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, 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 March 31, 1998
Common Stock, $.02 par value 4,028,290
"This document consists of twelve
pages. One exhibit is being filed."
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
BALANCE SHEETS (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
FEBRUARY 28, AUGUST 31, FEBRUARY 28,
1998 1997 1997
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,732,485 $ 3,945,567 $ 3,052,595
Receivables:
Trade, less allowance for doubtful accounts of $25,000,
$27,000, and $28,000, respectively 1,470,136 1,164,660 1,253,666
Corporate joint ventures 399,715 517,551 449,770
Inventories 885,302 841,618 556,733
Prepaid expenses and other 119,737 77,196 67,418
Deferred income taxes 240,000 240,000 170,000
------------ ------------ ------------
Total current assets 5,847,375 6,786,592 5,550,182
PROPERTY AND EQUIPMENT, net 996,964 962,328 1,001,496
OTHER ASSETS:
Investments in corporate joint ventures 2,172,663 2,291,600 1,909,280
Investment in European holding company 264,430 254,639 254,375
Investment in foreign company 136,302 132,000 159,879
Deferred income taxes 130,000 130,000 90,000
Other 603,952 625,544 364,140
------------ ------------ ------------
3,307,347 3,433,783 2,777,674
------------ ------------ ------------
$ 10,151,686 $ 11,182,703 $ 9,329,352
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 106,368 $ 162,477 $ 201,515
Income taxes 18,522 376,867 106,579
Accrued liabilities:
Payroll 114,500 230,951 73,197
Other 186,279 189,707 134,761
------------ ------------ ------------
Total current liabilities 425,669 960,002 516,052
DEFERRED GROSS PROFIT 118,000 118,000 109,000
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 4,128,290,
4,202,508, and 4,206,308, respectively 82,566 84,050 84,126
Additional paid-in capital 5,031,368 5,185,828 5,193,207
Retained earnings 4,990,203 5,217,221 3,684,904
Cumulative foreign currency translation adjustments (366,313) (252,591) (128,130)
------------ ------------ ------------
9,737,824 10,234,508 8,834,107
Notes and related interest receivable from purchase of
common stock (129,807) (129,807) (129,807)
------------ ------------ ------------
Total stockholders' equity 9,608,017 10,104,701 8,704,300
------------ ------------ ------------
$ 10,151,686 $ 11,182,703 $ 9,329,352
============ ============ ============
</TABLE>
See notes to financial statements.
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
STATEMENTS OF INCOME (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
SALES $ 2,532,443 $ 2,092,961 $ 5,215,184 $ 4,014,375
COST OF GOODS SOLD 1,241,662 969,976 2,629,177 1,882,678
----------- ----------- ----------- -----------
GROSS PROFIT 1,290,781 1,122,985 2,586,007 2,131,697
OPERATING EXPENSES:
Selling 346,960 322,882 619,695 591,303
General and administrative 430,364 352,954 954,765 819,397
Research, engineering, and
technical support 135,847 119,396 247,975 219,428
----------- ----------- ----------- -----------
913,171 795,232 1,822,435 1,630,128
----------- ----------- ----------- -----------
OPERATING INCOME 377,610 327,753 763,572 501,569
JOINT VENTURES, EUROPEAN HOLDING
COMPANY AND FOREIGN COMPANY:
Equity in income of corporate
joint ventures, European holding
company, and foreign company 99,883 129,399 214,028 284,088
Fees for technical assistance to
corporate joint ventures 371,479 469,432 838,300 981,371
Corporate joint venture expense (114,635) (130,994) (300,273) (251,995)
----------- ----------- ----------- -----------
356,727 467,837 752,055 1,013,464
OTHER INCOME:
Interest income 54,591 57,472 87,307 65,194
Other income -- 3,727 -- 7,884
----------- ----------- ----------- -----------
54,591 61,199 87,307 73,078
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 788,928 856,789 1,602,934 1,588,111
INCOME TAXES 250,000 315,000 500,000 525,000
----------- ----------- ----------- -----------
NET INCOME $ 538,928 $ 541,789 $ 1,102,934 $ 1,063,111
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic $ .13 $ .13 $ .26 $ .25
=========== =========== =========== ===========
Diluted $ .13 $ .13 $ .26 $ .25
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
Basic 4,143,451 4,206,241 4,169,098 4,201,925
=========== =========== =========== ===========
Diluted 4,219,147 4,275,224 4,252,088 4,262,998
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
FEBRUARY 28, FEBRUARY 28,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,102,934 $ 1,063,111
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 59,400 57,450
Equity income of joint ventures (214,028) (284,088)
Dividends received from joint ventures 284,461 39,555
Change in current assets and liabilities:
Receivables:
Trade (305,476) (125,691)
Joint ventures 117,836 74,807
Inventories (43,684) 27,479
Prepaid expenses and other 1,051 61,186
Accounts payable (56,109) 46,656
Income taxes (358,345) (357,121)
Accrued liabilities (119,879) (66,592)
----------- -----------
Total adjustments (634,773) (526,359)
----------- -----------
Net cash provided by operating activities 468,161 536,752
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in European holding company -- (254,375)
Investments in joint ventures (79,311) (107,067)
Additions to property (94,036) (78,130)
Increase in other assets (22,000) (250,000)
----------- -----------
Net cash used in investing activities (195,347) (689,572)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 51,497 27,228
Repurchase of common stock (915,595) (24,600)
Dividends paid (621,798) (504,733)
----------- -----------
Net cash used in financing activities (1,485,896) (502,105)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,213,082) (654,925)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,945,567 3,707,520
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,732,485 $ 3,052,595
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
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, 1998 and 1997,
the results of operations for the three and six months ended February
28, 1998 and 1997, and the cash flows for the six months ended February
28, 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 six months ended February 28,
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 six months ended February 28, 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:
February 28, August 31, February 28,
1998 1997 1997
Production materials $ 419,147 $ 276,631 $ 130,276
Work in process 219,800 21,301 31,177
Finished goods 246,355 543,686 395,280
------------ ------------ ------------
$ 885,302 $ 841,618 $ 556,733
============ ============ ============
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
February 28, August 31, February 28,
1998 1997 1997
Land $ 246,097 $ 246,097 $ 246,097
Buildings and improvements 1,077,670 1,044,996 1,044,996
Machinery and equipment 657,229 603,919 600,040
------------- ------------- --------------
1,980,996 1,895,012 1,891,133
Less accumulated depreciation 984,032 932,684 889,637
------------- ------------- --------------
$ 996,964 $ 962,328 $ 1,001,496
============= ============= ==============
4. INVESTMENTS IN CORPORATE JOINT VENTURES
During the six months ended February 28, 1998, the Company invested
$79,311 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 six months ended February 28, 1998, the Company purchased and
retired 90,020 shares of common stock for $915,595.
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 six months ended February 28, 1998, stock options for the
purchase of 15,802 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.
7. SUBSEQUENT EVENT
During March 1998, the Company acquired 100,000 shares of its common
stock for $912,500.
<PAGE>
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 $439,482 or 21% during the second quarter of 1998
from those of the second quarter of 1997. Net sales increased by $1,200,809 or
30% during the six months ended February 28, 1998 compared to the six months
ended February 28, 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 second
quarter of 1998 was 49% compared to 46% for the second quarter of 1997. The cost
of goods sold percentage of net sales was 50% and 47% for the six months ended
February 28, 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 36% in the second quarter of fiscal 1998 from 38% in the second
quarter of fiscal 1997. Operating expenses were 35% of net sales for the six
months ended February 28, 1998 and 41% for the six months ended February 28,
1997.
Operating expense classification percentages of net sales were as follows:
Three Months Ended Six Months Ended
-------------------------- --------------------------
February 28, February 28, February 28, February 28,
1998 1997 1998 1997
Selling expense 14% 15% 12% 15%
General and administrative 17 17 18 20
Research, engineering, and
technical support 5 6 5 6
Selling expenses increased during the second quarter of fiscal 1998 as compared
to the same period in fiscal 1997 due to increase in staff salaries and
distributor commissions. These same factors account for the increase in the
selling expense for the six months ended February 28, 1998 over the same period
in fiscal 1997. Selling expenses as a percentage of net sales decreased for the
quarter and six months ended February 28, 1998 as compared to the same periods
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 increased during the second quarter of
fiscal 1998 as compared to the same period in fiscal 1997 due to increases in
salary expense, insurance expense, and travel expense. These same factors
account for the increase in the general and administrative expenses for the six
months ended February 28, 1998 over the same period in fiscal 1997. General and
administrative expenses as a
<PAGE>
percentage of net sales were 17% for the quarters ended February 28, 1998 and
1997. General and administrative expenses as a percentage of net sales decreased
for the six months ended February 28, 1998, as compared to the same period in
1997 due to the increased level of net sales in fiscal 1998 offsetting the
effect of increased fiscal 1998 general and administrative expenses.
Research, engineering, and technical support expenses increased during the
second 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 six months ended February 28, 1998 over the same period in fiscal 1997. Such
expenses, as a percentage of sales were largely unchanged for the three and six
month periods ended February 28, 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 $356,727 and $752,055 for the three and six months ended February 28, 1998,
respectively, compared to $467,837 and $1,013,464 for the three and the six
months ended February 28, 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 six months ended February
28, 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 February 28, 1998, the Company's working capital was $5,421,706, including
$2,732,485 in cash and cash equivalents, compared to working capital of
$5,826,590 and $5,034,130 as of August 31, 1997 and February 28, 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 six months ended February 28, 1998 and 1997 was $468,161 and $536,752,
respectively. The net cash flow from operations for the six months ended
February 28, 1998 and 1997 resulted principally from net income and joint
venture dividends offset by equity income of joint ventures, increased trade
receivables, and payments on income tax liabilities.
Net cash used in investing activities for the six months ended February 28, 1998
was $195,347 which resulted from investments in joint ventures, additions to
property and other assets. 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 other
assets.
Net cash used in financing activities for the six months ended February 28, 1998
resulted from the payment of dividends to stockholders of $621,798 and the
repurchase of common stock of $915,595 offset by proceeds of $51,497 from the
exercise of stock options. Net cash used in financing activities for the six
months ended February 28, 1997 was $502,105 which resulted from the payment of
dividends
<PAGE>
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 February
28, 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.
<PAGE>
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 20, 1998. 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 3,646,282 1,568 2,760
Vincent J. Graziano 3,647,400 450 2,760
Gerhard Hahn 3,647,400 450 2,760
Dr. Donald A. Kubik 3,647,400 450 2,760
Richard G. Lareau 3,646,800 1,050 2,760
Philip M. Lynch 3,647,200 650 2,760
Haruhiko Rikuta 3,647,400 450 2,760
Dr. Milan R. Vukcevich 3,647,400 450 2,760
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, 1998 was ratified. Total
votes cast:
For 3,641,160
Against 2,400
Abstain 7,050
<PAGE>
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
27 Financial Data Schedule
<PAGE>
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, 1998
/s/ Donald A. Kubik
Donald A. Kubik
Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 2,732,485
<SECURITIES> 0
<RECEIVABLES> 1,495,136
<ALLOWANCES> 25,000
<INVENTORY> 885,302
<CURRENT-ASSETS> 5,847,375
<PP&E> 1,980,996
<DEPRECIATION> 984,032
<TOTAL-ASSETS> 10,151,686
<CURRENT-LIABILITIES> 425,669
<BONDS> 0
0
0
<COMMON> 82,566
<OTHER-SE> 9,525,451
<TOTAL-LIABILITY-AND-EQUITY> 10,151,686
<SALES> 5,215,184
<TOTAL-REVENUES> 5,215,184
<CGS> 2,629,177
<TOTAL-COSTS> 2,629,177
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,602,934
<INCOME-TAX> 500,000
<INCOME-CONTINUING> 1,102,934
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,102,934
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
