SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED ______________.
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM July 1, 2001 to
December 31, 2001.
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 March 18, 2002 was $4,087,510 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
March 18, 2002 was 3,953,578 shares.
-------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Transition Report on Form 10-K incorporates by reference
information from the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held in June 2002.
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 and a line of skin care
products. The Company markets and sells its products to consumers through retail
outlets (food, chain drug, and mass merchandise stores), other health care
consumer products companies and direct via the Internet. All of the products
manufactured by the Company are designed to be effective, safe and highly
compatible with skin.
The Company is an innovator in hydrogel-based topical delivery of
therapeutic OTC medications which provide alternatives to topical 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 onto the skin.
The Company holds multiple domestic and international 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, new
technologies and existing technologies are being developed and 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 and went
public in December 1986. Its principal executive office is located at 10701 Red
Circle Drive, Minnetonka, Minnesota 55343, and its telephone number is (952)
933-2291.
On September 5, 2001, the Company elected to change its fiscal year end
from June 30 to December 31. Previously, the fiscal year ran from July 1 through
June 30. This Transition Report on Form 10-K covers the period from July 1, 2001
through December 31, 2001 (the "Transition Period"). Hereafter, the fiscal year
will correspond with the calendar year. The most recent results and analysis for
a 12 month reporting period, is fiscal year 2001, covering the period from July
1, 2000 through June 30, 2001.
PRODUCTS
The Company's core competency is skin interface hydrogel technology.
This competency results in products which are beneficial to human skin. 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
patch products for the application of OTC drugs and skin care ingredients.
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, psoriasis, sinus and allergy,
1
acne treatment products, wart removers, and a corn and callus remover. The
analgesic, cooling, anti-itch, cold sore, psoriasis and sinus and allergy
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 80%
and 60% of the Company's total sales for the six month periods ended December
31, 2001 and 2000 respectively. Sales of therapeutic consumer products accounted
for approximately 58%, 36% and 15% of the Company's total sales for fiscal years
ended June 30, 2001, 2000 and 1999 respectively.
Beginning in February 2002, the Company expanded into the skin care
cosmeceutical market by launching a three-product line of skin care products
under the Company's brand name NeoSkin(R) . These products include pre-formed
face masks, under eye gel patches and cucumber eye pads.
In March 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 the fiscal year ended June
30, 2000, to exit the low margin medical tape business.
Sales of medical tapes accounted for approximately 0% and 2% of the
Company's total sales for the six month periods ended December 31, 2001 and 2000
respectively. 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.
In April 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 included
diagnostic electrodes and electrically conductive adhesive hydrogels. Under a
manufacturing and supply agreement between the Company and the buyer, the
Company continued to manufacture, and supply to the buyer, certain conductive
products through January 2002. The Company supplied the products at its cost of
production through October 31, 2001, and at its cost of production plus ten
percent from November 1, 2001 through January 31, 2002. The Company is
continuing to manufacture and supply the buyer electrically conductive adhesive
hydrogels, at margins of approximately 30%, subsequent to expiration of the
manufacturing and supply agreement. The Company anticipates supplying the
product to the buyer through the second quarter of calendar 2002.
Sales of conductive products accounted for approximately 20% and 38% of
the Company's total sales for the six month periods ended December 31, 2001 and
2000 respectively. Sales of conductive products accounted for approximately 41%,
51% and 63% of the Company's total sales for fiscal years ended June 30, 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), healthcare consumer
products companies and via the Internet.
In 1998 the Company entered into the consumer products market. The
entry was supported by the hiring of a new retail sales executive in May 1998
and a retail sales team in the year ended June 30, 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 66%
and 75% of the sales of the Company's consumer patch products during
2
the six month periods ended December 31, 2001 and 2000 respectively, 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, and in part on the ability to get consumers to
purchase the Company's products from the retailers. 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 adversely affect
business. The Company also believes that the absence of advertising expenditures
could limit its ability to sell product to the ultimate consumer and execute its
business strategy.
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. The therapeutic patch product affected least
by seasonality is TheraPatch Warm, which is primarily sold for arthritis and
chronic back pain.
The Company currently sells its products in the U.S., Asia 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 January
1, 1999 euro currency conversion did not have a material impact on the Company's
financial statements. Export sales accounted for approximately 2% and 9% of
total sales for the six month periods ended December 31, 2001 and 2000
respectively. Export sales accounted for approximately 8%, 13% and 13% of total
sales for the fiscal years ended June 30, 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 tables set forth export sales by geographic
area:
Six-month periods ended
December 31 Years ended June 30
---------------------------------- ----------------------------------------------
2001 2000 2001 2000 1999
---- ---- ---- ---- ----
Europe $ - $422,757 $ 815,796 $1,006,412 $1,216,199
Latin America - 139,613 139,613 547,904 371,654
Asia 46,512 24,135 72,851 46,279 31,935
Canada 80,146 135,770 215,686 298,884 7,011
Other - 3,100 7,950 36,234 28,333
--------- -------- ---------- ---------- ----------
Total Export Sales $ 126,658 $725,375 $1,251,896 $1,935,713 $1,655,132
========= ======== ========== ========== ==========
CUSTOMERS
Novartis Consumer Health, Inc. (Novartis) accounted for 33% and 18% of
the Company's total sales for the six month periods ended December 31, 2001 and
2000 respectively, and 20% of the Company's total sales for the fiscal year
ended June 30, 2001. The fiscal year ended June 30, 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 and sell the patches or any other vapor patches in the pediatric
field of
3
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 adversely affected 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 adversely affected. If the Company is unable to extend or
renew the agreement upon its expiration, its results of operations would be
adversely affected.
Johnson & Johnson Consumer Products Company (J&J) accounted for 14% and
22% of the Company's total sales for the six month periods ended December 31,
2001 and 2000, and 16% of the Company's total sales for the fiscal year ended
June 30, 2001. The fiscal year ended June 30, 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 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
adversely affected 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 adversely affected. If the Company is
unable to extend or renew the agreement upon its expiration, its results of
operations would be adversely affected.
Spacelabs Burdick Inc. accounted for 0% and 13% of the Company's total
sales for the six month periods ended December 31, 2001 and 2000. Spacelabs
Burdick Inc. accounted for 12%, 17% and 22% of the Company's total sales for the
fiscal years ended June 30, 2001, 2000 and 1999. This conductive products
customer no longer generates sales due to the sale of the conductive business
assets during the year ended June 30, 2001.
Ludlow Technical Products accounted for 20% of the Company's total
sales for the six month period ended December 31, 2001. The six month period
ended December 31, 2001 was the first full period of sales to Ludlow. These
sales were attributable to the manufacturing and supply agreement between the
Company and Ludlow Company LP as a result of the sale of the Company's
diagnostic electrode and electrically conductive adhesive hydrogel business. The
Company anticipates sales to Ludlow will continue through the second quarter of
calendar 2002.
The Company sold its products to approximately 163 and 253 active
customers (excluding TheraPatch sales to individual consumers) during the six
month periods ended December 31, 2001 and 2000 respectively. The Company's
backlog orders as of February 28, 2002 totaled $1,640,000, compared to
approximately $2,638,000 on February 28, 2001. The Company sold its products to
approximately 310, 275 and 240 active customers (excluding TheraPatch sales to
individual consumers) during the fiscal years ended June 30, 2001, 2000 and
1999.
COMPETITION
The markets for OTC drug delivery patches and skin care products are
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 which 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, cold sore, psoriasis and sinus and allergy patches competes with
ointments, lotions and creams manufactured by various competitors including
Mentholatum/Rohto Pharmaceuticals, Inc.
4
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
therapeutic products consist primarily of hydrogel-based, individually wrapped,
breathable, self-adhering cloth patches that topically deliver therapeutic OTC
medications. 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.
To assure that the Company's customers receive quality products, the
Company's manufacturing process complies with standards that meet the
requirements of ISO 9001, EN46001 and ISO 13485. Meeting these standards
demonstrates that the Company has achieved the highest level of quality systems
compliance as demonstrated by world-class manufacturers.
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 such as the new NeoSkin skin care product.
During the six month periods ended December 31, 2001 and 2000, the
Company spent approximately $466,000 and $442,000 on research and development
respectively. During the fiscal years ended June 30, 2001, 2000 and 1999 the
Company spent approximately $920,000, $1,095,000 and $1,170,000 on research and
development respectively.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
The Company's Quality System includes design 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 Company is subject to Food and Drug Administration ("FDA")
regulations concerning manufacturing practices and reporting obligations. These
regulations require that manufacturing and quality assurance be performed
according to FDA guidelines and in accordance with applicable Code of Federal
Regulation documentation, control and testing requirements. The Company is also
subject to inspection by the FDA at any time. The Company is required to report
to the FDA serious adverse product incidents, as well as, maintain a
documentation and record keeping system in accordance with FDA regulations. The
advertising of the Company's products is also subject to both FDA and Federal
Trade Commission jurisdiction. If the FDA believes that the Company is not in
compliance with any aspect of the law, it can institute proceedings to detain or
seize products, issue a recall, stop future violations and assess civil and
criminal penalties against the Company, its officers and its employees.
5
The products manufactured by the Company's continuing consumer products
business are classified as either non-drugs or over-the-counter (OTC) drugs,
which are either not regulated or regulated by published FDA OTC monographs.
Monographs are used to regulate OTC drugs that contain ingredients known to be
safe and effective. Monographs have also established 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 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 distributors
for processing into finished commercial goods.
INTERNATIONAL 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.
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 international patents on adhesive hydrogels,
electrodes and transdermal and topical delivery systems. Twelve active U.S.
patents and three active international patents are currently assigned or
licensed to the Company. Seventeen U.S. and international applications are
pending including two which are on appeal. International 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.
No trademarks were registered during the six month period ended
December 31, 2001. Five 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 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.
6
EMPLOYEES
As of December 31, 2001, the Company employed 68 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
Name Age Title
- ---- --- -----
Rodney A. Young 47 Chairman, Chief Executive Officer and President
Douglas J. Nesbit 49 Chief Financial Officer, Secretary and Treasurer
Timothy P. Fitzgerald 62 Vice President, Operations
John D. LeGray 56 Vice President, Quality Assurance and Regulatory Affairs
Jane M. Nichols 55 Vice President, Marketing and New Business Development
Timothy R. J. Quinn 41 Vice President, Consumer Products
Rodney A. Young, 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. In addition to fulfilling his role as Chairman and
Director of the Company, Mr. Young also serves as a Director of Possis Medical,
Inc., Delta Dental Plan of Minnesota, and Health Fitness Corporation.
Douglas J. Nesbit is Chief Financial Officer, Secretary and Treasurer.
He joined the Company in August 2000. Mr. Nesbit's 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. Mr. Nesbit also
serves as a Director of the Minnesota Society of Certified Public Accountants.
Timothy P. Fitzgerald is Vice President, Operations. He joined the
Company in February 2000. Mr. Fitzgerald's 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 career includes
technical and management positions at DiaSorin Inc., Bayer Corporation and
Abbott Laboratories.
Jane M. Nichols is Vice President, Marketing and New Business
Development. She joined the Company in April 1997. Ms. Nichols' 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. Mr. Quinn's career includes
extensive 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.
7
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.
The Company is currently in the process of renegotiating an extension to the
lease.
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 the six-month
period ended December 31, 2001, and the fiscal years ended June 30, 2001 and
2000. Such prices reflect interdealer prices, without retail mark-up, mark-down,
or commission, and may not necessarily represent actual transactions.
SIX MONTHS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 JUNE 30, 2001 JUNE 30, 2000
----------------- ------------- -------------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
Quarter ended Sept. 30 $2.30 $1.53 $4.22 $2.00 $4.38 $2.69
Quarter ended Dec. 31 1.95 1.00 2.75 1.00 3.13 1.19
Quarter ended March 31 N/A N/A 3.13 1.56 5.00 1.38
Quarter ended June 30 N/A N/A 3.00 1.56 4.88 2.00
As of March 22, 2002 the Company had 3,953,578 shares of common stock
outstanding, and approximately 328 common shareholders of record which number
does not include beneficial owners whose shares were held of record by nominees
or broker dealers.
The Company has not declared or paid cash dividends on its common stock
since its inception, and intends to retain all earnings for use in its business
for the foreseeable future.
8
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Please see Item 1 of this report for information regarding the
disposition of the Company's conductive business assets and medical tape assets
during the first half of calendar year 2001 that affect the comparability of the
information set forth below.
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Six-months ended
December 31, Year ended June 30,
----------------------- ------------------------------------------------------------------
2001 2000 2001 (a) 2000 (b) 1999 1998 1997 (c)
---- ---- -------- -------- ---- ---- --------
(unaudited)
Net sales $5,119,391 $8,245,378 $15,928,832 $14,596,346 $12,279,075 $12,922,365 $12,256,327
Gross profit 1,489,139 2,992,804 5,422,601 5,121,217 4,093,561 3,715,032 4,324,180
Loss from operations (2,557,456) (1,203,196) (3,135,622) (2,890,497) (1,771,324) (474,935) (2,215,951)
Earnings (loss) before equity
in losses of unconsolidated
subsidiary (2,562,920) (1,286,897) 1,343,492 (2,859,276) (1,683,257) (404,061) (2,140,660)
Equity in losses of unconsolidated
subsidiary -- -- -- -- -- -- 126,067
Net earnings (loss) (2,562,920) (1,286,897) 1,343,492 (2,859,276) (1,683,257) (404,061) (2,266,727)
Net earnings (loss) per share
Basic (.65) (.33) .34 (.74) (.43) (.10) (.59)
Diluted (.65) (.33) .34 (.74) (.43) (.10) (.59)
CONSOLIDATED BALANCE SHEET DATA
December 31, June 30,
----------------------- ------------------------------------------------------------------
2001 2000 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
(unaudited)
Cash, cash equivalents and
short-term investments $1,425,205 285,620 $3,376,723 $ 100,171 $1,022,025 $2,186,532 $1,242,777
Current assets 3,790,987 5,179,994 7,301,333 5,236,110 5,904,111 6,728,531 6,873,696
Working capital 1,106,202 1,100,455 4,279,728 1,512,561 3,497,926 5,335,861 4,035,084
Property, plant and equip, net 2,262,094 2,928,073 2,422,494 3,039,088 4,028,491 4,306,568 4,592,304
Total assets 6,350,154 8,360,011 9,967,776 8,474,549 10,132,573 11,317,774 11,837,356
Long-term liabilities 125,170 838,718 859,623 31,184 217,868 222,000 211,000
Shareholders' equity 3,540,199 3,441,754 6,086,548 4,719,816 7,508,520 9,703,104 8,787,744
(a) 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.
(b) Includes a charge of $730,000 or $.19 per share related to the plan to
exit the medical tape product line.
(c) Includes a nonrecurring restructuring charge of $2,180,353 or $.57 per
share related to the elimination of the Pharmadyne subsidiary.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
was effective immediately. Therefore, the Company is filing this Transition
Report on Form 10-K for the transition period from July 1, 2001 to December 31,
2001.
RESULTS OF OPERATIONS
COMPARISON OF THE SIX-MONTHS ENDED DECEMBER 31, 2001 AND 2000
NET SALES
Net sales were $5,119,391 for the six-month period ended December 31,
2001, a decrease of 37.9% from net sales of $8,245,378 for the six-month period
ended December 31, 2000. The decrease in net sales for the six month period
ended December 31, 2001 was primarily due to decreased conductive product sales
resulting from the sale of the assets of the conductive products division.
Net sales of therapeutic consumer products decreased 17.9% for the
six-month period ended December 31, 2001 to $4,095,055 from $4,986,215 for the
six-month period ended December 31, 2000. The decrease for the six-month period
ended December 31, 2001 was primarily the result of softening demand from
contract manufacturing customers in response to a slowing economy and a weaker
than expected cough/cold season. The decrease in contract manufacturing
therapeutic consumer product sales was partially offset by an increase in LecTec
branded TheraPatch consumer product sales. Management believes that sales of the
Company's therapeutic patch products along with sales of its new skin care
products will represent substantially all of total net sales during calendar
2002 due to increased TheraPatch brand name recognition, anticipated sales
growth of the vapor product and acne products to Novartis Consumer Health, Inc.
and Johnson & Johnson Consumer Products Worldwide respectively, the introduction
of the Company's skin care product line, and the decrease in conductive product
sales due to the sale of the conductive business assets.
Net sales of conductive products (medical electrodes and conductive
hydrogels) decreased by 67.0% for the six-month period ended December 31, 2001
to $1,024,336 from $3,103,727 for the six-month period ended December 31, 2000.
The decrease for the six-month period ended December 31, 2001 was primarily the
result of the sale of the assets of the conductive products division. Under a
manufacturing and supply agreement between the Company and the buyer of the
Company's conductive products division, the Company continued to manufacture,
and supply to the buyer, certain conductive products through January 2002. The
Company supplied the products at its cost of production through October 31,
2001, and at its cost of production plus ten percent from November 1, 2001
through January 31, 2002. The Company will continue to manufacture and supply
the buyer conductive hydrogels, at margins of approximately 30%, through the
second quarter of calendar 2002. The Company expects calendar 2002 conductive
sales to continue to decrease significantly due to the expiration of deliveries
under the manufacturing and supply agreement with the buyer of the Company's
conductive products division.
.
There were no sales of medical tape products for the six-month period
ended December 31, 2001. Medical tape product sales were $155,436 for the
six-month period ended December 31, 2000. The decrease for the six-month period
ended December 31, 2001 resulted from exiting the medical tape business. The
Company expects no medical tape sales in calendar 2002.
Export sales were 2% and 9% of total net sales for the six-month
periods ended December 31, 2001 and 2000 respectively. The decrease for the
current six-month period ended December 31, 2001 resulted primarily from the
absence of conductive product sales as a result of the sale of the assets of the
conductive products division. All international sales were in U. S. dollars with
the exception of TheraPatch brand products sold in Canada. Export sales
decreased by $598,717 in the six-month period ended December 31, 2001 compared
to the six-month period ended
10
December 31, 2000 primarily as a result of the sale of the assets of the
conductive products division. The Company anticipates international sales as a
percent of total net sales in calendar 2002 will be comparable to the six-month
period ended December 31, 2001.
GROSS PROFIT
The Company's gross profit was $1,489,139 for the six-month period
ended December 31, 2001, down from $2,992,804 for the six-month period ended
December 31, 2000. As a percentage of net sales, gross profits were 29.1% and
36.3% for the six-month periods ended December 31, 2001 and 2000. Gross profit
for the six-month period ended December 31, 2001 decreased by 50.2% from the
prior year resulting primarily from decreased sales volumes, lower production
levels and less absorption of overhead expenses. The decrease in gross profit
percent for the six-month period ended December 31, 2001 was also affected by
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 through
October 31, 2001 and at its cost of production plus ten percent thereafter.
SALES AND MARKETING EXPENSES
Sales and marketing expenses totaled $2,308,045 or 45.1% of net sales
for the six-month period ended December 31, 2001, compared to $2,294,571 or
27.8% of net sales for the six-month period ended December 31, 2000. The
increase in sales and marketing expenses as a percent of sales was primarily due
to decreased sales. The Company anticipates sales and marketing expenses as a
percent of sales in calendar 2002 will decrease due to expense reduction
measures initiated in the latter part of calendar 2001.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $1,272,244 or 24.9% of net
sales for the six-month period ended December 31, 2001, compared to $1,459,907
or 17.7% of net sales for the six-month period ended December 31, 2000. The
decrease for the six-month period ended December 31, 2001 was primarily due to a
decrease of $189,000 in payroll related expenses and employment fees which more
than offset a slight increase in other expense categories. The Company
anticipates general and administrative expenses as a percent of sales in
calendar 2002 will decrease due to expense reduction measures initiated in the
latter part of calendar 2001.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses totaled $466,306 or 9.1% of net sales
for the six-month period ended December 31, 2001, compared to $441,523 or 5.4%
of net sales for the six-month period ended December 31, 2000. The increase for
the six-month period ended December 31, 2001 primarily resulted from an increase
of $20,000 in test run production costs associated with new product development.
Management believes that research and development expenditures as a percent of
sales will decrease in calendar 2002.
OTHER INCOME AND EXPENSE
Interest expense totaled $67,558 for the six-month period ended
December 31, 2001 compared to $72,919 for the six-month period ended December
31, 2000. The decrease for the six-month period ended December 31, 2001 was
primarily due to a decrease in interest expense associated with no borrowings on
the line of credit during the period. This decrease was offset by an increase in
interest expense associated with the mortgage agreement. Other income for the
six-month period ended December 31, 2001 was $45,996 compared to other expense
of $13,782 for the six-month period ended December 31, 2000. The current
six-month period increase was primarily the result of increased interest income
due to higher cash and cash equivalent balances.
11
INCOME TAXES
The Company recorded an income tax benefit for the six-month period
ended December 31, 2001 of $16,098, and no income tax expense or benefit for the
six-month period ended December 31, 2000. The income tax benefit for the
six-month period ended December 31, 2001 resulted from a difference between
actual income tax liability and estimated income tax liability for the fiscal
year ended June 30, 2001. There was no income tax benefit recorded for the
six-month period ended December 31, 2000 related to the loss before income taxes
since the tax benefit may not be realizable by the Company.
OPERATIONS SUMMARY
The net loss for the six-month period ended December 31, 2001 resulted
primarily from a decrease in gross profit resulting from a decrease in sales
volumes and the impact of the manufacturing and supply agreement between the
Company and the buyer of the assets of the conductive products division. The
decrease in gross profit was slightly offset by a decrease in general and
administrative expenses associated with payroll related expenses. The net loss
for the six-month period ended December 31, 2000 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 and a shift in the
sales mix toward higher-margin therapeutic consumer products.
COMPARISON OF THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
NET SALES
Net sales were $15,928,832 for the year ended June 30, 2001, an
increase of 9.1% from net sales of $14,596,346 for the year ended June 30, 2000.
Net sales were $12,279,075 for the year ended June 30, 1999. The increase in
both years 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% for the year
ended June 30, 2001 to $9,237,472 from $5,218,199 for the year ended June 30,
2000. Net sales of therapeutic consumer products were $1,804,249 for the year
ended June 30, 1999. The increase for the year ended June 30, 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 for the year ended June 30, 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.
Net sales of conductive products (medical electrodes and conductive
hydrogels) decreased by 11.9% for the year ended June 30, 2001 to $6,563,924
from $7,450,755 for the year ended June 30, 2000. Net conductive product sales
were $7,758,286 for the year ended June 30, 1999. The decrease for the year
ended June 30, 2001 was primarily the result of the sale of the assets of the
conductive products division in the fourth quarter. The decrease for the year
ended June 30, 2000 net sales was primarily due to a decrease in units sold.
Net sales of medical tapes decreased by 93.4% for the year ended June
30, 2001 to $127,436 from $1,927,392 for the year ended June 30, 2000. Net
medical tape sales were $2,716,540 for the year ended June 30, 1999. The
decrease for the year ended June 30, 2001 was primarily the result of exiting
the medical tape business. The decrease for the year ended June 30, 2000 was
primarily the result of reduced sales to low-margin slit roll tape customers.
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 for the years ended June 30,
12
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 for the year ended June 30, 2001 primarily as a result of
the exit from the medical tape business and the sale of the assets of the
conductive products division.
GROSS PROFIT
The Company's gross profit was $5,422,601 for the year ended June 30,
2001, up from $5,121,217 for the year ended June 30, 2000. Gross profit was
$4,093,561 for the year ended June 30, 1999. As a percentage of net sales, gross
profit was 34.0%, 35.1% and 33.3% for the years ended June 30, 2001, 2000 and
1999 respectively. Gross profit for the year ended June 30, 2001 increased 5.9%
from the prior year and gross profit for the year ended June 30, 2000 increased
25.1% from the prior year. The increase in gross profit for the year ended June
30, 2001 resulted primarily from increased sales. The slight decrease in gross
profit percent for the year 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
for the year ended June 30, 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
for the year ended June 30, 2001, compared to $3,672,908 or 25.2% of net sales
for the year ended June 30, 2000, and $2,187,710 or 17.8.% of net sales for the
year ended June 30, 1999. The increase for the year ended June 30, 2001 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 increase for the year
ended June 30, 2000 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.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $2,957,098 or 18.6% of net
sales for the year ended June 30, 2001, compared to $2,598,998 or 17.8% of net
sales for the year ended June 30, 2000, and $2,507,432 or 20.4% of net sales for
the year ended June 30, 1999. The increase for the year ended June 30, 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 for the year
ended June 30, 2000 was primarily the result of an increase of $154,000 in
consulting expense which more than offset a decrease in 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.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses totaled $919,786 or 5.8% of net sales
for the year ended June 30, 2001, compared to $1,094,808 or 7.5% of net sales
for the year ended June 30, 2000, and $1,169,743 or 9.5% of net sales for the
year ended June 30, 1999. The decrease for the year ended June 30, 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 for the year ended
June 30, 2000 primarily reflects a decrease of $60,000 in test-run production
costs.
OTHER INCOME AND EXPENSE
Interest expense totaled $151,272 for the year ended June 30, 2001
compared to $35,405 for the year ended June 30, 2000 and $1,173 for the year
ended June 30, 1999. The increase for the year ended June 30, 2001 was primarily
due to interest expense associated with increased borrowings on the line of
13
credit and interest expense associated with the mortgage agreement. The increase
for the year ended June 30, 2000 was primarily due to interest expense
associated with the line of credit. Gain on disposition of assets totaled
$4,622,210 for the year ended June 30, 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 for the years ended June 30, 2000 and 1999. Other
income decreased to $16,176 for the year ended June 30, 2001 from $27,692 for
the year ended June 30, 2000 and $89,240 for the year ended June 30, 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 for the year ended June 30,
2001 of $48,000, an income tax benefit for the year ended June 30, 2000 of
$38,934 and no income tax expense or benefit for the year ended June 30, 1999.
The income tax expense for the year ended June 30, 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 for the
year ended June 30, 2000 resulted primarily from the refund of taxes previously
paid by the Company's foreign sales corporation. The foreign sales corporation
was dissolved during the year ended June 30, 2000. There was no income tax
benefit recorded during the years ended June 30, 2000 and 1999 related to the
loss before income taxes since the tax benefit may not be realizable by the
Company.
OPERATIONS SUMMARY
The net earnings for the year ended June 30, 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. 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. Excluding the gain and restructuring charge, the
Company incurred a comparable net loss to the year ended June 30, 2000. The net
loss excluding the gain and restructuring charge for the year ended June 30,
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 the year ended June 30, 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 the year ended June 30, 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 related
primarily to expenses associated with the modification of the cotinine license
agreement and achievement of ISO 9001 and EN 46001 certification.
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 decreased by $1,951,518 to $1,425,205 at
December 31, 2001 from $3,376,723 at June 30, 2001. This decrease was primarily
due to the net loss for the six-month period ended December 31, 2001 of
$2,562,920. Accounts receivable decreased by $1,030,397 to $547,838 primarily
due to decreased sales during the period. Inventories decreased by $524,395 to
$1,527,543 primarily due to lower inventory levels required for current
production levels.
Working capital totaled $1,106,202 at December 31, 2001 compared to
$4,279,728 at June 30, 2001. The Company's current ratio was 1.4 at December 31,
2001 compared to 2.4 at June 30, 2001.
Capital spending for equipment totaled $94,580 for the six-month period
ended December 31, 2001. There were no material commitments for capital
expenditures at December 31, 2001. Net
14
property, plant and equipment decreased by $160,400 to $2,262,094 at December
31, 2001 from $2,422,494 at June 30, 2001, reflecting the excess of depreciation
expense over capital spending.
Accounts payable decreased by $547,365 to $628,363 at December 31, 2001
from $1,175,728 at June 30, 2001 primarily due to decreased payables related to
decreased manufacturing production as well as a decrease in the average number
of days outstanding before payment.
The Company finalized a two year extension of its $2,000,000 asset
based line of credit in November 2001 with terms similar to the terms of the
$2,000,000 line of credit as originally finalized in November 1999. There were
no borrowings outstanding on the line of credit at December 31, 2001 and June
30, 2001. The Company was in default at December 31, 2001 with covenants
relating to the minimum book net worth and the maximum loss before taxes. This
was the result of financial results not meeting expectations due to the
softening of the economy, which was magnified by the uncertainties resulting
from the events of September 11. Until the Company cures or gets a waiver for
the covenant defaults, the line of credit is not available for borrowings. The
Company is currently renegotiating the line of credit with the lender.
During the year ended June 30, 2001, the Company entered into a
mortgage agreement with gross proceeds of $820,000. Shareholders' equity
decreased by $2,546,349 to $3,540,199 as of December 31, 2001 from $6,086,548 as
of June 30, 2001, primarily due to the net loss incurred during the six-month
period ended December 31, 2001.
Management expects the Company to continue to operate at a net loss and
experience negative cash flow from operating activities for the foreseeable
future. The Company's existing cash, cash equivalents and secured line of credit
will be insufficient to fund operations in the near term. The Company has
received an offer to factor its receivables and is negotiating advances and a
short-term loan from a customer. In addition, management is exploring other
options for additional capital. Management believes that the Company will have
sufficient cash and borrowing capacity to ensure the Company will continue
operations in the near term.
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 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
six-months ended December 31, 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.
15
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 December 31, 2001 and June 30, 2001, and the related
statements of operations, shareholders' equity, and cash flows for the six
months ended December 31, 2001 and each of the three years in the period ended
June 30, 2001. 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 December 31, 2001 and June 30, 2001, and the results of their
operations and their cash flows for the six months ended December 31, 2001 and
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 the
six months ended December 31, 2001 and 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
January 29, 2002 (except for Note C, as to
which the date is April 10, 2002)
16
LECTEC CORPORATION
BALANCE SHEETS
December 31, June 30,
ASSETS 2001 2001
-------------- -----------
CURRENT ASSETS
Cash and cash equivalents $1,425,205 $3,376,723
Receivables
Trade, net of allowances of $99,000 and $108,500
at December 31, 2001 and June 30, 2001 487,504 1,519,232
Other 60,334 59,003
Inventories 1,527,543 2,051,938
Prepaid expenses and other 290,401 294,437
---------- ----------
Total current assets 3,790,987 7,301,333
PROPERTY, PLANT AND EQUIPMENT
Land 247,731 247,731
Building and improvements 1,971,031 1,971,031
Equipment 4,533,719 4,439,139
Furniture and fixtures 414,857 414,857
---------- ----------
7,167,338 7,072,758
Less accumulated depreciation 4,905,244 4,650,264
---------- ----------
2,262,094 2,422,494
OTHER ASSETS
Patents and trademarks, less accumulated amortization
of $1,227,627 and $1,189,787 at December 31,
2001 and June 30, 2001 297,073 243,949
---------- ----------
$6,350,154 $9,967,776
========== ==========
The accompanying notes are an integral part of these statements.
17
LIABILITIES AND December 31, June 30,
SHAREHOLDERS' EQUITY 2001 2001
-------------- ----------
CURRENT LIABILITIES
Current maturities of long-term obligations $ 938,800 $ 38,311
Accounts payable 628,363 1,175,728
Accrued expenses
Payroll related 349,885 366,467
Retail support programs 328,133 595,509
Restructuring charges 105,232 274,698
Other 259,372 495,892
Customer deposits 75,000 75,000
----------- -----------
Total current liabilities 2,684,785 3,021,605
LONG-TERM OBLIGATIONS, less current maturities 125,170 859,623
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 15,000,000 shares authorized; 3,940,920 and
3,922,384 shares issued and outstanding at December 31, 2001
and June 30, 2001 39,409 39,224
Additional contributed capital 11,360,552 11,344,166
Accumulated deficit (7,859,762) (5,296,842)
----------- -----------
3,540,199 6,086,548
----------- -----------
$ 6,350,154 $ 9,967,776
=========== ===========
18
LECTEC CORPORATION
STATEMENTS OF OPERATIONS
Six months
ended Years ended June 30,
December 31, ----------------------------------------------------
2001 2001 2000 1999
------------ ------------ ------------ ------------
Net sales $ 5,119,391 $ 15,928,832 $ 14,596,346 $ 12,279,075
Cost of goods sold 3,630,252 10,506,231 9,475,129 8,185,514
------------ ------------ ------------ ------------
Gross profit 1,489,139 5,422,601 5,121,217 4,093,561
Operating expenses
Sales and marketing 2,308,045 4,377,580 3,672,908 2,187,710
General and administrative 1,272,244 2,957,098 2,598,998 2,507,432
Research and development 466,306 919,786 1,094,808 1,169,743
Restructuring charge - 303,759 - -
Medical tape asset impairment - - 645,000 -
------------ ------------ ------------ ------------
4,046,595 8,558,223 8,011,714 5,864,885
------------ ------------ ------------ ------------
Loss from operations (2,557,456) (3,135,622) (2,890,497) (1,771,324)
Other income (expenses)
Interest expense (67,558) (151,272) (35,405) (1,173)
Gain on disposition of assets - 4,662,210 - -
Other, net 45,996 16,176 27,692 89,240
------------ ------------ ------------ ------------
Earnings (loss) before income taxes (2,579,018) 1,391,492 (2,898,210) (1,683,257)
Income taxes (16,098) 48,000 (38,934) -
------------ ------------ ------------ ------------
Net earnings (loss) $ (2,562,920) $ 1,343,492 $ (2,859,276) $ (1,683,257)
============ ============ ============ ============
Net earnings (loss) per share
Basic $ (0.65) $ 0.34 $ (0.74) $ (0.43)
Diluted $ (0.65) $ 0.34 $ (0.74) $ (0.43)
Weighted average shares outstanding
Basic 3,925,608 3,911,577 3,885,911 3,906,694
Diluted 3,925,608 3,925,851 3,885,911 3,906,694
The accompanying notes are an integral part of these statements.
19
LECTEC CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common stock Additional other Comprehensive
------------------- contributed comprehensive Accumulated earnings
Shares Amount capital gain (loss) deficit (loss)
-------- -------- ------------- --------------- ------------- ---------------
Balance at July 1, 1998 4,036,000 $40,360 $11,769,053 $ (8,508) $(2,097,801)
Common shares issued upon exercise of options 1,000 10 2,390 - -
Common shares issued in connection with the
employee stock option plan 15,126 151 32,855 - -
Shares repurchased (175,650) (1,756) (541,644) - -
Net loss - - - - (1,683,257) $(1,683,257)
Unrealized loss on securities
available-for-sale - - - (3,333) - (3,333)
---------- -------- ----------- --------- ----------- -----------
Comprehensive loss $(1,686,590)
===========
Balance at June 30, 1999 3,876,476 38,765 11,262,654 (11,841) (3,781,058)
Common shares issued upon exercise of options 500 5 1,295 - -
Common shares issued in connection with the
employee stock purchase plan 27,489 275 52,311 - -
Net loss - - - - (2,859,276) $(2,859,276)
Unrealized gain on securities
available-for-sale - - - 16,686 - 16,686
---------- -------- ----------- --------- ----------- -----------
Comprehensive loss $(2,842,590)
===========
Balance at June 30, 2000 3,904,465 39,045 11,316,260 4,845 (6,640,334)
Realized loss on securities available for
sale - - - (4,845) -
Common shares issued in connection with the
employee stock purchase plan 17,919 179 27,906 - -
Net earnings - - - - 1,343,492 $ 1,343,492
---------- -------- ----------- --------- ----------- -----------
Comprehensive earnings $ 1,343,492
===========
Balance at June 30, 2001 3,922,384 39,224 11,344,166 - (5,296,842)
Common shares issued in connection with the
employee stock purchase plan 18,536 185 16,386 - -
Net loss - - - - (2,562,920) $(2,562,920)
---------- -------- ----------- --------- ----------- -----------
Comprehensive loss $(2,562,920)
===========
Balance at December 31, 2001 3,940,920 $39,409 $11,360,552 $ - $(7,859,762)
========= ======== =========== ========= ===========
The accompanying notes are an integral part of these statements.
20
LECTEC CORPORATION
STATEMENTS OF CASH FLOWS
Six months
ended Years ended June 30,
December 31, --------------------------------------------------
2001 2001 2000 1999
-------------- ----------- ----------- -----------
Cash flows from operating activities:
Net earnings (loss) $(2,562,920) $ 1,343,492 $(2,859,276) $(1,683,257)
Adjustments to reconcile net earnings (loss) to net
cash 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 292,820 521,276 908,024 851,087
Deferred income taxes - - 157,000 -
Changes in operating assets and
liabilities, net of dispositions:
Trade and other receivables 1,030,397 (297,647) (294,165) (61,620)
Refundable income taxes - - - 52,000
Inventories 524,395 (177,646) (336,162) (278,513)
Prepaid expenses and other 4,036 (73,923) (45,840) (71,611)
Accounts payable (547,365) (103,675) 265,643 835,761
Accrued expenses (689,944) 337,513 42,917 167,154
Customer deposits - (85,000) 160,000 -
----------- ----------- ----------- -----------
Net cash used in operating activities (1,948,581) (2,923,122) (1,271,859) (188,999)
Cash flows from investing activities:
Purchase of property, plant and equipment (94,580) (371,906) (424,448) (419,469)
Investment in patents and trademarks (90,964) (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 (185,544) 6,164,943 (563,001) (498,982)
Cash flows from financing activities:
Issuance of common stock 16,571 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 187,832 867,703 33,649 36,849
Repayment of long-term obligations (21,796) (23,515) (11,771) (4,981)
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities 182,607 34,731 913,006 (476,526)
----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (1,951,518) 3,276,552 (921,854) (1,164,507)
Cash and cash equivalents - beginning 3,376,723 100,171 1,022,025 2,186,532
----------- ----------- ----------- -----------
Cash and cash equivalents - end $ 1,425,205 $ 3,376,723 $ 100,171 $ 1,022,025
=========== =========== =========== ===========
21
LECTEC CORPORATION
STATEMENTS OF CASH FLOWS - CONTINUED
Six months
ended Years ended June 30,
December 31, --------------------------------------------------
2001 2001 2000 1999
-------------- ----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 57,600 $ 161,664 $ 28,085 $ 792
Cash paid during the year for income taxes $ 56,000 $ 2,000 $ - $ 22,010
The accompanying notes are an integral part of these statements.
22
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 and
Asia. 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 has had investments which were classified as available-for-sale
and were reported at fair value. The Company utilized the specific
identification method in computing realized gains and losses on these
investments.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market and consist of the following:
December 31, June 30,
2001 2001
------------ ----------
Raw materials $1,159,685 $1,517,167
Work in process 5,198 4,850
Finished goods 362,660 529,921
---------- ----------
$1,527,543 $2,051,938
========== ==========
23
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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 and 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 when the product has been shipped and accepted by the
customer and collection is probable.
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 $682,000, $1,233,000,
$536,000 and $271,000, for the six months ended December 31, 2001 and the
years ended June 30, 2001, 2000 and 1999.
Research and Development
Research and development costs are expensed as incurred.
24
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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 1,203,763, 1,044,129, 1,048,205
and 897,506 shares of common stock with a weighted average exercise price of
$4.75, $5.39, $6.07 and $7.54 were outstanding during the six months ended
December 31, 2001 and 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
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE B - CHANGE IN YEAR END
Effective September 5, 2001, the Company changed its year end to December 31
from June 30.
The following unaudited condensed information presents the six month period
ended December 31, 2000 and is presented for comparative purposes to the six
month period ended December 31, 2001, which is included in the financial
statements.
STATEMENT OF OPERATIONS STATEMENT OF CASH FLOWS
----------------------- -----------------------
Six months ended Six months ended
December 31, 2000 December 31, 2000
----------------- -----------------
Net sales $ 8,245,378 Cash flows from operating
Cost of goods sold 5,252,574 activities $ 112,252
-----------
Gross profit 2,992,804 Cash flows from investing activities:
Purchase of property and equipment (183,651)
Operating expenses 4,196,000 Investment in patents and trademarks (85,789)
----------- Proceeds from the sale of investments 11,076
Loss from operations (1,203,196) ---------
Net cash used in investing
Other expense, net (86,701) activities (258,364)
-----------
Loss before income taxes (1,289,897) Cash flows from financing activities:
Issuance of common stock 16,681
Income taxes - Net repayments on note payable (494,217)
----------- Proceeds from borrowing on
Net loss $(1,289,897) long-term obligations 820,000
=========== Repayment of long-term
obligations (10,903)
---------
Net cash provided by financing
activities 331,561
---------
Net increase in cash and cash
equivalents 185,449
Cash and cash equivalents at
beginning of period 100,171
---------
Cash and cash equivalents at
end of period $ 285,620
=========
26
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE C - LIQUIDITY
Since inception, the Company has experienced negative cash flows and incurred
net losses, resulting in an accumulated deficit of $7,859,762 at December 31,
2001. Management expects to continue to operate at a net loss and experience
negative cash flow from operating activities.
The Company has received an offer to factor its receivables and is
negotiating advances and a short-term loan from a customer. In addition,
management is exploring other options for additional capital. Management
believes that the Company has sufficient cash and borrowing capacity to
ensure the Company will continue operations in the near term.
NOTE D - NOTE PAYABLE TO BANK
The Company maintains a secured line of credit with a maximum borrowing of
$2,000,000 as defined in the agreement. The credit agreement expires November
22, 2003 and includes interest computed at the prime rate plus 3% (effective
rate of 7.75% and 9.75% at December 31, 2001 and June 30, 2001). The
agreement includes a minimum annual interest charge for each year of the
agreement ($50,000, $80,000 and $95,000 for the years ended November 22,
2002, 2001 and 2000). There were no borrowings outstanding on the line of
credit at December 31, 2001. The Company was not in compliance with certain
covenants at December 31, 2001. Borrowings under the credit agreement are
collateralized by substantially all of the Company's assets.
NOTE E - LONG-TERM OBLIGATIONS
The Company has a mortgage note payable to a bank. The principal balance of
$820,000 at December 31, 2001 and June 30, 2001, is due in December 2002 with
monthly interest payments due computed at the prime rate plus 5% (effective
rate of 9.75% at December 31, 2001 and 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 $8,015 including interest up to 19.1% through June 2005,
collateralized by equipment.
27
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE E - LONG-TERM OBLIGATIONS - Continued
Maturities of long-term obligations are as follows:
Years ending December 31:
2002 $ 938,800
2003 114,400
2004 8,200
2005 2,570
----------
$1,063,970
==========
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 $98,215, $265,595, $260,481 and $250,641 for the six months ended
December 31, 2001 and years ended June 30, 2001, 2000 and 1999. The Company
also leases various equipment under operating leases that expire December,
2004.
Future minimum lease commitments under all operating leases are as follows:
Years ending December 31:
-------------------------
2002 $142,800
2003 2,300
2004 1,900
28
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE F - COMMITMENTS AND CONTINGENCIES - Continued
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 $35,561, $86,750, $81,474 and $71,006 for
the six months ended December 31, 2001 and the years ended June 30, 2001,
2000 and 1999. The Company may also make a discretionary contribution. No
discretionary contributions were made for the six months ended December 31,
2001 and each of the three years ended June 30, 2001, 2000 and 1999.
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.
NOTE G - INCOME TAXES
Income tax expense (benefit) consists of the following:
Six months
ended Years ended June 30,
December 31, ---------------------------------------------
2001 2001 2000 1999
------------ -------- ---------- --------
Current $(16,098) $48,000 $(195,934) $ -
Deferred - - 157,000 -
-------- ------- --------- ------
$(16,098) $48,000 $ (38,934) $ -
======== ======= ========= ======
29
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE G - INCOME TAXES - Continued
Differences between income tax expense (benefit) and the statutory federal
income tax rate of 34% are as follows:
June 30,
December 31, --------------------------
2001 2001 2000 1999
------------ ---- ---- ----
Federal statutory income tax rate (34.0)% 34.0% (34.0)% (34.0)%
State income taxes, net of federal effect .1 .1 .1 --
Change in valuation allowance 42.0 (35.4) 33.6 34.4
Other (8.7) 4.8 (1.0) (.4)
----- ----- ----- -----
(.6)% 3.5% (1.3)% --
===== ===== ===== =====
Deferred tax assets and liabilities consists of the following:
December 31, June 30,
2001 2001
------------ ------------
Current assets and liabilities:
Inventories $ 79,200 $ 150,500
Vacation pay 63,300 57,300
Restructuring accrual 48,300 109,400
Other 120,500 227,800
----------- -----------
Net current asset 311,300 545,000
Long-term assets and liabilities:
Net operating loss carryforwards 2,788,300 1,640,000
Tax credit carryforwards 316,300 287,600
Tax depreciation in excess of book depreciati (83,200) (210,100)
Charitable contribution carryforwards 14,300 --
Other 68,300 70,200
----------- -----------
Net long-term asset 3,104,000 1,787,700
----------- -----------
Net deferred tax asset 3,415,300 2,332,700
Less valuation allowance (3,415,300) (2,332,700)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
30
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE G - INCOME TAXES - Continued
At December 31, 2001, the Company has available net operating loss
carryforwards of approximately $8,200,000 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. The Company continually reviews the adequacy of the
valuation allowance and recognizes those benefits only as the Company's
assessment indicates that it is more likely than not that future tax benefits
will be realized.
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 18,536, 17,919, 27,489 and 15,126
shares in connection with purchases by employees for $16,571, $28,085,
$52,586 and $33,006 for the six months ended December 31, 2001 and three
years ended June 30, 2001, 2000 and 1999.
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 751,000 shares of common
stock are available for grants of options under the plans at December 31,
2001. 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.
31
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE H - EQUITY TRANSACTIONS - Continued
A summary of the Company's stock option transactions for the six months ended
December 31, 2001 and the years ended June 30, 2001, 2000 and 1999 is as
follows:
Weighted average
Number of shares exercise price
---------------- --------------
Outstanding at July 1, 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
Granted 109,000 1.82
Exercised -- --
Canceled (167) 2.94
---------
Outstanding at December 31, 2001 1,244,448 4.60
=========
A total of 754,709, 716,667, 604,971 and 593,876 options were exercisable at
December 31, 2001, June 30, 2001, 2000 and 1999, with a weighted average
price of $6.02, $5.93, $6.54 and $7.83.
32
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE H - EQUITY TRANSACTIONS - Continued
The following information applies to grants that are outstanding at December
31, 2001:
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
--------------- ----------- ---------------- -------- ----------- --------
$1.75 - $2.50 427,500 4.1 years $2.09 88,918 $ 2.05
$2.75 - $3.88 322,200 3.0 years 2.93 191,043 2.96
$4.38 - $6.25 175,500 5.9 years 5.36 155,500 5.42
$6.63 - $9.52 181,248 3.5 years 7.98 181,248 7.98
$10.00 - $11.25 138,000 4.4 years 10.91 138,000 10.91
--------- -------
1,244,448 754,709
========= =======
The weighted average fair value of the options granted during the six months
ending December 31, 2001 and the years ending June 30, 2001, 2000 and 1999
was $1.29, $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 during
the six months ending December 31, 2001 and the years ending June 30, 2001,
2000 and 1999: zero dividend yield, expected volatility of 95%, 96%, 74% and
62%, risk-free interest rate of 4.18%, 4.97%, 6.53% and 5.77% and expected
lives of 4.0 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
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE H - EQUITY TRANSACTIONS - Continued
The Company's net earnings (loss) and net earnings (loss) per share for the
six months ending December 31, 2001 and the years ending June 30, 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.
Six months ended
December 31, Years ended June 30,
------------------------ -------------------------------------------------------------------------------
2001 2001 2000 1999
As reported Pro forma As reported Pro forma As reported Pro forma As reported Pro forma
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Net earnings (loss) $(2,562,920) $(2,745,293) $1,343,492 $873,179 $(2,859,276) $(3,447,381) $(1,683,257) $(2,201,974)
Net earnings (loss)
per share - $(.65) $(.70) $.34 $.22 $(.74) $(.89) $(.43) $(.56)
basic/diluted
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. There were no shares repurchased during the six months ending
December 31, 2001 and years ended June 30, 2001 and 2000. During the year
ended June 30, 1999, the Company repurchased 175,650 shares for $543,400.
Warrants
The Company has outstanding warrants to an outside party to purchase 12,953
shares of common stock. The warrants are fully exercisable and entitle the
holder to purchase common stock at $6.25 per share until November 20, 2004.
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
34
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE I - SEGMENT INFORMATION - Continued
and 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 ending June 30, 2001, but
continues to manufacture conductive products for the buyer. Net sales by
major product line were as follows:
Six months
ended Years ended June 30,
December 31, ----------------------------------------
2001 2001 2000 1999
----------- ---- ---- ----
Conductive products $1,024,336 $ 6,563,924 $ 7,450,755 $ 7,758,286
Medical tape products -- 127,436 1,927,392 2,716,540
Therapeutic consumer products 4,095,055 9,237,472 5,218,199 1,804,249
---------- ----------- ----------- -----------
$5,119,391 $15,928,832 $14,596,346 $12,279,075
========== =========== =========== ===========
Export sales accounted for approximately 2%, 8%, 13% and 13% of total net
sales during the six months ended December 31, 2001 and 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 the year ended June 30, 2001 and 2000 and
accounted for all the export sales other than to Canada and Asia. Export
sales by geographic area were as follows:
Six months
ended Years ended June 30,
December 31, ----------------------------------------
2001 2001 2000 1999
------------ ---- ---- ----
Europe $ -- $ 815,796 $1,006,412 $1,216,199
Latin America -- 139,613 547,904 371,654
Asia 46,512 72,851 46,279 31,935
Canada 80,146 215,686 298,884 7,011
Middle East -- -- 10,272 --
Other -- 7,950 25,962 28,333
---------- ---------- ---------- ----------
$ 126,658 $1,251,896 $1,935,713 $1,655,132
========== ========== ========== ==========
35
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE J - MAJOR CUSTOMERS
The Company had sales greater than 10% to the following customers:
Year ended
Six months ended June 30,
December 31, ------------------------
2001 2001 2000 1999
---------------- ---- ---- ----
Customers:
A 33% 20% * *
B 14% 16% * *
C 20% * * *
D * 12% 17% 22%
*Sales were less than 10%.
The accounts receivable from customer A represented 13% and 18% of trade
receivables at December 31, 2001 and June 30, 2001. The accounts receivable
from customer B represented 19% of trade receivables at December 31, 2001 and
June 30, 2001. The accounts receivable from customer C represented 14% and
15% of trade receivables at December 31, 2001 and June 30, 2001. Management
believes that the loss of these three major customers could have a material
adverse effect on the Company. There were no accounts receivable from
customer D at June 30, 2001 as this conductive products customer will no
longer generates sales due to the sale of the Company's conductive business
assets during the year ended June 30, 2001.
NOTE K - RECENT ACCOUNTING PRONOUNCEMENTS
In July 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. The
Company is currently reviewing the affect of these Statements on their
financial statements.
In September 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations and SFAS 144, Accounting for the Impairment or Disposal of
Long-lived Assets. SFAS 143 gives guidance on the accounting for asset
retirement obligations. SFAS 144 clarifies the guidance used to measure
impairment and clarifies the accounting for disposals of long-lived assets.
These Statements are effective for the Company for the year ended December
31, 2002. The Company is currently reviewing the affect of these Statements
on their financial statements.
36
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE L - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarter ended Quarter ended
September 30, 2001 December 31, 2001
------------------ -----------------
Net sales $2,725,261 $2,394,130
Gross profit 940,681 548,458
Net loss (1,190,124) (1,372,796)
Net loss per share
Basic and diluted $(.30) $(.35)
Weighted average common shares outstanding
Basic and diluted 3,922,384 3,928,831
Year ended June 30, 2001
------------------------------------------------------------------------
First quarter Second quarter Third quarter* Fourth quarter**
------------- -------------- -------------- ----------------
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
* Includes a gain of $103,624 from the disposition of the Medical Tape
assets (see note M).
** Includes a gain of $4,558,586 from the sale of the Conductive Business
assets and a related restructuring charge of $303,759 (see note N).
37
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE L - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - Continued
Year ended June 30, 2000
------------------------------------------------------------------------
First quarter Second quarter Third quarter Fourth quarter*
------------- -------------- ------------- ---------------
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 and diluted $ (0.16) $ (0.20) $ (0.17) $ (0.21)
Weighted average common shares
outstanding
Basic and diluted 3,876,476 3,881,352 3,890,494 3,895,479
* Includes a charge of $645,000 relating to the disposition of Medical
Tape assets (see note M).
NOTE M - 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 N - SALE OF CONDUCTIVE BUSINESS ASSETS AND RESTRUCTURING
During the fourth quarter of the year ending June 30, 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 the six
months ending December 31, 2001 and a portion of the year ending December 31,
2002. The Company will supply the products at its cost of production through
October 31, 2001 and at its cost of production plus 10% until January 31,
2002. Thereafter, the Company will supply the products at normal margins.
38
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE N - 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:
Six months
ended Year ended June 30,
December 31, ---------------------------------------
2001 2001 2000 1999
------------ ---- ---- ----
Net sales
Conductive products $ 1,024,000 $ 6,564,000 $ 7,451,000 $ 7,758,000
Medical tape products -- 127,000 1,927,000 2,717,000
----------- ----------- ----------- -----------
1,024,000 6,691,000 9,378,000 10,475,000
Cost of good sold
Conductive products 1,019,000 4,940,000 5,230,000 4,780,000
Medical tape products -- 178,000 2,048,000 2,685,000
----------- ----------- ----------- -----------
1,019,000 5,118,000 7,278,000 7,465,000
----------- ----------- ----------- -----------
Gross profit $ 5,000 $ 1,573,000 $ 2,100,000 $ 3,010,000
=========== =========== =========== ===========
A non-recurring restructuring charge of $303,759 was incurred in the fourth
quarter of the year ending June 30, 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. During the six months ending December 31, 2001 and the year ended
June 30, 2001, the separation costs include the termination of 23 production
and 4 administrative employees. The total restructuring charge decreased the
June 30, 2001 net income per basic and diluted share by $.08. The Company
expects to complete the restructuring during fiscal year ending December 31,
2002.
Selected information regarding the restructuring accrual 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)
--------- --------- --------- ---------
Accrual at June 30, 2001 101,996 122,702 50,000 274,698
Payments (80,066) (61,350) (28,050) (169,466)
--------- --------- --------- ---------
Accrual at December 31, 2001 $ 21,930 $ 61,352 $ 21,950 $ 105,232
========= ========= ========= =========
39
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item with respect to directors will
be included under the heading "Election of Directors" in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held in
June 2002, and is incorporated herein by reference. The information required
under this item with respect to executive officers is included under the heading
"Executive Officers of the Registrant" of Item 1 of this Form 10-K. The
information required under this item with respect to officers, directors and
persons who beneficially own more than 10% of the Company's Common Stock will be
included under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held in June 2002, and is incorporated herein by
reference.
Item 11. EXECUTIVE COMPENSATION
The information required under this item will be included under the
heading "Executive Compensation" in the Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held in June 2002, and is incorporated
herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item will be included under the
heading "Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held in June 2002, and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item with respect to certain
relationships and related transactions will be included under the heading
"Certain Relationships and Related Transactions" in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held in June
2002, and is incorporated herein by reference.
40
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 December 31, 2001and June 30, 2001
(iii) Statements of Operations for the six months ended
December 31, 2001 and the years ended June 30, 2001,
2000 and 1999
(iv) Statements of Shareholders' Equity for the six months
ended December 31, 2001 and for the years ended June
30, 2001, 2000 and 1999
(v) Statements of Cash Flows for the six months ended
December 31, 2001 and for the years ended June 30,
2001, 2000 and 1999
(vi) Notes to Financial Statements
2. Financial Statement Schedules
(i) Schedule II - Valuation and Qualifying Accounts, for
the six months ended December 31, 2001 and 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)
41
10.05 First amendment dated May 5, 1997 between LecTec
Corporation and Rushmore Plaza Partners Limited
Partnership (2)
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)
10.21 Fifth Amendment to Credit and Security Agreement and
Waiver of Defaults by and Between LecTec Corporation
and Wells Fargo Business Credit, Inc. dated November
13, 2001 (13)
23.01 Consent of Grant Thornton LLP (13)
42
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 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
None.
43
LecTec Corporation
Schedule II
Valuation and Qualifying Accounts
Six Months Ended December 31, 2001 and the Three Years Ended June 30, 2001
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
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
Six months ended Dec. 31, 2001 108,453 16,500 -- 25,944 99,009
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
Six months ended Dec. 31, 2001 570,798 201,887 -- 514,969 257,716
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
Six months ended Dec. 31, 2001 128,790 60,000 -- 99,635 89,155
44
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 15th day of
April, 2002.
LECTEC CORPORATION
/s/Rodney A. Young
-----------------------
Rodney A. Young
Chairman, Chief Executive Officer and President
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Rodney A. Young and Douglas J. Nesbit (with full
power to act alone), as his or her true and lawful attorneys-in-fact and agents,
with full powers of substitution and re-substitution, for him or her and in his
or her name, place and stead, in any and all capacities, to sign any and all
amendments to the Transition Report on Form 10-K of LecTec Corporation, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, lawfully do or cause to be done by virtue
hereof.
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 April 15, 2002
- -----------------------------------------------
Rodney A. Young
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
/s/Douglas J. Nesbit April 15, 2002
- -----------------------------------------------
Douglas J. Nesbit
Chief Financial Officer
(Principal Financial Officer and Accounting Officer)
/s/Lee M. Berlin April 15, 2002
- -----------------------------------------------
Lee M. Berlin
Director
/s/Bert J. McKasy April 15, 2002
- -----------------------------------------------
Bert J. McKasy
Director
/s/Marilyn K. Speedie April 15, 2002
- -----------------------------------------------
Marilyn K. Speedie
Director
/s/Donald C. Wegmiller April 15, 2002
- -----------------------------------------------
Donald C. Wegmiller
Director
45
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).
46
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).
10.21 Fifth Amendment to Credit and Security Agreement and Waiver of
Defaults by and Between LecTec Corporation and Wells Fargo Business
Credit, Inc. dated November 13, 2001. (Filed herewith)
23.01 Consent of Grant Thornton LLP. (Filed herewith)
99.01 Cautionary Statements. (Filed herewith)
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. (7)
47
(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.
48