Table of Contents

 

 

 

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 September 27, 2008

 

 

 

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

 

(I.R.S. Employer

of incorporation or organization)

 

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 x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company 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 October 31, 2008 was 15,446,733.

 

 

 



Table of Contents

 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended September 27, 2008

 

INDEX

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements

 

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Earnings – Quarter Ended

4

 

Consolidated Statements of Earnings – Nine Months Ended

5

 

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

6

 

Consolidated Statements of Cash Flows

7

 

Notes to Consolidated Financial Statements

8–16

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17–26

Item 3

Quantitative and Qualitative Disclosures About Market Risk

26-27

Item 4

Controls and Procedures

27

 

 

 

PART II.OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

28

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 6

Exhibits

29-30

 

 

 

Signatures

 

31

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(in thousands)

 

 

 

December 29,

 

September 27,

 

 

 

2007 (1)

 

2008

 

 

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

12,865

 

$

13,699

 

Inventories

 

19,439

 

22,011

 

Prepaid expenses and other current assets

 

11,639

 

11,090

 

Deferred income taxes

 

2,049

 

2,980

 

 

 

 

 

 

 

Total current assets

 

45,992

 

49,780

 

 

 

 

 

 

 

Property and equipment, net

 

52,061

 

59,392

 

 

 

 

 

 

 

Assets held for sale

 

607

 

607

 

 

 

 

 

 

 

Goodwill

 

5,690

 

5,690

 

 

 

 

 

 

 

Other assets

 

4,778

 

5,673

 

 

 

 

 

 

 

 

 

$

109,128

 

$

121,142

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

8,111

 

$

9,384

 

Other current liabilities

 

32,074

 

34,875

 

 

 

 

 

 

 

Total current liabilities

 

40,185

 

44,259

 

 

 

 

 

 

 

Line of credit

 

28,000

 

30,650

 

 

 

 

 

 

 

Other long-term liabilities

 

2,305

 

2,836

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding 16,198 as of December 29, 2007 and 15,647 as of September 27, 2008

 

16

 

16

 

Additional paid-in capital

 

7,525

 

9,612

 

Retained earnings

 

30,108

 

33,361

 

Accumulated other comprehensive income

 

989

 

408

 

 

 

 

 

 

 

Total stockholders’ equity

 

38,638

 

43,397

 

 

 

 

 

 

 

 

 

$

109,128

 

$

121,142

 

 


(1) Derived from audited financial statements.

 

The accompanying notes are an integral part of these statements.

 

3



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(in thousands, except per share data)

 

(unaudited)

 

 

 

Quarter Ended

 

 

 

September 29,
2007

 

September 27,
2008

 

 

 

 

 

 

 

Net sales

 

$

106,181

 

$

107,176

 

 

 

 

 

 

 

Cost of sales

 

21,960

 

22,228

 

 

 

 

 

 

 

Gross profit

 

84,221

 

84,948

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

43,021

 

44,573

 

Selling, general and administrative

 

23,053

 

26,787

 

Research and development

 

864

 

834

 

 

 

 

 

 

 

Total operating expenses

 

66,938

 

72,194

 

 

 

 

 

 

 

Earnings from operations

 

17,283

 

12,754

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

53

 

5

 

Interest expense

 

(576

)

(84

)

Other, net

 

253

 

(410

)

 

 

 

 

 

 

Other income (expense), net

 

(270

)

(489

)

 

 

 

 

 

 

Earnings from continuing operations before income taxes

 

17,013

 

12,265

 

 

 

 

 

 

 

Income taxes

 

5,350

 

4,126

 

 

 

 

 

 

 

Income from continuing operations

 

11,663

 

8,139

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax benefit

 

(405

)

 

 

 

 

 

 

 

Net earnings

 

$

11,258

 

$

8,139

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

Basic

 

 

 

 

 

Continuing operations

 

$

0.72

 

$

0.51

 

Discontinued operations

 

(0.02

)

 

 

 

 

 

 

 

Net earnings

 

$

0.70

 

$

0.51

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

Continuing operations

 

$

0.70

 

$

0.50

 

Discontinued operations

 

(0.02

)

 

 

 

 

 

 

 

Net earnings

 

$

0.68

 

$

0.50

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

Basic

 

16,173

 

16,031

 

Diluted

 

16,613

 

16,133

 

 

The accompanying notes are an integral part of these statements.

 

4



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

(in thousands, except per share data)

 

(unaudited)

 

 

 

Nine Months Ended

 

 

 

September 29,
2007

 

September 27,
2008

 

 

 

 

 

 

 

Net sales

 

$

314,401

 

$

317,954

 

 

 

 

 

 

 

Cost of sales

 

64,989

 

65,614

 

 

 

 

 

 

 

Gross profit

 

249,412

 

252,340

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

125,850

 

131,540

 

Selling, general and administrative

 

67,085

 

77,696

 

Research and development

 

2,696

 

2,425

 

 

 

 

 

 

 

Total operating expenses

 

195,631

 

211,661

 

 

 

 

 

 

 

Earnings from operations

 

53,781

 

40,679

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

447

 

188

 

Interest expense

 

(985

)

(446

)

Other, net

 

726

 

(367

)

 

 

 

 

 

 

Other income (expense), net

 

188

 

(625

)

 

 

 

 

 

 

Earnings from continuing operations before income taxes

 

53,969

 

40,054

 

 

 

 

 

 

 

Income taxes

 

19,099

 

14,220

 

 

 

 

 

 

 

Income from continuing operations

 

34,870

 

25,834

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax benefit

 

(612

)

 

 

 

 

 

 

 

Net earnings

 

$

34,258

 

$

25,834

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

Basic

 

 

 

 

 

Continuing operations

 

$

2.06

 

$

1.59

 

Discontinued operations

 

(0.04

)

 

 

 

 

 

 

 

Net earnings

 

$

2.02

 

$

1.59

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

Continuing operations

 

$

2.00

 

$

1.58

 

Discontinued operations

 

(0.03

)

 

 

 

 

 

 

 

Net earnings

 

$

1.97

 

$

1.58

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

Basic

 

16,926

 

16,262

 

Diluted

 

17,413

 

16,351

 

 

The accompanying notes are an integral part of these statements.

 

5



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

 

Nine Months Ended September 29, 2007 and September 27, 2008

 

(in thousands)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months September 29, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Balance at December 30, 2006

 

17,859

 

$

18

 

$

15,573

 

$

44,251

 

$

355

 

$

60,197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

34,258

 

 

34,258

 

Foreign currency translation adjustment, net of tax benefit of $335

 

 

 

 

 

682

 

682

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

34,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock retired

 

(1,892

)

(2

)

(20,118

)

(59,460

)

 

(79,580

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock awarded to Associates

 

1

 

 

47

 

 

 

47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity-based compensation expense

 

 

 

4,786

 

 

 

4,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock exercised under equity award plan, including tax benefit of $1,458

 

162

 

 

4,543

 

 

 

4,543

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Balance at September 29, 2007

 

16,130

 

$

16

 

$

4,831

 

$

19,049

 

$

1,037

 

$

24,933

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 27, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Balance at December 29, 2007

 

16,198

 

$

16

 

$

7,525

 

$

30,108

 

$

989

 

$

38,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

25,834

 

 

25,834

 

Foreign currency translation adjustment, net of tax expense of $582

 

 

 

 

 

(581

)

(581

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

25,253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock retired

 

(809

)

 

(5,484

)

(22,581

)

 

(28,065

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity-based compensation expense

 

 

 

4,934

 

 

 

4,934

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock exercised under equity award plan, including tax benefit of $2,095

 

258

 

 

2,637

 

 

 

2,637

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 27, 2008

 

15,647

 

$

16

 

$

9,612

 

$

33,361

 

$

408

 

$

43,397

 

 

The accompanying notes are an integral part of these statements.

 

6



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

(unaudited)

 

 

 

Nine Months Ended

 

 

 

September 29,
2007

 

September 27,
2008

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net earnings

 

$

34,258

 

$

25,834

 

Adjustments to reconcile net earnings to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

3,599

 

4,894

 

(Gain) loss on disposition of property and equipment

 

59

 

(81

)

Equity-based compensation expense

 

4,786

 

4,934

 

Excess tax benefit from equity-based payment arrangements

 

(1,071

)

(2,225

)

Common stock awarded to Associates

 

47

 

 

Deferred income taxes

 

(1,140

)

(1,603

)

Provision for inventory valuation

 

973

 

700

 

Changes in operating assets and liabilities:

 

 

 

 

 

Inventories

 

1,515

 

(3,746

)

Prepaid expenses and other assets

 

(1,640

)

152

 

Accounts payable

 

(2,443

)

3,015

 

Other liabilities

 

5,199

 

6,246

 

 

 

 

 

 

 

Total adjustments

 

9,884

 

12,286

 

 

 

 

 

 

 

Net cash provided by operating activities

 

44,142

 

38,120

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Receipts on notes receivable

 

91

 

561

 

Increase in notes receivable

 

(667

)

4

 

Proceeds from the sale of property and equipment

 

769

 

136

 

Purchases of property and equipment

 

(19,008

)

(15,081

)

 

 

 

 

 

 

Net cash used in investing activities

 

(18,815

)

(14,380

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from equity awards exercised

 

3,085

 

542

 

Excess tax benefit from equity-based payment arrangements

 

1,071

 

2,225

 

Repurchase of common stock

 

(79,580

)

(28,065

)

Borrowings on line of credit

 

97,043

 

46,555

 

Payments on line of credit

 

(62,418

)

(43,905

)

 

 

 

 

 

 

Net cash used in financing activities

 

(40,799

)

(22,648

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

161

 

(258

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(15,311

)

834

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

27,029

 

12,865

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

11,718

 

$

13,699

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest, net of amount capitalized

 

$

964

 

$

315

 

Income taxes

 

19,472

 

16,222

 

 

The accompanying notes are an integral part of these statements.

 

7



Table of Contents

 

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 that are normally included in financial statements that have been 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 that are necessary to present fairly the Company’s financial position as of September 27, 2008, and results of operations for the quarters and nine months ended September 29, 2007 and September 27, 2008.  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 29, 2007.  The results of operations for the quarter and nine months ended September 27, 2008 may not be indicative of the results that may be expected for the fiscal year ending January 3, 2009.

 

NOTE A – ORGANIZATION

 

USANA develops and manufactures high-quality nutritional and personal care products that are sold internationally through a network marketing system, which is a form of direct selling.  The Company’s products are sold throughout the United States, Canada, Mexico, Australia, New Zealand, Singapore, Malaysia, Hong Kong, Taiwan, Japan, South Korea, the United Kingdom, and the Netherlands.

 

NOTE B – DISCONTINUED OPERATIONS

 

Consistent with the Company’s long-term objectives of focusing on its direct selling business, on August 10, 2007, the Company sold certain assets of its third-party contract manufacturing business.  The Company retained assets that are associated with manufacturing and packaging its Sensé™ skin and beauty care products and continues to manufacture these products at the Draper, Utah facility.  Results of the third-party contract manufacturing operations have been classified as “discontinued operations” for all applicable periods.

 

The Company’s sales that are reported in discontinued operations for the quarter and nine months ended September 29, 2007 were $706 and $4,460 respectively.  For the quarter ended September 29, 2007, the loss from discontinued operations was $625 and the related income tax benefit was $220.  For the nine months ended September 29, 2007, the loss from discontinued operations was $955 and the related income tax benefit was $343.

 

NOTE C – INVENTORIES

 

Inventories consist of the following:

 

 

 

December 29,

 

September 27,

 

 

 

2007

 

2008

 

 

 

 

 

 

 

Raw materials

 

$

5,730

 

$

6,322

 

Work in progress

 

5,825

 

4,734

 

Finished goods

 

7,884

 

10,955

 

 

 

 

 

 

 

 

 

$

19,439

 

$

22,011

 

 

8



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE D – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

 

 

December 29,

 

September 27,

 

 

 

2007

 

2008

 

 

 

 

 

 

 

Prepaid insurance

 

$

1,300

 

$

296

 

Other prepaid expenses

 

1,646

 

1,101

 

Federal income taxes receivable

 

2,754

 

3,292

 

Miscellaneous receivables, net

 

4,109

 

3,252

 

Deferred commissions

 

1,179

 

2,545

 

Other current assets

 

651

 

604

 

 

 

 

 

 

 

 

 

$

11,639

 

$

11,090

 

 

NOTE E – PROPERTY AND EQUIPMENT

 

 

 

 

 

December 29,

 

September 27,

 

 

 

Years

 

2007

 

2008

 

 

 

 

 

 

 

 

 

Buildings

 

40

 

$

23,466

 

$

36,229

 

Laboratory and production equipment

 

5-7

 

11,563

 

13,904

 

Computer equipment and software

 

3-5

 

25,745

 

25,430

 

Furniture, fixtures, and other

 

3-5

 

4,637

 

5,678

 

Leasehold improvements

 

3-5

 

3,700

 

4,104

 

Land improvements

 

15

 

1,579

 

1,994

 

 

 

 

 

 

 

 

 

 

 

 

 

70,690

 

87,339

 

 

 

 

 

 

 

 

 

Less accumulated depreciation and amortization

 

 

 

36,459

 

36,794

 

 

 

 

 

 

 

 

 

 

 

 

 

34,231

 

50,545

 

 

 

 

 

 

 

 

 

Land

 

 

 

1,956

 

7,187

 

 

 

 

 

 

 

 

 

Deposits and projects in process

 

 

 

15,874

 

1,660

 

 

 

 

 

 

 

 

 

 

 

 

 

$

52,061

 

$

59,392

 

 

The Company has utilized its line of credit in part for the expansion of its facilities in Salt Lake City, Utah, and in Sydney, Australia.  As of September 27, 2008, the Company’s balance on its line of credit was $30,650.  The interest expense that is associated with these projects has been capitalized as part of the asset to which it relates and will be amortized over the asset’s estimated useful life.  Total interest expense that was incurred during the first nine months of 2008 was $866, of which $420 was capitalized.

 

9



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE F – OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

 

 

December 29,

 

September 27,

 

 

 

2007

 

2008

 

 

 

 

 

 

 

Associate incentives

 

$

4,733

 

$

7,101

 

Accrued employee compensation

 

10,139

 

8,030

 

Income taxes

 

2,106

 

34

 

Sales taxes

 

4,111

 

4,342

 

Associate promotions

 

917

 

317

 

Deferred revenue

 

4,302

 

7,842

 

Provision for returns and allowances

 

931

 

1,118

 

All other

 

4,835

 

6,091

 

 

 

 

 

 

 

 

 

$

32,074

 

$

34,875

 

 

NOTE G – LONG TERM DEBT AND LINE OF CREDIT

 

The Company has a $40,000 line of credit, which had a balance of $30,650 at September 27, 2008.  The Company will be required to pay the balance on this line of credit in full at the time of maturity in May 2011.

 

The weighted-average interest rate on this line of credit at September 27, 2008 was 3.61%.  The interest rate is computed at the bank’s Prime Rate or LIBOR and is adjusted according to the related Credit Agreement.  The collateral for this line of credit is the pledge of the capital stock of certain subsidiaries of the Company, as set forth in a separate pledge agreement with the bank.  The Credit Agreement contains restrictive covenants that are based on the Company’s EBITDA and on the Company’s debt coverage ratio.

 

NOTE H – COMMITMENTS AND CONTINGENCIES

 

Contingencies

 

During 2008, the Company has been a named defendant in two class action lawsuits, which were filed in 2007.  These lawsuits were dismissed, with prejudice, on July 23, 2008 and October 1, 2008, respectively.  The Company is also involved in other various disputes arising in the normal course of business.  In the opinion of management, based upon advice of counsel, the ultimate outcome of these disputes will not have a material impact on the Company’s financial position or results of operations.

 

NOTE I – EQUITY-BASED COMPENSATION

 

During 2007 and 2008 the Company granted equity awards under its 2006 Equity Incentive Award Plan (the “2006 Plan”), which allows for the grant of various equity awards, including stock-settled stock appreciation rights (“SSAR”), stock options, deferred stock units (“DSU”), and other types of equity 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 September 27, 2008, the Company had issued 3,438 awards under this plan, 2,617 of which were issued in July 2008.

 

10



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE I – EQUITY-BASED COMPENSATION – CONTINUED

 

Equity-based compensation expense relating to equity awards under the current and previous plans of the Company, together with the related tax benefit recognized in earnings for the periods ended as of the dates indicated is as follows:

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 29,

 

September 27,

 

September 29,

 

September 27,

 

 

 

2007

 

2008

 

2007

 

2008

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

$

181

 

$

205

 

$

496

 

$

536

 

Selling, general and administrative

 

1,315

 

1,782

 

3,927

 

4,204

 

Research and development

 

70

 

89

 

363

 

194

 

 

 

 

 

 

 

 

 

 

 

 

 

1,566

 

2,076

 

4,786

 

4,934

 

Related tax benefit

 

542

 

748

 

1,647

 

1,796

 

 

 

 

 

 

 

 

 

 

 

Net equity-based compensation expense

 

$

1,024

 

$

1,328

 

$

3,139

 

$

3,138

 

 

The following table shows the remaining unrecognized compensation expense on a pre-tax basis for all types of equity awards that were outstanding as of September 27, 2008.  This table does not include an estimate for future grants that may be issued.

 

Remainder of 2008

 

$

2,689

 

2009

 

8,513

 

2010

 

7,726

 

2011

 

6,317

 

2013

 

4,910

 

2013

 

2,209

 

 

*

$

32,364

 

 


* Expected to be recognized over a weighted-average period of 2.5 years.

 

As determined by the Company’s Compensation Committee, awards granted to officers and key employees will generally vest 20% each year on the anniversary of the grant date.  Awards of stock options and SSARs to be granted to non-employee directors will generally vest 25% each quarter, commencing on the last day of the first fiscal quarter in which the awards are granted.  Awards of stock options and SSARs will generally expire five to five and one-half years from the date of grant.  Awards of DSUs 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 awards granted under the 2006 Plan is the closing price of the Company’s common stock on the date of grant.

 

The Company recognizes equity-based compensation expense under the straight-line method over the vesting term based on the grant date fair value and an estimate of forfeitures derived from historical experience.  The Company uses the Black-Scholes option pricing model to estimate the fair value of its equity awards, which requires the input of highly subjective assumptions, including expected stock price volatility.  For awards granted by the Company prior to 2008, expected volatility was calculated by averaging the historical volatility of the Company and a peer group index.  Beginning in 2008, expected volatility became a weighted-average of historical volatility and implied volatility of the Company.  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, was used to determine the expected life of awards granted prior to 2008.  Beginning in 2008, expected life became a weighted-average that includes historical settlement data of the Company’s equity awards and a hypothetical holding period for outstanding options.

 

11



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE I – EQUITY-BASED COMPENSATION – CONTINUED

 

Weighted-average assumptions that were used to calculate the fair value of awards that were granted during the periods ended as of the dates indicated are included in the table below.  Because DSUs are full-value shares at the date of grant, they have been excluded.

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 29,

 

September 27,

 

September 29,

 

September 27,

 

 

 

2007

 

2008

 

2007

 

2008

 

 

 

 

 

 

 

 

 

 

 

Expected volatility

 

*

 

37.3

%

41.9

%

37.3

%

Risk-free interest rate

 

*

 

3.2

%

4.6

%

3.2

%

Expected life

 

*

 

4.0 yrs.

 

4.2 yrs.

 

4.0 yrs.

 

Expected dividend yield

 

*

 

 

 

 

Grant price

 

*

 

$

26.06

 

$

42.10

 

$

26.06

 

 


*There were no equity awards granted during the quarter ended September 29, 2007.

 

 

A summary of the Company’s stock option and SSAR activity for the nine months ended September 27, 2008, is as follows:

 

 

 

Shares

 

Weighted-
average
exercise price

 

Weighted-average
remaining
contractual term

 

Aggregate
intrinsic
value*

 

Outstanding at December 29, 2007

 

1,864

 

$

32.18

 

4.9

 

$

12,606

 

Granted

 

2,617

 

$

26.06

 

 

 

 

 

Exercised

 

(261

)

$

2.51

 

 

 

 

 

Canceled or expired

 

(80

)

$

41.82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 27, 2008

 

4,140

 

$

29.99

 

4.9

 

$

65,816

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 27, 2008

 

824

 

$

35.14

 

4.9

 

$

8,861

 

 


*

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

 

The weighted-average fair value of stock options and SSARs that were granted during the nine month periods ended September 29, 2007, and September 27, 2008 was $16.79 and $8.73, respectively.  The total intrinsic value of awards that were exercised during the nine month periods ended September 29, 2007, and September 27, 2008, was $5,734 and $8,571, respectively.

 

The total fair value of awards that vested during the nine month periods ended September 29, 2007, and September 27, 2008, was $5,181 and $5,942, respectively.  This total fair value includes equity awards that were issued in the form of stock options, SSARs, and DSUs.

 

12



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share data)

(unaudited)

 

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

 

 

 

For the Quarter Ended

 

 

 

September 29,

 

September 27,

 

 

 

2007

 

2008

 

Earnings from continuing operations available to common shareholders

 

$

11,663

 

$

8,139

 

Loss from discontinued operations available to common shareholders

 

(405

)

 

 

 

 

 

 

 

Net earnings available to common shareholders

 

$

11,258

 

$

8,139

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding - entire period

 

17,859

 

16,198

 

Weighted-average common shares:

 

 

 

 

 

Issued during period

 

130

 

223

 

Canceled during period

 

(1,816

)

(390

)

 

 

 

 

 

 

Weighted-average common shares outstanding during period

 

16,173

 

16,031

 

 

 

 

 

 

 

Earnings per common share from continuing operations - basic

 

$

0.72

 

$

0.51

 

Loss per common share from discontinued operations - basic

 

(0.02

)

 

 

 

 

 

 

 

Earnings per common share from net earnings - basic

 

$

0.70

 

$

0.51

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Weighted-average shares outstanding during period - basic

 

16,173

 

16,031

 

Dilutive effect of equity awards

 

440

 

102

 

 

 

 

 

 

 

Weighted-average shares outstanding during period - diluted

 

16,613

 

16,133

 

 

 

 

 

 

 

Earnings per common share from continuing operations - diluted

 

$

0.70

 

$

0.50

 

Loss per common share from discontinued operations - diluted

 

(0.02

)

 

 

 

 

 

 

 

Earnings per common share from net earnings - diluted

 

$

0.68

 

$

0.50

 

 

Equity awards for 48 and 1,232 shares of stock were not included in the computation of diluted EPS for the quarters ended September 29, 2007, and September 27, 2008, respectively, due to the fact that their exercise prices were greater than the average market price of the shares.

 

13



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE J – COMMON STOCK AND EARNINGS PER SHARE – CONTINUED

 

 

 

For the Nine Months Ended

 

 

 

September 29,
2007

 

September 27,
2008

 

Earnings from continuing operations available to common shareholders

 

$

34,870

 

$

25,834

 

Loss from discontinued operations available to common shareholders

 

(612

)

 

 

 

 

 

 

 

Net earnings available to common shareholders

 

$

34,258

 

$

25,834

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding - entire period

 

17,859

 

16,198

 

Weighted-average common shares:

 

 

 

 

 

Issued during period

 

100

 

194

 

Canceled during period

 

(1,033

)

(130

)

 

 

 

 

 

 

Weighted-average common shares outstanding during period

 

16,926

 

16,262

 

 

 

 

 

 

 

Earnings per common share from continuing operations - basic

 

$

2.06

 

$

1.59

 

Loss per common share from discontinued operations - basic

 

(0.04

)

 

 

 

 

 

 

 

Earnings per common share from net earnings - basic

 

$

2.02

 

$

1.59

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Weighted-average shares outstanding during period - basic

 

16,926

 

16,262

 

Dilutive effect of equity awards

 

487

 

89

 

 

 

 

 

 

 

Weighted-average shares outstanding during period - diluted

 

17,413

 

16,351

 

 

 

 

 

 

 

Earnings per common share from continuing operations - diluted

 

$

2.00

 

$

1.58

 

Loss per common share from discontinued operations - diluted

 

(0.03

)

 

 

 

 

 

 

 

Earnings per common share from net earnings - diluted

 

$

1.97

 

$

1.58

 

 

Equity awards for 28 and 1,344 shares of stock were not included in the computation of diluted EPS for the nine months ended September 29, 2007, and September 27, 2008, respectively, due to the fact that their exercise prices were greater than the average market price of the shares.

 

During the nine months ended September 29, 2007, and September 27, 2008, the Company expended $79,580 and $28,065 to purchase 1,892 and 809 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.

 

14



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE K – SEGMENT INFORMATION

 

USANA operates as a direct selling company that develops, manufactures, and distributes high-quality nutritional and personal care products that are sold through a global network marketing system of independent distributors (“Associates”).  The table below summarizes the approximate percentage of total product revenue that has been contributed by the Company’s nutritional and personal care products for the periods indicated.

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 29,

 

September 27,

 

September 29,

 

September 27,

 

Product Line

 

2007

 

2008

 

2007

 

2008

 

USANA® Nutritionals

 

87

%

87

%

86

%

87

%

Sensé – beautiful science®

 

10

%

9

%

10

%

10

%

 

The Company’s primary business is to manage its worldwide Associate base.  As such, management has determined that the Company operates in one reportable business segment as defined in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”  Performance for a region or market is primarily evaluated based on sales.  The Company does not use profitability reports on a regional or market basis for making business decisions.  No single customer accounted for 10% or more of net sales for the periods presented.

 

In the table below, selected financial information is presented in four geographic regions: North America, Southeast Asia/Pacific, East Asia, and North Asia. “North America” includes our operations in the United States, Canada, Mexico, and direct sales from the United States to the United Kingdom and the Netherlands.  “Southeast Asia/Pacific” includes our operations in Australia, New Zealand, Singapore, and Malaysia.  “East Asia” includes our operations in Hong Kong and Taiwan.  “North Asia” includes our operations in Japan and South Korea.

 

Selected Financial Information

 

Selected financial information, presented by geographic region, is listed below for the periods ended as of the dates indicated:

 

 

 

Quarter ended

 

Nine Months Ended

 

 

 

September 29,

 

September 27,

 

September 29,

 

September 27,

 

 

 

2007

 

2008

 

2007

 

2008

 

Net Sales to External Customers

 

 

 

 

 

 

 

 

 

North America

 

$

66,619

 

$

64,593

 

$

199,328

 

$

192,789

 

Southeast Asia/Pacific

 

23,303

 

23,265

 

67,506

 

68,980

 

East Asia

 

12,230

 

15,206

 

35,746

 

43,878

 

North Asia

 

4,029

 

4,112

 

11,821

 

12,307

 

Consolidated Total

 

$

106,181

 

$

107,176

 

$

314,401

 

$

317,954

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

 

 

 

 

 

 

 

North America

 

$

73,305

 

$

87,338

 

$

73,305

 

$

87,338

 

Southeast Asia/Pacific

 

17,198

 

21,393

 

17,198

 

21,393

 

East Asia

 

7,027

 

8,178

 

7,027

 

8,178

 

North Asia

 

4,118

 

4,233

 

4,118

 

4,233

 

Consolidated Total

 

$

101,648

 

$

121,142

 

$

101,648

 

$

121,142

 

 

15



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE K – SEGMENT INFORMATION – CONTINUED

 

The following table provides further information on markets representing ten percent or more of consolidated net sales:

 

 

 

Quarter ended

 

Nine Months ended

 

 

 

September 29,

 

September 27,

 

September 29,

 

September 27,

 

 

 

2007

 

2008

 

2007

 

2008

 

 

 

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

United States

 

$

42,455

 

$

40,169

 

$

127,948

 

$

118,844

 

Canada

 

18,792

 

18,216

 

54,898

 

56,326

 

Australia-New Zealand

 

14,163

 

13,179

 

41,819

 

40,625

 

 

Due to the centralized structure of the Company’s manufacturing operations and its corporate headquarters in the United States, a significant concentration of assets exists in this market.  As of September 29, 2007, and September 27, 2008, long-lived assets in the United States totaled $42,051 and $50,230, respectively.  Additionally, due to the purchase, remodel, and fit-out of our new facility in Sydney, Australia during the last few years, long-lived assets in the Australia-New Zealand market as of September 29, 2007 and September 27, 2008 totaled $7,536 and $12,944, respectively.  There is no significant concentration of long-lived assets in any other market.

 

16



Table of Contents

 

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 that are contained in this quarterly report, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations that are included in our Annual Report on Form 10-K for the year ended December 29, 2007, and our other filings, including Current Reports on Form 8-K, that have been filed with the Securities and Exchange Commission (“SEC”) through the date of this report.

 

Our fiscal year end is the Saturday closest to December 31st of each year.  Fiscal year 2008 will end on January 3, 2009, and is a 53-week year.  Fiscal year 2007 ended on December 29, 2007, and was a 52-week year.

 

Presentation

 

Due to the sale of certain assets related to our third-party contract manufacturing business on August 10, 2007, we now operate as one reportable business segment, Direct Selling.  Our 2007 financial results reflect the reclassification of sales and related expenses in the former Contract Manufacturing segment to “discontinued operations.”

 

General

 

USANA develops and manufactures high-quality nutritional and personal care products.  We market our products on the basis of high levels of bioavailability, safety, and quality.  We distribute our products through a network marketing system, which is a form of direct selling.  Our customer base comprises two types of customers: “Associates” and “Preferred Customers.”  Associates are independent distributors of our products who also purchase our products for their personal use.  Preferred Customers purchase our products strictly for their personal use and are not permitted to resell or to distribute the products.  As of September 27, 2008, we had approximately 184,000 active Associates and approximately 73,000 active Preferred Customers worldwide.  During the nine months ended September 27, 2008, sales to Associates accounted for approximately 88% of product sales.  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, either for personal use or for resale.

 

We have ongoing operations in the following markets, which are grouped and presented in four geographic regions:

 

·                  North America – United States, Canada, Mexico, and direct sales from the United States to the United Kingdom and the Netherlands;

 

·                  Southeast Asia/Pacific – Australia-New Zealand, Singapore, and Malaysia;

 

·                  East Asia – Hong Kong and Taiwan; and

 

·                  North Asia – Japan and South Korea.

 

Our primary product lines consist of USANAâ Nutritionals and Sensé – beautiful scienceâ (Sensé).  The USANA Nutritionals product line is further categorized into three separate classifications:

 

·                  Essentials – core vitamin and mineral supplements that provide a foundation of advanced nutrition for every age group;

 

·                  Optimizers – targeted supplements that are designed to meet individual health and nutritional needs; and

 

·                  Macro Optimizers – healthy, low-glycemic functional foods and other related products.

 

17



Table of Contents

 

During the third quarter of 2008, at our Annual International Convention, we introduced two new products in our Optimizers category; Rev3 Energy Drink and Rev3 Energy Surge™ Pack.  Rev3 Energy Drink is sold in a ready-to-drink 12oz can, while Rev3 Energy Surge Pack is conveniently packaged in single serve packs to be mixed with water or other beverages.  These products were developed to be a healthy alternative to traditional energy drinks that are loaded with sugars and artificial flavors.  They were formulated with low-glycemic sugars for sustained energy, contain natural caffeine from a blend of teas, and provide vitamins, minerals, and antioxidants to support energy metabolism at the cellular level.  We also launched a new product in our Macro Optimizers category, Chocolate Whey Nutrimeal™.  Currently, these products are only available for sale in the United States.

 

The following tables summarize the approximate percentage of total product revenue that has been contributed by our major product lines and our top-selling products for the current and prior year periods indicated:

 

 

 

Nine Months Ended

 

 

 

September 29,

 

September 27,

 

Product Line

 

2007

 

2008

 

USANAâ Nutritionals

 

 

 

 

 

Essentials

 

36

%

34

%

Optimizers

 

37

%

40

%

Macro Optimizers

 

13

%

13

%

Sensé – beautiful scienceâ

 

10

%

10

%

All Other *

 

4

%

3

%

 


* Includes items such as resource materials and services, sales tools, and logo merchandise.

 

 

 

Nine Months Ended

 

 

 

September 29,

 

September 27,

 

Key Product

 

2007

 

2008

 

USANAâ Essentials

 

20

%

20

%

HealthPak 100 ™

 

13

%

12

%

Proflavanolâ

 

10

%

10

%

 

As a manufacturer of nutritional and personal care products utilizing direct selling for the distribution of our products, we compete within two industries: nutrition and direct selling.  We believe that the most significant factors affecting us are the aging of the worldwide population and the general public’s heightened awareness and understanding of the connection between diet and health, which affect our ability to attract and retain Associates and Preferred Customers to sell and consume our products.

 

Our results of operations and financial condition are directly related to changes in the number of Associates and Preferred Customers purchasing our products.  We believe that our high-quality products and our financially rewarding Compensation Plan are the key components to attracting and retaining Associates.  At our Annual International Convention in 2008, we announced two permanent enhancements to our Associate Compensation Plan.  These enhancements provide additional opportunities for our Associates to earn income through the Compensation Plan.

 

To support our Associates in building their businesses, we sponsor meetings and events throughout the year, which offer information about our products and our network marketing system.  These meetings are designed to assist Associates in business development and to provide a forum for interaction with some of our top-ranking Associates and members of the USANA management team.  We also provide low cost sales tools, which we believe are an integral part of building and maintaining a successful home-based business for our Associates.

 

In addition to Company-sponsored meetings and sales tools, we maintain a website exclusively for our Associates where they can keep up on the latest USANA news, obtain training materials, manage their business information, enroll new customers, shop, and register for Company-sponsored events.  Additionally, through this website, Associates can access other online services to which they may subscribe.  For example, we offer an online business management service, which includes a tool that helps

 

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Associates track and manage their business activity, a personal webpage to which their prospects or retail customers can be directed, e-cards for advertising, and a tax management tool.

 

The number of active Associates and Preferred Customers is used by management as a key non-financial measure because it is a leading indicator of net sales.  The tables below summarize the changes in our active customer base by geographic region, which are further discussed in the “Summary of Financial Results and Recent Developments” section below.  These numbers have been rounded to the nearest thousand.

 

Active Associates By Region

 

 

 

As of
September 29, 2007

 

As of
September 27, 2008

 

Change from
Prior Year

 

Percent
Change

 

North America

 

105,000

 

58.3

%

103,000

 

56.0

%

(2,000

)

(1.9

)%

Southeast Asia/Pacific

 

41,000

 

22.8

%

42,000

 

22.8

%

1,000

 

2.4

%

East Asia

 

27,000

 

15.0

%

32,000

 

17.4

%

5,000

 

18.5

%

North Asia

 

7,000

 

3.9

%

7,000

 

3.8

%

 

0.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

180,000

 

100.0

%

184,000

 

100.0

%

4,000

 

2.2

%

 

Active Preferred Customers By Region

 

 

 

As of
September 29, 2007

 

As of
September 27, 2008

 

Change from
Prior Year

 

Percent
Change

 

North America

 

71,000

 

89.9

%

64,000

 

87.7

%

(7,000

)

(9.9

)%

Southeast Asia/Pacific

 

6,000

 

7.5

%

8,000

 

10.9

%

2,000

 

33.3

%

East Asia

 

1,000

 

1.3

%

1,000

 

1.4

%

 

0.0

%

North Asia

 

1,000

 

1.3

%

 

0.0

%

(1,000

)

(100.0

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

79,000

 

100.0

%

73,000

 

100.0

%

(6,000

)

(7.6

)%

 

Total Active Customers By Region

 

 

 

As of
September 29, 2007

 

As of
September 27, 2008

 

Change from
Prior Year

 

Percent
Change

 

North America

 

176,000

 

68.0

%

167,000

 

65.0

%

(9,000

)

(5.1

)%

Southeast Asia/Pacific

 

47,000

 

18.1

%

50,000

 

19.5

%

3,000

 

6.4

%

East Asia

 

28,000

 

10.8

%

33,000

 

12.8

%

5,000

 

17.9

%

North Asia

 

8,000

 

3.1

%

7,000

 

2.7

%

(1,000

)

(12.5

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

259,000

 

100.0

%

257,000

 

100.0

%

(2,000

)

(0.8

)%

 

Forward-Looking Statements and Certain Risks

 

The statements contained in this report that are not purely historical are considered to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act.  These statements represent our expectations, beliefs, anticipations, commitments, intentions, and strategies regarding the future.  They may be identified by the use of words or phrases such as “believes,” “expects,” “anticipates,” “should,” “plans,” “estimates,” and “potential,” among others.  Forward-looking statements include, but are not limited to, statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue, and expense levels in the future and the sufficiency of our existing assets to fund our future operations and capital spending needs.