NATURES SUNSHINE PRODUCTS INC - Quarter Report: 2009 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

 

For the transition period from                 to               .

 

Commission File Number:  0-8707

 

 

NATURE’S SUNSHINE PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

 

 

75 East 1700 South

Provo, Utah  84606

(Address of principal executive offices and zip code)

 

(801) 342-4300

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes o No o

 

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

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes o No x

 

The number of shares of Common Stock, no par value, outstanding on July 31, 2009 was 15,510,159 shares.

 

 

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NATURE’S SUNSHINE PRODUCTS, INC.

FORM 10-Q

 

For the Quarter Ended June 30, 2009

 

Table of Contents

 

Part I. Financial Information
	Item 1. Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Operations	4
		Condensed Consolidated Statements of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
	Item 4.	Controls and Procedures	31
Part II. Other Information
	Item 1.	Legal Proceedings	34
	Item 1A.	Risk Factors	34
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
	Item 3.	Default Upon Senior Securities	35
	Item 4.	Submission of Matters to a Vote of Security Holders	35
	Item 5.	Other Information	35
	Item 6.	Exhibits	35

 

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PART I FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

(Unaudited)

 

		June 30, 2009			December 31, 2008
Assets
Current Assets:
Cash and cash equivalents		$	32,839		$	34,853
Accounts receivable, net of allowance for doubtful accounts of $1,575 and $1,472, respectively		9,260			10,786
Investments available for sale		3,300			3,858
Restricted investments		—			2,050
Inventories, net		41,024			39,558
Deferred income tax assets		9,408			9,080
Prepaid expenses and other current assets		10,180			7,935
Total current assets		106,011			108,120
Property, plant and equipment, net		29,461			30,224
Investment securities		1,531			1,394
Intangible assets		1,479			1,538
Deferred income tax assets		6,412			6,412
Other assets		16,507			16,588
		$	161,401		$	164,276
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable		$	6,556		$	8,777
Accrued volume incentives		18,669			15,753
Accrued liabilities		44,515			45,475
Deferred revenue		3,991			5,167
Income taxes payable		940			2,748
Short-term borrowings		966			—
Total current liabilities		75,637			77,920
Liability related to unrecognized tax benefits		30,604			30,952
Deferred compensation payable		1,531			1,394
Other liabilities		3,129			333
Total long-term liabilities		35,264			32,679
Commitments and Contingencies (Note 10)
Shareholders’ Equity:
Common Stock, no par value; 20,000 shares authorized, 15,510 shares issued and outstanding as of June 30, 2009 and December 31, 2008		66,705			66,705
Retained earnings		3,468			4,172
Accumulated other comprehensive loss		(19,673		)	(17,200		)
Total shareholders’ equity		50,500			53,677
		$	161,401		$	164,276

 

See accompanying notes to condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share information)

(Unaudited)

 

		Three Months Ended June 30,
		2009			2008
Net Sales Revenue (net of the rebate portion of volume incentives of $12,183 and $13,234, respectively)		$	84,149		$	95,911
Cost and Expenses:
Cost of goods sold		15,787			16,796
Volume incentives		31,217			36,457
Selling, general and administrative		35,089			39,280
		82,093			92,533
Operating Income		2,056			3,378
Other Income, Net		544			312
Income Before Provision for Income Taxes		2,600			3,690
Provision for Income Taxes		1,066			4,391
Net Income (Loss)		$	1,534		$	(701	)
Basic Net Income (Loss) Per Common Share		$	0.10		$	(0.05	)
Diluted Net Income (Loss) Per Common Share		$	0.10		$	(0.05	)
Weighted Average Basic Common Shares Outstanding		15,510			15,510
Weighted Average Diluted Common Shares Outstanding		15,510			15,510

 

See accompanying notes to condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (Amounts in thousands, except per share information)

(Unaudited)

 

		Six Months Ended June 30,
		2009			2008
Net Sales Revenue (net of the rebate portion of volume incentives of $23,454 and $26,532, respectively)		$	167,325		$	192,362
Cost and Expenses:
Cost of goods sold		33,334			36,013
Volume incentives		62,213			73,054
Selling, general and administrative		72,566			79,018
		168,113			188,085
Operating (Loss) Income		(788		)	4,277
Other Income (Expense), Net		1,748			(47		)
Income Before Provision for Income Taxes		960			4,230
Provision for Income Taxes		888			5,374
Net Income (Loss)		$	72		$	(1,144	)
Basic Net Income (Loss) Per Common Share		$	0.00		$	(0.07	)
Diluted Net Income (Loss) Per Common Share		$	0.00		$	(0.07	)
Weighted Average Basic Common Shares Outstanding		15,510			15,510
Weighted Average Diluted Common Shares Outstanding		15,510			15,510

 

See accompanying notes to condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

		Six Months Ended June 30,
		2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	72		$	(1,144	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Provision for doubtful accounts		5			801
Depreciation and amortization		2,303			3,024
Share-based compensation expense		—			86
Loss on sale of property and equipment		141			35
Deferred income taxes		46			(394		)
Amortization of bond discount		15			19
Purchase of trading investment securities		(131		)	(97		)
Proceeds from sale of trading investment securities		39			64
Realized and unrealized gains on investments		(68		)	(135		)
Amortization of prepaid taxes related to gain on intercompany sales		608			628
Foreign exchange gains		(2,029		)	(620		)
Changes in assets and liabilities:
Accounts receivable		1,510			431
Inventories		(1,339		)	(1,404		)
Prepaid expenses and other current assets		(2,209		)	(1,901		)
Other assets		(336		)	(652		)
Accounts payable		(1,869		)	2,033
Accrued volume incentives		2,806			1,497
Accrued liabilities		682			1,234
Deferred revenue		(1,176		)	(567		)
Income taxes payable		(1,865		)	3,510
Liability related to unrecognized tax positions		(348		)	652
Deferred compensation payable		141			(46		)
Net cash (used in) provided by operating activities		(3,002		)	7,054
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(1,812		)	(5,814		)
Proceeds from sale of investments available for sale		600			640
Proceeds from sale of restricted investments		2,050			25
Proceeds from sale of property, plant and equipment		25			52
Net cash provided by (used in) investing activities		863			(5,097		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of cash dividends		(776		)	(1,551		)
Proceeds from short-term borrowings		3,677			—
Payments on short-term borrowings		(2,711		)	—
Net cash provided by (used in) financing activities		190			(1,551		)
Effect of exchange rates on cash and cash equivalents		(65		)	476
Net (decrease) increase in cash and cash equivalents		(2,014		)	882
Cash and cash equivalents at the beginning of the period		34,853			45,299
Cash and cash equivalents at end of the period		$	32,839		$	46,181
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes		$	4,395		$	1,536
Cash paid for interest		$	—		$	59

 

See accompanying notes to condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per-share information)

(Unaudited)

 

(1)                     Basis of Presentation

 

Nature’s Sunshine Products, Inc. and its subsidiaries (hereinafter referred to collectively as the “Company”) are primarily engaged in the manufacturing and marketing of herbal products, vitamin and mineral supplements, personal care products, and miscellaneous products. Nature’s Sunshine Products, Inc. is a Utah corporation with its principal place of business in Provo, Utah. The Company sells its products to a sales force of independent Distributors and Managers who use the products themselves or resell them to other Distributors or consumers. The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of each of the Company’s major product groups are subject to regulation by one or more governmental agencies.

 

The Company markets its products in the United States, China, Hong Kong, Poland, South Korea, Mexico, Venezuela, Japan, Brazil, Canada, Central America, Colombia, the Dominican Republic, Ecuador, Peru, the United Kingdom, Austria, Germany, the Netherlands, Israel, Taiwan, Thailand, Singapore, Indonesia, Malaysia, the Philippines, Australia, Russia, Ukraine, Latvia, Lithuania, Kazakhstan, Mongolia, and Belarus. The Company also exports its products to several other countries, including Argentina, Australia, Chile, New Zealand, and Norway.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial information as of June 30, 2009, and for the three and six-month periods ended June 30, 2009 and 2008.  The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the fiscal year ending December 31, 2009.

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2008.

 

The Company has a variable interest and has determined that it is the primary beneficiary in a development stage entity.  As a result, the Company has consolidated the entity in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R) (“FIN 46R”), “Consolidation of Variable Interest Entities.”   This variable interest is the result of loans provided by the Company to the entity during 2008, which are secured by the entity’s assets. The Company has provided additional loans of $30 and $439 during the three and six months ended June 30, 2009, respectively. The Company provided loans to the entity in order to provide them with some of the capital necessary to market its products, and to provide the Company with access to new product formulations. The Company has provided no guarantees on behalf of the entity and has no future obligations to the entity.  Its creditors do not have any recourse against the Company.  The effect of consolidating the variable interest entity was a decrease of the Company’s net income of $90 and $429 for the three and six month periods ended June 30, 2009. During the three months ended June 30, 2009, the entity had no significant operations.

 

The Company records Volume Incentives that represent purchase rebates as a reduction of sales revenue in accordance with Emerging Issues Task Force No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).”  As part of the Company’s review of the quarterly results for the three months ended March 31, 2009, it identified that the volume rebates for the branches in Russia and Ukraine had been recorded as an expense rather than as a reduction of sales revenue.  There was no impact on beginning or ending retained earnings, operating income, net loss, loss per share, or cash flows for any periods. As a result, the Company is correcting its condensed consolidated statements of operations for the three month and six month periods ending June 30, 2008 as follows:

 

		Three Months Ended June 30, 2008						Six Months Ended June 30, 2008
		As Previously Presented			As Corrected			As Previously Presented			As Corrected
Net sales revenue		$	97,879		$	95,911		$	196,436		$	192,362
Volume incentives		38,425			36,457			77,128			73,054

 

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Recent Accounting Pronouncements

 

In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), “Business Combinations”, (“SFAS No. 141(R)”), which changes how business combinations are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. The Company adopted SFAS No. 141(R) on January 1, 2009, and will apply the acquisition method of accounting in SFAS No. 141(R) to future business combinations.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”), which changes the accounting and reporting standards for the noncontrolling interests in a subsidiary in consolidated financial statements. SFAS No. 160 recharacterizes minority interest as noncontrolling interests and requires noncontrolling interests to be classified as a component of shareholders’ equity. SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interest. The Company’s adoption of SFAS No. 160, effective January 1, 2009, did not have a material impact on the Company’s financial condition, results of operations, or cash flows.

 

In April 2008, the FASB issued Proposed Staff Position (“FSP”) FAS No. 142-3, “Determination of the Useful Life of Intangible Assets”. FSP No. FAS 142-3 states that in developing assumptions about renewal or extension options used to determine the useful life of an intangible asset, an entity needs to consider its own historical experience adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension options. This FSP is to be applied to intangible assets acquired after January 1, 2009. The adoption of this FSP did not have an impact on the Company’s financial condition, results of operations, or cash flows.

 

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” FSP No. FAS 107-1 and APB 28-1 amend SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, to require disclosures about fair value of financial instruments for interim reporting periods of publicly-traded companies, as well as in annual financial statements. The disclosure requirements of FSP No. FAS 107-1 and APB 28-1 are effective for interim reporting periods ending after June 15, 2009. The Company has included the additional disclosures in the accompanying Notes to the Condensed Unaudited Financial Statements.

 

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” FSP No. FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments of debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP No. FAS 115-2 and FAS 124-2 are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this FSP did not have a material impact on the Company’s financial condition, results of operations, or cash flows.

 

In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” FSP No. FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have significantly decreased. It also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP No. FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The adoption of this FSP did not have a material impact on the Company’s financial condition, results of operations, or cash flows.

 

In May 2009, the FASB issued SFAS 165, “Subsequent Events” (“SFAS No. 165”), which provides guidance on events that occur after the balance sheet date but prior to the issuance of the financial statements. SFAS No. 165 distinguishes events requiring recognition in the financial statements and those that may require disclosure in the financial statements. Furthermore, SFAS No. 165 requires disclosure of the date through which subsequent events were evaluated. SFAS No. 165 is effective for interim and annual periods after June 15, 2009. The Company has adopted SFAS No. 165 for the quarter ended June 30, 2009, and has evaluated subsequent events through August 10, 2009, the date of this filing.

 

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140” (“SFAS No. 166”).  The statement eliminates the concept of a qualifying special-purpose entity and clarifies existing GAAP as it relates to determining whether a transferor has surrendered control over transferred financial assets.  SFAS No. 166 limits the circumstances in which a financial asset, or a portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements reported and/or when the transferor has continuing involvement with the transferred financial asset.  The statement also requires enhanced disclosures about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. 

 

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SFAS No. 166 is effective for fiscal years beginning after November 15, 2009, with early adoption prohibited.   The Company does not expect the adoption of SFAS No. 166 to have a material impact on its financial condition, results of operations, or cash flows.

 

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”), which changes the consolidation model for variable interest entities (“VIEs”). The standard requires an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a VIE.  The primary beneficiary of a VIE is the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and has the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. SFAS No. 167 requires ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE.  SFAS No. 167 also expands the disclosure requirements for enterprises with an interest in a VIE.  SFAS No. 167 is effective for fiscal years beginning after November 15, 2009, with early adoption prohibited.  The Company is in the process of analyzing the impact of this statement, which will be adopted by the Company at the beginning of 2010.

 

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM  and the Hierarchy of Generally Accepted Accounting Principles,” (“Codification”), which supersedes all existing accounting standard documents and will become the single source of authoritative non-governmental U.S. GAAP. All other accounting literature not included in the Codification will be considered non-authoritative. The Codification was implemented on July 1, 2009 and will be effective for interim and annual periods ending after September 15, 2009. The Company expects to conform its financial statements and related notes to the new Codification for the quarter ending September 30, 2009.

 

(2)                     Inventories

 

Inventories consist of the following:

 

		June 30, 2009			December 31, 2008
Raw Materials		$	10,244		$	9,515
Work in Progress		861			766
Finished Goods		29,919			29,277
		$	41,024		$	39,558

 

(3)                     Intangible Assets

 

At June 30, 2009 and December 31, 2008, product formulations had a gross carrying amount of $1,763 and $1,763, accumulated amortization of $284 and $225, and a net amount of $1,479 and $1,538, respectively. The useful lives of the product formulations are estimated to be 15 years.

 

Amortization expense for intangible assets for the three months ended June 30, 2009 and 2008 was $29 and $29, respectively. Amortization expense for intangible assets for the six months ended June 30, 2009 and 2008 was $59 and $59, respectively. Estimated amortization expense for each of the five succeeding fiscal years is $118.

 

(4)                     Investment Securities

 

The amortized cost and estimated fair values of available-for-sale securities by balance sheet classification are as follows:

 

As of June 30, 2009		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Municipal obligations		$	2,243		$	92		$	(1	)	$	2,334
U.S. government securities funds		697			14			—			711
Equity securities		234			25			(4		)	255
Total short-term investment securities		$	3,174		$	131		$	(5	)	$	3,300

 

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As of December 31, 2008		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Municipal obligations		$	2,858		$	66		$	(1	)	$	2,923
U.S. government securities funds		691			19			—			710
Equity securities		233			—			(8		)	225
Total short-term investment securities		$	3,782		$	85		$	(9	)	$	3,858

 

Contractual maturities of municipal obligations fair value at June 30, 2009, are as follows:

 

Mature less than one year		$	203
Mature after one year through five years		1,701
Mature after five years		430
Total		$	2,334

 

During the six months ended June 30, 2009 and 2008, the proceeds from the sales of available-for-sale securities were $600 and $640, respectively. The gross realized gains on sales of available-for-sale securities (net of tax) were $0 for each of the three and six month periods ended June 30, 2009 and 2008. The gross realized losses on the sales of available-for-sale securities (net of tax) were $0 for each of the three and six month periods ended June 30, 2009 and 2008.

 

The Company’s trading securities portfolio totaled $1,531 at June 30, 2009 and $1,394 at December 31, 2008, and generated gains of $92 and losses of $12 for the three months ended June 30, 2009 and 2008, respectively, and generated gains of $46 and losses of $32 for the six months ended June 30, 2009 and 2008, respectively.

 

As of June 30, 2009 and December 31, 2008, the Company had unrealized losses of $5 and $9, respectively, in its municipal obligations and equity securities investments. These losses are due to the interest rate sensitivity of the municipal obligations and the performance of the overall stock market for the equity securities.

 

As of June 30, 2009 and December 31, 2008, none of the Company’s investments included unrealized losses that were considered to be other-than-temporary impairments.

 

(5)                     Net Income (Loss) Per Share

 

Basic net income (loss) per common share (“Basic EPS”) is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period.  Diluted net income (loss) per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock.  The computation of Diluted EPS does not assume exercise or conversion of common stock equivalents that would have an anti-dilutive effect on net income (loss) per common share.

 

The following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for the three and six months ended June 30, 2009 and 2008.

 

		Net Income (Loss) (Numerator)			Shares (Denominator)		Net Income (Loss) Per Share Amount
Three Months Ended June 30, 2009
Basic EPS		$	1,534		15,510		$	0.10
Effect of options		—			—		—
Diluted EPS		$	1,534		15,510		$	0.10
Three Months Ended June 30, 2008
Basic EPS		$	(701	)	15,510		$	(0.05	)
Effect of options		—			—		—
Diluted EPS		$	(701	)	15,510		$	(0.05	)

 

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		Net Income (Loss) (Numerator)			Shares (Denominator)		Net Income (Loss) Per Share Amount
Six Months Ended June 30, 2009
Basic EPS		$	72		15,510		$	0.00
Effect of options		—			—		—
Diluted EPS		$	72		15,510		$	0.00
Six Months Ended June 30, 2008
Basic EPS		$	(1,144	)	15,510		$	(0.07	)
Effect of options		—			—		—
Diluted EPS		$	(1,144	)	15,510		$	(0.07	)

 

For the three and six months ended June 30, 2009, a total of 209 exercisable options to purchase shares of common stock were not included in the computation of diluted earnings per share because their exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive. For the three and six months ended June 30, 2008, as a result of the Company’s net loss for each period, there were no options outstanding to purchase shares of common stock included in the computation of Diluted EPS, as their effect would have been anti-dilutive.

 

(6)                     Comprehensive Income (Loss)

 

The components of comprehensive income (loss), net of tax, for the three and six-month periods ended June 30, 2009 and 2008, respectively, are as follows:

 

		Three Months Ended June 30,
		2009			2008
Net income (loss)		$	1,534		$	(701	)
Foreign currency translation gain (loss)		358			(1,510		)
Net unrealized losses on investment securities		(56		)	(5		)
Total comprehensive income (loss)		$	1,836		$	(2,216	)

 

		Six Months Ended June 30,
		2009			2008
Net income (loss)		$	72		$	(1,144	)
Foreign currency translation (loss) gain		(2,485		)	493
Net unrealized gains (losses) on investment securities		12			(76		)
Total comprehensive loss		$	(2,401	)	$	(727	)

 

(7)                     Capital Transactions

 

Dividends

 

The Company paid cash dividends of $776 and $1,551 for the six months ended June 30, 2009 and 2008, respectively. During the second quarter of 2009 the Company suspended payment of its quarterly cash dividend.

 

Share-based Compensation

 

Share-based compensation expense from nonqualified stock options for the three-month periods ended June 30, 2009 and 2008 was approximately $0; the related tax benefit was approximately $0.  Share-based compensation expense from nonqualified stock options for the six-month periods ended June 30, 2009 and 2008 was approximately $0 and $86, respectively; the related tax benefit was approximately $0 and $33, respectively. As of June 30, 2009, there was no unrecognized share based compensation related to issued qualified or non-qualified employee stock options.

 

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Stock option activity for the six-months ended June 30, 2009 is as follows:

 

		Number of Shares		Weighted Average Exercise Price Per Share
Options outstanding at December 31, 2008		263		$	11.77
Granted		—		—
Forfeited or canceled		(54	)	11.81
Exercised		—		—
Options outstanding at June 30, 2009		209		11.76
Exercisable at June 30, 2009		209		$	11.76

 

No options were granted or exercised during the three and six-month periods ended June 30, 2009 and 2008. The aggregate intrinsic value of options outstanding and exercisable at June 30, 2009 and 2008 was $0 and $0, respectively.

 

(8)                     Segment Information

 

The Company has three business segments. These reportable segments are components of the Company for which separate information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

 

The Company has two reportable business segments based on geographic operations that include a United States segment and an international segment that operate under the Nature’s Sunshine Products name. The Company’s third reportable business segment is Synergy Worldwide, which offers products with formulations different from those of the Nature’s Sunshine Products offerings as well as marketing and Distributor compensation plans sufficiently different from those of Nature’s Sunshine Products to warrant its treatment as a separate reportable segment. Net sales revenues for each segment have been reduced by any intercompany sales as they are not included in the measure of segment profit or loss reviewed by the chief operating decision maker. The Company evaluates performance based on operating income (loss) by segment before consideration of certain inter-segment transfers and expenses.

 

Reportable segment information is as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2009			2008			2009			2008
Net Sales Revenue:
Nature’s Sunshine Products:
United States		$	39,507		$	39,166		$	75,975		$	78,092
International		31,603			41,957			65,165			85,260
		71,110			81,123			141,140			163,352
Synergy Worldwide		13,039			14,788			26,185			29,010
		84,149			95,911			167,325			192,362
Operating Expenses:
Nature’s Sunshine Products:
United States		35,987			36,725			73,391			76,817
International		32,078			39,444			64,060			78,934
		68,065			76,169			137,451			155,751
Synergy Worldwide		14,028			16,364			30,662			32,334
		82,093			92,533			168,113			188,085
Operating Income (Loss):
Nature’s Sunshine Products:
United States		3,520			2,441			2,584			1,275
International		(475		)	2,513			1,105			6,326
		3,045			4,954			3,689			7,601
Synergy Worldwide		(989		)	(1,576		)	(4,477		)	(3,324		)
		2,056			3,378			(788		)	4,277
Other Income (Expense), Net		544			312			1,748			(47		)
Income Before Provision for Income Taxes		$	2,600		$	3,690		$	960		$	4,230

 

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From an individual country perspective, only the United States, Japan, Russia and Ukraine comprise approximately 10 percent or more of consolidated net sales revenue for any of the three and six-month periods ended June 30, 2009 and 2008 as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2009			2008			2009			2008
Sales Revenue:
United States		$	39,748		$	38,465		$	76,755		$	77,735
Russia		6,453			10,031			15,309			20,377
Japan		6,858			10,489			13,936			20,495
Ukraine		4,526			8,003			9,692			16,949
Other		26,564			28,923			51,633			56,806
Total Sales Revenue		$	84,149		$	95,911		$	167,325		$	192,362

 

Net sales revenue by product group has not been disclosed as management has determined that it is impracticable to accumulate such information.

 

Segment long-lived assets as of June 30, 2009 and December 31, 2008 are as follows:

 

		June 30, 2009			December 31, 2008
Long-Lived Assets:
United States		$	23,300		$	23,723
Venezuela		4,644			4,646
Other		2,996			3,393
Total Long-Lived Assets		$	30,940		$	31,762

 

(9)                     Income Taxes

 

Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur.  For the three months ended June 30, 2009 and 2008, the Company’s provision for income taxes, as a percentage of income before income taxes, was approximately 41.0 percent and 119.0 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent. For the six months ended June 30, 2009 and 2008, the Company’s provision for income taxes, as a percentage of income before income taxes, was approximately 92.5 percent and 127.0 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent.

 

The differences between the effective rate and the U.S. federal statutory rate for the three and six months ended June 30, 2009 and 2008, are primarily attributed to increases in tax liabilities associated with uncertain tax positions, the U.S. tax impact of foreign operations, and increases in foreign valuation allowances primarily related to foreign subsidiary net losses for which no tax benefit is being recognized.  With the Company’s low pretax income amounts, tax amounts recorded related to the uncertain tax positions, valuation allowances, and other permanent tax items have a significant impact to the effective tax rate.

 

As of June 30, 2009, the Company had accrued $19,327 (net of $11,277 of other assets related to competent authority and royalty benefits) related to unrecognized tax positions compared with $19,675 (net of $11,277 of other assets related to competent authority and royalty benefits) as of December 31, 2008.  This net decrease is primarily attributed to reductions in liabilities recorded related to commission payment withholdings in foreign jurisdictions and transfer pricing.

 

The Company’s U.S. federal income tax returns for 2003 through 2008 are open to examination for federal tax purposes. The Company has several foreign tax jurisdictions which have open tax years from 2000 through 2008. The IRS is currently conducting an audit of the Company’s U.S. federal income tax returns for the 2003 through 2005 tax years, and the Company is in discussions with the IRS related to these open tax years. The Company is currently unable to determine the outcome of these discussions and their related impact, if any, on the Company’s financial condition, results of operations, or cash flows.

 

Although the Company believes its estimates are reasonable, the Company can make no assurance that the final tax outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals. Such difference could have a material impact on the Company’s income tax provision and operating results in the period in which the Company makes such determination.

 

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(10)              Commitments and Contingencies

 

Legal Proceedings

 

The Company is party to various legal proceedings, including those noted below. Management cannot predict the ultimate outcome of these proceedings, individually or in the aggregate, or their resulting effect on the Company’s business, financial position, results of operations or cash flows as litigation and related matters are subject to inherent uncertainties, and unfavorable rulings could occur. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the business, financial position, results of operations, or cash flows for the period in which the ruling occurs or future periods. The Company maintains directors’ and officers’ liability, product liability, general liability and excess liability insurance coverage. However, no assurances can be given that such insurance will continue to be available at an acceptable cost to the Company, that such coverage will be sufficient to cover one or more large claims, or that the insurers will not successfully disclaim coverage as to a pending or future claim.

 

Class-Action Litigation

 

Between April 3, 2006 and June 2, 2006, five separate shareholder class-action lawsuits were filed against the Company and certain of its present and former officers and directors in the United States District Court for the District of Utah. These matters were consolidated and on November 3, 2006, the plaintiffs filed a consolidated complaint (the “Consolidated Complaint”) against the Company, the Company’s Chief Executive Officer and a director, Douglas Faggioli, the Company’s former Chief Financial Officer, Craig D. Huff, and a former director and former Chair of the Company’s Audit Committee, Franz L. Cristiani. The Consolidated Complaint asserts three separate claims on behalf of purchasers of the Company’s common stock: (1) a claim against Mr. Faggioli and the Company for violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (“the Exchange Act”) and Rule 10b-5 promulgated thereunder, alleging that Mr. Faggioli made a series of alleged material misrepresentations to the investing public; (2) a claim against Mr. Faggioli and the Company for violation of Section 10(b) and Rule 10b-5, alleging that Mr. Faggioli made a series of misrepresentations to the Company’s then independent auditor, KPMG, LLP (“KPMG”), for the purpose of obtaining unqualified or “clean” audit opinions and review opinions from KPMG concerning certain of the Company’s annual and quarterly financial statements; and (3) a claim against Messrs. Faggioli, Huff and Cristiani for violation of Section 20(a) of the Exchange Act, alleging that the individual defendants have “control person” liability for the previously-alleged violations by the Company. The Consolidated Complaint seeks an unspecified amount of compensatory damages, together with interest thereon, litigation costs and expenses, including attorneys’ fees and expert fees, and any such other and further relief as may be allowed by law.

 

On January 5, 2007, the Company and Messrs. Faggioli, Huff and Cristiani moved to dismiss the Consolidated Complaint in its entirety. On May 21, 2007, the Court issued its decision denying the motion in large part, but shortening the proposed class period on one of the plaintiffs’ claims. On June 6, 2007, the Company and the other defendants answered the Consolidated Complaint, wherein they denied all allegations of wrongdoing and raised a number of affirmative defenses. On November 1, 2007, the plaintiffs filed their motion for class certification, which the Company opposed. On September 25, 2008, the Court granted the plaintiffs’ motion for class certification in part, establishing the class as all persons who purchased or otherwise acquired the Company’s common stock, and were damaged thereby, from March 16, 2005 to March 20, 2006. On May 9, 2008, at the invitation of the Court based upon recent case law developments, the Company filed a motion to dismiss the plaintiffs’ second cause of action (a 10b-5 claim based on non-public representations to KPMG).  The plaintiffs opposed this motion.  On September 23, 2008, the Court granted the Company’s motion and dismissed the plaintiffs’ second cause of action.

 

On June 26, 2009, the case was mediated in New York City before a nationally-recognized mediator.  All of the parties and the directors’ and officers’ liability insurer for the Company participated in the mediation.  The mediation was successful, in that the parties reached an oral agreement in principle at that time as to the settlement of the action.  The parties and the Company’s insurer have since succeeded in documenting their agreement in principle in the form of an executed Memorandum of Understanding (“MOU”).  The MOU will now serve as a guide to the parties as they negotiate and draft a definitive Stipulation and Agreement of Settlement (the “Stipulation”) setting forth all of the terms and conditions of the settlement, including the form and manner of providing notice to the class and the form of the parties’ proposed order and final judgment.  After being advised of this development, the court entered an order setting September 14, 2009 as the deadline for the parties to file a motion seeking preliminary approval of the class action settlement.  Assuming the parties successfully negotiate the Stipulation and then obtain preliminary approval of the same from the court, the class will then be notified of the proposed settlement, and the court will thereafter hold a hearing on whether to give final approval to the Stipulation and otherwise approve the proposed allocation of the settlement proceeds and the proposed award of attorneys’ fees and expenses to plaintiffs’ counsel.

 

If the parties are unable to reach agreement as to the Stipulation, or if the Stipulation is not approved by the court, the case will be returned to the litigation track and would most likely be subject to a new scheduling order.  As of the date of the mediation, the case was in the early stages of discovery and trial was not scheduled to commence until January 24, 2011.  If the case is returned to the litigation track, the Company and the other defendants will continue to vigorously defend themselves against the allegations in the lawsuit.  Notwithstanding this intent, the Company is not able at this time to predict the outcome of this litigation or whether the

 

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Company will incur any liability associated with the litigation, or to estimate the effect such outcome would have on the financial condition, results of operations, or cash flows of the Company.

 

The Company maintains insurance that may provide coverage for the potential consequences of a negative outcome of the litigation described above. The Company has given notice to its insurers of the claims and the insurers have responded by requesting additional information and by reserving their rights under the policies, including the rights to deny coverage under various policy exclusions or to rescind the policies in question.  As stated above, the Company’s directors’ and officers’ liability insurer participated in the recent mediation and agreed, as part of the ensuing MOU, to fund the settlement contemplated by the terms of the MOU on behalf of the Company and the individual defendants.  As also stated above, the settlement is subject to the parties successfully negotiating the Stipulation and then obtaining the preliminary and final approval of the same from the court after notice to the class.  If the parties are unable to negotiate the Stipulation, or if the court refuses to give either preliminary or final approval to the same, the case will return to the litigation track.  If this were to occur, there can be no assurance that the insurers will then not seek to deny coverage or rescind the policies; that some or all of the claims will not be covered by such policies; or that, even if covered, the Company’s ultimate liability will not exceed the available insurance.  Moreover, there can be no assurance as to the Company’s ability to obtain insurance coverage in the future, or as to the cost of such insurance.

 

Threatened Derivative Lawsuits

 

By letter dated October 4, 2007, a shareholder of the Company alleged that a number of the current and former officers and directors of the Company breached their fiduciary duties to the Company by supposedly engaging in the same alleged wrongdoing that is the subject of the class-action lawsuit. The shareholder demanded that the Company take action to recover from the specified officers and directors all damages sustained by the Company as a result of the alleged misconduct, and threatened to commence a derivative action if the Company failed to act on the shareholder’s demand within a reasonable period of time.

 

On December 26, 2007, before the expiration of the Company’s allotted 90-day period for responding to the demand, the shareholder presented a second but substantively identical demand on the Company, thereby triggering a new 90-day response period. The Company’s Board of Directors responded to this demand on March 20, 2008, rejecting the shareholder’s demands.

 

On May 21, 2008, the same shareholder filed a summons and complaint in the Fourth Judicial District Court for the State of Utah seeking an order compelling the Company to produce certain books and records to the shareholder. The Company filed its answer to the complaint on June 12, 2008.

 

Although the Company and the other defendants are vigorously defending against the allegations in the threatened derivative lawsuit above, management believes that it is not possible at this time to predict the outcome of this litigation or whether the Company will incur any liability associated with the litigation, or to estimate the effect such outcome would have on the financial condition, results of operations, or cash flows of the Company.

 

SEC and DOJ Investigations

 

On July 31, 2009, the Securities and Exchange Commission (“SEC”) filed a settled enforcement action against the Company, Douglas Faggioli, and Craig Huff, the Company’s former chief financial officer, relating to alleged violations of the Foreign Corrupt Practices Act (“FCPA”) by one of the Company’s foreign subsidiaries in 2000 and 2001.  This settlement resolves an SEC investigation previously disclosed by the Company related to an independent investigation by the Company’s Audit Committee.

 

Under the terms of the settlement with the SEC, the Company agreed to pay a civil penalty of $600 and to consent to the entry of injunctions against future violations of the FCPA as well as the antifraud, books and records, and internal controls provisions of the federal securities laws.  No additional undertakings are required of the Company under the terms of the settlement

 

In addition, Messrs. Faggioli and Huff each agreed to pay a civil penalty of $25 and to consent to the entry of injunctions against future violations relating only to the books and records and internal control provisions of the federal securities laws.

 

The SEC’s complaint alleges that, in 2000 and 2001, former employees in the Company’s Brazilian subsidiary made undocumented cash payments to customs brokers, some of which were later paid to Brazilian customs officials in order to allow unregistered products to be imported and sold in Brazil.  No current officers, directors, or employees of the Company are alleged to have participated in or had knowledge of these actions.

 

The complaint further alleges that, in 2000 and 2001, Mr. Faggioli, the Company’s then chief operating officer (and current chief executive officer), and Mr. Huff, the Company’s then chief financial officer, as control persons, failed to adequately supervise the Company’s management and other personnel who were directly responsible for the Company’s books and records and internal controls related to the registration of product in one foreign subsidiary.  As part of the settlement, the Company and the individual parties agreed to neither admit nor deny the allegations in the complaint.

 

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The Company believes that all government investigations relating to potential FCPA violations by the Company or related persons have been resolved.   The Company anticipates no action by the Department of Justice (“DOJ”) in a previously disclosed investigation relating to these events.

 

As previously disclosed, in March 2006, the Company voluntarily provided to the SEC and the DOJ information related to an independent investigation by the Company’s Audit Committee.  The Company fully cooperated in these government investigations.

 

SEC Section 12(j) Proceeding

 

On July 12, 2007, the Company announced that the SEC had instituted administrative proceedings pursuant to Section 12 (j) of the Exchange Act to suspend or revoke the registration of its common stock under Section 12 of the Exchange Act.  On November 8, 2007, an administrative law judge in the administrative proceeding issued an Initial Decision to revoke the registration of the Company’s common stock because of its failure to file required periodic reports.  Shortly thereafter, the Company filed a petition for review with the SEC.  On December 5, 2007, the SEC granted the Company’s petition for review. The SEC heard oral argument from both the Company and the SEC staff on January 7, 2009.  On January 21, 2009, the SEC issued a final order revoking the registration of the Company’s common stock.  On February 12, 2009, the Company filed a registration statement on Form 10 to re-register its common stock under the Exchange Act. The Company’s registration statement became effective as a result of the passage of time on April 13, 2009. On May 26, 2009, the Company cleared all comments from the SEC related to its registration statement on Form 10.  The Company’s stock is currently quoted on the OTC Bulletin Board under the symbol “NATR.OB.” The Company is currently in the process of registering its shares with NASDAQ.

 

Prescott Matter

 

In April 2009, Prescott Group Aggressive Small Cap Master Fund, G.P. (“Prescott”) filed, but did not serve, a complaint in the Fourth Judicial District Court for Utah County, Utah, (Prescott Group Aggressive Small Cap Master Fund, G.P. v. Nature’s Sunshine Products, Inc, Civil No. 090401518). Prescott’s filed complaint requested that the court compel the Company to hold an annual meeting of the Company’s shareholders.  The complaint did not request that the court award monetary damages other than the payment of attorneys’ fees.  On May 22, 2009, the Company and Kristine F. Hughes, Eugene L. Hughes and Pauline Hughes Francis in their capacity as shareholders of the Company (collectively, the “Hughes Parties”) entered into a settlement and voting agreement (the “Prescott Agreement”) with Prescott.  Contemporaneously with the Prescott Agreement, the Company and the Hughes Parties entered into voting agreements (collectively with the Prescott Agreement, the “Voting Agreements”) with each of the following shareholders of the Company:  Red Mountain Capital Partners II, L.P., Red Mountain Capital Partners III, L.P. and Paradigm Capital Management, Inc. (collectively with Prescott, the “Shareholder Parties”).

 

Pursuant to the Voting Agreements, effective as of June 7, 2009 , (i) the authorized number of directors of the Board was increased from six to eight directors in accordance with Section 3.2 of the Bylaws of the Company, creating two additional vacancies in addition to one previously unfilled vacancy on the Board, (ii) with the exception of Kristine F. Hughes, all of the current members of our Board of Directors (the “Board”) resigned as members of the Board, resulting in a total of seven vacancies on the Board and (iii) Michael D. Dean, Albert R. Dowden, Douglas Faggioli, Pauline Hughes Francis, Willem Mesdag, Jeffrey D. Watkins and Candace K. Weir were appointed, without any specific Board class designation, to fill such vacancies on the Board to serve as directors until the next annual meeting of shareholders at which directors are elected and until their respective successors are duly elected and qualified, unless they resign, are removed or are otherwise disqualified from serving as a director of the Company.

 

As part of the Voting Agreements, also provide that, at the next annual meeting of shareholders, which is currently planned for 2009, the Company will nominate, and the Shareholder Parties and the Hughes Parties will vote all of the shares of Common Stock beneficially owned by them in favor of, each of the following individuals, with such nominees serving in the Board class set forth opposite his or her name:

 

Name		Class
Jeffrey D. Watkins		Class I
Willem Mesdag		Class I
Michael D. Dean		Class II
Douglas Faggioli		Class II
Candace K. Weir		Class II
Kristine F. Hughes		Class III
Pauline Hughes Francis		Class III
Albert R. Dowden		Class III

 

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The voting arrangement set forth in the Voting Agreements will terminate immediately following the next annual meeting of shareholders of the Company or any adjournment or postponement thereof, or December 31, 2009, whichever is earlier.

 

Other Litigation

 

The Company is party to various other legal proceedings in several foreign jurisdictions related to VAT assessments and other civil litigation.  While there is a reasonable possibility that a material loss may be incurred, the Company cannot at this time estimate the loss, if any, therefore, no provision for losses has been provided.  The Company believes future payments related to these matters could range from $0 to approximately $1.3 million.

 

Non-Income Tax Contingencies

 

The Company has reserved for certain state sales and use tax and foreign non-income tax contingencies based on the likelihood of an obligation in accordance with SFAS No. 5, “Accounting for Contingencies.” Under SFAS No. 5, loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. The Company provides provisions for potential payments of tax to various tax authorities for contingencies related to non-income tax matters. The Company also provides provisions for state sales taxes in each of the states where the Company has potential nexus. As of June 30, 2009 and December 31, 2008, accrued liabilities include $18,091 and $17,359, respectively, related to non-income tax contingencies. While management believes that the assumptions and estimates used to determine this liability are reasonable, the ultimate outcome of those matters cannot presently be determined. The Company is not able at this time to predict the ultimate outcomes of those matters or to estimate the effect the ultimate outcomes, if greater than the amounts accrued, would have on the financial condition, results of operations, or cash flows of the Company.

 

Self-Insurance Liabilities

 

Similar to other manufacturers and distributors of products that are ingested, the Company faces an inherent risk of exposure to product liability claims in the event that, among other things, the use of its products results in injury. The Company carries insurance in the types and amounts it considers reasonably adequate to cover the risks associated with its business. On June 1, 2003, the Company established a wholly owned captive insurance company to provide it with product liability insurance coverage. The Company has accrued an amount that it believes is sufficient to cover probable and reasonably estimable liabilities related to product liability claims based on the Company’s history of such claims. However, there can be no assurance that these estimates will prove to be sufficient nor can there be any assurance that the ultimate outcome of any litigation for product liability will not have a material negative impact on the Company’s business prospects, financial position, results of operations, or cash flows.

 

The Company self-insures for certain employee medical benefits. The recorded liabilities for self-insured risks are calculated using actuarial methods and are not discounted. The liabilities include amounts for actual claims and claims incurred but not reported. Actual experience, including claim frequency and severity as well as health care inflation, could result in actual liabilities being more or less than the amounts currently recorded.

 

The Company reviews its self-insurance accruals on a quarterly basis and determines, based upon a review of its recent claims history and other factors, that portions of its self-insurance accruals be considered short-term and long-term.

 

The Company has accrued $2,908 and $2,873 for product liability and employee medical claims at June 30, 2009 and December 31, 2008, respectively, of which $502 and $2,873 was classified as short-term. Such amounts are included in accrued liabilities and other long-term liabilities on the Company’s unaudited condensed consolidated balance sheets.

 

Government Regulations

 

The Company is subject to governmental regulations pertaining to product formulation, labeling and packaging, product claims and advertising, and to the Company’s direct selling system. The Company is also subject to the jurisdiction of numerous foreign tax and customs authorities. Any assertions or determinations that either the Company or the Company’s Distributors are not in compliance with existing statutes, laws, rules or regulations could potentially have a material adverse effect on the Company’s operations. In addition, in any country or jurisdiction, the adoption of new statutes, laws, rules or regulations, or changes in the interpretation of existing statutes, laws, rules or regulations could have a material adverse effect on the Company and its operations. Although management believes that the Company is in compliance, in all material respects, with the statutes, laws, rules and regulations of every jurisdiction in which it operates, no assurance can be given that the Company’s compliance with applicable statutes, laws, rules and regulations will not be challenged by foreign authorities or that such challenges will not have a material adverse effect on the Company’s financial position or results of operations or cash flows.

 

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(11)              Fair Value Measurements

 

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Financial assets are marked to bid prices and financial liabilities are marked to offer prices.  Fair value measurements do not include transaction costs.  The Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), on January 1, 2008.  This statement defines fair value, establishes a framework to measure fair value, and expands disclosures about fair value measurements.  SFAS No. 157 establishes a fair value hierarchy used to prioritize the quality and reliability of the information used to determine fair values.  Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  The fair value hierarchy is defined into the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market

 

The following table presents the Company’s hierarchy for its asset and liabilities measured at fair value on a recurring basis as of June 30, 2009:

 

		Level 1			Level 2			Level 3
		Quoted Prices in Active Markets for Identical Assets or Liabilities			Significant Other Observable Inputs			Significant Unobservable Inputs			Total
Investments available for sale		$	964		$	2,336		$	—		$	3,300
Investment securities		1,531			—			—			1,531
Total assets measured at fair value on a recurring basis		$	2,495		$	2,336		$	—		$	4,831

 

The following table presents the Company’s hierarchy for its asset measured at fair value on a recurring basis as of December 31, 2008:

 

		Level 1			Level 2			Level 3
		Quoted Prices in Active Markets for Identical Assets or Liabilities			Significant Other Observable Inputs			Significant Unobservable Inputs			Total
Investments available for sale		$	933		$	2,925		$	—		$	3,858
Investment securities		1,394			—			—			1,394
Restricted investments		—			—			2,050			2,050
Total assets measured at fair value on a recurring basis		$	2,327		$	2,925		$	2,050		$	7,302

 

Investments available for sale — The majority of the Company’s investment portfolio consist of various fixed income securities such as U.S government funds, state and municipal bonds, mutual funds, and equity securities.  The Level 1 securities are valued using quoted prices for identical assets in active markets including equity securities, U.S. government treasuries, and various mutual funds.  The Level 2 securities include investments in state and municipal bonds, as well as various mutual funds whereby all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset.

 

Investment securities — The majority of the Company’s trading portfolio consists of various mutual funds that are using quoted prices in active markets.

 

Restricted investments  —  The Company’s restricted investments include auction rate preferred investments that have failed at auction during 2008.  Despite the underlying long-term contractual maturity of auction-rate securities (“ARS”), there was historically a ready liquid market for these securities based on the interest reset mechanism.  However, as a result of current negative liquidity and uncertainty in financial credit markets, the Company experienced “failed” auctions associated with its ARS.  In the case of a failed auction, the ARS become illiquid investments (until a future auction is successful or the security is called prior to the contractual maturity date by the issuer) and the rates are reset in accordance with terms in the prospectus/offering circular

 

The ARS consist primarily of AAA securities.  In determining the fair value of the Company’s restricted investments at December 31, 2008, the Company has taken into consideration fair values determined by the financial institutions, current credit rating

 

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of the underlying securities, insurance provisions, discounted cash flow analysis, as deemed appropriate, and its current liquidity position.

 

The following table shows a reconciliation of the beginning and ending Level 3 fair value measurements using significant unobservable inputs for the three months ended June 30, 2009 and 2008:

 

		Three Months Ended June 30,
		2009			2008
Balance at April 1,		$	—		$	2,075
Net unrealized gains included in earnings		—			—
Sales of restricted investments		—			(25		)
Purchases		—			—
Balance at June 30,		$	—		$	2,050

 

The following table shows a reconciliation of the beginning and ending Level 3 fair value measurements using significant unobservable inputs for the six months ended June 30, 2009 and 2008:

 

		Six Months Ended June 30,
		2009			2008
Balance at January 1,		$	2,050		$	2,075
Net unrealized gains included in earnings		—			—
Sales of restricted investments		(2,050		)	(25		)
Purchases		—			—
Balance at June 30,		$	—		$	2,050

 

During the six month periods ended June 30, 2009 and 2008, the Company sold restricted investments of $2,050 and $25, respectively that included ARS that had failed at auction during 2008.  These securities were sold at par value, which was the carrying value of these securities.  As a result, there was no realized gain or loss as a result of the sale of the ARS.

 

The carrying amounts reflected on the consolidated balance sheet for cash and cash equivalents, accounts and notes receivable, accounts payable, and short-term borrowings approximate fair value due to their short-term nature.  During the three and six months ended June 30, 2009, the Company did not have any write-offs related to the remeasurement of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.

 

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