<PAGE> 1
PROXY STATEMENT
PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant x
-----
Filed by a Party other than the Registrant
Check the appropriate box:
Preliminary Proxy Statement
-----
----- Confidential, for Use of the Commission Only (as permitted by
Rule 14a6(e)(2)
x
----- Definitive Proxy Statement
----- Definitive Additional Materials
----- Soliciting Material Pursuant to Section 240.14a-ll(c) or
Section 240.14a-12
NSA INTERNATIONAL, INC.
--------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No Fee.
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction
applies:
Common Stock, $.05 par value
-------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
800,000
-------------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
$1 1/8
-------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$900,000
-------------------------------------------------------------
(5) Total fee paid:
$180.00
-------------------------------------------------------------
[x] Fee paid previously with preliminary materials.
<PAGE> 2
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-ll(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $180.00
(2) Form, Schedule or Registration Statement No.: Schedule 13E-3
Transaction Statement
(3) Filing Party: NSA International, Inc.
(4) Date Filed: November 19, 1998
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<PAGE> 3
[NSA INTERNATIONAL LETTERHEAD]
February 3, 1999
Dear Shareholder:
You are cordially invited to attend the Annual and Special Meeting of
the Shareholders (the "Meeting") of NSA International, Inc., a Tennessee
corporation (the "Corporation"), to be held on Thursday, March 4, 1999, at 10:00
a.m. Memphis, Tennessee time, at the East Memphis Hilton, 5069 Sanderlin Avenue,
Memphis, Tennessee 38117.
At the Meeting, you will be asked to consider and vote upon the
following proposals:
(1) (a) the approval and adoption of an Amended and Restated
Charter for the Corporation (the "Restated Charter") which would
effect a one-for-2,400 reverse split of the Corporation's common
stock, $.05 par value (the "Common Stock"), by reducing the number of
authorized shares of Common Stock from 100,000,000 shares to 41,666
shares, $120.00 par value (such new shares of common stock to be
referred to herein as the "New Common Stock"), and (b) a cash payment
of $1 1/8 per share (the "Cash Consideration") of the currently
outstanding Common Stock in lieu of the issuance of any resulting
fractional shares of New Common Stock after the reverse stock split
(items (a) and (b) will be considered one proposal and referred to
herein as the "Reverse Stock Split");
(2) the election of three (3) Class I directors who will
serve two-year terms or until their successors have been duly elected
and qualified; and
(3) the ratification of the selection of Deloitte & Touche
LLP as independent accountants and auditors for the Corporation.
The purpose of the proposed Reverse Stock Split is to take the
Corporation private. The Corporation has been unable to provide the benefits
for its shareholders that are generally connected with being a shareholder of a
publicly-held corporation. Most importantly, a significant public trading
market does not currently exist for the Corporation's Common Stock and such a
market is not likely to develop in the foreseeable future.
The Corporation did not have a traditional public offering and has
never derived any material benefit of raising significant capital through such
offerings or utilizing the shares of Common Stock in connection with
acquisitions of other businesses or assets. Currently, the Corporation does not
have any intention of raising capital through the public market or using shares
of Common Stock in connection with any acquisitions. Nevertheless, the
Corporation's annual direct and indirect costs of being a publicly-held
corporation, which generally totals in excess of $300,000 a year, has had a
significant negative effect on the Corporation's profitability.
You are urged to read the accompanying Proxy Statement in its
entirety, including the section entitled "Approval of the Reverse Stock Split -
Special Factors" and the attached Appendices. The discussion set forth in the
Proxy Statement goes into detail regarding the due diligence of the Board of
Directors in proposing and recommending the Reverse Stock Split. The
Corporation's Annual Report information for fiscal 1998 is included in the body
of the accompanying Proxy Statement.
THE BOARD OF DIRECTORS HAS FULLY REVIEWED AND CONSIDERED THE TERMS AND
CONDITIONS OF THE PROPOSED REVERSE STOCK SPLIT AND HAS UNANIMOUSLY DETERMINED
THAT
<PAGE> 4
THE PROPOSED REVERSE STOCK SPLIT IS FAIR TO, AND IN THE BEST INTERESTS OF, THE
CORPORATION AND ITS SHAREHOLDERS AND, ACCORDINGLY, RECOMMENDS A VOTE FOR THE
PROPOSED REVERSE STOCK SPLIT.
IN ADDITION, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR THE NOMINEES TO THE BOARD OF DIRECTORS LISTED IN THE
ACCOMPANYING PROXY STATEMENT AND FOR THE RATIFICATION OF THE INDEPENDENT
ACCOUNTANTS AND AUDITORS.
Your continued support of and interest in NSA International, Inc. is
greatly appreciated.
Sincerely,
/s/
-----------------------------------------
A. Jay Martin, President
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
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<PAGE> 5
NSA INTERNATIONAL, INC.
4260 EAST RAINES ROAD
MEMPHIS, TENNESSEE 38118
NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 4, 1999
Notice is hereby given that the 1998 Annual and Special Meeting of
Shareholders (the "Meeting") of NSA International, Inc., a Tennessee corporation
(the "Corporation") will be held on Thursday, March 4, 1999, at 10:00 a.m.
Memphis, Tennessee time, at the East Memphis Hilton, 5069 Sanderlin Avenue,
Memphis, Tennessee 38117, for the following purposes:
PROPOSALS
(1) To consider and vote upon a proposal (a) to approve and adopt
an Amended and Restated Charter for the Corporation (the
"Restated Charter") which would effect a one-for-2,400
reverse split of the Corporation's common stock, $.05 par
value (the "Common Stock"), by reducing the number of
authorized shares of Common Stock from 100,000,000 shares to
41,666 shares, $120.00 par value (such new shares of common
stock to be referred to herein as the "New Common Stock"),
and (b) for a cash payment of $1 1/8 per share (the "Cash
Consideration") of the currently outstanding Common Stock in
lieu of the issuance of any resulting fractional shares of
New Common Stock after the reverse stock split (items (a) and
(b) will be considered one proposal and referred to herein as
the "Reverse Stock Split"), all as described more fully in
the accompanying Proxy Statement;
(2) To elect three (3) Class I directors who will serve two-year
terms or until their successors have been duly elected and
qualified;
(3) To ratify the selection of Deloitte & Touche LLP as
independent accountants and auditors for the Corporation; and
(4) To consider and act upon any other matters that may properly
come before the Meeting or any adjournment or adjournments
thereof.
Only shareholders of the Corporation's Common Stock of record at the
close of business on February 3, 1999, will be entitled to notice of, and to
participate in and to vote at, the Meeting. Each share of Common Stock
outstanding on such date is entitled to one vote at the Meeting.
The text of the proposed Restated Charter is set forth in Appendix A
to the accompanying Proxy Statement. If the proposed Reverse Stock Split is
approved, the shareholders of the Corporation who own less than 2,400 shares of
Common Stock will receive the Cash Consideration for their shares of Common
Stock and will cease to be shareholders of the Corporation or to have any
equity interest in the Corporation. Shareholders owning greater than 2,400
shares of Common Stock will receive one share of New Common Stock for each
2,400 share block of Common Stock held and the Cash Consideration in lieu of
any fractional shares resulting from the Reverse Stock Split. Finally, if the
Reverse Stock Split is approved, the Corporation will no longer file reports
with the Securities and Exchange Commission.
If the proposed Reverse Stock Split is approved, a shareholder who
strictly complies with the requirements of Sections 48-23-101 through 48-23-302
of the Tennessee Business Corporation Act (the "TBCA") may dissent from the
proposed Reverse Stock Split and, in lieu of the receipt of the New Common Stock
and/or payment of the Cash Consideration, obtain payment in cash of the "fair
value" of such shareholder's shares of Common Stock as determined under the
TBCA. ANY SHAREHOLDER WHO WISHES TO ASSERT SUCH DISSENTERS' RIGHTS MUST DELIVER
A WRITTEN NOTICE TO THE CORPORATION PRIOR TO THE VOTE AT THE MEETING ON THE
REVERSE STOCK SPLIT OF SUCH SHAREHOLDER'S INTENT TO
<PAGE> 6
DEMAND PAYMENT FOR SUCH SHAREHOLDER'S SHARES OF COMMON STOCK (THE "OBJECTION
NOTICE") IF THE REVERSE STOCK SPLIT IS EFFECTUATED. A SHAREHOLDER WHO WISHES TO
ASSERT SUCH DISSENTERS' RIGHTS MUST NOT VOTE ANY OF THE SHAREHOLDER'S SHARES OF
COMMON STOCK FOR THE REVERSE STOCK SPLIT. See "Approval of the Reverse Stock
Split - The Reverse Stock Split - Shareholders' Right to Dissent" in the
accompanying Proxy Statement. For a statement of the rights of dissenting
shareholders, a description of the procedures required to be followed to obtain
the fair value of the shares of Common Stock, and a copy of Sections 48-23-101
through 48-23-302 of the TBCA, see Appendix B to the accompanying Proxy
Statement. For convenience, a form of Objection Notice is also included in
Appendix B to the accompanying Proxy Statement.
Pursuant to the Corporation's Charter, the affirmative vote of
two-thirds (2/3) of the outstanding shares of Common Stock is required to
approve the Reverse Stock Split. The affirmative vote of a majority of the
shares of Common Stock voting, in person or by proxy, at the Meeting is
required to elect members of the Board of Directors and to ratify the selection
of the independent accountants and auditors.
The officers and directors of the Corporation have indicated
that they will each vote in favor of the Reverse Stock Split, the nominees to
the Board of Directors listed in the accompanying Proxy Statement, and the
ratification of the independent accountants and auditors. The officers and
directors of the Corporation directly, and indirectly through National Safety
Associates, Inc., an affiliated Tennessee corporation, control approximately
sixty-seven (67%) percent of the outstanding shares of Common Stock.
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATE AT THIS TIME.
PROMPTLY AFTER THE CONSUMMATION OF THE REVERSE STOCK SPLIT, IF APPROVED, THE
CORPORATION WILL MAIL A LETTER TO ALL HOLDERS OF COMMON STOCK WITH INSTRUCTIONS
FOR SURRENDERING THEIR STOCK CERTIFICATES.
You are cordially invited to attend the Meeting. Please note,
however, that we are asking you to complete and return the enclosed proxy even
if you plan to attend the Meeting. You may, of course, withdraw your proxy and
vote your shares in person if you attend the Meeting.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/
--------------------------------------------
STAN C. TURK
Secretary
February 3, 1999
- -------------------------------------------------------------------------------
IMPORTANT NOTICE
REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE MEETING, PLEASE REVIEW THE
ENCLOSED MATERIAL, AND PROMPTLY MARK, DATE, SIGN AND RETURN THE ENCLOSED
FORM OF PROXY IN THE ENCLOSED SELF-ADDRESSED, STAMPED ENVELOPE.
- -------------------------------------------------------------------------------
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<PAGE> 7
NSA INTERNATIONAL, INC.
4260 EAST RAINES ROAD
MEMPHIS, TENNESSEE 38118
-------------------------------------------
PROXY STATEMENT
GENERAL INFORMATION
-------------------------------------------
This Proxy Statement (the "Proxy Statement"), together with the
enclosed form of proxy, which is first being mailed to shareholders on or about
February 3, 1999, is furnished in connection with the solicitation of proxies
by the Board of Directors of NSA International, Inc., a Tennessee corporation
(the "Corporation") for use at the Annual and Special Meeting of the
Shareholders to be held on Thursday, March 4, 1999, at 10:00 a.m. Memphis,
Tennessee time, at the East Memphis Hilton, 5069 Sanderlin Avenue, Memphis,
Tennessee 38117 and at any adjournment or adjournments thereof
(the "Meeting").
Shareholders of the Corporation of record at the close of business on
December 28, 1998 (the "Record Date") will be entitled to notice of and to vote
at the Meeting. Shareholders will be asked to consider and vote upon: (i) (a)
approval and adoption of an Amended and Restated Charter for the Corporation
(the "Restated Charter") which would effect a one-for-2,400 reverse split of
the Corporation's common stock, $.05 par value (the "Common Stock"), by
reducing the number of authorized shares of Common Stock from 100,000,000
shares to 41,666 shares, $120.00 par value (such new shares of common stock to
be referred to herein as the "New Common Stock"), and (b) for a cash payment of
$1 1/8 per share (the "Cash Consideration") of the currently outstanding Common
Stock in lieu of the issuance of any resulting fractional shares of New Common
Stock after the reverse stock split (items (a) and (b) will be considered one
proposal and referred to herein as the "Reverse Stock Split"); (ii) the
election of three (3) Class I directors who will serve two-year terms or until
their successors have been duly elected and qualified; and (iii) ratification
of the selection of Deloitte & Touche LLP as independent accountants and
auditors for the Corporation.
The affirmative vote of two-thirds (2/3) of the outstanding shares of
Common Stock is required to approve the Reverse Stock Split. The affirmative
vote of a majority of the shares of Common Stock voting at the Meeting is
required to elect members of the Board of Directors and to ratify the selection
of the independent accountants and auditors. The directors and officers of the
Corporation have advised the Corporation that they intend to vote in favor of
the Reverse Stock Split, the nominees to the Board of Directors listed in this
Proxy Statement, and the ratification of the independent accountants and
auditors. The directors and officers of the Corporation directly, and
indirectly through National Safety Associates, Inc., an affiliated Tennessee
corporation ("NSA"), control approximately sixty-seven percent (67%) of the
outstanding shares of Common Stock.
The text of the proposed Restated Charter is set forth in Appendix A
to this Proxy Statement. If the proposed Reverse Stock Split is approved, the
shareholders of the Corporation who own less than 2,400 shares of Common Stock
will receive the Cash Consideration for their shares of Common Stock and will
cease to be shareholders of the Corporation or to have any equity interest in
the Corporation. Shareholders owning greater than 2,400 shares of Common Stock
will receive one share of New Common Stock for each 2,400 share block of Common
Stock held and the Cash Consideration in lieu of any fractional shares
resulting from the Reverse Stock Split. Finally, if the Reverse Stock Split is
approved, the Corporation will no longer file reports with the Securities and
Exchange Commission ("SEC").
SHAREHOLDERS ARE ENCOURAGED TO READ AND REVIEW CAREFULLY THIS PROXY
STATEMENT AND THE FINANCIAL INFORMATION AND APPENDICES INCLUDED HEREWITH,
INCLUDING WITHOUT LIMITATION THE SECTIONS ENTITLED "APPROVAL OF THE REVERSE
STOCK SPLIT - SPECIAL FACTORS - CONSIDERATION BY THE BOARD OF DIRECTORS;
FAIRNESS OF THE REVERSE STOCK SPLIT," "APPROVAL OF THE REVERSE STOCK SPLIT -
SPECIAL FACTORS - OPINIONS AND REPORTS," AND "APPROVAL OF THE REVERSE STOCK
SPLIT - SPECIAL FACTORS - CERTAIN EFFECTS OF THE REVERSE STOCK SPLIT."
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN
CONNECTION WITH THE SOLICITATION OF PROXIES MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE CORPORATION OR ANY OTHER PERSON.
----------------------------------------------------------
The date of this Proxy Statement is February 3, 1999.
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY ............................................................................... 1
THE ANNUAL AND SPECIAL MEETING ........................................................ 5
Time, Date, and Place of Annual and Special Meeting ............................... 5
Purpose of the Annual and Special Meeting ......................................... 5
Voting Rights and Proxy Information ............................................... 5
APPROVAL OF REVERSE STOCK SPLIT ....................................................... 6
The Reverse Stock Split ........................................................... 6
Special Factors ................................................................... 8
ELECTION OF DIRECTORS ................................................................. 22
Nominees for Director ............................................................. 22
Directors and Executive Officers of the Corporation ............................... 22
Meetings of the Board of Directors and Its Committees ............................. 24
Compensation of Executive Officers and Directors .................................. 25
Security Ownership of Certain Beneficial Owners and Management .................... 29
SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS ........................................... 30
BUSINESS OF THE CORPORATION ........................................................... 31
SELECTED FINANCIAL DATA ............................................................... 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION .................................................... 37
Results of Operations For the Fiscal Years Ended April 30, 1998, 1997 and 1996 .... 37
Results of Operations For the Three Months Ended July 31, 1998 and 1997 ........... 40
Future Outlook .................................................................... 42
Liquidity and Capital Resources ................................................... 42
MARKET PRICE FOR COMMON STOCK; DIVIDENDS .............................................. 42
Market Information ................................................................ 42
Transactions in Common Stock ...................................................... 43
Dividends ......................................................................... 43
EXPENSES OF SOLICITATION .............................................................. 43
SHAREHOLDER PROPOSALS ................................................................. 44
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE ............................... 44
OTHER MATTERS ......................................................................... 44
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K ............................................ 44
ADDITIONAL INFORMATION ................................................................ 44
INDEX TO FINANCIAL INFORMATION ........................................................ 47
</TABLE>
APPENDICES
Appendix A - Amended and Restated Charter of NSA International, Inc.
Appendix B - Dissenters' Right of Appraisal
Appendix C - Opinion of Asset Services, L.P. dated October 5, 1998
Appendix D - Opinion of Mercer Capital Management, Inc. dated
November 13, 1998
Appendix E - Opinion of Mercer Capital Management, Inc. dated January 20, 1999
ii
<PAGE> 9
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Proxy Statement. This summary is not intended to be a
complete description of the matters covered in this Proxy Statement and is
subject to and qualified in its entirety by reference to the more detailed
information contained elsewhere in this Proxy Statement, including the
Appendices hereto and the documents incorporated by reference herein. In
connection with the proposed Reverse Stock Split, the Corporation has filed a
Rule 13e-3 Transaction Statement on Schedule 13E-3 with the SEC, of which this
Proxy Statement is a part.
BUSINESS OF THE CORPORATION
The Corporation sells consumer products domestically and
internationally primarily to third party distributors ("Master Distributors")
who utilize multi-level and/or direct selling marketing systems. The
Corporation's products include nutritional products, air and water filtration
systems, and a sparkling water system, all of which were designed principally
for individual use. The Corporation's products are proprietary, and most were
developed by or for the Corporation or an affiliated entity. In the United
States, the Corporation sells its products to NSA for resale to NSA's dealers
and distributors. Outside the United States, the Corporation sells its products
to Master Distributors for distribution through local representative agents,
dealers, and distributors in Canada, the United Kingdom, Ireland, The
Netherlands, Belgium, Germany, Switzerland, Austria, Spain, Denmark, Sweden,
Australia, New Zealand, Hong Kong, Taiwan, Philippines, Malaysia, Indonesia,
Japan, Paraguay, Chile, Peru, and Costa Rica.
TIME, DATE, AND PLACE OF ANNUAL AND SPECIAL MEETING
The Annual and Special Meeting of the Shareholders of the Corporation
(the "Meeting") will be held on Thursday, March 4, 1999, at 10:00 a.m.
Memphis, Tennessee time, at the East Memphis Hilton, 5069 Sanderlin Avenue,
Memphis, Tennessee 38117.
PURPOSE OF THE ANNUAL AND SPECIAL MEETING
At the Meeting, holders of shares of Common Stock will consider and
vote upon a proposal (a) to approve and adopt an Amended and Restated Charter
for the Corporation (the "Restated Charter") which would effect a one-for-2,400
reverse split of the Corporation's common stock, $.05 par value (the "Common
Stock"), by reducing the number of authorized shares of Common Stock from
100,000,000 shares to 41,666 shares, $120.00 par value (such new shares of
common stock to be referred to herein as the "New Common Stock), and (b) for a
cash payment of $1 1/8 per share (the "Cash Consideration") of the currently
outstanding Common Stock in lieu of the issuance of any resulting fractional
shares of New Common Stock after the reverse stock split (items (a) and (b)
will be considered one proposal and referred to herein as the "Reverse Stock
Split"). The Board of Directors has unanimously approved the Reverse Stock
Split. The Board of Directors unanimously recommends that the shareholders vote
FOR the Reverse Stock Split.
Also at the Meeting, holders of shares of Common Stock will consider
and vote upon proposals to elect three (3) Class I directors who will serve
two-year terms or until their successors have been duly elected and qualified
and to ratify the selection of Deloitte & Touche LLP as independent accountants
and auditors for the Corporation. The Board of Directors unanimously recommends
that the shareholders vote FOR the nominees to the Board of Directors listed in
this Proxy Statement and FOR the ratification of the independent accountants
and auditors.
VOTING RIGHTS AND PROXY INFORMATION
The close of business on February 3, 1999 has been fixed as the
Record Date for determining holders of shares of Common Stock entitled to
notice of, and to vote at, the Meeting. Each holder of Common Stock is entitled
to one vote for each share of Common Stock held by such holder on all matters
submitted before the Meeting and any adjournment or adjournments thereof. As of
the Record Date, 4,695,036 shares of Common Stock were outstanding.
1
<PAGE> 10
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Common Stock entitled to vote at the Meeting is necessary
to constitute a quorum for the transaction of business at the Meeting.
The affirmative vote of two-thirds (2/3) of the outstanding shares of
Common Stock is required to approve the Reverse Stock Split. The affirmative
vote of a majority of the shares of Common Stock voting at the Meeting is
required to elect members of the Board of Directors and to ratify the selection
of the independent accountants and auditors. All "abstention" (including broker
"non-votes") will be considered present for quorum purposes, but will have the
same effect as a vote "against" the proposal to approve the Reverse Stock Split.
An "abstention" (including broker "non-votes") will be considered present for
quorum purposes, but will not be counted as a vote either "for" or "against" the
election directors and the ratification of the selection of the independent
accountants and auditors. A "broker non-vote" refers to shares represented at
the Special Meeting in person or by proxy by a broker or nominee where such
broker or nominee (i) has not received voting instructions on a particular
matter from the beneficial owners or persons entitled to vote and (ii) the
broker or nominee does not have the discretionary voting power on such matter.
The directors and officers of the Corporation have advised the
Corporation that they intend to vote in favor of the Reverse Stock Split, the
nominees to the Board of Directors listed in this Proxy Statement, and the
ratification of the independent accountants. The directors and officers of the
Corporation directly, and indirectly through NSA, control approximately
sixty-seven percent (67%) of the outstanding shares of Common Stock.
Shares of Common Stock represented by properly executed proxies
received at or prior to the Meeting, unless revoked, will be voted in
accordance with the instructions indicated thereon. IF NO INSTRUCTIONS ARE
INDICATED ON A PROPERLY EXECUTED PROXY, THE NAMED HOLDERS OF THE PROXIES WILL
VOTE SUCH SHARES OF COMMON STOCK (I) FOR THE REVERSE STOCK SPLIT, (II) FOR ALL
NOMINEES TO THE BOARD OF DIRECTORS OF THE CORPORATION NAMED IN THIS PROXY
STATEMENT, AND (III) FOR THE RATIFICATION OF THE SELECTION OF THE INDEPENDENT
ACCOUNTANTS AND AUDITORS. THE NAMED HOLDERS OF PROXIES WILL ALSO USE THEIR
DISCRETION IN VOTING THE SHARES OF COMMON STOCK IN CONNECTION WITH ANY OTHER
BUSINESS THAT PROPERLY MAY COME BEFORE THE MEETING.
A shareholder who has given a proxy may revoke the proxy at any time
prior to its exercise at the Meeting by (i) giving written notice of revocation
to the Secretary of the Corporation, (ii) properly submitting to the
Corporation a duly executed proxy bearing a later date, or (iii) attending the
Meeting and voting in person. Attendance at the Meeting will not in and of
itself revoke a proxy. All written notices of revocation and other
communications with respect to revocation of proxies should be addressed as
follows: NSA International, Inc., 4260 East Raines Road, Memphis, Tennessee
38118, Attention: Stan C. Turk, Secretary.
If the Meeting is adjourned or postponed for any purpose, at any
subsequent reconvening of the Meeting, all proxies will be voted in the same
manner as such proxies would have been voted at the original convening of the
meeting (except for any proxies which have theretofore effectively been revoked
or withdrawn), notwithstanding that they may have been effectively voted on the
same or any other matter at a previous meeting.
The Corporation will bear the costs of soliciting proxies from
shareholders. In addition to soliciting proxies by mail, officers and employees
of the Corporation, without receiving any additional compensation therefore,
may solicit proxies by telephone or in person. Arrangements will also be made
with brokerage firms, custodians, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of shares of Common Stock, and
the Corporation may reimburse such brokerage firms, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them in
connection therewith. The Corporation has not engaged or retained any other
entity or organization to aid in the solicitation of proxies.
PURPOSE OF THE REVERSE STOCK SPLIT
The purpose of the Reverse Stock Split is to cause the Corporation to
become a privately-held corporation and to afford shareholders holding a small
number of shares of Common Stock an opportunity to receive, in the reasonable
belief of the Board of Directors, a fair price for their shares without
incurring the accompanying costs of sale.
2
<PAGE> 11
EXCHANGE OF CERTIFICATES AND PAYMENT FOR FRACTIONAL SHARES
Upon the filing of the Restated Charter with the Secretary of State of
Tennessee, each 2,400 shares of the Corporation's Common Stock issued and
outstanding on the date of the filing of the Restated Charter will be converted
into one share of the Corporation's New Common Stock. Non-dissenting
shareholders owning greater than 2,400 shares of Common Stock will receive one
share of New Common Stock for each 2,400 shares of Common Stock held on such
date. The Corporation will then acquire all resulting fractional shares of New
Common Stock at a price equal to the Cash Consideration. The Corporation will
pay for such fractional shares upon the physical surrender of the stock
certificates pursuant to the transmittal instructions to be mailed by the
Corporation to all shareholders. As a result of the Reverse Stock Split, the
only remaining shareholders of the Corporation will be those shareholders who
prior to the Reverse Stock Split owned 2,400 shares or more of Common Stock and
who did not dissent to the Reverse Stock Split, and the Corporation will no
longer be subject to the reporting requirements of the 1934 Act.
SHAREHOLDERS' RIGHT TO DISSENT
If the proposed Reverse Stock Split is approved, a shareholder who
strictly complies with the requirements of Sections 48-23-101 through 48-23-302
of the TBCA may dissent from the proposed Reverse Stock Split and, in lieu of
receiving New Common Stock and/or the Cash Consideration, obtain payment in
cash of the "fair value" of such shareholder's shares of Common Stock as
determined under the TBCA. A shareholder who wishes to assert such dissenters'
rights must deliver a written notice to the Corporation prior to the vote on
the Reverse Stock Split of such shareholder's intent to demand payment for such
shareholder's shares of Common Stock (the "Objection Notice") if the Reverse
Stock Split is effectuated. A SHAREHOLDER WHO WISHES TO ASSERT SUCH DISSENTERS'
RIGHTS ALSO MAY NOT VOTE ANY OF THE SHAREHOLDER'S SHARES OF COMMON STOCK FOR
THE REVERSE STOCK SPLIT. For a statement of the rights of dissenting
shareholders, a description of the procedures required to be followed to obtain
the fair value of the shares of Common Stock, and a copy of Sections 48-23-101
through 48-23-302 of the TBCA, see Appendix B attached hereto. For convenience,
a form of Objection Notice is also included in Appendix B.
REASONS FOR THE REVERSE STOCK SPLIT
In making its determination, the Board of Directors has concluded that
(1) shareholders receive little benefit from the public trading market due to
the low trading volumes and low share prices; (2) the Corporation derives no
benefit from being a publicly-held corporation as it does not access the public
market for capital or effect mergers or acquisitions with shares of Common
Stock; (3) the administrative burden and costs associated with satisfying the
periodic and other filing requirements of the Securities Exchange Act of 1934,
as amended (the "1934 Act"), and being a publicly-held Corporation can no
longer be justified; and (4) the Corporation's status as a public company
places it at substantial competitive disadvantage.
CONSIDERATION BY THE BOARD OF DIRECTORS; FAIRNESS OF THE REVERSE STOCK SPLIT
The Board of Directors has concluded that the Reverse Stock Split,
including the payment of the Cash Consideration in lieu of the issuance of
fractional shares of New Common Stock, is fair to, and in the best interest of,
the Corporation and its shareholders, including the unaffiliated shareholders.
Accordingly, the Board of Directors has unanimously approved the Reverse Stock
Split and recommends a vote FOR the Reverse Stock Split.
OPINIONS AND REPORTS
Asset Services, L. P. ("Asset Services"), a financial advisory and
investment banking firm, was initially engaged by the directors to assist the
Board of Directors in evaluating methods by which the Corporation could become
a privately-held corporation. After the Board of Directors determined it would
propose the Reverse Stock Split, the Board of Directors engaged Asset Services
to assist the directors in establishing a range of fair values to be paid in
lieu of the
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issuance of fractional shares of New Common Stock resulting from the Reverse
Stock Split. After reviewing the range of value established by Asset Services,
the Board of Directors set the value at the highest end of the range and,
accordingly, Asset Services advised the Board of Directors that, in its
opinion, the Cash Consideration of $1 1/8 per share to be paid lieu of the
issuance of fractional shares of New Common Stock is fair to the shareholders
from a financial point of view.
Mercer Capital Management Inc. ("Mercer Capital"), a consulting
valuation and investment banking firm, was engaged by the Corporation to assist
a special committee of the Board of Directors consisting of the independent
members of the Board of Directors, Messrs. William W. Deupree, Jr. and William
L. Gurner (the "Special Committee"), in determining a fair price to be paid in
lieu of the issuance of fractional shares of New Common Stock pursuant to the
proposed Reverse Stock Split. Mercer Capital has advised the Special Committee
and the Board of Directors that, in its opinion, the Cash Consideration of $1
1/8 per share to be paid in lieu of the issuance of fractional shares of New
Common Stock is fair to the shareholders from a financial point of view.
CERTAIN EFFECTS OF THE REVERSE STOCK SPLIT
The proposed Restated Charter would effect for a one-for-2,400 reverse
split of the Corporation's Common Stock by reducing the number of authorized
shares from 100,000,000 shares of Common Stock to 41,666 shares of New Common
Stock. A payment of the Cash Consideration will be made to holders of Common
Stock in lieu of the issuance of any resulting fractional shares of New Common
Stock after the Reverse Stock Split. If the Reverse Stock Split is approved,
shareholders owning less than 2,400 shares of Common Stock will cease to be
shareholders of the Corporation or to have any equity interest in the
Corporation. Persons who remain as shareholders following the Reverse Stock
Split will have limited access to information regarding the Corporation and
will have more difficulty in selling their shares of New Common Stock.
SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS. IF THE REVERSE STOCK SPLIT IS APPROVED, THE PROCEDURE FOR THE EXCHANGE
OF CERTIFICATES REPRESENTING SHARES OF COMMON STOCK WILL BE AS SET FORTH IN
THIS PROXY STATEMENT.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The receipt of shares of New Common Stock in exchange for shares of
Common Stock will not result in recognition of gain or loss to the shareholder.
The receipt of cash by a shareholder pursuant to the Reverse Stock Split will
be a taxable transaction for federal income tax purposes. Depending on the
particular circumstances of each shareholder, the receipt of cash will be
treated either as an exchange for property transaction or as a distribution
that will be treated as a dividend to the extent of the shareholder's ratable
share of the Corporation's undistributed earnings and profits.
FINANCING OF THE REVERSE STOCK SPLIT
The Board of Directors estimates that the costs to be incurred by the
Corporation in connection with the Reverse Stock Split including the aggregate
Cash Consideration to be paid to shareholders in lieu of issuance of fractional
shares and the transactional expenses of approximately $107,680, will be
$1,007,680. The Corporation intends to use cash reserves to pay all expenses
associated with the Reverse Stock Split, including the Cash Consideration.
ELECTION OF DIRECTORS
The Board of Directors proposes the election of three (3) Class I
directors. Each Class I director elected at the Meeting will hold office until
the annual meeting of shareholders to be held in 2000 or until their successors
are duly elected and qualified. Unless authority to vote is withheld, all
proxies received by the Board of Directors will be voted for these three (3)
nominees; except that, if any such nominee is unable to serve, or for good
cause will not serve, those
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proxies will be voted for the person whom the Board of Directors designates to
replace the nominee. The Board of Directors believes that, if elected, each
nominee will be willing to serve. An affirmative vote of a majority of the
shares of Common Stock voting at the Meeting is required to elect each of the
nominees to the Board of Directors of the Corporation.
SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed, subject to ratification by the
shareholders at the Meeting, the firm of Deloitte & Touche LLP as independent
public accountants to audit the consolidated accounts of the Corporation and
its subsidiaries for the fiscal year ending April 30, 1999. An affirmative vote
of a majority of the shares of Common Stock voting at the Meeting is required
to ratify the selection of Deloitte & Touche LLP. Representatives of Deloitte &
Touche LLP are expected to be present at the Meeting with the opportunity to
make a statement and to respond to appropriate questions.
THE ANNUAL AND SPECIAL MEETING
TIME, DATE, AND PLACE OF ANNUAL AND SPECIAL MEETING
The Annual and Special Meeting of the Shareholders of the Corporation
(the "Meeting") will be held on Thursday, March 4, 1999, at 10:00 a.m. Memphis,
Tennessee time, at the East Memphis Hilton, 5069 Sanderlin Avenue, Memphis,
Tennessee 38117.
PURPOSE OF THE ANNUAL AND SPECIAL MEETING
At the Meeting, holders of shares of Common Stock will consider and
vote upon a proposal (a) to approve and adopt the Restated Charter for the
Corporation which would effect a one-for-2,400 reverse split of the
Corporation's common stock by reducing the number of authorized shares from
100,000,000 shares of Common Stock to 41,666 shares of the New Common Stock,
and (b) for a payment of the Cash Consideration of $1 1/8 per share of the
currently outstanding Common Stock in lieu of the issuance of any resulting
fractional shares of New Common Stock after the Reverse Stock Split. The Board
of Directors has unanimously approved the Reverse Stock Split. The Board of
Directors unanimously recommends that the shareholders vote FOR the Reverse
Stock Split.
Also at the Meeting, holders of shares of Common Stock will consider
and vote upon proposals to elect three (3) Class I directors who will serve
two-year terms or until their successors have been duly elected and qualified
and to ratify the selection of Deloitte & Touche LLP as independent accountants
and auditors for the Corporation. The Board of Directors unanimously recommends
that the shareholders vote FOR the nominees to the Board of Directors listed in
this Proxy Statement and FOR the ratification of the independent accountants
and auditors.
VOTING RIGHTS AND PROXY INFORMATION
Shareholders of the Corporation of record at the close of business on
February 3, 1999, the Record Date designated by the Board of Directors, will
be entitled to notice of, and to vote at, the Meeting. On February 3, 1999,
the Corporation had outstanding 4,695,036 shares of Common Stock.
The presence, in person or by proxy, of the holders of a majority of
the outstanding shares of Common Stock entitled to vote at the Meeting is
necessary in order to constitute a quorum for the transaction of business at
the Meeting. Assuming a quorum exists, the election of each of the nominees to
the Board of Directors of the Corporation and the ratification of the selection
of the independent accountants and auditors will require the affirmative vote
of a majority of the shares of Common Stock voting at the Meeting. Pursuant to
the Corporation's Charter, the affirmative vote of two-thirds (2/3) of the
outstanding shares of Common Stock is required to approve the Reverse Stock
Split.
An "abstention" (including broker "non-votes") will be considered
present for quorum purposes, but will have the same effect as a vote "against"
the proposal to approve the Reverse Stock Split. An "abstention" (including
broker "non-votes") will be considered present for quorum purposes, but will not
be counted as a vote either "for" or "against" the election directors and the
ratification of the selection of the independent accountants and auditors. A
"broker non-vote" refers to shares represented at the Special Meeting in person
or by proxy by a broker or nominee where such broker or nominee (i) has not
received voting instructions on a particular matter from the beneficial owners
or persons entitled to vote and (ii) the broker or nominee does not have the
discretionary voting power on such matter.
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Each holder of Common Stock is entitled to one vote for each share of
Common Stock held by such holder on all matters submitted before the Meeting
and any adjournment or adjournments thereof. Cumulative voting is not provided
for in the election of directors.
Shares of Common Stock represented by properly executed proxies,
unless previously revoked, will be voted in accordance with the instructions.
If no instructions are indicated on a properly executed proxy, the named
holders of the proxies will vote such shares of Common Stock (i) FOR the
Reverse Stock Split; (ii) FOR all nominees to the Board of Directors of the
Corporation named in this Proxy Statement; and (iii) FOR the ratification of
the selection of independent accountants and auditors. The Corporation is not
aware of any other matters to come before the Meeting. In the event any such
matters are properly raised, the named holders of proxies also will use their
discretion in voting the shares of Common Stock in connection with any other
business that properly may come before the Meeting.
The directors and officers of the Corporation have advised the
Corporation that they intend to vote in favor of the Reverse Stock Split, the
nominees to the Board of Directors listed in this Proxy Statement, and the
ratification of the independent accountants and auditors. The directors and
officers of the Corporation directly, and indirectly through NSA, control
approximately sixty-seven percent (67%) of the outstanding shares of Common
Stock.
A shareholder who has given a proxy may revoke the proxy at any time
prior to its exercise at the Meeting by (i) giving written notice of revocation
to the Secretary of the Corporation, (ii) properly submitting to the
Corporation a duly executed proxy bearing a later date, or (iii) attending the
Meeting and voting in person. Attendance at the Meeting will not in and of
itself revoke a proxy. All written notices of revocation and other
communications with respect to revocation of proxies should be addressed as
follows: NSA International, Inc., 4260 East Raines Road, Memphis, Tennessee
38118, Attention: Stan C. Turk, Secretary.
If the Meeting is adjourned or postponed for any reason, at any
subsequent reconvening of the Meeting, all proxies will be voted in the same
manner as such proxies would have been voted at the original convening of the
meeting (except for any proxies which have theretofore effectively been revoked
or withdrawn), notwithstanding that they may have been effectively voted on the
same or any other matter at a previous meeting.
The Corporation will bear the costs of soliciting proxies from
shareholders. In addition to soliciting proxies by mail, officers and employees
of the Corporation, without receiving any additional compensation therefore,
may solicit proxies by telephone or in person. Arrangements will also be made
with brokerage firms, custodians, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of shares of the Common Stock,
and the Corporation may reimburse such brokerage firms, custodians, nominees
and fiduciaries for reasonable out-of-pocket expenses incurred by them in
connection therewith. The Corporation has not engaged or retained any other
entity or organization to aid in the solicitation of proxies.
(PROPOSAL 1)
APPROVAL OF REVERSE STOCK SPLIT
THE REVERSE STOCK SPLIT
Purpose of the Reverse Stock Split
The principal purpose of the proposed Reverse Stock Split is to cause
the Corporation to become a privately-held corporation no longer subject to the
1934 Act filing requirements. The Reverse Stock Split will also afford
shareholders holding a small number of shares an opportunity to receive, in the
reasonable belief of the Board of Directors, a fair price for their shares
without incurring the accompanying costs of sale. The conversion of the
Corporation from a public company to a private company will result in
substantial benefits to the Corporation, including the elimination of the
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substantial reporting costs it incurs each year, and the elimination of the
substantial competitive disadvantage resulting from the Corporation's status as
a public company.
Restatement of Charter to Effect the Reverse Stock Split
Pursuant to the terms of the Restated Charter, if approved, the
authorized shares of common stock will be reduced from 100,000,000 to 41,666.
Therefore, each block of 2,400 shares of the Corporation's Common Stock
currently issued will be converted into one share of the Corporation's New
Common Stock. A payment in the amount of the Cash Consideration will be made to
holders in lieu of issuing fractional shares of New Common Stock. The form of
the Restated Charter is attached as Appendix A to this Proxy Statement. If the
Reverse Stock Split is approved at the Meeting by an affirmative vote of
two-thirds (2/3) of the outstanding shares of Common Stock, the Corporation
will file the Restated Charter with the Secretary of State of Tennessee as soon
as practicable after the Meeting. The Reverse Stock Split will become effective
on the date of filing the Restated Charter (the "Effective Date").
Exchange of Certificates and Payment for Fractional Shares
As soon as practicable after the Effective Date, shareholders will be
notified of the filing of the Restated Charter and asked to surrender their
stock certificates representing shares of Common Stock to the Corporation.
Those non-dissenting shareholders owning 2,400 shares or more will receive, in
exchange for certificates representing shares of Common Stock, new certificates
representing shares of New Common Stock on the basis of one share of New Common
Stock for each 2,400 shares of Common Stock held as of the Effective Date, and
if the shareholder does not own a number of shares evenly divisible by 2,400,
the Cash Consideration of $1 1/8 per share of Common Stock in lieu of receiving
fractional shares of New Common Stock. Non-dissenting shareholders owning less
than 2,400 shares as of the Effective Date will receive in exchange the Cash
Consideration of $1 1/8 per share of Common Stock.
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATE AT THIS TIME. PROMPTLY
AFTER THE CONSUMMATION OF THE REVERSE STOCK SPLIT, IF APPROVED, THE CORPORATION
WILL MAIL A LETTER TO ALL HOLDERS OF COMMON STOCK WITH INSTRUCTIONS FOR
SURRENDERING THEIR STOCK CERTIFICATES.
For purposes of determining whether and to what extent shareholders
will receive New Common Stock and/or the Cash Consideration in lieu of
fractional shares, and for no other purpose, the Corporation will treat the
person who is the underlying beneficial owner of shares of Common Stock held by
a nominee as the shareholder.
No interest will be accrued or paid on the Cash Consideration payable
to the shareholders following the Reverse Stock Split, and no service charges
or other fees will be payable by shareholders in connection with the exchange
of stock certificates or the payment of the Cash Consideration in lieu of the
issuance of fractional shares of New Common Stock. All costs and expenses will
be borne by the Corporation.
Voting; Vote Required
Pursuant to the Corporation's Charter, the proposed Reverse Stock Split
must be approved by an affirmative vote of two-thirds (2/3) of the outstanding
shares of Common Stock. Each share of Common Stock is entitled to one vote on
each matter submitted to a vote at the Meeting. The proposed Reverse Stock Split
does not require the approval of a majority of the unaffiliated shareholders.
The Board of Directors has been informed that the officers and directors of the
Corporation will vote in favor of the Reverse Stock Split. The officers and
directors of the Corporation directly, and indirectly through NSA, control
approximately sixty-seven (67%) of the outstanding shares of Common Stock. There
are no contracts, arrangements, understandings, or relationships in connection
with the Reverse Stock Split between the Corporation (including its officers or
directors) and any other person. An "abstention" (including broker "non-votes")
will be considered present for quorum purposes, but will have the same effect as
a vote "against" the proposal to approve the Reverse Stock Split. A "broker
non-vote" refers to shares represented at the Special Meeting in person or by
proxy by a broker or nominee where such broker or nominee (i) has not received
voting instructions on a particular matter from the beneficial owners or persons
entitled to vote and (ii) the broker or nominee does not have the discretionary
voting power on such matter.
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Shareholders' Right to Dissent
If the proposed Reverse Stock Split is approved, a shareholder who
strictly complies with the requirements of Sections 48-23-101 through 48-23-302
of the TBCA may dissent from the proposed Reverse Stock Split and in lieu of
receiving shares of New Common Stock and/or the Cash Consideration, obtain
payment in cash of the "fair value" of such shareholder's shares of Common
Stock as determined under the TBCA. A shareholder who wishes to assert such
dissenters' rights may not vote in favor of the Reverse Stock Split and must
deliver a written Objection Notice to the Corporation prior to the vote on the
Reverse Stock Split at the Meeting of such shareholder's intent to demand
payment and exercise dissenters' rights. A form of Objection Notice is included
in Appendix B, along with a more detailed description of the shareholders'
right to dissent and obtain payment for shares and a copy of Sections 48-23-101
through 48-23-302 of the TBCA. Shareholders who own greater than 2,400 shares
of Common Stock and do not wish to receive shares of New Common Stock, as it
will represent ownership in a privately-held corporation, may, through the
proper exercise of their dissenters' rights, cause the Corporation to deliver
fair consideration to them in lieu of New Common Stock. The Corporation has
determined that the Cash Consideration of $1 1/8 per share is fair
consideration, although a dissenting shareholder may require the Corporation to
institute judicial proceedings to establish fair value for the shares of Common
Stock. See Appendix B. ALL SHAREHOLDERS ARE URGED TO CAREFULLY REVIEW APPENDIX
B. ANY SHAREHOLDER WISHING TO EXERCISE DISSENTERS' RIGHTS SHOULD CONSULT WITH
SUCH SHAREHOLDER'S LEGAL ADVISOR BEFORE EXERCISING OR ATTEMPTING TO EXERCISE
SUCH RIGHTS.
SPECIAL FACTORS
Background
The Corporation was organized in 1989 by its affiliate, NSA, and NSA's
individual shareholders. NSA is a privately-held corporation that sells the
Corporation's products to NSA's network of dealers and distributors located
throughout the United States. In connection with the Corporation's formation,
NSA transferred certain rights and assets to the Corporation and received
shares of Common Stock and convertible preferred stock. As of February 3,
1999, NSA and its shareholders own 3,182,165, or approximately 68%, of the
outstanding shares of Common Stock, and NSA continues to finance the
Corporation's operations. See "Election of Directors - Compensation of
Executive Officers and Directors - Certain Relationships and Related
Transactions."
The Corporation became a publicly-held company through offerings of
Common Stock solely to distributors, employees and affiliates, not through a
traditional public offering of shares. Accordingly, all the Corporation's
shareholders were affiliated with the Corporation in some capacity, most as
representatives or employees, and either received their shares as incentive
compensation or purchased the shares from the Corporation. Initially, all of
the shares of Common Stock were issued with both statutory and contractual
restrictions prohibiting transfer. In order to comply with the provisions of
Section 12(g) of the 1934 Act, the Corporation filed a registration statement
on Form 10 in 1991 when the number of shareholders exceeded 500. To provide the
holders of Common Stock with the liquidity of a public market, the Corporation
listed the shares of Common Stock for trading on the Nasdaq National Market in
1992, under the symbol "NSAI." In order to meet the Nasdaq National Market
listing requirements, the Corporation terminated the contractual restrictions
against transfer, and the shares became freely transferable. In recent years
management determined that, aside from those shares held by NSA and its
shareholders, the majority of the shares of Common Stock are held by
unaffiliated purchasers who acquired their shares in secondary trading. In
fact, as of April 30, 1998 , of the Corporation's 839 identifiable shareholders
of record, only approximately 65 had any previous or current business
affiliation with the Corporation.
Over the past five years the Corporation has suffered continued
operating losses and steadily declining sales, and the market for the Common
Stock has deteriorated. On March 10, 1997, the Corporation received a letter
from The Nasdaq Stock Market, Inc. notifying the Corporation of The Nasdaq Stock
Market's intent to terminate the Nasdaq National Market listing for the Common
Stock due to the fact the shares were trading at less than $1.00. In response,
the Corporation initiated a stock repurchase program whereby the Corporation
would purchase shares of Common Stock from time to time in the open market. As a
result
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the Common Stock continued to be traded on the Nasdaq National Market. Pursuant
to the stock repurchase program, the Corporation purchased a total of 239,000
shares from March 1997 to August 1998 at prices ranging from $1 1/8 to $2 3/16
per share. See "- Reasons for the Reverse Stock Split." At present the
Corporation holds some 76,600 of these repurchased shares in its investment
account. The balance of the repurchased shares have been canceled in accordance
with statutory provisions governing corporate capital accounts.
In late 1997, the Nasdaq National Market adopted new listing
requirements. The Corporation realized it could not meet these revised listing
requirements and would be required to terminate its listing on the Nasdaq
National Market. Accordingly, due to the shift away from affiliated
shareholders, the poor operating results and the anticipated termination of the
Nasdaq National Market listing, the Corporation solicited the services of Asset
Services to make a recommendation as to the steps the Corporation should
consider with regard to continued listing of the Common Stock. According to
Asset Services' research and analysis, the cost of attempting to maintain any
level of Nasdaq listing (even a SmallCap Market listing) could not be justified
in light of the very limited market and trading that existed for and in the
Common Stock. The Board of Directors determined that it was in the best
interest of the Corporation and its shareholders to terminate the Nasdaq
National Market listing and to approve trading through the OTC Bulletin Board.
Therefore, on March 16, 1998, the Nasdaq National Market listing for the Common
Stock was terminated.
Furthermore, the Board of Directors determined that Corporation's
publicly-available information was being used by competing organizations to the
detriment of the Corporation. Very few of the Corporation's competitors are
publicly-held and those that are publicly-held are significantly larger than
the Corporation. Along with the shift away from affiliate shareholders, the
poor performance of and limited market for the Common Stock, and the large
number of small shareholders, the competitive disadvantage of being
publicly-held led management to consider taking the Corporation private. In
July 1998, the Board of Directors retained Asset Services to provide the
Corporation with an analysis as to the alternative methods by which the
Corporation could accomplish this objective of "going private."
On August 18, 1998, at a special meeting of the Board of Directors, the
Board of Directors discussed the possibility of a "going private" transaction
for the Corporation and the alternative methods by the which the Corporation
could effect such a transaction. See "- Consideration of Alternatives" for a
discussion of the alternative methods. The Board of Directors, pursuant to the
report and recommendation of Asset Services, began consideration of a reverse
stock split, as it was the most efficient method of reducing the number of
shareholders to below 300 and, therefore, providing the Corporation the
opportunity to terminate its public company status. Based upon the report and
recommendation of Asset Services, the Board of Directors determined that a ratio
of one-for-2,400 would sufficiently reduce the number of shareholders and allow
the Corporation to go private. In connection with its investigation of the
alternatives available for taking the Corporation private, Asset Services
considered (i) privately negotiated or continued open market purchases of
shares; (ii) an issuer self-tender offer; (iii) an asset sale followed by a
dissolution of the Corporation; (iv) a merger between NSA, or another
corporation, and the Corporation; and (v) a reverse stock split. Following the
August 18, 1998 meeting, in anticipation of the proposed Reverse Stock Split,
the Corporation terminated the stock repurchase program it had instituted in
March 1997. In the months immediately preceding the termination of the stock
repurchase program, the only significant transactions in the shares of Common
Stock were by the Corporation under the program. Subsequent to the termination
of the stock repurchase program, the trading price of shares of Common Stock has
been between $3/4 and $1 3/8 per share.
At the August 18, 1998 meeting, the Board of Directors also retained
the services of Asset Services for purposes of obtaining a formal fairness
opinion and valuation of the Common Stock. The Board of Directors also formed
the Special Committee consisting of Messrs. William W. Deupree, Jr. and William
L. Gurner, the members of the Corporation's Board of Directors who are neither
members of management nor employees of the Corporation, or its affiliate, NSA,
to independently evaluate the fairness of the Reverse Stock Split.
On September 3, 1998, the Special Committee met to consider the
Reverse Stock Split. The Special Committee determined that they would engage
independent legal counsel to represent the Special Committee in connection with
the Reverse Stock Split and subsequently engaged Wyatt, Tarrant and Combs.
During this Special Committee meeting, the Special Committee met with members
of management, Asset Services, and Baker, Donelson, Bearman & Caldwell, legal
counsel to the Corporation, and further investigated the Reverse Stock Split.
The Special Committee questioned Mr.
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Stan C. Turk and Mr. A. Jay Martin, management representatives, as to the
Corporation's future business prospects, the competitive disadvantages suffered
as a result of being a public company, the lack of a successful trading market
for the shares of Common Stock, and the costs of maintaining the Corporation as
a public company. The Special Committee questioned Asset Services'
representatives as to the methodology they would use to provide a fairness
evaluation of the value of the Common Stock. In addition, the Special Committee
reviewed the possibility of recommending the Board of Directors call for
neutralized voting (requiring the approval of at least a majority of the
unaffiliated security holders) in connection with the Reverse Stock Split. The
Special Committee determined that it would be in the best interest of
shareholders that do not want to continue as shareholders, but are in favor of
the transaction, to vote against or abstain from voting in order to be "cashed
out" through the exercise of dissenters' rights. Accordingly, the Special
Committee determined that it would not recommend the use of neutralized voting
as it would not necessarily enhance the procedural fairness by providing an
accurate measure of those unaffiliated shareholders actually in favor of the
Reverse Stock Split. See "Approval of the Reverse Stock Split - The Reverse
Stock Split - Shareholders' Right to Dissent" and Appendix B attached hereto.
On October 5, 1998, the Board of Directors met with representatives of
Asset Services, the Corporation's legal counsel, the Special Committee's legal
counsel, and management to again consider the proposal of the Reverse Stock
Split. During the meeting, representatives of Asset Services presented a range
of values of the Common Stock from $7/8 to $1 1/8 and the methodology for their
determination. In addition, Asset Services delivered copies of its evaluation
report to the Board of Directors. Shortly thereafter, Asset Services delivered
a copy of its fairness opinion. A copy of the opinion of Asset Services is
attached as Appendix C hereto. See "- Opinions and Reports". The Board of
Directors agreed to pursue the Reverse Stock Split at a ratio of one-for-2,400
shares, subject to the final review and recommendation by the Special
Committee. The Board of Directors determined, based on the opinion of Asset
Services, that, again subject to the review by the Special Committee, the Board
of Directors would recommend the Cash Consideration be set at the high end of
the range of values established by Asset Services, and, therefore, the Cash
Consideration of $1 1/8 per share would represent a fair value for the shares of
Common Stock to be acquired by the Corporation pursuant to the Reverse Stock
Split.
At the October 5, 1998 meeting, the Board of Directors asked the
Special Committee to again separately evaluate the fair price to be paid for
the Common Stock and approved the Special Committee engaging the services of
Mercer Capital to consult with the Special Committee and render a second report
and fairness opinion measuring the fairness of the consideration to be paid to
holders of the Common Stock. Although both Mercer Capital and Asset Services
have been paid by the Corporation to provide their opinions, the Corporation
imposed no limitations on either company with respect to the scope of their
valuation reports or opinions as to the amount of consideration to be paid for
the Common Stock. Asset Services had been engaged on three occasions by the
Corporation during the two years prior to their engagement to evaluate the
fairness of the Reverse Stock Split to provide valuations of certain of the
Corporation's subsidiaries for tax purposes, to render services in connection
with the termination of the Corporation's Nasdaq National Market listing and to
advise the Corporation as to available methods for going private and has
received an aggregate of $47,099 for those services. The Special Committee
chose to engage Mercer Capital to provide a second opinion and to work
specifically with the Special Committee in its evaluation of the fairness of
the Cash Consideration.
Subsequent to the October 5, 1998 meeting, the Special Committee met
with representatives of Mercer Capital. Mercer Capital completed its evaluation
and delivered its opinion to the Special Committee on November 13, 1999. A copy
of Mercer Capital's opinion is attached as Appendix D. See "- Opinions and
Reports." The Mercer Capital evaluation and the review by the Special Committee
confirmed the Board of Directors' earlier determinations. A final meeting of
the Board of Directors, management representatives, Asset Services, Mercer
Capital, the Special Committee's legal counsel and the Corporation's legal
counsel was held on November 13, 1998. At this meeting, the Special Committee
unanimously recommended that the Board of Directors recommend the Reverse Stock
Split with the Cash Consideration of $1 1/8 per share to the shareholders. The
Board of Directors then unanimously approved the Reverse Stock Split and the
Cash Consideration of $1 1/8 per share and resolved to recommend the Reverse
Stock Split to the Corporation's shareholders for their approval at the
Meeting.
Mercer Capital issued to the Special Committee an updated opinion dated
January 20, 1999. A copy of Mercer Capital's updated opinion is attached as
Appendix E. See "Opinions and Reports." In its updated opinion, Mercer Capital
reaffirmed its prior opinion that the Cash Consideration of $1-1/8 per share to
be paid to shareholders in lieu of fractional shares is fair to shareholders
from a financial point of view.
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Reasons for the Reverse Stock Split
The Corporation has been unable to provide the benefits for its
shareholders that are generally connected with being publicly-held, including
the appreciation of the investment value of their shares and the payment of
dividends. Over the past five years, the Corporation has experienced a steady
decline in sales of its products. Gross revenues have decreased from $112
million for the fiscal year ended April 30, 1994 to $23 million for the most
recent fiscal year ended April 30, 1998. The Corporation has never paid
dividends to its shareholders. The Corporation does not now have, and will not
likely in the future develop, any significant market for the shares of Common
Stock, and its operational and financial constraints now prevent, and in the
foreseeable future will continue to prevent, the payment of any dividends to
the shareholders.
A significant public trading market does not exist for the shares of
Common Stock, and such a market is not likely to develop in the foreseeable
future. The Common Stock previously was quoted on the Nasdaq National Market
under the symbol "NSAI." However, due to the lack of trading and the continuing
and substantial decline in the price for the shares of Common Stock, the
Corporation's Board of Directors was required to terminate the listing on the
Nasdaq National Market and, in lieu thereof, approve the listing of the Common
Stock on the OTC Bulletin Board. See "- Background." The termination of the
Corporation's listing on the Nasdaq National Market became effective on March
16, 1998. Subsequently, only a few brokers have made a market in the shares of
Common Stock, and transactions are therefore infrequent and sporadic. In
addition, on August 18, 1998, in connection with the consideration of the
proposed Reverse Stock Split, the Corporation's Board of Directors terminated
the previously authorized program to repurchase between 500,000 and 750,000
shares of Common Stock. From the adoption of the program in March 1997 until the
termination of the program on August 18, 1998, the Corporation provided the
primary market for shares of Common Stock. Under the stock repurchase program,
the Corporation repurchased a total of 239,000 shares of Common Stock at an
average purchase price of $1.64 per share. On November 12, 1998, the last
reported bid quotation for the Common Stock on the OTC Bulletin Board was
$.96875 per share. See "Market Price for Common Stock; Dividends - Market
Information."
Furthermore, a substantial number of the Corporation's shareholders
hold less than 2,000 shares of Common Stock. As of April 30, 1998, of
approximately 839 identifiable shareholders of record, 793 (or approximately
95%) hold less than 2,000 shares. Even if a significant trading market were to
develop, holders of such small number of shares of Common Stock nevertheless
would likely be deterred from trading the shares due to costly brokerage
commissions.
The Corporation does not derive any material benefit from the
registration of the shares of Common Stock under the 1934 Act. Historically,
the Corporation has not raised significant capital through offerings of shares
of Common Stock or utilized shares of Common Stock in connection with
acquisitions of other businesses or assets, and the Corporation does not have
any present intentions to raise capital or effect acquisitions with shares of
Common Stock.
The Corporation incurs direct and indirect costs as a result of its
status as a public company under the 1934 Act. The Corporation's management
estimates the costs of compliance with the reporting requirements of the 1934
Act to be $125,000 to $150,000 annually. The Corporation primarily incurs these
costs, which include legal, accounting and printing costs, in connection with
the preparation and filing of the periodic reports (Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K),
beneficial ownership reports for the Corporation's officers and directors,
proxy statements and accompanying materials, and annual reports to
shareholders, which are required by the 1934 Act. In addition, the Corporation
incurs annual costs of approximately $150,000 in order to maintain an
appropriate level of insurance for directors and officers of the Corporation in
light of its status as a public company. Moreover, the Corporation incurs
substantial indirect costs, including, but not limited to, the time and efforts
of the Corporation's management that are expended to prepare and review these
documents and to address other matters involving the Corporation's public
shareholders.
Finally, the Corporation's status as a public company places it at a
substantial competitive disadvantage. The reports filed by the Corporation
under the 1934 Act provide the Corporation's competitors with detailed
information regarding the Corporation's operations and financial condition,
which may be used to the competitor's advantage. Most of the
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<PAGE> 20
Corporation's competitors are privately-held and, therefore, are not required
to disclose similar information about their operations or financial condition.
The few competitors that are publicly-held are significantly larger than the
Corporation.
Consideration by the Board of Directors; Fairness of the Reverse Stock
Split
Procedural Fairness. At the meetings of the Board of Directors held on
August 18, 1998, October 5, 1998, and November 13, 1998, the Board of Directors
considered the proposed Reverse Stock Split. The Board of Directors has
unanimously concluded that the Reverse Stock Split, both from a financial and
procedural point of view, is fair to, and in the best interests of, both the
Corporation and its shareholders. In connection with such meetings, the Board
of Directors has resolved to recommend approval of the Reverse Stock Split
proposal to the Corporation's shareholders.
The Board of Directors did not structure the Reverse Stock Split to
require the approval of at least a majority of the unaffiliated shareholders.
Under Tennessee law, in order for a shareholder to exercise his dissenter's
rights to be "cashed out" under the Reverse Stock Split, the shareholder must
either abstain from voting or vote against the Reverse Stock Split. Therefore,
shareholders who are in favor of the Reverse Stock Split but wish to be "cashed
out" through the exercise of their dissenter's rights cannot vote in favor of
the Reverse Stock Split. Therefore the Board of Directors determined that
neutralized voting would not provide an accurate measure of those unaffiliated
shareholders actually in favor of the Reverse Stock Split since shareholders who
are in favor of the Reverse Stock Split but do not want to continue as
shareholders of the Corporation are prohibited from voting in favor of the
transaction. See "The Reverse Stock Split - Shareholders' Right to Dissent" and
Appendix B attached hereto.
The Board of Directors engaged Asset Services, an independent
financial advisory and investment banking firm, to assist the Board of
Directors in determining the value of the Common Stock and the fairness of the
Cash Consideration. See "- Opinions and Reports."
In addition, the Board of Directors established the Special Committee,
consisting of the independent members of the Board of Directors, to evaluate
the fairness of the Reverse Stock Split. The Special Committee retained its own
legal counsel to advise it of its responsibilities and duties with respect to
its evaluation of the Reverse Stock Split. The Special Committee had absolute
authority to reject the Reverse Stock Split if it determined the Reverse Stock
Split was unfair or not in the best interest of the Corporation and its
shareholders. The Special Committee retained the services of Mercer Capital, a
financial advisory firm which provides independent business valuations and
related investment banking services, to assist the Special Committee in
determining the value of the Common Stock and the fairness of the Cash
Consideration. The Special Committee unanimously recommended that the Board of
Directors recommend the Reverse Stock Split to the Corporation's shareholders
for their approval at the Meeting.
Fairness of the Cash Consideration. The Corporation reasonably
believes that the Reverse Stock Split is fair to all shareholders of the
Corporation, including the unaffiliated shareholders. The Corporation's
conclusion is based, in part, upon the fairness opinions issued to the
Corporation by Asset Services and Mercer Capital, which were specifically
retained by the Board of Directors and the Special Committee to render fairness
opinions as to the value of the Common Stock for purposes of the proposed
Reverse Stock Split. Information regarding the qualifications of Asset Services
and Mercer Capital to render fairness opinions regarding the Reverse Stock
Split is described below.
No director of the Corporation dissented or abstained from voting on
the Reverse Stock Split. All directors of the Corporation, including but not
limited to all independent, nonaffiliated directors, unanimously voted in favor
of the Reverse Stock Split at a special meeting of the Board of Directors held
on November 13, 1998 for the sole purpose of reviewing and considering the
Reverse Stock Split.
In determining the Cash Consideration to be paid in lieu of the
issuance of fractional shares of the New Common Stock, the Board of Directors
reviewed and considered: (1) current market prices of the Common Stock; (2)
historical market prices of the Common Stock; (3) net book value of the
Corporation; (4) going concern value of the Corporation; (5) liquidation value
of the Corporation; (6) the fairness opinion of Asset Services; (7) the
fairness opinion of Mercer Capital; (8) the purchase price paid in previous
purchases of the Common Stock by the Corporation; and (9) the absence
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<PAGE> 21
of any offers made by any unaffiliated persons during the preceding eighteen
(18) months for: (a) the merger or consolidation of the Corporation into or
with such person or of such person into or with the Corporation; (b) the sale
or other transfer of all or any substantial part of the assets of the
Corporation or; (c) securities of the Corporation which would enable the holder
thereof to exercise control of the Corporation. See "- Opinions and Reports."
Neither the Special Committee nor the Board of Directors assigned any specific
weight to the foregoing factors; however in their considerations individual
members of the Board of Directors or the Special Committee may have given
differing weights to different factors.
Because the Board of Directors wanted the Reverse Stock Split to be
equitable to all shareholders, including both affiliated and unaffiliated
shareholders, at the October 5, 1998 meeting, the Board of Directors initially
approved, subject to the review and recommendation of the Special Committee,
payment of the highest per share value included in the range of fair values of
the Common Stock initially proposed by Asset Services.
At the November 13, 1998 meeting of the Special Committee, all the
Corporation's independent directors unanimously recommended the Board of
Directors' approval of and proposal for adoption of the Reverse Stock Split.
The Special Committee did not retain an unaffiliated representative to act
solely on behalf of the unaffiliated shareholders for the purpose of
negotiating the Reverse Stock Split. The Reverse Stock Split was then
unanimously approved by all directors of the Corporation at the Special Meeting
of the Board of Directors held on November 13, 1998 for the sole purpose of
reviewing and considering the Reverse Stock Split. In addition, after
discussion and analysis, the Special Committee unanimously recommended to the
Board of Directors, and the Board of Directors unanimously approved, payment to
each shareholder in lieu of any fractional shares resulting from the Reverse
Stock Split, the Cash Consideration of $1 1/8 per share.
Opinions and Reports
Asset Services, L.P. The Corporation commissioned and has received
from Asset Services a report and fairness opinion relating to the Reverse Stock
Split, the fairness of the Cash Consideration to be offered to holders of the
Common Stock which is the subject of the Reverse Stock Split, and the fairness
of the Reverse Stock Split to the fractional and dissenting shareholders of the
Common Stock.
Founded in 1985, Asset Services is a private investment banking firm
headquartered in Memphis, Tennessee, specializing in mergers, acquisitions and
divestitures, raising capital through private debt and equity financing and the
valuation of businesses and corporate securities. Asset Services is a member of
M&A International, Inc., an organization comprised of many of the world's
leading independently owned private investment banking firms, with member firms
located throughout North and South America, Europe and the Pacific Rim. M&A
International, Inc. cooperates with M &A Partners, an autonomous sister
organization composed of member firms throughout Europe, for the purpose of
working cooperatively in the merger and acquisition field and promoting
cross-border transactions between entities in Europe and those in the Americas
and Asia. The M&A International/M&A Partners network is comprised of
approximately thirty-nine (39) firms in twenty-seven (27) countries. Asset
Services' membership in M&A International, Inc. provides Asset Services with
access to the resources of a global network of investment banking firms. Asset
Services is the parent company of Asset Services Investment Securities, Inc.,
an NASD member securities firm.
In July 1998, the Board of Directors retained the services of Asset
Services to provide an evaluation of alternatives available to the Corporation
with respect to the Corporation becoming a privately-held corporation. In
connection therewith, Asset Services issued a report to the Board of Directors
in August of 1998, evaluating the feasibility of such a transaction and giving
its recommendations in connections therewith. Asset Services analyzed four
methods through which the Corporation could potentially go private: (i) a
tender offer, (ii) an asset sale followed by the dissolution of the
Corporation, (iii) a merger with its affiliate NSA (either through a tender or
an asset purchase), and (iv) a reverse stock split. Following a detailed review
of each of these potential transactions, Asset Services recommended a reverse
stock split as the most viable approach to taking the Corporation private.
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<PAGE> 22
On August 18, 1998, following its decision to pursue a reverse stock
split for the Corporation, the Board of Directors voted to engage Asset
Services to provide its opinion as to the pre-split fair value to be paid for
fractional share interests following completion of the Reverse Stock Split, as
well as any shares held by whole shareholders that may elect to dissent to the
transaction. In rendering an opinion as to fair value, Asset Services generally
considers, among other factors, the nature and history of the corporation, the
economic outlook in the respective market area and for the industry in general,
the book value and financial condition of the corporation and its future
earnings and dividend paying capacities, the size of the block to be acquired,
the trading history of the shares, the prices paid for the shares of comparable
companies, and the financial impact of the transaction on the corporation.
While evaluating each of these factors, Asset Services elected to utilize the
"Delaware Block" method favored by the courts of Tennessee for determining the
fair value of corporate stock being repurchased by corporations in conjunction
with certain mergers and other corporate events. Under the Delaware Block
method three factors, (1) the earnings value, (2) the asset value (and its
corollary, liquidation value) and (3) the market value of the stock, must be
taken into account in determining fair value. Asset Services analyzed each of
the methodologies as follows:
Earnings Value. The Corporation has reported operating losses in each
of the last five years. Capitalization of these losses would result in an
assumption of negative or (more realistically) zero value for the Common Stock.
While there is no evidence to support a conclusion that the Corporation will
achieve profitability in the foreseeable future, Asset Services noted recent
reductions in the Corporation's operating losses and management's target of
moving the Corporation to positive operating results. As a result, Asset
Services concluded that a valuation of zero or a negative valuation as implied
by the earnings method would be an unrealistically low value for the Common
Stock. Accordingly, Asset Services assigned weighting of zero to the Earnings
Value in the case of the Corporation and looked to other measures of value in
rendering its opinion.
Asset Value. The asset value of a share of the Corporation's Common
Stock was established by using the Corporation's balance sheet. Adjustments were
made, as appropriate or necessary, to reflect the actual value of the
Corporation's assets and liabilities as opposed to their current (historical)
book value. Based on discussions with management, there is essentially a net
zero effect to asset value after taking into account the appropriate
adjustments. As of July 1998, net book value had decreased slightly to
$3,691,641, resulting in a per share value of $0.7863. While this value may
serve as a floor for pricing the shares as a going concern, Asset Services
attributed a weighting of zero to the asset value methodology in the case of the
Corporation as it felt that the value of the assets is lower than the enterprise
value that underlies the value of the Corporation's Common Stock.
Liquidation Value. Liquidation value is an appropriate measure unless
it is anticipated that the Corporation will cease to exist as a going concern
or the value of the assets in place would be greater to a third party than in
their current use by the Corporation. In assessing the value of the shares of
Common Stock, Asset Services concluded that any amounts realized in a
liquidation scenario would be less than the amounts calculated for the going
concern.
Market Price. The Corporation's maintenance of the stock repurchase
program through August 18, 1998 appears to have resulted in an upward bias in
the price of the Corporation's Common Stock during such period. In Asset
Services' opinion, trading after that date reflects a more accurate picture of
the true value of the Common Stock in the present environment. Asset Services
determined that the actual market prices reflected between buyers and sellers
without intervention of the Corporation as a market participant likely provides
the best indication available of the true value of the Common Stock,
particularly in light of the fact that the earnings and asset value approaches
lead to a valuation for the Corporation's Common Stock materially below the
value being place on the Common Stock by market participants. Accordingly, it
applied a 100% weighting to recent market values for the Common Stock.
In evaluating the value of the Corporation, Asset Services reviewed
and analyzed (1) annual shareholder reports for the fiscal years ended April
30, 1994 through 1997; (2) the Annual Report on Form 10-K for the fiscal year
ended April 30, 1998; (3) the Quarterly Report on Form 10-Q for the quarter
ended July 31, 1998; (4) the Corporation's fiscal 1999 budget; (5) minutes for
meetings of the Board of Directors; (6) the Corporation's recent press
releases; (7) historical price and volume data for the Common Stock for the
period April 30, 1993 through October 5, 1998; (8) interviews with senior
members of the Corporation's management; (9) discussions with the Corporation's
legal
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<PAGE> 23
counsel; and (10) the Tennessee dissenters' rights statute as promulgated in
Sections 48-23-101 through 48-23-302 of the TBCA and as interpreted in
Tennessee dissenters' rights and fair value case law.
The Board of Directors selected Asset Services based upon the firm's
experience in rendering fairness opinions and valuations and the firm's
reputation as an industry leader in providing valuations of businesses and
ownership interests in such businesses.
There were no limitations imposed on Asset Services by the Corporation
relating to the firm's fairness opinion or the scope of its investigation. The
only instructions provided by the Corporation to Asset Services relating to its
fairness opinion was to estimate the fair value of shares of Common Stock. The
consideration paid to Asset Services for the opinion of fair value was not
determined by the Corporation. Rather, Asset Services quoted and has received a
fee of $25,000 for its services in the preparation of the opinion of fair value
and related services. The Cash Consideration to be paid to the shareholders for
shares of Common Stock was determined by the Board of Directors, as recommended
by the Special Committee, based on the analysis set forth in the opinion, and
the factors described above. See "- Consideration by the Board of Directors;
Fairness of the Reverse Stock Split."
Asset Services determined that the fair value of a share of Common
Stock would fall within a range of $7/8 and $1 1/8 per share, with a bias
towards a value at the higher end of the range. Asset Services' fairness opinion
concluded that based upon its analysis and taking into account all relevant
measures, the firm believes that as of October 5, 1998, the Cash Consideration
of $1 1/8 per share of Common Stock to be received by the Corporation's
shareholders in lieu of fractional shares is fair from a financial point of view
and would be considered as fair value under the laws of Tennessee.
The fairness opinion of Asset Services is attached to this Proxy
Statement as Appendix C. Additionally, all opinions and reports prepared by
Asset Services referred to herein are available for inspection and copying at
the principal executive offices of the Corporation located at 4260 East Raines
Road, Memphis, Tennessee, 38118 during the Corporation's regular business hours
by any interested shareholder or his or her representative who has been so
designated in writing. A copy of the opinions and reports will be transmitted
by the Corporation to any interested shareholder or his or her representative
who has been so designated in writing upon written request and at the expense
of the requesting shareholder.
Mercer Capital Management, Inc. The Special Committee commissioned and
has received from Mercer Capital a report and fairness opinion relating to the
Reverse Stock Split, the fairness of the consideration to be offered to holders
of the Common Stock which is the subject of the Reverse Stock Split, and the
fairness of the Reverse Stock Split to the fractional and dissenting
shareholders of the Common Stock.
Mercer Capital, as part of its valuation consulting and investment
banking businesses, is engaged to assist financial institutions and businesses
in merging with and acquiring other entities, and to value businesses and their
securities in connection with mergers and acquisitions, estate tax matters,
private placements, corporate reorganization, and other purposes. Mercer
Capital, which was founded in 1982, is one of the ten largest independent
valuation firms in the country. Mercer Capital also provides investment banking
services through Mercer Capital Advisors.
The Special Committee retained Mercer Capital to serve as its
financial advisor during October 1998 on the basis of its reputation and its
experience in evaluating significant corporate transactions. Mercer Capital did
not participate in negotiations which established the Cash Consideration to be
received by the shareholders.
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<PAGE> 24
No limitations were imposed by the Special Committee or the
Corporation with respect to the investigations made or the procedures followed
by Mercer Capital in rendering its fairness opinions. Mercer Capital was paid a
fee of $15,000 for providing its fairness opinion. The fairness opinion, which
is included as Appendix D of this Proxy Statement, and should be read in its
entirety by the shareholders. Also, Mercer Capital provided an updated fairness
opinion which is included as Appendix E of this Proxy Statement, and should be
read in its entirety by the shareholders.
As part of its investigation, representatives of Mercer Capital
questioned the Corporation's management and legal counsel to the Special
Committee regarding Reverse Stock Split, the Corporation's operations,
including its history, historical and prospective financial performance, and
its relationship with NSA.
Mercer Capital also reviewed and considered the following documents:
(1) the draft Rule 13e-3 Transaction Statement and draft proxy statement
prepared for purposes of the contemplated transaction; (2) annual shareholder
reports for the fiscal years ended April 30, 1994 through 1997; (3) Annual
Reports on Form 10-K for the fiscal years ended April 30, 1994 through 1998;
(4) proxy statements to shareholders dated September 24, 1993, September 15,
1994, October 3, 1995, November 4, 1996, and December 2, 1997; (5) Quarterly
Report on Form 10-Q for the quarter ended July 31, 1998; (6) internally
prepared financial statements for the five month period ended September 30,
1998; (7) fiscal 1999 budget; (8) minutes for meetings of the Board of
Directors; (9) historical price and volume data for the Common Stock for the
period April 3, 1993 through November 6, 1998; (10) Tennessee's dissenters'
rights statute as promulgated in Sections 48-23-101 through 48-23-302 of the
TCBA and as interpreted in Tennessee dissenters' rights and fair value case
law; and (11) Asset Services' report dated September 1998. In addition to the
above, in preparing its updated fairness opinion Mercer Capital reviewed and
considered (i) Quarterly Report on Form 10-Q for the quarter ended October 31,
1998, and (ii) historical price and volume data for the period November 6, 1998
through January 19, 1999.
In connection with rendering its opinion, Mercer Capital performed a
variety of financial analyses. Mercer Capital believes that its analyses must
be considered as a whole and that selection of portions of such analyses and
the factors considered therein, without considering all factors and analyses,
could create an incomplete view of the analyses and the process underlying
Mercer Capital's opinion.
The following is a summary of Mercer Capital's analysis which was
supplied to the Special Committee in a report dated November 13, 1998 for
purposes of supporting its fairness opinion.
Financial Synopsis. Mercer Capital noted that the Corporation incurred
significant losses and declining sales during each of the five fiscal years
ended April 30, 1998. Reported sales declined from $112.5 million in fiscal
1994 to $23.6 million for the twelve month period ended July 31, 1998. The
Corporation recorded net losses, ranging from $2.4 million to $10.7 million, in
each of the past five fiscal years, while a net loss of $188,000 was recorded
during the first quarter of fiscal 1999.
Mercer Capital noted that the losses were funded through a reduction
in cash and short-term investments, which declined from $20.6 million at
year-end 1994 to $4.5 million at July 31, 1998, and advances from NSA.
Mercer Capital discussed with management its expectations for fiscal
1999 based upon management's budget, as well as its longer-term expectations
for the business. Although management indicated that the large losses were
believed to have been eliminated, Mercer Capital noted that it could not
conclude that the Corporation was entering into a turnaround in which the
Corporation would produce significant operating earnings.
Market for the Corporation's Common Stock. Mercer Capital noted that
the Corporation's shares of Common Stock set an all-time high during fiscal 1993
following the registration and listing of the Corporation's shares on the Nasdaq
National Market. Since that time, the shares of Common Stock have declined in
value, setting an all-time low of $3/4 per share on October 7, 1998 before
rising to as high as $1 3/8 per share on November 5, 1998, and then subsequently
declining to $1.00 per share on November 9, 1998 when approximately 50,000
shares traded. On November 11, 1998 approximately 29,000 shares traded at
$1 1/16 per share.
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<PAGE> 25
Mercer Capital noted that the price for the Common Stock during March
1997 through August 1998 was supported by the stock repurchase program in which
approximately 239,000 shares were repurchased in open market transactions in
accordance with Rule 10(b)(18) of the 1934 Act. It was also noted that the
termination of the repurchase program in mid-August, combined with the global
correction which developed in equity, bond and emerging markets, coincided with
an approximately 50% drop in the Corporation's share price from $1 1/2 per
share to $3/4 per share.
Mercer Capital noted that the November 5, 1998 trade involving 3,500
shares of Common Stock was the only transaction since August 27, 1998 which
exceeded the Cash Consideration of $1 1/8 per share. As of November 11, 1998,
the 10 day average closing price was $1.08 per share; however, the 10 day
average on which trading occurred was $1.01 per share through November 11.
Transaction (Market) Indication of Value. Mercer Capital derived
indications of value of $1.06 per share and $1.07 per share. Given the
relatively thin market for the Corporation's shares, it was deemed to be
appropriate to consider a 10 day average price in deriving a transaction based
indication of value, as well as the most recent transaction history. Mercer
Capital commented that utilizing an average price would be similar to a
stock-for-stock merger in which the exchange ratio is based upon an average
price for the buyer for a ten or twenty day period ending immediately prior to
the date the definitive agreement is signed or on the date that the merger is
consummated.
Net Asset Value. Net asset value essentially represents adjusted book
value, with assets and liabilities marked to market values, to the extent such
values are known. Mercer Capital noted that net asset value is sometimes
treated as an indication of value, rather than a liquidation value, though such
value might be realizable in a liquidation scenario. In Mercer Capital's
opinion, net asset value tends to assume greater importance for asset holding
companies. The relevance of net asset value is limited for going concern
operating entities, except in instances when earnings are depressed and
investors may look towards book value or adjusted book value for an indication
of value.
Based upon its analysis of the Corporation's balance sheet and
discussions with management regarding potential adjustments to the balance
sheet, Mercer Capital concluded that reported book value of $3,691,641 ($0.79
per share) as reported on the July 31, 1998 10-Q was reasonably representative
of net asset value.
Earnings Capitalization. Mercer Capital adjusted the Corporation's
reported earnings for non-operating charges and the like to derive estimated
adjusted operating pre-tax income, earnings before interest and taxes ("EBIT"),
and earnings before interest, taxes and depreciation/amortization ("EBITDA").
Based upon its analysis, Mercer Capital could not attribute any current earning
power to the Corporation. Mercer Capital also noted that although management
had projected a pre-tax profit of $489,000 for fiscal 1999 ($196,000 of which
represents interest income), interim results through September 30 indicated
that the Corporation continued to generate operating losses.
Discounted Cash Flow. Mercer Capital did not prepare projections for
purposes of deriving an discounted cash flow (DCF) indication of value because
management had not prepared any multi-year projections. Mercer Capital noted,
however, that even if such projections had been prepared, any projections which
showed significant levels of profitability in future years would result in an
indication of value which probably would be suspect given the Corporation's
financial performance during the past five years, and management's statements
that a significant turnaround in profitability was not anticipated.
In preparing its updated opinion as of January 20, 1999, Mercer Capital
reviewed and considered the Quarterly Report on Form 10-Q for the quarter ended
October 31, 1998, the Corporation's most recent internally prepared financial
statements and the historical price and volume data for the Common Stock for the
period November 6, 1998 through January 19, 1999, Representatives of Mercer
Capital also questioned the Corporation's management regarding the Corporation's
interim and prospective financial performance Based on its review and
consideration of the abovementioned items nothing came to the attention of
Mercer Capital that caused it to change its earlier opinion.
Based upon its analysis, Mercer Capital issued its fairness opinion on
November 13, 1998, which opined that the Cash Consideration of $1 1/8 per share
of Common Stock to be received by the Corporation's shareholders in lieu of
fractional shares is fair from a financial point of view, Mercer Capital
subsequently affirmed its initial opinion on January 20, 1999 after conducting
the additional review procedures.
The fairness opinion of Mercer Capital is attached to this Proxy
Statement as Appendix D, Additionally the opinion and the updated fairness
opinion of Mercer Capital is attached to this Proxy Statement as Appendix E. The
opinion and the undated fairness opinion of Mercer Capital is attached to this
Proxy Statement as Appendix E, Additionally, the opinions and report prepared by
Mercer Capital referred to herein are available for inspection and copying at
the principal executive offices of the Corporation located at 4260 East Raines
Road, Memphis, Tennessee, 38118 during the Corporation's regular business hours
by any interested shareholder or his or her representative who has been
designated in writing. A copy of the opinions and report will be transmitted by
the Corporation to any interested
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<PAGE> 26
shareholder or his or her representative who has been so designated in writing
upon written request and at the expense of the requesting shareholder.
Consideration of Alternatives
The Board of Directors and the Special Committee considered the merits
of various other alternatives to the Reverse Stock Split. They determined that
the first alternative considered, privately-negotiated or continued open market
purchases, would not be feasible because the vast majority of the Corporation's
shareholders hold small numbers of the shares of Common Stock. During the
eighteen month period from March 1997 to August 1998, the Corporation had been
unable to purchase the number of shares of Common Stock desired pursuant to the
authorized stock repurchase program. Therefore, the Board of Directors also
determined that, in all likelihood, it would not be possible in any reasonable
period of time to purchase a significant number of the shares of the
Corporation's Common Stock to ensure the reduction of the number of the holders
of the shares of Common Stock to less than 300. Further, they determined that
the legal and other transaction costs to implement this alternative would be
substantially greater than the costs to implement the Reverse Stock Split.
Similarly, they determined that the Corporation commencing a
self-tender offer would not be feasible for the same reasons that the
alternative of privately negotiated or continued open market purchases would
not be feasible.
Third, the Board of Directors and Special Committee concluded that the
dissolution of the Corporation following the sale of all or substantially all
of the assets of the Corporation would not be a feasible alternative. No third
party had expressed any interest in purchasing the assets of the Corporation.
Moreover, even if a third party desired to purchase the assets, the proceeds
from the sale of the Corporation's assets would likely not be significantly
greater than the Corporation's indebtedness and other liabilities, and
therefore, the Corporation would not be in a position to pay to its
shareholders any significant amount for their shares of Common Stock in
liquidation.
Finally, the Board of Directors and the Special Committee determined
that the merger of the Corporation into or with NSA or another corporation
would not be a feasible alternative as neither NSA or any other third party had
expressed any interest in merging with the Corporation.
Recommendations of the Board of Directors
The Board of Directors unanimously concluded that, on the basis of
these factors, the Reverse Stock Split, both from a financial and procedural
point of view, is fair to the Corporation, the affiliated shareholders and the
unaffiliated shareholders. For the reasons described above, the Board of
Directors, including the Special Committee, unanimously approved the Reverse
Stock Split and recommends that the shareholders vote FOR the Reverse Stock
Split.
Plans for the Corporation after the Reverse Stock Split
Except as indicated in this Proxy Statement, the Corporation does not
have any present plans or proposals which relate to or would result in an
extraordinary corporate transaction, such as a merger, reorganization, or
liquidation, involving the Corporation or any of its subsidiaries; a sale or
transfer of a material amount of assets of the Corporation or any of its
subsidiaries; any change in the present Board of Directors or management of the
Corporation including, but not limited to, any plan or proposal to change the
number or term of directors, to fill any existing vacancy on the Board of
Directors or to change any material term of the employment contract of any
executive officer; or any material change in the present dividend rate or
policy or indebtedness or capitalization of the Corporation. Upon consummation
of the Reverse Stock Split, the assets, business, and operations of the
Corporation will be continued substantially as they are currently being
conducted.
18
<PAGE> 27
Certain Effects of the Reverse Stock Split
General Effects. If the Reverse Stock Split is approved by the
affirmative vote of two-thirds (2/3) of the outstanding shares of Common Stock,
the number of authorized shares of common stock will be decreased from 100,000
to 41,666. After giving effect to the Reverse Stock Split, the interest of the
remaining shareholders in the net book value and net earnings of the
Corporation in terms of both dollar amounts and percentages will change. In
lieu of the issuance of fractional shares of New Common Stock, shareholders
will receive the Cash Consideration in the amount of $1 1/8 for each share of
Common Stock. Shareholders owning less than 2,400 shares of Common Stock will
cease to be shareholders or to have any equity interest in the Corporation and,
therefore, will not share in its future earnings and growth, if any, and will
not have any right to vote on any corporate matter.
Termination of 1934 Act Registration. The shares of Common Stock are
currently registered under the 1934 Act. Such registration may be terminated
upon application of the Corporation to the SEC if the Corporation has fewer
than 300 record holders of the shares. The Corporation currently intends to
make an application for termination of registration of the shares of New Common
Stock as promptly as possible after filing the Restated Charter. Termination of
registration of the shares of New Common Stock under the 1934 Act would
substantially reduce the information required to be furnished by the
Corporation to its shareholders and to the SEC and would be make certain
provisions of the 1934 Act, such as the short-swing profit recovery provisions
of Section 16(b) of the 1934 Act, the requirement of furnishing a proxy or
information statement in connection with shareholder meetings pursuant to
Section 14(a) of the 1934 Act, and the requirements of Rule 13e-3 promulgated
by the SEC under the 1934 Act with respect to "going private" transactions, no
longer applicable to the Corporation. Termination of the registration of the
shares of New Common Stock would also deprive "affiliates" of the Corporation
and persons holding "restricted securities" of the Corporation of the ability
to dispose of such securities pursuant to Rule 144 promulgated under the
Securities Act of 1933, as amended.
Effect on Market for Shares. If the Reverse Stock Split is approved
and, as contemplated, the shares of New Common Stock are deregistered under the
1934 Act, the Corporation will not have any market for its shares of New Common
Stock. In December 1997, the shareholders adopted the Corporation's 1997
Incentive and Non-Qualified Stock Option Plan (the "Incentive Plan"), providing
for issuance to eligible directors, officers, employees, advisors, and
consultants of the Corporation of up to 500,000 shares of Common Stock. At
February 3, 1999 various officers, employees and consultants of the Corporation
held options to purchase 225,000 shares. The exercise price of such options is
$1.25 and they vest over a four-year period and terminate on January 1, 2004.
Pursuant to the terms of the Incentive Plan, the number of shares issuable upon
exercise and the exercise price will be automatically proportionately adjusted
for any decrease in the number of authorized shares of Common Stock if the
proposed Reverse Stock Split is approved by shareholders. The Corporation will
continue to have shareholders following the Reverse Stock Split including the
plan participants and accordingly management has no plans to discontinue or
terminate the Incentive Plan, although the Corporation may choose to use cash
bonuses and other incentives to reward employees.
Certain Federal Income Tax Consequences
THE FOLLOWING DISCUSSION SUMMARIZING CERTAIN FEDERAL INCOME TAX
CONSEQUENCES IS BASED ON CURRENT LAW AND IS INCLUDED FOR GENERAL INFORMATION
ONLY. SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE FEDERAL,
STATE, LOCAL AND FOREIGN TAX EFFECTS OF THE REVERSE STOCK SPLIT IN LIGHT OF
THEIR INDIVIDUAL CIRCUMSTANCES.
Exchange of Common Stock Solely for New Common Stock. A shareholder
who receives solely shares of New Common Stock pursuant to the Reverse Stock
Split will recognize no gain or loss under Section 354 of the Internal Revenue
Code (the "Code"). The aggregate basis of the shares of New Common Stock
received by such shareholders pursuant to the Reverse Stock Split will be the
same as the tax basis of the shares of Common Stock surrendered in exchange.
The holding period of the shares of New Common Stock received by such
shareholder will include the holding period of the shares of Common Stock
surrendered in the exchange, provided Common Stock was held as a capital asset
at the time of the Reverse Stock Split.
19
<PAGE> 28
Exchange of Common Stock for a Combination of Cash and New Common
Stock. A shareholder who receives New Common Stock and cash pursuant to the
Reverse Stock Split will recognize gain (if any), but in an amount not in
excess of the amount of cash received. Such gain will be recognized in the year
in which New Common Stock and cash are received, or in the year New Common
Stock or cash is entitled to be received (i.e., at the time of the Reverse
Stock Split). Any recognized gain will be eligible for capital gain treatment
(assuming the shareholder's Common Stock is held as a capital asset) unless
such receipt of cash has the effect of a distribution of a dividend, as
provided in Section 356 of the Code, in which case such gain will be taxable as
ordinary income to the extent of the shareholder's ratable share of the
Corporation's earnings and profits. The principles applicable under Section 302
of the Code and the United States Supreme Court decision in Clark v.
Commissioner, 109 S. Ct. 1455, 89-1 U.S.T.C. 9230 (1989), will serve as
guidelines in determining whether the receipt of cash has the effect of the
distribution of a dividend under Section 356 of the Code. Under these
principles, the distribution to a shareholder will not be considered to have
the effect of the distribution of a dividend if it is "substantially
disproportionate" with respect to the shareholder or if it is "not essentially
equivalent to a dividend" to the shareholder. For purposes of these tests and
under Clark, the shareholder presumably is treated as if he or she received
solely New Common Stock pursuant to the Reverse Stock Split and then received
cash through a redemption by the Corporation of a number of such shares having
a value equal to the cash amount.
Under Clark, a distribution will be "substantially disproportionate"
with respect to a shareholder if the shareholder's proportionate interest in
New Common Stock actually held by the shareholder after the Reverse Stock Split
is less than 80% of what the shareholder's proportionate interest in Common
Stock would have been if solely New Common Stock had been distributed in the
Reverse Stock Split. In applying this test for purposes of Section 356 of the
Code, the constructive ownership rules of Section 318 of the Code (under which
shareholders are treated as holding not only their own shares but also shares
held by certain related persons and entities) are applicable.
Even though a distribution does not satisfy the substantially
disproportionate test discussed above, it still may be "not essentially
equivalent to a dividend" to a shareholder depending upon the shareholder's
particular facts and circumstances. The United States Supreme Court in Davis v.
United States, 397 U.S. 301 (1970), concluded that in order for a distribution
to be considered not essentially equivalent to a dividend, there must be a
"meaningful reduction in the shareholder's proportionate interest."
Shareholders who increase their proportionate interest in the Corporation as a
result of the Reverse Stock Split will not experience a meaningful reduction in
their proportionate interest in the Corporation, and therefore will be treated
as having received a distribution of cash essentially equivalent to a dividend.
See Rev. Rul. 78-351, 1978-2 C.B. 148 (holding that fractional share rule of
Rev. Rul. 69-34, 1969-1 C.B. 105 does not apply in the case of a reverse stock
split under circumstances substantially identical to these).
A shareholder who receives New Common Stock and cash will receive a
basis in such New Common Stock which will be the same as the basis of the
shares of Common Stock surrendered in the exchange, decreased by the amount of
any cash received, and increased by the amount of any gain recognized on the
change. The holding period of New Common Stock received by such a shareholder
will include the holding period of Common Stock surrendered in the exchange,
provided Common Stock was held as a capital asset as of the time of the Reverse
Stock Split.
Exchange of Common Stock Solely for Cash. In the case of a shareholder
who receives only cash in exchange for all of his or her Common Stock, the cash
will be treated as received by the shareholder as a distribution in redemption
of the shareholder's Common Stock, subject to the provisions and limitations of
Section 302 of the Code. Where, after such distribution, a former shareholder
does not own shares of Common Stock directly or indirectly through the
constructive ownership rules of Section 318(a) of the Code, the redemption will
be treated as a complete termination of interest within the meaning of Section
302(b)(3) of the Code. As provided in Section 1001 of the Code, gain or loss
will be recognized by such shareholders in an amount equal to the difference
between the amount of cash received in the redemption and the adjusted basis of
the Common Stock surrendered. Provided that Common Stock is a capital asset in
the hands of such shareholders, the gain or loss, if any, will constitute
capital gain or loss. The gain or loss will be long-capital gain or loss if the
shareholder will have held, or be deemed to have held, his or her Common Stock
for more than one year as of the time of the Reverse Stock Split.
20
<PAGE> 29
Capital Gain and Alternative Minimum Tax. Long-term capital gain for
noncorporate taxpayers is generally taxed at a maximum rate of 20%. Capital
losses are deductible generally only to the extent of capital gains.
Capital gains and dividends are also included in alternative minimum
taxable income, which may be subject to a special minimum tax at a 26% or 28%
rate (depending on the taxpayers' alternative minimum taxable income) to the
extent the minimum tax exceeds regular tax liabilities. Alternative minimum
taxable income is reduced by various exemption amounts, which are phased out
above certain levels.
Special taxation and withholding rules may apply to any shareholder
that is a nonresident alien or a foreign corporation. These rules are beyond
the scope of this discussion and should be discussed with a personal tax
advisor. Shareholders will be required to provide their social security or
other taxpayer identification numbers (or, in some instances, certain other
information) to the Exchange Agent (as defined below) in connection with the
Reverse Stock Split to avoid backup withholding requirements that might
otherwise apply. The letter of transmittal will require each shareholder to
deliver such information when Common Stock certificates are surrendered
following the effective date of the Amendment. Failure to provide such
information may result in backup withholding.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION
ONLY AND DOES NOT REFER TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY
SPECIFIC SHAREHOLDER. SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
FOR MORE SPECIFIC AND DEFINITIVE ADVICE AS TO THE FEDERAL INCOME TAX
CONSEQUENCES TO THEM OF THE TRANSACTION, AS WELL AS ADVICE AS TO THE
APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
Source and Amounts of Funds for and Expenses of the Reverse Stock
Split
Estimated fees and expenses incurred or to be incurred by the
Corporation in connection with the Reverse Stock Split are approximately as
follows:
<TABLE>
<CAPTION>
ITEM APPROXIMATE
- ---- AMOUNT
<S> <C>
Payment of Cash Consideration $ 900,000(1)
Legal Fees and Expenses 40,000
Accounting Fees and Expenses 5,000
Valuation Fees 40,000
Commission Filing Fees 180
Printing and Mailing Expenses 17,500
Miscellaneous Expenses 5,000
----------
Total $1,007,680
</TABLE>
(1) Price to be paid for an estimated 800,000 shares for which the
Cash Consideration is to be received in lieu of fractional shares.
The Corporation will be responsible for paying all of the expenses and
anticipates that it will pay such expenses out of available cash reserves.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL
OF THE REVERSE STOCK SPLIT.
21
<PAGE> 30
(PROPOSAL 2)
ELECTION OF DIRECTORS
The Board of Directors of the Corporation is divided into two Classes with
the term of office of each Class expiring in succeeding years. The terms of
office of Class I directors expire at the Meeting. The terms of office of Class
II directors expire at the next annual meeting of shareholders. The Board of
Directors proposes the election of three (3) Class I directors. Each Class I
director elected at the Meeting will hold office until the annual meeting of
shareholders to be held in 2000 or until their successors are duly elected and
qualified.
NOMINEES FOR DIRECTOR
Class I
For a Two-Year Term Expiring at the 2000 Annual Meeting of Shareholders
A. Jay Martin
Charles R. Evans, Jr.
J. Neil Rood
Unless authority to vote is withheld, all proxies received by the Board of
Directors will be voted for these three (3) nominees; except that, if any such
nominee is unable to serve, or for good cause will not serve, those proxies
will be voted for the person whom the Board of Directors designates to replace
the nominee. The Board of Directors believes that, if elected, each nominee
will be willing to serve. An affirmative vote of a majority of the shares of
Common Stock voting at the Meeting is required to elect each of the nominees to
the Board of Directors of the Corporation. An "abstention" (including broker
"non-votes") will be considered present for quorum purposes, but will not be
counted as a vote either "for" or "against" the election directors. A "broker
non-vote" refers to shares represented at the Special Meeting in person or by
proxy by a broker or nominee where such broker or nominee (i) has not received
voting instructions on a particular matter from the beneficial owners or
persons entitled to vote and (ii) the broker or nominee does not have the
discretionary voting power on such matter.
DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
The following table sets forth certain information regarding the directors
and executive officers of the Corporation.
<TABLE>
<CAPTION>
Director Term
Name Age Position(s) Since Expires
- ---- --- ----------- -------- -------
<S> <C> <C> <C> <C>
DIRECTORS:
A. Jay Martin(1) 56 Chief Executive Officer and President and Director 1989 1998
Charles R. Evans, Jr. 54 Chief Operating Officer and Executive Vice- 1992 1998
President and Director
J. Neil Rood 65 Director 1989 1998
George R. Poteet 50 Director 1989 1999
L. F. Swords 57 Director 1989 1999
William W. Deupree, Jr. 57 Director 1992 1999
William L. Gurner 52 Director 1996 1999
</TABLE>
22
<PAGE> 31
EXECUTIVE OFFICERS:
<TABLE>
<CAPTION>
Officer
Since
<S> <C> <C> <C>
Stan C. Turk 46 Chief Financial Officer and Secretary-Treasurer 1989
</TABLE>
- -----------
(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 Corporation.
A. Jay Martin has served as Chief Executive Officer and President and
as a director of the Corporation since its inception in March 1989. Mr. Martin
founded National Safety Associates, Inc., 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 Corporation
since August 1992. Mr. Evans joined NSA Polymers, Inc., a subsidiary of the
Corporation, in March 1989 and served as Vice President, Assistant Secretary
and a director of such corporation 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 Corporation 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 Corporation since its
inception. In April 1992, Mr. Rood was elected President of NSA Holdings, Inc.,
a subsidiary of the Corporation, and, in December 1992, Mr. Rood was elected
Vice President-International Operations for the Corporation. Mr. Rood completed
his tenure at that position in December 1993. Mr. Rood is also 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 that 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 Corporation since its
inception. From 1989 until March 1, 1994, Mr. Swords served as
Secretary-Treasurer and Chief Financial Officer of the Corporation and all of
its subsidiaries. Mr. Swords has been employed by NSA since 1971 in a variety
of management positions. 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 Corporation since its
inception. From 1989 until February 1994, Mr. Poteet served as the Vice
President-Manufacturing of the Corporation. 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.
William W. Deupree, Jr., a director of the Corporation 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 has served as a director of the Corporation 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
Corporation from 1987 through 1994.
23
<PAGE> 32
Stan C. Turk was appointed Chief Financial Officer and Secretary-Treasurer
of the Corporation on July 1, 1996. Prior to that time, Mr. Turk served as the
Assistant Treasurer of the Corporation beginning in August 1989. Mr. Turk is
also employed as the 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.
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
During the fiscal year ended April 30, 1998, the Board of Directors of the
Corporation held two meetings. The Board of Directors has two standing
committees, the Audit Committee and the Compensation Committee. No director
attended less than 75% of the aggregate number of meetings of the Board of
Directors or Board Committees on which he served.
The Audit Committee is presently composed of L.F. Swords, William W.
Deupree, Jr. and William L. Gurner. The Audit Committee held one meeting during
the fiscal year ended April 30, 1998. The Audit Committee reviews the integrity
of the Corporation's financial statements, the Corporation's internal controls,
the Corporation's internal audit function, the function and fees of the
independent public accountants and other matters relating to financial and
accounting functions. The Audit Committee also makes recommendations to the
Board of Directors concerning the engagement or discharge of the independent
public accountants.
The Compensation Committee is presently composed of L.F. Swords, William W.
Deupree, Jr., and William L. Gurner. The Compensation Committee held one
meeting during the fiscal year ended April 30, 1998. The Compensation Committee
reviews the compensation of executive officers and other key executives and
makes recommendations to the full Board of Directors regarding such
compensation.
The Board of Directors does not have a nominating committee.
In connection with the Reverse Stock Split, the Board of Directors formed
the Special Committee consisting of the independent members of the Board of
Directors, William W. Deupree, Jr. and William L. Gurner, to evaluate the
fairness of the Reverse Stock Split to the Corporation and the shareholders.
For further discussion on the authority and meetings of the Special Committee,
see "Approval of the Reverse Stock Split - Special Factors - Background" and
"Approval of the Reverse Stock Split - Special Factors - Recommendations of the
Board of Directors; Fairness of the Reverse Stock Split."
24
<PAGE> 33
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Report of Compensation Committee
BOARD COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
August 18, 1998
Overview of compensation philosophy and programs
The Compensation Committee is responsible for developing and communicating
recommendations to the Board of Directors with respect to the Corporation's
executive compensation policies and reviews the compensation of the executive
officers of the Corporation. The Corporation's compensation objectives are to
support the Corporation's financial objectives and performance goals, provide
compensation that will attract and retain superior management, and reward
performance.
Rapid market and product diversification have caused the Corporation to
rely on hiring senior executives from outside the corporate organization,
rather than growing or training managers from within. In general, the executive
salary structure is based significantly on local economic considerations for
each market in which management level personnel are retained. The Corporation
makes it a practice to recruit the best possible talent available to fill given
positions. Although domestically the Corporation faces less competition for key
executives, internationally the cost of living considerations and competing
salaries weigh heavily in compensation decisions.
Executive compensation, including salaries and bonuses reported for the
last completed fiscal year, is negotiated on an individual basis, and generally
the executive compensation includes a base salary coupled with bonus
compensation. Bonus compensation takes into consideration not only revenues,
but also profitability. Further, executive performance is reviewed on an annual
basis with each executive.
Compensation of the Chief Executive Officer
The Chief Executive Officer recommended to the Board of Directors that his
compensation be set slightly below average, comparable CEO salary levels and
without any bonus or short-term or long-term incentive and performance
programs. The Chief Executive Officer was one of the founders of the
Corporation and directly owns approximately 8% of the outstanding shares of
Common Stock of the Corporation. Rather than receiving compensation through
increased salary, the Chief Executive Officer and the Board of Directors have
determined that the Chief Executive Officer will be suitably compensated
primarily through the intrinsic value of his stock ownership of the
Corporation.
Respectfully submitted,
WILLIAM L. GURNER
WILLIAM W. DEUPREE, JR.
L.F. SWORDS
25
<PAGE> 34
Summary Compensation Table
The following table sets forth the aggregate compensation paid by the
Corporation and its subsidiaries to the Chief Executive Officer of the
Corporation and the two most highly compensated executive officers of the
Corporation or its subsidiaries, for services rendered in all capacities during
the fiscal years ended April 30, 1998, 1997, and 1996. No other executive
officer of the Corporation received compensation exceeding $100,000 for the
fiscal year ended April 30, 1998.
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------
Securities
Other Annual Underlying
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Options(#)
- --------------------------- ---- ---------- --------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
A. Jay Martin 1998 159,439 3,028 -0- -0-
Chief Executive Officer of the Corporation 1997 150,000 10,528 -0- -0-
1996 150,000 6,058 -0- -0-
Charles R. Evans, Jr 1998 167,410 78,181 8,400(1) -0-
Chief Operating Officer 1997 160,226 78,029 8,400(1) 25,000
of the Corporation 1996 225,000 7,001 -0- -0-
John Greenham 1998 152,845 25,000 13,540(1) -0-
Vice President - Europe 1997 120,750 25,000 31,704(1) 25,000
1996 139,844 26,128 40,757(1) -0-
Stan C. Turk 1998 126,538 2,404 -0- -0-
Chief Financial Officer of the Corporation 1997 40,865(2) -0- -0- 25,000
1996 -0- -0- -0- -0-
</TABLE>
- ---------------------------
(1) Represents housing, school fees, expenses and/or car allowance.
(2) Represents salary for the period January 1, 1997 through April 30,
1997.
The following table provides information with respect to the value of
the unexercised options held by the executive officers named in the above table
as of April 30, 1998. No such executive officer exercised any options during
the fiscal year ended April 30, 1998.
26
<PAGE> 35
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End(1)
-------------------------- ---------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles R. Evans, Jr. -0- 25,000 -0- $35,500
John Greenham -0- 25,000 -0- $35,500
Stan C. Turk -0- 25,000 -0- $35,500
</TABLE>
- ------------------
(1) Based upon a bid quotation of $1.42 taken from the National Quotation
Bureau Report and supplied by the National Association of Securities
Dealers, Inc. through the NASD OTC Bulletin Board.
Performance Graph
The following graph compares the percentage change in the
Corporation's cumulative total shareholder return with returns based on The
Nasdaq Stock Market (U.S. companies) Index and a peer group index, which is
described in the legend to the graph.
<TABLE>
<CAPTION>
MEASUREMENT PERIOD NSA
(FISCAL YEAR INTERNATIONAL, NASDAQ
COVERED) INC. PEER GROUP MARKET INDEX
<S> <C> <C> <C>
4/30/93 100.0 100.0 100.0
4/29/94 54.4 197.9 111.3
4/28/95 48.5 119.2 129.4
4/30/96 42.6 129.7 184.4
4/30/97 19.9 159.5 195.2
4/30/98 17.6 251.3 292.0
</TABLE>
- --------------------
The Peer Group includes BeautiControl Cosmetics, Inc. and Herbalife
International Inc. The comparison assumes $100 was invested in the
Corporation's Common Stock on April 30, 1993 and in each of the foregoing
indices and assumes reinvestment of dividends.
27
<PAGE> 36
Compensation of Directors
The non-employee directors of the Corporation currently receive $1,000
for each Board of Directors meeting and $1,000 for each committee meeting. The
directors of the Corporation's subsidiaries do not receive any additional
compensation for serving in such capacities.
Employment Agreements
The Corporation has an employment agreement with Mr. A. Jay Martin.
The employment agreement is renewable annually and provides for an annual
salary of $150,000 with appropriate annual increases and bonuses. The
Corporation also has an employment agreement with Mr. Charles R. Evans, Jr.
which provides for annual compensation equal to $225,000 with appropriate
annual increases and bonuses.
Compensation Committee Interlocks and Insider Participation
Mr. L.F. Swords serves as a member of the Compensation Committee of
the Corporation's Board of Directors. From 1989 until March 1, 1994, Mr. Swords
served as Secretary-Treasurer and Chief Financial Officer of the Corporation
and all of its subsidiaries. Mr. Swords has not served as an officer of the
Corporation since March 1, 1994.
Certain Relationships and Related Transactions
Sales of Juice Plus+(R) products to NSA totaled approximately
$8,732,000, or approximately 38%, of the Corporation's revenues for the fiscal
year ended April 30, 1998. Messrs. Martin, Swords and Poteet are all directors
and executive officers of NSA, serving in the respective capacities of
President, Chief Financial Officer, and Vice President Manufacturing.
At April 30, 1998, the Corporation owed approximately $9,291,356 to
NSA for cash advances for working capital, product purchases, and management
fees.
The Corporation purchases certain water filtration and related
accessory products from NSA. The cost of such purchases was approximately
$288,000 for the fiscal year ended April 30, 1998.
NSA provides certain management, consulting and advisory services to
the Corporation. In consideration for these services, the Corporation paid to
NSA approximately $119,510 for the fiscal year ended April 30, 1998. In
addition, the Corporation pays to NSA any and all amounts collected by the
Corporation from the Corporation's Master Distributors in exchange for data
processing services provided to such distributors as such services are in fact
provided by NSA. The total amount paid to NSA for such services during the
fiscal year ended April 30, 1998, was approximately $298,330.
NSA has guaranteed the obligations of National Safety Associates of
America (U.K.) Limited ("NSA UK"), a subsidiary of the Corporation, under lease
agreements pursuant to which NSA UK leases approximately 12,800 square feet in
Maidenhead, Berkshire, England.
There have not been, and it is the Corporation's current intention
that there will not be, loans or other financial transactions between the
Corporation 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 Corporation's disinterested and independent directors
and will be on terms no less favorable to the Corporation than could be
obtained from unaffiliated parties.
28
<PAGE> 37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock
beneficially owned as of February 3, 1999, by (a) each person known by the
Corporation to beneficially own more than 5% of the outstanding Common Stock,
(b) each director or executive officer of the Corporation, and (c) all directors
and executive officers of the Corporation as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP(1) OF CLASS(2)
------------------- ----------------- -----------
<S> <C> <C>
(a) National Safety Associates, Inc. 2,336,180(3) 49.8
4260 East Raines Road
Memphis, TN 38118
A. Jay Martin 2,755,135(4) 58.7
4260 East Raines Road
Memphis, TN 38118
L.F. Swords 2,474,266(5) 52.7
4260 East Raines Road
Memphis, TN 38118
(b) A. Jay Martin 2,755,135(4) 58.7
L.F. Swords 2,474,266(5) 52.7
George R. Poteet 164,041 3.5
4260 East Raines Road
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
William L. Gurner -0- *
40 South Main Street
Memphis, TN 38103
John Greenham 7,000 *
80 Park Street
Camberley
GU15 3PT
Surrey, England
Stan C. Turk 4,700 *
4260 East Raines Road
Memphis, TN 38118
(c) Officers and directors 3,133,495(4) 66.7
as a group (8 persons)
</TABLE>
- -------------------------
(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. Does not include shares of Common
Stock underlying options which are not exercisable within 60 days.
(2) Based upon 4,695,036 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%.
29
<PAGE> 38
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE LISTED
INDIVIDUALS AS DIRECTORS OF THE CORPORATION.
(PROPOSAL 3)
SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed, subject to ratification by the
shareholders at the Meeting, the firm of Deloitte & Touche LLP as independent
public accountants to audit the consolidated accounts of the Corporation and its
subsidiaries for the fiscal year ending April 30, 1999. An affirmative vote of a
majority of the shares of Common Stock voting at the Meeting is required to
ratify the selection of Deloitte & Touche LLP. Representatives of Deloitte &
Touche LLP are expected to be present at the Meeting with the opportunity to
make a statement and to respond to appropriate questions. An "abstention"
(including broker "non-votes") will be considered present for quorum purposes,
but will not be counted as a vote either "for" or "against" the ratification of
the selection of the independent accountants and auditors. A "broker non-vote"
refers to shares represented at the Special Meeting in person or by proxy by a
broker or nominee where such broker or nominee (i) has not received voting
instructions on a particular matter from the beneficial owners or persons
entitled to vote and (ii) the broker or nominee does not have the discretionary
voting power on such matter.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
SELECTION OF DELOITTE & TOUCHE LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE
CORPORATION FOR THE FISCAL YEAR ENDING APRIL 30, 1999.
30
<PAGE> 39
BUSINESS OF THE CORPORATION
GENERAL
The Corporation sells consumer products domestically and internationally
primarily to third party distributors ("Master Distributors") who utilize
multi-level and/or direct selling marketing systems. The Corporation's products
include nutritional products, air and water filtration systems, and a sparkling
water system, all of which were designed principally for individual use. The
Corporation's products are proprietary, and most were developed by or for the
Corporation or an affiliated entity. In the United States, the Corporation
sells its products to NSA for resale to NSA's dealers and distributors. Outside
the United States, the Corporation sells its products to Master Distributors
for retail distribution through local representative agents, dealers, and
distributors in Canada, the United Kingdom, Ireland, The Netherlands, Belgium,
Germany, Switzerland, Austria, Spain, Denmark, Sweden, the Russian Federation,
Australia, New Zealand, Hong Kong, Taiwan, Philippines, Malaysia, Indonesia,
Japan, Paraguay, Chile, Peru, and Costa Rica.
The Corporation continues to maintain its own direct selling operations in
France; however, in May 1998, the Corporation closed its French offices,
although direct selling activities continue in that country. In October 1998,
the Corporation sold its direct selling operations in Italy to a Master
Distributor.
OPERATIONS
Since organization, the Corporation's philosophy has been to pursue
increased revenues through new product lines and market expansion. In order to
reduce the costs associated with product line expansion, the Corporation
shifted the manufacturing of all of its products to unaffiliated manufacturing
organizations. The Corporation adopted a similar approach with regard to market
expansion and support through its Master Distributor Program. The Master
Distributor Program enhances the Corporation's ability to expand into
additional markets more quickly and efficiently and to transfer from the
Corporation to a third party distributor the costs and other burdens associated
with creating the corporate infrastructure required to open and support new
markets. The Corporation intends to continue to enter into distribution
agreements with Master Distributors pursuant to which the Corporation grants to
the Master Distributor the exclusive right to purchase and resell the
Corporation's products in a defined geographic area. These distribution
agreements generally require that certain minimum purchase levels be maintained
by the Master Distributor in order to continue their relationship with the
Corporation. The distribution system or method utilized by the Master
Distributors varies from country to country. Depending on the final terms of
the particular distribution agreement, the Corporation may provide a Master
Distributor with computer support and management consulting services in
addition to selling the Master Distributor products for resale. Likewise, the
distribution agreement may entitle the Corporation to receive a separate
distributorship fee which is calculated on the Master Distributor's product
sales.
In September 1998, the Corporation entered into a distribution agreement
with a Master Distributor for Japan. It is anticipated that the Japanese Master
Distributor will commence sales of certain of the Corporation's products in
Japan in December 1998. Sales of additional products will commence thereafter
pending product approval.
PRINCIPAL PRODUCTS
Nutritional Products
The Corporation sells a line of nutritional products under its Juice
Plus+(R) trademarks which include an encapsulated, concentrated nutritional
supplement product, a chewable version of the encapsulated product, a low
calorie powdered drink mix called Juice Plus+(R) Lite, and a dietary food
supplement called Juice Plus+(R) Thins and a "gummie" version of the
concentrated nutritional supplement called Juice Plus+(R) Gummies. 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+(R) capsules and prepares
the chewable form of the capsules and the Juice Plus+(R) Thins. Another
manufacturer utilizes the powder to produce the Juice Plus+(R) Snack Bars and
Juice Plus+(R) Lite on a purchase order basis for the Corporation.
31
<PAGE> 40
In addition, the Corporation sells nutritional products 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 Corporation
for any reason, the Corporation will be forced to seek out alternative
suppliers, which the Corporation believes will be available.
The Corporation 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 Corporation 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 65% of the Corporation's revenues for
the fiscal year ended April 30, 1998, compared with 56% of the Corporation's
revenues for the fiscal year ended April 30, 1997, and 52% of the Corporation's
revenues for the fiscal year ended April 30, 1996.
Air Filtration Systems
The Corporation sells five different types of air filtration systems, which
are designed to remove a variety of airborne contaminants including smoke,
pollen and dust. The Corporation 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 Corporation'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 6% of the Corporation's revenues
for the fiscal year ended April 30, 1998, compared with 11% of the
Corporation's revenues for the fiscal year ended April 30, 1997 and 13% of the
Corporation's revenues for fiscal year ended April 30, 1996. The Corporation's
air filtration systems, as well as the water filtration systems and the
Sparkling Water System described below, are manufactured for the Corporation by
a third party pursuant to a five-year manufacturing agreement which has
approximately three years remaining. In the event that the aforementioned
manufacturer terminates its relationship with the Corporation for any reason,
the Corporation will be forced to seek out alternative suppliers which the
Corporation believes will be available.
Water Filtration Products
The Corporation'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 replaceable cartridges, the remaining 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 problems.
The cost of water filtration products sold by the Corporation which were
purchased by NSA was approximately $288,000 for the fiscal year ended April 30,
1998. See "Election of Directors - Compensation of Executive Officers and
Directors - Certain Relationships and Related Transactions." Sales of the water
filtration products constituted approximately 14% of the Corporation's revenues
for the fiscal year ended April 30, 1998, compared with 21% of the
Corporation's revenues for the fiscal year ended April 30, 1997, and 14% of the
Corporation's revenues for the fiscal year ended April 30, 1996.
Sparkling Water System
The Corporation sells an in-home counter top carbonation appliance (the
"Sparkling Water System") which discharges carbon dioxide contained in a
refillable tank into liquids. Sales of the Sparkling Water System constituted
approximately 5% of the Corporation's revenues for the fiscal year ended April
30, 1998, compared to 7% of the Corporation's revenues for the fiscal year
ended April 30, 1997, and 5% of the Corporation's revenues for the fiscal year
ended April 30, 1996.
32
<PAGE> 41
Marketing Plans
Since the origination of the Master Distributor Program, the Corporation
has transferred the operations of all of its Canadian and European direct
selling subsidiaries, except its French subsidiary, to independent Master
Distributors. Likewise, the Corporation has expanded its product lines into new
markets. Except for the Direct Selling Subsidiaries, resale and retail
distribution of the Corporation'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 Corporation's
products to retail locations located in the Master Distributors' territory.
Distributors and dealers in a multi-level marketing system are independent
contractors, not employees of 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 Corporation's products. 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 Master Distributors for resale to other dealers or
directly to consumers. Master Distributors and certain of their local
distributors hold training and orientation seminars in their respective
countries. 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 Corporation maintains significant inventory volumes and has no backlog
due to the fact that it attempts to fill dealer, distributor, or Master
Distributor orders within two (2) business days of the date on which the order
was placed. The Corporation'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
operations. The Corporation 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 Corporation relating to accounting,
data processing, legal and regulatory compliance, general management,
administration of benefits, contract and lease negotiations, and other such
matters for which the Corporation requests assistance. In consideration for
these services, the Corporation paid NSA approximately $119,510 for the fiscal
year ended April 30, 1998. In addition, the Corporation pays to NSA any and all
amounts collected by the Corporation from the Corporation's Master Distributors
in exchange for data processing services provided to Master Distributors, as
such services are in fact provided by NSA. The total amount paid to NSA for
such services during the fiscal year ended April 30, 1998 was approximately
$298,330. See "Election of Directors - Compensation of Executive Officers and
Directors - Certain Relationships and Related Transactions." The management
agreements are renewable annually and may be terminated by either party by
giving written notice of termination to the other party.
RELIANCE UPON A FEW CUSTOMERS
Sales to NSA constituted approximately 38% of the Corporation's revenues
for the fiscal year ended April 30, 1998. See "Election of Directors -
Compensation of Executive Officers and Directors - Certain Relationships and
Related Transactions." Sales to the Corporation's Master Distributor for
Germany, Switzerland and Austria, and sales to the
33
<PAGE> 42
Corporation's Master Distributor in Hong Kong constituted approximately 17% and
10%, respectively, of the Corporation's revenues for the fiscal year ended
April 30, 1998. The loss of any of these customers would have a material
adverse effect on the Corporation.
COMPETITION
The products distributed by the Corporation 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 Corporation and 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 Corporation.
PATENTS AND TRADEMARKS
The Corporation owns five domestic patents which relate to the production
of the Sparkling Water System. The Corporation owns domestic trademark
registrations for the trademark "Juice Plus+(R)", and has filed several
additional domestic applications for these trademarks for various goods. The
Corporation has also registered "Juice Plus+(R)" in a number of foreign
jurisdictions, and currently has applications pending in various other foreign
jurisdictions. In fiscal 1998, the Corporation acquired through assignment the
domestic and foreign trademark applications and registrations for "NSA(R)"
owned by NSA in order to improve efficiency in obtaining foreign trademark
registrations.
REGULATION
The Corporation and the Master Distributors are subject to the laws and
regulations of the countries in which they operate 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 Corporation 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
Corporation's European direct selling operations prior to their conversion to
Master Distributorships and will continue to monitor the operations of the
Master Distributors. Although the Corporation's management believes that the
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 Master Distributors'
operations, which in turn could adversely affect the Corporation.
ENVIRONMENTAL
From May 1993, through February 1995, the Corporation manufactured a
majority of its own water filtration products. In connection with its past
manufacturing operations, the Corporation was subject to various federal,
state, and local regulations regarding the discharge of materials into the
environment. Management believes that the Corporation operated in substantial
compliance with such provisions, and the Corporation's compliance with these
provisions did not have a material impact upon the capital expenditures,
earnings or competitive position of the Corporation.
EMPLOYEES
At April 30, 1998, the Corporation had 19 employees. None of the
Corporation's employees are represented by a labor union or collective
bargaining unit. The Corporation considered relations with its employees to be
satisfactory.
34
<PAGE> 43
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to identify a year in the date field. If not
corrected, upon the change of century this could result in a system failure or
miscalculation causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar, normal business activities.
The Corporation currently believes that Year 2000 compliance will not pose
significant operational problems, and the Corporation does not anticipate such
compliance to be material to its financial position or results of operations in
any given year. However, there can be no assurance that the systems of other
companies on which the Corporation may rely will be timely converted or that
the failure to convert by another company will not have an adverse effect on
the Corporation.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
For Geographic Segment Financial Information as to the Corporation's
operations, see Note 8 in the Notes to Consolidated Financial Statements
included with this Proxy Statement.
35
<PAGE> 44
SELECTED FINANCIAL DATA
The selected financial data set forth below for the fiscal years ended
April 30, 1998, 1997, 1996, 1995, and 1994 have been derived from the audited
consolidated financial statements of the Corporation for those years. The
selected financial data set forth below for the six month periods ended October
31, 1998 and 1997 have been derived from the unaudited consolidated financial
statements of the Corporation for those periods and include all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial position and results of operation for those periods. The selected
financial data should be read in conjunction with the consolidated financial
statements and related notes and other financial data included elsewhere
herein.
<TABLE>
<CAPTION>
(In thousands, except for per share data) For the Six months
Ended October 31, For the Years Ended April 30,
--------------------------- ---------------------------------------------
1998 1997 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues $ 13,798 $ 12,090 $ 23,048 $ 36,107 $ 73,150
Costs and expenses 13,971 13,525 27,470 45,939 83,963
--------- --------- --------- --------- ---------
Loss before taxes and cumulative effect
of change in accounting principle (173) (1.435) (4,421) (9,832) (10,813)
Benefit for income taxes -0- -0- (65) (22) (103)
--------- --------- --------- --------- ---------
Net loss before cumulative effect of
change in accounting principle (173) (1,435) (4,156) (9,810) (10,709)
Cumulative effect of change
in accounting principles -0- -0- -0- -0- -0-
--------- --------- --------- --------- ---------
Net loss $ (173) $ (1,435) $ (4,156) $ (9,810) $ (10,709)
========= ========= ========= ========= =========
Loss per common share:
Before cumulative effect of change in
accounting principle $ (.04) $ (.30) $ (.87) $ (2.02) $ (2.20)
Cumulative effect of change in
accounting principle -- -- -- -- --
--------- --------- --------- --------- ---------
Net Loss per common share $ (.04) $ (.30) $ (.87) $ (2.02) $ (2.20)
========= ========= ========= ========= =========
Weighted average number of common
shares outstanding 4,695 4,857 4,763 4,858 4,858
Balance Sheet Data (at period end):
(In thousands)
Total assets $ 19,010 $ 20,059 $ 17,874 $ 22,365 $ 31,274
Current maturities of long term debt -0- -0- -0- -0- -0-
Amounts due to NSA, Inc. 10,922 7,835 9,291 7,793 7,900
Total Shareholders' equity 3,708 6,872 3,881 8,307 10,206
<CAPTION>
(In thousands, except for per share data) For the Years Ended April 30,
----------------------------
1995 1994
--------- ---------
<S> <C> <C>
Net revenues $ 108,689 $ 112,531
Costs and expenses 114,191 115,837
--------- ---------
Loss before taxes and cumulative effect
of change in accounting principle (5,502) (3,306)
Benefit for income taxes (761) (892)
--------- ---------
Net loss before cumulative effect of
change in accounting principle (4,741) (2,414)
Cumulative effect of change
in accounting principles -0- 264
--------- ---------
Net loss $ (4,741) $ (2,150)
========= =========
Loss per common share:
Before cumulative effect of change in
accounting principle $ (.98) $ (.49)
Cumulative effect of change in
accounting principle -- .05
--------- ---------
Net Loss per common share $ (.98) $ (.44)
========= =========
Weighted average number of common
shares outstanding 4,858 4,858
Balance Sheet Data (at period end):
(In thousands)
Total assets $ 44,643 $ 55,138
Current maturities of long term debt -0- 1,006
Amounts due to NSA, Inc. 9,310 12,512
Total Shareholders' equity 20,917 25,660
</TABLE>
36
<PAGE> 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the
consolidated financial statements and the discussion of the Corporation's
business and other detailed information appearing elsewhere herein. All
information is based on the Corporation's fiscal year ending April 30 and
second quarter ending October 31.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED APRIL 30, 1998, 1997 AND 1996
Net Revenues
<TABLE>
<CAPTION>
Fiscal Years
---------------------------------------------------------------------------------
1998 Change 1997 Change 1996
-------------- ------------- ------------- ------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net Revenues $ 23,048 (36.17)% $ 36,107 (50.64)% $ 73,150
Cost and expenses $ 27,469 (40.21)% $ 45,939 (45.29)% $ 83,963
Percentage of net revenues 119.18% 127.23% 114.78%
Net loss $ (4,156) $ (9,810) $(10,709)
Loss per share $ (.87) $ (2.02) $ (2.20)
</TABLE>
The Corporation's declining revenues for fiscal 1998 and 1997 were
primarily the result of the restructuring of its operations which began in 1997
and which included the sale of all of its European direct selling operations,
except for Italy and France. Approximately 75% of the 1998 revenues decline
resulted from the sales of the direct selling operations. The remaining
decrease resulted from a decrease in sales to the Corporation's Master
Distributor in Asia as a result of the Asian economic and currency condition,
coupled with prior year's initial inventory purchases by the Master
Distributors in Europe.
The 1997 restructuring resulted in a 1997 decline in revenues
attributable to the sale of the direct selling operations of approximately
$40,719,000. This decline was partially offset by approximately $5,640,000 from
increased sales to Master Distributors.
Cost and Expenses
<TABLE>
<CAPTION>
Fiscal Years
-----------------------------------------------------------------------------
1998 Change 1997 Change 1996
-------------- ------------- ----------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Dealer/Distributor $ 2,626 (64.86)% $ 7,473 (73.39)% $28,082
commissions and
allowances
Percentage of net revenues 11.39% 20.69% 38.39%
Cost of products sold $ 17,017 (11.42)% $ 19,211 (32.32)% $28,385
Percentage of net revenues 73.83% 53.21% 38.80%
</TABLE>
The decreases in the dealer/distributor commissions and allowances, as
a percentage of net revenues, for 1998 and 1997 resulted primarily from the
sale of direct selling operations and resulting restructuring of the
Corporation's sales method. Due to these changes, dealer/distributor
commissions which would formerly have been paid by the Corporation on such
product sales are now paid directly by the Master Distributors.
37
<PAGE> 46
The 1998 and 1997 increases in the cost of products sold as a
percentage of net revenues resulted from the Corporation's operational changes.
The product sales to the Master Distributors have lower margins than sales
which were previously made through the Corporation's direct selling operations.
<TABLE>
<CAPTION>
Fiscal Years
------------------------------------------------------------------------
1998 Change 1997 Change 1996
--------------- ------------- ---------------- ------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating Expenses $ 8,571 (48.17)% $ 16,537 (37.98)% $26,664
Percentage of net revenues 37.19% 45.80% 36.45%
</TABLE>
The 1998 decline in operating expenses primarily resulted from the
closure of the Corporation's European central office coupled with the 1997
second quarter sales of the European direct selling operations. This decline
was partially offset by an additional $1,000,000 reserve for notes receivable.
The 1997 decline in the Corporation'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 Canadian
operations. This reduction was partially offset by a $2,000,000 reserve
allowance for the Corporation's notes receivable.
<TABLE>
<CAPTION>
Fiscal Years
------------------------------------------------------------------------
1998 Change 1997 Change 1996
-------------- ------------- ---------------- ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest income, net $ 563 (18.99%) $ 695 (7.95%) $ 755
</TABLE>
The 1998 decline in interest income resulted from lower interest from
the re-negotiation of a note receivable and lower average balances of cash and
cash equivalents. The decrease in the 1997 net interest income reflects lower
average balances of cash and cash equivalents.
<TABLE>
<CAPTION>
Fiscal Years
-------------------------------------------------------------------------
1998 Change 1997 Change 1996
---------- ---------- ------------ ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Licensing and management
fees to NSA, Inc. $ 120 (76.05)% $ 501 (68.65)% $1,598
Percentage of net revenues .52% 1.39% 2.18%
</TABLE>
The decreases in the 1998 and 1997 management fees are due to the sale
of several of the Corporation's direct selling operations.
<TABLE>
<CAPTION>
Fiscal Years
---------------------------------------------------
1998 1997 1996
---------------- --------------------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Other income (expense), net $ $ 89 $ 12
302
Percentage of net revenues 1.31% .25% .02%
</TABLE>
The increase in the 1998 other income primarily resulted from
recognition of deferred gains from the sale of the direct selling operations of
$105,000 and from foreign currency translation gains.
The 1997 increase in other income primarily resulted from gains in
foreign currency translation.
38
<PAGE> 47
Restructuring Costs
<TABLE>
<CAPTION>
Fiscal Year
---------------------------------
1998 1997 1996
---- ---- -------
(Dollars in thousands)
<S> <C> <C> <C>
Restructuring costs $ 0 $3,000 $ 0
Percentage of net revenues N/A 8.31% N/A
</TABLE>
The Corporation 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.
Benefit (Provision) for income taxes
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------
1998 1997 1996
------ ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Benefit (provision) for income taxes $ 265 $ 22 $ 103
Effective tax rate 5.99% .22% .95%
</TABLE>
The 1998 tax benefit resulted from the use of operating losses as a
carry-back claim from the Corporation's foreign operations.
The low effective tax rates for each year reflect the inability to
utilize most of the operating losses of the Corporation and its subsidiaries.
Net Loss
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------------
1998 1997 1996
--------- --------- -- -------
(Dollars in thousands)
<S> <C> <C> <C>
Net loss $ (4,156) $ (9,810) $ (10,709)
Loss per share $ (.87) $ (2.02) $ (2.20)
</TABLE>
The Corporation's net loss for 1998 resulted primarily from the
decline in revenues from its Asian Master Distributor as a result of the
economic and currency conditions during the past three operating quarters;
losses in the Corporation's French direct selling operations of $721,182 (the
Corporation closed its offices in France in May, 1998, although direct selling
activities in the country are ongoing); certain relocation expenses of its
current European operations; lack of sales increases of product sold to the
European Master Distributors; and an additional $1,000,000 reserve to the
Corporation's notes receivable.
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 Corporation's required direct
selling operating costs and expenses which exceed its gross margin as a result
of decreased revenues.
39
<PAGE> 48
ITEM 2. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED OCTOBER 31, 1998
AND 1997.
Net Revenue
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------------------- ------------------------------------
1999 Change 1998 1999 Change 1998
------ ------ ------- -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenues $6,684 20.56% $ 5,544 $ 13,798 14.13% $ 12,090
Cost and expenses 6,668 2.73% 6,491 13,970 3.30% 13,524
Percentage of net revenues 99.76% 117.08% 101.25% 111.86%
Net income (loss) 16 (947) (172) (1,434)
Earnings (loss) per share Nil $ (.20) $ (.04) $ (.30)
</TABLE>
The 1999 second quarter increase in net revenues of approximately
$1,140,000 resulted from an increase in domestic sales to NSA.
The increase in the first six months net revenues of approximately
$1,708,000 for 1999 versus 1998 resulted primarily from continued domestic sales
growth. This six month revenue increase was partially offset by approximately
$200,000 as a result of the sale of the Company's Italian direct selling
operations effective October 1, 1998 and the first quarter closure of the
Company's office in France.
Cost and Expenses
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------------------- ------------------------------------
1999 Change 1998 1999 Change 1998
------ ------ ------- -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Dealer/Distributor commissions
and allowances $422 (27.37%) $ 581 $1,150 (13.60%) $ 1,181
Percentage of net revenues 6.31% 10.48% 8.33% 9.77%
Cost of products sold 4,835 13.58% 4,257 9,536 9.01% 8,898
Percentage of net revenues 72.34% 76.78% 69.11% 73.60%
</TABLE>
The decrease in the 1999 second quarter and the first six months
dealer/distributor commissions and allowances principally resulted from the
decline of the Company's sales in Italy and the 1999 first quarter closure of
the Company's office in France.
The decrease in percentage of cost of products sold for the 1999 second
quarter and first six months resulted from increased sales volumes that reduced
product cost, slight increases in the sales price of certain products, and
changes in product mix.
The 1999 second quarter and first six months increase in cost of product
sold primarily resulted from the increase in sales volume.
40
<PAGE> 49
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------------------- ------------------------------------
1999 Change 1998 1999 Change 1998
------ ------ ------- -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Operating Expenses $1,540 (17.91%) $1,876 $3,340 (15.19%) $3,938
Percentage of net revenues 23.04% 33.84% 24.21% 32.57%
</TABLE>
The Company's 1999 second quarter and first six months decline in operating
expenses reflect certain cost and expense reductions resulting from the sale and
closure of certain direct selling operations and offices during the 1999 fiscal
year coupled with the 1998 closure of the Company's central European office in
Amsterdam.
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------------------- ------------------------------------
1999 Change 1998 1999 Change 1998
------ ------ ------- -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 86 (54.50%) $ 190 $ 179 (48.56%) $ 348
</TABLE>
The decrease in the 1999 second quarter and first six months interest
income resulted primarily from the exchange of approximately $2,100,000 notes
receivable for preferred stock in the 1998 second quarter.
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------------------- ------------------------------------
1999 Change 1998 1999 Change 1998
------ ------ ------- -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Management fees
to NSA, Inc. $ 13 (40.91%) $ 22 $ 44 (22.81%) $ 57
Percentage of net revenues .19% .40% .32% .47%
</TABLE>
The decrease in the 1999 second quarter and first six months management
fees is primarily due to the sale of certain of the Company's direct selling
operations.
<TABLE>
<CAPTION>
Second Quarter Six Months
------------------------------- ---------------------------------
1999 1998 1999 1998
------ ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Other income (expense) $ 56 $ 56 $ (79) $ 202
Percentage of net revenues .84% 1.01% (.57%) 1.67%
</TABLE>
The 1999 first six months decrease in other income resulted primarily
from losses in the foreign currency hedging program and in foreign currency
translation adjustments totaling approximately $290,000.
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------------------- ---------------------------------
1999 1998 1999 1998
------ ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Provision for income taxes 0 $ 0 0 $ 0
Effective tax rate 0% 0% 0% 0%
</TABLE>
There were no income tax provisions for the second quarters and first
six months of 1999 and 1998 primarily due to the Company's overall operating
loss carry-forward position.
41
<PAGE> 50
Net Loss
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------------------- ------------------------------------
1999 1998 1999 1998
------ ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income (loss) $ 16 $ (947) $ (172) $ (1,434)
Earnings (loss) per share Nil $ (.20) $ (.04) $ (.30)
</TABLE>
The 1999 second quarter income primarily resulted from the increase in
net revenues coupled with the decrease in the Company's product costs and
operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
Six Months Ended October 31
------------------------------
1999 1998
------- -------
(Dollars in thousands)
<S> <C> <C>
Cash and cash equivalents $ 3,006 $ 4,440
Short-term investments 1,243 155
Working capital 1,339 3,706
Cash used by operating activities (1,286) (1,355)
Cash provided (used) by investing activities 542 (17)
Cash provided by financing activities 1,630 40
</TABLE>
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
at satisfactory terms.
MARKET PRICE FOR COMMON STOCK; DIVIDENDS
MARKET INFORMATION
The Corporation's Common Stock previously was quoted and traded on the
Nasdaq National Market under the symbol "NSAI." On December 2, 1997, the Board
of Directors resolved to terminate the listing of the Common Stock on the
Nasdaq National Market and to approve listing on the OTC Bulletin Board.
Termination of the Corporation's listing on the Nasdaq National Market became
effective on March 16, 1998. As such, an established public trading market
currently does not exist for the Common Stock, but a few brokers make a market
from time to time over-the-counter. The following table sets forth the high and
low bid quotations for the Common Stock as reported on the Nasdaq National
Market and the OTC Bulletin Board, as applicable, for the periods indicated.
42
<PAGE> 51
<TABLE>
<CAPTION>
HIGH LOW
----- ------
<S> <C> <C>
FISCAL 1999
First Quarter 1 1/2 1 1/4
Second Quarter 1 1/2 43/64
FISCAL 1998
First Quarter 2 1 9/16
Second Quarter 2 7/32 1 7/16
Third Quarter 2 1 1/4
Fourth Quarter 1 1/2 1
FISCAL 1997
Third Quarter 2 1/4 1 1/2
Fourth Quarter 2 1/8 5/8
</TABLE>
On January 27, 1999 the last reported bid quotation Common Stock on
the OTC Bulletin Board was $7/8 per share. This quotation was taken from
the National Quotation Bureau Report with the quote supplied by the National
Association of Securities Dealers, Inc. through the OTC Bulletin Board. The
quotation represents an interdealer price without retail markup, markdown, or
commission and may not necessarily represent an actual transaction. The
Corporation publicly announced the cash consideration of $1 1/8 per share to be
paid in lieu of the issuance of fractional shares pursuant to the Reverse Stock
Split on November 13, 1998. On November 12, 1998, the last day before the
announcement on which shares of the Common Stock were traded, the last reported
bid quotation was $0.96875 per share.
TRANSACTIONS IN COMMON STOCK
Neither the Corporation nor any of the officers, directors or
affiliates have purchased or sold any shares of Common Stock in the last sixty
(60) days.
DIVIDENDS
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 Corporation's dividend policy will depend on its
earnings, financial condition, and other factors deemed relevant by the Board
of Directors. The Board of Directors presently intends to retain future
earnings, if any, to finance the growth of the Corporation's business.
EXPENSES OF SOLICITATION
The Corporation will pay the total expense of preparing, assembling,
printing, and mailing proxies and proxy solicitation materials. It may be that,
following the original solicitation, some further solicitation will be made by
telephone or other communications with some shareholders. All such further
solicitation will be made by officers and directors of the Corporation, who
will not receive additional compensation for such activities.
43
<PAGE> 52
SHAREHOLDER PROPOSALS
Shareholders' proposals intended to be presented at the next annual
meeting of shareholders must be received by the Corporation at its executive
offices on or before June 30, 1999 to be included in the proxy statement and
form of proxy relating to that meeting.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the 1934 Act requires the Corporation's officers and
directors and persons who own more than 10% of a registered class of the
Corporation's equity securities to file reports of ownership and changes in
ownership with the SEC. Such officers, directors and shareholders are required
by SEC regulations to furnish the Corporation with copies of all such reports
that they file.
Based solely on a review of copies of reports furnished to the
Corporation, the Corporation believes that, during the fiscal year ended April
30, 1998, all persons subject to the reporting requirements of Section 16(a)
filed the required reports on a timely basis.
OTHER MATTERS
At the time of preparation of this Proxy Statement, the Board of
Directors has not been informed and is not aware of any matters to be presented
for action at the Meeting other than the matters listed in the Notice of
Meeting included with this Proxy Statement. If any other matters should come
before the Meeting, or any adjournment thereof, it is intended that the persons
named in the enclosed proxy will have discretionary authority to vote on such
matters according to their best judgment.
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K
A copy of the Corporation's Annual Report on Form 10-K, including the
financial statements and schedules thereto, which is filed with the Securities
and Exchange Commission, is available without charge upon written request to
Stan C. Turk, Chief Financial Officer, NSA International, Inc., 4260 East
Raines Road, Memphis, Tennessee 38118. Each such written request must set forth
a good faith representation that as of the record date, February 3, 1999, the
person making the request was a beneficial owner of shares of the Common Stock
entitled to vote at the Meeting. Exhibits to the Form 10-K will also be
supplied upon the written request to the Chief Financial Officer and payment
the Corporation of its cost of furnishing the requested exhibits. The copy of
the Form 10-K furnished without charge to the requesting shareholder will be
accompanied by a list briefly describing all of the exhibits and indicating the
cost of furnishing the exhibits.
ADDITIONAL INFORMATION
The Corporation is subject to the informational requirements of the
1934 Act and in accordance therewith files reports, proxy statements, and other
information with the SEC. Such reports, proxy statements, and other information
can be inspected and copied at the public reference facilities of the SEC at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and
at the regional offices of the SEC located at 7 World Trade Center, 13th Floor,
Suite 1300, New York, New York 10048 and Suite 1400, Citicorp Center, 14th
Floor, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
materials can also be obtained at prescribed rates by writing to the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549.
This Proxy Statement includes information required by the SEC to be
disclosed pursuant to Rule 13e-3 under the 1934 Act, which governs so called
"going private" transactions by certain issuers or their affiliates. In
accordance with that rule, the Corporation has filed with the SEC, under the
1934 Act, a Rule 13e-3 Transaction Statement with respect to the Reverse Stock
Split. This Proxy Statement does not contain all of the information set forth
in the Rule 13e-3 Transaction Statement, parts of which are omitted in
accordance with the regulations of the SEC. The Rule 13e-3 Transaction
Statement, and any amendments thereto, including exhibits filed as a part
thereof, will be available for inspection and copying at the offices of the SEC
as set forth above.
44
<PAGE> 53
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF NSA INTERNATIONAL, INC. AND SUBSIDIARIES:
<S> <C>
Report of Independent Certified Public Accounts ............................................... F-1
Consolidated Balance Sheets as of April 30, 1998 .............................................. F-2
Consolidated Statements of Operations for the Years Ended April 30, 1998, 1997 and 1996 ....... F-3
Consolidated Statements of Shareholders' Equity for the Years
Ended April 30, 1998, 1997 and 1996 .................................................. F-4
Consolidated Statements of Cash Flows for the Years Ended April 30, 1998, 1997 and 1996 ....... F-5
Notes to Consolidated Financial Statements .................................................... F-6
Consolidated Balance Sheets as of October 31, 1998 (unaudited) and April 30, 1998 ............. F-16
Consolidated Statements of Operations for the Six Month Periods
Ended October 31, 1998 and 1997 (unaudited) .......................................... F-17
Consolidated Statements of Shareholders' Equity for the Six Month Periods
Ended October 31, 1998 and 1997 (unaudited) .......................................... F-18
Consolidated Statements of Cash Flows for the Six Month Periods
Ended October 31, 1998 and 1997 (unaudited) .......................................... F-19
Notes to Consolidated Financial Statements (unaudited)......................................... F-20
</TABLE>
45
<PAGE> 54
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, 1998 and
1997 and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended April 30,
1998. 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, 1998 and 1997 and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
1998 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Memphis, Tennessee
July 17, 1998
F-1
<PAGE> 55
NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,121,058 $ 5,771,563
Short-term investments 1,509,004 10,754
Receivables, net 3,078,385 2,972,636
Refundable income taxes 304,000 690,000
Inventories, net 6,587,848 7,104,869
Deferred income taxes 15,000 32,000
Notes receivable - short-term 414,000 550,000
Other current assets 163,996 265,078
------------ ------------
Total current assets 14,193,291 17,396,900
PROPERTY AND EQUIPMENT, At cost:
Leasehold improvements 37,837 195,862
Manufacturing equipment 456,062 455,850
Office furniture and equipment 890,906 1,043,222
Data processing equipment 593,600 558,148
------------ ------------
Total 1,978,405 2,253,082
Less accumulated depreciation and amortization (1,381,910) (1,326,684)
------------ ------------
Property and equipment, net 596,495 926,398
LONG-TERM NOTES RECEIVABLE AND PREFERRED STOCK 2,079,303 2,945,007
OTHER ASSETS 1,005,250 1,096,200
------------ ------------
TOTAL ASSETS $ 17,874,339 $ 22,364,505
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Amounts due to NSA, Inc. $ 9,291,356 $ 7,793,387
Accounts payable, trade 913,567 913,452
Accrued sales commissions and allowances 116,631 246,603
Accrued compensation and expenses 2,005,484 2,834,976
Accrued sales returns 60,038 368,611
Advance payments by dealers/distributors 12,564 95,714
Income taxes payable 321,000 656,000
Other current liabilities 143,585 186,981
============ ============
Total current liabilities 12,864,225 13,095,724
DEFERRED INCOME TAXES 15,000 32,000
OTHER LIABILITIES 1,114,608 929,518
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.05 par value, 100,000,000 shares authorized, 4,695,036 and 4,858,156
shares outstanding at April 30, 1998 and 1997, respectively 234,752 242,908
Additional paid-in capital 28,844,804 29,106,950
Deficit (25,199,050) (21,042,595)
------------ ------------
Total shareholders' equity 3,880,506 8,307,263
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,874,339 $ 22,364,505
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 56
NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED APRIL 30, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
NET REVENUES:
Net sales $ 22,213,226 $ 35,424,937 $ 70,831,868
Dealer/distributor fee income 835,116 682,374 2,318,464
------------ ------------ ------------
Total 23,048,342 36,107,311 73,150,332
COSTS AND EXPENSES:
Dealer/distributor commissions and allowances (2,626,047) (7,472,932) (28,082,083)
Cost of products sold (17,017,759) (19,211,498) (28,385,494)
Operating expenses (8,571,453) (16,536,955) (26,663,852)
Licensing and management fees to NSA, Inc. (119,510) (500,873) (1,597,737)
Restructuring costs (3,000,000)
Interest income, net 563,070 694,506 754,835
Other income, net 301,902 88,913 11,514
------------ ------------ ------------
Total (27,469,797) (45,938,839) (83,962,817)
------------ ------------ ------------
LOSS BEFORE INCOME TAX BENEFIT (4,421,455) (9,831,528) (10,812,485)
INCOME TAX BENEFIT 265,000 22,000 103,000
------------ ------------ ------------
NET LOSS $ (4,156,455) $ (9,809,528) $(10,709,485)
============ ============ ============
BASIC LOSS PER COMMON SHARE $ (0.87) $ (2.02) $ (2.20)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,763,335 4,858,156 4,858,156
============ ============ ============
TRANSACTIONS WITH NSA, INC. INCLUDED
IN THE ABOVE:
Net sales to NSA, Inc. $ 8,774,000 $ 9,361,000 $ 11,588,030
Cost of products sold (purchased from NSA, Inc.) 288,000 45,596 1,162,501
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 57
NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED APRIL 30, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
---------------------------- Additional
Number Paid-in
of Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
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
Net loss (4,156,455) (4,156,455)
Repurchase and retirement of common stock (163,120) (8,156) (262,146) (270,302)
---------- ------------ ------------ ------------ -----------
BALANCES AT APRIL 30, 1998 4,695,036 $ 234,752 $ 28,844,804 $(25,199,050) $ 3,880,506
========== =========== ============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 58
NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,156,455) $ (9,809,528) $(10,709,485)
Adjustments to reconcile net loss to net cash used by operations:
Non cash restructuring charges 475,000
Depreciation and amortization 265,570 562,441 977,014
Provision for uncollectible notes receivable 1,000,000 2,000,000
Loss on sale or disposal of property and equipment 141,420 214,473 132,401
(Gain) loss on sale of short-term investments 2,293 (6,902)
Change in deferred income taxes (197,000)
Recognition of deferred gain on notes receivable 105,000
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 (105,749) (1,133,143) 187,528
Inventories 517,021 3,128,289 2,005,948
Other assets (147,968) 367,669 579,316
Accounts payable, trade 115 (1,643,079) 191,515
Accrued sales returns (308,573) (827,531) (589,466)
Advance payments by dealers/distributors (83,150) (9,365) (274,317)
Accrued expenses, other (959,464) (3,180,169) (2,368,413)
Income taxes payable and refundable 51,000 (373,051) 2,137,400
Other current liabilities (43,396) (254,319) 79,427
Other liabilities 185,090 (129,144) 1,000,000
----------- ------------ ------------
Net cash used in operating activities (3,749,539) (10,609,164) (6,855,034)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (1,498,250)
Proceeds from sale of short-term investments 515,200
Purchase of property and equipment (77,087) (39,831) (532,941)
Proceeds from sale of property and equipment 29,119 12,732
Proceeds from principal payments on notes receivable and
redemption of preferred stock 446,704 755,912 500,000
----------- ------------ ------------
Net cash provided by (used in) by investing activities (1,128,633) 745,200 494,991
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock and warrants (270,302) (1,186)
Advances from (to) NSA, Inc. 1,497,969 6,880,757 (487,317)
----------- ------------ ------------
Net cash provided by (used in) financing activities 1,227,667 6,880,757 (488,503)
----------- ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,650,505) (2,983,207) (6,848,546)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,771,563 8,754,770 15,603,316
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,121,058 $ 5,771,563 $ 8,754,770
=========== ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ Nil $ Nil $ 3,381
Income taxes refunded, net 162,000 Nil 2,045,400
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
See discussion of non cash investing and financing activities at Notes 3 and 7.
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 59
NSA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------
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
("Master Distributors") and its direct multi-level marketing network
outside the United States and through National Safety Associates, Inc.'s
("NSA, Inc.") 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 AND FAIR VALUE OF FINANCIAL INSTRUMENTS -
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash equivalents, short-term
investments, foreign exchange forward contracts, receivables, including
notes receivable, and preferred stock. Substantially all 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 and preferred stock, management believes
credit risk beyond that already provided for is limited due to geographic
dispersion and, for notes receivable and preferred stock, collateral
backing. Regarding the Company's financial instruments, management
believes that their recorded value, after consideration of related
allowances, approximates their fair value.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out basis) or market and consisted of the following at April 30,
1998 and 1997:
F-6
<PAGE> 60
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Raw materials $ 2,040,031 $ 1,784,662
Finished goods 5,778,977 5,615,235
Accessories 756,425 806,704
----------- -----------
Total at cost 8,575,433 8,206,601
Reserve for excess and obsolete inventories (1,987,585) (1,101,732)
----------- -----------
Inventories, net $ 6,587,848 $ 7,104,869
=========== ===========
</TABLE>
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:
<TABLE>
<S> <C>
Office furniture and equipment 2 to 7 years
Leasehold improvements 3 to 10 years
Manufacturing equipment 3 to 7 years
Data processing equipment 5 years
</TABLE>
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.
The Company attempts 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.
F-7
<PAGE> 61
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, 1998, the Company had foreign currency contracts to sell
forward the dollar equivalent of $1,138,000 of Swiss francs and Canadian
dollars, and to buy forward the dollar equivalent of $1,869,000 of
Deutsche marks and British pounds. These contracts generally mature within
one year and have aggregate unrealized gains of approximately $17,000,
which is included in net income. Margin deposits for these contracts total
$41,000 and are included in other current assets. 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 that date.
The foreign currency translation gains, net of the effects of foreign
exchange forward transactions, for the years ended April 30, 1998, 1997,
and 1996 totalled approximately $100,000, $140,000, and $460,000,
respectively.
OTHER ASSETS - Other assets primarily represent the cash surrender value
of officers' life insurance policies.
OTHER LIABILITIES - Other liabilities principally represent amounts
accrued for the excess of future rent expense over estimated sublease
income for two leases, as discussed in Note 5.
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 - Basic loss per common share has been computed by dividing
net loss by the weighted average number of common shares outstanding. The
adoption of Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," had no effect on amounts presented, as no
potentially dilutive securities were outstanding for the years ended April
30, 1998, 1997, and 1996.
NEW ACCOUNTING PRONOUNCEMENT - The Company has not yet adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information," but will be required to do so for the fiscal year ending
April 30, 1999. Management has not yet determined the effects, if any,
adoption of this statement will have on information presented in Note 8.
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.
F-8
<PAGE> 62
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, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Accounts receivable, trade $ 1,685,913 $2,779,995
Fees and interest due from Master Distributors 1,173,372
VAT and other miscellaneous taxes 299,100
Other accounts receivable 155,136
Amounts due under revolving credit agreements 82,767
Less amounts due to dealer/distributors (45,262)
----------- ----------
Total 3,158,385 2,972,636
Less allowance for doubtful accounts (80,000)
----------- ----------
Receivables, net $ 3,078,385 $2,972,636
=========== ==========
</TABLE>
3. DISPOSALS, NOTES RECEIVABLE, AND PREFERRED STOCK
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 European operations had been
unprofitable, having incurred losses for the three consecutive years prior
to the sale. The Buyers are thinly capitalized and did not make a down
payment at closing. These operations represent stand-alone operations and
are not part of any other businesses or operations. At the time of the
transaction, it was understood that the Buyers' ability to pay the notes
was contingent on their ability to generate favorable results of
operations, however, legally, the notes are not contingent on the results
of operations. Given the absence of cash received at closing, the history
of losses, and the Buyers' thin capitalization, the gain on the sales of
$630,000 was deferred. 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. Collections of $250,000 have been received
on the notes since closing and note payments are current as of April 30,
1998.
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.
F-9
<PAGE> 63
At April 30, 1998, the balance of the Polymer's (a former manufacturing
subsidiary) note receivable and preferred stock was $3,530,000 reduced by
the allowance of $2,360,000, resulting in a net carrying value of
$1,170,000. Polymers has not generated cash flows or profitable operations
since inception. Because of the concerns about collectibility of the
original notes and the financial stability of Polymers, during the third
quarter of fiscal 1998, the Company accepted preferred stock with a face
amount of $2,190,000 and a note receivable with a face amount of
$1,500,000 as consideration for its cancellation of a note receivable with
outstanding principal and interest balances totalling $4,190,000. The
Company obtained 4% cumulative non-voting preferred stock, redeemable at
varying rates through 2005 based on certain criteria, including the
Company's level of purchases, and obtained a note receivable bearing
interest at 9% per annum and secured by certain inventories, receivables,
and machinery and equipment of the investor group's company. The net book
value, after consideration of amounts previously reserved as
uncollectible, of the cancelled note receivable is considered to
approximate the fair value of consideration received; therefore, no
significant gain or loss resulted therefrom.
The reserve for uncollectible items of $2,360,000 is based on management's
estimate of the fair value of the preferred stock and new note, which was
based in part on a proposed refinancing arrangement subsequent to year
end, Polymer's history of operating losses, and Polymer's inability to
make note payments. Since the sale of Polymers, approximately $460,000 of
the $810,000 note reductions, excluding write-offs, have come in the form
of minimum purchase commitment shortfall penalties. The minimum purchase
commitment expired in January, 1998. The expiration of the minimum
purchase commitment and Polymer's deteriorating financial condition
necessitated the establishment of the reserve. Polymers ability to pay the
notes receivable is contingent on its ability to generate favorable
results of operations or obtain other financing.
Principal payments on notes receivable and redemptions on preferred stock
relating to the above and prior dispositions are scheduled to be received
as follows:
<TABLE>
<S> <C>
1999 $ 414,000
2000 434,798
2001 478,206
2002 445,906
2003 235,490
Thereafter 3,373,544
-----------
Total 5,381,944
Less:
Allowance for uncollectible items (2,363,641)
Deferred gain (525,000)
Short-term notes receivable (414,000)
-----------
Long-term notes receivable and preferred stock $ 2,079,303
===========
</TABLE>
Based on their rates of interest, security, and other characteristics, and
after consideration of the recorded allowance for uncollectible items,
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:
<TABLE>
<CAPTION>
1998 1997 199
<S> <C> <C> <C>
U.S. $(1,908,547) $(2,226,036) $ (208,892)
Foreign (2,512,908) (7,605,492) (10,603,593)
----------- ----------- ------------
Total $(4,421,455) $(9,831,528) $(10,812,485)
=========== =========== ============
</TABLE>
F-10
<PAGE> 64
The components of the income tax benefit are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ 22,000 $ (62,000)
Foreign $265,000 (32,000)
-------- -------- ---------
Total 265,000 22,000 (94,000)
Deferred - foreign 197,000
-------- -------- ---------
Total $265,000 $ 22,000 $ 103,000
======== ======== =========
</TABLE>
A reconciliation of the Company's actual income taxes for the years ended
April 30, 1998, 1997, and 1996 to that obtained by applying the U.S.
federal statutory income tax rate against pre-tax income is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Federal income tax benefit, at U.S.
federal statutory rate $ 1,503,000 $ 3,342,720 $ 3,676,000
Effect of unused net operating losses (1,238,000) (3,265,867) (3,579,000)
Other differences (54,853) 6,000
----------- ----------- -----------
Income tax benefit $ 265,000 $ 22,000 $ 103,000
=========== =========== ===========
</TABLE>
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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Reserves not currently deductible $ 826,000 $ 1,280,000
Uniform capitalization of inventory 54,000 69,000
Operating loss carryforwards 3,842,000 884,000
----------- -----------
Total 4,722,000 2,233,000
Valuation allowance (4,707,000) (2,201,000)
----------- -----------
Total deferred tax asset 15,000 32,000
Deferred tax liabilities - net foreign currency translation gain 15,000 32,000
----------- -----------
Net deferred tax asset (liability) $ NIL $ NIL
=========== ===========
</TABLE>
The Company has net operating loss carryforwards totalling approximately
$10,977,000 which are available for future reductions of income taxes in
the United States and which expire in 2017. 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.
F-11
<PAGE> 65
The valuation allowance of $4,707,000 and $2,201,000 in 1998 and 1997,
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 increased by $2,506,000 in 1998 and decreased by
$4,825,000 in 1997.
5. LEASES
The Company leases office and warehouse space in the U.K. under two
noncancellable operating leases expiring in 2013 and 2016. In October
1995, the Company abandoned the locations and signed a sublease agreement
with an unrelated party for one of the locations. The other location is
subleased on a month-to-month basis. A loss of approximately $1,000,000,
representing the excess of future rent expense over estimated 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 $1,386,928,
$1,770,351, and $1,684,153 for the years ended April 30, 1998, 1997, and
1996, respectively. In 1998 and 1997, the Company received sublease
rentals of $757,623 and $52,859, respectively.
The future minimum lease payments and related sublease payments receivable
under these agreements are as follows:
<TABLE>
<CAPTION>
Minimum Sublease
Lease Payments
Year Ending April 30 Payments Receivable
<S> <C> <C>
1999 $ 1,315,752 $ 657,375
2000 1,090,801 513,031
2001 529,644 200,496
2002 529,644 200,496
2003 529,644 200,496
Thereafter 6,585,458 4,646,070
----------- ----------
Total $10,580,942 $6,417,964
=========== ==========
</TABLE>
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 1998, 1997, and 1996.
F-12
<PAGE> 66
7. TRANSACTIONS WITH NSA, INC.
At April 30, 1998 NSA, Inc. owns 2,336,180 shares of the Company. Four of
the shareholders of NSA, Inc. also serve as directors of the Company.
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. The Company
is party to licensing and 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 the Company's two
U.K. operating leases which are discussed in Note 5. The annual rental
payments total approximately $500,000, excluding the sublease rentals.
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.
8. GEOGRAPHIC SEGMENT DATA AND MAJOR CUSTOMERS
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
Year Ended April 30, 1998 United States Canada/Mexico Europe Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Total revenues:
Unaffiliated customers $ 2,404,900 $ 11,870,395 $14,275,295
Sales to NSA, Inc. 8,773,047 8,773,047
Interarea sales 984,165 $ (984,165)
------------ ------------ ------------ -----------
Total $ 12,162,112 $ 11,870,395 $ (984,165) $23,048,342
============ ============ ============ ===========
Loss before income taxes $ 1,908,547 $ (53,390) $ 2,566,298 $ 4,421,455
============ =========== ============ ===========
Identifiable assets $ 23,562,802 $ 2,137,318 $ 8,120,646 $(15,978,003) $17,842,763
============ =========== ============ ============ ===========
Corporate assets 31,576
-----------
Total assets $17,874,339
===========
Depreciation and amortization expense $ 32,875 $ 232,695 $ 265,570
============ ============ ===========
Capital expenditures $ 3,567 $ 73,520 $ 77,087
============ ============ ===========
</TABLE>
F-13
<PAGE> 67
<TABLE>
<CAPTION>
Year Ended April 30, 1997 United States Canada/Mexico Europe Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
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
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Year Ended April 30, 1996 United States Canada/Mexico Europe Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
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 $ 27,815 $ 505,126 $ 532,941
=========== ============ ============
</TABLE>
In addition to NSA, Inc., the Company had one major customer in 1998,
accounting for 17% of the Company's total revenue. Another major customer
accounted for 10% of the Company's total revenue in 1997.
9. LITIGATION, COMMITMENTS, AND OTHER CONTINGENCIES
The Company is party to various 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 approximately $395,000 at
April 30, 1998.
The Company has an unused $5,000,000 line of credit at prime which expires
August 31, 1998.
F-14
<PAGE> 68
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 was 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.
11. STOCK OPTION PLAN
On February 18, 1997, the Board of Directors of the Company approved 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. Options on 250,000 of the Company's shares have
been issued under the Plan as of April 30, 1998. No compensation expense
resulted from the issuance of the options as their exercise price equaled
the quoted market price of the Company's stock on the date of grant. These
options are not potentially dilutive securities, as the Company has an
arrangement with NSA, Inc. pursuant to which NSA, Inc. will sell shares
to the Company at the option exercise price.
12. QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
<S> <C> <C> <C> <C>
Year ended April 30, 1998:
Total revenues $ 6,546,608 $ 5,543,726 $ 5,237,708 $ 5,720,300
Gross margin 1,905,327 1,287,286 1,651,160 1,186,810
Net loss (487,081) (947,749) (632,309) (2,089,316)
Basic loss per common share (0.10) (0.20) (0.13) (0.44)
</TABLE>
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
<S> <C> <C> <C> <C>
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)
Basic loss per common share (0.93) (0.17) (0.30) (0.62)
</TABLE>
SIGNIFICANT FOURTH QUARTER ADJUSTMENTS - During the fourth quarters of
fiscal 1998 and 1997, the Company wrote down the value of certain notes
receivable by $1,000,000 and $2,000,000, respectively, to reflect the
estimated collectible amounts. These writedowns were reflected as
operating expenses in the accompanying financial statements.
13. SUBSEQUENT EVENT
Effective May 31, 1998, the Company closed its offices in France. These
operations had total revenues of less than $400,000 during the year ended
April 30, 1998, and costs incurred relating to the closure were not
significant.
*******
F-15
<PAGE> 69
NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1998 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,006,307 $ 2,121,058
Short-term investments 1,242,685 1,509,004
Receivables, net 4,035,602 3,078,385
Refundable income taxes 304,000
Inventories 6,640,905 6,587,848
Deferred income taxes 15,000 15,000
Notes receivable - short-term 551,000 414,000
Other current assets 92,333 163,996
------------ ------------
Total current assets 15,583,832 14,193,291
PROPERTY AND EQUIPMENT, At cost:
Leasehold improvements 37,838 37,837
Manufacturing equipment 456,062 456,062
Office furniture and equipment 384,178 890,906
Data processing equipment 57,555 593,600
------------ ------------
Total 935,633 1,978,405
Less accumulated depreciation and amortization (792,073) (1,381,910)
------------ ------------
Property and equipment, net 143,560 596,495
NOTES RECEIVABLE - LONG-TERM 2,368,240 2,079,303
OTHER ASSETS 914,813 1,005,250
------------ ------------
TOTAL ASSETS $ 19,010,445 $ 17,874,339
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Amounts due to NSA, Inc. $ 10,921,503 $ 9,291,356
Accounts payable, trade 526,902 913,567
Accrued sales commissions and allowances 80,380 116,631
Accrued compensation and expenses 2,229,165 2,005,484
Accrued sales returns 41,319 60,038
Advance payments by dealers/distributors 16,383 12,564
Income taxes payable 269,000 321,000
Other current liabilities 160,306 143,585
------------ ------------
Total current liabilities 14,244,958 12,864,225
DEFERRED INCOME TAXES 15,000 15,000
OTHER LIABILITIES 1,042,453 1,114,608
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.05 par value, 100,000,000 shares authorized,
4,695,036 shares issued and outstanding 234,752 234,752
Additional paid-in capital 28,844,804 28,844,804
Deficit (25,371,522) (25,199,050)
------------ ------------
Total shareholders' equity 3,708,034 3,880,506
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 19,010,445 $ 17,874,339
============ ============
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE> 70
NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED OCTOBER 31, ENDED OCTOBER 31,
---------------------------- ------------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUES:
Net sales $ 6,442,320 $ 5,347,038 $ 13,300,199 $ 11,688,372
Dealer/distributor fee income 241,391 196,688 497,940 401,962
----------- ----------- ------------ ------------
Total 6,683,711 5,543,726 13,798,139 12,090,334
COSTS AND EXPENSES:
Dealer/distributor commissions and allowances (421,250) (580,367) (1,149,469) (1,181,236)
Cost of products sold (4,835,200) (4,256,440) (9,536,245) (8,897,721)
Operating expenses (1,539,508) (1,876,581) (3,340,487) (3,938,339)
Licensing and management fees to NSA, Inc. (12,535) (22,736) (43,675) (57,962)
Interest income, net 85,894 190,151 179,227 348,677
Other income (expense), net 55,281 54,498 (79,962) 201,417
----------- ----------- ------------ ------------
Total (6,667,318) (6,491,475) (13,970,611) (13,525,164)
----------- ----------- ------------ ------------
NET INCOME (LOSS) $ 16,393 $ (947,749) $ (172,472) $ (1,434,830)
=========== =========== ============ ============
INCOME (LOSS) PER COMMON SHARE $ Nil $ (0.20) $ (0.04) $ (0.30)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 4,695,036 4,855,656 4,695,036 4,856,906
TRANSACTIONS WITH NSA, INC. INCLUDED IN THE ABOVE:
Net sales to NSA, Inc. $ 3,206,000 $ 2,188,000 $ 6,185,000 $ 4,262,000
Cost of products sold (purchased from NSA, Inc.) 49,971 127,638 226,062 151,928
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE> 71
NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SIX MONTH PERIODS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- ADDITIONAL
NUMBER PAID-IN
OF SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT APRIL 30, 1997 4,858,156 $ 242,908 $ 29,106,950 $(21,042,595) $8,307,263
Net loss (1,434,830) (1,434,830)
Repurchase and retirement of common stock (2,500) (125) (755) (880)
--------- ----------- ------------ ------------- -----------
BALANCE AT OCTOBER 31, 1997 4,855,656 $ 242,783 $ 29,106,195 (22,477,425) $ 6,871,553
========= =========== ============ ============= ===========
BALANCE AT APRIL 30, 1998 4,695,036 $ 234,752 $ 28,844,804 $(25,199,050) $3,880,506
Net loss (172,472) (172,472)
--------- ----------- ------------ ------------- -----------
BALANCE AT OCTOBER 31, 1998 4,695,036 $ 234,752 $ 28,844,804 $ (25,371,522) $ 3,708,034
========= =========== ============ ============= ===========
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE> 72
NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTH PERIODS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (172,472) $(1,434,830)
Adjustments to reconcile net loss to net cash provided (used) by operations:
Loss on sales of property and equipment 87,096 459
Depreciation and amortization 90,255 135,967
Recognition of deferred gain (105,000)
Changes in assets and liabilities, net of the effects of disposals, as discussed in Note 4:
Receivables, net (957,218) (402,567)
Inventories (317,791) 1,208,906
Other current assets 162,100 (94,932)
Accounts payable (386,664) (180,230)
Liability for sales returns (18,719) (322,941)
Advance payments by dealers/distributors 3,819 (18,677)
Accrued expenses 131,594 (628,318)
Income taxes payable and refundable 252,000 64,121
Other liabilities (55,434) 317,899
----------- -----------
Net cash used in operating activities (1,286,434) (1,355,143)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (purchase of) short-term investments 266,319 (144,636)
Purchases of property and equipment (28,247) (73,022)
Proceeds from receipt of notes receivable 241,519 200,723
Proceeds from sale of property and equipment 61,945
----------- -----------
Net cash provided by (used in) investing activities 541,536 (16,935)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock and warrants (880)
Advances from NSA, Inc. for equipment purchases and working capital 1,630,147 41,569
----------- -----------
Net cash provided by financing activities 1,630,147 40,689
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 885,249 (1,331,389)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,121,058 5,771,563
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,006,307 $ 4,440,174
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ Nil $ 4,700
Income taxes refunded, net 252,000 64,121
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
See discussion of non-cash investing activities at Note 4
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE> 73
NSA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIODS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
1. FINANCIAL STATEMENT PRESENTATION
The consolidated balance sheet as of October 31, 1998, the consolidated
statements of operations for the three month and six month periods ended
October 31, 1998 and 1997, and the consolidated statements of
shareholders' equity and cash flows for the six month periods ended
October 31, 1998 and 1997 have been prepared by the Company, without
audit. It is management's opinion that these statements include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position, results of operations, and cash
flows as of October 31, 1998 and for all periods presented. The results
for the periods presented are not necessarily indicative of the results
that may be expected for the full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K, previously filed with the Securities
and Exchange Commission.
2. INCOME (LOSS) PER SHARE
Amounts shown as income (loss) per share have been computed by dividing
net income (loss) applicable to common shareholders by the weighted
average number of common shares outstanding.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1998 1998
----------- -----------
<S> <C> <C>
Raw materials $ 1,824,084 $ 2,040,031
Finished goods 6,373,429 5,778,977
Accessories 611,489 756,425
----------- -----------
Total at cost 8,809,002 8,575,433
Reserve for excess and obsolete inventory (2,168,097) (1,987,585)
----------- -----------
Total $ 6,640,905 $ 6,587,848
=========== ===========
</TABLE>
4. DISPOSALS
On October 1, 1998, the Company sold its operating rights and certain
inventories and fixed assets in Italy to an unrelated group of investors.
Consideration totalled $633,476, with $50,000 being paid at closing.
Additional payments of $183,476 are due on or before October 1, 1999, with
the balance payable over the following six years and bearing interest at a
rate of 7% per annum.
F-20
<PAGE> 74
5. SUBSEQUENT EVENT
On November 13, 1998, the Company's Board of Directors approved a
one-for-2,400 reverse split of the Company's common stock, $.05 par value
(the "Common Stock"). Pursuant to the proposed reverse stock split, the
number of authorized shares of Common Stock shall be reduced from
100,000,000 shares to 41,666 shares, $120.00 par value (the "New Common
Stock"), and the Company's shareholders shall receive a cash payment of
$1-1/8 per share of the currently outstanding Common Stock in lieu of the
issuance of any resulting fractional shares of New Common Stock. The
Company's Board of Directors will submit the proposed reverse stock split
to the Company's shareholders for approval at an annual and special
meeting of the Company's shareholders scheduled for January 26, 1999.
F-21
<PAGE> 75
APPENDIX A
AMENDED AND RESTATED CHARTER
OF
NSA INTERNATIONAL, INC.
Pursuant to the provisions of Section 48-20-107 of the Tennessee
Business Corporation Act, the undersigned corporation adopts the following
amended and restated charter:
1. The name of the corporation is NSA INTERNATIONAL, INC.
2. The maximum number of shares of common capital stock the
corporation is authorized to issue is Forty-One Thousand, Six Hundred
and Sixty-Six (41,666) with par value $120.00 per share.
3. The maximum number of shares of preferred stock the
corporation is authorized to issue is One Million (1,000,000) at the
par value and with the preferences, limitations, and relative rights of
which will be determined by the Board of Directors. The Board of
Directors is vested with the authority to establish and designate
series and to fix the number of shares to be included in each such
series and the preferences, limitations, and relative rights of each
such series.
4. (a) The complete address of the corporation's registered
office in Tennessee is 2000 First Tennessee Building, 165 Madison
Avenue, Memphis, Tennessee, 38103, County of Shelby.
(b) The name of the registered agent, to be located at the
address listed in 4(a), is G. Robert Morris.
5. The complete address of the corporation's principal office
is 4260 E. Raines Road, Memphis, Tennessee 38118.
6. The corporation is for profit.
7. Directors shall not have personal liability to the
corporation or the corporation's shareholders for monetary damages for
a breach of fiduciary duty as a director. This limitation shall not
eliminate or limit the liability of a director for any breach of a
director's duty of loyalty to the corporation or its shareholders or
for any
<PAGE> 76
acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law or unlawful distributions.
8. The terms of the Board of Directors of the corporation
shall be staggered so that the total number of directors shall be
divided into two classes with each class to serve two-year terms and in
such a manner that each year one-half of the members of the Board of
Directors will be subject to re-election, as provided by T.C.A. ss.
8-18-106.
9. A member of the Board of Directors of the corporation may
be removed by a majority of the shareholders only for cause. A member
of the Board of Directors also may be removed for cause by a majority
of the entire Board of Directors.
10. The affirmative vote of two-thirds of the outstanding
voting stock of the corporation is required in order to:
(a) make future changes in the classes and number of
authorized shares of capital stock of the corporation;
(b) grant preemptive rights to the shareholders of
the corporation;
(c) modify or eliminate the classification of the
Board of Directors; or
(d) modify or eliminate (i) the limitation on the
shareholders' right to remove a director or (ii) the
authorization granted to the Board of Directors to remove a
director for cause.
The date on which the original charter was filed by the Secretary of
State of the State of Tennessee was February 21, 1989. Amended and restated
charters were filed by the Secretary of State on April 14, 1989 and August 6,
1990.
The amended and restated charter was duly adopted at a meeting of the
shareholders on March 4, 1999.
Dated: March 4, 1999
---------------
NSA INTERNATIONAL, INC.
By:
-----------------------------
Title:
--------------------------
- 2 -
<PAGE> 77
APPENDIX B
DISSENTERS' RIGHT OF APPRAISAL
PART I.
SUMMARY OF TENNESSEE RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
The following summary of applicable provisions of Tennessee state law
governing the rights of shareholders is qualified in its entirety by reference
to Part II of this Appendix. Any shareholder entitled to vote on the Reverse
Stock Split has the right to receive payment of the fair value of his/her shares
of Common Stock upon compliance with Sections 48-23-202 and 48-23-204 of the
TBCA.
FILING WRITTEN OBJECTION AND VOTE AGAINST THE REVERSE STOCK SPLIT
A shareholder may not dissent as to less than all of the shares that
the shareholder beneficially owns. A nominee or fiduciary may not dissent on
behalf of any beneficial owner as to less than all of the shares of such
beneficial owner held of record by such nominee or fiduciary. A beneficial owner
asserting dissenters' rights to shares held on such owner's behalf must submit
to the Corporation written consent of the record shareholder of the Corporation
to the dissent not later than the time the beneficial shareholder asserts
dissenters' rights. Any shareholder intending to enforce his or her right to
dissent must not vote in favor of the Reverse Stock Split and must file written
notice of the shareholder's intent to demand payment for the shareholder's
shares (the "Objection Notice") with the Secretary of the Corporation either
before the Meeting or before the vote is taken at the Meeting. The Objection
Notice must state that the shareholder intends to demand payment for the
shareholder's shares of Common Stock if the Reverse Stock Split is approved. A
shareholder who does not satisfy the requirements of Section 48-23-202 of the
TBCA is not entitled to seek payment for his/her shares of Common Stock under
these provisions of the TBCA. A vote against approval of the Reverse Stock Split
will not, in and of itself, constitute an Objection Notice satisfying the
requirements of Section 48-23-202. A failure to vote will not constitute a
waiver of dissenters' rights as long as the requirements of Sections 48-23-101
through 48-23-302 of the TBCA are complied with. ANY SHAREHOLDER WHO EXECUTES A
PROXY CARD AND WHO DESIRES TO PURSUE DISSENTERS' RIGHTS MUST MARK THE PROXY CARD
"AGAINST" OR "ABSTAIN" WITH RESPECT TO THE PROPOSAL RELATING TO THE REVERSE
STOCK SPLIT BECAUSE IF THE PROXY CARD IS LEFT BLANK, IT WILL BE VOTED "FOR" THE
PROPOSAL RELATING TO THE REVERSE STOCK SPLIT. SEE "THE ANNUAL MEETING - VOTING
RIGHTS AND PROXY INFORMATION." FOR CONVENIENCE, A FORM OF WRITTEN NOTICE OF
INTENT TO DISSENT AND DEMAND PAYMENT FOR SHARES IS ATTACHED AS PART III OF THIS
APPENDIX.
NOTICE
If the Reverse Stock Split is approved, the Corporation will forward a
notice (the "Dissenters' Notice") to each shareholder who has filed an Objection
Notice. The Dissenters' Notice will be forwarded within ten (10) days of the
Meeting and will (i) state where dissenting shareholders must (a) send the
Payment Demand (as defined below) and where and when they must (b) deposit their
stock certificates, (ii) inform holders of uncertificated shares of the extent
of any restrictions on the transferability of such shares, (iii) be accompanied
by the form for demanding payment (the "Payment Demand") which includes the date
of the first announcement to the news media or to the Corporation's shareholders
of the terms of the proposed Reverse Stock Split and requires the dissenting
shareholder to certify whether the shareholder acquired beneficial ownership
before that date, (iv) set a date by which the Corporation must receive the
Payment Demand, which may not be fewer than one (1) or more than two (2) months
after the date the Dissenters' Notice is delivered, and (v) be accompanied by a
copy of Sections 48-23-101 through 48-23-302 of the TBCA, if not previously sent
to the dissenting shareholder.
UPON RECEIPT OF A PAYMENT DEMAND, THE CORPORATION SHALL, PURSUANT TO
SECTION 48-23-206, PAY TO EACH DISSENTING SHAREHOLDER WHO HAS COMPLIED WITH THE
REQUIREMENTS OF SECTION 48-23-204 OF THE TBCA THE AMOUNT
<PAGE> 78
THAT THE CORPORATION ESTIMATES TO BE THE FAIR VALUE, $1 1/8, OF THE SHARES OF
COMMON STOCK, PLUS ACCRUED INTEREST. Section 48-23-206 of the TBCA requires the
payment to be accompanied by (i) certain financial statements of the
Corporation, (ii) a statement of the Corporation's estimate of fair value of the
shares and explanation of how the interest was calculated, (iii) notification of
rights to demand payment and (iv) a copy of Sections 48-23-101 through 48-23-302
of the TBCA if not previously sent to the dissenting shareholder. A Payment
Demand may not be withdrawn unless the Corporation consents to such withdrawal.
If the dissenting shareholder believes that the amount paid by the
Corporation pursuant to Section 48-23-206 is less than the fair value of such
shareholder's shares or that the interest due is calculated incorrectly, or if
the Corporation fails to make payment, then the dissenting shareholder may,
within one month after (i) the Corporation made or offered payment for the
shares or failed to pay for the shares or (ii) the Corporation failed to return
deposited stock certificates or release restrictions on uncertificated shares
timely, notify the Corporation in writing of the dissenting shareholder's own
estimate of the fair value of such shares (including interest due) and demand
payment of such estimate (less any payment previously received). Failure to
notify the Corporation in writing of a demand for payment within one (1) month
after the Corporation made or offered payment for such shares will constitute a
waiver of the right to demand payment.
COMMENCEMENT OF JUDICIAL PROCEEDINGS
If the Corporation and the dissenting shareholder cannot agree on a
fair price within two months after the Corporation receives such a demand for
payment, Section 48-23-301 provides that the Corporation will institute judicial
proceedings in a court of record with equity jurisdiction in Shelby County,
Tennessee (the "Court") to fix (i) the fair value of the shares immediately
before the Reverse Stock Split became effective, excluding any appreciation or
depreciation in anticipation of the Reverse Stock Split, and (ii) the accrued
interest. The "fair value" of the Common Stock could be more than, the same as,
or less than that determined by the Board of Directors as described herein. The
Corporation must make all dissenting shareholders whose demands remain unsettled
parties to the proceeding and all such parties must be served with a copy of the
petition. The Court may, in its discretion, appoint an appraiser to receive
evidence and recommend a decision on the question of fair value. The Court is
required to issue a judgment for the amount, if any, by which the fair value of
the shares, as determined by the Court, plus interest, exceeds the amount paid
by the Corporation. If the Corporation does not institute such proceeding within
such two (2) month period, the Corporation shall pay each dissenting shareholder
whose demand remains unsettled the respective amount demanded by each
shareholder.
PAYMENT AND COSTS
The Court will assess the costs and expenses of such proceeding
(including reasonable compensation for and the expenses of the appraiser by
excluding fees and expenses of counsel and experts) against the Corporation,
except that the Court may assess such costs and expenses as it deems appropriate
against any or all of the dissenting shareholders if it finds that their demand
for additional payment was arbitrary, vexatious or otherwise not in good faith.
The Court may assess fees and expenses of counsel and experts in amounts the
Court finds equitable: (i) against the Corporation if the Court finds that the
Corporation did not substantially comply with the relevant requirements of the
TBCA or (ii) against either the Corporation or any dissenting shareholder, if
the Court finds that the party against whom the fees and expenses are assessed
acted arbitrarily, vexatiously or not in good faith. If the Court finds that the
services of counsel for any dissenting shareholder were of substantial benefit
to other dissenting shareholders and that the fees of such counsel should be
assessed against the Corporation, the Court may award reasonable fees to such
counsel to be paid out of amounts awarded to benefitted dissenting shareholder.
NOTICES
Dissenting shareholders of the Corporation should send any
communications regarding their rights to 4260 East Raines Road, Memphis,
Tennessee 38118, Attention: Stan C. Turk, Secretary. All such communications
should be
<PAGE> 79
signed by or on behalf of the dissenting shareholder in the form in which the
shares are registered on the books of the Corporation.
ANY SHAREHOLDER WHO DESIRES TO EXERCISE DISSENTERS' RIGHTS SHOULD CAREFULLY
REVIEW THE TBCA AND IS URGED TO CONSULT SUCH SHAREHOLDER'S LEGAL ADVISOR BEFORE
EXERCISING OR ATTEMPTING TO EXERCISE SUCH RIGHTS. THE FOREGOING IS A SUMMARY OF
THE APPLICABLE PROVISIONS OF THE TBCA WHICH SHAREHOLDERS MUST COMPLY WITH TO
EXERCISE THEIR DISSENTERS' RIGHTS. THIS SUMMARY IS NOT INTENDED TO BE A COMPLETE
STATEMENT OF SUCH PROVISIONS, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH SECTIONS, WHICH ARE INCLUDED AS PART II HEREOF.
PART II.
SECTIONS 48-23-101 THROUGH 48-23-302 OF THE TENNESSEE BUSINESS CORPORATION ACT
SS. 48-23-101. DEFINITIONS.
As used in this chapter, unless the context otherwise requires:
(1) "Beneficial shareholder" means the person who is a beneficial owner
of shares held by a nominee as the record shareholder;
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer;
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under ss. 48-23-102 and who exercises that right when and in
the manner required by part 2 of this chapter;
(4) "Fair value", with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action;
(5) "Interest" means interest from the effective date of the corporate
action that gave rise to the shareholder's right to dissent until the date of
payment, at the average auction rate paid on United States treasury bills with a
maturity of six (6) months (or the closest maturity thereto) as of the auction
date for such treasury bills closest to such effective date;
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation; and
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
SS. 48-23-102. RIGHT TO DISSENT.
(a) A shareholder is entitled to dissent from, and obtain payment of
the fair value of the shareholder's shares in the event of, any of the following
corporate actions:
(1) Consummation of a plan of merger to which the corporation is a
party:
<PAGE> 80
(A) If shareholder approval is required for the merger by ss. 48-21-103
or the charter and the shareholder is entitled to vote on the merger; or
(B) If the corporation is a subsidiary that is merged with its parent
under ss. 48-21-104;
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan;
(3) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders within one
(1) year after the date of sale;
(4) An amendment of the charter that materially and adversely affects
rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the shares;
(B) Creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares;
(C) Alters or abolishes a preemptive right of the holder of the shares
to acquire shares or other securities;
(D) Excludes or limits the right of the shares to vote on any matter,
or to cumulate votes, other than a limitation by dilution through issuance of
shares or other securities with similar voting rights; or
(E) Reduces the number of shares owned by the shareholder to a fraction
of a share, if the fractional share is to be acquired for cash under ss.
48-16-104; or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the charter, bylaws, or a resolution of the board of directors provides
that voting or nonvoting shareholders are entitled to dissent and obtain payment
for their shares.
(b) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(c) Notwithstanding the provisions of subsection (a), no shareholder
may dissent as to any shares of a security which, as of the date of the
effectuation of the transaction which would otherwise give rise to dissenters'
rights, is listed on an exchange registered under ss. 6 of the Securities
Exchange Act of 1934, as amended, or is a "national market system security," as
defined in rules promulgated pursuant to the Securities Exchange Act of 1934, as
amended.
SS. 48-23-103. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(a) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
(1) person and notifies the corporation in writing of the name and address of
each person on whose behalf the record shareholder asserts dissenters' rights.
The rights of a partial dissenter under this subsection are determined as if the
shares as to which the partial dissenter dissents and the partial dissenter's
other shares were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
of any one (1) or more classes held on the beneficial shareholder's behalf only
if the beneficial shareholder:
<PAGE> 81
(1) Submits to the corporation the record shareholder's written consent
to the dissent not later than the time the beneficial shareholder asserts
dissenters' rights; and
(2) Does so with respect to all shares of the same class of which the
person is the beneficial shareholder or over which the person has power to
direct the vote.
SS. 48-23-201. NOTICE OF DISSENTERS' RIGHTS.
(a) If proposed corporate action creating dissenters' rights under ss.
48-23-102 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter and be accompanied by a copy of this chapter.
(b) If corporate action creating dissenters' rights under ss. 48-23-102
is taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in ss. 48-23-203.
(c) A corporation's failure to give notice pursuant to this section
will not invalidate the corporate action.
SS. 48-23-202. NOTICE OF INTENT TO DEMAND PAYMENT.
(a) If proposed corporate action creating dissenters' rights under
ss.48-23-102 is submitted to a vote at a shareholders' meeting, a shareholder
who wishes to assert dissenters' rights must:
(1) Deliver to the corporation, before the vote is taken, written
notice of the shareholder's intent to demand payment for the shareholder's
shares if the proposed action is effectuated; and
(2) Not vote the shareholder's shares in favor of the proposed action.
No such written notice of intent to demand payment is required of any
shareholder to whom the corporation failed to provide the notice required by
ss. 48-23-201.
(b) A shareholder who does not satisfy the requirements of subsection
(a) is not entitled to payment for the shareholder's shares under this chapter.
SS. 48-23-203. DISSENTERS' NOTICE.
(a) If proposed corporate action creating dissenters' rights under
ss. 48-23-102 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of ss. 48-23-202.
(b) The dissenters' notice must be sent no later than ten (10) days
after the corporate action was authorized by the shareholders or effectuated,
whichever is the first to occur, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the principal terms of
the proposed corporate action and requires that the person asserting dissenters'
<PAGE> 82
rights certify whether or not the person asserting dissenters' rights acquired
beneficial ownership of the shares before that date;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than one (1) nor more than two (2) months
after the date the subsection (a) notice is delivered; and
(5) Be accompanied by a copy of this chapter if the corporation has
not previously sent a copy of this chapter to the shareholder pursuant to
ss. 48-23-201.
SS. 48-23-204. DUTY TO DEMAND PAYMENT.
(a) A shareholder sent a dissenters' notice described in ss. 48-23-203
must demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to ss. 48-23-203(b)(3), and deposit the
shareholder's certificates in accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (a) retains all other rights of a
shareholder until these rights are canceled or modified by the effectuation of
the proposed corporate action.
(c) A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this chapter.
(d) A demand for payment filed by a shareholder may not be withdrawn
unless the corporation with which it was filed, or the surviving corporation,
consents thereto.
SS. 48-23-205. SHARE RESTRICTIONS.
(a) The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is effectuated or the restrictions released under
ss. 48-23-207.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the effectuation of the proposed corporate
action.
SS. 48-23-206. PAYMENT.
(a) Except as provided in ss. 48-23-208, as soon as the proposed
corporate action is effectuated, or upon receipt of a payment demand, whichever
is later, the corporation shall pay each dissenter who complied with
ss. 48-23-204 the amount the corporation estimates to be the fair value of
each dissenter's shares, plus accrued interest.
(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for that
year, and the latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair value of the
shares;
(3) An explanation of how the interest was calculated;
<PAGE> 83
(4) A statement of the dissenter's right to demand payment under
ss. 48-23-209; and
(5) A copy of this chapter if the corporation has not previously sent a
copy of this chapter to the shareholder pursuant to ss. 48-23-201 or
ss. 48-23-203.
SS. 48-23-207. FAILURE TO TAKE ACTION.
(a) If the corporation does not effectuate the proposed action that
gave rise to the dissenters' rights within two (2) months after the date set for
demanding payment and depositing share certificates, the corporation shall
return the deposited certificates and release the transfer restrictions imposed
on uncertificated shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation effectuates the proposed action, it must send a
new dissenters' notice under ss. 48-23-203 and repeat the payment demand
procedure.
SS. 48-23-208. AFTER-ACQUIRED SHARES.
(a) A corporation may elect to withhold payment required by ss.
48-23-206 from a dissenter unless the dissenter was the beneficial owner of the
shares before the date set forth in the dissenters' notice as the date of the
first announcement to news media or to shareholders of the principal terms of
the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after effectuating the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall pay this
amount to each dissenter who agrees to accept it in full satisfaction of the
dissenter's demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to demand payment under
ss. 48-23-209.
SS. 48-23-209. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
(a) A dissenter may notify the corporation in writing of the
dissenter's own estimate of the fair value of the dissenter's shares and amount
of interest due, and demand payment of the dissenter's estimate (less any
payment under ss. 48-23-206), or reject the corporation's offer under
ss. 48-23-208 and demand payment of the fair value of the dissenter's shares and
interest due, if:
(1) The dissenter believes that the amount paid under ss. 48-23-206 or
offered under ss. 48-23-208 is less than the fair value of the dissenter's
shares or that the interest due is incorrectly calculated;
(2) The corporation fails to make payment under ss. 48-23-206 within
two (2) months after the date set for demanding payment; or
(3) The corporation, having failed to effectuate the proposed action,
does not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within two (2) months after the date set for
demanding payment.
(b) A dissenter waives the dissenter's right to demand payment under
this section unless the dissenter notifies the corporation of the dissenter's
demand in writing under subsection (a) within one (1) month after the
corporation made or offered payment for the dissenter's shares.
<PAGE> 84
SS. 48-23-301. COURT ACTION.
(a) If a demand for payment under ss. 48-23-209 remains unsettled, the
corporation shall commence a proceeding within two (2) months after receiving
the payment demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the two-month period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
(b) The corporation shall commence the proceeding in a court of record
having equity jurisdiction in the county where the corporation's principal
office (or, if none in this state, its registered office) is located. If the
corporation is a foreign corporation without a registered office in this state,
it shall commence the proceeding in the county in this state where the
registered office of the domestic corporation merged with or whose shares were
acquired by the foreign corporation was located.
(c) The corporation shall make all dissenters (whether or not residents
of this state) whose demands remain unsettled, parties to the proceeding as in
an action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one (1) or
more persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or in any amendment to it. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to
judgment:
(1) For the amount, if any, by which the court finds the fair value of
the dissenter's shares, plus accrued interest, exceeds the amount paid by the
corporation; or
(2) For the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under ss. 48-23-208.
SS. 48-23-302. COURT COSTS AND COUNSEL FEES.
(a) The court in an appraisal proceeding commenced under ss. 48-23-301
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under ss. 48-23-209.
(b) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable
against:
(1) The corporation and in favor of any or all dissenters if the court
finds the corporation did not substantially comply with the requirements of part
2 of this chapter; or
(2) Either the corporation or a dissenter, in favor of any other party,
if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefited.
<PAGE> 85
PART III.
OBJECTION NOTICE
NOTICE OF INTENT TO DISSENT AND DEMAND PAYMENT FOR SHARES
I/We _________________________, record shareholder(s) of __________
shares of NSA International, Inc. common stock, $.05 par value("Common Stock")
evidenced by certificate number(s) ___________, hereby give notice of my/our
intent to dissent and demand payment for my/our shares in accordance with the
Tennessee Business Corporation Act, Section 48-23-202. If the proposed
one-for-twenty four hundred reverse stock split is approved at the shareholders'
meeting to be held at the East Memphis Hilton, 5069 Sanderlin Avenue, Memphis,
Tennessee 38117 on Thursday, March 4, 1999, the undersigned understands that a
vote for the proposed reverse stock split, either in person or by proxy, by the
undersigned will terminate the undersigned's right to seek appraisal.
-----------------------------------------
Signature
-----------------------------------------
Signature (if jointly held)
-----------------------------------------
Title (if applicable)
-----------------------------------------
Certificate Number(s)
(If held in Street Name, so indicate)
-----------------------------------------
Print Name(s) of Shareholder(s)
(Please sign exactly as your printed name
appears on the accompanying Proxy. When
signing as attorney, executor,
administrator, trustee or guardian, please
give your full title. If shares are held
jointly, each holder should sign.)
<PAGE> 86
APPENDIX C
[ASSET SERVICES LETTERHEAD]
October 5, 1998
The Board of Directors
NSA International, Inc.
4260 East Raines Road
Memphis, TN 38118
Gentlemen:
NSA International, Inc. ("NSAI") and its Board of Directors have approved a
transaction which will enable the Company to transform itself from a public
entity to a private one. The Board of Directors of NSAI has asked for an opinion
with respect to the fairness to the shareholders of NSAI who will be required to
sell their shares back to the Company as a result of the proposed reverse stock
split.
In arriving at our opinion, we have (i) reviewed the audited financial
statements of NSAI for the last five years ended April 30, 1998, as well as the
results for the three months ended July 31, 1998; (ii) reviewed and analyzed
internal financial information regarding the expected performance of the Company
for fiscal 1999; (iii) reviewed the Company's corporate minutes and related
documents; (iv) reviewed Tennessee case law dealing with valuation of business
interests; (v) met with the Company's Board and outside counsel; (vi) held
discussions with senior executives of NSAI; and (vii) made such other studies,
analyses, and inquiries as we deemed relevant.
In connection with our opinion, we have assumed and relied upon, without
independent verification, the accuracy and completeness of the financial data
and other information that was provided to us by the management of NSAI or
otherwise publicly available. We did not obtain any independent appraisals of
the assets owned by NSAI. While we believe that our review as described here is
an adequate basis for the opinion we expressed, this opinion is necessarily
based upon market, economic and other conditions as they exist and can be only
evaluated as of the date of this letter.
Based on and subject to the foregoing considerations, it is our opinion as
investment bankers, that the consideration of $1.1250 to be received by the
shareholders of NSAI for the shares sold back to Company as a result of the
reverse stock split is fair from a financial point of view and would be
considered as fair value under the laws of Tennessee.
Sincerely yours,
ASSET SERVICES, L.P.
John W. Slater, Jr.
Managing Partner
<PAGE> 87
APPENDIX D
November 13, 1998
The Special Committee of the Board of Directors
NSA International, Inc.
c/o Mr. Lawson Apperson
Attorney at Law
Wyatt, Tarrant & Combs
P.O. Box 775000
Memphis, Tennessee 38177-5000
Re: Fairness Opinion Regarding the Proposed Reverse Stock Split
by NSA International, Inc.
Dear Directors:
Mercer Capital Management, Inc. ("Mercer Capital") has been retained by the
Special Committee of the Board of Directors of NSA International, Inc. ("NSAI")
to provide our opinion as to the fairness from a financial point of view to the
shareholders of NSAI who will receive cash consideration of $1.125 per share in
lieu of fractional shares as part of a planned one-for-2,400 reverse stock
split. As a result of the transaction, NSAI's shareholder base will decline from
approximately 900 today to less than 300, and thereby allow the Company to go
private.
Mercer Capital, as part of its valuation consulting and investment banking
businesses, is engaged to assist financial institutions and businesses in
merging with and acquiring other entities, and to value businesses and their
securities in connection with mergers and acquisitions, estate tax matters,
private placements, corporate reorganization, and other purposes. We have acted
as the Special Committee's Financial Advisor in connection with the proposed
transaction, but we have not participated in negotiations which established the
consideration to be received by shareholders.
As part of its investigation, representatives of Mercer Capital visited with
NSAI management and counsel to the Independent Committee of the Board of
Directors regarding the transaction, the Company's operations, including its
history, historical and prospective financial performance, and its relationship
with its privately held sister company, National Safety Associates, Inc.
("NSA").
<PAGE> 88
The Board of Directors
November 13, 1998
Page two
Mercer Capital also reviewed and considered the following documents:
1. Draft Rule 13e-3 Transaction Statement and Draft Proxy Statement prepared
for purposes of the contemplated transaction;
2. Annual stockholder reports for the fiscal years ended April 30, 1994-1997;
3. Annual report on Form 10-K for the fiscal years ended April 30, 1994-1998;
4. Proxy statements to shareholders dated September 24, 1993, September 15,
1994, October 3, 1995, November 4, 1996, and December 2, 1997;
5. Quarterly report on Form 10-Q for the quarter ended July 31, 1998;
6. Internally prepared financial statements for the five month period ended
September 30, 1998;
7. Fiscal 1999 budget;
8. Minutes of the Board of Directors meetings;
9. Historical price and volume data for NSAI's publicly traded common shares
for the period April 3, 1993 through November 6, 1998;
10. Tennessee's Fair Value statue as promulgated in Sections 48-23-101 through
48-23-302 of the Tennessee Business Corporation Act and as interpreted in
Tennessee fair value case law; and,
11. Indication of Fair Value of NSA International, Inc., dated September 1998,
by Asset Services, LP.
Mercer Capital neither compiled nor audited NSAI's financial statements; nor
have we independently verified the information reviewed. We have relied upon
such information as being complete and accurate in all material respects. We
have not made an independent valuation of any individual asset, liability, or
adequacy of reserves established for certain assets.
<PAGE> 89
The Board of Directors
November 13, 1998
Page three
With respect to the 1999 budget supplied to us, we have assumed that it was
reasonably prepared on the basis reflecting the best currently available
estimates and judgments of NSAI management. We also assumed that there were no
material changes in the assets, liabilities, financial condition, results of
operations, business or prospects of NSAI since the date of the last financial
statements made available to us.
Our opinion does not constitute a recommendation to any shareholder as to how
the shareholder should vote on the proposed transaction; nor have we expressed
any opinion as to the prices at which any security of NSAI might trade in the
future. The opinion is necessarily based on economic, market, financial and
other conditions as they exist on, and on the information made available to us,
as of the date of this letter. Although it is anticipated that an updated
opinion may be provided to coincide with the mailing of the proxy to
shareholders, Mercer Capital is not obligated to provide such an opinion.
Based upon our analysis of the proposed transaction, it is our opinion as of the
date hereof that the consideration to be paid to NSAI shareholders in lieu of
fractional shares is fair from a financial point of view to the common
shareholders of NSAI.
Sincerely yours,
MERCER CAPITAL MANAGEMENT, INC.
Kenneth W. Patton, ASA
Executive Vice President
<PAGE> 90
APPENDIX E
January 20, 1999
The Special Committee of the Board of Directors
NSA International, Inc.
c/o Mr. Lawson Apperson
Attorney at Law
Wyatt, Tarrant & Combs
P.O. Box 775000
Memphis, Tennessee 38177-5000
Re: Affirmation of our Fairness Opinion Regarding the Proposed Reverse Stock
Split by NSA International, Inc.
Dear Directors:
Mercer Capital Management, Inc. ("Mercer Capital") has been retained by the
Special Committee of the Board of Directors of NSA International, Inc. ("NSAI")
to provide our opinion as to the fairness from a financial point of view to the
shareholders of NSAI who will receive cash consideration of $1.125 per share in
lieu of fractional shares as part of a planned one-for-2,400 reverse stock
split. As a result of the transaction, NSAI's shareholder base will decline
from approximately 900 today to less than 300, and thereby allow the Company to
go private. Mercer Capital previously opined in a letter dated November 13,
1998 that the transaction as of the aforementioned date was fair to
shareholders from a financial point of view.
Mercer Capital, as part of its valuation consulting and investment banking
businesses, is engaged to assist financial institutions and businesses in
merging with and acquiring other entities, and to value businesses and their
securities in connection with mergers and acquisitions, estate tax matters,
private placements, corporate reorganization, and other purposes. We have acted
as the Special Committee's Financial Advisor in connection with the proposed
transaction, but we have not participated in negotiations which established the
consideration to be received by shareholders.
<PAGE> 91
The Board of Directors
January 20, 1999
Page two
As part of its investigation, representatives of Mercer Capital visited with
NSAI management and counsel to the Independent Committee of the Board of
Directors regarding the transaction, the Company's operations, including its
history, historical and prospective financial performance, and its relationship
with its privately held sister company, National Safety Associates, Inc.
("NSA").
Mercer Capital also reviewed and considered the following documents:
1. Draft Rule 13e-3 Transaction Statement and Draft Proxy Statement prepared
for purpose of the contemplated transaction;
2. Annual stockholder reports for the fiscal years ended April 30, 1994-1997;
3. Annual report on Form 10-K for the fiscal years ended April 30, 1994-1998;
4. Proxy statements to shareholders dated September 24, 1993, September 15,
1994, October 3, 1995, November 4, 1996, and December 2, 1997;
5. Quarterly reports on Form 10-Q for the quarters ended July 31, 1998;
6. Internally prepared financial statements for the eight month period ended
November, 1998;
7. Fiscal 1999 budget;
8. Minutes of the Board of Directors meetings;
9. Historical price and volume data for NSAI's publicly traded common shares
for the period April 3, 1993 through January 19, 1999;
10. Tennessee's Fair Value statue as promulgated in Sections 48-23-101 through
48-23-302 of the Tennessee Business Corporation Act and as interpreted in
Tennessee fair value case law; and,
11. Indication of Fair Value of NSA International, Inc., dated September 1998,
by Asset Services, LP.
<PAGE> 92
The Board of Directors
January 20, 1999
Page three
Mercer Capital neither compiled nor audited NSAI's financial statements; nor
have we independently verified the information reviewed. We have relied upon
such information as being complete and accurate in all material respects. We
have not made an independent valuation of any individual asset, liability, or
adequacy of reserves established for certain assets.
With respect to the 1999 budget supplied to us, we have assumed that it was
reasonably prepared on the basis reflecting the best currently available
estimates and judgments of NSAI management. We also assumed that there were no
material changes in the assets, liabilities, financial condition, results of
operations, business or prospectus of NSAI since the date of the last financial
statements made available to us.
Our opinion does not constitute a recommendation to any shareholder as to how
the shareholder should vote on the proposed transaction; nor have we expressed
any opinion as to the prices at which any security of NSAI might trade in the
future. The opinion is necessarily based on economic, market, financial and
other conditions as they exist on, and on the information made available to us,
as of the date of this letter. Although it is anticipated that an updated
opinion may be provided to coincide with the mailing of the proxy to
shareholders, Mercer Capital is not obligated to provide such an opinion.
Based upon our analysis of the proposed transaction, we reaffirm our prior
opinion that as of the date hereof that the consideration to be paid to NSAI
shareholders in lieu of fractional shares is fair from a financial point of
view to the common shareholders of NSAI.
Sincerely your,
MERCER CAPITAL MANAGEMENT, INC.
Jeff K. Davis, CFA, ASA
Senior Vice President
<PAGE> 93
APPENDIX F
PROXY
NSA INTERNATIONAL, INC.
4260 EAST RAINES ROAD
MEMPHIS, TENNESSEE 38118
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints Stan C. Turk or Karen M. Morris with full power of
substitution and revocation as Proxy to vote all shares of stock standing in my
name on the books of NSA International, Inc. (the "Corporation") at the close of
business on February 3, 1999, which I would be entitled to vote if personally
present at the Annual and Special Meeting of Shareholders of the Corporation to
be held at the East Memphis Hilton, 5069 Sanderlin Avenue, Memphis, Tennessee
38117 on March 4, 1999, at 10:00 p.m., local time, and at any and all
adjournments, upon the matters set forth in the notice of said meeting. The
Proxy is further authorized to vote in his or her discretion as to any other
matters which may come before the meeting. The Board of Directors at the time of
preparation of the Proxy Statement knows of no business to come before the
meeting other than that referred to in the Proxy Statement.
THE SHARES COVERED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS GIVEN BELOW AND WHEN NO INSTRUCTIONS ARE GIVEN WILL BE VOTED FOR
THE PROPOSALS DESCRIBED IN THE ACCOMPANYING NOTICE OF ANNUAL AND SPECIAL MEETING
AND PROXY STATEMENT AND ON THIS PROXY.
(1) To approve a proposal (a) to approve and adopt an Amended and Restated
Charter for the Corporation which would effect a one-for-2,400 reverse split
of the Corporation's common stock, $.05 par value (the "Common Stock"), by
reducing the number of authorized shares of Common Stock from 100,000,000
shares to 41,666 shares, $120.00 par value (such new shares of common stock
to be referred to herein as the "New Common Stock") AND (b) for a cash
payment of $1 1/8 per share of the currently outstanding Common Stock in
lieu of the issuance of any resulting fractional shares of New Common Stock
after the reverse stock split.
The Board of Directors recommends a vote FOR the proposal.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) To elect 3 Class I Directors
[ ] FOR all nominees listed below (except as indicated to the contrary below).
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below.
A. Jay Martin Charles R. Evans, Jr. J. Neil Rood
INSTRUCTION: To withhold authority to vote for any individual nominee, write
such nominee's name in the space provided below.
- --------------------------------------------------------------------------------
(3) To ratify the selection of Deloitte & Touche LLP as the Corporations
independent accountants and auditors for the fiscal year ending April 30,
1999.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The undersigned hereby acknowledges receipt of notice of said meeting and
the related Proxy Statement.
Dated: , 1999
----------------------------
-------------------------------
Signature
-------------------------------
Signature (if jointly held)
-------------------------------
Print Name(s) of Shareholder(s)
(Please sign exactly as your
printed name appears hereon.
When signing as attorney,
executor, administrator,
trustee or guardian, please
give your full title. If shares
are held jointly, each holder
should sign.)
