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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, 1997
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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) 342-4370
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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 20, 1998 was approximately $403,851,605.
The number of shares of Common Stock, without par value, outstanding on
March 20, 1998 was 18,567,814 shares.
Documents Incorporated by Reference:
Proxy Statement for May 11, 1998 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 and through
the Company's 17 subsidiaries: Brazil, Colombia, Mexico, Japan, Canada,
Venezuela, South Korea, 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 and Norway.
Although a significant portion of the Company's operations is conducted in
the United States, operations in certain geographical areas outside the United
States are conducted through the Company's 17 subsidiaries. The Company's
subsidiaries are incorporated in Canada, Mexico, Colombia, South Korea, Brazil,
Japan, Venezuela, Costa Rica, Panama, Guatemala, El Salvador, Peru, Argentina,
Honduras, the United Kingdom, Ecuador and Nicaragua. All of the above
subsidiaries are wholly-owned except for Japan which is majority-owned.
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 8 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 herbal products, vitamins, mineral
supplements and homeopathic products. 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 facility in Spanish Fork, Utah. Certain
of the Company's personal care and
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homeopathic 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.
The Company distributes more than 500 products, including encapsulated and
tableted herbal products, vitamins, homeopathics and personal care products.
The Company's product lines are described below.
HERBAL PRODUCTS
The Company manufactures a wide selection of herbal products which are sold
in the form of capsules or tablets. These capsules or tablets contain herb
powder or a combination of two or more herb powders. The Company also
manufactures liquid herbs and extracts. Liquid herbs are manufactured by
concentrating herb constituents in a vegetable glycerin base. Extracts are
created by dissolving powdered herbs in liquid solvents that separate the key
elements of the herbs from the fibrous plant material.
The Company produces both single herbs and herb combinations in the form of
liquid herbs and extracts. Sales of herbal products accounted for approximately
67 percent, 65 percent and 66 percent of the Company's total revenues in 1997,
1996 and 1995, respectively.
VITAMINS AND MINERAL SUPPLEMENTS
The Company manufactures a wide variety of single vitamins, which are sold
in the form of chewable or non-chewable tablets. The Company also manufactures
several multiple vitamins, including a line of vitamins containing natural
antioxidants. The Company manufactures a number of mineral supplements.
Generally, mineral supplements are sold in the form of tablets; however, certain
minerals are offered only in liquid form.
Combined sales of vitamins and mineral supplements were approximately 23
percent, 24 percent and 24 percent of the Company's total revenues in 1997, 1996
and 1995, respectively.
PERSONAL CARE PRODUCTS
The Company manufactures or contracts with independent manufacturers to
supply a variety of personal care products for external use, including oils and
lotions, aloe vera gel, herbal shampoo, herbal skin treatment, toothpaste and
skin cleanser. Sales of personal care products accounted for approximately 3
percent, 2 percent and 3 percent, of the Company's total revenues in 1997, 1996
and 1995, respectively.
HOMEOPATHIC PRODUCTS
The Company markets a line of more than 50 distinctive homeopathic products
designed for the treatment of certain common ailments, including several items
designed especially for various allergies and common childhood maladies.
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Sales of homeopathic products accounted for approximately 1 percent, 2
percent and 2 percent of the Company's total revenues in 1997, 1996 and 1995,
respectively.
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 and warehouse 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 inventory to supply its
customers.
Demand for the Company's products is created by approximately 660,000
active members (at December 31, 1997) of the Company's independent distributor
sales force, which includes approximately 187,000 in the United States. A
person who wishes to join the Company's independent sales force begins as a
"Distributor". Any individual 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. Each Distributor is required to renew his/her
distributorship on a yearly basis. Approximately 30 to 35 percent choose to
renew annually. 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 13,780 at December 31, 1997, including 6,880
Managers in the United States. 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. Once a Distributor is
appointed to the status of Manager, approximately 90 percent continue to
maintain that status through recruiting additional Distributors and product
purchases.
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, within each respective country.
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, 1995 through 1997. 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. To date, the Company has not experienced
any major difficulty in obtaining adequate
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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. Although, there can be no assurances the Company will be successful
in locating such sources in the future, the Company believes it will be able
to do so.
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 products market include
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Twinlab (New York), Rexall Sundown (Florida), Nature's Way (Utah), Sunrider
(California), USANA, Inc. (Utah), Nutraceuticals (Utah) and NBTY, Inc. (New
York).
The Company believes that the principal components 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 facility 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
$1,500,000, $1,400,000 and $1,100,000 in 1997, 1996 and 1995, 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
The formulation, manufacturing, packaging, labeling, advertising,
distribution and sale of each of the Company's major product groups are subject
to regulation by one or more governmental agencies, the most active of which is
the Food and Drug Administration ("FDA"), which regulates the Company's products
under the Federal Food, Drug and Cosmetic Act ("FDCA") and regulations
promulgated thereunder. The FDCA defines the terms "food" and "dietary
supplement" and sets forth various conditions or that constitute adulteration or
misbranding of such articles. The FDCA has been amended several times with
respect to dietary supplements, most recently by the Nutrition Labeling and
Education Act of 1990 (the "NLEA") and the Dietary Supplement Health and
Education Act of 1994 (the "DSHEA").
FDA regulations relating specifically to foods for human use are set forth
in Title 21 of the Code of Federal Regulations. These regulations include basic
food labeling requirements and Good Manufacturing Practices ("GMPs") for foods.
Detailed dietary supplement GMPs have been proposed; however, no regulations
establishing such GMPs have been adopted. Additional regulations to implement
the specific DSHEA requirements for dietary supplement labeling have also been
proposed and final regulations are expected to be implemented over a period of
time following final publication.
The Company's products are also subject to regulation by the Federal Trade
Commission ("FTC"), the Consumer Product Safety Commission ("CPSC"), the United
States Department of
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Agriculture ("USDA") and the Environmental Protection Agency ("EPA"). The
Company's activities are also regulated by various agencies of the states,
localities and foreign countries to which the Company distributes its
products and in which the Company's products are sold.
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.
The Company may be subject to additional laws or regulations administered
by the FDA or other Federal, State or foreign regulatory authorities, the repeal
or amendment of laws or regulations which the Company considers favorable, or
more stringent interpretations of current laws or regulations, from time to time
in the future. The Company is unable to predict the nature of such future laws,
regulations, interpretations or applications, nor can it predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require reformulation of certain products to meet new standards, recall or
discontinuance of certain products not able to be reformulated, imposition of
additional recordkeeping requirements, expanded documentation of the properties
of certain products, expanded or different labeling and scientific
substantiation. Any or all such requirements could have a material adverse
effect on the Company's results of operations and financial position.
EMPLOYEES
The approximate number of people employed by the Company as of December 31,
1997, was 994. The Company believes that its relations with its employees are
satisfactory.
INTERNATIONAL OPERATIONS
The Company's direct sales of nutritional and personal care products are
established internationally in Brazil, Colombia, Mexico, Japan, South Korea,
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 and Norway. Information, for each of the 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 10
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
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risks increases as the Company's international operations grow and expand.
The Company's operations in Venezuela, Japan, Colombia, Mexico and South
Korea have been affected by currency devaluations.
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 57,000 square feet. The lease agreement for
the main building, comprising approximately 32,000 square feet was extended
during 1997 for an additional 5-year term (of which 4 1/2 years remain at
December 31, 1997) and grants the Company an option to purchase the premises at
fair market value. The lease for the second building, approximately 25,000
square feet, expires in November of 2000.
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 percent of its productive capacity.
During 1997, the Company began a 129,000 square foot expansion of its
manufacturing and warehouse facility in Spanish Fork, Utah. Approximately
60,000 square feet will be for a high bay warehouse with the remaining 69,000
square feet to be used by the Company for future expansion of its manufacturing
area. This expansion will replace a 70,000 square foot building the Company
currently leases on a month-to-month basis. The consolidation of warehousing
space should increase operating efficiencies and allow the Company to meet the
increased demand for its products. Management expects the total cost of the
project to be approximately $6.0 million of which $2.7 million has already been
incurred. Management expects to fund the remainder of the project out of
working capital.
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.
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, South Korea, 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. During 1997, the Company spent approximately $2.0 million for all of its
leased facilities.
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.
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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 1997 and 1996, and has been restated
to reflect the three-for-two stock split declared in February 1996.
<TABLE>
<CAPTION>
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Market Prices Market Prices
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1997 HIGH LOW 1996 HIGH LOW
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<S> <C> <C> <C> <C> <C>
First Quarter 18 3/4 14 First Quarter 32 19 1/2
Second Quarter 18 3/8 13 1/2 Second Quarter 30 1/2 22
Third Quarter 24 17 7/8 Third Quarter 26 1/2 16
Fourth Quarter 26 3/4 20 7/8 Fourth Quarter 24 3/4 16 3/4
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</TABLE>
There were approximately 1,489 shareholders of record as of March 2, 1998.
During 1997 and 1996, the Company has paid quarterly cash dividends of 3 1/3
cents per common share. On February 18, 1998, the Company declared a cash
dividend of 3 1/3 cents per common share to shareholders of record on March 2,
1998. On March 11, 1998, the Company paid approximately $600 related to this
declared dividend. The Company expects to continue to pay equivalent cash
dividends in the future.
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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
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INCOME STATEMENT DATA
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<TABLE>
<CAPTION>
Selling, Income
Cost of General & Before
Sales Goods Volume Administrative Operating Income Net
Revenue Sold Incentives Expenses Income Taxes Income
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<S> <C> <C> <C> <C> <C> <C> <C>
1997 $280,902 $51,608 $130,709 $67,580 $31,005 $33,203 $20,133
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
</TABLE>
BALANCE SHEET DATA
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<TABLE>
<CAPTION>
Property,
Plant &
Working Current Equipment, Total Long-Term Shareholders'
Capital Ratio Inventories Net Assets Debt Equity
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<S> <C> <C> <C> <C> <C> <C> <C>
1997 $38,571 2.40:1 $19,555 $23,711 $95,796 $ --- $66,857
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
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</TABLE>
(CONTINUED NEXT PAGE)
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COMMON SHARE SUMMARY
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<TABLE>
<CAPTION>
Basic Diluted
Cash Basic Diluted Weighted Weighted
Dividends Net Income Net Income Book Value Average Average
per share(1) Per Share Per Share Per Share(2) Shares Shares
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 $.133 $1.08 $1.06 $3.60 18,653,349 19,070,257
1996 .133 .90 .86 3.30 18,793,456 19,683,964
1995 .133 .65 .63 2.25 18,301,209 18,887,894
1994 .120 .46 .45 1.81 18,380,705 18,779,229
1993 .120 .41 .40 1.57 18,346,565 18,610,359
1992 .093 .32 .32 1.30 18,331,931 18,555,737
1991 .073 .25 .25 1.07 18,260,812 18,461,408
1990 .067 .19 .19 .91 18,353,719 18,373,494
1989 .067 .21 .21 .79 18,536,969 18,537,480
1988 .026 .17 .17 .69 18,562,785 18,934,971
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</TABLE>
OTHER INFORMATION
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<TABLE>
<CAPTION>
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>
1997 31.0% 21.4% 13,776 522,373 994
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
</TABLE>
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.
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, 1997, was $280.9
million compared to $249.0 million in 1996, an increase of 13 percent. Sales
revenue increased 21 percent in 1996 compared to $205.6 million reported in
1995. 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.
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The Company distributes its products to consumers through an independent
sales force comprised of Managers and Distributors. Active Managers totaled
approximately 13,800, 11,700 and 11,500 at December 31, 1997, 1996 and 1995,
respectively. Active distributors totaled approximately 660,000, 522,000 and
373,000 at December 31, 1997, 1996 and 1995, respectively. During the past
three years, the growth rate of active Distributors has increased significantly
over that which was experienced in the past. The accelerated growth rate is
primarily due to the continued expansion into new international markets in Latin
America as well as Asia. Due to the increased awareness of the benefits of
herbs, vitamins and supplements, new customers having a desire to purchase the
products at wholesale cost instead of at retail cost sign up as Distributors of
the Company. The Company expects that the number of active Distributors will
continue to increase as the Company enters new markets and as current
Distributors grow their business.
Price increases of less than 1 percent and approximately 3 percent went
into effect in 1997 and 1996, respectfully, and resulted in greater sales
revenue for those years. A price increase of approximately 2 percent, primarily
driven by increased raw material costs, is scheduled to become effective on
April 1, 1998. Management believes that this price increase will be acceptable
to its sales force and will result in increased sales revenue.
Sales revenue, related to the Company's domestic operations, increased
approximately 11 percent during 1997 and 17 percent for 1996. International
sales revenue increased approximately $14.2 million in 1997, or 16 percent, and
$19.7 million in 1996, or 28 percent. The Company's operations in Brazil and
Venezuela were the principal drivers of the growth in international sales,
contributing approximately $11.7 million to the increase in sales revenue in
1997. 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. Further
information related to the Company's domestic and international operations is
set forth in Note 10 of the Notes to the Consolidated Financial Statements
appearing in Item 8 of this report, and such information is incorporated herein
by reference and made a part hereof.
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:
<TABLE>
<CAPTION>
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Year ended December 31 1997 1996 1995
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<S> <C> <C> <C>
Cost of goods sold 18.4% 18.0% 18.7%
Volume incentives 46.5 46.0 45.9
Selling, general and
administrative expenses 24.1 25.4 26.9
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89.0% 89.4% 91.5%
- --------------------------------------------------------------------------------
</TABLE>
COST OF GOODS SOLD
Cost of goods sold increased slightly as a percent of sales in 1997 as
compared to 1996 primarily as a result of increased freight and duty costs.
Cost of goods sold decreased as a percent of
12
<PAGE>
sales during 1996 as compared to 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 1998 as a result of pricing adjustments. Management
also believes that the expansion of the Company's manufacturing and warehouse
facility will not have a material impact on cost of goods sold due to the
savings associated with the elimination of leased facilities and increased
operating 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
increased slightly, as a percent of sales, during 1997 primarily as a result of
the increased development of the sales leader organization in Brazil and Mexico.
Management expects volume incentives to remain relatively constant as a
percent of sales during 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased from 25.4 percent of
sales in 1996 to 24.1 percent of sales in 1997. The decreases in selling,
general and administrative expenses resulted from an increase in sales revenue
and focused efforts on the part of management to reduce costs.
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 decreased as a percent of
sales during 1996 as compared to 1995 primarily as the result of
disproportionate costs of $6.3 million incurred during 1995 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 1998 as the result of continued emphasis
on cost containment and improved sales revenue in certain of the Company's
international operations.
13
<PAGE>
OTHER INCOME AND EXPENSE
Other income (expense) consists of the following (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and other income $2,453 $2,021 $1,921
Interest expense (182) (63) (173)
Foreign exchange loss (565) (787) (280)
Minority interest 492 209 1,225
- --------------------------------------------------------------------------------
$2,198 $1,380 $2,693
- --------------------------------------------------------------------------------
</TABLE>
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 1997 and 1996 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 1998 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 approximately $.6 million and $.8 million
during 1997 and 1996, respectively. The losses were primarily related to the
Company's operations in Venezuela, Japan, Colombia, Mexico and South Korea.
MINORITY INTEREST
The Company eliminates the minority interest in its subsidiaries which are
not wholly-owned. Accordingly, the Company eliminated approximately $.5 million
and $.2 million of losses reported by its joint venture operation in Japan in
1997 and 1996, respectively.
INCOME TAXES
The Company's effective tax rate was 39.4, 39.6 and 41.2 percent for 1997,
1996 and 1995, respectively.
INVENTORIES
Consolidated inventories decreased approximately $4.9 million or 20 percent
in 1997, compared to an increase of $1.3 million or 6 percent in 1996. This
decrease resulted primarily from management's efforts to control inventory
levels in both the Company's domestic and international operations.
14
<PAGE>
PREPAID EXPENSES AND OTHER
Prepaid expenses and other increased approximately $3.2 million at the end
of 1997, primarily due to increased income tax deposits and other tax assets in
1997 compared to 1996.
ACCRUED VOLUME INCENTIVES
Accrued volume incentives increased approximately $.8 million at the end of
1997, 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 decreased approximately $2.8 million at the end of
1997, compared to the prior year. The decrease is primarily related to the
change in the accruals needed for the Company's Management and Employee Bonus
Plan.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are its available resources of
cash and cash equivalents and cash generated from operations. At December 31,
1997, cash and cash equivalents decreased slightly as compared to December 31,
1996. The decrease in cash and cash equivalents is primarily the result of the
Company's ongoing stock buyback program. Cash provided by operating activities
was $24.2 million in 1997 compared to $18.6 million in 1996.
Cash was used during 1997 to purchase approximately 1.4 million shares of
common stock totaling $26.1 million. The Company purchased approximately $7.5
million of property, plant and equipment of which $2.7 million was associated
with the expansion of the Company's manufacturing and warehouse facility in
Spanish Fork, Utah. The capital budget for the expansion of the manufacturing
and warehouse facility is approximately $6.0 million and is scheduled to be
completed in June 1998. Management believes that the Company's available cash
and cash equivalents, combined with cash generated by operations, will be
sufficient to fund the foregoing expenditures. Volume incentive payments
increased approximately $17.0 million during 1997, primarily as the result of
increased sales. Cash paid to suppliers and employees increased approximately
$8.8 million as a result of production to support higher levels of sales, as
well as increased employment-related costs. The Company paid approximately $2.5
million in cash dividends during 1997.
Cash was used during 1996 to purchase approximately $10.5 million of
property, plant and equipment, including the purchase of an office building and
warehouse in Mexico during the first quarter of 1996 for approximately $2.4
million. Volume incentive payments increased approximately $19.9 million during
1996, primarily as the result of increased sales. Cash paid to suppliers and
employees increased approximately $12.5 million as the result of higher levels
of inventory and Common stock purchases totaled approximately $4.9 million. The
Company paid approximately $2.5 million in cash dividends during 1996.
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
15
<PAGE>
purchase up to 419,000 shares, the remaining balance as of March 20, 1998,
should market conditions warrant.
Options for 883,682 and 926,247 shares of the Company's common stock were
exercised during 1997 and 1996, respectively. The proceeds from and tax
benefits associated with the options exercised were approximately $13.2 million
in 1997 and $12.1 million in 1996.
From time to time, the Company has issued shares of its stock to certain
key Distributors. These shares are generally issued during an awards ceremony
at the Company's annual convention and are intended to reward these Distributors
for their efforts. During 1997, 1996 and 1995, respectively, the Company issued
2,000, 3,000 and 1,000 restricted shares of common stock to certain key
Distributors. The Company relied on Section (2)(3) and/or Section (4)(2) of the
Securities Act of 1933, as amended, in connection with these issuances.
During 1997, the Company established a new international subsidiary in
South Korea. Management believes this new operation may require additional
funding of $.5 million to $1.0 million during 1998.
Management believes that working capital requirements can be met through
the Company's available cash and cash equivalents and internally-generated funds
for the foreseeable future; however, a prolonged economic downturn or a decrease
in the demand for the Company's products could adversely affect the long-term
liquidity of the Company. In the event of a significant decrease in cash
provided by the Company's operations, it may be necessary for the Company to
obtain external sources of funding. The Company does not currently maintain a
credit facility or any other external sources of long-term funding; however,
Management believes that such funding could be obtained on competitive terms in
the event additional sources of funds became necessary.
THE YEAR 2000 ISSUE
The Company believes that it will not incur any material additional costs
to modify computer hardware or software to make the Company's internal-use
software application systems "Year 2000" compliant.
FORWARD-LOOKING INFORMATION
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and other items of this Form 10-K
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, the expected
development schedule of existing real estate projects, plans for growth and
future operations, financing needs, 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
this "Management's Discussion and Analysis of Financial Condition and Results of
Operations", and elsewhere in this Form 10-K the words "estimates", "expects",
"anticipates", "forecasts", "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.
16
<PAGE>
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,
1997 and 1996, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 30, 1998
17
<PAGE>
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AMOUNTS IN THOUSANDS EXCEPT PER SHARE INFORMATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales Revenue $280,902 $249,046 $205,566
- --------------------------------------------------------------------------------
Costs and expenses:
Cost of goods sold 51,608 44,886 38,533
Volume incentives 130,709 114,419 94,316
Selling, general and
administrative expenses 67,580 63,252 55,221
- --------------------------------------------------------------------------------
249,897 222,557 188,070
- --------------------------------------------------------------------------------
Operating Income 31,005 26,489 17,496
- --------------------------------------------------------------------------------
Other income (expense):
Interest and other income 2,453 2,021 1,921
Interest expense (182) (63) (173)
Foreign exchange loss (565) (787) (280)
Minority interest 492 209 1,225
- --------------------------------------------------------------------------------
2,198 1,380 2,693
- --------------------------------------------------------------------------------
Income before income taxes 33,203 27,869 20,189
Provision for income taxes 13,070 11,021 8,311
- --------------------------------------------------------------------------------
Net Income $ 20,133 $ 16,848 $ 11,878
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Basic Net Income Per Common Share $ 1.08 $ .90 $ .65
Diluted Net Income Per Common Share $ 1.06 $ .86 $ .63
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
18
<PAGE>
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
As of December 31 1997 1996
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $27,813 $27,879
Accounts receivable, net of allowance for
doubtful accounts of $661 in 1997 and $417
in 1996 7,465 6,698
Inventories 19,555 24,459
Prepaid expenses and other 11,197 8,014
- --------------------------------------------------------------------------------
Total current assets 66,030 67,050
- --------------------------------------------------------------------------------
Property, plant and equipment, net 23,711 20,197
Long-term investments 3,468 2,048
Other assets 2,587 2,701
- --------------------------------------------------------------------------------
$95,796 $91,996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current liabilities:
Short-term debt $ 2,665 $ 2,788
Accounts payable 5,094 4,225
Accrued volume incentives 9,531 8,729
Accrued liabilities 7,223 9,992
Income taxes payable 2,946 1,756
- --------------------------------------------------------------------------------
Total current liabilities 27,459 27,490
- --------------------------------------------------------------------------------
Deferred income taxes 1,480 1,343
- --------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value, authorized 20,000
shares, issued 19,446 shares in 1997
and 1996 37,896 39,406
Retained earnings 51,190 33,549
Treasury stock, at cost, 861 and 334 shares as of
December 31, 1997 and 1996, respectively (17,278) (5,868)
Receivables from related parties (77) (84)
Unrealized gains on securities available for sale 416 ---
Cumulative foreign currency
translation adjustments (5,290) (3,840)
- --------------------------------------------------------------------------------
Total shareholders' equity 66,857 63,163
- --------------------------------------------------------------------------------
$95,796 $91,996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
19
<PAGE>
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Balance at beginning of year $39,406 $31,263 $29,849
Tax benefit related to exercise
of stock options 3,240 6,328 683
Issuance of 2, 3 and 1, shares of
treasury stock, respectively 3 44 13
Issuance of 884, 926 and 129
shares of treasury stock,
respectively, on exercise of
stock options (4,753) 1,771 721
Stock dividend --- --- (3)
- --------------------------------------------------------------------------------
Balance at end of year 37,896 39,406 31,263
- --------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 33,549 19,214 9,778
Net income 20,133 16,848 11,878
Cash dividends (2,492) (2,513) (2,442)
- --------------------------------------------------------------------------------
Balance at end of year 51,190 33,549 19,214
- --------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year (5,868) (4,942) (3,742)
Purchase of 1,413, 261 and 109
shares of common stock,
respectively (26,128) (4,902) (1,298)
Issuance of 886, 929 and 130 of
treasury stock, respectively 14,718 3,976 98
- --------------------------------------------------------------------------------
Balance at end of year (17,278) (5,868) (4,942)
- --------------------------------------------------------------------------------
RECEIVABLES FROM RELATED PARTIES:
Balance at beginning of year (84) (293) (405)
Reductions 7 209 112
- --------------------------------------------------------------------------------
Balance at end of year (77) (84) (293)
- --------------------------------------------------------------------------------
UNREALIZED GAINS ON SECURITIES AVAILABLE
FOR SALE:
Balance at beginning of year --- --- ---
Net increase in market value 416 --- ---
- --------------------------------------------------------------------------------
Balance at end of year 416 --- ---
- --------------------------------------------------------------------------------
CUMULATIVE FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS:
Balance at beginning of year (3,840) (3,737) (2,200)
Foreign currency translation
adjustments (1,450) (103) (1,537)
- --------------------------------------------------------------------------------
Balance at end of year (5,290) (3,840) (3,737)
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $66,857 $63,163 $41,505
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
20
<PAGE>
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents
- --------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales revenue $ 279,525 $ 247,566 $ 204,085
Cash paid as volume incentives (129,907) (112,897) (92,986)
Cash paid to suppliers and employees (116,020) (107,269) (94,740)
Interest paid (182) (62) (173)
Interest received 2,497 2,058 1,868
Income taxes paid (11,744) (10,807) (7,462)
- -------------------------------------------------------------------------------
Net cash provided by operating activities 24,169 18,589 10,592
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,453) (10,544) (6,098)
Sale (purchase) of long-term investments,
net (1,004) 333 672
Payments received (advanced) on long-term
receivables, net 394 (170) 393
Payments from (advanced to) related parties 7 489 (68)
Purchase of other assets (599) (215) (331)
Proceeds from sale of assets 25 344 ---
Minority interest elimination 383 (396) 341
- -------------------------------------------------------------------------------
Net cash used in investing activities (8,247) (10,159) (5,091)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends (2,492) (2,513) (2,446)
Purchase of treasury stock (26,128) (4,902) (1,298)
Proceeds from short-term debt, net (123) 746 509
Proceeds from exercise of stock options 9,925 5,732 819
Tax benefit from stock option exercise 3,240 6,328 683
Issuance of treasury stock 43 60 14
- -------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (15,535) 5,451 (1,719)
EFFECT OF EXCHANGE RATES ON CASH (453) (174) (811)
- -------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (66) 13,707 2,971
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 27,879 14,172 11,201
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 27,813 $ 27,879 $ 14,172
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NET INCOME $ 20,133 $ 16,848 $ 11,878
- -------------------------------------------------------------------------------
Bad debt expense and reserve 67 133 242
Depreciation and amortization 4,292 3,420 3,467
Gain (Loss) on sale of fixed assets 8 (96) ---
Increase in accounts receivable, net (834) (788) (1,349)
Decrease (Increase) in inventories 4,904 (1,332) (5,849)
Increase in prepaid expenses and other (3,106) (4,010) (1,593)
Increase (Decrease)in income taxes payable 1,190 (126) 818
(Decrease) Increase in accrued liabilities
and volume incentives (1,967) 4,936 3,090
Increase (Decrease) in accounts payable 868 (806) 558
Increase in deferred income taxes (389) 341 55
Foreign currency translation adjustment (997) 69 (725)
- -------------------------------------------------------------------------------
Total adjustments 4,036 1,741 (1,286)
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 24,169 $ 18,589 $ 10,592
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
21
<PAGE>
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE INFORMATION
NOTE 1: OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
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, South Korea, 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 and Norway.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Nature's Sunshine Products, Inc. and its majority-owned subsidiaries.
Intercompany balances and transactions have been eliminated in consolidation.
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 the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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
include only investments with original maturities of three months or less.
MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS
The Company's marketable securities and long-term investments are
categorized as available-for-sale securities, as defined by the Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Unrealized holding gains and losses
are reflected as a net amount in a separate component of shareholders' equity.
Realized gains and losses on sales of investments, as determined on a specific
identification basis, are included in the consolidated statement of income in
the year of disposition.
22
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book value of the financial instruments approximates fair value. The
estimated fair values have been determined using appropriate market information
and valuation methodologies.
INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market value. At December 31, 1997, management believes the Company
had incurred no material impairments in the carrying value of its inventories,
other than impairments for which a provision has been made.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost less accumulated
depreciation and amortization. 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. Leasehold improvements are
amortized over the lesser of the life of the applicable lease or the estimated
useful life of the applicable asset. Maintenance and repairs are charged to
expenses 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.
TRANSLATION OF FOREIGN CURRENCIES
The local currency of the international subsidiaries is used as the
functional currency in translation, except for subsidiaries operating in highly
inflationary economies. The financial statements of foreign subsidiaries, where
the local currency is the functional currency, are translated into U.S. dollars
using exchange rates in effect at the year end for assets and liabilities and
average exchange rates during each year for the results of operations.
Adjustments resulting from translation of financial statements are reflected as
a separate component of shareholders' equity.
During 1997, 1996 and 1995, Brazil and Venezuela were considered highly
inflationary economies. Effective January 1, 1997, Mexico was considered a
highly inflationary economy. The functional currency in these highly
inflationary economies is the U.S. dollar and transactions denominated in a
local currency are remeasured as if the functional currency were the U.S.
dollar. The remeasurement of local currencies into U.S. dollars creates
translation adjustments which are included in the consolidated statements of
income. If current trends in the Brazilian economy continue, Brazil will no
longer be considered highly inflationary as of January 1, 1998.
REVENUE RECOGNITION
For domestic sales, the Company generally receives its product sales price
in the form of cash or credit card accompanying the orders from independent
sales force members. For certain of the Company's international operations, the
Company offers credit terms consistent with industry standards within each
respective country. A volume incentive payment related to product orders is
made in the month following the sale. Sales revenue and related volume
incentives are recorded when the merchandise is shipped. Cash received for
unshipped merchandise is recorded as a liability.
23
<PAGE>
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 $3,456 and $2,625 at December 31,
1997 and 1996, respectively.
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred. Total research
and development costs were approximately $1,500, $1,400 and $1,100 for 1997,
1996 and 1995, respectively.
INCOME TAXES
The Company recognizes a liability or asset for the deferred tax
consequences of temporary differences between the tax basis 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. The deferred tax assets are reviewed for recoverability and valuation
allowances are provided as necessary. 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.
NET INCOME PER COMMON SHARE
Basic net income per common share (Basic EPS) excludes dilution and is
computed by dividing net income by the weighted-average number of common shares
outstanding during the year. 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
securities that would have an anti-dilutive effect on net income per common
shares. Net income per common share amounts and share data have been restated
for all periods presented to reflect Basic and Diluted EPS and the stock split
described in Note 7.
24
<PAGE>
Following is a reconciliation of the numerator and denominator of Basic EPS
to the numerator and denominator of Diluted EPS for all periods ( in thousands,
except per share information):
<TABLE>
<CAPTION>
Net Income Shares Per Share
(Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1997
Basic EPS $20,133 18,653 $1.08
Effect of options --- 417
- --------------------------------------------------------------------------------
Diluted EPS $20,133 19,070 $1.06
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
Basic EPS $16,848 18,793 $ .90
Effect of options --- 891
- --------------------------------------------------------------------------------
Diluted EPS $16,848 19,684 $ .86
- --------------------------------------------------------------------------------
DECEMBER 31, 1995
Basic EPS $11,878 18,310 $ .65
Effect of options --- 578
- --------------------------------------------------------------------------------
Diluted EPS $11,878 18,888 $ .63
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, 1996 and 1995, there were outstanding options to
purchase 233,192, 5,137 and 27,123 shares of common stock, respectively, that
were not included in the computation of Diluted EPS because the options'
exercise prices were greater than the average market price of the common shares
for the preceding quarters.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 130 establishes standards for
the reporting and display of comprehensive income and its components and SFAS
No. 131 establishes new standards for public companies to report information
about their operating segments, products and services, geographic areas and
major customers. Both statements are effective for financial statements issued
for periods beginning after December 15, 1997. Accordingly, the Company will
adopt SFAS No. 130 and SFAS No. 131 in its December 31, 1998 consolidated
financial statements.
NOTE 2: INVENTORIES
The composition of inventories is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
As of December 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 5,912 $ 7,554
Work in process 1,455 1,146
Finished goods 12,188 15,759
- --------------------------------------------------------------------------------
$19,555 $24,459
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment is as follows:
<TABLE>
<CAPTION>>
- --------------------------------------------------------------------------------
As of December 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Buildings and improvements $14,015 $11,659
Machinery and equipment 11,676 9,094
Furniture and fixtures 12,695 11,188
- --------------------------------------------------------------------------------
38,386 31,941
Accumulated depreciation
and amortization (16,074) (13,092)
Land 1,399 1,348
- --------------------------------------------------------------------------------
$23,711 $20,197
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
NOTE 4: INVESTMENTS
The amortized cost and estimated market values of securities available for
sale by balance sheet classification are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1997 Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash equivalents:
Municipal obligations $ 7,358 $ --- $ --- $ 7,358
Corporate bonds 5,750 --- --- 5,750
- --------------------------------------------------------------------------------
Total cash equivalents 13,108 --- --- 13,108
- --------------------------------------------------------------------------------
Long-term investments:
Corporate bonds 2,583 90 --- 2,673
Equity securities 469 358 (32) 795
- --------------------------------------------------------------------------------
Total long-term investments 3,052 448 (32) 3,468
- --------------------------------------------------------------------------------
Total securities available
for sale $16,160 $448 $(32) $16,576
- --------------------------------------------------------------------------------
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1996 Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash equivalents:
Municipal obligations $11,125 $ --- $ --- $11,125
Corporate bonds 900 --- --- 900
- --------------------------------------------------------------------------------
Total cash equivalents 12,025 --- --- 12,025
- --------------------------------------------------------------------------------
Long-term investments:
Municipal obligations 227 11 --- 238
Corporate bonds 1,266 60 (5) 1,321
Equity securities 555 282 (38) 799
- --------------------------------------------------------------------------------
Total long-term investments 2,048 353 (43) 2,358
- --------------------------------------------------------------------------------
Total securities available
for sale $14,073 $353 $(43) $14,383
- --------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
Contractual maturities of long-term debt securities at market value at
December 31, 1997, are as follows:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Mature after one year
through five years $ 313
Mature after five years 2,360
- --------------------------------------------------------------------------------
Total long-term investments $2,673
- --------------------------------------------------------------------------------
</TABLE>
During 1997 and 1996, the proceeds from the sales of available-for-sale
securities were $5,153 and $4,226, respectively. The gross realized gains and
gross realized losses on the sales of available-for-sale securities was $65 and
$8, respectively, for the year ended December 31, 1997, and $61 and $168,
respectively, for the year ended December 31, 1996.
NOTE 5: SHORT-TERM DEBT
During 1994, the Company established operating lines of credit in Japan to
facilitate payment of start-up and operating expenses. The Company decreased
its borrowings during 1997, which are payable in local currency. The debt is
unsecured and payable during 1998. The outstanding amounts relating to the
lines of credit at December 31, 1997 and 1996, were $2,665 and $2,788,
respectively. The weighted average interest rate approximates two percent at
December 31, 1997.
NOTE 6: INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 9,177 $ 6,655 $4,984
State 1,683 1,146 967
Foreign 2,768 3,249 2,305
- --------------------------------------------------------------------------------
13,628 11,050 8,256
- --------------------------------------------------------------------------------
Deferred (558) (29) 55
- --------------------------------------------------------------------------------
Total provision for income taxes $13,070 $11,021 $8,311
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The domestic and foreign components of income before taxes are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $27,919 $20,516 $14,617
Foreign 5,284 7,353 5,572
- --------------------------------------------------------------------------------
Total $33,203 $27,869 $20,189
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
27
<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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory Federal income
tax rate 35.0% 35.0% 35.0%
State income taxes, net of Federal
income tax benefit 3.1 2.7 3.1
Foreign and other tax credits (3.4) (2.8) (5.1)
Net effect of foreign subsidiaries
tax attributes 6.2 5.3 6.8
Other (1.5) (.6) 1.4
- --------------------------------------------------------------------------------
Effective tax rate 39.4% 39.6% 41.2%
- --------------------------------------------------------------------------------
</TABLE>
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year ended December 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful
accounts $ 65 $ 49
Inventory unicap adjustment 300 408
Foreign tax credits 190 214
State income taxes 427 125
Accrued vacation 140 85
Inventory obsolescence reserve 176 117
Sale of subsidiary 386 250
Intangible assets 520 430
- --------------------------------------------------------------------------------
Total deferred tax assets $ 2,204 $ 1,678
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Accelerated depreciation $(1,452) $(1,172)
Gain on sale of subsidiaries (28) (171)
- --------------------------------------------------------------------------------
Total deferred tax liabilities $(1,480) $(1,343)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
As of December 31, 1997, the Company has available net operating losses
from its foreign subsidiaries for U.S. Federal income tax purposes and financial
reporting purposes of approximately $8,300 and $8,100, respectively. The tax
net operating losses will expire in 1999 through 2002. Certain of these net
operating losses may be limited by the extent of foreign taxable income in
future years. Management has provided valuation allowances equal to the amount
of the deferred income tax asset related to the net operating loss carry forward
of the foreign subsidiaries.
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, 1997, such earnings were
approximately $13,650. 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 $500 as of December 31, 1997.
28
<PAGE>
During 1996, the Company sold its ownership in one of its international
subsidiaries. The sale resulted in a book gain of $1,000 and a tax gain of
$351. The Company recorded a reserve of $1,000 against the book gain since a
portion of the sale was contingent upon the achievement of certain sales targets
by the purchaser. The Company elected the installment method for reporting the
tax gain. The combination of these transactions resulted in a net deferred
income tax asset of $250 at December 31, 1996.
In 1997, the Company elected to forego the installment method for reporting
the income tax gain resulting in an increase to the related deferred income tax
asset from $250 at December 31, 1996, to $386 at December 31, 1997.
NOTE 7: CAPITAL TRANSACTIONS
STOCK SPLIT
In February 1996, the Board of Directors declared a three-for-two stock
split of the Company's common stock to shareholders of record on March 4, 1996.
The effects of the stock split have been retroactively reflected in the
accompanying consolidated financial statements and in these notes to
consolidated financial statements.
TREASURY STOCK
In January 1998, the Board of Directors approved the a repurchase of up to
500,000 shares of the Company's common stock. As of January 30, 1998, no shares
had been repurchased under this repurchase approval.
STOCK OPTIONS
The Company maintains a 1995 Stock Option Plan which provides for the
granting or awarding of certain non-qualified stock options to officers,
directors and employees. The term, not to exceed 10 years, and the exercise
period of each stock option awarded under the plan are determined by the
Company's Board of Directors. Such grants have been made at the fair market
value of the stock at the date of grant. At December 31, 1997, the Company had
approximately 607,000 shares remaining in the 1995 Stock Option Plan, which are
available to be granted to employees. At December 31, 1997, the Company had
reserved approximately 860,000 treasury shares to accommodate the exercise of
the outstanding options.
29
<PAGE>
Stock option activity for 1995, 1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
Number of
Shares Weighted Average
(IN THOUSANDS) Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding at December 31, 1994 1,909 $ 5.74
Issued 1,701 14.69
Canceled (39) 6.67
Exercised (194) 4.23
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1995 3,377 $10.32
- --------------------------------------------------------------------------------
Issued 313 19.67
Canceled (135) 15.01
Exercised (960) 5.97
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1996 2,595 $12.81
- --------------------------------------------------------------------------------
Issued 139 19.83
Canceled (617) 15.61
Exercised (884) 11.33
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1997 1,233 $13.26
- --------------------------------------------------------------------------------
</TABLE>
Shares issued during 1997, 1996 and 1995, related to the exercise of stock
options were issued from treasury stock. Options for 956, 2,012 and 1,389
shares of common stock were exercisable on December 31, 1997, 1996 and 1995,
respectively, with weighted average exercise prices of $11.36, $11.69 and $5.36,
respectively. The weighted average fair value of options granted were $8.69,
$10.82 and $7.90 for 1997, 1996 and 1995, respectively.
The following table summarizes information about options outstanding and
options exercisable at December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------
Weighted-
Avg. Weighted- Weighted-
Shares Remaining Avg. Shares Avg.
Range of Outstanding Contractual Exercise Exercisable Exercise
Option Prices (000's) Life Price (000's) Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.79 to $1.86 49 3.0 years $ 1.81 49 $ 1.81
$4.03 to $8.83 458 6.2 years 7.25 458 7.25
$15.50 to $19.75 572 8.5 years 16.80 372 15.84
$20.00 to $25.63 154 9.4 years 21.55 77 20.00
- --------------------------------------------------------------------------------
$1.79 to $25.63 1,233 7.5 years $13.25 956 $11.35
- --------------------------------------------------------------------------------
</TABLE>
The Company accounts for the stock option plans under Accounting Principles
Board Opinion No. 25, under which no compensation cost has been recognized in
the accompanying consolidated statements of income for the years ended December
31, 1997, 1996 and 1995. Had compensation costs been determined consistent with
SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net
income and earnings per share would have been reduced to the following proforma
amounts:
30
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income As reported $20,133 $16,848 $11,878
Proforma 20,026 14,349 11,776
Basic Earnings Per Share As reported $ 1.08 $ .90 $ .65
Proforma 1.07 .76 .64
Diluted Earnings Per Share As reported $ 1.06 $ .86 $ .63
Proforma 1.05 .73 .62
- --------------------------------------------------------------------------------
</TABLE>
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 1997: risk-free interest rate of 6.5 percent;
expected dividend yield of approximately .5 percent; expected lives of seven
years and expected volatility of 32.0 percent. The weighted average assumptions
used for grants in 1996 and 1995 were: 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. The estimated fair value of
options granted is subject to the assumptions made, and if the assumptions were
to change, the estimated fair value amounts could be significantly different.
Because SFAS No. 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.
NOTE 8: EMPLOYEE BENEFIT PLANS
DEFERRED COMPENSATION PLAN
The Company sponsors a qualified deferred compensation plan which qualifies
under Section 401(k) of the Internal Revenue Code. The Company contributes
matching contributions of 100 percent of employee contributions up to a maximum
of five percent of the employee's compensation. The Company's contributions to
the plan vest after a period of 4 years. During 1997, 1996 and 1995, the
Company contributed to the plan approximately $530, $451 and $478,
respectively.
MANAGEMENT AND EMPLOYEE BONUS PLAN
The Company has a bonus plan that provides for participants to receive
payments based upon the achievement of set annual increases in revenue and
operating income as set by the Board of Directors. The expense related to the
plan was approximately $687, $2,822 and $2,706 for 1997, 1996 and 1995,
respectively. All domestic employees as well as key international employees
participate in the plan.
NOTE 9: RELATED PARTY TRANSACTIONS
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.
31
<PAGE>
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 $77 and $84 at December 31, 1997 and 1996, respectively. The
loans are collateralized by the Company stock purchased, have an interest rate
of 6 percent and are due 90 days from the date called.
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 subsidiary.
NOTE 10: INTERNATIONAL OPERATIONS
Sales for domestic and international operations during the past three years
were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $177,647 $159,977 $136,168
- --------------------------------------------------------------------------------
International:
Americas 87,389 71,690 53,296
Asia Pacific 11,413 12,497 11,953
Other 4,453 4,882 4,149
- --------------------------------------------------------------------------------
Total International 103,255 89,069 69,398
- --------------------------------------------------------------------------------
Total Sales $280,902 $249,046 $205,566
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Operating income for domestic and international operations during the
past three years was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $25,173 $18,682 $13,357
- --------------------------------------------------------------------------------
International:
Americas 6,283 8,191 5,994
Asia Pacific (1,144) (424) (2,326)
Other 693 40 471
- --------------------------------------------------------------------------------
Total International 5,832 7,807 4,139
- --------------------------------------------------------------------------------
Total Operating Income $31,005 $26,489 $17,496
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Total assets for domestic and international operations for the past
three years were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $58,700 $58,674 $40,996
- --------------------------------------------------------------------------------
International:
Americas 31,818 28,764 18,941
Asia Pacific 4,685 3,767 4,239
Other 593 791 1,071
- --------------------------------------------------------------------------------
Total International 37,096 33,322 24,251
- --------------------------------------------------------------------------------
Total Assets $95,796 $91,996 $65,247
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
NOTE 11: 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, 1997, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year ending December 31
- --------------------------------------------------------------------------------
<S> <C>
1998 $2,101
1999 1,731
2000 1,300
2001 976
2002 384
Thereafter 551
- --------------------------------------------------------------------------------
$7,043
- --------------------------------------------------------------------------------
</TABLE>
The Company incurred expenses of approximately $2,962, $2,512 and $2,725 in
connection with operating leases during 1997, 1996 and 1995, 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 adverse effect upon the Company's results of operations or financial
position.
NOTE 12: SUMMARY OF QUARTERLY OPERATIONS -- UNAUDITED
<TABLE>
<CAPTION>
Selling, Income Basic Diluted
General Other Before Net Net
Sales Cost of Volume & Admin. Operating Income Income Net Income Income
1997 Revenue Goods Sold Incentives Expenses Income (Expense) Taxes Income Per Share Per Share
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Qtr $ 67,825 $12,060 $ 31,404 $17,951 $ 6,410 $ 361 $ 6,771 $ 4,010 $ .21 $ .21
Second Qtr 71,411 13,405 33,319 16,720 7,967 672 8,639 5,247 .28 .28
Third Qtr 71,589 12,756 33,424 17,272 8,137 683 8,820 5,406 .29 .29
Fourth Qtr 70,077 13,386 32,563 15,637 8,491 482 8,973 5,470 .29 .29
- ----------------------------------------------------------------------------------------------------------------------------
$280,902 $51,607 $130,710 $67,580 $31,005 $2,198 $33,203 $20,133 $1.08 $1.06
- ----------------------------------------------------------------------------------------------------------------------------
1996
- ----------------------------------------------------------------------------------------------------------------------------
First Qtr $60,113 $10,384 $ 27,896 $16,753 $ 5,080 $ 500 $ 5,580 $ 3,276 $.18 $.17
Second Qtr 63,182 11,565 28,750 15,542 7,325 (73) 7,252 4,342 .23 .22
Third Qtr 63,031 11,201 28,976 16,009 6,845 319 7,164 4,538 .24 .23
Fourth Qtr 62,720 11,736 28,797 14,948 7,239 634 7,873 4,692 .25 .24
- ----------------------------------------------------------------------------------------------------------------------------
$249,046 $44,886 $114,419 $63,252 $26,489 $1,380 $27,869 $16,848 $.90 $.86
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
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, 1997, a definitive Proxy
Statement pursuant to Regulation 14A of the Commission.
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, 1997, 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, 1997, 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, 1997, 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, 1997, 1996 and 1995.
Consolidated balance sheets as of December 31, 1997 and 1996.
Consolidated statements of shareholders' equity for the years ended
December 31, 1997, 1996 and 1995.
34
<PAGE>
Consolidated statements of cash flows for the years ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements
(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) - Exempt Employee Incentive Compensation Plan
10.4(6) - 1995 Stock Option Plan
10.5(6) - Form of Stock Option Agreement (1995 Stock Option Plan)
10.6 - 1998 Employee Incentive Compensation Plan
21 - List of Subsidiaries of Registrant
23 - Consent of Independent Public Accountants
27 - Financial Data Schedule
- ----------------
[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.
35
<PAGE>
[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, 1992 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, 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, 1997.
(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.
36
<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 20, 1998 By: /s/ Daniel P. Howells
--------------------------------------
Daniel P. Howells, President,
C.E.O. and Director
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.
Signature Title Date
---------- ----- ----
/s/ Daniel P. Howells President, Chief Executive March 20, 1998
- -------------------------- Officer and Director
Daniel P. Howells
/s/ Craig D. Huff Vice President of Finance, March 20, 1998
- -------------------------- Treasurer, Chief Financial Officer,
Craig D. Huff Chief Accounting Officer
/s/ Douglas Faggioli Chief Operating Officer and Director March 20, 1998
- --------------------------
Douglas Faggioli
/s/ Kristine F. Hughes Chairman of the Board and Director March 20, 1998
- --------------------------
Kristine F. Hughes
/s/ Eugene L. Hughes Vice President and Director March 20, 1998
- --------------------------
Eugene L. Hughes
/s/ Merrill Gappmayer Director March 20, 1998
- --------------------------
Merrill Gappmayer
/s/ Pauline T. Hughes Director March 20, 1998
- --------------------------
Pauline T. Hughes
/s/ Robert H. Daines Director March 20, 1998
- --------------------------
Robert H. Daines
37
<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 January 30, 1998. 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
January 30, 1998
38
<PAGE>
NATURE'S SUNSHINE PRODUCTS, INC.
SCHEDULE II-- VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
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, 1997
Allowance for doubtful
accounts receivable $417 $394 $(138) $(12) $661
Allowance for obsolete
inventory 304 470 (240) --- 534
Allowance for notes
receivable 14 --- --- --- 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
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
</TABLE>
39
<PAGE>
LIST OF EXHIBITS
LOCATED AT
SEQUENTIALLY
ITEM NO. EXHIBIT NUMBERED PAGE
- -------- ------- -------------
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) - Exempt Employee Incentive Compensation Plan ---
10.4(6) - 1995 Stock Option Plan ---
10.5(6) - Form of Stock Option Agreement (1995 Stock Option Plan) ---
10.6 - 1998 Employee Incentive Compensation Plan 41
21 - List of Subsidiaries of Registrant 43
23 - Consent of Independent Public Accountants 44
27 - Financial Data Schedule 45
- -------------
[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, 1992 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, 1995 and is incorporated herein
by reference.
40
<PAGE>
EXHIBIT 10.6
SUMMARY OF
1998 EMPLOYEE INCENTIVE COMPENSATION PLAN
PHILOSOPHY
NSP's philosophy is to "pay for performance." This not only means that pay must
be linked to Company performance; it also means that pay should be related to
individual performance as well. NSP desires to have such a pay-for-performance
link with all of its compensation programs, including merit-based performance
appraisals, bonus, and stock option programs.
OBJECTIVES
- Reward for business performance by providing short-term and long-term
incentives tied to Company and individual business results.
- Create an MBO approach in which Company goals and individual
objectives are aligned with measurable business results, rather than
activities.
- Focus management and employees on the long- and short-term performance
of NSP sales, income and stock performance.
- Enhance NSP's ability to attract, retain and motivate top
organizational contributors.
PERFORMANCE APPRAISAL GUIDELINES
NSP has developed, and is currently using, a computer-assisted appraisal process
that helps supervisors manage and evaluate the performance of their employees.
The appraisal process emphasizes a three-step cycle involving:
1. Planning Performance (Reaching mutual agreement on the JOB DUTIES,
WEIGHTS, and GOALS)
2. Coaching Performance (Monitoring and coaching employees through
OBSERVATION, FEEDBACK, and DOCUMENTATION), and
3. Appraising Performance (Formalizing the pay-for-performance link by
determining the performance RATING, conducting the annual REVIEW, and
giving the REWARD.)
[GRAPHIC]
41
<PAGE>
SHORT-TERM INCENTIVE PROGRAM
NSP's bonus program is well aligned with two of the most important business
results, sales and income growth. The current program is straight-forward and
motivational but lacks a tie to individual performance.
We also believe that to the extent that individual performance impacts and can
be measured against business results that such individual contributions need to
affect individual bonus payouts. We suggest that the weighting of company to
individual performance should have a ratio of 60/40 (60 percent company
performance and 40 percent individual performance). We understand that it will
take time to develop MBO-objectives for all employees; and in some cases, it may
not be feasible. In those situations, the individual bonus payout will be
determined based on the appropriate "Full Bonus-100 percent" schedule. If the
individuals performance as determined by the annual performance review is "fully
standard," (3.0/5.0), then the employee is eligible to receive full bonus based
on the established matrix according to NSP's sales/income growth.
It is true that the "deeper" an employee is in the organization, the farther the
"line of sight" may be to business results. However, VPs, directors, and in
some cases, managers and other exempt employees have direct or indirect impact
to the bottom line that can be measured, if in no other way, through annual
budgets.
Bonus is determined after evaluating the degree of performance based on the
following definitions of Basic, Target and Outstanding performance:
- BASIC PERFORMANCE - Minimal acceptable performance.
- TARGET PERFORMANCE - Satisfactory performance.
- OUTSTANDING PERFORMANCE - Exceptional performance.
LONG-TERM INCENTIVE PROGRAM
In 1997, NSP has approximately 19,000,000 outstanding shares of stock. We
recommend that the company allocate between 1-3 percent of the outstanding
shares to a management incentive, non-qualified stock option pool (1 percent =
190,000, 3 percent = 570,000). The granting of management stock options will be
based on the increase in sales and operating income in 1998 compared to 1997.
Individual performance will also be a factor to determine the amount of options
to be granted, following the guidelines of the Short-Term Incentive Program.
The options granted under this program will be subject to a two-year vesting
period. The American Compensation Association (ACA) reports in its course, the
"Elements of Executive Compensation," that the rule of thumb is that companies
allocate 1 percent of the outstanding shares to executive stock option
incentives annually. The instruction manual also points out that the percent of
total shares varies inversely with the size of the company. Young companies use
proportionately more shares, and service companies use more shares than
manufacturing companies. (ACA Course C6A p. 5.16) The "1995/96 Long-Term
Incentive Compensation Survey Results" published by William M. Mercer, reports
that companies with revenues greater than $100mm show the median percent of
shares reserved for management incentives is 5 percent.
42
<PAGE>
EXHIBIT 21
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
Nature's Sunshine Produtos Naturais Ltda. Brazil
Nature's Sunshine K.K. Japan
Nature's Sunshine Korea, Ltd. South Korea
Nature's Sunshine Products de Venezuela Venezuela
Nature's Sunshine Products de Centroamerica Costa Rica
Nature's Sunshine Products de Panama, S.A. Panama
Nature's Sunshine Products 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 del Ecuador, S.A. Ecuador
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.
43
<PAGE>
EXHIBIT 23
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 27, 1998
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