UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended 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                         

 

Commission file number: 0-21116

 

---

 

USANA HEALTH SCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

 

3838 West Parkway Blvd., Salt Lake City, Utah 84120

(Address of principal executive offices, Zip Code)

 

(801) 954-7100

(Registrant’s telephone number, including area code)

 

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

 

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

 

The number of shares outstanding of the registrant’s 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.

 

FORM 10-Q

 

For the Quarterly Period Ended July 3, 2004

 

INDEX

 

PART I. FINANCIAL INFORMATION
Item 1		Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Earnings – Quarter Ended
		Consolidated Statements of Earnings – Six Months Ended
		Consolidated Statement of Stockholders’ Equity
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3		Quantitative and Qualitative Disclosures About Market Risk
Item 4		Controls and Procedures
PART II.  OTHER INFORMATION
Item 2		Changes in Securities and Use of Proceeds.
Item 4		Submission of Matters to a Vote of Security Holders.
Item 6		Exhibits and Reports on Form 8-K.
Signatures

 

2

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(in thousands, except per share data)

 

		January 3, 2004			July 3, 2004
					(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	18,965		$	13,798
Inventories, net		14,069			13,574
Prepaid expenses and other current assets		3,294			3,658
Deferred income taxes		1,921			1,669
Total current assets		38,249			32,699
Property and equipment, net		20,195			24,062
Goodwill		4,267			5,690
Other assets		2,416			2,498
		$	65,127		$	64,949
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	5,215		$	4,103
Other current liabilities		14,704			15,197
Total current liabilities		19,919			19,300
Other long-term liabilities		837			772
Stockholders’ equity
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		19			19
Additional paid-in capital		14,187			11,547
Retained earnings		28,935			32,169
Accumulated other comprehensive income		1,230			1,142
Total stockholders’ equity		44,371			44,877
		$	65,127		$	64,949

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(in thousands, except per share data)

 

		Quarter Ended
		­­(unaudited)
		June 28, 2003			July 3, 2004
Net sales		$	47,157		$	67,246
Cost of sales		10,417			16,195
Gross profit		36,740			51,051
Operating expenses:
Associate incentives		18,662			25,556
Selling, general and administrative		10,574			13,656
Research and development		373			607
Total operating expenses		29,609			39,819
Earnings from operations		7,131			11,232
Other income (expense):
Interest income		21			36
Interest expense		(1		)	—
Other, net		(248		)	(37		)
Total other expense		(228		)	(1		)
Earnings before income taxes		6,903			11,231
Income taxes		2,554			3,818
Net earnings		$	4,349		$	7,413
Earnings per common share
Basic		$	0.23		$	0.39
Diluted		$	0.20		$	0.36
Weighted average common and dilutive common equivalent shares outstanding
Basic		19,087			19,199
Diluted		21,450			20,523

 

The accompanying notes are an integral part of these statements.

 

4

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(in thousands, except per share data)

 

		Six Months Ended
		(unaudited)
		June 28, 2003			July 3, 2004
Net sales		$	88,021		$	129,021
Cost of sales		19,637			31,253
Gross profit		68,384			97,768
Operating expenses:
Associate incentives		34,759			49,168
Selling, general and administrative		20,146			26,918
Research and development		707			1,185
Total operating expenses		55,612			77,271
Earnings from operations		12,772			20,497
Other income (expense):
Interest income		41			86
Interest expense		(48		)	—
Other, net		(187		)	62
Total other income (expense)		(194		)	148
Earnings before income taxes		12,578			20,645
Income taxes		4,654			7,019
Net earnings		$	7,924		$	13,626
Earnings per common share
Basic		$	0.42		$	0.71
Diluted		$	0.37		$	0.66
Weighted average common and dilutive common equivalent shares outstanding
Basic		18,853			19,288
Diluted		21,247			20,688

 

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)

 

													Accumulated
							Additional						Other
		Common Stock					Paid-in			Retained			Comprehensive
		Shares		Value			Capital			Earnings			Income (Loss)			Total
For the Six Months Ended June 28, 2003
Balance at December 28, 2002		18,273		$	18		$	3,666		$	14,520		$	(111	)	$	18,093
Comprehensive income
Net earnings		—		—			—			7,924			—			7,924
Foreign currency translation adjustment		—		—			—			—			892			892
Comprehensive income																8,816
Common stock retired		(87	)	—			(254		)	(894		)	—			(1,148		)
Common stock issued under stock option plan, including tax benefit of $3,007		1,038		1			5,338			—			—			5,339
Balance at June 28, 2003		19,224		$	19		$	8,750		$	21,550		$	781		$	31,100
For the Six Months Ended July 3, 2004
Balance at January 3, 2004		19,470		$	19		$	14,187		$	28,935		$	1,230		$	44,371
Comprehensive income
Net earnings		—		—			—			13,626			—			13,626
Foreign currency translation adjustment		—		—			—			—			(88		)	(88		)
Comprehensive income																13,538
Common stock retired		(524	)	—			(4,505		)	(10,392		)	—			(14,897		)
Common stock issued under stock option plan, including tax benefit of $1,372		224		—			1,865			—			—			1,865
Balance at July 3, 2004		19,170		$	19		$	11,547		$	32,169		$	1,142		$	44,877

 

The accompanying notes are an integral part of these statements.

 

6

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

(unaudited)

 

		Six Months Ended
		June 28, 2003			July 3, 2004
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings		$	7,924		$	13,626
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization		1,839			2,255
Gain on sale of property and equipment		(24		)	(2		)
Deferred income taxes		(257		)	174
Allowance for inventory valuation		1,187			553
Changes in operating assets and liabilities:
Inventories		(1,097		)	(34		)
Prepaid expenses and other assets		80			(246		)
Accounts payable		1,730			(1,144		)
Other current liabilities		5,667			1,688
Total adjustments		9,125			3,244
Net cash provided by operating activities		17,049			16,870
Cash flows from investing activities
Acquisition, net of cash acquired		—			(2,140		)
Purchases of property and equipment		(2,115		)	(5,349		)
Proceeds from the sale of property and equipment		40			21
Net cash used in investing activities		(2,075		)	(7,468		)

 

The accompanying notes are an integral part of these statements.

 

7

 

		Six Months Ended
		June 28, 2003			July 3, 2004
Cash flows from financing activities
Principal payments of long-term debt		(6,000		)	—
Net proceeds from the sale of common stock		2,332			493
Redemption of common stock		(1,148		)	(14,897		)
Decrease in line of credit		(2,913		)	—
Payments on capital lease obligations		(91		)	—
Net cash used in financing activities		(7,820		)	(14,404		)
Effect of exchange rate changes on cash and cash equivalents		124			(165		)
Net increase (decrease) in cash and cash equivalents		7,278			(5,167		)
Cash and cash equivalents, beginning of period		6,686			18,965
Cash and cash equivalents, end of period		$	13,964		$	13,798
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	65		$	—
Income taxes		1,167			5,727
Non-cash activities
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.

 

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 Company’s 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 Company’s 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, 2003			July 3, 2004			June 28, 2003			July 3, 2004
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, 2003		July 3, 2004		June 28, 2003			July 3, 2004
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 Company’s 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 Company’s employee stock options have characteristics significantly different from those of traded options, including long vesting schedules and changes in the subjective input assumptions that can materially affect the fair value estimate.  Management believes the best assumptions available were used to value the options and that the resulting option values were reasonable as of the dates the options were granted.

 

NOTE B – ACQUISITIONS

 

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 Company’s management and are summarized on the following page:

 

10

 

		At February 1, 2004
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, 2004			July 3, 2004
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

 

 

NOTE D – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

		January 3, 2004			July 3, 2004
Prepaid expenses
Miscellaneous receivables, net		$	1,376		$	1,127
Other current assets		1,449			1,959
		469			572
		$	3,294		$	3,658

 

11

 

NOTE E – PROPERTY AND EQUIPMENT

 

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

 

		Years		January 3, 2004			July 3, 2004
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 Total
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

 

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NOTE G – OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

		January 3, 2004			July 3, 2004
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, 2003			July 3, 2004
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, 2003			July 3, 2004
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 Company’s share repurchase plan.  The purchase of shares under this plan reduces the number of shares issued and outstanding.

 

NOTE I – SEGMENT INFORMATION

 

The Company’s 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 Company’s 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 Company’s 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 Company’s 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 External Customers			Intersegment Revenues			Earnings before Income Taxes
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 External Customers			Intersegment Revenues			Earnings before Income Taxes
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 External Customers			Intersegment Revenues			Earnings before Income Taxes			Long-lived Assets			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

 

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		Revenues from External Customers			Intersegment Revenues			Earnings before Income Taxes			Long-lived Assets			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.

 

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

 

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

 

General

 

USANA Health Sciences, Inc. develops and manufactures high-quality nutritional 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 Company’s Sensé product line of skin and personal care products.

 

Our primary product lines within the Direct Selling segment consist of USANA^â Nutritionals and Sensé – beautiful science^â (Sensé).  The USANA^â Nutritionals product line is further categorized into three separate classifications: Essentials, Optimizers, and Macro Optimizers. Prior to the third quarter of 2003, the USANA^â 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 USANA^â 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.

 

USANA^â Nutritionals.

 

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

 

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

 

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

 

Sensé - beautiful science^â

 

The Sensé product line includes premium, science-based personal care products that support healthy skin and hair by providing advanced topical nourishment, moisturization and protection.  Products in this line include Perfecting Essence, Gentle Daily Cleanser, Hydrating Toner, Daytime Protective Emulsion SPF 15, Eye Nourisher, Night Renewal (Replenishing Crème), Serum Intensive (Skin Revival Complex), Rice Bran Polisher, Nutritious Crème Masque, Revitalizing Shampoo, Nourishing Conditioner, Firming Body Nourisher, and Energizing Shower Gel.

 

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 * Six Months Ended
Product Line		June 28, 2003		July 3, 2004
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 USANA^â Nutritionals product line includes USANA^â Essentials, HealthPak 100Ô, Body RoxÔ, and UsanimalsÔ

 

Key Products

 

The following highlights sales data for our top-selling products as a percentage of Direct Selling segment product sales for the six months ended July 3, 2004.

 

USANAâ Essentials		25	%
HealthPak 100Ô		11	%
Proflavanolâ		10	%

 

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Results of Operations

 

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 (in thousands) Quarter Ended										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.

 

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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 June 28, 2003				As of July 3, 2004				Change from Prior Year		Percent Change
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 <