<PAGE> 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 July 31, 1997
-------------------------------------------------
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
---------------------------------------------------------
NSA INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-1387102
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
4260 East Raines Road, Memphis, Tennessee 38118
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(901) 541-1223
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(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
September 10, 1997.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
NSA International, Inc. and Subsidiaries:
Consolidated Balance Sheets as of July 31, 1997 (unaudited) and April
30, 1997
Consolidated Statements of Operations for the Three Month Periods Ended
July 31, 1997 and 1996 (unaudited)
Consolidated Statements of Shareholders' Equity for the Three Month
Periods Ended July 31, 1997 and 1996 (unaudited)
Consolidated Statements of Cash Flows for the Three Month Periods Ended
July 31, 1997 and 1996 (unaudited)
Notes to Consolidated Financial Statements
<PAGE> 3
NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
July 31, April 30,
1997 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,328,716 $ 5,771,563
Short-term investments 18,031 10,754
Receivables, net 2,845,913 2,972,636
Refundable income taxes 827,798 690,000
Inventories, net 5,291,635 7,104,869
Deferred income taxes 32,000 32,000
Notes receivable - short-term 690,000 550,000
Other current assets 191,522 265,078
------------ ------------
Total current assets 15,225,615 17,396,900
PROPERTY AND EQUIPMENT, At cost:
Leasehold improvements 194,548 195,862
Manufacturing equipment 456,062 455,850
Office furniture and equipment 908,706 1,043,222
Data processing equipment 562,125 555,148
------------ ------------
Total 2,121,441 2,253,082
Less accumulated depreciation and amortization (1,201,244) (1,326,684)
------------ ------------
Property and equipment, net 920,197 926,398
NOTES RECEIVABLE - LONG-TERM 2,705,303 2,945,007
OTHER ASSETS 1,016,081 1,096,200
------------ ------------
TOTAL ASSETS $ 19,867,196 $ 22,364,505
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Amounts due to NSA, Inc. $ 6,701,524 $ 7,793,387
Accounts payable, trade 680,474 913,452
Accrued sales commissions and allowances 242,558 246,603
Accrued compensation and expenses 2,139,258 2,834,976
Accrued sales returns 200,535 368,611
Advance payments by dealers/distributors 83,283 95,714
Income taxes payable 574,124 656,000
Other current liabilities 224,378 186,981
------------ ------------
Total current liabilities 10,846,134 13,095,724
DEFERRED INCOME TAXES 32,000 32,000
OTHER LIABILITIES 1,168,880 929,518
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.05 par value, 100,000,000
shares authorized, 4,858,156 shares issued and
outstanding at July 31 and April 30, 1997 242,908 242,908
Additional paid-in capital 29,106,950 29,106,950
Deficit (21,529,676) (21,042,595)
------------ ------------
Total shareholders' equity 7,820,182 8,307,263
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 19,867,196 $ 22,364,505
------------ ------------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTH PERIODS ENDED JULY 31, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
NET REVENUES:
Net sales $ 6,341,334 $ 13,335,120
Dealer fee income 205,274 274,606
----------- ------------
Total 6,546,608 13,609,726
COSTS AND EXPENSES:
Dealer/distributor commissions and allowances (600,869) (4,549,701)
Cost of products sold (4,641,281) (5,964,228)
Operating expenses (2,061,758) (4,562,919)
Licensing and management fees to NSA, Inc. (35,226) (246,449)
Interest income, net 158,526 122,886
Other income, net 146,919 93,152
Restructuring charge (3,000,000)
----------- ------------
Total (7,033,689) (18,107,259)
----------- ------------
LOSS BEFORE INCOME TAXES (487,081) (4,497,533)
INCOME TAX PROVISION (9,468)
----------- ------------
NET LOSS $ (487,081) $ (4,507,001)
----------- ------------
LOSS PER COMMON SHARE $ (0.10) $ (0.93)
----------- ------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 4,858,156 4,858,156
----------- ------------
TRANSACTIONS WITH NSA, INC. INCLUDED IN THE ABOVE:
Net sales to NSA, Inc. $ 2,074,000 $ 2,521,000
Cost of products sold for products purchased from NSA, Inc. 24,290 293,823
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTH PERIODS ENDED JULY 31, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
----------------------
Additional
Number Paid-in
of Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
1996
BALANCES AT APRIL 30, 1996 4,858,156 $ 242,908 $21,196,430 $(11,233,067) $10,206,271
Net loss (4,507,001) (4,507,001)
Forgiveness of debt by NSA, Inc. 7,910,520 7,910,520
--------- ----------- ----------- ------------ -----------
BALANCES AT JULY 31, 1996 4,858,156 $ 242,908 $29,106,950 $(15,740,068) $13,609,790
--------- ----------- ----------- ------------ -----------
1997
BALANCES AT APRIL 30, 1997 4,858,156 $ 242,908 $29,106,950 $(21,042,595) $ 8,307,263
Net loss (487,081) (487,081)
--------- ----------- ----------- ------------ -----------
BALANCES AT JULY 31, 1997 4,858,156 $ 242,908 $29,106,950 $(21,529,676) $ 7,820,182
--------- ----------- ----------- ------------ -----------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTH PERIODS ENDED JULY 31, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (487,081) $(4,507,001)
Adjustments to reconcile net loss to net cash provided by (used in) operations:
Loss on disposal of property and equipment 459
Gain on sales of short-term investments (7,277)
Depreciation 68,685 205,510
Restructuring charge 3,000,000
Changes in assets and liabilities:
Receivables, net 126,723 (1,407,192)
Inventories 1,813,234 (1,103,402)
Other assets 153,675 22,962
Accounts payable, trade (232,978) (825,006)
Accrued sales returns (168,076) 59,414
Advance payments by dealers/distributors (12,431) (61,225)
Accrued expenses (699,763) (61,200)
Income taxes payable and refundable (219,674) 8,988
Other liabilities 276,759 (274,250)
----------- -----------
Net cash provided by (used in) operating activities 612,255 (435,401)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (62,943) (2,755)
Principal payments on notes receivable 99,704 157,086
----------- -----------
Net cash provided by investing activities 36,761 154,331
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from (repayments to) National Safety Associates, Inc. for equipment
purchases and working capital (1,091,863) 2,894,024
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (442,847) (1,894,047)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,771,563 8,754,770
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,328,716 $ 6,860,723
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ Nil $ Nil
Income taxes refunded, net 219,674 Nil
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
NSA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED JULY 31, 1997 AND 1996 (UNAUDITED)
1. FINANCIAL STATEMENT PRESENTATION
The consolidated balance sheet as of July 31, 1997 and the consolidated
statements of operations, shareholders' equity, and cash flows for the
three month periods ended July 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 July 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.
Certain amounts in the three month period ended July 31, 1996 financial
statements have been reclassified to be consistent with the presentation
in the three month period ended July 31, 1997 financial statements.
2. LOSS PER SHARE
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:
<TABLE>
<CAPTION>
July 31, 1997 April 30, 1997
<S> <C> <C>
Raw materials $ 1,917,749 $ 1,784,662
Finished goods 3,811,404 5,615,235
Accessories 732,749 806,704
----------- -----------
Total at cost 6,461,902 8,206,601
Reserve for excess and obsolete inventories (1,170,267) (1,101,732)
----------- -----------
Inventories, net $ 5,291,635 $ 7,104,869
=========== ===========
</TABLE>
6
<PAGE> 8
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
July 31.
Results of Operations
NET REVENUE
<TABLE>
<CAPTION>
First Quarter
1998 Change 1997
---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
Net revenues $ 6,546 (51.90%) $ 13,610
Cost and expenses $ 7,033 (61.16%) $ 18,107
Percentage of net revenues 107.44% 133.04%
Net loss $ 487 $ 4,507
Loss per share $ (.10) $ (.93)
</TABLE>
The 1998 first quarter decrease in net revenues primarily resulted from
the Company's reorganization and change in its method of selling and
distributing its products. This reorganization resulted in the sales of the
Company's European direct selling operations in Germany, Switzerland, United
Kingdom, Ireland, Holland and Belgium in the 1997 second quarter to third party
licensees (Master Distributors).
The Company continues to maintain direct selling operations in France
and Italy and to sell products to its Master Distributors.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
First Quarter
1998 Change 1997
---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
Dealer/Distributor commissions
and allowances $ 600 (86.81%) $ 4,550
Percentage of net revenues 9.17% 33.43%
Cost of products sold $4,641 (22.18%) $ 5,964
Percentage of net revenues 70.90% 43.82%
</TABLE>
The decrease in the 1998 first quarter 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 Master Distributors. The 1998 first quarter 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.
7
<PAGE> 9
<TABLE>
<CAPTION>
First Quarter
1998 Change 1997
---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
Operating expenses $2,062 (54.81%) $4,563
Percentage of net revenues 31.50% 33.53%
</TABLE>
The Company's decline in the 1998 first quarter operating expenses
primarily reflects certain operating cost and expense reductions resulting from
the sale of the above direct selling operations and closure of the Company's
central operations headquarters in Amsterdam.
<TABLE>
<CAPTION>
First Quarter
1998 Change 1997
---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
Interest income, net $ 159 29.27% $ 123
Percentage of net revenue 2.42% 0.90%
</TABLE>
The 1998 first quarter increase in interest income resulted from the
increase in notes receivables due to the sale of the direct selling operations.
<TABLE>
<CAPTION>
First Quarter
1998 Change 1997
---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
Management fees to NSA, Inc. $ 35 (85.77%) $ 246
Percentage of net revenues 0.53% 1.81%
</TABLE>
The decrease in management fees is principally due to the sale of the
Company's direct selling operations discussed above.
<TABLE>
<CAPTION>
First Quarter
1998 Change 1997
---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
Other income, net $ 146 56.99% $ 93
Percentage of net revenues 2.23% .68%
</TABLE>
The increase in the 1998 first quarter other income primarily resulted
from foreign currency translation gains, net of a small foreign currency hedging
loss.
8
<PAGE> 10
<TABLE>
<CAPTION>
First Quarter
1998 Change 1997
---- ------ ----
(Dollars in thousands)
<S> <C> <C>
Restructuring costs $ 0 $3,000
Percentage of net revenues 0.00% 22.04%
</TABLE>
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 and other changes as a result of the pending sales of certain of the
European direct selling operations.
<TABLE>
<CAPTION>
First Quarter
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Provision for income taxes $0 $9
Effective tax rate N/A N/A
</TABLE>
The relatively low income tax provisions for the first quarters of 1998
and 1997 primarily reflect the unusable net operating losses during each period.
NET LOSS
<TABLE>
<CAPTION>
First Quarter
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Net loss $ 487 $4,507
Loss per share $(.10) $ (.93)
</TABLE>
FUTURE OUTLOOK
The Company is actively looking for suitable third party licensees to
acquire its remaining direct selling operations in France and Italy.
The Company's new Master Distributor in Spain, Portugal, and Andorra
began operations in the 1998 first quarter. The Company is continuing to expand
geographically into new markets. It expects to have new Master Distributor
operations in Australia, New Zealand, Korea, Paraguay and Fiji during the later
part of the year.
Management anticipates that its operational changes and new product
introductions will provide the Company with long-term favorable operation
results, although the ultimate effect of these change cannot be determined.
There could be continue adverse short-term operating results.
9
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
First Quarter
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Cash and cash equivalents $5,329 $6,861
Short-term investments 18 13
Working capital 4,379 7,227
Cash provided (used) by operating activities 621 (435)
Cash provided (used) by investing activities 37 154
Cash (used) by financing activities (1,092) 2,894
</TABLE>
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 30,885 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is party to various claims and matters of litigation that
arise in the normal course of its business. Management of the Company believes
the resolution of these matters will not have a material adverse effect on the
results of operations or the financial condition of the Company.
On February 12, 1993, a complaint for injunctive relief and damages was
filed against the Company's affiliate, NSA, and Messrs. A. Jay Martin, L.F.
Swords and George R. Poteet, individually, in the United States District Court
for the Northern District of California. The named plaintiffs sought relief on
behalf of themselves and for an alleged class of persons who participated in
NSA's multi-level marketing plan from February 13, 1989 to the present. The
complaint alleges that the NSA multi-level marketing plan constitutes an
unlawful pyramid scheme and the unlawful sale of unregistered securities made
through the use of allegedly untrue and misleading statements of material facts.
It further alleges that the NSA marketing plan was promoted by utilizing
fraudulent activities, unfair business practices and false advertising. NSA and
the individual defendants answered denying the allegations. On April 5, 1994,
the case was moved to the United States District Court for the Western District
of Tennessee. The magistrate judge assigned to the case recommended
certification of the class and NSA filed exceptions to the report. On August 20,
1996, the Court rendered an Order Granting Plaintiff's Motion for Class
Certification as Modified. The Court's Order certified a class only as to two of
plaintiff's claims, and only as to persons in NSA's multi-level marketing plan
who participated in the plan from June 5, 1990 to the present and who incurred a
loss because of such participation. Subsequently, the Court ordered plaintiffs
to include four additional named plaintiffs for the action. At present, the
exact parameters of the class are unresolved, and therefore, the members of the
class have not been fully determined. Further, the District Court Judge who
issued the August 1996 order on certification has since retired, and the case
has been reassigned to a new District Court Judge. It is uncertain whether the
new District Court Judge will review and/or modify any prior decisions,
including, the order on class certification.
10
<PAGE> 12
In April 1997, Safety Technologies, Inc., a wholly-owned subsidiary of
Safetec International, Inc., filed a complaint in the United States District
Court for the Middle District of Florida, Orlando Division, for injunctive
relief and damages against NSA Polymers, Inc., a wholly-owned subsidiary of the
Company, as well as Polymers, Inc., Futuro, Inc., Tubmaster, L.C., Eckerd
Corporation, Berger Brunswig Corp., American Stores Company, McKesson
Corporation, and Mr. Rushton Bailey, individually. Claims alleged by the
plaintiff in the complaint include breach of contract, trademark infringement,
unfair competition and deceptive trade policies. The complaint alleges that the
named defendants manufactured and/or distributed products developed by the
plaintiff and containing the plaintiff's registered trademark in various
wholesale and retail markets without the knowledge or consent of the plaintiff.
The Company believes that insurance coverage may be available for certain of
these claims. The Company is evaluating its options and intends to vigorously
defend this suit.
ITEM 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.
None.
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.
11
<PAGE> 13
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: September 10, 1997 By: /s/ Stan C. Turk
-----------------------------
Stan C. Turk,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q OF NSA INTERNATIONAL, INC. FOR THE PERIOD ENDED JULY 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000850036
<NAME> NSA INTERNATIONAL, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JUL-31-1997
<EXCHANGE-RATE> 1
<CASH> 5,329
<SECURITIES> 18
<RECEIVABLES> 2,853
<ALLOWANCES> (8)
<INVENTORY> 5,291
<CURRENT-ASSETS> 15,226
<PP&E> 2,121
<DEPRECIATION> (1,201)
<TOTAL-ASSETS> 19,867
<CURRENT-LIABILITIES> 10,846
<BONDS> 0
0
0
<COMMON> 243
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 19,867
<SALES> 6,341
<TOTAL-REVENUES> 6,547
<CGS> 4,641
<TOTAL-COSTS> 5,241
<OTHER-EXPENSES> 2,062
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (487)
<INCOME-TAX> 0
<INCOME-CONTINUING> (487)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (487)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
