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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________to_______________________________
Commission File Number: 0-19487
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NSA INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1387102
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
4260 East Raines Road, Memphis, Tennessee 38118
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(Address of principal executive offices) (Zip Code)
(901) 541-1223
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
4,858,156 shares of Common Stock, $.05 par value were outstanding at
December 11, 1997.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NSA International, Inc. and Subsidiaries:
Consolidated Balance Sheets as of October 31, 1997 (unaudited) and
April 30, 1997
Consolidated Statements of Operations for the Three Month and Six Month
Periods Ended October 31, 1997 and 1996 (unaudited)
Consolidated Statements of Shareholders' Equity for the Six Month
Periods Ended October 31, 1997 and 1996 (unaudited)
Consolidated Statements of Cash Flows for the Six Month Periods Ended
October 31, 1997 and 1996 (unaudited)
Notes to Consolidated Financial Statements
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NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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OCTOBER 31, APRIL 30,
ASSETS 1997 1997
CURRENT ASSETS:
Cash and cash equivalents $ 4,440,174 $ 5,771,563
Short-term investments 155,390 10,754
Receivables, net 3,375,203 2,972,636
Refundable income taxes 546,671 690,000
Inventories 5,895,963 7,104,869
Deferred income taxes 32,000 32,000
Notes receivable - short-term 783,000 550,000
Other current assets 424,202 265,078
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Total current assets 15,652,603 17,396,900
PROPERTY AND EQUIPMENT, At cost:
Leasehold improvements 194,548 195,862
Manufacturing equipment 456,062 455,850
Office furniture and equipment 890,429 1,043,222
Data processing equipment 590,941 558,148
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Total 2,131,980 2,253,082
Less accumulated depreciation and amortization (1,268,986) (1,326,684)
------------ ------------
Property and equipment, net 862,994 926,398
NOTES RECEIVABLE - LONG-TERM 2,511,284 2,945,007
OTHER ASSETS 1,032,008 1,096,200
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TOTAL ASSETS $ 20,058,889 $ 22,364,505
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Amounts due to NSA, Inc. $ 7,834,956 $ 7,793,387
Accounts payable, trade 733,222 913,452
Accrued sales commissions and allowances 156,017 246,603
Accrued compensation and expenses 2,297,244 2,834,976
Accrued sales returns 45,670 368,611
Advance payments by dealers/distributors 77,037 95,714
Income taxes payable 576,792 656,000
Other current liabilities 225,296 186,981
============ ============
Total current liabilities 11,946,234 13,095,724
DEFERRED INCOME TAXES 32,000 32,000
OTHER LIABILITIES 1,209,102 929,518
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.05 par value, 100,000,000 shares authorized, 4,855,656 and 4,858,156
outstanding, respectively, at October 31, 1997 and April 30, 1997 242,783 242,908
Additional paid-in capital 29,106,195 29,106,950
Deficit (22,477,425) (21,042,595)
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Total shareholders' equity 6,871,553 8,307,263
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 20,058,889 $ 22,364,505
============ ============
See notes to consolidated financial statements.
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NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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THREE MONTHS SIX MONTHS
ENDED OCTOBER 31, ENDED OCTOBER 31,
----------------------------- ------------------------------
1997 1996 1997 1996
NET REVENUES:
Net sales $ 5,347,038 $ 9,269,252 $ 11,688,372 $ 22,604,372
Dealer/distributor fee income 196,688 172,745 401,962 447,351
----------- ----------- ------------ ------------
Total 5,543,726 9,441,997 12,090,334 23,051,723
COSTS AND EXPENSES:
Dealer/distributor commissions and allowances (580,367) (1,584,701) (1,181,236) (6,134,402)
Cost of products sold (4,256,440) (5,041,859) (8,897,721) (11,006,087)
Operating expenses (1,876,581) (3,634,989) (3,938,339) (8,197,908)
Licensing and management fees to NSA, Inc. (22,736) (142,595) (57,962) (389,044)
Interest income, net 190,151 123,943 348,677 246,829
Other income (expense), net 54,498 174,424 201,417 267,576
Restructuring charge (3,000,000)
----------- ----------- ------------ ------------
Total (6,491,475) (10,105,777) (13,525,164) (28,213,036)
----------- ----------- ------------ ------------
LOSS BEFORE INCOME TAXES (947,749) (663,780) (1,434,830) (5,161,313)
INCOME TAX PROVISION (190,532) (200,000)
----------- ----------- ------------ ------------
NET LOSS $ (947,749) $ (854,312) $ (1,434,830) $ (5,361,313)
=========== =========== ============ ============
LOSS PER COMMON SHARE $ (0.20) $ (0.17) $ (0.30) $ (1.10)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 4,855,656 4,858,156 4,856,906 4,858,156
TRANSACTIONS WITH NSA, INC. INCLUDED IN THE ABOVE:
Net sales to NSA, Inc. $ 2,188,000 $ 2,504,000 $ 4,262,000 $ 5,025,000
Cost of products sold (purchased from NSA, Inc.) 127,638 NIL 151,928 293,823
See notes to consolidated financial statements.
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NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SIX MONTH PERIODS ENDED OCTOBER 31, 1997 AND 1996 (UNAUDITED)
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COMMON STOCK
--------------------------- ADDITIONAL
NUMBER PAID-IN
OF SHARES AMOUNT CAPITAL DEFICIT TOTAL
BALANCE AT APRIL 30, 1996 4,858,156 $ 242,908 $ 21,196,430 $ (11,233,067) $ 10,206,271
Net loss (5,361,313) (5,361,313)
Forgiveness of debt by NSA, Inc. 7,910,520 7,910,520
--------- --------- ------------ ------------- ------------
BALANCE AT OCTOBER 31, 1996 4,858,156 $ 242,908 $ 29,106,950 $ (16,594,380) $ 12,755,478
========= ========= ============ ============= ============
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
========= ========= ============ ============= ============
See notes to consolidated financial statements.
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NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTH PERIODS ENDED OCTOBER 31, 1997 AND 1996 (UNAUDITED)
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OCTOBER 31, OCTOBER 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,434,830) $ (5,361,313)
Adjustments to reconcile net loss to net cash provided (used) by operations:
Gain on sales of property and equipment 459
Depreciation and amortization 135,967 383,054
Restructuring charge 3,000,000
Changes in assets and liabilities:
Receivables, net (402,567) (2,791,827)
Inventories 1,208,906 (183,812)
Other current assets (94,932) 231,167
Accounts payable (180,230) (1,574,289)
Liability for sales returns (322,941) (31,282)
Advance payments by dealers/distributors (18,677) (60,682)
Accrued expenses (628,318) (1,782,687)
Income taxes payable and refundable 64,121 (175,799)
Other liabilities 317,899 (292,405)
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Net cash used in operating activities (1,355,143) (8,639,875)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (144,636)
Purchases of property and equipment (73,022) (9,120)
Proceeds from receipt of notes receivable 200,723 50,000
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Net cash provided by (used in) investing activities (16,935) 40,880
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock and warrants (880)
Advances from NSA, Inc. for equipment purchases and working capital 41,569 5,725,948
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Net cash provided by financing activities 40,689 5,725,948
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NET DECREASE IN CASH AND CASH EQUIVALENTS (1,331,389) (2,873,047)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,771,563 8,754,770
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,440,174 $ 5,881,723
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 4,700 $ NIL
Income taxes paid (refunded), net 64,121 (223,310)
See notes to consolidated financial statements.
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NSA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIODS ENDED OCTOBER 31, 1997 AND 1996 (UNAUDITED)
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1. FINANCIAL STATEMENT PRESENTATION
The consolidated balance sheet as of October 31, 1997, the consolidated
statements of operations for the three month and six month periods ended
October 31, 1997 and 1996, and the consolidated statements of
shareholders' equity and cash flows for the six month periods ended
October 31, 1997 and 1996 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, 1997 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. LOSS PER SHARE
Amounts shown as loss per share have been computed by dividing net loss
applicable to common shareholders by the weighted average number of common
shares outstanding.
3. INVENTORIES
Inventories consisted of the following:
OCTOBER 31, 1997 APRIL 30, 1997
Raw materials $ 2,064,657 $ 1,784,662
Finished goods 4,252,844 5,615,235
Accessories 796,433 806,704
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Total at cost 7,113,934 8,206,601
Reserve for excess and obsolete inventory (1,217,971) (1,101,732)
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Total $ 5,895,963 $ 7,104,869
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's discussion should be read in conjunction with the
Consolidated Financial Statements and the discussion of NSA International,
Inc.'s (the "Company") business and other detailed information appearing
elsewhere herein. All information is based on the Company's fiscal quarter ended
October 31.
RESULTS OF OPERATIONS
NET REVENUE
Second Quarter Six Months
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1998 CHANGE 1997 1998 CHANGE 1997
---- ------ ---- ---- ------ ----
(Dollars in Thousands)
Net Revenues $ 5,544 (41.29%) $ 9,443 $ 12,090 (47.55%) $23,052
Cost and expenses 6,491 (35.77%) 10,106 13,524 (52.06%) 28,213
Percentage of net
revenues 117.08% 107.02% 111.86% 122.39%
Net loss 947 854 1434 5361
Earnings (loss) per share $ (.20) $ (.17) $ (.30) $ (1.10)
The 1998 second quarter revenues decreased approximately $1,000,000 from the
1998 first quarter revenues. This second quarter revenue decline resulted from
late summer, early fall seasonal revenue declines that the Company had
previously experienced in Europe. Both the Company's remaining direct selling
operations and sales to its European Master Distributors had revenues decline
from the first quarter of 1998. This was coupled by a sales decline to the
Company's Asian Master Distributor as a result of the changing economic and
currency conditions in that part of the world.
The decrease in the 1998 second quarter and first six months revenues, versus
the 1997 periods, resulted primarily from the sale of certain of the direct
selling operations to the Master Distributors.
COST AND EXPENSES
Second Quarter Six Months
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1998 CHANGE 1997 1998 CHANGE 1997
---- ------ ---- ---- ------ ----
(Dollars in thousands)
Dealer/Distributor commissions
and allowances $ 581 (63.32%) $1,584 $1,181 (80.75%) $ 6,134
Percentage of net revenues 10.48% 16.79% 9.77% 26.61%
Cost of products sold 4,257 (15.57%) 5,042 8,898 (19.15%) 11,006
Percentage of net revenues 76.78% 53.40% 73.59% 47.74%
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The decrease in the 1998 second quarter and first six months' dealer/distributor
commissions and allowances, as a percent of net revenues, primarily reflects the
change in the sales mix caused by the sale of the above mentioned direct selling
operations to the Master Distributors. The 1998 second quarter and first six
months increase in the cost of products sold as a percentage of net revenues
principally occurred for this reason also. Sales made by the Company to its
Master Distributors are lower margin sales which do not incur dealer/distributor
commissions. Sales made by the Company through its direct selling subsidiaries
are at a higher margin, but most of these sales require the payment of
dealer/distributor commissions. The Company's 1998 second quarter cost of sales
increased approximately 3% from the 1998 first quarter cost of sales causes by a
changing product mix as a result of the above net revenue decline.
Second Quarter Six Months
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1998 CHANGE 1997 1998 CHANGE 1997
---- ------ ---- ---- ------ ----
(Dollars in thousands)
Operating Expenses $1,876 (48.39)% $3,635 $3,938 (51.96)% $8,198
Percentage of net revenues 33.84% 38.49% 32.57% 35.56%
The Company's 1998 second quarter and first six months declines in
operating expenses reflect certain cost and expense reductions resulting from
the sale of European direct selling operations in the 1997 second quarter.
Second Quarter Six Months
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1998 CHANGE 1997 1998 CHANGE 1997
---- ------ ---- ---- ------ ----
(Dollars in thousands)
Interest income $190 54.47% $123 $348 41.46% $246
The increase in interest income resulted from the increase in notes
receivables due from the sale of direct selling operations.
Second Quarter Six Months
------------------------------------- -------------------------------------------
1998 CHANGE 1997 1998 CHANGE 1997
---- ------ ---- ---- ------ ----
(Dollars in thousands)
Management fees
to NSA, Inc. $22 (84.62%) $ 143 $ 57 (85.35%) $ 389
Percentage of net revenues .40% 1.51% .47% 1.69%
The management fees decrease is due to the sales of the direct selling
operations.
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Second Quarter Six Months
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1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands)
Other income (expense) $ 56 $ 175 $ 202 $ 268
Percentage of net revenues 1.01% 1.85% 1.67% 1.16%
The decrease in the 1998 second quarter and six months other income results from
losses in foreign currency translation versus foreign currency translation gains
in the same 1997 periods. This 1998 second quarter translation loss was offset
by the recognition of approximately $150,000 of gain on the sale of certain
direct selling operations which was previously deferred.
Second Quarter Six Months
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1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands)
Restructuring Costs $-0- $-0- $-0- $3,000
Percentage of net revenues 13.01%
During the 1997 first quarter, the Company charged $3,000,000 for
expenses to be incurred with the closing of the Company's European Central
Office in Amsterdam and other charges as a result of the sales of the European
direct selling operations.
Second Quarter Six Months
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1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands)
Provision for income taxes 0 $ 191 0 $ 200
Effective tax rate 0% 28.81% 0% 3.88%
The tax provision for the 1997 second quarter and first six months
resulted from taxable income from the Company's domestic operations which could
not be offset by the losses incurred by the Company's European direct selling
subsidiaries.
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Net Loss
Second Quarter Six Months
------------------------------------- ---------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands)
Net loss $ 947 $ 854 $1434 $ 5361
Earning (loss) per share $(.20) $(.17) $(.30) $(1.10)
The 1998 second quarter loss increase from the 1998 first quarter loss
primarily resulted from the revenue decline coupled with the increase in the
Company's product cost.
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended October 31
---------------------------
1998 1997
---- ----
(Dollars in thousands)
Cash and cash equivalents $ 4,440 $ 5,882
Short-term investments 155 13
Working capital 3,706 6,369
Cash used by operating activities (1,355) (8,640)
Cash provided (used) by investing activities (17) 41
Cash provided by financing activities 40 5,726
On March 19, 1997 the Company's Board of Directors authorized the
repurchase of up to $1 million in shares of its Common Stock, $.05 par value,
from time to time on the open market or in privately negotiated purchases.
Currently, the Company has repurchased approximately 76,120 shares of Common
Stock pursuant to this repurchase plan. These shares have yet to be retired and
upon retirement the total outstanding shares will be adjusted.
The Company has sufficient cash on-hand to finance current operations,
and does not anticipate requiring additional funding in excess of the current
cash balances and cash flow generated from operations. If required, management
believes additional funding will be available from financial institutions or
NSA, Inc. at satisfactory terms.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On February 12, 1993, a complaint for injunctive relief and damages was
filed against the Company's affiliate, National Safety Associates, Inc., and
Messrs. A. Jay Martin, L.F. Swords and George R. Poteet, individually, in the
United States District Court for the Northern District of California. On April
5, 1994, the case was moved to the United States District Court for the Western
District of Tennessee. The parties have agreed upon the terms of a settlement
and the wording of a settlement agreement. However, the Court has yet to approve
the parties' settlement. Such approval by the Court is necessary to give effect
the parties' settlement.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
During October, 1997, the Company terminated its agreement with a third
party distributor for retail distribution of the Company's products in
Australia, New Zealand and Fiji. Such termination resulted from the
distributor's failure to adhere to the requirements of its agreement. However,
as of December 1, 1997, the Company contracted with a new third party for the
retail distribution of the Company's products in that same territory.
The Company previously sold substantially all of the assets of NSA
Polymers, Inc., a wholly-owned subsidiary of the Company ("NSA Polymers"), to
the management of NSA Polymers for $5,000,000. The purchase price for the NSA
Polymers assets consisted of a $500,000 cash payment at the closing from the
buyer to NSA Polymers, delivery of the buyer's promissory note in the principal
amount of $500,000 which was due and payable six (6) months following the
closing date, and delivery of the buyer's promissory note in the principal
amount of $4,000,000 which was to be paid over an eight (8) year period (the
"Original Note"). In September, 1997, the Company and the buyer agreed to
restructure the outstanding indebtedness, consisting of both principal and
accrued interest, owed by the buyer as evidenced by the Original Note. At that
time, the balance of principal and interest owed by the buyer under the Original
Note equaled $4,190,000. Pursuant to the such debt restructuring, the buyer
agreed to issue to NSA Polymers 2,190,000 shares of the buyer's preferred stock
at a purchase price of $1.00 per share to be paid by NSA Polymers by the
exchange of $2,190,000 of the aggregate outstanding indebtedness under the
Original Note. The buyer also agreed to execute a revised, replacement note in
the original principal amount of $1,500,000. Appropriate documentation was
executed by the Company, NSA Polymers and the buyer evidencing the proposed debt
restructuring. However, the transaction as yet has not been consummated. Among
other items, the obligation of NSA Polymers to close the transaction is
expressly conditioned upon the acquisition by the buyer of additional financing
from a third party lender satisfactory to NSA Polymers. Although the Company
expects the buyer to obtain such financing prior to the end of the 1997 calendar
year, it is not certain that the buyer will be successful in consummating any
such financing.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (SS. 249.308 OF THIS CHAPTER).
(a) Exhibits.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NSA INTERNATIONAL, INC.
Date: December 11, 1997 By: /s/ Stan C. Turk
-----------------------------
Stan C. Turk
Secretary/Treasurer,
Chief Financial Officer