only when products
are sold. We pay Associate commissions on a weekly basis. As noted elsewhere in this report, our China operations maintain their own compensation plan, which has been implemented by BabyCare
specifically for China.
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Bonuses.
We offer Associates several bonus opportunities,
including our leadership bonus, elite bonus, and lifetime matching bonus. These bonus opportunities are based on a pay-for-performance philosophy and, therefore, are paid out
when the Associate achieves the required performance measures.
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Retail Mark-Ups.
As discussed previously, our
Associates purchase products from us at wholesale prices and may resell them to consumers at higher retail prices. The Associate retains the retail mark-up as another form of compensation.
-
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Contests and Promotions.
We periodically sponsor contests
and promotions designed to incentivize Associates to generate sales and grow their down-line organization and product users. These promotions are also based on a
pay-for-performance philosophy and, therefore, are only paid upon the achievement of the promotion objectives.
We
endeavor to integrate our Compensation Plan seamlessly across all markets where legally permissible, allowing Associates to receive commissions for globalnot merely
localproduct sales. This seamless down-line structure is designed to allow Associates to build a global network by establishing or expanding their down-line in any
of the markets where we operate. We believe our Compensation Plan significantly enhances our ability to expand internationally, and we intend, where permitted, to continue to integrate new markets
into our Compensation Plan. Our Associates in China do not participate in USANA's Compensation Plan. Instead, they are compensated under a plan that has been created and implemented by BabyCare
specifically for China.
Operating Strengths
Our principal objective is to be a leading developer, manufacturer and distributor of science-based nutritional and personal care
products and to create a rewarding opportunity through network marketing for our Associates who distribute our products. Our strategy is to capitalize on our operating strengths, which include: a
strong research and development program; in-house manufacturing
12
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capability;
science-based products; an attractive Associate Compensation Plan; a scalable business model; and an experienced management team.
Emphasis on Research and Development.
We have a technical team of experienced scientists, including several holding Ph.D. degrees,
quality engineers,
and regulatory specialists who contribute to our research and development activities. In our research and development laboratories, our scientists and
researchers:
-
-
Investigate activities of natural extracts and formulated products in laboratory and clinical settings;
-
-
Identify and research combinations of nutrients that may be candidates for new products;
-
-
Develop new nutritional ingredients for use in supplements;
-
-
Study the metabolic activities of existing and newly identified nutritional ingredients;
-
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Enhance existing products, as new discoveries in nutrition and skin care are made;
-
-
Formulate products to meet diverse regulatory requirements across all of our markets; and
-
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Investigate processes for improving the production of our formulated products.
Our
scientists and researchers also conduct double-blind, placebo-controlled, clinical studies which are intended to further evaluate the efficacy of our products. In addition, we work
with outside research organizations to further support various aspects of our research and development efforts. One of these organizations is the Linus Pauling Institute at Oregon State University.
Our work with the Linus Pauling Institute advances the science of human nutrition and health, provides us with valuable information to formulate and upgrade our nutritional products, and allows us to
better advise our customers on how to use USANA products. We have also funded clinical research programs at Boston University, the University of Colorado, the University of Utah, Sydney University in
Australia, The Orthopedic Specialty Hospital ("TOSH") and Utah State University. Additionally, our Scientific Advisory Council, comprised of health care professionals and nutritional science experts
worldwide, provides us with valuable insights into product applications and efficacy. It is through our internal research and development efforts and our relationships with outside research
organizations and health care providers that we can provide what we believe to be some of the highest quality health products in the industry.
In-house Manufacturing.
We manufacture products that account for approximately 75% of our product sales. We believe that our ability to
manufacture our own products in-house is a significant competitive advantage for the following reasons:
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-
We can better control the quality of raw materials and finished products;
-
-
We can more reliably monitor the manufacturing process to better guarantee potency and bioavailability and to reduce the
risk of product contamination;
-
-
We can better control production schedules to increase the likelihood of maintaining an uninterrupted supply of products
for our customers;
-
-
We are able to produce most of our own prototypes in the research phase of product development; and
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We are better able to manage the underlying costs associated with manufacturing our products.
Science-based Products.
As a result of our emphasis on research and development and our in-house manufacturing capabilities, we have
developed a focused line of high-quality health products that we believe provides health benefits to our customers. Our products have been developed based on
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a
combination of published research, in-house laboratory and third-party clinical studies, and sponsored research.
Attractive Associate Compensation Plan and Support.
We are committed to increasing our product sales by providing a highly competitive
compensation
plan to attract and retain Associates who constitute our sales force. We incent our Associates by paying incentives on a weekly basis. Additionally, our Compensation Plan is, where permissible, a
global-seamless plan, meaning that Associates can be compensated each week for their business success in any market in which they have a down-line organization where we conduct business.
As noted elsewhere in this report, our China operations maintain their own compensation plan, which is structured differently than USANA's plan in other markets.
To
support our Associates, we sponsor meetings and events throughout the year, which offer information about our products and our network marketing system. These meetings are designed to
assist Associates in business development and to provide a forum for interaction with some of our Associate leaders and with members of the USANA management team. We also provide low-cost
sales tools and resources, which we believe are an integral part of building and maintaining a successful home-based business for our Associates. For example, we offer an interactive
presentation tool, called Health and Freedom Solution, which was created and designed to help our Associates easily explain and share the USANA opportunity, including the benefits of our products and
our Compensation Plan.
In
addition to Company-sponsored meetings, sales tools and resources, we maintain a website exclusively for our Associates, where they can keep up on the latest USANA news, obtain
training materials, manage their personal information, enroll new customers, shop for products, and register for
Company-sponsored events. Additionally, through this website, Associates can access other online services to which they may subscribe. For example, we offer an online business management service,
which includes a tool that helps Associates track and manage their business activity, a personal webpage to which prospects or retail customers can be directed, e-cards for advertising,
and a tax tracking tool.
We
also believe that recognition is an important factor in supporting and retaining our Associates. We understand that being a successful USANA Associate requires hard work and
dedication. We frequently hold a variety of contests and promotions, rewarding our Associates for their achievements to help motivate them and recognize their efforts. We also celebrate key
achievements and rank advancements of our Associates. We believe that our recognition programs and contests greatly contribute to our ability to retain our Associates.
Business Model.
We believe that our business model provides, among others, the following advantages:
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No requirement for a company-employed sales force to sell our products, with a relatively low incremental cost to add a
new Associate;
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Commissions paid to our Associates are tied to sales performance;
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Accounts receivable are minimal because payment is required at the time an Associate or Preferred Customer purchases
product;
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A stream of recurring revenue from our monthly product subscription program known as "Autoship," which we utilize in all
of our markets (for the year ended December 29, 2012, this program represented 31% of our sales); and
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We can expand into new international markets with moderate investment because, for markets other than China, we generally
maintain minimal administrative, customer support, and warehouse facilities in each of these markets.
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Experienced Management Team.
Our management team includes individuals with expertise in various scientific and managerial disciplines,
including
nutrition, product research and development, international development, marketing, customer network development, information technology, finance, legal, regulatory and operations. This team is
responsible for supporting growth, research and development, international expansion, strengthening our financial condition, and improving our internal controls.
Growth Strategy
We seek to grow our business by pursuing the following strategies:
Personalization.
Our personalization initiative will be our marketing and operating strategy going forward. This strategy focuses on
personalizing
each aspect of our business to our customer base around the world. We will use our personalization initiative to facilitate growth through the other strategies set out below.
Attract and Retain Associates.
Our Associates are the key to the growth of our business. Accordingly, we must continue to attract and
retain
Associates. For this reason, our management team maintains a close working relationship with our Associate leaders. One of our key initiatives in 2012 was to continue to strengthen this working
relationship by holding more in-person meetings between management and Associates and by providing additional leadership training for Associates. In addition to our Annual International
Convention and our Asia Pacific Convention, we hold several regional events in key growth areas to provide support and training to new Associates. We continue to increase our investment in these
events and in the marketing of our Compensation Plan to aid Associates in improving the productivity of their businesses.
Over
the last couple of years we have also worked closely with certain of our Associate leaders to develop new and unique training tools to assist in the personal development and growth
of our new Associates. These training tools are designed to serve as a guide for someone new to USANA and network marketing who has the entrepreneurial spirit to own and operate a
home-based business. In addition to these new sales tools, we have also increased our emphasis on building global awareness of the USANA brand. This includes our new sponsorship of the
U.S. Ski Team, as well as our partnership with the Women's Tennis Association ("WTA"). Not only are we the official health supplement supplier to the WTA, but we now have six top players who are
dedicated to promoting our products and brand. We seek to leverage this relationship to build brand credibility and increase product consumption and loyalty. In addition to our sponsorship of
professional athletes, we seek to advertise and collaborate with credible, nationally recognized organizations and individuals to enhance our global brand. In 2012, we began a strategic relationship
with Dr. Mehmet Oz through his charity, Healthcorps. Over the past 5 or 6 years, the world has witnessed the overwhelming rise in popularity of Dr. Oz and, now, he has become a
nationally recognized part of American culture. Dr. Oz participated in a number of our Associate events during 2012 and was a key speaker at our 2012 International Convention in Salt Lake City,
Utah. We plan to continue our relationship with Dr. Oz through Healthcorps in 2013 and going forward. This relationship will include Dr. Oz's participation on future Associate leadership
calls and, more importantly, his continued participation at Associate events. While branding efforts such as this have a global reach, the primary objective of this initiative is to grow sales and the
number of Associates in North America.
In
2013, our primary initiative will be to strengthen and grow our Active Associate counts throughout the world. To this end, we will continue to execute our growth strategies in North
America and Greater China as well as introduce additional market-specific strategies. One of these new strategies is a pricing initiative that we implemented in several of our mature markets, which
includes price reductions in certain markets. This pricing initiative is intended to make our products more consistently priced for our Associates and Preferred Customers in all of our markets. We
believe that
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this
strategy will create greater long-term customer growth in these markets and our business in general.
Successfully Grow our Greater China Region.
In light of the strength of our Asia Pacific region and our growing Asian Associate base,
we believe that
Greater China currently represents the most significant and imminent growth opportunity for us. Our strategy in this region is focused on generating Associate growth in each of Taiwan, Hong Kong and
China, with an emphasis on China. To capitalize on this opportunity, in August 2010, we indirectly acquired BabyCare, a direct selling company organized under the laws of China. We believe our
acquisition of BabyCare accelerates our growth potential in China for several reasons, including: (i) the license granted to BabyCare from the Chinese government, which
allows BabyCare to engage in direct selling in the municipality of Beijing; and (ii) BabyCare's existing management team, which continues to operate BabyCare and has extensive experience in the
Chinese direct selling market as well as in Chinese government relations and regulations. BabyCare is working to obtain similar direct selling licenses in other provinces within China. Notably,
subsequent to the year ended December 29, 2012, we received three additional provincial direct selling licenses in Jiangsu, Shaanxi, and Tianjin. During 2012, we continued integrating our China
operations and systems, to the extent possible, with our worldwide operations in an effort to make it easier, more efficient, and more enjoyable for BabyCare's Associates to conduct business in China.
We also continued educating our Associates on the USANA products that we have introduced in China, as well as on our China business opportunity. The launch of several USANA products in China has
expanded our presence in China's adult supplement market and, as a result, expanded the sales opportunities for BabyCare Associates to existing and prospective Chinese customers. In 2013, we will
continue to execute our Greater China growth strategy to generate Associate and sales growth in this region.
Introduce New and Re-formulate Existing Products.
Our research and development team is continually reviewing the latest scientific
findings related to nutrition, conducting in-house research and clinical trials, looking at new technologies, and attending scientific conferences. If, in the process, we see potential for
a new product or ingredient that provides a measurable and important health benefit, and if we believe this benefit can be realized by our customers, we will generally pursue development of that
product. Our research and development focus in 2012 and going forward will be centered on personalization and innovation. To the extent reasonably possible, we intend to personalize our product
offering and product delivery systems to our customers' individual needs. An example of our personalization efforts is our MyHealthPak product, which is a fully customized,
pre-packaged supplement regimen that can include any of our Essentials and Optimizers. We will also enhance our focus on innovation to develop new products and technologies. To facilitate
this, we have expanded our research and development team, increased our research and development investment, and expanded our collaborations with outside scientific experts and organizations. In
particular, we hired a new executive during 2012 to lead our research and development team. With his leadership, we will launch a variety of new products and technologies under our personalization
strategy over the next several years.
Enter New Markets.
We believe that significant growth opportunities continue to exist in markets where we currently conduct business
and in new
international markets. In 2011, we announced our intent to become more aggressive in our international expansion efforts. To this end, we commenced operations in Thailand, France and Belgium in 2012.
We will also open another new market during 2013. These new markets, as well as any future markets we may consider, are selected following an assessment of several factors, including market size,
anticipated demand for USANA products, receptiveness to network marketing, and the market entry process, which includes consideration of possible regulatory restrictions on our products or our network
marketing system. We have also begun to register certain products with regulatory and government agencies in other countries in preparation for further international expansion. Wherever possible, we
expect to seamlessly integrate the
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Compensation
Plan in each market to allow Associates to receive commissions for globalnot merely localproduct sales. This seamless down-line structure is designed
to allow an Associate to build a global network by creating a down-line across national borders. We believe our seamless Compensation Plan significantly enhances our ability to expand
internationally, and we intend, where permitted, to integrate the future markets that we open into this plan. While we deem new market expansion as a key growth strategy, given the significant
opportunity that currently exists in China, we plan to focus the majority of our time and resources on growing sales in that market.
Pursue Strategic Acquisitions.
We believe that attractive acquisition opportunities may arise in the future. We intend to pursue
strategic
acquisition opportunities that would grow our customer base, expand our product lines, enhance our manufacturing and technical expertise, allow vertical integration, or otherwise complement our
business or further our strategic goals.
Competition
We compete with manufacturers, distributors, and retailers of nutritional products for consumers, and with network marketing companies
for distributors. On both fronts, some of our competitors are significantly larger than we are, have a longer operating history, higher visibility and name recognition, and greater financial resources
than we do. We compete with these entities by emphasizing the underlying science, value, and superior quality of our products, the simplicity in our product offerings, and the convenience and
financial benefits afforded by our network marketing system and global seamless Compensation Plan.
Our
business is driven primarily by our distributors, whom we refer to as Associates. Our ability to compete with other network marketing companies depends, in significant part, on our
success in attracting and retaining Associates. There can be no assurance that our programs for attracting and retaining Associates will be successful. The pool of individuals interested in network
marketing is limited in each market and is reduced to the extent other network marketing companies successfully attract these individuals into their businesses. Although we believe that we offer an
attractive opportunity for our Associates, there can be no assurance that other network marketing companies will not be able to recruit our existing Associates or deplete the pool of potential
Associates in a given market.
We
believe that the leading network marketing company in the world, based on total sales, is Amway Corporation and its affiliates, and that Avon Products, Inc. is the leading
direct seller of beauty and related products worldwide. Leading competitors in the nutritional network marketing and nutritional product industry include Herbalife Ltd., Inc.; Nu Skin
Enterprises, Inc.; and NBTY, Inc. Based on information that is publicly available, 2011 net sales of the aforementioned companies ranged from $1.7 billion to $11.1 billion.
There are other manufacturers of competing product lines that have or may launch direct selling enterprises that compete with us in certain product lines and in the recruiting of Associates. There can
be no assurance that we will be able to successfully meet the challenges posed by increased competition.
Product Returns
Product returns have not been a material factor in our business, totaling approximately 1.1% of net sales in both 2010 and 2011 and
0.8% in 2012. Because our emphasis on customer satisfaction is a hallmark of our business model, our standard policy allows Associates to return any unused product from their first purchase within the
first 30 days following their purchase for a 100% refund of the sales price. Thereafter, any returned product that is unused and resalable is refunded up to one year from the date of purchase
at 100% of the sales price, less a 10% restocking fee. According to the terms of the Associate agreement, return of product where the purchase amount exceeds $100 and was not damaged at the time of
receipt by the Associate may result in cancellation of the Associate's
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distributorship.
Depending upon the conditions under which product was returned Associates and Preferred Customers may either receive a refund based on their original form of payment, or credit on
account for a product exchange. This standard policy differs slightly in a few of our international markets due to the regulatory environment in those markets.
Major Customers
Sales are made to independent Associates and Preferred Customers. No single customer accounted for 10% or more of net sales.
Notwithstanding the foregoing, the nature of our business model results in a significant amount of sales to several different Associate leaders and their downline sales organizations. Although no
single Associate accounted for 10% or more of our net
sales, the loss of a key Associate leader or that Associate's downline sales organization could adversely affect our net sales and our overall operating results.
Compliance by Associates
We continually monitor and review our Associates' compliance with our policies and procedures as well as the laws and regulations
applicable to our business around the world. Part of this review entails an assessment of our Associates' sales activities to ensure that Associates are actually selling products to consumers. Our
policies and procedures require Associates to present our products and the USANA opportunity ethically and honestly. Associates are not permitted to make claims about our products or Compensation Plan
that are not consistent with our policies and procedures and applicable laws and regulations. The majority of our Associates must use marketing and promotional materials provided by USANA. Associates
who have achieved a certain leadership threshold are permitted, however, to produce their own marketing and promotional materials, but only if such materials are approved by USANA prior to use.
From
time to time, some Associates fail to adhere to our policies and procedures. We systematically review reports of alleged Associate misbehavior. Infractions of the policies and
procedures are reported to our compliance group, who determine what disciplinary action is warranted in each case. More serious infractions are reported to our Compliance Committee, which includes
USANA executives. If we determine that an Associate has violated any of our policies and procedures, we may take a number of disciplinary actions, such as warnings, fines or probation. We may also
withdraw or deny awards, suspend privileges, withhold commissions until specific conditions are satisfied, or take other appropriate actions in our discretion, including termination of the Associate's
purchase and distribution rights.
We
believe that Associate compliance is critical to the integrity of our business, and, therefore, we are aggressive in ensuring that our Associates comply with our policies and
procedures. As explained above, when an Associate fails to comply with our policies and procedures, we may terminate their purchase and distribution rights. From time to time, we become involved in
litigation with Associates whose purchase and distribution rights have been terminated. We consider such litigation to be routine and incidental to our business and will continue to be aggressive in
ensuring that our Associates comply with our policies and procedures.
Information Technology
We believe that the ability to efficiently manage distribution, compensation, manufacturing, inventory, and communication functions
through the use of sophisticated
and dependable information processing systems is critical to our success. Our information technology resources are maintained primarily by our in-house staff to optimally support our
customer base and core business processes.
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Our
IT staff manages an array of systems and processes which support our global operations 24 hours a day and 365 days a year. Three of our most critical applications
include:
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A web-based application that provides online services to Associates, such as training sessions and
presentations, online shopping, enrollment, real-time reporting engine, Company and product information, web-hosting, email, and other tools to help Associates effectively
manage their business and down-line organizations.
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A web-based order-entry system that handles order entry, customer information, compensation, the hierarchy of
Associates, returns, invoices, and other transactional-based processes.
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A fully integrated world-wide Enterprise Resource Planning ("ERP") system that handles accounting, human
resources, inventory management, production processes, quality assurance, and reporting requirements in a multinational environment.
Our
web applications are supported by a clustered environment and a redundant system outside of our home office, which serves as a disaster recovery site.
Regulatory Matters
Product Regulation.
Numerous governmental agencies in the United States and other countries regulate the manufacturing, packaging,
labeling,
advertising, promoting, distributing, and the selling of nutrition, health, beauty, and weight-management products. In the United States, advertisement of our products is regulated by the Federal
Trade Commission ("FTC") under the FTC Act and, where such advertising is considered to be product labeling by the FDA, under the Food, Drug, and Cosmetic Act ("FDCA") and the regulations thereunder.
USANA products in the U.S. are also subject to regulation by, among others, the Consumer Product Safety Commission, the U.S. Department of Agriculture, and the Environmental Protection Agency. The
manufacturing, labeling, and advertising of our products are also regulated by various governmental agencies in each country in which they are distributed. For example, in Australia, product
registration, labeling and manufacturing is regulated by the TGA and, in Japan, the Ministry of Health, Labor and Welfare. In China, the State Food and Drug Administration ("SFDA") regulates product
registration, labeling and manufacturing.
Our
largest selling product group includes products that are regulated as dietary supplements under the FDCA. Dietary supplements are also regulated in the United States under the
Dietary Supplement Health and Education Act of 1994 ("DSHEA"), which we believe is generally favorable to the dietary supplement industry. Some of our powdered drink, food bar, and other nutrition
products are regulated as foods under the Nutrition Labeling and Education Act of 1990 ("NLEA"). The NLEA establishes requirements for ingredient and nutritional labeling including product labeling
claims.
The
manufacture of nutritional or dietary supplements and related products in the United States requires compliance with dietary supplement GMPs, which are based on the
food-model GMPs and Pharmaceutical GMP's, with additional requirements that are specific to dietary supplements. We believe our manufacturing processes comply with these GMPs for dietary
supplements.
In
general, our personal care products, which are regulated as cosmetic products by the FDA, are not subject to pre-market approval by that agency. Cosmetics, however, are
subject to regulation by the FDA under the FDCA adulteration and misbranding provisions. Cosmetics also are subject to specific labeling regulations, including warning statements, if the safety of a
cosmetic is not adequately substantiated or if the product may be hazardous, as well as ingredient statements and other packaging requirements under the Fair Packaging and Labeling Act. Cosmetics that
meet the definition of a drug (i.e., that are intended to treat or prevent disease or affect the structure or function of the body), such as sunscreens, are regulated as drugs.
Over-the-counter ("OTC") drug products, including cosmetics, may be marketed if they conform to the requirements of the OTC monograph that is applicable to that drug. Drug
products not conforming to monograph requirements require an approved New Drug
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Application
("NDA") before marketing may begin. Under these provisions, if the agency were to find that a product or ingredient of one of our OTC drug products is not generally recognized as safe and
effective or is not included in a final monograph that is applicable to one of our OTC drug products, we would be required to reformulate or cease marketing that product until it is the subject of an
approved NDA or until the time, if ever, that the monograph is amended to include such product.
Advertising
of our products in the U.S. is subject to regulation by the FTC under the FTC Act. Under the FTC's Substantiation Doctrine, an advertiser is required to have a "reasonable
basis" for all objective product claims before the claims are made. Failure to adequately substantiate claims may be considered either deceptive or unfair practices. Pursuant to this FTC requirement,
we are required to have adequate substantiation for all material advertising claims that we make for our products in the U.S.
In
recent years, the FTC has initiated numerous investigations of and actions against companies that sell dietary supplement, weight-management, and cosmetic products. The FTC has issued
guidance to assist companies in understanding and complying with its substantiation requirement. We believe that we have adequate substantiation for all material advertising claims that we make for
our products in the U.S., and we believe that we have organized the documentation to support our advertising and promotional practices in compliance with these guidelines. However, no assurance can be
given that the FTC would reach the same conclusion if it were to review or question our substantiation for our advertising claims in the U.S.
The
FTC may enforce compliance with the law in a variety of ways, both administratively and judicially, using compulsory process, cease and desist orders, and injunctions. FTC
enforcement can result in orders requiring, among other things, limits on advertising, corrective advertising, consumer redress, divestiture of assets, rescission of contracts, and such other relief
as the agency deems necessary to protect the public. Violation of these orders could result in substantial financial or other penalties. Although, to our knowledge, we have not been the subject of any
action by the FTC, no assurance can be given that the FTC will not question our advertising or other operations in the U.S. in the future. Any action in the future by the FTC could materially and
adversely affect our ability to successfully market our products in the U.S.
The
Dietary Supplement & Nonprescription Drug Consumer Protection Act requires manufacturers of dietary supplement and over-the-counter products to notify
the FDA when they receive reports of serious adverse events occurring within the United States. We have an internal adverse event reporting system that has been in place for several years and believe
that we are in compliance with this law.
In
markets outside the United States, prior to commencing operations or marketing products, we may be required to obtain approvals, licenses, or certifications from a country's Food
Administration, Ministry of Health or comparable agency. Approvals or licensing may be conditioned on reformulation of USANA products for the market or may be unavailable with respect to certain
products or product ingredients. We must also comply with local product labeling and packaging regulations that vary from country to country. For example, China extensively regulates the registration,
labeling and marketing of our products. In China, our nutritional products are typically classified as "health foods" and our personal care products are typically classified as
"non-special use cosmetics". The registration process for health foods is complex and generally requires extensive analysis and approval by the SFDA. As a result, it may take several years
to register a product as a health food in China. We continue to work through the registration process for other health food products, which we also hope to begin selling through BabyCare in the
future.
We
cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative
orders, when and if promulgated, would have on our business. Future changes could include requirements for the
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reformulation
of certain products to meet new standards, the recall or discontinuation of certain products that cannot be reformulated, additional record keeping, expanded documentation of the
properties of certain products, expanded or different labeling, and additional scientific substantiation. Any or all of these requirements could have a material adverse effect on our business,
financial condition, and operating results.
Network Marketing Regulation.
Laws and regulations in each country in which we operate prevent the use of deceptive or fraudulent
practices that have
sometimes been inappropriately associated with legitimate direct selling and network marketing activities. Generally these laws are directed at ensuring that product sales ultimately are made to
consumers and that advancement within sales organizations is based on sales of the enterprise's products, rather than on investments in the organizations or on other criteria or activity that are not
related to retail sales. Where required by law, we obtain regulatory approval of our network marketing system, or, where approval is not required or available, the favorable opinion of local counsel
as to regulatory compliance.
In
addition to the FTC, each state has enacted its own "Little FTC Act" to regulate sales and advertising. Occasionally, we receive requests to supply information regarding our network
marketing plan to regulatory agencies. Although we have, from time to time, modified our network marketing system to comply with interpretations of various regulatory authorities, we believe that our
network marketing program is compliant with the laws and regulations relating to network marketing activities in our current markets. Nevertheless, we remain subject to the risk that, in one or more
of our present
or future markets, the marketing system or the conduct of certain Associates could be found not to be compliant with applicable laws and regulations. Failure by an Associate or by us to comply with
these laws and regulations could have a material adverse effect on our business in a particular market or in general.
The
direct selling laws and regulations in China require us to operate under a business model, which is different from our global business model. In China, we operate through BabyCare's
business model, which has been designed specifically for China. China's direct selling regulations contain both financial and operational restrictions for direct selling companies. Additionally,
BabyCare is required to obtain various licenses and approvals to conduct its direct selling business in China. BabyCare has been granted a license to engage in direct selling activities in the
municipalities of Beijing, Jiangsu, Shaanxi, and Tianjin and continues working to obtain similar licenses in other cities and provinces. These licenses allow BabyCare to operate under its direct
selling business model in the approved provinces by utilizing non-employee sales representatives to sell products away from fixed retail locations. In cities and provinces where BabyCare
has not been issued a direct selling license, it must operate under a retail and wholesale sales model. Under this model, BabyCare utilizes non-employee sales representatives to sell its
products through retail stores in the applicable city or province. BabyCare has also engaged independent service providers that meet both the requirements to operate their own business under Chinese
law as well as the conditions set forth by BabyCare to sell products and provide services to BabyCare customers. If, and when, BabyCare receives a direct selling license in additional cities and
provinces, it will continue to transition away from this retail model and integrate its direct selling business model in these cities and provinces.
We
cannot predict the nature of any future law, regulation, interpretation, or application, nor can we predict what effect additional governmental legislation or regulations, judicial
decisions, or administrative orders, when and if promulgated, would have on our business. It is possible that future legal requirements may require that we revise our network marketing program. Such
new requirements could have a material adverse effect on our business, financial condition, and operating results.
Transfer Pricing Regulation.
In the U.S. and many other countries, we are subject to transfer pricing and other tax regulations that are
designed to
ensure that appropriate levels of income are reported by our U.S. or international entities and are taxed accordingly. We have adopted transfer
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prices,
which are supported by a formal transfer pricing study for the sale of products to our subsidiaries in accordance with applicable transfer pricing laws. In addition, we have entered into
agreements with our subsidiaries for services and other contractual obligations, such as the payment of Associate incentives that are also supported by the same formal transfer pricing study. If the
U.S. Internal Revenue Service or the taxing authorities of any other jurisdiction were to successfully
challenge these agreements or require changes in our standard transfer pricing practices for products, we could become subject to higher taxes and our earnings may be adversely affected. The tax
treaties between the U.S. and most countries provide competent authority for relief to avoid any double taxation. We believe that we operate in compliance with all applicable transfer pricing
regulations. There can be no assurance, however, that we will continue to be found to be operating in compliance with transfer pricing regulations or that those laws will not be modified, which may
require that we change our operating procedures.
Intellectual Property
Trademarks.
We have developed and we use registered trademarks in our business, particularly relating to our corporate and product
names. We own 17
trademarks that are registered with the United States Patent and Trademark Office. Federal registration of a trademark enables the registered owner of the mark to bar the unauthorized use of the
registered mark in connection with a similar product in the same channels of trade by any third-party anywhere in the United States, regardless of whether the registered owner has ever used the
trademark in the area where the unauthorized use occurs. We have filed applications and own trademark registrations, and we intend to register additional trademarks in countries where USANA products
are or may be sold in the future. Protection of registered trademarks in some jurisdictions may not be as extensive as the protection in the United States.
We
also claim ownership and protection of certain product names, unregistered trademarks, and service marks under common law. Common law trademark rights do not provide the same level of
protection that is afforded by the registration of a trademark. In addition, common law trademark rights are limited to the geographic area in which the trademark is actually used. We believe these
trademarks, whether registered or claimed under common law, constitute valuable assets, adding to recognition of USANA and the effective marketing of USANA products. Trademark registration once
obtained is essentially perpetual, subject to the payment of a renewal fee. We therefore believe that these proprietary rights have been and will continue to be important in enabling us to compete.
Trade Secrets.
We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality
agreements
with employees and other parties. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that
our trade secrets will not otherwise become known to or independently developed by competitors. Our proprietary product formulations are generally considered trade secrets, but are not otherwise
protected under intellectual property laws.
Patents.
We have three U.S. patents. Two of our patents relate to the method of extracting an antioxidant from olives and the
byproducts of olive oil
production. These patents were issued in 2002 and will continue in force until December 20, 2019. In 2003, we entered into a licensing agreement with a supplier to make olive extract using our
patented process. Our third patent relates to a method of self-preserving our Sensé line of personal care products. This patent was issued in May 2007 and will
continue in force until August 5, 2024.
We
intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine
the enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel.
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Seasonality
Although we are not significantly affected by seasonality, we do experience slight variations in the activity of our Associates in many
of our markets in the first and fourth quarters around major cultural events such as Chinese New Year and Christmas.
Backlog
Our products are typically shipped within 72 hours after receipt of an order. As of March 1, 2013 we had no significant
backlog of orders.
Working Capital Practices
We maintain sufficient amounts of inventory in stock in order to provide a high level of service to our Associates and Preferred
Customers. Substantial inventories are required to meet the needs of our dual role as manufacturer and distributor. We also watch seasonal commodity markets and may buy ahead of normal demand to hedge
against cost increases and supply risks.
Environment
We are not aware of any instance in which we have contravened federal, state, or local laws relating to protection of the environment
or in which we otherwise may be subject to liability for environmental conditions that could materially affect operations.
Employees
As of March 1, 2013 we had approximately 1,330 employees worldwide, as measured by full-time equivalency. Our
employees are not currently represented by a collective bargaining agreement, and we have not experienced work stoppages as a result of labor disputes. We believe that we have a good relationship with
our employees.
Additional Available Information
We maintain executive offices and principal facilities at 3838 West Parkway Boulevard, Salt Lake City, Utah 84120. Our telephone number
is (801) 954-7100. We maintain a World Wide Web site at www.usanahealthsciences.com. The information on our web site should not be considered part of this report on
Form 10-K.
We
make available, free of charge at our corporate web site, copies of our annual reports on United States Securities and Exchange Commission ("SEC") Form 10-K,
quarterly reports on
SEC Form 10-Q, current reports on SEC Form 8-K, proxy statements, and all amendments to these reports, as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. This information may also be obtained from the SEC's on-line database,
which is located at www.sec.gov.
Item 1A. Risk Factors
Forward-Looking Statements and Certain Risks
We encounter substantial risks in our business, any one of which may adversely affect our business, results of
operations or financial condition. The fact that some of these risk factors may be the same or similar to those that we have filed with the Securities and Exchange Commission in past reports, means
only that the risks are present in multiple periods. We believe that many of the risks that are described here are part of doing business in the industry in which we operate and will likely be present
in all periods. The fact that certain risks are endemic to the industry does not lessen their significance. These risk factors should be
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read together with the other items in this report, including Item 1, "Business," and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Among others, risks and uncertainties that may affect our business, financial condition, performance, development, and results of operations include the following:
As a network marketing company, we are dependent upon an independent sales force and we do not have direct control over the marketing of our
products.
We rely on non-employee, independent Associates to market and sell our products and to generate our sales. Associates typically market and
sell our products on a part-time basis and likely will engage in other business activities, some of which may compete with us. We have a large number of Associates and a
relatively small corporate staff to implement our marketing programs and to provide motivational support to our Associates. We rely primarily upon our Associates to attract, train and motivate new
Associates. Our sales are directly dependent upon the efforts of our Associates. Our ability to maintain and increase sales in the future will depend in large part upon our success in increasing the
number of new Associates, retaining and motivating our existing Associates, and in improving the productivity of our Associates. Moreover, our ability to continue to attract and retain Associates can
be affected by a number of factors, some of which are beyond our control, including:
-
-
General business and economic conditions;
-
-
Adverse publicity or negative misinformation about us or our products;
-
-
Public perceptions about network marketing programs;
-
-
High-visibility investigations or legal proceedings against network marketing companies by federal or state
authorities or private citizens;
-
-
Public perceptions about the value and efficacy of nutritional, personal care, or weight management products generally;
-
-
Other competing network marketing organizations entering into the marketplace that may recruit our existing Associates or
reduce the potential pool of new Associates; and
-
-
Changes to the Compensation Plan required by law or implemented for business reasons that make attracting and retaining
Associates more difficult.
We
can provide no assurance that the number of Associates will increase or remain constant or that their productivity will increase. Our Associates may terminate their services at any
time, and, like most direct selling companies, we experience a high turnover among new Associates from year to year. In previous fiscal years, we have experienced both increases and declines in our
overall number of active Associates. A few of our mature markets, however, including the United States, have experienced a decline in the number of active Associates for several years. If our
initiatives for 2013 do not drive growth in our Associate numbers, particularly in the United States and other markets where our Associate numbers have declined, our operating results could be harmed.
We cannot accurately predict any fluctuation in the number and productivity of Associates because we primarily rely upon existing Associates to sponsor and train new Associates and to motivate new and
existing Associates. Our operating results in other markets could also be adversely affected if we and our existing Associates do not generate sufficient interest in our business to successfully
retain existing Associates and attract new Associates.
Our Hong Kong market accounts for a significant part of our business. Any decline in sales or customers in this market, without a corresponding increase in sales and customers in our
China market through BabyCare, would harm our business, financial condition and results of operations.
Over the past few years, the majority of our sales and
Associate growth has occurred in our Hong Kong market, which represented 27.9% of our net sales in 2012. Following our acquisition of BabyCare in China, we announced that we would shift our
international attention to growing our business in
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China.
As a result of this strategy, we will likely experience a decline in sales and/or customers in our Hong Kong market. Any decline in the performance of our Hong Kong market without a
corresponding increase in the performance in China would harm our business, financial condition and results of operations. We must comply with significant legal and regulatory requirements to engage
in direct selling in China and use a separate compensation plan for our Associates in China. Although we believe that, in light of our successful Asian Associate base, we will be successful in growing
our business in China, it is difficult to assess the extent to which our Chinese business model and Associate compensation plan will be accepted or successful in that market. Although we are required
to conduct our operations in China through BabyCare, we believe that our long-term success in China will depend on our ability to successfully integrate, to the extent possible, our
operations with BabyCare's operations. This includes, among other things, continuing to register current and future USANA products, in a timely manner, for sale in China and educating our Associates
on our Compensation Plan in China. In light of the factors listed above, and the other risks to our business, there can be no assurance that we will not experience a decline in sales and/or customers
in our Hong Kong market or that we will be successful in growing sales and customers in China.
Difficult economic conditions may adversely affect our business.
Over the past few years, economic conditions in many of the markets
where we sell
our products have resulted in challenges to our business. This is particularly true in our North America region, where, although we have seen a recent improvement, we continue to experience difficulty
generating meaningful growth. We cannot predict whether world or market specific economies will improve or deteriorate in the future. If difficult economic conditions continue or worsen, we could
experience declines in net sales, profitability and cash flow due to lower demand for our products or other factors caused by economic challenges faced by our customers, potential customers or
suppliers. Additionally, these conditions may result in a material adverse effect on our liquidity and capital resources or otherwise negatively impact our operations or overall financial condition.
The loss of a significant USANA Associate or downline sales organization could adversely affect our business.
We rely on the successful
efforts of
our Associates that become leaders within our Compensation Plan. Our Compensation Plan is designed to permit Associates to sponsor new Associates, creating multiple "business centers," or levels in
the downline organization. Sponsored Associates are referred to as "downline" Associates within the sponsoring Associate's "downline network." If these downline Associates in turn sponsor new
Associates, additional business centers are created, with the new downline Associates becoming part of the original sponsoring Associate's downline network. As a result of this network marketing
system, Associates develop business relationships with other Associates. The loss of a key Associate or group of Associates, large turnover or decreases in the size of the key Associate force,
seasonal or other decreases in purchase volume, sales volume reduction, the costs associated with training new Associates, and other related expenses may adversely affect our business, financial
condition, or results of operations.
Our Associate Compensation Plan, or changes we make to it, may be viewed negatively by some Associates, could fail to achieve our desired objectives, and could have a negative impact
on
our business.
Our line of business is highly competitive and sensitive to the introduction of new competitors, new products and/or new distributor compensation
plans. Network marketing companies commonly attempt to attract new distributors by offering generous distributor compensation plans. From time to time, we modify components of our Compensation Plan in
an effort to (i) keep it competitive and attractive to existing and potential Associates, (ii) cause or address a change in Associate behavior, (iii) incent Associates to grow our
business, (iv) conform to legal and regulatory requirements, and (v) address other business needs. In light of the size and diversity of our Associate force and the complexity of our
Compensation Plan, it is difficult to predict how any changes to the plan will be viewed by Associates and whether such changes will achieve their desired results. For example, in 2012, we made
changes to the matching bonus component of our Compensation Plan in an
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effort
to make it a more long-term focused incentive and to make it successful in all of our regions. Our old matching bonus program was successful in certain of our Asia Pacific markets,
but was unsuccessful in North America. In 2010, we also made changes to our Compensation Plan to encourage more entrepreneurial Associates to join the Company and build a sales organization at an
accelerated pace. While these changes successfully caused us to enroll more entrepreneurial Associates, they have made it more challenging for us to enroll Associates in general, including those who
simply consume our products and are less entrepreneurial. As a result, our Associate counts have decreased in many of our markets, including North America. There can be no assurance that our Associate
Compensation Plan will allow us to successfully attract new Associates or retain existing Associates, nor can we assure that any changes we make to our Compensation Plan will achieve our desired
results.
The violation of marketing or advertising laws by Associates in connection with the sale of our products or the improper promotion of our Compensation Plan could adversely affect our
business.
All Associates sign a written contract and agree to adhere to our policies and procedures. Although these policies and procedures prohibit Associates
from making false, misleading and other improper claims regarding products or income potential from the distribution of the products, Associates may, from time to time, without our knowledge and in
violation of our policies, create promotional materials or otherwise provide information that does not accurately describe our marketing program. They also may make statements regarding potential
earnings, product claims, or other matters in violation of our policies or applicable laws and regulations concerning these matters. These violations may result in legal action against us by
regulatory agencies, state attorneys general, or private parties. Legal actions against our Associates or others who are associated with us could lead to increased regulatory scrutiny of our business,
including our network marketing system. We take what we believe to be commercially reasonable steps to monitor the activities of our Associates to guard against misrepresentation and other illegal or
unethical conduct by Associates and to assure that the terms of our policies and procedures and Compensation Plan are observed. There can be no assurance, however, that our efforts in this regard will
be sufficient to accomplish this objective, particularly in times/regions where we may experience rapid growth. Adverse publicity resulting from such activities could also make it more difficult for
us to attract and retain Associates and may have an adverse effect on our business, financial condition, and results of operations.
Legal action by former Associates or third parties against us could harm our business.
We continually monitor and review our
Associates' compliance
with our policies and procedures as well the laws and regulations applicable to our business. From time to time, some Associates fail to adhere to our policies and procedures. If this happens, we may
take disciplinary action against the particular Associate. This disciplinary action is based on the facts and circumstances of the particular case and may include anything from warnings for minor
violations to termination of an Associate's purchase and distribution rights for more serious violations. From time to time, we become involved in litigation with an Associate whose purchase and
distribution rights have been terminated. We consider this type of litigation to be routine and incidental to our business. While neither the existence nor the outcome of this type of litigation is
typically material to our business, in the past we have been involved in litigation
of this nature that resulted in a large cash award against the Company. Our competitors have also been involved in this type of litigation, and in some cases class actions, where the result has been a
large cash award against the competitor or a large cash settlement by the competitor. These types of challenges, awards or settlements could provide incentives for similar actions by other former
Associates against us in the future. Any such challenge involving us or others in our industry could harm our business by resulting in fines or damages against us, creating adverse publicity about us
or our industry, or hurting our ability to attract and retain customers. We believe that Associate compliance is critical to the integrity of our business, and, therefore, we will continue to be
aggressive in ensuring that our Associates comply with our policies and procedures. As such, there can be no assurance that this type of litigation will not occur again in the future or result in an
award or settlement that has a materially adverse effect on our business.
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Network marketing is subject to intense government scrutiny and regulation, which adds to the expense of doing business and the possibility that changes in the law might adversely
affect
our ability to sell some of our products in certain markets.
Network marketing systems, such as ours, are frequently subject to laws and regulations, both in the
U.S. and internationally, that are directed at ensuring that product sales are made to consumers of the products and that compensation, recognition, and advancement within the marketing organization
are based on the sale of products rather than on investment in the sponsoring company. Regulatory authorities, in one or more of our present or future markets, could determine that our network
marketing system does not comply with these laws and regulations or that it is prohibited. Failure to comply with these laws and regulations or such a prohibition could have a material adverse effect
on our business, financial condition, or results of operations. Further, we may simply be prohibited from distributing products through a network-marketing channel in some countries, or we may be
forced to alter our Compensation Plan.
We
are also subject to the risk that new laws or regulations might be implemented or that current laws or regulations might change, which could require us to change or modify the way we
conduct our business in certain markets. This could be particularly detrimental to us if we had to change or modify the way we conduct business in markets that represent a significant percentage of
our net sales. For example, the FTC released a proposed New Business Opportunity Rule in April 2006. As initially drafted, the proposed rule would have required pre-sale disclosures for
all business opportunities, which may have included network marketing compensation plans such as ours. However, in March 2008 the FTC issued a revised notice of proposed rulemaking, and, in December
2011, the FTC issued its final rule. This final rule does not attempt to cover multi-level marketing companies.
We may have or incur obligations relating to the activities of our Associates.
Our Associates are subject to taxation, and, in some
instances,
legislation or governmental agencies impose an obligation on us to
collect taxes, such as sales taxes or value added taxes, and to maintain appropriate records of such transactions. In addition, we are subject to the risk in some jurisdictions of being responsible
for social security and similar taxes with respect to our Associates. In the event that local laws and regulations or the interpretation of local laws and regulations change to require us to treat our
independent Associates as employees, or if our Associates are deemed by local regulatory authorities in one or more of the jurisdictions in which we operate to be our employees rather than independent
contractors, under existing laws and interpretations, we may be held responsible for a variety of obligations that are imposed upon employers relating to their employees, including social security and
related taxes in those jurisdictions, plus any related assessments and penalties, which could harm our financial condition and operating results.
Our business is subject to the effects of adverse publicity and negative public perception.
Our ability to attract and retain
Associates and to
sustain and enhance sales through our Associates can be affected by adverse publicity or negative public perception regarding our industry, our competition, or our business generally. This negative
public perception may include publicity regarding the legality of network marketing, the quality or efficacy of nutritional supplement products or ingredients in general or our products or ingredients
specifically, and regulatory investigations, regardless of whether those investigations involve us or our Associates or the business practices or products of our competitors or other network marketing
companies. In 2007, we were the victim of false statements made to the press and regulatory agencies, causing us to incur significant expense in defending and dispelling the allegations during 2007
and 2008. More recently, in November 2012, we were again the target of false and misleading statements concerning our business practices, particularly in China and Hong Kong. This adverse publicity
also adversely impacted the market price of our stock and caused insecurity among our Associates. There can be no assurance that we will not be subject to adverse publicity or negative public
perception in the future or that such adverse publicity will not have a material adverse effect on our business, financial condition, or results of operations.
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The loss of key management personnel could adversely affect our business.
Our Founder, Dr. Myron Wentz, is a highly visible
spokesman for our
products and our business, and our message is based in large part on his vision and reputation, which helps distinguish us from our competitors. Any loss or limitation on Dr. Wentz as a lead
spokesman for our mission, business, and products could have a material adverse effect upon our business, financial condition, or results of operations. In addition, our executive officers are
primarily responsible for our day-to-day operations, and we believe our success depends in part on our ability to retain our executive officers, to compensate our executive
officers at attractive levels, and to continue to attract additional qualified individuals to our management team. We cannot guarantee continued service by our key executive officers. We do not
maintain key man life insurance on any of our executive officers, nor do we have an employment agreement with any of our executive officers. The loss or limitation of the services of
any of our executive officers or the inability to attract additional qualified management personnel could have a material adverse effect on our business, financial condition, or results of operations.
The beneficial ownership of a significant percentage of our common stock gives our founder and parties related to or affiliated with him effective control, and limits the influence
of
other shareholders on important policy and management issues.
Gull Holdings, Ltd., an entity that is solely owned and controlled by Dr. Wentz, owned
48% of our outstanding common stock at December 29, 2012. By virtue of this stock ownership, Dr. Wentz is able to exert significant influence over the election of the members of our
Board of Directors and our business affairs. This concentration of ownership could also have the effect of delaying, deterring, or preventing a change in control that might otherwise be beneficial to
shareholders. In addition, Dr. Wentz also currently serves as Chairman of our Board of Directors and his son, David Wentz, is our Chief Executive Officer. There can be no assurance that
conflicts of interest will not arise with respect to these relationships or that conflicts will be resolved in a manner favorable to other shareholders of the Company.
Sales by our shareholders of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common
stock.
A large number of outstanding shares of our common stock are held by several of our principal shareholders. If any of these principal shareholders were to
decide to sell large amounts of stock over a short period of time such sales could cause the market price of our common stock to decline.
Our stock price has been volatile and subject to various market conditions.
There can be no assurance that an active market in our stock
will be
sustained. The trading price of our common stock has been subject to wide fluctuations. We have a relatively small public float compared to the number of our shares outstanding. Accordingly, we cannot
predict the extent to which investors' interest in our common stock will provide an active and liquid trading market. Due to our limited public float, we are vulnerable to investors taking a "short
position" in our common stock, which is likely to have a depressing effect on the price of our common stock and add increased volatility to our trading market. The price of our common stock also may
fluctuate in the future in response to quarter-to-quarter variations in operating results, material announcements by us or our competitors, governmental regulatory action,
conditions in the nutritional supplement industry, negative publicity, or other events or factors, many of which are beyond our control. In addition, the stock market has historically experienced
significant price and volume fluctuations, which have particularly affected the market prices of many dietary and nutritional supplement companies and which have, in certain cases, not had a strong
correlation to the operating performance of these companies. Our operating results in future quarters may be below the expectations of securities analysts and investors. If that were to occur, the
price of our common stock would likely decline, perhaps substantially.
Our products and manufacturing activities are subject to extensive government regulation, which could limit or prevent the sale of our products in some
markets.
The manufacture, packaging, labeling, advertising, promotion, distribution, and sale of our products are subject to regulation by
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numerous
national and local governmental agencies in the United States and other countries, including the U.S. Food and Drug Administration ("FDA") and the U.S. Federal Trade Commission ("FTC"). For
example, failure to comply with FDA regulatory requirements may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines, and criminal prosecutions. Any action
of this type by the FDA could materially adversely affect our ability to successfully market our products. With respect to FTC matters, if the FTC has reason to believe the law is being violated
(e.g., failure to possess adequate substantiation for product claims), it can initiate an enforcement action. The FTC has a variety of processes and remedies available to it for enforcement,
both administratively and judicially, including compulsory process authority, cease and desist orders, and injunctions. FTC enforcement could result in orders requiring, among other things, limits on
advertising, consumer redress, divestiture of assets, rescission of contracts, or such other relief as may be deemed necessary. Violation of these orders could result in substantial financial or other
penalties. Any action against us by the FTC could materially and adversely affect our ability to successfully market our products.
The
manufacture of nutritional or dietary supplements and related products in the United States requires compliance with dietary supplement GMPs, which are based on the
food-model GMPs, with additional requirements that are specific to dietary supplements. We believe our manufacturing processes comply with these GMPs for dietary supplements. Nevertheless,
any action by the FDA which determined that our processes were non-compliant with dietary supplement GMPs, could materially adversely affect our ability to manufacture and market our
products. Additionally, the Dietary Supplement & Nonprescription Drug Consumer Protection Act requires manufacturers of dietary supplement and over-the-counter products
to notify the FDA when they receive reports of serious adverse events occurring within the United States. Potential FDA responses to any such report could include injunctions, product withdrawals,
recalls, product seizures, fines, or criminal prosecutions. We have an internal adverse event reporting system that has been in place for several years and believe that we are in compliance with this
new law. Nevertheless, any action by the FDA in response to a serious adverse event report that may be filed by us could materially and adversely affect our ability to successfully market our
products.
In
markets outside the United States, prior to commencing operations or marketing our products, we may be required to obtain approvals, licenses, or certifications from a country's
ministry of health or a comparable agency. For example, our manufacturing facility has been registered with the FDA and Health Canada and is certified by Australia's TGA. Approvals or licensing may be
conditioned on reformulation of products or may be unavailable with respect to certain products or product ingredients. We must also comply with product labeling and packaging regulations that vary
from
country to country. These activities are also subject to regulation by various agencies of the countries in which our products are sold.
We
cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative
orders, when and if promulgated, could have on our business. These potential effects could include, however, requirements for the reformulation of certain products to meet new standards, the recall or
discontinuance of certain products, additional record keeping and reporting requirements, expanded documentation of the properties of certain products, expanded or different labeling, or additional
scientific substantiation. Any or all of these requirements could have a material adverse effect on our business, financial condition, or results of operations.
Risks associated with operating in international markets could restrict our ability to expand globally and harm our business and prospects, and we could be adversely affected by our
failure to comply with the laws applicable to our foreign activities, including the U.S. Foreign Corrupt Practices Act and other similar worldwide anti-bribery
laws.
Our international operations are presently conducted in various foreign countries, and we expect that the number of countries in which we
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operate
could expand over the next few years. Economic conditions, including those resulting from wars, civil unrest, acts of terrorism and other conflicts or volatility in the global markets, may
adversely affect our customers, their demand for our products and their ability to pay for our products. In addition, there are numerous risks inherent in conducting our business internationally,
including, but not limited to, potential instability in international markets, changes in regulatory requirements applicable to international operations, currency fluctuations in foreign countries,
political, economic and social conditions in foreign countries and complex U.S. and foreign laws and treaties, including tax laws and the U.S. Foreign Corrupt Practices Act (FCPA). These risks could
restrict our ability to sell products to or to obtain international customers or to operate our international business profitably, and our overall business and results of operations could be
negatively impacted by our foreign activities.
The
FCPA and similar anti-bribery laws in other jurisdictions prohibit U.S.-based companies and their intermediaries from making improper payments to government officials for
the purpose of obtaining or retaining business. We pursue opportunities in certain parts of the world that experience government corruption, and in certain circumstances, compliance with
anti-bribery laws may conflict with local customs and practices. Our policies mandate compliance with all applicable anti-bribery laws. Further, we require our partners,
subcontractors, agents and others who work for us or on our behalf to comply with the FCPA and other anti-bribery laws. Although we have policies and procedures designed to ensure that we,
our employees, our agents and others who work with us in foreign countries comply with the
FCPA and other anti-bribery laws, there is no assurance that such policies or procedures will protect us against liability under the FCPA or other laws for actions taken by our agents,
employees and intermediaries. If we are found to be liable for FCPA violations (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we could incur severe
criminal or civil penalties or other sanctions, which could have a material adverse effect on our reputation, business, results of operations or cash flows. In addition, detecting, investigating and
resolving actual or alleged FCPA violations is expensive and could consume significant time and attention of our senior management.
Our net sales are significantly affected by our success in growing existing markets, as well as opening new markets. As we continue to expand into international markets, our business
becomes increasingly subject to political, economic, legal and other risks. Changes in these markets could adversely affect our business.
We have a history of
expanding into new international markets. We believe that our ability to achieve future growth is dependent in part on our ability to continue our international expansion efforts. There can be no
assurance, however, that we will be able to grow in our existing international markets, enter new international markets on a timely basis, or that new markets will be profitable. We must overcome
significant regulatory and legal barriers before we can begin marketing in any international market. Also, before marketing commences in a new country or market, it is difficult to assess the extent
to which our products and sales techniques will be accepted or successful in any given country. In addition to significant regulatory barriers, we may also encounter problems conducting operations in
new markets with different cultures and legal systems from those encountered elsewhere. We may be required to reformulate certain of our products before commencing sales in a given country. Once we
have entered a market, we must adhere to the regulatory and legal requirements of that market. No assurance can be given that we will be able to successfully reformulate our products in any of our
current or potential international markets to meet local regulatory requirements or to attract local customers. Our failure to do so could have a material adverse effect on our business, financial
condition, or results of operations. There can be no assurance that we will be able to obtain and retain necessary permits and approvals in new markets, or that we will have sufficient capital to
finance our expansion efforts in a timely manner.
In
many market areas, other network marketing companies already have significant market penetration, the effect of which could be to desensitize the local Associate population to a new
opportunity, such as USANA, or to make it more difficult for us to attract qualified Associates. Even if
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we
are able to commence operations in new markets, there may not be a sufficient population of persons who are interested in our network marketing system. We believe our future success will depend in
part on our ability to seamlessly integrate our Compensation Plan across all markets where legally permissible. There can be no assurance, however, that we will be able to utilize our Compensation
Plan seamlessly in all existing or future markets. For example, in August 2010, we indirectly acquired BabyCare, a nutritional supplement company that is now licensed by the government of China to
engage in direct selling in the Municipalities of Beijing, Jiangsu, Shaanxi, and Tianjin. In accordance with Chinese law, we utilize a compensation plan that has been designed specifically for China
and implemented by BabyCare separately from our Compensation Plan in our other markets.
Our operations in China are subject to significant government scrutiny and may be harmed by the results of such scrutiny.
Because of
the government's
significant concerns about direct selling activities, government regulators in China closely scrutinize activities of direct selling companies or activities that resemble direct selling. The
regulatory environment in China with regard to direct selling is evolving, and officials in multiple national and local levels in the Chinese government often exercise broad discretion in deciding how
to interpret and apply applicable regulations. In the past, the government has taken significant actions against companies that the government has found have been engaging in direct selling activities
in violation of applicable law, including shutting down their businesses and imposing substantial fines.
Any
determination that our operations or activities, or the activities of our sales employees, contractual sales promoters, direct sellers or Associates are not in compliance with
applicable regulations could result in substantial fines, extended interruptions of business, termination of necessary licenses and permits, including our direct selling licenses, or restrictions on
our ability to open new stores, obtain approvals for service centers or expand into new locations, all of which could harm our business.
Chinese regulations prevent persons who are not Chinese nationals from engaging in direct selling in China.
We cannot guarantee that
any of our
Associates living outside of China or any of our sales representatives or independent Associates in China have not engaged or will not engage in activities that violate our policies in this market, or
that violate Chinese law or other applicable law, and therefore result in regulatory action and adverse publicity, which would harm our business in China.
Our business will be adversely affected if Chinese regulatory authorities view our direct selling and other corporate activities as non-compliant with applicable Chinese laws
and regulations.
Our operations in China may be deemed to be subject to numerous Chinese commercial laws, including restrictions on foreign investments. In
addition, the Chinese regulatory authorities with jurisdiction over our operations may change applicable laws and regulations or impose additional requirements and conditions with which we may be
unable to comply. Our operations in China are licensed to engage in direct selling activity in the Municipalities of Beijing, Jiangsu, Shaanxi, and Tianjin. We have not sought confirmation from
Chinese regulatory governmental authorities whether our structure and business in China complies with applicable Chinese laws and regulations, including regulation of direct selling business in China.
If:
-
-
Chinese authorities deem our corporate activities as violating applicable Chinese laws and regulations (including
restrictions on foreign investments);
-
-
Chinese regulatory authorities change applicable laws and regulations or impose additional requirements and conditions
with which we are unable to comply; or
-
-
We are found to violate any existing or future Chinese laws or regulations;
the
relevant Chinese authorities would have broad discretion to deal with such a violation by levying fines, revoking business licenses, requiring us to restructure our China ownership or operations,
and/or
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require
us to discontinue some or all of our business in China. Any of these actions would adversely affect our business.
Our ability to expand our direct selling operations in China is dependent upon the Chinese government granting us additional direct selling
licenses.
We will be required to obtain licenses from municipalities and provinces within China where we currently do not hold direct selling licenses. We
currently hold four such licenses and we are in the process of applying for licenses in additional jurisdictions within China. If we are unable to obtain additional necessary national and local
government approvals in China as quickly as we would like, our ability to expand and grow our business could be negatively impacted. The process for obtaining the necessary government approvals to
conduct direct selling continues to evolve. The process is time-consuming and expensive. The complexity of the approval process, as well as the government's continued cautious approach as
direct selling develops in China, makes it difficult to predict the timeline for obtaining additional approvals. If the results of the government's evaluation of our direct selling activities result
in further delays in obtaining licenses elsewhere, or if the current processes for obtaining approvals are delayed for any reason or are changed or are interpreted differently than currently
understood, our ability to expand direct selling in China and our growth prospects in this market, could be negatively impacted. We currently are only allowed by the PRC to sell through direct selling
the limited number of products that we manufacture in China. If we wish to sell additional products (other than those
already approved) through the direct-selling channel, we must successfully complete a product approval process similar to the process described above. We cannot assure that we will be successful in
obtaining such additional product approvals on a timely basis or at all.
If our operations in China are successful, we may experience rapid growth in China, and there can be no assurances that we will be able to successfully manage rapid expansion of our
direct selling activities under license in China or the related manufacturing and retail operations required to support this expansion.
If we are unable to
effectively manage such growth and expansion, including expansion of our retail stores, warehouses, and manufacturing operations, our government relations may be compromised and our operations in
China may be harmed.
A return to profit repatriation controls may limit the ability to expand business and reduce the attractiveness of investing in Chinese business
opportunities.
Chinese law allows enterprises owned by foreign investors to remit their profits, dividends and bonuses earned in China to other countries, and the
remittance does not require prior approval by the State Administration of Foreign Exchange ("SAFE"). SAFE regulations require extensive documentation and reporting, some of which are burdensome and
slows payments. If there is a return to payment restrictions and reporting, the ability of a Chinese company to attract investors will be reduced. Also, current investors may not be able to obtain the
profits of the businesses they own for other reasons. Relevant Chinese law and regulation permit payment of dividends only from retained earnings, if any, determined in accordance with Chinese
accounting standards and regulations. It is possible that the Chinese tax authorities may require changes in the calculation of distributable net income of our operations in China that may limit our
ability to pay dividends and other distributions to stockholders. Chinese law requires companies to set aside a portion of net income to fund certain reserves, which amounts are not distributable as
dividends. These rules and possible changes could restrict us from repatriating funds.
Our ability to enforce our material agreements in China is uncertain.
Chinese law governs our material operating agreements in China.
There is no
assurance that we will be able to enforce those material agreements or that remedies will be available outside China. The Chinese judiciary is relatively inexperienced in enforcing corporate and
commercial laws, leading to a substantial degree of uncertainty as to the outcome of litigation. The inability to enforce or obtain a remedy under our agreements may have a material adverse impact on
our operations.
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Intellectual property rights are difficult to enforce in China.
Chinese commercial law is relatively underdeveloped compared to most of
our other
major markets, and, as a result, we may have limited legal recourse in the event we encounter significant difficulties with patent or trademark infringers. Limited protection of intellectual property
is available under Chinese law, and the local manufacturing of our products may subject us to an increased risk that unauthorized parties may attempt to manufacture and sell counterfeited products or
copy or otherwise obtain or use our product formulations. As a result, we cannot assure that we will be able to adequately protect our product formulations or other intellectual property in China.
An increase in the amount of incentives paid to Associates reduces our profitability.
The payment of Associate incentives is our most
significant
expense. These incentives include commissions, bonuses, and certain awards and prizes. From time to time, we adjust our Compensation Plan to better manage these incentives as a percentage of net
sales. We closely monitor the amount of Associate incentives that are paid as a percentage of net sales, and may periodically adjust our Compensation Plan to prevent Associate incentives from having a
significant adverse effect on our earnings. There can be no assurance that changes to the Compensation Plan or product pricing will be successful in achieving target levels of Associate incentives as
a percentage of net sales. Furthermore, such changes may make it difficult to attract and retain qualified and motivated Associates or cause us to lose some of our longer-standing Associates.
Our business is subject to the risks associated with intense competition from larger, wealthier, and more established competitors.
We
face intense
competition in the business of distributing and marketing nutritional supplements, vitamins and minerals, personal care products, and other nutritional products, as described in greater detail in
"BusinessCompetition." Numerous manufacturers, Associates, and retailers compete actively for consumers and, in the case of other network marketing companies, for Associates. There can be
no assurance that we will be able to compete in this intensely competitive environment. In addition, nutrition and personal care products can be purchased in a wide variety of channels of
distribution, including retail stores. Our product offerings in each product category are also relatively small, compared to the wide variety of products offered by many of our competitors.
We
are also subject to significant competition from other network marketing organizations for the time, attention, and commitment of new and existing Associates. Our ability to remain
competitive depends, in significant part, on our success in recruiting and retaining Associates. There can be no assurance that our programs for recruiting and retaining Associates will be successful.
The pool of individuals who may be interested in network marketing is limited in each market, and it is reduced to the extent other network marketing companies successfully recruit these individuals
into their businesses. Although we believe we offer an attractive opportunity for Associates, there can be no assurance that other network marketing companies will not be able to recruit our existing
Associates or deplete the pool of potential Associates in a given market.
Taxation and transfer pricing considerations affect our operations.
In many countries, including the United States, we are subject to
transfer
pricing and other tax regulations that are designed to ensure that appropriate levels of income are reported by our U.S. and foreign entities and are taxed appropriately. Although we believe that we
are in compliance with all material regulations and restrictions in this regard, we are subject to the risk that taxing authorities could audit our transfer pricing and related practices and assert
that additional taxes are owed. We are also subject to the risk that taxing authorities in any of our markets could change the laws in a manner that may increase our effective tax rate and/or duties
on our products. Under tax treaties, we are eligible to receive foreign tax credits in the United States for foreign taxes paid abroad. In the event any audits or assessments are concluded adversely
to us, we may or may not be able to offset the consolidated effect of foreign income tax assessments through the use of U.S. foreign tax credits. Currently, we are utilizing all
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foreign
tax credits in the year in which they arise. Because the laws and regulations governing U.S. foreign tax credits are complex and subject to periodic legislative amendment, we cannot be sure
that we would in fact be able to take advantage of any foreign tax credits in the future. As a result, adverse outcomes in these matters could have a material impact on our financial condition or
operating results.
Fluctuation in the value of currency exchange rates with the U.S. dollar affects our operations and our net sales and earnings.
Over
the past several
years, a majority of our net sales have been generated outside the United States. Such sales for the year ended December 29, 2012 represented 76.5% of our total net sales. We will likely
continue to expand our operations into new markets, exposing us to expanding risks of changes in social, political, and economic conditions, including changes in the laws and policies that govern
investment or exchange in these markets. Because a significant portion of our sales are generated outside the United States, exchange rate fluctuations will have a significant effect on our sales and
earnings. Further, if exchange rates fluctuate dramatically, it may become uneconomical for us to establish or to continue activities in certain countries. For instance, changes in currency exchange
rates may affect the relative prices at which we and our competitors sell similar products in the same market. As our business expands outside the United States, an increasing share of our net sales
and operating costs will be transacted in currencies other than the U.S. dollar. Accounting practices require that our non-U.S. financial results be converted to U.S. dollars for reporting
purposes. Consequently, our reported net earnings may be significantly affected by fluctuations in currency exchange rates, with earnings generally increasing with a weaker U.S. dollar and decreasing
with a strengthening U.S. dollar. Product purchases by our subsidiaries are transacted in U.S. dollars. As our operations expand in countries where transactions may be made in currencies other than
the U.S. dollar, our operating results will be increasingly subject to the risks of exchange rate fluctuations and we may not be able to accurately estimate the impact that these changes might have on
our future business, product pricing, results of operations, or financial condition. In addition, the value of the U.S. dollar in relation to other currencies may also adversely affect our sales to
customers outside the United States. Currently our strategy for reducing our exposure to currency
fluctuation includes the timely and efficient repatriation of earnings from international markets and settlement of intercompany transactions. At times in the past we have sought to reduce exposure to
fluctuations in currency exchange rates by creating offsetting positions through the use of currency exchange contracts on cash that we repatriate. We did not enter into any such contracts during
2012, but we may look to something like this in the coming year. We do not use derivative instruments for speculative purposes. There can be no assurance that we will be successful in protecting our
operating results or cash flows from potentially adverse effects of currency exchange fluctuations. Any such adverse effects could also adversely affect our business, financial condition, or results
of operations.
Disruptions to shipping channels that we use to distribute our products to international warehouses may adversely affect our margins and profitability in those
markets.
In the past, we have felt the impact of disruptions to the shipping channels used to distribute our products; these disruptions have included increased
port congestion, a lack of capacity on the railroads, and a shortage of manpower. Although we have not recently experienced significant shipping disruptions, we continue to watch for signs of upcoming
congestion. Congestion to ports can affect previously negotiated contracts with shipping companies, resulting in unexpected increases in shipping costs and reduction in our net sales.
The inability to obtain adequate supplies of raw materials for products at favorable prices, or at all, or the inability to obtain certain products from third-party suppliers, could
have
a material adverse effect on our business, financial condition, or results of operations.
We acquire all of our raw materials for the manufacture of our products
from third-party suppliers. Materials used in manufacturing our products are purchased through purchase order, often invoking pre-negotiated annual supply agreements. We have very few
long-term agreements for the supply of these materials. We also contract with third-party manufacturers and suppliers for the production of some of our
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products,
including most of our gelatin-capsuled supplements, Probiotic, Rev3 Energy Drink, our powdered drink mixes and nutrition bars, and certain of our personal care products. These
third-party suppliers and manufacturers produce and, in most cases, package these products according to formulations that have been developed by, or in conjunction with, our in-house
product development team. There is a risk that any of our suppliers or manufacturers could discontinue manufacturing our products or selling their products to us. Although we believe that we could
establish alternate sources for most of our products, any delay in locating and establishing relationships with other sources could result in product shortages or back orders for products, with a
resulting loss of net sales. In certain situations, we may be required to alter our products or to substitute different products from another source. We have, in the past, discontinued or temporarily
stopped sales of certain products that were manufactured by third parties while those products were on back order. There can be no assurance that suppliers will provide the raw materials or
manufactured products that are needed
by us in the quantities that we request or at the prices that we are willing to pay. Because we do not control the actual production of certain raw materials and products, we are also subject to
delays caused by any interruption in the production of these materials, based on conditions not within our control, including weather, crop conditions, transportation interruptions, strikes by
supplier employees, and natural disasters or other catastrophic events.
Shortages of raw materials may temporarily adversely affect our margins or our profitability related to the sale of those products.
In
the past, we
have experienced temporary shortages of the raw materials used in certain of our nutritional products. Although we had identified multiple sources to supply such raw material ingredients, quantities
of the materials we purchased during these shortages were at higher prices, which negatively impacted our gross margins for those products. While we periodically experience price increases due to
unexpected raw material shortages and other unanticipated events, we have been able to manage this by increasing the price at which we sell our products, therefore, this has historically not resulted
in a material effect on our overall cost of goods sold. However, there is no assurance that our raw materials will not be significantly adversely affected in the future, causing our profitability to
be reduced.
Nutritional supplement products may be supported by only limited availability of conclusive clinical studies.
Our products include
nutritional
supplements that are made from vitamins, minerals, herbs, and other substances for which there is a long history of human consumption. Some of our products contain innovative ingredients or
combinations of ingredients. Although we believe that all of our products are safe when taken as directed, there is little long-term experience with human consumption of certain of these
product ingredients or combinations of ingredients in concentrated form. We conduct research and test the formulation and production of our products, but we have performed or sponsored only limited
clinical studies. Furthermore, because we are highly dependent on consumers' perception of the efficacy, safety, and quality of our products, as well as similar products distributed by other
companies, we could be adversely affected in the event that those products prove or are asserted to be ineffective or harmful to consumers or in the event of adverse publicity associated with any
illness or other adverse effects resulting from consumers' use or misuse of our products or similar products of our competitors.
As a manufacturer, we may be subject to product liability claims.
As a manufacturer and a distributor of products for human consumption
and topical
application, we could become exposed to product liability claims and litigation. Additionally, the manufacture and sale of these products involves the risk of injury to consumers due to tampering by
unauthorized third parties or product contamination. To date, we have not been a party to any product liability litigation, although, like any dietary supplement company, we have received reports from
individuals who have asserted that they suffered adverse consequences as a result of using our products. The number of reports we have received to date is nominal. These matters historically have been
settled to our satisfaction and have not resulted in material payments. We are aware of no instance in which any of our products are or
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have
been defective in any way that could give rise to material losses or expenditures related to product liability claims. Although we maintain product liability insurance, which we believe to be
adequate for our needs, there can be no assurance that we will not be subject to such claims in the future or that our insurance coverage will be adequate.
Our business is subject to particular intellectual property risks.
Most of our products are not protected by patents. The labeling
regulations
governing our nutritional supplements require that the ingredients of such products be precisely and accurately indicated on product containers. Accordingly, patent protection for nutritional
supplements often is impractical given the large number of manufacturers who produce nutritional supplements having many active ingredients in common. Additionally, the nutritional supplement industry
is characterized by rapid change and frequent reformulations of products, as the body of scientific research and literature refines current understanding of the application and efficacy of certain
substances and the interactions among various substances. In this respect, we maintain an active research and development program that is devoted to developing better, purer, and more effective
formulations of our products. We protect our investment in research, as well as the techniques we use to improve the purity and effectiveness of our products, by relying on trade secret laws. We have
also entered into confidentiality agreements with certain of our employees involved in research and development activities. Additionally, we endeavor to seek, to the fullest extent permitted by
applicable law, trademark and trade dress protection for our products, which protection has been sought in the United States, Canada, and in many of the other countries in which we are either
presently operating or plan to commence operations in the future. Notwithstanding our efforts, there can be no assurance that our efforts to protect our trade secrets and trademarks will be
successful. Nor can there be any assurance that third-parties will not assert claims against us for infringement of their intellectual proprietary rights. If an infringement claim is asserted, we may
be required to obtain a license of such rights, pay royalties on a retrospective or prospective basis, or terminate our manufacturing and marketing of our infringing products. Litigation with respect
to such matters could result in substantial costs and diversion of management and other resources and could have a material adverse effect on our business, financial condition, or operating results.
Our manufacturing activity is subject to certain risks.
We manufacture approximately 75% of the products sold to our customers. As a
result, we are
dependent upon the uninterrupted and efficient operation of our manufacturing facilities. Those operations are subject to power failures, the breakdown, failure, or substandard performance of
equipment, the improper installation or operation of equipment, natural or other disasters, and the need to comply with the requirements or directives of government agencies, including the FDA. There
can be no assurance that the occurrence of these or any other operational problems at our facility would not have a material adverse effect on our business, financial condition, or results of
operations. We are subject to a variety of environmental laws relating to the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals, solid and hazardous waste,
and other toxic and hazardous materials. Our manufacturing operations
presently do not result in the generation of material amounts of hazardous or toxic substances. Nevertheless, complying with new or more stringent laws or regulations, or more vigorous enforcement of
current or future policies of regulatory agencies, could require substantial expenditures by us that could have a material adverse effect on our business, financial condition, or results of
operations. Environmental laws and regulations require us to maintain and comply with a number of permits, authorizations, and approvals and to maintain and update training programs and safety data
regarding materials used in our processes. Violations of those requirements could result in financial penalties and other enforcement actions and could require us to halt one or more portions of our
operations until a violation is cured. The combined costs of curing incidents of non-compliance, resolving enforcement actions that might be initiated by government authorities, or of
satisfying new legal requirements could have a material adverse effect on our business, financial condition, or results of operations.
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A failure of our information technology systems would harm our business.
The global nature of our business and our seamless global
compensation plan
requires the development and implementation of robust and efficiently functioning information technology systems. Such systems are vulnerable to a variety of potential risks, including damage or
interruption resulting from natural disasters and telecommunication failures and human error or intentional acts of sabotage, vandalism, break-ins and similar acts. Although we have
adopted and implemented a business continuity and disaster recovery plan, which includes routine back-up, off-site archiving and storage, and certain redundancies, the
occurrence of any of these events could result in costly interruptions or failures adversely affecting our business and the results of our operations.
We may incur liability under our "Athlete Guarantee" program, if and to the extent participating athletes make a successful claim against USANA for testing positive for certain
banned
substances while taking USANA nutritional supplements.
USANA believes that its nutritional supplement products are free from substances that have been banned by
world-class training and competitive athletic programs. The Company retains independent testing agencies to conduct periodic checks for banned substances. The Company further believes that, while its
products promote good health, they are not otherwise considered to be "performance enhancing" as that term has been used in defining substances that are banned from use in international competition by
the World Anti-Doping Agency ("WADA"). For many years, USANA has been a sponsor of Olympic athletes and professional competitors around the world. These athletes have been tested on many
occasions and have never tested positive for banned substances as a result of taking USANA nutritional products. To back up its claim that athletes who use the Company's products as part of their
training regimen will not be consuming banned substances, the Company has offered to enter into agreements with select athletes, some of whom have high-profiles and are highly compensated,
which state that, during the term of the agreement, should the athlete test positive for a banned substance included in the
WADA, and should such positive result be the result of taking USANA nutritional products, USANA will compensate that athlete two times their current annual earnings up to one million dollars, based on
the athlete's personal level of competition, endorsement, and other income, as well as other factors. To mitigate potential exposure under these agreements,
we:
-
-
Designate lots identified as dedicated to the Athlete Guarantee program and retain additional samples;
-
-
Store designated lot samples externally with a third-party; and
-
-
Establish a chain of custody that requires signatures on behalf of USANA and the third-party to transfer possession of the
product lots and that restricts access by USANA employees after the transfer.
All
applicants to this Athlete Guarantee program are subject to screening and acceptance by the Company in its sole discretion. Contracts are tailored to fit the athlete's individual
circumstances and the amount of the Company's exposure is limited based on the level of sponsorship of the participating athlete. Although the Company believes that the pool of current and potential
participants in the program is small, there is no guarantee that an athlete who is accepted in the program will not successfully make a claim against us. The Company currently has no insurance to
protect it from potential claims under this program.
Based
on the mitigating factors, screening process and the Company's view that its products are not "performance enhancing," management believes there is a less than remote chance that
the Company will incur a liability under the Athlete Guarantee program.
Failure to maintain effective internal controls in accordance with the Sarbanes-Oxley Act of 2002 could negatively impact the market price of our common
stock.
We are required by federal securities laws to document and test our internal control procedures in order to satisfy the requirements of the
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Sarbanes-Oxley
Act of 2002, which requires annual management assessments of the effectiveness of our internal control over financial reporting. Effective internal controls are necessary for us to
provide reliable financial reports and to effectively prevent fraud. The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a
report by management on the effectiveness of our internal control over financial reporting in our Annual Reports on Form 10-K. In addition, our independent registered public
accounting firm must report on the effectiveness of the internal control over financial reporting. Although we review our internal control over financial reporting in order to ensure compliance with
the Section 404 requirements, if we or our independent registered public accounting firm are not satisfied with our internal control over financial reporting or the level at which these
controls are documented, designed, operated or reviewed, or if our independent registered public accounting firm interprets the requirements, rules and/or regulations differently from our
interpretation, then they may issue a report that is qualified. If we fail to maintain effective internal control over financial reporting, or our independent registered public accounting firm is
unable to provide us with an unqualified attestation report on our internal control, we could be required to take costly and time-consuming corrective measures, be required to restate the
affected historical financial statements, be subjected to investigations and/or sanctions by federal and state securities regulators, and be subjected to civil lawsuits by security holders. Any of the
foregoing could also cause investors to lose confidence in our reported financial information and in our company and would likely result in a decline in the market price of our stock and in our
ability to raise additional financing if needed in the future.