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
May 31, 1998 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 July 7, 1998
Common Stock, $.02 par value 4,001,230
"This document consists of eleven
pages. One exhibit is being filed."
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------
MAY 31, AUGUST 31, MAY 31,
1998 1997 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,271,720 $ 3,945,567 $ 3,605,505
Receivables:
Trade, less allowance for doubtful accounts of $26,000,
$27,000, and $29,000, respectively 1,322,791 1,164,660 1,294,850
Corporate joint ventures 436,598 517,551 484,650
Income tax receivable 98,356 -- --
Inventories 823,300 841,618 573,536
Prepaid expenses and other 66,468 77,196 51,708
Deferred income taxes 240,000 240,000 170,000
------------ ------------ ------------
Total current assets 5,259,233 6,786,592 6,180,249
PROPERTY AND EQUIPMENT, net 979,191 962,328 977,666
OTHER ASSETS:
Investments in corporate joint ventures 2,409,352 2,291,600 2,145,571
Investment in European holding company 257,146 254,639 254,375
Investment in foreign company 139,475 132,000 159,879
Deferred income taxes 130,000 130,000 90,000
Other 603,952 625,544 364,140
------------ ------------ ------------
3,539,925 3,433,783 3,013,965
------------ ------------ ------------
$ 9,778,349 $ 11,182,703 $ 10,171,880
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 191,728 $ 162,477 $ 118,338
Income taxes -- 376,867 222,414
Accrued liabilities:
Payroll 170,750 230,951 141,326
Other 174,596 189,707 134,691
------------ ------------ ------------
Total current liabilities 537,074 960,002 616,769
DEFERRED GROSS PROFIT 118,000 118,000 118,000
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 3.999,030,
4,202,508, and 4,206,308, respectively 79,981 84,050 84,126
Additional paid-in capital 4,775,886 5,185,828 5,193,207
Retained earnings 4,778,490 5,217,221 4,418,164
Cumulative foreign currency translation adjustments (381,275) (252,591) (128,579)
------------ ------------ ------------
9,253,082 10,234,508 9,566,918
Notes and related interest receivable from purchase of
common stock (129,807) (129,807) (129,807)
------------ ------------ ------------
Total stockholders' equity 9,123,275 10,104,701 9,437,111
------------ ------------ ------------
$ 9,778,349 $ 11,182,703 $ 10,171,880
============ ============ ============
See notes to financial statements.
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
STATEMENTS OF INCOME (UNAUDITED
- --------------------------------------------------------------------------------
)
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31 MAY 31
---------------------------- --------------------------
1998 1997 1998 1997
SALES $ 2,607,271 $ 2,518,582 $ 7,822,455 $ 6,532,957
COST OF GOODS SOLD 1,268,043 1,201,326 3,897,220 3,084,004
----------- ----------- ----------- -----------
GROSS PROFIT 1,339,228 1,317,256 3,925,235 3,448,953
OPERATING EXPENSES:
Selling 317,926 241,033 937,621 832,336
General and administrative 376,765 529,735 1,331,530 1,349,132
Research, engineering, and technical support 132,184 107,199 380,159 326,627
----------- ----------- ----------- -----------
826,875 877,967 2,649,310 2,508,095
----------- ----------- ----------- -----------
OPERATING INCOME 512,353 439,289 1,275,925 940,858
JOINT VENTURES, EUROPEAN HOLDING
COMPANY AND FOREIGN COMPANY:
Equity in income of corporate
joint ventures, European holding
company, and foreign company 147,540 185,740 361,568 469,828
Fees for technical assistance to
corporate joint ventures 477,085 573,841 1,315,385 1,555,212
Corporate joint venture expense (145,754) (127,034) (446,027) (379,029)
----------- ----------- ----------- -----------
478,871 632,547 1,230,926 1,646,011
OTHER INCOME:
Interest income 21,551 36,311 108,858 101,505
Other income -- 113 -- 7,997
----------- ----------- ----------- -----------
21,551 36,424 108,858 109,502
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,012,775 1,108,260 2,615,709 2,696,371
INCOME TAXES 320,000 375,000 820,000 900,000
----------- ----------- ----------- -----------
NET INCOME $ 692,775 $ 733,260 $ 1,795,709 $ 1,796,371
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic $ .17 $ .17 $ .44 $ .43
=========== =========== =========== ===========
Diluted $ .17 $ .17 $ .43 $ .42
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 4,041,299 4,206,308 4,126,018 4,203,407
=========== =========== =========== ===========
Diluted 4,111,299 4,274,164 4,181,344 4,266,742
=========== =========== =========== ===========
See notes to financial statements.
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED
MAY 31
--------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,795,709 $ 1,796,371
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 89,100 86,175
Equity income of joint ventures, European holding company,
and foreign company (361,568) (469,828)
Dividends received from joint ventures 284,461 39,555
Deferred gross profit -- 9,000
Change in current assets and liabilities:
Receivables:
Trade (158,131) (166,875)
Joint ventures 80,953 39,927
Income tax receivable (98,356) --
Inventories 18,318 10,676
Prepaid expenses and other 54,320 76,895
Accounts payable 29,251 (36,521)
Income taxes (376,867) (241,286)
Accrued liabilities (75,312) 1,468
----------- -----------
Total adjustments (513,831) (650,814)
----------- -----------
Net cash provided by operating activities 1,281,878 1,145,557
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (105,963) (83,025)
Investment in European holding company -- (254,375)
Investments in joint ventures (179,311) (158,067)
Increase in other assets (22,000) (250,000)
----------- -----------
Net cash used in investing activities (307,274) (745,467)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 56,030 27,228
Dividends paid (621,798) (504,733)
Repurchase of common stock (2,082,683) (24,600)
----------- -----------
Net cash used in financing activities (2,648,451) (502,105)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,673,847) (102,015)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,945,567 3,707,520
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,271,720 $ 3,605,505
=========== ===========
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 May 31, 1998 and 1997, the
results of operations for the three and nine months ended May 31, 1998
and 1997, and the cash flows for the nine months ended May 31, 1998 and
1997, in conformity with generally accepted accounting principles.
Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. Net income per
common share presented for the three and nine months ended May 31, 1997
have been restated for the adoption of SFAS No. 128. The effect of
adopting SFAS No. 128 at December 15, 1997, on income per share for the
three and nine months ended May 31, 1997 was not material.
These financial statements should be read in conjunction with the
financial statements and related notes as of and for the year ended
August 31, 1997 contained in the Company's filing on Form 10-KSB dated
November 25, 1997 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:
May 31, August 31, May 31,
1998 1997 1997
Production materials $ 315,348 $ 276,631 $ 142,395
Work in process 75,346 21,301 20,205
Finished goods 432,606 543,686 410,936
---------- ---------- ----------
$ 823,300 $ 841,618 $ 573,536
========== ========== ==========
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
May 31, August 31, May 31,
1998 1997 1997
Land $ 246,097 $ 246,097 $ 246,097
Buildings and improvements 1,077,671 1,044,996 1,044,996
Machinery and equipment 669,155 603,919 604,935
---------- ---------- ----------
1,992,923 1,895,012 1,896,028
Less accumulated depreciation 1,013,732 932,684 918,362
---------- ---------- ----------
$ 979,191 $ 962,328 $ 977,666
========== ========== ==========
4. INVESTMENTS IN CORPORATE JOINT VENTURES
During the nine months ended May 31, 1998, the Company invested $179,311
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.
5. STOCKHOLDERS' EQUITY
During the nine months ended May 31, 1998, the Company purchased and
retired 220,020 shares of common stock for $2,082,683.
In November 1997, the Company declared a cash dividend of $.15 per share
payable on December 15, 1997 to shareholders of record on December 1,
1997.
During the nine months ended May 31, 1998, stock options for the
purchase of 16,542 shares of the Company's common stock were exercised
at prices between $3.00 and $6.13 per share.
6. INCOME PER SHARE
Basic income per share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted income per
share assumes the exercise of stock options using the treasury stock
method, if dilutive.
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 and foreign
company. The exchange rate differential relating to investments in foreign joint
ventures and foreign company is accounted for under the requirements of SFAS No.
52.
SALES - Net sales increased by $88,689 or 4% during the third quarter of 1998 as
compared to the third quarter of 1997. Net sales increased by $1,289,498 or 20%
during the nine months ended May 31, 1998 compared to the nine months ended May
31, 1997. 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 third
quarter of 1998 was 49% compared to 48% for the third quarter of 1997. The cost
of goods sold percentage of net sales was 50% and 47% for the nine months ended
May 31, 1998 and 1997, respectively. Variations are due primarily to the mix of
product sales.
OPERATING EXPENSES - As a percentage of net sales, total operating expenses
decreased to 32% in the third quarter of fiscal 1998 from 35% in the third
quarter of fiscal 1997. Operating expenses were 34% of net sales for the nine
months ended May 31, 1998 and 38% for the nine months ended May 31, 1997.
Operating expense classification percentages of net sales were as follows:
Three Months Ended Nine Months Ended
May 31 May 31
-------------------- -----------------
1998 1997 1998 1997
Selling expense 12% 10% 12% 13%
General and administrative 15 21 17 20
Research, engineering, and
technical support 5 4 5 5
Selling expenses increased during the third quarter of fiscal 1998 as compared
to the same period in fiscal 1997 due to increase in staff salaries and related
expenses and travel. These same factors account for the increase in the selling
expense for the nine months ended May 31, 1998 over the same period in fiscal
1997. Selling expenses as a percentage of net sales increased for the three
months ended May 31, 1998 as compared to the same period in 1997 due to the
increased level of net sales in fiscal 1998 not offsetting the effect of
increased fiscal 1998 selling expenses. Selling expenses as a percentage of net
sales decreased for the nine months ended May 31, 1998 as compared to the same
period in fiscal 1997 due to the increased level of net sales in fiscal 1998
offsetting the effect of increased fiscal 1998 selling expenses.
General and administrative expenses decreased during the third quarter of fiscal
1998 as compared to the same period in fiscal 1997 due to decreases in
professional fees and various other expenses. These same factors account for the
decrease in the general and administrative expenses for the nine months ended
May 31, 1998 over the same period in fiscal 1997. General and administrative
expenses as a percentage of net sales decreased for the three and nine months
ended May 31, 1998, as compared to the same period in 1997 due to the increased
level of net sales in fiscal 1998 and the decrease in fiscal 1998 general and
administrative expenses.
Research, engineering, and technical support expenses increased during the third
quarter of fiscal 1998 as compared to the same period in fiscal 1997 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 nine months ended May 31, 1998 over the same period in fiscal 1997. Such
expenses, as a percentage of sales were largely unchanged for the three and nine
month periods ended May 31, 1998 as compared to fiscal 1997 periods.
JOINT VENTURES, EUROPEAN HOLDING COMPANY, AND FOREIGN COMPANY - Net earnings
from corporate joint ventures, European holding company, and foreign company
were $478,871 and $1,230,926 for the three and nine months ended May 31, 1998,
respectively, compared to $632,547 and $1,646,011 for the three and the nine
months ended May 31, 1997. This net decrease is due to the strengthening of the
U.S. dollar when compared to the local currencies of the Company's corporate
joint ventures and decreased sales volume at certain of the Company's joint
ventures located in the Pacific Rim.
INCOME TAXES - Income tax expense for the three and nine months ended May 31,
1998 and 1997 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 1998 and 1997 is lower than the statutory rate primarily due to the
Company's equity in income of corporate joint ventures, European holding
company, 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 May 31, 1998, the Company's working capital was $4,722,159, including
$2,271,720 in cash and cash equivalents, compared to working capital of
$5,826,590 and $5,563,480 as of August 31, 1997 and May 31, 1997, 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 nine months ended May 31, 1998 and 1997 was $1,281,878 and $1,145,557,
respectively. The net cash flow from operations for the nine months ended May
31, 1998 and 1997 resulted principally from net income and joint venture
dividends offset by equity income of joint ventures, increased trade
receivables, and payment of income taxes.
Net cash used in investing activities for the nine months ended May 31, 1998 was
$307,274 which resulted from investments in joint ventures, additions to
property and an increase in other assets. Net cash used in investing activities
for the nine months ended May 31, 1997 was $745,467 which resulted from
investments in joint ventures and European holding company, additions to
property, and an increase in other assets.
Net cash used in financing activities for the nine months ended May 31, 1998
resulted from the payment of dividends to stockholders of $621,798 and the
repurchase of common stock of $2,082,683 offset by proceeds of $56,030 from the
exercise of stock options. Net cash used in financing activities for the nine
months ended May 31, 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.
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 May 31,
1998.
The Company has no postretirement benefit plan and does not anticipate
establishing any postretirement benefit program.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE
INCOME, which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The Company will be required to adopt SFAS No. 130 in fiscal 1999.
In June 1997, the FASB also issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 redefines how operating
segments are determined and requires disclosures of certain financial and
descriptive information about a company's operating segments. The Company
anticipates the adoption of SFAS No. 131 will result in the Company continuing
to operate in one segment. The Company will be required to adopt SFAS No. 131 in
fiscal 1999.
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
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
27 Financial Data Schedule
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
July 13, 1998
/s/ Loren M. Ehrmanntraut
-----------------------------------------------
Loren M. Ehrmanntraut
Chief Financial Officer and Corporate Secretary
5
9-MOS
AUG-31-1998
SEP-01-1997
MAY-31-1998
2,271,720
0
1,785,389
26,000
823,300
5,259,233
1,992,923
1,013,732
9,778,349
537,074
0
0
0
79,981
9,043,294
9,778,349
7,822,455
7,822,455
3,897,220
3,897,220
0
(1,000)
0
2,615,709
820,000
1,795,709
0
0
0
1,795,709
.44
.43
