SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
|X| Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting under ss. 240.14a-12
LECTEC CORPORATION
(Name of Registrant as Specified in its Charter)
-------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:____________
(2) Aggregate number of securities to which transaction applies:_______________
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):_______________________________
(4) Proposed maximum aggregate value of transaction: $7,250,000 (represents the
consideration to be received by the Registrant in connection with the
transaction).
(5) Total fee paid: $1,450
|X| Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ________________________
(2) Form, Schedule or Registration Statement No.: ________________________
(3) Filing Party: ________________________
(4) Date Filed: ________________________
LECTEC CORPORATION
10701 RED CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
Dear Shareholder:
You are cordially invited to attend the 2000 annual meeting of
shareholders of LecTec Corporation to be held at the Minneapolis Marriott
Southwest Hotel, 5801 Opus Parkway, Minnetonka, Minnesota 55343, on Thursday,
March 29, 2001, at 3:00 p.m. (CST).
In addition to the customary annual meeting matters, you will be asked
to approve the sale of certain assets used in our conductive products division,
in accordance with the Asset Purchase Agreement among LecTec, The Ludlow Company
LP and Sherwood Services AG dated November 17, 2000. Ludlow and Sherwood have
agreed to buy the assets of LecTec's conductive products division for
approximately $7,250,000 in cash.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE,
SIGN, DATE AND MAIL THE ENCLOSED PROXY CARD PROMPTLY. If you attend the annual
meeting, you may revoke your proxy and vote in person if you wish, even if you
have previously returned your proxy card. If you do not attend the annual
meeting, you may still revoke your proxy at any time prior to the annual meeting
by providing a later dated proxy or by providing written notice of your
revocation to Douglas J. Nesbit, Chief Financial Officer of LecTec. Your prompt
cooperation will be greatly appreciated.
Sincerely,
/s/ Rodney A. Young
Rodney A. Young,
Chairman of the Board
This proxy statement is dated February 28, 2001. This proxy statement
is first being mailed to shareholders on or about February 28, 2001, along with
LecTec's annual report to shareholders for the fiscal year ended June 30, 2000,
annual report on Form 10-K for the fiscal year ended June 30, 2000, quarterly
reports on Form 10-Q for the quarters ended September 30, 2000 and December 31,
2000 and current report on Form 8-K filed November 21, 2000.
LECTEC CORPORATION
10701 RED CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MARCH 29, 2001
TO THE SHAREHOLDERS OF LECTEC CORPORATION:
The 2000 annual meeting of the shareholders of LecTec Corporation, a
Minnesota Corporation, will be held at the Minneapolis Marriott Southwest Hotel,
5801 Opus Parkway, Minnetonka, Minnesota 55343, on Thursday, March 29, 2001, at
3:00 p.m. (CST) for the following purposes:
1. To approve the sale of certain assets used in LecTec's conductive
products division pursuant to the Asset Purchase Agreement dated
November 17, 2000, among LecTec, The Ludlow Company LP and Sherwood
Services AG. Details of this transaction and other important
information are set forth in the accompanying proxy statement which you
are urged to read carefully.
2. To elect six directors, to serve on the Board of Directors for a term
of one year and until their successors are duly elected and qualified.
3. To ratify the appointment of Grant Thornton LLP as LecTec's independent
auditor for LecTec's current fiscal year.
4. To transact such other business as may properly come before the meeting
or any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS THAT AN AFFIRMATIVE VOTE BE CAST IN
FAVOR OF ALL NOMINEES AND FOR EACH OF THE PROPOSALS LISTED IN THE PROXY CARD (OR
VOTING INSTRUCTIONS) CARD.
Holders of LecTec common stock who do not vote their shares in favor of
the asset sale, and who strictly comply with the provisions of Sections 302A.471
and 302A.473 of the Minnesota Business Corporations Act, have the right to
object to the approval of the asset sale and may make written demand for payment
of the "fair value" of their shares of common stock. For a description of the
rights of dissenting shareholders, see Sections 302A.471 and 302A.473 of the
Minnesota Business Corporations Act, a copy of which is attached as Exhibit C to
the proxy statement. In addition, a description of the procedures to be followed
by a dissenting
shareholder in order to obtain payment for their shares is set forth under the
caption "Rights Of Dissenting Shareholders" in the proxy statement.
Only holders of record of common stock at the close of business on
February 23, 2001, will be entitled to notice of and to vote at the annual
meeting or any adjournment thereof.
IT IS IMPORTANT THAT YOUR SHARES OF COMMON STOCK BE REPRESENTED AT THE
ANNUAL MEETING. YOU ARE URGED TO COMPLETE AND SIGN THE ACCOMPANYING PROXY CARD,
WHICH IS SOLICITED BY THE BOARD OF DIRECTORS OF LECTEC, AND MAIL IT PROMPTLY IN
THE ENCLOSED ENVELOPE. YOUR PROXY WILL NOT BE USED IF YOU ATTEND AND VOTE AT THE
ANNUAL MEETING IN PERSON.
BY ORDER OF THE BOARD
OF DIRECTORS
/s/ Rodney A. Young
Rodney A. Young
Chairman of the Board
February 28, 2001
IMPORTANT: PLEASE RETURN EACH PROXY CARD SENT TO YOU. THE PROMPT RETURN
OF PROXIES WILL SAVE LECTEC THE EXPENSE OF FURTHER REQUESTS FOR PROXIES.
LECTEC CORPORATION
10701 RED CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
MARCH 29, 2001
--------------
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE PROPOSED ASSET SALE............................1
SUMMARY........................................................................3
The Companies.........................................................3
The Asset Sale........................................................3
Reasons for the Asset Sale............................................4
Recommendation of LecTec's Board of Directors.........................4
Opinion of LecTec's Financial Advisor.................................4
Proceeds of the Asset Sale............................................4
Shareholder Approval of the Asset Sale; Vote Required.................5
Rights of Dissenting Shareholders.....................................5
Closing Date..........................................................5
Closing Conditions....................................................5
Termination of the Asset Purchase Agreement...........................5
Certain Federal Income Tax Consequences...............................6
Regulatory Matters....................................................6
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION....................6
RISK FACTORS...................................................................6
Risks Relating to the Asset Sale......................................6
Risks Relating to LecTec..............................................7
THE ANNUAL MEETING OF SHAREHOLDERS............................................13
When and Where the Annual Meeting of Shareholders will be held.......13
What Will be Voted Upon..............................................13
Record Date; Shareholders Entitled to Vote; Quorum...................13
Vote Required........................................................14
Board Recommendation.................................................14
Voting Your Shares...................................................14
Changing Your Vote by Revoking Your Proxy............................14
How Proxies Are Counted..............................................14
Cost of Solicitation.................................................15
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA...............................15
CONDUCTIVE BUSINESS UNAUDITED FINANCIAL STATEMENTS............................16
i
UNAUDITED PRO FORMA FINANCIAL STATEMENTS......................................19
PROPOSAL 1: APPROVAL OF THE ASSET SALE........................................26
THE SALE OF THE CONDUCTIVE BUSINESS ASSETS....................................26
The Companies........................................................26
The Asset Sale.......................................................26
Background of the Asset Sale.........................................27
Reasons for the Asset Sale...........................................30
Recommendation of LecTec's Board of Directors........................32
Opinion of LecTec's Financial Advisor................................32
Proceeds of the Asset Sale...........................................36
Shareholder Approval of the Asset Sale; Vote Required................37
Rights of Dissenting Shareholders....................................37
Accounting Treatment.................................................39
Certain Federal Income Tax Consequences..............................39
Sale of LecTec's Medical Tape Equipment..............................36
THE ASSET PURCHASE AGREEMENT..................................................39
The Asset Sale.......................................................39
Closing Date.........................................................40
Consideration; Post-Closing Adjustment...............................40
Assets Purchased.....................................................40
Assumption of Liabilities............................................41
Representations and Warranties of Seller.............................41
Covenants of LecTec..................................................43
Regulatory Matters...................................................43
Closing Conditions...................................................44
Termination..........................................................44
Indemnification......................................................45
The Non-Competition Agreement........................................45
The Manufacturing and Supply Agreement...............................45
PROPOSAL 2: ELECTION OF DIRECTORS.............................................46
Generally............................................................46
Information Concerning Nominees......................................46
Meetings and Committees of the Board of Directors....................47
Director Compensation................................................48
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS.......................48
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION................49
Compensation Philosophy..............................................49
Executive Officer Compensation Program...............................49
EXECUTIVE COMPENSATION AND OTHER INFORMATION..................................52
Summary of Cash and Certain Other Compensation.......................52
Summary Compensation Table...........................................52
Option Grants in Last Fiscal Year....................................53
Aggregated Option Exercises in the Last Fiscal Year and Fiscal
Year-End Option Values...............................................54
Change in Control Plans..............................................54
ii
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions...............................................54
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................55
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.......................56
SHAREHOLDER RETURN PERFORMANCE GRAPH..........................................58
PROPOSAL 3: RATIFICATION OF APPOINTMENT OF AUDITORS...........................58
OTHER MATTERS.................................................................59
PROPOSALS FOR THE NEXT REGULAR MEETING........................................59
WHERE YOU CAN FIND MORE INFORMATION...........................................60
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................60
EXHIBITS
- --------
Exhibit A - Asset Purchase Agreement
Exhibit B - Opinion of Goldsmith, Agio, Helms Securities, Inc.
Exhibit C - Sections 302A.471 and 302A.473 of the MBCA
Exhibit D - Audit Committee Charter
iii
QUESTIONS AND ANSWERS ABOUT THE PROPOSED ASSET SALE
Q: WHAT IS THE PROPOSAL RELATING TO THE ASSET SALE THAT I WILL BE VOTING
ON AT THE ANNUAL MEETING?
A: You will be asked to consider and vote upon a proposal to approve the
sale by LecTec of certain assets used in LecTec's conductive products
division pursuant to the Asset Purchase Agreement, dated November 17,
2000 among LecTec, Ludlow and Sherwood. The asset purchase agreement is
attached to this proxy statement as Exhibit A.
Q: CAN I STILL SELL MY SHARES?
A: Neither the asset purchase agreement nor the asset sale will affect
your right to sell or otherwise transfer your shares of LecTec common
stock.
Q: WHAT VOTE IS REQUIRED TO APPROVE THE ASSET SALE?
A: Under section 302A.661 of the Minnesota Business Corporation Act, or
MBCA, the sale by LecTec of "all or substantially all" of its assets
would require approval by the affirmative vote of the holders of a
majority of the voting power of all outstanding shares of LecTec common
stock on the record date. LecTec, in consultation with its legal
counsel, has determined that the sale of the conductive products
division assets to Ludlow and Sherwood may constitute a sale of "all or
substantially all" of LecTec's assets based on current interpretations
of that term. Thus, the asset purchase agreement provides that, as a
condition to LecTec's obligation to consummate the transactions
contemplated by the asset purchase agreement, the affirmative vote of
the holders of at least fifty percent of the voting power of all
outstanding shares of LecTec common stock on the record date must be
obtained.
Q: WHO IS ENTITLED TO VOTE ON THE ASSET SALE?
A: Only holders of record of LecTec common stock as of the close of
business on February 23, 2001 will be entitled to notice of and to vote
at the annual meeting of shareholders.
Q: WHEN AND WHERE IS THE ANNUAL MEETING?
A: The annual meeting of shareholders of LecTec will be held at the
Minneapolis Marriott Southwest Hotel, 5801 Opus Parkway, Minnetonka,
Minnesota 55343, on Thursday, March 29, 2001, at 3:00 p.m. (CST).
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on
how to vote. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. Just send in a written revocation or a later dated, signed proxy
card before the annual meeting or simply attend the annual meeting and
vote in person.
Q: WHAT DO I NEED TO DO NOW?
A: PLEASE VOTE YOUR SHARES AS SOON AS POSSIBLE, SO THAT YOUR SHARES MAY BE
REPRESENTED AT THE ANNUAL MEETING. You may vote by signing your proxy
card and mailing it in the enclosed return envelope, or you may vote in
person at the annual meeting. Because a vote of a majority of the
outstanding LecTec shares is required to approve the asset sale, your
failure to vote is the same as your voting against the asset sale.
Q: WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ASSET SALE TO
THE SHAREHOLDERS?
A: LecTec does not expect that the asset sale will result in any federal
income tax consequences to its shareholders other than those who
exercise dissenters' rights under the MBCA. Such dissenting
shareholders should consult with their own tax advisers to determine
the tax consequences of dissenting.
Q: WHOM SHOULD I CALL IF I HAVE QUESTIONS?
A: If you have questions about the asset sale or the asset purchase
agreement you may call Douglas J. Nesbit, our chief financial officer,
toll free at (800) 777-2291.
-2-
SUMMARY TERM SHEET
THIS SECTION SUMMARIZES SELECTED INFORMATION ABOUT THE PROPOSED ASSET
SALE FROM THIS PROXY STATEMENT AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT
IS IMPORTANT TO YOU. TO UNDERSTAND THE ASSET SALE FULLY, WE STRONGLY ENCOURAGE
YOU TO READ CAREFULLY THIS ENTIRE PROXY STATEMENT. WE HAVE INCLUDED A COPY OF
THE ASSET PURCHASE AGREEMENT IN THIS PROXY STATEMENT AS EXHIBIT A.
THE COMPANIES
(See Page __.)
LECTEC. Upon completion of the asset sale, LecTec will focus its
efforts on the design, manufacture and marketing of topical ointment-based
products for the application of over-the-counter drugs. These therapeutic
products use a hydrogel coated onto a breathable cloth to deliver
over-the-counter drugs and other therapeutic compounds onto the skin. Products
currently manufactured using this technology are analgesics for localized pain
relief, cooling gel comfort strips, vapor cough suppressants, anti-itch and acne
treatment products, wart removers, and a corn and callus remover. The analgesic,
cooling and anti-itch products are marketed under the LecTec brand name
TheraPatch(R). The acne treatment, wart removers and corn and callus removers
are sold by LecTec to certain customers who then market them under their own
brand name. The vapor cough suppressant products are marketed under the
TheraPatch brand name as well as under the brand name of certain customers.
The principal executive office of LecTec is located at 10701 Red Circle
Drive, Minnetonka, Minnesota 55343, and LecTec's telephone number is (952)
933-2291.
LUDLOW AND SHERWOOD. The Ludlow Company LP and Sherwood Services AG are
both wholly owned subsidiaries of Tyco International Ltd. Tyco is a diversified
manufacturing and service company. As a member of Tyco's healthcare group,
Ludlow manufactures and sells a variety of disposable medical products,
specialized paper and film products. These include medical electrodes and gels
for monitoring and diagnostic tests and hydrogel wound care products, which are
used primarily in critical care, physical therapy and rehabilitative departments
in hospitals. Sherwood is a Swiss corporation which owns certain intellectual
property assets licensed to Tyco and its subsidiaries.
The principal executive offices of Ludlow are located at Two Ludlow
Park Drive, P.O. Box 297, Chicopee, Massachusetts 01021, and Ludlow's telephone
number is (413) 593-6400.
THE ASSET SALE
(See Page __.)
Pursuant to the asset purchase agreement, LecTec will sell and transfer
to Ludlow certain assets and liabilities related to LecTec's conductive products
division, which produces diagnostic electrodes and electrically conductive
adhesive hydrogels. Certain intellectual property rights associated with
LecTec's conductive products division will be sold to Sherwood. Upon the
-3-
approval of the asset sale and the closing of the transactions contemplated by
the asset purchase agreement, LecTec will receive a total purchase price of
$7,250,000 in cash. The purchase price will be subject to a post closing
adjustment as more fully described below.
REASONS FOR THE ASSET SALE
(See Page __.)
LecTec believes that the strategic sale of its conductive products
division will provide LecTec with the financial and operational ability to fund
and grow its therapeutic consumer products division. The asset sale will allow
LecTec to receive cash in exchange for the assets of the conductive products
division and focus LecTec's full operational capacity on its therapeutic
consumer products division.
RECOMMENDATION OF LECTEC'S BOARD OF DIRECTORS
(See Page __.)
The Board of Directors has determined that the asset sale is in the
best interests of LecTec and LecTec's shareholders. The Board of Directors has
unanimously approved the asset purchase agreement and unanimously recommends
that shareholders vote in favor of the proposal to approve the asset sale.
OPINION OF LECTEC'S FINANCIAL ADVISOR
(See Page __.)
LecTec received a written opinion dated November 17, 2000, from its
financial advisor, Goldsmith, Agio, Helms Securities, Inc., which together with
its affiliate companies is referred to as Goldsmith, Agio, Helms Securities, to
the effect that, as of the date of its opinion, and based upon and subject to
the assumptions, procedures and limitations described in the opinion, the
consideration to be received by LecTec pursuant to the proposed asset sale,
consisting of $7,250,000 in cash plus the assumption of liabilities relating to
the conductive products division assets, was fair from a financial point of view
to LecTec. We have included this opinion in this proxy statement as Exhibit B.
The opinion of the financial advisor is directed to the Board of Directors of
LecTec and is not a recommendation to shareholders with respect to any matter
relating to the asset sale. LECTEC URGES ITS SHAREHOLDERS TO READ THE OPINION OF
GOLDSMITH, AGIO, HELMS SECURITIES IN ITS ENTIRETY.
PROCEEDS OF THE ASSET SALE
(See Page __.)
The proceeds of the asset sale will be retained by LecTec. It is the
intention of LecTec's Board of Directors to use the proceeds along with other
cash and cash equivalents held by LecTec to fund and grow LecTec's therapeutic
consumer products division. Pending any such use, the net proceeds of the asset
sale, after deduction of the expenses incurred by LecTec in connection with the
asset sale, will be invested in U.S. government securities.
-4-
SHAREHOLDER APPROVAL OF THE ASSET SALE; VOTE REQUIRED
(See Page __.)
Under section 302A.661 of the Minnesota Business Corporation Act, or
MBCA, the sale by LecTec of "all or substantially all" of its assets requires
approval by the affirmative vote of the holders of a majority of the voting
power of all outstanding shares of LecTec common stock on the record date.
LecTec, in consultation with its legal counsel, has determined that the sale of
the conductive products division assets to Ludlow and Sherwood may constitute a
sale of "all or substantially all" of LecTec's assets based on current
interpretations of that term. Thus, the asset purchase agreement provides that,
as a condition to LecTec's obligation to consummate the transactions
contemplated by the asset purchase agreement, the affirmative vote of the
holders of at least fifty percent of the voting power of all outstanding shares
of LecTec common stock on the record date must be obtained.
RIGHTS OF DISSENTING SHAREHOLDERS
(See Page __.)
Under the MBCA, any holder of LecTec common stock who does not vote
their shares in favor of the asset sale and who strictly complies with the
provisions of Sections 302A.471 and 302A.473 of the MBCA, the full text of which
is attached as Exhibit C to this proxy statement, has the right to object to the
asset sale and may make written demand for payment of the "fair value" of their
shares of common stock.
CLOSING DATE
(See Page __.)
The closing of the asset sale will take place within five business days
after the shareholders of LecTec approve the asset sale and all other closing
conditions are satisfied, unless the parties agree upon another time. It is the
intent of the parties to complete the asset sale as soon as practicable.
CLOSING CONDITIONS
(See Page __.)
Each party's obligation to complete the asset sale is subject to the
prior satisfaction or waiver of certain conditions including approvals by
LecTec's shareholders and certain third parties.
TERMINATION OF THE ASSET PURCHASE AGREEMENT
(See Page __.)
The asset purchase agreement may, under specified circumstances, be
terminated and the transactions abandoned, notwithstanding shareholder approval
of the asset sale.
-5-
FEDERAL INCOME TAX CONSEQUENCES
(See Page __.)
LecTec does not expect that the asset sale will result in any federal
income tax consequences to its shareholders other than those who exercise
dissenters' rights under the MBCA.
REGULATORY MATTERS
(See Page __.)
The parties have voluntarily submitted the asset sale for review by the
Federal Trade Commission, or FTC. In the event that the FTC objects to the asset
sale, any party may unilaterally terminate the asset purchase agreement. The FTC
has informed the parties that, based on its informal review of the transaction,
it does not intend to object to the asset sale.
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION
Certain information contained in this proxy statement which does not
relate to historical information may be deemed to constitute forward looking
statements. The words or phrases "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," "believe" or similar
expressions identify "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, as amended. This proxy
statement contains certain forward-looking statements with respect to the
financial condition, results of operations, plans, objectives, future
performance and business of LecTec and the effect of the asset sale. Because
such statements are subject to risks and uncertainties, actual results may
differ materially from historical results and those presently anticipated or
projected. LecTec's shareholders are cautioned not to place undue reliance on
such statements, which speak only as of the date hereof. Among the factors that
could cause actual results in the future to differ materially from any opinions
or statements expressed with respect to future periods are those described under
the caption "Risk Factors" in this proxy statement. LecTec undertakes no
obligation to release publicly any revisions to such forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROXY STATEMENT,
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS RELATING TO THE ASSET
SALE AND LECTEC IN DECIDING WHETHER TO APPROVE THE ASSET SALE.
RISKS RELATING TO THE ASSET SALE
AFTER THE ASSET SALE, WE WILL HAVE A MORE NARROWED FOCUS OF BUSINESS
After the sale of our conductive products division, we will be
substantially smaller. In each of the last three fiscal years, sales from our
conductive products division have accounted for more than half of our total
sales. After the asset sale, we expect to generate substantially all of our
sales
-6-
from our therapeutic consumer products division which designs, manufactures and
markets products for the topical application of over-the-counter drugs. Until
recently, the therapeutic consumer products division has not represented a large
portion of our business or revenues. Growth in sales of our therapeutic consumer
products will depend upon a number of factors including our ability to develop,
manufacture and market therapeutic products that are accepted by the market. We
can not assure you that after the asset sale we will be able to generate sales
equal to historic levels or any level. If we are unable to increase the sales
from our therapeutic consumer products division it will have a material adverse
effect on our business.
THERE IS NO PLAN TO DISTRIBUTE ANY OF THE PROCEEDS OF THE ASSET SALE TO
OUR SHAREHOLDERS
We do not intend to distribute any portion of the proceeds from the
asset sale to our shareholders. Currently, we intend to use the proceeds from
the asset sale to fund and grow our therapeutic consumer products division.
MANAGEMENT COULD SPEND OR INVEST THE PROCEEDS FROM THE ASSET SALE IN
WAYS WITH WHICH THE SHAREHOLDERS MAY NOT AGREE, INCLUDING THE POSSIBLE PURSUIT
OF OTHER MARKET OPPORTUNITIES
Our management can spend or invest the proceeds from the asset sale in
ways with which the shareholders may not agree. The investment of these proceeds
may not yield a favorable return. Furthermore, because the market for
therapeutic consumer products is evolving, we may in the future discover new
opportunities that are more attractive. As a result, we may commit resources to
these alternative market opportunities. This action may require us to limit or
abandon our currently planned focus on developing, manufacturing and marketing
our therapeutic consumer products. If we change our product focus we may face
risks that may be different from the risks associated with the therapeutic
consumer products market.
THE ASSET PURCHASE AGREEMENT WILL EXPOSE US TO CONTINGENT LIABILITIES
Under the asset purchase agreement, we have agreed to indemnify Ludlow
and Sherwood for any breach of our representations and warranties contained in
the asset purchase agreement and for other matters. For example, an
indemnification claim by Ludlow or Sherwood might result if our representations
about the assets comprising our conductive products division are later proved to
be incorrect. Significant indemnification claims by Ludlow or Sherwood would
have a material adverse effect on our business. For a description of our
representations and warranties contained in the asset purchase agreement which
are material to our contingent liability, see the section entitled
"Representations and Warranties of Seller" beginning on page __.
RISKS RELATING TO LECTEC
WE HAVE A HISTORY OF LOSSES AND WE EXPECT LOSSES TO CONTINUE FOR THE
FORESEEABLE FUTURE
Although we have generated differing levels of revenue over the last
several years, we have not had profitable operations. We expect to continue to
incur losses for the foreseeable future. We have expended a substantial amount
of our resources in sales and marketing efforts and researching and developing
technology relating to our products.
-7-
We plan to increase our operating expenses as we continue to devote
significant resources to developing our therapeutic consumer products business.
We expect to incur substantial operating losses in the foreseeable future as we
invest in our therapeutic consumer products business. Our losses may increase in
the future, and even if we achieve our revenue targets, we may not be able to
sustain or increase profitability on a quarterly or annual basis. The amount of
future net losses, and the time required to reach profitability, are both highly
uncertain. We cannot assure you that we will ever be able to achieve or sustain
profitability.
OUR SUCCESS DEPENDS ON A SINGLE FAMILY OF PRODUCTS
We have adopted a strategy of focusing our efforts on our therapeutic
consumer products business. As a result, our revenue and profitability depend on
sales of our topical ointment-based products for the application of
over-the-counter drugs. A reduction in demand for these products would have a
material adverse effect on our business. We have relatively limited experience
selling our therapeutic consumer products. Accordingly, we can not assure you
that sales of our therapeutic consumer products represent long-term consumer
acceptance of these products, or that the recent increase in therapeutic
consumer products sales is indicative of future growth rates for sales of these
products. The sustainability of current levels of therapeutic consumer products
sales and the future growth of such sales, if any, will depend on, among other
factors:
* continued consumer trial of our products;
* generation of repeat consumer sales;
* further development and sales of our TheraPatch brand name products;
* development of further relationships with resellers of our products;
* competition from substitute products;
* effective consumer advertising.
We can not assure you that we will maintain or increase our current
level of therapeutic consumer products sales or profits in future periods.
OUR SUCCESS DEPENDS ON OUR RELATIONSHIPS WITH RESELLERS OF OUR PRODUCTS
Approximately 64% of the sales of our consumer patch products during
calendar year 2000 were derived from contract manufacturing agreements with
other companies that act as resellers of our products. Under these agreements,
our products are marketed and sold under another company's brand name and by
another company's sales force. Our success depends in part upon our ability to
enter into additional reseller agreements with new third parties while
maintaining our existing reseller relationships. We believe our relationships
with our existing third party resellers have been a significant factor in the
success to date of our therapeutic consumer products business, and any
deterioration or termination of these relationships would seriously harm our
business.
-8-
Our reseller agreement with Johnson & Johnson Consumer Products Company
and Neutrogena Corporation has an initial term which expires May 24, 2002.
Either party may terminate for breach or insolvency. In addition, the agreement
can be terminated by the reseller on six months notice during any extension of
the initial term. Our reseller agreement with Novartis Consumer Health, Inc. has
an initial term which expires May 15, 2005 and will be renewed for subsequent
one year terms upon the mutual consent of the parties. Novartis may terminate
the agreement for failure to supply adequate quantities of product on ten days
notice to LecTec and for any reason by giving LecTec at least six months prior
written notice. Either party may terminate for breach or insolvency.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO MANAGE ANY GROWTH IN OUR
THERAPEUTIC CONSUMER PRODUCTS BUSINESS
If we are successful in increasing the sales of our therapeutic
consumer products we may be required to expand our operations, particularly in
the areas of research and development, sales and marketing, and manufacturing.
If we are required to expand our operations in these areas, those expansions
will likely result in new and increased responsibilities for management
personnel and place significant strain on our management, operating and
financial systems and other resources. To accommodate any such growth and
compete effectively, we will be required to implement improved information
systems, procedures and controls, and to expand, train, motivate and manage our
work force. Our future success will depend to a significant extent on the
ability of our current and future management personnel to operate effectively
both independently and as a group. We can not assure you that our personnel,
systems, procedures and controls will be adequate to support our future
operations.
We manufacture our therapeutic consumer products in quantities
sufficient to satisfy our current level of sales. To meet any increases in
sales, we may need to increase our production significantly beyond our present
manufacturing capacity. Accordingly, we may be required to increase our
manufacturing capacities. We can not assure you that increasing our capacity can
be accomplished on a profitable basis.
THE MARKET FOR OUR PRODUCTS IS COMPETITIVE AND WE MAY NOT HAVE THE
RESOURCES REQUIRED TO COMPETE EFFECTIVELY
The markets for the therapeutic consumer products we sell are
relatively new and therefore subject to rapid and significant change. We face
significant competition in the development and marketing of these products. We
can not assure you that we will be able to compete effectively in the sale of
our products. Competitors in the United States and abroad are numerous and
include, among others, major pharmaceutical and consumer product companies. Our
competitors may succeed in developing technologies and products that are more
effective than those we are developing and could render our therapeutic consumer
products obsolete and noncompetitive. Many of our competitors have substantially
greater financial and technical resources, marketing capabilities and regulatory
experience. In addition, these companies compete with us in recruiting and
retaining highly qualified personnel. As a result, we cannot assure you that we
will be able to compete successfully with these organizations.
-9-
PATENTS AND OTHER PROPRIETARY RIGHTS PROVIDE UNCERTAIN PROTECTION OF
OUR PROPRIETARY INFORMATION AND OUR INABILITY TO PROTECT A PATENT OR OTHER
PROPRIETARY RIGHT MAY HARM OUR BUSINESS
The patent position of companies engaged in the sale of products such
as ours is uncertain and involves complex legal and factual questions. Issued
patents can later be held invalid by the patent office issuing the patent or by
a court. We can not assure you that our patents will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
us a competitive advantage. In addition, many other organizations are engaged in
research and development of products similar to our therapeutic consumer
products. Such organizations may currently have, or may obtain in the future,
legally blocking proprietary rights, including patent rights, in one or more
products or methods under development or consideration by us. These rights may
prevent us from commercializing new technology, or may require us to obtain a
license from the organizations to use their technology.
We also rely on trade secrets and other unpatented proprietary
information in the manufacturing of our therapeutic consumer products. To the
extent we rely on confidential information to maintain our competitive position,
there can be no assurance that other parties will not independently develop the
same or similar information.
There has been substantial litigation regarding patent and other
intellectual property rights in the consumer products industry. Litigation could
result in substantial costs and a diversion of our effort, but may be necessary
to enforce any patents issued to us, protect our trade secrets or know-how,
defend against claimed infringement of the rights of others or determine the
scope and validity of the proprietary rights of others. We can not assure you
that third parties will not pursue litigation that could be costly to us. An
adverse determination in any litigation could subject us to significant
liabilities to third parties, require us to seek licenses from or pay royalties
to third parties or prevent us from manufacturing or selling our products, any
of which could have a material adverse effect on our business.
WE ARE SUBJECT TO REGULATION BY REGULATORY AUTHORITIES INCLUDING THE
FDA WHICH MAY AFFECT THE MARKETING OF OUR PRODUCTS
The research, development, manufacture, labeling, distribution,
marketing and advertising of our products, and our ongoing research and
development activities, are subject to extensive regulation by governmental
regulatory authorities in the United States and other countries. Failure to
comply with regulatory requirements for marketing our products could subject us
to regulatory or judicial enforcement actions, including, but not limited to,
product recalls or seizures, injunctions, civil penalties, criminal prosecution,
refusals to approve new products and suspensions and withdrawals of existing
approvals. Currently, the majority of our therapeutic consumer products are
regulated as over-the-counter products. We can not assure you that the FDA will
continue to regulate these products as over-the-counter products. If the FDA
changed its approach to regulating our products, we would be faced with
significant additional costs and may be unable to sell some or all of our
products. Any such change would have a material adverse effect on our business.
Delays in obtaining regulatory approvals for any new products could have a
material adverse effect on our business. Even if regulatory approval of a new
product is granted, such
-10-
approval may include significant limitations on the indicated uses of the
product or the manner in which or conditions under which the product may be
marketed.
WE MAY BE REQUIRED TO REDUCE OR ELIMINATE SOME OR ALL OF OUR SALES AND
MARKETING EFFORTS OR RESEARCH AND DEVELOPMENT ACTIVITIES IF WE FAIL TO OBTAIN
ADDITIONAL FUNDING THAT MAY BE REQUIRED TO SATISFY OUR FUTURE CAPITAL
EXPENDITURE NEEDS
We plan to continue to spend substantial funds to expand our sales and
marketing efforts and our research and development activities related to our
therapeutic consumer products. Although we expect that these activities can be
adequately funded in the short term through proceeds from the asset sale and
other current sources of liquidity, long term financing of these activities
could require additional funding in the future. Our future liquidity and capital
requirements will depend upon numerous factors, including the costs and timing
of sales and marketing, manufacturing and research and development activities,
the extent to which our therapeutic consumer products gain market acceptance and
competitive developments. Any additional required financing may not be available
on satisfactory terms, if at all. If we are unable to obtain financing, we may
be required to reduce or eliminate some or all of our sales and marketing
efforts or research and development activities.
WE HAVE LIMITED STAFFING AND WILL CONTINUE TO BE DEPENDENT UPON KEY
EMPLOYEES
Our success is dependent upon the efforts and abilities of our key
employees. If key individuals leave, we could be adversely affected if suitable
replacement personnel are not quickly recruited. Our future success depends upon
our ability to continue to attract and retain qualified scientific, marketing
and technical personnel. There is intense competition for qualified personnel in
all functional areas and competition will make it difficult to attract and
retain the qualified personnel necessary for the development and growth of our
business.
THE PRICE OF OUR COMMON STOCK COULD BE HIGHLY VOLATILE DUE TO A NUMBER
OF FACTORS
The trading price of our common stock may fluctuate widely as a result
of a number of factors, including:
* performance of our therapeutic consumer products in the market;
* regulatory developments in both the United States and foreign
countries;
* market perception and customer acceptance of our therapeutic
consumer products;
* increased competition;
* relationships with resellers of our products;
* economic and other external factors; and
* period-to-period fluctuations in financial results.
-11-
In addition, the price of our common stock has from time to time
experienced significant price and volume fluctuations that may be unrelated to
our operating performance.
WE MAY NOT CONTINUE TO MEET THE REQUIREMENTS FOR CONTINUED LISTING ON
NASDAQ
The National Association of Securities Dealers, Inc., which administers
Nasdaq, has adopted certain criteria for continued eligibility on Nasdaq. In
order to continue to be included on Nasdaq, we must maintain $4 million in net
tangible assets, a public float of 750,000 shares and a $5 million market value
of our public float. In the past, we have come close to not satisfying the $5
million public float requirement. In addition, continued inclusion requires two
market-makers, at least 400 holders of our common stock and a minimum bid price
of our common stock of $1 per share. Our failure in the future to meet these
maintenance criteria, as now in effect or as may be later amended, may result in
the delisting of our common stock from Nasdaq. In such event, trading, if any,
in our common stock may then continue to be conducted in the non-Nasdaq
over-the-counter market in less orderly markets commonly referred to as the
electronic bulletin board and the "pink sheets." As a result, an investor may
find it more difficult to dispose of or to obtain accurate quotations as to the
market value of our common stock. If Nasdaq were to begin delisting proceedings
against us, it could reduce the level of liquidity currently available to our
shareholders. If our common stock were delisted, the price of our common stock
would, in all likelihood, decline.
-12-
THE ANNUAL MEETING OF SHAREHOLDERS
This proxy statement is provided in connection with the 2000 annual
meeting of shareholders of LecTec Corporation, and any adjournment or
postponement of the meeting. The accompanying proxy is solicited by the Board of
Directors of LecTec. This proxy statement and the accompanying form of proxy are
first being sent or given to shareholders beginning on or about February 28,
2001.
WHEN AND WHERE THE ANNUAL MEETING OF SHAREHOLDERS WILL BE HELD
The annual meeting of shareholders of LecTec will be held at the
Minneapolis Marriott Southwest Hotel, 5801 Opus Parkway, Minnetonka, Minnesota
55343, on Thursday, March 29, 2001, at 3:00 p.m. (CST).
WHAT WILL BE VOTED UPON
The Board of Directors is aware of three items of business to be
considered at the annual meeting:
* approval of the sale of certain assets used in LecTec's conductive
products division in accordance with the Asset Purchase Agreement
dated as of November 17, 2000, by and among LecTec, Ludlow and
Sherwood;
* the election of six directors; and
* ratification of the appointment of Grant Thornton LLP, as the
independent auditors for LecTec's current fiscal year.
The Board of Directors knows of no other matters to be presented for
action at the annual meeting. If any other matters properly come before the
annual meeting, however, the persons named in the proxy will vote on such other
matters and/or for other nominees in accordance with their best judgment. This
includes a motion to adjourn or postpone the annual meeting to solicit
additional proxies. However, no proxy voted against the proposal to approve the
asset sale will be voted in favor of an adjournment or postponement to solicit
additional votes in favor of approval of the asset sale.
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE; QUORUM
Holders of record of the shares of LecTec common stock at the close of
business on February 23, 2001, will be entitled to vote on all matters at the
annual meeting. Each share of common stock will be entitled to one vote. On
February 23, 2001, a total of _____ shares of common stock were outstanding. A
majority of the voting power of the outstanding shares of common stock entitled
to vote, represented in person or by proxy, will be required to constitute a
quorum for the annual meeting.
-13-
VOTE REQUIRED
The asset sale must be approved by the holders of a majority of all the
outstanding shares of common stock, whether or not represented at the meeting. A
majority of the shares of common stock present at the meeting, whether
represented in person or by proxy, will be required to elect the directors of
LecTec and to ratify the appointment of Grant Thornton LLP, as the independent
auditors of LecTec.
BOARD RECOMMENDATION
The Board of Directors recommends that an affirmative vote be cast in
favor of all nominees and for each of the proposals listed in the proxy (or
voting instructions) card.
VOTING YOUR SHARES
The LecTec Board of Directors is soliciting proxies from the LecTec
shareholders. By completing and returning the accompanying proxy, you will be
authorizing Rodney A. Young and Douglas J. Nesbit to vote your shares. If your
proxy is properly signed and dated it will be voted as you direct. If you attend
the annual meeting in person, you may vote your shares by completing a ballot at
the meeting.
CHANGING YOUR VOTE BY REVOKING YOUR PROXY
Your proxy may be revoked at any time before it is voted at the annual
meeting by giving notice of revocation to LecTec, in writing, by execution of a
later dated proxy or by attending and voting at the annual meeting.
HOW PROXIES ARE COUNTED
If you return a signed and dated proxy card but do not indicate how the
shares are to be voted, those shares will be voted FOR each of the nominees and
the listed proposals. Votes cast by proxy or in person at the annual meeting
will be tabulated by the election inspectors appointed for the annual meeting.
Shares voted as abstentions on any matter (or a "withhold vote for" as
to directors) will be counted for purposes of determining the presence of a
quorum at the annual meeting and treated as unvoted, although present and
entitled to vote, for purposes of determining the approval of each matter as to
which a shareholder has abstained. As a result, abstentions have the same effect
as voting against a proposal. If a broker submits a proxy that indicates the
broker does not have discretionary authority as to certain shares to vote on one
or more matters, those shares will be counted for purposes of determining the
presence of a quorum at the meeting, but will not be considered as present and
entitled to vote with respect to such matters. As a result, a "broker non-vote"
with respect to the election of directors or ratification of appointment of
auditors will not have the effect of a vote "for" nor a vote "against" those
proposals. Since the MBCA requires the affirmative vote of the holders of a
majority of the outstanding shares of common stock entitled to vote on the
proposal to approve the asset sale, a "broker non-vote" on such proposal will
have the same effect as a vote against the approval of the asset sale.
-14-
COST OF SOLICITATION
All expenses in connection with this solicitation will be paid by
LecTec. Officers, directors and regular employees of LecTec, who will receive no
extra compensation for their services, may solicit proxies by telephone or
electronic transmission.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data should be
read in conjunction with LecTec's consolidated financial statements and related
notes thereto and LecTec's "Management's Discussion and Analysis of Financial
Condition and Results of Operations" which are included in LecTec's annual
report to shareholders for the fiscal year ended June 30, 2000 and LecTec's
Quarterly Reports on Form 10-Q for the quarters ended September 30 and December
31, 2000, each of which are being delivered with this proxy statement.
Unaudited
Six Months
Ended
December 31, Year Ended June 30,
------------------------------------------------------------------------------
2000 2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------ ------------
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net sales $ 8,245,378 $ 14,596,346 $ 12,279,075 $ 12,922,365 $ 12,256,327 $ 13,100,754
Gross profit 2,992,804 5,121,217 (1) 4,093,561 3,715,032 4,324,180 4,969,659
Loss from operations (1,203,197) (2,890,497)(2) (1,771,324) (474,935) (2,215,951)(3) (724,074)
Loss before equity in losses of
unconsolidated subsidiary (1,289,898) (2,859,276)(2) (1,683,257) (404,061) (2,140,660)(3) (632,193)
Equity in losses of
unconsolidated subsidiary -- -- -- -- 126,067 --
Net loss (1,289,898) (2,859,276)(2) (1,683,257) (404,061) (2,266,727)(3) (632,193)
Net loss per common and common
equivalent share
(BASIC AND DILUTED) (.33) (.74)(2) (.43) (.10) (.59)(3) (.17)
Unaudited
Six Months
Ended
December 31, Year Ended June 30,
------------------------------------------------------------------------------
2000 2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------ ------------
CONSOLIDATED BALANCE
SHEET DATA
Cash, cash equivalents and
short-term investments $ 285,670 $ 100,171 $ 1,022,025 $ 2,186,532 $ 1,242,777 $ 800,693
Current assets 5,179,994 5,236,110 5,904,111 6,728,531 6,873,696 5,624,682
Working capital 1,100,455 1,512,561 3,497,926 5,335,861 4,035,084 4,240,024
Property, plant and equipment, net 2,928,073 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 8,360,011 8,474,549 10,132,573 11,317,774 11,837,356 12,494,003
Long-term liabilities 838,718 31,184 217,868 222,000 211,000 174,000
Shareholders' equity 3,441,754 4,719,816 7,508,520 9,703,104 8,787,744 10,935,345
- ------------------
(1) Includes a charge of $85,000 or $.02 per share related to the plan to
exit the medical tape product line.
(2) Includes a charge of $730,000 or $.19 per share related to the plan to
exit the medical tape product line.
(3) Includes a non-recurring restructuring charge of $2,180,353 or $.57 per
share.
-15-
CONDUCTIVE BUSINESS UNAUDITED FINANCIAL STATEMENTS
The following Statements of Assets and Liabilities and Statements of
Operations present certain historical financial data of LecTec's conductive
business on an unaudited basis.
CONDUCTIVE BUSINESS STATEMENTS OF ASSETS AND LIABILITIES
(UNAUDITED)
December 31, June 30, June 30,
2000 2000 1999
------------ ------------ ------------
ASSETS
CURRENT ASSETS
Receivables
Trade, net of allowances of $19,383, $36,765
and $50,556 at December 31, 2000, June 30,
2000 and June 30, 1999 ........................ $ 927,445 $ 1,336,517 $ 1,456,981
Inventories
Raw materials ................................... 739,446 723,269 694,624
Finished goods .................................. 57,081 32,899 19,679
------------ ------------ ------------
796,527 756,168 714,303
------------ ------------ ------------
Total current assets ........................... 1,723,972 2,092,685 2,171,284
PROPERTY, PLANT AND EQUIPMENT - AT COST
Equipment ......................................... 591,385 591,385 583,306
Less accumulated depreciation ..................... 567,307 558,243 539,552
------------ ------------ ------------
24,078 33,142 43,754
OTHER ASSETS
Patents and trademarks, less accumulated
amortization of $168,658, $164,087 and
$156,704 at December 31, 2000, June 30, 2000
and June 30, 1999 ............................... 31,992 20,801 21,117
------------ ------------ ------------
$ 1,780,042 $ 2,146,628 $ 2,236,155
============ ============ ============
LIABILITIES
CURRENT LIABILITIES
Accounts payable .................................. 212,705 244,600 394,503
------------ ------------ ------------
Total liabilities .............................. $ 212,705 $ 244,600 $ 394,503
============ ============ ============
-16-
CONDUCTIVE BUSINESS STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months
Ended
Dec. 31, Years ended June 30,
--------------------------------------------
2000 2000 1999 1998
------------ ------------ ------------ ------------
Net sales ........................... $ 3,100,511 $ 7,429,435 $ 7,715,670 $ 7,906,677
Cost of goods sold .................. 2,250,888 5,193,188 4,739,473 4,326,361
------------ ------------ ------------ ------------
Gross profit ................... 849,623 2,236,247 2,976,197 3,580,316
Operating expenses
Sales and marketing .............. 63,825 194,607 364,577 638,040
General and administrative ....... 548,969 1,322,871 1,575,568 1,291,076
Research and development ......... 109,453 332,879 431,201 634,557
------------ ------------ ------------ ------------
722,247 1,850,357 2,371,346 2,563,673
------------ ------------ ------------ ------------
Income from operations ......... $ 127,376 $ 385,890 $ 604,851 $ 1,016,643
============ ============ ============ ============
-17-
NOTES TO CONDUCTIVE BUSINESS FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Financial Statement Presentation
- --------------------------------
Amounts presented in the Statements of Assets and Liabilities and the Statements
of Operations represent the historical amounts of the assets and liabilities and
operating results of the Conductive Business of LecTec Corporation and
Subsidiaries that will be sold to Ludlow. All amounts presented are specifically
identified as related to the Conductive Business except for a portion of
operating expenses which are related but cannot be specifically identified and
are allocated based upon net sales.
Inventories
- -----------
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market.
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. Estimated
useful lives used in the calculation of depreciation was 4-15 years.
Revenue Recognition
- -------------------
Sales are recognized at the time of shipment.
-18-
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet as of
December 31, 2000, and the unaudited pro forma consolidated statements of
operations for the six months ended December 31, 2000 and for the year ended
June 30, 2000 give effect to the sale of certain assets and liabilities related
to LecTec's conductive products division and the sale of medical tape assets
related to LecTec's plan to exit the medical tape business. The adjustments
related to the unaudited pro forma consolidated balance sheet assume the
transactions were consummated at December 31, 2000, while the adjustments to the
unaudited pro forma consolidated statements of operations assume the
transactions were consummated at July 1, 1999. These unaudited pro forma
financial statements are not necessarily indicative of the results that actually
would have occurred if the sales had been in effect as of and for the periods
presented or the results that may be achieved in the future. These unaudited pro
forma financial statements should be read in conjunction with the historical
financial statements and notes thereto of LecTec Corporation and Subsidiaries.
-19-
LECTEC CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
(UNAUDITED)
Medical
Conductive Tape
Historical Business Business Pro Forma
Financial Pro Forma Pro Forma Financial
Statements Adjustments Adjustments Statements
------------ ------------ ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........... $ 285,620 $ 6,275,000(1) $ 525,675(5) $ 7,086,295
Receivables
Trade ............................. 2,694,225 (946,828)(2) -- 1,747,397
Less: Allowance for doubtful
accounts .......................... (521,715) 19,383(2) -- (502,332)
------------ ------------ ------------ ------------
2,172,510 (927,445) -- 1,245,065
Other ............................. 17,697 -- -- 17,697
------------ ------------ ------------ ------------
2,190,207 (927,445) -- 1,262,762
Inventories
Raw materials ..................... 1,765,434 (739,446)(2) -- 1,025,988
Work-in-process ................... 40,323 -- -- 40,323
Finished goods .................... 487,542 (57,081)(2) -- 430,461
------------ ------------ ------------ ------------
2,293,299 (796,527) -- 1,496,772
Prepaid expenses and other .......... 410,868 -- -- 410,868
------------ ------------ ------------ ------------
Total current assets .............. 5,179,994 4,551,028 525,675 10,256,697
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land ................................ 247,731 -- -- 247,731
Buildings and improvements .......... 1,968,384 -- -- 1,968,384
Equipment ........................... 5,174,453 (591,385)(2) (525,675)(2) 4,057,393
Furniture and fixtures .............. 414,857 -- -- 414,857
------------ ------------ ------------ ------------
7,805,425 (591,385) (525,675) 6,688,365
Less accumulated depreciation ....... 4,877,352 (567,307)(2) -- 4,310,045
------------ ------------ ------------ ------------
2,928,073 (24,078) (525,675) 2,378,320
OTHER ASSETS
Patents and trademarks .............. 1,579,011 (200,650)(2) -- 1,378,361
Less: Accumulated amortization ...... (1,327,067) 168,658 (2) -- (1,158,409)
------------ ------------ ------------ ------------
251,944 (31,992) -- 219,952
------------ ------------ ------------ ------------
$ 8,360,011 $ 4,494,958 $ -- $ 12,854,969
============ ============ ============ ============
-20-
LECTEC CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEETS - CONTINUED
DECEMBER 31, 2000
(UNAUDITED)
Conductive Medical
Historical Business Tape Business Pro Forma
Financial Pro Forma Pro Forma Financial
Statements Adjustments Adjustments Statements
------------ ------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank ..................... $ 343,325 $ -- $ -- $ 343,325
Current maturities of long-term
obligations .............................. 24,125 -- -- 24,125
Accounts payable ......................... 2,795,212 (212,705)(2) -- 2,582,507
Accrued expenses ......................... 766,877 -- -- 766,877
Customer deposits ........................ 150,000 -- -- 150,000
------------ ------------ ------------ ------------
Total current liabilities ........... 4,079,539 (212,705) -- 3,866,834
LONG-TERM OBLIGATIONS, LESS CURRENT
MATURITIES .................................. 838,718 -- -- 838,718
COMMITMENTS AND CONTINGENCIES ............... -- -- -- --
SHAREHOLDERS' EQUITY
Common stock, $.01 par value:
15,000,000 shares authorized;
3,904,465 shares issued and
outstanding at December 31, 2000 ....... 39,157 -- -- 39,157
Additional paid-in capital ............... 11,332,829 -- -- 11,332,829
Accumulated deficit in retained earnings . (7,930,232) 4,707,663 (3) -- (3,222,569)
------------ ------------ ------------ ------------
3,441,754 4,707,663 (4) -- 8,149,417
------------ ------------ ------------ ------------
$ 8,360,011 $ 4,494,958 -- $ 12,854,969
============ ============ ============ ============
BOOK VALUE PER SHARE ........................ $ 0.68 $ 1.21 -- $ 2.09
============ ============ ============ ============
-21-
LECTEC CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
(UNAUDITED)
Conductive Medical
Historical Business Tape Business Pro Forma
Financial Pro Forma Pro Forma Financial
Statements Adjustments(8) Adjustments(9) Statements
------------ -------------- -------------- ------------
Net sales ................................ $ 8,245,378 $ (3,100,511)(6) $ (168,652)(6) $ 4,976,215
Cost of goods sold ....................... 5,252,574 (2,250,888)(6) (200,840)(6) 2,800,846
------------ ------------ ------------ ------------
Gross profit ........................ 2,992,804 (849,623) 32,188 2,175,369
Operating expenses:
Sales and marketing ................... 2,294,571 (63,825)(7) (4,043)(7) 2,226,703
General and administrative ............ 1,459,907 (548,969)(7) (29,861)(7) 881,077
Research and development .............. 441,523 (109,453)(7) (12,618)(7) 319,452
------------ ------------ ------------ ------------
4,1946,001 (722,247) (46,522) 3,427,232
------------ ------------ ------------ ------------
Loss from operations ................ (1,203,197) (127,376) 78,710 (1,251,863)
Other income (expenses)
Interest expense ...................... (72,919) -- -- (72,919)
Other, net ............................ (13,782) -- -- (13,782)
------------ ------------ ------------ ------------
Loss before income taxes ............ (1,289,898) (127,376) 78,710 (1,338,564)
Income taxes ............................. -- -- -- --
------------ ------------ ------------ ------------
Net loss ............................ $ (1,289,898) $ (127,376) $ 78,710 $ (1,338,564)
============ ============ ============ ============
Net loss per share - basic and diluted ... $ (0.33) $ (0.03) $ 0.02 $ (0.34)
============ ============ ============ ============
Weighted average shares outstanding -
basic and diluted ..................... 3,906,415 3,906,415 3,906,415 3,906,415
============ ============ ============ ============
-22-
LECTEC CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000
Conductive Medical
Historical Business Tape Business Pro Forma
Financial Pro Forma Pro Forma Financial
Statements Adjustments(8) Adjustments(9) Statements
------------ -------------- -------------- ------------
(unaudited) (unaudited) (unaudited)
Net sales .............................. $ 14,596,346 $ (7,429,435)(6) $ (2,059,324)(6) $ 5,107,587
Cost of goods sold ..................... 9,475,129 (5,193,188)(6) (2,084,685)(6) 2,197,256
------------ ------------ ------------ ------------
Gross profit ...................... 5,121,217 (2,236,247) 25,361 2,910,331
Operating expenses:
Sales and marketing ................. 3,672,908 (194,607)(7) (72,602)(7) 3,405,699
General and administrative .......... 2,598,998 (1,322,871)(7) (366,679)(7) 909,448
Research and development ............ 1,094,808 (332,879)(7) (174,812)(7) 587,117
Medical tape asset impairment ....... 645,000 -- (645,000)(7) --
------------ ------------ ------------ ------------
8,011,714 (1,850,357) (1,259,093) (4,902,264)
------------ ------------ ------------ ------------
Loss from operations .............. (2,890,497) (385,890) 1,284,454 (1,991,933)
Other income (expenses)
Interest expense .................... (35,405) -- -- (35,405)
Other, net .......................... 27,692 -- -- 27,692
------------ ------------ ------------ ------------
Loss before income taxes .......... (2,898,210) (385,890) 1,284,454 (1,999,646)
Income tax benefit ..................... (38,934) -- -- (38,934)
------------ ------------ ------------ ------------
Net loss .......................... $ (2,859,276) $ (385,890) $ 1,284,454 $ (1,960,712)
============ ============ ============ ============
Net loss per share - basic and diluted . $ (0.74) $ (0.10) $ 0.34 $ (0.50)
============ ============ ============ ============
Weighted average shares outstanding -
basic and diluted .................. 3,885,911 3,885,911 3,885,911 3,885,911
============ ============ ============ ============
-23-
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
(UNAUDITED)
NOTE A--PRO FORMA ADJUSTMENTS
The unaudited pro forma consolidated financial statements of LecTec Corporation
and Subsidiaries give effect to the following pro forma adjustments.
(1) To reflect the cash consideration received for the sale.
Estimated net proceeds consist of the purchase price of
$7,250,000 less transaction costs of $975,000.
(2) To reflect the sale of assets and liabilities.
(3) The pro forma gain on sale is as follows:
Sale proceeds............................. $ 7,250,000
Net asset value sold...................... (1,567,337)
Transaction costs......................... (975,000)
-------------
Gain on sale.......................... $ 4,707,663
=============
(4) The net assets sold of $1,567,337 per the unaudited Conductive
Business Statements of Assets and Liabilities at December 31,
2000 differ from the Pro Forma Consolidated Balance Sheet--
Conductive Business Pro Forma Adjustments by the amount of the
net sales proceeds of $6,275,000.
(5) To reflect the cash consideration received for the sale.
Estimated net proceeds consist of the purchase price of
$650,000 less transaction costs of $124,325.
(6) To reflect sales and cost of goods sold specifically
identified as Conductive Business or Medical Tape Business.
(7) To reflect operating expenses, a portion of which is
specifically identified as Conductive Business or Medical Tape
Business expenses and a portion that is allocated based on net
sales.
(8) The gain on sale for the conductive products division is
estimated to be $4,707,663 and is not included in the pro
forma consolidated statement of operations for the six months
ended December 31, 2000.
-24-
(9) The gain on sale for the Medical Tape Products division is
expected to be zero and is not included in the pro forma
consolidated statement of operations for the six months ended
December 31, 2000.
-25-
PROPOSAL 1:
APPROVAL OF THE ASSET SALE
----------
THE SALE OF THE CONDUCTIVE BUSINESS ASSETS
THE COMPANIES
LECTEC
Upon completion of the asset sale, LecTec will focus its efforts on the
design, manufacture and marketing of topical ointment-based products for the
application of over-the-counter drugs. These therapeutic products use a hydrogel
coated onto a breathable cloth to deliver over-the-counter drugs and other
therapeutic compounds onto the skin. Products currently manufactured using this
technology are analgesics for localized pain relief, cooling gel comfort strips,
vapor cough suppressants, anti-itch and acne treatment products, wart removers,
and a corn and callus remover. The analgesic, cooling and anti-itch products are
marketed under the LecTec brand name TheraPatch(R). The acne treatment, wart
removers and corn and callus removers are sold by LecTec to certain customers
who then market them under their own brand name. The vapor cough suppressant
products are marketed under the TheraPatch brand name as well as under the brand
name of certain customers.
LUDLOW AND SHERWOOD
The Ludlow Company LP and Sherwood Services AG are both wholly owned
subsidiaries of Tyco International Ltd. Tyco is a diversified manufacturing and
service company. As a member of Tyco's healthcare group, Ludlow manufactures and
sells a variety of disposable medical products, specialized paper and film
products. These include medical electrodes and gels for monitoring and
diagnostic tests and hydrogel wound care products, which are used primarily in
critical care, physical therapy and rehabilitative departments in hospitals.
Sherwood is a Swiss corporation which owns certain intellectual property assets
licensed to Tyco and its subsidiaries.
THE ASSET SALE
Pursuant to the asset purchase agreement, LecTec will sell and transfer
to Ludlow certain assets and liabilities related to LecTec's conductive products
division. That division produces physiological monitoring and stimulation
products such as diagnostic electrodes and electrically conductive adhesive
hydrogels. LecTec is retaining its therapeutic consumer products division which
manufactures patches for the topical application of therapeutic compounds. Both
divisions use hydrogel technology, but the electrically conductive hydrogels
used in the conductive products division are distinct from the skin interface
hydrogels used in the consumer products division.
The intellectual property rights associated with the hydrogels used in
the products manufactured by LecTec's conductive products division will be sold
to Sherwood. The intellectual property associated with the consumer products
division will be retained by LecTec. In connection with the asset sale, LecTec
will dispose of nine patents and retain 26 patents. LecTec does not
-26-
believe that the patents and other intellectual property acquired by Sherwood
will facilitate competition with LecTec's retained consumer patch business. As
discussed below, Ludlow has entered into a noncompetition agreement that
precludes Ludlow from using the assets acquired from LecTec to compete in the
consumer patch market.
LecTec is currently a Food and Drug Administration, or FDA, registered
medical device manufacturer and pharmaceutical manufacturer. After the asset
sale, LecTec will no longer be a medical device manufacturer. The products
manufactured by LecTec's continuing consumer products division are classified as
either non-drugs or over-the-counter, or OTC, drugs, which are either not
regulated or regulated with published FDA OTC monographs, which are used to
regulate drugs that contain ingredients known to be safe and effective. The
monographs set out acceptable ingredients, combinations, concentrations and
specific labeling requirements. After the asset sale, LecTec will continue to be
subject to adverse event reporting. To date, LecTec has reported no adverse
events.
As a result of the asset sale, LecTec will lose one of its significant
customers, Spacelabs Burdick Inc., which accounted for 17% of fiscal 2000 sales.
Following the asset sale, there will be an increase in the portion of our
business attributable to our remaining material customers Johnson & Johnson
Consumer Products Company and Novartis Consumer Health, Inc. LecTec's margins
will be lower during the term of the manufacturing and supply agreement
discussed below. Following the expiration of that agreement LecTec expects
margins to improve since the consumer products division produces higher margin
products than the conductive products division. International sales from the
continuing consumer products division will initially be limited to Canada, which
accounted for 25.1% of LecTec's international sales in calendar year 2000.
Upon the approval of the asset sale and the closing of the transactions
contemplated by the asset purchase agreement, LecTec will receive a total
purchase price of $7,250,000 in cash. The purchase price will be subject to a
post closing adjustment as more fully described below. Ludlow and Sherwood
intend to fund the purchase price from cash on hand.
BACKGROUND OF THE ASSET SALE
During the last several years, the Board of Directors of LecTec has
explored several strategic alternatives for maximizing shareholder value,
including a sale of the entire business, sales of one or more of the Company's
product lines, or retaining all of its products and outsourcing its
manufacturing and production operations. Ultimately, the Board concluded that
the Company should retain the consumer products division with its comparatively
higher margins and current growth in revenues. As a result, the Board has
endorsed the strategy of selling LecTec's conductive products division and
focusing its full efforts on its consumer products division.
Over the past two years, Ludlow has made several overtures to LecTec
regarding the possible sale of LecTec's conductive products division. Although
Ludlow expressed its general interest, LecTec did not receive any formal or
informal offers from Ludlow prior to the negotiations which led to signing of
the asset purchase agreement for the asset sale. In October 1999, Lee Carrier,
Ludlow's Divisional President, and Teresa Hacunda, Ludlow's Director of New
Business and Strategic Development, met with Rod Young, LecTec's President and
Chief
-27-
Executive Officer, and Deborah Moore, then the Chief Financial Officer of
LecTec, regarding the possible acquisition of the conductive products division.
Following this meeting, Ms. Hacunda sent a letter to Ms. Moore on November 30,
1999, requesting certain financial and organizational information about LecTec.
Ms. Moore complied with that request in December 1999.
In January 2000, Mr. Carrier and Ms. Hacunda met with Mr. Young and Ms.
Moore and Kevin Davidson from Arthur Andersen LLP, LecTec's mergers and
acquisitions advisor at the time, to further discuss Ludlow's possible
acquisition of LecTec's conductive products division. On January 20, 2000, Mr.
Carrier sent a letter to Mr. Davidson expressing Ludlow's desire to make a
formal offer for the conductive products division. On February 2, 2000, LecTec's
Board of Directors met and discussed the possibility of negotiating with Ludlow
the sale of the conductive products division. After discussion of the matter,
LecTec's Board of Directors decided not to pursue a transaction with Ludlow at
that time. The Board's decision not to pursue a transaction with Ludlow at that
time was based on two reasons. First, the Board of Directors wanted to keep open
the possibility of other strategic alternatives for LecTec that would include a
sale of the entire business. Second, in order to assess the merits of an offer
from Ludlow, the Board of Directors wanted more information about other
potential purchasers and their level of interest. It was felt that a more formal
process for selling the conductive products division was needed in order to
elicit that information.
On March 6, 2000, LecTec engaged Goldsmith, Agio, Helms Securities to
assist LecTec in analyzing alternatives to maximize shareholder value. The
alternatives analyzed were those under consideration by the Board of Directors,
namely, whether to pursue the sale of LecTec as a whole or to pursue the sale of
one or more divisions. In addition, the Board concluded that LecTec would
benefit from Goldsmith, Agio, Helms Securities' experience in investment banking
and their ability to conduct a formal sale of one or more divisions. In
connection with this engagement, and after that the Board decided to pursue a
strategy of retaining LecTec's consumer products division, Goldsmith, Agio,
Helms Securities agreed to assist LecTec with potential transactions involving
two of its operating divisions, the conductive products division and the medical
tape division.
In May and June of 2000, Goldsmith, Agio, Helms Securities had numerous
discussions with officers and key employees of LecTec, toured LecTec's
facilities, reviewed publicly available and non-public information regarding
LecTec and worked with LecTec management to prepare a confidential memorandum
describing the conductive products division (the "Confidential Memorandum").
Goldsmith, Agio, Helms Securities and LecTec used their formal and
informal contacts in the healthcare and investing community to identify
potential purchasers for LecTec's conductive products division. During July and
August of 2000, Goldsmith, Agio, Helms Securities approached 70 potential buyers
with respect to such a transaction. Out of the 70 potential buyers, ten executed
confidentiality agreements and received the Confidential Memorandum. Goldsmith,
Agio, Helms Securities contacted each of the ten potential buyers who received
the Confidential Memorandum after each potential buyer had had several weeks to
review the Confidential Memorandum. Goldsmith, Agio, Helms Securities then
sought an initial indication of interest from each potential buyer.
-28-
Initial indications of interest were received from four parties and
each of those parties was invited to attend a meeting with management of LecTec
and Goldsmith, Agio, Helms Securities. Meetings with the four prospective buyers
were held in August and September of 2000. After the meetings, one potential
buyer withdrew from the process when they learned that the sale of the
conductive products division assets did not include certain equipment that the
buyer was interested in obtaining. Three buyers, including Ludlow, continued to
express an interest in purchasing the conductive products division from LecTec.
These expressions of interest described proposed transactions, subject in each
case to further due diligence investigations and negotiation of definitive
agreements. LecTec and Goldsmith, Agio, Helms Securities evaluated the potential
purchasers in light of their expressed interest and concluded that further
negotiations with Ludlow would yield the most satisfactory result because the
other potential purchasers were interested in less than all of the assets up for
sale. On October 2, 2000, Goldsmith, Agio, Helms Securities informed Ludlow that
LecTec had decided to enter into exclusive negotiations with Ludlow regarding
the sale of LecTec's conductive products division.
Throughout the first two weeks of October 2000, representatives of
LecTec and Ludlow engaged in numerous formal and informal telephone conferences.
On October 2, 2000, the date LecTec chose to enter into exclusive negotiations
with Ludlow, representatives of LecTec and Ludlow, together with representatives
of Goldmsith, Agio, Helms Securities, held a telephone conference to agree upon
the purchase price Ludlow would pay for the conductive products division,
subject to due diligence, as well as to discuss the structure of the transaction
and the logistics of transitioning the conductive products business. At this
time, the parties agreed that the purchase price would be $9 million, subject to
due diligence. On October 10, 2000, representatives of Ludlow spoke with
representatives of Goldsmith, Agio, Helms Securities to discuss possible dates
for Ludlow to conduct its due diligence investigation of the conductive products
division. From October 16, through October 18, 2000, LecTec hosted due diligence
meetings between senior executives of LecTec and representatives of Ludlow in
order to provide additional information to Ludlow regarding financial and
operational matters and to refine the terms and conditions of the proposed
transaction.
On October 17, 2000, Ludlow presented to LecTec a proposed asset
purchase agreement. Throughout the course of the next several weeks,
representatives of LecTec and Ludlow negotiated the terms and conditions of the
asset purchase agreement and several ancillary agreements. Sherwood, which is
under common control with Ludlow and did not participate directly in those
negotiations, was represented by Ludlow in those negotiations. On October 31,
2000, representatives of LecTec, Ludlow, and Goldsmith, Agio, Helms Securities
held a telephone conference to discuss the asset purchase agreement and to
discuss the results of Ludlow's due diligence investigation of the conductive
products division. On November 2, 2000, representatives of LecTec, Ludlow, and
Goldsmith, Agio, Helms Securities held a telephone conference during which
Ludlow announced that the purchase price it was willing to pay for the
conductive products division had decreased to $7 million. Ludlow explained that
the lower offer was a result of their due diligence investigation which showed
that the accounts receivable which were attributable to the conductive products
division were lower than Ludlow had previously estimated. On November 6, 2000,
representatives of LecTec, Ludlow, and Goldsmith, Agio, Helms Securities held a
telephone conference during which LecTec and Ludlow agreed upon the final
purchase price
-29-
of $7.25 million for the assets of the conductive products division. The parties
reached agreement on a definitive form of asset purchase agreement during the
week of November 13, 2000.
On November 17, 2000, LecTec's Board of Directors met to consider
approval of the asset purchase agreement. On that same date, Goldsmith, Agio,
Helms Securities delivered to LecTec's Board of Directors its oral opinion,
which was confirmed in writing, to the effect that, as of such date, and subject
to the assumptions, procedures and limitations set forth in the opinion, the
proposed sale consideration to be received by LecTec pursuant to the asset
purchase agreement is fair to LecTec from a financial point of view. The written
opinion of Goldsmith, Agio, Helms Securities constitutes a part of this proxy
statement and is attached hereto as Exhibit B. LecTec's Board of Directors
thoroughly discussed the proposed sale of the conductive products division, the
asset purchase agreement and the opinion of Goldsmith, Agio, Helms Securities.
At the conclusion of the meeting, LecTec's Board of Directors unanimously
approved the asset purchase agreement and unanimously recommended approval of
the asset sale by LecTec's shareholders.
On November 17, 2000, the parties executed the asset purchase
agreement. A press release announcing the execution of the definitive asset
purchase agreement was issued by LecTec on November 20, 2000.
REASONS FOR THE ASSET SALE
LecTec believes that the strategic sale of its conductive products
division will provide LecTec with the financial and operational ability to fund
and grow its therapeutic consumer products division. The asset sale will allow
LecTec to receive cash in exchange for the assets of the conductive products
division and focus LecTec's full operational capacity on its therapeutic
consumer products division.
In arriving at its determination that the asset sale is in the best
interest of LecTec and its shareholders, the Board of Directors carefully
considered the terms of the asset purchase agreement. As part of this process,
the Board of Directors considered the advice and assistance of its outside
financial and legal advisors. In determining to authorize the asset sale, the
Board of Directors considered the following factors:
* The fact that the $7,250,000 offered by Ludlow represents approximately
$1.86 per share of LecTec common stock outstanding, compared to the
$2.00 closing price of LecTec's common stock on November 17, 2000. The
Board felt that the price for the assets in relation to LecTec's share
price was a positive factor, especially in light of the fact that after
the sale LecTec will continue to own and operate its therapeutic
consumer products operations;
* The written opinion of Goldsmith, Agio, Helms Securities, LecTec's
financial advisor, that the consideration to be received by LecTec
pursuant to the asset sale is fair to LecTec from a financial point of
view;
* The absence of other offers that are superior to Ludlow's offer in
light of all the terms and conditions presented by Ludlow, including
the ability for LecTec to retain certain hydrogel
-30-
manufacturing equipment which LecTec requires in the operation of its
therapeutic consumer products division;
* The terms and conditions of the asset purchase agreement, including the
fiduciary out provision negotiated by LecTec, which allows LecTec to
consider unsolicited offers to purchase the conductive products
division assets;
* The fact that there is no termination fee payable to Ludlow if the
asset purchase agreement is terminated by LecTec which provides LecTec
with additional flexibility if it becomes necessary to terminate the
agreement;
* The fact that the asset purchase agreement requires that the sale be
approved by a majority of LecTec's shareholders which ensures that the
board will not be taking action which the shareholders disapprove of;
* The fact that the sale consideration consists of entirely of cash which
eliminates the risks associated with financing contingencies or
receiving consideration which is paid in securities with a fluctuating
share price;
* The risk that after the asset sale LecTec will have a less diversified
business which would leave LecTec dependent on the performance of its
consumer products division;
* The risk that LecTec could be exposed to future indemnification
payments for a breach of the representations and warranties contained
in the asset purchase agreement;
* The negative fact that as part of the asset sale LecTec will enter into
a manufacturing and supply agreement that will require LecTec to supply
products from the conductive products division for a period of nine
months which will delay the transition of a portion of LecTec's
manufacturing capacity; and
* The risk that the purchase price for the conductive products division
assets will be adjusted down if there is a change in the net asset
value of the assets sold. Despite this risk, the Board has not based
its recommendation on the receipt of any minimum amount of
consideration.
In view of the variety of factors considered in connection with its
evaluation of the asset sale, the Board of Directors did not find it practical
to, and did not quantify or otherwise attempt to assign, relative weights to the
specific factors considered in reaching its conclusions.
With respect to liquidation value, the Board of Directors considered
that the conductive products division's liquidation value would likely be lower
than the valuation of this division as a going concern because of the value
placed on an existing customer base and on existing revenue stream. As a result,
the division's liquidation value does not provide a useful comparison for
assessing the fairness of the sale consideration. With respect to book value,
the Board of Directors considered that the historic costs of the assets being
sold would also undervalue the conductive
-31-
products division because of the historic costs do not take into account the
present value of the revenue stream created by these assets.
RECOMMENDATION OF LECTEC'S BOARD OF DIRECTORS
The Board of Directors has determined that the asset sale is in the
best interests of LecTec and LecTec's shareholders. The Board of Directors has
unanimously approved the asset purchase agreement and unanimously recommends
that shareholders vote in favor of the proposal to approve the asset sale.
OPINION OF LECTEC'S FINANCIAL ADVISOR
As described above, LecTec engaged Goldsmith, Agio, Helms Securities to
act as its exclusive financial advisor in connection with strategic
alternatives, including LecTec's sale of its conductive products division. In
connection with the asset sale and pursuant to the terms of an engagement
agreement, LecTec requested that Goldsmith, Agio, Helms Securities evaluate the
fairness to LecTec, from a financial point of view, of the consideration be
received by LecTec pursuant to the sale of its conductive products division. On
November 17, 2000, Goldsmith, Agio, Helms Securities delivered to the Board of
Directors its oral opinion, which was confirmed in writing, to the effect that,
as of such date, and subject to the assumptions, procedures and limitations set
forth in the opinion, the proposed sale consideration to be received by LecTec
pursuant to the asset purchase agreement is fair to LecTec from a financial
point of view.
SELECTION OF GOLDSMITH, AGIO, HELMS SECURITIES; FEE AND OTHER
INFORMATION. Goldsmith, Agio, Helms Securities is a nationally recognized
investment banking firm which, as a customary part of its business, is engaged
in the valuation of businesses and securities in connection with mergers and
acquisitions, private placements, and valuations for corporate and other
purposes. The Board of Directors of LecTec selected Goldsmith, Agio, Helms
Securities based upon Goldsmith, Agio, Helms Securities' reputation, experience
and familiarity with companies like LecTec. Goldsmith, Agio, Helms Securities
was engaged by LecTec on March 6, 2000, to pursue various strategic
alternatives, including the sale of the conductive products division.
Pursuant to a letter agreement with LecTec dated March 6, 2000, and
amended November 17, 2000 (the "Engagement Letter"), Goldsmith, Agio, Helms
Securities was entitled to a fee of $125,000 after delivering its opinion. Upon
consummation of the asset sale, Goldsmith, Agio, Helms Securities is entitled to
cash compensation of approximately $275,000. Goldsmith, Agio, Helms Securities
also received a retainer of $10,000 per month for each of the six months ended
September 30, 2000. LecTec has agreed to reimburse Goldsmith, Agio, Helms
Securities for out-of-pocket expenses, including reasonable fees and expenses of
counsel, and to indemnify Goldsmith, Agio, Helms Securities for liabilities and
expenses arising out of the asset sale or transactions in connection with the
asset sale, including liabilities under federal securities laws. The terms of
the fee agreement with Goldsmith, Agio, Helms Securities, which are customary in
transactions of this nature, were negotiated at arm's length between LecTec and
Goldsmith, Agio, Helms Securities, and the Board of Directors was aware of such
arrangement.
-32-
The Engagement Letter further provides for fees to be paid to
Goldsmith, Agio, Helms Securities in the event certain other transactions are
consummated during the term of the Engagement Letter or within 12 months
following termination of the Engagement Letter. The other transactions covered
by the Engagement Letter include any sale, exchange or other disposition of all
or a material portion of LecTec, whether accomplished by a sale of assets or
stock or through a merger, tender or exchange offer, joint venture, equity
investment, recapitalization or other transaction which changes the financial
structure, control or ownership of the company. The fees in connection with such
transactions range from $150,000 (plus 7.5% of total consideration over $1.8
million) for the sale of the medical tape division to $500,000 (plus 3% to 5% of
valuation in excess of $3.00 per share) for a sale of at least 50% of LecTec's
common stock.
GENERAL. The type and amount of consideration payable in the asset sale
and the payment and other terms were determined through negotiation between
LecTec and Ludlow. Although Goldsmith, Agio, Helms Securities provided financial
advice to LecTec during the course of the negotiations, Goldsmith, Agio, Helms
Securities did not recommend the amount of the consideration to be paid in the
sale or the payment or other terms and the decision to enter into the asset
purchase agreement was solely that of LecTec's Board of Directors. Goldsmith,
Agio, Helms Securities' opinion as to the fairness of the consideration was only
one of many factors considered by the Board of Directors in the Board's
evaluation of the sale.
A copy of Goldsmith, Agio, Helms Securities' opinion dated November 17,
2000, which sets forth the assumptions made, matters considered, and limits on
the review taken, is attached as Exhibit B to this proxy statement. You are
urged to read the Goldsmith, Agio, Helms Securities opinion in its entirety. The
description set forth below of Goldsmith, Agio, Helms Securities' opinion is
qualified in its entirety by reference to the full text of the opinion.
Goldsmith, Agio, Helms Securities' opinion is rendered for the benefit and use
of the Board of Directors in connection with the Board of Directors'
consideration of the asset sale and does not constitute a recommendation to any
holder of LecTec common stock as to how such shareholder should vote with
respect to the asset sale.
In arriving at its opinion, Goldsmith, Agio, Helms Securities undertook
such reviews, analyses and inquiries as it deemed necessary and appropriate
under the circumstances. Among other things, Goldsmith, Agio, Helms Securities
(i) reviewed the asset purchase agreement; (ii) analyzed financial and other
information that is publicly available relating to LecTec and its assets and
liabilities; (iii) analyzed certain financial and operating data of LecTec and
the conductive products division that was made available to Goldsmith, Agio,
Helms Securities by LecTec; (iv) visited the facilities of LecTec and discussed
with management of LecTec the financial condition, operating results, business
outlook and prospects of LecTec and the conductive products division; (v) held
discussions with certain third parties with respect to their interest in
acquiring or merging with all or part of LecTec's conductive products division;
(vi) analyzed the valuations of publicly traded companies that Goldsmith, Agio,
Helms Securities deemed comparable to the conductive products division; and
(vii) performed a comparable merger and acquisition analysis for LecTec's
conductive products division
In arriving at it opinion, Goldsmith, Agio, Helms Securities relied
upon and assumed the accuracy, completeness, and fairness of the financial
statements and other information furnished
-33-
by, or publicly available relating to, LecTec and the conductive products
division or otherwise made available to Goldsmith, Agio, Helms Securities, and
relied upon and assumed that the representations and warranties of LecTec and
Ludlow contained in the asset purchase agreement are true and correct.
Goldsmith, Agio, Helms Securities was not engaged to, and did not attempt to or
assume responsibility to, verify independently such information. Goldsmith,
Agio, Helms Securities further relied upon assurances by LecTec that the
information provided to Goldsmith, Agio, Helms Securities had a reasonable
basis, and with respect to projections and other business outlook information,
reflects the best currently available estimates, and that LecTec is not aware of
any information or fact that would make the information provided to Goldsmith,
Agio, Helms Securities incomplete or misleading. Goldsmith, Agio, Helms
Securities also assumed that LecTec and Ludlow will each perform all of the
covenants and agreements to be performed by it under the asset purchase
agreement as set forth in the asset purchase agreement would be satisfied and
that the sale would be consummated on a timely basis in the manner contemplated
by the asset purchase agreement. In arriving at its opinion, Goldsmith, Agio,
Helms Securities did not perform any appraisals or valuations of specific assets
or liabilities of LecTec and expressed no opinion regarding the liquidation
value of LecTec or any of its assets. Goldsmith, Agio, Helms Securities' opinion
is based upon the information available to it and the facts and circumstances as
they existed and were subject to evaluation on the date of such opinion. Events
occurring after the date of Goldsmith, Agio, Helms Securities' opinion could
materially affect the assumptions used in preparing such opinion and the
conclusions reached therein. However, Goldsmith, Agio, Helms Securities does not
have any obligation to update, revise or reaffirm its opinion.
Goldsmith, Agio, Helms Securities relied, with respect to legal and
accounting matters related to the asset purchase agreement, on the advice of
LecTec's legal and accounting advisors. Goldsmith, Agio, Helms Securities made
no independent investigation of any legal or accounting matters that may affect
LecTec and assumed the correctness of the legal and accounting advice provided
to LecTec and its Board of Directors.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the Goldsmith, Agio, Helms Securities analyses set forth below does not
purport to be a complete description of the presentation by Goldsmith, Agio,
Helms Securities to the Board of Directors. In arriving at its opinion,
Goldsmith, Agio, Helms Securities did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly,
Goldsmith, Agio, Helms Securities believes that its analyses and the summary set
forth below must be considered as a whole and that selecting portions of its
analyses, or of the summary, without considering all factors and analyses, could
create an incomplete view of the processes underlying the analyses set forth in
Goldsmith, Agio, Helms Securities' presentation to the Board of Directors and
its opinion.
The analyses performed by Goldsmith, Agio, Helms Securities (and
summarized below) are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than those
suggested by such analyses. Additionally, analyses relating to the values of
businesses do not purport to be appraisals or reflect the prices at which
businesses actually may be acquired. Also, Goldsmith, Agio, Helms Securities did
not consider the effects of the proposed sale of the conductive products
division on the future performance of the remaining
-34-
assets of LecTec, nor did Goldsmith, Agio, Helms Securities express an opinion
as to LecTec's planned use of proceeds arising from the proposed sale.
Furthermore, Goldsmith, Agio, Helms Securities has expressed no opinion as to
the prices at which LecTec's shares may trade following the date of Goldsmith,
Agio, Helms Securities' opinion or following the consummation of the proposed
sale of the conductive products division.
OVERVIEW OF ANALYSIS. Goldsmith, Agio, Helms Securities' analysis of
LecTec's value incorporated a review of LecTec's conductive products division
only, and Goldsmith, Agio, Helms Securities did not conduct a valuation of
LecTec in its entirety in rendering its fairness opinion with respect to the
sale.
Because LecTec's conductive products division is an independent
component of LecTec's business, Goldsmith, Agio, Helms Securities analyzed this
component separately as described below. The following summarizes the analyses
performed relative to the conductive products division being sold.
ANALYSIS OF PUBLICLY TRADED COMPARABLE COMPANIES. Goldsmith, Agio,
Helms Securities analyzed selected historical and projected financial,
operating, and stock market data of LecTec, and other publicly traded companies
that Goldsmith, Agio, Helms Securities deemed to be comparable to the conductive
products division. In performing this comparable company analysis, Goldsmith,
Agio, Helms Securities recognized that no one company is identical to LecTec.
None of the eight companies analyzed has the exact same products, strategy,
markets, or revenue size as LecTec. However, the eight companies chosen by
Goldsmith, Agio, Helms Securities generally are subject to the same
macroeconomic forces, such as customer demand, material supply, regulatory
constraints, technological change, and barriers to entry.
The eight companies deemed by Goldsmith, Agio, Helms Securities to be
reasonably comparable to the conductive products division in terms of products
and services offered, markets served and business prospects were: (1) Advanced
Polymer Systems, (2) Chattem Inc., (3) CNS, Inc., (4) Del Laboratories, (5) Hi
Tech Pharmacal Co., Inc., (6) Rehabilicare, Inc., (7) PDK Labs, Inc., and (8)
Perrigo Company. No company utilized in the comparable company analysis is
identical to the conductive products division. Accordingly, an analysis of the
results of the foregoing necessarily involves complex considerations and
judgments concerning the differences in financial and operating characteristics
of the conductive products division and other factors that could affect the
public trading value of the comparable companies to which it is being compared.
Goldsmith, Agio, Helms Securities examined certain publicly available
financial data of the comparable companies including the ratio of firm value
(equity value plus total debt less cash and equivalent) to latest-twelve month,
or LTM, revenue. Goldsmith, Agio, Helms Securities implied a 25% discount to the
comparable companies ratios because all of the comparable companies were
significantly larger than the conductive products division in sales and
profitability. Goldsmith, Agio, Helms Securities selected 25% as the appropriate
discount in this and in subsequent analyses based upon its experience in
mergers, acquisitions and valuations involving companies of various sizes and
the relative values applied in such transactions.
-35-
This analysis showed that after application of the 25% discount, the
comparable companies had a multiple of firm value to LTM revenue ranging from
.23x to 2.48x with a median of .45x and a mean of .75x.
By applying median and mean ratios derived from the comparable company
analysis to the LTM revenues of the conductive products division, the conductive
products division's implied value ranged from $3,400,000 to $5,600,000.
ANALYSIS OF SELECTED MERGER AND ACQUISITION TRANSACTIONS. Goldsmith,
Agio, Helms Securities compared the valuation of the conductive products
division with selected comparable merger and acquisition transactions. No
transaction analyzed in the comparable transaction analysis is identical to the
sale of the conductive products division. Accordingly, an analysis of the
results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the conductive products division and other factors that could affect the
acquisition value of the companies to which it is being compared.
Goldsmith, Agio, Helms Securities performed an analysis of 13 merger
and acquisition transactions involving medical products component manufacturing
companies that occurred between October 1, 1998 and November 1, 2000. Each of
the transactions was selected based on the dollar value of the transaction and
the fact that each transaction involved medical products companies. Goldsmith,
Agio, Helms Securities' analysis focused on multiples of transaction value to
LTM revenues because other income statement measures were not publicly available
for most of the acquired companies. Goldsmith, Agio, Helms Securities implied a
10% discount to the multiples generated from these merger and acquisition
transactions due to the conductive products division's small size relative to
the other transactions. This analysis of 13 merger and acquisition transactions
showed that after application of the 10% discount, transaction value to revenue
multiples ranged from .54x to 1.98x. By applying the median and mean multiples
derived from the selected merger and acquisition transactions to the LTM
revenues of the conductive products division, implied equity value ranged from
$6,100,000 to $7,500,000.
PROCEEDS OF THE ASSET SALE
The proceeds of the asset sale will be retained by LecTec. It is the
intention of LecTec's Board of Directors to use the proceeds along with other
cash and cash equivalents held by LecTec to fund and grow LecTec's therapeutic
consumer products division. Pending any such use, the net proceeds of the asset
sale, after deduction of the expenses incurred by LecTec in connection with the
asset sale, will be invested in U.S. government securities.
SALE OF LECTEC'S MEDICAL TAPE EQUIPMENT
As previously announced, LecTec is in the process of divesting certain
assets that were formerly used in LecTec's discontinued medical tape business.
In connection with this divestiture, and as of the date of this proxy statement,
LecTec is in negotiations with Ludlow and other potential purchasers for the
possible sale of certain medical tape equipment. LecTec expected that the sale
of the medical tape equipment would be complete by December 31, 2000, but delays
in negotiations and management's focus on the sale of the conductive products
division have delayed
-36-
the sale of the medical tape equipment. The sale of the medical tape equipment
is not conditioned on, or otherwise connected to, the sale of LecTec's
conductive products division assets to Ludlow. The sale of the medical tape
equipment is consistent with LecTec's strategy of focusing on its consumer
products division. Other than following from the same strategic plan for LecTec,
the pending sale of the medical tape equipment did not affect the Board of
Director's recommendation regarding the sale of the conductive products
division.
SHAREHOLDER APPROVAL OF THE ASSET SALE; VOTE REQUIRED
Under section 302A.661 of the Minnesota Business Corporation Act, or
MBCA, the sale by LecTec of "all or substantially all" of its assets requires
approval by the affirmative vote of the holders of a majority of the voting
power of all outstanding shares of LecTec common stock on the record date.
LecTec, in consultation with its legal counsel, has determined that the sale of
the conductive products division assets to Ludlow and Sherwood may constitute a
sale of "all or substantially all" of LecTec's assets based on current
interpretations of that term. Thus, the asset purchase agreement provides that,
as a condition to LecTec's obligation to consummate the transactions
contemplated by the asset purchase agreement, the affirmative vote of the
holders of at least fifty percent of the voting power of all outstanding shares
of LecTec common stock on the record date must be obtained.
RIGHTS OF DISSENTING SHAREHOLDERS
Under the MBCA, holders of LecTec common stock are entitled to certain
dissenters' rights in connection with the asset sale. The following is a summary
of the rights of the shareholders of LecTec who dissent from the asset sale. The
summary does not purport to be complete and is qualified in its entirety by
reference to Sections 302A.471 and 302A.473 of the MBCA, or the Minnesota
Dissenters' Rights Statute, a copy of which is attached as Exhibit C to this
proxy statement.
Under the MBCA, shareholders have the right to dissent from the asset
sale and, subject to certain conditions provided for under Minnesota law, are
entitled to receive payment of the fair value of their shares of common stock.
Assuming shareholder approval of the asset sale, shareholders will be bound by
the terms of the asset purchase agreement unless they dissent by complying with
all of the requirements of the Minnesota Dissenters' Rights Statute. Any
shareholder contemplating exercising the right to demand payment for their
shares should carefully review the Minnesota Dissenters' Rights Statute, a copy
of which is included as Exhibit C to this proxy statement, and in particular the
procedural steps. A SHAREHOLDER WHO FAILS TO COMPLY WITH THESE PROCEDURAL
REQUIREMENTS MAY LOSE THE RIGHT TO DISSENT.
Set forth below, to be read in conjunction with the full text of the
Minnesota Dissenters' Rights Statute, is a summary of the procedures relating to
the exercise of dissenters' rights by LecTec shareholders.
Any shareholder who wishes to dissent from the asset sale must deliver
to LecTec, prior to the vote on the asset sale, a written notice of intent to
demand payment for their shares if the asset
-37-
sale is consummated. Voting against the asset sale will not be deemed to satisfy
such notice requirement. In addition, the shareholder must not vote their shares
of common stock in favor of the asset sale. Failure to vote against the asset
sale will not constitute a waiver of a shareholder's dissenter's rights;
provided, however, that if a shareholder returns a signed proxy but does not
specify a vote AGAINST approval of the asset sale or a direction to abstain, the
proxy will be voted for approval of the asset sale, which will have the effect
of waiving the shareholders' dissenters' rights. A shareholder who fails to
deliver the notice on time or who votes in favor of the asset sale will not have
any dissenters' rights.
If the asset sale is approved by LecTec's shareholders, LecTec is
required to deliver a written dissenters' notice to all of its shareholders who
gave timely notice of intent to demand payment and who did not vote in favor of
the asset sale. The notice must (i) state where the payment demand and share
certificates must be sent in order to obtain payment and the date by which they
must be received; (ii) inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is received;
(iii) supply a form for demanding payment and requiring the dissenting
shareholder to certify the date on which the shareholder acquired the shares of
common stock; and (iv) be accompanied by a copy of the Minnesota Dissenters'
Rights Statute.
In order to receive fair value for the shares of common stock, a
shareholder who is sent the dissenters' notice described above must demand
payment within 30 days following the date of notice, deposit such shareholder's
certificates representing shares of common stock and complete other information
as required by such notice. A shareholder who demands payment and deposits the
certificates representing their shares of common stock as requested by the
dissenters' notice retains all other rights of a shareholder of LecTec until
such rights are canceled by the consummation of the asset sale. LecTec may
restrict the transfer of uncertificated shares from the date of the demand for
payment until the asset sale is consummated; however, the holder of
uncertificated shares retains all other rights of a shareholder of LecTec until
those rights are canceled by the consummation of the asset sale.
Except for shares of common stock acquired by a dissenter after the
date of the first announcement to the public of the asset sale, upon the
consummation of the asset sale, or upon receipt of the payment demand, whichever
is later, LecTec must pay each dissenter who complies with the foregoing
requirements the amount LecTec estimates to be the fair value of the dissenter's
shares of common stock plus accrued interest. The payment must be accompanied by
certain financial information concerning LecTec, a statement of LecTec's
estimate of the fair value of the shares, an explanation of the method used to
reach the estimate, a brief description of the procedure to be followed to
demand supplemental payment and a copy of the Minnesota Dissenters' Rights
Statute.
If a dissenting shareholder believes the amount remitted by LecTec is
less than the fair value for the shares of common stock plus interest, the
dissenter may, within 30 days, notify LecTec in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and the amount of interest
due, and may demand payment of the dissenter's estimate. If LecTec receives a
demand for an amount greater than its estimation of fair value, LecTec shall,
within 60 days, pay
-38-
the greater amount, or another amount agreed to between LecTec and the
shareholder, or petition a court to determine the fair value of the shares.
Any shareholder contemplating the exercise of dissenters' rights is
urged to review the full text of the Minnesota Dissenters' Rights Statute, a
copy of which is attached as Exhibit C to this proxy statement.
ACCOUNTING TREATMENT
The proposed asset sale is expected to be accounted for as a sale of
assets.
FEDERAL INCOME TAX CONSEQUENCES
The pro forma gain on the sale of LecTec's conductive business net
assets is $4,707,663. LecTec has net operating losses available from prior years
to carry forward to offset the effect of this gain on taxable income for the
fiscal year ending June 30, 2001. LecTec does not expect that the asset sale
will result in any federal income tax consequences to its shareholders other
than those who exercise dissenters' rights under the MBCA. Cash payments made to
a holder of LecTec common stock who exercises dissenters' rights will be treated
as distributions in redemption of the shareholder's LecTec common stock. A
holder of LecTec common stock receiving cash in connection with the exercise of
dissenters' rights will recognize either: (1) gain or loss equal to the
difference between the cash received and the holder's basis in the LecTec common
stock; or (2) dividend income, depending upon whether the deemed redemption
qualifies for sale or exchange treatment under the tests set forth in Section
302 of the Code. Gain or loss will be capital gain or loss provided the LecTec
common stock was a capital asset in the hands of the LecTec shareholder at the
time of the merger.
EACH HOLDER OF LECTEC COMMON STOCK IS URGED TO CONSULT HIS OR HER OWN
TAX ADVISOR AS TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER, AND ALSO AS
TO ANY STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES BASED ON HIS OR HER OWN
PARTICULAR FACTS AND CIRCUMSTANCES.
THE ASSET PURCHASE AGREEMENT
We believe this summary describes the material terms of the asset
purchase agreement. However, we recommend that you read carefully the complete
agreement for the precise legal terms of the asset purchase agreement and other
information that may be important to you. The asset purchase agreement is
included in this proxy statement as Exhibit A.
THE ASSET SALE
Pursuant to the asset purchase agreement, LecTec will sell and transfer
to Ludlow certain assets and liabilities related to LecTec's conductive products
division, which produces diagnostic electrodes and electrically conductive
adhesive hydrogels. Certain intellectual property rights associated with
LecTec's conductive products division will be sold to Sherwood.
-39-
CLOSING DATE
The closing of the asset sale will take place within five business days
after the shareholders of LecTec approve the asset sale and all other closing
conditions are satisfied, unless the parties agree upon another time. It is the
intent of the parties to complete the asset sale as soon as practicable.
CONSIDERATION; POST-CLOSING ADJUSTMENT
The consideration that LecTec will receive in the asset sale consists
of a cash payment of $7,250,000 plus the assumption by Ludlow and Sherwood of
certain liabilities. In addition, the cash portion of the purchase price will be
adjusted after closing based on the change in the net asset value of the
purchased assets between the time of signing the asset purchase agreement and
closing the asset sale. For example, in the event that upon closing LecTec
delivers an amount of inventory which is less than the amount of inventory on
which the purchase price was based, LecTec will be required to pay Ludlow for
the amount of the difference. Similarly, in the event that LecTec delivers at
closing an amount of inventory which exceeds the amount of inventory on which
the purchase price was based, Ludlow will be required to pay LecTec for the
amount of the difference.
At the time of the signing of the asset purchase agreement, the net
asset value of the assets to be purchased was $1,460,000 as stated in the asset
purchase agreement. This amount included assumed accounts payable of $150,000.
On December 31, 2000, the net asset value was $1,567,337, including assumed
accounts payable of $212,705. If the closing were to have occurred on December
31, 2000, the adjustment to the purchase price would have been an increase of
approximately $107,337. The asset purchase agreement does not provide for a
limit on the amount of the adjustment.
ASSETS PURCHASED
Subject to and upon the terms and conditions of the asset purchase
agreement, LecTec will sell the assets related to the conductive products
division to Ludlow and Sherwood. Those assets which are considered intellectual
property will be purchased by Sherwood and the rest of the assets will be
purchased by Ludlow. The purchased assets include:
* hydrogel and conductive converting machinery and equipment, tooling,
molds, dies, instruments, and supplies;
* inventories of raw materials (chemicals and packaging materials),
work in process, and finished goods related to the conductive
products division;
* accounts receivable related to the conductive products division;
* all patents, trademarks, trade names, service marks, copyrights and
other intellectual property related to the conductive products
division;
-40-
* all claims and rights against third parties relating to the
purchased assets;
* contracts to supply electrodes and hydrogels related to the
conductive products business;
* governmental permits, approvals and authorizations required to
operate the conductive products division;
* all books and records related to the conductive products division;
and
* all customer lists, distribution lists and prospective customer
lists related to the conductive products division.
ASSUMPTION OF LIABILITIES
As partial consideration for the purchase of the assets, Ludlow and
Sherwood will assume certain liabilities related to the conductive products
division. These liabilities include the unfulfilled obligations of LecTec under
certain contracts, liability for the operation of the conductive products
division by Ludlow and Sherwood after the closing and certain liabilities
disclosed on the financial statements relating to the conductive products
division.
REPRESENTATIONS AND WARRANTIES OF SELLER
In the asset purchase agreement, LecTec represents and warrants to
Ludlow and Sherwood with respect to the matters set forth below. LecTec has
agreed to indemnify Ludlow and Sherwood for any breach of these representations
and warranties:
* LecTec is a corporation duly organized, validly existing and in good
standing and LecTec has the corporate power to enter into the asset
purchase agreement;
* there are no conflicts between the asset purchase agreement and
LecTec's charter documents, LecTec's contracts or applicable law;
* LecTec's financial statements are complete and fairly present
LecTec's results of operations and financial condition;
* the following events have not occurred since the date of LecTec's
financial statements:
- any material circumstance or event that adversely affects the
purchased assets;
- any material damage or loss to the purchased assets;
- any action taken materially affecting the purchased assets or
assumed liabilities, including incurring of indebtedness or
mortgage of property; and
-41-
- any transfer of purchased assets other than the sale of inventory
in the ordinary course of business.
* there are no liabilities or obligations related to the purchased
assets which LecTec has not disclosed;
* LecTec has filed returns for and paid all taxes related to the
purchased assets and there are no liens for taxes on any of the
purchased assets;
* LecTec's inventory is of a quality and quantity salable and usable
in the ordinary course of business.
* LecTec has good and marketable title to the purchased assets and the
purchased assets are in good operating condition;
* LecTec's accounts receivable arose in the ordinary course of
business, represent valid and binding claims and are collectible;
* LecTec owns the rights to the intellectual property used in the
conductive products division and is not infringing the rights of any
third party;
* the contracts to be transferred in connection with the asset sale
are in full force and effect and enforceable against the parties
thereto;
* there are no legal proceedings related to the business of the
conductive products division;
* LecTec is in compliance with applicable laws and possesses permits
and licenses necessary to operate the conductive products division;
* the purchased assets are adequate to conduct the business of the
conductive products division; and
* there are no product liability claims threatened or pending against
LecTec relating to the conductive products division.
In the asset purchase agreement, Ludlow and Sherwood represent and
warrant to LecTec with respect to:
* Ludlow's and Sherwood's organization, existence, good standing and
corporate power;
* Ludlow's and Sherwood's authorization to complete the asset sale;
* The lack of conflict between the asset purchase agreement and
Ludlow's and Sherwood's charter documents, Ludlow's and Sherwood's
contracts and applicable law;
-42-
* the absence of legal proceedings;
* payment of broker's fees; and
* third party consents to the asset sale.
COVENANTS OF LECTEC
In the asset purchase agreement, LecTec agreed that prior to closing or
termination of the asset purchase agreement LecTec:
* will not take any action inconsistent with the asset purchase
agreement or which would cause its representations and warranties to
become untrue;
* will provide Ludlow and Sherwood with full access to information
regarding the conductive products division;
* will conduct the business of the conductive products division in the
ordinary course and otherwise preserve the goodwill of the
conductive products division;
* will not engage in discussions with other third parties regarding
the sale of the assets of the conductive products division, to the
extent LecTec can do so without violating its fiduciary duty to its
shareholders;
* will take the actions required to satisfy the conditions precedent
to closing the asset sale;
* will maintain its insurance policies;
* will file its tax returns; and
* will file this proxy statement with the Securities and Exchange
Commission.
REGULATORY MATTERS
LecTec believes that no regulatory approvals are legally required in
connection with the asset sale. Nonetheless, the parties have agreed to
voluntarily submit the asset sale for review by the FTC. In the event that the
FTC objects to the asset sale, any party may unilaterally terminate the asset
purchase agreement. In addition, if the FTC has not, within 30 days after the
date of the asset purchase agreement, provided an affirmative statement that it
will not object to the asset sale, any party may unilaterally terminate the
asset purchase agreement. The FTC has informed the parties that, based on its
informal review of the transaction, it does not intend to object to the asset
sale.
-43-
CLOSING CONDITIONS
Each party's obligation to complete the asset sale is subject to the
prior satisfaction or waiver of certain conditions. If any of the closing
conditions are waived, LecTec will consider the facts and circumstances at that
time and make a determination as to whether a resolicitation of proxies from its
shareholders is appropriate. The following list sets forth the material
conditions which have not yet been satisfied and therefore must be satisfied or
waived before completion of the asset sale:
* each party's representations and warranties shall be true and
correct in all material respects on the date of closing;
* Ludlow and Sherwood shall have delivered the cash portion of the
purchase price;
* certain agreements to be entered into in connection with the asset
sale shall have been executed by the appropriate parties;
* no action shall have been instituted, or threatened in writing, by a
government agency seeking to prohibit the asset sale;
* LecTec's shareholders shall have approved the asset sale;
* each party shall have received a legal opinion regarding certain
legal matters;
* no event shall have occurred that would have a material adverse
effect on the business of LecTec's conductive products division;
TERMINATION
The parties may mutually agree to terminate the asset purchase
agreement prior to the time the asset sale becomes effective. In addition, any
party may unilaterally terminate the asset purchase agreement if the asset sale
has not been concluded by March 31, 2001. The asset purchase agreement may be
terminated by LecTec, on the one hand, and Ludlow and Sherwood, on the other
hand, in the event that the other party or parties commit a material breach or
default which can not be cured within 15 days. The asset purchase agreement may
also be terminated by LecTec in the event that LecTec receives an unsolicited
third-party offer to purchase the assets of the conductive products division and
LecTec's legal counsel advises LecTec's Board of Directors that fulfillment of
its fiduciary duties requires the Board of Directors to accept the alternative
offer.
The asset purchase agreement may also be terminated based on the
outcome of the FTC's review of the asset sale. In the event that the FTC objects
to the asset sale, any party may unilaterally terminate the asset purchase
agreement. In addition, if the FTC has not, within 30 days after the date of the
asset purchase agreement, provided an affirmative statement that it will not
object to the asset sale, any party may unilaterally terminate the asset
purchase agreement.
-44-
INDEMNIFICATION
LecTec has agreed to indemnify Ludlow and Sherwood for certain losses
which could arise in connection with the asset sale. The losses covered by the
indemnification include losses resulting from a breach of LecTec's
representations, warranties and covenants contained in the asset purchase
agreement and the other agreements to be entered into at closing or LecTec's
failure to transfer good title to the purchased assets. LecTec's indemnification
liability is limited to $700,000 unless the claim involves liability for taxes.
Ludlow and Sherwood have agreed to provided a similar indemnification to LecTec.
THE NON-COMPETITION AGREEMENT
LecTec has agreed that upon closing the asset sale it will enter into a
non-competition agreement with Ludlow. The non-competition agreement provides
that LecTec will not engage in the type of business conducted by the conductive
products division for a period of five years. In addition, Ludlow has agreed
that for a period of three years, it will not manufacture therapeutic patches
that utilize certain assets acquired in the asset sale.
THE MANUFACTURING AND SUPPLY AGREEMENT
In order to facilitate the transfer of the business of the conductive
products division to Ludlow, LecTec has agreed that upon the closing of the
asset sale it will enter into a manufacturing and supply agreement. Pursuant to
that agreement, LecTec will continue to manufacture, and supply to Ludlow,
certain electrode products for a period of four months and certain hydrogels for
a period of nine months. For the first six months of the agreement, LecTec will
supply the products at its cost of production. Thereafter, Ludlow will purchase
the products at LecTec's cost plus ten percent.
Based upon historic margins and projected purchase volumes under the
manufacturing and supply agreement, LecTec's gross margin will decrease from
36.3% to approximately 26.9% during the first six months of the agreement.
During the last three months of the agreement, LecTec's gross margin is expected
to be approximately 29.6%. Changes in the estimated volumes to be purchased
under the agreement and changes in the sales volume of existing business can
significantly increase or decrease these percentages.
-45-
PROPOSAL 2:
ELECTION OF DIRECTORS
GENERALLY
LecTec's bylaws provide that the size of the Board of Directors shall
be one or more directors. The Board of Directors may increase the number of
directors at any time. Six persons have been nominated for election as directors
at the 2000 annual meeting. Directors are elected for a one-year term and to
serve until their successors are duly elected and qualified.
THE BOARD OF DIRECTORS RECOMMEND THAT LEE M. BERLIN, ALAN C. HYMES,
M.D., BERT J. MCKASY, MARILYN K. SPEEDIE, PH.D., DONALD C. WEGMILLER AND RODNEY
A. YOUNG BE ELECTED AS DIRECTORS, EACH TO HOLD OFFICE FOR A TERM OF ONE YEAR AND
UNTIL THEIR SUCCESSORS ARE DULY ELECTED AND QUALIFIED. ALL OF THE NOMINEES ARE
CURRENTLY MEMBERS OF THE BOARD OF DIRECTORS OF LECTEC AND HAVE SERVED IN THAT
CAPACITY SINCE ORIGINALLY ELECTED OR DESIGNATED AS INDICATED BELOW IN THE
INFORMATION CONCERNING NOMINEES. SHELDON L. ZIMBLER RETIRED FROM THE BOARD OF
DIRECTORS IN OCTOBER 2000. LECTEC THANKS MR. ZIMBLER FOR HIS DEDICATED SERVICE
TO LECTEC.
INFORMATION CONCERNING NOMINEES
Lee M. Berlin, 79 years old, has been a Director since 1981 and served
as Chairman of the Board from 1983 through May 1993. He served as LecTec's Chief
Executive Officer from 1983 through January 1989. Prior to joining LecTec, Mr.
Berlin served in a variety of foreign and domestic marketing, product
development and general management positions with Minnesota Mining &
Manufacturing Company ("3M"). Currently, Mr. Berlin manages personal business
interests.
Alan C. Hymes, M.D., 68 years old, is a founder of LecTec, has been a
Director since 1977 and acts as LecTec's medical consultant. He has been engaged
in the private practice of surgery since 1968. He is a diplomat of the American
Board of Surgery and the American Board of Thoracic and Cardiovascular Surgery.
Bert J. McKasy, 58 years old, has been a Director since 1997 and has
been a partner with the law firm Lindquist & Vennum PLLP since 1994. He is also
the current Commissioner of the Metropolitan Airports Commission and has owned
McKasy Travel Service, Inc. since 1983. Prior to joining Lindquist & Vennum, Mr.
McKasy was an attorney with Maun & Simon, Vice President of First Trust Company,
Trust and Investment Administration (now U.S. Bank Trust) and Executive Vice
President of Fritz Company.
Marilyn K. Speedie, Ph.D., 52 years old, has been a Director since 1997
and is the Dean of the College of Pharmacy and a professor at the University of
Minnesota. Prior to her association with the University of Minnesota in 1996,
Dr. Speedie held several professorship and departmental chairperson positions at
the University of Maryland (1989-1995), the most recent being in the Department
of Pharmaceutical Sciences. She has been the recipient of numerous honors, the
most
-46-
recent in October of 1996 which was as an inductee as Fellow of the American
Association of Pharmaceutical Scientists, and has also co-authored a book
published in 1996 entitled PHARMACOGNOSY AND PHARMACOBIOTECHNOLOGY.
Donald C. Wegmiller, 62 years old, has served as a Director since 1997.
Since April 1993, Mr. Wegmiller has served as President and Chief Executive
Officer of HealthCare Compensation Strategies, a consulting firm specializing in
compensation and benefits for health care executives and physicians. From May
1987 until April 1993, Mr. Wegmiller was President and CEO of Health One
Corporation, Minneapolis, Minnesota. He currently serves as a Director of ALLETE
(formerly known as Minnesota Power), Possis Medical, Inc. and JLJ Medical
Devices International, LLC. From 1986 to 1988, Mr. Wegmiller served as Chairman
of the Board of American Hospital Association. From 1972 to 1976 and 1981 to
1988, Mr. Wegmiller served as a White House staff assistant to Presidents Nixon,
Ford and Reagan.
Rodney A. Young, 45 years old, was appointed a Director, Chief
Executive Officer and President of LecTec in August 1996. In November 1996 he
was appointed as Chairman of the Board. Prior to assuming the leadership role
with LecTec, Mr. Young served Baxter International, Inc. for five years in
various management roles, most recently as Vice President and General Manager of
the Specialized Distribution Division. Mr. Young also serves as a Director of
Possis Medical, Inc., and Delta Dental Plan of Minnesota, as well as the
University of Minnesota Science Undergraduate Advisory Board.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During the 2000 fiscal year, the Board of Directors held four meetings.
Each Director holding office during the fiscal year attended at least 75% of the
total number of meetings of the Board of Directors (held during the period for
which they were a director) and committees of the Board on which they served.
The Board of Directors has an Audit Committee and a Compensation Committee,
which are described below. LecTec does not have a Nominating Committee.
The Board of Directors has an Audit Committee comprised of Mr. McKasy,
Mr. Berlin and Dr. Hymes. Paul O. Johnson served as the Chairman of the Audit
Committee until his resignation from the Board of Directors in November 1999, at
which time Mr. McKasy was elected to the Audit Committee. Mr. McKasy currently
serves as Chairman. All of the members of the Audit Committee are "independent"
as that concept is defined in Rule 4200(a)(14) of the Nasdaq Marketplace Rules.
The Audit Committee reviews and investigates all matters pertaining to the
accounting activities of LecTec and the relationship between LecTec and its
independent auditor. The Audit Committee held three meetings during the 2000
fiscal year.
The Board of Directors has a Compensation Committee comprised of Mr.
Wegmiller, who served as the Committee's Chairman, Mr. Berlin and Dr. Hymes. The
Compensation Committee determines and periodically evaluates the various levels
and methods of compensation for directors, officers and employees of LecTec. The
Compensation Committee held two meetings during the 2000 fiscal year.
-47-
DIRECTOR COMPENSATION
Directors who are not employees of LecTec are paid for their services
at the rate of $1,000 per quarter plus reasonable meeting expenses. The
quarterly payments were suspended for the fourth quarter of the 2000 fiscal
year. During the 2000 fiscal year, each of the outside directors received a
five-year option under the LecTec 1998 Director's Stock Option Plan to purchase
5,000 shares of LecTec's common stock at a price of $2.875 which was the fair
market value of the common stock at the date of grant.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
Our Audit Committee reviews LecTec's financial reporting process on
behalf of the Board of Directors. Our Board of Directors adopted an Audit
Committee charter in October 2000, and it is included in this proxy statement as
Exhibit D. In fulfilling its responsibilities, our Committee has reviewed and
discussed the audited financial statements contained in our Fiscal 2000 Annual
Report on Form 10-K with LecTec's management and independent auditors.
Management is responsible for the financial statements and the reporting
process, including the system of internal controls. The independent auditors are
responsible for expressing an opinion on the conformity of those audited
financial statements with accounting principles generally accepted in the United
States.
The Committee discussed with the independent auditors, the matters
required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees, as amended. In addition, the Committee has
discussed with the independent auditors, the auditors' independence from LecTec
and its management including the matters in the written disclosures required by
Independence Standard Board No. 1, Independence Discussions with Audit
Committees.
In reliance on the reviews and discussions referred to above, the
Committee recommended to the Board of Directors (and the Board has approved)
that the audited financial statements be included in LecTec's Annual Report on
Form 10-K for the fiscal year ended June 30, 2000, for filing with the
Securities and Exchange Commission.
THE AUDIT COMMITTEE
Bert J. McKasy, Chairman
Lee M. Berlin
Alan C. Hymes, M.D.
-48-
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE
COMPENSATION
The Compensation Committee of the Board of Directors is responsible for
establishing compensation policy and administering the compensation programs for
LecTec's executive officers. The Committee is comprised of independent outside
directors. The Committee meets as necessary to review executive compensation
policies, the design of compensation programs and individual salaries and awards
for the executive officers. The purpose of this report is to inform shareholders
of LecTec's compensation policies for executive officers and the rationale for
the compensation paid to executive officers.
COMPENSATION PHILOSOPHY
LecTec's compensation program is designed to motivate and reward
executives responsible for attaining the financial and strategic objectives
essential to LecTec's long-term success and growth in shareholder value. The
compensation program has been designed to provide a competitive level of total
compensation and offers incentive and equity ownership opportunities directly
linked to LecTec's performance and shareholder return. The Committee believes it
is in the best interests of the shareholders to reward executives when LecTec's
performance objectives are achieved and to provide significantly less
compensation when these objectives are not met. Therefore, a significant portion
of executive compensation is comprised of "at risk" performance and stock-based
incentives.
Key objectives of the compensation program are to:
* Provide a strong, direct link between LecTec's financial and
strategic goals and executive compensation;
* Motivate executives to achieve corporate operating goals through an
emphasis on performance-based compensation;
* Align the interests of executives with those of LecTec's
shareholders by providing a significant portion of total
compensation that is LecTec stock-based; and
* Provide competitive total compensation in order to attract and
retain high caliber key executives critical to the long-term success
of LecTec.
EXECUTIVE OFFICER COMPENSATION PROGRAM
The key components of LecTec's executive officer compensation program
are base salary, annual incentives and long-term incentives. These elements are
described below. During fiscal year 2000, specific and objective criteria were
utilized to determine each element of an executive's compensation package.
-49-
BASE SALARY. The Committee annually reviews the base salaries of
executive officers. In determining appropriate salary levels, the Committee
considers individual performance, level of responsibility, scope and complexity
of the position and salary levels for comparable positions at industry peer
group companies.
During the fiscal year ended June 30, 2000 the current executive
officers of LecTec did not receive salary increases, with the exception of
Timothy R.J. Quinn.
ANNUAL INCENTIVE AWARDS. The purpose of LecTec's annual incentive
program is to provide a direct financial incentive in the form of an annual cash
bonus to executive officers and key managers who achieve corporate operating
goals established under LecTec's annual operating plan.
Executive officers are eligible for cash bonuses ranging from 30% to
60% of base salary. The size of the bonus is dependent upon the executive
officer's position and the achievement of targeted post-bonus, pre-tax earnings,
as well as the achievement of individual and team goals.
For the fiscal year 2000, the minimum earnings performance goals under
the annual incentive program were not achieved and no cash bonus payments were
made under the annual incentive program. One executive officer, Mr. Quinn,
received a bonus made outside the annual incentive program based on the
achievement of certain sales goals.
LONG-TERM INCENTIVE PLANS. Long-term incentives are provided to
executive officers through LecTec's stock option program.
LecTec's stock option program provides compensation that directly links
the interests of management and shareholders, and aids in retaining key
executive officers. Executive officers are eligible for annual grants of stock
options. Guideline levels of options are prepared based on a review of
competitive data from industry peer group companies. Individual awards are based
on the individual's responsibilities and performance, ability to impact
financial performance and future potential. All individual stock option grants
are reviewed and approved by the Committee. Executive officers receive gains
from stock options only to the extent that the fair market value of the stock
has increased since the date of option grant.
CHIEF EXECUTIVE OFFICER COMPENSATION. The base salary for Mr. Young was
$200,000 during fiscal 2000, the same base salary as during fiscal 1999. The
base salary of the Chief Executive Officer is established by the Compensation
Committee in generally the same way as the base salary is determined for other
executive officers.
A bonus payment under the annual incentive program described above was
not made during fiscal 2000 due to LecTec not achieving the minimum performance
goals established by the Committee. In fiscal 2000, Mr. Young did not receive
any stock options to purchase LecTec's Common Stock.
CONCLUSION. The executive officer compensation program administered by
the Committee provides incentives to attain strong financial performance and
aligns the interests of executive officers with shareholder interests. The
Committee believes that LecTec's compensation program
-50-
focuses the efforts of LecTec's executive officers on the achievement of growth,
profitability and the enhancement of shareholder value for the benefit of all of
LecTec's shareholders.
COMPENSATION COMMITTEE
Donald C. Wegmiller, Chairman
Lee M. Berlin
Alan C. Hymes, M.D.
-51-
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows the cash and non-cash compensation for the
fiscal years ended June 30, 2000, 1999 and 1998, awarded to or earned by Rodney
A. Young, the Chairman of the Board and LecTec's President and Chief Executive
Officer, and the other executive officers of LecTec.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
-------------------- ----------
Fiscal Year Securities
Ended Underlying All Other
Name and Position June 30, Salary Bonus Options Compensation(1)
- ----------------- -------- ------ ----- ---------- ---------------
Rodney A. Young 2000 $200,000 $ -- -- $4,039
Chairman, President and 1999 200,000 -- 95,000 2,358
Chief Executive Officer 1998 178,000 -- 55,000 2,450
Timothy R. J. Quinn(2) 2000 118,800 35,640(3) -- 2,009
Vice President and General 1999 99,000 -- 58,000 2,365
Manager, Consumer Products 1998 13,300 -- -- --
Deborah L. Moore(4) 2000 117,300 -- -- 1,779
Chief Financial Officer, 1999 117,300 -- 36,000 1,573
Secretary and Treasurer 1998 108,885 -- 20,000 1,447
Jane M. Nichols 2000 117,300 -- -- 1,218
Vice President, Marketing and 1999 117,300 -- 22,500 1,173
New Business Development 1998 108,885 -- 20,000 579
Daniel M. McWhorter 2000 117,300 -- -- 3,045
Vice President, Research and 1999 111,200 -- 27,700 2,577
Development 1998 96,075 -- 20,000 1,277
John D. LeGray 2000 104,420 -- -- 2,711
Vice President, Quality Assurance 1999 98,400 -- 22,500 2,460
and Regulatory Affairs 1998 68,100 -- 17,500 1,135
Timothy P. Fitzgerald(5) 2000 40,192 -- 25,000 --
Vice President, Operations 1999 -- -- -- --
1998 -- -- -- --
- ----------------------------
(1) Reflects matching contributions under LecTec's 401(k) and Profit
Sharing Plan.
(2) Mr. Quinn joined LecTec on May 11, 1998 and was appointed Vice
President and General Manager, Consumer Products on January 24, 2000.
(3) Mr. Quinn received a bonus made outside the annual incentive program
based on the achievement of certain sales goals.
(4) Ms. Moore resigned her position with LecTec effective August 4, 2000.
(5) Mr. Fitzgerald joined LecTec and was appointed Vice President,
Operations on February 21, 2000.
-52-
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options under LecTec's 1998 Stock Option Plan during the fiscal year ended June
30, 2000, to each of the executive officers named in the Summary Compensation
Table:
Individual Grants(1) Potential
------------------------------------------------ Realizable
Percent Value at
of Total Assumed
Options Annual Rates of
Number of Granted Stock Price
Securities To Exercise Appreciation
Underlying Employees Price for Option Term(3)
Options in Fiscal Per Expiration ----------------------
Name Granted Year(2) Share Date 5% 10%
- --------------------- ------- ------- ----- ---------- ------- -------
Rodney A. Young 0 0.0% -- -- -- --
Timothy R. J. Quinn 0 0.0% -- -- -- --
Deborah L. Moore 0 0.0% -- -- -- --
Jane M. Nichols 0 0.0% -- -- -- --
Daniel M. McWhorter 0 0.0% -- -- -- --
John D. LeGray 0 0.0% -- -- -- --
Timothy P. Fitzgerald 25,000 21.7% $3.25 May 2, 2005 $23,453 $50,872
- -------------------------
(1) Each option represents the right to purchase one share of LecTec common
stock. The options shown in this column are all incentive stock options
granted pursuant to LecTec's 1998 Stock Option Plan. The options vest
in annual installments over a period of three years beginning one year
after the date of grant. Each option grant allows the individual to
acquire shares of the LecTec's common stock at a fixed price per share.
The term of each option is five years.
(2) In the fiscal year ended June 30, 2000, LecTec granted employees
options to purchase an aggregate of 115,000 shares of common stock.
(3) The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange
Commission and do not represent LecTec's estimate or projection of
LecTec's future common stock prices. These amounts represent certain
assumed rates of appreciation only. Actual gains, if any, on stock
option exercises are dependent on the future performance of the common
stock and overall stock market conditions. The amounts reflected in the
table may not necessarily be achieved.
-53-
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the exercise of
options during the fiscal year ended June 30, 2000 and unexercised options held
as of June 30, 2000, by each of the executive officers named in the Summary
Compensation Table above.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at June 30, 2000 as of June 30, 2000(1)
Acquired Value -------------------------- --------------------------
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Rodney A. Young 0 $ 0 148,750 151,250 $ 0 $ 0
Timothy R. J. Quinn 0 0 14,500 43,500 0 0
Deborah L. Moore 0 0 49,000 47,000 0 0
Jane M. Nichols 0 0 45,625 36,875 0 0
Daniel M. McWhorter 0 0 39,425 38,275 0 0
John D. LeGray 0 0 14,375 25,625 0 0
Timothy P. Fitzgerald 0 0 0 25,000 0 0
- ---------------------------
(1) "Value" has been determined based on the difference between the last
sale price of LecTec's common stock as reported by the Nasdaq National
Market System on June 30, 2000 ($2.25) and the per share option
exercise price, multiplied by the number of shares subject to the
in-the-money options.
CHANGE IN CONTROL PLANS
LecTec's Change in Control Termination Pay Plan provides for
termination payments to executive officers if they are terminated within twelve
months of a change in control. The plan provides for termination payments to the
Chief Executive Officer equal to twenty times the monthly base salary and
termination payments for all other executives equal to twelve times the monthly
base salary.
In July 1999, LecTec adopted the Improved Shareholder Value Cash Bonus
Plan which provides cash bonus payments to executive officers if LecTec is
acquired by or merged with another company, and the valuation of LecTec for
purposes of the acquisition or merger equals or exceeds $22,102,200 (the minimum
level defined by the plan). Cash bonus payments to executives increase as the
total valuation of LecTec for purposes of the sale or merger increases, thus
aligning the interests of the executives with the interests of the shareholders
and providing an incentive to the executives to maximize shareholder value. The
total payments under the plan range from 2.0% of the valuation of LecTec if the
minimum valuation is reached to 5.9% of the valuation of LecTec if the valuation
equals or exceeds $76,129,800. No payments will be made under any of LecTec's
change in control plans as a result of the asset sale described above in
proposal one.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Compensation Committee consists of three non-employee directors,
Lee M. Berlin, Alan C. Hymes, M.D. and Donald C. Wegmiller. All three directors
served on the Committee for the entire fiscal year ended June 30, 2000.
-54-
Mr. Berlin was formerly an officer of LecTec, having served as both
Chairman of the Board and Chief Executive Officer of LecTec. There were no other
Compensation Committee "interlocks" within the meaning of the SEC rules.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of December 31, 2000, by each
person, or group of affiliated persons, who is known by us to own beneficially
more than 5% of our common stock, each of our directors and nominees for
director, each of our executive officers named in the Summary Compensation Table
above and all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
SEC. In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock under options held
by that person that are currently exercisable or exercisable within 60 days of
December 31, 2000 are considered outstanding. These shares, however, are not
considered outstanding when computing the percentage ownership of each other
person. The column entitled "Number of Shares Beneficially Owned" includes the
number of shares of common stock subject to options held by that person that are
currently exercisable or that will become exercisable within 60 days of December
31, 2000. The number of shares subject to options that each beneficial owner has
the right to acquire within 60 days of December 31, 2000 are listed separately
under the column entitled "Number of Shares Underlying Options Beneficially
Owned."
-55-
Except as indicated in the footnotes to this table, each shareholder
named in the table has sole voting and investment power for the shares shown as
beneficially owned by them. Percentage of ownership is based on 3,915,676 shares
of common stock outstanding on December 31, 2000.
Number of
Shares
Number of Underlying
Shares Options Percent of
Beneficially Beneficially Shares
Name Owned Owned Outstanding
- ---- ----- ----- -----------
Lee M. Berlin(1) 567,029 24,125 14.4%
Alan C. Hymes, M.D. 430,042 32,669 11.0
Rodney A. Young 209,500 195,000 5.1
Daniel M. McWhorter 69,050 53,225 1.7
Deborah L. Moore 59,541 49,000 1.5
Jane M. Nichols 54,538 50,625 1.4
John D. LeGray 27,410 18,750 *
Timothy R. J. Quinn 23,800 20,000 *
Bert J. McKasy 17,778 13,000 *
Donald C. Wegmiller 17,000 16,000 *
Marilyn K. Speedie, Ph.D. 13,000 11,500 *
Timothy P. Fitzgerald 0 0 *
All directors and executive
officers as a group (12 persons) 1,488,688 483,894 33.8
- ------------------------------
*Less than 1%
(1) Includes 75,605 shares owned by Mr. Berlin's wife and 137,145 shares
owned by Mr. Berlin's son. Mr. Berlin disclaims beneficial ownership of
these shares.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires LecTec's
executive officers and directors and persons who beneficially own more than 10%
of LecTec's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission. Such executive
officers, directors and greater than 10% beneficial owners are required by the
regulations of the Commission to furnish LecTec with copies of all Section 16(a)
reports they file.
Based solely on a review of the copies of such reports furnished to
LecTec and written representations from the executive officers and directors,
LecTec believes that all Section 16(a) filing requirements applicable to its
executive officers and directors and greater than 10% beneficial owners have
been met, except that a May 22, 2000 purchase of LecTec common stock by Alan
Hymes was not reported on a timely filed May 2000 Form 4 on which several other
-56-
purchases were recorded. An amended Form 4 for Mr. Hymes was filed on July 7,
2000 which correctly reported the transaction.
-57-
SHAREHOLDER RETURN PERFORMANCE GRAPH
The graph and table below compare the cumulative total shareholder
return on LecTec's Common Stock for the last five fiscal years with the
cumulative total return on the Russell 2000 Index and the S & P Medical Products
& Supplies Index over the same period. The graph and table assume the investment
of $100 in each of LecTec's Common Stock, the Russell 2000 Index and the S & P
Medical Products & Supplies Index on June 30, 1995 and that all dividends (cash
and stock) were reinvested.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
[PLOT POINTS CHART]
6/30/95 6/30/96 6/30/97 6/30/98 6/30/99 6/30/00
------- ------- ------- ------- ------- -------
LECTEC CORPORATION ...... 100 107 54 29 34 19
Russell 2000 ............ 100 121 155 186 176 171
S & P Med. P&S .......... 100 131 174 233 277 301
PROPOSAL 3:
RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has appointed Grant Thornton LLP as LecTec's
independent auditor for the fiscal year which began July 1, 2000. A proposal to
ratify that appointment will be
-58-
presented at the annual meeting. Grant Thornton LLP has served as LecTec's
auditor since June 1987. Representatives of Grant Thornton LLP are expected to
be present at the annual meeting and will have an opportunity to make a
statement if they desire to do so and will be available to respond to
appropriate questions from shareholders.
AUDIT FEES
Audit fees billed or expected to be billed to the Company by Grant
Thornton LLP for the audit of the Company's financial statements for the fiscal
year ended June 30, 2000 and for reviews of the Company's financial statements
included in the Company's quarterly reports on Form 10-Q for the last fiscal
year totaled $51,100.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
No fees were billed or are expected to be billed to the Company by
Grant Thornton LLP for services provided during the last fiscal year for the
design and implementation of financial information systems.
ALL OTHER FEES
Fees billed or expected to be billed to the Company by Grant Thornton
LLP for all other non-audit services, including tax-related services, provided
during the last fiscal year totaled $13,190.
The Audit Committee considered whether non-audit services provided by
Grant Thornton LLP during the last fiscal year were compatible with maintaining
Grant Thornton LLP's independence.
The Board of Directors recommends a vote FOR the proposal to ratify the
appointment of Grant Thornton LLP as LecTec's independent auditors. If the
appointment is not ratified by the shareholders, the Board of Directors is not
obligated to appoint another auditor, but the Board of Directors will give
consideration to an unfavorable vote.
OTHER MATTERS
As of this date, the Board of Directors does not know of any business
to be brought before the meeting other than as specified above. However, if any
matters properly come before the meeting, it is the intention of the person
named in the enclosed proxy to vote such proxy in accordance with their judgment
on such matters.
PROPOSALS FOR THE NEXT REGULAR MEETING
Any shareholder proposals to be considered for inclusion in LecTec's
proxy material for the 2001 annual meeting of shareholders must be received at
LecTec's principal executive office at 10701 Red Circle Drive, Minnetonka,
Minnesota 55343, no later than July 30, 2001. In connection with any matter to
be proposed by a shareholder at the 2001 annual meeting, but not proposed for
inclusion in LecTec's proxy material, the proxy holders designated by LecTec for
that meeting may
-59-
exercise their discretionary voting authority with respect to that shareholder
proposal if appropriate notice of that proposal is not received by LecTec at its
principal executive office by October 4, 2001.
WHERE YOU CAN FIND MORE INFORMATION
LecTec files annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information we file at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room. Our SEC filings are also available to the public from commercial document
retrieval services and at the internet website maintained by the SEC at
http://www.sec.gov.
Some of the important business and financial information relating to
LecTec that you may want to consider in deciding how to vote is not included in
this proxy statement, but rather is "incorporated by reference" to documents
that have been previously filed by LecTec with the SEC and are being delivered
with this proxy statement. The information incorporated by reference is deemed
to be a part of this proxy statement, except for any information superseded by
information contained directly in this proxy statement.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT TO VOTE ON THE MATTERS SET FORTH ABOVE. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT
FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED
FEBRUARY 28, 2001. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE AND THE MAILING
OF THIS PROXY STATEMENT TO SHAREHOLDERS SHALL NOT CREATE ANY IMPLICATION TO THE
CONTRARY.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by LecTec with the Securities and
Exchange Commission (File No. 0-16159) are being delivered with this proxy
statement and are incorporated by reference in this proxy statement:
1. LecTec's Annual Report on Form 10-K for the fiscal year ended
June 30, 2000.
2. LecTec's Quarterly Reports on Form 10-Q for the quarters ended
September 30, 2000 and December 31, 2000.
3. LecTec's Current Report on Form 8-K filed November 21, 2000.
4. The portions of LecTec's Annual Report to Shareholders for the
fiscal year ended June 30, 2000, under the following headings:
"Section I - Description of Business - Products" and " -
Marketing and Marketing Strategy," "Section II - Equity
-60-
Information and Financial Data - Selected Consolidated
Financial Data," and "Section III - Management's Discussion
and Analysis of Financial Condition and Results of
Operations."
Any statement contained in a document incorporated herein shall be
deemed to be modified or superseded for purposes of this proxy statement to the
extent that a statement contained herein or in any other subsequently filed
document which also is incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this proxy
statement.
By Order of the Board of Directors
/s/ Rodney A. Young
Rodney A. Young,
Chairman of the Board
Dated: February 28, 2001
-61-
LECTEC(TM)
CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
___________, ______, 2001
___ P.M. (CENTRAL STANDARD TIME)
THE MINNEAPOLIS MARRIOTT SOUTHWEST HOTEL
5801 OPUS PARKWAY
MINNETONKA, MN 55343
- --------------------------------------------------------------------------------
LECTEC(TM)
CORPORATION PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS 2000
I appoint Rodney A. Young and Douglas J. Nesbit, together and separately, as
proxies to vote all shares of common stock which I have power to vote at the
annual meeting of shareholders to be held on _____________, 2001 at Minnetonka,
Minnesota, and at any adjournment thereof, in accordance with the instructions
on the reverse side of this card and with the same effect as though I were
present in person and voting such shares. The proxies are authorized in their
discretion to vote upon such other business as may properly come before the
meeting and they may name others to take their place.
(CONTINUED, AND TO BE SIGNED AND DATED ON REVERSE SIDE)
TO VOTE YOUR PROXY
Mark, sign and date your proxy card and return it in the postage-paid
envelope we have provided.
[ARROW] PLEASE DETACH HERE [ARROW]
THE DIRECTORS RECOMMEND A VOTE "FOR" ITEMS 1, 2 AND 3.
1. Approval of the sale of certain assets used in LecTec Corporation's conductive [ ] For [ ] Against [ ] Abstain
products division pursuant to the Asset Purchase Agreement dated November 17,
2000, among LecTec, The Ludlow Company LP and Sherwood Services AG.
2. Election of 01 Lee M. Berlin 04 Marilyn K. Speedie, Ph.D. [ ] FOR All [ ] WITHHOLD All
directors: 02 Alan C. Hymes, M.D. 05 Donald C. Wegmiller
03 Bert J. McKasy 06 Rodney A. Young [ ] FOR All Except
______________________________________________
(Instructions: To withhold authority to vote for any individual nominee, | |
mark "For All Except" and write the number(s) in the box provided to the |______________________________________________|
right.)
3. Approval of appointment of Grant Thornton LLP as independent auditors [ ] For [ ] Against [ ] Abstain
THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS MADE, IT WILL BE VOTED "FOR" ITEMS 1, 2 AND 3.
Address Change? Mark Box [ ] Dated ____________________________, 2001
Indicate changes below:
______________________________________________
| |
| |
|______________________________________________|
Signature(s) of Shareholder(s) in Box
PLEASE DATE AND SIGN exactly as name(s) appears
hereon and return promptly in the accompanying
postage paid envelope. If shares are held by
joint tenants or as community property, both
shareholders should sign. If signing as attorney,
executor, administrator, trustee or guardian,
please give full title as such. If a corporation,
please sign in full corporate name by president
or other authorized officer. If a partnership,
please sign in partnership name by an authorized
person.