- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 ------------------------------------------- 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 ---------------- ------------------ Commission File Number 0-8707 ---------------------------------------------- NATURE'S SUNSHINE PRODUCTS, INC. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) UTAH 87-0327982 - ------------------------------- ------------------------------ (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 75 EAST 1700 SOUTH, PROVO, UTAH 84606 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (801) 342-4407 ---------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- NONE NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value ------------------------------- (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] --- The aggregate market value of the voting stock held by non-affiliates of the Registrant on March 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). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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.
- ----------------------------------------------------------------------------- Market Prices Market Prices - ----------------------------------------------------------------------------- 1995 HIGH LOW 1994 HIGH LOW - ----------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA - -------------------------------------------------------------------------------------------------------- Selling, General Sales Cost of Volume & Administrative Operating Other Income Before Net Revenue Goods Sold Incentives Expenses Income Income Income Taxes Income - -------------------------------------------------------------------------------------------------------- 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
- ---------------------------------------------------------------------------------------------------- BALANCE SHEET DATA - ---------------------------------------------------------------------------------------------------- Working Current Property, Plant & Total Long-Term Shareholders' Capital Ratio Inventories Equipment, Net Assets Debt Equity - ---------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------
(CONTINUED NEXT PAGE) 8
- ----------------------------------------------------------------------------------- COMMON SHARE SUMMARY* - ----------------------------------------------------------------------------------- Cash Dividends Net Income Book Value Weighted Per Share(1) Per Share Per Share(2) Average Shares - ----------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------- OTHER INFORMATION - ----------------------------------------------------------------------------------- Return on Square Footage Shareholders' Return on Number of of Property Number of Equity(3) Assets(4) Managers In Use Employees - ----------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------
* 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:
- ----------------------------------------------------------------- Year ended December 31 1995 1994 1993 - ----------------------------------------------------------------- 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 - ----------------------------------------------------------------- 91.5% 91.2% 91.0% - -----------------------------------------------------------------
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):
- ------------------------------------------------------------------- Year ended December 31 1995 1994 1993 - ------------------------------------------------------------------- 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 - -------------------------------------------------------------------
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