| USANA HEALTH SCIENCES INC Item 1A Risk Factors Forward-Looking Statements and Certain Risks The statements contained in this report that are not purely historical are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act |
| These statements relate to our expectations, hopes, beliefs, commitments, intentions, and strategies regarding the future |
| They may be identified by the use of words or phrases, such as “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate,” and “potential,” among others |
| Forward-looking statements include, but are not limited to, statements contained in “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our financial performance, revenue and expense levels in the future, and the sufficiency of our existing assets to fund future operations and capital spending needs |
| Actual results could differ materially from the anticipated results or other expectations expressed in these forward-looking statements or for the reasons discussed below |
| The fact that some of the risk factors may be the same or similar to past reports we have filed with the Securities and Exchange Commission means only that the risks are present in multiple periods |
| We believe that many of the risks detailed here are part of doing business in the industry in which we operate and will likely be present in all periods reported |
| The fact that certain risks are endemic to the industry does not lessen their significance |
| The forward-looking statements contained in this report are made as of the date of this report, and we assume no obligation to update them or to update the reasons why actual results could differ from those projected in these forward-looking statements |
| 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 purchase, market, and sell our products |
| Associates are independent contractors who purchase products directly for their own use or for resale |
| Associates typically work at the distribution of the products on a part-time basis and may 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 undertake minimal effort to provide individual training to Associates |
| Associates may voluntarily terminate their agreements with us at any time |
| There is typically significant turnover in Associates from year to year |
| 20 ______________________________________________________________________ Because of this high turnover, we must continually recruit new Associates |
| Our net sales are directly dependent upon the efforts of these non-employee, independent Associates |
| Future growth in sales volume will depend in large part upon our success in increasing the number of new Associates and improving the productivity of Associates |
| Our net sales are significantly affected by our success in growing existing markets, as well as opening new markets |
| If we lose market share in existing markets or are unable to open new markets we might have difficulty achieving our long-term objectives |
| We experienced revenue growth in 2003 and 2004 due in part to the successful expansion of our operations into Taiwan, South Korea, Singapore and Mexico |
| North Korea has experienced significant political tension created by North Korean government actions involving its nuclear program |
| There is no assurance that this situation will not adversely affect our operations in South Korea or that the tensions created by the situation in North Korea will not adversely affect our other operations in neighboring countries, such as Japan, Hong Kong, and Taiwan |
| If the political situation in North Korea adversely affects the economies or political situation in South Korea or our existing markets in the region, our net sales and profits in fiscal year 2006 may be affected |
| In 2005 we planned to open one new market, however, we have not yet received all required local government approvals to commence operations in that market |
| If we are unable to obtain local government approval, our net sales and profits in fiscal year 2006 may fall short of guidance for the year |
| On December 1, 2005, China announced the adoption of new regulations governing direct selling |
| Single-level compensation models are permissible under the new regulations, however, these regulations prohibit multi-level compensation models as practiced by USANA and many other direct selling companies |
| If we were to enter the Chinese market we would be required to adjust our compensation and selling model to comply with the specific form of direct selling permissible under the new regulations |
| These adjustments could require more time and effort to enter the Chinese market than would otherwise be necessary if multi-level compensation models were permissible |
| Additionally, modifying our successful compensation plan and sales model may create uncertainty regarding our expectations for success after entering the market |
| If the number or productivity of independent Associates does not increase, our revenue will not increase |
| To increase revenue, we must increase the number and/or the productivity of our Associates |
| We can provide no assurances that the number of Associates will increase or remain constant, or that their productivity will increase |
| We experienced a 33dtta3prca, 29dtta5prca, and 16dtta7prca increase in active Associates during 2003, 2004, and 2005 respectively |
| The number of active Associates may not increase and could decline in the future |
| Associates may terminate their services at any time, and, like most direct selling companies, we experience a high turnover among Associates from year to year |
| 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 |
| Operating results could be adversely affected if our existing and new business opportunities and products do not generate sufficient economic incentive or interest to retain existing Associates and to attract new Associates |
| The violation of marketing or advertising laws by Associates in connection with the sale of our products or the promotion of our Compensation Plan could adversely affect our business |
| New Associates sign a written contract and agree to adhere to the USANA policies and procedures |
| Although these policies and procedures prohibit Associates from making certain 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 21 ______________________________________________________________________ agencies or state attorneys general |
| Legal actions against Associates or others 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 Associate activities to guard against misrepresentation and other illegal or unethical conduct by Associates and to assure that the terms of our Compensation Plan are observed |
| There can be no assurance, however, that our efforts in this regard will be sufficient to accomplish this objective |
| Publicity resulting from these Associate activities can 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 |
| 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 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 investment in the sponsoring company |
| We are subject to the risk that, in one or more of our present or future markets, our marketing system could be found not to comply with these laws and regulations or may be prohibited |
| Failure to comply with these laws and regulations or such a prohibition could have a material adverse effect on our business, financial condition, and results of operations |
| Further we may simply be prohibited from distributing products through a network-marketing channel in some foreign countries, or be forced to alter our Compensation Plan |
| 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 |
| 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, and results of operations |
| The loss of key management personnel would adversely affect our business |
| Our Founder, Chairman and CEO, Dr |
| Wentz, is a highly visible spokesman for our products and our business, and our message is based in large part on the vision and reputation of Dr |
| Wentz, which helps distinguish us from our competitors |
| The loss or limitation of Dr |
| Wentz as the lead spokesman for our mission, business and products could have a material adverse effect upon our business, financial condition, and results of operations |
| In addition, our executive officers, including executive vice presidents, 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, and results of operations |
| The beneficial ownership of a significant percentage of our common stock gives Dr |
| Wentz effective control and limits the influence of other shareholders on important policy and management issues |
| Wentz, owned 45dtta01prca of our outstanding common stock at December 31, 2005 |
| 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 22 ______________________________________________________________________ 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 |
| Wentz also currently serves on the Board of Directors |
| There can be no assurance that conflicts of interest will not arise with respect to this directorship or that conflicts will be resolved in a manner favorable to other shareholders of the Company |
| 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 numerous national and local governmental agencies in the United States and other countries |
| 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 |
| In addition, if the FTC has reason to believe the law is being violated (eg, we do not 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, and such other relief as may be deemed necessary |
| Violation of these orders could result in substantial financial or other penalties |
| Any action by the FTC could materially 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 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 or 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, would have on our business in the future |
| They could include, however, requirements for the reformulation of certain products to meet new standards, the recall or discontinuance of certain products, additional record keeping and reporting, 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 us |
| As we continue to expand into international markets, our business becomes increasingly subject to political and economic risks |
| Changes in these markets could adversely affect our business |
| We commenced operations in Australia and New Zealand in February 1998, in the United Kingdom in December 1998, and in Hong Kong in November 1999 |
| In 2000, we began limited business activity in Japan and launched more formal operations there in October 2001 |
| In October 2002, we began business operations in Taiwan |
| We ceased operations in the United Kingdom at the end of the first quarter of 2000 |
| We commenced operations in South Korea and Singapore in July and November 2003, respectively, and opened operations in Mexico during March 2004 |
| We believe that our ability to achieve future growth is dependent in part on our ability to continue our international expansion efforts |
| However, there can be no assurance 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 foreign market |
| Also, before marketing commences 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 23 ______________________________________________________________________ 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 attract local customers |
| The failure to do so would have a material adverse effect on our business, financial condition, and results of operations |
| There can be no assurance that we will be able to obtain and retain necessary permits and approvals 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 recruit qualified Associates |
| There can be no assurance that, even if we are able to commence operations in foreign countries, there will be a sufficiently large population of persons inclined to participate 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 in which our products are sold |
| There can be no assurance that we will be able to further develop and maintain a seamless compensation program |
| An increase in the amount of incentives paid to Associates would reduce profitability |
| The payment of Associate incentives is a significant expense |
| These incentives include commissions, leadership bonuses, and certain awards and prizes |
| From time to time we have changed our Compensation Plan to better manage these incentives as a percentage of net sales |
| For example, during the third quarter of 1997, we introduced a broad re-pricing strategy across our product lines, creating a spread between the price the Associate pays for the product and the sales volume point value associated with the product |
| At the same time, we changed our leadership bonus program, increasing the payout from 2dtta0prca to 3dtta0prca of total sales volume points |
| In February 2000, we introduced a broad re-pricing initiative, reducing the average price of our products by approximately 24prca |
| This initiative decreased the amount of incentives as a percentage of net sales |
| Management closely monitors the amount of Associate incentives paid as a percentage of net sales and may adjust our Compensation Plan to prevent Associate incentives from having a significant adverse effect on earnings |
| There can be no assurance that these changes or future changes to the Compensation Plan or product pricing will be successful in maintaining the level of Associate incentives expense as a percentage of net sales |
| Furthermore, these changes may make it difficult to recruit and retain qualified and motivated Associates |
| An increase in incentive payments to Associates as a percentage of net sales would reduce our profitability |
| We are subject to risks associated with our reliance upon information technology systems |
| Our success is dependent on the accuracy, reliability, and proper use of sophisticated and dependable information processing systems and management information technology |
| Our information technology systems are designed and selected in order to facilitate order entry and customer billing, maintain Associate and Preferred Customer records, accurately track purchases and incentive payments, manage accounting, finance and manufacturing operations, generate reports, and provide customer service and technical support |
| Although off-site data back-up is maintained, it is possible that an interruption in these systems could have a material adverse effect on our business, financial condition, and results of operations |
| The loss of a significant Associate or downline organization could adversely affect our business |
| We rely on the successful efforts of certain Associates |
| Our Compensation Plan is designed to permit Associates to sponsor new Associates, creating multiple “business centers,” or levels in the marketing structure |
| 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 sponsor’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 turnovers or decreases in the size of the Associate force, seasonal or other decreases in purchase volume, sales volume reduction, the 24 ______________________________________________________________________ costs associated with training new Associates, and other related expenses may adversely affect our business, financial condition, and results of operations |
| 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; · Public perceptions about network marketing programs; · High-visibility investigations or legal proceeding 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; and · Other competing network marketing organizations entering into the marketplace that may recruit our existing Associates or reduce the potential pool of new Associates |
| There can be no assurance that we will be able to continue to attract and retain Associates in numbers sufficient to sustain future growth or to maintain present growth levels, which could have a material adverse effect on our business, financial condition, and results of operations |
| 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 “Business—Competition |
| ” 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 other companies |
| 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 interested in the business opportunities presented by direct selling tends to be 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 |
| 25 ______________________________________________________________________ Taxation and transfer pricing considerations affect our operations |
| Our principal domicile is the United States |
| The following table summarizes 2005 sales data as a percentage of consolidated net sales and the associated statutory income tax rates for each of our geographic regions (sales data for the United States region includes 2dtta5prca of net consolidated sales contributed by the Contract Manufacturing segment): Region % Net Sales Tax Rate United States 44dtta0prca 37dtta5prca Canada 19dtta0prca 36dtta0prca Australia / New Zealand 13dtta8prca 30dtta0prca / 33dtta0prca Hong Kong 3dtta9prca 17dtta5prca Japan 3dtta1prca 46dtta3prca Taiwan 6dtta2prca 25dtta0prca South Korea 1dtta5prca 18dtta0prca Singapore 4dtta2prca 20dtta0prca Mexico 4dtta3prca 30dtta0prca In many countries, including the United States, we are subject to transfer pricing and other tax regulations designed to ensure appropriate levels of income are reported as earned by our US and foreign entities and are taxed accordingly |
| Although we believe that we are in compliance with all applicable regulations and restrictions, we are subject to the risk that taxing authorities could audit our transfer pricing and related practices and assert that additional taxes are owed |
| Under tax treaties, we are eligible to receive foreign tax credits in the United States for foreign taxes actually paid abroad |
| At this time there are no major audits in progress |
| In the event future 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 US foreign tax credits |
| Currently, we are utilizing all foreign tax credits in the year in which they arise |
| Because the laws and regulations governing US 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 |
| Exchange rate fluctuations affect our foreign operations and could reduce our net sales and earnings |
| Over the past several years, a significant amount of our net sales have been generated outside the United States |
| We intend to continue to expand our foreign operations, exposing us to risks of changes in social, political, and economic conditions in foreign countries, including changes in the laws and policies that govern foreign investment in countries where we have operations |
| Since a significant portion of our sales is in foreign countries, exchange rate fluctuations may have a significant effect on our sales and earnings |
| Further, if exchange rates fluctuate dramatically, it may become uneconomical for us to establish or continue activities in certain countries |
| For instance, changes in currency exchange rates may affect the relative prices at which we and our foreign competitors sell similar products in the same market |
| As our business expands outside the United States, an increasing share of our net sales and cost of sales will be transacted in currencies other than the US dollar |
| Accounting practices require that our non-US financial results be converted to US 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 US dollar and decreasing with a strengthening US dollar |
| Product purchases by our foreign subsidiaries are transacted in US dollars |
| As operations expand in countries where foreign currency transactions may be made, 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 of these changes on our future business, product pricing, results of operations, or financial condition |
| In addition, the value of the US dollar in relation to other currencies may also adversely affect our sales to customers outside the United States |
| We enter into forward and option foreign exchange contracts to manage currency 26 ______________________________________________________________________ fluctuations on certain commitments denominated in foreign currency, including intercompany cash transfers |
| We generally do not use derivative instruments for speculative purposes |
| There can be no assurance that foreign currency contract transactions will protect operating results and cash flows from potentially adverse effects of currency exchange fluctuations |
| Those adverse effects would also adversely affect our business, financial condition, and 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 2004 the financial press reported congestion at West Coast ports caused by increasing cargo volumes, a lack of capacity on the railroads, and a shortage of manpower |
| We felt the effects in our container shipments to Australia, which required additional use of airfreight to meet demand |
| Port congestion has since been relieved |
| Although there was no significant port congestion this year through the months when retailers prepare for the holidays, 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 |
| Our freight forwarders will continue to exercise flexibility in the selection of ports and carriers to provide the best service |
| The inability to obtain adequate supplies of raw materials for products at favorable prices, or at all, could have a material adverse effect on our business, financial condition, and results of operations |
| We depend on outside suppliers for raw materials |
| We acquire all of our raw materials for the manufacture of our products from third-party suppliers |
| Normally, materials used in manufacturing our products are purchased on account or by purchase order |
| We have very few long-term agreements for the supply of these materials |
| There is a risk that any of our suppliers or manufacturers could discontinue 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 and back orders for the 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 |
| In addition, we rely on third-party manufacturers for several of our products, including our food bars and certain drink mixes |
| We have in the past discontinued or temporarily stopped sales of certain products manufactured by third parties while those products were on back order |
| There can be no assurance that suppliers will provide the raw materials needed by us in the quantities requested or at prices we are willing to pay |
| Because we do not control the actual production of these raw materials, we are also subject to delays caused by interruption in production of 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 used in certain of our products may temporarily adversely affect our margins and our profitability related to the sale of those products |
| Many nutritional supplement companies that manufacture products containing Coenzyme Q10 (CoQ10) have experienced a shortage in supply of this raw material component during the year 2005 |
| The sharp increase in demand, which began in 2003, caused a shortage in supply while suppliers worked to re-tool their manufacturing facilities to increase production capacity in order to meet the growing demand |
| We have identified multiple sources to supply quality raw ingredients; however, quantities of materials acquired during this shortage were purchased at higher prices, which negatively impacted gross margins for those products affected |
| By mid-2005 some suppliers had re-tooled their manufacturing facilities to increase production capacity of CoQ10, and more competitors entered the market to produce it, which has caused supply to increase and purchase prices to decline |
| 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 all of our products to be safe 27 ______________________________________________________________________ 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 those products should prove or be asserted to be ineffective or harmful to consumers or in the event of adverse publicity associated with illness or other adverse effects resulting from consumers’ use or misuse of our products or a competitor’s similar products |
| 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 as a result of tampering by unauthorized third parties or product contamination |
| To date, we have not been party to any product liability litigation, although certain individuals have asserted that they have suffered adverse consequences as a result of using our nutritional products |
| 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 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 claims in the future or that our insurance coverage will be adequate or that we will be able to maintain adequate insurance coverage |
| Our business is subject to particular intellectual property risks |
| 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 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 nutritional or other 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 many of the other countries in which we are either presently operating or plan to commence operations in the near future |
| Notwithstanding our efforts as described above, there can be no assurance that these 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 the proprietary rights of others |
| 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 products that are alleged to have infringed |
| 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, and operating results |
| There can be no assurance that third-party claims will not in the future adversely affect our business, financial condition, and results of operations |
| Our manufacturing activity is subject to certain risks |
| We manufacture approximately 78prca of the products sold to our customers |
| As a result, we are dependent upon the uninterrupted and efficient operation of our manufacturing facilities in Salt Lake City, Utah |
| Those operations are subject to power 28 ______________________________________________________________________ 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, and 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 and could have a material adverse effect on our business, financial condition, and 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 satisfying business requirements following any period affected by the need to take such actions could have a material adverse effect on our business, financial condition, and results of operations |
| 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 |
| The price of our common stock 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, 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 |
| 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 nutrition supplement products are free from substances that have been banned by world-class training and competitive athletic programs |
| 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 in Canada, 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 would compensate that athlete up to one million Canadian 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 program and retain additional samples; · Store designated lot samples externally with a third party; and 29 ______________________________________________________________________ · 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 |
| This program is open only to elite world-class athletes in Canada and all applicants 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 very small, there is no guarantee that an athlete accepted in the program will not successfully make a claim against the guarantee, which would require that the Company pay the athlete under the terms of its agreement with that athlete |
| The Company currently has no insurance to protect it from potential claims under this program |