SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
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LECTEC CORPORATION
(Name of Registrant as Specified in its Charter)
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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
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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.
* This proxy statement contains a proposal for LecTec shareholders to
approve an asset sale. See page ___.
* If the asset sale is approved, LecTec will sell to Ludlow most of the
assets and liabilities related to LecTec's conductive products
division. See page ___.
* The intellectual property rights associated with LecTec's conductive
products division will be sold to Sherwood if the asset sale is
approved. See page ___.
* LecTec will receive a total purchase price of $7,250,000 in cash. See
page ___.
* The purchase price will be adjusted to take into account the increase
or decrease in the value of the assets prior to closing. See page ___.
* LecTec received a written opinion from its financial advisor stating
that the purchase price is fair to LecTec from a financial point of
view. See page ___.
* The proceeds of the asset sale will be retained by LecTec. See page
___.
* The asset sale will allow LecTec to focus its full operational capacity
on its therapeutic consumer products division. See page ___.
* LecTec's Board of Directors unanimously recommends that shareholders
vote in favor of the proposal to approve the asset sale. See page ___.
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 the Minnesota
Business Corporations Act 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.
See page ___.
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE PROPOSED ASSET SALE............................1
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION....................3
RISK FACTORS...................................................................3
RISKS RELATING TO THE ASSET SALE............................................3
RISKS RELATING TO LECTEC....................................................4
THE ANNUAL MEETING OF SHAREHOLDERS............................................10
WHEN AND WHERE THE ANNUAL MEETING OF SHAREHOLDERS WILL BE HELD.............10
WHAT WILL BE VOTED UPON....................................................10
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE; QUORUM.........................10
VOTE REQUIRED..............................................................11
BOARD RECOMMENDATION.......................................................11
VOTING YOUR SHARES.........................................................11
CHANGING YOUR VOTE BY REVOKING YOUR PROXY..................................11
HOW PROXIES ARE COUNTED....................................................11
COST OF SOLICITATION.......................................................12
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA...............................12
CONDUCTIVE BUSINESS UNAUDITED FINANCIAL STATEMENTS............................13
UNAUDITED PRO FORMA FINANCIAL STATEMENTS......................................17
PROPOSAL 1: APPROVAL OF THE ASSET SALE........................................23
THE SALE OF THE CONDUCTIVE BUSINESS ASSETS....................................23
THE COMPANIES..............................................................23
THE ASSET SALE.............................................................23
BACKGROUND OF THE ASSET SALE...............................................25
REASONS FOR THE ASSET SALE.................................................28
RECOMMENDATION OF LECTEC'S BOARD OF DIRECTORS..............................30
OPINION OF LECTEC'S FINANCIAL ADVISOR......................................30
PROCEEDS OF THE ASSET SALE.................................................34
SALE OF LECTEC'S MEDICAL TAPE EQUIPMENT....................................34
SHAREHOLDER APPROVAL OF THE ASSET SALE; VOTE REQUIRED......................35
RIGHTS OF DISSENTING SHAREHOLDERS..........................................35
ACCOUNTING TREATMENT.......................................................37
FEDERAL INCOME TAX CONSEQUENCES............................................37
THE ASSET PURCHASE AGREEMENT..................................................37
THE ASSET SALE.............................................................37
CLOSING DATE...............................................................37
CONSIDERATION; POST-CLOSING ADJUSTMENT.....................................38
ASSETS PURCHASED...........................................................38
ASSUMPTION OF LIABILITIES..................................................39
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REPRESENTATIONS AND WARRANTIES OF SELLER...................................39
COVENANTS OF LECTEC........................................................41
REGULATORY MATTERS.........................................................41
CLOSING CONDITIONS.........................................................41
TERMINATION................................................................42
INDEMNIFICATION............................................................42
THE NON-COMPETITION AGREEMENT..............................................43
THE MANUFACTURING AND SUPPLY AGREEMENT.....................................43
PROPOSAL 2: ELECTION OF DIRECTORS.............................................44
GENERALLY..................................................................44
INFORMATION CONCERNING NOMINEES............................................44
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS..........................45
DIRECTOR COMPENSATION......................................................46
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS.......................46
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION................47
COMPENSATION PHILOSOPHY....................................................47
EXECUTIVE OFFICER COMPENSATION PROGRAM.....................................47
EXECUTIVE COMPENSATION AND OTHER INFORMATION..................................50
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION.............................50
SUMMARY COMPENSATION TABLE.................................................50
OPTION GRANTS IN LAST FISCAL YEAR..........................................51
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES..............................................................52
CHANGE IN CONTROL PLANS....................................................52
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS.....................................................52
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................53
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.......................54
SHAREHOLDER RETURN PERFORMANCE GRAPH..........................................55
PROPOSAL 3: RATIFICATION OF APPOINTMENT OF AUDITORS...........................55
AUDIT FEES....................................................................56
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES..................56
ALL OTHER FEES................................................................56
OTHER MATTERS.................................................................56
PROPOSALS FOR THE NEXT REGULAR MEETING........................................56
WHERE YOU CAN FIND MORE INFORMATION...........................................57
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................57
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EXHIBITS
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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
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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.
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CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION
Certain information contained in this proxy statement that 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 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
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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.
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:
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* 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; and
* 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.
We have entered into a significant reseller agreement with Johnson &
Johnson Consumer Products Company and Neutrogena Corporation. Sales to both of
these parties are made pursuant to one contract since both parties are under
common corporate control. The agreement has an initial term that expires May 24,
2002, but either party may terminate the agreement for breach or insolvency. In
addition, the agreement can be terminated by the resellers on six months notice
during any extension of the initial term. Sales of our products to Johnson &
Johnson Consumer Products Company under this agreement accounted for $1,247,000
in calendar 2000, which was 14.9% of our sales of consumer patch products and
7.5% of our total sales. For the quarter ended December 31, 2000, sales of our
products to Johnson & Johnson Consumer Products Company under this agreement
accounted for $588,000, which was 23.5% of our sales of consumer patch products
and 14.5% of our total sales for that period. Sales of our products to
Neutrogena Corporation under this agreement accounted for $1,841,000 in calendar
2000, which was 22.1% of our sales of consumer patch products and 11.1% of our
total sales. For the quarter ended December 31, 2000, sales of our products to
Neutrogena Corporation under this agreement accounted for $560,000, which was
22.4% of our sales of consumer patch products and 13.8% of our total sales for
that period. Our primary obligation under the agreement is to manufacture and
sell the product ordered by the resellers. Under the terms of the agreement the
resellers are collectively required to purchase a minimum amount of our product
in each year of the initial two-year term. The minimum purchase requirement
equates to approximately $600,000 per year in sales of our products. Our results
of operations would be harmed if the resellers purchased only the minimum
requirement. In addition, if the agreement were cancelled due to our breach, our
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results of operations would be harmed. If we were unable to extend or renew the
agreement upon its expiration, our results of operations would be harmed.
Our other significant reseller agreement is with Novartis Consumer
Health, Inc. The agreement has an initial term that 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 and for any reason by giving us at
least six months prior written notice. Either party may terminate for breach or
insolvency. Sales of our products to Novartis under this agreement accounted for
$1,424,000 in calendar 2000, which was 17.1% of our sales of consumer patch
products and 8.6% of our total sales. For the quarter ended December 31, 2000,
sales of our products to Johnson & Johnson Consumer Products Company under this
agreement accounted for $608,000, which was 24.3% of our sales of consumer patch
products and 15.0% of our total sales for that period. Our primary obligation
under the agreement is to manufacture and sell the product ordered by Novartis.
Under the terms of the agreement, Novartis is not required to purchase a minimum
amount of our product. However, Novartis has an incentive to purchase a minimum
of $1,900,000 of our product in each year in order to maintain the exclusivity
provisions of the agreement. Our results of operations could be harmed if
Novartis decreased the purchases it makes under the agreement. In addition, if
the agreement were cancelled, which Novartis has the right to do upon six months
notice, our results of operations would be harmed. If we were unable to extend
or renew the agreement upon its expiration, our results of operations would be
harmed.
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
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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.
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 THAT 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
-7-
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 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;
-8-
* 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.
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.
-9-
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 3,915,676 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.
-10-
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.
-11-
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 Year Ended June 30,
December 31, ------------------------------------------------------------------------------
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 Year Ended June 30,
December 31, ------------------------------------------------------------------------------
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.
-12-
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
============ ============ ============
-13-
CONDUCTIVE BUSINESS STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months
Ended Years ended June 30,
Dec. 31, --------------------------------------------
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
============ ============ ============ ============
-14-
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 that 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.
-15-
NOTE B - CASH FLOWS
Cash flows for the Conductive Business based on its income from operations are
as follows:
SIX MONTHS
ENDED YEARS ENDED JUNE 30,
DECEMBER 31, ----------------------------------------------
2000 2000 1999 1998
------------ ------------ ------------ ------------
Cash flows from operating activities:
Income from operations .............. $ 127,376 $ 385,890 $ 604,851 $ 1,016,643
Depreciation and amortization ....... 13,635 26,074 87,773 86,991
Changes in operating assets and
liabilities:
Accounts receivable ............... 409,072 120,464 (52,110) (45,403)
Inventory ......................... (40,359) (41,865) (99,599) 307,354
Accounts payable .................. (31,895) (149,903) 204,111 6,929
------------ ------------ ------------ ------------
Net cash provided by operating
activities ...................... 477,829 340,660 745,026 1,372,514
Cash flows from investing activities:
Purchase of equipment and
investment in patents ............. (15,962) (15,146) (40,170) (25,616)
------------ ------------ ------------ ------------
Net cash used in investing
activities: ..................... (15,962) (15,146) (40,170) (25,616)
The Conductive Business had no cash flows from financing activities.
-16-
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.
-17-
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
============ ============ ============ ============
-18-
LECTEC CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEETS - CONTINUED
DECEMBER 31, 2000
(UNAUDITED)
Medical
Conductive Tape
Historical Business 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 ................... $ 0.88 $ 1.21 -- $ 2.09
============ ============ ============ ============
-19-
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
------------ ------------ ------------ ------------
4,196,001 (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
============ ============ ============ ============
-20-
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
============ ============ ============ ============
-21-
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.
(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.
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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.
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
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 that
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
-23-
distinction relates to the compounds that are mixed together to create the
hydrogels. Hydrogels have different characteristics, and can be used for
different applications, depending on the components making up the hydrogels. The
electrically conductive hydrogels contain additives, such as salt, that permit
the hydrogels to conduct electricity. This property allows them to be used in
applications that require electrical conductivity, such as diagnostic ECG
electrodes. The skin interface hydrogels are not electrically conductive but the
mixture of compounds has been optimized to permit the hydrogels to facilitate
the delivery of a substance through human skin. These hydrogels are used to
create patches that topically deliver specific medications, such as an acne
compound, to the skin.
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. The nine patents that LecTec
will be transferring relate to processes involved in creating electrically
conductive hydrogels. Twenty of the 26 retained patents relate to products which
LecTec no longer manufacturers or sells. Six of the retained patents relate to
processes involved in creating skin interface hydrogels. Of these six retained
patents, five are important to LecTec's ongoing operations. These five patents
expire at various times beginning in 2014. LecTec does not 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.
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, or J&J, Neutrogena Corporation, or Neutrogena, and
Novartis Consumer Health, Inc., or Norvartis. Sales to J&J and Neutrogena are
made pursuant to one reseller agreement since both parties are under common
corporate control. The agreement provides that J&J and Neutrogena will purchase
from LecTec hydrogel patches for use in the treatment of acne. The agreement has
an initial term that expires May 24, 2002. LecTec's principal duty under the
agreement is to manufacture and sell the patches ordered by J&J and Neutrogena.
Under the terms of the agreement J&J and Neutrogena are collectively required to
purchase a minimum amount of patches in each year of the initial two-year term
that equates to approximately $600,000 in sales of patches. Based on internal
projections and conversations with J&J and Neutrogena, LecTec expects actual
sales under the agreement to be approximately $1.5 million for fiscal year 2001.
During the term of the agreement, J&J and Neutrogena have the exclusive
worldwide right to market, sell and distribute
-24-
the patches and the right of first negotiation as to any of LecTec's new acne
products utilizing the same technology as the patches. Any improvements to the
patches must be approved by LecTec, J&J and Neutrogena. LecTec has warranted as
to its manufacturing practices and the compliance of the patches with the
specifications set forth in the agreement. LecTec has agreed not to provide any
similarly situated customer with preferential treatment with respect to pricing
or allocation of the patches. In the event that LecTec fails to supply patches
in accordance with the agreement, J&J and Neutrogena are permitted to obtain the
patches from an alternate supplier. Either party may terminate the agreement for
breach or insolvency. In addition, the agreement can be terminated by J&J or
Neutrogena on six months notice during any extension of the initial term.
LecTec's reseller agreement with Novartis Consumer Health, Inc.
provides that Novartis will purchase from LecTec hydrogel patches which emit
vapors that, when inhaled, provide relief of cough and cold symptoms. LecTec's
principal duty under the agreement is to manufacture and sell the patches
ordered by Novartis. LecTec may not manufacture and sell the patches or any
other vapor patches in the pediatric field of use and in the United States to
any other reseller, but may manufacture and sell competing patches under
LecTec's own brand name. The agreement does not require Novartis to purchase a
minimum quantity each year. Based upon discussions with Novartis and internal
forecasts, LecTec expects the agreement to generate approximately $2,800,000 in
sales in fiscal year 2001. Novartis has an incentive to purchase a minimum of
$1,900,000 of the patches in each year in order to maintain the exclusivity
provisions of the agreement. Novartis is required to purchase its requirements
of the patches for use in the pediatric field and in the United States
exclusively from LecTec. Each of LecTec and Novartis shall retain the ownership
of its intellectual property provided to the other party during the agreement.
LecTec has warranted as to its manufacturing practices and the compliance of the
patches with the specifications set forth in the agreement. The agreement has an
initial term that 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.
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.
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,
-25-
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 that 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 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").
-26-
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.
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, including a
manufacturing and supply agreement. Sherwood, which is under common control with
Ludlow and did not participate directly in those negotiations, was represented
by Ludlow in those negotiations. The negotiation of the manufacturing and supply
agreement centered on the issue of how long LecTec would be required to supply
products at its cost of production. On October 31,
-27-
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 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 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
-28-
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 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 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 Board of Directors also considered
that, as a result of the asset sale, there would be an increase in the
relative importance of its revenues from and relationships with the
three significant resellers of its consumer products;
* 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 approximately 60% of LecTec's
manufacturing capacity to the production of consumer products; 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. The Board of Directors considered that the
purchase price adjustment would be limited by the net asset value of
the
-29-
assets sold, or $1,460,000. As a result, the Board of Directors was
aware that the minimum purchase price could be as low as $5,790,000,
but no lower.
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 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,
-30-
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.
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)
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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 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.
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
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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 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.
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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 the sale of the medical tape equipment. The sale of the
medical tape equipment is not conditioned
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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 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
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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 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.
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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, which must be made on a shareholder by shareholder basis. 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.
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
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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;
* all claims and rights against third parties relating to the
purchased assets;
* contracts to supply electrodes and hydrogels related to the
conductive products business;
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* 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
- 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;
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* 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;
* the absence of legal proceedings;
* payment of broker's fees; and
* third party consents to the asset sale.
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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.
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 that have not yet been satisfied and therefore must be satisfied or
waived before completion of the asset sale:
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* 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;
* the parties shall have executed and delivered a bill of sale and
assignment, an assumption of liabilities agreement, a
non-competition agreement, a manufacturing and supply agreement, and
a transition services agreement;
* 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 delivered a legal opinion regarding its
corporate formation, legal power to enter into the asset purchase
agreement and the lack of conflicts between the asset purchase
agreement and its charter documents and applicable law; and
* 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.
INDEMNIFICATION
LecTec has agreed to indemnify Ludlow and Sherwood for certain losses
that 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
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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.
-43-
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 recent in October of 1996 which was as an inductee as Fellow of the
American Association of
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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.
-45-
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.
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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.
BASE SALARY. The Committee annually reviews the base salaries of
executive officers. In determining appropriate salary levels, the Committee
considers the following criteria:
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* scope and complexity of the position including required substantive
knowledge and required training;
* level of responsibility including number of employees directly
supervised;
* past performance including revenue generated from operations under
the management of the executive officer; and
* salary levels for comparable positions at industry peer group
companies and the market opportunities available to the executive
officer.
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 pool is dependent upon the following
criteria:
* the measure of annual sales actually achieved compared to the level
of annual sales contained in LecTec's annual budget as approved by
the Board of Directors; and
* the measure of profits (or loss) actually achieved compared to the
level of profits (or loss) contained in LecTec's annual budget as
approved by the Board of Directors.
An executive officer's individual bonus is dependent upon the following
criteria:
* annual sales directly attributable to operations managed by the
executive officer;
* achievement of significant corporate goals which do not generate
sales; and
* the results of the executive officer's annual performance review.
In addition to the above criteria, the Compensation Committee retains
ultimate discretion to make final bonus determinations based on the best
interests of LecTec. For the fiscal year 2000, the minimum sales and profits
performance goals under the annual incentive program were achieved, but no cash
bonus payments were made under the annual incentive program because the
Compensation Committee determined that it was in the best interests of LecTec to
conserve cash. 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
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eligible for annual grants of stock options. The amount of stock options awarded
to an executive officer are dependent on the following criteria:
* the executive officer's past performance with the company including
sales directly attributable to operations managed by the executive
officers;
* the executive officer's ability to impact financial performance; and
* the importance of the executive officer's responsibilities at LecTec
in light of LecTec's future strategic plans.
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 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.
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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.
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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.
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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.
-52-
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."
-53-
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 10.9
Rodney A. Young 209,500 195,000 5.1
Daniel M. McWhorter 69,050 53,225 1.7
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 *
Deborah L. Moore 10,541 0 *
Timothy P. Fitzgerald 0 0 *
All directors and executive
officers as a group (12 persons) 1,439,688 434,894 33.1
- -----------------------------
*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
purchases were recorded. An amended Form 4 for Mr. Hymes was filed on July 7,
2000 which correctly reported the transaction.
-54-
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
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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 exercise their discretionary voting authority with respect to
that shareholder
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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
Information and Financial Data - Selected Consolidated
Financial Data," and
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"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
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EXHIBIT A
ASSET PURCHASE AGREEMENT
THIS AGREEMENT made as of November 17, 2000 (this "Agreement") by and
among The Ludlow Company LP, a Delaware limited partnership ("Ludlow"), Sherwood
Services AG, a Swiss corporation ("Sherwood" and, together with Ludlow, the
"Purchasers"), and LecTec Corporation, a Minnesota corporation (the "Seller").
Capitalized terms used in this Agreement shall have the meanings given to them
upon their first use or in Section 16 herein.
W I T N E S S E T H
WHEREAS, the Seller has been engaged in the business (the "Business")
of the research, development, design, manufacture, marketing, distribution and
sale of physiological monitoring and stimulation products, including the
diagnostic electrodes and electrically conductive adhesive hydrogel products
listed on Exhibit A attached hereto (the "Products");
WHEREAS, the Seller desires to sell and assign and the Purchasers
desire to buy and assume, on the terms and conditions set forth in this
Agreement, certain specified assets, properties and liabilities of the Seller
associated with the Business as set forth herein;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements hereinafter contained, the parties hereto agree as follows:
Section 1. Purchase and Sale of Purchased Assets.
(a) Subject to and upon the terms and conditions of this Agreement, the
Seller agrees to sell, assign, transfer and convey to the Purchasers and the
Purchasers agree to purchase from the Seller, on the Closing Date (as
hereinafter defined), all of the Seller's right, title and interest, as of the
Closing Date, in and to the following assets of the Seller:
(i) The machinery and equipment, tooling, molds, dies,
instruments, supplies of the Seller listed on Schedule 1(a)(i) hereto;
(ii) The inventories of raw materials, work in process and
finished goods listed on Schedule 1(a)(ii) hereto (collectively, "Inventory"),
possession of which shall be transferred to Ludlow upon the expiration or
termination of the Manufacturing and Supply Agreement substantially in the form
of Exhibit E to be entered into by and between the Seller and Ludlow, in
accordance with the terms thereof;
(iii) The Seller's accounts, notes and royalties receivable
listed on Schedule 1(a)(iii), and any other accounts receivable arising from the
sale of Products;
(iv) The U.S. and foreign registered and unregistered trademarks,
tradenames, service marks, copyrights and applications for the foregoing, owned
by, or registered in the name
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of the Seller (including all licenses with respect thereto) which are listed on
Schedule 1(a)(iv) hereto;
(v) The U.S. and foreign letters patent and patent applications of
the Seller (including all licenses with respect thereto) and all reissues,
divisions, continuations-in-part and extensions thereof which are listed on
Schedule 1(a)(v) hereto, and the Seller's right, title and interest in the
technology, know-how, technical information, inventions, research records and
other documentation, formulae, processes, techniques, technical information,
manufacturing and engineering drawings and information and trade secrets listed
on Schedule 1(a)(v) hereto or otherwise related to the manufacture of the
Products;
(vi) The Seller's claims and rights against third parties
relating to the Purchased Assets (as defined below), including, without
limitation, rights under manufacturers' and vendors' warranties;
(vii) All rights and privileges of the Seller under and pursuant
to the contracts, leases, licenses or agreements which are listed in Schedule
1(a)(vii) hereto (the "Assumed Contracts");
(viii) To the extent transferable, the governmental licenses,
permits, approvals, authorizations and registrations which are listed in
Schedule 1(a)(viii) hereto (collectively, the "Permits");
(ix) The supplier lists, advertising and promotional materials,
price and product lists, sales records and files, books, records, catalogues,
manuals, financial and accounting records, marketing surveys, production
records, quality control records, papers, software, correspondence and
computerized reports of the Seller related to the Business; and
(x) All customer lists, distribution lists and prospective
customer lists of the Seller directly related to the Business, and the goodwill
of the Business.
Between the date of this Agreement and the Closing Date, the Seller
shall deliver to the Buyers an update of the Schedules referred to in Sections
1(a)(ii), 1(a)(iii) and 1 (a)(vii) to reflect any changes in the foregoing due
to acquisition or disposition of assets in the ordinary course of the Business.
The information set forth on such updated schedules shall be current as of a
date no earlier than three (3) business days prior to the Closing Date. The
items of property referred to in Sections 1(a) through 1(a)(x) above, as
adjusted pursuant to the updated Schedules, are hereinafter collectively
referred to as the "Purchased Assets".
(b) Notwithstanding anything in Section 1(a) to the contrary, the
assets and properties to be transferred by the Seller to the Purchasers pursuant
hereto (and the term "Purchased Assets" as used herein) shall not include any
assets and properties which are not referred to in Sections 1(a)(i) through
1(a)(x) above (collectively, the "Excluded Assets").
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(c) The parties acknowledge and agree that on the Closing Date, subject
to the conditions set forth herein, (i) all of the Purchased Assets described in
Section 1(a)(iv) and 1(a)(v), and the goodwill associated therewith (the "IP
Assets"), shall be conveyed to Sherwood; and (ii) all of the Purchased Assets
other than the IP Assets (the "Non-IP Assets"), shall be conveyed to Ludlow.
Section 2. Assumption of Certain Liabilities.
(a) The Purchasers shall assume and be responsible for, and shall
promptly pay, perform and otherwise satisfy in accordance with their terms, only
those obligations and liabilities of the Seller set forth in clauses (i), (ii)
and (iii) below (collectively, the "Assumed Liabilities") and no others:
(i) The obligations of the Seller under the Assumed Contracts;
(ii) All liabilities and obligations arising out of or resulting
from the conduct of the Business by the Purchasers occurring subsequent to the
Closing Date, except for the Excluded Liabilities (defined below); and
(iii) All liabilities reflected on the Closing Net Asset Statement
(as defined in Section 5 below), other than liabilities in respect of
indebtedness for borrowed money and any liabilities owing to any Affiliates of
the Seller.
(b) Notwithstanding any implication to the contrary contained in
Section 2(a) hereof, the Purchasers shall not assume, pay or in any way be
liable or responsible for any of the following debts, liabilities or obligations
(collectively, the "Excluded Liabilities"):
(i) any liability or obligation of the Seller under this
Agreement or on account of any of the transactions contemplated hereby,
including, without limitation, any liability or obligation of the Seller to
attorneys, accountants, brokers, or others for services rendered or expenses
incurred by or on behalf of the Seller;
(ii) any wages, salaries, bonuses, commissions, vacation or
holiday pay, post retirement medical benefits, fringe benefits, long-term
disability benefits, life insurance benefits, any duties, obligations or
liabilities arising under any employee benefit plan, policy or practice, whether
defined by Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended and in effect ("ERISA") or otherwise, relating to the employees of
the Seller or other amounts due to any employees or former employees of the
Seller;
(iii) any liabilities and obligations of the Seller for any
federal, state, provincial, local or foreign income, excise, sales, real estate,
personalty, payroll or other taxes of any kind whatsoever payable with respect
to the operations of the Business prior to the Closing Date;
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(iv) any tax (including, without limitation, any federal, state,
foreign or local income, franchise, sales, transfer, recording, documentary or
other tax) imposed upon or incurred by the Seller arising out of or in
connection with the negotiation and preparation of this Agreement and the
consummation and performance of the transactions contemplated hereby;
(v) any liability or obligation of the Seller relating to,
resulting from, caused by, or arising out of the ownership, operations or
control of the Business by the Seller prior to the Closing Date, including,
without limitation, liabilities and obligations arising out of the following:
(A) any accident or occurrence resulting in personal injury,
sickness, death, property damage, property destruction or loss of use of
property arising out of or resulting from the operation of the Business by the
Seller prior to the Closing Date,
(B) any breach of contract, workers' compensation claim or
violation of any law or final order of any federal, state, local or foreign
judicial, quasi-judicial or governmental body,
(C) any personal injury, sickness, death or property damage
resulting from or arising out of (i) any defect or alleged defect of products
manufactured or sold by the Seller prior to the Closing Date including, without
limitation, any such liabilities or obligations for defects or alleged defects
in design or failure to warn, or (ii) any negligence or alleged negligence in
inspection, maintenance or service by the Seller prior to the Closing Date, or
(D) any product recall or retrofit liabilities or warranty
liabilities relating to products of the Business which were manufactured or sold
by the Seller prior to the Closing Date, or any shortage in the products of the
Business delivered before the Closing Date or in transit at the time of the
Closing;
(vi) any liability for failure to comply with applicable bulk
sales laws;
(vii) any liability or obligation with respect to any options,
warrants, puts or calls granted by the Seller;
(viii) any liability or obligation with respect to any
indebtedness for borrowed money;
(ix) any liability or obligation related to any of the Excluded
Assets; and
(x) any other liabilities (whether contingent, actual or
contractual), obligations, claims, or commitments, disclosed or undisclosed, of
the Seller which are not expressly disclosed to and assumed by the Purchasers
pursuant to Section 2(a) hereof.
(b) The parties acknowledge and agree that on the Closing Date, subject
to the conditions set forth herein, (i) all of the Assumed Liabilities related
to the Non-IP Assets shall be
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assumed by Ludlow, and (ii) all of the Assumed Liabilities related to the IP
Assets shall be assumed by Sherwood.
(c) To the extent that the assignment of any contract or any license,
permit, approval or qualification issued or to be issued by any Person or
government or agency or instrumentality thereof relating to the Business or the
Purchased Assets including, without limitation, the Permits to be assigned to
the Purchasers pursuant to this Agreement, shall require the consent of any
other party, this Agreement shall not constitute a contract to assign the same
if an attempted assignment would constitute a breach thereof. The Seller shall
use commercially reasonable efforts, and the Purchasers shall cooperate where
appropriate, to obtain any consent necessary to any such assignment. If any such
consent is not obtained, then the Seller shall cooperate with the Purchasers in
any reasonable arrangement requested by the Purchasers designed to provide to
the Purchasers the benefits under any such contract, license, Permit, approval
or qualification, including enforcement of any and all rights of the Seller
against the other party thereto arising out of breach or cancellation thereof by
such other party or otherwise.
Section 3. Purchase Price.
Subject to and upon the terms and conditions of this Agreement
(including the adjustment provisions set forth in Section 5 below), the
Purchasers shall purchase and the Seller shall sell the Purchased Assets for a
sum equal to $7,250,000 (the "Cash Purchase Price") plus the assumption of the
Assumed Liabilities (collectively, the "Purchase Price"). Ludlow shall pay the
Seller $7,230,000 of the Cash Purchase Price for the Non-IP Assets and Sherwood
shall pay $20,000 of the Cash Purchase Price for the IP Assets.
Section 4. Closing and Payment of Purchase Price.
The closing of the transactions contemplated herein (the "Closing")
shall take place at the offices of Dorsey & Whitney LLP, at 220 South Sixth
Street, Minneapolis, Minnesota 55402, within 5 business days after the
shareholders of the Seller approve the sale of the Purchased Assets, and all
other conditions precedent to the Closing set forth in Sections 10 and 11 hereof
have been satisfied, or such other time and place as may be agreed upon by the
Purchasers and the Seller (the "Closing Date").
On the Closing Date, the Seller shall transfer to the Purchasers by all
necessary and appropriate bills of sale, deeds, assignments and other
instruments, all right, title and interest of the Seller in and to the Purchased
Assets and the Purchasers shall deliver to the Seller by cash, certified or
cashier's check or by wire transfer of immediately available funds an amount
equal to the Cash Purchase Price. On the Closing Date, the Seller shall assign
and the Purchaser shall assume by all necessary and appropriate instruments the
Assumed Liabilities.
Section 5. Adjustments to Purchase Price.
The Cash Purchase Price set forth in Section 3 above is based upon a
Net Asset Value of the Seller of $1,460,000, as reflected on the net asset
statement attached as Schedule 5 hereto (the
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"Preliminary Net Asset Statement"). The Cash Purchase Price shall be subject to
adjustment in accordance with the procedures set forth below:
(i) Within ninety (90) days subsequent to the Closing Date the
Purchasers shall prepare and deliver to the Seller a net asset statement as of
the Closing Date (the "Closing Net Asset Statement,"), which Closing Net Asset
Statement shall reflect the Purchased Assets and Assumed Liabilities and (a)
shall be derived from financial statements that have been prepared in accordance
with generally accepted accounting principles consistently applied, and (b)
shall be prepared in a manner consistent with the preparation of the Preliminary
Net Asset Statement, provided, however, that notwithstanding the manner in which
Inventory is valued on the Preliminary Net Asset Statement, (I) any Inventory
that is not is saleable or usable condition, and any volume of any item of
Inventory in excess of the Seller's historical usage of such item during the
twelve (12) months preceding the Closing Date, shall be valued at zero on the
Closing Net Asset Statement, and (II) all Inventory shall be valued on the
Closing Net Asset Statement at the lower of the Seller's actual purchased cost
or market value, without any mark-up or burden of any kind. Any fees and
expenses incurred by the Purchasers in preparing the Closing Net Asset Statement
shall be paid by the Purchasers.
(ii) After receipt of the Closing Net Asset Statement, the Seller and
its accountants and attorneys shall have thirty (30) days to review the Closing
Net Asset Statement. In addition, the Seller and its accountants and attorneys
shall be given reasonable access to the premises of the Purchasers, to their
books, records and work papers, and to the appropriate personnel of the
Purchasers for purposes of confirming the Closing Net Asset Statement. Unless
the Seller notifies the Purchasers to the contrary in writing within such thirty
(30) day period pursuant to paragraph (iii) hereof, the Seller shall be deemed
to have accepted the Closing Net Asset Statement and such Closing Net Asset
Statement shall be conclusive and binding on the Seller. Any fees and expenses
incurred by the Seller in undertaking such review shall be paid by the Seller.
(iii) If the Seller takes exception to any aspect of the Closing Net
Asset Statement or the preparation thereof, the Seller shall notify the
Purchasers of such exception in writing on or prior to the thirtieth (30th) day
after the Seller's receipt of the Closing Net Asset Statement. Unless resolved
by the parties within thirty (30) days thereafter (the "Resolution Period"),
such exception or exceptions shall be submitted to a firm of nationally
recognized independent public accountants (the "Neutral Auditors") selected by
mutual agreement of the Purchasers and the Seller within five (5) days after the
expiration of the Resolution Period or, in the absence of such mutual agreement,
by a firm of nationally recognized independent public accountants selected by
lot after eliminating the Seller's principal outside accountants and the
Purchasers' principal outside accountants and one additional firm designated as
objectionable by each of the Seller, on the one hand, and the Purchasers, on the
other hand. Each party agrees to execute a reasonable engagement letter, if
requested to do so by the Neutral Auditors. All fees and expenses relating to
the work performed by the Neutral Auditors shall be shared equally by the Seller
and the Purchasers. The Neutral Auditors, within forty-five (45) days after
their selection, shall make a determination of all issues in dispute, which
determination shall be set forth in a written
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statement delivered to the Purchasers and the Seller and shall be binding and
conclusive as among the parties hereto absent fraud or manifest error.
(iv) The Cash Purchase Price shall be adjusted upon the happening of
(a) the acceptance of the Closing Net Asset Statement by the Seller, as
evidenced by written notice thereof to the Purchasers, (b) the deemed acceptance
of the Closing Net Asset Statement by the Seller pursuant to paragraph (ii)
hereof, or (c) the resolution of the parties or the delivery of the statement of
the Neutral Auditors pursuant to paragraph (iii) hereof. If the Net Asset Value
as reflected on the Closing Net Asset Statement (after taking into account any
changes resulting from the mutual agreement of the parties or the statement of
the Neutral Auditors, if any), is less than the Net Asset Value on the
Preliminary Net Asset Statement, the Cash Purchase Price shall be decreased
dollar for dollar by the amount of such deficiency. Any such decrease in the
Cash Purchase Price shall be settled by a prompt payment made within 5 business
days of the date that the Closing Net Asset Statement becomes binding on the
parties, in immediately available funds, by the Seller to the Purchasers. If the
Net Asset Value on the Closing Net Asset Statement (after taking into account
any changes resulting from the mutual agreement of the parties or the statement
of the Neutral Auditors, if any), is more than the Net Asset Value on the
Preliminary Net Asset Statement, the Cash Purchase Price shall be increased
dollar for dollar by the amount of such difference. Any such increase in the
Cash Purchase Price shall be settled by a prompt payment made within 5 business
days of the date that the Closing Net Asset Statement becomes binding on the
parties, in immediately available funds, by the Purchasers to the Seller.
Section 6. Representations and Warranties of the Seller
The Seller hereby represents and warrants to the Purchasers as follows:
(a) Due Organization. The Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of Minnesota.
The Seller has all requisite corporate power and authority to own, lease and
operate its properties, to carry on its business as presently conducted by it,
to enter into this Agreement, the Additional Agreements (defined below) to which
it will be a party and the other instruments and agreements of the Seller
provided for herein, and to consummate the transactions contemplated hereby and
thereby, except where the failure to have such corporate power would not
reasonably be likely to have a Material Adverse Effect. The Business has been
conducted solely by the Seller and not through any other subsidiary, Affiliate,
joint venture or other Person.
(b) Authorization. The execution and delivery by the Seller of this
Agreement, the Additional Agreements to which it will be a party, and the other
instruments and agreements of the Seller provided for herein, and, subject to
obtaining the approval of the Seller's shareholders, the performance of its
obligations hereunder and thereunder, have been duly and validly authorized by
all necessary corporate action on its part, and this Agreement, the Additional
Agreements and all other such instruments and agreements delivered or to be
delivered by such Person in connection with the transactions contemplated hereby
are, or (when executed and delivered in accordance herewith) will be, the legal,
valid and binding obligations of the Seller, enforceable against it in
accordance with their respective terms.
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(c) Non-Contravention. Except where the occurrence of any of the events
in (i) or (ii) below would not reasonably be likely to have a Material Adverse
Effect or as set forth on Schedule 6(c), neither the execution and delivery by
the Seller of this Agreement and the Additional Agreements, nor the performance
by the Seller of its obligations hereunder and thereunder will, or with the
giving of notice or the lapse of time, or both, would:
(i) conflict with, result in a breach of, or constitute a default
under, any provision of the Articles of Incorporation or By-laws of the Seller;
(ii) conflict with, result in a breach of, or constitute a
default under, any provision of any contract, indenture, lease, sublease, loan
agreement, restriction, Lien or other obligation or liability to which the
Seller is a party or by which it is bound, or result in or create in any party
the right to accelerate, terminate, modify or cancel any contract, license,
indenture, lease, sublease or loan agreement to which the Seller is a party or
by which it, or any of its properties or assets, is affected or bound;
(iii) violate any order, writ, injunction, decree, law, statute,
rule or regulation applicable to the Seller; or
(iv) result in the creation or imposition of any Lien upon any of
the Purchased Assets.
(d) Financial Statements. The Seller has delivered to the Purchasers
true and complete copies of (i) the audited financial statements of the Seller
for each of the twelve-month periods ended June 30, 2000, June 30, 1999 and June
30, 1998, and (ii) the unaudited financial information of the Business set forth
on Schedule 6(d) (the statements described in the foregoing clauses (i) and (ii)
are hereinafter referred to as the "Financial Information"). The Financial
Information described in (i) above has been prepared from the books and records
of the Seller and fairly present the results of operations and financial
condition of the Seller at the respective dates thereof and for the periods
therein referred to, all in accordance with generally accepted accounting
principles applied consistently with prior periods. The Financial Information
described in (ii) above has been prepared from the books and records of the
Seller and fairly presents the Purchased Assets and Assumed Liabilities and the
sales, gross margin and other information of the Business set forth on Schedule
6(d) at the respective dates thereof and for the periods therein referred to.
The Financial Information described in (ii) above has been derived from
financial statements of the Seller prepared in accordance with generally
accepted accounting principles applied consistently with prior periods.
(e) Absence of Certain Changes or Events. Except as set forth in
Schedule 6(e), since June 30, 2000, there has not been:
(i) any circumstances, event, occurrence, change or effect that
individually or in the aggregate has resulted in a Material Adverse Effect;
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(ii) any damage, destruction or loss (whether or not covered by
insurance) to the Purchased Assets which would constitute a Material Adverse
Effect;
(iii) any termination or amendment of, or other Material Adverse
Effect on the Seller's contractual or other relationships relating to the
Purchased Assets;
(iv) any commitment made or action taken materially affecting the
Purchased Assets or Assumed Liabilities, including, without limitation,
incurring of indebtedness, mortgage or pledge of property, forgiveness or
cancellation of debts or claims or waiver of any rights by the Seller, other
than the entering into of this Agreement;
(v) any sale or transfer, including by way of mortgage or pledge,
or any agreement to sell or transfer, any Purchased Assets, other than the sale
of Inventory in the ordinary course of business and the entering into of this
Agreement;
(vi) any material transaction directly relating to the Purchased
Assets other than in the ordinary course of business;
(vii) any incurrence of any liability or obligation (whether
absolute, accrued, contingent or otherwise) that would be an Assumed Liability
other than in the ordinary course of business; or
(viii) any commitment or agreement (other than this Agreement)
with respect to any of the foregoing.
(f) No Undisclosed Liabilities. Except as set forth in Schedule 6(f),
to the Seller's knowledge there is no liability or obligation related to the
Purchased Assets, whether known or unknown, direct or indirect, accrued,
contingent or otherwise, including, without limitation, liabilities for federal,
state, local or foreign taxes or assessments or liabilities relating to
renegotiation of contracts or leases, which is not reflected or reserved against
in the Preliminary Net Asset Statement. Except as set forth in Schedule 6(f), to
the knowledge of Seller, there is no basis for the assertion against the Seller
of any liability of any nature or in any amount which is directly related to the
Purchased Assets which is not fully reflected or reserved against in the
Preliminary Net Asset Statement.
(g) Related-Party Transactions. Except as set forth in Schedule 6(g),
and with the exception of payment of wages and benefits to individuals in their
capacities as employees of the Seller, no Assumed Contract is between the Seller
and a Related Party.
(h) Taxes.
(i) For purposes of this Agreement, (A) "Tax" means any of the
Taxes, and "Taxes" means, with respect to the Seller, (I) all net income,
capital gains, gross income, gross receipts, sales, use, ad valorem, franchise,
capital, profits, license, and other withholding, employee payroll withholding,
employment, payroll, transfer, conveyance, documentary, stamp,
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property, value added, customs duties, minimum taxes, and any other taxes, fees,
charges, levies, excises, duties or assessments of any kind whatsoever, together
with additions to tax or additional amounts, interest and penalties relating
thereto that may be imposed by the federal government or any state, local or
foreign government on or with respect to the Purchased Assets, with respect to
all periods up to and including the Closing Date, and (II) any liability of the
Seller for the payment of any amount of the type described in clause (I) as a
result of the Seller being a transferee or a member of an affiliated or combined
group prior to the Closing Date, and (B) "Tax Returns" means all returns,
reports and forms required to be filed in respect of any Taxes.
(ii) The Seller has (A) timely filed or will file when due (or
has filed and has paid all assessed penalties and interest), including
extensions thereof, all federal, foreign, state and local Tax Returns required
to be filed by or with respect to the Seller prior to the Closing Date, and all
such Tax Returns are true, complete and correct; and (B) paid or will pay when
due or finally settled all Taxes which are or become due and payable for all
periods ending on or prior to the Closing Date.
(iii) The Seller is not a person other than a United States
person within the meaning of the Code. The Seller's federal employer
identification number is 41-1301878.
(iv) There are no Liens for Taxes (other than for current Taxes
not yet due and payable) on any of the Purchased Assets.
(i) Inventory. All items of Inventory are of a quality and quantity
salable or usable in the ordinary course of the Business. All such Inventories
are valued on the books of the Business at the lower of cost (calculated using
the first-in, first-out valuation method) or market and have net realizable
market values in the ordinary course of business of not less than their book
value. Each of the Seller's commitments for the sale or delivery of Products is
priced such that the consideration to be received for such Products exceeds the
aggregate book value of the items of Inventory required to fulfill such
commitment.
(j) Title to Purchased Assets; Condition of Purchased Assets. All of
the tangible Purchased Assets (other than Inventory and Excluded Assets) are
listed in Schedule 1(a)(i) hereto. Except as set forth in Schedule 6(j), the
Seller has good and marketable title to and possession of all of the Purchased
Assets, free and clear of all Liens, except (i) liens for current property taxes
not yet due and payable, (ii) liens imposed by law and incurred in the ordinary
course of business for obligations not yet due to carriers, warehousemen,
laborers, materialmen and the like, (iii) liens in respect of pledges or
deposits under workers' compensation laws or (iv) liens set forth in Schedule
6(j) (collectively, the "Permitted Liens"); and no interest in or right to any
of the Purchased Assets is held, legally or beneficially by any Person other
than the Seller. The tangible Purchased Assets have been properly maintained and
are in good operating condition, reasonable wear and tear excepted, and there
exists no outstanding written notice of any violation of any statute relating to
them.
(k) Accounts Receivable. Schedule 1(a)(iii) sets forth a complete and
accurate list of the notes, accounts and royalties receivable arising from the
sale of Products. All of such notes, accounts and royalties receivable arose in
the ordinary course of the Business, constitute valid
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and binding claims of the Seller against independent third parties and are
collectible, assuming commercially reasonable efforts are expended, in the
aggregate in amounts not less than their net amount reflected in the Seller's
books and records or financial statements, taking into account any reserve for
bad debts reflected on Schedule 1(a)(iii) or the Preliminary Net Asset
Statement. None of such notes, accounts and royalties receivable are subject to
any rights of set-off. None of such notes, accounts and royalties receivable are
with Related Parties or Affiliates.
(l) Intellectual Property. Schedules 1(a)(iv) and 1(a)(v) attached
hereto set forth a complete and accurate list of all of the United States and
foreign patents, trademarks, copyrights and registrations thereof and/or
applications therefor, and all service marks and trade names that are related to
the manufacture, promotion, sale or distribution of Products, (collectively, the
"Intellectual Property"). Unless otherwise indicated in such Schedule 1(a)(iv)
or 1(a)(v), the Seller exclusively owns the entire right, title and interest in
and to each item of Intellectual Property. Such Schedules 1(a)(iv) and 1(a)(v)
also correctly set forth a list of all licenses of or rights in Intellectual
Property granted by the Seller to others and by others to the Seller, including
any and all royalty agreements. Except as set forth in such Schedule 1(a)(iv) or
1(a)(v), (i) all of such licenses or rights are currently in full force and
effect, binding upon the parties thereto, and enforceable against them in
accordance with their terms, (ii) the Seller is complying in full with the terms
and provisions thereof, (iii) to the best knowledge of the Seller, the other
parties to all of such licenses or rights are complying in full with the terms
and provisions thereof, and (iv) the consummation of the transactions
contemplated hereby will not impair any right or privilege enjoyed by the Seller
under such licenses granted to the Seller by others, or give rise to any right
of termination or cancellation thereunder.
To the Seller's knowledge, the use of the Intellectual Property in the
conduct of the Business or the use of the Seller's know-how in the conduct of
the Business or the sale of the Seller's products related to the Business do not
infringe the rights of any third party. Except as set forth in Schedules
1(a)(iv) and 1(a)(v), no present or former stockholder, director, officer,
employee, agent or Affiliate of the Seller has any direct or indirect ownership
right or other interest in any item of Intellectual Property or in any of the
Seller's products sold hereunder relating to the Business, except (i) as would
not reasonably be likely to result in a Material Adverse Effect, and (ii)
resulting from the ownership of capital stock of the Seller.
(m) Contracts. The Assumed Contracts listed on Schedule 1(a)(vii)
include all material contracts, leases, agreements, letters of intent and
commitments related exclusively to the Business, whether written or oral, to
which the Seller is a party or by which any of the Purchased Assets are bound.
Except as set forth in such Schedule 1(a)(vii), (i) all of the Contracts were
entered into in the ordinary course of the Business, (ii) all of the Assumed
Contracts are currently in full force and effect, binding upon the parties
thereto, and enforceable against them in accordance with their terms, (iii) the
Seller is complying in full with the terms and provisions thereof, (iv) to the
best knowledge of the Seller, the other parties to all of the Assumed Contracts
are complying in full with the terms and provisions thereof, and (v) the
consummation of the transactions contemplated hereby will not impair any right
or privilege enjoyed by the Seller under any Assumed Contract, or give rise to
any right of termination or cancellation thereunder. The Seller has not made any
commitment to grant any rebates or cash
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discounts to their customers in connection with any contract or obligation,
except as shown in writing on the Assumed Contracts. To the best knowledge of
the Seller, no customer or supplier of the Seller intends to cease doing
business with the Seller, or to diminish the amount of business that such party
currently conducts with the Seller. The Seller provided the Purchasers full
access to complete and correct copies of the Assumed Contracts during the
Purchasers' due diligence investigation relating to the transactions
contemplated by this Agreement.
(n) Warranties; Product Compliance. The Seller has not given any
warranty, express or implied, with respect to any Products shipped prior to the
date hereof, other than the warranty or warranties set forth in Schedule 6(n).
All Products have been manufactured, packaged and labeled in compliance with all
applicable laws. To the Sellers knowledge, there is no basis for any
governmental body to deny or rescind any approval for any Products . There is no
action or proceeding by any governmental body pending or, to the best of the
Seller's knowledge, any basis therefor relating to the safety or efficacy of the
Products.
(o) Consents of Third Parties. Except as set forth in Schedule 6(o), no
consent, approval or agreement of any Person, court, government or other entity
is required to be obtained by the Seller in connection with the execution and
delivery of this Agreement, the Additional Agreements or the other instruments
or agreements provided herein or therein, or the consummation of the
transactions contemplated hereby or thereby, except where the failure to obtain
such consent, approval or agreement would not be reasonably likely to result in
a Material Adverse Effect.
(p) Litigation. Except as set forth on Schedule 6(p), there is no
litigation, arbitration, claim, governmental or other investigation or
proceeding (formal or informal) pending or, to the best knowledge of the Seller,
threatened with respect to the Business, the Purchased Assets or the
transactions contemplated hereby and, to the best knowledge of the Seller, there
exists no bases or grounds for any of the foregoing. The Seller has received no
written notification that it is in violation of, or in default with respect to,
any order, judgment or decree applicable to the Business or the Purchased
Assets, and to Seller's knowledge, is not required to take any remedial action
in order to avoid such violation or default.
(q) Compliance with Law; Permits. The Seller has complied with all, and
has not committed any violation of any, federal, state, local or foreign
statutes, laws, rules and regulations applicable to the Business or the
Purchased Assets. Except where the absence would not reasonably be likely to
result in a Material Adverse Effect, the Seller holds all permits, licenses (or
permissions in the nature thereof), registrations with, and consents of,
governmental authorities necessary to conduct the Business and in the same
manner as it has been conducted heretofore, all of which are listed in Schedule
1(a)(viii) attached hereto. All of the Permits are up to date and in good
standing, and no fees or charges are currently due with respect thereto, except
as would not reasonably be likely to result in a Material Adverse Effect.
(r) Adequacy of Purchased Assets. Except as set forth on Schedule 6(r),
the Purchased Assets constitute all of the assets, rights and privileges
necessary to the conduct of the Business as currently conducted and as currently
contemplated to be conducted in the future.
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The consummation of the transactions contemplated hereby will not impair the
rights of the Business with respect to any such assets, rights and privileges.
(s) Insurance. Schedule 6(s) contains a complete and accurate
description of all policies of insurance owned or held by the Seller which
covers risk to the Purchased Assets or the Business or potential liabilities to
third parties. All such policies are valid and in full force and effect on the
date hereof. No written notice of cancellation or termination has been received
with respect to any such policy listed in such Schedule 6(s) and such policies
are sufficient for compliance with all requirements of law applicable to the
Business and of all Assumed Contracts and provide adequate insurance coverage
for the Purchased Assets.
(t) No Broker. No agent, broker, person or firm (other than Goldsmith,
Agio, Helms and Lynner, Ltd.) acting on behalf of the Seller or any of its
Affiliates, or under its authority, is or will be entitled to a financial
advisory fee, brokerage commission, finder's fee or like payment in connection
with this Agreement or any of the transactions contemplated hereby. The Seller
paid or will pay any fees and expenses payable to Goldsmith, Agio, Helms and
Lynner, Ltd. in connection with the transactions contemplated hereby.
(u) Product Liability and Recalls. Except as set forth on Schedule
6(u), (i) there is no action, suit, claim, inquiry, proceeding or investigation
in any case by or before any court or governmental body pending or, to the best
knowledge of the Seller, threatened, against or involving the Seller relating to
any Product alleged to have been designed, manufactured or sold by the Seller
and alleged to have been defective or improperly designed or manufactured; and
(ii) there is no pending, or to the best knowledge of the Seller, threatened
recall or investigation of any Product sold by the Seller.
Section 7. Representations and Warranties of the Purchasers.
The Purchasers hereby jointly and severally represent and warrant to
the Seller as follows:
(a) Due Organization. Ludlow is a limited partnership duly formed,
validly existing and in good standing under the laws of the State of Delaware.
Sherwood is a corporation duly organized, validly existing and in good standing
under the laws of Switzerland. Each Purchaser has all requisite power and
authority to enter into this Agreement, the Additional Agreements to which it is
a party and the other instruments and agreements to be delivered by it
hereunder, and to consummate the transactions contemplated hereby and thereby.
(b) Authorization. The execution and delivery by each Purchaser of this
Agreement, the Additional Agreements to which it is a party, and the other
instruments and agreements to be delivered by it hereunder, and the performance
by it of its obligations hereunder and thereunder, have been duly and validly
authorized by all necessary action on its part, and this Agreement, the
Additional Agreements and all other such instruments and agreements delivered or
to be delivered by such Purchaser in connection with the transactions
contemplated hereby are, or (when executed and delivered in accordance herewith)
will be, the legal, valid and binding obligations of such Purchaser, enforceable
against it in accordance with their respective terms.
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(c) Non-Contravention. Neither the execution nor delivery of this
Agreement and the Additional Agreements by each Purchaser nor the performance by
each Purchaser of its obligations hereunder and thereunder will, or with the
giving of notice or the lapse of time, or both, would:
(i) conflict with, result in a breach of, or constitute a default
under, any provision of such Purchaser's agreement of limited partnership,
articles of incorporation or by-laws, or of any contract, indenture, lease,
sublease, loan agreement, Lien or other obligation or liability to which such
Purchaser is a party or by which it is bound; or
(ii) violate any order, writ, injunction, decree, law, statute,
rule or regulation applicable to or by which it or its properties are bound.
(d) Litigation. There is no litigation, arbitration, claim,
governmental or other investigation or proceeding (formal or informal) involving
the transactions contemplated hereby pending or, to the best knowledge of the
Purchasers, threatened, against any Purchaser and to the best knowledge of the
Purchasers there exists no bases or grounds for any of the foregoing.
(e) No Broker. No agent, broker, person or firm acting on behalf of the
Purchasers or under their authority, is or will be entitled to a financial
advisory fee, brokerage commission, finder's fee or like payment in connection
with this Agreement or any of the transactions contemplated hereby.
(f) Consents of Third Parties. No consent, approval or agreement of any
Person, party, court, government or entity is required to be obtained by any
Purchaser in connection with the execution and delivery of this Agreement, or
the other instruments and agreements provided herein or the consummation of the
transactions contemplated hereby.
Section 8. Covenants of the Seller Pending the Closing.
The Seller covenants and agrees that, between the date of this
Agreement and the Closing or termination of this Agreement prior to Closing,
unless consented to by a Purchaser, which consent will not be unreasonably
delayed or withheld:
(a) The Seller will not take any action, or omit to take any action,
which action or omission would make any of the representations and warranties of
the Seller untrue or incorrect at the Closing Date, and will not undertake any
course of action inconsistent with this Agreement, or which would render any of
the conditions to Closing by any of the other parties unable to be satisfied on
or prior to the Closing Date.
(b) The Purchasers and their respective officers, employees, and other
agents, including accountants and counsel, shall have full access to all of the
books of account, records, permits, franchises, plans and other business records
of the Seller related to the Business, at reasonable times during business
hours, for the purpose of examining and inspecting the same
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and making copies of and extracts from such records and documents, provided,
however, that any activity of the Purchasers shall be conducted in a manner so
as (i) not to interfere with the normal business operations of the Seller, and
(ii) not to cause the Seller to incur additional costs or liabilities. The
purchasers hereby acknowledge that they continue to be bound by the terms of
that certain Confidentiality Agreement between Goldsmith Agio Helms and Ludlow
dated July 13, 2000, (the "Confidentiality Agreement") and that any
investigation of the Seller shall be in accordance with the terms thereof.
(c) The Seller will carry on the Business diligently and in the
ordinary course, consistent with past practice and the Seller will take all
steps reasonably necessary to preserve the Seller's relations with customers and
suppliers of the Business and to otherwise prevent the impairment of its
goodwill. The Seller will not grant any extended credit terms or provide any
discounts relating to the Business or rebates outside of the ordinary course of
business. In addition, the Seller will pay all vendors of the Business in the
ordinary course of business consistent with past practices. The Seller will make
no material change in the Purchased Assets or the accounting practices, methods
of operation or management of the Business without the Purchasers' prior written
consent. The Seller will use its best efforts to preserve and maintain in good
condition the Purchased Assets. Without limiting the generality of the
foregoing, the Seller will not take, any action, or permit or suffer to be taken
any action, that is represented in Section 6(e) not to have been taken since
June 30, 2000.
(d) Neither the Seller nor any of its officers, directors,
representatives, agents or Affiliates, will, directly or indirectly, encourage,
solicit or engage in discussions or negotiations with any third party (other
than the Purchasers) concerning any purchase of any portion of the Purchased
Assets, to the extent that refraining from the foregoing activities is
consistent with any fiduciary duty to the Seller's shareholders. The Seller will
notify the Purchasers promptly of any inquiries or proposals with respect to any
such transaction that are received by, or any such negotiations or discussions
that are sought to be initiated with the Seller.
(e) The Seller will use all reasonable efforts to (i) promptly make all
filings and seek to obtain all authorizations required under the Assumed
Contracts and applicable laws with respect to the transactions contemplated
hereby and by the Additional Agreements and will cooperate with the Purchasers
with respect thereto, (ii) promptly take or cause to be taken all other actions
necessary, proper or appropriate to satisfy the conditions set forth in Section
11 and to consummate and make effective the transactions contemplated by this
Agreement and the Additional Agreements on the terms and conditions set forth
herein and therein as soon as practicable, and (iii) not take any action that
would reasonably be expected to impair the ability of the Seller to consummate
the transactions contemplated by this Agreement and the Additional Agreements at
the earliest practicable time, including without limitation any action that
would impair efforts to secure any required authorizations for such
transactions.
(f) The Seller will, at its sole cost and expense, maintain all
policies of insurance relating to the Purchased Assets in full force and effect
during the period up to and including the Closing Date.
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(g) The Seller will timely and properly file all federal, foreign,
state, county and local Tax Returns, reports and estimates due between the date
hereof and the Closing Date.
(h) The Seller will, as promptly as practicable after the date hereof,
prepare and file with the SEC a proxy statement and form of proxy to be sent to
the shareholders of the Seller in connection with the meeting of the Seller's
shareholders to consider the sale of the Purchased Assets (such proxy statement
together with any amendments thereof or supplements thereto, in each case in the
form or forms mailed to Seller's shareholders, is called the "Proxy Statement").
Section 9. Covenants of the Purchasers Pending the Closing.
The Purchasers hereby covenant and agree that between the date of this
Agreement and the Closing or termination of this Agreement prior to the Closing:
(a) the Purchasers will not take any action, or omit to take any
action, which action or omission would make any of their representations and
warranties untrue or incorrect at the Closing Date, and will not undertake any
course of action inconsistent with this Agreement, or which would render any of
the conditions to Closing by any of the other parties unable to be satisfied at
or prior to the Closing Date.
(b) the Purchasers will use all reasonable efforts to (i) promptly
make all filings and seek to obtain all authorizations required under applicable
laws with respect to the transactions contemplated hereby and by the Additional
Agreements and will cooperate with the Seller with respect thereto, (ii)
promptly take or cause to be taken all other actions necessary, proper or
appropriate to satisfy the conditions set forth in Section 10 and to consummate
and make effective the transactions contemplated by this Agreement and the
Additional Agreements on the terms and conditions set forth herein and therein
as soon as practicable, and (iii) not take any action that would reasonably be
expected to impair its ability to consummate the transactions contemplated by
this Agreement and the Additional Agreements at the earliest practicable time,
including without limitation any action that would impair efforts to secure any
required authorizations for such transactions.
The Purchasers will use commercially reasonable efforts to meet or
otherwise communicate with staff of the Federal Trade Commission (the
"Commission") within ten business days after the date of this Agreement to
request that such staff not recommend that the Commission issue a subpoena
and/or a Civil Investigative Demand (a "CID") to further investigate, or
otherwise seek to challenge, the acquisition of the Purchased Assets by the
Purchasers. The Purchasers will consult in good faith with the Seller with
respect to any presentations made to, or positions taken with respect to, the
Commission or its staff, shall give Seller reasonable advance notice of any and
shall provide Seller the opportunity to participate in any communications with
the Commission or its staff. Notwithstanding the foregoing, if at any time after
informing the Commission that the Purchasers and the Seller have executed this
Agreement for the Purchased Assets, the Commission staff notifies the Purchasers
(a "CID Notification") that if the parties do not abandon the acquisition of the
Purchased Assets, the Commission staff will recommend that the Commission issue
a subpoena and/or a CID to further
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investigate the acquisition of the Purchased Assets by the Purchasers, the
Purchasers and the Seller shall have the right, but no obligation to respond to
such requests, and the parties shall have the right to terminate this Agreement
to the extent provided below and in Section 13. The Purchasers shall notify the
Seller of any claimed receipt of a CID Notification from the Commission within
24 hours, and of whether the Purchasers intend to respond to such CID within
three business days after the Purchasers' receipt of such CID Notification. If
Purchasers state that they intend to respond to such CID, and the Seller has not
informed the Purchasers within three (3) business days thereafter that the
Seller intends to exercise its right to terminate this Agreement, then neither
the Purchasers nor the Seller shall have any further right to terminate this
Agreement based on the issuance or prospective issuance of the CID. If the
Purchasers state that they intend to not respond to such CID, Sellers shall then
have five business days in which to verify such CID Notification and attempt to
persuade the Commission or its staff to withdraw such CID Notification. If the
CID Notification is not withdrawn within that period, then either Purchasers or
Seller shall have the right to terminate this Agreement. In addition, if, within
thirty (30) days after the date hereof, the Commission staff shall have not
notified the Purchasers, in form and substance reasonably satisfactory to the
Purchasers, that the Commission staff will not recommend that the Commission
issue a subpoena and/or a CID to further investigate, or otherwise seek to
challenge, the acquisition of the Purchased Assets by the Purchasers, then
either Purchasers or Seller shall have the right to terminate this Agreement.
(c) The Purchasers shall fully cooperate with the Sellers in the
preparation and filing of the Proxy Statement. Such cooperation shall include,
without limitation, providing any information regarding the Purchasers which is
required to be set forth in the Proxy Statement.
Section 10. Conditions Precedent to Closing by the Seller.
The obligations of the Seller to sell the Purchased Assets and to
consummate the transactions contemplated hereby are subject to the fulfillment
prior to or at the Closing of each of the following conditions (any or all of
which may be waived at or prior to the Closing at the sole and absolute
discretion of the Seller):
(a) All of the agreements and covenants contained in this Agreement
that are to be complied with, satisfied or performed by the Purchasers on or
before the Closing Date shall have been complied with, satisfied and performed
in all material respects.
(b) All of the representations and warranties made by the Purchasers in
this Agreement shall be true and correct in all material respects both on and as
of the date of this Agreement and on and as of the Closing Date. It is
understood and agreed that all of the representations and warranties contained
in Section 7 of this Agreement that are not expressly limited to some other date
shall be deemed to state the facts contained therein as they existed both as of
the date of this Agreement and as of the Closing Date.
(c) The Seller shall have received a certificate, signed by the
President or a Vice President on behalf of each Purchaser and dated as of the
Closing Date, stating that the conditions precedent set forth in subsection (a)
and (b) above have been satisfied.
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(d) The Purchasers shall have delivered the Cash Purchase Price to the
Seller pursuant to Section 4 hereof.
(e) The following instruments and agreements (the "Additional
Agreements") shall have been duly executed and delivered by the appropriate
parties:
(i) A bill of sale and assignment from the Seller to the
Purchasers, substantially in the form attached hereto as Exhibit B;
(ii) An assumption of liabilities agreement by and between the
Purchasers and the Seller, substantially in the form attached hereto as Exhibit
C;
(iii) A Non-Competition Agreement by and between the Seller and
Ludlow, substantially in the form attached hereto as Exhibit D;
(iv) A Manufacturing and Supply Agreement by and between the
Seller and Ludlow, substantially in the form hereto attached as Exhibit E; and
(v) A Transition Services Agreement by and between the Seller and
Ludlow, substantially in the form attached hereto as Exhibit F.
(f) The Seller shall have received a certificate signed by the
Secretary or Assistant Secretary of each Purchaser and dated as of the Closing
Date, certifying as to (i) the due authorization of this Agreement, the
Additional Agreements to which it will be a party and all other agreements and
instruments to be delivered by such Purchaser hereunder, and the consummation of
the transactions contemplated hereby and thereby, and (ii) the incumbency and
signatures of signing officers.
(g) All consents, approvals and authorizations, and registrations,
qualifications or filings, required to have been made or obtained by the
Purchasers to permit the consummation by the Purchasers of the transactions
contemplated hereby shall have been made or obtained, and all required
authorizations, consents and approvals of third parties to permit the
consummation of the transactions contemplated hereby shall have been obtained.
(h) No action or proceeding before a court or other governmental body
shall have been instituted or threatened in writing by any government or agency
thereof to restrain or prohibit the consummation of any of the transactions
contemplated hereby.
(i) The Seller shall have received all documents it shall have
reasonably requested relating to the existence, qualification to do business and
good standing of the Purchasers. The Sellers acknowledge and agree that the
Purchasers will be deemed to have satisfied their obligations under this
subsection by (i) delivering a good standing certificate with respect to Ludlow
issued by the Secretary of State of the State of Delaware, and (ii) delivering a
certificate
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of an officer of Sherwood Services certifying that Sherwood Services is in good
standing under the laws of Switzerland.
(j) The shareholders of the Seller shall have authorized the
transactions contemplated by this Agreement.
(k) The Seller shall have received from Matthew J. Nicolella, counsel
to Ludlow, a written opinion, dated as of the Closing Date, addressed to the
Seller, with respect to the representations related to Ludlow set forth in
Sections 7(a), 7(b) and 7(c).
Section 11. Conditions Precedent to Closing by the Purchasers.
The obligations of the Purchasers to purchase the Purchased Assets,
assume the Assumed Liabilities and to consummate the transactions contemplated
hereby are subject to the fulfillment prior to or at the Closing of each of the
following conditions (any or all of which may be waived at or prior to the
Closing on behalf of both Purchasers at the sole and absolute discretion of
Ludlow):
(a) All of the agreements and covenants contained in this Agreement
that are to be complied with, satisfied or performed by the Seller on or before
the Closing Date shall have been complied with, satisfied and performed in all
material respects.
(b) All of the representations and warranties made by the Seller in
this Agreement shall be true and correct in all material respects both on and as
of the date of this Agreement and on and as of the Closing Date, except for any
such material misrepresentations actually known by the Purchasers prior to the
date hereof. It is understood and agreed that all of the representations and
warranties contained in Section 6 of this Agreement that are not expressly
limited to some other date shall be deemed to state the facts contained therein
as they existed both as of the date of this Agreement and as of the Closing
Date.
(c) The Purchasers shall have received a certificate, signed by the
President or a Vice President on behalf of the Seller and dated as of the
Closing Date, stating that the conditions precedent set forth in subsection (a)
and (b) above have been satisfied.
(d) Each of the parties to the Additional Agreements (other than the
Purchasers) shall have duly executed and delivered the Additional Agreements to
which it shall be a party.
(e) The Purchasers shall have received certificates, signed by the
Secretary or Assistant Secretary of the Seller and dated as of the Closing Date,
certifying as to (i) the due adoption by the Seller's Board of Directors of
resolutions authorizing this Agreement, the Additional Agreements to which it
shall be a party and all other agreements and instruments to be delivered by the
Seller hereunder, and the consummation of the transactions contemplated hereby
and thereby, (ii) approval of the sale of the Purchased Assets by the Seller's
shareholders, and (iii) the incumbency and signatures of signing officers.
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(f) There shall have been no circumstance, event, occurrence, change or
effect that individually or in the aggregate has resulted in a Material Adverse
Effect since the date of this Agreement.
(g) All consents, approvals and authorizations, and registrations,
qualifications or filings, required to have been made or obtained by the Seller
to permit the consummation by the Seller of the transactions contemplated hereby
shall have been made or obtained, and all required authorizations, consents and
approvals of third parties to permit the consummation by the Seller of the
transactions contemplated hereby shall have been obtained.
(h) The Commission staff shall have notified the Purchasers, in form
and substance reasonably satisfactory to the Purchasers, that the Commission
staff will not recommend that the Commission issue a subpoena and/or a CID to
further investigate, or otherwise seek to challenge, the acquisition of the
Purchased Assets by the Purchasers; provided, however, the Purchasers shall be
deemed to have waived such condition if a CID is issued prior to the Closing
Date and the Purchasers have elected to respond to such CID in accordance with
Section 9(b)
(i) No action or proceeding before a court or other governmental body
shall have been instituted or threatened in writing by any government or agency
thereof to restrain or prohibit the consummation of any of the transactions
contemplated hereby.
(j) The Purchasers shall have received from Dorsey & Whitney LLP,
counsel to the Seller, a written opinion dated as of the Closing Date, addressed
to the Purchasers, with respect to the representations set forth in Sections
6(a) and 6(b) and clauses (i) and (iii) of Section 6(c).
(k) The Purchasers shall have received from the Seller appropriate
bills of sale, assignments and deeds, satisfactory to the Purchasers, to
transfer the Purchased Assets to the Purchasers.
(l) The Purchasers shall have received all documents it shall have
reasonably requested relating to the existence, qualification to do business and
corporate and tax good standing of the Seller.
(m) All Liens, other than Permitted Liens of the kind described in
clauses (i), (ii) and (iii) of Section 6(j), affecting any of the Purchased
Assets shall have been discharged and released (or the holders of such Liens
shall have committed in writing to discharge and release such Liens) and the
Purchasers shall have received written evidence of such discharges and releases,
or commitments to discharge and release, satisfactory to the Purchasers.
Section 12. Indemnification.
----------------
(a) The parties shall be entitled to rely upon the representations and
warranties of the other parties set forth in Section 6 and Section 7 of this
Agreement, and except as otherwise specifically provided herein, such
representations and warranties shall survive the Closing and remain in full
force and effect for a period of eighteen (18) months after the Closing (other
than
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the representations and warranties set forth in Sections 6(b) and 7(b)
(Authorization) and 6(h)(Taxes), which shall survive until sixty (60) days after
the expiration of the applicable statutes of limitations, and the
representations and warranties set forth in Section 6(j)(Title to Purchased
Assets), which shall survive indefinitely).
(b) The Seller, hereby agrees to indemnify and hold harmless the
Purchasers, the Purchasers' Affiliates and their respective officers, directors,
employees, stockholders, agents and representatives (collectively, the
"Purchaser Indemnified Parties"), from and against any loss, liability, claim,
damage or expense (including costs of litigation and reasonable legal fees and
expenses) (a "Loss") suffered or incurred by any such Purchaser Indemnified
Party based upon, arising out of or resulting from any of the following:
(i) The failure of the Seller to transfer to the Purchasers good
and sufficient title to the Purchased Assets, free and clear of all Liens,
other than Permitted Liens;
(ii) Any breach of any representation or warranty of the Seller
contained in this Agreement, the Additional Agreements or any other agreement or
document delivered by them pursuant hereto;
(iii) Any breach of any covenant of the Seller contained in this
Agreement, the Additional Agreements or any other agreement or document
delivered by them pursuant hereto requiring performance after the Closing Date;
(iv) The Excluded Liabilities; and
(v) Noncompliance with any so-called bulk sales law of Minnesota
applicable to the transactions contemplated hereby.
(c) The Purchasers hereby agree to indemnify and hold harmless the
Seller, the Seller's Affiliates and their respective officers, directors,
employees, stockholders, agents and representatives (collectively, the "Seller
Indemnified Parties"), from and against any Loss suffered or incurred by any
such Seller Indemnified Party based upon, arising out of or resulting from any
of the following:
(i) Any breach of any representation or warranty of the Purchasers
contained in this Agreement, the Additional Agreements or any other agreement,
certificate or document delivered by the Purchasers pursuant hereto;
(ii) Any breach of any covenant of the Purchasers contained in
this Agreement, the Additional Agreements or any other agreement or document
delivered by the Purchasers pursuant hereto; and
(iii) The Assumed Liabilities
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(d) Promptly after any Person entitled to indemnification under this
Section 12 (the "Indemnified Party") has received notice of or has knowledge of
any claim against the Indemnified Party by a Person not a party to this
Agreement (a "Third Person") or the commencement of any action or proceeding by
a Third Person, it shall give the other party (the "Indemnifying Party") written
notice of such claim or the commencement of such action or proceeding. The
Indemnified Party shall be entitled to indemnification only if the Indemnified
Party delivers such notice to the Indemnifying Party prior to the expiration of
the representations and warranties of the Indemnifying Party as set forth in
Section 12(a). Such notice shall state the nature and the basis of such claim
and a reasonable estimate of the Loss and shall be given at least 10 days prior
to the date that an answer to such claim is due to be filed. The Indemnifying
Party shall have right to defend, at its own expense and by its own counsel, any
such matter so long as the Indemnifying Party pursues the same in good faith and
diligently. If the Indemnifying Party undertakes to defend or settle, it shall
promptly notify the Indemnified Party of its intention to do so, and the
Indemnified Party shall cooperate with the Indemnifying Party and its counsel in
the defense thereof and in any settlement thereof. Such cooperation shall
include, but shall not be limited to, furnishing the Indemnifying Party with any
personnel, books, records or information reasonably requested by the
Indemnifying Party that are in the Indemnified Party's possession or control.
Notwithstanding the foregoing, the Indemnified Party shall have the right to
participate in any matter through counsel of its own choosing at its own expense
(unless there is a conflict of interest that prevents counsel for the
Indemnifying Party from representing the Indemnified Party, in which case the
Indemnifying Party will reimburse the Indemnified Party for the reasonable
expenses of its counsel); provided, however, that the Indemnifying Party's
counsel shall always be lead counsel and shall determine all litigation and
settlement steps, strategy and the like. After the Indemnifying Party has
notified the Indemnified Party of its intention to undertake to defend or settle
any such asserted liability, and for so long as the Indemnifying Party
diligently pursues such defense, the Indemnifying Party shall not be liable for
any additional legal expenses incurred by the Indemnified Party in connection
with any defense or settlement of such asserted liability. If the Indemnifying
Party desires to accept a final and complete settlement of any such Third Person
claim, such settlement shall require as an unconditional term thereof that the
Third Person deliver to the Indemnified Party a release from all liability in
respect of such claim. If the Indemnified Party refuses to consent to such
settlement, then the Indemnifying Party's liability under this Section with
respect to such Third Person's claim shall be limited to the amount so offered
in settlement by said Third Person and the Indemnified Party shall reimburse the
Indemnifying Party for any additional costs of defense which it subsequently
incurs with respect to such claim; provided, however that such limitation shall
not apply to claims in respect of Taxes, for which no settlement shall be made
without the prior consent of the Indemnified Party. If the Indemnifying Party
does not undertake to defend such matter to which the Indemnified Party is
entitled to indemnification hereunder, or fails to diligently pursue such
defense, the Indemnified Party may undertake such defense through counsel of its
choice, at the cost and expense of the Indemnifying Party, and the Indemnified
Party may settle such matter; and the Indemnifying Party shall reimburse the
Indemnified Party for the amount paid in such settlement and any other
liabilities or expenses incurred by the Indemnified Party in connection
therewith.
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(e) In the event any Indemnified Party should have a claim for
indemnification against any Indemnifying Party which does not involve a claim by
a Third Person, the Indemnified Party shall deliver a notice of such claim to
the Indemnifying Party, setting forth in reasonable detail the identity, nature
and estimated amount of the Loss (if reasonably determinable) related to such
claim or claims, with reasonable promptness. The Indemnified Party shall be
entitled to indemnification only if the Indemnified Party delivers such notice
to the Indemnifying Party prior to the expiration of the representations and
warranties of the Indemnifying Party as set forth in Section 12(a). If the
Indemnifying Party notifies the Indemnified Party that it does not dispute the
claim described in such notice or fails to notify the Indemnified Party within
20 days after delivery of such notice by the Indemnified Party whether the
Indemnifying Party disputes the claim described in such notice, the Loss in the
amount specified in the Indemnified Party's notice will be conclusively deemed a
liability of the Indemnifying Party subject to the limitations of the Basket
Amount and Cap described below. If the Indemnifying Party has timely disputed
its liability with respect to such claim, the Indemnifying Party and the
Indemnified Party will proceed in good faith to negotiate a resolution of such
dispute for a period of 30 days.
(f) Any Indemnified Party shall bring a claim for indemnification
hereunder in good faith and in a timely manner consistent with good commercial
practices.
(g) After the Closing Date, the rights set forth in this Section 12
shall be each party's sole and exclusive remedies against the other parties
hereto for misrepresentations or breaches of covenants contained in this
Agreement and the Additional Agreements. Notwithstanding the foregoing, nothing
herein shall prevent any of the parties hereto from bringing an action based
upon allegations of fraud or other intentional breach of an obligation of or
with respect to the other parties in connection with this Agreement and the
Additional Agreements. In the event such action is brought, the Purchasers, on
the one hand, and the Sellers and on the other hand, shall bear their own fees
and expenses in connection with such action.
(h) Notwithstanding anything in this Agreement to the contrary, the
amount of any Losses for which indemnification is provided under this Section 12
shall be reduced by (i) any related recoveries actually received by an
Indemnified Party under insurance policies, (ii) any other related payments
actually received by an Indemnified Party from third parties and (iii) any Tax
benefits actually realized or received by an Indemnified Party or any of their
Affiliates, in each case, on account of the matter resulting in such Losses or
the payment of such Losses.
(i) Anything to the contrary notwithstanding, neither the Purchaser
Indemnified Parties, on the one hand, nor the Seller Indemnified Parties, on the
other hand, shall be entitled to recovery from the Indemnifying Party with
respect to any inaccuracy or breach of any representation or warranty in
Sections 6 or 7 hereof, as applicable, (i) unless and until the aggregate amount
of such Losses suffered, sustained or incurred by the Purchaser Indemnified
Parties or the Seller Indemnified Parties, as the case may be, by reason of such
inaccuracy or breach, shall exceed $55,000 calculated on a cumulative and not on
a per item basis (the "Basket Amount"), and then only with respect to the excess
over the Basket Amount, or (ii) in an aggregate amount in excess of $700,000
(the "Cap"). The Basket Amount and the Cap shall not
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be applicable to claims arising out of an inaccuracy or breach of the
representations set forth in Section 6(h).
(j) Notwithstanding anything in this Agreement to the contrary, the
Purchasers shall not be entitled to indemnification under this Section 12 for
any Losses arising in connection with Section 6(k) (Accounts Receivable) and
related to the collection of an account receivable, unless and until the
Purchasers have (i) expended commercially reasonable efforts to collect such
account receivable, and (ii) have assigned such account receivable to the
Seller.
(k) In the event that the Seller (or any successor Person into which
the Seller shall have merged or consolidated) sells or otherwise transfers all
or substantially all of its assets, the Seller shall require such transferee to
assume the Seller's obligations under this Section 12. The Seller shall provide
notice of any such sale or transfer to the Purchasers promptly following the
consummation thereof.
Section 13. Termination of Agreement.
(a) This Agreement may be terminated at any time prior to the Closing:
(i) by mutual consent of the parties hereto;
(ii) by the Seller, on the one hand, or by the Purchasers, on
the other hand, if the Closing shall not have been consummated on or prior to
March 31, 2001 or such later date, if any, as the parties hereto shall agree in
writing, provided, that, no party will be entitled to terminate this Agreement
pursuant to this Section 13(a)(ii) if such party's willful breach of this
Agreement has prevented the consummation of the transactions contemplated
hereby;
(iii) by the Seller, on the one hand, or by the Purchasers, on
the other hand, in the event of a material breach or default by the other
parties hereto of any provision of this Agreement and, in the case of a breach
or default that is capable of being cured, continuation of such breach or
default for a period of 15 days after written notice thereof shall have been
given to the breaching party;
(iv) by Purchasers on the one hand, or the Seller, on the other
hand to the extent set forth in Section 9(b); and
(v) by the Seller if the Board of Directors of the Seller,
acting on the advice of counsel, reasonably concludes that fulfillment of its
fiduciary obligations to the Seller's shareholders requires acceptance of an
unsolicited competing offer to acquire the Purchased Assets.
(b) Upon termination of this Agreement as provided in paragraph (a)
above, all obligations of the parties hereunder shall terminate, but (i) such
termination will in no way limit any obligation or liability of any party based
on or arising from a willful breach or default by such party which occurs prior
to such termination with respect to any of its representations,
A-24
warranties, covenants or agreements contained in this Agreement, and (ii) all
Seller information disclosed to Purchasers in connection with this Agreement and
the transactions contemplated hereby shall remain subject to the Confidentiality
Agreement. The provisions of this Section 13 and of Sections 17, 18 and 20 shall
survive the termination of this Agreement.
Section 14. Additional Covenants and Agreements.
(a) Books, Records and Information.
(i) The Purchasers agree that all documents delivered to the
Purchasers by the Seller pursuant to this Agreement shall after the Closing be
open for inspection by representatives of the Seller at any time during regular
business hours for reasonable and necessary purposes until such time as
documents are destroyed or possession thereof is given to the other party as
provided for in Section 14(a)(ii) hereof and that the Seller may during such
period at its expense make such copies thereof as it may reasonably request. The
Seller agrees that all documents that are retained by the Seller after the
Closing Date and that are related to the Purchased Assets shall be open for
inspection by representatives of the Purchasers at any time during regular
business hours until such time as documents are destroyed or possession thereof
is given up to the other party as provided for in Section 14(a)(ii) hereof and
that the Purchasers may during such period at its expense make such copies
thereof as it may reasonably request.
(ii) Without limiting the generality of Section 14(a)(i), for a
period ending on the sixth anniversary of the Closing Date, neither the
Purchasers nor the Seller shall destroy or give up possession of any item
referred to in Section 14(a)(i) hereof without first offering to the other the
opportunity, at such other's expense (but without any other payment), to obtain
the same. Thereafter each party shall be free to dispose of them as it deems
fit.
(iii) The Purchasers shall use reasonable efforts to afford the
Seller access to employees who were previously employees of the Seller, and
remain in the employ of the Purchasers or their Affiliates, as the Seller shall
reasonably request for their proper corporate purposes, including, without
limitation, the defense of legal proceedings. Such access may include interviews
or attendance at depositions or legal proceedings. All out-of-pocket expenses
reasonably incurred by the Purchasers in connection with this Section 14(a)(iii)
shall be paid or promptly reimbursed by the Seller.
(b) Tax Matters.
(i) The Seller shall be solely responsible for and shall indemnify
and hold harmless the Purchasers for all Taxes with respect to Purchased Assets
which are due and payable up to and including the Closing Date, and the
Purchasers shall be responsible for and indemnify and hold harmless the Seller
for all Taxes with respect to the Purchased Assets which are due and payable
after the Closing Date, except that any Taxes imposed upon the ownership of
Purchased Assets which relate to a period commencing prior to the Closing
Date and ending after the Closing Date, shall be prorated such that Taxes for
the period prior to the Closing Date shall be the responsibility of the Seller
and Taxes for the period after the Closing Date shall be the
A-25
responsibility of the Purchasers. Any claim for indemnification hereunder shall
be subject to the procedures set forth in Sections 12(d) and 12(e).
(ii) The Purchasers and the Seller recognize their mutual
obligations pursuant to Section 1060 of the Code to timely file IRS Form 8594
with each of their respective federal income tax returns. The Purchasers and the
Seller agree to allocate the Purchase Price among the Purchased Assets in
accordance with the provisions of Section 1060 of the Code and the Treasury
Regulations thereunder and in accordance with the allocation schedule attached
hereto as Exhibit H. Unless otherwise required by a determination within the
meaning of Section 1313 of the Code (or a counterpart provision of foreign,
state or local law), all foreign, federal, state and local income tax returns
filed by the Purchasers and the Seller shall be filed consistently with the
allocations reflected on Exhibit G attached hereto.
(c) Risk of Loss. The risk of loss or damage to the Purchased Assets
shall be upon the Seller at all times prior to the Closing Date. In the event of
such loss or damage, the Seller shall use its commercially reasonable efforts to
repair, replace or restore such Purchased Assets as soon as possible.
(d) License to Use LecTec Name. Within eighteen (18) months after the
Closing Date, the Purchaser shall revise product labeling and packaging and
otherwise discontinue use of the name "LecTec" and variations thereof ("Names").
The Seller hereby grants to the Purchasers a fully-paid, non-exclusive license
to use the Names (and any trademarks associated therewith) in conjunction with
currently existing applications of Names on products, labeling, packaging and
promotional materials for a period of eighteen (18) months following the Closing
Date. In no event shall the Purchaser use any Names after the Closing Date in
any manner or for any purpose different from the use of the Names in the
Business as of the Closing Date.
Section 15. Remedies.
The Seller acknowledges and agrees that the Purchased Assets are unique
and that the Purchasers will be irreparably harmed in the event that this
Agreement, including the obligations of the Seller to sell and deliver the
Purchased Assets to the Purchasers, or the Additional Agreements are not
specifically enforced. The parties further agree it is impossible to measure in
money the damage which will accrue by reason of a refusal by the Seller to
perform such obligations under this Agreement or the Additional Agreements.
Therefore, in the event that the Purchasers shall institute any action to
enforce such obligations, the Seller hereby acknowledges that the Purchasers do
not have an adequate remedy at law and that injunctive or other equitable relief
will not constitute any hardship upon the Seller.
Section 16. Definitions.
As used in this Agreement, the following terms shall have the
meanings ascribed to them below:
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(a) "Affiliate" means, when used with reference to a specified party,
(i) any entity that, directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, the specified
party, and (ii) any entity of which the specified party is, directly or
indirectly, the owner of an equity interest of ten (10) percent or more.
(b) "Code" means the Internal Revenue Code of 1986, as amended,
including the rules and regulations thereunder, as well as any successor or
substitute provisions thereto.
(c) "knowledge" means, with respect to the Seller, the actual knowledge
after due inquiry (or what would reasonably be the knowledge if due inquiry were
made) of any executive officer (determined in accordance with Rule 16a-1(f)
under the Exchange Act) of the Seller and with respect to Ludlow or Sherwood,
the actual knowledge after due inquiry (or what would reasonably be the
knowledge if due inquiry were made) of any executive officer (determined in
accordance with Rule 16a-1(f) under the Exchange Act) of Ludlow or Sherwood, as
the case may be.
(d) "Lien" means any mortgage, lien, pledge, restriction, charge,
security interest, claims, encumbrance, or rights, title and interest of others.
(e) "Material Adverse Effect" means any circumstance, event,
occurrence, change or effect that, individually or in the aggregate, materially
and adversely affects the Purchased Assets taken as a whole or the financial
condition or results of operation of the Business; provided, however, that none
of the following shall be deemed in themselves, either alone or in combination,
to constitute, and none of the following shall be taken into account in
determining whether there has been or will be a Material Adverse Effect: (a) any
adverse change, effect, event, occurrence, state of facts or development
attributable to conditions affecting the industries in which the Seller
participates as a whole, the economy of the Unites States as a whole or foreign
economies in any locations where the Seller has material operations or sales,
(b) any adverse change, effect, event, occurrence, state of facts or development
arising from or relating to any change in accounting requirements or principles
or any change in applicable laws, rules or regulations or the interpretation
thereof, (c) any adverse change, effect, event, occurrence, state of facts of
development arising from any action taken by Ludlow or Sherwood or any of their
respective directors, officers, employees, agents or Affiliates, other than the
execution and delivery of this Agreement and any permitted public announcement
thereof.
(f) "Net Asset Value" means the difference between (i) the total assets
of the Seller related to the Business and included in the Purchased Assets and
(ii) the total liabilities (other than liabilities in respect of indebtedness
for borrowed money) of the Seller related to the Business and included in the
Assumed Liabilities, derived from financial statements that were prepared in
accordance with generally accepted accounting principles consistently applied.
(g) "Person" means any individual, general partnership, limited
partnership, corporation, limited liability company, joint venture, trust,
business trust, cooperative, association or other form of organization.
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(h) "Related Party" means (i) any director, officer, employee, agent or
Affiliate of the Seller or (ii) any spouse or child or Affiliate of any such
Persons referred to in the foregoing clause (i).
Section 17. Confidentiality.
Prior to the Closing, none of the parties hereto shall disclose the
terms of any non-public confidential information of the other parties hereto or
any Affiliate thereof obtained in connection with such proposed transactions
without the prior written consent of the other parties, which consent shall not
be unreasonably withheld or delayed. If the acquisition of the Purchased Assets
is not consummated as provided for herein, the parties and their representatives
shall, for a period of three (3) years from the date hereof, treat all
information of the other parties as confidential (except to the extent that such
information: (i) is now, or later comes to be, in the public domain, other than
through the acts of the receiving party or its representatives in breach of this
provision, (ii) can be shown to have been known by the receiving party prior to
the time of disclosure to it by the other party, (iii) is later disclosed to the
receiving party on a nonconfidential basis by a Person having no obligation to
the disclosing party in regard thereto, or (iv) is independently developed, as
evidenced by written records, by the receiving party) and shall return to the
disclosing party all copies of confidential information made during such
investigation.
Section 18. Expenses.
Whether or not the transactions contemplated by this Agreement are
consummated, each party will pay its respective expenses, including all fees and
expenses of counsel, accountants and other advisors, incurred in connection with
the origination, negotiation, execution and performance of this Agreement.
Notwithstanding the foregoing, the Seller shall pay any sales, transfer, stamp,
deed or similar tax payable as a result of the sale and transfer of the
Purchased Assets to the Purchasers.
Section 19. Further Assurances.
The parties agree that, on and after the Closing Date, each shall take
all reasonable action and execute any commercially reasonable documents,
instruments or conveyances which may be reasonably necessary or advisable to
carry out any of the provisions hereof. All such actions and assistance shall be
taken and rendered at the sole cost and expense of the requesting party.
Section 20. No Public Announcement.
The Purchasers and the Seller agree that the existence, nature and
terms and conditions of this Agreement and discussions between the parties
regarding the transactions contemplated hereby are, and shall be treated as,
confidential by the parties. Accordingly, each party agrees that it (a) will
make no public comment concerning or announcement of the transactions
contemplated hereby; (b) will respond to all inquiries concerning the
transactions contemplated hereby by stating that it is such company's policy not
to comment on such inquiries; (c) will take
A-28
reasonable steps to restrict knowledge of the transactions contemplated hereby
to those who need to know; and (d) will notify the other parties of any rumor
external to the parties of the transactions contemplated hereby. Notwithstanding
the foregoing, the Purchasers acknowledge and agree that the Seller, as a public
company, is subject to certain disclosure requirements under applicable
securities laws. For this reason, the Seller reserves the right to disclose the
existence of and the status and terms of negotiations at any time it is advised
by its counsel that securities laws or the rules of any stock market on which
its shares are traded require such disclosure, and the Seller shall have the
right to issue a press release regarding the transactions contemplated hereby
upon the signing of this Agreement and upon the Closing; provided that, the
Seller agrees to notify the Purchasers if the Seller intends to make a
disclosure prior to Closing and, to the extent feasible, to provide the
Purchasers with the text of the disclosure and opportunity to comment in advance
of its release to the public; and provided, further, that the text of any such
press release shall be reasonably acceptable to the Purchasers.
Section 21. Entire Agreement.
This Agreement, the Additional Agreements (including all attachments
hereto and thereto) and the Confidentiality Agreement comprise the entire
agreement among the parties hereto as to the subject matter hereof and thereof,
and supersede all prior agreements and understandings between them relating
thereto.
Section 22. Amendments and Waivers.
This Agreement may not be amended or modified, except by a writing
executed by the party against which such amendment or waiver is sought to be
enforced; provided, however, that after any required approval of the
transactions contemplated by this Agreement by the shareholders of Seller, there
shall not be made any amendment that by law requires further approval by such
shareholders without obtaining such further approval. No extension of time for,
or waiver of the performance of, any obligation of any party hereto shall be
effective unless it is made in a writing signed by the party granting such
extension or waiver. Unless it specifically states otherwise, no waiver shall
constitute or be construed as a waiver of any subsequent breach or
non-performance.
Section 23. Notices.
Any notice, request, demand, waiver, consent, approval or other
communication which is required or permitted to be given pursuant to this
Agreement shall be in writing and shall be given in person or by facsimile or by
certified or registered first-class mail or internationally recognized express
courier delivery service addressed as follows:
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If to any Purchaser: c/o The Ludlow Company LP
Two Ludlow Park Drive
P.O. Box 297
Chicopee, MA 01021
Attention: Lee Carrier
with a copy to: Tyco Healthcare Group LP
15 Hampshire Street
Mansfield, MA 02048
Attention: General Counsel
If to the Seller: LecTec Corporation
10701 Red Circle Drive
Minnetonka, MN 55343
Attention: Rodney A. Young
with a copy to: Dorsey & Whitney, LLP
220 South Sixth Street
Minneapolis, MN 55402
Attention: Timothy S. Hearn, Esq.
Any such address may be changed by any party by written notice to the other
parties given in accordance herewith. Any notice shall be deemed to be given
three (3) days after being placed for delivery so addressed with postage or
other charges prepaid, provided, however, that any written notice actually
received by any party in less than three (3) days shall be deemed to be given,
for all purposes of this Agreement, at the time it is received. Notice given by
facsimile shall be deemed given upon electronic confirmation of delivery.
Section 24. Governing Law; Consent to Jurisdiction.
This Agreement is made and shall be construed in accordance with the
laws of The Commonwealth of Massachusetts, without giving effect to the
conflicts of laws principles thereof. This Agreement may be enforced in any
federal court or state court sitting in Minnesota or Massachusetts; and the
parties hereto consent to the jurisdiction and venue of any such court and waive
any argument that venue in such forum is not convenient.
Section 25. Successors and Assigns.
This Agreement shall inure to the benefit of, and be binding upon and
enforceable against, the respective successors and assigns of the parties hereto
but may not be assigned by any party hereto without the prior written consent of
the others, except that any Purchaser may assign its interests in this Agreement
to any Affiliate of such Purchaser without the consent of any other party, so
long as such assigning Purchaser guarantees the performance of such Affiliate
hereunder.
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Section 26. Captions.
Section headings and other captions are supplied herein for convenience
only and shall not be deemed a part of this Agreement for any purpose.
Section 27. Counterparts.
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original for all purposes, and all of which together
shall constitute one agreement. A facsimile signature followed by an original
signature shall be sufficient to execute this Agreement and the Additional
Agreements.
Section 28. Severability.
If any term or provision of this Agreement or any of the Additional
Agreements, or the application thereof to any Person or circumstance, shall to
any extent be invalid or unenforceable under applicable law, the remainder of
this Agreement (or such Additional Agreement, as the case may be), or the
application of such term or provision to Persons or circumstances other than
those as to which it is invalid or unenforceable under applicable law, shall not
be affected thereby and each term and provision of this Agreement (or such
Additional Agreement, as the case may be) shall be valid and enforced to the
fullest extent permitted by applicable law.
Section 29. No Third Party Beneficiaries.
Nothing in this Agreement shall confer any rights upon any person or
entity that is not a party or permitted assignee of a party to this Agreement,
except Indemnified Parties (as defined in Section 12).
Section 30. Bulk Sales Laws.
The parties hereby waive compliance with the provisions of all
applicable bulk sales laws (if any are applicable).
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IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the day and year first above written.
THE LUDLOW COMPANY LP
By /s/ Richard J. Meelia
--------------------------------------
Its: President
SHERWOOD SERVICES AG
By /s/ Stephen Faciszewski
--------------------------------------
Its: Vice President
LECTEC CORPORATION
By /s/ Rodney A. Young
--------------------------------------
Its: Chairman, Chief Executive Officer
and President
A-32
EXHIBIT B
FAIRNESS OPINION
17 November 2000
PERSONAL AND CONFIDENTIAL
The Board of Directors
LecTec Corporation
10701 Red Circle Drive
Minnetonka, MN 55343
Members of the Board of Directors:
In connection with the proposed sale of the assets of the Conductive Products
Division (the "Conductive Products Division") of LecTec Corporation (the
"Company") to Ludlow Company LP ("Ludlow"), you have requested our opinion as to
the fairness, from a financial point of view, to the Company of the
consideration to be received by the Company in the proposed transaction (the
"Sale"). The terms of the Sale are set forth in the Asset Purchase Agreement
dated November 17, 2000 (the "Asset Purchase Agreement") between the Company and
Ludlow.
As a customary part of its investment banking business, Goldsmith, Agio, Helms
Securities, Inc. ("GAHS") is engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, private placements and
valuations for corporate and other purposes. In return for our services in
connection with providing this opinion, the Company will pay us a fee for this
fairness opinion, which fee is not contingent upon the consummation of the Sale,
and indemnify us against certain liabilities. We are also acting as a financial
advisor to the Company in connection with the Sale for which we will receive
certain other fees, a significant portion of which is contingent upon the
consummation of the Sale.
In arriving at our opinion, we have undertaken such reviews, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we have:
(i) Reviewed a draft of the Asset Purchase Agreement;
(ii) Analyzed financial and other information that is publicly
available relating to the Company and its assets and
liabilities;
(iii) Analyzed certain financial and operating data of the Company
and the Conductive Products Division that has been made
available to us;
B-1
(iv) Visited the facilities of the Company and discussed with
management of the Company the financial conditions, operating
results, business outlook and prospects of the Company 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 the
Company's Conductive Products Division;
(vi) Analyzed the valuations of publicly traded companies that we
deemed comparable to the Company's Conductive Products
Division; and
(vii) Performed a comparable merger and acquisition analysis for the
Company's Conductive Products Division.
In arriving at our conclusions, we have relied upon and assumed the accuracy,
completeness, and fairness of the financial statements and other information
furnished by, or publicly available relating to, the Company and the Conductive
Products Division or otherwise made available to us, and relied upon and assumed
that the representations and warranties of the Company and Ludlow contained in
the Asset Purchase Agreement are true and correct. We were not engaged to, and
did not attempt to or assume responsibility to, verify independently such
information. We have further relied upon assurances by the Company that the
information provided to us has a reasonable basis, and with respect to
projections and other business outlook information, reflects the best currently
available estimates, and that the Company is not aware of any information or
fact that would make the information provided to us incomplete or misleading. We
also assumed that the Company and Ludlow will each perform all of the covenants
and agreements to be performed by it under the Asset Purchase Agreement and that
the conditions to the Sale 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 our opinion, we
have not performed any appraisals or valuations of specific assets or
liabilities of the Company and express no opinion regarding the liquidation
value of the Company or any of its assets. Our opinion is based upon the
information available to us and the facts and circumstances as they exist and
are subject to evaluation on the date hereof. Events occurring after the date
hereof could materially affect the assumptions used in preparing this opinion
and the conclusions reached herein. However, we do not have any obligation to
update, revise or reaffirm this opinion.
We have relied, with respect to legal and accounting matters related to the
Sale, on the advice of the Company's legal and accounting advisors. We have made
no independent investigation of any legal or accounting matters that may affect
the Company and have assumed the correctness of the legal and accounting advice
provided to the Company and its Board of Directors.
Our opinion is rendered for the benefit and use of the Board of Directors of the
Company in connection with the Board's consideration of the Sale and does not
constitute a recommendation to any holder of Company common stock as to how such
shareholder
B-2
should vote with respect to the Sale. We have not been asked to, nor do we
express an opinion as to, the relative merits of the Sale as compared to any
alternative business strategies that might exist for the Company, the effect of
any other transaction in which the Company might engage, or the form of the
Asset Purchase Agreement or the terms contained therein. Also, we did not
consider the effects of the proposed Sale on the future performance of the
remaining assets of the Company, nor do we express an opinion as to the
Company's planned use of proceeds arising from the proposed Sale. Furthermore,
we express no opinion as to the prices at which the Company's shares may trade
following the date of this opinion or following the consummation of the proposed
Sale. This opinion may not be published or otherwise used or referred to
publicly without our written consent; provided, however, that this opinion may
be included in its entirety in any filing with the Securities and Exchange
Commission with respect to the Sale.
Based upon and subject to the foregoing, and based upon such other facts as we
consider relevant, it is our opinion that, as of the date hereof, the
consideration to be received by the Company in the proposed Sale is fair to the
Company from a financial point of view.
Sincerely,
/s/ Goldsmith, Agio, Helms Securities, Inc.
B-3
EXHIBIT C
SECTIONS 302A.471 AND 302A.473 OF THE
MINNESOTA BUSINESS CORPORATION ACT
Set forth below are Sections 302A.471 and 302A.473 of the Minnesota
Business Corporation Act which provide that shareholders may dissent from, and
obtain payment for the fair value of their shares in the event of, certain
corporate actions, and establish procedures for the exercise of such dissenters
rights.
302A.471 RIGHTS OF DISSENTING SHAREHOLDERS.
SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation
may dissent from, and obtain payment for the fair value of the shareholder's
shares in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder in that
it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking fund for
the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the
shares to acquire shares, securities other than shares, or rights to purchase
shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or limited
through the authorization or issuance of securities of an existing or new class
or series with similar or different voting rights; except that an amendment to
the articles of an issuing public corporation that provides that section
302A.671 does not apply to a control share acquisition does not give rise to the
right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation, but not
including a transaction permitted without shareholder approval in section
302A.66l, subdivision 1, or a disposition in dissolution described in section
302A.725, subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with
their respective interests within one year after the date of disposition;
C-1
(c) A plan of merger, whether under this chapter or under chapter 322B,
to which the corporation is a constituent organization, except as provided in
subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares will
be acquired by the acquiring corporation, except as provided in subdivision 3;
or
(e) Any other corporate action taken pursuant to a shareholder vote
with respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting shareholders may obtain payment for their shares.
SUBD. 2. BENEFICIAL OWNERS.
(a) A shareholder shall not assert dissenters? rights as to less than
all of the shares registered in the name of the shareholder, unless the
shareholder dissents with respect to all the shares that are beneficially owned
by another person but registered in the name of the shareholder and discloses
the name and address of each beneficial owner on whose behalf the shareholder
dissents. In that event, the rights of the dissenter shall be determined as if
the shares as to which the shareholder has dissented and the other shares were
registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may
assert dissenters? rights with respect to shares held on behalf of the
beneficial owner, and shall be treated as a dissenting shareholder under the
terms of this section and section 302A.473, if the beneficial owner submits to
the corporation at the time of or before the assertion of the rights a written
consent of the shareholder.
SUBD. 3. RIGHTS NOT TO APPLY.
(a) Unless the articles, the bylaws, or a resolution approved by the
board otherwise provide, the right to obtain payment under this section does not
apply to a shareholder of (1) the surviving corporation in a merger with respect
to shares of the shareholder that are not entitled to be voted on the merger and
are not canceled or exchanged in the merger or (2) the corporation whose shares
will be acquired by the acquiring corporation in a plan of exchange with respect
to shares of the shareholder that are not entitled to be voted on the plan of
exchange and are not exchanged in the plan of exchange.
(b) If a date is fixed according to section 302A.445, subdivision 1,
for the determination of shareholders entitled to receive notice of and to vote
on an action described in subdivision 1, only shareholders as of the date fixed,
and beneficial owners as of the date fixed who hold through shareholders, as
provided in subdivision 2, may exercise dissenters rights.
SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a
right under this section to obtain payment for their shares do not have a right
at law or in equity to have a corporate action described in subdivision 1 set
aside or rescinded, except when the corporate action is fraudulent with regard
to the complaining shareholder or the corporation.
C-2
302A.473 PROCEDURES FOR ASSERTING DISSENTERS RIGHTS.
SUBDIVISION 1. DEFINITIONS.
(a) For purposes of this section, the terms defined in this subdivision
have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in section 302A.471, subdivision 1 or
the successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.47l, subdivision 1.
(d) "Interest" means interest commencing five days after the effective
date of the corporate action referred to in section 302A.471, subdivision 1, up
to and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting
at which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
SUBD. 3. NOTICE OF DISSENT. If the proposed action must be approved by
the shareholders, a shareholder who is entitled to dissent under section
302A.471 and who wishes to exercise dissenters? rights must file with the
corporation before the vote on the proposed action a written notice of intent to
demand the fair value of the shares owned by the shareholder and must not vote
the shares in favor of the proposed action.
SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates
of certificated shares must be sent in order to obtain payment and the
date by which they must be received;
(2) Any restrictions on transfer of uncertificated shares that
will apply after the demand for payment is received;
(3) A form to be used to certify the date on which the
shareholder, or the beneficial owner on whose behalf the shareholder
dissents, acquired the shares or an interest in them and to demand
payment; and
C-3
(4) A copy of section 302A.471 and this section and a brief
description of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
SUBD. 5. PAYMENT; RETURN OF SHARES.
(a) After the corporate action takes effect, or after the corporation
receives a valid demand for payment, whichever is later, the corporation shall
remit to each dissenting share holder who has complied with subdivisions 3 and 4
the amount the corporation estimates to be the fair value of the shares, plus
interest, accompanied by:
(1) The corporation's closing balance sheet and statement of
income for a fiscal year ending not more than 16 months before the
effective date of the corporate action, together with the latest
available interim financial statements;
(2) An estimate by the corporation of the fair value of the
shares and a brief description of the method used to reach the
estimate; and
(3) A copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental
payment.
(b) The corporation may withhold the remittance described in paragraph
(a) from a person who was not a shareholder on the date the action dissented
from was first announced to the public or who is dissenting on behalf of a
person who was not a beneficial owner on that date. If the dissenter has
complied with subdivisions 3 and 4, the corporation shall forward to the
dissenter the materials described in paragraph (a), a statement of the reason
for withholding the remittance, and an offer to pay to the dissenter the amount
listed in the materials if the dissenter agrees to accept that amount in full
satisfaction. The dissenter may decline the offer and demand payment under
subdivision 6. Failure to do so entitles the dissenter only to the amount
offered. If the dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates and cancel all
transfer restrictions. However, the corporation may again give notice under
subdivision 4 and require deposit or restrict transfer at a later time.
SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter?s own estimate of the fair value of the shares, plus interest, within
30 days after the corporation malls the remittance under subdivision
C-4
5, and demand payment of the difference. Otherwise, a dissenter is entitled only
to the amount remitted by the corporation.
SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by registered
or certified mail or by publication as provided by law. Except as otherwise
provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all shareholders, wherever located. A dissenter is entitled to judgment in cash
for the amount by which the fair value of the shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under subdivision 5, but
shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
SUBD. 8. COSTS; FEES; EXPENSES.
(a) The court shall determine the costs and expenses of a proceeding
under subdivision 7, including the reasonable expenses and compensation of any
appraisers appointed by the court, and shall assess those costs and expenses
against the corporation, except that the court may assess part or all of those
costs and expenses against a dissenter whose action in demanding payment under
subdivision 6 is found to be arbitrary, vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
C-5
EXHIBIT D
LECTEC CORPORATION
AUDIT COMMITTEE CHARTER
OCTOBER 2000
The Audit Committee (the "Committee") is a committee of the Board of
Directors (the "Board") of LecTec Corporation (the "Company") designed to assist
the Board in monitoring (1) the integrity of the financial statements of the
Company, (2) the adequacy of the Company's internal controls, (3) the
independence and performance of the Company's outside auditors, and (4) conflict
of interest transactions.
I. ROLES AND RESPONSIBILITIES
A. MAINTENANCE OF CHARTER. The Committee shall review and reassess the
adequacy of this formal written charter on at least an annual basis.
B. FINANCIAL REPORTING. The Committee shall review and make
recommendations to the Board regarding the adequacy of the Company's financial
statements and compliance of such statements with financial standards. In
particular, and without limiting such responsibilities, the Committee shall:
WITH RESPECT TO THE ANNUAL FINANCIAL STATEMENTS:
o Review and discuss the Company's audited financial
statements with management and with the Company's
outside auditors.
o Review an analysis prepared by management and the
independent auditor of significant financial
reporting issues and judgments made in connection
with the preparation of the Company's audited
financial statements.
o Discuss with the outside auditor the matters required
to be discussed by Statement on Auditing Standards
No. 61 (as modified or supplemented) relating to the
conduct of the audit.
o Based on the foregoing, indicate to the Board whether
the Committee recommends that the audited financial
statements be included in the Company's Annual Report
on Form 10-K.
o Prepare the report required by the rules of the
Securities and Exchange Commission to be included in
the Company's annual proxy statement.
D-1
WITH RESPECT TO QUARTERLY FINANCIAL STATEMENTS:
o Review with management and the outside auditors the
Company's quarterly financial statements prior to the
filing of its Form 10-Q. The review may be conducted
through a designated representative member of the
Committee
C. INTERNAL CONTROLS. The Committee shall evaluate and report to the
Board regarding the adequacy of the Company's financial controls. In particular,
the Committee shall:
o Ensure that the outside auditors are aware that the
Committee is to be informed of all control problems
identified.
o Review with the Company's counsel legal matters that
may have a material impact on the financial
statements.
o Review the effectiveness of systems for monitoring
compliance with laws and regulations relating to
financial reporting, including any issues that might
implicate Section 10A of the Securities Exchange Act
of 1934.
o Receive periodic updates from management, legal
counsel, and independent auditors concerning
financial compliance.
D. RELATIONSHIP WITH OUTSIDE AUDITORS. The Committee shall:
o Interview, evaluate, and make recommendations to the
Board with respect to the retention of, or
replacement of, outside auditors.
o Ensure receipt from outside auditors of a formal
written statement delineating all relationships
between the outside auditor and the Company,
consistent with Independence Standards Board Standard
1.
o Actively engage in a dialog with the outside auditors
with respect to any disclosed relationships or
services that may impact the objectivity and
independence of the outside auditors.
o Take, or recommend that the Board take, appropriate
action to oversee the independence of the outside
auditors.
o Review and approve the fees to be paid to the outside
auditor.
Notwithstanding the foregoing, the outside auditors shall be ultimately
accountable to the Board and the Committee, as representatives of shareholders.
The Board, upon recommendation from the Committee, shall have ultimate authority
and responsibility to select, evaluate, and, where appropriate, replace the
outside auditor (or to nominate the outside auditor to be proposed for
shareholder approval in any proxy statement).
D-2
E. CONFLICT OF INTEREST TRANSACTIONS. The Committee shall:
o Review potential conflict of interest situations,
including transactions between the Company and its
officers, directors and significant shareholders.
o Make recommendations to the Board regarding the
disposition of conflict of interest transactions in
accordance with applicable law, including Minnesota
Statutes Section 302A.255 if applicable.
II. MEMBERSHIP REQUIREMENTS
o The Committee shall consist of at least three
directors chosen by the Board.
o Each member of the Committee shall be able to read
and understand fundamental financial statements,
including the Company's balance sheet, income
statement, and cash flow statement or will become
able to do so within a reasonable period of time
after his or her appointment to the Committee.
o At least one member of the Committee shall have past
employment experience in finance or accounting,
requisite professional certification in accounting,
or comparable experience or background (such as a
position as a chief executive officer, chief
financial officer or other senior officer with
financial oversight responsibilities) which results
in financial sophistication, recognized financial or
accounting expertise.
o All Committee members shall be independent directors
as defined in Rule 4200(a)(14) of the Nasdaq
Marketplace Rules.
III. STRUCTURE
o The Committee shall appoint one of its members to act
as a Chairperson, either generally or with respect to
each meeting.
o The Committee Chairperson shall review and approve an
agenda in advance of each meeting
o The Committee shall meet at least twice annually, or
more frequently as circumstances dictate.
o The Committee shall have the authority to retain
special legal, accounting or other consultants to
advise the Committee.
o The Committee may request any officer or employee of
the Company or the Company's outside counsel or
independent auditor to attend a meeting of the
Committee or to meet with any members of, or
consultants to, the Committee.
While the Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Committee to plan or conduct audits or to
determine that the Company's financial
D-3
statements are complete and accurate and are in accordance with generally
accepted accounting principles. This is the responsibility of management and the
independent auditor. Nor is it the duty of the Committee to conduct
investigations, to resolve disagreements, if any, between management and the
independent auditor or to assure compliance with laws and regulations and the
Company's corporate policies.
D-4
EXCERPTS FROM 2000 ANNUAL REPORT TO SHAREHOLDERS
BEING INCORPORATED BY REFERENCE INTO PROXY STATEMENT
PURSUANT TO NOTE D.4. TO SCHEDULE 14A
SECTION I - DESCRIPTION OF BUSINESS
PRODUCTS
The Company's core competency is skin interface technology. This
competency results in products which are chemically compatible with human skin,
thereby reducing skin irritation and reducing damage to the skin as well as the
risk of infection. The electrical properties, adhesive characteristics,
dimensions, drug stability, shelf life and manufacturability of the Company's
products are highly consistent and reproducible from product to product.
CONDUCTIVE PRODUCTS
The Company's conductive products include diagnostic electrodes and
electrically conductive adhesive hydrogels.
The Company applies its patented conductive, skin compatible, adhesive
hydrogel technology to cardiac diagnostic electrodes. The Company's patented
natural and synthetic-based hydrogel polymers are self-adherent and are capable
of being made electrically conductive. Using natural-based polymers, the Company
developed the first solid gel disposable diagnostic ECG electrodes.
The solid gel design of the Company's electrodes provides more
consistent electrical performance and eliminates clean-up time for the
clinician. Currently the Company has three different types of diagnostic
electrodes: LecTec 1000 Series, a disposable electrode made of natural polymer
solid gel with gentle adhesion; LecTec 3000 Series and LecTec 3009 Series,
synthetic solid gel electrodes with higher levels of adhesion which meet all
American Association for Medical Instrumentation ("AAMI") standards including
defibrillation recovery; and LecTec 4000 Series, a synthetic solid gel, silver
substrate electrode which also meets all AAMI standards including defibrillation
recovery.
The Company pioneered hydrogel technology and manufactures synthetic
and natural-based hydrogels. These hydrogels are resistant to dehydration,
evaporation and changes in electrical and physical properties. Hydrogels are
also used topically to deliver specific medications to the skin. Hydrogels are
manufactured with various levels of conductivity, as well as with varying
degrees of self-adhesive properties, for diagnostic electrodes, external
defibrillation, pacing and monitoring electrodes, Transcutaneous Electronic
Nerve Stimulation ("TENS") products and iontophoretic return electrodes.
Sales of conductive products accounted for approximately 51%, 63% and
61% of the Company's total sales for fiscal years 2000, 1999 and 1998.
MEDICAL TAPE PRODUCTS
The Company adopted a plan at the end of fiscal 2000 to exit the low
margin medical tape business for which sales had been declining for several
years. The medical tape business was comprised of sales of individual slit roll
widths of the standard paper, plastic and cloth products widely used in the
health care industry and sales of large jumbo rolls which were converted by the
customer into individual slit rolls widths for ultimate sale to consumers.
Minimal sales are expected in fiscal 2001 as remaining medical tape inventories
are liquidated.
Sales of medical tapes accounted for approximately 13%, 22% and 32% of
the Company's total sales for fiscal years 2000, 1999 and 1998.
THERAPEUTIC CONSUMER PRODUCTS
The Company manufactures and markets patches for the topical
application of OTC drugs and other therapeutic compounds. Therapeutic patch
products use a hydrogel coated, breathable cloth patch to deliver OTC drugs and
other therapeutic compounds onto the skin. Products currently manufactured using
the adhesive-based patch technology are analgesic patches for localized pain
relief, cooling gel comfort patches, vapor cough suppressant patches, anti-itch
patches, acne treatment patches, wart removers, and a corn and callus remover.
These products are marketed as OTC products. The
SECTION I - DESCRIPTION OF BUSINESS (continued)
analgesic, cooling and anti-itch patches are marketed under the LecTec brand
name TheraPatch(R). The acne treatment patches, wart removers and corn and
callus removers are marketed by the customer under the brand of the customer.
The vapor cough suppressant patches are marketed under the TheraPatch brand name
as well as by the customer under the brand of the customer.
Sales of therapeutic consumer products accounted for approximately 36%,
15% and 7% of the Company's total sales for fiscal years 2000, 1999 and 1998.
MARKETING AND MARKETING STRATEGY
The Company markets and sells its products to medical products
distributors, consumers through retail outlets (food, chain drug and mass
merchandise stores), consumer products companies and original equipment
manufacturers.
A major entry into the consumer products markets was supported by the
hiring of a new retail sales executive late in fiscal 1998 and a retail sales
team in fiscal 1999. In the consumer products markets, retail broker and
manufacturer's representative contracts have been established. The TheraPatch
brand is the umbrella brand for the Company's therapeutic patch products
introduced to all markets.
In addition to the retail sales team hired for entry into the retail
consumer products markets, the Company has sales teams which address other
markets into which it sells. These teams support sales to:
* medical products distributors who sell to end-user
organizations,
* consumer products companies who sell directly to the consumer,
and
* OEMs which either include the Company's product with the
product they sell (e.g., electrodes purchased from the Company
may be included with electrocardiogram machines manufactured
and sold by an OEM), or use the Company's jumbo rolls of
hydrogels to manufacture a finished product for sale to the
end-user (e.g., hydrogel purchased from the Company may be
used by an OEM to make electrodes).
The Company has not experienced any significant seasonality in sales of
its products.
The Company sells its products in the U.S., Europe, Latin America,
Asia, Canada and Middle East. Except for sales of the TheraPatch brand patch
product into Canada, all of the Company's international sales are denominated in
U.S. dollars, thus, most of the impact of the foreign currency transaction gains
and losses are borne by the Company's customers. The Company does not believe
the January 1, 1999 euro currency conversion has had, nor will have, a material
impact on its financial statements. Export sales accounted for approximately
13%, 13% and 26% of total sales for 2000, 1999 and 1998.
The Company's international sales are made by the Company's corporate
sales force. The Company does not maintain a separate international marketing
staff or operations. The following table sets forth export sales by geographic
area:
Years ended June 30
---------------------------------------------------
2000 1999 1998
---- ---- ----
Europe $1,006,412 $1,216,199 $1,705,996
Latin America 547,904 371,654 371,854
Asia 46,279 31,935 62,027
Canada 298,884 7,011 199,082
Middle East 10,272 - 912,240
Other 25,962 28,333 71,949
------- ------- -------
Total Export Sales $1,935,713 $1,655,132 $3,323,148
========= ========= =========
SECTION II - EQUITY INFORMATION AND FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read
in conjunction with our consolidated financial statements and related notes
thereto and our "Management's Discussion and Analysis of Financial Condition and
Results of Operations" each of which is included in this report.
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Years ended June 30, 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net sales $14,596,346 $12,279,075 $12,922,365 $12,256,327 $13,100,754
Gross profit 5,121,217 * 4,093,561 3,715,032 4,324,180 4,969,659
Loss from operations (2,890,497) ** (1,771,324) (474,935) (2,215,951) *** (724,074)
Loss before equity in losses of
unconsolidated subsidiary (2,859,276) ** (1,683,257) (404,061) (2,140,660) *** (632,193)
Equity in losses of unconsoli-
dated subsidiary -- -- -- 126,067 --
Net loss (2,859,276) ** (1,683,257) (404,061) (2,266,727) *** (632,193)
Net loss per common and
common equivalent share
(BASIC AND DILUTED) (.74) ** (.43) (.10) (.59) *** (.17)
CONSOLIDATED BALANCE SHEET DATA
At June 30, 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Cash, cash equivalents and
short-term investments $ 100,171 $ 1,022,025 $ 2,186,532 $ 1,242,777 $ 800,693
Current assets 5,236,110 5,904,111 6,728,531 6,873,696 5,624,682
Working capital 1,512,561 3,497,926 5,335,861 4,035,084 4,240,024
Property, plant and equipment, net 3,039,088 4,028,491 4,306,568 4,592,304 5,112,975
Long-term investments - - 8,676 8,013 574,806
Total assets 8,474,549 10,132,573 11,317,774 11,837,356 12,494,003
Long-term liabilities 31,184 217,868 222,000 211,000 174,000
Shareholders' equity 4,719,816 7,508,520 9,703,104 8,787,744 10,935,345
* Includes a charge of $85,000 related to the plan to exit the medical tape
product line.
** Includes a charge of $730,000 or $.19 per share related to the plan to exit
the medical tape product line.
*** Includes a nonrecurring restructuring charge of $2,180,353 or $.57 per
share.
SECTION II - EQUITY INFORMATION AND FINANCIAL DATA (continued)
SELECTED CONSOLIDATED FINANCIAL DATA
SUPPLEMENTARY FINANCIAL INFORMATION
First Second Third Fourth
FISCAL YEAR 2000 Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net sales $3,008,752 $3,299,705 $3,934,825 $4,353,064
Gross profit 939,281 1,063,014 1,511,661 1,607,261**
Loss before extraordinary items and
cumulative effect of a change in
accounting method (603,282) (795,167) (643,328) (817,499)***
Net loss (603,282) (795,167) (643,328) (817,499)***
Net loss per common and common
equivalent share (BASIC AND DILUTED) * (.16) (.20) (.17) (.21)***
First Second Third Fourth
FISCAL YEAR 1999 Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net sales $2,903,057 $3,103,277 $3,196,311 $3,076,430
Gross profit 1,017,253 925,738 1,169,181 981,389
Loss before extraordinary items and
cumulative effect of a change in
accounting method (152,217) (661,216) (348,869) (520,955)
Net loss (152,217) (661,216) (348,869) (520,955)
Net loss per common and common
equivalent share (BASIC AND DILUTED) * (.04) (.17) (.09) (.13)
* Per share data represents both net loss and net loss before extraordinary
items and cumulative effect of a change in accounting method.
** Includes a charge of $85,000 related to the plan to exit the medical tape
product line.
*** Includes a charge of $730,000 or $.19 per share related to the plan to
exit the medical tape product line.
SECTION III - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES
Net sales were $14,596,346 in 2000, an increase of 18.9% from net sales
of $12,279,075 in 1999. Net sales were $12,922,365 in 1998. The increase in 2000
net sales was primarily the result of increased therapeutic consumer product
sales, partially offset by decreased medical tape and conductive product sales.
The decrease in 1999 net sales was primarily the result of decreased medical
tape sales, partially offset by increased therapeutic consumer product sales.
Net sales of conductive products (medical electrodes and conductive
hydrogels) decreased by 4.0% in 2000 to $7,450,755 from $7,758,286 in 1999.
Conductive product net sales were $7,906,676 in 1998. These fluctuations in
sales were primarily volume-related. The Company expects fiscal 2001 conductive
sales to be comparable to fiscal 2000 sales.
Net sales of medical tapes decreased by 29.0% in 2000 to $1,927,392
from $2,716,540 in 1999. Medical tape net sales were $4,157,199 in 1998. The
decrease in 2000 was primarily the result of reduced sales to a low-margin slit
roll tape customer and decreases in sales volume to several other low-margin
medical tape customers. The decrease in 1999 was primarily the result of the
absence of sales in 1999 to an international customer. The Company adopted a
plan at the end of fiscal 2000 to exit the medical tape business and expects
minimal medical tape sales in 2001 as remaining inventories are liquidated.
Net sales of therapeutic consumer products increased 189.2% in 2000 to
$5,218,199 from $1,804,249 in 1999. Net sales of therapeutic consumer products
were $858,490 in fiscal 1998. The increase in 2000 was primarily the result of
increased TheraPatch(R) product sales, which increased 127.1%, and sales in 2000
of the new acne product to Johnson & Johnson Consumer Products Worldwide. The
increase in 1999 was primarily the result of increased TheraPatch sales to
retailers, both as a result of increased volumes and increased unit selling
price. The higher unit selling price in 1999 was the result of the Company
selling directly to retailers rather than to CNS, Inc., the Company's exclusive
distributor to retailers in the prior year. The agreement under which CNS
distributed the TheraPatch product was terminated at the end of fiscal 1998 when
the Company assumed responsibility for retail distribution of the product.
Management believes that sales of the Company's therapeutic patch products will
represent an increased percentage of total net sales during fiscal 2001 due to
continued sales growth of the acne product, new sales of Triaminic(R) Vapor
brand topical cough and cold patches and increased TheraPatch brand name
recognition.
Export sales, consisting primarily of electrodes, semi-finished
conductive and medical tape products sold to overseas converters for final
processing, packaging and marketing, as well as TheraPatch brand therapeutic
consumer products, were 13%, 13% and 26% of total net sales in 2000, 1999 and
1998. All international sales are in U. S. dollars with the exception of
TheraPatch brand products sold in Canada. Export sales increased by $280,581 in
fiscal 2000 primarily as a result of the Canadian TheraPatch sales. The decrease
in the percent for 1999 resulted primarily from the absence in 1999 of medical
tape sales to an international customer as well as decreased conductive sales to
another customer who began manufacturing product previously purchased from the
Company. The Company expects fiscal 2001 international sales will be comparable
to 2000.
GROSS PROFIT
The Company's gross profit was $5,121,217 in 2000, up from
$4,093,561 in 1999. Gross profit was $3,715,032 in 1998. As a percentage of net
sales, gross profit was 35.1% in 2000, 33.3% in 1999 and 28.8% in 1998. Gross
profit in 2000 increased by 25.1% from the prior year and gross profit in 1999
increased by 10.2% from the prior year. The increase in gross profit in 2000
resulted primarily from a shift in the sales mix to higher margin therapeutic
consumer products. The increase in gross profit in 1999 resulted primarily from
a shift in the sales mix to higher margin therapeutic consumer products from
lower margin medical tape products, as well as higher margins on therapeutic
patch sales primarily as a result of sales made directly to retailers rather
than to a distributor.
SECTION III - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
SALES AND MARKETING EXPENSES
Sales and marketing expenses totaled $3,672,908 or 25.2% of net sales
in 2000, compared to $2,187,710 or 17.8% of net sales in 1999, and $1,042,788 or
8.1% of net sales in 1998. The 2000 increase was primarily due to increased
TheraPatch related advertising and promotional expenses and slotting fees. The
increase in advertising was primarily the result of a TV ad campaign for
TheraPatch Vapor for Kids. The increased slotting fees resulted from the
placement of TheraPatch products in new stores as well as the placement of new
TheraPatch products on the shelves in existing stores. The 1999 increase was
primarily due to increased sales staff and advertising and slotting fees to
establish new retail accounts. The Company anticipates sales and marketing
expenses as a percent of sales in fiscal 2001 will be comparable to 2000.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $2,598,998 or 17.8% of net
sales in 2000, compared to $2,507,432 or 20.4% of net sales in 1999, and
$2,110,084 or 16.3% of net sales in 1998. The increase in 2000 was primarily the
result of increased consulting expense which more than offset a decrease in
legal expenses. Legal expense in the prior year included approximately $126,000
related to the re-negotiation and modification of the license agreement for the
development and commercialization of cotinine as well as legal expenses
associated with work on new and existing patents. The increase in 1999 was
primarily the result of increased regulatory and quality assurance expenses
associated with achieving and maintaining ISO 9001 and EN 46001 certification,
expenses related to the re-negotiation and modification of the license agreement
for the development and commercialization of cotinine, and legal expenses
associated with work on new and existing patents. The Company anticipates
general and administrative expenses in fiscal 2001 will be comparable to fiscal
2000.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses totaled $1,094,808 or 7.5% of net
sales in 2000, compared to $1,169,743 or 9.5% of net sales in 1999, and
$1,037,095 or 8.0% of net sales in 1998. The decrease in 2000 primarily reflects
decreased test-run production costs and supplies which were partially offset by
increased labor costs. The increase in 1999 reflects increased staffing levels
and increased costs for testing of products under development. Management
believes that research and development expenditures as a percent of sales will
be comparable in fiscal 2001 to fiscal 2000.
MEDICAL TAPE ASSET IMPAIRMENT AND EXIT PLAN
In June of fiscal 2000, the Company adopted a plan to exit the medical
tape business effective June 30, 2000. Adoption of this plan resulted in a
charge for $645,000 related to the write-down of the medical tape equipment to
its estimated fair market value, net of disposal costs, of $526,000. The Company
also recorded a charge of $85,000 to reduce the carrying value of medical tape
inventory to a net realizable value. The $85,000 charge was included in the cost
of goods sold. The Company expects to sell the assets and dispose of the
remaining inventory by December 31, 2000.
OTHER INCOME AND EXPENSE
Interest expense increased to $35,405 in 2000 from $1,173 in 1999
primarily due to interest expense associated with the line of credit. There was
no interest expense in 1998. Other income decreased to $27,692 in 2000 from
$89,240 in 1999 and $69,874 in 1998 primarily due to decreased interest income
as a result of lower cash and cash equivalent balances.
SECTION III - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
INCOME TAX BENEFIT
The Company recorded an income tax benefit in 2000 of $38,934, no
income tax expense or benefit in 1999 and an income tax benefit of $1,000 in
1998. The income tax benefit in 2000 resulted primarily from the refund of taxes
previously paid by the Company's foreign sales corporation. The foreign sales
corporation was dissolved during fiscal 2000. There was no income tax benefit
recorded during 2000, 1999 and 1998 related to the loss before income taxes
since the tax benefit may not be realizable by the Company.
OPERATIONS SUMMARY
The net loss for 2000 resulted primarily from increased sales and
marketing expenses and charges related to the plan to exit the medical tape
business which more than offset an increase in gross profit. The increase in
gross profit resulted from increased sales volume and a shift in the sales mix
toward higher-margin therapeutic consumer products. The net loss for 1999
resulted primarily from increased sales and marketing expenses related to the
Company's investment in the consumer products market and increased general and
administrative expenses, primarily those expenses related to the modification of
the cotinine license agreement and achievement of ISO 9001 and EN 46001
certification. The net loss for 1998 resulted primarily from a decrease in the
gross profit percent due to a shift in the sales mix from higher margin
conductive and therapeutic consumer products to lower margin medical tape
products and increased material costs and material usage.
EFFECT OF INFLATION
Inflation has not had a significant impact on the Company's operations
or cash flow.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $921,854 to $100,171 at June 30,
2000 from $1,022,025 at June 30, 1999. This decrease was primarily due to the
net loss for fiscal 2000 of $2,859,276. Accounts receivable increased by
$294,165 to $2,645,710 primarily due to increased sales for June 2000 as
compared to June 1999. Inventories increased by $251,162 to $2,247,686 primarily
due to increased raw material and finished goods inventory related to
therapeutic products which was partially offset by decreased finished goods
inventory of medical tape.
Working capital totaled $1,512,561 at June 30, 2000, compared to
$3,497,926 at the end of fiscal 1999. The Company's current ratio was 1.4 at
June 30, 2000 compared to 2.5 at June 30, 1999.
Capital spending for plant improvements and equipment totaled $425,856
in 2000. There were no material commitments for capital expenditures at June 30,
2000. Net property, plant and equipment decreased by $989,403 to $3,039,088 at
June 30, 2000 from $4,028,491 at June 30, 1999, reflecting the write-down of the
medical tape equipment to its estimated fair market value of $526,000 and the
excess of depreciation expense over capital spending.
Accounts payable increased by $265,643 to $1,910,551 at June 30, 2000
from $1,644,908 at June 30, 1999 primarily due to increased payables related to
increased manufacturing production as well as an increase in the average number
of days outstanding before payment.
The Company finalized a $2,000,000 asset-based line of credit in
November, 1999 and borrowings outstanding on the line were $837,542 at June 30,
2000. The Company was in default at June 30, 2000 with covenants relating to the
minimum book net worth and the maximum loss before taxes as a result of the
charges totaling $730,000 related to the exit of the medical tape business.
These defaults were waived by the bank in an amendment to the line of credit
dated September 26, 2000. Shareholders' equity decreased by $2,788,704 to
$4,719,816 as of June 30, 2000 from $7,508,520 as of June 30, 1999, primarily
due to the net loss incurred during 2000.
SECTION III - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Management believes that existing cash and cash equivalents,
internally-generated cash flow, the existing secured line of credit, an expected
increase in the existing line of credit due to the addition of international
receivables and inventory in the asset base, and expected additional fixed
asset-based financing will be sufficient to support anticipated operating and
capital spending requirements during fiscal 2001. Management is also evaluating
additional sources of capital that may be appropriate for funding longer-term
growth and expansion of the business. Maintaining adequate levels of working
capital depends in part upon the success of the Company's products in the
marketplace, the relative profitability of those products and the Company's
ability to control operating expenses. Funding of the Company's operations in
future periods may require additional investments in the Company in the form of
equity or debt. There can be no assurance that the Company will achieve desired
levels of sales or profitability, or that future capital infusions will be
available.
FORWARD-LOOKING STATEMENTS
From time to time, in reports filed with the Securities and Exchange
Commission in press releases, and in other communications to shareholders or the
investment community, the Company may provide forward-looking statements
concerning possible or anticipated future results of operations or business
developments which are typically preceded by the words "believes", "expects",
"anticipates", "intends", "will", "may", "should" or similar expressions. Such
forward-looking statements are subject to risks and uncertainties which could
cause results or developments to differ materially from those indicated in the
forward-looking statements. Such risks and uncertainties include, but are not
limited to, the buying patterns of major customers; competitive forces including
new products or pricing pressures; costs associated with and acceptance of the
Company's TheraPatch brand strategy; impact of interruptions to production;
dependence on key personnel; need for regulatory approvals; changes in
governmental regulatory requirements or accounting pronouncements; and ability
to satisfy funding requirements for operating needs, expansion or capital
expenditures.
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.