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Morgan,
Lewis & Bockius LLP
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2
Palo Alto Square
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3000
El Camino Real, Suite 700
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Palo
Alto, CA 94306-2122
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Tel.
650.843.4000
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Fax:
650.843.4001
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www.morganlewis.com
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Thomas
W. Kellerman
Partner
650.843.7550
tkellerman@morganlewis.com
April 23, 2009
VIA
EDGAR AND FACSIMILE
Mr. Jeffrey P.
Riedler
Assistant Director
Securities and Exchange
Commission
Division of Corporation
Finance
100 F Street N.E.
Washington, DC 20549
Facsimile Number:
202.772.9217
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Re:
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Nature’s Sunshine Products, Inc.
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Amendment No. 1 to
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Registration Statement on Form 10-12G,
filed March 31, 2009
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File No. 0-08707
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Dear Mr. Riedler:
On
behalf of Nature’s Sunshine Products, Inc. (the “Company”), we
respectfully submit this letter in response to the comments from the Staff of
the Securities and Exchange Commission (the “Commission”) contained in
your letter to Mr. Douglas Faggioli at the Company, dated April 14,
2009 (the “Comment Letter”), with respect to the Company’s Amendment No. 1
to the Registration Statement on Form 10-12G, filed with the Commission on
March 31, 2009 (the “Form 10-12G”). The numbered paragraphs set forth below
restate the numbered paragraphs in the Comment Letter, and the discussion set
out below each such paragraph is the Company’s response to the Staff’s
comments.
As
discussed with the Staff during a telephone conference on April 20, 2009, the
Company intends to file an amended Form 10-12G pending the Staff’s review
and further comment, if any, to the Company’s responses set forth in this
letter. For the convenience of the Staff,
the Company has included marked changes, where applicable, to the respective
disclosures in this letter in response to the Staff’s comments.
Palo Alto
Philadelphia Washington New York
Los Angeles San Francisco Miami
Pittsburgh Princeton Chicago
Minneapolis
Dallas Houston Harrisburg Irvine
Boston London Paris
Brussels Frankfurt Beijing
Tokyo
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Securities and Exchange Commission
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April 23, 2009
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Page 2
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Amendment No. 1 to Form 10-12G
Explanatory Note, page 1
1. We note the expanded disclosure
in response to our prior comment 4.
Please also disclose that the Board of Directors made the decision not
to terminate Mr. Faggioli despite the recommendation of the Special
Committee.
The Company intends to
amend the Form 10-12G to more fully describe the circumstances and history
surrounding Mr. Faggioli’s leave of absence as an officer and director of
the Company and his subsequent reappointment to these positions, which reflects
the records of the Board of Directors and describes the decisions made at the
time as set forth in the Board records. The Explanatory Note under the heading “Internal
Investigation” in the Form 10-12G will be amended to read substantially as
follows:
Internal
Investigation
The Company’s failure to file required reports with the SEC related
back to an internal investigation commenced in October 2005 by the Audit
Committee of our Board of Directors (the “Audit Committee”) regarding certain
sales and commission activities involving certain of our foreign operations.
The investigation was subsequently expanded to include other matters related to
our consolidated financial statements. The Audit Committee engaged a nationally
recognized independent law firm to assist in the investigation and the law
firm, in turn, engaged a nationally recognized independent public accounting
firm to provide further assistance (the “Investigative
Team”). The internal investigation was overseen by a special committee (the
“Special Committee”) comprised of one independent member of the Audit Committee
and an outside independent consultant, who later became a director and
independent member of the Audit Committee. On March 15, 2006, the Audit
Committee and the Board of Directors received an oral preliminary report on the
findings of the investigation through that date (the “Preliminary Report”). The
Preliminary Report indicated that the Company had certain internal control weaknesses
and outlined potential violations of law by the Company and related persons,
including potential violations of the books and records, internal controls,
financial reporting, and anti-fraud provisions of the federal securities laws
and potential violations of the anti-bribery provisions of the Foreign Corrupt
Practices Act. These issues are the subject of a pending investigation by the
SEC. The Preliminary Report also included a series of recommendations,
including the termination of certain employees and senior officers. Based on
issues raised in the Preliminary Report, on March 15, 2006, the Audit
Committee determined that the financial statements filed with the SEC in
connection with the following previously issued reports of the Company should not
be relied upon:
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Securities and Exchange
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April 23, 2009
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Page 3
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(i) Quarterly Reports on Form 10-Q for
each of the first three fiscal quarters of 2005;
(ii) Annual Report on Form 10-K for the
fiscal year ended December 31, 2004 (which includes financial statements
as of December 31, 2004 and 2003 and for the fiscal years ended December 31,
2004, 2003 and 2002); and
(iii) Quarterly Reports on Form 10-Q for each of the
first three fiscal quarters of 2004, 2003 and 2002.
The Board of Directors
also considered the appropriate actions to be taken with respect to Mr. Douglas
Faggioli. As described below, KPMG LLP (“KPMG”),
our independent registered public accounting firm at that time, demanded that Mr. Faggioli’s
employment be terminated. The two
members of the Special Committee supported this recommendation, but after
consideration the Board of Directors determined that, pending the conclusion of
the investigation, Mr. Faggioli should step down as President, Chief
Executive Officer and a director of the Company, but remain an employee. The
Board of Directors was informed that the Investigative Team agreed that the
interim steps regarding Mr. Faggioli were appropriate at that time.
Cash and Cash Equivalents, page 77
2. Please tell us and disclose the
factors you considered in determining that Venezuela is not a highly
inflationary country. Address your
consideration of recent trends, including the country’s recent change of its
currency from the bolivar to the bolivar fuerte at a conversion rate of
approximately 1000 to 1 and your inability to exchange your bolivars into U.S.
dollars at the official exchange rate.
In addition, please tell us why you believe it is appropriate to still
translate the financial statement of your Venezuelan subsidiary into U.S.
dollars at the official exchange rate if you are unable to receive that
exchange rate in actuality. Please refer
to paragraph 25-27 of FAS 57.
Although the government
of Venezuela has converted its currency from the bolivar to the bolivar fuerte,
it has not had an impact on the translation to U.S. dollars. The change from the bolivar to the bolivar
fuerte converted 1,000 bolivars to 1 bolivar fuerte. The Company now uses the official exchange
rate of 2.145 bolivar fuertes to the U.S. dollar, which is the equivalent of
the prior exchange rate of 2,145 bolivars to the U.S. dollar. As a result, the current exchange rate for
bolivar fuertes and the prior year exchange rate for bolivars result in the
same ultimate rate of exchange to U.S. dollars.
The Company has received
permission from the government of Venezuela to convert its bolivars to U.S.
dollars at the official exchange rate. The
Company has determined that as long as it can continue to receive permission to
convert its Venezuelan bolivar feurtes to U.S.
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Securities and Exchange Commission
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April 23, 2009
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Page 4
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dollars at the official
exchange rate, it should continue to use the official rate for translation
purposes and the bolivar fuerte as the functional currency of its subsidiary in
Venezuela. The official exchange rate
has been consistent since 2005 at 2,145 bolivars (or 2.145 bolivar fuertes as a
result of the conversion in 2008). In
addition, management continues to monitor the historical inflation rates for Venezuela
(which had a three-year cumulative inflation rate of 84.6% as of December 31,
2008, less than the approximate 100% specified in paragraph 11 of FAS 52, which
is a factor used in determining whether an economy is highly inflationary). Should inflationary trends and other
pertinent economic factors continue to show indications of increasing inflation,
the Company would further evaluate whether its subsidiary is operating in a
highly inflationary economy in accordance with FAS 52 and EITF Topic D-55, “Determining
a Highly Inflationary Economy under FASB Statement No. 52,” and, if
necessary, begin remeasuring its transactions as if the U.S. dollar was the functional
currency in accordance with FAS 52. Furthermore,
if the Company determines that it can no longer obtain payment for imported
products or other remittances at this rate, then it would consider converting
its bolivar fuertes to U.S. dollars at market rates, which are significantly
below the official exchange rate. The
Company will continue to monitor whether the official exchange rate is the
appropriate rate for currency translation for consolidation and reporting
purposes.
The Company intends to amend
the Form 10-12G to describe the discussion above with respect to (i) the
steps necessary to obtain the official exchange rate in order to convert Venezuelan
bolivars to U.S. dollars and associated risks in the event the Company is
unable to obtain the official exchange rate, as well as (ii) the risk that
Venezuela could potentially be considered highly inflationary in future periods. The applicable disclosures related to cash
and cash equivalents for the Company’s Venezuela operations within the Foreign
Currency Risk section of the Management’s Discussion and Analysis of Financial
Condition and Results of Operations and the corresponding disclosures in the
Notes to the Consolidated Financial Statements will be amended to read
substantially as follows:
The functional currency in highly inflationary economies is the U.S.
dollar and transactions denominated in the local currency are re-measured as if
the functional currency were the U.S. dollar if they are considered material to
the consolidated financial statements. The re-measurement of local currencies
into U.S. dollars creates translation adjustments, which are included in the
consolidated statements of operations. A
country is considered to have a highly inflationary economy if it has a
cumulative inflation rate of approximately 100 percent or more over a three
year period as well as other qualitative factors including historical inflation
rate trends (increasing and decreasing), the capital intensiveness of the
operation, and other pertinent economic factors. There were no countries considered
to have a highly inflationary economy during 2008, 2007, or 2006.
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Securities and Exchange
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April 23, 2009
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Page 5
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As of December 31, 2008, we have approximately $3.4 million in
cash denominated in Venezuelan bolivarsbolivar
fuertes. Currency restrictions enacted by the government of Venezuela have
had a negative impact on the ability ofrequire
approval from the government’s currency control organization for our
subsidiary in Venezuela to obtain U.S. dollars at the official exchange rate to
pay for imported products or to repatriate dividends back to the Company. Our access
to these funds for use within Venezuela is not restricted. The market rate,
which is substantially lower than the official rate, may be used to obtain U.S.
dollars or other currencies without approval of the government’s currency
control organization. Our Venezuelan
subsidiary continues to expect to convert its bolivarsreceive the official exchange rate to pay for
imported products. It continues to apply
for and expects to receive approval from the government of Venezuela to convert
its bolivar fuertes into U.S. dollars at the official exchange rate to pay
for imported products orand to
repatriate dividends. As a result, we continue to use the official exchange
rate of 2.15 bolivar fuertes to the U.S.
dollar to translate the financial statements of our Venezuelan subsidiary
into U.S. dollars. Unless the official exchange rate is made more readily
available, however, our subsidiary’s operations could be adversely affected as
it may need to obtain U.S. dollars at less favorable exchange rates from
non-government sources. During 2008, our Venezuelan subsidiary’s net
sales revenue represented approximately 3.3 percent of consolidated net sales
revenue. Our Venezuelan subsidiary held
total assets of $11.5 million at December 31, 2008, including $3.4 million
of monetary assets noted above.
Inflation in Venezuela
has continued to increase over the past few years, and it is possible that
Venezuela will be designated a highly inflationary economy during 2009. If this were to occur, then gains and losses
resulting from the translation of our Venezuelan subsidiary would be recorded
in earnings. If Venezuela is designated as a highly inflationary economy and
there is a devaluation of the official exchange rate, then our earnings would
be negatively impacted. For example, if Venezuela were to be designated as
highly inflationary and there were a devaluation of the official currency of 20
percent, then our pre-tax earnings would be negatively impacted by
approximately $2.3 million based upon the assets held by our Venezuelan
subsidiary. In addition, revenue and
operating income would be impacted on an ongoing basis as a result of the
devaluation.
In the view of the
foregoing disclosures, the Company also intends to amend the Risk Factor under
the heading “Currency exchange rate fluctuations could lower our revenue and
net income” to read substantially as follows:
In 2008, we recognized approximately 60.3 percent of our revenue in
markets outside the United States, and we recognized 35.9 percent of our
revenue in each market’s respective local currency (other than the U.S.
dollar). We purchase inventory primarily in the United States in U.S. dollars.
In preparing our financial statements, we
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Securities and Exchange
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April 23, 2009
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Page 6
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translate revenues
and expenses in foreign countries from their local currencies into U.S. dollars
using weighted-average exchange rates. Because a significant portion of our
sales is in foreign countries, exchange rate fluctuations may have a
significant effect on our sales and earnings. Our reported net earnings may be
significantly affected by fluctuations in currency exchange rates, with
earnings generally increasing with a weaker U.S. dollar and decreasing with a
strengthening U.S. dollar. These fluctuations had a generally positive effect on
our revenue in 2008 as compared to 2007. However, during the fourth quarter for
the year ended December 31, 2008, we began to see a decline in our global
net sales of our products of approximately 4.7 percent as result of changes in
global economic conditions in the markets in which our business segments
operate. The decline is primarily driven by strengthening of the U.S. dollar
against most major currencies. In the first fiscal quarter of 2009, we have
experienced a continuing decline in our global net sales as a result of the
U.S. dollar continuing to strengthen against most major currencies, which is a
reversal of the trend for prior years. For instance, the U.S. dollar has
increased approximately 5.7 percent through February 2009 against the
Mexican peso compared to the year ended December 31, 2008 and 33.5 percent
against the Mexican peso compared to the same period last year. If exchange
rates were to change in future periods relative to those experienced in 2008,
it could have a disproportionate impact on our revenue in these future periods.
As operations expand in countries where foreign currency transactions may be
made, our operating results will increasingly be subject to the risks of
exchange rate fluctuations and we may not be able to accurately estimate the
impact that these changes may have on our future results of operations or
financial condition.
The possibility that
foreign governments may impose currency remittance restrictions is another risk
faced by our international operations. Due to the possibility of government
restrictions on transfers of cash out of the country and control of exchange
rates, we may not be able to immediately repatriate cash at the official
exchange rate or if the official exchange rate devalues, it may have a material
adverse effect on our financial position, results of operations, or cash
flows. For example, as of December 31,
2008, we had approximately $3.4 million in cash denominated in Venezuelan
bolivar fuertes. Currency restrictions enacted by the government of Venezuela
require approval from the government’s currency control organization for our
subsidiary in Venezuela to obtain U.S. dollars at the official exchange rate to
pay for imported products or to repatriate dividends back to the Company. Our
access to these funds for use within Venezuela is not restricted. While to date
we have been able to receive approval from the government of Venezuela to
obtain U.S. dollars at the official exchange rate, no assurances can be given
that we will continue to receive such approval.
Unless the official exchange rate is made more readily available, our
Venezuelan subsidiary’s operations could be adversely
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April 23, 2009
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Page 7
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affected as it may need to obtain U.S. dollars from
non-government sources where the exchange rate is substantially less favorable
than the official exchange rate.
Inflation is another risk
associated with our international operations. For example, inflation in
Venezuela has continued to increase over the past few years, and it is possible
that Venezuela will be designated a highly inflationary economy during
2009. If this were to occur, then gains
and losses resulting from the translation of revenues and expenses of our
Venezuelan subsidiary would be recorded in earnings. If Venezuela is designated
as a highly inflationary economy and there is a devaluation of the official
exchange rate, then our earnings would be negatively impacted. In addition, revenue
and operating income would be impacted on an ongoing basis as a result of the
devaluation.
We
greatly appreciate the Staff’s attention to this matter and hope that you find
that our responses have adequately addressed the concerns you raised in the Comment
Letter. If you should require any
additional information in connection with our responses, please feel free to
contact the undersigned at (650) 843-7550.
Very truly yours,
Thomas W.
Kellerman
c: Douglas Faggioli
President and Chief Executive Officer
Nature’s Sunshine Products, Inc.
75 East 1700 South
Provo, Utah 84606