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, 1999 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: (651) 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, 1999
were $9,870,531.
As of November 19, 1999, 3,867,992 shares of Common Stock of the
Registrant were outstanding, and the aggregate market value of the Common Stock
of the Registrant as of that date (based upon the closing price of the Common
Stock at that date as reported on the American Stock Exchange) excluding
outstanding shares beneficially owned by directors and executive officers, was
approximately $15,191,546.
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" AND IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" IN
THIS REPORT.
ITEM 1. DESCRIPTION OF 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." In 1999, the Company organized Northern
Instruments Corporation, LLC, an Ohio limited liability company ("NIC"); and the
instruments operation of the Company was transferred into NIC. NIC is a
wholly-owned subsidiary of the Company. Effective March 4, 1999, Special Control
Systems, Inc., an Ohio corporation 100% owned by the Company, was merged into
NIC. The operating results and assets of NIC are included in the consolidated
financial statements of the Company.
(b) BUSINESS OF THE COMPANY.
GENERAL
The Company is a developer, manufacturer and marketer of materials
science based industrial packaging products and systems and electronic sensing
instruments. The Company's dry corrosion inhibiting products, marketed under the
name ZERUST(R) ("ZERUST"), 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 96% of the Company's sales during its fiscal year ended August
31, 1999.
The Company's electronic sensing instruments include portable oil
quality analyzers for on-site evaluation of various types of oils and fluids,
instruments that provide for on- and off-line measurement of fiber denier and
devices, which utilize microwave technology to measure moisture and the tempo of
manufacturing process in metallurgical facilities.
JOINT VENTURES AND EUROPEAN HOLDING COMPANY
The Company participates in an expanding number of international joint
venture arrangements that provide for the manufacturing, marketing and
distributing of materials science based industrial packaging products based upon
the Company's technology. Both the Company and the Company's corporate joint
venture in
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Germany, Excor Korrosionsschutz - Technologien und Produkte GmbH ("Excor"),
manufactures and supply the proprietary ingredients that make the finished
product functional, but the actual manufacturing of the finished product itself
takes place in each country in which the Company has a joint venture or similar
relationship. Manufacturing the product in foreign countries 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 the Company having to develop its own international sales force. The
Company's joint venture partners are knowledgeable in the applicable
environmental, labor, tax regulations and laws of the respective foreign
countries, as well as the local customs and business practices, and have a
vested interest in making each joint venture a success.
All of the Company's joint ventures are owned 50% by the Company,
except where the Company has invited a related third party to purchase a portion
of the ownership that the Company would otherwise have purchased. Thus, for
example, the Company owns 25% of the joint venture in South Korea, and Taiyo
Petroleum Gas Co. Ltd., the Company's Japanese joint venture partner, also owns
25% of that entity. The Company organized NTI Asean LLC, a Nevada limited
liability company, for its joint venture investments in the Asean region, which,
of course, does not encompass Japan or South Korea. NTI Asean LLC is owned 50%
by the Company and 50% by Taiyo Petroleum Gas Co. Ltd. The Company has
established the following corporate joint ventures, in which the Company has an
ownership interest either directly or indirectly through NTI Asean LLC:
Date of
Country Investment
Japan 1987
Taiwan 1990
France 1990
Germany 1991
Sweden 1991
Singapore 1991
Brazil 1993
Austria 1994
Russia 1994
South Korea 1994
Finland 1995
Italy 1996
United Kingdom 1997
Czech-Republic 1997
Poland 1998
Indonesia 1998
Thailand 1998
In addition to the Company's investments in the corporate joint
ventures listed above, the Company acquired a 50% ownership interest in a
European holding company during fiscal year 1997; however, to date, this entity
has been inactive.
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
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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 may maintain.
PRODUCTS
The Company operates in two businesses: materials science based
industrial packaging products and electronic sensing instruments. Materials
science based industrial packaging products accounted for approximately 96% of
the Company's sales in fiscal year 1999.
MATERIALS SCIENCE BASED INDUSTRIAL PACKAGING PRODUCTS. Corrosion
negatively affects products and components in the manufacturing industry. This
applies to the rusting of ferrous (iron and steel) metals and the deterioration
by oxidation 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 commonly requires specialized application
equipment. In addition, the oils and greases may pose unacceptable health and
fire hazards and also may collect and trap dirt and debris that, in some cases,
may actually initiate corrosion. For the removal of such oils and greases,
chemical solvents and specialized safety equipment may be necessary that
typically introduce additional health and hazardous waste disposal problems.
ZERUST volatile corrosion inhibiting ("VCI") products may entirely
eliminate or reduce the use of oils and greases to inhibit corrosion; for ZERUST
formulations 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 reach. The inhibiting layer is maintained
so long as the product remains within the ZERUST package. Electron scanning
further shows that once the contents are removed from the ZERUST package, the
VCI layer revolatilizes from the contents' surfaces within two hours, leaving a
clean, dry and corrosion-free product. This mechanism of corrosion protection
enables the Company's customers to package and ship metal parts so that they
arrive ready for use. Furthermore, by eliminating costly greasing and degreasing
processes, ZERUST VCI technology provides significant savings in labor, material
and capital expenditures for equipment to apply, remove and dispose of oil and
grease as compared to traditional methods of corrosion prevention.
In 1980, the Company developed a means of combining ZERUST VCI systems
with polyethylene and polypropylene resins, and was granted a patent on this
process on September 22, 1981. 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 gave packaging engineers an
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 developed additives in liquid form to imbue
corrugated cardboard, solid fiber and chipboard packaging materials with VCI
corrosion protection properties.
ELECTRONIC SENSING INSTRUMENTS. The Company's electronic sensing
instruments accounted for approximately 4% of the Company's sales in fiscal year
1999. The Company's electronic sensing instruments include oil quality
analyzers, fiber monitors and testers, and other instruments used primarily
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for process and quality control of materials in hostile environments, such as
steel mills. Several of 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,
however, also includes measurement devices for materials and moisture testing
based upon microwave technology.
MANUFACTURING
The Company produces certain proprietary materials science based
industrial packaging formulations and products at its facility in Lino Lakes,
Minnesota and electronic sensing instruments at facilities in Forest Lake,
Minnesota and Cleveland, Ohio. The Company's materials science based industrial
packaging end products include flexible and rigid packaging systems and other
products that are produced to customer specification by selected contractors who
are supplied with the necessary active ingredients by the Company.
The Company is ISO 9001 certified with respect to its materials science
based industrial packaging production. The Company believes that the process of
ISO 9001 certification serves as an excellent tool for total quality management,
enabling the Company to provide consistency and excellence in its products.
Also, because potential customers may prefer or require manufacturers to have
achieved ISO certification, such ISO certification may provide the Company with
certain competitive advantages.
SALES AND MARKETING OF MATERIALS SCIENCE BASED INDUSTRIAL PACKAGING PRODUCTS
In the United States, the Company markets its materials science based
industrial packaging products principally 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 analyze their specific needs and develop systems to
meet their technical requirements.
Internationally, the Company has entered into (either directly or
through NTI Asean LLC) joint ventures and similar arrangements with foreign
partners. Pursuant to these arrangements, the Company and/or Excor supply
certain proprietary formulations to the foreign joint venture entities, which in
turn provide for the international manufacture and marketing of ZERUST and
others finished products. The Company receives fees for providing technical
support and marketing assistance to the joint ventures in accordance with the
terms of the joint venture arrangements.
COMPETITION
The Company is aware of other organizations that manufacture and market
corrosion inhibiting packaging products, which compete with the Company's ZERUST
products. The Company evaluates competing products on an ongoing basis and
believes that none of the competing products on the market at this time are
superior to the Company's products.
The Company is aware of competitors in the "Lubri-Sensor" oil quality
analyzer area; however, the Company does not have any knowledge as to the
business effectiveness of such competitors and believes that 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
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Foodoil Sensor have historically been limited by price sensitivity rather than
differences in product capabilities.
Some of the Company's competitors, in both the materials science based
industrial packaging 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 impact and brand recognition. The Company competes with such companies by
providing high quality products and by attempting to provide the highest level
of customer service, including real time direct technical support and
applications engineering.
SIGNIFICANT CUSTOMERS
No single customer accounted for more than 10% of net sales for the
fiscal year ended August 31, 1999. One customer accounted for approximately 16%
and 14% of net sales for the fiscal years ended August 31, 1998 and 1997,
respectively.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are directed at the
improvement of existing products, new product development and quality assurance
through improved testing of the Company's products. The Company's research and
development expenditures, including engineering and technical support, were
$578,231, $487,456, and $432,943 in fiscal years 1999, 1998 and 1997,
respectively. In 1997, the Company's joint venture in Germany, Excor
Korrosionsschutz - Technologien und Produkte GmbH, established a wholly-owned
subsidiary, Excor Korrosionsforschung GmbH, to conduct research into new fields
of materials science based industrial packaging and the applications engineering
thereof in conjunction with the Company's domestic research and development
operation. Today the Company's U.S.A. research and development activities are
conducted at its Minnesota headquarters, in Dresden, Germany and at various
international locations staffed by independent contractors to the Company. The
results of the research and development activities outside Minnesota and
Germany, like the results of the Company's research and development efforts
generally, invariably engender certain proprietary rights for the Company.
PATENTS AND TRADEMARKS
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 currently owns one United States
patent, which will expire in 2000, relating to its corrosion inhibiting
products. 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; and that mere patent
protection without close technical support and applications engineering will not
serve to keep any given supplier in the forefront of any sophisticated
technology based market.
The Company also has several registered trademarks in the United States
and certain foreign countries. The registered trademarks in the U.S. are: the
logo "NTI", the word "ZERUST", the words "THE ZERUST PEOPLE", the word
"PLASTABS", the words "COR TAB" and the color "YELLOW" "for anticorrosive
plastic film used for packaging metallic products, for industrial and consumer
use". The Company's trademarks have a life, subject to periodic maintenance, of
10 to 20 years, which may be extended.
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BACKLOG
The Company did not have a significant order backlog as of August 31,
1999. 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 thereof from various
suppliers. The Company has sufficient working capital to meet all obligations
when due.
EMPLOYEES
As of August 31, 1999, the Company had 27 full-time direct employees in
the United States, including five engaged in administration, twelve in sales and
marketing, three in research and development and seven 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, to the Company's
knowledge, threatened labor or employment disputes or work interruptions.
CERTAIN IMPORTANT FACTORS
In addition to the influences 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. Such factors, which may impact on the
success of the Company's operations and its ability to achieve its goals,
include the following:
(1) The Company's ability to make investments in existing and
future joint ventures to generate a positive rate of return
and demonstrate a pattern of growth consistent with past and
current performance; and
(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 the technological advantages of its
proprietary products.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's primary office, production facilities and domestic
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. On this parcel, the Company built a warehouse of approximately 18,000
square feet that was completed in November 1996. The parcel of land on which
this warehouse is located is of sufficient size should the Company choose to
relocate its entire facility to this location, although the Company has no
current plans to do so. The Company leases approximately 750 square feet in
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Cleveland, Ohio for $650 per month on a month-to-month basis. The Company uses
this space for production of electronic sensing instruments.
ITEM 3. LEGAL PROCEEDINGS.
There is no material pending or threatened legal, governmental,
administrative or other proceeding to which the Company is a party or of which
any of its property is the 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.
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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, and it continues to trade on, the American Stock Exchange under the
symbol NTI.
COMMON STOCK
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HIGH LOW
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1999:
Fourth fiscal quarter............. $ 8 3/8 $ 5 11/16
Third fiscal quarter.............. 6 7/8 5 1/2
Second fiscal quarter............. 7 1/4 5 3/8
First fiscal quarter.............. 7 5
1998:
Fourth fiscal quarter............. $ 8 $ 6 7/16
Third fiscal quarter.............. 9 7/8 7 3/8
Second fiscal quarter............. 11 1/4 8 1/2
First fiscal quarter.............. 12 3/4 9 1/4
The Company declared Common Stock cash dividends of $.15 per share to
shareholders of record on December 1, 1997; $.15 per share to shareholders of
record on December 4, 1998; and $0.16 per share to shareholders of record on
December 3, 1999. 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, 1999, the Company's Common Stock was held by
approximately 500 shareholders of record.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
NET SALES AND COST OF SALES. The Company's net sales originating in the United
States of $9,870,531 in fiscal year 1999; a decrease of $206,963 or 2.1% from
net sales of $10,077,494 in fiscal year 1998. The decrease in net sales is due
primarily to a decrease in the volume of materials science based industrial
packaging products sold to the Company's international corporate joint ventures
partially
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offset by an increase in the volume of such products sold to new and existing
customers in North America. During fiscal year 1999, certain of the corporate
joint ventures purchased active formulations previously sourced from the Company
from a corporate joint venture of the Company. The Company expects this trend to
continue in the future.
No single customer accounted for more than 10% of sales in fiscal year
1999, whereas, in fiscal year 1998 sales to one customer accounted for 16% of
total sales. The decrease in sales to a single customer is a result of a major
industrial customer changing logistic firms during fiscal year 1999. The new
logistic firm of that industrial customer has, however, itself become a customer
of the Company, and the Company expects sales to this firm may exceed 10% of net
sales in the future.
The cost of sales decreased as a percentage of sales to 47.9% in fiscal
year 1999 from 49.1% in fiscal year 1998. The variation in the cost of sales
percentage reflects changes in product mix. The Company anticipates that its
annual percentage of cost of sales for fiscal year 2000 will not vary
significantly under its current pricing structure.
SELLING EXPENSES. The Company's selling expenses increased by $230,249
or 18.3% to $1,490,857 in fiscal year 1999 from $1,260,608 in fiscal year 1998.
The increase in selling expenses in fiscal year 1999 was primarily related to
increases in salaries and related expenses, sales promotion, and travel. As a
percentage of sales these costs increased to 15.1% in fiscal year 1999 from
12.5% in fiscal year 1998 due to the decreased level of net sales and the
overall increase in selling expenses in fiscal year 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and
administrative expenses increased by $218,155 or 15.1% to $1,664,936 in fiscal
year 1999 from $1,446,781 in fiscal year 1998. The increase in general and
administrative expenses in fiscal year 1999 was primarily due to increases in
salaries and related expenses, various professional fees, and building
maintenance. As a percentage of sales these costs increased to 16.9% in fiscal
year 1999 from 14.4% in fiscal year 1998 due to the decreased level of net sales
and the overall increase in general and administrative expenses in fiscal year
1999.
RESEARCH, ENGINEERING, AND TECHNICAL SUPPORT EXPENSES. The Company's
research, engineering, and technical support expenses increased by $90,775 or
18.6% to $578,231 in fiscal year 1999 from $487,456 in fiscal year 1998. The
increase in research, engineering and technical support expenses in fiscal year
1999 was primarily due to the increase of research and development activities
conducted at various international locations by independent contractors to the
Company. The results of the Company's international research and development
activities, as the results of the Company's research and development efforts,
invariably engender certain proprietary rights thereto to the Company. As a
percentage of sales these costs increased to 5.9% in fiscal year 1999 from 4.8%
in fiscal year 1998 due to the decreased level of net sales and the increased
research, engineering, and technical support activities in fiscal year 1999. The
Company anticipates that its fiscal year 2000 research, engineering, and
technical support expenses will surpass expenses incurred in fiscal year 1999.
OPERATIONS OF INTERNATIONAL JOINT VENTURES
CORPORATE JOINT VENTURE AND EUROPEAN HOLDING COMPANY. The Company
continues its business program of establishing corporate joint venture
arrangements in international markets. The Company and/or an existing corporate
joint venture manufactures and supplies patented and/or proprietary ingredients,
which make the finished
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products functional and enable manufacturing of the finished products to take
place in the foreign countries. The corporate joint ventures then market the
finished products in their respective territories, and the corporate joint
ventures' profits are shared by the respective corporate joint venture
shareholders in accordance with share ownership.
The Company received fees for technical and other support to the
corporate joint ventures based on the revenues of the individual corporate joint
ventures. The Company recognized fees for such support in the amounts of
$2,459,697 and $1,868,938 for fiscal years 1999 and 1998, respectively. The
increase in fees for technical and other support to corporate joint ventures was
primarily due to the greater efficacy of the Company's service to its corporate
joint ventures, which provided for increased sales volume at certain of the
Company's corporate joint ventures located in the Pacific Rim and Europe. Sales
of the corporate joint ventures in fiscal year 1999 increased $2,444,772 or
12.5% to $22,022,767.
The Company incurred direct expenses related to corporate joint
ventures and the European holding company of $741,703 and $566,051 in fiscal
years 1999 and 1998, respectively. These expenses consisted primarily of
technical and marketing services to existing joint ventures as well as legal
fees regarding the development of new joint ventures, travel and meetings; but
do not include a share of research and development expenses or of selling
expenses incurred by the Company, including for participation in the
international trade fairs and symposia. The Company anticipates that expenses
relating to corporate joint ventures will continue to increase in the future due
to the Company providing ongoing technical, marketing and other support to its
joint ventures, and to the development of new corporate joint ventures.
The Company and NTI Asean LLC ("NTI Asean") anticipate that in the
future they will enter into joint ventures in other foreign countries. The
Company maintains a 50% ownership interest in NTI Asean, with the remaining 50%
ownership interest owned by Taiyo Petroleum Gas Co. Ltd., which also owns the
other 50% ownership interest in the Company's corporate joint venture located in
Japan.
The Company also has an investment in a European holding company, which
is currently inactive.
The Company's investments in corporate joint ventures and the European
holding company are accounted for using the equity method and resulted in income
to the Company of $368,711 and $549,875 for fiscal years 1999 and 1998,
respectively. The decrease in equity in income of corporate joint ventures and
the European holding company was primarily due to high inflation in South
America. Net income of the corporate joint ventures in fiscal year 1999 of
$1,038,785 represents a 14.6% decrease from fiscal year 1998, due to higher
operating expenses and in some measure to currency fluctuations.
INCOME TAXES
INCOME TAXES. The Company's effective income tax rates were 29.7% and
33.5% for fiscal years 1999 and 1998, respectively. The decrease in the
effective income tax rate in fiscal year 1999 is due to the utilization of a net
operating loss carry forward that became available in fiscal year 1999. The
effective income tax rate is also lower than the statutory rate due to equity in
income of corporate joint ventures and the European holding company being
recognized based on after tax earnings of these entities. To the extent the
corporate joint ventures' and the foreign company's undistributed earnings were
distributed to the Company during fiscal years 1999 and 1998, it did not result
in material additional income tax liability after the application of foreign tax
credits.
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FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
NET SALES AND COST OF SALES. The Company's net sales originating in the
United States of $10,077,494 in fiscal year 1998 increased by $1,348,176 or
15.4% from net sales of $8,729,318 in fiscal year 1997. The increase in net
sales is primarily due to an increase in the volume of materials science based
industrial packaging products sold to new and existing customers. Fiscal year
1998 sales to an existing customer increased to 16% of total sales in fiscal
year 1998 from 14% of total sales in fiscal year 1997. The cost of sales
increased as a percentage of sales to 49.1% in fiscal year 1998 from 47.4% in
fiscal year 1997. The variation in the cost of sales percentage reflects changes
in product mix.
SELLING EXPENSES. The Company's selling expenses increased by $168,328
or 15.4% to $1,260,608 in fiscal year 1998 from $1,092,280 in fiscal year 1997.
The increase in selling expenses in fiscal year 1998 was primarily related to
increases in salaries and related expenses and travel. As a percentage of sales
these costs were 12.5% in fiscal years 1998 and 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and
administrative expenses decreased by $439,235 or 23.3% to $1,446,781 in fiscal
year 1998 from $1,886,016 in fiscal year 1997. The decrease in general and
administrative expenses in fiscal year 1998 was primarily due to decreases in
personnel costs and related expenses, various professional fees and real estate
and other expenses associated with the Company's expanded warehouse facility,
which was completed in fiscal year 1997. As a percentage of sales, these costs
decreased to 14.4% in fiscal year 1998 from 21.6% in fiscal year 1997 due to the
increased level of net sales in fiscal year 1998 and the decrease in fiscal year
1998 in general and administrative expenses.
RESEARCH, ENGINEERING, AND TECHNICAL SUPPORT EXPENSES. The Company's
research, engineering, and technical support expenses increased by $54,513 or
12.6% to $487,456 in fiscal year 1998 from $432,943 in fiscal year 1997. The
increase in research, engineering and technical support expenses in fiscal year
1998 was primarily due to increases in personnel costs and related expenses and
increases in expenses for research, engineering and technical support supplies.
As a percentage of sales these costs decreased to 4.8% in fiscal year 1998 from
5.0% in fiscal year 1997 due to the increased level of net sales in fiscal year
1998.
OPERATIONS OF INTERNATIONAL JOINT VENTURES
CORPORATE JOINT VENTURE AND EUROPEAN HOLDING COMPANY. The Company's
investments in corporate joint ventures and the European holding company are
accounted for using the equity method and resulted in income to the Company of
$549,875 and $712,244 for fiscal years 1998 and 1997, respectively. In addition,
the Company received fees for technical and other support to the corporate joint
ventures based on the revenues of the individual corporate joint ventures. The
Company recognized fees for such assistance of $1,868,938 and $2,213,228 for
fiscal years 1998 and 1997, respectively. The decrease in equity in income of
corporate joint ventures and the European holding company, and fees for
technical and other support to corporate joint ventures was primarily due to the
strengthening of the U.S. dollar when compared to the local currencies of the
Company's corporate joint ventures, and decreased sales volume at certain of the
Company's corporate joint ventures located in the Pacific Rim. Sales of the
12
<PAGE>
corporate joint ventures in fiscal year 1998 decreased $180,091 or 0.9% to
$19,577,995. Net income of the corporate joint ventures in fiscal year 1998 of
$1,216,111 represents an 18.8% decrease from fiscal year 1997. The Company
recognized expenses related to corporate joint ventures and the European holding
company of $566,051 and $457,263 in fiscal years 1998 and 1997, respectively.
The expenses consist primarily of marketing, technical and other services to
existing joint ventures, as well as legal fees regarding the development of new
joint ventures, travel, and meetings.
INCOME TAXES
INCOME TAXES. The Company's effective income tax rates were 33.5% and
31.5% for fiscal years 1998 and 1997, respectively. The effective income tax
rate was lower than the statutory rate primarily due to equity in income of
corporate joint ventures and the European holding company being recognized based
on after tax earnings of these entities. To the extent the corporate joint
ventures' and the foreign company's undistributed earnings were distributed to
the Company during fiscal years 1998 and 1997, it did not result in material
additional income tax liability after the application of foreign tax credits.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1999, the Company's working capital was $5,471,523
including $2,750,209 in cash and cash equivalents, with a current ratio of
9.1:1. At August 31, 1998, the Company's working capital was $4,567,334,
including $2,200,490 in cash and cash equivalents, with a current ratio of
14.2:1. Net cash provided from operations has been sufficient to meet liquidity
requirements, capital expenditures, research and development cost, and expansion
of operations of the Company's joint ventures. Cash flow from operations totaled
$1,983,425, $2,048,207, and $1,753,483 for the fiscal years 1999, 1998, and
1997, respectively. The net cash flow from operations for fiscal years 1999,
1998, and 1997 resulted principally from net income and joint venture dividends
offset by a non-cash component of net income identified as equity in income of
corporate joint ventures and European holding company.
Net cash used in investing activities totaled $641,317, $91,682 and
$985,457 for fiscal years 1999, 1998, and 1997, respectively. The primary uses
of cash in fiscal years 1999 and 1998 were investments in corporate joint
ventures and additions to property. The primary uses of cash in fiscal year 1997
were investments in corporate joint ventures and European holding company,
trading investments, property development and the issuance of a loan to a joint
venture partner pursuant to a note. In fiscal years 1999 and 1998, the Company's
expenditures of cash for investing activities were offset by repayment of the
corporate joint venture note and proceeds from the sale of trading investments,
respectively.
Net cash used in financing activities was $792,389, $3,701,602, and
$529,979 for fiscal years 1999, 1998, and 1997, respectively. The primary uses
of cash in financing activities resulted from the payment of dividends and the
repurchase of common stock. The primary source of cash provided by financing
activities was proceeds from the exercise of stock options.
The Company expects to meet future liquidity requirements with its
existing cash and cash equivalents and cash flows from future operating earnings
and distributions of earnings and technical assistance fees from the corporate
joint venture investments.
13
<PAGE>
The Company has no long-term debt and no material lease commitments as
at August 31, 1999.
The Company has no postretirement benefit plan and does not anticipate
establishing any postretirement benefit program.
Inflation in the U.S. historically has had little effect on the
Company.
IMPACT OF YEAR 2000
Computer programs have historically been written to abbreviate dates by
using two digits instead of four digits to identify a particular year. The
so-called "year 2000 problem" or "millennium bug" is the inability of computer
software or hardware (collectively, "Systems") to recognize or properly process
dates ending in "00" and dates after the year 2000. Significant attention is
being focused as the year 2000 approaches on updating or replacing such Systems
in order to avoid System failures, miscalculations or business interruptions
that might otherwise result. The Company believes it has taken the steps
necessary to insure that this potential problem does not adversely affect the
Company's operating results in the future, and continues to assess the impact of
the year 2000 problem on the Company.
The Company has taken, and will continue to take, actions intended to
minimize the impact of the year 2000 problem and maximize the Company's state of
readiness for the year 2000. However, it is impossible to eliminate year 2000
risks entirely. Unfortunately, there is no single test that can be used to
conclusively determine whether Systems are year 2000 compliant. To the contrary,
the technology community identifies additional potential year 2000 risks
regularly. Also impeding year 2000 testing is the high degree of integration
between various Systems and the difficulty in conducting full-scale live
testing. Consequently, inter-related Systems believed secure in a test
environment could conceivably fail when operating together under real-time
workloads.
The Company's state of readiness for the year 2000, the Company's
estimated costs associates with year 2000 issues, the risks the Company faces
associated with year 2000 issues and the Company's year 2000 contingency plans
are summarized below.
STATE OF READINESS. All major internal information technology ("IT")
systems have been replaced. Year 2000 issues were addressed when selecting and
implementing these new systems, and the Company believes they are year 2000
compliant. The Company has also reviewed its major non-IT systems, including
hardware, software, phone and security systems, and the Company believes they
are year 2000 compliant. The Company anticipates continuing to invest in IT and
non-IT technology to accommodate the Company's future growth, and the Company
expects these investments and upgrades to be year 2000 compliant. The Company
has concluded its on going testing program as regards to the Company's year 2000
compliance. While such testing has to date indicated the Company's IT and non -
IT systems are year 2000 compliant only the systems in operation subsequent to
January 1, 2000 will confirm year 2000 compliance and what, if any effect, the
consequences of any year 2000 failures might have on the
14
<PAGE>
Company. The Company has completed a review of the Company international joint
ventures as to year 2000 readiness with all reporting their being year 2000
compliant.
COSTS ASSOCIATED WITH YEAR 2000 ISSUES. Since unanticipated expenses
may arise relating to Year 2000 issues, the Company is unable to quantify the
total expected costs associated with year 2000 issues. The Company believes that
these costs will not have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows. The total amount the
Company has expended on year 2000 issues through August 31, 1999 was
approximately $50,000. The Company anticipates that future costs associated with
year 2000 issues will be financed with cash flows from operations.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES. The Company is dependent on
computer processing in its business activities and the year 2000 problem creates
the risk of unforeseen problems in the Company's Systems and the Systems of
third parties with whom the Company does business. The failure of the Company's
Systems and/or third parties' Systems could have a material adverse effect on
the Company's results of operations, liquidity, and financial condition. Due to
the general uncertainty inherent in the year 2000 problem, resulting in part
from the uncertainty of the year 2000 readiness of third-party suppliers and
customers, the Company is unable to determine at this time whether the
consequences of year 2000 failures will have a material impact on the Company's
results of operations, liquidity, or financial condition. The Company believes
that it may need to temporarily reduce its operations if third party suppliers
are not year 2000 compliant. The Company is also unable at this time to
determine what the reasonably likely worst case year 2000 scenario is for the
Company.
CONTINGENCY PLANS. The Company has, to the extent practicable, a
business interruption contingency plan to address internal and external issues
specific to year 2000 problems. However, due to the widespread nature of
possible year 2000 problems as regards third parties, the contingency plan
process is ongoing and may require modifications as the Company obtains
additional information as to the status of third party year 2000 readiness.
EURO CURRENCY ISSUE
On January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their respective
existing currencies and the Euro and to adopt the Euro as their common legal
currency on that date (the "Euro Conversion"). Following the Euro Conversion,
however, the previously existing currencies of the participating countries are
scheduled to remain legal tender in the participating countries between January
1, 1999 and January 2002. During this transition period, public and private
parties may pay for goods and services using either the Euro or the previously
existing currencies. Beginning January 1, 2002, the participating countries will
issue new Euro-denominated bills and coins for use in cash transactions. No
later than July 1, 2002, the participating countries will withdraw all bills and
coins denominated in the previously existing currencies making Euro Conversion
complete.
The Company, the corporate joint ventures and the foreign company have
been evaluating the potential impact the Euro Conversion and the Euro currency
may have on their results of operations,
15
<PAGE>
liquidity or financial condition. The Company has determined that expected costs
for compliance will not be material to its results of operations, liquidity,
financial condition or capital expenditures. Significant noncompliance by the
Company's corporate joint ventures, and their customers or suppliers could
adversely impact the Company's results of operations, liquidity or financial
condition. Accordingly, until the Company completes its assessment of the Euro
Conversion impact, there can be no assurance that the Euro Conversion will not
have a material impact on the overall business operations of the Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies
to record derivatives on the balance sheet as assets and liabilities, measured
at fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. In July 1999, the FASB issued SFAS
No. 137 delaying the effective date of SFAS No. 133 for one year to fiscal years
beginning after June 15, 2000, with earlier adoption encouraged. The Company has
not yet determined the effects SFAS No. 133 will have on its financial position
or the results of its operations.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following items are included herein:
Financial Statements: Page
<S> <C>
Independent Auditors' Report.................................................................... 18
Consolidated Balance Sheets as of August 31, 1999 and 1998...................................... 19
Consolidated Statements of Income for the years ended August 31, 1999, 1998 and 1997............ 20
Consolidated Statements of Stockholders' Equity for the years ended August 31, 1999, 1998
and 1997....................................................................................... 21
Consolidated Statements of Cash Flows for the years ended August 31, 1999, 1998 and 1997........ 22
Notes to Consolidated Financial Statements..................................................... 23-32
</TABLE>
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Northern Technologies International Corporation
Lino Lakes, Minnesota
We have audited the accompanying consolidated balance sheets of Northern
Technologies International Corporation and Subsidiary (the Company) as of August
31, 1999 and 1998 and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended August 31, 1999. 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 consolidated financial statements present fairly, in all
material respects, the financial position of Northern Technologies International
Corporation and Subsidiary at August 31, 1999 and 1998 and the results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1999, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
November 19, 1999
18
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1999 AND 1998
- -------------------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,750,209 $ 2,200,490
Receivables:
Trade, less allowance for doubtful accounts of $27,000 and $25,000, respectively 1,704,536 1,042,428
Corporate joint ventures 473,553 352,164
Inventories 1,013,525 969,520
Prepaid expenses and other 37,008 118,259
Deferred income taxes 170,000 230,000
------------ ------------
Total current assets 6,148,831 4,912,861
PROPERTY AND EQUIPMENT, net 1,115,229 955,010
OTHER ASSETS:
Investments in corporate joint ventures 3,424,623 2,754,165
Investment in European holding company 247,253 247,869
Deferred income taxes 210,000 120,000
Other 315,662 357,106
------------ ------------
4,197,538 3,479,140
------------ ------------
$ 11,461,598 $ 9,347,011
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 149,328 $ 156,604
Income taxes 307,188 66,416
Accrued liabilities:
Payroll and related benefits 54,182 3,132
Other 166,610 119,375
------------ ------------
Total current liabilities 677,308 345,527
DEFERRED GROSS PROFIT 60,000 120,000
CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; authorized 10,000 shares; none issued
Common stock, $.02 par value per share; authorized 10,000,000 shares;
issued and outstanding 3,865,103 and 3,847,452 shares, respectively 77,302 76,949
Additional paid-in capital 4,613,806 4,477,167
Retained earnings 6,481,550 4,850,696
Accumulated other comprehensive income (loss) (Note 1) (318,561) (393,521)
------------ ------------
10,854,097 9,011,291
Notes and related interest receivable from purchase of common stock (129,807) (129,807)
------------ ------------
Total stockholders' equity 10,724,290 8,881,484
------------ ------------
$ 11,461,598 $ 9,347,011
============ ============
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 31, 1999, 1998, AND 1997
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
SALES $9,870,531 $ 10,077,494 $ 8,729,318
COST OF GOODS SOLD 4,726,928 4,947,816 4,141,704
----------- ------------ -----------
GROSS PROFIT 5,143,603 5,129,678 4,587,614
OPERATING EXPENSES:
Selling 1,490,857 1,260,608 1,092,280
General and administrative 1,664,936 1,446,781 1,886,016
Research, engineering, and technical support 578,231 487,456 432,943
----------- ------------ -----------
3,734,024 3,194,845 3,411,239
----------- ------------ -----------
OPERATING INCOME 1,409,579 1,934,833 1,176,375
CORPORATE JOINT VENTURES AND EUROPEAN HOLDING
COMPANY:
Equity in income of corporate joint ventures and
European holding company 368,711 549,875 712,244
Fees for technical and other support to corporate joint ventures 2,459,697 1,868,938 2,213,228
Corporate joint venture expense (741,703) (566,051) (457,263)
----------- ------------ -----------
2,086,705 1,852,762 2,468,209
OTHER INCOME:
Interest income 111,901 151,720 160,396
Other income - - 15,868
----------- ------------ -----------
111,901 151,720 176,264
----------- ------------ -----------
INCOME BEFORE INCOME TAXES 3,608,185 3,939,315 3,820,848
INCOME TAXES 1,070,000 1,320,000 1,205,000
----------- ------------ -----------
NET INCOME $ 2,538,185 $ 2,619,315 $ 2,615,848
=========== ============ ===========
NET INCOME PER SHARE:
Basic $ .65 $ .64 $ .62
=========== ============ ===========
Diluted $ .64 $ .63 $ .61
=========== ============ ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 3,915,001 4,084,408 4,204,602
============ ============ ===========
Diluted 3,956,977 4,157,721 4,273,500
============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------
NOTES AND
RELATED
INTEREST
ACCUMULATED RECEIVABLE
OTHER FROM TOTAL
COMMON STOCK ADDITIONAL COMPREHENSIVE PURCHASE OF COMMON
------------ PAID-IN RETAINED INCOME COMMON STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS (LOSS) STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
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)
Comprehensive earnings, 1997:
Foreign currency translation
adjustment - - - - (293,109) - (293,109)
Net income - - - 2,615,848 - - 2,615,848
-----------
Comprehensive earnings 1997 - - - - - - 2,322,739
--------- -------- ---------- ---------- --------- ---------- -----------
BALANCE AT AUGUST 31, 1997 4,202,508 84,050 5,185,828 5,217,221 (252,591) (129,807) 10,104,701
Repurchase of common stock (374,765) (7,495) (775,131) (2,364,042) - - (3,146,668)
Stock options exercised 19,709 394 66,470 - - - 66,864
Dividends on common stock -
$.15 per share - - - (621,798) - - (621,798)
Comprehensive earnings, 1998:
Foreign currency translation
adjustment - - - - (140,930) - (140,930)
Net income - - - 2,619,315 - - 2,619,315
-----------
Comprehensive earnings 1998 - - - - - - 2,478,385
--------- -------- ---------- ---------- --------- ---------- -----------
BALANCE AT AUGUST 31, 1998 3,847,452 76,949 4,477,167 4,850,696 (393,521) (129,807) 8,881,484
Repurchase of common stock (80,989) (1,620) (186,275) (326,227) - - (514,122)
Issuance of common stock for
services provided 3,200 64 21,986 - - - 22,050
Stock options exercised 95,440 1,909 300,928 - - - 302,837
Dividends on common stock -
$.15 per share - - - (581,104) - - (581,104)
Comprehensive earnings, 1999:
Foreign currency translation
adjustment - - - - 74,960 - 74,960
Net income - - - 2,538,185 - - 2,538,185
-----------
Comprehensive earnings 1999 - - - - - - 2,613,145
--------- -------- ---------- ---------- --------- ---------- -----------
BALANCE AT AUGUST 31, 1999 3,865,103 $ 77,302 $4,613,806 $6,481,550 $(318,561) $ (129,807) $10,724,290
========= ======== ========== ========== ========= ========== ===========
</TABLE>
See notes consolidated to financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1999, 1998, AND 1997
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,538,185 $ 2,619,315 $ 2,615,848
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 156,540 118,127 100,497
Impairment loss 50,941 - -
Equity in income of corporate joint ventures and
European holding company (368,711) (549,875) (712,244)
Dividends received from corporate joint ventures 88,890 284,461 69,147
Deferred income taxes (30,000) 20,000 (110,000)
Deferred gross profit (60,000) 2,000 9,000
Common stock issued for services 22,050 - -
Changes in assets and liabilities:
Receivables:
Trade receivables (662,108) 122,232 (36,685)
Corporate joint ventures (121,389) 165,387 7,026
Inventories (44,005) (127,902) (257,406)
Prepaid expenses and other 81,251 8,937 1,407
Accounts payable (7,276) (5,873) 7,618
Income taxes 240,772 (310,451) (86,833)
Accrued liabilities 98,285 (298,151) 146,108
------------- --------------- -------------
Total adjustments (554,760) (571,108) (862,365)
------------- -------------- -------------
Net cash provided by operating activities 1,983,425 2,048,207 1,753,483
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property (316,759) (110,809) (82,009)
Investments in corporate joint ventures and European
holding company (522,661) (199,311) (442,044)
Decrease (increase) in other assets 198,103 218,438 (461,404)
------------- -------------- -------------
Net cash used in investing activities (641,317) (91,682) (985,457)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (581,104) (621,798) (504,733)
Repurchase of common stock (319,122) (3,146,668) (53,100)
Issuance of common stock 107,837 66,864 27,854
------------- -------------- -------------
Net cash used in financing activities (792,389) (3,701,602) (529,979)
------------- -------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 549,719 (1,745,077) 238,047
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 2,200,490 3,945,567 3,707,520
------------- -------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,750,209 $ 2,200,490 $ 3,945,567
============= ============== =============
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS - Northern Technologies International Corporation
and Subsidiary (the Company) is engaged in the development, manufacture,
and marketing of proprietary materials science based industrial products
and electronic sensing instruments.
CONSOLIDATION - The consolidated financial statements include the
accounts of Northern Technologies International Corporation and its
subsidiary. All significant intercompany transactions have been
eliminated.
CASH EQUIVALENTS - The Company considers investments with an original
maturity of three months or less to be cash equivalents.
INVENTORIES - Inventories are recorded at the lower of cost (first-in,
first-out basis) or market.
PROPERTY AND DEPRECIATION - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method at rates based
on the estimated service lives of the various assets as follows:
Buildings and improvements 5-20 years
Machinery and equipment 2-10 years
INVESTMENTS IN CORPORATE JOINT VENTURES - Investments in corporate joint
ventures are accounted for using the equity method. Intercompany profits
on inventories held by the corporate joint ventures which were purchased
from the Company have been eliminated based on the Company's ownership
percentage in each corporate joint venture.
INVESTMENT IN EUROPEAN HOLDING COMPANY - Investment in European holding
company is accounted for using the equity method.
RECOVERABILITY OF LONG-LIVED ASSETS - The Company reviews its long-lived
assets whenever events or changes in circumstances indicate the carrying
amount of the assets may not be recoverable. The Company determines
potential impairment by comparing the carrying value of the assets with
expected net cash flows expected to be provided by operating activities
of the business or related products. Should the sum of the expected
future net cash flows be less than the carrying value, the Company would
determine whether an impairment loss should be recognized. An impairment
loss would be measured by comparing the amount by which the carrying
value exceeds the fair value of the asset based on market value that is
based on the discounted cash flows expected to be generated by the
asset. As of August 31, 1999, the Company did not consider any of its
assets impaired, except for $50,941 relating to the Company's investment
in a corporate joint venture.
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
23
<PAGE>
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.
The translation of the applicable foreign currencies into U.S. dollars
is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts
using an average monthly exchange rate. Translation gains or losses are
reported as an element of other comprehensive income (loss).
REVENUE RECOGNITION - Revenue is recognized when 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
$578,231, $487,456, and $432,943 for the years ended August 31, 1999,
1998, and 1997, 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.
STOCK-BASED COMPENSATION - The Company has adopted SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. This statement defines a fair
value based method of accounting for an employee stock option or similar
equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However,
the statement also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board (APB) Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Under the fair value based
method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is
usually the vesting period. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date or other measurement date over the amount an
employee must pay to acquire the stock. The Company accounts for stock
options grants and awards to employees in accordance with APB Opinion
No. 25 and related interpretations.
NET INCOME PER SHARE - Basic net income per share is computed by
dividing net income by the weighted average number of common shares
outstanding. Diluted net income per share assumes the exercise of stock
options using the treasury stock method, if dilutive. Diluted net income
per share is computed by dividing net income by the weighted average
common and common equivalent shares outstanding. For the years ended
August 31, 1999, 1998, and 1997, the assumed exercise of stock options
increased the weighted average common and common equivalent shares
outstanding by 41,976, 73,313, and 68,898 shares, respectively. Options
to purchase 29,041, 11,575, and 0 shares of common stock as of August
31, 1999, 1998, and 1997, respectively, were not included in the
computations of diluted net income per share because the options'
exercise
24
<PAGE>
prices were greater than the average market price of the Company's
common stock during the respective periods.
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.
COMPREHENSIVE INCOME - On September 1, 1998, the Company retroactively
adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which establishes
standards for reporting and display of comprehensive income and its
components, such as foreign currency translation adjustments, in a full
set of general-purpose financial statements. Comprehensive income
includes all changes in stockholders' equity except those resulting from
investments by and distributions to owners.
NEW ACCOUNTING STANDARD - In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 requires companies to
record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. In July
1999, FASB issued SFAS No. 137, delaying the effective date of SFAS No.
133 for one year to fiscal years beginning after June 15, 2000, with
earlier adoption encouraged. The Company has not yet determined the
effects SFAS No. 133 will have on its financial position or the results
of its operations.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1998
and 1997 financial statements to conform to the presentation used in the
1999 financial statements. The reclassifications had no effect on
stockholders' equity or net income as previously reported.
2. INVENTORIES
Inventories at August 31 consist of the following:
1999 1998
Production materials $ 218,701 $ 163,177
Work-in-process 24,753 32,334
Finished goods 770,071 774,009
------------ -------------
$ 1,013,525 $ 969,520
============ =============
25
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment at August 31 consist of the following:
1999 1998
Land $ 246,097 $ 246,097
Buildings and improvements 1,100,757 1,077,670
Machinery and equipment 964,152 674,002
------------ -------------
2,311,006 1,997,769
Less accumulated depreciation 1,195,777 1,042,759
------------ -------------
$ 1,115,229 $ 955,010
============ =============
4. INVESTMENTS IN CORPORATE JOINT VENTURES 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 to purchase from a joint venture a portion
of the ownership that the Company would otherwise have purchased. A
related third party owns 25% of the joint venture in South Korea. The
joint ventures provide for the manufacturing, marketing, and
distributing of material science based industrial products. The Company
also has a 50% ownership interest in a limited liability company for its
joint venture investments in the Asean region. A related party owns the
remaining 50% ownership interest in this company. The Company has
established corporate joint ventures, which the Company has an ownership
interest in either directly or indirectly, as follows:
Date of
Country Investment
Japan 1987
Taiwan 1990
France 1990
Germany 1991
Sweden 1991
Singapore 1991
Brazil 1993
Austria 1994
Russia 1994
South Korea 1994
Finland 1995
Italy 1996
United Kingdom 1997
Czech Republic 1997
Indonesia 1998
Poland 1998
Thailand 1998
26
<PAGE>
Fees earned from the corporate joint ventures under licenses and
technical and other support agreements were $2,459,697, $1,868,938, and
$2,213,228 for the years ended August 31, 1999, 1998, and 1997,
respectively.
The Company incurred expenses associated with corporate joint ventures
of $741,703, $566,051, and $457,263 for the years ended August 31, 1999,
1998, and 1997, respectively. These expenses consist primarily of legal
fees regarding the development of new joint ventures, travel, and
technical services regarding existing joint ventures.
Summarized financial information from the audited and unaudited
financial statements of joint ventures carried on the equity basis is as
follows:
<TABLE>
<CAPTION>
August 31
--------------------------------
1999 1998
<S> <C> <C> <C>
Current assets $ 11,417,847 $ 9,364,206
Total assets 12,595,710 10,395,022
Current liabilities 5,658,770 4,476,445
Noncurrent liabilities 52,968 15,715
Stockholders' equity 6,883,972 5,902,862
Northern Technologies International Corporation's
share of corporate joint ventures' equity 3,424,623 2,754,165
Years Ended August 31
--------------------------------------------------
1999 1998 1997
Sales $ 22,022,767 $ 19,577,995 $ 19,758,086
Gross profit 11,389,838 9,930,884 10,807,776
Net income 1,038,785 1,216,111 1,497,148
Northern Technologies International
Corporation's share of equity in income
of corporate joint ventures 369,325 556,644 712,244
</TABLE>
During 1999, the Company purchased the remaining 50% ownership interests
of two corporate joint ventures the Company did not previously own for
$452,152. The Company has not consolidated the accounts of the two
corporate joint ventures in its financial statements due to the
Company's intention of reducing its ownership percentage in both
entities to 50% or less in fiscal 2000.
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, 1999 and 1998
consist primarily of cash and cash equivalents. The Company's share of
equity in loss of European holding company was $614 and $6,769 for the
years ended August 31, 1999 and 1998, respectively.
5. STOCKHOLDERS' EQUITY
During 1999, 1998, and 1997, the Company acquired and retired 80,989,
374,765, and 9,000 shares of common stock for $514,122, $3,146,668, and
$53,100, respectively.
27
<PAGE>
During 1999, the Company issued 3,200 shares of common stock in return
for services provided. The value of the common stock issued, $22,050,
was determined based on the market value of the Company's common stock.
During 1997, certain employees received 3,000 shares of common stock, in
return for services provided and expensed in 1996. The value of the
common stock issued, $15,375 in 1997, 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, 1999 and 1998 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.
A summary of the status of the Company's stock options for the years
ended August 31 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- --------------------- ----------------------
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 124,236 $ 4.24 132,370 $ 3.46 133,203 $ 3.34
Granted 52,000 6.31 11,575 11.81 12,000 5.00
Exercised (95,440) 3.17 (19,709) 3.39 (9,233) 3.02
Canceled - - - - (3,600) 5.50
--------- -------- --------
Outstanding at end of year 80,796 $ 6.83 124,236 $ 4.24 132,370 $ 3.46
========= ====== ======== ====== ======== ======
Options exercisable at year-end 17,751 $ 6.51 101,909 $ 3.25 85,608 $ 3.16
========= ====== ======== ====== ======== ======
</TABLE>
The following table summarizes information about stock options
outstanding at August 31, 1999:
<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>
$3.00 2,000 .01 $ 3.00 2,000 $ 3.00
$5.00 - $6.88 67,888 3.62 6.14 12,558 5.73
$10.63 - $12.00 10,908 3.04 11.80 3,193 11.77
--------- ---------
$3.00 - $12.00 80,796 3.45 $ 6.83 17,751 $ 6.51
========= ======== ========== ========= ========
</TABLE>
28
<PAGE>
If compensation cost for the Company's Plan had 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:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income, as reported $ 2,538,185 $ 2,619,315 $ 2,615,848
Net income, pro forma 2,488,042 2,594,076 2,603,869
Basic net income per common share, as reported $ .65 $ .64 $ .62
Basic net income per common share, pro forma .64 .64 .62
Diluted net income per share, as reported .64 .63 .61
Diluted net income per share, pro forma .63 .62 .61
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Dividend yield 2.0% 2.0% 2.0%
Expected volatility 48.2% 49.0% 49.8%
Expected life of option 5 5 5
Average risk-free interest rate 4.71% 6.16% 6.50%
Average fair value of options on grant date $ 2.57 $5.09 $2.27
</TABLE>
6. SEGMENT INFORMATION
The Company is engaged in the development, manufacture, and marketing of
proprietary material science based industrial products and electronic
sensing instruments. Further disclosure regarding the two businesses is
not presented, as management uses the consolidated information to
allocate resources and evaluate performance.
Sales by geographic location as a percentage of total sales were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
U.S.A. to unaffiliated customers 75% 70% 74%
Outside the U.S.A. to:
Corporate joint ventures in which the
Company is a shareholder directly
and indirectly 6 10 17
Unaffiliated customers 19 20 9
------ ------- -------
100% 100% 100%
====== ======= =======
</TABLE>
No single customer accounted for more than 10% of net sales for the year
ended August 31, 1999. One customer accounted for approximately 16% and
14% of net sales for the years ended August 31, 1998 and 1997,
respectively.
29
<PAGE>
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
participant's contributions or 3 1/2% of the employee's salary. The
Company recognized expense for the savings plan of $39,000, $40,000, and
$36,000 for the years ended August 31, 1999, 1998, and 1997,
respectively.
8. RELATED PARTY TRANSACTIONS
The Company paid reimbursement for travel and related expenses of
$414,500, $458,000, and $382,000 for the years ended August 31, 1999,
1998, and 1997, respectively, to a financial and management consulting
firm of which the Company's Co-Chief Executive Officer and Chairman of
the Board and another Executive Officer are officers and directors.
9. INCOME TAXES
The provisions for income taxes for the years ended August 31 consist of
the following:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current:
Federal $ 990,000 $ 1,180,000 $ 1,200,000
State 110,000 120,000 115,000
------------- ------------- --------------
1,100,000 1,300,000 1,315,000
Deferred:
Federal (5,000) 18,000 (101,000)
State (25,000) 2,000 (9,000)
------------- ------------- --------------
(30,000) 20,000 (110,000)
------------- ------------- --------------
$ 1,070,000 $ 1,320,000 $ 1,205,000
============= ============= ==============
</TABLE>
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>
1999 1998 1997
<S> <C> <C> <C>
Tax computed at statutory rates $ 1,263,000 $ 1,379,000 $ 1,337,000
State income tax, net of federal benefit 71,000 80,000 71,000
Equity in income of joint ventures (125,000) (187,000) (242,000)
Change in valuation allowance (162,000) - -
Other 23,000 48,000 39,000
------------- ------------- --------------
$ 1,070,000 $ 1,320,000 $ 1,205,000
============= ============= ==============
</TABLE>
The Company has not recognized a deferred tax liability relating to
investments in foreign corporate joint ventures and European holding
company that are essentially permanent in duration of $840,000 and
$740,000 at August 31, 1999 and 1998, respectively. If some or all of
the undistributed earnings of the foreign corporate joint ventures and
European holding 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.
30
<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:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Current:
Allowance for doubtful accounts $ 10,000 $ 9,000
Inventory costs 20,000 18,000
Prepaid expenses and other 96,000 70,000
Accrued expenses 22,000 90,000
Deferred gross profit 22,000 43,000
----------- -----------
Total current $ 170,000 $ 230,000
=========== ===========
Noncurrent:
Excess of book over tax depreciation $ 76,000 $ 35,000
Investment write-offs 568,000 568,000
Net operating loss carryforward - 162,000
Joint venture expenses 91,000 47,000
Interest receivable relating to notes 43,000 38,000
Valuation allowance (568,000) (730,000)
----------- -----------
Total noncurrent $ 210,000 $ 120,000
=========== ===========
</TABLE>
10. 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.
11. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information for the years ended
August 31 consist of:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash paid during the year for income taxes $ 733,047 $ 1,610,451 $ 1,401,833
Increase (decrease) in the Company's investment in
corporate joint ventures and accumulated other
comprehensive income (loss) due to changes in
exchange rates 74,960 (140,930) (293,109)
Issuance of common stock in exchange for services
provided in 1996 and accrued for at August 31, 1996 - - 15,375
Issuance of common stock in exchange for services 22,050 - -
Exercise of stock options with outstanding common stock 195,000 - -
</TABLE>
12. SUBSEQUENT EVENT
On November 19, 1999, the Company's Board of Directors declared a $.16
per share dividend on all outstanding shares of the Company's common
stock to be distributed on December 17, 1999 to holders of record on
December 3, 1999.
31
<PAGE>
13. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------
November 30 February 28 May 31 August 31
<S> <C> <C> <C> <C>
Fiscal 1999:
Net sales $ 2,155,395 $ 2,005,873 $ 2,442,319 $ 3,266,944
Gross profit 1,085,692 1,027,387 1,192,792 1,837,732
Income before income taxes 777,643 580,278 907,074 1,343,190
Income taxes 220,000 205,000 245,000 400,000
Net income 557,643 375,278 662,074 943,190
Net income per share:
Basic $ .14 $ .10 $ .17 $ .24
Diluted .14 .10 .17 .24
Weighted average common shares outstanding:
Basic 3,856,408 3,871,863 3,863,446 3,886,833
Diluted 3,900,463 3,911,779 3,924,514 3,912,202
Fiscal 1998:
Net sales $ 2,682,741 $ 2,532,442 $ 2,607,271 $ 2,255,040
Gross profit 1,295,226 1,290,781 1,339,228 1,204,443
Income before income taxes 814,006 788,928 1,012,775 1,323,606
Income taxes 250,000 250,000 320,000 500,000
Net income 564,006 538,928 692,775 823,606
Net income per share:
Basic $ .13 $ .13 $ .17 $ .21
Diluted .13 .13 .17 .20
Weighted average common shares outstanding:
Basic 4,194,464 4,143,451 4,041,299 3,960,933
Diluted 4,284,746 4,219,147 4,111,299 4,018,205
</TABLE>
During the fourth quarters of 1999 and 1998, 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
in the fourth quarters of 1999 and 1998, respectively. It is not
practicable to determine the periods of the fiscal year to which these
adjustments relate.
32
<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 19,
1999, 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 78 Chairman of the Board and Chief Executive 1979
Officer of Advanced Modular Systems, Inc.
Vincent J. Graziano 66 President Emeritus of the Company and Internal 1979
Consultant
Gerhard Hahn 55 General Manager of Knuppel KG 1996
Dr. Donald A. Kubik 59 Vice Chairman and Chief Technology Officer of 1995
the Company; Member of Executive Committee
Serving as Co-Chief Executive Officer of the
Company
Richard G. Lareau 71 Partner of Oppenheimer Wolff & Donnelly LLP 1980
Philip M. Lynch 63 Co-Chief Executive Officer and Chairman of the 1979
Board of the Company and Executive Vice
President of Inter Alia Holding Company
Haruhiko Rikuta 34 Corporate Officer of Taiyonic Limited and 1997
President of NTI Asean LLC
Dr. Milan R. Vukcevich 62 Chief Scientist Research and Development of 1995
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., Grand Court Lifestyle, Inc., Viragen,
Inc., and
33
<PAGE>
Paragon Mortgage Company, Inc. and as Chairman of the Board of Comtrex Systems
Corp., Nova Pet, Inc., and Marbledge Group, Inc.
Mr. Graziano was employed by the Company from 1976 until his retirement
from the Company in 1999, and was President of the Company at the time he
retired. Since his retirement from the Company in September 1999, Mr. Graziano
has been serving as an internal consultant to the Company. 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.
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.
Dr. Kubik has been employed by the Company since 1978, has been Vice
Chairman since September 1999. Dr Kubik was Vice President of the Company from
1979 to September 1999 and was Treasurer of the Company from 1998 to September
1999. Dr. Kubik was appointed Vice Chairman in September 1999, and since then he
has been a Member of the Executive Committee Serving as Co-Chief Executive
Officer of the Company. During his employment as Chief Technology Officer with
the Company, Dr. Kubik has been 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 LLP for more than five years. Mr. Lareau also serves as a director of
Ceridian Corporation, Merrill Corporation and 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, 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.
Mr. Rikuta, a citizen of Japan, has been employed at Taiyo Petroleum
Gas Co. Ltd. as Manager, ZERUST Department, since February 1993. From August
1991 to January 1993, Mr. Rikuta served as a Sales Representative of the
Company. Mr. Rikuta received a B.A. degree in Economics from Seijo University in
Tokyo, Japan in March 1989. In May 1991, Mr. Rikuta received a B.A. degree in
International Relations from the University of Wisconsin in Milwaukee,
Wisconsin.
Dr. Vukcevich is employed as Chief Scientist Research and Development
of Bicron Saint-Gobain Industrial Ceramics. Dr. Vukcevich was employed by GE
Lighting from 1973 to 1995, holding various positions including Chief Scientist,
Manager of Metallurgical Engineering and Coordinator of International Research
and Development in Materials Science.
B. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages and the offices held,
as of November 19, 1999, are as follows:
34
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION IN THE COMPANY
---- --- -----------------------
<S> <C> <C>
Philip M. Lynch 63 Chairman of the Board and Co-Chief Executive Officer
Dr. Donald A. Kubik 59 Vice Chairman, Chief Technology Officer and Member of
the Executive Committee Serving as Co-Chief Executive
Officer and Director
Loren M. Ehrmanntraut 72 Chief Financial Officer and Member of the Executive
Committee Serving as Co-Chief Executive Officer
G. Patrick Lynch 32 Vice President of Strategic Planning, Secretary and Member
of the Executive Committee Serving as Co-Chief Executive
Officer
Matjaz Korosec 32 Vice President of Financial Planning, Treasurer and Member
of the Executive Committee Serving as Co-Chief Executive
Officer
Elsie F. Gilles 58 Controller and Assistant Secretary
</TABLE>
Mr. Philip M. Lynch has been Executive Vice President of Inter Alia
Holding Company for more than five years. Refer to "Directors of the Registrant"
for a more detailed discussion.
Dr. Donald A. Kubik has been employed by the Company since 1978. Refer
to "Directors of the Registrant" for a more detailed discussion.
Mr. Loren M. 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 to September 1999. Since September 1999, he has been a member
of the Executive Committee serving as Co-Chief Executive Officer. 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.
Mr. G. Patrick Lynch, an employee of the Company since 1995, has been
Vice President of Strategic Planning since 1999 and has been Secretary and a
member of the Executive Committee serving as Co-Chief Executive Officer since
September 1999. Mr. Lynch is also and officer and director of Inter Alia Holding
Company. Prior to joining the Company, Mr. Lynch held positions in sales
management for Fuji Electric Co., Ltd. in Tokyo, Japan, and programming project
management for BMW AG in Munich, Germany. Mr. Lynch received an M.B.A. degree
from the University of Michigan Business School in Ann Arbor, Michigan. Mr.
Lynch is the son of Mr. Philip M. Lynch.
Mr. Matjaz Korosec has been employed by the Company since 1999, and has
been Treasurer and a member of the Executive Committee serving as Co-Chief
Executive Officer since September 1999. Previously, Mr. Korosec was Advisor to
the Government and Head of Debt Management at the Ministry of Finance of the
Republic of Slovenia. He also served on the Board of Directors of the Slovenian
35
<PAGE>
Ecological Fund. Prior to this, he was Controller of an Industrial Division of
Honeywell GmbH in Vienna, Austria. Mr. Korosec is a Slovenian citizen. Mr.
Korosec holds an M.B.A. degree from the University of Michigan Business School
in Ann Arbor, Michigan.
Ms. Elsie F. Gilles has been employed by the Company since 1985,
serving in a variety of capacities in the areas of accounting and personnel. Ms.
Gilles has been Controller and Assistant Secretary since 1998.
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, 1999, 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 one Form 3 was filed approximately
three months late on behalf of Mr. Matjaz Korosec.
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 1999 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, 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; however, these options were
cancelled in 1999. On November 19, 1997, Mr. Rikuta received a Director Option
to purchase 1,575 shares of Common Stock at an exercise price of $10.625 per
share. On September 1, 1998, Messrs. Dworkin, Hahn, Lareau, Lynch, Rikuta and
Vukcevich each received a Director Option to purchase 2,000 shares of Common
Stock at an exercise price of $6.25 per share, and on September 1, 1999, the
same individuals each received a Director Option to purchase 2,000 shares of
Common Stock at an exercise price of $6.5625 per share. Subsequently, Mr. Lynch
returned his September 1, 1999 Director Option to purchase 2,000 shares to the
Option Plan. All of such Director Options granted vest in equal one-third
installments over a three-year period.
36
<PAGE>
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
$100,000 in the fiscal year ended August 31, 1999 (the "Named Executive
Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
SECURITIES
BONUS UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) ($)(1) OPTIONS (#) COMPENSATION ($)(2)
--------------------------- ---- ---------- ------ ----------- -------------------
<S> <C> <C> <C> <C> <C>
Vincent J. Graziano (4) 1999 $230,000 $ 0 0 $5,000
PRESIDENT AND CO-CHIEF EXECUTIVE OFFICER 1998 230,000 55,000 0 4,750
1997 217,107 55,000 0 4,750
Philip M. Lynch 1999 0 0 0 0 (3)
CHAIRMAN OF THE BOARD AND CO-CHIEF 1998 0 0 2,000 0 (3)
EXECUTIVE OFFICER 1997 0 0 2,000 0 (3)
Donald A. Kubik 1999 200,000 0 0 4,667
VICE CHAIRMAN 1998 200,000 55,000 0 5,000
1997 176,082 55,000 0 4,750
Loren M. Ehrmanntraut 1999 117,410 0 0 3,025
CHIEF FINANCIAL OFFICER 1998 117,410 55,000 0 5,000
1997 107,410 55,000 0 5,013
Constance M. Fason 1999 108,000 0 0 2,520
VICE PRESIDENT 1998 108,000 0 0 0
</TABLE>
- ----------------------------
(1) Bonuses paid in 1998 were earned in 1997 and bonuses paid in 1997 were
earned in 1996.
(2) Compensation hereunder consists of contributions to the 401(k) plans of
the Named Executive Officers.
(3) Does not include any commissions payable to Inter Alia Holding Company,
an entity of which Mr. Lynch is an officer and director, under a
certain Manufacturer's Representative Agreement. See "Item 12 Certain
Relationships and Related Transactions."
(4) Retired as President and Co - Chief Executive Officer in September
1999. Mr. Graziano's duties as Co-Chief Executive Officer are now
fulfilled by an Executive Committee the Members of which are Messrs.
Kubik, Ehrmanntraut, Korosec and G. Patrick Lynch.
C. OPTION GRANTS AND EXERCISES.
The following tables provide information for the year ended August 31,
1999 as to individual grants of options to purchase shares of the Common Stock,
exercises of options and the potential realizable value of the options held by
the Named Executive Officers at August 31, 1999.
37
<PAGE>
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 1999
PERCENT OF TOTAL OPTIONS
GRANTED TO EMPLOYEES EXERCISE OR BASE
NAME OPTIONS GRANTED (1) IN FISCAL YEAR (2) PRICE ($/SHARE) EXPIRATION DATE
---- ------------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Vincent J. Graziano 10,000 29% $6.25 11/19/03
Donald A. Kubik 10,000 29% 6.25 11/19/03
Loren M. Ehrmanntraut 10,000 29% 6.25 11/19/03
Constance M. Fason 5,000 13% 6.25 11/19/03
Philip M. Lynch 2,000 0% 6.25 11/19/03
</TABLE>
(1) These options were granted under the Plan. The options vest in three
equal installments on the first, second and third anniversary of the
date of grant. To the extent not already exercisable, options granted
under the Plan become immediately exercisable in full upon certain
"changes in control" (as defined in the Plan) of the Company.
(2) Mr. Lynch is not an employee of the Company.
AGGREGATED OPTION EXERCISES IN FISCAL 1999 AND
FISCAL 1999 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT AUGUST 31, 1999 IN-THE-MONEY OPTIONS
-------------------------- AT AUGUST 31, 1999 (1) ($)
(#) --------------------------
---
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Vincent J. Graziano 38,000 $139,500 0 10,000 $ 0 $1,250
Philip M. Lynch 5,000 11,250 3,001 3,999 1,834 1,166
Donald A. Kubik 5,000 13,000 0 10,000 0 1,250
Loren M. Ehrmanntraut 32,500 96,875 0 10,000 0 1,250
Constance M. Fason 0 0 0 5,000 0 625
</TABLE>
(1) Value is calculated as the excess of the fair market value of the
Common Stock on August 31, 1999 over the exercise price of the options.
On August 31, 1999, the fair market value of the Common Stock was
$6.375 per share.
38
<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 19, 1999, 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 (2)
Inter Alia Holding Company 911,668 (3) 23.6%
Sidney Dworkin 55,167 (4) 1.4
Elsie F. Gilles 3,200 *
Vincent J. Graziano 62,532 (5) 1.6
Gerhard Hahn 7,337 *
Dr. Donald A. Kubik 106,673 (6) 2.8
Richard G. Lareau 27,343 (7) *
Philip M. Lynch 3,667 (8) *
Haruhiko Rikuta 17,717 (9) *
Dr. Milan R. Vukcevich 4,597 (10) *
Loren M. Ehrmanntraut 50,333 (11) 1.3
G. Patrick Lynch 1,700 (12) *
Matjaz Korosec 0 *
All directors and executive officers
as a group (13 persons) 1,251,934 (13) 32.4
- --------------------
* 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 3,867,992 shares of Common Stock outstanding as of November
19, 1999.
(3) Includes 911,668 shares held of record by Inter Alia Holding Company, a
financial and management consulting firm of which Mr. Philip M. Lynch,
the Chairman of the Board of Directors and the Co-Chief Executive
Officer of the Company, and Mr. G. Patrick Lynch, Vice President of
Strategic Planning, Secretary and Member of the Executive Committee are
officers and directors.
(4) Does not include 21,015 shares held by Sidelmar, a partnership in which
Mr. Dworkin, a director of the Company, is a general partner. Includes
4,667 shares of Common Stock, which may be acquired within 60 days
pursuant to the exercise of options.
39
<PAGE>
(5) Includes 3,333 shares of Common Stock, which may be acquired within 60
days pursuant to the exercise of options.
(6) Includes 3,333 shares of Common Stock, which may be acquired within 60
days pursuant to the exercise of options.
(7) Includes 4,667 shares of Common Stock, which may be acquired within 60
days pursuant to the exercise of options.
(8) Does not include 911,668 shares held of record or beneficially owned by
Inter Alia Holding Company, of which Mr. Philip M. Lynch is an officer
and director. Includes 3,667 shares of Common Stock, which may be
acquired within 60 days pursuant to the exercise of options.
(9) Includes 1,717 shares of Common Stock, which may be acquired within 60
days pursuant to the exercise of options.
(10) Includes 1,333 shares of Common Stock, which may be acquired within 60
days pursuant to the exercise of options.
(11) Includes 3,333 shares of Common Stock, which may be acquired within 60
days pursuant to the exercise of options.
(12) Does not include 911,688 shares held of record or beneficially owned
by Inter Alia Holding Company, of which Mr. G. Patrick Lynch is an
officer and director.
(13) Includes (i) 911,668 shares held of record by Inter Alia Holding
Company, a financial and management consulting firm of which Mr. Philip
M. Lynch, the Chairman of the Board of Directors and the Co-Chief
Executive Officer of the Company, and Mr. G. Patrick Lynch, Vice
President of Strategic Planning, Secretary and Member of the Executive
Committee are officers and directors, (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 26,050
shares which are held by officers and directors of the Company which
are exercisable within 60 days. (iv) does not include any shares
beneficially owned by Mrs. Constance M. Fason, who resigned effective
November 15, 1999.
40
<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 Holding Company, a financial and management
consulting firm of which Philip M. Lynch, the Chairman of the Board of Directors
of the Company, is an officer and director. Under the Agreement, Inter Alia
Holding Company (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 Holding Company. 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 for
this activity. The Representative has not effected any sales within the United
States. The Representative has developed sales outside the United States, which
resulted in commissions of approximately $45,484, $51,754, and $42,582 for the
fiscal years ended August 31, 1999, 1998 and 1997, 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 Holding Company purchased 119,083 shares
of the Common Stock and paid therefore 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 $119,335, was $244,710 at August 31, 1999.
The Company paid reimbursement for travel and related Company expenses
of $419,500, $458,000 and $382,000 for the year ended August 31, 1999, 1998 and
1997, respectively, to Inter Alia Holding Company of which the Company's
Co-Chief Executive Officer and Chairman of the Board is and officer and
director. Mr. G. Patrick Lynch, Vice President of Strategic Planning, Secretary
and Member of the Executive Committee of the Company is also an officer and
director of Inter Alia Holding Company.
Mr. 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.
Mr. Vincent Graziano, who has retired as President and Co-Chief
Executive Officer of the Company, but also remains a director of the Company,
has agreed to render services to the Company on a half time/half salary basis
from December 1, 1999 to December 31, 2000. The Company anticipates paying Mr.
Graziano approximately $147,000 in exchange for services rendered during the
fiscal year ending August 31, 2000.
41
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Reference is made to the Exhibit Index hereinafter contained, at page
44 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. Matjaz Korosec, 6680 N. Highway 49, Lino Lakes, Minnesota 55014;
Attn: Stockholder Information.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Annual Report on
Form 10-KSB pursuant to Item 13(a):
A. Form of Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended August 31, 1993).
B. Form of Non-Qualified Stock Option Agreement (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended August 31, 1993).
C. 1994 Stock Incentive Plan (incorporated by reference to
Exhibit 10.3 to the Company's Annual Report on Form 10-KSB for
the year ended August 31, 1993).
(b) REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of fiscal 1999.
42
<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 19, 1999 By: /s/ Philip M. Lynch
-----------------------------------
Philip M. Lynch
Co-Chief Executive Officer
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 19, 1999 in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE
- ---- -----
<S> <C>
/s/ Philip M. Lynch Co-Chief Executive Officer and Chairman of the Board of
Philip M. Lynch Directors (principal executive officer)
/s/ G. Patrick Lynch Vice President of Strategic Planning, Secretary and
G. Patrick Lynch Member of Executive Committee Serving as Co-Chief
Executive Officer (principal executive officer)
/s/ Matjaz Korosec Vice President of Financial Planning, Treasurer and
Matjaz Korosec Member of Executive Committee Serving as Co-Chief
Executive Officer (principal executive officer)
/s/ Donald A. Kubik, Ph.D. Vice Chairman and Member of Executive Committee Serving
Donald A. Kubik, Ph.D. as Co-Chief Executive Officer (principal executive
officer); Director
/s/ Loren M. Ehrmanntraut Chief Financial Officer (principal financial officer and
Loren M. Ehrmanntraut principal accounting officer)
/s/ Sidney Dworkin Director
Sidney Dworkin
/s/ Gerhard Hahn Director
Gerhard Hahn
/s/ Richard G. Lareau Director
Richard G. Lareau
/s/ Milan R. Vukcevich, Ph.D. Director
Milan R. Vukcevich, Ph.D.
/s/ Loren M. Ehrmanntraut Directors
Loren M. Ehrmanntraut, as
attorney-in-fact for Vincent
J. Graziano and Haruhiko Rikuta
</TABLE>
43
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR THE YEAR ENDED AUGUST 31, 1999
<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.
24.1 Power of Attorney Filed herewith electronically.
24.2 Power of Attorney Filed herewith electronically.
27.1 Financial Data Schedule Filed herewith electronically.
</TABLE>
44
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State or Other
Jurisdiction of Names Under Which
Incorporation or Subsidiary Does
Name of Subsidiary Organization Ownership Interest Business
------------------ ------------ ------------------ --------
<S> <C> <C> <C>
Northern Instruments Corporation, LLC Ohio 100% Same
</TABLE>
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, 1999, appearing in the Annual Report on Form 10-KSB of
Northern Technologies International Corporation for the fiscal year ended August
31, 1999.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
November 19, 1999
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of
Northern Technologies International Corporation, does hereby make, nominate and
appoint Loren M. Ehrmanntraut to be my attorney-in-fact, with full power and
authority to sign his name to the Annual Report on Form 10-KSB of Northern
Technologies International Corporation for the fiscal year ended August 31,
1999, and all amendments thereto, provided that the Annual Report and any
amendments thereto, in final form, be approved by said attorney-in-fact; and his
name, when thus signed, shall have the same force and effect as though I had
manually signed said document.
IN WITNESS WHEREOF, I have hereunto affixed by signature this 1st day
of November 1999.
/s/ Vincent J. Graziano
-----------------------
Vincent J. Graziano
EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of
Northern Technologies International Corporation, does hereby make, nominate and
appoint Loren M. Ehrmanntraut to be my attorney-in-fact, with full power and
authority to sign his name to the Annual Report on Form 10-KSB of Northern
Technologies International Corporation for the fiscal year ended August 31,
1999, and all amendments thereto, provided that the Annual Report and any
amendments thereto, in final form, be approved by said attorney-in-fact; and his
name, when thus signed, shall have the same force and effect as though I had
manually signed said document.
IN WITNESS WHEREOF, I have hereunto affixed by signature this 1st day
of November, 1999.
/s/ Haruhiko Rikuta
-------------------
Haruhiko Rikuta
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> AUG-31-1999
<CASH> 2,750,209
<SECURITIES> 0
<RECEIVABLES> 1,731,536
<ALLOWANCES> 27,000
<INVENTORY> 1,013,525
<CURRENT-ASSETS> 6,148,831
<PP&E> 2,311,006
<DEPRECIATION> 1,195,777
<TOTAL-ASSETS> 11,461,598
<CURRENT-LIABILITIES> 677,308
<BONDS> 0
0
0
<COMMON> 77,302
<OTHER-SE> 10,646,988
<TOTAL-LIABILITY-AND-EQUITY> 11,461,598
<SALES> 9,870,531
<TOTAL-REVENUES> 9,870,531
<CGS> 4,726,928
<TOTAL-COSTS> 4,726,928
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,608,185
<INCOME-TAX> 1,070,000
<INCOME-CONTINUING> 2,538,185
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,538,185
<EPS-BASIC> 0.65
<EPS-DILUTED> 0.64
</TABLE>
