-----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, IaFseqSyqHGcT6pg43lAmHUmbasgwqYP3YChWLmf/Quda0pJ5VGRaeTmR/fdrKhT q3AoUFlv2MzXSv29oAADcQ== 0000950144-97-008306.txt : 19970730 0000950144-97-008306.hdr.sgml : 19970730 ACCESSION NUMBER: 0000950144-97-008306 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970430 FILED AS OF DATE: 19970729 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NSA INTERNATIONAL INC CENTRAL INDEX KEY: 0000850036 STANDARD INDUSTRIAL CLASSIFICATION: REFRIGERATION & SERVICE INDUSTRY MACHINERY [3580] IRS NUMBER: 621387102 STATE OF INCORPORATION: TN FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19487 FILM NUMBER: 97647443 BUSINESS ADDRESS: STREET 1: 4260 E RAINES RD CITY: MEMPHIS STATE: TN ZIP: 38118 BUSINESS PHONE: 9015411223 MAIL ADDRESS: STREET 1: 4260 E RAINES RD CITY: MEMPHIS STATE: TN ZIP: 38118 10-K 1 NSA INTERNATIONAL, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended April 30, 1997 ------------------------------------------------------ or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to ------------------------ ----------------------- Commission file number 0-19487 --------------------------------------------------------- NSA INTERNATIONAL, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Tennessee 62-1387102 - ----------------------------- -------------------------- State or other jurisdiction (I.R.S. Employer incorporation or organization Identification No.) 4260 East Raines Road, Memphis, Tennessee 38118 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (901) 541-1223 ----------------- Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.05 par value ------------------------------------ (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant: $2,705,720 computed by reference to a price of $1.5625 per share, the last reported sales price of the registrant's Common Stock on July 21, 1997. 1 2 (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at July 21, 1997 - -------------------------------- ---------------------------- Common Stock, $.05 par value 4,858,156 DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: None. PART I Item 1. Business. General NSA International, Inc. (the "Company") sells consumer products domestically and internationally through subsidiaries and third parties primarily utilizing multi-level and/or direct selling marketing systems. In a limited number of international markets, the Company does sell its proprietary consumer products to third-party distributors for traditional retail distribution. The Company's products include nutritional products, air and water filtration systems, security products, and a sparkling water system, all of which were designed principally for individual use. The Company's products are proprietary and most were developed by or for the Company or its affiliated entities. In the United States, the Company sells its products to National Safety Associates, Inc. ("NSA"), an affiliated Tennessee corporation, for resale to NSA's dealers and distributors. Outside the United States, the Company sells its products to third party distributors for retail distribution through local representative agents, dealers, and distributors in the United Kingdom, Ireland, Germany, Switzerland, the Netherlands, Belgium, Austria, Spain, Portugal, Andorra, the Russian Federation, Canada and certain parts of Asia. Additionally, the Company has entered into distribution agreements with third party distributors in Australia, New Zealand, Fiji, Pakistan, Peru, Israel and Turkey, although product sales to such distributors have not yet begun. In France and Italy, the Company does continue to sell its products through its wholly-owned subsidiaries to dealers and distributors residing in those countries. Operations Since organization, the Company's philosophy has been to pursue increased revenues through new product lines and product line and market expansion. In order to reduce the costs associated with product line expansion, the Company has shifted the manufacturing of all of its products to unaffiliated manufacturing organizations. The Company has adopted a similar approach with regard to market expansion and support through its Master Distributor program. The Master Distributor program enhances the Company's ability to expand into additional markets more quickly and efficiently and to transfer from the Company to a third party distributor the costs and other burdens associated with creating the corporate infrastructure required to open and support new markets. The Company intends to continue to enter into distribution agreements with third party distributors ("Master Distributors") pursuant to which the Company grants to the Master Distributor the exclusive right to purchase and resell the Company's products in a defined geographic area. The Company may, depending on the final terms of the particular distribution agreements, provide a Master Distributor with computer support and management consulting services in addition to products for resale. Following the development of the Master Distributor program in Asia, the Company entered into distribution agreements with unrelated third parties for the distribution of the Company's products in the countries of Israel and Peru, 1 3 both new markets for the Company's products. The first conversion of an existing market, however, occurred in April 1996, when the Company's subsidiary, National Safety Associates, Ltd., an Ontario corporation ("NSA Canada"), sold substantially all of its assets to a third party purchaser, the owners of which included members of NSA Canada's senior management, an employee of the Company and consultants to the Company. As a condition to the sale, the Company entered into a distribution agreement with the purchaser, pursuant to which the purchaser became the Company's Canadian Master Distributor. Since that time, the Company has succeeded in converting most of its European operations into Master Distributorships. In September 1996, the Company sold certain of the assets of its German and Swiss subsidiaries, NSA International GmbH ("NSA Germany") and NSA AG ("NSA Switzerland"), to a third party purchaser (the "German Master Distributor"), a principal of which was the former Director of Sales and Marketing of NSA Germany and a Director of NSA Switzerland. The sale included the transfer of the Company's Austrian subsidiary, NSA Oko Filter Systems Vertriebs GmbH. In November 1996, the Company completed negotiations for the sale of certain of the assets of three more of its European subsidiaries, National Safety Associates of America (U.K) Limited, a limited liability company registered in England ("NSA UK"), NSA B.V., a Dutch corporation, and NSA S.A., a Belgium corporation, to a third party purchaser (the "U.K. Master Distributor"), an entity controlled by three of the Company's European independent distributors. As in the transaction with the German Master Distributor, the Company entered into a distribution contract with the U.K. Master Distributor for the resale of the Company's products in the territory composed of the United Kingdom, the Republic of Ireland, Belgium and The Netherlands. Currently, the Company does continue to maintain its own direct selling operations in Italy ("NSA Italy") and France ("NSA France") (NSA Italy and NSA France collectively the "Direct Selling Subsidiaries"). The Company originally anticipated that the disposition of these operations would be completed during the 1997 fourth quarter or the 1998 first quarter. However, as yet the Company has not reached a satisfactory arrangement with third parties for the conversion of its remaining operations in Italy and France. In addition to converting most of its existing European operations to Master Distributorship, the Company has continued to expand into new markets. In November 1996, the Company entered into a limited distribution agreement with a third party distributor for the Russian Federation. Likewise, during the month of December, 1996, the Company entered into a distribution contract for selected Company products in Turkey and Pakistan. In January 1997, the Company entered into a distribution agreement and transferred ownership of its name holding subsidiary NSA S.R.L., a Spanish corporation, to its new Master Distributor for Spain, Portugal and Andorra. Finally, on May 2, 1997, the Company entered into a distribution contract with an unrelated third party distributor for Australia, New Zealand, and Fiji. Pursuant to the agreements with the Master Distributors in Spain, Portugal, Andorra, Australia, New Zealand and Fiji, the Company will provide computer support and management consulting services in addition to products. Principal Products Nutritional Products. The Company sells a line of nutritional products under its Juice Plus+(R) trademarks which includes an encapsulated, concentrated nutritional supplement product, a chewable version of the encapsulated product, a snack and energy bar called Juice Plus+(R) Snack Bars, a low calorie powdered drink mix called Juice Plus+(TM) Lite, and a dietary food supplement called Juice Plus+(TM) Thins. The principal ingredients of the Juice Plus+(R) product line are vegetable and fruit juices, fibers, plant enzymes, and food actives which are reduced to powder through a proprietary process by an unrelated manufacturer. A second manufacturer encapsulates the powder into Juice Plus+(TM) capsules and prepares the chewable form of the capsules and the Juice Plus+(TM) Thins. Another manufacturer utilizes the powder to produce the Juice Plus+(TM) Snack Bars and Juice Plus+(TM) Lite on a purchase order basis for the Company. Recently, the Company introduced a new nutritional product for pets, Juice Plus +(TM) for Dogs and Juice Plus +(TM) for Cats. Each of these products is produced by unrelated manufacturers. In the event that any of the aforementioned manufacturers terminate their relationship with the Company for any reason, the Company will be forced to seek out alternative suppliers which the Company believes will be available. 2 4 The Company obtained the rights to manufacture and distribute the Juice Plus+(R) product line pursuant to a manufacturing and licensing agreement with an unrelated third party. This agreement provides that the Company will pay a royalty fee from .5% to 1% of net sales revenues from the Juice Plus+(R) products, depending upon the volume of such sales. Sales of the Juice Plus+(R) product line constituted approximately 56% of the Company's revenues for the fiscal year ended April 30, 1997, compared with 52% of the Company's revenues for the fiscal year ended April 30, 1996, and 40% of the Company's revenues for the fiscal year ended April 30, 1995. Air Filtration Systems. The Company sells five different types of air filtration systems which systems are designed to remove a variety of airborne contaminants including smoke, pollen and dust. The Company sells three basic models which are suitable for general home or office use: the portable Models 1200 Personal Air Filter, the 692 AH Personal Air Filter with Heat, and the Model 7100 A/B Stationary Air Filter. The Company's Auto 600 Environmental Air System is designed for automobile use. The Model 1200 CS Personal Air Filter is designed for use in any area where hospital grade appliances are required. Sales of these air filtration systems constituted approximately 11% of the Company's revenues for the fiscal year ended April 30, 1997, compared with 13% of the Company's revenues for the fiscal year ended April 30, 1996 and 17% of the Company's revenues for fiscal year ended April 30, 1995. The Company's air filtration systems, as well as the water filtration systems and the Sparkling Water System described below, are manufactured for the Company by a third party pursuant to a five year manufacturing agreement which has approximately two and one-half years remaining. In the event that the aforementioned manufacturer terminates its relationship with the Company for any reason, the Company will be forced to seek out alternative suppliers which the Company believes will be available. Water Filtration Products. The Company's water filtration product line includes eight water filtration systems which are designed to remove chlorine from, and improve the taste, odor and clarity of, drinking water. Although the most recently designed water unit, the CT-2000, utilizes replacable cartridges, generally, the units utilize silver impregnated granular activated carbon to remove chlorine. Although most of these models are designed for use on treated drinking water, each model is designed for a specific application or water filtration problem. From May 1, 1993 through February 1, 1995, the Company manufactured a majority of its own water filtration products, although certain water filtration products continued to be purchased from NSA. The cost of water filtration products sold by the Direct Selling Subsidiaries' operators (prior to being converted to Master Distributorships) which were purchased from NSA was approximately $46,000 for the fiscal year ended April 30, 1997. See "Certain Relationships and Related Transactions." Sales of the water filtration products constituted approximately 21% of the Company's revenues for the fiscal year ended April 30, 1997, compared to 14% of the Company's revenues for the fiscal year ended April 30, 1996, and 18% of the Company's revenues for the fiscal year ended April 30, 1994. Sparkling Water System. The Company sells an in-home counter top carbonation appliance (the "Sparkling Water System") which discharges carbon dioxide contained in a refillable tank into liquids such as water. Sales of the Sparkling Water System constituted approximately 7% of the Company's revenues for the fiscal year ended April 30, 1997, compared to 5% of the Company's revenues for the fiscal year ended April 30, 1996, and 8% of the Company's revenues for the fiscal year ended April 30, 1995. Security Products. During fiscal 1994, the Company began marketing and selling its security product line in the European market. The Company's security product line includes a personal alarm, a bicycle alarm, a door viewer, and the NSA Surestop. The personal security alarm sounds a siren when activated. The bicycle alarm attaches to the handlebars of a bicycle and once activated, emits a siren if the bicycle is moved before the alarm is deactivated. 3 5 The door viewer is designed to be inserted in almost any door and provides field of vision of 180(degrees) on the other side of the door. The NSA Surestop is attached to the bottom of any door and is designed to prevent forced entry through the door. Sales of the Company's security products were expanded to all of the Company's operating European direct selling subsidiary organizations during fiscal 1995. The Company continues to sell its security products to certain, but not all, of its independent Master Distributors. Sales of the Company's security products constituted approximately 2% of the Company's revenues for the fiscal year ended April 30, 1997, compared to 5% of the Company's revenues for the fiscal year ended April 30, 1996, and 8% of Company revenues for the fiscal year ended April 30, 1995. The security products are manufactured exclusively for the Company by unrelated manufacturers located in the Asia on a purchase order basis. Marketing Plans. Since the origination of the Master Distributor program, the Company has transferred the operations of most of its European direct selling subsidiary organizations to independent Master Distributors. Likewise, the Company has expanded its product lines into new markets. Except for the two remaining Direct Selling Subsidiaries, resale and retail distribution of the Company's products will be accomplished by independent Master Distributors pursuant to contract. The marketing plans utilized by the various Master Distributors differ slightly by country for each Master Distributor. Some Master Distributors, for example, utilize a multi-level marketing system, while other Master Distributors simply sell the Company's products to retail locations in the applicable territory. Pursuant to the Company's existing multi-level marketing plans, the Company's two remaining Direct Selling Subsidiaries continue to distribute the Company's products to consumers through a network of distributors and dealers in much the same manner as the Master Distributors that utilize the multi-level marketing system. Distributors and dealers in a multi-level marketing system are independent contractors, not employees of the Direct Selling Subsidiaries or the Master Distributors. Distributors and dealers sell products directly to consumers primarily through individual in-home demonstrations and trial use. Generally, an individual becomes a dealer by the execution of an application and the payment of a small processing fee. As a dealer, the individual is authorized to retail the products purchased from the Company. An individual becomes a distributor by attaining a set level of sales activity over a specific time period. Dealers and Distributors may purchase products, at wholesale, directly from the Direct Selling Subsidiaries for resale to dealers or directly to consumers. The Direct Selling Subsidiaries, Master Distributors and certain local distributors hold training and orientation seminars in the respective countries. The Direct Selling Subsidiaries and Master Distributors depend on their existing distributors and dealers to identify, sponsor and train new dealers. Specifically, new dealers are brought into the multi-level distribution networks by existing distributors and dealers. In turn, these new dealers are encouraged to identify other new dealers. The existing distributors benefit from the sponsorship of new dealers in that the sponsoring distributor receives a percentage commission on the products purchased for resale by those individuals sponsored directly by the distributor, as well as commissions on the products purchased by those distributors or dealers sponsored by such individuals. The commissions vary depending upon the level of sales activity attained by a distributor and the individuals such distributor has sponsored. Inventory and Backlog. The Company maintains significant inventory volumes and has no backlog due to the fact that it attempts to fill dealer, distributor, Direct Selling Subsidiary or Master Distributor orders within two (2) business days of the date on which the order was placed. The Company's sales return policy varies as a result of country-specific governmental regulations. Provision for estimated sales returns is recorded based on historical return rates and current business conditions. The Company provides limited warranties for all of its products. Costs related to warranties have been insignificant. Management Agreement with NSA. Pursuant to a written management agreement, NSA provides management, consulting and advisory services to the Company relating to accounting, data processing, legal and regulatory compliance, general management, 4 6 administration of benefits, contract and lease negotiations, and other such matters for which the Company requests assistance. In consideration for these services, the Company pays to NSA any and all amounts collected by the Company from the Company's Master Distributors in exchange for data processing services offered to such Master Distributors by the Company. The total amount paid by the Company to NSA for management fees in fiscal 1997 was approximately $500,873. The management agreement is renewable annually and may be terminated by either party thereto by giving written notice to the other party. Reliance Upon a Single Customer Sales to NSA constituted approximately 26% of the Company's revenues for the fiscal year ended April 30, 1997. The loss of NSA as a customer would have a material adverse effect on the Company. See "Certain Relationships and Related Transactions." Competition. The products distributed by the Company are sold in highly competitive markets. Competitive products are sold by both retail sellers and other multi-level and direct selling organizations. In addition to competition relating to the products, the Direct Selling Subsidiaries as well as certain of the Master Distributors are subject to intense competition in the identification, sponsorship, and training of distributors and dealers from other multi-level direct selling organizations, whose specific product lines may or may not compete with the products distributed by the Company. Patents and Trademarks. The Company owns five domestic patents which relate to the production of the Sparkling Water System. The Company owns domestic trademark registrations for the trademark "Juice Plus+(R)", and has filed several additional domestic applications for these trademarks for various goods. The Company has also registered "Juice Plus+(R) in a number of foreign jurisdictions, and currently has applications pending in various other foreign jurisdictions. To improve efficiency in obtaining foreign tradermark registrations subsequent to the fiscal year ended April 30, 1997, the Company acquired through assignment the domestic and foreign trademark applications and registrations for "NSA(R)" owned by NSA. Regulation. The Direct Selling Subsidiaries and Master Distributors are subject to the laws and regulations in their respective countries relating to the marketing, content, labeling and packaging of their products; the operation of their sales programs, and the sales, advertising, and recruiting practices of their distributors and dealers. Numerous foreign governmental authorities regulate selling activities of the Direct Selling Subsidiaries and Master Distributors in their respective jurisdictions through complex regulatory schemes which are subject to constant change. Regulatory agencies previously have requested information regarding the products distributed by or the respective sales plans of the Company's remaining Direct Selling Subsidiaries (and the Company's other European direct selling operations prior to Master Distributorships). Although Company management believes that its products, sales materials, and sales plans are in substantial compliance with applicable laws and regulations, these laws and regulations are subject to change and interpretation which could adversely affect the Direct Selling Subsidiaries' operations or the Master Distributors' operations, which in turn could adversely affect the Company. Environmental. In connection with its past manufacturing operations, the Company was subject to various federal, state, and local regulations regarding the discharge of materials into the environment. Management believes that the Company operated in substantial compliance with such provisions, and the Company's compliance with these provisions did not have a material impact upon the capital expenditures, earnings or competitive position of the Company. 5 7 Employees. At April 30, 1997, the Company had approximately 31 employees. None of the Company's employees is represented by a labor union or collective bargaining unit. The Company considers relations with its employees to be satisfactory. Distributors and dealers participating in the marketing plans of the Direct Selling Subsidiaries are independent contractors of the Direct Selling Subsidiaries and are not employees of the Direct Selling Subsidiaries or the Company. Financial Information About Foreign and Domestic Operations and Export Sales. For Geographic Segment Financial Information as to the Company's operations see Note 8 in the Notes to Consolidated Financial Statements included in Item 8. Item 2. Properties. NSA UK leases approximately 12,800 square feet of office space in Maidenhead, Berkshire, England pursuant to noncancellable leases. The NSA UK leases are guaranteed by NSA. See "Certain Relationships and Related Transactions." NSA UK has licensed the UK Master Distributor to occupy approximately 4,000 square feet of the leased premises in Maidenhead, Berkshire, England. NSA UK has subleased the remaining 8,800 square feet of the leased premises in Maidenhead, Berkshire, England to an independent third party. NSA Germany leases approximately 663 square meters of office space in Didenberg-Hoffheim, Germany. NSA Switzerland leases approximately 160 square meters of office space in Basel, Switzerland, which premises have been subleased to the German Master Distributor. NSA France leases approximately 504 square meters of office space in Nanterre, France. NSA Italy leases approximately 530 square meters of office space in Milan, Italy. The Company leases approximately 1,500 square feet of office space in Camberly, England. NSA Polymers, Inc. leases approximately 52,000 square feet of warehouse space in Lake Mary, Florida. In the event any of these leases are terminated, the Company anticipates that it will be able to locate and lease other premises, if needed, without a material adverse effect to the operations of the Company. Neither the Company nor any of its subsidiaries own any real estate. The Company believes that its properties are suitable and adequate for the Company's present and future needs. Item 3. Legal Proceedings. The Company is party to various claims and matters of litigation that arise in the normal course of its business. Management of the Company believes the resolution of these matters will not have a material adverse effect on the results of operations or the financial condition of the Company. On February 12, 1993, a complaint for injunctive relief and damages was filed against the Company's affiliate, NSA, and Messrs. A. Jay Martin, L.F. Swords and George R. Poteet, individually, in the United States District Court for the Northern District of California. The named plaintiffs sought relief on behalf of themselves and for an alleged class of persons who participated in NSA's multi-level marketing plan from February 13, 1989 to the present. The complaint alleges that the NSA multi-level marketing plan constitutes an unlawful pyramid scheme and the unlawful sale of unregistered securities made through the use of allegedly untrue and misleading statements of material facts. It further alleges that the NSA marketing plan was promoted by utilizing fraudulent activities, unfair business practices and false advertising. NSA and the individual defendants answered denying the allegations. On April 5, 1994, the case was moved to the United States District Court for the Western District of Tennessee. The magistrate judge assigned to the case recommended certification of the class and NSA filed exceptions to the report. On August 20, 1996, the Court rendered an Order Granting Plaintiff's Motion for Class Certification as Modified. The Court's Order certified a class only as to two of plaintiff's claims, and only as to persons in NSA's multi-level marketing plan who participated in the plan from June 5, 1990 to the present and who incurred a loss because of such participation. Subsequently, the Court ordered plaintiffs to include four additional named plaintiffs for the action. At present, the exact parameters of the class are unresolved, and therefore, the members of the class have not been fully determined. Further, the District Court Judge who issued the August 1996 order on certification has since retired, and the case has been reassigned to 6 8 a new District Court Judge. It is uncertain whether the new District Court Judge will review and/or modify any prior decisions, including, the order on class certification. In April 1997, Safety Technologies, Inc., a wholly-owned subsidiary of Safetec International, Inc., filed a complaint in the United States District Court for the Middle District of Florida, Orlando Division, for injunctive relief and damages against NSA Polymers, Inc., a wholly-owned subsidiary of the Company, as well as Polymers, Inc., Futuro, Inc., Tubmaster, L.C., Eckerd Corporation, Berger Brunswig Corp., American Stores Company, McKesson Corporation, and Mr. Rushton Bailey, individually. Claims alleged by the plaintiff in the complaint include breach of contract, trademark infringement, unfair competition and deceptive trade policies. The complaint alleges that the named defendants manufactured and/or distributed products developed by the plaintiff and containing the plaintiff's registered trademark in various wholesale and retail markets without the knowledge or consent of the plaintiff. The Company believes that insurance coverage may be available for certain of these claims. The Company is evaluating its options and intends to vigorously defend this suit. Item 4. Submission of Matters to Vote of Security Holders. None. 7 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Price Range of Common Stock and Dividend Policy The Company's Common Stock is quoted and traded on The Nasdaq Stock Market under the symbol "NSAI." The following table sets out the high and low bid information for the Common Stock as reported on The Nasdaq Stock Market for the periods indicated.
HIGH LOW FISCAL 1997 First Quarter ............................................................... 4 1/4 2 1/2 Second Quarter ............................................................... 3 3/4 2 Third Quarter ............................................................... 2 1/4 1 1/2 Fourth Quarter ............................................................... 2 1/8 5/8 FISCAL 1996 First Quarter ............................................................... 4 5/8 3 5/8 Second Quarter ............................................................... 4 1/8 3 Third Quarter ............................................................... 3 3/4 1 1/2 Fourth Quarter ............................................................... 3 7/8 2 1/8
On July 21, 1996 the last reported sales price of the Common Stock on The Nasdaq Stock Market was $1.5625 per share. As of July 21, 1997, the Company had approximately 950 shareholders of record. The Company's dividend policy will depend on its earnings, financial condition, and other factors deemed relevant by the Board of Directors. The Board of Directors has never declared dividends on the Common Stock and does not anticipate declaring cash dividends on the Common Stock in the foreseeable future. The Board of Directors presently intends to retain future earnings, if any, to finance the growth of the Company's business. 8 10 Item 6. Selected Financial Data. The selected historical consolidated financial data set forth below for the fiscal years ended April 30, 1997, 1996, 1995, 1994, and 1993 have been derived from the consolidated financial statements of the Company for those years. The selected consolidated financial data should be read in conjunction with the consolidated financial statements and related notes and other financial data included elsewhere herein. The selected consolidated financial data also should be read in conjunction with the discussion set forth above in Part I, Item 1, under the heading "Operations." Income Statement Data:
(In thousands, except for per share data) For the Years Ended April -------------------------------------------------------------------------- 1997 1996 1995 1994 1993 (Historical) (Historical) (Historical) (Historical) (Historical) Net revenues $36,107 $ 73,150 $ 108,689 $ 112,531 $ 95,702 Costs and expenses 45,939 83,963 114,191 115,837 98,635 ------- --------- ---------- --------- --------- Income (loss) before taxes and minority interest and cumulative effect of change in accounting principle (9,832) (10,813) (5,502) (3,306) (2,933) Provision (benefit) for income taxes (22) (103) (761) (892) (744) ------- -------- ---------- --------- --------- Net income (loss) before minority interest and cumulative effect of change in accounting principle (9,810) (10,709) (4,741) (2,414) (2,189) Minority interest in (income) loss of consolidated subsidiaries 21 Cumulative effect of change in accounting principles 264 ------- -------- ---------- --------- --------- Net income (loss) $(9,810) $(10,709) $ (4,741) $ (2,150) $ (2,168) ======= ======== ========== ========= ========= Earnings (loss) per common share: Before cumulative effect of change in accounting principle $ (2.02) $ (2.20) $ (.98) $ (.49) $ (65) Cumulative effect of change in accounting principle .05 ------- -------- ---------- --------- --------- Net Income (loss) per common share $ (2.02) (2.20) $ (.98) $ (.44) $ (.65) ======= ======== ========== ========= ========= Weighted average number of common shares outstanding 4,858 4,858 4,858 4,858 13,338 Balance Sheet Data (at period end): (In thousands) Total assets $22,365 $ 31,274 $ 44,643 $ 55,138 $ 63,688 Note payable to bank -0- -0- -0- -0- -0- Current maturities of long term debt -0- -0- -0- 1,006 -0- Amounts due to NSA, Inc. 7,793 7,900 9,310 12,512 14,626 Long-term debt less current maturities -0- -0- -0- -0- -0- Total Shareholders' equity (deficit) 8,307 10,206 20,917 25,660 27,815
9 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. Management's discussion should be read in conjunction with the Consolidated Financial Statements and the discussion of the Company's business and other detailed information appearing elsewhere herein. All information is based on the Company's fiscal years ended April 30. Results of Operations Net Revenues
Fiscal Year ------------------------------------------------------- 1997 Change 1996 Change 1995 (Dollars in thousands) Net Revenues $36,107 (50.64)% $ 73,150 (32.70)% $ 108,689 Cost and expenses $45,939 (45.29)% $ 83,963 (26.47)% $ 114,191 Percentage of net revenues 127.23% 114.78% 105.06% Net loss $(9,810) $(10,709) $ (4,741) Loss per share $(2.02) $ (2.20) $ (.98)
On April 30, 1996, the Company sold its Canadian direct selling operation. During the 1997 second quarter, the Company sold its direct selling operations in Germany, Switzerland, Holland, Belgium, Ireland, and the United Kingdom. The above direct selling operations were purchased by Master Distributors who have continued to purchase product from the Company. In addition to product purchases, the Company receives royalties, management consulting, and computer support fees for certain administrative and computer services from these Master Distributors. As a result of these dispositions, the Company's only remaining direct selling operations are in Italy and France. The Company's reorganization and change in its method of selling and distributing its products caused the 1997 decline in its net revenues. As opposed to prior years, the 1997 net revenues of the transferred direct selling operations no longer include dealer/distributor commissions and allowances as those expenses are now paid by the Master Distributor. Accordingly, the 1997 decline in the Company's direct selling operations net revenues of approximately $40,719,000 was offset by increased sales to Master Distributors of approximately $5,640,000. The decline in 1996 net revenues primarily resulted from decreases in product sales of the Company's direct selling subsidiary organizations. Declines in revenue from the direct selling operations are attributed to a number of factors, including (i) adverse publicity in certain of the European markets aimed at multilevel sales organizations in general and/or in certain instances the Company or its products and (ii) continued adverse reaction to the Vitacron settlement and to certain changes made in the NSA Germany Marketing Plan in connection with the settlement. Cost and Expenses
Fiscal Year -------------------------------------------------- 1997 Change 1996 Change 1995 ----- ------ ---- ------ ------ (Dollars in thousands) Dealer/Distributor commissions and allowances $ 7,473 (73.39)% $28,082 (38.35)% $45,554 Percentage of net revenues 20.69% 38.39% 41.91% Cost of products sold $19,211 (32.32)% $28,385 (24.77)% $37,732 Percentage of net revenues 53.21% 38.80% 34.72%
10 12 The decrease in dealer/distributor commissions and allowances, as a percentage of net revenues for 1997 resulted primarily from the sale of most of the Company's direct selling operations and resulting restructuring of the Company's sales method, and the fact that dealer/distributor commissions which would have been paid on such product sales are now paid by the Master Distributor. The 1996 decrease in dealer/distributor commissions and allowances resulted primarily from the decrease in revenues from the direct selling operations. The 1997 increase in the cost of products sold as a percentage of net revenues resulted from the Company's operational changes. The product sales to Master Distributors have lower margins than sales made from the Company's direct selling operations. The 1996 cost of products sold, as a percentage of net revenues, increased as a result of the continued change in the Company's sales mix. Additionally, the Company's costs of goods sold reflected increased inventory reserves in 1996 of $1 million.
Fiscal Year ------------------------------------------------ 1997 Change 1996 Change 1995 ---- ------ ---- ------ ---- (Dollars in thousands) Operating Expenses $16,537 (37.98)% $26,664 (11.86)% $30,252 Percentage of net revenues 45.80% 36.45% 27.83%
The 1997 decline in the Company's operating expenses is the result of expense reductions caused from the 1997 second quarter sale of several of its European direct selling operations and the April 30, 1996 sale of the Canadian operations. This reduction was partially offset by a $2,000,000 reserve allowance the Company's notes receivable. The decrease in the 1996 operating expenses resulted from the institution of cost and expense controls and the 1995 fourth quarter sale of the Company's manufacturing subsidiary. This decrease was partially offset by a $1,000,000 charge representing the present value of excess future rent expense over subleased income from premises located in the United Kingdom leased by NSA UK.
Fiscal Year ------------------------------------------ 1997 Change 1996 Change 1995 ---- ------ ---- ------ ---- (Dollars in thousands) Interest income, net $695 (7.95%) $755 82.81% $413
The decrease in the 1997 net interest income reflects lower average balances of cash and cash equivalents. The 1996 increase in net interest income primarily reflects interest earned on notes receivable from the sale of the manufacturing operations.
Fiscal Year ------------------------------------------------ 1997 Change 1996 Change 1995 ---- ------ ---- ------ ---- (Dollars in thousands) Licensing and management fees to NSA, Inc. $501 (68.65)% $1,598 (35.40)% $2,472 Percentage of net revenues 1.39% 2.18% 2.28%
11 13 The decrease in the 1997 management fees is due to the sale of several of the Company's direct selling operations. The 1996 management fee decrease resulted from the sale of the Company's manufacturing subsidiary and the closing of the Company's Mexican subsidiary which reduced the administrative costs paid to NSA.
Fiscal Year ------------------------------------------------ 1997 1996 1995 ---- ---- ---- (Dollars in thousands) Other income (expense), net $89 $12 $2,405 Percentage of net revenues .25% .02% 2.21%
The 1997 increase in other income primarily resulted from gains in foreign currency translation. The decrease in the other income (expense) for 1996 resulted from a reduced foreign currency translation gain of approximately $1,050,000. The 1995 foreign currency translation gain was approximately $1,220,000. The remaining amount of the 1996 decrease is attributed to an approximate $300,000 loss in the Company's hedging program verses an approximate gain of $1,090,000 in the 1995 hedging program. Restructuring Costs
Fiscal Year ------------------------------------------------ 1997 1996 1995 ---- ---- ---- (Dollars in thousands) Restructuring costs $3,000 $-0- $1,000 Percentage of net revenues 8.31% N/A. 92%
The Company took a 1997 first quarter charge of $3,000,000 for expenses to be incurred with the restructuring of its direct selling operations and the closing of its European central office in Amsterdam. In 1995, the Company charged $1,000,000 for expenses to be incurred in the closing of the Company's Mexican direct selling subsidiary. Benefit (Provision) for income taxes
Fiscal Year --------------------------------------- 1997 1996 1995 ---- ---- ----- (Dollars in thousands) Benefit (provision) for income taxes $22 $103 $ 761 Effective tax rate .22% .95% 13.83%
The 1997 and 1996 effective tax rates reflect the inability to utilize operating losses of certain subsidiaries. The effective tax rate for fiscal 1995 was due to initial losses incurred by the Company's market expansions into France and Italy, on which the Company was not able to recognize a tax benefit. 12 14 Net Loss - --------
Fiscal Year ------------------------------------------------ 1997 1996 1995 ---- ---- ---- (Dollars in thousands) Net loss $(9,810) $(10,709) $(4,741) Loss per share $ (2.02) $ (2.20) $ (.98)
The 1997 net loss consists of a $3,000,000 ($.62 per share) restructuring charge, a note receivable allowance, totaling $2,000,000 ($.48 per share), and approximately $2,674,000 ($.55 per share) of operating losses during the 1997 first and second quarters generated by the European direct selling operations which were sold during the 1997 second quarter. The 1996 net loss primarily reflects the Company's fixed direct selling operating costs and expenses which exceeded its gross margin as a result of decreased revenues. The 1995 net loss primarily reflects the $2.4 million loss by the Company's Mexican direct selling subsidiary, which includes the $1 million in restructuring costs, and the $1.3 million loss in the Company's m anufacturing subsidiary. Future Outlook The Company has successfully replaced most of its direct selling and distribution operations with Master Distributors. The Company is continuing to search for qualified new Master Distributors to acquire its remaining two direct selling operations in Italy and France. During 1997, the Company made several new product introductions including a new water filter, which has interchangeable replaceable filters, Juice Plus Thins (TM), a dietary food supplement, and Juice Plus+(TM) for Dogs and Juice Plus+(TM) for Cats, a food supplement for dogs and cats. Through the Master Distributor program, the Company is expanding geographically into new markets. In the 1998 first quarter, a new Master Distributor began operations in Spain, Portugal and Andorra. The Company expects a new Master Distributor to begin operations in Australia, New Zealand and Fiji during the fall of calendar 1997. The Company's management believes that the conversion of its sales and distributorship operations to the Master Distributor program and new product introductions will provide the Company with long term favorable effects on its operating results. Although the ultimate effect of these changes cannot be determined, there could be continued adverse short-term results in operations caused by these changes. Liquidity and Capital Resources
Fiscal Year Ended April 30 ------------------------------------------ 1997 1996 1995 ------ ----- ------ (Dollars in thousands) Cash and cash equivalents $ 5,772 $ 8,755 $15,603 Short-term investments 11 13 521 Working capital 4,301 11,323 13,126 Cash provided (used) by operating activities (10,609) (6,855) (4,004) Cash provided (used) by investing activities 745 495 (1,119) Cash provided (used) by financing activities 6,881 (489) 645
13 15 On March 19, 1997, the Company's Board of Directors authorized the repurchase up to $1 million in shares of its common stock, $.05 par value, from time to time on the open market or in privately negotiated purchases. During the year ended April 30, 1997, the Company repurchased approximately 4,940 shares of common stock pursuant to this repurchase plan. These shares have yet to be retired and upon retirement the total outstanding shares will be adjusted. The Company has sufficient cash on-hand to finance current operations, and does not anticipate requiring additional funding in excess of the current cash balances and cash flow generated from operations. If required, management believes additional funding will be available from financial institutions or NSA on satisfactory terms. Item 8. Financial Statements and Supplementary Data. NSA International, Inc. and Subsidiaries: Report of Independent Certified Public Accountants Consolidated Balance Sheets as of April 30, 1997 and 1996 Consolidated Statements of Operations for the Years Ended April 30, 1997, 1996, and 1995 Consolidated Statements of Shareholders' Equity for the Years Ended April 30, 1997, 1996, and 1995 Consolidated Statements of Cash Flows for the Years Ended April 30, 1997, 1996, and 1995 Notes to Consolidated Financial Statements Schedule II Valuation and Qualifying Accounts Year Ended April 30, 1997, 1996, and 1995 14 16 NSA INTERNATIONAL, INC. AND SUBSIDIARIES TABLE OF CONTENTS - --------------------------------------------------------------------------------
Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets as of April 30, 1997 and 1996 2 Consolidated Statements of Operations for the Years Ended April 30, 1997, 1996, and 1995 3 Consolidated Statements of Shareholders' Equity for the Years Ended April 30, 1997, 1996, and 1995 4 Consolidated Statements of Cash Flows for the Years Ended April 30, 1997, 1996, and 1995 5 Notes to Consolidated Financial Statements 6-17
17 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of NSA International, Inc. We have audited the accompanying consolidated balance sheets of NSA International, Inc. and Subsidiaries (the "Company") as of April 30, 1997 and 1996 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended April 30, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. As discussed in Note 7 to the financial statements, the Company is party to a significant number of transactions with National Safety Associates, Inc. ("NSA, Inc."), the shareholders of which own a majority of the Company's common stock. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of NSA International, Inc. and Subsidiaries as of April 30, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Memphis, Tennessee July 17, 1997 18 NSA INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS APRIL 30, 1997 AND 1996 - --------------------------------------------------------------------------------
ASSETS 1997 1996 CURRENT ASSETS: Cash and cash equivalents $ 5,771,563 $ 8,754,770 Short-term investments 10,754 13,047 Receivables, net 2,972,636 1,839,493 Refundable income taxes 690,000 729,545 Inventories, net 7,104,869 10,233,158 Deferred income taxes 32,000 322,000 Notes receivable - short-term 550,000 125,000 Other current assets 265,078 1,093,442 ------------ ------------ Total current assets 17,396,900 23,110,455 PROPERTY AND EQUIPMENT, At cost: Leasehold improvements 195,862 579,618 Manufacturing equipment 455,850 678,800 Office furniture and equipment 1,043,222 2,693,847 Transportation equipment 124,765 Data processing equipment 558,148 2,148,027 ------------ ------------ Total 2,253,082 6,225,057 Less accumulated depreciation and amortization (1,326,684) (3,347,843) ------------ ------------ Property and equipment, net 926,398 2,877,214 NOTES RECEIVABLE - LONG-TERM 2,945,007 4,615,495 OTHER ASSETS 1,096,200 670,827 ------------ ------------ TOTAL ASSETS $ 22,364,505 $ 31,273,991 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Amounts due to NSA, Inc. $ 7,793,387 $ 923,150 Accounts payable, trade 913,452 2,556,531 Accrued sales commissions and allowances 246,603 771,868 Accrued compensation and expenses 2,834,976 4,724,392 Accrued sales returns 368,611 1,196,142 Advance payments by dealers/distributors 95,714 105,079 Income taxes payable 656,000 1,068,596 Other current liabilities 186,981 441,300 ------------ ------------ Total current liabilities 13,095,724 11,787,058 AMOUNTS DUE TO NSA, INC 7,900,000 DEFERRED INCOME TAXES 32,000 322,000 OTHER LIABILITIES 929,518 1,058,662 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, $.05 par value, 100,000,000 shares authorized, 4,858,156 shares issued and outstanding 242,908 242,908 Additional paid-in capital 29,106,950 21,196,430 Deficit (21,042,595) (11,233,067) ------------ ------------ Total shareholders' equity 8,307,263 10,206,271 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 22,364,505 $ 31,273,991 ============ ============
See notes to consolidated financial statements. -2- 19 NSA INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED APRIL 30, 1997, 1996, AND 1995 - --------------------------------------------------------------------------------
1997 1996 1995 NET REVENUES: Net sales $ 35,424,937 $ 70,831,868 $ 105,977,808 Dealer/distributor fee income 682,374 2,318,464 2,710,854 ------------- ------------- ------------- Total 36,107,311 73,150,332 108,688,662 COSTS AND EXPENSES: Dealer/distributor commissions and allowances (7,472,932) (28,082,083) (45,553,564) Cost of products sold (19,211,498) (28,385,494) (37,732,481) Operating expenses (16,536,955) (26,663,852) (30,251,635) Licensing and management fees to NSA, Inc. (500,873) (1,597,737) (2,471,986) Restructuring costs (3,000,000) (1,000,000) Interest income, net 694,506 754,835 413,073 Other income (expense), net 88,913 11,514 2,405,466 ------------- ------------- ------------- Total (45,938,839) (83,962,817) (114,191,127) ------------- ------------- ------------- LOSS BEFORE INCOME TAX BENEFIT (9,831,528) (10,812,485) (5,502,465) INCOME TAX BENEFIT 22,000 103,000 761,000 ------------- ------------- ------------- NET LOSS $ (9,809,528) $ (10,709,485) $ (4,741,465) ============= ============= ============= LOSS PER COMMON SHARE $ (2.02) $ (2.20) $ (0.98) ============= ============= ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 4,858,156 4,858,156 4,858,270 ============= ============= ============= TRANSACTIONS WITH NSA, INC. INCLUDED IN THE ABOVE: Net sales to NSA, Inc. $ 9,361,000 $ 11,588,030 $ 9,301,000 Cost of products sold (purchased from NSA, Inc.) 45,596 1,162,501 3,180,102
See notes to consolidated financial statements. -3- 20 NSA INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED APRIL 30, 1997, 1996, AND 1995 - --------------------------------------------------------------------------------
COMMON STOCK ------------------------- ADDITIONAL RETAINED NUMBER PAID-IN EARNINGS OF SHARES AMOUNT CAPITAL (DEFICIT) TOTAL BALANCES AT APRIL 30, 1994 4,858,456 $ 242,923 $ 21,199,751 $ 4,217,883 $ 25,660,557 Repurchase of common stock warrants (1,750) (1,750) Repurchase and retirement of common stock (300) (15) (385) (400) Net loss (4,741,465) (4,741,465) --------- ------------ ------------ ------------ ------------ BALANCES AT APRIL 30, 1995 4,858,156 242,908 21,197,616 (523,582) 20,916,942 Repurchase of common stock warrants (1,186) (1,186) Net loss (10,709,485) (10,709,485) --------- ------------ ------------ ------------ ------------ BALANCES AT APRIL 30, 1996 4,858,156 242,908 21,196,430 (11,233,067) 10,206,271 Net loss (9,809,528) (9,809,528) Forgiveness of debt by NSA, Inc. 7,910,520 7,910,520 --------- ------------ ------------ ------------ ------------ BALANCES AT APRIL 30, 1997 4,858,156 $ 242,908 $ 29,106,950 $(21,042,595) $ 8,307,263 ========= ============ ============ ============ ============
See notes to consolidated financial statements. -4- 21 NSA INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED APRIL 30, 1997, 1996, AND 1995 - --------------------------------------------------------------------------------
1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (9,809,528) $(10,709,485) $ (4,741,465) Adjustments to reconcile net loss to net cash used by operations: Non cash restructuring charges 475,000 1,000,000 Depreciation and amortization 562,441 977,014 1,582,632 Provision for uncollectible notes receivable 2,000,000 Loss on sale of property and equipment 214,473 132,401 134,813 (Gain) loss on sale of short-term investments 2,293 (6,902) 16,215 Change in deferred income taxes (197,000) 903,000 Changes in assets and liabilities, net of the effects of the sale of significant assets of the Company, as discussed in Note 3: Receivables, net (1,133,143) 187,528 (638,816) Inventories 3,128,289 2,005,948 1,203,176 Other assets 367,669 579,316 (794,919) Accounts payable, trade (1,643,079) 191,515 (48,218) Accrued sales returns (827,531) (589,466) (1,792,864) Advance payments by dealers/distributors (9,365) (274,317) (177,875) Accrued expenses, other (3,180,169) (2,368,413) 254,451 Income taxes payable and refundable (373,051) 2,137,400 (878,349) Other current liabilities (254,319) 79,427 (25,656) Other liabilities (129,144) 1,000,00 ------------ ------------ ------------ Net cash used by operating activities (10,609,164) (6,855,034) (4,003,875) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments (3,050,545) Proceeds from sale of short-term investments 515,200 3,004,200 Purchase of property and equipment (39,831) (532,941) (1,611,935) Proceeds from sale of property and equipment 29,119 12,732 39,600 Proceeds from principal payments on notes receivable 755,912 500,000 Proceeds from the sale of substantially all assets of NSA Polymers, Inc. 500,000 ------------ ------------ ------------ Net cash provided (used) by investing activities 745,200 494,991 (1,118,680) CASH FLOWS FROM FINANCING ACTIVITIES: Repurchase of common stock and warrants (1,186) (2,150) Advances from (to) NSA, Inc. 6,880,757 (487,317) 894,522 Principal payments on long-term debt (247,864) ------------ ------------ ------------ Net cash provided (used) by financing activities 6,880,757 (488,503) 644,508 ------------ ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS (2,983,207) (6,848,546) (4,478,047) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,754,770 15,603,316 20,081,363 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,771,563 $ 8,754,770 $ 15,603,316 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ Nil $ 3,381 $ 55,000 Income taxes refunded (paid), net Nil 2,045,400 340,000
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES: See discussion of non cash financing activities at Notes 3 and 7. See notes to consolidated financial statements. -5- 22 NSA INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1997, 1996, AND 1995 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS - NSA International, Inc. and Subsidiaries (the "Company") sells products which include air and water filtration products, an in-home carbonation appliance, and a line of nutritional supplement products. The products are distributed through the Company's third-party licensees and its direct multi-level marketing network outside the United States and through NSA, Inc.'s United States direct multi-level marketing network. Also see Note 3. BASIS OF CONSOLIDATION - The accompanying consolidated financial statements include the accounts of the Company and all subsidiaries. All significant intercompany accounts and transactions have been eliminated. CASH AND CASH EQUIVALENTS - Certificates of deposit and other debt instruments with a maturity of three months or less from the date of purchase are considered to be cash equivalents. SHORT-TERM INVESTMENTS - Short-term investments consist of certificates of deposit, municipal bonds, and corporate bonds which are classified as trading securities. The investments are stated at market. CONCENTRATION OF CREDIT RISK - Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash equivalents, short-term investments, foreign exchange forward contracts, and receivables, including notes receivable. Substantially all of cash and cash equivalents were deposited with major banks covered with only a nominal amount of government provided insurance. Short-term investments are limited to investment grade bonds or to certificates of deposit with major banks. The counterparties to foreign exchange forward contracts are limited to major commodity exchanges. The Company continually evaluates the financial viability and reputation of each financial institution and exchange. Regarding receivables, management believes credit risk beyond that already provided for is limited due to geographic dispersion and, for notes receivable, collateral backing. INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out basis) or market and consisted of the following at April 30, 1997 and 1996:
1997 1996 Raw materials $ 1,784,662 $ 5,850,158 Finished goods 5,615,235 6,733,874 Accessories 806,704 1,933,995 ------------ ------------ Total at cost 8,206,601 14,518,027 Reserve for excess and obsolete inventories (1,101,732) (4,284,869) ------------ ------------ Inventories, net $ 7,104,869 $ 10,233,158 ============ ============
-6- 23 PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost. Depreciation of property and equipment is principally computed by the straight-line method over the estimated useful lives of the assets, which range as follows: Office furniture and equipment 2 to 7 years Leasehold improvements 3 to 10 years Manufacturing equipment 3 to 7 years Transportation equipment 3 to 5 years Data processing equipment 5 years
Maintenance and repairs are charged to expense as incurred; major renewals are capitalized. Gains or losses on retirement or disposition are charged to income and respective costs and accumulated depreciation are eliminated. FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE FORWARD CONTRACTS - The Company's functional currency is the U.S. dollar; therefore, the foreign subsidiaries remeasure monetary assets and liabilities at year-end exchange rates and inventory, property, equipment, and non-monetary assets and liabilities at historical rates. Income and expense accounts are translated at the exchange rates in effect on the day of the transaction, except for depreciation, which is translated at historical rates. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the U.S. dollar) are included in net income in the period incurred. In fiscal 1994, the Company adopted a policy to reduce the effects of fluctuations in foreign currency exchange rates associated with certain aspects of these investments, principally the monetary assets and liabilities of the Company's foreign subsidiaries, by buying or selling foreign exchange forward contracts in manners which will generally replicate the effects which would occur if related options had been purchased. The size of positions held vary based principally on the Company's net position of monetary assets and liabilities and on the duration and magnitude of the current foreign exchange trend in effect. Management believes this practice will partially hedge the effects of foreign currency fluctuations on the Company's financial statements, but of course cannot assure that this objective will be met. Fair values of the foreign exchange forward contracts are estimated using quoted market prices of these or comparable instruments; related gains and losses on these contracts, as well as the foreign exchange gains and losses resulting from translation of the financial statements of the Company's foreign subsidiaries, are recognized in other income or expense. Within the definitions contained in Statement of Financial Accounting Standards No. 119, management considers these contracts to be held for purposes other than trading. As discussed in Note 3, in fiscal 1997 the Company sold its remaining significant foreign operations to certain investor groups. Due to these sales, the Company's foreign subsidiaries now have substantially lower monetary asset and liability positions. Accordingly, the Company's positions taken with respect to foreign exchange forward contracts have been substantially reduced as well. At April 30, 1997, the Company was not a party to any foreign exchange forward contracts and therefore had no unrealized gains or losses or margin deposits related thereto as of this date. At April 30, 1996, the Company had foreign currency contracts to sell forward the dollar equivalent of $800,000 of pound sterling, Swiss franc, and deutsche mark, and to buy forward the dollar equivalent of $150,000 Canadian dollars. These contracts generally mature within one year and had aggregate unrealized gains of approximately $18,000, which were included in net income. Margin deposits made for these contracts totalled $618,000 at April 30, 1996 and were included in other current assets. -7- 24 The foreign currency translation gains (losses), net of the effects of foreign exchange forward transactions, for the years ended April 30, 1997, 1996, and 1995 totalled approximately $140,000, $460,000, and $2,310,000, respectively. REVENUE RECOGNITION - Revenues from product sales are recognized upon shipment of product. Provision for estimated sales returns is recorded based on historical returns rates and current business conditions. INCOME TAXES - Deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. LOSS PER SHARE - Loss per share has been computed by dividing net loss by the weighted average number of common shares outstanding. No effect has been given to common stock equivalents as they have no dilutive effects. EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share," which is required to be adopted during the Company's fiscal year 1998. At that time, the Company will be required to change the method currently used to compute its earnings per share and, if necessary, to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effects of any outstanding stock options will be excluded. As the Company currently has no dilutive securities outstanding, Statement No. 128 is not expected to have an impact on the calculation of the Company's loss per share for the years ended April 30, 1997 and 1996. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. RECLASSIFICATIONS - Certain amounts in the 1996 and 1995 financial statements have been reclassified to be consistent with the presentation of the 1997 financial statements. 2. RECEIVABLES Accounts receivable, trade represents amounts due from the Company's third-party licensees and from customers of the Company's domestic subsidiaries. Receivables consisted of the following at April 30, 1997 and 1996:
1997 1996 Accounts receivable, trade $ 2,779,995 $ 1,292,726 Other accounts receivable 155,136 340,041 Amounts due under revolving credit agreements 82,767 467,214 Less amounts due to dealer/distributors (45,262) (164,608) ----------- ----------- Total 2,972,636 1,935,373 Less allowance for doubtful accounts (95,880) ----------- ----------- Receivables, net $ 2,972,636 $ 1,839,493 =========== ===========
-8- 25 3. DISPOSALS, NOTES RECEIVABLE, AND PRO FORMA INFORMATION During the second quarter of 1997, the Company completed two dispositions in which it sold its operating rights and certain fixed assets in Germany, Switzerland, and Austria to an unrelated group of investors and sold similar assets of Belgium, Holland, and the United Kingdom to a separate unrelated group of investors (collectively, the "Buyers"). Consideration was received in the form of notes receivable which provide for annual payments of principal and interest over the next six and seven years. As the rates on the notes are substantially less than current market rates, these notes were discounted to a present value of $1,510,000 using the then-current U.S. Prime rate of 8.25%. The gain on the sales of $630,000 is being deferred, as the Buyers did not make any payments to the Company as of the closing dates; this deferred gain is offset against the related notes receivable on the accompanying balance sheet and will be ratably recognized by the Company as the notes are collected. The notes receivable are secured by liens on substantially all fixed assets, inventories, and accounts receivable of the Buyers. These dispositions obligate the Buyers to assume responsibilities for future multi-level direct selling operations in these countries. As of the close of business on April 30, 1996, the Company sold certain inventories, fixed assets, and prepaid expenses of National Safety Associates, Ltd. (NSA Canada or the "Seller") to a group of investors (the "Buyer"), which included certain members of the Seller's management. In conjunction with the acquisition, the Buyer has assumed responsibility for future multi-level direct selling operations in Canada, with the Company continuing to sell certain goods at market prices and provide certain administrative and marketing support for a monthly fee. Consideration was received in the form of a note receivable totalling $740,495, which approximated the net book value of the assets sold. The note receivable bears interest at 8.25% per annum and is secured by liens on substantially all fixed assets, inventories, and accounts receivable of the Buyer. SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION (UNAUDITED) - As a result of the aforementioned disposals, the Company believes that the following pro forma financial information is important to enable the reader to obtain a meaningful understanding of the Company's results of operations. The pro forma financial statements are for informational purposes only to illustrate the estimated effects of the disposal of certain assets and operating responsibilities of operations in Canada, Germany, Switzerland, Belgium, Holland, Austria, and the United Kingdom on NSA International had they occurred as of May 1, 1995. Such pro forma financial statements may not necessarily reflect the future results of operations of NSA International or what the losses or results of operations of NSA International would have been had it disposed of these assets and operating responsibilities as of May 1, 1995. Pro Forma Condensed Consolidated Statement of Operations Years Ended April 30, 1997 and 1996 (Unaudited) - --------------------------------------------------------------------------------
1997 HISTORICAL ADJUSTMENTS PRO FORMA Net revenues $36,107,311 $7,005,720(a) $29,101,591 =========== ========== =========== Loss before income taxes $(9,831,528) $7,111,136(a) $(2,720,392) Income tax benefit 22,000 Nil(b) 22,000 ----------- ---------- ----------- Net loss $(9,809,528) $7,111,136 $(2,698,392) =========== ========== =========== Loss per common share (c) $ (2.02) $ (0.55) =========== ===========
-9- 26
1996 HISTORICAL ADJUSTMENTS PRO FORMA Net revenues $ 73,150,332 $37,766,199(a) $35,384,133 ============ =========== =========== Loss before income taxes $(10,812,485) $ 5,888,404(a) $(4,924,081) Income tax benefit 103,000 Nil(b) 103,000 ------------ ----------- ----------- Net loss $(10,709,485) $ 5,888,404 $(4,821,081) ------------ ----------- ----------- Loss per common share (c) $ (2.20) $ (0.99) ============ ===========
The April 30, 1997 balance sheet presented in the accompanying financial statements reflects the disposal of these assets and operating rights for the above-mentioned countries, as these were disposed of prior to this date. INTRODUCTION TO NOTES TO SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION - The following is a summary of adjustments reflected in the pro forma condensed consolidated statement of operations. NOTES TO SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION - (a) To eliminate the gross sales, cost of revenues, and commissions expense related to these disposals and to reinstate the sales and cost of sales from NSA International to these units, and to eliminate costs and expenses directly attributable to these disposals which management does not believe would have been incurred by NSA International had the disposals taken place prior to the 1996 fiscal year. Sales are estimated based on contractual prices and the actual quantities sold in 1997 and 1996. (b) The estimated income tax effects for the pro forma adjustments described in note (a) above are expected to be nil, as the Company has sufficient net operating losses available in each relevant country. (c) Historical and pro forma loss per common share are computed based on net loss divided by the weighted average number of common shares outstanding. On February 1, 1995, the Company sold substantially all assets of its manufacturing subsidiary, NSA Polymers, Inc. The assets were purchased by a group of investors (the "Buyer"), including certain members of NSA Polymers, Inc.'s management, for $5,000,000. This consideration was composed of $500,000 cash paid at closing and notes receivable totalling $4,500,000. The first note, totalling $500,000, was collected during fiscal 1996. The remaining note, totalled $4,000,000 at inception, bears interest at 8.5% per annum, and is secured by liens on all assets except certain accounts receivable of the Buyer. The net book value of the assets related to the transaction approximated consideration received, therefore no significant gain or loss resulted therefrom. In conjunction with the sale, the Company agreed to minimum purchases at prevailing market prices from the Buyer totalling $7,000,000 in the first twelve months following the date of the sale, $6,000,000 in the next twelve month period, and $5,500,000 in the following twelve months. Actual purchases for the twelve months ended January 31, 1997 and 1996 totalled approximately $5,521,846 and $5,050,000, resulting in the Company paying penalties of approximately $0 and $722,000, respectively, to the Buyer. In the event future purchase levels are not met, the Company must pay additional penalties of up to 36% of the difference between them and the actual purchases made. The remaining purchase commitment as of April 30, 1997 is $4,125,000. -10- 27 Principal payments on notes receivable relating to the above dispositions are scheduled to be received as follows: 1998 $ 550,000 1999 860,328 2000 897,296 2001 1,026,406 2002 1,221,225 Thereafter 1,569,752 ----------- Total 6,125,007 Less: Allowance for uncollectible notes (2,000,000) Deferred gain (630,000) Notes receivable - short-term (550,000) ----------- Notes receivable - long-term $ 2,945,007 ===========
Based on their rates of interest, security, and other characteristics, and after consideration of the recorded allowance for uncollectible notes, management believes the recorded values of the notes receivable approximate their fair values. 4. INCOME TAXES The Company and its domestic subsidiaries file a consolidated federal income tax return. The Company's foreign subsidiaries file separate returns in the respective countries of domicile. The components by region of loss before income taxes are as follows:
1997 1996 1995 U.S. $ (2,226,036) $ (208,892) $ (3,574,205) Foreign (7,605,492) (10,603,593) (1,928,260) ------------ ------------ ------------ Total $ (9,831,528) $(10,812,485) $ (5,502,465) ============ ============ ============
The components of the income tax benefit are as follows:
1997 1996 1995 Current: Federal $ 22,000 $ (62,000) $ 1,580,000 Foreign (32,000) 84,000 ----------- ----------- ----------- Total 22,000 (94,000) 1,664,000 Deferred: State Federal (584,000) Foreign 197,000 (319,000) ----------- ----------- Total 197,000 (903,000) ----------- ----------- ----------- Total $ 22,000 $ 103,000 $ 761,000 =========== =========== ===========
-11- 28 A reconciliation of the Company's actual income taxes for the years ended April 30, 1997, 1996, and 1995 to that obtained by applying the U.S. federal statutory income tax rate against pre-tax income is as follows:
1997 1996 1995 Federal income tax benefit, at U.S. federal statutory rate $ 3,342,720 $ 3,676,000 $ 1,870,000 Effect of different rates applied to the operations of the foreign subsidiaries 50,000 Effect of unused net operating losses (3,265,867) (3,579,000) (986,000) Foreign sales corporation (63,000) Other differences (54,853) 6,000 (110,000) ----------- ----------- ----------- Income tax benefit $ 22,000 $ 103,000 $ 761,000 =========== =========== ===========
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and (b) operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's deferred taxes as of April 30, 1997 and 1996 are as follows:
1997 1996 Deferred tax assets: Reserves not currently deductible $ 1,280,000 $ 502,000 Intercompany profit-in-inventory elimination 24,000 Uniform capitalization of inventory 69,000 93,000 Operating loss carryforwards 884,000 6,729,000 ----------- ----------- Total 2,233,000 7,348,000 Valuation allowance (2,201,000) (7,026,000) ----------- ----------- Total deferred tax asset 32,000 322,000 Deferred tax liabilities: Differences between book and tax basis of property 47,000 Net foreign currency translation gain 32,000 275,000 ----------- ----------- Total deferred tax liability 32,000 322,000 ----------- ----------- Net deferred tax asset (liability) $ NIL $ NIL =========== ===========
The Company has net operating loss carryforwards totalling approximately $2,600,000 which are available for future reductions of income taxes in the United States and which expire in 2011. The Company also has substantial net operating loss carryforwards available in various other countries. However, due to the sale of certain operating assets and operating rights as discussed in Note 3, management does not expect to be able to utilize the remaining foreign net operating loss carryforwards. Giving effect to this expectation, the Company now considers only operating loss carryforwards of the United States to qualify for deferred tax asset recognition. This change had the effect of reducing each of the deferred tax asset and the related offsetting valuation allowance by approximately $5,750,000 as of April 30, 1997. The valuation allowance of $2,201,000 and $7,026,000 in 1997 and 1996, respectively, has been provided because it is more likely than not that a substantial portion of the deferred tax assets will not be realized. The valuation allowance decreased by $4,825,000 in 1997 and increased by $4,389,000 in 1996. -12- 29 5. LEASES The Company leases office space in the U.K. under a noncancellable operating lease expiring in 2016. In October 1995, the Company abandoned the location and signed a sublease agreement with an unrelated party. A loss of $1,000,000, representing the excess of future rent expense over sublease income discounted at 8%, was recognized in the second quarter of fiscal 1996. The Company is currently leasing warehouse and office space under numerous other non-cancelable operating leases. Lease terms generally range from one to twenty-five years with options to renew at varying terms. Rent expense under operating leases totalled approximately $1,770,351, $1,684,153, and $2,015,000 for the years ended April 30, 1997, 1996, and 1995, respectively. In 1997 and 1996, the Company received sublease rentals of $64,980 and $40,000, respectively. The future minimum lease payments and related sublease payments receivable under these agreements are as follows:
MINIMUM SUBLEASE LEASE PAYMENTS YEAR ENDING APRIL 30 PAYMENTS RECEIVABLE 1998 $ 1,653,838 $ 636,369 1999 1,581,935 651,819 2000 1,237,537 507,475 2001 514,967 194,940 2002 514,967 194,940 Thereafter 8,103,006 4,646,070 ----------- ---------- Total $13,606,250 $6,831,613 =========== ==========
6. EMPLOYEE BENEFITS PLAN The Company's domestic subsidiaries participate in NSA, Inc.'s defined contribution plan to provide full-time employees, with a minimum of 1,000 hours of service and who are employed at year-end, with additional income upon retirement or termination. The Company may elect to make annual contributions to the plan equal to a discretionary percentage of the participant's annual salary, to the extent the participant's salary does not exceed $150,000, as defined. The Company made no contributions to the plan during 1997, 1996, and 1995. 7. TRANSACTIONS WITH NSA, INC. At April 30, 1997 NSA, Inc. owns 2,336,180 shares of the Company. Four of the shareholders of NSA, Inc. also serve as directors of the Company. -13- 30 The Company sells nutritional supplement products, air treatment systems, in-home beverage appliances, and certain water filtration product components to NSA, Inc. The Company purchases certain water filtration products and certain related accessory products from NSA, Inc. Certain of the Company's subsidiaries and its third-party licensees are parties to licensing and/or management agreements with NSA, Inc. that provide for fees payable to NSA, Inc. equal to a percentage of sales and/or allocation of certain costs incurred by NSA, Inc. in providing management and administrative services. Costs incurred by NSA, Inc. in providing management and administrative services include general management, financial reporting, benefits administration, insurance, information-systems, and other miscellaneous services. These allocations are based primarily on the percentage of sales of each company to total sales of both. Management believes that these allocations were made on a reasonable basis. However, the allocations are not necessarily indicative of the level of expenses that might have been incurred had the Company operated on a stand-alone basis. Management has not made a study or any attempt to obtain quotes from third parties to determine what the cost of obtaining such services from third parties would have been. NSA, Inc. has also provided funding on a payable upon demand and non-interest bearing basis for equipment purchases and working capital. NSA, Inc. also guarantees the terms and obligations of NSA U.K.'s two twenty-five year operating lease agreements, one location of which has been subleased to an unrelated party, through November 28, 2013 and June 23, 2016, respectively, for office and warehouse space. The annual rental payments total approximately $500,000, excluding the sublease rentals. Also see Note 5. On July 21, 1994, the Company completed the sale of its exclusive rights and inventory in Wings, an educational product, and The Knowledge Network, an educational catalog product, to NSA, Inc. The total purchase price of $5,500,000 approximated the book value of the related assets and was determined based upon an independent valuation. NSA, Inc. assumed a $1.1 million note payable and the remainder of the purchase price was settled as a reduction of the amounts due to NSA, Inc. On July 9, 1996, the Board of Directors of NSA, Inc. made a $7,910,520 capital contribution to the Company in the form of forgiveness of amounts due from certain direct selling subsidiaries of NSA International. -14- 31 8. GEOGRAPHIC SEGMENT DATA AND MAJOR CUSTOMERS Financial information, summarized by geographic area, is as follows:
YEAR ENDED APRIL 30, 1997 UNITED STATES CANADA/MEXICO EUROPE ELIMINATIONS CONSOLIDATED Total revenues: Unaffiliated customers $ 5,406,373 $ 21,339,226 $ 26,745,599 Sales to NSA, Inc. 9,361,712 9,361,712 Interarea sales 2,126,976 $ (2,126,976) ------------ ------------ ------------ Total $ 16,895,061 $ 21,339,226 $ (2,126,976) $ 36,107,311 ============ ============ ============ ============ Loss before income taxes $ (2,226,036) $ 105,165 $ (7,710,657) $ (9,831,528) ============ ============ ============ Identifiable assets $ 24,846,365 $ 2,746,729 $ 9,295,773 $(14,809,078) $ 22,079,789 ============ ============ ============ ============ ============ Corporate assets 284,716 ------------ Total assets $ 22,364,505 ============ Depreciation and amortization expense $ 91,241 $ 471,200 $ 562,441 ============ ============ ============ Capital expenditures $ 2,169 $ 37,662 $ 39,831 ============ ============ ============
-15- 32
YEAR ENDED APRIL 30, 1996 UNITED STATES CANADA/MEXICO EUROPE ELIMINATIONS CONSOLIDATED Total revenues: Unaffiliated customers $ 3,459,376 $ 4,805,151 $ 53,297,775 $ 61,562,302 Sales to NSA, Inc. 11,588,030 11,588,030 Interarea sales 3,455,008 $ (3,455,008) ------------ ------------ ------------ ------------ ------------ Total $ 18,502,414 $ 4,805,151 $ 53,297,775 $ (3,455,008) $ 73,150,332 ============ ============ ============ ============ ============ Loss before income taxes $ (208,892) $ 14,902 $(10,618,495) $(10,812,485) ============ ============ ============ ============ Identifiable assets $ 21,238,400 $ 2,174,434 $ 17,442,971 $ (9,807,542) $ 31,048,263 ============ ============ ============ ============ Corporate assets 225,728 ============ Total assets $ 31,273,991 ============ Depreciation and amortization expense $ 134,714 $ 56,981 $ 785,319 $ 977,014 ============ ============ ============ ============ Capital expenditures $ 0 $ 27,815 $ 505,126 $ 532,941 ============ ============ ============ ============
YEAR ENDED APRIL 30, 1995 UNITED STATES CANADA/MEXICO EUROPE ELIMINATIONS CONSOLIDATED Total revenues: Unaffiliated customers $ 4,504,565 $ 5,360,501 $ 89,522,596 $ 99,387,662 Sales to NSA, Inc. 9,301,000 9,301,000 Interarea sales 4,990,675 $ (4,990,675) ------------- ------------- ------------- ------------- ------------- Total $ 18,796,240 $ 5,360,501 $ 89,522,596 $ (4,990,675) $ 108,688,662 ============= ============= ============= ============= ============= Loss before income taxes $ (3,574,205) $ (218,750) $ (1,709,510) $ (5,502,465) ============= ============= ============= ============= Identifiable assets $ 24,590,248 $ 2,992,989 $ 25,589,851 $ (8,696,861) $ 44,476,227 ============= ============= ============= ============= Corporate assets 167,545 ============= Total assets $ 44,643,772 ============= Depreciation and amortization expense $ 553,747 $ 324,412 $ 704,473 $ 1,582,632 ============= ============= ============= ============= Capital expenditures $ 118,506 $ 45,264 $ 1,448,165 $ 1,611,935 ============= ============= ============= =============
In addition to NSA, Inc., the Company had one major customer in 1997, accounting for 10% of the Company's total revenue. There were no major customers other than NSA, Inc. in 1996 and 1995. 9. LITIGATION, COMMITMENTS, AND OTHER CONTINGENCIES During fiscal 1997, a former employee of a wholly-owned subsidiary of the Company has filed a workers' compensation complaint against the subsidiary in the State of Florida. Claims alleged by the plaintiff include injuries resulting from alleged toxic exposure during employment. The case is currently proceeding with mediation and is scheduled for trial in late September 1997. In April 1997 an unrelated company filed a complaint seeking injunctive relief and damages from a wholly-owned subsidiary of the Company and several other unrelated parties. Claims alleged by the plaintiff include breach of contract, trademark infringement, unfair competition and deceptive trade practices. The complaint alleges that the defendants manufactured and/or distributed products developed by the plaintiff and containing their registered trademark without their knowledge or consent. -16- 33 The Company believes that the above matters lack merit and intends to contest them vigorously; however, the outcomes cannot be predicted with certainty. The amount of any liability which might finally exist cannot be reasonably be estimated and no provision for loss has been made in the accompanying financial statements. The Company is party to various other claims and matters of litigation that arise in the normal course of business. Management believes the resolution of these matters will not have a material adverse effect on the results of operation or the financial condition of the Company. The Company has an employment contract with certain officers. Remaining minimum commitments under the agreements total $450,000 at April 30, 1997. 10. RESTRUCTURING CHARGES During the first quarter of 1997, the Company announced its decision to close its European headquarters. Accordingly, a restructuring charge totalling $3,000,000 was reflected during the first quarter of fiscal 1997. As of April 30, 1997, the restructuring reserve has been fully utilized as follows: $475,000 to writedown fixed assets to net realizable value; $1,125,000 to write-off certain sales materials which are obsolete as a result of the restructuring; $425,000 to recognize costs associated with early terminations of leases; $500,000 to recognize termination costs of certain employees; and $475,000 for salary and other shutdown expenses related to the restructuring. In the third and fourth quarters of 1995, the Company recorded a restructuring charge totalling $1,000,000 to reflect the closing of its Mexican operation. The charge included estimates to write-down inventory and fixed assets to net realizable value and to recognize employee termination costs. 11. STOCK OPTION PLAN On February 18, 1997, the Board of Directors of the Company approved, subject to shareholder approval, the adoption of the NSA International, Inc. 1997 Incentive and Non-Qualified Stock Option Plan (the "Plan"). Under the terms of the Plan, options on up to 500,000 shares of the Company's common stock may be issued to eligible officers, directors, and key employees of the Company and its subsidiaries, as well as advisors and consultants thereto. Vesting provisions, exercise price, and duration of the options shall be as determined by the Plan committee, which will consist of at least two directors of the Company; in no event, however, will the exercise price be below fair market value of the Company's common stock at the date of grant, nor will the duration of the options exceed ten years from date of grant. No stock options may be issued under the Plan after the expiration of ten years from the date the Plan becomes effective, and in no event after November 30, 2007. No options have been issued under the Plan as of April 30, 1997. -17- 34 12. QUARTERLY RESULTS (UNAUDITED)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER Year ended April 30, 1997: Total revenues $ 13,609,726 $ 9,441,997 $ 7,433,358 $ 5,622,230 Gross margin 7,645,498 4,400,138 2,523,467 2,326,710 Net loss (4,507,001) (854,312) (1,440,409) (3,007,806) Net loss per common share (0.93) (0.17) (0.30) (0.62)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER Year ended April 30, 1996: Total revenues $ 21,632,028 $ 18,421,847 $ 18,347,914 $14,748,543 Gross margin 13,618,413 11,666,489 11,758,154 7,721,782 Net loss (2,428,233) (3,019,606) (2,734,673) (2,526,973) Net loss per common share (0.50) (0.62) (0.56) (0.52)
SIGNIFICANT FOURTH QUARTER ADJUSTMENTS - During the fourth quarter of fiscal 1997, the Company wrote down the value of certain notes receivable by $2,000,000 to reflect the estimated collectible amounts. This writedown was reflected as an operating expense in the accompanying financial statements. ******* -18- 35 SCHEDULE II NSA INTERNATIONAL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED APRIL 30, 1997, 1996, AND 1995 - --------------------------------------------------------------------------------
CHARGED TO CHARGED BALANCE AT SALES OR TO OTHER BALANCE BEGINNING EXPENSES ACCOUNTS DEDUCTIONS AT END 1997 Allowance for doubtful accounts $ 95,880 $ (11,770) $ (84,110) Allowance for uncollectible notes receivable 2,000,000 $ 2,000,000 Accrued sales returns 1,196,142 (10,454) (817,077) 368,611 1996 1996 Allowance for doubtful accounts 745,145 (113,928) (535,337) 95,880 Accrued sales returns 1,785,608 32,447 (621,913) 1,196,142 1995 1995 Allowance for doubtful accounts 797,296 245,601 (297,752) 745,145 Accrued sales returns 3,578,472 (188,193) (1,604,671) 1,785,608
(1) Accounts written off during the period. (2) Actual sales returns during the period consisted of:
SALES INVENTORY COMMISSIONS NET SALES RETURNS RETURNED CHARGED BACK RETURNS 1997 $(1,919,213) $123,337 $ 978,799 $ (817,077) 1996 (2,188,681) 450,541 1,116,227 (621,913) 1995 (4,829,540) 761,294 2,463,575 (1,604,671)
36 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. The following table sets forth certain information regarding the directors and executive officers of the Company and its subsidiaries. Pursuant to the Company's Charter and Bylaws, members of the Board of Directors are elected for staggered two-year terms. Except for those executive officers with employment agreements, the executive officers of the Company and its subsidiaries serve at the discretion of the Company's Boards of Directors. See "Employment Agreements." Director Term Name Age Position(s) Since Expires - ---- --- ----------- ----- ------- DIRECTORS: A. Jay Martin(1) 55 President and Director 1989 1998 Charles R. Evans, Jr. 53 Chief Operating Officer and Executive Vice-President and Director 1992 1998 J. Neil Rood 64 Director 1989 1998 George R. Poteet 49 Director 1989 1997 L.F. Swords 56 Director 1989 1997 William W. Deupree, Jr. 56 Director 1992 1997 William L. Gurner 51 Director 1996 1997 EXECUTIVE OFFICERS: - ------------------- Officer Since ----- Stan C. Turk 45 Chief Financial Officer and Secretary-Treasurer 1989 - ------------ (1) Mr. Martin is also a director and executive officer of NSA. Mr. Martin devotes approximately 60% of his management time to the operations of the Company. 20 37 A. Jay Martin has served as President and as a director of the Company since its inception in March 1989. Mr. Martin founded National Safety Associates, Inc., a Tennessee corporation ("NSA"), in 1969 and has served NSA in various capacities since its inception. Presently, Mr. Martin is a shareholder and serves as President and a director of NSA. Charles R. Evans, Jr. has served as a director as well as the Executive Vice-President and the Chief Operating Officer of the Company since August 1992. Mr. Evans joined NSA Polymers in March 1989 and served as Vice President, Assistant Secretary and a director of NSA Polymers until August 1992. From 1984 until March 1989, he was Treasurer of Florida Polymers, Inc., a Florida corporation, the assets of which were acquired by the Company in March 1989 and which was primarily engaged in the business of plastics injection molding and tool and die manufacturing. J. Neil Rood has been a director of the Company since its inception. In April 1992, Mr. Rood was elected President of NSA Holdings, Inc. and, in December 1992, Mr. Rood was elected Vice President-International Operations for the Company. In December 1993, Mr. Rood completed his tenure as Vice President-International Operations. Mr. Rood is a shareholder of NSA. In April 1982, Mr. Rood organized and became President of Jonfor Systems, Inc. In June 1975, Mr. Rood organized and became President of Jonfor, Inc. Both entities are privately-held Florida corporations which act as holding and operating companies, respectively, for various retail businesses and real estate properties. Mr. Rood is also active in various real estate ventures as a developer and an owner. L.F. Swords has been a director of the Company since its inception. Mr. Swords has been employed by NSA since 1971 in a variety of management positions. From 1989 until March 1, 1994, Mr. Swords served as Secretary-Treasurer and Chief Financial Officer of the Company and all of its subsidiaries. Presently, Mr. Swords is a shareholder, and serves as Vice President, Chief Financial Officer, Secretary-Treasurer, and a director of NSA. George R. Poteet has served as a director of the Company since its inception. Since 1971, Mr. Poteet has been employed by NSA and he presently is a shareholder and serves as Vice President-Manufacturing and a director of NSA. From 1989 until February 1994, Mr. Poteet served as the Vice President - Manufacturing of the Company. William W. Deupree, Jr., a director of the Company since October 1992, retired as President of Morgan Keegan & Company, Inc. and its parent company, Morgan Keegan, Inc., a New York Stock Exchange listed company, in 1996 after 10 years in such positions. Mr. Deupree joined Morgan Keegan & Company, Inc. in 1972. He is a past member of the Regional Firms Advisory Committee of the New York Stock Exchange as well as a past member of the Board of Directors for the Securities Industry Association. Mr. Deupree is a director of Morgan Keegan & Company, Inc. and Equity Inns, Inc. Mr. Deupree is a graduate of the University of the South. William L. Gurner, 51, has served as a director of the Company since December 1996. Mr. Gurner founded Sector Capital Management, L.L.C. in January 1995. That entity offers an equity product to public and corporate pension plans, Taft-Hartly plans and foundations. Prior to starting Sector Capital Management, L.L.C., Mr. Gurner was the pension officer for Federal Express from 1987 through 1994. Stan C. Turk was appointed Chief Financial Officer and Secretary-Treasurer of the Company on July 1, 1996. Mr. Turk was elected Assistant Treasurer of the Company in May 1991. Since August 1989, Mr. Turk has been employed as Assistant Treasurer of NSA. Prior to joining NSA in 1989, Mr. Turk served as the Chief Financial Officer of Barton Equipment Company and Barton Truck Center in Memphis, Tennessee and spent approximately 9 years employed as a certified public accountant. Board of Directors Committees. The Board of Directors has appointed two committees: the Compensation Committee and the Audit Committee. The members of the Compensation and Audit Committees are Messrs. Swords, Deupree and Gurner. 21 38 Section 16(a) Beneficial Ownership Reporting Compliance Rules. Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act") requires the Company's officers and directors and persons who own more than 10% of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Such officers, directors and shareholders are required by SEC regulations to furnish the Company with copies of all such reports that they file. Based solely on a review of copies of reports furnished to the Company, the Company believes that, during the fiscal year ended April 30, 1997, all persons subject to the reporting requirements of Section 16(a) filed the required reports on a timely basis except as follows: On July 1, 1996, Mr. Stan C. Turk became an officer of the Company subject to Section 16(a) of the Exchange Act. Although the Form 3 as required by the Exchange Act was not timely filed, on January 20, 1997, a Form 5 was filed correcting this inadvertent failure. Item 11. Executive Compensation. The following table sets forth the aggregate compensation paid by the Company and its subsidiaries to the President of the Company and the two most highly compensated executive officers of the Company or its subsidiaries, for services rendered in all capacities during the fiscal years ended April 30, 1997, 1996, and 1995.
SUMMARY COMPENSATION TABLE Annual Compensation ------------------------------------------------ Other Annual All Other Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Compensation - --------------------------- ---- ---------- --------- ---------------- ------------ A. Jay Martin 1997 150,000 10,528 -- -- President of the Company 1996 150,000 6,058 -- -- 1995 150,000 -0- -- -- Charles R. Evans, Jr. 1997 160,226 78,029 -- 8,400(2) Chief Operating Officer 1996 225,000 7,001 -- -- of the Company 1995(1) 135,000 56,250 -- -- John Greenham 1997 120,750 25,000 -- 31,704(2) Vice President - Europe 1996 139,844 26,128 -- 49,757(2) 1995 90,268 20,000 -- 69,663(2)
- --------------------------- (1) During the first quarter of 1995, the Company paid Mr. Evans $22,500 pursuant to an oral employment agreement between the parties. (2) Represents housing, school fees, expenses and/or car allowance. The non-employee directors of the Company currently receive $1,000 for each Board of Directors meeting. The directors of the Company's subsidiaries do not receive any compensation for serving in such capacities. 22 39 Employment Agreements. The Company has an employment agreement with Mr. A. Jay Martin. The employment agreement is renewable annually and provides for an annual salary of $150,000. The Company also has an employment agreement with Mr. Charles Evans which provides for annual compensation equal to $225,000. Compensation Committee Interlocks and Insider Participation. Mr. L.F. Swords serves as a member of the Compensation Committee of the Company's Board of Directors. From 1989 until March 1, 1994, Mr. Swords served as Secretary-Treasurer and Chief Financial Officer of the Company and all of its subsidiaries. Mr. Swords has not served as an officer of the Company since March 1, 1994. Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth the number of shares beneficially owned as of July 22, 1997, by (a) each person known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock, (b) each director or executive officer of the Company, and (c) all directors and executive officers of the Company as a group.
Amount and Name Name and Address of of Beneficial Percent Beneficial Owner Ownership(1) of Class(2) ------------------- --------------- ----------- (a) National Safety Associates, Inc. 2,336,180(3) 48.1 4260 East Raines Road Memphis, Tennessee 38118 A. Jay Martin 2,755,135(4) 56.7 4260 East Raines Road Memphis, Tennessee 38118 L.F. Swords 2,474,266(5) 50.9 4260 East Raines Road Memphis, Tennessee 38118 (b) A. Jay Martin 2,755,135(4) 56.7 L.F. Swords 2,474,266(5) 50.9 George R. Poteet 164,041 3.4 4180 Pilot Memphis, TN 38118 J. Neil Rood 40,733 * 12192 Mandarin Road Jacksonville, FL 32223 William W. Deupree, Jr. 15,000 * 50 North Front Street, 21st Floor Memphis, TN 38103 Charles R. Evans, Jr. 8,800 * 4260 East Raines Road Memphis, TN 38118
23 40
Amount and Name Name and Address of of Beneficial Percent Beneficial Owner Ownership(1) of Class(2) ------------------- --------------- ----------- William L. Gurner - 0 - * 40 South Main Street Memphis, TN 38103 Stan C. Turk 4,700 * 4260 East Raines Road Memphis, TN 38118 (c) Officers and directors 3,126,495(4) 64.3 as a group (8 persons)
- ------------------------- (1) Includes shares of Common Stock as to which such person, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares voting power and/or investment power. Unless otherwise indicated, each listed shareholder possesses sole voting and investment power with respect to all of the shares shown opposite his name. (2) Based upon 4,858,156 shares issued and outstanding. (3) Messrs. Martin and/or Swords, as the President and Secretary-Treasurer of NSA, respectively, acting separately or jointly, have the power to vote or to direct the vote, and to dispose of or to direct the disposition of, the shares owned by NSA, unless otherwise instructed by the Board of Directors of NSA. (4) Includes the 2,336,180 shares held by NSA for which Messrs. Martin and/or Swords have the power to vote or to direct the vote, and to dispose of or to direct the disposition of. Also includes the indirect beneficial ownership of 9,000 shares held by Mr. Martin's child for which Mr. Martin disclaims beneficial ownership. (5) Includes the 2,336,180 shares held by NSA for which Messrs. Martin and/or Swords have the power to vote or to direct the vote, and to dispose of or to direct the disposition of. * Indicates less than 1%. Item 13. Certain Relationships and Related Transactions. Sales of Juice Plus+(R) products to NSA totaled approximately $9,300,000 or 26% of the Company's revenues for the fiscal year ended April 30, 1997. At April 30, 1996, the Company owed approximately $8,823,000 to NSA for product purchases, management and licensing fees, and cash advances for equipment purchases and working capital. Such borrowings were payable upon demand and are non-interest bearing. On July 9, 1996, NSA made an approximate $7.9 million capital contribution to the Company by forgiving $7.9 million of the outstanding indebtedness owed to NSA by the Company's European direct-selling subsidiary organizations. At April 30, 1997, the Company owed approximately $7,793,000 to NSA for cash advances for working capital, product purchases and management fees. Prior to May 1, 1993, the Company purchased from NSA the majority of the water filtration and related accessory products which it sold in Canada, the United Kingdom, Ireland, Germany, Mexico, Switzerland, the Netherlands and Belgium. The Company still purchases certain water filtration and related accessory products from NSA. The cost of such purchases was approximately $46,000 for the fiscal year ended April 30, 1997. NSA provides certain management, consulting and advisory services to the Company. In consideration for these services, the Company pays to NSA any and all amounts collected by the Company from the Company's Master Distributors in exchange for data processing services offered to such Master Distributors by the Company. The amount paid by the Company to NSA was $500,873 for the fiscal year ended April 30, 1997. 24 41 In April 1991, the Company obtained a line of credit for $5,000,000 from National Bank of Commerce. Mr. Williams, a former director of the Company, was at the time the Executive Vice President and Senior Commercial Loan Officer of the Commercial Banking Group of National Bank of Commerce. Any amounts advanced to the Company by National Bank of Commerce pursuant to this line of credit were to bear interest at the Bank's prime rate. As of April 30, 1997, no amounts were outstanding under the line of credit. NSA has guaranteed the obligations of National Safety Associates of America (U.K.) Limited ("NSA UK") under the lease agreements pursuant to which NSA UK leases approximately 12,800 square feet in Maidenhead, Berkshire, England. Effective February 1, 1995, the Company sold substantially all of the assets of NSA Polymers to its management for $5 million. In order to determine an appropriate purchase price, the Company had an evaluation and fairness opinion prepared by an unrelated third party which is in the business of rendering such opinions. The fairness opinion provided that a purchase price of $5 million was fair to the Company and its shareholders. The purchase price for the NSA Polymers assets consisted of a $500,000 cash payment at the closing from the Buyer to NSA Polymers, delivery of the buyer's promissory note in the principal amount of $500,000 which is due and payable six months from the closing date, and delivery of the buyer's promissory note in the principal amount of $4 million which is due and payable over an eight year period. The $500,000 and $4 million notes are secured by the fixed assets of the buyer. As additional consideration for the purchase of the NSA Polymer's assets, the Company entered into a 5 year manufacturing contract with the buyer which requires that certain minimum purchase levels be maintained by the Company. The Company satisfied such minimum purchase levels in fiscal 1997. There have not been, and it is the Company's current intention that there will not be, loans or other financial transactions between the Company and its officers, directors or significant employees. However, to the extent such loans or financial transactions do occur in the future, they will be approved by the Company's disinterested and independent directors and will be on terms no less favorable to the Company than could be obtained from unaffiliated parties. PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) Financial Statement Schedule Schedule II Valuation and Qualifying Accounts Years Ended April 30, 1977, 1996, and 1995 (2) Exhibits * 3.1 Amended and Restated Charter of the Company ** 3.2 Bylaws of the Company * 4.1 Form of Stock Certificate + 10.3 Amended and Restated Manufacturing License and Distribution Agreement between Smokey Santillo and the Company dated March 31, 1994. *** 10.4 Manufacturing Agreement between the Company and Polymers, Inc. dated February 28, 1995. + 10.5 Lease Agreement between the Company and Adobe Systems Europe, B.V. dated July 1, 1993. * 10.6 Lease Agreement between NSA U.K. and Crown Life Pensions Limited dated November 28, 1988.
25 42 10.7 Management Agreement between NSA and the Company dated May 1, 1996 + 10.8 Distribution and License Agreement between NSA and the Company dated May 1, 1994. + 10.9 Exclusive Manufacturing License Agreement between NSA and the Company dated May 1, 1993. + 10.10 Sales Agreement between NSA and the Company dated May 1, 1994. + 10.11 Sales Agreement between NSA and NSA Polymers dated May 1, 1994. + 10.12 Warehousing Agreement between the NSA Netherlands and Expeditiebedrijf Frans Maas B.V. dated April 21, 1994. + 10.13 Manufacturing Agreement between the Company and Natural Alternatives International, Inc. dated April 1, 1993. + 10.14 First Amendment to the Exclusive Manufacturing License Agreement between the Company and NSA dated May 1, 1993. **** 10.15 Asset Purchase Agreement between National Safety Associates, Ltd. and National Safety Associates of Canada, Inc. + 10.16 Employment Agreement between A. Jay Martin and the Company dated May 1, 1994. ***** + 10.17 Employment Agreement between Charles R. Evans and the Company dated August 1, 1994. ***** 10.18 Registrant's 1997 Incentive and Non-Qualified Stock Option Plan. ***** 21.1 List of Subsidiaries of the Company. * Incorporated by reference to exhibits filed with the Company's Registration Statement on Form 10, Commission File No. 0-19487 ** Incorporated by reference to exhibits filed with the Company's Registration Statement of Form S-18 Registration No. 33-42158-A + Incorporated by reference to exhibits filed with the Company's Form 10-K for the year ended April 30, 1995. *** Incorporated by reference to exhibits filed with the Company's 8-K on March 7, 1995. **** Incorporated by reference to exhibits filed with the Company's 8-K on May 15, 1996. ***** Management Compensatory Plan (b) Reports on Form 8-K None. (c) Financial Data Schedule (for SEC purposes only)
26 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. NSA INTERNATIONAL, INC. By: /s/ A. Jay Martin --------------------------- A. Jay Martin, President Date: July 25, 1997 ------------------------- Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ A. Jay Martin - --------------------------- President and Director July 25, 1997 A. Jay Martin /s/ Stan C. Turk Secretary-Treasurer and July 25, 1997 - --------------------------- Chief Financial Officer Stan C. Turk /s/ George R. Poteet Director July 25, 1997 - --------------------------- George R. Poteet /s/ J. Neil Rood Director July 25, 1997 - --------------------------- J. Neil Rood /s/ Charles R. Evans, Jr. Executive Vice-President, Chief July 25, 1997 - --------------------------- Operating Officer and Director Charles R. Evans, Jr. /s/ William W. Deupree, Jr. Director July 25, 1997 - --------------------------- William W. Deupree, Jr. /s/ William L. Gurner Director July 25, 1997 - --------------------------- William L. Gurner /s/ L. F. Swords Director July 25, 1997 - --------------------------- L. F. Swords
22 EX-10.7 2 MANAGEMENT AGREEMENT 1 Exhibit 10.7 2 MANAGEMENT AGREEMENT THIS MANAGEMENT AGREEMENT ("Agreement") is made as of the 1st day of May, 1996 by and between NATIONAL SAFETY ASSOCIATES, INC., a Tennessee corporation ("NSA"), and NSA INTERNATIONAL, INC., a Tennessee corporation ("the Company"). W I T N E S S E T H: WHEREAS, NSA desires to provide certain managerial and advisory services, to the Company; and WHEREAS, NSA and the Company desire to set forth the scope of the services to be rendered by NSA to the Company and the compensation to be paid by the Company to NSA in return for such services. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is agreed as follows: i. SERVICES. NSA shall provide management, consulting and advisory services to the Company relating to data processing and other such matters for which the Company shall request assistance. ii. EMPLOYEES. NSA agrees to make its employees available to the Company as reasonably requested by the Company to provide the forgoing services. iii. REIMBURSEMENT. In consideration for the services rendered by NSA to the Company, the Company shall pay to NSA any and all amounts collected by the Company from the Company's independent distributors in exchange for data processing services offered to such distributors by the Company, specifically including, the provision of certain computer consulting services and access to NSA's mainframe computer and the programs therein contained ("Computer Usage and Management Fee"). The Computer Usage and Management Fee shall be paid quarterly, in arrears, within twenty-five (25) business days following the close of each calendar quarter. iv. TERM. This Agreement shall have a term of one (1) year but shall automatically be renewed for successive one (1) year periods thereafter; provided, however, that either party has the right to terminate this Agreement at any time by giving written notice to the other party of its intention to terminate, which termination shall be effective upon the receipt by the other party of such written notice. v. ALLOCATION OF GENERAL AND ADMINISTRATIVE EXPENSES. This Agreement is intended to accurately allocate the costs and expenses incurred to operate the business of the respective parties. vi. BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the parties and their successors and assigns. vii. APPLICABLE LAW. This Agreement shall be construed and enforced under the substantive laws of the State of Tennessee. viii. ENTIRE AGREEMENT; AMENDMENT. This Agreement represents the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings with respect thereto. This Agreement may be amended only by a written instrument signed by both parties hereto. 3 ix. SEVERABILITY. If any term, clause or provision of this Agreement shall be determined to be invalid, the validity of any other term, clause or provision shall not be affected, and such invalid term, clause or provision shall be deleted from the Agreement. x. NOTICES. Any notice required by the terms of this Agreement to be given by either of the parties hereto to the other party shall be given by sending such notice by regular mail or hand delivery to the other party's last known address. Such notice shall be effective from the date of mailing or hand delivery, as the case may be. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written. NATIONAL SAFETY ASSOCIATES, INC. By: ---------------------------------- Title: ------------------------------- NSA INTERNATIONAL, INC. By: ---------------------------------- Title: ------------------------------- EX-10.18 3 REGISTRANTS 1997 INCENTIVE AND NONQUALIF STCK OPTN 1 Exhibit 10.18 2 NSA INTERNATIONAL, INC. 1997 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN 1. PURPOSE OF PLAN AND EFFECTIVE DATE. a. PURPOSE. The purpose of this 1997 Incentive and Non-Qualified Stock Option Plan (hereinafter called the "Plan") is to further the success and advance the interests of NSA International, Inc. (the "Company") and its subsidiaries by making available Common Stock of the Company for purchase by eligible directors, officers, advisors, consultants and key employees of the Company and any subsidiaries and thus to provide an additional incentive to such personnel to continue to serve the Company and any subsidiaries and to give them a greater interest as stockholders in the success of the Company. It is intended that this Plan be considered an "Employee Benefit Plan" within the meaning of Regulation 405 of the Securities Act of 1933, as amended (the "1933 Act"). b. AWARDS. The Company intends this Plan to enable the Company to issue, pursuant hereto, Incentive Stock Options as such term is defined in Section 422 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). The Company also intends this Plan to enable it to issue similar options which will not, however, be qualified as Incentive Stock Options (also known as "Non-Statutory" or "Non-Qualified" stock options). c. EFFECTIVENESS. The Plan shall become effective on the date of approval by the Board of Directors of the Company, which date is February 18, 1997; provided, however, that the Plan shall be subject to approval and ratification by stockholders of the Company holding a majority of its voting stock, voting in person or by proxy, at a meeting of stockholders to be held within twelve months from February 18, 1997. 2. DEFINITIONS. a. As used in this Plan, the following terms have the following respective meanings: "1933 Act" means the Securities Act of 1933, as amended from time to time. References to any provision of the 1933 Act shall be deemed to include successor provisions thereto and rules and regulations thereunder. "Board" means the Board of Directors of the Company. "Change in Control" means any transaction pursuant to which (i) the Company merges with another corporation and is not the surviving entity, (ii) the majority of outstanding shares of Common Stock are issued or acquired by persons or entities not affiliated with the Company, who, acting as a group, have the voting power to change the composition of the Board, or (iii) any other transaction of a nature similar to the foregoing. "Code" means the Internal Revenue Code of 1986, as amended. References to any provisions of the Code shall be deemed to include successor provisions. "Committee" shall mean a group of at least two (2) directors appointed by the Board to administer the Plan. "Common Stock" means the common stock, $.05 par value of the Company. "Company" means NSA International, Inc. "Disability" means the inability to substantially perform the usual duties of the person's occupation by reason of a medically determinable physical or mental impairment which can be expected to be of long, continued and indefinite duration as determined by the Committee. 1 3 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. References to any provision of the Exchange Act shall be deemed to include successor provisions thereto and rules and regulations thereunder. "Fair Market Value" unless otherwise required by an applicable provision of the Code, as of any date, means the last reported bid price of the Common Stock on The Nasdaq Stock Market on the date the Option is granted. If no such bid price is available, then the price per share shall be determined by the Committee. "Grant" means the action of the Committee at the time of grant of an option. "Imminent Change in Control" means any offer or announcement, oral or written, by any person or persons acting as a group, to acquire control of the Company. The decision of the Committee whether an Imminent Change in Control have occurred shall be conclusive and binding. "Incentive Stock Option" means any Incentive Stock Option granted pursuant to this Plan which is intended to be, and designated and qualifying as, an "incentive stock option" within the meaning of Section 422 of the Code. "Modification" means any change in the terms of an Option which would constitute a "modification" as defined in Section 424(h)(3) of the Code, including, without limitation, such a modification to an Option as effected by a change in the Plan and any other change in the Plan which would increase the number of shares reserved for Options under the Plan, materially change the administration of the Plan or that would otherwise materially increase the benefits accruing to, or available for, participants in the Plan; provided, however, that registration of Option Stock under the 1933 Act, as amended, shall not be deemed a Modification. "Non-Statutory Stock Option" and "Non-Qualified Stock Option" means any option granted under this Plan other than an Incentive Stock Option. "Option Agreement" means a written agreement setting forth the terms of an Option. "Option" or "Stock Option" means a right granted pursuant to the Plan to purchase shares of Common Stock, and includes the terms Incentive Stock Option and Non-Qualified Stock Option or Non- Qualified Stock Option. "Option Price" or "Exercise Price" means the price per share at which Common Stock may be purchased upon the exercise of an Option. "Option Stock" means Common Stock subject to an option granted under this Plan. "Participant" means any individual to whom an Option has been granted by the Committee under the Plan. "Subsidiary" or "Subsidiaries" means any corporation which is a "subsidiary corporation" as defined in Section 424(f) of the Code, and the regulations thereto. "Retirement" means retirement from active employment under a retirement plan of the Company, or pursuant to an employment agreement with any of the aforementioned, or termination of employment at or after age 55 under circumstances which the Committee, in its sole discretion, deems equivalent to retirement. "Termination for Cause" shall mean the termination of employment of a Participant due to (i) any illegal or dishonest conduct which adversely affects or may adversely affect the reputation, good will, or business position of the Company or any Subsidiary or which involves Company or any Subsidiary's funds or assets; (ii) any intentional or material damage to the property or business of the Company or any Subsidiary; (iii) theft, embezzlement or misappropriation of the Company's or any Subsidiary's property; 2 4 or (iv) the willful failure of the Participant to carry out his or her duties as an employee of the Company or any subsidiary. "Termination without Cause" shall mean the termination of employment of a Participant due to any reason which does not constitute a Termination for Cause. "10% Stockholder" means a person who owns stock possessing more than 10% of the total combined voting power of all classes of stock of Company or of any parent or subsidiary of the Company after giving effect to the attribution of stock ownership provisions of Section 424(d) of the Code. b. References in these definitions to provisions of the Code shall, when appropriate to effectuate the purpose of this Plan, be deemed to be references to such provisions of the Code and regulations promulgated thereunder as the same may be from time to time amended or to successor provisions to such provisions. Terms defined elsewhere in this Plan shall have the meanings set forth in such respective definitions. 3. STOCK SUBJECT TO PLAN. a. NUMBER OF SHARES. Subject to the provisions of PARAGRAPH 12 hereof, there shall be reserved for issuance or transfer upon the exercise of the Options to be granted from time to time under the Plan an aggregate of 500,000 shares of Common Stock. b. EXCESS SHARES. Shares of stock which are attributable to Options which expire or are otherwise terminated, canceled, surrendered or forfeited, during a calendar year, are available for issuance or use in connection with future Options, during the calendar year in which they expire or otherwise become available. c. SOURCE OF STOCK. Shares of Common Stock to be issued under the Plan may be authorized and unissued shares of Common Stock, treasury stock or a combination thereof. d. ADJUSTMENT. In the event of a merger, consolidation, reorganization, recapitalization, stock split, stock dividend, other extraordinary dividend or other change in corporate structure or capitalization affecting the Common Stock, the Committee may make appropriate adjustment in the number or kind of shares subject to Options granted under the Plan, and/or the exercise price and other terms and conditions of Options or appropriate adjustment in the maximum number of shares referred to in PARAGRAPH 3.1 of the Plan, as provided in PARAGRAPH 12 hereof. e. LIMITATION ON GRANTS. In no event shall the Committee grant Options in any given plan year which, in the aggregate, result in Options being granted for the purchase of Option Shares representing more than two percent (2%) of the Company's then issued and outstanding shares of Common Stock at the issuance of the Options. 4. ADMINISTRATION. a. COMPOSITION OF COMMITTEE. The Plan shall be administered by a Committee (the "Committee") of a minimum of two members of the Board, with such Committee appointed by the Board, as constituted from time to time. Members of the Committee shall serve until they resign or they are removed by the vote of a majority of the Board. b. AUTHORITY OF COMMITTEE. The Committee shall have the authority to (a) establish such rules and regulations as it deems necessary for the proper operation and administration of the Plan; (b) select the persons to receive Options under the Plan; (c) determine the form of an Option and whether such Option is to operate on a tandem basis and/or in conjunction with or apart from other awards made by the Company, either within or outside of this Plan; (d) determine the number of shares of Common Stock to be covered by each such Option granted hereunder; (e) determine the terms and conditions, not inconsistent with the terms of this Plan, of any Option granted hereunder (including, but not limited to, any restriction or limitation on transfer, any vesting schedule or acceleration thereof, and any forfeiture provisions or waiver thereof), regarding any Option and the 3 5 shares of Common Stock relating thereto, based on such factors as the Committee shall determine, in its sole and absolute discretion; and (f) make any other determination or take any action that the Committee deems necessary or desirable for the administration of the Plan. c. DECISIONS OF COMMITTEE FINAL. All decisions, determinations and interpretations of the Committee shall be final and conclusive on all persons affected thereby. 5. ELIGIBILITY. Incentive Stock Options under this Plan may be granted only to officers (who are employees) and to other key employees of (a) the Company or (b) Subsidiaries of the Company. A director of the Company or any Subsidiaries may receive an Incentive Stock Option under this Plan if such person is otherwise an employee of the Company and/or any Subsidiaries. An employee, director or officer of the Company (or any Subsidiaries), may receive a Non-Qualified Stock Option. In addition, consultants, non-employee directors, and advisors who the Committee determines are providing bona fide services to the Company or any Subsidiaries, whether or not otherwise compensated, may receive a Non-Qualified Stock Option so long as the Plan would continue to qualify as an Employee Benefit Plan under the 1933 Act. In determining the persons to whom Options shall be granted and the number of shares to be covered by each Option, the Committee may take into account the nature of the services rendered by, and the responsibilities borne by, such respective persons, their present and potential contributions to the Company's success and such other factors as the Committee in its discretion shall deem relevant. Subject to the provisions of PARAGRAPH 7 hereof, Options may be granted to persons who hold or have held options under previous plans, and a person who has been granted an Option under the Plan may be granted an additional Option or Options under the Plan or under any future option plan if the Committee shall so determine. 6. AWARDS UNDER THE PLAN. a. TERM OF PLAN. The Committee may grant Incentive Stock Options, Non-Qualified Stock Options or both to purchase shares of Common Stock from the Company to such officers and key employees, in such amounts and subject to such terms and conditions, as the Committee shall determine in its sole discretion, subject to the provisions of the Plan, provided, however, that in no event may any Stock Option be granted hereunder after the expiration of 10 years after the date of the Plan. b. CODE COMPLIANCE. In the case of Incentive Stock Options, the terms and conditions of such grants, including the exercise price of the purchase of Common Stock, shall be subject to and comply with the requirements of Section 422 of the Code, as from time to time amended, and any implementing regulations. c. EXERCISE PRICE. The exercise price at which shares of Common Stock may be purchased pursuant to the grant of an Option shall be fixed by the Committee at the time of grant; however, the price of an Incentive Stock Option must be equal to or greater than the Fair Market Value of the shares of Common Stock covered thereby. The exercise price of an Incentive Stock Option granted to any Participant who owns shares of Common Stock possessing more than 10% of the total combined voting power of all outstanding shares of Common Stock of the Company must be at least equal to 110% of the fair market value of the shares of Common Stock on the date of grant. Options granted under the Plan will not be Incentive Stock Options to the extent that the Fair Market Value of the shares of Common Stock with respect to which such Options first become exercisable in any year exceeds $100,000. d. VESTING. Awards of Options will vest and become non-forfeitable as determined by the Committee. Subject to the provisions of Section 422 of the Code and Rule 16b-3, Options shall become exercisable in accordance with their terms in the event of Death, Disability or Retirement of a Participant or upon a Change in Control. 4 6 7. CERTAIN LIMITATIONS ON GRANTING AND EXERCISE OF OPTIONS. Any other provisions of this Plan to the contrary notwithstanding, the granting and exercise of Options hereunder shall be subject to the following limitations (which shall be in addition to the limitations, provisions and conditions contained elsewhere in this Plan): i. The aggregate Fair Market Value (determined at the time the option is granted) of the Option Stock for which Incentive Stock Options are exercisable for the first time by any employee during any calendar year (under all such Plans of the Company and its subsidiaries) shall not exceed $100,000. Any options granted in excess of this $100,000 threshold shall be specifically designated Non-Qualified Options. ii. Options may be granted as soon as practicable after the date of the adoption of the Plan by the Board and instruments evidencing such grant(s)may similarly be so issued, but in each case, such Options and such instruments shall be subject to the approval and ratification of the Plan by the stockholders of the Company as provided in PARAGRAPH 1, and notwithstanding anything in the Plan that may be deemed to be to the contrary, no Option may be exercised unless and until such approval and ratification is obtained. In the event such approval and ratification shall not be obtained, the Plan and all Options that may have been granted pursuant thereto shall be null and void. 8. DURATION OF OPTIONS. The term of Options granted under the Plan shall be as fixed by the Committee at the time of grant; provided, however, that the term of an Option shall not exceed 10 years from the date of grant. In the case of 10% Stockholders, the term of an Incentive Stock Option shall not exceed five (5) years from the date of grant. The terms of options may, however, be foreshortened as provided in PARAGRAPH 11 hereof. No Option may be exercised after expiration of such Option's term. 9. EXERCISE OF OPTIONS. An Option granted under the Plan shall be exercisable at such time or times, whether or not in installments, as the Committee shall prescribe at the time the Option is granted. An Option which has become exercisable may be exercised in accordance with its terms as to any or all full shares purchasable under the provisions of the Option, but not at any time as to less than 100 shares unless the remaining shares which have become so purchasable are less than 100 shares. The purchase price of the shares shall be paid in full, as provided in PARAGRAPH 13 hereof, upon the exercise of the Option, and the Company shall not be required to deliver certificates for such shares until such payment has been made. Except as provided in PARAGRAPH 11, an Incentive Stock Option may not be exercised at any time unless the holder thereof is then an employee of the Company or any Subsidiary and shall have been continuously employed by the Company or any Subsidiary since the date of grant. 10. NONTRANSFERABILITY OF OPTIONS. Options shall not be assignable or transferable by a Participant except by will or the laws of descent and distribution and during the Participant's lifetime, such Options and rights shall be exercisable only by such Participant or such Participant's duly appointed guardian or legal representative. 11. TERMINATION OF EMPLOYMENT. a. TERMINATION FOR CAUSE OR TERMINATION BY EMPLOYEE. In the event of Termination for Cause or the termination of employment by employee of a person to whom an Incentive Stock Option has been granted under the Plan, such Incentive Stock Options held by him under the Plan, to the extent vested and not theretofore exercised, shall on the close of business on the date of termination of his or her employment be null and void. Incentive Stock Options granted under the Plan shall not be affected by any change of employment so long as the holder continues in the employ of the Company or any Subsidiaries. Nothing in the Plan or in any Option granted pursuant to the Plan shall confer on any individual any right to continue in the employ of the Company or any 5 7 Subsidiaries or interfere in any way with the right of the Company or any Subsidiaries to terminate his or her employment or occupancy of any corporate office at any time. b. DEATH OF PARTICIPANT. In the event of the death of a Participant, any Incentive Stock Options granted to such Participant may be exercised by the person or persons to whom the Participant's rights under any such Incentive Stock Options pass by will or by the laws of descent and distribution (including the Participant's estate during the period of administration) at any time prior to the earlier of (i) the respective expiration dates of any such Incentive Stock Options or (ii) the date which is one (1) year after the date of death of such Participant but only if, and to the extent that, the Participant was entitled to exercise any such Incentive Stock Options at the date of death. c. DISABILITY OF PARTICIPANT. In the event that any Participant's employment with the Company shall terminate as a result of the Disability of such Participant, such Participant may exercise any Inventive Stock Options granted to him pursuant to the Plan at any time prior to the earlier of (i) the respective expiration dates of any such Incentive Stock Options or (ii) the date which is one (1) year after the date of such termination of employment, but only if, and to the extent that, the Participant was entitled to exercise any such Incentive Stock Options at the date of such termination of employment. d. TERMINATION WITHOUT CAUSE. In the event of termination without cause of a person to whom an Incentive Stock Option has been granted under the Plan, any Incentive Stock Options held by him under the Plan, to the extent vested and not theretofore exercised, shall be exercisable for a period of three (3) months following the date of termination. e. NON-QUALIFIED OPTIONS. The terms and conditions of Non-Qualified Stock Options relating to the effect of the termination of a Participant's employment, or association with the Company, Disability of a Participant or his death shall be such terms and conditions as the Committee shall, in its sole and absolute discretion, determine at the time of termination, unless specifically provided for by the terms of the Option Agreement at the time of grant of the Option. 12. RECAPITALIZATION, MERGER, CONSOLIDATION, CHANGE IN CONTROL AND SIMILAR TRANSACTIONS. a. ADJUSTMENT. Subject to any required action by the stockholders and Board of the Company, within the sole and absolute discretion of the Committee, the aggregate number of shares of Common Stock for which Options may be granted hereunder, the number of shares of Common Stock covered by each outstanding Option and the exercise price per share of Common Stock of each such Option, shall all be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Common Stock resulting from a subdivision or consolidation of shares (whether by reason of merger, consolidation, recapitalization, reclassification, split-up, combination of shares, or otherwise) or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of such shares of Common Stock affected without the receipt of consideration by the Company (other than shares held by dissenting stockholders). b. CHANGE IN CONTROL. All outstanding Options shall automatically vest and become immediately exercisable in the event of a Change in Control or Imminent Change in Control of the Company. In the event of a Change in Control or Imminent Change of Control, the Participant shall, at the discretion of the Committee, be entitled to receive cash in amount equal to the fair market value of the Common Stock subject to any Incentive or Non-Qualified Stock Option over the Option Price of such shares, in exchange for the surrender of such Options by the Participant on that date in the event of Change in Control or Imminent Change in Control of the Company. c. EXTRAORDINARY CORPORATE ACTION. Subject to any required action by the stockholders of the Company, in the event of any Change in Control, recapitalization, merger, consolidation, exchange of shares, spin-off, reorganization, tender offer, liquidation or other extraordinary 6 8 corporate action or event, the Committee, in its sole and absolute discretion, shall have the power, prior or subsequent to such action to: (i) appropriately adjust the number of shares of Common Stock subject to each Option, the exercise price of per share of Common Stock and the consideration to be given or received by the Company upon the exercise of any outstanding Options; (ii) cancel any or all previously granted Options, provided that appropriate consideration (as described in PARAGRAPH 12.2) is paid to the Participants in connection therewith; and/or (iii) make such other adjustments in connection with the Plan as the Committee in its sole and absolute discretion, deems necessary, desirable, appropriate or advisable; PROVIDED, however, that no action shall be taken by the Committee which would cause Incentive Stock Options granted pursuant to this plan and to fail to meet the requirements of Section 422 of the Code. Except as expressly provided in PARAGRAPHS 12.1, 12.2 and 12.3 hereof, no Participant shall have any rights by reason of the occurrence of any of the events described in this PARAGRAPH 12. d. ACCELERATED VESTING. The Committee shall at all times have the power to accelerate the exercise date of Options previously granted under the Plan. 13. PAYMENT OF PURCHASE PRICE, FEDERAL INCOME TAX OR OTHER WITHHOLDING AMOUNT. The shares to be purchased upon exercise of any Option shall be paid for in full, in cash, at the time of such exercise. In respect to Non-Qualified Stock Options or any Incentive Stock Options which fail to qualify as such for any reason, any required federal income tax or other withholding amount shall be paid (in full) by the Participant to the Company in cash or by certified check at the time of such exercise. The Company shall not be required to deliver certificates for such shares until all such payments have been made, and until the Company has had an opportunity (at its sole option) to obtain verification from the Participant that all federal income tax or other withholding amounts have been properly calculated and paid if required by the Code. 14. TERMINATION AND AMENDMENT. a. TERMINATION DATE. Unless the Plan shall theretofore have been terminated as hereinafter provided, it shall terminate on, and no Options shall be granted hereunder after November 30, 2007. The Plan may be terminated earlier by the stockholders of the Company or by the Board. b. AMENDMENT. Modifications or other amendments to the Plan may be made by the stockholders of the Company. The Plan may also be amended by the Board; provided, however, that no amendment which shall constitute a Modification shall be effective unless approved by the stockholders of the Company within 12 months before or after the adoption of the Modification. c. PARTICIPANT CONSENT. No termination, Modification, or amendment of the Plan, may, without the consent of the Participant to whom any Option shall theretofore have been granted, adversely affect the rights of such Participant under such Option; nor shall any such Modification or amendment be deemed to effect a Modification, extension or renewal of any such Option previously granted except pursuant to an express written agreement to such effect, executed by the Company and the Participant. 15. TIME OF GRANTING OPTIONS. Nothing contained in the Plan shall constitute the granting of any Option hereunder. The granting of an Option pursuant to the Plan shall take place only upon approval by the Committee of a resolution granting an Option under this Plan. Notice of the determination shall be given to each person to whom an Option is so granted within a reasonable time after the date of such grant. After the granting of an Option under this Plan, a written Option Agreement shall be duly executed by or on behalf of the Company. 7 9 16. FORM AND TERMS OF OPTION AGREEMENT. Option Agreements evidencing Options granted pursuant to the Plan shall be in such form and shall contain such terms not inconsistent with the Plan as the Committee may approve. Option agreements may contain such restrictions upon the exercise of Options and upon the transfer of Common Stock acquired upon exercise of Options (and such provisions for the enforcement of compliance with the Securities Act of 1933, as amended, and/or with state "Blue Sky" laws). 17. PARTIAL INVALIDITY. The invalidity or unenforceability of any particular provision of this Plan shall not effect the other provisions of this Plan nor affect the validity or enforceability of the other provisions of Options granted under this Plan, and this Plan and the Options granted hereunder shall be construed in all respects as if such invalid or unenforceable provision were omitted. 18. SPECIAL PROVISIONS WITH RESPECT TO INCENTIVE STOCK OPTIONS UNDER THIS PLAN AND NON-QUALIFIED STOCK OPTIONS. Paragraph 5 describes the persons eligible to receive Options granted under this Plan. The Committee in granting any Option shall indicate whether it intends the Option to be an Incentive Stock Option under this Plan or a Non-Qualified Stock Option and shall cause the Option Agreement with respect thereto to indicate such intention. Should a person hold both one or more Incentive Stock Options under this Plan and one or more Non-Qualified Stock Options, all of such Options shall be exercisable in accordance with their respective terms and limitations, and nothing in this Plan shall be construed as causing the exercise of any such Option to preclude the exercise of any such other Option in accordance with its terms. 19. NO OWNERSHIP OR SUBSCRIPTION RIGHTS. Shares of Common Stock of the Company which are subject to an Option but which have not yet been purchased or paid for shall have no subscription rights and no Option holder shall be deemed to be a stockholder of the Corporation for any purpose. 20. UNFUNDED PLAN. The Plan is intended to constitute an "unfunded" plan. Unless otherwise determined by the Board, the Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. 21. RULE 16B-3 COMPLIANCE. It is the intent of the Company that this Plan comply in all respects with applicable provisions of Rule 16b-3 and Rule 16a-1(c)(3) under the Exchange Act in connection with any grant of Options to or other transactions by a Participant who is subject to Section 16 of the Exchange Act (except for transactions exempted under alternative Exchange Act Rules or acknowledged in writing to be non-exempt by such Participant). Accordingly, if any provision of this Plan or any Option Agreement does not comply with the requirements of Rule 16b-3 or Rule 16a-1(c)(3) as then applicable to any such transaction, such provision will be construed or deemed amended to the extent necessary to conform to the applicable requirements of Rule 16b-3 or Rule 16a-1(c)(3) so that such Participant shall avoid liability under Section 16(b). 22. GOVERNING LAW. The validity, construction, and effect of the Plan, any rules and regulations relating to the Plan and any Option Agreement shall be determined in accordance with the laws of the State of Tennessee and applicable federal law. Plan Adopted by the Board of Directors on February 18, 1997 to be ratified by the stockholders no later than December 31, 1997. 8 EX-21.1 4 LIST OF SUBSIDIARIES OF THE COMPANY 1 Exhibit 21.1 2 LIST OF SUBSIDIARIES -------------------- NSA N.V. (Belgium) National Safety Associates, Ltd. (Ontario, Canada) National Safety Associates of America (U.K.) Limited (England) National Safety Associates of America (Ireland) Limited (Ireland) NSA International GmbH (Germany) NSA Polymers, Inc. (Florida) NSA AG (Switzerland) NSA B.V. (The Netherlands) NSA S.A.R.L. (France) NSA s.r.1. (Italy) EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-K OF NSA INTERNATIONAL, INC. FOR THE YEAR ENDED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS YEAR APR-30-1997 MAY-01-1996 APR-30-1997 1 5,772 11 3,018 45 7,105 17,397 2,253 1,327 22,365 13,096 0 0 0 243 8,064 22,365 36,107 36,107 19,211 26,684 19,949 2,000 0 (9,832) (22) (9,810) 0 0 0 (9,810) (2.02) (2.02)
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