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, 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 July 9, 1997
Common Stock, $.02 par value 4,202,308
This document consists of eleven
pages. No exhibits are being filed.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
BALANCE SHEETS (UNAUDITED)
MAY 31, AUGUST 31, MAY 31,
1997 1996 1996
------------ ------------ ------------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,605,505 $ 3,707,520 $ 3,392,612
Receivables:
Trade, less allowance for doubtful accounts of $29,000, $26,000,
and $26,500, respectively 1,294,850 1,127,975 979,167
Corporate joint ventures 484,650 524,577 409,817
Inventories 573,536 584,212 627,264
Prepaid expenses and other 51,708 78,603 59,238
Deferred income taxes 170,000 170,000 110,000
------------ ------------ ------------
Total current assets 6,180,249 6,192,887 5,578,098
PROPERTY AND EQUIPMENT, net 977,666 980,816 809,815
OTHER ASSETS:
Investments in corporate joint ventures 2,145,571 1,726,328 1,448,161
Investment in European holding company 254,375 -- --
Investment in foreign company 159,879 159,879 155,068
Trading investment 250,000 -- --
Deferred income taxes 90,000 90,000 100,000
Other 114,140 164,140 103,092
------------ ------------ ------------
3,013,965 2,140,347 1,806,321
------------ ------------ ------------
$ 10,171,880 $ 9,314,050 $ 8,194,234
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 118,338 $ 154,859 $ 116,591
Income taxes 222,414 463,700 180,295
Accrued liabilities:
Payroll 141,326 177,381 63,073
Other 134,691 112,544 60,916
------------ ------------ ------------
Total current liabilities 616,769 908,484 420,875
DEFERRED GROSS PROFIT 118,000 109,000 100,500
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 4,216,190 shares, respectively 84,126 83,985 84,324
Additional paid-in capital 5,193,207 5,158,344 5,183,717
Retained earnings 4,418,164 3,143,526 2,500,443
Cumulative foreign currency translation adjustments (128,579) 40,518 34,182
------------ ------------ ------------
9,566,918 8,426,373 7,802,666
Notes and related interest receivable from purchase of common stock (129,807) (129,807) (129,807)
------------ ------------ ------------
Total stockholders' equity 9,437,111 8,296,566 7,672,859
------------ ------------ ------------
$ 10,171,880 $ 9,314,050 $ 8,194,234
============ ============ ============
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31 MAY 31
-------------------------- --------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
SALES $ 2,518,582 $ 1,751,478 $ 6,532,957 $ 4,977,396
COST OF GOODS SOLD 1,201,326 809,361 3,084,004 2,330,574
----------- ----------- ----------- -----------
GROSS PROFIT 1,317,256 942,117 3,448,953 2,646,822
OPERATING EXPENSES:
Selling 241,033 191,778 832,336 597,862
General and administrative 529,735 315,945 1,349,132 830,773
Research, engineering, and technical support 107,199 108,959 326,627 297,883
----------- ----------- ----------- -----------
877,967 616,682 2,508,095 1,726,518
----------- ----------- ----------- -----------
OPERATING INCOME 439,289 325,435 940,858 920,304
JOINT VENTURES AND FOREIGN COMPANY:
Equity in income of corporate joint ventures
and foreign company 185,740 116,214 469,828 338,845
Fees for technical assistance to corporate joint ventures 573,841 344,094 1,555,212 1,017,072
Corporate joint venture expense (127,034) (97,678) (379,029) (386,226)
----------- ----------- ----------- -----------
632,547 362,630 1,646,011 969,691
OTHER INCOME:
Interest income 36,311 41,519 101,505 112,921
Other income 113 7,455 7,997 11,182
----------- ----------- ----------- -----------
36,424 48,974 109,502 124,103
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,108,260 737,039 2,696,371 2,014,098
INCOME TAXES 375,000 230,000 900,000 630,000
----------- ----------- ----------- -----------
NET INCOME $ 733,260 $ 507,039 $ 1,796,371 $ 1,384,098
=========== =========== =========== ===========
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ .17 $ .12 $ .42 $ .32
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 4,274,164 4,300,718 4,266,742 4,310,226
=========== =========== =========== ===========
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
MAY 31
--------------------------
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,796,371 $ 1,384,098
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 86,175 57,760
Equity in income of corporate joint ventures and foreign company (469,828) (338,845)
Dividends received from joint ventures 39,555 184,101
Deferred gross profit 9,000 --
Change in current assets and liabilities:
Receivables:
Trade (166,875) (147,730)
Corporate joint ventures 39,927 (3,187)
Inventories 10,676 (96,670)
Prepaid expenses and other 76,895 (3,375)
Accounts payable (36,521) (17,952)
Income taxes (241,286) 37,915
Accrued liabilities 1,468 (101,416)
----------- -----------
Total adjustments (650,814) (429,399)
----------- -----------
Net cash provided by operating activities 1,145,557 954,699
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (83,025) (525,326)
Trading investment (250,000) --
Investment in European holding company (254,375) --
Investment in corporate joint ventures (158,067) --
Payment on note receivable from purchase of common stock -- 743,875
----------- -----------
Net cash (used in) provided by investing activities (745,467) 218,549
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 27,228 39,960
Dividends paid (504,733) (424,877)
Repurchase of common stock (24,600) (227,020)
----------- -----------
Net cash used in financing activities (502,105) (611,937)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (102,015) 561,311
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,707,520 2,831,301
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,605,505 $ 3,392,612
=========== ===========
See notes to financial statements.
</TABLE>
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, 1997 and 1996, the
results of operations for the three and nine months ended May 31, 1997
and 1996, and the cash flows for the nine months ended May 31, 1997 and
1996, in conformity with generally accepted accounting principles.
Operating results for the nine months ended May 31, 1997 are not
necessarily indicative of the results that may be expected for the year
ending August 31, 1997.
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
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Inventories consist of the following:
May 31, August 31, May 31,
1997 1996 1996
<S> <C> <C> <C>
Production materials $ 142,395 $ 150,139 $ 125,453
Work in process 20,205 22,619 31,363
Finished goods 410,936 411,454 470,448
----------- ----------- -----------
$ 573,536 $ 584,212 $ 627,264
=========== =========== ===========
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
May 31, August 31, May 31,
1997 1996 1996
Land $ 246,097 $ 246,097 $ 241,196
Buildings and improvements 1,044,996 979,369 553,907
Machinery and equipment 604,935 587,537 587,657
Deposits - - 249,083
----------- ----------- -----------
1,896,028 1,813,003 1,631,843
Less accumulated depreciation 918,362 832,187 822,028
----------- ----------- -----------
$ 977,666 $ 980,816 $ 809,815
=========== =========== ===========
</TABLE>
4. INVESTMENTS IN CORPORATE JOINT VENTURES AND
EUROPEAN HOLDING COMPANY
During the nine months ended May 31, 1997, the Company invested $158,067
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 nine months ended May 31, 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 purchases and
sales of shares on the New York Stock Exchange involving 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 nine months ended May 31, 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 fair market value of the
Company's common stock on the grant date and was accrued in fiscal 1996.
During the nine months ended May 31, 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.
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. Common equivalent
shares include common stock equivalents of 63,334 and 67,950 for the
nine months ended May 31, 1997 and 1996, respectively, and 67,856 and
65,413 for the third quarter of fiscal 1997 and 1996, respectively, from
the assumed exercise of outstanding warrants and options using the
treasury stock method.
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 $767,104 or 44% in the third quarter of fiscal
1997 as compared to the third quarter of fiscal 1996. Net sales increased by
$1,555,561 or 31% in the nine months ended May 31, 1997 as compared to the same
period of fiscal 1996. These increases in sales are due to the volume of
corrosion inhibiting products sold to new and existing customers. Fiscal 1997
year to date sales to an existing customer increased significantly over fiscal
1996 and represents approximately 13% of total net sales in fiscal 1997. There
has been no change in product pricing or introduction of new products during
fiscal 1997.
COST OF SALES - Cost of goods sold as a percentage of net sales was 48% for the
third quarter of fiscal 1997 as compared to 46% for the third quarter of fiscal
1996. The cost of goods sold percentage was 47% for the nine months ended May
31, 1997 and 1996. Variations are due primarily to the mix of product sales.
OPERATING EXPENSES - As a percentage of net sales, total operating expenses
remained consistent at 35% in the third quarters of fiscal 1996 and 1997.
Operating expenses were 38% and 35% of net sales for the nine months ended May
31, 1997 and 1996, respectively.
Operating expense classification percentages of net sales were as follows:
Three Months Nine Months
Ended Ended
May 31 May 31
-------------- --------------
1997 1996 1997 1996
Selling expenses 10% 11% 13% 12%
General and administrative 21% 18% 20% 17%
Research, engineering, and technical support 4% 6% 5% 6%
Selling expenses increased in the third quarter of fiscal 1997 as compared to
the same period in fiscal 1996 due to increases in distributor commissions,
salaries, and travel. Selling expenses increased for the nine months ended May
31, 1997 as compared to the same period in fiscal 1996 due to increases in
promotional expenses in addition to the factors impacting the third quarter.
Selling expenses as a percentage of net sales increased for the nine months
ended May 31, 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 for the three and nine months
ended May 31, 1997 as compared to the same periods in 1996 due to increases in
salaries, travel, legal and real estate taxes and other expenses associated with
the Company's expanded warehouse facility completed in December 1996. General
and administrative expenses as a percentage of net sales increased for the three
and nine months ended May 31, 1997 as compared to the same periods in 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 in the third quarter of
fiscal 1997 were comparable to the same period in 1996. Such expenses for the
nine month period ended May 31, 1997 increased over the comparable fiscal 1996
period due primarily to increases in salaries and travel. Research, engineering
and technical support expenses, as a percentage of sales, were substantially
unchanged for the three and nine months ended May 31, 1997 as compared to the
same periods in 1996.
JOINT VENTURES AND FOREIGN COMPANY - Net earnings from corporate joint ventures
and foreign company were $632,547 and $1,646,011 for the three and the nine
months ended May 31, 1997, respectively, compared to $362,630 and $969,691 for
the three and the nine months ended May 31, 1996, respectively. The net
increases primarily reflect increased sales volume and net earnings at the
Company's corporate joint ventures.
INCOME TAXES - Income tax expense for the three and nine months ended May 31,
1997 and 1996 was calculated based on management's estimate of the Company's
annual effective income tax rate. The Company's effective income tax rate 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 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, 1997, the Company's working capital was $5,563,480, including
$3,605,505 in cash and cash equivalents, compared to working capital of
$5,284,403 and $5,157,223 at August 31, 1996 and May 31, 1996, respectively.
Net cash provided from operations has been sufficient to meet liquidity
requirements, capital expenditures, research and development costs, and
expansion of the Company's joint ventures operations. Cash flow from operations
for the nine months ended May 31, 1997 and 1996 was $1,145,557 and $954,699,
respectively. The net cash flow from operations for the nine months ended May
31, 1997 and 1996 resulted principally from net income and joint venture
dividends offset by equity income of joint ventures and increases in trade
receivables. During the nine months ended May 31, 1997, net cash flow from
operations was further reduced by payments on income tax liabilities.
Net cash used in investing activities for the nine months ended May 31, 1997 was
$745,467 which resulted from investments in corporate joint ventures and a
European holding company, purchases of property and equipment and deposit to a
trading investment account. Net cash provided by investing activities for the
nine months ended May 31, 1996 was $218,549 of which $743,875 related to the
payments received on notes receivable offset by additions to property of
$525,326.
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. Net cash used in financing activities
for the nine months ended May 31, 1996 resulted from the payment of dividends to
stockholders of $424,877 and the repurchase of common stock of $227,020 offset
by proceeds of $39,960 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 May 31,
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 effective 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. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15,
EARNINGS PER SHARE, and replaces the presentation of primary earnings 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. The implementation of SFAS No. 128 is
expected to increase earnings per share by an immaterial amount.
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
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
July 11, 1997
/S/ Loren M. Ehrmanntraut
-----------------------------------------------
Loren M. Ehrmanntraut
Chief Financial Officer and Corporate Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 3,605,505
<SECURITIES> 0
<RECEIVABLES> 1,808,500
<ALLOWANCES> 29,000
<INVENTORY> 573,536
<CURRENT-ASSETS> 6,180,249
<PP&E> 1,896,028
<DEPRECIATION> 918,362
<TOTAL-ASSETS> 10,171,880
<CURRENT-LIABILITIES> 616,769
<BONDS> 0
0
0
<COMMON> 84,126
<OTHER-SE> 9,352,985
<TOTAL-LIABILITY-AND-EQUITY> 10,171,880
<SALES> 6,532,957
<TOTAL-REVENUES> 6,532,957
<CGS> 3,084,004
<TOTAL-COSTS> 3,084,004
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,696,371
<INCOME-TAX> 900,000
<INCOME-CONTINUING> 1,796,371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,796,371
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
