Back to GetFilings.com




QuickLinks -- Click here to rapidly navigate through this document

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended
June 30, 2002
  Commission File Number
0-8707

Logo

NATURE'S SUNSHINE PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)

Utah
(State or other jurisdiction of
incorporation or organization)
  87-0327982
(IRS Employer
Identification No.)

75 East 1700 South
Provo, Utah 84606
(Address of principal executive offices and zip code)

(801) 342-4300
(Registrant's telephone number)

        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 for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

        The number of shares of Common Stock, no par value, outstanding on July 30, 2002 was 15,809,991 shares.





NATURE'S SUNSHINE PRODUCTS, INC.
FORM 10-Q
For the Quarter Ended June 30, 2002
Table of Contents


Part I.

 

Financial Information

 

 

 

 

Item 1.

 

Unaudited Financial Statements

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

 

Condensed Consolidated Statements of Income and Comprehensive Income

 

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

13

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

18

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

19

Part II.

 

Other Information

 

 

 

 

Item 6.

 

Exhibits and Reports on Form 8-K

 

20

2



PART I FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
(Unaudited)

 
  June 30,
2002

  December 31,
2001

ASSETS            
CURRENT ASSETS:            
  Cash and cash equivalents   $ 25,391   $ 29,788
  Accounts receivable, net     6,533     6,327
  Inventories     28,028     26,834
  Deferred income tax assets     2,828     1,188
  Prepaid expenses and other     8,773     9,209
   
 
    Total Current Assets     71,553     73,346
PROPERTY, PLANT AND EQUIPMENT, net     33,992     35,294
LONG-TERM INVESTMENTS     10,694     12,973
INTANGIBLE ASSETS, net     4,060     4,753
OTHER ASSETS, net     5,153     5,062
   
 
    $ 125,452   $ 131,428
   
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3



NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Amounts in Thousands)
(Unaudited)

 
  June 30,
2002

  December 31,
2001

 
LIABILITIES AND SHAREHOLDERS' EQUITY              
CURRENT LIABILITIES:              
  Accounts payable   $ 3,942   $ 4,814  
  Accrued volume incentives     10,613     12,005  
  Accrued liabilities     15,848     11,978  
  Income taxes payable     3,100     3,988  
   
 
 
    Total Current Liabilities     33,503     32,785  
   
 
 
LONG-TERM LIABILITIES:              
  Deferred income tax liabilities     637     1,220  
  Deferred compensation     1,563     1,625  
   
 
 
    Total Long-Term Liabilities     2,200     2,845  
   
 
 
SHAREHOLDERS' EQUITY:              
  Common stock, no par value; 20,000 shares authorized, 19,446 shares issued     34,865     36,308  
  Retained earnings     117,889     116,836  
  Treasury stock, at cost, 3,560 and 3,180 shares, respectively     (46,813 )   (43,538 )
  Accumulated other comprehensive loss     (16,192 )   (13,808 )
   
 
 
    Total Shareholders' Equity     89,749     95,798  
   
 
 
    $ 125,452   $ 131,428  
   
 
 

The accompanying notes 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)

 
  Three Months Ended
June 30,

 
 
  2002
  2001
 
SALES REVENUE   $ 77,920   $ 81,760  
   
 
 
COSTS AND EXPENSES:              
  Cost of goods sold     13,704     14,655  
  Volume incentives     34,430     35,929  
  Selling, general and administrative     25,912     24,395  
   
 
 
      74,046     74,979  
   
 
 
OPERATING INCOME     3,874     6,781  
   
 
 
OTHER EXPENSE     1,434     695  
   
 
 
INCOME BEFORE PROVISION FOR INCOME TAXES     5,308     7,476  
PROVISION FOR INCOME TAXES     2,289     2,780  
   
 
 
NET INCOME     3,019     4,696  
   
 
 
OTHER COMPREHENSIVE INCOME (LOSS), net of tax:              
  Foreign currency translation adjustments     (2,286 )   234  
  Net unrealized holding gains (losses) on marketable securities     (87 )   22  
  Reclassification adjustment for losses included in net income     34     (13 )
   
 
 
      (2,339 )   243  
   
 
 
COMPREHENSIVE INCOME   $ 680   $ 4,939  
   
 
 
BASIC NET INCOME PER COMMON SHARE   $ 0.19   $ 0.29  
   
 
 
WEIGHTED AVERAGE BASIC COMMON SHARES     16,088     16,258  
   
 
 
DILUTED NET INCOME PER COMMON SHARE   $ 0.18   $ 0.28  
   
 
 
WEIGHTED AVERAGE DILUTED COMMON SHARES     16,701     16,710  
   
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5



NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Amounts in Thousands, Except Per-Share Information)
(Unaudited)

 
  Six Months Ended
June 30,

 
 
  2002
  2001
 
SALES REVENUE   $ 153,780   $ 163,454  
   
 
 
COSTS AND EXPENSES:              
  Cost of goods sold     27,319     29,268  
  Volume incentives     67,805     72,212  
  Selling, general and administrative     52,999     48,788  
   
 
 
      148,123     150,268  
   
 
 
OPERATING INCOME     5,657     13,186  
   
 
 
OTHER INCOME (EXPENSE)              
  Impairment of investment     (3,000 )    
  Other income, net     2,162     654  
   
 
 
      (838 )   654  
   
 
 
INCOME BEFORE PROVISION FOR INCOME TAXES     4,819     13,840  
PROVISION FOR INCOME TAXES     2,688     5,122  
   
 
 
NET INCOME     2,131     8,718  
   
 
 
OTHER COMPREHENSIVE INCOME (LOSS), net of tax:              
  Foreign currency translation adjustments     (3,216 )   (772 )
  Net unrealized holding gains (losses) on marketable securities     (627 )   24  
  Reclassification adjustment for losses included in net income     1,459     (13 )
   
 
 
      (2,384 )   (761 )
   
 
 
COMPREHENSIVE INCOME (LOSS)   $ (253 ) $ 7,957  
   
 
 
BASIC NET INCOME PER COMMON SHARE   $ 0.13   $ 0.54  
   
 
 
WEIGHTED AVERAGE BASIC COMMON SHARES     16,175     16,273  
   
 
 
DILUTED NET INCOME PER COMMON SHARE   $ 0.13   $ 0.53  
   
 
 
WEIGHTED AVERAGE DILUTED COMMON SHARES     16,902     16,524  
   
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6



NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Amounts in Thousands)
(Unaudited)

 
  Six Months Ended
June 30,

 
 
  2002
  2001
 
CASH FLOWS FROM OPERATING ACTIVITIES:              
  Net income   $ 2,131   $ 8,718  
  Adjustments to reconcile net income (loss) to net cash provided by operating activities:              
    Depreciation and amortization     4,391     3,249  
    Tax benefit from stock option exercises     289     48  
    Loss on sale of property, plant and equipment     108     14  
    Deferred income taxes     (2,223 )   (1,804 )
    Deferred compensation     (62 )   252  
    Loss on impaired investment     3,000      
    Changes in assets and liabilities:              
      Accounts receivable, net     (206 )   593  
      Inventories     (1,194 )   (1,155 )
      Prepaid expenses and other assets     523     599  
      Accounts payable     (872 )   1,892  
      Accrued volume incentives     (1,392 )   1,593  
      Accrued liabilities     3,870     1,969  
      Income taxes payable     (888 )   592  
      Cumulative currency translation adjustments     (3,578 )   (333 )
   
 
 
        Net Cash Provided by Operating Activities     3,897     16,227  
   
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:              
  Capital expenditures     (2,572 )   (9,807 )
  Proceeds from (purchase of) long-term investments, net     110     (1,100 )
  Payments received (advances) on long-term receivables     (111 )   112  
  Purchase of other assets     (71 )   (440 )
  Proceeds from sale of property, plant and equipment     74     59  
   
 
 
        Net Cash Used in Investing Activities     (2,570 )   (11,176 )
   
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:              
  Payment of cash dividends     (1,077 )   (1,084 )
  Purchase of treasury stock     (6,010 )   (1,300 )
  Repayments of short-term debt         (273 )
  Proceeds from exercise of stock options     1,001     237  
   
 
 
        Net Cash Used in Financing Activities     (6,086 )   (2,420 )
   
 
 
EFFECT OF EXCHANGE RATES ON CASH     362     (439 )
   
 
 
NET INCREASE (DECREASE) IN CASH AND              
CASH EQUIVALENTS     (4,397 )   2,192  
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD     29,788     28,803  
   
 
 
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD   $ 25,391   $ 30,995  
   
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

7



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 United States Securities and Exchange Commission. Certain information and footnote disclosures normally required in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes 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 June 30, 2002, and the results of operations and cash flows 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 six months ended June 30, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

        The Company suggests that these condensed consolidated 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, 2001.

(2) RECENT ACCOUNTING PRONOUNCEMENTS

        In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting and broadens the criteria for recording identifiable intangible assets separate from goodwill and amounts previously recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS No. 142 requires the use of a nonamortization approach to account for goodwill and indefinite-lived intangibles, and instead these assets are reviewed for impairment on a periodic basis as appropriate. The provisions of each statement which apply to goodwill and intangible assets acquired prior to June 30, 2001, were adopted by the Company on January 1, 2002.

        In connection with the adoption of SFAS No. 142, the Company reassessed the useful lives and classification of its intangible assets. The Company determined that $3,213 of previously identified goodwill should be classified as an acquired distributor network and continues to be amortized over a 10-year period. The Company has determined that none of its intangible assets are impaired. Because all of the Company's intangible assets continue to be amortized over the same useful lives, there is no

8



impact on operations. Therefore, no reconciliation of reported net income to adjusted net income is presented. Information regarding the Company's intangible assets is as follows:

 
  As of June 30, 2002
  As of December 31, 2001
 
  Carrying
Amount

  Accumulated
Amortization

  Net
  Carrying
Amount

  Accumulated
Amortization

  Net
Patents and Trademarks   $ 1,202   $ 943   $ 259   $ 1,202   $ 829   $ 373
Acquired Distributor Networks     5,634     2,107     3,527     5,634     1,674     3,960
Product Registrations     706     432     274     773     353     420
   
 
 
 
 
 
  Total   $ 7,542   $ 3,482   $ 4,060   $ 7,609   $ 2,856   $ 4,753
   
 
 
 
 
 

        Amortization expense for intangible assets for the six months ended June 30, 2002, was $626. Estimated amortization expense for the remainder of 2002 and the five succeeding fiscal years follows:

 
  Estimated
Amortization
Expense

2002 (remainder)   $ 652
2003     1,118
2004     525
2005     303
2006     301
2007     300

(3) INVENTORIES

        Inventories consist of the following:

 
  June 30,
2002

  December 31,
2001

Raw materials   $ 7,557   $ 6,571
Work in process     948     928
Finished goods     19,523     19,335
   
 
    $ 28,028   $ 26,834
   
 

(4) NET INCOME PER COMMON 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 June 30, 2002, the Company had a total of 3,765 common stock options outstanding. These options were granted at fair market value and have a weighted-average exercise price of $8.18 per share.

9



        Following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for the three months ended June 30, 2002 and 2001:

 
  Net Income
(Numerator)

  Shares
(Denominator)

  Per Share
Amount

 
Three Months Ended June 30, 2002                  
Basic EPS   $ 3,019   16,088   $ 0.19  
  Effect of stock options       613     (0.01 )
   
 
 
 
Diluted EPS   $ 3,019   16,701   $ 0.18  
   
 
 
 
Three Months Ended June 30, 2001                  
Basic EPS   $ 4,696   16,258   $ 0.29  
  Effect of stock options       452     (0.01 )
   
 
 
 
Diluted EPS   $ 4,696   16,710   $ 0.28  
   
 
 
 
Six Months Ended June 30, 2002                  
Basic EPS   $ 2,131   16,175   $ 0.13  
  Effect of stock options       727      
   
 
 
 
Diluted EPS   $ 2,131   16,902   $ 0.13  
   
 
 
 
Six Months Ended June 30, 2001                  
Basic EPS   $ 8,718   16,273   $ 0.54  
  Effect of stock options       251     (0.01 )
   
 
 
 
Diluted EPS   $ 8,718   16,524   $ 0.53  
   
 
 
 

        For the three months ended June 30, 2002 and 2001, there were outstanding options to purchase 259 and 623 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 six months ended June 30, 2002 and 2001, there were outstanding options to purchase 230 and 866 shares of common stock, respectively, that were not included in the computation of Diluted EPS, as their effect would have been anti-dilutive.

(5) EQUITY TRANSACTIONS

        The Company has declared consecutive quarterly cash dividends since 1988. The most recent quarterly cash dividend of 31/3 cents per common share was declared on July 29, 2002, to shareholders of record on August 9, 2002, and is payable on August 16, 2002.

        For the three and six months ended June 30, 2002, the Company repurchased approximately 352 and 521 shares of its common stock at an average price per share of $11.01 and $11.55, respectively, as part of its 1,000-share buyback program authorized by the Company's Board of Directors in February 2001. At July 29, 2002, the Company had 251 shares remaining to be purchased under the current buyback program.

10


(6) ACCUMULATED OTHER COMPREHENSIVE LOSS

        The composition of accumulated other comprehensive loss, net of tax, is as follows:

 
  Foreign Currency
Adjustments

  Unrealized
Gains (Losses) on
Available-for Sale
Securities

  Total
Accumulated
Other Comprehensive
Loss

 
Balance as of December 31, 2001   $ (13,158 ) $ (650 ) $ (13,808 )
Current period change     (3,216 )   832     (2,384 )
   
 
 
 
Balance as of June 30, 2002   $ (16,374 ) $ 182   $ (16,192 )
   
 
 
 

(7) 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 assess performance. The Company evaluates performance based on operating income.

        The Company's operating segments are based on geographic operations. Intersegment sales are eliminated in consolidation and are not material.

11



        Operating segment information for the three and six months ended June 30, 2002 and 2001, is as follows:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2002
  2001
  2002
  2001
Sales Revenue:                        
  United States   $ 45,344   $ 45,635   $ 89,495   $ 91,679
  International:                        
    Latin America     16,848     19,142     32,602     39,006
    Asia Pacific     9,244     11,374     19,274     21,638
    Other     6,484     5,609     12,409     11,131
   
 
 
 
      77,920     81,760     153,780     163,454
   
 
 
 
Operating Expenses:                        
  United States     43,022     40,070     86,097     81,666
  International:                        
    Latin America     15,103     18,653     29,984     37,014
    Asia Pacific     10,118     10,756     20,608     21,046
    Other     5,803     5,500     11,434     10,542
   
 
 
 
      74,046     74,979     148,123     150,268
   
 
 
 
Operating Income:                        
  United States     2,322     5,565     3,398     10,013
  International:                        
    Latin America     1,745     489     2,618     1,992
    Asia Pacific     (874 )   618     (1,334 )   592
    Other     681     109     975     589
   
 
 
 
      3,874     6,781     5,657     13,186
  Other Income (Expense), net     1,434     695     (838 )   654
   
 
 
 
Income Before Provision for Income Taxes   $ 5,308   $ 7,476   $ 4,819   $ 13,840
   
 
 
 

        Segment assets as of June 30, 2002 and December 31, 2001, are as follows:

 
  June 30,
2002

  December 31,
2001

Assets            
  United States   $ 84,028   $ 81,736
  International:            
    Latin America     23,453     25,402
    Asia Pacific     14,182     20,424
    Other     3,789     3,866
   
 
    $ 125,452   $ 131,428
   
 

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 on Form 10-K for the year ended December 31, 2001.

SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

        For domestic sales, the Company generally receives its product sales price in the form of cash or credit card accompanying the orders from independent Distributors and Managers. From time to time, the Company's domestic operation extends short-term credit associated with product promotions. For certain of the Company's international operations, the Company offers credit terms consistent with industry standards within each respective country. Sales revenue and related volume incentives are recorded when the merchandise is shipped. Amounts received for unshipped merchandise are recorded as customer deposits and are included in accrued liabilities. Payments of volume incentives related to product orders are made in the month following the sale.

Impairment of Long-Lived Assets

        The Company reviews its long-lived assets, including intangibles, for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable. The Company uses an estimate of future undiscounted net cash flows of the related asset or group of assets over the remaining life in measuring whether the assets are recoverable. At June 30, 2002, the Company did not consider any of its long-lived assets impaired. See "Recent Accounting Pronouncements".

Inventories

        Inventories are stated at the lower of cost (using the first-in, first-out method) or market value. At June 30, 2002, management believes the Company had incurred no material impairments in the carrying value of its inventories, other than impairments for which a provision has been made.

Investments

        A substantial portion of the Company's investments are categorized as available-for-sale securities and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income (loss) in shareholders' equity. The cost of the securities sold is based on the specific identification method. Realized gains and losses on sales of available-for-sale securities are included in interest and other income.

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) the amount and percent of change of such items compared to the corresponding prior period.

13


(Dollar Amounts in Thousands)
(Unaudited)

 
  (i)
Income and Expense
Items as a Percent of Sales

  (ii)
Three Months Ended June 30
2002 to 2001

 
 
  Three Months Ended
June 30

   
   
 
Income and
Expense Items

  Amount of
Increase
(Decrease)

  Percent
of
Change

 
  2002
  2001
 
Sales   100.0 % 100.0 % $ 3,840   (4.7 )%
   
 
 
     
Cost of goods sold   17.6   17.9     (951 ) (6.5 )
Volume incentives   44.2   44.0     (1,499 ) (4.2 )
SG&A expenses   33.2   29.8     1,517   6.2  
   
 
 
     
Total operating expenses   95.0   91.7     (933 ) (1.2 )
   
 
 
     
Operating income   5.0   8.3     (2,907 ) (42.9 )
Other income, net   1.8   0.8     739   106.3  
   
 
 
     
Income before provision for income taxes   6.8   9.1     (2,168 ) (29.0 )
Provision for income taxes   2.9   3.4     (491 ) (17.7 )
   
 
 
     
Net income   3.9 % 5.7 % $ (1,677 ) (35.7 )%
   
 
 
     

        The following table identifies (i) the relationship that net income items disclosed in the condensed consolidated financial statements have to total sales, and (ii) the amount and percent of change of such items compared to the corresponding prior period.

(Dollar Amounts in Thousands)
(Unaudited)

 
  (i)
Income and Expense
Items as a Percent of Sales

  (ii)
Six Months Ended June 30
2002 to 2001

 
 
  Six Months Ended
June 30

   
   
 
Income and
Expense Items

  Amount of
Increase
(Decrease)

  Percent
of
Change

 
  2002
  2001
 
Sales   100.0 % 100.0 % $ (9,674 ) (5.9 )%
   
 
 
     
Cost of goods sold   17.8   17.9     (1,949 ) (6.7 )
Volume incentives   44.1   44.2     (4,407 ) (6.1 )
SG&A expenses   34.4   29.8     4,211   8.6  
   
 
 
     
Total operating expenses   96.3   91.9     (2,145 ) (1.4 )
   
 
 
     
Operating income   3.7   8.1     (7,529 ) (57.1 )
Other income (expense), net   (.6 ) 0.4     (1,492 ) (228.1 )
   
 
 
     
Income before provision for income taxes   3.1   8.5     (9,021 ) (65.2 )
Provision for income taxes   1.7   3.2     (2,434 ) (47.5 )
   
 
 
     
Net income   1.4 % 5.3 % $ (6,587 ) (75.6 )%
   
 
 
     

14


Sales Revenue

        Sales revenue for the three months ended June 30, 2002, was $77.9 million compared to $81.8 million for the same period in the prior year, a decrease of approximately 5 percent. Sales revenue for the six months ended June 30, 2002, was $153.8 million compared to $163.5 million for the same period in the prior year, a decrease of approximately 6 percent. The decrease in sales revenue for the three and six months ended June 30, 2002, primarily reflects decreases in sales revenue in the Company's international operations.

        Sales revenue in the Company's United States operation for the three and six months ended June 30, 2002, was $45.3 million and $89.5 million, a decrease of approximately 1 percent and 2 percent, respectively, compared to the same periods in the prior year. Increased product competition in the nutritional supplement market, as well as increased competition for Distributors caused the sales revenue decrease in the United States. The Company expects competition to remain strong for the foreseeable future.

        The Company's international operations reported sales revenue of $32.6 million and $64.3 million for the three and six months ended June 30, 2002, a decrease of approximately 10 percent, respectively, compared to the same periods in the prior year.

        Sales revenue in Latin America was $16.8 million and $32.6 million for the three and six months ended June 30, 2002, a decrease of 12 percent and 16 percent, respectively, compared to the same periods in the prior year. The sales revenue decline experienced in Latin America was primarily due to import restrictions imposed by the Brazilian government, and the decrease in sales revenue attributable to the devaluation of the local currency as well as the unstable economic environment in Venezuela.

        Sales revenue in Asia Pacific was $9.2 million and $19.3 million for the three and six months ended June 30, 2002, a decrease of 19 percent and 11 percent, respectively, compared to the same periods in the prior year. The sales revenue decline experienced in the Company's Asia Pacific markets is the result of continued sales revenue decreases experienced in the Company's Synergy operation as well as the decrease in sales revenue reported by Korea due to increased competition.

        Sales revenue in the Company's other markets was $6.5 million and $12.4 million for the three and six months ended June 30, 2002, an increase of 16 percent and 11 percent, respectively, compared to the same periods in the prior year. The growth in sales revenue experienced in the Company's other markets is primarily due to the results of its operations in the Russian Federation.

        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 June 30, 2002, was approximately 19,100 compared to approximately 18,900 at December 31, 2001. The number of Distributors at June 30, 2002, was approximately 555,000 compared to approximately 596,000 at December 31, 2001.

Cost of Goods Sold

        For the three and six months ended June 30, 2002, cost of goods sold decreased slightly, as a percent of sales, compared to the same period in the prior year due to increased efficiencies attributable to the Company's expansion of its manufacturing facility. Management expects cost of goods sold to remain relatively constant as a percent of sales during the remainder of 2002 compared to the six months ended June 30, 2002.

15



Volume Incentives

        Volume incentives are payments to independent sales force members for reaching certain levels of sales revenue 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 three and six months ended June 30, 2002, volume incentives, as a percent of sales, remained relatively constant compared to the same period in the prior year. Management expects volume incentives to remain relatively constant, as a percent of sales, during the remainder of 2002, compared to the six months ended June 30, 2002.

Selling, General and Administrative

        Selling, general and administrative expenses for the three and six months ended June 30, 2002, increased as a percent of sales compared to the same period of the prior year as a result of the decrease in sales revenue in the Company's United States and international markets as well as expenditures associated with the Company's sales conventions, travel and incentive programs. For the remainder of 2002, management expects selling, general and administrative expenses, as a percent of sales, to return to those levels experienced in the prior year.

Other Income

        Other income for the six months ended June 30, 2002, decreased approximately $1.5 million as a result of an impairment of the Company's investment in Cetalon Corporation of $3.0 million.

Product Liability

        Similar to other manufacturers and distributors of products that are ingested, the Company faces an inherent risk of exposure to product liability claims in the event that, among other things, the use of its products results in injury. As a result of increased regulatory scrutiny of products that contain ephedrine alkaloids and kava, the Company has not been able to obtain product liability insurance covering such products. Approximately 2 percent of the Company's products contain some amount of ephedrine alkaloids and kava. The Company carries insurance in the types and amounts that management considers reasonably adequate to cover the risks associated with its business. Premiums for the Company's product liability coverage applicable to all its products increased approximately 35 percent at June 1, 2002, offering less coverage than that of the prior year. There can be no assurance that product liability insurance will continue to be available at a reasonable cost or, if available, to cover potential liabilities associated with the Company's products. In the event that product liability claims exceed product liability coverage, the results could have a material negative impact on the Company. The Company is exploring various options to obtain other forms of coverage, including but not limited to, captive plans.

Segment Information

        See information included in the condensed consolidated financial statements under Item 1 Note 7.

Balance Sheet

        Accrued volume incentives decreased approximately $1.4 million as of June 30, 2002, compared to December 31, 2001, as a result of decreased U.S. and international sales revenue during the quarter ended June 30, 2002.

16


        Accrued liabilities increased approximately $3.9 million as of June 30, 2002, compared to December 31, 2001, as a result of accruals associated with the Company's sales conventions, travel and incentive programs.

LIQUIDITY AND CAPITAL RESOURCES

        Cash and cash equivalents decreased approximately $4.4 million as of June 30, 2002 compared to December 31, 2001. The decrease in cash and cash equivalents is primarily the result of the Company's authorized stock buyback program and its continuing repurchase of its common shares in the open market. During the six months ended June 30, 2002, cash totaling $6.0 million was used to repurchase approximately 521,000 shares of common stock. During the six months ended June 30, 2002, the Company recorded an impairment loss of $3.0 million relating to long-term investments.

        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 operating activities, it might 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.

Legal Proceedings

        The Company is a defendant in various lawsuits which are incidental to the Company's business. Management, after consultation with legal counsel, believes that the ultimate disposition of these matters will not have a material effect upon the Company's consolidated results of operations, financial position or liquidity.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections 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, product liability claims, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. When used in "Management's Discussion and Analysis of Financial Condition and Results of Operations", and elsewhere in this Form 10-Q the words "estimates", "expects", "anticipates", "projects", "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

        The Company conducts its business in several countries and intends to continue to expand its foreign operations. Sales revenue, operating income and net income are affected by fluctuations in currency exchange rates, interest rates and other uncertainties inherent in doing business and selling product in more than one currency. In addition, the Company's operations are exposed to risks associated with changes in social, political and economic conditions inherent in foreign operations, including changes in the laws and policies that govern foreign investment in countries where it has

17



operations as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.

Foreign Currency Risk

        During the six months ended June 30, 2002, approximately 42 percent of the Company's revenue and expenses were realized outside of the United States. Inventory purchases are transacted primarily in U.S. dollars from vendors located in the United States. The local currency of each international subsidiary is considered the functional currency, and all sales and expenses are translated at average exchange rates for the reported periods. Therefore, the Company's sales revenue and expenses will be positively impacted by a weakening of the U.S. dollar and will be negatively impacted by a strengthening of the U.S. dollar. Given the uncertainty of exchange rate fluctuations, the Company cannot estimate the affect of these fluctuations on the Company's future business, product pricing, results of operations or financial condition. Changes in currency exchange rates affect the relative prices at which the Company sells its products. The Company regularly monitors its foreign currency risks and periodically takes measures to reduce the impact of foreign exchange rate fluctuations on the Company's operating results. The Company does not use derivative instruments for hedging, trading or speculating on foreign exchange rate fluctuations.

        The following table sets forth average currency exchange rates of one U.S. dollar into local currency for each of the countries in which sales revenue exceeded $10.0 million during any of the previous two years.

Six Months Ended June 30

  2002
  2001
Brazil   2.4   2.1
Japan   129.5   120.3
Mexico   9.3   9.4
South Korea   1,287.0   1,288.7
Venezuela   925.9   707.7

Interest Rate Risk

        The Company has investments, which by nature are subject to market risk. At June 30, 2002, the Company had investments totaling $10.7 million of which $4.3 million were equity investments and $6.4 million were municipal obligations, which carry fixed interest rates. Approximately $6.4 million mature between one and five years and carry a weighted average interest rate of 5.2 percent. A hypothetical one percent change in interest rates would not have a material affect on the Company's liquidity, financial condition or results of operations.


Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        At the Company's Annual Meeting of Shareholders held on May 24, 2002, the stockholders re-elected the following persons to three-year terms to the Board of Directors:

NOMINEE

  FOR
  WITHHOLD
AUTHORITY

Kristine F. Hughes   14,173,613   468,155
Daniel P. Howells   14,211,343   430,425

        Pauline T. Hughes-Francis, Douglas Faggioli, Richard G. Hinckley and Eugene L. Hughes also serve as directors of the Company, and their terms of office continued after the Annual Meeting.

18




PART II OTHER INFORMATION

Item 6. EXHIBITS AND REPORTS ON FORM 8-K



99.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350 (filed herewith)

99.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350 (filed herewith)

Other Items

        There were no other items to be reported under Part II of this Report.

19



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: August 12, 2002

 

/s/  
DANIEL P. HOWELLS      
Daniel P. Howells, President & Chief Executive Officer

Date: August 12, 2002

 

/s/  
CRAIG D. HUFF      
Craig D. Huff, Chief Financial Officer

20




QuickLinks

NATURE'S SUNSHINE PRODUCTS, INC. FORM 10-Q For the Quarter Ended June 30, 2002 Table of Contents
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in Thousands) (Unaudited)
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (Amounts in Thousands) (Unaudited)
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Amounts in Thousands, Except Per-Share Information) (Unaudited)
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Amounts in Thousands, Except Per-Share Information) (Unaudited)
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (Amounts in Thousands) (Unaudited)
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands, Except Per-Share Information) (Unaudited)
SIGNATURES