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)

 

Utah

 

87-0500306

(State or other jurisdiction
of incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

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

(Address of principal executive offices, Zip Code)

 

(801) 954-7100

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes 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.

 

3



 

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

 

 

12



 

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

 

 

16



 

 

 

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.

 

17



 

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 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 *
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 USANAâ Nutritionals product line includes USANAâ 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

%

 

19



 

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.

 

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
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

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