SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: March 27, 1998
(Date of earliest event reported)
NU SKIN ASIA PACIFIC, INC.
(Exact name of Registrant as specified in its charter)
Delaware 1-12421 87-0565309
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
75 West Center Street, Provo, Utah 84601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 345-6100
The Index to Exhibits appears on page 11.
Item 2. Acquisition or Disposition of Assets.
On March 27, 1998, Nu Skin Asia Pacific, Inc., a Delaware corporation
("NSAP"), completed the previously announced acquisition of the capital stock of
Nu Skin International, Inc., a Utah corporation ("NSI"), its primary supplier
and the owner of rights to the worldwide Nu Skin distributor network, the Nu
Skin product formulas and trademarks and the rights to future markets for Nu
Skin products worldwide. In addition, NSAP acquired the capital stock of NSI
affiliates operating in Europe, South America, Australia and New Zealand and
certain other NSI affiliates, including Nu Skin Europe, Inc., a Delaware
corporation; Nu Skin U.K., Ltd., a United Kingdom corporation, domesticated in
Delaware under the name Nu Skin U.K., Inc.; Nu Skin Germany, GmbH, a German
corporation, domesticated in Delaware under the name Nu Skin Germany, Inc.; New
Skin France, SARL, a French corporation, domesticated in Delaware under the name
Nu Skin France, Inc.; Nu Skin Netherlands, B.V., a Netherlands corporation,
domesticated in Delaware under the name Nu Skin Netherlands, Inc.; Nu Skin
Italy, (SRL.), an Italian corporation, domesticated in Delaware under the name
Nu Skin Italy, Inc.; Nu Skin Spain, S.L., a Spanish corporation, domesticated in
Delaware under the name Nu Skin Spain, Inc.; Nu Skin Belgium, N.V., a Belgium
corporation, domesticated in Delaware under the name Nu Skin Belgium, Inc.; Nu
Skin Personal Care Australia, Inc., a Utah corporation; Nu Skin New Zealand,
Inc., a Utah corporation; Nu Skin Brazil, Ltda., a Brazilian corporation,
domesticated in Delaware under the name Nu Skin Brazil, Inc.; Nu Skin Argentina,
Inc., a Utah corporation; Nu Skin Chile, S.A., a Chilean corporation,
domesticated in Delaware under the name Nu Skin Chile, Inc.; Nu Skin Poland
Spa., a Polish corporation, domesticated in Delaware under the name Nu Skin
Poland, Inc.; Nu Skin International Management Group, Inc., a Utah corporation
("NSIMG"); and Cedar Meadows, L.C. (together with NSI, the "Acquired Entities").
The initial consideration paid by NSAP to the stockholders of the
Acquired Entities (the "NSI Stockholders") consisted of 2,986,663 shares of a
newly created series of preferred stock of NSAP (the "Series A Preferred Stock")
and long-term notes payable to the NSI Stockholders totaling approximately $23.7
million. Contingent upon NSI and NSAP meeting certain earnings growth targets,
NSAP may pay up to $100 million in cash (up to $25 million per year) to the NSI
Stockholders over the next four years. In connection with the acquisition, NSAP
also assumed the liabilities of the Acquired Entities, including the obligation
to repay approximately $156.3 million principal amount of promissory notes (the
"S Distribution Notes") previously distributed to the NSI Stockholders for
payment of earned and undistributed S corporation earnings in the Acquired
Entities. The S Distribution Notes bear interest at 8% per annum and mature on
December 31, 2004.
The shares of Series A Preferred Stock are automatically convertible on
a one-to-one basis, subject to adjustment, into shares of Class A Common Stock
of NSAP if stockholder approval for such conversion is obtained. NSAP intends to
seek approval for conversion at its next annual meeting, scheduled for May 5,
1998. If stockholder approval for conversion is not received prior to September
30, 1998, NSAP may, at its option, redeem the Series A Preferred Stock at a
redemption price per share equal to the lesser of (i) $14.0625 (the "Preference
Value") or (ii) 60% of the average of the last sales prices per share of the
Class A Common Stock of the Company on the New York Stock Exchange for the 20
consecutive trading days ending on the trading day five days prior to the
redemption date. The redemption price would be payable 25% in cash on the
redemption date and the remaining 75% in equal installments on the anniversary
of the redemption date in each of the three succeeding years. If stockholder
approval for conversion is not received prior to September 30, 1998, the Series
A Preferred Stock will also be entitled to cumulative dividends at the rate of
7% of the Preference Value per share per annum, payable quarterly. If such
dividends become in arrears in an amount equal to at least six quarterly
dividends, holders of the Series A Preferred Stock will have the right to elect
two new directors, provided that such right will terminate when all accrued and
unpaid dividends are paid. The shares of Series A Preferred Stock are entitled
to a liquidation preference equal to the Preference Value per share.
Several of the NSI Stockholders were at the time of the acquisition and
continue to be significant holders of the Class A Common Stock of NSAP and
collectively the NSI Stockholders held and continue to hold all of the
outstanding shares of the Class B Common Stock of NSAP. In addition, several of
the NSI Stockholders were at the time of the acquisition and continue to be
directors and/or officers of NSAP. The acquisition was approved by a special
committee of NSAP's board of directors consisting solely of members of the board
who were not NSI Stockholders.
-1-
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
The combined financial statements as of and for the year ended December
31, 1997 and report of independent certified public accountants for the
Acquired Entities are included as Exhibit 99.15.
(b) Pro Forma Financial Information.
On March 27, 1998, the Company completed the acquisition of the capital
stock of the Acquired Entities (the "NSI Acquisition") for $70 million
in convertible preferred stock that is anticipated to convert to Class
A Common Stock upon stockholder approval and long-term notes payable to
the NSI Stockholders totaling approximately $23.7 million. In addition,
contingent upon NSI and NSAP meeting certain earnings growth targets,
NSAP may pay up to $25 million in cash per year over the next four
years. Also, as part of the NSI Acquisition, NSAP assumed approximately
$156.3 million in S Distribution Notes. The contingent consideration
paid, if any, will be accounted for as an adjustment to the purchase
price and allocated to the Acquired Entities' assets and liabilities.
The NSI Acquisition was accounted for by the purchase method of
accounting, except for the portion of the Acquired Entities under the
common control of a group of stockholders, which portion was accounted
for in a manner similar to a pooling of interests. The common control
group is comprised of the stockholders of NSAP and the Acquired
Entities that are immediate family members.
COMBINED FINANCIAL STATEMENTS
Inasmuch as a portion of the NSI Acquisition was accounted for in a
manner similar to a pooling of interests, all prior period financial
statements presented have been combined and restated as if NSAP and the
Acquired Entities had been combined during all periods presented.
The following Combined Balance Sheet (Unaudited) as of December 31,
1997 and the Combined Statements of Income (Unaudited) for the years
ended December 31, 1997, 1996 and 1995 include the accounts of NSAP and
its subsidiaries, including the Acquired Entities, and all significant
intercompany accounts and transactions have been eliminated in
consolidation. Intercompany eliminations include receivables, payables,
profit-in-inventory, other assets, revenues, cost of sales and selling,
general and administrative expenses. The minority interest represents
the NSI Stockholders who are not immediate family members. The
statements of income include a pro forma presentation for income taxes
which would have been recorded if the Acquired Entities had been taxed
as C corporations instead of as S corporations for all periods
presented.
PRO FORMA FINANCIAL STATEMENTS
Inasmuch as a portion of the NSI Acquisition was accounted for by the
purchase method of accounting, the combined and restated financial
statements for the most recent year have been adjusted to give effect
to the events directly attributable to the NSI Acquisition.
The following Pro Forma Combined Balance Sheet (Unaudited) as of
December 31, 1997 reflects the combined and restated financial
statements of NSAP and its subsidiaries, including the Acquired
Entities, as if the NSI Acquisition had occurred at December 31, 1997,
and the following Pro Forma Combined Statement of Income (Unaudited)
for the year ended December 31, 1997 reflects the combined and restated
financial statements of NSAP and its subsidiaries, including the
Acquired Entities, as if the NSI Acquisition had occurred at January 1,
1997.
The following pro forma financial information is presented for
informational purposes only and is not necessarily indicative of the
actual results of operations which might have occurred had the NSI
Acquisition been consummated as of those earlier dates, nor are they
indicative of the results of operations which may occur in the future.
-2-
Nu Skin Asia Pacific, Inc.
Combined Balance Sheet (Unaudited)
As of December 31, 1997
(in thousands, except share amounts)
Nu Skin Asia Acquired
Pacific, Inc. Entities Combined
ASSETS ------------- --------- ---------
Current assets
Cash and cash equivalents $ 166,305 $ 7,995 $ 174,300
Accounts receivable 9,585 1,489 11,074
Related parties receivable 10,686 43,332 23,008
Inventories, net 52,448 45,037 69,491
Prepaid expenses and other 37,238 1,478 38,716
--------- --------- ---------
276,262 99,331 316,589
Property and equipment, net 10,884 16,262 27,146
Other assets, net 65,303 11,402 61,269
--------- --------- ---------
Total assets $ 352,449 $ 126,995 $ 405,004
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 9,412 $ 13,847 $ 23,259
Accrued expenses 132,727 7,888 140,615
Related parties payable 32,782 17,808 10,038
Notes payable to stockholders, current portion -- 19,457 19,457
--------- --------- ---------
174,921 59,000 193,369
--------- --------- ---------
Notes payable to stockholders, less current portion -- 116,743 116,743
Minority interest -- -- (15,753)
--------- --------- ---------
Commitments and contingencies
Stockholders' equity
Preferred stock - 25,000,000 shares authorized,
$.001 par value, 1,941,331 shares issued and
outstanding -- -- 2
Class A common stock - 500,000,000 shares
authorized, $.001 par value, 11,758,011 shares
issued and outstanding 12 -- 12
Class B common stock - 100,000,000 shares
authorized, $.001 par value, 70,280,759 shares
issued and outstanding 70 -- 70
Capital stock -- 287 --
Additional paid-in capital 115,053 -- 115,053
Retained earnings 105,139 (43,920) 33,541
Deferred compensation (3,998) (5,457) (9,455)
Notes receivable from Nu Skin affiliates (9,828) -- --
Accumulated other comprehensive income (28,920) 342 (28,578)
--------- --------- ---------
177,528 (48,748) 110,645
--------- --------- ---------
Total liabilities and stockholders' equity $ 352,449 $ 126,995 $ 405,004
========= ========= =========
-3-
Nu Skin Asia Pacific, Inc.
Combined Statement of Income (Unaudited)
For the Year Ended December 31, 1997
(in thousands, except per share amounts)
Nu Skin Asia Acquired
Pacific, Inc. Entities Combined
------------ ---------- ----------
Revenue $ 890,548 $ 308,920 $ 953,422
Cost of sales 248,367 138,516 191,218
---------- ---------- ----------
Gross profit 642,181 170,404 762,204
---------- ---------- ----------
Operating expenses
Distributor incentives 346,117 16,078 362,195
Selling, general and administrative 139,525 109,738 201,880
Distributor stock expense 17,909 -- 17,909
---------- ---------- ----------
Total operating expenses 503,551 125,816 581,984
---------- ---------- ----------
Operating income 138,630 44,588 180,220
Other income (expense), net 10,726 (1,753) 8,973
---------- ---------- ----------
Income before provision for income taxes and minority
interest 149,356 42,835 189,193
Provision for income taxes 55,710 (3) 55,707
Minority interest -- -- 14,993
---------- ---------- ----------
Net income $ 93,646 $ 42,838 $ 118,493
========== ========== ==========
Net income per share:
Basic $ 1.42
Diluted $ 1.36
Weighted average common shares outstanding:
Basic 83,331
Diluted 87,312
Pro forma data:
Income before pro forma provision for income taxes
and minority interest $ 189,193
Pro forma provision for income taxes 71,856
Pro forma minority interest 9,299
----------
Pro forma net income $ 108,038
==========
Pro forma net income per share:
Basic $ 1.30
Diluted $ 1.24
-4-
Nu Skin Asia Pacific, Inc.
Combined Statement of Income (Unaudited)
For the Year Ended December 31, 1996
(in thousands, except per share amounts)
Nu Skin Asia Acquired
Pacific, Inc. Entities Combined
------------ ---------- ----------
Revenue $ 678,596 $ 265,030 $ 761,638
Cost of sales 193,158 124,429 171,187
---------- ---------- ----------
Gross profit 485,438 140,601 590,451
---------- ---------- ----------
Operating expenses
Distributor incentives 249,613 32,975 282,588
Selling, general and administrative 105,477 92,639 168,706
Distributor stock expense 1,990 -- 1,990
---------- ---------- ----------
Total operating expenses 357,080 125,614 453,284
---------- ---------- ----------
Operating income 128,358 14,987 137,167
Other income (expense), net 2,833 24,188 10,771
---------- ---------- ----------
Income before provision for income taxes and minority
interest 131,191 39,175 147,938
Provision for income taxes 49,494 32 49,526
Minority interest -- -- 13,700
---------- ---------- ----------
Net income $ 81,697 $ 39,143 $ 84,712
---------- ---------- ----------
Net income per share:
Basic $ 1.07
Diluted $ 1.02
Weighted average common shares outstanding:
Basic 79,194
Diluted 83,001
Pro forma data:
Income before pro forma provision for income taxes
and minority interest $ 147,938
Pro forma provision for income taxes 54,752
Pro forma minority interest 8,630
----------
Pro forma net income $ 84,556
==========
Pro forma net income per share:
Basic $ 1.07
Diluted $ 1.02
-5-
Nu Skin Asia Pacific, Inc.
Combined Statement of Income (Unaudited)
For the Year Ended December 31, 1995
(in thousands, except per share amounts)
Nu Skin Asia Acquired
Pacific, Inc. Entities Combined
------------ ---------- ----------
Revenue $ 358,609 $ 179,407 $ 435,855
Cost of sales 96,615 82,036 101,474
---------- ---------- ----------
Gross profit 261,994 97,371 334,381
---------- ---------- ----------
Operating expenses
Distributor incentives 135,722 3,773 139,495
Selling, general and administrative 67,475 63,699 115,950
Distributor stock expense -- -- --
---------- ---------- ----------
Total operating expenses 203,197 67,472 255,445
---------- ---------- ----------
Operating income 58,797 29,899 78,936
Other income (expense), net 511 139 650
---------- ---------- ----------
Income before provision for income taxes and minority
interest 59,308 30,038 79,586
Provision for income taxes 19,097 44 19,141
Minority interest -- -- 10,498
---------- ---------- ----------
Net income $ 40,211 $ 29,994 $ 49,947
========== ========== ==========
Net income per share:
Basic $ .64
Diluted $ .61
Weighted average common shares outstanding:
Basic 78,645
Diluted 82,459
Pro forma data:
Income before pro forma provision for income taxes
and minority interest $ 79,586
Pro forma provision for income taxes 29,423
Pro forma minority interest 6,617
---------
Pro forma net income $ 43,546
=========
Pro forma net income per share:
Basic $ .55
Diluted $ .53
-6-
Nu Skin Asia Pacific, Inc.
Pro Forma Combined Balance Sheet (Unaudited)
As of December 31, 1997
(in thousands, except share amounts)
Pro Forma Pro Forma
Combined Adjustments Combined
ASSETS ---------- ----------- ----------
Current assets
Cash and cash equivalents $ 174,300 $ 174,300
Accounts receivable 11,074 11,074
Related parties receivable 23,008 23,008
Inventories, net 69,491 $ 21,600 (a) 91,091
Prepaid expenses and other 38,716 38,716
---------- ----------
316,589 338,189
Property and equipment, net 27,146 27,146
Other assets, net 61,269 39,598(a)(b) 100,867
---------- ----------
Total assets $ 405,004 $ 466,202
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 23,259 $ 23,259
Accrued expenses 140,615 3,000 (b) 143,615
Related parties payable 10,038 10,038
Notes payable to stockholders, current
portion 19,457 19,457
---------- ----------
193,369 196,369
---------- ----------
Notes payable to stockholders, less current
portion 116,743 43,800 (b) 160,543
Minority interest (15,753) 15,753 (g) --
---------- ----------
Commitments and contingencies
Stockholders' equity
Preferred stock - 25,000,000 shares
authorized, $.001 par value, 1,941,331 and
2,986,663 shares issued and outstanding 2 1 (b) 3
Class A common stock - 500,000,000 shares
authorized, $.001 par value, 11,758,011
shares issued and outstanding 12 12
Class B common stock - 100,000,000 shares
authorized, $.001 par value, 70,280,759
shares issued and outstanding 70 70
Capital stock -- --
Additional paid-in capital 115,053 (1,356) (b) 113,697
Retained earnings 33,541 33,541
Deferred compensation (9,455) (9,455)
Notes receivable from Nu Skin affiliates -- --
Accumulated other comprehensive income (28,578) (28,578)
---------- ----------
110,645 109,290
---------- ----------
Total liabilities and stockholders' equity $ 405,004 $ 466,202
========== ==========
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
-7-
Nu Skin Asia Pacific, Inc.
Pro Forma Combined Statement of Income (Unaudited)
For the Year Ended December 31, 1997
(in thousands, except per share amounts)
Pro Forma Pro Forma
Combined Adjustments Combined
---------- ----------- ----------
Revenue $ 953,422 $ 953,422
Cost of sales 191,218 (c) 191,218
---------- ----------
Gross profit 762,204 762,204
---------- ----------
Operating expenses
Distributor incentives 362,195 362,195
Selling, general and administrative 201,880 $ 1,707 (d) 203,587
Distributor stock expense 17,909 17,909
---------- ----------
Total operating expenses 581,984 583,691
---------- ----------
Operating income 180,220 178,513
Other income (expense), net 8,973 (14,400) (e) (5,427)
---------- ----------
Income before provision for income taxes and
minority interest 189,193 173,086
Provision for income taxes 55,707 10,016 (f) 65,723
Minority interest 14,993 (14,993) (g) --
---------- ----------
Net income $ 118,493 $ 107,363
---------- ----------
Net income per share:
Basic $ 1.29
Diluted $ 1.21
Weighted average common shares outstanding:
Basic 83,331
Diluted (h) 88,357
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
-8-
Nu Skin Asia Pacific, Inc.
Notes to Unaudited Pro Forma Combined Financial Statements
(a) The following table sets forth the calculation of NSAP's acquisition costs
and its preliminary allocation to the Acquired Entities' assets and
liabilities using the estimated purchase accounting adjustments, which are
subject to post-closing adjustments. Final purchase accounting adjustments
may differ from the amounts shown below.
Calculation of acquisition costs:
Preferred stock (2,986,663 shares at $23.44 per share) $ 70,000,000
Long-term notes payable to stockholders 23,735,000
Assumed S Distribution Notes 156,265,000
Estimated acquisition expenses 3,000,000
-----------
253,000,000
Net book value of net assets acquired 114,720,000
-----------
Excess of cost over net book value 138,280,000
Less: portion under common control (89,882,000)
Portion not under common control $ 48,398,000 *
=============
* The portion of the excess of cost over net book value not under common
control was allocated as follows: (1) inventory step-up of $21,600,000;
(2) marketing rights --intangible of $7,000,000; (3) distributor
network --intangible of $7,350,000; and (4) tradename/trademark
--intangible of $12,448,000.
(b) Reflects the issuance of 1,045,332 shares of preferred stock, $.001 par
value, at $23.44 per share. The 1,941,331 shares of preferred stock issued
to the common control group are already reflected in the combined and
restated financial statements for all periods presented. Also reflects
$20,065,000 of the total $156,265,000 assumed S Distribution Notes, as only
$136,200,000 of the notes were actually issued as of December 31, 1997.
Also reflects the issuance of long-term notes payable to the NSI
Stockholders totaling $23,735,000, estimated accrued acquisition expenses
totaling $3,000,000, termination of the Acquired Entities' S corporation
status and the effect of recording long-term deferred tax assets totaling
$12,800,000 upon conversion of the Acquired Entities from S to C
corporations.
(c) The unaudited pro forma statement of income does not reflect additional
cost of sales related to the one-time inventory step-up totaling
$21,600,000.
(d) Reflects increased amortization expense totaling $1,707,000 on the
intangible assets. The marketing rights and the tradename/trademark assets
will be amortized on a straight-line basis over 20 years, and the
distributor network asset will be amortized on a straight-line basis over
10 years.
(e) Reflects increased interest expense totaling $14,400,000 on the notes
payable to the NSI Stockholders. The assumed S Distribution Notes totaling
$156,265,000 are due in equal monthly installments over seven years and the
long-term notes totaling $23,735,000 are due in 2005. The notes bear
interest at 8% per annum.
(f) Reflects adjustments of U.S. Federal and state income taxes as if the
Acquired Entities had been taxed as C corporations rather than as S
corporations during the year using the combined Company's effective tax
rate of 37.98%. Also reflects the tax effect of the above pro forma
adjustments. The statement of income does not reflect the one-time effect
of recording deferred tax assets totaling approximately $12,800,000 upon
conversion of the Acquired Entities from S to C corporations.
(g) Reflects the purchase of the minority interest in the Acquired Entities.
The minority interest represents the NSI Stockholders who are not immediate
family members.
(h) Diluted weighted average common shares outstanding are computed as if the
2,986,663 preferred shares had been converted to Class A Common Stock as of
the beginning of the year.
-9-
(c) Exhibits.
2.1 Stock Acquisition Agreement dated as of February 27, 1998 among Nu
Skin Asia Pacific, Inc. and the NSI Stockholders (incorporated by
reference to Exhibit 2.1 of the Annual Report on Form 10-K filed
by Nu Skin Asia Pacific, Inc. on March 13, 1998 with the
Securities and Exchange Commission).
99.15 Combined financial statements as of and for the year ended
December 31, 1997and report of independent certified public
accountants for the Acquired Entities.
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the date indicated.
NU SKIN ASIA PACIFIC, INC.
(Registrant)
By: /s/ M. Truman Hunt
M. Truman Hunt
Vice President of Legal Affairs
and Investor Relations
Dated: April 28, 1998
-10-
INDEX TO EXHIBITS
Exhibit Description
2.1 Stock Acquisition Agreement dated as of February 27, 1998 among Nu Skin
Asia Pacific, Inc. and the NSI Stockholders (incorporated by reference
to Exhibit 2.1 of the Annual Report on Form 10-K filed by Nu Skin Asia
Pacific, Inc. on March 13, 1998 with the Securities and Exchange
Commission).
99.15 Combined financial statements as of and for the year ended December 31,
1997 and report of independent certified public accountants for the
Acquired Entities.
-11-
99.15 Combined financial statements as of and for the year ended December 31,
1997 and report of independent certified public accountants for the
Acquired Entities.
Nu Skin Acquired Entities
Combined Financial Statements And Report Of
Independent Certified Public Accountants
December 31, 1997
C O N T E N T S
Page
Report Of Independent Certified Public Accountants 1
Combined Financial Statements
Balance Sheet 3
Statement Of Earnings 4
Statement Of Shareholders' Deficit 5
Statement Of Cash Flows 6
Notes To Combined Financial Statements 8
Report Of Independent
Certified Public Accountants
Boards of Directors
Nu Skin Acquired Entities
We have audited the accompanying combined balance sheet of Nu Skin Acquired
Entities (collectively, the Entities) as of December 31, 1997, and the related
combined statements of earnings, shareholders' deficit, and cash flows for the
year then ended. These financial statements are the responsibility of the
Entities' management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Nu Skin Acquired
Entities as of December 31, 1997, and the combined results of their operations
and their combined cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/S/ GRANT THORNTON LLP
Provo, Utah
April 1, 1998
Combined Financial Statements
Nu Skin Acquired Entities
Combined Balance Sheet
(in thousands, except share data)
December 31, 1997
ASSETS
Current assets
Cash and cash equivalents $ 7,995
Receivables
Affiliated companies (Note H) $ 42,725
Related parties (Note H) 607
Other 1,489 44,821
---------
Inventories, net (Note B) 45,037
Other current assets 1,478
---------
Total current assets 99,331
Property and equipment, at cost (Note C) 51,884
Less accumulated depreciation and amortization 35,622 16,262
---------
Deferred tax asset (Note L)
174
Other assets (Note D) 11,228
=========
$ 126,995
=========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 13,847
Accrued liabilities (Note E) 7,888
Affiliated company payable (Notes G and H) 7,980
Payable to NSAP (Note G) 9,828
Current maturities of long-term obligations to affiliates (Note K) 19,457
---------
Total current liabilities 59,000
Long-term obligations to shareholders,
less current maturities (Note K ) 116,743
Commitments and contingencies (Notes F, J and K) --
Shareholders' deficit (Notes G, J, K and M)
Common stock $.001 to $8.265, par values 287
Capital in excess of par values --
Accumulated deficit (43,920)
Unearned compensation (5,457)
Cumulative foreign translation adjustments 342 (48,748)
---------
$ 126,995
=========
The accompanying notes are an integral part of this financial statement.
3
Nu Skin Acquired Entities
Combined Statement Of Earnings
(in thousands)
Year ended December 31, 1997
Revenue (Note H) $ 308,920
Cost of products sold (Notes B and H) 138,516
---------
Gross profit 170,404
Distributor incentives (Note H) 16,078
Selling, general, and administrative expenses (Note H) 109,738
---------
125,816
---------
Operating profit 44,588
Other expense, net 1,753
---------
Earnings before income taxes 42,835
Income tax benefit (Note L) (3)
---------
Net Earnings $ 42,838
=========
Pro forma income taxes (Note L):
Earnings before pro forma
provision for income taxes $ 42,835
Pro forma income taxes 15,829
---------
Pro forma net earnings $ 27,006
=========
The accompanying notes are an integral part of this financial statement.
4
Nu Skin Acquired Entities
Combined Statement Of Shareholders' Deficit
(in thousands)
Year ended December 31, 1997
Retained
earnings Cumulative
Capital in (accum- Unearned foreign
Par excess of lated compen- translation
values par values deficit) sation adjustments Total
---------- ---------- ---------- ---------- ----------- ----------
Balance at January 1, 1997 $ 287 $ 2,308 $ 47,757 $ (8,468) $ (91) $ 41,793
Capital contribution by shareholders - 29,845 - - - 29,845
Net change in foreign currency
translation adjustments - - - - 433 433
Forfeiture of available-for-sale
securities to employees (Note G) - - - 215 - 215
Amortization of securities
granted to employees - - - 2,086 - 2,086
Amortization of distributor stock options - - - 629 - 629
Adjustment to distributor stock
options (Note G) - - - 81 - 81
Dividends to shareholders
Cash - (30,468) - - - (30,468)
Notes to shareholders (Note K) - - (87,114) - - (87,114)
Investment in Nu Skin USA, Inc. - (1,685) (47,401) - - (49,086)
Net earnings - - 42,838 - - 42,838
---------- ---------- ---------- ---------- ----------- ----------
Balance at December 31, 1997 $ 287 $ - $ (43,920) $ (5,457) $ 342 $ (48,748)
========== ========== ========== ========== =========== ==========
The accompanying notes are an integral part of this financial statement.
5
Nu Skin Acquired Entities
Combined Statement Of Cash Flows
(in thousands)
Year ended December 31, 1997
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings $ 42,838
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation and amortization $ 4,890
Forfeiture of employee stock
awards granted 215
Gain on sale of property and equipment
(443)
Amortized unearned compensation 2,715
Adjustment of distributor compensation
81
Deferred taxes
(3)
Changes in assets and liabilities
Receivables (4,319)
Inventories, net (6,428)
Other assets 7,004
Accounts payable 516
Accrued liabilities 2,967
Related party payable (43,222)
---------
Total adjustments (36,027)
---------
Net cash provided by
operating activities 6,811
---------
Cash flows from investing activities
Proceeds from sale of property
and equipment 695
Purchase of property and equipment (7,038)
---------
Net cash used in
investing activities (6,343)
---------
(Continued)
6
Nu Skin Acquired Entities
Combined Statement Of Cash Flows - Continued
(in thousands)
Year ended December 31, 1997
Cash flows from financing activities
Capital contributions from shareholders 29,845
Cash dividends to shareholders (30,468)
---------
Net cash used in financing activities (623)
---------
Effect of exchange rate changes on cash 433
---------
Net increase in cash and cash equivalents 278
Cash and cash equivalents at beginning of year 7,717
=========
Cash and cash equivalents at end of year $ 7,995
=========
Supplemental disclosures of cash flow information
Cash paid during the year for
Income taxes $ 142
Noncash investing and financing activities
During 1997, certain of the Entities distributed their accumulated earnings to
shareholders in the form of notes payable totaling $136,200. In addition, NSI's
investment in Nu Skin USA, Inc. of $49,086 was contributed to the shareholders
of NSI at December 31, 1997. Also during 1997, the Entities changed the
estimated number of options reserved for distributors (Note G) resulting in a
$2,716 reduction in the payable to Nu Skin Asia Pacific, Inc. (Note K).
The accompanying notes are an integral part of this financial statement.
7
Nu Skin Acquired Entities
Notes To Combined Financial Statements
December 31, 1997
Note A - Summary Of Significant Accounting Policies
A summary of the significant accounting policies applied in the
preparation of the accompanying financial statements follows. Dollar
amounts in these notes to the combined financial statements are in
thousands, except for per share and per option data.
1. Business activity
Nu Skin International, Inc. (NSI) was incorporated in 1984, pursuant to
the laws and regulations of the State of Utah. NSI is a global leader in
the direct selling industry specializing in the development and
distribution of personal care and nutrition products. NSI markets products
to independent distributors throughout the United States and sells
products to various Nu Skin affiliated entities operating in foreign
jurisdictions. At December 31, 1997, NSI spun-off the assets relating to
its sales to independent distributors in the United States into a related
entity named Nu Skin USA, Inc. (NSUSA). The financial results of NSUSA and
the results of operations relating to the assets within NSUSA are not
included in the combined financial statements of the Nu Skin Acquired
Entities (the Entities).
The financial statements of the Entities consist of the combined
statements of NSI (excluding the operations of NSUSA), Nu Skin Europe,
Inc. (NSE) and its European affiliated entities, Nu Skin Personal Care
Australia, Inc., Nu Skin New Zealand, Inc., Nu Skin Brazil, Inc., Nu Skin
Argentina, Inc., Nu Skin Chile, Inc., Nu Skin Poland, Inc., Cedar Meadows,
L.C. and Nu Skin International Management Group, Inc. Inasmuch as these
entities are under common control and will be acquired by Nu Skin Asia
Pacific, Inc. (NSAP), an affiliated entity, they have been reported herein
on a combined basis. All significant intercompany accounts and
transactions among the Entities have been eliminated.
NSE markets products throughout Europe by selling products to or through
the following European affiliated entities: Nu Skin U.K. Inc. (NSUK), Nu
Skin Germany, Inc. (NSGR), Nu Skin France, Inc. (NSF), Nu Skin
Netherlands, Inc. (NSNL), Nu Skin Italy, Inc. (NSIT), Nu Skin Spain, Inc.
(NSSP) and Nu Skin Belgium, Inc. (NSB). Each of these companies are
incorporated in their respective geographic areas and domesticated in the
State of Delaware. These entities were organized from January to December
of 1995.
Nu Skin Personal Care Australia, Inc. (NSAU), and Nu Skin New Zealand,
Inc. (NSNZ) are the affiliated companies servicing the product orders of
the distributors in their respective geographic areas. NSAU and NSNZ were
organized in January of 1993.
Nu Skin International Management Group, Inc. (NSIMG), a Utah corporation,
provides support services to the Entities and other affiliated companies.
These services consist primarily of development, marketing, legal,
accounting and other managerial services. NSIMG was organized in January
of 1993.
8
Note A - Summary Of Significant Accounting Policies - Continued
1. Business activity - continued
Nu Skin Brazil, Inc. (NSBR), Nu Skin Chile, Inc. (NSCH), Nu Skin
Argentina, Inc. (NSAR), and Nu Skin Poland, Inc. (NSPL) are non-operating,
start-up companies which will service the product orders of distributors
in each of their respective geographic areas. NSBR, NSCH and NSPL are
incorporated in their respective geographic areas and are domesticated in
the State of Delaware. NSAR is a Utah corporation. NSBR, NSCH, NSAR and
NSPL were organized in July of 1997, November of 1996, December of 1996,
and September of 1997, respectively.
Cedar Meadows L.C., a limited liability company, was organized in
September of 1994, holds certain property and equipment which are rented
to related parties.
2. Cash and cash equivalents
Cash equivalents are short-term, highly liquid instruments with original
maturities of 90 days or less.
3. Inventories
Inventories consist of merchandise purchased for resale and are stated at
the lower of cost or market using the first-in, first-out method.
4. Depreciation and amortization
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives.
Leasehold improvements are amortized over the lesser of their economic
lives or the lives of the respective leases. For financial reporting
purposes, the straight-line method of depreciation is followed for all
assets.
5. Other assets
Video production and trademark costs are capitalized and amortized over
their estimated useful lives ranging from 2 to 15 years.
6. Forward exchange contracts
As part of its risk management activities, the Entities enter into forward
exchange contracts to reduce the impact of foreign currency fluctuations
on certain receivables transactions with foreign affiliates. The contracts
are transacted in Japanese Yen. The Entities hold no other derivatives or
similar instruments.
9
Note A - Summary Of Significant Accounting Policies - Continued
6. Forward exchange contracts -continued
Gain or loss on a forward contract, determined based on the difference
between the spot rate at the balance sheet date and at the last valuation
date, is recognized each period. The premium or discount on the forward
exchange contract, calculated as the difference between the contract rate
and the spot rate at the inception of the contract is amortized over the
contract period. Net gains and losses on forward contracts entered into
during 1997 approximate $1,467 (gain) and are included in operating
activities in the Statement of Cash Flows as a component of Net Earnings.
The Entities held forward exchange contracts at December 31, 1997 with
notional amounts totaling approximately $8,160 which are due through March
of 1998.
7. Revenue recognition
NSI records sales to affiliates when product is shipped, or when license
fees and royalties are earned. Royalties are based upon trademark rights
owned by NSI and are earned as product is sold by affiliates. License fees
are based upon NSI's rights to distributors and the worldwide distribution
system, as utilized by affiliates, and are earned as distributors purchase
product.
The Entities which sell products to independent distributors generally
receive the sales price of products in cash at the time orders are made by
an independent distributor. Sales are generally recorded when the product
is shipped. Payments received for unshipped products are recorded as
deferred revenue.
8. Distributor incentives
Distributor incentives are billable by NSI to the affiliated entities
originating the commisionable sale at an agreed-upon rate of 42% of
product sales. Distributor incentives in excess of 42% are absorbed by
NSI. If total distributor incentives are less than 42%, NSI receives the
benefit.
9. Income taxes
Foreign entities are required to pay income taxes to the appropriate
foreign governmental organizations on profits derived from sales in the
respective countries. Accordingly, when the Entities have net earnings, a
provision is provided to recognize such taxes.
10
Note A - Summary Of Significant Accounting Policies - Continued
9. Income taxes - continued
Pursuant to the foreign taxes described above, the foreign Entities
utilize the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are measured using
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. An allowance against deferred tax assets is recorded
when it is more likely than not that such tax benefits will not be
realized.
Income taxes on the earnings applicable to the United States are payable
personally by the shareholders pursuant to an election under Subchapter S
of the Internal Revenue Code. Pro forma income taxes are disclosed in Note
L to present what income taxes would have been if all of the Entities
would have been subject to income taxes.
10. Product return policy
The refund program of NSAU, NSNZ, and combined NSE generally provides that
a distributor may return product and sales aids in excess of monthly
consumption, re-order requirements. Returned items will be refunded at 90%
of the sales price to the distributor, less respective commissions paid.
Product returns are not significant for the year ended December 31, 1997.
11. Foreign currency transactions
Gains or losses from foreign currency transactions, such as those
resulting from the settlement of payables to, or receivables from, foreign
affiliates, are included in the combined statement of earnings. Also
included in this amount are gains and losses from forward contract
transactions. Included in other expense, net is $3,879 of foreign
transaction losses.
12. Fair value of financial instruments
The fair value of financial instruments including, cash and cash
equivalents, receivables, investments, accounts and commissions payable,
accrued liabilities and long-term obligations approximate book values. The
fair values of open letters of credit approximate their face values.
11
Note A - Summary Of Significant Accounting Policies - Continued
13. Use of estimates
In preparing the Entities' financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
14. Recently issued accounting pronouncements not yet adopted
Comprehensive income
In September 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income." SFAS 130 requires entities presenting a complete
set of financial statements to include details of comprehensive income
that arise in the reporting period. Comprehensive income consists of net
earnings or loss for the current period and other comprehensive income,
which consists of revenue, expenses, gains, and losses that bypass the
statement of earnings and are reported directly in a separate component of
equity. Other comprehensive income includes, for example, foreign currency
items, minimum pension liability adjustments, and unrealized gains and
losses on certain investment securities. SFAS 130 requires that components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This
statement is effective for fiscal years beginning after December 15, 1997
and requires restatement of prior period financial statements presented
for comparative purposes.
Disclosure of segments
Also in September 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise
and Related Information." This statement requires an entity to report
financial and descriptive information about their reportable operating
segments. An operating segment is a component of an entity for which
financial information is developed and evaluated by the entity's chief
operating decision maker to assess performance and to make decisions about
resource allocation. Entities are required to report segment profit or
loss, certain specific revenue and expense items and segment assets based
on financial information used internally for evaluating performance and
allocating resources. This statement is effective for fiscal years
beginning after December 15, 1997 and requires restatement of prior period
financial statements presented for comparative purposes.
Management does not believe that the adoption of SFAS 130 or 131 will have
a material effect on the Entities combined financial statements.
12
Note B - Inventories
Inventories, net of reserves, consist of the following (in thousands):
Product inventory $ 39,473
Sales aids inventory 5,564
--------
$ 45,037
========
As of December 31, 1997, the Company had reserved for approximately $8,500
for inventory estimated as obsolete.
Note C - Property And Equipment
Property and equipment, at cost, and estimated useful lives are as follows
(dollar amounts in thousands):
Years
-------
Furniture and equipment 5-7 $ 50,005
Leasehold improvements 5-20 1,260
Motor vehicles 5 619
========
$ 51,884
========
Note D - Other Assets
Other assets consist of the following (in thousands):
Trademarks, net of accumulated amortization of $276 $ 5,346
9.5% long-term notes receivable from affiliates 3,193
Video production costs, net of accumulated
amortization of $1,517 424
All other 2,265
--------
$ 11,228
========
13
Note E - Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Wages, payroll taxes and vacation $ 3,453
Contingent liabilities 1,657
All other 2,778
---------
$ 7,888
=========
Note F - Commitments And Contingencies
1. Litigation
The Entities are involved in litigation and claims arising in the normal
course of business. Management of the Entities do not expect the liability
from these matters, if any, will have a significant impact on the
financial condition of the Entities in excess of amounts accrued.
2. Leases
The following is a schedule of future minimum annual rental payments,
primarily due to related parties (Note H), for real property and equipment
required under operating leases having initial or remaining non-cancelable
lease terms in excess of one year which expire from 2000 to 2014 (in
thousands):
Year ending December 31,
1998 $ 5,001
1999 4,357
2000 3,456
2001 2,644
2002 2,583
Thereafter 20,253
=========
$ 38,294
=========
Rent expense totaled $6,207 for the year ended December 31, 1997.
14
Note F - Commitments And Contingencies - Continued
3. Self Insurance
The Entities are generally self-insured for health care up to
predetermined amounts above which third party insurance applies. Accruals
are made based upon estimates of the aggregate liability for claims
incurred based upon the Entities experience. Health care claims accrued at
December 31, 1997 are not significant.
4. Line of credit
The Entities have an unused, unsecured domestic line of credit in the
amount of $2,500 at December 31, 1997 that expires in June of 1998. There
are no compensating balance arrangements with the bank.
5. Letters of credit
At December 31, 1997, the Entities had approximately $350 in open letters
of credit. The letters expire in April and July of 1998.
Note G - Stock Based Incentives
1. Distributor stock option plan
In November of 1996 the operating entities, other than NSUK and NSIT,
adopted the Nu Skin International, Inc., 1996 Distributor Stock Option
Plan (the Plan). Pursuant to the Plan, the Entities were initially
allocated approximately 638,000 options, each to purchase one share of
NSAP Class A common stock for $5.75 per share. The estimated fair value of
the options at December 31, 1996 approximated $13,140 ($20.59 per option).
Of the options acquired by the Entities, approximately 600,000 options
were assigned to the Entities' affiliates at fair value in exchange for
notes receivable.
The Plan allowed distributors who achieved certain performance criteria
through August 31, 1997 to receive options. The options vested ratably
from September 1, 1997 through December 31, 1997 and are exercisable
through December 31, 2001.
15
Note G - Stock Based Incentives - Continued
In accordance with the Plan, the number of options to be issued to each
distributor was finalized as of August 31, 1997. The actual number of
options allocated to the Entities at August 31, 1997 was approximately
517,000 with an estimated value of $9,828 ($19.00 per option). Of these
options approximately 480,000 were assigned to the Entities' affiliates.
The options were purchased in 1996 by the Entities in exchange for a
$13,140 ten year note payable to NSAP. As discussed above, the number of
distributor stock options to be issued to each distributor in each market
was revised through August 31, 1997 and the note payable to NSAP was
adjusted to $9,828 as of December 31, 1997. The note bears interest at 6%
annually and payments begin in January of 1998. Principal on this note
includes unpaid interest. Interest accrues on the principal and unpaid
interest and approximated $684 as of December 31, 1997.
2. Employee stock awards
In November of 1996, the Entities acquired approximately 347,000 shares of
NSAP Class A common stock in exchange for a $7,980 note from an affiliate
to be distributed as employee stock awards. The awards were immediately
granted to employees. During 1997, employees of the Entities forfeited
approximately 9,400 shares ($215) which were transferred to NSUSA. Shares
granted to employees vest over a four-year period. Compensation expense is
recognized ratably over the vesting period and totaled approximately
$2,086 during 1997.
Note H - Related Party Transactions
In addition to the related party transactions discussed in Notes D, F, G
and K, the Entities also entered into the following:
1. Sales, management, licensing, and royalty agreements
NSI has entered into agreements with other of the Entities, NSAP, Nu Skin
Canada, Inc. (NSC), Nu Skin Mexico, Inc. (NSM), Nu Skin Guatemala, Inc.
(NSG), Nu Skin Puerto Rico (NSPR), and NSUSA, affiliated companies with
common shareholders. Under the terms of the agreements, NSI grants these
affiliated companies the right to use the Nu Skin name and distributor
network, purchase management services and NSI's products. NSI's
transactions with the Entities and the affiliated companies are governed
by the agreements described above and include sales of product, and
collection of royalty, license, and management fees. The Entities' revenue
is derived primarily from transactions with affiliates.
16
Note H - Related Party Transactions - Continued
2. Receivables from affiliates
The Entities transactions with affiliated companies create receivables,
which bear interest at 8%, from these companies. At December 31, 1997, the
Entities held net receivables from affiliates as follows (in thousands):
NSAP $ 27,288
NSUSA 7,980
NSM 3,622
NSC 2,397
NSG 878
NSPR 560
---------
$ 42,725
=========
3. Sale of marketing and distribution rights
During the year ended December 31, 1996, NSI sold certain marketing and
distribution rights to NSAP. These rights were sold for $25,000 of which
$10,000 was received during 1997. The remaining $10,000 is due January 15,
1998 and is included in the financial statements as part of the
receivables from affiliated companies.
4. Direct expense reimbursements
The Entities received $1,698 of direct expense reimbursements from
affiliates during the year ended December 31, 1997. These reimbursements
are included as a reduction in selling, general, and administrative
expenses.
5. Transactions with related parties
The Entities have entered into transactions with the other related parties
as follows:
a. Purchases of sales aids
The Entities purchase sales aids from a related party. These purchases
totaled approximately $698, during the year ended December 31, 1997.
Management believes these purchases were at fair market value.
17
Note H - Related Party Transactions - Continued
b. Receivables
The Entities had related party receivables of approximately $607 at
December 31, 1997. No allowance for doubtful accounts is considered
necessary.
c. Shareholder distributors
Two major shareholders of the Entities have been independent
distributors of the Entities since 1984. These shareholder
distributors receive commission payments at the highest level of
distributor compensation.
Note I - Employee Benefit Plan
NSI and NSIMG have established an employees savings plan under section
401(k) of the Internal Revenue Code. This plan covers all employees who
are at least 21 years of age, have at least one year of service and work
at least 1,000 hours per year. NSI and NSIMG match 100% of the first 2% of
employee contributions and 50% of the next 2% of employee contributions up
to 3% of the employee salary. NSI and NSIMG's matching contributions vest
at a rate of 25% per year. NSI and NSIMG also may contribute a
discretionary amount to the plan. This discretionary amount vests from 20%
after 3 years to 100% after 7 years. NSI and NSIMG contributed
approximately $474 during the year ended December 31, 1997.
Note J - Stock Purchase Agreement
The shareholders and certain of the Entities have entered into a stock
purchase agreement whereby, upon the death of a shareholder, the Entities
are obligated to purchase the shares from the shareholder's estate at
market value. The commitment under such arrangement is partially funded by
shareholders' insurance policies owned by the Entities.
Note K - Long-Term Obligations To Shareholders
On December 31, 1997, certain of the Entities entered into agreements with
the S Corporation shareholders of the respective Entities whereby the
accumulated and previously undistributed earnings of the Entities were
distributed to the shareholders according to their proportionate holdings.
The distributions were in
18
Note K - Long-Term Obligations To Shareholders - Continued
the form of 8% notes payable with payments of $1,621 plus accrued interest
due monthly, and mature on December 31, 2004. The notes are not
collateralized.
Aggregate maturities of long-term obligations are as follows (in
thousands):
Year ending December 31,
1999 $ 19,457
2000 19,457
2001 19,457
2002 19,457
Thereafter 38,915
----------
Long-term portion 116,743
Current portion (due in 1998) 19,457
----------
Total $ 136,200
==========
Note L - Income Taxes
The Entities operating outside the United States are required to pay
income taxes to the appropriate foreign government on profits derived from
sales in those countries. The provision for income taxes represents income
taxes paid in foreign countries.
Income taxes on earnings applicable to the United States are payable
personally by the shareholders pursuant to an election under Subchapter S
of the Internal Revenue Code. Accordingly, when the Entities have
earnings, a provision for United States income taxes will not be provided.
Pro forma provision for income taxes
The combined statement of earnings includes a pro forma presentation for
income taxes which would have been recorded as if the Entities had been
able to file consolidated income taxes returns and had been subject to
U.S. federal and state tax laws.
19
Note L - Income Taxes - Continued
The pro forma provision for income taxes (benefit) consists of the
following (in thousands):
Current
Federal $ 19,528
State 2,728
Foreign 5,526
Deferred
Federal (8,402)
State (1,173)
Foreign (2,378)
---------
$ 15,829
=========
The principal components of pro forma deferred tax assets (liabilities)
are as follows (in thousands):
Depreciation $ 416
Capitalized expenses 8,256
Amortization (1,292)
Uniform capitalization 2,433
Foreign exchange transactions 1,619
Inventory reserve 3,178
Sale of marketing rights (3,739)
Accrued expenses 327
Capitalized start up costs 1,209
Stock incentives 372
All other 55
---------
$ 12,834
=========
A reconciliation of the Entities' pro forma effective tax rate compared to
the statutory U.S. federal tax rate is as follows:
Income taxes at statutory rate 35.00 %
State taxes, net of federal benefit 2.36 %
Tax exempt interest income (0.62)%
Nondeductible expenses 0.22 %
---------
36.96 %
=========
20
Note M - Subsequent Event (unaudited)
On March 27, 1998, NSAP completed the acquisition of the capital stock of
the Entities for $70,000 in convertible preferred stock and long-term
notes payable to the shareholders of the Entities totaling approximately
$23,700. In addition, contingent upon NSI and NSAP meeting certain
earnings growth targets, NSAP may pay up to $25,000 in cash per year over
the next four years. Also, as part of the acquisition of the Entities,
NSAP assumed the obligation to repay the principal amount of certain
promissory notes (Note K).
21
