UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

 

 

NATURE’S SUNSHINE PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

 

Utah		87-0327982
(State or other jurisdiction of incorporation or organization)		(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)

 

Securities registered pursuant to Section 12(b) of the Act:

None

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, without par value

 

 

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 30, 2004 was approximately $146,317,737 based on the closing price of $14.24 as reported on the NASDAQ 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 11, 2005 was 15,052,961 shares.

 

Documents Incorporated by Reference:

 

Proxy Statement for the May 27, 2005 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 Mexico, Central America, Canada, Venezuela, Dominican Republic, Japan, Ecuador, the United Kingdom, Colombia, Peru, Israel, and Brazil. We export our products to several other countries, including Argentina, Australia, Chile, New Zealand, Norway and the Russian Federation.

 

We also sell our products through a separate division, Synergy Worldwide.  Synergy Worldwide sells products in Japan, the United States, South Korea, Singapore, Thailand, Taiwan, and Australia.

 

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.  The Company has two operating business segments that operate under the Nature’s Sunshine Products name and are based on geographic operations: a United States segment and an international segment.  The Company’s third operating business segment operates under the Synergy Worldwide name.  The segments have similar business characteristics and each offers similar products through similar methods of distribution. Information by business segment for each of our last three fiscal years for sales revenue and operating income, and information by business segment as of the end of our last two fiscal years for identifiable assets, are 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 700 products includes herbal products, vitamins and mineral supplements, personal care, nutritional drinks, and miscellaneous other products.  We purchase herbs and other raw materials in bulk and, after quality control testing, formulate, encapsulate, tablet or concentrate, and package them for shipment.  Most of our products are manufactured at our facility in Spanish Fork, Utah.  Contract manufacturers produce some 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.

 

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.

 

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.

 

Other Products

 

We manufacture or contract with independent manufacturers to supply a variety of other products, including a variety of different nutritional drinks, homeopathic products, and powders.

 

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 665,000 active distributors at December 31, 2004, which include approximately 223,000 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 signing up under the sponsorship of someone who is already a Distributor.  Each Distributor is required to renew his/her distributorship on a yearly basis; approximately 20 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 earn “Manager” status.  Manager status is contingent upon attaining certain purchase volume levels, recruiting additional Distributors, and demonstrating leadership abilities.  Managers numbered approximately 18,400 at December 31, 2004, including approximately 6,000 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. Historically, approximately 60 percent of Distributors appointed as Managers have continued 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 offer credit terms consistent with industry standards within each respective country.

 

We pay sales commissions (“Volume Incentives”) to our Managers and Distributors based upon the amount of sales group product purchases.  A portion of these volume incentives are paid as rebates for purchases made by Managers and Distributors of products for their own use or for resale and a portion of these volume incentives are commissions for purchases made by their down-line Distributors. Reference is made to Item 8 herein for “Volume Incentives” paid by us for the years ended December 31, 2004, 2003, and 2002.  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.

 

3

 

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

 

Seasonality

 

Our business does not reflect significant seasonality.

 

Inventories

 

We maintain a considerable inventory of raw materials and finished goods in order to provide a high level of product availability to our 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 have 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, 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, Usana, and Amway.  The principal competitors in the encapsulated and tableted herbal products market include Nature’s Way, 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 recognition.  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 the enhancement of existing products.  The amount, excluding capital expenditures, spent on research and development activities was approximately $1.7 million, $2.1 million, and $2.2 million in 2004, 2003, and 2002, respectively.  During the three years in the period ended December 31, 2004, 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 results of operations 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 our 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 business prospects, results of operations, liquidity, and financial position.

 

Employees

 

The number of individuals employed by us as of December 31, 2004, was 1,069.  We believe that our relations with our employees are satisfactory.

 

International Operations

 

Our sales of nutritional and personal care products are established internationally in Japan, Mexico, Central America, Canada, Venezuela, South Korea, Dominican Republic, Ecuador, the United Kingdom, Colombia, Thailand, Peru, Singapore, Israel, Brazil, Taiwan, and Australia. We also export our products to numerous other countries, including Argentina, Australia, Chile,
New Zealand, Norway, and the Russian Federation.  Information by business segment for each of our last three fiscal years for sales revenue and operating income, and information by business segment as of our last two fiscal years for identifiable assets attributable to the Nature’s Sunshine United States, Nature’s Sunshine International, and Synergy Worldwide business segments are set forth in Note 14 of the Notes to Consolidated Financial Statements appearing in Item 8 of this Report.

 

5

 

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.

 

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 continue to 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 in as early as two years but are renewable upon expiration.

 

Our principal warehousing and manufacturing facilities are housed in a building consisting of approximately 265,000 square feet owned by us and located on approximately ten acres in Spanish Fork, Utah.  During 2002, we completed an 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 Japan, Mexico, Central America, Canada, Venezuela, South Korea, Dominican Republic, Ecuador, the United Kingdom, Colombia, Thailand, Peru, Singapore, Israel, Brazil, Taiwan, and Australia.  We believe these facilities are suitable for their respective uses and are, in general, adequate for our present and near-term future needs.  During 2004, 2003, and 2002, we spent approximately $4.6 million, $3.6 million, and $4.0 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 resulting from these matters will not have a material effect upon our business prospects, 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 Shareholder 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 2004 and 2003.

 

		Market Prices								Market Prices
2004		High			Low			2003		High			Low
First Quarter		$	14.99		$	8.25		First Quarter		$	9.99		$	6.65
Second Quarter		15.69			12.45			Second Quarter		10.89			7.50
Third Quarter		16.00			13.00			Third Quarter		9.19			7.10
Fourth Quarter		21.36			13.76			Fourth Quarter		9.03			7.61

 

There were approximately 1,266 shareholders of record as of March 14, 2005.  During 2004 and 2003, the Company paid quarterly cash dividends of $0.05 cents and $0.033 cents per common share, respectively.  On February 24, 2005, the Company declared a cash dividend of $0.05 cents per common share to shareholders of record on March 9, 2005. The Company expects to continue to pay cash dividends in the future.

 

Purchases of Equity Securities

 

Period		(a) Total Number of Shares Purchased		(b) Average Price Paid Per Share			(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
October 1 to October 31, 2004		—		—			—		—
November 1 to November 30, 2004		—		—			—		—
December 1 to December 31, 2004		1,000,000	(1)	$	16.50		1,000,000		—
Total		1,000,000		$	16.50		1,000,000		—

 

(1)       On October 26, 2004, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our common stock through a Dutch Auction tender offer, which commenced on October 27, 2004 and expired on November 24, 2004.  Pursuant to the Dutch Auction tender offer, we repurchased 1,000,000 shares at a price of $16.50 per share on December 3, 2004.

 

7

 

Item 6. Selected Financial Data

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

 

Income Statement Data

 

		Net Sales Revenue			Cost of Goods Sold			Volume Incentives			Selling, General and Administrative			Operating Income			Income Before Income Taxes			Net Income
2004		$	331,063		$	62,693		$	127,985		$	118,731		$	21,654		$	22,961		$	17,078
2003		260,151			51,927			93,910			106,608			7,706			7,232			5,099
2002		261,574			53,317			92,926			103,663			11,668			10,696			7,064
2001		279,075			57,659			98,665