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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, 1998
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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.
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(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
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
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(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 16, 1999 was approximately $169,848,455.
The number of shares of Common Stock, without par value, outstanding on
March 12, 1999 was 17,946,599 shares.
Documents Incorporated by Reference:
Proxy Statement for May 17, 1999 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 international subsidiaries. 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 18 subsidiaries. The Company's subsidiaries are incorporated in :
Brazil, Colombia, Mexico, Japan, Canada, Venezuela, South Korea, the United
Kingdom, El Salvador, Guatemala, Costa Rica, Peru, Panama, Argentina, Chile,
Ecuador, Honduras and Nicaragua. All of the above subsidiaries are wholly-owned,
except for Japan which is majority-owned. The Company also exports its products
to several other countries, including Australia, Malaysia, New Zealand, Norway
and Russia.
FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company is principally engaged in one line of business, namely, the
manufacturing and marketing, 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 marketing 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 products of the Company's personal care and homeopathic lines are
manufactured for the Company, by contract manufacturers, in accordance with the
Company's specifications and standards. The Company has implemented stringent
quality control procedures to verify that the contract manufacturers have
complied with its specifications and standards.
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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 produces both
single herbs and herb combinations in the form of 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. Sales of herbal products accounted for approximately 67 percent in
1998 and 1997, and 65 percent in 1996, of the Company's total sales revenue.
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 in 1998 and 1997, and 24 percent in
1996, of the Company's total sales revenue.
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 in 1998 and 1997, and 2 percent in 1996, of the Company's total sales
revenue.
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. Sales of homeopathic products accounted for approximately 1 percent in
1998 and 1997, and 2 percent in 1996 of the Company's total sales revenue.
DISTRIBUTION AND MARKETING
The Company attracts independent distributors who explain and market
the Company's products through direct selling techniques to consumers as well as
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.
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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 international operation maintains warehouse facilities
with inventory to supply its customers.
Demand for the Company's products is created by approximately 516,000
active members (at December 31, 1998) of the Company's independent distributor
sales force, which includes approximately 185,000 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 percent renew annually. Many
Distributors sell on a part-time basis to friends or associates or consume the
Company's products themselves. 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 14,000 at December 31, 1998, including
approximately 6,700 Managers in the United States. Managers resell the products
they purchase from the Company to Distributors in their sales group, to
consumers or use the 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. From time to time, the Company's domestic operation extends
short-term credit associated with product promotions. 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 and volume discounts
based upon the amount of personal product purchases as well as their group sales
purchases. 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, 1998, 1997 and 1996. In addition, Managers who qualify
by attaining certain levels of monthly product purchases are eligible for
additional incentive programs including automobile allowances, medical and
dental insurance and travel.
SOURCE AND AVAILABILITY OF RAW MATERIALS
Raw materials used in the manufacture of the Company's products are
available from a number of suppliers. To date, the Company has not experienced
any major difficulty in obtaining adequate sources of supply. The Company
attempts to assure the availability of many of its raw materials by contracting,
in advance, for its annual requirements. In the past, the Company has found
alternative sources of raw materials when needed. Although, there can be no
assurance 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.
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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 product availability 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
manufacturers and retailers of nutritional and personal care products which are
distributed through supermarkets, drug stores, health food stores, discount
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 principal competitors in the encapsulated and
tableted herbal products market include Twinlab, Rexall Sundown, Nature's Way,
Sunrider, USANA, Inc., Nutraceuticals and NBTY, Inc. 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. The principal emphasis of
the Company's research and development activities is the development of new
products and improvement of existing products. The amount, excluding capital
expenditures, spent during each of the last three years on Company-sponsored
research and development activities was approximately $1.5 million in 1998 and
1997 and $1.4 million in 1996. The Company has no third-party-sponsored
research.
5
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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 that unless complied with may
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 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.
6
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EMPLOYEES
The approximate number of people employed by the Company as of December
31, 1998, was 971. 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, Chile, Ecuador, Honduras and Nicaragua. The Company also
exports its products to numerous other countries, including Australia, Malaysia,
New Zealand, Norway and Russia. Information, for each of the last three years,
with respect to the amounts of revenue, operating income, and identifiable
assets attributable to domestic and segment information, is set forth in Note 12
of the Notes to Consolidated Financial Statements appearing in Item 8 of this
Report, and such information is incorporated herein by reference and made a part
hereof.
The Company's international operations are conducted in a manner
substantially the same as those conducted domestically; however, in order to
conform to local variations, economic realities, market customs, consumer habits
and regulatory environments, differences exist in the products and in the
distribution and marketing programs.
The Company's international operations are subject to many of the same
risks faced by the Company's domestic operations. These include competition and
the strength of the local economy. In addition, international operations are
subject to certain risks inherent in carrying on business abroad, including
foreign regulatory restrictions, fluctuations in monetary exchange rates,
import-export controls and the economic and political policies of foreign
governments. The importance of these risks increases as the Company's
international operations grow and expand. Virtually all of the Company's
international operations have been effected by foreign currency devaluation,
most notably, Brazil, Colombia, Venezuela, Mexico and Japan.
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 3 1/2 years remain at
December 31, 1998) 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 and warehousing facilities are
housed in a building owned by the Company, of approximately 265,000 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. During 1998, the Company completed a
129,000-square-foot expansion. Approximately 60,000 square feet is a high bay
warehouse with the remaining 69,000 square feet to be used by the Company for
future expansion of its manufacturing, research and development and quality
assurance areas. This expansion replaced a 70,000 square foot building the
Company leased. The consolidation of warehousing space should increase operating
efficiencies and allow the Company to meet the increased demand for its
products. The total cost of the project was approximately $6.2 million of which
$3.5 million was incurred during 1998. The entire cost of the
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project was funded from working capital. The building presently includes
approximately 34,000 square feet of office space and 231,000 square feet of
manufacturing and warehouse space. The building is suited to the Company's
business, with the current manufacturing areas presently being utilized at
approximately 95 percent of productive capacity.
The Company also leases properties used primarily as distribution
warehouses which are located in Columbus, Ohio; Dallas, Texas; Atlanta, Georgia;
as well as office and distribution warehouses in Brazil, Colombia, Japan,
Canada, Venezuela, South Korea, the United Kingdom, El Salvador, Guatemala,
Costa Rica, Peru, Panama, Argentina, Chile, 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 1998, the
Company spent approximately $2.6 million for all of its leased facilities.
The Company also owns approximately 60,000 square feet of office and
warehouse space in Mexico.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits which are incidental to
the Company's business. Management, after consultation with its legal counsel,
believes that any liability as a result of these matters will not have a
material effect upon the Company's results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the NASDAQ National Market
System (symbol NATR). The information in the table below reflects the actual
high and low sales prices of the Company's stock for 1998 and 1997.
<TABLE>
<CAPTION>
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Market Prices Market Prices
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1998 HIGH LOW 1997 HIGH LOW
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<S> <C> <C> <C> <C> <C>
First Quarter 28 5/8 23 1/4 First Quarter 18 3/4 14
Second Quarter 27 3/8 21 3/4 Second Quarter 18 3/8 13 1/2
Third Quarter 24 1/4 13 5/8 Third Quarter 24 17 7/8
Fourth Quarter 17 3/4 13 3/4 Fourth Quarter 26 3/4 20 7/8
</TABLE>
There were approximately 1,473 shareholders of record as of March 4,
1999. During 1998 and 1997, the Company paid quarterly cash dividends of 3 1/3
cents per common share. On February 9, 1999, the Company declared a cash
dividend of 3 1/3 cents per common share to shareholders of record on February
19, 1999. On February 26, 1999, the Company paid approximately $0.6 million
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
AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE INFORMATION
<TABLE>
<CAPTION>
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INCOME STATEMENT DATA
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Selling, General
Sales Cost of Volume & Administrative Operating Income Before Net
Revenue Goods Sold Incentives Expenses Income Income Taxes Income
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<S> <C> <C> <C> <C> <C> <C> <C>
1998 $296,052 $52,191 $136,490 $71,304 $36,067 $38,373 $23,278
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
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</TABLE>
<TABLE>
<CAPTION>
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BALANCE SHEET DATA
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Working Current Property, Plant & Total Long-Term Shareholders'
Capital Ratio Inventories Equipment, Net Assets Debt Equity
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<S> <C> <C> <C> <C> <C> <C> <C>
1998 $35,298 2.27:1 $22,494 $25,896 $103,699 $ --- $73,967
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
</TABLE>
<TABLE>
<CAPTION>
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COMMON SHARE SUMMARY
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Basic Diluted
Basic Diluted Weighted Weighted
Cash Dividends Net Income Net Income Book Value Average Shares Average Shares
Per Share Per Share Per Share Per Share(1) (000s) (000s)
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<S> <C> <C> <C> <C> <C> <C>
1998 $0.133 $1.27 $1.25 $4.10 18,383 18,639
1997 0.133 1.08 1.06 3.60 18,653 19,070
1996 0.133 0.90 0.86 3.30 18,793 19,684
1995 0.133 0.65 0.63 2.25 18,301 18,888
1994 0.120 0.46 0.45 1.81 18,381 18,779
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</TABLE>
<TABLE>
<CAPTION>
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OTHER INFORMATION
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Return on Square Footage
Shareholders' Return on Number of of Property Number of
Equity(2) Assets(3) Managers In Use Employees
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<S> <C> <C> <C> <C> <C>
1998 33.1% 23.3% 14,006 631,430 971
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
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</TABLE>
1 Year end shareholders' equity divided by actual shares outstanding at the
end of each year.
2 Net income divided by average shareholders' equity.
3 Net income divided by average total assets.
The information in the preceding tables has been adjusted, where necessary,
to reflect stock dividends and splits.
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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, 1998, was
$296.1 million compared to $280.9 million in 1997, an increase of approximately
5 percent. Sales revenue increased approximately 13 percent in 1997 compared to
$249.0 million reported in 1996. 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.
During 1998, the Company's sales revenue was negatively impacted by foreign
currency devaluation in the majority of its international markets and increased
competition in the Company's domestic market. Eliminating the adverse affect of
foreign currency devaluation, sales revenue for the year ended December 31,
1998, would have increased approximately 9 percent.
The Company distributes its products to consumers through an
independent sales force comprised of Managers and Distributors. Active Managers
totaled approximately 14,000, 13,800 and 11,700 at December 31, 1998, 1997 and
1996, respectively. Active Distributors totaled approximately 516,000, 660,000
and 522,000 at December 31, 1998, 1997 and 1996, respectively. At December 31,
1998, the number of active Distributors decreased 22 percent as compared to
1997, as the result of the Company's standardization of the definition of an
active Distributor in its international operations. Domestically, active
Distributors increased 4 percent in 1998 to approximately 185,000. During 1997
and 1996, the growth rate of active Distributors increased approximately 26
percent and 40 percent, respectively, primarily due to the expansion into new
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, 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 approximately 2 percent and less than 1 percent went
into effect in 1998 and 1997, 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, 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.
Sales revenue, related to the Company's domestic operations, increased
approximately 7 percent during 1998 and 11 percent for 1997. International sales
revenue increased to approximately $105.7 million in 1998, or 2 percent, and
$103.3 million in 1997, or 16 percent. The Company's operations in Brazil and
Venezuela were the principal drivers of the growth in international sales
revenue, increasing approximately $8.3 million and $11.7 million in 1998 and
1997, respectively. During 1998, the Company continued to experience foreign
currency devaluation in its international operations. International operations
which reported the most significant impact from foreign currency devaluation
were Brazil, Colombia, Venezuela, Mexico and Japan. Sales revenue in the
Company's Latin America segment decreased approximately 8 percent, primarily as
the result of foreign currency
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devaluation. Operating income in the Company's Asia Pacific segment decreased
approximately $1.4 million, primarily as the result of startup costs
associated with the opening of the Company's new international market in
South Korea. The Company's board of directors has authorized the management
of the Company to implement programs in Japan, the world's largest direct
selling market, aimed at increasing sales revenue and operating income.
Subsequent to December 31, 1998, the Brazilian real has experienced a
significant devaluation against the U.S. dollar. Brazil represents
approximately 30 percent of international sales revenue. Price increases are
planned in various international markets to adjust for foreign currency
devaluation. Management believes the price increases will be acceptable to
its sales force and will result in increased sales. However, there can be no
assurance that the price increase will be accepted by the sales force.
Further information related to the Company's domestic and international
segment information is set forth in Note 12 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 1998 1997 1996
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<S> <C> <C> <C>
Cost of goods sold 17.6% 18.4% 18.0%
Volume incentives 46.1 46.5 46.0
Selling, general and
administrative expenses 24.1 24.1 25.4
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87.8% 89.0% 89.4%
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</TABLE>
COST OF GOODS SOLD
Cost of goods sold decreased as a percent of sales in 1998 as compared
to 1997 primarily as a result of efforts made by management to control costs in
its international operations and efficiencies gained through the construction of
its new warehousing and manufacturing facility. Cost of goods sold increased as
a percent of sales during 1997 as compared to 1996 as a result of higher freight
and duty costs.
Management believes that cost of goods sold will remain approximately
the same as a percent of sales during 1999 as compared to 1998. 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
decreased slightly, as a percent of sales, during 1998 as compared to 1997,
primarily as a result of pricing adjustments in several international
operations.
11
<PAGE>
Management expects volume incentives to remain relatively constant as a
percent of sales during 1999 as compared to 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses remained constant as a
percent of sales in 1998 as compared to 1997. 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 from 25.4
percent of sales in 1996 to 24.1 percent of sales in 1997. The decrease in
selling, general and administrative expenses resulted from an increase in sales
revenue and focused efforts on the part of management to control costs.
Management believes that selling, general and administrative expenses
will remain constant as a percent of sales during 1999 as compared to 1998, as
the result of continued emphasis on cost containment and improved sales revenue
in certain of the Company's international operations.
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 decreased slightly during 1998 as the result of lower
yields earned on short-term investments as well as cash used on capital projects
and the Company's common share repurchase program. Interest income increased
during 1997 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 1999
as the result of the cash requirements for international market development and
repayment of a short-term debt in Japan.
INCOME TAXES
The Company's effective tax rate was 39.3, 39.4 and 39.6 percent for
1998, 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are its available cash and
cash equivalents and cash generated from operations. At December 31, 1998, cash
and cash equivalents decreased approximately $5.7 million as compared to
December 31, 1997. During 1998, cash and cash equivalents were used to purchase
long-term investments of $8.3 million. These investments were made in accordance
with the Company's policy to invest in only high-grade investments. Cash
provided by operating activities was $25.6 million in 1998 compared to $24.2
million in 1997.
Cash was used during 1998 to purchase approximately 720,000 shares of
common stock for $14.3 million. The Company purchased approximately $6.5 million
of property, plant and equipment of which $3.5 million was associated with the
expansion of the Company's manufacturing and
12
<PAGE>
warehouse facility in Spanish Fork, Utah. The warehouse portion of the
facility was completed during the second quarter of 1998. The manufacturing
portion of the facility will be completed as additional manufacturing
capacity is needed. Total costs associated with the expansion were
approximately $6.2 million. Volume incentive payments increased approximately
$6.5 million during 1998, primarily as the result of increased sales. Cash
paid to suppliers and employees increased approximately $3.4 million as a
result of increased 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 1998. During 1999, the Company anticipates
increased expenses associated with market development of certain
international subsidiaries.
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. 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
increased 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.
Management believes the Company's stock is an attractive investment
and, pursuant to its previously announced 500,000 share buyback program, may
utilize some of its available cash to purchase up to 200,000 shares, the
remaining balance as of March 9, 1999, should market conditions warrant.
Options for 159,835 and 883,682 shares of the Company's common stock
were exercised during 1998 and 1997, respectively. The proceeds from and tax
benefits associated with the options exercised were approximately $2.3 million
in 1998, and $13.2 million in 1997.
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. The Company issued 1,000, 2,000 and 3,000
restricted shares of common stock to certain key Distributors during 1998, 1997
and 1996, respectively. 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.
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.
13
<PAGE>
SUBSEQUENT EVENT
Subsequent to December 31, 1998, Brazil experienced a significant
foreign currency devaluation. As of January 29, 1999, the Brazilian real
devalued relative to the U.S. dollar by approximately 72 percent. Any impact of
future fluctuations of the Brazilian real relative to the U.S. dollar on the
Company's net monetary assets denominated in Brazilian real will be reflected on
the Company's consolidated balance sheet in the shareholders' equity section as
a component of accumulated other comprehensive income.
YEAR 2000
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. 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, electrical, 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.
14
<PAGE>
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, costs and expenses, 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.
ITEM 7A. 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.
15
<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,
1998 and 1997, and the related consolidated statements of income and
comprehensive income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 29, 1999
16
<PAGE>
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
AMOUNTS IN THOUSANDS EXCEPT PER SHARE INFORMATION
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales Revenue $ 296,052 $ 280,902 $ 249,046
- ---------------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of goods sold 52,191 51,608 44,886
Volume incentives 136,490 130,709 114,419
Selling, general and administrative expenses 71,304 67,580 63,252
- ---------------------------------------------------------------------------------------------------------------------
259,985 249,897 222,557
- ---------------------------------------------------------------------------------------------------------------------
Operating Income 36,067 31,005 26,489
- ---------------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest and other income 2,095 2,453 2,021
Interest expense (48) (182) (63)
Foreign exchange loss (78) (565) (787)
Minority interest 337 492 209
- ---------------------------------------------------------------------------------------------------------------------
2,306 2,198 1,380
- ---------------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 38,373 33,203 27,869
Provision for Income Taxes 15,095 13,070 11,021
- ---------------------------------------------------------------------------------------------------------------------
Net Income 23,278 20,133 16,848
- ---------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), net of tax:
Foreign currency translation adjustments (1,722) (1,450) (103)
Unrealized holding gain (loss) arising during period (14) 416 ---
Less: reclassification adjustment for (gain) loss
included in net income (38) --- ---
- ---------------------------------------------------------------------------------------------------------------------
(1,774) (1,034) (103)
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 21,504 $ 19,099 $ 16,745
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Basic Net Income Per Common Share $ 1.27 $ 1.08 $ 0.90
- ---------------------------------------------------------------------------------------------------------------------
Diluted Net Income Per Common Share $ 1.25 $ 1.06 $ 0.86
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
17
<PAGE>
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
As of December 31 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ---------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 22,099 $ 27,813
Accounts receivable, net of allowance for doubtful accounts
of $819 in 1998 and $661 in 1997 9,939 7,465
Inventories 22,494 19,555
Deferred income tax assets 2,438 2,204
Prepaid expenses and other 6,025 8,993
- ---------------------------------------------------------------------------------------------------------
Total current assets 62,995 66,030
Property, plant and equipment, net 25,896 23,711
Long-term investments 11,675 3,468
Other assets 3,133 2,587
- ---------------------------------------------------------------------------------------------------------
$ 103,699 $ 95,796
- ---------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------
Current Liabilities:
Short-term debt $ 1,728 $ 2,665
Accounts payable 4,403 5,094
Accrued volume incentives 9,638 9,531
Accrued liabilities 8,649 7,223
Income taxes payable 3,279 2,946
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 27,697 27,459
- ---------------------------------------------------------------------------------------------------------
Long-Term Deferred Income Tax Liabilities 2,035 1,480
- ---------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 11)
- ---------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Common stock, no par value, 20,000 shares authorized,
19,446 shares issued 37,528 37,896
Retained earnings 72,013 51,190
Treasury stock, at cost, 1,421 and 861 shares as of
December 31, 1998 and 1997, respectively (28,926) (17,278)
Receivables from related parties --- (77)
Accumulated other comprehensive income (loss) (6,648) (4,874)
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity 73,967 66,857
- ---------------------------------------------------------------------------------------------------------
$103,699 $95,796
- ---------------------------------------------------------------------------------------------------------
</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 STATEMENTS OF SHAREHOLDERS' EQUITY
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Balance at beginning of year $ 37,896 $ 39,406 $ 31,263
Tax benefit related to exercise of stock options 809 3,240 6,328
Issuance of 161, 886 and 929 shares of
treasury stock, respectively (1,177) (4,750) 1,815
- --------------------------------------------------------------------------------------------------------------
Balance at end of year 37,528 37,896 39,406
- --------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 51,190 33,549 19,214
Net income 23,278 20,133 16,848
Cash dividends (2,455) (2,492) (2,513)
- --------------------------------------------------------------------------------------------------------------
Balance at end of year 72,013 51,190 33,549
- --------------------------------------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year (17,278) (5,868) (4,942)
Purchase of 721, 1,413 and 261 shares
of common stock, respectively (14,306) (26,128) (4,902)
Issuance of 161, 886 and 929 shares of
treasury stock, respectively 2,658 14,718 3,976
- --------------------------------------------------------------------------------------------------------------
Balance at end of year (28,926) (17,278) (5,868)
- --------------------------------------------------------------------------------------------------------------
RECEIVABLES FROM RELATED PARTIES:
Balance at beginning of year (77) (84) (293)
Reductions/Reclassification 77 7 209
- --------------------------------------------------------------------------------------------------------------
Balance at end of year --- (77) (84)
- --------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of year (4,874) (3,840) (3,737)
Other comprehensive income (loss) (1,774) (1,034) (103)
- --------------------------------------------------------------------------------------------------------------
Balance at end of year (6,648) (4,874) (3,840)
- --------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 73,967 $ 66,857 $ 63,163
- --------------------------------------------------------------------------------------------------------------
</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 CASH FLOWS
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales revenue $ 293,315 $ 279,525 $ 247,566
Cash paid as volume incentives (136,382) (129,907) (112,897)
Cash paid to suppliers and employees (119,398) (116,020) (107,269)
Interest paid (48) (182) (62)
Interest received 2,279 2,497 2,058
Income taxes paid (14,209) (11,744) (10,807)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 25,557 24,169 18,589
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,473) (7,453) (10,544)
(Purchase) sale of long-term investments, net (8,260) (1,004) 333
Payments received (advanced) on long-term receivables, net 228 394 (170)
Payments received from related parties 77 7 489
Purchase of other assets (861) (599) (215)
Proceeds from sale of assets 153 25 344
Receipt from (advance to) minority interest partners (337) 383 (396)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (15,473) (8,247) (10,159)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends (2,455) (2,492) (2,513)
Purchase of treasury stock (14,306) (26,128) (4,902)
Proceeds from(repayments of) short-term debt, net (678) (123) 746
Proceeds from exercise of stock options 1,481 9,925 5,732
Tax benefit from stock option exercise 809 3,240 6,328
Issuance of treasury stock --- 43 60
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (15,149) (15,535) 5,451
- -----------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH (649) (453) (174)
- -----------------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,714) (66) 13,707
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 27,813 27,879 14,172
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 22,099 $ 27,813 $ 27,879
- -----------------------------------------------------------------------------------------------------------------------------------
Reconciliation of Net Income to Net Cash Provided by Operating Activities
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 23,278 $ 20,133 $ 16,848
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts 229 67 133
Depreciation and amortization 4,812 4,292 3,420
(Gain) loss on sale of fixed assets (75) 8 (96)
Increase in accounts receivable (2,704) (834) (788)
(Increase) decrease in inventories (2,939) 4,904 (1,332)
Decrease (increase) in prepaid expenses and other 2,533 (3,106) (4,010)
(Decrease) increase in accounts payable (691) 868 (806)
Increase (decrease) in income taxes payable 333 1,190 (126)
Increase (decrease) in accrued liabilities and volume incentives 1,534 (1,967) 4,936
Increase (decrease) in deferred income taxes 321 (389) 341
Foreign currency translation adjustment (1,074) (997) 69
- -----------------------------------------------------------------------------------------------------------------------------------
Total adjustments 2,279 4,036 1,741
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 25,557 $ 24,169 $ 18,589
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
20
<PAGE>
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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") are primarily engaged in the
manufacturing and marketing of herbal and homeopathic products, vitamin and
mineral supplements 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 formulation, manufacturing,
packaging, labeling, advertising, distribution and sale of each of the Company's
major product groups are subject to regulation by one or more governmental
agencies.
The Company markets its products directly in the United States, Brazil,
Colombia, Mexico, Japan, South Korea, Canada, Venezuela, the United Kingdom, El
Salvador, Guatemala, Costa Rica, Peru, Panama, Argentina, Chile, Ecuador,
Honduras and Nicaragua. The Company also exports its products to numerous other
countries, including Australia, Malaysia, New Zealand, Norway and Russia.
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. Unrealized holding gains and
losses are reflected as a net amount in other comprehensive income 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.
21
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, cash
equivalents, trade receivables, long-term investments, trade payables and debt
instruments. 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, 1998, 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 in
accumulated other comprehensive income.
Countries considered to have highly inflationary economies were Mexico,
Venezuela and Ecuador; Brazil, Mexico, Venezuela and Ecuador; and Brazil,
Venezuela and Ecuador, during 1998, 1997 and 1996, respectively. 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. Effective January 1, 1998, Brazil was no longer considered
highly inflationary. Effective January 1, 1999, Mexico will no longer be
considered highly inflationary.
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. From time to time, the Company's domestic
operation extends short-term credit associated with product promotions. 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
22
<PAGE>
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 customer deposits and is included in
accrued liabilities.
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 $3,089, $3,456 and $2,625 at
December 31, 1998, 1997 and 1996, respectively.
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred. Total
research and development costs were approximately $1,528, $1,500 and $1,400 in
1998, 1997 and 1996, 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 8.
23
<PAGE>
Following is a reconciliation of the numerator and denominator of Basic
EPS to the numerator and denominator of Diluted EPS for all periods:
<TABLE>
<CAPTION>
Net Income Shares Per Share
(Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1998
Basic EPS $23,278 18,383 $ 1.27
Effect of options --- 256
- ----------------------------------------------------------------------------
Diluted EPS $23,278 18,639 $ 1.25
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
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 $ 0.90
Effect of options --- 891
- ----------------------------------------------------------------------------
Diluted EPS $16,848 19,684 $ 0.86
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
At December 31, 1998, 1997 and 1996, there were outstanding options
to purchase 87, 233 and 5 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 during
the year.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior periods'
consolidated financial statements to conform with the current year
presentation.
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.
24
<PAGE>
NOTE 2: INVENTORIES
The composition of inventories is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
As of December 31 1998 1997
- --------------------------------------------------------------
<S> <C> <C>
Raw materials $ 6,104 $ 5,912
Work in process 1,377 1,455
Finished goods 15,013 12,188
- --------------------------------------------------------------
$22,494 $19,555
- --------------------------------------------------------------
- --------------------------------------------------------------
</TABLE>
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
As of December 31 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Buildings and improvements $17,128 $14,015
Machinery and equipment 12,218 11,676
Furniture and fixtures 14,171 12,695
- ------------------------------------------------------------------------
43,517 38,386
Accumulated depreciation and amortization (19,020) (16,074)
Land 1,399 1,399
- ------------------------------------------------------------------------
$25,896 $23,711
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
</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
As of December 31, 1998 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash equivalents:
Municipal obligations $ 4,750 $ --- $ --- $ 4,750
- -------------------------------------------------------------------------------------------------------
Total cash equivalents 4,750 --- --- $ 4,750
- -------------------------------------------------------------------------------------------------------
Long-term investments:
Municipal obligations 10,564 81 (34) 10,611
Equity securities 747 335 (18) 1,064
- -------------------------------------------------------------------------------------------------------
Total long-term investments 11,311 416 (52) 11,675
- -------------------------------------------------------------------------------------------------------
Total securities available for sale $16,061 $416 $(52) $16,425
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
As of 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
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
Contractual maturities of long-term debt securities at market value at
December 31, 1998, are as follows:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------
Mature after one year through five years $ 8,551
Mature after five years 2,060
- -----------------------------------------------------------------------------------------------------
Total long-term investments $10,611
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
During 1998, 1997 and 1996, the proceeds from the sales of
available-for-sale securities were $11,763, $5,153 and $4,226 respectively. The
gross realized gains on sales of available-for-sale securities were $65, for the
each of the years ended December 31, 1998 and 1997. The gross realized losses on
the sales of available-for-sale securities were $26 and $8 for the years ended
December 31, 1998 and 1997, respectively.
NOTE 5: SHORT-TERM DEBT
The Company has operating lines of credit in Japan which are payable in
local currency, to facilitate payment of operating expenses. During 1998, the
Company repaid approximately $937. The debt is unsecured and matures during
1999. The outstanding amounts relating to the lines of credit at December 31,
1998 and 1997, were $1,728 and $2,665, respectively, with a weighted average
interest rate of 2 percent at December 31, 1998. The weighted average
outstanding amounts relating to these lines of credit in Japan were $2,224 and
$2,727 for 1998 and 1997, respectively.
NOTE 6: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The composition of accumulated other comprehensive income (loss), net
of tax, is as follows:
<TABLE>
<CAPTION>
Unrealized Total
Foreign Currency Gains On Accumulated
Translation Available-For-Sale Other Comprehensive
Adjustments Securities Income (Loss)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1997 $(5,290) $416 $(4,874)
Current period change (1,722) (52) (1,774)
- ----------------------------------------------------------------------------------------------------
Balance as of December 31, 1998 $(7,012) $364 $(6,648)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
NOTE 7: INCOME TAXES
The domestic and foreign components of income before provision for
income taxes are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $30,569 $27,919 $20,516
Foreign 7,804 5,284 7,353
- ----------------------------------------------------------------------------------------
Total $38,373 $33,203 $27,869
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 9,574 $ 9,177 $ 6,655
State 1,858 1,683 1,146
Foreign 3,342 2,768 3,249
- ------------------------------------------------------------------------------------
14,774 13,628 11,050
Deferred 321 (558) (29)
- ------------------------------------------------------------------------------------
Total provision for income taxes $15,095 $13,070 $11,021
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
The tax benefit associated with the nonqualified stock option plan
decreased the income tax payable by $809, $3,240 and $6,328 in 1998, 1997 and
1996, respectively. These benefits were recorded as an increase to common stock.
The provision for income taxes as a percentage of income before
provision for income taxes differs from the statutory Federal income tax rate
due to the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------
<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 3.1 2.7
Foreign and other tax credits (5.6) (3.4) (2.8)
Net effect of foreign subsidiaries
tax attributes 7.1 6.2 5.3
Other (0.3) (1.5) (0.6)
- ------------------------------------------------------------------------------------
Effective tax rate 39.3% 39.4% 39.6%
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
The significant components of the deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Year ended December 31 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Inventory $ 300 $300
Accrued liabilities 703 140
State income taxes 644 427
Foreign tax credits 126 190
Sale of subsidiary --- 386
Other 665 761
- -----------------------------------------------------------------------------
Total deferred tax assets $ 2,438 $ 2,204
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Deferred tax liabilities:
Accelerated depreciation $(2,016) $(1,452)
Gain on sale of subsidiaries (19) (28)
- -----------------------------------------------------------------------------
Total deferred tax liabilities $(2,035) $(1,480)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
Although realization of the net deferred tax assets is not assured,
management believes it is more likely than not that all of the net deferred tax
assets will be realized. The amount of net deferred tax assets considered
realizable could be reduced based on changing conditions.
As of December 31, 1998, the Company has available net operating losses
from its foreign subsidiaries for foreign income tax purposes and financial
reporting purposes of approximately $11,900 and $12,200, respectively. The tax
net operating losses will expire in 2000 through 2003. Certain of these net
operating losses may be limited by the extent of foreign taxable income in
future years. Due to the uncertainty regarding the utilization of these net
operating loss carryforwards, management has provided valuation allowances equal
to the amount of the deferred income tax assets related to the net operating
loss carryforwards 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, 1998, such earnings were
approximately $15,500. If federal taxes and foreign dividend withholding taxes
had been provided on those earnings, net of the effect of utilization of foreign
tax credits, such taxes would have approximated $250 as of December 31, 1998.
NOTE 8: 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.
28
<PAGE>
TREASURY STOCK
During 1998, 1997 and 1996, the Company repurchased 721, 1,413 and 261
shares of common stock for a total of $14,306, $26,128 and $4,902, respectively.
In September 1998, the Board of Directors approved the repurchase of up to 500
shares of the Company's common stock. As of January 29, 1999, approximately 220
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 nonqualified 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, 1998, the Company had
approximately 525 shares remaining in the 1995 Stock Option Plan, which are
available to be granted to employees. At December 31, 1998, the Company had
reserved approximately 1,129 treasury shares to accommodate the exercise of the
outstanding options.
Stock option activity for 1998, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Shares Per Share
- ----------------------------------------------------------------------------------
<S> <C> <C>
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
Issued 83 18.32
Canceled (27) 15.83
Exercised (160) 9.15
- -------------------------------------------------------------
Options outstanding at December 31, 1998 1,129 14.15
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
Shares issued during 1998, 1997 and 1996, related to the exercise of
stock options were issued from treasury stock. Options for 908, 956 and 2,012
shares of common stock were exercisable on December 31, 1998, 1997 and 1996,
respectively, with weighted average exercise prices of $12.91, $11.36 and
$11.69, respectively. The weighted average fair value of options granted was
$10.30, $8.69 and $10.82 for 1998, 1997 and 1996, respectively.
29
<PAGE>
The following table summarizes information about options outstanding
and options exercisable at December 31, 1998.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------
Range of Weighted-Avg. Weighted-Avg. Weighted-Avg.
Option Prices Shares Remaining Exercise Price Shares Exercise Price
(Per Share) Outstanding Contractual Life Per Share Exercisable Per Share
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.79 16 2.0 years $ 1.79 16 $ 1.79
$4.03 to $8.83 384 5.3 years 7.22 384 7.22
$15.50 to $19.75 562 7.9 years 16.93 420 17.00
$20.00 to $26.44 167 8.4 years 21.89 88 20.24
- ----------------------------- ---
$1.79 to $26.44 1,129 7.0 years $14.15 908 $12.91
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</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, 1998, 1997 and 1996. 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:
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income As reported $23,278 $20,133 $16,848
Proforma 22,613 20,026 14,349
Basic Earnings Per Share As reported $ 1.27 $ 1.08 $ .90
Proforma 1.23 1.07 .76
Diluted Earnings Per Share As reported $ 1.25 $ 1.06 $ .86
Proforma 1.21 1.05 .73
- --------------------------------------------------------------------------------------------------
</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: risk-free interest rate of 6.5 percent with
expected lives of seven years in 1998, 1997 and 1996; expected dividend yield of
approximately 0.6, 0.5 and 1.0 percent in 1998, 1997 and 1996, respectively; and
expected volatility of 48.9, 32.0 and 47.5 percent in 1998, 1997 and 1996,
respectively. 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.
30
<PAGE>
NOTE 9: EMPLOYEE BENEFIT PLANS
DEFERRED COMPENSATION PLANS
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 four years. During 1998, 1997
and 1996, the Company contributed to the plan approximately $545, $530 and $451,
respectively.
During 1998, the Company established a funded nonqualified deferred
compensation plan for its officers, directors and certain key employees. Under
this plan, participants may defer up to 100 percent of their annual salary and
bonus. The amounts deferred remain the sole property of the Company, which uses
them to purchase certain investments as directed by the participants. The
program is not qualified under Section 401 of the Internal Revenue Code. At
December 31, 1998, the amounts payable under the plan are valued at the fair
market value of the assets owned by the Company.
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 $1,239, $687 and $2,822 for 1998, 1997 and 1996,
respectively. All domestic employees as well as key international employees
participate in the plan.
NOTE 10: RELATED PARTY TRANSACTIONS
During 1998, as part of the Company's marketing efforts, the Company
spent approximately $100 for the services of a certain outside advertising
agency. The president and CEO of the advertising agency is a relative of a key
officer and director of the Company.
During 1996, the Company purchased an office building and warehouse 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 former key employee of the Mexican subsidiary.
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, 1998, were as follows:
31
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Year ending December 31
- -----------------------------------------------------------------------
<S> <C>
1999 $2,067
2000 1,303
2001 700
2002 446
2003 131
Thereafter 436
- -----------------------------------------------------------------------
$5,083
- -----------------------------------------------------------------------
</TABLE>
The Company incurred expenses of approximately $2,865, $2,962 and
$2,512 in connection with operating leases during 1998, 1997 and 1996,
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: OPERATING SEGMENT AND INTERNATIONAL OPERATION 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. The segments have
similar business characteristics and each offers similar products through
similar methods of distribution as described in Note 1. The accounting policies
of the segments are the same as those described in the summary of significant
accounting policies in Note 1. Intersegment sales, eliminated in consolidation,
are not material.
32
<PAGE>
Operating segment information for the years ended December 31, 1998,
1997 and 1996 as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales Revenue:
Domestic $ 190,309 $ 177,647 $ 159,977
International:
Latin America 80,798 87,389 71,690
Asia Pacific 10,581 11,413 12,497
Other 14,364 4,453 4,882
- ----------------------------------------------------------------------------------------------
296,052 280,902 249,046
- ----------------------------------------------------------------------------------------------
Operating Expenses:
Domestic 160,946 152,474 141,295
International:
Latin America 72,508 81,106 63,499
Asia Pacific 13,172 12,557 12,921
Other 13,359 3,760 4,842
- ----------------------------------------------------------------------------------------------
259,985 249,897 222,557
- ----------------------------------------------------------------------------------------------
Operating Income:
Domestic 29,363 25,173 18,682
International:
Latin America 8,290 6,283 8,191
Asia Pacific (2,591) (1,144) (424)
Other 1,005 693 40
- ----------------------------------------------------------------------------------------------
36,067 31,005 26,489
- ----------------------------------------------------------------------------------------------
Unallocated Amounts
Other Income (Expense) 2,306 2,198 1,380
- ----------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes $ 38,373 $ 33,203 $ 27,869
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
As of December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------
Assets:
Domestic $ 62,971 $ 58,700 $ 58,674
International:
Latin America 32,154 31,818 28,764
Asia Pacific 6,236 4,685 3,767
Other 2,338 593 791
- ----------------------------------------------------------------------------------------------
Total Assets $ 103,699 $ 95,796 $ 91,996
- ----------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Expenditures:
Domestic $5,880 $6,328 $ 6,452
International:
Latin America 477 596 3,739
Asia Pacific 76 438 51
Other 40 91 302
- -----------------------------------------------------------------------------------
$6,473 $7,453 $10,544
- -----------------------------------------------------------------------------------
Depreciation and Amortization:
Domestic $3,439 $2,862 $ 2,388
International:
Latin America 1,169 1,191 860
Asia Pacific 138 132 96
Other 66 107 76
- -----------------------------------------------------------------------------------
$4,812 $4,292 $ 3,420
- -----------------------------------------------------------------------------------
</TABLE>
Revenues by classes of principal product lines for the years ended
December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales Revenue by Product Lines:
Herbal Products $198,355 $188,204 $161,880
Vitamins & Mineral Supplements 68,092 64,607 59,771
Personal Care Products 8,882 8,427 4,981
Homeopathic 2,961 2,809 4,981
Other 17,762 16,855 17,433
- -----------------------------------------------------------------------------------
$296,052 $280,902 $249,046
- -----------------------------------------------------------------------------------
</TABLE>
Revenues attributed to individual countries for the years ended
December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales Revenue:
United States $190,309 $177,647 $159,977
International:
Brazil 30,289 25,981 17,559
Other 75,454 77,274 71,510
- -----------------------------------------------------------------------------------
$296,052 $280,902 $249,046
- -----------------------------------------------------------------------------------
</TABLE>
International countries not shown individually comprise less than 10
percent of consolidated sales revenue.
34
<PAGE>
Long-lived assets attributed to individual countries consist primarily
of property, plant and equipment and are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
As of December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Long-Lived Assets:
United States $18,799 $16,291 $13,010
International:
Brazil 3,085 3,209 3,052
Other 4,012 4,211 4,135
- -----------------------------------------------------------------------------------
$25,896 $23,711 $20,197
- -----------------------------------------------------------------------------------
</TABLE>
International countries not shown individually comprise less than 10
percent of consolidated long-lived assets.
NOTE 13: SUBSEQUENT EVENT
Subsequent to December 31, 1998, Brazil experienced a significant
foreign currency devaluation. As of January 29, 1999, the Brazilian real
devalued relative to the U.S. dollar by approximately 72 percent. Any impact of
fluctuations of the Brazilian real relative to the U.S. dollar on the Company's
net monetary assets denominated in Brazilian real will be reflected on the
Company's consolidated balance sheet in the shareholders' equity section as a
component of accumulated other comprehensive income.
NOTE 14: SUMMARY OF QUARTERLY OPERATIONS -- UNAUDITED
<TABLE>
<CAPTION>
Income Basic Diluted
Selling, General Other Before Net Net
Sales Cost of Volume & Admin. Operating Income Income Net Income Income
1998 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 $ 75,283 $13,542 $ 35,199 $18,684 $ 7,858 $ 329 $ 8,187 $ 4,867 $0.26 $ 0.26
Second Qtr 77,201 13,646 35,474 18,858 9,223 700 9,923 6,105 0.33 0.32
Third Qtr 73,456 13,155 33,628 17,774 8,899 749 9,648 6,059 0.33 0.33
Fourth Qtr 70,112 11,848 32,189 15,988 10,087 528 10,615 6,247 0.34 0.34
- ------------------------------------------------------------------------------------------------------------------------------
$296,052 $52,191 $136,490 $71,304 $36,067 $2,306 $38,373 $23,278 $1.27 $1.25
- ------------------------------------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------------------------------------------
First Qtr $ 67,825 $12,060 $ 31,404 $17,951 $ 6,410 $ 361 $ 6,771 $ 4,010 $0.21 $0.21
Second Qtr 71,411 13,405 33,319 16,720 7,967 672 8,639 5,247 0.28 0.28
Third Qtr 71,589 12,756 33,424 17,272 8,137 683 8,820 5,406 0.29 0.29
Fourth Qtr 70,077 13,387 32,562 15,637 8,491 482 8,973 5,470 0.29 0.29
- ------------------------------------------------------------------------------------------------------------------------------
$280,902 $51,608 $130,709 $67,580 $31,005 $2,198 $33,203 $20,133 $1.08 $1.06
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
35
<PAGE>
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, 1998, 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, 1998, 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, 1998, 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, 1998, 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, 1998, 1997 and 1996.
Consolidated balance sheets as of December 31, 1998 and 1997.
Consolidated statements of shareholders' equity for the years
ended December 31, 1998, 1997 and 1996.
Consolidated statements of cash flows for the years ended
December 31, 1998, 1997 and 1996.
36
<PAGE>
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
10.2(3) - 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(4) 1995 Stock Option Plan
10.4(4) Form of Stock Option Agreement (1995 Stock
Option Plan)
10.5(5) - 1998 Employee Incentive Compensation Plan
10.6 Supplemental Elective Deferral Plan
10.7 Executive Loan Program
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.
[3] 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.
37
<PAGE>
[4] 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.
[5] Previously filed with the Commission as an exhibit to the Annual Report
on Form 10-K for the year ended December 31, 1997 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, 1998.
(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.
38
<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 16, 1999 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Daniel P. Howells President, Chief Executive Officer and Director March 16, 1999
- ----------------------
Daniel P. Howells
/s/ Craig D. Huff Vice President of Finance, Treasurer, March 16, 1999
- ---------------------- Chief Financial Officer, Chief Accounting Officer
Craig D. Huff
/s/ Douglas Faggioli Chief Operating Officer and Director March 16, 1999
- ----------------------
Douglas Faggioli
/s/ Kristine F. Hughes Chairman of the Board and Director March 16, 1999
- ----------------------
Kristine F. Hughes
/s/ Eugene L. Hughes Vice President and Director March 16, 1999
- ----------------------
Eugene L. Hughes
/s/ Merrill Gappmayer Director March 16, 1999
- ----------------------
Merrill Gappmayer
/s/ Pauline T. Hughes Director March 16, 1999
- ----------------------
Pauline T. Hughes
/s/ Robert H. Daines Director March 16, 1999
- ----------------------
Robert H. Daines
</TABLE>
39
<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 29, 1999. 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 29, 1999
40
<PAGE>
NATURE'S SUNSHINE PRODUCTS, INC.
SCHEDULE II-- VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Amounts Amounts End of
Description of Year Provisions Written Off Recovered Year
----------- ---------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Allowance for doubtful
accounts receivable $ 661 $ 229 $ (46) $ (25) $ 819
Allowance for obsolete
inventory 534 468 (375) --- 627
Allowance for notes
receivable 14 --- --- --- 14
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
</TABLE>
41
<PAGE>
LIST OF EXHIBITS
<TABLE>
<CAPTION>
LOCATED AT
SEQUENTIALLY
ITEM NO. EXHIBIT NUMBERED PAGE
-------- ------- -------------
<S> <C> <C>
3.1(1) - Restated Articles of Incorporation ---
3.2(2) - By-laws, as amended ---
10.2(3) - 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(4) 1995 Stock Option Plan ---
10.4(4) Form of Stock Option Agreement (1995 Stock Option Plan) ---
10.5(5) - 1998 Employee Incentive Compensation Plan ---
10.6 Executive Loan Program 43
10.7 Supplemental Elective Deferral Plan 44
21 - List of Subsidiaries of Registrant 52
23 - Consent of Independent Public Accountants 53
27 - Financial Data Schedule 54
</TABLE>
- ------------
[1] Previously filed with the Commission as an exhibit to the Annual Report
on Form 10-K for the year ended December 31, 1988 and is incorporated
herein by reference.
[2] Previously filed with the Commission as an exhibit to the Annual Report
on Form 10-K for the year ended December 31, 1985 and is incorporated
herein by reference.
[3] Previously filed with the Commission as an exhibit to the Annual Report
on Form 10-K for the year ended December 31, 1994 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, 1995 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, 1997 and is incorporated
herein by reference.
42
<PAGE>
EXHIBIT 10.6
EXECUTIVE LOAN PROGRAM
All loans are secured by Company stock and bear interest at 7.75%. The
amounts of all loans for officers shall be limited to $59,000. Loan proceeds
shall be used for the purchase of Nature's Sunshine Products' common stock.
Loans shall bear simple interest only. Principal and interest shall be callable
upon 90 days notice or automatically due 90 days after termination from the
Company.
43
EXHIBIT 10.7
SUPPLEMENTAL ELECTIVE DEFERRAL PLAN
This Supplemental Elective Deferral Plan of Nature's Sunshine Products,
Inc. is effective as of May 15, 1998 except as otherwise provided in this Plan.
ARTICLE I
NAME
1.1 NAME. The Plan shall be known as the "NATURE'S SUNSHINE PRODUCTS,
INC. SUPPLEMENTAL ELECTIVE DEFERRAL PLAN" and is hereinafter sometimes referred
to as the "Plan".
ARTICLE II
PURPOSE
2.1 PURPOSE. This Plan herein set forth has been created for the
primary purpose of providing certain selected employees and non-employee
directors of the Employer with the ability to defer the receipt of income,
including amounts that cannot be deferred under the Tax Deferred Retirement Plan
of the Employer due to limitations in the law. The Plan is intended to be an
unfunded plan maintained primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purposes of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and shall be administered as such.
ARTICLE III
DEFINITIONS
When used herein, the following words shall have the meanings
indicated, unless the context clearly indicates otherwise:
3.1 ACCOUNT. The words "ACCOUNT" means the Deferral Account described
in Section 5.1.
3.2 BENEFICIARY. The word "BENEFICIARY" shall mean the person or
persons entitled to receive benefits upon the death of a Member under this Plan.
3.3 CODE. The word "CODE" shall mean the Internal Revenue Code of 1986,
as amended.
3.4 COMMENCEMENT DATE. The words "Commencement Date" shall mean the
date selected by the Member on his/her initial election form from among the
following:
(a) The Termination Date; or
(b) First day of the year following the year containing the Termination
Date.
44
<PAGE>
If no election is properly made, the Commencement Date shall be the
Termination Date.
The Member may change the Commencement Date by submitting an election
form to the Plan Administrator specifying a Commencement Date, provided,
however, such election shall not be effective unless:
(i) the Plan Administrator, in its sole discretion, approves the
proposed Commencement Date; and
(ii) the election form is received by the Plan Administrator at least
one year before the proposed Commencement Date.
3.5 COMPENSATION. The word "COMPENSATION" with respect to employees
of the Employer has the following meaning:
(a) "Compensation" shall mean the total of all amounts paid by the
Employer by reason of services performed by the Member, including any bonus
pay, taking into account any of the following:
(1) Contributions or payments by the Employer for or on account
of the Member under any employee benefit plan, including but not
limited to any qualified pension plan and any health or welfare plan;
(2) Compensation that is not subject to employer income tax
withholding under Code Section 3402 (or any successor thereof);
(3) Income caused by the exercise of stock options;
(4) Income attributable to benefits received under any long term
disability plan maintained by the Company; and
(5) Automobile, moving or entertainment allowances;
reimbursements for medical, professional or transportation expenses;
excess group term life insurance coverage or other life insurance
coverage; tuition refunds; expense reimbursements and other fringe
benefits including such things as physical exams, Christmas gifts and
service awards.
(c) Notwithstanding the foregoing, a Member's Compensation shall
include contributions made on behalf of the Member under a salary reduction
agreement to any plan of the Employer qualifying under Code Sections 125,
401(k), or 408(k), and any amounts deferred at the election of the Member
pursuant to the terms of this Plan.
The word "COMPENSATION" with respect to members of the Board of Directors of the
Employer who are not employees of the Employer shall mean the total amount paid
for services as a member of the Board of Directors of the Employer.
45
<PAGE>
3.6 DEFERRAL ACCOUNT. The words "DEFERRAL ACCOUNT" means the account
maintained on the books of the Employer as described in Section 5.1.
3.7 DISABILITY. The word "Disability" shall mean any medically
determinable physical or mental impairment which is considered a permanent
disability under the terms of the Tax Deferred Retirement Plan.
3.8 EFFECTIVE DATE. The "EFFECTIVE DATE" of this Plan shall be May 15,
1998.
3.9 ELIGIBLE PERSON. The word "Eligible Person" means any member of the
Board of Directors of the Employer who is not an employee of the Employer, each
employee who is an officer of the Employer, and each employee who is in an
employment position that has the title of director. In addition, Eligible Person
includes any other employee who is a management or highly compensated employee
for purposes of ERISA designated as eligible by the Plan Administrator;
provided, however, such employee shall be an Eligible Person only so long as so
designated by the Plan Administrator which designation can be changed by the
Plan Administrator at anytime in its sole discretion.
3.10 EMPLOYER. The word "EMPLOYER" shall mean Nature's Sunshine
Products, Inc. or any successor thereof, if its successor shall adopt this Plan.
3.11 MEMBER. The word "MEMBER" means a person who has become a
participant in the Plan.
3.12 PLAN. The word "PLAN" shall mean the Supplemental Elective
Deferral Plan set forth in and by this document, as the same may be amended from
time to time.
3.13 PLAN ADMINISTRATOR. The words "Plan Administrator" shall mean the
person or committee designated by the Employer to administer this Plan. In the
absence of an effective designation, it shall mean the Employer.
3.14 PLAN YEAR. The words "PLAN YEAR" shall mean the calendar year,
with a short plan year from May 15, 1998 to December 31, 1998.
3.15 TAX DEFERRED RETIREMENT PLAN. The words "TAX DEFERRED
RETIREMENT PLAN" shall mean the Nature's Sunshine Products, Inc. Tax Deferred
Retirement Plan, and any successor to that Plan.
3.16 TERMINATION DATE. The words "TERMINATION DATE" means the date a
Member ceasing to render services to the Employer for any reason whatsoever,
voluntary or involuntary, including death or disability of the Member.
ARTICLE IV
ELIGIBILITY
4.1 PARTICIPATION. Each Eligible Person shall be eligible to
participate in this Plan as of the later of May 15, 1998 or the first day of the
month coincident with or immediately following
46
<PAGE>
the date he or she becomes an Eligible Person. A Member shall cease to be
eligible to make further elective deferrals under this Plan at such time as
the Member ceases to be an Eligible Person.
ARTICLE V
ACCOUNTS
5.1 ESTABLISHMENT AND DETERMINATION OF ELECTIVE ACCOUNT. The Employer
shall establish an Elective Deferral Account on its books for each Member. The
Deferral Account balance of a Member shall be credited with each of the
following:
(a) ELECTIVE DEFERRAL CONTRIBUTION. At the time each payroll is paid,
the Employer shall credit to the Deferral Account of the Member the amount
equal to the percentage or amount of the Compensation of the Member for the
payroll period set forth on the election form submitted by the Member prior
to the date the compensation was earned in accordance with the rules
adopted by the Plan Administrator . The normal compensation actually paid
to the Member for the payroll period by the Employer shall be reduced by
the amount credited to the Deferral Account under this Section 5.1(a).
(b) ADDITIONAL DEFERRALS. The Deferral Account of the Member shall be
credited with the amount that the Member has notified the Employer in
writing prior to the date the compensation is earned in accordance with
rules adopted by the Plan Administrator that he/she wishes to have
deferred. The amount set forth in writing by the Member to be deferred
shall be expressed as a percentage or amount of Compensation for the Plan
Year or as a percentage or amount of a contingent payment (such as a
year-end bonus). The Deferral Account of the Member shall be credited with
the deferred amount as of the date such amount otherwise would have been
paid to the Member. The compensation paid by the Employer to the Member for
the Plan Year shall be reduced by the amount deferred under this Section
5.1(b).
(c) EARNINGS. As of the end of each month, and as of the date the
benefit is payable under Article VI, the Employer shall credit as earnings
to the Deferral Account of a Member under rules established by the Plan
Administrator an amount equal to that which would have been earned on the
account since the last day of the preceding month if the account had earned
an investment return for the applicable period equal to the investment
return for the investments selected in advance by the Member from those
made available by the Plan Administrator, or to the extent no selection has
properly been made, by crediting the account with the rate of return for
the applicable period of the fixed income fund selected in its sole
discretion by the Plan Administrator. The Plan Administrator shall
prescribe such rules as it deems necessary or appropriate regarding the
crediting of earnings and the adjustments to be made in the way the
earnings are credited to the Deferral Accounts to reflect the timing of
investment elections made by the Member and the timing of amounts being
credited or debited to the Deferral Accounts.
The Deferral Account balance of a Member shall be debited with the amount paid
to or on behalf of the Member under this Plan.
47
<PAGE>
5.2 STATEMENT OF ACCOUNTS. The Plan Administrator shall provide to each
Member within one hundred twenty (120) days after the close of each Plan Year, a
statement in such form as the Plan Administrator selects setting forth the
balance, if any, in the Deferral Account of the Member as of the last day of the
Plan Year just ended.
5.3 ACCOUNTING DEVICE ONLY. The Deferral Account shall be utilized
solely as a device for the measurement and determination of the amounts to be
paid to the Member under this Plan. The Deferral Account shall not constitute or
be treated as a trust fund of any kind.
ARTICLE VI
PAYMENT OF ACCOUNTS
6.1 BENEFIT PAYMENT. A Member shall be entitled to a payment equal to
the amount credited to his/her Deferral Account as of the Commencement Date. The
payment shall commence to be paid within 60 days of the Commencement Date.
6.2 FORM OF PAYMENT. The amount due the Member shall be paid in one of
the following forms as selected by the Member in his/her initial election form:
(a) substantially equal annual installments over three years; or
(b) substantially equal annual installments over five years.
While the amount of the Deferral Account is being paid in installments,
the Deferral Accounts used to measure the amount due the Member shall continue
to be adjusted for earnings under rules prescribed by the Plan Administrator as
provided in Section 5.1(c). In the event no form of payment is properly elected,
the amount due the Member shall be paid in the form of annual installments over
a period of five years.
6.3 PAYMENT TO BENEFICIARY. In the event a Member dies before receiving
his/her full benefit under this Plan, the Employer shall pay any remaining
amount due on behalf of the Member hereunder to the Beneficiary of the Member.
Such payment shall be in the form of a single cash payment and shall be paid
within 60 days of the date of death. A Member may designate a Beneficiary on the
form prescribed by and delivered to the Plan Administrator. If no Beneficiary is
properly designated under this Plan, then the Beneficiary shall be the person
entitled under the terms of the Tax Deferred Retirement Plan to receive any
death benefits payable under the Tax Deferred Retirement Plan on account of the
death of that Plan Member. If there is no Beneficiary after application of the
foregoing provisions of this Section, then the payment shall be made to the
estate of the Member.
ARTICLE VII
CERTAIN OTHER BENEFITS TAKEN INTO ACCOUNT
For purposes of this Plan, the Employer shall take into account and
credit against its obligations hereunder with respect to any Member, the
actuarial value of any payments or benefits
48
<PAGE>
provided said Member that were intended to pay the benefits to be provided by
this Plan. For this purpose, any benefits payable under the qualified plans
of the Employer are not intended to pay the benefits to be provided by this
Plan.
ARTICLE VIII
CLAIMS AND REVIEW PROCEDURES
8.1 CLAIMS PROCEDURE. The Plan Administrator shall notify the Member or
beneficiary ("claimant") in writing, within ninety (90) days of his or her
written application for benefits, of his or her eligibility or noneligibility
for benefits under the Plan. If the Plan Administrator determines that a
claimant is not eligible for benefits or full benefits, the notice shall set
forth (1) the specific reasons for such denial, (2) a specific reference to the
provisions of the Plan on which the denial is based, (3) a description of any
additional information or material necessary for the claimant to perfect his or
her claim, and a description of why it is needed, and (4) an explanation of the
Plan's claims review procedure and other appropriate information as to the steps
to be taken if the claimant wishes to have the claim reviewed. If the Plan
Administrator determines that there are special circumstances requiring
additional time to make a decision, the Plan Administrator shall notify the
claimant of the special circumstances and the date by which a decision is
expected to be made, and may extend the time for up to an additional ninety-day
period.
8.2 REVIEW PROCEDURE. If a claimant is determined by the Plan
Administrator not to be eligible for benefits, or if the claimant believes that
he or she is entitled to greater or different benefits, the claimant shall have
the opportunity to have such claim reviewed by the Plan Administrator by filing
a petition for review with the Plan Administrator within sixty (60) days after
receipt of the notice issued by the Plan Administrator. Said petition shall
state the specific reasons which the claimant believes entitle him or her to
benefits or to greater or different benefits. Within sixty (60) days after
receipt by the Plan Administrator of the petition, the Plan Administrator shall
afford the claimant (and counsel, if any) an opportunity to present his or her
position to the Plan Administrator orally or in writing, and the claimant (or
counsel) shall have the right to review the pertinent documents. The Plan
Administrator shall notify the claimant of its decision in writing within the
sixty-day period, stating specifically the basis of its decision, written in a
manner calculated to be understood by the claimant and the specific provisions
of the Plan on which the decision is based. If, because of the need for a
hearing, the sixty-day period is not sufficient, the decision may be deferred
for up to another sixty-day period at the election of the Plan Administrator,
but notice of this deferral shall be given to the claimant. In the event of the
death of a claimant, the same procedures shall apply to the claimant's
beneficiaries.
ARTICLE IX
ADMINISTRATION OF THE PLAN
9.1 PLAN ADMINISTRATION. The Plan Administrator shall have the
authority to interpret the Plan and issue such administrative procedures as it
deems appropriate. The Plan Administrator shall have the duty and responsibility
of maintaining records, making the requisite calculations and disbursing the
payments hereunder. The Plan Administrator's interpretations,
49
<PAGE>
determinations, regulations and calculations shall be final and binding on
all persons and parties concerned.
9.2 AMENDMENT AND TERMINATION. The Employer may amend or terminate the
Plan at any time, provided, however, that no such amendment or termination shall
adversely affect a benefit to which a terminated or retired Member or the
Beneficiary of such Member is entitled under Article V prior to the date of such
amendment or termination unless the Member becomes entitled to an amount equal
to such benefit under another plan or practice adopted by the Employer. In the
event of termination of the Plan, the Employer may elect to immediately pay all
benefits due under the Plan to Members or may elect to have such benefits paid
at such time as such Members would have received the benefits if the Plan had
continued. The Plan Administrator may amend this Plan at anytime so long as the
amendment does not materially increase the cost of the Plan to the Employer.
9.3 PAYMENTS. The Employer will pay all benefits arising under this
Plan. There shall be deducted from each payment any federal, state or local
withholding or taxes or charges which may be required under applicable law as
determined by the Employer.
9.4 NON-ASSIGNABILITY OF BENEFITS. The benefits payable hereunder or
the right to receive future benefits under the Plan may not be anticipated,
alienated, pledged, encumbered, or subjected to any charge or legal process, and
if any attempt is made to do so, or a person eligible for any benefits becomes
bankrupt, the earnings under the Plan of the person affected may be terminated
by the Plan Administrator which, in its sole discretion, may cause the same to
be held or applied for the benefit of one or more of the dependents of such
person or make any other disposition of such benefits that it deems appropriate.
9.5 STATUS OF PLAN. Nothing contained herein shall be construed as
providing for assets to be held in trust or escrow or any other form of asset
segregation for the Member or for any other person or persons to whom benefits
are to be paid pursuant to the terms of this plan, the Member's only earnings
hereunder being the right to receive the benefits set forth herein. To the
extent any person acquires a right to receive benefits under this Plan, such
right shall be no greater than the right of any unsecured general creditor of
the Employer.
9.6 INDEMNIFICATION. To the extent permitted by law, the Employer
shall indemnify each member of the Board of Directors and any other employee of
the Employer to whom duties are assigned with respect to this Plan, against
expenses (including any amount paid in settlement) reasonably incurred by
him/her in connection with any claims against him/her by reason of his/her
conduct in the performance of his/her duties under the Plan, except in relation
to matters as to which he/she acted fraudulently or in bad faith in the
performance of such duties. This right of indemnification shall be in addition
to any other right to which the Board or other person may be entitled as a
matter of law or otherwise, and shall pass to the estate of a deceased person.
9.7 REPORTS AND RECORDS. The Plan Administrator and those to whom the
Plan Administrator has delegated duties under the Plan shall keep records of all
their proceedings and actions and shall maintain books of account, records, and
other data as shall be necessary for the proper administration of the Plan and
for compliance with applicable law.
50
<PAGE>
9.8 FINANCES. The costs of the Plan shall be borne by the Employer. The
rights of the Member (or of his Beneficiary) to benefits under the Plan shall be
solely those of an unsecured general creditor of the Employer. Any assets
acquired by or held by the Employer shall not be deemed to be held as security
for the performance of the obligations of the Employer under this Plan.
9.9 NONGUARANTEE OF EMPLOYMENT. Nothing contained in this Plan shall be
construed as a contract of employment between the Employer and any Member, or as
a right of any Member to be continued in employment of the Employer, or as a
limitation on the right of the Employer to discharge any of its employees, with
or without cause.
9.10 APPLICABLE LAW. All questions pertaining to the construction,
validity and effect of the Plan shall be determined in accordance with the laws
of the United States and to the extent not pre-empted by such laws, by the laws
of the State of Utah.
9.11 HEADINGS. The headings of Sections and Articles in this Plan are
for convenience purposes only and shall in no way control or be used in the
interpretation of the content of the Sections or Articles or this Plan as a
whole.
9.12 NUMBER AND GENDER. Where the context requires, the singular shall
include the plural and the plural shall include the singular, and any gender
shall include both other genders.
51
<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.
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation
---- -------------
<S> <C>
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
Comercializadora Nature's Sunshine Chile Ltda. Chile
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
- ----------------------
</TABLE>
Each subsidiary listed above is doing business under its corporate name.
52
<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 23, 1999
53
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 22,099
<SECURITIES> 0
<RECEIVABLES> 9,939
<ALLOWANCES> 819
<INVENTORY> 22,494
<CURRENT-ASSETS> 62,995
<PP&E> 25,896
<DEPRECIATION> 19,020
<TOTAL-ASSETS> 103,699
<CURRENT-LIABILITIES> 27,697
<BONDS> 0
0
0
<COMMON> 37,528
<OTHER-SE> 36,439
<TOTAL-LIABILITY-AND-EQUITY> 73,967
<SALES> 296,052
<TOTAL-REVENUES> 296,052
<CGS> 52,191
<TOTAL-COSTS> 259,985
<OTHER-EXPENSES> 2,306
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> 38,373
<INCOME-TAX> 15,095
<INCOME-CONTINUING> 23,278
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,278
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.25
</TABLE>
