Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

**x****      Annualreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

** **

**for thefiscal year ended****December 31, 2009**

 

**OR**

 

**o****         Transitionreport under Section 13 or 15(d) of the Securities Exchange Act of1934**

** **

**for thetransition period****from                 to               .**

 

**Commission file number  0-8707**

 

 

**NATURE’SSUNSHINE 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)

 

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

**None**

 

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

**Common Stock, no par value.**

 

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Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.   Yes o No x.

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.   Yes o No x.

 

Indicateby check mark whether the registrant has (1) filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.   Yes x No o.

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). Yes o No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.   o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o                                              |   | Accelerated filer x         |
|------------------------------------------------------------------------|--------|-----------------------------|
|                                                                   |   |                        |
| Non-accelerated filer o  (Do not check if a smaller reporting company) |   | Smaller reporting company o |

 

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

 

The aggregate market value of the voting stock held by non-affiliates ofthe registrant on June 30, 2009 was approximately $36,116,631 based on theclosing price of $5.25 as quoted by Nasdaq Capital Market on June 30,2009.

 

The number of shares of Common Stock, no par value, outstanding on March 5,2010 is 15,510,159 shares.

 

**EXPLANATORY NOTES**

 

Portions of the registrant’s Definitive ProxyStatement to be filed with the Securities and Exchange Commission no later than120 days after the end of the Registrant’s fiscal year ended December 31,2009, are incorporated by reference in Part III of this Annual Report on Form 10-K.

 

 

 

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**NATURE’S SUNSHINEPRODUCTS, INC.**

**FORM 10-K**

 

**For the Fiscal Year Ended December 31,2009**

 

**Table of Contents**

 
| **Part I.**   |     |                                                                                                                |
|--------------------|----------|---------------------------------------------------------------------------------------------------------------------|
| ** **         |     |                                                                                                                |   |   |
|               | Item 1.  | Business                                                                                                            |   | 3 |
|               | Item 1A. | Risk Factors                                                                                                        |   | 9 |
|               | Item 1B. | Unresolved Staff Comments                                                                                           |   | 13 |
|               | Item 2.  | Properties                                                                                                          |   | 13 |
|               | Item 3.  | Legal Proceedings                                                                                                   |   | 14 |
|               | Item 4.  | Reserved                                                                                                            |   | 17 |
|               |     |                                                                                                                |   |   |
| **Part II.**  |     |                                                                                                                |
| ** **         |     |                                                                                                                |   |   |
|               | Item 5.  | Market for Registrant’s  Common Equity, Related Shareholder Matters and Issuer Purchases of Equity  Securities |   | 17 |
|               | Item 6.  | Selected Financial Data                                                                                             |   | 21 |
|               | Item 7.  | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                         |   | 22 |
|               | Item 7A. | Quantitative and Qualitative  Disclosures about Market Risk                                                         |   | 36 |
|               | Item 8.  | Financial  Statements and Supplementary Data                                                                        |   | 41 |
|               | Item 9.  | Change in  and Disagreements with Accountants on Accounting and Financial Disclosure                                |   | 71 |
|               | Item 9A. | Controls and  Procedures                                                                                            |   | 71 |
|               | Item 9B. | Other Information                                                                                                   |   | 77 |
|               |     |                                                                                                                |   |   |
| **Part III.** |     |                                                                                                                |
| ** **         |     |                                                                                                                |   |   |
|               | Item 10. | Directors,  Executive Officers and Corporate Governance                                                             |   | 77 |
|               | Item 11. | Executive  Compensation                                                                                             |   | 77 |
|               | Item 12. | Security  Ownership of Certain Beneficial Owners and Management and Related Shareholder  Matters                    |   | 77 |
|               | Item 13. | Certain  Relationships and Related Transactions, and Director Independence                                          |   | 77 |
|               | Item 14. | Principal  Accountant Fees and Services                                                                             |   | 77 |
|               |     |                                                                                                                |   |   |
| **Part IV.**  |     |                                                                                                                |
| ** **         |     |                                                                                                                |   |   |
|               | Item 15. | Exhibits  and Financial Statement Schedules                                                                         |   | 77 |
|               |     |                                                                                                                |   |   |
| **Signatures**     |     | 78                                                                                                                  |

 

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**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Certain information included or incorporated herein by reference inthis report may be deemed to be “forward-looking statements” within the meaningof the Private Securities Litigation Reform Act of 1995. Forward-lookingstatements may include, but are not limited to, statements relating to ourobjectives, plans and strategies. All statements (other than statements ofhistorical fact) that address activities, events or developments that weintend, expect, project, believe or anticipate will or may occur in the futureare forward-looking statements. These statements are often characterized byterminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,”“plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” andsimilar expressions, and are based on assumptions and assessments made bymanagement in light of their experience and their perception of historicaltrends, current conditions, expected future developments and other factors theybelieve to be appropriate. Forward-looking statements are not guarantees offuture performance and are subject to risks and uncertainties. Importantfactors that could cause actual results, developments and business decisions todiffer materially from forward-looking statements are described in this report,including the risks set forth under “Risk Factors” in Item 1A.

 

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

 

**PART 1**

 

## ***Item1. Business***

## *** ***

**TheCompany**

 

Nature’s Sunshine Products, Inc.,founded in 1972 and incorporated in Utah in 1976, together with oursubsidiaries, is primarily engaged in the manufacturing and marketing ofnutritional and personal care products. We sell our products worldwide to asales force of independent Distributors (as defined below) who use the productsthemselves or resell them to other Distributors or consumers.

 

Ouroperations are conducted in the United States as well as in various othercountries. Our subsidiaries are located in 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 export our products to severalother countries, including Argentina, Australia, Chile, New Zealand and Norway.

 

Wealso sell our products through a separate division, Synergy Worldwide. SynergyWorldwide sells products in the United States, Japan, South Korea, Singapore,Thailand, Taiwan, Malaysia, Hong Kong, the Philippines, Indonesia, the UnitedKingdom, Germany, Austria, the Netherlands, Norway, Sweden, Australia, Canada,Mexico, and the Czech Republic.

 

**BusinessSegments**

 

We are principally engaged in one line ofbusiness: the manufacturing and marketing of nutritional and personal careproducts. We conduct our business through three reportable business segments.Two of the reportable business segments operate under the *Nature’sSunshine Products* name and are divided based on geographicoperations: a United States segment (“NSP United States”) and an internationalsegment (“NSP International”). Our third reportable business segment operatesunder the *Synergy Worldwide*name, a division thatwas acquired by us in 2000. Synergy Worldwide offers products with formulationsthat are sufficiently different from those of the Nature’s Sunshine Productsofferings to warrant its treatment as a separate reportable segment . Inaddition, Synergy Worldwide’s marketing and Distributor compensation plans aresufficiently different from those of Nature’s Sunshine Products. Information bybusiness segment for each of our last three fiscal years regarding net salesrevenue and operating income, and information by business segment as of the endof our last two fiscal years regarding identifiable assets, are set forth inNote 12 of the Notes to Consolidated Financial Statements set forth in Item 8of this report.

 

**Products and Manufacturing**

 

Our line of over 700products includes herbal products, vitamins and mineral supplements, personalcare products, nutritional drinks, and miscellaneous other products. Wepurchase herbs and other raw materials in bulk and, after quality controltesting, we formulate, encapsulate, tablate or concentrate them, and packagethem for shipment. Most of our products are manufactured at our facility inSpanish Fork, Utah. Contract manufacturers produce some of our personal careand other miscellaneous products for us in accordance with our specificationsand standards. We have implemented stringent quality control procedures toverify that our contract manufacturers have complied with our specificationsand standards. Our product lines are described below.

 

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*Herbal Products*

 

We manufacture a wideselection of herbal products, which are sold in the form of capsules ortablets. These capsules or tablets contain herb powder or a combination of twoor more herb powders. We also produce both single herbs and herb combinationsin the form of liquid herbs and extracts. Liquid herbs are manufactured byconcentrating herb constituents in a vegetable glycerin base. Extracts arecreated by dissolving powdered herbs into liquid solvents that separate the keyelements of the herbs from the fibrous plant material. For the years ended December 31,2009, 2008 and 2007, herbal products accounted for approximately 48.5, 49.6 and52.9 percent of net sales revenue for NSP United States, respectively.  We believe these percentages reasonablyreflect the proportions experienced by the Company on a consolidated basis.

 

*Vitamins and Mineral Supplements*

 

We manufacture a wide variety of singlevitamins, which are sold in the form of chewable or non-chewable tablets. Wealso manufacture several multiple vitamins and mineral supplements, including aline containing natural antioxidants. Generally, mineral supplements are soldin the form of tablets; however, certain minerals are offered only in liquidform. For the years ended December 31, 2009, 2008, and 2007, vitamins andmineral supplements accounted for approximately 44.1, 44.4, and 41.6 percentof  net sales revenue for NSP UnitedStates, respectively. We believe these percentages reasonably reflect theproportions experienced by the Company on a consolidated basis.

 

*Personal Care Products*

 

Wemanufacture or contract with independent manufacturers to supply a variety ofpersonal care products for external use, including oils and lotions, aloe veragel, herbal shampoo, herbal skin treatment, toothpaste, and skin cleanser. Forthe years ended December 31, 2009, 2008, and 2007, personal care productsaccounted for approximately 3.1, 2.8, and 2.3 percent of net sales revenue forNSP United States, respectively. We believe these percentages reasonablyreflect the proportions experienced by the Company on a consolidated basis.

 

*Other Products*

 

We manufacture or contract with independentmanufacturers to supply a variety of other products, including a variety ofnutritional drinks, homeopathic products, and powders. For the years ended December 31,2009, 2008, and 2007, other products accounted for approximately 4.3, 3.2, and3.2 percent of net sales revenue for NSP United States, respectively. Webelieve these percentages reasonably reflect the proportions experienced by theCompany on a consolidated basis.

 

**Distributionand Marketing**

 

Ourindependent Distributors market our products to consumers throughdirect-selling techniques, as well as sponsoring other Distributors. We seek tomotivate and provide incentives to our independent Distributors by offeringhigh quality products and providing our Distributors with product support,training seminars, sales conventions, travel programs, and financial benefits.

 

Ourproducts sold in the United States are shipped directly from our manufacturingand warehouse facilities located in Spanish Fork, Utah, as well as from ourregional warehouses located in Columbus, Ohio; Dallas, Texas; and Atlanta,Georgia. Most of our international operations maintain warehouse facilitieswith inventory to supply their customers.

 

Demandfor our products is created primarily from our independent Distributors. As of December 31,2009, we had approximately 697,200 active Distributors worldwide, whichincluded approximately 253,400 Distributors in the United States. A person whojoins our independent sales force begins as a “Distributor.” An individual canbecome a Distributor by signing up under the sponsorship of someone who isalready a Distributor or by signing up through the Company, where they willthen be assigned a sponsor. Each Distributor is required to renew his or herdistributorship on a yearly basis; our experience indicates that, on average,approximately 45 percent of our Distributors renew annually. Many Distributorssell our products on a part-time basis to friends or associates or use theproducts themselves. An independent Distributor interested in earningadditional income by committing more time and effort to selling our productsmay earn “Manager” status. Manager status is contingent upon attaining certainpurchase volume levels, recruiting additional Distributors, and demonstratingleadership abilities. As of December 31, 2009, we had approximately 28,700independent Managers worldwide, including approximately 6,900 independentManagers in the United States. Managers resell our products to Distributorswithin their sales group, sell our products directly to consumers, or use theproducts themselves. Historically, on average, approximately 63 percent ofDistributors appointed as Managers have continued to maintain that statusannually.

 

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In the United States, wegenerally sell our products on a cash or credit card basis. From time to time,our United States operation extends short-term credit associated with productpromotions. For certain of our international operations, we use independentdistribution centers and offer credit terms that are generally consistent withindustry standards within each respective country.

 

Wepay sales commissions (“Volume Incentives”) to our independent Managers andDistributors based upon the amount of sales group product purchases. Generally,a portion of these Volume Incentives are paid to the applicable Manager as arebate for product purchases made by the Manager and the Manager’s down-lineDistributors. Volume Incentives are recorded as an expense in the year earned.The remaining portion of these Volume Incentives is paid in the form ofcommissions for purchases made by the Manager’s down-line Distributors. Theamounts of Volume Incentives that we paid during the years ended December 31,2009, 2008, and 2007 are set forth in our Consolidated Financial Statements inItem 8 of this report. In addition to the opportunity to receive VolumeIncentives, Managers who qualify by attaining certain levels of monthly productpurchases are eligible for additional incentive programs including automobileallowances, sales convention privileges, and travel awards.

 

**Sourceand Availability of Raw Materials**

 

Rawmaterials used in the manufacture of our products are generally available froma number of suppliers. To date, we have not experienced any major difficulty inobtaining adequate sources of supply. We attempt to ensure the availability ofmany of our raw materials by contracting, in advance, for our annualrequirements. In the past, we have found alternative sources of raw materialswhen needed. Although there can be no assurance we will be successful inlocating such sources in the future, we believe we will be able to do so.

 

**Trademarksand Trade Names**

 

Wehave obtained trademark registrations of our basic trademark, Nature’sSunshine®, and the landscape logo for all of our Nature’s Sunshine Productsproduct lines. We have also obtained trademark registrations for Synergy® forall of our Synergy Worldwide product lines. We hold trademark registrations inthe United States and in many other countries. Our customers’ recognition andassociation of our brands and trademarks with quality is an important elementof our operating strategy.

 

**Seasonality**

 

Ourbusiness does not reflect significant seasonality.

 

**Inventories**

 

Inorder to provide a high level of product availability to our independentDistributors and Managers, we maintain a considerable inventory of rawmaterials in the United States and of finished goods in most countries in whichwe sell our products. Due to different regulatory requirements across thecountries in which we sell our products, our finished goods inventories reflectproduct labels and sometimes product formulations specific for each country.Our inventories are subject to obsolescence due to finite shelf lives.

 

**Dependenceupon Customers**

 

Weare not dependent upon a single customer or a few customers, the loss of whichwe believe would have a material adverse effect on our business.

 

**Backlog**

 

Wetypically ship orders for our products within 24 hours after receipt. As aresult, we have not historically experienced significant backlogs.

 

**Competition**

 

Ourproducts are sold in competition with other companies, some of which havegreater sales volumes and financial resources than we do, and sell brands thatare, through advertising and promotions, better known to consumers. We competein the nutritional and personal care industry against companies that sell throughretail stores as well as against other direct selling companies. For example,we compete against manufacturers and retailers of nutritional and personal careproducts, which are distributed through supermarkets, drug stores, health foodstores, discount stores, etc. In addition to competition with thesemanufacturers and retailers, we compete for product sales and independentdistributors with many other direct sales companies, including Herbalife,Pharmanex 

 

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(NuSkin),USANA, Shaklee, Mannatech and Amway, among others. The principal competitors inthe retail encapsulated and tableted herbal products market include Nature’sWay, NOW, Rexall Sundown, and Nutraceuticals**.**Webelieve that the principal components of competition in the direct salesmarketing of nutritional and personal care products are quality, price, andbrand recognition. In addition, the recruitment, training, travel, andfinancial incentives for the independent sales force are important factors.

 

**Researchand Development**

 

Weconduct research and development activities at our manufacturing facilitylocated in Spanish Fork, Utah. Our principal emphasis in our research anddevelopment activities is the development of new products and the enhancementof existing products. The amount, excluding capital expenditures, spent onresearch and development activities was approximately $2.0 million in 2009, $2.0million in 2008, and $1.9 million in 2007. During the three years in the periodended December 31, 2009, we did not contract for any third-party researchand development.

 

**Compliancewith Environmental Laws and Regulations**

 

Thenature of our business has not required any material capital expenditures tocomply with federal, state, or local provisions enacted or adopted regulatingthe discharge of materials into the environment. No material expenditures tomeet such provisions are anticipated. Such regulatory provisions have not hadany material effect upon our results of operations or competitive position.

 

**Regulation**

 

Theformulation, manufacturing, packaging, labeling, advertising, distribution andsale of each of our major product groups are subject to regulation by one ormore governmental agencies. The most active of these is the Food and DrugAdministration (“FDA”), which regulates our products under the Federal Food,Drug and Cosmetic Act (“FDCA”) and regulations promulgated there under. TheFDCA defines the terms “food” and “dietary supplement” and sets forth variousconditions that, unless complied with, may constitute adulteration ormisbranding of such products. The FDCA has been amended several times withrespect to dietary supplements, most recently by the Nutrition Labeling andEducation Act of 1990 (the “NLEA”) and the Dietary Supplement Health andEducation Act of 1994 (the “DSHEA”).

 

FDA regulations relatingspecifically to foods and dietary supplements for human use are set forth inTitle 21 of the Code of Federal Regulations. These regulations include basiclabeling requirements for both foods and dietary supplements. Additionally, FDAregulations require us to meet relevant good manufacturing practice regulationsfor the preparation, packaging and storage of our food and dietary supplements.

 

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

 

In foreign markets, priorto commencing operations and prior to making or permitting sales of ourproducts in the market, we may be required to obtain an approval, license orcertification from the country’s ministry of health or comparable agency.  Prior to entering a new market in which aformal approval, license or certificate is required, we work extensively withlocal authorities in order to obtain the requisite approvals.  We must also comply with product labeling andpackaging regulations that vary from country to country.  Our failure to comply with these regulationscan result in a product being removed from sale in a particular market, eithertemporarily or permanently.

 

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**International Operations**

 

A significant portion of ournet sales are concentrated within the United States, which represented 45.0percent of net sales in 2009. Outside of the United States, Russia is ourlargest market, representing 8.8 percent of net sales during 2009, while Japanfollows close behind, representing 8.2 percent of net sales during 2009. As wecontinue to expand internationally, our operating results will likely becomemore sensitive to economic and political conditions in foreign markets, as wellas to foreign currency fluctuations.  Abreakdown of net sales revenue by region in 2009, 2008, and 2007 is set forthbelow.

 

(Dollar amounts inthousands)

 
| **Year Ended December 31,** | ** ** | **2009**    | ** **  | **2008**   | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|-------------|-------------|------------|------------|----------|------------|
| Net Sales Revenue:                         |       |        |        |       |       |     |       |   |   |   |   |   |   |
| United States                              | ** ** | **$**       | **154,217** | ** ** | **45.0**   | **%**    | $          | 151,332 |   | 40.6 | % | $ | 152,943 |   | 42.4 | % |
| Foreign                                    |       |        |        |       |       |     |       |   |   |   |   |   |   |
| Russia                                     | ** ** | **30,097**  | ** **  | **8.8**    |       | 40,419   |       | 10.8 |   | 31,023 |   | 8.6 |   |
| Japan                                      | ** ** | **28,125**  | ** **  | **8.2**    |       | 38,972   |       | 10.4 |   | 45,554 |   | 12.6 |   |
| Other                                      | ** ** | **130,584** | ** **  | **38.0**   |       | 142,511  |       | 38.2 |   | 131,354 |   | 36.4 |   |
| Total Foreign                              | ** ** | **188,806** | ** **  | **55.0**   |       | 221,902  |       | 59.4 |   | 207,931 |   | 57.6 |   |
| ** **                                 | ** ** | **$**       | **343,023** | ** ** | **100.0**  | **%**    | $          | 373,234 |   | 100.0 | % | $ | 360,874 |   | 100.0 | % |

 

Our sales of nutritional and personal care productsare established internationally in 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, Brazil, South Korea, Singapore, Thailand, Taiwan, Malaysia, HongKong, the Philippines, Indonesia, Germany, Austria, the Netherlands, Norway,Sweden, and the Czech Republic. We also export our products to several othercountries, including Argentina, Australia, Chile, New Zealand, and Norway.

 

Ourinternational operations are conducted in a manner we believe is comparablewith those conducted in the United States; however, in order to conform tolocal variations, economic realities, market customs, consumer habits, andregulatory environments, differences often exist in the products and in thedistribution and marketing programs.

 

Ourinternational operations are subject to many of the same risks faced by ourUnited States operations, including competition and the strength of the localeconomy. In addition, our international operations are subject to certain risksinherent in carrying on business abroad, including foreign regulatoryrestrictions, fluctuations in monetary exchange rates, import-export controlsand the economic and political policies of foreign governments. Thesignificance of these risks increases as our international operations continueto expand. A significant portion of our long-lived assets are located in theUnited States and Venezuela.  Informationby region for each of our last two fiscal years regarding our long-lived assetsis set forth in Note 12 of the Notes to the Consolidated Financial Statementsset forth in Item 8 of this report.

 

**Executive Officers**

 

The Company’s executiveofficers, as of the date of this report, are as follows:

 
| **Name**             | ** ** | **Age** | ** ** | **Position**                                                                       | ** ** | **Served in  Position  Since** | ** ** |
|----------------------|------------|---------|------------|------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| Douglas  Faggioli    |       | 55      |       | President and Chief Executive Officer                                              |       | 2003                                |       |
| Stephen  M. Bunker   |       | 51      |       | Executive Vice President, Chief Financial Officer  and Treasurer                   |       | 2006                                |       |
| Jamon  Jarvis        |       | 43      |       | Executive Vice President, General Counsel, Chief  Compliance Officer and Secretary |       | 2007                                |       |
| Greg  Halliday       |       | 45      |       | President—U.S. Sales, Nature’s Sunshine Products                         |       | 2006                                |       |
| Bryant  J. Yates     |       | 36      |       | President—International, Nature’s Sunshine  Products                     |       | 2007                                |       |
| John  R. DeWyze      |       | 53      |       | Executive Vice President—Operations, Nature’s  Sunshine Products         |       | 2002                                |       |
| William  J. Keller   |       | 67      |       | Vice President—Health Sciences and Educational  Services                      |       | 2001                                |       |
| Lynda  Marie Hammons |       | 55      |       | Vice President—Quality and Regulatory Affairs                                 |       | 2001                                |       |

 

*Douglas Faggioli.*  Mr. Faggioli is the President and ChiefExecutive Officer of our Company. Prior to his appointment as President andChief Executive Officer in November 2003, Mr. Faggioli served asExecutive Vice President and Chief Operating 

 

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Officerof our Company. He began his employment with us in 1983 and has served as oneof our officers since 1989 and currently serves as a director of our Company.He is a Certified Public Accountant. On March 12, 2010, Mr. Faggioli informedthe Board of Directors of his intent to step down as President and ChiefExecutive Officer, as well as a Member of the Company’s Board of Directorseffective June 30, 2010.

 

*Stephen M. Bunker.*  Mr. Bunker has served as Executive VicePresident, Chief Financial Officer and Treasurer since March 27, 2006. Mr. Bunkerserved as Vice President of Finance and Treasurer of Geneva Steel HoldingsCorporation from July 2001 until March 2006. Prior to July 2001 Mr. Bunkerserved as Corporate Controller for Geneva Steel Corporation. Mr. Bunker isa Certified Public Accountant, and worked for Arthur Andersen for six years.

 

*Jamon Jarvis.*  Mr. Jarvis is the Executive VicePresident, General Counsel, Chief Compliance Officer and Secretary of ourCompany. He has served in this position since March 2007. Prior to hisappointment, Mr. Jarvis served as General Counsel and Chief FinancialOfficer of InterNetwork, Inc., in San Francisco, California, from January 2004to November 2006, and as Executive Vice President Finance, General Counseland Corporate Secretary at Spontaneous Technology, Inc., in Salt LakeCity, Utah, from September 2001 to October 2003. Mr. Jarvisreceived his B.A. in History in 1990 from Brigham Young University and his J.D.in 1993 from Cornell Law School.

 

*Greg Halliday.*  Mr. Halliday is the President—U.S. Salesfor Nature’s Sunshine Products. He has served in this position since April 2006and previously served as Vice President—Nature’s Sunshine Products U.S. Salesfrom May 2001 to March 2006. Mr. Halliday received his B.S. in1989 and M.B.A. with an emphasis in Marketing in 1991 from the Marriott Schoolof Management at Brigham Young University.

 

*Bryant J. Yates.*  Mr. Yates is the President—Internationalof our Company. Mr. Yates, has served as Executive Director—Internationalof the Company, Director—International—Europe/Middle East and General Managerof Nature’s Sunshine Products of Russia, an affiliate of the Company. Mr. Yateshas been employed by the Company since 1999.

 

*John R. DeWyze.*  Mr. DeWyze is the Executive VicePresident—Operations for Nature’s Sunshine Products and has served in thisposition since 2002. Mr. DeWyze received his B.S. in Chemistry in 1981from Grand Valley State University and his M.B.A. in 1994 from the Universityof Southern Indiana.

 

*William J. Keller.*  Dr. Keller is the Vice President—HealthSciences and Educational Services for Nature’s Sunshine Products. He wasappointed to serve in this capacity in April 2001. Prior to joining ourCompany, Dr. Keller was the Department Chair/Professor in the School ofPharmacy at Samford University and Northeast Louisiana University. Dr. Kellerreceived his B.S. in Pharmacy and M.S. in Pharmaceutical Sciences from IdahoState University. In 1972, the University of Washington awarded him a Ph.D. inPharmacognosy.

 

*Lynda Marie Hammons.*  Ms. Hammons is the VicePresident—Quality and Regulatory Affairs for Nature’s Sunshine Products. Shehas served in this capacity since June 2001. Ms. Hammons received herB.S. in Chemistry and Microbiology from Bowling Green State University and herM.B.A. with an emphasis on Quality Management from the University ofCincinnati. Ms. Hammons is also a Certified Quality Engineer, a CertifiedQuality Technician and a Certified Quality Auditor—American Society forQuality.

 

**Employees**

 

Thenumber of individuals we employed as of December 31, 2009 was 1,191. Webelieve that our relations with our employees are satisfactory.

 

**AvailableInformation**

 

Ourprincipal executive office is located at 75 East 1700 South, Provo, Utah 84606.Our telephone number is (801) 342-4300 and our Internet website address is *http://www.natr.com*. We make available free of charge on ourwebsite our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q,our Current Reports on Form 8-K, and amendments to those reports, filed orfurnished pursuant to Section 13(a) or Section 15(d) of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”) as soon aspracticable after we electronically file these documents with, or furnish themto, the Securities and Exchange Commission (the “SEC”). The SEC also maintainsan Internet website that contains reports, and other information regardingissuers that file electronically with the SEC at www.sec.gov. We also makeavailable free of charge on our website our Corporate Governance Guidelines,our Code of Business Conduct and Ethics, and the Charters of our AuditCommittee, Corporate Governance and Nominating Committee, and CompensationCommittee.

 

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## ***Item1A. Risk Factors***

 

*You should carefully consider the following risks inevaluating our Company and our business. The risks described below are therisks that we currently believe are material to our business. However,additional risks not presently known to us, or risks that we currently believeare not material, may also impair our business operations. You should alsorefer to the other information set forth in this report, including theinformation set forth in “Business” and “Management’s Discussion and Analysisof Financial Condition and Results of Operations” as well as our consolidatedfinancial statements and the related notes. Our business prospects, financialcondition, or results of operations could be adversely affected by any of thefollowing risks. If we are adversely affected by such risks, then the tradingprice of our common stock could decline.*

 

***Changesin laws and regulations regarding network marketing may prohibit or restrictour ability to sell our products in some markets.***

 

Networkmarketing systems are frequently subject to laws and regulations by variousgovernment agencies throughout the world. These laws and regulations aregenerally intended to prevent fraudulent or deceptive practices and ensure thatsales are made to consumers of the products and that compensation, recognition,and advancement within the marketing organization are based upon sales of theproduct. Failure to comply with these laws and regulations could result insignificant penalties. Violations could result from misconduct by an associate,ambiguity in statutes, changes or new laws and regulations affecting ourbusiness, and court related decisions. Furthermore, we may be restricted orprohibited from using network marketing plans in some foreign countries.

 

***Our products and manufacturing activities are subject toextensive government regulations and could be subject to additional laws andregulations.***

 

Theformulation, manufacturing, packaging, labeling, advertising, distribution andsales of each of our major product groups are subject to regulation by numerous domestic and foreigngovernmental agencies and authorities. These include the FDA, the FTC, theCPSC, the USDA, and state regulatory agencies as well as regulatory agencies inthe foreign markets in which we operate. The markets in which we operate havevaried regulations which often require us to reformulate products for specificmarkets, conform product labeling to market regulations, and register orqualify products or obtain necessary approvals with the applicable governmentalauthorities in order to market our products in these markets. Failure to complywith the regulatory requirements of these various governmental agencies andauthorities could result in enforcement actions including: cease and desistorders, injunctions, limits on advertising, consumer redress, divestitures ofassets, rescission of contracts, or such other relief as may be deemednecessary. Violation of these orders could result in substantial financial orother penalties. Any action against us could materially affect our ability tosuccessfully market our products.

 

Inthe future, we may be subject to additional laws or regulations administered bythe FDA or other federal, state, local, or foreign regulatory authorities, therepeal or amendment of laws or regulations which we consider favorable and/ormore stringent interpretations of current laws or regulations. We can neitherpredict the nature of such future laws, regulations, interpretations, orapplications, nor what effect additional governmental regulations oradministrative orders, when and if promulgated, would have on our business. Theycould, however, require reformulation of certain products to meet newstandards, recall or discontinuance of certain products not able to bereformulated, imposition of additional record-keeping requirements, expandeddocumentation of the properties of certain products, expanded or alteredlabeling and/or scientific substantiation. Any or all such requirements couldhave a material negative impact on our financial position, results ofoperations, or cash flows.

 

***If we are unable to attract and retain independentDistributors, our business could suffer.***

 

We rely on our independent Distributorsto market and sell our products through direct marketing techniques, as well assponsoring other Distributors. Many Distributors sell our products on apart-time basis to friends or associates or use the products for themselves.Our Distributors may terminate their service at any time, and, like most directselling companies, we experience high turnover among Distributors from year toyear. Each Distributor is required to renew his or her distributorship on ayearly basis; our experience indicates that, on average, approximately 45percent of our Distributors renew annually. As a result, we need to continue toretain existing Distributors and recruit additional Distributors in order tomaintain and/or increase sales in the future.

 

Several factors affect our ability to attract andretain independent Distributors, including:

 

·                  any adverse publicity regarding us, our products, our distributionchannels or our competitors;

 

·                  on-going motivation of our independent Distributors;

 

·                  public’s perceptions about the value and efficacy of our products;

 

·                  public’s perceptions and acceptance of network-marketing;

 

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·                  general and economic business conditions;

 

·                  changes to our compensation arrangements with our independentDistributors; and

 

·                  competition in recruiting and retaining independent Distributors and ormarket saturation.

 

We cannot provide any assurance that ourindependent Distributors will continue to maintain their current levels ofproductivity or that we will be able to continue to attract and retainDistributors in sufficient numbers to sustain future growth or to maintainpresent growth levels.

 

***The economic slowdown in the markets in which we do businesshas reduced consumer demand for our products.***

 

Consumer spending habits, including spending forour products, are affected by, among other things, prevailing economicconditions, levels of employment, fuel prices, salaries and wages, theavailability of consumer credit, consumer confidence and consumer perception ofeconomic conditions. For instance, in the last fiscal quarter of 2008, we beganto see changes in our consumer spending habits in the United States, Russia,Asian and Latin American markets due to the current general economic slowdown,which has resulted in lower net sales of our products. The current generaleconomic slowdown in the markets in which we do business and an uncertaineconomic outlook may continue to adversely affect consumer spending habits andcustomer traffic, which may result in lower net sales of our products.  A prolonged global economic downturn couldhave a material negative impact on our financial position, results ofoperation, or cash flows.

 

***Currency exchange rate fluctuations have lowered our revenueand net income.***

 

In2009, we recognized approximately 55.0 percent of our revenue in marketsoutside the United States, of which 36.2 percent was recognized in each market’srespective local currency (other than the U.S. dollar). We purchase inventoryprimarily in the United States in U.S. dollars. In preparing our financial statements,we translate revenues and expenses in foreign countries from their localcurrencies into U.S. dollars using weighted-average exchange rates. Because asignificant portion of our sales is in foreign countries, exchange ratefluctuations may have a significant effect on our sales and earnings. Ourreported net earnings have in the past and are likely to continue to besignificantly affected by fluctuations in currency exchange rates, withearnings generally increasing with a weaker U.S. dollar and decreasing with astrengthening U.S. dollar. These fluctuations had a generally negative effecton our revenue in 2009 as compared to 2008 beginning in the fourth quarter2008.  During the fourth quarter for the year ended December 31,2008, we began to see a decline in our global net sales of our products ofapproximately 4.7 percent as a result of changes in global economic conditionsin the markets in which our business segments operate.  The decline was primarily driven bystrengthening of the U.S. dollar against most major currencies of the marketsin which we operate. During 2009, we have experienced a continuing decline inour global net sales as a result of the U.S. dollar strengthening against mostmajor currencies, which is a reversal of the trend for prior years.  For instance, the U.S. dollar increasedapproximately 26.2 percent from the end of the third quarter of 2008 to the endof the fourth quarter 2008 against the Mexican peso and the weighted averageexchange rate used to translate revenues and expenses from Mexico has alsoweakened 22.7 percent for the year ended December 31, 2009 compared to2008 as a result of the U.S. dollar strengthening against the Mexicanpeso.  However, during 2009, we began tosee some stabilization in the average exchange rates used to translate revenuesand expenses over the course of the year for most of the markets in which weoperate. If exchange rates were tochange in future periods relative to those experienced during the end of 2008and the beginning of 2009, it could have a significant impact on our revenue infuture periods. As operations expand in countries where foreign currencytransactions may be made, our operating results will increasingly be subject tothe risks of exchange rate fluctuations and we may not be able to accuratelyestimate the impact that these changes may have on our future results ofoperations or financial condition.

 

***Some of the markets in which we operate may become highlyinflationary.***

 

Inflation is another riskassociated with our international operations. For example, as of January 1,2010, Venezuela has been designated as a highly inflationary economy undergenerally accepted accounting principles in the United States of America (“U.S.GAAP”). As a result, beginning January 1, 2010, the U.S. dollar willbe the functional currency for our subsidiaries in Venezuela. Goingforward, currency remeasurement adjustments for this subsidiary’s financialstatements and other transactional foreign exchange gains and losses will bereflected in earnings, which could result in volatility within our earnings,rather than as a component of comprehensive income within shareholders’ equity.

*** ***

***Some of the markets in which we operate have currencycontrols in place which may restrict the repatriation of cash.***

 

The possibilitythat foreign governments may impose currency remittance restrictions is anotherrisk faced by our international operations. Due to the possibility ofgovernment restrictions on transfers of cash out of the country and control ofexchange rates, we 

 

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may not be able torepatriate cash at exchange rates beneficial to the Company, which could have amaterial adverse effect on our financial position, results of operations, orcash flows.

 

For example, as ofDecember 31, 2009, we had approximately $2.0 million in cash denominatedin Venezuelan bolivar fuertes. Currency restrictions enacted by the governmentof Venezuela require approval from the government’s currency controlorganization for our subsidiary in Venezuela to obtain U.S. dollars at anofficial exchange rate to pay for imported products or to repatriate dividendsback to the Company. While to date we have been able to receive approval fromthe government of Venezuela to obtain U.S. dollars at the official exchangerate, no assurances can be given that we will continue to receive suchapproval, or that other markets in which we operate will enact similarrestrictions.

 

***Availabilityand integrity of raw materials could become compromised.***

 

Wedepend on outside suppliers for raw materials. We acquire all of our rawmaterials for the manufacture of our products from third-party suppliers. Wehave many agreements for the supply of materials used in the manufacture of ourproducts in order to hedge against shortages or potential spikes in materialcosts. We also contract with third-party manufacturers and suppliers for theproduction of some of our products.****In the eventwe were to lose any significant suppliers and experience any difficulties infinding or transitioning to alternative suppliers, it could result in productshortages or product back orders, which could harm our business. There can beno assurance that suppliers will be able to provide us the raw materials in thequantities and at the appropriate level of quality we request or at a price weare willing to pay. We are also subject to the delays caused by anyinterruption in the production of these materials including weather, cropconditions, climate change, transportation interruptions, and natural disastersor other catastrophic events.

 

Occasionally, our suppliers have experiencedproduction difficulties with respect to our products, including the delivery ofmaterials or products that do not meet our quality control standards. Thesequality problems have in the past resulted in, and in the future could resultin, stock outages or shortages of our products, and could harm our sales andcreate inventory write-offs for unusable product.

 

***Geopolitical issues and conflicts could adverselyaffect our business.***

 

Because asubstantial portion of our business is conducted outside of the United States,our business is subject to global political issues and conflicts. If theseconflicts or issues escalate, it could harm our foreign operations. Inaddition, changes and actions by governments in foreign markets could harm ourbusiness.

 

***Our business is subject to the effects of adverse publicityand negative public perception.***

 

Our ability to attract and retain Distributors, aswell as their ability to maintain or grow sales in the future, can be affectedby either adverse publicity or negative public perception in regards to ourindustry, our competition, our direct marketing model, the quality or efficacyof nutritional product supplements and ingredients, and our business generally.There can be no assurance we will not be subject to adverse publicity ornegative public perception in the future or that it would not have an adverseor material negative impact on our financial position, results of operations,or cash flows.

 

***Taxation and transfer pricing affect our operations.***

 

As a U.S. company doing business in manyinternational markets, we are subject to foreign tax and intercompany pricinglaws, including those relating to the flow of funds between our parent Companyand our subsidiaries. These pricing laws are designed to ensure thatappropriate levels of income and deductions are reported by our U.S. andforeign entities and that they are taxed appropriately. Regulators in theUnited States and in foreign markets closely monitor our corporate structures,intercompany transactions, and how we effectuate intercompany fund transfers.If regulators challenge our corporate structures, transfer pricingmethodologies or intercompany transfers, our operations may be harmed, and oureffective tax rate may increase. We are eligible to receive foreign tax creditsin the United States for certain foreign taxes actually paid abroad. In theevent any audits or assessments are concluded adversely to us, we may not beable to offset the consolidated effect of foreign income tax assessmentsthrough the use of U.S. foreign tax credits. Because the laws and regulationsgoverning U.S. foreign tax credits are complex and subject to periodiclegislative amendment, we cannot be sure that we would in fact be able to takeadvantage of any foreign tax credits in the future. The various customs,exchange control and transfer pricing laws are continually changing and aresubject to the interpretation of governmental agencies.

 

Inearly 2006, the Internal Revenue Service began an audit of the Company’s incometax returns. This audit is ongoing and covers income tax returns for the years2003 through 2008. See Item 3, “Legal Proceedings — Audit of U.S. Federal TaxReturn 2003-2008”. We cannot predict what impact, if any, and the materialityof such impact, if any, the conclusion of these matters may have on ourfinancial statements.

 

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We collect and remit sales tax in states in whichwe have determined that nexus exists.  Other states may, from time totime, claim we have state-related activities constituting a sufficient nexus torequire such collection.

 

Despite our best efforts to be aware of and complywith such laws and changes to the interpretations thereof, there is a risk thatwe may not continue to operate in compliance with such laws. We may need to adjust our operatingprocedures in response to these changes, and such changes could have a materialnegative impact on our financial position, results of operation, or cash flows.

 

***Our business is subject to intellectual property risks.***

 

Most of our products are not protected by patents.Restrictive regulations governing the precise labeling of ingredients andpercentages for nutritional supplements, the large number of manufacturers whoproduce products with many active ingredients in common, and the rapid changeand frequent reformulation of products make patent protection impractical. As aresult, we enter into confidentiality agreements with certain of our employeesin our research and development activities, our independent associates,suppliers, directors, officers, and consultants to help protect ourintellectual property, investment in research and development activities andtrade secrets. We have also obtained trademarks for the Nature’s SunshineProducts name and logo as well as the Synergy Worldwide name. There can be noassurance that our efforts to protect our intellectual property and trademarkswill be successful. Nor can there be any assurance that third parties will notassert claims against us for infringement of intellectual property rights,which could result in our business being required to obtain licenses for suchrights, payment of royalties, or the termination of our manufacturing ofinfringing products, all of which could have a material negative impact on ourfinancial position, results of operations, or cash flows.

 

***Product liability claims could harm our business.***

 

As a manufacturer and distributor of products thatare ingested, we face an inherent risk of exposure to product liability claimsin the event that, among other things, the use of our products results inalleged injury to consumers due to tampering by unauthorized third parties orproduct contamination and/or other causes. We have historically had a verylimited number of product claims or reports from individuals who have assertedthat they have suffered adverse consequences as a result of using our products.We have established a wholly-owned captive insurance company to provide us withproduct liability insurance coverage and have accrued an amount that we believeis sufficient to cover probable and reasonably estimable liabilities related toproduct liability claims based upon our history. There can be no assurance thatthese estimates will prove to be sufficient nor can there be any assurance thatthe ultimate outcome of any litigation for product liability will not have amaterial negative impact on our business prospects, financial position, resultsof operations, orcash flows.

 

***Inventory obsolescence due to finite shelf livescould adversely affect our business.***

 

In order to provide a high level of productavailability to our independent Distributors and Managers, we maintain aconsiderable inventory of raw materials in the United States and of finishedgoods in most countries in which we sell our products. Our inventories of bothraw materials and finished goods have finite shelf lives. If we overestimatethe demand for our products, we could experience significant write-downs on ourinventory due to obsolescence. Such write-downs could have a material negativeimpact on our financial position, results of operations, or cashflows.

 

***Systemfailures could harm our business.***

 

Likemany companies, our business is highly dependent upon our informationtechnology infrastructure to effectively and efficiently manage our operations,including order entry, customer billing, accurately tracking purchases andvolume incentives, and managing accounting, finance, and manufacturingoperations. The occurrences of natural disasters or other unanticipatedproblems could result in interruptions in our day-to-day business that couldadversely affect our business. We have a disaster recovery plan in place tomitigate the risk. Nevertheless, there can be no assurance that a long-termfailure or impairment of any of our information systems would not adverselyaffect our ability to conduct our day-to-day business.

 

***The Company could incur obligations relating to the activities of ourDistributors.***

 

We sell our products worldwide to a salesforce of independent Distributors who use the products themselves or resellthem to other independent Distributors or consumers. In the event that locallaws and regulations or the interpretation of locals laws and regulations changeand require us to treat our independent Distributors as employees, or if ourDistributors are deemed by local regulatory authorities in one or more of thejurisdictions in which we operate to be our employees rather than independentcontractors, under existing laws and interpretations, we may be heldresponsible for a variety of obligations that are imposed upon employersrelating to their employees, including employment related taxes and penalties.Our Distributors also operate in jurisdictions where 

 

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locallegislation and governmental agencies require us to collect and remit taxessuch as sales tax or value-added taxes. In addition, there is the possibilitythat some jurisdictions could seek to hold the Company responsible for falseproduct claims or the negligent actions of an independent Distributor. However,to date the Company has had no such occurrences.  In addition, we believe we have strong legaldefenses if such a claim were to arise. If the Company were found to beresponsible for any of these issues related to our Distributors, it could havea material negative impact on our financial position, results of operations, orcash flows.

 

***Changes in key management could materially adversely affect theCompany.***

 

Webelieve our success depends in part on our ability to retain our executiveofficers, and to continue to attract additional qualified individuals to ourteam. We have entered into employment agreements with each of our namedexecutive officers, which we believe achieves two important goals crucial toour long-term financial success: the long-term retention of our seniorexecutives and their commitment to the attainment of our strategic objectives.However, we cannot guarantee the continued service by our key officers. Theloss or limitation of any of our executive officers or the inability to attractadditional qualified management personnel could have a material negative impacton our financial position, results of operations, or cash flows. We do notcarry key man insurance on the lives of any of our executive officers.

 

***Our business is involved in an industry with intense competition.***

 

Ourbusiness operates in an industry with numerous manufacturers, distributors, andretailers of nutritional products. The market for our products is intenselycompetitive. Many of our competitors are significantly larger, have greaterfinancial resources and have better name recognition than we do. We also relyon our independent Distributors to market and sell our products through directmarketing techniques, as well as sponsoring other Distributors. Our ability tocompete with other direct marketing companies depends greatly on our ability inattracting and retaining our Distributors. In addition, we currently do nothave significant patent or other proprietary protection, and our competitorsmay introduce products with the same or similar ingredients that we use in our products.As a result, we may have difficulty differentiating our products from ourcompetitors’ products, and competing products entering the nutritional market.There can be no assurance that our future operations would not be harmed as aresult of changing market conditions and future competition.

 

***We have had material weaknesses in our internalcontrols over financial reporting.***

 

Asdiscussed in Item 9A of this report, “Controls and Procedures,” ourmanagement team for financial reporting, under the supervision and with theparticipation of our chief executive officer and chief financial officer,conducted an evaluation of the effectiveness of the design and operation of ourinternal controls. Management concluded that the Company did not maintain effectiveinternal control over financial reporting as of December 31, 2009, becauseof the continued existence of material weakness related to accounting fortaxes.  A “material weakness” is definedunder auditing rules as a deficiency, or a combination of deficiencies, ininternal control over financial reporting such that there is a reasonablepossibility that a material misstatement of a company’s annual or interimfinancial statements will not be prevented or detected on a timely basis by thecompany’s internal controls.

 

TheCompany has taken various steps to remediate this remaining material weakness.With respect to our accounting for taxes, we hired a new Tax Director during2008 and have utilized various outsourced service providers for tax consultingservices to assist in our accounting for income taxes.  Although we have made and are continuing tomake improvements in our internal controls, if we are unsuccessful in ourfocused effort to effectively remediate the weakness in our internal controlsover financial reporting over time, it may adversely impact our ability toreport our financial condition and results of operations in the futureaccurately and in a timely manner, and may adversely impact our reputation withstakeholders.

 

## ***Item1B. Unresolved Staff Comments***

 

None.

 

## ***Item2. Properties***

 

Ourcorporate offices are located in two adjacent office buildings in Provo, Utah.The facilities consist of approximately 63,000 square feet and are leased froman unaffiliated third party through lease agreements which expire in as earlyas three years but are renewable upon expiration at our option.

 

Ourprincipal warehousing and manufacturing facilities are housed in a buildingconsisting of approximately 270,000 square feet owned by us and located onapproximately ten acres in Spanish Fork, Utah. These facilities support all ofour business segments.

 

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Weown approximately 60,000 square feet of office and warehouse space in Mexicoand approximately 13,000 square feet of office and warehouse space inVenezuela. These facilities support NSP International.

 

Wealso own approximately 53 acres of undeveloped land in Springville, Utah andapproximately 8 acres of undeveloped land in Provo, Utah.

 

Welease properties used primarily as distribution warehouses located in Columbus,Ohio; Dallas, Texas; Atlanta, Georgia; and Spanish Fork, Utah; as well asoffices and distribution warehouses in Pleasant Grove, Utah; Japan; Mexico;Central America; Canada; Venezuela; South Korea; the Dominican Republic;Ecuador; the United Kingdom; Colombia; Thailand; Peru; Singapore; Israel;Brazil; Taiwan; Indonesia; Malaysia; the Philippines; Poland; China; andAustralia. We believe these facilities are suitable for their respective usesand are, in general, adequate for our present and near-term future needs.During our fiscal years 2009, 2008, and 2007, we spent approximately $5.7million, $5.9 million, and $5.2 million, respectively, for all of our leasedfacilities.

 

## ***Item3. Legal Proceedings***

## *** ***

TheCompany is party to various legal proceedings, including those noted below.Management cannot predict the ultimate outcome of these proceedings, individuallyor in the aggregate, or their resulting effect on the Company’s business,financial position, results of operations or cash flows as litigation andrelated matters are subject to inherent uncertainties, and unfavorable rulingscould occur. Were an unfavorable outcome to occur, there exists the possibilityof a material adverse impact on the business, financial position, results ofoperations, or cash flows for the period in which the ruling occurs and/orfuture 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 beavailable at an acceptable cost to the Company, that such coverage will be sufficientto cover one or more large claims, or that the insurers will not successfullydisclaim coverage as to a pending or future claim.

 

**Class-Action Litigation**

 

BetweenApril 3, 2006 and June 2, 2006, five separate shareholderclass-action lawsuits were filed against the Company and certain of its presentand former officers and directors in the United States District Court for theDistrict 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, FranzL. Cristiani. The Consolidated Complaint asserts three separate claims onbehalf of purchasers of the Company’s common stock: (1) a claim against Mr. Faggioliand the Company for violation of Section 10(b) of the Exchange Actand Rule 10b-5 promulgated thereunder, alleging that Mr. Faggiolimade a series of alleged material misrepresentations to the investing public; (2) aclaim against Mr. Faggioli and the Company for violation of Section 10(b) andRule 10b-5, alleging that Mr. Faggioli made a series ofmisrepresentations to the Company’s then independent auditor, KPMG, LLP (“KPMG”),for the purpose of obtaining unqualified or “clean” audit opinions and reviewopinions from KPMG concerning certain of the Company’s annual and quarterlyfinancial statements; and (3) a claim against Messrs. Faggioli, Huffand Cristiani for violation of Section 20(a) of the Exchange Act,alleging that the individual defendants have “control person” liability for thepreviously-alleged violations by the Company. The Consolidated Complaint seeksan unspecified amount of compensatory damages, together with interest thereon,litigation costs and expenses, including attorneys’ fees and expert fees, andany such other and further relief as may be allowed by law.

 

OnJanuary 5, 2007, the Company and Messrs. Faggioli, Huff and Cristianimoved to dismiss the Consolidated Complaint in its entirety. On May 21,2007, the Court issued its decision denying the motion in large part, butshortening 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 ofaffirmative defenses. On November 1, 2007, the plaintiffs filed their motionfor 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 theCompany’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 recentcase law developments, the Company filed a motion to dismiss the plaintiffs’second cause of action (a Rule 10b-5 claim based on non-publicrepresentations 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.

 

OnSeptember 14, 2009, the parties and the Company’s directors’ and officers’liability insurer signed a Stipulation of Settlement (“Stipulation”), which wasfiled with the Court on September 14, 2009.  The Stipulation set forth the complete termsof the parties’ proposed settlement.  Thebasic terms of the settlement were that the Company’s insurer would pay thesettlement class, which is defined as all persons (except for defendants andspecified related persons and entities) who purchased the Company’s commonstock during the period from April 23, 2002 through April 5, 2006, $6million in exchange for a dismissal with prejudice of the lawsuit and a releaseof all claims held by members of the settlement class.  As set forth in the Stipulation, the proposedsettlement would not 

 

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become final until anumber of conditions were satisfied, including the Stipulation receiving bothpreliminary and final approval from the Court. On October 8, 2009, the Court entered an order (i) grantingpreliminary approval of the Stipulation, (ii) requiring that notice of theproposed settlement and the proposed plan of allocation of the settlementproceeds 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 considered, amongother issues, (i) whether the Stipulation should receive final approval, (ii) whetherthe proposed plan of allocation for the settlement proceeds should be approved,(iii) whether the settlement class counsel’s application for an award ofattorneys’ fees and reimbursement of costs and expenses should be approved, and(iv) whether the settlement class counsel’s application for incentiveawards to the settlement class representatives should be approved.  The Court’s October 8, 2009 order alsoset January 19, 2010 as the deadline by which settlement class membersmust submit a valid proof of claim, if they wanted to share in the settlementproceeds, or a proper opt-out request, if they wanted to be excluded from thesettlement class and thereby not be bound by the terms of the Stipulation.

 

OnFebruary 10, 2010, the day after it held the final approval hearing, theCourt formally entered an Order and Final Judgment dated February 9, 2010(“Final Judgment”), which gave final approval to the Stipulation and approvedthe proposed plan of allocation of the settlement proceeds, the application foran award of attorneys’ fees and reimbursement of costs and expenses by thesettlement class counsel, and the application for incentive awards to thesettlement class representatives.  Amongother things, the Final Judgment also included findings by the Court thatnotice of the action and of the proposed settlement had been properly given tothe class members and that no one had opted out of the class or objected to anyof the terms of the Stipulation. Furthermore, the Final Judgment provides that the Company and the individualdefendants are released from all of the Released Claims, as defined by theStipulation, and that the Consolidated Complaint is dismissed with prejudice.

 

Unlessa party appeals the Final Judgment within 30 days following the entry of theFinal Judgment, which the Company does not anticipate happening given the lackof any objection being filed to the Stipulation, the case will then be formallyconcluded and the Claims Administrator will proceed to distribute thesettlement proceeds in accordance with the Stipulation.

 

**Threatened Derivative Lawsuits**

 

Byletter dated October 4, 2007, a shareholder of the Company alleged that anumber of the current and former officers and directors of the Company breachedtheir fiduciary duties to the Company by supposedly engaging in the samealleged wrongdoing that is the subject of the class-action lawsuit. Theshareholder demanded that the Company take action to recover from the specifiedofficers and directors all damages sustained by the Company as a result of thealleged misconduct, and threatened to commence a derivative action if theCompany failed to act on the shareholder’s demand within a reasonable period oftime.

 

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

 

On May 21, 2008, thesame shareholder filed a summons and complaint in the Fourth Judicial DistrictCourt for the State of Utah seeking an order compelling the Company to producecertain books and records to the shareholder. The Company filed its answer tothe complaint on June 12, 2008, and the shareholder has taken no actionsince then to prosecute the case or otherwise pursue any derivative claim.

 

Although the Company andthe other defendants are vigorously defending against the allegations in thethreatened derivative lawsuit above, management believes that it is notpossible at this time to predict the outcome of this litigation or whether theCompany will incur any liability associated with the litigation, or to estimatethe effect such outcome would have on the financial condition, results ofoperations, or cash flows of the Company.

 

**SEC and DOJ Investigations**

 

On July 31,2009, the SEC filed a settled enforcement action against the Company, DouglasFaggioli, and Craig Huff, the Company’s former chief financial officer, relatingto alleged violations of the Foreign Corrupt Practices Act (“FCPA”) by one ofthe Company’s foreign subsidiaries in 2000 and 2001. This settlement resolvedan SEC investigation previously disclosed by the Company related to anindependent investigation conducted by the Company’s Audit Committee.

 

Under the terms of the settlement with the SEC,without admitting or denying the allegations in the Commission’s complaint, theCompany agreed to pay a civil penalty of $600,000 and to consent to the entryof an injunction against future violations of the FCPA as well as theantifraud, issuer reporting, books and records, and internal controlsprovisions of the federal securities laws. No additional undertakings arerequired of the Company under the terms of the settlement.

 

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In addition, Messrs. Faggioli and Huff, withoutadmitting or denying the allegations in the Commission’s complaint, each agreedto pay a civil penalty of $25,000 and to consent to the entry of injunctionsagainst future violations relating only to the books and records and internalcontrol 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 cashpayments to customs brokers, some of which were later paid to Brazilian customsofficials in order to allow unregistered products to be imported and sold inBrazil.  The complaint further alleged that, in doing so, NSP’s subsidiaryfalsified its books, records and accounts to hide the nature of the paymentsand failed to disclose those payments to Brazilian customs agents in itsfilings with the Commission.  The complaint also alleged that the Company,during the time period in question, failed to implement an adequate system ofinternal controls to ensure proper reporting of the alleged payments.  Nocurrent officers, directors, or employees of the Company are alleged to haveparticipated 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 executiveofficer), and Mr. Huff, the Company’s then chief financial officer, ascontrol persons, failed to adequately supervise the Company’s management andother personnel who were directly responsible for the Company’s books andrecords and internal controls related to the registration of product in oneforeign subsidiary. As part of the settlement, the Company and the individualparties agreed to neither admit nor deny the allegations in the complaint.

 

The Company believes that all governmentinvestigations relating to potential FCPA violations by the Company or relatedpersons have been resolved. The Company anticipates no additional action by theDepartment of Justice in relation to these events.

 

**SEC Section 12(j) Proceeding**

 

On July 12,2007, the Company announced that the SEC had instituted administrativeproceedings pursuant to Section 12 (j) of the Exchange Act to suspendor revoke the registration of its common stock under Section 12 of theExchange Act. On November 8, 2007, an Administrative Law Judge in theadministrative proceeding issued an Initial Decision to revoke the registrationof the Company’s common stock because of its failure to file required periodicreports. Shortly thereafter, the Company filed a petition for review with theSEC. On December 5, 2007, the SEC granted the Company’s petition forreview. 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 theregistration of the Company’s common stock. On February 12, 2009, theCompany filed a registration statement on Form 10 to reregister its commonstock under the Exchange Act. The Company’s registration statement becameeffective 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 registrationstatement on Form 10. On October 12, 2009, the Company began tradingits common stock on the NASDAQ Capital Market under the symbol “NATR.”

 

**Prescott Matter**

 

InApril 2009, Prescott Group Aggressive Small Cap Master Fund, G.P. (“Prescott”)filed, but did not serve, a complaint in the Fourth Judicial District Court forUtah 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 thecourt compel the Company to hold an annual meeting of the Company’sshareholders.  The complaint did notrequest that the court award monetary damages other than the payment ofattorneys’ fees.  On May 22, 2009,the Company and Kristine F. Hughes, Eugene L. Hughes and Pauline Hughes Francisin their capacity as shareholders of the Company (collectively, the “HughesParties”) entered into a settlement and voting agreement (the “PrescottAgreement”) with Prescott. Contemporaneously with the Prescott Agreement, the Company and theHughes Parties entered into voting agreements (collectively with the PrescottAgreement, the “Voting Agreements”) with each of the following shareholders ofthe Company:  Red Mountain CapitalPartners II, L.P., Red Mountain Capital Partners III, L.P. and Paradigm CapitalManagement, Inc. (collectively with Prescott, the “Shareholder Parties”).As a result of the Prescott Agreement, the filed complaint was withdrawn.

 

Pursuantto the Voting Agreements, effective as of June 7, 2009, (i) theauthorized number of directors of the Board was increased from six to eightdirectors in accordance with Section 3.2 of the Bylaws of the Company,creating two additional vacancies in addition to one previously unfilled vacancyon the Board, (ii) with the exception of Kristine F. Hughes, all of thecurrent members of the Company’s Board of Directors (the “Board”) resigned asmembers of the Board, resulting in a total of seven vacancies on the Board and (iii) MichaelD. Dean, Albert R. Dowden, Douglas Faggioli, Pauline Hughes Francis, WillemMesdag, Jeffrey D. Watkins and Candace K. Weir were appointed, without anyspecific Board class designation, to fill such vacancies on the Board to serveas directors until the next annual meeting of shareholders at which directorsare elected and until their respective successors are duly elected andqualified, unless they resign, are removed or are otherwise disqualified fromserving as a director of the Company.

 

TheVoting Agreements also provide that, at the next annual meeting ofshareholders, which was held on November 6, 2009, the Company wouldnominate, and the Shareholder Parties and the Hughes Parties will vote all ofthe shares of Common Stock

 

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beneficiallyowned by them in favor of, each of the following individuals, with suchnominees 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 |

 

Thevoting arrangement set forth in the Voting Agreements terminated on November 6,2009, immediately following the annual meeting of shareholders of the Company,and the election of the new Board of Directors as slated above.

 

**Audit of U.S. Federal Tax Returns, 2003 – 2008**

 

TheIRS is currently conducting a civil examination with respect to the 2006through 2008 taxable years.  The examination is in process.

 

InOctober 2009, the Internal Revenue Service (“IRS”) issued an examinationreport formally proposing adjustments with respect to the 2003 through 2005taxable years, which primarily relate to the prices that were charged inintragroup transfers of property and the disallowance of related deductions.The Company has challenged the IRS proposals and the matter is currently beforethe Office of Appeals of the Internal Revenue Service.  Managementbelieves that the Company has appropriately reserved for these matters at anamount which it believes will ultimately be due upon resolution of the administrativeproceedings. The Company is currently unable to determine the outcome of thesediscussions and their related impact, if any, on the Company’s financialcondition, results of operations, or cash flows.

 

**Other Litigation**

 

The Company is party to various other legalproceedings in several foreign jurisdictions related to VAT assessments andother civil litigation.  While there is areasonable possibility that a material loss may be incurred, the Company cannotat this time estimate the loss, if any, therefore, no provision for losses hasbeen provided.  The Company believesfuture payments related to these matters could range from $0 to approximately$1.4 million.

 

One of the Company’s foreign subsidiaries isa defendant in litigation regarding primarily employee-related matters. TheCompany has recorded accruals of approximately $0.2 million and $0.1 millionrelated to this litigation at December 31, 2009 and 2008, respectively,which is included in accrued liabilities.

 

## ***Item4. Reserved***

 

**PART II**

** **

## ***Item5. Market for Registrant’s Common Equity, Related Shareholder Matters andIssuer Purchases of Equity Securities***

## *** ***

**Market and Share Prices**

 

Our common stock was traded on the Nasdaq NationalMarket System (symbol “NATR”) until April 5, 2006, the date that theNasdaq Listing Qualifications Panel determined to delist our common stock fromThe Nasdaq National Market. Following the delisting of our stock from NasdaqNational Market, our stock was traded on the Pink Sheets (symbol NATR.PK) until the revocation of  the Exchange Act registration of our commonstock on January 21, 2009. On February 12, 2009, the Company filedwith the SEC a registration statement on Form 10 to re-register its commonstock under the Exchange Act. The Company’s registration statement became effectiveas 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 registrationstatement on Form 10. Our stock then began trading on the OTC Market(symbol NATR.OTC) on June 25, 2009. On October 12, 2009, trading ofthe Company’s common stock recommenced on the NASDAQ Capital Market under thesymbol “NATR.”

 

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The following tablesummarizes the high and low market prices of our common stock from the time itresumed trading on the Nasdaq National Market on October 12, 2009 throughthe year ended December 31, 2009:

 

| ** **     | ** ** | **Market Prices** | ** ** |
|----------------|------------|------------------------|------------|
| **2009**       | ** ** | **High**               | ** ** | **Low** | ** ** |
| Fourth Quarter |       | $                      | 9.60       |   | $ | 5.40 |   |
|                |            |                        |            |  |  |  |  |

 

The following tablesummarizes the best ask and bid market prices of our common stock while ittraded on the Pink Sheets and OTC Markets:

 
| ** **         | ** ** | **Market Prices** | ** ** |
|--------------------|------------|------------------------|------------|
| **2009**           | ** ** | **Best Ask(1)**   | ** ** | **Best Bid(2)** | ** ** |
| First Quarter (3)  |       | $                      | 5.50       |   | $ | 4.75 |   |
| Second Quarter (4) |       | 5.50                   |       | 3.25 |   |
| Third Quarter      |       | 5.90                   |       | 4.75 |   |
| Fourth Quarter (5) |       | 5.98                   |       | 4.90 |   |
|                    |            |                        |            |  |  |  |  |

 
| ** **     | ** ** | **Market Prices** | ** ** |
|----------------|------------|------------------------|------------|
| **2008**       | ** ** | **Best Ask(1)**   | ** ** | **Best Bid(2)** | ** ** |
| First Quarter  |       | $                      | 11.00      |   | $ | 7.01 |   |
| Second Quarter |       | 12.35                  |       | 9.25 |   |
| Third Quarter  |       | 14.45                  |       | 9.00 |   |
| Fourth Quarter |       | 12.50                  |       | 8.40 |   |
|                |            |                        |            |  |  |  |  |

 

----

(1)          The“Best Ask” represents the highest ask during the quarter at which a trade ofour common stock was transacted on either the Pink Sheets or OTC Market.

(2)          The“Best Bid” represents the lowest bid during the quarter at which a trade of ourcommon stock was transacted on either the Pink Sheets or OTC Market.

(3)          Includesactivity from January 1, 2009 through January 21, 2009, the date ourregistration under the Exchange Act was revoked.

(4)          Includesactivity from June 25, 2009, the date our shares began trading on the OTCMarket, through June 30, 2009.

(5)          Includesactivity from October 1, 2009, through October 9, 2009, the last dateour common stock traded on the OTC Market.

 

The market price of our common shares is subject to significantfluctuations in response to variations in our quarterly operating results,general trends in the markets for our products, economic and currency exchangeissues in the foreign markets in which we operate and other factors, many ofwhich are not within our control. In addition, broad market fluctuations, aswell as general economic, business and political conditions may adverselyaffect the market for our common shares, regardless of our actual or projectedperformance.

 

The Pink Sheets and OTC Market quotations reflectinter-dealer prices, without retail mark-up, mark-down or commission and maynot necessarily represent actual transactions.

 

The closing price of our common shares on March 5,2010, was $8.38.  The approximate numberof holders of record of our common shares as of March 5, 2010 was 1,040.This number of holders of record does not represent the actual number ofbeneficial owners of our common shares because shares are frequently held in “streetname” by securities dealers and others for the benefit of individual owners whohave the right to vote their shares.

 

**Recent Sales ofUnregistered Securities**

 

Since January 1, 2007, we haveissued and sold the following unregistered securities:

 

On February 1, 2007, we issued andsold 95,690 shares of common stock to Douglas Faggioli, our Chief ExecutiveOfficer, for cash consideration in an aggregate amount of $735,665 upon theexercise of stock options granted under our 1995 Stock Option Plan (the “1995Stock Plan”). This sale is exempt from the registration requirement of Section 5of the Securities Act pursuant to Section 4(2) of the Securities Act.

 

On February 2, 2007, we issued andsold 61,330 shares of common stock to Eugene L. Hughes, our founder andDirector, for cash consideration in an aggregate amount of $471,505 upon theexercise of stock options granted under our 1995 Stock Plan. This sale isexempt from the registration requirement of Section 5 of the SecuritiesAct pursuant to Section 4(2) of the Securities Act.

 

On February 6, 2007, we issued andsold 5,340 shares of common stock to Kent Hastings, our Director of ExportMarkets, for cash consideration in an aggregate amount of $41,054 upon theexercise of stock options granted under our 1995 Stock Plan. This sale isexempt from the registration requirement of Section 5 of the SecuritiesAct pursuant to Section 4(2) of the Securities Act.

 

On July 27, 2007, we issued and sold500 shares of common stock to the estate of Robert Schaffer for cashconsideration in an aggregate amount of $4,157 upon the exercise of stockoptions granted under our 1995 Stock Plan. This sale is exempt from theregistration requirement of Section 5 of the Securities Act pursuant to Section 4(2) ofthe Securities Act.

 

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**Dividends**

 

There were 1,042 shareholders of recordas of December 31, 2009. During the fiscal years 2009 and 2008, theCompany paid cash dividends of $0.05 and $0.20 per common share, respectively.The Company suspended payment of its quarterly cash dividends, effective thesecond quarter of 2009, in an effort to conserve cash in the UnitedStates.  The suspension of cash dividendsis expected to preserve approximately $3.1 million of cash flow on an annualbasis.

 

**Securities Authorized forIssuance Under Equity Compensation Plans**

 

The following table contains informationregarding the Company’s equity compensation plans as of December 31, 2009:

 
| **Plan category**                                              | ** ** | **Number of securities to  be issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  issuance under equity  compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **(a)**                                                                                                                                              | ** ** | **(b)**                                                                                                     | ** ** | **(c)**                                                                                                                                                                                              | ** ** |
| **Equity compensation plans approved by security  holders (1)**     |       | 321,083                                                                                                                                              |       | $                                                                                                           | 6.74       |                                                                                                                                                                                                 | 500,350    |   |
| **Equity compensation plans not approved by  security holders (2)** |       | 133,800                                                                                                                                              |       | 11.85                                                                                                       |       | —                                                                                                                                                                                               |       |
| **Total**                                                           |       | 454,833                                                                                                                                              |       | $                                                                                                           | 8.25       |                                                                                                                                                                                                 | 500,350    |   |

 

----

(1)          Consists of two plans:  The Nature’s Sunshine Products, Inc.2009 Stock Incentive Plan (the “2009 Incentive Plan”) and the Nature’s SunshineProducts, Inc. 1995 Stock Option Plan (the “1995 Option Plan”). The 2009Incentive Plan was approved by shareholders on November 6, 2009. The termsof these plans are summarized in Note 9, “Capital Transactions”, to the Notesof our Consolidated Financial Statements, of Item 8, Part 2 of thisreport.

 

(2)          During the year ended December 31,2007, the Company issued nonqualified options to purchase shares of commonstock outside of any shareholder approved stock incentive plan. The terms ofthese nonqualified options to purchase shares of common stock are summarized inNote 9, “Capital Transactions”, to the Notes of our Consolidated FinancialStatements, of Item 8, Part 2 of this report.

 

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**Performance Graph**

 

The graph below depicts our common stock asan index, assuming $100.00 was invested on December 31, 2004 along withthe composite prices of companies listed in the Nasdaq and our peer group.Standard & Poor’s Investment Services has provided us with thisinformation. The comparisons in the graph are required by regulations of theSEC and are not intended to forecast or be indicative of the possible futureperformance of our common stock. The publicly-traded companies in our peergroup are USANA Health Sciences, Inc., Nu Skin Enterprises, Inc.,Herbalife International, Inc., and Mannatech Incorporated.

 

 
| ** **                                 | ** ** | **12/31/05** | ** ** | **12/31/06** | ** ** | **12/31/07** | ** ** | **12/31/08** | ** ** | **12/31/09** | ** ** |
|--------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|
| **Nature’s Sunshine  Products, Inc.** |       | $            | 89.78      |         | $          | 58.38        |       | $            | 48.86      |         | $          | 32.22 |   | $ | 45.11 |   |
| **Nasdaq Index**                           |       | 101.33       |       | 114.01       |       | 123.71       |       | 73.11        |       | 105.61       |       |
| **Peer Group**                             |       | 80.73        |       | 95.92        |       | 86.72        |       | 53.68        |       | 102.07       |       |
|                                            |            |              |            |              |            |              |            |              |            |              |            |  |  |  |  |  |

 

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**Item6. Selected Financial Data**

 

The selected financial data presented below issummarized from our results of consolidated operations for each of the fiveyears in the period ended December 31, 2009, as well as selectedconsolidated balance sheet data as of December 31, 2009, 2008, 2007, 2006,and 2005.

 

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

 

**Income Statement Data**

 
| ** ** | ** ** | **Net Sales  Revenue** | ** **  | **Cost of  Goods Sold** | ** ** | **Volume  Incentives** | ** ** | **Selling, General  and Administrative** | ** **  | **Operating  Income** | ** ** | **Income Before  Income Taxes** | ** ** | **Net Income  (Loss)** | ** ** |
|------------|------------|-----------------------------|-------------|-----------------------------------|------------|------------------------|------------|----------------------------------------------------|-------------|-----------------------|------------|-------------------------------------------|------------|-----------------------------|------------|
| **2009**   | ** ** | **$**                       | **343,023** | ** **                        | **$**      | **68,803**             | ** ** | **$**                                              | **126,165** | ** **            | **$**      | **137,288**                               | ** ** | **$**                       | **10,767** | ** ** | **$** | **14,325** | ** ** | **$** | **6,115** | ** ** |
| 2008       |       | 373,234                     |        | 71,874                            |       | 140,074                |       | 155,688                                            |        | 5,598                 |       | 6,468                                     |       | (1,838                      | )          |
| 2007       |       | 360,874                     |        | 70,996                            |       | 138,111                |       | 148,706                                            |        | 3,061                 |       | 4,465                                     |       | (8,237                      | )          |
| 2006       |       | 357,979                     |        | 68,745                            |       | 141,584                |       | 139,645                                            |        | 8,005                 |       | 8,629                                     |       | (3,565                      | )          |
| 2005       |       | 348,544                     |        | 67,593                            |       | 140,985                |       | 128,381                                            |        | 11,585                |       | 11,423                                    |       | 3,504                       |       |
|            |            |                             |             |                                   |            |                        |            |                                                    |             |                       |            |                                           |            |                             |            |  |  |  |  |  |  |  |

 

**Balance Sheet Data**

 
| ** ** | ** ** | **Working  Capital** | ** ** | **Current  Ratio** | ** ** | **Inventories** | ** ** | **Property, Plant and  Equipment, Net** | ** ** | **Total  Assets** | ** ** | **Long-Term  Liabilities** | ** ** | **Shareholders’  Equity** | ** ** |
|------------|------------|----------------------|------------|--------------------|------------|-----------------|------------|--------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|--------------------------------|------------|
| **2009**   | ** ** | **$**                | **33,523** | ** **         | **1.49**   | ** **      | **$**      | **40,623**                                             | ** ** | **$**             | **28,757** | ** **                 | **$**      | **164,856**                    | ** ** | **$** | **39,892** | ** ** | **$** | **57,095** | ** ** |
| 2008       |       | 30,200               |       | 1.39               |       | 39,558          |       | 30,224                                                 |       | 164,276           |       | 32,679                     |       | 53,677                         |       |
| 2007       |       | 32,017               |       | 1.42               |       | 35,249          |       | 28,282                                                 |       | 165,338           |       | 27,986                     |       | 60,392                         |       |
| 2006       |       | 23,968               |       | 1.31               |       | 38,639          |       | 30,581                                                 |       | 148,347           |       | 2,190                      |       | 68,186                         |       |
| 2005       |       | 27,928               |       | 1.40               |       | 34,988          |       | 34,075                                                 |       | 147,286           |       | 2,284                      |       | 75,407                         |       |
|            |            |                      |            |                    |            |                 |            |                                                        |            |                   |            |                            |            |                                |            |  |  |  |  |  |  |

 

**Common Share Summary**

 
| ** ** | ** ** | **Cash Dividend  Per Share** | ** ** | **Basic Net Income  (Loss) Per Share** | ** ** | **Diluted Net Income  (Loss) Per Share** | ** ** | **Basic Weighted  Average Number  of Shares** | ** ** | **Diluted Weighted  Average Number  of Shares** | ** ** |
|------------|------------|----------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **2009**   | ** ** | **$**                                  | **0.05**   | ** **                                                 | **$**      | **0.39**                                                     | ** ** | **$**                                                        | **0.39**   | ** **                                                     | **15,510** | ** ** | **15,512** | ** ** |
| 2008       |       | 0.20                                   |       | (0.12                                                      | )          | (0.12                                                        | )          | 15,510                                                       |       | 15,510                                                         |       |
| 2007       |       | 0.20                                   |       | (0.53                                                      | )          | (0.53                                                        | )          | 15,495                                                       |       | 15,495                                                         |       |
| 2006       |       | 0.20                                   |       | (0.23                                                      | )          | (0.23                                                        | )          | 15,344                                                       |       | 15,344                                                         |       |
| 2005       |       | 0.20                                   |       | 0.23                                                       |       | 0.23                                                         |       | 15,211                                                       |       | 15,515                                                         |       |
|            |            |                                        |            |                                                            |            |                                                              |            |                                                              |            |                                                                |            |  |  |  |

 

**Other Information**

 
| ** ** | ** ** | **Number of  Independent Managers** | ** ** | **Number of**

**Independent Distributors** | ** ** | **Square Footage of  Property in Use** | ** ** | **Number of Employees** | ** ** |
|------------|------------|-----------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------|------------|
| **2009**   | ** ** | **28,726**                                    | ** ** | ** 697,150**                                     | ** ** | **750,610**                                                | ** ** | **1,191**                         | ** ** |
| 2008       |       | 26,002                                        |       | 729,627                                               |       | 731,277                                                    |       | 1,183                             |       |
| 2007       |       | 24,115                                        |       | 698,685                                               |       | 706,519                                                    |       | 1,170                             |       |
| 2006       |       | 24,292                                        |       | 668,565                                               |       | 852,235                                                    |       | 1,181                             |       |
| 2005       |       | 21,309                                        |       | 588,060                                               |       | 816,296                                                    |       | 1,100                             |       |

 

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## ***Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operations***

 

The following discussion highlights the principalfactors that have affected our financial condition, results of operations,liquidity and capital resources for the periods described. This discussionshould be read in conjunction with our Consolidated Financial Statements andthe related notes in Item 8 of this report. This discussion containsforward-looking statements. Please see “Cautionary Note RegardingForward-Looking Statements” for the risks, uncertainties and assumptionsassociated with these forward-looking statements.

 

**OVERVIEW**

 

*Our Business, Industry and Target Market*

 

Nature’s Sunshine Products, Inc. and itssubsidiaries are primarily engaged in the manufacturing and marketing of herbalproducts, vitamin and mineral supplements, personal care, and miscellaneousproducts. Nature’s Sunshine Products, Inc. is a Utah corporation with itsprincipal place of business in Provo, Utah. We sell our products to a salesforce of independent Distributors and Managers who use the products themselvesor resell them to other Distributors or consumers. The formulation,manufacturing, packaging, labeling, advertising, distribution and sale of eachof our major product groups are subject to regulation by one or more governmentalagencies.

 

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

 

We also sell our products through a separatedivision and operating business segment, Synergy Worldwide, which was acquiredby us in 2000. Synergy Worldwide offers products with formulations differentfrom those of the Nature’s Sunshine Products offerings. In addition, SynergyWorldwide’s marketing and Distributor compensation plans are sufficientlydifferent from those of Nature’s Sunshine Products to warrant accounting forthese operations as a separate business segment. Synergy Worldwide sellsproducts 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, Australia, and the Czech Republic.

 

In 2009, we experienced a decline in net salesrevenue of approximately 8.1 percent. This decline was primarily related todecreased sales overseas in our NSP International business segment ofapproximately 18.4 percent and a decrease of approximately 2.1 percent in ourSynergy Worldwide segment, which were offset in part by an increase in netsales revenue of 1.1 percent for our NSP United States segment.  The decreases in net sales revenue for NSPInternational and Synergy Worldwide were primarily due to the strengthening ofthe U.S. dollar against most foreign currencies in which our subsidiaries operateand its impact on consumer demand in these markets, as well as weakening demandin certain foreign markets as a result of current economic conditions. The mostsignificant impact of these events was in our Russian, Ukrainian, and Mexicanmarkets,  principally during the firsthalf of the year. The Japanese market was also impacted by weak economicconditions during the first half of 2009. Over the same period, our cost ofgoods sold increased as a percentage of net sales revenue as a result ofadditional promotions offered in our foreign markets during the earlier part ofthe year, as well as increases in raw material costs for some of our products,and reduced production volumes due to the decline in global sales.

 

Wedistribute our products to consumers through an independent sales force comprisedof Managers and Distributors. Active Managers totaled approximately 28,700 and26,000 at December 31, 2009 and 2008, respectively. Active Distributorstotaled approximately 697,200 and 729,600 at December 31, 2009 and 2008,respectively. We anticipate the number of active Distributors to increase as weexpand our existing operations, enter new international markets, and as currentDistributors grow their businesses.

 

**Critical Accounting Policies and Estimates**

 

Our consolidated financial statements have beenprepared in accordance with accounting U.S. GAAP and form the basis for thefollowing discussion and analysis on critical accounting policies andestimates. The preparation of these financial statements requires us to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On a regular basis we evaluate our estimates and assumptions.We base our estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actual resultscould differ from these estimates and those differences could have a materialeffect on our financial position and results of operations. Management hasdiscussed the development, selection and disclosure of these estimates with theBoard of Directors and its Audit Committee.

 

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A summary of our significant accounting policies isprovided in Note 1 of the Notes to Consolidated Financial Statements in Item 8of this report. We believe the critical accounting policies and estimatesdescribed below, reflect our more significant estimates and assumptions used inthe preparation of our consolidated financial statements. The impact and anyassociated risks on our business that are related to these policies are alsodiscussed throughout this “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” where such policies affect reported and expectedfinancial results.

 

*Revenue Recognition*

 

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

 

A reserve for product returns is recorded based uponhistorical experience.  The Companyallows Distributors or Managers to return the unused portion of products withinninety days of purchase if they are not satisfied with the product.  In some of our markets, the requirements toreturn product are more restrictive.  Sales returns for each of the years 2009, 2008, and 2007, wereapproximately $0.1 million.

 

*Accounts Receivable Allowances*

 

Accounts receivable have been reduced by an allowancefor amounts that may be uncollectible in the future. This estimated allowanceis based primarily on the aging category, historical trends and management’sevaluation of the financial condition of the customer. This reserve is adjustedperiodically as information about specific accounts becomes available.

 

*Investments*

 

The Company’s available-for-sale investment portfolio is recorded atfair 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 inactive markets or (b) from significant inputs that are observable or canbe derived from or corroborated by observable market data for substantially thefull term of the asset. The Company’s trading portfolio is recorded at fairvalue and consists of various mutual funds that are valued using quoted pricesin active markets.

 

For available-for-sale debt securities withunrealized losses, the Company performs an analysis to assess whether itintends to sell or whether it would more likely than not be required to sellthe security before the expected recovery of the amortized cost basis. Wherethe Company intends to sell a security, or may be required to do so, thesecurity’s decline in fair value is deemed to be other-than-temporary and thefull amount of the unrealized loss is recorded within earnings as an impairmentloss.

 

For all other debt securities that experience adecline in fair value that is determined to be other-than-temporary and notrelated to credit loss, the Company records a loss, net of tax, in accumulatedother comprehensive income (loss).  Thecredit loss is recorded within earnings as an impairment loss. Managementjudgment is involved in evaluating whether a decline in an investment’s fairvalue is other-than-temporary.

 

Regardless of the Company’s intent to sell asecurity, the Company performs additional analysis on all securities withunrealized losses to evaluate losses associated with the creditworthiness ofthe security.  Credit losses areidentified where we do not expect to receive cash flows sufficient to recoverthe amortized cost basis of a security.

 

For equity securities, when assessing whether adecline in fair value below our cost basis is other-than-temporary, the Companyconsiders the fair market value of the security, the length of time and extentto which market value has been less than cost, the financial condition andnear-term prospects of the issuer as well as specific events or circumstancesthat may influence the operations of the issuer, and our intent and ability tohold the investment for a sufficient time in order to enable recovery of ourcost. New

 

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informationand the passage of time can change these judgments.  Where the Company has determined that theCompany lacks the intent and ability to hold an equity security to its expectedrecovery, the security’s decline in fair value is deemed to beother-than-temporary and is recorded within earnings as an impairment loss.

 

*Inventories*

 

Inventories are stated atthe lower-of-cost-or-market, using the first-in, first-out method. Thecomponents of inventory cost include raw materials, labor, and overhead. Toestimate any necessary lower-of-cost-or-market adjustments, various assumptionsare made in regard to excess or slow-moving inventories, non-conforminginventories, expiration dates, current and future product demand, productionplanning, and market conditions.

 

*Self-insurance Liabilities*

 

As a manufacturer anddistributor of products that are ingested, we face an inherent risk of exposureto product liability claims in the event that, among other things, the use ofour products results in injury to consumers due to tampering by unauthorizedthird parties or product contamination. We have historically had a very limited number of product claims orreports from individuals who have asserted that they have suffered adverseconsequences as a result of using our products. These matters have historicallybeen settled to our satisfaction and have not resulted in material payments. Wehave established a wholly owned captive insurance company to provide us withproduct liability insurance coverage and have accrued an amount that we believeis sufficient to cover probable and reasonable estimable liabilities related toproduct liability claims based upon our history. However, there can be noassurance that these estimates will prove to be sufficient nor can there be anyassurance that the ultimate outcome of any litigation for product liabilitywill not have a material negative impact on our business prospects, financialposition, results of operations, or liquidity.

 

Weself-insure for certain employee medical benefits. The recorded liabilities forself-insured risks are calculated using actuarial methods and are notdiscounted. The liabilities include amounts for actual claims and claimsincurred but not reported. Actual experience, including claim frequency andseverity as well as health care inflation, could result in actual liabilitiesbeing more or less than the amounts currently recorded.

 

*Incentive Trip Accrual*

 

We accrue for expenses for incentive tripsassociated with our direct sales marketing program, which rewards independentDistributors and Managers with paid attendance at our conventions and meetings.Expenses associated with incentive trips are accrued over qualification periodsas they are earned. We specifically analyze incentive trip accruals based onhistorical and current sales trends as well as contractual obligations whenevaluating the adequacy of the incentive trip accrual. Actual results couldresult in liabilities being more or less than the amounts recorded. We haveaccrued convention and meeting costs of approximately $2.9 million and $4.5million at December 31, 2009 and 2008, respectively.

 

*Impairment of Long-Lived Assets*

 

The Company reviews its long-lived assets, such asproperty, plant and equipment and intangible assets for impairment when eventsor changes in circumstances indicate that the carrying value of an asset maynot be recoverable. The Company uses an estimate of future undiscounted netcash flows of the related assets or groups of assets over their remaining livesin measuring whether the assets are recoverable. An impairment loss iscalculated by determining the difference between the carrying values and thefair values of these assets. As of December 31, 2009 and 2008, the Companydid not consider any of its long-lived assets to be impaired.

 

*Contingencies*

 

We are involved in certain legal proceedings. When aloss is considered probable in connection with litigation or non-income taxcontingencies and when a loss can be reasonably estimated with a range, werecord our best estimate within the range related to the contingency. If thereis no best estimate, we record the minimum of the range. As additionalinformation becomes available, we assess the potential liability related to thecontingency and revise the estimates. Revision in estimates of the potentialliabilities could materially impact our results of operations in the period ofadjustment. Our contingencies are discussed in further detail in Note 11, “Commitmentsand Contingencies”, to the Notes of our Consolidated Financial Statements, ofItem 8, Part 2 of this report.

 

*Income Taxes*

 

Our income tax expense, deferred tax assets andliabilities and contingent reserves reflect management’s best assessment ofestimated future taxes to be paid. We are subject to income taxes in both theUnited States and numerous foreign jurisdictions. Significant judgments andestimates are required in determining the consolidated income tax expense.

 

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Deferred income taxes arise from temporarydifferences between the tax and financial statement recognition of revenue andexpense. In evaluating our ability to recover our deferred tax assets weconsider all available positive and negative evidence, including scheduledreversals of deferred tax liabilities, projected future taxable income, taxplanning strategies and recent financial operations. In projecting futuretaxable income, we develop assumptions including the amount of future state,federal and foreign pretax operating income, the reversal of temporarydifferences, and the implementation of feasible and prudent tax planningstrategies. These assumptions require significant judgment about the forecastsof future taxable income and are consistent with the plans and estimates we areusing to manage the underlying businesses. Valuation allowances are recorded asreserves against net deferred tax assets by the Company when it is determined thatnet deferred tax assets are not likely to be realized in the foreseeablefuture. As of December 31, 2009 and 2008, we had recorded valuationallowances of $18.7 million and $14.0 million, respectively, as offsets to ourrecorded net deferred tax assets.

 

As of December 31, 2009, we had foreign incometax net operating loss carryforwards of $9.8 million, which will expire atvarious dates from 2010 through 2012. TheCompany had approximately $4.4 million of foreign tax credits, which begin toexpire at various times starting in 2012.

 

Changesin tax laws and rates could also affect recorded deferred tax assets andliabilities in the future. Management is not aware of any such changes thatwould have a material effect on the Company’s results of operations, cash flowsor financial position.

 

Thecalculation of our tax liabilities involves dealing with uncertainties in theapplication of complex tax laws and regulations in a multitude of jurisdictionsacross our global operations. Income tax positions must meet amore-likely-than-not recognition threshold to be recognized.

 

*Share-Based Compensation*

 

The Company recognizesall share-based payments to employees, including grants of employee stockoptions, to be recognized in the statement of operations based on theirgranted-dated fair values in accordance with authoritative U.S. GAAP. TheCompany records compensation expense, net of an estimated forfeiture rate, overthe vesting period of the stock options based on the fair value of the stockoptions on the date of grant. The Company estimated forfeiture rate is basedupon historical experience.

 

 

**RESULTS OF OPERATIONS**

 

The following table summarizes our consolidatedoperating results as a percentage of net sales revenue for the periodsindicated:

 
| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales revenue                        | ** ** | **100.0**                                  | **%**      | 100.0 | % | 100.0 | % |
|                                     |       |                                       |       |   |   |   |   |
| Costs and Expenses:                      |       |                                       |       |   |   |   |   |
| Cost of goods sold                       | ** ** | **20.1**                                   | ** ** | 19.3 |   | 19.7 |   |
| Volume incentives                        | ** ** | **36.8**                                   | ** ** | 37.5 |   | 38.3 |   |
| Selling, general and administrative      | ** ** | **40.0**                                   | ** ** | 41.7 |   | 41.2 |   |
| ** **                               | ** ** | **96.9**                                   | ** ** | 98.5 |   | 99.2 |   |
|                                     |       |                                       |       |   |   |   |   |
| Operating Income                         | ** ** | **3.1**                                    | ** ** | 1.5 |   | 0.8 |   |
|                                     |       |                                       |       |   |   |   |   |
| Other Income (Expense):                  |       |                                       |       |   |   |   |   |
| Interest and other income, net           | ** ** | **0.4**                                    | ** ** | 0.5 |   | 0.4 |   |
| Interest expense                         | ** ** | **—**                                 | ** ** | — |   | — |   |
| Foreign exchange losses, net             | ** ** | **0.7**                                    | ** ** | (0.3 | ) | — |   |
| ** **                               | ** ** | **1.1**                                    | ** ** | 0.2 |   | 0.4 |   |
|                                     |       |                                       |       |   |   |   |   |
| Income Before Provision for Income Taxes | ** ** | **4.2**                                    | ** ** | 1.7 |   | 1.2 |   |
| Provision for Income Taxes               | ** ** | **2.4**                                    | ** ** | 2.2 |   | 3.5 |   |
|                                     |       |                                       |       |   |   |   |   |
| Net Income (Loss)                        | ** ** | **1.8**                                    | **%**      | (0.5 | )% | (2.3 | )% |

 

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*** ***

***Year Ended December 31, 2009as Compared to the Year Ended December 31, 2008***

 

*Net Sales Revenue*

 

Consolidated net sales revenue for the year ended December 31,2009 was $343.0 million compared to $373.2 million in 2008, a decrease ofapproximately 8.1 percent. The decrease in net sales revenue for year ended December 31,2009 compared to the same period in 2008 is primarily due to the strengtheningof the U.S. dollar against most foreign currencies in which our subsidiariesoperate and its impact on consumer demand in these markets, as well asweakening demand in certain foreign markets as a result of current economicconditions. The most significant impact was in our Russian, Ukrainian, andMexican markets, during the first half of 2009. The Japanese markets was alsoimpacted by weak economic conditions during the first half of 2009.

 

NSP United States

 

Net sales revenue related to NSP United States forthe year ended December 31, 2009 was $151.8 million compared to $150.1million for the same period in 2008, or an increase of 1.1 percent in 2009compared to 2008. During the first half of 2009, sales were down 2.7 percentcompared to the same period in 2008, as a result of decreases in consumerdemand and as a result of difficult economic conditions in the United States atthat time.  However, during the last sixmonths of 2009, we saw an increase in net sales revenue compared to the sametime in the prior year due to the launch of several new products during theCompany’s August 2009 convention, as well as the launch of a new Managerdevelopment program which has encouraged Managers to sign up new Distributors.

 

Active Distributors within NSP United States totaledapproximately 248,100 and 225,000 at December 31, 2009 and December 31,2008, respectively.  Active Managerswithin NSP United States totaled approximately 6,900 and 6,200 at December 31,2009 and December 31, 2008, respectively.

 

NSP International

 

NSP International reported net sales revenue for theyear ended December 31, 2009 of $135.4 million compared to $166.0 millionfor the same period in 2008, a decrease of approximately 18.4 percent.  The decrease in sales is primarily due toweakness in the economies of many of the markets in which we operate due toglobal economic conditions during 2009 (primarily Russia, Ukraine, Mexico, andJapan) as well as negative foreign currency fluctuations of approximately $5.5million, or 3.3 percent of the decrease in sales, as a result of thestrengthening of the U.S. dollar against the currencies in substantially allmarkets in which NSP International operates, and the effect of thestrengthening U.S. dollar on customer purchasing power for our products inthese markets.

 

We had the following significant changes within themarkets in which NSP International operates:

 

In Russia, our net sales revenues decreasedapproximately $10.3 million or 25.5 percent to $30.1 million for the year endedDecember 31, 2009 from $40.4 million for the same period in 2008. InRussia, our productsare priced using the U.S. dollar. The strengthening of the U.S. dollar inrelation to the Russian ruble has increased the price of our productssignificantly during 2009 compared to the same period in 2008.  During 2008, the average exchange rate wasapproximately 24.9 rubles to one dollar compared to 31.8 rubles to one dollarin 2009, a decline of 27.7 percent. As a result of these conditions, there hasbeen a corresponding decrease in Distributors in Russia.

 

In Ukraine, our net sales revenues decreasedapproximately $12.5 million or 38.0 percent to $20.4 million for the year endedDecember 31, 2009 from $32.9 million for the same period in 2008.  In Ukraine, our products are priced using the U.S. dollar. Thestrengthening of the U.S. dollar in relation to the Ukrainian hryvnia hasincreased the price of our products significantly during 2009 compared to thesame period in 2008.  During 2008, theaverage exchange rate was approximately 5.4 hryvnia to one dollar compared to8.1 hryvnia to one dollar in 2009, a decline of 55.6 percent. As a result ofthese conditions, there has been a corresponding decrease in Distributors inUkraine.

 

In Canada, our net sales revenues increasedapproximately $0.5 million or 3.6 percent to $14.5 million for the year ended December 31,2009 from $14.0 million for the same period in 2008.  Our net sales in Canada were negativelyimpacted approximately $1.1 million or 7.9 percent by foreign currencyfluctuations due to the U.S. dollar strengthening in relation to the Canadiandollar from 2008 to 2009. Excluding the effect of foreign currencyfluctuations, net sales in Canada increased approximately $1.6 million or 11.4percent for the year ended December 31, 2009 compared to the same periodin 2008.  The increase in net sales isprimarily due to the launch of several new products during the second half ofthe year, as well as an increase in the number of active Distributors.

 

In Mexico, our net sales revenues decreasedapproximately $4.0 million or 22.3 percent to $13.9 million for the year ended

 

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December 31,2009 from $17.9 million for the same period in 2008.  Our net sales in Mexico were negativelyimpacted by approximately $3.1 million or 17.3 percent by foreign currencyfluctuations due to the U.S. dollar strengthening in relation to the Mexicanpeso from 2008 to 2009. Excluding the effect of foreign currency fluctuations,net sales in Mexico decreased approximately $0.9 million or 5.0 percent for theyear ended December 31, 2009 compared to the same period in 2008.  The decrease in net sales is primarily due toweak economic conditions within Mexico during 2009, as well as a decrease inthe number of active Distributors.

 

In the remaining markets in which NSP Internationaloperates, our net sales revenues decreased approximately $4.3 million or 7.1percent to $56.5 million for the year ended December 31, 2009 from $60.8million for the same period in 2008.  Ournet sales were negatively impacted approximately $1.3 million or 2.1 percent byforeign currency fluctuations due to the U.S. dollar strengthening in relationto the various currencies our markets operate in from 2008 to 2009. Excludingthe effect of foreign currency fluctuations, net sales revenues in NSPInternational’s remaining markets decreased approximately $3.0 million or 4.9percent for the year ended December 31, 2009 compared to the same periodin 2008, primarily due to weak economic conditions during the earlier part ofthe current year.

 

Active Distributors within NSP International totaledapproximately 353,300 and 428,600 at December 31, 2009 and December 31,2008, respectively.  Active Managerswithin NSP International totaled approximately 20,300 and 19,000 at December 31,2009, and December 31, 2008, respectively. The decrease in Distributors isprimarily related to the changes in the markets of Russia, Ukraine, and Mexicoas noted above.

 

Synergy Worldwide

 

Synergy Worldwide net sales revenue decreased to$55.9 million in 2009 compared to $57.1 million in 2008, a decrease ofapproximately 2.1 percent. The decrease in net sales is primarily due tocurrent economic conditions in Japan and the effect of foreign currencyfluctuations in the markets in which Synergy Worldwide operates, which havebeen offset by growth in several of our markets as noted below.

 

In Japan, our net sales revenues decreasedapproximately $8.9 million or 30.4 percent to $20.4 million for the year ended December 31,2009 from $29.3 million for the same period in 2008.  Our net sales in Japan were positivelyimpacted by approximately $1.9 million or 6.5 percent by foreign currencyfluctuations due to the U.S. dollar weakening in relation to the Japanese yenfrom 2008 to 2009. Excluding the effect of foreign currency fluctuations, netsales in Japan decreased approximately $10.8 million or 36.9 percent for theyear ended December 31, 2009 compared to the same period in 2008.  The decrease in net sales is primarily due tocontinuing economic weakness in Japan, which has resulted in a decrease in thenumber of active Distributors as well.

 

In Indonesia, our net sales revenues increasedapproximately $2.1 million or 30.4 percent to $9.0 million for the year ended December 31,2009 from $6.9 million for the same period in 2008.  Our net sales in Indonesia were negativelyimpacted by approximately $0.7 million or 10.1 percent by foreign currencyfluctuations due to the U.S. dollar strengthening in relation to the Indonesianrupiah from 2008 to 2009. Excluding the effect of foreign currencyfluctuations, net sales in Indonesia increased approximately $2.8 million or40.6 percent for the year ended December 31, 2009 compared to the sameperiod in 2008.  The increase in netsales is primarily due to the implementation of a new Distributor recruitingprogram, which has significantly increased the level of Active Distributorswithin Indonesia, as well as the launch of several new products earlier this yearin Indonesia.

 

In Europe, our net sales revenues increasedapproximately $3.0 million or 76.9 percent to $6.9 million for the year ended December 31,2009 from $3.9 million for the same period in 2008.  Our net sales in Europe were negativelyimpacted by approximately $0.4 million or 10.3 percent by foreign currencyfluctuations due to the U.S. dollar strengthening in relation to the euro from2008 to 2009. Excluding the effect of foreign currency fluctuations, net salesin Europe increased approximately $3.4 million or 87.2 percent for the yearended December 31, 2009 compared to the same period in 2008 due to thecontinued growth of our operations in the countries in which we have operatedsince the opening of Synergy Worldwide in Europe in late 2007, as well asexpansion into several additional countries during 2009.

 

In the United States, our net sales revenuesincreased approximately $1.6 million or 27.1 percent to $7.5 million for theyear ended December 31, 2009 from $5.9 million for the same period in2008.  Our growth within the UnitesStates is primarily due to growth of our U.S. Distributor base, as well asexpansion of our personal import market program.

 

In the remaining markets in which Synergy Worldwideoperates, our net sales revenues increased approximately $1.0 million or 9.0percent to $12.1 million for the year ended December 31, 2009 from $11.1million for the same period in 2008.  Ournet sales were negatively impacted approximately $1.6 million or 14.4 percentby foreign currency fluctuations due to the U.S. dollar strengthening inrelation to the various currencies our markets operate in from 2008 to 2009.Excluding the effect of foreign currency fluctuations, net sales revenue inSynergy Worldwide’s remaining markets increased approximately $2.6 million or23.4 percent for the year ended December 31, 2009 compared to the sameperiod in 2008, primarily due to growth of our Distributor base, which has beendriven by 

 

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changesin management within some of these markets.

 

Active Distributors within Synergy Worldwide totaledapproximately 95,800 and 76,000 at December 31, 2009 and December 31,2008, respectively.  Active Managerswithin Synergy Worldwide totaled approximately 1,500 and 800 at December 31,2009, and December 31, 2008, respectively.

 

Further information related to the NSP UnitedStates, NSP International and Synergy Worldwide is set forth in Note 12 of theNotes to Consolidated Financial Statements in Item 8 of this report.

 

*Cost ofGoods Sold*

 

Cost of goods sold as a percent of net sales revenueincreased to 20.1 percent in 2009 compared to 19.3 percent in 2008.   This increase is primarily a result ofadditional promotions offered in our foreign markets during the earlier part ofthe year, as well as increases in raw material costs for some of our products,reduced production volumes, and product mix.

 

*Volume Incentives*

 

Volume Incentives are asignificant part of our direct sales marketing program and represent commissionpayments made to our independent Distributors and Managers. These payments aredesigned to provide incentives for reaching higher sales levels and forrecruiting additional Distributors. Volume Incentives vary slightly, on a percentage basis, by product dueto our pricing policies and commission plans in place in our internationaloperations.  Volume Incentives as apercent of net sales revenue decreased to 36.8 percent in 2009 compared to 37.5percent in 2008.  The decrease ispartially due to fewer Distributors qualifying for payouts at higher rates dueto lower sales volumes in Russia, Ukraine, Mexico, and Japan, as well as toreductions in the Volume Incentive programs for some products sold within theUnited States.

 

*Selling, General and Administrative*

 

Selling, general andadministrative expenses decreased to 40.0 percent of net sales revenue in 2009compared to 41.7 percent in 2008, or by approximately $18.4 million in 2009compared to 2008, from $155.7 million to $137.3 million. The decrease inselling, general and administrative expenses is the result of decreasedspending of approximately $6.8 million in our Russian, Ukrainian, and otherEastern European markets due to the significant declines in our net salesrevenues in these markets, decreases in non-income tax related contingencies of$3.8 million related to favorable settlements for NSP United States, $3.4million of favorable settlements related to VAT contingencies within some ofthe markets in which Synergy operates, as well as decreased professional feeswithin the United States of $2.9 million related to our efforts to becomecurrent in our financial reporting.  Inaddition, foreign currency fluctuations positively impacted general andadministrative expenses by approximately $3.0 million, of which $1.7 millionwas related to exchange changes in Mexico. These decreases were offset by increases of approximately $2.6 millionof VAT related contingencies within some of the foreign markets in NSPInternational operates, as well an increase of $0.6 million related to thesettlement of the SEC investigation of the Company as described in Note 10 ofthe consolidated financial statements in Part II, of Item 8 of thisreport. Excluding the items noted above, we have seen selling, general, andadministrative costs in our NSP International and Synergy Worldwide segmentsincrease as a percentage of sales as a result of reduced sales in some the keymarkets in which we operate as noted in the net sales revenue discussionabove.  We continue to evaluate andexplore ways to reduce costs within all of our operating segments.

 

*OperatingIncome*

 

Operating income increased $5.2 million in 2009compared to 2008, from $5.6 million to $10.8 million.  The operating income for NSP United Statesincreased to $6.6 million in 2009 compared to an operating loss of $5.9 millionin 2008, an increase of $12.5 million. This increase is the result of declinesin volume incentives as a percentage of net sales revenues, the reduction ofselling, general and administrative expenses primarily due to decreases in thereduction in non-income tax related accruals and professional fees, as notedabove. Operating income for NSP International decreased $14.3 million from$16.9 million in 2008 to $2.6 million during 2009 as a result of decreased netsales in many of the markets in which NSP International operates due to generaleconomic conditions within these markets, as well as the impact of foreigncurrency fluctuations, as noted above in the discussion of net sales revenue.The conditions had a more significant impact earlier in the year. The operatingloss in Synergy Worldwide decreased $7.0 million to operating income of $1.6 millionin 2009 compared to an operating loss of $5.4 million in 2008.  This is primarily due to a favorablesettlement of VAT related contingencies in some of its foreign markets as notedabove. Excluding this, its operating loss decreased to $1.8 million, animprovement of $3.6 million primarily due to the increases in net sales revenuefor Synergy Worldwide’s European, Indonesian, and United States markets, aswell as continued cost cutting efforts in each of its markets.  The net impact of foreign currencyfluctuations on operating income included in the operating results of NSPInternational and Synergy Worldwide is $0.4 million.

 

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*OtherIncome, net*

 

Other income, net for the year ended December 31,2009 increased $2.7 million compared to the same period in 2008 primarily dueto foreign exchange gains in certain markets based upon changes in exchangerates on intercompany related balances and U.S. dollar denominated cashaccounts.

 

*Income Taxes*

 

Our effective income tax rate was 57.3 percent for2009, compared to 128.4 percent for 2008. The effective rate for 2009 differedfrom the federal statutory rate of 35.0 percent primarily due to:

 

(i)                                     The amortization of a prepaid taxresulting from a taxable gain on the sale of intercompany assets eliminated forreporting purposes, but recognized for the calculation of the consolidatedincome tax provision, increased the effective tax rate by approximately 9.8percent in 2009. The prepaid tax is being amortized over the respective life ofthe asset, and it is anticipated to impact the effective rate through 2010.

 

(ii)                                  Adjustments relating to the U.S. taximpact of foreign operations decreased the effective tax rate by 13.7percentage points in 2009.  Included wereadjustments for dividends received from foreign subsidiaries, adjustments forforeign tax credits, and adjustments relating to outside basis calculationsunder applicable U.S. GAAP. Changes to the effective rate due to dividendsreceived from foreign subsidiaries, adjustments for foreign taxcredits, and outside basis are expected to be recurring.

 

(iii)                               Foreign tax rate differentials thatincrementally impact the federal statutory rate increased the effective taxrate by approximately 14.0 percent. This is primarily due to the Company notrecording a benefit for losses in most jurisdictions where tax losses exist,particularly with respect to the Company’s markets in the Asia-Pacific regionof the world. Some of these losses may be recurring or may result in benefitsin future periods if these markets return to profitability.

 

(iv)                              Nondeductible foreign expensesincrementally that impact the federal statutory rate increased the effectivetax rate by approximately 6.4 percent. In the current year, the increaserelates primarily to income tax adjustments in foreign markets that arenon-deductible for tax purposes. Some of these items may be recurring.

 

(v)                                 Changes in the deferred tax assetvaluations allowance increased the effective tax rate by approximately 8.8percent in 2009.  The change in thedeferred tax asset valuation allowance was primarily the result of reservesbeing established for certain foreign affiliate deferred tax assets that werenot likely to be realized due to recurring losses within the respective taxjurisdictions

 

As anet result of these and other differences, the effective tax rate for 2009 wasgreater than the statutory rate of 35.0 percent for the year ended December 31,2009.

 

***Year Ended December 31, 2008as Compared to the Year Ended December 31, 2007***

 

*Net Sales Revenue*

 

Consolidated net salesrevenue for the year ended December 31, 2008 was $373.2 million comparedto $360.9 million in 2007, an increase of approximately 3.4 percent. During2008, the increase in net sales revenue was primarily due to continued growthin NSP International.

 

NSP United States

 

Net sales revenue related to the NSP United Statesbusiness segment operations were $150.1 million and $148.3 million for theyears ended December 31, 2008 and 2007, respectively, or an increase of1.2 percent in 2008 compared to 2007. This growth is partially due to a reduction of some of the rebatesprovided to Distributors associated with some of our products, as well asincrease in shipping charges to customers due to fuel surcharges related toincreasing fuel costs.

 

Active Distributors within NSP United States totaledapproximately 225,000 and 214,100 at December 31, 2008 and December 31,2007, respectively.  Active Managerswithin NSP United States totaled approximately 6,200 and 6,500 at December 31,2008 and December 31, 2007, respectively.

 

NSP International

 

NSP International reported net sales revenue for theyear ended December 31, 2008 of $166.0 million compared to $144.0

 

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millionfor the same period in 2007, an increase of approximately 15.3 percent. Theincrease in international net sales revenue in 2008 compared to 2007 was primarilythe result of continued growth in our operations in Russia and Ukraine.  The increase in net sales revenue reflectedthe continued increase in Distributors and Managers in the Company’sinternational operations as well as foreign currency exchange rate fluctuationswhich positively impacted revenues by $1.8 million or 1.2 percent in 2008compared to 2007.   Approximately $1.3million of the benefit was the result of positive currency fluctuations inJapan, as the yen strengthened significantly in relation to the U.S. dollar in2008. The effects of currency fluctuations on sales were immaterial in theaggregate for the remaining markets of NSP International.

 

We had the following significant changes within themarkets in which NSP International operates:

 

In Russia, our net sales revenues increasedapproximately $9.4 million or 30.3 percent to $40.4 million for the year ended December 31,2008 from $31.0 million for the same period in 2007. In Russia, the increase insales was primarily due to a significant increase in the number of Distributorsin this market due to active efforts to grow the market by local management.

 

In Ukraine, our net sales revenues increasedapproximately $11.0 million or 50.2 percent to $32.9 million for the year endedDecember 31, 2008 from $21.9 million for the same period in 2007. InUkraine, the increase in sales was primarily due to a significant increase inthe number of Distributors in this market due to active efforts to grow themarket by local management.

 

In Mexico, our net sales revenues decreasedapproximately $1.4 million or 7.3 percent to $17.9 million for the year ended December 31,2008 from $19.3 million for the same period in 2007.  Our net sales in Mexico were negativelyimpacted by approximately $0.2 million or 1.0 percent by foreign currencyfluctuations due to the U.S. dollar strengthening in relation to the Mexicanpeso from 2007 to 2008. Excluding the effect of foreign currency fluctuations,net sales in Mexico decreased approximately $1.2 million or 6.2 percent for theyear ended December 31, 2008 compared to 2007.  The decrease in net sales was primarily dueto increased competition within Mexico during 2008, which resulted in adecrease in the number of active Distributors.

 

In Japan, our net sales revenues decreasedapproximately $0.4 million or 4.0 percent to $9.7 million for the year ended December 31,2008 from $10.1 million for the same period in 2007.  Our net sales in Japan were positivelyimpacted by approximately $1.3 million or 12.9 percent by foreign currencyfluctuations due to the U.S. dollar weakening in relation to the Japanese yenfrom 2007 to 2008. Excluding the effect of foreign currency fluctuations, netsales in Japan decreased approximately $1.7 million or 16.8 percent for theyear ended December 31, 2008 compared to 2007.  The decrease in net sales was primarily dueto increased competition and economic conditions within Japan during 2008,which resulted in a decrease in the number of active Distributors.

 

In the remaining markets in which NSP Internationaloperates, our net sales revenues increased approximately $3.4 million or 5.5percent to $65.1 million for the year ended December 31, 2008 from $61.7million for the same period in 2008.  Ournet sales were positively impacted by approximately $0.6 million or 1.0 percentby foreign currency fluctuations due to the U.S. dollar weakening in relationto the various currencies our markets operate in from 2007 to 2008. Excludingthe effect of foreign currency fluctuations, net sales revenues in NSPInternational’s remaining markets increased approximately $2.8 million or 4.5percent for the year ended December 31, 2008 compared to the same periodin 2007, primarily due to growth in our Distributor base.

 

Active Distributors within NSP International totaledapproximately 428,600 and 403,500 at December 31, 2008 and December 31,2007, respectively.  Active Managerswithin NSP International totaled approximately 19,000 and 16,800 at December 31,2008, and December 31, 2007, respectively. The increase in Distributors isprimarily related to the changes in Russia and Ukraine as noted above.

 

Synergy Worldwide

 

Synergy Worldwide net sales revenue decreased to$57.1 million in 2008 compared to $68.6 million in 2007, a decrease ofapproximately 16.8 percent. The decrease in Synergy Worldwide net sales wasprimarily due to the loss of key Distributor networks as a result of increasedcompetition in the United States and Japanese markets.  This decrease was partially offset by foreigncurrency exchange rate fluctuations that positively impacted net sales revenueby $2.6 million for the year ended 2008 compared to 2007. The strengthening ofthe Japanese yen contributed to $3.7 million of this increase, which was offsetby a $1.1 million decrease in sales as a result of the South Korean wonweakening in relation to the U.S. dollar.   The effects of currency fluctuations on sales were immaterial in theaggregate for the remaining markets of Synergy Worldwide.

 

In Japan, our net sales revenues decreased approximately$6.2 million or 17.5 percent to $29.3 million for the year ended December 31,2008 from $35.5 million for the same period in 2007.  Our net sales in Japan were positivelyimpacted approximately $3.7 million or 10.4 percent by foreign currency fluctuationsdue to the U.S. dollar weakening in relation to the Japanese yen from 2007 to2008. Excluding the effect of foreign currency fluctuations, net sales in Japandecreased approximately $9.9 million or 27.9

 

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percentfor the year ended December 31, 2008 compared to the same period in2007.  The decrease in net sales isprimarily due to the loss of a key Distributor network in Japan, which hasresulted in a decrease in the number of active Distributors.

 

In South Korea, our net sales revenues decreasedapproximately $2.8 million or 30.1 percent to $6.5 million for the year ended December 31,2008 from $9.3 million for the same period in 2007.  Our net sales in South Korea were negativelyimpacted approximately $1.1 million or 11.8 percent by foreign currencyfluctuations due to the U.S. dollar strengthening in relation to the SouthKorean won from 2007 to 2008. Excluding the effect of foreign currencyfluctuations, net sales in South Korea decreased approximately $1.7 million or18.3 percent for the year ended December 31, 2008 compared to the sameperiod in 2007.  The decrease in netsales is primarily due to economic conditions within South Korea, which hasresulted in a decrease in the number of active Distributors.

 

In Europe, our net sales revenues increasedapproximately $2.1 million or 116.7 percent to $3.9 million for the year ended December 31,2008 from $1.8 million for the same period in 2007.  Our net sales in Europe were positivelyimpacted approximately $0.3 million or 16.7 percent by foreign currencyfluctuations due to the U.S. dollar weakening in relation to the euro from 2007to 2008. Excluding the effect of foreign currency fluctuations, net sales inEurope increased approximately $1.8 million or 100.0 percent for the year endedDecember 31, 2008 compared to the same period in 2007 due to the continuedgrowth of our operations in the countries in which we have operated since theopening of Synergy Worldwide in Europe in 2007.

 

In the United States, our net sales revenuesdecreased approximately $2.6 million or 30.6 percent to $5.9 million for theyear ended December 31, 2008 from $8.5 million for the same period in2007.  The decline in our net salesrevenue within the United States is primarily due to the loss of a keyDistributor network during the year.

 

In the remaining markets in which Synergy Worldwideoperates, our net sales revenues decreased approximately $2.0 million or 14.8percent to $11.5 million for the year ended December 31, 2008 from $13.5million for the same period in 2007.  Ournet sales were negatively impacted approximately $0.3 million or 2.2 percent byforeign currency fluctuations due to the U.S. dollar strengthening in relationto the various currencies our markets operate in from 2007 to 2008. Excludingthe effect of foreign currency fluctuations, net sales revenue in SynergyWorldwide’s remaining markets decreased approximately $1.7 million or 12.6percent for the year ended December 31, 2008 compared to the same periodin 2007, primarily due to economic conditions within the various markets.

 

Active Distributors within Synergy Worldwide totaledapproximately 76,000 and 81,100 at December 31, 2008 and December 31,2007, respectively.  Active Managerswithin Synergy Worldwide totaled approximately 800 and 800 at December 31,2008, and December 31, 2007, respectively. The change in Distributors isprimarily related to Japan and the United States as noted above.

 

*Cost ofGoods Sold*

 

Cost of goods sold as a percent of net sales revenuedecreased to 19.3 percent in 2008 compared to 19.7 percent in 2007.   This improvement was primarily a result ofdecreased importation and purchasing costs in some of our foreign markets, as aresult of their currencies strengthening in relation to the U.S. dollar.  In particular, these markets include Japanand Mexico, which account for a significant portion of consolidated netsales.  In addition, we were able toraise prices, while maintaining level inventory costs in our Russian, Ukraine,and other eastern European markets.

 

*Volume Incentives*

 

Volume Incentives as apercent of net sales revenue decreased to 37.5 percent in 2008 compared to 38.3percent in 2007.  The decrease waspartially due to changes in Volume Incentive programs for some products soldwithin the United States as well as the result of fuel surcharges included innet sales revenue within the United States for which there is no VolumeIncentive.

 

*Selling, General and Administrative*

 

Selling, general andadministrative expenses increased to 41.7 percent of net sales revenue in 2008compared to 41.2 percent in 2007.  Inabsolute terms, our selling, general and administrative expenses increased by$7.0 million in 2008 compared to 2007, from $148.7 million to $155.7million.  The increase in selling,general and administrative expenses is primarily as a result of increasedspending of approximately $7.6 million in our Russian and Eastern Europeanmarkets for infrastructure to support our continued growth and costs ofapproximately $2.1 million for entering new markets in China and Europe (ofwhich $1.1 million is related to Synergy Worldwide).  Foreign currency fluctuations negatively impactedgeneral and administrative expenses by approximately $1.5 million, of which$0.7 million was related to Synergy Worldwide. These costs were offset bydecreases of approximately $3.4 million in our Synergy Worldwide operations(excluding costs for entering new markets and the effect of foreign currencyfluctuations) as a result of cost cutting initiatives to help bring operatingcosts more in line with the division’s reduced net sales revenue. These

 

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initiatives include reducing the division’sconsulting fees, professional fees, travel, personnel, office and warehouserent expense through the termination and renegotiation of leases, as well asother selling expenses.

 

*OperatingIncome*

 

Operating income increased $2.5 million in 2008compared to 2007, from $3.1 million to $5.6 million.  The operating loss for NSP United Statesincreased $0.6 million to $5.9 million in 2008 compared to $5.3 million in2007.  This increase was primarilyrelated to the Company’s interest in the losses of a variable interest entityof $0.9 million for which the Company was the primary beneficiary (see Note 1of the Notes to the Consolidated Financial Statements set forth in Item 8 ofthis report).  This entity was involvedin the development of nutritional supplements. Operating income for NSP International increased $4.2 million from $12.7million in 2007 to $16.9 million in 2008 as a result of continued growth in ourRussian, Ukrainian, and Eastern European markets.  The operating loss in Synergy Worldwideincreased $1.0 million to $5.4 million in 2008 compared to $4.4 million in2007.  This was primarily due to the lossof key Distributor networks as a result of increasing competition within theUnited States and Japanese markets.  Thisloss resulted in a significant decrease in sales in relation to the operatingcosts in these markets.  The net impactof foreign currency fluctuations on operating income included in the operatingresults of NSP International and Synergy Worldwide was $0.2 million.

 

*OtherIncome, net*

 

Other income, net for the year ended December 31,2008 decreased $0.5 million compared to the same period in 2007 primarily dueto a decrease in foreign exchange gains in certain markets based upon changesin exchange rates on intercompany related balances.

 

*Income Taxes*

 

The effective income tax rate was 128.4 percent for2008, compared to 284.5 percent for 2007. The effective rate for 2008 differedfrom the federal statutory rate of 35.0 percent primarily due to:

 

(i)                                     Additional liabilities associated withuncertain tax positions increased the effective rate by 59.7 percent for 2008.These reserves related primarily to our exposure to transfer pricing onintercompany sales to foreign subsidiaries, to the withholding on salescommissions within certain foreign jurisdictions, and to the deductibility ofvolume incentive payments within certain foreign jurisdictions.  The increase recognized in 2008 was relatedto items that arose or increased during 2008.

 

(ii)                                  Changes in the deferred tax assetvaluation allowance increased the effective rate by approximately 68.2 percentfor 2008.  The decrease in the deferredtax asset valuation allowance was primarily the result of significant reservesbeing established for certain foreign subsidiary deferred tax assets that werenot likely to be realized due to the recurring losses within the respective taxjurisdictions.

 

(iii)                               The amortization of a prepaid taxresulting from a taxable gain on the sale of intercompany assets eliminated forreporting purposes, but recognized for the calculation of the consolidatedincome tax provision, increased the effective rate by approximately 17.4 percentin 2008. The prepaid tax is being amortized over the respective life of theasset, and it is anticipated to impact the effective tax rate through 2010.

 

(iv)                              Adjustments relating to the U.S. taximpact of foreign operations decreased the effective tax rate by 33.6 percentin 2008.  Included were adjustments fordividends received from foreign subsidiaries, adjustments for foreign taxcredits, and adjustments relating to outside basis calculations underapplicable U.S. GAAP.

 

(v)                                 A foreign exchange tax loss on a U.S.dollar denominated intercompany payable decreased the effective tax rate byapproximately 16.8 percent in 2008.  Therelated foreign book loss are eliminated in consolidation; however, it wasstill taxable in the respective foreign jurisdictions.

 

(vi)                              Foreign and state tax rate differentialsthat incrementally impact the federal statutory rate, as well as permanentnondeductible or deductible items account for the remaining change.

 

As anet result of these and other differences, tax expense for 2008 was greaterthan income before taxes for the year ended December 31, 2008.

 

Theeffective income tax rate was 284.5 percent for 2007. The effective rate for2007 differed from the federal statutory rate of 

 

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35 percent primarily due to:

 
| (i)    | Additional liabilities associated with uncertain tax  positions increased the effective rate by approximately 104.4 percent and  related primarily to our exposure to transfer pricing on intercompany sales  to foreign subsidiaries, to the withholding on sales commissions within  certain foreign jurisdictions, and to the deductibility of volume incentive  payments within certain foreign jurisdictions. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| (ii)   | Additional tax contingencies which increased the  effective rate by approximately 16.0 percent.   The increase in tax contingencies primarily relates to foreign  non-income tax related expenses which reduced the pretax income but were  non-deductible for income tax purposes consequently increased the effective  rate. The items primarily related to tax contingencies for VAT transactions.         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| (iii)  | Changes in the deferred tax asset valuation  allowance increased the effective rate by approximately 61.1 percent. The  increase in the deferred tax asset valuation allowance was primarily the  result of establishing reserves against certain foreign subsidiary deferred  tax assets that were not likely to be realized due to the recurring losses  within the respective tax jurisdiction.                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| (iv)   | The amortization of a prepaid tax resulting from a  taxable gain on the sale of intercompany assets eliminated for reporting  purposes, but recognized for the calculation of the consolidated income tax  provision, increased the effective tax rate by approximately 25.2 percent.  The prepaid tax is anticipated to impact the effective tax rate through 2010.                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| (v)    | A foreign exchange tax gain on a U.S. dollar  denominated intercompany payable increased the effective tax rate by  approximately 17.4 percent.  The  related foreign book gain was eliminated in consolidation; however, it was  still taxable in the respective foreign jurisdictions.                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| (vi)   | An approximately 10.6 percent increase for state  income taxes represented the incremental impact on the statutory rate for  state income taxes deducted according to the expected blended state income  tax rate, net of the federal benefit.                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| (vii)  | Adjustments relating to the U.S. tax impact of  foreign operations increased the effective tax rate by approximately 17.1  percent.  Included were adjustments for  dividends received from foreign subsidiaries, adjustments for deduction of  foreign taxes, and adjustments relating to outside basis calculations under  applicable U.S. GAAP.                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| (viii) | Foreign tax rate differentials, due to higher tax  rates in some foreign jurisdictions, as well as permanent nondeductible or  deductible items account for the remaining change.                                                                                                                                                                                                                                  |

 

As anet result of these and other differences, tax expense for 2007 was greaterthan income before taxes for the year ended December 31, 2007.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our principal use of cash is to pay for operatingexpenses, including Volume Incentives, capital assets, inventory purchases, andfunding of international expansion. As of December 31, 2009, workingcapital was $33.5 million, compared to $30.2 million as of December 31,2008.  At December 31, 2009, we had$35.5 million in cash and cash equivalents, of which $33.7 is held in ourforeign markets and may be subject to various withholding taxes and otherrestrictions related to repatriation, and $3.2 million in unrestrictedshort-term investments, which were available to be used along with our normalcash flows from operations to fund any unanticipated shortfalls in future cashflows.

 

Ournet consolidated cash inflows (outflows) are as follows (*in thousands*):

 
| ** **           | ** ** | **Year Ended December 31,** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| Operating activities | ** ** | **$**                                      | **927**    |   | $ | 772 |   | $ | 12,832 |   |
| Investing activities | ** ** | **(297**                                   | **)**      | (6,759 | ) | (5,701 | ) |
| Financing activities | ** ** | **(776**                                   | **)**      | (3,102 | ) | (1,604 | ) |
|                      |            |                                            |            |  |  |  |  |  |  |  |

 

For the year ended December 31, 2009, wegenerated cash from operating activities of $0.9 million compared to $0.8million in 2008. The increase in operating cash is primarily related toimprovements in operating income from a net loss of $1.8 million in the prioryear, to net income of $6.1 million, as well as the decrease in our accruedliabilities related to the reduction of certain non-income tax relatedcontingencies, payments of professional fees, as well as the timing of receiptsfrom accounts receivable, and other fluctuations in other operating assets andliabilities.

 

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For the year ended December 31, 2008, wegenerated cash from operating activities of $0.8 million compared to $12.8million in 2007. The decrease in cash generated from operating activities wasprimarily due to the timing of payments on accounts receivable and increaseduse of funds to purchase inventory compared to decreases in our overallinventory balances in 2007.  Our supplyof inventory on hand had increased to 201 days as of December 31, 2008compared to 181 days as of December 31, 2007.  The increase in our inventory on hand is theresult of building inventory for our new markets in Europe and China, as wellas new product launches in South Eastern Asia. In addition, operating cash flowdecreased significantly as a result of the timing of payments of accruedliabilities.

 

Capital expenditures related to the purchase ofequipment, computer systems, and software for the years ended December 31,2009, 2008, and 2007 were $3.2 million, $3.5 million, and $4.5 million,respectively. Approximately $4.0 million of cash was used during 2008 topurchase a warehouse in Venezuela. During 2007, an additional $1.0 million wasused for the acquisition of intangibles related to the purchase of productformulations.

 

We also had cash proceeds of $2.1 million and $0.1million from the sale of restricted investments during the years ended December 31,2009 and 2008, respectively. These investments were initially purchased during2007. In addition, we had cash proceeds of $0.8 million, $0.6 million, and $1.4million from the sale of available-for-sale investments for each of the yearsended December 31, 2009, 2008, and 2007, respectively.

 

During 2009, 2008, and 2007, we used cash to paydividends of $0.8 million, $3.1 million, and $3.1 million, respectively.  The Company suspended the payment of itsquarterly cash dividends, effective the second quarter of 2009, in an effort toconserve cash in the United States. The suspension of cash dividends isexpected to preserve approximately $3.1 million of cash flow on an annualbasis.

 

The uses of cash for financing activities above werepartially offset by proceeds received from option holders exercising theiroptions of $1.3 million for the year ended December 31, 2007.  There were no proceeds related to theexercise of stock options for the years ended December 31, 2008 and 2009.

 

We believe that our working capital requirements canbe met for the foreseeable future through our available cash and cashequivalents, and cash generated from operating activities; however, a prolongedeconomic downturn, a decrease in the demand for our products, the unfavorablesettlement of our unrecognized tax positions and non-income tax contingenciescould adversely affect our long-term liquidity. In the event of a significantdecrease in cash provided by our operating activities, it might be necessaryfor us to obtain additional external sources of funding.

 

We do not currently maintain a long-term creditfacility or any other external sources of long-term funding; however, we areexploring the possibility of establishing a long-term credit facility andbelieve that such funding can be established with competitive terms in theevent additional sources of funds become necessary.

 

During 2009, we had short-term borrowings andrepayments of $7.9 million from our investment brokerage secured by ouravailable for sale investments in order to generate additional liquidity frommonth-to-month based upon our working capital needs. We have the ability toborrow up to approximately 80 percent of the fair value of our municipalobligations within our available for sale investments. These borrowings beganin 2009 and were typically repaid in the month following the initial borrowing.

 

**CONTRACTUAL OBLIGATIONS**

 

The following table summarizes information aboutcontractual obligations as of December 31, 2009 (*in thousands*):

 
| ** **                                                               | ** ** | **Total** | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** |
|--------------------------------------------------------------------------|------------|-----------|------------|-------------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|
| Operating lease obligations                                              |       | $         | 11,747     |                                | $          | 4,756              |       | $                  | 5,336      |                        | $          | 1,374 |   | $ | 281 |   |
| Purchase obligations(1)                                                  |       | 14,061    |       | 14,061                              |       | —             |       | —             |       | —                      |       |
| Capital purchase obligations(2)                                          |       | 216       |       | 216                                 |       | —             |       | —             |       | —                      |       |
| Self-insurance reserves(3)                                               |       | 2,942     |       | 457                                 |       | —             |       | —             |       | 2,485                       |       |
| Other long-term liabilities reflected on  the balance sheet(4) |       | 1,752     |       | —                              |       | —             |       | —             |       | 1,752                       |       |
| Unrecognized tax benefits(5)                                             |       | —    |       | —                              |       | —             |       | —             |       | —                      |       |
| Total                                                                    |       | $         | 30,718     |                                | $          | 19,490             |       | $                  | 5,336      |                        | $          | 1,374 |   | $ | 4,518 |   |

 

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| (1) |   | Purchase obligations include non-cancelable purchase agreements for  both botanical and non-botanical raw materials related to |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------|

 

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|   |   | our forecasted 2009 production estimates, as well as related  packaging materials.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (2)    |   | Capital purchase obligations included non-cancelable purchase  agreements for upgrades related to our information systems and manufacturing  equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (3)    |   | The Company retains a significant portion of the risks associated  with certain employee medical benefits and product liability insurance.  Recorded liabilities for self-insured risks are calculated using actuarial  methods and are not discounted. Amounts for self-insurance obligations are  included in accrued liabilities and long-term other liabilities on the  Company’s consolidated balance sheet.                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (4)    |   | The Company provides a nonqualified deferred compensation plan for  its officers and certain key employees. Under this plan, participants may  defer up to 100 percent of their annual salary and bonus (less the  participant’s share of employment taxes). The deferrals become an obligation  owed to the participant by the Company under the plan. Upon separation of the  participant from the service of the Company, the obligation owed to the  participant under the plan will be paid as a lump sum or over a period of  either three or five years. As we cannot easily determine when our officers  and key employees will separate from the Company, we have classified the  obligation greater than five years for payment. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (5)    |   | At December 31, 2009, there was $35.0 million of liabilities,  offset by $15.4 million of other assets related to unrecognized tax benefits.  Because of the high degree of uncertainty regarding the timing of future cash  outflows associated with these liabilities, if any, the Company is unable to  estimate the years in which cash settlement may occur with the respective tax  authorities.                                                                                                                                                                                                                                                                                                                                     |

 

The Company has entered into long-term agreements withthird-parties in the ordinary course of business, in which it has agreed to paya percentage of net sales in certain regions in which it operates, or royaltieson certain products. In 2009, 2008 and 2007, the aggregate amounts of thesepayments were $4.0 million, $7.7 million and $5.6 million, respectively.

 

**OFF-BALANCESHEET ARRANGEMENTS**

 

We have no off-balance sheet arrangements other thanoperating leases. We do not believe that these operating leases are material toour current or future financial position, results of operations, revenues orexpenses, cash flows, capital expenditures, or capital resources.

 

**RECENTACCOUNTING PRONOUNCEMENTS**

 

**Recently AdoptedAccounting Guidance**

 

In December 2007,the Financial Accounting Standards Board (“FASB”) issued new guidance onbusiness combinations that changes how business combinations are accounted forand will impact financial statements both on the acquisition date and insubsequent periods. In addition, the guidance expands required disclosuressurrounding the nature and financial affects of business combinations. TheCompany adopted this guidance on January 1, 2009, and will apply it tofuture business combinations.

 

In December 2007, the FASB issued new guidance onnoncontrolling interests in a subsidiary that changes the accounting andreporting standards for the noncontrolling interests in a subsidiary inconsolidated financial statements. The guidance recharacterizes minorityinterest as noncontrolling interests and requires noncontrolling interests tobe classified as a component of shareholders’ equity. The guidance requiresretroactive adoption of the presentation and disclosure requirements forexisting 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 authoritativeguidance related to the determination of the useful life of intangible assets.The guidance states that in developing assumptions about renewal or extensionoptions used to determine the useful life of an intangible asset, an entityneeds to consider its own historical experience adjusted for entity-specificfactors. In the absence of that experience, an entity shall consider theassumptions that market participants would use about renewal or extensionoptions. 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’sfinancial condition, results of operations, or cash flows.

 

In April 2009, the FASB issued new guidance thatamends the other-than-temporary impairment guidance in U.S. GAAP for debtsecurities to make the guidance more operational and to improve thepresentation and disclosure of other-than-temporary impairments of debt andequity securities in the financial statements. This guidance does not amendexisting recognition and measurement guidance related to other-than-temporaryimpairments of equity securities. The guidance is effective for interim and 

 

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annual reporting periods ending after June 15,2009. The adoption of this guidance did not have an impact on the Company’sfinancial condition, results of operations, or cash flows.

 

In April 2009, the FASB issued new guidance providingadditional information on factors to consider in estimating fair values whenthere has been a significant decrease in the market activity for a financialasset or liability. It also includes guidance on identifying circumstances thatindicate a transaction is not orderly. This guidance is effective for interimand annual reporting periods ending after June 15, 2009, and shall beapplied prospectively. The adoption of this guidance did not have an impact onthe Company’s financial condition, results of operations, or cash flows.

 

In May 2009, the FASB issued new authoritativeguidance on events that occur after the balance sheet date but prior to theissuance of the financial statements. The guidance distinguishes eventsrequiring recognition in the financial statements and those that may requiredisclosure in the financial statements. Furthermore, it requires disclosure ofthe date through which subsequent events were evaluated. This guidance iseffective for interim and annual periods after June 15, 2009. In February 2010,FASB amended this guidance to clarify the date through which subsequent eventsare to be evaluated. The Company adopted this guidance during the quarter endedJune 30, 2009 and the subsequent amendment as of the year ended December 31,2009, and has evaluated subsequent events through the date the Company’sconsolidated financial statements were issued.

 

In June 2009, the FASB Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles,” (“Codification”)was issued. The Codification supersedes all existing accounting standarddocuments and is the single source of authoritative non-governmental U.S. GAAP.All other accounting literature not included in the Codification will beconsidered 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 Consolidated Financial Statements in Item 8 ofthis report reflect the adoption of the Codification.

 

**Recent Accounting GuidanceNot Yet Adopted**

 

In June 2009, the FASB issued an amendment to theaccounting and disclosure requirements for the consolidation of variableinterest entities (“VIEs”). The amendment requires an enterprise to determinewhether its variable interest or interests give it a controlling financialinterest in a VIE. The primary beneficiary of a VIE is the enterprise that hasboth the power to direct the activities of the VIE that most significantlyimpact the entity’s economic performance and has the obligation to absorblosses or the right to receive benefits from the entity that could potentiallybe significant to the VIE. The amendment requires ongoing reassessments ofwhether an enterprise is the primary beneficiary of a VIE as well as expandeddisclosure requirements for enterprises with an interest in a VIE. The guidanceis effective for fiscal years beginning after November 15, 2009, withearly adoption prohibited. The Company does not expect the adoption of thisamendment to have a material impact on its financial condition, results ofoperations, or cash flows.

 

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

 

In January 2010, the FASB issued authoritativeguidance that requires new disclosures related to fair value measurements andclarifies existing disclosure requirements about the level of disaggregation,inputs and valuation techniques. Specifically, reporting entities now mustdisclose separately the amounts of significant transfers in and out ofLevel 1 and Level 2 fair value measurements and describe the reasonsfor the transfers. In addition, in the reconciliation for Level 3 fairvalue measurements, a reporting entity should present separately informationabout purchases, sales, issuances and settlements. The guidance clarifies thata reporting entity needs to use judgment in determining the appropriate classesof assets and liabilities for disclosure of fair value measurement, consideringthe level of disaggregated information required by other applicable U.S. GAAPguidance and should also provide disclosures about the valuation techniques andinputs used to measure fair value for each class of assets and liabilities.This guidance will be effective for the Company on January 1, 2010, exceptfor the disclosures about purchases, sales, issuances and settlements in thereconciliation for Level 3 fair value measurements, which will beeffective for the Company on January 1, 2011. The Company does not expectthis guidance to have a material impact on its financial condition, results ofoperations, or cash flows.

 

## ***Item 7A. Quantitative andQualitative Disclosures about Market Risk***

 

We conduct business in several countries and intend tocontinue to expand our international operations. Net sales revenue, operatingincome, and net income are affected by fluctuations in currency exchange rates,interest rates and other uncertainties inherent in doing business and sellingproduct in more than one currency. In addition, our operations are exposed torisks associated 

 

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with changes in social, political, and economicconditions inherent in international operations, including changes in the lawsand policies that govern international investment in countries where we haveoperations, as well as, to a lesser extent, changes in United States laws andregulations relating to international trade and investment.

 

**Foreign Currency Risk**

 

Duringthe year ended December 31, 2009, approximately 55.0 percent of our netsales revenue and approximately 54.7 percent of our operating expenses wererealized outside of the United States. Inventory purchases are transactedprimarily in U.S. dollars from vendors located in the United States. The localcurrency of each international subsidiary is generally the 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 inU.S. dollars. We conduct business in twenty-three different currencies withexchange rates that are not on a one-to-one relationship with the U.S.dollar.  All revenues and expenses aretranslated at average exchange rates for the periods reported. Therefore, ouroperating results will be positively or negatively impacted by a weakening orstrengthening of the U.S. dollar in relation to another fluctuating currency.Given the uncertainty and diversity of exchange rate fluctuations, we cannotestimate the effect of these fluctuations on our future business, productpricing, results of operations, or financial condition, but we have providedconsolidated sensitivity analyses below of functional currency/reportingcurrency exchange rate risks. Changes in various currency exchange rates affectthe relative prices at which we sell our products. We regularly monitor ourforeign currency risks and periodically take measures to reduce the risk offoreign exchange rate fluctuations on our operating results. We do not usederivative instruments for hedging, trading, or speculating on foreign exchangerate fluctuations.  Additional discussionof the impact on the effect of currency fluctuations has been included in ourmanagement’s discussion and analysis included in Part II, Item 7 of thisreport.

 

The following table setsforth a composite sensitivity analysis of our net sales revenue, costs andexpenses, and operating income in connection with strengthening of the U.S.dollar (our reporting currency) by 10%, 15% and 25% against every otherfluctuating functional currency in which we conduct business.  We note that while our individual net salesrevenue and cost and expenses components were less sensitive to increases inthe strength of the U.S. dollar, our operating income was sensitive to suchincreases on almost a three-to-one percentage point basis, assuming astrengthening of the U.S. dollar by 10%, 15% and 25% against every otherfluctuating currency in which we conduct business.

 

Exchange Rate Sensitivity of Operating Income for the year ended December 31,2009 (dollar amounts in thousands)

 
| ** **                                       | ** ** | ** **  | ** **  | **With Strengthening of U.S. Dollar by:** | ** ** |
|--------------------------------------------------|------------|-------------|-------------|--------------------------------------------------------------------|------------|
| **Exchange Rate Sensitivity -**   | ** ** | ** **  | ** **  | **10%**                                                            | ** ** | **15%** | ** ** | **25%** | ** ** |
| **Operating Income**                        | ** ** | ** **  | ** **  | **Decrease ($)**                                              | ** ** | **Decrease (%)** | ** ** | **Decrease ($)** | ** ** | **Decrease (%)** | ** ** | **Decrease ($)** | ** ** | **Decrease (%)** | ** ** |
| **(Dollar amounts in thousands)** | ** ** | ** **  | ** **  | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                             |       |        |        |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Net Sales Revenue**                            | ** ** | **$**       | **343,023** |                                                               | $          | (11,284 | ) | (3.3 | )% | $ | (16,191 | ) | (4.7 | )% | $ | (24,826 | ) | (7.2 | )% |
| ** **                                       |       |        |        |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Cost and Expenses**                            |       |        |        |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Cost of Goods Sold**                           | ** ** | **68,803**  |        | (2,016                                                             | )          | (2.9 | )% | (2,893 | ) | (4.2 | )% | (4,436 | ) | (6.4 | )% |
| **Volume Incentives**                            | ** ** | **126,165** |        | (4,429                                                             | )          | (3.5 | )% | (6,355 | ) | (5.0 | )% | (9,744 | ) | (7.7 | )% |
| **Selling, General and Administrative**          | ** ** | **137,288** |        | (4,544                                                             | )          | (3.3 | )% | (6,520 | ) | (4.7 | )% | (9,998 | ) | (7.3 | )% |
|                                             |       |        |        |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Operating Income**                             | ** ** | **10,767**  |        | (295                                                               | )          | (2.7 | )% | (423 | ) | (3.9 | )% | (648 | ) | (6.0 | )% |
|                                                  |            |             |             |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As noted above, certain of our operations including Russia and theUkraine are served by a U.S. subsidiary through third party entities, for whichall business is conducted in U.S. dollars. Although changes in exchange ratesbetween the U.S. dollar and the Russian rubble or the Ukrainian hryvnia do notresult in currency fluctuations within our financial statements, a weakening orstrengthening of the U.S. dollar in relation to these other currencies cansignificantly impact the prices of our products and the purchasing power of ourindependent Managers and Distributors within these markets.

 

The following table sets forth a composite sensitivityanalysis of our assets and liabilities by those balance sheet line items thatare subject to exchange rate risk, together with the total gain or loss fromthe strengthening of the U.S. dollar in relation to our various fluctuatingfunctional currencies.  The sensitivityof our assets and liabilities, taken by balance sheet line items, was somewhatless than the sensitivity of our operating income to increases in the strengthof the U.S. dollar in relation to other fluctuating currencies in which weconduct business.

 

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Exchange Rate Sensitivityof Balance Sheet as of December 31, 2009 (dollar amounts in thousands)

 
| ** **                                                             | ** ** | ** ** | ** ** | **With Strengthening of U.S. Dollar by:** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | ** ** | ** ** | **10%**                                                            | ** ** | **15%** | ** ** | **25%** | ** ** |
| ** **                                                             | ** ** | ** ** | ** ** | **Gain**                                                           | ** ** | **Gain** | ** ** | **Gain** | ** ** | **Gain** | ** ** | **Gain** | ** ** | **Gain** | ** ** |
| **Exchange Rate Sensitivity - Balance Sheet** | ** ** | ** ** | ** ** | **(Loss) ($)**                                                | ** ** | **(Loss) (%)** | ** ** | **(Loss) ($)** | ** ** | **(Loss) (%)** | ** ** | **(Loss) ($)** | ** ** | **(Loss) (%)** | ** ** |
| **(Dollar amounts in thousands)**                       | ** ** | ** ** | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                   |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| ***Current Assets subject to Exchange Rate Risk***                     |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Cash and cash equivalents**                                          | ** ** | **$**      | **35,538** |                                                               | $          | (2,888 | ) | (8.1 | )% | $ | (4,144 | ) | (11.7 | )% | $ | (6,355 | ) | (17.9 | )% |
| **Restricted cash**                                                    | ** ** | **1,495**  |       | (136                                                               | )          | (9.1 | )% | (195 | ) | (13.0 | )% | (299 | ) | (20.0 | )% |
| **Accounts receivable, net**                                           | ** ** | **8,294**  |       | (372                                                               | )          | (4.5 | )% | (533 | ) | (6.4 | )% | (817 | ) | (9.9 | )% |
|                                                                   |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| ***Current Liabilities subject to Exchange Rate Risk***                |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Accounts payable**                                                   | ** ** | **4,176**  |       | 113                                                                |       | 2.7 | % | 162 |   | 3.9 | % | 249 |   | 6.0 | % |
|                                                                   |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Total Loss from Strengthening of U.S.  Dollar**                 |       |       |       | (3,283                                                             | )          |   |   | (4,710 | ) |   |   | (7,222 | ) |   |   |
|                                                                        |            |            |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following table sets forth the local currenciesother than the U.S. dollar in which our assets that are subject to exchangerate risk were denominated as of December 31, 2009 and exceeded $1 millionupon translation into U.S. dollars.  Noneof our liabilities that are denominated in a local currency other than the U.S.dollar and that are subject to exchange rate risk exceeded $1 million upontranslation into U.S. dollars. We use the spot exchange rate for translatingbalance sheet items from local currencies into our reporting currency.  The respective spot exchange rate for eachsuch local currency meeting the foregoing thresholds is provided in the tableas well.

 

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

 
| ** **                     | ** ** | ** **               | ** ** | **At Spot Exchange Rate per** | ** ** |
|--------------------------------|------------|--------------------------|------------|---------------------------------------------------|------------|
| ** **                     | ** ** | **Translated into** | ** ** | **One U.S. Dollar as of**     | ** ** |
| ** **                     | ** ** | **U.S. Dollars**    | ** ** | **December 31, 2009**                   | ** ** |
| **Cash and Cash  Equivalents** |       |                     |       |                                              |       |
| Canada (Dollar)                |       | $                        | 3,395      |                                              | 1.1        |   |
| Colombia (Peso)                |       | 1,565                    |       | 2,064.6                                           |       |
| Indonesia (Rupiah)             |       | 1,256                    |       | 9,416.2                                           |       |
| Japan (Yen)                    |       | 4,978                    |       | 92.2                                              |       |
| Mexico (Peso)                  |       | 2,518                    |       | 13.0                                              |       |
| South Korea (Won)              |       | 2,774                    |       | 1,165.8                                           |       |
| European Markets (Euro)        |       | 1,409                    |       | 0.7                                               |       |
| United Kingdom (Pound)         |       | 1,131                    |       | 0.6                                               |       |
| Honduras (Lempira)             |       | 1,170                    |       | 19.3                                              |       |
| Other                          |       | 4,324                    |       | Varies                                            |       |
| Total                          |       | $                        | 24,520     |                                              |       |   |
| ** **                     |       |                     |       |                                              |       |
| **Restricted Cash**            |       |                     |       |                                              |       |
| Venezuela (Bolivar)            |       | $                        | 1,495      |                                              | 2.1        |   |
|                           |       |                     |       |                                              |       |
| **Accounts Receivable**        |       |                     |       |                                              |       |
| Japan (Yen)                    |       | $                        | 1,362      |                                              | 92.2       |   |
| Other                          |       | 2,725                    |       | Varies                                            |       |
| Total                          |       | $                        | 4,087      |                                              |       |   |

 

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Finally, the followingtable sets forth the annual weighted average of fluctuating currency exchangerates of each of the local currencies per one U.S. dollar for each of the localcurrencies in which sales revenue exceeded $10.0 million during any of thethree years presented.  We use the annualaverage exchange rate for translating items from the statement of operationsfrom local currencies into our reporting currency.

 
| **Year ended December 31** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Canada (Dollar)                           | ** ** | **1.1**  |       | 1.1      |       | 1.1      |       |
| Japan (Yen)                               | ** ** | **93.5** |       | 102.8    |       | 117.7    |       |
| Mexico (Peso)                             | ** ** | **13.5** |       | 11.1     |       | 10.9     |       |
| Venezuela (Bolivar)                       | ** ** | **2.1**  | **(1)**    | 2.1      | (1)        | 2,145.9  |       |

 

----

(1)       Effective January 1, 2008, Venezuelachanged its currency from the bolivar to the bolivar fuerte (the bolivar fuerteis equal to approximately 1,000 bolivars; both are referred to as “bolivars”).

 

The local currency of the foreign subsidiaries is usedas the functional currency, except for subsidiaries operating in highlyinflationary economies. The financial statements of foreign subsidiaries, wherethe local currency is the functional currency, are translated into U.S. dollarsusing exchange rates in effect at year end for assets and liabilities andaverage exchange rates during each year for the results of operations.Adjustments resulting from translation of financial statements are reflected inaccumulated other comprehensive loss, net of income taxes. Foreign currencytransaction gains and losses are included in interest and other income(expense) in the consolidated statements of operations.

 

The functional currency in highly inflationaryeconomies is the U.S. dollar and transactions denominated in the local currencyare remeasured as if the functional currency were the U.S. dollar. Theremeasurement of local currencies into U.S. dollars creates translationadjustments, which are included in the consolidated statements ofoperations.  A country is considered tohave a highly inflationary economy if it has a cumulative inflation rate ofapproximately 100 percent or more over a three year period as well as otherqualitative factors including historical inflation rate trends (increasing anddecreasing), the capital intensiveness of the operation, and other pertinenteconomic factors.  There were nocountries considered to have a highly inflationary economy during 2009, 2008,or 2007.

 

As of January 1, 2010, Venezuela has beendesignated as a highly inflationary economy under U.S. GAAP. As a result,beginning January 1, 2010, the U.S. dollar will be the functional currencyfor our subsidiary in Venezuela. Going forward, currency remeasurementadjustments for this subsidiary’s financial statements and other transactionalforeign exchange gains and losses will be reflected in earnings. Through December 31,2009 (prior to being designated as highly inflationary), translationadjustments were reflected in shareholders’ equity as part of othercomprehensive income (loss).

 

On January 8, 2010, the Venezuelan governmentannounced the devaluation of the bolivar fuerte relative to the U.S. dollar.The official exchange rate for imported goods classified as essential, such asfood and medicine, will change from 2.15 to 2.60, while other payments fornon-essential goods will move to an exchange rate of 4.30. We believe that themajority of our products are expected to fall into the essential classificationand will qualify for the 2.60 rate.  However, our overall results in Venezuela will be remeasured to the U.S.dollar at approximately 4.30, the rate expected to be applicable to dividendrepatriations.

 

We will need to remeasure our local balance sheet asof January 1, 2010 to reflect the impact of the devaluation. However, weexpect this impact to be a gain of approximately $3.6 million to $4.7 milliondue to the negative position of our Venezuelan subsidiary’s net monetaryassets. There will also be an ongoing impact related to measuring our incomestatement at the new exchange rates. Our earnings from Venezuela will bereflected in our consolidated financial statements at the 4.30 official rate,as this is the rate at which we expect to be able to repatriatedividends. Moving from the 2.15 rate to 4.30 will reduce future totalcompany reported sales by less than 2 percent on an ongoing basis. Theexchange rate change will also reduce our reported operating income by $0.8million. Over time, we intend to restore the sales and profit levels achievedprior to the devaluation. However, our ability to do so will be impactedby several factors, including the Company’s ability to take actions to mitigatethe effect of the devaluation, further actions of the Venezuelan government,economic conditions in Venezuela such as inflation and consumer spending.

 

As of December 31, 2009, the Company hadapproximately $2.0 million in cash, of which $1.5 million was restricted (or$1.0 million, of which $0.7 million is restricted, as of January 1, 2010due to the devaluation of the bolivar fuerte as described above), denominatedin Venezuelan bolivar fuertes. Currency restrictions enacted by the governmentof Venezuela require approval from the government’s currency controlorganization for our subsidiary in Venezuela to obtain U.S. dollars at theofficial exchange rate to pay for imported products or to repatriate dividendsback to the Company. The market rate, which is substantially lower than theofficial rate, may be used to obtain U.S. dollars or other currencies withoutapproval of the government’s currency control organization. Going forward, thedevaluation of the official rate has reduced the differential between theofficial and parallel exchange rate and is therefore

 

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expected to reduce the incremental cost ofexchanging currencies through securities transactions in the parallelmarket. However, at this time, we are not able to reasonably estimate thefuture state of exchange controls in Venezuela and the availability of officialforeign exchange rate U.S. dollars. However, the application and approvalprocess has been delayed in recent periods, and the timing and ability to obtainU.S. dollars in the future at the official exchange rate remains uncertain.Unless the official exchange rate is made more readily available, however, oursubsidiary’s operations could be adversely affected as it may need to obtainU.S. dollars at less favorable exchange rates from non-government sources.

 

The restriction of $1.5 million in cash as of December 31,2009 in Venezuela is the result of the local government seizing control of thebank in which this operating cash was deposited and temporarily freezing itsdeposits.  As a result, the Company hasreclassified these deposits from cash and cash equivalents to restrictedcash.  While we expect these funds tobecome unrestricted in the near future, at this time we cannot estimate whenthey will be released or if there will be any potential loss related to therelease of these funds.

 

During 2009, our Venezuelan subsidiary’s net salesrevenue represented approximately 3.6 percent of consolidated net salesrevenue.  Our Venezuelan subsidiary heldtotal assets of $11.2 million (which includes an intercompany receivabledenominated in U.S. dollars of approximately $1.9 million) and net assets of$0.5 million at December 31, 2009, including $2.0 million of monetaryassets noted above.

 

**Interest Rate Risk**

 

Theprimary objectives of our investment activities are to preserve principal whilemaximizing yields without significantly increasing risk. These objectives areaccomplished by purchasing investment grade securities. On December 31,2009, we had investments of $3.2 million of which $2.1 million were municipalobligations, which carry an average fixed interest rate of 5.1percent andmature over a 5-year period. A hypothetical 1.0 percent change in interestrates would not have had a material effect on our liquidity, financialposition, or results of operations.

 

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## ***Item 8. Financial Statements andSupplementary Data***

## *** ***

**INDEX TO FINANCIAL STATEMENTS**

 
| REPORT  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                                                       |   | 42     |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                           |   |   |
| CONSOLIDATED  BALANCE SHEETS AS OF DECEMBER 31, 2009, AND 2008                                                                                 |   | 43     |
|                                                                                                                                           |   |   |
| CONSOLIDATED  STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER  31, 2009, 2008, AND 2007                                                  |   | 44     |
|                                                                                                                                           |   |   |
| CONSOLIDATED  STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND  COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 |   | 45     |
|                                                                                                                                           |   |   |
| CONSOLIDATED  STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER  31, 2009, 2008, AND 2007                                                  |   | 46     |
|                                                                                                                                           |   |   |
| NOTES  TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                                    |   | 47     |

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Shareholders of Nature’s Sunshine Products, Inc.

 

Wehave audited the accompanying consolidated balance sheets of Nature’s SunshineProducts, Inc. and subsidiaries (the “Company”) as of December 31,2009 and 2008, and the related consolidated statements of operations, changesin shareholders’ equity and comprehensive loss, and cash flows for each of thethree years in the period ended December 31, 2009. Our audits alsoincluded the financial statement schedule listed in the Index at Item 15. Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thefinancial statements and financial statement schedule based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Nature’s Sunshine Products, Inc.and subsidiaries as of December 31, 2009 and 2008, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2009, in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion, suchfinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

 

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the Company’s internal control overfinancial reporting as of December 31, 2009, based on the criteriaestablished in *Internal Control — Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission and ourreport dated March 16, 2010 expressed an adverse opinion on theeffectiveness of the Company’s internal control over financial reporting.

 
| /s/  Deloitte & Touche LLP |   |
|-------------------------------------|--------|
|                                |   |
| Salt  Lake City, Utah               |   |
| March 16,  2010                |   |

 

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**NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDBALANCE SHEETS**

***(Amounts in thousands)***

 
| **As of December 31**                                                                                               | ** ** | **2009**    | ** **  | **2008**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **Assets**                                                                                                                         |       |        |        |        |       |
| Current Assets:                                                                                                                    |       |        |        |        |       |
| Cash and cash equivalents                                                                                                          | ** ** | **$**       | **35,538**  |        | $          | **34,853** |   |
| Restricted cash                                                                                                                    | ** ** | **1,495**   |        | —      |       |
| Accounts receivable, net of allowance for doubtful  accounts of $1,840 and $1,472, respectively                                    | ** ** | **8,294**   |        | **10,786**  |       |
| Investments available for sale                                                                                                     | ** ** | **3,167**   |        | **3,858**   |       |
| Restricted investments                                                                                                             | ** ** | **—**  |        | **2,050**   |       |
| Inventories, net                                                                                                                   | ** ** | **40,623**  |        | **39,558**  |       |
| Deferred income tax assets                                                                                                         | ** ** | **6,646**   |        | **9,080**   |       |
| Prepaid expenses and other                                                                                                         | ** ** | **5,629**   |        | **7,935**   |       |
| Total current assets                                                                                                               | ** ** | **101,392** |        | **108,120** |       |
|                                                                                                                               | ** ** | ** **  |        | ** **  |       |
| Property, plant and equipment, net                                                                                                 | ** ** | **28,757**  |        | **30,224**  |       |
| Investment securities                                                                                                              | ** ** | **1,752**   |        | **1,394**   |       |
| Intangible assets, net                                                                                                             | ** ** | **1,421**   |        | **1,538**   |       |
| Deferred income tax assets                                                                                                         | ** ** | **12,228**  |        | **6,412**   |       |
| Other assets                                                                                                                       | ** ** | **19,306**  |        | **16,588**  |       |
| ** **                                                                                                                         |       | **$**       | **164,856** |        | $          | **164,276** |   |
|                                                                                                                               |       |        |        |        |       |
| **Liabilities and Shareholders’  Equity**                                                                                     |       |        |        |        |       |
| Current Liabilities:                                                                                                               |       |        |        |        |       |
| Accounts payable                                                                                                                   | ** ** | **$**       | **4,176**   |        | $          | **8,777** |   |
| Accrued volume incentives                                                                                                          | ** ** | **17,495**  |        | **15,753**  |       |
| Accrued liabilities                                                                                                                | ** ** | **34,143**  |        | **45,475**  |       |
| Deferred revenue                                                                                                                   | ** ** | **4,513**   |        | **5,167**   |       |
| Income taxes payable                                                                                                               | ** ** | **7,542**   |        | **2,748**   |       |
| Total current liabilities                                                                                                          | ** ** | **67,869**  |        | **77,920**  |       |
|                                                                                                                               | ** ** | ** **  |        | ** **  |       |
| Liability related to unrecognized tax benefits                                                                                     | ** ** | **35,028**  |        | **30,952**  |       |
| Deferred compensation payable                                                                                                      | ** ** | **1,752**   |        | **1,394**   |       |
| Other liabilities                                                                                                                  | ** ** | **3,112**   |        | **333**     |       |
| Total long-term liabilities                                                                                                        | ** ** | **39,892**  |        | **32,679**  |       |
|                                                                                                                               |       |        |        |        |       |
| **Commitments and Contingencies  (Notes 8 and 11)**                                                                                |       |        |        |        |       |
|                                                                                                                               |       |        |        |        |       |
| Shareholders’ Equity:                                                                                                         |       |        |        |        |       |
| Common stock, no par value; 50,000 shares  authorized, 15,510 shares issued and outstanding as of December 31, 2009  and 2008 | ** ** | **67,183**  |        | **66,705**  |       |
| Retained earnings                                                                                                                  | ** ** | **9,511**   | ** **  | **4,172**   |       |
| Accumulated other comprehensive loss                                                                                               | ** ** | **(19,599** | **)**       | **(17,200** | )          |
| Total shareholders’ equity                                                                                                    | ** ** | **57,095**  |        | **53,677**  |       |
| ** **                                                                                                                         |       | **$**       | **164,856** |        | $          | **164,276** |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**NATURE’S SUNSHINEPRODUCTS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

***(Amounts in thousands,except per share information)***

** **
| **Year Ended December 31**                                                                               | ** ** | **2009**    | ** **  | **2008**   | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|----------|------------|
| Net Sales Revenue (net of the rebate portion of  volume incentives of $47,505, $50,988, and $49,700, respectively) | ** ** | **$**       | **343,023** |       | $          | 373,234  |       | $ | 360,874 |   |
| Costs and Expenses:                                                                                                     |       |        |        |       |       |     |       |
| Cost of goods sold                                                                                                      | ** ** | **68,803**  |        | 71,874     |       | 70,996   |       |
| Volume incentives                                                                                                       | ** ** | **126,165** |        | 140,074    |       | 138,111  |       |
| Selling, general and administrative                                                                                     | ** ** | **137,288** |        | 155,688    |       | 148,706  |       |
| ** **                                                                                                              |       | **332,256** |        | 367,636    |       | 357,813  |       |
| Operating Income                                                                                                        | ** ** | **10,767**  |        | 5,598      |       | 3,061    |       |
| Other Income (Expense):                                                                                                 |       |        |        |       |       |     |       |
| Interest and other income, net                                                                                          | ** ** | **1,409**   |        | 1,830      |       | 1,409    |       |
| Interest expense                                                                                                        | ** ** | **(124**    | **)**       | (52        | )          | (69      | )          |
| Foreign exchange gains (losses), net                                                                                    | ** ** | **2,273**   | ** **  | (908       | )          | 64       |       |
| ** **                                                                                                              |       | **3,558**   |        | 870        |       | 1,404    |       |
| Income Before Provision for Income Taxes                                                                                | ** ** | **14,325**  |        | 6,468      |       | 4,465    |       |
| Provision for Income Taxes                                                                                              | ** ** | **8,210**   |        | 8,306      |       | 12,702   |       |
| Net Income (Loss)                                                                                                       | ** ** | **$**       | **6,115**   | ** ** | $          | (1,838   | )          | $ | (8,237 | ) |
|                                                                                                                    |       |        |        |       |       |     |       |
| Basic Net Income (Loss) Per Common Share                                                                                | ** ** | **$**       | **0.39**    | ** ** | $          | (0.12    | )          | $ | (0.53 | ) |
| Diluted Net Income (Loss) Per Common Share                                                                              | ** ** | **$**       | **0.39**    | ** ** | $          | (0.12    | )          | $ | (0.53 | ) |
| Basic Common Shares Outstanding                                                                                         | ** ** | **15,510**  |        | 15,510     |       | 15,495   |       |
| Diluted Common Shares Outstanding                                                                                       | ** ** | **15,512**  |        | 15,510     |       | 15,495   |       |

 

Seeaccompanying notes to consolidated financial statements.

 

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**NATURE’S SUNSHINEPRODUCTS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**

**ANDCOMPREHENSIVE LOSS**

***(Amounts in thousands,except per share data)***

 
| ** **                                                             | ** ** | **Common Stock** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** **  | ** ** |
|------------------------------------------------------------------------|------------|-----------------------|------------|--------------|------------|---------------------------------------|------------|-------------|------------|
| ** **                                                             | ** ** | **Shares**            | ** ** | **Value**    | ** ** | **Earnings**                          | ** ** | **Loss**    | ** ** | **Total** | ** ** |
| Balance at January 1, 2007                                        |       | 15,348                |       | $            | 64,795     |                                  | $          | 20,451      |       | $ | (17,060 | ) | $ | 68,186 |   |
| Common stock issued under stock option plan                            |       | 162                   |       | 1,252        |       | —                                |       | —      |       | 1,252 |   |
| Tax benefit related to exercise of stock options                       |       | —                |       | 246          |       | —                                |       | —      |       | 246 |   |
| Share-based compensation expense                                       |       | —                |       | 326          |       | —                                |       | —      |       | 326 |   |
| Cash dividends ($0.20 per share)                                       |       | —                |       | —       |       | (3,102                                | )          | —      |       | (3,102 | ) |
| Components of comprehensive loss:                                      |       |                  |       |         |       |                                  |       |        |       |   |   |
| Foreign currency translation                                           |       | —                |       | —       |       | —                                |       | 1,625       |       |   |   |
| Net unrealized gains on investment securities (net  of tax of $63)     |       | —                |       | —       |       | —                                |       | 96          |       |   |   |
| Net loss                                                               |       | —                |       | —       |       | (8,237                                | )          | —      |       |   |   |
| Total comprehensive loss                                               |       | —                |       | —       |       | —                                |       | —      |       | (6,516 | ) |
| Balance at December 31, 2007                                      |       | 15,510                |       | 66,619       |       | 9,112                                 |       | (15,339     | )          | 60,392 |   |
| Share-based compensation expense                                       |       | —                |       | 86           |       | —                                |       | —      |       | 86 |   |
| Cash dividends ($0.20 per share)                                       |       | —                |       | —       |       | (3,102                                | )          | —      |       | (3,102 | ) |
| Components of comprehensive loss:                                      |       |                  |       |         |       |                                  |       |        |       |   |   |
| Foreign currency translation                                           |       | —                |       | —       |       | —                                |       | (1,757      | )          |   |   |
| Net unrealized losses on investment securities  (net of tax of $66)    |       | —                |       | —       |       | —                                |       | (104        | )          |   |   |
| Net loss                                                               |       | —                |       | —       |       | (1,838                                | )          | —      |       |   |   |
| Total comprehensive loss                                               |       |                  |       |         |       |                                  |       |        |       | (3,699 | ) |
| **Balance at December 31,  2008**                                 | ** ** | **15,510**            | ** ** | **66,705**   | ** ** | **4,172**                             | ** ** | **(17,200** | **)**      | **53,677** | ** ** |
| **Share-based compensation  expense**                                  | ** ** | **—**            | ** ** | **478**      | ** ** | **—**                            | ** ** | **—**  | ** ** | **478** | ** ** |
| **Cash dividends ($0.05 per  share)**                                  | ** ** | **—**            | ** ** | **—**   | ** ** | **(776**                              | **)**      | **—**  | ** ** | **(776** | **)** |
| **Components of comprehensive  income:**                               | ** ** | ** **            | ** ** | ** **   | ** ** | ** **                            | ** ** | ** **  | ** ** | ** ** | ** ** |
| **Foreign currency translation**                                       | ** ** | **—**            | ** ** | **—**   | ** ** | **—**                            | ** ** | **(2,463**  | **)**      | ** ** | ** ** |
| **Net unrealized gains on  investment securities (net of tax of $42)** | ** ** | **—**            | ** ** | **—**   | ** ** | **—**                            | ** ** | **64**      | ** ** | ** ** | ** ** |
| **Net income**                                                         | ** ** | **—**            | ** ** | **—**   | ** ** | **6,115**                             | ** ** | **—**  | ** ** | ** ** | ** ** |
| **Total comprehensive income**                                         | ** ** | ** **            | ** ** | ** **   | ** ** | ** **                            | ** ** | ** **  | ** ** | **3,716** | ** ** |
| **Balance at December 31,  2009**                                 | ** ** | **15,510**            | ** ** | **$**        | **67,183** | ** **                            | **$**      | **9,511**   | ** ** | **$** | **(19,599** | **)** | **$** | **57,095** | ** ** |

 

Seeaccompanying notes to consolidated financial statements.

 

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**NATURE’S SUNSHINEPRODUCTS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

***(Amounts In Thousands)***

 
| **Year Ended December 31**                                                 | ** ** | **2009**    | ** **  | **2008**   | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|----------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |       |        |        |       |       |     |       |
| Net income (loss)                                                                         | ** ** | **$**       | **6,115**   | ** ** | $          | (1,838   | )          | $ | (8,237 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |        |        |       |       |     |       |
| Provision for doubtful accounts                                                           | ** ** | **219**     |        | 990        |       | (208     | )          |
| Depreciation and amortization                                                             | ** ** | **4,501**   |        | 5,437      |       | 6,409    |       |
| Share-based compensation expense                                                          | ** ** | **478**     |        | 86         |       | 326      |       |
| Tax benefit from stock option exercise                                                    | ** ** | **—**  |        | —     |       | (246     | )          |
| Loss (gain) on sale of property and equipment                                             | ** ** | **142**     |        | 102        |       | (18      | )          |
| Deferred income taxes                                                                     | ** ** | **(3,968**  | **)**       | (3,091     | )          | (1,450   | )          |
| Amortization of bond discount                                                             | ** ** | **28**      |        | 38         |       | 48       |       |
| Purchase of trading investment securities                                                 | ** ** | **(267**    | **)**       | (1,769     | )          | (149     | )          |
| Proceeds from sale of trading investment  securities                                      | ** ** | **91**      |        | 1,714      |       | 173      |       |
| Realized and unrealized (gains) losses on  investments                                    | ** ** | **(182**    | **) ** | 428        |       | (171     | )          |
| Amortization of prepaid taxes related to gain on  intercompany sales                      | ** ** | **1,127**   |        | 1,215      |       | 1,471    |       |
| Foreign exchange (gains) losses                                                           | ** ** | **(2,273**  | **)**       | 908        |       | 433      |       |
| Changes in assets and liabilities:                                                        |       |        |        |       |       |     |       |
| Restricted cash                                                                           | ** ** | **(1,495**  | **)**       | —     |       | —   |       |
| Accounts receivable                                                                       | ** ** | **2,424**   | ** **  | (4,168     | )          | (857     | )          |
| Inventories                                                                               | ** ** | **(617**    | **)**       | (4,825     | )          | 3,780    |       |
| Prepaid expenses and other                                                                | ** ** | **2,407**   | ** **  | (225       | )          | (1,826   | )          |
| Other assets                                                                              | ** ** | **(3,756**  | **) ** | (1,632     | )     | (323     | )          |
| Accounts payable                                                                          | ** ** | **(4,339**  | **) ** | 1,840      |       | 358      |       |
| Accrued volume incentives                                                                 | ** ** | **1,429**   |        | 114        |       | 383      |       |
| Accrued current and other long-term liabilities                                           | ** ** | **(10,110** | **) ** | 2,268      |       | 15,480   |       |
| Deferred revenue                                                                          | ** ** | **(654**    | **)**       | (40        | )          | 393      |       |
| Income taxes payable                                                                      | ** ** | **5,193**   | ** **  | (1,564     | )          | (3,017   | )          |
| Liability related to unrecognized tax positions                                           | ** ** | **4,076**   | ** **  | 5,064      |       | —   |       |
| Deferred compensation payable                                                             | ** ** | **358**     | ** **  | (280       | )          | 80       |       |
| Net cash provided by operating activities                                                 | ** ** | **927**     |        | 772        |       | 12,832   |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |       |        |        |       |       |     |       |
| Purchases of property, plant and equipment                                                | ** ** | **(3,211**  | **)**       | (7,504     | )          | (4,456   | )          |
| Proceeds from sale of investments available for  sale                                     | ** ** | **794**     |        | 640        |       | 1,432    |       |
| Proceeds from sale of restricted investments                                              | ** ** | **2,050**   |        | 25         |       | —   |       |
| Purchase of restricted investments                                                        | ** ** | **—**  |        | —     |       | (2,075   | )          |
| Purchase of intangible assets                                                             | ** ** | **—**  |        | —     |       | (1,000   | )          |
| Proceeds from sale of property, plant and  equipment                                      | ** ** | **70**      |        | 80         |       | 398      |       |
| Net cash used in investing activities                                                     | ** ** | **(297**    | **)**       | (6,759     | )          | (5,701   | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |       |        |        |       |       |     |       |
| Payments of cash dividends                                                                | ** ** | **(776**    | **)**       | (3,102     | )          | (3,102   | )          |
| Proceeds from short-term borrowings                                                       |       | **7,900**   |        | —     |       | —   |       |
| Payments on short-term borrowings                                                         |       | **(7,900**  | **) ** | —     |       | —   |       |
| Proceeds from exercise of stock options                                                   |       | **—**  |        | —     |       | 1,252    |       |
| Tax benefits from stock option exercises                                                  |       | **—**  |        | —     |       | 246      |       |
| Net cash used in financing activities                                                     | ** ** | **(776**    | **)**       | (3,102     | )          | (1,604   | )          |
| Effect of exchange rates on cash and cash  equivalents                                    | ** ** | **831**     | ** **  | (1,357     | )          | 711      |       |
| Net increase (decrease) in cash and cash  equivalents                                     | ** ** | **685**     | ** **  | (10,446    | )          | 6,238    |       |
| Cash and cash equivalents at beginning of the year                                        | ** ** | **34,853**  |        | 45,299     |       | 39,061   |       |
| Cash and cash equivalents at end of the year                                              | ** ** | **$**       | **35,538**  |       | $          | 34,853   |       | $ | 45,299 |   |

** **
| **Year Ended December 31**                                | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Supplemental disclosure of cash flow information:                        |       |     |       |     |       |     |       |
| Cash paid for income taxes                                               | ** ** | **$**    | **8,370**  |     | $          | 5,807    |       | $ | 11,140 |   |
| Cash paid for interest                                                   | ** ** | **124**  |       | 60       |       | 85       |       |
| Supplemental disclosure of noncash investing and  financing activities:  |       |     |       |     |       |     |       |
| Purchases of property, plant and equipment  included in accounts payable | ** ** | **$**    | **114**    |     | $          | 487      |       | $ | 78 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**NATURE’S SUNSHINE PRODUCTS, INC.AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

** **

***(Amounts in thousands,except per share information)***

 

**NOTE 1: NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES**

 

**Nature of Operations**

 

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

 

The Company markets its 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, Brazil, South Korea,Singapore, Thailand, Taiwan, Malaysia, Hong Kong, the Philippines, Indonesia,Germany, Austria, the Netherlands, Norway, Sweden, and the Czech Republic. TheCompany also exports its products to several other countries, includingArgentina, Australia, Chile, New Zealand, and Norway.

 

**Principles of Consolidation**

 

The accompanying consolidated financial statementsinclude the accounts and transactions of Nature’s Sunshine Products, Inc.and its subsidiaries. At December 31, 2009, 2008, and 2007, all of theCompany’s subsidiaries were wholly owned.

 

During 2008, the Company determined that it had avariable interest and was the primary beneficiary in a development stageentity. As a result, the Company consolidated the entity in accordance withauthoritative guidance issued by the Financial Accounting Standards Board (“FASB”)related to the consolidation of variable interest entities. This variableinterest is the result of loans provided by the Company to the entity during2008 and early 2009, which were secured by the entity’s assets. The Companyprovided loans to the entity in order to provide them with some of the capitalnecessary to market its products, and to provide the Company with access to newproduct formulations. The Company provided no guarantees on behalf of theentity and had no future obligations to the entity. Its creditors did not haveany recourse against the Company. The Company provided additional loans of $439during the twelve months ended December 31, 2009. During December 2009,the entity ceased operations and filed for bankruptcy protection, and as aresult, the Company deconsolidated the entity. The impact of thedeconsolidation was immaterial to the results of the Company. The related loansof $772 have been fully reserved as of December 31, 2009.

 

Intercompany balances and transactions have beeneliminated in consolidation.

 

**Use of Estimates**

 

The preparation of consolidated financial statementsin accordance with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities, in these financialstatements and accompanying notes. Actual results could differ from theseestimates and those differences could have a material effect on the Company’sfinancial position and results of operations.

 

The significant accounting estimates inherent in thepreparation of the Company’s financial statements include estimates associatedwith its evaluation of impairment of long-lived assets, the determination ofliabilities related to Distributor and Manager incentives, the determination ofincome tax assets and liabilities, certain other non-income tax and value-addedtax contingencies, legal contingencies, share-based compensation, and thevaluation of investments. In addition, significant estimates form the basis forallowances with respect to the collection of accounts receivable, inventoryvaluations and self-insurance liabilities associated with product liability andmedical claims. Various assumptions and other factors enter into thedetermination of these significant estimates. The process of determiningsignificant estimates takes into account historical experience and current andexpected economic conditions.

 

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**Cash and Cash Equivalents**

 

The Company considers allhighly liquid short-term investments with original maturities of three monthsor less to be cash equivalents. Substantially all of the Company’s cashdeposits either exceed the United States federally insured limit or are locatedin countries that do not have government insured accounts or are subject to taxwithholdings when repatriating earnings.

 

As of December 31, 2009 and 2008, the Company hadapproximately $2,005, of which $1,495 was restricted (or $1,000, of which $746is restricted, as of January 1, 2010 due to the devaluation of the bolivarfuerte as described below in the discussion of foreign currency translation),and $3,415, respectively, in cash denominated in Venezuelan bolivar fuertes.Currency restrictions enacted by the government of Venezuela require approvalfrom the government’s currency control organization for the Company’ssubsidiary in Venezuela to obtain U.S. dollars at the official exchange rate topay for imported products or to repatriate dividends back to the Company. Themarket rate, which is substantially lower than the official rate, may be usedto obtain U.S. dollars or other currencies without approval of the government’scurrency control organization. Going forward, the devaluation of the officialrate in January 2010 has reduced the differential between the official andparallel exchange rate and is therefore expected to reduce the incremental costof exchanging currencies through securities transactions in the parallelmarket. However, at this time, we are not able to reasonably estimate thefuture state of exchange controls in Venezuela and the availability of officialforeign exchange rate U.S. dollars. However, the application and approvalprocess has been delayed in recent periods, and the timing and ability toobtain U.S. dollars in the future at the official exchange rate remainsuncertain. Unless the official exchange rate is made more readily available,however, its subsidiary’s operations could be adversely affected as it may needto obtain U.S. dollars at less favorable exchange rates from non-governmentsources.

 

The restriction of $1,495 in cash as of December 31,2009 in Venezuela is the result of the local government seizing control of thebank in which this operating cash was deposited and temporarily freezing itsdeposits.  As a result, the Company hasreclassified these deposits from cash and cash equivalents to restricted cash.While the Company expects these funds to become unrestricted in the nearfuture, at this time it cannot estimate when they will be released or if therewill be any potential loss related to the release of these funds.

 

During 2009 and 2008, the Company’s Venezuelansubsidiary’s net sales revenue represented approximately 3.6 percent and 3.4percent of consolidated net sales revenue, respectively.  Its Venezuelan subsidiary held total assetsof $11,233 and $11,539 (which includes an intercompany receivable denominatedin U.S. dollars of $1,850 and $1,737) and net assets of $524 and $1,561 at December 31,2009 and 2008, respectively.

 

**Accounts Receivable Allowances**

 

Accounts receivable have been reduced by an allowancefor amounts that may be uncollectible in the future. This estimated allowanceis based primarily on the aging category, historical trends and management’sevaluation of the financial condition of the customer. This reserve is adjustedperiodically as information about specific accounts becomes available.

 

**Investment Securities**

 

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

 

For available-for-sale debt securities with unrealizedlosses, the Company performs an analysis to assess whether it intends to sellor whether it would be more likely than not required to sell the securitybefore the expected recovery of the amortized cost basis. Where the Companyintends to sell a security, or may be required to do so, the security’s declinein fair value is deemed to be other-than-temporary and the full amount of theunrealized loss is recorded within earnings as an impairment loss.

 

For all other debt securities that experience adecline in fair value that is determined to be other-than-temporary and notrelated to credit loss, the Company records a loss, net of a tax, inaccumulated other comprehensive income (loss). The credit loss is recordedwithin earnings as an impairment loss. Management judgment is involved inevaluating whether a decline in an investment’s fair value isother-than-temporary.

 

Regardless of the Company’s intent to sell a security,the Company performs additional analysis on all securities with unrealizedlosses to evaluate losses associated with the creditworthiness of the security.Credit losses are identified where we do not expect to receive cash flowssufficient to recover the amortized cost basis of a security.

 

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For equity securities, when assessing whether adecline in fair value below our cost basis is other-than-temporary, the Companyconsiders the fair market value of the security, the length of time and extentto which market value has been less than cost, the financial condition andnear-term prospects of the issuer as well as specific events or circumstancesthat may influence the operations of the issuer, and our intent and ability tohold the investment for a sufficient time in order to enable recovery of ourcost. New information and the passage of time can change these judgments. Wherethe Company has determined that the Company lacks the intent and ability tohold an equity security to its expected recovery, the security’s decline infair value is deemed to be other-than-temporary and is recorded within earningsas an impairment loss.

 

The Company also has certain investment securitiesclassified as trading securities. The Company maintains its trading securitiesportfolio to generate returns that are offset by corresponding changes incertain liabilities related to the Company’s deferred compensation plans (seeNote 10). The trading securities portfolio consists of marketable securities,which are recorded at fair value and are included in long-term investmentsecurities on the consolidated balance sheets because they remain assets of theCompany until they are actually paid out to the participants. These investmentsecurities are not available to the Company to fund its operations as they arerestricted for the payment of the deferred compensation payable.  The Company has established a rabbi trust tofinance obligations under the plan. Both realized and unrealized gains andlosses on trading securities are included in interest and other income.

 

**Restricted Investments**

 

The Company’s restricted investments include auctionrate preferred investments totaling $2,050 with Merrill Lynch with investmentgrades of AAA (original date of purchase) as of December 31, 2008. Auctionrate preferred investments are similar in nature to auction rate securities inthat they are long-term bonds or preferred stocks that act like short-termdebt; however unlike auction rate securities, these investments require atleast 200% collateral by the issuer. Interest rates for these investments resetin Dutch auctions held weekly. These investments were carried at par, which approximatesfair value. The auction process for action rate investments historicallyprovided a liquid market for these investments. However, in the second half of2007, this process began to deteriorate. While the Company’s portfolio was notaffected by the auction rate process in 2007, the investments held by theCompany experienced auction failures during 2008. An unsuccessful auction is anevent when there are fewer securities bid for than are available for sale

 

In determining the fair value of the Company’srestricted investments at December 31, 2008, the Company took intoconsideration fair values determined by the financial institutions, currentcredit ratings of the underlying securities, insurance provisions, discountedcash flow analysis, as deemed appropriate, and its current liquidityposition.  In January 2009, theCompany redeemed these securities at par value.

 

**Fair Value of Financial Instruments**

 

The Company’s financial instruments consist primarilyof cash, cash equivalents, accounts receivable, investments, and accountspayable. Other than investments, which are carried at fair value, the carryingvalues of these financial instruments approximate their fair values.

 

**Inventories**

 

Inventories are stated at the lower-of-cost-or-market,using the first-in, first-out method. The components of inventory cost includeraw materials, labor and overhead. To estimate any necessarylower-of-cost-or-market adjustments, various assumptions are made in regard toexcess or slow-moving inventories, non-conforming inventories, expirationdates, current and future product demand, production planning, and marketconditions.

 

**Property, Plant and Equipment**

 

Property, plant and equipment are recorded at costless accumulated depreciation and amortization. Depreciation is computed usingthe straight-line method over the estimated useful lives of the related assets.Estimated useful lives for buildings range from 20 to 50 years, buildingimprovements range from 7 to 10 years, machinery and equipment range from 2 to10 years, and furniture and fixtures range from 2 to 5 years. Leaseholdimprovements are amortized over the shorter of the lease term or the estimateduseful lives of the related assets. Maintenance and repairs are expensed asincurred, and major improvements are capitalized.

 

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**Intangible Assets**

 

Intangible assets consist of purchased productformulations. Such intangible assets are amortized using the straight-linemethod over the estimated economic lives of the assets of 15 years. Intangibleassets, net of accumulated amortization, totaled $1,421 and $1,538 at December 31,2009 and 2008, respectively.

 

**Impairment of Long-LivedAssets**

 

The Company reviews itslong-lived assets, such as property, plant and equipment and intangible assetsfor impairment when events or changes in circumstances indicate that thecarrying value of an asset may not be recoverable. The Company uses an estimateof future undiscounted net cash flows of the related assets or groups of assetsover their remaining lives in measuring whether the assets are recoverable. Animpairment loss is calculated by determining the difference between thecarrying values and the fair values of these assets. At December 31, 2009and 2008, the Company did not consider any of its long-lived assets to beimpaired.

 

**Incentive Trip Accrual**

 

The Company accrues for expenses for incentive tripsassociated with its direct sales marketing program, which rewards independentDistributors and Managers with paid attendance at its conventions and meetings.Expenses associated with incentive trips are accrued over qualification periodsas they are earned. The Company specifically analyzes incentive trip accrualsbased on historical and current sales trends as well as contractual obligationswhen evaluating the adequacy of the incentive trip accrual. Actual resultscould result in liabilities being more or less than the amounts recorded. TheCompany has accrued convention and meeting costs of $2,903 and $4,499 at December 31,2009 and 2008, respectively, which are included in accrued liabilities in theconsolidated balance sheets.

 

**Short-term Borrowings**

 

During 2009, the Company had short-term borrowingsand repayments of $7,900  from itsinvestment brokerage secured by its available for sale investments in order togenerate additional liquidity from month-to-month based upon its workingcapital needs. The Company has the ability to borrow up to approximately 80percent of the fair value of its municipal obligations within its available forsale investments. These borrowings began in 2009 and were typically repaid inthe month following the initial borrowing.

 

**Foreign Currency Translation**

 

The local currency of the foreign subsidiaries is usedas the functional currency, except for subsidiaries operating in highlyinflationary economies. The financial statements of foreign subsidiaries, wherethe local currency is the functional currency, are translated into U.S. dollarsusing exchange rates in effect at year end for assets and liabilities andaverage exchange rates during each year for the results of operations.Adjustments resulting from translation of financial statements are reflected inaccumulated other comprehensive loss, net of income taxes. Foreign currencytransaction gains and losses are included in other income (expense) in theconsolidated statements of operations.

 

The functional currency in highly inflationaryeconomies is the U.S. dollar and transactions denominated in the local currencyare remeasured as if the functional currency were the U.S. dollar. Theremeasurement of local currencies into U.S. dollars creates translationadjustments, which are included in the consolidated statements ofoperations.  A country is considered tohave a highly inflationary economy if it has a cumulative inflation rate ofapproximately 100 percent or more over a three year period as well as otherqualitative factors including historical inflation rate trends (increasing anddecreasing), the capital intensiveness of the operation, and other pertinenteconomic factors.  There were nocountries considered to have a highly inflationary economy during 2009, 2008,or 2007.

 

As of January 1, 2010, Venezuela has beendesignated as a highly inflationary economy under accounting principlesgenerally accepted in the United States of America (“GAAP”). As a result, beginning January 1,2010, the U.S. dollar will be the functional currency for our subsidiary inVenezuela. Going forward, currency remeasurement adjustments for thissubsidiary’s financial statements and other transactional foreign exchangegains and losses will be reflected in earnings. Through December 31,2009 (prior to being designated as highly inflationary), translationadjustments were reflected in shareholders’ equity as part of othercomprehensive income (loss).

 

On January 8, 2010, the Venezuelan governmentannounced the devaluation of the bolivar fuerte relative to the U.S. dollar.The official exchange rate for imported goods classified as essential, such asfood and medicine, will change from 2.15 to 2.60, while other payments fornon-essential goods will move to an exchange rate of 4.30. The Company believesthat the majority of its products are expected to fall into the essentialclassification and will qualify for the 2.60 rate.   However, its overall results in Venezuelawill be remeasured to the U.S. dollar at approximately 4.30, the rate expectedto be applicable to dividend repatriations.

 

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The Company will need to remeasure its Venezuelansubsidiary’s local balance sheet as of January 1, 2010 to reflect theimpact of the devaluation. However, it expects this impact to be a gain ofapproximately $3,600 to $4,700 due to the negative position of its Venezuelansubsidiary’s net monetary assets. There will also be an ongoing impact relatedto measuring our income statement at the new exchange rates. Its earningsfrom Venezuela will be remeasured to the U.S. dollar in its consolidatedfinancial statements at the 4.30 official rate, as this is the rate at which itexpects to be able to repatriate dividends. Moving from the 2.15 rate to4.30 will reduce future total company reported sales by less than 2 percent ona going basis.

 

**Revenue Recognition**

 

Net sales revenue and related volume incentiveexpenses are recorded when persuasive evidence of an arrangement exists,collectability is reasonably assured, the amount is fixed and determinable, andtitle and risk of loss have passed, generally when the merchandise has beendelivered. The amount of the volume incentive is determined based upon theamount of qualifying purchases in a given month. It is necessary for theCompany to make estimates about the timing of when merchandise has beendelivered.  These estimates are basedupon the Company’s historical experience related to time in transit, and timingof when shipments occurred, and shipping volumes. Amounts received forundelivered merchandise are recorded as deferred revenue. From time to time,the Company’s United States operation extends short-term credit associated withproduct promotions. In addition for certain of the Company’s internationaloperations, the Company offers credit terms consistent with industry standardswithin the country of operation. Payments to Distributors and Managers forsales incentives or rebates are recorded as a reduction of revenue. Paymentsfor sales incentives and rebates are calculated monthly based upon qualifyingsales. Membership fees are deferred and amortized as revenue over the life ofthe membership, which is primarily one year. Prepaid event registration feesare deferred and recognized as revenues when the related event is held.

 

A reserve for product returns is recorded based uponhistorical experience.  The Companyallows Distributors or Managers to return the unused portion of products withinninety days of purchase if they are not satisfied with the product.  In some of our markets, the requirements toreturn product are more restrictive. Sales returns for the years 2009, 2008, and 2007, were $145, $113, and$93, respectively.

 

Amounts billed to customers for shipping and handlingare reported as a component of net sales revenue. Shipping and handlingrevenues of approximately $11,167, $9,924, and $9,453 were reported as netsales revenue for the years ended December 31, 2009, 2008, and 2007,respectively. The corresponding shipping and handling expenses are reported inselling, general and administrative expenses and approximated the amountsreported as net sales revenue.

 

Taxes that have been assessed by governmentalauthorities and that are directly imposed on revenue-producing transactionsbetween the Company and its customers, including sales, use, value-added, andsome excise taxes, are presented on a net basis (excluded from net sales) aspermitted by authoritative U.S. GAAP.

 

**Advertising Costs**

 

Advertising costs areexpensed as incurred. Advertising expense incurred for the years ended December 31,2009, 2008, and 2007 totaled approximately $2,397, $1,728, and $1,547respectively.

 

**Research and Development**

 

All research and development costs are expensed asincurred and classified in selling, general and administrative expense. Totalresearch and development expenses were approximately $2,041, $2,034, and $1,940in 2009, 2008, and 2007, respectively.

 

**Contingencies**

 

We areinvolved in certain legal proceedings. When a loss is considered probable inconnection with litigation or non-income tax contingencies and when the losscan be reasonably estimated with a range, we record our best estimate withinthe range related to the contingency. If there is no best estimate, we recordthe minimum of the range. As additional information becomes available, weassess the potential liability related to the contingency and revise theestimates. Revision in estimates of the potential liabilities could materiallyimpact our results of operations in the period of adjustment. The Company’scontingencies are discussed in further detail in Note 11.

 

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**Income Taxes**

 

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

 

Deferredincome taxes arise from temporary differences between the tax and financialstatement recognition of revenue and expense. In evaluating our ability torecover our deferred tax assets, we consider all available positive andnegative evidence, including scheduled reversals of deferred tax liabilities,projected future taxable income, tax planning strategies and recent financialoperations. In projecting future taxable income, we develop assumptionsincluding the amount of future state, federal and foreign pretax operatingincome, the reversal of temporary differences, and the implementation offeasible and prudent tax planning strategies. These assumptions requiresignificant judgment about the forecasts of future taxable income and areconsistent with the plans and estimates we are using to manage the underlyingbusinesses.

 

Changes in tax laws and rates could also affectrecorded deferred tax assets and liabilities in the future. Management is notaware of any such changes that would have a material effect on the Company’sresults of operations, cash flows or financial position.

 

The calculation of our tax liabilities involvesdealing with uncertainties in the application of complex tax laws andregulations in a multitude of jurisdictions across our global operations.Income tax positions must meet a more-likely-than-not recognition threshold tobe recognized.

 

**Net Income (Loss) PerCommon Share**

 

Basic net income (loss)per common share (“Basic EPS”) excludes dilution and is computed by dividingnet income (loss) by the weighted-average number of common shares outstandingduring the year. Diluted net income (loss) per common share (“Diluted EPS”)reflects the potential dilution that could occur if stock options or othercontracts to issue common stock were exercised or converted into common stock.The computation of Diluted EPS does not assume exercise or conversion ofsecurities that would have an anti-dilutive effect on net loss per common share.

 

Following is areconciliation of the numerator and denominator of Basic EPS to the numeratorand denominator of Diluted EPS for all years:

 
| ** **                         | ** ** | **Net Income (Loss)  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Net Income  (Loss) Per  Share Amount** | ** ** |
|------------------------------------|------------|-----------------------------------------|------------|---------------------------|------------|---------------------------------------------------------|------------|
| Year Ended December 31,  2009 |       |                                    |       |                      |       |                                                    |       |
| Basic EPS                          | ** ** | **$**                                   | **6,115**  | ** **                | **15,510** | ** **                                              | **$**      | **0.39** | ** ** |
| Effect of options                  | ** ** | **—**                              | ** ** | **2**                     | ** ** | **—**                                              | ** ** |
| Diluted EPS                        | ** ** | **$**                                   | **6,115**  | ** **                | **15,512** | ** **                                              | **$**      | **0.39** | ** ** |
|                               |       |                                    |       |                      |       |                                                    |       |
| Year Ended December 31,  2008 |       |                                    |       |                      |       |                                                    |       |
| Basic EPS                          |       | $                                       | (1,838     | )                         | 15,510     |                                                    | $          | (0.12 | ) |
| Effect of options                  |       | —                                  |       | —                    |       | —                                                  |       |
| Diluted EPS                        |       | $                                       | (1,838     | )                         | 15,510     |                                                    | $          | (0.12 | ) |
|                               |       |                                    |       |                      |       |                                                    |       |
| Year Ended December 31,  2007 |       |                                    |       |                      |       |                                                    |       |
| Basic EPS                          |       | $                                       | (8,237     | )                         | 15,495     |                                                    | $          | (0.53 | ) |
| Effect of options                  | ** ** | **—**                              | ** ** | **—**                | ** ** | **—**                                              | ** ** |
| Diluted EPS                        |       | $                                       | (8,237     | )                         | 15,495     |                                                    | $          | (0.53 | ) |

 

For the year ended December 31, 2009, options topurchase a total of 205 shares of common stock were not included in thecomputation of diluted earnings per share because their exercise price wasgreater than the average market price of the common shares and therefore, theeffect would be anti-dilutive. Because of net losses in the years ended December 31,2008 and 2007, outstanding options to purchase 263 and 307 shares of commonstock, respectively, were not included in the computation of diluted not lossper share because the effect on net loss per share would be anti-dilutive.

 

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**Share-Based Compensation**

 

The Company recognizesall share-based payments to employees, including grants of employee stockoptions, to be recognized in the statement of operations based on theirgranted-dated fair values in accordance with authoritative U.S. GAAP. TheCompany records compensation expense, net of an estimated forfeiture rate, overthe vesting period of the stock options based on the fair value of the stockoptions on the date of grant. The Company estimated forfeiture rate is basedupon historical experience.

 

**Comprehensive Income (Loss)**

 

Comprehensive income(loss) includes all changes in shareholders’ equity except those resulting frominvestments by, and distributions to, shareholders. Accordingly, the Company’scomprehensive income (loss) includes net income (loss), net unrealized gains(losses) on investment securities, reclassifications of realized gains, andforeign currency adjustments that arise from the translation of the financialstatements of the Company’s foreign subsidiaries.

 

**Recent AccountingPronouncements**

 

**RecentlyAdopted Accounting Guidance**

 

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

 

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

 

In April 2008, theFASB issued authoritative guidance related to the determination of the usefullife of intangible assets. The guidance states that in developing assumptionsabout renewal or extension options used to determine the useful life of anintangible asset, an entity needs to consider its own historical experienceadjusted for entity-specific factors. In the absence of that experience, anentity shall consider the assumptions that market participants would use aboutrenewal or extension options. This guidance is to be applied to intangibleassets acquired after January 1, 2009. The adoption of this guidance didnot have an impact on the Company’s financial condition, results of operations,or cash flows.

 

In April 2009, theFASB issued new guidance that amends the other-than-temporary impairmentguidance in U.S. GAAP for debt securities to make the guidance more operationaland to improve the presentation and disclosure of other-than-temporaryimpairments of debt and equity securities in the financial statements. Thisguidance does not amend existing recognition and measurement guidance relatedto other-than-temporary impairments of equity securities. The guidance iseffective for interim and annual reporting periods ending after June 15,2009. The adoption of this guidance did not have an impact on the Company’sfinancial condition, results of operations, or cash flows.

 

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

 

In May 2009, the FASB issued new authoritativeguidance on events that occur after the balance sheet date but prior to theissuance of the financial statements. The guidance distinguishes eventsrequiring recognition in the financial statements and those that may requiredisclosure in the financial statements. Furthermore, it requires disclosure ofthe date through which subsequent events were evaluated. This guidance iseffective for interim and annual periods after June 15, 2009. In February 2010,FASB amended this guidance to clarify the date through which subsequent eventsare to be evaluated. The Company adopted this guidance during the quarter endedJune 30, 2009 and the subsequent amendment during the year ended December 31,2009, and has evaluated subsequent events through the date the Company’sconsolidated financial statements were issued.

 

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In June 2009, the FASB Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles,” (“Codification”)was issued. The Codification supersedes all existing accounting standarddocuments and is the single source of authoritative non-governmental U.S. GAAP.All other accounting literature not included in the Codification will beconsidered 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 Consolidated Financial Statements reflect theadoption of the Codification.

 

**RecentAccounting Guidance Not Yet Adopted**

 

In June 2009,the FASB issued an amendment to the accounting and disclosure requirements forthe consolidation of variable interest entities (“VIEs”). The amendmentrequires an enterprise to determine whether its variable interest or interestsgive it a controlling financial interest in a VIE. The primary beneficiary of aVIE is the enterprise that has both the power to direct the activities of theVIE that most significantly impact the entity’s economic performance and hasthe obligation to absorb losses or the right to receive benefits from the entitythat could potentially be significant to the VIE. The amendment requiresongoing reassessments of whether an enterprise is the primary beneficiary of aVIE as well as expanded disclosure requirements for enterprises with aninterest 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 adoptionof this amendment to have a material impact on its financial condition, resultsof operations, or cash flows.

 

In October 2009, the FASB issued amendments tothe accounting and disclosure for revenue recognition. These amendments,effective for fiscal years beginning on or after June 15, 2010 (earlyadoption is permitted), modify the criteria for recognizing revenue in multipleelement arrangements and the scope of what constitutes a non-softwaredeliverable. The Company does not expect the adoption of these amendments tohave a material impact on its financial condition, results of operations, orcash flows.

 

In January 2010, the FASB issued authoritativeguidance that requires new disclosures related to fair value measurements andclarifies existing disclosure requirements about the level of disaggregation,inputs and valuation techniques. Specifically, reporting entities now mustdisclose separately the amounts of significant transfers in and out ofLevel 1 and Level 2 fair value measurements and describe the reasonsfor the transfers. In addition, in the reconciliation for Level 3 fairvalue measurements, a reporting entity should present separately informationabout purchases, sales, issuances and settlements. The guidance clarifies thata reporting entity needs to use judgment in determining the appropriate classesof assets and liabilities for disclosure of fair value measurement, consideringthe level of disaggregated information required by other applicable U.S. GAAPguidance and should also provide disclosures about the valuation techniques andinputs used to measure fair value for each class of assets and liabilities.This guidance will be effective for the Company on January 1, 2010, exceptfor the disclosures about purchases, sales, issuances and settlements in thereconciliation for Level 3 fair value measurements, which will beeffective for the Company on January 1, 2011. The Company does not expectthis guidance to have a material impact on its financial condition, results ofoperations, or cash flows.

 

**NOTE 2: INVENTORIES**

 

The composition ofinventories is as follows:

 
| **As of December 31** | ** ** | **2009**   | ** ** | **2008** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|
| Raw materials                        | ** ** | **$**      | **9,205**  |     | $          | 9,515 |   |
| Work in process                      | ** ** | **675**    |       | 766      |       |
| Finished goods                       | ** ** | **30,743** |       | 29,277   |       |
| ** **                           |       | **$**      | **40,623** |     | $          | 39,558 |   |

 

**NOTE 3:PROPERTY, PLANT AND EQUIPMENT**

 

The composition of property, plant and equipment is asfollows:

 
| **As of December 31**      | ** ** | **2009**    | ** ** | **2008** | ** ** |
|-------------------------------------------|------------|-------------|------------|----------|------------|
| Land and improvements                     | ** ** | **$**       | **3,784**  |     | $          | 3,784 |   |
| Buildings and improvements                | ** ** | **32,168**  |       | 32,036   |       |
| Machinery and equipment                   | ** ** | **17,238**  |       | 16,906   |       |
| Furniture and fixtures                    | ** ** | **24,103**  |       | 24,959   |       |
| ** **                                |       | **77,293**  |       | 77,685   |       |
| Accumulated depreciation and amortization | ** ** | **(48,536** | **)**      | (47,461  | )          |
| ** **                                |       | **$**       | **28,757** |     | $          | 30,224 |   |

 

Depreciation expense was $4,384, $5,319, and $6,310for the years ended December 31, 2009, 2008, and 2007, respectively.

 

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**NOTE 4: INTANGIBLE ASSETS**

 

The Company acquiredcertain product formulations during the years ended December 31, 2007 and2006. At December 31, 2009 and 2008, the product formulations had a grosscarrying amount of $1,763 and $1,763, accumulated amortization of $342 and$225, and a net amount of $1,421 and $1,538, respectively. The useful life ofthe product formulations is estimated to be 15 years.

 

Amortization expense forintangible assets for the years ended December 31, 2009, 2008 and 2007 was$117, $118 and $99, respectively. Estimated amortization expense for the fivesucceeding fiscal years and thereafter is as follows:

 
| **Year Ending December 31:** | ** ** | **Estimated  Amortization  Expense** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|
| 2010                                        |       | $                                    | 118        |   |
| 2011                                        |       | 118                                  |       |
| 2012                                        |       | 118                                  |       |
| 2013                                        |       | 118                                  |       |
| 2014                                        |       | 118                                  |       |
| Thereafter                                  |       | 831                                  |       |
| Total                                       |       | $                                    | 1,421      |   |

 

**NOTE 5: INVESTMENT SECURITIES**

 

The amortized cost andestimated fair values of available-for-sale securities by balance sheetclassification are as follows:

 
| **As of December 31,  2009** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|---------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| Municipal obligations                       |       | $                   | 2,030      |                         | $          | 107                           |       | $               | —     |   | $ | 2,137 |   |
| U.S. Government Securities  Funds           |       | 698                 |       | 13                           |       | —                        |       | 711             |       |
| Equity securities                           |       | 233                 |       | 90                           |       | (4                            | )          | 319             |       |
| Total short-term investment  securities     |       | $                   | 2,961      |                         | $          | 210                           |       | $               | (4         | ) | $ | 3,167 |   |

 
| **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 |   |

 

The fair values of contractual maturities of municipalobligations at December 31, 2009, are as follows:

 
| Mature after one year through five years |   | $   | 2,029  |   |
|------------------------------------------|--------|-----|--------|--------|
| Mature after five years                  |   | 108 |   |
| Total                                    |   | $   | 2,137  |   |

 

During 2009, 2008, and 2007, the proceeds from thesales of available-for-sale securities were $794, $640, and $1,432,respectively. There were no gross realized gains (losses) on sales ofavailable-for-sale securities (net of tax) for the years ended December 31,2009, 2008, and 2007, respectively.

 

The Company’s trading securities portfolio totaled$1,752 and $1,394 at December 31, 2009 and 2008, respectively, and generatedgains of $182, losses of $345, and gains of $171 for the years ended December 31,2009, 2008 and 2007, respectively.

 

As of December 31, 2009 and 2008, the Company hadunrealized losses of $4 and $9, respectively, in its municipal obligations andequity securities investments. These losses are due to the interest ratesensitivity of the municipal obligations and the performance of the overallstock market for the equity securities.

 

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**NOTE 6: ACCRUED LIABILITIES**

 

The composition ofaccrued liabilities is as follows:

 
| **As of December 31**                | ** ** | **2009**  | ** ** | **2008** | ** ** |
|-----------------------------------------------------|------------|-----------|------------|----------|------------|
| Foreign non-income tax  contingencies (See Note 11) | ** ** | **$**     | **6,949**  |     | $          | 8,141 |   |
| Sales, use, and property  tax (See Note 11)         | ** ** | **8,902** |       | 11,447   |       |
| Salaries and employee  benefits                     | ** ** | **8,807** |       | 9,590    |       |
| Convention and meeting  costs                       | ** ** | **2,903** |       | 4,499    |       |
| Other                                               | ** ** | **6,582** |       | 11,798   |       |
| Total                                               | ** ** | **$**     | **34,143** |     | $          | 45,475 |   |

 

**NOTE 7: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)**

 

The components ofaccumulated other comprehensive income (loss), net of tax, are as follows:

 
| ** **                            | ** ** | **Foreign Currency  Translation  Adjustments** | ** **  | **Net Unrealized  Gains (Losses) On  Available-For-Sale  Securities** | ** ** | **Total  Accumulated Other  Comprehensive Loss** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|-------------|--------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Balance as of January 1,  2007   |       | $                                                   | (17,154     | )                                                                                    | $          | 94                                                         |       | $ | (17,060 | ) |
| Activity, net of tax                  |       | 1,625                                               |        | 96                                                                                   |       | 1,721                                                      |       |
| Balance as of December 31,  2007 |       | (15,529                                             | )           | 190                                                                                  |       | (15,339                                                    | )          |
| Activity, net of tax                  |       | (1,757                                              | )      | **(104**                                                                             | **)**      | **(1,861**                                                 | **)**      |
| Balance as of December 31,  2008 |       | **(17,286**                                         | )           | **86**                                                                               |       | **(17,200**                                                | )          |
| Activity, net of tax                  | ** ** | **(2,463**                                          | **)**       | **64**                                                                               | ** ** | **(2,399**                                                 | **)**      |
| Balance as of December 31,  2009 | ** ** | **$**                                               | **(19,749** | **)**                                                                                | **$**      | **150**                                                    | ** ** | **$** | **(19,599** | **)** |

 

**NOTE 8: INCOME TAXES**

 

Income from operations before provision (benefit)for income taxes are taxed under the following jurisdictions:

 
| **Year Ended December 31** | ** ** | **2009**  | ** ** | **2008**   | ** ** | **2007** | ** ** |
|-------------------------------------------|------------|-----------|------------|------------|------------|----------|------------|
| Domestic                                  | ** ** | **$**     | **7,476**  | ** ** | $          | 1,067    |       | $ | 265 |   |
| Foreign                                   | ** ** | **6,849** | ** ** | 5,401      |       | 4,200    |       |
| Total                                     | ** ** | **$**     | **14,325** |       | $          | 6,468    |       | $ | 4,465 |   |

 

Components of the provision (benefit) for incometaxes for each of the three years in the period ended December 31, 2009are as follows:

 
| **Year Ended December 31** | ** ** | **2009**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Current:                                  |       |       |       |     |       |     |       |
| Federal                                   | ** ** | **$**      | **6,812**  |     | $          | 3,437    |       | $ | 5,161 |   |
| State                                     | ** ** | **599**    |       | 454      |       | 1,196    |       |
| Foreign                                   | ** ** | **4,767**  |       | 7,506    |       | 7,795    |       |
| Subtotal                                  | ** ** | **12,178** |       | 11,397   |       | 14,152   |       |
| Deferred:                                 |       |       |       |     |       |     |       |
| Federal                                   | ** ** | **(4,593** | **)**      | (1,904   | )          | (1,324   | )          |
| State                                     | ** ** | **277**    | ** ** | (463     | )          | (527     | )          |
| Foreign                                   | ** ** | **348**    | ** ** | (724     | )          | 401      |       |
| Subtotal                                  | ** ** | **(3,968** | **)**      | (3,091   | )          | (1,450   | )          |
| Total provision for income taxes          | ** ** | **$**      | **8,210**  |     | $          | 8,306    |       | $ | 12,702 |   |

 

Theincome tax benefits associated with employee exercises of options under thenonqualified stock option plan decreased the income taxes payable by $0, $0,and $246 in 2009, 2008, and 2007, respectively. These benefits were recorded asan increase to common stock.

 

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Theprovision for income taxes, as a percentage of income before provision forincome taxes, differs from the statutory U.S. federal income tax rate due tothe following:

 
| **Year Ended December 31**                   | ** ** | **2009**  | ** **  | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------|------------|-----------|-------------|----------|------------|----------|------------|
| Statutory U.S. federal  income tax rate                     | ** ** | **35.0**  | **%**       | 35.0     | %          | 35.0     | %          |
| State income taxes, net of  U.S. federal income tax benefit | ** ** | **4.0**   | ** **  | (0.1     | )          | 10.6     |       |
| U.S. tax impact of foreign  operations                      | ** ** | **(13.7** | **)**       | (33.6    | )          | 17.1     |       |
| Valuation allowance change                                  | ** ** | **8.8**   | ** **  | 68.2     |       | 61.1     |       |
| Tax contingencies                                           | ** ** | **(4.5**  | **)**       | (1.0     | )          | 16.0     |       |
| Foreign exchange gains  (losses)                            |       | **2.0**   | ** **  | (16.8    | )          | 17.4     |       |
| Gain on sale of  intercompany assets                        |       | **9.8**   | ** **  | 17.4     |       | 25.2     |       |
| Charitable contributions                                    | ** ** | **(0.1**  | **)**       | (0.5     | )          | (0.9     | )          |
| Foreign tax rate  differential                              | ** ** | **14.0**  | ** **  | 1.7      |       | 5.6      |       |
| Unrecognized tax benefits                                   |       | **(1.4**  | **) ** | 59.7     |       | 104.4    |       |
| Meals and entertainment                                     | ** ** | **0.5**   | ** **  | 1.3      |       | 2.4      |       |
| Tax adjustment for  inflation                               |       | **(0.1**  | **)**       | (1.1     | )          | (7.1     | )          |
| Domestic manufacturing  deduction                           | ** ** | **(1.2**  | **)**       | (2.3     | )          | (3.7     | )          |
| Nondeductible foreign  expenses                             |       | **6.4**   | ** **  | 2.7      |       | 6.2      |       |
| Other                                                       | ** ** | **(2.2**  | **)**       | (2.2     | )          | (4.8     | )          |
| Effective income tax rate                                   | ** ** | **57.3**  | **%**       | 128.4    | %          | 284.5    | %          |

 

Pretaxearnings of a foreign subsidiary or affiliate are subject to U.S. taxation wheneffectively repatriated. The Company does not intend to reinvest undistributedearnings indefinitely in the Company’s foreign subsidiaries.

 

Thesignificant components of the deferred tax assets (liabilities) are as follows:

 
| **As of December 31** | ** ** | **2009**    | ** ** | **2008**   | ** ** |
|--------------------------------------|------------|-------------|------------|------------|------------|
| Inventory                            | ** ** | **$**       | **1,862**  | ** ** | $          | 2,314 |   |
| Accrued liabilities                  | ** ** | **3,928**   | ** ** | 4,086      | ** ** |
| Impaired investments                 | ** ** | **783**     | ** ** | 549        | ** ** |
| Deferred compensation                | ** ** | **1,071**   | ** ** | 786        | ** ** |
| Amortization of intangibles          | ** ** | **7,078**   | ** ** | 1,384      | ** ** |
| Bad debts                            | ** ** | **480**     | ** ** | 510        | ** ** |
| Net operating losses                 | ** ** | **9,765**   | ** ** | 6,813      | ** ** |
| Capital losses                       | ** ** | **708**     | ** ** | 708        | ** ** |
| Foreign tax and withholding credits  | ** ** | **4,447**   | ** ** | 3,909      | ** ** |
| Non-income tax accruals              | ** ** | **2,493**   | ** ** | 3,791      | ** ** |
| Health insurance accruals            | ** ** | **339**     | ** ** | 1,182      | ** ** |
| APB 23— outside basis           | ** ** | **2,695**   | ** ** | 2,073      | ** ** |
| Accelerated depreciation             | ** ** | —      | ** ** | 131        | ** ** |
| Other deferred tax assets            | ** ** | **1,887**   | ** ** | 2,061      | ** ** |
| Valuation allowance                  | ** ** | **(18,662** | **)**      | (13,986    | )          |
| Total deferred tax assets            | ** ** | **18,874**  | ** ** | 16,311     |       |
| Other deferred tax liabilities       | ** ** | **(578**    | **)**      | (1,438     | )          |
| Total deferred tax liabilities       | ** ** | **(578**    | **)**      | (1,438     | )          |
| Total deferred taxes, net            | ** ** | **$**       | **18,296** | ** ** | $          | 14,873 |   |

 

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Thecomponents of deferred tax assets (liabilities), net are as follows:

 
| **Year Ended December 31** | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| Net current deferred tax  assets          | ** ** | **$**      | **6,646**  | ** ** | $          | 9,080 |   |
| Net non-current deferred  tax assets      | ** ** | **12,228** | ** ** | 6,412      |       |
| Total net deferred tax  assets            | ** ** | **18,874** | ** ** | 15,492     |       |
|                                      |       |       | ** ** |       |       |
| Net current deferred tax  liabilities     | ** ** | **(62**    | **)**      | (286       | )          |
| Net non-current deferred  tax liabilities | ** ** | **(516**   | **)**      | (333       | )          |
| Total net deferred tax  liabilities       | ** ** | **(578**   | **)**      | (619       | )          |
|                                      |       |       | ** ** |       |       |
| Total deferred tax assets,  net           | ** ** | **$**      | **18,296** | ** ** | $          | 14,873 |   |

 

Net current deferred tax liabilities are included inaccrued liabilities and net non-current deferred tax liabilities are includedin other liabilities in the consolidated balance sheets.

 

Management has provided a valuation allowance of$18,662 and $13,986 as of December 31, 2009 and 2008, respectively, forcertain deferred tax assets, including foreign net operating losses and foreigntax credits, for which management cannot conclude it is more likely than notthat they will be realized. The Company reviewed its tax positions andincreased its valuation allowance by approximately $4,676, $2,696 and $3,468for 2009, 2008 and 2007, respectively.

 

At December 31, 2009, foreign subsidiaries hadunused operating loss carryovers of approximately $9,765. The net operatinglosses will expire at various dates from 2010 through 2012. For financialreporting purposes, the release of these valuation allowances would reduceincome tax expenses. At December 31, 2009, the Company had approximately$4,427 of foreign tax credits which begin to expire at various times startingin 2012.

 

The Company is subject to regular audits by federal,state and foreign tax authorities. These audits may result in additional taxliabilities. The Company believes it has appropriately provided for incometaxes for all years. Several factors drive the calculation of its tax reserves.Some of these factors include: (i) the expiration of various statutes oflimitations; (ii) changes in tax law and regulations; (iii) theissuance of tax rulings; and (iv) settlements with tax authorities.Changes in any of these factors may result in adjustments to the Company’sreserves, which would impact its reported financial results.

 

The Company’s U.S. federal income tax returns for2003 through 2009 are open to examination for federal tax purposes. The Companyhas several foreign tax jurisdictions which have open tax years from 2000through 2009. The Internal Revenue Service “IRS” is currently conducting anaudit of the Company’s U.S. federal income tax returns for the 2003 through2008 tax years.

 

InOctober 2009, the IRS issued an examination report formally proposingadjustments with respect to the 2003 through 2005 taxable years, whichprimarily relate to the prices that were charged in intragroup transfers ofproperty and the disallowance of related deductions. The Company has challengedthe IRS proposals and the matter is currently before the Office of Appeals ofthe Internal Revenue Service.  Management believes that the Company hasappropriately reserved for these matters at an amount which it believes willultimately be due upon resolution of the administrative proceedings. TheCompany is currently unable to determine the outcome of these discussions andtheir related impact, if any, on the Company’s financial condition, results ofoperations, or cash flows.

 

The Brazilian tax authorities are currently auditingthe 2001 income tax return of the Company’s Brazilian subsidiary.  The tax authorities in Venezuela arecurrently auditing the 2005 through 2007 income tax returns of the Company’sVenezuelan subsidiary. The Company is currently unable to estimate the impact,if any, of these income tax examinations in Brazil and Venezuela.

 

The total outstanding balance for liabilitiesrelated to unrecognized tax benefits at December 31, 2009 and 2008 was$19,643 and $19,675, respectively, all of which would favorably impact theeffective tax rate if recognized. Included in these amounts is approximately $6,624 and $5,558,respectively, of interest and penalties. The Company recorded approximately $1,066 and $1,284 in interest andpenalties for the years ended December 31, 2009 and 2008,respectively.  The Company accounts forinterest expense and penalties for unrecognized tax benefits as part of itsincome tax provision.

 

Duringthe years ended December 31, 2009, 2008 and 2007, the Company addedapproximately $12,769, $6,892 and $4,728, respectively, to its liability forunrecognized tax benefits. Included in these amounts are approximately $2,047,$2,690 and $1,773 for the years ended December 31, 2009, 2008 and 2007,respectively, related to interest expense and penalties. In addition, theCompany recorded a benefit related to the lapse of applicable statute oflimitations of approximately $2,261, $3,030 and $64, for the years ended December 31,2009, 2008 and 2007, respectively, all of which favorably impacted theCompany’s effective tax rate, as well as settlements with taxing authorities of$5,817, $0 and $0, for the years ended December 31, 2009, 2008 and 2007,respectively. Of our total liability for unrecognized tax benefits, approximately $19,643would favorably impact the effective tax rate if recognized.

 

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A reconciliation of the beginning and ending amountof liabilities associated with uncertain tax benefits, excluding interest andpenalties, is as follows for the years:

 
| **Year Ended December 31**  | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                       |       |     |       |     |       |     |       |
| Unrecognized tax benefits, opening balance |       | $        | 25,394     |     | $          | 21,614   |       | $ | 13,030 |   |
| Tax positions taken in a prior period      |       |     |       |     |       |     |       |
| Gross increases                            |       | 5,649    |       | 937      |       | —   |       |
| Gross decreases                            |       | (775     | )          | (238     | )          | —   |       |
| Tax positions taken in the current period  |       |     |       |     |       |     |       |
| Gross increases                            |       | 5,073    |       | 4,712    |       | 8,592    |       |
| Gross decreases                            |       | —   |       | —   |       | —   |       |
| Settlements with taxing authorities        |       | $        | (5,817     | )   | —     |     | —     |   |
| Lapse of applicable statute of limitations |       | $        | (1,273     | )        | (1,631     | )        | (8         | ) |
| Currency translation adjustments           |       | 153      |       | —   |       | —   |       |
| Unrecognized tax benefits, ending balance  |       | $        | 28,404     |     | $          | 25,394   |       | $ | 21,614 |   |

 

The tabular roll forward ending balances do notinclude interest expense and penalties related to unrecognized tax benefits andthe impact of competent authority and royalty benefit positions. At December 31,2009 and 2008, other assets included $15,385 and $11,277, respectively, ofamounts related to competent authority and royalty benefit positions where theunrecognized tax liability and other assets are presented on a gross basis inthe consolidated balance sheets as there is no right of offset between theCompany and other tax jurisdictions.

 

The Company anticipates that unrecognized taxbenefits will increase approximately $2,000 to $3,000 within the next twelvemonths due to additional transactions related to commissions and transferpricing.

 

The Company believes that it is reasonably possiblethat unrecognized tax benefits will decrease approximately $3,500 to $4,500within the next twelve months due to the close of audits or the expiration ofstatutes of limitations in various foreign jurisdictions.

 

Although the Company believes its estimates arereasonable, the Company can make no assurance that the final tax outcome ofthese matters will not be different from that which it has reflected in itshistorical income tax provisions and accruals. Such difference could have amaterial impact on the Company’s income tax provision and operating results inthe period in which the Company makes such determination.

 

**NOTE 9:  CAPITAL TRANSACTIONS**

 

**Dividends**

 

TheCompany paid cash dividends totaling $776, $3,102 and $3,102, for the yearsended December 31, 2009, 2008, and 2007, respectively.  During the second quarter of 2009, theCompany suspended payment of its quarterly cash dividend.

 

**Share-BasedCompensation**

 

During the year ended December 31, 2009, theCompany’s shareholders adopted and approved the Nature’s Sunshine Products, Inc.2009 Stock Incentive Plan (the “2009 Incentive Plan”).  The 2009 Incentive Plan provides for thegrant of incentive stock options, non-statutory stock options, stockappreciation rights, restricted stock, restricted stock units, dividendequivalent rights, performance awards, stock awards and other stock-basedawards (collectively “Awards”).  TheCompany’s Compensation Committee of the Board of Directors has authority anddiscretion to determine the type of Award as well as the amount, terms andconditions of each Award under the 2009 Incentive Plan, subject to thelimitations of the 2009 Incentive Plan. A total of 750 shares of the Company’scommon stock were authorized for the granting of awards under the 2009Incentive Plan. The numbers of shares available for Awards, as well as theterms of outstanding Awards, are subject to adjustment as provided in the 2009Incentive Plan for stock splits, stock dividends, recapitalizations and othersimilar events.

 

TheCompany also maintained a stock option plan, which was approved by shareholdersin 1995 and expired in 2005 (“the 1995 Stock Plan”). The 1995 Stock Planprovided for the granting or awarding of certain nonqualified stock options toofficers, directors and other employees. The term, not to exceed 10 years, andthe vesting and exercise period of each stock option awarded under the 1995Stock Plan were determined by the Company’s Board of Directors. All grantsunder the 1995 Stock Plan were made at

 

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the quoted fair market value of the stock atthe date of grant.

 

Stock option activity for 2009, 2008, and 2007consisted of the following:

 
| ** **                                    | ** ** | **Number of  Shares** | ** ** | **Weighted Average Exercise  Price Per Share** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|--------------------------------------------------------------------|------------|
| Options outstanding at January 1, 2007   |       | 432                        |       | $                                                                  | 10.13      |   |
| Granted                                       |       | 140                        |       | 11.85                                                              |       |
| Forfeited or canceled                         |       | (102                       | )          | 10.74                                                              |       |
| Exercised                                     |       | (163                       | )          | 7.69                                                               |       |
| Options outstanding at December 31, 2007 |       | 307                        |       | 12.01                                                              |       |
| Granted                                       |       | —                     |       | —                                                             |       |
| Forfeited or canceled                         |       | (44                        | )          | 13.44                                                              |       |
| Exercised                                     |       | —                     |       | —                                                             |       |
| Options outstanding at December 31, 2008 |       | 263                        |       | 11.77                                                              |       |
| Granted                                       |       | 250                        |       | 5.35                                                               |       |
| Forfeited or canceled                         |       | (58                        | )          | 11.77                                                              |       |
| Exercised                                     |       | —                     |       | —                                                             |       |
| Options outstanding at December 31, 2009 |       | 455                        |       | $                                                                  | 8.25       |   |

 

Theaggregate intrinsic values on the dates of exercise of options exercised duringthe years ended December 31, 2007 was $623. Intrinsic value is defined asthe difference between the current market value of the underlying common stockand the grant price for options with exercise prices less than the marketvalues on such dates.

 

Duringthe year ended December 31, 2009, the Company issued options to purchase250 shares of common stock under the 2009 Incentive Plan, of which 125 wereawarded to the new directors on the Board of Directors, while the remainingoptions were issued to the Company’s executive officers and otheremployees.  These options were issuedwith a weighted-average grant date fair value of $3.68 per share.  The options issued to the new members of theBoard of Directors vested upon issuance and have an option termination date often years from the option grant date, while the remaining options granted havea vesting period of three years from the option grant date, and an option terminationdate of ten years from the option grant date.

 

Duringthe year ended December 31, 2007, the Company issued nonqualified stockoptions to purchase 140 shares of common stock outside any stock option planwith a weighted-average grant date fair value of $3.85 per share, a vestingperiod of one year from the option grant date, and an option termination dateof six years from the option grant date.

 

Thefair value of each option grant was estimated on the date of the grant usingthe Black-Scholes option-pricing model with the following weighted-averageassumptions for the years ended December 31, 2009 and 2007:

 
| ** **                                        | ** ** | **2009** | ** ** | **2007** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Weighted average grant  date fair value of grants |       | $        | 3.68       |     | $          | 3.85 |   |
| Expected life (in years)                          |       | 3.5      |       | 3.5      |       |
| Risk-free interest rate                           |       | 1.4      |       | 4.5      |       |
| Expected volatility                               |       | 40.50    |       | 42.88    |       |
| Dividend yield                                    |       | 0.0      |       | 1.76     |       |
|                                                   |            |          |            |          |            |  |  |

 

Expectedoption lives and volatilities are based on historical data of the Company. Therisk free interest rate is calculated as the average U.S. Treasury bill ratethat corresponds with the option life.

 

Share-basedcompensation expense from qualified stock options for the year ended December 31,2009 was $478, and the related tax benefit was approximately $191. Share-basedcompensation expense from nonqualified stock options for the years ended December 31,2008 and 2007 was approximately $86 and $326, and the related tax benefit wasapproximately $33 and $124, respectively. As of December 31, 2009 and2008, the unrecognized share-based compensation cost related to grants describedabove was $441 and $0, respectively.

 

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Thefollowing table summarizes information about options outstanding andexercisable at December 31, 2009.

 
| ** **                                                | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                        | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------|------------|
| **Range of Option  Prices Per Share** | ** ** | **Options  Outstanding**     | ** ** | **Weighted-Avg.  Remaining  Contractual Life** | ** ** | **Weighted-Avg.  Exercise Price  Per Share** | ** ** | **Options  Exercisable** | ** ** | **Weighted-  Avg. Exercise  Price Per  Share** | ** ** |
| $5.35 to $9.99                                            |       | 276                          |       | 9.1                                                 |       | $ | 5.64 |   | 151 |   | $ | 5.88 |   |
| $10.00 to $11.99                                          |       | 155                          |       | 3.1                                                 |       | 11.74 |   | 155 |   | 11.74 |   |
| $12.00 to $19.71                                          |       | 24                           |       | 0.8                                                 |       | 15.53 |   | 24 |   | 15.53 |   |
|                                                      |       | 455                          |       | 6.6                                                 |       | $ | 8.25 |   | 330 |   | $ | 9.34 |   |

 

The aggregate intrinsic value of the outstandingoptions to purchase 455 shares of common stock, the exercisable options topurchase 330 shares of common stock and the options to purchase 106 shares ofcommon stock expected to vest at December 31, 2009 was $804, $406 and$338, respectively.  The aggregateintrinsic value of the options outstanding and exercisable at December 31,2008 had no value as all options outstanding and exercisable had an exerciseprice greater than the fair value of the underlying common stock.  As of December 31, 2008, there were nounvested options outstanding. As of December 31, 2009, there were 500shares available for the issuance of Awards under the 2009 Incentive Plan.

 

**NOTE 10:  EMPLOYEE BENEFIT PLANS**

 

**Deferred Compensation Plans**

 

TheCompany sponsors a qualified deferred compensation plan which qualifies under Section 401(k) ofthe Internal Revenue Code. The Company makes matching contributions of 100percent of employee contributions up to a maximum of five percent of theemployee’s compensation. The Company’s contributions to the plan vest after aperiod of three years. During 2009, 2008, and 2007, the Company contributed tothe plan approximately $1,318, $1,142, and $1,087, respectively.

 

The Company provides a nonqualified deferredcompensation plan for its officers and certain key employees. Under this plan,participants may defer up to 100 percent of their annual salary and bonus.Although participants direct the investment of these funds, they are classifiedas trading securities and are included in long-term investment securities onthe consolidated balance sheets because they remain assets of the Company untilthey are actually paid out to the participants. The Company has established atrust to finance obligations under the plan. At the end of each year and atother times provided under the plan, the Company adjusts its obligation to aparticipant by the investment return or loss on the funds selected by theparticipant under rules established in the plan. Upon separation ofemployment of the participant with the Company, the obligation owed to theparticipant under the plan will be paid as a lump sum or over a period ofeither three or five years (and will continue to be adjusted by the applicableinvestment return or loss during the period of pay-out). The Company haddeferred compensation plan assets of approximately $1,752 and $1,394 as of December 31,2009 and December 31, 2008, respectively. The change in the liabilityassociated with the deferred compensation plan is recorded in the deferred compensationpayable.

 

**Management and Employee BonusPlan**

 

The Company has adiscretionary bonus plan that provides for participants to receive paymentsbased upon the achievement of specified annual increases in net sales revenueand operating income, as well as individual objectives. The expense related tothe bonus plan was approximately $2,774, $3,487, and $3,580 for the years endedDecember 31, 2009, 2008, and 2007, respectively. These amounts wereaccrued as liabilities in the respective year-end consolidated balance sheets.All United States employees as well as key international employees participatein the bonus plan.

 

**NOTE 11:  COMMITMENTS AND CONTINGENCIES**

 

**ContractualObligations**

 

TheCompany leases certain facilities and equipment used in its operations andaccounts for leases with escalating payments using the straight-line method.The Company incurred expenses of approximately $5,948, $6,103, and $5,358 inconnection with operating leases during 2009, 2008, and 2007, respectively. Theapproximate aggregate commitments under non-cancelable operating leases ineffect at December 31, 2009 were as follows:

 

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| **Year Ending December 31** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2010                                       |       | $          | 4,756      |   |
| 2011                                       |       | 3,611      |       |
| 2012                                       |       | 1,725      |       |
| 2013                                       |       | 814        |       |
| 2014                                       |       | 560        |       |
| Thereafter                                 |       | 281        |       |
|                                       |       | $          | 11,747     |   |

 

TheCompany enters into contracts with suppliers to ensure the availability of bothbotanical and non-botanical raw materials, as well as packing materials, inadvance of its annual requirements. As of December 31, 2009, the Companyhas entered into non-cancelable purchase agreements for $14,061 related tofiscal year 2010 production needs.

 

Asof December 31, 2009, the Company has entered into non-cancelable capitalpurchase commitments for $216 related to upgrades to the Company’s informationsystems.

 

TheCompany has entered into long-term agreements with third-parties in theordinary course of business, in which it has agreed to pay a percentage of netsales in certain regions in which it operates, or royalties on certainproducts. In 2009, 2008 and 2007, the aggregate amounts of these payments were$3,963, $7,748 and $5,373, respectively.

 

**LegalProceedings**

 

TheCompany 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’sbusiness, financial position, results of operations or cash flows as litigationand related matters are subject to inherent uncertainties, and unfavorablerulings could occur. Were an unfavorable outcome to occur, there exists thepossibility of a material adverse impact on the business, financial position,results of operations, or cash flows for the period in which the ruling occursand/or future periods. The Company maintains directors’ and officers’liability, product liability, general liability and excess liability insurancecoverage. However, no assurances can be given that such insurance will continueto be available at an acceptable cost to the Company, that such coverage willbe sufficient to cover one or more large claims, or that the insurers will notsuccessfully disclaim coverage as to a pending or future claim.

 

***Class-Action Litigation***

 

BetweenApril 3, 2006 and June 2, 2006, five separate shareholderclass-action lawsuits were filed against the Company and certain of its presentand former officers and directors in the United States District Court for theDistrict 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, FranzL. Cristiani. The Consolidated Complaint asserts three separate claims onbehalf of purchasers of the Company’s common stock: (1) a claim against Mr. Faggioliand the Company for violation of Section 10(b) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5promulgated thereunder, alleging that Mr. Faggioli made a series of allegedmaterial misrepresentations to the investing public; (2) a claim against Mr. Faggioliand the Company for violation of Section 10(b) and Rule 10b-5,alleging that Mr. Faggioli made a series of misrepresentations to theCompany’s then independent auditor, KPMG, LLP (“KPMG”), for the purpose ofobtaining unqualified or “clean” audit opinions and review opinions from KPMGconcerning certain of the Company’s annual and quarterly financial statements;and (3) a claim against Messrs. Faggioli, Huff and Cristiani forviolation of Section 20(a) of the Exchange Act, alleging that theindividual defendants have “control person” liability for thepreviously-alleged violations by the Company. The Consolidated Complaint seeksan unspecified amount of compensatory damages, together with interest thereon,litigation costs and expenses, including attorneys’ fees and expert fees, andany such other and further relief as may be allowed by law.

 

OnJanuary 5, 2007, the Company and Messrs. Faggioli, Huff and Cristianimoved to dismiss the Consolidated Complaint in its entirety. On May 21,2007, the Court issued its decision denying the motion in large part, butshortening 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 ofaffirmative defenses. On November 1, 2007, the plaintiffs filed theirmotion 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 theCompany’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 recentcase law developments, the Company filed a motion to dismiss the plaintiffs’second cause of action (a Rule 10b-5 claim based on non-publicrepresentations to KPMG).  The plaintiffs opposed this motion.  On September 23,2008, the Court granted the Company’s 

 

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motion and dismissed the plaintiffs’ secondcause of action.

 

OnSeptember 14, 2009, the parties and the Company’s directors’ and officers’liability insurer signed a Stipulation of Settlement (“Stipulation”), which wasfiled with the Court on September 14, 2009.  The Stipulation set forth the complete termsof the parties’ proposed settlement.  Thebasic terms of the settlement were that the Company’s insurer would pay thesettlement class, which is defined as all persons (except for defendants andspecified related persons and entities) who purchased the Company’s commonstock during the period from April 23, 2002 through April 5, 2006,$6,000 in exchange for a dismissal with prejudice of the lawsuit and a releaseof all claims held by members of the settlement class.  As set forth in the Stipulation, the proposedsettlement would not become final until a number of conditions were satisfied,including the Stipulation receiving both preliminary and final approval fromthe Court.  On October 8, 2009, theCourt entered an order (i) granting preliminary approval of theStipulation, (ii) requiring that notice of the proposed settlement and theproposed plan of allocation of the settlement proceeds be mailed to members ofthe settlement class by October 26, 2009, and (iii) setting a February 9,2010 hearing.  At this hearing the Courtconsidered, among other issues, (i) whether the Stipulation should receivefinal approval, (ii) whether the proposed plan of allocation for thesettlement proceeds should be approved, (iii) whether the settlement classcounsel’s application for an award of attorneys’ fees and reimbursement ofcosts and expenses should be approved, and (iv) whether the settlementclass counsel’s application for incentive awards to the settlement classrepresentatives should be approved.  TheCourt’s October 8, 2009 order also set January 19, 2010 as thedeadline by which settlement class members must submit a valid proof of claim,if they wanted to share in the settlement proceeds, or a proper opt-outrequest, if they wanted to be excluded from the settlement class and therebynot be bound by the terms of the Stipulation.

 

OnFebruary 10, 2010, the day after it held the final approval hearing, theCourt formally entered an Order and Final Judgment dated February 9, 2010(“Final Judgment”), which gave final approval to the Stipulation and approvedthe proposed plan of allocation of the settlement proceeds, the application foran award of attorneys’ fees and reimbursement of costs and expenses by thesettlement class counsel, and the application for incentive awards to thesettlement class representatives.  Amongother things, the Final Judgment also included findings by the Court thatnotice of the action and of the proposed settlement had been properly given tothe class members and that no one had opted out of the class or objected to anyof the terms of the Stipulation. Furthermore, the Final Judgment provides that the Company and theindividual defendants are released from all of the Released Claims, as definedby the Stipulation, and that the Consolidated Complaint is dismissed withprejudice.

 

Unlessa party appeals the Final Judgment within 30 days following the entry of theFinal Judgment, which the Company does not anticipate happening given the lackof any objection being filed to the Stipulation, the case will then be formallyconcluded and the Claims Administrator will proceed to distribute thesettlement proceeds in accordance with the Stipulation.

 

***Threatened Derivative Lawsuits***

 

By letter dated October 4,2007, a shareholder of the Company alleged that a number of the current andformer officers and directors of the Company breached their fiduciary duties tothe Company by supposedly engaging in the same alleged wrongdoing that is thesubject of the class-action lawsuit. The shareholder demanded that the Companytake action to recover from the specified officers and directors all damagessustained by the Company as a result of the alleged misconduct, and threatenedto commence a derivative action if the Company failed to act on the shareholder’sdemand within a reasonable period of time.

 

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

 

On May 21, 2008, thesame shareholder filed a summons and complaint in the Fourth Judicial DistrictCourt for the State of Utah seeking an order compelling the Company to producecertain books and records to the shareholder. The Company filed its answer tothe complaint on June 12, 2008, and the shareholder has taken no actionsince then to prosecute the case or otherwise pursue any derivative claim.

 

Although the Company andthe other defendants are vigorously defending against the allegations in thethreatened derivative lawsuit above, management believes that it is notpossible at this time to predict the outcome of this litigation or whether theCompany will incur any liability associated with the litigation, or to estimatethe effect such outcome would have on the financial condition, results ofoperations, or cash flows of the Company.

 

***SEC and DOJ Investigations***

 

On July 31, 2009, the Securities and ExchangeCommission (“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 

 

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Practices Act (“FCPA”) by one of the Company’sforeign subsidiaries in 2000 and 2001. This settlement resolved an SECinvestigation previously disclosed by the Company related to an independentinvestigation conducted by the Company’s Audit Committee.

 

Under the terms of the settlement with the SEC,without admitting or denying the allegations in the Commission’s complaint, theCompany agreed to pay a civil penalty of $600 and to consent to the entry of aninjunction against future violations of the FCPA as well as the antifraud,issuer reporting, books and records, and internal controls provisions of thefederal securities laws. No additional undertakings are required of the Companyunder the terms of the settlement.

 

In addition, Messrs. Faggioli and Huff, withoutadmitting or denying the allegations in the Commission’s complaint, each agreedto pay a civil penalty of $25 and to consent to the entry of injunctionsagainst future violations relating only to the books and records and internalcontrol provisions of the federal securities laws.

 

The SEC’s complaint alleged that, in 2000 and 2001, formeremployees in the Company’s Brazilian subsidiary made undocumented cash paymentsto customs brokers, some of which were later paid to Brazilian customsofficials in order to allow unregistered products to be imported and sold inBrazil.  The complaint further alleged that, in doing so, NSP’s subsidiaryfalsified its books, records and accounts to hide the nature of the paymentsand failed to disclose those payments to Brazilian customs agents in itsfilings with the Commission.  The complaint also alleged that the Company,during the time period in question, failed to implement an adequate system ofinternal controls to ensure proper reporting of the alleged payments.  Nocurrent officers, directors, or employees of the Company are alleged to haveparticipated 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 executiveofficer), and Mr. Huff, the Company’s then chief financial officer, ascontrol persons, failed to adequately supervise the Company’s management andother personnel who were directly responsible for the Company’s books andrecords and internal controls related to the registration of product in oneforeign subsidiary. As part of the settlement, the Company and the individualparties agreed to neither admit nor deny the allegations in the complaint.

 

The Company believes that all governmentinvestigations relating to potential FCPA violations by the Company or relatedpersons have been resolved. The Company anticipates no additional action by theDepartment of Justice in relation to these events.

 

***SEC Section 12(j) Proceeding***

 

On July 12,2007, the Company announced that the SEC had instituted administrativeproceedings pursuant to Section 12 (j) of the Exchange Act to suspendor revoke the registration of its common stock under Section 12 of theExchange Act. On November 8, 2007, an Administrative Law Judge in theadministrative proceeding issued an Initial Decision to revoke the registrationof the Company’s common stock because of its failure to file required periodicreports. Shortly thereafter, the Company filed a petition for review with theSEC. On December 5, 2007, the SEC granted the Company’s petition forreview. 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 theregistration of the Company’s common stock. On February 12, 2009, theCompany filed a registration statement on Form 10 to reregister its commonstock under the Exchange Act. The Company’s registration statement becameeffective 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 registrationstatement on Form 10. On October 12, 2009, the Company began tradingits common stock on the NASDAQ Capital Market under the symbol “NATR.”

 

***Prescott Matter***

 

InApril 2009, Prescott Group Aggressive Small Cap Master Fund, G.P. (“Prescott”)filed, but did not serve, a complaint in the Fourth Judicial District Court forUtah County, Utah, (*Prescott Group AggressiveSmall Cap Master Fund, G.P. v. Nature’s Sunshine Products, Inc, Civil No. 090401518)*.  Prescott’s filed complaint requested that thecourt compel the Company to hold an annual meeting of the Company’sshareholders.  The complaint did notrequest that the court award monetary damages other than the payment ofattorneys’ fees.  On May 22, 2009,the Company and Kristine F. Hughes, Eugene L. Hughes and Pauline Hughes Francisin their capacity as shareholders of the Company (collectively, the “HughesParties”) entered into a settlement and voting agreement (the “PrescottAgreement”) with Prescott. Contemporaneously with the Prescott Agreement, the Company and theHughes Parties entered into voting agreements (collectively with the PrescottAgreement, the “Voting Agreements”) with each of the following shareholders ofthe Company:  Red Mountain CapitalPartners II, L.P., Red Mountain Capital Partners III, L.P. and Paradigm CapitalManagement, Inc. (collectively with Prescott, the “Shareholder Parties”).As a result of the Prescott Agreement, the filed complaint was withdrawn.

 

Pursuant to the Voting Agreements, effective as of June 7,2009, (i) the authorized number of directors of the Board was increasedfrom six to eight directors in accordance with Section 3.2 of the Bylawsof the Company, creating two additional vacancies

 

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in addition to one previously unfilled vacancy onthe Board, (ii) with the exception of Kristine F. Hughes, all of thecurrent members of the Company’s Board of Directors (the “Board”) resigned asmembers of the Board, resulting in a total of seven vacancies on the Board and (iii) MichaelD. Dean, Albert R. Dowden, Douglas Faggioli, Pauline Hughes Francis, WillemMesdag, Jeffrey D. Watkins and Candace K. Weir were appointed, without any specificBoard class designation, to fill such vacancies on the Board to serve asdirectors until the next annual meeting of shareholders at which directors areelected and until their respective successors are duly elected and qualified,unless they resign, are removed or are otherwise disqualified from serving as adirector of the Company.

 

The Voting Agreementsalso provide that, at the next annual meeting of shareholders, which was heldon November 6, 2009, the Company would nominate, and the ShareholderParties and the Hughes Parties will vote all of the shares of Common Stockbeneficially owned by them in favor of, each of the following individuals, withsuch 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 VotingAgreements terminated on November 6, 2009, immediately following theannual meeting of shareholders of the Company and the election of the newBoard of Directors as slated above.

 

***Other Litigation***

 

The Company is party to various other legal proceedings in severalforeign jurisdictions related to VAT assessments and other civillitigation.  While there is a reasonablepossibility that a material loss may be incurred, the Company cannot at thistime estimate the loss, if any, therefore, no provision for losses has beenprovided.  The Company believes futurepayments related to these matters could range from $0 to approximately $1,400.

 

One of the Company’s foreign subsidiaries isa defendant in litigation regarding primarily employee-related matters. TheCompany has recorded accruals of approximately $222 and $113 related to thislitigation at December 31, 2009 and 2008, respectively, which is includedin accrued liabilities.

 

**Non-Income Tax Contingencies**

 

The Company has reservedfor certain state sales and use tax and foreign non-income tax contingenciesbased on the likelihood of an obligation in accordance with accounting guidancefor probable loss contingencies. Loss contingency provisions are recorded forprobable losses at management’s best estimate of a loss, or when a bestestimate cannot be made, a minimum loss contingency amount is recorded. TheCompany provides provisions for potential payments of tax to various taxauthorities for contingencies related to non-income tax matters. The Companyalso provides provisions for state sales taxes in each of the states where theCompany has potential nexus. As of December 31, 2009 and 2008, accruedliabilities include $13,174 and $17,359, respectively, related to non-incometax contingencies. While management believes that the assumptions and estimatesused to determine this liability are reasonable, the ultimate outcome of thosematters cannot presently be determined. The Company is not able at this time topredict the ultimate outcomes of those matters or to estimate the effect theultimate outcomes, if greater than the amounts accrued, would have on thefinancial condition, results of operations, or cash flows of the Company.

 

**Self-InsuranceLiabilities**

 

Similar to other manufacturers and distributors ofproducts that are ingested, the Company faces an inherent risk of exposure toproduct liability claims in the event that, among other things, the use of itsproducts results in injury. The Company carries insurance in the types andamounts it considers reasonably adequate to cover the risks associated with itsbusiness. The Company has a wholly owned captive insurance company to provideit with product liability insurance coverage. The Company has accrued an amountthat it believes is sufficient to cover probable and reasonably estimableliabilities related to product liability claims based on the Company’s historyof such claims. However, there can be no assurance that these estimates willprove to be sufficient nor can there be any assurance that the ultimate outcomeof any litigation for product liability will not have a material negativeimpact on the Company’s business prospects, financial position, results ofoperations, or cash flows.

 

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The Company self-insures for certain employee medicalbenefits. The recorded liabilities for self-insured risks are calculated usingactuarial methods and are not discounted. The liabilities include amounts foractual claims and claims incurred but not reported. Actual experience,including claim frequency and severity as well as health care inflation, couldresult in actual liabilities being more or less than the amounts currentlyrecorded.

 

The Company reviews its self-insurance accruals on aquarterly basis and determines, based upon a review of its recent claimshistory and other factors, that portions of its self-insurance accruals beconsidered short-term and long-term. The Company has accrued $2,942 and $2,873for product liability and employee medical claims at December 31, 2009 and2008, respectively, of which $457 and $2,873 was classified as short-term. Suchamounts are included in accrued liabilities and other long-term liabilities onthe Company’s consolidated balance sheets.

 

**GovernmentRegulations**

 

The Company is subject to governmental regulationspertaining to product formulation, labeling and packaging, product claims andadvertising, and to the Company’s direct selling system. The Company is alsosubject to the jurisdiction of numerous foreign tax and customs authorities.Any assertions or determinations that either the Company or the Company’sDistributors are not in compliance with existing statutes, laws, rules orregulations could potentially have a material adverse effect on the Company’soperations. In addition, in any country or jurisdiction, the adoption of newstatutes, laws, rules or regulations, or changes in the interpretation ofexisting statutes, laws, rules or regulations could have a materialadverse effect on the Company and its operations. Although management believesthat the Company is in compliance, in all material respects, with the statutes,laws, rules and regulations of every jurisdiction in which it operates, noassurance can be given that the Company’s compliance with applicable statutes,laws, rules and regulations will not be challenged by foreign authoritiesor that such challenges will not have a material adverse effect on the Company’sfinancial position or results of operations or cash flows.

 

**NOTE 12:  OPERATING BUSINESSSEGMENT AND INTERNATIONAL OPERATION INFORMATION**

 

TheCompany has three reportable business segments. These reportable segments arecomponents of the Company for which separate information is available that isevaluated regularly by the chief operating decision maker in deciding how toallocate resources and in assessing performance.

 

TheCompany has two reportable business segments based on geographic operations thatinclude a United States segment and an international segment that operate underthe Nature’s Sunshine Products name. The Company’s third reportable businesssegment is Synergy Worldwide, which offers products with formulations differentfrom those of the Nature’s Sunshine Products offerings. In addition, SynergyWorldwide’s marketing and Distributor compensation plans are sufficientlydifferent from those of Nature’s Sunshine Products. The accounting policies ofthe segments are the same as those described in the summary of significantaccounting policies in Note 1. Net sales revenues for each segment have beenreduced by any intercompany sales as they are not included in the measure ofsegment profit or loss reviewed by the chief operating decision maker. TheCompany evaluates performance based on operating income (loss) by segmentbefore consideration of certain inter-segment transfers and expenses.

 

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Reportable business segment informationfor the years ended December 31, 2009, 2008, and 2007 is as follows:

 
| **Year Ended December 31** | ** ** | **2009**    | ** **  | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Net Sales Revenue:                        |       |        |        |     |       |     |       |
| Nature’s Sunshine Products:          |       |        |        |     |       |     |       |
| United States                             | ** ** | **$**       | **151,789** |     | $          | 150,101  |       | $ | 148,254 |   |
| International                             | ** ** | **135,350** |        | 166,032  |       | 144,049  |       |
| ** **                                |       | **287,139** |        | 316,133  |       | 292,303  |       |
| Synergy Worldwide                         | ** ** | **55,884**  |        | 57,101   |       | 68,571   |       |
| Total net sales revenue                   | ** ** | **343,023** |        | 373,234  |       | 360,874  |       |
| Operating Expenses:                       |       |        |        |     |       |     |       |
| Nature’s Sunshine Products:          |       |        |        |     |       |     |       |
| United States                             | ** ** | **145,191** |        | 155,988  |       | 153,522  |       |
| International                             | ** ** | **132,759** |        | 149,147  |       | 131,350  |       |
| ** **                                |       | **277,950** |        | 305,135  |       | 284,872  |       |
| Synergy Worldwide                         | ** ** | **54,306**  |        | 62,501   |       | 72,941   |       |
| Total operating expenses                  | ** ** | **332,256** |        | 367,636  |       | 357,813  |       |
| Operating Income (Loss):                  |       |        |        |     |       |     |       |
| Nature’s Sunshine Products:          |       |        |        |     |       |     |       |
| United States                             | ** ** | **6,598**   | ** **  | (5,887   | )          | (5,268   | )          |
| International                             | ** ** | **2,591**   | ** **  | 16,885   |       | 12,699   |       |
| ** **                                |       | **9,189**   | ** **  | 10,998   |       | 7,431    |       |
| Synergy Worldwide                         | ** ** | **1,578**   | ** **  | (5,400   | )          | (4,370   | )          |
| Total operating income                    | ** ** | **10,767**  |        | 5,598    |       | 3,061    |       |
|                                      |       |        |        |     |       |     |       |
| Other Income, net                         | ** ** | **3,558**   |        | 870      |       | 1,404    |       |
| Income Before Provision for Income Taxes  | ** ** | **$**       | **14,325**  |     | $          | 6,468    |       | $ | 4,465 |   |

 
| **Year Ended December 31** | ** ** | **2009**  | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Capital Expenditures:                     |       |      |       |     |       |     |       |
| Nature’s Sunshine Products:          |       |      |       |     |       |     |       |
| United States                             | ** ** | **$**     | **2,074**  |     | $          | 2,467    |       | $ | 3,000 |   |
| International                             | ** ** | **468**   |       | 4,872    |       | 422      |       |
| ** **                                | ** ** | **2,542** |       | 7,339    |       | 3,422    |       |
| Synergy Worldwide                         | ** ** | **296**   |       | 574      |       | 974      |       |
| Total capital expenditures                | ** ** | **$**     | **2,838**  |     | $          | 7,913    |       | $ | 4,396 |   |
|                                      |       |      |       |     |       |     |       |
| Depreciation and Amortization:            |       |      |       |     |       |     |       |
| Nature’s Sunshine Products:          |       |      |       |     |       |     |       |
| United States                             | ** ** | **$**     | **2,934**  |     | $          | 3,419    |       | $ | 3,729 |   |
| International                             | ** ** | **666**   |       | 756      |       | 1,161    |       |
| ** **                                | ** ** | **3,600** |       | 4,175    |       | 4,890    |       |
| Synergy Worldwide                         | ** ** | **901**   |       | 1,262    |       | 1,519    |       |
| Total depreciation and amortization       | ** ** | **$**     | **4,501**  |     | $          | 5,437    |       | $ | 6,409 |   |

 
| **As of December 31** | ** ** | **2009**    | ** **  | **2008** | ** ** |
|--------------------------------------|------------|-------------|-------------|----------|------------|
| Assets:                              |       |        |        |     |       |
| Nature’s Sunshine Products      |       |        |        |     |       |
| United States                        | ** ** | **$**       | **93,743**  |     | $          | 95,131 |   |
| International                        | ** ** | **45,728**  |        | 45,995   |       |
| ** **                           | ** ** | **139,471** |        | 141,126  |       |
| Synergy Worldwide                    | ** ** | **25,385**  |        | 23,150   |       |
| Total Assets                         | ** ** | **$**       | **164,856** |     | $          | 164,276 |   |

 

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From an individual countryperspective, only the United States, Japan, and Russia comprise approximately10 percent or more of consolidated net sales revenue for any of the years endedDecember 31, 2009, 2008, and 2007 as follows:

 
| **Year Ended December 31** | ** ** | **2009**    | ** **  | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Net Sales Revenue:                        |       |        |        |     |       |     |       |
| United States                             | ** ** | **$**       | **154,217** |     | $          | 151,332  |       | $ | 152,943 |   |
| Russia                                    | ** ** | **30,097**  |        | 40,419   |       | 31,023   |       |
| Japan                                     | ** ** | **28,125**  |        | 38,972   |       | 45,554   |       |
| Other                                     | ** ** | **130,584** |        | 142,511  |       | 131,354  |       |
| Total Net Sales Revenue                   | ** ** | **$**       | **343,023** |     | $          | 373,234  |       | $ | 360,874 |   |

 

Net sales revenue by productgroup has not been disclosed as management has determined that it isimpracticable to accumulate such information.

 

From an individual countryperspective, only the United States and Venezuela comprise 10 percent or moreof consolidated long-lived assets, consisting of property, plant and equipmentand intangible assets, as follows:

 
| **As of December 31** | ** ** | **2009**  | ** ** | **2008** | ** ** |
|--------------------------------------|------------|-----------|------------|----------|------------|
| Long-Lived Assets                    |       |      |       |     |       |
| United  States                       | ** ** | **$**     | **22,629** |     | $          | 23,723 |   |
| Venezuela                            | ** ** | **4,620** |       | 4,646    |       |
| Other                                | ** ** | **2,929** |       | 3,393    |       |
| Total Long-Lived Assets              | ** ** | **$**     | **30,178** |     | $          | 31,762 |   |

 

**NOTE 13:  RELATED PARTY TRANSACTIONS**

 

The Companymaintains split-dollar life insurance policies on certain executives. The cashsurrender value of $63 and $206 related to such policies is recorded in otherassets as of December 31, 2009 and 2008, respectively.

 

Mr. Eugene Hughes, a member of the Company’sBoard of Directors and a shareholder, retired as an employee of the Companyeffective as of December 22, 2008. Prior to his retirement, the Companyand Mr. Hughes entered into a Retirement and Consulting Agreement, datedas of December 9, 2008, pursuant to which Mr. Hughes providesconsulting services to the Company for an initial term of eight years followinghis retirement. In exchange for such consulting services, Mr. Hughes willreceive (i) annual compensation of $215 for the first two years ofservice, (ii) annual compensation of $100 for the remainder of the initialterm, (iii) annual compensation of $50 after the initial term, and (iv) certainmedical and life insurance benefits.

 

**NOTE14:  FAIR VALUE**

 

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

 

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

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

Level 3: Unobservable inputs that are not corroboratedby market data

 

The following table presents the Company’s hierarchyfor its asset measured at fair value on a recurring basis as of December 31,2009:

 
| ** **                                                | ** ** | **Level 1**                                             | ** ** | **Level 2**                           | ** ** | **Level 3**                      | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                                | ** ** | **Quoted  Prices  in Active  Markets for  Identical Assets** | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** | **Total**  | ** ** |
| Investments available for sale                            |       | $                                                            | 1,030      |                                       | $          | 2,137                                 |       | $          | —     |   | $ | 3,167 |   |
| Investment securities                                     |       | 1,752                                                        |       | —                                     |       | —                                |       | 1,752      |       |
| Total assets measured at fair value on a recurring  basis |       | $                                                            | 2,782      |                                       | $          | 2,137                                 |       | $          | —     |   | $ | 4,919 |   |

 

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The following table presents the Company’s hierarchyfor 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** | ** ** | **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’sinvestment portfolio consist of various fixed income securities such as U.Sgovernment funds, state and municipal bonds, mutual funds, and equitysecurities.  The Level 1 securities arevalued using quoted prices for identical assets in active markets including equitysecurities, U.S. government treasuries, and various mutual funds.  The Level 2 securities include investments instate and municipal bonds whereby all significant inputs are observable or canbe derived from or corroborated by observable market data for substantially thefull term of the asset.

 

*Investment securities* — The majority of the Company’s tradingportfolio consists of various mutual funds that are using quoted prices inactive markets.

 

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

 

The ARS consisted primarily of AAA securities. Indetermining the fair value of the Company’s restricted investments at December 31,2008, the Company took into consideration fair values determined by thefinancial institutions, current credit rating of the underlying securities,insurance provisions, discounted cash flow analysis, as deemed appropriate, andits current liquidity position. These securities were sold in January 2009at their estimated fair value.

 

The following table shows a reconciliation of thebeginning and ending fair value measurements using significant unobservableinputs (Level 3) for the years ended December 31, 2009 and 2008:

 
| ** **                                | ** ** | **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 December 31,              |       | $        | —     |     | $          | 2,050 |   |

 

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**NOTE 15:  SUMMARY OF QUARTERLY OPERATIONS — UNAUDITED**

 

The followingtables presents the Company’s unaudited summary of quarterly operations during2009 and 2008 for each of  three monthperiods ended March 31, June 30, September 30, and December 31(amounts in thousands).

 
| ** **                           | ** ** | **For the Quarter Ended** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **March 31,  2009**                 | ** ** | **June 30,  2009** | ** ** | **September  30, 2009** | ** ** | **December  31, 2009** | ** ** |
| Net  sales revenue                   |       | $                                        | 83,176     |   | $ | 84,149 |   | $ | 85,777 |   | $ | 89,921 |   |
| Cost  of goods sold                  |       | 17,547                                   |       | 15,787 |   | 17,299 |   | 18,170 |   |
| Gross  profit                        |       | 65,629                                   |       | 68,362 |   | 68,478 |   | 71,751 |   |
| Volume  incentives                   |       | 30,996                                   |       | 31,217 |   | 31,068 |   | 32,884 |   |
| Selling,  general and administrative |       | 37,477                                   |       | 35,089 |   | 31,203 |   | 33,519 |   |
| Operating  income (loss)             |       | (2,844                                   | )          | 2,056 |   | 6,207 |   | 5,348 |   |
| Other  income (expense)              |       | 1,204                                    |       | 544 |   | 1,300 |   | 510 |   |
| Income  before income taxes          |       | (1,640                                   | )          | 2,600 |   | 7,507 |   | 5,858 |   |
| Taxes  (benefit)                     |       | (178                                     | )          | 1,066 |   | 5,427 |   | 1,895 |   |
| Net  income (loss)                   |       | $                                        | (1,462     | ) | $ | 1,534 |   | $ | 2,080 |   | $ | 3,963 |   |
|                                 |       |                                     |       |   |   |   |   |   |   |
| Basic  net income (loss) per share   |       | (0.09                                    | )          | 0.10 |   | 0.13 |   | 0.26 |   |
| Diluted  net income (loss) per share |       | (0.09                                    | )          | 0.10 |   | 0.13 |   | 0.26 |   |

 
| ** **                           | ** ** | **For the Quarter Ended** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **March 31,  2008**                 | ** ** | **June 30,  2008** | ** ** | **September  30, 2008** | ** ** | **December  31, 2008** | ** ** |
| Net  sales revenue                   |       | $                                        | 96,451     |   | $ | 95,911 |   | $ | 92,661 |   | $ | 88,211 |   |
| Cost  of goods sold                  |       | 19,217                                   |       | 16,796 |   | 17,146 |   | 18,715 |   |
| Gross profit                         |       | 77,234                                   |       | 79,115 |   | 75,515 |   | 69,496 |   |
| Volume incentives                    |       | 36,597                                   |       | 36,457 |   | 34,580 |   | 32,440 |   |
| Selling, general and  administrative |       | 39,738                                   |       | 39,280 |   | 38,864 |   | 37,806 |   |
| Operating income (loss)              |       | 899                                      |       | 3,378 |   | 2,071 |   | (750 | ) |
| Other income (expense)               |       | (359                                     | )          | 312 |   | (448 | ) | 1,365 |   |
| Income before income taxes           |       | 540                                      |       | 3,690 |   | 1,623 |   | 615 |   |
| Taxes                                |       | 983                                      |       | 4,391 |   | 1,789 |   | 1,143 |   |
| Net loss                             |       | $                                        | (443       | ) | $ | (701 | ) | $ | (166 | ) | $ | (528 | ) |
|                                 |       |                                     |       |   |   |   |   |   |   |
| Basic net loss per share             |       | (0.03                                    | )          | (0.05 | ) | (0.01 | ) | (0.03 | ) |
| Diluted net loss per share           |       | (0.03                                    | )          | (0.05 | ) | (0.01 | ) | (0.03 | ) |

 

Basic and diluted income (loss) per share are computedindependently for each of the quarters presented. Therefore, the sum of thequarterly net loss per share may not equal the total computed for the year.

 

The results for the quarterended December 31, 2009, includes approximately $2,000 of favorablesettlements related to VAT contingencies.

 

**NOTE 16: SUBSEQUENT EVENTS**

 

On March 12, 2010, Mr. DouglasFaggioli informed the Board of Directors of his intent to step-down asPresident and Chief Executive Officer, as well as a member of the Company’sBoard of Directors, effective June 30, 2010.  In addition, Mr. Faggioli has enteredinto a consulting agreement with the Company to begin on July 1,2010.  Mr. Michael Dean, who iscurrently a member of the Board of Directors, will become the next Presidentand Chief Executive Officer of the Company effective June 30, 2010, and asa result, has been awarded 200 options to purchase shares of the Company’scommon stock.

 

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**Item 9. Change In andDisagreements with Accountants on Accounting and Financial Disclosure**

 

None.

 

**Item 9A. Controls andProcedures**

 

This reportincludes the certifications of our Chief Executive Officer and Chief FinancialOfficer required by Rule 13a-14 of the Securities Exchange Act of 1934 (the“Exchange Act”). See Exhibits 31.1 and 31.2. This Item 9A includes informationconcerning the controls and control evaluations referred to in thosecertifications.

 

**Overview**

 

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

 

During the year ended December 31, 2009, theCompany completed the remediation related to the financial reporting processand information technology material weaknesses. As shown below, the accountingfor taxes material weakness reported as of December 31, 2008 remains amaterial weakness as of December 31, 2009, for which remediation effortsare in process.

 
| **Material Weakness Reported**        | ** ** | **Status as of**      | ** ** | **Status as of the Date** |
|-------------------------------------------------|------------|---------------------------------|------------|-----------------------------------------------|
| **as of December 31, 2008** | ** ** | **December 31, 2009** | ** ** | **of this Filing**                  |
| 1.  Accounting for Taxes                        |       | Remediation  in process         |       | Remediation  in process                       |
| 2.  Financial Reporting Process                 |       | Remediated                      |       | Remediated                                    |
| 3.  Information Technology:                     |       |                            |       |                                          |
| Access Control                                  |       | Remediated                      |       | Remediated                                    |
| Change Management                               |       | Remediated                      |       | Remediated                                    |
| Spreadsheets                                    |       | Remediated                      |       | Remediated                                    |

 

**Evaluation of Disclosure Controlsand Procedures**

 

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

 

In connection with the preparation of its annualreport as of December 31, 2008, the Company’s management, under thesupervision and with the participation of the Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the design and operation ofour disclosure controls and procedures as of December 31, 2008. Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures were not effective as of December 31,2008, as a result of the existence of material weaknesses in our internalcontrol over financial reporting.

 

Since December 31, 2008, we have made significantprogress in improving our disclosure controls and procedures. We have taken,and are taking, the actions described below under “Remediation Actions Relatingto Remaining Material Weaknesses” to remediate the remaining materialweaknesses in our internal control over financial reporting that existed atthat date.

 

We continue to strive to improve our processes toenable us to provide complete and accurate public disclosure. Management believesthat we will not be able to conclude that our disclosure controls andprocedures are effective until the material weaknesses have been fullyremediated.

 

To address the material weaknesses reported in our2008 Form 10-K/A, management performed additional analyses and otherpost-closing procedures designed to ensure that our consolidated interimfinancial statements were prepared in accordance with U.S. GAAP. Theseprocedures included documentation and testing of processes, data validationprocedures from the systems into the general ledger, testing ofsystems, validation of results, disclosure review, and other analytics. As aresult, management believes that 

 

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the consolidated financial statementsincluded in this report fairly present, in all material respects, our financialposition, results of operations and cash flows as of the dates, and for theperiods presented.

 

**Changes in Internal Control overFinancial Reporting**

 

**Overview**

 

Management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, has assessed whether any changesin our internal control over financial reporting that occurred during theperiod from January 1, 2009 through December 31, 2009 have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting. Based on management’s assessment, significant changeswere implemented and tested during the period from January 1, 2009 throughDecember 31, 2009 to continue the remediation of our material weaknessesin internal control over financial reporting.

 

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

 

**Remediation Actions Relating toRemaining Material Weaknesses**

 

The discussionbelow describes the actions that management took during 2009 and is currentlyin the process of taking in 2010 to remediate our remaining material weaknessesin internal control over financial reporting.

 

*Accounting for Taxes*

 

Description of Material Weakness as of December 31,2008

 

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

 

Description of 2009 Remediation Actions

 

In late 2008, we hired an Executive Director ofCorporate Tax and during 2009, we have utilized outsourced service providersfor tax consulting services to assist in our accounting for income taxes andthe recording of non-income tax contingencies. In October 2009, theCompany engaged tax consultants with specific expertise related to theremediation of accounting for taxes to assist the Company in completing theremediation of its material weakness in this area. We continue to evaluate ourtax process and tax resource requirements. We continue to work towards thecompletion of delinquent foreign statutory filings identified during the prioryears as result of management’s analysis, as well as refining our process tohelp ensure timely completion of future filings. In addition, in 2008 ourmanagement performed an analysis with the assistance of outside consultants toassess, estimate, and record the exposure related to our uncertain taxpositions and non-income tax contingencies in accordance with U.S. GAAP. During2009 we continued to monitor and assess the uncertain tax positions andnon-income tax contingencies and are now evaluating and implementing plans toreduce these contingencies. We continue to evaluate the adequacy of our taxresources. This material weakness still exists, and the Company is in theprocess of remediating this material weakness.

 

*Financial Reporting Process*

 

Description of Material Weakness as of December 31,2008

 

The Company did not maintain an effective financialreporting process to prepare financial statements in accordance with U.S. GAAP.Specifically, our process lacked timely and complete financial statementreviews, appropriate account closing procedures, and appropriate reconciliationprocesses. Further, we were unable to complete regulatory filings as requiredby the rules of the SEC.

 

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Description of 2009 Remediation Actions

 

During 2008, we redesigned and implemented improvedprocedures and controls related to our monthly and quarterly close processesincluding account reconciliations, enhancement of the formal monthly close andreporting checklists, variance analysis of financial statement fluctuations,and budget to actual reviews. As a result of the remediation efforts, the Companyhas completed its regulatory filings during 2009 as required by the rules ofthe SEC. Our remediation efforts during the second and third quarters of 2009included the enhancement and testing of the processes and controls institutedin the prior year. We believe that these remediation efforts have improved ourfinancial reporting process and that the material weakness was effectivelyremediated at September 30, 2009.

 

*Information Technology Systems*

 

Description of Material Weakness as of December 31,2008

 

The Company did not maintain effective internalcontrol over financial reporting related to certain information technologyapplications and general computer controls that are considered to have animpact on financial reporting and that resulted in a more than reasonablepossibility that material misstatements in our financial statements would notbe prevented or detected.

 

Specifically, welacked effective controls in the following areas:

 

·                  *Access Control*— The Company did not maintaineffectively designed controls to prevent unauthorized access to certainprograms and data, and provide for periodic review and monitoring of accessincluding reviews of security logs and analysis of segregation of dutiesconflicts.

 

·                  *Change Management*— The Company did not maintaineffectively designed controls to ensure that all information technology programand data changes were authorized, developer access to the productionenvironment was limited, and that all program and data changes were adequatelytested for accuracy and appropriate implementation.

 

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

 

Description of 2009 Remediation Actions

 

*Access Control*— During 2008, management performed abroad and detailed analysis of user access to the applications we havedetermined to have a material impact on our financial reporting for ourdomestic locations and implemented formal training of managers and others whogrant and approve access to these data programs, as well as providing managersand employees with better data program descriptions and other tools to assistin their understanding if the access of their subordinates violates segregationof duties or access controls. In addition, detailed quarterly security reviewshave been instituted. During 2009, the Company continued to refine theprocesses and procedures put in place. During 2009, the Company also purchasedand implemented a software package to automate the monitoring of user accesscontrols and segregation of duties which has greatly enhanced the Company’sability to identify and/or prevent access and segregation of duty issues fromarising. We believe that these remediation efforts have improved our useraccess controls and that the material weakness was effectively remediated at December 31,2009.

 

*Change Management —*During 2008, management continuedimplementation of enhanced procedures to control changes to the productionenvironment, the retention of adequate documentation, as well as redesigningjob descriptions, assigned roles, and segregation of duties within the changecontrol 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 has implemented additional measures to ensure that adequatedocumentation is retained. During 2009, the Company also purchased andimplemented a software package to assist in the monitoring of change managementof the Company’s critical application systems, which has greatly enhanced theCompany’s ability to prevent unauthorized changes, as well as indentify whereadditional documentation is required. The Company is currently implementingthis software package at its subsidiary Synergy Worldwide. Additionally,limiting developer access to production systems has been addressed. We believethat these remediation efforts have improved our change management controls andthat the material weakness was effectively remediated at December 31,2009.

 

*Spreadsheets*— During 2008, management designed andimplemented procedures to inventory, assess the risk of, and rank our criticalfinancial reporting spreadsheets that have a material impact on our financialreporting, including the implementation of enhanced review procedures. During2009, management continued to perform detailed testing at locations that have amaterial impact on our financial reporting around security and changemanagement for spreadsheets. Management has further enhanced the design of ourcontrols over spreadsheets by establishing procedures for benchmarking criticalspreadsheets to ensure that formulas are appropriate and protected,and that the logic and design of the spreadsheets is appropriate andconsistent. During the third quarter of 

 

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2009, management implemented a softwareapplication package that allows the Company to audit and track changes to itscritical spreadsheets. The Company has completed the audits on its criticalspreadsheets. Management continues the process of implementing an applicationpackage that will facilitate a worldwide consolidation and reduce our relianceon spreadsheets. In addition, our information technology management has selectedan application to provide for a world-wide standardization of the generalledger system, which has been deployed in several markets. Management hasdeveloped a timeline for completing the implementation of this applicationglobally. We believe that these remediation efforts have improved our controlsaround our critical spreadsheets and that the material weakness was effectivelyremediated at December 31, 2009.

 

We believe that these remediation efforts haveimproved our information technology systems and that the material weaknessesrelated to access control, change management, and spreadsheets has beeneffectively remediated at December 31, 2009.

 

**Conclusion**

 

We believe weaknesses other than accounting for taxeshave been remediated and that the process is in place to facilitate theremediation of the one remaining material weakness. We believe the measuresdescribed above will facilitate remediation of the material weakness related toaccounting for taxes and will continue to strengthen our internal control overfinancial reporting. We are committed to continually improving our internalcontrol processes and will diligently and vigorously review our financialreporting controls and procedures. As we continue to evaluate and work toimprove our internal control over financial reporting, we may determine thatadditional measures are necessary to address control deficiencies. Moreover, wemay decide to modify, or in appropriate circumstances not to complete, certainof the remediation measures described above.

 

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REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directorsand Shareholders of

Nature’s SunshineProducts, Inc.:

 

We have audited Nature’sSunshine Products, Inc. and subsidiaries (the “Company”) internal controlover financial reporting as of December 31, 2009, based on criteriaestablished in *Internal Control — IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting, included in theaccompanying Management’s Report on Internal Control over Financial Reporting.Our responsibility is to express an opinion on the Company’s internal controlover financial reporting based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, testing and evaluating thedesign and operating effectiveness of internal control based on that risk, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

A company’s internalcontrol over financial reporting is a process designed by, or under thesupervision of, the company’s principal executive and principal financialofficers, or persons performing similar functions, and effected by the company’sboard of directors, management, and other personnel to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitationsof internal control over financial reporting, including the possibility ofcollusion or improper management override of controls, material misstatementsdue to error or fraud may not be prevented or detected on a timely basis. Also,projections of any evaluation of effectiveness of the internal control overfinancial reporting to future periods are subject to the risk that the controlsmay become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

A material weakness is adeficiency, or combination of deficiencies, in internal control over financialreporting, such that there is a reasonable possibility that a materialmisstatement of the Company’s annual or interim financial statements will notbe prevented or detected on a timely basis. The following material weakness hasbeen identified and included in management’s assessment:

 

·                  *Accounting for Taxes* — The Company’s processes, proceduresand controls related to the preparation and review of the annual tax provisionand the accrual of other non-income tax contingencies were not effective toensure that amounts related to the tax provision, related current or deferredincome tax asset and liability accounts, and non-income tax contingencies wereaccurate, recorded in the proper period, and determined in accordance withgenerally accepted accounting principles. Specifically, the Company did not (i) analyzeand reconcile certain deferred income and tax payable accounts, (ii) appropriatelyconsider the need to record or disclose contingencies for certain income taxand non income tax positions in accordance with generally accepted accountingprinciples*,* and (iii) filetax returns in certain foreign jurisdictions. Additionally, the Company hadinsufficient qualifications and training in accounting for taxes.

 

This material weaknesswas considered in determining the nature, timing, and extent of audit testsapplied in our audit of the consolidated financial statements and financialstatement schedule as of and for the year ended December 31, 2009, of theCompany and this report does not affect our report on such financial statementsand financial statement schedule.

 

In our opinion, becauseof the effect of the material weakness identified above on the achievement ofthe objectives of the control criteria, the Company has not maintainedeffective internal control over financial reporting as of December 31,2009, based on the criteria established in *InternalControl — Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

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We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements and financial statementschedule as of and for the year ended December 31, 2009, of the Companyand our report dated March 16, 2010, expressed an unqualified opinion onthose financial statements and financial statement schedule.

 
| /s/ Deloitte &  Touche LLP |
|-------------------------------------|
|                                |
| Salt Lake City, Utah                |
| March 16, 2010                 |

 

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## ***Item 9B. Other Information***

 

None.

 

**PART III**

 

## ***Item 10.  Directors, Executive Officers and CorporateGovernance***

 

The information required by this Item is incorporatedherein by reference to our definitive proxy statement to be filed with the SECno later than 120 days after the close of our fiscal year ended December 31,2009, except that the information required with respect to our executiveofficers is set forth under Item 1. “Business”, of this Annual Report on Form 10-K,and is incorporated herein by reference.

 

**Item 11. Executive Compensation**

 

The information required by this Item is incorporatedherein by reference to our definitive proxy statement to be filed with the SECno later than 120 days after the close of our fiscal year ended December 31,2009.

 

**Item 12. Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.**

 

The information required by this Item is incorporatedherein by reference to our definitive proxy statement to be filed with the SECno later than 120 days after the close of our fiscal year ended December 31,2009.

 

**Item 13. Certain Relationships and Related Transactions, and DirectorIndependence**

 

The information required by this Item is incorporatedherein by reference to our definitive proxy statement to be filed with the SECno later than 120 days after the close of our fiscal year ended December 31,2009.

 

## ***Item 14. Principal AccountantFees and Services.***

 

The information required by this Item is incorporatedherein by reference to our definitive proxy statement to be filed with the SECno later than 120 days after the close of our fiscal year ended December 31,2009.

 

**PART IV**

 

## ***Item 15. Exhibits and FinancialStatement Schedules***

 
| **(a)(1)** | **List of Financial Statements**                                                                                                                                                                                                                                  |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                              |
|       | The following are filed as part of this report:                                                                                                                                                                                                                   |
|       |                                                                                                                                                                                                                                                              |
|       | Report of Independent Registered Public Accounting Firm                                                                                                                                                                                                           |
|       |                                                                                                                                                                                                                                                              |
|       | Consolidated balance sheets as of December 31, 2009 and 2008                                                                                                                                                                                                 |
|       |                                                                                                                                                                                                                                                              |
|       | Consolidated statements of operations for the years ended  December 31, 2009, 2008, and 2007                                                                                                                                                                 |
|       |                                                                                                                                                                                                                                                              |
|       | Consolidated statements of changes in shareholders’ equity and  comprehensive loss for the years ended December 31, 2009, 2008, and 2007                                                                                                                |
|       |                                                                                                                                                                                                                                                              |
|       | Consolidated statements of cash flows for the years ended  December 31, 2009, 2008, and 2007                                                                                                                                                                 |
|       |                                                                                                                                                                                                                                                              |
|       | Notes to consolidated financial statements                                                                                                                                                                                                                        |
|       |                                                                                                                                                                                                                                                              |
| **(a)(2)** | **List of Financial Statement Schedules**                                                                                                                                                                                                                         |
|       |                                                                                                                                                                                                                                                              |
|       | Schedule II - Valuation and Qualifying Accounts.                                                                                                                                                                                                                  |
|       |                                                                                                                                                                                                                                                              |
|       | Financial statement schedules other than the one listed are omitted  for the reason that they are not required or are not applicable, or the  required information is shown in the financial statements or notes thereto,  or contained elsewhere in this report. |
|       |                                                                                                                                                                                                                                                              |
| **(a)(3)** | **List of Exhibits**                                                                                                                                                                                                                                              |
|       |                                                                                                                                                                                                                                                              |
|       | Exhibit Index as seen below                                                                                                                                                                                                                                  |

 

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**SIGNATURES**

** **

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

**Nature’s Sunshine Products, Inc.**

 
| Date:  **March 16, 2010** | By:    | /s/  Douglas Faggioli                  |
|--------------------------------|--------|----------------------------------------|
|                           |   |                                   |
|                           |   | Douglas  Faggioli,                     |
|                           |   | President  and Chief Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| **Signature** | ** **              | **Title**  | ** **                                                       | **Date**   |
|---------------|-------------------------|------------|------------------------------------------------------------------|------------|
| ** **    | ** **              | ** ** | ** **                                                       | ** ** |
| /s/           | Kristine  F. Hughes     |       | Chair  of the Board and Director                                 |       | March 16, 2010 |
|          | Kristine  F. Hughes     |       |                                                             |       |   |
|          |                    |       |                                                             |       |   |
| /s/           | Douglas  Faggioli       |       | President  and Chief Executive Officer                           |       | March 16, 2010 |
|          | Douglas  Faggioli       |       |                                                             |       |   |
|          |                    |       |                                                             |       |   |
| /s/           | Stephen  M. Bunker      |       | Executive  Vice President,                                       |       | March 16, 2010 |
|          | Stephen  M. Bunker      |       | Chief  Financial Officer and Treasurer, Chief Accounting Officer |       |   |
|          |                    |       |                                                             |       |   |
| /s/           | Willem  Mesdag          |       | Director                                                         |       | March 16, 2010 |
|          | Willem  Mesdag          |       |                                                             |       |   |
|          |                    |       |                                                             |       |   |
| /s/           | Jeffrey  D. Watkins     |       | Director                                                         |       | March 16, 2010 |
|          | Jeffrey  D. Watkins     |       |                                                             |       |   |
|          |                    |       |                                                             |       |   |
| /s/           | Michael  D. Dean        |       | Director                                                         |       | March 16, 2010 |
|          | Michael  D. Dean        |       |                                                             |       |   |
|          |                    |       |                                                             |       |   |
| /s/           | Candice  K. Weir        |       | Director                                                         |       | March 16, 2010 |
|          | Candice  K. Weir        |       |                                                             |       |   |
|          |                    |       |                                                             |       |   |
| /s/           | Albert  R. Dowden       |       | Director                                                         |       | March 16, 2010 |
|          | Albert  R. Dowden       |       |                                                             |       |   |
|          |                    |       |                                                             |       |   |
| /s/           | Pauline  Hughes Francis |       | Director                                                         |       | March 16, 2010 |
|          | Pauline  Hughes Francis |       |                                                             |       |   |

 

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**NATURE’S SUNSHINE PRODUCTS, INC.**

**SCHEDULE II — VALUATION ANDQUALIFYING ACCOUNTS**

**FOR THE YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007**

*(Amounts in thousands)*

 
| **Description**                            | ** ** | **Balance at  Beginning  of Year** | ** ** | **Provisions** | ** ** | **Amounts  Written Off** | ** ** | **Amounts  Recovered** | ** ** | **Effect of  Currency  Translation** | ** ** | **Balance at  End of Year** | ** ** |
|--------------------------------------------|------------|----------------------------------------------|------------|----------------|------------|-------------------------------|------------|------------------------|------------|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| **Year ended December 31,  2009**     |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| ** **                                 |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for doubtful accounts receivable |       | $                                            | 1,472      |           | $          | 219                           |       | $                      | (69        | )                                         | $          | —                                     |       | $ | 218 |   | $ | 1,840 |   |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for sales returns                |       | 55                                           |       | 145            |       | (145                          | )     | —                 |       | —                                    |       | 55                                         |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for obsolete inventory           |       | 3,286                                        |       | 1,062          |       | (1,524                        | )          | —                 |       | 9                                         |       | 2,833                                      |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Tax valuation allowance                    |       | 13,986                                       |       | 5,870          |       | (1,234                        | )          | —                 |       | —                                    |       | 18,662                                     |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| **Year ended December 31,  2008**     |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for doubtful accounts receivable |       | $                                            | 739        |           | $          | 990                           |       | $                      | (90        | )                                         | $          | 18                                         |       | $ | (185 | ) | $ | 1,472 |   |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for sales returns                |       | 55                                           |       | 113            |       | (113                          | )     | —                 |       | —                                    |       | 55                                         |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for obsolete inventory           |       | 2,815                                        |       | 1,945          |       | (1,499                        | )          | —                 |       | 25                                        |       | 3,286                                      |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Tax valuation allowance                    |       | 11,290                                       |       | 3,002          |       | (306                          | )          | —                 |       | —                                    |       | 13,986                                     |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| **Year ended December 31,  2007**     |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for doubtful accounts receivable |       | $                                            | 1,129      |           | $          | (208                          | )          | $                      | (508       | )                                         | $          | 259                                        |       | $ | 67 |   | $ | 739 |   |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for sales returns                |       | 74                                           |       | 93             |       | (112                          | )          | —                 |       | —                                    |       | 55                                         |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for obsolete inventory           |       | 3,325                                        |       | 964            |       | (1,563                        | )          | 89                     |       | —                                    |       | 2,815                                      |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Tax valuation allowance                    |       | 7,822                                        |       | 3,468          |       | —                        |       | —                 |       | —                                    |       | 11,290                                     |       |

 

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Table ofContents

 

**LIST OF EXHIBITS**

 
| ** **        | ** ** | ** **  | ** **                                                                                                                                                | **Located At**    |
|-------------------|------------|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------|
| ** **        | ** ** | ** **  | ** **                                                                                                                                                | **Sequentially**       |
| **Item No.** | ** ** | **Exhibit** | ** **                                                                                                                                                | **Numbered Page** |
|              |       |        |                                                                                                                                                      |                   |
|              | 3.1(1)     |        | Amended  and Restated Articles of Incorporation.                                                                                                          |                   |   |
|              | 3.2(1)     |        | Amended  and Restated By-laws.                                                                                                                            |                   |   |
|              | 10.1(1)*   |        | Nature’s  Sunshine Products, Inc. Tax Deferred Retirement Plan, as restated as of March 1,  2008.                                          |                   |   |
|              | 10.2(1)*   |        | Nature’s  Sunshine Products, Inc. Supplemental Elective Deferral Plan, as restated  effective as of January 1, 2008.                       |                   |   |
|              | 10.3(1)*   |        | 1995  Stock Option Plan, as amended.                                                                                                                      |                   |   |
|              | 10.4(1)*   |        | Form of  Stock Option Agreement (1995 Stock Option Plan).                                                                                            |                   |   |
|              | 10.5(1)*   |        | Employment  Agreement, dated as of April 16, 2001, by and between Nature’s Sunshine  Products, Inc. and William J. Keller.                 |                   |   |
|              | 10.6(2)*   |        | Employment  Agreement, dated as of December 30, 2008, by and between Nature’s  Sunshine Products, Inc. and Greg Halliday.                  |                   |   |
|              | 10.7(2)*   |        | Employment  Agreement, dated as of December 30, 2008, by and between Nature’s  Sunshine Products, Inc. and Douglas Faggioli.               |                   |   |
|              | 10.8(3)*   |        | Employment  Agreement, dated as of December 21, 2007, between Nature’s Sunshine  Products, Inc. and Stephen M. Bunker.                     |                   |   |
|              | 10.9(2)*   |        | Amendment  to Employment Agreement, dated as of December 30, 2008, by and between  Nature’s Sunshine Products, Inc. and Stephen M. Bunker. |                   |   |
|              | 10.10(3)*  |        | Employment  Agreement, dated as of December 21, 2007, by and between Nature’s  Sunshine Products, Inc. and Bryant J. Yates.                |                   |   |
|              | 10.11(2)*  |        | Amendment  to Employment Agreement, dated as of December 30, 2008, by and between  Nature’s Sunshine Products, Inc. and Bryant J. Yates.   |                   |   |
|              | 10.12(2)*  |        | Employment  Agreement, dated as of December 30, 2008, by and between Nature’s  Sunshine Products, Inc. and John DeWyze.                    |                   |   |
|              | 10.13(4)*  |        | Retirement  and Consulting Agreement, dated as of December 9, 2008, by and between  Nature’s Sunshine Products, Inc. and Eugene Hughes.    |                   |   |
|              | 10.14(5)*  |        | Employment  Agreement, dated as of December 21, 2007, by and between Nature’s  Sunshine Products, Inc. and Jamon Jarvis.                   |                   |   |
|              | 10.15(5)*  |        | Amendment  to Employment Agreement, dated as of December 30, 2008, by and between  Nature’s Sunshine Products, Inc. and Jamon Jarvis.      |                   |   |
|              | 10.16(6)   |        | 2009  Stock Incentive Plan                                                                                                                                |                   |   |
|              | 10.17(7)   |        | Form of  Award Agreement (2009 Stock Incentive Plan)                                                                                                 |                   |   |
|              | 10.18(8)   |        | First Amendment to Employment Agreement and Form of  Consulting Agreement, dated March 12, 2010, by and between the Company and  Douglas Faggioli    |                   |   |
|              | 10.19(8)   |        | Employment Agreement, dated March 12, 2010, by and between  the Company and Michael Dean                                                             |                   |   |
|              | 10.20(8)   |        | Stock Option Agreement, dated March 12, 2010, by and  between the Company and Michael Dean                                                           |                   |   |
|              | 14(1)      |        | Nature’s  Sunshine Products, Inc. Code of Conduct.                                                                                              |                   |   |
|              | 21(9)      |        | List  of Subsidiaries of Registrant.                                                                                                                      |                   | 81 |
|              | 23.1(9)    |        | Consent  of Independent Registered Public Accounting Firm.                                                                                                |                   | 82 |
|              | 31.1(9)    |        | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934, as amended.                    |                   | 83 |
|              | 31.2(9)    |        | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934, as amended.                    |                   | 84 |
|              | 32.1(10)   |        | Certification  of Chief Executive Officer pursuant to 18 U.S.C. § 1350.                                                                              |                   | 85 |
|              | 32.2(10)   |        | Certification  of Chief Financial Officer pursuant to 18 U.S.C. § 1350.                                                                              |                   | 86 |

 

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| (1)    | Previously  filed with the SEC on November 9, 2009 as an exhibit to the Quarterly  Report on Form 10-Q for the quarter ended September 30, 2009 and is  incorporated herein by reference. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | Previously  filed with the SEC on January 12, 2009 as an exhibit to the Current  Report on Form 8-K and is incorporated herein by reference.                                                   |
| (3)    | Previously  filed with the SEC on December 31, 2007 as an exhibit to the Current  Report on Form 8-K and is incorporated herein by reference.                                                  |
| (4)    | Previously  filed with the SEC on February 12, 2009 as an exhibit to the  registration statement on Form 10 and is incorporated herein by  reference.                                          |
| (5)    | Previously  filed with the SEC on March 20, 2009 as an exhibit to the Annual Report  on Form 10-K for the year ended December 31, 2008 and is  incorporated herein by reference.          |
| (6)    | Previously  filed with the SEC on October 19, 2009 as Appendix C, an exhibit to the  Registrant’s Proxy Statement and is incorporated herein by reference.                                          |
| (7)    | Previously  filed with the SEC on November 12, 2009 as an exhibit to the Current Report  on Form 8-K and is incorporated herein by reference.                                                            |
| (8)    | Filed with the SEC on March 16,  2010 as an exhibit to the Current Report on Form 8-K and is incorporated  herein by reference.                                                                |
| (9)    | Filed  herewith.                                                                                                                                                                                         |
| (10)   | Furnished  herewith.                                                                                                                                                                                     |
|   |                                                                                                                                                                                                     |
| *      | Management  contract or compensatory plan.                                                                                                                                                               |

 

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