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 September 27, 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)

 

 

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 October 31, 2003 was 19,258,574.

 

On October 14, 2003, the registrant declared a two-for-one stock split of its common stock that was distributed in the form of a stock dividend on October 30, 2003 to shareholders of record as of October 24, 2003.  Outstanding common stock data in this report have been adjusted to reflect the stock split.

 

 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended September 27, 2003

 

INDEX

 

PART I. FINANCIAL INFORMATION
Item 1	Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Earnings – Quarter Ended
		Consolidated Statements of Earnings – Nine 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 5	Other Information.
Item 6	Exhibits and Reports on Form 8-K.
Signatures

 

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			September 27, 2003
					(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	6,686		$	10,335
Inventories, net (Note C)		9,119			13,042
Prepaid expenses and other current assets (Note D)		1,545			2,126
Deferred income taxes		1,557			1,417
Total current assets		18,907			26,920
Property and equipment, net (Note E)		18,405			19,591
Goodwill (Note B)		—			4,260
Other assets		1,801			2,342
		$	39,113		$	53,113
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt		$	3,428		$	—
Capital lease obligations, current		17			—
Accounts payable		2,666			5,045
Other current liabilities (Note F)		8,655			15,455
Line of credit		2,913			—
Total current liabilities		17,679			20,500
Long-term debt, less current maturities		2,572			—
Other long-term liabilities		769			685
Stockholders’ equity (Notes A and G)
Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding 18,273 as of December 28, 2002 and 19,047 as of September 27, 2003		18			19
Additional paid-in capital		3,666			8,951
Retained earnings		14,520			22,098
Accumulated other comprehensive income (loss)		(111		)	860
Total stockholders’ equity		18,093			31,928
		$	39,113		$	53,113

 

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)
		September 28, 2002			September 27, 2003
Net sales		$	34,787		$	52,506
Cost of sales		8,430			11,364
Gross profit		26,357			41,142
Operating expenses:
Associate incentives		13,429			20,332
Selling, general and administrative		9,099			11,926
Research and development		260			379
Total operating expenses		22,788			32,637
Earnings from operations		3,569			8,505
Other income (expense):
Interest income		24			42
Interest expense		(71		)	—
Other, net		(94		)	483
Total other income (expense)		(141		)	525
Earnings before income taxes		3,428			9,030
Income taxes		1,085			2,974
Net earnings		$	2,343		$	6,056
Earnings per common share (Notes A and G)
Basic		$	0.13		$	0.32
Diluted		$	0.11		$	0.28
Weighted average common and dilutive common equivalent shares outstanding (Notes A and G)
Basic		18,645			19,057
Diluted		21,216			21,383

 

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)

 

		Nine Months Ended
		(unaudited)
		September 28, 2002			September 27, 2003
Net sales		$	95,477		$	140,527
Cost of sales		24,500			31,001
Gross profit		70,977			109,526
Operating expenses:
Associate incentives		36,364			55,091
Selling, general and administrative		25,714			32,072
Research and development		699			1,086
Total operating expenses		62,777			88,249
Earnings from operations		8,200			21,277
Other income (expense):
Interest income		61			83
Interest expense		(263		)	(48		)
Other, net		(1		)	296
Total other income (expense)		(203		)	331
Earnings before income taxes		7,997			21,608
Income taxes		2,799			7,628
Net earnings		$	5,198		$	13,980
Earnings per common share (Notes A and G)
Basic		$	0.27		$	0.74
Diluted		$	0.25		$	0.66
Weighted average common and dilutive common equivalent shares outstanding (Notes A and G)
Basic		19,064			18,923
Diluted		20,613			21,294

 

The accompanying notes are an integral part of these statements.

 

5

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

Nine Months Ended September 28, 2002 and September 27, 2003

 

(in thousands)

 

(unaudited)

 

		Common Stock					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
		Shares		Value
For the Nine Months Ended September 28, 2002
Balance at December 29, 2001		19,328		$	19		$	2,350		$	12,752		$	(594	)	$	14,527
Comprehensive income
Net earnings		—		—			—			5,198			—			5,198
Foreign currency translation adjustment		—		—			—			—			308			308
Comprehensive income																5,506
Common stock retired		(1,054	)	(1		)	(328		)	(2,696		)	—			(3,025		)
Common stock issued under stock option plan, including tax benefit of $90		104		—			196			—			—			196
Balance at September 28, 2002		18,378		$	18		$	2,218		$	15,254		$	(286	)	$	17,204
For the Nine Months Ended September 27, 2003
Balance at December 28, 2002		18,273		$	18		$	3,666		$	14,520		$	(111	)	$	18,093
Comprehensive income
Net earnings		—		—			—			13,980			—			13,980
Foreign currency translation adjustment		—		—			—			—			971			971
Comprehensive income																14,951
Common stock retired		(472	)	—			(1,835		)	(6,402		)	—			(8,237		)
Common stock issued under stock option plan, including tax benefit of $4,498		1,246		1			7,120			—			—			7,121
Balance at September 27, 2003		19,047		$	19		$	8,951		$	22,098		$	860		$	31,928

 

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)

 

		Nine Months Ended
		September 28, 2002			September 27, 2003
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings		$	5,198		$	13,980
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization		3,116			2,839
(Gain) loss on sale of property and equipment		8			(30		)
Deferred income taxes		(850		)	159
Provision for inventory valuation		1,046			1,068
Changes in operating assets and liabilities:
Inventories		(212		)	(3,280		)
Prepaid expenses and other assets		(292		)	(1,396		)
Accounts payable		361			1,591
Other current liabilities		3,508			10,738
Total adjustments		6,685			11,689
Net cash provided by operating activities		11,883			25,669
Cash flows from investing activities
Acquisition, net of cash acquired		—			(5,341		)
Purchases of property and equipment		(1,341		)	(2,948		)
Proceeds from the sale of property and equipment		37			47
Net cash used in investing activities		(1,304		)	(8,242		)
Cash flows from financing activities
Net proceeds from the sale of common stock		106			2,623
Redemption of common stock		(3,025		)	(8,237		)
Principal payments of long-term debt		(1,500		)	(6,000		)
Decrease in line of credit		(2,965		)	(2,913		)
Payments on capital lease obligations		—			(91		)
Net cash used in financing activities		(7,384		)	(14,618		)
Effect of exchange rate changes on cash and cash equivalents		614			840
Net increase in cash and cash equivalents		3,809			3,649
Cash and cash equivalents, beginning of period		2,465			6,686
Cash and cash equivalents, end of period		$	6,274		$	10,335
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	290		$	65
Income taxes		2,847			1,644

 

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 September 27, 2003, and results of operations for the quarters and nine months ended September 28, 2002 and September 27, 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 nine months ended September 27, 2003 may not be indicative of the results that may be expected for the fiscal year ending January 3, 2004.

 

On October 14, 2003, the Company declared a two-for-one stock split of its common stock that was distributed in the form of a stock dividend on October 30, 2003 to shareholders of record as of October 24, 2003.  This stock dividend will double the number of shares outstanding but will not affect the number of authorized shares of the Company or the par value of the common stock.  All existing stock option agreements provide that the number of shares of common stock and the respective exercise price covered by each outstanding option agreement be proportionately adjusted for a stock split or similar event. Outstanding common stock data in this report have been adjusted to reflect the stock split.

 

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 quarters and nine months ended September 28, 2002 and September 27, 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						Nine Months Ended
				September 28, 2002			September 27, 2003			September 28, 2002			September 27, 2003
Net earnings		As reported		$	2,343		$	6,056		$	5,198		$	13,980
		Pro forma		$	2,149		$	5,860		$	4,586		$	13,556
Earnings per share - basic		As reported		$	0.13		$	0.32		$	0.27		$	0.74
		Pro forma		$	0.12		$	0.31		$	0.24		$	0.72
Earnings per share - diluted		As reported		$	0.11		$	0.28		$	0.25		$	0.66
		Pro forma		$	0.10		$	0.27		$	0.22		$	0.64

 

8

 

Weighted average Black-Scholes fair value assumptions for options granted during the periods indicated:

 

		Quarter Ended						Nine Months Ended
		September 28, 2002			September 27, 2003			September 28, 2002			September 27, 2003
Expected volatility		77		%	77		%	71		%	77		%
Risk free interest rate		3.98		%	3.60		%	4.96		%	3.67		%
Expected life		10 yrs.			10 yrs.			10 yrs.			10 yrs.
Expected dividend yield		0		%	0		%	0		%	0		%
Weighted average fair value of options granted		$	6.40		$	28.77		$	1.81		$	25.04

 

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 – ACQUISITIONS

 

Effective July 1, 2003, the Company acquired Wasatch Product Development, Inc. (WPD), a company specializing in the manufacture of skin and personal care products.  The aggregate investment was $5,341 including $5,016 in cash, $125 for professional fees directly associated with the acquisition, and $200 in income tax liabilities of the selling shareholders prior to the sale.  WPD 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 Sensé products for the Company.  The Company expects to realize future benefits from this acquisition, in the form of reduced cost of sales and enhanced quality control for its Sensé product line.

 

The acquisition was accounted for in accordance with SFAS No. 141, “Business Combinations” and as such, the results of operations for WPD have been included in the consolidated financial statements since the effective date of acquisition.  This acquisition contributed $656 in sales and operating income of $25 for the quarter ended September 27, 2003.  The Company obtained an independent appraisal of the fair values of identified intangible assets and based on the results of the analysis, has concluded that the fair value is effectively nil.  The assets acquired and liabilities assumed were recorded at estimated fair values as of the date of the acquisition as determined by the Company’s management and are summarized below:

 

		At July 1, 2003
Assets acquired
Accounts receivable		$	335
Inventories		537
Property and equipment		978
Goodwill		4,260
Total assets acquired		6,110
Liabilities assumed
Accounts payable		707
Other liabilities		62
Total liabilities assumed		769
Net assets acquired		$	5,341

 

9

 

Goodwill has been recognized for the amount of the excess of the purchase price paid over the fair market value of the net assets acquired.  In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, Goodwill will not be amortized; however, it will be tested at least annually for impairment.

 

NOTE C – INVENTORIES

 

Inventories consist of the following:

 

		December 28, 2002			September 27, 2003
Raw materials		$	2,488		$	5,096
Work in progress		2,018			1,965
Finished goods		6,336			7,392
		10,842			14,453
Less allowance for inventory valuation		1,723			1,411
		$	9,119		$	13,042

 

NOTE D – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

		December 28, 2002			September 27, 2003
Prepaid expenses		$	1,157		$	456
Receivables, net		150			1,112
All other		238			558
		$	1,545		$	2,126

 

10

 

NOTE E – PROPERTY AND EQUIPMENT

 

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

 

		Years		December 28, 2002			September 27, 2003
Building		40		$	8,110		$	8,120
Laboratory and production equipment		5-7		4,803			6,030
Computer equipment and software		3-5		16,606			18,828
Furniture and fixtures		3-5		2,139			2,269
Automobiles		3-5		351			174
Leasehold improvements		3-5		1,344			1,995
Land improvements		15		931			931
				34,284			38,347
Less accumulated depreciation and amortization				18,618			21,604
				15,666			16,743
Land				1,773			1,773
Deposits and projects in process				966			1,075
				$	18,405		$	19,591

 

NOTE F – OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

		December 28, 2002			September 27, 2003
Associate incentives		$	1,209		$	2,319
Accrued compensation		2,781			3,368
Income taxes		1,350			2,754
Sales taxes		732			1,390
Accrued associate promotions		32			1,598
Deferred revenue		973			1,166
Provision for returns and allowances		515			627
All other		1,063			2,233
		$	8,655		$	15,455

 

Certain items within other current liabilities have been re-categorized for the year ended December 28, 2002 to conform with the current year’s presentation.

 

NOTE G – 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.

 

11

 

			For the Quarter Ended
			September 28, 2002			September 27, 2003
	Earnings available to common shareholders		$	2,343		$	6,056
	Basic EPS
	Shares
	Common shares outstanding entire period		19,328			18,273
	Weighted average common shares:
	Issued during period		72			1,104
	Canceled during period		(755		)	(320			)
	Weighted average common shares outstanding during period		18,645			19,057
	Earnings per common share - basic		$	0.13		$	0.32
Diluted EPS
Shares
Weighted average shares outstanding during period - basic			18,645			19,057
Dilutive effect of stock options			2,571			2,326
Weighted average shares outstanding during period - diluted			21,216			21,383
Earnings per common share - diluted			$	0.11		$		0.28

 

Options to purchase 632 shares of stock were not included in the computation of EPS for the quarter ended September 28, 2002 due to their exercise price being greater than the average market price of the shares.  For the quarter ended September 27, 2003, all options to purchase shares of stock were included in the computation of EPS.

 

		For the Nine Months Ended
		September 28, 2002			September 27, 2003
Earnings available to common shareholders		$	5,198		$	13,980
Basic EPS
Shares
Common shares outstanding entire period		19,328			18,273
Weighted average common shares:
Issued during period		27			773
Canceled during period		(291		)	(123		)
Weighted average common shares outstanding during period		19,064			18,923
Earnings per common share - basic		$	0.27		$	0.74

 

12

 

		For the Nine Months Ended
		September 28, 2002			September 27, 2003
Diluted EPS
Shares
Weighted average shares outstanding during period - basic		19,064			18,923
Dilutive effect of stock options		1,549			2,371
Weighted average shares outstanding during period - diluted		20,613			21,294
Earnings per common share - diluted		$	0.25		$	0.66

 

Options to purchase 2,634 shares of stock were not included in the computation of EPS for the nine months ended September 28, 2002 due to their exercise price being greater than the average market price of the shares.  For the nine months ended September 27, 2003, all options to purchase shares of stock were included in the computation of EPS.

 

As of the fiscal year ended 2002, 790 shares of 4,000 authorized were available in the Company’s share repurchase plan. Through the nine months ended September 27, 2003, the Company expended $8.2 million to purchase an additional 472 shares under this plan.  The purchase of shares under this plan reduces the number of shares issued and outstanding.

 

NOTE H – SEGMENT INFORMATION

 

The Company’s operations are distinguished by type of products produced, markets served, and method of distribution employed and are classified into two reportable business segments: Direct Selling and Contract Manufacturing.  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 net sales 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.

 

Direct Selling

 

The Direct Selling segment comprises the Company’s principal line of business: developing, manufacturing, and distributing nutritional, personal care, and weight management products.  Products are distributed through a network marketing system using independent distributors referred to as “Associates”.  Products are also sold directly to “Preferred Customers” who purchase products for personal use and are not permitted to resell or distribute the products.  Sales to Associates and Preferred Customers are reported for six operating geographic regions including North America, Australia-New Zealand, Hong Kong, Japan, Taiwan, and South Korea.

 

Contract Manufacturing

 

Operating activities for the Contract Manufacturing segment include the manufacture and sale of premium personal care products under the brand names of its customers. Operations are located in Draper, Utah and sales are made to a limited number of customers.  We expect that manufacturing and packaging activities for the Company’s Sensé products will begin during the fourth quarter of 2003.

 

Sales made by the Contract Manufacturing segment to one customer accounted for 59% of segment revenues for the quarter ended September 27, 2003.  No other individual customer accounted for 10% or more of segment net revenues.

 

13

 

Prior to the quarter ended September 27, 2003, the Company was only engaged in a single line of business, which was developing, manufacturing, and distributing nutritional, personal care, and weight management products through a network marketing system.  As such, only one business segment was reported, which was distinguished by geography.  Due to the Company’s recent acquisition (See Note B), the basis of segmentation has been modified to reflect the change in business activities to include the addition of Contract Manufacturing.  This change does not affect the presentation of historical segment information.

 

The following table summarizes financial information by operating segment and geographic region for the quarters ended September 28, 2002 and September 27, 2003:

 

		Revenues from External Customers			Intersegment Revenues			Earnings before Income Taxes
Quarter ended September 28, 2002:
Direct Selling
North America		$	26,191		$	4,930		$	3,766
Australia - New Zealand		4,809			321			438
Hong Kong		2,268			—			245
Japan (1)		1,519			—			(466		)
Segment Total		34,787			5,251			3,983
Contract Manufacturing (2)		N/A			N/A			N/A
Reportable Segments Total		34,787			5,251			3,983
Unallocated and Other (3)		—			(5,251		)	(555		)
Consolidated Total		$	34,787		$	—		$	3,428

 

		Revenues from External Customers			Intersegment Revenues			Earnings before Income Taxes
Quarter ended September 27, 2003:
Direct Selling
North America		$	34,214		$	13,313		$	13,360
Australia - New Zealand		8,023			762			(989		)
Hong Kong		2,285			—			349
Japan (1)		1,750			—			(515		)
Taiwan		3,507			—			77
South Korea		2,071			—			(430		)
Segment Total		51,850			14,075			11,852
Contract Manufacturing (2)		656			—			25
Reportable Segments Total		52,506			14,075			11,877
Unallocated and Other (3)		—			(14,075		)	(2,847		)
Consolidated Total		$	52,506		$	—		$	9,030

 

14

 

The following table summarizes financial information by operating segment and geographic region for the nine months ended September 28, 2002 and September 27, 2003:

 

		Revenues from External Customers			Intersegment Revenues			Earnings before Income Taxes			Long-lived Assets			Total Assets
Nine months ended September 28, 2002:
Direct Selling
North America		$	74,485		$	11,470		$	8,981		$	21,418		$	32,704
Australia - New Zealand		12,656			941			1,050			237			4,537
Hong Kong		4,753			—			228			249			1,442
Japan (1)		3,583			—			(1,907		)	1,326			2,608
Segment Total		95,477			12,411			8,352			23,230			41,291
Contract Manufacturing (2)		N/A			N/A			N/A			N/A			N/A
Reportable Segments Total		95,477			12,411			8,352			23,230			41,291
Unallocated and Other (3)		—			(12,411		)	(355		)	(3,740		)	(4,263		)
Consolidated Total		$	95,477		$	—		$	7,997		$	19,490		$	37,028

 

		Revenues from External Customers			Intersegment Revenues			Earnings before Income Taxes			Long-lived Assets			Total Assets
Nine months ended September 27, 2003:
Direct Selling
North America		$	97,068		$	26,588		$	25,513		$	29,079		$	42,417
Australia - New Zealand		20,430			1,675			521			291			6,412
Hong Kong		6,280			—			921			187			1,915
Japan (1)		4,433			—			(2,034		)	1,179			3,502
Taiwan		9,589			—			1,563			487			3,432
South Korea		2,071			—			(430		)	895			3,545
Segment Total		139,871			28,263			26,054			32,118			61,223
Contract Manufacturing (2)		656			—			25			5,262			6,461
Reportable Segments Total		140,527			28,263			26,079			37,380			67,684
Unallocated and Other (3)		—			(28,263		)	(4,471		)	(11,187		)	(14,571		)
Consolidated Total		$	140,527		$	—		$	21,608		$	26,193		$	53,113

 

(1)               Includes results from local operations in Japan.  Direct U.S. export sales to Japan are included in the North America geographic region.

 

(2)               Reportable business activities for the Contract Manufacturing segment commenced July 1, 2003.

 

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

 

15

 

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 September 27, 2003, we had approximately 87,000 active Associates in the United States, Canada, Australia, New Zealand, Hong Kong, Japan, Taiwan, South Korea, 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 September 27, 2003, we had approximately 49,000 active Preferred Customers worldwide.  Sales to Preferred Customers accounted for approximately 15% of net sales for the Direct Selling segment during the nine months ended September 27, 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.

 

As discussed more fully in Segment Information Note H, beginning on page 13 to the consolidated financial statements, we have two reportable segments: Direct Selling and Contract Manufacturing.  The Direct Selling segment constitutes our principal line of business: developing, manufacturing, and distributing nutritional, personal care, and weight management products through a network marketing system.  The Contract Manufacturing segment includes the manufacture and sale of premium personal care products, produced under the brand names of its customers, including sales to the Company for manufacturing and packaging its Sensé product line.

 

Our primary product lines within the Direct Selling segment consist of USANA^â Nutritionals and Sensé – beautiful science^â (Sensé).  The USANA^â Nutritionals product line is further categorized into three separate classifications: Essentials, Optimizers, and Macro Optimizers. Various individual items within these primary product lines are also grouped and sold as combination packs.

 

USANA^â Nutritionals.

 

The Essentials include core vitamin and mineral supplements that provide a foundation of advanced nutrition for every age group.  To help meet the “essential” nutrient needs of children and teens during the years of development, when good nutrition is most important, USANA offers: UsanimalsÔ, a great-tasting formulation of vitamins, minerals, and antioxidants, in an easy-to-take chewable tablet for children 13 months to 12 years old and Body RoxÔ, a nutritional supplement containing 31 essential vitamins, minerals, antioxidants, and cofactors for adolescents 12 to 18 years old, who need optimal nutrition to support the demands of growth and active teenage lifestyles.  USANA^â Essentials for adults is a combination of two products: Mega Antioxidant, a balanced, high-potency blend of 30 vitamins, antioxidants, and other important nutrients to support cellular metabolism and to counteract free-radical damage and Chelated Mineral, a complete spectrum of essential minerals, in balanced, highly bioavailable forms.  The USANA^â Essentials are also provided in a convenient pillow pack format, HealthPak 100Ô.

 

Optimizers are more targeted supplements designed to meet individual health and nutritional needs.  Products in this category include Proflavanol^â, Poly C^â, Procosa^â II, CoQuinone^â 30, BiOmega-3Ô, E-PrimeÔ, Active CalciumÔ, PhytoEstrinÔ, Palmetto PlusÔ, Ginkgo-PSÔ, Garlic ECÔ, VisionexÔ, and OptOmega^â.

 

The Macro Optimizers include healthy convenience foods and other related products, including powdered drink mixes and nutrition bars that were previously sold under the L·E·A·N LifelongÔ brand name.  NutrimealÔ and Fibergy^â drink mixes, SoyaMaxÔ, and Nutrition Bar and Fibergy Bar are included in this product category.

 

16

 

Sensé - beautiful science^â

 

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.  Products in this line include Perfecting Essence, Gentle Daily Cleanser, Hydrating Toner, Daytime Protective Emulsion SPF 15, Eye Nourisher, Night Renewal (Replenishing Crème), Serum Intensive (Skin Revival Complex), Rice Bran Polisher, Nutritious Crème Masque, Revitalizing Shampoo, Nourishing Conditioner, Firming Body Nourisher, and Energizing Shower Gel.

 

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 for the Direct Selling segment contributed by major product line for the nine months ended as of the dates indicated:

 

		Sales By Product Line Nine Months Ended
Product Line		September 28, 2002		September 27, 2003
USANAâ Nutritionals
Essentials *		33	%	33	%
Optimizers		33	%	29	%
Macro Optimizers		8	%	6	%
Sensé – beautiful scienceâ		13	%	12	%
Combination Packs		7	%	9	%
All Other		6	%	11	%

 

*                 The Essentials category under the USANA^â Nutritionals product line includes USANA^â Essentials (comprised of Mega Antioxidant and Chelated Mineral), HealthPak 100Ô, Body RoxÔ, and UsanimalsÔ

 

Key Products

 

The following highlights sales data for our top-selling products as a percentage of Direct Selling segment product sales for the nine months ended September 27, 2003.

 

USANAâ Essentials		22	%
HealthPak 100Ô		9	%
Proflavanolâ		9	%

 

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.  Fiscal year 2004 will be a 52-week year.

 

17

 

Results of Operations

 

Quarters Ended September 28, 2002 and September 27, 2003

 

Net Sales.  Net sales increased 50.9% to $52.5 million for the quarter ended September 27, 2003, an increase of $17.7 million from the $34.8 million reported for the comparable quarter in 2002.  The increase was comprised of $17.0 million associated with our Direct Selling segment and $0.7 million associated with our newly acquired Contract Manufacturing segment.

 

The following table summarizes the growth in net sales by segment and geographic region for the fiscal quarters ended September 28, 2002 and September 27, 2003. Direct Selling sales data for the United States region includes products shipped directly from the U.S. headquarters to customers in the United Kingdom and Japan.

 

		Sales By Segment and Region (in thousands) Quarter Ended										Change from Prior Year			Percent Change
Segment / Region		September 28, 2002					September 27, 2003
Direct Selling
United States		$	18,485		53.1	%	$	23,444		44.7	%	$	4,959		26.8	%
Canada		7,706			22.2	%	10,770			20.5	%	3,064			39.8	%
Australia-New Zealand		4,809			13.8	%	8,023			15.3	%	3,214			66.8	%
Hong Kong		2,268			6.5	%	2,285			4.4	%	17			0.7	%
Japan		1,519			4.4	%	1,750			3.3	%	231			15.2	%
Taiwan		—			0.0	%	3,507			6.7	%	3,507			N/A
South Korea		—			0.0	%	2,071			3.9	%	2,071			N/A
Segment Total		34,787			100.0	%	51,850			98.8	%	17,063			49.0	%
Contract Manufacturing		—			0.0	%	656			1.2	%	656			N/A
Consolidated		$	34,787		100.0	%	$	52,506		100.0	%	$	17,719		50.9	%

 

The increase in net sales contributed by the Direct Selling segment can be primarily attributed to the following factors:

 

•                  A 15.9% increase in the active Associate base and a 14.0% increase in the active Preferred Customer base for the third quarter of 2003 in markets that have been open longer than one year,

 

•                  Sales of $3.5 million from our Taiwan market that commenced operations in the fourth quarter of 2002 and sales of $2.1 million from our South Korea market that commenced operations in the third quarter of 2003, and

 

•                  Stronger foreign currencies, relative to the U. S. dollar, which positively affected the translation of sales in foreign currencies by $2.7 million.

 

Additionally, two other items contributed to the year-over-year third quarter increase in sales including a price increase on two key products, USANA^â Essentials and HealthPak 100Ô in North America and incremental product sales from our Annual International Convention held in the third quarter.

 

We expect net sales of approximately $57 million for the 14-week fourth quarter ended January 3, 2004.  A typical quarter for the Company consists of 13 weeks.

 

The following tables summarize the growth (decline) in active customers for the Direct Selling segment by geographic region as of the dates indicated:

 

18

 

Active Associates By Region

 

Region		As of September 28, 2002				As of September 27, 2003				Change from Prior Year		Percent Change
United States		28,000		44.4	%	33,000		37.9	%	5,000		17.9	%
Canada		16,000		25.4	%	19,000		21.8	%	3,000		18.8	%
Australia-New Zealand		11,000		17.5	%	14,000		16.1	%	3,000		27.3	%
Hong Kong		6,000		9.5	%	4,000		4.6	%	(2,000	)	(33.3	)%
Japan		2,000		3.2	%	3,000		3.4	%	1,000		50.0	%
Taiwan		—		0.0	%	9,000		10.3	%	9,000		N/A
South Korea		—		0.0	%	5,000		5.7	%	5,000		N/A
Total		63,000		100.0	%	87,000		100.0	%	24,000		38.1	%

 

We believe that various factors contributed to the year-over-year third 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 and promotions held to motivate Associates.

 

Active Preferred Customers By Region

 

Region		As of September 28, 2002				As of September 27, 2003				Change from Prior Year		Percent Change
United States		26,000		60.5	%	30,000		61.2	%	4,000		15.4	%
Canada		12,000		27.9	%	14,000		28.6	%	2,000		16.7	%
Australia-New Zealand		4,000		9.3	%	4,000		8.2	%	—		0.0	%
Hong Kong		1,000		2.3	%	1,000		2.0	%	—		0.0	%
Japan		**		0.0	%	**		0.0	%	—		N/A
Taiwan		—		0.0	%	**		0.0	%	—		N/A
South Korea		—		0.0	%	**		0.0	%	—		N/A
Total		43,000		100.0	%	49,000		100.0	%	6,000		14.0	%

 

**          Active Preferred Customer count is less than 500.

 

Total Active Customers By Region

 

Region		As of September 28, 2002				As of September 27, 2003				Change from Prior Year		Percent Change
United States		54,000		50.9	%	63,000		46.3	%	9,000		16.7	%
Canada		28,000		26.4	%	33,000		24.3	%	5,000		17.9	%
Australia-New Zealand		15,000		14.2	%	18,000		13.2	%