SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 1996 COMMISSION FILE NO. 1-11038
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
(Exact name of small business issuer as specified in its charter)
DELAWARE 41-0857886
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6680 N. HIGHWAY 49, LINO LAKES, MINNESOTA 55014
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (612) 784-1250
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.02 PAR VALUE
Check 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 ____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The Registrant's revenues for the fiscal year ended August 31, 1996
were $6,869,184.
As of November 15, 1996, 4,194,275 shares of Common Stock of the
Registrant were outstanding, and the aggregate market value of the Common Stock
of the Registrant as of that date (based upon the closing price of the Common
Stock at that date as reported on the American Stock Exchange) excluding
outstanding shares beneficially owned by directors and executive officers, was
approximately $15,022,095.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format (check one):
YES___ NO __X__
PART I
This Form 10-KSB contains certain forward-looking statements. For this
purpose, any statements contained in this Form 10-KSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate" or "continue" or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety of factors, including those set forth in the section below entitled
"Certain Important Factors."
ITEM 1. BUSINESS.
(a) BUSINESS DEVELOPMENT.
Northern Instruments, Inc. was incorporated in the State of Minnesota
on August 4, 1970. On January 12, 1973, Northern Instruments, Inc. was merged
with St. Anthony Printing Co., a Minnesota corporation, and continued the
business of the pre-merger Northern Instruments, Inc. On August 3, 1976,
Northern Instruments, Inc. changed its name to Northern Instruments Corporation.
On January 13, 1978, Northern Instruments Corporation, a Minnesota corporation,
was merged with and into Northern Instruments Corporation, a newly-formed
Delaware corporation. On April 13, 1993, Northern Technologies International
Corporation, a wholly owned subsidiary of Northern Instruments Corporation, was
merged into Northern Instruments Corporation. As a result of such merger,
Northern Instruments Corporation changed its name to Northern Technologies
International Corporation. Northern Technologies International Corporation is
referred to hereafter as the "Company" or "NTIC".
(b) BUSINESS OF THE COMPANY.
The Company is a developer, manufacturer and marketer of proprietary
corrosion inhibiting products and electronic sensing instruments. The Company's
corrosion inhibiting products, marketed under the name ZERUST(TM), are utilized
in protective packaging serving a wide variety of companies in industries such
as transportation, nuclear power, electronics, aerospace, power generation, on-
and off-road automotive equipment, agriculture and metal processing. The ZERUST
product line, which accounted for 98% of the Company's sales in fiscal 1996,
includes: corrosion inhibiting packaging films; chipboard, fiberboard and
corrugated cartons; dunnage trays and bins; bubble cushioning and foamsheet;
reinforced plastic scrim; corrugated and profile plastics; and pellets, tablets
and capsules, all of which emit vapors that are protective to metal surfaces. A
majority of the Company's end user corrosion inhibiting products are contract
manufactured. The Company's electronic sensing instruments include portable oil
quality analyzers for on-site evaluation of oils and fluids and instruments that
provide for on- and off-line measurement of fiber denier and critical tubing
measurements.
JOINT VENTURES AND FOREIGN COMPANY
The Company participates in a number of international joint venture
arrangements which manufacture, market and distribute corrosion inhibiting
products. The Company manufactures and supplies the proprietary ingredient which
makes the finished product functional, but the actual manufacturing of the
finished product takes place in the foreign country. Manufacturing the product
in the foreign country facilitates lower shipping costs and improved on-time
delivery to foreign customers. The joint venture format allows the Company to
successfully promote its products in foreign countries through the marketing
efforts of joint venture partners without having to develop its own
international sales force. The joint venture partners are knowledgeable in the
applicable environmental, tax and other laws of the foreign country, as well as
the local customs and business practices, and have a vested interest in making
the venture a success.
While the Company is not aware of any specific potential risk beyond
its initial investment, the Company could possibly be subject to lawsuits based
on product liability claims or other claims arising out of the activities of the
joint ventures. To protect against such an occurrence, the Company maintains
liability insurance specifically applicable to its shareholder position in the
international joint venture arrangements in excess of any insurance the joint
venture maintains.
During 1994, the Company purchased ownership interests in two companies
located in Austria. The two companies were organized as partnerships. One
partnership was a trading company and the other partnership was the general
partner of, and provided management services to, the trading company. During
1995, the two partnerships were converted into a corporation of which the
Company owns 50%.
PRODUCT BACKGROUND
The Company operates in two industry segments: corrosion inhibiting
packaging products and electronic sensing instruments. Corrosion inhibiting
packaging products accounted for 98% of the Company's sales in fiscal 1996.
Corrosion affects many products and components in the manufacturing industry. It
encompasses the corrosion of ferrous (iron and steel) metals as well as the
deterioration of nonferrous (aluminum, copper, brass, etc.) metals. The
Company's corrosion inhibiting products and application techniques fall into two
basic categories, the dry method and the wet method.
In combating corrosion, the traditional approach has been to apply oils
and greases to protect metal parts. This approach may require specialized
application equipment. The oils and greases also may pose unacceptable health
and fire hazards. Oils and greases collect and trap dirt and debris which may,
in some cases, actually initiate corrosion. Should the removal of the oils and
greases be required, solvents and specialized safety equipment will be
necessary. This removal step may also introduce additional health and hazardous
waste disposal problems.
The Company's electronic sensing instruments are based on the
measurement of the change in dielectric properties of different liquids and
fibers by means of capacitance sensors.
DRY METHOD - CORROSION INHIBITORS. The Company's dry corrosion
inhibiting products utilize proprietary chemical formulations that emit an
invisible vapor. The emitted corrosion inhibiting molecules diffuse throughout
an enclosed air space saturating the atmosphere of the enclosure. The molecules
are deposited on surfaces and prevent humid and polluted atmospheres from
initiating corrosion of the surfaces. The inhibiting layer is maintained on the
metal surfaces by the saturated atmosphere in the package. As a result of this
process, the metal surfaces in the enclosure are continuously passivated from
the singular or combined effect of humidity, salt and certain other corrosive
atmospheres. The packaged metal components are ready for immediate use, i.e.,
clean, dry and corrosion free.
The Company's dry corrosion inhibiting products are marketed under the
name ZERUST(TM). The products are available in various forms to meet the
specific needs of industry. Most of the Company's dry method corrosion
inhibiting products are manufactured to customer specifications.
ZERUST films prevent corrosion of ferrous and nonferrous metals on a
temporary basis without the need for rust preventative coatings. The films are
produced by incorporating a chemical formulation into the film in its extrusion
stage, whereby ZERUST corrosion inhibitors become an integral component of the
film. The corrosion inhibitors operate through vapor emittance and contact to
counteract the corrosive effects of moisture, salt and pollutants. ZERUST films
are available as:
ZERUST Bag and Shroud Film
This product protects metal products from corrosion for long
periods without supplemental protection.
ZERUST Shrink Film
Provides the desired contour fit of shrink film and corrosion
protection that will not flake off, stick to or otherwise harm
the packages' contents.
ZERUST Stretch Film
The chemical effectiveness is not impaired by the rough
handling in applying the film.
ZERUST Skin Packaging Film and Board
Provides product immobilization and corrosion protection even
when the product is in contact with the support board.
Additional ZERUST Plastic Products
Also available from the Company are a range of flexible and
rigid corrosion inhibiting products which also eliminate the
need for rust preventative coatings and intermediate packaging
materials.
These additional ZERUST products include:
ZERUST Foam Sheet and ZERUST Bubble Cushioning Sheet
These products provide cushioned, resilient,
lightweight packaging plus corrosion protection.
ZERUST Corrugated, Solid Fibre and Chipboard Cartons
ZERUST coated cartons protect metal products without
the need for intermediate wrapping.
ZERUST Scrim
This product provides the strength and durability of
woven and nonwoven reinforced materials plus an
interior layer of ZERUST film.
ZERUST Profile and Corrugated Plastic Board
This product provides weather resistance, durability,
reusability and built-in long term ZERUST protection.
ZERUST Dunnage Trays and Bins
This product provides thermoformed trays and bins
that resist abrasion, refract shock and vibration to
their contents and protect against both dirt and
corrosion.
ZERUST Vapor Capsules
This product is designed for electrical and
electronic enclosures and provides corrosion
protection of ferrous and nonferrous metals in
shipment, storage and operation.
ZERUST Plastabs
This product provides flexible, fused VCI plastic
squares, for ferrous and nonferrous metals, which are
unaffected by rough handling.
ZERUST Cortabs
Tabletted VCI protection of ferrous and nonferrous
metals.
ZERUST Pipe Strips
Assemblages of ZERUST Capsules for residue free
protection of interior surfaces of ferrous and
nonferrous pipes.
ZERUST Tube Strips
Extruded polyethylene tubing extruded with the ZERUST
formulation to protect interior surfaces of narrow
diameter metal tubes.
WET METHOD -- CORROSION INHIBITORS. The Company provides various liquid
corrosion inhibitors, each having differing features to meet user requirements.
ELECTRONIC SENSING INSTRUMENTS. The Company's electronic sensing
instruments accounted for approximately 2% of the Company's sales in fiscal
1996. The Company's electronic sensing instruments include oil quality
analyzers, fiber monitors and testers and a tubing monitor. The Company does not
expect that its electronic sensing instruments will increase as a percentage of
sales in fiscal 1997.
MANUFACTURING
The Company produces its proprietary dry corrosion inhibiting products
and additives, its wet corrosion inhibiting products and its electronic sensing
instruments at its facility in Lino Lakes, Minnesota.
Certain of the Company's dry inhibiting final products are produced by
selected contractors who are supplied with the necessary corrosion inhibiting
additives by the Company.
SALES AND MARKETING
The Company markets its products principally in the United States to
industrial users by a direct sales force and through a network of distributors
and sales representatives. The Company's technical service representatives work
directly with the end users of the Company's products to respond to their
technical requirements. The Company has also entered joint venture arrangements
with foreign corporations pursuant to which the Company sells certain corrosion
inhibiting formulations to foreign corporations, who then manufacture and market
finished products. The Company receives fees for providing technical and other
support to the joint ventures in accordance with the terms of the joint venture
arrangements.
COMPETITION
The Company's principal competition for its corrosion inhibiting film
are corrosion inhibiting paper products. As the Company's film serves a dual
role of moisture barrier as well as a dispenser of corrosion inhibitors, it
avoids a shortcoming of the paper inhibiting products whose inhibitors are
adversely affected and can leach out when heavy moisture is encountered. The
Company is aware of other companies which manufacture and market corrosion
inhibiting products which are similar to the Company's ZERUST products. The
Company evaluates these products on an ongoing basis and is satisfied that none
of the products in the market at this time are superior to the Company's
products.
The Company is aware of competitors in the Lubri-Sensor oil quality
analyzer area; however, the Company does not have any knowledge as to the
business effectiveness of such competitors and believes that its products are
competitive with all other products currently on the market. In the Foodoil
Sensor oil quality analyzer area, the Company is aware of one competitor. This
competitor does not provide an analysis instrument but instead provides a paper
test strip. Although the Company believes that its product offers significant
advantages over paper test strips, the Company has concluded that sales of the
Foodoil Sensor are related to price sensitivity rather than differences in
product capabilities.
Some of the Company's competitors, in both the corrosion inhibiting
area and the electronic instrument area, are established companies which may
have financial and other resources greater than those of the Company, some of
which may have achieved significant market recognition. The Company competes
with such companies by providing high quality products and by attempting to
provide the highest level of customer service, including delivery of its
products on a timely basis at a competitive price.
SIGNIFICANT CUSTOMERS
No customer of the Company represented 10% or more of the Company's net
sales for the fiscal years ended August 31, 1996 and August 31, 1995. One
customer accounted for approximately 10% of net sales for the fiscal year ended
August 31, 1994.
RESEARCH AND DEVELOPMENT
Research and development expenditures were $370,045, $353,887 and
$310,475 in fiscal 1996, 1995 and 1994, respectively. The Company's research and
development activities are conducted at its headquarters. The Company's research
and development is directed at both the improvement of existing products and
development of new products.
PATENTS AND TRADEMARKS
The Company currently owns one United States patent, which will expire
in 1998, relating to its products. Although the Company has sought patent
protection for its technology and products, it does not believe such protection
is critical to its commercial success. The Company is committed to the timely
and continual upgrading of its product line and the introduction of new
products, developed in-house or via exclusive technology licenses. The Company
believes that trade secrets and proprietary (albeit unpatented) know-how are at
least as important as patent protection in establishing and maintaining a
competitive advantage. The Company also has several trademarks in the United
States and certain foreign countries. The Company's trademarks have a life,
subject to periodic maintenance, of 10 to 20 years, which may be extended.
BACKLOG
As of August 31, 1996, and as is typically the case, the Company did
not have a significant order backlog. Customers generally place orders on an "as
needed" basis and expect delivery within a relatively short period of time.
WORKING CAPITAL AND AVAILABILITY OF MATERIALS
The Company does not carry excess quantities of raw materials or
purchased parts because of widespread availability from various suppliers. The
Company has sufficient working capital to meet all obligations when due.
EMPLOYEES
As of August 31, 1996, the Company had 23 full-time employees,
including three engaged in administration, nine in sales and marketing, three in
research and development and eight in operations. There are no unions
representing the Company's employees and the Company believes that its relations
with employees are good. There are no pending or threatened labor or employment
disputes or work interruptions.
CERTAIN IMPORTANT FACTORS
In addition to the factors identified above, there are several
important factors that could cause the Company's actual results to differ
materially from those anticipated by the Company or which are reflected in any
forward-looking statements of the Company. These factors, and their impact on
the success of the Company's operations and its ability to achieve its goals,
include the following:
(1) the ability of the Company to continue the current level of return
on its investments in joint ventures and foreign company in existing and future
joint ventures; and
(2) the Company's ability to enter international markets in a timely
fashion.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's office, production facilities and research and
development operations are located at 6680 North Highway 49, Lino Lakes,
Minnesota 55014. The Company owns approximately 3.5 acres at this site and three
buildings thereon. The main building, consisting of approximately 15,300 square
feet, is used for office, production, research and development and shipping and
receiving. A second building of approximately 7,200 square feet and third
building of 4,800 square feet are used for warehouse space. In 1995, the Company
acquired an approximately 10 acre parcel of land on which the Company built a
warehouse of approximately 18,000 square feet which was completed in November
1996. The Company will begin utilizing this new warehouse, located at 13915 Lake
Drive, Forest Lake, Minnesota 55025 (approximately six miles from the Company's
offices), by December 31, 1996. The parcel of land on which this new warehouse
is located is of sufficient size should the Company choose to relocate its
entire facility to the new location, although the Company has no current plans
to do so.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending or threatened legal, governmental,
administrative or other proceedings to which the Company is a party or of which
any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
Effective September 10, 1993, the Company's Common Stock commenced
trading on the American Stock Exchange under the symbol NTI.
COMMON STOCK
HIGH LOW
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1996:
Fourth fiscal quarter................ $5.250 $4.750
Third fiscal quarter................. 5.875 4.875
Second fiscal quarter................ 5.438 4.750
First fiscal quarter................. 7.625 4.625
1995:
Fourth fiscal quarter................ $8.750 $4.875
Third fiscal quarter................. 5.375 3.500
Second fiscal quarter................ 5.750 3.250
First fiscal quarter................. 6.375 2.938
The Company declared Common Stock cash dividends of $.06 per share on
December 3, 1993; $.075 per share on December 14, 1994; $.10 per share on
December 4, 1995; and $.12 per share to shareholders of record on December 6,
1996. The Company's Board of Directors will continue to evaluate the payment of
dividends based on the Company's net income and operating cash requirements.
As of August 31, 1996, there were approximately 650 holders of record
of the Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
The Company's sales increased by $655,052, or 10.5%, to $6,869,184 in
fiscal year 1996 from $6,214,132 in fiscal 1995. The increase in sales is
primarily due to an increase in the volume level of shipments of corrosion
inhibiting products. The cost of sales decreased as a percentage of sales to
45.2% in fiscal year 1996 from 47.4% in fiscal 1995. The variation in the cost
of sales percentage was primarily due to product mix. The Company anticipates
that its annual cost of sale percentage for fiscal year 1997 will not vary
significantly under its current product pricing structure.
The Company's selling expenses increased by $58,198, or 7.5%, to
$834,650 in fiscal year 1996 from $776,452 in fiscal year 1995. As a percentage
of sales these costs decreased to 12.2% from 12.5% for fiscal year 1996 compared
to fiscal year 1995. The increase in fiscal year 1996 selling expenses was
primarily due to an increase in sales salaries and related expenses and travel
expense.
The Company's general and administrative expenses increased by
$417,302, or 42.7%, to $1,394,033 in fiscal year 1996 from $976,731 in fiscal
year 1995. As a percentage of sales these costs increased to 20.3% from 15.7%
for fiscal year 1996 compared to fiscal year 1995. The increase in fiscal year
1996 general and administrative expenses was primarily due to increases in
salaries and related expenses, various professional fees, meeting expenses and
waste disposal expense.
The Company's research, engineering and technical support expenses
increased by $16,158 or 4.6% to $370,045 in fiscal year 1996 from $353,887 in
fiscal year 1995. As a percentage of sales these costs decreased to 5.4% in
fiscal year 1996 from 5.7% in fiscal year 1995. The increase in fiscal year 1996
research, engineering and technical support expenses was primarily due to
increases in salaries. The Company anticipates its fiscal 1997 research,
engineering and technical support expense will approximate expenses incurred in
fiscal 1996.
The Company continues its business program of establishing joint
venture arrangements in international markets. The Company manufactures and
supplies patented and proprietary ingredients which make the finished products
functional and enable manufacturing of the finished products to take place in
the foreign countries. The joint ventures market the finished products and the
joint ventures' profit is shared by the respective joint venture shareholders in
accordance with share ownership. The Company also has an investment in a foreign
company that operates as a trading company. The Company's investments in
corporate joint ventures and the foreign company are accounted for using the
equity method and resulted in income to the Company of $488,969 and $428,639 for
fiscal 1996 and fiscal 1995, respectively. In addition, the Company received
fees for technical and other support to the joint ventures based on the revenues
of the individual joint ventures. The Company recognized fees for such
assistance of $1,659,792 and $1,313,522 for fiscal 1996 and fiscal 1995,
respectively. The increase in equity income in corporate joint ventures and the
foreign company and fees for technical and other support to corporate joint
ventures was primarily due to the joint ventures' increasing revenues and
profitability as they mature. The Company anticipates that in the future it will
consider entering into joint ventures in other foreign countries. The Company
recognized expenses related to corporate joint ventures of $346,677 and $340,009
in fiscal 1996 and fiscal 1995, respectively. The expenses consisted primarily
of legal fees regarding the development of new joint ventures and travel and
technical services regarding existing joint ventures. The Company anticipates
that expenses relating to corporate joint ventures will continue to increase in
the future due to the development of new corporate joint ventures and the
Company providing ongoing technical and other support to existing joint
ventures.
The Company's effective income tax rates were 34.3% and 30.9% for 1996
and 1995, respectively. The effective income tax rate was lower than the
statutory rate primarily due to equity in income of corporate joint ventures
being recognized on an after tax basis for these entities. To the extent the
joint ventures' undistributed earnings were distributed to the Company during
fiscal years 1996 and 1995, it did not result in material additional income tax
liability after the application of foreign tax credits.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
The Company's sales increased by $1,307,600, or 26.7%, to $6,214,132 in
fiscal year 1995 from $4,906,532 in fiscal year 1994. The increase in sales is
primarily due to an increase in the volume level of shipments of corrosion
inhibiting products. Cost of sales increased as a percentage of sales to 47.4%
in fiscal year 1995 from 44.0% in fiscal 1994. The variation in the cost of
sales percentage is primarily due to product mix.
The Company's selling expenses increased by $71,891, or 10.2%, to
$776,452 in fiscal year 1995 from $704,561 in fiscal year 1994. As a percentage
of sales these costs decreased from 14.4% in fiscal year 1994 to 12.5% in fiscal
year 1995. The increase in fiscal year 1995 selling expenses is primarily due to
an increase in sales salaries and related expenses, advertising and promotion
expenses, and travel expenses.
The Company's general and administrative expenses increased by
$101,106, or 11.5%, to $976,731 in fiscal year 1995 from $875,625 in fiscal year
1994. As a percentage of sales, however, these costs decreased from 17.8% in
fiscal year 1994 to 15.7% in fiscal year 1995. The increase in fiscal year 1995
general and administrative expenses is primarily due to an increase in employee
bonuses. This increase in bonuses was partially offset because the Company did
not have a similar expense in fiscal year 1995 relating to extending the
exercise date of warrants to purchase common stock as it had incurred in fiscal
year 1994.
The Company's research, engineering and technical support expenses
increased by $43,412, or 14.0%, to $353,887 in fiscal year 1995 from $310,475 in
fiscal year 1994. However, as a percentage of sales these costs decreased from
6.3% in fiscal year 1994 to 5.7% in fiscal year 1995. The increase in fiscal
year 1995 research, engineering and technical support expenses is primarily due
to increases in staff salary and related expenses, laboratory materials, and
travel.
The Company's investments in corporate joint ventures and the foreign
company resulted in income to the Company of $428,639 and $311,879 for fiscal
1995 and fiscal 1994, respectively. In addition, the Company received fees for
technical and other support to the joint ventures based on the revenues of the
individual joint ventures. The Company recognized fees for such support of
$1,313,522 and $743,757 for fiscal 1995 and fiscal 1994, respectively. The
increase in equity income of corporate joint ventures and the foreign company
and fees for technical and other support to corporate joint ventures is
primarily due to the joint ventures' increasing revenues and profitability as
they mature. The Company recognized expenses related to corporate joint ventures
of $340,009 and $190,848 in 1995 and 1994, respectively. These expenses consist
primarily of legal fees regarding the development of new joint ventures and
travel and support regarding existing joint ventures.
The Company's effective income tax rates were 30.9% and 30.2% for
fiscal 1995 and fiscal 1994, respectively. The effective income tax rate is
lower than the statutory rate primarily due to equity in income of the corporate
joint ventures and the foreign company being recognized on an after tax basis
for these entities. To the extent the joint ventures' undistributed earnings
were distributed to the Company during fiscal years 1995 and 1994, it did not
result in material additional income tax liability after the application of
foreign tax credits.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1996, the Company's working capital was $5,284,403,
including $3,707,520 in cash and cash equivalents, with a current ratio of
6.8:1. At August 31, 1995, the Company's working capital was $4,250,684,
including $2,831,301 in cash and cash equivalents, with a current ratio of
9.3:1. At August 31, 1996, the Company had no long-term debt and no material
lease commitments.
On September 13, 1995, the Company entered into a $400,000 revolving
credit agreement that expired on September 13, 1996. The Company did not renew
the revolving credit agreement.
In late 1995, the Company purchased an approximately 10 acre parcel of
land and began constructing in March 1996 an off-site warehouse on the site. The
land, site development and construction of the warehouse was completed in
November 1996 and cost approximately $700,000 and has been funded with existing
cash and cash equivalents.
In fiscal 1996, the Company repurchased 61,165 shares of its Common
Stock in various open market transactions at prices ranging from $4.875 per
share to $5.25 per share. During fiscal 1996, holders of stock options exercised
their rights to purchase 13,167 shares of Common Stock at prices ranging from
$3.00 to $3.13 per share. On August 31, 1995, the Company repurchased 113,000
shares of its Common Stock in a negotiated transaction at a price of $6.30 per
share. During fiscal year 1995, the holders of warrants exercised their right to
purchase 137,000 shares of Common Stock at $2.50 per share.
On April 25, 1994, Inter Alia Holding Company ("Inter Alia") exercised
a warrant to purchase 233,000 shares of Common Stock at an exercise price of
$2.50 per share, for an aggregate exercise price of $582,500. In connection with
such exercise, Inter Alia paid $4,660 in cash and issued a promissory note to
the Company in the amount of $577,840, which note bears interest at 7.25% per
annum and was due December 31, 1995. The note was collateralized by marketable
equity securities. This note was paid in full in fiscal 1996.
Over the past three fiscal years, cash flow from operations has been
sufficient to meet liquidity requirements, capital expenditures, research and
development costs and expansion of operations. Cash flow from operations totaled
$1,672,589, $1,463,930 and $1,155,059 for the years ended August 31, 1996, 1995
and 1994, respectively. This net cash flow resulted principally from net income.
Net cash used in investing activities totaled $98,151, $147,722 and
$430,831 for the years ended August 31, 1996, 1995 and 1994, respectively. The
primary uses of cash were investments in corporate joint ventures and additions
to property. In fiscal 1996, the Company's expenditures of cash for investing
activities were offset by payments of $743,875 on notes receivable from the
purchase of Common Stock.
Net cash used in financing activities was $698,219, $687,458 and
$790,136 for the years ended August 31, 1996, 1995 and 1994, respectively. The
primary uses of cash resulted from the payment of dividends in fiscal 1996, 1995
and 1994 and the repurchase of Common Stock in fiscal 1996, 1995 and 1994. The
primary source of cash provided by financing activities was proceeds of $39,959
and $342,500 from the issuance of Common Stock upon the exercise of outstanding
stock options and warrants in fiscal 1996 and 1995, respectively.
Historically, inflation has had little effect on the Company.
The Company has no postretirement benefit program and does not
anticipate establishing any postretirement benefit program.
RECENT ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board 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 based on SFAS No. 123. SFAS No. 123
is effective for the Company's fiscal year ending August 31, 1997 and would
require disclosure information in the financial statements about stock options
granted in 1996. The Company has not yet determined if it will elect to change
to the fair value method, nor has it determined the effect SFAS No. 123 will
have on net income and net income per share should it elect to make such change.
Adoption of SFAS No. 123 will not have any effect on the Company's cash flows.
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
The following items are included herein:
Financial Statements: Page
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Independent Auditors' Report on Financial Statements............. 13
Balance Sheets as of August 31, 1996 and 1995.................... 14
Statements of Income for the years ended August 31, 1996,
1995 and 1994................................................. 15
Statements of Stockholders' Equity for the
years ended August 31, 1996, 1995, and 1994................... 16
Statements of Cash Flows for the years ended August 31, 1996,
1995 and 1994................................................. 17
Notes to Financial Statements.................................... 18-27
INDEPENDENT AUDITORS' REPORT
Board of Directors
Northern Technologies International Corporation
Lino Lakes, Minnesota
We have audited the accompanying balance sheets of Northern Technologies
International Corporation (the Company) as of August 31, 1996 and 1995 and the
related statements of income, stockholders' equity, and cash flows for each of
the three years in the period ended August 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Northern Technologies International
Corporation at August 31, 1996 and 1995 and the results of its operations and
its cash flows for each of the three years in the period ended August 31, 1996
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
November 15, 1996
<TABLE>
<CAPTION>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
BALANCE SHEETS
AUGUST 31, 1996 AND 1995
- -------------------------------------------------------------------------------------------------------------
1996 1995
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 3,707,520 $ 2,831,301
Receivables:
Trade, less allowance for doubtful accounts of
$26,000 and $25,000, respectively 1,127,975 831,437
Corporate joint ventures 524,577 406,630
Inventories (Note 2) 584,212 530,594
Prepaid expenses and other 78,603 55,863
Deferred income taxes (Note 8) 170,000 110,000
----------- -----------
Total current assets 6,192,887 4,765,825
PROPERTY AND EQUIPMENT, net (Note 3) 980,816 342,249
OTHER ASSETS:
Investments in corporate joint ventures (Note 4) 1,726,328 1,352,143
Investment in foreign company (Note 4) 159,879 161,725
Deferred income taxes (Note 8) 90,000 100,000
Other 164,140 103,092
----------- -----------
2,140,347 1,716,960
----------- -----------
$ 9,314,050 $ 6,825,034
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 154,859 $ 134,543
Income taxes 463,700 142,380
Accrued liabilities:
Payroll 177,381 153,350
Other 112,544 84,868
----------- -----------
Total current liabilities 908,484 515,141
DEFERRED GROSS PROFIT 109,000 100,500
CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Note 5):
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 4,199,275 and 4,244,773 shares, respectively 83,985 84,895
Additional paid-in capital 5,158,344 5,197,633
Retained earnings 3,143,526 1,700,982
Cumulative foreign currency translation adjustments 40,518 99,565
----------- -----------
8,426,373 7,083,075
Notes and related interest receivable from purchase of common stock (129,807) (873,682)
----------- -----------
Total stockholders' equity 8,296,566 6,209,393
----------- -----------
$ 9,314,050 $ 6,825,034
=========== ===========
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
STATEMENTS OF INCOME
YEARS ENDED AUGUST 31, 1996, 1995, AND 1994
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
SALES (Note 6) $ 6,869,184 $ 6,214,132 $ 4,906,532
COST OF GOODS SOLD 3,106,913 2,948,554 2,157,004
----------- ----------- -----------
GROSS PROFIT 3,762,271 3,265,578 2,749,528
OPERATING EXPENSES:
Selling 834,650 776,452 704,561
General and administrative 1,394,033 976,731 875,625
Research, engineering, and technical support 370,045 353,887 310,475
----------- ----------- -----------
2,598,728 2,107,070 1,890,661
----------- ----------- -----------
OPERATING INCOME 1,163,543 1,158,508 858,867
CORPORATE JOINT VENTURES AND FOREIGN COMPANY:
Equity in income of corporate joint ventures and foreign company (Note 4) 488,969 428,639 311,879
Fees for technical and other support to corporate joint ventures (Note 4) 1,659,792 1,313,522 743,757
Corporate joint venture expense (Note 4) (346,677) (340,009) (190,848)
----------- ----------- -----------
1,802,084 1,402,152 864,788
OTHER INCOME:
Interest income 197,216 91,766 64,233
Other income 14,908 15,576 34,778
----------- ----------- -----------
212,124 107,342 99,011
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,177,751 2,668,002 1,822,666
INCOME TAXES (Note 8) 1,090,000 825,000 550,000
----------- ----------- -----------
NET INCOME $ 2,087,751 $ 1,843,002 $ 1,272,666
=========== =========== ===========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ .49 $ .42 $ .30
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 4,290,099 4,353,747 4,255,238
=========== =========== ===========
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
NOTES AND
RELATED
INTEREST
CUMULATIVE RECEIVABLE
FOREIGN FROM TOTAL
ADDITIONAL CURRENCY PURCHASE OF COMMON
COMMON STOCK PAID-IN RETAINED TRANSLATION COMMON STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 31, 1993 4,183,273 $ 83,665 $ 4,630,333 $ 19,348 $ 33,608 $ (362,230) $ 4,404,724
Repurchase of common stock (195,500) (3,910) (215,050) (324,840) -- -- (543,800)
Payments received on notes
receivable -- -- -- -- -- 3,567 3,567
Warrants exercised 233,000 4,660 577,840 -- -- (577,840) 4,660
Extension of exercise date of
warrants -- -- 34,250 -- -- -- 34,250
Dividends on common stock -
$.06 per share -- -- -- (250,996) -- -- (250,996)
Foreign currency translation
adjustment -- -- -- -- 21,816 -- 21,816
Net income -- -- -- 1,272,666 -- -- 1,272,666
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT AUGUST 31, 1994 4,220,773 84,415 5,027,373 716,178 55,424 (936,503) 4,946,887
Repurchase of common stock (113,000) (2,260) (169,500) (540,140) -- -- (711,900)
Payments received on notes
receivable -- -- -- -- -- 62,821 62,821
Warrants exercised 137,000 2,740 339,760 -- -- -- 342,500
Dividends on common stock -
$.075 per share -- -- -- (318,058) -- -- (318,058)
Foreign currency translation
adjustment -- -- -- -- 44,141 -- 44,141
Net income -- -- -- 1,843,002 -- -- 1,843,002
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT AUGUST 31, 1995 4,244,773 84,895 5,197,633 1,700,982 99,565 (873,682) 6,209,393
Repurchase of common stock (61,165) (1,223) (91,748) (220,330) -- -- (313,301)
Payments received on notes
receivable -- -- -- -- -- 743,875 743,875
Issuance of common stock
for services provided 2,500 50 12,763 -- -- -- 12,813
Stock options exercised 13,167 263 39,696 -- -- -- 39,959
Dividends on common stock -
$.10 per share -- -- -- (424,877) -- -- (424,877)
Foreign currency translation
adjustment -- -- -- -- (59,047) -- (59,047)
Net income -- -- -- 2,087,751 -- -- 2,087,751
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT AUGUST 31, 1996 4,199,275 $ 83,985 $ 5,158,344 $ 3,143,526 $ 40,518 $ (129,807) $ 8,296,566
=========== =========== =========== =========== =========== =========== ===========
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS (NOTE 10)
YEARS ENDED AUGUST 31, 1996, 1995, AND 1994
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,087,751 $ 1,843,002 $ 1,272,666
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 88,411 77,466 70,703
Equity in income of corporate joint ventures and foreign company (488,969) (428,639) (311,879)
Dividends received from corporate joint ventures and foreign company 161,583 188,925 98,473
Deferred income taxes (50,000) (80,000) (37,000)
Deferred gross profit 8,500 44,750 11,289
Gain on sale of equipment -- -- (5,321)
Exercise date of warrants extended -- -- 34,250
Change in assets and liabilities:
Receivables:
Trade receivables (296,538) (129,522) (128,703)
Corporate joint ventures (117,947) (140,608) (42,693)
Inventories (53,618) (104,747) (2,433)
Prepaid expenses and other (72,740) (1,091) (33,267)
Accounts payable 20,316 33,268 6,597
Income taxes 321,320 15,190 136,740
Accrued liabilities 64,520 145,936 85,637
----------- ----------- -----------
Total adjustments (415,162) (379,072) (117,607)
----------- ----------- -----------
Net cash provided by operating activities 1,672,589 1,463,930 1,155,059
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property (726,978) (47,003) (178,639)
Investments in corporate joint ventures and foreign company (104,000) (90,000) (252,000)
Proceeds from sale of equipment -- -- 10,174
Increase in other assets (11,048) (10,719) (13,933)
Payments on notes receivable from purchase of common stock 743,875 -- 3,567
----------- ----------- -----------
Net cash used in investing activities (98,151) (147,722) (430,831)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (424,877) (318,058) (250,996)
Repurchase of common stock (313,301) (711,900) (543,800)
Issuance of common stock 39,959 342,500 4,660
----------- ----------- -----------
Net cash used in financing activities (698,219) (687,458) (790,136)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 876,219 628,750 (65,908)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,831,301 2,202,551 2,268,459
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,707,520 $ 2,831,301 $ 2,202,551
=========== =========== ===========
See notes to financial statements.
</TABLE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1996, 1995, AND 1994
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS - Northern Technologies International Corporation (the
Company) is engaged in the development, manufacture, and marketing of
proprietary corrosion inhibiting products and electronic sensing
instruments. Operations are conducted from owned premises in Lino Lakes,
Minnesota, located in the Minneapolis-St. Paul, Minnesota metropolitan
area.
CASH EQUIVALENTS - The Company considers investments with an original
maturity of three months or less to be cash equivalents.
INVENTORIES - Inventories are recorded at the lower of cost (first-in,
first-out basis) or market.
PROPERTY AND DEPRECIATION - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method at rates based on
the estimated service lives of the various assets as follows:
Buildings and improvements 5-20 years
Machinery and equipment 2-10 years
INVESTMENTS IN CORPORATE JOINT VENTURES - Investments in corporate joint
ventures are accounted for using the equity method. Intercompany profits
on inventories held by the corporate joint ventures which were purchased
from the Company have been eliminated based on the Company's ownership
percentage in each corporate joint venture.
INVESTMENT IN FOREIGN COMPANY - Investment in foreign company is accounted
for using the equity method.
INCOME TAXES - The Company utilizes the liability method of accounting for
income taxes as set forth in Statement of Financial Accounting Standards
(SFAS) No. 109, ACCOUNTING FOR INCOME TAXES. SFAS No. 109 requires an
asset and liability approach to financial accounting and reporting for
income taxes. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax basis of
assets and liabilities that will result in taxable or deductible amounts
in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the
tax payable or refundable for the period plus or minus the change during
the period in deferred tax assets and liabilities.
FOREIGN CURRENCY TRANSLATION - The functional currency of the corporate
joint ventures and the foreign company is the applicable local currency,
except for the Company's corporate joint venture in Brazil, for which the
functional currency is the U.S. dollar. 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 excluded from net earnings and
accumulated in a separate component of stockholders' equity.
REVENUE RECOGNITION - Revenue is recognized when the products are shipped.
A portion of the gross profit on products shipped to the Company's
corporate joint ventures is deferred until such products are sold by the
corporate joint ventures.
RESEARCH AND DEVELOPMENT - Research and development expenditures are
expensed as incurred. Total research and development expenses were
$370,045, $353,887, and $310,475 for the years ended August 31, 1996,
1995, and 1994, respectively.
INCOME PER SHARE - Income per share of common stock was computed by
dividing net income by the weighted average number of common and common
equivalent shares outstanding during each year. This amount includes
common stock equivalents of 56,830, 106,512, and 33,146 for the years
ended August 31, 1996, 1995, and 1994, respectively, resulting from the
assumed exercise of outstanding options and warrants using the treasury
stock method.
USE OF ESTIMATES - The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS - Cash and cash
equivalents, receivables, and current liabilities are carried at amounts
which reasonably approximate their fair value due to their short-term
nature.
RECLASSIFICATIONS - Certain 1994 amounts have been reclassified to conform
to 1996 presentations. The reclassifications had no effect on
stockholders' equity or net income as previously reported.
NEW ACCOUNTING STANDARD - In October 1995, the Financial Accounting
Standards Board 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 based on SFAS No.
123. SFAS No. 123 is effective for the Company's fiscal year ending August
31, 1997 and would require disclosure information in the financial
statements about stock options granted in 1996. The Company has not yet
determined if it will elect to change to the fair value method, nor has it
determined the effect SFAS No. 123 will have on net income and net income
per share should it elect to make such change. Adoption of SFAS No. 123
will not have any effect on the Company's cash flows.
2. INVENTORIES
Inventories at August 31 consist of the following:
1996 1995
Production materials $ 150,139 $ 127,052
Work-in-process 22,619 23,851
Finished goods 411,454 379,691
----------- -----------
$ 584,212 $ 530,594
=========== ===========
3. PROPERTY AND EQUIPMENT
Property and equipment at August 31 consist of the following:
1996 1995
Land $ 246,097 $ 16,196
Buildings and improvements 979,369 553,907
Machinery and equipment 587,537 508,433
Deposits - 27,981
------------ ------------
1,813,003 1,106,517
Less accumulated depreciation 832,187 764,268
------------ ------------
$ 980,816 $ 342,249
============ ============
4. INVESTMENTS IN CORPORATE JOINT VENTURES AND FOREIGN COMPANY
JOINT VENTURES - The Company participates in various corporate joint
ventures in countries outside the United States and in similar
noncontractual arrangements in various other countries. All joint ventures
are owned 50% by the Company except where the Company has allowed an
affiliated company to purchase from the joint venture a portion of the
ownership which would have been otherwise purchased by the Company.
Affiliated companies own 10%, 10%, and 25% of the joint ventures in
Taiwan, Singapore, and South Korea, respectively. The joint ventures
manufacture, market, and distribute corrosion inhibiting products. The
Company's investments in corporate joint ventures are as follows:
DATE OF
COUNTRY INVESTMENT
Japan 1987
Taiwan 1990
France 1990
Germany 1991
Sweden 1991
Singapore 1991
Brazil 1993
Russia 1994
South Korea 1994
Finland 1995
Italy 1996
Fees earned from the corporate joint ventures under licenses and technical
and other support agreements were $1,659,792, $1,313,522, and $743,757 for
the years ended August 31, 1996, 1995, and 1994, respectively.
The Company incurred expenses associated with corporate joint ventures of
$346,677, $340,009, and $190,848 for the years ended August 31, 1996,
1995, and 1994, respectively. These expenses consist primarily of legal
fees regarding the development of new joint ventures and travel and
technical services regarding existing joint ventures.
Summarized financial information from the audited and unaudited financial
statements of joint ventures carried on the equity basis is as follows:
<TABLE>
<CAPTION>
August 31
-------------------------------
1996 1995
<S> <C> <C>
Current assets $ 6,200,415 $ 5,142,471
Total assets 7,350,225 5,396,749
Current liabilities 3,636,430 2,464,546
Noncurrent liabilities 27,735 149,071
Stockholders' equity 3,686,060 2,783,132
Northern Technologies International Corporation's
share of corporate joint ventures' equity 1,726,328 1,352,143
</TABLE>
<TABLE>
<CAPTION>
Years Ended August 31
-------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Sales $ 14,207,675 $ 10,984,299 $ 5,958,475
Gross profit 7,743,600 4,704,073 2,713,614
Net income 1,168,273 895,575 638,040
Northern Technologies International
Corporation's share of equity in income
of corporate joint ventures 483,181 419,996 311,879
</TABLE>
FOREIGN COMPANY - During 1994, the Company purchased ownership interests
in two partnerships located in Austria for $142,000. One partnership was a
trading company, and the other partnership was the general partner of, and
provided management services to, the trading company. At August 31, 1994,
the Company had a 73.75% ownership interest in the trading company and a
75% ownership interest in the partnership that provided management
services. The Company did not consolidate the accounts of the two
partnerships in its fiscal 1994 financial statements due to the likelihood
that its majority ownership would subsequently be reduced to a level below
a majority ownership. During 1995, the two partnerships were converted
into a corporation of which the Company owns 50%.
Summarized financial information from the unaudited financial statements
of the foreign company carried on the equity basis is as follows:
<TABLE>
<CAPTION>
August 31,
-------------------------------
1996 1995
<S> <C> <C>
Current assets $ 841,893 $ 850,704
Total assets 1,217,270 1,230,009
Current liabilities 897,512 906,559
Stockholders' equity 319,758 323,450
Northern Technologies International Corporation's
share of foreign company's equity 159,879 161,725
Years Ended
August 31,
-------------------------------
1996 1995
Sales $ 1,514,567 $ 861,795
Gross profit 819,988 56,075
Net income 11,576 17,287
Northern Technologies International Corporation's
share of equity income of foreign company 5,788 8,643
</TABLE>
The sales of the foreign company include revenues from merchandise sold
and commissions received from the arrangement of sales of goods
approximating $11,200,000 and $11,975,000 for the years ended August 31,
1996 and 1995, respectively.
5. STOCKHOLDERS' EQUITY
During 1996, 1995, and 1994, the Company acquired and retired 61,165,
113,000, and 195,500 shares of common stock for $313,301, $711,900, and
$543,800, respectively.
During 1996, five employees received 2,500 shares of common stock in
return for services provided and expensed in 1995. The value of the common
stock issued, $12,813, was determined based on the market value of the
Company's common stock.
At August 31, 1994, the Company had warrants outstanding to purchase
137,000 shares of common stock at $2.50 per share. On June 10, 1994, the
Board of Directors agreed to extend the expiration date of these warrants
from August 31, 1994 to August 31, 1995. The difference between the fair
market value of the Company's common stock on June 14, 1994 and the
exercise price of the warrants, $34,250, was expensed during the year
ended August 31, 1994. All the warrants were exercised in 1995.
On April 25, 1994, the Board of Directors approved the exercise of
warrants to purchase 233,000 shares of common stock at $2.50 per share in
exchange for a $577,840 promissory note and $4,660 in cash.
Receivables resulting from the exercise of warrants and employee stock
purchases have been shown as a reduction of stockholders' equity. At
August 31, they consist of:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Note receivable, 11% interest rate, due on demand $ 125,375 $ 125,375
Notes receivable, payment received in 1996 - 7,535
Note receivable, payment received in 1996 - 98,000
Note receivable, payment received in 1996 - 577,840
------------- -------------
125,375 808,750
Accrued interest receivable 4,432 64,932
------------- -------------
$ 129,807 $ 873,682
============= =============
</TABLE>
At August 31, 1996 and 1995, the increase in accrued interest receivable
on the outstanding notes receivable has been fully reserved for due to the
uncertainty as to when the interest would be paid. The Company received
interest of $114,974 and $48,943 relating to the notes receivable during
the years ended August 31, 1996 and 1995, respectively.
During 1994, the Company's Board of Directors and shareholders approved a
stock option plan (the Plan) providing for the granting of options to
purchase 250,000 shares of common stock. Under the Plan, incentive stock
options and nonqualified stock options may be granted to directors,
officers, nonofficer employees, and others. The options become exercisable
ratably over a three- or four-year period beginning on the first annual
anniversary date of the grant. The options expire in fiscal 1999 and 2001.
The following summarizes the activity for the Plan:
Exercise
Options Price
Outstanding Per Share
Granted 122,170 $2.63 - $3.13
---------- -------------
Balance at August 31, 1994 122,170 2.63 - 3.13
Granted 17,000 3.00
Terminated (5,780) 2.63 - 3.13
--------- -------------
Balance at August 31, 1995 133,390 2.63 - 3.13
Granted 13,870 5.06 - 6.75
Exercised (13,167) 3.00 - 3.13
Terminated (890) 2.63 - 3.13
--------- -------------
Balance at August 31, 1996 133,203 $3.00 - $6.75
========= =============
At August 31, 1996, options to purchase 57,005 shares were exercisable and
the weighted average option exercise price per share for exercisable
options at August 31, 1996 was $3.02.
6. SALES INFORMATION
Sales by geographic location were as follows:
1996 1995 1994
U.S.A. (unaffiliated customers) 75% 79% 81%
Outside the U.S.A.:
Corporate joint ventures in which the
Company is a stockholder 16 15 14
Unaffiliated customers:
Canada 2 2
Other foreign countries 9 4 3
------- ------- -------
100% 100% 100%
======= ======= =======
No single customer accounted for more than 10% of net sales for the years
ended August 31, 1996 and 1995. Approximately 10% of net sales were made
to a single customer in 1994.
7. RETIREMENT PLAN
The Company has a 401(k) Employee Savings Plan. Employees who meet certain
age and service requirements may elect to contribute up to 15% of their
salaries. The Company contributes the lesser of 50% of the participants'
contributions or 3-1/2% of the employee's salary. The Company recognized
expense for the savings plan of $34,000, $33,000, and $28,000 for the
years ended August 31, 1996, 1995, and 1994, respectively.
8. INCOME TAXES
The provisions for income taxes for the years ended August 31 consist of
the following:
1996 1995 1994
Current:
Federal $ 1,040,000 $ 820,000 $ 533,000
State 100,000 85,000 54,000
------------- ----------- -----------
1,140,000 905,000 587,000
Deferred:
Federal (46,000) (73,000) (35,000)
State (4,000) (7,000) (2,000)
------------- ----------- -----------
(50,000) (80,000) (37,000)
------------- ----------- -----------
$ 1,090,000 $ 825,000 $ 550,000
============= =========== ===========
Reconciliations of the expected federal income tax at the statutory rate
with the provisions for income taxes for the years ended August 31 are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Tax computed at statutory rates $ 1,112,000 $ 934,000 $ 638,000
State income tax, net of federal benefit 63,000 51,000 34,000
Change in valuation allowance - - (50,000)
Equity in income of joint ventures (166,000) (163,000) (106,000)
Other 81,000 3,000 34,000
------------ ----------- -----------
$ 1,090,000 $ 825,000 $ 550,000
============ =========== ===========
</TABLE>
The Company has not recognized a deferred tax liability relating to
investments in foreign corporate joint ventures and foreign company that
are essentially permanent in duration of $450,000 and $330,000 at August
31, 1996 and 1995, respectively. If some or all of the undistributed
earnings of the foreign corporate joint ventures and foreign company are
remitted to the Company in the future, income taxes, if any, after the
application of foreign tax credits, will be provided at that time.
The tax effect of the temporary differences and tax carryforwards
comprising the net deferred taxes shown on the balance sheets at August 31
are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current:
Allowance for doubtful accounts $ 9,000 $ 9,000
Inventory costs 30,000 25,000
Prepaid expenses 27,000 (18,000)
Accrued expenses 65,000 58,000
Deferred gross profit 39,000 36,000
----------- -----------
Total current $ 170,000 $ 110,000
=========== ===========
Noncurrent:
Excess of book over tax depreciation $ 34,000 $ 35,000
Investment write-offs 568,000 568,000
Joint venture expenses 28,000 30,000
Interest receivable relating to notes 28,000 35,000
Valuation allowance (568,000) (568,000)
----------- -----------
Total noncurrent $ 90,000 $ 100,000
=========== ===========
</TABLE>
9. CONTINGENCIES
The Company is involved in various legal actions arising in the normal
course of business. Management is of the opinion that any judgment or
settlement resulting from pending or threatened litigation would not have
a material adverse effect on the financial position or results of
operations of the Company.
10. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information for the years ended
August 31 consist of:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash paid during the year for income taxes $ 818,680 $ 887,972 $ 450,260
(Decrease) increase in the Company's investment
in joint ventures and foreign company and cumulative
foreign currency translation adjustments due to
changes in exchange rates (59,047) 44,141 21,816
Issuance of common stock in exchange for services
provided in 1995 and accrued for at August 31, 1995 12,813 - -
Accrued expense decrease resulting from a reduction in
principal balance and accrued interest receivable relating
to notes receivable from purchase of common stock - 62,821 -
Issuance of common stock in exchange for a note
receivable - - 577,840
</TABLE>
11. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------
November 30 February 28 May 31 August 31
<S> <C> <C> <C> <C>
1996:
Net sales $ 1,618,599 $ 1,607,319 $ 1,751,478 $ 1,891,788
Gross profit 860,989 843,716 942,117 1,115,449
Income before income taxes 606,635 670,424 737,039 1,163,653
Income taxes 170,000 230,000 230,000 460,000
Net income 436,635 440,424 507,039 703,653
Net income per common and
common equivalent share $ .10 $ .10 $ .12 $ .17
1995:
Net sales $ 1,347,215 $ 1,641,919 $ 1,805,521 $ 1,419,477
Gross profit 735,613 838,585 934,071 757,309
Income before income taxes 558,082 717,608 808,157 584,155
Income taxes 190,000 210,000 300,000 125,000
Net income 368,082 507,608 508,157 459,155
Net income per common and
common equivalent share $ .08 $ .12 $ .12 $ .10
</TABLE>
During the fourth quarters of 1996 and 1995, the Company adjusted the
carrying value of inventory as a result of a complete annual physical
count and valuation. This annual counting and pricing was more
comprehensive than that which had been conducted on an interim basis. As a
result, the Company decreased cost of sales by approximately $76,000 and
$56,000 in the fourth quarters of 1996 and 1995, respectively. It is not
practicable to determine the periods of the fiscal year to which these
adjustments relate.
12. REVOLVING CREDIT AGREEMENT
On September 13, 1995, the Company entered into a $400,000 revolving
credit agreement that expired on September 13, 1996. The Company did not
renew this agreement.
13. SUBSEQUENT EVENT
On November 15, 1996, the Company's Board of Directors declared a $.12 per
share dividend on all outstanding shares of the Company's common stock to
be distributed on December 20, 1996 to holders of record on December 6,
1996.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
A. DIRECTORS OF THE REGISTRANT
The following table sets forth certain information as of November 15,
1996, which has been furnished to the Company by the directors named below.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
---- --- -------------------- --------------
<S> <C> <C> <C>
Sidney Dworkin 75 Chairman, Advanced Modular Systems, Inc. 1979
Vincent J. Graziano 63 Co-Chief Executive Officer and President of the 1979
Company
Gerhard Hahn 52 General Manager, Knuppel KG 1996
Dr. Donald A. Kubik 56 Vice President of the Company 1995
Richard G. Lareau 68 Partner, Oppenheimer Wolff & Donnelly 1980
Philip M. Lynch 60 Co-Chief Executive Officer; Chairman of the 1979
Board of the Company; Executive Vice President
of Inter Alia Holding Company
Dr. Milan R. Vukcevich 59 Director of Materials Research and Development, 1995
Bicron Saint-Gobain Industrial Ceramics
</TABLE>
Mr. Dworkin has been chairman of the Board of Advanced Modular Systems,
Inc., a company which sells and leases modular buildings, since 1988. In
addition, since September 1987, Mr. Dworkin has been an independent venture
capitalist. Mr. Dworkin also serves as a director of CCA Industries, Inc.,
Viragen Corporation and Interactive Technologies, Inc. and as chairman of the
board of each of Comtrex Systems Corp. and Marbledge Group, Inc.
Mr. Graziano has been employed by the Company since 1976 and has been
president of the Company and a director of the Company since 1979. Prior to
joining the Company, Mr. Graziano held the position of Manager of Manufacturing
Systems with the management consulting department of Peat, Marwick, Mitchell &
Co. in Europe and the United States for nine years.
Mr. Hahn has been employed as General Manager by Knuppel KG, a German
packaging firm, since 1966. Mr. Hahn has also been employed by Excor
Korrosionsschutz-Technologien and Produtke GmbH (the Company's German joint
venture) since 1991.
Dr. Kubik has been employed by the Company since 1978 and has been a
Vice President of the Chemical Division of the Company since 1979. Effective as
of August 30, 1995, Dr. Kubik was appointed as a director of the Company. During
his employ as senior chemist, Dr. Kubik was responsible for developing the
patent that led to the Company's introduction of protective plastic film and
paper products incorporating volatile corrosion inhibitors. Prior to joining the
Company, Dr. Kubik held a research and development position with 3M Company
which also led to the development of two patents.
Mr. Lareau has been a partner of the law firm of Oppenheimer Wolff &
Donnelly for more than five years. Mr. Lareau also serves as a director of
Ceridian Corporation, Merrill Corporation, Nash Finch Company and as a trustee
of Mesabi Trust.
Mr. Lynch has been executive vice president of Inter Alia Holding
Company, a financial and management consulting firm ("Inter Alia"), for more
than five years. In September, 1992, Olympia Fitness Center, Inc., of which Mr.
Lynch was an officer and director, filed for protection under Chapter 11 of the
Federal Bankruptcy laws, which bankruptcy was subsequently discharged. Mr. Lynch
is also a member of the Board of Directors of the Fosbel Group of Companies:
Fosbel International (U.K.), Fosbel, Inc. (U.S.), Fosbel Japan, Ltd. (Tokyo),
Fosbel do Brasil (San Paulo), and Fosbel Europe BV, (operating in 17 Western and
three Eastern European countries). The Fosbel Group is itself a joint venture
between multinational listed companies: Glaverbel S.A., (Bruxelles) a leading
Belgian glass manufacturing company and an affiliate of Asahi Glass Co., Ltd.,
and the English petrochemical and materials science company Burmah Castrol plc.
Dr. Vukcevich was appointed to the Board of Directors in 1995. Dr.
Vukcevich is employed as Director of Materials Research and Development of
Bicron Saint-Gobain Industrial Ceramics. Dr. Vukcevich was employed by GE
Lighting from 1973 to 1995, holding various positions including Chief Scientist,
Manager of Metallurgical Engineering, and Coordinator of International Research
and Development in Materials Science.
B. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages and the offices held,
as of November 15, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION IN THE COMPANY
---- --- -----------------------
<S> <C> <C>
Vincent J. Graziano 63 Co-Chief Executive Officer, President and Director
Philip M. Lynch 60 Co-Chief Executive Officer and Chairman of the Board
Dr. Donald A. Kubik 56 Vice President and Director
Ernest R. Peake 61 Vice President
Loren M. Ehrmanntraut 69 Secretary and Treasurer
</TABLE>
Mr. Graziano has been employed by the Company since 1976 and has been
President of the Company and a director of the Company since 1979. Refer to
"Directors of the Registrant" for a more detailed discussion.
Mr. Lynch has been Executive Vice President of Inter Alia, a financial
and management consulting firm, for more than five years. Refer to "Directors of
the Registrant" for a more detailed discussion.
Dr. Kubik has been employed by the Company since 1978 and has been a
Vice President of the Company since 1979. Refer to "Directors of the Registrant"
for a more detailed discussion.
Mr. Peake has been employed by the Company since 1978 and has been a
Vice President of the Company since 1979. Prior to joining the Company, Mr.
Peake spent eight years in the medical patient monitoring field including five
years with Marcom, Inc. as Operations Manager and as a partner and Vice
President of Advance Design, Inc. Mr. Peake also spent three years with
Honeywell as a Principal Development Engineer.
Mr. Ehrmanntraut has been employed by the Company since 1973. He has
served as Treasurer since 1974 and as Secretary since 1978. Prior to joining the
Company, Mr. Ehrmanntraut spent four years with Bankers Mortgage Corporation and
its subsidiaries performing accounting, finance and personnel duties. Prior to
his employ with Bankers Mortgage Corporation, Mr. Ehrmanntraut served as
controller for Physicians and Surgeons Underwriters Insurance Company, office
manager for Employers Overload Corporation, accountant, auditor, and various
personnel positions with American Hardware Mutual Insurance Company and as an
auditor with Ernst and Ernst.
C. SECTION 16(a) OF THE EXCHANGE ACT BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers and all persons who
beneficially own more than 10% of the outstanding shares of the Company's Common
Stock to file with the Securities and Exchange Commission initial reports of
ownership and reports of changes in ownership of the Company's Common Stock.
Executive officers, directors and greater than 10% beneficial owners are also
required to furnish the Company with copies of all Section 16(a) forms they
file. To the Company's knowledge, based upon a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the year ended August 31, 1996, none of the
Company's directors or officers or beneficial owners of greater than 10% of the
Company's Common Stock failed to file on a timely basis the forms required by
Section 16 of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION.
A. COMPENSATION OF DIRECTORS
DIRECTORS FEES. Each person who was a non-employee director received an
annual retainer of $5,000 in each of fiscal 1994, 1995 and 1996 for services
rendered as a director of the Company. Effective November 15, 1996, the Company
increased the annual retainer fee to $7,500. Each current non-employee director
of the Company receives $750 for each Board meeting and $500 for each Board
committee meeting attended. The Company also pays the premium on a group
insurance policy for the Chairman of the Board.
AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS. On November 16,
1993, the Board adopted the 1994 Stock Incentive Plan (the "Plan"), which was
approved by the Company's stockholders at the April 25, 1994, Annual Meeting. In
accordance with the terms of the Plan, each non-employee director of the Company
who was a director on September 1, 1993 was automatically granted, on a one-time
basis, non-qualified options to purchase 2,000 shares of Common Stock, at an
exercise price equal to the fair market value of the Common Stock on November
16, 1993. In addition, each non-employee director elected or appointed to the
Board after the effective date of the Plan is granted, on a one-time basis,
non-qualified options to purchase the pro-rata portion of 2,000 shares of Common
Stock calculated by dividing the number of months remaining in the fiscal year
at the time of election or appointment divided by twelve. The Plan also provides
that following the effective date of the Plan, non-employee directors
automatically are granted non-qualified options to purchase 2,000 shares of
Common Stock on the first day of each fiscal year while serving as a
non-employee director of the Company.
On September 1, 1994, each of the non-employee directors on that date,
and Mr. Lynch, received an automatic grant of options under the Plan to purchase
2,000 shares of Common Stock at an exercise price of $3.00 per share. On
September 1, 1995, each of the non-employee directors on that date, and Mr.
Lynch, received an automatic grant of options under the Plan to purchase 2,000
shares of Common Stock at an exercise price of $6.75 per share. On November 20,
1995, each of Mr. Vukcevich and Maria Szonert-Binienda received an automatic
grant of options under the Plan to purchase 1,600 shares of Common Stock at an
exercise price of $6.125 per share. Ms. Szonert-Binienda served as a director of
the Company from November 20, 1995 until November 14, 1996. On May 1, 1996, Mr.
Hahn received an automatic grant of an option under the Plan to purchase 670
shares of Common Stock at an exercise price of $5.06 per share. On September 1,
1996, each of the non-employee directors, and Mr. Lynch, received an automatic
grant of options under the Plan to purchase 2,000 shares of Common Stock at an
exercise price of $5.00 per share. All of such options granted vest in equal
one-third installments over a three-year period.
B. SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION PAID TO EXECUTIVE
OFFICERS
The following table provides summary information concerning cash and
non-cash compensation paid or accrued by the Company to or on behalf of the
Company's Co-Chief Executive Officers and the most highly compensated executive
officers of the Company whose cash and non-cash salary and bonus exceeded
$100,000 in the fiscal year ended August 31, 1996 (the "Named Executive
Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(1)
--------------------------- ---- --------- -------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Vincent J. Graziano 1996 $190,443 $45,000 0 $4,750
PRESIDENT AND CO-CHIEF EXECUTIVE OFFICER 1995 182,516 40,000 0 5,574
1994 157,414 25,000 38,000 5,080
Philip M. Lynch 1996 0 0 2,000 0(2)
CHAIRMAN OF THE BOARD AND CO-CHIEF 1995 0 0 2,000 0(2)
EXECUTIVE OFFICER 1994 0 0 2,000 0(2)
Donald A. Kubik 1996 152,749 45,000 0 5,496
VICE PRESIDENT 1995 136,487 35,000 0 5,287
1994 121,386 15,000 32,500 4,238
Loren M. Ehrmanntraut 1996 107,410 40,000 0 5,159
TREASURER AND SECRETARY 1995 92,811 30,000 0 3,584
1994 82,714 20,000 32,500 2,884
</TABLE>
- -----------------------------
(1) Compensation hereunder consists of contributions to the 401(k) plans of
the Named Executive Officers.
(2) Does not include any commissions payable to Inter Alia, an entity
affiliated with Mr. Lynch, under a certain Manufacturer's
Representative Agreement. See "Item 12 - Certain Relationships and
Related Transactions."
C. OPTION GRANTS AND EXERCISES.
The following tables provide information for the year ended August 31,
1996 as to individual grants of options to purchase shares of the Common Stock,
exercises of options and the potential realizable value of the options held by
the Named Executive Officers at August 31, 1996.
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 1996
PERCENT OF TOTAL OPTIONS
GRANTED TO EMPLOYEES EXERCISE OR BASE
NAME OPTIONS GRANTED(1) IN FISCAL YEAR PRICE ($/SHARE) EXPIRATION DATE
---- ------------------ -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Philip M. Lynch 2,000 100% $6.750 August 31, 2000
</TABLE>
- ----------------------------
(1) These options were granted under the Plan. The options vest in three
equal installments on the first, second and third anniversary of the
date of grant (9/1/95). To the extent not already exercisable, options
granted under the Plan become immediately exercisable in full upon
certain changes in control of the Company.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND
FISCAL 1996 YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT AUGUST 31, 1996 OPTIONS AT AUGUST 31, 1996 (1)
-------------------------- ------------------------------
SHARES ACQUIRED ON VALUE
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Vincent J. Graziano 0 0 19,500 18,500 $38,750 $36,875
Philip M. Lynch 0 0 2,001 3,999 3,835 3,915
Donald A. Kubik 9,167 23,282 7,500 15,833 15,000 31,562
Loren M. Ehrmanntraut 0 0 16,667 15,833 33,126 31,562
</TABLE>
- ---------------------------
(1) Value is calculated as the excess of the market value of the Common
Stock at August 31, 1996 over the exercise price. On August 31, 1996,
the market value of the Common Stock was $5.00 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth information regarding the beneficial
ownership of the Common Stock of the Company as of November 15, 1996, unless
other noted, (a) by each stockholder who is known by the Company to own
beneficially more than 5% of the outstanding Common Stock, (b) by each director,
(c) each Named Executive Officer, and (d) by all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK BENEFICIALLY OWNED(1)
--------------------------------------------
NAME AMOUNT PERCENT OF CLASS
---- ------ ----------------
<S> <C> <C>
Inter Alia Holding Company............................... 911,668 (2) 21.7%
Herman H. Lee............................................ 261,545 (3) 6.2
Sidney Dworkin........................................... 50,501 (4) 1.2
Vincent J. Graziano...................................... 71,005 (5) 1.7
Gerhard Hahn............................................. 2,500 (6) *
Dr. Donald A. Kubik...................................... 88,340 (7) 2.1
Richard G. Lareau........................................ 31,677 (8) *
Philip M. Lynch.......................................... 4,001 (9) *
Dr. Milan R. Vukcevich................................... 533(10) *
Loren M. Ehrmanntraut.................................... 51,500(11) 1.2
All directors and executive officers
as a group (10 persons).................................. 1,275,240(12) 29.9
</TABLE>
- ---------------------------
*Less than 1%.
(1) Shares not outstanding but deemed beneficially owned by virtue of the
right of a person or member of a group to acquire them within 60 days
are treated as outstanding only when determining the amount and percent
owned by such person or group. Unless otherwise noted, all of the
shares owned or held by individuals or entities possessing sole voting
and investment power with respect to such shares.
(2) Includes 911,668 shares held of record by Inter Alia, a financial and
management consulting firm of which Mr. Lynch, the Chairman of the
Board of Directors and the Co-Chief Executive Officer of the Company,
is a stockholder, officer and director.
(3) Includes 259,545 shares beneficially owned by Mr. Lee, based on a
Schedule 13G filed by Mr. Lee dated as of November 12, 1996. Includes
2,000 shares beneficially owned by Mr. Lee's wife as to which he
disclaims any beneficial interest.
(4) Does not include 21,015 shares held by Sidelmar, a partnership in which
Mr. Dworkin, a director of the Company, is a general partner. Includes
4,001 shares of Common Stock which may be acquired within 60 days
pursuant to the exercise of options.
(5) Includes 20,500 shares of Common Stock which may be acquired within 60
days pursuant to the exercise of options.
(6) Includes 500 shares of Common Stock which may be acquired within 60
days pursuant to the exercise of options.
(7) Includes 8,333 shares of Common Stock which may be acquired within 60
days pursuant to the exercise of options.
(8) Includes 4,001 shares of Common Stock which may be acquired within 60
days pursuant to the exercise of options.
(9) Does not include 911,668 shares held of record or beneficially owned by
Inter Alia Holding Company, of which Mr. Lynch is a stockholder,
officer and director. Includes 4,001 shares of Common Stock which may
be acquired within 60 days pursuant to the exercise of options.
(10) Includes 533 shares of Common Stock which may be acquired within 60
days pursuant to the exercise of options.
(11) Includes 17,500 shares of Common Stock which may be acquired within 60
days pursuant to the exercise of options.
(12) Includes (i) 911,668 shares held of record by Inter Alia Holding
Company, a financial and management consulting firm of which Mr. Lynch,
the Chairman of the Board of Directors and the Co-Chief Executive
Officer of the Company, is a stockholder, officer and director, (ii)
21,015 shares held of record by Sidelmar, a partnership in which Mr.
Dworkin, a director of the Company, is a general partner, and (iii)
options to purchase 64,369 shares which are held by officers and
directors of the Company which are exercisable within 60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On October 1, 1976, the Company entered into a Manufacturer's
Representative Agreement with The Saxxon Organization, Incorporated (the
"Agreement"). The Agreement has no expiration date and may be terminated by
either party upon 60 days written notice. Effective January 9, 1980, the
Agreement was assigned to Inter Alia, a financial and management consulting firm
of which Philip M. Lynch, the Chairman of the Board of Directors of the Company,
is a stockholder, officer and director. Under the Agreement, Inter Alia (or the
"Representative") is entitled to commissions from the Company on the net
proceeds of sales of the Company's product generated by Inter Alia. The
Representative acts as an independent manufacture's representative of the
Company. It has a non-exclusive worldwide right to offer for sale and solicit
orders for the Company's products in accordance with prices determined by the
Company. The Representative is responsible for all of its own operating expenses
with no entitlement for reimbursement from the Company. The Representative has
not effected any sales within the United States. The Representative's effort has
developed sales outside the United States, specifically in France, which
resulted in commissions of approximately $52,950, $52,057 and $29,700 for the
fiscal years ending August 31, 1996, 1995, and 1994, respectively. In light of
the Company's own domestic sales effort and its distributor network within the
United States, the Company does not anticipate the Representative developing any
sales within the United States. Additionally, the Company's expanding
international joint venture program may also limit opportunities abroad for the
Representative. Thus, the Company does not anticipate that the Representative
will develop any significant sales volume for the Company.
On February 1, 1982, each of Vincent J. Graziano, President of the
Company, and Inter Alia, a financial and management consulting firm of which
Philip M. Lynch, the Chairman of the Board of Directors of the Company, is a
stockholder, officer and director, purchased 15,000 shares of the Common Stock
from former employees who originally purchased the stock through the Company's
Employee Retention and Incentive Plan. Both Mr. Graziano and Inter Alia
purchased the stock and paid therefor by signing promissory notes dated February
1, 1982, each with a face value of $13,878 bearing interest at 5% per annum.
Both notes were originally due on December 31, 1992 and were due on demand
thereafter. As of August 31, 1995, Mr. Lynch paid all amounts due and owing
under his promissory note, including accrued interest. As of August 31, 1995,
the outstanding balance of the Graziano note, including prepaid and accrued
interest, was $6,538. Mr. Graziano paid all amounts due and owing under his
promissory note on October 15, 1995.
On August 31, 1984 and November 30, 1990, Inter Alia purchased 119,083
and 100,000 shares, respectively, of the Common Stock and paid therefor by
signing promissory notes. The August 31, 1984 promissory note (the "August
Note") had a face value of $125,375 and bore interest at 11% per year. The
August Note was originally due on December 31, 1992 and is currently due on
demand. As of August 31, 1996, the outstanding balance of the August Note,
including accrued interest, was $204,162. The November 30, 1990 promissory note
(the "November Note") had a face value of $98,000 and bore interest, to be paid
semi-annually, at the applicable federal rate. The November Note was due
November 30, 1995. The outstanding balance of the November Note, including
accrued interest, was paid in full in fiscal 1996.
On April 25, 1994, Inter Alia exercised a warrant to purchase 233,000
shares of the Common Stock at an exercise price of $2.50 per share, for an
aggregate exercise price of $582,500. In connection with such exercise, Inter
Alia paid $4,660 in cash and issued a promissory note to the Company in the
amount of $577,840, which note bore interest at 7.25% per annum and was due
December 31, 1995. Marketable equity securities owned by Inter Alia served as
collateral for the note. The outstanding balance of this note, including accrued
interest, was paid in full in fiscal 1996.
Inter Alia paid $48,943 and $13,878 of accrued interest and principal,
respectively, in fiscal 1995 pursuant to the cancellation of commissions and
other expense reimbursement due Inter Alia.
Gerhard Hahn, a director of the Company, is a shareholder and General
Manager of Knuppel KG. Knuppel KG is a 50% partner with the Company in a joint
venture in Germany. The German joint venture entity has granted a loan of
750,000 DM to Knuppel KG. The loan is secured by Knuppel KG's equity in the
German joint venture and bears interest at 7.5% per annum.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Reference is made to the Exhibit Index hereinafter contained, at page
38 of this Report.
A copy of any exhibits listed or referred to herein will be furnished
at a reasonable cost to any person who is a stockholder upon receipt from any
such person of a written request for any such exhibit. Such request should be
sent to: Mr. Loren M. Ehrmanntraut, 6680 N. Highway 49, Lino Lakes, Minnesota
55014; Attn: Stockholder Information.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Annual Report on
Form 10-KSB pursuant to Item 13(a):
A. Form of Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended August 31, 1993).
B. Form of Non-Qualified Stock Option Agreement (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended August 31, 1993).
C. 1994 Stock Incentive Plan (incorporated by reference to
Exhibit 10.3 to the Company's Annual Report on Form 10-KSB for
the year ended August 31, 1993).
(b) REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of fiscal 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 of the Securities
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
Dated: November 26, 1996 By: /s/ Vincent J. Graziano
--------------------------------------
Vincent J. Graziano
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant on November 26, 1996 in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE
- ---- -----
<S> <C>
/s/ Vincent J. Graziano Co-Chief Executive Officer, President and Director
- --------------------------------- (principal executive officer)
Vincent J. Graziano
/s/ Loren M. Ehrmanntraut Treasurer and Secretary (principal financial officer
- --------------------------------- and principal accounting officer)
Loren M. Ehrmanntraut
/s/ Philip M. Lynch Co-Chief Executive Officer and Chairman of the Board of
- --------------------------------- Directors
Philip M. Lynch
/s/ Sidney Dworkin Director
- ---------------------------------
Sidney Dworkin
/s/ Gerhard Hahn Director
- ---------------------------------
Gerhard Hahn
/s/ Donald A. Kubik, Ph.D. Director
- ---------------------------------
Donald A. Kubik, Ph.D.
/s/ Richard G. Lareau Director
- ---------------------------------
Richard G. Lareau
/s/ Milan R. Vukcevich, Ph.D. Director
- ---------------------------------
Milan R. Vukcevich, Ph.D.
</TABLE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR THE YEAR ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
Item No. Item Method of Filing
- -------- ---- ----------------
<S> <C> <C>
3.1 Certificate of Incorporation Incorporated by reference to Exhibit 3.1
contained in the Registration Statement on Form
10 (File No. 0-19331).
3.2 Bylaws Incorporated by reference to Exhibit 3.2
contained in the Registration Statement on Form
10 (File No. 0-19331).
10.1 Form of Incentive Stock Option Incorporated by reference to Exhibit 10.1 to
Agreement the Company's Annual Report on Form 10-KSB for
the fiscal year ended August 31, 1993.
10.2 Form of Non-Qualified Stock Option Incorporated by reference to Exhibit 10.2 to
Agreement the Company's Annual Report on Form 10-KSB for
the fiscal year ended August 31, 1993
10.3 1994 Stock Incentive Plan Incorporated by reference to Exhibit 10.3 to
the Company's Annual Report on Form 10-KSB for
the year ended August 31, 1993
21.1 Subsidiaries of the Registrant Filed herewith electronically.
27.1 Financial Data Schedule Filed herewith electronically.
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Euromasch-Handels-Gesellschaft m.b.H.
Incorporated in Austria.
The Registrant owns 50% of the capital stock of this corporation.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 3,707,520
<SECURITIES> 0
<RECEIVABLES> 1,678,552
<ALLOWANCES> 26,000
<INVENTORY> 584,212
<CURRENT-ASSETS> 6,192,887
<PP&E> 1,813,003
<DEPRECIATION> 832,187
<TOTAL-ASSETS> 9,314,050
<CURRENT-LIABILITIES> 908,484
<BONDS> 0
0
0
<COMMON> 83,985
<OTHER-SE> 8,212,581
<TOTAL-LIABILITY-AND-EQUITY> 9,314,050
<SALES> 6,869,184
<TOTAL-REVENUES> 6,869,184
<CGS> 3,106,913
<TOTAL-COSTS> 3,106,913
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,177,751
<INCOME-TAX> 1,090,000
<INCOME-CONTINUING> 2,087,751
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,087,751
<EPS-PRIMARY> .49
<EPS-DILUTED> .49
</TABLE>
