SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Quarterly Period Ended: Commission File Number
February 28, 1997 1-11038
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 41-0857886
(State of Incorporation) (I.R.S. Employer Identification Number)
6680 N. Highway 49, Lino Lakes, MN 55014
(Address of principal executive offices)
(612) 784-1250
(Registrant's telephone number)
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.
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 as of April 11, 1997
Common Stock, $.02 par value 4,206,308
"This document consists of eleven
pages. No exhibits are being filed."
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
FEBRUARY 28, AUGUST 31, FEBRUARY 29,
1997 1996 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,052,595 $ 3,707,520 $ 3,349,109
Receivables:
Trade, less allowance for doubtful accounts of $28,000,
$26,000, and $27,000, respectively 1,253,666 1,127,975 978,014
Corporate joint ventures 449,770 524,577 375,750
Inventories 556,733 584,212 560,884
Prepaid expenses and other 67,418 78,603 78,944
Deferred income taxes 170,000 170,000 110,000
----------- ----------- -----------
Total current assets 5,550,182 6,192,887 5,452,701
PROPERTY AND EQUIPMENT, net 1,001,496 980,816 674,602
OTHER ASSETS:
Investments in corporate joint ventures 1,909,280 1,726,328 1,434,010
Investment in European holding company 254,375 -- --
Investment in foreign company 159,879 159,879 155,800
Trading investment 250,000 -- --
Deferred income taxes 90,000 90,000 100,000
Other 114,140 164,140 103,092
----------- ----------- -----------
2,777,674 2,140,347 1,792,902
----------- ----------- -----------
$ 9,329,352 $ 9,314,050 $ 7,920,205
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 201,515 $ 154,859 $ 196,982
Income taxes 106,579 463,700 104,534
Accrued liabilities:
Payroll 73,197 177,381 77,966
Other 134,761 112,544 117,398
----------- ----------- -----------
Total current liabilities 516,052 908,484 496,880
DEFERRED GROSS PROFIT 109,000 109,000 100,500
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, authorized 10,000 shares, none issued
Common stock, $.02 par value per share; authorized
10,000,000 shares; issued and outstanding 4,206,308,
4,199,275, and 4,237,773, respectively 84,126 83,985 84,755
Additional paid-in capital 5,193,207 5,158,344 5,202,316
Retained earnings 3,684,904 3,143,526 2,102,809
Cumulative foreign currency translation adjustments (128,130) 40,518 62,752
----------- ----------- -----------
8,834,107 8,426,373 7,452,632
Notes and related interest receivable from purchase of
common stock (129,807) (129,807) (129,807)
----------- ----------- -----------
Total stockholders' equity 8,704,300 8,296,566 7,322,825
----------- ----------- -----------
$ 9,329,352 $ 9,314,050 $ 7,920,205
=========== =========== ===========
See notes to financial statements.
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
STATEMENTS OF INCOME (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
1997 1996 1997 1996
SALES $ 2,092,961 $ 1,607,319 $ 4,014,375 $ 3,225,918
COST OF GOODS SOLD 969,976 763,603 1,882,678 1,521,213
----------- ----------- ----------- -----------
GROSS PROFIT 1,122,985 843,716 2,131,697 1,704,705
OPERATING EXPENSES:
Selling 322,882 212,825 591,303 406,084
General and administrative 352,954 181,174 819,397 514,828
Research, engineering, and
technical support 119,396 103,366 219,428 188,924
----------- ----------- ----------- -----------
795,232 497,365 1,630,128 1,109,836
----------- ----------- ----------- -----------
OPERATING INCOME 327,753 346,351 501,569 594,869
JOINT VENTURES AND FOREIGN
COMPANY:
Equity in income of corporate
joint ventures and foreign company 129,399 85,420 284,088 222,631
Fees for technical assistance to
corporate joint ventures 469,432 375,340 981,371 672,978
Corporate joint venture expense (130,994) (180,238) (251,995) (288,548)
----------- ----------- ----------- -----------
467,837 280,522 1,013,464 607,061
OTHER INCOME:
Interest income 57,472 43,551 65,194 71,402
Other income 3,727 -- 7,884 3,727
----------- ----------- ----------- -----------
61,199 43,551 73,078 75,129
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 856,789 670,424 1,588,111 1,277,059
INCOME TAXES 315,000 230,000 525,000 400,000
----------- ----------- ----------- -----------
NET INCOME $ 541,789 $ 440,424 $ 1,063,111 $ 877,059
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE $ .13 $ .10 $ .25 $ .20
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 4,275,224 4,308,573 4,262,998 4,315,018
=========== =========== =========== ===========
See notes to financial statements.
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
----------------------------
FEBRUARY 28, FEBRUARY 29,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,063,111 $ 877,059
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 57,450 37,775
Equity income of joint ventures (284,088) (222,631)
Dividend received from joint ventures 39,555 109,876
Change in current assets and liabilities:
Receivables:
Trade (125,691) (146,577)
Joint ventures 74,807 30,880
Inventories 27,479 (30,290)
Prepaid expenses and other 61,186 (23,081)
Accounts payable 46,656 62,439
Income taxes (357,121) (37,846)
Accrued liabilities (66,592) (30,041)
----------- -----------
Total adjustments (526,359) (249,496)
----------- -----------
Net cash provided by operating activities 536,752 627,563
CASH FLOWS FROM INVESTING ACTIVITIES:
Trading investment (250,000) --
Investment in European holding company (254,375) --
Investments in joint ventures (107,067) --
Additions to property (78,130) (370,128)
Payment on notes receivable from purchase of common stock -- 743,875
----------- -----------
Net cash (used in) provided by investing activities (689,572) 373,747
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 27,228 12,250
Repurchase of common stock (24,600) (70,875)
Dividends paid (504,733) (424,877)
----------- -----------
Net cash used in financing activities (502,105) (483,502)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (654,925) 517,808
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,707,520 2,831,301
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,052,595 $ 3,349,109
=========== ===========
See notes to financial statements.
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited financial
statements contain all necessary adjustments, which are of a normal
recurring nature, to present fairly the financial position of Northern
Technologies International Corporation as of February 28, 1997 and
February 29, 1996, the results of operations for the three and six
months ended February 28, 1997 and February 29, 1996, and the cash flows
for the six months ended February 28, 1997 and February 29, 1996, in
conformity with generally accepted accounting principles.
These financial statements should be read in conjunction with the
financial statements and related notes as of and for the year ended
August 31, 1996 contained in the Company's filing on Form 10-KSB dated
November 26, 1996 and with Management's Discussion and Analysis of
Financial Condition and Results of Operations appearing on pages 7
through 9 of this quarterly report.
2. INVENTORIES
Inventories consist of the following:
February 28, August 31, February 29,
1997 1996 1996
Production materials $ 130,276 $ 150,139 $ 137,641
Work in process 31,177 22,619 28,574
Finished goods 395,280 411,454 394,669
---------- ---------- ----------
$ 556,733 $ 584,212 $ 560,884
========== ========== ==========
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
February 28, August 31, February 29,
1997 1996 1996
Land $ 246,097 $ 246,097 $ 241,196
Buildings and improvements 1,044,996 979,369 553,907
Machinery and equipment 600,040 587,537 583,926
Deposits - - 97,616
------------ ----------- ------------
1,891,133 1,813,003 1,476,645
Less accumulated depreciation 889,637 832,187 802,043
------------ ----------- ------------
$ 1,001,496 $ 980,816 $ 674,602
============ =========== ============
4. INVESTMENTS IN CORPORATE JOINT VENTURES AND
EUROPEAN HOLDING COMPANY
During the six months ended February 28, 1997, the Company invested
$107,067 in foreign joint ventures. The Company has a 50% ownership
interest in each entity. The entities had no significant operations
prior to the Company's investment.
During the six months ended February 28, 1997, the Company invested
$254,375 for a 50% ownership interest in a European holding company. To
date, the entity has been inactive.
5. TRADING INVESTMENT
During the three months ended November 30, 1996, the Company entered
into an agreement (the Agreement) with a company to start a day trading
program. The program's objectives generally are to make purchase and
sales of shares on the New York Stock Exchange involving rapid turnover
of market positions within a trading day. The Agreement required the
Company to deposit $250,000 in a trading account at a broker for an
indefinite period of time.
6. STOCKHOLDERS' EQUITY
During the six months ended February 28, 1997, the Company acquired and
retired 5,000 shares of common stock for $24,600.
In November 1996, the Company declared a cash dividend of $.12 per share
payable on December 20, 1996 to shareholders of record on December 6,
1996.
In November 1996, six employees received a total of 3,000 shares of
common stock for services provided in fiscal 1996. The fair value of the
common stock issued was determined based on the market value of the
Company's common stock on the grant date and was accrued in fiscal 1996.
During the six months ended February 28, 1997, stock options for the
purchase of 9,033 shares of the Company's common stock were exercised at
prices between $3.00 and $3.13 per share.
7. INCOME PER SHARE
Income per common and common equivalent share was computed by dividing
net income by the weighted average number of shares of common and common
equivalent shares outstanding during each period. This amount includes
common stock equivalents of 68,983 and 61,073 for the three and six
months ended February 28, 1997, respectively, and 65,219 and 69,219 from
the three and six months ended February 29, 1996, respectively, assumed
for the exercise of outstanding options using the treasury stock method.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
GENERAL - The Company conducts all foreign transactions based on the U.S.
dollar, except for its investments in foreign joint ventures. The exchange rate
differential relating to investments in foreign joint ventures is accounted for
under the requirements of SFAS No. 52.
SALES - Net sales increased by $485,642 or 30% during the second quarter of 1997
from those of the second quarter of 1996. Net sales increased by $788,457 or 24%
during the six months ended February 28, 1997 compared to the six months ended
February 29, 1996. These changes in sales are due to the volume of corrosion
inhibiting products sold to existing or new customers. There has been no change
in product pricing, introduction of new products, or entry into any particular
new markets.
COST OF SALES - Cost of goods sold as a percentage of net sales for the second
quarter of 1997 was 46% compared to 48% for the second quarter of 1996. The cost
of goods sold percentage of net sales was 47% for the six months ended February
28, 1997 and February 29, 1996. Variations are due primarily to the mix of
product sales.
OPERATING EXPENSES - As a percentage of net sales, total operating expenses
increased from 31% in the second quarter of fiscal 1996 to 38% in the second
quarter of fiscal 1997. Operating expenses were 41% of net sales for the six
months ended February 28, 1997 and 34% for the six months ended February 29,
1996.
Operating expense classification percentages of net sales were as follows:
Three Months Ended Six Months Ended
------------------------------ --------------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
Selling expense 15% 13% 15% 12%
General and administrative 17 11 20 16
Research, engineering, and
technical support 6 7 6 6
Selling expenses increased during the second quarter of fiscal 1997 as compared
to the same period in fiscal 1996 due to increase in staff salaries, distributor
commissions, and travel. These same factors account for the increase in the
selling expense for the six months ended February 28, 1997 over the same period
in fiscal 1996. Selling expenses as a percentage of net sales increased for the
quarter and six months ended February 28, 1997 as compared to the same period in
fiscal 1996 due to the increased level of net sales in fiscal 1997 not fully
offsetting the effect of increased fiscal 1997 selling expenses.
General and administrative expenses increased during the second quarter of
fiscal 1997 as compared to the same period in fiscal 1996 due to increases in
salary expense, travel, and real estate taxes and other expenses associated with
the Company's expanded warehouse facility completed in December 1996. These same
factors account for the increase in the general and administrative expenses for
the six months ended February 28, 1997 over the same period in fiscal 1996.
General and administrative expenses as a percentage of net sales increased for
the quarter and six months ended February 28, 1997 as compared to the same
period in fiscal 1996 due to the increased level of net sales in fiscal 1997 not
fully offsetting the effect of increased fiscal 1997 general and administrative
expenses.
Research, engineering, and technical support expenses increased during the
second quarter of fiscal 1997 as compared to the same period in fiscal 1996 due
primarily to increases in staff salaries and travel. These same factors account
for the increase in research, engineering, and technical support expenses for
the six months ended February 28, 1997 over the same period in fiscal 1996. Such
expenses, as a percentage of sales were largely unchanged for the three and six
month periods ended February 28, 1997 as compared to fiscal 1996 periods.
JOINT VENTURES AND FOREIGN COMPANY - Net earnings from corporate joint ventures
and foreign company were $467,837 and $1,013,464 for the three and six months
ended February 28, 1997, respectively, compared to $280,522 and $607,061 for the
three and the six months ended February 29, 1996. This net increase reflects
increased sales volume at the Company's corporate joint ventures and reduced
travel and legal expense incurred by the Company in its support of existing and
new corporate joint ventures.
INCOME TAXES - Income tax expense for the three and six months ended February
28, 1997 and February 29, 1996 was calculated based on management's estimate of
the Company's annual effective income tax rate. The Company's effective income
tax rate for fiscal 1997 and 1996 is lower than the statutory rate primarily due
to the Company's equity in income of corporate joint ventures and foreign
company being recognized based on after tax earnings of these entities. To the
extent joint venture's undistributed earnings are distributed to the Company, it
does not result in any material additional income tax liability after the
application of foreign tax credits.
LIQUIDITY AND CAPITAL RESOURCES
At February 28, 1997, the Company's working capital was $5,034,130, including
$3,052,595 in cash and cash equivalents, compared to working capital of
$5,284,403 and $4,955,821 as of August 31, 1996 and February 29, 1996,
respectively.
Net cash provided from operations has been sufficient to meet liquidity
requirements, capital expenditures, research and development cost, and expansion
of operations of the Company's joint ventures. Cash flows from operations for
the six months ended February 28, 1997 and February 29, 1996 was $536,752 and
$627,563, respectively. The net cash flow from operations for the six months
ended February 28, 1997 and February 29, 1996 resulted principally from net
income and joint venture dividends offset by equity income of joint ventures and
increased trade receivables. During the six months ended February 28, 1997, the
net cash flow from operations was further reduced by payments on income tax
liabilities.
Net cash used in investing activities for the six months ended February 28, 1997
was $689,572 which resulted from investments in joint ventures and European
holding company, additions to property, and trading investment. Net cash
provided by investing activities for the six months ended February 29, 1996 was
$373,747 of which $743,875 related to the payments received on notes receivable
offset by additions to property of $370,128.
Net cash used in financing activities for the six months ended February 28, 1997
was $502,105 which resulted from the payment of dividends to stockholders of
$504,733 and the repurchase of common stock of $24,600 offset by proceeds from
the exercise of stock options of $27,228. Net cash used in financing activities
for the six months ended February 29, 1996 resulted from the payment of
dividends to stockholders of $424,877 and the repurchase of common stock of
$70,875 offset by proceeds of $12,250 from the exercise of stock options.
The Company expects to meet future liquidity requirements with its existing cash
and cash equivalents and from cash flows of future operating earnings and
distributions of earnings and technical assistance fees from the corporate joint
venture investments.
The Company has no long-term debt and no material lease commitments at February
28, 1997.
The Company has no postretirement benefit plan and does not anticipate
establishing any postretirement benefit program.
RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No. 123 encourages companies
to adopt a new accounting method that accounts for stock compensation awards
based on their estimated fair value at the date they are granted. However,
companies are permitted to continue following current accounting requirements
for employee stock-based transactions, which generally do not result in an
expense charge for most options if the exercise price is at least equal to the
fair market value of the stock at the date of grant. Companies that continue to
follow existing standards would be required to disclose in a note to the
financial statements the effect on net income and net income per share had the
Company recognized expense for options issued to employees based on SFAS No.
123. SFAS No. 123 is effect for the Company's fiscal year ending August 31, 1997
and will require disclosure information in those financial statements about
stock options granted in fiscal 1996 and thereafter. The Company has determined
that it will not adopt the fair value method prescribed by SFAS No. 123 for
employee stock-based transactions. The "as if" disclosures will be included in
the Company's annual financial statements for the year ending August 31, 1997.
In February 1997, the FASB issued SFAS No. 128, EARNINGS PER SHARE, which is
effective for interim and annual reporting periods ending after December 15,
1997. The implementation of SFAS No. 128 is expected to increase earnings per
share by an immaterial amount.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, EARNINGS PER
SHARE, and replaces the presentation of primary earning per share with a
presentation of basic earnings per share. It also requires dual presentation for
all entities with complex capital structures and provides guidance on other
computational changes.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By proxy solicitation, the following items were voted on by the Company's
stockholders at the Company's annual stockholders' meeting held February 14,
1997:
1. ELECTION OF DIRECTORS:
The following unopposed nominees for Director were elected: Philip M.
Lynch, Vincent J. Graziano, Sidney Dworkin, Richard G. Lareau, Donald A.
Kubik, Gerhard Hahn, and Milan R. Vukcevich. Each of the seven nominees for
Director received at least 99.5% of the votes cast.
2. APPOINTMENT OF DELOITTE & TOUCHE LLP AS INDEPENDENT AUDITORS.
The appointment of Deloitte & Touche LLP as independent auditors of the
Company for the fiscal year ending August 31, 1997 was ratified. Total
votes cast:
For 3,738,674
Against 4,050
Abstain 8,036
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
April 11, 1997
/s/ Loren M. Ehrmanntraut
------------------------------------------
Loren M. Ehrmanntraut
Secretary and Treasurer
5
3-MOS
AUG-31-1997
DEC-01-1996
FEB-28-1997
3,052,595
0
1,703,436
28,000
556,733
5,550,182
1,891,133
889,637
9,329,352
516,052
0
0
0
84,126
8,620,174
9,329,352
4,014,375
4,014,375
1,882,678
1,882,678
0
2,000
0
1,588,111
525,000
1,063,111
0
0
0
1,063,111
.25
.25
