UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2007

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 x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No x

The number of shares outstanding of the registrant’s common stock as of August 3, 2007 was 16,264,889.

USANA HEALTH SCIENCES, INC.

FORM 10-Q

For the Quarterly Period Ended June 30, 2007

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 Statements of Stockholders’ Equity and Comprehensive Income
	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 1	Legal Proceedings
Item 1A	Risk Factors
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds
Item 4	Submission of Matters to a Vote of Security Holders
Item 6	Exhibits
Signatures

 

2

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EXPLANATORY NOTE

Rule 10-01(d) of Regulation S-X requires that interim financial statements included in quarterly reports on Form 10-Q be reviewed by an independent public accountant using professional standards and procedures for conducting such reviews, as established by generally accepted auditing standards, as may be modified or supplemented by the Securities and Exchange Commission (SEC).  The Company previously announced that its independent registered public accountant, Grant Thornton LLP, resigned July 10, 2007.  The timing of the resignation prevented the Company from engaging a new independent registered public accountant to review the financial statements included in this report before filing.  Consequently, the accompanying consolidated financial statements as of June 30, 2007 and for the quarter ended June 30, 2007 have not been reviewed by an independent public accountant in accordance with Statement of Auditing Standards No. 100, Interim Financial Information (“SAS 100”).

Furthermore, Section 302 of the Sarbanes-Oxley Act of 2002 (“Section 302”) requires our chief executive officer and our chief financial officer to certify concerning the Company’s disclosure controls and procedures, internal controls over financial reporting in accordance with rules of the SEC, and disclosures concerning their evaluation of those controls to the Company’s auditors and Audit Committee.  Additionally, Section 906 of the Sarbanes-Oxley Act (“Section 906”) requires our chief executive officer and chief financial officer to certify that this Quarterly Report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) and that the information contained in the report fairly presents, in all material respects, our financial condition and results of operations.  Those certifications are omitted from this filing only because the financial statements accompanying this report have not been reviewed by an independent public accountant under SAS 100.  The Company believes that this report otherwise meets all of the qualifications of the Exchange Act and the rules and regulations thereunder governing the preparation and filing of periodic reports as referenced in the certifications. Before our officers can make such certifications, our new independent public accounting firm must complete its review of the consolidated financial statements appearing elsewhere in this report under SAS 100, as required by SEC rules.  Once our Audit Committee has engaged a new independent registered public accountant as our auditor and that firm completes its review under SAS 100, we will file an amendment to this report pursuant to which our chief executive officer and chief financial officer will make the certifications required under Section 302 and Section 906.

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

		December 30,			June 30,
		2006			2007
					(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	27,029		$	9,876
Inventories		22,483			20,810
Prepaid expenses and other current assets		8,908			7,328
Current assets held for sale		—			3,260
Deferred income taxes		2,195			2,659
Total current assets		60,615			43,933
Property and equipment, net		30,323			42,293
Goodwill		5,690			5,690
Other assets		3,374			4,052
		$	100,002		$	95,968
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	10,241		$	9,337
Other current liabilities		29,564			35,165
Line of credit		—			34,515
Total current liabilities		39,805			79,017
Stockholders’ equity
Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding 17,859 as of December 30, 2006 and 16,265 as of June 30, 2007		18			16
Additional paid-in capital		15,573			3,114
Retained earnings		44,251			13,213
Accumulated other comprehensive income		355			608
Total stockholders’ equity		60,197			16,951
		$	100,002		$	95,968

 

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)

(unaudited)

		Quarter Ended
		July 1,			June 30,
		2006			2007
Net sales		$	89,694		$	107,542
Cost of sales		19,319			22,443
Gross profit		70,375			85,099
Operating expenses:
Associate incentives		36,025			43,280
Selling, general and administrative		17,910			22,531
Research and development		756			902
Total operating expenses		54,691			66,713
Earnings from operations		15,684			18,386
Other income (expense):
Interest income		169			87
Interest expense		(10		)	(403		)
Other, net		177			303
Other income (expense), net		336			(13		)
Earnings from continuing operations before income taxes		16,020			18,373
Income taxes		5,462			6,966
Income from continuing operations		10,558			11,407
Loss from discontinued operations, net of tax benefit		(214		)	(93		)
Net earnings		$	10,344		$	11,314
Earnings per common share
Basic
Continuing operations		$	0.58		$	0.68
Discontinued operations		(0.01		)	—
Net earnings		$	0.57		$	0.68
Diluted
Continuing operations		$	0.56		$	0.66
Discontinued operations		(0.01		)	—
Net earnings		$	0.55		$	0.66
Weighted average common shares outstanding
Basic		18,149			16,709
Diluted		18,777			17,163

 

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)

(unaudited)

		Six Months Ended
		July 1,			June 30,
		2006			2007
Net sales		$	175,078		$	208,220
Cost of sales		37,697			43,029
Gross profit		137,381			165,191
Operating expenses:
Associate incentives		70,031			82,829
Selling, general and administrative		35,400			44,032
Research and development		1,429			1,832
Total operating expenses		106,860			128,693
Earnings from operations		30,521			36,498
Other income (expense):
Interest income		311			394
Interest expense		(10		)	(408		)
Other, net		330			472
Other income, net		631			458
Earnings from continuing operations before income taxes		31,152			36,956
Income taxes		10,835			13,749
Income from continuing operations		20,317			23,207
Loss from discontinued operations, net of tax benefit		(413		)	(207		)
Net earnings		$	19,904		$	23,000
Earnings per common share
Basic
Continuing operations		$	1.11		$	1.34
Discontinued operations		(0.02		)	(0.01		)
Net earnings		$	1.09		$	1.33
Diluted
Continuing operations		$	1.07		$	1.30
Discontinued operations		(0.02		)	(0.01		)
Net earnings		$	1.05		$	1.29
Weighted average common shares outstanding
Basic		18,304			17,302
Diluted		19,002			17,813

 

The accompanying notes are an integral part of these statements.

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Six Months Ended July 1, 2006 and June 30, 2007

(in thousands)

(unaudited)

													Accumulated
							Additional						Other
		Common Stock					Paid-in			Retained			Comprehensive
		Shares		Value			Capital			Earnings			Income (Loss)			Total
For the Six Months Ended July 1, 2006
Balance at December 31, 2005		18,343		$	18		$	9,161		$	35,720		$	839		$	45,738
Comprehensive income
Net earnings		—		—			—			19,904			—			19,904
Foreign currency translation adjustment, net		—		—			—			—			(49		)	(49		)
Comprehensive income																19,855
Common stock retired		(801	)	—			(5,733		)	(24,413		)	—			(30,146		)
Equity-based compensation expense		—		—			2,152			—			—			2,152
Common stock issued under equity-based award plan, including tax benefit of $1,033		181		—			1,840			—			—			1,840
Balance at July 1, 2006		17,723		$	18		$	7,420		$	31,211		$	790		$	39,439
For the Six Months Ended June 30, 2007
Balance at December 30, 2006		17,859		$	18		$	15,573		$	44,251		$	355		$	60,197
Comprehensive income
Net earnings		—		—			—			23,000			—			23,000
Foreign currency translation adjustment, net		—		—			—			—			253			253
Comprehensive income																23,253
Common stock retired		(1,712	)	(2		)	(18,958		)	(54,038		)	—			(72,998		)
Common stock awarded to Associates		1					47									47
Equity-based compensation expense		—		—			3,220			—			—			3,220
Common stock issued under equity-based award plan, including tax benefit of $1,031		117		—			3,232			—			—			3,232
Balance at June 30, 2007		16,265		$	16		$	3,114		$	13,213		$	608		$	16,951

 

The accompanying notes are an integral part of these statements.

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

		Six Months Ended
		July 1,			June 30,
		2006			2007
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings		$	19,904		$	23,000
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization		2,924			2,457
Loss on disposition of property and equipment		8			73
Write-down of assets held for sale		—			25
Equity-based compensation expense		2,152			3,220
Excess tax benefit from equity-based payment arrangements		(832		)	(844		)
Common stock awarded to Associates		—			47
Deferred income taxes		(721		)	(998		)
Provision for inventory valuation		1,690			691
Changes in operating assets and liabilities:
Inventories		340			26
Prepaid expenses and other assets		(411		)	106
Accounts payable		1,379			(1,371		)
Other current liabilities		3,805			6,167
Total adjustments		10,334			9,599
Net cash provided by operating activities		30,238			32,599
Cash flows from investing activities
Receipts on notes receivable		—			60
Increases in notes receivable		—			(65		)
Proceeds from the sale of property and equipment		—			23
Purchases of property and equipment		(3,104		)	(14,271		)
Net cash used in investing activities		(3,104		)	(14,253		)
Cash flows from financing activities
Proceeds from equity awards exercised		807			2,201
Excess tax benefit from equity-based payment arrangements		832			844
Retirement of common stock		(30,146		)	(72,998		)
Increase in line of credit		—			34,515
Net cash used in financing activities		(28,507		)	(35,438		)
Effect of exchange rate changes on cash and cash equivalents		(33		)	(61		)
Net decrease in cash and cash equivalents		(1,406		)	(17,153		)
Cash and cash equivalents, beginning of period		10,579			27,029
Cash and cash equivalents, end of period		$	9,173		$	9,876
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	8		$	201
Income taxes		10,491			11,343

 

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 its subsidiaries (collectively, 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 June 30, 2007, and results of operations for the quarters and six months ended July 1, 2006 and June 30, 2007.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006.  The results of operations for the quarter ended June 30, 2007 may not be indicative of the results that may be expected for the fiscal year ending December 29, 2007.

Reclassification

Minor reclassifications relating to net sales and Associate incentives expense have been made to the Company’s financial statements in order to comply with EITF 01-09.  Under these guidelines, certain incentives that are offered to our Associates are classified as sales discounts, resulting in a reduction of revenue, with a corresponding reduction to Associate incentives.  Net sales and Associate incentives expense numbers reflected throughout this document, for periods prior to December 31, 2006, have been adjusted for comparability purposes.  The impact of this reclassification reduced previously reported net sales for the quarter ended July 1, 2006 by 1.6%.  This minor reclassification had no effect on our earnings from operations, net earnings, or earnings per share.

Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements.  SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged.  Any amounts recognized upon adoption as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption.  The Company has not yet determined the impact of adopting SFAS No. 157 on its Consolidated Financial Statements.

On February 15, 2007, the FASB issued SFAS Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115.”  SFAS No. 159 permits an entity to choose to measure eligible items at fair value at specified election dates.  An entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective for fiscal years that begin after November 15, 2007.  The Company has not yet determined the impact of adopting SFAS No. 159 on its Consolidated Financial Statements.

On June 27, 2007, the FASB ratified the EITF consensus on EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities”, which calls for nonrefundable advance payments for goods or services to be used in future research and development activities to be deferred and capitalized until such time as the related goods are delivered or related services are performed, at which point the amounts are to be recognized as an expense.  EITF 07-3 is effective for fiscal periods beginning after December 15, 2007.  The Company has evaluated its research and development contracts in regard to this new pronouncement and has determined that the effect of this consensus will not have a material impact on its financial statements.

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NOTE A – EQUITY-BASED COMPENSATION

Equity-based compensation expense relating to awards vested under the current and previous plans utilized by the Company, and the related tax benefit recognized in earnings for the quarters and six months ended July 1, 2006, and June 30, 2007, are as follows:

		Quarter Ended						Six Months Ended
		July 1,			June 30,			July 1,			June 30,
		2006			2007			2006			2007
Cost of sales		$	143		$	172		$	270		$	315
Selling, general and administrative		930			1,303			1,637			2,612
Research and development		132			154			245			293
		1,205			1,629			2,152			3,220
Related tax benefit		386			529			648			1,105
Net equity-based compensation expense		$	819		$	1,100		$	1,504		$	2,115

 

The following table shows the remaining unrecognized compensation expense on a pre-tax basis that is related to all types of equity awards that are outstanding as of June 30, 2007.  This table does not include an estimate for future grants that may be issued.

Remainder of 2007		$	3,177
2008		5,844
2009		3,853
2010		3,393
2011		1,959
Thereafter		418
		$	18,644

 

The weighted-average period over which the expense above will be recognized is 2.3 years.

 

During the quarter and six months ended June 30, 2007, the Company granted equity awards under the Company’s 2006 Equity Incentive Award Plan (the “2006 Plan”), which was approved by the shareholders in April 2006.  The 2006 Plan allows for the grant of various equity awards, including stock-settled stock appreciation rights, stock options, deferred stock units, and other types of equity-based awards to the Company’s officers, key employees, and non-employee directors.  The 2006 Plan authorized 5,000 shares of common stock for issuance; as of June 30, 2007, 4,202 of these shares were available for future issuance.

The Company’s Compensation Committee has determined that awards to be granted to officers and key employees under the 2006 Plan will generally vest 20% each year on the anniversary of the grant date and will generally expire five to five and one-half years from the date of grant.  Awards of stock options and stock-settled stock appreciation rights to be granted to non-employee directors will generally vest 25% each quarter, commencing on the last day of the fiscal quarter in which the awards are granted, and will generally expire five years to five and one-half years from the date of grant.  Awards of deferred stock units are full-value shares at the date of grant, vesting over the periods of service, and do not have expiration dates.  The exercise price of all awards granted under the 2006 Plan during 2006 was established by averaging the closing price of the Company’s common stock over the five trading days preceding the date of grant.  The exercise price of all awards granted under the 2006 Plan subsequent to December 30, 2006 is the closing price of the Company’s common stock on the date of grant.

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Prior to the approval of the 2006 Plan, the Company maintained the 2002 Stock Option Plan (the “2002 Plan”), which was limited to the granting of incentive and non-qualified stock options.  Options granted under the 2002 Plan generally vest 20% each year on the anniversary of the grant date and expire five to ten years from the date of grant.  The exercise price of all awards granted under the 2002 Plan was established by averaging the closing price of the Company’s common stock over the five trading days preceding the date of grant.  The 2006 Plan replaced the 2002 Plan for all grants that were awarded subsequent to the approval of the 2006 Plan.

During 2006 and the first six months of 2007, the Company continued to use the Black-Scholes option pricing model to estimate fair value of equity awards, which requires the input of highly subjective assumptions, including the expected stock price volatility.  Expected volatility is calculated by averaging the historical volatility of the Company and a peer group index.  The risk-free interest rate is based on the U.S. Treasury yield curve on the date of grant with respect to the expected life of the award.  Due to the “plain vanilla” characteristics of the Company’s equity awards, the “simplified method,” as permitted by the guidance in Staff Accounting Bulletin No. 107, has been used to determine expected life.

Weighted-average assumptions used to calculate the fair value of awards that have been granted during the quarters ended as of the dates indicated are included in the table below.  Deferred stock units are full-value shares at the date of grant and have been excluded.

		Quarter Ended						Six Months Ended
		July 1,			June 30,			July 1,			June 30,
		2006			2007			2006			2007
Expected volatility		57.04		%	41.87		%	57.04		%	41.88		%
Risk-free interest rate		4.98		%	4.58		%	4.79		%	4.59		%
Expected life		4.1 yrs.			4.2 yrs.			4.1 yrs.			4.2 yrs.
Expected dividend yield		—			—			—			—
Grant price		$	37.54		$	40.51		$	38.14		$	42.10

 

A summary of the Company’s stock option and stock-settled stock appreciation right activity for the six months ended June 30, 2007 is as follows:

 

		Shares		Weighted- average exercise price			Weighted-average remaining contractual term		Aggregate  intrinsic value*
Outstanding at December 30, 2006		1,720		$	27.15		5.8		$	42,172
Granted		449		$	42.10
Exercised		(116	)	$	18.93
Canceled or expired		(70	)	$	40.66
Outstanding at June 30, 2007		1,983		$	30.54		5.4		$	28,733
Exercisable at June 30, 2007		645		$	29.22		6.5		$	10,038

 

*      Aggregate intrinsic value is defined as the difference between the current market value at period end and the exercise price of awards that were in-the-money and is estimated using the closing price of the Company’s common stock on the last trading day of the period.

 

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The weighted-average fair value of stock options and stock-settled stock appreciation rights that were granted during the six month periods ending July 1, 2006, and June 30, 2007 was $18.76 and $16.79, respectively.  The total intrinsic value of awards that were exercised during the six month periods ending July 1, 2006 and June 30, 2007, was $6,348 and $4,745, respectively.

A summary of the Company’s deferred stock unit activity for the six months ended June 30, 2007 is as follows:

		Shares		Weighted- average fair value
Nonvested at December 30, 2006		1		$	37.60
Granted		3		$	40.59
Vested		(2	)	$	39.04
Canceled or expired		—		$	—
Nonvested at June 30, 2007		2		$	40.59

 

The total fair value of awards that vested during the six month periods ending July 1, 2006 and June 30, 2007, was $2,561 and $4,397, respectively.  This total fair value included equity awards that were issued in the form of stock options, stock-settled stock appreciation rights, and deferred stock units.

NOTE B – ASSETS HELD FOR SALE

Consistent with our long-term objectives of focusing on our direct selling business, on June 5, 2007, the Company adopted a plan to discontinue the operations of its third-party contract manufacturing business at its Draper, Utah facility.  Accordingly, we have a signed Letter of Intent to sell certain assets, accounts receivable, and inventory associated with our third-party contract manufacturing segment.  The buyer has agreed to purchase the assets for $3,260 to be adjusted for changes in inventory levels and accounts receivable as of the closing date of the sale.  The agreed upon sales price has been determined to exceed the carrying amount of current assets held for sale, and as a result an impairment loss of $25 has been incurred and the assets have been adjusted to fair value in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.  It is anticipated that the sale of this business will be effective during the third quarter of 2007.  We will retain assets that are associated with manufacturing and packaging our Sensé skin and beauty care products and will continue to manufacture these products at our Draper, Utah facility.

The following table shows revenues and pre-tax loss from discontinued operations for the three months ended July 1, 2006 and June 30, 2007, respectively.

		July 1,			June 30,
		2006			2007
Revenues		$	2,788		$	1,865
Pre-tax loss from operations		(324		)	(150		)

 

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The following table shows revenues and pre-tax loss from discontinued operations for the six months ended July 1, 2006 and June 30, 2007, respectively.

		July 1,			June 30,
		2006			2007
Revenues		$	5,633		$	3,754
Pre-tax income (loss) from operations		(634		)	(330		)

 

The following table shows the carrying amount of the assets of the third-party contract manufacturing business as of June 30, 2007, including the write-down impairment adjustment to fair value.

		June 30,
		2007
Inventory		$	1,492
Accounts receivable		1,087
Property, plant and equipment, net of $594 of accumulated depreciation		706
Current assets held for sale		$	3,285
Less write-down of assets held for sale		(25		)
Total current assets held for sale		$	3,260

 

NOTE C – INVENTORIES

Inventories consist of the following:

		December 30,			June 30,
		2006			2007
Raw materials		$	8,073		$	5,192
Work in progress		4,227			5,342
Finished goods		10,183			10,276
		$	22,483		$	20,810

 

NOTE D – PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

 

		December 30,			June 30,
		2006			2007
Prepaid expenses		$	2,150		$	1,821
Miscellaneous receivables, net		5,082			3,112
Other current assets		1,676			2,395
		$	8,908		$	7,328

 

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NOTE E – PROPERTY AND EQUIPMENT

				December 30,			June 30,
		Years		2006			2007
Buildings		40		$	10,682		$	14,184
Laboratory and production equipment		5-7		10,863			9,966
Sound and video library		5		600			600
Computer equipment and software		3-5		23,365			23,516
Furniture and fixtures		3-5		2,719			2,802
Automobiles		3-5		242			187
Leasehold improvements		3-5		2,834			3,081
Land improvements		15		931			1,011
				52,236			55,347
Less accumulated depreciation and amortization				33,330			34,401
				18,906			20,946
Land				2,070			2,074
Deposits and projects in process				9,347			19,273
				$	30,323		$	42,293

 

NOTE F – GOODWILL

Goodwill represents the excess of the purchase price paid for acquired entities over the fair market value of the net assets acquired.  As of June 30, 2007, goodwill totaled $5,690, comprising $4,267 that was associated with the July 1, 2003 acquisition of Wasatch Product Development, Inc. (WPD) and $1,423 that was associated with the February 1, 2004 acquisition of FMG Productions (FMG).  No events have occurred subsequent to either acquisition that resulted in an impairment of the original goodwill amounts that were initially recorded from these 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 July 2007, an independent third party conducted the annual impairment analysis of goodwill related to the Company’s acquisition of WPD in July 2003.  The impairment analysis incorporated the anticipated sale of certain assets relating to the third-party contract manufacturing segment during the third quarter of 2007.  The fair market value of the remaining net assets retained to manufacture and package our Sensé skin and beauty care products 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 this independent appraisal, the fair market value of the net assets tested has been determined to be in excess of the carrying amount, and, therefore, no impairment loss for goodwill has been recognized. As previously reported, the goodwill associated with WPD relates to the premium that was paid for acquiring the ability to produce our Sensé products in-house, along with benefits in the form of reduced cost of sales and enhanced quality control for the Sensé product line.  As such, there is no impairment relating to the planned future sale of the third-party contract manufacturing assets of WPD.

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NOTE G – OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

		December 30,			June 30,
		2006			2007
Associate incentives		$	5,793		$	5,626
Accrued employee compensation		7,022			7,053
Income taxes		3,095			3,920
Sales taxes		4,031			4,227
Associate promotions		711			1,514
Deferred revenue		3,092			4,468
Provision for returns and allowances		947			971
All other		4,873			7,386
		$	29,564		$	35,165

 

NOTE H – LONG TERM DEBT AND LINE OF CREDIT

In June 2004, the Company entered into an agreement with a financial institution to provide a $10,000, two-year, revolving line of credit.  The term of this agreement extended through May 30, 2006, however an amendment to this agreement was entered into on May 17, 2006.  The amendment increased the Company’s line of credit to $25,000, extended its termination to May 30, 2011, and modified certain restrictive covenants in the agreement.  On April 24, 2007, a subsequent amendment was entered into to increase the Company’s line of credit to $40,000 and to modify certain restrictive covenants in the agreement.

At June 30, 2007, there was an outstanding balance of $34,515 that was associated with the above line of credit, with a weighted-average interest rate of 6.4%.  The Company, therefore, had $5,485 available under the line of credit as of that date.  The interest rate under this line of credit is computed at the bank’s Prime Rate or LIBOR, adjusted by features specified in the agreement.  The Company may choose to borrow at the bank’s publicly announced Prime Rate, including a margin adjustment per annum, as specified in the agreement, or, at the option of the Company, loans within the approved commitment may be available in minimum amounts of $100 or more for specific periods, ranging from one to six months at LIBOR, including a margin adjustment as specified in the agreement.  The collateral for this revolving line of credit is the pledge of the capital stock of certain subsidiaries of the Company.  The credit agreement contains restrictive covenants that are based on EBITDA and a specified debt coverage ratio.  As of June 30, 2007, the Company was in compliance with these covenants.

NOTE I – COMMITMENTS AND CONTINGENCIES

Litigation

In the normal course of business, the Company is party to various legal claims, actions, and complaints.  During 2007, four class action complaints were filed against the Company and certain of its executive officers, alleging that the defendants violated federal securities laws by making certain alleged false and misleading statements.  The Company believes that these claims are without merit and plans to vigorously defend against these claims.  The potential loss or range of loss that could arise from these complaints is not estimable at this time.

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NOTE J – COMMON STOCK AND EARNINGS PER SHARE

Basic earnings per share are based on the weighted-average number of shares outstanding for each period.  Shares that have been repurchased and retired during the specified periods have been included in the calculation of weighted-average shares that are outstanding for the basic earnings per share calculation.  Diluted earnings per share are based on shares outstanding (computed under basic EPS) and potentially dilutive shares.  Shares included in the diluted earnings per share calculations include equity awards that are in the money but that have not yet been exercised.

		For the Quarter Ended
		July 1,			June 30,
		2006			2007
Earnings from continuing operations available to common shareholders		$	10,558		$	11,407
Loss from discontinued operations available to common shareholders		(214		)	(93		)
Net earnings available to common shareholders		$	10,344		$	11,314
Basic EPS
Shares
Common shares outstanding entire period		18,343			17,859
Weighted average common shares:
Issued during period		173			116
Canceled during period		(367		)	(1,266		)
Weighted average common shares outstanding during period		18,149			16,709
Earnings per common share from continuing operations - basic		$	0.58		$	0.68
Loss per common share from discontinued operations - basic		(0.01		)	—
Earnings per common share from net earnings - basic		$	0.57		$	0.68
Diluted EPS
Shares
Weighted average shares outstanding during period - basic		18,149			16,709
Dilutive effect of equity awards		628			454
Weighted average shares outstanding during period - diluted		18,777			17,163
Earnings per common share from continuing operations - diluted		$	0.56		$	0.66
Loss per common share from discontinued operations - diluted		(0.01		)	—
Earnings per common share from net earnings - diluted		$	0.55		$	0.66

 

Equity awards for 571 and 58 shares of stock were not included in the computation of EPS for the quarters ended July 1, 2006 and June 30, 2007, respectively, due to their exercise prices being greater than the average market price of the shares during those periods.

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Equity awards for 319 and 42 shares of stock were not included in the computation of EPS for the six months ended July 1, 2006 and June 30, 2007, respectively, due to their exercise prices being greater than the average market price of the shares during those periods.

During the six months ended July 1, 2006, and June 30, 2007, the Company expended $30,146 and $72,998 to purchase 801 and 1,712 shares, respectively, under the Company’s share repurchase plan.  The purchase of shares under this plan reduces the number of shares issued and outstanding in the above calculations.

NOTE K – SEGMENT INFORMATION

As of June 30, 2007, the Company’s segments were based on two operating geographic regions. Management considers the geographic segments of the Company to be the only reportable operating segments.  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 the net sales and the amount of operating income or loss in these segments.

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Segment profit or loss is based on profit or loss from operations before income taxes.  All intercompany transactions, intercompany profit, currency gains and losses, interest income and expense, and income taxes are excluded in the Company’s determination of segment profit or loss.  The profitability of each reported region is representative of what is controllable within that region by local management and is not necessarily indicative of the actual profit or loss that is generated by a fully burdened region.  Nevertheless, the presentation of this data is consistent with how management evaluates each region and the respective markets within that region.

Prior to the second quarter of 2007, the Company’s operations were reported as two business segments: Direct Selling and Contract Manufacturing.  Direct Selling continues to constitute our principal line of business: developing, manufacturing, and distributing nutritional and personal care products through a network marketing system.  Due to the planned sale of assets related to the third-party contract manufacturing business, however, the Company now recognizes only one reportable segment that is distinguished by geographic regions.  The Company will retain the remaining assets that are associated with manufacturing and packaging its Sensé skin and beauty care products and will continue to manufacture these products at its current facility in Draper, Utah.  Reported third-party contract manufacturing assets have been presented as held for sale, and the results of these operations have been classified as discontinued in the financial statements.  Accordingly, the segment financial information below has been updated to exclude these contract manufacturing assets and these discontinued operations, the detail of which is presented in Note B – Assets Held for Sale.

Selected financial information is reported for two geographic regions: North America and Asia Pacific.  North America includes the United States, Canada, and Mexico.  All other entities outside of North America are located within the Asia Pacific region, which includes Australia/New Zealand, Hong Kong, Japan, Taiwan, South Korea, Singapore, and Malaysia.

Segment Financial Information

Financial information, summarized by geographic region for the quarters ended July 1, 2006 and June 30, 2007, is listed below:

		Net Sales from External Customers			Inter-segment Revenues			Earnings before Income Taxes
Quarter ended July 1, 2006:
North America		$	61,294		$	16,651		$	8,297
Asia Pacific		28,400			1,402			8,330
Reportable Segments Total		89,694			18,053			16,627
Unallocated and Other *		—			(18,053		)	(607		)
Consolidated Total		$	89,694		$	—		$	16,020

 

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