SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended September 30, 2004

Commission File Number 0-8707

 

 

NATURE’S SUNSHINE PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

 

Utah		87-0327982
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
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  ý   No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ý   No  o

 

The number of shares of Common Stock, no par value, outstanding on November 7, 2004 was 15,390,269 shares.

 

When we refer in this Form 10-Q to the “Company,” “we,” “our,” and “us,” we mean Nature’s Sunshine Products, Inc., a Utah corporation, together with our subsidiaries.

 

 

NATURE’S SUNSHINE PRODUCTS, INC.

FORM 10-Q

 

For the Quarter Ended September 30, 2004

 

Table of Contents

 

Part I. Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets
		Condensed Consolidated Statements of Income and Comprehensive Income
		Condensed Consolidated Statements of Cash Flows
		Notes to Condensed 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.	Disclosure Controls and Procedures
Part II. Other Information
	Item 6.	Exhibits and Reports on Form 8-K

 

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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)

 

		September 30, 2004			December 31, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	39,521		$	30,665
Accounts receivable, net		6,920			5,567
Inventories, net		35,087			26,528
Deferred income tax assets		4,747			3,553
Prepaid expenses and other		13,261			9,723
Total current assets		99,536			76,036
PROPERTY, PLANT AND EQUIPMENT, net		33,874			32,318
LONG-TERM INVESTMENTS		7,554			6,416
DEFERRED TAX ASSETS LONG TERM		5,619			5,359
DEFINITE-LIVED INTANGIBLE ASSETS, net		1,832			2,094
OTHER ASSETS		2,053			3,335
		$	150,468		$	125,558
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Line of credit		$	—		$	5,000
Accounts payable		6,519			4,003
Accrued volume incentives		14,323			12,093
Accrued liabilities		24,993			18,009
Income taxes payable		8,561			6,879
Total current liabilities		54,396			45,984
DEFERRED COMPENSATION		2,010			2,232
SHAREHOLDERS’ EQUITY:
Common Stock, no par value; 20,000 shares authorized, 19,446 shares issued		19,904			25,437
Retained earnings		135,178			124,997
Treasury stock, at cost, 4,352 and 5,267 shares, respectively		(41,142		)	(54,833		)
Accumulated other comprehensive loss		(19,878		)	(18,259		)
Total shareholders’ equity		94,062			77,342
		$	150,468		$	125,558

 

See accompanying notes to condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

AND COMPREHENSIVE INCOME (LOSS)

(Amounts in Thousands, Except Per-Share Information)

(Unaudited)

 

		Three Months Ended September 30,
		2004			2003
					(As Restated, See Note 1)
NET SALES REVENUE (net of the rebate portion of volume incentives of $8,823 and $9,600, respectively)		$	83,617		$	63,470
COST AND EXPENSES:
Cost of goods sold		15,312			13,228
Volume incentives		33,363			23,503
Selling, general and administrative		28,160			27,787
OPERATING INCOME (LOSS)		6,782			(1,048		)
OTHER INCOME (EXPENSE)
Interest income		94			110
Interest expense		(59		)	(77		)
Other income (expense), net		140			187
		175			220
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES		6,957			(828		)
PROVISION (BENEFIT) FOR INCOME TAXES		2,350			(264		)
NET INCOME (LOSS)		4,607			(564		)
OTHER COMPREHENSIVE INCOME (LOSS), net of tax:
Foreign currency translation adjustments		319			(57		)
Net unrealized holding losses on marketable securities		(5		)	(61		)
Reclassification adjustment for net realized gains on marketable securities included in net income		32			5
		346			(113		)
COMPREHENSIVE INCOME (LOSS)		$	4,953		$	(677	)
BASIC NET INCOME (LOSS) PER COMMON SHARE		$	0.31		$	(0.04	)
WEIGHTED AVERAGE BASIC COMMON SHARES		15,076			13,930
DILUTED NET INCOME (LOSS) PER COMMON SHARE		$	0.29		$	(0.04	)
WEIGHTED AVERAGE DILUTED COMMON SHARES		15,654			13,930

 

See accompanying notes to condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(Amounts in Thousands, Except Per-Share Information)

(Unaudited)

 

		Nine Months Ended September 30,
		2004				2003
					(As Restated, See Note 1)
NET SALES REVENUE (net of the rebate portion of volume incentives of $27,930 and $28,697, respectively)		$	240,100			$	189,725
COST AND EXPENSES:
Cost of goods sold		44,813				39,154
Volume incentives		92,986				68,928
Selling, general and administrative		87,142				77,744
OPERATING INCOME		15,159				3,899
OTHER INCOME (EXPENSE)
Impairment of investment		—				(1,768		)
Interest income		280				384
Interest expense		(73		)		(207		)
Other income, net		696				876
		903				(715		)
INCOME BEFORE PROVISION FOR INCOME TAXES		16,062				3,184
PROVISION FOR INCOME TAXES		3,645				1,019
NET INCOME		12,417				2,165
OTHER COMPREHENSIVE INCOME (LOSS), net of tax:
Foreign currency translation adjustments		(1,573		)		(1,175		)
Net unrealized holding losses on marketable securities		(68		)		(136		)
Reclassification adjustment for net realized gains on marketable securities included in net income		22				338
		(1,619		)		(973		)
COMPREHENSIVE INCOME		$	10,798			$	1,192
BASIC NET INCOME PER COMMON SHARE		$	0.84			$	0.15
WEIGHTED AVERAGE BASIC COMMON SHARES		14,846				14,237
DILUTED NET INCOME PER COMMON SHARE		$	0.81			$	0.15
WEIGHTED AVERAGE DILUTED COMMON SHARES		15,395				14,411

 

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)

 

		Nine Months Ended September 30,
		2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	12,417		$	2,165
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,229			5,025
Tax benefit from stock option exercises		966			120
Gain on sale of property, plant and equipment		313			100
Deferred income taxes		(1,448		)	(2,298		)
Deferred compensation		(222		)	561
Loss on impaired investments		—			1,768
Changes in assets and liabilities:
Accounts receivable, net		(1,403		)	251
Inventories, net		(8,523		)	224
Prepaid expenses and other assets		(2,891		)	(4,793		)
Accounts payable		2,532			782
Accrued volume incentives		2,170			1,952
Accrued liabilities		6,963			3,769
Income taxes payable		1,681			67
Net cash provided by operating activities		16,784			9,693
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(6,061		)	(2,833		)
Proceeds from sale (purchase) of investments		(1,176		)	2,020
Payments received on long-term receivables		478			840
Proceeds from sale of property, plant and equipment		79			138
Net cash provided by (used) in investing activities		(6,680		)	165
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds from line of credit		(5,000		)	4,500
Payment of cash dividends		(2,235		)	(1,426		)
Purchase of treasury stock		(17		)	(11,796		)
Proceeds from exercise of stock options		7,205			982
Net cash used in financing activities		(47		)	(7,740		)
EFFECT OF EXCHANGE RATES ON CASH		(1,201		)	(1,174		)
NET INCREASE IN CASH AND CASH EQUIVALENTS		8,856			944
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD		30,665			26,175
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD		$	39,521		$	27,119

 

See accompanying notes to condensed consolidated financial statements.

 

6

 

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 AND ACCOUNTING POLICIES

 

The unaudited, condensed consolidated financial statements of Nature’s Sunshine Products, Inc. and subsidiaries (together, the “Company”) included herein have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission.  Certain information and footnote disclosures normally required 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, although the Company believes the following disclosures are adequate to make the information presented not misleading.

 

These unaudited, condensed consolidated financial statements reflect all adjustments, which in the opinion of management are necessary to present fairly the Company’s financial position as of September 30, 2004, and the results of their operations and their cash flows for the periods presented.  All of the adjustments which have been made in these condensed consolidated financial statements are of a normal recurring nature.  Operating results for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

 

We re-evaluated our financial statement presentation of volume incentive payments made to our independent Distributors and Managers during the year ended December 31, 2003. These payments consist of (1) commissions paid for purchases made by the Distributors’ and Managers’ down-line organizations, and (2) rebates paid to Distributors and Managers for purchases of products for their own use or for resale.  In accordance with Emerging Issue Task Force Issue 01-9 (“EITF 01-9”), we determined it was appropriate to present the portion of volume incentive payments representing rebates as reductions to sales revenue rather than as operating expenses.  As a result, we have reclassified the appropriate amounts for all periods presented in this Form 10-Q, including all quarterly and segment data, by reducing sales revenue and volume incentives (operating expense) by equal amounts.  These reclassifications had no effect on operating income, net income, or earnings per basic or diluted common share.

 

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 for the year ended December 31, 2003.

 

(2)                                 RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2003, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51”  (“FIN

 

7

 

No. 46”).  FIN No. 46 addresses consolidation and reporting by business enterprises of variable interest entities.  All enterprises with variable interests in variable interest entities created after January 31, 2003 apply the provisions of FIN No. 46 to those entities immediately.  A public entity with a variable interest in a variable interest entity created before February 1, 2003 applies the provisions of FIN No. 46 to that entity no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003.  In addition, FIN No. 46R delayed the effective date for application of FIN No. 46 by public companies, until periods ending after March 15, 2004 for all types of variable interest entities other than special-purpose entities.  The adoption of FIN No. 46 did not have an effect on our results of operations, liquidity, or financial position.

 

(3)                                 INVENTORIES

 

Inventories consist of the following:

 

 

(4)                                 DEFINITE-LIVED INTANGIBLE ASSETS

 

The composition of the Company’s definite-lived intangible assets is as follows:

 

		As of September 30, 2004									As of December 31, 2003
		Carrying Amount			Accumulated Amortization			Net			Carrying Amount			Accumulated Amortization			Net
Acquired Distributor Networks		$	3,213		$	1,381		$	1,832		$	3,213		$	1,119		$	2,094

 

As of September 30, 2004, the Company determined that none of its intangible assets are impaired. Amortization expense for intangible assets for the nine months ended September 30, 2004 was $262.  Estimated amortization expense for the remainder of 2004 and the five succeeding fiscal years is as follows:

 

 

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(5)                                 NET INCOME PER COMMON SHARE

 

Basic net income per common share (“Basic EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding during the period.  Diluted net income 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 per common share.  For periods in which the Company incurs losses, Diluted EPS does not assume the exercise or conversion of common stock equivalents.

 

As of September 30, 2004, the Company had a total of 2,228 common stock options outstanding.  These options were granted at fair market value and have a weighted-average exercise price of $8.53 per 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 nine months ended September 30, 2004 and 2003.

 

		Net Income (Numerator)			Shares (Denominator)		Per Share Amount
Three Months Ended September 30, 2004
Basic EPS		$	4,607		15,076		$	0.31
Effect of stock options		—			578		(0.02		)
Diluted EPS		$	4,607		15,654		$	0.29
Three Months Ended September 30, 2003
Basic EPS		$	(564	)	13,930		$	(0.04	)
Effect of stock options		—			—		—
Diluted EPS		$	(564	)	13,930		$	(0.04	)
		Net Income (Numerator)			Shares (Denominator)		Per Share Amount
Nine Months Ended September 30, 2004
Basic EPS		$	12,417		14,846		$	0.84
Effect of stock options		—			549		(0.03		)
Diluted EPS		$	12,417		15,395		$	0.81
Nine Months Ended September 30, 2003
Basic EPS		$	2,165		14,237		$	0.15
Effect of stock options		—			174		—
Diluted EPS		$	2,165		14,411		$	0.15

 

 

For the three months ended September 30, 2004 and 2003, there were outstanding options to purchase 47 and 3,430 shares of common stock, respectively, that were not included in the computation of Diluted EPS, as their effect would have been anti-dilutive.  For the nine months ended September 30, 2004 and 2003, there were options to purchase 36 and 497 shares of common stock, respectively, that were not included in the computation of diluted EPS, as their effect would have been anti-dilutive.

 

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(6)                                 EQUITY TRANSACTIONS

 

The Company has declared consecutive quarterly cash dividends since 1988. During the third quarter, the Company paid a dividend of 5 cents per common share on August 19, 2004 to shareholders of record on August 9, 2004.

 

Common shares held as treasury stock totaled 4,352 at September 30, 2004 compared to 5,267 at December 31, 2003. Common shares held as treasury stock decreased as a result of common shares issued from treasury stock for the exercise of stock options.

 

(7)                                 OPERATING LINE OF CREDIT

 

The Company has an operating line of credit with an interest rate equal to LIBOR plus 1.5 percent, which provides for borrowings of up to $15,000.  Borrowings under this line of credit may be used to repurchase shares of the Company’s outstanding common stock under Board-authorized repurchase programs as well as to fund working capital, capital expenditures, and related costs.  The Company amended the terms of the line of credit during the second quarter to extend the maturity date to July 1, 2006.  The line of credit had an original maturity of July 1, 2004.  There were no outstanding borrowings under this line of credit at September 30, 2004. The line of credit contains various terms and conditions, including affirmative and negative financial covenants. As of September 30, 2004, the Company was in compliance with these covenants.

 

(8)                                 ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The composition of accumulated other comprehensive loss, net of tax, is as follows:

 

		Foreign Currency Translation Adjustments			Unrealized Gains On Available-For- Sale Securities			Total Accumulated Other Comprehensive Loss
Balance as of December 31, 2003		$	(18,428	)	$	169		$	(18,259	)
Period Change		(1,573		)	(46		)	(1,619		)
Balance as of September 30, 2004		$	(20,001	)	$	123		$	(19,878	)

 

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(9)                                 STOCK-BASED COMPENSATION

 

The Company accounts for stock-based compensation plans for employees and directors under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized in the accompanying condensed consolidated statements of income for the three and nine months ended September 30, 2004 and 2003.  Had compensation cost been determined consistent with SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, the Company’s net income (loss) and net income (loss) per share would have been reduced to the following pro forma amounts:

 

				Three Months Ended September 30,
				2004			2003
Net Income (Loss)		As reported		$	4,607		$	(564	)
		Stock option expense, net of related tax effects		(131		)	(64		)
		Pro forma		$	4,476		$	(628	)
Basic Net Income (Loss)Per Share		As reported		$	0.31		$	(0.04	)
		Stock option expense, net of related tax effects		(0.01		)	(0.01		)
		Pro forma		$	0.30		$	(0.05	)
Diluted Net Income (Loss)Per Share		As reported		$	0.29		$	(0.04	)
		Stock option expense, net of related tax effects		(0.00		)	(0.01		)
		Pro forma		$	0.29		$	(0.05	)

 

				Nine Months Ended September 30,
				2004			2003
Net Income		As reported		$	12,417		$	2,165
		Stock option expense, net of related tax effects		(331		)	(177		)
		Pro forma		$	12,086		$	1,988
Basic Net Income Per Share		As reported		$	0.84		$	0.15
		Stock option expense, net of related tax effects		(0.03		)	(0.01		)
		Pro forma		$	0.81		$	0.14
Diluted Net Income Per Share		As reported		$	0.81		$	0.15
		Stock option expense, net of related tax effects		(0.02		)	(0.01		)
		Pro forma		$	0.79		$	0.14

 

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(10)                          SEGMENT INFORMATION

 

The Company has three operating segments.  These operating segments are components of the Company for which separate information is available that is evaluated regularly by management in deciding how to allocate resources and assess performance.  The Company evaluates performance based on operating income.

 

The Company has three operating segments, which includes a United States segment, an international segment that operates under the Nature’s Sunshine Products name, and a third operating segment that operates under the Synergy Worldwide name.  The segments have similar business characteristics and each offers similar products through similar methods of distribution.  Inter-segment sales, eliminated in consolidation, are not material.  The Company evaluates performance based on operating income (loss) by segment before consideration of certain inter-segment transfers and expenses. This information is used by the Chief Operating Decision Maker to assess the segments performance and in allocating the Company’s resources.   During the three-month period ended September 30, 2004, the Company changed the composition of its operating segments as a result of converting certain locations from Nature’s Sunshine to Synergy Operations and has restated the corresponding items of segment information for prior periods.

 

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Operating segment information is as follows:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
					(As Restated, See Note 1 and 10)						(As Restated, See Note 1 and 10)
Net Sales Revenue:
Nature’s Sunshine Products:
United States		$	32,886		$	33,969		$	103,336		$	107,786
International		26,383			22,937			76,646			65,499
		59,269			56,906			179,982			173,285
Synergy Worldwide:		24,348			6,564			60,118			16,440
		83,617			63,470			240,100			189,725
Operating Expenses:
Nature’s Sunshine Products:
United States		30,843			33,870			98,273			103,282
International		23,521			23,287			69,450			63,728
		54,364			57,157			167,723			167,010
Synergy Worldwide:		22,471			7,361			57,218			18,816
		76,835			64,518			224,941			185,826
Operating Income (Loss):
Nature’s Sunshine Products:
United States		2,043			99			5,063			4,504
International		2,862			(350		)	7,196			1,771
		4,905			(251		)	12,259			6,275
Synergy Worldwide:		1,877			(797		)	2,900			(2,376		)
		6,782			(1,048		)	15,159			3,899
Other Income (Expense), net		175			220			903			(715		)
Income (Loss) Before Provision for Income Taxes		$	6,957		$	(828	)	$	16,062		$	3,184

 

Segment assets as of September 30, 2004 and December 31, 2003, are as follows:

 

		September 30, 2004			December 31, 2003
					(As Restated, See Note 10)
Assets:
Nature’s Sunshine Products:
United States		$	91,889		$	79,840
International		40,302			34,368
		132,191			114,208
Synergy Worldwide:		18,277			11,350
Total Assets		$	150,468		$	125,558

 

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

 

The following discussion should be read in conjunction with the interim financial information included in this Form 10-Q as well as the consolidated financial statements, the notes thereto, and management’s discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2003.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q may contain forward-looking statements.  Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Such statements may relate but not be limited to projections of revenues, income or loss, capital expenditures, plans for growth and future operations, financing needs, product liability claims and availability of insurance, as well as assumptions relating to the foregoing.  Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified.  When used in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and elsewhere in this Form 10-Q the words “estimates”, “expects”, “anticipates”, “projects”, “plans”, “intends” and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties.  Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements.  For factors which could affect such results, see the description of our business contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

 

CRITICAL ACCOUNTING POLICIES

 

Revenue Recognition

 

We recognize sales revenue when products are shipped and title passes to our independent distributors. For most product sales, the sales price is received in the form of cash or credit card payment, which accompanies or precedes the shipment of the orders. As products are shipped, persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed, and collectibility is reasonably assured. A reserve for product returns, which reduces revenue, is accrued based on historical experience. From time to time, our United States operation extends short-term credit associated with product promotions. For certain of our international operations, we offer credit terms consistent with industry standards within the country of operation. Amounts received for unshipped merchandise are not recognized as revenue but rather they are recorded as customer deposits and are included in accrued liabilities.

 

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Volume Incentives Accrual

 

We accrue for volume incentives expense associated with our net sales revenue. Volume incentives are a significant part of our direct sales marketing program and represent commission payments made to our independent Distributors and Managers. We specifically analyze volume incentives based on historical and current sales trends when evaluating the adequacy of the accrued volume incentives.  We have re-evaluated our financial statement presentation of volume incentive payments made to our independent Distributors and Managers. These payments consist of (1) commissions paid for purchases made by the Distributors’ and Managers’ down-line organizations, and (2) rebates paid to Distributors and Managers for purchases of products for their own use or for resale.  In accordance with EITF 01-9, we present the portion of volume incentive payments representing rebates as reductions to sales revenue rather than as operating expenses.  As a result, we have reclassified the appropriate amounts for all periods presented in this Form 10-Q, including all segment data, by reducing sales revenue and volume incentives (operating expense) by equal amounts.  These reclassifications had no effect on operating income, net income, or earnings per basic or diluted common shares.

 

Self-insurance Liabilities

 

We self-insure for certain employee medical and specific product liabilities. 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.

 

Incentive Trip Accrual

 

We accrue for expenses of incentive trips associated with our direct sales marketing program, which rewards independent Distributors and Managers with paid attendance at our conventions and meetings. Expenses associated with incentive trips are accrued over qualification periods as they are earned. We specifically analyze incentive trip accruals based on historical and current sales trends as well as contractual obligations when evaluating the adequacy of the incentive trip accrual. Actual results could result in liabilities being more or less than the amounts recorded.

 

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RESULTS OF OPERATIONS

 

The following table identifies for the three-month periods (i) the relationship that net income items disclosed in the condensed consolidated financial statements have to total sales, and (ii) the amount and percent of change of such items compared to the corresponding prior period.

 

(Dollar Amounts in Thousands)

(Unaudited)

 

						(ii)
		(i)				Three Months Ended
		Income and Expense				September 30,
		Items as a Percent of Net sales				2004 to 2003
		Three Months Ended				Amount of			Percent
Income and		September 30,				Increase			of
Expense Items		2004		2003		(Decrease)			Change
Net sales		100.0	%	100.0	%	$	20,147		31.7	%
Cost of goods sold		18.3		20.8		2,084			15.8
Volume incentives		39.9		37.0		9,860			42.0
SG&A expenses		33.7		43.9		373			1.3
Total operating expenses		91.9		101.7		12,317			19.1
Operating income		8.1		(1.7	)	7,830			747.2
Other income (expense), net		0.2		0.4		(45		)	(20.5	)
Income before provision for income taxes		8.3		(1.3	)	7,785			940.2
Provision (benefit) for income taxes		2.8		(0.4	)	2,614			990.2
Net income		5.5	%	(0.9	)%	$	5,171		916.8	%

 

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The following table identifies for the nine-month periods (i) the relationship that net income items disclosed in the condensed consolidated financial statements have to total sales, and (ii) the amount and percent of change of such items compared to the corresponding prior period.

 

(Dollar Amounts in Thousands)

(Unaudited)

 

						(ii)
		(i)				Nine Months Ended
		Income and Expense				September 30,
		Items as a Percent of Net sales				2004 to 2003
		Nine Months Ended				Amount of			Percent
Income and		September 30,				Increase			of
Expense Items		2004		2003		(Decrease)			Change
Net sales		100.0	%	100.0	%	$	50,375		26.6	%
Cost of goods sold		18.7		20.6		5,659			14.5
Volume incentives		38.7		36.3		24,058			34.9
SG&A expenses		36.3		41.0		9,398			12.1
Total operating expenses		93.7		97.9		39,115			21.1
Operating income		6.3		2.1		11,260			288.8
Other income (expense), net		0.4		(0.4	)	1,618			226.3
Income before provision for income taxes		6.7		1.7		12,878			404.5
Provision for income taxes		1.5		0.6		2,626			257.7
Net income		5.2	%	1.1	%	$	10,252		473.5	%

 

Net Sales Revenue

 

Net sales revenue for the three months ended September 30, 2004, was $83.6 million compared to $63.5 million for the same period in the prior year, an increase of approximately 31.7 percent. Net sales revenue for the nine months ended September 30, 2004, was $240.1 million compared to $189.7 million for the same period in the prior year, an increase of approximately 26.6 percent. The increase in net sales revenue for the three and nine months ended September 30, 2004, primarily reflects higher net sales revenue in our Synergy Worldwide and international operations due to an increased number of distributors which resulted in an increased number of units sold.

 

United States net sales revenue for the third quarter totaled $32.9 million, compared with $34.0 million in the same period of the prior year, a decline of 3.2 percent. For the nine months ended September 30, 2004, United States net sales revenue totaled $103.3 million, a decline of 4.1 percent from the same period of the prior year. Net sales revenue in the United States, which includes sales revenue from the Dominican Republic, continues to be negatively impacted by the devaluation of the Dominican Republic peso. Year to date operating income in the United States totaled $5.1 million compared to $4.5 million in the prior year.

 

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