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, 1995.
[_] 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 ___
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 15, 1995 was $37,922,390.
The number of shares outstanding of the registrant's common stock as of
September 15, 1995 was 3,792,239 shares.
[_] Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation 5-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.
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 17, 1995 Part III
PART I
Item 1. BUSINESS
GENERAL
LecTec Corporation (the "Company") designs, manufactures and/or markets
diagnostic and monitoring electrodes, nerve and muscle stimulation electrodes,
conductive and non-conductive adhesive hydrogels, medical tapes, transdermal and
dermal drug delivery 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 the first "solid state" electrodes,
which did not require the use of messy liquid, aqueous conductive gels or
irritating tapes in order to maintain contact with the skin. The Company has
since continued to develop, manufacture and/or market electrodes, hydrogels,
medical tapes, transdermal and dermal drug delivery systems, and therapeutic
drug products. The Company holds domestic and foreign patents on various
products. The Company, through its research and development efforts, is
developing new systems for transdermal drug delivery, 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,
hypoallergenic and can be made electrically conductive. Using natural-based
polymers, the Company developed the first solid-state electrode. 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. The Company's electrodes are electrically and
chemically stable. 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 state and snapless design of the Tracets electrodes
provide more consistent electrical performance and offer shorter procedure and
clean-up time than Welsh bulbs. Presently the Company has four different types
of 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; AG 4000, a synthetic solid gel, silver substrate
electrode which meets all AAMI standards including defibrillation recovery; and
T6000, introduced in April, 1993, a compact electrode with a synthetic solid gel
which meets 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 makes several hydrogels which are used in stimulation
products to treat acute and chronic pains and stimulate bone and muscle growth.
The Company has been directing resources into developing hydrogels for
stimulation applications which are sold to converters or OEMs of medical
products.
The Company manufactures synthetic and naturally-based hydrogels. 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 electrical conductivity, with or without
self-adhesive properties, for diagnostic and monitoring electrodes,
electrosurgical grounding pads, external pacing and defibrillation electrodes,
TENS products and iontophoretic return electrodes. Sales of conductive products
accounted for approximately 52%, 58% and 61% of the Company's product sales
during its fiscal years ended June 30, 1995, 1994 and 1993.
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 programs to
enable major medical marketers to gain market share and penetrate the world-wide
market for quality, cost-effective medical tape products. 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 26%, 36% and 37% of the Company's product sales in its fiscal
years ended June 30, 1995, 1994 and 1993.
THERAPEUTIC PRODUCTS The Company researches, develops and manufactures patented
pharmaceutical products which include transdermal and dermal delivery systems
and oral medications which are or will be marketed by the Company, or by
pharmaceutical and marketing companies. The membrane-based pharmaceutical
products use a monolithic system that delivers drugs topically onto or through
the skin. Also, non membrane products are being developed that will deliver the
drugs in an oral tablet or capsule form. Products currently manufactured using
the membrane-based transdermal or dermal (patch) technology are a wart remover,
analgesic patches for localized pain relief and a corn and callus remover. These
products are marketed as OTC products. The Company, through its 51% owned
subsidiary, Natus Corporation, also sells a variety of natural health, beauty
and home care products to distributors located throughout the United States. One
of the products sold by Natus is the "NatusPatch(TM)", an analgesic patch for
localized pain relief manufactured by the Company. Excluding the NatusPatch,
other products marketed by Natus Corporation are manufactured by third parties
under manufacturing agreements, and generally utilize custom formulations
exclusive to Natus. Effective April 1, 1994, the Company consolidated Natus and
its results of operations. Sales of therapeutic products accounted for
approximately 22%, 6% and 2% of the Company's product sales in each of the
fiscal years ended June 30, 1995, 1994 and 1993.
CUSTOMERS
Burdick Corporation, ("Burdick") accounted for 14.6%, 17.4% and 17.9%
of the Company's total revenues during fiscal years 1995, 1994 and 1993,
respectively. Beiersdorf, Inc. accounted for 10.1% of the Company's total
revenues during fiscal year 1994 and the National Medical Products Company
accounted for 11.5% of the Company's total revenues during fiscal 1993. The
Company sold its product to approximately 150 active customers during the fiscal
year 1995, down from approximately 240 active customers during fiscal years 1994
and 1993. 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 (open) orders as of August 12, 1995 totaled
approximately $2,184,800 (all of which the Company expects to fill), compared
with approximately $1,807,900 and $2,604,600 on August 12, 1994 and 1993,
respectively.
GOVERNMENTAL REGULATION
Clinical testing, manufacturing, packaging, labeling and distribution
of the Company's products are subject to FDA regulation. Comparable agencies in
some states and certain foreign countries also regulate the Company's
activities. The Company's electrodes and hydrogels may, under current FDA
policy, be 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' delivery technology, however, 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, transdermal drug delivery
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 (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.
The Company believes Tracets brand diagnostic electrodes have superior
electrical performance and skin adherence, which allows for more accurate
electrocardiogram tracings, and superior hydrophilic properties, which prevent
the conductive hydrogels from drying out in storage under normal conditions and
duration. Tracets offer significant cost savings over snap, pre-gelled tape
diagnostic electrodes.
Most competing monitoring electrodes use hydrophobic,
solvent-containing adhesive tapes and high chloride ion concentration conductive
gels. The Company believes its SynCor monitoring electrodes are the only
monitoring electrodes on the market that offer hydrophilic adhesive systems and
a conductive material that does not dry out in storage under normal conditions
and duration. The Company's new monitoring snap-type electrode VitaTrace(R)
competes very well due to its product performance, high quality and competitive
price.
The Company manufactures synthetic and natural-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 believes that it is the
lowest cost producer of such medical hydrogels.
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 the
first medical tape company manufacturing medical tapes without the use of
harmful solvent-based adhesives or processing aids. The Company's tapes are
non-irritating and highly breathable. The Company has also entered the retail
medical tape market, supplying private label product to major medical marketing
companies.
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 including Ciba Consumer Products, Chattem,
Pfizer and Bristol-Myers Squibb.
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 added two new foreign patents, Canadian 1,326,063
and Danish 169,235. Thirteen U.S. and foreign patent applications are pending.
Additionally, six patent applications are pending for which the Company has
exclusive licenses. The patents most pertinent to the Company's major products
have been awarded and have a remaining duration in excess of eight years.
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 infringement possibilities.
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 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, DermaPhyl 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 51% owned subsidiary, Natus Corporation, has registered
the following tradenames in the United States Patent and Trademark Office:
Natus, Aromasynergy, and Natus Patch. Natus Corporation has filed for the
registration of the following tradenames: TheraPatch, Thermal Patch, Hydro
Gesic Patch, Natus Born of Nature-Body Balance, Duogenol, Natus Born of
Nature-Pure Indulgence, Natus Born of Nature-Diet Sense, Natus Born of
Nature-Ultra Sense and Natus Born of Nature-Advanced Revitalizing Complex.
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 for application in the design of new products
and the improvement and manufacturing of disposable products to be sold in the
medical marketplace.
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
sponsoring partners or through a marketing arrangement with an appropriate
distributor. R&D contract opportunities are evaluated on an individual basis.
A Phase I clinical trial of a non-nicotine smoking cessation product
was successfully completed in 1994. This in-hospital study demonstrated that the
product is safe and non-toxic and provided encouraging indications of efficacy.
In 1995 the identity of our non-nicotine smoking cessation compound was
identified as being cotinine. An outpatient (Phase II) clinical trial (performed
at the Baltimore VA Medical Center) was completed in the Spring of 1995. This
study provided further evidence of the drug's safety and showed a strong trend
supporting the conclusion that cotinine is effective in assisting smokers to
quit by alleviating a wide range of tobacco withdrawal symptoms.
Concurrently, the Addiction Research Center of the National Institute
of Health (NIH) is conducting a study to determine if cotinine is addictive.
Preliminary data was presented in March at the National Conference of the
Society for Research on Nicotine and Tobacco. This data lends support to the
notion that cotinine is behaviorally active and could mediate certain components
of nicotine dependence. Minimal abuse potential (addiction potential) was
detected. We expect this study to continue into December of 1995.
Research and development efforts in the conductive product group has
led to the development of a new polymer-based reusable hydrogel. A 510(k) was
submitted for the new UltraEase ultrasonic hydrogel couplant pad product. The
Company also continues to develop a unique defibrillation/monitoring/external
pacing electrode system under a manufacturing supply and research and
development agreement.
The Company has developed an adhesive medical tape product, containing
Zinc Oxide, which meets the BP (British Pharmacopoeia) Standard for the
international market. The newly acquired and developed pressure sensitive
adhesive coating and slitting production equipment, for the manufacturing of
medical tapes, now employs two patent pending processes. One of those processes
is used for the manufacture of a newly developed tape product, namely, Isoclear.
In the fiscal years ended June 30, 1995, 1994 and 1993, the Company
spent, approximately, $1,877,000, $1,380,000 and $1,406,000, 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 sells its products in Canada, Europe, Asia, and portions of
Latin America. Export revenues totaled $2,603,349 (18% of total revenues) in the
fiscal year ended June 30, 1995, $2,349,007 (22% of total revenues) in the
fiscal year ended June 30, 1994 and $2,561,346 (28% of total revenues) in the
fiscal year ended June 30, 1993. The Company intends to continue to market its
products internationally and expects international revenues to remain
approximately the same as a percent of total revenues.
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 revenues by
geographic area (See Note J to the Financial Statements):
Export Revenues Years ended June 30
1995 1994 1993
Canada $ 113,597 $ 122,208 $ 84,320
Europe 1,171,910 943,250 604,734
Asia 1,122,179 1,114,928 1,521,532
Latin America 195,663 168,621 350.760
Total Export Revenues $ 2,603,349 $2,349,007 $ 2,561,346
MANUFACTURING
The Company manufactures diagnostic and monitoring electrodes,
conductive and non-conductive adhesive hydrogels, medical tapes, dermal drug
delivery products and therapeutic drug products. The conductive adhesive
membranes and medical tapes are used internally to produce finished products and
are also sold to other companies who produce medical products. The conductive
and therapeutic membranes are manufactured at the Company's Minnetonka,
Minnesota facility. The Minnetonka facility also manufactures and packages the
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.
EMPLOYEES
As of June 30, 1995, the Company employed 78 full-time employees.
ACQUISITION OF NATUS CORPORATION
During 1993, the Company invested $175,000 in Natus Corporation
(Natus), which represented a 19.5% ownership interest in Natus. This investment
was recorded at cost. In addition to this equity investment, the Company made
cash advances to Natus during fiscal 1993 and 1994.
On April 1, 1994, the Company exercised an option to purchase 182,822
shares of Natus common stock at $1 per share increasing the ownership in Natus
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 3 years.
Effective April 1, 1994, the Company consolidated Natus in its results
of operations.
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
LecTec Corporation 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.
Years ended June 30, 1995 1994
High Low High Low
First Quarter $10.500 $7.000 $11.677 $8.452
Second Quarter 10.000 6.750 11.429 9.048
Third Quarter 11.000 7.250 10.238 7.619
Fourth Quarter 14.250 10.750 10.000 7.619
As of September 15, 1995 the Company had 3,792,239 shares of Common
Stock outstanding and 437 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
<TABLE>
<CAPTION>
STATEMENT OF EARNINGS DATA
Years ended June 30, 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Revenues
Product sales $14,138,290 $10,685,215 $8,999,005 $8,015,536 $7,995,461
Contract research --- 30,275 225,000 86,418 ---
Total revenues 14,138,290 10,715,490 9,224,005 8,101,954 7,995,461
Gross profit 5,697,562 4,041,853 3,434,128 3,290,005 2,997,190
Operating profit 69,761 837,161 750,335 1,153,802 1,065,568
Earnings before equity in losses
of unconsolidated subsidiary 153,863 768,974 745,282 964,026 884,173
Equity in losses of
unconsolidated subsidiary --- (133,639) (163,442) --- ---
Net earnings 153,863 635,335 581,840 964,026 884,173
Net earnings per share
Primary .04 .17 .15 .26 .25
Fully diluted .04 .17 .15 .26 .24
BALANCE SHEET DATA
Years ended June 30, 1995 1994 1993 1992 1991
Cash, cash equivalents and
short-term investments $839,942 $2,182,570 $3,469,632 $2,736,361 $1,648,516
Current assets 5,836,764 6,124,640 6,082,934 5,480,921 4,310,529
Working capital 4,490,796 4,737,567 5,471,894 5,013,766 3,569,474
Property, plant and equipment, net 5,559,807 4,705,602 3,016,761 2,961,711 2,532,347
Long-term marketable securities 568,156 585,855 1,195,992 1,143,605 1,256,030
Total assets 12,719,146 12,363,075 10,876,068 9,885,809 8,406,877
Long-term obligations 167,000 139,000 64,000 --- ---
Shareholders' equity 11,206,178 10,837,002 10,201,028 9,418,654 7,665,822
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Earnings Summary
The Company reported net earnings of $154,000 or $.04 per share in
fiscal 1995, a decrease of 76% from $635,000 or $.17 per share in 1994 and down
from $582,000 or $.15 per share in 1993.
On April 1, 1994, the Company acquired an additional 31.5% interest in
Natus Corporation and began consolidating Natus' results of operations
effectively on that date. Natus was acquired to expand the Company's
distribution capabilities for over-the-counter (OTC) therapeutic products.
Revenues
Revenues totaled $14,138,000 in fiscal 1995, an increase of 32% from
$10,715,000 in 1994 and also up from $9,224,000 in 1993. Product sales have
accounted for the great majority of the Company's total revenues in each of the
past three years. The increases in product sales are mostly attributable to
increases in volume of products sold.
Sales of conductive products (medical electrodes and hydrogel
membranes) grew by 22% in fiscal 1995 to $7,334,000 from $6,015,000 in fiscal
1994. Conductive products sales were $5,469,000 in fiscal 1993. These increases
were primarily attributable to new product introductions and the strengthening
of the sales and marketing organization of this core business. Sales of medical
tapes decreased by 3% in fiscal 1995 to $3,688,000 from $3,790,000 in fiscal
1994. Medical tape sales were $3,395,000 in fiscal 1993. 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 scheduled for introduction during the first quarter of fiscal
1996. The 1994 increase from 1993 was primarily attributable to new product
introductions and the strengthening of the sales and marketing organization.
International sales, consisting primarily of semi-finished medical tape sold to
overseas converters for final processing, packaging and marketing, declined to
18% of total revenues in fiscal 1995 from 22% in 1994 and 28% in 1993.
International sales are expected to decline further as a percentage of total
revenues in fiscal 1996 due to the Company's increased emphasis on domestic
market opportunities, while strengthening existing relationships with overseas
customers.
Sales of therapeutic products grew 254% in fiscal 1995 to $3,116,000
from $880,000 in fiscal 1994. Therapeutic product sales were $135,000 in fiscal
1993. Sales of an over-the-counter analgesic patch product accounted for a
significant portion of this growth. The Company believes therapeutic products,
currently on the market and under development, should account for a growing
proportion of the Company's sales mix over the next few years.
Contract research revenues totaled $30,000 and $225,000 in fiscal years
1994 and 1993, respectively. There were no research revenues in fiscal 1995. The
Company has been aggressively moving forward with the research and development
of a non-nicotine smoking cessation product based on cotinine. The Company
completed the Phase I clinical trials during the fourth quarter of fiscal 1994.
The results of the Phase I study established that cotinine is safe and
non-toxic. This study also provided encouraging indications of efficacy, meaning
that cotinine could be an effective aid at assisting smokers through withdrawal
symptoms. While planning the Phase II clinical trial, the Addiction Research
Center (ARC) of the National Institutes of Health initiated its own, completely
independent, study to determine if cotinine is addictive. The preliminary
results of the ongoing ARC study were that cotinine appears to have a very low
potential for abuse or addictiveness. The Company completed the Phase II
clinical study of the cotinine pill in the fourth quarter of fiscal 1995. An
analysis of the data generated by this study indicated that cotinine is
effective at assisting smokers to quit by alleviating a wide range of tobacco
withdrawal symptoms. In December 1994, McNeil Consumer Products, a division of
Johnson & Johnson, decided not to exercise its option to proceed with the
research, development and licensing agreement previously signed with the
Company, thereby relinquishing all licensing agreement rights to the
non-nicotine smoking cessation product. The McNeil action provides the Company
with the opportunity to establish a new marketing alliance under which the
Company retains maximum rights to the product. The Company is actively engaged
in discussions with several prospective pharmaceutical/ medical marketing
partners. The Company's goal is to secure a partner during fiscal year 1996.
Gross Profit
The Company's gross profit totaled $5,698,000 in fiscal 1995, up from
$4,042,000 in 1995 and $3,434,000 in 1993. As a percentage of revenues,
gross profit was to 40.3% in fiscal 1995, 37.7% in 1994 and 37.2% in 1993. In
1995, sales of higher-margin therapeutic and Natus products increased, but were
partially offset by lower-margin medical tape product sales. The 1994 and 1993
gross margins were affected by relatively high sales of lower-margin medical
tape products. The Company believes its consolidated gross margin in fiscal 1996
will benefit from manufacturing volume efficiencies stemming from a new medical
tape production line and increased sales of higher-margin therapeutic products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $3,751,000 or
26.5% of revenues in fiscal 1995, compared to $1,825,000 or 17.0% in 1994, and
$1,277,000 or 13.8% in 1993. The 1995 increase was due primarily to the full
year impact of the consolidation of Natus with the Company for fiscal 1995; the
higher selling costs associated with the Natus direct selling organization; and
the inclusion of goodwill amortization related to the acquisition of Natus. The
1994 increase was due primarily to higher selling expenses related to the
acquisition of Natus' direct selling system, combined with efforts to strengthen
the sales and marketing organizations of the conductive and medical tape product
lines.
Research and Product Development Expenses (R&D)
Research and product development expenses totaled $1,877,000 or 13% of
revenues in fiscal 1995, compared to $1,380,000 or 15.2% in 1994, and $1,406,000
or 15.2% in 1993. 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 1995 was associated with the clinical studies for the non-nicotine
smoking cessation product. Although the Company intends to continue seeking
appropriate partners to market selected therapeutic products and help defray
development costs, this emphasis on in-house product development is permitting
the Company to negotiate with potential partners in a way that will enable it to
retain a maximum degree of product rights, receive royalty revenue and retain
manufacturing rights. R&D resources are also being used to fund development of
new conductive products and specialized medical tapes. The Company believes that
R&D expenditures, as a percentage of revenues, will remain in the range of 10%
to 15% for the immediate future.
Other Income (Expense)
Other income totaled $73,000 in fiscal 1995, down from $109,000 in 1994
and $207,000 in 1993. 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. In 1994 the
decrease was due in part to reduced levels of dividend income, reflecting the
liquidation of a substantial portion of the Company's long-term marketable
securities to meet capital spending requirements and fund a portion of the Natus
acquisition costs.
Income Tax Expense
The Company had an income tax benefit of $11,000 in fiscal 1995,
compared to income tax expense of $177,000 in 1994 and $212,000 in 1993. The tax
benefit in 1995 was primarily attributable to R&D tax credits and alternative
minimum tax credits. The lower tax provision in 1994 versus 1993 was
attributable to increased R&D tax credits as well as an increase in tax-exempt
investment income.
Equity in Losses of Unconsolidated Subsidiary
In fiscal 1995, the Company consolidated Natus' results of operations.
In fiscal 1994, the Company's pro-rata share of Natus' net loss (based on 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.
In fiscal 1993, the Company's pro-rata share of Natus' net loss (based on a
19.5% equity ownership position) and goodwill amortization totaled $163,000.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments decreased by
$1,343,000 to $840,000 at June 30, 1995. Long-term marketable securities
decreased by $18,000 to $568,000 at June 30, 1995. Short-term investments were
utilized during fiscal 1995 to finance research and product development efforts,
significant levels of capital expenditures on new equipment and funding
receivables and inventory requirements. Capital spending totaled $1,471,000, the
largest portion of which was for a therapeutic products production line.
Trade accounts receivable increased by $257,000 to $2,028,000 at June
30, 1995, due primarily to higher levels of business volume. Inventories rose
$325,000 to $2,097,000 at the end of fiscal 1995, reflecting increases in
finished goods inventory.
Working capital totaled $4,491,000 at June 30, 1995, compared to
$4,738,000 at the end of fiscal 1994. The Company's current ratio stood at 4.3
at year-end fiscal 1995 compared to 4.4 a year earlier. A decrease in short-term
investments was offset by increased receivables, inventories and prepaid assets
which resulted in a current ratio essentially unchanged between the year-ends.
Net property, plant and equipment rose by $854,000 to $5,560,000 at
June 30, 1995, due primarily to the installation of a therapeutic products
production line addition.
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 1995. Shareholders' equity increased by $369,000 to $11,206,000 at June
30, 1995.
The Company 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 1996.
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, 1995 and 1994, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1995. 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, 1995 and 1994, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended June 30, 1995, in conformity with generally
accepted accounting principles.
Grant Thornton LLP
Minneapolis, Minnesota
August 31, 1995
LecTec Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
<TABLE>
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (note A) $ 839,942 $ 785,770
Short-term investments (note B) - 1,396,800
Receivables
Trade, less allowance for doubtful accounts of
$18,000 in 1995 and $16,402 in 1994 2,027,985 1,770,726
Refundable income taxes 119,540 169,254
Other 268,247 51,318
2,415,772 1,991,298
Inventories (note A) 2,097,254 1,772,035
Prepaid expenses and other 229,796 101,737
Deferred tax asset (note E) 254,000 77,000
Total current assets 5,836,764 6,124,640
PROPERTY, PLANT AND EQUIPMENT --
AT COST (note A)
Building and improvements 1,673,069 1,426,072
Equipment 5,447,479 3,413,165
Furniture and fixtures 422,265 309,560
7,542,813 5,148,797
Less accumulated depreciation 2,813,760 2,285,900
4,729,053 2,862,897
Construction in progress 583,023 1,594,974
Land 247,731 247,731
5,559,807 4,705,602
OTHER ASSETS
Patents and trademarks, less accumulated amortization
of $554,286 in 1995 and $436,125 in 1994 (note A) 386,470 362,966
Goodwill, less accumulated amortization of $245,835
in 1995 and $49,167 in 1994 (notes A and I) 344,165 540,833
Long-term investments (note B) 568,156 585,855
Other 23,784 43,179
1,322,575 1,532,833
$12,719,146 $12,363,075
The accompanying notes are an integral part of these statements.
LecTec Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS - CONTINUED
June 30,
LIABILITIES AND
SHAREHOLDERS' EQUITY 1995 1994
CURRENT LIABILITIES
Accounts payable $ 771,471 $ 960,528
Accrued expenses
Payroll related 375,282 367,161
Product returns (note A) 77,831 8,219
Distributor bonuses 71,384 26,165
Other 50,000 25,000
Total current liabilities 1,345,968 1,387,073
DEFERRED INCOME TAXES (note E) 167,000 139,000
COMMITMENTS AND CONTINGENCIES
(notes D, F, G and H) - -
SHAREHOLDERS' EQUITY (notes A and G)
Common stock, $.01 par value; 15,000,000 shares
authorized; issued and outstanding: 3,786,500
shares in 1995 and 3,757,000 shares in 1994 37,865 37,570
Additional paid-in capital 10,013,949 9,809,079
Unrealized losses on securities available-for-
sale (note B) (50,816) (60,964)
Retained earnings 1,205,180 1,051,317
11,206,178 10,837,002
$12,719,146 $12,363,075
</TABLE>
The accompanying notes are an integral part of these statements.
LecTec Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended June 30,
<TABLE>
<CAPTION>
1995 1994 1993
Revenues
<S> <C> <C> <C>
Product sales (notes A and J) $14,138,290 $10,685,215 $8,999,005
Contract research (notes A, H and I) - 30,275 225,000
Total revenues 14,138,290 10,715,490 9,224,005
Cost of goods sold 8,440,728 6,673,637 5,789,877
Gross profit 5,697,562 4,041,853 3,434,128
Operating expenses
Selling, general and administrative 3,751,194 1,825,121 1,277,377
Research and development (notes H and I) 1,876,607 1,379,571 1,406,416
5,627,801 3,204,692 2,683,793
Operating profit 69,761 837,161 750,335
Other income (expense)
Interest income 35,846 89,498 55,443
Dividend income 38,487 60,433 92,505
Other (1,231) (41,118) 58,999
73,102 108,813 206,947
Earnings before income tax expense and equity
in losses of unconsolidated subsidiary 142,863 945,974 957,282
Income tax expense (benefit) (note E) (11,000) 177,000 212,000
Earnings before equity in losses of
unconsolidated subsidiary 153,863 768,974 745,282
Equity in losses of unconsolidated subsidiary
(note I) - (133,639) (163,442)
Net earnings $ 153,863 $ 635,335 $ 581,840
Net earnings per common and common
equivalent share (note A) $ .04 $ .17 $ .15
Weighted average number of common and
common equivalent shares outstanding
during the year 3,826,905 3,803,439 3,795,600
</TABLE>
The accompanying notes are an integral part of these statements.
LecTec Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Unrealized
losses on
Additional securities Total
Common stock paid-in available- Retained shareholders'
Shares Amount capital for-sale earnings equity
<S> <C> <C>
Balance, July 1, 1992 3,379,019 $ 33,790 $ 5,875,943 $(113,485) $ 3,622,406 $ 9,418,654
Net earnings -- -- -- -- 581,840 581,840
Cost of shares retired (1,689) (17) (18,441) -- -- (18,458)
Common stock issued (note G) 17,053 170 60,286 -- -- 60,456
Unrealized gain on
long-term marketable
securities (note B) -- -- -- 54,740 -- 54,740
Stock dividend 169,518 1,695 1,907,614 -- (1,909,309) --
Other (56) -- 42,273 -- 61,523 103,796
Balance, June 30, 1993 3,563,845 35,638 7,867,675 (58,745) 2,356,460 10,201,028
Net earnings -- -- -- -- 635,335 635,335
Cost of shares retired (3,883) (39) (43,874) -- -- (43,913)
Common stock issued (note G) 18,366 184 68,768 -- -- 68,952
Unrealized loss on long-term
marketable securities (note B) -- -- -- (2,219) -- (2,219)
Stock dividend 178,721 1,787 1,871,042 -- (1,872,829) --
Other (49) -- 45,468 -- (67,649) (22,181)
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 (note G) 31,602 316 162,200 -- -- 162,516
Unrealized loss on securities
available-for-sale (note B) -- -- -- 10,148 -- 10,148
Other -- -- 60,000 -- -- 60,000
Balance, June 30, 1995 3,786,500 $ 37,865 $ 10,013,949 $ (50,816) $ 1,205,180 $ 11,206,178
</TABLE>
The accompanying notes are an integral part of these statements.
LecTec Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 153,863 $ 635,335 $ 581,840
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 932,051 584,362 459,202
Deferred income taxes (149,000) 76,000 (9,000)
Equity in losses of unconsolidated subsidiary -- 133,639 163,442
Changes in operating assets and liabilities:
Trade and other receivables (474,188) (305,304) (271,929)
Refundable income taxes 109,714 (101,762) (116,302)
Inventories (325,219) (811,246) 416,843
Prepaid expenses and other (128,059) (33,149) (8,167)
Accounts payable (189,057) 185,234 54,224
Accrued expenses 147,952 (10,890) 138,471
Net cash provided by operating activities 78,057 352,219 1,408,624
Cash flows from investing activities:
Purchase of property, plant and equipment (1,471,427) (2,091,228) (451,417)
Investment in patents and trademarks (141,665) (119,325) (223,301)
Purchase of investments (249,603) (3,003,396) (4,090,000)
Sale of investments 1,674,250 5,285,873 2,250,433
Acquisition of business, net of cash acquired -- (182,822) --
Investment in affiliate -- -- (175,000)
Other 19,395 85,656 130,011
Net cash used in investing activities (169,050) (25,242) (2,559,274)
Cash flows from financing activities:
Issuance of common stock 162,516 68,952 60,456
Retirement of common stock (17,351) (43,913) (18,458)
Net cash provided by financing activities 145,165 25,039 41,998
Net increase (decrease) in cash and cash
equivalents 54,172 352,016 (1,108,652)
Cash and cash equivalents at beginning of year 785,770 433,754 1,542,406
Cash and cash equivalents at end of year $ 839,942 $ 785,770 $ 433,754
</TABLE>
The accompanying notes are an integral part of these statements.
LecTec Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1995, 1994 and 1993
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 International Corporation, a wholly-owned subsidiary, and
Natus Corporation, a fifty-one percent owned subsidiary (note I). The Company
began consolidating Natus' results of operations effective 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,
1995 1994
Raw materials $1,162,559 $1,224,609
Work in process 218,351 185,307
Finished goods 716,344 362,119
$2,097,254 $1,772,035
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
Revenues are recognized at the time of shipment of product against a
confirmed sales order.
The Company recognizes contract research revenue as the related research and
development costs are incurred. During the years ended June 30, 1994 and
1993, there were approximately $32,000 and $226,000 of research and
development expenses associated with the contract research revenues.
6. Net Earnings Per Common and Common Equivalent Share
Net earnings per common and common equivalent share have been computed by
dividing net earnings 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.
NOTE B - INVESTMENTS
On July 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). The adoption of SFAS 115 did not have a material
effect on the consolidated financial statements.
The Company's long-term investments are classified as available-for-sale and
consist primarily of a preferred stock fund at June 30, 1995. These
investments are reported at fair value, with the net unrealized losses of
$50,816 included in shareholders' equity at June 30, 1995.
Long-term investments at June 30, 1994 were carried at the lower of aggregate
cost or market using the specific identification method and consisted
primarily of a preferred stock fund. Reductions in the carrying value were
established by a charge to shareholders' equity to reflect management's
belief that the decline in the value of the investment was temporary.
Short-term investments at June 30, 1994 consisted of tax exempt bonds
purchased with maturities of more than three months and were recorded at
market, which approximated cost.
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 2, 1996 with interest at the bank's reference rate (effective
rates of 9.0% and 7.25% at June 30, 1995 and 1994, respectively). There were
no borrowings outstanding on the line at June 30, 1995 or 1994. 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, 1995, the Company was in
compliance with all such covenants.
NOTE D - COMMITMENTS AND CONTINGENCIES
The Company conducts portions of its operations in leased facilities. The
leases provide for payment of a portion of taxes and other operating expenses
by the Company.
The minimum rental commitments under all operating leases are as follows for
the years ending June 30:
1996 $216,836
1997 214,859
1998 7,729
$439,424
Total rent expense for operating leases was $223,147, $218,375 and $197,118
for the years ended June 30, 1995, 1994 and 1993, respectively.
The Company is subject to various legal proceedings in the normal course of
business. Management believes that these proceedings will not have a material
adverse effect on the financial statements.
NOTE E - INCOME TAXES
Income taxes are provided under the liability method where 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 (benefit) expense consists of the following:
Years ended June 30,
1995 1994 1993
Current
Federal $ 136,000 $ 99,000 $215,000
State 2,000 2,000 6,000
138,000 101,000 221,000
Deferred
Federal (149,000) 76,000 (9,000)
State - - -
(149,000) 76,000 (9,000)
$ (11,000) $177,000 $212,000
The provision for deferred income taxes relates to the tax effect of
temporary differences as follows:
Years ended June 30,
1995 1994 1993
Tax credit carryforward $(141,000) $ - $ -
Tax depreciation in excess of book
depreciation 59,800 72,200 42,300
Inventory capitalization and reserve (25,900) 16,200 (31,200)
Other (41,900) (12,400) (20,100)
$(149,000) $ 76,000 $ (9,000)
Deferred tax assets (liabilities) represent the tax effects of cumulative
temporary differences as follows at June 30:
1995 1994
Deferred current assets and liabilities:
Net operating loss carryforwards $309,000 $266,000
Tax credit carryforwards 141,100 -
Inventory capitalization and reserve 78,700 52,800
Vacation pay accrual 28,200 35,400
Other 6,000 (11,200)
563,000 343,000
Valuation allowance (309,000) (266,000)
Net current asset $254,000 $ 77,000
Deferred long-term assets and liabilities:
1995 1994
Tax depreciation in excess of book
depreciation $(256,900) $(197,100)
Charitable contribution carryforwards 51,700 50,400
Other 38,200 7,700
Net long-term liability $(167,000) $(139,000)
At June 30, 1995, Natus Corporation has available net operating loss
carryforwards of approximately $908,000 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 Corporation. The utilization of
these net operating loss carryforwards by Natus Corporation 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, 1995, LecTec
Corporation has available tax credit carryforwards of approximately $141,000
which can be used to reduce future tax liabilities. These carryforwards begin
to expire in 2010.
Differences between income tax expense (benefit) and the statutory federal
income tax rate of 34% are as follows:
1995 1994 1993
Federal statutory income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 0.1 0.1 0.4
Tax credit carryforwards (74.7) (4.0) (3.0)
Foreign sales corporation (24.9) (3.9) (4.0)
Subsidiary loss producing no benefit 29.9 - -
Tax exempt investment income (14.7) (5.1) (4.0)
Goodwill amortization 46.8 1.8 -
Prior years' overaccruals (4.8) - -
Other .6 (4.2) (1.3)
(7.7)% 18.7% 22.1%
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 pension 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, $46,918 and $80,708 for the years ended June 30, 1995, 1994 and
1993, respectively.
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 $18,534, $56,978 and $31,619 for the years
ended June 30, 1995, 1994 and 1993, respectively.
The Company maintains a contributory 401(k) profit sharing pension 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 $37,230, $36,785 and $30,547 for
the years ended June 30, 1995, 1994 and 1993, respectively.
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, 1995 are summarized as follows:
Number of shares Option price of share
Outstanding at July 1, 1992 234,998 $3.34 - $ 7.77
Granted 93,272 9.07
Exercised (18,804) 3.34 - 7.77
Canceled (20,451) 3.34 - 9.07
Outstanding at June 30, 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
Under the Plan, options to purchase an aggregate of 189,429 shares were
exercisable at June 30, 1995.
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 such times
as set forth in the individual option agreements, vesting 100% after four
years or upon date of 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,
1995 are summarized as follows:
Number of shares Option price of share
Outstanding at July 1, 1992 17,364 $3.34 - $7.77
Granted 8,270 9.06
Outstanding at June 30, 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
Under the Directors' Plan, options to purchase an aggregate of 28,320 shares
were exercisable at June 30, 1995.
The Company's 1989 Stock Option Plan and the Company's 1991 Directors' Stock
Option Plan also provide for the grant of Stock Indemnification Rights (an
"SIR") to individuals who have a holding period restriction pursuant to
regulations under Section 16 of the Securities Exchange Act of 1934. Under
the SIR provision the Company would make a payment to the SIR holder for any
loss in value of the stock during the restricted holding period.
NOTE H - RESEARCH AGREEMENTS
The Company has an agreement with a university and a research company
(collectively the "Inventors") that grants the Company an exclusive,
worldwide license to certain technology for which patents have been filed. In
conjunction with the agreement, the Company also entered into a consulting
contract with one of the individuals who developed the technology. Terms of
the consulting contract provide for payments of $125,000 per year for three
years commencing in March 1993. In May 1993, the Company entered into a
sublicense agreement with another company ("Sublicensee") which gave the
Sublicensee exclusive right to the technology obtained by the Company from
the Inventors. During the year ended June 30, 1993 the Company received
payment of $100,000 from the Sublicensee which was recorded as contract
research revenue. During the year ended June 30, 1995 the Sublicensee did not
exercise its option to proceed under the sublicense agreement thereby
canceling the sublicense agreement with the Company.
NOTE I - ACQUISITION OF NATUS CORPORATION
On June 30, 1992, the Company entered into a Research, Development and
Marketing Agreement with Natus Corporation (Natus), whereby Natus agreed to
pay up to $200,000 for product research and development costs related to a
therapeutic product. Contract research revenues of $125,000 and $75,000 were
recognized in 1993 and 1992, respectively.
During 1993, the Company invested $175,000 in Natus Corporation, which
represented a 19.5% ownership interest in Natus. This investment was recorded
at cost. In addition to this equity investment, during 1993, the Company also
made an advance of $50,000 to Natus. Effective March 28, 1994, the Company
entered into a stock option agreement with Natus which provided the Company
the right and option to purchase a number of shares of common stock of Natus
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 Natus common stock at $1 per share, representing a total exercise
amount of $182,822. The Company paid cash of $132,525 and reduced their note
receivable from Natus 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
years ended June 30, 1994 and 1993 give effect to the acquisition of Natus as
though it had occurred on July 1 of each year:
1994 1993
Net sales $11,501,000 $9,652,000
Earnings before income taxes 347,000 199,000
Net earnings 178,000 3,000
Net earnings per common and
common equivalent share .05 -
NOTE J - MAJOR CUSTOMERS AND EXPORT REVENUES
One customer accounted for 14.6%, 17.4% and 17.9% of total revenues for the
years ended June 30, 1995, 1994 and 1993, respectively. One additional
customer accounted for 10.1% of total revenues during the year ended June 30,
1994 and another customer accounted for 11.5% of total revenues during the
year ended June 30, 1993. Export revenues accounted for approximately 18%,
22% and 28% of total revenues during the years ended June 30, 1995, 1994 and
1993, respectively. Export revenues by geographic area were as follows:
Years ended June 30,
1995 1994 1993
Canada $ 113,597 $ 122,208 $ 84,320
Europe 1,171,910 943,250 604,734
Asia 1,122,179 1,114,928 1,521,532
Latin America 195,663 168,621 350,760
$ 2,603,349 $2,349,007 $2,561,346
NOTE K - CASH FLOW INFORMATION
Cash paid for income taxes was $137,922, $178,316 and $283,323, respectively,
during the years ended June 30, 1995, 1994 and 1993.
NOTE L - RECLASSIFICATION
Certain of the 1994 and 1993 amounts have been reclassified to conform with
the financial statement presentation used in 1995.
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 17, 1995, and is incorporated herein by reference.
NON DIRECTOR, EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Age Title
<S> <C> <C>
Erwin W. Templin II * 42 Executive Vice President, Chief Financial Officer, Secretary and Treasurer
Robert T. Leick 54 Vice President, Sales and Marketing
David A. Montecalvo 30 Vice President, Operations
</TABLE>
Erwin W. Templin II is Executive Vice President, Chief Financial
Officer, Secretary and Treasurer. Mr. Templin is also Chairman of Natus
Corporation, a 51% owned subsidiary of LecTec. 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.
Robert T. Leick is Vice President, Sales and Marketing. Mr. Leick
joined the Company in 1992 as the Director of Sales and Marketing, Therapeutic
Products. In July 1993, Mr. Leick was promoted to Vice President, Sales and
Marketing. Prior to joining LecTec, Mr. Leick held various sales and marketing
positions during a 23-year career with Bristol-Myers Squibb Company in the Mead
Johnson and Company Division and the Mead Johnson Nutritional Group.
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.
* Mr. Templin, presently a director of the Company, will not be standing for
election as a director at the November 17, 1995 Annual Meeting of Shareholders.
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 17, 1995, 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 17, 1995, 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
17, 1995, 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, 1995 and 1994
(iii) Consolidated Statements of Earnings for the years ended
June 30, 1995, 1994 and 1993
(iv) Consolidated Statements of Shareholders' Equity for
the years ended June 30, 1995, 1994 and 1993
(v) Consolidated Statements of Cash Flows for the years
ended June 30, 1995, 1994 and 1993
(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.
<TABLE>
<CAPTION>
3. Exhibits Method of
Filing
<S> <C> <C>
3.1 Articles of Incorporation of Registrant, as amended (1)
3.2 By-laws of Registrant (1)
10.1 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.
10.2 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.
10.4 1986 Incentive Stock Option Plan (1)
10.5 Agreement dated June 1, 1983, between LecTec (1)
Corporation and George Ingebrand, relating to the grant
of stock-equivalent units.
10.6 Promissory Note dated January 12, 1995; 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.
10.7 Certificate of Secretary pertaining to Resolution of Board of (1)
Directors of LecTec Corporation, dated October 30, 1986,
implementing a Profit Sharing Bonus Plan.
10.81 Research Agreement dated December 31, 1991, between LecTec (2)
Corporation and the University of Minnesota, whereby LecTec Corporation
has exclusive rights to market and sell a non-nicotine compound,
which would be mutually developed for smoking cessation.
10.82 Assignment and Mutual Release Agreement dated March 9, 1993 (2)
between Pharmaco Behavioral Associates, Inc., Robert M. Keenan, Ph.D.,M.D. and
the University of Minnesota, whereby the University assigns 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 was a Mutual Release of all parties on all past
title, royalty and patent rights.
10.83 License Agreement dated March 9, 1993 between Pharmaco Behavioral (2)
Associates, Inc. and LecTec Corporation, whereby the Company receives an
exclusive, worldwide license to market, make and sublicense product
associated with the technology to alleviate symptoms of tobacco withdrawal.
For this license, Pharmaco and the University of Minnesota receives
royalties and lump sum payments upon completion of milestones and
payments from Sublicensee.
10.84 Consultant Contract and Invention Assignment dated March 9, 1993 (2)
between Robert Keenan, Ph.D., M.D. and LecTec Corporation, whereby
the Company receives assignment of patent and invention rights associated
with the technology to alleviate symptoms of tobacco withdrawal and the
Company will enter into a consulting agreement with Dr. Keenan.
10.91 Research Agreement dated June 30, 1992, between LecTec (2)
Corporation and the Natus Corporation, whereby Natus will fund the
the development of an analgesic patch for exclusive rights to sell the
the product.
10.92 Stock Investment and Repurchase Agreement dated July 1, 1992, (2)
between LecTec Corporation and the Natus Corporation, whereby LecTec
purchased Common Stock of Natus Corporation.
10.93 Amendments dated March 18, 1993 to the original Research Agreement (2)
dated June 30, 1992, which assigned the payable of $125,000 to
American Therapeutics Research, Inc., a subsidiary of Natus Corporation.
The Amendments established minimum payments for the balance of the liability.
10.94 Subscription Agreement dated June 17, 1993 between LecTec Corporation (2)
and the Natus Corporation, whereby LecTec purchased common stock of
Natus Corporation.
10.95 A Promissory Note dated June 17, 1993 between LecTec Corporation and (2)
the Natus Corporation. Included in the note is an option for LecTec to
receive common stock of Natus in lieu of payment.
10.96 The Amended and Restated Stock Option Agreement between LecTec Corporation (3)
and Natus Corporation, whereby LecTec has the option to acquire the additional
shares required to equal 51% of the Common Stock of Natus.
21.0 Subsidiaries of the Company (3)
23.0 Consent of Grant Thornton LLP (4)
27.0 Financial Data Schedule (4)
</TABLE>
Method of filing:
(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 26th day of
September, 1995.
LECTEC CORPORATION
/s/Thomas E. Brunelle
Thomas E. Brunelle
Chairman, President, Chief
Executive Officer 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/Thomas E. Brunelle September 26, 1995
Thomas E. Brunelle
Chairman, President, and Chief Executive Officer
Director
(Principal Executive Officer)
/s/Erwin W. Templin II September 26, 1995
Erwin W. Templin II
Executive Vice President, Chief Financial Officer
Secretary, Treasurer
Director
(Principal Financial and Accounting Officer)
/s/Lee M. Berlin September 26, 1995
Lee M. Berlin
Director
/s/George B. Ingebrand September 26, 1995
George B. Ingebrand
Director
EXHIBIT INDEX
Exhibits Page
3.1 Articles of Incorporation of Registrant, as amended (Note 1)
3.2 By-laws of Registrant (Note 1)
10.1 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).
10.2 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).
10.4 1986 Incentive Stock Option Plan (Note 1).
10.5 Agreement dated June 1, 1983, between LecTec Corporation and
George Ingebrand, relating to the grant of stock-equivalent
units (Note 1).
10.6 Promissory Note dated January 12, 1995; 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 . . . .
10.7 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).
10.81 Research Agreement dated December 31, 1991, between LecTec
Corporation and the University of Minnesota, whereby LecTec
Corporation has exclusive rights to market and sell a
non-nicotine compound, which would be mutually developed for
smoking cessation (Note 2).
10.82 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 assigns 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 was a Mutual Release of all parties
on all past title, royalty and patent rights (Note 2).
10.83 License Agreement dated March 9, 1993 between Pharmaco
Behavioral Associates, Inc. and LecTec Corporation, whereby
the Company receives an exclusive, worldwide license to
market, make and sublicense product associated with the
technology to alleviate symptoms of tobacco withdrawal. For
this license, Pharmaco and the University of Minnesota
receives royalties and lump sum payments upon completion of
milestones and payments from Sublicensee (Note 2). 10.84
Consultant Contract and Invention Assignment dated March 9,
1993 between Robert Keenan, Ph.D., M.D. and LecTec
Corporation, whereby the Company receives assignment of patent
and invention rights associated with the technology to
alleviate symptoms of tobacco withdrawal and the Company will
enter into a consulting agreement with Dr. Keenan.
10.91 Research Agreement dated June 30, 1992, between LecTec
Corporation and the Natus Corporation, whereby Natus will fund
the the development of an analgesic patch for exclusive rights
to sell the the product (Note 2).
10.92 Stock Investment and Repurchase Agreement dated July 1, 1992,
between LecTec Corporation and the Natus Corporation, whereby
LecTec purchased Common Stock of Natus Corporation (Note 2).
10.93 Amendments dated March 18, 1993 to the original Research
Agreement dated June 30, 1992, which assigned the payable of
$125,000 to American Therapeutics Research, Inc., a subsidiary
of Natus Corporation. The Amendments established minimum
payments for the balance of the liability (Note 2).
10.94 Subscription Agreement dated June 17, 1993 between LecTec
Corporation and the Natus Corporation, whereby LecTec
purchased common stock of Natus Corporation (Note 2).
10.95 A Promissory Note dated June 17, 1993 between LecTec
Corporation and the Natus Corporation. Included in the note is
an option for LecTec to receive common stock of Natus in lieu
of payment (Note 2).
10.96 The Amended and Restated Stock Option Agreement between LecTec
Corporation and Natus Corporation, whereby LecTec has the
option to acquire the additional shares required to equal 51%
of the Common Stock of Natus (Note 3).
21.0 Subsidiaries of the Company (Note 3)
23.0 Consent of Grant Thornton LLP . . . . . . . . . . . . . . . .
27.0 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.
PROMISSORY NOTE
(Single/Multiple Advance--Single Pay/Demand--Commercial/Agricultural)
Initial Rate 8.50%
Scheduled Maturity 1-2-96
Note No.
This Note renews Noie
No.
Dated , 19_
Officer Approval )
Note Date 1-12-95
Eden Prairie, MN 55344
Name: LecTec Corporation
For value received, the undersigned (if more than one, jointly and severally;
the "Borrower") promises to pay |_| on demand; |X| on January 2, 1996, to the
order of First Bank National Association (the"Bank"), its successors and
assigns, at the Banks office at 300 PrairieCenter Drive, Eden Prairie, MN 55344,
or at any other place designated in writing by the holder hereof (the "Holder"),
in lawful money of the United States of America, the principal sum
Of One Million and 00/100 Dollars( 1,000,000.00 ), or so much thereof as is
advanced and remains outstanding hereunder, as shown by the Holder's liability
record,together with interest (calculated on the basis of actual days elapsed
and a 360-day year) on the unpaid principal hereof, from the date hereof until
this Note is fully paid at the following rate:
|_| an annual percentage rate of %;
|X| A variable annual rate equal to the reference rate plus 0%. (The term
"reference rate" means the rate publicly announced by the Bank from time to time
as its reference rate:the Bank may lend to its customers at rates that are at,
above. or below the reference rate);
|_| Other
If the index used to compute a variable rate ceases to be available, the Holder
may choose a comparable successor index.
Interest shall be payable |_| at maturity, |X| to begin 2-1-95 and on the first
of each month thereafter until (and including) the Due Date. The term "Due Date"
means the maturity date hereof (whether it be the stated maturity date or an
earlier date by reason of acceleration) or, if this Note is payable upon demand,
the date of demand. The Bank may charge the Borrower's Account No.
1-801-2060-0150 maintained with the Bank for payments of |X| interest and |_|
principal due under this Note.
|X| Amounts may be readvanced hereunder provided that the principal balance
outstanding shall not exceed the amount first above written.
Unless the Bank has issued its written commitment to the Borrower referring to
this Note, the Bank has not obligated itself to make any advances hereunder.
|_| This note is secured. |_| This note is guaranteed.
All principal and interest not paid on the Due Date shall bear interest at a
rate of interest two percent (2%) per annum in excess of the rate otherwise
applicable to this Note, unless the law requires that the rate of interest not
change after the Due Date, in which event the principal balance shall bear
interest after the Due Date at the rate in effect on the Due Date.
If this Note evidences a variable rate loan, the following provisions shall also
apply:
1. The annual rate of interest hereon shall never exceed the highest rate
permitted by law.
2. The rate of interest shall initially be determined as of the date hereof and
shall thereafter be adjusted daily on the same day the index rate changes.
The Bank shall have no obligation to renew this Note.
OTHER TERMS: This Note is subiect to the terms and conditions set forth in that
certain Credit Areement dated as of the date of this note between the Borrower
and the Bank.
THIS NOTE IS SUBJECT TO THE ADDITIONAL PROVlSIONS SET FORTH ON THE REVERSE SIDE
HEREOF.
Address of Borrower: 10701 Red Circle Drive LecTec Corporation
Minnetonka, MN. 55343 (Name of Borrower if
corporation, partnership or
proprietorship)
( its) VP/CFO
Purpose of Loan Working Capital/Letters of Credit Erwin Templin II
AUDITORS' CONSENT
We have issued our report dated August 31, 1995 accompanying the
consolidated financial statements included in the Annual Report of LecTec
Corporation on Form 10-K for the year ended June 30, 1995. We hereby consent to
the incorporation by reference of said report in the Registration Statements of
LecTec Corporation on Forms S-8 (File No. 33-121780, effective April 21, 1987
and No. 33-45931, effective February 21, 1992).
Grant Thornton LLP
Minneapolis, Minnesota
September 26, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 839,942
<SECURITIES> 0
<RECEIVABLES> 2,433,772
<ALLOWANCES> 18,000
<INVENTORY> 2,097,254
<CURRENT-ASSETS> 5,836,764
<PP&E> 8,373,567
<DEPRECIATION> 2,813,760
<TOTAL-ASSETS> 12,719,146
<CURRENT-LIABILITIES> 1,345,968
<BONDS> 0
<COMMON> 37,865
0
0
<OTHER-SE> 11,168,313
<TOTAL-LIABILITY-AND-EQUITY> 12,719,146
<SALES> 14,138,290
<TOTAL-REVENUES> 14,138,290
<CGS> 8,440,728
<TOTAL-COSTS> 8,440,728
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 142,863
<INCOME-TAX> (11,000)
<INCOME-CONTINUING> 153,863
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 153,863
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
