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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM________ TO________.
Commission File Number: 0-16159
LECTEC CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1301878
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10701 RED CIRCLE DRIVE, MINNETONKA, MINNESOTA 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (952) 933-2291
Securities registered pursuant to Section 12(b)
of the Act: None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, par value $0.01
per share.
(Title of class)
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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the Common Stock held by non-affiliates
of the registrant as of April 10, 2003 (i.e., the last business day of the
registrant's most recently completed second fiscal quarter), was $1,189,919
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
April 10, 2003 was 3,966,395 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 on May 22, 2003.
PART I
ITEM 1. BUSINESS
GENERAL
LecTec Corporation (the "Company") is a health care and consumer
products company that develops, manufactures and markets products based on its
advanced skin interface technologies. Primary products include a complete line
of over-the-counter ("OTC") therapeutic patches and a line of skin care
products. The Company markets and sells its products to consumers through retail
outlets (food, chain drug, and mass merchandise stores), other health care
consumer products companies and directly via the Internet. All of the products
manufactured by the Company are designed to be effective, safe and highly
compatible with skin.
The Company is an innovator in hydrogel-based topical delivery of
therapeutic OTC medications, which provide alternatives to topical creams and
ointments. A hydrogel is a gel-like material having an affinity for water and
similar compounds. These gels are ideal for delivering medication onto the skin.
The Company holds multiple domestic and international patents on its hydrogel
technology.
Effective January 14, 1999, the Company was certified as meeting the
requirements of ISO 9001 and EN46001 quality system standards. Certification was
granted by TUV Product Service GmbH. On September 21, 2001 the quality system
was re-audited and certification was expanded to include ISO 13485, as well as
recognition to be certified as a contract manufacturer for other consumer
products companies. Meeting these standards confirms that the Company has
achieved the highest level of quality systems compliance demonstrated by
world-class design and manufacturing firms.
The Company, through its research and development efforts, is
investigating new products for topical delivery of OTC drugs. In addition, new
technologies and existing technologies are being developed and refined to focus
on new skin care and comfort care consumer products targeting new retail
customers and new markets.
The Company was organized in 1977 as a Minnesota corporation and went
public in December 1986. Its principal executive office is located at 10701 Red
Circle Drive, Minnetonka, Minnesota 55343, and its telephone number is (952)
933-2291.
On September 5, 2001, the Company elected to change its fiscal year end
from June 30 to December 31. Previously, the fiscal year was from July 1 through
June 30. The most recent results and analysis for a 12-month reporting period is
fiscal year 2002, covering the period from January 1, 2002 through December 31,
2002.
PRODUCTS
The Company's core competency is skin interface hydrogel technology.
This competency results in products that are beneficial to treating a variety of
temporary aliments including minor aches and pains, as well as coughs and sore
thoughts through the topical delivery of over the counter active medicaments on
to the skin. These products are convenient to use and less messy than creams and
lotions. The adhesive characteristics, dimensions, drug stability, shelf life
and manufacturability of the Company's products are highly consistent and
reproducible from product to product.
The Company designs, manufactures and markets topical ointment-based
patch products for the application of OTC drugs and skin care ingredients.
Therapeutic patch products use a hydrogel adhesive, breathable cloth patch to
deliver OTC drugs and other therapeutic compounds onto the skin. Products
currently manufactured using the adhesive-based patch technology are analgesics
for localized pain relief, vapor cough suppressants, anti-itch, acne treatment
products, wart removers, and a corn and callus remover. The analgesic and
anti-itch products are marketed under the LecTec brand name TheraPatch(R). The
acne treatment patches are marketed by Johnson & Johnson Consumer Products
Company under the Neutrogena(R), On-the-Spot(R) Acne Patch, and CLEAN & CLEAR(R)
brand names. The vapor cough
1
suppressant patches are marketed under the TheraPatch brand name as well as by
Novartis Consumer Health, Inc. under the Triaminic(R) brand name. The Company
sells the wart removers and corn and callus removers to certain customers who
market them under their own brand name.
Sales of therapeutic consumer products accounted for approximately 89%
and 62% of the Company's total net sales for the twelve-month periods ended
December 31, 2002 and 2001. Sales of therapeutic consumer products accounted for
approximately 77% and 60% of the Company's total net sales for the six-month
periods ended December 31, 2001 and 2000. Sales of therapeutic consumer products
accounted for approximately 55% and 29% of the Company's total net sales for the
years ended June 30, 2001 and 2000.
Beginning in February 2002, the Company expanded into the skin care
market by launching a two-products under the Company's brand name NeoSkin(R).
These products include pre-formed facemasks and under eye gel patches.
BUSINESS DISPOSITIONS
In March 2001, the Company sold its medical tape manufacturing
equipment and other related assets. The sale of the medical tape equipment
finalized the Company's plan, which was adopted at the end of the fiscal year
ended June 30, 2000, to exit the low margin medical tape business.
No sales of medical tapes occurred in fiscal 2002 and for the six
months ended December 31, 2001. Sales of medical tapes accounted for
approximately 1% and 14% of the Company's total net sales for the years ended
June 30, 2001 and 2000.
In April 2001, the Company sold its diagnostic electrode and
electrically conductive adhesive hydrogel business assets, which were used to
produce the Company's conductive products. The conductive products included
diagnostic electrodes and electrically conductive adhesive hydrogels. Under a
manufacturing and supply agreement between the Company and the buyer, the
Company continued to manufacture and supply to the buyer certain conductive
products through January 2002. The Company supplied the products at its cost of
production through October 31, 2001, and at its cost of production plus 10% from
November 1, 2001 through January 31, 2002. The Company continued to manufacture
and supply the buyer electrically conductive adhesive hydrogels at margins of
approximately 30% subsequent to the expiration of the manufacturing and supply
agreement. The Company supplied the product to the buyer through the third
quarter of fiscal 2002.
Sales of conductive products accounted for approximately 11% and 38% of
the Company's total net sales for the twelve-month periods ended December 31,
2002 and 2001. Sales of conductive products accounted for approximately 23% and
38% of the Company's total net sales for the six-month periods ended December
31, 2001 and 2000. Sales of conductive products accounted for approximately 44%
and 55% of the Company's total net sales for the years ended June 30, 2001 and
2000.
MARKETING AND MARKETING STRATEGY
The Company markets and sells its products to consumers through retail
outlets (food, chain drug and mass merchandise stores), healthcare consumer
products companies and via the Internet. In the second half of fiscal 2002, the
Company changed its strategy of launching and maintaining new products under its
own brand name, which required significant marketing investments, to expanding
its efforts to establish contract manufacturing and licensing relationships with
large pharmaceutical and skin care companies.
In 1998, the Company entered into the consumer products market. The
entry was supported by the hiring of a new retail sales and marketing executive
in May 1998 and a retail sales team in the fiscal year ended June 30, 1999. In
the consumer products markets, retail broker and manufacturer's representative
contracts were established. Due to financial difficulties in the fiscal year
ended December 31, 2002, the Company reduced its retail sales and support team
to a level that allows it to continue established relationships with select
retail organizations. The TheraPatch brand is the umbrella brand for the
Company's therapeutic patch products introduced to all markets.
2
While the remaining retail sales team maintains the current retail
consumer products markets, it also has responsibility for contract manufacturing
sales to consumer products companies who sell directly to the consumer.
Approximately 72% and 76% of the sales of the Company's consumer patch products
during the twelve month periods ended December 31, 2002 and 2001 were derived
from contract manufacturing agreements with other companies that act as
resellers of our products. Under these agreements, the Company's products are
marketed and sold under another company's brand name and sold by another
company's sales force. The Company's success depends in part upon its ability to
enter into additional reseller agreements with new third parties while
maintaining existing reseller relationships and in part on its ability to get
consumers to purchase the Company's products from retailers. The Company
believes its relationships with existing third party resellers have been a
significant factor in the success to date of its therapeutic consumer products
business, and any deterioration or termination of these relationships would
adversely affect its business. Due to the lack of funds for significant
advertising expenditures, the Company has been limited in its ability to sell
products to the ultimate consumer and has had to significantly modify its
business strategy.
Because of working capital constraints, the Company was unable to
adequately fund the advertising needed to drive the two-product line of skincare
products under the Company's brand name NeoSkin through its distribution
channels. The Company has made a decision that these products will be
repositioned for the direct to consumer distribution channel.
The Company experiences seasonality in the sales of three of its
therapeutic patch products. The vapor cough suppressant patches and cold sore
patches experience increased sales during the cough and cold season, which
typically includes the fall and winter months. The sales of the anti-itch patch
increase during the summer months when insect bites and itching associated with
poison oak/ivy/sumac are prevalent. The therapeutic patch product affected least
by seasonality is TheraPatch Warm, which is primarily sold for arthritis and
chronic back pain.
The Company currently sells its products in the U.S., Europe, Latin
America, Middle East and Canada. In prior years, the Company also sold its
conductive products in the U.S., Europe, Latin America, Asia and Canada. Except
for sales of the TheraPatch brand patch product into Canada, all of the
Company's international sales were denominated in U.S. dollars. Thus, most of
the impact of the foreign currency transaction gains and losses were borne by
the Company's customers. Export sales accounted for approximately 12% and 6% of
total net sales for the twelve-month periods ended December 31, 2002 and 2001.
Export sales accounted for approximately 8% and 14% of total net sales for the
fiscal years ended June 30, 2001 and 2000.
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:
Year Year Six-month
Ended Ended Periods ended Years Ended
---------- ---------- ------------------------ ------------------------
12/31/2002 12/31/2001 12/31/2001 12/31/2000 6/30/2001 6/30/2000
---------- ---------- ---------- ---------- ---------- ----------
Europe $ 21,096 $393,040 $ 0 $422,757 $ 815,796 $1,006,412
Latin America 85,608 0 0 139,613 139,613 547,904
Asia 0 95,228 46,512 24,135 72,851 46,279
Canada 509,537 160,059 80,146 135,770 215,686 298,884
Middle East 195,310 0 0 0 0 0
Other 0 4,850 0 3,100 7,950 36,234
-------- --------- ---------------------- ------------------------
Total Exports $811,551 $ 653,177 $126,658 $725,375 $1,251,896 $1,935,713
======== ========= ====================== ========================
3
CUSTOMERS
Novartis Consumer Health, Inc. (Novartis) accounted for 31% and 26% of
the Company's net sales for the twelve-month periods ended December 31, 2002 and
2001. Novartis accounted for 33% and 18% of the Company's total sales for the
six-month periods ended December 31, 2001 and 2000, and 20% of the Company's
total net sales for the fiscal year ended June 30, 2001. The fiscal year ended
June 30, 2001 was the first full year of sales to Novartis. The Company's
reseller agreement with Novartis provides that Novartis will purchase from the
Company hydrogel patches which emit vapors that, when inhaled, act as a cough
suppressant to provide relief of cough and cold symptoms. The agreement has an
initial term that expires May 15, 2005. The Company's principal duty under the
agreement is to manufacture the patches ordered by Novartis. The Company may not
manufacture and sell the patches or any other vapor patches in the pediatric
field of use or to any other reseller in the United States, but it may
manufacture and sell competing patches under the Company's own brand name. The
agreement does not require Novartis to purchase a minimum quantity each year.
The Company's results of operations could be adversely affected if Novartis
decreased the purchases it makes under the agreement. In addition, if the
agreement were cancelled, which Novartis has the right to do upon six months
notice or if the Company were unable to extend or renew the agreement upon its
expiration, the Company's results of operations would be adversely affected.
On May 2, 2002, Novartis and LecTec amended and restated the Supply
Agreement dated May 15, 2000, incorporating a number of changes that create a
vehicle for prepayment against future orders. The prepayment amount, not to
exceed $600,000, will represent an advance of orders placed 60 days in advance
of shipment. In exchange for the prepayment program, LecTec agreed to a
conversion of a payable of $220,000 to a note payable, the execution of a
non-exclusive license agreement that would survive LecTec in the event of
default and the grant of a security interest in most of LecTec's assets. On
December 31, 2002 and February 28, 2003, the amount of the prepayment was
approximately $265,000 and $370,000.
Johnson & Johnson Consumer Products Company (J&J) accounted for 14% and
12% of the Company's net sales for the twelve-month periods ended December 31,
2002 and 2001. J&J accounted for 14% and 22% of the Company's total sales for
the six-month periods ended December 31, 2001 and 2000, respectively, and 16% of
the Company's total net sales for the fiscal year ended June 30, 2001. The
fiscal year ended June 30, 2001 was the first full year of sales to J&J. The
reseller agreement with J&J provides that J&J will purchase from the Company
hydrogel patches for use in the treatment of acne. Although the agreement has an
initial term that expired on May 24, 2002, and the both parties are still
operating as if the Agreement is still in place until an extension is agreed
upon. The Company's principal duty under the agreement is to manufacture the
patches ordered by J&J. Under the terms of the agreement, J&J is required to
purchase a minimum amount of patches in each year of the initial two-year term.
During the term of the agreement, J&J has the exclusive worldwide right to
market, sell and distribute the patches and the right of first negotiation as to
any of the Company's new acne products utilizing the same technology. The
Company's operations would be adversely affected if the reseller purchased only
the minimum requirement. In addition, if the agreement were cancelled due to the
Company's breach or if the Company were unable to extend or renew the agreement
its results of operations would be adversely affected.
Ludlow Technical Products (Ludlow) accounted for 9% and 14% of the
Company's total net sales for the twelve-month periods ended December 31, 2002
and 2001. These sales were attributable to the manufacturing and supply
agreement between the Company and Ludlow Company LP as a result of the sale of
the Company's diagnostic electrode and electrically conductive adhesive hydrogel
business. The Company's sales to Ludlow continued through the third quarter of
fiscal 2002.
Spacelabs Burdick Inc. accounted for 0% and 6% of the Company's total
net sales for the years ended December 31, 2002 and 2001, and 0% and 13% of the
Company's total net sales for the six-month periods ended December 31, 2001 and
2000. Spacelabs Burdick Inc. accounted for 12% and 17% of the Company's total
net sales for the fiscal years ended June 30, 2001 and 2000. This conductive
products customer no longer generates sales due to the sale of the conductive
business assets during its fiscal year ended June 30, 2001.
4
The Company sold its products to 312 and 262 active customers
(excluding TheraPatch sales to individual consumers) during the twelve-month
periods ended December 31, 2002 and 2001. The Company sold its products to 163
and 253 active customers (excluding TheraPatch sales to individual consumers)
during the six-month periods ended December 31, 2001 and 2000. The Company's
backlog orders as of February 28, 2003 totaled approximately $2,628,000,
compared to approximately $1,640,000 on February 28, 2002. The Company sold its
products to 310 and 275 active customers (excluding TheraPatch sales to
individual consumers) during the fiscal years ended June 30, 2001 and 2000.
COMPETITION
The markets for OTC drug delivery patches and skin care products are
highly competitive. Firms in the consumer and medical industries compete on the
basis of product performance, pricing, distribution and service. Competitors in
the United States and abroad are numerous and include, among others, major
pharmaceutical and consumer product companies which have significantly greater
financial, marketing and technological resources than the Company. However, the
Company believes that it competes on the strength of its proprietary technology,
speed-to-market, flexibility, innovative "first-in-category" patches, customer
focus and its ability to manufacture and market its products to targeted market
segments.
The Company's OTC TheraPatch family of analgesic, cooling, vapor,
anti-itch, cold sore, psoriasis and sinus and allergy patches competes with
ointments, lotions and creams as well as other OTC patch products manufactured
by various competitors including Chattem, Mentholatum/Rohto Pharmaceuticals,
Inc.
MANUFACTURING
The Company manufactures its therapeutic topical patches at the
Company's Minnetonka, Minnesota facility. The Minnetonka facility also processes
raw materials and manufactures the Company's therapeutic products. The Company's
therapeutic products consist primarily of hydrogel-based, individually wrapped,
breathable, self-adhering cloth patches that topically deliver therapeutic OTC
medications. The Company's second facility in Edina, Minnesota is the primary
site for the packaging of therapeutic products and the majority of the Company's
warehouse capacity. The Company believes that the raw materials used in
manufacturing its products are generally available from multiple suppliers.
Inventory levels have been higher than normally needed for the current
production levels due to pressure placed on the Company to prepay certain
vendors to assure inventory availability.
To assure that the Company's customers receive quality products, the
Company's manufacturing process complies with standards that meet the
requirements of ISO 9001: 1994; EN46001: 1996; ISO 13485; Drug cGMP (Current
Good Manufacturing Practice) and 21 CFR (Code of Federal Regulations) Parts 210
and 211. Meeting these standards demonstrates that the Company has achieved the
highest level of quality systems compliance as demonstrated by world-class
manufacturers.
RESEARCH AND DEVELOPMENT
The Company's research and development staff consists of professionals
drawn from the business and academic communities with experience in the
biological, chemical, pharmaceutical and engineering sciences. The research and
development staff is responsible for the investigation, development and
implementation of new and improved products and new technologies.
The Company may develop products internally, jointly with corporations
and/or inventors from outside the Company. The Company may then market resulting
products by sponsoring partners or through a marketing arrangement with
appropriate health care companies. Research and development contract
opportunities are evaluated on an individual basis.
The Company, through its research and development efforts, is
investigating new products for topical delivery of OTC drugs. In addition,
existing technologies are being refined to focus on new products targeting new
customers and new markets such as the new NeoSkin skin care product.
5
During the twelve-month periods ended December 31, 2002 and 2001, the
Company spent approximately $492,000 and $945,000 on research and development.
During the six-month periods ended December 31, 2001 and 2000, the Company spent
approximately $466,000 and $442,000 on research and development. During the
fiscal years ended June 30, 2001 and 2000, the Company spent approximately
$919,000 and $1,092,000 on research and development.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
The Company has established a number of quality systems to comply with
applicable regulations. The quality systems are associated with designing,
planning, testing, manufacturing, packaging, labeling and distributing the
Company's products that are subject to federal and foreign regulations and, in
some instances, state and local government regulations.
UNITED STATES REGULATION
The Company is subject to Food and Drug Administration ("FDA")
regulations concerning manufacturing practices and reporting obligations. These
regulations require that development, manufacturing and quality assurance be
performed according to FDA guidelines and in accordance with applicable Code of
Federal Regulation documentation, control and testing requirements. The Company
is also subject to inspection by the FDA at any time. The Company is required to
report to the FDA serious adverse product incidents and to maintain a
documentation and record keeping system in accordance with FDA regulations. The
advertising of the Company's products is also subject to both FDA and Federal
Trade Commission jurisdiction. If the FDA believes that the Company is not in
compliance with any aspect of the law, it can institute proceedings to detain or
seize products, issue a recall, stop future violations and assess civil and
criminal penalties against the Company, its officers and its employees.
The products manufactured by the Company's continuing consumer products
business are classified as either non-drugs or over-the-counter ("OTC") drugs
that are either not regulated or regulated by published FDA OTC monographs.
Monographs are used to regulate OTC drugs that contain ingredients known to be
safe and effective. Monographs have also established acceptable ingredients,
combinations, concentrations and specific labeling requirements. Until all
finished good electrodes sold by the Company in the United States reach their
expiration date, the Company will continue to be subject to federal FDA policy
including current Good Manufacturing Practices ("GMP") and quality system
regulations. The Company's hydrogels sold domestically also continue to be
subject to GMP and quality system regulations because they are sold to
distributors for processing into finished commercial goods.
INTERNATIONAL REGULATION
The Company's topical OTC drug delivery patches are marketed in Canada
under applicable Canadian OTC monographs where appropriate, and they are
reviewed and approved prior to commercialization by the Health Protection branch
of Health Canada. Products sold in other international markets or communities
require compliance with specific country regulations. International sales of our
products are subject to the regulatory requirements of each country in which we
sell our product. These requirements vary from country to country but generally
are much less stringent than those in the United States. Generally, we rely on
distributors or purchasers of our products to pursue regulatory approval in
foreign countries. The distributors interface with foreign governments, assemble
and format documentation provided by LecTec Corporation personnel, and respond
to requested information by reviewers in the process of review and approval of
individual product dossiers.
PATENTS AND TRADEMARKS
The Company has U.S. and international patents on adhesive hydrogels,
electrodes and transdermal and topical delivery systems. Nineteen active U.S.
patents and three active international patents are currently assigned or
licensed to the Company. Nine U.S. and international applications are pending.
International patent applications are pending in numerous European countries,
Canada and Japan. The patents most pertinent to the Company's major products
have a remaining legal duration ranging from 11 to 18 years. Issued patents can
later be held invalid by the patent office issuing the
6
patent or by a court. The Company cannot be certain that its patents will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide a competitive advantage.
Two trademarks were registered during fiscal 2002. Five trademark
registrations are pending. The Company has 10 registered trademarks and three
pending trademarks.
The Company expects that its products will be subject to continuous
modifications due to improvements in materials and technological advances for
medical products. Therefore, the Company's continued success does not depend
solely upon ownership of patents but upon technical expertise, creative skills
and the ability to forge these talents into the timely release of new products.
The Company uses both patents and trade secrets to protect its
proprietary property and information. In addition, the Company monitors
competitive products and patent publications to be aware of potential
infringement of its rights. To the extent the Company relies on confidential
information to maintain competitive position, there can be no assurance that
other parties will not independently develop the same or similar information.
EMPLOYEES
As of December 31, 2002, 41 people were employed by the Company, of
which 37 were full-time employees. None of the Company's employees are
represented by labor unions or other collective bargaining units. The Company
believes relations with its employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Title
- --------------------- --- --------------------------------------------------------
Rodney A. Young 48 Chairman, Chief Executive Officer and President
Timothy P. Fitzgerald 63 Vice President, Operations
John D. LeGray 57 Vice President, Quality Assurance and Regulatory Affairs
Timothy R. J. Quinn 42 Vice President, Consumer Products
Rodney A. Young has served as Director, Chief Executive Officer and
President of the Company since August 1996 and as Chairman of the Board since
November 1996. Prior to assuming these positions with the Company, Mr. Young
served Baxter International, Inc. for five years in various management roles,
most recently as Vice President and General Manager of the Specialized
Distribution Division. In addition to fulfilling his role as Chairman of the
Company, Mr. Young also serves as a Director of Possis Medical, Inc., Delta
Dental Plan of Minnesota and Health Fitness Corporation.
Timothy P. Fitzgerald has served as Vice President, Operations since he
joined the Company in February 2000. Prior to joining the Company, he served as
President of United Recycling, Inc. from 1997 to 1999. Mr. Fitzgerald's career
includes technical and senior management positions at Bell & Howell Co.,
International Data Engineering, Inc. and Varitronic Systems, Inc.
John D. LeGray has served as Vice President, Quality Assurance and
Regulatory Affairs since he joined the Company in September 1997. Mr. LeGray's
career includes technical and management positions at DiaSorin Inc., Bayer
Corporation and Abbott Laboratories.
Timothy R. J. Quinn has served as Vice President and General Manager,
Consumer Products since he joined the Company in May 1998. Mr. Quinn's career
includes extensive sales and marketing experience in the consumer products
industry. Prior to joining the Company, he served as Vice President of Sales at
Redmond Products from 1991 to 1998. Prior to joining Redmond, Mr. Quinn served
in a variety of sales and marketing management positions for Lederle
Laboratories and General Foods Corporation.
7
ITEM 2. PROPERTIES
On December 31, 2002, the Company owned 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. As of
February 25, 2003, the building was sold to a third party and leased back. The
initial term of the lease is 12 months with an option to extend the lease for
two consecutive five-year terms. The lease contains a provision that grants the
Company free rent for the 12 months following the transaction and thereafter
extends the lease at a rate based on current market conditions in the local
commercial rental market. 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, 2003.
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 traded on the Nasdaq Small Cap Market tier
of the Nasdaq Stock Market ("Nasdaq") under the symbol LECT until November 26,
2002 when the Company's stock was moved to the OTC Bulletin Board due to the
Company's inability to satisfy the minimum bid price and stockholders' equity
standards for continued listing.
The following table sets forth the high and low daily trade price
information for the Company's common stock for each quarter of the fiscal year
ended December 31, 2002, six-month period ended December 31, 2001, and the
fiscal year ended June 30, 2001. Such prices reflect interdealer prices, without
retail mark-up, markdown, or commission and may not necessarily represent actual
transactions.
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001 JUNE 30, 2001
----------------- ------------------ -------------------
HIGH LOW HIGH LOW HIGH LOW
----- ----- ----- ----- ----- -----
Quarter ended Sept. 30 $0.99 $0.20 $2.30 $1.53 $4.22 $2.00
Quarter ended Dec. 31 0.95 0.30 1.95 1.00 2.75 1.00
Quarter ended March 31 3.05 1.16 N/A N/A 3.13 1.56
Quarter ended June 30 1.45 0.60 N/A N/A 3.00 1.56
As of March 15, 2003, the Company had 3,966,395 shares of common stock
outstanding, and approximately 328 common shareholders of record which number
does not include beneficial owners whose shares were held of record by nominees
or broker dealers.
8
The Company has not declared or paid cash dividends on its common stock
since its inception, and the Company intends to retain all earnings for use in
its business for the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
Please see Item 1 of this report for information regarding the
dispositions of the Company's conductive business assets and medical tape assets
during the first half of calendar year 2001 that affect the comparability of the
information set forth below.
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Year ended Six-months ended
December 31, December 31, Year ended June 30
-------------------------- -------------------------- ------------------------------------------------------
2002 2001(a) 2001 2000 2001(a) 2000(b) 1999 1998
---- ------- ---- ---- ------- ------- ---- ----
(unaudited) (unaudited)
Net sales $ 6,852,091 $11,698,110 $ 4,537,691 $ 7,796,791 $14,957,209 $13,416,098 $11,962,420 $12,922,365
Gross profit 1,639,658 2,737,365 882,963 2,519,696 4,373,603 3,860,446 3,705,628 3,684,427
Loss from operations (2,491,878) (4,489,881) (2,557,456) (1,203,196) (3,135,622) (2,890,497) (1,771,324) (474,935)
Net earnings (loss) (2,602,781) 70,470 (2,562,920) (1,286,897) 1,343,492 (2,859,276) (1,683,257) (404,061)
Net earnings (loss)
per share
Basic (.66) .02 (.65) (.33) .34 (.74) (.43) (.10)
Diluted (.66) .02 (.65) (.33) .34 (.74) (.43) (.10)
CONSOLIDATED BALANCE SHEET DATA
December 31, June 30,
-------------------------------------- -------------------------------------------------------
2002 2001 2000 2001 2000 1999 1998
(unaudited)
Cash, cash equivalents and
short-term investments $ 671,588 $1,425,205 $ 285,620 $ 3,376,723 $ 100,171 $ 1,022,025 $ 2,186,532
Current assets 2,114,104 4,048,703 5,551,199 7,872,131 5,478,516 5,960,868 6,817,199
Working capital (1,058,534) 1,106,202 1,100,455 4,279,728 1,512,561 3,497,926 5,335,861
Property, plant and equip, net 1,750,241 2,262,094 2,928,073 2,422,494 3,039,088 4,028,491 4,306,568
Total assets 4,150,207 6,607,870 8,731,216 10,538,574 8,716,955 10,189,330 11,406,442
Long-term liabilities 10,770 125,170 838,718 859,623 31,184 217,868 222,000
Shareholders' equity 966,798 3,540,199 3,441,754 6,086,548 4,719,816 7,508,520 9,703,104
(a) Includes a nonrecurring restructuring charge of $303,759 related to the
sale of the conductive business assets and a gain on disposition of
assets of $4,662,210 related to the sale of the conductive business
assets and the disposition of the medical tape assets.
(b) Includes a charge of $730,000 or $.19 per share related to the plan to
exit the medical tape business.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
On September 5, 2001, the Company's Board of Directors approved a
change in the Company's fiscal year end from June 30 to December 31.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 AND 2001
The following unaudited condensed financial information relates to the
year ended December 31, 2001. Corresponding information for the fiscal year
ended December 31, 2002 is included in the financial statements in Item 8.
STATEMENT OF OPERATIONS STATEMENT OF CASH FLOWS
----------------------- -----------------------
Year ended Year ended
December 31, 2001 December 31, 2001
----------------- -----------------
Net Sales $11,698,110 Cash Flow from Operations $ (4,983,955)
Cost of Goods Sold 8,960,745
----------- Cash Flows from Investing:
Gross Profit 2,737,365 Purchase of Property and Equipment (282,836)
Investment in Patents and trademarks (146,389)
Operating Expenses 7,227,246 Proceeds from asset dispositions 6,666,988
----------- ------------
Loss From Operations (4,489,881) Net cash used in Investing activities 6,237,763
Other expense, net 4,592,253 Cash Flows from Financing:
----------- Issuance from Common Stock 27,975
Earnings before taxes 102,372 Net Payments on notes (343,325)
Proceeds from L-T Debt 239,520
Income taxes (31,902) Payments on L-T Debt (38,393)
----------- ------------
Net earnings $70,470 Net cash used in financing activities (114,223)
=========== ------------
Net increase in cash equivalents 1,139,585
Cash equivalents beginning 285,620
------------
Cash equivalents ending $ 1,425,205
============
NET SALES
Net sales were $6,852,091 for the year ended December 31, 2002, a
decrease of 41.4% from net sales of $11,698,110 for the year ended December 31,
2001. The decrease was primarily the result of decreased conductive product
sales due to the sale of the Company's conductive products division in 2001 and
slower sales in the contract-manufacturing segment due to a soft cough/cold
season. To a lesser extent, total sales were lower because branded consumer
product sales declined due to a reduction of TheraPatch products available.
10
Sales of therapeutic consumer products decreased 15.6% for the fiscal
year ended December 31, 2002 to $6,108,910 from $7,241,577 for the year ended
December 31, 2001. The decrease for the fiscal year ended December 31, 2002 was
primarily the result of a year over year decline of $789,341 in sales to
Novartis Consumer Health, Inc. and to Johnson & Johnson Consumer Products
Worldwide. Sales of branded products were virtually flat from 2001 to 2002.
Sales of conductive products (medical electrodes and conductive
hydrogels) decreased by 83.4% for the fiscal year ended December 31, 2002 to
$743,181 from $4,484,533 for the year ended December 31, 2001. The decrease for
the fiscal year ended December 31, 2002 was the result of the sale of the assets
of the conductive products division in the fourth quarter. The Company expects
no conductive sales in fiscal 2003.
Export sales have historically consisted primarily of electrodes and
semi-finished conductive products sold to overseas converters for final
processing, packaging and marketing; currently, TheraPatch brand therapeutic
consumer products and Triaminic vapor patches account for the majority of these
sales. Export sales accounted for 11.8% and 5.6% of total net sales for the
years ended December 31, 2002 and 2001. All international sales were in U.S.
dollars with the exception of TheraPatch brand products sold in Canada. Export
sales increased by $158,374 for the fiscal year ended December 31, 2002
primarily as a result of large shipments of TheraPatch products and the
commencement of international exports of Novartis-based contract goods. The
Company expects international sales growth in fiscal 2003.
GROSS PROFIT
The Company's gross profit was $1,639,658 for the fiscal year ended
December 31, 2002, which was down from $2,737,365 for the year ended December
31, 2001. As a percentage of total net sales, gross profit was 23.9% and 23.4%
for the years ended December 31, 2002 and 2001, respectively. The decrease in
gross profit dollars for the fiscal year ended December 31, 2002 resulted
primarily from significantly reduced sales manufacturing volumes related to the
sale of the conductive business in 2001.
SALES AND MARKETING EXPENSES
Sales and marketing expenses totaled $1,413,503 or 20.6% of total net
sales for the fiscal year ended December 31, 2002, compared to $3,213,445 or
27.5% of total net sales for the year ended December 31, 2001. The decrease for
the fiscal year ended December 31, 2002 was primarily due to a decrease of
$823,000 in media advertising expense mainly related to a television ad campaign
for TheraPatch Anti-Itch for Kids, $274,000 reduced salary and related benefits,
and $145,000 in reduced travel expenditures. During 2002, the sales and
marketing group retrenched to a position of pursuing contract opportunities that
reduced the sales force and consolidated the consumer and contract marketing
efforts. This resulted in across-the-board reductions in virtually every
spending category. The Company anticipates sales and marketing expenses, as a
percentage of total net sales in fiscal 2003, will decrease due to expense
reduction measures initiated in the latter part of fiscal 2002.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $2,226,518 or 32.5% of
total net sales for the fiscal year ended December 31, 2002, compared to
$2,765,473 or 23.6% of total net sales for the year ended December 31, 2001. The
decrease for the fiscal year ended December 31, 2002 was primarily due to a
decrease of $389,000 in payroll related expenses. The Company anticipates
general and administrative expenses, as a percentage of total net sales in
fiscal 2003, will decrease due to expense reduction measures initiated in the
latter part of fiscal 2002.
11
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses totaled $491,515 or 7.2% of net total
sales for the fiscal year ended December 31, 2002, compared to $944,569 or 8.1%
of total net sales for the year ended December 31, 2001. The decrease for the
fiscal year ended December 31, 2002 primarily resulted from a decrease of
$329,000 in labor related costs. The decrease was primarily the result of
decreased activity due to exiting the conductive products and medical tape
businesses. Management believes that research and development expenditures as a
percentage of total net sales will remain approximately the same in fiscal 2003.
OTHER INCOME AND EXPENSE
Interest expense totaled $141,674 for the fiscal year ended December
31, 2002, compared to $145,911 for the year ended December 31, 2001. The
decrease for the fiscal year ended December 31, 2002 was primarily due to
interest rate changes associated with the mortgage note payable.
INCOME TAXES
The Company recorded an income tax benefit for the fiscal year ended
December 31, 2002 of $25,473 and an income tax expense for the year ended
December 31, 2001 of $31,902. The income tax expense for the year ended December
31, 2001 resulted from an alternative minimum tax liability after offsetting
regular taxable income against prior years net operating loss carry forwards.
The income tax benefit for the fiscal year ended December 31, 2002 resulted
primarily from the refunding of taxes previously paid to cover the alternative
minimum taxes associated with the gain on the sale of the conductive business.
OPERATIONS SUMMARY
The net loss for the fiscal year ended December 31, 2002 resulted
primarily from decreased sales and the resultant lower contribution of gross
margin. Gross profits on a percentage basis were relatively flat year over year.
The net earnings for the year ended December 31, 2001 resulted from the gain on
the sale of the assets of the conductive products division, which was partially
offset by a non-recurring restructuring charge. The restructuring charge
consisted primarily of future rental payments for a leased facility, separation
costs, and other costs associated with the winding-down of conductive business
activity. Excluding the gain and restructuring charge, the Company incurred a
$4,287,981 greater net loss in the year ended December 31, 2001, which resulted
primarily from an increase in advertising expenses associated with retail sales
of the Company's TheraPatch products and which more than offset an increase in
gross profit. The increase in gross profit from 2001 to 2002 resulted from
increased sales volume. The net loss, excluding the gain and restructuring
charge, for the year ended December 31, 2001 resulted primarily from increased
sales and marketing expenses and charges related to the plan to exit the medical
tape business, which more than offset an increase in gross profit.
COMPARISON OF THE SIX-MONTHS ENDED DECEMBER 31, 2001 AND 2000
NET SALES
Net sales were $4,537,691 for the six-month period ended December 31,
2001, a decrease of 41.8% from net sales of $7,796,791 for the six-month period
ended December 31, 2000. The decrease in net sales for the six month period
ended December 31, 2001 was primarily due to decreased conductive product sales
resulting from the sale of the assets of the conductive products division.
Net sales of therapeutic consumer products decreased 22.4% for the
six-month period ended December 31, 2001 to $3,513,355 from $4,527,628 for the
six-month period ended December 31, 2000. The decrease for the six-month period
ended December 31, 2001 was primarily the result of softening demand from
contract manufacturing customers in response to a slowing economy and a weaker
than expected cough/cold season. The decrease in contract manufacturing
therapeutic consumer product sales was partially offset by an increase in LecTec
branded TheraPatch consumer product sales.
12
Net sales of conductive products (medical electrodes and conductive
hydrogels) decreased by 67.0% for the six-month period ended December 31, 2001
to $1,024,336 from $3,103,727 for the six-month period ended December 31, 2000.
The decrease for the six-month period ended December 31, 2001 was primarily the
result of the sale of the assets of the conductive products division. Under a
manufacturing and supply agreement between the Company and the buyer of the
Company's conductive products division, the Company continued to manufacture and
supply to the buyer certain conductive products through January 2002. The
Company supplied the products at its cost of production through October 31,
2001, and at its cost of production plus 10% percent from November 1, 2001
through January 31, 2002.
There were no sales of medical tape products for the six-month period
ended December 31, 2001. Medical tape product sales were $155,436 for the
six-month period ended December 31, 2000. The decrease resulted from exiting the
medical tape business.
Export sales were 3% and 9% of total net sales for the six-month
periods ended December 31, 2001 and 2000, respectively. The decrease for the
six-month period ended December 31, 2001 resulted primarily from the absence of
conductive product sales as a result of the sale of the assets of the conductive
products division. All international sales were in U.S. dollars with the
exception of TheraPatch brand products sold in Canada. Export sales decreased by
$598,717 in the six-month period ended December 31, 2001 compared to the
six-month period ended December 31, 2000 primarily as a result of the sale of
the assets of the conductive products division.
GROSS PROFIT
The Company's gross profit was $882,963 for the six-month period ended
December 31, 2001, down from $2,519,696 for the six-month period ended December
31, 2000. As a percentage of net sales, gross profits were 19.5% and 32.3% for
the six-month periods ended December 31, 2001 and 2000. Gross profit for the
six-month period ended December 31, 2001 decreased by 64.9% from the prior year
primarily as a result of decreased sales volumes, lower production levels and
less absorption of overhead expenses. The decrease in the gross profit
percentage for the six-month period ended December 31, 2001 was also affected by
the Company's entering into a manufacturing and supply agreement with the buyer
of the assets of the conductive products division to continue to manufacture and
supply the buyer certain conductive products at the Company's cost through
October 31, 2001 and at its cost of production plus 10% thereafter.
SALES AND MARKETING EXPENSES
Sales and marketing expenses totaled $1,703,988 or 37.6% of total net
sales for the six-month period ended December 31, 2001, compared to $1,823,478
or 23.4% of net total sales for the six-month period ended December 31, 2000.
The decrease in sales and marketing expenses was primarily due to decreased
sales and the associated variable marketing expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $1,270,614 or 28.0% of
total net sales for the six-month period ended December 31, 2001, compared to
$1,459,002 or 18.7% of total net sales for the six-month period ended December
31, 2000. The decrease for the six-month period ended December 31, 2001 was
primarily due to a decrease of $189,000 in payroll related expenses and
employment fees, which more than offset a slight increase in other expense
categories.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses totaled $465,817 or 10.3% of total
net sales for the six-month period ended December 31, 2001, compared to $440,412
or 5.6% of total net sales for the six-month period ended December 31, 2000. The
increase for the six-month period ended December 31, 2001 primarily resulted
from an increase of $20,000 in test-run production costs associated with new
product development.
13
OTHER INCOME AND EXPENSE
Interest expense totaled $67,558 for the six-month period ended
December 31, 2001, compared to $72,919 for the six-month period ended December
31, 2000. The decrease for the six-month period ended December 31, 2001 was
primarily due to a decrease in interest expense associated with zero borrowings
on the line of credit during the period. This decrease was offset by an increase
in interest expense associated with the mortgage agreement. Other income for the
six-month period ended December 31, 2001 was $45,996, compared to other expense
of $13,782 for the six-month period ended December 31, 2000. The six-month
period increase was primarily the result of increased interest income due to
higher cash and cash equivalent balances.
INCOME TAXES
The Company recorded an income tax benefit for the six-month period
ended December 31, 2001 of $16,098 and no income tax expense or benefit for the
six-month period ended December 31, 2000. The income tax benefit for the
six-month period ended December 31, 2001 resulted from a difference between
actual income tax liability and estimated income tax liability for the fiscal
year ended June 30, 2001. There was no income tax benefit recorded for the
six-month period ended December 31, 2000 related to the loss before income taxes
since the tax benefit may not be realizable by the Company.
OPERATIONS SUMMARY
The net loss for the six-month period ended December 31, 2001 resulted
primarily from a decrease in gross profit resulting from a decrease in sales
volumes and the impact of the manufacturing and supply agreement between the
Company and the buyer of the assets of the conductive products division. The
decrease in gross profit was slightly offset by a decrease in general and
administrative expenses associated with payroll related expenses. The net loss
for the six-month period ended December 31, 2000 resulted primarily from an
increase in advertising expenses associated with retail sales of the Company's
TheraPatch products, which more than offset an increase in gross profit.
COMPARISON OF THE YEARS ENDED JUNE 30, 2001 AND 2000
NET SALES
Net sales were $14,957,209 for the fiscal year ended June 30, 2001, an
increase of 11.5% from net sales of $13,416,098 for the fiscal year ended June
30, 2000. The increase was primarily the result of increased therapeutic
consumer product sales, which was partially offset by decreased medical tape and
conductive product sales.
Net sales of therapeutic consumer products increased 104.7% for the
fiscal year ended June 30, 2001 to $8,265,849 from $4,037,951 for the fiscal
year ended June 30, 2000. The increase for the fiscal year ended June 30, 2001
was primarily the result of sales of the new vapor product to Novartis as well
as sales of the acne product to Johnson & Johnson Consumer Products Worldwide.
Net sales of conductive products (medical electrodes and conductive
hydrogels) decreased by 11.9% for the fiscal year ended June 30, 2001 to
$6,563,924 from $7,450,755 for the fiscal year ended June 30, 2000. The decrease
for the fiscal year ended June 30, 2001 was primarily the result of the sale of
the assets of the conductive products division in the fourth quarter.
Net sales of medical tapes decreased by 93.4% for the fiscal year ended
June 30, 2001 to $127,436 from $1,927,392 for the fiscal year ended June 30,
2000. The decrease for the fiscal year ended June 30, 2001 was primarily the
result of exiting the medical tape business.
Export sales, consisting primarily of electrodes, semi-finished
conductive products sold to overseas converters for final processing, packaging
and marketing, as well as TheraPatch brand therapeutic consumer products, were
8% and 14% of total net sales for the fiscal years ended June 30, 2001 and 2000,
respectively. All international sales were in U.S. dollars with the exception of
TheraPatch brand products sold in Canada. Export sales decreased by $683,817 for
the fiscal year ended June 30,
14
2001, primarily as a result of the Company's exit from the medical tape business
and the sale of the assets of the conductive products division.
GROSS PROFIT
The Company's gross profit was $4,373,603 for the fiscal year ended
June 30, 2001, up from $3,860,446 for the fiscal year ended June 30, 2000. As a
percentage of total net sales, gross profit was 29.2% and 28.8% for the fiscal
years ended June 30, 2001 and 2000. Gross profit for the fiscal year ended June
30, 2001 increased 13.3% from the prior year. The increase in gross profit for
the fiscal year ended June 30, 2001 resulted primarily from increased total net
sales. The slight decrease in the gross profit percentage for the year resulted
primarily from the Company's entering into a manufacturing and supply agreement
with the buyer of the assets of the conductive products division to continue to
manufacture and supply the buyer certain conductive products at the Company's
cost.
SALES AND MARKETING EXPENSES
Sales and marketing expenses totaled $3,332,935 or 22.2% of net total
sales for the fiscal year ended June 30, 2001, compared to $2,420,457 or 18.0%
of total net sales for the fiscal year ended June 30, 2000. The increase for the
fiscal year ended June 30, 2001 was primarily due to an increase of $697,000 in
media advertising expense related to an ad campaign for TheraPatch Anti-Itch for
Kids.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $2,9553,862 or 19.7% of
total net sales for the fiscal year ended June 30, 2001, compared to $2,593,590
or 19.3% of total net sales for the fiscal year ended June 30, 2000. The
increase for the fiscal year ended June 30, 2001 was primarily due to an
increase of $270,000 in payroll related expenses and employment fees related to
the hiring of a new chief financial officer.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses totaled $918,669 or 6.1% of total net
sales for the fiscal year ended June 30, 2001, compared to $1,091,896 or 8.1% of
total net sales for the fiscal year ended June 30, 2000. The decrease for the
fiscal year ended June 30, 2001 primarily resulted from a decrease of $60,000 in
test-run production costs and activity due to exiting the conductive products
and medical tape businesses.
OTHER INCOME AND EXPENSE
Interest expense totaled $151,272 for the fiscal year ended June 30,
2001, compared to $35,405 for the fiscal year ended June 30, 2000. The increase
for the fiscal year ended June 30, 2001 was primarily due to interest expense
associated with increased borrowings on the line of credit and interest expense
associated with the mortgage agreement. Gain on disposition of assets totaled
$4,622,210 for the fiscal year ended June 30, 2001 due to the sale of the
conductive business assets and the disposition of the medical tape equipment.
There was no gain on disposition of assets for the fiscal year ended June 30,
2000. Other income decreased to $16,176 for the fiscal year ended June 30, 2001
from $27,692 for the fiscal year ended June 30, 2000, primarily due to decreased
interest income as a result of lower cash and cash equivalent balances.
INCOME TAXES
The Company recorded an income tax expense for the fiscal year ended
June 30, 2001 of $48,000 and an income tax benefit for the fiscal year ended
June 30, 2000 of $38,934. The income tax expense for the fiscal year ended June
30, 2001 resulted from an alternative minimum tax liability after offsetting
regular taxable income against prior years net operating loss carry forwards.
The income tax benefit for the fiscal year ended June 30, 2000 resulted
primarily from the refund of taxes previously paid by the Company's foreign
sales corporation. The foreign sales corporation was dissolved during the fiscal
year ended June 30, 2000. There was no income tax benefit recorded during the
fiscal year ended June
15
30, 2000 related to the loss before income taxes since the tax benefit may not
be realizable by the Company.
OPERATIONS SUMMARY
The net earnings for the fiscal year ended June 30, 2001 resulted
primarily from the gain on the sale of the assets of the conductive products
division, which was partially offset by a non-recurring restructuring charge.
The restructuring charge consisted primarily of future rental payments for a
leased facility, separation costs and other costs associated with the
winding-down of conductive business activity. Excluding the gain and
restructuring charge, the Company incurred a comparable net loss in the fiscal
year ended June 30, 2000. The net loss excluding the gain and restructuring
charge for the fiscal year ended June 30, 2001 resulted primarily from an
increase in advertising expenses associated with retail sales of the Company's
TheraPatch products, which more than offset an increase in gross profit. The
increase in gross profit resulted from increased sales volume. The net loss for
the fiscal year ended June 30, 2000 resulted primarily from increased sales and
marketing expenses and charges related to the plan to exit the medical tape
business, which more than offset an increase in gross profit. The increase in
gross profit resulted from increased sales volume and a shift in the sales mix
toward higher-margin therapeutic consumer products.
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 $753,617 to $671,588 at December
31, 2002 from $1,425,205 at December 31, 2001. This decrease was primarily due
to the net loss for the 12-month period ended December 31, 2002 of $2,602,781.
The accounts receivable balance decreased by $458,316 to $286,904 primarily due
to the prepayment program entered into with Novartis during fiscal 2002.
Inventories decreased by $516,754 to $1,010,789 primarily due to lower inventory
levels required for current production levels.
Working capital totaled negative $1,058,534 at December 31, 2002,
compared to positive $1,106,202 at December 31, 2001. The Company's current
ratio was negative.7 at December 31, 2002, compared to 1.4 at December 31, 2001.
Capital spending for equipment totaled $21,070 for the fiscal year
ended December 31, 2002. There were no material commitments for capital
expenditures at December 31, 2002. Net property, plant and equipment decreased
by $511,853 to $1,750,241 at December 31, 2002 from $2,262,094 at December 31,
2001, reflecting the excess of depreciation expense over capital spending.
Accounts payable decreased by $40,713 to $587,650 at December 31, 2002
from $628,363 at December 31, 2001, primarily due to decreased payables related
to decreased manufacturing production as well as a decrease in the average
number of days outstanding before payment.
During the fiscal year ended December 31, 2002, the Company entered
into an agreement with Novartis Corporation to have them advance monies 60 days
prior to shipment against open orders. At December 31, 2002, the amount owed
under product prepayment advances was $264,655. In exchange for this product
prepayment program, the Company agreed to pledge substantially all of its assets
to secure its obligations under the program as well as $220,000 payable to
Novartis. In addition, the Company granted Novartis a nonexclusive license to
produce its hydrogel patches in the event that the Company defaults in its
obligation to supply patches to Novartis.
During the year ended December 31, 2001, the Company entered into a
mortgage agreement with gross proceeds of $820,000. On February 25, 2003, this
mortgage was transferred to a third party in connection with the sale of the
Company's Minnetonka, Minnesota facility. The Company is leasing back the
building from the purchaser at no cost for the first 12 months of the agreement.
Shareholders' equity
16
decreased by $2,573,400 to $966,799 as of December 31, 2002 from $3,540,199 as
of December 31, 2001, primarily due to the net loss incurred during the fiscal
year ended December 31, 2002.
Management expects the Company to continue to operate at a net loss and
experience negative cash flow from operating activities for the foreseeable
future. The Company's existing cash and cash equivalents will be insufficient to
fund operations through 2003. Management is exploring options for additional
capital. Such funding could come in the form of equity or debt financing,
strategic alliances with corporate partners and others, or through other sources
not yet identified. We do not have any committed sources of financing, and
cannot guarantee that additional funding will be available in a timely manner,
on acceptable terms, or at all. If adequate funds are not available, we may be
required to further delay, scale-back or eliminate certain aspects of our
operations or attempt to obtain funds through unfavorable arrangements with
partners or others that may require us to relinquish rights to certain of our
technologies or potential markets or which otherwise may be materially
unfavorable to us. These factors among others may indicate that the Company will
be unable to continue as a going concern for a reasonable period of time. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Our continuation as a going concern
is dependent upon our ability to generate sufficient cash flow to meet our
obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to attain successful operations. Management is
continuing its efforts to obtain additional funds so that the Company can meet
its obligations and sustain operations.
CRITICAL ACCOUNTING POLICIES
Management believe the Company has not adopted any critical accounting
policies that, if changed, would result in a material change in financial
estimates, financial condition, results of operation or cash flows for the years
ended December 31, 2002 and 2001.
Critical accounting policies are as follows:
Revenue Recognition
For domestic sales, revenue is recognized when the product has been shipped
and accepted by the customer and collection is probable. For international
sales, revenue is recognized when the product is received by the customer
and collection is probable.
Patents and Trademarks
Patents and trademarks consist primarily of the cost of applying for
patents and trademarks and are amortized on a straight-line basis over the
estimated useful life of the asset, which is generally five years.
Amortized intangible assets consist of the following:
December 31, 2002 December 31, 2001
----------------------------- -----------------------------
Gross carrying Accumulated Gross carrying Accumulated
amount amortization amount amortization
-------------- ------------ -------------- ------------
Patents $1,576,583 $1,309,223 $1,494,003 $1,223,859
Trademarks 29,119 10,617 30,697 3,768
---------- ---------- ---------- ----------
$1,605,702 $1,319,840 $1,524,700 $1,227,627
========== ========== ========== ==========
Amortization expense of amortized intangible assets totaled $92,213 for the
fiscal year ended December 31, 2002, $37,840 for the six months ended
December 31, 2001, and $68,104 and $139,174 for the fiscal years ended June
30, 2001 and 2000. At December 31, 2002, amortization expense for the
succeeding years is expected to be as follows:
17
Years ended December 31:
2003 $100,027
2004 87,743
2005 78,326
2006 11,766
2007 8,000
The carrying value of long-lived assets is reviewed periodically or when
factors indicating impairment are present. Projected discounted cash flows
are used when reviewing these assets.
Accounts Receivable
The Company grants credit to customers in the normal course of business,
but it generally does not require collateral or any other security to
support amounts due. Management performs on-going credit evaluation of
customers. The Company maintains allowances for potential credit losses
which, when realized, have been within management expectations.
Advertising
The Company expenses the cost of advertising as incurred, except for the
cost of television commercials, which are expensed as the commercials are
broadcast. Advertising expense totaled approximately $231,000 for the
fiscal year ended December 31, 2002, $682,000 for the six months ended
December 31, 2001 and $1,233,000 and $536,000 for the fiscal years ended
June 30, 2001 and 2000.
Research and Development
Research and development costs are expensed as incurred.
FORWARD-LOOKING STATEMENTS
From time to time, in reports filed with the Securities and Exchange
Commission (including this Form 10-K), in press releases, and in other
communications to shareholders or the investment community, the Company may
provide forward-looking statements concerning possible or anticipated future
results of operations or business developments which are typically preceded by
the words "believes", "expects", "anticipates", "intends", "will", "may",
"should" or similar expressions. Such forward-looking statements are subject to
risks and uncertainties which could cause results or developments to differ
materially from those indicated in the forward-looking statements. Such risks
and uncertainties include, but are not limited to, the buying patterns of major
customers; competitive forces including new products or pricing pressures; costs
associated with and acceptance of the Company's TheraPatch brand strategy;
impact of interruptions to production; dependence on key personnel; need for
regulatory approvals; changes in governmental regulatory requirements or
accounting pronouncements; ability to satisfy funding requirements for operating
needs, expansion or capital expenditures and the matters discussed on our
"Cautionary Statements" filed as Exhibit 99.01 to this from 10-K for the fiscal
year ended December 31, 2002.
18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no history of investing in derivative financial
instruments, derivative commodity instruments or other such financial
instruments, and the Company does not anticipate investing in such instruments
in the future. Transactions with international customers are entered into in
U.S. dollars with the exception of TheraPatch sales to Canadian customers,
thereby precluding the need for foreign currency hedges. Canadian sales have not
been material. Additionally, the Company invests in money market funds that
experience minimal volatility. Thus, the exposure to market risk is not
material.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The balance sheets of the Company as of December 31, 2002 and 2001, and the
related statements of operations, shareholders' equity, and cash flows for the
year ended December 31, 2002, for the six months ended December 31, 2001, and
for each of the two years in the period ended June 30, 2001, and the notes
thereto have been audited by Grant Thornton LLP, independent certified public
accountants.
CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS....................................................... 21
FINANCIAL STATEMENTS
BALANCE SHEETS........................................................................................ 22
STATEMENTS OF OPERATIONS.............................................................................. 24
STATEMENTS OF SHAREHOLDERS' EQUITY.................................................................... 25
STATEMENTS OF CASH FLOWS.............................................................................. 26
NOTES TO FINANCIAL STATEMENTS......................................................................... 28
20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and
Board of Directors
LecTec Corporation
We have audited the accompanying balance sheets of LecTec
Corporation as of December 31, 2002 and 2001, and the related statements of
operations, shareholders' equity, and cash flows for the year ended December 31,
2002, for the six months ended December 31, 2001, and for each of the two years
in the period ended June 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of LecTec
Corporation as of December 31, 2002 and 2001, and the results of its operations
and its cash flows for the year ended December 31, 2002, for the six months
ended December 31, 2001, and for each of the two years in the period ended June
30, 2001, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
B, the Company has recurring negative cash flows from operations, net losses,
and has a working capital deficiency at December 31, 2002. These factors, among
others, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plan in regard to these matters are also described
in note B. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
We have also audited Schedule II of LecTec Corporation for the
year ended December 31, 2002, for the six months ended December 31, 2001, and
for each of the two years in the period ended June 30, 2001. In our opinion,
this Schedule presents fairly, in all material respects, the information
required to be set forth therein.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
March 19, 2003
21
LecTec CORPORATION
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 671,588 $1,425,205
Receivables
Trade, net of allowances of $80,655 and
$99,009 at December 31, 2002 and 2001 286,904 745,220
Other 31,992 60,334
Inventories 1,010,789 1,527,543
Prepaid expenses and other 112,831 290,401
---------- ----------
Total current assets 2,114,104 4,048,703
PROPERTY, PLANT AND EQUIPMENT
Land 247,731 247,731
Building and improvements 1,973,386 1,971,031
Equipment 4,544,698 4,533,719
Furniture and fixtures 414,857 414,857
---------- ----------
7,180,672 7,167,338
Less accumulated depreciation 5,430,431 4,905,244
---------- ----------
1,750,241 2,262,094
OTHER ASSETS
Patents and trademarks 285,862 297,073
---------- ----------
$4,150,207 $6,607,870
========== ==========
The accompanying notes are an integral part of these statements.
22
LIABILITIES AND
SHAREHOLDERS' EQUITY 2002 2001
------------ ------------
CURRENT LIABILITIES
Current maturities of long-term obligations $ 1,154,404 $ 938,800
Accounts payable 587,650 628,363
Accrued expenses
Payroll related 181,984 349,885
Retail support programs 125,894 328,133
Reserve for sales returns and credits 312,378 257,716
Restructuring charges -- 105,232
Other 160,255 259,372
Customer deposits 650,073 75,000
------------ ------------
Total current liabilities 3,172,638 2,942,501
LONG-TERM OBLIGATIONS, less current maturities 10,770 125,170
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 15,000,000 shares
authorized; 3,966,395 and 3,940,920 shares issued
and outstanding at December 31, 2002 and 2001 39,664 39,409
Additional contributed capital 11,389,678 11,360,552
Accumulated deficit (10,462,543) (7,859,762)
------------ ------------
966,799 3,540,199
------------ ------------
$ 4,150,207 $ 6,607,870
============ ============
The accompanying notes are an integral part of these statements.
23
LecTec CORPORATION
STATEMENTS OF OPERATIONS
Six months Years ended
Year ended ended June 30,
December 31, December 31, ----------------------------
2002 2001 2001 2000
------------ ------------ ------------ ------------
Net sales $ 6,852,091 $ 4,537,691 $ 14,957,209 $ 13,416,098
Cost of goods sold 5,212,433 3,654,728 10,583,606 9,555,652
------------ ------------ ------------ ------------
Gross profit 1,639,658 882,963 4,373,603 3,860,446
Operating expenses
Sales and marketing 1,413,503 1,703,988 3,332,935 2,420,457
General and administrative 2,226,518 1,270,614 2,953,862 2,593,590
Research and development 491,515 465,817 918,669 1,091,896
Restructuring charge - - 303,759 -
Medical tape asset impairment - - - 645,000
------------ ------------ ------------ ------------
4,131,536 3,440,419 7,509,225 6,750,943
------------ ------------ ------------ ------------
Loss from operations (2,491,878) (2,557,456) (3,135,622) (2,890,497)
Other income (expenses)
Interest expense (141,674) (67,558) (151,272) (35,405)
Gain on disposition of assets - - 4,662,210 -
Other, net 5,298 45,996 16,176 27,692
------------ ------------ ------------ ------------
Earnings (loss) before income taxes (2,628,254) (2,579,018) 1,391,492 (2,898,210)
Income taxes (benefit) (25,473) (16,098) 48,000 (38,934)
------------ ------------ ------------ ------------
Net earnings (loss) $ (2,602,781) $ (2,562,920) $ 1,343,492 $ (2,859,276)
============ ============ ============ ============
Net earnings (loss) per share
Basic $ (0.66) $ (0.65) $ 0.34 $ (0.74)
Diluted $ (0.66) $ (0.65) $ 0.34 $ (0.74)
Weighted average shares outstanding
Basic 3,957,445 3,925,608 3,911,577 3,885,911
Diluted 3,957,445 3,925,608 3,925,851 3,885,911
The accompanying notes are an integral part of these statements.
24
LecTec CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Common stock Additional other
---------------------------- contributed comprehensive
Shares Amount capital gain (loss)
------------ ------------ ------------ ------------
Balance at June 30, 1999 3,876,476 $ 38,765 $ 11,262,654 $ (11,841)
Common shares issued upon exercise of options 500 5 1,295 -
Common shares issued in connection with the
employee stock purchase plan 27,489 275 52,311 -
Net loss - - - -
Unrealized gain on securities available-for-sale - - - 16,686
------------ ------------
Comprehensive loss
Balance at June 30, 2000 3,904,465 39,045 11,316,260 4,845
Realized loss on securities available for sale - - - (4,845)
Common shares issued in connection with the
employee stock purchase plan 17,919 179 27,906 -
Net earnings - - - -
------------ ------------
Comprehensive earnings
Balance at June 30, 2001 3,922,384 39,224 11,344,166 -
Common shares issued in connection with the
employee stock purchase plan 18,536 185 16,386 -
Net loss - - - -
------------ ------------
Comprehensive loss
Balance at December 31, 2001 3,940,920 39,409 11,360,552 -
Common shares issued in connection with the
employee stock purchase plan 3,817 38 2,234 -
Common shares issued in payment of employee
compensation 9,000 90 8,010 -
Common shares issued in payment of
consulting services received 12,658 127 18,882 -
Net loss - - - -
------------ ------------
Comprehensive loss
Balance at December 31, 2002 3,966,395 $ 39,664 $ 11,389,678 $ -
============ ============ ============ ============
Comprehensive
Accumulated earnings
deficit (loss)
------------ ------------
Balance at June 30, 1999 $ (3,781,058)
Common shares issued upon exercise of options -
Common shares issued in connection with the
employee stock purchase plan -
Net loss (2,859,276) $ (2,859,276)
Unrealized gain on securities available-for-sale - 16,686
------------ ------------
Comprehensive loss $ (2,842,590)
============
Balance at June 30, 2000 (6,640,334)
Realized loss on securities available for sale -
Common shares issued in connection with the
employee stock purchase plan -
Net earnings 1,343,492 $ 1,343,492
------------ ------------
Comprehensive earnings $ 1,343,492
============
Balance at June 30, 2001 (5,296,842)
Common shares issued in connection with the
employee stock purchase plan -
Net loss (2,562,920) $ (2,562,920)
------------ ------------
Comprehensive loss $ (2,562,920)
============
Balance at December 31, 2001 (7,859,762)
Common shares issued in connection with the
employee stock purchase plan -
Common shares issued in payment of employee
compensation -
Common shares issued in payment of
consulting services received -
Net loss (2,602,781) $ (2,602,781)
------------ ------------
Comprehensive loss $ (2,602,781)
============
Balance at December 31, 2002 $(10,462,543)
============
The accompanying notes are an integral part of these statements.
25
LecTec CORPORATION
STATEMENTS OF CASH FLOWS
Six months Years ended
Year ended ended June 30,
December 31, December 31 --------------------------
2002 2001 2001 2000
----------- ----------- ----------- -----------
Cash flows from operating activities:
Net earnings (loss) $(2,602,781) $(2,562,920) $ 1,343,492 $(2,859,276)
Adjustments to reconcile net earnings (loss) to net cash used in
operating activities:
Common stock issued in payment of employee compensation and
consulting services received 27,109 - - -
Medical tape asset impairment and inventory write-down - - - 730,000
Gain on disposition of assets - - (4,662,210) -
Restructuring charge - - 274,698 -
Depreciation and amortization 625,136 292,820 521,276 908,024
Deferred income taxes - - - 157,000
Changes in operating assets and liabilities, net of dispositions:
Trade and other receivables 486,658 1,343,479 (626,039) (479,814)
Inventories 516,754 524,395 (177,646) (336,162)
Prepaid expenses and other 177,570 4,036 (73,923) (45,840)
Accounts payable (40,713) (547,365) (103,675) 265,643
Accrued expenses (519,827) (1,003,026) 665,905 228,566
Customer deposits 575,073 - (85,000) 160,000
----------- ----------- ----------- -----------
Net cash used in operating activities (755,021) (1,948,581) (2,923,122) (1,271,859)
Cash flows from investing activities:
Purchase of property, plant and equipment (21,070) (94,580) (371,906) (424,448)
Investment in patents and trademarks (81,002) (90,964) (141,215) (138,553)
Net proceeds from disposition of assets - - 6,666,988 -
Proceeds from the sale of investments - - 11,076 -
----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities (102,072) (185,544) 6,164,943 (563,001)
Cash flows from financing activities:
Proceeds from the issuance of common stock 2,272 16,571 28,085 53,586
Net borrowings (repayments) on note payable - - (837,542) 837,542
Proceeds from borrowing on long-term obligations 220,000 187,832 867,703 33,649
Repayment of long-term obligations (118,796) (21,796) (23,515) (11,771)
----------- ----------- ----------- -----------
Net cash provided by financing activities 103,476 182,607 34,731 913,006
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (753,617) (1,951,518) 3,276,552 (921,854)
Cash and cash equivalents - beginning 1,425,205 3,376,723 100,171 1,022,025
----------- ----------- ----------- -----------
Cash and cash equivalents - ending $ 671,588 $ 1,425,205 $ 3,376,723 $ 100,171
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
26
LecTec CORPORATION
STATEMENTS OF CASH FLOWS - CONTINUED
Six months Years ended
Year ended ended June 30,
December 31, December 31 --------------------------
2002 2001 2001 2000
----------- ----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 136,589 $ 57,600 $ 161,664 $ 28,085
Cash paid during the year for income taxes $ - $ 56,000 $ 2,000 $ -
The accompanying notes are an integral part of these statements.
27
LecTec CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LecTec Corporation (the "Company") is primarily engaged in the
research, design, manufacture and sale of therapeutic consumer
products. The Company's customers are located throughout the United
States as well as Canada and Asia. A summary of the Company's
significant accounting policies consistently applied in the preparation
of the accompanying financial statements follows:
Cash and Cash Equivalents
The Company considers all highly liquid temporary investments purchased
with original maturities of three months or less to be cash
equivalents. At times, cash and cash equivalents may be in excess of
insurance limits.
Accounts Receivable
The Company grants credit to customers in the normal course of
business, but generally does not require collateral or any other
security to support amounts due. Management performs on-going credit
evaluation of customers. The Company maintains allowances for potential
credit losses which, when realized, have been within management
expectations.
Investments
The Company has had investments which were classified as
available-for-sale and were reported at fair value. The Company
utilized the specific identification method in computing realized gains
and losses on these investments.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market and consist of the following:
December 31,
-------------------------
2002 2001
---------- ----------
Raw materials $ 716,957 $1,159,685
Work in process 24,294 5,198
Finished goods 269,538 362,660
---------- ----------
$1,010,789 $1,527,543
========== ==========
28
LecTec CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Long-Lived Assets
Property, plant, and equipment is recorded at cost. Depreciation is
provided in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives. The straight-line method of
depreciation is followed for financial reporting purposes, and accelerated
methods are used for tax purposes. Estimated useful lives used in the
calculation of depreciation for financial statement purposes are:
Buildings and improvements 5 - 40 years
Equipment 4 - 15 years
Furniture and fixtures 5 - 7 years
Patents and trademarks consist primarily of the cost of applying for
patents and trademarks and are amortized on a straight-line basis over the
estimated useful life of the asset, generally five years.
Amortized intangible assets consist of the following:
December 31, 2002 December 31, 2001
----------------------------- -----------------------------
Gross carrying Accumulated Gross carrying Accumulated
amount amortization amount amortization
-------------- ------------ ------------ ------------
Patents $1,576,583 $1,309,223 $1,494,003 $1,223,859
Trademarks 29,119 10,617 30,697 3,768
---------- ---------- ---------- ----------
$1,605,702 $1,319,840 $1,524,700 $1,227,627
========== ========== ========== ==========
Amortization expense of amortized intangible assets totaled $92,213 for the
year ended December 31, 2002, $37,840 for the six months ended December 31,
2001, and $68,104 and $139,174 for the years ended June 30, 2001 and 2000.
At December 31, 2002, amortization expense for the succeeding years is
expected to be as follows:
Years ended December 31:
2003 $100,027
2004 87,743
2005 78,326
2006 11,766
2007 8,000
The carrying value of long-lived assets is reviewed periodically or when
factors indicating impairment are present. Projected discounted cash flows
are used when reviewing these assets.
Revenue Recognition
For domestic sales, revenue is recognized when the product has been shipped
and accepted by the customer and collection is probable. For international
sales, revenue is recognized when the product is received by the customer
and collection is probable.
29
LecTec CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Advertising
The Company expenses the cost of advertising as incurred, except for the
cost of television commercials which are expensed as the commercials are
broadcast. Advertising expense totaled approximately $231,000 for the year
ended December 31, 2002, $682,000 for the six months ended December 31,
2001 and $1,233,000 and $536,000 for the years ended June 30, 2001 and
2000.
Research and Development
Research and development costs are expensed as incurred.
Net Earnings (Loss) Per Share
Basic net earnings (loss) per share is computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding. Diluted
net earnings (loss) per share is computed by dividing net earnings (loss)
by the weighted average number of common shares outstanding and common
share equivalents related to stock options and warrants when dilutive.
Common stock options and warrants to purchase 1,209,790, 1,203,763,
1,044,129, and 1,048,205 shares of common stock with a weighted average
exercise price of $3.40, $4.75, $5.39, and $6.07 were outstanding during
the year ended December 31, 2002, the six months ended December 31, 2001
and the years ended June 30, 2001 and 2000, but were excluded because they
were anti-dilutive.
Stock Based Compensation
The Company utilizes the intrinsic value method of accounting for stock
based employee compensation plans. All options granted had an exercise
price equal to the market value of the underlying common stock on the date
of grant and no compensation cost is reflected in net earnings (loss), for
the year ended December 31, 2002, the six months ended December 31, 2001,
and the years ended June 30, 2001 and 2000. The following table illustrates
the effect on net earnings (loss) if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-based Compensation:
Six months Years ended
Year ended ended June 30,
December 31, December 31, ------------------------------
2002 2001 2001 2000
------------- ------------- ------------- -------------
Net earnings (loss), as reported $ (2,602,781) $ (2,562,920) $ 1,343,492 $ (2,859,276)
Less: compensation expense determined
under the fair value method (259,089) (190,000) (470,313) (588,105)
------------- ------------- ------------- -------------
Pro-forma net earnings (loss) $ (2,861,870) $ (2,752,920) $ 873,179 $ (3,447,381)
============= ============= ============= =============
Net earnings (loss) per share:
Basic, as reported $ (0.66) $ (0.65) $ 0.34 $ (0.74)
Basic, pro-forma $ (0.72) $ (0.70) $ 0.22 $ (0.89)
Diluted, as reported $ (0.66) $ (0.65) $ 0.34 $ (0.74)
Diluted, pro-forma $ (0.72) $ (0.70) $ 0.22 $ (0.89)
The pro-forma information above should be read in conjunction with the
related historical information.
30
LecTec CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The weighted average fair value of options granted during the year ended
December 31, 2002, the six months ending December 31, 2001 and the years
ending June 30, 2001 and 2000 was $0.63, $1.29, $1.52 and $1.84,
respectively. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option valuation model with the following
weighted-average assumptions used for all grants during the year ended
December 31, 2002, the six months ending December 31, 2001 and the years
ending June 30, 2001 and 2000; zero dividend yield, expected volatility of
121%, 95%, 96% and 74%, risk-free interest rate of 3.13%, 4.18%, 4.97% and
6.53% and expected lives of 4.0 years.
Management believes the Black-Scholes option valuation model currently
provides the best estimate of fair value. However, the Black-Scholes option
valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of
several subjective assumptions. The Company's employee and director stock
options have characteristics different from those of traded options, and
changes in the subjective input assumptions can materially affect the fair
value estimate.
Fair Value of Financial Instruments
Due to their short-term nature, the carrying value of current financial
assets and liabilities approximates their fair values. The fair value of
long-term obligations, if recalculated based on current interest rates,
would not significantly differ from the recorded amounts.
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications
Certain amounts for the six months ending December 31, 2001, and the years
ending June 30, 2001 and 2000 have been reclassified to conform to the
presentation used in the year ended December 31, 2002.
NOTE B - LIQUIDITY AND GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company has experienced
recurring negative cash flows from operations and net losses resulting in
an accumulated deficit of $10,462,543 as of December 31, 2002 and, as of
that date, the Company's current liabilities exceeded its current assets by
$1,058,534.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon profitable operations of the Company and
access to working capital financing. The financial statements do not
include any adjustments relating to the recoverability and classification
of recorded asset amounts or amounts and classification of liabilities that
might be necessary should the Company be unable to continue in existence.
Management expects to continue to operate at a net loss and experience
negative cash flow from operating activities through the foreseeable
future.
31
LecTec CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE B - LIQUIDITY AND GOING CONCERN - Continued
At December 31, 2002, the Company's cash resources and available borrowings
are insufficient to fund operations for the next 12 months without
additional borrowings or equity capital. These factors raise substantial
doubt about its ability to continue as a going concern.
Management currently is exploring available options for additional capital
including borrowings secured by otherwise unencumbered assets or private
issuances of common stock. However, there is no assurance that such funds
will be available on terms acceptable to the Company. If the Company is not
successful in obtaining additional funding it may not be able to continue
as a going concern.
NOTE C - CHANGE IN YEAR END
Effective September 5, 2001, the Company changed its year end to December
31 from June 30. The following unaudited condensed information presents the
six month period ended December 31, 2000 and is presented for comparative
purposes to the six month period ended December 31, 2001, which is included
in the financial statements.
STATEMENT OF OPERATIONS
Six months ended
December 31, 2000
-----------------
Net sales $ 7,796,791
Cost of goods sold 5,277,095
-----------
Gross profit 2,519,696
Operating expenses 3,722,892
-----------
Loss from operations (1,203,196)
Other expense, net (86,701)
-----------
Loss before income taxes (1,289,897)
Income taxes -
-----------
Net loss $(1,289,897)
===========
STATEMENT OF CASH FLOWS
Six months ended
December 31, 2000
-----------------
Cash flows from operating activities $ 112,252
Cash flows from investing activities:
Purchase of property and equipment (183,651)
Investment in patents and trademarks (85,789)
Proceeds from the sale of investments 11,076
---------
Net cash used in investing
activities (258,364)
Cash flows from financing activities:
Issuance of common stock 16,681
Net repayments on note payable (494,217)
Proceeds from borrowing on
long-term obligations 820,000
Repayment of long-term
obligations (10,903)
---------
Net cash provided by financing
activities 331,561
---------
Net increase in cash and cash
equivalents 185,449
Cash and cash equivalents at
beginning of period 100,171
---------
Cash and cash equivalents at
end of period $ 285,620
=========
32
LecTec CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE D - NOTE PAYABLE TO BANK
The Company maintained a secured line of credit with maximum borrowings of
$2,000,000 which was terminated in August 2002. Interest was computed at
the prime rate plus 3% and included an annual interest charge for each year
of the agreement ($50,000, $80,000 and $95,000 for the years ended November
22, 2002, 2001 and 2000). There were no borrowings outstanding on the line
of credit at December 31, 2001.
NOTE E - LONG-TERM OBLIGATIONS
Long-term debt consists of the following:
December 31,
-----------------------------
2002 2001
---------- ---------
Mortgage note payable (a) $ 820,000 $ 820,000
Promissory note payable (b) 220,000 -
Capital lease obligations (c) 125,174 243,970
--------- ---------
1,165,174 1,063,970
Less current maturities 1,154,404 938,800
--------- ---------
$ 10,770 $ 125,170
========= =========
Scheduled maturities of long-term obligations are as follows:
Years ending December 31:
2003 $ 1,154,404
2004 8,245
2005 2,525
-----------
$ 1,165,174
===========
(a) The Company had a mortgage note payable to a bank. The principal balance
was due in December 2002 and was extended until April 2003. Monthly
interest payments were computed at the prime rate plus 5.0% (effective rate
of 9.25% and 9.75% at December 31, 2002 and 2001). The mortgage was
collateralized by the Company's real property. In February 2003, the
Company sold their Minnetonka facility and repaid the mortgage (see note
O).
(b) In May 2002, the Company entered into a $220,000 promissory note with a
major customer. The principal balance of the note is due in December 2003.
Interest payments are due monthly and are computed at the prime rate plus
2.0% (effective rate of 6.25% at December 31, 2002). The promissory note is
collateralized by substantially all of the Company's assets.
(c) Capital lease obligations are due in various monthly installments up to
$8,406, including interest up to 19.1% through June 2005, and are
collateralized by equipment.
33
LecTec CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE F - COMMITMENTS AND CONTINGENCIES
Leases
The Company conducts portions of its operations in a leased facility that
expires June 30, 2003. The lease provides for payment of a portion of taxes
and other operating expenses by the Company. The Company also leases
various equipment under operating leases which run through June, 2005.
Total rent expense for operating leases was $261,899 for the year ended
December 31, 2002, $98,215 for the six months ended December 31, 2001, and
$265,595 and $260,481 for the years ended June 30, 2001 and 2000.
Future minimum lease commitments under operating leases are as follows:
Years ending December 31:
2003 $173,507
2004 33,778
2005 16,940
Employee Benefit Plan
The Company maintains a contributory 401(k) profit sharing benefit plan
covering substantially all employees. The plan allows Company matches of
50% of employee contributions up to 5% of a participant's compensation. The
Company suspended its matching contributions in early 2002. The Company's
contributions under this plan were $3,874 for the year ended December 31,
2002, $35,561 for the six months ended December 31, 2001 and $86,750 and
$81,474 for the years ended June 30, 2001 and 2000. The Company may also
make a discretionary contribution. No discretionary contributions were made
for the year ended December 31, 2002, the six months ended December 31,
2001 or each of the years ended June 30, 2001 and 2000.
Legal Proceedings
The Company is subject to various legal proceedings in the normal course of
business. Management believes these proceedings will not have a material
adverse effect on the Company's financial position or results of
operations.
NOTE G - INCOME TAXES
Income tax expense (benefit) consists of the following:
Six months Years ended
Year ended ended June 30,
December 31, December 31, ------------------------
2002 2001 2001 2000
------------ ------------ --------- ----------
Current $(25,473) $(16,098) $48,000 $(195,934)
Deferred - - - 157,000
-------- -------- ------- ---------
$(25,473) $(16,098) $48,000 $ (38,934)
======== ======== ======= ==========
34
LecTec CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE G - INCOME TAXES - Continued
Differences between income tax expense (benefit) and the statutory federal
income tax rate are as follows:
Six months Years ended
Year ended ended June 30,
December 31, December 31, ------------------------
2002 2001 2001 2000
------------ ------------ --------- ----------
Federal statutory income tax rate (34.0)% (34.0)% 34.0% (34.0)%
State income taxes, net of federal effect - .1 .1 .1
Change in valuation allowance 33.7 42.0 (35.4) 33.6
Other (0.7) (8.7) 4.8 (1.0)
----- ----- ----- -----
(1.0)% (.6)% 3.5% (1.3)%
===== ===== ===== =====
Deferred tax assets and liabilities consists of the following:
December 31,
-------------------------
2002 2001
---------- ----------
Current assets:
Inventories $ 107,700 $ 79,200
Vacation pay 37,500 63,300
Restructuring accrual - 48,300
Other 141,500 120,500
---------- ----------
Net current asset 286,700 311,300
Long-term assets (liabilities):
Net operating loss carryforwards 3,752,900 2,788,300
Tax credit carryforwards 294,300 316,300
Tax depreciation in excess of book depreciation (62,300) (83,200)
Charitable contribution carryforwards 14,300 14,300
Other 47,400 68,300
---------- -------
Net long-term asset 4,046,600 3,104,000
---------- ----------
Net deferred tax asset 4,333,300 3,415,300
Less valuation allowance (4,333,300) (3,415,300)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
35
LecTec CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE G - INCOME TAXES - Continued
At December 31, 2002, the Company has available net operating loss
carryforwards of approximately $11,000,000 which can be used to reduce
future taxable income. The utilization of a portion of these net operating
loss carryforwards is restricted under Section 382 of the Internal Revenue
Code due to past ownership changes. These net operating loss carryforwards
begin to expire in 2007. A valuation allowance has been recorded for these
net operating loss carryforwards and all other deferred tax assets as they
may not be realizable. The Company continually reviews the adequacy of the
valuation allowance and recognizes those benefits only as the Company's
assessment indicates that it is more likely than not that future tax
benefits will be realized.
NOTE H - EQUITY TRANSACTIONS
Employee Stock Purchase Plan
The Company's employee stock purchase plan, 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 and a total of 117,092 shares are available at December 31,
2002 for issuance under the plan. The Company issued 3,817, 18,536, 17,919,
and 27,489 shares in connection with purchases by employees for $2,272,
$16,571, $28,085, and $52,586 for the year ended December 31, 2002, six
months ended December 31, 2001 and the years ended June 30, 2001 and 2000.
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 788,123 shares of common
stock are available for grants of options under the plans at December 31,
2002. Options under the Company's plans are granted at fair market value
and expire at five or ten years from the grant date. Options given to
directors are exercisable at the date of grant. Options given to selected
officers and employees are exercisable at such times as set forth in the
individual option agreements, generally vesting 100% after three to four
years.
36
LecTec CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE H - EQUITY TRANSACTIONS - Continued
A summary of the Company's stock option transactions is as follows:
Weighted average
Number of shares exercise price
---------------- ----------------
Outstanding at July 1, 1999 1,133,826 $6.48
Granted 115,000 3.04
Exercised (500) 2.00
Canceled (221,704) 8.44
---------
Outstanding at June 30, 2000 1,026,622 5.68
Granted 285,000 2.20
Exercised - -
Canceled (176,007) 5.23
---------
Outstanding at June 30, 2001 1,135,615 4.87
Granted 109,000 1.82
Exercised - -
Canceled (167) 2.94
---------
Outstanding at December 31, 2001 1,244,448 4.60
Granted 43,500 .85
Exercised - -
Canceled (107,806) 3.11
---------
Outstanding at December 31, 2002 1,180,142 $2.06
=========
A total of 913,358, 754,709, 716,667 and 604,971 options were exercisable
at December 31, 2002 and 2001 and June 30, 2001 and 2000, respectively,
with a weighted average exercise price of $2.38, $6.02, $5.93, and $6.54,
respectively.
On July 1, 2002, 803,958 options outstanding with a weighted average grant
price of $4.54 per share were repriced to $0.81 per share. At December 31,
2002, 575,714 of these options were exercisable. No compensation expense
was recorded by the Company in connection with the repricing, as the
exercise price exceeded the market price on the date of the repricing. At
December 31, 2002 the exercise price of the repriced options exceeded the
market price for the Company's common stock and no compensation expense is
required to be recorded.
37
LecTec CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE H - EQUITY TRANSACTIONS - Continued
The following information applies to grants that are outstanding at
December 31, 2002:
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
- --------------- ----------- ---------------- -------- ----------- --------
$0.81 807,668 2.8 years $0.81 576,214 $0.81
$1.75 - $ 2.00 131,167 2.9 years 1.95 97,171 1.97
$2.75 - $ 3.63 72,700 2.1 years 2.96 71,366 2.97
$5.00 - $ 6.63 80,000 4.5 years 5.85 80,000 5.85
$8.38 - $10.00 88,607 1.9 years 9.44 88,607 9.44
---------
1,180,142 913,358
========= =======
Stock Repurchase Program
The Company has a stock repurchase program pursuant to which up to 500,000
shares, or approximately 12.4% of the Company's outstanding common stock,
may be repurchased. The shares may be purchased from time to time through
open market transactions, block purchases, tender offers, or in privately
negotiated transactions. The total consideration for all shares repurchased
under this program cannot exceed $2,000,000. There were no shares
repurchased during the year ended December 31, 2002, the six months ending
December 31, 2001 and years ended June 30, 2001 and 2000. Since the
program's inception, the Company has repurchased 175,650 shares for
$543,400.
Warrants
The Company has outstanding warrants to an outside party to purchase 12,953
shares of common stock. The warrants are fully exercisable and entitle the
holder to purchase common stock at $6.25 per share until November 20, 2004.
NOTE I - SEGMENT INFORMATION
The Company operates its business in one reportable segment - the
manufacture and sale of products based on advanced skin interface
technologies. Each of the Company's major product lines have similar
economic characteristics, technology, manufacturing processes, and
regulatory environments. Customers and distribution and marketing
strategies vary within major product lines as well as overlap between major
product lines. The Company's executive decision makers evaluate sales
performance based on the total sales of each major product line and
profitability on a total company basis, due to shared infrastructures, to
make operating and strategic
38
LecTec CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE I - SEGMENT INFORMATION - Continued
decisions. The Company sold its conductive and medical tape product lines
during the year ended June 30, 2001, but continued to manufacture
conductive products for the buyer through August 2002. Net sales by major
product line were as follows:
Six months Years ended
Year ended ended June 30,
December 31, December 31, -----------------------------
2002 2001 2001 2000
------------ ------------ ------------ ------------
Conductive products $ 743,181 $ 1,024,336 $ 6,563,924 $ 7,450,755
Medical tape products - - 127,436 1,927,392
Therapeutic consumer products 6,108,910 3,513,355 8,265,849 4,037,951
----------- ----------- ------------ ------------
$ 6,852,091 $ 4,537,691 $ 14,957,209 $ 13,416,098
=========== =========== ============ ============
Export sales accounted for approximately 12%, 3%, 8% and 14% of total net
sales during the year ended December 31, 2002, the six months ended
December 31, 2001, and the years ended June 30, 2001 and 2000. Export sales
are attributed to geographic region based upon the location of the
customer. The conductive and medical tape product lines were sold during
the year ended June 30, 2001 and accounted for all export sales other than
to Canada and Asia for the years ended June 30, 2001 and 2000. Gross export
sales by geographic area were as follows:
Six months Years ended
Year ended ended June 30,
December 31, December 31, -----------------------------
2002 2001 2001 2000
------------ ------------ ------------ ------------
Europe $ 21,096 $ - $ 815,796 $ 1,006,412
Latin America 85,608 - 139,613 547,904
Asia - 46,512 72,851 46,279
Canada 509.537 80,146 215,686 298,884
Middle East 195,310 - - 10,272
Other - - 7,950 25,962
------------ ------------ ------------ ------------
$ 811,551 $ 126,658 $ 1,251,896 $ 1,935,713
============ ============ ============ ============
39
LecTec CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE J - MAJOR CUSTOMERS
The Company had gross sales greater than 10% to the following customers:
Six months Years ended
Year ended ended June 30,
December 31, December 31, -----------------------------
2002 2001 2001 2000
------------ ------------ ------------ ------------
Customers:
A 31% 33% 20% *
B 14% 14% 16% *
C * 20% * *
D * * 12% 17%
* Sales were less than 10%.
Accounts receivable from customer A represented less than 1% and 13% of
trade receivables at December 31, 2002 and 2001. There were no accounts
receivable from customer B at December 31, 2002 and accounts receivable
from customer B represented 19% of trade receivables at December 31, 2001.
Management believes that the loss of these two major customers could have a
material adverse effect on the Company. The accounts receivable from
customer C represented 14% of trade receivables at December 31, 2001. There
were no accounts receivable from customer D at December 31, 2002 and 2001
as this conductive products customer no longer generates sales due to the
sale of the Company's conductive business assets during the year ended June
30, 2001 (see Note N).
NOTE K - ADOPTION OF ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations, SFAS No. 142, Goodwill and
Intangible Assets, SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The adoption of SFAS 141, 142 and 144 did not have a
material effect on the financial position or results of operations.
Effective for the year ending December 31, 2002, the Company adopted SFAS
148, Accounting for Stock-Based Compensation-Transaction and Disclosure.
SFAS 148 amends the disclosure and certain transition provisions of
statement 123, "Accounting for Stock-Based Compensation." The disclosure
requirements of this pronouncement are included in the financial statements
for the year ended December 31, 2002.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
143, Accounting for Retirement Obligations. In April 2002, the Financial
Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." In June 2002, FASB issued SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS 143, 145, and
146 are effective for the Company on January 1, 2003 and the adoption of
these standards is not expected to have a material impact on the financial
position or results of operations.
On January 1, 2002, the Company adopted EITF 00-14, Accounting for Certain
Sales Incentives, which requires sales incentives that involve a free
product to be classified as cost of goods sold. Pursuant to EITF 00-14 the
Company reclassified sample expenses of $24,476, $77,375 and $80,523 from
operating expenses to cost of goods sold for the six months ended December
31, 2001, and for the years ended June 31, 2001 and 2000. On January 1,
2002, the Company also adopted EITF 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Retailer of Vendor's Products,
which requires consideration from a vendor to a retailer be
40
LecTec CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE K - ADOPTION OF ACCOUNTING PRONOUNCEMENTS - Continued
classified as a reduction in revenue. Pursuant to EITF 00-25 the Company
reclassified cooperative advertising costs and slotting fees of $581,700,
$971,623 and $1,180,248 from operating expenses to a reduction in revenue
for the six months ended December 31, 2001, and for the years ended June
31, 2001 and 2000.
NOTE L - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Year ended December 31, 2002
---------------------------------------------------------------------
First quarter Second quarter Third quarter Fourth quarter
------------- -------------- ------------- --------------
Net sales $ 1,514,495 $ 1,583,007 $ 2,013,949 $ 1,740,640
Gross profit 464,858 456,248 583,461 135,091
Net loss (806,981) (767,603) (370,461) (657,736)
Net loss per share
Basic and diluted $ (0.20) $ (0.19) $ (0.09) $ (0.17)
Weighted average common shares outstanding
Basic and diluted 3,950,343 3,954,877 3,957,982 3,966,395
Six months ended December 31, 2001
----------------------------------------
Quarter ended Quarter ended
September 30, 2001 December 31, 2001
------------------ -----------------
Net sales $ 2,402,908 $ 2,134,783
Gross profit 607,951 275,012
Net loss (1,190,124) (1,372,796)
Net loss per share
Basic and diluted $ (.30) $ (.35)
Weighted average common shares outstanding
Basic and diluted 3,922,384 3,928,831
Year ended December 31, 2002
-----------------------------------------------------------------------
First quarter Second quarter Third quarter* Fourth quarter**
------------- -------------- -------------- ----------------
Net sales $ 4,018,945 $ 3,777,846 $ 3,748,560 $ 3,411,859
Gross profit 1,452,095 1,067,601 982,693 871,213
Net earnings (loss) (597,901) (691,996) (543,781) 3,177,171
Net earnings (loss) per share
Basic $ (0.15) $ (0.18) $ (0.14) $ 0.81
Diluted $ (0.15) $ (0.18) $ (0.14) $ 0.80
Weighted average common shares outstanding
Basic 3,904,465 3,908,364 3,915,676 3,917,961
Diluted 3,904,465 3,908,364 3,915,676 3,990,170
* Includes a gain of $103,624 from the disposition of the Medical Tape assets
(see note M).
** Includes a gain of $4,558,586 from the sale of the Conductive Business
assets and a related restructuring charge of $303,759 (see note N).
41
LecTec CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE M - DISPOSITION OF MEDICAL TAPE ASSETS
In March 2001, the Company sold its medical tape manufacturing equipment
and other related assets. Net proceeds from the sale were $630,000
consisting of the purchase price of $700,000 less transaction costs of
$70,000. The Company realized a gain on the sale of $103,624. The sale of
the medical tape equipment finalized the Company's plan to exit the medical
tape business which was adopted at the end of the fiscal year 2000.
Adoption of this plan originally resulted in a charge of $645,000 during
fiscal year 2000 related to the write-down of the medical tape equipment to
its estimated fair market value of $525,375 at June 30, 2000.
NOTE N - SALE OF CONDUCTIVE BUSINESS ASSETS AND RESTRUCTURING
In April 2001, the Company sold its diagnostic electrode and electrically
conductive adhesive hydrogel business assets which were used to produce the
Company's conductive products. Net proceeds from the sale were $6,036,988
consisting of the purchase price of $7,268,404 less transaction costs of
$1,231,416. The net assets sold as part of the transaction were carried at
a cost of $1,478,402. The Company realized a gain on the sale of
$4,558,586. Under a manufacturing and supply agreement between the Company
and the buyer, the Company continued to manufacture, and supply to the
buyer, certain conductive products for the six months ended December 31,
2001 and a portion of the year ended December 31, 2002. The Company
supplied the products at its cost of production through October 31, 2001
and at its cost of production plus 10% until January 31, 2002. Thereafter,
the Company supplied the products at normal margins.
Revenues and cost of goods sold for the medical tape business and
conductive business are as follows:
Six months Years ended
Year ended ended June 30,
December 31, December 31, -----------------------------
2002 2001 2001 2000
------------ ------------ ------------ ------------
Net sales
Conductive products $ 743,000 $ 1,024,000 $ 6,564,000 $ 7,451,000
Medical tape products - - 127,000 1,927,000
------------ ------------ ------------ ------------
743,000 1,024,000 6,691,000 9,378,000
Cost of good sold
Conductive products 529,000 1,019,000 4,940,000 5,230,000
Medical tape products - - 178,000 2,048,000
------------ ------------ ------------ ------------
529,000 1,019,000 5,118,000 7,278,000
------------ ------------ ------------ ------------
Gross profit $ 214,000 $ 5,000 $ 1,573,000 $ 2,100,000
============ ============ ============ ============
42
LecTec CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE N - SALE OF CONDUCTIVE BUSINESS ASSETS AND RESTRUCTURING - Continued
A non-recurring restructuring charge of $303,759 was incurred in the fourth
quarter of the year ended June 30, 2001 relating to the sale of the
Company's conductive business assets. The restructuring charge consists
primarily of future rental payments for a leased facility, separation
costs, and other costs associated with the wind-down of conductive business
activity. During the six months ended December 31, 2001 and the year ended
June 30, 2001, the separation costs include the termination of 23
production and 4 administrative employees. The total restructuring charge
decreased the June 30, 2001 net income per basic and diluted share by $.08.
The Company completed the restructuring during the fiscal year ended
December 31, 2002.
Selected information regarding the restructuring accrual is as follows:
Separation Facility Other
costs costs costs Total
---------- -------- ------- --------
Accrual at April 1, 2001 $ - $ - $ - $ -
Restructuring accrual 111,637 122,702 69,420 303,759
Payments (9,641) - (19,420) (29,061)
---------- --------- ------- --------
Accrual at June 30, 2001 101,996 122,702 50,000 274,698
Payments (80,066) (61,350) (28,050) (169,466)
---------- --------- ------- --------
Accrual at December 31, 2001 21,930 61,352 21,950 105,232
Payments (29,790) (61,352) (14,090) (105,232)
Reclassifications 7,860 - (7,860) -
---------- --------- ------- --------
Accrual at December 31, 2002 $ - $ - $ - $ -
========== ========= ======= ========
NOTE O - SUBSEQUENT EVENT
On February 25, 2003, the Company sold its corporate facility in Minnetonka,
Minnesota for an aggregate purchase price of $910,270 and recorded a loss on
sale of the building of $52,375. In connection with the sale, the Company
entered into a lease of its corporate facility which grants the Company free
rent for the 12 months following the sale/leaseback transaction and thereafter
extends the lease at a rate based on current market conditions. Also the
purchaser received a warrant for the purchase of 200,000 shares of common stock
at $0.90 per share.
43
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 May
22, 2003, and is incorporated herein by reference. The information required
under this item with respect to executive officers is included under the heading
"Executive Officers of the Registrant" of Item 1 of this Form 10-K. The
information required under this item with respect to officers, directors and
persons who beneficially own more than 10% of the Company's common stock will be
included under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held May 22, 2003, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item will be included under the
heading "Executive Compensation" in the Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held May 22, 2003, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes, with respect to the Company's equity
compensation plans, the number of shares of the Company's common stock to be
issued upon exercise of outstanding options, warrants and other rights to
acquire shares, the weighted-average exercise price of these outstanding
options, warrants and rights and the number of shares remaining available for
future issuance under the Company's equity compensation plans as of December 31,
2002.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO BE EXERCISE PRICE OF EQUITY COMPENSATION PLANS
ISSUED UPON EXERCISE OF OUTSTANDING (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OPTIONS, WARRANTS REFLECTED IN THE FIRST
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS COLUMN)
- ---------------------------- --------------------------- ------------------ -------------------------
Equity compensation plans
approved by security holders 1,066,974 $2.14 126,291
Equity compensation plans
not approved by security
holders 113,168 $1.30 661,832
Total 1,180,142 $2.06 788,123
44
LecTec CORPORATION 2001 STOCK OPTION PLAN
The LecTec Corporation 2001 Stock Option Plan (the "Plan") was designed
(i) to aid in maintaining and developing personnel capable of assuring the
future success of the Company and to offer such personnel additional incentives
to put forth maximum efforts for the success of the business, and (ii) to afford
such personnel an opportunity to acquire a proprietary interest in the Company
through stock options. An aggregate of 750,000 shares were authorized for
issuance under the Plan pursuant to the grant of stock options, stock
appreciation rights, restricted stock, restricted stock units or other stock
grants ("Awards"). The Plan became effective on July 1, 2001 and terminates on
July 1, 2011.
The Plan authorizes the grant of Awards to any employee, consultant or
independent contractor providing services to the Company or any affiliate of the
Company, except that officers and directors of the Company or the Company's
affiliates are not eligible to participate in the Plan. A committee of directors
designated by the Company's Board of Directors (the "Committee") is responsible
for administering the Plan.
The exercise price, option term, and time and method of exercise of the
stock options granted under the Plan are determined by the Committee. Subject to
the terms of the Plan and any applicable agreement, the grant price, term,
method of exercise, date of exercise, method of settlement and any other term
and condition of any stock appreciation right are determined by the Committee.
The Committee may impose such conditions or restrictions on the exercise of any
stock appreciation right as it may deem appropriate. Shares of restricted stock
and restricted stock units are subject to such restrictions as the Committee may
impose (including, without limitation, a waiver by participants of the right to
vote or to receive any dividend or other right or property with respect
thereto), which restrictions may lapse separately or in combination at such time
or times, in such installments or otherwise as the Committee may deem
appropriate. Any restricted stock granted under the Plan are evidenced by
issuance of a stock certificate or certificates, which certificate or
certificates are held by the Company. Except as otherwise determined by the
Committee, upon a participant's termination of employment during the applicable
restriction period, all shares of restricted stock and all restricted stock
units held by the participant at such time are forfeited and reacquired by the
Company. The Committee may, when it finds that a waiver would be in the best
interest of the Company, waive in whole or in part any or all-remaining
restrictions with respect to shares of restricted stock or restricted stock
units. Finally, the Committee is authorized, subject to the terms of the Plan
and any applicable award agreement, to grant to eligible persons shares of
common stock without restrictions thereon as are deemed by the Committee to be
consistent with the purpose of the Plan.
Certain of the information required under this item will be included
under the headings "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held May 22, 2003, 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 May 22,
2003, and is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934) as of a date within 90 days prior to the filing
date of this report. Based upon this evaluation, the principal executive officer
and principal financial officer have concluded that, as
45
of such date, our disclosure controls and procedures were effective in making
them aware on a timely basis of the material information relating to the Company
required to be included in our periodic filings with the Securities and Exchange
Commission.
There were no significant changes made in our internal controls during
the period covered by this report or, to our knowledge, in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
46
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) Financial Statements, Schedules and Exhibits
1. Financial Statements
The following financial statements of the Company are filed as
a part of this Form 10-K in Part II, Item 8:
(i) Report of Independent Certified Public Accountants.
(ii) Balance Sheets at December 31, 2002 and December 31,
2001.
(iii) Statements of Operations for the year ended December
31, 2002, six months ended December 31, 2001 and the
years ended June 30, 2001 and 2000.
(iv) Statements of Shareholders' Equity for the year ended
December 31, 2002, six months ended December 31, 2001
and for the years ended June 30, 2001 and 2000.
(v) Statements of Cash Flows for the year ended December
31, 2002, six months ended December 31, 2001 and for
the years ended June 30, 2001 and 2000.
(vi) Notes to Financial Statements.
2. Financial Statement Schedules
(i) Schedule II - Valuation and Qualifying Accounts, for
the year ended December 31, 2002, for the six months
ended December 31, 2001 and for each of the two years
in the period ended June 30, 2001
(ii) Other Schedules - All other schedules have been
omitted because of the absence of the conditions
under which they are required or because the required
information is included in the financial statements
or the notes thereto.
3. Exhibits
Method of
Filing
---------
3.01 Articles of Incorporation of LecTec Corporation, as amended (1)
3.02 Bylaws of LecTec Corporation (1)
10.01 Certificate of Secretary pertaining to Resolution of Board of
Directors of LecTec Corporation, dated October 30, 1986,
implementing a Profit Sharing Bonus Plan (1)
**10.02 LecTec Corporation 1989 Stock Option Plan (2)
**10.03 LecTec Corporation 1991 Directors' Stock Option Plan (2)
47
10.04 First amendment dated May 5, 1997 between LecTec Corporation and
Rushmore Plaza Partners Limited Partnership (2)
10.05 Articles of Merger of Pharmadyne Corporation into LecTec Corporation
dated December 31, 1997 (3)
** 10.06 Change In Control Termination Pay Plan adopted May 27, 1998 (3)
** 10.07 LecTec Corporation Employee Stock Purchase Plan (4)
** 10.08 LecTec Corporation 1998 Stock Option Plan (5)
** 10.09 LecTec Corporation 1998 Directors' Stock Option Plan (5)
* 10.10 Supply Agreement dated as of March 21, 2000 by and between LecTec
Corporation and Johnson & Johnson Consumer Companies, Inc. and
Neutrogena Corporation (7)
* 10.11 Supply Agreement dated as of May 15, 2000 by and between LecTec
Corporation and Novartis Consumer Health, Inc. (7)
10.12 Loan Agreement and Promissory Note by and between LecTec Corporation
and Equity Holdings II dated December 21, 2000 (9)
10.13 Asset Purchase Agreement dated November 17, 2000 by and among The
Ludlow Company LP, Sherwood Services AG and LecTec Corporation (10)
10.14 Asset Purchase Agreement dated March 13, 2001 by and among The
National Medical Products Co. Ltd. and LecTec Corporation (11)
** 10.15 LecTec Corporation 2001 Stock Option Plan (12)
10.16 Supply and Non-exclusive License Agreement By and Between LecTec
Corporation and Novartis Consumer Health, Inc. dated May 8, 2002. (14)
10.17 Promissory Note By and Between LecTec Corporation and Novartis
Consumer Health, Inc. dated May 8, 2002. (14)
10.18 Promissory Note By and Between LecTec Corporation and Novartis
Consumer Health, Inc. dated May 8, 2002. (14)
10.19 Security Agreement By and Between LecTec Corporation and Novartis
Consumer Health, Inc. dated May 8, 2002. (14)
10.20 Sale Leaseback Agreement By and Between LecTec Corporation and Larry
Hopfenspirger, dated February 25, 2003. (15)
23.01 Consent of Grant Thornton LLP (15)
24.01 Power of Attorney (16)
48
99.01 Cautionary Statements (15)
99.02 Chief Executive Officer Certification Pursuant to 18 U.S.C. 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (15)
- ---------------------------------
* Confidential treatment has been granted for portions of this
Exhibit pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934 as amended. The confidential portions have been deleted
and filed separately with the United States Securities and
Exchange Commission.
** Management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-K.
(1) Incorporated herein by reference to the Company's Form S-18
Registration Statement (file number 33-9774C) filed on October
31, 1986 and amended on December 12, 1986.
(2) Incorporated herein by reference to the Company's Annual Report
on Form 10-K for the year ended June 30, 1997.
(3) Incorporated herein by reference to the Company's Annual Report
on Form 10-K for the year ended June 30, 1998.
(4) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 (file number 333-72571) filed on February
18, 1999.
(5) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 (file number 333-72569) filed on February
18, 1999.
(6) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1999.
(7) Incorporated herein by reference to the Company's Annual Report
on Form 10-K for the year ended June 30, 2000, as amended.
(8) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000.
(9) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 2000.
(10) Incorporated herein by reference to the Company's Definitive
Proxy Statement on Schedule 14A filed with the Commission on
March 15, 2001
(11) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001.
(12) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 (file number 333-68920) filed on September
4, 2001.
49
(13) Incorporated herein by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 2001, as amended.
(14) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002.
(15) Filed herewith.
(16) Included on signature page.
(b) Reports on Form 8-K
None.
50
LecTec Corporation
Schedule II
Valuation and Qualifying Accounts
Year Ended December 31, 2002, Six Months Ended December 31, 2001 and Years
Ended June 30, 2001 and 2000
Balance at Charged to Charge to Balance
beginning of costs and other at end
Description period expenses accounts Deductions of period
- ---------------------------------- -------- ---------- --------- ---------- ----------
Allowance for doubtful accounts
Year ended June 30, 2000 101,751 48,000 - 22,626 127,125
Year ended June 30, 2001 127,125 24,000 - 42,672 108,453
Six months ended Dec. 31, 2001 108,453 16,500 - 25,944 99,009
Year ended Dec. 31, 2002 99,009 10,000 - 28,354 80,655
Allowance for sales returns and credits
Year ended June 30, 2000 56,757 345,855 - 160,206 242,406
Year ended June 30, 2001 242,406 710,646 - 382,254 570,798
Six months ended Dec. 31, 2001 570,798 201,887 - 514,969 257,716
Year ended Dec. 31, 2002 257,716 941,534 - 886,872 312,378
Allowance for inventory obsolescence
Year ended June 30, 2000 284,609 267,911 - 406,545 145,975
Year ended June 30, 2001 145,975 326,257 - 343,442 128,790
Six months ended Dec. 31, 2001 128,790 60,000 - 99,635 89,155
Year ended Dec. 31, 2002 89,155 190,000 - 170,870 108,285
51
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 14th day of
April 2003.
LECTEC CORPORATION
/s/Rodney A. Young
--------------------
Rodney A. Young
Chairman, Chief Executive Officer and President
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Rodney A. Young (with full power to act alone),
as his or her true and lawful attorneys-in-fact and agents, with full powers of
substitution and re-substitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments to the
Annual Report on Form 10-K of LecTec Corporation, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or their substitute
or substitutes, lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/Rodney A. Young April 14, 2003
- -------------------------------------------------
Rodney A. Young
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
(Principal Financial Officer)
(Principal Accounting Officer)
/s/Lee M. Berlin April 14, 2003
- -------------------------------------------------
Lee M. Berlin
Director
/s/Marilyn K. Speedie April 14, 2003
- -------------------------------------------------
Marilyn K. Speedie
Director
/s/Donald C. Wegmiller April 14, 2003
- -------------------------------------------------
Donald C. Wegmiller
Director
52
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Rodney A. Young, Chief Executive Officer and President of LecTec
Corporation, a Minnesota corporation, certify that:
1. I have reviewed this annual report on Form 10-K of LecTec
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
/s/ Rodney A. Young
-------------------------------------
Rodney A. Young
Chief Executive Officer and President
53
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Rodney A. Young, Chief Executive Officer and President of LecTec
Corporation, a Minnesota corporation, certify that:
1. I have reviewed this annual report on Form 10-K of LecTec
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
/s/ Rodney A. Young
-------------------
Rodney A. Young
Chief Executive Officer
and President
54
EXHIBIT INDEX
Exhibits
3.01 Articles of Incorporation of Registrant, as amended (Note 1).
3.02 Bylaws of Registrant (Note 1).
10.01 Certificate of Secretary pertaining to Resolution of Board of
Directors of LecTec Corporation, dated October 30, 1986,
implementing a Profit Sharing Bonus Plan (Note 1).
** 10.02 LecTec Corporation 1989 Stock Option Plan (Note 2).
** 10.03 LecTec Corporation 1991 Directors' Stock Option Plan (Note 2).
10.04 First amendment dated May 5, 1997 between LecTec Corporation and
Rushmore Plaza Partners Limited Partnership (Note 2).
10.05 Articles of Merger of Pharmadyne Corporation into LecTec
Corporation dated December 31, 1997 (Note 3).
** 10.06 Change In Control Termination Pay Plan adopted May 27, 1998
(Note 3).
** 10.07 LecTec Corporation Employee Stock Purchase Plan (Note 4).
** 10.08 LecTec Corporation 1998 Stock Option Plan (Note 5).
** 10.09 LecTec Corporation 1998 Directors' Stock Option Plan (Note 5).
* 10.10 Supply Agreement dated as of March 21, 2000 by and between LecTec
Corporation and Johnson & Johnson Consumer Companies, Inc. and
Neutrogena Corporation (Note 7).
* 10.11 Supply Agreement dated as of May 15, 2000 by and between LecTec
Corporation and Novartis Consumer Health, Inc (Note 7).
10.12 Loan Agreement and Promissory Note by and between LecTec
Corporation and Equity Holdings II dated December 21, 2000
(Note 9).
10.13 Asset Purchase Agreement dated November 17, 2000 by and among The
Ludlow Company LP, Sherwood Services AG and LecTec Corporation
(Note 10).
10.14 Asset Purchase Agreement dated March 13, 2001 by and among The
National Medical Products Co. Ltd. and LecTec Corporation (Note
11).
** 10.15 LecTec Corporation 2001 Stock Option Plan (Note 12).
10.16 Supply and Non-exclusive License Agreement By and Between LecTec
Corporation and Novartis Consumer Health, Inc. dated May 8, 2002
(Note 14).
10.17 Promissory Note By and Between LecTec Corporation and Novartis
Consumer Health, Inc. dated May 8, 2002 (Note 14).
10.18 Promissory Note By and Between LecTec Corporation and
55
Novartis Consumer Health, Inc. dated May 8, 2002 (Note 14).
10.19 Security Agreement By and Between LecTec Corporation and Novartis
Consumer Health, Inc. dated May 8, 2002 (Note 14).
10.20 Sale Leaseback Agreement By and Between LecTec Corporation and
Larry Hopfenspirger, dated February 25, 2003 (Note 15).
23.01 Consent of Grant Thornton LLP. (Note 15)
24.01 Power of Attorney. (Note 16)
99.01 Cautionary Statements (Note 15).
99.02 Chief Executive Officer Certification Pursuant to 18 U.S.C.1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002 (Note 15).
NOTES:
* Confidential treatment has been granted for portions of this
Exhibit pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934 as amended. The confidential portions have been deleted
and filed separately with the United States Securities and
Exchange Commission.
** Management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-K.
(1) Incorporated herein by reference to the Company's Form S-18
Registration Statement (file number 33-9774C) filed on October 31,
1986 and amended on December 12, 1986.
(2) Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended June 30, 1997.
(3) Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998.
(4) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 (file number 333-72571) filed on February
18, 1999.
(5) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 (file number 333-72569) filed on February
18, 1999.
(6) Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1999.
(7) Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended June 30, 2000, as amended.
(8) Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000.
56
(9) Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 2000.
(10) Incorporated herein by reference to the Company's Definitive Proxy
Statement on Schedule 14A filed with the Commission on March 15,
2001.
(11) Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2001.
(12) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 (file number 333-68920) filed on September
4, 2001.
(13) Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, as amended.
(14) Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2002.
(15) Filed herewith.
(16) Included on signature page.
57