Page 1
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, 1999
----------------
( ) 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 0-19056
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Northstar Computer Forms, Inc.
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0882640
- ----------------------------- -------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Numbers)
7130 Northland Circle North Brooklyn Park, Minnesota 55428
- ------------------------------------------------------ ---------
(Address or Principal Executive Offices) Zip Code
Registrant's telephone number, including area code (612) 531-7340
--------------
- --------------------------------------------------------------------------------
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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 5, 1999
----- ----------------------------
Common Stock, $ .05 par value 2,728,586 Shares
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Part 1. Financial Information
Item 1. Financial Statements
NORTHSTAR COMPUTER FORMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
January 31, October 31,
1999 (Unaudited) 1998
---------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,053,772 $ 4,162,845
Accounts receivable, less
allowance for doubtful accounts
of $149,000 at January 31, 1999 and $138,000 at October 31, 1998 5,646,989 4,936,112
Inventories 2,207,624 2,245,338
Other current assets 907,917 687,769
Deferred income taxes 253,156 255,656
------------ ------------
Total current assets 13,069,458 12,287,720
------------ ------------
Property, plant and equipment 30,975,417 30,433,014
Less accumulated depreciation and
amortization (16,874,808) (16,279,745)
------------ ------------
Net property, plant and equipment 14,100,609 14,153,269
------------ ------------
Notes receivable, less current portion 155,426 161,573
Goodwill, net 1,505,916 1,556,293
Other assets, net 1,277,197 1,292,817
------------ ------------
Total assets $ 30,108,606 $ 29,451,672
------------ ------------
------------ ------------
See accompanying notes to unaudited Condensed
Consolidated Financial Statements
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NORTHSTAR COMPUTER FORMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET, CONTINUED
January 31, October 31,
1999 (Unaudited) 1998
---------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,385,000 $ 1,385,000
Accounts payable 2,203,814 1,316,878
Accrued liabilities 1,346,852 1,927,671
------------ ------------
Total current liabilities 4,935,666 4,629,549
Deferred compensation 731,660 738,845
Deferred income taxes 1,612,133 1,526,633
Long-term debt, less current portion 3,683,050 3,945,550
Commitments
Stockholders' equity:
Common stock, $ .05 par value
authorized, 5,000,000 shares; issued
and outstanding, 2,728,585 at January 31, 1999
and 2,714,436 at October 31, 1998 136,429 135,722
Additional paid-in capital 2,734,289 2,671,492
Retained earnings 16,275,379 15,803,881
------------ ------------
Total stockholders' equity 19,146,097 18,611,095
------------ ------------
Total liabilities and stockholders' equity $ 30,108,606 $ 29,451,672
------------ ------------
------------ ------------
See accompanying notes to unaudited Condensed
Consolidated Financial Statements
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NORTHSTAR COMPUTER FORMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
Three Months Ended
January 31
1999 1998
---- ----
Net sales $ 10,643,618 $ 10,608,027
Cost of goods sold 7,916,249 7,747,106
------------ ------------
Gross profit 2,727,369 2,860,921
Selling, general and
administrative expenses 1,945,720 1,936,854
------------ ------------
Operating income 781,649 924,067
Other income (expense):
Interest expense (92,020) (209,577)
Other, net, principally
interest income 70,869 77,085
------------ ------------
(21,151) (132,492)
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Earnings Before income taxes 760,498 791,575
Provision for income taxes 289,000 297,000
------------ ------------
Net earnings $ 471,498 $ 494,575
------------ ------------
Net earnings per common share:
Basic $ 0.17 $ 0.19
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Diluted $ 0.17 $ 0.18
------------ ------------
Dividends declared per
common share $ - $ -
------------ ------------
------------ ------------
See accompanying notes to unaudited Condensed
Consolidated Financial Statements
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NORTHSTAR COMPUTER FORMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
for the three months ended January 31, 1999 and 1998
1999 1998
---- ----
Cash flows from operating activities:
Net earnings $ 471,498 $ 494,575
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation 646,577 644,139
Amortization 95,597 71,151
Provision for losses on receivables 13,800 13,800
Gain on sale of equipment (7,900) (10,662)
Changes in certain operating assets and liabilities (359,762) (1,003,772)
----------- ------------
Net cash provided by operating activities 859,810 209,231
----------- ------------
Cash flows from investing activities:
Capital expenditures and equipment deposits (599,617) (762,487)
Capitalized computer software costs - (229,261)
Proceeds from sale of equipment 13,600 13,000
Notes receivable repayments 6,147 540,619
----------- ------------
Net cash used in investing activities (579,870) (438,129)
----------- ------------
Cash flows from financing activities:
Dividends paid (190,017) (176,147)
Principal payments on long-term debt (262,500) (1,187,500)
Stock options exercised 63,504 20,554
----------- ------------
Net cash used in financing activities (389,013) (1,343,093)
----------- ------------
Net decrease in cash and cash equivalents (109,073) (1,571,991)
Cash and cash equivalents at beginning of period 4,162,845 5,317,881
----------- ------------
Cash and cash equivalents at end of period $ 4,053,772 $ 3,745,890
----------- ------------
----------- ------------
Supplemental disclosure of cash flow:
Cash paid during the period for:
Income taxes $ 56,000 $ 1,103,250
Interest 71,300 209,577
See accompanying notes to unaudited Condensed
Consolidated Financial Statements
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NORTHSTAR COMPUTER FORMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1999
1. Basis of Presentation
The interim condensed consolidated financial statements included in this
Form 10-Q have been prepared by Northstar Computer Forms, Inc. (the
Company), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed, or omitted, pursuant to these rules and regulations. The
year-end balance sheet was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles. These unaudited condensed consolidated financial statements
should be read in conjunction with the financial statements and related
notes included in the Company's 1998 Annual Report on Form 10-K as filed
with the Securities and Exchange Commission.
The unaudited condensed consolidated financial statements presented herein
as of January 31, 1999, and for the three months ended January 31, 1999 and
1998 reflect, in the opinion of management, all adjustments (which include
only normal, recurring adjustments) necessary for a fair presentation of
the financial position, results of operations and cash flows as of and for
the periods presented. The results of operations for any interim period
are not necessarily indicative of results for the full year.
2. Earnings per share
Net earnings per share (EPS) for all periods presented have been computed
by dividing net earnings by the weighted average number of common shares
outstanding (basic EPS) and by the weighted average number of common and
common equivalent shares outstanding (diluted EPS). The Company's common
equivalent shares consist of stock options when their effect is not
antidilutive.
At January 31, 1999 and 1998, 39,000 and 9,000 outstanding options were
excluded from the computation of diluted earnings per share for the
respective quarter because the option's exercise price was greater than the
average market price of the Company's common shares.
For all periods presented, the weighted average common and common
equivalent shares outstanding are as follows:
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For the three months ended January 31,
(Unaudited)
1999 1998
---- ----
Weighted average common
shares outstanding 2,719,103 2,642,819
Common equivalent shares
outstanding:
Option equivalents 99,325 239,024
--------- ---------
Weighted average common
and common equivalent shares
outstanding 2,818,428 2,881,843
--------- ---------
--------- ---------
3. At January 31, 1999 and 1998, inventories consisted of the following:
January 31
1999 1998
---- ----
Raw materials $1,396,597 $1,394,156
Work in process 477,183 598,846
Finished goods 333,844 252,336
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$2,207,624 $2,245,338
---------- ----------
---------- ----------
4. New Accounting Pronouncements
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income," a
new standard requiring the reporting and display of "Comprehensive Income"
(defined as the change in equity of a business enterprise during a period
from sources other than those resulting from investment by owners and
distributions to owners) and its components in a full-set of
general-purpose financial statements. In the fiscal years 1999 and 1998,
the Company did not have any changes in equity from nonowner sources.
In June 1997, the FASB issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information," a new standard for reporting
information about operating or business segments in financial statements.
The new standard will be effective for the Company's annual financial
statements in fiscal year 1999. The Company has not evaluated what impact,
if any, this new standard will have on the Company's future reporting of
operating and business segments.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." This SOP provides
guidance on accounting for the costs of computer software developed or
obtained for internal use. The Company is reviewing the requirements of
the SOP and does not expect it to significantly change its current
accounting for software costs. SOP-98-1 is required to be adopted by the
Company for its fiscal year 2000.
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4. Subsequent Event
On February 5, 1999, the Company's Board of Directors (Board) approved
an amendment to the Outside Directors Stock Option Plan to permit the
granting of additional options to directors and to add an additional
100,000 shares to the plan. This amendment is subject to shareholders'
approval at the April 8, 1999 annual meeting. Contingent upon approval
of the amendment, the Compensation Committee of the Board granted options
for 10,000 shares each to the four outside directors.
On February 5, 1999 the Board also granted 100,700 options under the
Company's Incentive Stock Option Plan. Key employees were granted
options for 56,000 shares and all other employees were granted an option
for 100 shares each.
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NORTHSTAR COMPUTER FORMS, INC.
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations of
Interim Financial Data (Unaudited)
Results of Operations
The following discussion and analysis provides information that the Company's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions readers that statements
contained herein, other than historical data, may be forward-looking and
subject to risks and uncertainties. The following important factors could
cause the Company's actual results to differ materially from those projected
in forward-looking statements made by, or on behalf of, the Company. This
list is not intended to present an all-inclusive list of such factors.
- Loss of one or more major customers due to bank consolidations or
other reasons,
- Rise in paper prices which outpaces the Company's ability to pass the
increase onto its customers,
- Inability to extend existing contracts or successfully negotiate new
contracts,
- Technological obsolescence of the Company's products or manufacturing
equipment,
- Contracting market for traditional business forms products,
- Competition from large national manufacturers of internal bank forms
and custom business forms.
Three Months Ended January 31
Percentage of Net Sales Increase (Decrease)
----------------------- -------------------
1999 1998 1999 vs. 1998
---- ---- -------------
Net Sales................................. 100.0 % 100.0 % .3 %
Cost of Goods Sold........................ 74.4 73.0 2.2
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Gross Profit ............................. 25.6 27.0 (4.7)
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Selling, General and
Administrative Expenses................. 18.3 18.3 .5
------- ------- ------
Operating Income.......................... 7.3 8.7 (15.4)
Net Earnings.............................. 4.4 4.7 (4.7)
------- ------- ------
The following table sets forth unaudited net sales information for the periods
indicated for internal bank forms, custom business forms and consolidated net
sales of the Company.
INTERNAL CUSTOM CONSOLIDATED
BANK FORMS % BUSINESS FORMS % SALES
---------- - -------------- - --------
Current Quarter
1999 $ 7,225,903 68 $3,417,715 32 $10,643,618
1998 7,455,284 70 3,152,743 30 10,608,027
Change (229,381) 264,972 35,591
Percentage Change ( 3.1%) 8.4% 0.3%
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RESULTS OF OPERATIONS
NET SALES. Net sales for the first quarter of 1999 remained relatively flat
compared to the first quarter of 1998. However, as the sales mix shows,
internal bank forms decreased $229,381 or 3.1%. The sales decrease occurred
within the Northstar Financial Forms division which had several sales contracts
which expired in the second and third quarter of 1998 and were not renewed. The
other internal bank forms operations had a sales increase of approximately 9%
for the quarter with no significant change in product mix, sales prices or
customer base. The custom business forms sales increase is due to a new
negotiable document product line for an existing customer. Sales fluctuations
were driven primarily by volume and mix changes as sales prices remained
relatively constant.
GROSS PROFIT. Gross profit was $2,727,369 for the first quarter of 1999
compared to $2,860,921 for the first quarter of 1998, a decrease of $133,552.
As a percent of sales, gross profit was 25.6% in the first quarter of 1999
compared to 27.0% in the first quarter of 1998. The Company was able to
maintain material costs, indirect labor and benefits, variable costs and fixed
costs at the same percentage of sales. However direct labor costs increased
approximately 10% as new employees were added to train for the anticipated
increased business as discussed in the "Outlook" section.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses increased minimally, and remained constant at 18.3% of
net sales.
OTHER INCOME AND EXPENSE. Other income and expense consists principally of
interest expense which decreased $117,557 in 1999 due to debt repayments.
PROVISION FOR IN INCOME TAXES. The provision for income taxes remained constant
at 38% for 1999 consistent with the first quarter of 1998.
EARNINGS. Earnings before income taxes were $760,498 or 7.1 percent of net
sales in 1999 compared with $791,575 or 7.5 percent of net sales in the first
quarter of 1998. Net earnings were $471,498 ($0.17 per diluted share)in 1999
compared to $494,575 ($0.18 per diluted share) in 1998.
FINANCIAL CONDITION AND LIQUIDITY
LONG-TERM DEBT. The Company's long-term debt consists of a term loan and
Industrial Development Revenue Bonds. The term loan principal is payable in
quarterly installments and from annual excess cash flow as defined in the Loan
Agreement with any remaining principal balance due on July 31, 2003. The bonds
require annual principal payments and interest at a variable rate based upon
comparable tax-exempt issues. Both the term loan and the bonds specify limits
on capital expenditures and dividends as well as specify working capital, net
worth and certain financial ratios that the Company must maintain.
LIQUIDITY. Cash provided by operations was $859,810 for the first quarter of
1999, compared to $209,231 in the first quarter of 1998. Working capital was
$8.1 million on January 31, 1999 compared to $7.7 million on October 31, 1998.
During the quarter ended January 31, 1999, the Company continued to expand its
manufacturing capacity by the acquisition of $599,617 in equipment compared to
capital expenditures of $991,748 for equipment and computer software for the
first quarter of 1998. The Company anticipates that total equipment and
computer software expenditures for 1999 will approximate $2,100,000.
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If necessary to finance operations, the Company has a $1.5 million line of
credit at an interest rate equal to the bank's reference rate. The Company did
not have to utilize this line of credit during 1999 or 1998. The Company
believes its existing financial resources are adequate to fund its 1999
operations, including capital expenditures and dividend payments, and foresees
no events or uncertainties that are likely to have a material impact on its
liquidity.
OUTLOOK. Merger and acquisition activity in the banking industry remains
extremely strong at this time. Banks generally consolidate their purchasing of
internal bank forms with one supplier. Therefore, the Company could obtain or
lose a significant customer or numerous smaller customers as this consolidation
activity continues. The Company continues to work to stabilize and increase
its customer base. During the third quarter of 1998, the Company was able to
obtain three new large-volume internal bank form customers which are expected to
positively impact sales in 1999. In addition, to increase and improve market
penetration in the internal bank forms market, the Company has developed
additional distribution channels by forming two new strategic alliances with
other companies in the financial forms industry. Sales with one of these
partners began slowly but are now increasing monthly. Sales with the second
alliance depends on the partner's ability to sell internal bank forms as
ancillary products used in the equipment it sells to the banking industry. In
January 1999, the Company signed a new contract to manufacture negotiable
documents for its largest customer. The new contract is for a four-year term
with additional sales from a new product line estimated at $3.5 million
annually. The Company also has a proposal pending for one other new negotiable
document contract and has begun producing a new line of custom business forms
for a current customer.
Paper price changes, sales volume changes and sales mix changes are three
factors with a significant effect on the Company's gross profit. The Company
expects the paper industry to increase prices in 1999, but at this time expects
to be able to pass these paper price increases onto its customers. During the
remainder of 1999, sales volumes are expected to increase in both custom
business forms and internal bank forms. Based upon these expectations, the
Company expects the gross profit for the balance of 1999 to exceed the 1998
gross profit in total and as a percentage of sales.
The Company does not anticipate significant change in selling, general and
administrative costs for 1999. Based on the projected increase in sales volume,
these costs are expected to decrease as a percentage of sales in 1999.
The outlook for the Company has been positively affected by the internal bank
forms computer system which the Company developed and installed in the first
location in the last quarter of 1997. This system has been continually enhanced
and is now installed in all of the Company's internal bank forms production
facilities. The last installation was completed in February 1999. The
integrated computer system is already increasing operating efficiencies within
the internal bank forms plants by streamlining order processing, enhancing
equipment utilization and improving billing and reporting capabilities.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the FASB issued SFAS 130,
"Reporting Comprehensive Income," a new standard requiring the reporting and
display of "Comprehensive Income" (defined as the change in equity of a
business enterprise during a period from sources other than those resulting
from investment by owners and distributions to owners) and its components in
a full-set of general-purpose financial statements. In the three month
period ended January 31, 1999, and in fiscal year 1998, the Company did not
have any changes in equity from nonowner sources.
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In June 1997, the FASB issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information," a new standard for reporting information
about operating or business segments in financial statements. The new standard
will be effective for the Company's annual financial statements in fiscal year
1999. The Company has not determined what impact, if any, this new standard
will have on its reporting of segment information.
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This SOP provides guidance on accounting for the
costs of computer software developed or obtained for internal use. The Company
is reviewing the requirements of the SOP and does not expect it to significantly
change its current accounting for software costs. SOP 98-1 is required to be
adopted by the Company for its fiscal year 2000.
READINESS FOR YEAR 2000.
STATE OF READINESS. The Company's Y2K Plan is focused on assessing and ensuring
compliance of its hardware, operating systems, software applications and custom
applications. Additionally, the Company is reviewing the Year 2000 compliance
status of its customers, vendors and other service providers.
HARDWARE, OPERATING SYSTEMS AND SOFTWARE APPLICATIONS. The Company is in the
process of completing its assessment of its hardware, operating systems and
software applications. The Company estimates that 80% of its hardware,
operating systems and software applications have been upgraded for Y2K
compliance or have been certified internally or through the appropriate vendor
to be compliant. The Company expects any remaining upgrades required to be
completed by August 31, 1999. Projected expenditures are included in the 1999
proposed capital expenditure budget.
THIRD PARTY RELATIONSHIPS. The Company is communicating with vendors, customers
and other business partners to determine their Y2K compliance. The Company
anticipates that this will be complete by July 1999.
COST AND CONTINGENCY PLANS. Although the ultimate cost of attaining Year 2000
compliance is not fully known at this time, management's best estimate is that
the external costs will not be material. These costs will be funded from
operations. In the event the Company needs to devote more resources to the
process, additional costs may be incurred. Such a situation could have a
materially adverse effect on the Company's financial condition and results of
operations. To date, the Company has not developed any detailed contingency
plans. To the extent that the Company identifies Year 2000 compliance issues
that cannot be addressed on a timely basis, it will seek to develop appropriate
contingency plans in order to mitigate its risk.
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NORTHSTAR COMPUTER FORMS, INC.
PART II. - OTHER INFORMATION
Item 6. A. Exhibits
10.30 Northstar Computer Forms Inc, Amended and Restated
Outside Directors Stock Option Plan.
10.31 MICR Forms Agreement between Travelers Express Company,
Inc. and Northstar Computer Forms, Inc.
B. Reports on Form 8K - None.
None of the other items contained in Part II of Form 10-Q is applicable to the
Company for the quarter ended January 31, 1999.
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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.
Northstar Computer Forms, Inc.
(Registrant)
Date: March 10, 1999 By: Mary Ann Morin
----------------------- ----------------------------
Mary Ann Morin
Chief Financial Officer
(Principal Financial Officer)