I issued a report to Fraud Discovery Institute about many of the financial issues raised in the Usana Health Sciences matter. The report clarifies the issues and why they’re important from an accounting perspective, specifically regarding Generally Accepted Accounting Principles (GAAP), materiality, and disclosures.
A few of the high points of my report include:
- Dave Wentz, President of Usana, said in last week’s conference call that the only way a Usana distributor loses money is if she purchased products “…and threw it in the garbage can, in which case I guess you would call it a loss, or they could have I guess sold it at much less.. That statement is false.
- 14% of Usana’s sales come from Preferred Customers, showing that even Usana itself is not able to build a significant retail business
- Usana’s Preferred Customers are buying less than 6 HealthPak 100s per year. They’re not even taking a full year’s worth of products!
- Usana’s Associates are buying 19 HealthPak 100s per year, meaning they’re each taking a year’s supply and they have 1/2 year’s supply left to sell or give to someone else. Not really evidence of significant retailing, is it?
- The company boasts about its low rate of product returns from Associates, suggesting that this says they distributors are happy. That’s the wrong conclusion. And distributors can and do lose money with Usana; above and beyond the products, they’ve got expenses such as tools (which they will never get refunded).
- Usana’s “average earnings” information constitutes and incomplete and misleading disclosure.
- Usana President Dave Wentz says that most distributors just want their Usana experience to pay for their vitamins; they’re not really in it for a profit. Yet 87% of distributors don’t make enough to pay for their vitamins. Talk about failure of the system!
- Distributors have only a 1 in 3 chance of earning one cent of Usana commissions.
- Usana supporters say that the falsified credentials of Denis Waitley and Tim Wood, along with the fact that found Myron Wentz renounced his U.S. citizenship and parked his Usana stock in Lichtenstein, are minor in and of themselves, and therefore of no consequence. I submit that they are of consequence, as they demonstrate a pattern of deception by Usana executives. That in and of itself is material. Period.
- Gil Fuller, CFO of Usana stated on the most recent earnings call that only 12% of Usana Associates want to make money, and only about half of those actually try to make money. This is in stark contrast with everything else published by the company, including recruiting literature.
- If 88% of Usana distributors are .in it. for the vitamins, then why don.t the Preferred Customer numbers bear this out? The Preferred Customer program is available for those who just want to buy vitamins at a discount off suggested retail, and not build a business. Yet Usana.s figures show that only 33% of the company.s representatives are Preferred Customers.
- Usana’s disclosures about “high” Associate turnover are indequate. They must disclose material items under GAAP, and knowing the exact figures regarding turnover is a material point.
- The total number of distributors active with the company at any time during the year is a material point as well, as it would influence the judgement of a user of the financial statements. As such, Usana is required to make this disclosure of material information, but does not.
I challenge the Securities and Exchange Commission (SEC) to ask the following questions, and I challenge Usana to answer them truthfully:
1. How much do distributors spend on tools purchased from Usana, other distributors, Usana insiders, or other parties?
2. How many Associates and Preferred Customers were in Usana at any time during the years 2004, 2005, and 2006?
3. How does Usana calculate average associates?
4. On average, how long is an Associate and a Preferred Customer in Usana? (Let.s define .in. as the time from sign-up until the last purchase of products.)
5. Since we know that averages can be misleading, please break down the numbers for us. Show us how many Associates in 2006 were .in. the company for one month, two months, three months, six months, nine months, one year, 18 months, 2 years, 3 years, 4 years, 5 years, more than 5 years.
6. While we’re at it, please also disclose the commissions paid to the Associates at each of those milestones.
7. What was the average commission paid to distributors in 2004, 2005, and 2006 based upon all Associates active during the year?
8. Please provide the data supporting the assertion that only 12% of Associates want to build businesses, and that only about half of those put forth much effort.
9. What is the annual associate turnover rate?