- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 March 31, 1997 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 (Address of 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 April 30, 1997, was 18,721,512. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollar Amounts In Thousands) (Unaudited) March 31 December 31 1997 1996 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $30,937 $27,879 Accounts receivable, net 8,138 6,698 Inventories 22,361 24,459 Prepaid expenses and other 7,380 8,014 ------- ------- Total Current Assets 68,816 67,050 PROPERTY, PLANT AND EQUIPMENT, net 20,036 20,197 LONG-TERM INVESTMENTS 2,069 2,048 OTHER ASSETS 2,633 2,701 ------- ------- $93,554 $91,996 ------- ------- ------- ------- 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) March 31 December 31 1997 1996 ---------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt $ 2,376 $ 2,788 Accounts payable 5,670 4,225 Accrued volume incentives 11,048 8,729 Accrued liabilities 9,901 9,992 Income taxes payable 2,949 1,756 -------- -------- Total Current Liabilities 31,944 27,490 -------- -------- DEFERRED INCOME TAXES 1,392 1,343 -------- -------- SHAREHOLDERS' EQUITY: Common stock, no par value, 20,000 shares authorized; 19,446 shares issued 38,885 39,406 Retained earnings 36,929 33,549 Treasury stock, at cost, 650 and 334 shares at March 31, 1997 and December 31, 1996, respectively (11,450) (5,868) Receivables due from related parties (83) (84) Cumulative translation adjustments (4,063) (3,840) -------- -------- Total Shareholders' Equity 60,218 63,163 -------- -------- $ 93,554 $ 91,996 -------- -------- -------- -------- 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 March 31 -------------------------- (Unaudited) 1997 1996 ------- ------- SALES REVENUE $67,825 $60,113 ------- ------- COSTS AND EXPENSES: Cost of goods sold 12,060 10,384 Volume incentives 31,404 27,896 Selling, general and administrative 17,951 16,753 ------- ------- 61,415 55,033 ------- ------- OPERATING INCOME 6,410 5,080 ------- ------- OTHER INCOME (EXPENSE): Interest and other income 467 744 Interest expense (11) (32) Foreign exchange loss (166) (207) Minority interest 71 (5) ------- ------- 361 500 ------- ------- INCOME BEFORE INCOME TAXES 6,771 5,580 PROVISION FOR INCOME TAXES 2,761 2,304 ------- ------- NET INCOME $ 4,010 $ 3,276 ------- ------- ------- ------- NET INCOME PER COMMON SHARE $ 0.21 $ 0.17 ------- ------- ------- ------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 19,364 19,458 ------- ------- ------- ------- 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 CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (Dollar Amounts In Thousands) Three Months Ended March 31 -------------------- (Unaudited) 1997 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from sales revenue $ 66,182 $ 60,494 Cash paid as volume incentives (29,085) (24,936) Cash paid to suppliers and employees (24,906) (24,176) Interest paid (11) (32) Interest received 503 668 Income taxes paid (1,519) (893) ------- ------- Net Cash Provided by Operating Activities 11,164 11,125 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (783) (2,830) Purchase of long-term investments (21) (49) Payments received on long-term receivables 52 68 Payments received on related party receivables 1 91 Purchase of other assets (132) --- Minority interest elimination 38 5 ------- ------- Net Cash Used in Investing Activities (845) (2,715) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of cash dividends (630) (620) Purchase of treasury stock (6,837) --- (Repayments of)/proceeds from short-term debt (412) 726 Proceeds from exercise of stock options 733 197 ------- ------- Net Cash (Used in)/Provided By Financing Activities (7,146) 303 ------- ------- EFFECT OF EXCHANGE RATES ON CASH (115) (8) ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 3,058 8,705 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,879 14,172 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $30,937 $22,877 ------- ------- ------- ------- The accompanying notes to the financial statements are an integral part of these consolidated condensed statements of cash flows. 5 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) Three Months Ended March 31 ------------------ (Unaudited) 1997 1996 -------- ------- NET INCOME $ 4,010 $ 3,276 ------- ------- Bad debt expense 66 16 Depreciation and amortization 1,092 867 (Increase) decrease in accounts receivable (1,506) 497 Decrease in inventories 2,099 472 Decrease (increase) in prepaid expenses & other assets 596 (1,924) Increase in income taxes payable 1,193 1,214 Increase in accrued liabilities and volume incentives 2,228 6,864 Increase (decrease) in accounts payable 1,445 (693) Increase in deferred income taxes 49 197 Cumulative translation adjustments (108) 339 ------- ------- Total Adjustments 7,154 7,849 ------- ------- Net Cash Provided by Operating Activities $11,164 $11,125 ------- ------- ------- ------- 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 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollar Amounts In Thousands, Except Per-Share Information) (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 present fairly the financial position as of March 31, 1997, 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. It is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. (2) INVENTORIES Inventories consist of: (Unaudited) March 31 December 31 1997 1996 ----------- ----------- Raw materials $ 6,864 $ 7,554 Work in process 716 1,146 Finished goods 14,781 15,759 ------- ------- $22,361 $24,459 ------- ------- ------- ------- 7 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 for the three-month periods ended March 31, 1997 and 1996. As of March 31, 1997, the Company had a total of 2,495,759 options outstanding. The options were all granted at market prices, with a weighted average exercise price of $12.81. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 effective for years beginning after December 15, 1996. This statement, which is expected to increase earnings per share when implemented, is not expected to have a material effect on the Company's consolidated financial statements. (4) QUARTERLY CASH DIVIDENDS The Company has declared 35 consecutive quarterly cash dividends. The most recent quarterly cash dividend of 3 1/3 cents per common share was declared May 1, 1997, to shareholders of record on May 13, 1997, payable May 26, 1997. (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. 8 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) (Unaudited) (i) (ii) Income and Expense Three Months Ended March 31 Items as a Percent of Sales ------------------------------------- - --------------------------- 1997 to 1996 1996 to 1995 Three Months Ended ---------------------- ------------ March 31 Amount of Percent Percent - --------------------------- Income and Increase/ of of 1997 1996 Expense Items (Decrease) Change Change ---- --- ------------- ---------- ------- ------- 100.00% 100.00% Sales revenue $7,712 12.83% 27.73% ------ ------ ------ ----- ----- 17.78 17.27 Cost of sales 1,676 16.14 12.51 46.30 46.41 Volume incentives 3,508 12.57 28.00 26.47 27.87 SG&A expenses 1,198 7.15 28.36 ------ ------ ------ ----- ----- 90.55 91.55 6,382 11.60 24.86 ------ ------ ------ ----- ----- 9.45 8.45 Operating income 1,330 26.18 70.07 ------ ------ ------ ----- ----- 0.67 1.24 Interest and other income (288) (38.77) 86.93 --- (0.05) Interest expense 32 100.00 27.27 (0.25) (0.35) Foreign exchange loss 41 19.80 (62.99) 0.11 (0.01) Minority interest 76 1,523.28 (102.21) ------ ------ ------ ----- ----- 0.53 0.83 (139) (28.06) 10.38 ------ ------ ------ ----- ----- 9.98 9.28 Income before income taxes 1,191 21.34 62.21 4.07 3.83 Provision for income taxes 457 19.79 61.57 ------ ------ ------ ----- ----- 5.91% 5.45% Net income $ 734 22.37% 62.66% ------ ------ ------ ----- ----- ------ ------ ------ ----- -----
9 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 months ended March 31, 1997. Sales revenue for the three months ended March 31, 1997, was $67.8 million compared to $60.1 million in the same period the prior year, an increase of 13 percent. Management believes the increase in sales for the three-month period 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. In addition, the Company's sales revenue growth has been enhanced by its international expansion. The Company's international operations reported sales revenue of $23.4 million for the three-month period in 1997, an increase of 18 percent compared to the same period in 1996. 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 was 13,946 at March 31, 1997, compared to 14,268 at March 31, 1996. The decrease in Managers was the result of a policy change in the Company's international operations during the fourth quarter of 1996. The number of domestic Managers increased 20 percent since December 31, 1996, and 8 percent over March 31, 1996. The number of Distributors at March 31, 1997, was 523,040 compared to 427,777 at March 31, 1996. 10 COST OF GOODS SOLD: The Company experienced a slight increase in cost of goods sold, as a percentage of sales, for the three months ended March 31, 1997, compared to the same period last year. The increase in cost of goods sold, as a percentage of sales, was primarily related to the Company's international operations. Additional shipping costs were incurred in the first quarter in order to maintain appropriate levels of inventory in selected markets. Management expects cost of goods sold to decrease slightly as a percent of sales during the rest of 1997 as the result of efficiencies in the Company's manufacturing operations. VOLUME INCENTIVES: The slight decrease in volume incentives, as a percent of sales, for the three months ended March 31, 1997, is directly related to the increase in international 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 decrease slightly, as a percent of sales, during the rest of 1997. The decrease is anticipated as the result of increasing sales from the Company's international operations, which have comparatively lower volume incentive payments. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: The Company experienced decreased selling, general and administrative expenses (SG&A), as a percent of sales, during the period ended March 31, 1997. The decrease, as a percent of sales, was the result of improved budgetary review and an effort by management to control costs. Management expects SG&A to decrease, as a percent of sales, for the year ended December 31, 1997. 11 SUBSIDIARY OPERATIONS: Segment information for the three months ended March 31, 1997, compared to the previous year are as follows: SALES REVENUE (Dollars in Thousands) (Unaudited) 1997 1996 ------- ------- DOMESTIC SALES REVENUE $44,428 $40,335 ------- ------- INTERNATIONAL SALES REVENUE: Americas 19,489 15,371 Asia Pacific 2,914 3,493 Other 994 914 ------- ------- TOTAL INTERNATIONAL 23,397 19,778 ------- ------- TOTAL SALES REVENUE $67,825 $60,113 ------- ------- ------- ------- OPERATING INCOME (Dollars in Thousands) (Unaudited) 1997 1996 ------- ------- DOMESTIC OPERATING INCOME $ 4,935 $ 3,340 ------- ------- INTERNATIONAL OPERATING INCOME: Americas 1,396 1,942 Asia Pacific (17) (183) Other 96 (19) ------- ------- TOTAL INTERNATIONAL 1,475 1,740 ------- ------- TOTAL OPERATING INCOME $ 6,410 $ 5,080 ------- ------- ------- ------- (Dollars in Thousands) (Unaudited) March 31 December 31 ASSETS 1997 1996 ------- ------- DOMESTIC ASSETS $57,611 $58,674 ------- ------- INTERNATIONAL ASSETS: Americas 31,474 28,764 Asia Pacific 3,881 3,767 Other 588 791 ------- ------- TOTAL INTERNATIONAL 35,943 33,322 ------- ------- TOTAL ASSETS $93,554 $91,996 ------- ------- ------- ------- 12 BALANCE SHEET INVENTORIES Inventories decreased approximately $2.1 million during the three months ended March 31, 1997, as the result of a concerted effort to reduce inventory levels. ACCRUED VOLUME INCENTIVES Accrued volume incentives increased approximately $2.3 million during the first three months of the year as a direct result of increased sales revenue. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased approximately $3.1 million for the three months ended March 31, 1997. The increase in cash is primarily the result of the increased sales and income as well as increases in current liabilities. Management believes the Company's stock is an attractive investment and, from time to time pursuant to its recently announced 500,000 share stock buyback program, may utilize a portion of its available cash to purchase up to the remaining balance of approximately 415,000 shares of its stock as market conditions warrant. During the first quarter of 1997, the Company acquired $6.8 million, or approximately 413,000 shares, of treasury stock as part of the previous 500,000 share buyback program. The Company is in the process of establishing a new international subsidiary. Management expects that this new operation may require initial capitalization of approximately $1.5 million during the next twelve to eighteen months. The Company is evaluating the need to expand its domestic manufacturing, inventory and other facilities. Management expects the cost of these projects to be in the range of $6.0 million to $12.0 million. The Company may consider long-term financing for these projects. 13 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 should not have a material effect upon the Company's results of operations or financial position. Management believes that future working capital requirements can be satisfied by cash, which is generated by the Company's operating activities. Management expects cash and investments to increase during 1997, as the result of operations. However, cash and investments may be reduced in the event the Company proceeds with the capital projects mentioned above. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS The Company has included forward-looking statements concerning its business and operations in this Form 10-Q. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. 14 PART II OTHER INFORMATION 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. Date: May 5, 1997 /s/ Kristine F. Hughes ---------------------------------- Kristine F. Hughes, President & Chief Executive Officer Date: May 5, 1997 /s/ Douglas Faggioli ---------------------------------- Douglas Faggioli, Chief Financial Officer 15