Results of Operations
Fiscal Year 2007 Compared to
Fiscal Year 2006
The following table sets forth NTICs
consolidated results of operations for fiscal 2007 and fiscal 2006. These
results of operations exclude the impact of NTICs activities with its joint
ventures, other than React-NTIC LLC. As explained in more detail in note 2 to
NTICs consolidated financial statements, the results of React-NTIC LLC are
included in NTICs consolidated results of operations and thus included in the
table below.
|
|
Fiscal
|
|
% of
|
|
Fiscal
|
|
% of
|
|
$
|
|
%
|
|
|
2007
|
|
Net
Sales
|
|
2006
|
|
Net Sales
|
|
Change
|
|
Change
|
Net
sales
|
|
$16,829,030
|
|
100.0%
|
|
$16,604,964
|
|
100.0%
|
|
$224,066
|
|
|
1.3%
|
|
Cost of
sales
|
|
$10,799,180
|
|
64.2%
|
|
$10,346,437
|
|
62.3%
|
|
$452,743
|
|
|
4.4%
|
|
Selling
expenses
|
|
$3,214,170
|
|
19.1%
|
|
$3,075,072
|
|
18.5%
|
|
$139,098
|
|
|
4.5%
|
|
General and
administrative expenses
|
|
$3,083,314
|
|
18.3%
|
|
$2,795,194
|
|
16.8%
|
|
$288,120
|
|
|
10.3%
|
|
Lab and
technical support expenses
|
|
$229,988
|
|
1.4%
|
|
$296,676
|
|
1.8%
|
|
($66,688
|
)
|
|
(22.5%
|
)
|
Net Sales
. NTICs consolidated net sales slightly increased 1.3% during fiscal
2007 as compared to fiscal 2006 primarily as a result of an increase in demand
of React-NTI products to existing customers partially offset by a decrease in
demand for Zerust
®
products. Net sales of React-NTI products
increased $279,012, or 6.2%, to $4,784,789 during fiscal 2007 as compared to
fiscal 2006. Net sales of Zerust
®
products decreased $54,946 to
$12,044,241. As discussed in more detail above under the heading Recent
Development, NTIC anticipates that its net sales will significantly decrease in
fiscal 2008 compared to fiscal 2007 as a result of the loss of a principal
customer of a subsidiary of NTICs React-NTI joint venture.
Cost of Sales
. Cost of sales slightly increased 4.4% in fiscal 2007
compared to fiscal 2006 and cost of sales as a percentage of net sales also
increased slightly to 64.2% in fiscal 2007 compared to 62.3% in fiscal 2006
primarily as a result of an increase in raw material prices, primarily plastic
resins.
Selling Expenses
. NTICs selling expenses increased 4.5% in fiscal 2007
compared in fiscal 2006 primarily as a result of increases in (i) promotional
materials expense of $40,000, (ii) lab supplies and testing of $55,000, and
(iii) selling expense related to the sale of React products of $70,000. These
increases were partially offset by a decrease in commissions to salespeople and
manufacturers representatives totaling $76,000. As a percentage of net sales,
selling expenses increased slightly to 19.1% in fiscal 2007 compared to 18.5% in
fiscal 2006, primarily as a result of the increased spending as described above
and NTICs increased efforts to diversify its product lines and expand the
distribution of its new product lines into new industry markets.
General and Administrative
Expenses
. NTICs general and administrative
expenses increased 10.3% in fiscal 2007 compared to fiscal 2006 primarily as a
result of increases in (i) information technology expenses of $30,000, (ii)
insurance expense of $23,000, (iii) legal expenses of $75,000, (iv) audit and
tax expense of $51,000, and (v) depreciation expense of $88,000. These increases
were partially offset by a decrease in travel of $29,000. As a percentage of net
sales, general and administrative expenses increased slightly to 18.3% in fiscal
2007 compared to 16.8% in fiscal 2006, primarily as a result of the increased
spending as described above and NTICs increased efforts to support the
diversification of its product lines and the expansion of the distribution of
its new product lines into new industry markets.
Lab and Technical Support
Expenses
. NTICs lab and technical support
expenses decreased 22.5% in fiscal 2007 compared to fiscal 2006 primarily a
result of decreases in (i) salary and wages of $31,000 and (ii) lab supplies and
testing of $39,000. As a percentage of net sales, lab and technical support
expenses decreased to 1.4% in fiscal 2007 compared to 1.8% in fiscal 2006
primarily as a result of the decreased expenses described above.
27
International Corporate Joint
Ventures and Holding Companies
. Net sales of
NTICs corporate joint ventures in fiscal 2007 and fiscal 2006, excluding
React-NTI LLC, were as follows:
|
Fiscal 2007
|
|
Fiscal 2006
|
Industrial chemical
|
$78,601,707
|
|
$62,266,618
|
Non-industrial
chemical
|
1,949,993
|
|
1,692,472
|
Total
|
$80,551,700
|
|
$63,959,090
|
NTIC had equity in income of corporate
joint ventures and holding companies of $3,201,621 in fiscal 2007 compared to
$2,713,096 in fiscal 2006. The increase in equity in income was due to the
significant increase in sales and profitability from the corporate joint
ventures as a whole due to global product demand.
NTIC receives fees for technical and
other support services it provides to its corporate joint ventures based on the
revenues of the individual corporate joint ventures. NTIC recognized fee income
for such support of $4,976,194 in fiscal 2007 compared to $4,695,124 in fiscal
2006. The increase in fees for technical and other support to its corporate
joint ventures was due to the significant increase in total net sales of the
corporate joint ventures and the weakening of the United States
dollar.
|
|
Fiscal
|
|
Fiscal
|
|
$
|
|
%
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
Total
net sales of corporate joint ventures,
|
|
|
|
|
|
|
|
|
|
excluding React-NTI LLC
|
|
$80,551,700
|
|
$63,959,090
|
|
$16,592,610
|
|
|
26.0%
|
NTICs fee income for
technical and other
|
|
|
|
|
|
|
|
|
|
support
services
|
|
$4,976,194
|
|
$4,695,124
|
|
$281,070
|
|
|
6.0%
|
NTICs
direct expenses incurred related to
|
|
|
|
|
|
|
|
|
|
corporate joint ventures and holding companies
|
|
$4,876,928
|
|
$5,481,757
|
|
$(604,829
|
)
|
|
(11.0)%
|
NTIC sponsors a worldwide corporate
joint venture conference approximately every two to four years in which all of
its corporate joint ventures are invited to participate. The most recent
conference was in August 2005 and the next corporate joint venture conference is
scheduled to be held in 2008. NTIC defers a portion of its technical and other
support fees received from its corporate joint ventures in each accounting
period leading up to the conference, reflecting that NTIC has not fully earned
the payments received during that period. There was $96,000 of deferred income
recorded in fiscal 2007 bringing the total deferred accrual for the conference
to $192,000 at August 31, 2007. The costs associated with these joint venture
conferences are offset against the deferral as incurred, generally in the period
in which the conference is held and immediately before.
NTIC incurred direct expenses related
to its corporate joint ventures and the holding companies of $4,876,928 in
fiscal 2007 compared to $5,481,757 in fiscal 2006. These expenses include:
product and business development, consulting, travel, establishment of a reserve
on a note receivable, technical and marketing services to existing joint
ventures, legal fees regarding the establishment of new joint ventures,
registration and promotion and legal defense of worldwide trademarks and legal
fees incurred in the filing of patent applications for new technologies to which
NTIC acquired certain rights. The decrease in direct expenses incurred relating
to NTICs corporate joint ventures and holding companies in fiscal 2007 compared
to in fiscal 2006 was attributable to decreases of (i) loan forgiveness of
$571,000, (ii) consulting expense of $43,000, (iii) legal expense of $64,000,
partially offset by increases in (i) expenses related to employee relocation of
$32,000, (ii) travel and related expenses of $83,000, (iii) lab supplies and
testing of $30,000, and (iv) insurance and group health benefits of $39,000.
28
Interest Income
. NTICs interest income decreased to $4,165 in fiscal 2007
compared to $34,251 for fiscal 2006 primarily as a result of lower average
invested cash balances and fewer notes receivable in fiscal 2007.
Interest Expense
. NTICs interest expense increased to $164,372 in fiscal 2007
compared to $94,751 for fiscal 2006 as a result of higher average outstanding
borrowings under NTICs revolving line of credit in fiscal 2007 compared to
fiscal 2006 and the entering into of the term note in May 2006 in connection
with NTICs purchase of the real estate and building for its new corporate
headquarters.
Gain on Sale of
Assets
. NTIC recognized a gain on the sale of
land, building and equipment that previously served as NTICs corporate
headquarters of $726,295 during fiscal 2007. This was a one-time sale and no
additional gain is anticipated to be recognized relating to the building in the
future. NTIC did not recognize any gain on sale of assets during fiscal 2006.
Income Before Income
Taxes
. Income before income taxes increased
to $3,409,408 in fiscal 2007 compared to $1,973,065 in fiscal 2006.
Income Taxes
. Income tax expense for fiscal 2007 and fiscal 2006 was
calculated based on managements estimate of NTICs annual effective income tax
rate. NTICs annual effective income tax rate for fiscal 2007 was lower than the
statutory rate primarily due to NTICs equity in income of corporate joint
ventures being recognized for book purposes based on NTICs share of after-tax
earnings of these entities. For tax purposes, to the extent joint ventures
undistributed earnings are distributed to NTIC, it is not expected to result in
any material additional income tax liability after the application of foreign
tax credits.
Fiscal Year 2006 Compared to
Fiscal Year 2005
The following table sets forth NTICs
consolidated results of operations for fiscal 2006 and fiscal 2005. These
results of operations exclude the impact of NTICs activities with its joint
ventures, other than React-NTIC LLC. As explained in more detail in note 2 to
NTICs consolidated financial statements, the results of React-NTIC LLC are
included in NTICs consolidated results of operations and thus included in the
table below.
|
|
Fiscal
|
|
% of
|
|
Fiscal
|
|
% of
|
|
$
|
|
%
|
|
|
2006
|
|
Net
Sales
|
|
2005
|
|
Net Sales
|
|
Change
|
|
Change
|
Net
sales
|
|
$16,604,964
|
|
100.0%
|
|
$14,816,672
|
|
100.0%
|
|
$1,788,292
|
|
|
12.1%
|
|
Cost of
sales
|
|
$10,346,437
|
|
62.3%
|
|
$8,967,155
|
|
60.5%
|
|
$1,379,282
|
|
|
15.4%
|
|
Selling
expenses
|
|
$3,075,072
|
|
18.5%
|
|
$2,714,740
|
|
18.3%
|
|
$360,332
|
|
|
13.3%
|
|
General and
administrative expenses
|
|
$2,795,194
|
|
16.8%
|
|
$2,364,667
|
|
16.0%
|
|
$430,527
|
|
|
18.2%
|
|
Lab and
technical support expenses
|
|
$296,676
|
|
1.8%
|
|
$759,662
|
|
5.1%
|
|
($462,986
|
)
|
|
(60.9%
|
)
|
Net Sales
. NTICs consolidated net sales increased 12.1% in fiscal 2006 compared
to fiscal 2005 primarily as a result of an increase in demand of Zerust
®
products and of React-NTI products to new and existing customers in North
America. Net sales of Zerust
®
products increased $1,501,881, or
12.4%, to $12,099,187 and net sales of React-NTI products increased $286,411, or
6.4%, to $4,505,777 in fiscal 2006 as compared to in fiscal 2005.
Cost of Sales
. Cost of sales increased 15.4% in fiscal 2006 compared to
fiscal 2005 primarily as a result of the increase in net sales. Cost of sales as
a percentage of net sales also increased slightly to 62.3% in fiscal 2006
compared to 60.5% in fiscal 2005 primarily as a result of an increase in raw
material prices, primarily plastic resins.
29
Selling Expenses
. NTICs selling expenses increased 13.3% in fiscal 2006
compared in fiscal 2005 primarily as a result of increases in (i) consulting
expense of $145,000, (ii) promotional materials expense of $71,000, (iii) travel
expenses of $38,000, (iv) telecommunications expense of $26,000, (v) auto
expense of $25,000 (vi) salary expense related of $166,000 and (vii) insurance
expense of $23,000. These increases were partially offset by decreases in (i)
selling expense related to the sale of React products of $93,000, and (ii)
commissions to salespeople and manufacturers representatives totaling $63,000.
As a percentage of net sales, selling expenses increased slightly to 18.5% in
fiscal 2006 compared to 18.3% in fiscal 2005, primarily as a result of the
increased spending as described above and NTICs increased efforts to diversify
its product lines and expand the distribution of its new product lines into new
industry markets.
General and Administrative
Expenses
. NTICs general and administrative
expenses increased 18.2% in fiscal 2006 compared to in fiscal 2005 primarily as
a result of increases in (i) salaries and wage expense increases of $118,000,
(ii) insurance expense of $132,000, (iii) management bonus of $185,000, (iv)
travel expense of $97,000 (v) general and administrative expense related to the
sale of React products of $154,000. These increases were partially offset by
decreases in (i) legal expense of $68,000 and (ii) directors fees and expenses
of $113,000, (iii) shipping expense of $32,000 and (iv) telecommunications
expense of $29,000. As a percentage of net sales, general and administrative
expenses increased slightly to 16.8% in fiscal 2006 compared to 16.0% in fiscal
2005, primarily as a result of the increased spending as described above and
NTICs increased efforts to support the diversification of its product lines and
the expansion of the distribution of its new product lines into new industry
markets.
Lab and Technical Support
Expenses
. NTICs lab and technical support
expenses decreased 60.9% in fiscal 2006 compared to in fiscal 2005 primarily due
to the transfer of employees from the lab and technical support area to research
and development associated with corporate joint venture support, which decreased
lab and technical support expenses by $450,000. As a percentage of net sales,
lab and technical support expenses decreased to 1.8% in fiscal 2006 compared to
5.1% in fiscal 2005 primarily as a result of the transfer of employees and
decrease in spending as described above.
International Corporate Joint
Ventures and Holding Companies
. Net sales of
NTICs corporate joint ventures in fiscal 2006 and fiscal 2005, excluding
React-NTI LLC, were as follows:
|
Fiscal
2006
|
|
Fiscal
2005
|
Industrial chemical
|
$62,266,618
|
|
$55,606,933
|
Non-industrial
chemical
|
1,342,472
|
|
1,210,121
|
Business consulting
|
350,000
|
|
350,000
|
Total
|
$63,959,090
|
|
$57,167,054
|
NTIC had equity in income of corporate
joint ventures and holding companies of $2,713,096 in fiscal 2006 compared to
$1,968,777 in fiscal 2005. The increase in equity in income was due to the
significant increase in profitability from the corporate joint ventures as a
whole.
NTIC receives fees for technical and
other support services it provides to its corporate joint ventures based on the
revenues of the individual corporate joint ventures. NTIC recognized fee income
for such support of $4,695,124 in fiscal 2006 compared to $4,136,913 in fiscal
2005. The increase in fees for technical and other support to its corporate
joint ventures was due to the significant increase in total net sales of the
corporate joint ventures.
30
|
Fiscal
|
|
Fiscal
|
|
$
|
|
%
|
|
2006
|
|
2005
|
|
Change
|
|
Change
|
Total net sales of corporate joint ventures,
|
|
|
|
|
|
|
|
excluding React-NTI LLC
|
$63,959,090
|
|
$57,167,054
|
|
$6,792,036
|
|
11.9%
|
NTICs fee
income for technical and other
|
|
|
|
|
|
|
|
support
services
|
$4,695,124
|
|
$4,136,913
|
|
$558,211
|
|
13.5%
|
NTICs direct expenses incurred related to
|
|
|
|
|
|
|
|
corporate joint ventures and holding companies
|
$5,481,757
|
|
$4,977,375
|
|
$504,382
|
|
10.1%
|
NTIC sponsors a worldwide corporate
joint venture conference approximately every two to four years in which all of
its corporate joint ventures are invited to participate. The most recent
conference was in August 2005 and the next corporate joint venture conference is
scheduled to be held in 2008. NTIC defers a portion of its technical and other
support fees received from its corporate joint ventures in each accounting
period leading up to the conference, reflecting that NTIC has not fully earned
the payments received during that period. There was $96,000 of deferred income
recorded within other accrued liabilities at August 31, 2006. The costs
associated with these joint venture conferences are offset against the deferral
as incurred, generally in the period in which the conference is held and
immediately before.
NTIC incurred direct expenses related
to its corporate joint ventures and the holding companies of $5,481,757 in
fiscal 2006 compared to $4,977,375 in fiscal 2005. These expenses include:
product and business development, consulting, travel, establishment of a reserve
on a note receivable, technical and marketing services to existing joint
ventures, legal fees regarding the establishment of new joint ventures,
registration and promotion and legal defense of worldwide trademarks and legal
fees incurred in the filing of patent applications for new technologies to which
NTIC acquired certain rights. The increase in direct expenses incurred relating
to NTICs corporate joint ventures and holding companies in fiscal 2006 compared
to in fiscal 2005 was attributable to increases in (i) expenses related to the
transfer of employees from the lab and technical support area to research and
development associated with corporate joint venture support of $450,000 (ii)
amortization expense of $81,000 and (iii) establishment of a reserve for a note
receivable of $571,000. These increases were partially offset by decreases in
(i) legal fees of $33,000, (ii) insurance expense of $128,000, (iii) travel
expenses of $91,000, (iv) loan forgiveness of $96,000 and (v) consulting fees of
$271,000. As a percentage of net sales, direct expenses incurred relating to
NTICs corporate joint ventures and holding companies decreased in fiscal 2006
compared to in fiscal 2005, primarily as a result of the increase in net sales
and changes in spending as described above.
Interest Income
. NTICs interest income decreased to $34,251 in fiscal 2006
compared to $96,282 for fiscal 2005 primarily as a result of lower average
invested cash balances and fewer notes receivable in fiscal 2006.
Interest Expense
. NTICs interest expense increased to $94,751 in fiscal 2006
compared to $36,090 for fiscal 2005 as a result of higher average outstanding
borrowings under NTICs revolving line of credit in fiscal 2006 compared to in
fiscal 2005 and the entering into of a term note in May 2005 in connection with
NTICs purchase of the real estate and building for its new corporate
headquarters.
Income Before Income
Taxes
. Income before income taxes increased
to $1,973,065 in fiscal 2006 compared to $1,209,281 in fiscal 2005.
Income Taxes
. Income tax expense for fiscal 2006 and fiscal 2005 was
calculated based on managements estimate of NTICs annual effective income tax
rate. NTICs annual effective income tax rate for fiscal 2006 is lower than the
statutory rate primarily due to NTICs equity in income of corporate joint
ventures being recognized for book purposes based on NTICs share of after-tax
earnings of these entities. For tax purposes, to the extent joint ventures
undistributed earnings are distributed to NTIC, it is not
expected to result in any material additional income tax liability after
the application of foreign tax credits.
31
Liquidity and Capital Resources
Sources of Cash and Working
Capital
. As of August 31, 2007, NTICs
working capital was $3,788,777, including $244,499 in cash and cash equivalents,
compared to working capital of $2,221,334, including $299,117 in cash and cash
equivalents, as of August 31, 2006.
NTIC has a revolving credit facility
that expires on January 31, 2008 that it expects to renew. Outstanding amounts
under the revolving credit facility bear interest at an annual rate based on
LIBOR plus 2.25%. As of August 31, 2007, the interest rate was 7.97%. Amounts
borrowed under the facility are collateralized by a lien on substantially all of
NTICs assets, excluding its corporate joint venture interests, intellectual
property rights and its Circle Pines headquarters. The credit documents contain
other terms and provisions, including representations, covenants and conditions,
customary for transactions of this type. Significant financial covenants include
minimum fixed charge coverage ratio of 1.0 to 1.0. Other covenants include a
prohibition on any merger or consolidation without prior consent of the lender
and restrictions on future credit extensions and non-equity investments and the
incurrence of additional indebtedness without the lenders prior consent. NTIC
is in compliance with all covenants under the revolving credit facility. The
facility contains customary events of default, including nonpayment of principal
or other amounts when due; breach of covenants; inaccuracy of representations
and warranties; cross-default and/or cross-acceleration to other indebtedness;
non-compliance with laws; certain voluntary and involuntary bankruptcy events;
judgments entered against NTIC; and a sale of material assets. If an event of
default occurs and is continuing, the lender may, among other things, terminate
its obligations thereunder and require NTIC to repay all amounts thereunder. As
of August 31, 2007, there was no amount outstanding under the facility. However,
subsequently, NTIC borrowed on the facility and had $484,000 in borrowings
outstanding under the facility as of November 16, 2007. NTIC has the right to
prepay the facility at any time without premium or penalty. The line of credit
is subject to a borrowing base calculation and at August 31, 2007, NTIC had
$1,500,000 available.
NTIC believes that a combination of its
existing cash and cash equivalents, funds available through existing or
anticipated financing arrangements and forecasted cash flows, will continue to
be adequate to fund its operations, capital expenditures, debt repayments and
any stock repurchases for at least the next twelve months. In an effort to
increase net sales, NTIC is in the process of expanding the application of its
corrosion inhibiting technology into the oil and gas industry and its product
line to include biodegradable and compostable plastics and machinery that
converts waste plastics back into diesel, gasoline and mid-distillates. During
fiscal 2008, NTIC expects to invest additional research and development and
marketing efforts and resources into these new emerging businesses, product
lines and markets. In order to take advantage of such new product and market
opportunities to expand its business and increase its revenues, NTIC may decide
to finance such opportunities by increasing borrowings under its line of credit
or raising additional financing through the issuance of debt or equity
securities. There is no assurance that any financing transaction will be
available on terms acceptable to NTIC or at all, or that any financing
transaction will not be dilutive to NTICs current stockholders.
Uses of Cash and Cash
Flows
. Cash flows used in operations during
fiscal 2007 was $717,358, which resulted principally from equity income of
corporate joint ventures, decreases in accounts payable, increases in
inventories, gain on sale of assets being offset by net income, depreciation and
amortization expense, and decreases in trade receivables. Cash flows provided by
operations during fiscal 2006 was $855,467, which resulted principally from net
income after excluding the effect of depreciation and amortization expense and
the write-off of a certain note receivable, as well as an increase in accrued
liabilities and a decrease in inventories, all offset by
equity income of corporate joint ventures, trade excluding corporate joint
ventures and an increase in prepaid expenses.
32
Net cash provided by investing
activities during fiscal 2007 was $1,502,939, which resulted from proceeds from
the sale of assets, cash received from loans and deposits and dividends received
from corporate joint ventures, offset by additions to property and equipment and
investments in joint ventures. NTIC received back its required deposit of
$445,469 from the courts in Finland and replaced it with a standby letter of
credit. Net cash used in investing activities during fiscal 2006 was $1,669,020,
which resulted from additions to property and equipment and industrial patents,
offset by dividends received from corporate joint ventures and cash received on
loans.
Net cash used in financing activities
during fiscal 2007 was $840,199, which resulted primarily from the repayments of
the line of credit and bank overdrafts offset by the exercise of stock options.
Net cash provided by financing activities during fiscal 2006 was $785,212, which
resulted primarily from borrowings on a term loan, the exercise of stock options
and bank overdrafts, offset by the payoff of the note payable and repayments on
the line of credit.
Capital Expenditures and
Commitments
. NTIC had no material lease
commitments as of August 31, 2007, except a lease agreement entered into by NTI
Facilities, Inc., a subsidiary of NTIC, for approximately 16,994 square feet of
office, manufacturing, laboratory and warehouse space in Beachwood, Ohio,
requiring monthly payments of $17,500, which are adjusted annually according to
the annual consumer price index, through November 2014.
NTIC recently moved its corporate
headquarters. NTIC purchased the real estate and 40,000 square feet building in
which its new corporate headquarters is located pursuant to a like-kind exchange
transaction within the meaning of Section 1031 of the Internal Revenue Code of
1986, as amended, for a purchase price of $1,475,000. To finance the
transaction, NTIC obtained a secured term loan in the principal amount of
$1,275,000. The term loan matures on May 1, 2011, bears interest at a fixed rate
of 8.01% and is payable in 59 monthly installments equal to approximately
$10,776 (inclusive of principal and interest) commencing June 1, 2006. All of
the remaining unpaid principal and accrued interest is due and payable on the
May 1, 2011 maturity date. The loan is secured by a first lien on the real
estate and building.
NTIC sold the real property and
building in which NTICs former Lino Lakes corporate headquarters was located
for a purchase price of $870,000 on September 8, 2006. The net book value of the
building held for sale was $89,636 and the closing costs and fees associated
with the sale of the property was $46,571. The gain on sale of the property was
$726,295.
NTIC has no postretirement benefit plan
and does not anticipate establishing any postretirement benefit program.
Off-Balance Sheet
Arrangements
NTIC does not have any relationships
with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet financial
arrangements. As such, NTIC is not materially exposed to any financing,
liquidity, market or credit risk that could arise if NTIC had engaged in such
arrangements.
In fiscal 1999, a subsidiary of NTIC,
NTI Facilities, Inc., acquired a one-third ownership of Omni-Northern Ltd.,
which owns and operates a rental property located at 23205 Mercantile Road,
Beachwood, Ohio. The property has an approximate value of $2,205,000, based upon
the cash-to-mortgage acquisition price of the property paid in fiscal 2000. NTIC
has guaranteed up to $329,082 of Omni-Northern Ltd.s $1,903,571 mortgage
obligation with National City Bank, Cleveland, Ohio. The building is fully
leased at present.
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Inflation and Seasonality
Inflation in the U.S. and abroad has
historically had little effect on NTIC. NTICs business has not historically
been seasonal.
Market Risk
NTIC is exposed to some market risk
stemming from changes in foreign currency exchange rates, commodity prices and
interest rates.
NTIC is exposed to foreign currency
exchange rate risk arising from its investments in its foreign corporate joint
ventures and holding companies since NTICs fees for technical support and other
services and dividend distributions from these foreign entities are paid in
foreign currencies. NTICs principal exchange rate exposure is with the Euro,
the Japanese yen, Korean won and the English pound against the U.S. dollar. NTIC
does not hedge against its foreign currency exchange rate risk. Since NTICs
investments in its corporate joint ventures and holding companies are accounted
for using the equity method, any changes in foreign currency exchange rates
would be reflected as a foreign currency translation adjustment and would not
change the equity in income of joint ventures and holding companies reflected in
NTICs consolidated statement of income.
Some raw materials used in NTICs
products are exposed to commodity price changes. The primary commodity price
exposures are with a variety of plastic resins.
NTICs revolving credit facility bears
interest at a rate based on LIBOR and thus may subject NTIC to some market risk
on interest rates. There was no outstanding balance under this facility as of
August 31, 2007.
Related Party Transactions
See note 17 to NTICs consolidated
financial statements for related party transaction disclosure.
Critical Accounting Policies
The preparation of NTICs consolidated
financial statements requires management to make estimates and judgments that
affect the reported amount of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. The Securities and
Exchange Commission has defined a companys most critical accounting policies as
those that are most important to the portrayal of its financial condition and
results of operations, and which require the company to make its most difficult
and subjective judgments, often as a result of the need to make estimates of
matters that are inherently uncertain. Based on this definition, NTIC has
identified the following critical accounting policies. Although NTIC believes
that its estimates and assumptions are reasonable, they are based upon
information available when they are made. Actual results may differ
significantly from these estimates under different assumptions or conditions.
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Investments in Corporate Joint
Ventures
NTICs investments in corporate joint
ventures are accounted for using the equity method, except for React-NTI LLC
which has been fully consolidated, due to the adoption of FIN 46R. Periodically,
NTIC evaluates the investments for any impairment and assesses the future cash
flow projections to determine if there are any going concern issues. If an
investment were determined to be impaired, then a reserve would be created to
reflect the impairment on the financial results of NTIC. NTICs evaluation of
its investments in corporate joint ventures requires NTIC to make assumptions
about future cash flows of its corporate joint ventures. These assumptions
require significant judgment and actual results may differ from assumed or
estimated amounts. NTICs investments in corporate joint ventures were
$13,602,842 and $10,772,102 as of August 31, 2007 and 2006, respectively.
Principles of
Consolidation
The consolidated financial statements
include the accounts of Northern Technologies International Corporation, its
wholly owned subsidiaries, NTI Facilities, Inc. and Northern Technologies
Holding Company, LLC, and its 75% owned subsidiary, React-NTI LLC. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Accounts and Notes
Receivable
NTIC values accounts and notes
receivable, net of an allowance for doubtful accounts. Each quarter, NTIC
prepares an analysis of its ability to collect outstanding receivables that
provides a basis for an allowance estimate for doubtful accounts. In doing so,
NTIC evaluates the age of its receivables, past collection history, current
financial conditions of key customers, and economic conditions. Based on this
evaluation, NTIC establishes a reserve for specific accounts and notes
receivable that it believes are uncollectible, as well as an estimate of
uncollectible receivables not specifically known. A deterioration in the
financial condition of any key customer or a significant slowdown in the economy
could have a material negative impact on NTICs ability to collect a portion or
all of the accounts and notes receivable. NTIC believes that an analysis of
historical trends and its current knowledge of potential collection problems
provide NTIC with sufficient information to establish a reasonable estimate for
an allowance for doubtful accounts. However, since NTIC cannot predict with
certainty future changes in the financial stability of its customers, NTICs
actual future losses from uncollectible accounts may differ from its estimates.
In the event NTIC determined that a smaller or larger uncollectible accounts
reserve is appropriate, NTIC would record a credit or charge to selling expense
in the period that it made such a determination. Accounts receivable have been
reduced by an allowance for uncollectible accounts of $30,000 and $10,000 at
August 31, 2007 and August 31, 2006, respectively.
Revenue
Recognition
In recognizing revenue, NTIC applies
the provisions of the Securities and Exchange Commission Staff Accounting
Bulletin No. 104, Revenue Recognition. NTIC recognizes revenue from the sale of
its products when persuasive evidence of an arrangement exists, the product has
been delivered, the price is fixed and determinable and collection of the
resulting receivable is reasonably assured. These criteria are met at the time
of shipment when risk of loss and title pass to the customer or
distributor.
Foreign Currency Translation
(Accumulated Other Comprehensive Income)
The functional currency of each
international corporate joint venture is the applicable local currency. The
translation of the applicable foreign currencies into U.S. dollars is performed
for balance sheet accounts using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using an average monthly
exchange rate. Translation gains or losses are reported as an element of
accumulated other comprehensive income.
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Stock-Based
Compensation
In December 2004, FASB published FASB
Statement No. 123 (revised 2004),
Share-Based Payment
. FAS 123(R)
requires that the compensation cost relating to share-based payment
transactions, including grants of employee stock options, be recognized in
financial statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. FAS 123(R) covers a wide range of
share-based compensation arrangements including stock options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. FAS 123(R) is a replacement of FASB Statement No. 123,
Accounting for Stock-Based Compensation
, and supersedes APB Opinion No.
25,
Accounting for Stock Issued to Employees
, and its related
interpretive guidance. The effect of FAS 123(R) is to require entities to
measure the cost of employee services received in exchange for stock options
based on the grant-date fair value of the award, and to recognize the cost over
the period the employee is required to provide services for the award. FAS
123(R) permits entities to use any option-pricing model that meets the fair
value objective in FAS 123(R). NTIC implemented FAS 123(R) on September 1, 2006,
using the modified prospective transition method.
Recent Accounting Pronouncements
See note 2 to NTICs consolidated
financial statements for a discussion of recent accounting
pronouncements.
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