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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee required]
For the Fiscal Year Ended December 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No fee required]
For the transition period from N/A to N/A
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Commission File Number 0-8707
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NATURE'S SUNSHINE PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
UTAH 87-0327982
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
75 EAST 1700 SOUTH, PROVO, UTAH 84606
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 342-4407
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
-------------------------------
(TITLE OF CLASS)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
---
The aggregate market value of the voting stock held by non-affiliates of
the Registrant on March 13, 1997 was approximately $284,043,790.
The number of shares of Common Stock, without par value, outstanding on
March 13, 1997 was 18,857,679 shares.
Documents Incorporated by Reference:
Proxy Statement for May 19, 1997 Annual Meeting of Shareholders (Part III
of this Report).
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Nature's Sunshine Products, Inc., incorporated in Utah in 1976, and its
subsidiaries (hereinafter referred to collectively as the "Company") is
primarily engaged in the manufacturing and marketing of nutritional and personal
care products. The Company sells its products to a sales force of independent
distributors who use the products themselves or resell them to other
distributors or consumers.
The Company markets its products directly in the United States, Brazil,
Colombia, Mexico, Japan, Canada, Venezuela, the United Kingdom, El Salvador,
Guatemala, Costa Rica, Peru, Panama, Argentina, Ecuador, Honduras and Nicaragua.
The Company also exports its products to several other countries, including
Australia, Malaysia, New Zealand, Norway and the Philippines.
FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company is principally engaged in one line of business, namely, the
sale of nutritional and personal care products. Information, for each of the
Company's last three fiscal years, with respect to the amounts of revenue from
sales to unaffiliated customers, operating profit and identifiable assets of
this segment is set forth under Item 6 of this Report and such information is
incorporated by this reference and made a part hereof.
NARRATIVE DESCRIPTION OF BUSINESS
The principal business of the Company and its predecessors has been the
manufacture and sale of nutritional and personal care products since 1972. The
Company's nutritional products include herbs, vitamins, beverages, mineral and
food supplements and homeopathic remedies. Personal care products include
natural skin, hair and beauty care products. Additional information with
respect to the Company's business is set forth below:
PRODUCTS AND MANUFACTURING
The Company is engaged in the manufacture and distribution of nutritional
and personal care products which are primarily sold to independent distributors
who resell the Company's products directly to consumers, other distributors, or
use the products themselves. The Company purchases herbs and other raw
materials in bulk, and after quality control testing, encapsulates, tabulates or
concentrates them and then packages them for shipment. Most of the Company's
products are manufactured at its facilities in Spanish Fork, Utah. Certain of
the Company's personal care products are manufactured for the Company, in
accordance with its specifications and standards, by contract manufacturers.
The Company has implemented stringent quality control procedures to verify that
the contract manufacturers have complied with its specifications and standards.
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DISTRIBUTION AND MARKETING
The Company attracts independent distributors who explain and market the
Company's products through direct selling techniques to consumers and sponsor
other distributors. The Company motivates and provides incentives to its
independent sales force through a combination of high quality products, product
support, financial benefits, sales conventions, travel programs and a variety of
training seminars.
The Company's domestic product sales are shipped directly from its
manufacturing facilities located in Spanish Fork, Utah, as well as from its
regional warehouses located in Columbus, Ohio; Dallas, Texas and Atlanta,
Georgia. Each subsidiary operation maintains an inventory to supply its
customers.
Demand for the Company's products is created by approximately 522,000
active members (at December 31, 1996) of the Company's independent distributor
sales force. A person who wishes to join the Company's independent sales force
begins as a "Distributor". One can become a Distributor only by applying to the
Company under the sponsorship of someone who is already a member of the
independent sales force. A Distributor interested in earning additional income
by committing more time and effort to selling the Company's products may be
appointed to "Manager" status. Appointment as a Manager is dependent upon
attaining certain purchase volume levels and demonstrating leadership abilities.
Managers numbered approximately 11,700 at December 31, 1996. Managers resell
the products they purchase from the Company to the Distributors in their sales
group, to consumers or use the products themselves. Many Distributors sell on a
part-time basis to friends or associates or consume the Company's products
themselves.
Domestically, the Company generally sells its products on a cash or credit
card basis. For certain of the Company's international operations, the Company
uses independent distribution centers and offers credit terms consistent with
industry standards.
The Company pays its Managers sales commissions ("overrides") and volume
discounts based upon the amount of personal product purchases as well as their
sales group volume. Reference is made to Item 8 contained herein for the total
commissions and discounts ("Volume Incentives") paid by the Company for the
years ended December 31, 1994 through 1996. In addition, Managers who qualify
by attaining certain levels of monthly product purchases are eligible for
additional incentive programs including automobile allowances, medical and
dental insurance and travel.
SOURCE AND AVAILABILITY OF RAW MATERIALS
Raw materials used in the manufacture of the Company's products are
available from a number of suppliers, and the Company has not experienced any
major difficulty in obtaining adequate sources of supply. The Company attempts
to assure the availability of many of its raw materials by contracting, in
advance, for its annual requirements. In the past, the Company has found
alternative sources of raw materials when needed, and therefore, believes it
will be able to do so in the future.
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TRADEMARKS AND TRADE NAMES
The Company has obtained trademark registrations of its basic trademarks,
"Nature's Sunshine", and the landscape logo for all of its product lines, as
well as the trademark "Nature's Spring" for its water purifier. The Company
also owns numerous trademark registrations in the United States and in many
foreign countries.
SEASONALITY
The business of the Company does not reflect significant seasonality.
WORKING CAPITAL ITEMS
The Company maintains a substantial inventory of raw materials and finished
goods in order to provide a high level of service to its independent
distributors.
DEPENDENCE UPON CUSTOMERS
The Company is not dependent upon a single customer or a few customers, the
loss of which would have a material adverse effect on its business.
BACKLOG
Orders for the Company's products are typically shipped within 24 hours
after receipt; and as a result, there is no significant amount of backlog at any
given time.
COMPETITION
The Company's products are sold in domestic and foreign markets in
competition with other companies, some of which have greater sales volumes and
financial resources than the Company, and which sell brands that are, through
advertising and promotions, better known to consumers. The Company competes
in the nutritional and personal care industry against companies which sell
heavily advertised and promoted products through retail stores as well as
against other direct selling companies. For example, the Company competes
against numerous manufacturers and retailers of nutritional and personal care
products which are distributed through supermarkets, department stores, drug
stores, health food stores, beauty salons, etc. In addition to its competition
with these manufacturers and retailers, the Company competes for product sales
and independent distributors with many other direct sales companies, including
Shaklee, NuSkin and Amway.
The Company is one of the world's largest distributors of encapsulated and
tableted herbal products. The principal competitors in the encapsulated and
tableted herbal market include Twinlab (New York), Rexall Sundown (Florida),
Nature's Way (Utah) and Sunrider (California).
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The Company believes that the principal methods of competition in the
direct sales marketing of nutritional and personal care products are quality,
price and brand name. In addition, the recruitment, training, financial and
travel incentives for the independent sales force are important factors.
RESEARCH AND DEVELOPMENT
The Company conducts its research and development activities at its
manufacturing facilities located in Spanish Fork, Utah. Principal emphasis of
the Company's research and development activities is the development of new
products and improvement of existing products for domestic and foreign markets.
The amount excluding capital expenditures spent during each of the last three
years on Company-sponsored research and development activities was approximately
$1,400,000, $1,100,000 and $800,000 in 1996, 1995 and 1994, respectively. The
Company has no third-party-sponsored research.
COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS
The nature of the Company's business has not required any material capital
expenditures to comply with Federal, state or local provisions enacted or
adopted regulating the discharge of materials into the environment. No material
expenditures to meet such provisions are anticipated. Such regulatory
provisions have not had any material effect upon the Company's earnings or
competitive position.
REGULATION
One or more of the following agencies regulates the formulation, labeling
and advertising of each of the Company's major product groups: the Federal Food
and Drug Administration ("FDA"), the Federal Trade Commission ("FTC"), the
Consumer Product Safety Commission ("CPSC") and various agencies of the
countries and states into which the Company's products are shipped or sold. In
addition, the Company's distribution and sales program is, like that of other
companies operating in interstate commerce, subject to the jurisdiction of the
FTC and a number of other Federal and state agencies. Various state agencies
regulate multi-level distribution activities.
As a result of the Company's efforts to comply with applicable statutes and
regulations, the Company has from time to time reformulated, relabeled or
eliminated certain of its products and revised certain provisions of its sales
and marketing program. The Company believes it is in material compliance with
the applicable Federal and state rules and regulations pertaining to its
products and marketing program.
EMPLOYEES
The approximate number of people employed by the Company as of December 31,
1996, was 955. The Company believes that its relations with its employees are
satisfactory.
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INTERNATIONAL OPERATIONS
The Company's direct sales of nutritional and personal care products are
established internationally in Brazil, Colombia, Mexico, Japan, Canada,
Venezuela, the United Kingdom, El Salvador, Guatemala, Costa Rica, Peru, Panama,
Argentina, Ecuador, Honduras and Nicaragua. The Company also exports its
products to numerous other countries, including Australia, Malaysia, New
Zealand, Norway and the Philippines. Information, for each of the Company's
last three years, with respect to the amounts of revenue, operating income, and
identifiable assets attributable to domestic and international operations, is
set forth in Note 9 of the Notes to Consolidated Financial Statements appearing
in Item 8 of this Report, and such information is incorporated herein by
reference and made a part hereof.
The Company's international operations are conducted in a manner
substantially the same as those conducted domestically; however, in order to
conform to local variations, economic realities, market customs, consumer habits
and regulatory environments, differences exist in the products and in the
distribution and marketing programs.
The Company's international operations are subject to many of the same
risks faced by the Company's domestic operations. These include competition and
the strength of the local economy. In addition, international operations are
subject to certain risks inherent in carrying on business abroad, including
foreign regulatory restrictions, fluctuations in monetary exchange rates,
import-export controls and the economic and political policies of foreign
governments. The importance of these risks increases as the Company's
international operations grow and expand. The Company's operations in Mexico,
Colombia and Venezuela have been affected by currency devaluations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company has included forward-looking statements concerning its business
and operations in this Form 10-K. These forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those projected.
ITEM 2. PROPERTIES
The Company's corporate offices are located in two adjacent office
buildings in Provo, Utah. The facilities are leased from an unaffiliated third
party and consist of approximately 50,000 square feet. The lease agreement for
the main building, comprising approximately 32,000 square feet, is for a 5 1/2
year term (of which 1/2 year remains) and grants the Company an option to
purchase the premises. Management expects to continue to utilize this facility
either by extending the lease arrangement or by exercising its option to
purchase. The lease for the second building, approximately 18,000 square feet,
expires in four years.
The Company's principal manufacturing facilities are housed in a building
owned by the Company, of approximately 136,000 square feet, located on
approximately ten acres in Spanish Fork, Utah. The building was constructed to
the Company's specifications in 1977. The building has been expanded on several
occasions and presently includes approximately 34,000 square feet of office
space and 102,000 square feet of manufacturing and warehouse space. The
building is suited to the Company's business, and is presently being utilized at
approximately 95
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percent of its productive capacity. The Company is in the process of
evaluating the expansion of its manufacturing facilities. The preliminary
capital budget for this expansion is approximately $10 million. The Company
also leases a 65,000-square-foot building, on a month-to-month basis, in
Spanish Fork to supplement the warehousing of finished goods inventory.
In 1996, the Company purchased an office building and warehouse in Mexico,
approximately 60,000 square feet, for approximately $2.4 million including
improvements. These buildings were acquired to provide adequate facilities for
the Company's administrative and warehousing needs.
In 1995, the Company purchased one floor of an office building in
Venezuela. This office space, approximately 10,000 square feet, was purchased
to provide an adequate facility for the administrative functions.
The Company also leases properties used primarily as distribution
warehouses which are located in Columbus, Ohio; Dallas, Texas; Atlanta, Georgia;
as well as Venezuela, Colombia, Japan, Brazil, Canada, the United Kingdom, Costa
Rica, Panama, Peru, El Salvador, Guatemala, Argentina, Ecuador, Honduras and
Nicaragua. Management believes these facilities are suitable for their
respective uses and are, in general, adequate for the Company's present needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits which are incidental to the
Company's business. Management, after consultation with its legal counsel,
believes that any liability as a result of these matters will not have a
material effect upon the Company's results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market System
(symbol NATR). The information in the table below reflects the actual high and
low sales prices of the Company's stock for 1996 and 1995, and has been restated
to reflect the three-for-two stock split declared in February 1996.
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Market Prices Market Prices
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1996 HIGH LOW 1995 HIGH LOW
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First Quarter 32 19 1/2 First Quarter 9 1/3 6 1/2
Second Quarter 30 1/2 22 Second Quarter 10 1/2 6 2/3
Third Quarter 26 1/2 16 Third Quarter 18 10 1/6
Fourth Quarter 24 3/4 16 3/4 Fourth Quarter 18 2/3 14
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There were approximately 1,297 shareholders of record as of March 13, 1997.
The Company has paid 34 consecutive quarterly cash dividends.
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ITEM 6. SELECTED FINANCIAL DATA
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE INFORMATION
<TABLE>
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INCOME STATEMENT DATA
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Selling, General
Sales Cost of Volume & Administrative Operating Income Before Net
Revenue Goods Sold Incentives Expenses Income Income Taxes Income
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $249,046 $44,886 $114,419 $63,252 $26,489 $27,869 $16,848
1995 205,566 38,533 94,316 55,221 17,496 20,189 11,878
1994 160,901 30,839 74,163 41,691 14,208 14,511 8,448
1993 127,194 24,210 59,741 31,747 11,496 12,279 7,455
1992 101,044 18,478 46,433 27,644 8,489 9,885 5,919
1991 72,605 13,962 33,427 18,685 6,531 7,247 4,622
1990 60,069 12,353 27,660 15,089 4,967 5,810 3,600
1989 52,082 10,294 24,026 11,997 5,765 6,399 3,958
1988 44,516 8,721 20,580 10,465 4,750 5,119 3,317
1987 38,184 7,510 18,145 9,118 3,411 3,727 2,042
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</TABLE>
<TABLE>
BALANCE SHEET DATA
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Working Current Property, Plant & Total Long-Term Shareholders'
Capital Ratio Inventories Equipment, Net Assets Debt Equity
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<S> <C> <C> <C> <C> <C> <C> <C>
1996 $39,560 2.44:1 $24,459 $20,197 $91,966 $--- $63,163
1995 24,433 2.07:1 23,127 13,088 65,247 --- 41,505
1994 18,798 2.06:1 17,278 9,919 52,458 --- 33,279
1993 14,223 2.16:1 11,171 9,672 41,534 --- 28,850
1992 11,125 2.19:1 9,367 8,917 33,987 --- 23,924
1991 10,242 2.35:1 6,523 7,500 27,420 --- 19,614
1990 9,570 2.89:1 4,836 6,885 22,004 11 16,543
1989 7,740 2.47:1 3,747 6,384 20,054 24 14,423
1988 6,939 2.64:1 3,271 5,964 17,538 36 12,855
1987 3,783 1.84:1 2,780 5,797 14,582 239 9,460
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(CONTINUED NEXT PAGE)
</TABLE>
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COMMON SHARE SUMMARY
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Cash Dividends Net Income Book Value Weighted
Per Share(1) Per Share Per Share(2) Average Shares
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1996 $.133 $.86 $3.30 19,683,964
1995 .133 .63 2.25 18,887,894
1994 .120 .45 1.81 18,779,229
1993 .120 .40 1.57 18,610,359
1992 .093 .32 1.30 18,555,737
1991 .073 .25 1.07 18,461,408
1990 .067 .19 .91 18,373,494
1989 .067 .21 .79 18,537,480
1988 .026 .17 .69 18,934,971
1987 --- .11 .53 18,011,042
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<TABLE>
OTHER INFORMATION
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Return on Square Footage
Shareholders' Return on Number of of Property Number of
Equity(3) Assets(4) Managers In Use Employees
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<S> <C> <C> <C> <C> <C>
1996 32.2% 21.4% 11,694 485,772 955
1995 31.8 20.2 11,547 443,895 862
1994 27.2 18.0 8,404 346,747 718
1993 28.3 19.6 6,328 315,772 588
1992 27.2 19.3 6,150 244,789 443
1991 25.6 18.7 4,866 195,165 344
1990 23.3 17.1 3,798 161,765 281
1989 29.0 21.1 2,999 161,265 278
1988 29.7 20.7 2,645 157,765 247
1987 24.2 15.6 2,502 150,149 218
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(1) The Company expects to continue paying cash dividends.
(2) Year end shareholders' equity divided by actual shares outstanding at the end
of each year.
(3) Net income divided by average shareholders' equity.
(4) Net income divided by average total assets.
The information in the preceding tables has been adjusted, where necessary, to
reflect stock dividends and splits.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES REVENUE
Consolidated sales revenue for the year ended December 31, 1996, was $249.0
million compared to $205.6 million in 1995, an increase of 21 percent. Sales
revenue increased 28 percent in 1995 compared to $160.9 million reported in
1994. The increases in sales revenue are directly related to the growth of the
Company's independent sales force and international operations, and the
continued expansion of the nutritional products market.
The Company distributes its products to consumers through an independent
sales force comprised of managers and distributors. Active managers totaled
approximately 11,700, 11,500 and 8,400 for 1996, 1995 and 1994, respectively.
Active distributors totaled approximately 522,000, 373,000 and 212,000 for 1996,
1995 and 1994, respectively.
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A price increase of approximately three percent went into effect on April
1, 1996, and resulted in greater sales revenue for the year. A minor price
adjustment of less than one percent is scheduled to become effective on April 1,
1997. Management believes that this price adjustment will not have a
significant impact on sales revenue.
Sales revenue, related to the Company's domestic operations, increased
approximately 17 percent for 1996 and 23 percent for 1995. International sales
revenue increased approximately $19.7 million in 1996, or 28 percent, and $19.3
million in 1995, or 39 percent. The Company's operations in Brazil, Colombia,
El Salvador, Japan and Mexico were the principal drivers of the growth in
international sales, contributing approximately $19.9 million to the increase in
sales revenue in 1996. The Company's operations in Mexico experienced a sales
revenue decrease of $11.4 million in 1995 primarily as the result of the
continued devaluation of the peso during 1995. The decrease in sales revenue
reported for Mexico during 1995 was more than offset by revenue increases in
other international operations, most notably Japan, Venezuela, Brazil and
Colombia.
COSTS AND EXPENSES
The Company's costs and expenses, which include cost of goods sold, volume
incentives, and selling, general and administrative expenses, are identified as
a percentage of sales in the table below:
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Year ended December 31 1996 1995 1994
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Cost of goods sold 18.0% 18.7% 19.2%
Volume incentives 46.0 45.9 46.1
Selling, general and
administrative expenses 25.4 26.9 25.9
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89.4% 91.5% 91.2%
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COST OF GOODS SOLD
Cost of goods sold decreased as a percent of sales during 1996 and 1995 as
a result of increased efficiencies in the Company's manufacturing operations as
well as pricing adjustments in the Company's subsidiary operations.
Management believes that cost of goods sold will decrease slightly as a
percent of sales during 1997 as a result of continued improvements in
manufacturing efficiencies.
VOLUME INCENTIVES
Volume incentives are a significant part of the Company's direct sales
marketing program and represent payments made to its independent sales force.
These payments are designed to provide incentives for reaching higher sales
levels and to encourage organizational development. Total volume incentives
varied slightly during 1996 and 1995 as a percent of sales.
Management expects volume incentives to remain relatively constant as a
percent of sales during 1997.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased, as a percent of
sales, during 1996 primarily as the result of increased sales revenue and
improved budgetary cost controls. Additionally, the Company incurred
approximately $.8 million of incremental selling, general and administrative
expenses in connection with its newest subsidiary operation in Argentina.
In addition to typical selling and administrative expenses, this expense
category includes costs for research and development, distribution, as well as
incentive programs such as the Company's conventions.
Selling, general and administrative expenses increased as a percent of
sales during 1995 primarily as the result of disproportionate costs of $6.3
million incurred in Japan and Brazil. Additionally, the Company's operations in
Mexico experienced a slight increase in selling, general and administrative
expenses as a percent of sales during 1995, primarily as a result of the
continued devaluation of the Peso.
Management believes that selling, general and administrative expenses will
decrease as a percent of sales during 1997 as the result of continued emphasis
on cost containment and improved sales revenue in certain of the Company's
international operations.
OTHER INCOME AND EXPENSE
Other income (expense) consists of the following (in thousands):
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Year ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
Interest and other income $2,021 $1,921 $ 503
Interest expense (63) (173) (46)
Foreign exchange loss (787) (280) (745)
Minority interest 209 1,225 591
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$1,380 $2,693 $ 303
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INTEREST AND OTHER INCOME
Interest and other income is earned principally from investments of excess
operating cash balances. Investment income will vary depending upon the rate of
interest, the investment instruments available and the need for cash in the
Company's operations. It is management's policy to invest only in high-grade
investments.
Interest income increased during 1996 and 1995 as the result of greater
cash balances available for investment as well as higher yields obtained in
certain of the Company's international operations. Management expects interest
and other income to decrease during 1997 as the result of the cash requirements
for anticipated capital projects during the year.
FOREIGN EXCHANGE GAIN (LOSS)
Because of its operations outside of the United States, the Company is
subject to realized and unrealized foreign exchange gains and losses. The
Company experienced exchange losses of
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approximately $.8 million and $.3 million during 1996 and 1995, respectively.
The losses were primarily related to the Company's operations in Venezuela,
Mexico and Japan.
MINORITY INTEREST
The Company eliminates the minority interest in its subsidiaries which are
not wholly owned. Accordingly, the Company eliminated approximately $.2 million
and $1.2 million of losses reported by subsidiaries in 1996 and 1995,
respectively.
INCOME TAXES
The Company's effective tax rate was 40, 41, and 42 percent for 1996, 1995,
and 1994, respectively.
INVENTORIES
Consolidated inventories increased approximately $1.3 million or 6 percent
in 1996, compared to an increase of $5.8 million or 34 percent in 1995. These
increases resulted primarily from an increase in the level of inventory the
Company maintains due to increased domestic and international sales, the
addition of new subsidiaries as well as the introduction of new products.
PREPAID EXPENSES AND OTHER
Prepaid expenses and other increased approximately $4.4 million in 1996,
primarily due to increased income tax deposits and other tax assets in 1996
compared to 1995.
ACCRUED VOLUME INCENTIVES
Accrued volume incentives increased approximately $1.5 million at the end
of 1996, compared to the prior year, as a direct result of increased sales
revenue. Volume incentives are a significant part of the Company's direct sales
marketing program and represent payments made to its independent sales force.
ACCRUED LIABILITIES
Accrued liabilities increased approximately $3.4 million at the end of
1996, compared to the prior year. The increase is generally related to the
growth in sales revenue and expenses associated with the Company's incentive
travel programs.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased approximately $13.7 million during
1996. The increase was the result of cash generated by operations, an increase
in short-term liabilities and proceeds and tax benefits from the exercise of
employee stock options.
Cash was used during 1996 to purchase approximately $10.5 million of
property, plant and equipment. The Company paid approximately $2.5 million in
cash dividends. Volume
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incentive payments increased approximately $19.9 million during 1996,
primarily as the result of increased sales. Payments to suppliers and
employees increased approximately $12.5 million as a result of higher levels
of inventory and production to support higher levels of sales, as well as
increased employment-related costs. Treasury stock purchases totaled
approximately $4.9 million. The Company is in the process of planning the
expansion of its manufacturing facility. The preliminary capital budget for
the expansion is approximately $10.0 million. In the first quarter of 1996,
the Company purchased an office building and warehouse in Mexico for
approximately $2.4 million, to provide an adequate facility for its
administrative and warehousing operations.
Management believes that the Company's stock is an attractive investment
and, pursuant to its previously announced 500,000 share buyback program, may
utilize some of its available cash to purchase up to the remaining balance of
approximately 112,400 shares, as of February 28, 1997, should market
conditions warrant.
The Company is in the process of opening another international market.
Management believes that the initial capitalization of this new market will
require $1.0 million to $2.0 million.
Options for 926,247 shares of the Company's common stock were exercised
during 1996. The cash flow benefit to the Company during the year was
approximately $12.1 million.
Management believes that future working capital requirements can be met
through internally-generated funds or can be arranged through credit facilities
on favorable terms.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Nature's Sunshine Products, Inc.:
We have audited the accompanying consolidated balance sheets of Nature's
Sunshine Products, Inc. (a Utah corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nature's Sunshine
Products, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
February 4, 1997
14
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
AMOUNTS IN THOUSANDS EXCEPT PER SHARE INFORMATION
- --------------------------------------------------------------------------------
Year ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
Sales Revenue $249,046 $205,566 $160,901
- --------------------------------------------------------------------------------
Costs and expenses:
Cost of goods sold 44,886 38,533 30,839
Volume incentives 114,419 94,316 74,163
Selling, general and administrative
expenses 63,252 55,221 41,691
- --------------------------------------------------------------------------------
222,557 188,070 146,693
- --------------------------------------------------------------------------------
Operating Income 26,489 17,496 14,208
- --------------------------------------------------------------------------------
Other income (expense):
Interest and other income 2,021 1,921 503
Interest expense (63) (173) (46)
Foreign exchange loss (787) (280) (745)
Minority interest 209 1,225 591
- --------------------------------------------------------------------------------
1,380 2,693 303
- --------------------------------------------------------------------------------
Income before income taxes 27,869 20,189 14,511
Provision for income taxes 11,021 8,311 6,063
- --------------------------------------------------------------------------------
Net Income $ 16,848 $ 11,878 $ 8,448
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net Income Per Common Share $ .86 $ .63 $ .45
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Weighted Average Shares Outstanding 19,684 18,888 18,779
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying significant accounting policies and notes to consolidated
financial statements are an integral part of these statements.
15
<PAGE>
CONSOLIDATED BALANCE SHEETS
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
AMOUNTS IN THOUSANDS
- --------------------------------------------------------------------------------
As of December 31 1996 1995
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $27,879 $14,172
Accounts receivable, net of
allowance for doubtful accounts
of $417 in 1996 and $346 in 1995 6,698 6,042
Inventories 24,459 23,127
Notes receivable from related parties --- 213
Prepaid expenses and other 8,014 3,619
- --------------------------------------------------------------------------------
Total current assets 67,050 47,173
- --------------------------------------------------------------------------------
Property, plant and equipment, net 20,197 13,088
Long-term investments 2,048 2,381
Other assets 2,701 2,605
- --------------------------------------------------------------------------------
$91,996 $65,247
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current liabilities:
Short-term debt $ 2,788 $ 2,042
Accounts payable 4,225 5,031
Accrued volume incentives 8,729 7,207
Accrued liabilities 9,992 6,577
Income taxes payable 1,756 1,883
- --------------------------------------------------------------------------------
Total current liabilities 27,490 22,740
- --------------------------------------------------------------------------------
Deferred income taxes 1,343 1,002
- --------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value, authorized 20,000 shares,
issued 19,446 shares and 19,412 shares in
1996 and 1995, respectively 39,406 31,263
Retained earnings 33,549 19,214
Treasury stock, at cost, 334 and 1,012
shares as of December 31, 1996
and 1995, respectively (5,868) (4,942)
Receivables from related parties (84) (293)
Cumulative foreign currency translation adjustments (3,840) (3,737)
- --------------------------------------------------------------------------------
Total shareholders' equity 63,163 41,505
- --------------------------------------------------------------------------------
$91,996 $65,247
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying significant accounting policies and notes to consolidated
financial statements are an integral part of these statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
AMOUNTS IN THOUSANDS
<TABLE>
- ------------------------------------------------------------------------------------------------
Year ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Balance at beginning of year $31,263 $29,849 $ 15,794
Tax benefit related to exercise of stock options 6,328 683 138
Issuance of 3, 1 and 16, shares of
treasury stock, respectively 44 13 201
Issuance of 926, 129 and 40 shares of
treasury stock, respectively, on exercise of
stock options 1,771 721 157
Stock dividend --- (3) 13,559
- ------------------------------------------------------------------------------------------------
Balance at end of year 39,406 31,263 29,849
- ------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 19,214 9,778 17,118
Net income 16,848 11,878 8,448
Stock dividend --- --- (13,559)
Cash dividends (2,513) (2,442) (2,229)
- ------------------------------------------------------------------------------------------------
Balance at end of year 33,549 19,214 9,778
- ------------------------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year (4,942) (3,742) (3,500)
Purchase of common stock (4,902) (1,298) (285)
Cost of treasury stock issued 3,976 98 43
- ------------------------------------------------------------------------------------------------
Balance at end of year (5,868) (4,942) (3,742)
- ------------------------------------------------------------------------------------------------
RECEIVABLES FROM RELATED PARTIES:
Balance at beginning of year (293) (405) (418)
Reductions 209 112 13
- ------------------------------------------------------------------------------------------------
Balance at end of year (84) (293) (405)
- ------------------------------------------------------------------------------------------------
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENTS:
Balance at beginning of year (3,737) (2,200) (144)
Foreign currency translation adjustments (103) (1,537) (2,056)
- ------------------------------------------------------------------------------------------------
Balance at end of year (3,840) (3,737) (2,200)
- ------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $63,163 $41,505 $ 33,280
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
The accompanying significant accounting policies and notes to consolidated financial statements
are an integral part of these statements.
</TABLE>
17
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
AMOUNTS IN THOUSANDS
<TABLE>
Increase (Decrease) in Cash and Cash Equivalents
- -----------------------------------------------------------------------------------------------------------
Year ended December 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales revenue $ 247,566 $204,085 $159,447
Cash paid as volume incentives (112,897) (92,986) (72,002)
Cash paid to suppliers and employees (107,269) (94,740) (76,727)
Interest paid (62) (173) (46)
Interest received 2,058 1,868 371
Income taxes paid (10,807) (7,462) (3,774)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 18,589 10,592 7,269
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10,544) (6,098) (2,590)
Sale (purchase) of long-term investments, net 333 672 (683)
Payments received (advanced) on long-term receivables, net (170) 393 325
Payments from (advanced to) related parties 489 (68) 89
Purchase of other assets (215) (331) (1,235)
Proceeds from sale of assets 344 --- ---
Minority interest elimination (396) 341 336
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,159) (5,091) (3,758)
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends (2,513) (2,446) (2,229)
Purchase of treasury stock (4,902) (1,298) (285)
Proceeds from short-term debt, net 746 509 1,533
Proceeds from exercise of stock options 5,732 819 187
Tax benefit from stock option exercise 6,328 683 138
Issuance of treasury stock 60 14 215
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 5,451 (1,719) (441)
- -----------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH (174) (811) (536)
- -----------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,707 2,971 2,534
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 14,172 11,201 8,667
- -----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 27,879 $ 14,172 $ 11,201
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Reconciliation of Net Income to Net Cash Provided by Operating Activities
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
NET INCOME $ 16,848 $ 11,878 $ 8,448
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Bad debt expense and reserve 133 242 839
Depreciation and amortization 3,420 3,467 3,067
Gain on sale of fixed assets (96) --- ---
Increase in accounts receivable, net (788) (1,349) (1,681)
Increase in inventories (1,332) (5,849) (6,107)
Increase in prepaid expenses and other (4,010) (1,593) (402)
(Decrease) increase in income taxes payable (126) 818 997
Increase in accrued liabilities and volume incentives 4,936 3,090 1,833
(Decrease) increase in accounts payable (806) 558 1,129
Increase in deferred income taxes 341 55 667
Foreign currency translation adjustment 69 (725) (1,521)
- -----------------------------------------------------------------------------------------------------------
Total adjustments 1,741 (1,286) (1,179)
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 18,589 $ 10,592 $ 7,269
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
The accompanying significant accounting policies and notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
18
<PAGE>
SIGNIFICANT ACCOUNTING POLICIES
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE INFORMATION
NATURE OF OPERATIONS
Nature's Sunshine Products, Inc., and its subsidiaries (hereinafter
referred to collectively as the "Company") is primarily engaged in the
manufacturing and marketing of nutritional and personal care products. The
Company sells its products to a sales force of independent distributors who use
the products themselves or resell them to other distributors or consumers.
The Company markets its products directly in the United States, Brazil,
Colombia, Mexico, Japan, Canada, Venezuela, the United Kingdom, El Salvador,
Guatemala, Costa Rica, Peru, Panama, Argentina, Ecuador, Honduras and Nicaragua.
The Company also exports its products to numerous other countries, including
Australia, Malaysia, New Zealand, Norway and the Philippines.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Nature's
Sunshine Products, Inc. and its majority-owned subsidiaries. Intercompany
transactions have been eliminated in consolidation.
NET INCOME PER SHARE
Net income per share is based upon the weighted average number of common
shares and common equivalent shares outstanding during the period. Common
equivalent shares consist primarily of stock options, which have a dilutive
effect when applying the treasury stock method.
The Board of Directors declared a three-for-two stock split to shareholders
of record March 4, 1996, and a ten percent stock dividend to shareholders of
record February 17, 1995. All per share amounts included in the consolidated
financial statements and accompanying notes reflect the stock dividend and
split.
INCOME TAXES
The Company recognizes a liability or asset for the deferred tax
consequences of temporary differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when the reported amounts of the assets or liabilities are recovered or
settled. Foreign and other tax credits are accounted for using the "liability"
method, which reduces income tax expense in the year in which these credits are
generated.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
19
<PAGE>
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
TRANSLATION OF FOREIGN CURRENCIES
The financial statements of the international subsidiaries have been
translated to U.S. dollars in accordance with the provisions of SFAS No. 52.
The Company translated the assets and liabilities of its international
operations at rates of exchange in effect at year end, and the consolidated
statements of income were translated at the average rates of exchange for the
year. Gains and losses resulting from translation are accumulated as a separate
component of shareholders' equity. Gains and losses resulting from foreign
currency transactions are included in the consolidated statements of income.
REVENUE RECOGNITION
For domestic sales, the Company generally receives its product sales price
in cash accompanying orders from independent sales force members. For certain of
the Company's international operations, the Company offers credit terms
consistent with industry standards. A volume incentive payment related to
product orders is made in the month following the sale. Sales and related volume
incentives are recorded when the merchandise is shipped. Cash received for
unshipped merchandise is recorded as a liability.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid short-term investments to be cash equivalents, which generally
includes only investments with original maturities of three months or less.
SELLING EXPENSES
Independent sales force members may earn Company-paid attendance at
conventions as well as other travel awards by achieving the required levels of
product purchases within the qualification period. Convention costs and other
travel expenses are accrued over the qualification period as they are earned.
Accordingly, the Company accrued approximately $2,625 and $1,450 at December
31, 1996 and 1995, respectively.
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred. Total research
and development costs were approximately $1,400, $1,100, and $800 for 1996, 1995
and 1994, respectively.
CASH DIVIDENDS PER COMMON SHARE
The Company declared and paid quarterly cash dividends totaling 13 1/3
cents per common share in 1996. The Company paid on March 7, 1997, a quarterly
cash dividend of 3 1/3 cents per common share to shareholders of record on March
3, 1997.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE INFORMATION
NOTE 1: INVENTORIES
Inventories are stated at the lower of cost (using the first-in,
first-out method) or market value. The composition of inventories is as follows:
- --------------------------------------------------------------------------------
As of December 31 1996 1995
- --------------------------------------------------------------------------------
Raw materials $ 7,554 $ 7,772
Work in process 1,146 1,123
Finished goods 15,759 14,232
- --------------------------------------------------------------------------------
$24,459 $23,127
- --------------------------------------------------------------------------------
NOTE 2: PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Estimated useful lives for buildings and
improvements range from 20 to 30 years, and equipment, furniture and fixtures
range from 3 to 10 years. Maintenance and repairs are charged to expense as
incurred, and major improvements are capitalized. Gains or losses on sales or
retirements are included in the consolidated statement of income in the year of
disposition. The composition of property, plant and equipment is as follows:
- --------------------------------------------------------------------------------
As of December 31 1996 1995
- --------------------------------------------------------------------------------
Buildings and improvements $ 11,659 $ 8,880
Machinery and equipment 9,094 7,992
Furniture and fixtures 11,188 7,381
- --------------------------------------------------------------------------------
31,941 24,253
Accumulated depreciation and
amortization (13,092) (11,376)
Land 1,348 211
- --------------------------------------------------------------------------------
$ 20,197 $ 13,088
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 3: INVESTMENTS
The following are the aggregate fair values and related gross unrealized
holding gains and losses for securities available for sale at December 31, 1996
and 1995:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Securities available for sale:
Amortized cost $14,073 $7,922
Gross unrealized holding gains 353 292
Gross unrealized holding losses (43) (194)
- --------------------------------------------------------------------------------
Aggregate fair value $14,383 $8,020
- --------------------------------------------------------------------------------
21
<PAGE>
During 1996 and 1995, the proceeds from the sales of available-for-sale
securities was $4,226 and $3,598, respectively. The gross realized gains and
gross realized losses on the sales of available-for-sale securities was $61 and
$168, respectively, for the year ended December 31, 1996, and $34 and $63,
respectively, for the year ended December 31, 1995. In determining the realized
gains and losses, the Company has used the specific identification method to
determine the cost of the investments.
The Company did not have any securities which were classified as held to
maturity at December 31, 1996.
NOTE 4: SHORT-TERM DEBT
During 1994, the Company established operating lines of credit in Japan and
Brazil to facilitate payment of start-up and initial operating expenses. During
1995, the Company paid the outstanding balance on the line of credit in Brazil.
The Company increased its borrowings, which are payable in local currency, in
Japan as a result of the favorable interest rate. The debt is unsecured and
payable during 1997. The weighted average balance of the line of credit was
$3,165 during 1996. The weighted average interest rate approximates two percent
at December 31, 1996.
NOTE 5: INCOME TAXES
The provision for income taxes consists of the following:
- --------------------------------------------------------------------------------
Year ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
Current:
Federal $ 6,655 $4,984 $3,844
State 1,146 967 610
Foreign 3,249 2,305 2,275
- --------------------------------------------------------------------------------
11,050 8,256 6,729
- --------------------------------------------------------------------------------
Deferred (29) 55 (666)
- --------------------------------------------------------------------------------
Total provision for income taxes $11,021 $8,311 $6,063
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The domestic and foreign components of income before taxes are as follows:
- --------------------------------------------------------------------------------
Year ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
Domestic $20,516 $14,617 $11,053
Foreign 7,353 5,572 3,458
- --------------------------------------------------------------------------------
Total $27,869 $20,189 $14,511
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
22
<PAGE>
The provision for income taxes as a percentage of income before taxes
differs from the statutory Federal income tax rate due to the following:
- -------------------------------------------------------------------
Year ended December 31 1996 1995 1994
- -------------------------------------------------------------------
Statutory Federal income tax rate 35.0% 35.0% 34.3%
State income taxes, net of Federal
income tax benefit 2.7 3.1 2.8
Foreign and other tax credits (2.8) (5.1) (6.5)
Net effect of foreign subsidiaries
tax attributes 5.3 6.8 12.1
Other (.6) 1.4 (.9)
- -------------------------------------------------------------------
Effective tax rate 39.6% 41.2% 41.8%
- -------------------------------------------------------------------
The components of the deferred income tax assets and liabilities as of
December 31, 1996 and 1995, are as follows:
- -------------------------------------------------------------------
DECEMBER 31, December 31,
1996 1995
- -------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 49 $ 31
Inventory unicap adjustment 408 479
Foreign tax credits 214 158
State income taxes 125 313
Accrued vacation 85 99
Inventory obsolescence reserve 117 170
Foreign currency exchange --- 58
Sale of subsidiary 250 ---
Intangible assets 430 ---
- -------------------------------------------------------------------
Total deferred tax assets $ 1,678 $ 1,308
- -------------------------------------------------------------------
Deferred tax liabilities:
Accelerated depreciation $(1,172) $ (696)
Gain on sale of subsidiaries (171) (306)
- -------------------------------------------------------------------
Total deferred tax liabilities $(1,343) $(1,002)
- -------------------------------------------------------------------
As of December 31, 1996, the Company has available net operating losses
from its foreign subsidiaries for U.S. Federal income tax purposes and financial
reporting purposes of approximately $3,800 and $4,200, respectively. The tax
net operating losses will expire in 1999 through 2001. Certain of these net
operating losses may be limited by the extent of foreign taxable income in
future years.
The Company considers all international earnings which have not been
previously taxed for U.S. purposes to be permanently invested in the
international subsidiaries. As of December 31, 1996, such earnings were
approximately $10,333. If U.S. taxes and foreign dividend withholding taxes had
been provided on those earnings, net of the effect of utilization of foreign tax
credits attributable to foreign taxes paid up to the incremental U.S. rate, such
taxes would have approximated $630 as of December 31, 1996.
23
<PAGE>
NOTE 6: STOCK OPTIONS
The Company has from time to time granted certain non-qualified stock
options to officers, directors and key employees. Such grants have been made at
the fair market value of the stock at the date of grant. At December 31, 1996,
the Company had approximately 143,000 shares remaining in the 1995 Stock Option
Plan, which are available to be granted to employees. At December 31, 1996, the
Company had reserved approximately 300,000 treasury shares to accommodate the
exercise of the outstanding options.
The Company accounts for the stock option plans under APB Opinion No.
25, under which no compensation cost has been recognized in the accompanying
consolidated statements of income for the years ended December 31, 1996,
1995 and 1994. Had compensation costs been determined consistent with SFAS
Statement No. 123, the Company's net income and earnings per share would have
been reduced to the following proforma amounts:
- -------------------------------------------------------------------
Year ended December 31 1996 1995
- -------------------------------------------------------------------
Net Income As reported $16,848 $11,878
Proforma $14,447 $11,776
Earnings Per Share As reported $ .86 $ .63
Proforma $ .74 $ .63
- -------------------------------------------------------------------
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in both 1996 and 1995:
risk-free interest rate of 6.5 percent; expected dividend yield of
approximately 1 percent; expected lives of seven years and expected
volatility of 47.5 percent.
Because SFAS Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting proforma compensation
cost may not be representative of what is to be expected in future years.
Stock option activity for 1994, 1995 and 1996 consisted of the following:
- -------------------------------------------------------------------------------
Number of
Shares Weighted Average
(IN THOUSANDS) Exercise Price
- -------------------------------------------------------------------------------
Options outstanding at December 31, 1993 1,570 $ 4.90
- -------------------------------------------------------------------------------
Options issued 406 $ 8.50
Options canceled (1) $ 3.03
Options exercised (a) (66) $ 2.81
- -------------------------------------------------------------------------------
Options outstanding at December 31, 1994 (b) 1,909 $ 5.74
- -------------------------------------------------------------------------------
Options issued (c) 1,701 $14.69
Options canceled (39) $ 6.67
Options exercised (a) (194) $ 4.23
- -------------------------------------------------------------------------------
Options outstanding at December 31, 1995 (b) 3,377 $10.32
- -------------------------------------------------------------------------------
Options issued (c) 313 $19.67
Options canceled (135) $15.01
Options exercised (a) (960) $ 5.97
- -------------------------------------------------------------------------------
Options outstanding at December 31, 1996 (b) 2,595 $12.81
- -------------------------------------------------------------------------------
(a) Shares issued related to the exercise of stock options were issued from
treasury stock.
(b) Options for 2,012, 1,389 and 1,048 shares of common stock were exercisable
on December 31, 1996, 1995 and 1994, respectively, with weighted average
exercise prices of $11.69, $5.36 and $4.26, respectively.
(c) The weighted average fair value of options granted were $10.82 and $7.90
for 1996 and 1995, respectively.
24
<PAGE>
NOTE 7: EMPLOYEE BENEFIT PLANS
DEFERRED COMPENSATION PLAN
The Company sponsors a qualified deferred compensation plan (401(k)). The
Company contributes matching contributions of 100 percent of employee
contributions up to a maximum of five percent of the employee's compensation.
Employer contributions to the plan during 1996, 1995 and 1994 were approximately
$451, $478 and $284, respectively.
MANAGEMENT AND EMPLOYEE BONUS PLAN
The Company has a bonus plan that provides for participants to receive
payments based upon the annual increase in revenue and operating income. The
expense related to the plan was approximately $2,822, $2,706 and $1,912 for
1996, 1995 and 1994, respectively. All employees participate in the plan.
NOTE 8: RELATED PARTY TRANSACTIONS
In the second quarter of 1995, the Company advanced $120 to one of its
officers on a short-term basis at an interest rate of nine percent. The loan
was repaid with interest during the third quarter.
In the second quarter of 1995, the Company advanced $250 to a key employee.
The loan was collateralized and had an interest rate of nine percent. The loan
was repaid during 1996.
During 1993 and 1992, the Company made loans to certain officers of the
Company, primarily to purchase Company stock in the open market. The balance of
these loans was $84 and $293 at December 31, 1996 and 1995, respectively.
During 1996, the Company purchased several buildings in Mexico for its
administrative and warehousing operations. The Company made improvements to the
buildings at a cost of $483. The improvements were made by a company, which is
owned by a relative of a key employee of the Mexican operations.
25
<PAGE>
NOTE 9: INTERNATIONAL OPERATIONS
Sales for domestic and international operations during the past three years
were as follows:
- -------------------------------------------------------------------
Year ended December 31 1996 1995 1994
- -------------------------------------------------------------------
Domestic $159,977 $136,168 $110,839
- -------------------------------------------------------------------
International:
Americas 71,690 53,296 42,215
Asia Pacific 12,497 11,953 4,115
Other 4,882 4,149 3,732
- -------------------------------------------------------------------
Total International 89,069 69,398 50,062
- -------------------------------------------------------------------
Total Sales $249,046 $205,566 $160,901
- -------------------------------------------------------------------
Operating income for domestic and international operations during the past
three years was as follows:
- -------------------------------------------------------------------
Year ended December 31 1996 1995 1994
- -------------------------------------------------------------------
Domestic $18,682 $13,357 $ 9,706
- -------------------------------------------------------------------
International:
Americas 8,191 5,994 4,578
Asia Pacific (424) (2,326) (473)
Other 40 471 397
- -------------------------------------------------------------------
Total International 7,807 4,139 4,502
- -------------------------------------------------------------------
Total Operating Income $26,489 $17,496 $14,208
- -------------------------------------------------------------------
Total assets for domestic and international operations for the past three
years were as follows:
- -------------------------------------------------------------------
As of December 31 1996 1995 1994
- -------------------------------------------------------------------
Domestic $58,674 $40,996 $34,973
- -------------------------------------------------------------------
International:
Americas 28,764 18,941 12,970
Asia Pacific 3,767 4,239 3,487
Other 791 1,071 1,028
- -------------------------------------------------------------------
Total International 33,322 24,251 17,485
- -------------------------------------------------------------------
Total Assets $91,996 $65,247 $52,458
- -------------------------------------------------------------------
NOTE 10: COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment used in its operations.
The approximate aggregate commitments under non-cancelable operating leases in
effect at December 31, 1996, were as follows:
26
<PAGE>
- --------------------------------------------------------------------------------
Year ending December 31 Lease Commitments
- --------------------------------------------------------------------------------
1997 $1,737
1998 622
1999 423
2000 309
2001 and thereafter 395
- --------------------------------------------------------------------------------
$3,486
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company incurred expenses of approximately $2,512, $2,725 and $2,434 in
connection with operating leases during 1996, 1995 and 1994, respectively.
The Company is a defendant in various lawsuits which are incidental to the
Company's business. Management, after consultation with its legal counsel,
believes that any liability as a result of these matters will not have a
material effect upon the Company's results of operations or financial position.
SUMMARY OF QUARTERLY OPERATIONS -- UNAUDITED
DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE INFORMATION
<TABLE>
Income
Selling, General Other Before Net
Sales Cost of Volume & Administrative Operating Income Income Net Income
1996 Revenue Goods Sold Incentives Expenses Income (Expense) Taxes Income Per Share*
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Qtr $ 60,113 $10,384 $ 27,896 $16,753 $ 5,080 $ 500 $ 5,580 $ 3,276 $.17
Second Qtr 63,182 11,565 28,750 15,542 7,325 (73) 7,252 4,342 .22
Third Qtr 63,031 11,201 28,976 16,009 6,845 319 7,164 4,538 .23
Fourth Qtr 62,720 11,736 28,797 14,948 7,239 634 7,873 4,692 .24
- ------------------------------------------------------------------------------------------------------------------------------
$249,046 $44,886 $114,419 $63,252 $26,489 $1,380 $27,869 $16,848 $.86
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1995
- ------------------------------------------------------------------------------------------------------------------------------
First Qtr $ 47,062 $ 9,229 $ 21,794 $13,052 $ 2,987 $ 453 $ 3,440 $ 2,014 $.11
Second Qtr 50,725 9,523 23,104 13,446 4,652 380 5,032 2,972 .16
Third Qtr 53,164 9,817 24,222 13,860 5,265 451 5,716 3,306 .17
Fourth Qtr 54,615 9,964 25,196 14,863 4,592 1,409 6,001 3,586 .19
- ------------------------------------------------------------------------------------------------------------------------------
$205,566 $38,533 $ 94,316 $55,221 $17,496 $2,693 $20,189 $11,878 $.63
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
*The common share information has been adjusted to reflect the 3-for-2 stock split declared in February 1996.
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 10 is omitted because the Company intends to
file with the Securities and Exchange Commission, not later than 120 days after
the close of the fiscal year ended December 31, 1996, a definitive Proxy
Statement pursuant to Regulation 14A of the Commission.
27
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Item 11 is omitted because the Company intends to
file with the Securities and Exchange Commission, not later than 120 days after
the close of the fiscal year ended December 31, 1996, a definitive Proxy
Statement pursuant to Regulation 14A of the Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Item 12 is omitted because the Company intends to
file with the Securities and Exchange Commission, not later than 120 days after
the close of the fiscal year ended December 31, 1996, a definitive Proxy
Statement pursuant to Regulation 14A of the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Item 13 is omitted because the Company intends to
file with the Securities and Exchange Commission, not later than 120 days after
the close of the fiscal year ended December 31, 1996, a definitive Proxy
Statement pursuant to Regulation 14A of the Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) LIST OF FINANCIAL STATEMENTS
The following are filed as part of this Report:
Report of Independent Public Accountants
Consolidated statements of income for the years ended
December 31, 1996, 1995 and 1994.
Consolidated balance sheets as of December 31, 1996
and 1995.
Consolidated statements of shareholders' equity for the
years ended December 31, 1996, 1995 and 1994
Consolidated statements of cash flows for the years ended
December 31, 1996, 1995 and 1994.
Significant Accounting Policies
Notes to Consolidated Financial Statements
Summary of Quarterly Operations - Unaudited
28
<PAGE>
(a)(2) LIST OF FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants on Consolidated Financial
Statement Schedule.
Schedule II - Valuation and Qualifying Accounts.
Financial statement schedules other than those listed are omitted
for the reason that they are not required or are not applicable,
or the required information is shown in the financial statements
or notes thereto, or contained in this Report.
(a)(3) LIST OF EXHIBITS
3.1(1) - Restated Articles of Incorporation
3.2(2) - By-laws, as amended
10.1(3) - Lease Agreement dated January 8, 1992 between the
Registrant and East Bay Associates Partnership No. 3
10.2(4) - Form of Employment Agreement between the Registrant and
its executive officers together with a schedule
identifying the agreements omitted and setting forth
the material differences between the filed agreement
and the omitted agreements
10.3(5) - 1990 Long-Term Incentive Compensation Plan
10.4(5) - Form of Stock Option Agreement (1990 Long-Term
Incentive Compensation Plan)
10.5(6) - Executive Loan Program
10.6(6) - Exempt Employee Incentive Compensation Plan
10.7(7) - 1993 Stock Option Plan
10.8(7) - Forms of Stock Option Agreements for employees and non-
employee directors (1993 Stock Option Plan)
10.9(8) - 1995 Stock Option Plan
10.10(8) - Form of Stock Option Agreement (1995 Stock Option Plan)
10.11(8) - Key Employees' Automobile Incentive Program
22 - List of Subsidiaries of Registrant
24 - Consent of Independent Public Accountants
27 - Financial Data Schedule
- ------------------
29
<PAGE>
(1) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1988 and is incorporated herein
by reference.
(2) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1985 and is incorporated herein
by reference.
(3) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1991 and is incorporated herein
by reference.
(4) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1994 and is incorporated herein
by reference.
(5) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1990 and is incorporated herein
by reference.
(6) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1992 and is incorporated herein
by reference.
(7) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1993 and is incorporated herein
by reference.
(8) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1995 and is incorporated herein
by reference.
(b) REPORTS ON FORM 8-K
The Registrant did not file any reports on Form 8-K during the last
quarter of the year ended December 31, 1996.
(c) EXHIBITS
Exhibits required to be filed in respect to this paragraph of Item 14
are listed above in subparagraph (a)(3).
(d) FINANCIAL STATEMENT SCHEDULES
See subparagraph (a)(2) above.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Nature's Sunshine Products, Inc.
(Registrant)
Date: March 18, 1997 By: /s/ Kristine F. Hughes
-------------------------------------
Kristine F. Hughes, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Kristine F. Hughes President, Chief Executive Officer, March 18, 1997
- ---------------------------- Chairman of the Board and Director
Kristine F. Hughes
/s/ Douglas Faggioli Vice President of Finance, Treasurer, March 18, 1997
- ---------------------------- Chief Financial Officer
Douglas Faggioli
/s/ Eugene L. Hughes Vice President and Director March 18, 1997
- ----------------------------
Eugene L. Hughes
/s/ Merrill Gappmayer Director March 18, 1997
- ----------------------------
Merrill Gappmayer
/s/ Pauline T. Hughes Director March 18, 1997
- -----------------------------
Pauline T. Hughes
/s/ Robert H. Daines Director March 18, 1997
- -----------------------------
Robert H. Daines
</TABLE>
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
To Nature's Sunshine Products, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Nature's Sunshine Products, Inc., and
subsidiaries appearing in Item 8 in this Annual Report on Form 10-K, and have
issued our report thereon dated February 4, 1997. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The
schedule listed in Item 14(a)(2) is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California
February 4, 1997
32
<PAGE>
NATURE'S SUNSHINE PRODUCTS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(DOLLARS AMOUNTS IN THOUSANDS)
<TABLE>
Balance at Balance at
Beginning Amounts Amounts End of
Description of Period Provisions Written Off Recovered Period
----------- ---------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful
accounts receivable $260 $839 $(461) $ (2) $636
Allowance for obsolete
inventory 281 --- (78) (89) 114
Allowance for notes
receivable --- 304 --- --- 304
Year ended December 31, 1995
Allowance for doubtful
accounts receivable $636 $182 $(462) $(10) $346
Allowance for obsolete
inventory 114 322 --- --- 436
Allowance for notes
receivable 304 --- (290) --- 14
Year ended December 31, 1996
Allowance for doubtful
accounts receivable $346 $162 $ (83) $ (8) $417
Allowance for obsolete
inventory 436 203 (335) --- 304
Allowance for notes
receivable 14 --- --- --- 14
</TABLE>
33
<PAGE>
LIST OF EXHIBITS
<TABLE>
LOCATED AT
SEQUENTIALLY
ITEM NO. EXHIBIT NUMBERED PAGE
-------- ------- -------------
<S> <C> <C>
3.1(1) - Restated Articles of Incorporation ---
3.2(2) - By-laws, as amended ---
10.1(3) - Lease Agreement dated January 8, 1992 between the ---
Registrant and East Bay Associates Partnership No. 3
10.2(4) - Form of Employment Agreement between the Registrant and ---
its executive officers together with a schedule identifying the
agreements omitted and setting forth the material differences
between the filed agreement and the omitted agreements.
10.3(5) - 1990 Long-Term Incentive Compensation Plan ---
10.4(5) - Form of Stock Option Agreement (1990 Long-Term Incentive ---
Compensation Plan)
10.5(6) - Executive Loan Program ---
10.6(6) - Exempt Employee Incentive Compensation Plan ---
10.7(7) - 1993 Stock Option Plan ---
10.8(7) - Forms of Stock Option Agreements for employees and ---
non-employee directors (1993 Stock Option Plan)
10.9(8) - 1995 Stock Option Plan ---
10.10(8) - Form of Stock Option Agreement (1995 Stock Option Plan) ---
10.11(8) - Key Employees' Automobile Incentive Program ---
22 - List of Subsidiaries of Registrant 36
24 - Consent of Independent Public Accountants 37
27 - Financial Data Schedule 38
</TABLE>
- ---------------------
(1) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1988 and is incorporated herein
by reference.
(2) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1985 and is incorporated herein
by reference.
(3) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1991 and is incorporated herein
by reference.
(4) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1994 and is incorporated herein
by reference.
(5) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1990 and is incorporated herein
by reference.
34
<PAGE>
(6) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1992 and is incorporated herein
by reference.
(7) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1993 and is incorporated herein
by reference.
(8) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1995 and is incorporated herein
by reference.
35
n<PAGE>
EXHIBIT 22
SUBSIDIARIES
Set forth below is a list of all active subsidiaries of the Registrant, the
state or other jurisdiction of incorporation or organization of each, and the
names under which such subsidiaries do business.
Jurisdiction of
Name Incorporation
---- ---------------
Nature's Sunshine Products of Canada, Ltd. Canada
Nature's Sunshine Products de Mexico, S.A. de C.V. Mexico
Nature's Sunshine Products de Colombia, S.A. Colombia
NSSP Malaysia Sdn. Bhd. Malaysia
Nature's Sunshine Produtos Naturais Ltda. Brazil
Nature's Sunshine K.K. Japan
Nature's Sunshine Products de Venezuela Venezuela
Nature's Sunshine Products de Centroamerica Costa Rica
Nature's Sunshine Products de Panama, S.A. Panama
NSP de Guatemala, S.A. Guatemala
Nature's Sunshine Products de El Salvador, S.A. de C.V. El Salvador
Nature's Sunshine Products del Peru, S.A. Peru
Nature's Sunshine Products de Argentina Argentina
Nature's Sunshine Products de Honduras, S.A. Honduras
Nature's Sunshine Products de Nicaragua, S.A. Nicaragua
________________________
Each subsidiary listed above is doing business under its corporate name.
36
<PAGE>
EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed Form S-8
Registration Statements File Nos. 33-38621, 33-80582, 33-59497 and 333-08139.
ARTHUR ANDERSEN LLP
San Francisco, California
March 13, 1997
37
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 27,879
<SECURITIES> 0
<RECEIVABLES> 6,698
<ALLOWANCES> 417
<INVENTORY> 24,459
<CURRENT-ASSETS> 67,050
<PP&E> 20,197
<DEPRECIATION> 13,092
<TOTAL-ASSETS> 91,996
<CURRENT-LIABILITIES> 27,490
<BONDS> 0
0
0
<COMMON> 39,406
<OTHER-SE> 23,757
<TOTAL-LIABILITY-AND-EQUITY> 91,996
<SALES> 249,046
<TOTAL-REVENUES> 249,046
<CGS> 44,886
<TOTAL-COSTS> 222,557
<OTHER-EXPENSES> 1,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> 27,869
<INCOME-TAX> 11,021
<INCOME-CONTINUING> 16,848
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,848
<EPS-PRIMARY> .86
<EPS-DILUTED> .86
</TABLE>
