================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
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, 2000 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. [X]
The Registrant's revenues for the fiscal year ended August 31, 2000 were
$11,032,199.
As of November 17, 2000, 3,794,284 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 $17,669,313.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
================================================================================
<PAGE>
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 were 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 Company established a wholly-owned subsidiary NTI Facilities, Inc. on
January 1, 2000. The operating results and assets of NIC and NTI Facilities,
Inc. 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 corrosion inhibiting industrial packaging products
and systems, marketed under the name ZERUST(R) ("ZERUST"), are utilized in
protective packaging serving a wide variety of companies in industries such as
transportation, fossil fuel power generation, electronics, on-and off-road
automotive equipment, machinery for agriculture and metal processing. The ZERUST
product line accounted for approximately 97% of the Company's sales during its
fiscal year ended August 31, 2000.
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
other devices, which utilize microwave technology to measure moisture and the
tempo of manufacturing process in metallurgical facilities.
2
<PAGE>
INTERNATIONAL 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
distribution of materials science based industrial packaging products based upon
the Company's technology. Both the Company and the Company's corporate joint
venture in Germany, Excor Korrosionsschutz - Technologien und Produkte GmbH
("Excor"), through Excor's wholly owned subsidiary Excor Korrosionsforschung
GmbH, manufacture 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 international
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 international joint venture partners are knowledgeable in
the applicable environmental, labor, tax and other requisite regulations and
laws of the respective foreign countries in which they operate, as well as the
local customs and business practices, and have a vested interest in making each
joint venture a success.
The Company participates in various corporate joint ventures in
countries outside the United States and in similar non-contractual arrangements
in various other countries. The international joint ventures provide for the
manufacturing, marketing, and distribution of materials science based industrial
packaging products. The Company also has a 50% ownership interest in NTI ASEAN,
LLC, for its joint venture investments in the ASEAN region, which does not
encompass Japan or South Korea. Taiyo Petroleum Gas Co. Ltd., an existing joint
venture partner, owns the remaining 50% ownership interest in NTI ASEAN, LLC
subject to final capitalization of NTI ASEAN, LLC. The Company has an ownership
interest either directly or indirectly in the following joint ventures:
Date of Original
Country Investment
------- ----------
Japan 1987
France 1990
Taiwan* 1990
Germany 1991
Singapore* 1991
Sweden 1991
Brazil 1993
Austria 1994
Russia 1994
South Korea 1994
Finland 1995
Italy 1996
United Kingdom 1997
Czech Republic 1997
Poland 1998
Thailand* 1998
China* 2000
India 2000
Malaysia* 2000
*INDIRECT OWNERSHIP INTEREST THROUGH NTI ASEAN, LLC
3
<PAGE>
The Company had invested $100,000 in 1998 to fund its interest in a
joint venture in Indonesia. During the fiscal year ended August 31, 2000, the
Company withdrew from this joint venture, receiving back its $100,000 investment
and interest thereon. The Company currently has no joint venture interests in
Indonesia.
In addition to the Company's investments in the international 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 international 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 each international joint ventures. To protect against such an
occurrence, the Company maintains liability insurance specifically applicable to
its ownership positions in the international joint venture arrangements in
excess of any insurance the joint ventures may maintain.
PRODUCTS
The Company operates in two businesses: materials science based
industrial packaging products and systems and electronic sensing instruments.
Materials science based industrial packaging products and systems accounted for
approximately 97% of the Company's sales in fiscal year 2000.
MATERIALS SCIENCE BASED INDUSTRIAL PACKAGING PRODUCTS AND SYSTEMS.
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 microscopy shows
that the VCI-rich atmosphere causes VCI molecules to condense in a microscopic
layer on all surfaces they reach. The corrosion inhibiting layer is maintained
so long as the metal product to be protected 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.
4
<PAGE>
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 3% of the Company's sales in fiscal year
2000. The Company's electronic sensing instruments include oil quality
analyzers, fiber monitors and testers, and other instruments used primarily 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, under a Trade
Secrecy Agreement.
The Company is ISO 9001 certified with respect to the manufacturing of
its materials science based industrial packaging products. 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 joint ventures and
similar arrangements with foreign partners (either directly or through NTI
ASEAN, LLC). 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.
5
<PAGE>
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
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
One customer accounted for approximately 14% and 16% of net sales for
the fiscal years ended August 31, 2000 and 1998, respectively. No single
customer accounted for more than 10% of net sales for the fiscal year ended
August 31, 1999.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are directed at the
improvement of existing products, the development of new products and quality
assurance through improved testing of the Company's products. The Company's
research and development expenditures, including engineering and technical
support, were $587,434, $578,231, and $487,456 in fiscal years 2000, 1999 and
1998, respectively. In 1997, the Company's joint venture in Germany, Excor,
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 internal
research and development activities are conducted at its Minnesota headquarters,
in Beachwood, Ohio, in Dresden, Germany; and at various international locations
under the direction of internationally known scientists and research institutes
under exclusive contract to the Company with respect to the subject of their
respective research efforts. The conduct of the research and development
activities outside Minnesota and Germany, like the results of the Company's
research and development efforts generally, invariably engenders 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 agreements. The Company currently owns one United States
patent, which expired 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.
6
<PAGE>
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.
BACKLOG
The Company did not have a significant order backlog as of August 31,
2000. 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, 2000, the Company had 31 full-time direct employees in
the United States, consisting of six engaged in administration, ten in sales and
marketing, four in research and development, ten in operations and one person
responsible for international coordination. 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.
7
<PAGE>
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.
A subsidiary of the Company, NTI Facilities, Inc., acquired a one-third
ownership of Omni - Northern Ltd., an Ohio limited liability company, in
contemplation of entering into a lease (as described below) for approximately
50% of the net rentable space in the building itself. Omni - Northern Ltd. owns
and operates a rental property located at 23205 Mercantile Road, Beachwood,
Ohio, comprising approximately 1.989 acres of land and a building of
approximately 33,877 square feet, having an approximate value of $2,205,000
based upon the cash - to mortgage acquisition price of the property paid in
fiscal year 2000. The Company has guaranteed up to $339,235 of the Omni -
Northern Ltd.'s $2,035,000 mortgage obligation with National City Bank,
Cleveland, Ohio. NTI Facilities, Inc. has entered into a 15 year lease agreement
for approximately 16,826 square feet of office, manufacturing, laboratory and
warehouse space requiring monthly payments of $13,194 (approximately $9.41 per
square foot), which can be adjusted annually according to the annual consumer
price index through November 2014. By its ownership in Omni - Northern Ltd., NTI
Facilities Inc. is entitled to one third of the operating results of
Omni - Northern Ltd. The building is now fully leased.
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.
8
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
Effective September 10, 1993, the Company's Common Stock commenced
trading on, and it continues to trade on, the American Stock Exchange under the
symbol NTI.
COMMON STOCK
------------
HIGH LOW
---- ---
2000:
Fourth fiscal quarter............. $ 8 7/8 $ 5 3/4
Third fiscal quarter.............. 8 1/8 6 3/8
Second fiscal quarter............. 9 5/8 6 1/8
First fiscal quarter.............. 7 9/16 5 1/4
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
The Company declared Common Stock cash dividends of $.15 per share to
shareholders of record on December 4, 1998; and $.16 per share to shareholders
of record on December 3, 1999; and $.17 per share to shareholders of record on
December 1, 2000. The Company's Board of Directors will continue to consider the
payment of dividends annually, based on the Company's net income and operating
cash requirements.
As of August 31, 2000, the Company's Common Stock was held by
approximately 460 shareholders of record.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
NET SALES AND COST OF SALES. The Company had net sales originating in
the United States of $11,032,199 in fiscal year 2000; an increase of $1,161,668
or 11.8% from net sales of $9,870,531 in fiscal year 1999. The increase in net
sales was due primarily to an increase in the volume of materials science based
industrial packaging products sold to new and existing customers in North
America. One existing customer accounted for 14% of sales in fiscal year 2000
and 7% of sales in fiscal year 1999.
9
<PAGE>
The cost of sales increased as a percentage of sales to 50.4% in fiscal
year 2000 from 47.9% in fiscal year 1999. The variation in the cost of sales
percentage includes an obsolete inventory charge of $90,000 and the impact of
the increase in the market price for certain raw materials and labor cost. The
Company does not anticipate a further ongoing increase in cost of sales in
fiscal year 2001 as a percentage of sales.
SELLING EXPENSES. The Company's selling expenses decreased by $182,242
or 12.2% to $1,308,615 in fiscal year 2000 from $1,490,857 in fiscal year 1999.
The decrease in selling expenses in fiscal year 2000 was primarily related to a
decrease in external selling commissions and related expenses, which was
partially offset with an increase in salaries. As a percentage of sales these
costs decreased to 11.9% in fiscal year 2000 from 15.1% in fiscal year 1999 due
to the increased level of net sales and the overall decrease in selling expenses
in fiscal year 2000. The Company anticipates that its selling expenses will
increase in fiscal year 2001 due to planned increases in marketing efforts.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and
administrative expenses increased by $433,055 or 26.0% to $2,097,991 in fiscal
year 2000 from $1,664,936 in fiscal year 1999. The increase in general and
administrative expenses in fiscal year 2000 was primarily due to increases in
various professional fees (e.g. for the filing and defense of U.S. and foreign
patents and trademarks), group insurance and development of the Company's
facilities, including technical equipment and a new laboratorium. As a
percentage of sales general and administrative expenses increased to 19.0% in
fiscal year 2000 from 16.9% in fiscal year 1999. The Company anticipates that
its general and administrative expenses will continue to increase in fiscal year
2001, for the reasons cited.
RESEARCH, ENGINEERING, AND TECHNICAL SUPPORT EXPENSES. The Company's
research, engineering, and technical support expenses increased by $9,203 or
1.6% to $587,434 in fiscal year 2000 from $578,231 in fiscal year 1999. As a
result of the Company's international research and development activities
certain proprietary rights to new technology have been added to the Company. As
a percentage of sales, research, engineering and technical support expenses
decreased to 5.3% in fiscal year 2000 from 5.9% in fiscal year 1999 due to the
increased level of net sales. The Company anticipates that in fiscal year 2001
research, engineering and technical support expenses will surpass expenses
incurred in fiscal year 2000.
OPERATIONS OF INTERNATIONAL JOINT VENTURES
CORPORATE JOINT VENTURES AND EUROPEAN HOLDING COMPANY. The Company
continues its business program of establishing corporate joint venture
arrangements in international markets directly or indirectly through NTI ASEAN,
LLC ("NTI ASEAN"). 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 and/or an existing corporate joint venture manufactures and
supplies patented and/or proprietary ingredients, which make the finished
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.
10
<PAGE>
Corporate joint venture sales were as follows:
2000 1999
Direct ownership interest $23,913,708 $22,022,767
Indirect ownership interest (NTI ASEAN) 1,288,396
----------- -----------
Total $25,202,104 $22,022,767
=========== ===========
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
$2,749,578 and $2,459,697 for fiscal years 2000 and 1999, 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.
The Company incurred direct expenses related to corporate joint
ventures and the European holding company of $1,312,213 and $741,703 in fiscal
years 2000 and 1999, respectively. These expenses include: technical and
marketing services to existing joint ventures, legal fees regarding the
establishment of new joint ventures, registration and promotion of worldwide
trade marks and legal fees incurred in the filing of letters patent for new
technologies to which the Company acquired certain rights. 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, to the development of new corporate
joint ventures and to the development of new technologies and their concomitant
intellectual property rights.
The Company and NTI ASEAN anticipate that in the future they will enter
into joint ventures in other foreign countries and in the ASEAN region.
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 $854,032 and $368,711 for fiscal years 2000 and 1999,
respectively. Net income of the corporate joint ventures in fiscal year 2000 of
$1,810,885 represents a 74.3% increase from fiscal year 1999.
The Company also has an investment in a European holding company, which
is currently inactive.
INTEREST INCOME
INTEREST INCOME. The Company's interest income increased to $238,858 in
fiscal year 2000 from $111,901 in fiscal year 1999 due partially to the interest
received upon a full payment of a note from purchase of common stock.
INCOME BEFORE INCOME TAXES
INCOME BEFORE INCOME TAXES. The comparison of the income before income
taxes of the Company reveals an increase of $397,620 to $4,005,805 in fiscal
year 2000, over the income before income taxes of $3,608,185 in fiscal year
1999, a net gain of 11.0% year to year.
11
<PAGE>
INCOME TAXES
INCOME TAXES. The Company's effective income tax rates were 34.3% and
29.7% for fiscal years 2000 and 1999, respectively. The effective income tax
rate for the Company in fiscal year 2000 was lower than the statutory rate,
since the Company's equity in income of its international corporate joint
ventures and in the European holding company are recognized based on after tax
earnings of these entities, resulting in foreign tax credits. Thus, to the
extent the corporate joint ventures' and the foreign company's undistributed
earnings were distributed to the Company during fiscal years 2000 and 1999, such
did not result in material additional income tax liability after the application
of foreign tax credits. The increase in the Company's effective income tax rate
in fiscal year 2000 is primarily due to the utilization of a net operating loss
carry forward in fiscal year 1999, which was exhausted in that period.
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 were $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 which was only partially 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.
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's changing logistic firms during fiscal year 1999.
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.
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 reflecting the decreased level of net sales together
with 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, general and administrative expenses
increased to 16.9% in fiscal year 1999 from 14.4% in fiscal year 1998 reflecting
the decreased level of net sales and the overall increase in general and
administrative expenses in fiscal year 1999.
12
<PAGE>
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 with and through independent
contractors under the direct supervision of the Company. The conduct of the
Company's research and development activities, both internationally and
domestically, invariability engender certain proprietary rights to the results
thereof to the Company. As a percentage of sales research, engineering and
technical support expenses costs increased to 5.9% in fiscal year 1999 from 4.8%
in fiscal year 1998 due to the increased research, engineering, and technical
support activities in fiscal year 1999, as against the decreased level of net
sales in that period.
OPERATIONS OF INTERNATIONAL JOINT VENTURES
CORPORATE JOINT VENTURES AND EUROPEAN HOLDING COMPANY. The Company's
investments in international 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 international corporate joint ventures and
the European holding company was primarily due to a write down of the U.S.
dollar value of the Company's investment in its Brazilian joint venture
accompanied by the erosion in value of the Brazilian Real. Net income of the
Company's international corporate joint ventures in fiscal year 1999 in the
amount of $1,038,785 represents a 14.6% decrease from the net income of the
Company's international joint ventures in fiscal year 1998, due partially to
higher operating expenses in those companies and in some measure to currency
fluctuations. The Company also receives fees for technical and other support to
its international corporate joint ventures, based on the revenues of each
individual corporate joint venture. 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 support and other services to
international corporate joint ventures was primarily due to the greater efficacy
of the Company's services to its corporate joint ventures, which provided for
increased sales volume at certain of the Company's international corporate joint
ventures located in the Pacific Rim and Europe. Sales of the international
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 its support of the
international 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 cost incurred to provide technical and marketing
services to existing joint ventures, legal fees incurred for the development of
new joint ventures, and travel and meetings expenses; but do not include an
allocation of research and development expenses or of selling expenses incurred
by the Company, including, for example, for participation in the international
trade fairs and symposia.
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 as compared to fiscal year 1998
was due to the utilization of a net operating loss carry forward that became
available in fiscal year 1999. The effective income tax rate for the Company's
fiscal year 1999 was lower than the statutory rate, since the equity in income
of its international corporate joint ventures and the European holding company
are recognized based on after tax earnings of these entities. Thus, 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, such
did not result in material additional income tax liability after the application
of foreign tax credits.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2000, the Company's working capital was $6,078,694
including $3,840,057 in cash and cash equivalents, with a current ratio of
7.3:1. 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. To date, 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 international joint ventures. Cash flow
from operations totaled $2,620,833, $1,983,425, and $2,048,207 for the fiscal
years 2000, 1999, and 1998, respectively. The net cash flow from operations for
fiscal years 2000, 1999, and 1998 resulted principally from net income and
international joint venture dividends offset by a non-cash component of net
income identified as equity in income of international corporate joint ventures
and European holding company.
Net cash used in investing activities totaled $429,420, $641,317 and
$91,682 for fiscal years 2000, 1999, and 1998, respectively. The primary uses of
cash in fiscal year 2000 were investments in international corporate joint
ventures, and additions to property, and an increase in other assets. In fiscal
year 2000, the Company's expenditures of cash for investing activities were
offset by payment of the note receivable from purchase of common stock. The
primary use of cash in fiscal years 1999 and 1998 were investments in corporate
joint ventures and additions to property. In fiscal years 1999 and 1998 the
Company's expenditures of cash for investing activities were offset by payment
of an international corporate joint venture note and proceeds from the sale of
trading investments, respectively.
Net cash used in financing activities was $1,101,565, $792,389, and
$3,701,602 for fiscal years 2000, 1999, and 1998, 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 and its subsidiaries have no long-term debt and no material
lease commitments as of August 31, 1999, except for an office, manufacturing,
laboratory and warehouse lease requiring monthly payments of $13,194, which can
be adjusted annually according to the annual consumer price index through
November 2014.
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.
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 were
scheduled to remain legal tender in the participating countries from January 1,
1999 to 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, its international corporate joint ventures and the
European holding company have been evaluating the potential impact the Euro
Conversion to the Euro Currency may have on their results of operations,
liquidity or financial condition. The Company has determined that expected costs
for compliance will not be material to its results of operations, liquidity,
financial condition or capital expenditures. However, significant noncompliance
by the Company's international 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.
14
<PAGE>
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." This statement 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. To date, the Company believes the
adoption of SFAS No. 133 will not have a significant impact on its financial
position or the results of its operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulleting (SAB) No. 101 that provides the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
The Company is required to modify its revenue recognition policy to comply with
SAB No. 101, as amended, no later than August 31, 2001. Management has not yet
determined the effects SAB No. 101 will have on the Company's financial position
or the results of the operations.
15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following items are included herein:
Financial Statements: Page
-------------------- ----
Independent Auditors' Report..................................... 17
Consolidated Balance Sheets as of August 31, 2000 and 1999....... 18
Consolidated Statements of Income for the years ended August 31,
2000, 1999 and 1998............................................. 19
Consolidated Statements of Stockholders' Equity for the years
ended August 31, 2000, 1999 and 1998............................ 20
Consolidated Statements of Cash Flows for the years ended
August 31, 2000, 1999 and 1998.................................. 21
Notes to Consolidated Financial Statements....................... 22-32
16
<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 Subsidiaries (the Company) as of
August 31, 2000 and 1999 and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended August 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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 Subsidiaries at August 31, 2000 and 1999 and the results of
their operations and their cash flows for each of the three years in the period
ended August 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
November 17, 2000
17
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,840,057 $ 2,750,209
Receivables:
Trade, less allowance for doubtful accounts of $30,000 and $27,000, respectively 1,390,264 1,704,536
International corporate joint ventures 608,136 473,553
Inventories 929,661 1,013,525
Prepaid expenses and other 51,066 37,008
Deferred income taxes 220,000 170,000
------------ ------------
Total current assets 7,039,184 6,148,831
PROPERTY AND EQUIPMENT, net 1,219,189 1,115,229
OTHER ASSETS:
Investments in international corporate joint ventures 3,602,692 3,424,623
Investment in European holding company 243,598 247,253
Deferred income taxes 310,000 210,000
Other 703,631 315,662
------------ ------------
4,859,921 4,197,538
------------ ------------
$ 13,118,294 $ 11,461,598
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 221,236 $ 149,328
Income taxes 313,806 307,188
Accrued liabilities:
Payroll and related benefits 224,445 54,182
Other 201,003 166,610
------------ ------------
Total current liabilities 960,490 677,308
DEFERRED GROSS PROFIT 50,000 60,000
COMMITMENTS AND 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 3,803,118 and 3,865,103 shares, respectively 76,062 77,302
Additional paid-in capital 4,532,550 4,613,806
Retained earnings 8,093,286 6,481,550
Accumulated other comprehensive loss (Note 1) (594,094) (318,561)
------------ ------------
12,107,804 10,854,097
Notes and related interest receivable from purchase of common stock -- (129,807)
------------ ------------
Total stockholders' equity 12,107,804 10,724,290
------------ ------------
$ 13,118,294 $ 11,461,598
============ ============
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 31, 2000, 1999, AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
SALES $ 11,032,199 $ 9,870,531 $ 10,077,494
COST OF GOODS SOLD 5,562,609 4,726,928 4,947,816
------------ ------------ ------------
GROSS PROFIT 5,469,590 5,143,603 5,129,678
OPERATING EXPENSES:
Selling 1,308,615 1,490,857 1,260,608
General and administrative 2,097,991 1,664,936 1,446,781
Research, engineering, and technical support 587,434 578,231 487,456
------------ ------------ ------------
3,994,040 3,734,024 3,194,845
------------ ------------ ------------
OPERATING INCOME 1,475,550 1,409,579 1,934,833
INTERNATIONAL CORPORATE JOINT VENTURES AND
EUROPEAN HOLDING COMPANY:
Equity in income of international corporate joint ventures and
European holding company 854,032 368,711 549,875
Fees for technical support and other services provided to international
corporate joint ventures 2,749,578 2,459,697 1,868,938
Expenses incurred in support of international corporate joint ventures (1,312,213) (741,703) (566,051)
------------ ------------ ------------
2,291,397 2,086,705 1,852,762
INTEREST INCOME 238,858 111,901 151,720
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 4,005,805 3,608,185 3,939,315
INCOME TAXES 1,375,000 1,070,000 1,320,000
------------ ------------ ------------
NET INCOME $ 2,630,805 $ 2,538,185 $ 2,619,315
============ ============ ============
NET INCOME PER SHARE:
Basic $ .68 $ .65 $ .64
============ ============ ============
Diluted $ .68 $ .64 $ .63
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES ASSUMED
OUTSTANDING:
Basic 3,857,964 3,915,001 4,084,408
============ ============ ============
Diluted 3,869,075 3,956,977 4,157,721
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTES AND
RELATED
INTEREST
RECEIVABLE
ACCUMULATED FROM TOTAL
COMMON STOCK ADDITIONAL OTHER PURCHASE OF COMMON
------------------------- PAID-IN RETAINED COMPREHENSIVE COMMON STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS LOSS STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
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
Repurchase of common stock (74,874) (1,498) (149,748) (400,137) -- -- (551,383)
Stock options exercised 12,889 258 68,492 -- -- -- 68,750
Payment received on note
receivable -- -- -- -- -- 129,807 129,807
Dividends on common stock -
$.16 per share -- -- -- (618,932) -- -- (618,932)
Comprehensive earnings, 2000:
Foreign currency translation
adjustment -- -- -- -- (275,533) -- (275,533)
Net income -- -- -- 2,630,805 -- -- 2,630,805
-----------
Comprehensive earnings 2000 -- -- -- -- -- -- 2,355,272
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT AUGUST 31, 2000 3,803,118 $ 76,062 $ 4,532,550 $ 8,093,286 $ (594,094) $ -- $12,107,804
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 2000, 1999, AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,630,805 $ 2,538,185 $ 2,619,315
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 198,264 156,540 118,127
Impairment loss -- 50,941 --
Equity in income of international corporate joint ventures
and European holding company (854,032) (368,711) (549,875)
Dividends received from international corporate joint ventures 273,119 88,890 284,461
Deferred income taxes (150,000) (30,000) 20,000
Deferred gross profit (10,000) (60,000) 2,000
Common stock issued for services -- 22,050 --
Changes in assets and liabilities:
Receivables:
Trade receivables 314,272 (662,108) 122,232
International corporate joint ventures (134,583) (121,389) 165,387
Inventories 83,864 (44,005) (127,902)
Prepaid expenses and other (14,058) 81,251 8,937
Accounts payable 71,908 (7,276) (5,873)
Income taxes 6,618 240,772 (310,451)
Accrued liabilities 204,656 98,285 (298,151)
------------ ------------ ------------
Total adjustments (9,972) (554,760) (571,108)
------------ ------------ ------------
Net cash provided by operating activities 2,620,833 1,983,425 2,048,207
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property (302,224) (316,759) (110,809)
Investments in international corporate joint ventures (101,083) (522,661) (199,311)
(Increase) decrease in other assets (155,920) 198,103 218,438
Payment on note receivable from purchase of
common stock 129,807 -- --
------------ ------------ ------------
Net cash used in investing activities (429,420) (641,317) (91,682)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (618,932) (581,104) (621,798)
Repurchase of common stock (551,383) (319,122) (3,146,668)
Issuance of common stock 68,750 107,837 66,864
------------ ------------ ------------
Net cash used in financing activities (1,101,565) (792,389) (3,701,602)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,089,848 549,719 (1,745,077)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 2,750,209 2,200,490 3,945,567
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,840,057 $ 2,750,209 $ 2,200,490
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 2000, 1999, AND 1998
--------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS - Northern Technologies International Corporation
and Subsidiaries (the Company) are engaged in the development,
manufacture, and marketing of proprietary material science based
industrial packaging products and electronic sensing instruments.
CONSOLIDATION - The consolidated financial statements include the
accounts of Northern Technologies International Corporation and its
wholly owned subsidiaries. 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 INTERNATIONAL CORPORATE JOINT VENTURES - Investments in
international corporate joint ventures are accounted for using the
equity method. Intercompany profits on inventories held by the
international corporate joint ventures which were purchased from the
Company have been eliminated based on the Company's ownership percentage
in each international corporate joint venture.
INVESTMENT IN EUROPEAN HOLDING COMPANY - Investment in the 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, 2000, the Company did not consider any of its
assets impaired.
INCOME TAXES - The Company utilizes the liability method of accounting
for income taxes as set forth in Statement of Financial Accounting
Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES. SFAS No. 109
requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities
are computed annually for differences between the financial statement
and tax basis of assets and liabilities that will result in taxable or
deductible amounts in the future, based on enacted tax laws and rates
applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets
and liabilities.
22
<PAGE>
FOREIGN CURRENCY TRANSLATION - The functional currency of the
international 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
international corporate joint ventures is deferred until such products
are sold by the international corporate joint ventures.
RESEARCH AND DEVELOPMENT - Research and development expenditures are
expensed as incurred. Total research and development expenses were
$587,434, $578,231, and $487,456 for the fiscal years ended August 31,
2000, 1999, and 1998, respectively.
FEES FOR TECHNICAL SUPPORT AND OTHER SERVICES PROVIDED TO INTERNATIONAL
CORPORATE JOINT VENTURES - Fees for technical support and other services
to the international 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 during the period. 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 during
the period. For the fiscal years ended August 31, 2000, 1999, and 1998,
the assumed exercise of stock options increased the weighted average
common and common equivalent shares outstanding by 11,111, 41,976, and
73,313 shares, respectively. Options to purchase 15,489, 29,041, and
11,575 shares of common stock as of August 31, 2000, 1999, and 1998,
respectively, were not included in the computations of diluted net
income per share because the options' exercise prices were greater than
the average market price of the Company's common stock during the
respective periods.
23
<PAGE>
USE OF ESTIMATES - The preparation of the financial statements in
conformity with accounting principles generally accepted in the United
States of America (generally accepted accounting principles) requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS - Cash and cash
equivalents, receivables, and current liabilities are carried at amounts
which reasonably approximate their fair value due to their short-term
nature.
NEW ACCOUNTING STANDARDS - In June 1998 the Financial Accounting
Standards Board 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. The
Company will adopt SFAS No. 133 in the first quarter of fiscal year
2001. The Company does not anticipate that the adoption of SFAS No. 133
will have a significant impact on the Company's financial position or
the results of its operations.
In December 1999 the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101 that provides the staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. The Company is required to modify its revenue
recognition policy to comply with SAB No. 101, as amended, no later than
August 31, 2001. Management has not yet determined the effects SAB No.
101 will have on the Company's financial position or the results of its
operations.
2. INVENTORIES
Inventories at August 31 consist of the following:
2000 1999
Production materials $ 267,175 $ 218,701
Work-in-process 23,947 24,753
Finished goods 638,539 770,071
------------- ------------
$ 929,661 $ 1,013,525
============= ============
24
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment at August 31 consist of the following:
2000 1999
Land $ 246,097 $ 246,097
Buildings and improvements 1,180,938 1,100,757
Machinery and equipment 1,168,812 964,152
------------- ------------
2,595,847 2,311,006
Less accumulated depreciation 1,376,658 1,195,777
------------- ------------
$ 1,219,189 $ 1,115,229
============= ============
4. INVESTMENTS IN INTERNATIONAL CORPORATE JOINT VENTURES AND EUROPEAN
HOLDING COMPANY
JOINT VENTURES - The Company participates in various international
corporate joint ventures in countries outside the United States and in
similar noncontractual arrangements in various other countries. The
international corporate joint ventures provide for the manufacturing,
marketing, and distribution of materials science based industrial
packaging products. The Company also has a 50% ownership interest in NTI
ASEAN, LLC for its joint venture investments in the ASEAN region, which
does not encompass Japan or South Korea. An existing joint venture
partner owns the remaining 50% interest in NTI ASEAN, LLC. The Company
has an ownership interest either directly or indirectly in international
corporate joint ventures in the following countries:
Date of Original
Country Investment
------- ----------
Japan 1987
France 1990
Taiwan* 1990
Germany 1991
Singapore* 1991
Sweden 1991
Brazil 1993
Austria 1994
Russia 1994
South Korea 1994
Finland 1995
Italy 1996
United Kingdom 1997
Czech Republic 1997
Poland 1998
Thailand* 1998
China* 2000
India 2000
Malaysia* 2000
*Indirect ownership interest through NTI ASEAN, LLC.
25
<PAGE>
Fees earned from the international corporate joint ventures under
licenses and technical and other support agreements were $2,749,578,
$2,459,697, and $1,868,938 for the fiscal years ended August 31, 2000,
1999, and 1998, respectively.
The Company incurred expenses associated with the performance of its
services to its international corporate joint ventures of $1,312,213,
$741,703, and $566,051 for the fiscal years ended August 31, 2000, 1999,
and 1998, respectively. These expenses were incurred primarily in
conjunction with the performance of the technical services to existing
international corporate joint ventures, travel and legal fees regarding
the development of new joint ventures.
Composite financial information from the audited and unaudited financial
statements of the Company's international joint ventures carried on the
equity basis is summarized as follows:
<TABLE>
<CAPTION>
August 31
-----------------------------
2000 1999
<S> <C> <C> <C>
Current assets $ 10,465,397 $ 11,417,847
Total assets 12,507,607 12,595,710
Current liabilities 4,759,056 5,658,770
Noncurrent liabilities 44,719 52,968
Joint ventures' equity 7,703,832 6,883,972
Northern Technologies International Corporation's
share of international corporate joint ventures' equity 3,602,692 3,424,623
<CAPTION>
Fiscal Years Ended August 31
--------------------------------------------
2000 1999 1998
Sales* $ 23,913,708 $ 22,022,767 $ 19,577,995
Gross profit 12,448,148 11,389,838 9,930,884
Net income 1,810,885 1,038,785 1,216,111
Northern Technologies International
Corporation's share of equity in income
of international corporate joint ventures 857,687 369,325 556,644
</TABLE>
* Excludes sales of NTI ASEAN, LLC's joint ventures
During fiscal year 1999, the Company purchased the local 50% ownership
interests of two international corporate joint ventures the Company did
not previously own for a total of $452,152. The Company has not
consolidated the accounts of the two international corporate joint
ventures in its financial statements due to the Company's intention of
reducing its ownership in fiscal year 2000. The Company sold its
ownership interest over 50% in one of the international corporate joint
ventures in fiscal year 2000. The Company sold a portion of its
ownership interest over 50% in the other international corporate joint
venture in fiscal year 2000 and does not have unilateral control of the
latter international corporate joint venture's operations.
EUROPEAN HOLDING COMPANY - During the fiscal year 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, 2000 and 1999 consisted primarily of cash and cash
equivalents. The Company's share of equity in loss of the European
holding company was $3,655, $614, and $6,769 for the fiscal years ended
August 31, 2000, 1999, and 1998, respectively.
26
<PAGE>
5. STOCKHOLDERS' EQUITY
During fiscal years 2000, 1999, and 1998, the Company acquired and
retired 74,874, 80,989, and 374,765 shares of common stock for $551,383,
$514,122, and $3,146,668, respectively.
During fiscal year 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.
A note receivable of $129,807 (including accrued interest of $4,432)
resulting from the exercise of warrants was presented as a reduction of
stockholders' equity prior to fiscal year 2000. The note receivable had
an interest rate of 11% and was due on demand. The increase in accrued
interest receivable on the outstanding note receivable as of August 31,
1999 had been fully reserved for, due to the uncertainty as to when the
interest would be paid. The note receivable and all interest were paid
in full in fiscal year 2000.
During fiscal years 2000 and 1994 the Company's Board of Directors and
shareholders approved stock option plans (the Plans) providing for the
granting of options to purchase 450,000 shares of common stock in toto.
Under the Plans, incentive stock options and nonqualified stock options
could 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>
2000 1999 1998
---------------------- ---------------------- ----------------------
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 80,796 $ 6.83 124,236 $ 4.24 132,370 $ 3.46
Granted 47,655 6.89 52,000 6.31 11,575 11.81
Exercised (12,889) 5.33 (95,440) 3.17 (19,709) 3.39
Canceled (21,000) 9.02 -- -- -- --
-------- -------- -------- --------
Outstanding at end of year 94,562 $ 6.57 80,796 $ 6.83 124,236 $ 4.24
======== ======== ======== ======== ======== ========
Options exercisable at year-end 19,718 6.07 17,751 $ 6.51 101,909 $ 3.25
======== ======== ======== ======== ======== ========
</TABLE>
27
<PAGE>
The following table summarizes information about stock options
outstanding at August 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Weighted Options Exercisable
Average ------------------------
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
<S> <C> <C> <C> <C> <C> <C>
$5.00 - $7.00 92,987 3.43 $ 6.51 18,668 $ 5.81
$10.63 1,575 2.22 10.63 1,050 10.63
--------- ---------
$5.00 - $10.63 94,562 3.41 $ 6.57 19,718 $ 6.07
========= ======== ======== ========= ========
</TABLE>
If compensation cost for the Company's Plan had been determined based on
the fair value at the grant date for awards in the fiscal 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>
2000 1999 1998
<S> <C> <C> <C>
Net income, as reported $ 2,630,805 $ 2,538,185 $ 2,619,315
Net income, pro forma 2,558,094 2,488,042 2,594,076
Basic net income per common share, as reported $ .68 $ .65 $ .64
Basic net income per common share, pro forma .66 .64 .64
Diluted net income per share, as reported .68 .64 .63
Diluted net income per share, pro forma .66 .63 .62
</TABLE>
The fair value of each option grant is estimated on the grant date using
the Black-Scholes option-pricing model with the following assumptions
and results for the grants:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Dividend yield 2.0% 2.0% 2.0%
Expected volatility 46.6% 48.2% 49.0%
Expected life of option 5 years 5 years 5 years
Average risk-free interest rate 5.79% 4.71% 6.16%
Average fair value of options on grant date $ 2.84 $ 2.57 $ 5.09
</TABLE>
6. SEGMENT INFORMATION
The Company is engaged in the development, manufacture, and marketing of
proprietary materials science based industrial packaging 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.
28
<PAGE>
Sales by geographic location as a percentage of total sales were as
follows:
2000 1999 1998
Sales to unaffiliated customers in the U.S.A. 74% 75% 70%
Sales outside the U.S.A. to:
International corporate joint ventures in
which the Company is a shareholder
directly and indirectly 6 6 10
Unaffiliated customers 20 19 20
------ ------ ------
100% 100% 100%
====== ====== ======
One customer accounted for approximately 14% and 16% of net sales for
the fiscal years ended August 31, 2000 and 1998, respectively. No single
customer accounted for more than 10% of net sales for the fiscal year
ended August 31, 1999.
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 $37,000, $39,000, and
$40,000 for the fiscal years ended August 31, 2000, 1999, and 1998,
respectively.
8. RELATED-PARTY TRANSACTIONS
The Company paid reimbursement for travel and related expenses of
$378,000, $419,500, and $458,000 for the fiscal years ended August 31,
2000, 1999, and 1998, respectively, to a financial and management
consulting firm of which the Company's Co-Chief Executive Officer and
Chairman of the Board and the Company's other Co-Chief Officer and
President are officers and directors.
9. INCOME TAXES
The provisions for income taxes for the fiscal years ended August 31
consisted of the following:
2000 1999 1998
Current:
Federal $ 1,395,000 $ 990,000 $ 1,180,000
State 130,000 110,000 120,000
----------- ----------- -----------
1,525,000 1,100,000 1,300,000
Deferred:
Federal (140,000) (5,000) 18,000
State (10,000) (25,000) 2,000
----------- ----------- -----------
(150,000) (30,000) 20,000
----------- ----------- -----------
$ 1,375,000 $ 1,070,000 $ 1,320,000
=========== =========== ===========
29
<PAGE>
Reconciliations of the expected federal income tax at the statutory rate
with the provisions for income taxes for the the three fiscal years
ended August 31 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Tax computed at statutory rates $ 1,400,000 $ 1,263,000 $ 1,379,000
State income tax, net of federal benefit 100,000 71,000 80,000
Equity in income of international joint ventures (290,000) (125,000) (187,000)
Change in valuation allowance -- (162,000) --
Other 165,000 23,000 48,000
----------- ----------- -----------
$ 1,375,000 $ 1,070,000 $ 1,320,000
=========== =========== ===========
</TABLE>
The Company has not recognized a deferred tax liability relating to
investments in international corporate joint ventures and European
holding company that are essentially permanent in duration of $1,020,000
and $840,000 at August 31, 2000 and 1999, respectively. If some or all
of the undistributed earnings of the international 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 calculated and provided at that time.
The tax effect of the temporary differences and tax carryforwards
comprising the net deferred taxes shown on the balance sheets at August
31 are as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Current:
Allowance for doubtful accounts $ 10,000 $ 10,000
Inventory costs 35,000 20,000
Prepaid expenses and other 90,000 96,000
Accrued expenses 65,000 22,000
Deferred gross profit 20,000 22,000
---------- ----------
Total current $ 220,000 $ 170,000
========== ==========
Noncurrent:
Excess of book over tax depreciation $ 80,000 $ 76,000
Expenses incurred to support international joint ventures 230,000 91,000
Interest receivable relating to notes -- 43,000
---------- ----------
Total noncurrent $ 310,000 $ 210,000
========== ==========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
A subsidiary of the Company acquired a one-third ownership in an Ohio
limited liability company (the LLC). The LLC owns and operates a rental
property located in Beachwood, Ohio, acquired at a cost of $2,205,000 in
fiscal year 2000. The Company has guaranteed up to $339,235 of the LLC's
$2,035,000 mortgage obligation. The Company's subsidiary has entered
into a 15 year lease agreement for 16,826 square feet of office,
manufacturing, laboratory and warehouse space requiring monthly payments
of $13,194 (approximately $9.41 per square foot), which can be adjusted
annually according to the annual consumer price index through November
2014. Total rent expense under the lease was approximately $110,000 for
the year ended August 31, 2000. By its ownership in LLC the Company's
subsidiary is entitled to one third of the LLC's operating results. The
rental property is now fully leased.
30
<PAGE>
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 three fiscal
years ended August 31 consist of:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Cash paid during the year for income taxes $ 1,361,000 $ 733,047 $ 1,610,451
Increase (decrease) in the Company's investment in
international corporate joint ventures and accumulated
other comprehensive income (loss) due to changes in
exchange rates (275,533) 74,960 (140,930)
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 17, 2000, the Company's Board of Directors declared a $.17
per share dividend on all outstanding shares of the Company's common
stock to be distributed on December 15, 2000 to holders of record on
December 1, 2000.
31
<PAGE>
13. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
November 30 February 29 May 31 August 31
<S> <C> <C> <C> <C>
Fiscal year 2000:
Net sales $2,831,864 $2,693,682 $2,812,990 $2,693,663
Gross profit 1,483,344 1,345,997 1,467,029 1,173,220
Income before income taxes 963,791 694,199 1,122,746 1,225,069
Income taxes 290,000 220,000 360,000 505,000
Net income 673,791 474,199 762,746 720,069
Net income per share:
Basic $ .17 $ .12 $ .20 $ 0.19
Diluted .17 .12 .20 0.19
Weighted average common shares
assumed outstanding:
Basic 3,867,379 3,870,127 3,865,524 3,829,061
Diluted 3,870,919 3,890,481 3,874,605 3,841,818
<CAPTION>
Quarter Ended
-----------------------------------------------------
November 30 February 28 May 31 August 31
Fiscal year 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
assumed 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
</TABLE>
During the fourth quarters of fiscal years 2000 and 1999, 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 increased cost of sales by approximately
$300,000 in the fourth quarter of fiscal year 2000 and decreased cost of
sales by approximately $50,000 in the fourth quarter of fiscal year
1999. 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 17,
2000, which has been furnished to the Company by the directors named below.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
---- --- -------------------- --------------
<S> <C> <C> <C>
Vincent J. Graziano 67 Consultant 1979
Dr. Donald A. Kubik 60 Vice Chairman and Chief Technology Officer of 1995
the Company
Richard G. Lareau 72 Partner of Oppenheimer Wolff & Donnelly LLP 1980
Philip M. Lynch 64 Co-Chief Executive Officer and Chairman of the 1979
Board of the Company and Executive Vice
President of Inter Alia Holding Company
Haruhiko Rikuta 35 Corporate Officer of Taiyonic Limited and 1997
President of NTI ASEAN, LLC
Prof. Milan R. Vukcevich 63 Chief Scientist Research and Development of 1995
Bicron Saint-Gobain Industrial Ceramics
</TABLE>
Mr. Sidney Dworkin, having been a Company director since 1979, died of
complications from cancer on October 17, 2000. Mr. Dworkin was wise, upbeat,
honest, straightforward and generous. The Company was honored by his
directorship service and will greatly miss his advice and counsel.
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, at will, as a 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. Gerhard Hahn has been employed as General Manager by Knuppel KG, a
German packaging firm, since 1966. Mr. Hahn has also been employed by Excor
Korrosionsschutz-Technologien and Produkte GmbH (the Company's German joint
venture) since 1991. Mr. Hahn, due to extensive work demands resigned from his
directorship with the Company effective February 18, 2000. Mr. Hahn's
contributions as a member of the Board of Directors of the Company, particularly
regarding Europe, will be greatly missed.
33
<PAGE>
Dr. Kubik has been employed by the Company since 1978, was named Vice
Chairman in September 1999. Dr Kubik served as 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 is
a member of the Executive Committee, which served as Co-Chief Executive Officer
of the Company from September 1999 to May 2000. 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
Nash Finch Company, a public company, and as a trustee of Mesabi Trust.
Mr. Lynch has been Executive Vice President of Inter Alia Holding
Company, a financial and management consulting firm, 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.
Prof. Vukcevich is employed as Chief Scientist Research and Development
of Bicron Saint-Gobain Industrial Ceramics. Prof. 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.
34
<PAGE>
B. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages and the offices held,
as of November 17, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION IN THE COMPANY
---- --- -----------------------
<S> <C> <C>
Philip M. Lynch 64 Chairman of the Board and Co-Chief Executive Officer
G. Patrick Lynch 33 President and Co-Chief Executive Officer*
Dr. Donald A. Kubik 60 Vice Chairman, Chief Technology Officer*
Loren M. Ehrmanntraut 73 Chief Financial Officer*
Matjaz Korosec 33 Vice President of Financial Planning and Treasurer*
Elsie F. Gilles 59 Controller and Assistant Secretary
Irina V. Roytman 35 Vice President and Coordinator for Eastern Europe
Tiffany M. Swann 32 Corporate Secretary
Prof. Efim Ya. Lyublinski 63 Vice President and Director of Field Technical Support
and Applications Engineering
</TABLE>
*Members of the Executive Committee
Mr. Philip M. Lynch has been Executive Vice President of Inter Alia
Holding Company for more than five years. Mr. Lynch is the father of Mr. G.
Patrick Lynch. Refer to "Directors of the Registrant" for a more detailed
discussion.
Mr. G. Patrick Lynch, an employee of the Company since 1995, has been
President and Co-Chief Executive Officer since May, 2000. Mr. G. Patrick Lynch
was Vice President of Strategic Planning, Corporate Secretary and a member of
the Executive Committee, which served as Co-Chief Executive Officer from
September 1999 to May 2000. Mr. G. Patrick Lynch is also an officer and director
of Inter Alia Holding Company. Prior to joining the Company, Mr. G. Patrick
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. G.
Patrick Lynch received an M.B.A. degree from the University of Michigan Business
School in Ann Arbor, Michigan. Mr. G. Patrick Lynch is the son of Mr. Philip M.
Lynch.
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 from 1978 to September 1999. He is a member of the Executive Committee,
which served as Co-Chief Executive Officer of the Company from September 1999 to
May 2000. 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. Effective
November 20, 2000 Mr. Ehrmanntraut relinquishes the position of Chief Financial
Officer and assumes the positions of the Head of Investor Relations of the
Company and Advisor to the Board of Directors.
35
<PAGE>
Mr. Matjaz Korosec has been employed by the Company since June 1999, in
the capacity of Vice President of Financial Planning and Treasurer. He is a
member of the Executive Committee, which served as Co-Chief Executive Officer of
the Company from September 1999 to May 2000. 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
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. Effective November 20, 2000 Mr. Korosec relinquishes the
position of Treasurer and and assumes the position of Chief Financial Officer of
the Company.
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 Corporate Secretary of the Company since 1998.
Effective November 20, 2000 Ms. Gilles relinquishes the position of Controller
and assumes the position of Treasurer of the Company.
Ms. Irina V. Roytman has been employed by the Company since September
1994 serving in a variety of capacities in the area of international business
development and was named Vice President and Coordinator for Eastern Europe in
July 2000. Ms. Roytman holds BS in engineering from the Technical University of
St. Petersburg.
Ms. Tiffany Swann has been employed by the Northern Instruments
Corporation LLC, the Company's subsidiary in Ohio as Vice President, Marketing
since April 1999 and was named Corporate Secretary of the Company in November,
2000. From February 1995 until April 1999 she was employed in the furniture
industry by the Mitchell Gold Company as a Field Account Manager. Ms. Swann
received a BFA from the University of North Carolina.
Prof. Efim Ya. Lyublinski has been employed by the Company since March
2000 in the position of Vice President and Director of Field Technical Support
and Applications Engineering. Prof. Lyublinski is a Member of the Russian
Academy of Natural Sciences. From 1984 to 1999 Prof. Lyublinski was Head of
Laboratory of Complex Methods of Corrosion Protection at the Central Research
Institute of Structural Materials (,,Prometey"), St. Petersburg. Prof Lyublinski
also held a Senior Consulting Position with Osmos Technology, Boston,
Massachusssetts from 1995 to 1999. Prof. Lyublinski holds 14 patents, 64
inventions and has authored 8 books, 6 booklets, 140 articles and 75
contributions to various conferences in the areas of materials science and
corrosion.
36
<PAGE>
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, 2000, none of the
Company's directors or officers or beneficial owners of greater than 10% of the
Company's Common Stock failed to file on a timely basis the forms required by
Section 16 of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION.
A. COMPENSATION OF DIRECTORS
DIRECTORS FEES. Each person who was a non-employee director received an
annual retainer of $5,000 in fiscal 2000 for services rendered as a director of
the Company. Each non-employee director of the Company further received $750 for
each Board meeting and $500 for each Committee (e.g. Audit, Compensation and
Strategic Planning Committees) 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 and 2000 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 in respect of their past year's services 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, which options are granted at the end of the relevant fiscal
year.
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 returned and
cancelled in fiscal 2000. 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. On November 17, 2000, the Board of
Directors approved the automatic option grants as of September 1, 2000 to
Messrs. Dworkin, Lareau, Lynch, Rikuta, and Vukcevich each received a Director
Option to purchase 2,000 shares of Common Stock at an exercise price of $6.75.
37
<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
$100,000 in the fiscal year ended August 31, 2000 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
SECURITIES
BONUS UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) ($)(1) OPTIONS (#) COMPENSATION ($)(2)
--------------------------- ---- ---------- ------ ----------- -------------------
<S> <C> <C> <C> <C> <C>
Philip M. Lynch 2000 $0 $0 0 0(3)
CHAIRMAN OF THE BOARD AND CO-CHIEF 1999 0 0 0 0(3)
EXECUTIVE OFFICER 1998 0 0 2,000 0(3)
Donald A. Kubik (4) 2000 200,000 0 0 5,000
VICE CHAIRMAN 1999 200,000 0 8,000 4,667
1998 200,000 55,000 0 5,000
Loren M. Ehrmanntraut (4) 2000 51,568 0 0 1,805
CHIEF FINANCIAL OFFICER 1999 117,410 0 10,000 3,025
1998 117,410 55,000 0 5,000
G. Patrick Lynch (4) 2000 95,000 0 3,000 3,325(3)
PRESIDENT AND CO-CHIEF 1999 45,416 0 0 1,571(3)
EXECUTIVE OFFICER 1998 32,691 0 0 1,211(3)
Matjaz Korosec (4) (5) 2000 90,000 0 3,000 1,650
VICE PRESIDENT OF FINANCIAL PLANNING AND 1999 35,250 0 0 0
TREASURER
</TABLE>
-------------------------
(1) Bonuses paid in 1998 were earned in 1997. There were no bonuses paid in
2000 or 1999. On November 17, 2000 the Board of Directors approved
bonuses to be paid in fiscal year 2001 related for the services
performed in the fiscal year 2000 for Messrs. Kubik, Ehrmanntraut, G.
Lynch and Korosec in the amount of $20,000 each, for which an accrual
was made in the fiscal year 2000.
(2) Compensation hereunder consists of contributions to the 401(k) plans of
the Named Executive Officers.
(3) Does not include any commissions payable to Inter Alia Holding Company,
an entity of which Mr. Philip Lynch and Mr. G. Patrick Lynch are
officers and directors, under a certain Manufacturer's Representative
Agreement. See "Item 12 - Certain Relationships and Related Party
Transactions."
(4) Member of the Executive Committee, which served as Co-Chief Executive
Officer of the Company from September 1999 to May 2000.
(5) Mr. Korosec joined the Company during the fiscal year ended August 31,
1999.
38
<PAGE>
C. OPTION GRANTS AND EXERCISES.
The following tables provide information for the year ended August 31,
2000 as to individual grants of options to purchase shares of the Common Stock,
exercises of options and the potential realizable value of the options held by
the Named Executive Officers at August 31, 2000.
OPTION GRANTS IN FISCAL 2000
<TABLE>
<CAPTION>
PERCENT OF TOTAL OPTIONS
GRANTED TO EMPLOYEES EXERCISE OR BASE
NAME OPTIONS GRANTED (1) IN FISCAL YEAR (2) PRICE ($/SHARE) EXPIRATION DATE
---- ------------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
G. Patrick Lynch 3,000 8.4% 7.00 09/17/04
Matjaz Korosec 3,000 8.4% 7.00 09/17/04
</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.
AGGREGATED OPTION EXERCISES IN FISCAL 2000 AND
FISCAL 2000 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
OPTIONS AT AUGUST 31, 2000 VALUE OF UNEXERCISED
-------------------------- IN-THE-MONEY OPTIONS
(#) AT AUGUST 31, 2000 (1) ($)
--- --------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Philip M. Lynch 3,000 8,000 667 1,333 1,254 2,506
Donald A. Kubik 2,667 1,334 5,333 10,026
Loren M. Ehrmanntraut 3,333 6,667 6,266 12,534
G. Patrick Lynch 3,000 3,390
Matjaz Korosec 3,000 3,390
</TABLE>
(1) Value is calculated as the excess of the fair market value of the Common
Stock on August 31, 2000 over the exercise price of the options. On
August 31, 2000, the fair market value of the Common Stock was $8.13 per
share.
39
<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 17, 2000, 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) by 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) 24.0%
Elsie F. Gilles 4,200 (4) *
Vincent J. Graziano 37,034 (5) 1.0
Dr. Donald A. Kubik 108,674 (6) 2.9
Richard G. Lareau 28,677 (7) *
Philip M. Lynch 1,334 (8) *
Haruhiko Rikuta 19,576 (9) *
Prof. Milan R. Vukcevich 5,931 (10) *
Loren M. Ehrmanntraut 53,666 (11) 1.4
G. Patrick Lynch 2,700 (12) *
Matjaz Korosec 1,500 (13) *
Irina Roytman 1,650 (14) *
Tiffany Swann 334 (15) *
All directors and executive
officers as a group (14 persons) 1,176,944 (16) 31.0
-------------------------
* 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 3,794,284 shares of Common Stock outstanding as of November 17,
2000.
(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, President and the
Co-Chief Executive Officer of the Company are officers and directors.
(4) Includes 1,000 shares of Common Stock, which may be acquired within 60
days pursuant to the exercise of options.
(5) Includes 31,700 shares held jointly with his wife Leone A. Medin and
includes 5,334 shares of Common Stock, which may be acquired within 60
days pursuant to the exercise of options.
40
<PAGE>
(6) Includes 2,667 shares of Common Stock, which may be acquired within 60
days pursuant to the exercise of options.
(7) Includes 4,001 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 1,334 shares of Common Stock, which may be
acquired within 60 days pursuant to the exercise of options.
(9) Includes 3,576 shares of Common Stock, which may be acquired within 60
days pursuant to the exercise of options.
(10) Includes 657 shares held jointly with his wife Michelle Vukcevich, and
includes 2,001 shares of Common Stock, which may be acquired within 60
days pursuant to the exercise of options.
(11) Includes 6,666 shares of Common Stock, which may be acquired within 60
days pursuant to the exercise of options.
(12) Includes 1,000 shares of Common Stock, which may be acquired within 60
days pursuant to the exercise of options. 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 500 shares held jointly with his wife Margaret D. Korosec, and
includes 1,000 shares of Common Stock, which may be acquired within 60
days pursuant to the exercise of options.
(14) Includes 350 shares held jointly with her husband Alexander Roytman, and
includes 1,000 shares of Common Stock, which may be acquired within 60
days pursuant to the exercise of options.
(15) Includes 334 shares of Common Stock, which may be acquired within 60
days pursuant to the exercise of options.
(16) 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, President
and the Co-Chief Executive Officer of the Company are officers and
directors, , and (ii) options to purchase 27,579 shares which are held
by officers and directors of the Company which are exercisable within 60
days.
41
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY 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 $42,590, $45,484, and $51,754 for the
fiscal years ended August 31, 2000, 1999 and 1998, 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 in the future.
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") had a face value of $125,375 and bore interest at
11% per year. The Note was originally due on December 31, 1992, subsequently
adjusted to a demand note. The balance of the Note, including accrued interest
of $132,826, amounted to $258,201 as of August 31, 2000 and was paid on the same
day.
The Company paid reimbursement for travel and related Company expenses
of $378,000, $419,500 and $458,000 for the year ended August 31, 2000, 1999 and
1998, 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. Such reimbursements of travel and related expenses were not related to
the functions of Inter Alia Holding Company as representative, but rather were
paid in respect of the conduct of business for and on behalf of the Company.
`Mr. G. Patrick Lynch, President and Co-Chief Executive Officer of the Company
is also an officer and director of Inter Alia Holding Company.
Mr. Vincent Graziano, who has retired as President and Co-Chief
Executive Officer of the Company, but remains a director of the Company, has
agreed to render services to the Company, at will, on a half time/half salary
basis from December 1, 1999 to December 31, 2000. Mr. Vincent Graziano has
received $143,750 for his services in fiscal year 2000.
42
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Reference is made to the Exhibit Index hereinafter contained, at page 45
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 for 1994 Stock
Incentive Plan (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 for 1994 Stock
Incentive Plan (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).
D. 2000 Stock Incentive Plan (filed herewith)
E. Form of Incentive for Stock Option Agreement for 2000 Stock
Incentive Plan (filed herewith).
F. Form of Non-Qualified Stock Option Agreement for 2000 Stock
Incentive Plan (filed herewith)
(b) REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of fiscal 2000.
43
<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 17, 2000 By: /s/ Philip M. Lynch
-----------------------------------
Philip M. Lynch
Chairman and 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 17, 2000 in the capacities indicated.
NAME TITLE
---- -----
/s/ Philip M. Lynch Co-Chief Executive Officer and Chairman of the
----------------------------- Board of Directors (principal executive
Philip M. Lynch officer)
/s/ G. Patrick Lynch President and Co-Chief Executive Officer
----------------------------- (principal executive officer)
G. Patrick Lynch
/s/ Matjaz Korosec Vice President of Financial Planning and
----------------------------- Treasurer
Matjaz Korosec
/s/ Donald A. Kubik, Ph.D. Vice Chairman; Director
-----------------------------
Donald A. Kubik, Ph.D.
/s/ Loren M. Ehrmanntraut Chief Financial Officer (principal financial
----------------------------- officer and principal accounting officer)
Loren M. Ehrmanntraut
/s/ Richard G. Lareau Director
-----------------------------
Richard G. Lareau
/s/ Milan R. Vukcevich, Ph.D. Director
-----------------------------
Milan R. Vukcevich, Ph.D.
Director
-----------------------------
Vincent J. Graziano
/s/ Haruhiko Rikuta Director
-----------------------------
Haruhiko Rikuta
44
<PAGE>
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR THE YEAR ENDED AUGUST 31, 2000
Item No. Item Method of Filing
-------- ---- ----------------
3.1 Certificate of Incorporation Incorporated by reference to
Exhibit 3.1 contained in the
Registration Statement on Form
10 (File No. 0-19331).
3.2 Bylaws Incorporated by reference to
Exhibit 3.2 contained in the
Registration Statement on Form
10 (File No. 0-19331).
10.1 Form of Incentive Stock Option Incorporated by reference to
Agreement for 1994 Stock Incentive Exhibit 10.1 to the Company's
Plan Annual Report on Form 10-KSB for
the fiscal year ended August 31,
1993.
10.2 Form of Non-Qualified Stock Option Incorporated by reference to
Agreement for 1994 Stock Incentive Exhibit 10.2 to the Company's
Plan 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.
10.4 2000 Stock Incentive Plan Filed herewith electronically.
10.5 Form of Incentive Stock Option Filed herewith electronically.
Agreement for 2000 Stock Incentive
Plan
10.6 Form of Non-Qualified Stock Option Filed herewith electronically.
Agreement for 2000 Stock Incentive
Plan
21.1 Subsidiaries of the Registrant Filed herewith electronically.
23.1 Independent Auditors' Consent Filed herewith electronically.
27.1 Financial Data Schedule Filed herewith electronically.
45
