SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

NATURE’S SUNSHINE PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not

contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)

Yes ý  No o

 

The aggregate market value of the voting stock held by non-affiliates of the registrant on June 28, 2002 was approximately $179,672,820 based on the closing price of $11.31 as reported on the NASDAQ National Market on such date and using the definition of beneficial ownership contained in Rule 16a-1(a)(2) promulgated to the Securities Exchange Act of 1934.

 

The number of shares of Common Stock, no par value, outstanding on March 24, 2003 was 13,943,766 shares.

 

Documents Incorporated by Reference:

Proxy Statement for the May 23, 2003 Annual Meeting of Shareholders (Part III of this Report).

 

 

PART I

 

Item 1. Business

 

The Company

 

Nature’s Sunshine Products, Inc., founded in 1972 and incorporated in Utah in 1976, and its subsidiaries (sometimes hereinafter referred to collectively as “we”, “our” or the “Company”) are primarily engaged in the manufacturing and marketing of nutritional and personal care products.  The Company sells its products worldwide to a sales force of independent Distributors who use the products themselves or resell them to other Distributors or consumers.

 

Our operations are conducted in the United States as well as in certain other countries.  The Company’s subsidiaries are located in South Korea, Mexico, Venezuela, Japan, Brazil, Canada, Central America, Colombia, Ecuador, Peru, the United Kingdom, Israel, Taiwan and Singapore. We also export our products to several other countries, including Argentina, Australia, Chile, Malaysia, New Zealand, Norway and the Russian Federation.

 

We maintain an Internet website at http://www.natr.com.  We make available free of charge on our website our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as practicable after we electronically file these documents with, or furnish them to, the Securities and Exchange Commission.

 

Financial Information by Business Segment

 

We are principally engaged in one line of business, namely, the manufacturing and marketing of nutritional and personal care products.  Information for each of our last three fiscal years, with respect to the amounts of sales revenue, operating income and the last two years of identifiable assets by geographical business segment, is set forth in Note 14 of the Notes to Consolidated Financial Statements appearing in Item 8 of this Report.

 

Products and Manufacturing

 

Our line of over 500 products includes herbal products, vitamins, mineral supplements and miscellaneous other products.  We purchase herbs and other raw materials in bulk and, after quality control testing, formulates, encapsulates, tablets or concentrates and packages them for shipment.  Most of our products are manufactured at its facility in Spanish Fork, Utah.  Contract manufacturers produce certain of the personal care and miscellaneous other products for us in accordance with our specifications and standards.  We have implemented stringent quality control procedures to verify that the contract manufacturers have complied with our specifications and standards.  Our product lines are described below.

 

Herbal Products

 

We manufacture a wide selection of herbal products, which are sold in the form of capsules or tablets.  These capsules or tablets contain herb powder or a combination of two or more herb powders.  We also produce both single herbs and herb combinations in the form of liquid herbs and extracts.  Liquid herbs are manufactured by concentrating herb constituents in a vegetable glycerin base.  Extracts are created by dissolving powdered herbs into liquid solvents that separate the key elements of the herbs from the fibrous plant material.  Sales of our herbal products accounted for approximately 65 percent of total sales revenue in 2002, 67 percent in 2001 and 69 percent in 2000.

 

2

 

Vitamins and Mineral Supplements

 

We manufacture a wide variety of single vitamins, which are sold in the form of chewable or non-chewable tablets.  We also manufacture several multiple vitamins and mineral supplements, including a line containing natural antioxidants.  Generally, mineral supplements are sold in the form of tablets; however, certain minerals are offered only in liquid form.  Combined sales of our vitamins and mineral supplements were approximately 29 percent of total sales revenue in 2002, 27 percent in 2001 and 23 percent in 2000.

 

Personal Care Products

 

We manufacture or contract with independent manufacturers to supply a variety of personal care products for external use, including oils and lotions, aloe vera gel, herbal shampoo, herbal skin treatment, toothpaste and skin cleanser.  Sales of personal care products accounted for approximately 2 percent of our total sales revenue in 2002, 2001 and 2000.

 

Other Products

 

We manufacture or contract with independent manufacturers to supply a variety of other products, including a variety of different drinks, homeopathic products and powders.  Sales of other products accounted for approximately 4 percent of our total sales revenue in 2002 and 2001 and 6 percent in 2000.

 

Distribution and Marketing

 

Our independent distributors market our products to consumers through direct-selling techniques as well as sponsor other distributors.  We seek to motivate and provide incentives to our independent distributors through a combination of high quality products, product support, financial benefits, sales conventions, travel programs and a variety of training seminars.

 

Our products sold in the United States are shipped directly from our manufacturing and warehouse facilities located in Spanish Fork, Utah, as well as from our regional warehouses located in Columbus, Ohio, Dallas, Texas and Atlanta, Georgia.  Each international operation maintains warehouse facilities with inventory to supply its customers.

 

Demand for our products is created from approximately 509,000 active distributors at December 31, 2002, which include approximately 235,000 in the United States.  A person who wishes to join our independent sales force begins as a “Distributor”.  An individual can become a Distributor by applying to us under the sponsorship of someone who is already a Distributor.  Each Distributor is required to renew his/her distributorship on a yearly basis; approximately 30 percent renew annually.  Many Distributors sell our products on a part-time basis to friends or associates or consume the products themselves.  A Distributor interested in earning additional income by committing more time and effort to selling our products may be appointed to  “Manager” status.  Appointment as a Manager is contingent upon attaining certain purchase volume levels, recruiting additional Distributors and demonstrating leadership abilities.  Managers numbered approximately 14,000 at December 31, 2002, including approximately 6,400 in the United States.  Managers resell the products they purchase from the Company to Distributors within their sales group, to consumers, or use the products themselves. Approximately 70 percent of Distributors appointed as Managers continue to maintain that status.

 

In the United States, we generally sell our products on a cash or credit card basis.  From time to time, our United States operation extends short-term credit associated with product promotions.  For certain of our international operations, we use independent distribution centers and offers credit terms consistent with industry standards within each respective country.

 

We pay sales commissions and volume discounts (collectively, “Volume Incentives”) to our Managers and Distributors based upon the amount of personal and sales group product purchases.  Reference is made to Item 8 herein for “Volume Incentives” paid by us for the years ended December 31, 2002, 2001 and 2000.  In addition, Managers who qualify by attaining certain levels of monthly product purchases are eligible for additional incentive programs including automobile allowances, sales conventions and travel.

 

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Source and Availability of Raw Materials

 

Raw materials used in the manufacture of our products are available from a number of suppliers.  To date, we have not experienced any major difficulty in obtaining adequate sources of supply.  We attempt to assure the availability of many of our raw materials by contracting, in advance, for our annual requirements.  In the past, we have found alternative sources of raw materials when needed.  Although there can be no assurance we will be successful in locating such sources in the future, we believe we will be able to do so.

 

Trademarks and Trade Names

 

We have obtained trademark registrations of our basic trademarks, “Nature’s Sunshine”, and the landscape logo for all of its product lines.  We also own numerous trademark registrations in the United States and in many other countries.

 

Seasonality

 

Our business does not reflect significant seasonality.

 

Working Capital

 

We maintain a considerable inventory of raw materials and finished goods in order to provide a high level of product availability to its independent Distributors and Managers.

 

Dependence Upon Customers

 

We are not dependent upon a single customer or a few customers, the loss of which would have a material adverse effect on our business.

 

Backlog

 

We typically ship orders for our products within 24 hours after receipt. As a result, we experience no significant backlog at any time.

 

Competition

 

Our products are sold in competition with other companies, some of which have greater sales volumes and financial resources than we do, and which sell brands that are, through advertising and promotions, better known to consumers.  We compete in the nutritional and personal care industry against companies, which sell through retail stores as well as against other direct selling companies.  For example, we compete against manufacturers and retailers of nutritional and personal care products, which are distributed through supermarkets, drug stores, health food stores, discount stores, beauty salons, etc.  In addition to competition with these manufacturers and retailers, we compete for product sales and independent Distributors with many other direct sales companies, including Shaklee, NuSkin, Unicity and Amway.  The principal competitors in the encapsulated and tableted herbal products market include TwinLab, Nature’s Way, USANA, Nutraceuticals and NBTY.  We believe that the principal components of competition in the direct sales marketing of nutritional and personal care products are quality, price and brand name.  In addition, the recruitment, training, travel and financial incentives for the independent sales force are important factors.

 

Research and Development

 

We conduct research and development activities at our manufacturing facility located in Spanish Fork, Utah.  Our principal emphasis in our research and development activities is the development of new products and enhancement of existing products.  The amount, excluding capital expenditures, spent on research and development activities was approximately $2.2 million, $1.9 million and $1.8 million in 2002, 2001 and 2000, respectively.  During the three years in the period ended December 31, 2002, we did not contract for any third-party research and development.

 

4

 

Compliance with Environmental Laws and Regulations

 

The nature of our business has not required any material capital expenditures to comply with federal, state or local provisions enacted or adopted regulating the discharge of materials into the environment.  No material expenditures to meet such provisions are anticipated.  Such regulatory provisions have not had any material effect upon our earnings or competitive position.

 

Regulation

 

The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of each of our major product groups are subject to regulation by one or more governmental agencies.  The most active of these is the Food and Drug Administration (“FDA”) which regulates our products under the Federal Food, Drug and Cosmetic Act (“FDCA”) and regulations promulgated thereunder.  The FDCA defines the terms “food” and “dietary supplement” and sets forth various conditions that unless complied with may constitute adulteration or misbranding of such products.  The FDCA has been amended several times with respect to dietary supplements, most recently by the Nutrition Labeling and Education Act of 1990 (the “NLEA”) and the Dietary Supplement Health and Education Act of 1994 (the “DSHEA”).

 

FDA regulations relating specifically to foods for human use are set forth in Title 21 of the Code of Federal Regulations.  These regulations include basic food labeling requirements and Good Manufacturing Practices (“GMPs”) for foods.  Detailed dietary supplement GMPs have been proposed; however, no regulations establishing such GMPs have been adopted.  Additional regulations to implement the specific DSHEA requirements for dietary supplement labeling have also been proposed, and final regulations should be implemented over a period of time upon final publication.

 

Our products are also regulated by the Federal Trade Commission (“FTC”), the Consumer Product Safety Commission (“CPSC”), the United States Department of Agriculture (“USDA”) and the Environmental Protection Agency (“EPA”).  Our activities, including our multi-level distribution activities, are also regulated by various agencies of the states, localities and foreign countries in which our products are sold.

 

In the future, we may be subject to additional laws or regulations administered by the FDA or other federal, state, local or foreign regulatory authorities, the repeal or amendment of laws or regulations which we consider favorable and/or more stringent interpretations of current laws or regulations.  We can neither predict the nature of such future laws, regulations, interpretations or applications, nor what effect additional governmental regulations or administrative orders, when and if promulgated, would have on its business.  They could, however, require reformulation of certain products to meet new standards, recall or discontinuance of certain products not able to be reformulated, imposition of additional record-keeping requirements, expanded documentation of the properties of certain products, expanded or altered labeling and/or scientific substantiation.  Any or all such requirements could have a material adverse effect on our results of operations, liquidity and financial position.

 

Employees

 

The number of individuals employed by us as of December 31, 2002, was 1,037.  We believe that its relations with its employees are satisfactory.

 

International Operations

 

Our sales of nutritional and personal care products are established internationally in South Korea, Mexico, Venezuela, Japan, Brazil, Canada, Central America, Colombia, Ecuador, Peru, the United Kingdom, Israel, Taiwan and Singapore. We also export our products to numerous other countries, including Argentina, Australia, Chile, Malaysia, New Zealand, Norway and the Russian Federation.  Information for each of the last three years with respect to the amounts of sales revenue and operating income and the last two years of identifiable assets attributable to the United States and international segments is set forth in Note 14 of the Notes to Consolidated Financial Statements appearing in Item 8 of this Report.

 

Our international operations are conducted in a manner comparable with those conducted in the United States; however, in order to conform to local variations, economic realities, market customs, consumer habits and regulatory environments, differences may exist in the products and in the distribution and marketing programs.

 

5

 

Our international operations are subject to many of the same risks faced by the United States operations, including competition and the strength of the local economy.  In addition, international operations are subject to certain risks inherent in carrying on business abroad, including foreign regulatory restrictions, fluctuations in monetary exchange rates, import-export controls and the economic and political policies of foreign governments.  The importance of these risks increases as our international operations expand.

 

Item 2. Properties

 

Our corporate offices are located in two adjacent office buildings in Provo, Utah.  The facilities consist of approximately 63,000 square feet and are leased from an unaffiliated third party through lease agreements, which expire as early as four years but are renewable upon expiration.

 

Our principal warehousing and manufacturing facilities are housed in a building of approximately 265,000 square feet owned by us and located on approximately ten acres in Spanish Fork, Utah.  On March 2, 2000, we announced our plans to complete an expansion of the manufacturing portion of the warehouse and manufacturing facility completed in 1998.  During the quarter ended June 30, 2002, we completed the expansion of our manufacturing facility at a total cost of approximately $14 million.

 

We own approximately 60,000 square feet of office and warehouse space in Mexico and approximately 10,800 square feet of office space in Venezuela.

 

We lease properties used primarily as distribution warehouses located in Columbus, Ohio; Dallas, Texas and Atlanta, Georgia, as well as offices and distribution warehouses in South Korea, Mexico, Venezuela, Japan, Brazil, Canada, Colombia, Ecuador, El Salvador, Honduras, Guatemala, Costa Rica, Panama, Nicaragua, Peru, the United Kingdom, Israel, Taiwan and Singapore.  We believe these facilities are suitable for their respective uses and are, in general, adequate for our present and near-term future needs.  During 2002, 2001 and 2000, we spent approximately $4.0 million, $3.9 million and $3.6 million, respectively, for all of our leased facilities.

 

Item 3. Legal Proceedings

 

We are a defendant in various lawsuits that are incidental to our business.  We believe, after consultation with legal counsel, that any liability as a result of these matters will not have a material effect upon our results of operations, liquidity or financial position.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

None.

 

6

 

PART II

 

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

 

Our common stock is traded on the NASDAQ National Market System (symbol NATR).  The information in the table below reflects the actual high and low sales prices of our stock in 2002 and 2001.

 

		Market Prices								Market Prices
2002		High			Low			2001		High			Low
First Quarter		$	13.50		$	10.87		First Quarter		$	9.44		$	5.69
Second Quarter		16.13			9.53			Second Quarter		13.00			6.75
Third Quarter		12.30			9.36			Third Quarter		14.25			8.15
Fourth Quarter		12.27			8.78			Fourth Quarter		14.75			7.43

 

There were approximately 1,450 shareholders of record as of March 24, 2003.  During 2002 and 2001, the Company paid quarterly cash dividends of 3 1/3 cents per common share.  On February 26, 2003, the Company declared a cash dividend of 3 1/3 cents per common share to shareholders of record on March 10, 2003. The Company expects to continue to pay similar levels of cash dividends in the future.

 

Item 6. Selected Financial Data

(Dollar and Share Amounts in Thousands, Except for Per Share Information)

 

Income Statement Data

 

		Sales Revenue			Cost of Goods Sold			Volume Incentives			Selling, General & Administrative			Operating Income			Income Before Income Taxes			Net Income
2002		$	298,734		$	53,317		$	132,175		$	101,574		$	11,668		$	10,696		$	7,064
2001		318,722			57,659			140,540			96,625			23,898			25,333			16,659
2000		314,820			55,448			139,441			93,303			26,628			27,920			17,131
1999		294,779			51,138			132,268			84,263			27,110			28,991			17,796
1998		301,665			52,191			136,490			76,917			36,067			38,373			23,278

 

Balance Sheet Data

 

		Working Capital			Current Ratio		Inventories			Property, Plant & Equipment, Net			Total Assets			Long-Term Debt			Shareholders’ Equity
2002		$	34,105		1.97:1		$	26,460		$	34,621		$	121,922		$	—		$	83,900
2001		40,561			2.24:1		26,834			35,294			131,428			—			95,798
2000		43,570			2.48:1		26,043			25,293			118,447			—			84,884
1999		35,594			2.28:1		26,660			25,193			107,435			—			77,537
1998		35,557			2.30:1		22,494			25,896			103,699			—			73,967