<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________to __________________
Commission File #0-8707
NATURE'S SUNSHINE PRODUCTS, INC.
--------------------------------
(Exact Name of Registrant)
Utah 87-0327982
------------------------ ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
75 East 1700 South
Provo, Utah 84606
(Address of Principal Executive Offices)
(801) 342-4300
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, during the preceding 12 months (or such shorter period that the
Registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares of common stock, without par value, outstanding as of
May 3, 1999, was 17,740,599.
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts In Thousands)
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(UNAUDITED) 1998
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 30,641 $ 22,099
Accounts receivable, net 10,068 9,939
Inventories 21,076 22,494
Deferred income tax assets 2,369 2,438
Prepaid expenses and other 5,612 6,025
--------- ---------
Total Current Assets 69,766 62,995
PROPERTY, PLANT AND
EQUIPMENT, net 25,491 25,896
LONG-TERM INVESTMENTS 12,171 11,675
OTHER ASSETS 2,840 3,133
--------- ---------
$ 110,268 $ 103,699
--------- ---------
--------- ---------
</TABLE>
The accompanying notes to the financial statements are an integral
part of these consolidated condensed financial statements.
2
<PAGE>
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Amounts In Thousands)
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(UNAUDITED) 1998
--------- ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 1,447 $ 1,728
Accounts payable 4,544 4,403
Accrued volume incentives 12,343 9,638
Accrued liabilities 10,102 8,649
Income taxes payable 5,110 3,279
--------- ---------
Total Current Liabilities 33,546 27,697
--------- ---------
LONG-TERM LIABILITIES:
Long-term deferred income tax liabilities 2,123 2,035
Deferred compensation 524 ---
--------- ---------
Total Long-Term Liabilities 2,647 2,035
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock, no par value, 20,000 shares
authorized; 19,446 shares issued 37,528 37,528
Retained earnings 76,404 72,013
Treasury stock, at cost, 1,569 and 1,421
shares at March 31, 1999 and
December 31, 1998, respectively (30,765) (28,926)
Accumulated other comprehensive income (loss) (9,092) (6,648)
--------- ---------
Total Shareholders' Equity 74,075 73,967
--------- ---------
$ 110,268 $ 103,699
--------- ---------
--------- ---------
</TABLE>
The accompanying notes to the financial statements are an integral
part of these consolidated condensed financial statements.
3
<PAGE>
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Amounts In Thousands, Except Per-Share Information)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
SALES REVENUE $ 72,178 $ 75,283
-------- --------
COSTS AND EXPENSES:
Cost of goods sold 12,857 13,542
Volume incentives 33,123 35,199
Selling, general and administrative 18,539 18,684
-------- --------
64,519 67,425
-------- --------
OPERATING INCOME 7,659 7,858
OTHER INCOME, net: 597 329
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 8,256 8,187
PROVISION FOR INCOME TAXES 3,266 3,320
-------- --------
NET INCOME $ 4,990 $ 4,867
-------- --------
OTHER COMPREHENSIVE INCOME (LOSS), net of tax:
Foreign currency translation adjustments (2,437) 42
Unrealized holding losses arising during the period (7) (125)
-------- --------
(2,444) (83)
-------- --------
COMPREHENSIVE INCOME $ 2,546 $ 4,784
-------- --------
-------- --------
BASIC NET INCOME PER COMMON SHARE $ 0.28 $ 0.26
-------- --------
WEIGHTED AVERAGE BASIC SHARES 17,976 18,587
-------- --------
-------- --------
DILUTED NET INCOME PER COMMON SHARE $ 0.28 $ 0.26
-------- --------
WEIGHTED AVERAGE DILUTED SHARES 18,101 18,950
-------- --------
-------- --------
</TABLE>
The accompanying notes to the financial statements are an integral
part of these consolidated condensed financial statements.
4
<PAGE>
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Amounts In Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,990 $ 4,867
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense 9 1
Depreciation and amortization 1,489 1,139
Gain on sale of fixed assets (5) ---
Changes in assets and liabilities:
Increase in accounts receivable (138) (1,388)
Decrease in inventories 1,418 410
Decrease in prepaid expenses and other assets 757 336
Increase in accounts payable 141 362
Increase in accrued volume incentives 2,705 2,685
Increase in accrued liabilities 1,977 4,164
Increase in income taxes payable 1,831 932
Increase in deferred income taxes 157 221
Cumulative translation adjustments (1,777) 207
-------- --------
Net Cash Provided by Operating Activities 13,554 13,936
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (731) (2,028)
(Purchase) Sale of long-term investments (496) 123
Payments received on long-term receivables 18 18
Purchase of other assets (333) (429)
Proceeds from sale of assets 17 ---
Advance to minority interest partner (108) (129)
-------- --------
Net Cash Used in Investing Activities (1,633) (2,445)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of cash dividends (599) (619)
Purchase of treasury stock (1,839) (2,072)
Repayments of short-term debt (280) (152)
Proceeds from exercise of stock options --- 853
Tax benefit from stock option exercise --- 252
-------- --------
Net Cash Used in Financing Activities (2,718) (1,738)
-------- --------
EFFECT OF EXCHANGE RATES ON CASH (661) (164)
-------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 8,542 9,589
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 22,099 27,813
-------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 30,641 $ 37,402
-------- --------
-------- --------
</TABLE>
The accompanying notes to the financial statements are an integral
part of these consolidated condensed financial statements.
5
<PAGE>
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts In Thousands, Except Per-Share Information)
(UNAUDITED)
(1) INTERIM FINANCIAL STATEMENT POLICIES AND DISCLOSURES
The unaudited, condensed consolidated financial statements of Nature's
Sunshine Products, Inc. and subsidiaries included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally required in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the following disclosures
are adequate to make the information presented not misleading.
These condensed consolidated financial statements reflect all
adjustments, which in the opinion of management, are necessary to present
fairly the financial position as of March 31, 1999, and the results of
operations for the periods presented. All of the adjustments which have been
made in these condensed consolidated financial statements are of a normal
recurring nature. Operating results for the three-month period ended March
31, 1999, are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999.
It is suggested that these consolidated condensed financial statements
be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Raw materials $ 6,467 $ 6,104
Work in process 1,298 1,377
Finished goods 13,311 15,013
-------- --------
$ 21,076 $ 22,494
-------- --------
-------- --------
</TABLE>
6
<PAGE>
(3) NET INCOME PER 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 period. Diluted net income per common share
(Diluted EPS) reflects the potential dilution that could occur if stock
options or other contracts to issue common stock were exercised or converted
into common stock. The computation of Diluted EPS does not assume exercise or
conversion of securities that would have an anti-dilutive effect on net
income per common share.
As of March 31, 1999, the Company had a total of 1,119 options
outstanding. The options were all granted at market prices and have a
weighted average exercise price of $10.96.
Following is a reconciliation of the numerator and denominator of Basic
EPS to the numerator and denominator of Diluted EPS for the three months
ended:
<TABLE>
<CAPTION>
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
March 31, 1999
Basic EPS $4,990 17,976 $0.28
Effect of stock options --- 125
------ ------ -----
Diluted EPS $4,990 18,101 $0.28
------ ------ -----
------ ------ -----
March 31, 1998
Basic EPS $4,867 18,587 $0.26
Effect of stock options --- 363
------ ------ -----
Diluted EPS $4,867 18,950 $0.26
------ ------ -----
------ ------ -----
</TABLE>
At March 31, 1999 and 1998, there were outstanding options to purchase
151 and 11 shares of common stock, respectively, that were not included in
the computation of Diluted EPS, as their effect would have been anti-dilutive.
7
<PAGE>
(4) EQUITY TRANSACTIONS
The Company has declared 43 consecutive quarterly cash dividends. The
most recent quarterly cash dividend of 3 1/3 cents per common share was
declared April 29, 1999, to shareholders of record on May 13, 1999 and is
payable on May 27, 1999.
On September 23, 1998, the Board of Directors authorized the repurchase
up to 500 shares of the Company's common stock as market conditions warrant.
As of March 31, 1999, the Company had repurchased approximately 370 shares of
common stock under this approval. Subsequent to March 31, 1999, the Company
repurchased the remaining 130 shares of common stock previously authorized by
the Board of Directors.
(5) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards requiring that
derivative instruments be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The adoption of this statement will not have a
material effect on the Company's consolidated financial statements as the
Company does not currently hold any derivative or hedging instruments.
8
<PAGE>
(6) ACCUMULATED OTHER COMPREHENSIVE INCOME
The composition of accumulated other comprehensive income (loss), net of
tax, is as follows:
<TABLE>
<CAPTION>
Unrealized Total
Gains/(Losses) Accumulated
Foreign Currency on Available-for Sale Other Comprehensive
Adjustments Securities Income (Loss)
---------------- ---------------------- -------------------
<S> <C> <C> <C>
Balance as of December 31, 1998 $ (7,012) $364 $ (6,648)
Current period change (2,437) (7) (2,444)
-------- ---- --------
Balance as of March 31, 1999 $ (9,449) $357 $ (9,092)
-------- ---- --------
-------- ---- --------
</TABLE>
During the quarter ended March 31, 1999, the Brazilian real devalued
approximately 45 percent relative to the U.S. dollar. A significant portion
of the foreign currency adjustment is associated with the devaluation of the
Brazilian real.
(7) 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 the ultimate disposition of these matters will not
have a material effect upon the Company's consolidated results of operations
or financial position.
(8) SEGMENT INFORMATION
The Company has four operating segments. These operating segments are
components of the Company for which separate information is available that is
evaluated regularly by management in deciding how to allocate resources and
in assessing performance. The Company evaluates performance based on
operating income (loss).
The Company's operating segments are based on geographic operations and
include a domestic segment (United States) and three international segments
consisting of Latin America, Asia Pacific and other regions. Intersegment
sales, eliminated in consolidation, are not material.
Prior balances have been restated to reflect the Company's
implementation of SFAS No. 131.
9
<PAGE>
Segment information for the three months ended March 31, 1999, compared
to the previous year are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 1998
---- ----
<S> <C> <C>
Sales Revenue:
Domestic $ 48,580 $ 49,496
International:
Latin America 17,132 20,073
Asia Pacific 3,002 2,294
Other 3,464 3,420
-------- --------
72,178 75,283
-------- --------
Operating Expenses:
Domestic 41,791 43,453
International:
Latin America 15,800 18,048
Asia Pacific 3,840 2,916
Other 3,088 3,008
-------- --------
64,519 67,425
-------- --------
Operating Income:
Domestic 6,789 6,043
International:
Latin America 1,332 2,025
Asia Pacific (838) (622)
Other 376 412
-------- --------
7,659 7,858
Unallocated Amounts
Other Income (Expense) 597 329
-------- --------
Income Before Provision for Income Taxes $ 8,256 $ 8,187
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Assets
Domestic $ 71,631 $ 62,971
International:
Latin America 30,382 32,154
Asia Pacific 5,590 6,236
Other 2,665 2,338
-------- --------
$110,268 $103,699
-------- --------
-------- --------
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements, the notes thereto and management's
discussion and analysis included in the Company's Annual Report for the year
ended December 31, 1998.
RESULTS OF OPERATIONS
The following table identifies (i) the relationship that net income items
disclosed in the consolidated condensed financial statements have to total
sales, and (ii) amount and percent of change of such items compared to the
corresponding prior period.
(Dollar Amounts in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
(i)
Income and Expense (ii)
Items as a Percent of Sales Three Months Ended March 31
- --------------------------- 1999 to 1998
Three Months Ended ----------------------------
March 31 Amount of Percent
- --------------------------- Income and Increase of
1999 1998 Expense Items (Decrease) Change
---- ---- ------------- ---------- -------
<S> <C> <C> <C> <C>
100.0% 100.0% Sales revenue $(3,105) (4.1)%
----- ----- -------
17.8 18.0 Cost of sales (685) (5.1)
45.9 46.8 Volume incentives (2,076) (5.9)
25.7 24.8 SG&A expenses (145) (0.8)
----- ----- -------
89.4 89.6 Total operating expenses (2,906) (4.3)
----- ----- -------
10.6 10.4 Operating income (199) (2.5)
-------
0.8 0.5 Other income 268 81.5
----- -----
11.4 10.9 Income before income taxes 69 0.8
4.5 4.4 Provision for income taxes (54) (1.6)
----- ----- -------
6.9% 6.5% Net income $ 123 2.5%
----- ----- -------
-------
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SALES REVENUE
Sales revenue for the three months ended March 31, 1999, was $72.2
million compared to $75.3 million in the prior year, an decrease of
approximately 4 percent. Management believes the decrease in sales for the
three months ended March 31, 1999, is attributable to increased product and
price competition in the nutritional supplement market as well as increased
competition for new distributors and the continued devaluation of foreign
currencies against the U.S. dollar. Sales revenue in the Company's domestic
operations was $48.6 million for the three months ended March 31, 1999, a
decrease of approximately 2 percent over the same period in the prior year.
The domestic sales revenue growth rate was negatively impacted during the
period by increased product and price competition in the nutritional
supplement market. The Company expects competition to remain strong for the
foreseeable future. Management is evaluating various programs and promotions
in an effort to restore current growth rates to those experienced in the
past. Domestic sales revenue from the Hispanic market increased approximately
4 percent during the first quarter of 1999, as compared to the same period
the prior year. These increases were the result of increased focus on and the
introduction of several programs directed specifically at the Hispanic
market. A price increase of approximately 2 percent, primarily driven by
increased raw material costs, went into effect on April 1, 1999. Management
believes this price increase will be acceptable to its sales force and will
result in increased sales revenue. However, there can be no assurance that
the price increase will be accepted by the sales force.
The Company's international operations reported sales revenue of $23.6
million for the three months ended March 31, 1999, a decrease of 8 percent
compared to the same period in 1998. The declining rate of growth of
international sales revenue was primarily the result of the increased
valuation of the U.S. dollar against foreign currencies. International
operations which reported the most significant foreign currency impacts were
Brazil, Mexico, Ecuador and Colombia. During the quarter
12
<PAGE>
ended March 31, 1999, the Brazilian real devalued (approximately 45 percent)
relative to the U.S. dollar. The Company instituted a price increase in
Brazil effective March 1, 1999, to adjust for this devaluation. Management
believes that the price increases will be acceptable to its sales force and
will result in increased sales revenue. Eliminating the adverse effect of the
foreign currency devaluation, international sales revenue would have
increased approximately 3 percent. The Company also experienced a decrease in
sales revenue in certain of its Latin American subsidiaries, most notably,
Colombia, Brazil and Venezuela.
The Company's independent sales force consists of Managers and
Distributors. A Distributor interested in earning additional income by
committing more time and effort to selling the Company's products may attain
the rank of "Manager." Appointment as a Manager is dependent upon attaining
certain purchase volume levels and demonstrating leadership abilities. The
number of Managers at March 31, 1999, was 15,778 compared to 15,758 at March
31, 1998. The number of Distributors at March 31, 1999, was approximately
526,000 compared to approximately 516,000 at December 31, 1998, an increase
of approximately 2 percent.
COST OF GOODS SOLD
For the three months ended March 31, 1999, the Company experienced a
slight decrease in cost of goods sold, as a percentage of sales, compared to
the same period in the prior year. Management expects cost of goods sold to
remain relatively constant as a percent of sales during the remainder of
1999, as compared to the quarter ended March 31, 1999.
VOLUME INCENTIVES
Volume incentives are payments to independent sales force members for
reaching certain levels of sales performance and organizational development
and are an integral part of the Company's direct sales marketing program.
Volume incentives vary slightly, on a percentage basis, by product due to the
Company's pricing policies. For the three months ended March 31, 1999, the
Company experienced a
13
<PAGE>
0.9 percent decrease in volume incentives, as a percentage of sales, compared
to the same period the prior year. The decrease in volume incentives is
primarily the result of change in product sales mix to products that have a
lower volume incentive payout. Management expects volume incentives to remain
relatively constant, as a percent of sales, during the remainder of 1999, as
compared to the quarter ended March 31, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
March 31, 1999, increased, as a percent of sales, as the result of the
decrease in sales revenue. Actual SG&A expenses decreased slightly during the
quarter as compared to March 31, 1998. Management expects SG&A to decrease
slightly, as a percent of sales, for the year ended December 31, 1999,
compared to the quarter ended March 31, 1999.
SEGMENT INFORMATION
See information included in the condensed consolidated financial
statements under Item 1 Note 8.
BALANCE SHEET
ACCRUED VOLUME INCENTIVES
Accrued volume incentives increased approximately $2.7 million as of
March 31, 1999, as compared to December 31, 1998, as a result of increased
sales revenue during the month of March as compared to the month of December.
ACCRUED LIABILITIES
Accrued liabilities increased approximately $1.5 million during the
three months ended March 31, 1999, resulting primarily from accruals
associated with the Company's sales conventions and travel programs.
14
<PAGE>
INCOME TAXES PAYABLE
Income taxes payable increased approximately $1.8 million during the
three months ended March 31, 1999. The increase is associated with the timing
of required tax deposits in the United States.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased approximately $8.5 million for the
three months ended March 31, 1999. The increase in cash and cash equivalents
is primarily the result of net income as well as the increases in accrued
liabilities. During the first three months of 1999, cash totaling $1.8
million was used to repurchase approximately 150,000 shares of common stock.
Management believes the Company's stock is an attractive investment and
pursuant to its previously announced 500,000 common share buyback program
purchased the remaining balance of approximately 130,000 shares of its common
stock subsequent to March 31, 1999.
On February 23, 1999, the Company's Board of Directors authorized the
expenditure of $6.0 million for revitalizing and relaunching the Company's
products in Japan. The authorized funds will be used for marketing and
advertising costs as well as capital improvements. The Company anticipates a
majority of these expenditures to take place during the second and third
quarters of 1999, and will be funded from the Company's current working
capital. The expenditures could have an impact on future earnings.
During the three months ended March 31, 1998, the Company paid
approximately $1.5 million for the expansion of its domestic warehouse and
manufacturing facilities associated with continued construction costs. The
warehouse portion of the facility was completed during the second quarter of
1998. Total costs associated with the expansion were approximately $6.2
million. The entire amount was financed from working capital.
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
15
<PAGE>
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.
LEGAL PROCEEDING
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 the ultimate disposition of these matters will not
have a material effect upon the Company's consolidated results of operations
or financial position.
THE YEAR 2000 ISSUE
In an effort to ensure the Company's information systems as well as all
other systems are Year 2000 ("Y2K") compliant, the Company is actively
engaged in assessing and correcting any potential problems. During 1997, the
Company formed a committee to review all systems and correct any potential
problems. After initial review of all internal systems, the Company has
determined that the majority are currently Y2K compliant. It is estimated by
third quarter of 1999, systems which are not currently Y2K compliant will be
brought into compliance.
The Company has estimated that it may need to spend from $0.5 million to
$1.0 million to ensure that all areas of non-compliance are corrected. Most
of the systems that are not currently compliant had previously been scheduled
for replacement as part of the Company's ongoing maintenance and upgrading
programs.
The Company anticipates that risks related to its information and
non-information systems will be mitigated by current efforts being made in
conjunction with ongoing testing and review of its systems.
16
<PAGE>
However, the primary Y2K risk to the Company's operation is potential service
disruption from third-party providers. These services include but are not
limited to providers that supply telephone, electricity, banking, shipping
and raw materials for the Company's manufacturing operations. Any disruption
of these critical services would hinder the Company's ability to receive,
process and ship orders. In the event of a temporary disruption in the supply
of raw materials, the Company believes it currently maintains an adequate
supply of finished goods and raw material inventories to sustain
manufacturing and distribution of finished product until alternative sources
become available. Although in the past the Company has been able to locate
alternative sources, there can be no assurance the Company will be successful
in locating such sources in the future. The Company also believes that a
temporary disruption of communication services would seriously impact the
Company's ability to receive and process orders. The Company has manual
processes in place, which it believes would provide temporary replacement for
such services. Efforts are currently underway to verify Y2K compliance of the
Company's major service providers.
Notwithstanding the foregoing, there can be no assurance that the
Company will not experience operational difficulties as a result of Y2K
issues, either arising out of internal operations or caused by third-party
service providers, which individually or collectively could have an adverse
impact on business operations and require the Company to incur unanticipated
expenses to remedy any problems. The Company is currently evaluating what
contingency plans, if any, may need to be made in the event the Company or
third-party providers with whom the Company does business experience Y2K
problems.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and other items of this Form
10-Q may contain forward-looking statements. Such forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
17
<PAGE>
Litigation Reform Act of 1995. Such statements may relate but not be limited
to projections of revenues, income or loss, capital expenditures, plans for
growth and future operations, financing needs, 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-Q 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is not presented because the Company
believes that its investments in market-risk-sensitive instruments is not
material.
18
<PAGE>
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a) No exhibits are required to be filed by Item 601 of Regulation S-K.
b) No reports were filed on Form 8-K during the quarter for which this
report is filed.
OTHER ITEMS
There were no other items to be reported under Part II of this report.
SIGNATURES
Pursuant to the requirements 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.
Date: May 10, 1999 /s/ Daniel P. Howells
------------------------------
Daniel P. Howells, President & Chief Executive
Officer
Date: May 10, 1999 /s/ Craig D. Huff
------------------------------
Craig D. Huff, Chief Financial Officer
19
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