Back to GetFilings.com



 

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 June 29, 2002

 

 

 

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

 

 

The number of shares outstanding of the registrant’s common stock as of August 7, 2002 was 9,335,337.

 

 



 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended June 29, 2002

 

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

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 5

Other Information.

 

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)

 

 

 

December 29,
2001

 

June 29,
2002

 

 

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

2,465

 

$

4,472

 

Inventories, net (Note A)

 

9,533

 

8,984

 

Prepaid expenses and other current assets (Note B)

 

1,441

 

1,709

 

Deferred income taxes

 

750

 

1,212

 

 

 

 

 

 

 

Total current assets

 

14,189

 

16,377

 

 

 

 

 

 

 

Property and equipment, net (Note C)

 

19,489

 

18,301

 

 

 

 

 

 

 

Other assets

 

1,676

 

1,802

 

 

 

 

 

 

 

 

 

$

35,354

 

$

36,480

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current maturities of long-term debt

 

$

2,000

 

$

2,714

 

Accounts payable

 

2,627

 

3,032

 

Other current liabilities (Note D)

 

5,114

 

7,643

 

Line of credit

 

4,098

 

903

 

 

 

 

 

 

 

Total current liabilities

 

13,839

 

14,292

 

 

 

 

 

 

 

Deferred income taxes

 

988

 

744

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

6,000

 

4,286

 

 

 

 

 

 

 

Stockholders’ equity (Note E)

 

 

 

 

 

Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding 9,664 as of December 29, 2001 and 9,501 as of June 29, 2002

 

10

 

10

 

Additional paid-in capital

 

2,359

 

2,340

 

Retained earnings

 

12,752

 

14,871

 

Accumulated other comprehensive loss

 

(594

)

(63

)

 

 

 

 

 

 

Total stockholders’ equity

 

14,527

 

17,158

 

 

 

 

 

 

 

 

 

$

35,354

 

$

36,480

 

 

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 30,
2001

 

June 29,
2002

 

 

 

 

 

 

 

Net sales

 

$

28,606

 

$

32,068

 

 

 

 

 

 

 

Cost of sales

 

8,354

 

8,359

 

 

 

 

 

 

 

Gross profit

 

20,252

 

23,709

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

10,958

 

12,205

 

Selling, general and administrative

 

8,150

 

8,560

 

Research and development

 

266

 

240

 

 

 

 

 

 

 

Total operating expenses

 

19,374

 

21,005

 

 

 

 

 

 

 

Earnings from operations

 

878

 

2,704

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

36

 

21

 

Interest expense

 

(206

)

(92

)

Other, net

 

82

 

105

 

 

 

 

 

 

 

Total other income (expense)

 

(88

)

34

 

 

 

 

 

 

 

Earnings before income taxes

 

790

 

2,738

 

 

 

 

 

 

 

Income taxes

 

296

 

1,000

 

 

 

 

 

 

 

Net earnings

 

$

494

 

$

1,738

 

 

 

 

 

 

 

Earnings per common share (Note E)

 

 

 

 

 

Basic

 

$

0.05

 

$

0.18

 

Diluted

 

$

0.05

 

$

0.16

 

 

 

 

 

 

 

Weighted average common and dilutive common equivalent shares outstanding (Note E)

 

 

 

 

 

Basic

 

9,683

 

9,598

 

Diluted

 

9,719

 

10,627

 

 

The accompanying notes are an integral part of these statements.

 

4



 

 

 

Six Months Ended

 

 

 

(unaudited)

 

 

 

June 30,
2001

 

June 29,
2002

 

 

 

 

 

 

 

Net sales

 

$

56,220

 

$

60,690

 

 

 

 

 

 

 

Cost of sales

 

16,336

 

16,070

 

 

 

 

 

 

 

Gross profit

 

39,884

 

44,620

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

21,461

 

22,935

 

Selling, general and administrative

 

15,724

 

16,615

 

Research and development

 

551

 

439

 

 

 

 

 

 

 

Total operating expenses

 

37,736

 

39,989

 

 

 

 

 

 

 

Earnings from operations

 

2,148

 

4,631

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

71

 

37

 

Interest expense

 

(467

)

(192

)

Other, net

 

(208

)

93

 

 

 

 

 

 

 

Total other expense

 

(604

)

(62

)

 

 

 

 

 

 

Earnings before income taxes

 

1,544

 

4,569

 

 

 

 

 

 

 

Income taxes

 

579

 

1,714

 

 

 

 

 

 

 

Net earnings

 

$

965

 

$

2,855

 

 

 

 

 

 

 

Earnings per common share (Note E)

 

 

 

 

 

Basic

 

$

0.10

 

$

0.30

 

Diluted

 

$

0.10

 

$

0.28

 

 

 

 

 

 

 

Weighted average common and dilutive common equivalent shares outstanding (Note E)

 

 

 

 

 

Basic

 

9,683

 

9,631

 

Diluted

 

9,726

 

10,150

 

 

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 30, 2001 and June 29, 2002

 

(in thousands, except per share data)

 

(unaudited)

 

 

 



Common Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Total

 

Shares

 

Value

For the Six Months Ended June 30, 2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 30, 2000

 

9,683

 

$

10

 

$

2,364

 

$

10,581

 

$

(82

)

$

12,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

965

 

 

965

 

Foreign currency translation adjustment

 

 

 

 

 

(151

)

(151

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

814

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Balance at June 30, 2001

 

9,683

 

$

10

 

$

2,364

 

$

11,546

 

$

(233

)

$

13,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 29, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 29, 2001

 

9,664

 

$

10

 

$

2,359

 

$

12,752

 

$

(594

)

$

14,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

2,855

 

 

2,855

 

Foreign currency translation adjustment

 

 

 

 

 

531

 

531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

3,386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock retired

 

(182

)

 

(86

)

(736

)

 

(822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued under stock option plan, including tax benefit of $33

 

19

 

 

67

 

 

 

67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Balance at June 29, 2002

 

9,501

 

$

10

 

$

2,340

 

$

14,871

 

$

(63

)

$

17,158

 

 

The accompanying notes are an integral part of this statement.

 

6



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands, except per share data)

 

 

 

Six Months Ended

 

 

 

(unaudited)

 

 

 

June 30,
2001

 

June 29,
2002

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net earnings

 

$

965

 

$

2,855

 

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

 

 

 

 

 

Depreciation and amortization

 

1,954

 

2,095

 

Loss on sale of property and equipment

 

10

 

11

 

Deferred income taxes

 

22

 

(664

)

Provision for inventory obsolescence

 

450

 

906

 

Changes in operating assets and liabilities:

 

 

 

 

 

Inventories

 

(116

)

(127

)

Income taxes receivable

 

590

 

 

Prepaid expenses and other assets

 

(367

)

(964

)

Accounts payable

 

1,047

 

371

 

Other current liabilities

 

1,624

 

2,393

 

 

 

 

 

 

 

Total adjustments

 

5,214

 

4,021

 

 

 

 

 

 

 

Net cash provided by operating activities

 

6,179

 

6,876

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property and equipment

 

(5,004

)

(837

)

Proceeds from the sale of property and equipment

 

427

 

23

 

 

 

 

 

 

 

Net cash used in investing activities

 

(4,577

)

(814

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Net proceeds from the sale of common stock

 

 

67

 

Redemption of common stock

 

 

(822

)

Principal payments of long-term debt

 

 

(1,000

)

Decrease in line of credit

 

(1,010

)

(3,195

)

 

 

 

 

 

 

Net cash used in financing activities

 

(1,010

)

(4,950

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(327

)

895

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

265

 

2,007

 

 

 

 

 

 

 

Cash and cash equivalents beginning of period

 

2,900

 

2,465

 

 

 

 

 

 

 

Cash and cash equivalents end of period

 

$

3,165

 

$

4,472

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

519

 

$

215

 

Income taxes

 

703

 

1,844

 

 

The accompanying notes are an integral part of these statements.

 

7



 

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 statements of USANA Health Sciences, Inc. and Subsidiaries (the “Company” or “USANA”) have 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 statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s financial position as of June 29, 2002, and results of operations for the quarters and six months ended June 30, 2001 and June 29, 2002.  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, as amended, for the year ended December 29, 2001.  The results of operations for the quarter and six months ended June 29, 2002 may not be indicative of the results that may be expected for the fiscal year ending December 28, 2002.

 

NOTE A — INVENTORIES

 

Inventories consist of the following:

 

 

 

December 29,
2001

 

June 29,
2002

 

 

 

 

 

 

 

Raw materials

 

$

2,314

 

$

2,876

 

Work in progress

 

1,610

 

1,527

 

Finished goods

 

6,438

 

6,141

 

 

 

 

 

 

 

 

 

10,362

 

10,544

 

 

 

 

 

 

 

Less allowance for inventory obsolescence

 

829

 

1,560

 

 

 

 

 

 

 

 

 

$

9,533

 

$

8,984

 

 

The increase in the allowance for inventory obsolescence can be attributed to the anticipated increase in inventory for new markets that have yet to meet expected sales levels.

 

NOTE B — PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other assets consist of the following:

 

 

 

December 29,
2001

 

June 29,
2002

 

 

 

 

 

 

 

Prepaid expenses

 

$

1,002

 

$

1,275

 

Receivables, net

 

321

 

302

 

Other current assets

 

118

 

132

 

 

 

 

 

 

 

 

 

$

1,441

 

$

1,709

 

 

8



 

NOTE C - - PROPERTY AND EQUIPMENT

 

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

 

 

 

Years

 

December 29,
2001

 

June 29,
2002

 

 

 

 

 

 

 

 

 

Building

 

40

 

$

8,110

 

$

8,110

 

Laboratory and production equipment

 

5-7

 

4,505

 

4,509

 

Computer equipment and software

 

3-5

 

15,607

 

15,820

 

Furniture and fixtures

 

3-5

 

2,099

 

2,130

 

Automobiles

 

3-5

 

294

 

294

 

Leasehold improvements

 

3-5

 

1,024

 

1,110

 

Land improvements

 

15

 

931

 

931

 

 

 

 

 

 

 

 

 

 

 

 

 

32,570

 

32,904

 

 

 

 

 

 

 

 

 

Less accumulated depreciation and amortization

 

 

 

15,055

 

17,028

 

 

 

 

 

 

 

 

 

 

 

 

 

17,515

 

15,876

 

 

 

 

 

 

 

 

 

Land

 

 

 

1,773

 

1,773

 

 

 

 

 

 

 

 

 

Deposits and projects in process

 

 

 

201

 

652

 

 

 

 

 

 

 

 

 

 

 

 

 

$

19,489

 

$

18,301

 

 

NOTE D - OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

 

 

December 29,
2001

 

June 29,
2002

 

 

 

 

 

 

 

Associate incentives

 

$

682

 

$

1,005

 

Accrued compensation

 

664

 

970

 

Sales taxes

 

534

 

690

 

Income taxes payable

 

187

 

1,150

 

Accrued Associate promotions

 

313

 

662

 

Deferred revenue

 

727

 

799

 

All other

 

2,007

 

2,367

 

 

 

 

 

 

 

 

 

$

5,114

 

$

7,643

 

 

9



 

NOTE E — COMMON STOCK AND EARNINGS PER SHARE

 

Basic earnings per share are based on the weighted average number of shares outstanding for each period.  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 not yet exercised.

 

 

 

For the Quarter Ended

 

 

 

June 30,
2001

 

June 29,
2002

 

Earnings available to common shareholders

 

$

494

 

$

1,738

 

Basic EPS

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding entire period

 

9,683

 

9,664

 

Weighted average common shares:

 

 

 

 

 

Issued during period

 

 

4

 

Canceled during period

 

 

(70

)

 

 

 

 

 

 

Weighted average common shares outstanding during period

 

9,683

 

9,598

 

 

 

 

 

 

 

Earnings per common share - basic

 

$

0.05

 

$

0.18

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

Shares

 

 

 

 

 

Weighted average shares outstanding during period - basic

 

9,683

 

9,598

 

 

 

 

 

 

 

Dilutive effect of stock options

 

36

 

1,029

 

 

 

 

 

 

 

Weighted average shares outstanding during period - diluted

 

9,719

 

10,627

 

 

 

 

 

 

 

Earnings per common share - diluted

 

$

0.05

 

$

0.16

 

 

Options to purchase 1,716 and 1,151 shares of stock were not included in the computation of EPS for the quarters ended June 30, 2001 and June 29, 2002, respectively, due to their exercise price being greater than the average market price of the shares.

 

 

 

For the Six Months Ended

 

 

 

June 30,
2001

 

June 29,
2002

 

Earnings available to common shareholders

 

$

965

 

$

2,855

 

Basic EPS

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding entire period

 

9,683

 

9,664

 

Weighted average common shares:

 

 

 

 

 

Issued during period

 

 

2

 

Canceled during period

 

 

(35

)

 

 

 

 

 

 

Weighted average common shares outstanding during period

 

9,683

 

9,631

 

 

 

 

 

 

 

Earnings per common share - basic

 

$

0.10

 

$

0.30

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Weighted average shares outstanding during period - basic

 

9,683

 

9,631

 

 

 

 

 

 

 

Dilutive effect of stock options

 

43

 

519

 

 

 

 

 

 

 

Weighted average shares outstanding during period — diluted

 

9,726

 

10,150

 

 

 

 

 

 

 

Earnings per common share - diluted

 

$

0.10

 

$

0.28

 

 

10



 

Options to purchase 1,729 and 1,816 shares of stock were not included in the computation of EPS for the six months ended June 30, 2001 and June 29, 2002, respectively, due to their exercise price being greater than the average market price of the shares.

 

During 2000, the Company announced and implemented a share repurchase program that could include up to 1,000 shares of its outstanding common stock in the open market at market prices.  No shares were purchased by the Company under this program during the first quarter of 2002.  However, during the second quarter of 2002, the Company repurchased 182 shares under this program.  The Company intends to continue to repurchase shares under this program as circumstances permit.  The purchase of shares by the Company under this program reduces the number of shares issued and outstanding.

 

NOTE F — SEGMENT INFORMATION

 

The Company has five operating segments. The United Kingdom (which, for purposes of this report, includes The Netherlands) market is serviced from the United States and is considered a part of the United States operating segment of the Company.  Additionally, the Company has a direct export program for customers in Japan.  These results are also incorporated in the United States segment.  The Japan segment contains all the results from our operations in Japan that began during the fourth quarter of 2001.

 

The Company’s operating segments are based on 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 sales revenue 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, while significant, are not included in the Company’s determination of segment profit or loss in assessing the performance of a segment.

 

Financial information summarized by geographic segment for the six months ended June 30, 2001 and June 29, 2002 is listed on the following page:

 

11



 

 

 

Revenues from
External
Customers

 

Intersegment
Revenues

 

Earnings (loss)
before Income
Taxes

 

Long-lived
Assets

 

Total Assets

 

Six months ended June 30, 2001:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

32,839

 

$

6,158

 

$

2,259

 

$

28,349

 

$

43,216

 

Canada

 

13,842

 

 

(33

)

166

 

1,148

 

Australia — New Zealand

 

7,016

 

501

 

(264

)

307

 

2,630

 

Hong Kong

 

2,523

 

 

(92

)

346

 

511

 

Japan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

56,220

 

6,659

 

1,870

 

29,168

 

47,505

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated and Other (1)

 

 

(6,659

)

(326

)

(8,037

)

(9,624

)

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

$

56,220

 

$

 

$

1,544

 

$

21,131

 

$

37,881

 

 

 

 

Revenues from External Customers

 

Intersegment Revenues

 

Earnings (loss) before Income Taxes

 

Long-lived Assets

 

Total Assets

 

Six months ended June 29, 2002:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

32,903

 

$

6,540

 

$

3,819

 

$

22,912

 

$

30,556

 

Canada

 

15,391

 

 

1,396

 

110

 

3,413

 

Australia — New Zealand

 

7,847

 

620

 

612

 

283

 

3,663

 

Hong Kong

 

2,485

 

 

(17

)

201

 

1,630

 

Japan

 

2,064

 

 

(1,441

)

1,495

 

2,732

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

60,690

 

7,160

 

4,369

 

25,001

 

41,994

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated and Other (1)

 

 

(7,160

)

200

 

(4,898

)

(5,514

)

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

$

60,690

 

$

 

$

4,569

 

$

20,103

 

$

36,480

 

 


(1)  “Unallocated and Other” includes certain corporate items and eliminations that are not allocated to the operating segments.

 

12



 

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 develops and manufactures high-quality nutritional, personal care and weight management products.  USANA distributes its products through a network marketing system in the United States, Canada, Australia, New Zealand, Hong Kong, Japan and the United Kingdom.  USANA refers to its independent distributors as Associates.  We also offer a Preferred Customer program specifically designed for customers who desire to purchase USANA’s products for personal use and do not desire to resell or distribute products.  Sales to Preferred Customers accounted for approximately 19% of net sales during the first six months of 2002.

 

USANA’s three primary product lines consist of USANAâ Nutritionals, SenséÔ and LEAN LifelongÔ. The USANA Nutritionals product line accounted for approximately 66% of net sales for the six months ended June 29, 2002.  USANA’s top selling products, USANAâ Essentials and Proflavanolâ represented approximately 26% and 11%, respectively, of net sales for the six months ended June 29, 2002.  The Sensé product line consists of scientifically developed natural products designed to support healthy skin and hair by providing protection and nourishment on both the inside and outside of the dermal layers of the skin.  The Sensé product line accounted for approximately 13% of net sales for the six months ended June 29, 2002.  The LEAN Lifelong product line accounted for approximately 10% of net sales for the six months ended June 29, 2002. The LEAN Lifelong product line includes several completely reformulated food products previously sold under the LEAN or USANA brand names.  NutrimealÔ and Fibergyâ drink mixes, Nutribar and Fibergy bar, a LEAN Formula for weight management and several other related products for healthy diets are included in the LEAN Lifelong product line.

 

In addition to these three principal product lines, USANA develops and makes available to Associates a number of materials to assist them in building their business and selling the products. These resource materials or sales aids, which may be purchased from USANA, include product brochures and business forms designed by USANA and printed by outside publishers.  Each major product line incorporates specifically designed sales aids.  From time to time we contract with authors and publishers to provide books, tapes and other items dealing with health and personal motivation and make these available to Associates. USANA also writes and develops materials for audio and videotapes, which are produced by third parties. New Associates are required to purchase a starter kit containing USANA training materials, which assists them in starting and growing their business.  Affinity and identity are also furthered through the sale of logo merchandise such as clothing, caps, mugs, and other products. Associates do not earn commissions on sales aids, starter kits or logo merchandise.

 

The fiscal year end of USANA is the Saturday closest to December 31 of each year.  Fiscal year 2002 will end on December 28, 2002.  Fiscal year 2001 ended on December 29, 2001.

 

Results of Operations

 

Quarters Ended June 29, 2002 and June 30, 2001

 

                Net Sales.  Net sales increased 12.1% to $32.1 million for the quarter ended June 29, 2002, an increase of $3.5 million from the $28.6 million reported for the comparable quarter in 2001.  The increase can be primarily attributed to:

 

            •                   A substantial increase in Associate enrollments,

 

            •                   Sales from our Japan market that commenced operations in the fourth quarter of 2001, and

 

            •                   Stronger foreign currencies, relative to the U. S. dollar, which positively affected the translation of sales in foreign markets by approximately $200,000.

 

13



 

The following table illustrates the change in sales by market for the quarters ended June 30, 2001 and June 29, 2002.  Sales data for the United States includes products shipped directly from the U.S. headquarters to customers in the United Kingdom and Japan:

 

 

 

Sales By Market
(in thousands)
Quarter Ended

 

 

 

 

 

Market

 

June 30, 2001

 

June 29, 2002

 

Change from
Prior Year

 

Percent
Change

 

United States

 

$

16,788

 

58.7

%

$

16,971

 

52.9

%

$

183

 

1.1

%

Canada

 

7,035

 

24.6

%

8,193

 

25.5

%

1,158

 

16.5

%

Australia-New Zealand

 

3,549

 

12.4

%

4,367

 

13.6

%

818

 

23.0

%

Hong Kong

 

1,234

 

4.3

%

1,309

 

4.1

%

75

 

6.1

%

Japan

 

 

0.0

%

1,228

 

3.8

%

1,228

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

28,606

 

100.0

%

$

32,068

 

100.0

%

$

3,462

 

12.1

%

 

Gross Profit.  Gross profit increased to 73.9% of net sales for the quarter ended June 29, 2002 from 70.8% for the comparable quarter in 2001.  The increase can be attributed to:

 

                  Improved procurement efficiencies and inventory management,

 

                  A price increase in the Australia-New Zealand market, and

 

                  Sales in Japan, which are priced to yield a higher gross profit.

 

These positive changes were partially offset by a higher percentage of sales aids and starter kits sold in the second quarter of 2002 compared to the same period in 2001.  The increase in sales aids and starter kits sold is a result of the strong Associate enrollments during the second quarter of 2002.  Sales aids and starter kits are priced to yield lower gross profit margins as compared to our other products.  We believe that we will see modest improvement in gross profit as a percentage of net sales during the third quarter of 2002.

 

Associate Incentives.  Associate incentives decreased slightly to 38.1% of net sales for the quarter ended June 29, 2002 from 38.3% for the comparable quarter in 2001.  This modest decrease can be attributed to a higher percentage of sales aids sold, on which USANA does not pay commissions, in the second quarter of 2002.  In addition, in newly opened markets, like Japan, Associate incentives run at slightly lower rates for a short period of time while Associates begin building their business.  We expect Associate incentives, as a percentage of net sales, will trend modestly higher in the next few quarters as the Japan market begins to mature.  The trend towards higher Associate incentives may be partially offset by the opening of the Company’s newest market in Taiwan in the fourth quarter of 2002.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expense decreased to 26.7% of net sales for the quarter ended June 29, 2002 from 28.5% for the comparable quarter in 2001.  The decrease, as a percentage of net sales, can be primarily attributed to increased sales.

 

In absolute terms, selling, general and administrative expenses increased by $410,000.  This increase can be primarily attributed to variable costs related to the higher sales and the initial investment in our Taiwan market during the second quarter of 2002.  We expect that selling, general and administrative expense will be pressured in the third quarter of 2002 by costs associated with establishing operations in Taiwan, which is scheduled to open in the fourth quarter of 2002.

 

Other Income (Expense).  Other income (expense) improved by $122,000 in the second quarter of 2002 when compared to the second quarter of 2001.  This improvement can be primarily attributed to a decrease in interest expense of $114,000 for the second quarter of 2002 when compared to the same period in 2001.  The decrease in interest expense is a result of lower interest

 

14



 

rates and reduced debt levels throughout the second quarter of 2002.

 

Net Earnings.  Net earnings increased more than 250% to $1.7 million for the quarter ended June 29, 2002, an increase of $1.2 million from the $494,000 reported for the comparable quarter in 2001.  This increase in net earnings can be attributed to:

 

                  Better operating margins,

 

                  Increased sales, and

 

                  Lower interest expense.

 

Diluted earnings per share increased $0.11 to $0.16 for the second quarter of 2002 from $0.05 for the comparable quarter in 2001.

 

Six Months Ended June 29, 2002 and June 30, 2001

 

Net Sales.  Net sales increased 8.0% to $60.7 million for the six months ended June 29, 2002, an increase of $4.5 million from the $56.2 million reported for the comparable period in 2001.  This increase can be primarily attributed to a substantial increase in Associate enrollments and sales from our Japan market that commenced operations in the fourth quarter of 2001.

 

The increase in sales was partially offset by weaker foreign currencies, relative to the U. S. dollar, which negatively affected the translation of sales in foreign markets.  Sales would have been approximately $100,000 higher had foreign currency exchange rates in the first six months of 2002 been comparable to the rates present in the first six months of 2001.

 

During the first quarter of 2002, the Company implemented a price increase in our Australia-New Zealand market that averaged 10%.  However, top-line growth in this market can primarily be attributed to strong Associate enrollments.

 

The following table illustrates the change in sales by market for the six months ended June 30, 2001 and June 29, 2002 Sales data for the United States includes products shipped directly from the U.S. headquarters to customers in the United Kingdom and Japan:

 

 

 

Sales By Market
(in thousands)
Six Months Ended

 

 

 

 

 

Market

 

June 30, 2001

 

June 29, 2002

 

Change from
Prior Year

 

Percent
Change

 

United States

 

$

32,839

 

58.4

%

$

32,903

 

54.2

%

$

64

 

0.2

%

Canada

 

13,842

 

24.6

%

15,391

 

25.4

%

1,549

 

11.2

%

Australia-New Zealand

 

7,016

 

12.5

%

7,847

 

12.9

%

831

 

11.8

%

Hong Kong

 

2,523

 

4.5

%

2,485

 

4.1

%

(38

(1.5

)%

Japan

 

 

0.0

%

2,064

 

3.4

%

2,064

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

56,220

 

100.0

%

$

60,690

 

100.0

%

$

4,470

 

8.0

%

 

Gross Profit.  Gross profit increased to 73.5% of net sales for the six months ended June 29, 2002 from 70.9% for the comparable period in 2001.  Reasons for the increase are the same as those for the second quarter of 2002 and are discussed on page 14 in the quarterly “Results of Operations” section.

 

Associate Incentives.  Associate incentives decreased to 37.8% of net sales for the six months ended June 29, 2002 from 38.2% for the comparable period in 2001.  The decrease can be primarily attributed to a higher percentage of sales aids and starter kits sold in the first six months of 2002 and increased sales from our Japan market.  In newly opened markets, like Japan, Associate incentives run at slightly lower rates for a short period of time while Associates begin building their business.

 

15



 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses decreased to 27.4% of net sales for the six months ended June 29, 2002 from 28.0% for the comparable period in 2001.  The decrease, as a percentage of net sales, can be primarily attributed to the increase in net sales during the period.

 

Although selling, general and administrative expenses decreased as a percentage of net sales during the six months ended June 29, 2002, in absolute terms, these expenses increased $891,000.  This increase can be primarily attributed to:

 

                  Costs related to the aborted transaction involving the proposed sale of assets to the Company’s founder,

 

                  Variable costs related to the higher sales, and

 

                  Increased costs to support the Japan market during the first six months of 2002.

 

The sale of assets transaction was terminated during the second quarter of 2002.  USANA still serviced its Japan customers through a direct export program from the United States during the first six months of 2001.

 

Other Income (Expense).  Foreign currency exchange loss (a component of “Other, net”) decreased by $307,000 in the first six months of 2002 when compared to the same period in 2001.  Additionally, interest expense decreased $275,000 during the first six months of 2002 when compared to the same period in 2001.  The decrease in interest expense is a result of lower interest rates and reduced debt levels throughout the first six months of 2002.

 

Net Earnings.  Net earnings increased 196% to $2.9 million for the six months ended June 29, 2002, an increase of $1.9 million from the $965,000 reported for the comparable quarter in 2001.  The increase in net earnings can be attributed to:

 

                  Better operating margins,

 

                  Increased sales,

 

                  The decrease in foreign currency exchange losses, and

 

                  Lower interest expense.

 

Diluted earnings per share increased $0.18 to $0.28 for the first six months of 2002 from $0.10 for the comparable period in 2001.  During 2000, the Company announced and implemented a share repurchase program that could include up to one million shares of its outstanding common stock.  No shares were purchased under this program during the first quarter of 2002.  However, during the second quarter of 2002, the Company repurchased 182,000 shares.  The Company intends to continue to repurchase shares under this program as circumstances permit.  All purchases under the repurchase program are in the open market at market prices and subject to applicable SEC regulations.  The purchase of shares by the Company under this program reduces the number of shares issued and outstanding.

 

Liquidity and Capital Resources

 

USANA has historically financed growth with cash flows from operations. In the first six months of 2002, USANA generated net cash flows from operations of $6.9 million compared to $6.2 million for the same period in 2001.  Cash and cash equivalents increased to $4.5 million at June 29, 2002 from $2.5 million at December 29, 2001.

 

On June 29, 2002, USANA had net working capital of $2.1 million compared to net working capital of $350,000 at December 29, 2001. The change in net working capital was primarily the result of the increased cash balance and decreased level of current debt.  USANA does not extend credit to its customers, but requires payment prior to shipping, which eliminates significant receivables.

 

USANA has agreements with a financial institution that provided up to $22.5 million in secured credit facilities consisting of a $10 million five-year term loan and a $12.5 million three-year revolving line of credit.  The credit facilities contain restrictive covenants requiring USANA to maintain certain financial ratios.  As of June 29, 2002, USANA was in compliance

 

16



 

with all covenants.  As of June 29, 2002, $7.0 million was outstanding on the 5-year term loan and $903,000 was outstanding on the line of credit.  At  June 29, 2002, the Company had $11.6 million available under the line of credit, which expires September 1, 2002.

 

USANA believes that its current cash balances, the available line of credit and cash provided by operations will be sufficient to cover its needs in the ordinary course of business for the foreseeable future.  If USANA experiences an adverse operating environment or unusual capital expenditure requirements, additional financing may be required.  However, no assurance can be given that additional financing, if required, would be available on favorable terms.  USANA may also require or seek additional financing, including through the sale of its equity securities to finance future expansion into new markets, finance capital acquisitions associated with the growth of USANA and for other reasons.  Any financing which involves the sale of equity securities or instruments convertible into equity securities would result in immediate and possibly significant dilution to existing shareholders.

 

Forward-Looking Statements

 

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, hopes, 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 future operations and capital spending needs.  Readers are cautioned that actual results could differ materially from the anticipated results or other expectations expressed in these forward-looking statements for the reasons detailed in our most recent Annual Report on Form 10-K, as amended, at pages 24 through 30.  The fact that some of the risk factors may be the same or similar to our past reports filed with the Securities and Exchange Commission means only that the risks are present in multiple periods.  We believe that many of the risks detailed here and in the Company’s other SEC filings are part of doing business in the industry in which we operate and compete and will likely be present in all periods reported.  The fact that certain risks are endemic to the industry does not lessen their significance.  The forward-looking statements contained in this report are made as of the date of this report and we assume no obligation to update them or to update the reasons why actual results could differ from those projected in such forward-looking statements.  Among others, risks and uncertainties that may affect our business, financial condition, performance, development and results of operations include:

 

                  Our ability to attract and maintain a sufficient number of Associates,

 

                  High turnover of Associates,

 

                  Our reliance on information technology,

 

                  Our dependence upon a network marketing system to distribute our products,

 

                  The fluctuation in the value of foreign currencies against the US dollar,

 

                  Activities of our independent Associates,

 

                  Rigorous government scrutiny of network marketing practices,

 

                  Potential effects of adverse publicity regarding nutritional supplements or the network marketing industry,

 

                  Reliance on key management personnel, including our Chief Executive Officer and Chairman of the Board of Directors, Myron W. Wentz, Ph.D.,

 

                  Extensive government regulation of the Company’s products and manufacturing,

 

17



 

                  Risks related to our expansion into international markets,

 

                  Failure of USANA to sustain or manage growth including the failure to continue to develop new products,

 

                  The adverse effect of the loss of a high level sponsoring Associate together with a group of leading Associates in that person’s downline,

 

                  The loss of product market share or Associates to competitors,

 

                  Potential adverse effects of taxation and transfer pricing regulations,

 

                  Our reliance on outside suppliers for raw materials,

 

                  Intellectual property risks particularly applicable to our business, or

 

                  Product liability claims and other manufacturing activity risks.

 

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We conduct our business in several countries and intend to continue to expand our foreign operations. Net sales, earnings from operations and net earnings are affected by fluctuations in currency exchange rates, interest rates and other uncertainties inherent in doing business and selling product in more than one currency. In addition, USANA’s operations are exposed to risks associated with changes in social, political and economic conditions inherent in foreign operations, including changes in the laws and policies that govern foreign investment in countries where it has operations as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.

 

Foreign Currency Risks.  Sales outside the United States represented 41.6% and 45.8% of net sales for the six months ended June 30, 2001 and June 29, 2002, respectively.  Inventory purchases are transacted primarily in U.S. dollars from vendors located in the United States.  The local currency of each international subsidiary is considered the functional currency with all revenue and expenses translated at weighted average exchange rates for reported periods.  Consequently, USANA’s reported sales and earnings are impacted positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar.  Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations or financial condition. Changes in currency exchange rates affect the relative prices at which USANA sells its products.

 

As of June 29, 2002 and during the six months then ended, USANA had no hedging instruments in place to offset exposure to the Canadian Dollar, Australian Dollar, New Zealand Dollar, Hong Kong Dollar, Japanese Yen, British Pound or Euro, to which, in aggregate, USANA had significant exposure.  We regularly monitor our foreign currency risks and periodically take measures to reduce the impact of foreign exchange fluctuations on our operating results.

 

As a last recourse for hedging currency risk, USANA may elect to adjust prices in non-U.S. markets to reflect changes in foreign currency exchange rates.  For example, during the first quarter of 2002, the Company implemented a price increase for its products sold in its Australia-New Zealand market.  However, there can be no assurance that these practices will be successful in eliminating all or substantially all of the risks encountered in connection with our foreign currency transactions.

 

Interest Rate Risks.  USANA currently carries $7.0 million in long-term debt at an effective interest rate of 4.09%.  This long-term debt matures at the rate of $1.0 million for the remainder of 2002, $3.4 million in 2003 and $2.6 million in 2004.  We also have a revolving line of credit with $903,000 outstanding at June 29, 2002 with a weighted average interest rate of 5.25%. The interest rate is computed at the bank’s Prime Rate or LIBOR adjusted by features specified in our loan agreements, with fixed rate term options of up to six months.  A hypothetical 100 basis point increase in interest rates on all of the above

 

18



 

debt would result in an annual after tax increase of interest expense of approximately $50,000, which would not materially affect earnings.

 

PART II.  OTHER INFORMATION

 

Item 5.  OTHER INFORMATION

 

On July 12, 2002, USANA’s Board of Directors named David A. Wentz to the position of President of the Company.  David Wentz previously served as Executive Vice President and will continue to serve as a member of the Company’s Board of Directors.  Dr. Myron W. Wentz, founder of the Company, will continue to serve as Chairman and Chief Executive Officer.  David Wentz is the son of Dr. Wentz.

 

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

(a)                                  Exhibits.

 

Exhibit
Number

 

Description

 

 

3.1

Articles of Incorporation [Incorporated by reference to Registration Statement on Form 10, File No. 0-21116, effective April 16, 1993]

 

 

3.2

Bylaws [Incorporated by reference to Registration Statement on Form 10, File No. 0-21116, effective April 16, 1993]

 

 

3.3

Amendment to Articles of Incorporation to change name and increase par value [Incorporated by reference to Report on Form 10-Q for the period ended July 1, 2000]

 

 

4.1

Specimen Stock Certificate for Common Stock, no par value [Incorporated by reference to Registration Statement on Form 10, File No. 0-21116, effective April 16, 1993]

 

 

10.1

Business Loan Agreement by and between Bank of America National Trust and Savings Association, d/b/a Seafirst Bank (“Seafirst Bank”) and the Company [Incorporated by reference to Report on Form 10-Q for the period ended June 27, 1998]

 

 

10.2

Loan Modification Agreement by and between Seafirst Bank and the Company [Incorporated by reference to Report on Form 10-Q for the period ended June 27, 1998]

 

 

10.3

Employment Agreement dated June 1, 1997 by and between the Company and Gilbert A. Fuller [Incorporated by reference to Report on Form 10-Q for the period ended June 27, 1998]

 

 

10.4

Amended and Restated Long-Term Stock Investment and Incentive Plan [Incorporated by reference to Report on Form 10-Q for the period ended June 27, 1998]

 

 

10.5

Promissory Note and Redemption Agreement dated April 28, 1999 [Incorporated by reference to Report on Form 10-Q for the period ended April 3, 1999]

 

 

10.6

Stock Pledge Agreement dated April 28, 1999 [Incorporated by reference to Report on Form 10-Q for the period ended April 3, 1999]

 

 

10.7

Redemption Agreement dated July 30, 1999 [Incorporated by reference to Report on Form 8-K, filed September 24, 1999]

 

 

10.8

Amended Term Note dated March 26, 2001 [Incorporated by reference to Report on Form 10-K, filed March 30, 2001]

 

 

10.9

Amended Revolving Note dated March 26, 2001 [Incorporated by reference to Report on Form 10-K, filed March 30, 2001]

 

 

10.10

Amended Credit Agreement dated March 26, 2001 [Incorporated by reference to Report on Form 10-K, filed March 30, 2001]

 

 

10.11

Purchase Agreement dated March 21, 2002 [Incorporated by reference to Annex A of the Preliminary Schedule 14A, filed March 26, 2002]

 

 

10.12

Termination of Purchase Agreement dated April 11, 2002 [Incorporated by reference to Report on Form 10-K/A, filed May 1, 2002]

 

 

10.13

Amended Credit Agreement dated April 17, 2002 [Incorporated by reference to Report on Form 10-Q for the period ended March 30, 2002]

 

 

10.14

2002 USANA Health Sciences, Inc. Stock Option Plan [Incorporated by reference to Registration Statement on Form S-8, filed July 18, 2002]

 

 

11.1

Computation of Net Earnings per Share (included in Notes to Consolidated Financial Statements)

 

 

23.1

Consent of Grant Thornton LLP, Independent Auditors [Incorporated by reference to Registration Statement on Form S-8, filed July 18, 2002]

 

 

23.2

Consent of Durham Jones & Pinegar, Professional Corporation [Incorporated by reference to Registration Statement on Form S-8, filed July 18, 2002]

 

 

99.1

Press Release dated September 21, 1999 [Incorporated by reference to Report on Form 8-K, filed September 24, 1999]

 

 

99.2

Press Release dated April 11, 2002 [Incorporated by reference to Report on Form 10-K/A, filed May 1, 2002]

 

 

99.3

Certification of Periodic Financial Reports

 

(b)                                 Reports on Form 8-K.

 

 

The Company filed no current reports on Form 8-K during the quarter ended June 29, 2002.

 

19



 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

USANA HEALTH SCIENCES, INC.

 

 

 

 

Date: August 7, 2002

By:

/s/ Gilbert A. Fuller

 

 

 

Gilbert A. Fuller

 

 

Senior Vice President and
Chief Financial Officer

 

20