UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 27, 2003 |
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OR |
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
USANA HEALTH SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Utah |
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87-0500306 |
(State or other
jurisdiction |
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(I.R.S. Employer |
3838 West Parkway Blvd., Salt Lake City, Utah 84120
(Address of principal executive offices, Zip Code)
(801) 954-7100
(Registrants 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 registrants 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.
For the Quarterly Period Ended September 27, 2003
INDEX
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
(in thousands, except per share data)
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December 28, |
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September 27, |
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(Unaudited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
6,686 |
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$ |
10,335 |
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Inventories, net (Note C) |
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9,119 |
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13,042 |
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Prepaid expenses and other current assets (Note D) |
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1,545 |
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2,126 |
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Deferred income taxes |
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1,557 |
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1,417 |
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Total current assets |
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18,907 |
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26,920 |
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Property and equipment, net (Note E) |
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18,405 |
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19,591 |
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Goodwill (Note B) |
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4,260 |
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Other assets |
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1,801 |
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2,342 |
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$ |
39,113 |
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$ |
53,113 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities |
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Current maturities of long-term debt |
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$ |
3,428 |
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$ |
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Capital lease obligations, current |
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17 |
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Accounts payable |
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2,666 |
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5,045 |
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Other current liabilities (Note F) |
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8,655 |
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15,455 |
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Line of credit |
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2,913 |
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Total current liabilities |
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17,679 |
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20,500 |
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Long-term debt, less current maturities |
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2,572 |
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Other long-term liabilities |
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769 |
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685 |
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Stockholders equity (Notes A and G) |
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Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding 18,273 as of December 28, 2002 and 19,047 as of September 27, 2003 |
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18 |
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19 |
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Additional paid-in capital |
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3,666 |
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8,951 |
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Retained earnings |
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14,520 |
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22,098 |
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Accumulated other comprehensive income (loss) |
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(111 |
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860 |
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Total stockholders equity |
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18,093 |
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31,928 |
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$ |
39,113 |
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$ |
53,113 |
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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)
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Quarter Ended |
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(unaudited) |
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September 28, |
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September 27, |
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Net sales |
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$ |
34,787 |
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$ |
52,506 |
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Cost of sales |
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8,430 |
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11,364 |
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Gross profit |
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26,357 |
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41,142 |
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Operating expenses: |
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Associate incentives |
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13,429 |
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20,332 |
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Selling, general and administrative |
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9,099 |
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11,926 |
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Research and development |
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260 |
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379 |
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Total operating expenses |
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22,788 |
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32,637 |
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Earnings from operations |
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3,569 |
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8,505 |
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Other income (expense): |
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Interest income |
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24 |
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42 |
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Interest expense |
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(71 |
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Other, net |
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(94 |
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483 |
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Total other income (expense) |
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(141 |
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525 |
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Earnings before income taxes |
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3,428 |
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9,030 |
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Income taxes |
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1,085 |
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2,974 |
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Net earnings |
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$ |
2,343 |
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$ |
6,056 |
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Earnings per common share (Notes A and G) |
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Basic |
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$ |
0.13 |
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$ |
0.32 |
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Diluted |
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$ |
0.11 |
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$ |
0.28 |
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Weighted average common and dilutive common equivalent shares outstanding (Notes A and G) |
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Basic |
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18,645 |
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19,057 |
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Diluted |
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21,216 |
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21,383 |
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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)
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Nine Months Ended |
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(unaudited) |
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September 28, |
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September 27, |
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Net sales |
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$ |
95,477 |
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$ |
140,527 |
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Cost of sales |
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24,500 |
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31,001 |
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Gross profit |
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70,977 |
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109,526 |
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Operating expenses: |
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Associate incentives |
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36,364 |
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55,091 |
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Selling, general and administrative |
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25,714 |
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32,072 |
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Research and development |
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699 |
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1,086 |
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Total operating expenses |
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62,777 |
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88,249 |
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Earnings from operations |
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8,200 |
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21,277 |
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Other income (expense): |
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Interest income |
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61 |
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83 |
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Interest expense |
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(263 |
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(48 |
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Other, net |
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(1 |
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296 |
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Total other income (expense) |
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(203 |
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331 |
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Earnings before income taxes |
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7,997 |
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21,608 |
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Income taxes |
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2,799 |
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7,628 |
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Net earnings |
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$ |
5,198 |
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$ |
13,980 |
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Earnings per common share (Notes A and G) |
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Basic |
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$ |
0.27 |
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$ |
0.74 |
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Diluted |
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$ |
0.25 |
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$ |
0.66 |
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Weighted average common and dilutive common equivalent shares outstanding (Notes A and G) |
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Basic |
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19,064 |
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18,923 |
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Diluted |
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20,613 |
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21,294 |
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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)
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Common Stock |
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Additional |
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Retained |
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Accumulated |
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Total |
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Shares |
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Value |
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For the Nine Months Ended September 28, 2002 |
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Balance at December 29, 2001 |
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19,328 |
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$ |
19 |
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$ |
2,350 |
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$ |
12,752 |
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$ |
(594 |
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$ |
14,527 |
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Comprehensive income |
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Net earnings |
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5,198 |
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5,198 |
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Foreign currency translation adjustment |
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308 |
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308 |
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Comprehensive income |
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5,506 |
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Common stock retired |
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(1,054 |
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(1 |
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(328 |
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(2,696 |
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(3,025 |
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Common stock issued under stock option plan, including tax benefit of $90 |
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104 |
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196 |
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196 |
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Balance at September 28, 2002 |
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18,378 |
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$ |
18 |
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$ |
2,218 |
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$ |
15,254 |
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$ |
(286 |
) |
$ |
17,204 |
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For the Nine Months Ended September 27, 2003 |
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Balance at December 28, 2002 |
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18,273 |
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$ |
18 |
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$ |
3,666 |
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$ |
14,520 |
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$ |
(111 |
) |
$ |
18,093 |
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Comprehensive income |
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Net earnings |
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13,980 |
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13,980 |
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Foreign currency translation adjustment |
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971 |
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971 |
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Comprehensive income |
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14,951 |
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Common stock retired |
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(472 |
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(1,835 |
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(6,402 |
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(8,237 |
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Common stock issued under stock option plan, including tax benefit of $4,498 |
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1,246 |
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1 |
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7,120 |
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7,121 |
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Balance at September 27, 2003 |
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19,047 |
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$ |
19 |
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$ |
8,951 |
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$ |
22,098 |
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$ |
860 |
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$ |
31,928 |
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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)
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Nine Months Ended |
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September 28, |
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September 27, |
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Increase (decrease) in cash and cash equivalents |
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Cash flows from operating activities |
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Net earnings |
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$ |
5,198 |
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$ |
13,980 |
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Adjustments to reconcile net earnings to net cash provided by operating activities |
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Depreciation and amortization |
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3,116 |
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2,839 |
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(Gain) loss on sale of property and equipment |
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8 |
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(30 |
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Deferred income taxes |
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(850 |
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159 |
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Provision for inventory valuation |
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1,046 |
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1,068 |
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Changes in operating assets and liabilities: |
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Inventories |
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(212 |
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(3,280 |
) |
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Prepaid expenses and other assets |
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(292 |
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(1,396 |
) |
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Accounts payable |
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361 |
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1,591 |
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Other current liabilities |
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3,508 |
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10,738 |
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Total adjustments |
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6,685 |
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11,689 |
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Net cash provided by operating activities |
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11,883 |
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25,669 |
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Cash flows from investing activities |
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Acquisition, net of cash acquired |
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(5,341 |
) |
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Purchases of property and equipment |
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(1,341 |
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(2,948 |
) |
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Proceeds from the sale of property and equipment |
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37 |
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47 |
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Net cash used in investing activities |
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(1,304 |
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(8,242 |
) |
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Cash flows from financing activities |
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Net proceeds from the sale of common stock |
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106 |
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2,623 |
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Redemption of common stock |
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(3,025 |
) |
(8,237 |
) |
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Principal payments of long-term debt |
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(1,500 |
) |
(6,000 |
) |
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Decrease in line of credit |
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(2,965 |
) |
(2,913 |
) |
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Payments on capital lease obligations |
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(91 |
) |
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Net cash used in financing activities |
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(7,384 |
) |
(14,618 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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614 |
|
840 |
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Net increase in cash and cash equivalents |
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3,809 |
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3,649 |
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Cash and cash equivalents, beginning of period |
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2,465 |
|
6,686 |
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Cash and cash equivalents, end of period |
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$ |
6,274 |
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$ |
10,335 |
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Supplemental disclosures of cash flow information |
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Cash paid during the period for: |
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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 Companys 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 Companys 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, |
|
September 27, |
|
September 28, |
|
September 27, |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
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, |
|
September 27, |
|
September 28, |
|
September 27, |
|
||||
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 Companys 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 Companys management and are summarized below:
|
|
At
July 1, |
|
|
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, |
|
September 27, |
|
||
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 |
|
Prepaid expenses and other current assets consist of the following:
|
|
December 28, |
|
September 27, |
|
||
Prepaid expenses |
|
$ |
1,157 |
|
$ |
456 |
|
Receivables, net |
|
150 |
|
1,112 |
|
||
All other |
|
238 |
|
558 |
|
||
|
|
|
|
|
|
||
|
|
$ |
1,545 |
|
$ |
2,126 |
|
10
Cost of property and equipment and their estimated useful lives is as follows:
|
|
Years |
|
December 28, |
|
September 27, |
|
||
|
|
|
|
|
|
|
|
||
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, |
|
September 27, |
|
||
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 years 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, |
|
September 27, |
|
|
||||
|
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, |
|
September 27, |
|
||
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, |
|
September 27, |
|
||
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 Companys 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 Companys 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 Companys determination of segment profit or loss in assessing the performance of a segment.
Direct Selling
The Direct Selling segment comprises the Companys 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 Companys 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 Companys 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 |
|
Intersegment |
|
Earnings |
|
|||
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 |
|
Intersegment |
|
Earnings |
|
|||
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 |
|
Intersegment |
|
Earnings |
|
Long-lived |
|
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 |
|
Intersegment |
|
Earnings |
|
Long-lived |
|
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. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of USANAs 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 USANAâ Nutritionals and Sensé beautiful scienceâ (Sensé). The USANAâ 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.
USANAâ 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. USANAâ 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 USANAâ 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 Proflavanolâ, Poly Câ, Procosaâ II, CoQuinoneâ 30, BiOmega-3Ô, E-PrimeÔ, Active CalciumÔ, PhytoEstrinÔ, Palmetto PlusÔ, Ginkgo-PSÔ, Garlic ECÔ, VisionexÔ, and OptOmegaâ.
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 Fibergyâ drink mixes, SoyaMaxÔ, and Nutrition Bar and Fibergy Bar are included in this product category.
16
Sensé - beautiful scienceâ
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 |
|
||
Product Line |
|
September 28, |
|
September 27, |
|
|
|
|
|
|
|
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 USANAâ Nutritionals product line includes USANAâ Essentials (comprised of Mega Antioxidant and Chelated Mineral), HealthPak 100Ô, Body RoxÔ, and UsanimalsÔ
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
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 |
|
Change from |
|
Percent |
|
|||||||||
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, USANAâ 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 |
|
As of |
|
Change from |
|
Percent |
|
||||
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 |
|
As of |
|
Change from |
|
Percent |
|
||||
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 |
|
As of |
|
Change from |
|
Percent |
|
||||
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 |
% |