UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                       to

 

Commission file number: 0-21116

USANA HEALTH SCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

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

(Address of principal executive offices, Zip Code)

(801) 954-7100

(Registrant’s telephone number, including area code)

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

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

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

 

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

Yes o  No x

The number of shares outstanding of the registrant’s common stock as of November 1, 2006 was 17,780,696.

USANA HEALTH SCIENCES, INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2006

INDEX

					Page
		PART I. FINANCIAL INFORMATION
Item 1		Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Earnings — Quarter Ended
		Consolidated Statements of Earnings — Nine Months Ended
		Consolidated Statement of Stockholders’ Equity and Comprehensive Income
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3		Quantitative and Qualitative Disclosures About Market Risk
Item 4		Controls and Procedures
		PART II.OTHER INFORMATION
Item 1A		Risk Factors
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6		Exhibits.
Signatures

 

 

2

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

		December 31,			September 30,
		2005			2006
					(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	10,579		$	20,977
Inventories		22,223			22,497
Prepaid expenses and other current assets		6,024			6,833
Deferred income taxes		3,004			2,715
Total current assets		41,830			53,022
Property and equipment, net		23,302			25,764
Goodwill		5,690			5,690
Other assets		2,886			2,349
		$	73,708		$	86,825
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	4,955		$	8,928
Other current liabilities		21,601			25,954
Total current liabilities		26,556			34,882
Long-term liabilities		1,414			—
Stockholders’ equity
Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding 18,343 shares as of December 31, 2005 and 17,811 shares as of September 30, 2006		18			18
Additional paid-in capital		9,161			11,996
Retained earnings		35,720			39,110
Accumulated other comprehensive income		839			819
Total stockholders’ equity		45,738			51,943
		$	73,708		$	86,825

 

The accompanying notes are an integral part of these statements.

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(in thousands, except per share data)

(unaudited)

		Quarter Ended
		October 1,			September 30,
		2005			2006
Net sales		$	82,225		$	95,187
Cost of sales		19,760			22,188
Gross profit		62,465			72,999
Operating expenses:
Associate incentives		32,545			38,483
Selling, general and administrative		14,756			17,898
Research and development		551			881
Total operating expenses		47,852			57,262
Earnings from operations		14,613			15,737
Other income (expense):
Interest income		143			141
Interest expense		(8		)	—
Other, net		37			(73		)
Other income, net		172			68
Earnings before income taxes		14,785			15,805
Income taxes		4,743			5,582
Net earnings		$	10,042		$	10,223
Earnings per common share
Basic		$	0.53		$	0.57
Diluted		$	0.51		$	0.55
Weighted-average common shares outstanding
Basic		18,867			17,780
Diluted		19,755			18,486

 

The accompanying notes are an integral part of these statements

4

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(in thousands, except per share data)

(unaudited)

		Nine Months Ended
		October 1,			September 30,
		2005			2006
Net sales		$	240,818		$	278,749
Cost of sales		57,269			65,802
Gross profit		183,549			212,947
Operating expenses:
Associate incentives		94,006			111,365
Selling, general and administrative		44,773			53,515
Research and development		1,839			2,443
Total operating expenses		140,618			167,323
Earnings from operations		42,931			45,624
Other income (expense):
Interest income		340			446
Interest expense		(11		)	(4		)
Other, net		(59		)	257
Other income, net		270			699
Earnings before income taxes		43,201			46,323
Income taxes		14,688			16,196
Net earnings		$	28,513		$	30,127
Earnings per common share
Basic		$	1.50		$	1.66
Diluted		$	1.44		$	1.60
Weighted average common shares outstanding
Basic		18,961			18,130
Diluted		19,849			18,830

 

The accompanying notes are an integral part of these statements.

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Nine Months Ended October 1, 2005 and September 30, 2006

(in thousands)

(unaudited)

													Accumulated
							Additional						Other
		Common Stock					Paid-in			Retained			Comprehensive
		Shares		Value			Capital			Earnings			Income (Loss)			Total
For the Nine Months Ended October 1, 2005
Balance at January 1, 2005		18,953		$	19		$	11,853		$	34,496		$	1,475		$	47,843
Comprehensive income
Net earnings		—		—			—			28,513			—			28,513
Foreign currency translation adjustment, net		—		—			—			—			(596		)	(596		)
Comprehensive income																27,917
Common stock retired		(353	)	—			(3,948		)	(11,053		)	—			(15,001		)
Common stock issued under equity-based award plan, including tax benefit of $3,551		333		—			6,241			—			—			6,241
Balance at October 1, 2005		18,933		$	19		$	14,146		$	51,956		$	879		$	67,000
For the Nine Months Ended September 30, 2006
Balance at December 31, 2005		18,343		$	18		$	9,161		$	35,720		$	839		$	45,738
Comprehensive income
Net earnings		—		—			—			30,127			—			30,127
Foreign currency translation adjustment, net		—		—			—			—			(20		)	(20		)
Comprehensive income																30,107
Common stock retired		(868	)	(1		)	(6,367		)	(26,737		)	—			(33,105		)
Common stock awarded to Associates		2		1			100			—			—			101
Equity-based compensation expense		—		—			3,468			—			—			3,468
Common stock issued under equity-based award plan, including tax benefit of $3,090		334		—			5,634			—			—			5,634
Balance at September 30, 2006		17,811		$	18		$	11,996		$	39,110		$	819		$	51,943

 

The accompanying notes are an integral part of these statements.

6

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

		Nine Months Ended
		October 1,			September 30,
		2005			2006
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings		$	28,513		$	30,127
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization		4,353			4,249
(Gain) loss on sale of property and equipment		7			(2		)
Equity-based compensation expense		—			3,468
Excess tax benefit from equity-based payment arrangements		—			(2,109		)
Common stock awarded to Associates		—			101
Deferred income taxes		(255		)	(1,309		)
Allowance for inventory valuation		1,296			1,813
Changes in operating assets and liabilities:
Inventories		(9,079		)	(1,897		)
Prepaid expenses and other assets		667			(544		)
Accounts payable		1,836			3,953
Other current liabilities		5,427			7,189
Total adjustments		4,252			14,912
Net cash provided by operating activities		32,765			45,039
Cash flows from investing activities
Proceeds from the sale of property and equipment		17			17
Purchases of property and equipment		(3,668		)	(6,278		)
Net cash used in investing activities		(3,651		)	(6,261		)
Cash flows from financing activities
Proceeds from exercise of equity-based awards		2,690			2,544
Excess tax benefit from equity-based payment arrangements		—			2,109
Redemption of common stock		(15,001		)	(33,105		)
Net cash used in financing activities		(12,311		)	(28,452		)
Effect of exchange rate changes on cash and cash equivalents		(549		)	72
Net increase (decrease) in cash and cash equivalents		16,254			10,398
Cash and cash equivalents, beginning of period		15,067			10,579
Cash and cash equivalents, end of period		$	31,321		$	20,977
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	8		$	5
Income taxes		11,002			15,788

 

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 September 30, 2006, and results of operations for the quarters and nine months ended October 1, 2005 and September 30, 2006.  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 December 31, 2005.  The results of operations for the quarter and nine months ended September 30, 2006 may not be indicative of the results that may be expected for the fiscal year ending December 30, 2006.

Recently Issued Accounting Standards

In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. FIN 48 defines the threshold for recognizing tax return positions in the financial statements as “more likely than not” that the position is sustainable, based on technical merits of the provision. FIN 48 also provides guidance on the measurement, classification and disclosure of tax return positions in the financial statements. FIN 48 is effective for the first reporting period beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to the beginning balance of retained earnings in the period of adoption. The Company’s accounting for income tax contingency reserves is not based on the provisions of FIN 48 because its financial statements for the nine months ended September 30, 2006 have been issued without the early adoption of the provisions of this interpretation.  The Company is currently evaluating the impact of adopting FIN 48 on its consolidated financial statements.

In June 2006, the FASB ratified the consensuses of Emerging Issues Task Force (“EITF”) Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06-3”).  EITF 06-3 clarifies that the scope of this Issue includes any tax assessed by a governmental authority that is imposed concurrently with or subsequent to a revenue-producing transaction between a seller and a customer and indicates that the income statement presentation on either a gross basis or a net basis of the taxes within the scope of the Issue is an accounting policy decision that should be disclosed. Furthermore, for taxes reported on a gross basis, an enterprise should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented. The consensus is effective, through retrospective application, for periods beginning after December 15, 2006.  The Company currently presents taxes on a net basis within the scope of this issue.

In September 2006, the SEC issued Staff Accounting Bulletin 108 (“SAB 108”) “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.”  SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment.  SAB 108 requires registrants to quantify the impact of correcting misstatements on the current year financial statements using both the rollover and iron curtain approaches.  The rollover approach quantifies a misstatement based on the amount of the error originating in the current year income statement.  The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origination.  The Company will be required to adopt the provisions of SAB 108 for its fiscal year ending December 30, 2006.  Management believes the provisions of SAB 108 will have no material effect on the Company’s financial position or results of operations.

8

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In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement addresses how to calculate fair value measurements required or permitted under other accounting pronouncements. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. SFAS No. 157 is effective for the Company beginning January 1, 2008. The Company is currently evaluating the impact of this standard.

NOTE A — EQUITY-BASED COMPENSATION

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” using the modified prospective application.  Under this method, compensation expense includes the estimated fair value of equity awards earned during the reported periods.  Expense for equity awards earned is determined based on grant date fair value previously calculated for pro forma disclosures under SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123.”  Equity-based compensation expense recognized for the quarter and nine months ended September 30, 2006 was comprised as follows:

 

The impact of equity-based compensation expense on net earnings and earnings per share for the quarter and nine months ended September 30, 2006 can be found in the pro forma table in this footnote.  The Company currently estimates that equity-based compensation expense will reduce basic and diluted earnings per share in 2006 by $0.18.  The following table shows the remaining unrecognized compensation expense on a pre-tax basis related to all types of equity awards outstanding as of September 30, 2006.  This table does not include an estimate for future grants that may be issued.

 

The cost above is expected to be recognized over a weighted-average period of 2.4 years.

Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits resulting from equity-based compensation as cash flows from operating activities in the condensed consolidated statements of cash flows.  SFAS No. 123(R) requires cash flows resulting from tax deductions in excess of the grant-date fair value of equity awards to be included in cash flows from financing activities.  The excess tax benefits of $2,109 related to equity-based compensation included in cash flows from financing activities during the nine months ended September 30, 2006 would have been included in cash flows from operating activities if the Company had not adopted SFAS No. 123(R).

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NOTE A — EQUITY-BASED COMPENSATION — CONTINUED

The Company has elected to follow the transition guidance indicated in Paragraph 81 of SFAS No. 123(R) for purposes of calculating the pool of excess tax benefits available to absorb possible future tax deficiencies.  As such, the Company has calculated its historical “APIC pool” of windfall tax benefits using the long-form method.

As permitted by SFAS No. 148, prior to the adoption of SFAS No. 123(R), the Company accounted for equity award expense under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” under which no compensation was recognized in the Company’s financial statements for the quarter and nine months ended October 1, 2005.  In connection with the modified prospective method, disclosures made for periods prior to the adoption of SFAS No. 123(R) do not reflect restated amounts.

The following table presents equity-based compensation expense included in the Company’s financial statements for the quarter and nine months ended September 30, 2006.  Also illustrated are the pro forma 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 equity-based compensation for the quarter and nine months ended October 1, 2005:

				Quarter Ended						Nine Months Ended
				October 1, 2005			September 30, 2006			October 1, 2005			September 30, 2006
Net earnings		As reported		$	10,042		$	10,223		$	28,513		$	30,127
Add: Compensation cost included in reported net income				—			870			—			2,374
Deduct: Total compensation expense under the fair value method for all awards				(491		)	(870		)	(1,406		)	(2,374		)
Net earnings		Pro forma		$	9,551		$	10,223		$	27,107		$	30,127
Earnings per share - basic		As reported		$	0.53		$	0.57		$	1.50		$	1.66
		Pro forma		$	0.51		$	0.57		$	1.43		$	1.66
Earnings per share - diluted		As reported		$	0.51		$	0.55		$	1.44		$	1.60
		Pro forma		$	0.48		$	0.55		$	1.37		$	1.60

* For the quarter and nine months ended September 30, 2006, earnings per basic and diluted share were reduced $0.05 and $0.13, respectively, from what earnings would have been exclusive of equity-based compensation.

The Company’s 2006 Equity Incentive Award Plan (the “2006 Plan”), which was approved by the shareholders at the Annual Shareholders’ Meeting held on April 19, 2006, allows for the grant of various equity awards including stock-settled stock appreciation rights, stock options, deferred stock units, and other types of equity-based awards to the Company’s officers, key employees, and non-employee directors.  Prior to the approval of the 2006 Plan, the Company maintained the 2002 Stock Option Plan (the “2002 Plan”), which was limited to the granting of incentive and non-qualified stock options.  Between January 1, 2006 and April 19, 2006, the Company granted options for 175 shares of stock under the 2002 Plan.  Options granted under the 2002 Plan generally vest 20% each year on the anniversary of the grant date and expire five to ten years from the date of grant.  The 2006 Plan replaces the 2002 Plan for all future grants, and no new awards will be granted under the 2002 Plan.  The 2006 Plan authorized 5,000 shares of common stock for issuance, of which 4,654 shares were available for future issuance as of September 30, 2006.  Of

10

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NOTE A — EQUITY-BASED COMPENSATION — CONTINUED

the 346 shares granted under the 2006 Plan, 340 were stock-settled stock appreciation rights, 3 were stock options, and 3 were deferred stock units.  The Company’s Compensation Committee has initially determined that awards to be granted to officers and key employees under the 2006 Plan will generally vest 20% each year on the anniversary of the grant date and expire five to five and one-half years from the date of grant.  Awards of stock options and stock-settled stock appreciation rights to be granted to non-employee directors will generally vest 25% each quarter commencing on the last day of the fiscal quarter in which the awards are granted, and will expire five years to five and one-half years from the date of grant.  Awards of deferred stock units are full-value shares at the date of grant, vesting over the periods of service, and do not have expiration dates.

The Company continues to use the Black-Scholes option pricing model to estimate fair value of equity awards, which requires the input of highly subjective assumptions, including the expected stock price volatility.  Prior to the implementation of SFAS No. 123(R), expected volatility represented the historical share prices of the Company’s common stock over the expected life of the award and the risk-free interest rate was based on the U.S. Treasury yield curve on the date of grant with respect to the expected life of the award.  Expected life was based on the contractual term of the award.  Grant price was the market value on the date of grant, established by averaging the closing price of the Company’s common stock over the five trading days preceding the date of grant.

Preceding the adoption of SFAS No. 123(R), the Company engaged a third-party valuation expert to analyze assumptions used by the Company and to determine changes necessary for a more accurate reflection of the estimated fair value of equity awards granted by the Company.  Based on this analysis, the Company decided that, effective January 1, 2006, expected volatility will be calculated by averaging the historical volatility of the Company and a peer group index.  The risk-free interest rate will continue to be based on the U.S. Treasury yield curve on the date of grant with respect to the expected life of the award.  Also, effective January 1, 2006, due to the “plain vanilla” characteristics of the Company’s stock options, the simplified method, as permitted by the guidance provided in Staff Accounting Bulletin No. 107, will be used to determine expected life while permitted.  Awards will continue to be granted at the market value on the date of grant, which is established by averaging the closing price of the Company’s common stock over the five trading days preceding the date of grant.  We estimate that the equity-based compensation expense included in earnings before income taxes for the nine months ended September 30, 2006 was decreased by approximately $254 due to the above mentioned change in assumptions used to estimate fair value of awards granted during the nine months ended September 30, 2006.

The following table includes weighted-average assumptions used to calculate the fair value of awards granted during the periods indicated, as well as the weighted-average fair value of awards granted.  Deferred stock units are full-value shares at the date of grant and have been excluded from the table below.

		Quarter Ended					Nine Months Ended
		October 1,		September 30,			October 1,			September 30,
		2005		2006			2005			2006
Expected volatility		*		57.04		%	71.69		%	57.04		%
Risk-free interest rate		*		5.04		%	3.87		%	4.81		%
Expected life		*		4.250 yrs.			5.250 yrs.			4.137 yrs.
Expected dividend yield		*		0.00		%	0.00		%	0.00		%
Weighted-average fair value of awards granted		*		$	18.47		$	26.84		$	18.77

*   No grants were issued during period.

There were no deferred stock units granted during the quarter ended September 30, 2006.  The weighted-average fair value and grant price of the three deferred stock units granted during the nine months ended September 30, 2006 was $37.60.

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NOTE A — EQUITY-BASED COMPENSATION — CONTINUED

A summary of the Company’s stock option and stock-settled stock appreciation right activity for the nine months ended September 30, 2006 is as follows:

		Shares		Weighted- average Exercise Price*			Weighted-average Remaining Contractual Term		Aggregate Intrinsic Value**
Outstanding at December 31, 2005		1,773		$	17.43		6.97		$	37,121
Granted		518		$	38.00
Exercised		(334	)	$	7.61
Canceled or expired		(12	)	$	27.69
Outstanding at September 30, 2006		1,945		$	24.53		5.98		$	39,058
Exercisable at September 30, 2006		746		$	19.58		6.89		$	18,696

*                    All awards are granted at the market value on the date of grant, which is established by averaging the closing price of the Company’s common stock over the five trading days preceding the date of grant.

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

Total intrinsic value of awards exercised during the nine month periods ending October 1, 2005 and September 30, 2006, which includes stock options and stock-settled stock appreciation rights, was $12,035 and $11,313, respectively.

A summary of the Company’s deferred stock unit activity for the nine months ended September 30, 2006 is as follows:

 

The total fair value of awards that vested during the nine months ended October 1, 2005 and September 30, 2006 was $2,962 and $3,274, respectively.  This total fair value included equity-based awards issued in the form of stock options, stock-settled stock appreciation rights, and deferred stock units.

 

12

 

NOTE B — INVENTORIES

Inventories consist of the following:

 

NOTE C — PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

 

 

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NOTE D — PROPERTY AND EQUIPMENT

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

 

NOTE E — GOODWILL

Goodwill represents the excess of the purchase price paid for acquired entities over the fair market value of the net assets acquired.  As of September 30, 2006, goodwill totaled $5,690, comprising $4,267 that was associated with the July 1, 2003 acquisition of Wasatch Product Development, Inc. (WPD) and $1,423 that was associated with the February 1, 2004 acquisition of FMG.  No events have occurred subsequent to either acquisition that have resulted in an impairment of the original goodwill amounts initially recorded from the transactions.  In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill must be tested at least annually and if the carrying amount of goodwill exceeds its fair value, an impairment loss must be recognized in an amount equal to that excess.

During July 2006, an independent third party conducted the annual impairment test of goodwill related to the acquisition of WPD.  The fair market value of the net assets of WPD was estimated using widely accepted valuation methods, including both a market approach and an income approach.  In determining the fair market value as part of the impairment test, certain assumptions were used to project future results that management believes are reasonable, given current facts and circumstances; however, there can be no assurance that, under the assumptions used, these projections will materialize.  Based upon the results of the independent appraisal, the fair market value of the net assets of WPD has been determined to be in excess of the carrying amount of the net assets, and, therefore, no impairment loss for goodwill has been recognized.

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NOTE F — OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

 

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 issued and weighted-average shares redeemed during the periods indicated 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 diluted earnings per share calculations include equity-based awards that are in-the-money but have not yet been exercised.

 

Options to purchase 16 shares of stock were excluded from the computation of EPS for the quarter ended September 30, 2006 due to their exercise price being greater than the average market price of the shares.

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NOTE G — COMMON STOCK AND EARNINGS PER SHARE — CONTINUED

 

Options to purchase 218 shares of stock were excluded from the computation of EPS for the nine months ended September 30, 2006, due to their exercise price being greater than the average market price of the shares.

During the nine months ended September 30, 2006, and October 1, 2005, the Company expended $33,105 and $15,001 to purchase 868 and 353 shares, respectively, which reduced the number of shares issued and outstanding for these periods.

NOTE H — SEGMENT INFORMATION

The Company’s operations are distinguished by regions served and method of distribution employed.  Two reportable business segments are recognized by the Company: 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.  All intercompany transactions, intercompany profit, currency gains and losses, interest income and expense, and income taxes are excluded from the Company’s determination of segment profit or loss.

Direct Selling

The Company’s Direct Selling segment develops, manufactures, and distributes nutritional, weight management, and personal care products, and is the primary segment in which the Company operates.  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.

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

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