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
November 30, 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)
(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 December 31, 1998
----- -----------------------------------
Common Stock, $.02 par value 3,874,359
"This document consists of 12
pages. No exhibits are being filed."
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
<TABLE>
<CAPTION>
BALANCE SHEETS (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
NOVEMBER 30, AUGUST 31,
1998 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,338,348 $2,200,490
Receivables:
Trade, less allowance for doubtful accounts of $28,000 and $25,000, respectively 1,190,239 1,042,428
Corporate joint ventures 546,573 352,164
Income tax receivable 20,363 -
Inventories 831,738 969,520
Prepaid expenses and other 116,418 118,259
Deferred income taxes 230,000 230,000
----------- ----------
Total current assets 5,273,679 4,912,861
PROPERTY AND EQUIPMENT, net 954,966 955,010
OTHER ASSETS:
Investments in corporate joint ventures 3,068,101 2,754,165
Investment in European holding company 249,510 247,869
Deferred income taxes 120,000 120,000
Other 334,797 357,106
----------- ----------
3,772,408 3,479,140
----------- ----------
$10,001,053 $9,347,011
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 93,898 $ 156,604
Income taxes payable - 66,416
Dividends payable 577,913 -
Accrued liabilities:
Payroll 59,150 3,132
Other 81,082 119,375
----------- ----------
Total current liabilities 812,043 345,527
DEFERRED GROSS PROFIT 120,000 120,000
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 3,873,359 and 3,847,452, respectively 77,467 76,949
Additional paid-in capital 4,567,180 4,477,167
Retained earnings 4,830,426 4,850,696
Cumulative foreign currency translation adjustments (276,256) (393,521)
----------- ----------
9,198,817 9,011,291
Notes and related interest receivable from purchase of common stock (129,807) (129,807)
----------- ----------
Total stockholders' equity 9,069,010 8,881,484
----------- ----------
$10,001,053 $9,347,011
=========== ==========
</TABLE>
See notes to financial statements.
2
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
<TABLE>
<CAPTION>
STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
SALES $2,155,395 $2,682,741
COST OF GOODS SOLD 1,069,703 1,387,515
---------- ----------
GROSS PROFIT 1,085,692 1,295,226
OPERATING EXPENSES:
Selling 341,631 272,735
General and administrative 512,628 524,401
Research, engineering, and technical support 102,479 112,128
---------- ----------
956,738 909,264
---------- ----------
OPERATING INCOME 128,954 385,962
CORPORATE JOINT VENTURES AND EUROPEAN
HOLDING COMPANY:
Equity in income of corporate joint ventures and European
holding company 177,803 114,145
Fees for technical assistance to corporate joint ventures 594,713 466,821
Corporate joint ventures expense (139,849) (185,638)
---------- ----------
632,667 395,328
INTEREST INCOME 16,022 32,716
---------- ----------
INCOME BEFORE INCOME TAXES 777,643 814,006
INCOME TAXES 220,000 250,000
---------- ----------
NET INCOME $ 557,643 $ 564,006
========== ==========
NET INCOME PER SHARE:
Basic $ .14 $ .13
========== ==========
Diluted $ .14 $ .13
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 3,856,408 4,194,464
========== ==========
Diluted 3,900,463 4,284,746
========== ==========
</TABLE>
See notes to financial statements.
3
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
- ----------------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 557,643 $ 564,006
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 31,275 29,700
Equity in income of corporate joint ventures and European
holding company (177,803) (114,145)
Change in current assets and liabilities:
Receivables:
Trade (147,811) (254,599)
Corporate joint ventures (194,409) (563)
Income tax receivable (20,363) -
Inventories 137,782 (58,923)
Prepaid expenses and other 10,741 (10,690)
Accounts payable (62,706) 7,511
Income taxes payable (66,416) (281,095)
Accrued liabilities 17,725 (28,686)
---------- ----------
Total adjustments (471,985) (711,490)
---------- ----------
Net cash provided by (used in) operating activities 85,658 (147,484)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in corporate joint ventures (20,509) (79,311)
Additions to property (31,231) (36,291)
Decrease (increase) in other assets 13,409 (22,000)
---------- ----------
Net cash used in investing activities (38,331) (137,602)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock - (672,206)
Issuance of common stock 90,531 21,774
---------- ----------
Net cash provided by (used in) financing activities 90,531 (650,432)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 137,858 (935,518)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,200,490 3,945,567
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,338,348 $3,010,049
========== ==========
</TABLE>
See notes to financial statements.
4
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
- -------------------------------------------------------------------------------
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 November 30, 1998 and the
results of its operations and its cash flows for the three months
ended November 30, 1998 and 1997, 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, 1998 contained in the Company's filing on Form 10-KSB dated
November 20, 1998 and with Management's Discussion and Analysis of
Financial Condition and Results of Operations appearing on pages 7
through 10 of this quarterly report.
Certain fiscal year 1998 amounts have been reclassified to conform to
fiscal year 1999 presentations. These classification had no effect on
stockholders' equity, sales, or net income as previously reported.
2. COMPREHENSIVE INCOME
Effective September 1, 1998, the Company adopted Statement of
Financial Accounting Standards 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. Comprehensive income is defined as all
changes in stockholders' equity except those resulting from
investments by and distributions to owners. Annual financial
statements for prior periods will be reclassified as required. The
Company's total comprehensive incomes were as follows:
Three Months Ended
November 30
1998 1997
Net income $557,643 $564,006
Other comprehensive income (loss) 117,265 (51,464)
-------- --------
Total comprehensive income $674,908 $512,542
======== ========
3. INVENTORIES
Inventories consist of the following:
November 30, August 31,
1998 1997
Production materials $168,971 $163,177
Work in process 47,491 32,334
Finished goods 615,276 774,009
-------- --------
$831,738 $969,520
======== ========
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4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
November 30, August 31,
1998 1998
Land $ 246,097 $ 246,097
Buildings and improvements 1,077,670 1,077,670
Machinery and equipment 705,233 674,002
---------- ----------
2,029,000 1,997,769
Less accumulated depreciation 1,074,034 1,042,759
---------- ----------
$ 954,966 $ 955,010
========== ==========
5. INVESTMENT IN CORPORATE JOINT VENTURES
During the three months ended November 30, 1998, the Company invested
an additional $20,509 in an existing foreign joint venture.
6. STOCKHOLDERS' EQUITY
During the three months ended November 30, 1998, stock options for the
purchase of 25,907 shares of the Company's common stock were exercised
at prices between $3.00 and $12.00 per share.
7. SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended November 30, 1998, the Company declared
a cash dividend of $.15 per share payable on December 18, 1998 to
shareholders of record on December 4, 1998.
During the three months ended November 30, 1997, the Company declared
a cash dividend of $.15 per share payable on December 15, 1997 to
shareholders of record on December 1, 1997.
8. 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.
6
<PAGE>
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 decreased by $527,346 during the first quarter of fiscal 1999
from those in the first quarter of fiscal 1998. This decrease was due to a
decrease in demand for corrosion inhibiting products.
COST OF SALES - Cost of goods sold as a percentage of net sales was 50% for the
first quarter of fiscal 1999 compared to 52% for the first quarter of fiscal
1998. The variation is primarily due to the mix of product sales.
OPERATING EXPENSES - As a percentage of sales, total operating expenses
increased from 34% in the first quarter of fiscal 1998 to 44% in the first
quarter of fiscal 1999.
Operating expense classification percentages of sales were as follows:
Three Months Ended
November 30
1998 1997
Selling 16% 10%
General and administrative 24% 20%
Research, engineering, and technical support 4% 4%
Selling expenses increased for the first three months of fiscal 1999 as compared
to the same period in 1998 due primarily to increases in distributor
commissions, product promotion, and travel expense. Selling expenses as a
percentage of sales increased for the three months ended November 30, 1998 as
compared to the same period in fiscal 1998 due to the decrease in sales in
fiscal 1999 and the increase in fiscal 1999 selling expenses.
General and administrative expenses decreased for the first three months of
fiscal 1999 as compared to the same period in 1998 due primarily to decreases in
salary expense and travel expense. General and administrative expenses as a
percentage of sales increased for the three months ended November 30, 1998 as
compared to the same period in fiscal 1998 due to the decrease in sales in
fiscal 1999 not being fully offset by the decrease in fiscal 1999 general and
administrative expenses.
Research, engineering and technical support expenses for the first three months
of fiscal 1999 were lower than the comparable period in fiscal 1998 due
primarily to decreases in staff salaries and supplies. Such expenses, as a
percentage of sales, were substantially unchanged for the first three months of
fiscal 1999 as compared to the same period in fiscal 1998.
CORPORATE JOINT VENTURES AND EUROPEAN HOLDING COMPANY - Net earnings from
corporate joint ventures and European holding company increased in the first
three months of fiscal 1999 to $632,667 from $395,328 in the first three months
of fiscal 1998. This net increase is due to the weakening of the U.S. dollar
when compared to the local currencies of the Company's corporate joint ventures,
increased sales
7
<PAGE>
of the corporate joint ventures, and lower travel and legal expenses incurred by
the Company in its corporate joint ventures and in establishing new corporate
joint ventures.
INCOME TAXES - Income tax expense for the three months ended November 30, 1998
and 1997 was calculated based upon management's estimate of the annual effective
rates. The effective income tax rates for fiscal 1999 and 1998 is lower than the
statutory rate primarily due to equity in income of joint ventures being
recognized on an after tax basis for these entities. To the extent the joint
ventures' 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 November 30, 1998, the Company's working capital was $4,461,636, including
$2,338,348 in cash and cash equivalents, compared to working capital of
$4,567,334 including cash and cash equivalents of $2,200,490 as of August 31,
1998.
Net cash provided from past operations has been sufficient to meet liquidity
requirements, capital expenditures, research and development costs and expansion
of operations of the Company's joint ventures. Cash flows from operations for
the three months ended November 30, 1998 was $85,658. The net cash flow from
operations for the three months ended November 30, 1998 resulted principally
from net income and a decrease in inventories offset by equity income of
corporate joint ventures and European holding company and increases in
receivables. Cash flows used in operations for the three months ended November
30, 1997 was $147,484. The net cash flow used in operations for the three months
ended November 30, 1997 was principally from an increase in trade receivables, a
decrease in income taxes payable, and equity in income of corporate joint
ventures and European holding company partially offset by net income.
Cash used in investing activities for the three months ended November 30, 1998
was $38,331, which resulted from investments in corporate joint ventures and
additions to property partially offset by decreases in other assets. Cash used
in investing activities for the three months ended November 30, 1997 was
$137,602, which resulted principally from additions to property and investments
in corporate joint ventures.
Cash provided by financing activities for the three months ended November 30,
1998 was $90,531, which resulted from payments received from the exercise of
stock options. Cash used in financing activities for the three months ended
November 30, 1997 was $650,432, which resulted from the purchase of common stock
for $672,206 partially offset by $21,774 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 November
30, 1998.
The Company has no postretirement benefit plan and does not anticipate
establishing any post retirement 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
8
<PAGE>
inability of computer software or hardware (collectively, Systems) to recognize
or properly process dates ending in "00" and dates after the year 2000.
Significant attention is being focused as the year 2000 approaches on updating
or replacing such Systems in order to avoid System failures, miscalculations or
business interruptions that might otherwise result. The Company believes it is
taking the steps necessary to insure that this potential problem does not
adversely affect the Company's operating results in the future, and is
continuing the as-yet incomplete assessment of the impact of the year 2000
problem on the Company.
The Company has taken, and will continue to take, actions intended to minimize
the impact of the year 2000 problem and maximize the Company's state of
readiness for the year 2000. However, it is impossible to eliminate year-2000
risks entirely. Unfortunately, there is no single test that can be used to
conclusively determine whether Systems are year-2000 compliant. To the contrary,
the technology community identifies additional potential year 2000 risks
regularly. Also impeding year-2000 testing is the high degree of integration
between various Systems and the difficulty in conducting full-scale live
testing. Consequently, interrelated Systems believed secure in a test
environment could conceivably fail when operating together under real-time
workloads.
The Company's state of readiness for the year 2000, the Company's estimated
costs associates with year-2000 issues, the risks the Company faces associated
with year-2000 issues and the Company's year-2000 contingency plans are
summarized below.
STATE OF READINESS - All major internal information technology (IT) systems have
been replaced. Year-2000 issues were addressed when selecting and implementing
these new systems, and the Company believes they are year-2000 compliant. The
Company has also reviewed its major non-IT systems, including hardware,
software, phone and security systems, and the Company believes they are
year-2000 compliant. The Company anticipates continuing to invest in IT and
non-IT technology to accommodate the Company's future growth, and the Company
expects these investments and upgrades to be year-2000 compliant. The Company is
currently implementing a testing program of its other various Systems, and
expects to substantially complete this testing before August 31, 1999. The
Company is in the process of reviewing the year-2000 readiness of the corporate
joint ventures.
COSTS ASSOCIATED WITH YEAR-2000 ISSUES - Until the Company completes its System
testing, it will be unable to quantify the total expected costs associated with
year-2000 issues. The Company believes that these costs will not have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flows. The total amount the Company has expended on
year-2000 issues through November 30, 1998 was approximately $20,000. The
Company anticipates that future costs associated with year-2000 issues will be
financed with cash flows from operations.
RISKS ASSOCIATED WITH YEAR-2000 ISSUES - The Company is dependent on computer
processing in its business activities and the year-2000 problem creates the risk
of unforeseen problems in the Company's Systems and the Systems of third parties
with whom the Company does business. The failure of the Company's Systems and/or
third parties' Systems could have a material adverse effect on the Company's
results of operations, liquidity, and financial condition. Due to the general
uncertainty inherent in the year-2000 problem, resulting in part from the
uncertainty of the year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of year
2000 failures will have a material impact on the Company's results of
operations, liquidity, or financial condition. The Company believes that it may
need to temporarily reduce its operations if third party suppliers are not
year-2000 compliant. The Company is also unable at this time to determine what
the reasonably likely worst case year-2000 scenario is for the Company.
9
<PAGE>
CONTINGENCY PLANS - The Company has not yet developed specific contingency plans
for the millennium bug because its assessment of year-2000 issues is incomplete.
The Company plans on developing, to the extent practicable, a business
interruption contingency plan to address internal and external issues specific
to the year-2000 problem before August 31, 1999. However, the Company believes
that due to the widespread nature of the year-2000 problem, the contingency
planning process is an ongoing one which will require modifications as the
Company obtains additional information regarding the Company's internal systems
and equipment and the status of third-party year-2000 readiness.
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. To date, the Euro Conversion has not had a material
impact on the overall business operations of the Company. However, there can be
no assurance that the Euro Conversion will not have a material impact on the
overall business operations of the Company in the future.
10
<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
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None
11
<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
January 12, 1999 /s/ Loren M. Ehrmanntraut
-----------------------------------------------
Loren M. Ehrmanntraut
Chief Financial Officer and Corporate Secretary
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 2,338,348
<SECURITIES> 0
<RECEIVABLES> 1,764,812
<ALLOWANCES> 28,000
<INVENTORY> 831,738
<CURRENT-ASSETS> 5,273,679
<PP&E> 2,029,000
<DEPRECIATION> 1,074,034
<TOTAL-ASSETS> 10,001,053
<CURRENT-LIABILITIES> 812,043
<BONDS> 0
0
0
<COMMON> 77,467
<OTHER-SE> 8,991,543
<TOTAL-LIABILITY-AND-EQUITY> 10,001,053
<SALES> 2,155,395
<TOTAL-REVENUES> 2,155,395
<CGS> 1,069,703
<TOTAL-COSTS> 1,069,703
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 777,643
<INCOME-TAX> 220,000
<INCOME-CONTINUING> 557,643
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 557,643
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
