NOTE 10:  CAPITAL TRANSACTIONS

 

Dividends

 

The declaration of future dividends is subject to the discretion of the Company’s Board of Directors and will depend upon various factors, including the Company’s earnings, financial condition, restrictions imposed by any indebtedness that may be outstanding, cash requirements, future prospects and other factors deemed relevant by its Board of Directors.

 

On March 6, 2013, the Company’s Board of Directors declared a cash dividend of $0.10 per common share in an aggregate amount of $1,583 that was paid on March 28, 2013, to shareholders of record on March 18, 2013. On May 8, 2013, the Company’s Board of Directors declared a cash dividend of $0.10 per common share in an aggregate amount of $1,587 that was paid on May 30, 2013, to shareholders of record on May 20, 2013. On August 8, 2013, the Company’s Board of Directors declared a special one-time cash dividend of $1.50 per common share in addition to the Company’s recurring quarterly dividend of $0.10 per common share that was paid on August 29, 2013, to shareholders of record on August 19, 2013. The amount of the cash dividend paid to shareholders was $25,627. On November 6, 2013, the Company’s Board of Directors declared a cash dividend of $0.10 per common share in an aggregate amount of $1,622 that was paid on November 29, 2013, to shareholders of record on November 19, 2013.

 

Share Repurchase Program

 

On August 8, 2013, the Board of Directors authorized a $10,000 share repurchase program to be implemented over two years. Such purchases may be made in the open market, through block trades, in privately negotiated transactions or otherwise. The timing and amount of any shares repurchased will be determined based on the Company’s evaluation of market conditions and other factors and the program may be discontinued or suspended at any time.

 

The following is a summary of the Company's repurchases of common shares during the year ended December 31, 2013:

 

Period		Number of Shares		Average Price Paid per Share			Program Balance Used for Repurchases
July 1 — September 30, 2013		108		$	18.06		$	1,945
October 1 — December 31, 2013		32		18.44			601
		140		$	18.14		$	2,546

 

Share-Based Compensation

 

During the year ended December 31, 2012, the Company’s shareholders adopted and approved the Nature’s Sunshine Products, Inc. 2012 Stock Incentive Plan (the “2012 Incentive Plan”).  The 2012 Incentive Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, performance awards, stock awards and other stock-based awards.  The Compensation Committee of the Board of Directors has authority and discretion to determine the type of award as well as the amount, terms and conditions of each award under the 2012 Incentive Plan, subject to the limitations of the 2012 Incentive Plan. A total of 1,500 shares of the Company’s common stock were authorized for the granting of awards under the 2012 Incentive Plan. The number of shares available for awards, as well as the terms of outstanding awards, are subject to adjustment as provided in the 2012 Incentive Plan for stock splits, stock dividends, recapitalizations and other similar events.

 

The Company also maintains a stock incentive plan, which was approved by shareholders in 2009 (the “2009 Incentive Plan”). The 2009 Incentive Plan also provided for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, performance awards, stock awards and other stock-based awards.  Under the 2012 Incentive Plan, any shares subject to award, or awards forfeited or reacquired by the Company issued under the 2009 Incentive Plan are available for award up to a maximum of 400 shares.

 

Stock option activity for 2013, 2012 and 2011 consisted of the following:

 

		Number of Shares (in thousands)		Weighted Average Exercise Price Per Share
Options outstanding at January 1, 2011		859		$	9.20
Granted		630		10.84
Forfeited or canceled		(79	)	9.64
Exercised		(36	)	11.08
Options outstanding at December 31, 2011		1,374		9.88
Granted		686		15.11
Forfeited or canceled		(35	)	13.60
Exercised		(241	)	9.95
Options outstanding at December 31, 2012		1,784		11.81
Granted		832		15.85
Forfeited or canceled		(184	)	13.65
Exercised		(506	)	8.56
Options outstanding at December 31, 2013		1,926		$	12.54

 

On August 29, 2013, the Company paid a special one-time cash dividend of $1.50 per common share. In accordance with the provisions of the Company’s stock incentive plans, the exercise price of all outstanding stock options on the ex-dividend date were decreased by $1.50 per share in order to prevent a dilution of benefits or potential benefits intended to be made available to the stock option holders. Because this modification was required by the provisions of the Company’s stock incentive plans, no additional share-based compensation expense was recorded.

 

The Company’s outstanding stock options include time-based stock options which vest over differing periods ranging from the date of issuance up to 48 months from the option grant date, performance-based stock options which already vested upon achieving operating income margins of six, eight and ten percent as reported in four of five consecutive quarters over the term of the options, performance-based stock options which vest upon achieving cumulative annual net sales revenue growth targets over a rolling two-year period subject to the Company maintaining at least an eight percent operating income margin during the applicable period, and performance-based stock options which vest upon achieving annual net sales targets over a rolling one-year period.

 

During the year ended December 31, 2013, the Company issued options to purchase 832 shares of common stock under the 2012 Stock Incentive Plan to the Company’s executive officers and other employees, which are composed of both time-based stock options and net sales revenue performance-based stock options. These options were issued with a weighted-average exercise price of $15.85 per share and a weighted-average grant date fair value of $6.55 per share. All of the options issued have an option termination date of ten years from the option grant date.

 

During the year ended December 31, 2012, the Company issued time-based options to purchase 217 shares of common stock under the 2009 Incentive Plan to the Company’s new senior executives. These options were issued with a weighted average exercise price of $15.65 per share and a weighted average grant date fair value of $7.66 per share. All of the options issued have an option termination date of ten years from the option grant date.

 

Also, during the year ended December 31, 2012, the Company issued options to purchase 469 shares of common stock under the 2012 Incentive Plan to the Company’s executive officers and other employees, which are composed of both time-based stock options and net sales revenue performance-based stock options. These options were issued with a weighted average exercise price of $14.86 per share and a weighted average grant date fair value of $7.00 per share. All of the options issued have an option termination date of ten years from the option grant date.

 

During the year ended December 31, 2011, the Company issued options to purchase 630 shares of common stock under the 2009 Incentive Plan to the Company’s executive officers, other employees and to new members of its Board of Directors. These options were issued with a weighted-average exercise price of $10.84 per share, and a weighted-average grant date fair value of $5.13 per share. All of the options issued have an option termination date of ten years from the option grant date.

 

For the years ended December 31, 2013, 2012 and 2011, the Company issued 506, 241 and 36 shares of common stock upon the exercise of stock options at an average exercise price of $8.56, $9.95 and $11.08 per share, respectively. The aggregate intrinsic values of options exercised during the years ended December 31, 2013, 2012 and 2011 was $4,576, $1,427 and $211, respectively. For the years ended December 31, 2013 and 2012, the Company recognized $653 and $378 of tax benefits from the exercise of stock options during the period, respectively.

 

The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the years ended December 31, 2013, 2012 and 2011:

 

		2013			2012			2011
Weighted average grant date fair value of grants		$	6.55		$	7.21		$	5.13
Expected life (in years)		5.0 to 6.0			4.0 to 6.0			3.0 to 4.0
Risk-free interest rate		0.6 to 1.5			0.3 to 0.9			0.7 to 1.2
Expected volatility		55.9 to 58.2			58.5 to 66.0			49.0 to 67.7
Dividend yield		2.1 to 2.7			0.0 to 1.3			0.0

 

Expected option lives and volatilities are based on historical data of the Company. The risk free interest rate is calculated as the average U.S. Treasury bill rate that corresponds with the option life.  The dividend yield is based on the Company’s historical and expected amount of dividend payouts, at the time of grant. On August 29, 2013, the Company paid a special one-time cash dividend of $1.50 per common share. The Company has excluded this special one-time cash dividend from the dividend yield used in the Black-Scholes option-pricing model calculations as it is not representative of future dividends declared by the Company.

 

Share-based compensation expense from time-based stock options for the years ended December 31, 2013, 2012 and 2011 was $3,166, $2,101 and $557, respectively; the related tax benefit was approximately $1,251, $850 and $222, respectively. As of December 31, 2013, 2012 and 2011, the unrecognized share-based compensation cost related to grants described above was $3,294, $2,715 and $607, respectively.  As of December 31, 2013, the remaining compensation cost is expected to be recognized over the weighted-average period of approximately 1.9 years.

 

Shared-based compensation expense from operating income performance-based stock options for the years ended December 31, 2013, 2012 and 2011 was $0, $653 and $2,921, respectively; the related tax benefit of approximately $0, $255 and $1,168, respectively. As of December 31, 2012, there was no remaining compensation expense to be recognized for the operating income performance-based stock options.

 

The Company has not recognized any share-based compensation expense related to the net sales revenue performance-based stock options for the year ended December 31, 2013.  Should the Company attain all of the net sales revenue metrics related to the net sales revenue performance-based stock option grants, the Company would recognize up to $800 of potential share-based compensation expense.

 

The following table summarizes information about options outstanding and exercisable at December 31, 2013.

 

		Options Outstanding							Options Exercisable
Range of Option Prices Per Share		Options Outstanding		Weighted-Avg. Remaining Contractual Life		Weighted-Avg. Exercise Price Per Share			Options Exercisable		Weighted-Avg. Remaining Contractual Life		Weighted-Avg. Exercise Price Per Share
$3.85 to $9.99		456		6.5		$	6.93		456		6.5		$	6.93
$10.00 to $13.99		986		8.6		13.41			285		7.8		13.39
$14.00 to $19.20		484		9.0		16.06			97		6.0		15.26
		1,926		8.2		$	12.59		838		7.2		$	10.09

 

At December 31, 2013, the aggregate intrinsic value of outstanding options to purchase 1,926 shares of common stock, the exercisable options to purchase 838 shares of common stock, and options to purchase 905 shares of common stock expected to vest was $9,415, $6,069 and $3,179, respectively. At December 31, 2012, the aggregate intrinsic value of outstanding options to purchase 1,784 shares of common stock, the exercisable options to purchase 1,011 shares of common stock, and options to purchase 644 shares of common stock expected to vest was $5,315, $5,016 and $281, respectively.

 

Restricted stock unit activity for the period ended December 31, 2013 and 2012, is as follows:

 

		Number of Shares		Weighted Average Grant Date Fair Value
Units outstanding at January 1, 2012		—		$	—
Granted		18		12.07
Issued		—		—
Forfeited		—		—
Units outstanding at December 31, 2012		18		12.07
Granted		17		12.90
Issued		(3	)	12.07
Forfeited		—		—
Units outstanding at December 31, 2013		32		12.47

 

During the period ended December 31, 2013, the Company issued 17 restricted stock units (RSUs) of common stock under the 2012 Incentive Plan to the Board of Directors. The RSUs were issued with a weighted average grant date fair value of $12.90 per share and vest in 12 monthly installments over a one year period from the grant date.

 

During the period ended December 31, 2012, the Company issued 18 restricted stock units (RSUs) of common stock under the 2012 Incentive Plan to the Board of Directors. The RSUs were issued with a weighted average grant date fair value of $12.07 per share and vest in 12 monthly installments over a one year period from the grant date.

 

RSUs are valued at the market value on the date of grant.  Due to post-vesting restrictions, a Finnerty Model was utilized to calculate a valuation discount from the market value of common shares reflecting the restriction embedded in the RSUs preventing the sale of the underlying shares over a certain period of time. The Finnerty Model proposes to estimate a discount for lack of marketability such as transfer restrictions by using an option pricing theory. This model has gained recognition through its ability to address the magnitude of the discount by considering the volatility of a company’s stock price and the length of restriction. The concept underpinning the Finnerty Model is that restricted stock cannot be sold over a certain period of time. Using assumptions previously determined for the application of the option pricing model at the valuation date, the Finnerty Model discount for lack of marketability is approximately 17.5 percent for a common share.

 

Share-based compensation expense from RSUs for the period ended December 31, 2013 and 2012 was approximately $223 and $124, respectively; and the related tax benefit was approximately $88 and $49, respectively. As of December 31, 2013 and 2012, the unrecognized share-based compensation expense related to the grants described above was $62 and $99, respectively. As of December 30, 2013, the remaining compensation expense is expected to be recognized over the weighted average period of approximately 0.4 years.