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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement.
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2)).
[X] Definitive Proxy Statement.
[ ] Definitive Additional Materials.
[ ] Soliciting Material Pursuant to Section 240.14a-12
LECTEC CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
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1) Title of each class of securities to which transaction applies:
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SEC 1913 (02-02)
LECTEC CORPORATION
10701 RED CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
------------------
The Annual Meeting of the shareholders of LecTec Corporation, a
Minnesota corporation (the "Company"), will be held at The Hilton Garden Inn
Eden Prairie Hotel, 6330 Point Chase, Eden Prairie, Minnesota 55344, on
Thursday, May 22, 2003, at 3:00 p.m. (CDT), for the following purposes:
1. To elect five directors to serve on the Board of Directors for
a term of one year and until their successors are duly elected
and qualified.
2. To ratify the appointment of Grant Thornton LLP as the
Company's independent auditor for the Company's current fiscal
year.
3. To transact such other business as may properly come before
the meeting or any adjournment thereof.
Only shareholders of record as of the close of business on Monday,
March 24, 2003, the record date, are entitled to notice of and to vote at the
meeting.
Whether or not you expect to attend the meeting in person, please
complete, sign and promptly return the enclosed form of proxy. If you later
desire to revoke your proxy, you may do so at any time before it is exercised.
BY ORDER OF THE BOARD OF DIRECTORS
/s/John D. LeGray
John D. LeGray
Secretary
Minnetonka, Minnesota
April 25, 2003
LECTEC CORPORATION
10701 RED CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS -- MAY 22, 2003
INFORMATION CONCERNING SOLICITATION AND VOTING
The enclosed proxy is solicited by the Board of Directors of LecTec
Corporation (the "Company") for use at the Annual Meeting of shareholders to be
held on Thursday, May 22, 2003, at 3:00 p.m. (CDT), at The Hilton Garden Inn
Eden Prairie Hotel, 6330 Point Chase, Eden Prairie, Minnesota 55344, or any
adjournments thereof (the "Meeting"), for the purposes set forth herein and in
the accompanying Notice of Annual Meeting of Shareholders. Proxies will be voted
in accordance with the directions specified therein. These proxy solicitation
materials and the annual report on Form 10-K for the year ended December 31,
2002 are first being sent to shareholders on or about April 24, 2003.
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 items of
business described in this proxy statement. Votes cast by proxy or in person at
the Meeting will be tabulated by the election inspectors appointed for the
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 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" or a vote "against" those
proposals.
Under Minnesota law, the affirmative vote of a majority of the shares
of common stock present or represented and entitled to vote at the Meeting is
necessary to approve each item of business properly presented at the meeting of
shareholders. However, if the shares present and entitled to vote on that item
of business at the time that the item is presented for a vote would not
constitute a quorum for the transaction of business at the meeting, then the
item must be approved by a majority of the voting power of the minimum number of
shares that would constitute such a quorum.
As of March 24, 2003, the record date fixed for the determination of
shareholders of the Company entitled to notice of and to vote at the Meeting,
there were 3,966,395 outstanding shares of common stock, which is the only class
of capital stock of the Company. Each shareholder will be entitled to one vote
per share on all matters acted upon at the Meeting. There is no cumulative
voting.
1
Votes cast by proxy or in person at the Annual Meeting of Shareholders
will be tabulated by the election inspectors appointed for the Meeting.
Any proxy given pursuant to this solicitation may be revoked by the
shareholder giving it at any time prior to its use by (i) delivering to the
principal office of the Company a written notice of revocation, (ii) filing with
the Company a duly executed proxy bearing a later date, or (iii) attending the
Meeting and voting in person.
The costs of this solicitation will be borne by the Company. Proxies
may be solicited by the Company's directors, officers and regular employees,
without extra compensation, by mail, telegram, telephone and personal
solicitation. The Company will request brokerage houses and other nominees,
custodians and fiduciaries to forward soliciting material to beneficial owners
of the Company's common stock. The Company may reimburse brokerage firms and
other persons representing beneficial owners for their expenses in forwarding
solicitation materials to beneficial owners.
ELECTION OF DIRECTORS
The Company's Amended and Restated By-laws provide that the size of the
Board of Directors shall be one or more directors, with the number of directors
to be determined by the shareholders from time to time prior to the election of
directors. The Board of Directors may increase the number of directors at any
time. Five persons have been nominated for election as directors at the Meeting.
Directors are elected to serve a one-year term and until their successors are
duly elected and qualified. Lee M. Berlin, Alan C. Hymes, M.D., Marilyn K.
Speedie, Ph.D., Donald C. Wegmiller and Rodney A. Young are the current
directors who have been nominated for reelection to the Board to serve for a
term of one year and until their successors are duly elected and qualified. Bert
J. McKasy retired from the Board of Directors in December 2002. All of the
nominees are currently members of the Board of Directors of the Company and have
served in that capacity since originally elected or designated as indicated
below in the information concerning nominees.
A shareholder submitting a proxy may vote for all or any of the
nominees for election to the Board of Directors or may withhold his or her vote
from all or any of such nominees. If a submitted proxy is properly signed but
unmarked with respect to the election of directors, the proxy agents named in
the proxy will vote the shares represented thereby for the election of all of
the nominees. Each of the nominees has agreed to serve the Company as a director
if elected; however, should any nominee become unwilling or unable to serve if
elected, the proxy agents named in the proxy will exercise their voting power in
favor of such other person as the Board of Directors may recommend.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE FIVE NOMINATED
DIRECTORS. PROXIES WILL BE VOTED FOR THE ELECTION OF THE FIVE NOMINEES UNLESS
OTHERWISE SPECIFIED.
2
INFORMATION CONCERNING NOMINEES
Lee M. Berlin, 81 years old, has been a Director since 1981 and served
as Chairman of the Board from 1983 through May 1993. He served as the Company's
Chief Executive Officer from 1983 to 1989. Prior to joining the Company, Mr.
Berlin served in a variety of foreign and domestic marketing, product
development and general management positions with Minnesota Mining &
Manufacturing Company ("3M").
Alan C. Hymes, M.D., 71 years old, is a founder of the Company and has
been a Director since 1977. In addition, Mr. Hymes acts as the Company's medical
consultant. Mr. Hymes was engaged in the private practice of surgery since 1968
but has recently retired. He is a diplomat of the American Board of Surgery and
the American Board of Thoracic and Cardiovascular Surgery.
Marilyn K. Speedie, Ph.D., 55 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 from 1989 to 1995, the most recent being in the
Department of Pharmaceutical Sciences. Dr. Speedie has been the recipient of
numerous honors, the most recent in of which was as an inductee as Fellow of the
American Association of Pharmaceutical Scientists in October of 1996. Dr.
Speedie also co-authored a book published in 1996 entitled "Pharmacognosy and
Pharmacobiotechnology".
Donald C. Wegmiller, 64 years old, has served as a Director since 1997.
Since April 1993, Mr. Wegmiller has served as President and Chief Executive
Officer of Clark/Bardes Consulting - Healthcare Group, 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 the 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, 48 years old, has served as Director, Chief Executive
Officer and President of the Company since August 1996 and as Chairman of the
Board since November 1996. Prior to assuming these positions with the Company,
Mr. Young served Baxter International, Inc. for five years in various management
roles, most recently as Vice President and General Manager of the Specialized
Distribution Division. In addition to serving as Chairman and Director for
LecTec Corporation, Mr. Young also serves as a Director of Possis Medical, Inc.,
Delta Dental Plan of Minnesota and Health Fitness Corporation.
3
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During fiscal year 2002, the Board of Directors held four meetings and
sixteen conference calls. Each Director holding office during the fiscal year
attended at least 75% of the total 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. The Company does not have a
Nominating Committee.
The Board of Directors has an Audit Committee comprised of Mr.
Wegmiller, Mr. Berlin and Dr. Hymes. Mr. McKasy served as Chairman of the Audit
Committee until his resignation in December of 2002. Mr. Wegmiller replaced Mr.
McKasy as Chairman of the Audit Committee in 2003. All of the members of the
Audit Committee are "independent" as defined in Rule 4200(a)(14) of the National
Association of Securities Dealers' listing standards. The Audit Committee
reviews and investigates all matters pertaining to the accounting activities of
the Company and the relationship between the Company and its independent
auditor. The Audit Committee held two meetings during fiscal year 2002.
The Board of Directors has a Compensation Committee comprised of Mr.
Wegmiller, who serves 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 the
Company. The Compensation Committee held one meeting during calendar year 2002.
DIRECTOR COMPENSATION
Directors who are not employees of the Company are paid for their
services at a rate of $6,000 per fiscal year plus $1,000 per regular board
meeting plus reasonable meeting expenses. This compensation arrangement became
effective during 2001. However, both types of payments were suspended beginning
with the meeting held in December 2001 and have not been reinstated.
4
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
Our Audit Committee reviews the Company's financial reporting process
on behalf of the Board of Directors. Our Board of Directors adopted an Audit
Committee charter in October 2000. In fulfilling its responsibilities, our
Committee has reviewed and discussed the audited financial statements contained
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002
with the Company'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 Audit
Committee has received the written disclosures and the letter from the
independent auditors required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees, and has discussed with the
independent auditors the independent auditors' independence.
Based 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 the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2002 filed with the Securities and
Exchange Commission.
THE AUDIT COMMITTEE
Don Wegmiller, Chairman
Lee M. Berlin
Alan C. Hymes, M.D.
5
EXECUTIVE COMPENSATION
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors is responsible for
establishing compensation policy and administering the compensation programs for
the Company's executive officers. The Committee is composed entirely 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 the Company's compensation policies for
executive officers and the rationale for the compensation paid to executive
officers.
COMPENSATION PHILOSOPHY
The Company's compensation program is designed to motivate and reward
executive officers responsible for attaining the financial and strategic
objectives essential to the Company'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 the Company's performance and
shareholder return. The Committee believes it is in the best interests of the
shareholders to reward executive officers when the Company'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:
o Provide a strong, direct link between the Company's financial
and strategic goals and executive compensation;
o Motivate executive officers to achieve corporate operating
goals through an emphasis on performance-based compensation;
o Align the interests of executive officers with those of the
Company's shareholders by providing a significant portion of
total compensation that is LecTec stock-based; and
o Provide competitive total compensation in order to attract and
retain high caliber key executive officers critical to the
long-term success of the Company.
EXECUTIVE OFFICER COMPENSATION PROGRAM
The key components of the Company's executive officer compensation
program are base salary, annual incentives and long-term incentives. These
elements are described below. During fiscal year 2002, specific and objective
criteria were utilized to determine each element of an executive's compensation
package.
6
BASE SALARY. The Committee annually reviews the base salaries of
executive officers. In determining appropriate salary levels, the Committee
considers the following criteria:
o scope and complexity of the position including required
substantive knowledge and required training;
o level of responsibility including number of employees
directly supervised;
o past performance including revenue generated from operations
under the management of the executive officer; and
o salary levels for comparable positions at industry peer group
companies and the market opportunities available to the
executive officer.
In January 2002, the current executive officers accepted a 10% salary
decrease as a cost reduction measure.
ANNUAL INCENTIVE AWARDS. The purpose of the Company'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 the Company'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:
o the measure of annual sales actually achieved compared to the
level of annual sales contained in the Company's annual budget
as approved by the Board of Directors; and
o the measure of profits (or loss) actually achieved compared to
the level of profits (or loss) contained in the Company's
annual budget as approved by the Board of Directors.
An executive officer's individual bonus is dependent upon the following
criteria:
o annual sales directly attributable to operations managed by
the executive officer;
o achievement of significant corporate goals which do not
generate sales; and
o 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 the Company.
LONG-TERM INCENTIVE PLANS. Long-term incentives are provided to
executive officers through the Company's stock option program.
7
The Company's stock option program provides compensation that directly
links the interests of management and shareholders and aids in retaining key
executive officers. Executive officers are eligible for annual grants of stock
options. The amount of stock options awarded to an executive officer are
dependent on the following criteria:
o the executive officer's past performance with the Company
including sales directly attributable to operations managed by
the executive officer;
o the executive officer's ability to impact financial
performance; and
o the importance of the executive officer's responsibilities at
the Company in light of the Company's future strategic plans.
All individual stock option grants are reviewed and approved by the
Committee. The exercise price of the stock options equals the fair market value
of the Company's common stock on the date the options are granted. The options
have a 5-year term and vest in three equal, annual increments beginning one year
from the grant date.
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.
During fiscal 2002, no new stock options were granted to executive officers. The
Company repriced certain outstanding stock options. See "Report on Option
Repricing" below.
CHIEF EXECUTIVE OFFICER COMPENSATION. The base salary for Mr. Young was
$240,000 until January 21, 2002 when it was decreased by 10% to $216,000 as part
of cost reduction measures. 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 to Mr. Young during fiscal year 2002. In fiscal 2002, Mr. Young
received no new stock option grants. The Company repriced all of Mr. Young's
options to purchase shares of the Company's common stock, which were originally
granted at various times during his employment. See "Report on Option Repricing"
below.
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 the Company's compensation program focuses the efforts
of the Company's executive officers on the achievement of growth, profitability
and the enhancement of shareholder value for the benefit of all of the Company's
shareholders.
COMPENSATION COMMITTEE
Donald C. Wegmiller, Chairman
Lee M. Berlin
Alan C. Hymes, M.D.
8
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows the cash and non-cash compensation for the
fiscal year ended December 31, 2002, the calendar year ended December 31, 2001,
and the fiscal year ended June 30, 2001, paid to the Company's Chief Executive
Officer and the other executive officers of the Company.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Awards Compensation
--------------------------- --------------------
Year Securities Underlying All Other
Name and Principal Position Ended (1) Salary Bonus Options (2) Compensation (3)
- --------------------------- --------- ------ ------ -------------------- ----------------
Rodney A. Young 12/31/02 $220,310 $ - 360,000 $ 568
Chairman, President and 12/31/01 238,191 80,000 60,000 2,221
Chief Executive Officer 06/30/01 216,834 80,000 60,000 3,471
Timothy R. J. Quinn 12/31/02 121,852 - 88,000 258
Vice President and General 12/31/01 132,581 35,640 30,000 1,750
Manager, Consumer Products 06/30/01 124,859 35,640 30,000 1,901
John D. LeGray 12/31/02 107,103 - 70,000 113
Vice President, Quality 12/31/01 116,533 31,326 30,000 2,913
Assurance & Regulatory Affairs 06/30/01 109,746 31,326 30,000 2,744
Timothy P. Fitzgerald 12/31/02 112,826 - 55,000 1,853
Vice President, Operations 12/31/01 122,760 22,000 30,000 2,625
06/30/01 115,610 22,000 30,000 2,890
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(1) On September 5, 2001, the Board of Directors approved a change in the
Company's fiscal year end from June 30 to December 31. Therefore, an
overlapping period from January 1, 2001 to June 30, 2001 is represented
in both the years ended June 30, 2001 and December 31, 2001 in the
table. To illustrate, the bonus paid in May 2001 and the stock options
granted on February 2001 are represented in both the years ended June
30, 2001 and December 31, 2001 in the table.
(2) In fiscal 2002, Mr. Fitzgerald had a total of 55,000 options repriced;
Mr. LeGray had a total of 70,000 options repriced; Mr. Quinn had a
total of 88,000 options repriced; and Mr. Young had a total of 360,000
options repriced; See "Report on Option Repricing" below.
(3) Reflects matching contributions under the Company's 401(k) and Profit
Sharing Plan.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options under the Company's 1989 and 1998 Stock Option Plans during fiscal year
2002, to each of the executive officers named in the Summary Compensation Table:
9
INDIVIDUAL GRANTS (5) POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED
PERCENT OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION
UNDERLYING EMPLOYEES PRICE FOR OPTION TERM(4)
OPTIONS IN FISCAL PER EXPIRATION ---------------------
NAME GRANTED YEAR 2002 (3) SHARE DATE 5% 10%
- ------------------------- ---------- ---------------- ------- ---------- -------- -------
Rodney A. Young (2) 100,000 11.8% $0.81 8/12/06 $18,037 $38,991
Rodney A. Young (2) 71,250 8.4% $0.81 6/10/04 $5,749 $11,770
Rodney A. Young (2) 55,000 6.5% $0.81 1/22/08 $13,912 $31,245
Rodney A. Young (1) 51,264 6.0% $0.81 2/1/06 $7,968 $17,016
Rodney A. Young (2) 50,000 5.9% $0.81 11/19/06 $9,685 $21,103
Rodney A. Young (1) 23,750 2.8% $0.81 6/10/04 $1,916 $3,923
Rodney A. Young (2) 8,736 1.0% $0.81 2/1/06 $1,358 $2,900
Timothy R. J. Quinn (1) 36,000 4.2% $0.81 6/10/04 $2,905 $5,947
Timothy R. J. Quinn (1) 30,000 3.5% $0.81 2/1/06 $4,663 $9,958
Timothy R. J. Quinn (2) 22,000 2.6% $0.81 7/30/08 $6,162 $14,018
John D. LeGray (1) 30,000 3.5% $0.81 2/1/06 $4,663 $9,958
John D. LeGray (1) 22,500 2.7% $0.81 6/10/04 $1,815 $3,717
John D. LeGray (2) 17,500 2.1% $0.81 11/20/07 $4,271 $9,549
Timothy P. Fitzgerald (1) 30,000 3.5% $0.81 2/1/06 $4,663 $9,958
Timothy P. Fitzgerald (1) 25,000 2.9% $0.81 5/2/05 $3,011 $6,306
- ------------------------
(1) Incentive stock option representing the right to purchase one share of
the Company's common stock, granted pursuant to the Company's 1989 or
1998 Stock Option Plans.
(2) Non-qualified stock option representing the right to purchase one share
of the Company's common stock, granted pursuant to the Company's 1989
or 1998 Stock Option Plans.
(3) Percent calculations based on 847,458 total options granted to officers
and employees in 2002 consisting of 43,500 original grants and 803,958
repriced options.
(4) 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 the Company's estimate or projection of
the Company'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.
(5) Represents repricing of options originally granted prior to fiscal year
2002. Effective July 1, 2002, the Company amended certain options
granted prior to November 2, 2001 to provide for a decrease in the
exercise price to $0.81, which was the common stock's closing price on
the Nasdaq Small Cap Market on the approval date. The repriced options
may be exercised in accordance with the vesting schedules contained in
the original option grants. See "Report on Option Repricing" below.
10
AGGREGATED OPTION EXERCISES IN 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 December 31, 2002 and unexercised options
held as of December 31, 2002, 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 DEC. 31, 2002 AS OF DEC. 31, 2002 (1)
ACQUIRED VALUE --------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- ---------------
Rodney A. Young 0 $ 0 294,794 65,206 $ 0 $ 0
Timothy R. J. Quinn 0 0 59,000 29,000 0 0
John D. LeGray 0 0 44,375 25,625 0 0
Timothy P. Fitzgerald 0 0 26,667 28,333 0 0
- -------------------------
(1) "Value" has been determined based on the difference between the last
sale price of the Company's common stock as reported by the Nasdaq
National Market System on December 31, 2002 ($.51) and the per share
option exercise price, multiplied by the number of shares subject to
the in-the-money options.
REPORT ON OPTION REPRICING
In 2002, after a significant decrease in the price of the Company's
common stock, the Compensation Committee determined that options granted by the
Company prior to November 2, 2001 no longer provided a meaningful incentive to
employees and directors as initially intended. The Company believes that the
market for skilled employees in the health care and consumer products field is
highly competitive, and believes that stock options with meaningful incentives
are an important measure in retaining its employees and directors, which is
critical to the Company's success. In light of the Compensation Committee's
desire to provide meaningful incentives to existing active employees and
directors, the options to purchase shares of the Company's common stock granted
to existing executives and certain active employees prior to November 2, 2001
were amended to reduce the exercise price thereunder to $.81, which was the
common stock's closing price on the Nasdaq Small Cap Market on the approval
date.
SUBMITTED BY THE COMPENSATION COMMITTEE OF THE COMPANY'S BOARD OF DIRECTORS:
Donald C. Wegmiller, Chairman
Lee M. Berlin
Alan C. Hymes, M.D.
11
CHANGE IN CONTROL PLANS
The Company'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 his monthly base salary and
termination payments for all other executive officers equal to twelve times the
executives monthly base salary.
In July 1999, the Company adopted the Improved Shareholder Value Cash
Bonus Plan which provides cash bonus payments to executive officers if the
Company is acquired by or merged with another company, and the valuation of the
Company for purposes of the acquisition or merger equals or exceeds the minimum
level defined by the plan. Cash bonus payments to executive officers increase as
the total valuation of the Company for purposes of the sale or merger increases,
thus aligning the interests of the executive officers with the interests of the
shareholders and providing an incentive to the executive officers to maximize
shareholder value.
In August 2002, the Company adopted a Stay in Place Executive Retention
Program which provides cash bonus payments to executive officers if the Company
obtains a strategic capital investment of at least $2,500,000. This program is
meant to reward the executive team for staying with the Company during difficult
times and for efforts associated with obtaining a strategic investment that does
not constitute an entire sale of the business.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
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 December 31, 2002.
Mr. Berlin was formerly an officer of the Company, having served as
both Chairman of the Board and Chief Executive Officer of the Company. There
were no other Compensation Committee "interlocks" within the meaning of the
Securities and Exchange Commission 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 April 2, 2003, by each person, or
group of affiliated persons, who is known by us to beneficially own more than 5%
of our common stock, each of our directors, each of our executive officers named
in the Summary Compensation Table above and all of our directors and executive
officers as a group.
12
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. 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 April 2, 2003 are considered
outstanding. 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
April 2, 2003. The number of shares subject to options that each beneficial
owner has the right to acquire within 60 days of April 2, 2003 are listed
separately under the column entitled "Number of Shares Underlying Options
Beneficially Owned." 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
3,966,395 shares of common stock outstanding on April 2, 2003. The address of
each director and executive officer named below is the same as that of the
Company.
Table of Security Ownership of Certain Beneficial Owners and Management:
NUMBER
OF SHARES
NUMBER OF UNDERLYING
SHARES OPTIONS PERCENT OF
BENEFICIALLY BENEFICIALLY SHARES
NAME OWNED OWNED OUTSTANDING
- ---- ------------ ------------ -----------
Lee M. Berlin (1) 577,029 34,125 14.4%
Alan C. Hymes, M.D. 433,498 34,125 10.8%
Rodney A. Young 329,938 313,338 7.7%
Timothy R. J. Quinn 72,800 69,000 1.8%
John D. LeGray 63,035 54,375 1.6%
Timothy P. Fitzgerald 49,325 45,000 1.2%
Donald C. Wegmiller 27,000 26,000 .7%
Marilyn K. Speedie, Ph.D. 23,000 21,500 .6%
All directors and executive officers as 1,575,625 597,463 34.5%
a group (8 persons)
- -----------------------------------------
*Less than 1%
(1) Includes 75,605 shares owned by Mr. Berlin's wife and 137,145 shares owned
by Mr. Berlin's son as to which Mr. Berlin disclaims beneficial ownership.
13
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors and persons who beneficially own more
than 10% of the Company'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 the Company with copies
of all Section 16(a) reports they file.
Based solely on a review of the copies of such reports furnished to the
Company and written representations from the executive officers and directors,
the Company believes that all Section 16(a) filing requirements applicable to
its executive officers and directors and greater than 10% beneficial owners have
been satisfied.
14
SHAREHOLDER RETURN PERFORMANCE
GRAPH
The graph and table below compare the cumulative total shareholder
return on the Company's common stock for the period from January 1, 2002 to
December 31, 2002, July 1, 2001 to December 31, 2001, and the last four fiscal
years ended June 30, 2001, 2000, 1999, and 1998, 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 the Company's common stock, the Russell 2000 Index and the S & P Medical
Products & Supplies Index on June 30, 1997 and that all dividends (cash and
stock) were reinvested.
TOTAL RETURN
[LINE GRAPH]
6/30/97 6/30/98 6/30/99 6/30/00 6/30/01 12/31/01 12/31/02
------- ------- ------- ------- ------- -------- --------
LecTec Corporation . . . . . 100 55 63 35 35 20 8
Russell 2000 . . . . . . . . 100 117 118 135 136 130 104
S & P Med. P&S . . . . . . . 100 127 255 313 268 283 275
15
RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has appointed Grant Thornton LLP as the
Company's independent auditor for the fiscal year ended December 31, 2002. A
proposal to ratify that appointment will be presented at the Meeting. Grant
Thornton LLP has served as the Company's auditor since June 1987.
Representatives of Grant Thornton LLP are expected to be present at the Meeting
and will have an opportunity to make a statement if they desire to do so.
Representatives also 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 audits of the Company's financial statements for the fiscal
year ended December 31, 2002, and for reviews of the Company's financial
statements included in the Company's quarterly reports on Form 10-Q for fiscal
year 2002 totaled $56,500.
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 fiscal year ended December
31, 2002 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 fiscal year ended December 31, 2002, totaled $19,625.
The Audit Committee considered whether non-audit services provided by
Grant Thornton LLP during the fiscal year ended December 31, 2002 were
compatible with maintaining Grant Thornton LLP's independence.
While it is not required to do so, the Board of Directors is submitting
the appointment of Grant Thornton LLP to serve as the Company's independent
auditors for the fiscal year ending December 31, 2003 for ratification in order
to ascertain the views of the Company's shareholders on this appointment. If the
appointment is not ratified by the shareholders, the Board of Directors is not
obligated to appoint another independent auditor, but the Board of Directors
will give consideration to an unfavorable vote.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR RATIFICATION OF THE
APPOINTMENT OF GRANT THORNTON LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE
FISCAL YEAR ENDING DECEMBER 31, 2003. PROXIES WILL BE VOTED FOR RATIFYING THIS
APPOINTMENT UNLESS OTHERWISE SPECIFIED.
16
SHAREHOLDER PROPOSALS FOR THE 2004 ANNUAL MEETING
Any shareholder proposals to be considered for inclusion in the
Company's proxy material for the annual meeting of shareholders to be held in
2004 must be received at the Company's principal executive office at 10701 Red
Circle Drive, Minnetonka, Minnesota 55343, no later than December 26, 2003. In
connection with any matter to be proposed by a shareholder at the annual meeting
to be held in 2004, but not proposed for inclusion in the Company's proxy
material, the proxy holders designated by the Company for that meeting may
exercise their discretionary voting authority with respect to that shareholder
proposal if appropriate notice of that proposal is not received by the Company
at its principal executive office by March 10, 2004.
OTHER MATTERS
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.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ John D. LeGray
John D. LeGray
Secretary
Dated: April 25, 2003
17
[LECTEC(TM) CORPORATION LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
THURSDAY, MAY 22, 2003
3:00 P.M. (CENTRAL DAYLIGHT TIME)
THE HILTON GARDEN INN EDEN PRAIRIE HOTEL
6330 POINT CHASE
EDEN PRAIRIE, MN 55344
[LECTEC(TM) CORPORATION LOGO] PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
I appoint Rodney A. Young and John D. LeGray, 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 May 22, 2003 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.
- Please detach here -
THE DIRECTORS RECOMMEND A VOTE "FOR" ITEMS 1 AND 2.
1. Election of directors: 01 Lee M. Berlin
02 Alan C. Hymes, M.D.
03 Marilyn K. Speedie, Ph.D.
04 Donald C. Wegmiller
05 Rodney A. Young
[ ] FOR all listed [ ] WITHHOLD ALL
nominees
(except as marked)
(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.)
2. 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 AND 2.
Address Change? Mark Box [ ] Indicate changes below:
Dated__________________________________ , 2003
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.