USANA’s Sneaky Disclosure

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In the Usanan Health Sciences (NASDAQ:USNA) most recent 10-Q filed with the SEC, the company makes reference to restated financial statements:

During 2008, the Internal Revenue Service (“IRS”) commenced an audit of the Company’s tax returns. In January 2009, the IRS communicated its intent to disallow deductions claimed by the Company under Section 162(m) of the Internal Revenue Code (“IRC”). In February 2009, the Company settled the Section 162(m) matter with the IRS. Under the settlement, the cumulative tax impact to the Company is the loss of $11.8 million in tax deductions resulting in estimated taxes due of $4.4 million, plus $0.8 million in interest. The $4.4 million in taxes due resulted in an increase to current liabilities and corresponding reduction in stockholders’ equity in the affected periods. The $0.8 million in interest resulted in an increase to current liabilities with a corresponding increase to income tax expense in the affected periods.

Doesn’t sound like a big deal, right? Well it’s probably not a big deal if you don’t care what Section 162(m) of the Internal Revenue Code is. And Usana certainly isn’t volunteering that information.

That part of the code is related to excessive employee compensation, and the years under audit included 2003 through 2006. Usana had $11.8 million of its deductions related to excessive employee compensation (that’s also called lining the pockets of the executives) disallowed for those years.

Why does this even matter? It just provides further proof that the real winners in the multi-level marketing game are the owners and executives of the MLM companies themselves, not those who participate in the pyramid.

For those with an interest in the accounting and auditing issues, note that Usana admits their controls were deficient 2006, but says they were corrected in 2006. Really? Then how is it that the tax issue came up AFTER 2006, if your controls in 2006 were sufficient?

Here’s what Usana says in their letter to the SEC:

As part of its assessment, management concluded that the tax matters disclosed herein resulted from a control deficiency in the Company’s internal controls regarding the tax compliance of equity awards granted prior to 2006 by the Compensation Committee. Although a control deficiency was identified, management concluded that this control deficiency was remediated by the Company during 2006 and did not constitute a material weakness in our internal controls over financial reporting as of January 3, 2009.

If everything was “remediated” in 2006, why did it take an IRS audit to force the changes to the financial statements?

3 thoughts on “USANA’s Sneaky Disclosure

  1. Tracy,

    From 2003 to 2006, Lyle Macwilliam was on USANA’s medical advisory board. Remember, he is the author of the Comparative Guide to Nutritional Supplements. That is the so called 3rd party source USANA uses to claim their products are #1 in the world. I would be curious to know if Lyle Macwilliam was paid, and how much. I have no doubt Lyle has been well compensated by USANA.

  2. Kenneth

    “Great” work! anybody wants to take up the challenge to proof the above? Could it be that Usana really is a great product? and you pay the price for quality…

    the blended standard is also well researched method of comparing supplement brands.

  3. Jeff

    Kenneth,

    That Lyle MacWilliams was a member of USANA’s medical advisory board is no secret and additional connections between USANA and the Comparative Guide to Nutritional Supplements are also clearly visible. Look up info on Dr.Ray Strand. For the “blended standard” to be a well researched method of comparing brands those involved in its development should have relevant educational backgrounds but many of them have no real education and others lie about theirs (Something USANA should be familiar with). The Comparative Guide of Nutritional Supplements relied solely on product labels and conducted no experimentation on the products they reviewed.

    USANA doesn’t have a great product worth the price. Radio Canada revealed in a consumer investigation report that USANAs products cost as much as 3 times more than the same products in store while offering no better quality.

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