SEC Filing | Northern Technologies International Corporation

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 29, 2000 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) (651) 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 March 31, 2000 Common Stock, $.02 par value 3,870,835 "This document consists of 12 pages. One exhibit is being filed."

PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) - --------------------------------------------------------------------------------------------------------------------------- FEBRUARY 29, AUGUST 31, 2000 1999 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,241,727 $ 2,750,209 Receivables: Trade, less allowance for doubtful accounts of $33,000 and $27,000, respectively 1,459,204 1,704,536 Corporate joint ventures 434,525 473,553 Inventories 1,132,557 1,013,525 Prepaid expenses and other 50,876 37,008 Deferred income taxes 170,000 170,000 ------------ ------------ Total current assets 6,488,889 6,148,831 PROPERTY AND EQUIPMENT, net 1,192,568 1,115,229 OTHER ASSETS: Investments in corporate joint ventures 3,281,476 3,424,623 Investment in European holding company 247,253 247,253 Deferred income taxes 210,000 210,000 Other 376,404 315,662 ------------ ------------ 4,115,133 4,197,538 ------------ ------------ $ 11,796,590 $ 11,461,598 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 183,230 $ 149,328 Income taxes 23,581 307,188 Accrued liabilities: Payroll and related benefits 148,230 54,182 Other 240,173 166,610 ------------ ------------ Total current liabilities 595,214 677,308 DEFERRED GROSS PROFIT 60,000 60,000 COMMITMENTS AND CONTINGENCIES 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 3,870,168 and 3,865,103, respectively 77,403 77,302 Additional paid-in capital 4,634,218 4,613,806 Retained earnings 7,009,513 6,481,550 Accumulated other comprehensive loss (449,951) (318,561) ------------ ------------ 11,271,183 10,854,097 Notes and related interest receivable from purchase of common stock (129,807) (129,807) ------------ ------------ Total stockholders' equity 11,141,376 10,724,290 ------------ ------------ $ 11,796,590 $ 11,461,598 ============ ============ See notes to financial statements. 2

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - --------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------- ------------------------------- FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, 2000 1999 2000 1999 SALES $ 2,693,682 $ 2,005,873 $ 5,525,546 $ 4,161,268 COST OF GOODS SOLD 1,347,685 978,486 2,696,205 2,048,189 ----------- ----------- ----------- ----------- GROSS PROFIT 1,345,997 1,027,387 2,829,341 2,113,079 OPERATING EXPENSES: Selling 459,431 383,363 910,840 724,994 General and administrative 517,309 322,981 1,197,107 835,609 Research, engineering, and technical support 201,043 160,019 316,216 262,498 ----------- ----------- ----------- ----------- 1,177,783 866,363 2,424,163 1,823,101 ----------- ----------- ----------- ----------- OPERATING INCOME 168,214 161,024 405,178 289,978 CORPORATE JOINT VENTURES AND EUROPEAN HOLDING COMPANY: Equity in income of corporate joint ventures and European holding company 112,045 3,866 271,362 181,669 Fees for technical assistance to corporate joint ventures 583,942 566,682 1,280,514 1,161,395 Corporate joint venture expense (190,426) (171,221) (354,405) (311,070) ----------- ----------- ----------- ----------- 505,561 399,327 1,197,471 1,031,994 INTEREST INCOME 20,424 19,927 55,341 35,949 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 694,199 580,278 1,657,990 1,357,921 INCOME TAXES 220,000 205,000 510,000 425,000 ----------- ----------- ----------- ----------- NET INCOME $ 474,199 $ 375,278 $ 1,147,990 $ 932,921 =========== =========== =========== =========== NET INCOME PER COMMON SHARE: Basic $ .12 $ .10 $ .30 $ .24 =========== =========== =========== =========== Diluted $ .12 $ .10 $ .30 $ .24 =========== =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES ASSUMED OUTSTANDING: Basic 3,870,127 3,871,863 3,868,752 3,864,093 =========== =========== =========== =========== Diluted 3,890,481 3,911,779 3,880,699 3,886,120 =========== =========== =========== =========== See notes to financial statements. 3

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - --------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED ------------------------------- FEBRUARY 29, FEBRUARY 28, 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,147,990 $ 932,921 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 76,165 68,950 Equity income of corporate joint ventures and European holding company (271,362) (181,669) Dividends received from corporate joint ventures 373,119 10,292 Change in current assets and liabilities: Receivables: Trade 245,332 (290,269) Joint ventures 39,028 (99,635) Income taxes -- (102,047) Inventories (119,032) 176,893 Prepaid expenses and other (21,260) 126,207 Accounts payable 33,902 (77,671) Income taxes (283,607) (66,416) Accrued liabilities 167,611 15,586 ----------- ----------- Total adjustments 239,896 (419,779) ----------- ----------- Net cash provided by operating activities 1,387,886 513,142 CASH FLOWS FROM INVESTING ACTIVITIES: Investments in corporate joint ventures (90,000) (522,660) Additions to property (153,504) (218,131) Increase in other assets (53,350) -- ----------- ----------- Net cash used in investing activities (296,854) (740,791) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 20,831 95,573 Repurchase of common stock (1,413) (68,900) Dividends paid (618,932) (581,104) ----------- ----------- Net cash used in financing activities (599,514) (554,431) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 491,518 (782,080) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,750,209 2,200,490 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,241,727 $ 1,418,410 =========== =========== See notes to financial statements. 4

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED 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 and Subsidiaries as of February 29, 2000 and February 28, 1999, the results of operations for the three and six months ended February 29, 2000 and February 28, 1999, and the cash flows for the six months ended February 29, 2000 and February 28, 1999, 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, 1999 contained in the Company's filing on Form 10-KSB dated November 19, 1999 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. COMPREHENSIVE INCOME The Company's total comprehensive income was as follows: Three Months Ended Six Months Ended ----------------------------- ----------------------- February 29, February 28, February 29, February 28, 2000 1999 2000 1999 Net income $ 474,199 $ 375,278 $ 1,147,990 $ 932,921 Other comprehensive (loss) income (106,233) (58,048) (131,390) 59,217 ----------- ----------- ------------ ----------- Total comprehensive income $ 367,966 $ 317,230 $ 1,016,600 $ 992,138 =========== =========== ============ =========== 3. INVENTORIES Inventories consist of the following: February 29, August 31, 2000 1999 Production materials $ 230,280 $ 218,701 Work in process 25,901 24,753 Finished goods 876,376 770,071 ------------ ------------- $ 1,132,557 $ 1,013,525 ============ ============= 5

4. PROPERTY AND EQUIPMENT Property and equipment consist of the following: February 29, August 31, 2000 1999 Land $ 246,097 $ 246,097 Buildings and improvements 1,152,997 1,100,757 Machinery and equipment 1,065,416 964,152 ------------- -------------- 2,464,510 2,311,006 Less accumulated depreciation 1,271,942 1,195,777 ------------- -------------- $ 1,192,568 $ 1,115,229 ============= ============== 5. INVESTMENTS IN CORPORATE JOINT VENTURES During the six months ended February 29, 2000, the Company invested an additional $90,000 in existing foreign joint ventures. 6. STOCKHOLDERS' EQUITY During the six months ended February 29, 2000, the Company purchased and retired 157 shares of common stock for $1,413. In November 1999, the Company declared a cash dividend of $.16 per share payable on December 17, 1999 to shareholders of record on December 3, 1999. During the six months ended February 29, 2000, stock options for the purchase of 5,222 shares of the Company's common stock were exercised at prices between $3.00 and $6.25 per share. 7. NET INCOME PER SHARE Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share assumes the exercise of stock options using the treasury stock method, if dilutive. 8. COMMITMENTS AND CONTINGENCIES A subsidiary of the Company owns a one-third ownership interest in a limited liability company, which owns and operates a rental property building. The Company has guaranteed a performance obligation of the limited liability company valued at $319,275. The Company's subsidiary has entered into a lease for office and warehouse space requiring monthly payments of $13,194 per month, subject to annual CPI index escalation, through November 2014. 6

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 $687,809 or 34% during the second quarter of 2000 from those of the second quarter of 1999. Net sales increased by $1,364,278 or 33% during the six months ended February 29, 2000 compared to the six months ended February 28, 1999. These changes in sales are due to an increase in demand and selling prices for materials science based industrial packaging products. There has been no introduction of new products or entry into any particular new markets. COST OF SALES - Cost of goods sold as a percentage of net sales was 50% and 49% for the second quarter of 2000 and 1999, respectively. The cost of goods sold percentage of net sales was 49% for the six months ended February 29, 2000 and February 28, 1999. Variations are due primarily to the mix of product sales. OPERATING EXPENSES - As a percentage of net sales, total operating expenses were 44% in the second quarter of fiscal 2000 and 43% in the second quarter of fiscal 1999. Operating expenses were 44% of net sales for the six months ended February 29, 2000 and for the six months ended February 28, 1999. Operating expense classification percentages of net sales were as follows: Three Months Ended Six Months Ended --------------------------------- ------------------------ February 29, February 28, February 29, February 28, 2000 1999 2000 1999 Selling expense 17% 19% 16% 18% General and administrative 19 16 22 20 Research, engineering, and technical support 8 8 6 6 Selling expenses increased during the second quarter of fiscal 2000 as compared to the same period in fiscal 1999 due primarily to increases in salaries and related expenses and product promotion expenses. These same factors account for the increase in the selling expense for the six months ended February 29, 2000 over the same period in fiscal 1999. Selling expenses as a percentage of net sales decreased for the quarter and six months ended February 29, 2000 as compared to the same periods in fiscal 1999 due to the increase in sales in fiscal 2000 offsetting the increase in fiscal 2000 selling expenses. General and administrative expenses increased during the second quarter of fiscal 2000 as compared to the same period in fiscal 1999 due primarily to increases in professional fees, travel, and expenses related to a new facility. These same factors account for the increase in the general and administrative expenses for the six months ended February 29, 2000 over the same period in fiscal 1999. General and administrative expenses as a percentage of net sales increased for the three and six months ended February 29, 2000, as compared to the same periods in fiscal 1999 due to the increase in sales in fiscal 2000 not fully offsetting the increase in fiscal 2000 general and administrative expenses. 7

Research, engineering, and technical support expenses increased during the second quarter of fiscal 2000 as compared to the same period in fiscal 1999 due primarily to an increase in independent consulting services for product development and travel. These same factors account for the increase in research, engineering, and technical support expenses for the six months ended February 29, 2000 over the same period in fiscal 1999. Such expenses as a percentage of sales were substantially unchanged for the quarter and six months ended February 29, 2000 as compared to the same period in fiscal 1999. CORPORATE JOINT VENTURES AND EUROPEAN HOLDING COMPANY - Net earnings from corporate joint ventures and European holding company were $505,561 and $1,197,471 for the three and six months ended February 29, 2000, respectively, compared to $399,327 and $1,031,994 for the three and the six months ended February 28, 1999. This net increase is due to increased sales volume at certain of the Company's joint ventures. INCOME TAXES - Income tax expense for the three and six months ended February 29, 2000 and February 28, 1999 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 2000 and 1999 is lower than the statutory rate primarily due to the Company's equity in income of corporate joint ventures and European holding company being recognized based on after tax earnings of these entities. To the extent joint ventures' undistributed earnings are distributed to the Company, they do not result in any material additional income tax liability after the application of foreign tax credits. LIQUIDITY AND CAPITAL RESOURCES At February 29, 2000, the Company's working capital was $5,893,675, including $3,241,727 in cash and cash equivalents, compared to working capital of $5,471,523 including cash and cash equivalents of $2,750,209 as of August 31, 1999. 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 29, 2000 and February 28, 1999 was $1,387,886 and $513,142, respectively. The net cash flow from operations for the six months ended February 29, 2000 resulted principally from net income, corporate joint venture dividends, and a decrease in accounts receivable offset by equity income of corporate joint ventures and European holding company and income tax payments. The net cash flow from operations for the six months ended February 28, 1999 resulted principally from net income and a decrease in inventories offset by equity in income of corporate joint ventures and European holding company and an increase in receivables. Net cash used in investing activities for the six months ended February 29, 2000 was $296,854 which resulted from investments in corporate joint ventures, additions to property and an increase in other assets. Net cash used in investing activities for the six months ended February 28, 1999 was $740,791 which resulted from additional investments in existing corporate joint ventures and additions to property. Net cash used in financing activities for the six months ended February 29, 2000 resulted from the payment of dividends to stockholders of $618,932 and the repurchase of common stock of $1,413 offset by proceeds of $20,831 from the exercise of stock options. Net cash used in financing activities for the six months ended February 28, 1999 was $554,431 which resulted from the payment of dividends to stockholders of $581,104 and the repurchase of common stock of $68,900 offset by proceeds from the exercise of stock options of $95,573. 8

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 capital lease commitments at February 29, 2000. The Company has no postretirement benefit plan and does not anticipate establishing any postretirement benefit program. IMPACT OF YEAR 2000 Computer programs have historically been written to abbreviate dates by using two digits instead of four digits to identify a particular year. The so-called "year-2000 problem" or "millennium bug" is the inability of computer software or hardware (collectively, Systems) to recognize or properly process dates ending in "00" and dates after the year 2000. As of April 10, 2000, the Company has not experienced and does not anticipate any adverse effects on the Company's systems and operations as a result of year-2000 issues. Further, as of April 10, 2000, the Company has not experienced any operating problems or product failures as a result of year-2000 issues with its vendors, service providers, or customers. EURO CURRENCY ISSUE On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their respective existing currencies and the Euro and to adopt the Euro as their common legal currency on that date (the Euro Conversion). Following the Euro Conversion, however, the previously existing currencies of the participating countries are scheduled to remain legal tender in the participating countries between January 1, 1999 and January 2002. During this transition period, public and private parties may pay for goods and services using either the Euro or the previously existing currencies. Beginning January 1, 2002, the participating countries will issue new Euro-denominated bills and coins for use in cash transactions. No later than July 1, 2002, the participating countries will withdraw all bills and coins denominated in the previously existing currencies making Euro Conversion complete. The Company and the corporate joint ventures have been evaluating the potential impact the Euro Conversion and the Euro currency may have on their results of operations, liquidity, or financial condition. The Company has determined that expected costs for compliance will not be material to its results of operations, liquidity, financial condition, or capital expenditures. Significant noncompliance by the Company's corporate joint ventures and their customers or suppliers could adversely impact the Company's results of operations, liquidity, or financial condition. Accordingly, until the Company completes its assessment of the Euro Conversion impact, there can be no assurance that the Euro Conversion will not have a material impact on the overall business operations of the Company. 9

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 The Annual Meeting of Stockholders of the Company (Annual Meeting) was held on February 18, 2000. The following matters were voted on and approved by the Company's stockholders at the Annual Meeting. The tabulation of votes with respect to each of the following matters voted on at the Annual Meeting is set forth as follows: 1. ELECTION OF DIRECTORS: For Against Abstain Sidney Dworkin 3,379,008 9,485 35,738 Vincent J. Graziano 3,385,208 3,285 35,738 Gerhard Hahn 3,385,208 3,285 35,738 Dr. Donald A. Kubik 3,385,208 3,285 35,738 Richard G. Lareau 3,379,008 9,485 35,738 Philip M. Lynch 3,385,208 3,285 35,738 Haruhiko Rikuta 3,385,208 3,285 35,738 Dr. Milan R. Vukcevich 3,385,208 3,285 35,738 2. ADOPTION OF THE COMPANY'S 2000 STOCK INCENTIVE PLAN The approval and adoption of the Company's 2000 Stock Incentive Plan was ratified. Total votes cast: For 2,590,555 Against 102,968 Abstain 730,708 10

3. 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, 2000 was ratified. Total votes cast: For 3,373,370 Against 12,023 Abstain 38,838 ITEM 5 - OTHER INFORMATION None ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 27 Financial Data Schedule 11

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 13, 2000 /s/ Matjaz Korosec ------------------ Matjaz Korosec Treasurer

5 6-MOS AUG-31-2000 FEB-29-2000 3,241,727 0 1,492,204 33,000 1,132,557 6,488,889 2,464,510 1,271,942 11,796,590 595,214 0 0 0 77,403 11,063,973 11,796,590 5,525,546 5,525,546 2,696,205 2,696,205 0 0 0 1,657,990 510,000 1,147,990 0 0 0 1,147,990 0.30 0.30