- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ---------------to ---------------------- Commission File #0-8707 NATURE'S SUNSHINE PRODUCTS, INC. (Exact Name of Registrant) UTAH 87-0327982 ------------------------ --------------------------------------- (State of Incorporation) (I.R.S. Employer Identification Number) 75 East 1700 South Provo, Utah 84606 (Principal Executive Offices) (801) 342-4407 (Registrant's Telephone Number, including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during the preceding 12 months (or such shorter period that the Registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares of common stock, without par value, outstanding as of July 31, 1996, was 18,853,719. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I FINANCIAL INFORMATION - ----------------------------- ITEM 1. FINANCIAL STATEMENTS NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollar Amounts In Thousands) (UNAUDITED) JUNE 30 DECEMBER 31 1996 1995 ASSETS ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $22,353 $14,172 Accounts receivable, net 7,071 6,042 Inventories 23,845 23,127 Prepaid expenses and other 5,981 3,619 Notes receivable due from related parties 143 213 ------- ------- Total Current Assets 59,393 47,173 PROPERTY, PLANT AND EQUIPMENT, net 15,540 13,088 LONG-TERM INVESTMENTS 2,307 2,381 OTHER ASSETS 2,466 2,605 ------- ------- $79,706 $65,247 ------- ------- ------- ------- The accompanying notes to the financial statements are an integral part of these consolidated condensed balance sheets. 2 NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED) (Dollar Amounts In Thousands) (UNAUDITED) JUNE 30 DECEMBER 31 1996 1995 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt $ 2,475 $ 2,042 Accounts payable 4,540 5,031 Accrued volume incentives 9,527 7,207 Accrued liabilities 9,956 6,577 Income taxes payable 2,213 1,883 ------- ------- Total Current Liabilities 28,711 22,740 ------- ------- DEFERRED INCOME TAXES 1,059 1,002 ------- ------- SHAREHOLDERS' EQUITY: Common stock, no par value, 20,000,000 shares authorized; 19,445,734 shares issued 32,549 31,263 Retained earnings 25,590 19,214 Treasury stock, at cost, 592,015 and 1,011,607 shares at June 30, 1996 and December 31, 1995, respectively (4,308) (4,942) Receivables due from related parties (229) (293) Cumulative translation adjustments (3,666) (3,737) ------- ------- Total Shareholders' Equity 49,936 41,505 ------- ------- $79,706 $65,247 ------- ------- ------- ------- The accompanying notes to the financial statements are an integral part of these consolidated condensed balance sheets. 3 NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Amounts In Thousands, Except Per-Share Information) THREE MONTHS ENDED JUNE 30 -------------------------- (UNAUDITED) 1996 1995 ------- ------- SALES REVENUE $63,182 $50,725 ------- ------- COSTS AND EXPENSES: Cost of goods sold 11,565 9,523 Volume incentives 28,750 23,104 Selling, general and administrative 15,542 13,446 ------- ------- 55,857 46,073 ------- ------- OPERATING INCOME 7,325 4,652 ------- ------- OTHER INCOME (EXPENSE): Interest and other income 313 498 Interest expense (6) (53) Foreign exchange loss, net (162) (86) Minority interest (218) 21 ------- ------- (73) 380 ------- ------- INCOME BEFORE INCOME TAXES 7,252 5,032 PROVISION FOR INCOME TAXES 2,910 2,060 ------- ------- NET INCOME $ 4,342 $ 2,972 ------- ------- ------- ------- NET INCOME PER COMMON SHARE $ 0.22 $ 0.16 ------- ------- ------- ------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 19,834 18,629 ------- ------- ------- ------- The accompanying notes to the financial statements are an integral part of these consolidated condensed statements of income. 4 NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Amounts In Thousands, Except Per-Share Information) Six Months Ended June 30 --------------------- (Unaudited) 1996 1995 --------- --------- SALES REVENUE $ 123,295 $ 97,787 --------- --------- COSTS AND EXPENSES: Cost of goods sold 21,949 18,752 Volume incentives 56,646 44,898 Selling, general and administrative 32,295 26,498 --------- --------- 110,890 90,148 --------- --------- OPERATING INCOME 12,405 7,639 --------- --------- OTHER INCOME (EXPENSE): Interest and other income 1,057 897 Interest expense (38) (97) Foreign exchange loss, net (369) (213) Minority interest (223) 247 --------- --------- 427 834 --------- --------- INCOME BEFORE INCOME TAXES 12,832 8,473 PROVISION FOR INCOME TAXES 5,214 3,487 --------- --------- NET INCOME $ 7,618 $ 4,986 --------- --------- --------- --------- NET INCOME PER COMMON SHARE $ 0.39 $ 0.27 --------- --------- --------- --------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 19,661 18,617 --------- --------- --------- --------- The accompanying notes to the financial statements are an integral part of these consolidated condensed statements of income. 5 NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollar Amounts In Thousands) Six Months Ended June 30 ----------------------- Increase (Decrease) in Cash and Cash Equivalents (Unaudited) 1996 1995 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from sales revenue $ 121,832 $ 96,632 Cash paid as volume incentives (53,898) (43,340) Cash paid to suppliers and employees (53,081) (45,603) Income taxes paid (4,827) (2,717) Interest received 1,123 724 Interest paid (38) (97) --------- -------- Net Cash Provided by Operating Activities 11,111 5,599 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (4,067) (1,710) Purchase of other assets (156) (12) Payments received on long-term receivables 110 68 Short-term related party receivables, net 201 (332) Sale of long-term investments, net 73 19 Proceeds from sale of assets --- 258 Investment in subsidiaries --- (247) --------- -------- Net Cash Used in Investing Activities (3,839) (1,956) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of cash dividends (1,242) (1,220) Proceeds from exercise of stock options 1,915 160 Proceeds from short-term debt, net 433 633 Purchase of treasury stock --- (1,298) Issuance of treasury stock 6 --- --------- -------- Net Cash Provided by (Used in) Financing Activities 1,112 (1,725) --------- -------- EFFECT OF EXCHANGE RATES ON CASH (203) (213) --------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 8,181 1,705 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,172 11,201 --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,353 $ 12,906 --------- -------- --------- -------- The accompanying notes to the financial statements are an integral part of these consolidated condensed statements of cash flows. 6 NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED) Reconciliation of Net Income to Net Cash Provided by Operating Activities (Dollar Amounts In Thousands) Six Months Ended June 30 ----------------------- (Unaudited) 1996 1995 --------- -------- NET INCOME $ 7,618 $ 4,986 --------- -------- Bad debt expense 36 20 Depreciation and amortization 1,729 1,217 Increase in accounts receivable (1,065) (1,135) Increase in inventories (718) (1,472) Increase in prepaid expenses and other (2,357) (568) Increase in income taxes payable 331 411 Increase in accrued liabilities and volume incentives 5,698 3,742 Decrease in accounts payable (491) (663) Increase (decrease) in deferred income taxes 57 (229) Cumulative translation adjustments 273 (710) --------- -------- Total Adjustments 3,493 613 --------- -------- Net Cash Provided by Operating Activities $ 11,111 $ 5,599 --------- -------- --------- -------- The accompanying notes to the financial statements are an integral part of these consolidated condensed statements of cash flows. 7 NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (1) INTERIM FINANCIAL STATEMENT POLICIES AND DISCLOSURES The unaudited, consolidated, condensed financial statements of Nature's Sunshine Products, Inc. and subsidiaries included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally required in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated, condensed financial statements reflect all adjustments, which in the opinion of management, are necessary to a fair statement of financial position as of June 30, 1996, and the results of operations for the interim periods presented. All of the adjustments which have been made in these consolidated, condensed financial statements are of a normal recurring nature. Weighted average number of common shares outstanding and all per share amounts included in the condensed financial statements have been adjusted to reflect the three-for-two stock split effected in March of 1996. It is suggested that these consolidated, condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. (2) INVENTORIES Inventories consist of: (Dollars in Thousands) (Unaudited) June 30 December 31 1996 1995 ----------- ----------- Raw materials $ 8,227 $ 7,772 Work in process 1,328 1,123 Finished goods 14,290 14,232 ------- ------- $23,845 $23,127 ------- ------- ------- ------- 8 NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (3) EARNINGS PER SHARE Outstanding stock options are considered common stock equivalents and are included in the computation of primary earnings per share. As of June 30, 1996, the Company had a total of 3,108,174 options outstanding. The options were all granted at market prices, which vary from $1.79 to $22.25 per share. (4) QUARTERLY CASH DIVIDENDS The Company has declared 32 consecutive quarterly cash dividends. The most recent quarterly cash dividend of 3 1/3 cents per common share was declared on August 5, 1996, to shareholders of record on August 16, 1996, payable August 26, 1996. (5) TRANSLATION OF FOREIGN CURRENCY The financial statements of the international subsidiaries have been translated to U.S. dollars in accordance with the provisions of SFAS No. 52. As a result of its international operations, the Company is subject to foreign currency fluctuations which may impact current earnings. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY The following table identifies (i) the relationship that net income items disclosed in the consolidated condensed financial statements have to total sales, and (ii) amount and percent of change of such items compared to the corresponding prior period. (Dollar Amounts In Thousands) (i) (ii) Income and Expense Three Months Ended June 30 Items as a Percent of Sales ---------------------------------------- - --------------------------- 1996 to 1995 1995 to 1994 Three Months Ended ---------------------- ------------ June 30 Amount of Percent Percent - ---------------------------- Income and Increase/ of of 1996 1995 Expense Items (Decrease) Change Change ------ ------ ------------- --------- ------- ------- 100.00% 100.00% Sales revenue $12,457 24.56% 32.40% ------ ------ ------- ------ ------ 18.30 18.77 Cost of sales 2,043 21.45 26.84 45.51 45.55 Volume incentives 5,646 24.44 29.51 24.60 26.51 SG&A expenses 2,095 15.58 43.67 ------ ------ ------- ------ ------ 88.41 90.83 9,784 21.24 32.75 ------ ------ ------- ------ ------ 11.59 9.17 Operating income 2,673 57.46 29.02 ------ ------ ------- ------ ------ 0.50 0.98 Interest and other income (185) (37.20) 40.56 (0.01) (0.10) Interest expense 47 88.82 (100.00) (0.26) (0.17) Foreign exchange loss (76) (87.87) (54.23) (0.34) 0.04 Minority interest (238) (1,183.29) (72.89) ------ ------ ------- ------ ------ (0.11) 0.75 (452) (119.46) 1.18 ------ ------ ------- ------ ------ 11.48 9.92 Income before income taxes 2,221 44.14 26.39 ------ ------ 4.61 4.06 Provision for income taxes 851 41.31 18.08 ------ ------ ------- ------ ------ 6.87% 5.86% Net income $ 1,370 46.09% 32.87% ------ ------ ------- ------ ------ ------ ------ ------- ------ ------
10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY The following table identifies (i) the relationship that net income items disclosed in the consolidated condensed financial statements have to total sales, and (ii) amount and percent of change of such items compared to the corresponding prior period. (Dollar Amounts In Thousands) (i) (ii) Income and Expense Six Months Ended June 30 Items as a Percent of Sales ---------------------------------------- - --------------------------- 1996 to 1995 1995 to 1994 Six Months Ended ---------------------- ------------ June 30 Amount of Percent Percent - ---------------------------- Income and Increase/ of of 1996 1995 Expense Items (Decrease) Change Change ------ ------ ------------- --------- ------- ------- 100.00% 100.00% Sales revenue $25,508 26.09% 29.26% ------ ------ ------- ------ ------ 17.80 19.18 Cost of sales 3,197 17.05 28.82 45.95 45.91 Volume incentives 11,748 26.17 26.27 26.19 27.10 SG&A expenses 5,797 21.88 40.48 ------ ------ ------- ------ ------ 89.94 92.19 20,742 23.01 30.69 ------ ------ ------- ------ ------ 10.06 7.81 Operating income 4,766 62.39 14.48 ------ ------ ------- ------ ------ 0.86 0.92 Interest and other income 160 17.84 79.29 (0.03) (0.10) Interest expense 59 60.82 100.00 (0.30) (0.22) Foreign exchange loss (156) (73.24) (20.20) (0.18) 0.25 Minority interest (469) (190.65) 118.17 ------ ------ ------- ------ ------ 0.35 0.85 (406) (48.74) 140.52 ------ ------ ------- ------ ------ 10.41 8.66 Income before income taxes 4,360 51.46 20.71 ------ ------ 4.23 3.56 Provision for income taxes 1,728 49.57 13.15 ------ ------ ------- ------ ------ 6.18% 5.10% Net income $ 2,632 52.79% 26.62% ------ ------ ------- ------ ------ ------ ------ ------- ------ ------
11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS SALES REVENUE: The Company reported record consolidated sales for the three and six months ended June 30, 1996. Sales revenue for the three and six months ended June 30, 1996, was $63 million and $123 million compared to $51 million and $98 million, an increase of 25 percent and 26 percent compared to corresponding periods of 1995, respectively. Management believes the increase in sales for the three- and six-month periods is attributable to the expansion of the Company's independent sales force, a continued increase of consumer awareness and interest in natural health and nutritional products and incentives the Company offers its independent sales force. Additionally, the Company's sales revenue growth has been enhanced through international expansion. The Company's international operations reported sales revenue of $43 million for the six months ended June 30, 1996, an increase of 32 percent compared to the same period in 1995. The Company's independent sales force consists of Managers and Distributors. A Distributor interested in earning additional income by committing more time and effort to selling the Company's products may attain the rank of "Manager." Appointment as a Manager is dependent upon attaining certain purchase volume levels and demonstrating leadership abilities. The number of Managers increased to 15,309 at June 30, 1996, from 10,396 at June 30, 1995. The number of Distributors at June 30, 1996, was 485,500 compared to 280,830 at June 30, 1995. 12 VOLUME INCENTIVES: The dollar increase in volume incentives, for the three and six months ended June 30, 1996, is directly related to the increase in sales revenue. Volume incentives are an integral part of the Company's direct sales marketing program and are payments to independent sales force members for reaching certain levels of sales performance and organizational development. Volume incentives vary slightly, on a percentage basis, by product due to the Company's pricing policies. Management expects volume incentives to remain relatively constant, as a percent of sales, during the rest of 1996. COST OF GOODS SOLD: The Company has experienced a decrease in cost of goods sold of .47 percent and 1.38 percent, as a percentage of sales, for the three and six months ended June 30, 1996, respectively, compared to the same period last year. The decrease in cost of goods sold, as a percentage of sales, was primarily related to increased efficiencies in the Company's manufacturing operations. Management expects cost of goods sold to decrease slightly as a percent of sales during the rest of 1996. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: The Company experienced a decrease in selling, general and administrative expenses (SG&A) of 1.91 percent and .91 percent, as a percent of sales, during the three and six month periods ended June 30, 1996, respectively, compared to the corresponding periods of 1995. The decrease in SG&A expenses, as a percentage of sales, resulted from efficiencies due to the increase in sales revenue and improved budgetary controls and efforts to reduce dollar increases in SG&A. Management expects SG&A to decrease slightly, as a percentage of sales, during the rest of 1996. 13 SUBSIDIARY OPERATIONS: Domestic and international sales for the six months ended June 30, 1996, compared to the previous year are as follows: SALES REVENUE (Dollars in Thousands) (Unaudited) 1996 1995 -------- ------- DOMESTIC SALES REVENUE $ 80,777 $65,664 -------- ------- INTERNATIONAL SALES REVENUE: Americas 33,308 24,099 Asia Pacific 6,716 5,404 Other 2,494 2,620 -------- ------- TOTAL INTERNATIONAL 42,518 32,123 -------- ------- TOTAL SALES REVENUE $123,295 $97,787 -------- ------- -------- ------- Domestic and international operating income for the six months ended June 30, 1996, compared to the previous year are as follows: OPERATING INCOME (Dollars in Thousands) (Unaudited) 1996 1995 -------- ------- DOMESTIC OPERATING INCOME $ 7,814 $5,140 ------- ------ INTERNATIONAL OPERATING INCOME: Americas 4,477 2,618 Asia Pacific 7 (501) Other 107 382 ------- ------ TOTAL INTERNATIONAL 4,591 2,499 ------- ------ TOTAL OPERATING INCOME $12,405 $7,639 ------- ------ ------- ------ 14 Domestic and international assets as of June 30, 1996, compared to December 31, 1995, balances are as follows: (Dollars in Thousands) (Unaudited) June 30 December 31 1996 1995 ----------- ----------- ASSETS DOMESTIC ASSETS $50,280 $40,996 ------- ------- INTERNATIONAL ASSETS: Americas 24,320 18,941 Asia Pacific 4,178 4,239 Other 928 1,071 ------- ------- TOTAL INTERNATIONAL 29,426 24,251 ------- ------- TOTAL ASSETS $79,706 $65,247 ------- ------- ------- ------- BALANCE SHEET ACCOUNTS RECEIVABLE Accounts receivable increased approximately $1 million during the six months ended June 30, 1996. The increase in receivables is related to the Company's growing international operations as well as promotional incentives offered during the second quarter. PREPAID EXPENSES AND OTHER Prepaid expenses and other increased approximately $2 million during the six months ended June 30, 1996. The increase is the result of deposits made for the Company's travel incentive programs as well as required tax deposits. ACCRUED VOLUME INCENTIVES Accrued volume incentives increased approximately $2 million during the first six months of the year as a direct result of increased sales revenue. 15 ACCRUED LIABILITIES The balance of accrued liabilities increased approximately $3 million during the six months ended June 30, 1996. The increase in accrued liabilities reflects the increased level of sales revenue and related accruals for incentives such as conventions and other travel awards. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased approximately $8 million for the six months ended June 30, 1996. The increase in cash and cash equivalents is primarily the result of operations as well as increases in current liabilities. The Company acquired approximately $4 million in machinery, equipment and building improvements during the first six months of 1996 to improve its manufacturing and administrative capabilities. Approximately $1.2 million was used for the payment of dividends during the first six months. Management believes the Company's stock is an attractive investment and, from time to time pursuant to its previously announced 660,000 share stock buyback program, may utilize a portion of its available cash to purchase up to the remaining balance of approximately 153,000 shares of its stock should market conditions warrant. The Company is in the process of establishing a new international subsidiary. Management expects that this new operation may require initial capitalization of approximately $1 million during the next twelve to eighteen months. The Company is evaluating the need to expand its domestic manufacturing, inventory and other facilities. The Company may consider long-term financing for these projects in the event that they require significant capital outlays, otherwise these facilities will be funded through working capital. 16 Management believes that future working capital requirements can be internally funded. Management expects cash and investments to increase during the remainder of 1996, primarily resulting from operations. However, cash and investments may be reduced in the event the Company proceeds with the capital projects mentioned above. 17 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders of the Company was held on May 20, 1996. At the meeting, the following persons were re-elected as Directors of the Company to serve until the next Annual Meeting or until their successors are elected and qualified. WITHHOLD DIRECTOR FOR AUTHORITY ------------------ ---------- --------- Kristine F. Hughes 17,100,788 185,586 Alan D. Kennedy 17,100,444 185,830 At the meeting, the shareholders also adopted and approved the Company's 1995 Stock Option Plan as described in the Company's Proxy Statement for the meeting. Shareholders voted on the Plan as follows: ABSTENTIONS OR FOR AGAINST NON-VOTES ---------- --------- ----------- 11,784,337 2,206,231 -0- 18 PART II OTHER INFORMATION (cont.) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) No exhibits are required to be filed by Item 601 of Regulation S-K. b) No reports were filed on Form 8-K during the quarter for which this report is filed. OTHER ITEMS There were no other items to be reported under Part II of this report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATURE'S SUNSHINE PRODUCTS, INC. August 8, 1996 /s/ Alan D. Kennedy ----------------------------------------- Alan D. Kennedy, President and Chief Executive Officer August 8, 1996 /s/ Douglas Faggioli ----------------------------------------- Douglas Faggioli, Chief Financial Officer 19