UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-KSB
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(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, 2005.
[ ] 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) of the Exchange Act: COMMON STOCK, 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, 2005 were
$443,352.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of March 17, 2006 was approximately
$1,991,519 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
20, 2006 was 4,148,998 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............................................ 29
Item 8A. Controls and Procedures......................................... 29
Item 8B. Other Information............................................... 29
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act............... 30
Item 10. Executive Compensation.......................................... 31
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters................................. 33
Item 12. Certain Relationships and Related Transactions.................. 34
Item 13. Exhibits........................................................ 35
Item 14. Principal Accountant Fees and Services.......................... 37
Signatures...................................................... 38
Exhibit Index................................................... 39
Exhibit 23.01-Consent of Independent Registered Public
Accounting Firm................................................. 41
Exhibit 31.01-Certification of Principal Executive Officer...... 42
Exhibit 31.02-Certification of Principal Financial Officer...... 43
Exhibit 32.01-Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant Section 906 of the Sarbanes-Oxley
Act of 2002..................................................... 44
Exhibit 99.01-Cautionary Statements for Purposes of the
"Safe Harbor" Provisions of the Private Securities Litigation
Reform Act of 1995.............................................. 45
- ----------
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", "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") and on key
personnel, the success or failure of any attempt by the Company to protect or
enforce its patents, issuance of new accounting pronouncements, available
opportunities for licensing agreements related to patents that the Company
holds, limitations of 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, 2005.
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 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, and its telephone number is
(952)-933-2291.
WIND DOWN OF MANUFACTURING OPERATIONS
Prior to 2000, the Company designed, manufactured and marketed diagnostic
electrocardiograph ("ECG") electrodes, conductive and non-conductive adhesive
hydrogels, patches for the topical application of OTC drugs and medical tape
products. The Company marketed and sold its products to medical products
distributors, consumers through retail outlets (food, chain drug and mass
merchandise stores), consumer products companies and original equipment
manufacturers ("OEM"). All of the products manufactured by the Company were
designed to be highly compatible with skin.
In 2000, the Company decided to focus on its therapeutic patch business and
so determined to exit the medical tape, diagnostic electrode and adhesive
hydrogel businesses. In March 2001, the Company sold its medical tape
manufacturing equipment and other related assets and exited the low margin
medical tape business. In April 2001, the Company sold its diagnostic electrode
and electrically conductive adhesive hydrogel business assets, which were used
to produce the Company's conductive products. The conductive products included
diagnostic electrodes and electrically conductive adhesive hydrogels. Under a
manufacturing and supply agreement between the Company and the buyer, the
Company continued to manufacture and supply to the buyer certain conductive
adhesive hydrogels through the third quarter of 2002. By the end of 2002, the
Company was focused primarily on establishing contract manufacturing and
licensing relationships with large pharmaceutical and skin care companies
relating to the Company's therapeutic topical patch technology.
In September 2003, the Company learned that, as a result of a change in its
internal supplier selection criteria, Novartis Consumer Health, Inc.
("Novartis"), the Company's largest customer, intended to stop using the Company
as a contract manufacturer for its topical patches by the end of 2004. In
addition, Johnson & Johnson Consumer Products Company, the Company's second
largest customer, also indicated that it intended to stop using the Company as a
contract manufacturer during 2004. Novartis and Johnson & Johnson accounted for
approximately 80.0% and 7.3% of the Company's net sales for the year ended
December 31, 2004, respectively. Based on this situation and without any other
manufacturing prospects, in July 2004, the Board of Directors determined that
the Company would cease manufacturing operations by December 31, 2004 and become
an intellectual property licensing and holding Company.
NOVARTIS LICENSING AND SUPPLY 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.
3
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.
In August 2004, Novartis purchased a cartoning machine from the Company for
a purchase price of $162,000. On December 7, 2004, the Company entered into a
capital equipment purchase agreement (the "Purchase Agreement") with Novartis.
Under the Purchase Agreement, Novartis paid the Company the contract price of
$733,100 in exchange for the Company's hydrogel coating and therapeutic
converting machinery and equipment. The contract price was based upon Novartis
taking delivery of the equipment at the Company's facility. Upon closing of this
disposition of assets to Novartis on December 29, 2004, the Company's
transformation from a manufacturing operation to an intellectual property
licensing and holding company was complete.
As of December 31, 2005, the Company collected $228,446 in royalty payments
related to sales of licensed products covered under the Agreement the Company
has with Novartis for the period of January 1, 2005 through September 30, 2005
and has recorded a royalty receivable and royalty income of $214,906 during the
fourth quarter of 2005 based on information provided to the Company by Novartis
related to sales of licensed products for that period.
STRATEGY
The Company is pursuing additional agreements with Novartis and is
concurrently pursuing similar agreements with other contract manufacturing
customers to enable them to use the Company's proprietary patch technology in
producing topical patch products in the future. 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
continuing operations. 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. Seventeen issued U.S. patents and
thirty-nine issued international patents are currently assigned to the Company.
Six U.S. applications and five foreign applications are pending. The patents
most pertinent to the Company's major products have a remaining legal duration
ranging from nine to thirteen years. The Company also holds four 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, 2005, and currently, the Company has 1 full time
employee, a three-member Board of Directors, and some contract labor personnel
available to the Company on an as needed basis. Labor unions or other collective
bargaining units do not represent the Company.
4
ITEM 2. DESCRIPTION OF PROPERTY
Currently, the Company leases a building in Edina, Minnesota ("Edina
Lease") 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 and
has a short term sub-lease for approximately 5,000 square feet of excess space
to an independent lessee for $3,500 per month. The sublease ended in February
2006. The Company is pursuing other sub-lease opportunities for approximately
10,000 square feet of excess space.
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 traded on the Nasdaq Small Cap Market tier of
the Nasdaq Stock Market ("Nasdaq") under the symbol LECT until November 26, 2002
when the Company's stock was de-listed to the OTC Bulletin Board due to the
Company's inability to satisfy the minimum bid price and shareholders' equity
standards for continued listing on the Nasdaq Exchange.
The following table sets forth, for each of the calendar periods indicated,
the quarterly high and low bid quotations 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 necessarily represent actual transactions.
Year Ended Year Ended
December 31, 2005 December 31, 2004
----------------- -----------------
High Low High Low
----- ----- ----- -----
Quarter ended March 31 $3.00 $1.50 $1.75 $0.70
Quarter ended June 30 2.65 1.20 1.08 0.60
Quarter ended Sept. 30 1.45 0.65 1.80 0.65
Quarter ended Dec. 31 0.95 0.51 1.55 0.80
As of March 20, 2006, the Company had 4,148,998 shares of common stock
outstanding, and 264 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
2004. 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 be winding down
its contract manufacturing operations before 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 consists of operations related to the current
structure of the Company as an intellectual property licensing and holding
company. The Company accounts for its 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 "Earnings (loss) from discontinued operations" in the accompanying
Statements of Operations. Assets and liabilities of the discontinued operations
have been classified and reflected on the accompanying Balance Sheets as
"Discontinued operations" for the current and prior period presented.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2005 AND 2004
RESULTS OF CONTINUING OPERATIONS
The Company recorded royalty income of $443,352 for the year ended December
31, 2005, compared to a one-time licensing fee of $1,065,000 for the year ended
December 31, 2004. The royalty and licensing fee income was earned during the
last two years under the Agreement that the Company entered into with Novartis
during the third quarter of 2004. The 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. There was no royalty income earned during
2004. Net loss from continuing operations for 2005 was ($326,522), or ($0.08)
per basic and diluted share, compared to a net loss from continuing operations
for 2004 of ($123,153), or ($0.03) per basic and diluted share. The increase in
the net loss from continuing operations for 2005 compared to 2004 was primarily
due to reduced royalty and licensing fee income offset by reductions in general
operating expenses related to the current operations of the Company during 2005.
RESULTS OF DISCONTINUED OPERATIONS
Loss from discontinued operations for the year ended December 31, 2005 was
($204,090), or ($0.05) per basic and diluted share, compared to earnings from
discontinued operations of $2,419,832, or $0.60 per basic and diluted share, for
2004. The decrease in the earnings from discontinued operations for 2005
compared to 2004 is attributable to the wind down of manufacturing operations,
all of which occurred during 2004. Sales to Novartis were $6,341,998 for 2004;
there were no sales in 2005.
NET RESULTS OF OPERATIONS
The net loss for 2005 was ($530,612), or ($0.13) per basic and diluted
share, compared to net earnings of $2,296,679, or $0.57 per basic and diluted
share, for 2004. The decrease in net earnings for the year ended December 31,
2005, compared to 2004 is due to the reasons stated above.
INCOME TAXES
The income tax benefit related to the net loss of the year ended December
31, 2005, has been offset by a valuation allowance for deferred taxes. The
Company recorded income tax expense of $27,000 for the year ended December 31,
2004, as a result of the Company being subject to alternative minimum tax, which
only allows 90% of the Company's taxable income to be offset by net operating
loss carryforwards, in addition to applicable Minnesota minimum state taxes.
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 $978,309 to $1,824,825 at December 31, 2005 from
$2,803,134 at December 31, 2004. Cash and cash equivalents decreased $928,740 to
$1,310,578 at December 31, 2005 from $2,239,318 at December 31, 2004. The
decrease in total assets and the reduction in cash and cash equivalent is
attributable to 2005 activities including the payment of a cash dividend of
approximately $247,000, the payment of severance and related costs from the wind
down of contract manufacturing operations of approximately $400,000, additional
costs related to the wind down of manufacturing operations paid in 2005 of
approximately $225,000, and the costs of continuing operations for 2005.
Working capital was $1,431,359 at December 31, 2005, compared to working
capital of $2,048,876 at December 31, 2004. The Company's current ratio was 9.90
at December 31, 2005, compared to 4.93 at December 31, 2004. The decline in
working capital of $617,517 for 2005 from 2004 was primarily due to cash used in
operating activities, the payment of a cash dividend and patent investment and
maintenance costs. The improvement in the current ratio for 2005 over 2004 is
due to an increase in royalty income receivable coupled with a reduction in
liabilities relating to the wind down of manufacturing operations that were paid
during 2005.
Shareholders' equity decreased by $618,117 to $1,663,965 as of December 31,
2005 from shareholders' equity of $2,282,082 as of December 31, 2004, due to the
net loss for year ended December 31, 2005 of ($530,612) and the payment of a
cash dividend of ($246,824), partially offset by proceeds from the exercise by
stock options by employees of the Company of $90,227, and net stock compensation
expense recorded during 2005 of $69,092.
In January 2005, the Company's Board of Directors announced that it had
declared a cash dividend of $0.06 per share, payable on March 11, 2005 to
shareholders of record as of February 25, 2005. The Company had 4,113,739 shares
outstanding on the record date. The cash used in 2005 to pay the dividend was
$246,824.
The Company believes its existing cash and cash equivalents will be
sufficient to fund continuing operations through 2006 based upon the royalty
income stream the Company has received during 2005, its cash on hand, and the
anticipated operating expenses the Company is likely to incur during the next
year. However, there can be no assurance that the anticipated revenue stream or
the anticipated expenses will be as planned, 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, 2005 and 2004. Critical accounting policies are
as follows:
REVENUE RECOGNITION
Royalty and licensing fee income is recognized when earned under the terms
of the agreements with customers and collection is reasonably assured. Revenue
from discontinued operations was recognized when the product was shipped to the
customer and collection was probable.
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. Based on the Company's decision to wind down manufacturing
operations, the Company reviewed its patent costs for impairment during 2004.
The Company recorded a charge of $115,055 during 2004 related to the impairment
of patents, and wrote off fully amortized patents of $1,201,271. The Company
believes that no impairment existed at December 31, 2005.
8
ROYALTY RECEIVABLE
The Company has a royalty receivable under the terms of the Agreement with
Novartis. The Company granted credit to Novartis in the normal course of
business and management believes, based upon past experience, that all amounts
outstanding are fully collectible. Royalty income recognized during the year
ended December 31, 2005 is based on net sales information provided by Novartis,
covering sales of products under the licensing agreement for the applicable
periods. Pursuant to the Agreement, the Company has the right to audit the
validity of the net annual sales of products covered under the Agreement. See
the discussion in Note B of Notes to Financial Statements for a description of
the Agreement with Novartis.
ACCOUNTING FOR DISCONTINUED OPERATIONS
The Company has exited from manufacturing operations of topical patches and
has 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
are 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 SFAS No. 144 as discontinued
operations for the years ended December 31, 2005 and 2004 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.............................................. 14
STATEMENTS OF SHAREHOLDERS' EQUITY.................................... 15
STATEMENTS OF CASH FLOWS.............................................. 16
NOTES TO FINANCIAL STATEMENTS......................................... 17
10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and
Board of Directors
LecTec Corporation
We have audited the accompanying balance sheets of LecTec Corporation
as of December 31, 2005 and 2004, 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 audit 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, 2005 and 2004, 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.
/s/ LURIE BESIKOF LAPIDUS & COMPANY, LLP
Minneapolis, Minnesota
January 25, 2006
11
LECTEC CORPORATION
BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
2005 2004
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,310,578 $2,239,318
Royalty receivable 214,906 --
Prepaid expenses and other 66,735 137,981
Discontinued operations -- 192,629
---------- ----------
Total current assets 1,592,219 2,569,928
OTHER ASSETS:
Patent costs 90,651 50,693
Prepaid insurance - director and officer 141,955 182,513
---------- ----------
232,606 233,206
---------- ----------
$1,824,825 $2,803,134
========== ==========
The accompanying notes are an integral part of these financial statements.
12
LECTEC CORPORATION
BALANCE SHEETS - CONTINUED
DECEMBER 31, 2005 AND 2004
LIABILITIES AND SHAREHOLDERS' EQUITY 2005 2004
------------ -----------
CURRENT LIABILITIES:
Capital lease obligation $ -- $ 2,525
Accounts payable 10,495 4,944
Accrued expenses 52,015 240,293
Discontinued operations 98,350 273,290
------------ -----------
Total current liabilities 160,860 521,052
------------ -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 15,000,000 shares
authorized; 4,148,998 and 4,030,330 shares issued
and outstanding at December 31, 2005 and 2004 41,490 40,303
Additional contributed capital 11,847,536 11,689,404
Accumulated deficit (10,225,061) (9,447,625)
------------ -----------
1,663,965 2,282,082
------------ -----------
$ 1,824,825 $ 2,803,134
============ ===========
The accompanying notes are an integral part of these financial statements.
13
LECTEC CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
---------- ----------
CONTINUING OPERATIONS:
Revenue - royalty and licensing fee income $ 443,352 $1,065,000
Operating expenses 769,874 1,189,601
---------- ----------
Loss from continuing operations
before income taxes (326,522) (124,601)
Income tax benefit -- 1,448
---------- ----------
Loss from continuing operations (326,522) (123,153)
---------- ----------
DISCONTINUED OPERATIONS:
Earnings (loss) from discontinued operations
before income taxes (204,090) 2,448,280
Income tax expense -- (28,448)
---------- ----------
Earnings (loss) from discontinued operations (204,090) 2,419,832
---------- ----------
NET EARNINGS (LOSS) $ (530,612) $2,296,679
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 4,134,232 4,011,631
========== ==========
EARNINGS (LOSS) PER COMMON SHARE:
Basic and diluted -
Continuing operations $ (0.08) $ (0.03)
Discontinued operations (0.05) 0.60
---------- ----------
Total $ (0.13) $ 0.57
========== ==========
The accompanying notes are an integral part of these financial statements.
14
LECTEC CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005 AND 2004
Common stock Additional
------------------- contributed Accumulated
Shares Amount capital deficit Total
--------- ------- ----------- ------------ ----------
Balance at December 31, 2003 3,979,327 $39,793 $11,550,743 $(11,744,304) $ (153,768)
Stock compensation expense -- -- 112,640 -- 112,640
Exercise of stock options 51,003 510 26,021 -- 26,531
Net earnings -- -- -- 2,296,679 2,296,679
--------- ------- ----------- ------------ ----------
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
========= ======= =========== ============ ==========
The accompanying notes are an integral part of these financial statements.
15
LECTEC CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
---------- -----------
Revised (1)
Cash flows from operating activities:
Net earnings (loss) $ (530,612) $ 2,296,679
Discontinued operations, net of tax 204,090 (2,419,832)
---------- -----------
Loss from continuing operations, net of tax (326,522) (123,153)
Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:
Compensation expense related to stock options 17,500 35,200
Amortization 20,042 26,894
Changes in operating assets and liabilities of continuing operations:
Royalty receivable (214,906) --
Prepaid expenses and other 111,804 (256,842)
Accounts payable 5,551 (14,857)
Accrued expenses (188,278) 100,186
---------- -----------
Net cash used by operating activities from continuing operations (574,809) (232,572)
---------- -----------
Cash flows from investing activities from continuing operations:
Investment in patents (60,000) (31,473)
---------- -----------
Cash flows from financing activities:
Payment of cash dividend (246,824) --
Proceeds from the issuance of common stock 6,447 8,750
Repayment of long-term obligations (2,525) (12,573)
---------- -----------
Net cash used in financing activities from continuing
operations (242,902) (3,823)
---------- -----------
Discontinued operations:
Provided by (used in) operating activities (134,809) 1,111,411
Provided by investing activities -- 894,150
Provided by financing activities 83,780 17,781
---------- -----------
Net cash provided by (used in) discontinued operations (51,029) 2,023,342
---------- -----------
Net increase (decrease) in cash and cash equivalents (928,740) 1,755,474
Cash and cash equivalents - beginning of year 2,239,318 483,844
---------- -----------
Cash and cash equivalents - end of year $1,310,578 $ 2,239,318
========== ===========
(1) The Company revised the statement of cash flows for the year ended December
31, 2004 to present cash flows from discontinued operations for each of the
operating, investing and financing activities. Previously, the components
were not broken out separately.
The accompanying notes are an integral part of these financial statements.
16
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LecTec Corporation (the "Company") is currently an intellectual property
licensing and holding company. The Company receives 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. Previously, the Company 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 the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
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
$1,303,947 at December 31, 2005, which is not insured by the Federal
Deposit Insurance Corporation.
Royalty Receivable (Continuing Operations)
The Company granted 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, 2005, the Company had an outstanding
royalty receivable with Novartis of $214,906.
Accounts Receivable (Discontinued Operations - Note C)
The Company granted credit to previous customers in the normal course of
business, but generally did not require collateral or other security to
support amounts due. Management performed on-going credit evaluations of
customers when deemed necessary.
Accounts receivable were generally due within 30 days and were stated at
amounts due from customers net of an allowance for doubtful accounts.
Accounts receivable outstanding longer than the contractual payment terms
were considered past due. The Company determined its allowance by
considering a number of factors, including the length of time trade
accounts receivable were past due, the Company's previous loss history, the
customer's ability to pay its obligation to the Company, and the condition
of the general economy and the industry as a whole. The Company wrote off
accounts receivable against the allowance when they became uncollectible,
and payments subsequently received on such receivables were credited to the
allowance for doubtful accounts. At December 31, 2005, the Company had no
outstanding accounts receivables related to previously discontinued
operations.
17
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005 AND 2004
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 costs consist of the following:
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------------------- -----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
Patents costs $291,922 $201,271 $231,922 $181,229
======== ======== ======== ========
Amortization expense of patent costs totaled $20,042 and $77,320 for 2005
and 2004, respectively. Amortization expense is expected to be as follows:
YEARS ENDING DECEMBER 31,
2006 $23,537
2007 20,348
2008 17,024
2009 16,371
2010 13,371
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. Based on the Company's decision to wind down manufacturing
operations, the Company reviewed its patent costs for impairment during
2004. The Company recorded a charge of $115,055 during 2004 related to the
impairment of patents, and wrote off the cost of fully amortized patents of
$1,201,271. The Company believes that no impairment exists at December 31,
2005.
Revenue Recognition
Royalty and licensing income is recognized when earned under the terms of
the agreements with customers and collection is reasonably assured. Revenue
from sales related to discontinued operations were recognized when the
product was shipped to the customer and collection was probable.
Research and Development (Discontinued Operations)
Research and development costs and patent maintenance costs are expensed as
incurred.
18
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005 AND 2004
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.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share are computed by dividing net
earnings (loss) by the weighted average number of common shares
outstanding. Diluted earnings (loss) per share is computed by dividing net
earnings (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 594,375 and 814,124 shares of
common stock with a weighted average exercise price of $1.99 and $1.96 were
outstanding at December 31, 2005 and 2004, respectively. As the Company had
a loss from continuing operations in both 2005 and 2004, those shares were
excluded from the earnings (loss) per common share computations because
they were anti-dilutive.
Stock-Based Compensation
The Company utilizes the intrinsic value method of accounting for
stock-based employee compensation plans. All options granted had an
exercise price equal to the market value of the underlying common stock on
the date of grant and no compensation cost is reflected in net earnings
(loss) for 2005 and 2004, respectively. The following table illustrates the
effect on net earnings (loss) if the Company had applied the fair value
recognition provisions of Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation:
YEARS ENDED DECEMBER 31,
------------------------
2005 2004
--------- ----------
Net earnings (loss), as reported $(530,612) $2,296,679
Compensation income (expense) determined under the fair
value method 469 (106,938)
--------- ----------
Pro forma net earnings (loss) $(530,143) $2,189,741
========= ==========
Earnings (loss) per common share:
As reported - Basic and diluted
Continuing operations $ (0.08) $ (0.03)
Discontinued operations (0.05) 0.60
--------- ----------
Total $ (0.13) $ 0.57
========= ==========
19
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005 AND 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Stock-Based Compensation - (continued)
YEARS ENDED DECEMBER 31,
------------------------
2005 2004
------ ------
Pro forma -
Basic and diluted
Continuing operations $(0.08) $(0.05)
Discontinued operations (0.05) 0.60
------ ------
Total $(0.13) $ 0.55
====== ======
The weighted average fair value of options granted during 2004 was $1.09.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option valuation model with the following
weighted-average assumptions; zero dividend yield, expected volatility of
179%, risk-free interest rate of 2.72%, and expected lives of 3.0 years.
There were no options granted during 2005.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of several subjective assumptions. The Company's
employee and director stock options have characteristics different from
those of traded options, and changes in the subjective input assumptions
can materially affect the fair value estimate.
Accounting for Discontinued Operations
The Company has exited from manufacturing operations of topical patches and
has 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 will be 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
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.
20
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005 AND 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Recent Accounting Pronouncements
In December 2004, the FASB 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 will be 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 is required to apply SFAS No. 123(R) in the first interim or annual
reporting period that begins after December 15, 2005. Thus, the Company's
financial statements will 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 has not been rendered as of that date, based on the grant date
estimated fair value. Management has not determined the effect of this
pronouncement on its future financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions." The amendments made by SFAS No. 153 are based on the
principle that exchanges of nonmonetary assets should be measured using the
estimated fair value of the assets exchanged. SFAS No. 153 eliminates the
narrow exception for nonmonetary exchanges of similar productive assets,
and replaces it with a broader exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has
"commercial substance" if the future cash flows of the entity are expected
to change significantly as a result of the transaction. This pronouncement
is effective for nonmonetary exchanges in fiscal periods beginning after
June 15, 2005. The adoption of SFAS No. 153 had no impact on the Company's
financial statements.
NOTE B - LICENSING AND SUPPLY 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.
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 advanced $2,000,000 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 any
advanced funds, the Company executed and delivered to Novartis a promissory
note of $2,000,000 and a security agreement. Under the security agreement,
the Company pledged substantially all of its assets. The Company repaid the
note by the delivery to Novartis of vapor patches under the Agreement. All
amounts owed were repaid as of December 31, 2004.
21
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005 AND 2004
NOTE B - LICENSING AND SUPPLY AGREEMENT - CONTINUED
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 for a fee of $1,065,000, which was paid to the
Company by Novartis as follows: (1) release of $250,000 in debt on July 19,
2004, (2) payment of $407,500 in cash on July 22, 2004, and (3) payment of
$407,500 in cash on September 24, 2004. 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. 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 will continue in
effect 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.
In conjunction with the signing of the Agreement, Novartis purchased
certain manufacturing equipment from the Company for approximately $900,000
in 2004. The gain on the sale of those assets is included in discontinued
operations.
22
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005 AND 2004
NOTE C - DISCONTINUED OPERATIONS
Discontinued operations assets and liabilities and income statement
information include the following:
December 31, December 31,
2005 2004
------------ ------------
DISCONTINUED OPERATIONS - ASSETS
Accounts receivable, net $ -- $ 176,207
Prepaid expenses and other -- 16,422
--------- ----------
Total discontinued operations - assets $ -- $ 192,629
========= ==========
DISCONTINUED OPERATIONS - LIABILITIES
Accounts payable $ -- $ 21,267
Accrued expenses -- 152,023
Reserve for sales returns and credits (1) 98,350 100,000
--------- ----------
Total discontinued operations - liabilities $ 98,350 $ 273,290
========= ==========
DISCONTINUED OPERATIONS - EARNINGS (LOSS):
Revenues $ -- $7,925,022
========= ==========
Earnings (loss) from discontinued operations
before gain on sale of property and equipment $(275,492) $1,807,878
Gain on sale of property and equipment
from discontinued operations (2) 71,402 611,954
--------- ----------
Earnings (loss) from discontinued operations $(204,090) $2,419,832
========= ==========
(1) Returns and credits waiting for documentation from the customer.
(2) The assets sold for the year ended December 31, 2005 were fully depreciated
at the time of sale. The assets sold for the year ended December 31, 2004,
primarily related to property and equipment sold to Novartis.
23
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005 AND 2004
NOTE D - COMMITMENTS AND CONTINGENCIES
Leases
The Company conducted its operations in two leased facilities during 2005
and 2004. 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 5,000 square feet of excess space in the
Edina Facility to an independent lessee on a month to month basis for
$3,500 per month. The lessee has indicated that the lease commitment will
cease in February 2006. Both leases provide for payment of a portion of
taxes and other operating expenses by the Company. The Company also leased
various equipment under operating leases that expired June 2005. Total rent
expense for operating leases, excluding sub-lease income of $12,250 and $0,
was $145,344 and $258,043 for 2005 and 2004, respectively.
Future minimum lease commitments under operating leases are as follows:
YEARS ENDING DECEMBER 31,
2006 $54,179
2007 51,540
2008 34,360
Employee Benefit Plan
The Company has a contributory 401(k) profit sharing benefit plan covering
all employees. The Plan allows for discretionary contributions; no such
contributions were made for 2005 and 2004.
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.
NOTE E - INCOME TAXES
Income tax expense consists of the following:
YEARS ENDED DECEMBER 31,
------------------------
2005 2004
---- -------
Current $-- $27,000
Deferred -- --
--- -------
$-- $27,000
=== =======
24
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005 AND 2004
NOTE E - INCOME TAXES - CONTINUED
Differences between income tax expense and the statutory federal income tax
rate are as follows:
YEARS ENDED DECEMBER 31,
------------------------
2005 2004
----- -----
Federal statutory income tax rate 34.0% 34.0%
State income taxes, net of federal effect 6.5 1.6
Net operating loss carryforwards utilized (36.5) (32.6)
Other (4.0) (3.0)
----- -----
--% 1.2%
===== =====
Deferred tax assets and liabilities consist of the following:
DECEMBER 31,
-------------------------
2005 2004
----------- -----------
Current assets:
Accrued expenses $ 43,000 $ 53,800
----------- -----------
Long-term assets (liabilities):
Net operating loss carry-forwards 4,131,100 3,907,300
Tax credit carry-forwards 297,000 297,200
Other (140,700) (121,600)
----------- -----------
Net long-term assets 4,287,400 4,082,900
----------- -----------
Net deferred tax assets 4,330,600 4,136,700
Less valuation allowance (4,330,600) (4,136,700)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
At December 31, 2005, the Company has available net operating loss
carry-forwards of approximately $11,100,000 and $4,122,962, federal and
state, respectively, which can be used to reduce future taxable income. The
utilization of a portion of these net operating loss carry-forwards is
restricted under Section 382 of the Internal Revenue Code due to past
ownership changes. These net operating loss carry-forwards begin to expire
in 2008. A valuation allowance has been recorded for these net operating
loss carry-forwards and all other deferred tax assets, as they may not be
realizable. 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 $193,900 and
decreased by $569,200 for 2005 and 2004, respectively. The Company used
approximately $1,860,000 and $470,000 of federal and state net operating
loss carry-forwards, respectively, to reduce its 2004 federal and state tax
liability.
The 2004 deferred tax assets and the related valuation allowance have been
restated to correctly report net operating loss carry-forwards. The
restatement had no impact on the net deferred tax asset or financial
statements.
25
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005 AND 2004
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 1,056,779 shares of
common stock are available for grants of options under the plans at
December 31, 2005. Options under the Company's plans are granted at fair
market 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% after three to
four years.
A summary of the Company's stock option transactions is as follows:
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
Outstanding at December 31, 2003 807,348 $ 2.39
Granted 75,000 1.20
Exercised (51,003) (0.52)
Canceled (217,221) (2.63)
-------- ------
Outstanding at December 31, 2004 614,124 2.31
Granted -- --
Exercised (118,668) (0.76)
Canceled (122,206) (2.95)
-------- ------
Outstanding at December 31, 2005 373,250 $ 2.59
======== ======
The following information applies to options that are outstanding at
December 31, 2005:
OPTIONS OUTSTANDING *
-----------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE
- --------------- ----------- ---------------- --------
$0.31 - $ 0.35 5,000 1.0 years $0.31
$0.75 - $ 0.81 118,050 0.5 years 0.80
$1.20 - $ 1.80 75,000 1.0 years 1.20
$1.90 - $ 2.00 75,000 0.4 years 2.00
$2.75 - $ 3.63 5,200 2.9 years 3.19
$5.00 - $ 6.63 80,000 1.5 years 5.85
$8.36 - $10.00 15,000 0.4 years 9.68
-------
373,250 2.1 years $2.59
=======
* All outstanding options are exercisable.
26
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005 AND 2004
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 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 expire 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. At December 31,
2005, 95,000 of these options were outstanding and exercisable. No
compensation expense was recorded by the Company in connection with the
re-pricing because the exercise price exceeded the market price on the date
of the re-pricing. During the year ended December 31, 2005, the Company
reversed previously recorded compensation expense of $30,865, effectively
adjusting the compensation expense back to the re-priced value of $0.81 per
share. At December 31, 2004 the exercise price of the re-priced options was
below the market price for the Company's common stock, and the Company
recorded compensation expense of $112,640 to bring the re-priced options up
to the market price.
Stock Repurchase Program
The Company has a stock repurchase program pursuant to which up to 500,000
shares, or approximately 12.0% 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 2005 and 2004. 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. The
Company also had outstanding warrants to another outside party to purchase
12,953 shares of common stock at $6.25 per share, which expired on November
20, 2004.
27
LECTEC CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005 AND 2004
NOTE G - SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Additional cash flow information is as follows:
Year Ended December 31,
-----------------------
2005 2004
------- --------
Cash paid for interest $ 4,126 $ 10,395
Cash paid for income taxes 24,018 --
Supplemental disclosures of noncash activities:
Licensing fees used to reduce long-term obligations and
accrued interest of discontinued operations -- 250,000
28
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, 2005, there were no changes in the
Company's internal control over financial reporting (as defined in Rule
13a-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.
29
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE TITLE
---- --- ------------------------------------
Alan C. Hymes, M.D. 74 Chief Executive Officer and Director
Judd A. Berlin 49 Director
C. Andrew Rollwagen 50 Director
Alan C. Hymes, M.D. is a founder of the Company and has been Chief
Executive Officer since January 2005 and a director since 1977. Dr. Hymes was
engaged in the private practice of surgery from 1968 until his retirement in
1992. He is a diplomat of the American Board of Surgery and the American Board
of Thoracic Surgery.
Judd A. Berlin has been a director since May 29, 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, and is the son of Lee M. Berlin, who
is a 10% shareholder in the Company.
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 is the Senior Vice President of Business Banking at First State
Bank and Trust, a locally owned community bank serving the greater St. Croix
Valley area in Minnesota.
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
2005 have been satisfied.
30
AUDIT COMMITTEE
Alan C. Hymes, M.D. (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 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 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 years
ended December 31, 2005, 2004, and 2003, paid to the Company's current Chief
Executive Officer and former Chief Executive Officer. No other individual who
served as an executive officer of the Company during fiscal 2005 received annual
compensation in excess of $100,000.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Securities
Year ------------------- Underlying All Other
Name and Principal Position Ended Salary Bonus Options Compensation
- --------------------------- -------- -------- ----- ------------ ------------
Alan C. Hymes, M.D.(1) 12/31/05 $ -- $-- -- $--
Chief Executive Officer 12/31/04 -- -- -- --
and President 12/31/03 19,399 -- -- --
Timothy P. Fitzgerald(2) 12/31/05 $ 22,797 $-- -- $--
Former Chief Executive Officer 12/31/04 145,036 -- -- --
and President 12/31/03 114,063 -- -- --
- ----------
(1) Alan C. Hymes, M.D, did not begin serving as Chief Executive Officer until
January 15, 2005.
(2) Mr. Fitzgerald's employment with the Company terminated effective as of
January 14, 2005.
31
OPTION GRANTS DURING LAST FISCAL YEAR
There we no stock option grants during 2005.
AGGREGATED OPTION EXERCISES DURING LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the exercise of
options during the year ended December 31, 2005 and unexercised options held as
of December 31, 2005, 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, 2005(1) AT DEC. 31, 2005(2)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Alan C. Hymes, M.D -- $-- 19,000 -- $-- $--
Timothy P. Fitzgerald -- -- 75,000 -- -- --
(1) In January 2005, the Company extended the exercise period for options held
by two former executive officers by two years from the date of their
respective termination dates (but not longer than the stock options normal
exercise date, if earlier). Mr. Fitzgerald had a total of 100,000 options
with an average exercise price of $0.99 per share subject to the
modification of terms. On May 2, 2005, 25,000 of Mr. Fitzgerald's modified
options expired. Dr. Hymes had a total of 19,000 options with an average
exercise price of $4.47 per shares that were not subject to the
modification of terms.
(2) "Value" has been determined based on the difference between the last sale
price of the Company's common stock as reported by the Nasdaq OTC Bulletin
Board on December 31, 2005 ($0.51) and the per share option exercise price,
multiplied by the number of shares subject to the in-the-money options.
COMPENSATION OF DIRECTORS
At a meeting held on January 14, 2005, the Board of Directors of the
Company approved the payment of an annual retainer to non-employee members of
the Board of Directors in the amount of $17,500 annually. This retainer will be
paid in advance in quarterly installments of $4,375 prior to the beginning of
the following quarter in which services will be performed. Payments started
during the first quarter of 2005.
SEPARATION AGREEMENT WITH TIMOTHY FITZGERALD
On December 28, 2004, the Company entered into a Separation Agreement (the
"Separation Agreement") with Timothy P. Fitzgerald, the Company's former Chief
Executive Officer and Director of LecTec. Pursuant to the Separation Agreement,
Mr. Fitzgerald agreed to resign from his positions as Chief Executive Officer
and a Director of the Company and to terminate his employment with the Company
effective as of January 14, 2005. In accordance with the Separation Agreement,
Mr. Fitzgerald received his normal salary and benefits through the last day of
his employment along with payment for any and all accrued but unused vacation.
Pursuant to the Separation Agreement, Mr. Fitzgerald agreed to be available to
and cooperate with the Company in the event of litigation or other needs at an
hourly rate of $200 plus reimbursement of any travel and other expenses. In
addition, the Company agreed that it would maintain director and officer
insurance coverage for a minimum of six years. Pursuant to the Separation
Agreement, the Company and Mr. Fitzgerald mutually agreed to release the other
party from future claims, subject to certain limited exceptions, and to not
disparage the other party in the market place. A copy of the Separation
Agreement was filed as an exhibit to Form 10-KSB for December 31, 2004.
32
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,
2005.
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 315,200 $2.83 403,500
Equity compensation plans
not approved by security
holders 58,050(1) $1.26 653,279
------- ----- ---------
Total 373,250 $2.59 1,056,779
======= ===== =========
- ----------
(1) Includes 33,050 options under the 2001 Stock Option Plan (see below) and
25,000 free standing options issued to a former officer of the Company.
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
33
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 February 28, 2006, 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 February 28, 2006 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
February 28, 2006. The number of shares subject to options that each beneficial
owner has the right to acquire within 60 days of February 28, 2006 is 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
4,148,998 shares of common stock outstanding on February 28, 2006. The address
of each director and executive officer named below is the same as that of the
Company.
NUMBER OF
SHARES NUMBER OF SHARES
BENEFICIALLY UNDERLYING OPTIONS PERCENT OF SHARES
NAME OWNED BENEFICIALLY OWNED OUTSTANDING
- ---- ------------ ------------------ -----------------
Lee M. Berlin (1) 424,759 19,000 10.19%
Alan C. Hymes, M.D 418,373 19,000 10.04%
Judd A. Berlin 137,145 -- 3.31%
C. Andrew Rollwagen -- -- --
Timothy P. Fitzgerald 79,325 75,000 1.88%
All directors and executive officers as a
group (4 persons) 634,843 113,000 14.90%
- ----------
(1) Lee M Berlin shares include 75,605 shares owned by Mr. Berlin's wife. Mr.
Berlin's address is 1700 Lexington Avenue, St. Paul, MN 55118
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
34
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 Certificate of Secretary pertaining to Resolution of Board
of Directors of LecTec Corporation, dated October 30,
1986, implementing a Profit Sharing Bonus Plan (1)
**10.02 LecTec Corporation 1989 Stock Option Plan (2)
**10.03 LecTec Corporation 1991 Directors' Stock Option Plan (2)
**10.04 LecTec Corporation 1998 Stock Option Plan (3)
**10.05 LecTec Corporation 1998 Directors' Stock Option Plan (3)
**10.06 LecTec Corporation 2001 Stock Option Plan (4)
10.07 Sale Leaseback Agreement By and Between LecTec Corporation
and Larry Hopfenspirger, dated February 25, 2003. (5)
10.08 Office/warehouse lease dated May 23, 2003, by and between
SMD Lincoln Investments LLC and LecTec Corporation. (6)
*10.09 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)
10.10 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)
10.11 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)
10.12 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)
**10.13 Separation Agreement dated December 28, 2004 by and
between LecTec Corporation and Timothy P. Fitzgerald. (9)
23.01 Consent of Lurie Besikof Lapidus & Company, LLP (10)
24.01 Power of Attorney (11)
31.01 Certification of Principal Executive Officer (10)
31.02 Certification of Principal Financial Officer (10)
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. (10)
99.01 Cautionary Statements (10)
35
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) Filed herewith.
(11) Included on signature page.
36
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 2005 and 2004:
2005 2004 NATURE OF SERVICES PROVIDED
------- ------- -------------------------------
Audit fees $32,000 $37,000 Audits and quarterly reviews of
financial statements of the
Company
Audit-related fees - -
Tax fees 7,500 7,500 Tax return preparation and
research
All other fees 8,685 10,160 Expenses related to SEC Comment
------- ------- Letter resolution and amended
SEC filing, agreement reviews,
and discontinued operations
issues
$48,185 $54,660
======= =======
Because of the Company's size, complexity, financial condition and
prospects, the Audit Committee is apprised of and approves all fees for audit
and tax services provided by the Company's outside accountants.
All audit fees and tax preparation fees 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 2005 and 2004 were compatible with maintaining the
outside accountants' independence.
37
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 20th day of March 2006.
LECTEC CORPORATION
/s/ Alan C. Hymes, M.D.
----------------------------------------
Alan C. Hymes, M.D.
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Alan C. Hymes, M.D. (with full power to act
alone), as his or her true and lawful attorneys-in-fact and agents, 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 attorneys-in-fact and
agents 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 attorneys-in-fact and agents, 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/ Alan C. Hymes, M.D. March 20, 2006
- -------------------------------------
Alan C. Hymes, M.D.
Chief Executive Officer and Director
(Principal Executive Officer)
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ Judd A. Berlin March 20, 2006
- -------------------------------------
Judd A. Berlin
Director
/s/ C. Andrew Rollwagen March 20, 2006
- -------------------------------------
C. Andrew Rollwagen
Director
38
EXHIBIT INDEX
Exhibit No.
- -----------
3.01 Articles of Incorporation of Registrant, as amended (Note 1).
3.02 Bylaws of Registrant (Note 1).
10.01 Certificate of Secretary pertaining to Resolution of Board of
Directors of LecTec Corporation dated October 30, 1986,
implementing a Profit Sharing Bonus Plan (Note 1).
** 10.02 LecTec Corporation 1989 Stock Option Plan (Note 2).
** 10.03 LecTec Corporation 1991 Directors' Stock Option Plan (Note 2).
** 10.04 LecTec Corporation 1998 Stock Option Plan (Note 3).
** 10.05 LecTec Corporation 1998 Directors' Stock Option Plan (Note 3).
** 10.06 LecTec Corporation 2001 Stock Option Plan (Note 4).
10.07 Sale Leaseback Agreement By and Between LecTec Corporation and
Larry Hopfenspirger, dated February 25, 2003 (Note 5).
10.08 Office/warehouse lease May 23, 2003, by and between SMD Lincoln
Investments LLC and LecTec Corporation (Note 6).
*10.09 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).
10.10 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).
10.11 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).
10.12 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).
** 10.13 Separation Agreement dated December 28, 2004 by and between LecTec
Corporation and Timothy P. Fitzgerald (Note 9).
23.01 Consent of Lurie Besikof Lapidus & Company, LLP (Note 10).
24.01 Power of Attorney (Note 11).
31.01 Certification of Principal Executive Officer (Note 10).
31.02 Certification of Principal Financial Officer (Note 10).
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 10).
99.01 Cautionary Statements (Note 10).
39
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) Filed herewith.
(11) Included on signature page.
40