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<SEC-DOCUMENT>0000897101-00-000947.txt : 20010224
<SEC-HEADER>0000897101-00-000947.hdr.sgml : 20010224
ACCESSION NUMBER: 0000897101-00-000947
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 20000630
FILED AS OF DATE: 20000928
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: LECTEC CORP /MN/
CENTRAL INDEX KEY: 0000805928
STANDARD INDUSTRIAL CLASSIFICATION: 3845
IRS NUMBER: 431301878
STATE OF INCORPORATION: MN
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 333-72569
FILM NUMBER: 731284
BUSINESS ADDRESS:
STREET 1: 10701 RED CIRCLE DR
CITY: MINNETONKA
STATE: MN
ZIP: 55343
BUSINESS PHONE: 6129332291
MAIL ADDRESS:
STREET 1: 10701 RED CIRCLE DRIVE
STREET 2: 10701 RED CIRCLE DRIVE
CITY: MINNETONKA
STATE: MN
ZIP: 55343
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>0001.txt
<TEXT>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
-----------------
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2000.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO _______.
Commission File Number: 0-16159
LECTEC CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1301878
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10701 RED CIRCLE DRIVE, MINNETONKA, MINNESOTA 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (952) 933-2291
-----------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.01 per
share.
-----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein; and will not be contained,
to the best of the Registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant as of September 20, 2000 was $6,513,235 based upon the last
reported sale price of the Common Stock at that date by the Nasdaq Stock Market.
The number of shares outstanding of the Registrant's Common Stock as of
September 20, 2000 was 3,904,465 shares.
-----------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information from the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held November 16, 2000.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
LecTec Corporation (the "Company") designs, manufactures and markets
diagnostic electrocardiograph ("ECG") electrodes, conductive and non-conductive
adhesive hydrogels, and patches for the topical application of over-the-counter
("OTC") drugs. The Company markets and sells its products to medical products
distributors, consumers through retail outlets (food, chain drug and mass
merchandise stores), consumer products companies and original equipment
manufacturers ("OEM"s). All of the products manufactured by the Company are
designed to be highly compatible with skin.
The Company developed one of the first solid gel disposable ECG
electrodes which did not require the use of aqueous conductive gels in order to
maintain contact with the skin. The Company has since continued to develop,
manufacture and market electrodes as well as hydrogels and OTC topical
therapeutic patches. A hydrogel is a gel-like material having an affinity for
water and similar compounds. These gels are ideal for electrical conductivity
and skin compatibility. The Company holds multiple domestic and foreign patents.
Effective January 14, 1999, the Company was certified as meeting the
requirements of ISO 9001 and EN46001 quality system standards. Certification was
granted by TUV Product Service GmbH. Meeting these standards, particularly
EN46001, confirms that the Company has achieved the highest level of quality
systems compliance demonstrated by world-class design and manufacturing firms.
For medical devices, EN46001 is awarded only to those companies which satisfy
the rigorous standards of ISO 9001 and comply with the European Union's Medical
Device Directive.
The Company, through its research and development efforts, is
investigating new products for topical delivery of OTC drugs, and new conductive
adhesive hydrogel polymers. In addition, existing technologies are being refined
to focus on new consumer products targeting new retail customers and new
markets.
The Company was organized in 1977 as a Minnesota corporation. Its
principal executive office is located at 10701 Red Circle Drive, Minnetonka,
Minnesota 55343, and its telephone number is (952) 933-2291.
PRODUCTS
The Company's core competency is skin interface technology. This
competency results in products which are chemically compatible with human skin,
thereby reducing skin irritation and reducing damage to the skin as well as the
risk of infection. The electrical properties, adhesive characteristics,
dimensions, drug stability, shelf life and manufacturability of the Company's
products are highly consistent and reproducible from product to product.
CONDUCTIVE PRODUCTS
The Company's conductive products include diagnostic electrodes and
electrically conductive adhesive hydrogels.
The Company applies its patented conductive, skin compatible, adhesive
hydrogel technology to cardiac diagnostic electrodes. The Company's patented
natural and synthetic-based hydrogel polymers are self-adherent and are capable
of being made electrically conductive. Using natural-based polymers, the Company
developed the first solid gel disposable diagnostic ECG electrodes.
The solid gel design of the Company's electrodes provides more
consistent electrical performance and eliminates clean-up time for the
clinician. Currently the Company has three different types of diagnostic
electrodes: LecTec 1000 Series, a disposable electrode made of natural polymer
solid gel with gentle adhesion; LecTec 3000 Series and LecTec 3009 Series,
synthetic solid gel electrodes with higher levels of adhesion which meet all
American Association for Medical Instrumentation ("AAMI") standards
-1-
<PAGE>
including defibrillation recovery; and LecTec 4000 Series, a synthetic solid
gel, silver substrate electrode which also meets all AAMI standards including
defibrillation recovery.
The Company pioneered hydrogel technology and manufactures synthetic
and natural-based hydrogels. These hydrogels are resistant to dehydration,
evaporation and changes in electrical and physical properties. Hydrogels are
also used topically to deliver specific medications to the skin. Hydrogels are
manufactured with various levels of conductivity, as well as with varying
degrees of self-adhesive properties, for diagnostic electrodes, external
defibrillation, pacing and monitoring electrodes, Transcutaneous Electronic
Nerve Stimulation ("TENS") products and iontophoretic return electrodes.
Sales of conductive products accounted for approximately 51%, 63% and
61% of the Company's total sales for fiscal years 2000, 1999 and 1998.
MEDICAL TAPE PRODUCTS
The Company adopted a plan at the end of fiscal 2000 to exit the low
margin medical tape business for which sales had been declining for several
years. The medical tape business was comprised of sales of individual slit roll
widths of the standard paper, plastic and cloth products widely used in the
health care industry and sales of large jumbo rolls which were converted by the
customer into individual slit rolls widths for ultimate sale to consumers.
Minimal sales are expected in fiscal 2001 as remaining medical tape inventories
are liquidated.
Sales of medical tapes accounted for approximately 13%, 22% and 32% of
the Company's total sales for fiscal years 2000, 1999 and 1998.
THERAPEUTIC CONSUMER PRODUCTS
The Company manufactures and markets patches for the topical
application of OTC drugs and other therapeutic compounds. Therapeutic patch
products use a hydrogel coated, breathable cloth patch to deliver OTC drugs and
other therapeutic compounds onto the skin. Products currently manufactured using
the adhesive-based patch technology are analgesic patches for localized pain
relief, cooling gel comfort patches, vapor cough suppressant patches, anti-itch
patches, acne treatment patches, wart removers, and a corn and callus remover.
These products are marketed as OTC products. The analgesic, cooling and
anti-itch patches are marketed under the LecTec brand name TheraPatch(R). The
acne treatment patches, wart removers and corn and callus removers are marketed
by the customer under the brand of the customer. The vapor cough suppressant
patches are marketed under the TheraPatch brand name as well as by the customer
under the brand of the customer.
Sales of therapeutic consumer products accounted for approximately 36%,
15% and 7% of the Company's total sales for fiscal years 2000, 1999 and 1998.
MARKETING AND MARKETING STRATEGY
The Company markets and sells its products to medical products
distributors, consumers through retail outlets (food, chain drug and mass
merchandise stores), consumer products companies and original equipment
manufacturers.
A major entry into the consumer products markets was supported by the
hiring of a new retail sales executive late in fiscal 1998 and a retail sales
team in fiscal 1999. In the consumer products markets, retail broker and
manufacturer's representative contracts have been established. The TheraPatch
brand is the umbrella brand for the Company's therapeutic patch products
introduced to all markets.
In addition to the retail sales team hired for entry into the retail
consumer products markets, the Company has sales teams which address other
markets into which it sells. These teams support sales to:
o medical products distributors who sell to end-user
organizations,
o consumer products companies who sell directly to the consumer,
and
o OEMs which either include the Company's product with the
product they sell (e.g., electrodes purchased from the Company
may be included with electrocardiogram machines manufactured
and sold by an OEM), or use the Company's jumbo rolls of
hydrogels to
-2-
<PAGE>
manufacture a finished product for sale to the end-user (e.g.,
hydrogel purchased from the Company may be used by an OEM to
make electrodes).
The Company has not experienced any significant seasonality in sales of
its products.
The Company sells its products in the U.S., Europe, Latin America,
Asia, Canada and Middle East. Except for sales of the TheraPatch brand patch
product into Canada, all of the Company's international sales are denominated in
U.S. dollars, thus, most of the impact of the foreign currency transaction gains
and losses are borne by the Company's customers. The Company does not believe
the January 1, 1999 euro currency conversion has had, nor will have, a material
impact on its financial statements. Export sales accounted for approximately
13%, 13% and 26% of total sales for 2000, 1999 and 1998.
The Company's international sales are made by the Company's corporate
sales force. The Company does not maintain a separate international marketing
staff or operations. The following table sets forth export sales by geographic
area:
Years ended June 30
-----------------------------------------------------
2000 1999 1998
---- ---- ----
Europe $1,006,412 $1,216,199 $1,705,996
Latin America 547,904 371,654 371,854
Asia 46,279 31,935 62,027
Canada 298,884 7,011 199,082
Middle East 10,272 -- 912,240
Other 25,962 28,333 71,949
---------- ---------- ----------
Total Export Sales $1,935,713 $1,655,132 $3,323,148
========== ========== ==========
CUSTOMERS
Spacelabs Burdick Inc. accounted for 17%, 22% and 18% of the Company's
total sales for the fiscal years 2000, 1999 and 1998. The Company sold its
products to approximately 275, 240 and 190 active customers (excluding
TheraPatch sales to individuals) during 2000, 1999 and 1998. The Company's
backlog orders (purchase orders received from customers for future shipment) as
of August 11, 2000 totaled $3,170,000 (all of which the Company expects to fill
in fiscal 2001), compared with approximately $913,000 on August 12, 1999. The
increase in the backlog as of August 11, 2000 was primarily the result of supply
agreements for patch products signed with Johnson & Johnson Consumer Products
Company and Novartis Consumer Health, Inc. towards the end of fiscal 2000.
COMPETITION
The markets for electrodes, hydrogels and topical OTC drug delivery
patches are highly competitive. Firms in the medical and consumer industries
compete on the basis of product performance, pricing, distribution and service.
Many of the Company's major competitors have significantly greater financial,
marketing and technological resources than the Company. However, the Company
believes that it competes on the basis of proprietary technology,
speed-to-market, flexibility, innovative "first-in-category" patches, customer
focus and its ability to manufacture and market its products to targeted market
segments.
Over the past several years there have been a number of mergers within
the electrode and hydrogel industries, resulting in fewer but larger
competitors.
The Company's primary competitor for electrode and hydrogel sales is
Tyco International. The Company's OTC TheraPatch family of analgesic, anti-itch
and cough suppressant patches competes with ointments, lotions and creams
manufactured by various competitors including Mentholatum/Rohto Pharmaceuticals,
Inc.
-3-
<PAGE>
MANUFACTURING
The Company manufactures its conductive and therapeutic membranes at
the Company's Minnetonka, Minnesota facility. The Minnetonka facility also
processes raw materials and manufactures the Company's therapeutic products. The
Company's second manufacturing facility in Edina, Minnesota is the primary site
for the manufacturing and packaging of diagnostic electrodes and the packaging
of therapeutic products. The Edina location also provides the majority of the
Company's warehouse capacity.
The Company believes that the raw materials used in manufacturing its
products are generally available from multiple suppliers.
RESEARCH AND DEVELOPMENT
The Company's research and development staff consists of professionals
drawn from the business and academic communities with experience in the
biological, chemical, pharmaceutical and engineering sciences. The research and
development staff is responsible for the investigation, development and
implementation of new and improved products and new technologies.
The Company may develop products internally, jointly with corporations
and/or with inventors from outside the Company. The Company may then market
resulting products by sponsoring partners or through a marketing arrangement
with an appropriate distributor. Research and development contract opportunities
are evaluated on an individual basis.
The Company, through its research and development efforts, is
investigating new products for topical delivery of OTC drugs and new conductive
adhesive hydrogel polymers. In addition, existing technologies are being refined
to focus on new products targeting new customers and new markets.
During fiscal 2000 the Company discontinued development of a
cotinine-based smoking cessation product after unsuccessful efforts to secure
the third party funding necessary for the next phases of research and
development.
During fiscal years 2000, 1999 and 1998, the Company spent
approximately $1,095,000, $1,170,000 and $1,037,000 on research and development.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
The Company's Quality System includes design development planning,
testing, manufacturing, packaging, labeling and distribution of the Company's
products which are subject to federal and foreign regulations, and in some
instances, state and local government regulations.
UNITED STATES REGULATION
The Company's electrodes sold in the United States are subject to
federal Food and Drug Administration (the "FDA") policy and are marketed
pursuant to Section 510(k) notification, which is a means of obtaining FDA
clearance to market a medical device. The Company's finished goods electrodes
sold in the United States are subject to the FDA's current Good Manufacturing
Practices ("GMP") and quality system regulations.
The Company's hydrogels sold domestically are also subject to GMP and
quality system regulations as they are sold to OEMs and distributors for
processing into finished commercial goods.
The Company's topical OTC drug delivery patches are marketed under
applicable federal FDA OTC monographs.
FOREIGN REGULATION
The Company's electrodes sold into the European Community (the "EC")
are considered to be Class I, non-sterile and non-measuring medical devices.
These products are "CE" marked and "self declared" as being compliant to the
Medical Device Directive 93/42/EEC. An authorized representative for
-4-
<PAGE>
the Company has been established in the EC as required by European law. Foreign
sales of the Company's electrodes are made only into the EC.
There are no foreign regulatory approvals required to sell the
Company's hydrogels into foreign countries because these products are sold to
OEM customers for processing into finished commercial goods.
The Company's topical OTC drug delivery patches are marketed in Canada
under applicable Canadian OTC monographs where appropriate, and are reviewed and
approved prior to commercialization by the Health Protection branch of Health
Canada.
ENVIRONMENTAL REGULATION
The Company does not use solvents that have an adverse effect on the
environment in the manufacturing of its products. The Company does not
anticipate any major expenditure for environmental controls during the next
fiscal year.
PATENTS AND TRADEMARKS
The Company has U.S. and foreign patents on adhesive hydrogels,
electrodes and transdermal and topical delivery systems. Twenty-two active U.S.
patents and fourteen active international patents are currently assigned or
licensed to the Company. Four U.S. patents were allowed during fiscal 2000 and
are expected to be issued to the Company in fiscal 2001. Sixteen U.S. and
foreign applications are pending including two which are on appeal. Foreign
patent applications are pending in numerous European countries, Canada and
Japan. The patents most pertinent to the Company's major products have a
remaining duration ranging from four to twenty years. Three of these patents
have a remaining duration of less than five years and the expiration of these
patents is not expected to have a material effect on the Company's proprietary
position.
Four trademark registrations were received in fiscal 2000. One
trademark registration is pending.
The Company expects that its products will be subject to continuous
modifications due to improvements in materials and technological advances for
medical products. Therefore, the Company's continued success does not depend
solely upon ownership of patents, but upon technical expertise, creative skills
and the ability to forge these talents into the timely release of new products.
The Company uses both patents and trade secrets to protect its
proprietary property and information. In addition, the Company monitors
competitive products and patent publications to be aware of potential
infringement of its rights.
EMPLOYEES
As of June 30, 2000, the Company employed 97 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 45 Chairman, Chief Executive Officer and President
Douglas J. Nesbit 48 Chief Financial Officer
Timothy P. Fitzgerald 60 Vice President, Operations
John D. LeGray 54 Vice President, Quality Assurance and Regulatory
Affairs
Daniel M. McWhorter 60 Vice President, Research and Development
Jane M. Nichols 54 Vice President, Marketing and New Business
Development
Timothy R. J. Quinn 39 Vice President, Consumer Products
-5-
<PAGE>
Rodney A. Young is Chairman, Chief Executive Officer and President. He
joined the Company in August 1996. Prior to joining LecTec, Mr. Young had 23
years of health care industry experience including sales and marketing for
Upjohn Company and 3M Company. Prior to joining the Company, he was Vice
President and General Manager of the Specialized Distribution Division of Baxter
International, Inc.
Douglas J. Nesbit is Chief Financial Officer. He joined the Company in
August 2000. Mr. Nesbit's 23-year professional background includes public
accounting experience with the big five firm of KPMG LLP. Prior to joining
LecTec he was the Chief Financial Officer at Total Solutions Group, Inc. and
Treasurer at Secure Computing Corporation.
Timothy P. Fitzgerald is Vice President, Operations. He joined the
Company in February 2000. Mr. Fitzgerald's 40-year career includes technical and
senior management positions at Bell & Howell Co., International Data
Engineering, Inc. and Varitronic Systems, Inc.
John D. LeGray is Vice President, Quality Assurance and Regulatory
Affairs. He joined the Company in September 1997. Mr. LeGray's 33-year career
includes technical and management positions at DiaSorin Inc., Bayer Corporation
and Abbott Laboratories.
Daniel M. McWhorter is Vice President, Research and Development. He
joined the Company in January 1997. Mr. McWhorter has more than 28 years of
experience in the medical products industry including both technical and general
management positions at The Kendall Company and Pharmacia Deltec and senior
technical positions at Abbott Laboratories and Mentor Corporation.
Jane M. Nichols is Vice President, Marketing and New Business
Development. She joined the Company in April 1997. Ms. Nichols' 28-year career
includes clinical, technical and management roles at Methodist Hospital and Park
Nicollet Medical Centers, and senior marketing positions at 3M Company and
Ecolab.
Timothy R. J. Quinn is Vice President and General Manager, Consumer
Products. He joined the Company in May 1998. He has 20 years of sales and
marketing experience in the consumer products industry. Prior to joining LecTec,
he was Vice President of Sales at Redmond Products. Prior to Redmond, Quinn
served in a variety of sales and marketing management positions for Lederle
Laboratories and General Foods Corporation. He received his Bachelor of Science
Degree in business administration from Western Michigan University and completed
Columbia University executive management courses.
-6-
<PAGE>
ITEM 2. PROPERTIES
The Company owns a building located in Minnetonka, Minnesota,
containing 18,000 square feet of office and laboratory space and 12,000 square
feet of manufacturing and warehouse space. In addition, the Company leases a
building in Edina, Minnesota containing 29,000 square feet of manufacturing and
warehouse space. The Edina building lease term extends through June 30, 2002.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on the Nasdaq National Market tier of
the Nasdaq Stock Market ("Nasdaq") under the symbol LECT.
The following table sets forth the high and low daily trade price
information for the Company's common stock for each quarter of fiscal 2000 and
1999. Such prices reflect interdealer prices, without retail mark-up, mark-down,
or commission, and may not necessarily represent actual transactions.
YEARS ENDED JUNE 30, 2000 1999
------------------ ----------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $4.375 $2.688 $4.000 $2.250
Second Quarter 3.125 1.188 4.000 2.125
Third Quarter 5.000 1.375 3.000 1.250
Fourth Quarter 4.875 2.000 4.750 1.813
As of September 20, 2000 the Company had 3,904,465 shares of common
stock outstanding, and 315 common shareholders of record which number does not
include beneficial owners whose shares were held of record by nominees or broker
dealers.
The Company has not declared or paid cash dividends on its common stock
since its inception, and intends to retain all earnings for use in its business
for the foreseeable future.
-7-
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
CONSOLIDATED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Years ended June 30, 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 14,596,346 $ 12,279,075 $ 12,922,365 $ 12,256,327 $ 13,100,754
Gross profit 5,121,217* 4,093,561 3,715,032 4,324,180 4,969,659
Loss from operations (2,890,497)** (1,771,324) (474,935) (2,215,951)*** (724,074)
Loss before equity in losses of
unconsolidated subsidiary (2,859,276)** (1,683,257) (404,061) (2,140,660)*** (632,193)
Equity in losses of unconsoli-
dated subsidiary -- -- -- 126,067 --
Net loss (2,859,276)** (1,683,257) (404,061) (2,266,727)*** (632,193)
Net loss per common and
common equivalent share
(BASIC AND DILUTED) (.74)** (.43) (.10) (.59)*** (.17)
</TABLE>
CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
At June 30, 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments $ 100,171 $ 1,022,025 $ 2,186,532 $ 1,242,777 $ 800,693
Current assets 5,236,110 5,904,111 6,728,531 6,873,696 5,624,682
Working capital 1,512,561 3,497,926 5,335,861 4,035,084 4,240,024
Property, plant and equipment, net 3,039,088 4,028,491 4,306,568 4,592,304 5,112,975
Long-term investments -- -- 8,676 8,013 574,806
Total assets 8,474,549 10,132,573 11,317,774 11,837,356 12,494,003
Long-term liabilities 31,184 217,868 222,000 211,000 174,000
Shareholders' equity 4,719,816 7,508,520 9,703,104 8,787,744 10,935,345
</TABLE>
* Includes a charge of $85,000 related to the plan to exit the medical
tape product line.
** Includes a charge of $730,000 or $.19 per share related to the plan to
exit the medical tape product line.
*** Includes a nonrecurring restructuring charge of $2,180,353 or $.57 per
share.
-8-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS
NET SALES
Net sales were $14,596,346 in 2000, an increase of 18.9% from net sales
of $12,279,075 in 1999. Net sales were $12,922,365 in 1998. The increase in 2000
net sales was primarily the result of increased therapeutic consumer product
sales, partially offset by decreased medical tape and conductive product sales.
The decrease in 1999 net sales was primarily the result of decreased medical
tape sales, partially offset by increased therapeutic consumer product sales.
Net sales of conductive products (medical electrodes and conductive
hydrogels) decreased by 4.0% in 2000 to $7,450,755 from $7,758,286 in 1999.
Conductive product net sales were $7,906,676 in 1998. These fluctuations in
sales were primarily volume-related. The Company expects fiscal 2001 conductive
sales to be comparable to fiscal 2000 sales.
Net sales of medical tapes decreased by 29.0% in 2000 to $1,927,392
from $2,716,540 in 1999. Medical tape net sales were $4,157,199 in 1998. The
decrease in 2000 was primarily the result of reduced sales to a low-margin slit
roll tape customer and decreases in sales volume to several other low-margin
medical tape customers. The decrease in 1999 was primarily the result of the
absence of sales in 1999 to an international customer. The Company adopted a
plan at the end of fiscal 2000 to exit the medical tape business and expects
minimal medical tape sales in 2001 as remaining inventories are liquidated.
Net sales of therapeutic consumer products increased 189.2% in 2000 to
$5,218,199 from $1,804,249 in 1999. Net sales of therapeutic consumer products
were $858,490 in fiscal 1998. The increase in 2000 was primarily the result of
increased TheraPatch(R) product sales, which increased 127.1%, and sales in 2000
of the new acne product to Johnson & Johnson Consumer Products Worldwide. The
increase in 1999 was primarily the result of increased TheraPatch sales to
retailers, both as a result of increased volumes and increased unit selling
price. The higher unit selling price in 1999 was the result of the Company
selling directly to retailers rather than to CNS, Inc., the Company's exclusive
distributor to retailers in the prior year. The agreement under which CNS
distributed the TheraPatch product was terminated at the end of fiscal 1998 when
the Company assumed responsibility for retail distribution of the product.
Management believes that sales of the Company's therapeutic patch products will
represent an increased percentage of total net sales during fiscal 2001 due to
continued sales growth of the acne product, new sales of Triaminic(R) Vapor
brand topical cough and cold patches and increased TheraPatch brand name
recognition.
Export sales, consisting primarily of electrodes, semi-finished
conductive and medical tape products sold to overseas converters for final
processing, packaging and marketing, as well as TheraPatch brand therapeutic
consumer products, were 13%, 13% and 26% of total net sales in 2000, 1999 and
1998. All international sales are in U. S. dollars with the exception of
TheraPatch brand products sold in Canada. Export sales increased by $280,581 in
fiscal 2000 primarily as a result of the Canadian TheraPatch sales. The decrease
in the percent for 1999 resulted primarily from the absence in 1999 of medical
tape sales to an international customer as well as decreased conductive sales to
another customer who began manufacturing product previously purchased from the
Company. The Company expects fiscal 2001 international sales will be comparable
to 2000.
GROSS PROFIT
The Company's gross profit was $5,121,217 in 2000, up from $4,093,561
in 1999. Gross profit was $3,715,032 in 1998. As a percentage of net sales,
gross profit was 35.1% in 2000, 33.3% in 1999 and 28.8% in 1998. Gross profit in
2000 increased by 25.1% from the prior year and gross profit in 1999 increased
by 10.2% from the prior year. The increase in gross profit in 2000 resulted
primarily from a shift in the sales mix to higher margin therapeutic consumer
products. The increase in gross profit in 1999 resulted primarily from a shift
in the sales mix to higher margin therapeutic consumer products from lower
margin medical tape products, as well as higher margins on therapeutic patch
sales primarily as a result of sales made directly to retailers rather than to a
distributor.
-9-
<PAGE>
SALES AND MARKETING EXPENSES
Sales and marketing expenses totaled $3,672,908 or 25.2% of net sales
in 2000, compared to $2,187,710 or 17.8% of net sales in 1999, and $1,042,788 or
8.1% of net sales in 1998. The 2000 increase was primarily due to increased
TheraPatch related advertising and promotional expenses and slotting fees. The
increase in advertising was primarily the result of a TV ad campaign for
TheraPatch Vapor for Kids. The increased slotting fees resulted from the
placement of TheraPatch products in new stores as well as the placement of new
TheraPatch products on the shelves in existing stores. The 1999 increase was
primarily due to increased sales staff and advertising and slotting fees to
establish new retail accounts. The Company anticipates sales and marketing
expenses as a percent of sales in fiscal 2001 will be comparable to 2000.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $2,598,998 or 17.8% of net
sales in 2000, compared to $2,507,432 or 20.4% of net sales in 1999, and
$2,110,084 or 16.3% of net sales in 1998. The increase in 2000 was primarily the
result of increased consulting expense which more than offset a decrease in
legal expenses. Legal expense in the prior year included approximately $126,000
related to the re-negotiation and modification of the license agreement for the
development and commercialization of cotinine as well as legal expenses
associated with work on new and existing patents. The increase in 1999 was
primarily the result of increased regulatory and quality assurance expenses
associated with achieving and maintaining ISO 9001 and EN 46001 certification,
expenses related to the re-negotiation and modification of the license agreement
for the development and commercialization of cotinine, and legal expenses
associated with work on new and existing patents. The Company anticipates
general and administrative expenses in fiscal 2001 will be comparable to fiscal
2000.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses totaled $1,094,808 or 7.5% of net
sales in 2000, compared to $1,169,743 or 9.5% of net sales in 1999, and
$1,037,095 or 8.0% of net sales in 1998. The decrease in 2000 primarily reflects
decreased test-run production costs and supplies which were partially offset by
increased labor costs. The increase in 1999 reflects increased staffing levels
and increased costs for testing of products under development. Management
believes that research and development expenditures as a percent of sales will
be comparable in fiscal 2001 to fiscal 2000.
MEDICAL TAPE ASSET IMPAIRMENT AND EXIT PLAN
In June of fiscal 2000, the Company adopted a plan to exit the medical
tape business effective June 30, 2000. Adoption of this plan resulted in a
charge for $645,000 related to the write-down of the medical tape equipment to
its estimated fair market value, net of disposal costs, of $526,000. The Company
also recorded a charge of $85,000 to reduce the carrying value of medical tape
inventory to a net realizable value. The $85,000 charge was included in the cost
of goods sold. The Company expects to sell the assets and dispose of the
remaining inventory by December 31, 2000.
OTHER INCOME AND EXPENSE
Interest expense increased to $35,405 in 2000 from $1,173 in 1999
primarily due to interest expense associated with the line of credit. There was
no interest expense in 1998. Other income decreased to $27,692 in 2000 from
$89,240 in 1999 and $69,874 in 1998 primarily due to decreased interest income
as a result of lower cash and cash equivalent balances.
INCOME TAX BENEFIT
The Company recorded an income tax benefit in 2000 of $38,934, no
income tax expense or benefit in 1999 and an income tax benefit of $1,000 in
1998. The income tax benefit in 2000 resulted primarily from the refund of taxes
previously paid by the Company's foreign sales corporation. The foreign sales
corporation was dissolved during fiscal 2000. There was no income tax benefit
recorded during 2000, 1999 and 1998 related to the loss before income taxes
since the tax benefit may not be realizable by the Company.
-10-
<PAGE>
OPERATIONS SUMMARY
The net loss for 2000 resulted primarily from increased sales and
marketing expenses and charges related to the plan to exit the medical tape
business which more than offset an increase in gross profit. The increase in
gross profit resulted from increased sales volume and a shift in the sales mix
toward higher-margin therapeutic consumer products. The net loss for 1999
resulted primarily from increased sales and marketing expenses related to the
Company's investment in the consumer products market and increased general and
administrative expenses, primarily those expenses related to the modification of
the cotinine license agreement and achievement of ISO 9001 and EN 46001
certification. The net loss for 1998 resulted primarily from a decrease in the
gross profit percent due to a shift in the sales mix from higher margin
conductive and therapeutic consumer products to lower margin medical tape
products and increased material costs and material usage.
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 $921,854 to $100,171 at June 30,
2000 from $1,022,025 at June 30, 1999. This decrease was primarily due to the
net loss for fiscal 2000 of $2,859,276. Accounts receivable increased by
$294,165 to $2,645,710 primarily due to increased sales for June 2000 as
compared to June 1999. Inventories increased by $251,162 to $2,247,686 primarily
due to increased raw material and finished goods inventory related to
therapeutic products which was partially offset by decreased finished goods
inventory of medical tape.
Working capital totaled $1,512,561 at June 30, 2000, compared to
$3,497,926 at the end of fiscal 1999. The Company's current ratio was 1.4 at
June 30, 2000 compared to 2.5 at June 30, 1999.
Capital spending for plant improvements and equipment totaled $425,856
in 2000. There were no material commitments for capital expenditures at June 30,
2000. Net property, plant and equipment decreased by $989,403 to $3,039,088 at
June 30, 2000 from $4,028,491 at June 30, 1999, reflecting the write-down of the
medical tape equipment to its estimated fair market value of $526,000 and the
excess of depreciation expense over capital spending.
Accounts payable increased by $265,643 to $1,910,551 at June 30, 2000
from $1,644,908 at June 30, 1999 primarily due to increased payables related to
increased manufacturing production as well as an increase in the average number
of days outstanding before payment.
The Company finalized a $2,000,000 asset-based line of credit in
November, 1999 and borrowings outstanding on the line were $837,542 at June 30,
2000. The Company was in default at June 30, 2000 with covenants relating to the
minimum book net worth and the maximum loss before taxes as a result of the
charges totaling $730,000 related to the exit of the medical tape business.
These defaults were waived by the bank in an amendment to the line of credit
dated September 26, 2000. Shareholders' equity decreased by $2,788,704 to
$4,719,816 as of June 30, 2000 from $7,508,520 as of June 30, 1999, primarily
due to the net loss incurred during 2000.
Management believes that existing cash and cash equivalents,
internally-generated cash flow, the existing secured line of credit, an expected
increase in the existing line of credit due to the addition of international
receivables and inventory in the asset base, and expected additional fixed
asset-based financing will be sufficient to support anticipated operating and
capital spending requirements during fiscal 2001. Management is also evaluating
additional sources of capital that may be appropriate for funding longer-term
growth and expansion of the business. Maintaining adequate levels of working
capital depends in part upon the success of the Company's products in the
marketplace, the relative profitability of those products and the Company's
ability to control operating expenses. Funding of the Company's operations in
future periods may require additional investments in the Company in the form of
equity or debt. There can be no assurance that the Company will achieve desired
levels of sales or profitability, or that future capital infusions will be
available.
-11-
<PAGE>
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; and ability to satisfy funding requirements for
operating needs, expansion or capital expenditures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no history of, and does not anticipate in the future,
investing in derivative financial instruments, derivative commodity instruments
or other such financial instruments. Transactions with international customers
are entered into in U. S. dollars with the exception of TheraPatch sales to
Canadian customers, precluding the need for foreign currency hedges. These
Canadian sales have not been material. Additionally, the Company invests in
money market funds and short-term commercial paper, which experience minimal
volatility. Thus, the exposure to market risk is not material.
-12-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LecTec Corporation and Subsidiaries Financial Statements Furnished Pursuant to
the Requirements of Form 10-K.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and
Board of Directors
LecTec Corporation
We have audited the accompanying consolidated balance sheets of LecTec
Corporation and subsidiaries as of June 30, 2000 and 1999, and the related
consolidated statements of operations, comprehensive loss, shareholders' equity,
and cash flows for each of the three years in the period ended June 30, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of LecTec
Corporation and subsidiaries as of June 30, 2000 and 1999, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited Schedule II of LecTec Corporation and subsidiaries
for each of the three years in the period ended June 30, 2000. In our opinion,
this Schedule presents fairly, in all material respects, the information
required to be set forth therein.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
August 18, 2000 (except for note B, as to which the date is September 26, 2000)
-13-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
----------------------------
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 100,171 $ 1,022,025
Receivables
Trade, net of allowance of $127,100 and
$101,800 at June 30, 2000 and 1999 2,642,880 2,335,314
Other 2,830 16,231
Inventories 2,247,686 1,996,524
Prepaid expenses and other 220,514 174,674
Investments 22,029 5,343
Deferred income taxes -- 354,000
------------ ------------
Total current assets 5,236,110 5,904,111
PROPERTY, PLANT AND EQUIPMENT -
AT COST
Land 247,731 247,731
Building and improvements 1,879,006 1,841,742
Equipment 5,080,180 7,157,016
Furniture and fixtures 414,857 413,013
------------ ------------
7,621,774 9,659,502
Less accumulated depreciation 4,582,686 5,631,011
------------ ------------
3,039,088 4,028,491
OTHER ASSETS
Patents and trademarks, less accumulated amortization
of $1,293,871 and $1,154,698 at June 30, 2000 and 1999 199,351 199,971
------------ ------------
$ 8,474,549 $ 10,132,573
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
-14-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
June 30,
LIABILITIES AND ------------------------------
SHAREHOLDERS' EQUITY 2000 1999
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Note payable to bank $ 837,542 $ --
Current maturities of long-term obligations 22,562 11,000
Accounts payable 1,910,551 1,644,908
Accrued expenses
Payroll related 371,405 403,075
Retail support programs 421,489 165,472
Other -- 181,730
Customer deposits 160,000 --
------------ ------------
Total current liabilities 3,723,549 2,406,185
LONG-TERM OBLIGATIONS, less current maturities 31,184 20,868
DEFERRED INCOME TAXES -- 197,000
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 15,000,000 shares
authorized; 3,904,465 and 3,876,476 shares
issued and outstanding at June 30, 2000 and 1999 39,045 38,765
Additional contributed capital 11,316,260 11,262,654
Accumulated other comprehensive gain (loss) 4,845 (11,841)
Accumulated deficit (6,640,334) (3,781,058)
------------ ------------
4,719,816 7,508,520
------------ ------------
$ 8,474,549 $ 10,132,573
============ ============
</TABLE>
The accompanying notes are an intregral part of these statements.
-15-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 14,596,346 $ 12,279,075 $ 12,922,365
Cost of goods sold 9,475,129 8,185,514 9,207,333
------------ ------------ ------------
Gross profit 5,121,217 4,093,561 3,715,032
Operating expenses
Sales and marketing 3,672,908 2,187,710 1,042,788
General and administrative 2,598,998 2,507,432 2,110,084
Research and development 1,094,808 1,169,743 1,037,095
Medical tape asset impairment 645,000 -- --
------------ ------------ ------------
8,011,714 5,864,885 4,189,967
------------ ------------ ------------
Loss from operations (2,890,497) (1,771,324) (474,935)
Other income (expenses)
Interest expense (35,405) (1,173) --
Other, net 27,692 89,240 69,874
------------ ------------ ------------
Loss before income taxes (2,898,210) (1,683,257) (405,061)
Income tax benefit (38,934) -- (1,000)
------------ ------------ ------------
Net loss $ (2,859,276) $ (1,683,257) $ (404,061)
============ ============ ============
Net loss per share - basic and diluted $ (0.74) $ (0.43) $ (0.10)
Weighted average shares outstanding -
basic and diluted 3,885,911 3,906,694 4,005,455
</TABLE>
The accompanying notes are an intregral part of these statements.
-16-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net loss $ (2,859,276) $ (1,683,257) $ (404,061)
Other comprehensive income (loss)
Unrealized gains (losses) on securities
available-for-sale
Unrealized holding gains (losses)
arising during period 16,686 (3,333) 13,949
Reclassification adjustment for losses
included in net loss -- -- 10,915
------------ ------------ ------------
16,686 (3,333) 24,864
------------ ------------ ------------
Comprehensive loss $ (2,842,590) $ (1,686,590) $ (379,197)
============ ============ ============
</TABLE>
The accompanying notes are an intregral part of these statements.
-17-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated
Common stock Additional other Total
------------------------- contributed comprehensive Accumulated shareholders'
Shares Amount capital gain (loss) deficit equity
----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1997 3,842,800 $ 38,428 $10,476,428 $ (33,372) $(1,693,740) $ 8,787,744
Net loss -- -- -- -- (404,061) (404,061)
Cost of shares retired (10,863) (109) (40,627) -- -- (40,736)
Common shares issued upon exercise of options 11,615 116 40,329 -- -- 40,445
Unrealized gain on securities available-for-sale -- -- -- 24,864 -- 24,864
Common shares issued to acquire minority
shares of consolidated subsidiary 221,948 2,220 1,367,191 -- -- 1,369,411
Shares repurchased (29,500) (295) (124,268) -- -- (124,563)
Warrants issued for services -- -- 50,000 -- -- 50,000
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 4,036,000 40,360 11,769,053 (8,508) (2,097,801) 9,703,104
Net loss -- -- -- -- (1,683,257) (1,683,257)
Common shares issued upon exercise of options 1,000 10 2,390 -- -- 2,400
Unrealized loss on securities available-for-sale -- -- -- (3,333) -- (3,333)
Common shares issued in connection with the
employee stock purchase plan 15,126 151 32,855 -- -- 33,006
Shares repurchased (175,650) (1,756) (541,644) -- -- (543,400)
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1999 3,876,476 38,765 11,262,654 (11,841) (3,781,058) 7,508,520
Net loss -- -- -- -- (2,859,276) (2,859,276)
Common shares issued upon exercise of options 500 5 1,295 -- -- 1,300
Unrealized gain on securities available-for-sale -- -- -- 16,686 -- 16,686
Common shares issued in connection with the
employee stock purchase plan 27,489 275 52,311 -- -- 52,586
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 2000 3,904,465 $ 39,045 $11,316,260 $ 4,845 $(6,640,334) $ 4,719,816
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an intregral part of these statements.
-18-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,859,276) $ (1,683,257) $ (404,061)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Medical tape asset impairment and inventory write-down 730,000 -- --
Depreciation and amortization 908,024 851,087 844,594
Warrants issued for services -- -- 50,000
Loss on sales of investments -- -- 10,915
Deferred income taxes 157,000 -- (2,000)
Changes in operating assets and liabilities, net of
effect of medical tape asset charges:
Trade and other receivables (294,165) (61,620) (80,617)
Refundable income taxes -- 52,000 341,719
Inventories (336,162) (278,513) 859,010
Prepaid expenses and other (45,840) (71,611) (18,192)
Accounts payable 265,643 835,761 29,448
Accrued expenses 42,917 167,154 (104,279)
Customer deposits 160,000 -- --
------------ ------------ ------------
Net cash provided by (used in) operating activities (1,271,859) (188,999) 1,526,537
Cash flows from investing activities:
Purchase of property, plant and equipment (424,448) (419,469) (406,515)
Investment in patents and trademarks (138,553) (79,513) (62,999)
Sale of investments -- -- 590,873
------------ ------------ ------------
Net cash provided by (used in) investing activities (563,001) (498,982) 121,359
Cash flows from financing activities:
Issuance of common stock 53,586 35,006 38,745
Repurchases and retirement of common stock -- (543,400) (165,299)
Net borrowings on note payable 837,542 -- --
Proceeds from long-term obligations 33,649 36,849 --
Repayment of long-term obligations (11,771) (4,981) --
------------ ------------ ------------
Net cash provided by (used in) financing activities 913,006 (476,526) (126,554)
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (921,854) (1,164,507) 1,521,342
Cash and cash equivalents at beginning of year 1,022,025 2,186,532 665,190
------------ ------------ ------------
Cash and cash equivalents at end of year $ 100,171 $ 1,022,025 $ 2,186,532
============ ============ ============
</TABLE>
The accompanying notes are an intregral part of these statements.
-19-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 28,085 $ 792 $ 1,106
Cash paid during the year for income taxes $ -- $ 22,010 $ 16,732
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During fiscal 1998, the Company issued 221,948 shares of common stock in
exchange for the minority interest in Pharmadyne, valued at $1,369,411.
The accompanying notes are an intregral part of these statements.
-20-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES
LecTec Corporation (the "Company") is primarily engaged in the research,
design, manufacture and sale of diagnostic electrodes, conductive hydrogels,
medical tapes and therapeutic consumer products. The Company's customers are
located throughout the United States as well as Europe, Latin America, Asia,
Canada and the Middle East. A summary of the Company's significant accounting
policies consistently applied in the preparation of the accompanying
financial statements follows:
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of LecTec
Corporation ("LecTec") and subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid temporary investments purchased with
original maturities of three months or less to be cash equivalents. At times
cash and cash equivalents may be in excess of FDIC insurance limits.
Accounts Receivable
The Company grants credit to customers in the normal course of business, but
generally does not require collateral or any other security to support
amounts due. Management performs on-going credit evaluation of customers. The
Company maintains allowances for potential credit losses which, when
realized, have been within management expectations.
Investments
The Company's investments are classified as available-for-sale and are
reported at fair value. The Company utilizes the specific identification
method in computing realized gains and losses.
-21-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2000, 1999 AND 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market and consist of the following:
June 30
-------------------------
2000 1999
---------- ----------
Raw materials $1,666,544 $1,324,973
Work in process 23,202 69,324
Finished goods 557,940 602,227
---------- ----------
$2,247,686 $1,996,524
========== ==========
Depreciation and Amortization
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. The
straight-line method of depreciation is followed for financial reporting
purposes, and accelerated methods are used for tax purposes. Estimated useful
lives used in the calculation of depreciation for financial statement
purposes are:
Buildings and improvements 5 - 40 years
Equipment 4 - 15 years
Furniture and fixtures 5 - 7 years
The investment in patents and trademarks consists primarily of the cost of
applying for patents and trademarks. Patents and trademarks are amortized on
a straight-line basis over the estimated useful life of the asset, generally
five years.
Revenue Recognition
Revenue is recognized at the time of shipment.
-22-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2000, 1999 AND 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Advertising
The Company expenses the cost of advertising as incurred, except for the
costs of television commercials. These costs are expensed as the commercials
are broadcast. Advertising expense totaled approximately $536,000, $271,000,
and $145,000 for the years ended June 30, 2000, 1999 and 1998.
Research and Development
Research and development costs are expensed as incurred and are reported as a
component of selling, general and administrative expenses.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding. Diluted net loss per share is
computed by dividing net 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 1,048,205, 897,506 and 795,997
shares of common stock with a weighted average exercise price of $6.07, $7.54
and $8.09 were outstanding during the years ended June 30, 2000, 1999 and
1998, but were excluded because they were antidilutive.
Stock Based Compensation
The Company utilizes the intrinsic value method of accounting for its
stock-based employee compensation plan. Pro-forma information related to fair
value based method of accounting is disclosed in Note F.
-23-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2000, 1999 AND 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
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 consolidated 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 reclassifications have been made to the 1999 and 1998 balances to
conform to the presentation used in 2000.
NOTE B - NOTE PAYABLE TO BANK
The Company entered into a secured line of credit on November 22, 1999, with
a maximum borrowing of $2,000,000 as defined in the agreement. The credit
agreement expires November 22, 2001 and includes interest computed at the
prime rate plus 3% (effective rate of 12.5% at June 30, 2000). The agreement
includes a minimum annual interest charge for each year of the agreement
($80,000 and $95,000 for each of the two years ended November 22, 2001).
Borrowings outstanding on the line of credit were $837,542 at June 30, 2000.
Borrowings under the credit agreement are collateralized by substantially all
of the Company's assets. At June 30, 2000, the Company was in violation of
certain covenants contained in the credit agreement. These covenant
violations were waived by the bank on September 26, 2000 in connection with
the establishment of revised financial covenants under the credit agreement.
The Company expects to be in compliance with the revised covenants during
fiscal 2001.
-24-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2000, 1999 AND 1998
NOTE C - LONG-TERM OBLIGATIONS
Long-term obligations consists of capital leases, due in various monthly
installments up to $1,230 including interest from 10.50% to 15.99% through
May 2003, collateralized by equipment.
Maturities of long-term obligations are as follows:
Years ending June 30:
---------------------
2001 $22,562
2002 19,499
2003 11,685
-------
$53,746
=======
NOTE D - COMMITMENTS AND CONTINGENCIES
Leases
The Company conducts portions of its operations in a leased facility. The
lease provides for payment of a portion of taxes and other operating expenses
by the Company. Total rent expense for operating leases was $260,481,
$250,641 and $248,931 for the years ended June 30, 2000, 1999 and 1998.
Future minimum lease commitments under all operating leases are as follows:
Years ending June 30:
---------------------
2001 $261,700
2002 256,100
-25-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2000, 1999 AND 1998
NOTE D - COMMITMENTS AND CONTINGENCIES - Continued
Employee Benefit Plan
The Company maintains a contributory 401(k) profit sharing benefit plan
covering substantially all employees. The Company matches 50% of employee
contributions up to 5% of a participant's compensation. The Company's
contributions under this plan were $81,474, $71,006 and $54,901 for the years
ended June 30, 2000, 1999 and 1998. The Company may also make a discretionary
contribution. No discretionary contributions were made for each of the three
years ended June 30, 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 E - INCOME TAXES
Income tax expense (benefit) consists of the following:
Years ended June 30,
---------------------------------------
2000 1999 1998
--------- --------- ---------
Current $(195,934) $ -- $ 1,000
Deferred 157,000 -- (2,000)
--------- --------- ---------
$ (38,934) $ -- $ (1,000)
========= ========= =========
-26-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2000, 1999 AND 1998
NOTE E - INCOME TAXES - Continued
Deferred tax assets and liabilities represent the tax effects of cumulative
future deductible or taxable items that have been recognized in the financial
statements as follows:
June 30,
--------------------------
2000 1999
----------- -----------
Current assets and liabilities:
Inventories $ 160,600 $ 199,400
Vacation pay 73,500 67,100
Write-down of long-lived medical tape assets 232,200 --
Other 115,600 40,900
----------- -----------
Net current asset 581,900 307,400
Long-term assets and liabilities:
Net operating loss carryforwards 2,312,000 1,656,500
Tax credit carryforwards 253,600 253,600
Tax depreciation in excess of book depreciation (225,000) (273,400)
Charitable contribution carryforwards 19,200 18,900
Other 69,800 57,500
----------- -----------
Net long-term asset 2,429,600 1,713,100
----------- -----------
Net deferred tax asset 3,011,500 2,020,500
Less valuation allowance (3,011,500) (1,863,500)
----------- -----------
Net deferred tax asset $ -- $ 157,000
=========== ===========
At June 30, 2000, the Company has available net operating loss carryforwards
of approximately $6,800,000 which can be used to reduce future taxable
income. The utilization of a portion of these net operating loss
carryforwards is restricted under Section 382 of the Internal Revenue Code
due to past ownership changes. These net operating loss carryforwards begin
to expire in 2007. A valuation allowance has been recorded for these net
operating loss carryforwards as they may not be realizable.
-27-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2000, 1999 AND 1998
NOTE E - INCOME TAXES - Continued
Differences between income tax benefit and the statutory federal income tax
rate of 34% are as follows:
2000 1999 1998
------ ------ ------
Federal statutory income tax rate (34.0)% (34.0)% (34.0)%
State income taxes, net of federal effect .1 -- 0.3
Foreign sales corporation -- -- (11.1)
Change in valuation allowance 33.6 34.4 58.0
Tax exempt investment income -- -- (1.7)
Prior years' overaccruals -- -- (3.7)
Other (1.0) (0.4) (8.0)
----- ----- -----
(1.3)% -- % (0.2)%
===== ===== =====
NOTE F - EQUITY TRANSACTIONS
Employee Stock Purchase Plan
The Company's employee stock purchase plan, adopted November 19, 1998, allows
eligible employees to purchase shares of the Company's common stock through
payroll deductions. The purchase price is the lower of 85% of the fair market
value of the stock on the first or last day of each six-month period during
which an employee participated in the plan. The Company has reserved 200,000
shares under the plan. The Company issued 27,489 and 15,126 shares in
connection with purchases by employees for $52,586 and $33,006 for the years
ended June 30, 2000 and 1999.
-28-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2000, 1999 AND 1998
NOTE F - EQUITY TRANSACTIONS - Continued
Stock Options and Warrants
The Company has stock option plans for the benefit of selected officers,
employees and directors of the Company. A total of 1,673,049 shares of common
stock are reserved for issuance under the plans. Options under the Company's
plans are granted at fair market value and expire at five or ten years from
the grant date. Options given to directors are exercisable at the date of
grant. Options given to selected officers and employees are exercisable at
such times as set forth in the individual option agreements, generally
vesting 100% after three to four years.
A summary of the Company's stock option transactions for the years ended June
30, 2000, 1999 and 1998 is as follows:
Weighted average
Number of shares exercise price
---------------- ----------------
Outstanding at July 1, 1997 722,833 $8.46
Granted 219,000 5.31
Exercised (11,615) 3.35
Canceled (82,598) 6.37
---------
Outstanding at June 30, 1998 847,620 7.86
Granted 304,200 2.76
Exercised (1,000) 2.00
Canceled (16,994) 8.74
---------
Outstanding at June 30, 1999 1,133,826 6.48
Granted 115,000 3.04
Exercised (500) 2.00
Canceled (221,704) 8.44
--------- -----
Outstanding at June 30, 2000 1,026,622 $5.68
========= =====
A total of 604,971, 593,876 and 459,994 options were exercisable at June 30,
2000, 1999 and 1998, with a weighted average price of $6.54, $7.83 and $8.35.
-29-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2000, 1999 AND 1998
NOTE F - EQUITY TRANSACTIONS - Continued
The following information applies to grants that are outstanding at June 30,
2000:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------- -----------------------
Weighted Weighted Weighted
average average average
Range of Number remaining exercise Number exercise
exercise prices outstanding contractual life price exercisable price
--------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.00- $2.99 341,000 3.7 years $ 2.71 117,750 $ 2.60
$3.00- $4.99 97,571 4.8 years 3.54 46,291 3.55
$5.00- $7.49 273,250 5.7 years 5.66 179,312 5.76
$7.50-$11.24 214,801 4.5 years 8.77 200,988 8.85
$11.25-$13.50 100,000 6.1 years 11.25 60,000 11.25
--------- -------
1,026,622 604,971
========= =======
</TABLE>
The weighted average fair value of the options granted during 2000, 1999 and
1998 were $1.84, $1.47 and $2.77. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option valuation model
with the following weighted-average assumptions used for all grants in 2000,
1999 and 1998: zero dividend yield, expected volatility of 74%, 62% and 52%,
risk-free interest rate of 6.53%, 5.77% and 5.57% and expected lives of 4.00,
4.09 and 5.16 years.
Management believes the Black-Scholes option valuation model currently
provides the best estimate of fair value. However, the Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of several subjective
assumptions. The Company's employee and director stock options have
characteristics different from those of traded options, and changes in the
subjective input assumptions can materially affect the fair value estimate.
In management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee and director stock
options.
-30-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2000, 1999 AND 1998
NOTE F - EQUITY TRANSACTIONS - Continued
The Company's net loss and net loss per share for 2000, 1999 and 1998 would
have been increased to the pro forma amounts indicated below had the fair
value method been used for options granted to employees and directors. These
effects may not be representative of the future effects of applying this
method.
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------- -------------------------- --------------------------
As reported Pro forma As reported Pro forma As reported Pro forma
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net loss $(2,859,276) $(3,447,381) $(1,683,257) $(2,201,974) $ (404,061) $ (897,365)
Net loss per share -
basic/diluted $(.74) $(.89) $(.43) $(.56) $(.10) $(.22)
</TABLE>
During 1998, the Company issued a warrant to an outside consultant for the
purchase of 12,953 shares of the Company's common stock at $6.25 per share,
expiring November 20, 2004, in exchange for recruiting and placement
services. The fair value of the warrant granted was calculated on the date of
grant using the Black-Scholes option-pricing model.
Stock Repurchase Program
In April 1998, the Company's Board of Directors authorized a stock repurchase
program pursuant to which up to 500,000 shares, or approximately 12.4% of the
Company's outstanding common stock, may be repurchased. The shares may be
purchased from time to time through open market transactions, block
purchases, tender offers, or in privately negotiated transactions. The total
consideration for all shares repurchased under this program cannot exceed
$2,000,000. During the year ended June 30, 1999, the Company repurchased
175,650 shares for $543,400. There were no shares repurchased during the year
ended June 30, 2000.
-31-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2000, 1999 AND 1998
NOTE G - MEDICAL TAPE ASSET IMPAIRMENT AND EXIT PLAN
The Company announced that it was exiting the medical tape business effective
June 30, 2000 and recorded a charge of $730,000. The Company analyzed all
long-lived medical tape assets in connection with this exit and recorded a
reduction of $645,000 to their estimated fair market value of $526,000. The
Company also recorded a charge of $85,000 to reduce the current carrying
value of medical tape inventory to a net realizable value which has been
included with costs of goods sold. The Company expects to sell the assets by
December 31, 2000.
NOTE H - PHARMADYNE CORPORATION AND RESTRUCTURING
In October 1997, the Company issued 221,948 new shares of its common stock to
acquire the minority interests in Pharmadyne. In November 1997, the newly
issued shares were registered with the Securities and Exchange Commission. On
December 31, 1997, Pharmadyne Corporation was merged into LecTec Corporation.
NOTE I - SEGMENT INFORMATION
The Company operates its business in one reportable segment - the manufacture
and sale of products based on advanced skin interface technologies. Each of
the Company's major product lines have similar economic characteristics,
technology, manufacturing processes, and regulatory environments. Customers
and distribution and marketing strategies vary within major product lines as
well as overlap between major product lines. The Company's executive decision
makers evaluate sales performance based on the total sales of each major
product line and profitability on a total company basis, due to shared
infrastructures, to make operating and strategic decisions. Net sales by
major product line were as follows:
Years ended June 30, 2000 1999 1998
----------- ----------- -----------
Conductive products $ 7,450,755 $ 7,758,286 $ 7,906,676
Medical tape products 1,927,392 2,716,540 4,157,199
Therapeutic consumer products 5,218,199 1,804,249 858,490
----------- ----------- -----------
$14,596,346 $12,279,075 $12,922,365
=========== =========== ===========
-32-
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2000, 1999 AND 1998
NOTE I - SEGMENT INFORMATION - Continued
Export sales accounted for approximately 13%, 13% and 26% of total net sales
during the years ended June 30, 2000, 1999, and 1998. Export sales are
attributed to geographic region based upon the location of the customer.
Export sales by geographic area were as follows:
Years ended June 30, 2000 1999 1998
---------- ---------- ----------
Europe $1,006,412 $1,216,199 $1,705,996
Latin America 547,904 371,654 371,854
Asia 46,279 31,935 62,027
Canada 298,884 7,011 199,082
Middle East 10,272 - 912,240
Other 25,962 28,333 71,949
---------- ---------- ----------
$1,935,713 $1,655,132 $3,323,148
========== ========== ==========
NOTE J - MAJOR CUSTOMER
One customer accounted for 17%, 22% and 18% of total sales for each of the
three years ended June 30, 2000. The accounts receivable from this customer
represented 18% and 26% of trade receivables at June 30, 2000 and 1999.
Management believes that the loss of this customer could have a material
adverse effect on the Company.
-33-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item with respect to directors will
be included under the heading "Election of Directors" in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
November 16, 2000, and is incorporated herein by reference. The information
required under this item with respect to executive officers is included under
the heading "Executive Officers of the Registrant" of Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item will be included under the
heading "Executive Compensation" in the Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held November 16, 2000, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item will be included under the
heading "Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held November 16, 2000, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item with respect to certain
relationships and related transactions will be included under the heading
"Certain Relationships and Related Transactions" in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held on November
16, 2000, and is incorporated herein by reference.
-34-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Financial Statements, Schedules and Exhibits
1. Financial Statements
The following consolidated financial statements of the Company
and its subsidiaries are filed as a part of this Form 10-K in
Part II, Item 8:
(i) Report of Independent Certified Public Accountants
(ii) Consolidated Balance Sheets at June 30, 2000 and 1999
(iii) Consolidated Statements of Operations for the years
ended June 30, 2000, 1999 and 1998
(iv) Consolidated Statements of Comprehensive Loss for the
years ended June 30, 2000, 1999 and 1998
(v) Consolidated Statements of Shareholders' Equity for
the years ended June 30, 2000, 1999 and 1998
(vi) Consolidated Statements of Cash Flows for the years
ended June 30, 2000, 1999 and 1998
(vii) Notes to the Consolidated Financial Statements
2. Financial Statement Schedules
(i) Schedule II - Valuation and Qualifying
Accounts, for each of the three years in the
period ended June 30, 2000 Page 38
(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 Registrant,
as amended (1)
3.02 By-laws of Registrant (1)
10.01 Service Agreement dated July 1, 1986, between
LecTec International, Inc., a U.S. Virgin
Islands corporation, and LecTec Corporation,
relating to the sale, lease or rental of
certain property outside the United States. (1)
10.02 Distribution and Commission Agreement dated
July 1, 1986, between LecTec International,
Inc., a U.S. Virgin Islands corporation, and
LecTec Corporation, relating to the sale,
lease or rental of certain property outside
the United States. (1)
-35-
<PAGE>
10.03 Certificate of Secretary pertaining to
Resolution of Board of Directors of LecTec
Corporation, dated October 30, 1986,
implementing a Profit Sharing Bonus Plan. (1)
**10.04 LecTec Corporation 1989 Stock Option Plan (2)
**10.05 LecTec Corporation 1991 Directors' Stock
Option Plan (2)
10.06 Building lease dated May 24, 1991 between
LecTec Corporation and Sierra Development
Co. for the lease of the manufacturing and
warehouse facility located in Edina, Minnesota (2)
10.07 First amendment dated May 5, 1997 between
LecTec Corporation and Rushmore Plaza
Partners Limited Partnership for the
extension of the previous lease of the
manufacturing and warehouse facility located
in Edina, Minnesota (2)
10.08 Articles of Merger of Pharmadyne Corporation
into LecTec Corporation dated December 31,
1997, whereby Pharmadyne, a wholly-owned
subsidiary, is merged into LecTec Corporation (3)
**10.09 Change In Control Termination Pay Plan
adopted May 27, 1998, for the benefit of
certain employees of LecTec Corporation in
the event of a Change in Control (3)
**10.10 LecTec Corporation Employee Stock Purchase
Plan (4)
**10.11 LecTec Corporation 1998 Stock Option Plan (5)
10.12 LecTec Corporation 1998 Directors' Stock
Option Plan (5)
10.13 Letter of Intent dated April 19, 1999 between
LecTec Corporation and Johnson & Johnson
Consumer Companies, Inc., whereby the parties
agree to certain milestones leading to the
development of a skin care product (6)
10.14 Credit and Security Agreement by and between
LecTec Corporation and Wells Fargo business
Credit, Inc. dated November 22, 1999 and
First Amendment To Credit and Security
Agreement and Waiver of Defaults dated
February 9, 2000, whereby the parties agree
to the terms and amended terms regarding a
line of credit (7)
*10.15 Supply Agreement dated as of May 15, 2000
by and between LecTec Corporation and
Novartis Consumer Health, Inc., whereby the
parties agree to terms for the sale of
product from LecTec Corporation to Novartis
Consumer Health, Inc. (8)
-36-
<PAGE>
21.01 Subsidiaries of the Company (8)
23.01 Consent of Grant Thornton LLP (8)
27.01 Financial Data Schedule (8)
- - ---------------------------------------------------
* Confidential treatment has been requested for portions of this
Exhibit pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934 as amended. The confidential portions have been
deleted and filed separately with the United States Securities
and Exchange Commission together with a confidential treatment
request.
** Management contract or compensatory plan or arrangment
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 Annual
Report on Form 10-K for the year ended June 30, 1999.
(7) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1999.
(8) Filed herewith.
(b) 1. Reports on Form 8-K.
None.
-37-
<PAGE>
LecTec Corporation and Subsidiaries
Schedule II
Valuation and Qualifying Accounts
Three Years Ended June 30, 2000
<TABLE>
<CAPTION>
Balance at Charged to Charge to Balance
Beginning of costs and other Deductions at end
Description Period expenses accounts (a) of period
- - ------------------------------- ------------ ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended June 30, 1998 48,529 48,000 -- 5,711 90,818
Year ended June 30, 1999 90,818 48,000 -- 37,067 101,751
Year ended June 30, 2000 101,751 48,000 -- 22,626 127,125
Allowance for sales returns and credits
Year ended June 30, 1998 17,598 71,070 -- -- 88,668
Year ended June 30, 1999 88,668 61,876 -- 93,787 56,757
Year ended June 30, 2000 56,757 345,855 -- 160,206 242,406
Allowance for inventory obsolescence
Year ended June 30, 1998 143,438 300,000 -- 233,216 210,222
Year ended June 30, 1999 210,222 243,198 -- 168,811 284,609
Year ended June 30, 2000 284,609 267,911 -- 406,545 145,975
</TABLE>
-38-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 27th day of
September, 2000.
LECTEC CORPORATION
/s/Rodney A. Young
-----------------------
Rodney A. Young
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/Rodney A. Young September 27, 2000
- - ---------------------------------------------------- ------------------
Rodney A. Young
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
/s/Douglas J. Nesbit September 27, 2000
- - ---------------------------------------------------- ------------------
Douglas J. Nesbit
Chief Financial Officer
(Principal Financial Officer and Accounting Officer)
/s/Lee M. Berlin September 27, 2000
- - ---------------------------------------------------- ------------------
Lee M. Berlin
Director
/s/Bert J. McKasy September 27, 2000
- - ---------------------------------------------------- ------------------
Bert J. McKasy
Director
/s/Marilyn K. Speedie September 27, 2000
- - ---------------------------------------------------- ------------------
Marilyn K. Speedie
/s/Donald C. Wegmiller September 27, 2000
- - ---------------------------------------------------- ------------------
Donald C. Wegmiller
Director
-39-
<PAGE>
EXHIBIT INDEX
Exhibits
- - --------
3.01 Articles of Incorporation of Registrant, as amended (Note 1).
3.02 By-laws of Registrant (Note 1).
10.01 Service Agreement dated July 1, 1986, between LecTec International,
Inc., a U.S. Virgin Islands corporation, and LecTec Corporation,
relating to the sale, lease or rental of certain property outside
the United States (Note 1).
10.02 Distribution and Commission Agreement dated July 1, 1986, between
LecTec International, Inc., a U.S. Virgin Islands corporation, and
LecTec Corporation, relating to the sale, lease or rental of certain
property outside the United States (Note 1).
10.03 Certificate of Secretary pertaining to Resolution of Board of
Directors of LecTec Corporation, dated October 30, 1986,
implementing a Profit Sharing Bonus Plan (Note 1).
**10.04 LecTec Corporation 1989 Stock Option Plan (Note 2).
**10.05 LecTec Corporation 1991 Directors' Stock Option Plan (Note 2).
10.06 Building lease dated May 24, 1991 between LecTec Corporation and
Sierra Development Co. for the lease of the manufacturing and
warehouse facility located in Edina, Minnesota (Note 2).
10.07 First amendment dated May 5, 1997 between LecTec Corporation and
Rushmore Plaza Partners Limited Partnership for the extension of the
previous lease of the manufacturing and warehouse facility located
in Edina, Minnesota (Note 2).
10.08 Articles of Merger of Pharmadyne Corporation into LecTec Corporation
dated December 31, 1997, whereby Pharmadyne, a wholly-owned
subsidiary, is merged into LecTec Corporation (Note 3).
**10.09 Change In Control Termination Pay Plan adopted May 27, 1998, for the
benefit of certain employees of LecTec Corporation in the event of a
Change in Control (Note 3).
**10.10 LecTec Corporation Employee Stock Purchase Plan (Note 4).
**10.11 LecTec Corporation 1998 Stock Option Plan (Note 5).
**10.12 LecTec Corporation 1998 Directors' Stock Option Plan (Note 5).
10.13 Letter of Intent dated April 19, 1999 between LecTec Corporation and
Johnson & Johnson Consumer Companies, Inc., whereby the parties
agree to certain milestones leading to the development of a skin
care product (Note 6).
10.14 Credit and Security Agreement by and between LecTec Corporation and
Wells Fargo business Credit, Inc. dated November 22, 1999 and First
Amendment To Credit and Security Agreement and Waiver of Defaults
dated February 9, 2000, whereby the parties agree to the terms and
amended terms regarding a line of credit (Note 7).
-40-
<PAGE>
*10.15 Supply Agreement dated as of May 15, 2000 by and between LecTec
Corporation and Novartis Consumer Health, Inc., whereby the parties
agree to terms for the sale of product from LecTec Corporation to
Novartis Consumer Health, Inc......................................
21.01 Subsidiaries of the Company........................................
23.01 Consent of Grant Thornton LLP......................................
27.01 Financial Data Schedule............................................
NOTES:
* Confidential treatment has been requested for portions of this
Exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of
1934 as amended. The confidential portions have been deleted and
filed separately with the United States Securities and Exchange
Commission together with a confidential treatment request.
** Management contract or compensatory plan or arrangment 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 Annual Report on
Form 10-K for the year ended June 30, 1999.
(7) Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1999.
-41-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.15
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>SUPPLY AGREEMENT
<TEXT>
EXHIBIT 10.15
SUPPLY AGREEMENT
THIS SUPPLY AGREEMENT, dated as of May 15, 2000 (the "Effective Date"), is
between Novartis Consumer Health, Inc., 560 Morris Avenue, Summit, New Jersey
07901 ("Novartis"), a Delaware corporation, and LecTec Corporation, a Minnesota
corporation, 10701 Red Circle Dr., Minnetonka, MN 55343 ("LecTec").
Background
A. LecTec is a manufacturer of medical and health-related consumer
products, including a line of proprietary patch products for the
over-the-counter market which emit vapors which, when inhaled, provide relief of
cough and cold symptoms (the "Vapor Patches"). LecTec manufactures and sells
such patch products under its own trade names and also manufactures and sells
certain of such patch products to third parties.
B. Novartis is a manufacturer and reseller of health-related consumer
products.
C. Novartis desires to obtain a supply of certain LecTec patch products,
and LecTec desires to supply same, all upon the terms and conditions set forth
below and in the attached exhibits.
NOW, THEREFORE, the parties do hereby agree to the following:
1. GENERAL SCOPE OF AGREEMENT
1.1 Manufacturing. LecTec has developed and shall manufacture, sell and
cause to be delivered to Novartis the products set forth in Exhibit A hereto
(the "Products") in quantities sufficient to meet the total requirements,
consistent with the forecasting and purchase order mechanism set forth in
Article 3 of this Agreement, of Novartis for use in the pediatric field of use
(the "Field of Use") and in the countries set forth in Exhibit D hereto (the
"Territory") of such Products. LecTec shall manufacture and sell the Products
exclusively to Novartis, provided, however, "exclusivity" in the foregoing
sentence shall mean that LecTec may not manufacture and sell the Products or any
other Vapor Patches (collectively, "Comparable Products") in the Field of Use
and in the Territory to any other customer. Notwithstanding such exclusivity,
LecTec may continue to manufacture and sell Comparable Products directly to
retailers under its "TheraPatch" tradename, or under any Other LecTec Trade Name
(as defined below) even if such Comparable Products may compete directly with
the Products in the Field of Use and in the Territory. The term "Other LecTec
Trade Names" shall mean any LecTec tradenames in existence at the Effective Date
or as developed by LecTec during the term of this Agreement, but not including
any third party's trade names which LecTec acquires or to which LecTec otherwise
gains rights during the term of this Agreement.
1.2 ( * )
* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
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1.2.1 ( * )
1.2.2 ( * )
1.3 Fulfillment of Requirements. Novartis shall purchase all of Novartis'
requirements of the Products for use in the Territory and the Field of Use
exclusively from LecTec, in accordance with and subject to the terms and
conditions of this Agreement. This requirements obligation is limited to
Novartis' requirements of Products which meet the Specifications (as defined
below).
1.4 Minimum Requirements. During the period commencing on the Effective
Date and ending on December 31, 2001 (the "Initial Period"), and during each
calendar year thereafter (the Initial Period and each calendar year thereafter
each being a "Period"), Novartis shall purchase at least the minimum
requirements of Products set forth in Exhibit C hereto (the "Minimum
Requirements").
1.4.1 In calculating whether Novartis has in fact purchased the
Minimum Requirements, the parties shall count all variations of the Products
purchased by Novartis from LecTec in the Period in one cumulative total. Any
Products returned to LecTec by Novartis hereunder shall not be counted in such
total (but replacements of such returned Products shall be
* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
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included in such counting as if such replacements had been purchased at the time
of the Products being replaced).
1.4.2 Beginning on January 1, 2002 and in each January thereafter,
if Novartis failed to purchase at least the Minimum Requirements of Products
during the preceding Period, then, by February 28 of the applicable calendar
year, Novartis shall either (a) place firm purchase orders for the shortfall
("Shortfall") and such Shortfall amount of Products shall be deemed added, on a
one-time basis, to the Minimum Requirements for the Period in which such
purchase order is placed; or (b) pay to LecTec an amount equal to forty percent
(40%) of the difference between (i) the amount Novartis would have paid if it
had actually purchased the Minimum Requirements of Products for such period and
(ii) the amount actually paid for Products purchased during such period
("Compensatory Payment"). If Novartis elects not to place such orders for the
Shortfall amount by such date, and elects not to make the Compensatory Payment
by such date, then LecTec shall no longer be obligated to sell Products to
Novartis on an exclusive basis within the Field of Use and the Territory and may
thereafter sell Comparable Products to third parties within the Field of Use and
the Territory. Upon such termination of Novartis' exclusivity, Novartis shall
cease to have any requirements to purchase the Minimum Requirements of the
Products. The provisions of this Section 1.4.2 shall not apply in the event that
Novartis' failure to purchase the Minimum Requirements is due to to the actions
or omissions of LecTec.
1.4.3 On January 1, 2002, at the option of LecTec, the parties shall
negotiate in good faith an increase in the annual Minimum Requirements. However,
in no event shall Novartis be obligated to agree to an increase in the Minimum
Requirements of more than twenty-five percent (25%).
1.5 Regulatory Compliance. As set forth below, LecTec shall be responsible
for regulatory compliance in the manufacture of the Products and supply of same
to Novartis. Novartis shall be responsible for regulatory compliance in the
proper labeling of the Products and the sale of same to end users, directly or
indirectly, which shall be under the exclusive control of Novartis. The parties
shall cooperate in good faith to achieve such regulatory compliance.
1.6 Production Standards. All Products sold and delivered to Novartis
hereunder shall (a) conform in all material respects with the specifications set
forth in the Quality Assurance Agreement, attached hereto as Exhibit B (the "QA
Agreement"), and with such further specifications as shall be agreed to by all
parties in writing (the "Specifications"); (b) be manufactured, packaged and
sold to Novartis without any material deviation from or breach of (i) the
QAAgreement, and (ii) any applicable laws, regulations, and requirements of any
government or governmental agency; and (c) be subject to the warranties set
forth in Article 9 of this Agreement.
1.7 Brand Name. Novartis intends to market the Products under the
proprietary names "Vapor Patch" or "VaporPatch" (as selected by Novartis in its
own discretion). LecTec hereby acknowledges that it has no objection to Novartis
seeking to register such names at its own expense and risk with the United
States Trademark Office, or with other authorities, and
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shall file its consent thereto, as requested in writing by Novartis, but LecTec
does not warrant or imply that such marks are otherwise available or will be
granted. LecTec shall give commercially reasonable cooperation to Novartis to
manufacture and label the Products with such name or names or other names as
Novartis, in its sole discretion, may designate from time to time during the
term of this Agreement. However, subject to the foregoing, nothing herein shall
be deemed to authorize the use of any LecTec trade name or trademark or any
other mark that would dilute or reasonably tend to dilute any such LecTec trade
name or trademark.
2. PAYMENT
2.1 Prices. In consideration of the satisfactory manufacture and delivery
to Novartis of the ordered quantities of Products, and subject to adjustment in
accordance with this Agreement, Novartis shall pay LecTec for the Products in
accordance with the prices set forth in Exhibit C hereto. Novartis shall make
such payments within thirty (30) days of the date of each LecTec invoice issued
upon shipment of the Products. Such payments shall be without prejudice to the
inspection and credit rights of Novartis under Article 4 of this Agreement.
2.2 Taxes. Novartis shall bear the cost of taxes of any kind, nature or
description whatsoever applicable to the sale of any Products by LecTec to
Novartis (other than taxes based upon the income of LecTec or LecTec's
employees), unless Novartis is exempt therefrom and provides to LecTec, at the
time of the submission of any Purchase Order, tax exemption certificates or
permits acceptable to the appropriate taxing authorities.
2.3 Shipment. ( * )
2.4 ( * )
2.5 ( * )
* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
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2.5.1 ( * )
2.5.2 ( * )
2.5.3 ( * )
2.6 ( * )
2.7 Raw Material Vendors. Novartis may at any time identify to LecTec
lower cost and comparable quality sources from which LecTec may obtain any of
the Raw Materials. In such an event, except to the extent that such other source
is unable to reasonably satisfy LecTec's quality, service or delivery standards,
or any of LecTec's other standard vendor qualification requirements, LecTec
shall utilize the sources identified by Novartis as soon as commercially
* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
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feasible, and the prices charged to Novartis for Products shall be reduced by
the amount of any resulting reductions in Raw Material costs. Novartis shall
reimburse LecTec for any costs LecTec shall reasonably incur in implementing any
such change in sources.
2.8 ( * )
2.9 ( * )
3. FORECASTS AND ORDERS
3.1 Rolling Forecasts. In order to assist LecTec in planning production,
Novartis shall provide LecTec with a twelve (12) month rolling forecast of the
quantities of Products and delivery dates required by Novartis, by month, for
the following twelve (12) months. It is understood that such forecasts are
intended to be estimates only and shall not be binding upon Novartis.
Notwithstanding the foregoing, Novartis shall be bound to purchase from LecTec
one hundred percent (100%) of those quantities of Products set forth in each
such forecast as being Novartis' requirements of Products for the first three
(3) months of each twelve (12) month period and, accordingly, shall issue
purchase orders therefor pursuant to Section 3.2. LecTec shall, no later than
ten (10) business days after receipt of each such forecast, notify Novartis in
writing of any prospective problems of which it is then aware that might prevent
it from meeting Novartis' forecasted order quantities or estimated delivery
dates. Unless LecTec so informs Novartis that it would have problems in meeting
Novartis' forecasted requirements, LecTec shall be obligated to deliver during
any calendar year, pursuant to purchase orders provided under Section 3.2 of
this Agreement, up to one hundred twenty percent (120%) of Novartis' estimated
purchases for that calendar year (but in no single month more than one hundred
fifty percent
* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
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(150%) of those quantities of Products set forth in the most recent forecast as
being Novartis' requirements of Products for the first month of the forecasted
twelve (12) month period). LecTec shall further use its commercially reasonable
efforts to comply with purchase orders for Products in excess of such one
hundred twenty percent (120%) and one hundred fifty percent (150%) amounts.
3.2 Purchase Orders. Subject to Section 3.1, at least sixty (60) days
prior to the date on which Novartis desires to have a shipment of Products
delivered (as defined in Section 2.4), Novartis shall furnish to LecTec a
binding purchase order for such shipment, stating (a) the desired quantity of
Products, and (b) the desired delivery date. Each such Novartis purchase order
shall be subject to acceptance by LecTec. If LecTec has not indicated in writing
its rejection of such a purchase order within five (5) business days from
receipt of same, such purchase order shall be deemed accepted. If LecTec cannot
accept a specific purchase order, it shall, within such 5-day period, inform
Novartis in writing of the circumstances and of LecTec's proposed alternative
delivery proposal. In such event, Novartis shall have no firm commitment to
purchase, and LecTec shall have no firm commitment to supply, unless Novartis
furnishes LecTec with a new purchase order incorporating such alternative
proposal and LecTec has accepted same.
3.3 Amendment of Purchase Orders. LecTec shall use its commercially
reasonable efforts to accommodate any Novartis requests for delivery of Products
in excess of the quantities described in any previously-submitted and accepted
purchase order, or for delivery of Products sooner than that allowed pursuant to
this Article 3. If Novartis' business conditions necessitate reduction or delay
in purchase order requirements, then LecTec shall use its commercially
reasonable efforts to implement such requested changes. Notwithstanding the
foregoing, LecTec shall not take any action in response to any such requests
which would result in charges to Novartis in addition to those set forth in the
respective purchase order without Novartis' prior written consent.
4. INSPECTIONS AND ACCEPTANCE
4.1 Inspection; Right of Rejection. Novartis shall accept any delivery of
Products hereunder if, in Novartis' sole and reasonable discretion, Novartis
determines that the delivery complies fully with the relevant purchase order,
the Specifications and the requirements of this Agreement. Novartis shall have
the right to inspect all Products delivered hereunder within thirty (30) days of
its receipt of the Products and all required documentation. Novartis shall
provide LecTec with written notice of its acceptance or rejection of the
shipment within sixty (60) days of receipt of the Products and all required
documentation. Any notice of rejection shall specify the reason(s) therefor.
Except in the event of any investigation, corrective action or retesting of a
shipment, if Novartis fails to provide LecTec with written notice of its
acceptance or rejection of the shipment within sixty (60) days of receipt of the
Products and all required documentation, then the shipment shall be deemed to
have been accepted by Novartis. Novartis' prior payment of any invoice for a
shipment which is timely rejected under this Section 4.1 shall not prejudice
Novartis' right under Section 4.2 to seek replacement Products or a credit or
refund, as Novartis may deem appropriate, with respect to any such rejected
Products.
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4.2 Replacements. If Novartis notifies LecTec that any, or any part
thereof, is rejected pursuant to Section 4.1, then, at Novartis' option, (a)
LecTec shall, at no additional charge, deliver replacement Products to Novartis
as soon as reasonably practicable thereafter (but, in any event, within ninety
(90) days after the initial notification by Novartis); or (b) the purchase order
at issue shall be deemed terminated, and Novartis shall not be obligated to make
any payments to LecTec with respect to such purchase order or the rejected
shipment (or, if payment has already been made for such Products, then Novartis
shall be entitled to a credit in such amount). Novartis shall give commercially
reasonable cooperation to LecTec to determine the nature and extent of any
problem giving rise to a rejection of Products, including, without limitation,
prompt samples of any allegedly non-conforming Products.
4.3 Returns. Novartis shall not return any rejected Products to LecTec
except upon a return material authorization ("RMA") from LecTec. LecTec shall
pay the freight to deliver replacement Products to Novartis for rightfully
rejected Products, and LecTec shall pay the freight to return to LecTec or its
designee rejected Products for which LecTec has provided to Novartis an RMA.
5. DOCUMENTATION AND INFORMATION
5.1 Confirmation. LecTec shall submit to Novartis the batch manufacturing
and testing documents relating to any Products ordered hereunder, within ten
(10) days of the completion of the manufacturing process with respect to any
particular batch of Products. LecTec shall provide such documentation as
reasonably requested by Novartis solely (a) to assist Novartis in determining
whether any manufactured or delivered Products comply fully with the
Specifications and the requirements of this Agreement; (b) to assist Novartis in
obtaining any and all regulatory approvals necessary to market the Products in
the Territory; or (c) to enable Novartis to comply with any statutory or
regulatory requirements or with a request by any governmental or regulatory
authority in the Territory. Such records and reports shall be subject to the
confidentiality provisions of Article 8 of this Agreement, shall be deemed
LecTec's Confidential Information, and shall be subject to the requirements of
Section 1.3 of the QA Agreement.
5.2 Certificate of Analysis. Every shipment of the Products to Novartis
shall be accompanied by a Certificate of Analysis from LecTec to certify the
active ingredients therein. LecTec shall warrant the accuracy of each such
Certificate of Analysis to a reasonable degree of scientific certainty.
5.3 Books and Records. LecTec shall keep on file all books and records in
connection with the manufacture and testing of the Products, including, but not
limited to, those books and records relating to cross-over cleaning, process
validation, installation qualification, operational qualification and cleaning
validation for a period of seven (7) years, plus the active year, from the time
of generation of such documents.
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6. PRODUCTION PROCEDURES
6.1 No Reworked Products. LecTec shall not rework or reprocess any
non-conforming Products without the prior written approval of Novartis.
6.2 Product Packaging. The Products shall be delivered to Novartis
packaged in accordance with the Specifications. Notwithstanding the foregoing,
Novartis shall have the right to require any special or varied packing that it
believes is reasonably necessary to meet customs or regulatory requirements in
the Territory. Reasonable incremental costs which result directly from any
packing changes required by Novartis will be borne by Novartis.
6.3 Production Procedures. At an agreed upon time prior to its first
production run of the Products for Novartis, and at some mutually agreeable time
prior to the production of qualification batches, LecTec either shall provide to
a designated Novartis employee, or shall permit such designated Novartis
employee to review at LecTec's facility, for Novartis' review and approval,
LecTec's production procedures for the Products ("Production Procedures"). Such
Production Procedures shall include the manufacturing site, manufacturing
equipment, manufacturing process, manufacturing conditions and testing
procedures for the manufacture of the Products. After such initial Novartis
approval, if LecTec wishes to make any material change in any of the Production
Procedures so documented and approved, LecTec shall provide notice thereof to
the designated Novartis employee, and shall permit such designated Novartis
employee to review such proposed changes at LecTec's facility, at least thirty
(30) days prior to its first production run under such revised Production
Procedures. All such changes to the Production Procedures must be approved in
writing by Novartis prior to being implemented, which approval shall not
unreasonably be withheld.
6.4 Waste Disposal. LecTec represents and warrants, to the best of its
knowledge, and shall take all commercially reasonable actions necessary to
ensure, that all facilities, equipment and practices used to perform LecTec's
responsibilities under this Agreement by or on behalf of LecTec, or by any of
LecTec's contractors of any rank (including, without limitation, environmental
or safety and health consultants or waste management or disposal firms) (each a
"LecTec Contractor") will be during the term of this Agreement, in full
compliance with all health, safety and environmental laws, statutes, ordinances,
regulations, rules, permits and pronouncements. LecTec assumes responsibility
for disposing of any and all waste generated during the performance of its
responsibilities under this Agreement (including, without limitation, during any
manufacturing, storage and transportation activities) in accordance with all
legal and professional standards.
6.4.1 LecTec shall Dispose or arrange for the Disposal of Waste and
at an Approved Disposal Facility. Novartis shall have the right to unilaterally
modify any designation of any Approved Disposal Facility at any time based upon
audit and inspection results. LecTec shall only transport Waste to an Approved
Disposal Facility by means of a transporter lawfully permitted to transport the
particular types of Waste at issue. LecTec shall be solely responsible for the
proper Disposal of Waste. For purposes of this Section 6.4.1,
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6.4.1.1 "Dispose" or "Disposal" shall mean any discharge,
deposit, injection, dumping, spilling, leaking, or placing of any Waste into or
on any land or water and the arrangement of any of the foregoing, and shall
include any storage, pretreatment, treatment (including incineration), any other
actual disposal, use, sale, sampling or other transfer or application of Waste
of any kind or nature whatsoever;
6.4.1.2 "Waste" shall mean, for purposes of this Agreement
only, all materials that are produced or generated in connection with the
manufacture of any chemical compounds pursuant to this Agreement and for which
Disposal is required, including but not limited to materials that are Hazardous
Waste, co-product, by-product, chemical compounds that fail to conform to the
requirements of this Agreement, wastewaters, residues, wastes, bottoms and other
remainders and materials, packaging of, or components of the chemical compounds,
and components of any chemical compounds that are not used in the manufacture of
the chemical compounds;
6.4.1.3 "Hazardous Waste" shall mean (a) any material or
substance defined as or containing materials defined as a "hazardous substance"
pursuant to any applicable laws or regulations, including the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, the Resource
Conservation and Recovery Act, as amended, and any similar successor or
supplementary legislation, and the regulations promulgated thereunder, or (b)
any material or substance that is radioactive; and
6.4.1.4 "Approved Disposal Facility" shall mean a disposal
facility approved by Novartis, which approval shall not be unreasonably
withheld.
6.4.2 Notwithstanding anything to the contrary herein, (i) if LecTec
and/or any LecTec Contractor fails to comply with the obligations set forth in
this Section 6.4, then LecTec shall be responsible for any claims, suits, or
liabilities resulting therefrom (including, without limitation, those based on
strict liability and joint and several liability), and LecTec shall indemnify,
defend and save Novartis (including officers, directors, employees and agents of
Novartis) harmless from and against any and all such claims, suits, and
liabilities; and (ii) LecTec shall indemnify, defend and save Novartis
(including officers, directors, employees and agents of Novartis) harmless from
and against any and all claims, suits, and liabilities which arise directly or
indirectly from the storage, release, transportation or disposal of chemicals,
raw materials, product, waste or any other substance by LecTec and/or any LecTec
Contractor.
7. OWNERSHIP
7.1 Novartis Property. All materials, inventions, know-how, trademarks,
information, data, writings and other property, in any form whatsoever, which is
provided to LecTec by and/or on behalf of Novartis, or which is used by LecTec
with respect to the performance of its obligations hereunder, and which was
owned by Novartis prior to being provided to LecTec, shall remain the property
of Novartis (the "Novartis Property"). LecTec shall have a royalty-free license
to use any Novartis Property supplied to it solely to the extent necessary to
enable LecTec to perform its obligations hereunder. LecTec shall not acquire any
other right, title or interest in the Novartis Property as a result of its
performance hereunder. Without limiting the
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foregoing, Novartis Property shall include the copyrights and trademarks used in
the packaging of the Products ("Packaging IP Rights").
7.2 LecTec Property. All materials, inventions, know-how, trademarks,
information, data, writings and other property, in any form whatsoever, which is
provided to Novartis by or on behalf of LecTec, or which is used by LecTec with
respect to the performance of its obligations hereunder, and which was owned by
LecTec prior to its performance or is developed or acquired in the course of
such performance hereunder, shall remain the property of LecTec (the "LecTec
Property"). Novartis shall acquire no right, title or interest in the LecTec
Property as a result of LecTec's performance hereunder. Without limiting the
foregoing, as between the parties hereto, all the intellectual property rights
for the Products other than the Packaging IP Rights shall be deemed to be LecTec
Property.
7.3 Effect of Termination. Upon the termination of this Agreement, each
party shall return to its owner all Novartis Property or LecTec Property, as
applicable, except for one copy which may be retained in the returning party's
confidential files.
8. TRADE SECRETS, CONFIDENTIALITY AND PUBLICITY
8.1 Confidential Information. During the period that this Agreement is in
effect and thereafter, LecTec and Novartis shall not disclose to anyone in any
manner whatsoever or use for any purpose other than its performance of this
Agreement (except as authorized in writing by the disclosing party) any
information it receives from the other party ( "Confidential Information"),
including, without limitation, intellectual property, inventions, works of
authorship, trade secrets or know-how or other information relating in any way
to the Products, processes, and services of the other party.
8.2 Limitations. Each party shall limit disclosure of Confidential
Information received hereunder to only those of its employees who are directly
concerned with the performance of any activities with respect to which the
Confidential Information was disclosed. Each party agrees to advise those of its
employees who receive any other party's Confidential Information that such
Confidential Information (a) is proprietary and confidential to such party and
(b) shall not be disclosed to anyone except as authorized by this Agreement or
otherwise authorized by such party in writing. Each party further agrees to take
at least such precautions as it normally takes with its own Confidential
Information to prevent unauthorized disclosure of the other party's Confidential
Information.
8.3 Injunctive Relief. Each party acknowledges that any unauthorized
disclosure of any portion of the other party's Confidential Information shall
cause irreparable injury to the other party and that no adequate or complete
remedy shall be available at law to such other party to compensate for such
injury. Accordingly, each party hereby also acknowledges that the other party
shall be entitled to injunctive relief in the event of such unauthorized
disclosure by a party or any of its employees in addition to whatever other
remedies it might have at law.
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8.4 Effect of Termination. Upon termination of this Agreement, each party
shall return to the other all copies of the other party's Confidential
Information, and shall make no further use of such Confidential Information,
except for one copy which may be retained in the receiving party's confidential
files.
8.5 Exceptions. The obligations of this Section 8 shall not apply to
- - -information.
8.5.1 that is or has been in the possession of the recipient prior
to receipt of the same from the disclosing party as evidenced by recipient's
written records;
8.5.2 which the recipient lawfully obtains from any third party not
under an obligation to the disclosing party to hold the same in confidence;
8.5.3 that is published or becomes part of the public domain without
breach of any undertakings discussed hereinabove;
8.5.4 that is independently developed by personnel of the recipient
without any use of or reliance upon the disclosing party's Confidential
Information; or
8.5.5 that is required to be disclosed pursuant to judicial process,
court order or administrative request, or that is otherwise required for any
regulatory filing, provided that the recipient shall notify the other party
sufficiently prior to disclosing such Confidential Information as to permit such
other party to seek a protective order.
8.6 Press Releases. LecTec shall not issue any press release or other
public statement disclosing the existence of or relating to this Agreement
without prior written consent of Novartis, which consent shall not be
unreasonably withheld or delayed. The foregoing shall not limit LecTec's rights
to make such disclosures as reasonably required by applicable securities laws or
the rules of any stock exchange where its securities are traded.
9. QUALITY OF THE PRODUCT; COMPLIANCE WITH LAW
9.1 Representations and Warranties. LecTec hereby represents and warrants
that:
9.1.1 no Products constituting or being a part of any shipment
hereunder shall at the time of any such shipment be (i) adulterated or
misbranded within the meaning of the Federal Food, Drug and Cosmetic Act, as
amended from time to time (the "Act"), or regulations promulgated thereunder, as
such law or regulation is constituted and in effect at the time of any such
shipment, or (ii) an article which may not, under the provisions of Sections
404, 505 or 512 of the Act, be introduced into interstate commerce;
9.1.2 all Products furnished to Novartis hereunder shall be in full
compliance with the Specifications, and shall remain in full compliance with the
Specifications for the full period of the expected shelf-life of such Products,
so long as the Products are stored in accordance with the Specifications;
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9.1.3 LecTec shall perform its obligations hereunder in compliance
with any materially applicable federal, state and local laws and regulations,
including without limitation the Act, the FDA's then-current Good Manufacturing
Practices ("cGMP"), and any health, safety and environmental laws and
regulations materially applicable to LecTec's manufacture and packaging of the
Products and its other performance hereunder;
9.1.4 all Products furnished to Novartis hereunder shall have been
manufactured in accordance with the terms of the QA Agreement;
9.1.5 LecTec's manufacturing, laboratory and packaging facilities
shall remain in compliance with CGMP at all times during the term of this
Agreement to the extent applicable to the manufacture and packaging of the
Products; and
9.1.6 LecTec owns or has the right to use all necessary copyright,
trademark, patents, trade secrets and other intellectual property rights which
it shall use to perform its obligations hereunder with respect to the Territory.
9.2 Disclaimer. EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED IN THIS
AGREEMENT, LECTEC MAKES NO WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, CONCERNING
THE PRODUCTS, OR THE MERCHANTABILITY OR FITNESS THEREOF FOR ANY PURPOSE.
9.3 Remedy. In the event that Products are delivered to Novartis by LecTec
which are not in compliance with the warranties made in Section 9.1 then, at
Novartis' option (i) LecTec shall replace the non-compliant Products at no
additional charge (which replacement Products shall be delivered to Novartis as
soon as reasonably practicable, but in no event more than ninety (90) days after
the initial notification by Novartis); or (ii) LecTec shall credit Novartis'
account in the amount of the price of the non-compliant Products. Novartis shall
give commercially reasonable cooperation to LecTec to determine the nature and
extent of any problem giving rise to a breach of warranties, including, without
limitation, prompt samples of any allegedly non-compliant Products. Returns of
non-compliant Products shall be subject to the provisions of Section 4.3.
10. INDEMNIFICATION AND INSURANCE
10.1 Novartis Indemnification. Novartis shall defend, indemnify and hold
LecTec harmless against any and all claims, damages, expenses, reasonable
attorneys' fees, settlement costs and judgments arising out of any death,
personal injury, bodily injury or property damage to a third party alleged to
have been caused by the Products, except to the extent that such injury or
damage was the result of any breach of this Agreement by LecTec, including any
warranty contained herein, or the result of any latent defects in the Products
caused by the negligence or willful misconduct of LecTec. LecTec shall promptly
notify Novartis of any such claim or action, shall reasonably cooperate with
Novartis in the defense of such claim or action, and shall permit Novartis to
control the defense and settlement of such claim or action, all at Novartis'
cost and expense.
13
<PAGE>
10.2 LecTec Indemnification. LecTec shall defend, indemnify and hold
Novartis harmless against any and all claims, damages, expenses, reasonable
attorneys' fees, settlement costs and judgments arising out of any death,
personal injury, bodily injury or property damage to a third party to the extent
that such death, injury or damage is the result of (i) any breach of this
Agreement by LecTec, including any warranty contained herein; (ii) any claim
regarding a work-related death or injury to any LecTec employee; (iii) any claim
regarding latent defects in the Products caused by the negligence or willful
misconduct of LecTec; or (iv) any claim that the Products, or any means used to
manufacture the Products, infringe any third party's patent, trade secret,
trademark, copyright, or other proprietary interest in the Territory. Novartis
shall promptly notify LecTec of any such claim or action, shall reasonably
cooperate with LecTec in the defense of such claim or action, and shall permit
LecTec to control the defense and settlement of such claim or action, all at
LecTec's cost and expense.
10.3 Product Recalls and Withdrawals. Each party shall promptly notify the
other party of any legal and/or factual circumstances which might, under
applicable laws and regulations, necessitate a field correction, recall or
withdrawal of any Products (collectively, a "Regulatory Recall") and shall
consult with each other regarding the appropriate steps to be taken. Novartis
shall determine whether any Regulatory Recall shall take place. Novartis shall
notify all regulatory authorities of any such Regulatory Recall, and shall take
all steps necessary to effectuate such Regulatory Recall. LecTec shall assist
Novartis in each of these activities to the extent reasonably requested by
Novartis. LecTec shall reimburse Novartis for the costs of any such Regulatory
Recall to the extent such Regulatory Recall was made necessary by the actions or
inaction of LecTec. If LecTec is unable in good faith to obtain the recall
insurance required by Section 10.4.6 for a reasonable premium, then the maximum
amount which LecTec shall be required to reimburse Novartis pursuant to the
preceding sentence shall be $500,000 per Regulatory Recall, not including the
cost of any replacement Products made necessary by the applicable Regulatory
Recall. Novartis shall reimburse LecTec for the costs of any such Regulatory
Recall to the extent such Regulatory Recall was made necessary by the actions or
inaction of Novartis. Any claim for such reimbursement of costs incurred in such
a Regulatory Recall shall be subject to audit by the CPA Firm.
10.4 LecTec's Insurance Coverage. LecTec shall obtain, at its own expense,
policies of insurance in amounts no less than those specified below and shall
cause its carrier or carriers to name Novartis as an additional insured on those
coverages marked with an (*) below:
10.4.1 *general liability insurance with combined limits of not less
than $1,000,000 per occurrence and $1,000,000 per accident for bodily injury,
including death, and property damage;
10.4.2 workers' compensation and disability insurance in the amounts
required by the law of the state(s) in which its workers are located, and
employer's liability insurance with limits of not less than $1,000,000 per
occurrence;
10.4.3 *automobile liability insurance (in the event that the use of
an automobile by LecTec is required in the performance of this Agreement) with
combined limits of not less
14
<PAGE>
than $1,000,000 per occurrence and $1,000,000 per accident for bodily injury,
including death, and property damage is required;
10.4.4 *product liability insurance with limits not less than
$5,000,000;
10.4.5 property insurance for the replacement value of the
facilities and equipment used to produce the Products;
10.4.6 *recall insurance with limits not less than $2,000,000; and
10.4.7 *excess insurance with limits not less than $5,000,000.
10.5 Documentation of Coverage. Upon request, LecTec shall provide to
Novartis evidence of its insurance or self insurance. LecTec shall provide
Novartis thirty (30) days prior written notice of any cancellation or material
change in coverage.
10.6 Novartis' Insurance Coverage. Novartis warrants and represents to
LecTec that Novartis maintains a policy or program of insurance or
self-insurance at levels sufficient to support the indemnification obligations
assumed herein. Upon request, Novartis shall provide to LecTec evidence of its
insurance or self-insurance. Novartis shall provide to LecTec thirty (30) days
prior written notice of any cancellation or material change in coverage.
11. TERM AND TERMINATION
11.1 Initial Term; Renewal. This Agreement shall commence on the Effective
Date and shall continue in effect for five (5) years ( the "Initial Term") and,
thereafter, shall be renewed for subsequent one (1) year terms upon the mutual
consent of the parties.
11.2 Termination for Convenience. Notwithstanding Section 11.1, Novartis
may terminate this Agreement for convenience at no cost, at any time, by giving
LecTec at least six (6) months prior written notice thereof.
11.3 Termination for Cause. In the event LecTec is unable for three (3)
consecutive months to supply Products which comply with LecTec's obligations
hereunder in quantities sufficient to meet Novartis' purchase orders under
Section 3.2, then Novartis may terminate this Agreement at no cost upon ten (10)
days prior written notice thereof. In addition, if either party materially
breaches this Agreement, the other party shall give such breaching party written
notice thereof with reasonable detail. If the breaching party fails to cure such
breach within forty-five (45) days of its receipt of such notice, then the
non-breaching party may terminate this Agreement at no cost upon written notice
thereof. In addition, either party may terminate this Agreement with immediate
effect upon giving written notice to the other party in the event of insolvency,
assignment for the benefit of creditors, or bankruptcy proceedings by or against
the other party.
11.4 Survival. Notwithstanding any termination of this Agreement, the
provisions of Sections 1.6, 1.7, 2.1, 2.2, 2.4, 2.5, 2.6, 2.9, 5.3, 6.4.2, 7, 8,
9, 10 and 13 shall remain in effect.
15
<PAGE>
12. AUDIT AND INSPECTION RIGHTS
12.1 Audit, Inspection and Observation. During the term of this Agreement
and any renewal thereof, Novartis shall have the right, at its sole cost and
expense, to send Novartis representatives to audit, inspect and observe the
manufacture, storage, disposal and transportation of the Products, and all other
materials reasonably related thereto or used in connection therewith, upon
reasonable prior notice to LecTec and during LecTec's normal business hours.
Such Novartis representatives shall have no responsibility or authority for
supervision of LecTec employees performing such manufacture, storage, disposal
or transportation operations. Such Novartis representatives shall comply with
any reasonable LecTec health, safety or security rules or policies while at
LecTec's premises. The audit, inspection and observations rights set forth in
this Section 12.1 are solely for the purpose of determining LecTec's compliance
with the terms of this Agreement and the QA Agreement.
12.2 Action Plan. If, as a result of any such audit, inspection or
observation under Section 12.1, Novartis reasonably concludes that LecTec is not
in compliance with any of its obligations hereunder, it shall so notify LecTec
in writing, specifying such areas of non-compliance in reasonable detail. LecTec
shall provide to Novartis within thirty (30) days of Novartis' request a written
action plan with a time line for resolution of the problems identified within a
reasonable, mutually agreed upon time frame.
12.3 Government Inspections. LecTec shall inform Novartis within
twenty-four (24) hours of any notification to LecTec of any site visits to the
LecTec facility by the FDA, state or federal regulatory agencies or any other
governmental or regulatory agency, relating, directly or indirectly, to the
manufacture of the Products, and shall provide to Novartis all other materials
related thereto or used in connection therewith. Novartis shall have the option
of participating in any site visit by any governmental or regulatory agency
(except to the extent such governmental or regulatory agency visitor objects) if
the site visit relates, directly or indirectly, to the manufacturing, storage,
disposal and transportation of the Products. If Novartis does not participate in
the site visit for any reason, LecTec shall report in writing the results of the
visit to Novartis within seven (7) days of the occurrence thereof. In the event
that any such governmental or regulatory agency finds that the site is deficient
or unsatisfactory in any material respect, LecTec shall cure all such material
deficiencies within the earlier of ninety (90) days or such cure period as
ordered by the government or regulatory agency. If all such deficiencies are not
cured by LecTec within the required time frame, Novartis may deem such condition
to be a material breach of this Agreement without the required 45-day cure
period in Section 11.2 of this Agreement and thus may immediately terminate this
Agreement.
13. MISCELLANEOUS
13.1 Waiver. Each party acknowledges and agrees that any failure on the
part of the other party to enforce at any time, or for any period of time, any
of the provisions of this Agreement shall not be deemed or construed to be a
waiver of such provisions or of the right of such other party thereafter to
enforce each an every such provision.
16
<PAGE>
13.2 Enforcement. If and to the extent that any provision of this
Agreement is determined by any legislature, court or administrative agency to
be, in whole or in part, invalid or unenforceable, such provision or part
thereof shall be deemed to be surplusage and, to the extent not so determined to
be invalid or unenforceable, each provision hereof shall remain in full force
and effect unless the purposes of this Agreement cannot be achieved. In the
event any provisions shall be held invalid, illegal or unenforceable the parties
shall use commercially reasonable efforts to substitute a valid, legal and
enforceable provision which insofar as practical implements the purposes hereof.
13.3 Choice of Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Minnesota as though made and to be
fully performed in said State.
13.4 Notices. All notices required or permitted hereunder shall be given
in writing and sent by confirmed facsimile transmission, or mailed postage
prepaid by first-class certified or registered mail, or sent by a nationally
recognized express courier service, or hand-delivered to the following
addressees:
Novartis: Novartis Consumer Health, Inc.
560 Morris Avenue
Summit, NJ 07901
Attn: General Counsel
LecTec: LecTec Corporation
10701 Red Circle Dr.
Minnetonka, MN 55343
Attn: Chief Executive Officer
or to such other address as may be specified in a notice given to the other
party in accordance with this Section 13.4. Any notice, if sent properly
addressed, postage prepaid, shall be deemed made three (3) days after the date
of mailing as indicated on the certified or registered mail receipt, or on the
next business day if sent by express courier service or on the date of delivery
or transmission (if delivered or sent during ordinary business hours, otherwise
on the next business day) if hand-delivered or sent by confirmed facsimile
transmission.
13.5 Captions. The captions of each section of this Agreement are inserted
only as a matter of convenience and for reference and in no way shall be deemed
to define, limit, enlarge, or describe the scope of this Agreement and the
relationship of the parties hereto, and shall not in any way affect this
Agreement or the construction of any provisions herein.
13.6 Entire Agreement; Amendment. This Agreement, including all Exhibits
annexed hereto (which are incorporated herein by reference), represents and
incorporates the entire understanding between the parties hereto with respect to
the subject matter of this Agreement and supersedes any prior offers, proposals,
drafts or other communications with respect thereto. Each party acknowledges
that there are no warranties, representations, covenants or
17
<PAGE>
understandings of any kind, nature or description whatsoever made by any party
to any other, except such as are expressly hereinabove set forth. This Agreement
shall not be subject to change or modification except by the execution of a
writing specified to be an explicit amendment to this Agreement duly executed by
all parties hereto.
13.7 Effect of Forms. The parties recognize that, during the term of this
Agreement, a purchase order, acknowledgment form or similar routine document
(collectively, "Forms") may be used to implement or administer provisions of
this Agreement. Therefore, the parties agree that the terms of this Agreement
shall prevail in the event of any conflict between this Agreement and the
printed provisions of such Forms, or typed provisions of Forms that appear to
add to, vary, modify or conflict with the provisions of this Agreement.
13.8 Relationship. Nothing in this Agreement shall create between the
parties a partnership, joint venture or principal-agent relationship and, for
the avoidance of doubt, each of LecTec and Novartis now confirms and accepts
that it is an independent contractor trading for and on its own behalf.
13.9 Assignment. LecTec may not assign or otherwise transfer this
Agreement or any interest herein or any right hereunder (other than to an
affiliate) without the prior written consent of Novartis, which consent shall
not be unreasonably withheld, except that LecTec may assign this Agreement in
connection with the transfer or sale of all or substantially all of its assets
or business or its merger or consolidation with another company, so long as (i)
such acquiror or successor in interest agrees in writing to be bound by all the
terms and conditions hereof; and (ii) LecTec shall first give Novartis written
notice of any such assignment, and fifteen (15) days to object thereto. The only
grounds upon which Novartis may object to such an assignment are if such
acquiror or successor in interest is (a) a direct competitor of Novartis; (b) in
Novartis' reasonable discretion, is not a manufacturer which has a proven record
of operational quality at least equal to that of LecTec; or (c) in Novartis'
reasonable discretion, does not have sufficient financial wherewithal. Any
purported assignment, transfer, or attempt to assign or transfer any interest or
right hereunder except in compliance with this Section 13.9 shall be null, void
and of no effect.
13.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original and all of which
together shall constitute a single instrument.
13.11 Force Majeure. A party shall not be liable for delayed performance
or non-performance of this Agreement (other than payment of money when due) if
such condition is due to events beyond its reasonable control, including,
without limitation, fire, flood, storm, earthquake, any other Act of God,
electrical or computer failures, supply or labor shortages, strikes, riot, civil
disorder, war or government order or decree.
13.11.1 A party claiming relief under this Section 13.11 shall give
prompt written notice thereof to the other party, together with its best
estimate of when such condition will end and its full performance may be
resumed.
18
<PAGE>
13.11.2 In the event of a Force Majeure, or if for any other reason
LecTec experiences any shortage and is therefore unable to supply Novartis with
the full quantity of Products and with the delivery date as ordered by Novartis
and accepted by LecTec, then Novartis shall be entitled to the same
proportionate quantity of available Vapor Patches as the quantity of Products
purchased by Novartis from LecTec in the twelve (12) months preceding the
shortage bears to all orders for Vapor Patches received by LecTec from all its
customers during such period, including LecTec's sales to Novartis, and
including LecTec's sales of Comparable Products directly to retailers under its
"TheraPatch" tradename, or under any Other LecTec Trade Name. 13.11.3
Notwithstanding the foregoing, if such condition continues without change for
more than ninety (90) days, the other party may then elect to treat such delayed
performance or non-performance as a material breach of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
LECTEC CORPORATION NOVARTIS CONSUMER HEALTH, INC.
By: /s/ Rodney A. Young By: /s/ Thomas E. Berry
----------------------------------- ------------------------------------
Name: Rodney A. Young Name: Thomas E. Berry
--------------------------------- ----------------------------------
Title: Chairman/CEO/President Title: Sr V P Supply Chain & Production
-------------------------------- ---------------------------------
Date: 5/15/00 Date: 5/23/00
--------------------------------- ----------------------------------
19
<PAGE>
EXHIBIT A
THE PRODUCTS
1. Packages of six (6) menthol-scented hydrogel patches containing
menthol, camphor, eucalyptus oil, and fragrance used for the topical application
of vapor active ingredients for relief of symptoms due to coughs and colds.
2. Packages of six (6) mentholated cherry-scented hydrogel patches
containing menthol, camphor, eucalyptus oil, and fragrance used for the topical
application of vapor active ingredients for relief of symptoms due to coughs and
colds.
20
<PAGE>
EXHIBIT C
PRODUCT PRICING AND MINIMUM PURCHASE REQUIREMENTS
FUNDING REQUIREMENTS STANDARD PRODUCT/PRIVATE LABEL
- - -------------------- ------------------------------
Concept Phase (*)
Feasibility Phase (*)
Salesmen's Samples (*)
Completion of Design Phase (*)
Transfer Phase (*)
(*)
PRICING
- - -------
Finished product: Price per patch: (*)
Per 6-patch folding carton: (*)
Per 24-carton case: (*)
ANNUAL MINIMUM PURCHASE REQUIREMENTS FOR US PEDIATRIC EXCLUSIVITY
- - -----------------------------------------------------------------
(*)
* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
EXHIBIT D
TERRITORY
United States of America
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.01
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT
<TEXT>
EXHIBIT 21.01
Subsidiaries of the Company
LecTec International Corporation
Dissolved effective December 31, 1999
Incorporated in the state of Minnesota
Registered office: 10701 Red Circle Drive
Minnetonka, MN 55343
Corporate office: 55-11 Curacao Gade
P. O. Box 309420
Charlotte Amalie
St. Thomas, Virgin Islands 00803-9420
Records office: C/O Chase Trade, Inc.
55-11 Curacao Gade
P. O. Box 309420
Charlotte Amalie
St. Thomas, Virgin Islands 00803-9420
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.01
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
<TEXT>
EXHIBIT 23.01
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated August 18, 2000 (except for Note B,
as to which the date is September 26, 2000) accompanying the consolidated
financial statements included in the Annual Report of LecTec Corporation and
Subsidiaries on Form 10-K for the year ended June 30, 2000. We hereby consent to
the incorporation by reference of said report in the Registration Statements of
LecTec Corporation on Form S-3 (File No. 333-40183, effective November 17, 1997)
and Forms S-8 (File No. 33-121780, effective April 21, 1987, File No. 33-45931,
effective February 21, 1992, File No. 333-46283, effective February 13, 1998,
File No. 333-46289, effective February 13, 1998, File No. 333-72569, effective
February 18, 1999 and File No. 333-72571, effective February 18, 1999).
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
September 27, 2000
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.01
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> JUN-30-2000
<CASH> 100,171
<SECURITIES> 0
<RECEIVABLES> 2,770,005
<ALLOWANCES> 127,125
<INVENTORY> 2,247,686
<CURRENT-ASSETS> 5,236,110
<PP&E> 7,621,774
<DEPRECIATION> 4,582,686
<TOTAL-ASSETS> 8,474,549
<CURRENT-LIABILITIES> 3,723,549
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 39,045
<OTHER-SE> 4,680,771
<TOTAL-LIABILITY-AND-EQUITY> 8,474,549
<SALES> 14,596,346
<TOTAL-REVENUES> 14,596,346
<CGS> 9,475,129
<TOTAL-COSTS> 17,486,843
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 48,000
<INTEREST-EXPENSE> 35,405
<INCOME-PRETAX> (2,898,210)
<INCOME-TAX> (38,934)
<INCOME-CONTINUING> (2,859,276)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,859,276)
<EPS-BASIC> (0.74)
<EPS-DILUTED> (0.74)
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
