SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1997.
/ / 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 Common Stock held by non-affiliates
of the Registrant as of September 19, 1997 was $17,558,896 based upon the last
reported sale price of the Common Stock at that date by the Nasdaq Stock Market.
The number of shares outstanding of the Registrant's Common Stock as of
September 19, 1997 was 3,842,818 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information from the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held November 20, 1997 (1997 Proxy Statement).
PART I
ITEM 1. BUSINESS
GENERAL
LecTec Corporation (the "Company") designs, manufactures and markets
resting diagnostic (ECG or "electrocardiograph") electrodes, conductive and
non-conductive adhesive hydrogels, medical tapes and patches for the topical
application of drugs or other therapeutic compounds. The Company markets its
products to medical products distributors, physician clinics, hospital
purchasing groups, hospitals, consumers through retail distribution channels,
original equipment manufacturers (OEMs) 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 aqueous conductive gels in order to
maintain contact with the skin. The Company has since continued to develop,
manufacture and market electrodes as well as hydrogels, medical tapes, topical
drug delivery systems, patches and therapeutic products. A hydrogel is a polymer
network having an affinity for water and similar materials which is ideal for
electrical conductivity and skin compatibility. The Company holds domestic and
foreign patents on several products.
The Company, through its research and development efforts, is
investigating new systems and products for topical drug delivery, new conductive
adhesive hydrogel polymers, medical tapes and wound care treatments, as well as
a smoking cessation pill. In addition, existing technologies are being refined
for product line extensions and 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, skin compatible, adhesive
hydrogels technology to cardiac diagnostic electrodes. The Company's patented
natural and synthetic-based polymers are self-adherent and are capable of being
made electrically conductive. Using natural-based polymers, the Company
developed one of the first solid gel disposable resting diagnostic ECG
electrodes. All of the Company's electrodes are electrically and chemically
stable.
All of the Company's skin interface technologies are chemically
compatible with human skin, thereby reducing or eliminating skin irritation,
reducing damage to the skin as well as 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, different from some of the conductive gels used in
competitive products. An integral part of the Company's proprietary technology
is the use of environmentally responsible substances and processes in the
manufacturing of its products.
CONDUCTIVE PRODUCTS
The Company's conductive products include diagnostic electrodes and
electrically conductive and non-conductive adhesive hydrogels.
The solid gel design of the Company's electrodes provides more
consistent electrical performance and eliminates clean-up time. Currently the
Company has three different types of diagnostic electrodes: T-1000 Plus, a
disposable electrode made of natural polymer solid gel with gentle adhesion;
MP-3000, a synthetic solid gel electrode with aggressive adhesion which meets
all AAMI (American Association For Medical Instrumentation) standards including
defibrillation recovery; and AG4000, a synthetic solid gel, silver substrate
electrode which also meets all AAMI standards including defibrillation recovery.
The Company manufactures synthetic and natural-based hydrogels. The
Company pioneered hydrogel technology and developed alternatives to competitors'
hydrogels that are resistant to dehydration, evaporation problems and changes in
their electrical and physical properties. The Company
also manufactures high quality adhesives used for attaching devices to the body.
The hydrogels can be modified to deliver specific medications to the skin for
topical use or through the skin for localized and systemic application. The
hydrogels also can be manufactured to have various levels of conductivity, with
or without self-adhesive properties, for diagnostic electrodes, electrosurgical
grounding pads, external pacing and defibrillation electrodes, TENS
(Transcutaneous Electronic Nerve Stimulation) products and iontophoretic return
electrodes. Sales of conductive products accounted for approximately 63%, 61%
and 52% of the Company's total sales for the fiscal years 1997, 1996 and 1995.
MEDICAL TAPE PRODUCTS
The Company manufactures and markets hypo-allergenic medical tape
products in various individual slit roll widths and in large jumbo rolls for the
world market. The Company's medical tape business includes the U.S. healthcare
market (hospitals and alternate care segments), the U.S. consumer market and the
international healthcare market. Medical tape products manufactured and marketed
by the Company are configured in both 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 healthcare industry.
The Company offers branded, private label and converter alliance
(selling of semi-finished goods to a manufacturer who then converts the goods
into a finished product) programs. The Company recently finalized a new LecTec
brand strategy which it believes will allow access to several new markets that
are not currently being served by the Company through private label distribution
channels.
Sales of medical tapes accounted for approximately 25%, 24% and 26% of
the Company's total sales for the fiscal years 1997, 1996 and 1995.
THERAPEUTIC PRODUCTS
The Company manufactures and markets topical drug delivery patches. The
hydrogel-based patch products use a monolithic (single structure adhesive)
system that delivers drugs and other therapeutic compounds onto and into the
skin. Products currently manufactured using the adhesive-based patch technology
are analgesic patches for localized pain relief, wart removers, and a corn and
callus remover. These products are marketed as OTC (over-the-counter) products.
Analgesic patches are marketed under the LecTec brand TheraPatch(TM) and through
several other marketing partners. Sales of therapeutic products accounted for
approximately 12%, 15% and 22% of the Company's total sales for the fiscal years
1997, 1996 and 1995 (see further discussion of therapeutic product sales under
Part II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, of this Form 10-K).
CUSTOMERS
Burdick Corporation accounted for 19%, 17% and 15% of the Company's
total sales for the fiscal years 1997, 1996 and 1995. The Company sold its
products to approximately 140 active customers in 1997 and 150 active customers
during 1996 and 1995. The Company's backlog orders (purchase orders received
from customers for future shipment) as of August 12, 1997 totaled $1,663,000
(all of which the Company expects to fill in fiscal 1998), compared with
approximately $1,319,000 on August 12, 1996.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
Design development planning, clinical testing, manufacturing,
packaging, labeling and distribution of the Company's products are subject to
federal (FDA - Food and Drug Administration), state, local and foreign
regulation. The Company's electrodes under current FDA policy are marketed
pursuant to Section 510(k) notification, which is a means of obtaining FDA
clearance to market a medical device. The Company's topical drug products are
marketed under the OTC monographs (submission requirements). Any new drug and
transdermal new drug development is marketed after approval of a New Drug
Application (NDA) containing full reports of detailed laboratory and clinical
investigations on laboratory animals and human patients.
The Company does not use solvents in the manufacturing of its products
and thus maintains environmental responsibility. The Company does not anticipate
any major expenditures for environmental controls during the next fiscal year.
COMPETITION
The markets for electrodes, hydrogels, medical tapes, topical 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 have
significantly greater financial, marketing and technological resources than the
Company. However, the Company believes that it competes on the basis of
proprietary technology and its ability to manufacture and market its products to
multiple healthcare market segments.
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 has also noted a consolidation of customers and
reduction in the number of manufacturers of medical tapes.
The Company's OTC analgesic patch competes with ointments, lotions and
creams manufactured by various competitors. Schering Plough (Dr. Scholl's), the
major competitor of two of the Company's therapeutic products, an OTC corn and
callous remover and an OTC wart remover, holds in excess of 85% U.S. market
share for both products.
The Company believes its proprietary technology, customer focus and
flexible manufacturing capabilities position it competitively in the U.S. and
international markets.
PATENTS AND TRADEMARKS
The Company has U.S. and foreign patents on adhesive membranes,
electrodes, transdermal and topical delivery systems and tape structures.
Twenty-two U.S. patents and fourteen international patents are currently
assigned or licensed to the Company. Three U.S. patents were issued to the
Company during fiscal 1997. The first two patents cover cotinine's use in aiding
smoking cessation. The third patent covers a synthesis or method of producing
cotinine. Thirteen U.S. and foreign applications are pending and the Company has
an exclusive license to seven other pending applications. The patents most
pertinent to the Company's major products have been issued and have a remaining
duration in excess of seven years.
Two registrations of trademarks were received in fiscal 1997. Five
other trademark registrations are pending, three of which were filed in fiscal
1997.
The Company expects that its products will be subject to continuous
modifications due to improvements in materials and rapid technological advances
in the market for medical products. Therefore, the Company's continued success
does not depend solely upon ownership of patents, but 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 both patents and trade secrets 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.
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 and approved products and new technologies.
The Company may develop products jointly with corporations and/or with
inventors from outside the Company 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. Research and development contract
opportunities are evaluated on an individual basis.
Research and development resources are being used to fund development
of new analgesic patch products, conductive products, medical tapes, specialty
wound management products and a cotinine based smoking cessation product.
In November 1996, the Company was informed that the FDA had accepted
its IND (Investigational New Drug) submission for cotinine. The Company believes
that cotinine is a promising non-nicotine drug for use in treating tobacco
withdrawal symptoms. Because of the additional cost associated with the
remaining clinical work on cotinine, the Company is actively seeking outside
partners to help fund and move this non-nicotine program to completion.
In fiscal years 1997, 1996 and 1995, the Company spent approximately
$1,515,000, $1,975,000 and $1,877,000 on research and development.
MARKETING AND MARKETING STRATEGY
The Company markets and sells its products to medical products
distributors, physician clinic, hospital purchasing organizations, hospitals,
consumers through retail partners, original equipment manufacturers (OEMs) and
direct selling groups.
The Company recently implemented a proactive marketing and sales
strategy to expand its existing customer business relationships and to develop a
base of new customers. The Company also recently formalized a balanced
distribution strategy, consisting of traditional private label distribution and
a new LecTec brand strategy. This balanced approach is designed to increase
penetration of current markets, while allowing the Company to move into several
highly promising new healthcare markets for its electrode, medical tape and
analgesic patch products.
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 accounted for 19% of total sales during
each of the years ended June 30, 1997 and 1996, and 18% of total sales during
the year ended June 30, 1995.
The Company's international sales are made by the Company's corporate
sales force. The Company does not maintain a separate international marketing
staff or operations. The following table sets forth export sales by geographic
area:
Years ended June 30
------------------------------------------
1997 1996 1995
---------- ---------- ----------
Canada $ 117,966 $ 80,746 $ 113,597
Europe 1,456,141 1,652,941 1,171,910
Asia 229,506 466,777 1,122,179
Latin America 484,319 225,440 195,663
---------- ---------- ----------
Total Export Sales $2,287,932 $2,425,904 $2,603,349
========== ========== ==========
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 diagnostic 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, 1997, the Company employed 72 full-time employees. None
of the Company's employees are represented by any labor unions or other
collective bargaining units. The Company believes relations with its employees
are good.
PHARMADYNE CORPORATION AND RESTRUCTURING CHARGE
During 1993, the Company invested $175,000 in Pharmadyne Corporation,
which represented a 19.5% ownership interest in Pharmadyne. The investment was
recorded at cost. During 1994, the Company purchased additional shares of
Pharmadyne common stock for $183,000 and increased the Company's ownership to
51%. The acquisition was accounted for as a purchase and the acquired goodwill
of approximately $590,000 was fully amortized on a straight-line basis over
three years.
During 1996 the Company made 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%.
During 1997, the Company adopted a plan for eliminating the Pharmadyne
subsidiary and recorded a nonrecurring restructuring charge of $2,180,000. The
restructuring charge included approximately $1,369,000 for the planned
acquisition of the minority interests in Pharmadyne in exchange for newly issued
shares of LecTec Corporation common stock, $480,000 for the write-off of
Pharmadyne's 15% interest in Natus, L.L.C., an Arizona-based direct marketing
company, and $331,000 for completion of restructuring activities, consisting
primarily of fees for professional services. The Pharmadyne restructuring plan
is expected to enable the Company to execute a broad-based, strategic marketing
plan to increase pain patch sales by reaching end-users through multiple
channels of distribution including retail outlets, clinics, nursing homes,
hospitals and other healthcare providers. Going forward the Company should also
benefit from a more efficient and lower-cost distribution system. The Company
expects to complete the restructuring during fiscal 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Title
- ---- --- -----
Rodney A. Young 42 Chairman, Chief Executive Officer and President
Deborah L. Moore 40 Chief Financial Officer and Secretary
Jane M. Nichols 51 Vice President, Marketing and New Business
Development
Daniel M. McWhorter 57 Vice President, Research and Development
Robert A. Eno 42 Vice President, Operations
Rodney A. Young is Chairman, Chief Executive Officer and President. He
joined the Company in August, 1996. Mr. Young has 19 years of medical industry
experience in sales and marketing for Upjohn Company and 3M and was most
recently Vice President and General Manager of the Specialized Distribution
Division of Baxter International, Inc.
Deborah L. Moore is Chief Financial Officer and Secretary. She joined
the Company in February, 1997. Ms. Moore's 20-year professional background
includes public accounting with the big six firms of Ernst & Young LLP and
Deloitte & Touche LLP and was most recently the Vice President of Corporate
Development for Varitronic Systems, Inc.
Jane M. Nichols is Vice President, Marketing and New Business
Development. She joined the Company in April, 1997. Ms. Nichol's 25-year career
includes clinical, technical and management roles at Methodist Hospital and Park
Nicollet Medical Centers, and senior marketing positions at 3M and Ecolab.
Daniel M. McWhorter is Vice President, Research and Development. He
joined the Company in January, 1997. Mr. McWhorter has more than 25 years of
experience in the medical products industry
including both technical and general management positions at The Kendall Company
and Pharmacia Deltec and senior technical positions at Abbott Laboratories and
Mentor Corporation.
Robert A. Eno is Vice President, Operations. He joined the Company in
September, 1997. Mr. Eno has had 19 years of industrial and manufacturing
engineering and operations management experience at St. Jude Medical Inc., ADC
Telecommunications Inc., Paco Corporation and Eaton Corporation.
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's common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market ("Nasdaq") under the symbol LECT.
The following table sets forth the high and low daily trade price
information for the Company's common stock for each quarter of fiscal 1997 and
1996. Such prices reflect interdealer prices, without retail mark-up, mark-down,
or commission, and may not necessarily represent actual transactions.
YEARS ENDED JUNE 30, 1997 1996
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $13.500 $8.500 $12.250 $8.500
Second Quarter 9.500 5.500 13.250 8.750
Third Quarter 8.500 5.000 12.000 9.750
Fourth Quarter 7.000 4.875 16.000 9.875
As of September 19, 1997 the Company had 3,842,818 shares of
common stock outstanding, and 377 common shareholders of record which does not
include beneficial owners whose shares were held of record by nominees or broker
dealers.
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, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Net sales $12,256,327 $13,100,754 $14,138,290 $10,715,490 $ 9,224,005
Gross profit 4,324,180 4,969,659 5,697,562 4,041,853 3,434,128
Earnings (loss) from operations (2,215,951) * (724,074) 69,761 837,161 750,335
Earnings (loss) before equity in
losses of unconsolidated
subsidiary (2,140,660) * (632,193) 153,863 768,974 745,282
Equity in losses of unconsoli-
dated subsidiary 126,067 -- -- 133,639 163,442
Net earnings (loss) (2,266,727) * (632,193) 153,863 635,335 581,840
Net earnings (loss) per common
and common equivalent share (.59) * (.17) .04 .17 .15
BALANCE SHEET DATA
At June 30, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Cash, cash equivalents and
short-term investments $ 1,242,777 $ 800,693 $ 839,942 $ 2,182,570 $ 3,469,632
Current assets 6,873,696 5,624,682 5,764,363 6,124,640 6,082,934
Working capital 4,035,084 4,240,024 4,490,796 4,737,567 5,471,894
Property, plant and equipment, net 4,592,304 5,112,975 5,559,807 4,705,602 3,016,761
Long-term investments 8,013 574,806 568,156 585,855 1,195,922
Total assets 11,837,356 12,494,003 12,646,745 12,363,075 10,876,068
Long-term liabilities 211,000 174,000 167,000 139,000 64,000
Shareholders' equity 8,787,744 10,935,345 11,206,178 10,837,002 10,201,028
* Includes a nonrecurring restructuring charge of $2,180,353 or $.57 per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES
Net sales were $12,256,000 in 1997, a decrease of 6% from net
sales of $13,101,000 in 1996. Net sales were $14,138,000 in 1995. The decrease
in 1997 net sales was due primarily to the absence of direct marketing sales for
the entire 1997 fiscal year. While there were no direct marketing sales in
fiscal 1997, such sales totaled $1,410,000 or 10.8% of total net sales in fiscal
1996. The Company's Pharmadyne Corporation subsidiary divested of its direct
marketing related assets near the end of the third quarter of fiscal 1996. In
1997, the absence of direct marketing therapeutic product sales was partially
offset by an increase in the volume of therapeutic products sold through
indirect distribution channels. Net sales of conductive products and medical
tape products each decreased by 3% in 1997 from the prior year.
The decrease in net sales for 1996 from 1995 was primarily
attributable to decreased therapeutic product sales resulting from the
divestiture of direct marketing related assets in the third quarter of fiscal
1996. Additionally, medical tape sales decreased by $508,000 offset by an
increase of $606,000 in conductive product sales.
Net sales of conductive products (medical electrodes and
conductive hydrogels) decreased by 3% in 1997 to $7,714,000 from $7,940,000 in
1996. Conductive product net sales were $7,334,000 in 1995. These fluctuations
in sales were primarily volume-related. The Company expects to maintain or
increase fiscal 1997 levels of conductive sales in fiscal 1998.
Net sales of medical tapes decreased by 3% in 1997 to $3,093,000
from $3,180,000 in 1996. Medical tape net sales were $3,688,000 in 1995. The
decrease in 1997 was primarily attributable to the absence of an order from an
international customer whose business fluctuates annually. Excluding sales to
this international customer, medical tape sales to all other customers increased
by 7% in 1997. This increase was primarily the result of increased sales volume.
The decrease in 1996 from 1995 was primarily attributable to reduced sales
volume to the international customer which more than offset the increased sales
volume associated with new product offerings. The Company expects to maintain or
increase fiscal 1997 levels of medical tape product sales in fiscal 1998.
Net sales of therapeutic products decreased 27% in 1997 to
$1,449,000 from $1,981,000 in 1996. Therapeutic product net sales were
$3,116,000 in fiscal 1995. The decrease in 1997 was primarily due to the absence
of Pharmadyne direct marketing sales for the entire 1997 fiscal year as compared
to the inclusion of direct marketing sales for the first three quarters of
fiscal 1996 which totaled $1,410,000. The absence of direct marketing sales
beginning in the fourth quarter of 1996 resulted from the divestiture of
Pharmadyne's direct marketing related assets near the end of the third quarter
of 1996. The decrease in 1996 net sales compared to 1995 net sales was primarily
attributable to the decrease in the third quarter and the absence in the fourth
quarter of the Pharmadyne direct marketing related sales. Management believes
that sales of the Company's therapeutic pain patch product will represent an
increased percentage of total net sales during fiscal 1998 due to the addition
of professional sales management personnel and increased marketing activities.
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 net sales in 1997 and
1996, and 18% in 1995. The Company expects fiscal 1998 international sales to be
comparable to fiscal 1997 sales levels.
GROSS PROFIT
The Company's gross profit was $4,324,000 in 1997, down from
$4,970,000 in 1996. Gross profit was $5,698,000 in 1995. As a percentage of net
sales, gross profit was 35.3% in 1997, 37.9% in 1996 and 40.3% in 1995. In 1997,
the decrease in the gross profit percent resulted primarily from the absence of
higher margin direct marketing related sales and increased inventory
obsolescence costs which were partially offset by decreased material and labor
costs for conductive products. In 1996, the decrease in the gross profit percent
was primarily attributable to decreased sales of higher margin therapeutic
products and increased overhead costs.
While direct marketing sales carried higher gross margins than
sales made through the Company's indirect distribution channels, the selling,
general and administrative costs associated with the direct marketing operation
were substantially greater than the costs required to support sales through
indirect distribution. The higher operating expenses of the direct marketing
organization more than offset the higher gross margins associated with those
sales.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
Selling, general and administrative expenses totaled $2,845,000 or
23.2% of net sales in 1997, compared to $3,718,000 or 28.4% of net sales in
1996, and $3,751,000 or 26.5% of net sales in 1995. The 1997 decrease was
primarily due to the absence of the direct marketing expenses of the Pharmadyne
subsidiary during all of 1997 as compared to 1996 which included direct
marketing expenses for the first three quarters. The 1997 decrease was partially
offset by increased administrative expenses associated with hiring a new
executive staff, and separation costs associated with former executives. The
1996 decrease was primarily due to the absence of costs in the fourth quarter
from direct marketing related operations. The Company anticipates SG&A expenses
in fiscal 1998 will be comparable to fiscal 1997.
RESEARCH AND DEVELOPMENT (R&D) EXPENSES
Research and development expenses totaled $1,515,000 or 12.4% of
net sales in 1997, compared to $1,975,000 or 15.1% of net sales in 1996, and
$1,877,000 or 13.3% of net sales in 1995. The high levels of R&D expenditures
over this three-year period reflect the utilization of internally-generated
funds to develop additional therapeutic products and a new cotinine-based
product. The decrease in 1997 R&D expense was primarily due to decreased labor
costs and decreased cotinine related expenses. Substantially all of the dollar
increase in R&D during fiscal 1996 was associated with clinical studies for a
non-nicotine cotinine-based smoking cessation product. R&D resources are also
being used to fund development of new analgesic patch products, conductive
products and specialized medical tapes. Management believes that R&D
expenditures, as a percentage of net sales, will be in the range of 10% to 12%
for the immediate future.
RESTRUCTURING CHARGE
During 1997 the Company recorded a nonrecurring restructuring
charge of $2,180,000 related to its plan for eliminating the Pharmadyne
Corporation subsidiary. The restructuring charge included approximately
$1,369,000 for the planned acquisition of the minority interests in Pharmadyne
in exchange for newly issued shares of LecTec Corporation common stock, $480,000
for the write-off of Pharmadyne's 15% interest in Natus, L.L.C., an
Arizona-based direct marketing company, and $331,000 for the completion of
restructuring activities, consisting primarily of fees for professional
services. The Company expects to complete the restructuring during fiscal 1998.
OTHER INCOME (EXPENSE)
Other income totaled $75,000 in 1997, up from $54,000 in 1996 and
$73,000 in 1995. The increase in 1997 resulted primarily from a gain on the sale
of equipment. In 1996 the decline resulted primarily from a reduction of
interest income due to the liquidation of short-term investments during 1995.
INCOME TAX
The Company recorded no income tax expense or benefit in 1997,
compared to an income tax benefit of $38,000 in 1996 and a benefit of $11,000 in
1995. There was no income tax benefit recorded during 1997 due primarily to the
effect of the non-deductible restructuring charge. The tax benefit in 1996
resulted from losses incurred in 1996 reduced by the effect of the subsidiary
losses which could not be utilized by the Company at that 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 March 12, 1996, the Company contributed the direct
marketing related assets of the Pharmadyne Corporation to Natus L.L.C. (an
Arizona limited liability company) in exchange for a 15%
interest in Natus L.L.C. This investment was accounted for using the equity
method. During 1997 the Company recorded $126,000 of equity in the losses of
Natus L.L.C. The remaining investment in Natus L.L.C. of $480,100 was fully
written off in 1997 as part of the $2,180,000 restructuring charge.
EARNINGS SUMMARY
The restructuring charge of $2,180,000 or $.57 per share was the
primary component of the total net loss in 1997 of $2,267,000 or $.59 per share.
Excluding the impact of this one-time charge, the loss for 1997 was $87,000 or
$.02 per share. The net loss in 1996 was $632,000 or $.17 per share compared to
net earnings of $154,000 or $.04 per share in 1995. The largest components of
the net loss for fiscal 1996 were the losses associated with the direct
marketing related operations of the Pharmadyne Corporation subsidiary and
increased R&D expense.
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 $136,000 to $665,000 at
June 30, 1997 from $801,000 at June 30, 1996. Short and long-term investments
increased by $11,000 to $586,000 at June 30, 1997 from $575,000 at June 30,
1996. Capital spending for various equipment totaled $187,000 in 1997. There
were no material commitments for capital expenditures at June 30, 1997.
Working capital totaled $4,035,000 at June 30, 1997, compared to
$4,240,000 at the end of fiscal 1996. The Company's current ratio was 2.4 at
June 30, 1997 compared to 4.1 at June 30, 1996. Excluding the accrued
restructuring charge, the Company's current ratio at June 30, 1997 was 5.2.
Increased raw material inventory levels due to increased supplier purchase
quantity requirements and investments reclassified as short-term were
significant factors impacting the current ratio at June 30, 1997 as well.
Net property, plant and equipment decreased by $521,000 to
$4,592,000 at June 30, 1997 from $5,113,000 at June 30, 1996, reflecting the
excess of depreciation expense over additions.
The Company has no short or long-term debt. During August 1997 the
Company obtained an unsecured $1,000,000 working capital line of credit which
expires in September 1998. The previous working capital line of credit expired
January 1, 1997. There were no borrowings outstanding under the previous line of
credit as of June 30, 1996, nor during fiscal year 1997. Shareholders' equity
decreased by $2,147,000 to $8,788,000 as of June 30, 1997 from $10,935,000 as of
June 30, 1996, primarily due to the impact of the $2,180,000 restructuring
charge.
Management believes that internally-generated cash-flow and the
existing short-term line of credit will be sufficient to support anticipated
operating and capital spending requirements during fiscal 1998.
FORWARD-LOOKING STATEMENTS
From time to time, in reports filed with the Securities and
Exchange Commission, in press releases, and in other communications to
shareholders or the investment community, the Company may provide
forward-looking statements concerning possible or anticipated future results of
operations or business developments which are typically preceded by the words
"believes", "expects", "anticipates", "intends", "will", "may", "should" or
similar expressions. Such forward-looking statements are subject to risks and
uncertainties which could cause results or developments to differ materially
from those indicated in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the buying patterns of major
customers; competitive forces including new products or pricing pressures; costs
associated with and acceptance of the Company's new brand strategy; impact of
interruptions to production; dependence on key personnel; need for regulatory
approvals; changes in governmental regulatory requirements or accounting
pronouncements; and ability to satisfy funding requirements for operating needs,
expansion or capital expenditures.
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, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe 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, 1997 and 1996, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Minneapolis, Minnesota
August 22, 1997
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30
-------------------------
ASSETS 1997 1996
----------- -----------
CURRENT ASSETS
Cash and cash equivalents (note A) $ 665,190 $ 800,693
Short-term investments (note A) 577,587 --
Receivables
Trade, net of allowances of $67,126
in 1997 and $74,208 in 1996 2,178,984 1,847,736
Refundable income taxes 401,263 375,580
Other 22,780 182,247
----------- -----------
2,603,027 2,405,563
Inventories (note A) 2,577,021 2,011,327
Prepaid expenses and other 84,871 123,099
Deferred income taxes (note D) 366,000 284,000
----------- -----------
Total current assets 6,873,696 5,624,682
PROPERTY, PLANT AND EQUIPMENT - AT COST
(note A)
Building and improvements 1,635,157 1,629,630
Equipment 6,578,960 6,414,132
Furniture and fixtures 371,670 354,985
----------- -----------
8,585,787 8,398,747
Less accumulated depreciation 4,241,214 3,533,503
----------- -----------
4,344,573 4,865,244
Land 247,731 247,731
----------- -----------
4,592,304 5,112,975
OTHER ASSETS
Patents and trademarks, less accumulated
amortization of $846,914 in 1997 and
$687,871 in 1996 (note A) 363,343 417,681
Goodwill, less accumulated amortization
of $590,000 in 1997 and $442,503 in 1996
(notes A and G) -- 147,497
Long-term investments (note A) 8,013 574,806
Investment in limited liability company (note H) -- 606,167
Other -- 10,195
----------- -----------
371,356 1,756,346
----------- -----------
$11,837,356 $12,494,003
=========== ===========
The accompanying notes are an integral part of these statements.
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
June 30
--------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
----------- -----------
CURRENT LIABILITIES
Accounts payable $ 779,699 $ 894,846
Accrued expenses
Payroll related 324,381 304,527
Restructuring charge (note G) 1,521,107 --
Other 213,425 185,285
----------- -----------
Total current liabilities 2,838,612 1,384,658
DEFERRED INCOME TAXES (note D) 211,000 174,000
COMMITMENTS AND CONTINGENCIES
(notes C and E) -- --
SHAREHOLDERS' EQUITY (note F)
Common stock, $.01 par value;
15,000,000 shares authorized;
issued and outstanding:
3,842,800 shares in 1997 and
3,835,800 shares in 1996 38,428 38,358
Additional paid-in capital 10,476,428 10,368,166
Unrealized losses on securities
available-for-sale (note A) (33,372) (44,166)
Retained earnings (deficit) (1,693,740) 572,987
----------- -----------
8,787,744 10,935,345
----------- -----------
$11,837,356 $12,494,003
=========== ===========
The accompanying notes are an integral part of these statements.
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Net sales (notes A and I) $ 12,256,327 $ 13,100,754 $ 14,138,290
Cost of goods sold 7,932,147 8,131,095 8,440,728
------------ ------------ ------------
Gross profit 4,324,180 4,969,659 5,697,562
Operating expenses
Selling, general and administrative 2,844,618 3,718,496 3,751,194
Research and development 1,515,160 1,975,237 1,876,607
Restructuring charge (note G) 2,180,353 -- --
------------ ------------ ------------
6,540,131 5,693,733 5,627,801
------------ ------------ ------------
Earnings (loss) from operations (2,215,951) (724,074) 69,761
Other income (expense)
Interest income 22,150 26,554 35,846
Dividend income 37,610 38,029 38,487
Other 15,531 (10,702) (1,231)
------------ ------------ ------------
75,291 53,881 73,102
------------ ------------ ------------
Earnings (loss) before income
taxes and equity in losses
of unconsolidated subsidiary (2,140,660) (670,193) 142,863
Income tax benefit (note D) -- (38,000) (11,000)
------------ ------------ ------------
Earnings (loss) before equity in
losses of unconsolidated subsidiary (2,140,660) (632,193) 153,863
Equity in losses of unconsolidated
subsidiary (note H) 126,067 -- --
------------ ------------ ------------
Net earnings (loss) $ (2,266,727) $ (632,193) $ 153,863
============ ============ ============
Net earnings (loss) per common and
common equivalent share (note A) $ (.59) $ (.17) $ .04
============ ============ ============
Weighted average number of common and
common equivalent shares outstanding
during the year 3,836,618 3,801,155 3,826,905
============ ============ ============
The accompanying notes are an integral part of these statements.
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Unrealized
losses on
Common stock Additional securities Retained Total
----------------------- paid-in available- earnings shareholders'
Shares Amount capital for-sale (deficit) equity
---------- -------- ------------ ---------- ----------- ------------
Balance, June 30, 1994 3,757,000 $ 37,570 $ 9,809,079 $(60,964) $ 1,051,317 $ 10,837,002
Net earnings -- -- -- -- 153,863 153,863
Cost of shares retired (2,102) (21) (17,330) -- -- (17,351)
Common stock issued upon
exercise of options (note F) 31,602 316 162,200 -- -- 162,516
Unrealized gain on securities
available-for-sale (note A) -- -- -- 10,148 -- 10,148
Tax benefit from exercise of
stock options -- -- 60,000 -- -- 60,000
---------- -------- ------------ -------- ----------- ------------
Balance, June 30, 1995 3,786,500 37,865 10,013,949 (50,816) 1,205,180 11,206,178
Net loss -- -- -- -- (632,193) (632,193)
Cost of shares retired (16,281) (163) (184,319) -- -- (184,482)
Common stock issued upon
exercise of options (note F) 65,581 656 450,536 -- -- 451,192
Unrealized gain on securities
available-for-sale (note A) -- -- -- 6,650 -- 6,650
Tax benefit from exercise of
stock options -- -- 88,000 -- -- 88,000
---------- -------- ------------ -------- ----------- ------------
Balance, June 30, 1996 3,835,800 38,358 10,368,166 (44,166) 572,987 10,935,345
Net loss -- -- -- -- (2,266,727) (2,266,727)
Cost of shares retired (8,278) (83) (54,023) -- -- (54,106)
Common stock issued upon
exercise of options (note F) 15,278 153 51,690 -- -- 51,843
Unrealized gain on securities
available-for-sale (note A) -- -- -- 10,794 -- 10,794
Investment by Pharmadyne
minority shareholders -- -- 83,595 -- -- 83,595
Tax benefit from exercise of
stock options -- -- 27,000 -- -- 27,000
---------- -------- ------------ -------- ----------- ------------
Balance, June 30, 1997 3,842,800 $ 38,428 $ 10,476,428 $(33,372) $(1,693,740) $ 8,787,744
========== ======== ============ ======== =========== ============
The accompanying notes are an integral part of these statements.
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities:
Net earnings (loss) $(2,266,727) $ (632,193) $ 153,863
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Restructuring charge 2,180,353 -- --
Depreciation and amortization 1,014,251 1,128,103 932,051
Deferred income taxes (45,000) 65,000 (149,000)
Equity in losses of unconsolidated
subsidiary 126,067 -- --
Changes in operating assets and
liabilities:
Trade and other receivables (171,781) 161,057 (410,006)
Refundable income taxes (25,683) (256,040) 109,714
Inventories (565,694) (298,803) (325,219)
Prepaid expenses and other 38,228 (29,011) (128,059)
Accounts payable (31,552) 123,375 (189,057)
Accrued expenses (104,152) (12,284) 83,770
----------- ----------- -----------
Net cash provided by
operating activities 148,310 249,204 78,057
Cash flows from investing activities:
Purchase of property, plant and
equipment (187,040) (430,956) (1,471,427)
Investment in patents and trademarks (104,705) (164,796) (141,665)
Purchase of investments -- -- (249,603)
Sale of investments -- -- 1,674,250
Other 10,195 40,589 19,395
----------- ----------- -----------
Net cash used in investing
activities (281,550) (555,163) (169,050)
Cash flows from financing activities:
Issuance of common stock 51,843 451,192 162,516
Retirement of common stock (54,106) (184,482) (17,351)
----------- ----------- -----------
Net cash provided by (used
in) financing activities (2,263) 266,710 145,165
----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents (135,503) (39,249) 54,172
Cash and cash equivalents at
beginning of year 800,693 839,942 785,770
----------- ----------- -----------
Cash and cash equivalents at
end of year $ 665,190 $ 800,693 $ 839,942
=========== =========== ===========
Supplemental disclosures:
Cash paid during the year
for interest $ 6,189 $ -- $ --
=========== =========== ===========
Cash paid during the year
for income taxes $ 6,000 $ 33,199 $ 137,922
=========== =========== ===========
The accompanying notes are an integral part of these statements.
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES
LecTec Corporation (the Company) is primarily engaged in the research, design,
manufacture and sale of diagnostic electrodes, conductive hydrogels, 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, a 61% owned subsidiary (note G). All material
intercompany accounts and transactions have been eliminated. The Company also
has a 15% investment in an unconsolidated subsidiary (note H).
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. Investments
The Company's investments are classified as available-for-sale, consist
primarily of a preferred stock fund classified as short-term at June 30, 1997
and long-term at June 30, 1996 and are reported at fair value. The Company
utilizes the specific identification method in computing realized gains and
losses.
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
4. 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
---------------------------
1997 1996
---------- ----------
Raw materials $1,655,924 $1,144,078
Work in process 184,208 229,974
Finished goods 736,889 637,275
---------- ----------
$2,577,021 $2,011,327
========== ==========
5. 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 - 40 years
Equipment 4 - 15 years
Furniture and fixtures 5 - 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 was amortized on a straight-line basis over three years.
6. Revenue Recognition
Sales are recognized at the time of shipment of product against a confirmed
sales order.
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
7. 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.
8. 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.
9. Reclassifications
Certain 1996 amounts have been reclassified to conform to the 1997 financial
statement presentation.
10. New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) 128, "Earnings Per Share," which is effective for
financial statements issued after December 15, 1997. Early adoption of the new
standard is not permitted. The new standard eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings per
share together with disclosure of how the per share amounts were computed.
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income," and
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information,"
which are effective for fiscal year 1999. SFAS 130 will require the Company to
display an amount representing total comprehensive income, as defined by the
statement, as part of the Company's basic financial statements. Comprehensive
income will include items such as unrealized gains or losses on certain
investment securities. SFAS 131 will require the Company to disclose financial
and other information about its business segments, their products and services,
geographic areas, major customers, sales, profits, assets and other information.
The adoption of these statements is not expected to have a material effect on
the consolidated financial statements of the Company.
NOTE B - LINE OF CREDIT
The Company's unsecured $1,000,000 working capital line of credit expired on
January 1, 1997 and during August 1997 the Company entered into an unsecured
$1,000,000 working capital line of credit which expires September 1998. Interest
is at the bank's reference rate (effective rate of 8.5% at June 30, 1997). There
were no borrowings outstanding on the previous line of credit as of June 30,
1996, nor during fiscal 1997. The new 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.
NOTE C - 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.
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE C - COMMITMENTS AND CONTINGENCIES - Continued
The minimum rental commitments under all operating leases are as follows for the
years ending June 30:
1998 $ 239,230
1999 222,576
2000 228,439
2001 233,140
2002 240,209
Thereafter -
----------
$1,163,594
==========
Total rent expense for operating leases was $224,849, $219,095 and $223,147 for
the years ended June 30, 1997, 1996 and 1995.
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.
NOTE D - INCOME TAXES
The provision for income tax expense (benefit) consists of the following:
Years ended June 30
-------------------------------------------
1997 1996 1995
-------- -------- ---------
Current
Federal $ 43,000 $(17,000) $ 136,000
State 2,000 2,000 2,000
-------- -------- ---------
45,000 (15,000) 138,000
Deferred
Federal (45,000) (23,000) (149,000)
State - - -
-------- -------- ---------
(45,000) (23,000) (149,000)
-------- -------- ---------
$ - $(38,000) $ (11,000)
======== ======== =========
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE D - INCOME TAXES - Continued
Deferred tax assets and liabilities represent the tax effects, based upon
current tax law, of cumulative future deductible or taxable items that have been
recognized in the financial statements as follows:
June 30
-------------------------
1997 1996
--------- ---------
Deferred current assets and liabilities:
Net operating loss carryforwards $ 848,800 $ 481,200
Tax credit carryforwards 260,000 207,100
Inventory capitalization and reserve 124,800 79,200
Vacation pay accrual 37,800 36,100
Other 4,400 7,400
--------- ---------
1,275,800 811,000
Valuation allowance (909,800) (527,000)
--------- ---------
Net current asset $ 366,000 $ 284,000
========= =========
Deferred long-term assets and liabilities:
Tax depreciation in excess of book depreciation $(293,100) $(278,300)
Charitable contribution carryforwards 64,400 57,100
Other 46,400 47,200
--------- ---------
(182,300) (174,000)
Valuation allowance (28,700) -
--------- ---------
Net long-term liability $(211,000) $(174,000)
========= =========
At June 30, 1997, Pharmadyne has available net operating loss carryforwards of
approximately $1,900,000 which can be used to reduce future taxable income.
These carryforwards begin to expire in 2007 and cannot be utilized to offset
taxable income of LecTec. The utilization of a portion 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.
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE D - INCOME TAXES - Continued
At June 30, 1997, LecTec has available tax credit carryforwards of approximately
$260,000 which can be used to reduce future tax liabilities. These carryforwards
begin to expire in 2008. LecTec also has available a net operating loss
carryforward of approximately $594,000, which can be used to reduce future
taxable income of LecTec. This carryforward expires in 2011.
A valuation allowance has also been recorded for a portion of LecTec's deferred
tax assets as they may not be fully realizable.
Differences between income tax expense (benefit) and the statutory federal
income tax rate of 34% are as follows:
1997 1996 1995
---- ---- ----
Federal statutory income tax rate (34.0)% (34.0)% 34.0 %
State income taxes, net of federal benefit 0.1 0.2 0.1
Nondeductible restructuring charge 34.6 - -
Tax credits - - (74.7)
Foreign sales corporation (2.1) (5.5) (24.9)
Subsidiary loss producing no benefit .6 25.7 29.9
Tax exempt investment income (0.8) (0.8) (14.7)
Goodwill amortization 2.3 10.0 46.8
Prior years' overaccruals - - (4.8)
Other (.7) (1.3) .6
----- ----- -----
- % (5.7)% (7.7)%
===== ===== =====
NOTE E - 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 for the year ended June 30, 1995. No contributions were made to the plan
for the years ended June 30, 1997 and 1996.
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE E - EMPLOYEE BENEFIT PLANS - Continued
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 and $18,534 for the years ended June 30, 1996 and 1995. There
was no bonus expense for the year ended June 30, 1997.
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% 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 $37,936, $44,549 and $37,230 for the years ended June 30, 1997,
1996 and 1995.
NOTE F - STOCK OPTIONS
The Company has stock option plans for the benefit of selected officers,
employees and directors of the Company. A total of 973,049 shares of common
stock are reserved for issuance under the plans. Options under the Company's
plans are granted at fair market value and expire ten years from the grant date.
Options given to directors are exercisable at the date of grant. Options given
to selected officers and employees are exercisable at such times as set forth in
the individual option agreements, generally vesting 100% after four years.
A summary of the Company's stock option transactions for the years ended June
30, 1997, 1996 and 1995 is as follows:
Weighted average
Number of shares exercise price
---------------- ----------------
Outstanding at June 30, 1994 425,714 $ 7.38
Granted 117,000 9.45
Exercised (31,602) 5.17
Canceled (33,316) 7.85
-------
Outstanding at June 30, 1995 477,796 7.99
Granted 133,500 10.18
Exercised (65,581) 6.87
Canceled (21,020) 8.92
-------
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE F - STOCK OPTIONS - Continued
Weighted average
Number of shares exercise price
---------------- ----------------
Outstanding at June 30, 1996 524,695 $8.65
Granted 343,350 8.26
Exercised (15,278) 3.39
Canceled (129,934) 9.30
-------- -----
Outstanding at June 30, 1997 722,833 $8.46
======== =====
A total of 371,946, 264,945 and 217,749 options were exercisable at June 30,
1997, 1996 and 1995, with a weighted average price of $8.30, $7.50 and $6.57.
The following information applies to grants that are outstanding at June 30,
1997:
Options outstanding Options exercisable
------------------------------------------- ------------------------
Weighted Weighted Weighted
average average average
Range of Number remaining exercise Number exercise
exercise prices outstanding contractual life price exercisable price
- --------------- ----------- ---------------- -------- ----------- ---------
$3.34 - $ 4.43 46,036 .75 years $3.54 46,036 $3.54
6.00 - 8.62 292,773 4.25 years 7.32 99,923 8.04
9.00 - 13.50 384,024 3.50 years 9.92 225,987 9.39
The weighted average fair value of the options granted during 1997 and 1996 is
$4.45 and $5.23. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for all grants in 1997 and 1996: zero dividend
yield, expected volatility of 54% and 59%, risk-free interest rate of 6.22% and
6.04% and expected lives of 5.09 and 4.52 years.
The Financial Accounting Standards Board issued Statement No. 123 (SFAS 123),
"Accounting for Stock Based Compensation," which introduced an alternative
method for recognizing compensation costs based upon the fair value of the
awards on the date they are granted. SFAS 123 allows entities to continue to
account for employee stock option plans using the intrinsic value method, which
exists under current accounting literature, provided pro forma net earnings and
net earnings per share, as if the fair value based method had been used, are
disclosed. The Company has elected to continue using the intrinsic value based
method for its employee options.
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE F - STOCK OPTIONS - Continued
The Company's net loss and net loss per share for 1997 and 1996 would have been
increased to the pro forma amounts indicated below had the fair value method
been used for options granted to employees and directors. These effects may not
be representative of the future effects of applying this statement.
1997 1996
--------------------------- ------------------------
As reported Pro forma As reported Pro forma
----------- ---------- ----------- ----------
Net loss $(2,266,727) $(2,620,449) $(632,193) $(781,467)
Net loss per share $(.59) $(.68) $(.17) $(.21)
NOTE G - PHARMADYNE CORPORATION AND RESTRUCTURING CHARGE
During 1993, the Company invested $175,000 in Pharmadyne Corporation, which
represented a 19.5% ownership interest in Pharmadyne. The investment was
recorded at cost. During 1994, the Company purchased additional shares of
Pharmadyne common stock for $183,000 and increased the Company's ownership to
51%. The acquisition was accounted for as a purchase and the acquired goodwill
of approximately $590,000 was fully amortized on a straight-line basis over
three years.
During 1996 the Company made 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%.
During the third quarter of 1997, the Company adopted a plan for eliminating the
Pharmadyne subsidiary and recorded a nonrecurring restructuring charge of
$1,500,000. The restructuring charge included approximately $780,000 for the
planned acquisition of the minority interests in Pharmadyne in exchange for
newly issued shares of LecTec Corporation common stock, $480,000 for the
write-off of Pharmadyne's 15% interest in Natus, L.L.C., an Arizona-based direct
marketing company, and $240,000 for completion of restructuring activities,
consisting primarily of fees for professional services. During the fourth
quarter of 1997, an additional charge of $680,000 was recorded as a result of an
increase in the cost to acquire the minority interests in Pharmadyne of $589,000
and an increase in estimated remaining costs associated with the restructuring
of $91,000. The total charge of $2,180,353 increased the 1997 net loss by $.57
per share. The Company expects to complete the restructuring during fiscal 1998.
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE H - 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. This investment has been accounted for using
the equity method. 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
========
During 1997 the Company recorded $126,067 of equity in the losses of Natus
L.L.C. The investment in Natus L.L.C. of $480,100 was fully written off in 1997
as part of the restructuring charge of $2,180,353 (note G).
NOTE I - MAJOR CUSTOMERS AND EXPORT SALES
One customer accounted for 19%, 17% and 15% of total sales for the years ended
June 30, 1997, 1996 and 1995. The accounts receivable from this customer
represented 27% and 24% of trade receivables at June 30, 1997 and 1996 and the
accounts receivable from another customer represented 12% and 15% of trade
receivables at June 30, 1997 and 1996. Export sales accounted for approximately
19% of total sales during each of the years ended June 30, 1997 and 1996, and
18% of total sales during the year ended June 30, 1995. Export sales by
geographic area were as follows:
Years ended June 30
-------------------------------------------
1997 1996 1995
---------- ---------- ----------
Canada $ 117,966 $ 80,746 $ 113,597
Europe 1,456,141 1,652,941 1,171,910
Asia 229,506 466,777 1,122,179
Latin America 484,319 225,440 195,663
---------- ---------- ----------
$2,287,932 $2,425,904 $2,603,349
========== ========== ==========
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 20, 1997, and is incorporated herein by reference.
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 20, 1997, 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 20, 1997, 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
20, 1997, 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, 1997 and 1996
(iii) Consolidated Statements of Operations for the years
ended June 30, 1997, 1996 and 1995
(iv) Consolidated Statements of Shareholders' Equity for
the years ended June 30, 1997, 1996 and 1995
(v) Consolidated Statements of Cash Flows for the years
ended June 30, 1997, 1996 and 1995
(vi) Notes to the Consolidated 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
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. (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. (1)
10.03 Certificate of Secretary pertaining to Resolution of
Board of Directors of LecTec Corporation, dated
October 30, 1986, implementing a Profit Sharing Bonus
Plan. (1)
10.04 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. (2)
10.05 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. (2)
10.06 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. (2)
10.07 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. (2)
10.08 Research Agreement dated June 30, 1992, between
LecTec Corporation and Pharmadyne Corporation
(formerly Natus Corporation), whereby Pharmadyne will
fund the development of an analgesic patch for
exclusive rights to sell the product. (2)
10.09 Stock Investment and Repurchase Agreement dated July
1, 1992, between LecTec Corporation and Pharmadyne
Corporation (formerly Natus Corporation), whereby
LecTec purchased Common Stock of Pharmadyne
Corporation. (2)
10.10 Amendments dated March 18, 1993 to the original
Research Agreement dated June 30, 1992, between
LecTec Corporation and Pharmadyne Corporation
(formerly Natus Corporation). (2)
10.11 Subscription Agreement dated June 17, 1993 between
LecTec Corporation and Pharmadyne Corporation
(formerly Natus Corporation). (2)
10.12 A Promissory Note dated June 17, 1993 between LecTec
Corporation and Pharmadyne Corporation (formerly
Natus Corporation). Included in the note is an option
for LecTec to receive common stock of Pharmadyne in
lieu of payment. (2)
10.13 Amended and Restated Stock Option Agreement between
LecTec Corporation and Pharmadyne Corporation
(formerly Natus Corporation), whereby LecTec has
obtained the option to acquire the additional shares
required to equal 51% of the Common Stock of
Pharmadyne. (3)
10.14 Contribution Agreement dated March 12, 1996 between
Pharmadyne Corporation (formerly Natus Corporation)
and ACM
Investments, L.L.C. regarding the acquisition
of an equity interest in Natus L.L.C. (4)
10.15 Distribution Agreement dated March 12, 1996 between
LecTec Corporation, Pharmadyne Corporation (formerly
Natus Corporation) and Natus L.L.C. (4)
10.16 Operating Agreement dated March 12, 1996 between
Natus L.L.C., ACM Investments, L.L.C., Pharmadyne
Coporation (formerly Natus Corporation) and Natus
Management, Inc. (4)
10.17 Marketing and Distribution Agreement dated January
11, 1996 between LecTec Corporation, Pharmadyne
Corporation (formerly Natus Corporation) and CNS,
Inc. regarding an analgesic pain patch (4)
10.18 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 (4)
10.19 Revolving Credit Note dated May 1, 1996 between
LecTec Corporation and The First National Bank of
Saint Paul, a national banking association (4)
10.20 Working Capital Loan Agreement dated September 5,
1995 between LecTec Corporation and Pharmadyne
Corporation (formerly Natus Corporation) relating to
a loan from LecTec to Pharmadyne Corporation (4)
10.21 Form of Working Capital Loan Agreement dated
September 5, 1995, between Pharmadyne Corporation
(formerly Natus Corporation) and various shareholders
relating to loans to Pharmadyne Corporation (4)
10.22 LecTec Corporation 1989 Stock Option Plan (5)
10.23 LecTec Corporation 1991 Directors' Stock Option Plan (5)
10.24 Building lease dated May 24, 1991 between LecTec
Corporation and Sierra Development Co. for the lease
of the manufacturing and warehouse facility located
in Edina, Minnesota (5)
10.25 First amendment dated May 5, 1997 between LecTec
Corporation and Rushmore Plaza Partners Limited
Partnership for the extension of the previous lease
of the manufacturing and warehouse facility located
in Edina, Minnesota (5)
10.26 Credit Agreement dated August 22, 1997 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 (5)
10.27 Revolving Credit Note dated August 22, 1997 between
LecTec Corporation and The First National Bank of
Saint Paul, a national banking association (5)
21.01 Subsidiaries of the Company (3)
23.01 Consent of Grant Thornton LLP (5)
27.01 Financial Data Schedule (5)
- ----------------
(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) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended June 30, 1996.
(5) 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 26th day of
September, 1997.
LECTEC CORPORATION
/s/Rodney A. Young
Rodney A. Young
Chairman, Chief Executive Officer and President
(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 26, 1997
Rodney A. Young
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
/s/Deborah L. Moore September 26, 1997
Deborah L. Moore
Chief Financial Officer and Secretary
(Principal Financial Officer and Accounting Officer)
/s/Alan C. Hymes September 26, 1997
Alan C. Hymes
Director
/s/Lee M. Berlin September 26, 1997
Lee M. Berlin
Director
/s/Paul O. Johnson September 26, 1997
Paul O. Johnson
Director
/s/Donald C. Wegmiller September 26, 1997
Donald C. Wegmiller
Director
/s/Alan J. Wilensky September 26, 1997
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 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).
10.04 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).
10.05 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).
10.06 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).
10.07 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 (Note 2).
10.08 Research Agreement dated June 30, 1992, between LecTec Corporation
and Pharmadyne Corporation (formerly Natus Corporation), whereby
Pharmadyne will fund the development of an analgesic patch for
exclusive rights to sell the product (Note 2).
10.09 Stock Investment and Repurchase Agreement dated July 1, 1992,
between LecTec Corporation and Pharmadyne Corporation (formerly
Natus Corporation), whereby LecTec purchased Common Stock of
Pharmadyne Corporation (Note 2).
10.10 Amendments dated March 18, 1993 to the original Research Agreement
dated June 30, 1992 between LecTec Corporation and Pharmadyne
Corporation (formerly Natus Corporation) (Note 2).
10.11 Subscription Agreement dated June 17, 1993 between LecTec
Corporation and Pharmadyne Corporation (formerly Natus Corporation)
(Note 2).
10.12 Promissory Note dated June 17, 1993 between LecTec Corporation and
Pharmadyne Corporation (formerly Natus Corporation). Included in
the note is an option for LecTec to receive common stock of
Pharmadyne in lieu of payment (Note 2).
10.13 Amended and Restated Stock Option Agreement between LecTec
Corporation and Pharmadyne Corporation (formerly Natus
Corporation), whereby LecTec obtained the option to acquire the
additional shares required to equal 51% of the Common Stock of
Pharmadyne (Note 3).
10.14 Contribution Agreement dated March 12, 1996 between Pharmadyne
Corporation (formerly Natus Corporation) and ACM Investments,
L.L.C. regarding the acquisition of an equity interest in Natus
L.L.C. (Note 4).
10.15 Distribution Agreement dated March 12, 1996 between LecTec
Corporation, Pharmadyne Corporation (formerly Natus Corporation)
and Natus L.L.C. (Note 4).
10.16 Operating Agreement dated March 12, 1996 between Natus L.L.C., ACM
Investments, L.L.C., Pharmadyne Corporation (formerly Natus
Corporation) and Natus Management, Inc. (Note 4).
10.17 Marketing and Distribution Agreement dated January 11, 1996 between
LecTec Corporation, Pharmadyne Corporation (formerly Natus
Corporation) and CNS, Inc. regarding an analgesic pain patch. (Note
4).
10.18 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 (Note 4).
10.19 Revolving Credit Note dated May 1, 1996 between LecTec Corporation
and The First National Bank of Saint Paul, a national banking
association (Note 4).
10.20 Working Capital Loan Agreement dated September 5, 1995 between
LecTec Corporation and Pharmadyne Corporation (formerly Natus
Corporation) relating to a loan from LecTec to Pharmadyne
Corporation (Note 4).
10.21 Form of Working Capital Loan Agreement dated September 5, 1995;
between Pharmadyne Corporation (formerly Natus Corporation) and
various shareholders relating to loans to Pharmadyne Corporation
(Note 4).
10.22 LecTec Corporation 1989 Stock Option Plan . . . . . . . . . . . . .
10.23 LecTec Corporation 1991 Directors' Stock Option Plan. . . . . . . .
10.24 Building lease dated May 24, 1991 between LecTec Corporation and
Sierra Development Co. for the lease of the manufacturing and
warehouse facility located in Edina, Minnesota. . . . . . . . . . .
10.25 First amendment dated May 5, 1997 between LecTec Corporation and
Rushmore Plaza Partners Limited Partnership for the extension of
the previous lease of the manufacturing and warehouse facility
located in Edina, Minnesota. . . . . . . . . . . . . . . . . . . .
10.26 Credit Agreement dated August 22, 1997 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 . . . . . . . . . . . . . . . . . .
10.27 Revolving Credit Note dated August 22, 1997 between LecTec
Corporation and The First National Bank of Saint Paul, a national
banking association . . . . . . . . . . . . . . .
21.01 Subsidiaries of the Company (Note 3)
23.01 Consent of Grant Thornton LLP. . . . . . . . . . . . . . . . . . .
27.01 Financial Data Schedule. . . . . . . . . . . . . . . . . . . . . .
NOTES:
(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) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended June 30, 1996.