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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ to_____________
Commission file number: 0-16159
LECTEC CORPORATION
(Exact name of Registrant as specified in its charter)
Minnesota 41-1301878
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10701 Red Circle Drive, Minnetonka, Minnesota 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 933-2291
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value
$0.01 per share.
Indicate by check mark 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 _______
[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein; and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 16, 1996 was $34,523,901.
The number of shares outstanding of the registrant's common stock as of
September 16, 1996 was 3,835,989 shares.
Documents Incorporated by Reference 10-K Parts Where Incorporated
----------------------------------- -----------------------------
1. Definitive Proxy Statement for Annual
Meeting of Shareholders of the Registrant
to be held November 18, 1996. Part III
PART I
Item 1. BUSINESS
GENERAL
LecTec Corporation (the "Company") designs, manufactures and markets
diagnostic and monitoring ECG electrodes, conductive and non-conductive adhesive
hydrogels, medical tapes, drug delivery patches and therapeutic products. The
Company markets its products to original equipment manufacturers, medical
products distributors, clinic and hospital purchasing groups, individual clinics
and hospitals as well as electronic retailing and direct selling groups. All of
the products manufactured by the Company are designed to be highly compatible
with skin, the largest organ of the human body.
The Company developed one of the first solid gel disposable ECG
electrodes, which did not require the use of messy liquid, aqueous conductive
gels in order to maintain contact with the skin. The Company has since continued
to develop, manufacture and market electrodes, hydrogels, medical tapes, drug
delivery systems, patches and therapeutic products. The Company holds domestic
and foreign patents on various products.
The Company, through its research and development efforts, is
developing new systems for drug delivery patches, new conductive-adhesive
hydrogel polymers, medical tapes and therapeutic drugs, and refining existing
technologies for new markets.
The Company was organized in 1977 as a Minnesota corporation. Its
principal executive office is located at 10701 Red Circle Drive, Minnetonka,
Minnesota 55343, and its telephone number is (612) 933-2291.
PRODUCTS
The Company applies its patented conductive and non-conductive adhesive
hydrogels technology to cardiac diagnostic and cardiac monitoring electrodes.
The Company's patented natural and synthetic-based polymers are self-adhesive
and can be made electrically conductive. Using natural-based polymers, the
Company developed one of the first solid gel disposable ECG electrodes. All of
the Company's electrodes are electrically and chemically stable.
All of the Company's "skin-like" hydrogels are chemically compatible
with human skin, thereby reducing or eliminating causative agents of skin
irritation and reducing both damage to the skin and the risk of infection. The
electrical and adhesive properties and the dimensions of the Company's products
are highly consistent and reproducible from product to product because the
conductive polymer is in a solid form, unlike some of the conductive gels used
on competitive products. As a result of its proprietary technology the Company
does not use toxic solvents in the manufacturing of its products. Solvents can
cause dehydration of the skin, thereby causing damage to the skin as well as
pain and discomfort to the patient. In addition, the use of this proprietary
technology enables the Company to avoid certain environmental concerns
associated with the use of harmful solvents in the manufacturing process.
Conductive Products
The Company's conductive products include diagnostic electrodes,
monitoring electrodes, and electrically conductive and non-conductive adhesive
hydrogels.
The Company's "Tracets"(R) diagnostic electrodes are snapless,
disposable electrodes designed to replace reusable suction cups (Welsh bulbs)
and conductive gels applied during routine electrocardiographs. Because Tracets
electrodes are disposable, they pose less risk of cross infection than reusable
suction cups. The solid gel and snapless design of the Tracets electrodes
provide more consistent electrical performance and offer shorter procedure and
clean-up time than Welsh bulbs. Currently the Company has three different types
of Tracets diagnostic electrodes: T1000 Plus, a snapless disposable tab
electrode made of natural polymer solid gel with gentle adhesion; MP 3000, a
synthetic solid gel electrode with aggressive adhesion which meets all AAMI
standards including defibrillation recovery; and AG 4000, a synthetic solid gel,
silver substrate electrode which meets all AAMI standards including
defibrillation recovery.
The Company's SynCor(R) monitoring electrodes are used for heart
monitoring applications. These applications include surgical patients and
hospitalized patients attached to bedside cardiac monitors. The SynCor product
line consists of a specialized short term surgical electrode and a neo-natal
product. The Company's short-term and neo-natal electrodes adhere without the
use of tape. The Company introduced a new monitoring snap-type electrode in
1995, VitaTrace(TM) VT-10, composed of a synthetic solid state gel that meets
all AAMI standards for adult use in bedside cardiac monitoring.
The Company manufactures synthetic and naturally-based hydrogels. The
Company pioneered hydrogel technology and developed alternatives to competitors'
hydrogels that are resistant to dehydration and evaporation problems and changes
in their electrical and physical properties. The Company regulates the adhesive
qualities of its hydrogels so that they can be used for attaching devices to the
body. The hydrogels can be developed to deliver specific medications to the skin
for topical use, or into or through the skin for localized or systemic
application. Also, the hydrogels can be manufactured to have various levels of
conductivity, with or without self-adhesive properties, for diagnostic and
monitoring electrodes, electrosurgical grounding pads, external pacing and
defibrillation electrodes, ultra-sonic gel pads, TENS products and iontophoretic
return electrodes. Sales of conductive products accounted for approximately 61%,
52% and 58% of the Company's sales during its fiscal years ended June 30, 1996,
1995 and 1994.
Medical Tape Products
The Company manufactures and markets medical tape products of various
types and configurations for the world market. The Company's medical tape
business includes the U.S. healthcare market (hospitals and alternate care), the
U.S. consumer market and the international healthcare market. Medical tape
products manufactured and marketed by the Company are configured in both
self-wound finished rolls and semi-finished master rolls. The Company's medical
tape product line is comprised of the standard paper, plastic and cloth products
widely used in the medical industry. The Company's trademarked products include
"Superpore(R)" Porous Paper Tape, "Isosilk(TM)" Cloth Tape and "Isoclear(TM)"
Transparent Tape. All of the Company's tapes are hypoallergenic and utilize
solvent-free adhesives.
The Company offers private label and converter alliance (selling of
semi-finished goods to a manufacturer who then converts the goods into a
finished product) programs. These programs offer customers quality products to
compete successfully against established brand names. Private labeling tape
products allows major medical marketers to penetrate markets offering
significant volume potential with their own custom brand of medical tapes.
The Converter Alliance Program increases profitability and marketing
opportunities for the Company's partners abroad. This program involves exporting
semi-finished master rolls of medical tape to partners who convert the material
into finished product, package the product and market it in a specific country.
When product labeling and packaging is completed in the country where the
product is sold, language and cultural barriers are reduced and packaging costs
are often significantly lowered. Manufacturing partners benefit from using
quality raw materials, market-oriented packaging, local labor content,
established distribution channels, and connections with local Ministries of
Health and other healthcare decision makers. Sales of medical tapes accounted
for approximately 24%, 26% and 36% of the Company's sales in its fiscal years
ended June 30, 1996, 1995 and 1994.
Therapeutic Products
The Company manufactures and markets drug delivery patches. The
hydrogel-based patch products use a monolithic system that delivers drugs
topically onto the skin. Products currently manufactured using the
adhesive-based patch technology are wart removers, analgesic patches for
localized pain relief and a corn and callus remover. These products are marketed
as OTC (over-ther-counter) products. The Company, through its subsidiary,
Pharmadyne Corporation (formerly Natus Corporation), markets the analgesic pain
patches manufactured by the Company through a variety of distribution channels.
Effective April 1, 1994, the Company consolidated Pharmadyne and its results of
operations. Sales of therapeutic products accounted for approximately 15%, 22%
and 6% of the Company's sales in each of the fiscal years ended June 30, 1996,
1995 and 1994.
CUSTOMERS
Burdick Corporation, ("Burdick") accounted for 17.0%, 14.6% and 17.4%
of the Company's total sales during fiscal years 1996, 1995 and 1994,
respectively. The Company sold its products to approximately 150 active
customers during the fiscal years 1996 and 1995, down from approximately 240
active customers during fiscal year 1994. The decrease in active customers was
the result of a marketing strategy to consolidate low volume customers with
higher volume dealers and distributors in an effort to reduce total costs
associated with order processing and shipping. The Company's backlog orders
(purchase orders received from customers for future shipment) as of August 12,
1996 totaled approximately $1,318,500 (all of which the Company expects to
fill), compared with approximately $2,184,800 and $1,807,900 on August 12, 1995
and 1994. The decrease in backlog at August 12, 1996 was primarily the result of
a change in customer ordering patterns from placing standing purchase orders for
multiple periods to placing individual purchase orders as needed.
GOVERNMENTAL REGULATION
Clinical testing, manufacturing, packaging, labeling and distribution
of the Company's products are subject to FDA (Food and Drug Administration)
regulation. Comparable agencies in some states and certain foreign countries
also regulate the Company's activities. The Company's electrodes under current
FDA policy are marketed pursuant to Section 510(k) notifications, which are
simplified means of obtaining FDA approval to market a medical device. The
Company's topical drug products are marketed under OTC monographs. The Company's
`new drug' and transdermal `new drug' developments, may be marketed only after
approval of a New Drug Application (NDA) containing full reports of extensive
laboratory and clinical investigations on animals and humans.
The Company does not use toxic solvents in the manufacturing of its
products and thus environmental concerns are reduced for the Company's
manufacturing processes as compared with its competitors. The Company does not
anticipate any major expenditures for environmental controls during the next
year.
COMPETITION
The markets for electrodes, hydrogels, tapes, drug delivery patches and
therapeutic products are highly competitive. Firms in the medical supply
industry compete on the basis of product performance, pricing, distribution and
service. Many of the Company's major competitors, including Minnesota Mining and
Manufacturing Company (3M), have significantly greater financial, marketing and
technological resources than the Company. Competitors of the Company most often
rely on pricing, distribution or brand-name recognition to obtain sales. The
Company believes that it competes successfully on the basis of product
performance, cost savings in the use of patented technology and its ability to
manufacture private label products for distributors and OEMs (Original Equipment
Manufacturers).
Over the past several years there has been a number of mergers within
the electrode and hydrogel industries, resulting in fewer but larger
competitors. The Company believes its proprietary technology and manufacturing
capabilities position it competitively in this market.
In recent years the Company has noted a reduction in the number of
manufacturers of medical tapes. The Company believes this is due, in part, to
the competitors' inability to satisfy increasingly stringent environmental
requirements and market price pressures. This provides the Company an
opportunity to increase its market share. The Company believes that it is one of
the first medical tape companies manufacturing medical tapes without the use of
harmful solvent-based adhesives or processing aids.
Schering-Plough (Dr. Scholl's) is the major competitor of two of the
Company's therapeutic products, an OTC corn and callous remover and an OTC wart
remover. Dr. Scholl's holds in excess of 85% market share for both products. The
Company's OTC analgesic patch competes with ointments, lotions and creams
manufactured by various competitors.
PATENTS AND TRADEMARKS
The Company has U.S. and foreign patents on adhesive membranes,
electrode designs, transdermal and dermal delivery systems and tape structures.
In the last year the Company was allowed four new U.S. patents. The first
covered cotinine's utility in aiding smoke cessation and the second covered
cotinine for weight management purposes. The third patent allowance covered a
new non-occlusive adhesive patch for applying medication. The fourth covered a
solid multi-purpose ultrasonic biomedical gel for diagnostic use. Eighteen U.S.
and foreign patent applications are pending; additionally the Company has
exclusive license for eight other patents. The patents most pertinent to the
Company's major products have been issued and have a remaining duration in
excess of eight years.
The Company expects that its products will be subject to continual
modifications due to improvements in materials and rapid technological advances
in the market for medical devices. Therefore, the Company's continued success
does not depend only upon ownership of patents, but also upon technical
expertise, creative skills and the ability to forge these talents into the
timely release of new products into the marketplace.
The Company uses its best efforts to protect its proprietary property
and information. In addition, the Company monitors competitive products and
patent publications to be aware of potential infringement of its rights.
The Company has registered the following trademarks in the United
States Patent and Trademark Office: LecPads, SPARE, Tracets, Superpore,
Tree-Skin, ResTest II, VitaTrace, SME, LecTec and SynCor. The Company has filed
for the registration of the tradenames UltraEase and Isoclear. The Company uses,
but has not registered, the following tradenames: LecTrode, Isosilk, Isotex,
Isopore, SME-5000, infiniti, Exten 238, DermaPhyl and "The Best ... Next to
Skin.".
The Company's subsidiary, Pharmadyne Corporation, has registered the
following tradenames in the United States Patent and Trademark Office:
TheraPatch, Thermal Patch, HydroGesic Patch and ThermoGesic Patch.
RESEARCH AND DEVELOPMENT
The Company's research and development staff consists of professionals
drawn from the business and academic communities with experience in the
biological, chemical, pharmaceutical and engineering sciences. The research and
development staff is responsible for the investigation, development and
implementation of new technologies.
The Company may develop products jointly with corporations and/or with
inventors from the academic world via research and development contracts or
other forms of working alliances. Resulting products may then be marketed by the
Company, by sponsoring partners or through a marketing arrangement with an
appropriate distributor. R&D contract opportunities are evaluated on an
individual basis.
Pilot clinical studies performed in previous years demonstrated
encouraging results for our cotinine drug product used in smoking cessation for
which the Company has exclusive license. The Addiction Research Center of the
National Institute of Health (NIH) completed a study to determine if cotinine is
addictive. The data was presented in June, 1996 at the CPDD (College on Problems
of Drug Dependence) National Meeting. This data lends support to the notion that
cotinine is behaviorally active and could mediate certain of the behavorial
effects attributed to nicotine dependence. Minimal abuse potential (addiction
potential) was detected. The encouraging clinical data gathered to date and the
Company's positive patent developments have propelled this project out of the
research phase and into the development phase which begins with a corporate
sponsored IND (Investigational New Drug) application. Work on this submission
continued throughout fiscal 1996 and the Company expects to file the IND in
October 1996.
Research and development efforts are underway to complete the
development of a new polymer-based reusable hydrogel. A 510(k) was awarded for
the new UltraEase ultrasonic hydrogel couplant pad product.
The Company has developed a new proprietary coating process for the
manufacture of porous medical tape products. The recently acquired and developed
pressure sensitive adhesive coating and slitting production equipment, for the
manufacturing of medical tapes employs two patent pending processes. Each of
these two patent pending processes are used to manufacture LecTec's medical tape
products.
R&D resources are also being used to fund development of new analgesic
pain patch products, conductive products and specialized medical tapes.
In the fiscal years ended June 30, 1996, 1995 and 1994, the Company
spent, approximately, $1,975,000, $1,877,000 and $1,380,000, respectively, on
research and development.
MARKETING AND MARKETING STRATEGY
The Company markets and sells its products to original equipment
manufacturers (OEM), medical product distributors, clinic and hospital
purchasing groups, individual clinics and hospitals as well as electronic
retailing and direct selling groups. The Company has focused on OEM accounts to
build strategic partnerships with medical equipment and disposable supply
manufacturers. Additionally, joint venture and marketing contracts are used to
promote the Company's growth in therapeutic markets.
The Company has not experienced any significant seasonality in sales of
its products.
The Company sells its products in the U.S., Canada, Europe, Asia, and
portions of Latin America. Export sales totaled $2,425,904 (19% of total sales)
in the fiscal year ended June 30, 1996, $2,603,349 (18% of total sales) in the
fiscal year ended June 30, 1995 and $2,349,007 (22% of total sales) in the
fiscal year ended June 30, 1994. The Company intends to continue to market its
products internationally and expects international sales to remain approximately
the same as a percent of total sales.
The Company's international sales are made by the Company's corporate
sales force and the Company does not maintain a separate international marketing
staff or operations. The following table sets forth export sales by geographic
area (See Note J to the Financial Statements):
Export Sales Years ended June 30
-----------------------------------------
1996 1995 1994
---- ---- ----
Canada $ 80,746 $ 113,597 $ 122,208
Europe 1,652,941 1,171,910 943,250
Asia 466,777 1,122,179 1,114,928
Latin America 225,440 195,663 168,621
------------ ----------- -----------
Total Export Sales $2,425,904 $ 2,603,349 $ 2,349,007
============ =========== ===========
MANUFACTURING
The Company manufactures its conductive and therapeutic membranes at
the Company's Minnetonka, Minnesota facility. The Minnetonka facility also
manufactures and packages the Company's therapeutic products and conducts raw
material processing operations. The Company's second manufacturing facility in
Edina, Minnesota is the primary site for the manufacturing and packaging of
medical tape and medical electrodes. The Edina location also provides the
majority of the Company's warehouse capacity.
The Company believes that the raw materials used in manufacturing its
products are generally available from multiple suppliers.
EMPLOYEES
As of June 30, 1996, the Company employed 76 full-time employees. None
of the Company's employees are represented by any labor unions or other
collective bargaining units. The Company believes its relations with its
employees are good.
ACQUISITION OF PHARMADYNE CORPORATION (Formerly Natus Corporation)
During 1993, the Company invested $175,000 in Pharmadyne Corporation,
which represented a 19.5% ownership interest in Pharmadyne. This investment was
recorded at cost. In addition to this equity investment, the Company made cash
advances to Pharmadyne during fiscal 1993 and 1994.
On April 1, 1994, the Company exercised an option to purchase 182,822
shares of Pharmadyne common stock at $1 per share increasing the ownership in
Pharmadyne to 51%. This acquisition was accounted for as a stock purchase. The
acquired goodwill of approximately $590,000 is being amortized on a
straight-line basis over three years.
Effective April 1, 1994, the Company consolidated Pharmadyne in its
results of operations.
During 1996 the Company made additional advances to Pharmadyne and
received a warrant to purchase 227,959 additional shares of Pharmadyne at $1 per
share. On September 5, 1996, the Company exercised the warrant and increased its
ownership interest in Pharmadyne to 61%.
DISPOSITION OF DIRECT MARKETING RELATED ASSETS
On March 12, 1996, the Company contributed the direct marketing related
assets of Pharmadyne to Natus L.L.C. (an Arizona limited liability company) in
exchange for a 15% interest in Natus L.L.C. The direct marketing related assets
contributed consisted of the following:
Accounts receivable $ 32,791
Inventory 384,730
Prepaid expenses and other 135,708
Property and equipment, net 79,938
Other (27,000)
--------
$606,167
========
Item 2. PROPERTIES
The Company owns a building located in Minnetonka, Minnesota,
containing 18,000 square feet of office and laboratory space and 12,000 square
feet of manufacturing and warehouse space. In addition, the Company leases a
building in Edina, Minnesota containing 29,000 square feet.
Item.3. LEGAL PROCEEDINGS
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Company has been listed on the NASDAQ since December 17, 1986 and
on the National Market System since June 7, 1988 under the trading symbol LECT.
The following table sets forth for the periods indicated the high and
low prices of the Company's Common Stock. The figures reflect the high and low
bid prices on the NASDAQ National Market System. Such prices reflect interdealer
prices, without retail mark-up, mark-down, or commission, and may not
necessarily represent actual transactions.
Years ended June 30, 1996 1995
----- ----
High Low High Low
---- --- ---- ---
First Quarter $12.250 $8.500 $10.500 $7.000
Second Quarter 12.500 8.750 10.000 6.750
Third Quarter 12.000 9.875 11.000 7.250
Fourth Quarter 15.375 9.875 14.250 10.750
As of September 16, 1996 the Company had 3,835,989 shares of Common
Stock outstanding and 399 shareholders of record.
The Company has not declared or paid cash dividends on its Common Stock
since its inception, and intends to retain all earnings for use in its business
for the foreseeable future.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA
Years ended June 30, 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net sales $13,100,754 $14,138,290 $10,715,490 $9,224,005 $8,101,954
Gross profit 4,969,659 5,697,562 4,041,853 3,434,128 3,290,005
Operating profit (loss) (724,074) 69,761 837,161 750,335 1,153,802
Earnings (loss) before equity in losses
of unconsolidated subsidiary (632,193) 153,863 768,974 745,282 964,026
Equity in losses of
unconsolidated subsidiary --- --- (133,639) (163,442) ---
Net earnings (loss) (632,193) 153,863 635,335 581,840 964,026
Net earnings (loss) per share (.17) .04 .17 .15 .26
BALANCE SHEET DATA
At June 30, 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Cash, cash equivalents and
short-term investments $ 800,693 $ 839,942 $ 2,182,570 $ 3,469,632 $2,736,361
Current assets 5,449,682 5,764,363 6,124,640 6,082,934 5,480,921
Working capital 4,240,024 4,490,796 4,737,567 5,471,894 5,013,766
Property, plant and equipment, net 5,112,975 5,559,807 4,705,602 3,016,761 2,961,711
Long-term investments 574,806 568,156 585,855 3,016,761 1,143,605
Total assets 12,319,003 12,646,745 12,363,075 10,876,068 9,885,809
Long-term obligations 174,000 167,000 139,000 64,000 ---
Shareholders' equity 10,935,345 11,206,178 10,837,002 10,201,028 9,418,654
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Earnings Summary
The Company reported a net loss of $632,000 or $.17 per share in fiscal
1996, a decrease from net earnings of $154,000 or $.04 per share in 1995 and
down from net earnings of $635,000 or $.17 per share in 1994. The largest
component of the net loss for 1996 was the losses associated with the direct
marketing related operations of the Company's former Natus Corporation
subsidiary. The 1996 net loss was also affected by increased R&D expenditures
and decreased medical tape and therapeutic product sales which more than offset
increased conductive product sales.
Results Of Operations
Sales
Sales totaled $13,101,000 in fiscal 1996, a decrease of 7% from
$14,138,000 in 1995 and up from $10,715,000 in 1994. The reduction in sales in
1996 was primarily attributable to decreased therapeutic product sales resulting
from the disposition of the direct marketing related assets of the Pharmadyne
subsidiary as well as decreased medical tape sales which more than offset
increased conductive product sales. The increase in sales from 1994 to 1995 was
primarily attributable to increases in volume of all products sold.
Sales of conductive products (medical electrodes and conductive
hydrogels) grew by 8% in fiscal 1996 to $7,940,000 from $7,334,000 in fiscal
1995. Conductive product sales were $6,015,000 in fiscal 1994. These increases
were primarily attributable to unit volume increases.
Sales of medical tapes decreased by 14% in fiscal 1996 to $3,180,000
from $3,688,000 in fiscal 1995. Medical tape sales were $3,790,000 in fiscal
1994. The 1996 decrease was primarily attributable to reduced volume to a major
international customer as compared to the prior year which more than offset the
increased sales volume associated with new product offerings. The 1995 decrease
was primarily attributable to a temporary slowdown in the purchasing volume of
domestic self-wound finished roll medical tape customers in anticipation of new
product offerings introduced during fiscal 1996.
Sales of therapeutic products decreased 36% in fiscal 1996 to
$1,981,000 from $3,116,000 in fiscal 1995. Therapeutic product sales were
$880,000 in fiscal 1994. The decrease in 1996 was primarily attributable to the
decrease in the third quarter and the absence in the fourth quarter of the
Pharmadyne Corporation (formerly Natus Corporation) direct marketing related
sales due to the divestiture of the direct marketing related assets. The
increase in 1995 was primarily attributable to increased sales of the
over-the-counter analgesic patch products and the full year inclusion of
Pharmadyne Corporation therapeutic product sales. Management believes the
anticipated growth of the analgesic pain patch program will account for an
increased proportion of the Company's sales mix during fiscal 1997.
International sales, consisting primarily of semi-finished conductive
and medical tape products sold to overseas converters for final processing,
packaging and marketing, were 19% of total sales in fiscal 1996, 18% in 1995 and
22% in 1994. The Company intends to continue to market its products
internationally and expects international sales to remain approximately the same
as a percent of total sales.
Gross Profit
The Company's gross profit totaled $4,970,000 in fiscal 1996, down from
$5,698,000 in 1995. Gross profit was $4,042,000 in 1994. As a percentage of
sales, gross profit was 37.9% in fiscal 1996, 40.3% in 1995 and 37.7% in 1994.
In 1996, the decrease in the gross profit percent was primarily attributable to
decreased sales of higher margin therapeutic products and increased overhead
costs. In 1995, the increased gross profit percent was primarily attributable to
increased sales of higher-margin therapeutic products. The 1994 gross profit was
affected by relatively high sales of lower-margin medical tape products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $3,718,000 or
28.4% of sales in fiscal 1996, compared to $3,751,000 or 26.5% in 1995, and
$1,825,000 or 17.0% in 1994. The 1996 decrease in expense was primarily the
result of the absence of costs in the fourth quarter from the Pharmadyne
Corporation direct marketing related operations which was partially offset by
increases in other selling, general and administrative expenses. The 1995
increase was due primarily to the full year impact of the consolidation of
Pharmadyne with the Company for fiscal 1995; the higher selling costs associated
with the Pharmadyne direct selling organization; and the inclusion of goodwill
amortization related to the acquisition of Pharmadyne.
Research and Product Development Expenses (R&D)
Research and product development expenses totaled $1,975,000 or 15.1%
of sales in fiscal 1996, compared to $1,877,000 or 13.3% in 1995, and $1,380,000
or 12.9% in 1994. The high levels of R&D expenditures over this three-year
period reflect the utilization of internally-generated funds to develop
therapeutic products. Substantially all of the dollar increase in R&D during
fiscal 1996 was associated with the clinical studies for the non-nicotine
smoking cessation product. R&D resources are also being used to fund development
of new analgesic pain patch products, conductive products and specialized
medical tapes. Management believes that R&D expenditures, as a percentage of net
sales, will remain in the range of 10% to 15% for the immediate future.
Other Income (Expense)
Other income totaled $54,000 in fiscal 1996, down from $73,000 in 1995
and $109,000 in 1994. In 1996 the decline resulted primarily from a reduction of
interest income due to the prior year liquidation of short-term investments. In
1995 the decline resulted from the liquidation of short-term investments to
finance research and product development efforts, the acquisition of a new
therapeutic products production line plus increases in receivables and inventory
necessary to support the growing business.
Income Tax Expense
The Company had income tax benefits of $38,000 in fiscal 1996 and
$11,000 in 1995, compared to income tax expense of $177,000 in 1994. The tax
benefit in 1996 resulted from losses incurred in the current year reduced by the
effect of the subsidiary losses which cannot be utilized by the Company at this
time and the effect of goodwill amortization. The tax benefit in 1995 was
primarily attributable to R&D tax credits and alternative minimum tax credits.
Equity in Losses of Unconsolidated Subsidiary
On April 1, 1994, the Company acquired an additional 31.5% interest in
Pharmadyne Corporation (formerly known as Natus Corporation) and began
consolidating Pharmadyne's results of operations on that date. During the first
nine months of fiscal 1994, the Company's pro-rata share of Pharmadyne's net
loss (based on a 19.5% equity ownership position through March 31, 1994),
together with goodwill amortization during the first nine months of the fiscal
year, totaled $134,000.
Effect of Inflation
Inflation has not had a significant impact on the Company as it has
generally been able to adjust its selling prices as the costs of materials and
other expenses have changed
Liquidity and Capital Resources
Cash and cash equivalents decreased by $39,000 to $801,000 at June 30,
1996. Long-term investments increased by $7,000 to $575,000 at June 30, 1996.
Capital spending for various equipment totaled $431,000 in 1996. There were no
material commitments for capital expenditures at June 30, 1996.
Working capital totaled $4,240,000 at June 30, 1996, compared to
$4,491,000 at the end of fiscal 1995. The Company's current ratio stood at 4.5
at the end of both fiscal 1996 and 1995.
Net property, plant and equipment decreased by $447,000 to $5,113,000
at June 30, 1996, reflecting the excess of depreciation expense over additions.
Of this decrease, $80,000 was related to the disposition of the direct marketing
related assets of Pharmadyne Corporation.
The Company is free of long-term debt, and has a $1,000,000 annually
renewable revolving line of credit for meeting current operating requirements.
There were no outstanding amounts on this short-term facility at the end of
fiscal 1996. Shareholders' equity decreased by $271,000 to $10,935,000 at June
30, 1996.
Management believes that internally-generated cash and the existing
short-term credit line will be sufficient for supporting anticipated growth and
capital spending requirements in fiscal 1997.
Statements about the fiscal 1997 outlook are forward-looking and,
therefore, involve certain risks and uncertainties, including but not limited
to: buying patterns of customers, competitive forces and other factors detailed
from time to time in filings with the Securities and Exchange Commission.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LecTec Corporation and Subsidiaries Financial Statements Furnished Pursuant to
the Requirements of Form 10-K
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and
Board of Directors
LecTec Corporation
We have audited the accompanying consolidated balance sheets of LecTec
Corporation and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of LecTec
Corporation and subsidiaries as of June 30, 1996 and 1995, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles.
Grant Thornton LLP
Minneapolis, Minnesota
August 26, 1996
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
ASSETS 1996 1995
---- ----
CURRENT ASSETS
Cash and cash equivalents (note A) $ 800,693 $ 839,942
Receivables
Trade, net of allowances of $74,208
in 1996 and $90,401 in 1995 1,847,736 1,955,584
Refundable income taxes 55,580 119,540
Other 182,247 268,247
----------- -----------
2,085,563 2,343,371
Inventories (note A) 2,011,327 2,097,254
Prepaid expenses and other 123,099 229,796
Deferred income taxes (note E) 429,000 254,000
----------- -----------
Total current assets 5,449,682 5,764,363
PROPERTY, PLANT AND EQUIPMENT --
AT COST (note A)
Building and improvements 1,629,630 1,603,447
Equipment 6,414,132 5,517,101
Furniture and fixtures 354,985 422,265
----------- -----------
8,398,747 7,542,813
Less accumulated depreciation 3,533,503 2,813,760
----------- -----------
4,865,244 4,729,053
Construction in progress -- 583,023
Land 247,731 247,731
----------- -----------
5,112,975 5,559,807
OTHER ASSETS
Patents and trademarks, less accumulated amortization
of $687,871 in 1996 and $554,286 in 1995 (note A) 417,681 386,470
Goodwill, less accumulated amortization of $442,503
in 1996 and $245,835 in 1995 (notes A and H) 147,497 344,165
Long-term investments (note B) 574,806 568,156
Investment in limited liability company (note I) 606,167 --
Other 10,195 23,784
----------- -----------
1,756,346 1,322,575
----------- -----------
$12,319,003 $12,646,745
=========== ===========
The accompanying notes are an integral part of these statements.
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
JUNE 30,
LIABILITIES AND
SHAREHOLDERS' EQUITY 1996 1995
---- ----
CURRENT LIABILITIES
Accounts payable $ 894,846 $ 771,471
Accrued expenses
Payroll related 304,527 375,282
Distributor bonuses -- 71,384
Other 10,285 55,430
------------ ------------
Total current liabilities 1,209,658 1,273,567
DEFERRED INCOME TAXES (note E) 174,000 167,000
COMMITMENTS AND CONTINGENCIES
(notes D, F and G) -- --
SHAREHOLDERS' EQUITY (note G)
Common stock, $.01 par value; 15,000,000 shares
authorized; issued and outstanding: 3,835,800 shares
in 1996 and 3,786,500 shares in 1995 38,358 37,865
Additional paid-in capital 10,368,166 10,013,949
Unrealized losses on securities available-for-
sale (note B) (44,166) (50,816)
Retained earnings 572,987 1,205,180
------------ ------------
10,935,345 11,206,178
------------ ------------
$ 12,319,003 $ 12,646,745
============ ============
The accompanying notes are an integral part of these statements.
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
1996 1995 1994
---- ---- ----
Net sales (notes A and J) $ 13,100,754 $ 14,138,290 $ 10,715,490
Cost of goods sold 8,131,095 8,440,728 6,673,637
------------ ------------ ------------
Gross profit 4,969,659 5,697,562 4,041,853
Operating expenses
Selling, general and administrative 3,718,496 3,751,194 1,825,121
Research and development 1,975,237 1,876,607 1,379,571
------------ ------------ ------------
5,693,733 5,627,801 3,204,692
------------ ------------ ------------
Earnings (loss) from operations (724,074) 69,761 837,161
Other income (expense)
Interest income 26,554 35,846 89,498
Dividend income 38,029 38,487 60,433
Other (10,702) (1,231) (41,118)
------------ ------------ ------------
53,881 73,102 108,813
------------ ------------ ------------
Earnings (loss) before income taxes and
equity in losses of unconsolidated
subsidiary (670,193) 142,863 945,974
Income tax expense (benefit) (note E) (38,000) (11,000) 177,000
------------ ------------ ------------
Earnings (loss) before equity in losses
of unconsolidated subsidiary (632,193) 153,863 768,974
Equity in losses of unconsolidated subsidiary
(note H) -- -- (133,639)
------------ ------------ ------------
Net earnings (loss) $ (632,193) $ 153,863 $ 635,335
============ ============ ============
Net earnings (loss) per common and common
equivalent share (note A) $ (.17) $ .04 $ .17
============ ============ ============
Weighted average number of common and
common equivalent shares outstanding
during the year 3,801,155 3,826,905 3,803,439
============ ============ ============
The accompanying notes are an integral part of these statements.
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
Additional
Common stock paid-in
Shares Amount capital
------ ------ ----------
Balance, July 1, 1993 3,563,845 $ 35,638 $ 7,867,675
Net earnings -- -- --
Cost of shares retired (3,883) (39) (43,874)
Common stock issued upon exercise of options (note G) 18,366 184 68,768
Net unrealized loss on long-term marketable securities -- -- --
(note B)
Stock dividend 178,721 1,787 1,871,042
Tax benefit from exercise of stock options -- -- 45,468
Other (49) -- --
------------ ------------ ------------
Balance, June 30, 1994 3,757,000 37,570 9,809,079
Net earnings -- -- --
Cost of shares retired (2,102) (21) (17,330)
Common stock issued upon exercise of options (note G) 31,602 316 162,200
Unrealized gain on securities available-for-sale -- -- --
(note B)
Tax benefit from exercise of stock options -- -- 60,000
------------ ------------ ------------
Balance, June 30, 1995 3,786,500 37,865 10,013,949
Net loss -- -- --
Cost of shares retired (16,281) (163) (184,319)
Common stock issued upon exercise of options (note G) 65,581 656 450,536
Unrealized gain on securities available-for-sale -- -- --
(note B)
Tax benefit from exercise of stock options -- -- 88,000
------------ ------------ ------------
Balance, June 30, 1996 3,835,800 $ 38,358 $ 10,368,166
============ ============ ============
[WIDE TABLE CONTINUED FROM ABOVE]
Unrealized
losses on
securities Total
available- Retained shareholders'
for-sale earnings equity
------------ ------------ ------------
Balance, July 1, 1993 $ (58,745) $ 2,356,460 $ 10,201,028
Net earnings -- 635,335 635,335
Cost of shares retired -- -- (43,913)
Common stock issued upon exercise of options (note G) -- -- 68,952
Net unrealized loss on long-term marketable securities (2,219) -- (2,219)
(note B)
Stock dividend -- (1,872,829) --
Tax benefit from exercise of stock options -- -- 45,468
Other -- (67,649) (67,649)
------------ ------------ ------------
Balance, June 30, 1994 (60,964) 1,051,317 10,837,002
Net earnings -- 153,863 153,863
Cost of shares retired -- -- (17,351)
Common stock issued upon exercise of options (note G) -- -- 162,516
Unrealized gain on securities available-for-sale 10,148 -- 10,148
(note B)
Tax benefit from exercise of stock options -- -- 60,000
------------ ------------ ------------
Balance, June 30, 1995 (50,816) 1,205,180 11,206,178
Net loss -- (632,193) (632,193)
Cost of shares retired -- -- (184,482)
Common stock issued upon exercise of options (note G) -- -- 451,192
Unrealized gain on securities available-for-sale 6,650 -- 6,650
(note B)
Tax benefit from exercise of stock options -- -- 88,000
------------ ------------ ------------
Balance, June 30, 1996 $ (44,166) $ 572,987 $ 10,935,345
============ ============ ============
The accompanying notes are an integral part of these statements.
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net earnings (loss) $ (632,193) $ 153,863 $ 635,335
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,128,103 932,051 584,362
Deferred income taxes (80,000) (149,000) 76,000
Equity in losses of unconsolidated subsidiary -- -- 133,639
Changes in operating assets and liabilities:
Trade and other receivables 161,057 (410,006) (297,085)
Refundable income taxes 63,960 109,714 (101,762)
Inventories (298,803) (325,219) (811,246)
Prepaid expenses and other (29,011) (128,059) (33,149)
Accounts payable 123,375 (189,057) 185,234
Accrued expenses (187,284) 83,770 (19,109)
----------- ----------- -----------
Net cash provided by operating activities 249,204 78,057 352,219
Cash flows from investing activities:
Purchase of property, plant and equipment (430,956) (1,471,427) (2,091,228)
Investment in patents and trademarks (164,796) (141,665) (119,325)
Purchase of investments -- (249,603) (3,003,396)
Sale of investments -- 1,674,250 5,285,873
Acquisition of business, net of cash acquired -- -- (182,822)
Other 40,589 19,395 85,656
----------- ----------- -----------
Net cash used in investing activities (555,163) (169,050) (25,242)
Cash flows from financing activities:
Issuance of common stock 451,192 162,516 68,952
Retirement of common stock (184,482) (17,351) (43,913)
----------- ----------- -----------
Net cash provided by financing activities 266,710 145,165 25,039
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (39,249) 54,172 352,016
Cash and cash equivalents at beginning of year 839,942 785,770 433,754
----------- ----------- -----------
Cash and cash equivalents at end of year $ 800,693 $ 839,942 $ 785,770
=========== =========== ===========
Cash paid during the year for income taxes $ 33,199 $ 137,922 $ 178,316
=========== =========== ===========
The accompanying notes are an integral part of these statements
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES
LecTec Corporation (the Company) is primarily engaged in the research,
design, manufacture and sale of diagnostic and monitoring electrodes,
membranes, medical tapes and therapeutic products. The Company sells and
extends credit without collateral to customers located throughout the United
States as well as Canada, Europe, Asia and Latin America. A summary of the
Company's significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
1. Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of LecTec
Corporation ("LecTec"), LecTec International Corporation, a wholly-owned
subsidiary, and Pharmadyne Corporation ("Pharmadyne," formerly known as Natus
Corporation), a fifty-one percent owned subsidiary (note H). The Company has
consolidated Pharmadyne's results of operations since April 1, 1994. All
material intercompany accounts and transactions have been eliminated.
2. Cash and Cash Equivalents
The Company considers all highly liquid temporary investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist primarily of money market accounts.
3. Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market and consist of the following:
June 30,
--------------------------
1996 1995
---------- ---------
Raw materials $1,144,078 $1,162,559
Work in process 229,974 218,351
Finished goods 637,275 716,344
---------- ----------
$2,011,327 $2,097,254
========== ==========
4. Depreciation and Amortization
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. The
straight-line method of depreciation is followed for financial reporting
purposes, and accelerated methods are used for tax purposes. Estimated useful
lives used in the calculation of depreciation for financial statement
purposes are:
Buildings and improvements 5 - 39 years
Equipment 5 - 15 years
Furniture and fixtures 7 years
The investment in patents and trademarks consists primarily of the cost of
applying for patents and trademarks. Patents and trademarks are amortized on
a straight-line basis over the estimated useful life of the asset, generally
three to five years.
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized on a straight-line basis over three years.
5. Revenue Recognition
Sales are recognized at the time of shipment of product against a confirmed
sales order.
6. Net Earnings (Loss) Per Common and Common Equivalent Share
Net earnings (loss) per common and common equivalent share have been computed
by dividing net earnings (loss) by the weighted average number of common and
common equivalent shares outstanding during the years. Common equivalent
shares included in the computation represent shares issuable upon the assumed
exercise of stock options, when dilutive.
7. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
8. Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform with the
financial statement presentation used in 1996.
9. New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) 123, "Accounting for Stock-Based Compensation,"
which establishes financial accounting and reporting standards for
stock-based employee compensation plans. This Statement defines and
encourages the use of a fair value based method of accounting for an employee
stock option or similar equity instrument. The Statement allows the use of
the intrinsic value based method of accounting as prescribed by current
existing accounting standards for options issued to employees; however, there
is a requirement to disclose the pro forma net income as if the fair value
based method had been used. SFAS 123 is effective for fiscal years beginning
after December 15, 1995. Management believes the adoption of SFAS 123 will
not have a material effect on the Company's financial position or results of
operations.
The FASB also issued SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," which establishes
guidance for when to recognize and how to measure impairment losses of
long-lived assets and certain identifiable intangibles, and how to value
long-lived assets to be disposed of. SFAS 121 is effective for fiscal years
beginning after December 15, 1995. Management believes the adoption of SFAS
121 will not have a material effect on the Company's financial position or
results of operations.
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE B - INVESTMENTS
The Company's long-term investments are classified as available-for-sale and
consist primarily of a preferred stock fund at June 30, 1996 and 1995. These
investments are reported at fair value, with the net unrealized loss of
$44,166 and $50,816 included in shareholders' equity at June 30, 1996 and
1995.
The Company utilizes the specific identification method in computing realized
gains and losses.
NOTE C - LINE OF CREDIT
The Company has an unsecured $1,000,000 working capital line of credit
through January 1, 1997 with interest at the bank's reference rate (effective
rates of 8.25% and 9.0% at June 30, 1996 and 1995). There were no borrowings
outstanding on the line at June 30, 1996 or 1995. The credit agreement
contains certain restrictive covenants which require the Company to maintain,
among other things, specified levels of working capital and net worth and
certain financial ratios. At June 30, 1996, the Company was in compliance
with these covenants. Management believes the Company will be able to renew
its line of credit under similar terms and conditions.
NOTE D - COMMITMENTS AND CONTINGENCIES
The Company conducts portions of its operations in a leased facility. The
lease provides for payment of a portion of taxes and other operating expenses
by the Company. This lease expires in 1997; however, management believes the
Company will be able to renew this lease under similar terms and conditions.
The minimum rental commitments under all operating leases are as follows for
the years ending June 30:
1997 $210,408
1998 7,910
--------
$218,318
========
Total rent expense for operating leases was $219,095, $223,147 and $218,375
for the years ended June 30, 1996, 1995 and 1994.
The Company is subject to various legal proceedings in the normal course of
business. Management believes these proceedings will not have a material
adverse effect on the Company's financial position or results of operations.
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE E - INCOME TAXES
Deferred tax assets and liabilities represent the tax effects, based upon
current tax law, of future deductible or taxable items that have been
recognized in the financial statements.
The provision for income tax expense (benefit) consists of the following:
Years ended June 30,
------------------------------------------
1996 1995 1994
---- ---- ----
Current
Federal $ 40,000 $ 136,000 $ 99,000
State 2,000 2,000 2,000
-------- --------- --------
42,000 138,000 101,000
Deferred
Federal (80,000) (149,000) 76,000
State - - -
-------- --------- -------
(80,000) (149,000) 76,000
-------- --------- --------
$(38,000) $ (11,000) $177,000
======== ========= ========
Deferred tax assets (liabilities) represent the tax effects of cumulative
temporary differences as follows at June 30:
1996 1995
---- ----
Deferred current assets and liabilities:
Net operating loss carryforwards $ 538,200 $ 309,000
Tax credit carryforwards 161,100 141,100
Stock option exercise 88,000 -
Inventory capitalization and reserve 79,200 78,700
Vacation pay accrual 36,100 28,200
Other 7,400 6,000
--------- ---------
910,000 563,000
Valuation allowance (481,000) (309,000)
--------- ---------
Net current asset $ 429,000 $ 254,000
========= =========
Deferred long-term assets and liabilities:
1996 1995
---- ----
Tax depreciation in excess of book depreciation $(278,300) $(256,900)
Charitable contribution carryforwards 57,100 51,700
Other 47,200 38,200
--------- ---------
Net long-term liability $(174,000) $(167,000)
========= =========
At June 30, 1996, Pharmadyne has available net operating loss carryforwards
of approximately $1,400,000 which can be used to reduce future taxable
income. These carryforwards begin to expire in 2009 and cannot be utilized to
offset taxable income of LecTec. The utilization of these net operating loss
carryforwards by Pharmadyne is restricted under Section 382 of the Internal
Revenue Code due to past ownership changes. A valuation allowance has been
recorded for these net operating loss carryforwards as they may not be
realizable.
At June 30, 1996, LecTec has available tax credit carryforwards of
approximately $161,000 which can be used to reduce future tax liabilities.
These carryforwards begin to expire in 2010. LecTec also has available a net
operating loss carryforward of approximately $168,000, which can be used to
reduce future taxable income of LecTec. This carryforward expires in 2011.
Differences between income tax expense (benefit) and the statutory federal
income tax rate of 34% are as follows:
1996 1995 1994
---- ---- ----
Federal statutory income tax rate (34.0)% 34.0% 34.0%
State income taxes, net of federal benefit 0.2 0.1 0.1
Tax credit carryforwards - (74.7) (4.0)
Foreign sales corporation (5.5) (24.9) (3.9)
Subsidiary loss producing no benefit 25.7 29.9 -
Tax exempt investment income (0.8) (14.7) (5.1)
Goodwill amortization 10.0 46.8 1.8
Prior years' overaccruals - (4.8) -
Other (1.3) .6 (4.2)
----- ---- ----
(5.7)% (7.7)% 18.7%
===== ===== ====
During the fourth quarter of the year ended June 30, 1995, the Company
recorded a $131,000 reduction of income tax expense to adjust to the
Company's annual effective tax rate. The effect of this adjustment was to
increase net earnings per share by $.03 for the year.
NOTE F - EMPLOYEE BENEFIT PLANS
The Company has a profit sharing benefit plan covering substantially all
employees who have completed one year of service. The Company's contributions
are discretionary as determined by the Board of Directors, subject to certain
limitations under the Internal Revenue Code. Pension expense under this plan
was $55,585 and $46,918 for the years ended June 30, 1995 and 1994. No
contributions were made to the plan during 1996.
The Company has a profit sharing bonus plan covering substantially all
employees who have completed two calendar quarters of employment. The
quarterly bonuses are paid from a pool equal to a maximum of 9% of pretax
income net of certain reductions, including the profit sharing distribution,
and a reserve based on the preceding quarter's net earnings. Profit sharing
bonus expense under this plan was $2,820, $18,534 and $56,978 for the years
ended June 30, 1996, 1995 and 1994.
The Company maintains a contributory 401(k) profit sharing benefit plan
covering substantially all employees who have completed one year of service.
The Company matches 50 percent of voluntary employee contributions to the
plan not to exceed 50% of a maximum 5% of a participant's compensation. The
Company's contributions under this plan were $44,549, $37,230 and $36,785 for
the years ended June 30, 1996, 1995 and 1994.
NOTE G - STOCK OPTIONS
The Company's 1989 Stock Option Plan (the "Plan") provides for the grant of
options to officers and other key employees of the Company. A total of
557,287 shares of common stock are reserved for issuance under the Plan. The
ten-year options are exercisable at such times as set forth in the individual
option agreements, generally vesting 100% after four years. The exercise
price of the options granted is the fair market value of the Company's common
stock at the date of grant. Option transactions under the Plan during the
three years ended June 30, 1996 are summarized as follows:
Number of shares Option price of share
---------------- ---------------------
Outstanding at July 1, 1993 289,015 $3.34 - $ 9.07
Granted 132,914 8.62 - 9.52
Exercised (16,391) 3.34 - 7.77
Canceled (10,438) 3.34 - 9.52
------- ----------------
Outstanding at June 30, 1994 395,100 3.34 - 9.52
Granted 107,000 9.00 - 13.00
Exercised (31,492) 3.34 - 9.52
Canceled (33,316) 3.34 - 9.52
------- ----------------
Outstanding at June 30, 1995 437,292 3.34 - 13.00
Granted 121,500 9.00 - 13.50
Exercised (65,663) 3.34 - 9.52
Canceled (20,938) 3.34 - 9.52
------- ----------------
Outstanding at June 30, 1996 472,191 $3.34 - $13.50
======= ================
Under the Plan, options to purchase an aggregate of 212,441 shares were
exercisable at June 30, 1996.
The Company's 1991 Directors' Stock Option Plan (the "Directors' Plan")
provides for the grant of options to members of the Board of Directors of the
Company. A total of 115,762 shares of common stock are reserved for issuance
under the Directors' Plan. The ten-year options are exercisable at the date
of the grant. The exercise price of the options granted is the fair market
value of the Company's common stock at the date of grant. Option transactions
under the Directors' Plan during the three years ended June 30, 1996 are
summarized as follows:
Number of shares Option price of share
---------------- ---------------------
Outstanding at July 1, 1993 25,634 $3.34 - $9.06
Granted 7,875 9.52
Exercised (2,895) 3.34
------ --------------
Outstanding at June 30, 1994 30,614 3.34 - 9.52
Granted 10,000 9.00
Exercised (110) 7.77
------ --------------
Outstanding at June 30, 1995 40,504 3.34 - 9.52
Granted 12,000 9.00
------ --------------
Outstanding at June 30, 1996 52,504 $3.34 - $9.52
====== ==============
During the year ended June 30, 1996, the Company earned a tax benefit of
$88,000 related to the exercise of stock options. As the benefit was not able
to be utilized currently, the Company recorded a deferred tax asset and an
increase in additional paid-in capital.
NOTE H - ACQUISITION OF PHARMADYNE CORPORATION
On June 30, 1992, the Company entered into a Research, Development and
Marketing Agreement with Pharmadyne and contract research revenues of
$125,000 and $75,000 were recognized in 1993 and 1992.
During 1993, the Company invested $175,000 in Pharmadyne, which represented a
19.5% ownership interest in Pharmadyne. This investment was recorded at cost.
In addition to this equity investment, during 1993, the Company also made an
advance of $50,000 to Pharmadyne. Effective March 28, 1994, the Company
entered into a stock option agreement with Pharmadyne which provided the
Company the right and option to purchase a number of shares of common stock
of Pharmadyne that, when combined with the common stock already owned, would
equal, at the date of exercise, 51% of the issued, outstanding and
potentially issuable shares of common stock.
On April 1, 1994, the Company exercised their option to purchase 182,822
shares of Pharmadyne common stock at $1 per share. The Company paid cash of
$132,525 and reduced their note receivable from Pharmadyne by $50,000 and
interest receivable by $297 to acquire the shares. This acquisition was
accounted for as a purchase. The acquired goodwill of approximately $590,000
is being amortized on a straight-line basis over 3 years.
The following unaudited pro forma consolidated results of operations for the
year ended June 30, 1994 give effect to the acquisition of Pharmadyne as
though it had occurred on July 1, 1993:
1994
----
Net sales $11,501,000
Earnings before income taxes 347,000
Net earnings 178,000
Net earnings per common and
common equivalent share .05
During 1996 the Company made additional advances to Pharmadyne and received a
warrant to purchase 227,959 additional shares of Pharmadyne at $1 per share.
On September 5, 1996 the Company exercised the warrant and increased its
ownership interest in Pharmadyne to 61%.
NOTE I - DISPOSITION OF DIRECT MARKETING RELATED ASSETS
On March 12, 1996, the Company contributed the direct marketing related
assets of Pharmadyne to Natus L.L.C. (an Arizona limited liability company)
in exchange for a 15% interest in Natus L.L.C. The direct marketing related
assets contributed consisted of the following:
Accounts receivable $ 32,791
Inventory 384,730
Prepaid expenses and other 135,708
Property and equipment, net 79,938
Other (27,000)
--------
$606,167
========
NOTE J - MAJOR CUSTOMERS AND EXPORT SALES
One customer accounted for 17.0%, 14.6% and 17.4% of total sales for the
years ended June 30, 1996, 1995 and 1994. The accounts receivable from this
customer represented 24% of trade receivables at June 30, 1996. The accounts
receivable from one other customer represented 15% of trade receivables at
June 30, 1996. One additional customer accounted for 10.1% of total sales
during the year ended June 30, 1994. Export sales accounted for approximately
19%, 18% and 22% of total sales during the years ended June 30, 1996, 1995
and 1994. Export sales by geographic area were as follows:
Years ended June 30,
---------------------------------------------
1996 1995 1994
---- ---- ----
Canada $ 80,746 $ 113,597 $ 122,208
Europe 1,652,941 1,171,910 943,250
Asia 466,777 1,122,179 1,114,928
Latin America 225,440 195,663 168,621
---------- ---------- ----------
$2,425,904 $2,603,349 $2,349,007
========== ========== ==========
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item with respect to directors will
be included under the heading "Election of Directors" in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
November 18, 1996, and is incorporated herein by reference.
NON DIRECTOR, EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Title
- ---- --- -----
Erwin W. Templin II 43 Executive Vice President, Chief Financial
Officer, Secretary and Treasurer
David A. Montecalvo 31 Vice President, Operations
Erwin W. Templin II is Executive Vice President, Chief Financial
Officer, Secretary and Treasurer. Mr. Templin joined the Company in July, 1993
as a Vice President of the Company and served as a director from 1990 to 1995.
From 1991 to 1993, he was Senior Vice President and Chief Financial Officer of
Aviation Services Holdings, Inc., a privately held general aviation investment
company. From 1988 to 1990, Mr. Templin was Senior Vice President and Chief
Financial Officer of Van Dusen Airport Services Company. Prior to 1988, he
served in various financial management positions with H.B. Fuller Company and
Jostens, Inc.
David A. Montecalvo is Vice President, Operations. Mr. Montecalvo
joined the Company in 1986 and held the position of Director, Corporate Science
and Technology prior to July 1995, when he became the Vice President,
Operations.
Item 11. EXECUTIVE COMPENSATION
The information required under this item will be included under the
heading "Executive Compensation" in the Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held November 18, 1996, and is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item will be included under the
heading "Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held November 18, 1996, and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item with respect to certain
relationships and related transactions will be included under the heading
"Certain Relationships and Related Transactions" in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held on November
18, 1996, and is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Financial Statements, Schedules and Exhibits
1. Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries are filed as a part of this Form 10-K in Part II, Item 8:
(i) Report of Independent Certified Public Accountants
(ii) Consolidated Balance Sheets at June 30, 1996 and 1995
(iii) Consolidated Statements of Operations for the years
ended June 30, 1996, 1995 and 1994
(iv) Consolidated Statements of Shareholders' Equity for
the years ended June 30, 1996, 1995 and 1994
(v) Consolidated Statements of Cash Flows for the years
ended June 30, 1996, 1995 and 1994
(vi) Notes to the Consoldiated Financial Statements
2. Financial Statement Schedules :
All schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements or the notes thereto.
3. Exhibits Method of Filing
-------- ----------------
3.01 Articles of Incorporation of Registrant, as amended (1)
3.02 By-laws of Registrant (1)
10.01 Service Agreement dated July 1, 1986, between LecTec (1)
International, Inc., a U.S. Virgin Islands
corporation, and LecTec Corporation, relating to the
sale, lease or rental of certain property outside the
United States.
10.02 Distribution and Commission Agreement dated July 1, (1)
1986, between LecTec International, Inc., a U.S.
Virgin Islands corporation, and LecTec Corporation,
relating to the sale, lease or rental of certain
property outside the United States.
10.03 1986 Incentive Stock Option Plan (1)
10.04 Agreement dated June 1, 1983, between LecTec (1)
Corporation and George Ingebrand, relating to the
grant of stock-equivalent units.
10.05 Certificate of Secretary pertaining to Resolution of (1)
Board of Directors of LecTec Corporation, dated
October 30, 1986, implementing a Profit Sharing Bonus
Plan.
10.06 Research Agreement dated December 31, 1991, between (2)
LecTec Corporation and the University of Minnesota,
whereby LecTec Corporation received exclusive rights
to market and sell a non-nicotine compound to be
mutually developed for smoking cessation.
10.07 Assignment and Mutual Release Agreement dated March (2)
9, 1993 between Pharmaco Behavioral Associates, Inc.,
Robert M. Keenan, Ph.D., M.D. and the University of
Minnesota, whereby the University assigned title,
royalty and patent rights associated with the
technology to alleviate symptoms of tobacco
withdrawal to Pharmaco Behavioral Associates, Inc.
and Dr. Keenan. Also included is a mutual release of
all parties on all past title, royalty and patent
rights.
10.08 License Agreement dated March 9, 1993 between (2)
Pharmaco Behavioral Associates, Inc. and LecTec
Corporation, whereby the Company received an
exclusive, worldwide license to market, make and
sublicense product associated with the technology to
alleviate symptoms of tobacco withdrawal.
10.09 Consultant Contract and Invention Assignment dated (2)
March 9, 1993 between Robert Keenan, Ph.D., M.D. and
LecTec Corporation, whereby the Company received
assignment of patent and invention rights associated
with the technology to alleviate symptoms of tobacco
withdrawal including provisions that the Company
enter into a consulting agreement with Dr. Keenan.
10.10 Research Agreement dated June 30, 1992, between (2)
LecTec Corporation and Natus Corporation, whereby
Natus will fund the the development of an analgesic
patch for exclusive rights to sell the the product.
10.11 Stock Investment and Repurchase Agreement dated July (2)
1, 1992, between LecTec Corporation and Natus
Corporation, whereby LecTec purchased Common Stock of
Natus Corporation.
10.12 Amendments dated March 18, 1993 to the original (2)
Research Agreement dated June 30, 1992, between
LecTec Corporation and Natus Corporation.
10.13 Subscription Agreement dated June 17, 1993 between (2)
LecTec Corporation and Natus Corporation.
10.14 A Promissory Note dated June 17, 1993 between LecTec (2)
Corporation and Natus Corporation. Included in the
note is an option for LecTec to receive common stock
of Natus in lieu of payment.
10.15 Amended and Restated Stock Option Agreement between (3)
LecTec Corporation and Natus Corporation, whereby
LecTec has obtained the option to acquire the
additional shares required to equal 51% of the Common
Stock of Natus.
10.16 Contribution Agreement dated March 12, 1996 between (4)
Natus Corporation and ACM Investments, L.L.C.
regarding the acquisition of an equity interest in
Natus L.L.C
*10.17 Distribution Agreement dated March 12, 1996 between (4)
LecTec Corporation, Natus Corporation and Natus
L.L.C.
10.18 Operating Agreement dated March 12, 1996 between (4)
Natus L.L.C., ACM Investments, L.L.C., Natus
Corporation and Natus Management, Inc.
*10.19 Marketing and Distribution Agreement dated January (4)
11, 1996 between LecTec Corporation, Natus
Corporation and CNS, Inc. regarding an analgesic pain
patch
10.20 Credit Agreement dated May 1, 1996 between LecTec (4)
Corporation and The First National Bank of Saint
Paul, a national banking association, whereby LecTec
Corporation has an unsecured $1 million working
capital line of credit
10.21 Revolving Credit Note dated May 1, 1996 between (4)
LecTec Corporation and The First National Bank of
Saint Paul, a national banking association
10.22 Working Capital Loan Agreement dated September 5, (4)
1995 between LecTec Corporation and Natus Corporation
relating to a loan from LecTec to Natus Corporation
10.23 Form of Working Capital Loan Agreement dated (4)
September 5, 1995; between Natus Corporation and
various shareholders relating to loans to Natus
Corporation
21.01 Subsidiaries of the Company (3)
23.01 Consent of Grant Thornton LLP (4)
27.01 Financial Data Schedule (4)
- -----------------------
* Confidential treatment requested for portions of this Exhibit
pursuant to Rule 24b-2 under the Securities Exchange Act of
1934 as amended, the confidential portions have been deleted
and filed separately with the Securities and Exchange
Commission together with a confidential treatment request
(1) Incorporated herein by reference to the Company's Form S-18
Registration Statement (file number 33-9774C) filed on October
31, 1986 and amended on December 12, 1986.
(2) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1993.
(3) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1994.
(4) Filed herewith.
(b) 1. Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 27th day of
September, 1996.
LECTEC CORPORATION
/s/Rodney A. Young
------------------
Rodney A. Young
Chief Executive Officer, President
and Director
(Principal 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 and in the capacities and on the date indicated.
/s/Rodney A. Young September 27, 1996
- -------------------------------------------
Rodney A. Young
Chief Executive Officer, President
Director
(Principal Executive Officer)
/s/Erwin W. Templin II September 27, 1996
- -------------------------------------------
Erwin W. Templin II
Executive Vice President, Chief Financial
Officer, Secretary, Treasurer
(Principal Financial Officer)
/s/Justin W. Shireman September 27, 1996
- -------------------------------------------
Justin W. Shireman
Controller
(Principal Accounting Officer)
/s/Thomas E. Brunelle September 27, 1996
- -------------------------------------------
Thomas E. Brunelle
Chairman
Director
/s/Alan C. Hymes September 27, 1996
- -------------------------------------------
Alan C. Hymes
Director
/s/Lee M. Berlin September 27, 1996
- -------------------------------------------
Lee M. Berlin
Director
/s/Paul Johnson September 27, 1996
- -------------------------------------------
Paul Johnson
Director
/s/Alan J. Wilensky September 27, 1996
- -------------------------------------------
Alan J. Wilensky
Director
EXHIBIT INDEX
-------------
Exhibits Page
-------- ----
3.01 Articles of Incorporation of Registrant, as amended (Note 1)
3.02 By-laws of Registrant (Note 1)
10.01 Service Agreement dated July 1, 1986, between LecTec
International, Inc., a U.S. Virgin Islands corporation, and
LecTec Corporation, relating to the sale, lease or rental of
certain property outside the United States (Note 1).
10.02 Distribution and Commission Agreement dated July 1, 1986,
between LecTec International, Inc., a U.S. Virgin Islands
corporation, and LecTec Corporation, relating to the sale,
lease or rental of certain property outside the United States
(Note 1).
10.03 1986 Incentive Stock Option Plan (Note 1).
10.04 Agreement dated June 1, 1983, between LecTec Corporation and
George Ingebrand, relating to the grant of stock-equivalent
units (Note 1).
10.05 Certificate of Secretary pertaining to Resolution of Board of
Directors of LecTec Corporation, dated October 30, 1986,
implementing a Profit Sharing Bonus Plan (Note 1).
10.06 Research Agreement dated December 31, 1991, between LecTec
Corporation and the University of Minnesota, whereby LecTec
Corporation received exclusive rights to market and sell a
non-nicotine compound to be mutually developed for smoking
cessation (Note 2).
10.07 Assignment and Mutual Release Agreement dated March 9, 1993
between Pharmaco Behavioral Associates, Inc., Robert M.
Keenan, Ph.D., M.D. and the University of Minnesota, whereby
the University assigned title, royalty and patent rights
associated with the technology to alleviate symptoms of
tobacco withdrawal to Pharmaco Behavioral Associates, Inc. and
Dr. Keenan. Also included is a mutual release of all parties
on all past title, royalty and patent rights (Note 2).
10.08 License Agreement dated March 9, 1993 between Pharmaco
Behavioral Associates, Inc. and LecTec Corporation, whereby
the Company received an exclusive, worldwide license to
market, make and sublicense product associated with the
technology to alleviate symptoms of tobacco withdrawal
(Note 2).
10.09 Consultant Contract and Invention Assignment dated March 9,
1993 between Robert Keenan, Ph.D., M.D. and LecTec
Corporation, whereby the Company received assignment of
patent and invention rights associated with the technology to
alleviate symptoms of tobacco withdrawal, including provisions
that the Company enter into a consulting agreement with Dr.
Keenan.
10.10 Research Agreement dated June 30, 1992, between LecTec
Corporation and Natus Corporation, whereby Natus will fund the
the development of an analgesic patch for exclusive rights to
sell the the product (Note 2).
10.11 Stock Investment and Repurchase Agreement dated July 1, 1992,
between LecTec Corporation and Natus Corporation, whereby
LecTec purchased Common Stock of Natus Corporation (Note 2).
10.12 Amendments dated March 18, 1993 to the original Research
Agreement dated June 30, 1992 between LecTec Corporation and
Natus Corporation (Note 2).
10.13 Subscription Agreement dated June 17, 1993 between LecTec
Corporation and Natus Corporation (Note 2).
10.14 Promissory Note dated June 17, 1993 between LecTec Corporation
and Natus Corporation. Included in the note is an option for
LecTec to receive common stock of Natus in lieu of payment
(Note 2).
10.15 Amended and Restated Stock Option Agreement between LecTec
Corporation and Natus Corporation, whereby LecTec obtained the
option to acquire the additional shares required to equal 51%
of the Common Stock of Natus (Note 3).
10.16 Contribution Agreement dated March 12, 1996 between Natus
Corporation and ACM Investments, L.L.C.regarding the
acquisition of an equity interest in Natus L.L.C
*10.17 Distribution Agreement dated March 12, 1996 between LecTec
Corporation, Natus Corporation and Natus L.L.C
10.18 Operating Agreement dated March 12, 1996 between Natus L.L.C.,
ACM Investments, L.L.C., Natus Corporation and Natus
Management, Inc.
*10.19 Marketing and Distribution Agreement dated January 11, 1996
between LecTec Corporation, Natus Corporation and CNS, Inc.
regarding an analgesic pain patch
10.20 Credit Agreement dated May 1, 1996 between LecTec Corporation
and The First National Bank of Saint Paul, a national banking
association, whereby LecTec Corporation has an unsecured $1
million working capital line of credit
10.21 Revolving Credit Note dated May 1, 1996 between LecTec
Corporation and The First National Bank of Saint Paul, a
national banking association
10.22 Working Capital Loan Agreement dated September 5, 1995 between
LecTec Corporation and Natus Corporation relating to a loan
from LecTec to Natus Corporation
10.23 Form of Working Capital Loan Agreement dated September 5,
1995; between Natus Corporation and various shareholders
relating to loans to Natus Corporation
21.01 Subsidiaries of the Company (Note 3)
23.01 Consent of Grant Thornton LLP
27.01 Financial Data Schedule
Notes:
* Confidential treatment requested for portions of this Exhibit
pursuant to Rule 24b-2 under the Securities Exchange Act of
1934 as amended, the confidential portions have been deleted
and filed separately with the Securities and Exchange
Commission together with a confidential treatment request
(1) Incorporated herein by reference to the Company's Form S-18
Registration Statement (file number 33-9774C) filed on October
31, 1986 and amended on December 12, 1986.
(2) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1993.
(3) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1994.