-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E80mcVyURDuHtgB7LmNALBlP5jNrChMXAeF3cuEyfRntWmRrOqucGtMSBu2XV3DJ X72Ftx9rImxn771cuGLeeA== 0001021561-98-000037.txt : 19980430 0001021561-98-000037.hdr.sgml : 19980430 ACCESSION NUMBER: 0001021561-98-000037 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980428 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980429 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NU SKIN ASIA PACIFIC INC CENTRAL INDEX KEY: 0001021561 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 870565309 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-12421 FILM NUMBER: 98603436 BUSINESS ADDRESS: STREET 1: 75 WEST CENTER ST CITY: PROVO STATE: UT ZIP: 84601 BUSINESS PHONE: 8013456100 MAIL ADDRESS: STREET 1: 75 WEST CENTER ST CITY: PROVO STATE: UT ZIP: 84606 8-K/A 1 NU SKIN ASIA PACIFIC, INC. 8K/A 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- EX-99.15 2 NU SKIN ACQUIRED ENTITIES 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 -----END PRIVACY-ENHANCED MESSAGE-----