SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO 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
(Exact name of Registrant as specified in its charter)
Minnesota 41-1301878
- --------------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10701 Red Circle Drive, Minnetonka, Minnesota 55343
- --------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 933-2291
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common stock,
par value $0.01
per share.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
The number of shares outstanding of the registrant's common stock as of February
11, 1999 was 3,870,329 shares.
<PAGE>
LECTEC CORPORATION
FORM 10-Q - QUARTERLY REPORT FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements and Notes to Financial Statements . . . . . . I-1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . I-8
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . I-13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . II-1
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . II-1
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . II-1
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . II-1
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . II-2
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . II-2
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . II-3
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS AND NOTES TO FINANCIAL STATEMENTS
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
December 31, June 30,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,022,455 $ 2,186,532
Receivables
Trade, net of allowances of $95,083 (unaudited) and $90,818
at December 31, 1998 and June 30, 1998 2,668,087 2,251,757
Refundable income taxes 7,544 59,544
Other 39,017 30,624
----------- -----------
2,714,648 2,341,925
Inventories
Raw materials 1,130,201 1,184,778
Work-in-process 18,400 15,055
Finished goods 736,311 518,178
----------- -----------
Total inventories 1,884,912 1,718,011
Prepaid expenses and other 228,677 103,063
Deferred income taxes 379,000 379,000
----------- -----------
Total current assets 6,229,692 6,728,531
PROPERTY, PLANT AND EQUIPMENT - AT COST
Building and improvements 1,919,402 1,816,277
Equipment 6,853,571 6,791,765
Furniture and fixtures 396,367 384,260
----------- -----------
9,169,340 8,992,302
Less accumulated depreciation 5,313,847 4,933,465
----------- -----------
3,855,493 4,058,837
Land 247,731 247,731
----------- -----------
4,103,224 4,306,568
OTHER ASSETS
Patents and trademarks, less accumulated amortization of $1,072,636
(unaudited) and $1,001,157 at December 31, 1998 and June 30, 1998 255,968 273,999
Long-term investments 8,676 8,676
----------- -----------
264,644 282,675
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$10,597,560 $11,317,774
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
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LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
(Unaudited)
December 31, June 30,
1998 1998
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,477,242 $ 809,147
Accrued expenses
Payroll related 350,657 384,135
Other 182,327 199,388
----------- -----------
Total current liabilities 2,010,226 1,392,670
DEFERRED INCOME TAXES 222,000 222,000
SHAREHOLDERS' EQUITY
Common stock, $.01 par value: 15,000,000 shares authorized; issued and
outstanding 3,870,300 shares (unaudited) at December 31, 1998 and
4,036,000 shares at June 30, 1998 38,703 40,360
Additional paid-in capital 11,246,373 11,769,053
Unrealized losses on securities available-for-sale (8,508) (8,508)
Deficit in retained earnings (2,911,234) (2,097,801)
----------- -----------
8,365,334 9,703,104
----------- -----------
$10,597,560 $11,317,774
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
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<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 3,103,277 $ 3,308,962 $ 6,006,334 $ 6,939,772
Cost of goods sold 2,177,539 2,362,392 4,063,343 4,784,343
----------- ----------- ----------- -----------
Gross profit 925,738 946,570 1,942,991 2,155,429
Operating expenses
Sales and marketing 545,938 244,879 879,471 505,224
General and administrative 781,630 470,347 1,368,091 1,001,693
Research and development 286,025 261,737 566,038 508,329
----------- ----------- ----------- -----------
1,613,593 976,963 2,813,600 2,015,246
----------- ----------- ----------- -----------
Earnings (loss) from operations (687,855) (30,393) (870,609) 140,183
Other income, net 26,987 12,623 58,788 21,417
----------- ----------- ----------- -----------
Earnings (loss) before income taxes (660,868) (17,770) (811,821) 161,600
Income tax expense (benefit) 348 (19,677) 1,612 8,000
----------- ----------- ----------- -----------
Net earnings (loss) $ (661,216) $ 1,907 $ (813,433) $ 153,600
=========== =========== =========== ===========
Net earnings (loss) per share
Basic $ (0.17) $ 0.00 $ (0.21) $ 0.04
=========== =========== =========== ===========
Diluted $ (0.17) $ 0.00 $ (0.21) $ 0.04
=========== =========== =========== ===========
Weighted average shares outstanding
Basic 3,907,995 4,062,354 3,945,599 3,952,586
=========== =========== =========== ===========
Diluted 3,907,995 4,073,910 3,945,599 3,966,996
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
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<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (813,433) $ 153,600
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 451,861 427,226
Loss on sale of investments -- 9,810
Changes in operating assets and liabilities:
Trade and other receivables (424,723) (496,923)
Refundable income taxes 52,000 328,094
Inventories (166,901) 106,020
Prepaid expenses and other (125,614) (41,171)
Accounts payable 608,632 322,452
Accrued expenses (50,539) (2,539)
----------- -----------
Net cash provided by (used in) operating activities (468,717) 806,569
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (177,038) (270,512)
Investment in patents and trademarks (53,448) (39,498)
Sale of investments -- 422,598
----------- -----------
Net cash provided by (used in) investing activities (230,486) 112,588
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of common stock (464,874) --
----------- -----------
Net cash used in financing activities (464,874) --
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,164,077) 919,157
Cash and cash equivalents at beginning of period 2,186,532 665,190
----------- -----------
Cash and cash equivalents at end of period $ 1,022,455 $ 1,584,347
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
I - 4
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $ -- $ 872
Income taxes 22,010 10,676
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Conversion of Pharmadyne minority shareholders' interest in the
Pharmadyne subsidiary into LecTec Corporation common stock $ -- $ 1,369,411
</TABLE>
See accompanying notes to the consolidated financial statements.
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<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 1998 AND 1997
(1) GENERAL
The accompanying consolidated financial statements include the accounts
of LecTec Corporation (the "Company"), LecTec International Corporation, a
wholly-owned subsidiary, and Pharmadyne Corporation, a wholly-owned subsidiary
which was merged into LecTec Corporation on December 31, 1997. All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company's financial statements for the three months and six months ended
December 31, 1998 should be read in conjunction with its Annual Report on Form
10-K and its Annual Report to Shareholders for the fiscal year ended June 30,
1998. The interim financial statements are unaudited and in the opinion of
management, reflect all adjustments necessary for a fair presentation of results
for the periods presented. Results for interim periods are not necessarily
indicative of results for the year.
The Company's basic net earnings (loss) per share amounts have been
computed by dividing net earnings (loss) by the weighted average number of
outstanding common shares. The Company's diluted net earnings (loss) per share
amounts have been computed by dividing net earnings (loss) by the weighted
average number of outstanding common shares and common share equivalents, when
dilutive. Options and warrants to purchase 873,066 and 753,355 shares of common
stock with a weighted average exercise price of $7.70 and $8.29 were outstanding
during the three months ended December 31, 1998 and 1997, but were excluded
because they were antidilutive. Options and warrants to purchase 870,323 and
736,460 shares of common stock with a weighted average exercise price of $7.72
and $8.34 were outstanding during the six months ended December 31, 1998 and
1997, but were excluded because they were antidilutive.
(2) STOCK REPURCHASE PROGRAM
In April 1998, the Company's Board of Directors authorized a stock
repurchase program pursuant to which up to 500,000 shares 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. During the quarter and six months ended December 31, 1998, 74,800
and 165,650 shares were repurchased for $223,663 and $524,338, including $59,463
which was settled after December 31, 1998. Through December 31, 1998 the Company
has repurchased a total of 195,150 shares at a cost of $648,900. During the
period from January 1, 1999 through February 10, 1999 the Company did not
repurchase any additional shares.
(3) COMPREHENSIVE INCOME
As of July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, which establishes
new rules for the reporting and display of comprehensive income and it
components. SFAS 130 requires companies to report, in addition to net income,
other components of comprehensive income, including unrealized gains or losses
on securities available-for-sale. Total comprehensive loss for the second
quarter of fiscal 1998 was $661,216 and total comprehensive income for the
second quarter of fiscal 1997 was $7,274. Total comprehensive loss for the first
six months of fiscal 1998 was $813,433 and total comprehensive income for the
first six months of fiscal 1997 was $174,487. Adoption of this disclosure
standard had no effect on the Company's results of operations or financial
position as reported in the consolidated financial statements.
I - 6
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 1998 AND 1997
(CONTINUED)
(4) NEW ACCOUNTING PRONOUNCEMENTS
Additionally, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," effective July 1, 1998. SFAS
No. 131 requires the Company to disclose financial and other information about
its business segments, their products and services, geographic areas, sales,
profits, assets and other information. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997, however the statement
does not need to be applied to interim financial statements in the initial year
of application. Comparative information for the interim period in the initial
year of application will be reported in the Company's financial statements for
interim periods in fiscal 2000.
I - 7
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
RESULTS OF OPERATIONS
NET SALES
Net sales for the second quarter of fiscal 1999 were $3,103,277
compared to net sales of $3,308,962 for the second quarter of fiscal 1998, a
decrease of 6.2%. The decrease was primarily the result of decreased medical
tape and conductive product sales which were partially offset by increased sales
of therapeutic products. Conductive product sales, the Company's largest product
group, decreased by 5.2% from the prior year while medical tape sales, the
Company's second largest product group, decreased by 39.3% from the prior year
and therapeutic product sales increased to $429,715 from $62,380 in the prior
year. The conductive product sales decrease was primarily due to normal
period-to-period fluctuations of sales to the Company's customers. Medical tape
product sales decreased primarily due to the absence of sales in fiscal 1999 to
several large international customers who purchase intermittently. The
therapeutic product sales increase was primarily the result of sales of the
various TheraPatch(R) brand products directly to retailers. In the prior year
the Company had no patch sales to either CNS, Inc. (the Company's former
distributor to retailers of its analgesic patch product), nor to a former direct
marketing distributor. Effective July 1, 1998, the Company assumed
responsibility for the retail distribution of the analgesic patch product that
CNS, Inc. had previously handled, and in September 1998, the Company began the
launch of its TheraPatch family of patch products. The product family launch
included two patches for topical pain relief and two patches for cough
suppression.
Net sales for the first six months of fiscal 1999 were $6,006,334
compared to net sales of $6,939,772 for the first six months of fiscal 1998, a
decrease of 13.5%. The decrease was primarily the result of decreased medical
tape and conductive product sales. Conductive product sales decreased by 4.4%
from the prior year, while medical tape product sales decreased by 34.0% and
therapeutic product sales increased by 2.9%. Conductive product sales decreased
primarily as a result of normal period-to-period fluctuations of sales to the
Company's customers. Medical tape product sales decreased primarily due to the
absence of sales in fiscal 1999 to several large international customers who
purchase intermittently and due to the discontinuance of sales to several
low-margin slit roll customers. The therapeutic product sales increase resulted
from increased sales volumes of corn and callus therapeutic products. Patch
product sales for the first six months of fiscal 1999 and fiscal 1998 were
comparable in dollar amount. However, decreased unit volume in 1999 was offset
by increased unit selling price as the Company sold directly to retailers rather
than to CNS, Inc., the Company's exclusive distributor to retailers in the prior
year.
GROSS PROFIT
Gross profit for the second quarter of fiscal 1999 was $925,738
compared to $946,570 for the second quarter of fiscal 1998, a decrease of 2.2%.
Gross profit as a percent of net sales for the second quarter of fiscal 1999 was
29.8% compared to 28.6% for the second quarter of fiscal 1998. The increase in
the gross profit percent for the quarter resulted primarily from a shift in the
sales mix toward higher margin patch products.
Gross profit for the first six months of fiscal 1999 was $1,942,991
compared to $2,155,429 for the first six months of fiscal 1998, a decrease of
9.9%. Gross profit as a percent of net sales for the first six months of fiscal
1999 was 32.3% compared to 31.1% for the first six months of fiscal 1998. The
increase in the gross profit percent for the first six months resulted primarily
from higher margins on patch sales, primarily as a result of sales directly to
retailers rather than to a distributor, and lower obsolescence
I - 8
<PAGE>
expense, due in part to decreased inventory levels. These factors were partially
offset by higher scrap and material usage costs, due primarily to the start-up
of production on retail TheraPatch products.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $545,938 and $244,879 during the
second quarters of fiscal 1999 and 1998, and as a percentage of net sales, were
17.6% and 7.4%. The increase in sales and marketing expenses for the quarter was
primarily the result of expenses associated with the launch of the TheraPatch
product family to retailers, as well as ongoing sales activities related to the
Company's new Consumer Products Division. The increase in expenses was primarily
due to increases in advertising, promotion and travel expense, as well as an
increase in sales staff. These expenses associated with the Company's new
Consumer Products Division were not present in the prior year. The Company
anticipates that sales and marketing expenses, as a percentage of sales, will
decrease as the sales volume of patch products increases.
Sales and marketing expenses were $879,471 and $505,224 during the
first six months of fiscal 1999 and 1998, and as a percentage of net sales, were
14.6% and 7.3%. The increase in sales and marketing expenses for the first six
months of fiscal 1999 compared to the first six months of fiscal 1998 resulted
from the same factors responsible for the increase in expenses for the second
quarter of fiscal 1999.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $781,630 and $470,347 during
the second quarters of fiscal 1999 and 1998, and as a percentage of net sales,
were 25.2% and 14.2%. The increase in general and administrative expenses for
the quarter included approximately $126,000 of expenses related to the
re-negotiation and modification of the license agreement for the development and
commercialization of cotinine, and $42,000 of legal expenses associated with
work on new and existing patents. Increased regulatory and quality assurance
expenses associated with achieving and maintaining ISO 9001 and EN 46001
certification were also factors in the increase in general and administrative
expenses for the quarter. The Company anticipates that general and
administrative expenses, as a percentage of sales, will be approximately 20% of
net sales for the remainder of fiscal 1999.
General and administrative expenses were $1,368,091 and $1,001,693
during the first six months of fiscal 1999 and 1998, and as a percentage of net
sales, were 22.8% and 14.4%. The increase in general and administrative expenses
for the first six months of fiscal 1999 compared to the first six months of
fiscal 1998 resulted from the same factors responsible for the increase in
expenses for the second quarter of fiscal 1999.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the second quarters of fiscal
1999 and 1998 were $286,025 and $261,737, and as a percentage of net sales, were
9.2% and 7.9%. The increase in research and development expenses for the quarter
was primarily due to increases in staff.
Research and development expenses for the first six months of fiscal
1999 and 1998 were $566,038 and $508,329, and as a percentage of net sales, were
9.4% and 7.3%. The increase in research and development expenses for the first
six months reflects increased staffing levels and increased costs for testing
and test runs of products under development.
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<PAGE>
OTHER INCOME, NET
Other income, net increased in the second quarter of fiscal 1999 to
$26,987 from $12,623 in the second quarter of 1998. Other income, net increased
in the first six months of fiscal 1999 to $58,788 from $21,417 in the first six
months of 1998. Other income was higher in both the second quarter and first six
months of fiscal 1999 due to increased investment income as a result of higher
cash and cash equivalent balances in fiscal 1999 compared to cash, cash
equivalent and short-term investment balances during 1998, and a loss on the
sale of investments incurred during fiscal 1998.
EARNINGS (LOSS) BEFORE INCOME TAXES
The Company recorded a loss before income taxes of $660,868 in the
second quarter of fiscal 1999 compared to a loss before income taxes of $17,770
in fiscal 1998. For the first six months of fiscal 1999, the Company recorded a
loss before income taxes of $811,821 compared to earnings before income taxes of
$161,600 for the first six months of fiscal 1998. The loss for the second
quarter and first six months of fiscal 1999 was primarily the result of
increased sales and marketing expenses related to the Company's new Consumer
Products Division and increased general and administrative expenses, primarily
those expenses related to the modification of the cotinine license agreement and
achievement of ISO 9001 and EN 46001 certification.
INCOME TAX EXPENSE (BENEFIT)
The Company recorded income tax expense of $348 in the second quarter
of fiscal 1999 compared to an income tax benefit of $19,677 in the second
quarter of fiscal 1998. For the first six months of fiscal 1999 the Company
recorded income tax expense of $1,612 as compared to income tax expense of
$8,000 in the first six months of fiscal 1998. Income tax expense for both the
second quarter and first six months of fiscal 1999 reflect minimal tax expense
associated with the Company's foreign sales corporation subsidiary and does not
include any loss benefit as it may not be realizable. The income tax benefit
recorded during the second quarter of fiscal 1998 reflects the adjustment of the
income tax expense for the first six months of fiscal 1998 to reflect minimal
income tax expense due to the utilization of NOL carryforwards.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's operations
or cash flow.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1,164,077 to $1,022,455 during
the first six months of fiscal 1999. Receivables increased by $372,723 to
$2,714,648 during the same period primarily as a result of higher sales in
December of 1998 as compared to sales in June of 1998. Inventories increased by
$166,901 during the six months ended December 31, 1998 to $1,884,912 primarily
due to increased finished goods inventory of TheraPatch products necessary for
the timely fulfillment of retail orders. Accounts payable increased by $668,095
to $1,477,242 during the first six months of fiscal 1999 primarily due to
increased raw material, advertising and promotional payables related to the
launch of the TheraPatch product family, amounts related to the modification of
the cotinine license agreement, and repurchases of the Company's Common Stock
made before, and settled after, December 31, 1998. Capital spending totaled
$177,038 during the first six months of fiscal 1999. There were no material
commitments for capital expenditures at December 31, 1998.
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<PAGE>
Working capital decreased to $4,219,466 at the end of the first six
months of fiscal 1999 from $5,335,861 at the end of fiscal 1998. The Company had
a current ratio at the end of the first six months of fiscal 1999 of 3.1 as
compared to 4.8 at the end of fiscal 1998.
The Company had no short or long-term debt as of December 31, 1998.
During August 1997 the Company obtained an unsecured $1,000,000 working capital
line of credit which expired in September 1998. There were no borrowings
outstanding on the line of credit during fiscal 1998 or fiscal 1999.
Shareholders' equity decreased by $1,337,770 to $8,365,334 during the first six
months of fiscal 1999. Of this decrease, $524,337 was due to the repurchase of
shares under the stock purchase program announced in April of 1998 authorizing
the repuchase of up to 500,000 shares. As of February 10, 1999 the Company has
repurchased a total of 195,150 shares at a cost of $648,900 under the share
repurchase program.
Management believes that existing cash and cash equivalents,
internally-generated cash-flow and the expected renewal of the short-term line
of credit will be sufficient to support anticipated operating and capital
spending requirements for the next twelve to eighteen months.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 ("Y2K") issue is the result of computer systems using a
two-digit format, as opposed to four digits, to indicate the year. Such computer
systems may be unable to interpret dates beyond the year 1999, which could cause
a system failure or other computer errors, leading to disruptions in operations.
A number of other date issues (i.e. incorrect handling of leap years) may also
cause problems. All of these issues are collectively referred to as Y2K. In
fiscal 1998, the Company developed a comprehensive program for Y2K compliance
consisting of two parts; internal systems compliance and third party compliance.
The internal systems compliance program includes informational,
manufacturing, financial and communication systems. A committee consisting of
representatives from all key areas of the Company developed the program. The
internal systems compliance program consists of four-phases. Phase I is the
identification of all internal computer systems in the Company, including
embedded microprocessor or similar circuitry. Phase II is the determination of
Y2K compliance for these systems. Phase III is development and implementation of
action plans to achieve compliance where needed, and is followed by the testing
in Phase IV of these systems after action plans have been completed.
The third party compliance program consists of three phases with Phase
I being the identification of major and/or critical third party vendors and
customers. Phase II consists of contacting these third parties and determining
their Y2K compliance. Phase III involves establishing risk and developing
contingency plans where necessary (i.e. third party compliance can not be
established or the risks associated with noncompliance are significant).
The Company has completed Phases I and II of the internal systems
compliance program and found the majority of its systems and all of its core
systems to be Y2K compliant. The Y2K compliant status of the core systems
benefited from upgrades undertaken during the past several years to make these
systems adequate for the business needs of the Company. Plans to achieve Y2K
compliance for the non-core systems were developed and completed by the end of
calendar 1998 (Phase III). Phase IV of the program, testing of systems after
implementation of changes, is currently underway and is expected to be completed
by March 31, 1999. The Company is approximately 85% complete with Phase IV. The
Company expects to have substantially completed all aspects of the internal
systems compliance program by March 31, 1999, and considers the risk that
compliance will not be achieved to be minimal.
The Company has completed Phase I of the third party compliance program
and is approximately 95% complete with Phase II. Initial questionnaires have
been sent to major and/or critical third party vendors and customers, and
approximately 90% of those contacted have responded. Responses are being sought
from the remaining major and/or critical vendors and customers. The Company is
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<PAGE>
approximately 50% complete with Phase III, the evaluation of responses,
establishment of risk and the development of contingency plans. Because of the
diversity of sources available for the Company's raw material, packaging
material and supplies, the Company believes that third party Y2K compliance
issues for these third parties will not have a material adverse effect on the
Company's financial position, operations or cash flow. There can, however, be no
assurance that this will be the case. If certain critical third party providers,
such as those providers supplying electricity, water or telephone service,
experience difficulties resulting in disruption of service to the Company, a
shutdown of the Company's operations at individual facilities could occur for
the duration of the disruption. The Company expects to have substantially
completed all phases of the third party compliance program by June 30, 1999.
All costs for Y2K compliance have been expensed in the period incurred
and have been paid from operating funds. The Company does not specifically track
internal staff time spent on the Y2K issue, however, it has included an estimate
of the cost of this time in the estimated total costs. The Company estimates the
total costs for both the internal systems compliance program and the third party
compliance program through December 31, 1998 to be approximately $20,000, while
total costs for Y2K compliance are estimated to be less than $50,000.
The Company's ability to successfully identify and address Y2K issues
involves inherent risks and uncertainties, and depends upon a number of factors
including, but not limited to, the availability of key Y2K personnel, the
Company's ability to locate and correct all relevant computer codes, the
readiness of third parties, and the Company's ability to respond to unforeseen
Y2K complications. Depending upon such factors, the Y2K issues faced by the
Company could result in, among other things, business disruption, operation
problems, financial loss, legal liability and similar adverse consequences.
FORWARD-LOOKING STATEMENTS
From time to time, in reports filed with the Securities and Exchange
Commission, in press releases, and in other communications to shareholders or
the investment community, the Company may provide forward-looking statements
concerning possible or anticipated future results of operations or business
developments which are typically preceded by the words "believes", "expects",
"anticipates", "intends", "will", "may", "should" or similar expressions. Such
forward-looking statements are subject to risks and uncertainties which could
cause results or developments to differ materially from those indicated in the
forward-looking statements. Such risks and uncertainties include, but are not
limited to, the buying patterns of major customers; competitive forces including
new products or pricing pressures; costs associated with and acceptance of the
Company's new brand strategy; impact of interruptions to production; dependence
on key personnel; need for regulatory approvals; changes in governmental
regulatory requirements or accounting pronouncements, unforeseen Y2K
complications and third party disruptions; and ability to satisfy funding
requirements for operating needs, expansion or capital expenditures.
I - 12
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
I - 13
<PAGE>
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
There have been no changes in the rights of security holders.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Regular Annual Meeting of Shareholders of the Company was
held on November 19, 1998. The following matters were voted on by
Shareholders:
1. The election of seven directors to serve on the Board of
Directors for a term of one year and until their successors
are duly elected and qualified.
2. The ratification of the appointment of Grant Thornton LLP as
the Company's independent auditor for the Company's current
fiscal year.
3. A proposal to approve the LecTec Corporation 1998 Stock Option
Plan.
4. A proposal to approve the LecTec Corporation 1998 Directors'
Stock Option Plan.
5. A proposal to approve the LecTec Corporation Employee Stock
Purchase Plan.
The results of the voting on these matters were as follows:
1. Board of Directors:
Withhold
For Authority Total
--------- --------- ---------
Lee M. Berlin 3,590,671 60,883 3,651,554
Alan C. Hymes, M.D. 3,585,779 65,775 3,651,554
Paul O. Johnson 3,196,563 454,991 3,651,554
Bert J. McKasy 3,590,386 61,168 3,651,554
Marilyn K. Speedie, Ph.D. 3,514,801 136,753 3,651,554
Donald C. Wegmiller 3,514,003 137,551 3,651,554
Rodney A. Young 3,513,299 138,255 3,651,554
2. Appointment of Grant Thornton LLP as independent auditor for
the Company:
For Against Abstain Non-Vote Total
--------- ------- ------- -------- ---------
3,593,310 12,955 45,289 - 3,651,554
II - 1
<PAGE>
3. Approval of the LecTec Corporation 1998 Stock Option Plan:
For Against Abstain Non-Vote Total
--------- ------- ------- -------- ---------
2,386,531 231,544 80,189 953,290 3,651,554
4. Approval of the LecTec Corporation 1998 Directors' Stock
Option Plan:
For Against Abstain Non-Vote Total
--------- ------- ------- -------- ---------
2,387,161 171,270 139,833 953,290 3,651,554
5. Approval of the LecTec Corporation Employee Stock Purchase
Plan:
For Against Abstain Non-Vote Total
--------- ------- ------- -------- ---------
2,511,797 94,358 92,109 953,290 3,651,554
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Item No. Item Method of Filing
-------- ---- ----------------
10.01 First Amendment, dated December 31,
1998, to License Agreement dated
March 9, 1993, between LecTec
Corporation, Pharmaco Behavioral
Associates, Inc. and The Regents of
the University of Minnesota . . . Filed herewith.*
10.02 Separate License Agreement
dated December 31, 1998
between LecTec Corporation and
Robert M. Keenan, M.D., Ph.D. . . Filed herewith.
27.01 Financial data schedule . . . . . Filed herewith.
(b) REPORTS ON FORM 8-K
None.
Notes:
* Confidential treatment requested 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
Securites and Exchange Commission together with a confidential treatment
request.
II - 2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LECTEC CORPORATION
Date February 12, 1999 /s/ Rodney A. Young
----------------- ----------------------------------------------------
Rodney A. Young, Chief Executive Officer & President
Date February 12, 1999 /s/ Deborah L. Moore
----------------- ----------------------------------------------------
Deborah L. Moore, Chief Financial Officer
II - 3
EXHIBIT 10.01
FIRST AMENDMENT TO LICENSE AGREEMENT
THIS AGREEMENT (hereinafter referred to as "this Agreement") by and
among LECTEC CORPORATION, a Minnesota corporation, having offices at 10701 Red
Circle Drive, Minnetonka, Minnesota, 55343 (hereinafter referred to as
"Company"), PHARMACO BEHAVIORAL ASSOCIATES, INC., a Minnesota corporation,
having offices at 8200 Harriet Avenue South, Bloomington, Minnesota 55420
(hereinafter referred to as "Pharmaco"), and THE REGENTS OF THE UNIVERSITY OF
MINNESOTA, a Minnesota constitutional corporation, having offices at Morrill
Hall, 100 Church Street, Minneapolis, MN 55455 (hereinafter referred to as "the
University") is made as of December 31, 1998 ("Effective Date") and shall be
deemed effective retroactively to March 9, 1993 ("Original Agreement Date").
RECITALS
WHEREAS, Company, Pharmaco and the University entered into a License
Agreement dated March 9, 1993 ("Original Agreement"), which granted Company a
license to make, have made, use and sell certain products, subject to certain
payment obligations from Company to Pharmaco and the University, with certain
sublicense rights;
WHEREAS, Company, Pharmaco and the University now desire to amend the
Original Agreement as provided herein;
NOW, THEREFORE, in consideration of the premises, covenants and
conditions herein contained, the parties agree as follows:
1.0 DEFINITIONS
"ARTICLE I - DEFINITIONS" of the Original Agreement shall be amended as
follows:
1.1 Paragraph A shall be deleted and replaced in its entirety by
the following:
A. "technology" shall mean any knowledge, information, knowhow
and devices, whether patentable or not, in the possession of Pharmaco relating
to:
(i) use of cotinine for body weight management, including but not
limited to US. Patent Application/Serial No. 07/964,277, filed
October 21, 1992, and issued as U.S. Patent No. 5,643,928, and
corresponding foreign patent applications or patents listed in
Appendix A;
(ii) therapeutic method to alleviate the craving associated with
cessation of tobacco with cotinine, including but not limited
to U.S. Patent Application/Serial No. 07/885,314, filed May
18, 1992, and issued as U.S. Patent No. 5,596,007, and
corresponding foreign patent applications or patents listed in
Appendix A;
<PAGE>
(iii) use of cotinine to assist in the cessation of tobacco smoking,
including but not limited to U.S. Patent Application/Serial
No. 07/971,573, filed November 5, 1992, and corresponding
foreign patent applications listed in Appendix A;
(iv) use of cotinine to assist in the cessation of tobacco smoking,
including but not limited to U.S. Patent Application/Serial
No. 08/293,585, filed August 22, 1994, and issued as U.S.
Patent No. 5,612,357, and corresponding foreign patent
applications or patents listed in Appendix A; and
(v) use of cotinine to alleviate tobacco withdrawal syndrome,
including but not limited to U.S. Patent Application/Serial
No. 08/691,888, filed August 1, 1996, and issued as U.S.
Patent No. 5,747,512, and corresponding foreign patent
applications or patents listed in Appendix A.
1.2 Paragraph C shall be deleted in its entirety and replaced with
the following:
"Subject Patent Applications" shall mean any patent application that
has been filed or is filed in the United States or in a foreign country that
covers the Technology and/or Improvements made solely by Pharmaco, jointly by
Pharmaco and Company or solely by Company, including but not limited to those
patent applications listed in paragraph A above.
1.3 A new paragraph J shall be added as follows:
J. "Phase I Studies" shall mean pilot efficacy studies described
in Appendix B hereto ("Phase I Studies") to be conducted by Company.
1.4 A new paragraph K shall be added as follows:
K. "Phase I Funds" shall mean any funds obtained by Company
specifically to enable Company to conduct the Phase I Studies. Company may use
its own funds or funds from a Third Party Source (but not from any Sublicensee,
Affiliate, shareholder, officer or director of Company) as Phase I Funds. Phase
I Funds shall not be deemed Net Sales revenues, lump sum payments, milestone
payments or part of the Revenue Sharing Pool.
1.5 A new paragraph L shall be added as follows:
L. "Third Party Source" shall mean any third-party source of
Phase I Study Funds, including, without limitation, any venture capital firm,
partnership, limited liability company or non-profit medical or health research
foundation. A Sublicensee, Affiliate, shareholder, officer or director of
Company may not be a Third Party Source.
-2-
<PAGE>
2.0 LICENSE GRANT AND COMMERCIAL EFFORT
"ARTICLE IV - LICENSE GRANT AND COMMERCIAL EFFORT" of the Original
Agreement shall be amended as follows:
2.1 A new paragraph J shall be added as follows:
J. As an express condition to the continuation of the License to
Company from and after the Effective Date and as a measure of its "best efforts"
under paragraph E above, Company shall meet each of the following milestones:
(i) Company shall itself provide or obtain from a Third Party
Source the Phase I Study Funds within eighteen (18) months of
the Effective Date;
(ii) assuming the Phase I Study Funds have been provided by Company
or obtained from a Third Party Source, Company shall complete
the Phase I Studies within twenty (20) months of Company's
provision or receipt of such funds; and
(iii) assuming the Phase I Studies are conducted, within eighteen
(18) months after the completion of the Phase I Studies,
Company shall negotiate but not execute a bona fide,
arm's-length agreement ("Proposed Agreement") with a
marketing/development partner for the development and
commercialization of Licensed Product(s) (provided such
partner may not be an Affiliate) and deliver a complete copy
of such Proposed Agreement to Pharmaco for its written
approval, which approval shall not be unreasonably withheld or
delayed and which approval shall be granted as provided in
Article IV K below. Such a Proposed Agreement may be with a
Sublicensee.
Company shall give Pharmaco and the University ten (10) days' written notice of
its achievement or failure to achieve each of the foregoing milestones. At its
sole election, Company may extend any of the foregoing milestone deadlines one
or more times for up to a maximum of twelve (12) months by the payment to
Pharmaco of $25,000 per additional month, which payment shall be made in advance
of the additional extension period being purchased. If Company fails to achieve
any of the above milestones and has not purchased an extension as provided in
the preceding sentence, at Pharmaco's sole election and upon ten (10) days prior
written notice to Company and the University, Pharmaco may terminate the License
as its sole remedy for such failure.
2.2 A new paragraph K shall be added as follows:
K. Pharmaco may review any Proposed Agreement submitted to
Pharmaco under paragraph J(iii) above limited solely and exclusively to the
question of whether such Proposed Agreement constitutes a bona fide,
arm's-length transaction with a recognized healthcare products company aimed at
pursuit of the development and commercialization of Licensed
-3-
<PAGE>
Product(s). Within ten (10) days of its receipt of a Proposed Agreement,
Pharmaco shall deliver to Company its written approval thereof or its written
objections thereto within the foregoing limited scope of review. If no such
written objection is delivered to Company within such ten (10) day period,
Pharmaco's approval shall be conclusively deemed given to Company to enter into
the Proposed Agreement. Pharmaco's delay in granting its approval of a Proposed
Agreement or its written objection to a Proposed Agreement (or any arbitration
under paragraph L below) shall not be counted in whether Company has completed
the milestone deadline in paragraph J(iii) above in a timely manner, so long as
Company has completed its negotiations and delivered the Proposed Agreement to
Pharmaco prior to such deadline. Within ten (10) days of the earlier of (i)
Company's receipt of Pharmaco's written approval, (ii) expiration of the ten
(10) day review period if Pharmaco has not delivered its written objection or
(iii) receipt of an arbitral award in favor of Company under paragraph L below,
Company shall execute the Proposed Agreement and shall perform such Proposed
Agreement in accordance with its terms. If Company does not so execute the
Proposed Agreement within such ten (10) day period, Company shall be deemed to
have failed to meet the deadline in Article IV, paragraph J(iii) above.
2.3 A new paragraph L shall be added as follows:
L. If Pharmaco does deliver such written objections to the
Proposed Agreement on a timely basis and Company disagrees with such objections,
Company and Pharmaco shall immediately submit such dispute to expedited final
and binding arbitration in Minneapolis, Minnesota, by a single arbitrator
designated by the American Arbitration Association ("AAA"), with such
arbitration to be conducted under the AAA Commercial Arbitration Rules then in
effect. Any such arbitration shall be limited solely and exclusively to the
question of whether such Proposed Agreement constitutes a bona fide,
arm's-length transaction with a recognized healthcare products company and is
aimed at the pursuit of the development and commercialization of Licensed
Product(s). Each party in such an arbitration shall bear its legal costs and
attorneys' fees thereby incurred, and Company shall pay the costs of the
arbitration. The arbitral award may be enforced in any court of competent
jurisdiction. Company and Pharmaco shall give written notice of any such dispute
and arbitration to the University but shall not make the University a party
thereto or otherwise involve the University, provided, however, at the
University's election, the University or its legal counsel may observe any such
arbitration and receive copies of any materials submitted by either party to the
arbitrator.
3.0 ROYALTIES, REPORTS AND RECORDS
"ARTICLE V - ROYALTIES, REPORTS AND RECORDS" of the Original Agreement
shall be amended as follows:
3.1 Paragraph A shall be deleted in its entirety and replaced with
the following:
-4-
<PAGE>
A. From the Original Agreement Date, Company shall pay the
University as royalties an amount which represents one and one-half percent (1
1/2 %) of the Net Sales of Licensed Products. Net of the foregoing payments to
the University, Company shall pay or cause to be paid to Pharmaco a royalty of
fifty percent (50%) of the remaining Revenue Sharing Pool after accounting for
previous payments credited against royalty payments unless subparagraph (i) of
this paragraph A is applicable, in which event the Revenue Sharing Pool shall be
divided among Company, Pharmaco and any Third Party Source as provided therein.
In the event that no Subject Patent(s) issue, the royalty rates and term shall
be re-negotiated among the parties from the date that it is certain that no
Subject Patent(s) will issue.
(i) Company and Pharmaco acknowledge that, as of the Effective
Date, Company has insufficient cash to provide the Phase I
Study Funds. To attract a Third Party Source for the Phase I
Study Funds, at its sole election, Company may offer a
percentage of the Revenue Sharing Pool in exchange for such
Third Party Source's financing of the Phase I Studies. If
Company enters into an agreement with a Third Party Source to
provide the Phase I Study Funds, the percentages of the
Revenue Sharing Pool to be retained by the Company and to be
paid to Pharmaco shall be ***
(ii) If Company engages such a Third Party Source to provide the
Phase I Study Funds, Company shall give ten (10) days' written
notice thereof to Pharmaco and shall provide Pharmaco a copy
of the agreement with such Third Party Source.
3.2 The first sentence of paragraph B shall be deleted in its
entirety.
3.3 The second sentence of paragraph G shall be deleted in its
entirety and replaced with the following:
Company shall pay the University and Pharmaco within twenty (20) days
following Company's receipt of any lump sum payment or milestone payment from a
Sublicensee or any running royalty payments from a Sublicensee with respect to
such Sublicensee's Net Sales of Licensed Product. Company shall pay the
University and Pharmaco within sixty (60) days following each calendar quarter
with respect to Company's own Net Sales of Licensed Products.
3.4 Paragraph I shall be deleted in its entirety.
*** Confidential treatment requested pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934, as amended.
-5-
<PAGE>
4.0 TERM AND TERMINATION
"ARTICLE VII - TERM AND TERMINATION" shall be amended as follows:
Paragraph B(3) and the final sentence of paragraph B shall be deleted
and replaced with the following:
(3) if Company fails to meet any of the milestone deadlines in
paragraph J of Article IV and has not purchased any
extension(s) thereof from Pharmaco as provided therein.
If Company does not cure or take substantial measures to cure the
above-specified conditions within sixty (60) days of receipt of notice
of termination in the case of subparagraphs (1) or (2) or ten (10) days
of receipt of notice of termination in the case of subparagraph (3),
such termination shall become effective.
5.0 COUNTERPART EXECUTION; FACSIMILE TRANSMISSION
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument. The parties acknowledge that each may rely upon the
other party's facsimile transmission of its executed counterpart hereof,
provided, each party shall exchange executed originals by mail or courier
service as soon as practicable thereafter.
-6-
<PAGE>
IN WITNESS WHEREOF, Pharmaco, the University and Company have caused
this Agreement to be executed by their duly authorized officers.
REGENTS OF THE UNIVERSITY LECTEC CORPORATION
OF MINNESOTA
By:/s/ Anthony L. Strauss By:/s/ Rodney A. Young
------------------------- ------------------------
Anthony L. Strauss Rodney A. Young
Director CEO and President
PHARMACO BEHAVIORAL
ASSOCIATES, INC.
By:/s/ Robert M. Keenan, M.D., Ph.D.
----------------------------------
Robert M. Keenan, M.D., Ph.D.
Chief Executive Officer and Chairman
-7-
EXHIBIT 10.02
SEPARATE LICENSE AGREEMENT
THIS AGREEMENT is made as of December 31, 1998 by and between LECTEC
CORPORATION, a Minnesota corporation, having offices at 10701 Red Circle Drive,
Minnetonka, Minnesota 55343 ("Company"), and ROBERT M. KEENAN, M.D., Ph.D., an
individual resident of Maryland, having offices at 810 Gleneagles Court, Suite
310, Towson, Maryland 21286 ("Keenan").
Recitals
WHEREAS, Keenan owns the rights to a United States patent No.
5,573,774, entitled "Nicotine Metabolites, Nicotine Dependence and Human Body
Weight" and issued on November 12, 1996, and to three U.S. patent applications,
Serial No. 12,379, filed February 2, 1993, Serial No. 236,190, filed May 2, 1994
and Serial No. 08/745,996, filed ____________ (collectively, the "Keenan
Patents");
WHEREAS, Company, The Regents of the University of Minnesota and
Pharmaco Behavioral Associates, Inc., a Minnesota corporation, are parties to
that certain License Agreement dated March 9, 1993, as amended as of December
31, 1998 ("the Pharmaco License Agreement");
WHEREAS, Company desires to obtain a license to make, have made, use
and sell products utilizing the cotinine portion of the Keenan Patents and
improvements thereon (but not as to any other portions of such patent or patent
applications);
NOW, THEREFORE, in consideration of the premises, the license granted
herein, and the covenants and conditions herein contained; the parties agree as
follows:
ARTICLE I - Incorporation by Reference
Company and Keenan do hereby adopt and incorporate by reference herein
the following provisions of the Pharmaco License Agreement as if such Agreement
were written to apply to Keenan as the sole licensor and the cotinine portions
only of the Keenan Patents as the sole licensed patents or patent applications
thereunder:
Article I - Definitions of "Technology," "Improvements," "Subject
Patent Applications," "Subject Patent(s)," "Licensed Product(s),"
"Affiliate(s)" and "Sublicensee(s)"
Article III - Inventions and Patent Applications
Article IV - License Grant and Commercial Effort, subject to Article IV
below
Article VI - Infringement
Article VIII - Confidential Information and Non-Disclosure
<PAGE>
Article IX - Indemnification
Article X - Miscellaneous, provided, however, any notice sent to Keenan
shall be addressed to him as provided at the top of page 1 hereof.
ARTICLE II - Representations or Warranties
To the best of Keenan's knowledge, Keenan owns and has the exclusive
right to use and license the Keenan Patents, free and clear of all material
liens, claims and restrictions, and, to the best of Keenan's knowledge, the use
of the Keenan Patents will not infringe on or otherwise act adversely to the
right or claimed right of any person under or with respect to any patent,
trademark, tradename, copyright, trade secret or other intangible asset. Except
as set forth in the preceding sentence, Keenan disclaims all other
representations or warranties, express or implied.
ARTICLE III - Limited License; No Other Rights
Any other provision notwithstanding, the license granted herein to
Company is limited solely and exclusively to the cotinine portions of the Keenan
Patents for weight loss or smoking cessation. No rights are granted herein as to
any other chemical compounds cited in the Keenan Patents or for any other use.
ARTICLE IV - Consideration
Upon execution of this Agreement, Company shall pay Keenan One Hundred
Dollars ($ 100.00) as the sole and exclusive compensation for the license of the
Keenan Patents.
ARTICLE V - Term and Termination
Keenan shall have the right to terminate this Agreement and the license
granted hereunder upon the same conditions and with same notice to Company as
Pharmaco may terminate the Pharmaco License Agreement under Article VII thereof.
IN WITNESS WHEREOF, Company and Keenan have caused this Agreement to be
duly executed as of the date noted on page 1 hereof.
LECTEC CORPORATION
By:/s/ Rodney A. Young /s/ Robert M. Keenan, M.D., Ph.D.
--------------------------- ---------------------------------
Rodney A. Young, Robert M. Keenan, M.D., Ph.D.
CEO and President
-2-
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