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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 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 Identification No.)
incorporation or organization)
10701 RED CIRCLE DRIVE, MINNETONKA, MINNESOTA 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 933-2291
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.01 per share.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein; and will not be
contained, to the best of the Registrant's knowledge, in the definitive proxy
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by
non-affiliates of the Registrant as of September 22, 1999 was $8,660,427 based
upon the last reported sale price of the Common Stock at that date by the Nasdaq
Stock Market.
The number of shares outstanding of the Registrant's Common Stock as
of September 22, 1999 was 3,876,476 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by
reference information from the Registrant's Proxy Statement for its Annual
Meeting of Shareholders to be held November 11, 1999 (1999 Proxy Statement).
PART I
ITEM 1. BUSINESS
GENERAL
LecTec Corporation (the "Company") designs, manufactures and markets
diagnostic ECG ("electrocardiograph") electrodes, conductive and non-conductive
adhesive hydrogels, medical tapes and patches for the topical application of
over-the-counter ("OTC") drugs and therapeutic and skin care ointments. The
Company markets and sells its products to medical products distributors,
physician clinics, hospital purchasing organizations, hospitals, long-term care
facilities, consumers through retail outlets (food, chain drug and discount
stores) and original equipment manufacturers ("OEM"s). All of the products
manufactured by the Company are designed to be highly compatible with skin.
The Company developed one of the first solid gel disposable ECG
electrodes which did not require the use of aqueous conductive gels in order to
maintain contact with the skin. The Company has since continued to develop,
manufacture and market electrodes as well as hydrogels, medical tapes, OTC
topical delivery patches and therapeutic products. A hydrogel is a gel-like
material having an affinity for water and similar compounds. These gels are
ideal for electrical conductivity and skin compatibility. The Company holds
multiple domestic and foreign patents.
Effective January 14, 1999, the Company was certified as meeting the
requirements of ISO 9001 and EN46001 quality system standards. Certification was
granted by TUV Product Service GmbH. Meeting these standards, particularly
EN46001, confirms that the Company has achieved the highest level of quality
systems compliance demonstrated by world-class design and manufacturing firms.
For medical devices, EN46001 is awarded only to those companies which satisfy
the rigorous standards of ISO 9001 and comply with the European Union's Medical
Device Directive.
The Company, through its research and development efforts, is
investigating new products for topical delivery of OTC drugs and ointments, new
conductive adhesive hydrogel polymers and improved medical tapes, as well as a
smoking cessation pill. In addition, existing technologies are being refined to
focus on new products targeting new customers and new markets.
The Company was organized in 1977 as a Minnesota corporation. Its
principal executive office is located at 10701 Red Circle Drive, Minnetonka,
Minnesota 55343, and its telephone number is (612) 933-2291.
PRODUCTS
The Company's core competency is skin interface technology. This
competency results in products which are chemically compatible with human skin,
thereby reducing skin irritation and reducing damage to the skin as well as the
risk of infection. The electrical properties, adhesive characteristics,
dimensions, drug stability, shelf life and manufacturability of the Company's
products are highly consistent and reproducible from product to product.
CONDUCTIVE PRODUCTS
The Company's conductive products include diagnostic electrodes and
electrically conductive adhesive hydrogels.
The Company applies its patented conductive, skin compatible,
adhesive hydrogel technology to cardiac diagnostic electrodes. The Company's
patented natural and synthetic-based hydrogel polymers are self-adherent and are
capable of being made electrically conductive. Using natural-based polymers, the
Company developed the first solid gel disposable diagnostic ECG electrodes. All
of the Company's electrodes meet or exceed all national and international
performance standards.
The solid gel design of the Company's electrodes provides more
consistent electrical performance and eliminates clean-up time for the
clinician. Currently the Company has three different types of diagnostic
electrodes: LecTec 1000 Series, a disposable electrode made of natural polymer
solid gel with
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gentle adhesion; LecTec 3000 Series and LecTec 3009 Series, synthetic solid gel
electrodes with higher levels of adhesion which meet all AAMI ("American
Association for Medical Instrumentation") standards including defibrillation
recovery; and LecTec 4000 Series, a synthetic solid gel, silver substrate
electrode which also meets all AAMI standards including defibrillation recovery.
The Company pioneered hydrogel technology and manufactures synthetic
and natural-based hydrogels. These hydrogels are resistant to dehydration,
evaporation and changes in electrical and physical properties. Hydrogels are
also used topically to deliver specific medications to the skin. Hydrogels are
manufactured with various levels of conductivity, as well as with varying
degrees of self-adhesive properties, for diagnostic electrodes, electrosurgical
grounding pads, external defibrillation, pacing and monitoring electrodes, TENS
("Transcutaneous Electronic Nerve Stimulation") products and iontophoretic
return electrodes.
Sales of conductive products accounted for approximately 63%, 61%
and 63% of the Company's total sales for fiscal years 1999, 1998 and 1997.
MEDICAL TAPE PRODUCTS
The Company manufactures and markets hypoallergenic medical tape
products in various individual slit roll widths and in large jumbo rolls for the
world market. The Company's medical tape business includes the U.S. health care
market (hospitals and alternate care segments), the U.S. consumer market and the
international health care market. The Company's medical tape product line is
comprised of the standard paper, plastic and cloth products widely used in the
health care industry.
The Company manufactures and markets the individual slit roll widths
under the private label brand names of customers and under the LecTec brand
name. The large jumbo rolls are converted by the customer into individual slit
roll widths for ultimate sale to consumers.
Sales of medical tapes accounted for approximately 22%, 32% and 25%
of the Company's total sales for fiscal years 1999, 1998 and 1997.
THERAPEUTIC CONSUMER PRODUCTS
The Company manufactures and markets patches for the topical
application of OTC drugs and other therapeutic ointments and skin care
compounds. 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
analgesic patches for localized pain relief, cough suppressant patches,
anti-itch patches, wart removers, and a corn and callus remover. These products
are marketed as OTC products. The analgesic, cough suppresant and anti-itch
patches are marketed under the LecTec brand name TheraPatch(R) while the wart
removers and corn and callus removers are marketed under the private label of
the customer.
Sales of therapeutic consumer products accounted for approximately
15%, 7% and 12% of the Company's total sales for fiscal years 1999, 1998 and
1997.
MARKETING AND MARKETING STRATEGY
The Company markets and sells its products to medical products
distributors, physician clinics, hospital purchasing organizations, hospitals,
long-term care facilities, consumers through retail outlets (food, chain drug
and discount stores) and original equipment manufacturers.
A major entry into the consumer products markets was supported by
the hiring of a new retail sales executive late in fiscal 1998 and a retail
sales team in fiscal 1999. In the consumer products markets, retail broker and
manufacturer's representative contracts have been established. The TheraPatch(R)
brand is the umbrella brand for the Company's topical patches introduced to all
markets.
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In addition to the retail sales team hired for entry into the retail
consumer products markets, the Company has sales teams which address other
markets into which it sells. These teams support sales to:
* end-user organizations such as physician clinics, hospital
purchasing organizations, individual hospitals and long-term
care facilties,
* medical products distributors who sell to end-user
organizations, and
* OEMs which either include the Company's product with the
product they sell (e.g., electrodes purchased from the Company
may be included with electrocardiogram machines manufactured
and sold by an OEM), or use the Company's jumbo rolls of
hydrogels and medical tapes to manufacture a finished product
for sale to the end-user (e.g., hydrogel purchased from the
Company may be used by an OEM to make electrodes, or jumbo
rolls of tape purchased from the Company may be slit, cut and
wound on small cores by an OEM resulting in a product ready
for the end-user).
The Company has not experienced any significant seasonality in sales
of its products.
The Company sells its products in the U.S., Europe, Latin America,
Asia, Canada and Middle East. All of the Company's international sales are
denominated in U.S. dollars, thus, the impact of the foreign currency
transaction gains and losses are borne by the Company's customers. The Company
does not believe the January 1, 1999 euro currency conversion has had, nor will
have, a material impact on its financial statements. Export sales accounted for
approximately 13%, 26% and 19% of total sales for 1999, 1998 and 1997.
The Company's international sales are made by the Company's
corporate sales force. The Company does not maintain a separate international
marketing staff or operations. The following table sets forth export sales by
geographic area:
Years ended June 30
--------------------------------------
1999 1998 1997
---- ---- ----
Europe $1,216,199 $1,705,996 $1,456,141
Latin America 371,654 371,854 484,319
Asia 31,935 62,027 132,590
Canada 7,011 199,082 117,966
Middle East -- 912,240 14,854
Other 28,333 71,949 82,062
---------- ---------- ----------
Total Export Sales $1,655,132 $3,323,148 $2,287,932
========== ========== ==========
CUSTOMERS
Spacelabs Burdick Inc. accounted for 22%, 18% and 19% of the
Company's total sales for the fiscal years 1999, 1998 and 1997. The Company sold
its products to approximately 240, 190 and 140 active customers during 1999,
1998 and 1997. The Company's backlog orders (purchase orders received from
customers for future shipment) as of August 12, 1999 totaled $913,000 (all of
which the Company expects to fill in fiscal 2000), compared with approximately
$911,000 on August 12, 1998.
COMPETITION
The markets for electrodes, hydrogels, medical tapes and topical OTC
drug delivery patches are highly competitive. Firms in the medical and consumer
industries compete on the basis of product performance, pricing, distribution
and service. Many of the Company's major competitors have significantly greater
financial, marketing and technological resources than the Company. However, the
Company believes that it competes on the basis of proprietary technology,
speed-to-market, flexibility, innovative "first-in-category" patches, customer
focus and its ability to manufacture and market its products to targeted market
segments.
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Over the past several years there have been a number of mergers
within the electrode and hydrogel industries, resulting in fewer but larger
competitors. The Company has also noted a consolidation of customers and a
reduction in the number of manufacturers of medical tapes.
The Company's primary competitor for electrode and hydrogel sales is
Tyco International and the dominant competitors for medical tape sales are 3M
Company and Johnson & Johnson. The Company's OTC TheraPatch family of analgesic,
anti-itch and cough suppressant patches competes with ointments, lotions and
creams manufactured by various competitors including Mentholatum/Rohto
Pharmaceuticals, Inc.
MANUFACTURING
The Company manufactures its conductive and therapeutic membranes at
the Company's Minnetonka, Minnesota facility. The Minnetonka facility also
manufactures and packages the Company's therapeutic products and conducts raw
material processing operations. The Company's second manufacturing facility in
Edina, Minnesota is the primary site for the manufacturing and packaging of
medical tape and diagnostic electrodes. The Edina location also provides the
majority of the Company's warehouse capacity.
The Company believes that the raw materials used in manufacturing
its products are generally available from multiple suppliers.
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 an appropriate distributor. 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 and ointments, new
conductive adhesive hydrogel polymers and improved medical tapes, as well as a
smoking cessation pill. In addition, existing technologies are being refined to
focus on new products targeting new customers and new markets.
The Company believes that cotinine is a promising non-nicotine drug
for use in treating tobacco withdrawal symptoms. Because of the additional cost
associated with the remaining clinical work on cotinine, the Company is actively
seeking outside partners to help fund this development and move this
non-nicotine program to completion.
During fiscal years 1999, 1998 and 1997, the Company spent
approximately $1,170,000, $1,037,000 and $1,515,000 on research and development.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
The Company's Quality System includes design development planning,
testing, manufacturing, packaging, labeling and distribution of the Company's
products which are subject to federal and foreign regulations, and in some
instances, state and local government regulations.
UNITED STATES REGULATION
The Company's electrodes sold in the United States are subject to
federal Food and Drug Administration (the "FDA") policy and are marketed
pursuant to Section 510(k) notification, which is a means of obtaining FDA
clearance to market a medical device. The Company's finished goods electrodes
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and medical tapes sold in the United States are subject to the FDA's current
Good Manufacturing Practices ("GMP") and quality system regulations.
The Company's hydrogels and jumbo roll medical tapes sold
domestically are also subject to GMP and quality system regulations as they are
sold to OEMs and distributors for processing into finished commercial goods.
The Company's topical OTC drug delivery patches are marketed under
applicable federal FDA OTC monographs. Any new drug development products, such
as the Company's cotinine-based smoking cessation product would be marketed only
after approval of a New Drug Application containing full reports of detailed
laboratory and clinical investigations on laboratory animals and human patients.
FOREIGN REGULATION
The Company's finished goods electrodes and medical tapes sold into
the European Community (the "EC") are considered to be Class I, non-sterile and
non-measuring medical devices. These products are "CE" marked and "self
declared" as being compliant to the Medical Device Directive 93/42/EEC. An
authorized representative for the Company has been established in the EC as
required by European law. Foreign sales of the Company's finished goods
electrodes and medical tapes are made only into the EC.
There are no foreign regulatory approvals required to sell the
Company's hydrogels and jumbo roll medical tapes into foreign countries because
these products are sold to OEM customers for processing into finished commercial
goods.
The Company's topical OTC drug delivery patches are not currently
sold outside the United States.
ENVIRONMENTAL REGULATION
The Company does not use solvents that have an adverse effect on the
environment in the manufacturing of its products. The Company does not
anticipate any major expenditure for environmental controls during the next
fiscal year.
PATENTS AND TRADEMARKS
The Company has U.S. and foreign patents on adhesive hydrogels,
electrodes, transdermal and topical delivery systems and tape structures.
Twenty-six active U.S. patents and twenty-two active international patents are
currently assigned or licensed to the Company. Five U.S. patents were issued to
the Company during fiscal 1999. Eleven U.S. and foreign applications are pending
including two which are on appeal. Foreign patent applications are pending in
numerous European countries, Australia, New Zealand, Canada and Japan. The
patents most pertinent to the Company's major products have a remaining duration
ranging from two to eighteen years. Three of these patents have a remaining
duration of less than five years and the expiration of these patents is not
expected to have a material effect on the Company's proprietary position.
No trademark registrations were received in fiscal 1999. Eight
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.
EMPLOYEES
As of June 30, 1999, the Company employed 93 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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Title
- - ------------------- --- -----------------------------------------------
Rodney A. Young 44 Chairman, Chief Executive Officer and President
Deborah L. Moore 42 Chief Financial Officer, Secretary and Treasurer
Jane M. Nichols 53 Vice President, Marketing and New Business Development
Daniel M. McWhorter 59 Vice President, Research and Development
John D. LeGray 53 Vice President, Quality Assurance and Regulatory Affairs
Rodney A. Young is Chairman, Chief Executive Officer and President.
He joined the Company in August 1996. Prior to joining LecTec, Mr. Young had 21
years of health care industry experience including sales and marketing for
Upjohn Company and 3M Company. Prior to joining the Company, he was Vice
President and General Manager of the Specialized Distribution Division of Baxter
International, Inc.
Deborah L. Moore is Chief Financial Officer, Secretary and
Treasurer. She joined the Company in February 1997. Ms. Moore's 22-year
professional background includes public accounting with the big five firms of
Ernst & Young LLP and Deloitte & Touche LLP. Prior to joining LecTec she was the
Vice President of Corporate Development for Varitronic Systems, Inc.
Jane M. Nichols is Vice President, Marketing and New Business
Development. She joined the Company in April 1997. Ms. Nichols' 27-year career
includes clinical, technical and management roles at Methodist Hospital and Park
Nicollet Medical Centers, and senior marketing positions at 3M Company and
Ecolab.
Daniel M. McWhorter is Vice President, Research and Development. He
joined the Company in January 1997. Mr. McWhorter has more than 27 years of
experience in the medical products industry including both technical and general
management positions at The Kendall Company and Pharmacia Deltec and senior
technical positions at Abbott Laboratories and Mentor Corporation.
John D. LeGray is Vice President, Quality Assurance and Regulatory
Affairs. He joined the Company in September 1997. Mr. LeGray's 32-year career
includes technical and management positions at DiaSorin Inc., Bayer Corporation
and Abbott Laboratories.
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ITEM 2. PROPERTIES
The Company owns a building located in Minnetonka, Minnesota,
containing 18,000 square feet of office and laboratory space and 12,000 square
feet of manufacturing and warehouse space. In addition, the Company leases a
building in Edina, Minnesota containing 29,000 square feet of manufacturing and
warehouse space. The Edina building lease term extends through June 30, 2002.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on the Nasdaq National Market tier
of The Nasdaq Stock Market ("Nasdaq") under the symbol LECT.
The following table sets forth the high and low daily trade price
information for the Company's common stock for each quarter of fiscal 1999 and
1998. Such prices reflect interdealer prices, without retail mark-up, mark-down,
or commission, and may not necessarily represent actual transactions.
YEARS ENDED JUNE 30, 1999 1998
------------------------ ------------------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $4.000 $2.250 $9.750 $5.375
Second Quarter 4.000 2.125 7.000 4.500
Third Quarter 3.000 1.250 5.750 3.875
Fourth Quarter 4.750 1.813 4.469 3.250
As of September 22, 1999 the Company had 3,876,476 shares of
common stock outstanding, and 337 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.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Years ended June 30, 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net sales $ 12,279,075 $ 12,922,365 $ 12,256,327 $ 13,100,754 $ 14,138,290
Gross profit 4,093,561 3,715,032 4,324,180 4,969,659 5,697,562
Earnings (loss) from operations (1,771,324) (474,935) (2,215,951)* (724,074) 69,761
Earnings (loss) before equity in
losses of unconsolidated
subsidiary (1,683,257) (404,061) (2,140,660)* (632,193) 153,863
Equity in losses of unconsoli-
dated subsidiary -- -- 126,067 -- --
Net earnings (loss) (1,683,257) (404,061) (2,266,727)* (632,193) 153,863
Net earnings (loss) per common
and common equivalent share
(BASIC AND DILUTED) (.43) (.10) (.59)* (.17) .04
CONSOLIDATED BALANCE SHEET DATA
At June 30, 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Cash, cash equivalents and
short-term investments $ 1,022,025 $ 2,186,532 $ 1,242,777 $ 800,693 $ 839,942
Current assets 5,898,768 6,728,531 6,873,696 5,624,682 5,764,363
Working capital 3,471,715 5,335,861 4,035,084 4,240,024 4,490,796
Property, plant and equipment, net 4,028,491 4,306,568 4,592,304 5,112,975 5,559,807
Long-term investments 5,343 8,676 8,013 574,806 568,156
Total assets 10,132,573 11,317,774 11,837,356 12,494,003 12,646,745
Long-term liabilities 197,000 222,000 211,000 174,000 167,000
Shareholders' equity 7,508,520 9,703,104 8,787,744 10,935,345 11,206,178
* Includes a nonrecurring restructuring charge of $2,180,353 or $.57 per share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES
Net sales were $12,279,075 in 1999, a decrease of 5.0% from
net sales of $12,922,365 in 1998. Net sales were $12,256,327 in 1997. The
decrease in 1999 net sales was primarily the result of decreased medical tape
sales, partially offset by increased therapeutic consumer product sales.
The increase in 1998 net sales was due primarily to increased medical tape
sales.
Net sales of conductive products (medical electrodes and
conductive hydrogels) decreased by 1.9% in 1999 to $7,758,286 from $7,906,676 in
1998. Conductive product net sales were $7,713,932 in 1997. These fluctuations
in sales were primarily volume-related. The Company expects fiscal 2000
conductive sales to be comparable to fiscal 1999 sales.
Net sales of medical tapes decreased by 34.7% in 1999 to
$2,716,540 from $4,157,199 in 1998. Medical tape net sales were $3,092,962 in
1997. The decrease in 1999 was primarily the result of the absence of sales in
1999 to an international customer. The increase in 1998 was primarily
attributable to the presence in 1998 of sales to this same international
customer who did not place an order in 1997. Excluding sales to this
international customer, medical tape sales to all other customers decreased by
16.5% in 1999 and increased by 5.2% in 1998. The decrease in 1999 sales to all
other customers was primarily the result of the discontinuance of sales to
several low-margin medical tape customers. The increase in 1998 was primarily
the result of increased sales volume. The Company expects a decrease in fiscal
2000 medical tape sales from 1999 levels due to discontinued sales to other
low-margin medical tape customers.
Net sales of therapeutic consumer products increased 113.3% in
1999 to $1,804,249 from $846,050 in 1998. Net sales of therapeutic consumer
products were $1,449,433 in fiscal 1997. The increase in 1999 was primarily the
result of increased TheraPatch sales to retailers, both as a result of increased
volumes and increased unit selling price. The higher unit selling price in 1999
was the result of the Company selling directly to retailers rather than to CNS,
Inc., the Company's exclusive distributor to retailers in the prior year. The
decrease in 1998 sales was primarily due to decreased analgesic patch sales to
CNS, Inc. and decreased wart remover product sales. The agreement under which
CNS distributed the TheraPatch product was terminated at the end of fiscal 1998
and the Company assumed responsibility for retail distribution of the product.
Management believes that sales of the Company's therapeutic patch products will
represent an increased percentage of total net sales during fiscal 2000 due to
continued sales growth resulting from increased TheraPatch brand name
recognition, additional product offerings and expansion of the number of
retailers selling the TheraPatch family of products.
International sales, consisting primarily of semi-finished
conductive and medical tape products sold to overseas converters for final
processing, packaging and marketing, were 13.5%, 25.7% and 18.7% of total net
sales in 1999, 1998 and 1997. All international sales are in U. S. dollars. The
decrease in the percent for 1999 resulted primarily from the absence in 1999 of
medical tape sales to an international customer as well as decreased conductive
sales to another customer who began manufacturing product previously purchased
from the Company. The increase in the percent for 1998 resulted primarily from
increased sales to the same international medical tape customer who accounted
for the decrease in 1999. The Company expects fiscal 2000 international sales
will be approximately 10% of total net sales.
GROSS PROFIT
The Company's gross profit was $4,093,561 in 1999, up from
$3,715,032 in 1998. Gross profit was $4,324,180 in 1997. As a percentage of net
sales, gross profit was 33.3% in 1999, 28.8% in 1998 and 35.3% in 1997. Gross
profit in 1999 increased by 10.2% from the prior year and gross profit in 1998
decreased by 14.1% from the prior year. The increase in gross profit in 1999
resulted primarily from a shift in the sales mix to higher margin therapeutic
consumer products from lower margin medical tape products, as well as higher
margins on therapeutic patch sales primarily as a result of sales made directly
to retailers rather than to a distributor. The decrease in gross profit in 1998
resulted primarily from a shift in the sales mix from higher margin conductive
and therapeutic consumer products to lower margin
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medical tape products, increased material costs, and a shift in labor costs from
research and development to manufacturing.
SALES AND MARKETING EXPENSES
Sales and marketing expenses totaled $2,187,710 or 17.8% of
net sales in 1999, compared to $1,042,788 or 8.1% of net sales in 1998, and
$597,169 or 4.9% of net sales in 1997. The 1999 increase was primarily due to
increased sales staff and advertising and slotting fees to establish new retail
accounts. The 1998 increase was primarily due to increased sales promotion
expense, as well as increased staffing levels and consulting expense. The 1998
increases were greatest in the fourth quarter and were largely related to the
launch of the new TheraPatch family of patch products. The Company anticipates
sales and marketing expenses as a percent of sales in fiscal 2000 will be
approximately 20% due to sales and marketing efforts, particularly marketing
programs associated with the TheraPatch product line.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $2,507,432 or
20.4% of net sales in 1999, compared to $2,110,084 or 16.3% of net sales in
1998, and $2,247,449 or 18.3% of net sales in 1997. The increase in 1999 was
primarily the result of increased regulatory and quality assurance expenses
associated with achieving and maintaining ISO 9001 and EN 46001 certification,
expenses related to the re-negotiation and modification of the license agreement
for the development and commercialization of cotinine, and legal expenses
associated with work on new and existing patents. The 1998 decrease was
primarily due to the absence of goodwill amortization and lower fees associated
with executive recruitment. The Company anticipates general and administrative
expenses in fiscal 2000 will be comparable to fiscal 1999.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses totaled $1,169,743 or 9.5%
of net sales in 1999, compared to $1,037,095 or 8.0% of net sales in 1998, and
$1,515,160 or 12.4% of net sales in 1997. The increase in 1999 reflects
increased staffing levels and increased costs for testing of products under
development. The decrease in research and development expense for 1998 reflects
reductions in research costs associated with the internal development of the
cotinine-based smoking cessation product as well as a shift in labor costs to
manufacturing. The higher levels of research and development expenditures in
1997 reflect the utilization of internally generated funds to develop additional
therapeutic consumer products and a cotinine-based smoking cessation product.
Management believes that research and development expenditures as a percent of
sales will be comparable in fiscal 2000 to fiscal 1999.
RESTRUCTURING CHARGE
During 1997 the Company recorded a nonrecurring restructuring
charge of $2,180,000 related to its plan for eliminating the Pharmadyne
Corporation subsidiary. The restructuring charge included approximately
$1,369,000 for the planned acquisition of the minority interests in Pharmadyne
in exchange for newly issued shares of LecTec Corporation common stock, $480,000
for the write-off of Pharmadyne's 15% interest in Natus, L.L.C., an
Arizona-based direct marketing company, and $331,000 for the completion of
restructuring activities, consisting primarily of fees for professional
services. In October 1997, the Company issued 221,948 new shares of its common
stock to acquire the minority interests in Pharmadyne. In November 1997, the
newly issued shares were registered with the Securities and Exchange Commission.
On December 31, 1997, Pharmadyne Corporation was merged into LecTec Corporation.
OTHER INCOME, NET
Other income, net totaled $88,067 in 1999, compared to $69,874
in 1998 and $75,291 in 1997.
-10-
INCOME TAX BENEFIT
The Company recorded no income tax expense or benefit in 1999,
an income tax benefit of $1,000 in 1998 and no income tax expense or benefit in
1997. There was no income tax benefit recorded during 1999 and the tax benefit
recorded in 1998 was minimal since the loss benefit for these two years may not
be realizable by the Company. There was no income tax benefit recorded during
1997 due primarily to the effect of the non-deductible restructuring charge.
EQUITY IN LOSSES OF UNCONSOLIDATED SUBSIDIARY
During 1997 the Company recorded $126,000 of equity in the
losses of Natus L.L.C. The remaining investment in Natus L.L.C. of $480,000 was
fully written off in 1997 as part of the $2,180,000 restructuring charge.
OPERATIONS SUMMARY
The net loss for 1999 resulted primarily from increased sales
and marketing expenses related to the Company's investment in its new Consumer
Products Division and increased general and administrative expenses, primarily
those expenses related to the modification of the cotinine license agreement and
achievement of ISO 9001 and EN 46001 certification. The net loss for 1998
resulted primarily from a decrease in the gross profit percent due to a shift in
the sales mix from higher margin conductive and therapeutic consumer products to
lower margin medical tape products and increased material costs and material
usage. In 1997, the restructuring charge of $2,180,000 or $.57 per share was the
primary component of the total net loss of $2,267,000 or $.59 per share.
Excluding the impact of this one-time charge, the loss for 1997 was $87,000 or
$.02 per share.
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 $1,164,507 to
$1,022,025 at June 30, 1999 from $2,186,532 at June 30, 1998. This decrease was
primarily due to the net loss for fiscal 1999 of $1,683,257. Inventories
increased by $278,513 to $1,996,524 primarily due to increased raw material and
finished goods inventory related to TheraPatch products necessary for the timely
fulfillment of retail orders.
Working capital totaled $3,471,715 at June 30, 1999, compared
to $5,335,861 at the end of fiscal 1998. The Company's current ratio was 2.4 at
June 30, 1999 compared to 4.8 at June 30, 1998.
Capital spending for plant improvements and equipment totaled
$419,469 in 1999. There were no material commitments for capital expenditures at
June 30, 1999. Net property, plant and equipment decreased by $278,077 to
$4,028,491 at June 30, 1999 from $4,306,568 at June 30, 1998, reflecting the
excess of depreciation expense over capital spending.
Accounts payable increased by $867,629 to $1,676,776 at June
30, 1999 from $809,147 at June 30, 1998 reflecting increased raw materials,
advertising and promotional, and slotting fee payables related to the TheraPatch
product family, as well as an increase in the average number of days outstanding
before payment.
The Company has no short or long-term debt. The Company had an
unsecured $1,000,000 working capital line of credit through September 1, 1998.
There were no borrowings outstanding under the line of credit during the fiscal
years ended June 30, 1999 or 1998. The Company is currently reviewing a proposal
from a bank to provide a new secured asset-based line of credit and expects to
finalize the credit line by December 31, 1999. Shareholders' equity decreased by
$2,194,584 to $7,508,520 as of June 30, 1999 from $9,703,104 as of June 30,
1998, primarily due to the net loss incurred during 1999 and the impact of the
shares repurchased under its stock repurchase program. In April 1998, the
Company announced a stock repurchase program authorizing the repurchase of up to
500,000 shares to be funded with internally generated funds. As of September 22,
1999 the Company has repurchased 205,150 shares of common stock under the
program for an aggregate purchase price of approximately $668,000. There have
been no repurchases since March 1999.
Management believes that existing cash and cash equivalents,
internally-generated cash flow and the new secured line of credit the Company
expects to obtain will be sufficient to support anticipated
-11-
operating and capital spending requirements during fiscal 2000. Management is
currently evaluating additional sources of capital that may be appropriate for
funding 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 (i.e., 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.
The internal systems compliance program includes
informational, manufacturing, financial and communication systems. A committee
consisting of representatives from all key areas of the Company developed the
program. The internal systems compliance program consists of five-phases. Phase
I is the identification of all internal computer systems in the Company,
including embedded microprocessor or similar circuitry. Phase II is the
determination of Y2K compliance for these systems. Phase III is development and
implementation of action plans to achieve compliance where needed, and is
followed by the testing in Phase IV of these systems after action plans have
been completed. Phase V involves establishing risk and developing contingency
plans where necessary (i.e., compliance can not be established or the risks
associated with errors in establishing compliance are significant).
The third party compliance program consists of three phases
with Phase I being the identification of major and/or critical third party
vendors and customers. Phase II consists of contacting these third parties and
determining their Y2K compliance. Phase III involves establishing risk and
developing contingency plans where necessary (i.e., third party compliance
cannot be established or the risks associated with noncompliance are
significant).
The Company has completed Phases I and II of the internal
systems compliance program and found the majority of its systems and all of its
core systems to be Y2K compliant. The Y2K compliant status of the core systems
benefited from upgrades undertaken during the past several years to make these
systems adequate for the business needs of the Company. Plans to achieve Y2K
compliance for the non-core systems were developed and completed by the end of
calendar 1998 (Phase III). Phase IV of the program, testing of systems after
implementation of changes, was completed by June 30, 1999. Phase V, development
of contingency plans where necessary, is currently in process and is expected to
be essentially completed by October 31, 1999.
The Company has completed Phase I and II of the third party
compliance program for current vendors and customers and is contacting new
vendors and customers to determine their Y2K compliance. The Company is
approximately 90% complete with Phase III, the evaluation of responses,
establishment of risk and the development of contingency plans. Because of the
diversity of sources available for the Company's raw material, packaging
material and supplies, the Company believes that Y2K compliance issues for these
third parties will not have a material adverse effect on the Company's financial
position, operations or cash flow. There can, however, be no assurance that this
will be the case. If certain critical third party providers, such as those
providers supplying electricity, water or telephone service, experience
difficulties resulting in disruption of service to the Company, a shutdown of
the Company's operations at individual facilities could occur for the duration
of the disruption. The Company expects to have substantially completed all
phases of the third party compliance program by October 31, 1999.
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 estimates the total costs for both the internal systems compliance
program and the third party compliance
-12-
program through June 30, 1999 to be approximately $24,000, while total costs for
Y2K compliance are estimated to be less than $35,000.
The Company's ability to successfully identify and address Y2K
issues involves inherent risks and uncertainties, and depends upon a number of
factors including, but not limited to, the availability of key Y2K personnel,
the Company's ability to locate and correct all relevant computer codes, the
readiness of third parties, and the Company's ability to respond to unforeseen
Y2K complications. Depending upon such factors, the Y2K issues faced by the
Company 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-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 new 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.
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, 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.
-13-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LecTec Corporation and Subsidiaries Financial Statements Furnished Pursuant to
the Requirements of Form 10-K.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and
Board of Directors
LecTec Corporation
We have audited the accompanying consolidated balance sheets of
LecTec Corporation and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of operations, comprehensive loss, shareholders'
equity, and cash flows for each of the three years in the period ended June 30,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of LecTec
Corporation and subsidiaries as of June 30, 1999 and 1998, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
August 18, 1999
-14-
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
--------------------------
ASSETS 1999 1998
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 1,022,025 $ 2,186,532
Receivables
Trade, net of allowance of $101,751
in 1999 and $90,818 in 1998 2,335,314 2,251,757
Refundable income taxes 7,544 59,544
Other 8,687 30,624
----------- -----------
2,351,545 2,341,925
Inventories 1,996,524 1,718,011
Prepaid expenses and other 174,674 103,063
Deferred income taxes 354,000 379,000
----------- -----------
Total current assets 5,898,768 6,728,531
PROPERTY, PLANT AND EQUIPMENT -
AT COST
Land 247,731 247,731
Building and improvements 1,841,742 1,816,277
Equipment 7,157,016 6,791,765
Furniture and fixtures 413,013 384,260
----------- -----------
9,659,502 9,240,033
Less accumulated depreciation 5,631,011 4,933,465
----------- -----------
4,028,491 4,306,568
OTHER ASSETS
Patents and trademarks, less accumulated amortization
of $1,154,698 in 1999 and $1,001,157 in 1998 199,971 273,999
Other 5,343 8,676
----------- -----------
205,314 282,675
----------- -----------
$10,132,573 $11,317,774
=========== ===========
The accompanying notes are an integral part of these statements.
-15-
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
June 30,
LIABILITIES AND -----------------------------
SHAREHOLDERS' EQUITY 1999 1998
------------ ------------
CURRENT LIABILITIES
Accounts payable $ 1,676,776 $ 809,147
Accrued expenses
Payroll related 403,075 384,135
Retail support programs 165,472 --
Other 181,730 199,388
------------ ------------
Total current liabilities 2,427,053 1,392,670
DEFERRED INCOME TAXES 197,000 222,000
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 15,000,000 shares
authorized; 3,876,476 shares and 4,036,000 shares
issued and outstanding at June 30, 1999 and 1998 38,765 40,360
Additional paid-in capital 11,262,654 11,769,053
Accumulated other comprehensive loss (11,841) (8,508)
Deficit in retained earnings (3,781,058) (2,097,801)
------------ ------------
7,508,520 9,703,104
------------ ------------
$ 10,132,573 $ 11,317,774
============ ============
The accompanying notes are an integral part of these statements.
-16-
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
Net sales $ 12,279,075 $ 12,922,365 $ 12,256,327
Cost of goods sold 8,185,514 9,207,333 7,932,147
------------ ------------ ------------
Gross profit 4,093,561 3,715,032 4,324,180
Operating expenses
Sales and marketing 2,187,710 1,042,788 597,169
General and administrative 2,507,432 2,110,084 2,247,449
Research and development 1,169,743 1,037,095 1,515,160
Restructuring charge -- -- 2,180,353
------------ ------------ ------------
5,864,885 4,189,967 6,540,131
------------ ------------ ------------
Loss from operations (1,771,324) (474,935) (2,215,951)
Other income, net 88,067 69,874 75,291
------------ ------------ ------------
Loss before income taxes and equity
in losses of unconsolidated subsidiary (1,683,257) (405,061) (2,140,660)
Income tax benefit -- (1,000) --
------------ ------------ ------------
Loss before equity in losses
of unconsolidated subsidiary (1,683,257) (404,061) (2,140,660)
Equity in losses of unconsolidated subsidiary -- -- 126,067
------------ ------------ ------------
Net loss $ (1,683,257) $ (404,061) $ (2,266,727)
============ ============ ============
Net loss per share - basic and diluted $ (.43) $ (.10) $ (.59)
Weighted average shares outstanding -
basic and diluted 3,906,694 4,005,455 3,836,618
The accompanying notes are an integral part of these statements.
-17-
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years ended June 30,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
Net loss $(1,683,257) $ (404,061) $(2,266,727)
Other comprehensive income (loss)
Unrealized gains (losses) on securities
available-for-sale
Unrealized holding gains (losses)
arising during period (3,333) 13,949 10,794
Reclassification adjustment for losses
included in net loss -- 10,915 --
----------- ----------- -----------
(3,333) 24,864 10,794
----------- ----------- -----------
Comprehensive loss $(1,686,590) $ (379,197) $(2,255,933)
=========== =========== ===========
The accompanying notes are an integral part of these statements.
-18-
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Accumulated
Common stock Additional other Retained Total
------------------- paid-in comprehensive earnings shareholders'
Shares Amount capital loss (deficit) equity
--------- ------- ----------- ------------- ----------- -----------
Balance, June 30, 1996 3,835,800 $38,358 $10,368,166 $(44,166) $ 572,987 $10,935,345
Net loss -- -- -- -- (2,266,727) (2,266,727)
Cost of shares retired (8,278) (83) (54,023) -- -- (54,106)
Common shares issued upon exercise of options 15,278 153 51,690 -- -- 51,843
Unrealized gain on securities available-for-sale -- -- -- 10,794 -- 10,794
Investment by minority shareholders in
consolidated subsidiary -- -- 83,595 -- -- 83,595
Tax benefit from exercise of stock options -- -- 27,000 -- -- 27,000
--------- ------- ----------- -------- ----------- -----------
Balance, June 30, 1997 3,842,800 38,428 10,476,428 (33,372) (1,693,740) 8,787,744
Net loss -- -- -- -- (404,061) (404,061)
Cost of shares retired (10,863) (109) (40,627) -- -- (40,736)
Common shares issued upon exercise of options 11,615 116 38,629 -- -- 38,745
Unrealized gain on securities available-for-sale -- -- -- 24,864 -- 24,864
Common shares issued to acquire minority
shares of consolidated subsidiary 221,948 2,220 1,367,191 -- -- 1,369,411
Shares repurchased (29,500) (295) (124,268) -- -- (124,563)
Warrants issued for services -- -- 50,000 -- -- 50,000
Tax benefit from exercise of stock options -- -- 1,700 -- -- 1,700
--------- ------- ----------- -------- ----------- -----------
Balance, June 30, 1998 4,036,000 40,360 11,769,053 (8,508) (2,097,801) 9,703,104
Net loss -- -- -- -- (1,683,257) (1,683,257)
Common shares issued upon exercise of options 1,000 10 1,990 -- -- 2,000
Unrealized loss on securities available-for-sale -- -- -- (3,333) -- (3,333)
Common shares issued in connection with the
employee stock purchase plan 15,126 151 32,855 -- -- 33,006
Shares repurchased (175,650) (1,756) (541,644) -- -- (543,400)
Tax benefit from exercise of stock options -- -- 400 -- -- 400
--------- ------- ----------- -------- ----------- -----------
Balance, June 30, 1999 3,876,476 $38,765 $11,262,654 $(11,841) $(3,781,058) $ 7,508,520
========= ======= =========== ======== =========== ===========
The accompanying notes are an integral part of these statements.
-19-
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(1,683,257) $ (404,061) $(2,266,727)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Restructuring charge -- -- 2,180,353
Depreciation and amortization 851,087 844,594 1,014,251
Warrants issued for services -- 50,000 --
Loss on sales of investments -- 10,915 --
Deferred income taxes -- (2,000) (45,000)
Equity in losses of unconsolidated subsidiary -- -- 126,067
Changes in operating assets and liabilities:
Trade and other receivables (61,620) (80,617) (171,781)
Refundable income taxes 52,000 341,719 (25,683)
Inventories (278,513) 859,010 (565,694)
Prepaid expenses and other (71,611) (18,192) 38,228
Accounts payable 867,629 29,448 (31,552)
Accrued expenses 167,154 (104,279) (104,152)
----------- ----------- -----------
Net cash provided by (used in) operating activities (157,131) 1,526,537 148,310
Cash flows from investing activities:
Purchase of property, plant and equipment (419,469) (406,515) (187,040)
Investment in patents and trademarks (79,513) (62,999) (104,705)
Sale of investments -- 590,873 --
Other -- -- 10,195
----------- ----------- -----------
Net cash provided by (used in) investing activities (498,982) 121,359 (281,550)
Cash flows from financing activities:
Issuance of common stock 35,006 38,745 51,843
Repurchases and retirement of common stock (543,400) (165,299) (54,106)
----------- ----------- -----------
Net cash used in financing activities (508,394) (126,554) (2,263)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (1,164,507) 1,521,342 (135,503)
Cash and cash equivalents at beginning of year 2,186,532 665,190 800,693
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,022,025 $ 2,186,532 $ 665,190
=========== =========== ===========
The accompanying notes are an integral part of these statements.
-20-
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended June 30,
---------------------------
1999 1998 1997
------- ------- -------
Supplemental disclosures:
Cash paid during the year for interest $ 792 $ 1,106 $ 6,189
======= ======= =======
Cash paid during the year for income taxes $22,010 $16,732 $ 6,000
======= ======= =======
Supplemental schedule of non-cash activities:
During fiscal 1998, the Company issued 221,948 shares of common stock in
exchange for the minority interest in Pharmadyne, valued at $1,369,411
The accompanying notes are an integral part of these statements.
-21-
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES
LecTec Corporation (the "Company") is primarily engaged in the research,
design, manufacture and sale of diagnostic electrodes, conductive hydrogels,
medical tapes and therapeutic consumer products. The Company sells and
extends credit without collateral to customers located throughout the United
States as well as Europe, Latin America, Asia, Canada and the Middle East. A
summary of the Company's significant accounting policies consistently applied
in the preparation of the accompanying financial statements follows:
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of LecTec
Corporation ("LecTec"), LecTec International Corporation, a wholly-owned
subsidiary, and Pharmadyne Corporation, a wholly-owned owned subsidiary which
was merged into LecTec Corporation on December 31, 1997 (note H). All
intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid temporary investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist primarily of short-term commercial paper.
Investments
The Company's investments are classified as available-for-sale and are
reported at fair value. The Company utilizes the specific identification
method in computing realized gains and losses.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market and consist of the following:
June 30
-------------------------
1999 1998
---------- ----------
Raw materials $1,324,973 $1,184,778
Work in process 69,324 15,055
Finished goods 602,227 518,178
---------- ----------
$1,996,524 $1,718,011
========== ==========
-22-
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Depreciation and Amortization
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. The
straight-line method of depreciation is followed for financial reporting
purposes, and accelerated methods are used for tax purposes. Estimated useful
lives used in the calculation of depreciation for financial statement
purposes are:
Buildings and improvements 5 - 40 years
Equipment 4 - 15 years
Furniture and fixtures 5 - 7 years
The investment in patents and trademarks consists primarily of the cost of
applying for patents and trademarks. Patents and trademarks are amortized on
a straight-line basis over the estimated useful life of the asset, generally
five years.
Revenue Recognition
Sales are recognized at the time of shipment.
Stock Options
The Company accounts for the issuance of stock options using the intrinsic
value method.
Net Earnings (Loss) Per Share
The Company's basic net earnings (loss) per share amounts are computed by
dividing net earnings (loss) by the weighted average number of outstanding
common shares. The Company's diluted net earnings per share amounts are
computed by dividing net earnings by the weighted average number of
outstanding common shares and common share equivalents, when dilutive.
Options and warrants to purchase 897,506, 795,997 and 628,062 shares of
common stock with a weighted average exercise price of $7.54, $8.09 and $8.82
were outstanding during the years ended June 30, 1999, 1998 and 1997, but
were excluded because they were antidilutive.
-23-
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Use of Estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE B - LINE OF CREDIT
The Company had an unsecured $1,000,000 working capital line of credit
through September 1, 1998 with interest at the bank's reference rate
(effective rate of 8.5% at June 30, 1998). There were no borrowings
outstanding on the line of credit during the fiscal years ended June 30, 1999
and 1998. Management believes the Company will be able to obtain a new
secured asset-based line of credit when required.
NOTE C - COMMITMENTS AND CONTINGENCIES
The Company conducts portions of its operations in a leased facility. The
lease provides for payment of a portion of taxes and other operating expenses
by the Company.
The minimum rental commitments under all operating leases, which expire at
various times through June 30, 2002, are as follows for the years ending June
30:
2000 $265,557
2001 270,350
2002 270,921
--------
$806,828
========
Total rent expense for operating leases was $250,641, $248,931 and $224,849
for the years ended June 30, 1999, 1998 and 1997.
-24-
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
NOTE C - COMMITMENTS AND CONTINGENCIES - Continued
The Company is subject to various legal proceedings in the normal course of
business. Management believes these proceedings will not have a material
adverse effect on the Company's financial position or results of operations.
NOTE D - INCOME TAXES
The provision for income taxes consists of the following:
Years ended June 30,
----------------------------------
1999 1998 1997
-------- -------- --------
Current
Federal $ -- $ (1,000) $ 43,000
State -- 2,000 2,000
-------- -------- --------
-- 1,000 45,000
Deferred
Federal -- (2,000) (45,000)
State -- -- --
-------- -------- --------
-- (2,000) (45,000)
-------- -------- --------
$ -- $ (1,000) $ --
======== ======== ========
Deferred tax assets and liabilities represent the tax effects, based upon
current tax law, of cumulative future deductible or taxable items that have
been recognized in the financial statements as follows:
June 30,
---------------------------
1999 1998
----------- -----------
Deferred current assets and liabilities:
Net operating loss carryforwards $ 1,656,500 $ 1,147,800
Tax credit carryforwards 253,600 244,900
Inventory 199,400 146,800
Vacation pay 67,100 63,700
Other 40,900 46,100
----------- -----------
2,217,500 1,649,300
Valuation allowance (1,863,500) (1,270,300)
----------- -----------
Net current asset $ 354,000 $ 379,000
=========== ===========
-25-
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
NOTE D - INCOME TAXES - Continued
June 30,
1999 1998
--------- ---------
Deferred long-term assets and liabilities:
Tax depreciation in excess of book depreciation $(273,400) $(289,700)
Charitable contribution carryforwards 18,900 18,400
Other 57,500 49,300
--------- ---------
Net long-term liability $(197,000) $(222,000)
========= =========
At June 30, 1999, the Company has available net operating loss carryforwards
of approximately $4,900,000 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 as they may not be realizable.
At June 30, 1999, the Company has available tax credit carryforwards of
approximately $254,000 which can be used to reduce future tax liabilities.
These carryforwards begin to expire in 2008. A valuation allowance has been
recorded for a portion of the tax credit carryforwards as they may not be
fully realizable.
Differences between income tax benefit and the statutory federal income tax
rate of 34% are as follows:
1999 1998 1997
---- ---- ----
Federal statutory income tax rate (34.0)% (34.0)% (34.0)%
State income taxes, net of federal effect -- 0.3 0.1
Nondeductible restructuring charge -- -- 34.6
Foreign sales corporation -- (11.1) (2.1)
Losses producing no current benefit 34.4 58.0 .6
Tax exempt investment income -- (1.7) (0.8)
Goodwill amortization -- -- 2.3
Prior years' overaccruals -- (3.7) --
Other (0.4) (8.0) (.7)
---- ---- ----
--% (0.2)% --%
==== ==== ====
-26-
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
NOTE E - 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 15,126 shares have been purchased by employees
for $33,006 as of June 30, 1999.
NOTE F - EMPLOYEE BENEFIT PLAN
The Company maintains a contributory 401(k) profit sharing benefit plan
covering substantially all employees who have completed one hour of service.
The Company matches 50% of voluntary employee contributions to the plan not
to exceed 50% of a maximum 5% of a participant's compensation. The Company's
contributions under this plan were $71,006, $54,901 and $37,936 for the years
ended June 30, 1999, 1998 and 1997. The Company may also make a discretionary
contribution. No discretionary contributions were made for the years ended
June 30, 1999, 1998 and 1997.
NOTE G - STOCK OPTIONS AND WARRANTS
The Company has stock option plans for the benefit of selected officers,
employees and directors of the Company. A total of 1,673,049 shares of common
stock are reserved for issuance under the plans. Options under the Company's
plans are granted at fair market value and expire at five or ten years from
the grant date. Options given to directors are exercisable at the date of
grant. Options given to selected officers and employees are exercisable at
such times as set forth in the individual option agreements, generally
vesting 100% after four years.
-27-
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
NOTE G - STOCK OPTIONS AND WARRANTS - Continued
A summary of the Company's stock option transactions for the years ended June
30, 1999, 1998 and 1997 is as follows:
Weighted average
Number of shares exercise price
---------------- ----------------
Outstanding at June 30, 1996 524,695 $8.65
Granted 343,350 8.26
Exercised (15,278) 3.39
Canceled (129,934) 9.30
---------
Outstanding at June 30, 1997 722,833 8.46
Granted 219,000 5.31
Exercised (11,615) 3.35
Canceled (82,598) 6.37
---------
Outstanding at June 30, 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
=========
A total of 593,876, 459,994 and 371,946 options were exercisable at June 30,
1999, 1998 and 1997, with a weighted average price of $7.83, $8.35 and $8.30.
The following information applies to grants that are outstanding at June 30,
1999:
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
--------------- ----------- ---------------- ------------ ----------- --------
$2.00 -$ 3.19 280,200 5.0 years $2.67 29,000 $2.00
3.35 - 5.00 196,974 7.4 years 4.61 83,099 4.41
6.00 - 8.63 297,321 5.9 years 7.08 191,196 7.34
9.00 - 13.50 359,331 4.2 years 9.98 290,581 9.72
--------- -------
1,133,826 593,876
========= =======
-28-
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
NOTE G - STOCK OPTIONS AND WARRANTS - Continued
The weighted average fair value of the options granted during 1999, 1998 and
1997 were $1.47, $2.77 and $4.45. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option valuation model
with the following weighted-average assumptions used for all grants in 1999,
1998 and 1997: zero dividend yield, expected volatility of 62%, 52% and 54%,
risk-free interest rate of 5.77%, 5.57% and 6.22% and expected lives of 4.09,
5.16 and 5.09 years.
Management believes the Black-Scholes option valuation model currently
provides the best estimate of fair value. However, the Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of several subjective
assumptions. The Company's employee and director stock options have
characteristics different from those of traded options, and changes in the
subjective input assumptions can materially affect the fair value estimate.
In management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee and director stock
options.
The Company's net loss and net loss per share for 1999, 1998 and 1997 would
have been increased to the pro forma amounts indicated below had the fair
value method been used for options granted to employees and directors. These
effects may not be representative of the future effects of applying this
method.
1999 1998 1997
--------------------------- ----------------------- ---------------------------
As reported Pro forma As reported Pro forma As reported Pro forma
------------ ------------ ----------- ---------- ------------ ------------
Net loss $(1,683,257) $(2,201,974) $(404,061) $(897,365) $(2,266,727) $(2,620,449)
Net loss per share -
basic/diluted $(.43) $(.56) $(.10) $(.22) $(.59) $(.68)
During 1998, the Company issued a warrant to an outside consultant for the
purchase of 12,953 shares of the Company's common stock at $6.25 per share,
expiring November 20, 2004, in exchange for recruiting and placement
services. The fair value of the warrant granted was calculated on the date of
grant using the Black-Scholes option-pricing model.
-29-
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
NOTE H - PHARMADYNE CORPORATION AND RESTRUCTURING
During 1993 through 1996, the Company made various investments in and
advances to Pharmadyne Corporation resulting in a cumulative ownership of
61%.
During 1997, the Company adopted a plan for eliminating the Pharmadyne
subsidiary and recorded a nonrecurring restructuring charge of $2,180,353
which increased the 1997 net loss by $.57 per share. The restructuring charge
included approximately $1,369,000 for the planned acquisition of the minority
interests in Pharmadyne in exchange for newly issued shares of LecTec
Corporation common stock and $331,000 for completion of restructuring
activities, consisting primarily of fees for professional services. The
restructuring charge also included $480,000 for the write-off of Pharmadyne's
15% interest in Natus, L.L.C., an Arizona-based direct marketing company.
During 1997, the Company recorded $126,067 of equity in the losses of Natus,
L.L.C.
In October 1997, the Company issued 221,948 new shares of its common stock to
acquire the minority interests in Pharmadyne. In November 1997, the newly
issued shares were registered with the Securities and Exchange Commission. On
December 31, 1997, Pharmadyne Corporation was merged into LecTec Corporation.
NOTE I - SEGMENT INFORMATION
During 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 requires the Company to
disclose financial and other information about its business segments, their
products and services, geographic areas, sales, profits, assets and other
information.
The Company operates its business in one reportable segment - the manufacture
and sale of products based on advanced skin interface technologies. Each of
the Company's major product lines have similar economic characteristics,
technology, manufacturing processes, and regulatory environments. Customers
and distribution and marketing strategies vary within major product lines as
well as overlap between major product lines. The Company's executive decision
makers evaluate sales performance based on the total sales of each major
product line and 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:
-30-
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
NOTE I - SEGMENT INFORMATION - Continued
Years ended June 30, 1999 1998 1997
----------- ----------- -----------
Conductive products $ 7,758,286 $ 7,906,676 $ 7,713,932
Medical tape products 2,716,540 4,157,199 3,092,962
Therapeutic consumer products 1,804,249 858,490 1,449,433
----------- ----------- -----------
$12,279,075 $12,922,365 $12,256,327
=========== =========== ===========
Export sales accounted for approximately 13%, 26%, and 19% of total sales
during the years ended June 30, 1999, 1998, and 1997. Export sales are
attributed to geographic region based upon the location of the customer.
Export sales by geographic area were as follows:
Years ended June 30, 1999 1998 1997
---------- ---------- ----------
Europe $1,216,199 $1,705,996 $1,456,141
Latin America 371,654 371,854 484,319
Asia 31,935 62,027 132,590
Canada 7,011 199,082 117,966
Middle East -- 912,240 14,854
Other 28,333 71,949 82,062
---------- ---------- ----------
$1,655,132 $3,323,148 $2,287,932
========== ========== ==========
One customer accounted for 22%, 18% and 19% of total sales for the years
ended June 30, 1999, 1998 and 1997. The accounts receivable from this
customer represented 26% and 18% of trade receivables at June 30, 1999 and
1998. The accounts receivable from another customer represented 11% of trade
receivables at June 30, 1999 and the accounts receivable from another
customer represented 10% of trade receivables at June 30, 1998.
-31-
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
NOTE J - 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 years ended June 30, 1999 and 1998, the Company
repurchased 175,650 and 29,500 shares for $543,400 and $124,563.
NOTE K - RISKS AND UNCERTAINTIES
The Year 2000 issue relates to limitations in computer systems and
applications that may prevent proper recognition of the year 2000. The
potential effect of the Year 2000 issue on the Company and its business
partners will not be fully determinable until the year 2000 and thereafter.
If Year 2000 modifications are not properly completed either by the Company
or entities with whom the Company conducts business, the Company's financial
condition and results of operations could be adversely impacted.
-32-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item with respect to directors
will be included under the heading "Election of Directors" in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
November 11, 1999, 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.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item will be included under the
heading "Executive Compensation" in the Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held November 11, 1999, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item will be included under the
heading "Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held November 11, 1999, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item with respect to certain
relationships and related transactions will be included under the heading
"Certain Relationships and Related Transactions" in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held on November
11, 1999, and is incorporated herein by reference.
-33-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits
1. Financial Statements
The following consolidated financial statements of the Company and
its subsidiaries are filed as a part of this Form 10-K in Part II,
Item 8:
(i) Report of Independent Certified Public Accountants
(ii) Consolidated Balance Sheets at June 30, 1999 and 1998
(iii) Consolidated Statements of Operations for the years ended June
30, 1999, 1998 and 1997
(iv) Consolidated Statements of Comprehensive Loss for the years
ended June 30, 1999, 1998 and 1997
(v) Consolidated Statements of Shareholders' Equity for the years
ended June 30, 1999, 1998 and 1997
(vi) Consolidated Statements of Cash Flows for the years ended June
30, 1999, 1998 and 1997
(vii) Notes to the Consolidated Financial Statements
2. Financial Statement Schedules
(i) Report of Independent Certified Public Accountants
on Schedule II Page 38
(ii) Schedule II - Valuation and Qualifying Accounts,
for each of the three years in the period ended
June 30, 1999 Page 39
(iii) 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 Registrant, as amended (1)
3.02 By-laws of Registrant (1)
10.01 Service Agreement dated July 1, 1986, between LecTec
International, Inc., a U.S. Virgin Islands corporation,
and LecTec Corporation, relating to the sale, lease or
rental of certain property outside the United States. (1)
10.02 Distribution and Commission Agreement dated July 1,
1986, between LecTec International, Inc., a U.S. Virgin
Islands corporation, and LecTec Corporation, relating to
the sale, lease or rental of certain property outside
the United States. (1)
-34-
10.03 Certificate of Secretary pertaining to Resolution of
Board of Directors of LecTec Corporation, dated October
30, 1986, implementing a Profit Sharing Bonus Plan. (1)
10.04 Research Agreement dated December 31, 1991, between
LecTec Corporation and the University of Minnesota,
whereby LecTec Corporation received exclusive rights to
market and sell a non-nicotine compound to be mutually
developed for smoking cessation. (2)
10.05 Assignment and Mutual Release Agreement dated March 9,
1993 between Pharmaco Behavioral Associates, Inc.,
Robert M. Keenan, Ph.D., M.D. and the University of
Minnesota, whereby the University assigned title,
royalty and patent rights associated with the technology
to alleviate symptoms of tobacco withdrawal to Pharmaco
Behavioral Associates, Inc. and Dr. Keenan. Also
included is a mutual release of all parties on all past
title, royalty and patent rights. (2)
10.06 License Agreement dated March 9, 1993 between Pharmaco
Behavioral Associates, Inc. and LecTec Corporation,
whereby the Company received an exclusive, worldwide
license to market, make and sublicense product
associated with the technology to alleviate symptoms of
tobacco withdrawal. (2)
10.07 Consultant Contract and Invention Assignment dated March
9, 1993 between Robert Keenan, Ph.D., M.D. and LecTec
Corporation, whereby the Company received assignment of
patent and invention rights associated with the
technology to alleviate symptoms of tobacco withdrawal
including provisions that the Company enter into a
consulting agreement with Dr. Keenan. (2)
10.08 Marketing and Distribution Agreement dated January 11,
1996 between LecTec Corporation, Pharmadyne Corporation
(formerly Natus Corporation) and CNS, Inc. regarding an
analgesic pain patch (3)
10.09 LecTec Corporation 1989 Stock Option Plan (4)
10.10 LecTec Corporation 1991 Directors' Stock Option Plan (4)
10.11 Building lease dated May 24, 1991 between LecTec
Corporation and Sierra Development Co. for the lease of
the manufacturing and warehouse facility located in
Edina, Minnesota (4)
10.12 First amendment dated May 5, 1997 between LecTec
Corporation and Rushmore Plaza Partners Limited
Partnership for the extension of the previous lease of
the manufacturing and warehouse facility located in
Edina, Minnesota (4)
10.13 Articles of Merger of Pharmadyne Corporation into LecTec
Corporation dated December 31, 1997 , whereby
Pharmadyne, a wholly-owned subsidiary, is merged into
LecTec Corporation (5)
-35-
10.14 Change In Control Termination Pay Plan adopted May 27,
1998, for the benefit of certain employees of LecTec
Corporation in the event of a Change in Control (5)
10.15 Termination Agreement dated July 30, 1998 between LecTec
Corporation and CNS, Inc., whereby the Marketing and
Distribution Agreement date January 11, 1996 is
terminated (5)
10.16 First Amendment, dated December 31, 1998, to License
Agreement dated March 9, 1993 between LecTec
Corporation, Pharmaco Behavioral Associates, Inc. and
The Regents of the University of Minnesota, whereby
certain provisions of the March 9, 1993 agreement are
modified (6)
10.17 Separate License Agreement dated December 31, 1998
between LecTec Corporation and Robert M, Keenan, M.D.,
Ph.D., whereby LecTec obtains a license to the cotinine
portion of certain patents (6)
10.18 LecTec Corporation Employee Stock Purchase Plan (7)
10.19 LecTec Corporation 1998 Stock Option Plan (8)
10.20 LecTec Corporation 1998 Directors' Stock Option Plan (8)
*10.21 Letter of Intent dated April 19, 1999 between LecTec
Corporation and Johnson & Johnson Consumer Companies,
Inc., whereby the parties agree to certain milestones
leading to the development of a skin care product (9)
21.01 Subsidiaries of the Company (9)
23.01 Consent of Grant Thornton LLP (9)
27.01 Financial Data Schedule (9)
- - ---------------------------------------------------------
* Confidential treatment requested 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 together with a confidential treatment
request.
(1) Incorporated herein by reference to the Company's Form S-18
Registration Statement (file number 33-9774C) filed on October
31, 1986 and amended on December 12, 1986.
(2) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1993.
(3) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1996.
(4) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1997.
-36-
(5) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1998.
(6) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1998.
(7) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 (file number 333-72571) filed on
February 18, 1999.
(8) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 (file number 333-72569) filed on
February 18, 1999.
(9) Filed herewith.
(b) 1. Reports on Form 8-K.
None.
-37-
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II
Board of Directors
LecTec Corporation
In connection with our audit of the consolidated financial statements of LecTec
Corporation and Subsidiaries referred to in our report dated August 18, 1999
which is included in the Annual Report to shareholders and incorporated by
reference, we have also audited Schedule II for each of the three years in the
period ended June 30, 1999. In our opinion, this schedule presents fairly, in
all material respects, the information required to be set forth therein.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
August 18, 1999
-38-
LecTec Corporation and Subsidiaries
Schedule II
Valuation and Qualifying Accounts
Three Years Ended June 30, 1999
Balance at Charged to Charge to Balance
Beginning of costs and other Deductions at end
Description Period expenses accounts (a) of period
- - -------------------------- ------ -------- -------- ---------- ---------
Allowance for doubtful accounts
Year ended June 30, 1997 $38,974 $56,000 $-- $46,445 $ 48,529
Year ended June 30, 1998 48,529 48,000 -- 5,711 90,818
Year ended June 30, 1999 90,818 48,000 -- 37,067 101,751
(a) Write-offs, less recoveries
-39-
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
24th day of September, 1999.
LECTEC CORPORATION
/s/Rodney A. Young
----------------------------------
Rodney A. Young
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/Rodney A. Young September 24, 1999
- - ---------------------------------------------------- ------------------
Rodney A. Young
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
/s/Deborah L. Moore September 24, 1999
- - ---------------------------------------------------- ------------------
Deborah L. Moore
Chief Financial Officer and Secretary
(Principal Financial Officer and Accounting Officer)
/s/Lee M. Berlin September 24, 1999
- - ---------------------------------------------------- ------------------
Lee M. Berlin
Director
/s/Alan C. Hymes September 24, 1999
- - ---------------------------------------------------- ------------------
Alan C. Hymes
Director
/s/Paul O. Johnson September 24, 1999
- - ---------------------------------------------------- ------------------
Paul O. Johnson
Director
/s/Donald C. Wegmiller September 24, 1999
- - ---------------------------------------------------- ------------------
Donald C. Wegmiller
Director
-40-
EXHIBIT INDEX
Exhibits
3.01 Articles of Incorporation of Registrant, as amended (Note 1).
3.02 By-laws of Registrant (Note 1).
10.01 Service Agreement dated July 1, 1986, between LecTec
International, Inc., a U.S. Virgin Islands corporation, and
LecTec Corporation, relating to the sale, lease or rental of
certain property outside the United States (Note 1).
10.02 Distribution and Commission Agreement dated July 1, 1986,
between LecTec International, Inc., a U.S. Virgin Islands
corporation, and LecTec Corporation, relating to the sale,
lease or rental of certain property outside the United States
(Note 1).
10.03 Certificate of Secretary pertaining to Resolution of Board of
Directors of LecTec Corporation, dated October 30, 1986,
implementing a Profit Sharing Bonus Plan (Note 1).
10.04 Research Agreement dated December 31, 1991, between LecTec
Corporation and the University of Minnesota, whereby LecTec
Corporation received exclusive rights to market and sell a
non-nicotine compound to be mutually developed for smoking
cessation (Note 2).
10.05 Assignment and Mutual Release Agreement dated March 9, 1993
between Pharmaco Behavioral Associates, Inc., Robert M. Keenan,
Ph.D., M.D. and the University of Minnesota, whereby the
University assigned title, royalty and patent rights associated
with the technology to alleviate symptoms of tobacco withdrawal
to Pharmaco Behavioral Associates, Inc. and Dr. Keenan. Also
included is a mutual release of all parties on all past title,
royalty and patent rights (Note 2).
10.06 License Agreement dated March 9, 1993 between Pharmaco
Behavioral Associates, Inc. and LecTec Corporation, whereby the
Company received an exclusive, worldwide license to market,
make and sublicense product associated with the technology to
alleviate symptoms of tobacco withdrawal (Note 2).
10.07 Consultant Contract and Invention Assignment dated March 9,
1993 between Robert Keenan, Ph.D., M.D. and LecTec Corporation,
whereby the Company received assignment of patent and invention
rights associated with the technology to alleviate symptoms of
tobacco withdrawal, including provisions that the Company enter
into a consulting agreement with Dr. Keenan (Note 2).
10.08 Marketing and Distribution Agreement dated January 11, 1996
between LecTec Corporation, Pharmadyne Corporation (formerly
Natus Corporation) and CNS, Inc. regarding an analgesic pain
patch. (Note 3).
10.09 LecTec Corporation 1989 Stock Option Plan (Note 4).
10.10 LecTec Corporation 1991 Directors' Stock Option Plan (Note 4).
10.11 Building lease dated May 24, 1991 between LecTec Corporation
and Sierra Development Co. for the lease of the manufacturing
and warehouse facility located in Edina, Minnesota (Note 4).
-41-
10.12 First amendment dated May 5, 1997 between LecTec Corporation
and Rushmore Plaza Partners Limited Partnership for the
extension of the previous lease of the manufacturing and
warehouse facility located in Edina, Minnesota (Note 4).
10.13 Articles of Merger of Pharmadyne Corporation into LecTec
Corporation dated December 31, 1997 , whereby Pharmadyne, a
wholly-owned subsidiary, is merged into LecTec Corporation
(Note 5).
10.14 Change In Control Termination Pay Plan adopted May 27, 1998,
for the benefit of certain employees of LecTec Corporation in
the event of a Change in Control (Note 5).
10.15 Termination Agreement dated July 30, 1998 between LecTec
Corporation and CNS, Inc., whereby the Marketing and
Distribution Agreement date January 11, 1996 is terminated
(Note 5).
10.16 First Amendment, dated December 31, 1998, to License Agreement
dated March 9, 1993 between LecTec Corporation, Pharmaco
Behavioral Associates, Inc. and The Regents of the University
of Minnesota, whereby certain provisions of the March 9, 1993
agreement are modified (Note 6).
10.17 Separate License Agreement dated December 31, 1998 between
LecTec Corporation and Robert M, Keenan, M.D., Ph.D., whereby
LecTec obtains a license to the cotinine portion of certain
patents (Note 6).
10.18 LecTec Corporation Employee Stock Purchase Plan (Note 7).
10.19 LecTec Corporation 1998 Stock Option Plan (Note 8).
10.20 LecTec Corporation 1998 Directors' Stock Option Plan (Note 8).
*10.21 Letter of Intent dated April 19, 1999 between LecTec
Corporation and Johnson & Johnson Consumer Companies, Inc.,
whereby the parties agree to certain milestones leading to the
development of a skin care product.............................
21.01 Subsidiaries of the Company....................................
23.01 Consent of Grant Thornton LLP..................................
27.01 Financial Data Schedule........................................
NOTES:
* Confidential treatment requested 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 together with a confidential treatment
request.
(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.
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(2) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1993.
(3) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1996.
(4) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1997.
(5) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1998.
(6) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1998.
(7) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 (file number 333-72571) filed on
February 18, 1999.
(8) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 (file number 333-72569) filed on
February 18, 1999.
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