UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 2004
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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 ý No o
The number of shares outstanding of the registrants common stock as of July 30, 2004 was 19,009,774.
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 for periods prior to October 30, 2003 have been adjusted to reflect the stock split.
USANA HEALTH SCIENCES, INC.
For the Quarterly Period Ended July 3, 2004
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
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
(in thousands, except per share data)
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January 3, |
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July 3, |
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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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$ |
18,965 |
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$ |
13,798 |
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Inventories, net |
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14,069 |
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13,574 |
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Prepaid expenses and other current assets |
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3,294 |
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3,658 |
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Deferred income taxes |
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1,921 |
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1,669 |
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Total current assets |
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38,249 |
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32,699 |
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Property and equipment, net |
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20,195 |
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24,062 |
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Goodwill |
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4,267 |
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5,690 |
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Other assets |
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2,416 |
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2,498 |
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$ |
65,127 |
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$ |
64,949 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
5,215 |
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$ |
4,103 |
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Other current liabilities |
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14,704 |
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15,197 |
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Total current liabilities |
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19,919 |
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19,300 |
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Other long-term liabilities |
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837 |
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772 |
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Stockholders equity |
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Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding 19,470 as of January 3, 2004 and 19,170 as of July 3, 2004 |
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19 |
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19 |
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Additional paid-in capital |
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14,187 |
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11,547 |
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Retained earnings |
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28,935 |
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32,169 |
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Accumulated other comprehensive income |
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1,230 |
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1,142 |
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Total stockholders equity |
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44,371 |
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44,877 |
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$ |
65,127 |
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$ |
64,949 |
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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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June 28, |
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July 3, |
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Net sales |
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$ |
47,157 |
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$ |
67,246 |
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Cost of sales |
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10,417 |
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16,195 |
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Gross profit |
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36,740 |
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51,051 |
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Operating expenses: |
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Associate incentives |
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18,662 |
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25,556 |
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Selling, general and administrative |
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10,574 |
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13,656 |
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Research and development |
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373 |
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607 |
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Total operating expenses |
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29,609 |
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39,819 |
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Earnings from operations |
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7,131 |
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11,232 |
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Other income (expense): |
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Interest income |
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21 |
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36 |
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Interest expense |
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(1 |
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Other, net |
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(248 |
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(37 |
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Total other expense |
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(228 |
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(1 |
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Earnings before income taxes |
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6,903 |
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11,231 |
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Income taxes |
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2,554 |
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3,818 |
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Net earnings |
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$ |
4,349 |
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$ |
7,413 |
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Earnings per common share |
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Basic |
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$ |
0.23 |
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$ |
0.39 |
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Diluted |
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$ |
0.20 |
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$ |
0.36 |
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Weighted average common and dilutive common equivalent shares outstanding |
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Basic |
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19,087 |
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19,199 |
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Diluted |
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21,450 |
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20,523 |
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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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Six Months Ended |
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(unaudited) |
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June 28, |
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July 3, |
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Net sales |
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$ |
88,021 |
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$ |
129,021 |
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Cost of sales |
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19,637 |
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31,253 |
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Gross profit |
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68,384 |
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97,768 |
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Operating expenses: |
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Associate incentives |
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34,759 |
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49,168 |
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Selling, general and administrative |
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20,146 |
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26,918 |
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Research and development |
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707 |
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1,185 |
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Total operating expenses |
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55,612 |
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77,271 |
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Earnings from operations |
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12,772 |
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20,497 |
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Other income (expense): |
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Interest income |
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41 |
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86 |
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Interest expense |
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(48 |
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Other, net |
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(187 |
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62 |
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Total other income (expense) |
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(194 |
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148 |
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Earnings before income taxes |
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12,578 |
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20,645 |
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Income taxes |
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4,654 |
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7,019 |
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Net earnings |
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$ |
7,924 |
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$ |
13,626 |
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Earnings per common share |
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Basic |
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$ |
0.42 |
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$ |
0.71 |
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Diluted |
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$ |
0.37 |
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$ |
0.66 |
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Weighted average common and dilutive common equivalent shares outstanding |
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Basic |
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18,853 |
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19,288 |
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Diluted |
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21,247 |
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20,688 |
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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
Six Months Ended June 28, 2003 and July 3, 2004
(in thousands)
(unaudited)
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Accumulated |
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Additional |
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Other |
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Common Stock |
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Paid-in |
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Retained |
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Comprehensive |
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Shares |
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Value |
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Capital |
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Earnings |
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Income (Loss) |
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Total |
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For the Six Months Ended June 28, 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 |
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$ |
18,093 |
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Comprehensive income |
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Net earnings |
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7,924 |
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7,924 |
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Foreign currency translation adjustment |
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892 |
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892 |
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Comprehensive income |
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8,816 |
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Common stock retired |
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(87 |
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(254 |
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(894 |
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(1,148 |
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Common stock issued under stock option plan, including tax benefit of $3,007 |
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1,038 |
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1 |
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5,338 |
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5,339 |
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Balance at June 28, 2003 |
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19,224 |
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$ |
19 |
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$ |
8,750 |
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$ |
21,550 |
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$ |
781 |
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$ |
31,100 |
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For the Six Months Ended July 3, 2004 |
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Balance at January 3, 2004 |
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19,470 |
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$ |
19 |
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$ |
14,187 |
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$ |
28,935 |
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$ |
1,230 |
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$ |
44,371 |
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Comprehensive income |
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Net earnings |
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13,626 |
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13,626 |
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Foreign currency translation adjustment |
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(88 |
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(88 |
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Comprehensive income |
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13,538 |
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Common stock retired |
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(524 |
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(4,505 |
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(10,392 |
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(14,897 |
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Common stock issued under stock option plan, including tax benefit of $1,372 |
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224 |
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1,865 |
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1,865 |
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Balance at July 3, 2004 |
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19,170 |
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$ |
19 |
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$ |
11,547 |
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$ |
32,169 |
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$ |
1,142 |
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$ |
44,877 |
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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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Six Months Ended |
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June 28, |
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July 3, |
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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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$ |
7,924 |
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$ |
13,626 |
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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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1,839 |
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2,255 |
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Gain on sale of property and equipment |
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(24 |
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(2 |
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Deferred income taxes |
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(257 |
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174 |
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Allowance for inventory valuation |
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1,187 |
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553 |
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Changes in operating assets and liabilities: |
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Inventories |
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(1,097 |
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(34 |
) |
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Prepaid expenses and other assets |
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80 |
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(246 |
) |
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Accounts payable |
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1,730 |
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(1,144 |
) |
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Other current liabilities |
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5,667 |
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1,688 |
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Total adjustments |
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9,125 |
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3,244 |
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Net cash provided by operating activities |
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17,049 |
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16,870 |
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Cash flows from investing activities |
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Acquisition, net of cash acquired |
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(2,140 |
) |
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Purchases of property and equipment |
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(2,115 |
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(5,349 |
) |
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Proceeds from the sale of property and equipment |
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40 |
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21 |
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Net cash used in investing activities |
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(2,075 |
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(7,468 |
) |
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The accompanying notes are an integral part of these statements.
7
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Six Months Ended |
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June 28, |
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July 3, |
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Cash flows from financing activities |
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Principal payments of long-term debt |
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(6,000 |
) |
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Net proceeds from the sale of common stock |
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2,332 |
|
493 |
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Redemption of common stock |
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(1,148 |
) |
(14,897 |
) |
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Decrease in line of credit |
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(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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(7,820 |
) |
(14,404 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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124 |
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(165 |
) |
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Net increase (decrease) in cash and cash equivalents |
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7,278 |
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(5,167 |
) |
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Cash and cash equivalents, beginning of period |
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6,686 |
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18,965 |
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Cash and cash equivalents, end of period |
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$ |
13,964 |
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$ |
13,798 |
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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 |
|
$ |
65 |
|
$ |
|
|
Income taxes |
|
1,167 |
|
5,727 |
|
||
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Non-cash activities |
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In February 2004, the Company acquired FMG Productions, LLC for $2,060 in cash. In conjunction with the acquisition, liabilities totaling $80 were assumed for professional fees directly associated with the acquisition. |
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The accompanying notes are an integral part of these statements.
8
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 July 3, 2004, and results of operations for the quarters and six months ended June 28, 2003 and July 3, 2004. 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 January 3, 2004. The results of operations for the quarter and six months ended July 3, 2004 may not be indicative of the results that may be expected for the fiscal year ending January 1, 2005.
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 six months ended June 28, 2003 and July 3, 2004. Issued in December 2002, SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As permitted by SFAS No. 148, the Company continues to account for stock options under APB Opinion No. 25, under which no compensation has been recognized. The following table illustrates the effects on net earnings and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148, to stock-based compensation:
|
|
|
Quarter Ended |
|
Six Months Ended |
|
||||||||
|
|
|
June 28, |
|
July 3, |
|
June 28, |
|
July 3, |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
Net earnings |
As reported |
|
$ |
4,349 |
|
$ |
7,413 |
|
$ |
7,924 |
|
$ |
13,626 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Pro forma |
|
$ |
4,229 |
|
$ |
6,973 |
|
$ |
7,696 |
|
$ |
12,962 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per share - basic |
As reported |
|
$ |
0.23 |
|
$ |
0.39 |
|
$ |
0.42 |
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Pro forma |
|
$ |
0.22 |
|
$ |
0.36 |
|
$ |
0.41 |
|
$ |
0.67 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per share - diluted |
As reported |
|
$ |
0.20 |
|
$ |
0.36 |
|
$ |
0.37 |
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Pro forma |
|
$ |
0.20 |
|
$ |
0.34 |
|
$ |
0.36 |
|
$ |
0.63 |
|
9
Weighted average assumptions used to determine the Black-Scholes fair value for options granted during the periods indicated:
|
|
Quarter Ended |
|
Six Months Ended |
|
||||||
|
|
June 28, |
|
July 3, |
|
June 28, |
|
July 3, |
|
||
|
|
|
|
|
|
|
|
|
|
||
Expected volatility |
|
* |
|
* |
|
77 |
% |
76 |
% |
||
Risk free interest rate |
|
* |
|
* |
|
3.86 |
% |
4.02 |
% |
||
Expected life |
|
* |
|
* |
|
10 yrs. |
|
10 yrs. |
|
||
Expected dividend yield |
|
* |
|
* |
|
0 |
% |
0 |
% |
||
Weighted average fair value of options granted** |
|
* |
|
* |
|
$ |
7.90 |
|
$ |
29.72 |
|
* No grants were issued during the quarters ended June 28, 2003 and July 3, 2004.
** All options during the periods indicated have been granted at the market price on the date of grant, which is established by averaging the closing price of the Companys common stock over the ten trading days preceding the date of grant.
Option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Additionally, 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
In February 2004, the Company completed the acquisition of the net assets of FMG Productions, LLC (FMG), a Utah limited liability company that produces video and audio promotional and training materials for large companies and sales organizations, including the Company. The aggregate investment was $2,140 including $2,060 in cash and $80 for professional fees directly associated with the acquisition. The purchase was made through a newly formed wholly owned subsidiary of the Company, which will operate the business formerly conducted by FMG. The former employees of FMG, including its founders and primary creative directors, will continue to operate the business now owned by USANA. The Company expects to realize future benefits from this acquisition primarily through the motivation and training of its independent Associates.
The acquisition was accounted for in accordance with SFAS No. 141, Business Combinations and, as such, the results of operations for FMG have been included in the consolidated financial statements since the effective date of the acquisition. 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 on the following page:
10
|
|
At February 1, |
|
|
|
|
Assets acquired |
|
|
|
|
|
|
Accounts receivable |
|
$ |
133 |
|
|
|
Property and equipment |
|
790 |
|
|
|
|
Goodwill |
|
1,423 |
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired |
|
2,346 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed |
|
|
|
|
|
|
Accounts payable |
|
23 |
|
|
|
|
Deferred revenue |
|
94 |
|
|
|
|
Other liabilities |
|
89 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed |
|
206 |
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
2,140 |
|
|
|
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:
|
|
January 3, |
|
July 3, |
|
||
|
|
|
|
|
|
||
Raw materials |
|
$ |
5,498 |
|
$ |
5,799 |
|
Work in progress |
|
2,497 |
|
2,350 |
|
||
Finished goods |
|
7,563 |
|
6,455 |
|
||
|
|
|
|
|
|
||
|
|
15,558 |
|
14,604 |
|
||
|
|
|
|
|
|
||
Less allowance for inventory valuation |
|
1,489 |
|
1,030 |
|
||
|
|
|
|
|
|
||
|
|
$ |
14,069 |
|
$ |
13,574 |
|
Prepaid expenses and other current assets consist of the following:
|
|
January 3, |
|
July 3, |
|
||
Prepaid expenses |
|
|
|
|
|
||
Miscellaneous receivables, net |
|
$ |
1,376 |
|
$ |
1,127 |
|
Other current assets |
|
1,449 |
|
1,959 |
|
||
|
|
469 |
|
572 |
|
||
|
|
|
|
|
|
||
|
|
$ |
3,294 |
|
$ |
3,658 |
|
11
Cost of property and equipment and their estimated useful lives is as follows:
|
|
Years |
|
January 3, |
|
July 3, |
|
||
|
|
|
|
|
|
|
|
||
Buildings |
|
40 |
|
$ |
8,120 |
|
$ |
9,283 |
|
Laboratory and production equipment |
|
5-7 |
|
6,879 |
|
7,897 |
|
||
Sound and video library |
|
5 |
|
|
|
600 |
|
||
Computer equipment and software |
|
3-5 |
|
18,702 |
|
21,782 |
|
||
Furniture and fixtures |
|
3-5 |
|
2,227 |
|
2,290 |
|
||
Automobiles |
|
3-5 |
|
180 |
|
200 |
|
||
Leasehold improvements |
|
3-5 |
|
1,626 |
|
2,282 |
|
||
Land improvements |
|
15 |
|
931 |
|
931 |
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
38,665 |
|
45,265 |
|
||
|
|
|
|
|
|
|
|
||
Less accumulated depreciation and amortization |
|
|
|
21,740 |
|
23,718 |
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
16,925 |
|
21,547 |
|
||
|
|
|
|
|
|
|
|
||
Land |
|
|
|
1,773 |
|
1,899 |
|
||
|
|
|
|
|
|
|
|
||
Deposits and projects in process |
|
|
|
1,497 |
|
616 |
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
$ |
20,195 |
|
$ |
24,062 |
|
NOTE F GOODWILL
Goodwill represents the excess of the purchase price paid of acquired entities over the fair market value of the net assets acquired. As of July 3, 2004, goodwill totaled $5,690, comprised of $4,267 associated with the July 1, 2003 acquisition of Wasatch Product Development, Inc. (WPD) and $1,423 in connection with the February 1, 2004 acquisition of FMG. No events have occurred subsequent to either acquisition that have resulted in an impairment of the original goodwill amounts initially recorded from the transactions. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill must be tested at least annually and if the carrying amount of goodwill exceeds its fair value, an impairment loss must be recognized in an amount equal to that excess.
During June 2004, an independent third party conducted the annual impairment test of goodwill related to the acquisition of WPD. The fair market value of the net assets of WPD was estimated using widely accepted valuation methods, including both a market approach and an income approach. In determining the fair market value as part of the impairment test, certain assumptions were used to project future results that management believes are reasonable, given current facts and circumstances; however, there can be no assurance that, under the assumptions used, these projections will materialize. Based upon the results of the independent appraisal, the fair market value of the net assets of WPD has been determined to be in excess of the carrying amount of the net assets, and, therefore, no impairment loss for goodwill has been recognized.
The changes in the carrying amount of goodwill by acquired subsidiary for the six months ended July 3, 2004, are as follows:
|
|
WPD |
|
FMG |
|
Consolidated |
|
|||
|
|
|
|
|
|
|
|
|||
Balance at January 3, 2004 |
|
$ |
4,267 |
|
$ |
|
|
$ |
4,267 |
|
|
|
|
|
|
|
|
|
|||
Goodwill acquired |
|
|
|
1,423 |
|
1,423 |
|
|||
|
|
|
|
|
|
|
|
|||
Impairment adjustments |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Balance at July 3, 2004 |
|
$ |
4,267 |
|
$ |
1,423 |
|
$ |
5,690 |
|
12
NOTE G OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
|
|
January 3, |
|
July 3, |
|
||
|
|
|
|
|
|
||
Associate incentives |
|
$ |
2,692 |
|
$ |
2,390 |
|
Accrued compensation |
|
4,186 |
|
2,988 |
|
||
Income taxes |
|
1,255 |
|
1,540 |
|
||
Sales taxes |
|
1,667 |
|
1,769 |
|
||
Associate promotions |
|
29 |
|
1,515 |
|
||
Deferred revenue |
|
1,404 |
|
1,788 |
|
||
Provision for returns and allowances |
|
998 |
|
1,142 |
|
||
Accrued loss on foreign currency forwards |
|
337 |
|
|
|
||
All other |
|
2,136 |
|
2,065 |
|
||
|
|
|
|
|
|
||
|
|
$ |
14,704 |
|
$ |
15,197 |
|
NOTE H COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of shares outstanding for each period. Weighted average shares redeemed have been included in the calculation of weighted average shares outstanding for basic earnings per share. Diluted earnings per common share are based on shares outstanding (computed under basic EPS) and potentially dilutive shares. Shares included in dilutive earnings per share calculations include stock options granted that are in the money but have not yet been exercised.
|
|
For the Quarter Ended |
|
||||
|
|
June 28, |
|
July 3, |
|
||
Earnings available to common shareholders |
|
$ |
4,349 |
|
$ |
7,413 |
|
|
|
|
|
|
|
||
Basic EPS |
|
|
|
|
|
||
|
|
|
|
|
|
||
Shares |
|
|
|
|
|
||
Common shares outstanding entire period |
|
18,273 |
|
19,470 |
|
||
Weighted average common shares: |
|
|
|
|
|
||
Issued during period |
|
864 |
|
180 |
|
||
Canceled during period |
|
(50 |
) |
(451 |
) |
||
Weighted average common shares outstanding during period |
|
19,087 |
|
19,199 |
|
||
Earnings per common share - basic |
|
$ |
0.23 |
|
$ |
0.39 |
|
|
|
|
|
|
|
||
Diluted EPS |
|
|
|
|
|
||
|
|
|
|
|
|
||
Shares |
|
|
|
|
|
||
Weighted average shares outstanding during period - basic |
|
19,087 |
|
19,199 |
|
||
Dilutive effect of stock options |
|
2,363 |
|
1,324 |
|
||
Weighted average shares outstanding during period - diluted |
|
21,450 |
|
20,523 |
|
||
Earnings per common share - diluted |
|
$ |
0.20 |
|
$ |
0.36 |
|
13
Options to purchase 390 shares of stock were not included in the computation of EPS for the quarter ended July 3, 2004 due to their exercise price being greater than the average market price of the shares. For the quarter ended June 28, 2003, all options were included in the computation of EPS.
|
|
For the Six Months Ended |
|
||||
|
|
June 28, |
|
July 3, |
|
||
Earnings available to common shareholders |
|
$ |
7,924 |
|
$ |
13,626 |
|
|
|
|
|
|
|
||
Basic EPS |
|
|
|
|
|
||
|
|
|
|
|
|
||
Shares |
|
|
|
|
|
||
Common shares outstanding entire period |
|
18,273 |
|
19,470 |
|
||
Weighted average common shares: |
|
|
|
|
|
||
Issued during period |
|
605 |
|
104 |
|
||
Canceled during period |
|
(25 |
) |
(286 |
) |
||
Weighted average common shares outstanding during period |
|
18,853 |
|
19,288 |
|
||
Earnings per common share - basic |
|
$ |
0.42 |
|
$ |
0.71 |
|
|
|
|
|
|
|
||
Diluted EPS |
|
|
|
|
|
||
|
|
|
|
|
|
||
Shares |
|
|
|
|
|
||
Weighted average shares outstanding during period - basic |
|
18,853 |
|
19,288 |
|
||
Dilutive effect of stock options |
|
2,394 |
|
1,400 |
|
||
Weighted average shares outstanding during period - diluted |
|
21,247 |
|
20,688 |
|
||
Earnings per common share - diluted |
|
$ |
0.37 |
|
$ |
0.66 |
|
Options to purchase 290 shares of stock were not included in the computation of EPS for the six months ended July 3, 2004 due to their exercise price being greater than the average market price of the shares. For the six months ended June 28, 2003, all options to purchase shares of stock were included in the computation of EPS.
During the six months ended July 3, 2004, the Company expended $14,897 to purchase 524 shares under the Companys share repurchase plan. The purchase of shares under this plan reduces the number of shares issued and outstanding.
NOTE I SEGMENT INFORMATION
The Companys operations are distinguished by 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, are not included in the Companys determination of segment profit or loss in assessing the performance of a segment.
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 and personal care products through a network marketing system. As such,
14
only one business segment was reported, which was distinguished by geography. During July 2003, Contract Manufacturing was added as a new business segment. This change does not affect the presentation of historical segment information.
Direct Selling
The Direct Selling segment comprises the Companys principal line of business: developing, manufacturing, and distributing nutritional and personal care 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 seven operating geographic regions including North America, Australia-New Zealand, Hong Kong, Japan, Taiwan, South Korea, and Singapore.
Contract Manufacturing
Operating activities for the Contract Manufacturing segment include the manufacture of premium personal care products, produced under the brand name of its customers, including manufacturing and packaging for the Companys Sensé product line of skin and personal care products. Operations are located in Draper, Utah and sales are made to a limited number of customers.
Sales made by the Contract Manufacturing segment to one customer accounted for 78%, or approximately $2,420, of segment revenues for the quarter ended July 3, 2004. No other individual customer accounted for 10% or more of segment net revenues.
Financial information summarized by operating segment and geographic region for the quarters ended June 28, 2003 and July 3, 2004 is listed below:
|
|
Revenues from |
|
Intersegment |
|
Earnings |
|
|||
Quarter ended June 28, 2003: |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
North America |
|
$ |
33,155 |
|
$ |
8,543 |
|
$ |
6,620 |
|
Australia - New Zealand |
|
7,084 |
|
503 |
|
823 |
|
|||
Hong Kong |
|
2,105 |
|
|
|
346 |
|
|||
Japan (2) |
|
1,445 |
|
|
|
(748 |
) |
|||
Taiwan |
|
3,368 |
|
|
|
932 |
|
|||
|
|
|
|
|
|
|
|
|||
Reportable Segments Total |
|
47,157 |
|
9,046 |
|
7,973 |
|
|||
|
|
|
|
|
|
|
|
|||
Unallocated and Other (4) |
|
|
|
(9,046 |
) |
(1,070 |
) |
|||
|
|
|
|
|
|
|
|
|||
Consolidated Total |
|
$ |
47,157 |
|
$ |
|
|
$ |
6,903 |
|
15
|
|
Revenues from |
|
Intersegment |
|
Earnings |
|
|||
Quarter ended July 3, 2004: |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Direct Selling |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
North America (1) |
|
$ |
42,415 |
|
$ |
11,598 |
|
$ |
11,389 |
|
Australia - New Zealand |
|
8,471 |
|
912 |
|
514 |
|
|||
Hong Kong |
|
2,750 |
|
|
|
277 |
|
|||
Japan (2) |
|
2,176 |
|
|
|
(602 |
) |
|||
Taiwan |
|
3,898 |
|
|
|
(76 |
) |
|||
South Korea |
|
1,804 |
|
|
|
(66 |
) |
|||
Singapore |
|
2,612 |
|
|
|
234 |
|
|||
|
|
|
|
|
|
|
|
|||
Segment Total |
|
64,126 |
|
12,510 |
|
11,670 |
|
|||
|
|
|
|
|
|
|
|
|||
Contract Manufacturing (3) |
|
3,120 |
|
192 |
|
190 |
|
|||
|
|
|
|
|
|
|
|
|||
Reportable Segments Total |
|
67,246 |
|
12,702 |
|
11,860 |
|
|||
|
|
|
|
|
|
|
|
|||
Unallocated and Other (4) |
|
|
|
(12,702 |
) |
(629 |
) |
|||
|
|
|
|
|
|
|
|
|||
Consolidated Total |
|
$ |
67,246 |
|
$ |
|
|
$ |
11,231 |
|
Financial information summarized by operating segment and geographic region for the six months ended June 28, 2003 and July 3, 2004 is listed below:
|
|
Revenues from |
|
Intersegment |
|
Earnings |
|
Long-lived |
|
Total Assets |
|
|||||
Six months ended June 28, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
North America |
|
$ |
62,854 |
|
$ |
13,275 |
|
$ |
12,154 |
|
$ |
22,591 |
|
$ |
42,291 |
|
Australia - New Zealand |
|
12,407 |
|
913 |
|
1,510 |
|
286 |
|
2,698 |
|
|||||
Hong Kong |
|
3,995 |
|
|
|
572 |
|
201 |
|
1,150 |
|
|||||
Japan (2) |
|
2,683 |
|
|
|
(1,519 |
) |
1,189 |
|
2,072 |
|
|||||
Taiwan |
|
6,082 |
|
|
|
1,486 |
|
341 |
|
2,749 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Reportable Segments Total |
|
88,021 |
|
14,188 |
|
14,203 |
|
24,608 |
|
50,960 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Unallocated and Other (4) |
|
|
|
(14,188 |
) |
(1,625 |
) |
(3,809 |
) |
(3,118 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Consolidated Total |
|
$ |
88,021 |
|
$ |
|
|
$ |
12,578 |
|
$ |
20,799 |
|
$ |
47,842 |
|
16
|
|
Revenues from |
|
Intersegment |
|
Earnings |
|
Long-lived |
|
Total Assets |
|
|||||
Six months ended July 3, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Direct Selling |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
North America (1) |
|
$ |
82,701 |
|
$ |
20,921 |
|
$ |
22,018 |
|
$ |
37,733 |
|
$ |
55,049 |
|
Australia - New Zealand |
|
16,747 |
|
1,584 |
|
(294 |
) |
223 |
|
5,038 |
|
|||||
Hong Kong |
|
5,207 |
|
|
|
485 |
|
210 |
|
2,977 |
|
|||||
Japan (2) |
|
4,392 |
|
|
|
(1,065 |
) |
1,009 |
|
2,396 |
|
|||||
Taiwan |
|
7,627 |
|
|
|
(562 |
) |
368 |
|
2,046 |
|
|||||
South Korea |
|
3,074 |
|
|
|
(710 |
) |
797 |
|
2,206 |
|
|||||
Singapore |
|
4,619 |
|
|
|
460 |
|
295 |
|
2,631 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Segment Total |
|
124,367 |
|
22,505 |
|
20,332 |
|
40,635 |
|
72,343 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Contract Manufacturing (3) |
|
4,654 |
|
680 |
|
(124 |
) |
5,923 |
|
9,510 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Reportable Segments Total |
|
129,021 |
|
23,185 |
|
20,208 |
|
46,558 |
|
81,853 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Unallocated and Other (4) |
|
|
|
(23,185 |
) |
437 |
|
(14,308 |
) |
(16,904 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Consolidated Total |
|
$ |
129,021 |
|
$ |
|
|
$ |
20,645 |
|
$ |
32,250 |
|
$ |
64,949 |
|
(1) Includes results from the FMG subsidiary acquired in February 2004 and operations in Mexico initiated in March 2004.
(2) Includes results from local operations in Japan. Direct U.S. export sales to Japan are included in the North America geographic region.
(3) Reportable business activities for the Contract Manufacturing segment commenced July 1, 2003.
(4) Unallocated and Other includes certain corporate items and eliminations that are not allocated to the operating segments.
17
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 and personal care 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 July 3, 2004, we had 104,000 active Associates in the United States, Canada, Australia, New Zealand, Hong Kong, Japan, Taiwan, South Korea, Singapore, Mexico, 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 July 3, 2004, we had 59,000 active Preferred Customers worldwide. Sales to Preferred Customers accounted for approximately 15% of net sales for the Direct Selling segment during the second quarter of 2004. 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.
The fiscal year end of USANA is the Saturday closest to December 31 of each year. Fiscal year 2004 will end on January 1, 2005 and is a 52-week year. Fiscal year 2003 ended on January 3, 2004 and was a 53-week year.
As discussed more fully in Note I Segment Information, beginning on page 14 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 and personal care products through a network marketing system. The Contract Manufacturing segment includes the manufacture of premium personal care products, produced under the brand name of its customers, including manufacturing and packaging for the Companys Sensé product line of skin and personal care products.
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. Prior to the third quarter of 2003, the USANAâ Nutritionals product line was comprised of the Essentials and Optimizers product categories. At our Annual International Convention in September 2003, we announced that the L·E·A·N LifelongÔ brand name would be discontinued and that the weight management products associated with this brand were to be sold under the new Macro Optimizers classification within the USANAâ Nutritionals product line. This transition was made to simplify the overall product story, which our Associates share with prospects. The change includes a shift away from a low-fat/weight-loss positioning to a focus on low-glycemic carbohydrates, soy protein and dietary fiber, as well as the specific health benefits associated with these ingredients.
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. 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.
18
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.
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.
All Other
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 FMG and 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 six months ended as of the dates indicated:
|
|
Sales By Product Line * |
|
||
Product Line |
|
June 28, |
|
July 3, |
|
USANAâ Nutritionals |
|
|
|
|
|
Essentials ** |
|
39 |
% |
38 |
% |
Optimizers |
|
34 |
% |
34 |
% |
Macro Optimizers |
|
8 |
% |
10 |
% |
Sensé beautiful scienceâ |
|
14 |
% |
13 |
% |
All Other |
|
5 |
% |
5 |
% |
* Product sales previously categorized as Combination Packs have been allocated to their respective product lines based on the weighted average price of the product components that comprise each pack.
** The Essentials category under the USANAâ Nutritionals product line includes USANAâ Essentials, 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 six months ended July 3, 2004.
USANAâ Essentials |
|
25 |
% |
HealthPak 100Ô |
|
11 |
% |
Proflavanolâ |
|
10 |
% |
19
Quarters Ended June 28, 2003 and July 3, 2004
Net Sales. Net sales increased 42.6% to $67.2 million for the quarter ended July 3, 2004, an increase of $20.0 million from $47.2 million for the comparable quarter in 2003. The increase was comprised of $16.9 million associated with our Direct Selling segment and $3.1 million associated with our Contract Manufacturing segment acquired in July 2003.
The following table summarizes the growth in net sales by segment and geographic region for the fiscal quarters ended June 28, 2003 and July 3, 2004.
|
|
Sales By Segment and Region |
|
Change from |
|
Percent |
|
|||||||||
Segment / Region |
|
June 28, 2003 |
|
July 3, 2004 |
|
Prior Year |
|
Change |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Direct Selling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
United States |
|
$ |
21,884 |
|
46.4 |
% |
$ |
27,821 |
|
41.4 |
% |
$ |
5,937 |
|
27.1 |
% |
Canada |
|
11,271 |
|
23.9 |
% |
12,378 |
|
18.4 |
% |
1,107 |
|
9.8 |
% |
|||
Australia-New Zealand |
|
7,084 |
|
15.0 |
% |
8,471 |
|
12.6 |
% |
1,387 |
|
19.6 |
% |
|||
Hong Kong |
|
2,105 |
|
4.5 |
% |
2,750 |
|
4.1 |
% |
645 |
|
30.6 |
% |
|||
Japan |
|
1,445 |
|
3.1 |
% |
2,176 |
|
3.2 |
% |
731 |
|
50.6 |
% |
|||
Taiwan |
|
3,368 |
|
7.1 |
% |
3,898 |
|
5.8 |
% |
530 |
|
15.7 |
% |
|||
South Korea |
|
|
|
0.0 |
% |
1,804 |
|
2.7 |
% |
1,804 |
|
N/A |
|
|||
Singapore |
|
|
|
0.0 |
% |
2,612 |
|
3.9 |
% |
2,612 |
|
N/A |
|
|||
Mexico |
|
|
|
0.0 |
% |
2,216 |
|
3.3 |
% |
2,216 |
|
N/A |
|
|||
Segment Total |
|
47,157 |
|
100.0 |
% |
64,126 |
|
95.4 |
% |
16,969 |
|
36.0 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Contract Manufacturing |
|
|
|
0.0 |
% |
3,120 |
|
4.6 |
% |
3,120 |
|
N/A |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Consolidated |
|
$ |
47,157 |
|
100.0 |
% |
$ |
67,246 |
|
100.0 |
% |
$ |
20,089 |
|
42.6 |
% |
The increase in net sales contributed by the Direct Selling segment can be primarily attributed to the following factors:
A 16.9% increase in the active Associate base and an 18.0% increase in the active Preferred Customer base for the second quarter of 2004 in markets that have been open longer than one year,
Sales from South Korea, Singapore, and Mexico, which were not open during the second quarter of 2003, and
Stronger foreign currencies, relative to the U. S. dollar, which positively affected the translation of sales in foreign currencies by $1.5 million.
Contract Manufacturing net sales for the quarter ended July 3, 2004 were positively affected by a higher than normal backlog of sales orders accumulated in the first quarter, during facility construction upgrades, which were subsequently filled in the second quarter. We believe that Contract Manufacturing net sales for the third quarter 2004 will be approximately $2.0 million.
Based on information currently available to the Company, we expect consolidated net sales to approach $69 million for the third quarter of 2004. We expect consolidated net sales to approach $270 million for fiscal year 2004.
20
The following tables summarize the growth in active customers for the Direct Selling segment by geographic region as of the dates indicated:
Active Associates By Region
Region |
|
As of |
|
As of |
|
Change from |
|
Percent |
|
||||
United States |
|
32,000 |
|
41.5 |
% |
40,000 |
|
38.5 |
% |
8,000 |
|
25.0 |
% |
Canada |
|
18,000 |
|
23.4 |
% |
20,000 |
|
19.2 |
% |
2,000 |
|
11.1 < |