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, 1997 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, $.02 PAR VALUE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE.
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. [ ]
The Registrant's revenues for the fiscal year ended August 31, 1997
were $8,729,318.
As of November 14, 1997, 4,202,488 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 $31,036,387.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
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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., a predecessor to Northern Technologies
International Corporation, was incorporated in the State of Minnesota on August
4, 1970. In 1976, Northern Instruments, Inc. changed its name to Northern
Instruments Corporation. In 1978, Northern Instruments Corporation, a Minnesota
corporation, was merged with and into Northern Instruments Corporation, a
newly-formed Delaware corporation. In 1993, Northern Technologies International
Corporation, a wholly owned subsidiary, was merged into Northern Instruments
Corporation. As a result of such merger, Northern Instruments Corporation
changed its name to Northern Technologies International Corporation, hereafter
referred to as the "Company" or "NTIC."
(b) BUSINESS OF THE COMPANY.
GENERAL
The Company is a developer, manufacturer and marketer of proprietary
corrosion inhibiting products and electronic sensing instruments. The Company's
dry 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 and fossil fuel power generation,
electronics, aerospace, on-and off-road automotive equipment, agriculture and
metal processing. The ZERUST product line accounted for approximately 98% of the
Company's sales during its fiscal year ended August 31, 1997.
The Company's electronic sensing instruments include portable oil
quality analyzers for on-site evaluation of oils and fluids, instruments that
provide for on- and off-line measurement of fiber denier and critical tubing
measurements and measurement devices for slow moving materials and moisture
testing which utilize a microwave technology.
JOINT VENTURES, FOREIGN TRADING COMPANY AND EUROPEAN HOLDING COMPANY
The Company participates in an expanding number of international joint
venture arrangements that manufacture, market and distribute corrosion
inhibiting products. The Company manufactures and supplies the proprietary
ingredient that 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 lowers shipping costs and
improves on-time delivery to foreign customers. The joint venture arrangements
allow the Company to successfully market and sell its products in foreign
countries through the marketing efforts of joint venture partners without having
to develop its own international sales force. The Company's joint venture
partners are knowledgeable in the applicable environmental, tax and other laws
of the foreign
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country, as well as the local customs and business practices, and have a vested
interest in making the joint venture a success.
All of the Company's joint ventures are owned 50% by the Company,
except where the Company has allowed Taiyo Petroleum Gas Co. Ltd. to purchase
from the joint venture a portion of the ownership that the Company would
otherwise have purchased. For instance, the Company owns 40%, 40% and 25% and
Taiyo Petroleum Gas Co. Ltd. owns 10%, 10% and 25% of the joint ventures in
Taiwan, Singapore and South Korea, respectively. In 1997, the Company organized
NTI Asean LLC, a Nevada limited liability company, as the Company's vehicle for
its joint venture investments in the Asia-Pacific market. The Company maintains
a 50% interest in NTI Asean LLC with the remaining 50% ownership interest owned
by Taiyo Petroleum Gas Co. Ltd. The Company has established the following
corporate joint ventures:
Date of
Country Investment
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Japan 1987
Taiwan 1990
France 1990
Germany 1991
Sweden 1991
Singapore 1991
Brazil 1993
Russia 1994
South Korea 1994
Finland 1995
Italy 1996
United Kingdom 1997
Czech-Republic 1997
In addition to the Company's investments in the corporate joint
ventures listed above, the Company created joint venture entities during fiscal
1997 in Thailand and Indonesia (to be funded through NTI Asean LLC) and Poland.
The Company anticipates that the funding of these joint venture investments will
occur in fiscal 1998. Additionally, during fiscal 1997, the Company purchased a
50% ownership interest in a European holding company; however, to date, this
entity has been inactive.
The Company also owns a 50% ownership interest in a foreign trading
company. The trading company sells merchandise directly and serves as an
intermediary in the arrangement of sales of goods on which it receives
commissions. The trading company's transactions include sales of ZERUST products
produced by one of the Company's international corporate joint ventures.
While the Company is not aware of any specific potential risk beyond
its initial investment and undistributed earnings of the joint ventures, there
can be no assurance that the Company will not 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 ownership positions in the
international joint venture arrangements in excess of any insurance the joint
ventures maintain.
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PRODUCTS
The Company operates in two industry segments: corrosion inhibiting
packaging products and electronic sensing instruments. Corrosion inhibiting
packaging products accounted for approximately 98% of the Company's sales in
fiscal 1997.
CORROSION INHIBITING PACKAGING PRODUCTS. Corrosion affects 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. In combating corrosion, the traditional
approach has been to apply oils and greases to protect metal parts. This
approach may require specialized application equipment. In addition, the oils
and greases may pose unacceptable health and fire hazards and may collect and
trap dirt and debris that, in some cases, may actually initiate corrosion.
Should the removal of the oils and greases be required, solvents and specialized
safety equipment may be necessary that typically introduce additional health and
hazardous waste disposal problems.
ZERUST volatile corrosion inhibiting ("VCI") products contain
proprietary chemical systems that emit a nontoxic vapor that is diffused
throughout an enclosure. Electron scanning instrumentation shows that the
VCI-rich atmosphere causes VCI molecules to condense in a microscopic layer on
all surfaces they can reach. The inhibiting layer is maintained so long as the
product remains in the ZERUST package. Electron scanning further shows that once
the contents are removed from the ZERUST package, the VCI layer revolatizes from
the contents' surfaces within two hours, leaving a clean, dry and corrosion-free
product. The protective mechanism enables parts to arrive ready for immediate
use. By eliminating costly greasing and degreasing processes, ZERUST VCI
technology offers significant savings in labor, material and space compared to
other methods of corrosion prevention.
In 1980, the Company developed a means of combining ZERUST VCI systems
with polyethylene and polypropylene resins. Subsequently, a line of flexible
packaging products in the form of low and high density polyethylene bags and
shroud film, stretch, shrink, skin and bubble cushioning film, woven scrim and
foam sheeting was introduced to United States industry. This offered packaging
engineers the opportunity to ship and store ferrous, nonferrous and mixed
multi-metal products in a clean, dry and corrosion-free condition, with an
attendant overall savings in total packaging cost.
The Company subsequently expanded the ZERUST product line to include a
range of rigid plastic products in the form of profile and corrugated board,
thermoformed dunnage trays and bins, injection and blow molded products and flat
netting. The Company also has additives in liquid form for VCI enhancement of
corrugated cardboard, solid fibre and chipboard packaging materials.
ELECTRONIC SENSING INSTRUMENTS. The Company's electronic sensing
instruments accounted for approximately 2% of the Company's sales in fiscal
1997. The Company's electronic sensing instruments include oil quality
analyzers, fiber monitors and testers and a tubing monitor. 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. The instrument product line also includes measurement devices for slow
moving materials and moisture testing which utilize a microwave technology. The
Company does not expect that its electronic sensing instruments will increase as
a percentage of sales in fiscal 1998.
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MANUFACTURING
The Company produces certain proprietary corrosion inhibiting products
and electronic sensing instruments at its facility in Lino Lakes, Minnesota. The
corrosion inhibiting additives are produced by selected contractors based upon
the Company's proprietary formulation. The Company's inhibiting final products
include flexible packaging and other products that are produced to customer
specification 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 into joint venture
arrangements with foreign entities pursuant to which the Company sells certain
corrosion inhibiting formulations to foreign entities, 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 is aware of competing organizations that 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. In addition, corrosion inhibiting paper products are
marketed by competitors as an alternative to the Company's film 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 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 the Company's
products are competitive with all other products currently on the market. In the
Foodoil Sensor oil quality analyzer area, the Company is aware of a competitor
who 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 believes 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 that may have
financial and other resources greater than those of the Company. Additionally,
some of these companies 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
One customer accounted for approximately 14% of net sales for the
fiscal year ended August 31, 1997. No customer of the Company represented 10% or
more of the Company's net sales for the fiscal years ended August 31, 1996 and
1995.
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RESEARCH AND DEVELOPMENT
Research and development expenditures, including engineering and
technical support, were $432,943, $370,045 and $353,887 in fiscal 1997, 1996 and
1995, respectively. The Company's research and development activities are
conducted at its Minnesota headquarters. The Company's research and development
activities are directed at the improvement of existing products, new product
development and quality assurance through testing of the Company's contract
manufactured corrosion inhibiting products.
In 1997, a corrosion testing laboratory was established in Germany
under the sponsorship of Excor, the Company's corporate joint venture. This
laboratory works in conjunction with the domestic research and development
operation on testing directed at the improvement of existing products and new
product development.
PATENTS AND TRADEMARKS
The Company currently owns one United States patent, which will expire
in 2000, relating to its corrosion inhibiting 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
The Company did not have a significant order backlog as of August 31,
1997. 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, 1997, the Company had 25 full-time employees,
including five engaged in administration, eight in sales and marketing, four 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.
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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's investments in existing and future
joint ventures to generate a positive rate of return and demonstrate a pattern
of growth consistent with current performance;
(2) the Company's ability to continue to enter into international
markets in a timely fashion; and
(3) the Company's ability to maintain gross margins at a level
consistent with current operating performance.
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 a third
building of approximately 4,800 square feet are used for warehouse space. In
1995, the Company acquired an approximately 10 acre parcel of land located in
Forest Lake, Minnesota, approximately six miles from the Company's offices. The
Company built a warehouse on this parcel of approximately 18,000 square feet
that was completed in November 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.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
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
---- ---
1997:
Fourth fiscal quarter............... $12 1/2 $7
Third fiscal quarter................ 8 7/16 6 3/8
Second fiscal quarter............... 8 1/8 5 1/2
First fiscal quarter................ 7 4 3/4
1996:
Fourth fiscal quarter............... $5 1/4 $4 3/4
Third fiscal quarter................ 5 7/8 4 7/8
Second fiscal quarter............... 5 7/16 4 3/4
First fiscal quarter................ 7 5/8 4 5/8
The Company declared Common Stock cash dividends of $.10 per share to
shareholders of record on December 4, 1995; $.12 per share to shareholders of
record on December 6, 1996; and $.15 per share to shareholders of record on
December 1, 1997. 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, 1997, the Company's Common Stock was held of record by
approximately 620 persons.
The following is information regarding all securities sold by the
Company during the fiscal year ended August 31, 1997 which were not registered
under the Securities Act of 1933, as amended (the "Securities Act"):
1. On November 15, 1996, the Company issued 3,000 shares of Common
Stock to six employees for services provided in fiscal 1996.
2. In November 1996, the Company issued 8,000 shares of Common Stock to
two individuals upon the exercise of certain stock options at an exercise price
of $3.00 per share and 833 shares of Common Stock to one individual upon the
exercise of a stock option at an exercise price of $3.125 per share.
3. In December 1996, the Company issued 200 shares of Common Stock to
one individual upon the exercise of a stock option at an exercise price of
$3.125 per share.
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4. In July 1997, the Company issued 200 shares of Common Stock to one
individual upon the exercise of a stock option at an exercise price of $3.125
per share.
All of the above sales were made in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.
In all such transactions, the recipients of securities represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the securities issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES AND GROSS PROFIT. The Company's net sales of $8,729,318 in
fiscal 1997 increased by $1,860,134, or 27.1% from net sales of $6,869,184 in
fiscal 1996. The increase in net sales is primarily due to an increase in the
volume of corrosion inhibiting products sold to new and existing customers.
Fiscal 1997 sales to an existing customer increased significantly over fiscal
1996 and represents approximately 14% of total net sales in fiscal 1997. The
cost of sales increased as a percentage of sales to 47.4% in fiscal 1997 from
45.2% in fiscal 1996. The variation in the cost of sales percentage reflects
changes in product mix. The Company anticipates that its annual cost of sales
percentage for fiscal 1998 will not vary significantly under its current pricing
structure.
SELLING EXPENSES. The Company's selling expenses increased by $257,630
or 30.9%, to $1,092,280 in fiscal 1997 from $834,650 in fiscal 1996. As a
percentage of sales these costs increased to 12.5% in fiscal 1997 from 12.2% in
fiscal 1996. The increase in fiscal 1997 selling expenses was primarily related
to increases in distributor commissions, salaries, travel and various
promotional expenses.
GENERAL ADMINISTRATIVE EXPENSES. The Company's general and
administrative expenses increased by $491,983 or 35.3% to $1,886,016 in fiscal
1997 from $1,394,033 in fiscal 1996. As a percentage of sales these costs
increased to 21.6% in fiscal 1997 from 20.3% in fiscal 1996. The increase in
fiscal 1997 general and administrative expenses was primarily due to increases
in salaries and related expenses, various professional fees, insurance, legal
and real estate and other expenses associated with the Company's expanded
warehouse facility completed in November 1996.
RESEARCH, ENGINEERING AND TECHNICAL SUPPORT EXPENSES. The Company's
research, engineering and technical support expenses increased by $62,898 or
17.0% to $432,943 in fiscal 1997 from $370,045 in fiscal 1996. As a percentage
of sales these costs decreased to 5.0% in fiscal 1997 from 5.4% in fiscal 1996.
The increase in fiscal 1997 research, engineering and technical support expenses
was primarily due to increases in salaries and travel. The Company anticipates
that its fiscal 1998 research, engineering and technical support expenses will
approximate expenses incurred in fiscal 1997.
JOINT VENTURES. 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
<PAGE>
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
trading company are accounted for using the equity method and resulted in income
to the Company of $712,244 and $488,969 for fiscal 1997 and fiscal 1996,
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 $2,213,228 and
$1,659,792 for fiscal 1997 and fiscal 1996, respectively. The increase in equity
income in corporate joint ventures and the foreign trading 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 progress. Sales of
the corporate joint ventures in fiscal 1997 increased by $4,701,791 or 33.1% to
$18,909,466. Net income of the corporate joint ventures in fiscal 1997 of
$1,489,856 represents a 27.5% increase over fiscal 1996. 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 $457,263 and $346,677 in fiscal 1997 and fiscal 1996, respectively.
The expenses consisted primarily of legal fees regarding the development of new
joint ventures and travel, meetings 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.
INCOME TAXES. The Company's effective income tax rates were 31.5% and
34.3% for fiscal 1997 and fiscal 1996, 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 1997 and fiscal 1996, it did not result
in material additional income tax liability after the application of foreign tax
credits.
FISCAL 1996 COMPARED TO FISCAL 1995
NET SALES AND GROSS PROFIT. The Company's sales increased by $655,052,
or 10.5%, to $6,869,184 in fiscal 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 1996 from 47.4% in fiscal 1995. The
variation in the cost of sales percentage was primarily due to product mix.
SELLING EXPENSES. The Company's selling expenses increased by $58,198,
or 7.5%, to $834,650 in fiscal 1996 from $776,452 in fiscal 1995. As a
percentage of sales these costs decreased to 12.2% from 12.5% for fiscal 1996
compared to fiscal 1995. The increase in fiscal 1996 selling expenses was
primarily due to an increase in sales salaries and related expenses and travel
expense.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and
administrative expenses increased by $417,302, or 42.7%, to $1,394,033 in fiscal
1996 from $976,731 in fiscal 1995. As a percentage of sales these costs
increased to 20.3% from 15.7% for fiscal 1996 compared to fiscal 1995. The
increase in fiscal 1996 general and administrative expenses was primarily due to
increases in salaries and related expenses, various professional fees, meeting
expenses and waste disposal expense.
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RESEARCH, ENGINEERING AND TECHNICAL SUPPORT EXPENSES. The Company's
research, engineering and technical support expenses increased by $16,158 or
4.6% to $370,045 in fiscal 1996 from $353,887 in fiscal 1995. As a percentage of
sales these costs decreased to 5.4% in fiscal 1996 from 5.7% in fiscal 1995. The
increase in fiscal 1996 research, engineering and technical support expenses was
primarily due to increases in salaries.
JOINT VENTURES. The Company's investments in corporate joint ventures
and the foreign trading 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 trading 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
progress. 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.
INCOME TAXES. The Company's effective income tax rates were 34.3% and
30.9% for fiscal 1996 and fiscal 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 1996 and fiscal 1995, it did not result
in material additional income tax liability after the application of foreign tax
credits.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1997, the Company's working capital was $5,826,590,
including $3,945,567 in cash and cash equivalents, with a current ratio of
7.1:1. 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, 1997, the Company had no long-term debt and no material
lease commitments.
In late 1995, the Company purchased an approximately 10 acre parcel of
land and began constructing an off-site warehouse on the site in March 1996. The
land, site development and construction of the warehouse was completed in
November 1996 and cost approximately $700,000 and was funded with existing cash
and cash equivalents.
In fiscal 1997, the Company repurchased 9,000 shares of its Common
Stock in various open market transactions at prices ranging from $4.92 per share
to $7.13 per share. During fiscal 1997, holders of stock options exercise their
right to purchase 9,233 shares of Common Stock ranging from $3.00 to $3.13 per
share. In fiscal 1996, the Company repurchased 61,165 shares of its Common Stock
in various open market transactions at prices ranging from $4.88 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 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 had an interest rate of 7.25% per
annum and was due
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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
$1,753,483, $1,672,589 and $1,463,930 for the fiscal years ended August 31,
1997, 1996 and 1995, respectively. This net cash flow resulted principally from
net income.
Net cash used in investing activities totaled $985,457, $98,151 and
$147,722 for the fiscal years ended August 31, 1997, 1996 and 1995,
respectively. The primary uses of cash in fiscal 1997 were investments in
corporate joint ventures, trading investment, property and the issuance of a
note receivable to a joint venture partner. The primary uses of cash in fiscal
1996 and 1995 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 $529,979, $698,219 and
$687,458 for the fiscal years ended August 31, 1997, 1996 and 1995,
respectively. The primary uses of cash resulted from the payment of dividends in
fiscal 1997, 1996 and 1995 and the repurchase of Common Stock in fiscal 1997,
1996 and 1995. The primary source of cash provided by financing activities was
proceeds from the issuance of Common Stock upon the exercise of outstanding
stock options and warrants in fiscal 1997, 1996 and 1995, respectively.
Inflation historically has had little effect on the Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, EARNINGS PER SHARE, which is effective for interim and
annual reporting periods ending after December 15, 1997. SFAS No. 128 supersedes
Accounting Principles Board Opinion No. 15, EARNINGS PER SHARE, and replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share. It also requires dual presentation for all entities with complex
capital structures and provides guidance on other computational changes. The
implementation of SFAS No. 128 is expected to increase earnings per share by
$0.01 per share and an immaterial amount for the years ended August 31, 1997 and
1996, respectively.
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
The following items are included herein:
Financial Statements: Page
--------------------- ----
Independent Auditors' Report on Financial Statements..... 13
Balance Sheets as of August 31, 1997 and 1996............ 14
Statements of Income for the years ended
August 31, 1997, 1996, and 1995....................... 15
Statements of Stockholders' Equity for the years ended
August 31, 1997, 1996, and 1995....................... 16
Statements of Cash Flows for the years ended
August 31, 1997, 1996, and 1995....................... 17
Notes to Financial Statements............................ 18 - 27
<PAGE>
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, 1997 and 1996 and the
related statements of income, stockholders' equity, and cash flows for each of
the three years in the period ended August 31, 1997. 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, 1997 and 1996 and the results of its operations and
its cash flows for each of the three years in the period ended August 31, 1997,
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
November 19, 1997
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
<TABLE>
<CAPTION>
BALANCE SHEETS
AUGUST 31, 1997 AND 1996
1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,945,567 $ 3,707,520
Receivables:
Trade, less allowance for doubtful accounts of $27,000 and $26,000, respectively 1,164,660 1,127,975
Corporate joint ventures 517,551 524,577
Inventories (Note 2) 841,618 584,212
Prepaid expenses and other 77,196 78,603
Deferred income taxes (Note 8) 240,000 170,000
------------- ------------
Total current assets 6,786,592 6,192,887
PROPERTY AND EQUIPMENT, net (Note 3) 962,328 980,816
OTHER ASSETS:
Investments in corporate joint ventures (Note 4) 2,291,600 1,726,328
Investment in foreign company (Note 4) 132,000 159,879
Investment in European holding company (Note 4) 254,639 -
Deferred income taxes (Note 8) 130,000 90,000
Other 625,544 164,140
------------- ------------
3,433,783 2,140,347
------------- ------------
$ 11,182,703 $ 9,314,050
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 162,477 $ 154,859
Income taxes 376,867 463,700
Accrued liabilities:
Payroll 230,951 177,381
Other 189,707 112,544
------------- ------------
Total current liabilities 960,002 908,484
DEFERRED GROSS PROFIT 118,000 109,000
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 4,202,508 and 4,199,275 shares, respectively 84,050 83,985
Additional paid-in capital 5,185,828 5,158,344
Retained earnings 5,217,221 3,143,526
Cumulative foreign currency translation adjustments (252,591) 40,518
------------- ------------
10,234,508 8,426,373
Notes and related interest receivable from purchase of common stock (129,807) (129,807)
------------- ------------
Total stockholders' equity 10,104,701 8,296,566
------------- ------------
$ 11,182,703 $ 9,314,050
============= ============
</TABLE>
See notes to financial statements.
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
YEARS ENDED AUGUST 31, 1997, 1996, AND 1995
1997 1996 1995
<S> <C> <C> <C>
SALES (Note 6) $ 8,729,318 $ 6,869,184 $ 6,214,132
COST OF GOODS SOLD 4,141,704 3,106,913 2,948,554
------------ ------------ ------------
GROSS PROFIT 4,587,614 3,762,271 3,265,578
OPERATING EXPENSES:
Selling 1,092,280 834,650 776,452
General and administrative 1,886,016 1,394,033 976,731
Research, engineering, and technical support 432,943 370,045 353,887
------------ ------------ ------------
3,411,239 2,598,728 2,107,070
------------ ------------ ------------
OPERATING INCOME 1,176,375 1,163,543 1,158,508
CORPORATE JOINT VENTURES, FOREIGN COMPANY, AND
EUROPEAN HOLDING COMPANY:
Equity in income of corporate joint ventures, foreign company, and
European holding company (Note 4) 712,244 488,969 428,639
Fees for technical and other support to corporate joint ventures
(Note 4) 2,213,228 1,659,792 1,313,522
Corporate joint venture expense (Note 4) (457,263) (346,677) (340,009)
------------ ------------ ------------
2,468,209 1,802,084 1,402,152
OTHER INCOME:
Interest income 160,396 197,216 91,766
Other income 15,868 14,908 15,576
------------ ------------ ------------
176,264 212,124 107,342
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 3,820,848 3,177,751 2,668,002
INCOME TAXES (Note 8) 1,205,000 1,090,000 825,000
------------ ------------ ------------
NET INCOME $ 2,615,848 $ 2,087,751 $ 1,843,002
============ ============ ============
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ .61 $ .49 $ .42
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 4,273,500 4,290,099 4,353,747
============ ============ ============
</TABLE>
See notes to financial statements.
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY
NOTES AND
RELATED
INTEREST
CUMULATIVE RECEIVABLE
FOREIGN FROM TOTAL
COMMON STOCK ADDITIONAL CURRENCY PURCHASE OF COMMON
------------------- 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, 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
Repurchase of common stock (9,000) (180) (15,500) (37,420) - - (53,100)
Issuance of common stock
for services provided 3,000 60 15,315 - - - 15,375
Stock options exercised 9,233 185 27,669 - - - 27,854
Dividends on common stock -
$.12 per share - - - (504,733) - - (504,733)
Foreign currency translation
adjustment - - - - (293,109) - (293,109)
Net income - - - 2,615,848 - - 2,615,848
--------- -------- ---------- ---------- --------- ---------- -----------
BALANCE AT AUGUST 31, 1997 4,202,508 $ 84,050 $5,185,828 $5,217,221 $(252,591) $ (129,807) $10,104,701
========= ======== ========== ========== ========= ========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (NOTE 10)
YEARS ENDED AUGUST 31, 1997, 1996, AND 1995
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,615,848 $ 2,087,751 $ 1,843,002
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 100,497 88,411 77,466
Equity in income of corporate joint ventures, foreign company,
European holding company (712,244) (488,969) (428,639)
Dividends received from corporate joint ventures and foreign company 69,147 161,583 188,925
Deferred income taxes (110,000) (50,000) (80,000)
Deferred gross profit 9,000 8,500 44,750
Change in assets and liabilities:
Receivables:
Trade receivables (36,685) (296,538) (129,522)
Corporate joint ventures 7,026 (117,947) (140,608)
Inventories (257,406) (53,618) (104,747)
Prepaid expenses and other 1,407 (72,740) (1,091)
Accounts payable 7,618 20,316 33,268
Income taxes (86,833) 321,320 15,190
Accrued liabilities 146,108 64,520 145,936
----------- ----------- -----------
Total adjustments (862,365) (415,162) (379,072)
----------- ----------- -----------
Net cash provided by operating activities 1,753,483 1,672,589 1,463,930
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property (82,009) (726,978) (47,003)
Investments in corporate joint ventures and European holding company (442,044) (104,000) (90,000)
Increase in other assets (461,404) (11,048) (10,719)
Payments on notes receivable from purchase of common stock - 743,875 -
----------- ----------- ----------
Net cash used in investing activities (985,457) (98,151) (147,722)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (504,733) (424,877) (318,058)
Repurchase of common stock (53,100) (313,301) (711,900)
Issuance of common stock 27,854 39,959 342,500
----------- ----------- -----------
Net cash used in financing activities (529,979) (698,219) (687,458)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 238,047 876,219 628,750
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,707,520 2,831,301 2,202,551
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,945,567 $ 3,707,520 $ 2,831,301
=========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1997, 1996, AND 1995
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.
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.
INVESTMENTS IN FOREIGN AND EUROPEAN HOLDING COMPANY - Investments in
foreign and European holding company are 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 income and accumulated in a separate component of
stockholders' equity.
<PAGE>
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
$432,943, $370,045, and $353,887 for the years ended August 31, 1997,
1996, and 1995, respectively.
FEES FOR TECHNICAL AND OTHER SUPPORT TO CORPORATE JOINT VENTURES - Fees
for technical and other support to corporate joint ventures are
recognized at the time the service is provided.
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 68,898, 56,830, and 106,512 for the years
ended August 31, 1997, 1996, and 1995, 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.
NEW ACCOUNTING STANDARD - In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, EARNINGS PER SHARE, which is
effective for interim and annual reporting periods ending after
December 15, 1997. SFAS No. 128 supersedes Accounting Principles Board
Opinion No. 15, EARNINGS PER SHARE, and replaces the presentation of
primary earnings per share with a presentation of basic earnings per
share. It also requires dual presentation for all entities with complex
capital structures and provides guidance on other computational
changes. The implementation of SFAS No. 128 is expected to increase
basic income per share by $.01 per share and an immaterial amount for
the years ended August 31, 1997 and 1996, respectively, due to the
elimination of common stock equivalents from the calculation.
2. INVENTORIES
Inventories at August 31 consist of the following:
1997 1996
Production materials $ 276,631 $ 150,139
Work-in-process 21,301 22,619
Finished goods 543,686 411,454
----------- -----------
$ 841,618 $ 584,212
=========== ===========
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment at August 31 consist of the following:
1997 1996
Land $ 246,097 $ 246,097
Buildings and improvements 1,044,996 979,369
Machinery and equipment 603,919 587,537
------------ -------------
1,895,012 1,813,003
Less accumulated depreciation 932,684 832,187
------------ -------------
$ 962,328 $ 980,816
============ =============
4. INVESTMENTS IN CORPORATE JOINT VENTURES, FOREIGN COMPANY, AND EUROPEAN
HOLDING 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 a related third party company to purchase from the joint
venture a portion of the ownership which would have been otherwise
purchased by the Company. Related third parties 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 has established corporate
joint ventures 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
United Kingdom 1997
Czech - Republic 1997
Fees earned from the corporate joint ventures under licenses and
technical and other support agreements were $2,213,228, $1,659,792, and
$1,313,522 for the years ended August 31, 1997, 1996, and 1995,
respectively.
<PAGE>
The Company incurred expenses associated with corporate joint ventures
of $457,263, $346,677, and $340,009 for the years ended August 31,
1997, 1996, and 1995, 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:
August 31
------------------------
1997 1996
Current assets $ 9,098,272 $ 6,200,415
Total assets 9,807,218 7,350,225
Current liabilities 4,745,910 3,636,430
Noncurrent liabilities 34,191 27,735
Stockholders' equity 5,027,117 3,686,060
Northern Technologies International
Corporation's share of corporate joint
ventures' equity 2,291,600 1,726,328
<TABLE>
<CAPTION>
Years Ended August 31
-------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Sales $18,909,466 $14,207,675 $10,984,299
Gross profit 10,224,861 7,743,600 4,704,073
Net income 1,489,856 1,168,273 895,575
Northern Technologies International
Corporation's share of equity in
income of corporate joint ventures 708,598 483,181 419,996
</TABLE>
FOREIGN COMPANY - The Company has a 50% interest in a foreign trading
company located in Austria. The trading company sells merchandise
directly and serves as an intermediary in the arrangement of sales of
goods on which it receives commissions.
<PAGE>
Summarized financial information from the unaudited financial
statements of the foreign company carried on the equity basis is as
follows:
August 31,
-------------------------
1997 1996
Current assets $ 443,818 $ 841,893
Total assets 661,971 1,217,270
Current liabilities 397,971 897,512
Stockholders' equity 264,000 319,758
Northern Technologies International
Corporation's share of foreign company's
equity 132,000 159,879
<TABLE>
<CAPTION>
Years Ended August 31,
----------------------------------
1997 1996 1995
<S> <C> <C> <C>
Sales $ 848,620 $1,514,567 $ 861,795
Gross profit 582,915 819,988 56,075
Net income 7,292 11,576 17,287
Northern Technologies International
Corporation's share of equity income
of foreign company 3,646 5,788 8,643
</TABLE>
EUROPEAN HOLDING COMPANY - During 1997, the Company invested $254,639
for a 50% ownership interest in a European holding company. To date,
the entity has been inactive and its assets as of August 31, 1997
consist primarily of cash and cash equivalents.
5. STOCKHOLDERS' EQUITY
During 1997, 1996, and 1995, the Company acquired and retired 9,000;
61,165; and 113,000 shares of common stock for $53,100; $313,301; and
$711,900, respectively.
During 1997 and 1996, certain employees received 3,000 and 2,500 shares
of common stock, respectively, in return for services provided and
expensed in 1996 and 1995, respectively. The value of the common stock
issued, $15,375 and $12,813 in 1997 and 1996, respectively, was
determined based on the market value of the Company's common stock.
A note receivable of $129,807 (including accrued interest of $4,432)
resulting from the exercise of warrants has been shown as a reduction
of stockholders' equity. The note receivable bears interest at a rate
of 11% and is due on demand. The increase in accrued interest
receivable on the outstanding note receivable as of August 31, 1997 and
1996 has been fully reserved for, due to the uncertainty as to when the
interest would be paid.
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 have
a term of five years and become exercisable ratably over a three- or
four-year period beginning on the first annual anniversary date of the
grant. Options are granted at prices equal to the market value of the
stock on the date of grant.
<PAGE>
A summary of the status of the Company's stock options for the years
ended August 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- --------------------- ---------------------
Wgtd Avg Wgtd Avg Wgtd Avg
Shares Exer Price Shares Exer Price Shares Exer Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 133,203 $ 3.34 133,390 $ 3.02 122,170 $ 3.02
Granted 12,000 5.00 13,870 6.13 17,000 3.00
Exercised (9,233) 3.02 (13,167) 3.04 - -
Canceled (3,600) 5.50 (890) 3.00 (5,780) 3.00
--------- -------- --------
Outstanding at end of year 132,370 3.46 133,203 3.34 133,390 3.02
========= ======== ========
Options exercisable at year end 85,608 3.16 57,005 3.02 36,975 3.03
========= ======== ========
</TABLE>
The Company applies Accounting Principles Board (APB) Opinion No. 25
and related interpretations in accounting for the Plan. No compensation
cost has been recognized for options issued under the Plan when the
exercise price of the options granted are at least equal to the fair
value of the common stock on the date of grant. Had compensation cost
for the Company's stock option plan been determined based on the fair
value at the grant date for awards in the years ended August 31,
consistent with the provisions of SFAS No. 123, the Company's net
income would have changed to the pro forma amounts indicated below:
1997 1996
Net income, as reported $ 2,615,848 $ 2,087,751
Net income, pro forma 2,603,869 2,081,235
Net income per common share, as reported $ .61 $ .49
Net income per common share, pro forma .61 .49
The fair value of each option grant is estimated on the grant date
using the Black-Sholes option-pricing model with the following
assumptions and results for the grants:
1997 1996
Dividend yield 2.0% 2.0%
Expected volatility 49.8% 47.6%
Expected life of option 5 5
Risk-free interest rate 6.50% 5.98%
Fair value of options on grant date $2.27 $2.81
<PAGE>
The following table summarizes information about stock options
outstanding at August 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------
Weighted Options Exercisable
Average -----------------------
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
<S> <C> <C> <C> <C> <C> <C>
$3.00 - $3.13 110,100 1.77 $ 3.02 81,849 $ 3.02
$5.00 - $6.75 22,270 3.56 5.62 3,759 6.20
--------- ---------
$3.00 - $6.75 132,370 2.07 $ 3.46 85,608 $ 3.16
========= ======== ========== ========= ========
</TABLE>
6. SALES INFORMATION
Sales by geographic location as a percentage of total sales were as
follows:
1997 1996 1995
U.S.A. (unaffiliated customers) 74% 75% 79%
Outside the U.S.A.:
Corporate joint ventures in which the
Company is a stockholder 17 16 15
Unaffiliated customers
Other foreign countries 9 9 6
------ ------ ------
100% 100% 100%
====== ====== ======
One customer accounted for approximately 14% of net sales for the year
ended August 31, 1997. No single customer accounted for more than 10%
of net sales for the years ended August 31, 1996 and 1995.
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 $36,000, $34,000,
and $33,000 for the years ended August 31, 1997, 1996, and 1995,
respectively.
<PAGE>
8. INCOME TAXES
The provisions for income taxes for the years ended August 31 consist
of the following:
1997 1996 1995
Current:
Federal $ 1,200,000 $ 1,040,000 $ 820,000
State 115,000 100,000 85,000
------------- ------------- -------------
1,315,000 1,140,000 905,000
Deferred:
Federal (101,000) (46,000) (73,000)
State (9,000) (4,000) (7,000)
------------- ------------- -------------
(110,000) (50,000) (80,000)
------------- ------------- -------------
$ 1,205,000 $ 1,090,000 $ 825,000
============= ============= =============
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>
1997 1996 1995
<S> <C> <C> <C>
Tax computed at statutory rates $1,337,000 $1,112,000 $ 934,000
State income tax, net of federal benefit 71,000 63,000 51,000
Equity in income of joint ventures (242,000) (166,000) (163,000)
Other 39,000 81,000 3,000
---------- ---------- ----------
$1,205,000 $1,090,000 $ 825,000
========== ========== ==========
</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 $650,000 and $450,000 at
August 31, 1997 and 1996, 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.
<PAGE>
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:
1997 1996
Current:
Allowance for doubtful accounts $ 10,000 $ 9,000
Inventory costs 22,000 30,000
Prepaid expenses and other 73,000 27,000
Accrued expenses 92,000 65,000
Deferred gross profit 43,000 39,000
----------- -----------
Total current $ 240,000 $ 170,000
=========== ===========
Noncurrent:
Excess of book over tax depreciation $ 37,000 $ 34,000
Investment write-offs 568,000 568,000
Joint venture expenses 60,000 28,000
Interest receivable relating to notes 33,000 28,000
Valuation allowance (568,000) (568,000)
----------- -----------
Total noncurrent $ 130,000 $ 90,000
=========== ===========
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>
1997 1996 1995
<S> <C> <C> <C>
Cash paid during the year for income taxes $ 1,401,833 $ 818,680 $ 887,972
(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 (293,109) (59,047) 44,141
Issuance of common stock in exchange for services
provided in 1996 and 1995 and accrued for at August 31,
1996 and 1995, respectively 15,375 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
</TABLE>
<PAGE>
11. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------
November 30 February 28 May 31 August 31
<S> <C> <C> <C> <C>
Fiscal 1997:
Net sales $ 1,921,414 $ 2,092,961 $ 2,518,582 $ 2,196,361
Gross profit 1,008,712 1,122,985 1,317,256 1,138,661
Income before income taxes 731,322 865,789 1,108,260 1,115,477
Income taxes 210,000 315,000 375,000 305,000
Net income 521,322 541,789 733,260 819,477
Net income per common and
common equivalent share $ .12 $ .13 $ .17 $ .19
Fiscal 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
</TABLE>
During the fourth quarters of 1997 and 1996, 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
$50,000 and $76,000 in the fourth quarters of 1997 and 1996,
respectively. It is not practicable to determine the periods of the
fiscal year to which these adjustments relate.
12. SUBSEQUENT EVENTS
On November 19, 1997, the Company's Board of Directors declared a $.15
per share dividend on all outstanding shares of the Company's common
stock to be distributed on December 15, 1997 to holders of record on
December 1, 1997.
On November 18, 1997, the Company acquired 64,000 shares of its common
stock for $672,000.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS 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 14,
1997, 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 76 Chairman of the Board and Chief Executive 1979
Officer of Advanced Modular Systems, Inc.
Vincent J. Graziano 64 Co-Chief Executive Officer and President of the 1979
Company
Gerhard Hahn 53 General Manager of Knuppel KG 1996
Dr. Donald A. Kubik 57 Vice President of the Company 1995
Richard G. Lareau 69 Partner of Oppenheimer Wolff & Donnelly 1980
Philip M. Lynch 61 Co-Chief Executive Officer and Chairman of the 1979
Board of the Company and Executive Vice
President of Inter Alia Holding Company
Dr. Milan R. Vukcevich 60 Director of Materials Research and Development 1995
of Bicron Saint-Gobain Industrial Ceramics
</TABLE>
Mr. Dworkin has been Chairman of the Board and Chief Executive Officer
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., Cragar Industries, Inc., Consolidated Healthcare, Inc.,
Entitle Design, Inc., QEP, Inc. and Interactive Technologies, Inc. and as
Chairman of the Board 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 served as Manager of Manufacturing Systems
with the management consulting department of Peat, Marwick, Mitchell & Co. in
Europe and the United States for nine years.
<PAGE>
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 Produkte GmbH (the Company's German joint
venture) since 1991. Mr. Hahn was appointed to the Board in April 1996.
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. Dr. Kubik was
appointed as a director of the Company in August 1995. During his employ as
senior chemist with the Company, 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.
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, all public
companies, 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. 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 Burmah Castrol plc, an English
petrochemical and materials science company.
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.
<PAGE>
B. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages and the offices held,
as of November 14, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION IN THE COMPANY
---- --- -----------------------
<S> <C> <C>
Vincent J. Graziano 64 Co-Chief Executive Officer, President and Director
Philip M. Lynch 61 Chairman of the Board and Co-Chief Executive Officer
Dr. Donald A. Kubik 57 Vice President and Director
Ernest R. Peake 62 Vice President
Loren M. Ehrmanntraut 70 Chief Financial Officer and Secretary
Constance M. Fason 49 Vice President - Domestic Marketing and Sales
</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 Chief Financial Officer since 1997 and as Secretary of the Company
since 1978. From 1974 to March 1997, Mr. Ehrmanntraut served as Treasurer of the
Company. 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.
Ms. Fason has been Vice President-Domestic Marketing and Sales of the
Company since September 1997. Prior to joining the Company, Ms. Fason spent 12
years at Cataphote, Inc., a company that manufactures and markets highway safety
products (pavement marking materials). Most recently, from February 1993 to
December 1996, Ms. Fason served as President and Chief Executive Officer of
Cataphote
<PAGE>
and from March 1990 to February 1993, Ms. Fason served as Executive Vice
President and General Manager of Cataphote.
C. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
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, 1997, 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, except that Connie L. Magnuson, the Company's
former Treasurer, failed to file a timely report under Section 16(a) reporting
her appointment as an executive officer of the Company. Such required report has
subsequently been filed.
ITEM 10. EXECUTIVE COMPENSATION.
A. COMPENSATION OF DIRECTORS
DIRECTORS FEES. Each person who was a non-employee director received an
annual retainer of $7,500 in fiscal 1997 for services rendered as a director of
the Company. Each non-employee director of the Company receives $750 for each
Board meeting and $500 for each Board committee meeting attended. The Chairman
of the Board does not receive any Board or committee meeting fee. The Company
pays the premium on a group insurance policy for the Chairman of the Board.
AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS. Pursuant to the
Company's 1994 Stock Incentive Plan (the "Plan"), each non-employee director of
the Company is automatically granted a non-qualified option to purchase 2,000
shares of Common Stock (a "Director Option") on the first day of each fiscal
year while serving as a non-employee director of the Company. Non-employee
directors who are elected or appointed to the Board following the first day of
the Company's fiscal year receive 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.
On September 1, 1996, Messrs. Dworkin, Hahn, Lareau, Lynch and
Vukcevich each received a Director Option to purchase 2,000 shares of Common
Stock at an exercise price of $5.00 per share. On September 1, 1997, Messrs.
Dworkin, Hahn, Lareau, Lynch and Vukcevich each received a Director Option to
purchase 2,000 shares of Common Stock at an exercise price of $12.00 per share.
All of such Director 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
$100,000 in the fiscal year ended August 31, 1997 (the "Named Executive
Officers").
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------- SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)(1)
--------------------------- ---- ---------- --------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
Vincent J. Graziano 1997 $217,107 $55,000 0 $4,750
PRESIDENT AND CO-CHIEF EXECUTIVE OFFICER 1996 190,443 45,000 0 4,750
1995 182,516 40,000 0 5,574
Philip M. Lynch 1997 0 0 2,000 0 (2)
CHAIRMAN OF THE BOARD AND CO-CHIEF 1996 0 0 2,000 0 (2)
EXECUTIVE OFFICER 1995 0 0 2,000 0 (2)
Donald A. Kubik 1997 176,082 55,000 0 4,750
VICE PRESIDENT 1996 152,749 45,000 0 5,496
1995 136,487 35,000 0 5,287
Loren M. Ehrmanntraut 1997 117,410 55,000 0 5,013
CHIEF FINANCIAL OFFICER AND SECRETARY 1996 107,410 40,000 0 5,159
1995 92,811 30,000 0 3,584
</TABLE>
- -----------------------------
(1) Compensation hereunder consists of contributions to the 401(k) plans of
the Named Executive Officers.
(2) Does not include any commissions payable to Inter Alia, an entity
affiliated with Mr. Lynch, under a certain Manufacturer's
Representative Agreement. See "Item 12 - Certain Relationships and
Related Transactions."
C. OPTION GRANTS AND EXERCISES.
The following tables provide information for the year ended August 31,
1997 as to individual grants of options to purchase shares of the Common Stock,
exercises of options and the potential realizable value of the options held by
the Named Executive Officers at August 31, 1997.
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
PERCENT OF TOTAL OPTIONS
GRANTED TO EMPLOYEES EXERCISE OR BASE
NAME OPTIONS GRANTED (1) IN FISCAL YEAR (2) PRICE ($/SHARE) EXPIRATION DATE
---- ------------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Philip M. Lynch 2,000 0% $5.00 8/31/01
</TABLE>
- --------------
(1) These options were granted under the Plan. The options vest in three
equal installments on the first, second and third anniversary of the
date of grant (September 1, 1996). To the extent not already
exercisable, options granted under the Plan become immediately
exercisable in full upon certain "changes in control" (as defined in
the Plan) of the Company.
(2) Mr. Lynch is not an employee of the Company. No options were granted to
any employees of the Company during fiscal 1997.
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND
FISCAL 1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT AUGUST 31, 1997 AT AUGUST 31, 1997 (1)
-------------------------- ----------------------
SHARES
ACQUIRED VALUE
NAME ON EXERCISE(#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Vincent J. Graziano 0 $ 0 29,250 8,750 $262,860 $78,750
Philip M. Lynch 0 0 4,000 4,000 33,239 27,001
Donald A. Kubik 8,333 28,541 7,500 7,500 67,500 67,500
Loren M. Ehrmanntraut 0 0 25,000 7,500 224,675 67,500
</TABLE>
- --------------------
(1) Value is calculated as the excess of the fair market value of the
Common Stock on August 31, 1997 over the exercise price of the options.
On August 31, 1997, the fair market value of the Common Stock was
$12.00 per share.
<PAGE>
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 14, 1997, 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.
SHARES OF COMMON STOCK
BENEFICIALLY OWNED (1)
--------------------------------
NAME AMOUNT PERCENT OF CLASS
Inter Alia Holding Company................. 911,668 (3) 21.7%
Herman H. Lee.............................. 256,545 (4) 6.1
Sidney Dworkin............................. 52,500 (5) 1.2
Vincent J. Graziano........................ 79,750 (6) 1.9
Gerhard Hahn............................... 3,641 (7) *
Dr. Donald A. Kubik........................ 95,840 (8) 2.3
Richard G. Lareau.......................... 33,676 (9) *
Philip M. Lynch............................ 6,000 (10) *
Dr. Milan R. Vukcevich..................... 2,064 (11) *
Loren M. Ehrmanntraut...................... 54,000 (12) 1.3
All directors and executive officers
as a group (10 persons).................... 1,299,904 (13) 30.3
* 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) Based on 4,202,488 shares of Common Stock outstanding as of November
14, 1997.
(3) 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 an officer and director.
(4) Includes 254,545 shares beneficially owned by Mr. Lee, based on
information provided to the Company by Mr. Lee. Includes 2,000 shares
beneficially owned by Mr. Lee's wife as to which he disclaims any
beneficial interest.
(5) 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
6,000 shares of Common Stock which may be acquired within 60 days
pursuant to the exercise of options.
(6) Includes 29,250 shares of Common Stock which may be acquired within 60
days pursuant to the exercise of options.
<PAGE>
(7) Includes 1,141 shares of Common Stock which may be acquired within 60
days pursuant to the exercise of options.
(8) Includes 7,500 shares of Common Stock which may be acquired within 60
days pursuant to the exercise of options.
(9) Includes 6,000 shares of Common Stock which may be acquired within 60
days pursuant to the exercise of options.
(10) 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 6,000 shares of Common Stock which may
be acquired within 60 days pursuant to the exercise of options.
(11) Includes 1,734 shares of Common Stock which may be acquired within 60
days pursuant to the exercise of options.
(12) Includes 25,000 shares of Common Stock which may be acquired within 60
days pursuant to the exercise of options.
(13) 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 88,875 shares which are held by officers and
directors of the Company which are exercisable within 60 days.
<PAGE>
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 manufacturer'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 $42,582, $52,950 and $52,057 for the
fiscal years ended August 31, 1997, 1996 and 1995, 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 August 31, 1984, Inter Alia purchased 119,083 shares of the Common
Stock and paid therefor by signing a promissory note. The promissory note (the
"Note") has a face value of $125,375 and bears interest at 11% per year. The
Note was originally due on December 31, 1992 and is currently due on demand. The
outstanding balance of the Note, including accrued interest of $92,579, was
$217,954 at August 31, 1997.
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
39 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.
<PAGE>
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 1997.
<PAGE>
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 25, 1997 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 25, 1997 in the capacities indicated.
NAME TITLE
- ---- -----
/s/ Vincent J. Graziano Co-Chief Executive Officer, President and
Vincent J. Graziano Director (principal executive officer)
/s/ Loren M. Ehrmanntraut Chief Financial Officer and Secretary
Loren M. Ehrmanntraut (principal financial officer and principal
accounting officer)
/s/ Philip M. Lynch Co-Chief Executive Officer and Chairman of
Philip M. Lynch the Board of Directors
/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.
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR THE YEAR ENDED AUGUST 31, 1997
<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 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.
10.2 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.
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.
23.1 Independent Auditors' Consent Filed herewith electronically.
27.1 Financial Data Schedule Filed herewith electronically.
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
State or Other
Jurisdiction of Names Under Which
Incorporation or Ownership Subsidiary Does
Name of Subsidiary Organization Interest Business
------------------ ------------ -------- --------
Special Control Systems, Inc. Ohio 100% Same
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
Northern Technologies International Corporation on Form S-8 relating to the
Northern Technologies International Corporation 1994 Stock Incentive Plan of our
report dated November 19, 1997, appearing in the Annual Report on Form 10-K of
Northern Technologies International Corporation for the fiscal year ended August
31, 1997.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
November 25, 1997
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