1
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 January 31, 1998
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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
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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
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation 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.
4,855,656 shares of Common Stock, $.05 par value, were outstanding at
March 13, 1998.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NSA International, Inc. and Subsidiaries:
Consolidated Balance Sheets as of January 31, 1998 (unaudited) and
April 30, 1997
Consolidated Statements of Operations for the Three Month and Nine
Month Periods Ended January 31, 1998 and 1997 (unaudited)
Consolidated Statements of Shareholders' Equity for the Nine Month
Periods Ended January 31, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows for the Nine Month Periods Ended
January 31, 1998 and 1997 (unaudited)
Notes to Consolidated Financial Statements
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NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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JANUARY 31, APRIL 30,
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 2,645,764 $ 5,771,563
Short-term investments 1,719,193 10,754
Receivables, net 2,327,654 2,972,636
Refundable income taxes 16,220 690,000
Inventories 7,050,712 7,104,869
Deferred income taxes 32,000 32,000
Notes receivable - short-term 411,000 550,000
Other current assets 474,119 265,078
----------- -----------
Total current assets 14,676,662 17,396,900
PROPERTY AND EQUIPMENT, At cost:
Leasehold improvements 194,548 195,862
Manufacturing equipment 456,062 455,850
Office furniture and equipment 890,906 1,043,222
Data processing equipment 594,013 558,148
----------- -----------
Total 2,135,529 2,253,082
Less accumulated depreciation and amortization (1,337,893) (1,326,684)
----------- -----------
Property and equipment, net 797,636 926,398
LONG-TERM NOTES RECEIVABLE AND INVESTMENT IN PREFERRED STOCK 3,055,581 2,945,007
OTHER ASSETS 686,841 1,096,200
----------- -----------
TOTAL ASSETS $19,216,720 $22,364,505
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Amounts due to NSA, Inc. $ 8,107,475 $ 7,793,387
Accounts payable, trade 971,115 913,452
Accrued sales commissions and allowances 66,098 246,603
Accrued compensation and expenses 2,062,711 2,834,976
Accrued sales returns 36,484 368,611
Advance payments by dealers/distributors 3,788 95,714
Income taxes payable 378,514 656,000
Other current liabilities 211,455 186,981
----------- -----------
Total current liabilities 11,837,640 13,095,724
DEFERRED INCOME TAXES 32,000 32,000
OTHER LIABILITIES 1,107,836 929,518
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.05 par value, 100,000,000 shares authorized,
4,855,656 and 4,858,156 outstanding at January 31, 1998
and April 30, 1997, respectively 242,783 242,908
Additional paid-in capital 29,106,195 29,106,950
Deficit (23,109,734) (21,042,595)
------------ ------------
Total shareholders' equity 6,239,244 8,307,263
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 19,216,720 $ 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 NINE MONTHS
ENDED JANUARY 31, ENDED JANUARY 31,
---------------------------- ---------------------------
1998 1997 1998 1997
NET REVENUES $ 5,237,708 $ 7,433,358 $ 17,328,042 $ 30,485,081
COSTS AND EXPENSES:
Dealer/distributor commissions and
allowances (663,773) (372,169) (1,845,009) (6,506,571)
Cost of products sold (3,586,548) (4,909,891) (12,484,269) (15,915,978)
Operating expenses (1,662,987) (3,786,482) (5,601,326) (11,984,390)
Interest income, net 138,871 161,859 487,548 408,688
Licensing and management fees to National
Safety Associates, Inc. (30,246) (38,446) (88,208) (427,490)
Restructuring costs (3,000,000)
Other income (expense), net (65,334) (23,872) 136,083 243,704
----------- ----------- ------------ ------------
Total (5,870,017) (8,969,001) (19,395,181) (37,182,037)
----------- ----------- ------------ ------------
LOSS BEFORE INCOME TAXES (632,309) (1,535,643) (2,067,139) (6,696,956)
INCOME TAX BENEFIT (EXPENSE) 95,234 (104,766)
----------- ----------- ------------ ------------
NET LOSS $ (632,309) $(1,440,409) $ (2,067,139) $ (6,801,722)
=========== =========== ============ ============
LOSS PER COMMON SHARE $ (0.13) $ (0.30) $ (0.43) $ (1.40)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 4,855,656 4,858,156 4,856,716 4,858,156
TRANSACTIONS WITH NATIONAL SAFETY
ASSOCIATES, INC. INCLUDED IN THE ABOVE:
Net sales to National Safety Associates, Inc. $ 2,194,000 $ 2,206,000 $ 6,461,000 $ 7,231,000
Cost of products sold (purchased from
National Safety Associates, Inc.) 505 83,669 152,433 348,628
See notes to consolidated financial statements.
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NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTH PERIODS ENDED JANUARY 31, 1998 AND 1997 (UNAUDITED)
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COMMON STOCK
-------------------------- ADDITIONAL
NUMBER PAID-IN
OF SHARES AMOUNT CAPITAL DEFICIT TOTAL
1997
BALANCE AT APRIL 30, 1996 4,858,156 $ 242,908 $ 21,196,430 $ (11,233,067) $ 10,206,271
Net loss (6,801,722) (6,801,722)
Forgiveness of debt by NSA, Inc. 7,910,520 7,910,520
---------- ------------ ------------ ------------- ------------
BALANCE AT JANUARY 31, 1997 4,858,156 $ 242,908 $ 29,106,950 $ (18,034,789) $ 11,315,069
========== ============ ============ ============= ============
1998
BALANCE AT APRIL 30, 1997 4,858,156 $ 242,908 $ 29,106,950 $ (21,042,595) $ 8,307,263
Net loss (2,067,139) (2,067,139)
Repurchase and retirement of common stock (2,500) (125) (755) (880)
---------- ------------ ------------ ------------- ------------
BALANCE AT JANUARY 31, 1998 4,855,656 $ 242,783 $ 29,106,195 $ (23,109,734) $ 6,239,244
========== ============ ============ ============= ============
See notes to consolidated financial statements.
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NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTH PERIODS ENDED JANUARY 31, 1998 AND 1997 (UNAUDITED)
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1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,067,139) $(6,801,722)
Adjustments to reconcile net loss to net cash used
by operations:
Gain on sales of property and equipment 459 113,061
Depreciation and amortization 205,335 524,090
Restructuring costs 3,000,000
Changes in assets and liabilities:
Receivables, net 644,982 (1,928,141)
Inventories 54,157 756,282
Other current and non-current assets 200,318 114,380
Accounts payable, trade 57,663 (1,889,641)
Accrued sales returns (332,127) (249,902)
Other accrued expenses (952,770) (3,846,808)
Advance payments by dealers/distributors (91,926) (88,424)
Income taxes payable/refundable 396,294 70,846
Other liabilities 202,792 (278,798)
----------- -----------
Net cash used in operating activities (1,681,962) (10,504,777)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (1,708,439)
Proceeds from collections of notes receivable 28,426 177,364
Purchases of property and equipment (77,032) (71,475)
----------- -----------
Net cash provided by (used in) investing
activities (1,757,045) 105,889
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock (880)
Advances from NSA, Inc. 314,088 7,510,297
----------- -----------
Net cash provided by financing activities 313,208 7,510,297
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NET DECREASE IN CASH AND CASH EQUIVALENTS (3,125,799) (2,888,591)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,771,563 8,754,770
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,645,764 $ 5,866,179
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 4,700 $ NIL
Income taxes refunded, net 396,294 223,310
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES:
See discussion of non-cash investing activities in Note 4.
See notes to consolidated financial statements.
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NSA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED JANUARY 31, 1998 AND 1997 (UNAUDITED)
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1. FINANCIAL STATEMENT PRESENTATION
The consolidated balance sheet as of January 31, 1998, the consolidated
statements of operations for the three month and nine month periods ended
January 31, 1998 and 1997, and the consolidated statements of
shareholders' equity and cash flows for the nine month periods ended
January 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 January 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. 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:
JANUARY 31, 1998 APRIL 30, 1997
Raw materials $ 2,059,150 $ 1,784,662
Finished goods 5,451,968 5,615,235
Accessories 802,565 806,704
----------- -----------
Total at cost 8,313,683 8,206,601
Reserve for excess and obsolete inventory (1,262,971) (1,101,732)
----------- -----------
Total $ 7,050,712 $ 7,104,869
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4. EXCHANGE OF NOTE RECEIVABLE FOR PREFERRED STOCK AND NEW NOTE RECEIVABLE
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 cancelled note receivable, which bore interest at 8.5%
per annum, originated in conjunction with an investor group's acquisition
of substantially all assets of the Company's former manufacturing
subsidiary, NSA Polymers, Inc. 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 9.0% per annum and secured
by certain inventories, receivables, and machinery and equipment of the
investor group's company. The net book value of the cancelled note
receivable, after consideration of amounts previously reserved as
uncollectible, approximates the fair value of consideration received;
therefore, no gain or loss resulted from the transaction.
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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 the business of NSA
International, Inc. (the "Company") and other detailed information appearing
elsewhere herein. All information is based on the Company's fiscal quarter ended
January 31, 1998.
RESULTS OF OPERATIONS
NET REVENUE
Third Quarter Nine Months
-------------------------------- ----------------------------
1998 Change 1997 1998 Change 1997
---- ------ ----- ---- ------ ----
(Dollars in thousands)
Net Revenues $5,238 (29.53%) $7,433 $17,328 (43.16%) $30,485
Costs and Expenses 5,871 (34.54%) 8,969 19,395 (47.84%) 37,182
Percentage of net revenues 112.08% 120.66% 111.93% 121.97%
Net income (loss) (633) (1,440) (2,067) (6,801)
Earnings (loss) per share $(.13) $(.30) $(.43) $(1.40)
The Company's 1998 third quarter net revenues decreased approximately
$300,000 from its 1998 second quarter net revenues. This decline was caused by
decreases in sales to Master Distributors as a result of the Asian economic and
currency conditions coupled with slight declines in sales to the European Master
Distributors.
Primarily all of the 1998 third quarter revenue decline from the 1997
third quarter revenue resulted from sales declines attributable to the Asian
economic problems and the 1997 third quarter initial inventory purchases by the
European Master Distributors.
The decrease in the first nine months revenues resulted from the sales
of certain direct selling operations in the 1997 second quarter and the above
decline in third quarter Master Distributor revenues.
COST AND EXPENSES
Third Quarter Nine Months
------------------------------ -------------------------
1998 Change 1997 1998 Change 1997
---- ------ ---- ---- ------ ----
(Dollars in thousands)
Dealer/Distributor commissions
and allowances $664 78.49% $372 $1,845 (71.65%) $6,507
Percentage of net revenues 12.68% 5.00% 10.65% 21.34%
Cost of products sold 3,586 (26.97%) 4,910 12,484 (21.56%) 15,916
Percentage of net revenues 68.46% 66.06% 72.05% 52.21%
The 1998 third quarter dealer/distributor commissions and allowances
principally represent the Company's 1998 third quarter direct selling revenues.
The Company's 1997 third quarter dealer/distributor commissions and allowances
did reflect one-time reductions in these expenses resulting from the 1997 second
quarter sale of certain direct selling operations.
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The 1997 second quarter sale of the direct selling operations caused
the decline in the 1998 nine months dealer/distributor commissions and
allowances. The 1998 first nine months increase in the cost of products sold as
a percentage of net revenues principally also occurred for this reason. 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 third
quarter cost of sales increased approximately 2.5% from the 1997 third quarter
cost of sales as a result of a change in the product mix.
Third Quarter Nine Months
---------------------------- --------------------------
1998 Change 1997 1998 Change 1997
---- ------ ---- ---- ------ ----
(Dollars in thousands)
Operating Expenses $1,663 (56.07%) $3,786 $5,601 (53.26%) $11,984
Percentage of net revenues 31.75% 50.94% 32.32% 39.31%
The Company's 1998 third quarter and first nine months declines in
operating expenses reflect expense reductions resulting from the restructuring
and the sale of several of the European direct selling operations in the 1997
second quarter.
Third Quarter Nine Months
------------------------- ------------------------
1998 Change 1997 1998 Change 1997
---- ------ ---- ---- ------ ----
(Dollars in thousands)
Interest income, net $139 (14.20%) $162 $488 19.31% $409
The decrease in 1998 third quarter interest income reflects lower
average balances of cash and cash equivalents. The 1998 first nine month
increase in interest income resulted from the increase in notes receivable.
Third Quarter Nine Months
---------------------------- --------------------------
1998 Change 1997 1998 Change 1997
---- ------ ---- ---- ------ ----
(Dollars in thousands)
Management fees to NSA, Inc. $31 (18.42%) $38 $88 (79.39%) $427
Percentage of net revenues 0.59% 0.51% 0.51% 1.40%
The management fees decrease is due to the sale of certain direct
selling operations.
Third Quarter Nine Months
----------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands)
Other Income $(65) N.M. $(24) $136 N.M. $(244)
Percentage of net revenues (1.24%) (0.32%) .8% .8%
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The 1998 third quarter expense was primarily due to foreign currency
transaction losses. The first nine months gain represents recognition of
approximately a $150,000 gain on the sale of certain direct selling operations
previously deferred.
Third Quarter Nine Months
-------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands)
Restructuring Costs $0 N/A $0 $0 (100.00%) $3,000
Percentage of net revenues 9.84%
During the 1997 first quarter, the Company charged $3,000,000 for
expenses 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.
Third Quarter Nine Months
---------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands)
Benefit (provision) for income taxes $0 (100.00%) $96 $0 (100.00%) $(104)
Effective tax rate 1.29% (0.34%)
The tax benefit for the 1997 third quarter resulted from taxable income
on the Company's domestic operations used to offset certain losses incurred by
the Company's European direct selling subsidiaries.
NET LOSS
Third Quarter Nine Months
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands)
Net income (loss) $(633) $(1,440) $(2,067) $(6,801)
Earnings (loss) per share $(.13) $(.30) $(.43) $(1.40)
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LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended January 31
1998 1997
---- ----
(Dollars in thousands)
Cash and cash equivalents $2,646 $5,866
Short-term investments 1,719 14
Working capital 2,839 5,185
Cash provided (used) by operating activities (1,682) (10,505)
Cash provided (used) by investing activities (1,757) 105
Cash (used) by financing activities 313 7,510
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. To
date, the Company has repurchased 148,120 shares of Common Stock pursuant to
this repurchase plan. Of these shares, 2,500 shares have been retired and the
total outstanding shares of Common Stock has been 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.
In an order dated December 15, 1997, the Court approved the settlement
of a complaint filed against the Company's affiliate, National Safety
Associates, Inc. ("NSA"), and Messrs. A. Jay Martin, L.F. Swords and George R.
Poteet, individually and dismissed the action without prejudice, also vacating
its order certifying a class. On February 12, 1993, this complaint for
injunctive relief and damages was filed 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. Such Court
granted plaintiff's motion, as modified, for certification of a class in an
August 20, 1996 order. However, pursuant to a Settlement Agreement dated as of
November 24, 1997, all parties to the action agreed to the terms of a
settlement. In the settlement, NSA agreed to implement a refund policy with
respect to persons participating in NSA's multi-level marketing plan. NSA also
agreed to pay counsel for the class the sum of $475,000 for legal fees and
expenses.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 2, 1997, the Company held its annual meeting of
shareholders. At the annual meeting, three matters were submitted to a vote of
the shareholders: (i) the election of four (4) Class II directors of the Company
to serve two-year terms or until their successors have been duly elected and
qualified; (ii) the approval and ratification of the independent accountants and
auditors for the Company; and (iii) the approval and ratification of the
Company's 1997 Incentive and Non-Qualified Stock Option Plan providing for the
issuance to eligible directors, officers, employees, advisors and consultants of
the Company and its subsidiaries of up to 500,000 shares of the Company's Common
Stock, $.05 par value. Proxies for the annual meeting were solicited pursuant to
Regulation 14 of the Securities Exchange Act of 1934, as amended, and there were
no solicitations in opposition to management's solicitation.
All of management's nominees to the Board of Directors of the Company
were elected to office by the following vote:
Name For Against Abstain
---- --- ------- -------
George R. Poteet 3,913,038 100 25,225
L.F. Swords 3,913,038 100 25,225
William W. Deupree, Jr. 3,913,038 100 25,225
William L. Gurner 3,913,038 100 25,225
The selection of the firm of Deloitte & Touche, L.L.P. as the Company's
independent accountants and auditors for the fiscal year ending April 30, 1998
was approved and ratified by the shareholders according to the following vote:
For Against Abstain
--- ------- -------
3,926,370 2,000 2,560
The Company's 1997 Incentive and Non-Qualified Stock Option Plan was
approved and ratified by the shareholders according to the following vote:
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For Against Abstain
--- ------- -------
3,574,391 35,472 4,519
ITEM 5. OTHER INFORMATION.
The Company's Board of Directors voted to remove the Company's Common
Stock, $.05 par value, from listing on the Nasdaq National Market System. The
Company has notified Nasdaq of its intentions and effective March 16, 1998, the
Company's Common Stock shall no longer be listed on the Nasdaq National Market
System. At that time the Company's Common Stock will be automatically eligible
for listing on the OTC Bulletin Board.
In December 1997, the Company entered into a distribution agreement
with a third party for the retail distribution of the Company's products in
Costa Rica, Panama and Guatemala. Through an amendment to such agreement, such
third party distributor's authorized territory was expanded to include the
countries of Nicaragua, Honduras and El Salvador.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(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: March 12, 1998 By: /s/ Stan C. Turk
--------------------------------
Stan C. Turk
Secretary/Treasurer,
Chief Financial Officer
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