SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

NATURE'S SUNSHINE PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)

(801) 342-4300
(Registrant's telephone number)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, without par value

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark 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. ý

        The aggregate market value of the voting stock held by non-affiliates of the registrant on March 13, 2002 was approximately $204,964,200.

        The number of shares of Common Stock, no par value, outstanding on March 13, 2002 was 16,267,000 shares.

Documents Incorporated by Reference:

        Proxy Statement for the May 24, 2002 Annual Meeting of Shareholders (Part III of this Report).

PART I

Item 1. Business

The Company

        Nature's Sunshine Products, Inc., incorporated in Utah in 1976, and its subsidiaries (hereinafter referred to collectively as the "Company") are primarily engaged in the manufacturing and marketing of nutritional and personal care products. The Company, founded in 1972, sells its products worldwide to a sales force of independent Distributors who use the products themselves or resell them to other Distributors or consumers.

        The Company's operations are conducted in the United States as well as in certain other countries. The Company's subsidiaries are located in South Korea, Mexico, Venezuela, Japan, Brazil, Canada, Central America, Colombia, Ecuador, Peru, the United Kingdom, Israel, Taiwan and Chile. The Company also exports its products to several other countries, including Argentina, Australia, Malaysia, New Zealand, Norway and the Russian Federation.

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 sales revenue, operating income and the last two years of identifiable assets by geographical business segment, is set forth in Note 13 of the Notes to Consolidated Financial Statements appearing in Item 8 of this Report.

Products and Manufacturing

        The Company's line of over 500 products includes herbal products, vitamins, mineral supplements and homeopathic products. The Company purchases herbs and other raw materials in bulk and, after quality control testing, formulates, encapsulates, tablets or concentrates and packages them for shipment. Most of the Company's products are manufactured at its facility in Spanish Fork, Utah. Contract manufacturers produce certain of the personal care and homeopathic products for the Company 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 the Company's specifications and standards. The Company's product lines are described below.

Herbal Products

        The Company manufactures a wide selection of herbal products, which are sold in the form of capsules or tablets. These capsules or tablets contain herb powder or a combination of two or more herb powders. The Company also 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 into liquid solvents that separate the key elements of the herbs from the fibrous plant material. Sales of the Company's herbal products accounted for approximately 67 percent of total sales revenue in 2001, 69 percent in 2000 and 65 percent in 1999.

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 and mineral supplements, including a line containing natural antioxidants. Generally, mineral supplements are sold in the form of tablets; however, certain minerals are offered only in liquid form. Combined sales of the Company's vitamins and mineral supplements were approximately 27 percent of total sales revenue in 2001, 23 percent in 2000 and 26 percent in 1999.

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 2 percent of the Company's total sales revenue in 2001 and 2000 and 3 percent in 1999.

Homeopathic Products

        The Company markets a line of more than 40 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 of total sales revenue in 2001, 2000 and 1999.

Distribution and Marketing

        The Company's independent Distributors market the Company's products to consumers through direct-selling techniques as well as sponsor other Distributors. The Company motivates and provides incentives to its independent Distributors through a combination of high quality products, product support, financial benefits, sales conventions, travel programs and a variety of training seminars.

        The Company's products that are sold domestically 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 from approximately 596,000 active Distributors at December 31, 2001, which include approximately 217,000 in the United States. A person who wishes to join the Company's independent sales force begins as a "Distributor". An individual can become a Distributor by applying to the Company under the sponsorship of someone who is already a Distributor. Each Distributor is required to renew his/her distributorship on a yearly basis; approximately 30 percent renew annually. Many Distributors sell the Company's products on a part-time basis to friends or associates or consume the 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 contingent upon attaining certain purchase volume levels, recruiting additional Distributors and demonstrating leadership abilities. Managers numbered approximately 18,000 at December 31, 2001, including approximately 6,000 in the United States. Managers resell the products they purchase from the Company to Distributors within their sales group, to consumers or use the products themselves. Once a Distributor is appointed to the status of Manager, approximately 70 percent continue to maintain that status.

        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 sales commissions and volume discounts (collectively, "Volume Incentives") to its Managers and Distributors based upon the amount of personal and sales group product purchases. Reference is made to Item 8 contained herein for Volume Incentives paid by the Company for the years ended December 31, 2001, 2000 and 1999. In addition, Managers who qualify by attaining certain levels of monthly product purchases are eligible for additional incentive programs including automobile allowances, sales conventions 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. The Company also owns numerous trademark registrations in the United States and in many other countries.

Seasonality

        The business of the Company does not reflect significant seasonality.

Working Capital

        The Company maintains a considerable inventory of raw materials and finished goods in order to provide a high level of product availability to its independent Distributors and Managers.

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. As a result, there is no significant backlog at any time.

Competition

        The Company's products are sold 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 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, Unicity and Amway. The principal competitors in the encapsulated and tableted herbal products market include TwinLab, Nature's Way, USANA, Nutraceuticals and NBTY. 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, travel and financial 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 enhancement of existing products. The amount, excluding capital expenditures, spent on research and development activities was approximately $1.9 million, $1.8 million and $1.7 million in 2001, 2000 and 1999, respectively. During the three years in the period ended December 31, 2001, the Company did not have any third-party-sponsored research.

Compliance with Environmental Laws and Regulations

        The nature of the Company's business has not required any material capital expenditures to comply with Federal, State or local provisions enacted or adopted regulating the discharge of materials into the environment. No material expenditures to meet such provisions are anticipated. Such regulatory provisions have not had any material effect upon the Company's earnings or competitive position.

Regulation

        The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of each of the Company's major product groups are subject to regulation by one or more governmental agencies. The most active of these 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 products. 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 should be implemented over a period of time upon final publication.

        The Company's products are also regulated 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, including its multi-level distribution activities, are also regulated by various agencies of the states, localities and foreign countries in which the Company's products are sold.

        In the future, the Company may be subject to additional laws or regulations administered by the FDA or other federal, state, local or foreign regulatory authorities, the repeal or amendment of laws or regulations which the Company considers favorable and/or more stringent interpretations of current laws or regulations. The Company can neither predict the nature of such future laws, regulations, interpretations or applications, nor what effect additional governmental regulations or administrative orders, when and if promulgated, would have on its business. 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 record-keeping requirements, expanded documentation of the properties of certain products, expanded or altered labeling and/or scientific substantiation. Any or all such requirements could have a material adverse effect on the Company's results of operations, liquidity and financial position.

Employees

        The number of individuals employed by the Company as of December 31, 2001, was 1,109. The Company believes that its relations with its employees are satisfactory.

International Operations

        The Company's sales of nutritional and personal care products are established internationally in South Korea, Mexico, Venezuela, Japan, Brazil, Canada, Central America, Colombia, Ecuador, Peru, the United Kingdom, Israel, Taiwan and Chile. The Company also exports its products to numerous other countries, including Argentina, Australia, Malaysia, New Zealand, Norway and the Russian Federation. Information for each of the last three years with respect to the amounts of sales revenue and operating income and the last two years of identifiable assets attributable to the United States and international segments is set forth in Note 13 of the Notes to Consolidated Financial Statements appearing in Item 8 of this Report.

        The Company's international operations are conducted in a manner comparable with those conducted in the United States; however, in order to conform to local variations, economic realities, market customs, consumer habits and regulatory environments, differences may 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 United States operations, including 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.

Item 2. Properties

        The Company's corporate offices are located in two adjacent office buildings in Provo, Utah. The facilities consist of approximately 63,000 square feet and are leased from an unaffiliated third party through lease agreements, which expire as early as six months but are renewable upon expiration.

        The Company's principal warehousing and manufacturing facilities are housed in a building of approximately 265,000 square feet owned by the Company and located on approximately ten acres in Spanish Fork, Utah. On March 2, 2000, the Company announced its plans to complete an expansion of the manufacturing portion of the warehouse and manufacturing facility completed in 1998. The cost of this project is expected to be approximately $14.0 million of which $13.0 million had been paid as of December 31, 2001. Construction began during the fourth quarter of 2000, and the expansion should be completed in the second quarter of 2002.

        The Company owns approximately 60,000 square feet of office and warehouse space in Mexico and approximately 10,800 square feet of office space in Venezuela.

        The Company leases properties used primarily as distribution warehouses located in Columbus, Ohio; Dallas, Texas and Atlanta, Georgia, as well as offices and distribution warehouses in South Korea, Mexico, Venezuela, Japan, Brazil, Canada, Colombia, Ecuador, El Salvador, Honduras, Guatemala, Costa Rica, Panama, Nicaragua, Peru, the United Kingdom, Israel, Taiwan and Chile. Management believes these facilities are suitable for their respective uses and are, in general, adequate for the Company's present needs. During 2001, 2000 and 1999, the Company spent approximately $3.9 million, $3.6 million and $3.1 million, respectively, for all of its leased facilities.

Item 3. Legal Proceedings

        The Company is a defendant in various lawsuits which are incidental to the Company's business. Management, after consultation with 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, liquidity 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 2001 and 2000.

        There were approximately 1,540 shareholders of record as of March 13, 2002. During 2001 and 2000, the Company paid quarterly cash dividends of 3¹/3 cents per common share. On February 14, 2002, the Company declared a cash dividend of 3¹/3 cents per common share to shareholders of record on February 28, 2002. On March 7, 2002, the Company paid approximately $.5 million related to this declared dividend. The Company expects to continue to pay equivalent cash dividends in the future.

Item 6. Selected Financial Data

(Dollar and Share Amounts in Thousands, Except for Per Share Information)

Income Statement Data

Balance Sheet Data

Common Share Summary

Other Information

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.

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, 2001, was $318.7 million compared to $314.8 million in 2000, an increase of approximately 1 percent. Sales revenue increased approximately 7 percent in 2000 compared to $294.8 million in 1999. The change in sales revenue is related to the increase in the number of independent Distributors and Managers and the growth of the Company's international operations.

        The Company distributes its products to consumers through an independent sales force comprised of Managers and Distributors. Active Managers totaled approximately 18,000, 16,100, and 14,500 at December 31, 2001, 2000 and 1999, respectively. Active Distributors totaled approximately 596,000, 589,000 and 530,000 at December 31, 2001, 2000 and 1999, respectively. The Company anticipates the number of active Distributors to increase as the Company expands its existing operations, enters new international markets and as current Distributors grow their businesses.

        Sales revenue related to the United States operations increased slightly in 2001 to $177.8 million compared to $177.2 million in 2000. Sales revenue decreased approximately 6 percent for 2000 compared to $188.8 million in 1999. The increase in sales revenue for the year ended December 31, 2001, is primarily the result of increased marketing incentives to attract new distributors. Price increases of 1 percent in the Company's domestic market went into effect in both 2001 and 2000, and resulted in greater sales revenue for these years. A price increase of approximately 1 percent, primarily associated with increased raw material costs, is scheduled to become effective on April 1, 2002. Management believes this price increase in its domestic market will be acceptable to its sales force and will result in increased sales revenue.

        International sales revenue increased to $140.9 million in 2001 compared to $137.6 million in 2000, an increase of approximately 2 percent. Sales revenue increased approximately 30 percent in 2000 compared to $106.0 million in 1999. Price increases are planned in various international markets to adjust for foreign currency devaluations and increases in the cost of finished products. Management believes the price increases will be acceptable to its sales force and will result in increased sales revenue. During 2001, the Company's operation in Brazil experienced a 57 percent decrease in sales revenue to $9.6 million compared to $22.1 million in 2000. The decrease in sales revenue was due to import regulations imposed by the Brazilian government. The Company expects these new regulations to continue to adversely impact sales revenue and operating results during 2002. Further information related to the United States and international segments is set forth in Note 13 of Notes to Consolidated Financial Statements appearing in Item 8 of this Report.

Costs and Expenses

        The Company's costs and expenses, which include cost of goods sold, volume incentives, and selling, general and administrative, are identified as a percent of sales in the table below:

Cost of Goods Sold

        Cost of goods sold as a percent of sales increased in 2001 as compared to 2000 and 1999, primarily as a result of the increase in international sales revenue where cost of goods sold was slightly higher than in the United States, as well as increased cost of goods sold in the Company's Brazilian operation.

        Management believes that cost of goods sold as a percent of sales will decrease slightly during 2002 as compared to 2001 due to the Company's ability to lower importation costs in its Brazilian operation.

Volume Incentives

        Volume incentives are a significant part of the Company's direct sales marketing program and represent payments made to its independent Distributors and Managers. These payments are designed to provide incentives for reaching higher sales levels and for recruiting additional Distributors. Volume incentives as a percent of sales decreased slightly during 2001 as compared to 2000 and 1999, primarily as a result of the increase in international sales revenue where volume incentives are slightly lower than in the Company's domestic operation.

        Management expects volume incentives as a percent of sales to decrease slightly during 2002 as compared to 2001 due to the growth of the Company's international operations.

Selling, General and Administrative

        Selling, general and administrative increased $3.3 million in 2001 compared to an increase of $9.0 million in 2000 and an increase of $7.4 million in 1999, primarily as the result of continued expansion in the Company's international operations as well as additional selling, general and administrative expenses associated with Synergy. During 2001, selling, general and administrative associated with Synergy totaled $4.4 million. Selling, general and administrative as a percent of sales increased to 30.3 percent in 2001 compared to 29.6 percent in 2000 and 28.6 percent in 1999. This category includes costs for research and development, distribution as well as incentive programs such as the Company's conventions.

        Management believes that selling, general and administrative as a percent of sales will decrease slightly during 2002 as compared to 2001 due to cost-control measures in the United States operations. In the Company's international operations planned selling, general and administrative reductions are anticipated in the Company's Synergy and Brazilian operations.

Income Taxes

        The effective income tax rate was 34.2 percent for 2001, compared to 38.6 percent reported in 2000 and 1999. Due to significant political and economic difficulties in Argentina, the Company dissolved its operations in that country and liquidated its assets. Through this process, the Company realized a tax deduction in the United States for the corresponding loss, arising from the write-off of its investment in Argentina. The Company anticipates its effective tax rate to return to its historical rates during 2002.

LIQUIDITY AND CAPITAL RESOURCES

        At December 31, 2001, the Company generated cash from operating activities of $25.8 million compared to $29.1 million in 2000. The decrease in cash generated from operating activities was primarily due to reduced net income in 2001 compared to 2000 as well as an increase in inventory and decreases in accrued expenses due to the timing of payments.

        Capital expenditures were $15.5 million and $5.0 million for the years ended December 31, 2001 and 2000, respectively. The increase in capital expenditures was primarily due to the construction of the manufacturing, research and development and quality assurance areas of its manufacturing facility expansion. Construction began during the fourth quarter of 2000 and should be completed in the second quarter of 2002. Capital expenditures related to this project were $11.7 million and $1.3 million for the years ended December 31, 2001 and 2000, respectively, bringing total capital expenditures relating to this project of $13.0 million. The total cost of the project is expected to be approximately $14.0 million. Residual capital expenditures not related to this expansion were primarily for equipment, computer systems and software, office furniture and leasehold improvements made to enhance existing operations as well as the expansion of international markets.

        During 2001, the Company entered into an exclusive, marketing agreement with HealtheTech, Inc., to make available personal health monitoring devices and personalized, diet and nutrition software to its distributors. As part of this agreement, the Company purchased approximately $2.0 million worth of HealtheTech, Inc. common stock at fair market value.

        During 2001, the Company's wholly owned subsidiary, Innovative Botanical Solutions, Inc., entered into an exclusive agreement with Cetalon Corporation to manufacture a proprietary line of Cetalon-branded herbs and vitamins. Additionally, Innovative Botanical Solutions purchased approximately $2.0 million in Cetalon common stock. A loan of $1.0 million was also provided to Cetalon Corporation, and an option obtained for Innovative Botanical Solutions to purchase additional shares of Cetalon common stock.

        The majority of the Company's unrealized losses are due to the investments made in Cetalon Corporation, which are carried at fair market value and classified as available for sale. Cetalon's stock price has continued to decline since the Company made it's initial investment, however, Cetalon has taken steps to secure additional funding and has restructured its management team. The Company is monitoring this investment on an ongoing basis.

        For the year ended December 31, 2000, the Company used cash of approximately $4.8 million to purchase certain assets of Synergy Worldwide, Inc. ("Synergy"). Additional information related to the purchase of certain assets of Synergy is set forth in Note 2 of the Notes to Consolidated Financial Statements appearing in Item 8 of this Report.

        In October 1999, the Board of Directors authorized the repurchase of 1,000,000 shares of the Company's common stock. The repurchase of these shares was completed in January 2001, and in February 2001, the Board of Directors authorized the repurchase of an additional 1,000,000 shares of the Company's common stock. As of December 31, 2001, $1.6 million was spent to purchase approximately 142,000 shares under this plan. As of March 8, 2002, approximately 719,000 shares were available to be repurchased under this authorization. Under these two board-approved authorizations of 1,000,000 shares each, the Company spent approximately $2.7 million and $5.5 million in cash to repurchase common stock for the years ended December 31, 2001 and 2000, respectively.

        The Company has certain commitments related to operating leases as set forth in Note 12 of the Notes to Consolidated Financial Statements appearing in Item 8 of this Report.

        Management believes that working capital requirements can be met through the Company's available cash and cash equivalents and cash generated from operating activities 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 operating activities, it might 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 become necessary.

Key Accounting Policies

        The Company's accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements appearing in Item 8 of this Report. As disclosed in Note 1 of Notes to Consolidated Financial Statements, the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

        The most significant accounting estimates inherent in the preparation of the Company's financial statements include estimates associated with its evaluation of impairment of long-lived assets as well as those used in the determination of liabilities related to convention costs, other travel incentives and taxation. In addition, significant estimates form the basis for the Company's reserves with respect to the collection of accounts receivable, inventory valuations and certain benefits provided to current employees. Various assumptions and other factors prompt the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience and current and expected economic conditions. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above.

Forward-Looking Information

        Statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations and other items in 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 "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 that set forth in, contemplated by or underlying the forward-looking statements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

        The Company conducts its business in several countries and intends to continue to expand its foreign operations. Sales revenue, operating income and net income are affected by fluctuations in currency exchange rates, interest rates and other uncertainties inherent in doing business and selling product in more than one currency. In addition, the Company's operations are exposed to risks associated with changes in social, political and economic conditions inherent in foreign operations, including changes in the laws and policies that govern foreign investment in countries where it has operations as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.

Foreign Currency Risk

        During the year ended December 31, 2001, approximately 44 percent of the Company's revenue and approximately 46 percent of the Company's expenses were realized outside of the United States. Inventory purchases are transacted primarily in U.S. dollars from vendors located in the United States. The local currency of each international subsidiary is considered the functional currency, and all revenue and expenses are translated at average exchange rates for the periods reported. Therefore, the Company's reported sales and expenses will be positively impacted by a weakening of the U.S. dollar and will be negatively impacted by a strengthening of the U.S. dollar. Given the uncertainty of exchange rate fluctuations, the Company cannot estimate the effect of these fluctuations on the Company's future business, product pricing, results of operations or financial condition. Changes in currency exchange rates affect the relative prices at which the Company sells its products. The Company regularly monitors its foreign currency risks and periodically takes measures to reduce the impact of foreign exchange rate fluctuations on the Company's operating results. The Company does not use derivative instruments for hedging, trading or speculating on foreign exchange rate fluctuations.

        The following table sets forth average currency exchange rates of one U.S. dollar into local currency for each of the countries in which sales revenue exceeded $10.0 million during any of the years presented.

        Subsequent to December 31, 2001, Venezuela experienced a significant devaluation in the Bolivar, which could adversely effect the result of operations in future periods.

Interest Rate Risk

        The primary objectives of the Company's investment activities are to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by purchasing investment grade securities; substantially all of which either mature within the next twelve months or have characteristics of marketable securities. At December 31, 2001, the Company had investments of $17.1 million of which $6.9 million were held as municipal obligations, carry an average fixed interest rate of 5.25 percent and mature between one and five years. A hypothetical 1 percent change in interest rates would not have had a material effect on the Company's liquidity, financial condition or results of operations.

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, 2001 and 2000, 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, 2001. 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 did not audit the financial statements of Nature's Sunshine Korea, Ltd. and Nature's Sunshine Products N.S.P. de Venezuela, C.A., wholly owned subsidiaries, as of December 31, 2001 and 2000 and for the years then ended. Additionally, we did not audit the financial statements of Nature's Sunshine, Japan Co., Ltd., a wholly owned subsidiary, as of December 31, 2000 and for the year then ended. Those statements collectively reflect 14 percent of total consolidated assets and 15 percent of total consolidated revenues in 2001, and 17 percent of both total consolidated assets and total consolidated revenues in 2000. The statements of Nature's Sunshine Korea, Ltd. and Nature's Sunshine Products N.S.P. de Venezuela, C.A. for 2001 and 2000, and Nature's Sunshine, Japan Co., Ltd. for 2000 were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to amounts included for those entities, is based solely on the reports of the other auditors.

We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 and the reports of other auditors described above provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors, the 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Salt Lake City, Utah
February 7, 2002

NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Amounts In Thousands, Except Per Share Information)

The accompanying notes are an integral part of these consolidated financial statements.

NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts In Thousands)

The accompanying notes are an integral part of these consolidated financial statements.

NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Amounts In Thousands)

The accompanying notes are an integral part of these consolidated financial statements.

NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts In Thousands)

Increase (Decrease) in Cash and Cash Equivalents

The accompanying notes are an integral part of these consolidated financial statements.

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 products, vitamin and mineral supplements, personal care and homeopathic products. The Company sells its products to a sales force of independent Distributors and Managers 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 in the United States, South Korea, Brazil, Mexico, Venezuela, Japan, Canada, Central America, Colombia, Peru, the United Kingdom, Ecuador, Chile and Israel. The Company also exports its products to several other countries, including Argentina, Australia, Malaysia, New Zealand, Norway and the Russian Federation.

Principles of Consolidation

        The accompanying consolidated financial statements include the accounts and transactions of Nature's Sunshine Products, Inc. and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

        Prior to 1999, the Company's subsidiary in Japan was majority-owned. During 1999, the Company forgave receivables due from minority shareholders totaling $1,131 in exchange for their minority interest. At December 31, 2001 and 2000, all of the Company's subsidiaries were wholly owned.

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in these financial statements and accompanying notes. Actual results could differ from these estimates.

Cash and Cash Equivalents

        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.

Investments

        A substantial portion of the Company's investments are categorized as available-for-sale securities and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income (loss) in shareholders' equity. The cost of the securities sold is based on the specific identification method. Realized gains and losses on sales of available-for-sale securities are included in interest and other income.

        The Company has certain investments classified as trading securities. The Company maintains its trading securities portfolio to generate returns that offset changes in certain liabilities related to the Company's deferred compensation arrangements (see Note 10). The trading securities portfolio consists of marketable securities, which are recorded at fair value. Both realized and unrealized gains and losses on trading securities are included in interest and other income.

Fair Value of Financial Instruments

        The Company's financial instruments consist primarily of cash, cash equivalents, trade and notes receivable, long-term investments, trade payables and debt instruments. The carrying values of these financial instruments approximate their fair values. 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, 2001, 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 lease or the estimated useful life of the asset. Maintenance and repairs are expensed 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.

Intangible Assets

        Intangible assets include trademarks, customer lists and goodwill associated with the acquisition of Synergy Worldwide, Inc. ("Synergy") (see Note 2) and the acquisition of the minority interest of the Company's subsidiary in Japan. Goodwill is being amortized using the straight-line method over periods from five to ten years. Other intangibles are amortized using the straight-line method over their estimated useful lives ranging from three to five years. Amortization expense associated with intangible assets was $1,384, $1,036 and $499 in 2001, 2000 and 1999, respectively. Intangible assets, net of accumulated amortization, totaled $4,644 and $5,297 at December 31, 2001 and 2000, respectively. Accumulated amortization totaled $2,724 and $1,655 at December 31, 2001 and 2000, respectively.

Impairment of Long-Lived Assets

        The Company reviews its long-lived assets, including intangibles, for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable. The Company uses an estimate of future undiscounted net cash flows of the related asset or group of assets over the remaining life in measuring whether the assets are recoverable. At December 31, 2001, the Company did not consider any of its long-lived assets impaired. See "Recent Accounting Pronouncements".

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 loss.

        Countries considered having highly inflationary economies were Venezuela during 2001, and Venezuela and Ecuador during 2000 and 1999. Venezuela ceased to be considered highly inflationary at the end of the third quarter 2001. The functional currency in these highly inflationary economies is the U.S. dollar and transactions denominated in the local currency are re-measured as if the functional currency were the U.S. dollar. The re-measurement of local currencies into U.S. dollars creates translation adjustments which are included in the consolidated statements of income and comprehensive income.

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 Distributors and Managers. 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. Sales revenue and related volume incentives are recorded when the merchandise is shipped. Amounts received for unshipped merchandise are recorded as customer deposits and are included in accrued liabilities. Payments of volume incentives related to product orders are made in the month following the sale.

        The Company accounts for shipping and handling fees in accordance with Emerging Issues Task Force ("EITF") No. 00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10"). Under EITF 00-10 guidelines, amounts billed to a customer for shipping and handling should be classified as revenue. Shipping and handling revenue of approximately $7,446, $5,571 and $5,590, was classified as sales revenue for the years ended December 31, 2001, 2000 and 1999, respectively. The corresponding shipping and handling expenses are classified in selling, general and administrative expenses and were approximately equivalent to the amounts classified as sales revenue.

Selling Expenses

        Independent Distributors and Managers may earn Company-paid attendance at conventions as well as other travel awards by achieving the required levels of product purchases within a specified qualification period. Convention costs and other travel expenses are accrued over the qualification period as they are earned. Accordingly, the Company has accrued convention costs of approximately $4,531 and $3,724 at December 31, 2001 and 2000, respectively.

Advertising Costs

        Advertising costs are expensed as incurred and totaled $0, $0 and $1,441 in 2001, 2000 and 1999, respectively.

Research and Development

        All research and development costs are expensed as incurred and classified in selling, general and administrative expense. Total research and development costs were approximately $1,912, $1,830 and $1,657 in 2001, 2000 and 1999, respectively,

Income Taxes

        The Company recognizes a liability or asset for the deferred income 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 income 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 share.

        Following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for all years:

        At December 31, 2001, 2000 and 1999, there were outstanding options to purchase 494, 1,103 and 557 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 years' consolidated financial statements to conform to the current year presentation.

Recent Accounting Pronouncements

        In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 141, "Business Combinations" ("SFAS 141"), which requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. As a result, use of the pooling-of-interests method is prohibited for business combinations initiated thereafter. SFAS 141 also establishes criteria for the separate recognition of intangible assets acquired in a business combination. The adoption of SFAS 141 is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows.

        In July 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which requires that goodwill and certain other intangible assets having indefinite lives no longer be amortized to earnings, but instead be subject to periodic testing for impairment. Intangible assets determined to have definite lives will continue to be amortized over their useful lives. However, goodwill and intangible assets acquired after June 30, 2001, are subject immediately to the non-amortization and amortization provisions of this Statement. This Statement is effective for the Company's 2002 fiscal year. Recorded goodwill and intangibles will be evaluated against this new criteria and may result in amounts initially recorded as goodwill being separately identified and recognized apart from goodwill. The adoption of SFAS 142 is not expected to have a material impact on the Company's consolidated results of operations, liquidity, financial position or cash flows.

        In August 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which provides the accounting requirements for retirement obligations associated with tangible long-lived assets. This Statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. This Statement is effective for the Company's 2002 fiscal year. The adoption of SFAS 143 is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows.

        In October 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which excludes from the definition of long-lived assets goodwill and other intangibles that are not amortized in accordance with SFAS 142. SFAS 144 requires that long-lived assets to be disposed of by sale be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS 144 also expands the reporting of discontinued operations to include components of an entity that have been or will be disposed of rather than limiting such discontinuance to a segment of a business. This Statement is effective for the Company's 2002 fiscal year. The adoption of SFAS 144 is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows.

NOTE 2: ACQUISITIONS AND DISPOSITIONS

        On December 31, 2001, the Company sold the assets of Nature's Sunshine Products S.A., a wholly owned subsidiary of Nature's Sunshine Products, Inc. with operations in Argentina, for $120. The $120 consideration for the assets purchased under the terms of the agreement will be paid over a five-year period in equal monthly installments at a market interest rate. The assets sold are collateral for the note receivable.

        On October 31, 2000, the Company acquired certain assets of Synergy, a direct marketing company involved in the distribution and sale of high quality nutritional, personal care and other products with an emphasis on the Asian markets. The total consideration paid in connection with this transaction was approximately $4,824 in cash. The acquisition was accounted for as a purchase. The excess of the purchase price over the fair value of the net identifiable assets acquired was approximately $3,128. This amount was recorded as goodwill and is being amortized using the straight-line method over a period of 10 years. See "Recent Accounting Pronouncements" in Note 1.

NOTE 3: INVENTORIES

        The composition of inventories is as follows:

NOTE 4: PROPERTY, PLANT AND EQUIPMENT

        The composition of property, plant and equipment is as follows:

NOTE 5: INVESTMENTS

        The amortized cost and estimated market values of available-for-sale securities by balance sheet classification are as follows:

        Contractual maturities of long-term debt securities at market value at December 31, 2001, are as follows:

        During 2001, 2000 and 1999, the proceeds from the sales of available-for-sale securities were $1,721, $1,786 and $1,689, respectively. The gross realized gains on sales of available-for-sale securities were $99, $159 and $165 for each of the years ended December 31, 2001, 2000 and 1999, respectively. The gross realized losses on the sales of available-for-sale securities were $106, $48 and $29 for the years ended December 31, 2001, 2000 and 1999, respectively.

        The Company's trading securities portfolio totaled $1,625 and $1,342 at December 31, 2001 and 2000, respectively, including losses of $143 and gains of $43, respectively.

NOTE 6: LINE OF CREDIT

        During 2001 and 2000, the Company had an operating line of credit in Japan with an interest rate of 2 percent payable in local currency to facilitate payment of operating expenses. The line of credit was unsecured, matured during 2001 and was not renewed. The outstanding borrowings under the line of credit at December 31, 2001 and 2000, were $0 and $385, respectively. The weighted average amounts outstanding under this line of credit were $148 and $662 for 2001 and 2000, respectively.

NOTE 7: ACCUMULATED OTHER COMPREHENSIVE LOSS

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

NOTE 8: INCOME TAXES

        The domestic and foreign components of income before provision for income taxes are as follows:

        The provision (benefit) for income taxes consists of the following:

        The income tax benefit associated with the nonqualified stock option plan decreased the income tax payable by $226, $36 and $0 in 2001, 2000 and 1999, 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: