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Hard To Swallow (from: http://www.forbes.com/markets/20 ... x_er_0808usana.html)
Evelyn M. Rusli, 08.08.07, 11:25 AM ET
In February, Usana Health Sciences seemed untouchable.
Shares in the vitamin maker were roaring towards an all-time-high above $60. The company was preparing to announce its 20th consecutive quarter of record sales. Its global empire was expanding, with the addition of Malaysia, its 14th country.
That may well have been the zenith of Usana's (nasdaq: USNA - news - people ) 15-year existence.
On March 19, Usana revealed it was the subject of an informal Securities and Exchange Commission probe into its sales practices. Then, in July, its long-time auditor abruptly and mysteriously resigned.
Now things are getting worse.
Last week, sources told Forbes.com that the FBI had launched a criminal investigation into the company. Usana says it isn't aware of any such probe. Meanwhile, Usana is suing Barry Minkow, a convicted felon-turned-fraud-buster, who penned a 500-page report alleging that the company's fantastic performance in recent years came not from selling vitamins but via a pyramid scheme that roped suckers into a multilevel marketing scheme from which few would be able to glean profits.
Usana claims Minkow improperly shorted its shares in concert with unnamed codefendants. The company alleges they arranged so-called naked short sales, creating phantom shares that put enormous pressure on the real stock price. That would have been illegal, but also a pretty good strategy: The stock has plunged 41.2% since its March high. Minkow admits to having held put options on Usana, but says he didn't profit from them and claims that he never naked shorted the stock.
"We believe everything he says to be false," Usana spokesman Joseph Poulos told Forbes.com. "He's a liar; he's a criminal--he can't be trusted."
Minkow, who has assisted federal and state authorities in 21 closed fraud cases, remains unfazed by the lawsuit, calling it a diversion to mask Usana's real problems.
Usana, Minkow alleges, is a convoluted pyramid scheme that baits consumers with promises of personal wealth and leaves them empty-handed.
Instead of offering its products in stores, Usana is a multilevel marketer, with a network of 178,000 distributors selling its line of nutritional supplements and personal-care products to consumers. In theory, distributors can make money by selling products to anybody who wants them, but they can make much bigger profits by recruiting other salespeople and getting a share of their revenue.
To get into the company's commission program, a Usana associate must front an initial fee of $20 to $50 for a business starter kit, buy roughly $150 in products and then order about $120 of goods each month, either for sale or personal use.
Minkow and other critics say Usana distributors aren't really paying for the products--they're ponying up the cash to participate in the profit-sharing network, which each can do once they've roped in two new recruits. Usana's promotional materials are emblazoned with phrases like "true wealth" and "financial freedom."
Usana disagrees, saying its members are "end users" who get involved less to make money than to enjoy Usana's vitamins at wholesale discounts. However, a customer does not have to sign up as a distributor to access the wholesale prices. One can also join as a "preferred" customer at no additional cost.
The company offers a diverse trove of nutrition and personal care products spanning from natural toothpaste to hair-care goods. Its best-selling product, however, is a 28-day pack of Essentials, a set of multivitamins and mineral supplements that wholesale for $39.95, or $1.43 a day. The product costs significantly more than standard retail varieties of vitamins, such as Centrum, whose multivitamins cost approximately $7.00 for a 50-pill bottle, or 14 cents a day. Usana says its premium is justified because its products offer "high-quality, certified nutritional supplements that are in a class by themselves."
Not quite, according to Anthony Almada, the president and chief scientist of Imaginutrition, a consulting firm for the nutritional supplement industry. Alamada, who has more than 30 years of experience in the industry, said Usana's vitamins are not that special. "The economic reality of Usana, and other [multilevel marketing] entities, mandates that their products invariably lack robust distinctiveness and convincing evidence of consumer relevance and superiority—achievable through rigorous clinical trials only—to their retail counterparts," Almada said.
The key question, according to James Kohm, associate director for the Federal Trade Commission's Bureau of Consumer Protection, is whether the company is really in the vitamin business. "Are they truly retail sales or simply incidental to participate in the scheme?"
Robert Fitzpatrick, the president of Pyramid Scheme Alert, who was contracted by Minkow to review Usana's structure, says there's another big problem: The company's sales model is untenable, at least from the point of view of recent recruits being able to find new distributors to work for them. "If this chain were continued just 26 levels, it would exceed the number of households in the U.S.A.," Fitzpatrick said in a recent report. "Usana's "success" depends on the "failures" of tens of thousands of recruits."
Usana wouldn't tell Forbes.com what portion of its distributors actually do turn a profit, but in an April conference call, Chief Financial Officer Gil Fuller said, "You only have something on the order of about 12% of people who get into this business with the intent of making money."
"The people who work at it are the ones that in fact generate the income for themselves. Those that don't, or do it for product reasons, obviously don't."
While the average distributor doesn't make enough to cover the cost of a one-month supply, the company and its senior executives have done somewhat better.
The Salt Lake City-based firm has experienced explosive growth since being founded in 1992 by Chief Executive Officer Myron Wentz. It operates in 14 countries and has 889 employees. In the last five years, the stock has skyrocketed from less than 70 cents a share on a split-adjusted basis to an all-time-high of $61.80 in February. It ended on Tuesday at $36.20.
In the second quarter, Usana blew past the Street’s second expectations by posting profits of $18.2 million, or 66 cents a share--above analysts’ estimate of 62 cents.
From 2004 to 2006, Usana held a spot on Forbes' top 200 small companies list.
By the books, Usana seems to be in the prime of financial health, but Minkow doesn't buy it. He says the company is dotted with red flags.
He claims that Wentz has renounced his American citizenship and stows his 50% shareholder stake in the tax haven of Lichtenstein.
According to Minkow, company insiders wring cash out of Usana through a concert of buybacks and stock dumps. Since the summer of 2003, Usana's board and executives have sold $100 million in shares. Meanwhile, the company has repurchased $211 million in stock since late 2000. This week, Usana announced an additional $50 million in repurchases.
In essence, according to Minkow, Usana is using shareholder funds to support its stock price while its insiders cash out. Not so, says Usana, which claims the aggressive buyback program reflects "management and the board's decisions to use excess cash reserves to return value to shareholders and avoid share dilution."
Then, there's the auditor situation.
Grant Thornton, Usana's auditor for more than a decade, resigned in July. Thornton did not respond to requests for comment, but in an SEC filing released Aug. 1, Usana said the firm initially disagreed with its audit committee on when to "engage independent consultants" in the company's investigation into Minkow's accusations. Usana's audit committee wanted to complete an internal investigation first before considering an independent consultant, but Grant Thornton wanted to employ an independent counsel immediately.
Fuller, Usana's CFO, said the company has not secured a new auditor. He refused to speculate on why Grant Thornton quit, aside from saying "From every indication I've been told, they were satisfied with the work," and the firm's departure "did not relate to any of the financial statements."
"It was a little bit frustrating," Fuller said. "Life is too short to dwell too much on it."
Usana has enough other problems it could dwell on.
In June, Fuller and Jerry McClain, a board member who is also a member of the audit committee, agreed to stop representing themselves as certified public accountants (they used to be). Also that month, a leading sales associate stepped down from the company's medical advisory board after Minkow revealed he no longer had a medical license--he turned over his license in 2004 after allegations surfaced that he had inappropriately doled out prescriptions to a family member. In April, Dennis Waitley resigned from the board of directors but stayed on as company spokesman soon after Minkow uncovered that he lied about having received a master's degree from the U.S. Navy (he didn't).
In addition, the company may have breached a loan covenant regarding a $40 million line of credit from Bank of America (nyse: BAC - news - people ), which could force it to pay back its borrowings. As of the end of June, the company had borrowed a little more than $34.5 million under that facility.
According to the terms of the credit line, the company's total debt cannot be more than 2.5 times its cash flow, or earnings before interest, taxes, depreciation and amortization.
The company believes it is within those bounds because its debt load is relatively low. Even though the company lists $35.2 million in "other current liabilities" in its second-quarter press release, Usana said a large portion of that is revenue "that we cannot recognize until the product is shipped and not an actual payment we will make to a third party."
However, after evaluating the loan document and Usana's recent filings, Don Coker, a banking specialist, said the company had less than $4 million in deferred revenue in the first quarter and even less than that in the fourth quarter of 2006. "In my opinion, to state that the $35 million plus in 'other liabilities' does not constitute 'debt' appears to be inconsistent with how a bank normally would make such a calculation," Coker said.
After adding the Bank of America loan and Usana's current liabilities--and subtracting $4 million in deferred revenue--the company's consolidated funded debt totaled $65.7 million, making its ratio 3.6-to-1. "They could be in violation of one of the covenants of their loan," said Coker, who holds a certificate in business valuation from Harvard Business School and has testified as an expert witness in hundreds of cases. The company disagrees, insisting that it is in compliance with the loan's covenants.
If Usana does have too much debt, Bank of America can revoke the entire loan. Bank of America did not return multiple calls seeking comment.
Faced with this tempest of controversy, Usana remains optimistic. "We have total confidence that we'll come out with flying colors on this. We're not wringing our hands over this matter," Fuller said. |
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行车记录仪布线 (2013-2-1) 大饼 
炼琴记（耳朵的敏锐，心灵的追求；机能的协调，灵魂的升华 ；一生的财富。） (2018-10-28) 莽撞人 
楼主:飞儿
发表于 2008-4-30 18:21
他们那里也一样有很多专家,来头也不会小.
）
