<SEC-DOCUMENT>0000897101-01-500638.txt : 20011009
<SEC-HEADER>0000897101-01-500638.hdr.sgml : 20011009
ACCESSION NUMBER: 0000897101-01-500638
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 20010630
FILED AS OF DATE: 20010928
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: LECTEC CORP /MN/
CENTRAL INDEX KEY: 0000805928
STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845]
IRS NUMBER: 431301878
STATE OF INCORPORATION: MN
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-16159
FILM NUMBER: 1748248
BUSINESS ADDRESS:
STREET 1: 10701 RED CIRCLE DR
CITY: MINNETONKA
STATE: MN
ZIP: 55343
BUSINESS PHONE: 6129332291
MAIL ADDRESS:
STREET 1: 10701 RED CIRCLE DRIVE
STREET 2: 10701 RED CIRCLE DRIVE
CITY: MINNETONKA
STATE: MN
ZIP: 55343
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>lectec013788_10k.txt
<DESCRIPTION>LECTEC CORPORATION FORM 10K
<TEXT>
UNITED STATES 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, 2001.
/ / 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: (952) 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 20, 2001 was $4,470,945 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 20, 2001 was 3,922,384 shares.
---------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
------- --------
GENERAL
LecTec Corporation (the "Company") is a health care and consumer
products company that develops, manufactures and markets products based on its
advanced skin interface technologies. Primary products include a complete line
of over-the-counter ("OTC") therapeutic patches. The Company markets and sells
its products to consumers through retail outlets (food, chain drug and mass
merchandise stores), other consumer products companies, and direct via the
Internet. All of the products manufactured by the Company are designed to be
highly compatible with skin.
The Company is an innovator in hydrogel-based topical delivery of
therapeutic OTC medications which provide alternatives to creams and ointments.
A hydrogel is a gel-like material having an affinity for water and similar
compounds. These gels are ideal for delivering medication on to the skin. The
Company holds multiple domestic and foreign patents.
Effective January 14, 1999, the Company was certified as meeting the
requirements of ISO 9001 and EN46001 quality system standards. Certification was
granted by TUV Product Service GmbH. On September 21, 2001 the quality system
was re-audited and certification was expanded to include ISO 13485, as well as
recognition to be certified as a contract manufacturer for other consumer
products companies. Meeting these standards confirms that the Company has
achieved the highest level of quality systems compliance demonstrated by
world-class design and manufacturing firms.
The Company, through its research and development efforts, is
investigating new products for topical delivery of OTC drugs. In addition,
existing technologies are being refined to focus on new skin care and comfort
care consumer products targeting new retail customers and 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 (952) 933-2291.
RECENT DEVELOPMENTS
During fiscal 2001 the Company significantly restructured, transforming
from a technology-based company, to a consumer products company. Consistent with
its new strategic focus, the Company is concentrating all of its efforts on its
consumer products business, with its comparatively higher margins and current
growth in revenues, and has exited the medical tape business and the conductive
products business.
During the third quarter of fiscal 2001, the Company sold its medical
tape manufacturing equipment and other related assets. The sale of the medical
tape equipment finalized the Company's plan, adopted at the end of fiscal year
2000, to exit the low margin medical tape business. The medical tape business
included sales of individual slit roll widths of the standard paper, plastic and
cloth products widely used in the health care industry and sales of large jumbo
rolls which were converted by the customer into individual slit roll widths for
ultimate sale to consumers. Sales of medical tapes accounted for approximately
1%, 13% and 22% of the Company's total sales for fiscal years 2001, 2000 and
1999 respectively. No sales are expected in fiscal 2002.
During the fourth quarter of fiscal 2001, the Company sold its
diagnostic electrode and electrically conductive adhesive hydrogel business
assets which were used to produce the Company's conductive products. The
conductive products include diagnostic electrodes and electrically conductive
adhesive hydrogels. Under a manufacturing and supply agreement between the
Company and the buyer, the Company will continue to manufacture, and supply to
the buyer, certain conductive products for a portion
1
<PAGE>
of fiscal 2002. The Company will supply the products at its cost of production
through October 31, 2001, and at its cost of production plus ten percent
thereafter. Sales of conductive products accounted for approximately 41%, 51%
and 63% of the Company's total sales for fiscal years 2001, 2000 and 1999
respectively.
PRODUCTS
The Company's core competency is skin interface hydrogel technology.
This competency results in products which are compatible with human skin,
thereby reducing skin irritation and reducing damage to the skin as well as the
risk of infection. The products are convenient to use and less messy than creams
and lotions. The adhesive characteristics, dimensions, drug stability, shelf
life and manufacturability of the Company's products are highly consistent and
reproducible from product to product.
The Company designs, manufactures and markets topical ointment-based
products for the application of OTC drugs. Therapeutic patch products use a
hydrogel coated, breathable cloth patch to deliver OTC drugs and other
therapeutic compounds onto the skin. Products currently manufactured using the
adhesive-based patch technology are analgesics for localized pain relief,
cooling gel comfort strips, vapor cough suppressants, anti-itch, cold sore and
acne treatment products, wart removers, and a corn and callus remover. The
analgesic, cooling, anti-itch and cold sore patches are marketed under the
LecTec brand name TheraPatch(R). The acne treatment patches are marketed by
Johnson & Johnson Consumer Products Company under the Neutrogena(R)
On-the-Spot(R) Acne Patch and CLEAN & CLEAR(R) brand names. The vapor cough
suppressant patches are marketed under the TheraPatch brand name as well as by
Novartis Consumer Health, Inc. under the Triaminic(R) brand name. The wart
removers and corn and callus removers are sold by LecTec to certain customers
who market them under their own brand name.
Sales of therapeutic consumer products accounted for approximately 58%,
36% and 15% of the Company's total sales for fiscal years 2001, 2000 and 1999
respectively.
MARKETING AND MARKETING STRATEGY
The Company markets and sells its products to consumers through retail
outlets (food, chain drug and mass merchandise stores), consumer products
companies and via the Internet.
A major entry into the consumer products markets was supported by the
hiring of a new retail sales executive late in fiscal 1998 and a retail sales
team in fiscal 1999. In the consumer products markets, retail broker and
manufacturer's representative contracts have been established. The TheraPatch
brand is the umbrella brand for the Company's therapeutic patch products
introduced to all markets.
In addition to the retail sales team hired for entry into the retail
consumer products markets, the Company has sales teams which support sales to
consumer products companies who sell directly to the consumer. Approximately 71%
of the sales of the Company's consumer patch products during fiscal year 2001
were derived from contract manufacturing agreements with other companies that
act as resellers of our products. Under these agreements, the Company's products
are marketed and sold under another company's brand name and by another
company's sales force. The Company's success depends in part upon its ability to
enter into additional reseller agreements with new third parties while
maintaining existing reseller relationships. The Company believes its
relationships with existing third party resellers has been a significant factor
in the success to date of its therapeutic consumer products business, and any
deterioration or termination of these relationships would seriously harm
business.
The Company experiences seasonality in the sales of three of its
therapeutic patch products. The vapor cough suppressant patches and cold sore
patches experience increased sales during the cough and cold season which
typically includes the winter months. The anti-itch patches experience increased
sales during the summer months when insects bites and itching associated with
poison oak/ivy/sumac are prevalent.
2
<PAGE>
The Company currently sells its products in the U.S. and Canada. In
prior years, the Company also sold its conductive products in Europe, Latin
America, Asia and the Middle East. Except for sales of the TheraPatch brand
patch product into Canada, all of the Company's international sales were
denominated in U.S. dollars, thus, most of the impact of the foreign currency
transaction gains and losses were borne by the Company's customers. The Company
does not believe the January 1, 1999 euro currency conversion has had a material
impact on its financial statements. Export sales accounted for approximately 8%,
13% and 13% of total sales for 2001, 2000 and 1999 respectively.
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
--------------------------------------------------
2001 2000 1999
---------- ---------- ----------
Europe $815,796 $1,006,412 $1,216,199
Latin America 139,613 547,904 371,654
Asia 72,851 46,279 31,935
Canada 215,686 298,884 7,011
Other 7,950 36,234 28,333
---------- ---------- ----------
Total Export Sales $1,251,896 $1,935,713 $1,655,132
========== ========= =========
CUSTOMERS
Novartis Consumer Health, Inc. (Novartis) accounted for 20% of the
Company's total sales for the year ended June 30, 2001. Fiscal 2001 was the
first full year of sales to Novartis. The Company's reseller agreement with
Novartis provides that Novartis will purchase from the Company hydrogel patches
which emit vapors that, when inhaled, provide relief of cough and cold symptoms.
The agreement has an initial term that expires May 15, 2005. The Company's
principal duty under the agreement is to manufacture the patches ordered by
Novartis. The Company may not manufacture the patches or any other vapor patches
in the pediatric field of use and in the United States to any other reseller,
but may manufacture and sell competing patches under the Company's own brand
name. The agreement does not require Novartis to purchase a minimum quantity
each year. The Company's results of operations could be harmed if Novartis
decreased the purchases it makes under the agreement. In addition, if the
agreement were cancelled, which Novartis has the right to do upon six months
notice, the Company's results of operations would be harmed. If the Company is
unable to extend or renew the agreement upon its expiration, its results of
operations would be harmed.
Johnson & Johnson Consumer Products Company (J&J) accounted for 10% of
the Company's total sales for the year ended June 30, 2001. Fiscal 2001 was the
first full year of sales to J&J. The reseller agreement with J&J provides that
J&J will purchase from the Company hydrogel patches for use in the treatment of
acne. The agreement has an initial term that expires May 24, 2002. The Company's
principal duty under the agreement is to manufacture and sell the patches
ordered by J&J. Under the terms of the agreement J&J is required to purchase a
minimum amount of patches in each year of the initial two-year term. During the
term of the agreement, J&J has the exclusive worldwide right to market, sell and
distribute the patches and the right of first negotiation as to any of the
Company's new acne products utilizing the same technology as the patches. The
Company's operations would be harmed if the reseller purchased only the minimum
requirement. In addition, if the agreement were cancelled due to the Company's
breach, the Company's results of operations would be harmed. If the Company is
unable to extend or renew the agreement upon its expiration, its results of
operations would be harmed.
Spacelabs Burdick Inc. accounted for 12%, 17% and 22% of the Company's
total sales for the fiscal years 2001, 2000 and 1999. This conductive products
customer will no longer generate sales due to the sale of the assets of the
Company's conductive products division during the year.
3
<PAGE>
The Company sold its products to approximately 310, 275 and 240 active
customers (excluding TheraPatch sales to individual consumers) during 2001, 2000
and 1999. The Company's backlog orders (purchase orders received from customers
for future shipment) as of August 10, 2001 totaled $3,606,000 (all of which the
Company expects to fill in fiscal 2002), compared with approximately $3,170,000
on August 11, 2000.
COMPETITION
The market for OTC drug delivery patches is highly competitive. Firms
in the consumer and medical industries compete on the basis of product
performance, pricing, distribution and service. Competitors in the United States
and abroad are numerous and include, among others, major pharmaceutical and
consumer product companies who have significantly greater financial, marketing
and technological resources than the Company. However, the Company believes that
it competes on the basis of proprietary technology, speed-to-market,
flexibility, innovative "first-in-category" patches, customer focus and its
ability to manufacture and market its products to targeted market segments.
The Company's OTC TheraPatch family of analgesic, cooling, vapor,
anti-itch and cold sore patches competes with ointments, lotions and creams
manufactured by various competitors including Mentholatum/Rohto Pharmaceuticals,
Inc.
MANUFACTURING
The Company manufactures its therapeutic membranes at the Company's
Minnetonka, Minnesota facility. The Minnetonka facility also processes raw
materials and manufactures the Company's therapeutic products. The Company's
second facility in Edina, Minnesota is the primary site for the packaging of
therapeutic products and 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.
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 improved products and new technologies.
The Company may develop products internally, jointly with corporations
and/or with inventors from outside the Company. The Company may then market
resulting products by sponsoring partners or through a marketing arrangement
with appropriate health care companies. Research and development contract
opportunities are evaluated on an individual basis.
The Company, through its research and development efforts, is
investigating new products for topical delivery of OTC drugs. In addition,
existing technologies are being refined to focus on new products targeting new
customers and new markets.
During fiscal years 2001, 2000 and 1999, the Company spent
approximately $920,000, $1,095,000 and $1,170,000 on research and development
respectively.
4
<PAGE>
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
The Company's Quality System includes design development planning,
testing, manufacturing, packaging, labeling and distribution of the Company's
products which are subject to federal and foreign regulations, and in some
instances, state and local government regulations.
UNITED STATES REGULATION
The products manufactured by the Company's consumer products division
are classified as either non-drugs or over-the-counter, or OTC drugs, which are
either not regulated or regulated with published FDA OTC monographs, which are
used to regulate drugs that contain ingredients known to be safe and effective.
The monographs set out acceptable ingredients, combinations, concentrations and
specific labeling requirements.
Until all finished good electrodes sold in the United States reach
their expiration date, the Company will continue to be subject to federal Food
and Drug Administration (the "FDA") policy including current Good Manufacturing
Practices ("GMP") and quality system regulations.
The Company's hydrogels sold domestically also continue to be subject
to GMP and quality system regulations as they are sold to OEMs and distributors
for processing into finished commercial goods.
FOREIGN REGULATION
The Company's topical OTC drug delivery patches are marketed in Canada
under applicable Canadian OTC monographs where appropriate, and are reviewed and
approved prior to commercialization by the Health Protection branch of Health
Canada.
The Company's electrodes previously sold into the European Community
(the "EC") were considered to be Class I, non-sterile and non-measuring medical
devices. These products were "CE" marked and "self declared" as being compliant
to the Medical Device Directive 93/42/EEC.
ENVIRONMENTAL REGULATION
The Company does not use solvents that have an adverse effect on the
environment in the manufacturing of its products. The Company does not
anticipate any major expenditure for environmental controls during the next
fiscal year.
PATENTS AND TRADEMARKS
The Company has U.S. and foreign patents on adhesive hydrogels,
electrodes and transdermal and topical delivery systems. Thirteen active U.S.
patents and four active international patents are currently assigned or licensed
to the Company. Twenty-two U.S. and foreign applications are pending including
two which are on appeal. Foreign patent applications are pending in numerous
European countries, Canada and Japan. The patents most pertinent to the
Company's major products have a remaining duration ranging from eight to twenty
years. Issued patents can later be held invalid by the patent office issuing the
patent or by a court. The Company cannot be certain that its patents will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide a competitive advantage.
One trademark registration was received in fiscal 2001. Two trademark
registrations are pending.
The Company expects that its products will be subject to continuous
modifications due to improvements in materials and technological advances for
medical products. Therefore, the Company's
5
<PAGE>
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.
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. To the extent the Company relies on confidential
information to maintain competitive position, there can be no assurance that
other parties will not independently develop the same or similar information.
EMPLOYEES
As of June 30, 2001, the Company employed 94 full-time employees. None
of the Company's employees are represented by labor unions or other collective
bargaining units. The Company believes relations with its employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Title
--------------------- --- --------------------------------------------------------
Rodney A. Young 46 Chairman, Chief Executive Officer and President
Douglas J. Nesbit 49 Chief Financial Officer, Secretary and Treasurer
Timothy P. Fitzgerald 61 Vice President, Operations
John D. LeGray 55 Vice President, Quality Assurance and Regulatory Affairs
William J. Tourek 53 Vice President, Research and Development
Jane M. Nichols 55 Vice President, Marketing and New Business Development
Timothy R. J. Quinn 40 Vice President, Consumer Products
</TABLE>
Rodney A. Young, 46 years old, was appointed a Director, Chief
Executive Officer and President of LecTec in August 1996. In November 1996 he
was appointed as Chairman of the Board. Prior to assuming the leadership role
with LecTec, Mr. Young served Baxter International, Inc. for five years in
various management roles, most recently as Vice President and General Manager of
the Specialized Distribution Division. Mr. Young also serves as a Director of
Possis Medical, Inc., Delta Dental Plan of Minnesota, as well as Health Fitness
Corporation.
Douglas J. Nesbit is Chief Financial Officer, Secretary and Treasurer.
He joined the Company in August 2000. Mr. Nesbit's 24-year professional
background includes public accounting experience with the big five firm of KPMG,
LLP. Prior to joining LecTec he was the Chief Financial Officer at Total
Solutions Group, Inc. and Corporate Treasurer at Secure Computing Corporation.
Timothy P. Fitzgerald is Vice President, Operations. He joined the
Company in February 2000. Mr. Fitzgerald's 41-year career includes technical and
senior management positions at Bell & Howell Co., International Data
Engineering, Inc. and Varitronic Systems, Inc.
John D. LeGray is Vice President, Quality Assurance and Regulatory
Affairs. He joined the Company in September 1997. Mr. LeGray's 34-year career
includes technical and management positions at DiaSorin Inc., Bayer Corporation
and Abbott Laboratories.
William J. Tourek is Vice President, Research and Development. He
joined the Company in February 2001. Mr. Tourek's 26-year career includes
technical and management positions in pharmaceutical development at Upsher-Smith
Laboratories and Boehringer Ingelheim Corporation (Roxane Laboratories).
6
<PAGE>
Jane M. Nichols is Vice President, Marketing and New Business
Development. She joined the Company in April 1997. Ms. Nichols' 29-year career
includes clinical, technical and management roles at Methodist Hospital and Park
Nicollet Medical Centers, and senior marketing positions at 3M Company and
Ecolab.
Timothy R. J. Quinn is Vice President and General Manager, Consumer
Products. He joined the Company in May 1998. He has 21 years of sales and
marketing experience in the consumer products industry. Prior to joining LecTec,
he was Vice President of Sales at Redmond Products. Prior to Redmond, Mr. Quinn
served in a variety of sales and marketing management positions for Lederle
Laboratories and General Foods 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 of manufacturing and
warehouse space. The Edina building lease term extends through June 30, 2002.
ITEM 3. LEGAL PROCEEDINGS
------- -----------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------- ---------------------------------------------------
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY 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 2001 and
2000. Such prices reflect interdealer prices, without retail mark-up, mark-down,
or commission, and may not necessarily represent actual transactions.
YEARS ENDED JUNE 30, 2001 2000
------------------ -------------------
HIGH LOW HIGH LOW
---- ---- ---- ----
First Quarter $4.22 $2.00 $4.38 $2.69
Second Quarter 2.75 1.00 3.13 1.19
Third Quarter 3.13 1.56 5.00 1.38
Fourth Quarter 3.00 1.56 4.88 2.00
As of September 20, 2001 the Company had 3,922,384 shares of common
stock outstanding, and 296 common shareholders of record which number does not
include beneficial owners whose shares were held of record by nominees or broker
dealers.
7
<PAGE>
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.
8
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
------- ------------------------------------
Please see Item 1 of this report for information regarding the
disposition of significant business operations that affect the comparability of
the information set forth below.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Year ended June 30,
-----------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 15,928,832 $ 14,596,346 $ 12,279,075 $ 12,922,365 $ 12,256,327
Gross profit 5,422,601 5,121,217(3) 4,093,561 3,715,032 4,324,180
Loss from operations (3,315,622)(1) (2,890,497)(4) (1,771,324) (474,935) (2,215,951)(5)
Earnings (loss) before equity
in losses of unconsolidated
subsidiary 1,343,492(2) (2,859,276)(4) (1,683,257) (404,061) (2,140,660)(5)
Equity in losses of unconsoli-
dated subsidiary -- -- -- -- 126,067
Net earnings (loss) 1,343,492(2) (2,859,276)(4) (1,683,257) (404,061) (2,266,727)(5)
Net earnings (loss) per share
Basic .34(2) (.74)(4) (.43) (.10) (.59)(5)
Diluted .34(2) (.74)(4) (.43) (.10) (.59)(5)
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA
June 30,
-----------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments $ 3,376,723 $ 100,171 $ 1,022,025 $ 2,186,532 $ 1,242,777
Current assets 7,301,333 5,236,110 5,904,111 6,728,531 6,873,696
Working capital 4,279,728 1,512,561 3,497,926 5,335,861 4,035,084
Property, plant and equipment, net 2,422,494 3,039,088 4,028,491 4,306,568 4,592,304
Long-term investments -- -- -- 8,676 8,013
Total assets 9,967,776 8,474,549 10,132,573 11,317,774 11,837,356
Long-term liabilities 859,623 31,184 217,868 222,000 211,000
Shareholders' equity 6,086,548 4,719,816 7,508,520 9,703,104 8,787,744
</TABLE>
(1) Includes a nonrecurring restructuring charge of $303,759 related to the
sale of the conductive business assets.
(2) Includes a nonrecurring restructuring charge of $303,759 related to the
sale of the conductive business assets and a gain on disposition of
assets of $4,662,210 related to the sale of the conductive business
assets and the disposition of the medical tape assets.
(3) Includes a charge of $85,000 related to the impairment of inventory of
the medical tape product line.
(4) Includes a charge of $730,000 or $.19 per share related to the plan to
exit the medical tape product line.
(5) Includes a nonrecurring restructuring charge of $2,180,353 or $.57 per
share related to the elimination of the Pharmadyne subsidiary.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
During the third quarter of fiscal 2001, the Company sold its medical
tape manufacturing equipment and other related assets. Net proceeds from the
sale were $630,000 consisting of the purchase price of $700,000 less transaction
costs of $70,000. The Company realized a gain on the sale of $103,624. The gain
resulted from achieving a higher sales price for the assets than originally
projected. The sale of the medical tape equipment finalized the Company's plan
to exit the medical tape business which was adopted at the end of the fiscal
year 2000. Adoption of this plan originally resulted in a charge of $645,000
during fiscal year 2000 related to the write-down of the medical tape equipment
to its estimated fair market value, net of disposal costs, of $525,000 at June
30, 2000.
During the fourth quarter of fiscal 2001, the Company sold its
diagnostic electrode and electrically conductive adhesive hydrogel business
assets which were used to produce the Company's conductive products. Net
proceeds from the sale were $6,036,988 consisting of the purchase price of
$7,268,404 less transaction costs of $1,231,416. The net assets sold as part of
the transaction were carried at a cost of $1,478,402. The Company realized a
gain on the sale of $4,558,586. Under a manufacturing and supply agreement
between the Company and the buyer, the Company will continue to manufacture, and
supply to the buyer, certain conductive products for a portion of fiscal 2002.
The Company will supply the products at its cost of production through October
31, 2001, and at its cost of production plus ten percent thereafter.
A non-recurring restructuring charge of $303,759 was incurred in the
fourth quarter of fiscal 2001 relating to the sale of the Company's conductive
business assets. The restructuring charge consists primarily of future rental
payments for a leased facility, separation costs, and other costs associated
with the wind-down of conductive business activity. The separation costs
includes the termination of production and administrative employees, of which
six were terminated on June 28, 2001. The total restructuring charge decreased
the 2001 net income per basic and diluted share by $.08. The Company expects to
complete the restructuring during fiscal 2002.
On September 5, 2001, the Company's Board of Directors approved a
change in the Company's fiscal year end from June 30 to December 31. The change
is effective immediately. The Company will file a Transition Report on Form 10-K
for the six months ended December 31, 2001.
NET SALES
Net sales were $15,928,832 in fiscal 2001, an increase of 9.1% from net
sales of $14,596,346 in fiscal 2000. Net sales were $12,279,075 in fiscal 1999.
The increase in both fiscal 2001 and fiscal 2000 net sales was primarily the
result of increased therapeutic consumer product sales, partially offset by
decreased medical tape and conductive product sales.
Net sales of therapeutic consumer products increased 77.0% in fiscal
2001 to $9,237,472 from $5,218,199 in fiscal 2000. Net sales of therapeutic
consumer products were $1,804,249 in fiscal 1999. The increase in fiscal 2001
was primarily the result of sales of the new vapor product to Novartis Consumer
Health, Inc as well as sales of the acne product to Johnson & Johnson Consumer
Products Worldwide. The increase in fiscal 2000 was primarily the result of
increased TheraPatch product sales, which increased 127.1%, and sales of the new
acne product to Johnson & Johnson Consumer Products Worldwide. Management
believes that sales of the Company's therapeutic patch products will represent
substantially all of total net sales during fiscal 2002 due to continued sales
growth of the vapor and acne products, increased TheraPatch brand name
recognition and the sale of the conductive business assets.
10
<PAGE>
Net sales of conductive products (medical electrodes and conductive
hydrogels) decreased by 11.9% in fiscal 2001 to $6,563,924 from $7,450,755 in
fiscal 2000. Net conductive product sales were $7,758,286 in fiscal 1999. The
decrease in fiscal 2001 was primarily the result of the sale of the assets of
the conductive products division in the fourth quarter. The decrease in fiscal
2000 net sales was primarily due to a decrease in units sold. The Company
expects fiscal 2002 conductive sales to decrease significantly due to the sale
of the assets of the conductive products division. Under a manufacturing and
supply agreement between the Company and the buyer, the Company will continue to
manufacture, and supply to the buyer, certain conductive products for a portion
of fiscal 2002. The Company will supply the products at its cost of production
through October 31, 2001, and at its cost of production plus ten percent
thereafter.
Net sales of medical tapes decreased by 93.4% in fiscal 2001 to
$127,436 from $1,927,392 in fiscal 1999. Net medical tape sales were $2,716,540
in fiscal 1999. The decrease in fiscal 2001 was primarily the result of exiting
the medical tape business. The decrease in fiscal 2000 was primarily the result
of reduced sales to low-margin slit roll tape customers. The Company expects no
medical tape sales in fiscal 2002 due to the sale of its medical tape
manufacturing equipment in the third quarter of fiscal 2001 which finalized the
Company's plan to exit the medical tape business.
Export sales, consisting primarily of electrodes, semi-finished
conductive products sold to overseas converters for final processing, packaging
and marketing, as well as TheraPatch brand therapeutic consumer products, were
8%, 13% and 13% of total net sales in fiscal 2001, 2000 and 1999 respectively.
All international sales were in U. S. dollars with the exception of TheraPatch
brand products sold in Canada. Export sales decreased by $683,817 in fiscal 2001
primarily as a result of the exit from the medical tape business and the sale of
the assets of the conductive products division. The Company expects fiscal 2002
international sales to decrease significantly due to the sale of the assets of
the conductive products division.
GROSS PROFIT
The Company's gross profit was $5,422,601 in fiscal 2001, up from
$5,121,217 in fiscal 2000. Gross profit was $4,093,561 in fiscal 1999. As a
percentage of net sales, gross profit was 34.0 % in fiscal 2001, 35.1% in fiscal
2000 and 33.3% in fiscal 1999. Gross profit in fiscal 2001 increased by 5.9%
from the prior year and gross profit in fiscal 2000 increased by 25.1% from the
prior year. The increase in gross profit in fiscal 2001 resulted primarily from
increased sales. The slight decrease in gross profit percent in 2001 resulted
primarily from the Company entering into a manufacturing and supply agreement
with the buyer of the assets of the conductive products division to continue to
manufacture, and supply the buyer certain conductive products at the Company's
cost. The increase in gross profit in fiscal 2000 resulted primarily from a
shift in the sales mix to higher margin therapeutic consumer products.
SALES AND MARKETING EXPENSES
Sales and marketing expenses totaled $4,377,580 or 27.5% of net sales
in fiscal 2001, compared to $3,672,908 or 25.2% of net sales in fiscal 2000, and
$2,187,710 or 17.8.% of net sales in fiscal 1999. The fiscal 2001 increase was
primarily due to an increase of $697,000 in media advertising expense related to
a TV ad campaign for TheraPatch Anti-Itch for Kids. The fiscal 2000 increase was
primarily due to increases of $280,000 in TheraPatch related advertising,
$256,000 in cooperative marketing retail promotions and $607,000 in slotting
fees. The Company anticipates sales and marketing expenses as a percent of sales
in fiscal 2002 will be comparable to fiscal 2001.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $2,957,098 or 18.6% of net
sales in fiscal 2001, compared to $2,598,998 or 17.8% of net sales in fiscal
2000, and $2,507,432 or 20.4% of net sales in fiscal 1999. The increase in
fiscal 2001 was primarily due to an increase of $270,000 in payroll related
expenses, and employment fees related to the hiring of a new CFO. The increase
in fiscal 2000 was primarily the result of an increase of $154,000 in consulting
expense which more than offset a decrease in
11
<PAGE>
legal expenses. Legal expense in the prior year included approximately $126,000
related to the re-negotiation and modification of the license agreement for the
development and commercialization of cotinine as well as legal expenses
associated with work on new and existing patents. The Company anticipates
general and administrative expenses as a percent of sales in fiscal 2002 will be
comparable to fiscal 2001.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses totaled $919,786 or 5.8% of net sales
in fiscal 2001, compared to $1,094,808 or 7.5% of net sales in fiscal 2000, and
$1,169,743 or 9.5% of net sales in fiscal 1999. The decrease in fiscal 2001
primarily resulted from a decrease of $60,000 in test run production costs. The
decrease was primarily the result of decreased activity due to exiting the
conductive products and tape business segments. The decrease in fiscal 2000
primarily reflects a decrease of $60,000 in test-run production costs.
Management believes that research and development expenditures as a percent of
sales will be comparable in fiscal 2002 to fiscal 2001.
OTHER INCOME AND EXPENSE
Interest expense totaled $151,272 in fiscal 2001 compared to $35,405 in
fiscal 2000 and $1,173 in fiscal 1999. The increase in fiscal 2001 was primarily
due to interest expense associated with increased borrowings on the line of
credit and interest expense associated with the mortgage agreement. The increase
in fiscal 2000 was primarily due to interest expense associated with the line of
credit. Gain on disposition of assets totaled $4,622,210 in fiscal 2001 due to
the sale of the conductive business assets and the disposition of the medical
tape equipment. There was no gain on disposition of assets in fiscal 2000 and
fiscal 1999. Other income decreased to $16,176 in fiscal 2001 from $27,692 in
fiscal 2000 and $89,240 in fiscal 1999 primarily due to decreased interest
income as a result of lower cash and cash equivalent balances.
INCOME TAXES
The Company recorded an income tax expense in fiscal 2001 of $48,000,
an income tax benefit in fiscal 2000 of $38,934 and no income tax expense or
benefit in fiscal 1999. The income tax expense in fiscal 2001 resulted from an
alternative minimum tax liability after offsetting regular taxable income with
prior years net operating loss carry forwards. The income tax benefit in fiscal
2000 resulted primarily from the refund of taxes previously paid by the
Company's foreign sales corporation. The foreign sales corporation was dissolved
during fiscal 2000. There was no income tax benefit recorded during fiscal 2000
and fiscal 1999 related to the loss before income taxes since the tax benefit
may not be realizable by the Company.
OPERATIONS SUMMARY
The net earnings from fiscal 2001 resulted primarily from the gain on
the sale of the assets of the conductive products division, which was partially
offset by a non-recurring restructuring charge. Excluding the gain and
restructuring charge, the Company incurred a comparable net loss to fiscal 2000.
The net loss excluding the gain and restructuring charge for fiscal 2001
resulted primarily from an increase in advertising expenses associated with
retail sales of the Company's TheraPatch products which more than offset an
increase in gross profit. The increase in gross profit resulted from increased
sales volume. The net loss for fiscal 2000 resulted primarily from increased
sales and marketing expenses and charges related to the plan to exit the medical
tape business which more than offset an increase in gross profit. The increase
in gross profit resulted from increased sales volume and a shift in the sales
mix toward higher-margin therapeutic consumer products. The net loss for fiscal
1999 resulted primarily from increased sales and marketing expenses related to
the Company's investment in the consumer products market and increased general
and administrative expenses, primarily those expenses related to the
modification of the cotinine license agreement and achievement of ISO 9001 and
EN 46001 certification.
12
<PAGE>
EFFECT OF INFLATION
Inflation has not had a significant impact on the Company's operations
or cash flow.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $3,276,552 to $3,376,723 at June
30, 2001 from $100,171 at June 30, 2000. This increase was primarily due to the
net proceeds from the disposition of assets in fiscal 2001 of $6,666,988 which
was partially offset by the net loss excluding the gain on disposition of assets
and non-recurring restructuring charge of $3,014,959. Accounts receivable
decreased by $1,067,475 to $1,578,235 primarily due to accounts receivable sold
as part of the sale of the assets of the conductive products division.
Inventories decreased by $195,748 to $2,051,938 primarily due to inventory sold
as part of the sale of the assets of the conductive products
Working capital totaled $4,279,728 at June 30, 2001, compared to
$1,512,561 at the end of fiscal 2000. The Company's current ratio was 2.4 at
June 30, 2001 compared to 1.4 at June 30, 2000.
Capital spending for plant improvements and equipment totaled $371,906
in fiscal 2001. The Company entered into a purchase commitment for production
machinery in the amount of $154,482 during fiscal 2001. This purchase commitment
will be fulfilled sometime in the first six months of fiscal 2002. Net property,
plant and equipment decreased by $616,594 to $2,422,494 at June 30, 2001 from
$3,039,088 at June 30, 2000, reflecting equipment sold as part of the sale of
the assets of the conductive products division and the excess of depreciation
expense over capital spending.
Accounts payable decreased by $401,254 to $1,175,728 at June 30, 2001
from $1,576,982 at June 30, 2000 primarily due to accounts payable sold as part
of the sale of the assets of the conductive products division as well as a
decrease in the average number of days outstanding before payment.
The Company finalized a $2,000,000 asset-based line of credit in
November, 1999. In September 2000, the line of credit was increased to allow
borrowing of up to $2,800,000. There were no borrowings outstanding on the line
of credit at June 30, 2001. Borrowings outstanding on the line of credit were
$837,542 at June 30, 2000. The Company was in compliance with all covenants at
June 30, 2001. During fiscal 2001, the Company entered into a mortgage agreement
with gross proceeds of $820,000. Shareholders' equity increased by $1,366,732 to
$6,086,548 as of June 30, 2001 from $4,719,816 as of June 30, 2000, primarily
due to the net earnings incurred during 2001.
Management believes that existing cash and cash equivalents,
internally-generated cash flow, and the existing secured line of credit
including the line of credit increase will be sufficient to support anticipated
operating and capital spending requirements through June 30, 2002 and contribute
to the funding of longer-term growth and expansion of the business. Management
is also evaluating additional sources of capital that may be appropriate for
funding longer-term growth and expansion. Maintaining adequate levels of working
capital depends in part upon the success of the Company's products in the
marketplace, the relative profitability of those products and the Company's
ability to control operating expenses. Funding of the Company's operations in
future periods may require additional investments in the Company in the form of
equity or debt. There can be no assurance that the Company will achieve desired
levels of sales or profitability, or that future capital infusions will be
available.
FORWARD-LOOKING STATEMENTS
From time to time, in reports filed with the Securities and Exchange
Commission (including this Form 10-K), 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
13
<PAGE>
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 TheraPatch brand strategy; impact of
interruptions to production; dependence on key personnel; need for regulatory
approvals; changes in governmental regulatory requirements or accounting
pronouncements; ability to satisfy funding requirements for operating needs,
expansion or capital expenditures and the matters discussed on our "Cautionary
Statements" filed as Exhibit 99.01 to this from 10-K for the year ended June 30,
2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------- ----------------------------------------------------------
The Company has no history of, and does not anticipate in the future,
investing in derivative financial instruments, derivative commodity instruments
or other such financial instruments. Transactions with international customers
are entered into in U.S. dollars with the exception of TheraPatch sales to
Canadian customers, precluding the need for foreign currency hedges. Canadian
sales have not been material. Additionally, the Company invests in money market
funds which experience minimal volatility. Thus, the exposure to market risk is
not material.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------- -------------------------------------------
LecTec Corporation Financial Statements Furnished Pursuant to the Requirements
of Form 10-K.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Shareholders and
Board of Directors
LecTec Corporation
We have audited the accompanying balance sheets of LecTec
Corporation as of June 30, 2001 and 2000, and the related statements of
operations, comprehensive earnings (loss), shareholders' equity, and cash flows
for each of the three years in the period ended June 30, 2000. 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 auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
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 financial position of LecTec
Corporation as of June 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2001, in conformity with accounting principles generally accepted in the United
States of America.
We have also audited Schedule II of LecTec Corporation for each
of the three years in the period ended June 30, 2001. In our opinion, this
Schedule presents fairly, in all material respects, the information required to
be set forth therein.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
August 7, 2001
15
<PAGE>
LECTEC CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
------------------------
ASSETS 2001 2000
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $3,376,723 $ 100,171
Receivables
Trade, net of allowances of $108,500 and
$127,100 at June 30, 2001 and 2000 1,519,232 2,642,880
Other 59,003 2,830
Inventories 2,051,938 2,247,686
Prepaid expenses and other 294,437 220,514
Investments -- 22,029
---------- ----------
Total current assets 7,301,333 5,236,110
PROPERTY, PLANT AND EQUIPMENT
Land 247,731 247,731
Building and improvements 1,971,031 1,963,364
Equipment 4,439,139 4,995,822
Furniture and fixtures 414,857 414,857
---------- ----------
7,072,758 7,621,774
Less accumulated depreciation 4,650,264 4,582,686
---------- ----------
2,422,494 3,039,088
OTHER ASSETS
Patents and trademarks, less accumulated amortization
of $1,189,787 and $1,293,871 at June 30, 2001 and 2000 243,949 199,351
---------- ----------
$9,967,776 $8,474,549
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
16
<PAGE>
LIABILITIES AND
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30,
-----------------------------
2001 2000
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Note payable to bank $ -- $ 837,542
Current maturities of long-term obligations 38,311 22,562
Accounts payable 1,175,728 1,576,982
Accrued expenses
Payroll related 366,467 371,405
Retail support programs 595,509 421,489
Other 495,892 333,569
Customer deposits 75,000 160,000
Restructuring charges 274,698 --
------------ ------------
Total current liabilities 3,021,605 3,723,549
LONG-TERM OBLIGATIONS, less current maturities 859,623 31,184
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 15,000,000 shares
authorized; 3,922,384 and 3,904,465 shares
issued and outstanding at June 30, 2001 and 2000 39,224 39,045
Additional contributed capital 11,344,166 11,316,260
Accumulated other comprehensive gain -- 4,845
Accumulated deficit (5,296,842) (6,640,334)
------------ ------------
6,086,548 4,719,816
------------ ------------
$ 9,967,776 $ 8,474,549
============ ============
</TABLE>
17
<PAGE>
LECTEC CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------------------
2001 2000 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 15,928,832 $ 14,596,346 $ 12,279,075
Cost of goods sold 10,506,231 9,475,129 8,185,514
------------ ------------ ------------
Gross profit 5,422,601 5,121,217 4,093,561
Operating expenses
Sales and marketing 4,377,580 3,672,908 2,187,710
General and administrative 2,957,098 2,598,998 2,507,432
Research and development 919,786 1,094,808 1,169,743
Restructuring charge 303,759 -- --
Medical tape asset impairment -- 645,000 --
------------ ------------ ------------
8,558,223 8,011,714 5,864,885
------------ ------------ ------------
Loss from operations (3,315,622) (2,890,497) (1,771,324)
Other income (expenses)
Interest expense (151,272) (35,405) (1,173)
Gain on disposition of assets 4,662,210 -- --
Other, net 16,176 27,692 89,240
------------ ------------ ------------
Earnings (loss) before income taxes 1,391,492 (2,898,210) (1,683,257)
Income taxes 48,000 (38,934) --
------------ ------------ ------------
Net earnings (loss) $ 1,343,492 $ (2,859,276) $ (1,683,257)
============ ============ ============
Net earnings (loss) per share
Basic $ 0.34 $ (0.74) $ (0.43)
Diluted $ 0.34 $ (0.74) $ (0.43)
Weighted average shares outstanding
Basic 3,911,577 3,885,911 3,906,694
Diluted 3,925,851 3,885,911 3,906,694
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
LECTEC CORPORATION
STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------
2001 2000 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net earnings (loss) $ 1,343,492 $(2,859,276) $(1,683,257)
Other comprehensive income (loss)
Unrealized holding gains (losses)
arising during period on securities
available for sale -- 16,686 (3,333)
----------- ----------- -----------
-- 16,686 (3,333)
----------- ----------- -----------
Comprehensive earnings (loss) $ 1,343,492 $(2,842,590) $(1,686,590)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
LECTEC CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common stock Additional other Total
--------------------------- contributed comprehensive Accumulated shareholders'
Shares Amount capital gain (loss) deficit equity
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1998 4,036,000 $ 40,360 $ 11,769,053 $ (8,508) $ (2,097,801) $ 9,703,104
Net loss -- -- -- -- (1,683,257) (1,683,257)
Common shares issued upon exercise
of options 1,000 10 2,390 -- -- 2,400
Unrealized loss on securities
available-for-sale -- -- -- (3,333) -- (3,333)
Common shares issued in connection
with the employee stock purchase plan 15,126 151 32,855 -- -- 33,006
Shares repurchased (175,650) (1,756) (541,644) -- -- (543,400)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1999 3,876,476 38,765 11,262,654 (11,841) (3,781,058) 7,508,520
Net loss -- -- -- -- (2,859,276) (2,859,276)
Common shares issued upon exercise of
options 500 5 1,295 -- -- 1,300
Unrealized gain on securities
available-for-sale -- -- -- 16,686 -- 16,686
Common shares issued in connection
with the employee stock purchase plan 27,489 275 52,311 -- -- 52,586
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2000 3,904,465 39,045 11,316,260 4,845 (6,640,334) 4,719,816
Net earnings -- -- -- -- 1,343,492 1,343,492
Realized loss on securities available
for sale -- -- -- (4,845) -- (4,845)
Common shares issued in connection
with the employee stock purchase plan 17,919 179 27,906 -- -- 28,085
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2001 3,922,384 $ 39,224 $ 11,344,166 $ -- $ (5,296,842) $ 6,086,548
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
LECTEC CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended June 30,
-------------------------------------------
2001 2000 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1,343,492 $(2,859,276) $(1,683,257)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Medical tape asset impairment and inventory write-down -- 730,000 --
Gain on disposition of assets (4,662,210) -- --
Restructuring charge 274,698 -- --
Depreciation and amortization 521,276 908,024 851,087
Deferred income taxes -- 157,000 --
Changes in operating assets and liabilities, net of dispositions:
Trade and other receivables (297,647) (294,165) (61,620)
Refundable income taxes -- -- 52,000
Inventories (177,646) (336,162) (278,513)
Prepaid expenses and other (73,923) (45,840) (71,611)
Accounts payable (103,675) 265,643 835,761
Accrued expenses 337,513 42,917 167,154
Customer deposits (85,000) 160,000 --
----------- ----------- -----------
Net cash used in operating activities (2,923,122) (1,271,859) (188,999)
Cash flows from investing activities:
Purchase of property, plant and equipment (371,906) (424,448) (419,469)
Investment in patents and trademarks (141,215) (138,553) (79,513)
Net proceeds from disposition of assets 6,666,988 -- --
Proceeds from the sale of investments 11,076 -- --
----------- ----------- -----------
Net cash provided by (used in) investing activities 6,164,943 (563,001) (498,982)
Cash flows from financing activities:
Issuance of common stock 28,085 53,586 35,006
Repurchases and retirement of common stock -- -- (543,400)
Net borrowings (repayments) on note payable (837,542) 837,542 --
Proceeds from borrowing on long-term obligations 867,703 33,649 36,849
Repayment of long-term obligations (23,515) (11,771) (4,981)
----------- ----------- -----------
Net cash provided by (used in) financing activities 34,731 913,006 (476,526)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 3,276,552 (921,854) (1,164,507)
Cash and cash equivalents at beginning of year 100,171 1,022,025 2,186,532
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,376,723 $ 100,171 $ 1,022,025
=========== =========== ===========
</TABLE>
21
<PAGE>
LECTEC CORPORATION
STATEMENTS OF CASH FLOWS - CONTINUED
Years ended June 30,
------------------------------
2001 2000 1999
-------- -------- --------
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest $161,664 $ 28,085 $ 792
Cash paid during the year for income taxes $ 2,000 $ -- $ 22,010
The accompanying notes are an integral part of these statements.
22
<PAGE>
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF ACCOUNTING POLICIES
LecTec Corporation (the "Company") is primarily engaged in the research,
design, manufacture and sale of therapeutic consumer products. The Company's
customers are located throughout the United States as well as Canada.
Subsequent to June 30, 2001, the Company changed its year end to December 31,
from June 30. A summary of the Company's significant accounting policies
consistently applied in the preparation of the accompanying financial
statements follows:
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid temporary investments purchased with
original maturities of three months or less to be cash equivalents. At times
cash and cash equivalents may be in excess of FDIC insurance limits.
Accounts Receivable
-------------------
The Company grants credit to customers in the normal course of business, but
generally does not require collateral or any other security to support
amounts due. Management performs on-going credit evaluation of customers. The
Company maintains allowances for potential credit losses which, when
realized, have been within management expectations.
Investments
-----------
The Company's investments are classified as available-for-sale and are
reported at fair value. The Company utilizes the specific identification
method in computing realized gains and losses.
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
---------------------------
2001 2000
---------- ----------
Raw materials $1,517,167 $1,666,544
Work in process 4,850 23,202
Finished goods 529,921 557,940
---------- ----------
$2,051,938 $2,247,686
========== ==========
23
<PAGE>
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Long-Lived Assets
-----------------
Property, plant, and equipment is recorded at cost. 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
Patents and trademarks consist 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 five years.
The carrying value of long-lived assets is reviewed periodically or when
factors indicating impairment are present. Projected undiscounted cash flows
are used when reviewing these assets.
Revenue Recognition
-------------------
Revenue is recognized at the time of shipment.
Advertising
-----------
The Company expenses the cost of advertising as incurred, except for the cost
of television commercials which are expensed as the commercials are
broadcast. Advertising expense totaled approximately $1,233,000, $536,000 and
$271,000, for the years ended June 30, 2001, 2000 and 1999.
Research and Development
------------------------
Research and development costs are expensed as incurred and are reported as a
component of selling, general and administrative expenses.
24
<PAGE>
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Net Earnings (Loss) Per Share
-----------------------------
Basic net earnings (loss) per share is computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding. Diluted
net earnings (loss) per share is computed by dividing net earnings (loss) by
the weighted average number of common shares outstanding and common share
equivalents related to stock options and warrants when dilutive.
Common stock options and warrants to purchase 1,044,129, 1,048,205 and
897,506 shares of common stock with a weighted average exercise price of
$5.39, $6.07 and $7.54 were outstanding during the years ended June 30, 2001,
2000 and 1999, but were excluded because they were antidilutive.
Stock Based Compensation
------------------------
The Company utilizes the intrinsic value method of accounting for its
stock-based employee compensation plan. Pro-forma information related to the
fair value based method of accounting is disclosed in Note H.
Fair Value of Financial Instruments
-----------------------------------
Due to their short-term nature, the carrying value of current financial
assets and liabilities approximates their fair values. The fair value of
long-term obligations, if recalculated based on current interest rates, would
not significantly differ from the recorded amounts.
Use of Estimates
----------------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, 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 the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
25
<PAGE>
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Reclassifications
-----------------
Certain reclassifications have been made to the 2000 and 1999 balances to
conform to the presentation used in 2001.
NOTE B - DISPOSITION OF MEDICAL TAPE ASSETS
During the third quarter of 2001, the Company sold its medical tape
manufacturing equipment and other related assets. Net proceeds from the sale
were $630,000 consisting of the purchase price of $700,000 less transaction
costs of $70,000. The Company realized a gain on the sale of $103,624. The
sale of the medical tape equipment finalized the Company's plan to exit the
medical tape business which was adopted at the end of the fiscal year 2000.
Adoption of this plan originally resulted in a charge of $645,000 during
fiscal year 2000 related to the write-down of the medical tape equipment to
its estimated fair market value of $525,375 at June 30, 2000.
NOTE C - SALE OF CONDUCTIVE BUSINESS ASSETS AND RESTRUCTURING
During the fourth quarter of 2001, the Company sold its diagnostic electrode
and electrically conductive adhesive hydrogel business assets which were used
to produce the Company's conductive products. Net proceeds from the sale were
$6,036,988 consisting of the purchase price of $7,268,404 less transaction
costs of $1,231,416. The net assets sold as part of the transaction were
carried at a cost of $1,478,402. The Company realized a gain on the sale of
$4,558,586. Under a manufacturing and supply agreement between the Company
and the buyer, the Company will continue to manufacture, and supply to the
buyer, certain conductive products for a portion of fiscal 2002. The Company
will supply the products at its cost of production through October 31, 2001
and at its cost of production plus 10% thereafter.
26
<PAGE>
NOTE C - SALE OF CONDUCTIVE BUSINESS ASSETS AND RESTRUCTURING -
Continued
Revenues and cost of goods sold for the medical tape business and conductive
business are as follows for the years ended June 30:
2001 2000 1999
---------- ---------- ----------
Net sales
Conductive products $6,564,000 $7,451,000 $7,758,000
Medical tape products 127,000 1,927,000 2,717,000
----------- ---------- ----------
6,691,000 9,378,000 10,475,000
Cost of good sold
Conductive products 4,940,000 5,230,000 4,780,000
Medical tape products 178,000 2,048,000 2,685,000
---------- ---------- ----------
5,118,000 7,278,000 7,465,000
---------- ---------- ----------
Gross profit $1,573,000 $2,100,000 $3,010,000
========== ========== ==========
A non-recurring restructuring charge of $303,759 was incurred in the fourth
quarter of 2001 relating to the sale of the Company's conductive business
assets. The restructuring charge consists primarily of future rental payments
for a leased facility, separation costs, and other costs associated with the
wind-down of conductive business activity. The separation costs includes the
termination of 17 production and administrative employees, of which six were
terminated on June 28, 2001. The total restructuring charge decreased the
2001 net income per basic and diluted share by $.08. The Company expects to
complete the restructuring during fiscal 2002.
Selected information regarding the restructuring accrual as of June 30, 2001
is as follows:
Separation Facility Other
costs costs costs Total
------- -------- -------- --------
Accrual at April 1, 2001 $ -- $ -- $ -- $ --
Restructuring accrual 111,637 122,702 69,420 303,759
Payments (9,641) -- (19,420) (29,061)
-------- -------- -------- --------
$101,996 $122,702 $ 50,000 $274,698
======== ======== ======== ========
27
<PAGE>
NOTE D - NOTE PAYABLE TO BANK
The Company entered into a secured line of credit on November 22, 1999, with
a maximum borrowing of $2,000,000 as defined in the agreement. In September
2000, the line of credit was increased to allow borrowing of up to
$2,800,000. The credit agreement expires November 22, 2001 and includes
interest computed at the prime rate plus 3% (effective rate of 9.75% and
12.5% at June 30, 2001 and 2000). The agreement includes a minimum annual
interest charge for each year of the agreement ($80,000 and $95,000 for each
of the two years ended November 22, 2001). There were no borrowings
outstanding on the line of credit at June 30, 2001. Borrowings under the
credit agreement are collateralized by substantially all of the Company's
assets. At June 30, 2001, the Company was in compliance with all covenants
contained in the credit agreement.
NOTE E - LONG-TERM OBLIGATIONS
In December 2000, the Company entered into a mortgage agreement which
provided gross proceeds of $820,000. The principal balance of the mortgage is
due in December 2002 with monthly interest payments due computed at the prime
rate plus five percentage points (effective rate of 11.75% at June 30, 2001).
The mortgage is collateralized by the Company's real property. The remainder
of long-term obligations consists of capital lease obligations, due in
various monthly installments up to $1,230 including interest up to 19.1%
through June 2005, collateralized by equipment.
Maturities of long-term obligations are as follows:
Years ending June 30:
2002 $ 38,311
2003 850,811
2004 3,990
2005 4,822
--------
$897,934
========
28
<PAGE>
NOTE F - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company conducts portions of its operations in a leased facility that
expires June 30, 2002. The lease provides for payment of a portion of taxes
and other operating expenses by the Company. Total rent expense for operating
leases was $265,595, $260,481 and $250,641 for the years ended June 30, 2001,
2000 and 1999.
Future minimum lease commitments under all operating leases are as follows:
Years ending June 30:
---------------------
2002 $257,003
2003 2,269
2004 2,269
2005 792
Employee Benefit Plan
---------------------
The Company maintains a contributory 401(k) profit sharing benefit plan
covering substantially all employees. The Company matches 50% of employee
contributions up to 5% of a participant's compensation. The Company's
contributions under this plan were $86,750, $81,474 and $71,006 for the years
ended June 30, 2001, 2000 and 1999. The Company may also make a discretionary
contribution. No discretionary contributions were made for each of the three
years ended June 30, 2001.
Legal Proceedings
-----------------
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.
29
<PAGE>
NOTE G - INCOME TAXES
Income tax expense (benefit) consists of the following:
Years ended June 30,
---------------------------------------------
2001 2000 1999
--------- --------- --------
Current $ 48,000 $(195,934) $ --
Deferred -- 157,000 --
--------- --------- --------
$ 48,000 $ (38,934) $ --
========= ========= ========
Deferred tax assets and liabilities represent the tax effects of cumulative
future deductible or taxable items that have been recognized in the financial
statements as follows:
June 30,
---------------------------
2001 2000
----------- -----------
Current assets and liabilities:
Inventories $ 150,500 $ 160,600
Vacation pay 57,300 73,500
Write-down of long-lived medical tape
assets -- 232,200
Restructuring accrual 109,400 --
Other 227,800 115,600
----------- -----------
Net current asset 545,000 581,900
Long-term assets and liabilities:
Net operating loss carryforwards 1,640,000 2,312,000
Tax credit carryforwards 287,600 253,600
Tax depreciation in excess of book
depreciation (210,100) (225,000)
Charitable contribution carryforwards -- 19,200
Other 70,200 69,800
----------- -----------
Net long-term asset 1,787,000 2,429,600
----------- -----------
Net deferred tax asset 2,332,700 3,011,500
Less valuation allowance (2,332,700) (3,011,500)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
30
<PAGE>
NOTE G - INCOME TAXES - Continued
At June 30, 2001, the Company has available net operating loss carryforwards
of approximately $4,800,000 which can be used to reduce future taxable
income. The utilization of a portion of these net operating loss
carryforwards is restricted under Section 382 of the Internal Revenue Code
due to past ownership changes. These net operating loss carryforwards begin
to expire in 2007. A valuation allowance has been recorded for these net
operating loss carryforwards and all other deferred tax assets as they may
not be realizable.
Differences between income tax expense (benefit) and the statutory federal
income tax rate of 34% are as follows:
2001 2000 1999
------- ------- -------
Federal statutory income tax rate 34.0% (34.0)% (34.0)%
State income taxes, net of federal effect .1 .1 --
Change in valuation allowance (35.4) 33.6 34.4
Other 4.8 (1.0) (0.4)
------- ------- -------
3.5% (1.3)% --%
======= ======= =======
NOTE H - EQUITY TRANSACTIONS
Employee Stock Purchase Plan
----------------------------
The Company's employee stock purchase plan, adopted November 19, 1998, allows
eligible employees to purchase shares of the Company's common stock through
payroll deductions. The purchase price is the lower of 85% of the fair market
value of the stock on the first or last day of each six-month period during
which an employee participated in the plan. The Company has reserved 200,000
shares under the plan. The Company issued 17,919 and 27,489 shares in
connection with purchases by employees for $28,085 and $52,586 for the years
ended June 30, 2001 and 2000.
31
<PAGE>
NOTE H - EQUITY TRANSACTIONS - Continued
Stock Options and Warrants
--------------------------
The Company has stock option plans for the benefit of selected officers,
employees and directors of the Company. A total of 1,673,049 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 at five or 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 three to four years.
A summary of the Company's stock option transactions for the years ended June
30, 2001, 2000 and 1999 is as follows:
Weighted average
Number of shares exercise price
---------------- ----------------
Outstanding at July1, 1998 847,620 $7.86
Granted 304,200 2.76
Exercised (1,000) 2.00
Canceled (16,994) 8.74
---------
Outstanding at June 30, 1999 1,133,826 6.48
Granted 115,000 3.04
Exercised (500) 2.00
Canceled (221,704) 8.44
---------
Outstanding at June 30, 2000 1,026,622 5.68
Granted 285,000 2.20
Exercised -- --
Canceled (176,007) 5.23
--------- -----
Outstanding at June 30, 2001 1,135,615 $4.87
========= =====
A total of 716,667, 604,971 and 593,876 options were exercisable at June 30,
2001, 2000 and 1999, with a weighted average price of $5.93, $6.54 and $7.83.
32
<PAGE>
NOTE H - EQUITY TRANSACTIONS - Continued
The following information applies to grants that are outstanding at June 30,
2001:
<TABLE>
<CAPTION>
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
--------------- ----------- ---------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 2.00 - $ 2.94 577,167 3.8 years $ 2.45 231,260 $ 2.51
$ 3.19 - $ 4.43 68,700 5.3 years 3.58 38,784 3.62
$ 5.00 - $ 7.50 262,250 6.0 years 5.99 239,625 6.07
$7.77 - $11.25 226,998 4.0 years 10.11 206,998 10.00
--------- -------
1,135,615 716,667
========= =======
</TABLE>
The weighted average fair value of the options granted during 2001, 2000 and
1999 were $1.52, $1.84, and $1.47. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option valuation model
with the following weighted-average assumptions used for all grants in 2001,
2000 and 1999: zero dividend yield, expected volatility of 96%, 74% and 62%,
risk-free interest rate of 4.97%, 6.53% and 5.77% and expected lives of 4.00,
4.00 and 4.09 years.
Management believes the Black-Scholes option valuation model currently
provides the best estimate of fair value. However, the Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of several subjective
assumptions. The Company's employee and director stock options have
characteristics different from those of traded options, and changes in the
subjective input assumptions can materially affect the fair value estimate.
In management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee and director stock
options.
33
<PAGE>
NOTE H - EQUITY TRANSACTIONS - Continued
The Company's net earnings (loss) and net earnings (loss) per share for 2001,
2000 and 1999 would have been changed 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 method.
<TABLE>
<CAPTION>
2001 2000 1999
------------------------- ------------------------- -------------------------
As reported Pro forma As reported Pro forma As reported Pro forma
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss) $ 1,343,492 $ 873,179 $(2,859,276) $(3,447,381) $(1,683,257) $(2,201,974)
Net earnings (loss)
per share - $ .34 $ .22 $ (.74) $ (.89) $ (.43) $ (.56)
basic/diluted
</TABLE>
Stock Repurchase Program
------------------------
In April 1998, the Company's Board of Directors authorized a stock repurchase
program pursuant to which up to 500,000 shares, or approximately 12.4% of the
Company's outstanding common stock, may be repurchased. The shares may be
purchased from time to time through open market transactions, block
purchases, tender offers, or in privately negotiated transactions. The total
consideration for all shares repurchased under this program cannot exceed
$2,000,000. During the year ended June 30, 1999, the Company repurchased
175,650 shares for $543,400. There were no shares repurchased during the
years ended June 30, 2001 and 2000.
NOTE I - SEGMENT INFORMATION
The Company operates its business in one reportable segment - the manufacture
and sale of products based on advanced skin interface technologies. Each of
the Company's major product lines have similar economic characteristics,
technology, manufacturing processes, and regulatory environments. Customers
and distribution and marketing strategies vary within major product lines as
well as overlap between major product lines. The Company's executive decision
makers evaluate sales performance based on the total sales of each major
product line and
34
<PAGE>
NOTE I - SEGMENT INFORMATION - Continued
profitability on a total company basis, due to shared infrastructures, to
make operating and strategic decisions. The Company sold the conductive and
medical tape product lines during fiscal year 2001. Net sales by major
product line were as follows:
Years ended June 30,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
Conductive products $ 6,563,924 $ 7,450,755 $ 7,758,286
Medical tape products 127,436 1,927,392 2,716,540
Therapeutic consumer products 9,237,472 5,218,199 1,804,249
----------- ----------- -----------
$15,928,832 $14,596,346 $12,279,075
=========== =========== ===========
Export sales accounted for approximately 8%, 13% and 13% of total net sales
during the years ended June 30, 2001, 2000, and 1999. Export sales are
attributed to geographic region based upon the location of the customer. The
conductive and medical tape product lines have been sold during fiscal 2001
and accounted for all the export sales other than to Canada. Export sales by
geographic area were as follows:
Years ended June 30,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
Europe $ 815,796 $ 1,006,412 $ 1,216,199
Latin America 139,613 547,904 371,654
Asia 72,851 46,279 31,935
Canada 215,686 298,884 7,011
Middle East -- 10,272 --
Other 7,950 25,962 28,333
----------- ----------- -----------
$ 1,251,896 $ 1,935,713 $ 1,655,132
=========== =========== ===========
35
<PAGE>
NOTE J - MAJOR CUSTOMERS
Two customers accounted for 30% of total sales for the year ended June 30,
2001. The accounts receivable from these customers represented 36% of trade
receivables at June 30, 2001. Management believes that the loss of these two
major customers could have a material adverse effect on the Company. Another
customer accounted for 12%, 17% and 22% of total sales for each of the three
years ended June 30, 2001. The accounts receivable from this customer
represented 18% and 26% of trade receivables at June 30, 2000 and 1999. This
conductive products customer will no longer generate sales due to the sale of
the Company's conductive business assets during the year ended June 30, 2001.
NOTE K - RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, BUSINESS
COMBINATIONS, and SFAS 142, GOODWILL AND INTANGIBLE ASSETS. SFAS 141 is
effective for all business combinations completed after June 30, 2001. SFAS
142 is effective for fiscal years beginning after December 15, 2001; however,
certain provisions of this Statement apply to goodwill and other intangible
assets acquired between July 1, 2001 and the effective date of SFAS 142. The
company is currently reviewing the affect of these Statements on their
financial statements.
The Securities and Exchange Commission issued Staff Accounting Bulletin No.
101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS" ("SAB 101") in December
1999. SAB 101 summarizes certain aspects of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. In 2000, the Securities and Exchange Commission issued SAB 101A
and 101B, which extended the transition provision of SAB 101 to the Company's
fiscal year 2001. SAB 101 has not had a material impact on the Company's
financial statements.
Financial Accounting Standard Board Statement No. 133 "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 133") was effective for
the Company's 2001 fiscal year. SFAS 133 requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. The statement also specifies new methods of
accounting for derivatives used in risk management strategies (hedging
activities), prescribes the items and transactions that may be hedged, and
specified detailed criteria required to qualify for hedge accounting. SFAS
133 has not had a material impact on the Company's financial statements.
36
<PAGE>
NOTE K - RECENT ACCOUNTING PRONOUNCEMENTS - Continued
In March 2000, the Emerging Issues Task Force ("EITF") reached a consensus on
EITF Issue No. 00-14, "Accounting for Certain Sales Incentives." This
consensus provides guidance on the recognition, measurement and income
statement classification of sales incentives which are offered voluntarily by
a vendor without charge to customers that can be used in, or that are
exercisable by a customer as a result of a single exchange transaction. EITF
Issue No. 00-14 has not had a material impact on the Company's financial
statements.
Financial Accounting Standards Board ("FASB") Interpretation 44,
INTERPRETATION OF APB OPINION 25 (FIN 44) was issued in March 2000. FIN 44
provides an interpretation of APB Opinion 25 on accounting for employee stock
compensation and describes its application to certain transactions. FIN 44
was effective as of the beginning of the Company's 2001 fiscal year. It
primarily applies on a prospective basis to events occurring after that date,
except for certain transactions involving options granted to non-employees,
re-priced fixed options, and modifications to add reload option features. FIN
44 has not had a material impact on the Company's financial statements.
NOTE L - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Year ended June 30, 2000
---------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter*
------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 4,188,894 $ 4,056,484 $ 4,171,778 $ 3,511,676
Gross profit 1,634,031 1,358,773 1,436,641 993,156
Net earnings (loss) (597,901) (691,996) (543,781) 3,177,170
Net earnings (loss) per share
Basic $ (0.15) $ (0.18) $ (0.14) $ 0.81
Diluted $ (0.15) $ (0.18) $ (0.14) $ 0.80
Weighted average common shares
outstanding
Basic 3,904,465 3,908,364 3,915,676 3,917,961
Diluted 3,904,465 3,908,364 3,915,676 3,990,170
</TABLE>
* Includes a gain of $4,558,586 from the sale of the Conductive Business
Assets and a related restructuring charge of $303,759.
37
<PAGE>
NOTE L - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - Continued
<TABLE>
<CAPTION>
Year ended June 30, 2000
---------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 3,008,752 $ 3,299,705 $ 3,934,825 $ 4,353,064
Gross profit 939,281 1,063,014 1,511,661 1,607,261
Net loss (603,282) (795,167) (643,328) (817,499)
Net loss per share
Basic $ (0.16) $ (0.20) $ (0.17) $ (0.21)
Diluted $ (0.16) $ (0.20) $ (0.17) $ (0.21)
Weighted average common shares
outstanding
Basic 3,876,476 3,881,352 3,890,494 3,895,479
Diluted 3,876,476 3,881,352 3,890,494 3,895,479
</TABLE>
38
<PAGE>
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 executive
officers has been previously included under the heading "Executive Officers of
the Registrant" in Item 1 of this Form 10-K.
INFORMATION CONCERNING DIRECTORS
Lee M. Berlin, 79 years old, has been a Director since 1981 and served
as Chairman of the Board from 1983 through May 1993. He served as LecTec's Chief
Executive Officer from 1983 through January 1989. Prior to joining LecTec, Mr.
Berlin served in a variety of foreign and domestic marketing, product
development and general management positions with Minnesota Mining &
Manufacturing Company ("3M"). Currently, Mr. Berlin manages personal business
interests.
Alan C. Hymes, M.D., 69 years old, is a founder of LecTec, has been a
Director since 1977 and acts as LecTec's medical consultant. He has been engaged
in the private practice of surgery since 1968. He is a diplomat of the American
Board of Surgery and the American Board of Thoracic and Cardiovascular Surgery.
Bert J. McKasy, 59 years old, has been a Director since 1997 and has
been a partner with the law firm Lindquist & Vennum PLLP since 1994. He is also
the current Comissioner of the Metropolitan Airports Commission and has owned
McKasy Travel Service, Inc. since 1983. Prior to joining Lindquist & Vennum, Mr.
McKasy was an attorney with Maun & Simon, Vice President of First Trust Company,
Trust and Investment Administration (now U.S. Bank Trust) and Executive Vice
President of Fritz Company.
Marilyn K. Speedie, Ph.D., 53 years old, has been a Director since 1997
and is the Dean of the College of Pharmacy and a professor at the University of
Minnesota. Prior to her association with the University of Minnesota in 1996,
Dr. Speedie held several professorship and departmental chairperson positions at
the University of Maryland (1989-1995), the most recent being in the Department
of Pharmaceutical Sciences. She has been the recipient of numerous honors, the
most recent in October of 1996 which was as an inductee as Fellow of the
American Association of Pharmaceutical Scientists, and has also co-authored a
book published in 1996 entitled PHARMACOGNOSY AND PHARMACOBIOTECHNOLOGY.
Donald C. Wegmiller, 63 years old, has served as a Director since 1997.
Since April 1993, Mr. Wegmiller has served as President and Chief Executive
Officer of Clark/Bardes Consulting - Healthcare Group, a consulting firm
specializing in compensation and benefits for health care executives and
physicians. From May 1987 until April 1993, Mr. Wegmiller was President and CEO
of Health One Corporation, Minneapolis, Minnesota. He currently serves as a
Director of ALLETE (formerly known as Minnesota Power), Possis Medical, Inc. and
JLJ Medical Devices International, LLC. From 1986 to 1988, Mr. Wegmiller served
as Chairman of the Board of the American Hospital Association. From 1972 to 1976
and 1981 to 1988, Mr. Wegmiller served as a White House staff assistant to
Presidents Nixon, Ford and Reagan.
Rodney A. Young, 46 years old, was appointed a Director, Chief
Executive Officer and President of LecTec in August 1996. In November 1996 he
was appointed as Chairman of the Board. Prior to assuming the leadership role
with LecTec, Mr. Young served Baxter International, Inc. for five years in
various management roles, most recently as Vice President and General Manager of
the Specialized
39
<PAGE>
Distribution Division. Mr. Young also serves as a Director of Possis Medical,
Inc., Delta Dental Plan of Minnesota, as well as Health Fitness Corporation.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires LecTec's
executive officers and directors and persons who beneficially own more than 10%
of LecTec's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission. Such executive
officers, directors and greater than 10% beneficial owners are required by the
regulations of the Commission to furnish LecTec with copies of all Section 16(a)
reports they file.
Based solely on a review of the copies of such reports furnished to
LecTec and written representations from the executive officers and directors,
LecTec believes that all Section 16(a) filing requirements applicable to its
executive officers and directors and greater than 10% beneficial owners have
been met, except that an April 20, 2000 exercise of LecTec stock options by
Marilyn Speedie was not reported on a timely filed April 2000 Form 4. A Form 5
for Ms. Speedie was filed on August 6, 2001 which correctly reported the
transaction.
40
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
-------- ----------------------
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows the cash and non-cash compensation for the
fiscal years ended June 30, 2001, 2000 and 1999, awarded to or earned by Rodney
A. Young, the Chairman of the Board and LecTec's President and Chief Executive
Officer, and the other executive officers of LecTec.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
---------------------- --------
Fiscal Year Securities
Ended Underlying All Other
Name and Position June 30, Salary Bonus Options Compensation(1)
----------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Rodney A. Young 2001 $216,834 $ 80,000(2) 60,000 $ 3,471
Chairman, President and 2000 200,000 -- -- 4,039
Chief Executive Officer 1999 200,000 -- 95,000 2,358
Timothy R. J. Quinn 2001 124,859 35,640(2) 30,000 1,901
Vice President and General 2000 118,800 35,640(3) -- 2,009
Manager, Consumer Products 1999 99,000 -- 58,000 2,365
Douglas J. Nesbit 2001 104,870 11,600(2) 55,000 2,267
Chief Financial Officer, 2000 -- -- -- --
Secretary and Treasurer 1999 -- -- -- --
Jane M. Nichols 2001 123,282 35,190(2) 30,000 1,233
Vice President, Marketing and 2000 117,300 -- -- 1,218
New Business Development 1999 117,300 -- 22,500 1,173
John D. LeGray 2001 109,746 31,326(2) 30,000 2,744
Vice President, Quality 2000 104,420 -- -- 2,711
Assurance & Regulatory Affairs 1999 98,400 -- 22,500 2,460
Timothy P. Fitzgerald 2001 115,610 22,000(2) 30,000 2,890
Vice President, Operations 2000 40,192 -- 25,000 --
1999 -- -- -- --
William J. Tourek 2001 46,154 -- -- 808
Vice President, Research and 2000 -- -- -- --
Development 1999 -- -- -- --
------------------------
</TABLE>
(1) Reflects matching contributions under LecTec's 401(k) and Profit
Sharing Plan.
(2) Executive officers at February 1, 2001 received a bonus outside the
annual incentive program based on the work performed to complete the
sale of the assets of the conductive products division.
(3) Mr. Quinn received a bonus outside the annual incentive program based
on the achievement of certain sales goals.
41
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options under LecTec's 1998 Stock Option Plan during the fiscal year ended June
30, 2001, to each of the executive officers named in the Summary Compensation
Table:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL
------------------------------------------------------ REALIZABLE
PERCENT VALUE AT
OF TOTAL ASSUMED
OPTIONS ANNUAL RATES OF
NUMBER OF GRANTED STOCK PRICE
SECURITIES TO EXERCISE APPRECIATION
UNDERLYING EMPLOYEES PRICE FOR OPTION TERM(3)
OPTIONS IN FISCAL PER EXPIRATION ------------------------
NAME GRANTED YEAR(2) SHARE DATE 5% 10%
--------------------------------- ------- -------- ----- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Rodney A. Young 60,000 21.1% $2.22 Feb. 1, 2006 $37,971 $82,781
Timothy R. J. Quinn 30,000 10.5 2.22 Feb. 1, 2006 18,986 41,391
Douglas J. Nesbit 25,000 8.8 2.44 Aug. 21, 2005 17,828 38,459
30,000 0.5 2.22 Feb. 1, 2006 18,986 41,391
Jane M. Nichols 30,000 0.5 2.22 Feb. 1, 2006 18,986 41,391
John D. LeGray 30,000 0.5 2.22 Feb. 1, 2006 18,986 41,391
Timothy P. Fitzgerald 30,000 0.5 2.22 Feb. 1, 2006 18,986 41,391
William J. Tourek 0 0.0 -- -- -- --
-------------------------
</TABLE>
(1) Each option represents the right to purchase one share of LecTec common
stock. The options shown in this column are all incentive stock options
granted pursuant to LecTec's 1998 Stock Option Plan. The options vest
in annual installments over a period of three years beginning one year
after the date of grant. Each option grant allows the individual to
acquire shares of the LecTec's common stock at a fixed price per share.
The term of each option is five years.
(2) In the fiscal year ended June 30, 2001, LecTec granted employees
options to purchase an aggregate of 285,000 shares of common stock.
(3) The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange
Commission and do not represent LecTec's estimate or projection of
LecTec's future common stock prices. These amounts represent certain
assumed rates of appreciation only. Actual gains, if any, on stock
option exercises are dependent on the future performance of the common
stock and overall stock market conditions. The amounts reflected in the
table may not necessarily be achieved.
42
<PAGE>
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the exercise of
options during the fiscal year ended June 30, 2001 and unexercised options held
as of June 30, 2001, by each of the executive officers named in the Summary
Compensation Table above.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT JUNE 30, 2001 AS OF JUNE 30, 2001 (1)
ACQUIRED VALUE --------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rodney A. Young 0 $ 0 218,750 141,250 $ 0 $ 1,860
Timothy R. J. Quinn 0 0 29,000 59,000 0 930
Douglas J. Nesbit 0 0 0 55,000 0 930
Jane M. Nichols 0 0 66,250 46,250 0 930
John D. LeGray 0 0 24,375 45,625 0 930
Timothy P. Fitzgerald 0 0 8,334 46,666 0 930
William J. Tourek 0 0 0 0 0 0
-------------------------
</TABLE>
(1) "Value" has been determined based on the difference between the last
sale price of LecTec's common stock as reported by the Nasdaq National
Market System on June 29, 2001 ($2.25) and the per share option
exercise price, multiplied by the number of shares subject to the
in-the-money options.
DIRECTOR COMPENSATION
Directors who are not employees of LecTec are paid for their services
at the rate of $6,000 per fiscal year plus $1,000 per regular board meeting plus
reasonable meeting expenses. This compensation arrangement became effective
during fiscal 2001. During the 2001 fiscal year, each of the outside directors
received a five-year option under the LecTec 1998 Director's Stock Option Plan
to purchase 10,000 shares of LecTec's common stock at a price of $2.00 which was
the fair market value of the common stock at the date of grant.
CHANGE IN CONTROL PLANS
LecTec's Change in Control Termination Pay Plan provides for
termination payments to executive officers if they are terminated within twelve
months of a change in control. The plan provides for termination payments to the
Chief Executive Officer equal to twenty times the monthly base salary and
termination payments for all other executives equal to twelve times the monthly
base salary.
In July 1999, LecTec adopted the Improved Shareholder Value Cash Bonus
Plan which provides cash bonus payments to executive officers if LecTec is
acquired by or merged with another company, and the valuation of LecTec for
purposes of the acquisition or merger equals or exceeds the minimum level
defined by the plan. Cash bonus payments to executives increase as the total
valuation of LecTec for purposes of the sale or merger increases, thus aligning
the interests of the executives with the interests of the shareholders and
providing an incentive to the executives to maximize shareholder value.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Compensation Committee consists of three non-employee directors,
Lee M. Berlin, Alan C. Hymes, M.D. and Donald C. Wegmiller. All three directors
served on the Committee for the entire fiscal year ended June 30, 2001.
43
<PAGE>
Mr. Berlin was formerly an officer of LecTec, having served as both
Chairman of the Board and Chief Executive Officer of LecTec. There were no other
Compensation Committee "interlocks" within the meaning of the SEC rules.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------- --------------------------------------------------------------
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of September 20, 2001, by each
person, or group of affiliated persons, who is known by us to own beneficially
more than 5% of our common stock, each of our directors, each of our executive
officers named in the Summary Compensation Table above and all of our directors
and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
SEC. In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock under options held
by that person that are currently exercisable or exercisable within 60 days of
September 20, 2001 are considered outstanding. The column entitled "Number of
Shares Beneficially Owned" includes the number of shares of common stock subject
to options held by that person that are currently exercisable or that will
become exercisable within 60 days of September 20, 2001. The number of shares
subject to options that each beneficial owner has the right to acquire within 60
days of September 20, 2001 are listed separately under the column entitled
"Number of Shares Underlying Options Beneficially Owned."
Except as indicated in the footnotes to this table, each shareholder named in
the table has sole voting and investment power for the shares shown as
beneficially owned by them. Percentage of ownership is based on 3,922,384 shares
of common stock outstanding on September 20, 2001.
44
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING
NUMBER OF SHARES OPTIONS PERCENT OF
BENEFICIALLY BENEFICIALLY SHARES
NAME OWNED OWNED OUTSTANDING
---- ----------- ----------- -----------
<S> <C> <C> <C>
Lee M. Berlin(1)(2) 577,029 34,125 14.6%
Alan C. Hymes, M.D.(2) 437,128 39,755 11.0
Rodney A. Young(2) 253,250 238,750 6.1
Jane M. Nichols 72,529 66,250 1.8
Timothy R. J. Quinn 38,300 34,500 *
John D. LeGray 37,410 28,750 *
Bert J. McKasy 27,778 23,000 *
Donald C. Wegmiller 27,000 26,000 *
Marilyn K. Speedie, Ph.D. 23,000 21,500 *
Timothy P. Fitzgerald 10,413 8,334 *
Douglas J. Nesbit 9,834 8,334 *
William J. Tourek 0 0 *
All directors and executive
officers as a group (12 persons) 1,513,671 529,298 34.0
----------------------------------
</TABLE>
*Less than 1%
(1) Includes 75,605 shares owned by Mr. Berlin's wife and 137,145 shares
owned by Mr. Berlin's son. Mr. Berlin disclaims beneficial ownership of
these shares.
(2) The address is: LecTec Corporation, 10701 Red Circle Drive, Minnetonka,
Minnesota 55343.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------- ----------------------------------------------
None.
45
<PAGE>
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 financial statements of the Company are filed as
a part of this Form 10-K in Part II, Item 8:
(i) Report of Independent Certified Public Accountants
(ii) Balance Sheets at June 30, 2001 and 2000
(iii) Statements of Operations for the years ended June 30,
2001, 2000 and 1999
(iv) Statements of Comprehensive Loss for the years ended
June 30, 2001, 2000 and 1999
(v) Statements of Shareholders' Equity for the years
ended June 30, 2001, 2000 and 1999
(vi) Statements of Cash Flows for the years ended June 30,
2001, 2000 and 1999
(vii) Notes to the Consolidated Financial Statements
2. Financial Statement Schedules
-----------------------------
(i) Schedule II - Valuation and Qualifying Accounts, for
each of the three years in the period ended June 30,
2001
(ii) Other Schedules - All other schedules have been
omitted because of the absence of the conditions
under which they are required or because the required
information is included in the financial statements
or the notes thereto.
3. Exhibits Method of
-------- Filing
---------
3.01 Articles of Incorporation of LecTec
Corporation, as amended (1)
3.02 By laws of LecTec Corporation (1)
10.01 Certificate of Secretary pertaining to
Resolution of Board of Directors of
LecTec Corporation, dated October 30,
1986, implementing a Profit Sharing
Bonus Plan (1)
**10.02 LecTec Corporation 1989 Stock Option
Plan (2)
**10.03 LecTec Corporation 1991 Directors' Stock
Option Plan (2)
10.04 Building lease dated May 24, 1991 between
LecTec Corporation and Sierra Development Co. (2)
10.05 First amendment dated May 5, 1997 between
LecTec Corporation and Rushmore Plaza
Partners Limited Partnership (2)
46
<PAGE>
10.06 Articles of Merger of Pharmadyne
Corporation into LecTec Corporation dated
December 31, 1997 (3)
**10.07 Change In Control Termination Pay Plan
adopted May 27, 1998 (3)
**10.08 LecTec Corporation Employee Stock
Purchase Plan (4)
**10.09 LecTec Corporation 1998 Stock Option Plan (5)
**10.10 LecTec Corporation 1998 Directors' Stock
Option Plan (5)
10.11 Credit and Security Agreement by and
between LecTec Corporation and Wells
Fargo business Credit, Inc. dated
November 22, 1999 (6)
10.12 First Amendment To Credit and Security
Agreement and Waiver of Defaults by and
Between LecTec Corporation and Wells Fargo
Business Credit, dated February 9, 2000 (6)
10.13 Second Amendment to Credit and Security
Agreement and Waiver of Defaults by and
between LecTec Corporation and Wells
Fargo Business Credit, Inc. dated
September 26, 2000. (8)
*10.14 Supply Agreement dated as of March 21,
2000 by and between LecTec Corporation and
Johnson & Johnson Consumer Companies, Inc.
and Neutrogena Corporation (7)
*10.15 Supply Agreement dated as of May 15, 2000
by and between LecTec Corporation and
Novartis Consumer Health, Inc. (7)
10.16 Credit and Security Agreement By and
Between LecTec Corporation and Wells
Fargo Bank Minnesota, National Association
dated September 28, 2000 (8)
10.17 Loan Agreement and Promissory Note By and
Between LecTec Corporation and Equity
Holdings II dated December 21, 2000 (9)
10.18 Asset Purchase Agreement dated November
17, 2000 by and among The Ludlow Company
LP, Sherwood Services AG and LecTec
Corporation (10)
10.19 Asset Purchase Agreement dated March 13,
2001 by and among The National Medical
Products Co. Ltd. and LecTec Corporation (11)
**10.20 LecTec Corporation 2001 Stock Option Plan (12)
23.01 Consent of Grant Thornton LLP (13)
99.01 Cautionary Statements (13)
--------------------------------
* Confidential treatment has been granted for portions of this
Exhibit pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934 as amended. The
47
<PAGE>
confidential portions have been deleted and filed separately
with the United States Securities and Exchange Commission.
** Management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.
(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, 1997.
(3) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1998.
(4) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 (file number 333-72571) filed on
February 18, 1999.
(5) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 (file number 333-72569) filed on
February 18, 1999.
(6) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1999.
(7) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 2000, as
amended.
(8) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000.
(9) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 2000.
(10) Incorporated herein by reference to the Company's Definitive
Proxy Statement on Schedule 14A filed with the Commission on
March 15, 2001
(11) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001.
(12) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 (file number 333-68920) filed on
September 4, 2001.
(13) Filed herewith.
(b) Reports on Form 8-K
-------------------
On May 1, 2001 the Company filed a report on Form 8-K in connection
with the closing of the transactions contemplated by an asset purchase
agreement dated November 17, 2000 with the Ludlow Company LP and
Sherwood Services AG, both of which are wholly owned subsidiaries of
Tyco International Ltd.
48
<PAGE>
LecTec Corporation
Schedule II
Valuation and Qualifying Accounts
Three Years Ended June 30, 2001
<TABLE>
<CAPTION>
Balance at Charged to Charge to Balance
beginning of costs and other at end
Description period expenses accounts Deductions of period
---------------------------------- -------- ---------- --------- ---------- ----------
Allowance for doubtful accounts
<S> <C> <C> <C> <C>
Year ended June 30, 1999 90,818 48,000 -- 37,067 101,751
Year ended June 30, 2000 101,751 48,000 -- 22,626 127,125
Year ended June 30, 2001 127,125 24,000 -- 42,672 108,453
Allowance for sales returns and credits
Year ended June 30, 1999 88,668 61,876 -- 93,787 56,757
Year ended June 30, 2000 56,757 345,855 -- 160,206 242,406
Year ended June 30, 2001 242,406 710,646 -- 382,254 570,798
Allowance for inventory obsolescence
Year ended June 30, 1999 210,222 243,198 -- 168,811 284,609
Year ended June 30, 2000 284,609 267,911 -- 406,545 145,975
Year ended June 30, 2001 145,975 326,257 -- 343,442 128,790
</TABLE>
49
<PAGE>
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 28th day of
September, 2001.
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 28, 2001
-------------------------
Rodney A. Young
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
/s/Douglas J. Nesbit September 28, 2001
-------------------------
Douglas J. Nesbit
Chief Financial Officer
(Principal Financial Officer and Accounting Officer)
/s/Lee M. Berlin September 28, 2001
-------------------------
Lee M. Berlin
Director
/s/Bert J. McKasy September 28, 2001
-------------------------
Bert J. McKasy
Director
/s/Marilyn K. Speedie September 28, 2001
-------------------------
Marilyn K. Speedie
Director
/s/Donald C. Wegmiller September 28, 2001
-------------------------
Donald C. Wegmiller
Director
50
<PAGE>
EXHIBIT INDEX
-------------
Exhibits
--------
3.01 Articles of Incorporation of Registrant, as amended (Note 1).
3.02 By-laws of Registrant (Note 1).
10.01 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).
**10.02 LecTec Corporation 1989 Stock Option Plan (Note 2).
**10.03 LecTec Corporation 1991 Directors' Stock Option Plan (Note 2).
10.04 Building lease dated May 24, 1991 between LecTec Corporation
and Sierra Development Co (Note 2).
10.05 First amendment dated May 5, 1997 between LecTec Corporation
and Rushmore Plaza Partners Limited Partnership (Note 2).
10.06 Articles of Merger of Pharmadyne Corporation into LecTec
Corporation dated December 31, 1997 (Note 3).
**10.07 Change In Control Termination Pay Plan adopted May 27, 1998
(Note 3).
**10.08 LecTec Corporation Employee Stock Purchase Plan (Note 4).
**10.09 LecTec Corporation 1998 Stock Option Plan (Note 5).
**10.10 LecTec Corporation 1998 Directors' Stock Option Plan (Note 5).
10.11 Credit and Security Agreement by and between LecTec
Corporation and Wells Fargo business Credit, Inc. dated
November 22, 1999 (Note 6).
10.12 First Amendment to Credit and Security Agreement and Waiver of
Defaults by and Between LecTec Corporation and Wells Fargo
Business Credit, dated February 9, 2000 (Note 6).
10.13 Second Amendment to Credit and Security Agreement and Waiver
of Defaults by and Between LecTec Corporation and Wells Fargo
Business Credit, Inc. dated September 26, 2000 (Note 8).
*10.14 Supply Agreement dated as of March 21, 2000 by and between
LecTec Corporation and Johnson & Johnson Consumer Companies,
Inc. and Neutrogena Corporation (Note 7).
*10.15 Supply Agreement dated as of May 15, 2000 by and between
LecTec Corporation and Novartis Consumer Health, Inc (Note 7).
10.16 Credit and Security Agreement By and Between LecTec
Corporation and Wells Fargo Bank Minnesota, National
Association dated September 28, 2000 (Note 8).
51
<PAGE>
10.17 Loan Agreement and Promissory Note By and Between LecTec
Corporation and Equity Holdings II dated December 21, 2000
(Note 9).
10.18 Asset Purchase Agreement dated November 17, 2000 by and among
The Ludlow Company LP, Sherwood Services AG and LecTec
Corporation (Note 10).
10.19 Asset Purchase Agreement dated March 13, 2001 by and among The
National Medical Products Co. Ltd. and LecTec Corporation
(Note 11).
**10.20 LecTec Corporation 2001 Stock Option Plan (Note 12).
23.01 Consent of Grant Thornton LLP.
99.01 Cautionary Statements.
NOTES:
* Confidential treatment has been granted for portions of this
Exhibit pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934 as amended. The confidential portions have been
deleted and filed separately with the United States Securities
and Exchange Commission.
** Management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.
(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, 1997.
(3) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1998.
(4) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 (file number 333-72571) filed on
February 18, 1999.
(5) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 (file number 333-72569) filed on
February 18, 1999.
(6) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1999.
(7) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 2000, as
amended.
(8) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000.
(9) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 2000.
(10) Incorporated herein by reference to the Company's Definitive
Proxy Statement on Schedule 14A filed with the Commission on
March 15, 2001.
52
<PAGE>
(11) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001.
(12) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 (file number 333-68920) filed on
September 4, 2001.
53
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>3
<FILENAME>lectec013788_ex23-01.txt
<DESCRIPTION>EXHIBIT 23.01 CONSENT OF INDEPENDENT CPA
<TEXT>
EXHIBIT 23.01
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated August 7, 2001 accompanying the
financial statements included in the Annual Report of LecTec Corporation on Form
10-K for the year ended June 30, 2001. We hereby consent to the incorporation by
reference of said report in the Registration Statements of LecTec Corporation on
Form S-3 (File No. 333-40183, effective November 17, 1997) and Forms S-8 (File
No. 33-121780, effective April 21, 1987, File No. 33-45931, effective February
21, 1992, File No. 333-46283, effective February 13, 1998, File No. 333-46289,
effective February 13, 1998, File No. 333-72569, effective February 18, 1999,
File No. 333-72571, effective February 18, 1999 and File No. 333-68920,
effective September 4, 2001).
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
September 28, 2001
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>4
<FILENAME>lectec013788_ex99-01.txt
<DESCRIPTION>EXHIBIT 99.01 CAUTIONARY STATEMENTS
<TEXT>
EXHIBIT 99.01
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides public
companies with a "safe harbor" from liability for forward-looking statements if
those statements are accompanied by meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from
those contained in the forward-looking statements. The Company hereby identifies
the following important factors which could cause the Company's actual results
to differ materially from those contained in any forward-looking statement made
by the Company from time to time in any report, proxy statement, registration
statement or other written communication or in oral forward-looking statements
made from time to time by the Company's offices or agents.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT LOSSES TO CONTINUE FORTHE
FORESEEABLE FUTURE
Although we have generated differing levels of revenue over the last
several years, we have not had profitable operations. We expect to continue to
incur losses for the foreseeable future. We have expended a substantial amount
of our resources in sales and marketing efforts and researching and developing
technology relating to our products.
We plan to increase our operating expenses as we continue to devote
significant resources to developing our therapeutic consumer products business.
We expect to incur substantial operating losses in the foreseeable future as we
invest in our therapeutic consumer products business. Our losses may increase in
the future, and even if we achieve our revenue targets, we may not be able to
sustain or increase profitability on a quarterly or annual basis. The amount of
future net losses, and the time required to reach profitability, are both highly
uncertain. We cannot assure you that we will ever be able to achieve or sustain
profitability.
OUR SUCCESS DEPENDS ON A SINGLE FAMILY OF PRODUCTS
We have adopted a strategy of focusing our efforts on our therapeutic
consumer products business. As a result, our revenue and profitability depend on
sales of our topical ointment-based products for the application of
over-the-counter drugs. A reduction in demand for these products would have a
material adverse effect on our business. We have relatively limited experience
selling our therapeutic consumer products. Accordingly, we can not assure you
that sales of our therapeutic consumer products represent long-term consumer
acceptance of these products, or that the recent increase in therapeutic
consumer products sales is indicative of future growth rates for sales of these
products. The sustainability of current levels of therapeutic consumer products
sales and the future growth of such sales, if any, will depend on, among other
factors:
* continued consumer trial of our products;
* generation of repeat consumer sales;
* further development and sales of our TheraPatch brand name
products;
* development of further relationships with resellers of our
products;
* competition from substitute products;
* effective consumer advertising.
We can not assure you that we will maintain or increase our current
level of therapeutic consumer products sales or profits in future periods.
<PAGE>
OUR SUCCESS DEPENDS ON OUR RELATIONSHIPS WITH RESELLERS OF OUR PRODUCTS
A significant portion of the sales of our therapeutic consumer products
are derived from agreements with other companies that act as resellers of our
products. Under these agreements, our products are marketed and sold under
another company's brand name and by another company's sales force. Our success
depends in part upon our ability to enter into additional reseller agreements
with new third parties while maintaining our existing reseller relationships. We
believe our relationships with our existing third party resellers have been a
significant factor in the success to date of our therapeutic consumer products
business, and any deterioration or termination of these relationships would
seriously harm our business.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO MANAGE ANY GROWTH IN OUR
THERAPEUTIC CONSUMER PRODUCTS BUSINESS
If we are successful in increasing the sales of our therapeutic
consumer products we may be required to expand our operations, particularly in
the areas of research and development, sales and marketing, and manufacturing.
If we are required to expand our operations in these areas, those expansions
will likely result in new and increased responsibilities for management
personnel and place significant strain on our management, operating and
financial systems and other resources. To accommodate any such growth and
compete effectively, we will be required to implement improved information
systems, procedures and controls, and to expand, train, motivate and manage our
work force. Our future success will depend to a significant extent on the
ability of our current and future management personnel to operate effectively
both independently and as a group. We can not assure you that our personnel,
systems, procedures and controls will be adequate to support our future
operations.
We manufacture our therapeutic consumer products in quantities
sufficient to satisfy our current level of sales. To meet any increases in
sales, we may need to increase our production significantly beyond our present
manufacturing capacity. Accordingly, we may be required to increase our
manufacturing capacities. We can not assure you that increasing our capacity can
be accomplished on a profitable basis.
THE MARKET FOR OUR PRODUCTS IS COMPETITIVE AND WE MAY NOT HAVE THE
RESOURCES REQUIRED TO COMPETE EFFECTIVELY
The markets for the therapeutic consumer products we sell are
relatively new and therefore subject to rapid and significant change. We face
significant competition in the development and marketing of these products. We
can not assure you that we will be able to compete effectively in the sale of
our products. Competitors in the United States and abroad are numerous and
include, among others, major pharmaceutical and consumer product companies. Our
competitors may succeed in developing technologies and products that are more
effective than those we are developing and could render our therapeutic consumer
products obsolete and noncompetitive. Many of our competitors have substantially
greater financial and technical resources, marketing capabilities and regulatory
experience. In addition, these companies compete with us in recruiting and
retaining highly qualified personnel. As a result, we cannot assure you that we
will be able to compete successfully with these organizations.
PATENTS AND OTHER PROPRIETARY RIGHTS PROVIDE UNCERTAIN PROTECTION OF
OUR PROPRIETARY INFORMATION AND OUR INABILITY TO PROTECT A PATENT OR OTHER
PROPRIETARY RIGHT MAY HARM OUR BUSINESS
The patent position of companies engaged in the sale of products such
as ours is uncertain and involves complex legal and factual questions. Issued
patents can later be held invalid by the patent office issuing the patent or by
a court. We can not assure you that our patents will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
us a competitive advantage. In addition, many other organizations are engaged in
research and development of products similar to our therapeutic consumer
products. Such organizations may currently have, or may obtain in the future,
legally blocking proprietary rights, including patent rights, in one or more
products or methods under
<PAGE>
development or consideration by us. These rights may prevent us from
commercializing new technology, or may require us to obtain a license from the
organizations to use their technology.
We also rely on trade secrets and other unpatented proprietary
information in the manufacturing of our therapeutic consumer products. To the
extent we rely on confidential information to maintain our competitive position,
there can be no assurance that other parties will not independently develop the
same or similar information.
There has been substantial litigation regarding patent and other
intellectual property rights in the consumer products industry. Litigation could
result in substantial costs and a diversion of our effort, but may be necessary
to enforce any patents issued to us, protect our trade secrets or know-how,
defend against claimed infringement of the rights of others or determine the
scope and validity of the proprietary rights of others. We can not assure you
that third parties will not pursue litigation that could be costly to us. An
adverse determination in any litigation could subject us to significant
liabilities to third parties, require us to seek licenses from or pay royalties
to third parties or prevent us from manufacturing or selling our products, any
of which could have a material adverse effect on our business.
WE ARE SUBJECT TO REGULATION BY REGULATORY AUTHORITIES INCLUDING THE
FDA WHICH MAY AFFECT THE MARKETING OF OUR PRODUCTS
The research, development, manufacture, labeling, distribution,
marketing and advertising of our products, and our ongoing research and
development activities, are subject to extensive regulation by governmental
regulatory authorities in the United States and other countries. Failure to
comply with regulatory requirements for marketing our products could subject us
to regulatory or judicial enforcement actions, including, but not limited to,
product recalls or seizures, injunctions, civil penalties, criminal prosecution,
refusals to approve new products and suspensions and withdrawals of existing
approvals. Currently, the majority of our therapeutic consumer products are
regulated as over-the-counter products. We can not assure you that the FDA will
continue to regulate these products as over-the-counter products. If the FDA
changed its approach to regulating our products, we would be faced with
significant additional costs and may be unable to sell some or all of our
products. Any such change would have a material adverse effect on our business.
Delays in obtaining regulatory approvals for any new products could have a
material adverse effect on our business. Even if regulatory approval of a new
product is granted, such approval may include significant limitations on the
indicated uses of the product or the manner in which or conditions under which
the product may be marketed.
WE MAY BE REQUIRED TO REDUCE OR ELIMINATE SOME OR ALL OF OUR SALES AND
MARKETING EFFORTS OR RESEARCH AND DEVELOPMENT ACTIVITIES IF WE FAIL TO OBTAIN
ADDITIONAL FUNDING THAT MAY BE REQUIRED TO SATISFY OUR FUTURE CAPITAL
EXPENDITURE NEEDS
We plan to continue to spend substantial funds to expand our sales and
marketing efforts and our research and development activities related to our
therapeutic consumer products. Our future liquidity and capital requirements
will depend upon numerous factors, including the costs and timing of sales and
marketing, manufacturing and research and development activities, the extent to
which our therapeutic consumer products gain market acceptance and competitive
developments. Any additional required financing may not be available on
satisfactory terms, if at all. If we are unable to obtain financing, we may be
required to reduce or eliminate some or all of our sales and marketing efforts
or research and development activities.
WE HAVE LIMITED STAFFING AND WILL CONTINUE TO BE DEPENDENT UPON KEY
EMPLOYEES
Our success is dependent upon the efforts and abilities of our key
employees. If key individuals leave, we could be adversely affected if suitable
replacement personnel are not quickly recruited. Our future success depends upon
our ability to continue to attract and retain qualified scientific, marketing
and technical personnel. There is intense competition for qualified personnel in
all functional areas and competition will make it difficult to attract and
retain the qualified personnel necessary for the development and growth of our
business.
<PAGE>
THE PRICE OF OUR COMMON STOCK COULD BE HIGHLY VOLATILE DUE TO A NUMBER
OF FACTORS
The trading price of our common stock may fluctuate widely as a result
of a number of factors, including:
* performance of our therapeutic consumer products in the
market;
* regulatory developments in both the United States and foreign
countries;
* market perception and customer acceptance of our therapeutic
consumer products;
* increased competition;
* relationships with resellers of our products;
* economic and other external factors; and
* period-to-period fluctuations in financial results.
In addition, the price of our common stock has from time to time
experienced significant price and volume fluctuations that may be unrelated to
our operating performance.
WE MAY NOT CONTINUE TO MEET THE REQUIREMENTS FOR CONTINUED LISTING ON
NASDAQ
The National Association of Securities Dealers, Inc. which administers
Nasdaq, has adopted certain criteria for continued eligibility on Nasdaq. In
order to continue to be included on Nasdaq, we must maintain $4 million in net
tangible assets, a public float of 750,000 shares and a $5 million market value
of our public float. In addition, continued inclusion requires two
market-makers, at least 400 holders of our common stock and a minimum bid price
of our common stock of $1 per share. Our failure in the future to meet these
maintenance criteria, as now in effect or as may be later amended, may result in
the delisting of our common stock from Nasdaq. In such event, trading, if any,
in our common stock may then continue to be conducted in the non-Nasdaq
over-the-counter market in less orderly markets commonly referred to as the
electronic bulletin board and the "pink sheets." As a result, an investor may
find it more difficult to dispose of or to obtain accurate quotations as to the
market value of our common stock. If Nasdaq were to begin delisting proceedings
against us, it could reduce the level of liquidity currently available to our
shareholders. If our common stock were delisted, the price of our common stock
would, in all likelihood, decline.
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
