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 June 28, 2003

 

 

 

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.)

 

3838 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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý

 

The number of shares outstanding of the registrant’s common stock as of July 25, 2003 was 9,615,637.

 

 



 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended June 28, 2003

 

INDEX

 

PART I.  FINANCIAL INFORMATION

 

 

Item 1

Financial Statements

 

Consolidated Balance Sheets

 

Consolidated Statements of Earnings – Quarter Ended

 

Consolidated Statements of Earnings – Six Months Ended

 

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

Item 4

Controls and Procedures

 

 

PART II.  OTHER INFORMATION

 

 

Item 4

Submission of Matters to a Vote of Security Holders

Item 5

Other Information

Item 6

Exhibits and Reports on Form 8-K

 

Signatures

Certifications

 

2



 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(in thousands, except per share data)

 

 

 

December 28,
2002

 

June 28,
2003

 

 

 

 

 

(Unaudited)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

6,686

 

$

13,964

 

Inventories, net (Note B)

 

9,119

 

9,449

 

Prepaid expenses and other current assets (Note C)

 

1,545

 

1,858

 

Deferred income taxes

 

1,557

 

1,772

 

 

 

 

 

 

 

Total current assets

 

18,907

 

27,043

 

 

 

 

 

 

 

Property and equipment, net (Note D)

 

18,405

 

18,730

 

 

 

 

 

 

 

Other assets

 

1,801

 

2,069

 

 

 

 

 

 

 

 

 

$

39,113

 

$

47,842

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current maturities of long-term debt

 

$

3,428

 

$

 

Capital lease obligations, current

 

17

 

 

Accounts payable

 

2,666

 

4,456

 

Other current liabilities (Note E)

 

8,655

 

11,653

 

Line of credit

 

2,913

 

 

 

 

 

 

 

 

Total current liabilities

 

17,679

 

16,109

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

2,572

 

 

 

 

 

 

 

 

Other long-term liabilities

 

769

 

633

 

 

 

 

 

 

 

Stockholders’ equity (Note A and F)

 

 

 

 

 

Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding 9,137 as of December 28, 2002 and 9,612 as of June 28, 2003

 

9

 

10

 

Additional paid-in capital

 

3,675

 

8,759

 

Retained earnings

 

14,520

 

21,550

 

Accumulated other comprehensive income (loss)

 

(111

)

781

 

 

 

 

 

 

 

Total stockholders’ equity

 

18,093

 

31,100

 

 

 

 

 

 

 

 

 

$

39,113

 

$

47,842

 

 

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)

 

 

 

June 29,
2002

 

June 28,
2003

 

 

 

 

 

 

 

Net sales

 

$

32,068

 

$

47,157

 

 

 

 

 

 

 

Cost of sales

 

8,359

 

10,417

 

 

 

 

 

 

 

Gross profit

 

23,709

 

36,740

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

12,205

 

18,662

 

Selling, general and administrative

 

8,560

 

10,574

 

Research and development

 

240

 

373

 

 

 

 

 

 

 

Total operating expenses

 

21,005

 

29,609

 

 

 

 

 

 

 

Earnings from operations

 

2,704

 

7,131

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

21

 

21

 

Interest expense

 

(92

)

(1

)

Other, net

 

105

 

(248

)

 

 

 

 

 

 

Total other income (expense)

 

34

 

(228

)

 

 

 

 

 

 

Earnings before income taxes

 

2,738

 

6,903

 

 

 

 

 

 

 

Income taxes

 

1,000

 

2,554

 

 

 

 

 

 

 

Net earnings

 

$

1,738

 

$

4,349

 

 

 

 

 

 

 

Earnings per common share (Note A and F)

 

 

 

 

 

Basic

 

$

0.18

 

$

0.46

 

Diluted

 

$

0.16

 

$

0.41

 

 

 

 

 

 

 

Weighted average common and dilutive common equivalent shares outstanding (Note A and F)

 

 

 

 

 

Basic

 

9,598

 

9,544

 

Diluted

 

10,627

 

10,725

 

 

The accompanying notes are an integral part of these statements.

 

4



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(in thousands, except per share data)

 

 

 

Six Months Ended

 

 

 

(unaudited)

 

 

 

June 29,
2002

 

June 28,
2003

 

 

 

 

 

 

 

Net sales

 

$

60,690

 

$

88,021

 

 

 

 

 

 

 

Cost of sales

 

16,070

 

19,637

 

 

 

 

 

 

 

Gross profit

 

44,620

 

68,384

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

22,935

 

34,759

 

Selling, general and administrative

 

16,615

 

20,146

 

Research and development

 

439

 

707

 

 

 

 

 

 

 

Total operating expenses

 

39,989

 

55,612

 

 

 

 

 

 

 

Earnings from operations

 

4,631

 

12,772

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

37

 

41

 

Interest expense

 

(192

)

(48

)

Other, net

 

93

 

(187

)

 

 

 

 

 

 

Total other expense

 

(62

)

(194

)

 

 

 

 

 

 

Earnings before income taxes

 

4,569

 

12,578

 

 

 

 

 

 

 

Income taxes

 

1,714

 

4,654

 

 

 

 

 

 

 

Net earnings

 

$

2,855

 

$

7,924

 

 

 

 

 

 

 

Earnings per common share (Note A and F)

 

 

 

 

 

Basic

 

$

0.30

 

$

0.84

 

Diluted

 

$

0.28

 

$

0.75

 

 

 

 

 

 

 

Weighted average common and dilutive common equivalent shares outstanding (Note A and F)

 

 

 

 

 

Basic

 

9,631

 

9,427

 

Diluted

 

10,150

 

10,623

 

 

The accompanying notes are an integral part of these statements.

 

5



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

Six Months Ended June 29, 2002 and June 28, 2003

 

(in thousands)

 

(unaudited)

 

 

 

 

 

 

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulate
Other
Comprehensive
Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

Shares

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 29, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Balance at December 29, 2001

 

9,664

 

$

10

 

$

2,359

 

$

12,752

 

$

(594

)

$

14,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

2,855

 

 

2,855

 

Foreign currency translation adjustment

 

 

 

 

 

531

 

531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

3,386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock retired

 

(182

)

 

(86

)

(736

)

 

(822

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued under stock option plan, including tax benefit of $33

 

19

 

 

67

 

 

 

67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Balance at June 29, 2002

 

9,501

 

$

10

 

$

2,340

 

$

14,871

 

$

(63

)

$

17,158

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 28, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Balance at December 28, 2002

 

9,137

 

$

9

 

$

3,675

 

$

14,520

 

$

(111

)

$

18,093

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

7,924

 

 

7,924

 

Foreign currency translation adjustment

 

 

 

 

 

892

 

892

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

8,816

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock retired

 

(43

)

 

(254

)

(894

)

 

(1,148

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued under stock option plan, including tax benefit of $3,007

 

518

 

1

 

5,338

 

 

 

5,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Balance at June 28, 2003

 

9,612

 

$

10

 

$

8,759

 

$

21,550

 

$

781

 

$

31,100

 

 

The accompanying notes are an integral part of these statements.

 

6



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

(unaudited)

 

 

 

Six Months Ended

 

 

 

June 29,
2002

 

June 28,
2003

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net earnings

 

$

2,855

 

$

7,924

 

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

 

 

 

 

 

Depreciation and amortization

 

2,095

 

1,839

 

(Gain) loss on sale of property and equipment

 

11

 

(24

)

Deferred income taxes

 

(664

)

(257

)

Provision for inventory valuation

 

906

 

1,187

 

Changes in operating assets and liabilities:

 

 

 

 

 

Inventories

 

(127

)

(1,097

)

Prepaid expenses and other assets

 

(964

)

80

 

Accounts payable

 

371

 

1,730

 

Other current liabilities

 

2,426

 

5,667

 

 

 

 

 

 

 

Total adjustments

 

4,054

 

9,125

 

 

 

 

 

 

 

Net cash provided by operating activities

 

6,909

 

17,049

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property and equipment

 

(837

)

(2,115

)

Proceeds from the sale of property and equipment

 

23

 

40

 

 

 

 

 

 

 

Net cash used in investing activities

 

(814

)

(2,075

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Net proceeds from the sale of common stock

 

34

 

2,332

 

Redemption of common stock

 

(822

)

(1,148

)

Principal payments of long-term debt

 

(1,000

)

(6,000

)

Decrease in line of credit

 

(3,195

)

(2,913

)

Payments on capital lease obligations

 

 

(91

)

 

 

 

 

 

 

Net cash used in financing activities

 

(4,983

)

(7,820

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

895

 

124

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

2,007

 

7,278

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

2,465

 

6,686

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

4,472

 

$

13,964

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

215

 

$

65

 

Income taxes

 

1,844

 

1,167

 

 

The accompanying notes are an integral part of these statements.

 

7



 

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 June 28, 2003, and results of operations for the quarters and six months ended June 29, 2002 and June 28, 2003.  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 28, 2002.  The results of operations for the quarter and six months ended June 28, 2003 may not be indicative of the results that may be expected for the fiscal year ending January 3, 2004.

 

NOTE A – STOCK-BASED COMPENSATION

 

The Company has applied the disclosure provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — An Amendment of FASB Statement No. 123,” for the six months ended June 29, 2002 and June 28, 2003.  Issued in December 2002, SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  As permitted by SFAS No. 148, the Company continues to account for stock options under APB Opinion No. 25, under which no compensation has been recognized. The following table illustrates the effects on net earnings and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148, to stock-based compensation:

 

 

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

 

 

June 29,
2002

 

June 28,
2003

 

June 29,
2002

 

June 28,
2003

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

As reported

 

$

1,738

 

$

4,349

 

$

2,855

 

$

7,924

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma

 

$

1,463

 

$

4,229

 

$

2,437

 

$

7,696

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic

 

As reported

 

$

0.18

 

$

0.46

 

$

0.30

 

$

0.84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma

 

$

0.15

 

$

0.44

 

$

0.25

 

$

0.82

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - diluted

 

As reported

 

$

0.16

 

$

0.41

 

$

0.28

 

$

0.75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma

 

$

0.14

 

$

0.39

 

$

0.24

 

$

0.72

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average Black-Scholes fair value assumptions:

 

 

 

 

 

 

 

 

 

Expected volatility

 

*N/A

 

*N/A

 

71

%

77

%

Risk free interest rate

 

*N/A

 

*N/A

 

4.99

%

3.86

%

Expected life

 

*N/A

 

*N/A

 

10 yrs.

 

10 yrs.

 

Expected dividend yield

 

*N/A

 

*N/A

 

0

%

0

%

Weighted average fair value of options granted

 

*N/A

 

*N/A

 

$

1.64

 

$

15.80

 

 


* No grants were made during the quarters ended June 29, 2002 and June 28, 2003.

 

8



 

Option pricing models require the input of highly subjective assumptions including the expected stock price volatility.  Also, the Company’s employee stock options have characteristics significantly different from those of traded options, including long vesting schedules and changes in the subjective input assumptions that can materially affect the fair value estimate.  Management believes the best assumptions available were used to value the options and that the resulting option values were reasonable as of the dates the options were granted.

 

NOTE B – INVENTORIES

 

Inventories consist of the following:

 

 

 

December 28,
2002

 

June 28,
2003

 

 

 

 

 

 

 

Raw materials

 

$

2,488

 

$

3,537

 

Work in progress

 

2,018

 

1,333

 

Finished goods

 

6,336

 

6,579

 

 

 

 

 

 

 

 

 

10,842

 

11,449

 

 

 

 

 

 

 

Less allowance for inventory valuation

 

1,723

 

2,000

 

 

 

 

 

 

 

 

 

$

9,119

 

$

9,449

 

 

 

NOTE C – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

 

 

December 28,
2002

 

June 28,
2003

 

 

 

 

 

 

 

Prepaid expenses

 

$

1,157

 

$

1,063

 

Receivables, net

 

150

 

417

 

All other

 

238

 

378

 

 

 

 

 

 

 

 

 

$

1,545

 

$

1,858

 

 

9



 

NOTE D – PROPERTY AND EQUIPMENT

 

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

 

 

 

Years

 

December 28,
2002

 

June 28,
2003

 

 

 

 

 

 

 

 

 

Building

 

40

 

$

8,110

 

$

8,110

 

Laboratory and production equipment

 

5-7

 

4,803

 

5,070

 

Computer equipment and software

 

3-5

 

16,606

 

18,510

 

Furniture and fixtures

 

3-5

 

2,139

 

2,181

 

Automobiles

 

3-5

 

351

 

214

 

Leasehold improvements

 

3-5

 

1,344

 

1,424

 

Land improvements

 

15

 

931

 

931

 

 

 

 

 

 

 

 

 

 

 

 

 

34,284

 

36,440

 

 

 

 

 

 

 

 

 

Less accumulated depreciation and amortization

 

 

 

18,618

 

20,581

 

 

 

 

 

 

 

 

 

 

 

 

 

15,666

 

15,859

 

 

 

 

 

 

 

 

 

Land

 

 

 

1,773

 

1,773

 

 

 

 

 

 

 

 

 

Deposits and projects in process

 

 

 

966

 

1,098

 

 

 

 

 

 

 

 

 

 

 

 

 

$

18,405

 

$

18,730

 

 

NOTE E – OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

 

 

December 28,
2002

 

June 28,
2003

 

 

 

 

 

 

 

Associate incentives

 

$

1,107

 

$

1,675

 

Accrued compensation

 

2,781

 

2,205

 

Income taxes

 

1,350

 

1,947

 

Sales taxes

 

732

 

972

 

Accrued associate promotions

 

102

 

1,522

 

Deferred revenue

 

973

 

1,168

 

Provision for returns and allowances

 

515

 

599

 

All other

 

1,095

 

1,565

 

 

 

 

 

 

 

 

 

$

8,655

 

$

11,653

 

 

10



 

NOTE F – COMMON STOCK AND EARNINGS PER SHARE

 

Basic earnings per share are based on the weighted average number of shares outstanding for each period.  Weighted average 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.  Shares included in dilutive earnings per share calculations include stock options granted that are in the money but have not yet been exercised.

 

 

 

For the Quarter Ended

 

 

 

June 29,
2002

 

June 28,
2003

 

Earnings available to common shareholders

 

$

1,738

 

$

4,349

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding entire period

 

9,664

 

9,137

 

Weighted average common shares:

 

 

 

 

 

Issued during period

 

4

 

407

 

Canceled during period

 

(70

)

 

 

 

 

 

 

 

Weighted average common shares outstanding during period

 

9,598

 

9,544

 

 

 

 

 

 

 

Earnings per common share - basic

 

$

0.18

 

$

0.46

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Weighted average shares outstanding during period - basic

 

9,598

 

9,544

 

 

 

 

 

 

 

Dilutive effect of stock options

 

1,029

 

1,181

 

 

 

 

 

 

 

Weighted average shares outstanding during period - diluted

 

10,627

 

10,725

 

 

 

 

 

 

 

Earnings per common share - diluted

 

$

0.16

 

$

0.41

 

 

Options to purchase 1,151 shares of stock were not included in the computation of EPS for the fiscal quarter ended June 29, 2002 due to their exercise price being greater than the average market price of the shares.  For the fiscal quarter ended June 28, 2003, all options to purchase shares of stock were included in the computation of EPS.

 

 

 

For the Six Months Ended

 

 

 

June 29,
2002

 

June 28,
2003

 

Earnings available to common shareholders

 

$

2,855

 

$

7,924

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding entire period

 

9,664

 

9,137

 

Weighted average common shares:

 

 

 

 

 

Issued during period

 

2

 

302

 

Canceled during period

 

(35

)

(12

)

 

 

 

 

 

 

Weighted average common shares outstanding during period

 

9,631

 

9,427

 

 

 

 

 

 

 

Earnings per common share - basic

 

$

0.30

 

$

0.84

 

 

11



 

 

 

For the Six Months Ended

 

 

 

June 29,
2002

 

June 28,
2003

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Weighted average shares outstanding during period - basic

 

9,631

 

9,427

 

 

 

 

 

 

 

Dilutive effect of stock options

 

519

 

1,196

 

 

 

 

 

 

 

Weighted average shares outstanding during period - diluted

 

10,150

 

10,623

 

 

 

 

 

 

 

Earnings per common share - diluted

 

$

0.28

 

$

0.75

 

 

Options to purchase 1,816 shares of stock were not included in the computation of EPS for the six months ended June 29, 2002 due to their exercise price being greater than the average market price of the shares.  For the six months ended June 28, 2003, all options to purchase shares of stock were included in the computation of EPS.

 

As of the fiscal year ended 2002, 395 shares of 2,000 authorized were available in the Company’s share repurchase plan.  No shares were purchased during the first quarter of 2003.  As of June 28, 2003, the Company expended $1.1 million to purchase 43 shares under this plan.  The purchase of shares under this plan reduces the number of shares issued and outstanding.

 

NOTE G – SEGMENT INFORMATION

 

As of June 28, 2003, the Company’s segments were based on six operating geographic regions (five as of June 29, 2002). 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.

 

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 three months ended June 29, 2002 and June 28, 2003 is listed below:

 

 

 

Revenues from
External
Customers

 

Intersegment
Revenues

 

Earnings
before Income
Taxes

 

Three months ended June 29, 2002:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

16,971

 

$

3,396

 

$

1,761

 

Canada

 

8,193

 

 

993

 

Australia - New Zealand

 

4,367

 

351

 

506

 

Hong Kong

 

1,309

 

 

104

 

Japan (1)

 

1,228

 

 

(594

)

 

 

 

 

 

 

 

 

Reportable Segments Total

 

32,068

 

3,747

 

2,770

 

 

 

 

 

 

 

 

 

Unallocated and Other (2)

 

 

(3,747

)

(32

)

 

 

 

 

 

 

 

 

Consolidated Total

 

$

32,068

 

$

 

$

2,738

 

 

12



 

 

 

 

Revenues from
External
Customers

 

Intersegment
Revenues

 

Earnings
before Income
Taxes

 

Three months ended June 28, 2003:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

21,884

 

$

8,543

 

$

6,851

 

Canada

 

11,271

 

 

(231

)

Australia - New Zealand

 

7,084

 

503

 

823

 

Hong Kong

 

2,105

 

 

346

 

Japan (1)

 

1,445

 

 

(748

)

Taiwan

 

3,368

 

 

932

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

47,157

 

9,046

 

7,973

 

 

 

 

 

 

 

 

 

Unallocated and Other (2)

 

 

(9,046

)

(1,070

)

 

 

 

 

 

 

 

 

Consolidated Total

 

$

47,157

 

$

 

$

6,903

 

 

Financial information summarized by geographic segment for the six months ended June 29, 2002 and June 28, 2003 is listed below:

 

 

 

Revenues from
External
Customers

 

Intersegment
Revenues

 

Earnings
before Income
Taxes

 

Long-lived
Assets

 

Total Assets

 

Six months ended June 29, 2002:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

 32,903

 

$

 6,540

 

$

 3,819

 

$

 22,912

 

$

 30,556

 

Canada

 

15,391

 

 

1,396

 

110

 

3,413

 

Australia - New Zealand

 

7,847

 

620

 

612

 

283

 

3,663

 

Hong Kong

 

2,485

 

 

(17

)

201

 

1,630

 

Japan (1)

 

2,064

 

 

(1,441

)

1,495

 

2,732

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

60,690

 

7,160

 

4,369

 

25,001

 

41,994

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated and Other (2)

 

 

(7,160

)

200

 

(4,898

)

(5,514

)

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

$

 60,690

 

$

 —

 

$

 4,569

 

$

 20,103

 

$

 36,480

 

 

13



 

 

 

Revenues from
External
Customers

 

Intersegment
Revenues

 

Earnings
before Income
Taxes

 

Long-lived
Assets

 

Total Assets

 

Six months ended June 28, 2003:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

 41,873

 

$

 13,275

 

$

 11,808

 

$

 22,466

 

$

 40,734

 

Canada

 

20,981

 

 

346

 

125

 

1,557

 

Australia - New Zealand

 

12,407

 

913

 

1,510

 

286

 

2,698

 

Hong Kong

 

3,995

 

 

572

 

201

 

1,150

 

Japan (1)

 

2,683

 

 

(1,519

)

1,189

 

2,072

 

Taiwan

 

6,082

 

 

1,486

 

341

 

2,749

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

88,021

 

14,188

 

14,203

 

24,608

 

50,960

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated and Other (2)

 

 

(14,188

)

(1,625

)

(3,809

)

(3,118

)

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

$

 88,021

 

$

 —

 

$

 12,578

 

$

 20,799

 

$

 47,842

 

 


(1)   Includes results from local operations in Japan.  Direct U.S. export sales to Japan are included in the United States operating segment.

 

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

 

14



 

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 Health Sciences, Inc. develops and manufactures high-quality nutritional, personal care and weight management products.  We market all of our products on the basis of high levels of bioavailability, safety, and quality.  We distribute our products through a network marketing system using independent distributors that we refer to as “Associates.”  As of June 28, 2003, we had approximately 77,000 active Associates in the United States, Canada, Australia, New Zealand, Hong Kong, Japan, Taiwan, and the United Kingdom.  We also sell products directly to  “Preferred Customers” who purchase product for personal use and are not permitted to resell or distribute the products.  As of June 28, 2003, we had approximately 50,000 active Preferred Customers worldwide.  Sales to Preferred Customers accounted for approximately 16% of net sales during the second quarter of 2003.  For purposes of this report, we only count as active customers those Associates and Preferred Customers who have purchased product from USANA at any time during the most recent three-month period.

 

Our three primary product lines consist of USANAâ Nutritionals, Sensé – beautiful scienceâ (Sensé), and L·E·A·N LifelongÔ.  Various individual items within these primary product lines are also grouped and sold as combination packs.  The USANA Nutritionals product line includes antioxidants, minerals, vitamins, and other nutritional supplements.  The USANA nutritional supplement products are designed to provide optimal balance, bioavailability, and efficacy.  The Sensé product line includes premium, science-based personal care products that support healthy skin and hair by providing advanced topical nourishment, moisturization and protection.  The LEAN Lifelong product line includes several weight management and other related products for healthy diets.

 

In addition to these principal product lines, we have developed and sell to Associates materials and online tools designed to assist them in building their business and selling products.  These resource materials or sales aids include product brochures and business forms designed by us and printed by outside publishers.  We periodically contract with authors and publishers to produce or provide books, tapes, and other items dealing with health topics and personal motivation, which are made available to Associates. We also write and develop our own 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 assist the Associates in starting and growing their business.  Associates do not earn commissions on the sale of sales aids or starter kits.

 

The following table summarizes the approximate percentage of total product revenue contributed by major product line for the quarters ended as of the dates indicated:

 

 

 

Sales By Product Line
Quarter Ended

 

Product Line

 

June 29,
2002

 

June 28,
2003

 

USANAâ Nutritionals

 

65

%

64

%

Sensé – beautiful scienceâ

 

13

%

12

%

L·E·A·N LifelongÔ

 

10

%

7

%

Combination Packs

 

5

%

10

%

All Other

 

7

%

7

%

 

Our top-selling products, USANAâ Essentials and Proflavanolâ, represented approximately 21% and 9%, respectively, of net sales for the quarter ended June 28, 2003.  The USANAâ Essentials are also provided in a convenient pillow pack format, HealthPak 100Ô that represented an additional 9% of net sales for the quarter ended June 28, 2003.

 

The fiscal year end of USANA is the Saturday closest to December 31 of each year.  Fiscal year 2003 will end on January 3, 2004 and is a 53-week year.  Fiscal year 2002 ended on December 28, 2002 and was a 52-week year.

 

15



 

The Company is in the practice of providing guidance concerning anticipated net sales.  Based on information currently available to the Company, we expect net sales of approximately $52 million for the third quarter of 2003 and $190 million for fiscal year 2003, dependent upon the actual operating results in our newest market, South Korea, which was formally opened on July 14, 2003.

 

Results of Operations

 

Quarters Ended June 29, 2002 and June 28, 2003

 

Net Sales.  Net sales increased 47.1% to $47.2 million for the quarter ended June 28, 2003, an increase of $15.1 million from the $32.1 million reported for the comparable quarter in 2002.  The increase can be primarily attributed to:

 

                  A 35.1% increase in the active Associate base and a 16.3% increase in the active Preferred Customer base for the second quarter of 2003, on a year-over-year basis,

 

                  Sales of $3.4 million from our Taiwan market that commenced operations in the fourth quarter of 2002,

 

                  Stronger foreign currencies, relative to the U. S. dollar, which positively affected the translation of sales in foreign currencies by $2.3 million, and

 

                  A price increase on two key products, USANAâ Essentials and HealthPak 100Ô in North America that contributed an additional $1.1 million to net sales.

 

We believe that various factors contributed to the year-over-year second quarter increase in the active Associate base, including general enthusiasm created by international expansion, ongoing communication with Associate leaders in the field, improved infrastructure to enhance the Associate service level, and company-sponsored events held to motivate Associates.

 

During the first quarter of 2003, there was an outbreak of Severe Acute Respiratory Syndrome (SARS).  To date, the outbreak has been largely concentrated in Asia, although cases have been confirmed in, among other locations, the United States and Canada.  Our operations and sales in regions affected by the outbreak may be adversely impacted as a result of travel restrictions or the illness and quarantine of employees and/or customers or other disruptions in commerce.  While we do not believe that the outbreak of SARS or the war in Iraq, which commenced in March 2003, had any adverse effect on our business during the six months ended June 28, 2003, there is no assurance that these events will not have any adverse effect on our business operations in the future.  Although the spread of the outbreak appears to have been controlled as of the date of this filing, a renewed outbreak or significant spread of SARS in Asia or other regions could have an adverse impact on our operations.

 

The following table summarizes the growth in net sales by market for the fiscal quarters ended June 29, 2002 and June 28, 2003.  Sales data for the United States includes products shipped directly from the U.S. headquarters to customers in the United Kingdom and Japan.

 

 

 

Sales By Market
(in thousands)
Quarter Ended

 

 

 

 

 

Market

 

June 29, 2002

 

June 28, 2003

 

Change from
Prior Year

 

Percent
Change

 

United States

 

$

16,971

 

52.9

%

$

21,884

 

46.4

%

$

4,913

 

28.9

%

Canada

 

8,193

 

25.5

%

11,271

 

23.9

%

3,078

 

37.6

%

Australia-New Zealand

 

4,367

 

13.6

%

7,084

 

15.0

%

2,717

 

62.2

%

Hong Kong

 

1,309

 

4.1

%

2,105

 

4.5

%

796

 

60.8

%

Japan

 

1,228

 

3.8

%

1,445

 

3.1

%

217

 

17.7

%

Taiwan

 

 

0.0

%

3,368

 

7.1

%

3,368

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

32,068

 

100.0

%

$

47,157

 

100.0

%

$

15,089

 

47.1

%

 

16



 

The following tables summarize the growth in active customers by market as of the dates indicated:

 

 

 

Active Associates By Market

 

 

 

 

 

Market

 

As of
June 29, 2002

 

As of
June 28, 2003

 

Change from
Prior Year

 

Percent
Change

 

United States

 

27,000

 

47.4

%

32,000

 

41.6

%

5,000

 

18.5

%

Canada

 

16,000

 

28.1

%

18,000

 

23.4

%

2,000

 

12.5

%

Australia-New Zealand

 

9,000

 

15.8

%

12,000

 

15.6

%

3,000

 

33.3

%

Hong Kong

 

3,000

 

5.3

%

4,000

 

5.2

%

1,000

 

33.3

%

Japan

 

2,000

 

3.5

%

3,000

 

3.9

%

1,000

 

50.0

%

Taiwan

 

 

0.0

%

8,000

 

10.4

%

8,000

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

57,000

 

100.0

%

77,000

 

100.0

%

20,000

 

35.1

%

 

 

 

Active Preferred Customers By Market

 

 

 

 

 

Market

 

As of
June 29, 2002

 

As of
June 28, 2003

 

Change from
Prior Year

 

Percent
Change

 

United States

 

26,000

 

60.5

%

30,000

 

60.0

%

4,000

 

15.4

%

Canada

 

13,000

 

30.2

%

15,000

 

30.0

%

2,000

 

15.4

%

Australia-New Zealand

 

4,000

 

9.3

%

4,000

 

8.0

%

 

0.0

%

Hong Kong

 

**

 

0.0

%

1,000

 

2.0

%

1,000

 

N/A

 

Japan

 

**

 

0.0

%

**

 

0.0

%

 

N/A

 

Taiwan

 

 

0.0

%

**

 

0.0

%

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

43,000

 

100.0

%

50,000

 

100.0

%

7,000

 

16.3

%

 


**          Active Preferred Customer count is less than 500.

 

 

 

Total Active Customers By Market

 

 

 

 

 

Market

 

As of
June 29, 2002

 

As of
June 28, 2003

 

Change from
Prior Year

 

Percent
Change

 

United States

 

53,000

 

53.0

%

62,000

 

48.8

%

9,000

 

17.0

%

Canada

 

29,000

 

29.0

%

33,000

 

26.0

%

4,000

 

13.8

%

Australia-New Zealand

 

13,000

 

13.0

%

16,000

 

12.6

%

3,000

 

23.1

%

Hong Kong

 

3,000

 

3.0

%

5,000

 

3.9

%

2,000

 

66.7

%

Japan

 

2,000

 

2.0

%

3,000

 

2.4

%

1,000

 

50.0

%

Taiwan

 

 

0.0

%

8,000

 

6.3

%

8,000

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

100,000

 

100.0

%

127,000

 

100.0

%

27,000

 

27.0

%

 

Gross Profit.  Gross profit increased to 77.9% of net sales for the quarter ended June 28, 2003 from 73.9% for the comparable quarter in 2002.  The increase can be attributed primarily to:

 

                  Improved cost efficiencies generated from procurement and production activities,

 

                  A change in pricing strategy to create greater incentives for our Associates that generally contributes to a higher gross profit margin,

 

                  The price increase on USANAâ Essentials and HealthPak 100Ô in North America, and

 

                  Leverage benefits of semi-variable costs on a rising sales base.

 

17



 

For the remainder of 2003, we believe that the gross profit margin will approximate the level achieved during the second quarter of 2003.  We do not expect to realize benefits in cost of sales resulting from the move of Sensé production in-house until the fourth quarter of 2003.  For information on the acquisition of in-house manufacturing capability for the Sensé product line, see “Recent Developments”, contained in this MD&A on page 21.

 

Associate Incentives.  Associate incentives increased to 39.6% of net sales for the quarter ended June 28, 2003 from 38.1% for the comparable quarter in 2002.  This increase can be attributed to:

 

                  A change in pricing strategy to create greater incentives for our Associates,

 

                  A larger portion of sales coming from products with higher sales volume point ratios,

 

                  An increase in the commission payout rate in the Australia-New Zealand market with no corresponding increase in the price at which we sell our products, and

 

                  The elimination of payment processing fees charged to customers in our North America and Australia-New Zealand markets.

 

For the remainder of 2003, we believe that Associate incentives, as a percentage of net sales, will modestly increase due to additional spending for special Associate promotions and incentives during the third and fourth quarters, which are aimed at stimulating sales.  The recently completed acquisition will not increase Associate incentives.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expense decreased to 22.4% of net sales for the quarter ended June 28, 2003 from 26.7% for the comparable quarter in 2002.  The decrease, as a percentage of net sales, can be primarily attributed to increased sales.

 

In absolute terms, selling, general and administrative expenses increased by $2.0 million.  This increase in selling, general, and administrative expenses can be attributed primarily to the following factors:

 

                  Variable costs associated with the rising sales base,

 

                  Spending in our new Taiwan and Korea markets of $313,000 and $376,000, respectively,

 

                  Increased spending on employee and management performance incentives, Associate related promotions, and insurance costs, and

 

                  Higher translated U.S. dollars of foreign currency expenses, totaling approximately $250,000, as a result of a weaker U.S. dollar.

 

We believe that selling, general and administrative expenses will continue to increase in absolute terms.  Although we would typically experience leverage benefits to selling, general and administrative expenses on a rising sales base, we believe that current levels as a percentage of net sales will continue throughout the remainder of fiscal year 2003 due in large part to additional expenses associated with our recent acquisition, the opening of our Korea market, and the opening of a new satellite office in Kaohsiung, Taiwan.

 

Other Income (Expense). Other income (expense) changed from other income of $34,000 in the second quarter of 2002 to other expense of $228,000 in the second quarter of 2003.  This increase of $262,000 can be primarily attributed to foreign currency losses resulting from stronger foreign currencies relative to the U.S. dollar.  These losses were partially offset by lower interest expense as a result of retiring all outstanding bank debt.

 

Income Taxes.  Income taxes totaled 37.0% of earnings before income taxes for the second quarter of 2003, compared to 36.5% during the same period in 2002.  The effective tax rate in the second quarter of 2003 was based on an estimate of the effective tax rate for the year.  The final actual tax rate of 32.4% for the year 2002 was substantially lower due to higher utilization of foreign tax credits.  We believe that a 37% effective tax rate is a reasonable estimate given the assumptions applied.  These

 

18



 

assumptions include an estimate of the number of stock options expected to be exercised during the year and the average market price at which those options will be exercised, which also affect our assumption of the foreign tax credits that we can utilize.  The actual number of stock options exercised, average market price, and the amount of foreign tax credits we are able to utilize could differ, causing the year end effective tax rate to vary materially from our estimate.

 

Net Earnings.  Net earnings increased 150.2% to $4.3 million for the quarter ended June 28, 2003, an increase of $2.6 million from the $1.7 million reported for the comparable quarter in 2002.  The increase in net earnings can be attributed primarily to the following:

 

                  Increased net sales,

 

                  Significant improvements in our gross profit margin, and

 

                  Improved operating margins achieved primarily from leverage benefits on a rising sales base.

 

Diluted earnings per share improved to $0.41 for the second quarter of 2003, an increase of $0.25, or 156.3%, from the $0.16 reported for the comparable quarter in 2002.

 

Six Months Ended June 29, 2002 and June 28, 2003

 

Net Sales.  Net sales increased 45.0% to $88.0 million for the six months ended June 28, 2003, an increase of $27.3 million from the $60.7 million reported for the comparable six-month period in 2002.  The increase can be primarily attributed to:

 

                  An increase in the active customer base,

 

                  Sales of $6.1 million from our Taiwan market that commenced operations in the fourth quarter of 2002,

 

                  Stronger foreign currencies, relative to the U. S. dollar, which positively affected the translation of sales in foreign currencies by $3.8 million, and

 

                  A price increase on two key products, USANAâ Essentials and HealthPak 100Ô in North America that contributed an additional $2.2 million to net sales.

 

The following table summarizes the growth in net sales by market for the six months ended June 29, 2002 and June 28, 2003.  Sales data for the United States includes products shipped directly from the U.S. headquarters to customers in the United Kingdom and Japan.

 

 

 

Sales By Market
(in thousands)
Six Months Ended

 

 

 

 

 

Market

 

June 29, 2002

 

June 28, 2003

 

Change from
Prior Year

 

Percent
Change

 

United States

 

$

32,903

 

54.2

%

$

41,873

 

47.6

%

$

8,970

 

27.3

%

Canada

 

15,391

 

25.4

%

20,981

 

23.8

%

5,590

 

36.3

%

Australia-New Zealand

 

7,847

 

12.9

%

12,407

 

14.1

%

4,560

 

58.1

%

Hong Kong

 

2,485

 

4.1

%

3,995

 

4.5

%

1,510

 

60.8

%

Japan

 

2,064

 

3.4

%

2,683

 

3.0

%

619

 

30.0

%

Taiwan

 

 

0.0

%

6,082

 

6.9

%

6,082

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

60,690

 

100.0

%

$

88,021

 

100.0

%

$

27,331

 

45.0

%

 

Gross Profit.  Gross profit increased to 77.7% of net sales for the six months ended June 28, 2003 from 73.5% for the comparable six-month period in 2002.  Reasons for improved gross profit margins are the same as those for the second quarter of 2003 and are discussed on page 17 in the quarterly “Results of Operations” section.

 

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Associate Incentives.  Associate incentives increased to 39.5% of net sales for the six months ended June 28, 2003 from 37.8% for the comparable six-month period in 2002.  Reasons for the increase are the same as those for the second quarter of 2003 and are discussed on page 18 in the quarterly “Results of Operations” section.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expense decreased to 22.9% of net sales for the six months ended June 28, 2003 from 27.4% for the comparable six-month period in 2002.  The decrease, as a percentage of net sales, can be primarily attributed to increased sales.

 

In absolute terms, selling, general and administrative expenses increased by $3.5 million.  This increase in selling, general, and administrative expenses can be attributed to the following factors:

 

                  Variable costs associated with the rising sales base,

 

                  Spending in our new Taiwan and Korea markets of approximately $660,000 and $400,000, respectively,

 

                  Increased spending on Associate related promotions, insurance costs, and employee and management performance incentives, and

 

                  Higher translated U.S. dollars of foreign currency expenses, totaling approximately $500,000, as a result of a weaker U.S. dollar.

 

Selling, general and administrative expense in the six-month period of 2002 included one-time costs totaling $0.4 million associated with the proposed sale of assets transaction, which was abandoned by the Company.

 

Other Income (Expense).  Other income (expense) increased by $132,000 for the first six months of 2003 when compared to the first six months of 2002.  This increase can be primarily attributed to foreign currency losses resulting from stronger foreign currencies relative to the U.S. dollar and was partially offset by gains on the disposition of assets and lower interest expense during the first six months of 2003.

 

Net Earnings.  Net earnings increased 177.5% to $7.9 million for the six months ended June 28, 2003, an increase of $5.0 million from the $2.9 million reported for the comparable period in 2002.  The increase in net earnings can primarily be attributed to the following:

 

                  Increased net sales,

 

                  Significant improvements in our gross profit margin, and

 

                  Improved operating margins achieved primarily from leverage benefits on a rising sales base.

 

Diluted earnings per share improved to $0.75 for the first six months of 2003, an increase of $0.47, or 167.9%, from the $0.28 reported for the comparable period in 2002.

 

Liquidity and Capital Resources

 

We have historically financed growth with cash flows from operations. In the first six months of 2003, net cash flows from operating activities totaled $17.0 million, compared to $6.9 million for the same period in 2002.  Cash and cash equivalents increased to $14.0 million at June 28, 2003 from $6.7 million at December 28, 2002.

 

On June 28, 2003, we had net working capital of $10.9 million, compared to net working capital of $1.2 million at December 28, 2002.  The improvement in net working capital was primarily the result of higher sales and improved operating margins.

 

We do not extend credit to customers.  We require payment prior to shipping, which eliminates significant receivables.

 

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As of June 28, 2003, our credit facilities consisted of a $10 million line of credit, with no amounts outstanding.  The credit facilities contain restrictive covenants requiring that we maintain certain financial ratios.  As of June 28, 2003, we were in compliance with these covenants.

 

We believe that current cash balances, cash provided by operations, and amounts available under the line of credit will be sufficient to cover our capital needs in the ordinary course of business for the foreseeable future.  If we experience 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.  We might also require or seek additional financing for the purpose of expanding new markets, growing our existing markets, and for other reasons.  Such financing  may include the sale of additional equity securities.  Any financing which involves the sale of equity securities or instruments convertible into equity securities could result in immediate and possibly significant dilution to existing shareholders.

 

Recent Developments

 

On July 9, 2003, we completed the acquisition of a company specializing in the manufacture of skin and personal care products.  The purchase agreement was dated effective July 1, 2003.  This company will be operated as a subsidiary of USANA and will, to the extent possible, retain its existing business of contract manufacturing, as well as perform manufacturing and packaging of our Sensé products.  Details of the transaction were included in a Current Report on Form 8-K, filed by the Company on July 15, 2003.  See Item 5 “Other Information.”

 

On July 14, 2003, we officially opened our new Korea market with grand opening activities in Seoul, South Korea.  We believe this market has great potential.  Industry reports indicate that South Korea is the third largest direct selling market in the world, with total annual sales of approximately $4.6 billion.

 

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 anticipated results or other expectations expressed in these forward-looking statements for the reasons detailed in our most recent Annual Report on Form 10-K at pages 28 through 33.  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 other 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,

 

21



 

                  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 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,

 

                  Potential inability to sustain or manage growth, including the failure to continue to develop new products,

 

                  The adverse effect of the 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,

 

                  The potential renewed outbreak of SARS, or

 

                  Product liability claims and other manufacturing activity risks.

 

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.  During the first six months of fiscal year 2003, approximately 52% of our net sales were provided from sales to markets outside the United States.   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, our 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 45.8% and 52.4% of net sales for the six months ended June 29, 2002 and June 28, 2003, 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, our reported sales and earnings are affected positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar.  Changes in currency exchange rates affect the relative prices at which we sell our products.  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.

 

We do not use derivative financial instruments for trading or speculative purposes.  We regularly monitor our foreign currency risks and may periodically take measures to reduce the impact of foreign exchange fluctuations on our operating results. As of June 28, 2003 and during the six months then ended, we had no hedging instruments in place to offset exposure to the

 

22



 

Canadian Dollar, Australian Dollar, New Zealand Dollar, Hong Kong Dollar, Japanese Yen, British Pound, Euro, or New Taiwan Dollar, to which, in aggregate, we had significant exposure.

 

As a last recourse for hedging currency risk, we 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.

 

Following are the average exchange rates of foreign currency units to one U.S. dollar for each of our foreign markets for the periods ended as of the dates indicated:

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

June 29,
2002

 

June 28,
2003

 

June 29,
2002

 

June 28,
2003

 

 

 

 

 

 

 

 

 

 

 

Canada

 

1.55

 

1.40

 

1.57

 

1.45

 

Australia

 

1.82

 

1.56

 

1.87

 

1.62

 

New Zealand

 

2.16

 

1.76

 

2.25

 

1.79

 

Hong Kong

 

7.80

 

7.80

 

7.80

 

7.80

 

Japan

 

126.90

 

118.48

 

129.65

 

118.72

 

Taiwan

 

**

 

34.67

 

**

 

34.65

 

 


**          Market was not in operation during period indicated.

 

Interest Rate Risks.  As of June 28, 2003, we had no outstanding debt and therefore, we currently have no direct exposure to interest rate risk.  It may become necessary to borrow in the future in order to meet our financing needs, as circumstances require.  In the event that it becomes necessary to finance with debt, there can be no assurance that we will be able to borrow at favorable rates.

 

Item 4.    CONTROLS AND PROCEDURES

 

Based on their evaluation, as of a date within 90 days of the filing date of this Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) are effective.  There have been no significant changes in internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

PART II.   OTHER INFORMATION

 

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

At our Annual Meeting of Shareholders on May 20, 2003, the following actions were submitted and approved by vote of the shareholders:

 

(1)          Election of six directors, and

 

(2)          Ratification of the Board’s selection of Grant Thornton LLP as our independent certified public accountants.

 

A total of 8,514,570 shares (approximately 90%) of the issued and outstanding shares of USANA were represented by proxy or in person at the meeting.  These shares were voted on the matters described above as follows:

 

23



 

1.               For the directors as follows: