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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, 1995
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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) 342-4407
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
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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
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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 22, 1996 was approximately $335,233,000.
The number of shares of Common Stock, without par value, outstanding on
March 22, 1996 was 18,501,942 shares.
Documents Incorporated by Reference:
Proxy Statement for May 20, 1996 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, Mexico,
Venezuela, Colombia, Japan, Brazil, Canada, the United Kingdom, Costa Rica,
Malaysia, Panama, Peru, El Salvador and Guatemala. The Company also exports its
products to numerous other countries, including Australia, New Zealand and
Norway.
FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company is principally engaged in one line of business, namely, the
sale of nutritional and personal care products. Information, for each of the
Company's last three fiscal years, with respect to the amounts of revenue from
sales to unaffiliated customers, operating profit and identifiable assets of
this segment is set forth under Item 6 of this Report and such information is
incorporated by this reference and made a part hereof.
NARRATIVE DESCRIPTION OF BUSINESS
Since 1972, the principal business of the Company and its predecessors
has been the manufacture and sale of nutritional and personal care products.
The Company's nutritional products include herbs, vitamins, beverages, mineral
and food supplements and homeopathic remedies. Personal care products include
natural skin, hair and beauty care products. Additional information with
respect to the Company's business is set forth below:
PRODUCTS AND MANUFACTURING
The Company is engaged in the manufacture and distribution of
nutritional and personal care products which are primarily sold to independent
distributors who resell the Company's products directly to consumers, other
distributors, or use the products themselves. The Company purchases herbs and
other raw materials in bulk, and after quality control testing, encapsulates,
tabulates or concentrates them and then packages them for shipment. Most of the
Company's products are manufactured at its facilities in Spanish Fork, Utah.
Certain of the Company's personal care products are manufactured for the
Company, in accordance with its specifications and standards, by contract
manufacturers. The Company has implemented stringent quality control procedures
to verify that the contract manufacturers have complied with its specifications
and standards.
2
DISTRIBUTION AND MARKETING
The Company attracts independent distributors who explain and market the
Company's products through direct selling techniques to consumers and sponsor
other distributors. The Company maintains a high level of motivation, morale
and enthusiasm among its independent distributors through a combination of high
quality competitively-priced products, product support, financial incentives,
sales conventions, automobile allowances, health insurance, travel programs and
a variety of training programs, publications and promotional materials.
The Company's domestic product sales are shipped directly from its
manufacturing facilities located in Spanish Fork, Utah, as well as from its
regional warehouses located in Columbus, Ohio; Dallas, Texas and Atlanta,
Georgia. Each subsidiary operation maintains an inventory to supply its
customers.
Demand for the Company's products is created by approximately 373,000
active members (at December 31, 1995) of the Company's independent distributor
sales force. A person who wishes to join the Company's independent sales force
begins as a "Distributor". One can become a Distributor only by applying to the
Company under the sponsorship of someone who is already a member of the
independent sales force. A Distributor interested in earning additional income
by committing more time and effort to selling the Company's products may be
appointed to "Manager" status. Appointment as a Manager is dependent upon
attaining certain purchase volume levels and demonstrating leadership abilities.
Managers numbered approximately 11,500 at December 31, 1995. Managers resell
the products they purchase from the Company to the Distributors in their sales
group, to consumers or use the products themselves. Many Distributors sell on a
part-time basis to friends or associates or consume the Company's products
themselves.
Domestically, the Company generally sells its products on a cash or
credit card basis. For certain of the Company's international operations, the
Company uses independent distribution centers and offers credit terms consistent
with industry standards.
The Company pays its Managers sales commissions ("overrides") and volume
discounts based upon the amount of personal product purchases as well as their
sales group volume. Reference is made to Item 8 contained herein for the total
commissions and discounts ("Volume Incentives") paid by the Company for the
years ended December 31, 1993 through 1995. In addition, Managers who qualify
by attaining certain levels of monthly product purchases are eligible for
additional incentive programs including automobile allowances, medical and
dental insurance and travel.
SOURCE AND AVAILABILITY OF RAW MATERIALS
Raw materials used in the manufacture of the Company's products are
available from a number of suppliers, and the Company has not experienced any
major difficulty in obtaining adequate sources of supply. The Company attempts
to assure the availability of many of its raw materials by contracting, in
advance, for its annual requirements. In the past, the Company has found
alternative sources of raw materials when needed, and therefore, believes it
will be able to do so in the future.
3
TRADEMARKS AND TRADE NAMES
The Company has obtained trademark registrations of its basic
trademarks, "Nature's Sunshine", and the landscape logo for all of its product
lines, as well as the trademark "Nature's Spring" for its water purifier. The
Company also owns numerous trademark registrations in the United States and in
many foreign countries.
SEASONALITY
The business of the Company does not reflect significant seasonality.
WORKING CAPITAL ITEMS
The Company maintains a substantial inventory of raw materials and
finished goods in order to provide a high level of service to its independent
distributors.
DEPENDENCE UPON CUSTOMERS
The Company is not dependent upon a single customer or a few customers,
the loss of which would have a material adverse effect on its business.
BACKLOG
Orders for the Company's products are typically shipped within 24 hours
after receipt; and as a result, there is no significant amount of backlog at any
given time.
GOVERNMENT CONTRACTS
The Company is not a party to any contracts with the government which
may be subject to renegotiation or termination.
COMPETITION
The Company's products are sold in domestic and foreign markets in
competition with other companies, some of which have greater sales volumes and
financial resources than the Company, and which sell brands that are, through
advertising and promotions, better known to consumers. The Company competes
in the nutritional and personal care industry against companies which sell
heavily advertised and promoted products through retail stores as well as
against other direct selling companies. For example, the Company competes
against numerous manufacturers and retailers of nutritional and personal care
products which are distributed through supermarkets, department stores, drug
stores, health food stores, beauty salons, etc. In addition to its competition
with these manufacturers and retailers, the Company competes for product sales
and independent distributors with many other direct sales companies, including
Shaklee, NuSkin and Amway.
The Company is one of the world's largest distributors of encapsulated
and tableted herbal products. The principal competitors in the encapsulated and
tableted herbal market include Nature's Herbs (Utah), Nature's Way (Utah) and
Sunrider (California).
4
The Company believes that the principal methods of competition in the
direct sales marketing of nutritional and personal care products are quality,
price and brand name. In addition, the recruitment, training, financial and
travel incentives for the independent sales force are important factors.
RESEARCH AND DEVELOPMENT
The Company conducts its research and development activities at its
manufacturing facilities located in Spanish Fork, Utah. Principal emphasis of
the Company's research and development activities is the development of new
products and improvement of existing products for domestic and foreign markets.
The amount excluding capital expenditures spent during each of the last three
years on Company-sponsored research and development activities was approximately
$1,100,000, $800,000 and $600,000 in 1995, 1994, and 1993, respectively. The
Company has no third-party-sponsored research.
COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS
The nature of the Company's business has not required any material
capital expenditures to comply with Federal, state or local provisions enacted
or adopted regulating the discharge of materials into the environment. No
material expenditures to meet such provisions are anticipated. Such regulatory
provisions have not had any material effect upon the Company's earnings or
competitive position.
REGULATION
One or more of the following agencies regulates the formulation,
labeling and advertising of each of the Company's major product groups: the
Federal Food and Drug Administration ("FDA"), the Federal Trade Commission
("FTC"), the Consumer Product Safety Commission ("CPSC") and various agencies of
the countries and states into which the Company's products are shipped or sold.
In addition, the Company's distribution and sales program is, like that of other
companies operating in interstate commerce, subject to the jurisdiction of the
FTC and a number of other Federal and state agencies. Various state agencies
regulate multi-level distribution activities.
As a result of the Company's efforts to comply with applicable statutes
and regulations, the Company has from time to time reformulated, relabeled or
eliminated certain of its products and revised certain provisions of its sales
and marketing program. The Company believes it is in material compliance with
the applicable Federal and state rules and regulations pertaining to its
products and marketing program.
EMPLOYEES
The approximate number of people employed by the Company as of
December 31, 1995, was 860. The Company believes that its relations with its
employees are satisfactory.
5
INTERNATIONAL OPERATIONS
The Company's direct sales of nutritional and personal care products are
established internationally in Mexico, Venezuela, Colombia, Japan, Brazil,
Canada, the United Kingdom, Costa Rica, Malaysia, Panama, Peru, El Salvador and
Guatemala. The Company also exports its products to numerous other countries,
including Australia, New Zealand and Norway. Information, for each of the
Company's last three years, with respect to the amounts of revenue, operating
income, and identifiable assets attributable to domestic and international
operations, is set forth in Note 9 of the Notes to Consolidated Financial
Statements appearing in Item 8 of this Report, and such information is
incorporated herein by reference and made a part hereof.
The Company's international operations are conducted in a manner
substantially the same as those conducted domestically; however, in order to
conform to local variations, economic realities, market customs, consumer habits
and regulatory environments, differences exist in the products and in the
distribution and marketing programs.
The Company's international operations are subject to many of the same
risks faced by the Company's domestic operations. These include competition and
the strength of the local economy. In addition, international operations are
subject to certain risks inherent in carrying on business abroad, including
foreign regulatory restrictions, fluctuations in monetary exchange rates,
import-export controls and the economic and political policies of foreign
governments. The importance of these risks increases as the Company's
international operations grow and expand. The Company's operations in Mexico,
Colombia and Venezuela have been affected by currency devaluations.
ITEM 2. PROPERTIES
The Company's corporate offices are located in two adjacent office
buildings in Provo, Utah. The facilities are leased from an unaffiliated third
party and consist of approximately 50,000 square feet of which approximately
10,000 square feet are subleased to an unaffiliated third party. The lease
agreement for the main building, comprising approximately 32,000 square feet, is
for a 5 1/2 year term (of which 1 1/2 years remain) and grants the Company an
option to purchase the premises. The lease for the second building,
approximately 18,000 square feet, expires in five years.
The Company's principal manufacturing facilities are housed in a
building owned by the Company, of approximately 136,000 square feet, located on
approximately ten acres in Spanish Fork, Utah. The building was constructed to
the Company's specifications in 1977. The building has been expanded on several
occasions and presently includes approximately 34,000 square feet of office
space and 102,000 square feet of manufacturing and warehouse space. The
building is suited to the Company's business, and is presently being utilized at
approximately 95 percent of its productive capacity. The Company is in
the process of evaluating the expansion of its manufacturing facilities.
The preliminary cost estimate for this expansion is approximately $12,000,000.
The Company also leases a 65,000 square foot building in Spanish Fork to
supplement the warehousing of finished goods inventory.
During 1995, the Company purchased one floor of an office building in
Venezuela for approximately $2.1 million. This office space, approximately
10,000 square feet, was purchased to provide an adequate facility for the
administrative functions.
6
In addition to its facilities in Spanish Fork and Provo, the Company
leases other properties used primarily as distribution warehouses which are
located in Columbus, Ohio; Dallas, Texas; Atlanta, Georgia; as well as Mexico,
Venezuela, Colombia, Japan, Brazil, Canada, the United Kingdom, Costa Rica,
Malaysia, Panama, Peru, El Salvador and Guatemala. Management believes these
facilities are suitable for their respective uses and are, in general, adequate
for the Company's present needs.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are presently pending to which the Company
or any of its property is subject, other than ordinary routine litigation
incidental to the Company's business or litigation involving claims for damages
not exceeding 10 percent of the Company's current assets.
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 1995 and 1994 and has been
restated to reflect the three-for-two stock split declared in February 1996.
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Market Prices Market Prices
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1995 HIGH LOW 1994 HIGH LOW
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First Quarter 9 1/3 6 1/2 First Quarter 10 11/12 6 2/3
Second Quarter 10 1/2 6 2/3 Second Quarter 9 7/10 7 7/10
Third Quarter 18 10 1/6 Third Quarter 9 6/11 7 7/12
Fourth Quarter 18 2/3 14 Fourth Quarter 9 1/3 7 5/12
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There were approximately 860 shareholders of record as of March 15, 1996.
The Company has paid 30 consecutive quarterly cash dividends.
7
ITEM 6. SELECTED FINANCIAL DATA
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE INFORMATION
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INCOME STATEMENT DATA
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Selling, General
Sales Cost of Volume & Administrative Operating Other Income Before Net
Revenue Goods Sold Incentives Expenses Income Income Income Taxes Income
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1995 $205,566 $38,533 $94,316 $55,221 $17,496 $2,693 $20,189 $11,878
1994 160,901 30,839 74,163 41,691 14,208 303 14,511 8,448
1993 127,194 24,210 59,741 31,747 11,496 783 12,279 7,455
1992 101,044 18,478 46,433 27,644 8,489 1,396 9,885 5,919
1991 72,605 13,962 33,427 18,685 6,531 716 7,247 4,622
1990 60,069 12,353 27,660 15,089 4,967 843 5,810 3,600
1989 52,082 10,294 24,026 11,997 5,765 634 6,399 3,958
1988 44,516 8,721 20,580 10,465 4,750 369 5,119 3,317
1987 38,184 7,510 18,145 9,118 3,411 316 3,727 2,042
1986 31,072 6,514 14,999 8,225 1,334 17 1,351 775
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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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1995 $24,433 2.07:1 $23,127 $13,088 $65,247 $ --- $41,505
1994 18,798 2.06:1 17,278 9,919 52,458 --- 33,279
1993 14,223 2.16:1 11,171 9,672 41,534 --- 28,850
1992 11,125 2.19:1 9,367 8,917 33,987 --- 23,924
1991 10,242 2.35:1 6,523 7,500 27,420 --- 19,614
1990 9,570 2.89:1 4,836 6,885 22,004 11 16,543
1989 7,740 2.47:1 3,747 6,384 20,054 24 14,423
1988 6,939 2.64:1 3,271 5,964 17,538 36 12,855
1987 3,783 1.84:1 2,780 5,797 14,582 239 9,460
1986 2,293 1.74:1 2,661 5,715 11,682 645 7,400
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(CONTINUED NEXT PAGE)
8
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COMMON SHARE SUMMARY*
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Cash Dividends Net Income Book Value Weighted
Per Share(1) Per Share Per Share(2) Average Shares
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1995 $.133 $.63 $2.25 18,887,894
1994 .120 .45 1.81 18,779,229
1993 .120 .40 1.57 18,610,359
1992 .093 .32 1.30 18,555,737
1991 .073 .25 1.07 18,461,408
1990 .067 .19 .91 18,373,494
1989 .067 .21 .79 18,537,480
1988 .026 .17 .69 18,934,971
1987 --- .11 .53 18,011,042
1986 --- .04 .42 18,212,813
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OTHER INFORMATION
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Return on Square Footage
Shareholders' Return on Number of of Property Number of
Equity(3) Assets(4) Managers In Use Employees
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1995 31.8% 20.2% 11,547 443,895 862
1994 27.2 18.0 8,404 346,747 718
1993 28.3 19.6 6,328 315,772 588
1992 27.2 19.3 6,150 244,789 443
1991 25.6 18.7 4,866 195,165 344
1990 23.3 17.1 3,798 161,765 281
1989 29.0 21.1 2,999 161,265 278
1988 29.7 20.7 2,645 157,765 247
1987 24.2 15.6 2,502 150,149 218
1986 10.7 6.8 2,368 150,149 208
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* The common share information has been adjusted to reflect the 3-for-2 stock
split declared in February 1996.
(1) The Company expects to continue paying cash dividends.
(2) Year end shareholders' equity divided by actual shares outstanding at the
end of each year.
(3) Net income dividend by average shareholders' equity.
(4) 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, 1995, was
$205.6 million compared to $160.9 million in 1994, an increase of 28 percent.
Sales revenue increased 27 percent in 1994 compared to $127.2 million reported
in 1993. The increases in sales revenue are directly related to the growth of
the Company's independent sales force and international operations, and the
continued expansion of the nutritional products market.
The Company distributes its products to consumers through an
independent sales force comprised of managers and distributors. Active managers
totaled approximately 11,500, 8,400, and 6,300 for 1995, 1994 and 1993,
respectively. Active distributors totaled approximately 373,000, 212,000 and
144,000 for 1995, 1994 and 1993, respectively.
9
Price increases of approximately three percent went into effect on
April 1, 1995 and 1994, and resulted in greater sales revenue for those
years. A price increase of approximately three percent, primarily driven by
increased raw material costs, is scheduled to become effective on April 1, 1996.
Management believes this price increase will be acceptable to its sales force
and will result in increased sales revenue.
Sales revenue, related to the Company's domestic operations, increased
approximately 23 percent for 1995 and 20 percent for 1994. International sales
revenue increased approximately $19.1 million in 1995, or 39 percent, and $15.1
million in 1994, or 43 percent. The Company's operations in Mexico experienced
a sales revenue decrease of $11.4 million in 1995 primarily as the result of the
continued devaluation of the peso during 1995. The decrease in sales revenue
reported for Mexico during 1995 was more than offset by revenue increases in
other international operations, most notably Japan, Venezuela, Brazil and
Colombia. In 1994 the most significant sales increases in the international
markets were in Mexico, Colombia and Canada. International sales revenue
includes export sales to countries where the Company does not have subsidiary
operations.
COSTS AND EXPENSES
The Company's total costs and expenses, which include cost of goods
sold, volume incentives, and selling, general and administrative expenses, are
identified as a percentage of sales in the table below:
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Year ended December 31 1995 1994 1993
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Cost of goods sold 18.7% 19.2% 19.0%
Volume incentives 45.9 46.1 47.0
Selling, general and
administrative expenses 26.9 25.9 25.0
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91.5% 91.2% 91.0%
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COST OF GOODS SOLD
Cost of goods sold decreased as a percent of sales during 1995 as a
result of increased efficiencies in the Company's manufacturing operations as
well as pricing adjustments in the Company's subsidiary operations. Cost of
goods sold increased as a percent of sales in 1994, as the result of
disproportionately high import costs for the Company's subsidiary in Venezuela.
Management believes that cost of goods sold will decrease slightly as a
percent of sales during 1996 as a result of continued improvements in
manufacturing efficiencies.
VOLUME INCENTIVES
Volume incentives are a significant part of the Company's direct sales
marketing program and represent payments made to its independent sales force.
These payments are designed to provide incentives for reaching higher sales
levels and to encourage organizational development. Total volume incentives
decreased slightly during 1995 and 1994 as a percent of sales, as the result of
relatively lower volume incentives in the Company's international operations.
10
Management expects volume incentives to decrease slightly as a percent
of sales during 1996 since the Company's newer international operations are
expected to generate increased sales for the year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In addition to typical selling and administrative expenses, this expense
category includes costs for research and development, distribution, as well as
incentive programs such as the Company's conventions.
Selling, general and administrative expenses increased as a percent of
sales during 1995 primarily as the result of disproportionate costs of $6.3
million incurred in Japan and Brazil. Additionally, the Company's operations in
Mexico experienced a slight increase in selling, general and administrative
expenses as a percent of sales during 1995, primarily as a result of the
continued devaluation of the Peso.
Selling, general and administrative expenses increased as a percent of
sales during 1994 as the result of incremental costs incurred in the Company's
newest operations in Japan and Brazil which totaled approximately $3.6 million.
Management believes that selling, general and administrative expenses
will decrease as a percent of sales during 1996 as the result of continued
emphasis on cost containment and improved sales revenue in certain of the
Company's international operations.
OTHER INCOME AND EXPENSE
Other income (expense) consists of the following (in thousands):
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Year ended December 31 1995 1994 1993
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Interest and other income $1,921 $503 $761
Interest expense (173) (46) (1)
Foreign exchange loss (280) (745) (46)
Minority interest 1,225 591 69
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$2,693 $303 $783
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INTEREST AND OTHER INCOME
Interest and other income is earned principally from investments of
excess operating cash balances. Investment income will vary depending upon the
rate of interest, the investment instruments available and the need for cash in
the Company's operations. It is management's policy to invest only in high-grade
investments.
Interest income increased during 1995 as the result of greater cash
balances available for investment as well as higher yields obtained in certain
of the Company's international operations. Management expects interest and
other income to decrease during 1996 as the result of the cash requirements for
anticipated capital projects during the year.
11
Interest and other income decreased during 1994 primarily as the result
of the write down of certain other long-term assets.
FOREIGN EXCHANGE GAIN (LOSS)
Because of its operations outside of the United States, the Company is
subject to realized and unrealized foreign exchange gains and losses. The
Company experienced exchange losses of approximately $280,000 and $745,000
during 1995 and 1994, respectively. The losses were primarily related to the
Company's operations in Mexico and Colombia.
MINORITY INTEREST
The Company eliminates the minority interest in its subsidiaries which
are not wholly owned. Accordingly, the Company eliminated approximately
$1,225,000 and $591,000 of losses reported by subsidiaries in 1995 and 1994,
respectively.
INCOME TAXES
The Company's effective tax rate was 41.2, 41.8 and 39.3 percent for
1995, 1994, and 1993, respectively. The increase in the effective tax rate for
1994 and to a lesser extent in 1995 was primarily related to losses in certain
subsidiary operations for which the Company did not record a tax benefit.
INTERNATIONAL OPERATIONS
Sales revenue of the Company's international subsidiaries, including
export sales revenue, totaled $69.4 million in 1995, an increase of
approximately 39 percent over 1994. Sales revenue was $50.1 million and $34.9
million in 1994 and 1993, respectively. The Company's subsidiary operations in
Japan, Brazil, Venezuela and Colombia contributed approximately $26.0 million to
the increase in sales revenue in 1995. The Company's operations in Mexico
experienced a decrease in sales revenue of approximately $11.4 million as the
result of the continued devaluation of the Peso.
INVENTORIES
Consolidated inventories increased approximately $5.8 million or 34
percent in 1995, compared to an increase of $6.1 million or 55 percent in 1994.
These increases resulted primarily from an increase in the level of inventory
the Company maintains due to increased domestic and international sales, the
addition of new subsidiaries as well as the introduction of new products.
ACCOUNTS RECEIVABLE
Accounts receivable increased approximately $1.3 million in 1995 and
$.8 million in 1994. These increases are primarily related to the Company's
international operations. In some of its international markets, the Company
allows its independent distribution centers limited credit lines which are
generally secured by their monthly commissions.
12
SHORT-TERM DEBT
During 1994, the Company established operating lines of credit in Japan
and Brazil to facilitate payment of start-up and initial operating expenses.
During 1995, the Company paid the outstanding balance on the line of credit in
Brazil. The Company increased its borrowings in Japan as a result of the
favorable interest rate available.
ACCRUED VOLUME INCENTIVES
Accrued volume incentives increased approximately $1.3 million at the
end of 1995, compared to the prior year, as a direct result of increased sales
revenue. Volume incentives are a significant part of the Company's direct sales
marketing program and represent payments made to its independent sales force.
ACCRUED LIABILITIES
Accrued liabilities increased approximately $1.8 million at the end of
1995, compared to the prior year. The increase is generally related to the
growth in sales revenue and expenses associated with the Company's incentive
travel programs.
CUMULATIVE TRANSLATION ADJUSTMENT
The balance of cumulative foreign currency translation adjustments
decreased shareholders' equity by approximately $1.5 million in 1995 and $2.1
million in 1994, primarily as the result of the devaluation of the Mexican peso.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased approximately $3.0 million during
1995. The increase was the result of cash generated by operations and an
increase in short-term liabilities.
Working capital was used during 1995 to purchase approximately $6.0
million of property, plant and equipment. The Company paid approximately $2.4
million in cash dividends. Volume incentive payments increased approximately
$21.0 million during 1995, primarily as the result of increased sales. Payments
to suppliers and employees increased approximately $18.0 million as a result of
higher levels of inventory and production to support higher levels of sales, as
well as increased employment-related costs. Treasury stock purchases totaled
approximately $1.3 million. The Company is in the process of evaluating the
expansion of its manufacturing facility. The preliminary cost estimate for the
expansion is approximately $12.0 million. During 1995, the Company purchased
one floor, approximately 10,000 square feet, of an office building in Venezuela
for approximately $2.1 million. In the first quarter of 1996, management agreed
to purchase an office building in Mexico for approximately $1.5 million, to
provide a more adequate facility for its administrative operations. The Company
is in the process of evaluating the purchase of additional properties, which are
necessary to accommodate the Company's continued growth, of approximately $1.6
million.
Management believes that the Company's stock is an attractive
investment and, pursuant to its previously announced 660,000 share buyback
program, may utilize some of its available
13
cash to purchase up to the remaining balance of approximately 153,000 shares,
should market conditions warrant.
Options for 193,757 shares of the Company's common stock were exercised
during 1995. The cash flow benefit to the Company during the year was
approximately $1.5 million.
Management believes that future working capital requirements can be met
through internally-generated funds or can be arranged through credit facilities
on favorable terms.
14
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,
1995 and 1994, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. 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, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Salt Lake City, Utah
February 12, 1996
15
CONSOLIDATED STATEMENTS OF INCOME
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
AMOUNTS IN THOUSANDS EXCEPT PER SHARE INFORMATION
- ---------------------------------------------------------------------------------------------------------
Year ended December 31 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
Sales Revenue $205,566 $160,901 $127,194
- ---------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of goods sold 38,533 30,839 24,210
Volume incentives 94,316 74,163 59,741
Selling, general and administrative expenses 55,221 41,691 31,747
- ---------------------------------------------------------------------------------------------------------
188,070 146,693 115,698
- ---------------------------------------------------------------------------------------------------------
Operating Income 17,496 14,208 11,496
- ---------------------------------------------------------------------------------------------------------
Other income (expense):
Interest and other income 1,921 503 761
Interest expense (173) (46) (1)
Foreign exchange loss (280) (745) (46)
Minority interest 1,225 591 69
- ---------------------------------------------------------------------------------------------------------
2,693 303 783
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 20,189 14,511 12,279
Provision for income taxes 8,311 6,063 4,824
- ---------------------------------------------------------------------------------------------------------
Net Income $ 11,878 $ 8,448 $ 7,455
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Net Income Per Common Share $ .63 $ .45 $ .40
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding 18,888 18,779 18,610
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
The accompanying significant accounting policies and notes to consolidated
financial statements are an integral part of these statements.
16
CONSOLIDATED BALANCE SHEETS
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
AMOUNTS IN THOUSANDS
- -------------------------------------------------------------------------------------------
As of December 31 1995 1994
- -------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $14,172 $11,201
Accounts receivable, net of allowance for doubtful accounts
of $346 in 1995 and $636 in 1994 6,042 4,787
Inventories 23,127 17,278
Notes receivable due from related parties 213 205
Prepaid expenses and other 3,619 3,092
- -------------------------------------------------------------------------------------------
Total current assets 47,173 36,563
- -------------------------------------------------------------------------------------------
Property, plant and equipment, net 13,088 9,919
Long-term investments 2,381 3,053
Other assets 2,605 2,923
- -------------------------------------------------------------------------------------------
$65,247 $52,458
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------
Current liabilities:
Short-term debt $ 2,042 $ 1,533
Accounts payable 5,031 4,473
Accrued volume incentives 7,207 5,877
Accrued liabilities 6,577 4,818
Income taxes payable 1,883 1,064
- -------------------------------------------------------------------------------------------
Total current liabilities 22,740 17,765
- -------------------------------------------------------------------------------------------
Deferred income taxes 1,002 971
- -------------------------------------------------------------------------------------------
Minority Interest --- 442
- -------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value, authorized 20,000 shares,
issued 19,412 shares 31,263 29,849
Retained earnings 19,214 9,778
Treasury stock, at cost, 1,012 and 1,033
shares held in treasury as of December 31, 1995
and 1994, respectively (4,942) (3,742)
Receivables due from related parties (293) (405)
Cumulative foreign currency translation adjustments (3,737) (2,200)
- -------------------------------------------------------------------------------------------
Total shareholders' equity 41,505 33,280
- -------------------------------------------------------------------------------------------
$65,247 $52,458
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
The accompanying significant accounting policies and notes to consolidated
financial statements are an integral part of these statements.
17
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
AMOUNTS IN THOUSANDS
- ---------------------------------------------------------------------------------------------------------
Year ended December 31 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of year $29,849 $15,794 $15,769
Tax benefit related to exercise of stock options 683 138 (8)
Issuance of .6, 16 and .4, shares of
treasury stock, respectively 13 202 4
Issuance of 129, 40 and 4 shares of
treasury stock, respectively, on exercise of
stock options 721 157 29
Stock dividend (3) 13,559 ---
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 31,263 29,849 15,794
- ---------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 9,778 17,118 11,890
Net income 11,878 8,448 7,455
Stock dividend --- (13,559) ---
Cash dividends (2,442) (2,229) (2,227)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 19,214 9,778 17,118
- ---------------------------------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year (3,742) (3,500) (3,169)
Purchase of common stock (1,298) (285) (335)
Cost of treasury stock issued 98 43 4
- ---------------------------------------------------------------------------------------------------------
Balance at end of year (4,942) (3,742) (3,500)
- ---------------------------------------------------------------------------------------------------------
RECEIVABLES DUE FROM RELATED PARTIES:
Balance at beginning of year (405) (418) (431)
Reductions 112 13 13
- ---------------------------------------------------------------------------------------------------------
Balance at end of year (293) (405) (418)
- ---------------------------------------------------------------------------------------------------------
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENTS:
Balance at beginning of year (2,200) (144) (135)
Foreign currency translation adjustments (1,537) (2,056) (9)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year (3,737) (2,200) (144)
- ---------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $41,505 $33,280 $28,850
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
The accompanying significant accounting policies and notes to consolidated
financial statements are an integral part of these statements.
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
AMOUNTS IN THOUSANDS
Increase (Decrease) in Cash and Cash Equivalents
- -----------------------------------------------------------------------------------------------------------------------
Year ended December 31 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales revenue $204,085 $159,447 $125,738
Cash paid as volume incentives (92,986) (72,002) (59,991)
Cash paid to suppliers and employees (94,740) (76,727) (56,423)
Interest paid (173) (46) (1)
Interest received 1,868 371 707
Income taxes paid (7,462) (3,774) (2,312)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,592 7,269 7,718
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,098) (2,590) (3,008)
(Purchase) Sale of long-term investments, net 672 (683) (481)
Payments received on long-term receivables, net 393 325 752
Receivables due from related parties 112 13 13
Purchase of other assets (331) (1,235) (397)
Payments (additions) short-term related party receivables (180) 76 133
Minority interest elimination 341 336 106
Proceeds from sales of assets --- --- 137
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,091) (3,758) (2,745)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends (2,446) (2,229) (2,227)
Purchase of treasury stock (1,298) (285) (335)
Proceeds from short-term debt, net 509 1,533 ---
Proceeds from exercise of stock options 819 187 29
Tax benefit from stock option exercise 683 138 ---
Issuance of treasury stock 14 215 ---
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,719) (441) (2,533)
- -----------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH (810) (536) (80)
- -----------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,971 2,534 2,360
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,201 8,667 6,307
- -----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $14,172 $ 11,201 $ 8,667
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Reconciliation of Net Income to Net Cash Provided by Operating Activities
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 11,878 $ 8,448 $ 7,455
- -----------------------------------------------------------------------------------------------------------------------
Bad debt expense and reserve 242 839 249
Depreciation and amortization 3,467 3,067 2,076
Increase in accounts receivable, net (1,349) (1,681) (1,714)
Increase in inventories (5,849) (6,107) (2,354)
Increase in prepaid expenses and other (1,593) (402) (580)
Increase (decrease) in income taxes payable 818 997 (116)
Increase in accrued liabilities and volume incentives 3,090 1,833 1,381
Increase in accounts payable 558 1,129 1,633
Increase (decrease) in deferred income taxes 55 667 (384)
Foreign currency translation adjustment (725) (1,521) 72
- -----------------------------------------------------------------------------------------------------------------------
Total adjustments (1,286) (1,179) 263
- -----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 10,592 $ 7,269 $ 7,718
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
The accompanying significant accounting policies and notes to consolidated
financial statements are an integral part of these statements.
19
SIGNIFICANT ACCOUNTING POLICIES
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE INFORMATION
NATURE OF OPERATIONS
Nature's Sunshine Products, Inc., 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, Mexico,
Venezuela, Colombia, Japan, Brazil, Canada, the United Kingdom, Costa Rica,
Malaysia, Panama, Peru, El Salvador and Guatemala. The Company also exports its
products to numerous other countries, including Australia, New Zealand and
Norway.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Nature's
Sunshine Products, Inc. and its majority-owned subsidiaries. Intercompany
transactions have been eliminated in consolidation.
NET INCOME PER SHARE
Net income per share is based upon the weighted average number of common
shares and common equivalent shares outstanding during the period. Common
equivalent shares consist primarily of stock options, which have a dilutive
effect when applying the treasury stock method.
The Board of Directors declared a three-for-two stock split to
shareholders of record March 4, 1996, a ten percent stock dividend to
shareholders of record February 17, 1995, and a four-for-three stock split to
shareholders of record January 13, 1993. All per share amounts included in the
consolidated financial statements and accompanying notes reflect the increased
number of shares, giving retroactive effect to the stock dividend and splits.
INCOME TAXES
The Company recognizes a liability or asset for the deferred tax
consequences of temporary differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when the reported amounts of the assets or liabilities are recovered or
settled. Foreign and other tax credits are accounted for using the "liability"
method, which reduces income tax expense in the year in which these credits are
generated.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported
20
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.
RECENT ACCOUNTING PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets." The Company is required to adopt SFAS No.
121 in 1996. Management does not expect that the adoption of SFAS No. 121 will
have a material impact on the Company's consolidated financial statements.
TRANSLATION OF FOREIGN CURRENCIES
The financial statements of the international subsidiaries have been
translated to U.S. dollars in accordance with the provisions of SFAS No. 52.
The Company translated the assets and liabilities of its international
operations at rates of exchange in effect at year end, and the consolidated
statements of income were translated at the average rates of exchange for the
year. Gains and losses resulting from translation are accumulated as a separate
component of shareholders' equity. Gains and losses resulting from foreign
currency transactions are included in the consolidated statements of income.
REVENUE RECOGNITION
For domestic sales, the Company generally receives its product sales
price in cash accompanying orders from independent sales force members. For
certain of the Company's international operations, the Company offers credit
terms consistent with industry standards. A volume incentive payment related to
product orders is made in the month following the sale. Sales and related volume
incentives are recorded when the merchandise is shipped. Cash received for
unshipped merchandise is recorded as a liability.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid short-term investments to be cash equivalents, which generally
includes only investments with original maturities of three months or less.
SELLING EXPENSES
Independent sales force members may earn Company-paid attendance at
conventions as well as other travel awards by achieving the required levels of
product purchases within the qualification period. Convention costs and other
travel expenses are accrued over the qualification period as they are earned.
Accordingly, the Company accrued approximately $1,450 and $650 at December 31,
1995 and 1994, respectively.
21
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred. Total
research and development costs were approximately $1,100, $800 and $648 for
1995, 1994 and 1993, respectively.
CASH DIVIDENDS PER COMMON SHARE
The Company declared and paid quarterly cash dividends totaling 13 1/3
cents per common share in 1995. The Company has declared a quarterly cash
dividend of 3 1/3 cents per common share on the newly split shares, which is
unchanged from the $.05 per common share paid on the prior number of outstanding
shares, to shareholders of record on March 4, 1996 and payable March 22, 1996.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE INFORMATION
NOTE 1: INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-
out method) or market value. The composition of inventories is as follows:
- -----------------------------------------------------------------
As of December 31 1995 1994
- -----------------------------------------------------------------
Raw materials $ 7,772 $ 6,125
Work in process 1,123 1,303
Finished goods 14,232 9,850
- -----------------------------------------------------------------
$23,127 $17,278
- -----------------------------------------------------------------
- -----------------------------------------------------------------
NOTE 2: PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Estimated useful lives for buildings and
improvements range from 20 to 30 years, and equipment, furniture and fixtures
range from 3 to 10 years. Maintenance and repairs are charged to expense as
incurred, and major improvements are capitalized. Gains or losses on sales or
retirements are included in the consolidated statement of income in the year of
disposition. The composition of property, plant and equipment is as follows:
- -----------------------------------------------------------------
As of December 31 1995 1994
- -----------------------------------------------------------------
Buildings and improvements $ 8,880 $ 6,223
Machinery and equipment 7,992 6,537
Furniture and fixtures 7,381 6,023
- -----------------------------------------------------------------
24,253 18,783
Accumulated depreciation and
amortization (11,376) (9,075)
Land 211 211
- -----------------------------------------------------------------
$13,088 $ 9,919
- -----------------------------------------------------------------
- -----------------------------------------------------------------
22
NOTE 3: INVESTMENTS
The following are the aggregate fair values and related gross unrealized
holding gains and losses for securities available for sale and securities held
to maturity at December 31, 1995 and 1994:
- -----------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------
Securities available for sale:
Amortized cost $7,922 $6,428
Gross unrealized holding gains 292 86
Gross unrealized holding losses (194) (75)
- -----------------------------------------------------------------
Aggregate fair value $8,020 $6,439
- -----------------------------------------------------------------
Securities held to maturity:
Amortized cost $ --- $1,049
Gross unrealized holding losses --- (95)
- -----------------------------------------------------------------
Aggregate fair value $ --- $ 954
- -----------------------------------------------------------------
- -----------------------------------------------------------------
During 1995, the proceeds from the sales of available-for-sale
securities was $3,598. The gross realized gains and gross realized losses on
the sales of available-for-sale securities was $34 and $63, respectively, for
the year ended December 31, 1995. In determining the realized gains and losses,
the Company has used the specific identification method to determine the cost of
the investments.
The total net unrealized holding losses on trading securities recognized
in the consolidated statement of income for the year ended December 31, 1994,
was $150.
NOTE 4: SHORT-TERM DEBT
During 1994, the Company established operating lines of credit in Japan and
Brazil to facilitate payment of start-up and initial operating expenses. During
1995, the Company paid the outstanding balance on the line of credit in Brazil.
The Company increased its borrowings, which are payable in local currency, in
Japan as a result of the favorable interest rate. The debt is unsecured and
payable during 1996. The weighted average interest rate approximates two
percent at December 31, 1995.
NOTE 5: INCOME TAXES
The provision for income taxes consists of the following:
- ----------------------------------------------------------------------------
Year ended December 31 1995 1994 1993
- ----------------------------------------------------------------------------
Current:
Federal $4,984 $3,844 $2,657
State 967 610 446
Foreign 2,305 2,275 2,104
- ----------------------------------------------------------------------------
8,256 6,729 5,207
- ----------------------------------------------------------------------------
Deferred 55 (666) (383)
- ----------------------------------------------------------------------------
Total provision for income taxes $8,311 $6,063 $4,824
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
23
The domestic and foreign components of income before taxes are as follows:
Year ended December 31 1995 1994 1993
- ----------------------------------------------------------------------------
Domestic $14,617 $11,053 $ 7,889
Foreign 5,572 3,458 4,390
- ----------------------------------------------------------------------------
Total $20,189 $14,511 $12,279
- ----------------------------------------------------------------------------
The provision for income taxes as a percentage of income before taxes
differs from the statutory Federal income tax rate due to the following:
Year ended December 31 1995 1994 1993
- ----------------------------------------------------------------------------
Statutory Federal income tax rate 35.0% 34.3% 34.2%
State income taxes, net of Federal
income tax benefit 3.1 2.8 1.6
Foreign and other tax credits (5.1) (6.5) (7.5)
Net effect of foreign subsidiaries
tax attributes 6.8 12.1 12.0
Other 1.4 (.9) (1.0)
- ----------------------------------------------------------------------------
Effective tax rate 41.2% 41.8% 39.3%
- ----------------------------------------------------------------------------
The components of the deferred income tax assets and liabilities as of
December 31, 1995 and 1994, are as follows:
December 31, December 31,
1995 1994
- -----------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 31 $ 293
Inventory unicap adjustment 479 273
Foreign tax credits 158 260
State income taxes 313 236
Accrued vacation 99 76
Inventory obsolescence reserve 170 53
Foreign currency exchange 58 93
Sale of subsidiary -- 15
Intangible assets -- 29
Environmental taxes -- 5
- -----------------------------------------------------------------
Total deferred tax assets $ 1,308 $1,333
- -----------------------------------------------------------------
Deferred tax liabilities:
Accelerated depreciation $ (696) $ (479)
Gain on sale of subsidiaries (306) (492)
- -----------------------------------------------------------------
Total deferred tax liabilities $(1,002) $ (971)
- -----------------------------------------------------------------
24
NOTE 6: STOCK OPTIONS
The Company has from time to time granted certain non-qualified stock
options to officers, directors and key employees. Such grants have been made at
the fair market value of the stock at the date of grant. As of December 31,
1995, the Company has reserved approximately one million treasury shares to
accommodate the exercise of the outstanding options.
Stock option activity for 1993, 1994 and 1995 consisted of the following:
Number of
Shares Range of Option
(IN THOUSANDS) Prices Per Share
- ---------------------------------------------------------------------
Options outstanding
at December 31, 1992 (b) 1,059 $1.79-$6.37
- ---------------------------------------------------------------------
Options issued 531 $6.51-$6.67
Options canceled (13) $5.38-$6.51
Options exercised (a) (7) $1.86-$4.85
- ---------------------------------------------------------------------
Options outstanding
at December 31, 1993 (b) 1,570 $1.79-$6.67
- ---------------------------------------------------------------------
Options issued 406 $8.26-$8.79
Options canceled (1) $3.03
Options exercised (a) (66) $1.79-$6.37
- ---------------------------------------------------------------------
Options outstanding
at December 31, 1994 (b) 1,909 $1.79-$8.79
- ---------------------------------------------------------------------
Options issued 1,701 $8.83-$16.33
Options canceled (39) $6.67
Options exercised (a) (194) $1.79-$6.37
- ---------------------------------------------------------------------
Options outstanding
at December 31, 1995 (b) 3,377 $1.79-$16.33
- ---------------------------------------------------------------------
(a) Shares issued related to the exercise of stock options were issued from
treasury stock.
(b) Options for 1,389, 1,048 and 940 shares of common stock were exercisable on
December 31, 1995, 1994 and 1993, respectively.
NOTE 7: EMPLOYEE BENEFIT PLANS
DEFERRED COMPENSATION PLAN
The Company sponsors a qualified deferred compensation plan (401(k)).
During 1995, the Company contributed matching contributions of 100 percent of
employee contributions up to a maximum of five percent of the employee's
compensation. Employer contributions to the plan during 1995, 1994 and 1993
were approximately $478, $284, and $314, respectively.
MANAGEMENT AND EMPLOYEE BONUS PLAN
The Company has a bonus plan that provides for participants to receive
payments based upon the annual increase in revenue and operating income. The
expense related to the plan was approximately $2,706, $1,912, and $1,520 for
1995, 1994 and 1993, respectively. Hourly employees have participated in the
plan since 1994.
25
NOTE 8: RELATED PARTY TRANSACTIONS
In the second quarter of 1995, the Company advanced $120 to one of its
officers on a short-term basis at an interest rate of nine percent. The loan
was repaid with interest during the third quarter.
In the second quarter of 1995, the Company advanced $250 to a key employee.
The loan is collateralized and bears interest at nine percent. The loan is
being repaid over a two-year period.
During the first quarter of 1994, loans totaling approximately $305 were
made to an officer of the Company. The entire amount including interest at six
percent was repaid during 1994.
During 1993 and 1992, the Company made loans of approximately $725 and
$684, respectively, to certain officers of the Company. Approximately $434 was
used by the officers to purchase Company stock in the open market. The stock
that was purchased was pledged as collateral. The loans are payable within 90
days of demand and bear interest at six percent. The outstanding balance of
these loans at December 31, 1995 and 1994, was approximately $393 and $505,
respectively.
NOTE 9: INTERNATIONAL OPERATIONS
Sales for domestic and international operations during the past three years
were as follows:
Year ended December 31 1995 1994 1993
- -----------------------------------------------------------------
Domestic $136,168 $110,839 $ 92,248
- -----------------------------------------------------------------
International:
Americas 53,296 42,215 31,004
Asia Pacific 11,953 4,115 756
Other 4,149 3,732 3,186
- -----------------------------------------------------------------
Total International 69,398 50,062 34,946
- -----------------------------------------------------------------
Total Sales $205,566 $160,901 $127,194
- -----------------------------------------------------------------
Operating income for domestic and international operations during the past
three years was as follows (in thousands):
Year ended December 31 1995 1994 1993
- -----------------------------------------------------------------
Domestic $13,357 $ 9,706 $ 7,087
- -----------------------------------------------------------------
International:
Americas 5,994 4,578 4,203
Asia Pacific (2,326) (473) (23)
Other 471 397 229
- -----------------------------------------------------------------
Total International 4,139 4,502 4,409
- -----------------------------------------------------------------
Total Operating Income $17,496 $14,208 $11,496
- -----------------------------------------------------------------
26
Total assets for domestic and international operations for the past three
years were as follows:
As of December 31 1995 1994 1993
- -----------------------------------------------------------------
Domestic $40,996 $34,973 $ 28,752
- -----------------------------------------------------------------
International:
Americas 18,941 12,970 11,597
Asia Pacific 4,239 3,487 459
Other 1,071 1,028 726
- -----------------------------------------------------------------
Total International 24,251 17,485 12,782
- -----------------------------------------------------------------
Total Assets $65,247 $52,458 $41,534
- -----------------------------------------------------------------
NOTE 10: COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment used in its operations.
The approximate aggregate commitments under non-cancelable operating leases in
effect at December 31, 1995, were as follows:
Year ending December 31 Lease Commitments
- ------------------------------------------------------------------
1996 $2,685
1997 1,186
1998 676
1999 470
2000 and thereafter 824
- ------------------------------------------------------------------
$5,841
- ------------------------------------------------------------------
The Company incurred expenses of approximately $2,725, $2,434 and $1,605 in
connection with operating leases during 1995, 1994 and 1993, respectively.
The Company is a defendant in various lawsuits which are incidental to the
Company's business. Management, after consultation with its legal counsel,
believes that any liability as a result of these matters will not have a
material effect upon the Company's results of operations or financial position.
27
SUMMARY OF QUARTERLY OPERATIONS -- UNAUDITED
DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE INFORMATION
Income
Selling, General Other Before Net
Sales Cost of Volume & Administrative Operating Income Income Net Income
1995 Revenue Goods Sold Incentives Expenses Income (Expense) Taxes Income Per Share*
- ---------------------------------------------------------------------------------------------------------------------------------
First Qtr $ 47,062 $ 9,229 $21,794 $13,052 $ 2,987 $ 453 $ 3,440 $ 2,014 $.11
Second Qtr 50,725 9,523 23,104 13,446 4,652 380 5,032 2,972 .16
Third Qtr 53,164 9,817 24,222 13,860 5,265 451 5,716 3,306 .17
Fourth Qtr 54,615 9,964 25,196 14,863 4,592 1,409 6,001 3,586 .19
- ---------------------------------------------------------------------------------------------------------------------------------
$205,566 $38,533 $94,316 $55,221 $17,496 $2,693 $20,189 $11,878 $.63
- ---------------------------------------------------------------------------------------------------------------------------------
1994
- ---------------------------------------------------------------------------------------------------------------------------------
First Qtr $ 37,337 $ 7,049 $17,718 $ 9,503 $ 3,067 $ (29) $ 3,038 $ 1,701 $.09
Second Qtr 38,312 7,508 17,840 9,359 3,605 377 3,982 2,237 .12
Third Qtr 41,003 7,917 18,690 10,930 3,466 192 3,658 2,221 .12
Fourth Qtr 44,249 8,365 19,915 11,899 4,070 (237) 3,833 2,289 .12
- ---------------------------------------------------------------------------------------------------------------------------------
$160,901 $30,839 $74,163 $41,691 $14,208 $ 303 $14,511 $ 8,448 $.45
- ---------------------------------------------------------------------------------------------------------------------------------
*The common share information has been adjusted to reflect the 3-for-2 stock
split declared in February 1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 10 is omitted because the Company intends to
file with the Securities and Exchange Commission, not later than 120 days after
the close of the fiscal year ended December 31, 1995, 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, 1995, 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, 1995, a definitive Proxy
Statement pursuant to Regulation 14A of the Commission.
28
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, 1995, 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,
1995, 1994 and 1993.
Consolidated balance sheets as of December 31, 1995 and 1994.
Consolidated statements of shareholders' equity for the years ended
December 31, 1995, 1994 and 1993.
Consolidated statements of cash flows for the years ended December
31, 1995, 1994 and 1993.
Significant Accounting Policies
Notes to Consolidated Financial Statements
Summary of Quarterly Operations - Unaudited
(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.
29
(a)(3) List of Exhibits
3.1(1) - Restated Articles of Incorporation
3.2(2) - By-laws, as amended
10.1(3) - Lease Agreement dated January 8, 1992 between the
Registrant and East Bay Associates Partnership No.
3
10.2(4) - Form of Employment Agreement between the
Registrant and its executive officers together
with a schedule identifying the agreements omitted
and setting forth the material differences between
the filed agreement and the omitted agreements
10.3(5) - 1990 Long-Term Incentive Compensation Plan
10.4(5) - Form of Stock Option Agreement (1990 Long-Term
Incentive Compensation Plan)
10.5(6) - Executive Loan Program
10.6(6) - Exempt Employee Incentive Compensation Plan
10.7(7) - 1993 Stock Option Plan
10.8(7) - Forms of Stock Option Agreements for employees and
non-employee directors (1993 Stock Option Plan)
10.9 1995 Stock Option Plan
10.10 Form of Stock Option Agreement (1995 Stock Option
Plan)
10.11 Key Employees' Automobile Incentive Program
22 - List of Subsidiaries of Registrant
24 - Consent of Independent Public Accountants
27 - Financial Data Schedules
____________
- ------------
[1] Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1988 and is incorporated herein
by reference.
[2] Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1985 and is incorporated herein
by reference.
[3] Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1991 and is incorporated herein
by reference.
[4] Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1994 and is incorporated herein
by reference.
30
(5) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1990 and is incorporated herein
by reference.
(6) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1992 and is incorporated herein
by reference.
(7) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1993 and is incorporated herein
by reference.
(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, 1995.
(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.
31
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 25, 1996 By: /s/ Alan D. Kennedy
------------------------------------
Alan D. Kennedy, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Alan D. Kennedy President, Chief Executive Officer March 25, 1996
- -------------------
Alan D. Kennedy and Director
/s/ Kristine F. Hughes Chairman of the Board and Director March 25, 1996
- ----------------------
Kristine F. Hughes
/s/ Douglas Faggioli Vice President of Finance, Treasurer, March 25, 1996
- --------------------
Douglas Faggioli Chief Financial Officer
/s/ Eugene L. Hughes Vice President and Director March 25, 1996
- --------------------
Eugene L. Hughes
/s/ Merrill Gappmayer Director March 25, 1996
- ---------------------
Merrill Gappmayer
/s/ Pauline T. Hughes Director March 25, 1996
- ---------------------
Pauline T. Hughes
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
To Nature's Sunshine Products, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Nature's Sunshine Products, Inc., and
subsidiaries appearing in Item 8 in this Annual Report on Form 10-K, and have
issued our report thereon dated February 12, 1996. 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
Salt Lake City, Utah
February 12, 1996
33
NATURE'S SUNSHINE PRODUCTS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
Balance at Balance at
Beginning Amounts Amounts End of
Description of Period Provisions Written Off Recovered Period
----------- --------- ---------- ----------- --------- ----------
Year ended December 31, 1993
Allowance for doubtful
accounts receivable $111,750 $279,946 $(128,027) $ (3,621) $260,048
Allowance for obsolete
inventory 306,359 (25,032) --- --- 281,327
Allowance for notes
receivable --- --- --- --- ---
Year ended December 31, 1994
Allowance for doubtful
accounts receivable $260,048 $839,232 $(460,921) $ (2,414) $635,945
Allowance for obsolete
inventory 281,327 --- (77,913) (89,429) 113,985
Allowance for notes
receivable --- 304,086 --- --- 304,086
Year ended December 31, 1995
Allowance for doubtful
accounts receivable $635,945 $182,753 $(462,348) $(10,210) $346,140
Allowance for obsolete
inventory 113,985 321,597 --- --- 435,582
Allowance for notes
receivable 304,086 --- (289,682) --- 14,404
34
LIST OF EXHIBITS
Located At
Sequentially
Item No. Exhibit Numbered Page
-------- ------- -------------
3.1[1] - Restated Articles of Incorporation ---
3.2[2] - By-laws, as amended ---
10.1[3] - Lease Agreement dated January 8, 1992 between the ---
Registrant and East Bay Associates Partnership No. 3
10.2[4] - Form of Employment Agreement between the Registrant and ---
its executive officers together with a schedule identifying the
agreements omitted and setting forth the material differences
between the filed agreement and the omitted agreements.
10.3[5] - 1990 Long-Term Incentive Compensation Plan ---
10.4[5] - Form of Stock Option Agreement (1990 Long-Term Incentive ---
Compensation Plan)
10.5[6] - Executive Loan Program ---
10.6[6] - Exempt Employee Incentive Compensation Plan ---
10.7[7] - 1993 Stock Option Plan ---
10.8[7] - Forms of Stock Option Agreements for employees and ---
non-employee directors (1993 Stock Option Plan)
10.9 1995 Stock Option Plan 37
10.10 Form of Stock Option Agreement (1995 Stock Option Plan) 53
10.11 Key Employees' Automobile Incentive Program 56
22 - List of Subsidiaries of Registrant 57
24 - Consent of Independent Public Accountants 58
27 - Financial Data Schedules 59
____________
[1] Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1988 and is incorporated herein
by reference.
[2] Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1985 and is incorporated herein
by reference.
[3] Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1991 and is incorporated herein
by reference.
35
[4] Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1994 and is incorporated herein
by reference.
[5] Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1990 and is incorporated herein
by reference.
[6] Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1992 and is incorporated herein
by reference.
[7] Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 1993 and is incorporated herein
by reference.
36