UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-KSB
---------------------
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM________ TO________.
COMMISSION FILE NUMBER: 0-16159
LECTEC CORPORATION
(Name of small business issuer in its charter)
MINNESOTA 41-1301878
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5610 LINCOLN DRIVE, EDINA, MINNESOTA 55436
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (952) 933-2291
Securities registered under Section 12(b)
of the Exchange Act: NONE
Securities registered under Section 12(g) COMMON STOCK,
of the Exchange Act: PAR VALUE $0.01 PER SHARE
(Title of class)
Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [ ]
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form; and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
The issuer's revenues for the fiscal year ended December 31, 2006 were
$126,660.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of March 21, 2007 was approximately
$2,907,799 based upon the last reported sale price of the Common Stock at that
date by the Over-the-Counter Bulletin Board.
The number of shares outstanding of the Issuer's Common Stock as of
March 21, 2007 was 4,153,998 shares.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Description of Business........................................................................................... 3
Item 2. Description of Property........................................................................................... 5
Item 3. Legal Proceedings................................................................................................. 5
Item 4. Submission of Matters to a Vote of Security Holders............................................................... 5
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities.... 6
Item 6. Management's Discussion and Analysis or Plan of Operation......................................................... 7
Item 7. Financial Statements............................................................................................. 10
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure............................. 26
Item 8A. Controls and Procedures.......................................................................................... 26
Item 8B. Other Information................................................................................................ 26
PART III
Item 9. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance With Section 16(a) of the Exchange Act................................................................ 27
Item 10. Executive Compensation........................................................................................... 28
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................................................................. 29
Item 12. Certain Relationships and Related Transactions, and Director Independence........................................ 31
Item 13. Exhibits......................................................................................................... 32
Item 14. Principal Accountant Fees and Services........................................................................... 34
Signatures....................................................................................................... 35
Exhibit Index.................................................................................................... 36
Exhibit 23.01-Consent of Independent Registered Public Accounting Firm........................................... 38
Exhibit 31.01-Certification of Principal Executive Officer....................................................... 39
Exhibit 31.02-Certification of Principal Financial Officer....................................................... 40
Exhibit 32.01-Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant Section 906 of the Sarbanes-Oxley Act of 2002................................................ 41
Exhibit 99.01-Cautionary Statements for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995............................................... 42
- --------------------------
FORWARD-LOOKING STATEMENTS
From time to time, in reports filed with the Securities and Exchange
Commission (including this Form 10-KSB), 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," "wants," "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 Company's
dependence on royalty payments from Novartis Consumer Health, Inc. ("Novartis"),
which is not currently selling the Company's licensed product, the Company's
dependence on key personnel and Board of Director members, the success or
failure of any attempt by the Company to protect or enforce its patents and
territories of coverage, the issuance of new accounting pronouncements, the
availability of opportunities for licensing agreements related to patents that
the Company holds, limitations on market expansion opportunities, and other
risks and uncertainties as described in the "Cautionary Statements" filed as
Exhibit 99.01 to this Form 10-KSB for the year ended December 31, 2006.
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
LecTec Corporation (the "Company") is primarily an intellectual property
licensing and holding company. The Company's primary focus is to obtain royalty
income through licensing agreements related to patents that the Company owns
based on its advanced skin interface technologies. The Company previously was an
innovator in hydrogel-based topical delivery of therapeutic over-the-counter
("OTC") medications, which provide alternatives to topical creams and ointments.
A hydrogel is a gel-like material having an affinity for water and similar
compounds. These gels are ideal for delivering medication onto the skin. The
Company holds multiple domestic and international patents on its hydrogel
technology.
The Company was organized in 1977 as a Minnesota corporation and went
public in December 1986. Its principal executive office is located at 5610
Lincoln Drive, Edina, Minnesota 55436, its telephone number is (952)-933-2291,
and the fax number is (952)-942-5369.
NOVARTIS SUPPLY AND LICENSE AGREEMENT
On July 19, 2004, the Company entered into a supply and licensing agreement,
effective as of January 1, 2004 (the "Agreement"), with Novartis. The Agreement
replaced the Company's prior supply and licensing agreement with Novartis dated
May 8, 2002. The Agreement required the Company to manufacture, sell, and
deliver to Novartis vapor patches in 2004 while Novartis developed its own patch
manufacturing capability. In order to provide the Company with working capital
funds necessary to enable it to manufacture and deliver vapor patches to
Novartis in accordance with the Agreement, Novartis agreed to advance up to
$2,000,000 to the Company for use by the Company to pay current accounts payable
and expenses incurred exclusively for the manufacture and delivery of vapor
patches. In consideration of the advanced funds, the Company executed and
delivered to Novartis a promissory note in the principal amount of $2,000,000
and a security agreement. Under the security agreement, the Company pledged
substantially all of its assets to secure the $2,000,000 advance payment note.
The Company repaid the advance payment note from time to time by the delivery to
Novartis of vapor patches under the Agreement.
Under the Agreement, the Company also granted to Novartis an exclusive
license (the "License") to all of the intellectual property of the Company to
the extent that it is used or useful in the production of the vapor patches
being supplied under the Agreement for a fee of $1,065,000. The License began on
July 19, 2004, and will continue for the duration of any patents included in the
licensed intellectual property and, with respect to all other elements of the
licensed intellectual property, for the maximum duration (14 years) permitted
under applicable law. Upon the expiration of the patents included in the
licensed intellectual property, Novartis will have a non-revocable, perpetual,
fully paid-up license to the intellectual property used or useful in the
production of vapor patches for the pediatric market and the adult cough/cold
market. Commencing January 1, 2005, Novartis is required by the Agreement to pay
royalties, at an agreed upon percentage, to the Company based on net semi-annual
sales of vapor patches by Novartis for each year the License is in effect.
During the years ended December 31, 2006 and 2005, the Company recorded
revenue of $126,660 and $443,352, respectively, for royalties covered under the
Agreement.
In June 2006, Novartis issued a nationwide recall of all of its Triaminic(R)
vapor patch products. The Company did not record royalty income in the second
quarter of fiscal 2006 because of the uncertainties related to the recall.
During the third quarter ended September 30, 2006, the Company received a
$34,383 royalty payment, and recorded royalty income, from Novartis for sales by
Novartis in the second quarter of 2006. The Company did not record any royalty
income during the fourth quarter ended December 31, 2006. In a press release
issued by Novartis pertaining to the recall, Novartis explained that the recall
was "due to the serious adverse health effects that could result if the product
is ingested by a child removing the patch and chewing on it." At the same time
that Novartis announced this voluntary recall, the U. S. Food and Drug
Administration (FDA) issued a release warning consumers "not to use the
Triaminic Vapor Patch due to reports of serious adverse events associated with
accidental ingestion by children."
According to news reports, the recall resulted from an adverse event
experienced by a child who suffered a seizure after chewing on a Triaminic Vapor
Patch. Novartis confirmed to the Company that the patch involved in this
incident was not manufactured by the Company.
3
The Company has been proactive in assisting Novartis to resolve the FDA
issues surrounding the product recall and is using its resources to move forward
to revive the Company's royalty income stream. The Board of Directors of the
Company is committed to actions that serve the best interests of its
shareholders.
The Company is currently engaged in an audit of royalties due the Company
pursuant to the Agreement. The audit period is from January 1, 2005, up to the
point of the product recall in June 2006. Royalty income recognized during the
years ended December 31, 2006 and 2005, is based on net sales information
provided by Novartis, covering sales of products under the License Agreement for
the applicable periods. The Company believes it has earned and been paid all
royalty income due to the Company in the North America territory, up to the
point of the product recall in June 2006. To date, the Company has not been able
to audit the amount of royalties that may be due to the Company from sales of
licensed products in Canada and Mexico, which are listed as additional fields of
use, in the Agreement. The Company has contacted Novartis to obtain the
additional information it needs to complete the audit. The Company has not
recorded any additional royalty income due to the audit because of this
uncertainty.
STRATEGY
The Company's strategy is to pursue additional agreements with Novartis and
concurrently pursue similar agreements with other domestic and foreign
manufacturers to enable them to use the Company's proprietary patch technology
in producing or selling topical patch products in the future. Furthermore, the
Company is assessing the value of its patent portfolio to enhance its options
with respect to future licensing opportunities, attraction of potential merger
or acquisition candidates, or the sale of the Company or public shell as a
whole. The Company is also taking steps to strengthen its primary patents for
territories of use, including Europe and other countries. This effort is also
intended to strengthen the Company's position with respect to other Company's
that may be infringing on the patents the Company owns. It is currently
management's intent to fund continuing operations with royalty income from
licensing agreements or from other income derived from protection of rights
pertaining to the Company's intellectual property. There can be no assurance
that the Company will be successful in the protection of the Company's rights
related to intellectual property or that royalty income will be sufficient to
fund operations in the future. In addition, there can be no assurance that the
Company will be successful in entering into future licensing agreements.
PATENTS AND TRADEMARKS
The Company has U.S. and international patents on adhesive hydrogels,
transdermal and topical delivery systems. Twenty issued U.S. patents and
forty-two issued international patents are currently assigned to the Company.
Four U.S. applications and two foreign applications are pending. The patents
most pertinent to the Company's major products have a remaining legal duration
ranging from five to fourteen years. The Company also holds three registered
U.S. trademarks.
Issued patents can later be held invalid by the patent office issuing the
patent or by a court. The Company cannot be certain that its patents will not be
challenged, invalidated or circumvented or that the rights granted hereunder
will provide a competitive advantage.
The Company uses both patents and trade secrets to protect its proprietary
property and information. In addition, the Company monitors competitive products
and patent publications to be aware of potential infringement of its rights. To
the extent the Company relies on confidential information to maintain
competitive position, there can be no assurance that other parties will not
independently develop the same or similar information.
EMPLOYEES
As of December 31, 2006, the Company has one full time employee, a
three-member Board of Directors, and has contract labor personnel available to
the Company on an as needed basis.
4
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases a building in Edina, Minnesota containing approximately
14,500 square feet of warehouse and office space. The lease began in July 2004
and expires in August 2008. The Company uses the space to maintain daily
operations and for record storage requirements. The Company has sub-leased
approximately 7,000 square feet of this space to an independent lessee for
$3,000 per month. The sublease continues until April 30, 2008. If the sub lessee
chooses to stay beyond this term, the monthly rent will escalate to $4,500 per
month to the end of the master lease ending in August 2008.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
5
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock trades on the Over the Counter ("OTC") Bulletin
Board ("Pink Sheets") under the symbol LECT.OB.
The following table sets forth, for each of the calendar periods indicated,
the quarterly high and low closing prices for the Company's common stock quoted
on the OTC Bulletin Board. The prices in the table represent prices between
dealers and do not include adjustments for retail mark-up, markdown, or
commission and may not represent actual transactions.
Year Ended Year Ended
December 31, 2006 December 31, 2005
------------------- ---------------------
High Low High Low
------ ------ ------ ------
Quarter ended March 31 $ 0.71 $ 0.48 $ 3.00 $ 1.50
Quarter ended June 30 0.80 0.35 2.65 1.20
Quarter ended Sept. 30 0.35 0.24 1.45 0.65
Quarter ended Dec. 31 0.72 0.27 0.95 0.51
As of March 21, 2007, the Company had 4,153,998 shares of common stock
outstanding, and 259 common shareholders of record, which number does not
include beneficial owners whose shares were held of record by nominees or broker
dealers.
The Company did not declare or pay cash dividends on its common stock in
2006. On January 20, 2005, the Company's Board of Directors approved and
declared a cash dividend of $0.06 per share, payable on March 11, 2005 to
shareholders of record at February 25, 2005. The Company had 4,113,739 shares
outstanding on the record date. The Company may pay future dividends based upon
excess cash the Company may have from royalty income exceeding operating
expenses of the Company. However, there can be no assurance that the Company
will pay any future dividends.
6
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
In July 2004, management determined that the Company would wind down its
contract manufacturing operations by December 31, 2004. Because of this, the
past and future financial results related to contract manufacturing operations
are treated as discontinued operations for financial reporting purposes.
Continuing operations relate to the current structure of the Company as an
intellectual property licensing and holding company. The Company accounts for
its prior discontinued operations under the provisions of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." Accordingly, results of operations and the related charges
for discontinued operations have been classified as "Loss from discontinued
operations" in the accompanying Statements of Operations. Assets and liabilities
of the discontinued operations have been classified and reflected in the
accompanying Balance Sheets as "Discontinued operations" for the current and
prior period presented.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2006 AND 2005
RESULTS OF CONTINUING OPERATIONS
The Company recorded royalty and licensing fees of $126,660 for the year
ended December 31, 2006, compared to $443,352 for the year ended December 31,
2005. The royalty and licensing fees were earned during the last two years under
the Agreement the Company has with Novartis. The 2006 and 2005 royalty income is
attributable to sales of licensed products by Novartis to consumers at an agreed
upon percentage under the terms of the Agreement. Net loss from continuing
operations for 2006 was ($335,532), or ($0.08) per basic and diluted share,
compared to a net loss from continuing operations for 2005 of ($326,522), or
($0.08) per basic and diluted share. The increase in the net loss from
continuing operations for 2006 compared to 2005 was primarily due to reduced
royalty and licensing fees as a result of the Novartis nationwide product
recall, offset by reductions in operating expenses.
RESULTS OF DISCONTINUED OPERATIONS
The loss from discontinued operations for the year ended December 31, 2006
was ($31,650) or ($0.01) per basic and diluted share, compared to a loss from
discontinued operations of ($204,090), or ($0.05) per basic and diluted share
for 2005. The decrease in loss from discontinued operations for 2006 compared to
2005 is attributable to expense reductions related to the wind down of
manufacturing operations partially offset by a charge of $31,650 in 2006 related
to an adjustment to the Company's reserve for sales returns and credits for
sales prior to discontinuance of operations. The Company had no revenue from
discontinued operations for the years ended December 31, 2006 and 2005.
NET RESULTS OF OPERATIONS
The net loss for 2006 was ($367,182), or ($0.09) per basic and diluted
share, compared to net loss of ($530,612), or ($0.13) per basic and diluted
share, for 2005. The reduction in net loss for the year ended December 31, 2006,
compared to 2005 is due to the reasons stated above.
INCOME TAXES
There was no income tax benefit recorded for the years ended December 31,
2006 and 2005, as realization of available net operating loss carryforwards is
not reasonably assured.
EFFECT OF INFLATION
Inflation has not had a significant impact on the Company's operations or
cash flow.
7
LIQUIDITY AND CAPITAL RESOURCES
Total assets decreased $310,168 to $1,514,657 at December 31, 2006 from
$1,824,825 at December 31, 2005. Cash and cash equivalents decreased $28,793 to
$1,281,785 at December 31, 2006 from $1,310,578 at December 31, 2005. The
decrease in total assets and the reduction in cash and cash equivalents is
attributable to 2006 activities including the net loss from continuing
operations, the absence of costs related to the wind down of manufacturing
operations, and general reductions in operating costs during 2006.
Working capital was $1,130,196 at December 31, 2006, compared to $1,431,359
at December 31, 2005. The Company's current ratio was 6.19 at December 31, 2006,
compared to 9.90 at December 31, 2005. The decline in working capital of
$301,163 for 2006 from 2005 was primarily due to the net loss the Company
incurred for 2006.
Shareholders' equity decreased by the net loss for 2006 of ($367,182) to
$1,296,783 as of December 31, 2006 from shareholders' equity of $1,663,965 as of
December 31, 2005. There were no equity financing transactions during 2006.
The Company believes its existing cash and cash equivalents will be
sufficient to fund continuing operations through 2007 based upon its current
cash on hand, and the anticipated operating expenses the Company is likely to
incur during 2007. The Company earns interest on its available cash. Interest
income earned was $61,846 (4.8% average annual interest) and $41,424 (2.4%
average annual interest) for 2006 and 2005, respectively. Management also
believes it is critical that the Company rejuvenate its revenue stream from
Novartis or other sources in order for the Company to survive. Management has
been working with Novartis to address the issues surrounding the product recall
as well as exploring other licensing opportunities pertaining to the
intellectual property the Company owns. However, there can be no assurance that
the anticipated revenue stream or the anticipated expenses will be as planned,
or that the Company will be successful in negotiating other licensing
opportunities with Novartis or other companies, due to the uncertainties and
risks described in the "Cautionary Statements" included as Exhibit 99.01 of this
Form 10-KSB.
CRITICAL ACCOUNTING POLICIES
Management believes that the Company has not adopted any critical accounting
policies, which, if changed, would result in a material change in financial
estimates, financial condition, results of operations or cash flows for the
years ended December 31, 2006 and 2005. Critical accounting policies are as
follows:
REVENUE RECOGNITION
Royalty and licensing fees are recognized when earned under the terms of the
Agreement with Novartis, based upon sales information of licensed products
provided by Novartis, and collection is reasonably assured.
PATENT COSTS
The carrying value of patent costs is reviewed periodically or when factors
indicating impairment are present. The amount of impairment loss is measured as
the amount by which the carrying value of the assets exceeds the fair value of
the assets. The Company believes that no impairment existed at December 31, 2006
or 2005.
ROYALTY RECEIVABLE
The Company grants credit to its only customer, Novartis, in the normal
course of business and under the terms contained in the Agreement. Pursuant to
the Agreement, Novartis pays royalty income within the terms defined in the
Agreement and management believes, based upon past payment experience, that any
and all amounts outstanding are fully collectible. At December 31, 2006, the
Company did not have an outstanding royalty receivable with Novartis due to a
voluntary nationwide recall of licensed products of the Company by Novartis. The
Company is currently engaged in an audit of royalties due the Company pursuant
to the Agreement. The audit period is from January 1, 2005, up to the point of
the product recall in June 2006. Royalty income recognized during the years
ended December 31, 2006 and 2005, are based on net sales information provided by
Novartis, covering sales of products under the License Agreement for the
applicable periods. The Company believes it has earned and been paid all royalty
income due to the Company in the North America territory, up to the point of the
product recall in June 2006. To date, the Company has not been able to audit the
amount of royalties that may be due to the Company from sales of licensed
products in Canada and Mexico, which are listed as additional fields of use, in
the Agreement. The Company has contacted Novartis to obtain the additional
information it needs to complete the audit. The Company has not recorded any
additional royalty income due to the audit because of this uncertainty.
8
ACCOUNTING FOR DISCONTINUED OPERATIONS
The Company exited from manufacturing operations of topical patches and sold
off all of its manufacturing assets related to the production of patches to its
only remaining customer, Novartis, as of December 31, 2004. The assets related
to the Company's manufacturing operations have been classified as discontinued
operations due to the sale of the manufacturing assets by December 31, 2004. The
operations and cash flows of the contract manufacturing operations were
eliminated from the ongoing operations as a result of the sales transaction. The
surviving entity (intellectual property licensing and holding company) will not
have any significant involvement in the operations of the previously sold
manufacturing operations. It is therefore management's position that the
conditions for reporting the Company's financial statements, balance sheets and
statements of cash flows under the requirements of Statement of Financial
Accounting Standard ("SFAS") No. 144 as discontinued operations for the years
ended December 31, 2006 and 2005 are appropriate.
The Company has used reasonable judgment combined with quantitative analysis
in determining the amounts of assets, liabilities, revenues and expenses that
were allocated between continuing operations and discontinued operations.
9
ITEM 7. FINANCIAL STATEMENTS
CONTENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM......................... 11
FINANCIAL STATEMENTS
BALANCE SHEETS............................................................... 12
STATEMENTS OF OPERATIONS..................................................... 13
STATEMENTS OF SHAREHOLDERS' EQUITY........................................... 14
STATEMENTS OF CASH FLOWS..................................................... 15
NOTES TO FINANCIAL STATEMENTS................................................ 16
10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and
Board of Directors of
LecTec Corporation
We have audited the accompanying balance sheets of LecTec Corporation as of
December 31, 2006 and 2005, and the related statements of operations,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LecTec Corporation as of
December 31, 2006 and 2005, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
Substantially all of the Company's revenue for the years ended December 31,
2006 and 2005 were earned from Novartis Consumer Health, Inc. ("Novartis"). As
disclosed in Note B to the Financial Statements, on June 21, 2006, Novartis
issued a nationwide product recall of patches for which the Company earns
licensing fees. As a result of the recall, unless and until Novartis
reintroduces this product or the Company develops another source of revenue, the
Company will have no immediate source of revenue.
/s/ LURIE BESIKOF LAPIDUS & COMPANY, LLP
Minneapolis, Minnesota
March 28, 2007
11
LECTEC CORPORATION
BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
ASSETS 2006 2005
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,281,785 $ 1,310,578
Royalty receivable - 214,906
Prepaid expenses and other 66,285 66,735
------------ ------------
Total current assets 1,348,070 1,592,219
OTHER ASSETS:
Patent costs 65,191 90,651
Prepaid insurance -- director and officer 101,396 141,955
------------ ------------
166,587 232,606
------------ ------------
$ 1,514,657 $ 1,824,825
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 14,479 $ 10,495
Accrued expenses 73,395 52,015
Discontinued operations 130,000 98,350
------------ ------------
Total current liabilities 217,874 160,860
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 15,000,000 shares
authorized; 4,148,998 shares issued
and outstanding 41,490 41,490
Additional contributed capital 11,847,536 11,847,536
Accumulated deficit (10,592,243) (10,225,061)
------------ ------------
1,296,783 1,663,965
------------ ------------
$ 1,514,657 $ 1,824,825
============ ============
The accompanying notes are an integral part of these financial statements.
12
LECTEC CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
----------- -----------
CONTINUING OPERATIONS:
Revenue -- royalty and licensing fees $ 126,660 $ 443,352
Operating expenses 524,038 811,298
----------- -----------
Loss from operations (397,378) (367,946)
Interest income 61,846 41,424
----------- -----------
Net loss from continuing operations (335,532) (326,522)
DISCONTINUED OPERATIONS:
Net loss from discontinued operations (31,650) (204,090)
----------- -----------
NET LOSS $ (367,182) $ (530,612)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 4,148,998 4,134,232
=========== ===========
LOSS PER COMMON SHARE:
Basic and diluted -
Continuing operations $ (0.08) $ (0.08)
Discontinued operations (0.01) (0.05)
----------- -----------
Total $ (0.09) $ (0.13)
=========== ===========
The accompanying notes are an integral part of these financial statements.
13
LECTEC CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2006 AND 2005
Common stock Additional
----------------------------- contributed Accumulated
Shares Amount capital deficit Total
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 4,030,330 $ 40,303 $ 11,689,404 $ (9,447,625) $ 2,282,082
Cash dividend - - - (246,824) (246,824)
Stock compensation expense - - 69,092 - 69,092
Exercise of stock options 118,668 1,187 89,040 - 90,227
Net loss - - - (530,612) (530,612)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2005 4,148,998 41,490 11,847,536 (10,225,061) 1,663,965
Net loss - - - (367,182) (367,182)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2006 4,148,998 $ 41,490 $ 11,847,536 $(10,592,243) $ 1,296,783
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
14
LECTEC CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
----------- -----------
Cash flows from operating activities:
Net loss $ (367,182) $ (530,612)
Net loss from discontinued operations 31,650 204,090
----------- -----------
Net loss from continuing operations (335,532) (326,522)
Adjustments to reconcile net loss from continuing operations to net
cash used by operating activities:
Compensation expense related to stock options - 17,500
Amortization of patent costs 25,460 20,042
Changes in operating assets and liabilities of continuing operations:
Royalty receivable 214,906 (214,906)
Prepaid expenses and other 41,009 111,804
Accounts payable 3,984 5,551
Accrued expenses 21,380 (188,278)
----------- -----------
Net cash used by operating activities from continuing operations (28,793) (574,809)
----------- -----------
Cash flows from investing activities from continuing operations:
Investment in patents - (60,000)
----------- -----------
Cash flows from financing activities:
Payment of cash dividend - (246,824)
Proceeds from the exercise of stock options - 6,447
Repayment of long-term obligations - (2,525)
----------- -----------
Net cash used by financing activities from
continuing operations - (242,902)
----------- -----------
Discontinued operations:
Used in operating activities - (134,809)
Provided by financing activities - 83,780
----------- -----------
Net cash used in discontinued operations - (51,029)
----------- -----------
Net decrease in cash and cash equivalents (28,793) (928,740)
Cash and cash equivalents -- beginning of year 1,310,578 2,239,318
----------- -----------
Cash and cash equivalents -- end of year $ 1,281,785 $ 1,310,578
=========== ===========
The accompanying notes are an integral part of these financial statements.
15
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LecTec Corporation (the "Company") is primarily an intellectual property
licensing and holding company. The Company earns royalties and licensing fees
from licensing agreements pertaining to the Company's patents. The Company
currently has one supply and licensing agreement ("Agreement") with Novartis
Consumer Health, Inc. ("Novartis"), which will pay the Company royalties from
time to time, based upon a percentage of Novartis net sales as specified in
the Agreement. The Company previously was a contract manufacturer of hydrogel
topical patches sold to major pharmaceutical customers until the Company
ceased its manufacturing operations in December 2004. A summary of the
Company's significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect certain reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid temporary investments purchased with
original maturities of three months or less to be cash equivalents. Cash and
cash equivalents includes a money market account with a balance of $1,280,322
earning approximately 4.8% annual interest at December 31, 2006, which is not
insured by the Federal Deposit Insurance Corporation.
Royalty Receivable
The Company grants credit to its only customer, Novartis, in the normal
course of business and under the terms contained in the Agreement. Pursuant
to the Agreement, Novartis paid the royalty income within the terms defined
in the Agreement. At December 31, 2006, the Company did not have an
outstanding royalty receivable with Novartis.
16
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 2006 AND 2005
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Patent Costs
Patent costs consist primarily of the cost of applying for patents and are
amortized on a straight-line basis over the estimated useful life of the
asset, which is generally five years. Patent maintenance costs are expensed
as incurred.
Patent costs consist of the following:
DECEMBER 31, 2006 DECEMBER 31, 2005
------------------------------ ------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
Patents costs $ 291,922 $ 226,731 $ 291,922 $ 201,271
=========== =========== ========== ===========
Amortization expense is expected to be as follows:
YEARS ENDING DECEMBER 31,
-------------------------
2007 22,273
2008 18,894
2009 15,024
2010 9,000
The carrying value of patent costs is reviewed periodically or when factors
indicating impairment are present. The impairment loss is measured as the
amount by which the carrying value of the assets exceeds the fair value of
the assets. The Company believes that no impairment existed at December 31,
2006 and 2005.
Revenue Recognition
Royalty and licensing fees are recognized when earned under the terms of the
Agreement with Novartis, based upon sales information of licensed products
provided by Novartis, and collection is reasonably assured.
17
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 2006 AND 2005
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Income Taxes
Deferred income taxes are provided for temporary differences between the
financial reporting and tax basis of assets and liabilities. Deferred taxes
are reduced by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred tax asset
will not be realized. Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws and rates on the date of the enactment.
Loss Per Common Share
Basic loss per common share is computed by dividing the net loss by the
weighted average number of common shares outstanding. Diluted loss per share
is computed by dividing the net loss by the weighted average number of common
shares outstanding and common share equivalents related to stock options and
warrants when dilutive.
Common stock options and warrants to purchase 391,250 and 573,250 shares of
common stock with a weighted average exercise price of $2.04 and $2.00 were
outstanding at December 31, 2006 and 2005, respectively. As the Company had a
loss from continuing operations in both 2006 and 2005, those shares were
excluded from the loss per common share computations because they were
anti-dilutive.
Stock-Based Compensation
Prior to January 1, 2006, the Company utilized the intrinsic value method of
accounting for stock-based employee compensation plans. The Company recorded
stock compensation expense of $99,957 in March 2005 as a result of extending
the exercise period for certain options (Note F). There was no other
compensation cost related to stock options for the year ended December 31,
2005.
Had the Company applied the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," the net loss and net loss per
common share for the year ended December 31, 2005, would not be materially
different.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123(R), "Share-Based Payment," which requires that compensation cost relating
to share-based payment transactions (including the cost of all employee stock
options) be recognized in the financial statements. That cost is measured
based on the estimated fair value of the equity or liability instruments
issued. SFAS No. 123(R) covers a wide range of share-based compensation
arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share
purchase plans. SFAS No. 123(R) replaces SFAS No. 123, "Accounting for
Stock-Based Compensation," and supersedes Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company was
required to apply SFAS No. 123(R) effective January 1, 2006. Thus, the
Company's financial statements reflect the cost for (a) all share-based
compensation arrangements granted after December 31, 2005 and for any such
arrangements that are modified, cancelled, or repurchased after that date,
and (b) the portion of previous share-based awards for which the requisite
service had not been rendered as of that date, based on the grant date
estimated fair value.
All of the Company's options were fully vested as of December 31, 2005 and
there were no new grants, or modifications to existing grants, during the
year ended December 31, 2006. Therefore, the adoption of SFAS No. 123(R) had
no impact on the Company's financial statements.
18
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 2006 AND 2005
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Accounting for Discontinued Operations
The Company ceased manufacturing operations of topical patches and sold off
all of its manufacturing assets related to the production of patches to its
only remaining customer, Novartis, as of December 31, 2004. The assets
related to the Company's manufacturing operations have been classified as
discontinued operations due to the sale of the manufacturing assets. The
operations and cash flows of the manufacturing operations have been
eliminated from the continuing operations as a result of the sale
transaction. The surviving entity (intellectual property licensing and
holding company) will not have any significant involvement in the operations
of the previously sold manufacturing operations. It is therefore management's
position that the conditions for reporting the Company's financial
statements, balance sheets and statements of cash flows under the
requirements of Statement of Financial Accounting Standards No. 144 as
discontinued operations are appropriate.
The Company used reasonable judgment combined with quantitative analysis in
determining the amounts of assets, liabilities, revenues, and expenses that
were allocated between continuing operations and discontinued operations.
Fair Value of Financial Instruments
The carrying value of current financial assets and liabilities approximates
their fair values due to their short-term nature.
Recent Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48). FIN 48 creates a single model to
address uncertainty in income tax positions. FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax
position is required to meet before being recognized in the financial
statements. It also provides guidance on de-recognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosures and transition. FIN 48 is effective for an entity's fiscal year
beginning after December 15, 2006. The Company is currently evaluating the
impact of such adoption on its financial statements.
Reclassification
Certain amounts in the 2005 financial statements were reclassified to conform
to the 2006 presentation. This reclassification did not affect the previously
reported shareholders' equity, net loss or net loss per share, and net cash
flows.
19
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 2006 AND 2005
NOTE B - NOVARTIS SUPPLY AND LICENSE AGREEMENT
On July 19, 2004, the Company entered into the Agreement, effective as of
January 1, 2004, with Novartis. The Agreement replaced the Company's prior
supply and licensing agreement with Novartis dated May 8, 2002. The Agreement
requires the Company to manufacture, sell and deliver to Novartis vapor
patches for sale to the pediatric market in the United States, Canada and
Mexico. Under the Agreement, Novartis had the option until March 31, 2005, to
extend the use of vapor patches to the adult cough/cold category in the
United States, Canada, and Mexico at no additional cost and under the same
terms and conditions as set forth in the Agreement. On March 31, 2005,
Novartis notified the Company of its intention to enter the adult market
pursuant to the Agreement.
Under the Agreement, the Company granted Novartis an exclusive license (the
"License") to all of the intellectual property of the Company to the extent
that it is used or useful in the production of the vapor patches being
supplied under the Agreement. The License began on July 19, 2004, and will
continue for the duration of any patents included in the licensed
intellectual property and, with respect to all other elements of the licensed
intellectual property, for the maximum duration permitted under applicable
law of 14 years. Upon the expiration of the patents included in the licensed
intellectual property, Novartis will have a non-revocable, perpetual, fully
paid-up license to the intellectual property used or useful in the production
of vapor patches for the pediatric market and the adult cough/cold market.
Commencing on January 1, 2005, Novartis was required by the Agreement to pay
royalties to the Company, at an agreed upon percentage, based upon the net
semi-annual sales of vapor patches by Novartis for each year the License is
in effect.
The supply portion of the Agreement continued in effect until February 5,
2005, except that the provisions relating to the License continue until the
conclusion of the term of the License. The Company may not assign or
otherwise transfer the Agreement (other than to an affiliate) without the
prior written consent of Novartis, except that the Company may assign the
Agreement in connection with the transfer or sale of all or substantially all
of its assets or business or its merger or consolidation with another
company, so long as (1) such acquirer or successor in interest agrees in
writing to be bound by all conditions of the Agreement, and (2) the Company
gives Novartis written notice of any such assignment and 15 days to object.
Novartis may object to an assignment only if such acquirer or successor in
interest is a direct competitor of Novartis.
On June 21, 2006, the Company issued a press release noting that Novartis had
issued a nationwide recall of all of its Triaminic(R) Vapor Patch products.
Royalties received by the Company from Novartis based on sales of this patch
represented substantially all of the Company's revenue in fiscal years 2006
and 2005. As a result of this development, unless and until Novartis
reintroduces this product or the Company develops another source of revenue,
the Company will have no immediate source of revenue.
The Board of Directors and management of the Company are currently assessing
the Company's position and strategy in light of this development. The Company
has been proactive in assisting Novartis to resolve the FDA issues
surrounding the product recall to attempt to revive the Company's royalty
income stream.
20
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 2006 AND 2005
NOTE B - NOVARTIS SUPPLY AND LICENSE AGREEMENT - CONTINUED
Under the terms of the Agreement, the Company is engaged in an audit of
royalty income received by the Company from Novartis. The audit period is
from January 1, 2005, up to the point of the product recall in June 2006. To
date, the Company does not know with certainty the amount of royalties, if
any, that may be due to the Company from sales of licensed products in Canada
and Mexico, which are also covered by the Agreement. The Company has
contacted Novartis to obtain this additional information for which additional
royalties may be due to the Company. Because of this uncertainty, the Company
has not recorded any royalty income related to Canada or Mexico. Royalty
income recognized during the years ended December 31, 2006 and 2005 is based
on net sales information provided by Novartis.
NOTE C - DISCONTINUED OPERATIONS
There was no cost for assets of discontinued operations at December 31, 2006
or 2005. However, the Company has fully depreciated assets on hand that may
be sold from time to time. Liabilities of discontinued operations at December
31, 2006 and 2005 were $130,000 and $98,350, respectively, which consisted of
a reserve for sales returns and credits for sales prior to the discontinuance
of operations. Included in the loss from discontinued operations for the year
ended December 31, 2005, was a gain of $71,402 on the sale of fully
depreciated property and equipment related to discontinued operations.
NOTE D - COMMITMENTS AND CONTINGENCIES
Leases
The Company conducted its operations in one leased facility during 2006 and
two leased facilities during 2005. In February 2005, the corporate building
lease expired and the Company moved its corporate operations to its Edina,
Minnesota leased facility ("Edina Facility"), which expires in August 2008.
The Company currently sub-leases approximately 7,000 square feet of excess
space in the Edina Facility to an independent lessee for $3,000 per month
which commenced mid May 2006. The sub-lease expires in April 2008. Both
leases provide for payment of a portion of taxes and other operating expenses
by the Company. The Company also leases various office equipment under
operating leases that are paid on a month to month basis. Total rent expense
for operating leases, excluding sub-lease income of $22,500 and $12,250, was
$119,078 and $145,344 for 2006 and 2005, respectively.
Future minimum lease commitments under operating leases are $51,540 and
$34,360 for the years ended December 31, 2007 and 2008, respectively.
Employee Benefit Plan
The Company has a contributory 401(k) profit sharing benefit plan covering
all employees. The Plan allows for discretionary contributions; no
contributions were made for 2006 and 2005.
Legal Proceedings
There are currently no pending legal proceedings against the Company.
However, the Company is subject to various legal proceedings in the normal
course of business.
21
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 2006 AND 2005
NOTE E - INCOME TAXES
Differences between income tax expense (benefit) and the statutory federal
income tax rate are as follows:
YEARS ENDED DECEMBER 31,
-------------------------
2006 2005
-------- --------
Federal statutory income tax rate (34.0%) (34.0%)
State income taxes, net of federal effect (1.6) (6.5)
Increase in valuation allowance 33.0 36.5
Other 2.6 4.0
-------- --------
- % - %
======== ========
Deferred tax assets and liabilities consist of the following:
DECEMBER 31,
----------------------------
2006 2005
----------- -----------
Current assets:
Accrued expenses $ 47,900 $ 43,000
----------- -----------
Long-term assets (liabilities):
Net operating loss carryforwards 4,215,000 4,131,100
Tax credit carryforwards 317,200 297,000
Other (128,500) (140,700)
----------- -----------
Net long-term assets 4,403,700 4,287,400
----------- -----------
Net deferred tax assets 4,451,600 4,330,600
Less valuation allowance (4,451,600) (4,330,600)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
At December 31, 2006, the Company has available federal and state net
operating loss carryforwards of approximately $11,295,000 and $3,823,000,
respectively, which can be used to reduce future taxable income. The
utilization of a portion of these net operating loss carryforwards is
restricted under Section 382 of the Internal Revenue Code due to past
ownership changes. These net operating loss carryforwards begin to expire in
2008. A valuation allowance has been recorded for these net operating loss
carryforwards and all other deferred tax assets, as it is more likely than
not that the net deferred asset will not be realized. The Company
continually reviews the adequacy of the valuation allowance and recognizes
those benefits only as the Company's assessment indicates that it is more
likely than not that future tax benefits will be realized. The valuation
allowance increased by approximately $121,000 and $193,900 for 2006 and
2005, respectively.
22
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 2006 AND 2005
NOTE F - EQUITY TRANSACTIONS
Stock Options
The Company has stock option plans for the benefit of selected officers,
employees and directors of the Company. A total of 1,201,779 shares of
common stock are available for grants of options under the plans at December
31, 2006. Options under the Company's plans are granted at fair value and
expire five or ten years from the grant date. Options given to directors are
exercisable at the date of grant. Options given to selected officers and
employees are exercisable at such times as set forth in the individual
option agreements, generally vesting 100% immediately (incentive) or after
three to four years (qualified). There were no stock option grants during
fiscal 2006 or 2005.
Stock option activity for fiscal 2006 was as follows:
WEIGHTED
AVERAGE
WEIGHTED AVERAGE REMAINING
NUMBER OF EXERCISE PRICE CONTRACTUAL TERM
OPTIONS * PER SHARE (IN YEARS)
--------- ---------------- ----------------
Outstanding on December 31, 2005 373,250 $ 2.59
Canceled (182,000) (1.91)
-------- -------
Outstanding on December 31, 2006 191,250 $ 3.24 0.4 years
======== ======= =========
* All outstanding options are exercisable.
The aggregate intrinsic value of our stock options (the amount by which the
market price exceeded the exercise price of the option) exercised during fiscal
2006 and 2005, was $0 and $176,826, respectively. At December 31, 2006, the
exercise price of substantially all options exceeded the market price of our
stock.
23
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 2006 AND 2005
NOTE F - EQUITY TRANSACTIONS - CONTINUED
Stock-Based Compensation
In January 2005, the Company extended the exercise period for options held
by two former executive officers of the Company and one former employee by
two years from the date of their respective employment termination dates
(but not longer than the stock options normal expiration date, if earlier).
There were 222,667 options with a weighted average exercise price of $0.83
per share subject to the modification in the exercise period. Normally,
these options would have expired ninety days from the employee's termination
date. Because of the modification to the terms related to the exercise
period granted to those former employees, the Company recorded compensation
expense of $99,957 during the first quarter ended March 31, 2005.
In July 2002, 803,958 options outstanding with a weighted average grant
price of $4.54 per share were re-priced to $0.81 per share. As a result of
the re-pricing, the option values were adjusted based on changes in the
Company's stock price at each balance sheet date. During the year ended
December 31, 2005, the Company reversed previously recorded compensation
expense of $30,865, as a result of decreases in the price of the Company
stock. At December 31, 2006, none of these options were outstanding or
exercisable because they were all expired, exercised, or cancelled.
Stock Repurchase Program
The Company has a stock repurchase program pursuant to which up to 500,000
shares, or approximately 12% of the Company's outstanding common stock, may
be repurchased. The shares may be purchased from time to time through open
market transactions, block purchases, tender offers, or in privately
negotiated transactions. The total consideration for all shares repurchased
under this program cannot exceed $2,000,000. There were no shares
repurchased during 2006 and 2005. Since the program's inception, the Company
has repurchased 175,650 shares for $543,400.
Warrants
In connection with the sale of the Company's corporate facility during 2003,
the Company issued warrants to an outside party to purchase 200,000 shares
of common stock. The warrants are exercisable and entitle the holder to
purchase common stock at $0.90 per share until February 25, 2008.
24
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 2006 AND 2005
NOTE G - SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Additional cash flow information is as follows:
YEARS ENDED DECEMBER 31,
------------------------
2006 2005
-------- ---------
Cash paid for interest $ - $ 4,126
Cash paid for income taxes - 24,018
25
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our principal executive and financial officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act"). Based upon this evaluation, the
principal executive and financial officer has concluded that, as of the end of
the period covered by this report, our disclosure controls and procedures were
effective.
During the quarter ended December 31, 2006, there were no changes in the
Company's internal control over financial reporting (as defined in Rule
13a-15(f) and 15d--15(f) under the Exchange Act) that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
26
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE TITLE
---- --- -----
Judd A. Berlin 50 Chief Executive Officer, Chief Financial
Officer, Chairman of the Board of Directors
C. Andrew Rollwagen 51 Director
Daniel C. Sigg, M.D. PhD 42 Director
Judd A. Berlin was elected to the offices of Chief Executive Officer, Chief
Financial Officer, and Chairman of the Board on November 21, 2006. Mr. Berlin
has been a director of the Company since May 2003. Mr. Berlin is a multinational
entrepreneur and founder of Hello Corporation, an Asian-based company operating
call centers for Fortune 100 companies. Mr. Berlin has also founded companies in
Europe, the Middle East, and Asia in food distribution, broadcasting, and
entertainment production. Mr. Berlin has an MBA from St. Thomas University in
St. Paul, Minnesota. Mr. Berlin also serves as Chairman of the Company's Audit
Committee.
C. Andrew Rollwagen became a director in January 2005. Mr. Rollwagen has
more than 25 years experience in banking and finance. He holds a Master of
Business Administration degree from the University of St. Thomas, St. Paul,
Minnesota and effective January 1, 2007, Mr. Rollwagen became the Senior Vice
President, Chief Lending Officer, and Chief Operating Officer of Business
Banking at First State Bank and Trust, a locally owned community bank serving
the greater St. Croix Valley area in Minnesota.
Daniel C. Sigg M.D. PhD was elected to the Company's Board of Directors on
November 21, 2006. Dr. Sigg, a Swiss national, is currently serving as Sr.
Manager in the R&D Division of Cardiac Rhythm Disease Management at Medtronic,
Inc., a leading medical device and technology company, which he joined in 2001.
Dr. Sigg is a board-certified anesthesiologist and has significant clinical
experience. His pre-clinical expertise includes both academic and industrial
R&D. His areas of interest and expertise include cardiovascular physiology,
biotechnology, pharmacology, and local drug delivery. To date, Dr. Sigg has
published 17 peer-reviewed papers, as well as numerous book chapters and
abstracts, and is inventor of two issued and 14 pending U.S. patents. Dr. Sigg
obtained his Medical Degree from the University of Basel, Switzerland, and his
PhD degree in Physiology from the University of Minnesota. Dr. Sigg speaks
German, English, French, and some Italian.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act 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, directors and greater than 10% beneficial owners during
2006 have been satisfied.
AUDIT COMMITTEE
Judd A. Berlin (Chairman) and Andrew Rollwagen comprise the Audit Committee
of the Board of Directors pursuant to the rules of the Securities and Exchange
Commission. Due to the Company's size, financial condition and prospects, the
Board has not sought to add a Board member who would qualify as an audit
committee financial
27
expert under the definition promulgated by the Securities and Exchange
Commission. Based on the size and complexity of the Company's financial
statements, the Board does not believe that the absence of an audit committee
financial expert materially undermines the ability of its Audit Committee to
fulfill its obligations.
ETHICS CODE
The Company has adopted a Code of Business Ethics applicable to all
employees and its executive officers. The Company's Code of Business Ethics is
an incorporated part of the LecTec Employee Handbook and is required to be read
and signed upon the commencement of employment with the Company. A copy of the
Company's Code of Business Ethics is available free of charge from the acting
Secretary of the Company.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows the cash and non-cash compensation for the year
ended December 31, 2006, paid to the Company's Chief Executive Officer and
former Chief Executive Officer. No other individual served as an executive
officer of the Company during fiscal 2006.
SUMMARY COMPENSATION TABLE
All Other
Name and Principal Position Year Salary Bonus Compensation Total
- --------------------------- ---- ------ ------ ------------ --------
Judd A. Berlin (1) 2006 $ - $ - $ - $ -
Chief Executive Officer
and Chief Financial Officer
Alan C. Hymes, M.D. (2) 2006 - - 17,500(3) 17,500(3)
Former Chief Executive Officer,
and Chief Financial Officer
- ------------------------
(1) Mr. Berlin has been a director since May 2003 and became Chief Executive
Officer, Chief Financial Officer, and Chairman in November 2006. Mr.
Berlin does not receive any compensation as an executive officer and has
chosen not to receive director fees.
(2) Alan C. Hymes, M.D, began serving as Chief Executive Officer, Chief
Financial Officer, and Chairman on January 15, 2005. Dr. Hymes has been
a director since 1977. Dr. Hymes resigned in November 2006. Dr. Hymes
did not receive any compensation as an executive officer.
(3) Represents fees paid to Dr. Hymes as a director in 2006.
There were no stock option grants during 2006 or 2005.
28
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth information concerning outstanding equity
awards held as of December 31, 2006, be each of the executive officers named in
the Summary Compensation Table above.
- ----------------------------------------------------------------------------------
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS (#) OPTION EXERCISE OPTION EXPIRATION
NAME EXERCISABLE PRICE ($) DATE
- ----------------------------------------------------------------------------------
Judd A. Berlin - - -
- ----------------------------------------------------------------------------------
Alan C. Hymes, M.D. 3,000 $6.625 January 20, 2007
3,000 $5.00 December 17, 2007
- ----------------------------------------------------------------------------------
COMPENSATION OF DIRECTORS
Our Board of Directors has established a policy that each of our
non-employee directors receives an annual cash payment of $17,500 for annual
services to the Company, as illustrated in the table below. This cash payment is
paid in quarterly installments of $4,375 at the beginning of each of the
following quarters in which services will be performed.
- --------------------------------------------------------------------------------------------
FEES EARNED OR PAID
NAME IN CASH ($) OPTIONS AWARDS ($) TOTAL ($)
- --------------------------------------------------------------------------------------------
C. Andrew Rollwagen $17,500 - $17,500
- --------------------------------------------------------------------------------------------
Daniel C. Sigg, M.D.(1) $ 6,293 - $ 6,293
- --------------------------------------------------------------------------------------------
- ------------------------
(1) Mr. Sigg became a director of the Company on November 21, 2006.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes, with respect to the Company's equity
compensation plans, the number of shares of the Company's common stock to be
issued upon exercise of outstanding options, warrants and other rights to
acquire shares, the weighted-average exercise price of these outstanding
options, warrants and rights and the number of shares remaining available for
future issuance under the Company's equity compensation plans as of December 31,
2006.
NUMBER OF SECURITIES
WEIGHTED-AVERAGE REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE EXERCISE PRICE OF FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF OUTSTANDING EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OPTIONS, WARRANTS (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS REFLECTED IN THE FIRST COLUMN)
------------- -------------------------- ----------------- ------------------------------
Equity compensation plans
approved by security holders 163,200 $ 3.68 543,500
Equity compensation plans
not approved by security
holders 28,050 $ 0.67 658,279
------- ------ ---------
Total 191,250 $ 3.24 1,201,779
======= ====== =========
29
LECTEC CORPORATION 2001 STOCK OPTION PLAN
The LecTec Corporation 2001 Stock Option Plan (the "Plan") was designed (i)
to aid in maintaining and developing personnel capable of assuring the future
success of the Company and to offer such personnel additional incentives to put
forth maximum efforts for the success of the business, and (ii) to afford such
personnel an opportunity to acquire a proprietary interest in the Company
through stock options. An aggregate of 750,000 shares are authorized for
issuance under the Plan pursuant to the grant of stock options, stock
appreciation rights, restricted stock, restricted stock units or other stock
grants ("Awards"). The Plan became effective on July 1, 2001 and terminates on
July 1, 2011.
The Plan authorizes the grant of Awards to any employee, consultant or
independent contractor providing services to the Company or any affiliate of the
Company, except that officers and directors of the Company or the Company's
affiliates are not eligible to participate in the Plan. A committee of directors
designated by the Company's Board of Directors (the "Committee") is responsible
for administering the Plan.
The exercise price, option term, and time and method of exercise of the
stock options granted under the Plan are determined by the Committee. Subject to
the terms of the Plan and any applicable agreement, the grant price, term,
method of exercise, date of exercise, method of settlement and any other term
and condition of any stock appreciation rights are determined by the Committee.
The Committee may impose such conditions or restrictions on the exercise of any
stock appreciation right as it may deem appropriate. Shares of restricted stock
and restricted stock units are subject to such restrictions as the Committee may
impose (including, without limitation, a waiver by participants of the right to
vote or to receive any dividend or other right or property with respect
thereto), which restrictions may lapse separately or in combination at such time
or times, in such installments or otherwise as the Committee may deem
appropriate. Any restricted stock granted under the Plan is evidenced by
issuance of a stock certificate or certificates, which certificate or
certificates are held by the Company. Except as otherwise determined by the
Committee, upon a participant's termination of employment during the applicable
restriction period, all shares of restricted stock and all restricted stock
units held by the participant at such time are forfeited and reacquired by the
Company. The Committee may, when it finds that a waiver would be in the best
interest of the Company, waive in whole or in part any or all-remaining
restrictions with respect to shares of restricted stock or restricted stock
units. Finally, the Committee is authorized, subject to the terms of the Plan
and any applicable award agreement, to grant to eligible persons shares of
common stock without restrictions thereon as are deemed by the Committee to be
consistent with the purpose of the Plan.
TABLE OF SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's common stock as of March 21, 2007, by each
person, or group of affiliated persons, who is known to beneficially own more
than 5% of LecTec's common stock, each of its directors, each of its executive
officers named in the Summary Compensation Table above and all of its directors
and executive officers as a group.
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 March 21, 2007 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
March 21, 2007. The number of shares subject to options that each beneficial
owner has the right to acquire within 60 days of March 21, 2007 is listed
separately under the column entitled "Number of Shares Underlying Options
Beneficially Owned." Except as may be indicated in any 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
4,153,998 shares of common stock outstanding on March 21, 2007. The address of
each person named below is the same as that of the Company.
30
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
NUMBER OF SHARES
UNDERLYING
OPTIONS PERCENT OF
NUMBER OF SHARES BENEFICIALLY SHARES
NAME BENEFICIALLY OWNED OWNED OUTSTANDING
- ---- ------------------ ---------------- -----------
Lee M. Berlin 411,759 6,000 9.88%
Alan C. Hymes, M.D. 405,373 6,000 9.73%
Judd A. Berlin (1) 137,145 - 3.29%
C. Andrew Rollwagen - - -
Daniel C. Sigg, M.D. PhD - - -
All directors and executive officers as
a group (3 persons) 137,145 - 3.30%
- -------------------
(1) Mr. Judd Berlin holds a general power of attorney from his father, Mr. Lee
Berlin, a founder and former Chief Executive Officer of the Company, to enable
him to help manage his father's affairs. Under this power of attorney, which
also names Mr. Lee Berlin's spouse as an attorney-in-fact, Mr. Judd Berlin could
exercise voting or investment power over his father's shares of the Company's
Common Stock. To date, Mr. Judd Berlin has not exercised this power with respect
to his father's shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
DIRECTOR INDEPENDENCE
The Company is not a listed issuer and so is not subject to the director
independence requirements of any exchange or inter-dealer quotation system.
Nevertheless, in determining whether one of our directors or nominees for
director is independent, the Company uses the definition of independence
provided in Rule 4200(a)(15) of The NASDAQ Stock Market's Marketplace Rules.
Under this definition of independence, Directors C. Andrew Rollwagen and Dr.
Daniel C. Sigg, who comprise a majority of our current Board of Directors, would
be independent directors of the Company. Judd A. Berlin, the third member of our
current Board of Directors, and Dr. Alan C. Hymes, who was one of our directors
for most of 2006, would not be considered independent because they are or were
serving as executive officers of the Company.
31
ITEM 13. EXHIBITS
Method of
Filing
---------
3.01 Articles of Incorporation of LecTec Corporation, as amended (1)
3.02 Bylaws of LecTec Corporation (1)
**10.01 LecTec Corporation 1989 Stock Option Plan (2)
**10.02 LecTec Corporation 1991 Directors' Stock Option Plan (2)
**10.03 LecTec Corporation 1998 Stock Option Plan (3)
**10.04 LecTec Corporation 1998 Directors' Stock Option Plan (3)
**10.05 LecTec Corporation 2001 Stock Option Plan (4)
10.06 Sale Leaseback Agreement By and Between LecTec Corporation and Larry
Hopfenspirger, dated February 25, 2003. (5)
10.07 Office/warehouse lease dated May 23, 2003, by and between SMD Lincoln
Investments LLC and LecTec Corporation. (6)
*10.08 Supply and License Agreement By and Between LecTec Corporation and
Novartis Consumer Health, Inc. executed on July 19, 2004 and effective
as of January 1, 2004. (7)
10.09 Promissory Note By and Between LecTec Corporation and Novartis Consumer
Health, Inc. executed on July 19, 2004 and effective as of January 1,
2004. (7)
10.10 Security Agreement By and Between LecTec Corporation and Novartis
Consumer Health, Inc. executed on July 19, 2004 and effective as of
January 1, 2004. (7)
10.11 General Terms and Conditions for the Purchase of Capital Equipment
dated as of December 2, 2004 between Novartis Consumer Health, Inc. and
LecTec Corporation. (8)
**10.12 Separation Agreement dated December 28, 2004 by and between LecTec
Corporation and Timothy P. Fitzgerald. (9)
10.13 Sub-Lease Agreement by and between LecTec Corporation and The Furniture
Source dated May 10, 2006 (10)
23.01 Consent of Lurie Besikof Lapidus & Company, LLP (11)
24.01 Power of Attorney (12)
31.01 Certification of Principal Executive Officer (11)
31.02 Certification of Principal Financial Officer (11)
32.01 Chief Executive Officer Certification Pursuant to 18 U.S.C. 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (11)
99.01 Cautionary Statements (11)
32
Notes to Exhibits - Method of Filing
* Confidential treatment has been granted for portions of this Exhibit
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 as
amended. The confidential portions have been deleted and filed
separately with the United States Securities and Exchange Commission.
** Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-KSB.
(1) Incorporated herein by reference to the Company's Form S-18
Registration Statement (file number 33-9774C) filed on October 31,
1986 and amended on December 12, 1986.
(2) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended June 30, 1997.
(3) Incorporated herein by reference to the Company's Registration Statement
on Form S-8 (file number 333-72569) filed on February 18, 1999.
(4) Incorporated herein by reference to the Company's Registration Statement
on Form S-8 (file number 333-68920) filed on September 4, 2001.
(5) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 2002.
(6) Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003.
(7) Incorporated herein by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 2004.
(8) Incorporated herein by reference to the Company's Current Report on Form
8-K filed on December 30, 2004.
(9) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 2004.
(10) Incorporated herein by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 2006.
(11) Filed herewith.
(12) Included on signature page.
33
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth information concerning fees and services
billed or expected to be billed by the Company's principal outside accountant,
Lurie Besikof Lapidus & Company, LLP for 2006 and 2005:
2006 2005 NATURE OF SERVICES PROVIDED
-------- --------- ---------------------------------
Audit fees $ 31,800 $ 32,000 Audits and quarterly reviews
of financial statements of
the Company
Audit-related fees - -
Tax fees 7,495 7,500 Tax return preparation and
research
All other fees - 8,685 Expenses related to SEC Comment
-------- --------- Letter resolution and amended SEC
filing, agreement reviews, and
discontinued operations issues
$ 39,295 $ 48,185
======== =========
Because of the Company's size, complexity, financial condition and
prospects, the Audit Committee is apprised of and pre-approves all fees for
services provided by the Company's outside accountants. All fees paid to the
Company's outside accountants for 2006 and 2005 were approved by the Audit
Committee of the Board of Directors. The Audit Committee has considered whether
non-audit services provided by the outside accountant during 2006 and 2005 were
compatible with maintaining the outside accountants' independence.
34
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on the 29th day of March 2007.
LECTEC CORPORATION
/s/ Judd A. Berlin
---------------------------
Judd A. Berlin
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Judd A. Berlin (with full power to act alone), as
his or her true and lawful attorney-in-fact and agent, with full powers of
substitution and re-substitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments to the
Annual Report on Form 10-KSB of LecTec Corporation, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or their substitute or
substitutes, lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Judd A. Berlin March 29, 2007
- --------------------------------------------------
Judd A. Berlin
Chief Executive Officer, Chief Financial Officer,
and Director
(Principal Executive Officer)
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ C. Andrew Rollwagen March 29, 2007
- --------------------------------------------------
C. Andrew Rollwagen
Director
/s/ Daniel C. Sigg, M.D. March 29, 2007
- --------------------------------------------------
Daniel C. Sigg, M.D.
Director
35
EXHIBIT INDEX
Exhibit No.
- ----------
3.01 Articles of Incorporation of Registrant, as amended (Note 1).
3.02 Bylaws of Registrant (Note 1).
** 10.01 LecTec Corporation 1989 Stock Option Plan (Note 2).
** 10.02 LecTec Corporation 1991 Directors' Stock Option Plan (Note 2).
** 10.03 LecTec Corporation 1998 Stock Option Plan (Note 3).
** 10.04 LecTec Corporation 1998 Directors' Stock Option Plan (Note 3).
** 10.05 LecTec Corporation 2001 Stock Option Plan (Note 4).
10.06 Sale Leaseback Agreement By and Between LecTec Corporation and
Larry Hopfenspirger, dated February 25, 2003 (Note 5).
10.07 Office/warehouse lease May 23, 2003, by and between SMD Lincoln
Investments LLC and LecTec Corporation (Note 6).
*10.08 Supply and License Agreement By and Between LecTec Corporation
and Novartis Consumer Health, Inc. executed on July 19, 2004 and
effective as of January 1, 2004 (Note 7).
10.09 Promissory Note By and Between LecTec Corporation and Novartis
Consumer Health, Inc. executed on July 19, 2004 and effective as
of January 1, 2004 (Note 7).
10.10 Security Agreement By and Between LecTec Corporation and Novartis
Consumer Health, Inc. executed on July 19, 2004 and effective as
of January 1, 2004 (Note 7).
10.11 General Terms and Conditions for the Purchase of Capital
Equipment dated as of December 2, 2004 between Novartis Consumer
Health, Inc. and LecTec Corporation (Note 8).
** 10.12 Separation Agreement dated December 28, 2004 by and between
LecTec Corporation and Timothy P. Fitzgerald (Note 9).
10.13 Sub-Lease Agreement by and between LecTec Corporation and The
Furniture Source dated May 10, 2006 (Note 10).
23.01 Consent of Lurie Besikof Lapidus & Company, LLP (Note 11).
24.01 Power of Attorney (Note 12).
31.01 Certification of Principal Executive Officer (Note 11).
31.02 Certification of Principal Financial Officer (Note 11).
32.01 Chief Executive Officer Certification Pursuant to 18 U.S.C.1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002 (Note 11).
99.01 Cautionary Statements (Note 11).
36
Exhibit Notes:
- -------------
* Confidential treatment has been granted for portions of this Exhibit
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 as
amended. The confidential portions have been deleted and filed separately
with the United States Securities and Exchange Commission.
** Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-KSB.
(1) Incorporated herein by reference to the Company's Form S-18 Registration
Statement (file number 33-9774C) filed on October 31, 1986 and amended on
December 12, 1986.
(2) Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended June 30, 1997.
(3) Incorporated herein by reference to the Company's Registration Statement
on Form S-8 (file number 333-72569) filed on February 18, 1999.
(4) Incorporated herein by reference to the Company's Registration Statement
on Form S-8 (file number 333-68920) filed on September 4, 2001.
(5) Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
(6) Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003.
(7) Incorporated herein by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 2004.
(8) Incorporated herein by reference to the Company's Current Report on
Form 8-K filed on December 30, 2004.
(9) Incorporated herein by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 2004.
(10) Incorporated herein by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 2006.
(11) Filed herewith.
(12) Included on signature page.
37