SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________to________
Commission file number: 0-16159
LECTEC CORPORATION
------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-1301878
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10701 Red Circle Drive, Minnetonka, Minnesota 55343
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 933-2291
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of February
10, 2000 was 3,890,494 shares.
LECTEC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements and Notes to Financial Statements............. I-1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. I-7
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... I-11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. II-1
Item 2. Changes in Securities and Use of Proceeds.......................... II-1
Item 3. Defaults Upon Senior Securities.................................... II-1
Item 4. Submission of Matters to a Vote of Security Holders................ II-1
Item 5. Other Information.................................................. II-1
Item 6. Exhibits and Reports on Form 8-K................................... II-2
Signature Page..................................................... II-3
PART I - FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS AND NOTES TO FINANCIAL STATEMENTS
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1999 1999
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 20,491 $ 1,022,025
Receivables
Trade, net of allowances of $115,035 (unaudited) and $101,751
at December 31, 1999 and June 30, 1999 1,960,300 2,335,314
Refundable income taxes -- 7,544
Other 5,965 8,687
----------- -----------
1,966,265 2,351,545
Inventories
Raw materials 1,728,921 1,324,973
Work-in-process 2,190 69,324
Finished goods 416,752 602,227
----------- -----------
Total inventories 2,147,863 1,996,524
Prepaid expenses and other 245,260 174,674
Deferred income taxes 354,000 354,000
----------- -----------
Total current assets 4,733,879 5,898,768
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 247,731 247,731
Building and improvements 1,937,568 1,841,742
Equipment 7,308,394 7,157,016
Furniture and fixtures 413,013 413,013
----------- -----------
9,906,706 9,659,502
Less accumulated depreciation 6,031,174 5,631,011
----------- -----------
3,875,532 4,028,491
OTHER ASSETS
Patents and trademarks, less accumulated amortization of $1,228,437
(unaudited) and $1,154,698 at December 31, 1999 and June 30, 1999 170,267 199,971
Other 5,343 5,343
----------- -----------
175,610 205,314
----------- -----------
$ 8,785,021 $10,132,573
=========== ===========
See accompanying notes to the consolidated financial statements.
I-1
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, June 30,
1999 1999
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,678,195 $ 1,676,776
Accrued expenses
Payroll related 392,075 403,075
Retail support programs 208,303 165,472
Other 172,562 181,730
------------ ------------
Total current liabilities 2,451,135 2,427,053
DEFERRED INCOME TAXES 197,000 197,000
SHAREHOLDERS' EQUITY
Common stock, $.01 par value: 15,000,000 shares authorized;
3,890,494 shares (unaudited) and 3,876,476 shares issued
and outstanding at December 31, 1999 and June 30, 1999 38,905 38,765
Additional paid-in capital 11,289,329 11,262,654
Accumulated other comprehensive loss (11,841) (11,841)
Deficit in retained earnings (5,179,507) (3,781,058)
------------ ------------
6,136,886 7,508,520
------------ ------------
$ 8,785,021 $ 10,132,573
============ ============
See accompanying notes to the consolidated financial statements.
I-2
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
December 31, December 31,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net sales $ 3,299,705 $ 3,103,277 $ 6,308,457 $ 6,006,334
Cost of goods sold 2,236,691 2,177,539 4,306,162 4,063,343
----------- ----------- ----------- -----------
Gross profit 1,063,014 925,738 2,002,295 1,942,991
Operating expenses
Sales and marketing 863,655 545,938 1,598,700 879,471
General and administrative 688,783 781,630 1,247,873 1,368,091
Research and development 310,202 286,025 579,964 566,038
----------- ----------- ----------- -----------
1,862,640 1,613,593 3,426,537 2,813,600
----------- ----------- ----------- -----------
Loss from operations (799,626) (687,855) (1,424,242) (870,609)
Other income, net 4,459 26,987 25,793 58,788
----------- ----------- ----------- -----------
Loss before income taxes (795,167) (660,868) (1,398,449) (811,821)
Income tax expense -- 348 -- 1,612
----------- ----------- ----------- -----------
Net loss $ (795,167) $ (661,216) $(1,398,449) $ (813,433)
=========== =========== =========== ===========
Net loss per share - basic and diluted $ (0.20) $ (0.17) $ (0.36) $ (0.21)
=========== =========== =========== ===========
Weighted average shares outstanding - basic and diluted 3,881,352 3,907,995 3,878,914 3,945,599
=========== =========== =========== ===========
See accompanying notes to the consolidated financial statements.
I-3
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended December 31,
-----------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,398,449) $ (813,433)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 473,902 451,861
Changes in operating assets and liabilities:
Trade and other receivables 385,280 (424,723)
Refundable income taxes -- 52,000
Inventories (151,339) (166,901)
Prepaid expenses and other (70,586) (125,614)
Accounts payable 1,419 608,632
Accrued expenses 22,663 (50,539)
----------- -----------
Net cash used in operating activities (737,110) (468,717)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (247,204) (177,038)
Investment in patents and trademarks (44,035) (53,448)
----------- -----------
Net cash used in investing activities (291,239) (230,486)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 26,815 --
Repurchases and retirement of common stock -- (464,874)
----------- -----------
Net cash provided by (used) in financing activities 26,815 (464,874)
----------- -----------
Net decrease in cash and cash equivalents (1,001,534) (1,164,077)
Cash and cash equivalents at beginning of period 1,022,025 2,186,532
----------- -----------
Cash and cash equivalents at end of period $ 20,491 $ 1,022,455
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $ 2,137 $ --
Income taxes -- 22,010
See accompanying notes to the consolidated financial statements.
I-4
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
(1) GENERAL
The accompanying consolidated financial statements include the accounts
of LecTec Corporation (the "Company") and LecTec International Corporation, a
wholly-owned subsidiary which was dissolved and merged into LecTec Corporation
on December 31, 1999. All significant intercompany balances and transactions
have been eliminated in consolidation. The Company's financial statements for
the three months and six months ended December 31, 1999 should be read in
conjunction with its Annual Report on Form 10-K and its Annual Report to
Shareholders for the fiscal year ended June 30, 1999. The interim financial
statements are unaudited and in the opinion of management, reflect all
adjustments necessary for a fair presentation of results for the periods
presented. Results for interim periods are not necessarily indicative of results
for the year.
(2) NET LOSS
The Company's basic net loss per share amounts have been computed by
dividing net loss by the weighted average number of outstanding common shares.
The Company's diluted net loss per share amounts have been computed by dividing
net loss by the weighted average number of outstanding common shares and common
share equivalents, when dilutive. Options and warrants to purchase 1,044,003 and
873,066 shares of common stock with a weighted average exercise price of $6.20
and $7.70 were outstanding during the three months ended December 31, 1999 and
1998, but were excluded because they were antidilutive. Options and warrants to
purchase 1,093,443 and 870,323 shares of common stock with a weighted average
exercise price of $6.35 and $7.72 were outstanding during the six months ended
December 31, 1999 and 1998, but were excluded because they were antidilutive.
(3) COMPREHENSIVE LOSS
For the quarter and six months ended December 31, 1999 and 1998, there
were no items which the Company is required to recognize as components of
comprehensive income (loss), therefore comprehensive loss was the same as net
loss.
(4) SEGMENTS
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 has similar economic characteristics,
technology, manufacturing processes, and regulatory environments. Customers and
distribution and marketing strategies vary within major product lines as well as
overlap between major product lines. The Company's executive decision makers
evaluate sales performance based on the total sales of each major product line
and profitability on a total company basis, due to shared infrastructures, to
make operating and strategic decisions. Net sales by major product line were as
follows:
Three months ended December 31, 1999 1998
---------- ----------
Conductive products $1,927,578 $1,955,025
Medical tape products 452,572 718,537
Therapeutic consumer products 919,555 429,715
---------- ----------
$3,299,705 $3,103,277
========== ==========
I-5
Six months ended December 31, 1999 1998
---------- ----------
Conductive products $3,504,361 $3,929,571
Medical tape products 1,021,362 1,466,420
Therapeutic consumer products 1,782,734 610,343
---------- ----------
$6,308,457 $6,006,334
========== ==========
(5) LINE OF CREDIT AND LIQUIDITY
In November 1999, the Company finalized a $2,000,000 line of credit
which expires in November 2001. The line of credit is secured by the Company's
receivables, inventory and equipment, and bears interest at the lending bank's
prime rate plus three percentage points. There were no borrowings outstanding on
the line of credit as of December 31, 1999, nor during the three months then
ending. The credit agreement contains certain restrictive covenants which
require the Company to maintain, among other things, specified levels of net
worth and not to exceed specified cumulative losses. Defaults by the Company on
certain financial covenants as of November 30 and December 31, 1999 were waived
by the bank in February 2000 and the line of credit agreement was amended to
adjust specified levels of these covenants for the months ending January 31 and
February 29, 2000.
The Company experienced negative cash flow from operations of $737,110
for the six months ending December 31, 1999. This cash requirement was satisfied
principally from existing cash balances. Management believes that internally
generated cash flow and the new line of credit will be sufficient to support
operating requirements in the near term.
(6) STOCK REPURCHASE PROGRAM
In April 1998, the Company's Board of Directors authorized a stock
repurchase program pursuant to which up to 500,000 shares, or approximately
12.4% of the Company's outstanding common stock, may be repurchased. The shares
may be purchased from time to time through open market transactions, block
purchases, tender offers, or in privately negotiated transactions. The total
consideration for all shares repurchased under this program cannot exceed
$2,000,000. During the quarter ended December 31, 1999 no shares were
repurchased and during the quarter ended December 31, 1998, 74,800 shares were
repurchased for $223,663. During the six months ended December 31, 1999 no
shares were repurchased and during the six months ended December 31, 1998,
165,650 shares were repurchased for $524,338. Through December 31, 1999 the
Company has repurchased a total of 205,150 shares at a cost of $667,963 under
this program.
(7) 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 of which 14,018 shares were purchased by employees
for $26,815 during the first six months of fiscal 2000. As of December 31, 1999
employees have purchased a total of 29,144 shares for $59,821.
I-6
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
QUARTERS AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
RESULTS OF OPERATIONS
Net sales for the second quarter of fiscal 2000 were $3,299,705
compared to net sales of $3,103,277 for the second quarter of fiscal 1999, an
increase of 6.3%. The increase was primarily the result of increased therapeutic
consumer product sales which more than offset decreased medical tape and
conductive product sales. Therapeutic consumer product sales increased by 114.0%
from $429,715 to $919,555 while conductive product sales, the Company's largest
product group, decreased slightly by 1.4% and medical tape product sales
decreased by 37.0%. The therapeutic consumer product sales increase was
primarily the result of increased TheraPatch(R) sales volume, especially
TheraPatch Vapor products. The decrease in medical tape product sales was
primarily due to the absence of sales to a former low-margin slit roll tape
customer and decreases in sales volume to several other low-margin medical tape
customers.
Net sales for the first six months of fiscal 2000 were $6,308,457
compared to net sales of $6,006,334 for the first six months of fiscal 1999, an
increase of 5.0%. The increase was primarily the result of increased therapeutic
consumer product sales which more than offset decreased medical tape and
conductive product sales. Therapeutic consumer product sales increased by 192.1%
from $610,343 to $1,782,734 while conductive product sales, the Company's
largest product group, decreased by 10.8% and medical tape product sales
decreased by 30.4%. The therapeutic consumer product sales increase was
primarily the result of increased TheraPatch sales volume, especially TheraPatch
Vapor products. The conductive product sales decrease was primarily the result
of the absence of sales to a former customer who began manufacturing their own
product in the fourth quarter of fiscal 1999. Sales to the former customer in
the first six months of fiscal 1999 were approximately $338,000. Medical tape
product sales decreased primarily due to reduced sales to a low-margin slit roll
tape customer and decreases in sales volume to several other low-margin medical
tape customers.
Gross profit for the second quarter of fiscal 2000 was $1,063,014
compared to $925,738 for the second quarter of fiscal 1999, an increase of
14.8%. Gross profit as a percent of net sales for the second quarter of fiscal
2000 was 32.2% compared to 29.8% for the second quarter of fiscal 1999. The
increase in gross profit for the quarter resulted primarily from the favorable
impact of a change in the sales mix toward higher-margin therapeutic consumer
products and increased sales volume which more than offset increased labor
costs. Labor costs were higher in the current quarter primarily due to an
increase in staffing levels and overtime related to the production of
therapeutic patch products.
Gross profit for the first six months of fiscal 2000 was $2,002,295
compared to $1,942,991 for the first six months of fiscal 1999, an increase of
3.1%. Gross profit as a percent of net sales for the first six months of fiscal
2000 was 31.7% compared to 32.3% for the first six months of fiscal 1999. The
increase in gross profit dollars for the six months resulted primarily from the
favorable impact of a change in the sales mix toward higher-margin therapeutic
consumer products which more than offset increased labor, depreciation, and
repairs and maintenance expense. Labor costs were higher in the current six
months primarily due to an increase in staffing levels and overtime related to
the production of therapeutic patch products.
Sales and marketing expenses were $863,655 and $545,938 during the
second quarters of fiscal 2000 and 1999, and as a percentage of net sales, were
26.2% and 17.6%. The increase in sales and marketing expense for the quarter was
primarily due to increased cooperative and media advertising expenses and retail
slotting fees related to sales of the TheraPatch product line. The Company
anticipates that sales and marketing expenses as a percent of sales for the
remainder of fiscal 2000 will
I-7
be comparable to the second quarter of fiscal 2000 due to marketing programs
associated with the TheraPatch product line.
Sales and marketing expenses were $1,598,700 and $879,471 during the
first six months of fiscal 2000 and 1999, and as a percentage of net sales, were
25.3% and 14.6%. The increase in sales and marketing expense for the first six
months was primarily due to increased retail slotting fees and advertising
expenses related to the TheraPatch product line.
General and administrative expenses were $688,783 and $781,630 during
the second quarters of fiscal 2000 and 1999, and as a percentage of net sales,
were 20.9% and 25.2%. The decrease in general and administrative expenses for
the quarter was primarily due to decreased legal expenses. Legal expenses in the
prior year quarter included approximately $126,000 of expenses associated with
the re-negotiation and modification of the license agreement for the development
and commercialization of cotinine.
General and administrative expenses were $1,247,873 and $1,368,091
during the first six months of fiscal 2000 and 1999, and as a percentage of net
sales, were 19.8% and 22.8%. The decrease in general and administrative expenses
for the first six months of fiscal 2000 was primarily due to decreased legal
expenses.
Research and development expenses for the second quarters of fiscal
2000 and 1999 were $310,202 and $286,025, and as a percentage of net sales, were
9.4% and 9.2%. The increase in research and development expense for the current
quarter primarily reflects increased labor costs of personnel working on
therapeutic consumer products under development.
Research and development expenses for the first six months of fiscal
2000 and 1999 were $579,964 and $566,038, and as a percentage of net sales, were
9.2% and 9.4%. The increase in research and development expense for the first
six months of fiscal 2000 primarily reflects increased labor costs which were
partially offset by a decrease in test-run production costs.
Other income, net, decreased in the second quarter of fiscal 2000 to
$4,459 from $26,987 in the second quarter of fiscal 1999. Other income, net,
decreased in the first six months of fiscal 2000 to $25,793 from $58,788 in the
first six months of fiscal 1999. Both of the fiscal 2000 decreases were
primarily the result of decreased interest income due to lower cash and cash
equivalent balances.
The Company recorded a loss before income taxes of $795,167 in the
second quarter of fiscal 2000 compared to a loss before income taxes of $660,868
for the second quarter of fiscal 1999. The Company recorded a loss before income
taxes of $1,398,449 in the first six months of fiscal 2000 compared to a loss
before income taxes of $811,821 for the first six months of fiscal 1999. The
increased loss in the current year second quarter and first six months was
primarily the result of increased sales and marketing expenses related to retail
sales of the Company's TheraPatch products. The increased sales and marketing
expenses more than offset an increase in gross profit that resulted from a shift
in the sales mix toward higher-margin therapeutic consumer products. The Company
expects to incur similar losses for the remainder of fiscal 2000 as it continues
to incur increased sales and marketing expenses related to retail sales of
TheraPatch consumer products.
The Company recorded no income tax expense or benefit in the second
quarter and first six months of fiscal 2000 compared to nominal income tax
expense in the second quarter and first six months of the prior year. There was
no income tax benefit recorded during the second quarter and first six months of
fiscal 2000 since the loss benefit may not be realizable by the Company. Income
tax expense in the second quarter and first six months of fiscal 1999 reflects
minimal tax expense associated with the Company's foreign sales corporation
subsidiary.
Inflation has not had a significant impact on the Company's operations
or cash flow.
I-8
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1,001,534 to $20,491 during the
first six months of fiscal 2000. Accounts receivable decreased by $385,280 to
$1,966,265 primarily due to a reduction in accounts more than 60 days old.
Inventories increased by $151,339 to $2,147,863 primarily due to increased raw
materials inventory related to therapeutic products which was partially offset
by decreased finished goods inventory of medical tape. Accounts payable of
$1,678,195 at December 31, 1999 were virtually unchanged during the first six
months of fiscal 2000. Capital spending for manufacturing equipment and plant
improvements totaled $247,204 during the first six months of fiscal 2000. There
were no material commitments for capital expenditures at December 31, 1999.
The Company had working capital of $2,282,744 and a current ratio of
1.9 at December 31, 1999 compared to working capital of $3,471,715 and a current
ratio of 2.4 at June 30, 1999.
There was no short or long-term debt outstanding at December 31, 1999
or June 30, 1999. The Company finalized a $2,000,000 asset-based line of credit
on November 22, 1999. There were no advances under this line of credit during
the period from November 22, 1999 through December 31, 1999. As of January 31,
2000, the Company had total borrowings outstanding on the line of credit of
$180,021. Defaults by the Company on certain financial covenants as of November
30 and December 31, 1999 were waived by the bank in February 2000 and the line
of credit agreement was amended to adjust specified levels of financial
covenants 6.12 and 6.13 for the months ending January 31 and February 29, 2000.
Management believes that internally-generated cash flow and the new
secured line of credit will be sufficient to support anticipated operating
requirements during the remainder of fiscal 2000. Management is currently
evaluating additional sources of capital that may be required to support
longer-term growth and expansion of the business. Maintaining adequate levels of
working capital depends in part upon the success of the Company's products in
the marketplace, the relative profitability of those products and the Company's
ability to control operating expenses. Funding of the Company's operations in
future periods may require additional investments in the Company in the form of
equity or debt. There can be no assurance that the Company will achieve desired
levels of sales or profitability, or that future capital infusions will be
available.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 ("Y2K") issue is the result of computer systems using a
two-digit format, as opposed to four digits, to indicate the year. Such computer
systems may be unable to interpret dates beyond the year 1999, which could cause
a system failure or other computer errors, leading to disruptions in operations.
A number of other date issues (e.g., incorrect handling of leap years) may also
cause problems. All of these issues are collectively referred to as Y2K. In
fiscal 1998, the Company developed a comprehensive program for Y2K compliance
consisting of two parts: internal systems compliance and third party compliance.
This program was described in the Company's Form 10-K for fiscal 1999 and Form
10-Q for the first quarter of fiscal 2000. All phases of the Y2K compliance
program were completed prior to December 31, 1999.
The Company has not experienced any Y2K related problems with its
internal systems nor has there been any disruption of supplies or services from
third parties. However, because the Company's continued Y2K compliance in
calendar 2000 is in part dependent on the continued Y2K compliance of third
parties, there can be no assurance that the Company's efforts alone have
resolved all Y2K issues or that key third parties will not experience Y2K
compliance failures as calendar year 2000 progresses.
All costs for Y2K compliance have been expensed in the period incurred
and have been paid from operating funds. The Company does not specifically track
internal staff time spent on the Y2K issue, however, it has included an estimate
of the cost of this time in the estimated total costs. The Company
I-9
estimates the total costs for both the internal systems compliance program and
the third party compliance program through December 31, 1999 were approximately
$25,000 and does not expect to incur additional costs.
Development of unforseen Y2K complications and the Company's ability to
deal with them continue to pose some risk and uncertainty which could result in,
among other things, business disruption, operation problems, financial loss,
legal liability and similar adverse consequences.
FORWARD-LOOKING STATEMENTS
From time to time, in reports filed with the Securities and Exchange
Commission (including this Form 10-Q), 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, unforeseen Y2K complications and third party
disruptions; and ability to satisfy funding requirements for operating needs,
expansion or capital expenditures.
I-10
PART I - FINANCIAL INFORMATION
ITEM 3 - 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, precluding the need for foreign currency
hedges. Additionally, the Company invests in money market funds and short-term
commercial paper, which experience minimal volatility. Thus, the exposure to
market risk is not material.
I-11
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Regular Annual Meeting of Shareholders of the Company was held on
November 11, 1999. The following matters were voted on by Shareholders:
1. The election of seven directors to serve on the Board of
Directors for a term of one year and until their successors
are duly elected and qualified.
2. The ratification of the appointment of Grant Thornton LLP as
the Company's independent auditor for the Company's current
fiscal year.
The results of the voting on these matters were as follows:
1. Board of Directors:
Withhold
For Authority Total
--------- --------- ---------
Lee M. Berlin 3,326,767 37,450 3,364,217
Alan C. Hymes, M.D. 3,315,769 48,448 3,364,217
Bert J. McKasy 3,326,767 37,450 3,364,217
Marilyn K. Speedie, Ph.D. 3,326,867 37,350 3,364,217
Donald C. Wegmiller 3,325,611 38,606 3,364,217
Rodney A. Young 3,319,604 44,613 3,364,217
Sheldon L. Zimbler 3,326,867 37,350 3,364,217
2. Appointment of Grant Thornton LLP as independent auditor for
the Company:
For Against Abstain Non-Vote Total
--------- ------- ------- -------- ---------
3,324,142 8,220 31,855 -- 3,364,217
Item 5. OTHER INFORMATION
None.
II-1
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Item No. Item Method of Filing
-------- ---- ----------------
10.01 Credit and Security Agreement By and
Between LecTec Corporation and Wells
Fargo Business Credit, Inc. dated
November 22, 1999 and First Amendment
To Credit and Security Agreement and
Waiver of Defaults dated February 9,
2000 ................................ Filed herewith.
27 Financial data schedule ............. Filed herewith.
(b) REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements 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.
LECTEC CORPORATION
Date February 10, 2000 /s/ Rodney A. Young
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Rodney A. Young, Chief Executive Officer & President
Date February 10, 2000 /s/ Deborah L. Moore
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Deborah L. Moore, Chief Financial Officer
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