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EX-3.(I) - EX-3(I) - NATURES SUNSHINE PRODUCTS INCa09-31227_1ex3di.htm
EX-32.2 - EX-32.2 - NATURES SUNSHINE PRODUCTS INCa09-31227_1ex32d2.htm
EX-32.1 - EX-32.1 - NATURES SUNSHINE PRODUCTS INCa09-31227_1ex32d1.htm
EX-31.1 - EX-31.1 - NATURES SUNSHINE PRODUCTS INCa09-31227_1ex31d1.htm
EX-31.2 - EX-31.2 - NATURES SUNSHINE PRODUCTS INCa09-31227_1ex31d2.htm
EX-3.(III) - EX-3(II) - NATURES SUNSHINE PRODUCTS INCa09-31227_1ex3diii.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2009

 

OR

 

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

 

For the transition period from                          to                         .

 

Commission File Number:  0-8707

 

 

NATURE’S SUNSHINE PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

 

Utah

 

87-0327982

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

75 East 1700 South

Provo, Utah  84606

(Address of principal executive offices and zip code)

 

(801) 342-4300

(Registrant’s telephone number including area code)

 

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 x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every

Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes o No x

 

The number of shares of Common Stock, no par value, outstanding on October 31, 2009 was 15,510,159 shares.

 

 

 



Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC.

FORM 10-Q

 

For the Quarter Ended September 30, 2009

 

Table of Contents

 

Part I. Financial Information

 

 

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

Condensed Consolidated Statements of Operations

4

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

 

 

Item 2.

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

21

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29

 

 

 

 

 

Item 4.

Controls and Procedures

32

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

 

 

Item 1A.

Risk Factors

35

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

 

 

Item 3.

Default Upon Senior Securities

36

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

36

 

 

 

 

 

Item 5.

Other Information

38

 

 

 

 

 

Item 6.

Exhibits

38

 

2



Table of Contents

 

PART I FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

(Unaudited)

 

 

 

September 30,
2009

 

December 31,
2008

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

36,263

 

$

34,853

 

Accounts receivable, net of allowance for doubtful accounts of $1,779 and $1,472, respectively

 

11,921

 

10,786

 

Investments available for sale

 

3,370

 

3,858

 

Restricted investments

 

 

2,050

 

Inventories, net

 

40,640

 

39,558

 

Deferred income tax assets

 

9,568

 

9,080

 

Prepaid expenses and other current assets

 

8,205

 

7,935

 

Total current assets

 

109,967

 

108,120

 

 

 

 

 

 

 

Property, plant and equipment, net

 

28,945

 

30,224

 

Investment securities

 

1,646

 

1,394

 

Intangible assets

 

1,450

 

1,538

 

Deferred income tax assets

 

6,558

 

6,412

 

Other assets

 

16,431

 

16,588

 

 

 

$

164,997

 

$

164,276

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

7,498

 

$

8,777

 

Accrued volume incentives

 

18,272

 

15,753

 

Accrued liabilities

 

41,690

 

45,475

 

Deferred revenue

 

4,249

 

5,167

 

Income taxes payable

 

3,999

 

2,748

 

Total current liabilities

 

75,708

 

77,920

 

Liability related to unrecognized tax benefits

 

31,676

 

30,952

 

Deferred compensation payable

 

1,646

 

1,394

 

Other liabilities

 

3,219

 

333

 

Total long-term liabilities

 

36,541

 

32,679

 

 

 

 

 

 

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

Common Stock, no par value; 20,000 shares authorized, 15,510 shares issued and outstanding as of September 30, 2009 and December 31, 2008

 

66,705

 

66,705

 

Retained earnings

 

5,548

 

4,172

 

Accumulated other comprehensive loss

 

(19,505

)

(17,200

)

Total shareholders’ equity

 

52,748

 

53,677

 

 

 

$

164,997

 

$

164,276

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (Amounts in thousands, except per share information)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Net Sales Revenue (net of the rebate portion of volume incentives of $11,466 and $12,267, respectively)

 

$

85,777

 

$

92,661

 

Cost and Expenses:

 

 

 

 

 

Cost of goods sold

 

17,299

 

17,146

 

Volume incentives

 

31,068

 

34,580

 

Selling, general and administrative

 

31,203

 

38,864

 

 

 

79,570

 

90,590

 

Operating Income

 

6,207

 

2,071

 

Other Income (Expense), Net

 

1,300

 

(448

)

 

 

 

 

 

 

Income Before Provision for Income Taxes

 

7,507

 

1,623

 

Provision for Income Taxes

 

5,427

 

1,789

 

Net Income (Loss)

 

$

2,080

 

$

(166

)

 

 

 

 

 

 

Basic Net Income (Loss) Per Common Share

 

$

0.13

 

$

(0.01

)

Diluted Net Income (Loss) Per Common Share

 

$

0.13

 

$

(0.01

)

Weighted Average Basic Common Shares Outstanding

 

15,510

 

15,510

 

Weighted Average Diluted Common Shares Outstanding

 

15,510

 

15,510

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (Amounts in thousands, except per share information)

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Net Sales Revenue (net of the rebate portion of volume incentives of $34,920 and $38,799, respectively)

 

$

253,102

 

$

285,023

 

Cost and Expenses:

 

 

 

 

 

Cost of goods sold

 

50,633

 

53,159

 

Volume incentives

 

93,281

 

107,634

 

Selling, general and administrative

 

103,769

 

117,882

 

 

 

247,683

 

278,675

 

Operating Income

 

5,419

 

6,348

 

Other Income (Expense), Net

 

3,048

 

(495

)

 

 

 

 

 

 

Income Before Provision for Income Taxes

 

8,467

 

5,853

 

Provision for Income Taxes

 

6,315

 

7,163

 

Net Income (Loss)

 

$

2,152

 

$

(1,310

)

 

 

 

 

 

 

Basic Net Income (Loss) Per Common Share

 

$

0.14

 

$

(0.08

)

Diluted Net Income (Loss) Per Common Share

 

$

0.14

 

$

(0.08

)

Weighted Average Basic Common Shares Outstanding

 

15,510

 

15,510

 

Weighted Average Diluted Common Shares Outstanding

 

15,510

 

15,510

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Amounts in thousands)

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

2,152

 

$

(1,310

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Provision for doubtful accounts

 

129

 

1,027

 

Depreciation and amortization

 

3,425

 

4,381

 

Share-based compensation expense

 

 

86

 

Loss on sale of property and equipment

 

140

 

62

 

Deferred income taxes

 

(361

)

(531

)

Amortization of bond discount

 

21

 

29

 

Purchase of trading investment securities

 

(169

)

(119

)

Proceeds from sale of trading investment securities

 

65

 

78

 

Realized and unrealized (gains) losses on investments

 

(194

)

261

 

Amortization of prepaid taxes related to gain on intercompany sales

 

911

 

942

 

Foreign exchange gains

 

(2,268

)

(100

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(1,043

)

(1,207

)

Inventories

 

(696

)

(3,523

)

Prepaid expenses and other current assets

 

(196

)

(1,843

)

Other assets

 

(283

)

(942

)

Accounts payable

 

(946

)

1,299

 

Accrued volume incentives

 

2,226

 

1,591

 

Accrued liabilities

 

(3,239

)

2,614

 

Deferred revenue

 

(918

)

(1,773

)

Income taxes payable

 

1,235

 

2,745

 

Liability related to unrecognized tax positions

 

724

 

187

 

Deferred compensation payable

 

252

 

(137

)

Net cash provided by operating activities

 

967

 

3,817

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of property, plant and equipment

 

(2,452

)

(6,767

)

Proceeds from sale of investments available for sale

 

600

 

640

 

Purchases of investments available for sale

 

(5

)

 

Proceeds from sale of restricted investments

 

2,050

 

25

 

Proceeds from sale of property, plant and equipment

 

53

 

79

 

Net cash provided by (used in) investing activities

 

246

 

(6,023

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Payment of cash dividends

 

(776

)

(2,327

)

Proceeds from short-term borrowings

 

7,900

 

 

Payments on short-term borrowings

 

(7,900

)

 

Net cash used in financing activities

 

(776

)

(2,327

)

Effect of exchange rates on cash and cash equivalents

 

973

 

(880

)

Net increase (decrease) in cash and cash equivalents

 

1,410

 

(5,413

)

Cash and cash equivalents at the beginning of the period

 

34,853

 

45,299

 

Cash and cash equivalents at end of the period

 

$

36,263

 

$

39,886

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid for income taxes

 

$

6,632

 

$

2,169

 

Cash paid for interest

 

$

69

 

$

59

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per-share information)

(Unaudited)

 

(1)                     Basis of Presentation

 

Nature’s Sunshine Products, Inc. and its subsidiaries (hereinafter referred to collectively as the “Company”) are primarily engaged in the manufacturing and marketing of herbal products, vitamin and mineral supplements, personal care products, and miscellaneous products. Nature’s Sunshine Products, Inc. is a Utah corporation with its principal place of business in Provo, Utah. The Company sells its products to a sales force of independent Distributors and Managers who use the products themselves or resell them to other Distributors or consumers. The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of each of the Company’s major product groups are subject to regulation by one or more governmental agencies.

 

The Company markets its products in the United States, China, Hong Kong, Poland, South Korea, Mexico, Venezuela, Japan, Brazil, Canada, Central America, Colombia, the Dominican Republic, Ecuador, Peru, the United Kingdom, Austria, Germany, the Netherlands, Norway, Sweden, the Czech Republic, Israel, Taiwan, Thailand, Singapore, Indonesia, Malaysia, the Philippines, Australia, Russia, Ukraine, Latvia, Lithuania, Kazakhstan, Mongolia, and Belarus. The Company also exports its products to several other countries, including Argentina, Australia, Chile, New Zealand, and Norway.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial information as of September 30, 2009, and for the three and nine-month periods ended September 30, 2009 and 2008.  The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the fiscal year ending December 31, 2009.

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2008.

 

During 2008, the Company determined that it had a variable interest and was the primary beneficiary in a development stage entity. As a result, the Company has consolidated the entity in accordance with authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) related to the consolidation of variable interest entities.   This variable interest is the result of loans provided by the Company to the entity during 2008 and early 2009, which are secured by the entity’s assets. The Company provided loans to the entity in order to provide them with some of the capital necessary to market its products, and to provide the Company with access to new product formulations. The Company has provided no guarantees on behalf of the entity and has no future obligations to the entity.  Its creditors do not have any recourse against the Company.  The Company has provided additional loans of $0 and $439 during the three and nine months ended September 30, 2009, respectively. The effect of consolidating the variable interest entity was a decrease of the Company’s net income of $141 and $570 for the three and nine month periods ended September 30, 2009. During the three months ended September 30, 2009, the entity had no significant operations.

 

The Company records Volume Incentives that represent purchase rebates as a reduction of sales revenue.  As part of the Company’s review of the quarterly results for the three months ended March 31, 2009, it identified that the volume rebates for the branches in Russia and Ukraine had been recorded as an expense rather than as a reduction of sales revenue.  There was no impact on beginning or ending retained earnings, operating income, net loss, loss per share, or cash flows for any periods. As a result, the Company is correcting its condensed consolidated statements of operations for the three month and nine-month periods ending September 30, 2008 as follows:

 

 

 

Three Months Ended
September 30, 2008

 

Nine Months Ended
September 30, 2008

 

 

 

As Previously
Presented

 

As Corrected

 

As Previously
Presented

 

As Corrected

 

Net sales revenue

 

$

94,669

 

$

92,661

 

$

291,105

 

$

285,023

 

 

 

 

 

 

 

 

 

 

 

Volume incentives

 

36,588

 

34,580

 

113,716

 

107,634

 

 

7



Table of Contents

 

Recent Accounting Pronouncements

 

Recently Adopted Accounting Guidance

 

In December 2007, the FASB issued new guidance on business combinations that changes how business combinations are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. In addition, the guidance expands required disclosures surrounding the nature and financial affects of business combinations. The Company adopted this guidance on January 1, 2009, and will apply it to future business combinations.

 

In December 2007, the FASB issued new guidance on noncontrolling interests in a subsidiary that changes the accounting and reporting standards for the noncontrolling interests in a subsidiary in consolidated financial statements.  The guidance recharacterizes minority interest as noncontrolling interests and requires noncontrolling interests to be classified as a component of shareholders’ equity. The guidance requires retroactive adoption of the presentation and disclosure requirements for existing minority interest. The Company’s adoption of this guidance, effective January 1, 2009, did not have a material impact on the Company’s financial condition, results of operations, or cash flows.

 

In April 2008, the FASB issued authoritative guidance related to the determination of the useful life of intangible assets. The guidance states that in developing assumptions about renewal or extension options used to determine the useful life of an intangible asset, an entity needs to consider its own historical experience adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension options. This guidance is to be applied to intangible assets acquired after January 1, 2009. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations, or cash flows.

 

In April 2009, the FASB issued new guidance requiring disclosures about the fair value of financial instruments for interim reporting periods of publicly-traded companies, as well as in annual financial statements. The disclosure requirements of this guidance are effective for interim reporting periods ending after June 15, 2009. The Company has included the additional disclosures in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

In April 2009, the FASB issued new guidance that amends the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments of debt and equity securities in the financial statements. This guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The guidance is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations, or cash flows.

 

In April 2009, the FASB issued new guidance providing additional guidance on factors to consider in estimating fair values when there has been a significant decrease in the market activity for a financial asset or liability. It also includes guidance on identifying circumstances that indicate a transaction is not orderly. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations, or cash flows.

 

In May 2009, the FASB issued new authoritative guidance on events that occur after the balance sheet date but prior to the issuance of the financial statements. The guidance distinguishes events requiring recognition in the financial statements and those that may require disclosure in the financial statements. Furthermore, it requires disclosure of the date through which subsequent events were evaluated. This guidance is effective for interim and annual periods after June 15, 2009. The Company has adopted this guidance during the quarter ended June 30, 2009, and has evaluated subsequent events through November 9, 2009, the date of this filing.

 

In June 2009, the FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles,” (“Codification”) was issued. The Codification supersedes all existing accounting standard documents and is the single source of authoritative non-governmental U.S. GAAP. All other accounting literature not included in the Codification will be considered non-authoritative. The Codification was implemented on July 1, 2009 and is effective for interim and annual periods ending after September 15, 2009. The Company’s notes to the condensed consolidated financial statements reflect the adoption of the Codification.

 

 

8



Table of Contents

 

Recent Accounting Guidance Not Yet Adopted

 

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). The amendment requires an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a VIE.  The primary beneficiary of a VIE is the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and has the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The amendment requires ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE as well expanded disclosure requirements for enterprises with an interest in a VIE. The guidance is effective for fiscal years beginning after November 15, 2009, with early adoption prohibited.  The Company does not expect the adoption of this amendment to have a material impact on its financial condition, results of operations, or cash flows.

 

In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition.  These amendments, effective for fiscal years beginning on or after June 15, 2010 (early adoption is permitted), modify the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable.  Although applicable to the Company, the Company does not expect the adoption of these amendments to have a material impact on its financial condition, results of operations, or cash flows.

 

(2)                     Inventories

 

Inventories consist of the following:

 

 

 

September 30,
2009

 

December 31,
2008

 

Raw Materials

 

$

9,567

 

$

9,515

 

Work in Progress

 

854

 

766

 

Finished Goods

 

30,219

 

29,277

 

 

 

$

40,640

 

$

39,558

 

 

(3)                     Intangible Assets

 

At September 30, 2009 and December 31, 2008, product formulations had a gross carrying amount of $1,763 and $1,763, accumulated amortization of $313 and $225, and a net amount of $1,450 and $1,538, respectively. The useful lives of the product formulations are estimated to be 15 years.

 

Amortization expense for intangible assets for the three months ended September 30, 2009 and 2008 was $29 and $40, respectively. Amortization expense for intangible assets for the nine months ended September 30, 2009 and 2008 was $88 and $99, respectively. Estimated amortization expense for each of the five succeeding fiscal years is $118.

 

(4)                     Investment Securities

 

The amortized cost and estimated fair values of available-for-sale securities by balance sheet classification are as follows:

 

As of September 30, 2009

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Municipal obligations

 

$

2,237

 

$

119

 

$

 

$

2,356

 

U.S. government securities funds

 

697

 

15

 

 

712

 

Equity securities

 

234

 

73

 

(5

)

302

 

Total short-term investment securities

 

$

3,168

 

$

207

 

$

(5

)

$

3,370

 

 

9



Table of Contents

 

As of December 31, 2008

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Municipal obligations

 

$

2,858

 

$

66

 

$

(1

)

$

2,923

 

U.S. government securities funds

 

691

 

19

 

 

710

 

Equity securities

 

233

 

 

(8

)

225

 

Total short-term investment securities

 

$

3,782

 

$

85

 

$

(9

)

$

3,858

 

 

Contractual maturities of municipal obligations fair value at September 30, 2009, are as follows:

 

Mature less than one year

 

$

378

 

Mature after one year through five years

 

1,760

 

Mature after five years

 

218

 

Total

 

$

2,356

 

 

During the nine months ended September 30, 2009 and 2008, the proceeds from the sales of available-for-sale securities were $600 and $640, respectively. The gross realized gains on sales of available-for-sale securities (net of tax) were $0 for each of the three and nine months ended September 30, 2009 and 2008. The gross realized losses on the sales of available-for-sale securities (net of tax) were $0 for each of the three and nine month ended September 30, 2009 and 2008.

 

The Company’s trading securities portfolio totaled $1,646 at September 30, 2009 and $1,394 at December 31, 2008, and generated gains of $96 and losses of $9 for the three months ended September 30, 2009 and 2008, respectively, and generated gains of $142 and losses of $41 for the nine months ended September 30, 2009 and 2008, respectively.

 

As of September 30, 2009 and December 31, 2008, the Company had unrealized losses of $5 and $9, respectively, in its municipal obligations and equity securities investments. These losses are due to the interest rate sensitivity of the municipal obligations and the performance of the overall stock market for the equity securities.

 

As of September 30, 2009 and December 31, 2008, none of the Company’s investments included unrealized losses that were considered to be other-than-temporary impairments.

 

(5)                     Net Income (Loss) Per Share

 

Basic net income (loss) per common share (“Basic EPS”) is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period.  Diluted net income (loss) 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 common stock equivalents that would have an anti-dilutive effect on net income (loss) per common share.

 

The following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for the three and nine months ended September 30, 2009 and 2008.

 

 

 

Net Income
(Loss)
(Numerator)

 

Shares
(Denominator)

 

Net Income
(Loss)
Per Share
Amount

 

Three Months Ended September 30, 2009

 

 

 

 

 

 

 

Basic EPS

 

$

2,080

 

15,510

 

$

0.13

 

Effect of options

 

 

 

 

Diluted EPS

 

$

2,080

 

15,510

 

$

0.13

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2008

 

 

 

 

 

 

 

Basic EPS

 

$

(166

)

15,510

 

$

(0.01

)

Effect of options

 

 

 

 

Diluted EPS

 

$

(166

)

15,510

 

$

(0.01

)

 

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Table of Contents

 

 

 

Net Income
(Loss)
(Numerator)

 

Shares
(Denominator)

 

Net Income
(Loss)
Per Share
Amount

 

Nine Months Ended September 30, 2009

 

 

 

 

 

 

 

Basic EPS

 

$

2,152

 

15,510

 

$

0.14

 

Effect of options

 

 

 

 

Diluted EPS

 

$

2,152

 

15,510

 

$

0.14

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2008

 

 

 

 

 

 

 

Basic EPS

 

$

(1,310

)

15,510

 

$

(0.08

)

Effect of options

 

 

 

 

Diluted EPS

 

$

(1,310

)

15,510

 

$

(0.08

)

 

For the three and nine months ended September 30, 2009, a total of 205 exercisable options to purchase shares of common stock were not included in the computation of diluted earnings per share because their exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive. Because of net losses in the three and nine-month periods ended September 30, 2008, outstanding common stock options of 282 were not included in the computation of diluted earnings per share because the effect on net loss per share would be anti-dilutive.

 

(6)                     Comprehensive Income (Loss)

 

The components of comprehensive income (loss), net of tax, for the three and nine-month periods ended September 30, 2009 and 2008, respectively, are as follows:

 

 

 

Three Months Ended
September 30,

 

 

 

2009

 

2008

 

Net income (loss)

 

$

2,080

 

$

(166

)

Foreign currency translation gain (loss)

 

118

 

(408

)

Net unrealized gains (losses) on investment securities

 

50

 

(24

)

Total comprehensive income (loss)

 

$

2,248

 

$

(598

)

 

 

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

Net income (loss)

 

$

2,152

 

$

(1,310

)

Foreign currency translation (loss) gain

 

(2,367

)

87

 

Net unrealized gains (losses) on investment securities

 

62

 

(101

)

Total comprehensive loss

 

$

(153

)

$

(1,324

)

 

(7)                     Capital Transactions

 

Dividends

 

The Company paid cash dividends of $776 and $2,327 during the nine months ended September 30, 2009 and 2008, respectively. During the second quarter of 2009, the Company suspended payment of its quarterly cash dividend.

 

Share-based Compensation

 

Share-based compensation expense from nonqualified stock options for the three-month periods ended September 30, 2009 and 2008 was approximately $0; the related tax benefit was approximately $0.  Share-based compensation expense from nonqualified stock options for the nine-month periods ended September 30, 2009 and 2008 was approximately $0 and $86, respectively; the related tax benefit was approximately $0 and $33, respectively. As of September 30, 2009, there was no unrecognized share based compensation related to issued qualified or non-qualified employee stock options.

 

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Stock option activity for the nine-months ended September 30, 2009 is as follows:

 

 

 

Number of
Shares

 

Weighted Average
 Exercise
Price Per Share

 

Options outstanding at December 31, 2008

 

263

 

$

11.77

 

Granted

 

 

 

Forfeited or canceled

 

(58

)

11.79

 

Exercised

 

 

 

Options outstanding at September 30, 2009

 

205

 

11.76

 

 

 

 

 

 

 

Exercisable at September 30, 2009

 

205

 

$

11.76

 

 

No options were granted or exercised during the three and nine-month periods ended September 30, 2009 and 2008. The aggregate intrinsic value of options outstanding and exercisable at September 30, 2009 and 2008 was $0 and $0, respectively.

 

On September 24, 2009, the Company granted options to purchase approximately 250 shares under its 2009 Stock Incentive Plan (the “Plan”) subject to the Plan’s approval by the Company’s shareholders.  On November 6, 2009, the Plan was approved by a vote of the Company’s shareholders.  Under the Plan, 750 shares have been reserved for the issuance of awards under the Plan.  All employees, officers, consultants, independent contractors and non-employee members of the Board of Directors of the Company are eligible to participate in the Plan.  The Compensation Committee of the Board of Directors have exclusive authority and complete discretion to determine which individuals are to receive awards, the type of award, the number of shares, and the terms and condition of the award.

 

(8)                     Segment Information

 

The Company has three business segments. These reportable segments are components of the Company for which separate information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

 

The Company has two reportable business segments based on geographic operations that include a United States segment and an international segment that operate under the Nature’s Sunshine Products name. The Company’s third reportable business segment is Synergy Worldwide, which offers products with formulations different from those of the Nature’s Sunshine Products offerings as well as marketing and Distributor compensation plans sufficiently different from those of Nature’s Sunshine Products to warrant its treatment as a separate reportable segment. Net sales revenues for each segment have been reduced by any intercompany sales as they are not included in the measure of segment profit or loss reviewed by the chief operating decision maker. The Company evaluates performance based on operating income (loss) by segment before consideration of certain inter-segment transfers and expenses.

 

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Table of Contents

 

Reportable segment information is as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net Sales Revenue:

 

 

 

 

 

 

 

 

 

Nature’s Sunshine Products:

 

 

 

 

 

 

 

 

 

United States

 

$

37,596

 

$

37,288

 

$

113,571

 

$

115,380

 

International

 

33,226

 

41,416

 

98,391

 

126,676

 

 

 

70,822

 

78,704

 

211,962

 

242,056

 

Synergy Worldwide

 

14,955

 

13,957

 

41,140

 

42,967

 

 

 

85,777

 

92,661

 

253,102

 

285,023

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

Nature’s Sunshine Products:

 

 

 

 

 

 

 

 

 

United States

 

35,181

 

37,108

 

108,572

 

113,925

 

International

 

29,476

 

38,415

 

93,536

 

117,349

 

 

 

64,657

 

75,523

 

202,108

 

231,274

 

Synergy Worldwide

 

14,913

 

15,067

 

45,575

 

47,401

 

 

 

79,570

 

90,590

 

247,683

 

278,675

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss):

 

 

 

 

 

 

 

 

 

Nature’s Sunshine Products:

 

 

 

 

 

 

 

 

 

United States

 

2,415

 

180

 

4,999

 

1,455

 

International

 

3,750

 

3,001

 

4,855

 

9,327

 

 

 

6,165

 

3,181

 

9,854

 

10,782

 

Synergy Worldwide

 

42

 

(1,110

)

(4,435

)

(4,434

)

 

 

6,207

 

2,071

 

5,419

 

6,348

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense), Net

 

1,300

 

(448

)

3,048

 

(495

)

Income Before Provision for Income Taxes

 

$

7,507

 

$

1,623

 

$

8,467

 

$

5,853

 

 

From an individual country perspective, only the United States, Japan, Russia and Ukraine comprise approximately 10 percent or more of consolidated net sales revenue for any of the three and nine-month periods ended September 30, 2009 and 2008 as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Sales Revenue:

 

 

 

 

 

 

 

 

 

United States

 

$

38,392

 

$

38,412

 

$

115,147

 

$

116,147

 

Russia

 

6,370

 

8,669

 

21,679

 

29,164

 

Japan

 

6,635

 

9,295

 

20,571

 

29,672

 

Other

 

34,380

 

36,285

 

95,705

 

110,040

 

Total Sales Revenue

 

$

85,777

 

$

92,661

 

$

253,102

 

$

285,023

 

 

Net sales revenue by product group has not been disclosed as management has determined that it is impracticable to accumulate such information.

 

Long-lived assets by geographical area as of September 30, 2009 and December 31, 2008 are as follows:

 

 

 

September 30,
2009

 

December 31,
2008

 

Long-Lived Assets:

 

 

 

 

 

United States

 

$

22,832

 

$

23,723

 

Venezuela

 

4,657

 

4,646

 

Other

 

2,906

 

3,393

 

Total Long-Lived Assets

 

$

30,395

 

$

31,762

 

 

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Table of Contents

 

(9)                     Income Taxes

 

Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur.  For the three months ended September 30, 2009 and 2008, the Company’s provision for income taxes, as a percentage of income before income taxes, was approximately 72.3 percent and 110.2 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent. For the nine months ended September 30, 2009 and 2008, the Company’s provision for income taxes, as a percentage of income before income taxes, was approximately 74.6 percent and 122.4 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent.

 

The differences between the effective rate and the U.S. federal statutory rate for the three and nine months ended September 30, 2009 and 2008, are primarily attributed to increases in tax liabilities associated with uncertain tax positions, the U.S. tax impact of foreign operations, and increases in foreign valuation allowances primarily related to foreign subsidiary net losses for which no tax benefit is being recognized.  Tax amounts recorded related to the uncertain tax positions, valuation allowances, and other permanent tax items have a significant impact on the effective tax rate. The effective rate declined in the three and nine-month periods ended September 30, 2009 compared to the same periods in the prior year primarily as a result of the permanent tax items having less impact on the higher pre-tax income.

 

As of September 30, 2009, the Company had accrued $20,399 (net of $11,277 of other assets related to competent authority and royalty benefits) related to unrecognized tax positions compared with $19,675 (net of $11,277 of other assets related to competent authority and royalty benefits) as of December 31, 2008.  This net increase is primarily attributed to increases in liabilities recorded related to transfer pricing.

 

In October 2009, the Internal Revenue Service (“IRS”) issued an examination report formally proposing adjustments with respect to the 2003 through 2005 taxable years, which primarily relate to the prices that were charged in intragroup transfers of property and the disallowance of related deductions. The Company expects to commence administrative proceedings with the Office of Appeals of the Internal Revenue Service challenging the proposed adjustments. Management believes that the Company has appropriately reserved for these matters at an amount which it believes will ultimately be due upon resolution of the administrative proceedings. The Company is currently unable to determine the outcome of these discussions and their related impact, if any, on the Company’s financial condition, results of operations, or cash flows.

 

The Company has also been advised by the IRS that it will begin to examine the Company’s tax returns for the 2006 and 2007 taxable years. The Company anticipates this audit will commence during the quarter ending December 31, 2009. The Company’s U.S. federal income tax returns are open from 2003 to 2008, and the Company has several foreign jurisdictions that have open years between 2003 and 2008.

 

Although the Company believes its estimates for unrecognized tax positions are reasonable, the Company can make no assurance that the final outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals. Such difference could have a material impact on the Company’s income tax provision and operating results in the period in which the Company makes such determination.

 

(10)              Commitments and Contingencies

 

Legal Proceedings

 

The Company is party to various legal proceedings, including those noted below. Management cannot predict the ultimate outcome of these proceedings, individually or in the aggregate, or their resulting effect on the Company’s business, financial position, results of operations or cash flows as litigation and related matters are subject to inherent uncertainties, and unfavorable rulings could occur. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the business, financial position, results of operations, or cash flows for the period in which the ruling occurs or future periods. The Company maintains directors’ and officers’ liability, product liability, general liability and excess liability insurance coverage. However, no assurances can be given that such insurance will continue to be available at an acceptable cost to the Company, that such coverage will be sufficient to cover one or more large claims, or that the insurers will not successfully disclaim coverage as to a pending or future claim.

 

Class-Action Litigation

 

Between April 3, 2006 and June 2, 2006, five separate shareholder class-action lawsuits were filed against the Company and certain of its present and former officers and directors in the United States District Court for the District of Utah. These matters were consolidated and on November 3, 2006, the plaintiffs filed a consolidated complaint (the “Consolidated Complaint”) against the Company, the Company’s Chief Executive Officer and a director, Douglas Faggioli, the Company’s former Chief Financial Officer, Craig D. Huff, and a former director and former Chair of the Company’s Audit Committee, Franz L. Cristiani. The Consolidated Complaint asserts three separate claims on behalf of purchasers of the Company’s common stock: (1) a claim against Mr. Faggioli and the Company for violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (“the Exchange Act”) and Rule 10b-5 promulgated thereunder, alleging that Mr. Faggioli made a series of alleged material misrepresentations to the investing public; (2) a

 

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Table of Contents

 

claim against Mr. Faggioli and the Company for violation of Section 10(b) and Rule 10b-5, alleging that Mr. Faggioli made a series of misrepresentations to the Company’s then independent auditor, KPMG, LLP (“KPMG”), for the purpose of obtaining unqualified or “clean” audit opinions and review opinions from KPMG concerning certain of the Company’s annual and quarterly financial statements; and (3) a claim against Messrs. Faggioli, Huff and Cristiani for violation of Section 20(a) of the Exchange Act, alleging that the individual defendants have “control person” liability for the previously-alleged violations by the Company. The Consolidated Complaint seeks an unspecified amount of compensatory damages, together with interest thereon, litigation costs and expenses, including attorneys’ fees and expert fees, and any such other and further relief as may be allowed by law.

 

On January 5, 2007, the Company and Messrs. Faggioli, Huff and Cristiani moved to dismiss the Consolidated Complaint in its entirety. On May 21, 2007, the Court issued its decision denying the motion in large part, but shortening the proposed class period on one of the plaintiffs’ claims. On June 6, 2007, the Company and the other defendants answered the Consolidated Complaint, wherein they denied all allegations of wrongdoing and raised a number of affirmative defenses. On November 1, 2007, the plaintiffs filed their motion for class certification, which the Company opposed. On September 25, 2008, the Court granted the plaintiffs’ motion for class certification in part, establishing the class as all persons who purchased or otherwise acquired the Company’s common stock, and were damaged thereby, from March 16, 2005 to March 20, 2006. On May 9, 2008, at the invitation of the Court based upon recent case law developments, the Company filed a motion to dismiss the plaintiffs’ second cause of action (a 10b-5 claim based on non-public representations to KPMG).  The plaintiffs opposed this motion.  On September 23, 2008, the Court granted the Company’s motion and dismissed the plaintiffs’ second cause of action.

 

On September 14, 2009, the parties and the Company’s directors’ and officers’ liability insurer signed a Stipulation of Settlement (“Stipulation”), which was filed with the Court on September 14, 2009.  The Stipulation sets forth the complete terms of parties’ proposed settlement.  The basic terms of the settlement are that the Company’s insurer will pay the settlement class, which is defined as all persons (except for defendants and specified related persons and entities) who purchased the Company’s common stock during the period from April 23, 2002 through April 5, 2006, $6 million in exchange for a dismissal with prejudice of the lawsuit and a release of all claims held by members of a settlement class.  As set forth in the Stipulation, the proposed settlement will not become final until a number of conditions are satisfied, including the Stipulation receiving both preliminary and final approval from the Court.  On October 8, 2009, the Court entered an order (i) granting preliminary approval of the Stipulation, (ii) requiring that notice of the proposed settlement and the proposed plan of allocation of the settlement proceeds be mailed to members of the settlement class by October 26, 2009, and (iii) setting a February 9, 2010 hearing.  At this hearing the Court will consider, among other issues, (i) whether the Stipulation should receive final approval, (ii) whether the proposed plan of allocation for the settlement proceeds should be approved, (iii) whether the settlement class counsel’s application for an award of attorneys’ fees and reimbursement of costs and expenses should be approved, and (iv) whether the settlement class counsel’s application for incentive awards to the settlement class representatives should be approved.  The Court’s October 8, 2009 order also sets January 19, 2010 as the deadline by which settlement class members must submit a valid proof of claim, if they want to share in the settlement proceeds, or a proper opt-out request, if they want to be excluded from the settlement class and thereby not be bound by the terms of the Stipulation.

 

If the Stipulation does not receive final approval from the Court, the case will be returned to the litigation track and would most likely be subject to a new scheduling order.  As of the date of the Stipulation, the case was in the early stages of discovery and trial was not scheduled to commence until January 24, 2011.  If the case is returned to the litigation track, the Company and the other defendants will continue to vigorously defend themselves against the allegations in the lawsuit.  Notwithstanding this intent, the Company is not able at this time to predict the outcome of this litigation or whether the Company will incur any liability associated with the litigation, or to estimate the effect such outcome would have on the financial condition, results of operations, or cash flows of the Company.

 

The Company maintains insurance that may provide coverage for the potential consequences of a negative outcome of the litigation described above. The Company has given notice to its insurers of the claims and the insurers have responded by requesting additional information and by reserving their rights under the policies, including the rights to deny coverage under various policy exclusions or to rescind the policies in question.  As stated above, the Company’s directors’ and officers’ liability insurer has agreed, as part of the Stipulation, to fully fund the proposed $6 million settlement.  If, however, the Court refuses to give final approval to the Stipulation, the case will return to the litigation track.  If this were to occur, there can be no assurance that the insurers will then not seek to deny coverage or rescind the policies; that some or all of the claims will not be covered by such policies; or that, even if covered, the Company’s ultimate liability will not exceed the available insurance.  Moreover, there can be no assurance as to the Company’s ability to obtain insurance coverage in the future, or as to the cost of such insurance.

 

Threatened Derivative Lawsuits

 

By letter dated October 4, 2007, a shareholder of the Company alleged that a number of the current and former officers and directors of the Company breached their fiduciary duties to the Company by supposedly engaging in the same alleged wrongdoing that is the subject of the class-action lawsuit. The shareholder demanded that the Company take action to recover from the specified

 

15



Table of Contents

 

officers and directors all damages sustained by the Company as a result of the alleged misconduct, and threatened to commence a derivative action if the Company failed to act on the shareholder’s demand within a reasonable period of time.

 

On December 26, 2007, before the expiration of the Company’s allotted 90-day period for responding to the demand, the shareholder presented a second but substantively identical demand on the Company, thereby triggering a new 90-day response period. The Company’s Board of Directors responded to this demand on March 20, 2008, rejecting the shareholder’s demands.

 

On May 21, 2008, the same shareholder filed a summons and complaint in the Fourth Judicial District Court for the State of Utah seeking an order compelling the Company to produce certain books and records to the shareholder. The Company filed its answer to the complaint on June 12, 2008.

 

Although the Company and the other defendants are vigorously defending against the allegations in the threatened derivative lawsuit above, management believes that it is not possible at this time to predict the outcome of this litigation or whether the Company will incur any liability associated with the litigation, or to estimate the effect such outcome would have on the financial condition, results of operations, or cash flows of the Company.

 

SEC and DOJ Investigations

 

On July 31, 2009, the Securities and Exchange Commission (“SEC”) filed a settled enforcement action against the Company, Douglas Faggioli, and Craig Huff, the Company’s former chief financial officer, relating to alleged violations of the Foreign Corrupt Practices Act (“FCPA”) by one of the Company’s foreign subsidiaries in 2000 and 2001.  This settlement resolved an SEC investigation previously disclosed by the Company related to an independent investigation by the Company’s Audit Committee.

 

Under the terms of the settlement with the SEC, the Company agreed to pay a civil penalty of $600 and to consent to the entry of injunctions against future violations of the FCPA as well as the antifraud, books and records, and internal controls provisions of the federal securities laws.  No additional undertakings are required of the Company under the terms of the settlement.

 

In addition, Messrs. Faggioli and Huff each agreed to pay a civil penalty of $25 and to consent to the entry of injunctions against future violations relating only to the books and records and internal control provisions of the federal securities laws.

 

The SEC’s complaint alleged that, in 2000 and 2001, former employees in the Company’s Brazilian subsidiary made undocumented cash payments to customs brokers, some of which were later paid to Brazilian customs officials in order to allow unregistered products to be imported and sold in Brazil.  No current officers, directors, or employees of the Company are alleged to have participated in or had knowledge of these actions.

 

The complaint further alleged that, in 2000 and 2001, Mr. Faggioli, the Company’s then chief operating officer (and current chief executive officer), and Mr. Huff, the Company’s then chief financial officer, as control persons, failed to adequately supervise the Company’s management and other personnel who were directly responsible for the Company’s books and records and internal controls related to the registration of product in one foreign subsidiary.  As part of the settlement, the Company and the individual parties agreed to neither admit nor deny the allegations in the complaint.

 

The Company believes that all government investigations relating to potential FCPA violations by the Company or related persons have been resolved.   The Company anticipates no action by the Department of Justice (“DOJ”) in a previously disclosed investigation relating to these events.

 

As previously disclosed, in March 2006, the Company voluntarily provided to the SEC and the DOJ information related to an independent investigation by the Company’s Audit Committee.  The Company fully cooperated in these government investigations.

 

16



 

SEC Section 12(j) Proceeding

 

On July 12, 2007, the Company announced that the SEC had instituted administrative proceedings pursuant to Section 12 (j) of the Exchange Act to suspend or revoke the registration of its common stock under Section 12 of the Exchange Act.  On November 8, 2007, an administrative law judge in the administrative proceeding issued an Initial Decision to revoke the registration of the Company’s common stock because of its failure to file required periodic reports.  Shortly thereafter, the Company filed a petition for review with the SEC.  On December 5, 2007, the SEC granted the Company’s petition for review. The SEC heard oral argument from both the Company and the SEC staff on January 7, 2009.  On January 21, 2009, the SEC issued a final order revoking the registration of the Company’s common stock.  On February 12, 2009, the Company filed a registration statement on Form 10 to re-register its common stock under the Exchange Act. The Company’s registration statement became effective as a result of the passage of time on April 13, 2009. On May 26, 2009, the Company cleared all comments from the SEC related to its registration statement on Form 10.   On October 12, 2009 the Company began trading its common stock on the NASDAQ Capital Market under the symbol “NATR.”

 

Prescott Matter

 

In April 2009, Prescott Group Aggressive Small Cap Master Fund, G.P. (“Prescott”) filed, but did not serve, a complaint in the Fourth Judicial District Court for Utah County, Utah, (Prescott Group Aggressive Small Cap Master Fund, G.P. v. Nature’s Sunshine Products, Inc, Civil No. 090401518). Prescott’s filed complaint requested that the court compel the Company to hold an annual meeting of the Company’s shareholders.  The complaint did not request that the court award monetary damages other than the payment of attorneys’ fees.  On May 22, 2009, the Company and Kristine F. Hughes, Eugene L. Hughes and Pauline Hughes Francis in their capacity as shareholders of the Company (collectively, the “Hughes Parties”) entered into a settlement and voting agreement (the “Prescott Agreement”) with Prescott.  Contemporaneously with the Prescott Agreement, the Company and the Hughes Parties entered into voting agreements (collectively with the Prescott Agreement, the “Voting Agreements”) with each of the following shareholders of the Company:  Red Mountain Capital Partners II, L.P., Red Mountain Capital Partners III, L.P. and Paradigm Capital Management, Inc. (collectively with Prescott, the “Shareholder Parties”).

 

Pursuant to the Voting Agreements, effective as of June 7, 2009 , (i) the authorized number of directors of the Board was increased from six to eight directors in accordance with Section 3.2 of the Bylaws of the Company, creating two additional vacancies in addition to one previously unfilled vacancy on the Board, (ii) with the exception of Kristine F. Hughes, all of the current members of our Board of Directors (the “Board”) resigned as members of the Board, resulting in a total of seven vacancies on the Board and (iii) Michael D. Dean, Albert R. Dowden, Douglas Faggioli, Pauline Hughes Francis, Willem Mesdag, Jeffrey D. Watkins and Candace K. Weir were appointed, without any specific Board class designation, to fill such vacancies on the Board to serve as directors until the next annual meeting of shareholders at which directors are elected and until their respective successors are duly elected and qualified, unless they resign, are removed or are otherwise disqualified from serving as a director of the Company.

 

The Voting Agreements also provide that, at the next annual meeting of shareholders, which was held on November 6, 2009, the Company would nominate, and the Shareholder Parties and the Hughes Parties would vote all of the shares of Common Stock beneficially owned by them in favor of, each of the following individuals, with such nominees serving in the Board class set forth opposite his or her name:

 

Name

 

Class

 

Jeffrey D. Watkins

 

Class I

 

Willem Mesdag

 

Class I

 

Michael D. Dean

 

Class II

 

Douglas Faggioli

 

Class II

 

Candace K. Weir

 

Class II

 

Kristine F. Hughes

 

Class III

 

Pauline Hughes Francis

 

Class III

 

Albert R. Dowden

 

Class III

 

 

The voting arrangement set forth in the Voting Agreements terminated on November 6, 2009, immediately following the annual meeting of shareholders of the Company.

 

17



 

Other Litigation

 

The Company is party to various other legal proceedings in several foreign jurisdictions related to VAT assessments and other civil litigation.  While there is a reasonable possibility that a material loss may be incurred, the Company cannot at this time estimate the loss, if any, therefore, no provision for losses has been provided.  The Company believes future payments related to these matters could range from $0 to approximately $1.4 million.

 

Non-Income Tax Contingencies

 

The Company has reserved for certain state sales and use tax and foreign non-income tax contingencies based on the likelihood of an obligation in accordance with accounting guidance for probable loss contingencies. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded.  The Company provides provisions for potential payments of tax to various tax authorities for contingencies related to non-income tax matters.  The Company also provides provisions for state sales taxes in each of the states where the Company has potential nexus. As of September 30, 2009 and December 31, 2008, accrued liabilities include $17,332 and $17,359, respectively, related to non-income tax contingencies. While management believes that the assumptions and estimates used to determine this liability are reasonable, the ultimate outcome of those matters cannot presently be determined. The Company is not able at this time to predict the ultimate outcomes of those matters or to estimate the effect the ultimate outcomes, if greater than the amounts accrued, would have on the financial condition, results of operations, or cash flows of the Company.

 

Self-Insurance Liabilities

 

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. The Company carries insurance in the types and amounts it considers reasonably adequate to cover the risks associated with its business. On June 1, 2003, the Company established a wholly owned captive insurance company to provide it with product liability insurance coverage. The Company has accrued an amount that it believes is sufficient to cover probable and reasonably estimable liabilities related to product liability claims based on the Company’s history of such claims. However, there can be no assurance that these estimates will prove to be sufficient nor can there be any assurance that the ultimate outcome of any litigation for product liability will not have a material negative impact on the Company’s business prospects, financial position, results of operations, or cash flows.

 

The Company self-insures for certain employee medical benefits. The recorded liabilities for self-insured risks are calculated using actuarial methods and are not discounted. The liabilities include amounts for actual claims and claims incurred but not reported. Actual experience, including claim frequency and severity as well as health care inflation, could result in actual liabilities being more or less than the amounts currently recorded.

 

The Company reviews its self-insurance accruals on a quarterly basis and determines, based upon a review of its recent claims history and other factors, that portions of its self-insurance accruals be considered short-term and long-term.

 

The Company has accrued $2,865 and $2,873 for product liability and employee medical claims at September 30, 2009 and December 31, 2008, respectively, of which $358 and $2,873 was classified as short-term.  Such amounts are included in accrued liabilities and other long-term liabilities on the Company’s unaudited condensed consolidated balance sheets.

 

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Table of Contents

 

Government Regulations

 

The Company is subject to governmental regulations pertaining to product formulation, labeling and packaging, product claims and advertising, and to the Company’s direct selling system. The Company is also subject to the jurisdiction of numerous foreign tax and customs authorities. Any assertions or determinations that either the Company or the Company’s Distributors are not in compliance with existing statutes, laws, rules or regulations could potentially have a material adverse effect on the Company’s operations. In addition, in any country or jurisdiction, the adoption of new statutes, laws, rules or regulations, or changes in the interpretation of existing statutes, laws, rules or regulations could have a material adverse effect on the Company and its operations. Although management believes that the Company is in compliance, in all material respects, with the statutes, laws, rules and regulations of every jurisdiction in which it operates, no assurance can be given that the Company’s compliance with applicable statutes, laws, rules and regulations will not be challenged by foreign authorities or that such challenges will not have a material adverse effect on the Company’s financial position or results of operations or cash flows.

 

(11)              Fair Value Measurements

 

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Financial assets are marked to bid prices and financial liabilities are marked to offer prices.  Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values of each financial instrument.  Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  The fair value hierarchy is defined into the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data

 

The following table presents the Company’s hierarchy for its asset and liabilities measured at fair value on a recurring basis as of September 30, 2009:

 

 

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

Quoted Prices
in Active
Markets for
Identical Assets or Liabilities

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

Total

 

 

 

 

 

 

 

 

 

 

 

Investments available for sale

 

$

1,014

 

$

2,356

 

$

 

$

3,370

 

Investment securities

 

1,646

 

 

 

1,646

 

Total assets measured at fair value on a recurring basis

 

$

2,660

 

$

2,356

 

$

 

$

5,016

 

 

The following table presents the Company’s hierarchy for its asset measured at fair value on a recurring basis as of December 31, 2008:

 

 

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

Quoted Prices
in Active
Markets for Identical Assets or Liabilities

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

Total

 

Investments available for sale

 

$

933

 

$

2,925

 

$

 

$

3,858

 

Investment securities

 

1,394

 

 

 

1,394

 

Restricted investments

 

 

 

2,050

 

2,050

 

Total assets measured at fair value on a recurring basis

 

$

2,327

 

$

2,925

 

$

2,050

 

$

7,302

 

 

Investments available for sale — The majority of the Company’s investment portfolio consists of mutual funds, equity securities and various fixed income securities, such as U.S government funds and state and municipal bonds.  The Level 1 securities are valued using quoted prices for identical assets in active markets including equity securities, U.S. government treasuries, and various mutual funds.  The Level 2 securities include investments in state and municipal bonds, as well as various mutual funds whereby all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset.

 

Investment securities — The majority of the Company’s trading portfolio consists of various mutual funds that are using quoted prices in active markets.

 

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Restricted investments  —  The Company’s restricted investments include auction rate preferred investments that failed at auction during 2008.  Despite the underlying long-term contractual maturity of auction-rate securities (“ARS”), there was historically a ready liquid market for these securities based on the interest reset mechanism.  However, as a result of negative liquidity and uncertainty in financial credit markets, the Company experienced “failed” auctions associated with its ARS.  In the case of a failed auction, the ARS become illiquid investments (until a future auction is successful or the security is called prior to the contractual maturity date by the issuer) and the rates are reset in accordance with terms in the prospectus/offering circular

 

The ARS consisted primarily of AAA securities.  In determining the fair value of the Company’s restricted investments at December 31, 2008, the Company has taken into consideration fair values determined by the financial institutions, current credit rating of the underlying securities, insurance provisions, discounted cash flow analysis, as deemed appropriate, and its current liquidity position.

 

The following table shows a reconciliation of the beginning and ending Level 3 fair value measurements using significant unobservable inputs for the three months ended September 30, 2009 and 2008:

 

 

 

Three Months Ended
September 30,

 

 

 

2009

 

2008

 

Balance at July 1,

 

$

 

$

2,050

 

Net unrealized gains included in earnings

 

 

 

Sales of restricted investments

 

 

 

Purchases

 

 

 

Balance at September 30,

 

$

 

$

2,050

 

 

The following table shows a reconciliation of the beginning and ending Level 3 fair value measurements using significant unobservable inputs for the nine months ended September 30, 2009 and 2008:

 

 

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

Balance at January 1,

 

$

2,050

 

$

2,075

 

Net unrealized gains included in earnings

 

 

 

Sales of restricted investments

 

(2,050

)

(25

)

Purchases

 

 

 

Balance at September 30,

 

$

 

$

2,050

 

 

During the nine month periods ended September 30, 2009 and 2008, the Company sold restricted investments of $2,050 and $25, respectively, that included ARS that had failed at auction during 2008.  These securities were sold at par value, which was the carrying value of these securities.  As a result, there was no realized gain or loss as a result of the sale of the ARS.

 

The carrying amounts reflected on the consolidated balance sheet for cash and cash equivalents, accounts and notes receivable, accounts payable, and short-term borrowings approximate fair value due to their short-term nature. During the three and nine months ended September 30, 2009, the Company did not have any write-offs related to the remeasurement of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.

 

(12)     Subsequent Event

 

Currency restrictions enacted by the government of Venezuela require approval from the government’s currency control organization for the Company’s subsidiary in Venezuela to obtain U.S. dollars at the official exchange rate to pay for imported products or to repatriate dividends back to the Company. The parallel market rate, which is substantially lower than the official rate, may be used to obtain U.S. dollars or other currencies without approval of the government’s currency control organization.

 

As of September 30, 2009, the Company had 9,322 bolivars, or the equivalent of $4,346 U.S. dollars at the official exchange rate. In October 2009, the Company elected to settle 4,000 bolivars, the equivalent of $1,865 U.S. dollars at the official rate, for $712 U.S. dollars of its intercompany payable balances using the legal parallel market exchange process to mitigate the Company’s currency exchange risk in Venezuela. The Company recorded an exchange loss of $1,153 as a result of using the parallel market rate versus the official rate for the transaction. The Company periodically assesses its ability to obtain U.S. dollars at the official exchange rate.  However, the Company continues to apply for and expects to receive approval from the government of Venezuela to convert is bolivars at the official exchange rate to pay for imported products and other remittances. However, the timing and ability to obtain U.S. dollars in the future at the official exchange rate could adversely affect the Company’s financial condition and results of operations.

 

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Table of Contents

 

Item 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis discussion should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this report, as well as the consolidated financial statements, the notes thereto, and management’s discussion and analysis included in our Annual Report on Form 10-K/A for the year ended December 31, 2008, and our other filings, including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, that have been filed with the SEC through the date of this report.

 

Throughout this report, we refer to Natures Sunshine Products, Inc., together with its subsidiaries, as “we,” “us,” “our Company” or “the Company.”

 

OVERVIEW

 

Nature’s Sunshine Products, Inc. and its subsidiaries are primarily engaged in the manufacturing and marketing of herbal products, vitamin and mineral supplements, personal care products, and miscellaneous products. Nature’s Sunshine Products, Inc. is a Utah corporation with its principal place of business in Provo, Utah. We sell our products to a sales force of independent Distributors and Managers who use the products themselves or resell them to other Distributors or consumers. 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.

 

We market our products in the United States, Mexico, Central America, Canada, Venezuela, the Dominican Republic, Japan, Ecuador, the United Kingdom, Colombia, Peru, Israel, Russia, Ukraine, Latvia, Lithuania, Kazakhstan, Mongolia, Belarus, China, Poland, and Brazil. We also export our products to several other countries, including Argentina, Australia, Chile, New Zealand, and Norway.

 

We also sell our products through a separate division and operating business segment, Synergy Worldwide, which was acquired by us in 2000. Synergy Worldwide offers products with formulations different from those of the Nature’s Sunshine Products offerings. In addition, Synergy Worldwide’s marketing and Distributor compensation plans are sufficiently different from those of Nature’s Sunshine Products. Synergy Worldwide sells products in Japan, the United States, South Korea, Singapore, Thailand, Taiwan, Malaysia, Hong Kong, the Philippines, Indonesia, the United Kingdom, Germany, Austria, the Netherlands, Norway, Sweden, the Czech Republic, and Australia.

 

During the first nine months of 2009, we experienced a decline in our consolidated net sales compared to the same period in 2008 of 11.2 percent.  This decline is primarily due to the negative impact of currency exchange rates in our foreign markets, as well as weakening demand in certain foreign markets as a result of current economic conditions.  Our Nature’s Sunshine Products International business segment (“NSP International”) experienced a decline in net sales of approximately 22.3 percent compared to the same period in 2008, while in our domestic business segment (“NSP United States”) net sales decreased approximately 1.6 percent. Our Synergy Worldwide business segment (“Synergy Worldwide”) experienced a decline in net sales revenue of approximately 4.4 percent compared to 2008, primarily due to current economic conditions and foreign currency fluctuations. A significant portion of the decline in our NSP International is the result of significant declines in the values of the Russian ruble and the Ukrainian hryvnia against the U.S. dollar, which have increased the price of our products significantly in these markets. Over the same period, our cost of goods sold increased as a percentage of net sales revenue primarily as a result of increased promotions within our foreign markets and increases in the manufacturing costs of some of our products, while our selling, general and administrative expenses decreased primarily as a result of reduced spending in our Russian, Ukrainian, and Eastern European markets as a result of reduced sales in these markets, as well as the positive impact of foreign currency fluctuations in many of our foreign markets.

 

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Table of Contents

 

RESULTS OF OPERATIONS

 

The following table summarizes our unaudited consolidated operating results in U.S. dollars and as a percentage of net sales for the three months ended September 30, 2009 and 2008 (dollar amounts in thousands).

 

 

 

 

 

 

 

Change from

 

 

 

2009

 

2008

 

2008 to 2009

 

 

 

Total

 

Percent of

 

Total

 

Percent of

 

 

 

 

 

dollars

 

net sales

 

dollars

 

net sales

 

Dollar

 

Percentage

 

Net sales revenue

 

$

85,777

 

100.0

%

$

92,661

 

100.0

%

$

(6,884

)

(7.4

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

17,299

 

20.2

 

17,146

 

18.5

 

153

 

0.9

 

Volume incentives

 

31,068

 

36.2

 

34,580

 

37.3

 

(3,512

)

(10.2

)

SG&A expenses

 

31,203

 

36.4

 

38,864

 

42.0

 

(7,661

)

(19.7

)

Total operating expenses

 

79,570

 

92.8

 

90,590

 

97.8

 

(11,020

)

(12.2

)

Operating income

 

6,207

 

7.2

 

2,071

 

2.2

 

4,136

 

199.7

 

Other income (expense), net

 

1,300

 

1.5

 

(448

)

(0.5

)

1,748

 

390.2

 

Income before provision for income taxes

 

7,507

 

8.7

 

1,623

 

1.7

 

5,884

 

362.5

 

Provision for income taxes

 

5,427

 

6.3

 

1,789

 

1.9

 

3,638

 

203.4

 

Net income (loss)

 

$

2,080

 

2.4

%

$

(166

)

(0.2

)%

$

2,246

 

1,353.0

%

 

The following table summarizes our unaudited consolidated operating results in U.S. dollars and as a percentage of net sales for the nine months ended September 30, 2009 and 2008 (dollar amounts in thousands).

 

 

 

 

 

 

 

Change from

 

 

 

2009

 

2008

 

2008 to 2009

 

 

 

Total

 

Percent of

 

Total

 

Percent of

 

 

 

 

 

dollars

 

net sales

 

dollars

 

net sales

 

Dollar

 

Percentage

 

Net sales revenue

 

$

253,102

 

100.0

%

$

285,023

 

100.0

%

$

(31,921

)

(11.2

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

50,633

 

20.0

 

53,159

 

18.6

 

(2,526

)

(4.8

)

Volume incentives

 

93,281

 

36.9

 

107,634

 

37.8

 

(14,353

)

(13.3

)

SG&A expenses

 

103,769

 

41.0

 

117,882

 

41.4

 

(14,113

)

(12.0

)

Total operating expenses

 

247,683

 

97.9

 

278,675

 

97.8

 

(30,992

)

(11.1

)

Operating income

 

5,419

 

2.1

 

6,348

 

2.2

 

(929

)

(14.6

)

Other income (expense), net

 

3,048

 

1.2

 

(495

)

(0.2

)

3,543

 

715.8

 

Income before provision for income taxes

 

8,467

 

3.3

 

5,853

 

2.0

 

2,614

 

44.7

 

Provision for income taxes

 

6,315

 

2.5

 

7,163

 

2.5

 

(848

)

(11.8

)

Net income (loss)

 

$

2,152

 

0.8

%

$

(1,310

)

(0.5

)%

$

3,462

 

264.3

%

 

Net Sales Revenue

 

Net sales revenue for the three and nine months ended September 30, 2009 was $85.8 million and $253.1 million compared to $92.7 million and $285.0 million for the same periods in 2008, decreases of approximately 7.4 percent and 11.2 percent, respectively. The decrease in net sales revenue for the three and nine months ended September 30, 2009 is primarily due to the negative impact of currency exchange rates in our foreign markets as a result of the strengthening of the U.S. dollar against most foreign currencies in which our subsidiaries operate and its impact on consumer demand in these markets, as well as weakening demand in certain foreign markets and our domestic markets as a result of current economic conditions.

 

Net sales revenue of NSP United States for the three and nine months ended September 30, 2009, was $37.6 million and $113.6 million, respectively, compared to $37.3 million and $115.4 million for the same periods in the prior year, an increase of 0.8 percent and a decrease of 1.6 percent, respectively. The decrease in sales of NSP United States is primarily related to a decrease in consumer demand as a result of current economic conditions in the United States during the first part of the nine months ended September 30, 2009 from the same period in the prior year.

 

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Table of Contents

 

NSP International reported net sales revenue for the three and nine months ended September 30, 2009 of $33.2 million and $98.4 million, respectively, compared to $41.4 million and $126.7 million for the same periods in 2008, decreases of approximately 19.8 percent and 22.3 percent.  The decrease in sales is primarily due to foreign currency fluctuations as a result of the strengthening of the U.S. dollar against the currencies in substantially all markets in which NSP International operates, and the effect of the strengthening U.S. dollar on customer purchasing power for our products in these markets.  A significant portion of the decline in NSP International’s net sales is the result of significant declines in the values of the Russian ruble and the Ukrainian hryvnia against the U.S. dollar, which have increased the price of our products significantly in these markets. In the Ukraine, net sales decreased $3.6 million, or 42.5 percent, and $10.8 million, or 42.7 percent, during the three month and nine month ended September 30, 2009, respectively, compared to the same periods in 2008, primarily as a result of a decrease in the Ukrainian hryvnia of approximately 72.0 percent and 64.4 percent, respectively, against the U.S. dollar compared to the same periods in 2008. In Russia, we experienced a decrease in sales of $2.3 million, or 26.5 percent, and $7.5 million, or 25.7 percent, during the three and nine month periods ended September 30, 2009, respectively, compared to the same periods in 2008, primarily as a result of a decrease in the Russian ruble of approximately 29.4 percent and 35.3 percent, respectively, against the U.S. dollar compared to the same periods in 2008. Foreign currency exchange rate fluctuations excluding Ukraine and Russia negatively impacted revenues for the three and nine month periods ended September 30, 2009 by $2.1 million and $6.2 million, respectively, compared to the same periods in 2008.  For the three months and nine months ended September 30, 2009, approximately $1.0 million and $3.0 million, respectively, of the negative foreign currency rate fluctuations relate to Mexico. Excluding the impact of foreign currency fluctuations, sales for Mexico decreased approximately $0.2 million, or 4.5 percent, and $1.3 million, or 9.0 percent, during three and nine month periods ended September 30, 2009, respectively, compared to the same periods in 2008 primarily due to a corresponding decrease in Distributors as a result of current economic conditions. Excluding the impact of foreign currency fluctuations, we experienced decreases in Japan net sales of $0.9 million or 38.2 percent and $2.4 million, or 32.4 percent during the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008, as a result of a corresponding decrease in the number of Distributors as well as current economic conditions in Japan.

 

Net sales revenue of Synergy Worldwide for the three and nine months ended September 30, 2009 was $15.0 million and $41.1 million, respectively, compared to $14.0 million and $43.0 million for the same periods in 2008, an increase of 7.1 percent and a decrease of 4.4 percent, respectively. These changes are primarily due to sales growth in the United States, Indonesia, and Europe, which were offset by declines in Japan due to the current economic conditions in that market. Net sales revenue in the three and nine month periods of 2009 were negatively impacted compared to the prior year by $0.9 million and $2.1 million as a result of the U.S. dollar strengthening against the currencies of the markets in which Synergy Worldwide operates.

 

We distribute our products to customers through an independent sales force comprised of Distributors and Managers.  A person who joins our independent sales force begins as a “Distributor,” and 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.  Active Distributors totaled approximately 695,000 and 713,200, at September 30, 2009 and 2008, respectively.  Active Managers totaled approximately 28,400 and 26,200 at September 30, 2009 and 2008, respectively.

 

Further information related to the NSP United States, NSP International and Synergy Worldwide is set forth in Note 8 to the Unaudited Condensed Consolidated Financial Statements in Part 1, Item 1 of this report.

 

Cost of Goods Sold

 

For the three and nine months ended September 30, 2009, cost of goods sold, as a percent of net sales revenue, increased to 20.2 percent and 20.0 percent of net sales revenue, respectively, compared to 18.5 percent and 18.6 percent for the same periods in the prior year primarily as a result of additional promotions offered in our foreign markets, increases in raw material costs for some of our products, and reduced production volumes.

 

Volume Incentives

 

We pay sales commissions (“Volume Incentives”) to our Managers and Distributors based upon the amount of sales group product purchases. Volume Incentives are a significant part of our direct sales marketing program. These payments are designed to provide incentives for reaching higher sales levels and for recruiting additional Distributors. As a percent of net sales revenue, Volume Incentives decreased during the three and nine months ended September 30, 2009 as compared to the same period in 2008, primarily as a result of decreased Volume Incentives in our United States and Japanese markets. Volume Incentives decreased due to declines in qualifying sales volumes and the impact on the mix of sales within our various markets, which have differing Volume Incentive rates based upon their respective sales marketing programs.

 

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Selling, General and Administrative

 

Selling, general and administrative expenses as a percent of net sales revenue decreased to 36.4 percent and 41.0 percent in the three and nine months ended September 30, 2009, respectively, compared to 42.0 percent and 41.4 percent for the same periods in 2008. In absolute terms, our selling, general and administrative expenses decreased by $7.7 million for the three months ended September 30, 2009 compared to the same period in 2008, from $38.9 million to $31.2 million, and by $14.1 million for the nine months ended September 30, 2009 compared to the same period in 2008, from $117.9 million to  $103.8 million.  The decreases were primarily due to decreased spending in our Russian, Ukrainian, and Eastern European markets of approximately $1.7 million and $5.6 million during the three and nine months ended September 30, 2009, respectively, as a result of the declines in net sales revenue in these markets. The decreases are also a result of foreign currency fluctuations in our other foreign markets of $1.1 million and $3.4 million, of which $0.3 million and $0.8 million relates to Synergy Worldwide. Within NSP United States selling, general, and administrative costs decreased approximately $2.4 million for the three months ended September 30, 2009 compared to the same period in 2008 due to decreased professional fees compared to the same period in 2008, which fees were primarily related to our significant efforts to become current in the filing of our financial reports during the same quarter last year, as well as other legal matters.  For the nine months ended September 30, 2009, NSP United States selling, general and administrative costs decreased $2.0 million. Approximately $0.3 million and $1.8 million of the decrease in NSP United States selling, general and administrative costs for the three and nine months ended September 30, 2009 are related to decreases  in non-income tax contingencies. The decreases for the nine months ended September 30, 2009 are offset by approximately $0.6 million related to the settlement of the SEC investigation of the Company as described in Note 10 of the Unaudited Condensed Financial Statements in Part 1, Item 1 of this report.

 

Operating Income (Loss)

 

Operating income increased $4.1 million during the three months ended September 30, 2009 compared to the same period in 2008, from operating income of $2.1 million to operating income of $6.2 million, and decreased $0.9 million during the nine months ended September 30, 2009 compared to same period in 2008, from operating income of $6.3 million to operating income of $5.4 million. Operating income for NSP International increased $0.7 million and decreased $4.5 million for the three and nine months ended September 30, 2009 compared to same periods in 2008 as a result of decreased sales due to foreign currency fluctuations and general economic conditions within these markets, which had a more significant impact earlier in the nine month period ended September 30, 2009.  Operating losses for Synergy Worldwide remained flat at $4.4 million for the nine months ended September 30, 2009 compared to the same period in 2008. However, its operating losses decreased $1.1 million in the third quarter compared to the same period in the prior year to break-even, primarily due to growth in Synergy Worldwide sales in its United States, Indonesian and European markets as noted above. In addition, the operating income of NSP United States  increased approximately $2.2 million and $3.5 million during the three and nine months ended September 30, 2009 compared with the same periods in 2008 primarily due to decreases  in professional fees related to becoming current with our filings in the same quarter of the prior year in comparison to the current year, the reduction of  non-income tax related contingencies, as well as declines in volume incentives as a percentage of sales during the three and nine months ended September 30, 2009 compared to the same periods in the prior year.

 

Other Income (Expense), Net

 

Other income (expense), net for the three and nine months ended September 30, 2009 increased $1.7 million and $3.5 million, respectively, compared to the same periods in 2008 primarily due to foreign exchange gains in certain markets based on changes in exchange rates.

 

Income Taxes

 

Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur.  For the three months ended September 30, 2009 and 2008, the Company’s provision for income taxes, as a percentage of income before income taxes, was approximately 72.3 percent and 110.2 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent. For the nine months ended September 30, 2009 and 2008, the Company’s provision for income taxes, as a percentage of income before income taxes, was approximately 74.6 percent and 122.4 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent.

 

The differences between the effective rate and the U.S. federal statutory rate for the three and nine months ended September 30, 2009 and 2008, are primarily attributed to increases in tax liabilities associated with uncertain tax positions, the U.S. tax impact of foreign operations, and increases in foreign valuation allowances primarily related to foreign subsidiary net losses for which no tax benefit is being recognized.  Tax amounts recorded related to the uncertain tax positions, valuation allowances, and other permanent tax items have a significant impact on the effective tax rate. The effective rate declined in the three and nine-month periods ended September 30, 2009 compared to the same periods in the prior year primarily as a result of the permanent tax items having less impact on the higher pre-tax income.

 

As of September 30, 2009, the Company had accrued $20,399 (net of $11,277 of other assets related to competent authority and royalty benefits) related to unrecognized tax positions compared with $19,675 (net of $11,277 of other assets related to competent

 

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authority and royalty benefits) as of December 31, 2008.  This net increase is primarily attributed to increases in liabilities recorded related to transfer pricing.

 

In October 2009, the Internal Revenue Service (“IRS”) issued an examination report formally proposing adjustments with respect to the 2003 through 2005 taxable years, which primarily relate to the prices that were charged in intragroup transfers of property and the disallowance of related deductions. The Company expects to commence administrative proceedings with the Office of Appeals of the Internal Revenue Service challenging the proposed adjustments. Management believes that the Company has appropriately reserved for these matters at an amount which it believes will ultimately be due upon resolution of the administrative proceedings. The Company is currently unable to determine the outcome of these discussions and their related impact, if any, on the Company’s financial condition, results of operations, or cash flows.

 

The Company has also been advised by the IRS that it will begin to examine the Company’s tax returns for the 2006 and 2007 taxable years. The Company anticipates this audit will commence during the quarter ending December 31, 2009. The Company’s U.S. federal income tax returns are open from 2003 to 2008, and the Company has several foreign jurisdictions that have open years between 2003 and 2008.

 

Although the Company believes its estimates for unrecognized tax benefits are reasonable, the Company can make no assurance that the final tax outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals. Such difference could have a material impact on the Company’s income tax provision and operating results in the period in which the Company makes such determination.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our principal use of cash is to pay for operating expenses, including Volume Incentives, capital assets, inventory purchases, and the funding of international expansion. As of September 30, 2009, working capital was $34.3 million compared to $30.2 million as of December 31, 2008. At September 30, 2009, we had $36.3 million in cash and cash equivalents, of which $33.2 million is held in our foreign markets and may be subject to various withholding taxes and other restrictions related to repatriation, and $3.4 million of short-term investments, which are available to be used along with our normal cash flows from operations to fund unanticipated shortfalls in future cash flows.

 

For the nine months ended September 30, 2009, we generated cash of $1.0 million from operating activities compared to $3.8 million for the same period in 2008.  The decrease in cash provided from operating cash flows is primarily due to decreases in accrued liabilities related to the payment of significant professional fees which were primarily accrued during the prior year, as well as changes in the timing of cash payments related to fluctuations in other operating assets and liabilities.

 

Capital expenditures for the first nine months of 2009 were $2.5 million related to the purchase of equipment, computer systems and software, compared to $6.8 million, for the same period in the prior year, of which $4.0 million is related to the purchase of a warehouse in Venezuela.

 

We also had cash proceeds of $2.1 million from the sale of restricted investments during the nine months ended September 30, 2009 and cash proceeds of $0.6 million from the sale of investments available-for-sale during each of the nine month periods ended September 30, 2009 and 2008.

 

We used cash to pay quarterly dividends of $0.8 million for the nine months ended September 30, 2009 compared to $2.3 million for the same period in 2008.  The Company suspended payment of its quarterly cash dividends, effective the second quarter of 2009, in an effort to conserve cash in the United States.  The suspension of cash dividends is expected to preserve approximately $3.1 million of cash flow on an annual basis.

 

There were no stock options exercised during the nine months ended September 30, 2009 and 2008.

 

We believe that working capital requirements can be met for the foreseeable future through our available cash and cash equivalents, and cash generated from operating activities; however, a prolonged economic downturn, a decrease in the demand for our products, the unfavorable settlement of our unrecognized tax positions and non-income tax contingencies could adversely affect our long-term liquidity.  In the event of a significant decrease in cash provided by operating activities, it might be necessary for us to obtain additional external sources of funding.

 

We do not currently maintain a long-term credit facility or any other external sources of long-term funding; however, we are exploring the issue and believe that such funding could be obtained on competitive terms in the event additional sources of funding become necessary.

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and form the basis for the following discussion and analysis on critical accounting policies and estimates. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates and those differences could have a material effect on our financial position and results of operations. Management has discussed the development, selection and disclosure of these estimates with the Board of Directors and its Audit Committee.

 

A summary of our significant accounting policies is provided in Note 1 of the Notes to Consolidated Financial Statements in Item 8 of our Annual Report on Form 10-K/A for the year ended December 31, 2008. We believe the critical accounting policies and estimates described below reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements. The impact and any associated risks on our business that are related to these policies are also discussed throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect reported and expected financial results.

 

Revenue Recognition

 

Net sales revenue and related volume incentive expenses are recorded when persuasive evidence of an arrangement exists, collectability is reasonably assured, the amount is fixed and determinable, and title and risk of loss have passed, generally when the merchandise has been delivered. The amount of the volume incentive is determined based upon the amount of qualifying purchases in a given month. It is necessary for the Company to make estimates about the timing of when merchandise has been delivered. These estimates are based upon the Company’s historical experience related to time in transit, timing of when shipments occurred, and shipping volumes. Amounts received for undelivered merchandise are recorded as deferred revenue. From time to time, the Company’s United States operation extends short-term credit associated with product promotions. In addition, for certain of the Company’s international operations, the Company offers credit terms consistent with industry standards within the country of operation. Payments to Distributors and Managers for sales incentives or rebates are recorded as a reduction of revenue. Payments for sales incentives and rebates are calculated monthly based upon qualifying sales. Membership fees are recorded as revenue over the life of the membership, primarily one year. Prepaid event registration fees are deferred and recognized as revenues when the related event is held.

 

A reserve for product returns is recorded based upon historical experience. The Company allows Distributors or Managers to return the unused portion of products within ninety days of purchase if they are not satisfied with the product. In some of our markets, the requirements to return product are more restrictive.

 

Investments

 

The Company’s available-for-sale investment portfolio is recorded at fair value and consists of various fixed income securities such as U.S. government and state and municipal bonds, mutual funds, and equity securities. These investments are valued using (a) quoted prices for identical assets in active markets or (b) from significant inputs that are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset. The Company’s trading portfolio is recorded at fair value and consists of various mutual funds that are valued using quoted prices in active markets.

 

For available-for-sale debt securities with unrealized losses, we perform an analysis to assess whether we intend to sell or whether we would be more likely than not required to sell the security before the expected recovery of the amortized cost basis. Where we intend to sell a security, or may be required to do so, the security’s decline in fair value is deemed to be other-than -temporary and the full amount of the unrealized loss is recorded within earnings as an impairment loss.

 

For all other debt securities that experience a decline in fair value that is determined to be other-than-temporary and not related to credit loss, we record, net of a tax loss in accumulated other comprehensive income.  The credit loss is recorded within earnings as an impairment loss. Management judgment is involved in evaluating whether a decline in an investment’s fair value is other-than-temporary.

 

Regardless of our intent to sell a security, we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the security.  Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a security.

 

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For equity securities, when assessing whether a decline in fair value below our cost basis is other-than-temporary, we consider the fair market value of the security, the length of time and extent to which market value has been less than cost, the financial condition and near-term prospects of the issuer as well as specific events or circumstances that may influence the operations of the issuer, and our intent and ability to hold the investment for a sufficient time in order to enable recovery of our cost. New information and the passage of time can change these judgments.  Where we have determined that we lack the intent and ability to hold an equity security to its expected recovery, the security’s decline in fair value is deemed to be other-than-temporary and is recorded within earnings as an impairment loss.

 

Inventories

 

Inventories are stated at the lower-of-cost-or-market, using the first-in, first-out method. The components of inventory cost include raw materials, labor, and overhead. To estimate any necessary lower-of-cost-or-market adjustments, various assumptions are made in regard to excess or slow-moving inventories, non-conforming inventories, expiration dates, current and future product demand, production planning, and market conditions.

 

Self-insurance Liabilities

 

As a manufacturer and distributor of products that are ingested, we face an inherent risk of exposure to product liability claims in the event that, among other things, the use of our products results in injury to consumers due to tampering by unauthorized third parties or product contamination. We have historically had a very limited number of product claims or reports from individuals who have asserted that they have suffered adverse consequences as a result of using our products. These matters have historically been settled to our satisfaction and have not resulted in material payments. We have established a wholly owned captive insurance company to provide us with product liability insurance coverage and have accrued an amount that we believe is sufficient to cover probable and reasonable estimable liabilities related to product liability claims based upon our history. However, there can be no assurance that these estimates will prove to be sufficient nor can there be any assurance that the ultimate outcome of any litigation for product liability will not have a material negative impact on our business prospects, financial position, results of operations, or liquidity.

 

We self-insure for certain employee medical benefits. The recorded liabilities for self-insured risks are calculated using actuarial methods and are not discounted. The liabilities include amounts for actual claims and claims incurred but not reported. Actual experience, including claim frequency and severity as well as health care inflation, could result in actual liabilities being more or less than the amounts currently recorded.

 

Incentive Trip Accrual

 

We accrue for expenses for incentive trips associated with our direct sales marketing program, which rewards independent Distributors and Managers with paid attendance at our conventions and meetings. Expenses associated with incentive trips are accrued over qualification periods as they are earned. We specifically analyze incentive trip accruals based on historical and current sales trends as well as contractual obligations when evaluating the adequacy of the incentive trip accrual. Actual results could result in liabilities being more or less than the amounts recorded.

 

Impairment of Long-Lived Assets

 

The Company reviews its long-lived assets, such as property, plant and equipment and intangible assets, for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company uses an estimate of future undiscounted net cash flows of the related assets or groups of assets over their remaining lives in measuring whether the assets are recoverable. An impairment loss is calculated by determining the difference between the carrying values and the fair values of these assets. As of September 30, 2009 and December 31, 2008, the Company did not consider any of its long-lived assets to be impaired.

 

Contingencies

 

We are involved in certain legal proceedings. When a loss is considered probable in connection with litigation or non-income tax contingencies and when the loss can be reasonably estimated with a range, we record our best estimate within the range related to the contingency. If there is no best estimate, we record the minimum of the range. As additional information becomes available, we assess the potential liability related to the contingency and revise the estimates. Revision in estimates of the potential liabilities could materially impact our results of operations in the period of adjustment.

 

Income Taxes

 

Our income tax expense, deferred tax assets and liabilities and contingent reserves reflect management’s best assessment of estimated future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.

 

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Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we develop assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.

 

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows or financial position.

 

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

Please refer to Note 1 to the Unaudited Condensed Consolidated Financial Statements in Part 1, Item 1 of this report for information regarding recently issued accounting pronouncements.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

The Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report 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 and Section 21E of the Securities and Exchange Act.  All statements other than statements of historical fact are forward-looking statements.  Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies. All statements (other than statements of historical fact) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These statements are often characterized by terminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” and similar expressions, and are based on assumptions and assessments made by management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Forward-looking statements are not guarantees of future performance and are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements.

 

Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in our forward-looking statements includes, among others, the following:

 

·                  our relationship with and our ability to influence the actions of our independent Distributors and Managers;

 

·                  our ability to attract and retain a sufficient number of independent Distributors and Managers;

 

·                  changes in laws and regulations regarding network marketing that may prohibit or restrict our ability to sell our products in new or existing markets;

 

·                  determinations regarding tax liabilities and required tax obligations in U.S. and foreign jurisdictions;

 

·                  our products and manufacturing activities are subject to extensive government regulations and restrictions;

 

·                  general economic conditions;

 

·                  an economic slowdown in the markets in which we do business could reduce consumer demand for our products;

 

·                  currency and exchange rate fluctuations could lower our revenue and net income;

 

·                  the availability and integrity of raw materials could be compromised;

 

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·                  geopolitical issues and conflicts could adversely affect our business;

 

·                  our business is subject to the effects of adverse publicity and negative public perception;

 

·                  changes in taxation and transfer pricing affect our operations;

 

·                  our business is subject to intellectual property risks;

 

·                  product and liability claims;

 

·                  changing consumer preferences and demands;

 

·                  inventory obsolescence due to finite shelf lives and changing product demand;

 

·                  product concentration;

 

·                  system failures;

 

·                  changes in key management; and

 

·                  the competitive nature of our business.

 

Additional factors that could cause actual results to differ materially from our forward-looking statements are set forth in this report and our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008 under the heading “Risk Factors.”

 

Forward-looking statements in this report speak only as of the date hereof, and forward-looking statements in documents attached that are incorporated by reference speak only as of the date of those documents.  We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law.

 

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We conduct our business in several countries and intend to continue to expand our international operations.  Net 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, our operations are exposed to risks associated with changes in social, political and economic conditions inherent in international operations, including changes in the laws and policies that govern international investment in countries where we have operations, as well as, to a lesser extent, changes in United States laws and regulations relating to international trade and investment.

 

Foreign Currency Risk

 

During the nine months ended September 30, 2009, approximately 54.5 percent of our net sales revenue and approximately 54.1 percent of our operating 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 its functional currency, while certain regions, including Russia and the Ukraine, are served by a U.S. subsidiary through third party entities, for which all business is conducted in U.S. dollars. We conduct business in twenty-three different currencies with exchange rates that are not on a one-to-one relationship with the U.S. dollar.  All revenues and expenses are translated at average exchange rates for the periods reported.  Therefore, our operating results will be positively or negatively impacted by a weakening or strengthening of the U.S. dollar in relation to another fluctuating currency.  Given the uncertainty and diversity of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations or financial condition, but we have provided consolidated sensitivity analyses below of functional currency/reporting currency exchange rate risks.  Our exposure to local currency/functional currency exchange rate risk is not significant. Changes in various currency exchange rates affect the relative prices at which we sell our products.  We regularly monitor our foreign currency risks and periodically take measures to reduce the risk of foreign exchange rate fluctuations on our operating results.  We do not use derivative instruments for hedging, trading or speculating on foreign exchange rate fluctuations. Additional discussion of the impact on the effect of currency fluctuations has been included in our management’s discussion and analysis included in Part 1, Item 2 of this report.

 

The following table sets forth a composite sensitivity analysis of our net sales revenue, costs and expenses, and operating

 

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income in connection with strengthening of the U.S. dollar (our reporting currency) by 10 percent, 15 percent and 25 percent against every other fluctuating functional currency in which we conduct business.  We note that our individual net sales revenue, cost and expenses, and operating income components are sensitive to increases in the strength of the U.S. dollar on almost a three-to-one percentage point basis, assuming a strengthening of the U.S. dollar by 10 percent, 15 percent and 25 percent against every other fluctuating currency in which we conduct business.

 

Exchange Rate Sensitivity of Operating Income for the three months ended September 30, 2009 (dollar amounts in thousands)

 

 

 

For the three

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

months

 

With Strengthening of U.S. Dollar by:

 

 

 

ended

 

10%

 

15%

 

25%

 

 

 

September 
30, 2009

 

Decrease
($)

 

Decrease
(%)

 

Decrease
($)

 

Decrease
(%)

 

Decrease
($)

 

Decrease
(%)

 

Net sales revenue

 

$

85,777

 

$

(2,947

)

(3.4

)%

$

(4,230

)

(4.9

)%

$

(6,485

)

(7.6

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

17,299

 

(491

)

(2.8

)

(704

)

(4.1

)

(1,080

)

(6.2

)

Volume incentives

 

31,068

 

(1,146

)

(3.7

)

(1,643

)

(5.3

)

(2,520

)

(8.1

)

Selling, general and administrative

 

31,203

 

(1,082

)

(3.5

)

(1,553

)

(5.0

)

(2,381

)

(7.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

6,207

 

$

(228

)

(3.7

)%

$

(330

)

(5.3

)%

(504

)

(8.1

)%

 

Exchange Rate Sensitivity of Operating Income for the nine months ended September 30, 2009 (dollar amounts in thousands)

 

 

 

For the nine

 

 

 

 

 

months

 

With Strengthening of U.S. Dollar by:

 

 

 

ended

 

10%

 

15%

 

25%

 

 

 

September 
30, 2009

 

Decrease
($)

 

Decrease
(%)

 

Decrease
($)

 

Decrease
(%)

 

Decrease
($)

 

Decrease
(%)

 

Net sales revenue

 

$

253,102

 

$

(8,271

)

(3.3

)%

$

(11,868

)

(4.7

)%

$

(18,197

)

(7.2

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

50,633

 

(1,453

)

(2.9

)

(2,084

)

(4.1

)

(3,196

)

(6.3

)

Volume incentives

 

93,281

 

(3,263

)

(3.5

)

(4,681

)

(5.0

)

(7,178

)

(7.7

)

Selling, general and administrative

 

103,769

 

(3,407

)

(3.3

)

(4,889

)

(4.7

)

(7,496

)

(7.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

5,419

 

$

(148

)

(2.7

)%

$

(214

)

(3.9

)%

(327

)

(6.0

)%

 

The following table sets forth a composite sensitivity analysis of our assets and liabilities by balance sheet line items that are subject to exchange rate risk, together with the total gain or loss from the strengthening of the U.S. dollar in relation to our various fluctuating functional currencies. The sensitivity of our assets and liabilities, taken by balance sheet line items, is somewhat more than the sensitivity of our operating income to increases in the strength of the U.S. dollar in relation to other fluctuating currencies in which we conduct business.

 

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Exchange Rate Sensitivity of Balance Sheet (dollar amounts in thousands)

 

 

 

 

 

With Strengthening of U.S. Dollar by:

 

 

 

As of

 

10%

 

15%

 

25%

 

 

 

September
30, 2009

 

Gain
(Loss) ($)

 

Gain
(Loss) (%)

 

Gain
(Loss) ($)

 

Gain
(Loss) (%)

 

Gain
(Loss) ($)

 

Gain
(Loss) (%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets subject to Exchange Rate Risk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,263

 

$

(2,833

)

(7.8

)%

$

(4,064

)

(11.2

)%

$

(6,232

)

(17.2

)%

Accounts receivable, net

 

11,921

 

(420

)

(3.5

)%

(603

)

(5.1

)%

(924

)

(7.8

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities subject to Exchange Rate Risk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

7,498

 

162

 

2.2

%

233

 

3.1

%

357

 

4.8

%

 

 

Total Loss from Strengthening of U.S. Dollar

 

(3,091

)

 

 

(4,434

)

 

 

(6,799

)

 

 

 

The following table sets forth the local currencies other than the U.S. dollar in which our assets and liabilities that are subject to exchange rate risk were denominated as of September 30, 2009 and exceeded $1 million upon translation into U.S. dollars.  We use the spot exchange rate for translating balance sheet items from local currencies into our reporting currency.  The respective spot exchange rate for each such local currency meeting the foregoing thresholds is provided in the table as well.

 

Translation of Balance Sheet Amounts Denominated in Local Currency (dollar amounts in thousands)

 

Cash and Cash Equivalents

 

Translated into U.S.
Dollars

 

At Spot Exchange Rate
per One U.S. Dollar as
of September 30, 2009

 

Canada (Dollar)

 

$

2,351

 

1.1

 

Colombia (Peso)

 

1,411

 

1,938.5

 

Indonesia (Rupiah)

 

1,253

 

9,746.6

 

Japan (Yen)

 

8,494

 

90.0

 

Korea (Won)

 

2,404

 

1,190.6

 

Mexico (Peso)

 

1,957

 

13.6

 

Venezuela (Bolivar)

 

4,346

 

2.1

 

Other

 

6,465

 

Varies

 

Total

 

$

28,681

 

 

 

 

 

 

 

 

 

Accounts Receivable

 

 

 

 

 

Japan (Yen)

 

$

1,482

 

90.0

 

Other

 

3,140

 

Varies

 

Total

 

$

4,622

 

 

 

 

The Company currently has no cash held in either the Russian ruble or the Ukrainian hryvnia.

 

Finally, the following table sets forth the annual weighted average of fluctuating currency exchange rates of each of the local currencies per one U.S. dollar for each of the local currencies in which sales revenue exceeded $10.0 million during any of the years presented in our Annual Report on Form 10-K/A for the year ended December 31, 2008. We use the annual weighted average exchange rate for translating items from the statement of operations from local currencies into our reporting currency.

 

Nine months ended September 30,

 

2009

 

2008

 

Canada (Dollar)

 

1.2

 

1.0

 

Japan (Yen)

 

94.8

 

105.8

 

Mexico (Peso)

 

13.6

 

10.5

 

Venezuela (Bolivar)

 

2.1

 

2.1

 

 

The functional currency in highly inflationary economies is the U.S. dollar and transactions denominated in the local currency are re-measured as if the functional currency were the U.S. dollar if they are considered material to the consolidated financial statements. The remeasurement of local currencies into U.S. dollars creates translation adjustments, which are included in the

 

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consolidated statements of operations.  A country is considered to have a highly inflationary economy if it has a cumulative inflation rate of approximately 100 percent or more over a three year period as well as other qualitative factors including historical inflation rate trends (increasing and decreasing), the capital intensiveness of the operation, and other pertinent economic factors. There were no countries considered to have a highly inflationary economy during 2008 or the nine months ended September 30, 2009.

 

As of September 30, 2009, the Company had approximately $4.3 million in cash denominated in Venezuelan bolivar fuertes. Our access to these funds for use within Venezuela is not restricted. Currency restrictions enacted by the government of Venezuela require approval from the government’s currency control organization for our subsidiary in Venezuela to obtain U.S. dollars at the official exchange rate to pay for imported products or to repatriate dividends back to the Company.  The market rate, which is substantially lower than the official rate, may be used to obtain U.S. dollars or other currencies without approval of the government’s currency control organization.  Our Venezuelan subsidiary continues to apply for and expects to receive approval from the government of Venezuela to convert its bolivar fuertes into U.S. dollars at the official exchange rate to pay for imported products and other remittances.  As a result, we continue to use the official exchange rate of 2.15 bolivar fuertes to the U.S. dollar to translate the financial statements of our Venezuelan subsidiary into U.S. dollars. However, the application and approval process has been delayed in recent periods, and the timing and ability to obtain U.S. dollars in the future at the official exchange rate remains uncertain. Unless the official exchange rate is made more readily available, however, our subsidiary’s operations could be adversely affected as it may need to obtain U.S. dollars at less favorable exchange rates from non-government sources.

 

Inflation in Venezuela has continued to increase over the past few years, and it is possible that Venezuela will be designated a highly inflationary economy no later than the beginning of our 2010 fiscal year.  Additionally, the Venezuelan government may change the official rate. If this were to occur, gains and losses resulting from the translation of our Venezuelan subsidiary would be recorded in earnings. If Venezuela is designated as a highly inflationary economy and there is a devaluation of the official exchange rate, then our earnings could be negatively impacted.  In addition, revenue and operating income would be impacted on an ongoing basis as a result of the devaluation. For the nine months ended September 30, 2009, our operations in Venezuela generated approximately 3.7% of our net sales revenue.

 

Interest Rate Risk

 

The primary objectives of our investment activities are to preserve principal while maximizing yields without significantly increasing risk. These objectives are accomplished by purchasing investment grade securities, substantially all of which either mature within the next 12 months or have characteristics of marketable securities. On September 30, 2009, we had investments of $3.4 million, of which $2.4 million were municipal obligations, which carry an average fixed interest rate of 5.1 percent and mature over a 5-year period. A hypothetical 1.0 percent change in interest rates would not have had a material effect on our liquidity, financial position, or results of operations.

 

Item 4.    CONTROLS AND PROCEDURES

 

Overview

 

Management identified certain material weaknesses which are described in our Annual Report on Form 10-K/A for the year ended December 31, 2008.  During 2009 and through the date of this filing, management has been focused on remediating these material weaknesses.  This overview discusses management’s evaluation of our disclosure controls and procedures as of September 30, 2009.  In addition, this item provides a summary of the status of each of the previously identified material weaknesses, followed by a discussion of management’s evaluation of disclosure controls and procedures, and management’s efforts to remediate the material weaknesses, as set forth in the table below.

 

During the quarter ended September 30, 2009, the Company completed the remediation related to the financial reporting process material weakness.  As shown below, the other two material weaknesses reported as of December 31, 2008 remain material weaknesses as of September 30, 2009, for which remediation efforts are in process.

 

Material Weakness Reported
as of December 31, 2008

 

Status as of
September 30, 2009

 

1. Accounting for Taxes

 

Remediation in process

 

2. Financial Reporting Process

 

Remediated

 

3. Information Technology:

 

 

 

Access Control

 

Remediation in process

 

Change Management

 

Remediation in process

 

Spreadsheets

 

Remediation in process

 

 

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Table of Contents

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the SEC, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

 

In connection with the preparation of this report, the Company’s management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2009. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2009, as a result of the existence of material weaknesses in our internal control over financial reporting.

 

Since December 31, 2008, we have made significant progress in improving our disclosure controls and procedures. We have taken, and are taking, the actions described below under “Remediation Actions Relating to Remaining Material Weaknesses” to remediate the remaining material weaknesses in our internal control over financial reporting.

 

We continue to strive to improve our processes to enable us to provide complete and accurate public disclosure. Management believes that we will not be able to conclude that our disclosure controls and procedures are effective until the material weaknesses have been fully remediated.

 

To address the material weaknesses reported in our 2008 Form 10-K/A, management performed additional analyses and other post-closing procedures designed to ensure that our unaudited condensed consolidated interim financial statements were prepared in accordance with GAAP. These procedures included documentation and testing of processes, data validation procedures from the systems into the general ledger, testing of systems, validation of results, disclosure review, and other analytics. As a result, management believes that the consolidated interim financial statements included in this report fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented.

 

Changes in Internal Control over Financial Reporting

 

Overview

 

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed whether any changes in our internal control over financial reporting that occurred during the period from January 1, 2009 through September 30, 2009 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on management’s assessment, significant changes were implemented and tested during the period from January 1, 2009 through September 30, 2009 to continue the remediation of our material weaknesses in internal control over financial reporting.

 

Management believes the measures that we have implemented during 2009 to remediate the material weaknesses in internal control over financial reporting have had a favorable impact on our internal control over financial reporting since December 31, 2008. Changes in our internal control over financial reporting from January 1, 2009 through September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting are described below.

 

Remediation Actions Relating to Remaining Material Weaknesses

 

The discussion below describes the actions that management took during 2008 and is currently in the process of taking in 2009 to remediate our remaining material weaknesses in internal control over financial reporting.

 

Accounting for Taxes

 

Description of Material Weakness as of December 31, 2008

 

The Company’s processes, procedures and controls related to the preparation and review of the annual tax provision and the accrual of other non-income tax contingencies were not effective to ensure that amounts related to the tax provision, related current or deferred income tax asset and liability accounts, and non-income tax contingencies were accurate, recorded in the proper period, and determined in accordance with GAAP. Specifically, we did not (i) analyze and reconcile certain deferred income and tax payable accounts, (ii) appropriately consider the need to record or disclose contingencies for certain income tax positions in accordance with GAAP, and (iii) file tax returns in certain foreign jurisdictions. Additionally, we had insufficient personnel with appropriate qualifications and training in accounting for taxes.

 

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Table of Contents

 

Description of 2009 Remediation Actions

 

In late 2008, we hired an Executive Director of Corporate Tax and during 2009 have utilized outsourced service providers for tax consulting services to assist in our accounting for income taxes and the recording of non-income tax contingencies. In October 2009, the Company engaged tax consultants with specific expertise related to the remediation of accounting for taxes to assist the Company in completing the remediation of its material weakness in this area.  We continue to evaluate our tax process and tax resource requirements. We continue to work towards the completion of delinquent foreign statutory filings identified during the prior years as result of management’s analysis, as well as refining our process to help ensure timely completion of future filings. In addition, in 2008 our management performed an analysis with the assistance of outside consultants to assess, estimate, and record the exposure related to our uncertain tax positions and non-income tax contingencies in accordance with GAAP. During 2009, we are continuing to monitor and assess the uncertain tax positions and non-income tax contingencies and are evaluating and implementing plans to reduce these contingencies.  We continue to evaluate the adequacy of our tax resources.  This material weakness still exists, and the Company is in the process of remediating this material weakness.

 

Financial Reporting Process

 

Description of Material Weakness as of December 31, 2008

 

The Company did not maintain an effective financial reporting process to prepare financial statements in accordance with GAAP. Specifically, our process lacked timely and complete financial statement reviews, appropriate account closing procedures, and appropriate reconciliation processes. Further, we were unable to complete regulatory filings as required by the rules of the SEC.

 

Description of 2009 Remediation Actions

 

During 2008, we redesigned and implemented improved procedures and controls related to our monthly and quarterly close processes including account reconciliations, enhancement of the formal monthly close and reporting checklists, variance analysis of financial statement fluctuations, and budget to actual reviews.  As a result of the remediation efforts, the Company has completed its regulatory filings during 2009 as required by the rules of the SEC.  Our remediation efforts during the second and third quarters of 2009 included the enhancement and testing of the processes and controls instituted in the prior year.  We believe that these remediation efforts have improved our financial reporting process and that the material weakness has been effectively remediated at September 30, 2009.

 

Information Technology Systems

 

Description of Material Weakness as of December 31, 2008

 

The Company did not maintain effective internal control over financial reporting related to certain information technology applications and general computer controls which are considered to have an impact on financial reporting and which resulted in a more than reasonable possibility that material misstatements in our financial statements would not be prevented or detected. Specifically, we lacked effective controls in the following areas:

 

·                                         Access Control — The Company did not maintain effectively designed controls to prevent unauthorized access to certain programs and data, and provide for periodic review and monitoring of access including reviews of security logs and analysis of segregation of duties conflicts.

 

·                                         Change Management — The Company did not maintain effectively designed controls to ensure that all information technology program and data changes were authorized, developer access to the production environment was limited, and that all program and data changes were adequately tested for accuracy and appropriate implementation.

 

·                                         Spreadsheets — The Company did not maintain effectively designed controls to ensure that critical spreadsheets were identified, access to these spreadsheets was restricted to appropriate personnel, changes to data or formulas were authorized and appropriate, or that the spreadsheets were adequately reviewed by someone other than the preparer.

 

Description of 2009 Remediation Actions

 

Access Control — During 2008, management performed a broad and detailed analysis of user access to the applications we have determined to have a material impact on our financial reporting for our domestic locations and  implemented formal training of managers and others who grant and approve access to these data programs, as well as providing managers and employees with better data program descriptions and other tools to assist in their understanding if the access of their subordinates violates segregation of duties or access controls.  In addition, detailed quarterly security reviews have been instituted. During 2009, the Company is continuing to refine the processes and procedures put in place.  During the third quarter of 2009, the Company also purchased and implemented a software package to automate the monitoring of user access controls and segregation of duties.  The Company’s internal audit group is in the process of validating the Company’s access controls.

 

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Table of Contents

 

Change Management — During 2008, management continued implementation of enhanced procedures to control changes to the production environment, the retention of adequate documentation, as well as redesigning job descriptions, assigned roles, and segregation of duties within the change control process of certain of the Company’s application systems.  During 2009, the Company is continuing to refine the processes and procedures put in place.  In addition, the Company is implementing additional measures to ensure that adequate documentation is retained. During the third quarter of 2009, the Company purchased and implemented a software package to assist in the monitoring of change management of the Company’s critical application systems.  The Company is currently implementing this software package at its subsidiary Synergy Worldwide. Additionally, limiting developer access to production systems has been addressed. The Company’s internal audit group is currently in the process of testing the Company’s change management controls.

 

Spreadsheets — During 2008, management designed and implemented procedures to inventory, assess the risk of, and rank our critical financial reporting spreadsheets that have a material impact on our financial reporting, including the implementation of enhanced review procedures. During 2009, management continues to perform detailed testing at locations that have a material impact on our financial reporting around security and change management for spreadsheets. Management has further enhanced the design of our controls over spreadsheets by establishing procedures for benchmarking critical spreadsheets to ensure that formulas are appropriate and protected, and that the logic and design of the spreadsheets is appropriate and consistent. During the third quarter of 2009, management implemented an application package that allows the Company to audit and track changes to its critical spreadsheets.  The Company is in the process of completing the audits on its critical spreadsheets.  Management is also in the process of implementing an application package that will facilitate a worldwide consolidation and reduce our reliance on spreadsheets.  In addition, our information technology management has selected an application to provide for a world-wide standardization of the general ledger system, which has been deployed in several markets. Management has developed a timeline for completing the implementation of this application globally.

 

Although the material weakness related to Access Control, Change Management, and Spreadsheets still exists in some areas of the Company, we have committed substantial resources to completing remediation of this material weakness.

 

Conclusion

 

We believe the measures described above will facilitate remediation of the material weaknesses we have identified and will continue to strengthen our internal control over financial reporting. We are committed to continually improving our internal control processes and will diligently and vigorously review our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine that additional measures are necessary to address control deficiencies. Moreover, we may decide to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.

 

PART II OTHER INFORMATION

 

Item 1.        LEGAL PROCEEDINGS

 

Please refer to Note 10 to the Unaudited Condensed Consolidated Financial Statements in Part 1, Item 1 of this report, which is incorporated by reference, as well as our recent SEC filings, including our Annual Report on Form 10-K/A for the 2008 fiscal year and subsequent Quarterly Reports on Forms 10-Q for information regarding the status of certain legal proceedings that have been previously reported.

 

Included within the Note 10 to the Unaudited Condensed Consolidated Financial Statements in Part 1, Item of this report, is discussion related to the Prescott Matter which make reference to the Voting Agreement.  Copies of the full Voting Agreement have been filed as exhibits to the Current Report on Form 8-K filed with the SEC on May 28, 2009, and are available on the Company’s website at www.natr.com or from the SEC.

 

Item 1A.     RISK FACTORS

 

In addition to the other information set forth in this report, you should carefully consider the risks discussed under the heading “Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2008, which could materially affect our business or our consolidated financial statements, results of operations, and cash flows. Additional risks not currently known to us, or risks that we currently believe are not material, may also impair our business operations.  Other than as set forth below, there have been no material changes to our risk factors since the filing of our Annual Report on Form 10-K/A for the year ended December 31, 2008.

 

Litigation arising in connection with our internal investigation and the restatement of our financial statements could adversely affect our financial condition, results of operations, or cash flows.

 

As of December 31, 2008, we had one securities class-action lawsuit pending against us, former members of our Board of Directors and present and former members of management that relate to the internal investigation and the restatement of our financial statements. The lawsuit and other legal matters in which we have become involved following the announcement of the restatement are

 

35



Table of Contents

 

described in Note 10 to the Unaudited Condensed Consolidated Financial Statements in Part 1of this report. The class-action suit was the subject of a successful mediation in which the parties, including the Company’s insurance carrier, orally agreed to settle the litigation.  The parties have since entered into a  Stipulation and Agreement of Settlement (the “Stipulation”), which sets forth all the terms and conditions of the settlement, including the form and manner of providing notice to the class and the form of the parties’ proposed order and final judgment.  As set forth in the Stipulation, the proposed settlement will not become final until a number of conditions are satisfied, including the Stipulation receiving both preliminary and final approval from the Court.  The Court has now granted preliminary approval of the Stipulation and set a hearing for February 9, 2010 to determine whether or not to grant final approval of the Stipulation.

 

If the Stipulation does not receive final approval from the Court, the case will be returned to the litigation track and would most likely be subject to a new scheduling order.  As of the date of the mediation, the case was in the early stages of discovery and trial was not scheduled to commence until January 24, 2011.  If the case is returned to the litigation track, the Company and the other defendants will continue to vigorously defend themselves against the allegations in the lawsuit. We are not able to predict the outcome if the case is returned to the litigation track; however, if we are unsuccessful in our efforts to defend against the allegations raised in the litigation, our business and financial condition would likely be negatively impacted. Among other consequences of a negative outcome of the litigation, we could become obligated to pay damages in an amount that would adversely affect our financial condition, results of operations, or cash flows.

 

The Company has also received a demand from a shareholder seeking to require the Company to take action against current and former officers and directors of the Company to recover all damages sustained by the Company as a result of their alleged misconduct, and threatening to commence a derivative action if the Company fails to act. The Company is vigorously defending against these allegations, but there can be no assurances that these defenses will be successful.

 

In addition to the possibility that we could become subject to damages resulting from the matter described above, the current lawsuit and other legal matters could have a disruptive effect upon the operation of our business and consume the time and attention of our senior management. In addition, we are likely to incur substantial expenses in connection with such matters, including substantial fees for attorneys.

 

We maintain insurance that may provide coverage for the potential consequences of a negative outcome of the litigation described above. We have given notice to our insurers of the claims. The insurers have responded by requesting additional information and by reserving their rights under the policies, including the rights to deny coverage under various policy exclusions or to rescind the policies in question as a result of our restatement of our financial statements. The Company’s directors’ and officers’ liability insurer has agreed, as part of the Stipulation, to fully fund the proposed $6 million settlement. If, however, the Court refuses to give final approval to the Stipulation, the case will return to the litigation track. If this were to occur, there can be no assurance that the insurers will not seek to deny coverage or rescind the policies; that some or all of the claims will not be covered by such policies; or that, even if covered, our ultimate liability will exceed the available insurance.

 

Item 2.        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

Item 3.        DEFAULTS UPON SENIOR SECURITIES

 

None.

 

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

 

On November 6, 2009 we held our 2009 Annual General Meeting of Shareholders. There were 12,943,408 common shares present either in person or by proxy. At this meeting, our shareholders voted upon the matters set forth below:

 

Proposal 1

 

For

 

Withheld

 

To elect two Class I Directors, each for a term of one year

 

 

 

 

 

Willem Mesdag

 

12,907,121

 

36,287

 

Jeffrey D. Watkins

 

12,907,737

 

35,671

 

 

 

 

 

 

 

To elect two Class II Directors, each for a term of two years

 

 

 

 

 

Michael D. Dean

 

12,901,886

 

41,522

 

Douglas Faggioli

 

12,847,388

 

96,020

 

Candace K. Weir

 

12,907,529

 

35,879

 

 

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Table of Contents

 

To elect two Class III Directors, each for a term of three years

 

 

 

 

 

Albert R. Dowden

 

12,902,019

 

41,389

 

Pauline Hughes Francis

 

12,627,848

 

315,560

 

Kristine F. Hughes

 

12,853,877

 

89,531

 

 

Proposal 2

 

For

 

Against

 

Abstain

 

 

 

 

 

 

 

 

 

Amendments to Restated Articles of Incorporation to modify or remove certain provisions and to make other technical changes.

 

12,908,912

 

28,140

 

6,356

 

 

Proposal 3

 

For

 

Against

 

Abstain

 

 

 

 

 

 

 

 

 

Amendment to Restated Articles of Incorporation to modify the purpose of the Company.

 

12,915,501

 

18,870

 

9,037

 

 

Proposal 4

 

For

 

Against

 

Abstain

 

 

 

 

 

 

 

 

 

Amendments to Restated Articles of Incorporation to authorize the Board of Directors to adopt, amend, alter and repeal the Bylaws.

 

12,608,955

 

328,085

 

6,368

 

 

Proposal 5

 

For

 

Against

 

Abstain

 

 

 

 

 

 

 

 

 

Amendment to Restated Articles of Incorporation to modify certain provisions relation to the terms of directors.

 

12,889,954

 

47,344

 

6,110

 

 

Proposal 6

 

For

 

Against

 

Abstain

 

 

 

 

 

 

 

 

 

Amendments to Restated Articles of Incorporation to eliminate personal liability, to the extent permitted by law, of the Company’s directors and officers and provide indemnification of its directors, officers, employees, fiduciaries and agents.

 

12,883,703

 

56,246

 

3,459

 

 

Proposal 7

 

For

 

Against

 

Abstain

 

 

 

 

 

 

 

 

 

Amendment to Restated Articles of Incorporation to increase authorized shares of common stock from 20,000,000 to 50,000,000 and to clarify certain rights and preferences of common stock.

 

12,578,252

 

359,096

 

6,060

 

 

Proposal 8

 

For

 

Against

 

Abstain

 

 

 

 

 

 

 

 

 

Amendments to Restated Articles of Incorporation to create a new class of stock designated as preferred stock and to authorize the issuance of up to 10,000,000 shares of preferred stock.

 

12,502,357

 

434,033

 

7,018

 

 

Proposal 9

 

For

 

Against

 

Abstain

 

 

 

 

 

 

 

 

 

Amendment to Restated Articles of Incorporation to require a showing of cause for shareholders to remove directors.

 

12,566,256

 

372,952

 

4,200

 

 

Proposal 10

 

For

 

Against

 

Abstain

 

 

 

 

 

 

 

 

 

Amendment to Restated Articles of Incorporation to require a shareholders to act by shareholder meeting and not by written consent.

 

12,579,866

 

354,378

 

9,164

 

 

Proposal 11

 

For

 

Against

 

Abstain

 

 

 

 

 

 

 

 

 

Amendment to Restated Articles of Incorporation to enhance shareholder voting requirements to adopt, amend or repeal bylaws.

 

12,584,231

 

352,584

 

6,593

 

 

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Table of Contents

 

Proposal 12

 

For

 

Against

 

Abstain

 

 

 

 

 

 

 

 

 

Amendments to Restated Articles of Incorporation to authorize the Board to Directors to fix the number of directors and to fill vacancies on the Board.

 

12,580,776

 

357,813

 

4,819

 

 

Proposal 13

 

For

 

Against

 

Abstain

 

 

 

 

 

 

 

 

 

Amendment to Restated Articles of Incorporation and the Bylaws to enhance shareholder voting requirements to alter, amend or repeal certain provisions of the Articles of Incorporation and the Bylaws.

 

12,577,179

 

359,984

 

6,245

 

 

Proposal 14

 

For

 

Against

 

Abstain

 

 

 

 

 

 

 

 

 

Amendment and Restatement of the Bylaws.

 

12,586,334

 

350,801

 

6,273

 

 

Proposal 15

 

For

 

Against

 

Abstain

 

 

 

 

 

 

 

 

 

Adoption of the Nature’s Sunshine Products, Inc. 2009 Stock Incentive Plan, under which 750,000 shares of common stock will be reserved for issuance.

 

12,762,217

 

174,396

 

6,795

 

 

Proposal 16

 

For

 

Against

 

Abstain

 

 

 

 

 

 

 

 

 

Ratification and appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2009.

 

12,917,946

 

23,243

 

2,219

 

 

Item 5.        OTHER INFORMATION

 

At the 2009 Annual General Meeting of Shareholders held on November 6, 2009, the shareholders approved an amendment and restatement of the Bylaws of the Company to, among other things, revise the advance notice provisions with respect to shareholder nominations for members of the Board of Directors.  The general purpose of the advance notice bylaw is to give the Company and its shareholders adequate time and information to consider the nominees to be presented by shareholders at a shareholder meeting.

 

The Company’s Amended and Restated Bylaws provide that nominations to the Board of Directors must be made by timely notice in writing to the Company’s Secretary.  To be timely, a shareholder’s notice must be received at the Company’s principal executive offices no later than the close of business on the sixtieth (60th) day, and no earlier than the close of business on the ninetieth (90th) day, prior to the anniversary date of the immediately preceding annual meeting.

 

The Amended and Restated Bylaws also provides that, in the event that no annual meeting was held in the previous year or the annual meeting is called for a date that is more than thirty (30) days before or after such anniversary date, then notice of nomination(s) to the Board of Directors must be received by the Company no earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of (i) the sixtieth (60th) day prior to such annual meeting and (ii) the tenth (10th) day following the day on which public disclosure of the date of the meeting was made by the Company.  In the event of a special meeting of shareholders for the purpose of electing directors, to be timely, a shareholder’s notice must be received at our principal executive offices no earlier than one hundred twentieth (120th) day prior to such special meeting and not later than the ninetieth (90th) day prior to such special meeting, or if later, the tenth (10th) day following the day on which public disclosure of the date of such special meeting was first made.

 

The foregoing description of the amendment and restatement of the Bylaws does not purport to be complete and is qualified in its entirety by reference to the Amended and Restated Bylaws being filed with this report as Exhibit 3(ii) and incorporated by reference herein.

 

 

Item 6.        EXHIBITS

 

a)     Index to Exhibits

 

Item No.

 

Exhibit

3(i)(1)

 

Amended and Restated Articles of Incorporation of the Company, filed with the Secretary of State of the State of Utah on November 9, 2009

 

 

 

3(ii)(1)

 

Amended and Restated Bylaws of the Company

 

 

 

31.1(1)

 

Certification of Chief Executive Officer under SEC Rule 13a—14(a)/15d—14(a) promulgated under the Securities Exchange Act of 1934

 

 

 

31.2(1)

 

Certificate of Chief Financial Officer under SEC Rule 13a—14(a)/15d—14(a) promulgated under the Securities Exchange Act of 1934

 

 

 

32.1(1)

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350

 

 

 

32.2(1)

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

 


(1)           Filed currently herewith.

 

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Table of Contents

 

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: November 9, 2009

 

/s/ Douglas Faggioli

 

 

Douglas Faggioli, President and Chief Executive Officer

 

 

 

Date: November 9, 2009

 

/s/ Stephen M. Bunker

 

 

Stephen M. Bunker, Executive Vice President, Chief Financial

 

 

Officer and Treasurer

 

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