===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
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) 342-4300
(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
November 10, 1999, was 17,171,599.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts In Thousands)
(UNAUDITED)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,413 $ 22,099
Accounts receivable, net 9,715 9,939
Inventories 22,355 22,494
Deferred income tax assets 2,302 2,438
Prepaid expenses and other 9,605 6,025
----------- -----------
Total Current Assets 66,390 62,995
PROPERTY, PLANT AND
EQUIPMENT, net 25,830 25,896
LONG-TERM INVESTMENTS 13,831 11,675
OTHER ASSETS 3,512 3,133
----------- -------------
$109,563 $103,699
=========== =============
The accompanying notes to the financial statements are an
integral part of these condensed consolidated financial statements.
2
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Amounts In Thousands)
(UNAUDITED)
September 30, December 31,
1999 1998
------------ --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 1,166 $ 1,728
Accounts payable 6,421 4,403
Accrued volume incentives 9,914 9,638
Accrued liabilities 11,890 8,649
Income taxes payable 2,466 3,279
------------ --------------
Total Current Liabilities 31,857 27,697
------------ --------------
LONG-TERM LIABILITIES:
Deferred income tax liabilities 1,952 2,035
Deferred compensation 753 ---
------------ --------------
Total Long-Term Liabilities 2,705 2,035
------------ --------------
SHAREHOLDERS' EQUITY:
Common stock, no par value, 20,000 shares
authorized; 19,446 shares issued 37,528 37,528
Retained earnings 84,154 72,013
Treasury stock, at cost, 2,200 and 1,421
shares at September 30, 1999 and
December 31, 1998, respectively (36,934) (28,926)
Accumulated other comprehensive loss (9,747) (6,648)
------------ --------------
Total Shareholders' Equity 75,001 73,967
------------ --------------
$109,563 $103,699
============ ==============
The accompanying notes to the financial statements are an
integral part of these condensed consolidated financial statements.
3
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Amounts In Thousands, Except Per-Share Information)
(UNAUDITED)
Three Months Ended
September 30
----------------------------------------
1999 1998
---------- ----------
SALES REVENUE $73,240 $73,456
---------- ----------
COSTS AND EXPENSES:
Cost of goods sold 13,151 13,155
Volume incentives 33,275 33,628
Selling, general and administrative 20,622 17,774
---------- ----------
67,048 64,557
---------- ----------
OPERATING INCOME 6,192 8,899
OTHER INCOME, net 304 749
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 6,496 9,648
PROVISION FOR INCOME TAXES 2,368 3,589
---------- ----------
NET INCOME 4,128 6,059
---------- ----------
OTHER COMPREHENSIVE INCOME (LOSS), net of tax:
Foreign currency translation adjustments (520) (1,818)
Unrealized holding losses arising during the period (8) (77)
Reclassification adjustment for gains
included in net income (40) ---
---------- ----------
(568) (1,895)
---------- ----------
COMPREHENSIVE INCOME $ 3,560 $ 4,164
========== ==========
BASIC NET INCOME PER COMMON SHARE $ 0.24 $ 0.33
========== ==========
WEIGHTED AVERAGE BASIC SHARES 17,472 18,341
========== ==========
DILUTED NET INCOME PER COMMON SHARE $ 0.24 $ 0.33
========== ==========
WEIGHTED AVERAGE DILUTED SHARES 17,547 18,548
========== ==========
The accompanying notes to the financial statements are an
integral part of these condensed consolidated financial statements.
4
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Amounts In Thousands, Except Per-Share Information)
(UNAUDITED)
Nine Months Ended
September 30
-------------------------------------------
1999 1998
------------- -----------
SALES REVENUE $217,056 $225,940
------------- -----------
COSTS AND EXPENSES:
Cost of goods sold 38,292 40,342
Volume incentives 99,162 104,301
Selling, general and administrative 58,370 55,317
------------- -----------
195,824 199,960
------------- -----------
OPERATING INCOME 21,232 25,980
OTHER INCOME, net 1,446 1,778
------------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 22,678 27,758
PROVISION FOR INCOME TAXES 8,763 10,727
------------- -----------
NET INCOME 13,915 17,031
------------- -----------
OTHER COMPREHENSIVE INCOME (LOSS), net of tax:
Foreign currency translation adjustments (3,066) (1,974)
Unrealized holding gains (losses) arising
during the period 38 (182)
Reclassification adjustment for gains
included in net income (71) (9)
------------- -----------
(3,099) (2,165)
------------- -----------
COMPREHENSIVE INCOME $ 10,816 $ 14,866
============= ===========
BASIC NET INCOME PER COMMON SHARE $ 0.79 $ 0.92
============= ===========
WEIGHTED AVERAGE BASIC SHARES 17,722 18,467
============= ===========
DILUTED NET INCOME PER COMMON SHARE $ 0.78 $ 0.91
============= ===========
WEIGHTED AVERAGE DILUTED SHARES 17,821 18,764
============= ===========
The accompanying notes to the financial statements are an
integral part of these condensed consolidated financial statements.
5
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Amounts In Thousands)
(UNAUDITED)
Nine Months Ended
September 30
-------------------------------------------
1999 1998
--------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $13,915 $ 17,031
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense 204 80
Depreciation and amortization 6,046 3,777
Gain on sale of fixed assets (7) (66)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 20 (2,005)
Decrease (increase) in inventories 139 (1,403)
(Increase) decrease in prepaid expenses and other assets (2,809) 1,982
Increase in accounts payable 2,018 644
Increase in accrued volume incentives 276 504
Increase in accrued liabilities 3,994 3,632
Decrease in income taxes payable (813) (237)
Increase in deferred income taxes 53 251
Cumulative translation adjustments (1,889) (1,283)
------------ -----------
Net Cash Provided by Operating Activities 21,147 22,907
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,198) (5,678)
(Purchase) sale of long-term investments (2,156) 156
Payments received on long-term receivables 46 130
Purchase of other assets (2,030) (554)
Proceeds from sale of assets 25 ---
Minority interest elimination --- (293)
------------ -----------
Net Cash Used in Investing Activities (9,313) (6,239)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of cash dividends (1,773) (1,849)
Purchase of treasury stock (8,008) (10,888)
Repayments of short-term debt (562) (1,041)
Proceeds from exercise of stock options --- 1,397
Tax benefit from stock option exercise --- 318
------------ -----------
Net Cash Used in Financing Activities (10,343) (12,063)
------------ -----------
EFFECT OF EXCHANGE RATES ON CASH (1,177) (691)
------------ -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 314 3,914
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 22,099 27,813
------------ -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $22,413 $31,727
============ ===========
The accompanying notes to the financial statements are an
integral part of these condensed consolidated financial statements.
6
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts In Thousands, Except Per-Share Information)
(UNAUDITED)
(1) INTERIM FINANCIAL STATEMENT POLICIES AND DISCLOSURES
The unaudited, condensed consolidated 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 following disclosures
are adequate to make the information presented not misleading.
These condensed consolidated financial statements reflect all
adjustments, which in the opinion of management, are necessary to present
fairly the financial position as of September 30, 1999, and the results of
operations for the periods presented. All of the adjustments which have been
made in these condensed consolidated financial statements are of a normal
recurring nature. Operating results for the three- and nine-month periods
ended September 30, 1999, are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999.
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 Annual Report on Form 10-K
for the year ended December 31, 1998.
(2) INVENTORIES
Inventories consist of the following: September 30, December 31,
1999 1998
------------- ------------
Raw materials $ 6,913 $ 6,104
Work in process 1,556 1,377
Finished goods 13,886 15,013
-------- --------
$22,355 $22,494
======== ========
7
(3) NET INCOME PER SHARE
Basic net income per common share (Basic EPS) excludes dilution and
is computed by dividing net income by the weighted-average number of common
shares outstanding during the period. Diluted net income per common share
(Diluted EPS) reflects the potential dilution that could occur if stock
options or other contracts to issue common stock were exercised or converted
into common stock. The computation of Diluted EPS does not assume exercise or
conversion of securities that would have an anti-dilutive effect on net
income per common share
As of September 30, 1999, the Company had a total of 1,068 options
outstanding. The options were granted at market prices and have a weighted
average exercise price of $10.59.
Following is a reconciliation of the numerator and denominator of
Basic EPS to the numerator and denominator of Diluted EPS for the three and
nine months ended:
8
Net Income Shares Per Share
(Numerator) (Denominator) Amount
- ---------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1999
- ---------------------------------------------------------------------------------------------------------
Basic EPS $4,128 17,472 $0.24
Effect of stock options --- 75
- ---------------------------------------------------------------------------------------------------------
Diluted EPS $4,128 17,547 $0.24
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1998
- ---------------------------------------------------------------------------------------------------------
Basic EPS $6,059 18,341 $0.33
Effect of stock options --- 207
- ---------------------------------------------------------------------------------------------------------
Diluted EPS $6,059 18,548 $0.33
- ---------------------------------------------------------------------------------------------------------
Net Income Shares Per Share
(Numerator) (Denominator) Amount
- ---------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
- ---------------------------------------------------------------------------------------------------------
Basic EPS $13,915 17,722 $0.79
Effect of stock options --- 99
- ---------------------------------------------------------------------------------------------------------
Diluted EPS $13,915 17,821 $0.78
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1998
- ---------------------------------------------------------------------------------------------------------
Basic EPS $17,031 18,467 $0.92
Effect of stock options --- 297
- ---------------------------------------------------------------------------------------------------------
Diluted EPS $17,031 18,764 $0.91
- ---------------------------------------------------------------------------------------------------------
For the three months ended September 30, 1999 and 1998, there were
outstanding options to purchase 700 and 298 shares of common stock,
respectively, that were not included in the computation of Diluted EPS, as
their effect would have been anti-dilutive. For the nine months ended
September 30, 1999 and 1998, there were outstanding options to purchase 535
and 74 shares of common stock, respectively, that were not included in the
computation of Diluted EPS, as their effect would have been anti-dilutive.
9
(4) EQUITY TRANSACTIONS
The Company has declared 45 consecutive quarterly cash dividends. The
most recent quarterly cash dividend of 3 1/3 cents per common share was
declared on October 29, 1999, to shareholders of record on November 10, 1999
and is payable on November 19, 1999.
For the nine months ended September 30, 1999, the Company repurchased
approximately 779 shares of its common stock in the open market. On May 11,
1999, the Board of Directors authorized the repurchase up to 500 shares of
the Company's common stock as market conditions warrant. As of September 30,
1999, the Company had repurchased approximately 458 shares of common stock
under this approval. Subsequent to September 30, 1999, the Company
repurchased the additional 42 shares of common stock under this authorization.
On October 20, 1999, the Board of Directors authorized the repurchase
of an additional 1,000 shares of the Company's common stock as market
conditions warrant.
(5) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Statement establishes
accounting and reporting standards requiring that derivative instruments be
recorded in the balance sheet as either an asset or liability measured at its
fair value and that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000. The
adoption of this statement will not have a material effect on the Company's
consolidated financial statements as the Company does not currently hold any
derivative or hedging instruments.
10
(6) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The composition of accumulated other comprehensive income (loss), net
of tax, is as follows:
- -------------------------------------------------------------------------------------------------------------------
Unrealized Total
Gains/(Losses) on Accumulated
Foreign Currency Available-for-Sale Other Comprehensive
Adjustments Securities Income (Loss)
- -------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1998 $ (7,012) $364 $(6,648)
Current period change (3,066) (33) (3,099)
- -------------------------------------------------------------------------------------------------------------------
Balance as of September 30, 1999 $(10,078) $331 $(9,747)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
During the nine months ended September 30, 1999, the Brazilian real
devalued approximately 61 percent relative to the U.S. dollar. Approximately
$3.0 million of the foreign currency adjustment is associated with the
devaluation of the Brazilian real.
(7) LEGAL PROCEEDINGS
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 the ultimate disposition of these matters will not
have a material effect upon the Company's consolidated results of operations
or financial position.
(8) SEGMENT INFORMATION
The Company has four operating segments. These operating segments are
components of the Company for which separate information is available that is
evaluated regularly by management in deciding how to allocate resources and
in assessing performance. The Company evaluates performance based on sales
revenue and operating income (loss).
The Company's operating segments are based on geographic regions,
including a domestic segment (United States) and three international segments
that consist of Latin America, Asia Pacific and other regions. Intersegment
sales, eliminated in consolidation, are not material.
Prior balances have been restated to reflect the Company's
implementation of SFAS No. 131.
11
Segment information for the three and nine months ended Septemer 30,
1999 and 1998, are as follows:
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Sales Revenue:
Domestic $44,510 $47,119 $139,482 $145,880
International:
Latin America 18,336 21,909 52,986 68,354
Asia Pacific 6,164 3,295 12,870 8,335
Other 4,230 1,133 11,718 3,371
- -------------------------------------------------------------------------------------------------------------------
73,240 73,456 217,056 225,940
- -------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Domestic 39,053 40,080 120,633 125,322
International:
Latin America 18,326 19,842 50,962 61,940
Asia Pacific 6,006 3,696 13,838 9,984
Other 3,663 939 10,391 2,714
- -------------------------------------------------------------------------------------------------------------------
67,048 64,557 195,824 199,960
- -------------------------------------------------------------------------------------------------------------------
Operating Income:
Domestic 5,457 7,039 18,849 20,558
International:
Latin America 10 2,067 2,024 6,414
Asia Pacific 158 (401) (968) (1,649)
Other 567 194 1,327 657
- -------------------------------------------------------------------------------------------------------------------
6,192 8,899 21,232 25,980
Other Income (Expense) 304 749 1,446 1,778
- -------------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes $ 6,496 $9,648 $ 22,678 $ 27,758
- -------------------------------------------------------------------------------------------------------------------
Segment assets as of September 30, 1999 and December 31, 1998, are as follows:
- -------------------------------------------------------------------------------------------------------------------
September 30, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
Assets
Domestic $ 68,002 $ 62,971
International:
Latin America 30,115 32,154
Asia Pacific 8,082 6,236
Other 3,364 2,338
- -------------------------------------------------------------------------------------------------------------------
$109,563 $103,699
- -------------------------------------------------------------------------------------------------------------------
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements, the notes thereto and management's
discussion and analysis included in the Company's Annual Report for the year
ended December 31, 1998.
RESULTS OF OPERATIONS
The following table identifies (i) the relationship that net income items
disclosed in the condensed consolidated 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 September 30
Items as a Percent of Sales 1999 TO 1998
- -------------------------------------- -------------------------------------------
Three Months Ended Amount of Percent
September 30 Increase of
1999 1998 (Decrease) Change
---- ----- ----------- -------
100.0% 100.0% Sales revenue $ (216) (0.3)%
- ------------------------------------ -------
18.0 17.9 Cost of sales (5) ---
45.4 45.8 Volume incentives (353) (1.0)
28.1 24.2 SG&A expenses 2,849 16.0
------ ------ -------
91.5 87.9 Total operating expenses 2,491 3.9
------ ------ -------
8.5 12.1 Operating income (2,707) (30.4)
0.4 1.0 Other income (445) (59.4)
------- ------- ---------
8.9 13.1 Income before income taxes (3,152) (32.7)
3.3 4.9 Provision for income taxes (1,221) (34.0)
------- ------- --------
5.6% 8.2% Net income $(1,931) (31.9)%
====== ======= =======
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
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 Nine Months Ended September 30
Items as a Percent of Sales 1999 to 1998
- -------------------------------------- -------------------------------------------
Nine Months Ended Amount of Percent
September 30 Increase of
1999 1998 (Decrease) Change
---- ----- ----------- -------
100.0% 100.0% Sales revenue $(8,884) (3.9)%
- ------------------------------------ -------
17.6 17.8 Cost of sales (2,050) (5.1)
45.7 46.2 Volume incentives (5,139) (4.9)
26.9 24.5 SG&A expenses 3,053 5.5
------ ------ --------
90.2 88.5 Total operating expenses (4,136) (2.1)
------ ------ --------
9.8 11.5 Operating income (4,748) (18.3)
0.6 0.8 Other income (332) (18.7)
------- ------- ---------
10.4 12.3 Income before income taxes (5,080) (18.3)
4.0 4.8 Provision for income taxes (1,963) (18.3)
------- ------- ---------
6.4% 7.5% Net income $(3,116) (18.3)%
======= ======= =======
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SALES REVENUE
Sales revenue for the three months ended September 30, 1999, was
$73.2 million compared to $73.5 million in the prior year. Sales revenue for
the nine months ended September 30, 1999, was $217.1 million compared to
$225.9 million in the same period the prior year, a decrease of approximately
4 percent. Management believes the decrease in sales revenue for the nine
months ended September 30, 1999, is attributable to increased product and
price competition in the nutritional supplement market as well as increased
competition for new distributors and the continued devaluation of foreign
currencies against the U.S. dollar. Sales revenue in the Company's domestic
operations for the three and nine months ended September 30, 1999, were $44.5
million and $139.5 million, a decrease of approximately 6 percent and 4
percent, respectively, compared to the same periods in the prior year. The
domestic sales revenue was negatively impacted during the period by increased
product and price competition in the nutritional supplement market. The
Company expects competition to remain strong for the foreseeable future. The
Company is testing and evaluating various marketing programs in an effort to
restore growth rates to those experienced previously.
The Company's international operations reported sales revenue of
$28.7 million and $77.6 million for the three and nine months ended September
30, 1999, an increase of 9 percent and a decrease of 3 percent, respectively,
compared to the same periods in 1998. The increase in sales revenue for the
third quarter was primarily the result of increased sales revenue reported in
Japan, Korea and Mexico. The declining rate of growth in international sales
revenue was primarily the result of the increased valuation of the U.S.
dollar against foreign currencies. The international operation which reported
the most significant foreign currency impact was Brazil. During the nine
months September 30, 1999, the Brazilian real devalued approximately 61
percent relative to the U.S. dollar. Effective March 1, 1999,
15
the Company instituted a price increase in Brazil to offset a portion of this
devaluation. Eliminating the adverse effect of the foreign currency
devaluation, international sales revenue for the nine months ended September
30, 1999, would have increased approximately 4 percent. The Company also
experienced a decrease in sales revenue in local currency in certain of its
Latin American subsidiaries, most notably, Colombia and Venezuela.
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 at September 30, 1999, was 15,279 compared to 14,783 at
September 30, 1998, an increase of approximately 3 percent. The number of
Distributors at September 30, 1999, was approximately 522,000 compared to
approximately 516,000 at December 31, 1998.
COST OF GOODS SOLD
For the nine months ended September 30, 1999, the Company experienced
a slight decrease in cost of goods sold, as a percentage of sales, compared
to the same period in the prior year.
Management expects cost of goods sold to remain relatively constant as
a percent of sales during the remainder of 1999, as compared to the nine
months ended September 30, 1999.
VOLUME INCENTIVES
Volume incentives are payments to independent sales force members for
reaching certain levels of sales performance and organizational development
and are an integral part of the Company's direct sales marketing program.
Volume incentives vary slightly, on a percentage basis, by product due to the
Company's pricing policies. For the nine months ended September 30, 1999, the
Company experienced a slight decrease in volume incentives, as a percentage
of sales, compared to the same period the prior
16
year. The decrease in volume incentives is primarily the result of change in
product sales mix to products that have a lower volume incentive payout.
Management expects volume incentives to remain relatively constant, as a
percent of sales, during the remainder of 1999, as compared to the nine
months ended September 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the three and
nine months ended September 30, 1999, increased, as a percent of sales, as
the result of the decrease in sales revenue and additional expenditures
associated with new marketing efforts. Actual expenses increased $3.1 million
during the nine months ended September 30, 1999, as compared to the same
period the prior year. SG&A expenses included approximately $1.5 million in
test marketing and advertising costs in the Company's domestic market
designed to attract new distributors. SG&A expenses also included
approximately $1.5 million associated with the Company's relaunch of its
Japanese operation, expansion of its South Korean operation as well as
expansion into other international markets. Management expects SG&A to
decrease slightly, as a percent of sales, for the year ended December 31,
1999, compared to the nine months ended September 30, 1999.
SEGMENT INFORMATION
(See information included in the condensed consolidated financial
statements included in Item 1-- Note 8.)
BALANCE SHEET
ACCRUED LIABILITIES
Accrued liabilities increased approximately $4.0 million as of
September 30, 1999, as compared to December 31, 1998, as a result of accruals
associated with the Company's sales conventions and travel programs.
17
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased slightly for the nine months ended
September 30, 1999. During the nine months ended September 30, 1999, cash
totaling $8.0 million was used to repurchase approximately 779,000 shares of
common stock. Management believes the Company's stock is an attractive
investment and pursuant to its recently announced 1,000,000 common share
buyback program purchased an additional 116,000 shares of its common stock
subsequent to September 30, 1999.
On February 23, 1999, the Company's Board of Directors authorized the
expenditure of $6.0 million for revitalizing and relaunching the Company's
products in Japan of which approximately $2.7 million was expended during the
nine months ended September 30, 1999. The authorized funds will be used for
marketing and advertising costs as well as capital improvements, and will be
funded from the Company's current working capital. The Company expects
operating results for the fourth quarter of 1999 as well as the first quarter
of 2000 to be impacted by continued, planned investments associated with the
relaunch of its Japanese operations.
Management believes that working capital requirements can be met
through the Company's available cash and cash equivalents and
internally-generated funds for the foreseeable future; however, a prolonged
economic downturn or a decrease in the demand for the Company's products
could adversely affect the long-term liquidity of the Company. In the event
of a significant decrease in cash provided by the Company's operations, it
may be necessary for the Company to obtain external sources of funding. The
Company does not currently maintain a credit facility or any other external
sources of long-term funding; however, Management believes that such funding
could be obtained on competitive terms in the event additional sources of
funds became necessary.
18
LEGAL PROCEEDINGS
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 the ultimate disposition of these matters will not
have a material effect upon the Company's consolidated results of operations
or financial position.
THE YEAR 2000 ISSUE
In an effort to ensure the Company's information systems as well as
all other systems are Year 2000 ("Y2K") compliant, the Company is actively
engaged in assessing and correcting any potential problems. During 1997, the
Company formed a committee to review all systems and correct any potential
problems. After initial review of all internal systems, the Company
determined that the majority are currently Y2K compliant. During the third
quarter of 1999, the Company completed the testing and replacement of systems
which were not determined to be Y2K compliant. At this time, the Company
believes its systems to be Y2K compliant. The Company will continue to test
and review all information and non-information systems during the fourth
quarter to ensure continued Y2K compliance.
The Company expended approximately $1.0 million to ensure that areas
of non-compliance were corrected. Most of the systems that were not compliant
had previously been scheduled for replacement as part of the Company's
ongoing maintenance and upgrading programs.
The primary Y2K risk to the Company's operations is the potential
service disruption from third-party providers. These services include but are
not limited to providers that supply telephone, electricity, banking,
shipping and raw materials for the Company's manufacturing operations. Any
disruption of these critical services would hinder the Company's ability to
receive, process and ship orders. In the event of a temporary disruption in
the supply of raw materials, the Company believes it
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currently maintains an adequate supply of finished goods and raw material
inventories to sustain manufacturing and distribution of finished product
until alternative sources become available. Although in the past the Company
has been able to locate alternative sources, there can be no assurance the
Company will be successful in locating such sources in the future. The
Company also believes that a temporary disruption of communication services
would seriously impact the Company's ability to receive and process orders.
The Company has manual processes in place, which it believes would provide
temporary replacement for such services. To the extent possible, the Company
has verified Y2K compliance of its major service providers.
Notwithstanding the foregoing, there can be no assurance that the
Company will not experience operational difficulties as a result of Y2K
issues, either arising out of internal operations or caused by third-party
service providers, which individually or collectively could have an adverse
impact on business operations and require the Company to incur unanticipated
expenses to remedy any problems. The Company is currently evaluating what
contingency plans, if any, may need to be made in the event the Company or
third-party providers with whom the Company does business experience Y2K
problems.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and other items of this Form
10-Q may contain forward-looking statements. Such forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such statements may relate but not be limited
to projections of revenues, income or loss, capital expenditures, plans for
growth and future operations, financing needs, as well as assumptions
relating to the foregoing. Forward-looking statements are inherently
20
subject to risks and uncertainties, some of which cannot be predicted or
quantified. When used in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations", and elsewhere in this Form
10-Q the words "estimates", "expects", "anticipates", "forecasts", "plans",
"intends" and variations of such words and similar expressions are intended
to identify forward-looking statements that involve risks and uncertainties.
Future events and actual results could differ materially from those set forth
in, contemplated by or underlying the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information required by this item is not presented because the Company
believes that its investments in market-risk-sensitive instruments is not
material.
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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: November 12, 1999 /S/ Daniel P. Howells
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Daniel P. Howells, President & Chief
Executive Officer
Date: November 12, 1999 /S/ Craig D. Huff
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Craig D. Huff, Chief Financial Officer
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