UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended March 30, 2002

 

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from               to               

 

 

Commission file number: 0-21116

 


 

USANA HEALTH SCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

Utah

 

87-0500306

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 


 

838 West Parkway Blvd., Salt Lake City, Utah 84120

(Address of principal executive offices, Zip Code)

 


 

(801) 954-7100

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   ý  No   o

 

The number of shares outstanding of the registrant’s common stock as of May 10, 2002 was 9,667,837.

 

 



 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended March 30, 2002

 

INDEX

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

Item 1

Financial Statements

 

Consolidated Balance Sheets

 

Consolidated Statements of Earnings

 

Consolidated Statement of Stockholders’ Equity

 

Consolidated Statements of Cash Flows

 

Notes to Consolidated Financial Statements

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3

Quantitative and Qualitative Disclosures About Market Risk

 

 

PART II. OTHER INFORMATION

 

 

Item 5

Other Information

Item 6

Exhibits and Reports on Form 8-K

 

 

Signatures

 

2



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(in thousands, except per share data)

 

 

 

December 29,
2001

 

March 30,
2002

 

 

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

2,465

 

$

3,269

 

Inventories, net (Note A)

 

9,533

 

9,554

 

Prepaid expenses and other current assets (Note B)

 

1,441

 

1,761

 

Deferred income taxes

 

750

 

962

 

 

 

 

 

 

 

Total current assets

 

14,189

 

15,546

 

 

 

 

 

 

 

Property and equipment, net (Note C)

 

19,489

 

18,792

 

 

 

 

 

 

 

Other assets

 

1,676

 

1,654

 

 

 

 

 

 

 

 

 

$

35,354

 

$

35,992

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current maturities of long-term debt

 

$

2,000

 

$

2,357

 

Accounts payable

 

2,627

 

2,372

 

Other current liabilities (Note D)

 

5,114

 

7,077

 

Line of credit

 

4,098

 

2,575

 

 

 

 

 

 

 

Total current liabilities

 

13,839

 

14,381

 

 

 

 

 

 

 

Deferred income taxes

 

988

 

756

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

6,000

 

5,143

 

 

 

 

 

 

 

Stockholders’ equity (Note E)

 

 

 

 

 

Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding 9,664 as of December 29, 2001 and March 30, 2002

 

10

 

10

 

Additional paid-in capital

 

2,359

 

2,359

 

Retained earnings

 

12,752

 

13,869

 

Accumulated other comprehensive loss

 

(594

)

(526

)

 

 

 

 

 

 

Total stockholders’ equity

 

14,527

 

15,712

 

 

 

 

 

 

 

 

 

$

35,354

 

$

35,992

 

 

The accompanying notes are an integral part of these statements.

 

3



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(in thousands, except per share data)

 

 

 

Quarter Ended

 

 

 

(unaudited)

 

 

 

March 31,
2001

 

March 30,
2002

 

 

 

 

 

 

 

Net sales

 

$

27,614

 

$

28,622

 

 

 

 

 

 

 

Cost of sales

 

7,982

 

7,711

 

 

 

 

 

 

 

Gross profit

 

19,632

 

20,911

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

10,503

 

10,730

 

Selling, general and administrative

 

7,574

 

8,055

 

Research and development

 

285

 

199

 

 

 

 

 

 

 

Total operating expenses

 

18,362

 

18,984

 

 

 

 

 

 

 

Earnings from operations

 

1,270

 

1,927

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

35

 

16

 

Interest expense

 

(261

)

(100

)

Other, net

 

(290

)

(12

)

 

 

 

 

 

 

Total other expense

 

(516

)

(96

)

 

 

 

 

 

 

Earnings before income taxes

 

754

 

1,831

 

 

 

 

 

 

 

Income taxes

 

283

 

714

 

 

 

 

 

 

 

Net earnings

 

$

471

 

$

1,117

 

 

 

 

 

 

 

Earnings per common share (Note E)

 

 

 

 

 

Basic

 

$

0.05

 

$

0.12

 

Diluted

 

$

0.05

 

$

0.12

 

 

 

 

 

 

 

Weighted average common and dilutive common equivalent shares outstanding (Note E)

 

 

 

 

 

Basic

 

9,683

 

9,664

 

Diluted

 

9,733

 

9,671

 

 

The accompanying notes are an integral part of these statements.

 

4



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

Quarters Ended March 31, 2001 and March 30, 2002

 

(in thousands, except per share data)

(unaudited)

 

 

 

Common Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Total

 

Shares

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended March 31, 2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 30, 2000

 

9,683

 

$

10

 

$

2,364

 

$

10,581

 

$

(82

)

$

12,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

471

 

 

471

 

Foreign currency translation adjustment

 

 

 

 

 

(313

)

(313

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

158

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2001

 

9,683

 

$

10

 

$

2,364

 

$

11,052

 

$

(395

)

$

13,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended March 30, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 29, 2001

 

9,664

 

$

10

 

$

2,359

 

$

12,752

 

$

(594

)

$

14,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

1,117

 

 

1,117

 

Foreign currency translation adjustment

 

 

 

 

 

68

 

68

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

1,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 30, 2002

 

9,664

 

$

10

 

$

2,359

 

$

13,869

 

$

(526

)

$

15,712

 

 

The accompanying notes are an integral part of this statement.

 

5



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands, except per share data)

(unaudited)

 

 

 

Quarter Ended

 

 

 

March 31,
2001

 

March 30,
2002

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net earnings

 

$

471

 

$

1,117

 

Adjustments to reconcile net earnings to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

1,007

 

1,059

 

Loss on sale of property and equipment

 

 

18

 

Deferred income taxes

 

(15

)

(426

)

Provision for inventory obsolescence

 

174

 

426

 

Changes in operating assets and liabilities:

 

 

 

 

 

Inventories

 

743

 

(406

)

Income taxes receivable

 

1,112

 

 

Prepaid expenses and other assets

 

407

 

(253

)

Accounts payable

 

199

 

(253

)

Other current liabilities

 

1,164

 

1,946

 

 

 

 

 

 

 

Total adjustments

 

4,791

 

2,111

 

 

 

 

 

 

 

Net cash provided by operating activities

 

5,262

 

3,228

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property and equipment

 

(2,712

)

(386

)

Proceeds from the sale of property and equipment

 

 

8

 

 

 

 

 

 

 

Net cash used in investing activities

 

(2,712

)

(378

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Principal payments of long-term debt

 

 

(500

)

Decrease in line of credit

 

(2,653

)

(1,523

)

 

 

 

 

 

 

Net cash used in financing activities

 

(2,653

)

(2,023

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(337

)

(23

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(440

)

804

 

 

 

 

 

 

 

Cash and cash equivalents beginning of period

 

2,900

 

2,465

 

 

 

 

 

 

 

Cash and cash equivalents end of period

 

$

2,460

 

$

3,269

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

368

 

$

117

 

Income taxes

 

180

 

99

 

 

The accompanying notes are an integral part of these statements.

 

6



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

Basis of Presentation

 

The unaudited interim consolidated financial information of USANA Health Sciences, Inc. and Subsidiaries (the “Company” or “USANA”) has been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, the accompanying interim consolidated financial information contains all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s financial position as of March 30, 2002, and results of operations for the quarters ended March 30, 2002 and March 31, 2001.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 29, 2001.  The results of operations for the quarter ended March 30, 2002 may not be indicative of the results that may be expected for the fiscal year ending December 28, 2002.

 

 

NOTE A — INVENTORIES

 

Inventories consist of the following:

 

 

 

 

December 29,
2001

 

March 30,
2002

 

Raw materials

 

$

2,314

 

$

2,382

 

Work in progress

 

1,610

 

1,752

 

Finished goods

 

6,438

 

6,570

 

 

 

10,362

 

10,704

 

 

 

 

 

 

 

Less allowance for inventory obsolescence

 

829

 

1,150

 

 

 

$

9,533

 

$

9,554

 

 

 

NOTE B — PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other assets consist of the following:

 

 

 

December 29,
2001

 

March 30,
2002

 

Prepaid expenses

 

$

1,002

 

$

1,137

 

Receivables, net

 

321

 

502

 

Other current assets

 

118

 

122

 

 

 

$

1,441

 

$

1,761

 

 

7



 

NOTE C - - PROPERTY AND EQUIPMENT

 

Cost of property and equipment and their estimated useful lives is as follows:

 

 

 

Years

 

December 29,
2001

 

March 30,
2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Building

 

40

 

$

8,110

 

$

8,110

 

Laboratory and production equipment

 

5-7

 

4,505

 

4,509

 

Computer equipment and software

 

3-5

 

15,607

 

15,813

 

Furniture and fixtures

 

3-5

 

2,099

 

2,102

 

Automobiles

 

3-5

 

294

 

296

 

Leasehold improvements

 

3-5

 

1,024

 

1,030

 

Land improvements

 

15

 

931

 

931

 

 

 

 

 

 

 

 

 

 

 

 

 

32,570

 

32,791

 

 

 

 

 

 

 

 

 

Less accumulated depreciation and amortization

 

 

 

15,055

 

16,054

 

 

 

 

 

 

 

 

 

 

 

 

 

17,515

 

16,737

 

 

 

 

 

 

 

 

 

Land

 

 

 

1,773

 

1,773

 

 

 

 

 

 

 

 

 

Deposits and projects in process

 

 

 

201

 

282

 

 

 

 

 

 

 

 

 

 

 

 

 

$

19,489

 

$

18,792

 

 

NOTE D - OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

 

 

December 29,
2001

 

March 30,
2002

 

 

 

 

 

Associate incentives

 

$

682

 

$

874

 

Accrued compensation

 

664

 

991

 

Sales taxes

 

534

 

616

 

Income taxes payable

 

187

 

1,677

 

Accrued Associate promotions

 

313

 

378

 

Deferred revenue

 

727

 

976

 

All other

 

2,007

 

1,565

 

 

 

$

5,114

 

$

7,077

 

 

8



 

NOTE E — COMMON STOCK AND EARNINGS PER SHARE

 

During 2000, the Company announced and began to implement a share repurchase program, under which it purchased shares of common stock in the open market at market prices.  No shares were purchased during this ongoing repurchase program during the quarter ended March 30, 2002.  However, the Company intends to repurchase shares as circumstances permit.

 

Basic earnings per share are based on the weighted average number of shares outstanding for each period.  Shares redeemed have been included in the calculation of weighted average shares outstanding for basic earnings per share. Diluted earnings per common share are based on shares outstanding (computed under basic EPS) and potentially dilutive shares.  Potential shares included in dilutive earnings per share calculations include stock options granted but not exercised.

 

 

 

For the Quarter Ended

 

 

 

March 31,
2001

 

March 30,
2002

 

 

 

 

 

Earnings available to common shareholders

 

$

471

 

$

1,117

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding entire period

 

9,683

 

9,664

 

Weighted average common shares:

 

 

 

 

 

Issued during period

 

 

 

Canceled during period

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding during period

 

9,683

 

9,664

 

 

 

 

 

 

 

Earnings per common share — basic

 

$

0.05

 

$

0.12

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Weighted average shares outstanding during period — basic

 

9,683

 

9,664

 

Dilutive effect of stock options

 

50

 

7

 

Weighted average shares outstanding during period — diluted

 

9,733

 

9,671

 

 

 

 

 

 

 

Earnings per common share — diluted

 

$

0.05

 

$

0.12

 

 

 

Options to purchase 1,741 and 2,480 shares of stock were not included in the computation of EPS for the quarters ended March 31, 2001and March 30, 2002, respectively, due to their exercise price being greater than the average market price of the shares.

 

NOTE F — SEGMENT INFORMATION

 

The Company has four operating segments. The United Kingdom (which, for purposes of this Report, includes The Netherlands) market is serviced from the United States and is considered a part of the domestic operating segment of the Company.  Additionally, the Company has a direct export program for customers in Japan.  These results are also incorporated in the domestic segment.  The Japan segment contains all the results from our operations in Japan that began during the fourth quarter of 2001.

 

The Company’s operating segments are based on operating geographic regions. Management considers the geographic segments of the Company to be the only reportable operating segments.  These operating segments are evaluated regularly by management in determining the allocation of resources and in assessing the performance of the Company.  Management evaluates performance based on sales revenue and the amount of operating income or loss.

 

9



 

Segment profit or loss is based on profit or loss from operations before income taxes.  Interest income and expense as well as income taxes, while significant, are not included in the Company’s determination of segment profit or loss in assessing the performance of a segment.

 

Financial information summarized by geographic segment for the quarters ended March 31, 2001 and March 30, 2002 is listed below:

 

 

 

Revenues from
External
Customers

 

Intersegment
Revenues

 

Earnings
before Income
Taxes

 

Long-lived
Assets

 

Total Assets

 

Quarter ended March 31, 2001:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

16,051

 

$

2,728

 

$

1,482

 

$

27,480

 

$

37,179

 

Canada

 

6,807

 

 

(179

)

161

 

2,063

 

Australia — New Zealand

 

3,467

 

222

 

(512

)

321

 

3,086

 

Hong Kong

 

1,289

 

 

(122

)

393

 

1,625

 

Japan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

27,614

 

2,950

 

669

 

28,355

 

43,953

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated and Other (1)

 

 

(2,950

)

85

 

(8,162

)

(9,736

)

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

$

27,614

 

$

 

$

754

 

$

20,193

 

$

34,217

 

 

 

 

 

Revenues from
External
Customers

 

Intersegment
Revenues

 

Earnings
before Income
Taxes

 

Long-lived
Assets

 

Total Assets

 

Quarter ended March 30, 2002:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

15,932

 

$

3,144

 

$

2,058

 

$

23,551

 

$

32,517

 

Canada

 

7,198

 

 

403

 

114

 

2,594

 

Australia — New Zealand

 

3,480

 

269

 

106

 

301

 

3,268

 

Hong Kong

 

1,176

 

 

(121

)

198

 

1,045

 

Japan

 

836

 

 

(847

)

1,463

 

2,397

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

28,622

 

3,413

 

1,599

 

25,627

 

41,821

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated and Other (1)

 

 

(3,413

)

232

 

(5,181

)

(5,829

)

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

$

28,622

 

$

 

$

1,831

 

$

20,446

 

$

35,992

 

 


(1)   “Unallocated and Other” includes certain corporate items and eliminations that are not allocated to the operating segments.

 

10



 

Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of USANA’s financial condition and results of operations should be read in conjunction with the Unaudited Consolidated Financial Statements and Notes thereto contained in this quarterly report.

 

General

 

USANA develops and manufactures high-quality nutritional, personal care and weight management products.  USANA distributes its products through a network marketing system in the United States, Canada, Australia, New Zealand, Hong Kong, and Japan.  USANA refers to its independent distributors as Associates.  We also offer a Preferred Customer program specifically designed for customers who desire to purchase USANA’s products for personal use and do not desire to resell or distribute products.  Sales to Preferred Customers accounted for approximately 19% of net sales during the first quarter of 2002.

 

USANA’s three primary product lines consist of USANA® Nutritionals, LEAN LifelongÔ and SenséÔ. The USANA Nutritionals product line accounted for approximately 67% of net sales for the quarter ended March 30, 2002.  USANA’s top selling products, USANA® Essentials and Proflavanol® represented approximately 27% and 11%, respectively, of net sales for the quarter ended March 30, 2002.  The LEAN Lifelong product line accounted for approximately 10% of net sales for the quarter ended March 30, 2002. The LEAN Lifelong product line includes several completely reformulated food products previously sold under the LEAN or USANA brand names.  NutrimealÔ and Fibergy® drink mixes, Nutribar and Fibergy bar, a LEAN Formula for weight management and several other related products for healthy diets are included in the LEAN Lifelong product line.  The Sensé product line consists of scientifically developed natural products designed to support healthy skin and hair by providing protection and nourishment on both the inside and outside of the dermal layers of the skin.  The Sensé product line accounted for approximately 12% of net sales for the quarter ended March 30, 2002.

 

In addition to these three principal product lines, USANA develops and makes available to Associates a number of materials to assist them in building their business and selling the products. These resource materials or sales aids, which may be purchased from USANA, include product brochures and business forms designed by USANA and printed by outside publishers.  Each major product line incorporates specifically designed sales aids.  From time to time we contract with authors and publishers to provide books, tapes and other items dealing with health and personal motivation and make these available to Associates. USANA also writes and develops materials for audio and videotapes, which are produced by third parties. New Associates are required to purchase a starter kit, containing USANA training materials, that assists them in starting and growing their business.  Affinity and identity are also furthered through the sale of logo merchandise such as clothing, caps, mugs, and other products. Associates do not earn commissions on sales aids, starter kits or logo merchandise.

 

The fiscal year end of USANA is the Saturday closest to December 31 of each year.  Fiscal year 2002 will end on December 28, 2002.  Fiscal year 2001 ended on December 29, 2001.

 

Results of Operations

 

Quarters Ended March 30, 2002 and March 31, 2001

 

Net Sales.  Net sales increased 3.7% to $28.6 million for the quarter ended March 30, 2002, an increase of $1.0 million from the $27.6 million reported for the comparable quarter in 2001.  The increase in net sales can be attributed to sales from our Japan market that commenced operations in the fourth quarter of 2001 and strong Associate enrollments in our more mature markets during the first quarter of 2002.

 

The increase in sales was partially offset by weaker foreign currencies, relative to the U. S. dollar, which negatively affected the translation of sales in foreign markets.  Sales would have been approximately $383,000 higher had foreign currency exchange rates in the first quarter of 2002 been comparable to the rates present in the first quarter of 2001.  Additionally, a price increase in our Australia-New Zealand market took place during the first quarter of 2002; however, lower unit volume offset the price increase and, as a result, only modest top line progress occurred in this market.

 

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The following table illustrates the change in sales by market for the quarters ended March 31, 2001 and March 30, 2002 (sales information for the United Kingdom are incorporated in the results for the United States):

 

 

 

Sales By Market
(in thousands)
Quarter Ended

 

 

 

 

 

Market

 

March 31, 2001

 

March 30, 2002

 

Change from
Prior Year

 

Percent
Change

 

United States

 

$

16,051

 

58.1

%

$

15,932

 

55.7

%

$

(119

)

(0.7%

)

Canada

 

6,807

 

24.7

%

7,198

 

25.1

%

391

 

5.7

%

Australia-New Zealand

 

3,467

 

12.5

%

3,480

 

12.2

%

13

 

0.4

%

Hong Kong

 

1,289

 

4.7

%

1,176

 

4.1

%

(113

)

(8.8%

)

Japan

 

 

0.0

%

836

 

2.9

%

836

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

27,614

 

100.0

%

$

28,622

 

100.0

%

$

1,008

 

3.7

%

 

Gross Profit.  Gross profit increased to 73.1% of net sales for the quarter ended March 30, 2002 from 71.1% for the comparable quarter in 2001.  The increase in gross profit can be attributed to:

 

                  Improved procurement efficiencies and inventory management,

 

                  The price increase in the Australia-New Zealand market, and

 

                  Sales in Japan which are priced to yield higher gross margins.

 

These factors that led to an increase in gross profit were partially offset by a higher percentage of sales aids sold in the first quarter of 2002 compared to the same period in 2001.  The increase in sales aids sold is a result of the strong Associate enrollments during the first quarter of 2002.  Revenues from sales aids and starter kits are priced to yield lower gross profit margins as compared to our other products.

 

Associate Incentives.  Associate incentives decreased to 37.5% of net sales for the quarter ended March 30, 2002 from 38.0% for the comparable quarter in 2001.  The decrease in Associate incentives can be primarily attributed to increased sales from our Japan market.  In a newly opened market like Japan, incentives run at a slightly lower than normal rate for a short period of time while Associates learn how to build an efficient and successful business.  The higher percentage of sales aids sold in the first quarter of 2002, which USANA does not pay commissions on, also contributed to lower Associate incentives.  We expect that Associate incentives, as a percentage of net sales, will trend towards historical levels in the next few quarters.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased to 28.1% of net sales for the quarter ended March 30, 2002 from 27.4% for the comparable quarter in 2001.  The increase in selling, general and administrative expenses as a percentage of net sales can be primarily attributed to the costs related to the proposed transaction involving the sale of assets to the Company’s founder and increased costs to support the Japan market during the first quarter of 2002.  The sale of assets transaction was terminated subsequent to the end of the first quarter of 2002.  USANA still serviced its Japan customers through a direct export program from the United States during the first quarter of 2001.

 

Other Income (Expense).  Foreign currency exchange loss (a component of “Other, net”) decreased by $385,000 in the first quarter of 2002 when compared to the first quarter of 2001.  Additionally, interest expense decreased $161,000 for the first quarter of 2002 when compared to the same period in 2001.  This decrease is a result of lower interest rates and reduced debt levels throughout the first quarter of 2002.

 

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Net Earnings.  Net earnings increased 137.2% to $1.1 million for the quarter ended March 30, 2002, an increase of $646,000 from the $471,000 reported for the comparable quarter in 2001.  The increase in net earnings can be attributed to:

 

                  Increased sales,

 

                  Better operating margins,

 

                  The decrease in foreign currency exchange losses, and

 

                  Lower interest expense.

 

Diluted earnings per share increased $0.07 to $0.12 for the first quarter of 2002 from $0.05 for the comparable quarter in 2001.

 

Liquidity and Capital Resources

 

USANA has historically financed growth with cash flows from operations. In the first quarter of 2002, USANA generated net cash flows from operations of $3.2 million compared to $5.3 million for the first quarter in 2001.  Cash and cash equivalents increased to $3.3 million at March 30, 2002 from $2.5 million at December 29, 2001.

 

On March 30, 2002, USANA had net working capital of $1.2 million compared to net working capital of $350,000 at December 29, 2001. The change in net working capital was primarily the result of the increased cash balance and decreased current debt.

 

USANA does not extend credit to its customers, but requires payment prior to shipping, which eliminates significant receivables.

 

USANA has agreements with a financial institution that provided up to $22.5 million in secured credit facilities consisting of a $10 million five-year term loan and a $12.5 million three-year revolving line of credit.  The credit facilities contain restrictive covenants requiring USANA to maintain certain financial ratios.  The credit facilities were amended on April 17, 2002 with an effective date equal to the date of the original credit facilities agreement.  The amended credit facilities changed the computation of the fixed charge coverage ratio.  Given this amendment, as of March 30, 2002, USANA was in compliance with all covenants.  As of March 30, 2002, $7.5 million was outstanding on the 5-year term loan and $2.6 million was outstanding on the line of credit.

 

USANA believes that its current cash balances, the available line of credit and cash provided by operations will be sufficient to cover its needs in the ordinary course of business for the foreseeable future.  If USANA experiences an adverse operating environment or unusual capital expenditure requirements, additional financing may be required.  However, no assurance can be given that additional financing, if required, would be available on favorable terms.  USANA may also require or seek additional financing, including through the sale of its equity securities to finance future expansion into new markets, finance capital acquisitions associated with the growth of USANA and for other reasons.  Any financing which involves the sale of equity securities or instruments convertible into equity securities would result in immediate and possibly significant dilution to existing shareholders.

 

Forward-Looking Statements

 

The statements contained in this Report that are not purely historical are considered to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act.  These statements represent our expectations, hopes, beliefs, anticipations, commitments, intentions and strategies regarding the future.  They may be identified by the use of words or phrases such as “believes,” “expects,” “anticipates,” “should,” “plans,” “estimates,” and “potential,” among others.  Forward-looking statements include, but are not limited to, statements contained in 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.  Readers are cautioned that actual results could differ materially from the

 

13



 

anticipated results or other expectations expressed in such forward-looking statements for the reasons detailed in our most recent Annual Report on Form 10-K, as amended, pages 24 through 30.  The fact that some of the risk factors may be the same or similar to our past reports 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 and in the Company’s SEC filings are part of doing business in the industry in which we operate and compete 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 such forward-looking statements.  Among others, risks and uncertainties that may affect our business, financial condition, performance, development and results of operations include:

 

                  Our ability to attract and maintain a sufficient number of Associates,

 

                  High turnover of Associates,

 

                  Our reliance on information technology,

 

                  Our dependence upon a network marketing system to distribute our products,

 

                  The fluctuation in the value of foreign currencies against the US dollar,

 

                  Activities of our independent Associates,

 

                  Rigorous government scrutiny of network marketing practices,

 

                  Potential effects of adverse publicity regarding nutritional supplements or the network marketing industry,

 

                  Reliance on key management personnel, including our President, Chief Executive Officer and Chairman of the Board of Directors, Myron W. Wentz, Ph.D.,

 

                  Extensive government regulation of the Company’s products and manufacturing,

 

                  Risks related to our expansion into international markets,

 

                  Failure of USANA to sustain or manage growth including the failure to continue to develop new products,

 

                  The adverse effect of USANA’s loss of a high level sponsoring Associate together with a group of leading Associates in that person’s downline,

 

                  The loss of product market share or Associates to competitors,

 

                  Potential adverse effects of taxation and transfer pricing regulations,

 

                  Our reliance on outside suppliers for raw materials,

 

                  Intellectual property risks particularly applicable to our business, or

 

                  Product liability claims and other manufacturing activity risks.

 

14



 

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We conduct our business in several countries and intend to continue to expand our foreign operations. Net sales, earnings from operations and net earnings are affected by fluctuations in currency exchange rates, interest rates and other uncertainties inherent in doing business and selling product in more than one currency. In addition, USANA’s operations are exposed to risks associated with changes in social, political and economic conditions inherent in foreign operations, including changes in the laws and policies that govern foreign investment in countries where it has operations as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.

 

Foreign Currency Risks.  Sales outside the United States represented 41.9% and 44.3% of net sales for the quarters ended March 31, 2001 and March 30, 2002, respectively.  Inventory purchases are transacted primarily in U.S. dollars from vendors located in the United States.  The local currency of each international subsidiary is considered the functional currency with all revenue and expenses translated at weighted average exchange rates for reported periods.  Consequently, USANA’s reported sales and earnings are impacted positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar.  Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations or financial condition. Changes in currency exchange rates affect the relative prices at which USANA sells its products.

 

As of March 30, 2002 and during the quarter then ended, USANA had no hedging instruments in place to offset exposure to the Canadian Dollar, Australian Dollar, New Zealand Dollar, Hong Kong Dollar, Japanese Yen, British Pound or Euro, to which, in aggregate, USANA had significant exposure.  We regularly monitor our foreign currency risks and periodically take measures to reduce the impact of foreign exchange fluctuations on our operating results.

 

As a last recourse for hedging currency risk, USANA may elect to adjust prices in non-U.S. markets to reflect changes in foreign currency exchange rates.  However, there can be no assurance that these practices will be successful in eliminating all or substantially all of the risks encountered in connection with our foreign currency transactions.

 

Interest Rate Risks.  USANA currently carries $7.5 million in long-term debt at an effective interest rate of 4.15%.  This long-term debt matures at the rate of $1.5 million for the remainder of 2002, $3.4 million in 2003 and $2.6 million in 2004.  We also have a revolving line of credit with $2.6 million outstanding at March 30, 2002 with a weighted average interest rate of 5.25%. The interest rate is computed at the bank’s Prime Rate or LIBOR adjusted by features specified in our loan agreements, with fixed rate term options of up to six months.  A hypothetical 100 basis point increase in interest rates on all of the above debt would result in an annual after tax increase of interest expense of approximately $62,000, which would not materially affect earnings.

 

 

PART II.   OTHER INFORMATION

 

 

Item 5.    OTHER INFORMATION

 

                On April 9, 2002, the Company terminated an agreement for the sale of operating assets to a company controlled by USANA’s founder, Myron W. Wentz, Ph.D.  The agreement for the sale had been entered into on March 21, 2002 and was subject, among other things, to a submission of the proposal to the vote of the shareholders of the Company.

 

15



 

Item 6.    EXHIBITS AND REPORTS ON FORM 8-K

 

(a)                                  Exhibits.

 

Exhibit
Number

 

Description

 

 

 

3.1

 

Articles of Incorporation [Incorporated by reference to Registration Statement on Form 10, File No. 0-21116, effective April 16, 1993]

 

 

 

3.2

 

Bylaws [Incorporated by reference to Registration Statement on Form 10, File No. 0-21116, effective April 16, 1993]

 

 

 

3.3

 

Amendment to Articles of Incorporation to change name and increase par value [Incorporated by reference to Report on Form 10-Q for the period ended July 1, 2000]

 

 

 

4.1

 

Specimen Stock Certificate for Common Stock, no par value [Incorporated by reference to Registration Statement on Form 10, File No. 0-21116, effective April 16, 1993]

 

 

 

10.1

 

Business Loan Agreement by and between Bank of America National Trust and Savings Association, d/b/a Seafirst Bank (“Seafirst Bank”) and the Company [Incorporated by reference to Report on Form 10-Q for the period ended June 27, 1998]

 

 

 

10.2

 

Loan Modification Agreement by and between Seafirst Bank and the Company [Incorporated by reference to Report on Form 10-Q for the period ended June 27, 1998]

 

 

 

10.3

 

Employment Agreement dated June 1, 1997 by and between the Company and Gilbert A. Fuller [Incorporated by reference to Report on Form 10-Q for the period ended June 27, 1998]

 

 

 

10.4

 

Amended and Restated Long-Term Stock Investment and Incentive Plan [Incorporated by reference to Report on Form 10-Q for the period ended June 27, 1998]

 

 

 

10.5

 

Promissory Note and Redemption Agreement dated April 28, 1999 [Incorporated by reference to Report on Form 10-Q for the period ended April 3, 1999]

 

 

 

10.6

 

Stock Pledge Agreement dated April 28, 1999 [Incorporated by reference to Report on Form 10-Q for the period ended April 3, 1999]

 

 

 

10.7

 

Redemption Agreement dated July 30, 1999 [Incorporated by reference to Report on Form 8-K, filed September 24, 1999]

 

 

 

10.8

 

Amended Term Note dated March 26, 2001 [Incorporated by reference to Report on Form 10-K, filed March 30, 2001]

 

 

 

10.9

 

Amended Revolving Note dated March 26, 2001 [Incorporated by reference to Report on Form 10-K, filed March 30, 2001]

 

 

 

10.10

 

Amended Credit Agreement dated March 26, 2001 [Incorporated by reference to Report on Form 10-K, filed March 30, 2001]

 

 

 

10.11

 

Purchase Agreement dated March 21, 2002 [Incorporated by reference to Annex A of the Preliminary Schedule 14A, filed March 26, 2002]

 

 

 

10.12

 

Termination of Purchase Agreement dated April 11, 2002 [Incorporated by reference to Report on Form 10-K/A, filed May 1, 2002]

 

 

 

10.13

 

Amended Credit Agreement dated April 17, 2002

 

 

 

11.1

 

Computation of Net Earnings per Share (included in Notes to Consolidated Financial Statements)

 

 

 

99.1

 

Press Release dated September 21, 1999 [Incorporated by reference to Report on Form 8-K, filed September 24, 1999]

 

 

 

99.2

 

Press Release dated April 11, 2002 [Incorporated by reference to Report on Form 10-K/A, filed May 1, 2002]

 

16



 

(b)                                 Reports on Form 8-K.

 

The Company filed no current reports on Form 8-K during the quarter ended March 30, 2002.

 

17



 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

USANA HEALTH SCIENCES, INC.

 

 

 

 

 

 

 

 

 

 

 

 

Date:

May 12, 2002

 

By:

/s/ Gilbert A. Fuller

 

 

 

 

Gilbert A. Fuller

 

 

 

Senior Vice President and

 

 

 

Chief Financial Officer

 

18