<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, 1998
------------------------------------------------
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 (I.R.S. Employer Identification
incorporation or organization) No.)
4260 East Raines Road, Memphis, Tennessee 38118
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(901) 541-1223
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(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.
4,695,036 shares of Common Stock, $.05 par value were outstanding at
September 11, 1998.
<PAGE> 2
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS.
<S> <C>
NSA International, Inc. and Subsidiaries:
Consolidated Balance Sheets as of July 31, 1998 (unaudited) and April 30, 1998
Consolidated Statements of Operations for the Three Month Periods Ended July 31, 1998 and 1997 (unaudited)
Consolidated Statements of Shareholders' Equity for the Three Month Periods Ended July 31, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows for the Three Month Periods Ended July 31, 1998 and 1997 (unaudited)
Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 3
NSA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
ASSETS 1998 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,248,993 $ 2,121,058
Short-term investments 1,228,958 1,509,004
Receivables, net 3,015,012 3,078,385
Refundable income taxes 304,000 304,000
Inventories, net 6,930,932 6,587,848
Deferred income taxes 15,000 15,000
Notes receivable - short-term 415,000 414,000
Other current assets 126,147 163,996
------------ ------------
Total current assets 15,284,042 14,193,291
PROPERTY AND EQUIPMENT, At cost:
Leasehold improvements 37,837 37,837
Manufacturing equipment 456,062 456,062
Office furniture and equipment 680,048 890,906
Data processing equipment 432,865 593,600
------------ ------------
Total 1,606,812 1,978,405
Less accumulated depreciation and amortization (1,175,986) (1,381,910)
------------ ------------
Property and equipment, net 430,826 596,495
LONG-TERM NOTES RECEIVABLE AND PREFERRED STOCK 2,019,031 2,079,303
OTHER ASSETS 1,029,402 1,005,250
------------ ------------
TOTAL ASSETS $ 18,763,301 $ 17,874,339
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Amounts due to NSA, Inc. $ 10,516,718 $ 9,291,356
Accounts payable, trade 1,021,470 913,567
Accrued sales commissions and allowances 199,308 116,631
Accrued compensation and expenses 1,806,051 2,005,484
Accrued sales returns 43,875 60,038
Advance payments by dealers/distributors 4,701 12,564
Income taxes payable 278,000 321,000
Other current liabilities 130,803 143,585
------------ ------------
Total current liabilities 14,000,926 12,864,225
DEFERRED INCOME TAXES 15,000 15,000
OTHER LIABILITIES 1,055,734 1,114,608
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.05 par value, 100,000,000 shares authorized,
4,695,036 shares issued and outstanding at July 31 and
April 30, 1998 234,752 234,752
Additional paid-in capital 28,844,804 28,844,804
Deficit (25,387,915) (25,199,050)
------------ ------------
Total shareholders' equity 3,691,641 3,880,506
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,763,301 $ 17,874,339
============ ============
</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, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
NET REVENUES:
Net sales $ 6,857,879 $ 6,341,334
Dealer/distributor fee income 256,549 205,274
----------- -----------
Total 7,114,428 6,546,608
COSTS AND EXPENSES:
Dealer/distributor commissions and allowances (728,219) (750,869)
Cost of products sold (4,701,045) (4,491,281)
Operating expenses (1,800,979) (2,061,758)
Licensing and management fees to NSA, Inc. (31,140) (35,226)
Interest income, net 93,333 158,526
Other income (expense), net (135,243) 146,919
----------- -----------
Total (7,303,293) (7,033,689)
----------- -----------
NET LOSS $ (188,865) $ (487,081)
=========== ===========
BASIC LOSS PER COMMON SHARE $ (0.04) $ (0.10)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 4,695,036 4,858,156
=========== ===========
TRANSACTIONS WITH NSA, INC. INCLUDED IN THE ABOVE:
Net sales to NSA, Inc. $ 2,979,000 $ 2,074,000
Cost of products sold (purchased from NSA, Inc.) 176,091 24,290
</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, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------ ADDITIONAL
NUMBER PAID-IN
OF SHARES AMOUNT CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
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
============ ============ ============ ============ ============
1998
BALANCES AT APRIL 30, 1998 4,695,036 $ 234,752 $ 28,844,804 $(25,199,050) $ 3,880,506
Net loss (188,865) (188,865)
------------ ------------ ------------ ------------ ------------
BALANCES AT JULY 31, 1998 4,695,036 $ 234,752 $ 28,844,804 $(25,387,915) $ 3,691,641
============ ============ ============ ============ ============
</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, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (188,865) $ (487,081)
Adjustments to reconcile net loss to net cash provided by
(used in) operations:
Loss on disposals of property and equipment 80,440 459
Gain on sales of short-term investments (7,277)
Depreciation 51,531 68,685
Changes in assets and liabilities:
Receivables, net 63,373 126,723
Inventories (343,084) 1,813,234
Other assets 13,697 153,675
Accounts payable, trade 107,903 (232,978)
Accrued sales returns (16,163) (168,076)
Advance payments by dealers/distributors (7,863) (12,431)
Accrued expenses (116,756) (699,763)
Income taxes payable and refundable (43,000) (219,674)
Other current liabilities (12,782) 37,397
Other liabilities (58,874) 239,362
---------- ----------
Net cash provided by (used in) operating activities (470,444) 612,255
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (28,247) (62,943)
Proceeds from principal payments on notes receivable and
redemptions of preferred stock 59,272 99,704
Proceeds from sale of short-term investments 280,046
Proceeds from sale of property and equipment 61,946 0
---------- ----------
Net cash provided by investing activities 373,017 36,761
CASH FLOWS FROM FINANCING ACTIVITIES - Advances from
(repayments to) National Safety Associates, Inc. 1,225,362 (1,091,863)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,127,935 (442,847)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,121,058 5,771,563
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $3,248,993 $5,328,716
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ Nil $ Nil
Income taxes paid (refunded), net 43,000 (219,674)
</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, 1998 AND 1997 (UNAUDITED)
1. FINANCIAL STATEMENT PRESENTATION
The consolidated balance sheet as of July 31, 1998 and the consolidated
statements of operations, shareholders' equity, and cash flows for the
three month periods ended July 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 July 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.
Certain amounts in the three month period ended July 31, 1997 financial
statements have been reclassified to be consistent with the
presentation in the three month period ended July 31, 1998 financial
statements.
2. LOSS PER SHARE
Basic loss per common share has 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, 1998 APRIL 30, 1998
<S> <C> <C>
Raw materials $ 1,980,881 $ 2,040,031
Finished goods 6,086,403 5,778,977
Accessories 907,525 765,425
----------- -----------
Total at cost 8,974,809 8,575,433
Reserve for excess and obsolete inventories (2,043,877) (1,987,585)
----------- -----------
Inventories, net $ 6,930,932 $ 6,587,848
=========== ===========
</TABLE>
4. SUBSEQUENT EVENT
During August 1998, the Company signed a letter of intent to sell its
operations in Italy. No significant gain or loss is expected to result
from this sale.
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, 1998.
Results of Operations
NET REVENUE
<TABLE>
<CAPTION>
First Quarter
1999 Change 1998
---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
Net revenues $ 7,114 8.67% $ 6,546
Cost and expenses $ 7,302 3.82% $ 7,033
Percentage of net revenues 102.64% 107.44%
Net loss $ 188 $ 487
Loss per share $ (.04) $ (.10)
</TABLE>
The 1999 first quarter revenue increase primarily resulted from an increase
in product sales to National Safety Associates, Inc. ("NSA"). This increase
was partially offset by sales declines to the Company's Master Distributors.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
First Quarter
1999 Change 1998
---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
Dealer/Distributor commissions $ 728 (2.93)% $ 750
and allowances
Percentage of net revenues 10.23% 11.46%
Cost of products sold $4,701 4.68% $4,491
Percentage of net revenues 66.08% 68.61%
</TABLE>
The decrease in the dealer/distributor commissions and allowances, as a
percentage of net revenues, for the 1999 first quarter principally resulted
from the decrease in sales by the Company's direct selling operation in France.
The 1999 first quarter decrease in the percentage of net revenues
represented by the cost of products sold resulted from the change in the
Company's products sales mix.
The 1999 first quarter increase in cost of products sold as compared to the
1998 first quarter resulted from the increase in product sales.
7
<PAGE> 9
<TABLE>
<CAPTION>
First Quarter
1999 Change 1998
---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
Operating expenses $1,800 (12.71)% $2,062
Percentage of net revenues 25.39% 31.50%
</TABLE>
The Company's decline in the 1999 first quarter operating expenses
primarily reflects certain operating cost and expense reductions from the 1998
first quarter closure of the Company's central operations headquarters in
Amsterdam.
<TABLE>
<CAPTION>
First Quarter
1999 Change 1998
---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
Interest income, net $93 (41.51)% $159
Percentage of net revenue 1.31% 2.42%
</TABLE>
The 1999 first quarter decrease in interest income resulted from lower
interest due to the September 1997 renegotiation of a note receivable and lower
average balances of cash, cash equivalents and short-term investments.
<TABLE>
<CAPTION>
First Quarter
1999 Change 1998
---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
Management fees to NSA, Inc. $31 (11.43)% $35
Percentage of net revenues 0.44% 0.53%
</TABLE>
The management fees primarily resulted from the Company's remaining direct
selling operation in Italy. The 1999 first quarter decrease was due to the
closure of the Company's French direct selling subsidiary's office.
<TABLE>
<CAPTION>
First Quarter
1999 Change 1998
---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
Other income, net $(135) (192.47)% $146
Percentage of net revenue (1.89)% 2.23%
</TABLE>
The decrease in the 1999 first quarter other income primarily resulted
from foreign currency translation losses coupled with foreign currency hedging
losses, and an approximate $40,000 loss on the sale of the Company's French
direct selling subsidiary's office equipment.
8
<PAGE> 10
<TABLE>
<CAPTION>
First Quarter
1999 Change 1998
---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
Provision for income taxes $0 $0
Effective tax rate N/A N/A
</TABLE>
There were not any income tax provisions for the first quarters of 1999
and 1998 primarily due to the use of net operating loss carryforwards during
each period.
NET LOSS
<TABLE>
<CAPTION>
First Quarter
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Net loss $ 188 $ 487
Loss per share $(.04) $(.10)
</TABLE>
FUTURE OUTLOOK
Shortly after the end of the 1999 first quarter, the Company signed a
tentative agreement to sell the assets of its Italian direct selling subsidiary
effective October 1, 1998. The Company has also signed a distributor agreement
with a Master Distributor for Japan. Product sales will commence in Japan as
soon as product approvals are completed. These approvals are expected to be
finalized in the fall of 1998.
Management anticipates that the impending sale of the Company's Italian
operation and the opening of the Japanese market, together with the changes made
in the past two years will provide the Company with long-term favorable
operation results, although the ultimate effect of these actions cannot be
determined. There could be continued adverse short-term operating results.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
First Quarter
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Cash and cash equivalents $3,248 $ 5,329
Short-term investments $1,229 $ 18
Working capital $1,283 $ 4,379
Cash provided (used) by operating
activities $ (470) $ 621
Cash provided (used) by investing
activities $ 373 $ 37
Cash (used) by financing
activities $1,225 $(1,092)
</TABLE>
The Company has sufficient cash on-hand to finance current operations, and
does not anticipate requiring additional funding in excess of the current cash
balances and cash flow generated from operations. If required, management
believes additional funding will be available from financial institutions or NSA
at satisfactory terms.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
9
<PAGE> 11
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.
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 August 1998, the Company terminated its agreement with third party
distributors for the retail distribution of the Company's products in the
Russian Federation. Such termination resulted from the distributors' failure to
adhere to the requirements of their agreement. On August 31, 1998, the Company
entered into a distribution agreement with a third party for the distribution
of the Company's products in Japan. The Company anticipates that sales of the
Company's products in Japan will commence in the fall of 1998.
On August 18, 1998, the Company's Board of Directors terminated the
previously authorized program to repurchase up to $1 million of shares of the
Company's common stock, $.05 par value. Since the adoption of the program in
March 1997, the Company had repurchased a total of 239,000 shares of common
stock at an average purchase price of $1.64 per share. The last purchase by the
Company occurred on August 10, 1998. The stock repurchase program was
terminated in connection with the Company's Board of Directors' consideration
of a proposal of a 2,400 to 1 reverse stock split for approval by the Company's
shareholders at the Company's next annual meeting scheduled on December 2,
1998. The Company's Board of Directors has appointed an independent committee
to investigate the possible reverse stock split. It is anticipated that the
Board of Directors will make a determination regarding whether it will propose
the reverse stock split during October 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (SECTION 249.308 OF THIS CHAPTER).
(a) Exhibits.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
None.
10
<PAGE> 12
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.
By: /s/ Stan C. Turk
-------------------------------------
Stan C. Turk, Chief Financial Officer
Date: September 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NSA INTERNATIONAL, INC. FOR THE THREE MONTHS ENDED JULY
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,478
<SECURITIES> 0
<RECEIVABLES> 3,015
<ALLOWANCES> 0
<INVENTORY> 6,931
<CURRENT-ASSETS> 15,284
<PP&E> 1,607
<DEPRECIATION> 1,176
<TOTAL-ASSETS> 18,763
<CURRENT-LIABILITIES> 14,001
<BONDS> 0
0
0
<COMMON> 235
<OTHER-SE> 3,456
<TOTAL-LIABILITY-AND-EQUITY> 18,763
<SALES> 6,858
<TOTAL-REVENUES> 7,114
<CGS> 4,701
<TOTAL-COSTS> 5,429
<OTHER-EXPENSES> 1,874
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (189)
<INCOME-TAX> 0
<INCOME-CONTINUING> (189)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (189)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
