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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 April 3, 2004

 

 

 

 

 

OR

 

 

 

o

 

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

 

 

 

 

 

For the transition period from                             to                            

 

 

 

Commission file number: 0-21116

 


 

USANA HEALTH SCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

Utah

 

87-0500306

(State or other jurisdiction
of incorporation or organization)

 

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

 

 

 

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

(Address of principal executive offices, Zip Code)

 

 

 

(801) 954-7100

(Registrant’s telephone number, including area code)

 

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

 

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

 

The number of shares outstanding of the registrant’s common stock as of April 30, 2004 was 19,209,474.

 

On October 14, 2003, the registrant declared a two-for-one stock split of its common stock that was distributed in the form of a stock dividend on October 30, 2003 to shareholders of record as of October 24, 2003.  Outstanding common stock data in this report for periods prior to October 30, 2003 have been adjusted to reflect the stock split.

 

 



 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended April 3, 2004

 

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1

Financial Statements

 

 

Consolidated Balance Sheets

 

 

Consolidated Statements of Earnings

 

 

Consolidated Statement of Stockholders’ Equity

 

 

Consolidated Statements of Cash Flows

 

 

Notes to Consolidated Financial Statements

 

Item 2

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

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

 

Item 4

Controls and Procedures

 

 

 

 

PART II.    OTHER INFORMATION

 

Item 2

Changes in Securities and Use of Proceeds

 

Item 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)

 

 

 

January 3,
2004

 

April 3,
2004

 

 

 

 

 

Unaudited

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

18,965

 

$

14,861

 

Inventories, net

 

14,069

 

14,715

 

Prepaid expenses and other current assets

 

3,294

 

3,582

 

Deferred income taxes

 

1,921

 

1,717

 

Total current assets

 

38,249

 

34,875

 

 

 

 

 

 

 

Property and equipment, net

 

20,195

 

22,020

 

 

 

 

 

 

 

Goodwill

 

4,267

 

5,687

 

 

 

 

 

 

 

Other assets

 

2,416

 

2,495

 

 

 

$

65,127

 

$

65,077

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

5,215

 

$

5,326

 

Other current liabilities

 

14,704

 

16,069

 

Total current liabilities

 

19,919

 

21,395

 

 

 

 

 

 

 

Other long-term liabilities

 

837

 

740

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding 19,470 as of January 3, 2004 and 19,267 as of April 3, 2004

 

19

 

19

 

Additional paid-in capital

 

14,187

 

12,109

 

Retained earnings

 

28,935

 

29,461

 

Accumulated other comprehensive income

 

1,230

 

1,353

 

Total stockholders’ equity

 

44,371

 

42,942

 

 

 

$

65,127

 

$

65,077

 

 

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)

 

 

 

March 29,
2003

 

April 3,
2004

 

 

 

 

 

 

 

Net sales

 

$

40,864

 

$

61,775

 

Cost of sales

 

9,220

 

15,058

 

Gross profit

 

31,644

 

46,717

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

16,097

 

23,612

 

Selling, general and administrative

 

9,572

 

13,262

 

Research and development

 

334

 

578

 

Total operating expenses

 

26,003

 

37,452

 

 

 

 

 

 

 

Earnings from operations

 

5,641

 

9,265

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

20

 

50

 

Interest expense

 

(47

)

 

Other, net

 

61

 

99

 

Total other income

 

34

 

149

 

 

 

 

 

 

 

Earnings before income taxes

 

5,675

 

9,414

 

 

 

 

 

 

 

Income taxes

 

2,100

 

3,201

 

Net earnings

 

$

3,575

 

$

6,213

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

Basic

 

$

0.19

 

$

0.32

 

Diluted

 

$

0.17

 

$

0.30

 

 

 

 

 

 

 

Weighted average common and dilutive common equivalent shares outstanding

 

 

 

 

 

Basic

 

18,624

 

19,377

 

Diluted

 

21,048

 

20,853

 

 

The accompanying notes are an integral part of these statements.

 

4



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

Quarters Ended March 29, 2003 and April 3, 2004

 

(in thousands)

 

(unaudited)

 

 

 

 

 

 

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total

 

 

 

 

Common Stock

Shares

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended March 29, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 28, 2002

 

18,273

 

$

18

 

$

3,666

 

$

14,520

 

$

(111

)

$

18,093

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

3,575

 

 

3,575

 

Foreign currency translation adjustment

 

 

 

 

 

257

 

257

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

3,832

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued under stock option plan, including tax benefit of $1,040

 

626

 

 

2,418

 

 

 

2,418

 

Balance at March 29, 2003

 

18,899

 

$

18

 

$

6,084

 

$

18,095

 

$

146

 

$

24,343

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended April 3, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 3, 2004

 

19,470

 

$

19

 

$

14,187

 

$

28,935

 

$

1,230

 

$

44,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

6,213

 

 

6,213

 

Foreign currency translation adjustment

 

 

 

 

 

123

 

123

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

6,336

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock retired

 

(285

)

 

(2,561

)

(5,687

)

 

(8,248

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued under stock option plan, including tax benefit of $261

 

82

 

 

483

 

 

 

483

 

Balance at April 3, 2004

 

19,267

 

$

19

 

$

12,109

 

$

29,461

 

$

1,353

 

$

42,942

 

 

The accompanying notes are an integral part of these statements.

 

5



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

(unaudited)

 

 

 

Quarter Ended

 

 

 

March 29,
2003

 

April 3,
2004

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net earnings

 

$

3,575

 

$

6,213

 

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

 

 

 

 

 

Depreciation and amortization

 

915

 

1,026

 

(Gain) loss on sale of property and equipment

 

(19

)

 

Deferred income taxes

 

(4

)

108

 

Provision for inventory obsolescence

 

476

 

432

 

Changes in operating assets and liabilities:

 

 

 

 

 

Inventories

 

204

 

(1,007

)

Prepaid expenses and other assets

 

(244

)

(441

)

Accounts payable

 

271

 

75

 

Other current liabilities

 

1,965

 

1,389

 

Total adjustments

 

3,564

 

1,582

 

Net cash provided by operating activities

 

7,139

 

7,795

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Acquisition, net of cash acquired

 

 

(2,137

)

Purchases of property and equipment

 

(980

)

(2,017

)

Proceeds from the sale of property and equipment

 

35

 

2

 

Net cash used in investing activities

 

(945

)

(4,152

)

 

The accompanying notes are an integral part of these statements.

 

6



 

 

 

Quarter Ended

 

 

 

March 29,
2003

 

April 3,
2004

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Principal payments of long-term debt

 

(6,000

)

 

Net proceeds from the sale of common stock

 

1,378

 

222

 

Redemption of common stock

 

 

(8,248

)

Decrease in line of credit

 

(2,913

)

 

Payments on capital lease obligations

 

(4

)

 

Net cash used in financing activities

 

(7,539

)

(8,026

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

144

 

279

 

Net decrease in cash and cash equivalents

 

(1,201

)

(4,104

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

6,686

 

18,965

 

Cash and cash equivalents, end of period

 

$

5,485

 

$

14,861

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

63

 

$

 

Income taxes

 

134

 

353

 

 

 

 

 

 

 

Non-cash activities

 

 

 

 

 

During the quarter ended April 3, 2004, the Company acquired FMG Productions, LLC for $2,060 in cash. In conjunction with the acquisition, liabilities totaling $77 were assumed for professional fees directly associated with the acquisition.

 

 

 

 

 

 

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 information of USANA Health Sciences, Inc. and Subsidiaries (the “Company” or “USANA”) has been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, the accompanying interim consolidated financial information contains all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s financial position as of April 3, 2004, and results of operations for the quarters ended April 3, 2004 and March 29, 2003.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 3, 2004.  The results of operations for the quarter ended April 3, 2004 may not be indicative of the results that may be expected for the fiscal year ending January 1, 2005.

 

NOTE A –  STOCK-BASED COMPENSATION

 

The Company has applied the disclosure provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — An Amendment of FASB Statement No. 123,” for the quarters ended March 29, 2003 and April 3, 2004.  Issued in December 2002, SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  As permitted by SFAS No. 148, the Company continues to account for stock options under APB Opinion No. 25, under which no compensation has been recognized. The following table illustrates the effects on net earnings and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148, to stock-based compensation:

 

 

 

 

 

Quarter Ended

 

 

 

 

 

March 29, 2003

 

April 3, 2004

 

 

 

 

 

 

 

 

 

Net earnings

 

As reported

 

$

3,575

 

$

6,213

 

 

 

Pro forma

 

$

3,467

 

$

5,989

 

 

 

 

 

 

 

 

 

Earnings per share - basic

 

As reported

 

$

0.19

 

$

0.32

 

 

 

Pro forma

 

$

0.19

 

$

0.31

 

 

 

 

 

 

 

 

 

Earnings per share - diluted

 

As reported

 

$

0.17

 

$

0.30

 

 

 

Pro forma

 

$

0.16

 

$

0.29

 

 

8



 

 

Weighted average assumptions used to determine the Black-Scholes fair value for options granted during the periods indicated:

 

 

 

Quarter Ended

 

 

 

March 29,
2003

 

April 3,
2004

 

 

 

 

 

 

 

Expected volatility

 

77

%

76

%

Risk free interest rate

 

3.86

%

4.02

%

Expected life

 

10

yrs.

10

yrs.

Expected dividend yield

 

0

%

0

%

Weighted average market price of options granted *

 

$

7.90

 

$

29.72

 

 


*            All options during the periods indicated have been granted at the market price on the date of grant, which is established by averaging the closing price of the Company’s common stock over the ten trading days preceding the date of grant.

 

Option pricing models require the input of highly subjective assumptions including the expected stock price volatility.  Also, the Company’s employee stock options have characteristics significantly different from those of traded options, including long vesting schedules and changes in the subjective input assumptions that can materially affect the fair value estimate.  Management believes the best assumptions available were used to value the options and that the resulting option values were reasonable as of the dates the options were granted.

 

NOTE B – ACQUISITIONS

 

In February 2004, the Company completed the acquisition of the net assets of FMG Productions, LLC (FMG), a Utah limited liability company that produces video and audio promotional and training materials for large companies and sales organizations, including the Company.  The aggregate investment was $2,137 including $2,060 in cash and $77 for professional fees directly associated with the acquisition.  The purchase was made through a newly formed wholly owned subsidiary of the Company, which will operate the business formerly conducted by FMG.  The former employees of FMG, including its founders and primary creative directors, will continue to operate the business now owned by USANA.  The Company expects to realize future benefits from this acquisition primarily through the motivation and training of its independent Associates.

 

The acquisition was accounted for in accordance with SFAS No. 141, “Business Combinations” and as such, the results of operations for FMG have been included in the consolidated financial statements since the effective date of the acquisition.  This acquisition contributed $345 in sales and operating income of $27 for the first quarter of 2004.  The assets acquired and liabilities assumed were recorded at estimated fair values as of the date of the acquisition as determined by the Company’s management and are summarized below:

 

9



 

 

 

At February 1,
2004

 

Assets acquired

 

 

 

Cash

 

$

0

 

Accounts receivable

 

133

 

Property and equipment

 

790

 

Goodwill

 

1,420

 

Total assets acquired

 

2,343

 

 

 

 

 

Liabilities assumed

 

 

 

Accounts payable

 

23

 

Deferred revenue

 

94

 

Other liabilities

 

89

 

Total liabilities assumed

 

206

 

Net assets acquired

 

$

2,137

 

 

Goodwill has been recognized for the amount of the excess of the purchase price paid over the fair market value of the net assets acquired.  In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill will not be amortized; however, it will be tested at least annually for impairment.

 

NOTE C – INVENTORIES

 

Inventories consist of the following:

 

 

 

January 3,
2004

 

April 3,
2004

 

Raw materials

 

$

5,498

 

$

5,819

 

Work in progress

 

2,497

 

2,878

 

Finished goods

 

7,563

 

7,006

 

 

 

15,558

 

15,703

 

 

 

 

 

 

 

Less allowance for inventory valuation

 

1,489

 

988

 

 

 

$

14,069

 

$

14,715

 

 

NOTE D – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

 

 

January 3,
2004

 

April 3,
2004

 

Prepaid expenses

 

$

1,376

 

$

1,547

 

Miscellaneous receivables, net

 

1,449

 

1,504

 

Other current assets

 

469

 

531

 

 

 

$

3,294

 

$

3,582

 

 

10



 

NOTE E – PROPERTY AND EQUIPMENT

 

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

 

 

 

Years

 

January 3,
2004

 

April 3,
2004

 

 

 

 

 

 

 

 

 

Building

 

40

 

$

8,120

 

$

8,669

 

Laboratory and production equipment

 

5-7

 

6,879

 

7,384

 

Sound and video library

 

5

 

 

600

 

Computer equipment and software

 

3-5

 

18,702

 

19,032

 

Furniture and fixtures

 

3-5

 

2,227

 

2,244

 

Automobiles

 

3-5

 

180

 

204

 

Leasehold improvements

 

3-5

 

1,626

 

1,941

 

Land improvements

 

15

 

931

 

931

 

 

 

 

 

38,665

 

41,005

 

 

 

 

 

 

 

 

 

Less accumulated depreciation and amortization

 

 

 

21,740

 

22,629

 

 

 

 

 

16,925

 

18,376

 

 

 

 

 

 

 

 

 

Land

 

 

 

1,773

 

1,899

 

 

 

 

 

 

 

 

 

Deposits and projects in process

 

 

 

1,497

 

1,745

 

 

 

 

 

$

20,195

 

$

22,020

 

 

NOTE F – OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

 

 

January 3,
2004

 

April 3,
2004

 

 

 

 

 

 

 

Associate incentives

 

$

2,692

 

$

2,364

 

Accrued compensation

 

4,186

 

1,929

 

Income taxes

 

1,255

 

4,300

 

Sales taxes

 

1,667

 

1,551

 

Accrued associate promotions

 

29

 

1,107

 

Deferred revenue

 

1,404

 

1,710

 

Provision for returns and allowances

 

998

 

1,172

 

Accrued loss on foreign currency forwards

 

337

 

81

 

All other

 

2,136

 

1,855

 

 

 

$

14,704

 

$

16,069

 

 

NOTE G – COMMON STOCK AND EARNINGS PER SHARE

 

Basic earnings per share are based on the weighted average number of shares outstanding for each period.  Weighted average shares redeemed have been included in the calculation of weighted average shares outstanding for basic earnings per share. Diluted earnings per common share are based on shares outstanding (computed under basic EPS) and potentially dilutive shares.  Shares included in dilutive earnings per share calculations include stock options granted that are in the money but have not yet been exercised.

 

11



 

 

 

For the Quarter Ended

 

 

 

March 29,
2003

 

April 3,
2004

 

Earnings available to common shareholders

 

$

3,575

 

$

6,213

 

Basic EPS

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding entire period

 

18,273

 

19,470

 

Weighted average common shares:

 

 

 

 

 

Issued during period

 

351

 

28

 

Canceled during period

 

 

(121

)

Weighted average common shares outstanding during period

 

18,624

 

19,377

 

Earnings per common share - basic

 

$

0.19

 

$

0.32

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

Shares

 

 

 

 

 

Weighted average shares outstanding during period - basic

 

18,624

 

19,377

 

Dilutive effect of stock options

 

2,424

 

1,476

 

Weighted average shares outstanding during period - diluted

 

21,048

 

20,853

 

Earnings per common share - diluted

 

$

0.17

 

$

0.30

 

 

Options to purchase 190 shares of stock were not included in the computation of EPS for the quarter ended April 3, 2004 due to their exercise price being greater than the average market price of the shares.  For the quarter ended March 29, 2003, all options were included in the computation of EPS.

 

During the first quarter 2004, the Company expended $8,248 to purchase 285 shares under the Company’s share repurchase plan.  The purchase of shares under this plan reduces the number of shares issued and outstanding.

 

NOTE H – SEGMENT INFORMATION

 

The Company’s operations are distinguished by markets served and method of distribution employed and are classified into two reportable business segments: Direct Selling and Contract Manufacturing.  These operating segments are evaluated regularly by management in determining the allocation of resources and in assessing the performance of the Company.  Management evaluates performance based on net sales and the amount of operating income or loss.

 

Segment profit or loss is based on profit or loss from operations before income taxes.  Interest income and expense, as well as income taxes, while significant, are not included in the Company’s determination of segment profit or loss in assessing the performance of a segment.

 

12



 

Direct Selling

 

The Direct Selling segment comprises the Company’s principal line of business: developing, manufacturing, and distributing nutritional and personal care products.  Products are distributed through a network marketing system using independent distributors referred to as “Associates”.  Products are also sold directly to “Preferred Customers” who purchase products for personal use and are not permitted to resell or distribute the products.  Sales to Associates and Preferred Customers are reported for seven operating geographic regions including North America, Australia-New Zealand, Hong Kong, Japan, Taiwan, South Korea, and Singapore.

 

Contract Manufacturing

 

Operating activities for the Contract Manufacturing segment include the manufacture of premium personal care products, produced under the brand name of its customers, including manufacturing and packaging for the Company’s Sensé product line of skin and personal care products.  Operations are located in Draper, Utah and sales are made to a limited number of customers.

 

Sales made by the Contract Manufacturing segment to one customer accounted for 75%, or approximately $1,156, of segment revenues for the quarter ended April 3, 2004.  No other individual customer accounted for 10% or more of segment net revenues.

 

Prior to the quarter ended September 27, 2003, the Company was only engaged in a single line of business, which was developing, manufacturing, and distributing nutritional and personal care products through a network marketing system.  As such, only one business segment was reported, which was distinguished by geography.  During July 2003, Contract Manufacturing was added as a new business segment.  This change does not affect the presentation of historical segment information.

 

Financial information summarized by operating segment and geographic region for the quarters ended March 29, 2003 and April 3, 2004 is listed below:

 

 

 

Revenues from
External
Customers

 

Intersegment
Revenues

 

Earnings
before Income
Taxes

 

Long-lived
Assets

 

Total Assets

 

Quarter ended March 29, 2003:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

29,699

 

$

4,732

 

$

5,534

 

$

22,742

 

$

33,545

 

Australia - New Zealand

 

5,323

 

410

 

687

 

286

 

2,342

 

Hong Kong

 

1,890

 

 

226

 

212

 

1,603

 

Japan (2)

 

1,238

 

 

(771

)

1,191

 

2,085

 

Taiwan

 

2,714

 

 

554

 

356

 

2,745

 

Reportable Segments Total

 

40,864

 

5,142

 

6,230

 

24,787

 

42,320

 

Unallocated and Other (4)

 

 

(5,142

)

(555

)

(4,266

)

(4,606

)

Consolidated Total

 

$

40,864

 

$

 

$

5,675

 

$

20,521

 

$

37,714

 

 

13



 

 

 

 

Revenues from
External
Customers

 

Intersegment
Revenues

 

Earnings
before Income
Taxes

 

Long-lived
Assets

 

Total Assets

 

Quarter ended April 3, 2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America (1)

 

$

40,286

 

$

9,323

 

$

10,629

 

$

35,566

 

$

55,409

 

Australia - New Zealand

 

8,276

 

672

 

(808

)

272

 

4,243

 

Hong Kong

 

2,457

 

 

208

 

231

 

2,445

 

Japan (2)

 

2,216

 

 

(463

)

1,131

 

2,577

 

Taiwan

 

3,729

 

 

(486

)

415

 

2,920

 

South Korea

 

1,270

 

 

(644

)

836

 

2,438

 

Singapore

 

2,007

 

 

226

 

321

 

2,874

 

Segment Total

 

60,241

 

9,995

 

8,662

 

38,772

 

72,906

 

Contract Manufacturing (3)

 

1,534

 

488

 

(314

)

5,734

 

8,682

 

Reportable Segments Total

 

61,775

 

10,483

 

8,348

 

44,506

 

81,588

 

Unallocated and Other (4)

 

 

(10,483

)

1,066

 

(14,304

)

(16,511

)

Consolidated Total

 

$

61,775

 

$

 

$

9,414

 

$

30,202

 

$

65,077

 

 


(1)               Includes results from the FMG subsidiary acquired in February 2004 and operations in Mexico initiated in March 2004.

 

(2)               Includes results from local operations in Japan.  Direct U.S. export sales to Japan are included in the North America geographic region.

 

(3)               Reportable business activities for the Contract Manufacturing segment commenced July 1, 2003.

 

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

 

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

 

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

 

General

 

USANA Health Sciences, Inc. develops and manufactures high-quality nutritional and personal care products.  We market all of our products on the basis of high levels of bioavailability, safety, and quality.  We distribute our products through a network marketing system using independent distributors that we refer to as “Associates.”  As of April 3, 2004, we had approximately 96,000 active Associates in the United States, Canada, Australia, New Zealand, Hong Kong, Japan, Taiwan, South Korea, Singapore, Mexico, and the United Kingdom.  We also sell products directly to  “Preferred Customers” who purchase product for personal use and are not permitted to resell or distribute the products.  As of April 3, 2004, we had approximately 55,000 active Preferred Customers worldwide.  Sales to Preferred Customers accounted for approximately 15% of net sales for the Direct Selling

 

14



 

segment during the first quarter of 2004.  For purposes of this report, we only count as active customers those Associates and Preferred Customers who have purchased product from USANA at any time during the most recent three-month period.

 

The fiscal year end of USANA is the Saturday closest to December 31 of each year.  Fiscal year 2004 will end on January 1, 2005 and is a 52-week year.  Fiscal year 2003 ended on January 3, 2004 and was a 53-week year.

 

As discussed more fully in Note H – Segment Information, beginning on page 12 to the consolidated financial statements, we have two reportable segments: Direct Selling and Contract Manufacturing.  The Direct Selling segment constitutes our principal line of business: developing, manufacturing, and distributing nutritional and personal care products through a network marketing system.  The Contract Manufacturing segment includes the manufacture of premium personal care products, produced under the brand name of its customers, including manufacturing and packaging for the Company’s Sensé product line of skin and personal care products.

 

Our primary product lines within the Direct Selling segment consist of USANAâ Nutritionals and Sensé – beautiful scienceâ (Sensé).  The USANAâ Nutritionals product line is further categorized into three separate classifications: Essentials, Optimizers, and Macro Optimizers. Prior to the third quarter of 2003, the USANAâ Nutritionals product line was comprised of the Essentials and Optimizers product categories.  At our Annual International Convention in September 2003, we announced that the L·E·A·N LifelongÔ brand name would be discontinued and that the weight management products associated with this brand were to be sold under the new Macro Optimizers classification within the USANAâ Nutritionals product line.  This transition was made to simplify the overall product story, which our Associates share with prospects. The change includes a shift away from a low-fat/weight loss positioning to a focus on low-glycemic carbohydrates, soy protein and dietary fiber, as well as the specific health benefits associated with these ingredients.

 

USANAâ Nutritionals.

 

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

 

Optimizers are more targeted supplements designed to meet individual health and nutritional needs.  Products in this category include Proflavanolâ, Poly Câ, Procosaâ II, CoQuinoneâ 30, BiOmega-3Ô, E-PrimeÔ, Active CalciumÔ, PhytoEstrinÔ, Palmetto PlusÔ, Ginkgo-PSÔ, Garlic ECÔ, VisionexÔ, and OptOmegaâ.

 

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

 

Sensé - beautiful scienceâ

 

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

 

In addition to these principal product lines, we have developed and sell to Associates materials and online tools designed to assist them in building their business and selling products.  These resource materials or sales aids include product brochures and

 

15



 

business forms designed by us and printed by outside publishers.  We periodically contract with authors and publishers to produce or provide books, tapes, and other items dealing with health topics and personal motivation, which are made available to Associates.  We also write and develop our own materials for audio and videotapes, which are produced by third parties.  New Associates are required to purchase a starter kit containing USANA training materials that assist the Associates in starting and growing their business.  Associates do not earn commissions on the sale of sales aids or starter kits.

 

The following table summarizes the approximate percentage of total product revenue for the Direct Selling segment contributed by major product line for the quarters ended as of the dates indicated:

 

 

 

Sales By Product Line *
Quarter Ended

 

Product Line

 

March 29,
2003

 

April 3,
2004

 

USANAâ Nutritionals

 

 

 

 

 

Essentials**

 

38

%

38

%

Optimizers

 

34

%

33

%

Macro Optimizers

 

8

%

10

%

Sensé – beautiful scienceâ

 

14

%

13

%

All Other

 

6

%

6

%

 


*   Product sales previously categorized as Combination Packs have been allocated to their respective product lines based on the weighted average price of the product components that comprise each pack.

 

** The Essentials category under the USANAâ Nutritionals product line includes USANAâ Essentials, HealthPak 100Ô, Body RoxÔ, and UsanimalsÔ

 

Key Products
 

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

 

USANAâ Essentials

 

25

%

HealthPak 100Ô

 

11

%

Proflavanolâ

 

11

%

 

Results of Operations
 

Quarters Ended March 29, 2003 and April 3, 2004

 

Net Sales.  Net sales increased 51.2% to $61.8 million for the quarter ended April 3, 2004, an increase of $20.9 million from the $40.9 million reported for the comparable quarter in 2003.  The increase was comprised of $19.4 million associated with our Direct Selling segment and $1.5 million associated with our Contract Manufacturing segment acquired in July 2003.

 

The following table summarizes the growth in net sales by segment and geographic region for the fiscal quarters ended March 29, 2003 and April 3, 2004.

 

16



 

 

 

Sales By Segment and Region

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

Quarter Ended

 

Change from

 

Percent

 

Segment / Region

 

March 29, 2003

 

April 3, 2004

 

Prior Year

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

19,989

 

48.9

%

$

27,101

 

43.9

%

$

7,112

 

35.6

%

Canada

 

9,710

 

23.8

%

12,437

 

20.1

%

2,727

 

28.1

%

Australia-New Zealand

 

5,323

 

13.0

%

8,276

 

13.4

%

2,953

 

55.5

%

Hong Kong

 

1,890

 

4.6

%

2,457

 

4.0

%

567

 

30.0

%

Japan

 

1,238

 

3.0

%

2,216

 

3.6

%

978

 

79.0

%

Taiwan

 

2,714

 

6.7

%

3,729

 

6.0

%

1,015

 

37.4

%

South Korea

 

 

0.0

%

1,270

 

2.1

%

1,270

 

N/A

 

Singapore

 

 

0.0

%

2,007

 

3.2

%

2,007

 

N/A

 

Mexico

 

 

0.0

%

748

 

1.2

%

748

 

N/A

 

Segment Total

 

40,864

 

100.0

%

60,241

 

97.5

%

19,377

 

47.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract Manufacturing

 

 

0.0

%

1,534

 

2.5

%

1,534

 

N/A

 

Consolidated

 

$

40,864

 

100.0

%

$

61,775

 

100.0

%

$

20,911

 

51.2

%

 

The increase in net sales contributed by the Direct Selling segment can be primarily attributed to the following factors:

 

                  A 22.9% increase in the active Associate base and a 17.0% increase in the active Preferred Customer base for the first quarter of 2004 in markets that have been open longer than one year,

 

                  Sales from South Korea, Singapore, and Mexico of $1.3 million, $2.0 million, and $0.7 million, respectively, which were not open during the first quarter of 2003, and

 

                  Stronger foreign currencies, relative to the U. S. dollar, which positively affected the translation of sales in foreign currencies by $3.7 million.

 

Based on information currently available to the Company, we expect consolidated net sales in excess of $65 million for the second quarter of 2004.  We expect consolidated net sales to be in the range of $255 to $260 million for fiscal year 2004.

 

The following tables summarize the growth in active customers for the Direct Selling segment by geographic region as of the dates indicated:

 

17



 

Active Associates By Region

 

Region

 

As of
March 29, 2003

 

As of
April 3, 2004

 

Change from
Prior Year

 

Percent
Change

 

United States

 

30,000

 

42.8

%

38,000

 

39.6

%

8,000

 

26.7

%

Canada

 

18,000

 

25.7

%

19,000

 

19.8

%

1,000

 

5.6

%

Australia-New Zealand

 

10,000

 

14.3

%

13,000

 

13.5

%

3,000

 

30.0

%

Hong Kong

 

4,000

 

5.7

%

4,000

 

4.2

%

 

0.0

%

Japan

 

2,000

 

2.9

%

4,000

 

4.2

%

2,000

 

100.0

%

Taiwan

 

6,000

 

8.6

%

8,000

 

8.3

%

2,000

 

33.3

%

South Korea

 

 

0.0

%

3,000

 

3.1

%

3,000

 

N/A

 

Singapore

 

 

0.0

%

4,000

 

4.2

%

4,000

 

N/A

 

Mexico

 

 

0.0

%

3,000

 

3.1

%

3,000

 

N/A

 

Total

 

70,000

 

100.0

%

96,000

 

100.0

%

26,000

 

37.1

%

 

We believe that various factors contributed to the year-over-year first quarter increase in the active Associate base, including general enthusiasm created by international expansion, ongoing communication with Associate leaders in the field, improved infrastructure to enhance the Associate service level, and company-sponsored events and promotions held to motivate Associates.

 

Active Preferred Customers By Region

 

Region

 

As of
March 29, 2003

 

As of
April 3, 2004

 

Change from
Prior Year

 

Percent
Change

 

United States

 

29,000

 

61.7

%

34,000

 

61.8

%

5,000

 

17.2

%

Canada

 

14,000

 

29.8

%

16,000

 

29.1

%

2,000

 

14.3

%

Australia-New Zealand

 

4,000

 

8.5

%

4,000

 

7.3

%

 

0.0

%

Hong Kong

 

 

**

0.0

%

1,000

 

1.8

%

1,000

 

N/A

 

Japan

 

 

**

0.0

%

 

**

0.0

%

 

N/A

 

Taiwan

 

 

**

0.0

%

 

**

0.0

%

 

N/A

 

South Korea

 

 

0.0

%

 

**

0.0

%

 

N/A

 

Singapore

 

 

0.0

%

 

**

0.0

%

 

N/A

 

Mexico

 

 

0.0

%

 

**

0.0

%

 

N/A

 

Total

 

47,000

 

100.0

%

55,000

 

100.0

%

8,000

 

17.0

%

 


**  Active Preferred Customer count is less than 500.

 

Total Active Customers By Region

 

Region

 

As of
March 29, 2003

 

As of
April 3, 2004

 

Change from
Prior Year

 

Percent
Change

 

United States

 

59,000

 

50.4

%

72,000

 

47.7

%

13,000

 

22.0

%

Canada

 

32,000

 

27.4

%

35,000

 

23.2

%

3,000

 

9.4

%

Australia-New Zealand

 

14,000

 

12.0

%

17,000

 

11.3

%

3,000

 

21.4

%

Hong Kong

 

4,000

 

3.4

%

5,000

 

3.3

%

1,000

 

25.0

%

Japan

 

2,000

 

1.7

%

4,000

 

2.6

%

2,000

 

100.0

%

Taiwan

 

6,000

 

5.1

%

8,000

 

5.3

%

2,000

 

33.3

%

South Korea

 

 

0.0

%

3,000

 

2.0

%

3,000

 

N/A

 

Singapore

 

 

0.0

%

4,000

 

2.6

%

4,000

 

N/A

 

Mexico

 

 

0.0

%

3,000

 

2.0

%

3,000

 

N/A

 

Total

 

117,000

 

100.0

%

151,000

 

100.0

%

34,000

 

29.1

%

 

Gross Profit.  Consolidated gross profit decreased to 75.6% of net sales for the quarter ended April 3, 2004 from 77.4% for the comparable quarter in 2003.  Gross profit in the Direct Selling segment for the quarter ended April 3, 2004 remained relatively

 

18



 

constant as a percent of net sales for the segment at 77.6% compared to 77.4% for the same quarter in 2003.  The consolidated gross profit for the current quarter was negatively impacted by the absence of gross margins in our Contract Manufacturing segment.  We expect to see modest improvements to the gross profit margin in our Contract Manufacturing segment in the second quarter and as we go forward in 2004.

 

Additionally, we continued to encounter higher purchase prices for one of our key raw materials CoQ10 during the quarter ended April 3, 2004 due to a sustained shortage in supply.

 

Associate Incentives.  Expenses related to Associate incentives are incurred only by the Direct Selling segment and represent the most significant cost as a percentage of net sales for this segment.  Associate incentives remained relatively constant at 39.2% of net segment sales during the first quarter of 2004, compared to 39.4% for the first quarter in 2003.

 

We believe that Associate incentives as a percentage of net segment sales for the remainder of fiscal 2004 will approximate the levels reported during the current year quarter.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expense decreased to 21.5% of net sales for the quarter ended April 3, 2004 from 23.4% for the comparable quarter in 2003.  The decrease, as a percentage of net sales, can be primarily attributed to leverage generated on an increasing sales base.

 

In absolute terms, selling, general and administrative expenses increased by $3.7 million for the quarter ended April 3, 2004 when compared to first quarter of 2003.  The increase in selling, general and administrative expenses can be primarily attributed to the following factors:

 

                  An increase in spending in many of our markets to support a growing Associate base and related sales,

 

                  Spending in our newer markets of South Korea, Singapore, and Mexico, and

 

                  Higher translated U.S. dollars of foreign currency expenses, totaling approximately $400,000, as a result of a weaker U.S. dollar.

 

Although we believe that selling, general and administrative expenses will continue to increase in absolute terms, we are also anticipating modest improvements for the remainder of 2004 as a percentage of net sales.

 

Other Income (Expense). Other income (expense) improved by $115,000 in the first quarter of 2004 when compared to the first quarter of 2003.  This increase in net other income can be primarily attributed to lower interest expense and foreign currency gains on outstanding intercompany balances, resulting from the continued weakening of the U.S. dollar.

 

Income Taxes.  Income taxes totaled 34.0% of earnings before income taxes for the first quarter of 2004, compared to 37.0% during the same period in 2003.  The effective tax rate in the first quarter of 2003 was based on an estimate of a 37.0% effective tax rate for the year, which was adjusted down to 33.5% at the end of 2003.  The change in the year-end effective tax rate was primarily due to the implementation of strategies that allowed us to take advantage of losses in our Japan subsidiary and the availability of higher foreign tax credits than previously anticipated.

 

The increase in the effective tax rate for the first quarter of 2004, compared to the year ended 2003 was primarily due to an increase in the effective federal income tax rate from 34% to 35% due to higher earnings and the utilization of a foreign tax credit carryforward in the tax year 2003 that will not occur again in the tax year 2004. The foreign tax credit carryforward utilized in 2003 lowered the effective tax rate as a result of decreasing a valuation allowance that had previously provided for the potential non-recovery of the foreign tax credit carryforwards prior to expiration.

 

Net Earnings.  Net earnings increased 73.8% to $6.2 million for the quarter ended April 3, 2004, an increase of $2.6 million from the $3.6 million reported for the comparable quarter in 2003.  The increase in net earnings can be attributed primarily to increased net sales and lower relative selling, general, and administrative expenses.

 

19



 

Diluted earnings per share improved to $0.30 for the first quarter of 2004, an increase of $0.13, or 76.5%, from the $0.17 reported for the comparable quarter in 2003.

 

Liquidity and Capital Resources

 

We have historically financed growth with cash flows from operations.  In the first quarter of 2004, net cash flows from operating activities totaled $7.8 million, compared to $7.1 million for the same period in 2003.  Cash and cash equivalents decreased to $14.9 million at April 3, 2004 from $19.0 million at January 3, 2004.  Additionally, net working capital declined to $13.5 million at April 3, 2004, compared to net working capital of $18.3 million at January 3, 2004.  The decrease in cash and cash equivalents and net working capital during the first quarter 2004 can be primarily attributed to the purchase of shares under the Company’s share repurchase plan totaling $8.2 million.

 

Effective April 23, 2004, we canceled our $10 million line of credit, and are currently in the process of negotiating a new line of credit.

 

We believe that current cash balances and cash provided by operations will be sufficient to cover our capital needs in the ordinary course of business for the foreseeable future.  If we experience 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.  We might also require or seek additional financing for the purpose of expanding new markets, growing our existing markets, and for other reasons.  Such financing may include the sale of additional equity securities.  Any financing which involves the sale of equity securities or instruments convertible into equity securities could 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 at pages 32 through 39.  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 dependence upon a network marketing system to distribute our products,

 

                  Activities of our independent Associates,

 

                  Risks related to our expansion into international markets,

 

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                  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 Founder, Chairman of the Board of Directors, and Chief Executive Officer Myron W. Wentz, Ph.D.,

 

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

 

                  Potential inability to sustain or manage growth, including the failure to continue to develop new products,

 

                  Our reliance on information technology,

 

                  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,

 

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

 

                  Our reliance on outside suppliers for raw materials,

 

                  Product liability claims and other manufacturing activity risks,

 

                  Intellectual property risks particularly applicable to our business, and

 

                  Liability claims associated with our “Athlete Guarantee” program.

 

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, our 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 we have operations as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.

 

Foreign Currency Risks.  Consolidated net sales outside the United States represented 51.1% and 53.6% of net sales for the quarters ended March 29, 2003 and April 3, 2004, 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, our reported sales and earnings are affected positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar.  Changes in currency exchange rates affect the relative prices at which we sell our products.  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.

 

We seek to reduce exposure to fluctuations in foreign exchange rates by creating offsetting positions through the use of foreign currency exchange contracts.  We do not use derivative financial instruments for trading or speculative purposes.  We enter into forward and option contracts to hedge expected net cash flows from our foreign affiliates, which is primarily represented by

 

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intercompany cash transfers.  As of April 3, 2004, forward and option contracts were in place to offset exposure to the Canadian Dollar, Australian Dollar, New Zealand Dollar, and New Taiwan Dollar.

 

As a last recourse for hedging currency risk, we may elect to adjust prices in non-U.S. markets to reflect changes in foreign currency exchange rates.  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.

 

Following are the average exchange rates of foreign currency units to one U.S. dollar for each of our foreign markets for the quarters ended as of the dates indicated:

 

 

 

Quarter Ended

 

 

 

March 29, 2003

 

April 3, 2004

 

Canadian Dollar

 

1.51

 

1.32

 

Australian Dollar

 

1.69

 

1.31

 

New Zealand Dollar

 

1.82

 

1.48

 

Hong Kong Dollar

 

7.80

 

7.80

 

Japanese Yen

 

118.96

 

107.20

 

New Taiwan Dollar

 

34.63

 

33.30

 

Korean Won

 

 

*

1,169.56

 

Singapore Dollar

 

 

*

1.70

 

Mexican Peso **

 

 

*

11.04

 

 


*                 Market was not in operation during period indicated.

 

**          The Mexican Peso exchange rate for the quarter ended April 3, 2004 represents the average rate for the first month of Mexico operations that commenced in March 2004.

 

Interest Rate Risks.  As of April 3, 2004, we had no outstanding debt and therefore, we currently have no direct exposure to interest rate risk.  It may become necessary to borrow in the future in order to meet our financing needs, as circumstances require.  In the event that it becomes necessary to finance with debt, there can be no assurance that we will be able to borrow at favorable rates.

 

Item 4.    CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

(a)           Evaluation of Disclosure Controls and Procedures.  As of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended). Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective.

 

(b)           Changes in Internal Controls.  There were no significant changes in our internal controls or in other factors that could significantly affect those internal controls subsequent to the date of the evaluation, nor were there any significant deficiencies or material weaknesses in our internal controls. As a result, no corrective actions were required or undertaken.

 

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PART II.   OTHER INFORMATION

 

Item 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

 

On February 3, 2004, the Board of Directors approved the continuation of the Company’s share repurchase plan and has provided for the repurchase of up to one million shares, which was announced in a press release dated February 10, 2004.  Purchases made during the quarter ended April 3, 2004 and for each fiscal month are summarized in the following table:

 

Issuer Purchases of Equity Securities

(amounts in thousands, except per share data)

 

Period

 

Total
Number of
Shares
Purchased

 

Average Price
Paid per Share

 

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs

 

Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs *

 

 

 

 

 

 

 

 

 

 

 

January 4, 2004 through February 7, 2004 (Fiscal January)

 

 

$

 

 

$

15,000

 

 

 

 

 

 

 

 

 

 

 

February 8, 2004 through March 6, 2004 (Fiscal February)

 

222

 

$

29.22

 

222

 

$

8,516

 

 

 

 

 

 

 

 

 

 

 

March 7, 2004 through April 3, 2004 (Fiscal March)

 

63

 

$

28.36

 

63

 

$

6,718

 

Total

 

285

 

$

29.03

 

285

 

 

 

 

 


*                 At their April 2004 meeting, the Board of Directors approved an increase in the dollar amount that may be purchased under the Company’s share repurchase plan from $6.7 million up to $10.0 million.

 

Item 5.    OTHER INFORMATION

 

In February 2004, the Company completed the acquisition of the net assets of FMG Productions, LLC (FMG), a Utah limited liability company that produces video and audio promotional and training materials for large companies and sales organizations, including the Company.  The aggregate investment was $2,137 including $2,060 in cash and $77 for professional fees directly associated with the acquisition.  The purchase was made through a newly formed wholly owned subsidiary of the Company, which will operate the business formerly conducted by FMG.  The former employees of FMG, including its founders and primary creative directors, will continue to operate the business now owned by USANA.  See Note B to the consolidated financial statements (unaudited) at page 9 of this report.

 

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]

 

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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 USANA [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 USANA [Incorporated by reference to Report on Form 10-Q for the period ended June 27, 1998]

 

 

 

  10.3

 

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]*

 

 

 

  10.4

 

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

 

 

 

  10.5

 

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

 

 

 

  10.6

 

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

 

 

 

  10.7

 

Second Amendment to Credit Agreement, dated August 21, 2002 [Incorporated by reference to Current Report on Form 8-K, filed August 23, 2002]

 

 

 

  10.8

 

Third Amendment to Credit Agreement, dated December 27, 2002 [Incorporated by reference to Report on Form 10-K, filed March 27, 2003]

 

 

 

  10.9

 

Consent and Fourth Amendment to Credit Agreement, dated July 8, 2003 [Incorporated by reference to Report on Form 10-K, filed March 12, 2004]

 

 

 

  10.10

 

Fifth Amendment to Credit Agreement, dated September 1, 2003 [Incorporated by reference to Report on Form 10-K, filed March 12, 2004]

 

 

 

  10.11

 

Sixth Amendment to Credit Agreement, dated December 1, 2003 [Incorporated by reference to Report on Form 10-K, filed March 12, 2004]

 

 

 

  11.1

 

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

 

 

 

  31.1

 

Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

  31.2

 

Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

  32.1

 

Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley act of 2002, 18 U.S.C. Section 1350

 

 

 

  32.2

 

Certification of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley act of 2002, 18 U.S.C. Section 1350

 


* Denotes a management contract or compensatory plan or arrangement.

 

 

 

(b)      Reports on Form 8-K.

 

 

 

 

 

On January 9, 2004, a Form 8-K was filed to update earnings estimates for the fourth quarter and fiscal year ended 2003.

 

 

 

 

 

On February 4, 2004, a Form 8-K was filed to disclose official financial results for the fourth quarter and fiscal year ended 2003.

 

24



 

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:

May 11, 2004

 

/s/ Gilbert A. Fuller

 

Gilbert A. Fuller

 

Chief Financial Officer
(Principal Financial and Accounting Officer)

 

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