Exhibit 10.02





Exhibit 10.02




SUPPLY AND LICENSE AGREEMENT




THIS SUPPLY AND LICENSE AGREEMENT (“Agreement”) entered into as of January 1, 2004 (the
“Effective Date”) by and between NOVARTIS CONSUMER HEALTH, INC., 200 Kimball Drive, Parsippany, NJ
07054, a Delaware corporation (“Novartis”) and LECTEC CORPORATION, 10701 Red Circle Drive,
Minnetonka, MN 55343, a Minnesota corporation (“LecTec”).



Recitals





	A.	 	LecTec is a manufacturer of medical and health-related consumer products, including a line of
proprietary patch products for the over-the-counter market which emit vapors which, when
inhaled, provide relief of cough and cold symptoms (the “Vapor Patches”). LecTec manufactures
and sells such patch products under its own trade names and also manufactures and sells
certain of such patch products to third parties.







	B.	 	Novartis is a manufacturer and reseller of health-related consumer products.







	C.	 	The parties entered into a Supply and Non-Exclusive License Agreement dated as of May 8, 2002
(the “Prior Agreement”) pursuant to which Novartis undertook to purchase, and LecTec undertook
to manufacture and sell to Novartis, certain LecTec patch products. As used herein “Products”
shall mean Vapor Patches for sale to the pediatric market (the “Field of Use”) in the United
States, Canada and Mexico (the “Territory”). The licensed patents are shown in Exhibit C
(the “Licensed Patents”) and made a part of this Agreement. All capitalized terms used herein
and not otherwise defined have the meanings ascribed to them in the Prior Agreement.







	D.	 	Pursuant to the terms of the Prior Agreement, Novartis provided financial assistance to
LecTec in the form of advance payments of the purchase price of the Products and LecTec issued
the Advance Payment Note to Novartis and granted a security interest and a non-exclusive
license to Novartis for the purpose of securing LecTec’s performance and repayment
obligations.







	E.	 	LecTec is indebted to Novartis for (i) an unpaid balance of the Advance Payment Note due and
payable as of December 31, 2003 (as extended by mutual agreement of the parties) in the amount
of one million thirty thousand twenty-one and 00/100 dollars ($1,030,021.00); (ii) an
additional obligation defined in the Prior Agreement and referred to herein as the “Recall
Debt;”








	 	 	 
	**	 	The appearance of a double asterisk denotes confidential information that has
been omitted from the exhibit and filed separately, accompanied by a confidential treatment
request, with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.




 


 









 






	F.	 	and (iii) the balance of the net advance payments of the purchase price of the Products made
to LecTec subsequent to December 31, 2003, after credit has been given for the aggregate
purchase price of all Products delivered by LecTec to Novartis.







	F.	 	LecTec has informed Novartis that it intends to discontinue its manufacturing operations and
wind up its business and that it desires to do so in a manner that (i) will enable it to
discontinue such operations in an orderly manner consistent with the preservation of the value
of LecTec’s assets, and (ii) will provide for an orderly transition from LecTec to Novartis
(or to a contract manufacturer designated by Novartis) of the manufacturing function with
regard to the Products.







	G.	 	Novartis has been providing and is willing to continue to provide financial assistance to
LecTec, pursuant to the terms set forth in this Agreement, by way of additional advance
payments for Products, which financial assistance is required by LecTec to enable it to
accomplish the discontinuance of manufacturing operations as described above.






NOW, THEREFORE, in consideration of the premises and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be bound,
hereby agree as follows:



Article 1

Inventory Requirements and Other Obligations




1.1 Production and Sale of Product Inventory. From the Effective Date until
February 5, 2005 or such earlier or later date as the parties may mutually agree upon (the
“Manufacturing Period”), LecTec shall manufacture, sell and cause to be delivered to Novartis,
Products in the quantities set forth in the Purchase Order and Novartis shall purchase such
Products in the quantities and at the prices set forth in the Purchase Order. As used herein,
“Purchase Order” shall mean the order by Novartis for Products at the prices and upon the delivery
schedule to be purchased by Novartis during the Manufacturing Period as set forth in Exhibit
1.1 hereto and made a part hereof.



1.2 Exclusivity. LecTec shall manufacture and sell the Products exclusively to Novartis,
provided, however, that the term “exclusively” as used herein shall be limited to mean that LecTec
may not manufacture the Products or any other Vapor Patches (collectively, “Comparable Products”)
for sale to any other customers for pediatric use (the “Field of Use”) in the United States, Canada
or Mexico (the “Territory”). Novartis shall have the option until March 31, 2005 to extend the
Territory and the exclusive Field of Use to the adult cough/cold category at no additional cost and
under the same terms and conditions set forth in this Agreement.


 


 









 





1.3 Regulatory Compliance. As set forth below, LecTec shall be responsible for regulatory
compliance in the manufacture of the Products and supply of same to Novartis. Novartis shall be
responsible for regulatory compliance in the proper labeling, promotion, and advertising of the
Products and the sale of same to end users according to existing OTC monograph requirements,
directly or indirectly, which shall be under the exclusive control of Novartis. The parties shall
cooperate in good faith to achieve such regulatory compliance.



1.4 Production Standards. All Products sold and delivered to Novartis hereunder shall (a)
conform in all material respects with the specifications set forth in that certain Quality
Assurance Agreement by and between Novartis and LecTec, dated as of May 5, 2000 (the “QA
Agreement”), and with such further specifications as shall be agreed to by all parties in writing
(the “Specifications”); (b) be manufactured, packaged and sold to Novartis without any material
deviation from or breach of (i) the QA Agreement, and (ii) any applicable laws, regulations, and
requirements of any government or governmental agency; and (iii) be subject to the warranties set
forth in this Agreement.



1.5 Brand Name. Novartis intends to market the Products under the proprietary names “Vapor
Patch” or “VaporPatch” (as selected by Novartis in its own discretion). LecTec hereby acknowledges
that it has no objection to Novartis seeking to register such names at its own expense and risk
with the United States Trademark Office, or with other authorities, and shall file its consent
thereto, as requested in writing by Novartis, but LecTec does not warrant or imply that such marks
are otherwise available or will be granted. LecTec shall give commercially reasonable cooperation
to Novartis to manufacture and label the Products with such name or names or other names as
Novartis, in its sole discretion, may designate from time to time during the term of this
Agreement. However, subject to the foregoing, nothing herein shall be deemed to authorize the use
of any LecTec trade name or trademark or any other mark that would dilute or reasonably tend to
dilute any such LecTec trade name or trademark.



1.6 Amendment of Purchase Order. LecTec shall use its commercially reasonable efforts to
accommodate any Novartis requests for delivery of Products in excess of the quantities described in
the Purchase Order, or for delivery of Products sooner than that allowed or specified in the
Purchase Order. If Novartis’ business conditions necessitate reduction or delay in its
requirements for Products, then LecTec shall use its commercially reasonable efforts to implement
such requested changes. Notwithstanding the foregoing, LecTec shall not take any action in response
to any such requests which would result in charges to Novartis in addition to those set forth in
the respective purchase order without Novartis’ prior written consent.


 


 









 





Article 2

Payment




2.1 Prices. In consideration of the satisfactory manufacture and delivery to Novartis of
the ordered quantities of Products, Novartis shall pay LecTec for the Products in accordance with
the prices set forth in Exhibit 2.1. Subject to the
provisions of Section. 2.5 hereof, Novartis shall make such payments within thirty (30) days of the date of each LecTec
invoice issued upon shipment of the Products. Such payments shall be without prejudice to the
inspection and credit rights of Novartis under Article 3 of this Agreement.



2.2 Taxes. Novartis shall bear the cost of taxes of any kind, nature or description
whatsoever applicable to the sale of any Products by LecTec to Novartis (other than taxes based
upon the income of LecTec or LecTec’s employees or due to the fact that LecTec conducts business or
otherwise is present in a particular tax jurisdiction), unless Novartis is exempt therefrom and
provides to LecTec tax exemption certificates or permits acceptable to the appropriate taxing
authorities.



2.3 Shipment. Shipping terms for the Products are F.O.B., LecTec’s manufacturing
facilities in either Minnetonka or Edina, Minnesota. Novartis shall designate in writing the
carrier(s) it selects to take delivery of the Products at such facilities and shall provide LecTec
with commercially reasonable shipping and packing instructions as Novartis deems appropriate. Risk
of loss of any Products shall pass to Novartis upon delivery to the carrier designated by Novartis.



2.4 Late Delivery Discount. Subject to Section 12.11, if LecTec fails to deliver the
Products in the quantities ordered within seven (7) days of the any delivery date specified in the
Purchase Order, then Novartis shall be entitled to a discount of five percent (5%) of the price of
the late-delivered Products for each week that delivery is delayed, up to a maximum discount of
twenty percent (20%); provided, however, that if such delay in delivery is caused by Novartis’
batch record review or release of a releasable Batch (as used in this Agreement, “Batch” shall mean
525 cases of the Products as provided to Novartis for subsequent packaging for retail sale),
Novartis shall not be entitled to any discount hereunder. For purposes of this Agreement, delivery
of a shipment of Products shall occur when LecTec tenders such shipment to Novartis’ designated
carrier at LecTec’s facility, and any delay incurred thereafter by Novartis’ designated carrier
shall be deemed beyond LecTec’s control or responsibility.



2.5 Advance Payments. In order to provide LecTec with working capital funds necessary to
enable it to manufacture and deliver Products to Novartis pursuant to this Agreement, Novartis
shall advance funds (each such advance, an “Advance Payment” and, collectively, the “Advance
Payments”) to LecTec for use by LecTec (a) to pay current accounts payable and expenses not
exceeding $2,000,000.00 in the aggregate and thereafter (b) exclusively for the manufacture and
delivery of Products. Subject to the full and timely performance by LecTec of the Product shipment
requirements set forth in the Purchase Order and all other obligations of LecTec under this
Agreement, Novartis shall disburse the Advance Payments to LecTec in installments in accordance
with the schedule designated as “LecTec Payments” in Exhibit 2.5.


 


 









 





Novartis shall have no obligation to disburse any Advance Payment (x) if LecTec shall fail to
make any delivery of Products to Novartis in strict compliance with the provisions of the Purchase
Order, time being of the essence or (y) if such Advance
Payment would cause the unpaid principal balance of the New Advance Payment Note, as defined
in Section 2.5.1 to exceed $2,000,000.00 In the event that Novartis shall withhold any Advance
Payment by reason of clause (y) in the preceding sentence, Novartis shall thereafter disburse the
withheld Advance Payment, in whole or in part, from time to time at the request of LecTec at such
time or times as the making of such disbursement will not cause the unpaid principal balance of the
New Advance Payment Note to exceed $2,000,000.00, provided that Novartis shall have no obligation
to disburse such withheld Advance Payment unless LecTec shall be in compliance with its obligations
under this Agreement at the time of its request therefore.




2.5.1 The Advance Payments disbursed to LecTec as provided in Section 2.5 together with the
outstanding balance of advances made by Novartis to LecTec on and after the date of the
Prior Agreement, including such amounts advanced subsequent to December 31, 2003, as set
forth in Schedule 2.5.1 (“Schedule of Inventory Payments”) annexed hereto and made a part
of this Agreement shall be deemed to be a loan from Novartis to LecTec. On the Effective
Date, LecTec shall execute and deliver to Novartis (a) a promissory note in the principal
amount of $2,000,000.00 in the form attached hereto as Exhibit 2.5.1(a) (the “New
Advance Payment Note”), (b) a security agreement in the form attached hereto as Exhibit
2.5.1(b) (“New Security Agreement”), and (c) such other documents as shall reasonably
be deemed necessary by Novartis to perfect its security interests in the assets of LecTec
as provided in the Security Agreement.




2.5.2 Unless otherwise prepaid in accordance with the terms of the Advance Payment Note,
LecTec shall repay the principal amount of the New Advance Payment Note (or so much thereof
as shall actually have been disbursed to it in accordance with the provisions of Section
2.5) in monthly installments equal to the aggregate purchase price of all Products
delivered by LecTec to Novartis during such calendar month pursuant to the Purchase Order.
Novartis shall credit the aggregate purchase price of Products delivered, determined as
provided in this Agreement, against the payment obligations of LecTec under or by reason
of (a) first, the outstanding balance as of the Effective Date of advances made to LecTec
until such balance and all obligations of LecTec under the Advance Payment Note shall have
been fully satisfied and (b) second, the New Advance Payment Note, and such credits shall
constitute full payment by Novartis of the purchase price of such Products until such time
as all of LecTec’s obligations under Section 2.5.1 shall have been paid in full.




2.5.3 Notwithstanding the provisions of Section 10.2 of this Agreement, LecTec shall be
deemed to be in default of its obligations under Section 2.5.2: (a) if, during the
Manufacturing Period, two consecutive Batches, as defined in Section 2.4 or any three
Batches, as so defined, are rejected by Novartis based upon a commercially reasonable
determination by Novartis, made without regard to the procedures set forth in Article 3 of
this Agreement, that such Batches, as so defined, fail to comply with the Product quality
provisions of Section 8.1 of this Agreement, or (b) if LecTec shall fail to deliver any
Batch, as so defined, by the
later of (i) the thirty (30) day period commencing upon Novartis’ QA release or rejection
and (ii) thirty (30) days following the date specified for delivery in the Purchase Order,
unless such failure to make timely delivery is attributable exclusively to changes ordered
by Novartis in Product specifications or Product packaging specifications.


 


 









 





Article 3

Inspections and Acceptance




3.1 Inspection; Right of Rejection. Novartis shall accept any delivery of Products
hereunder if, in Novartis’ sole and reasonable discretion, Novartis determines that the delivery
complies fully with the Purchase Order, the Specifications and the requirements of this Agreement.
Novartis shall have the right to inspect all Products delivered hereunder within thirty (30) days
of its receipt of the Products and all required documentation. Novartis shall provide LecTec with
written notice of its acceptance or rejection of the shipment within sixty (60) days of receipt of
the Products and all required documentation. Any notice of rejection shall specify the reason(s)
therefor. Except in the event of any investigation, corrective action or retesting of a shipment,
if Novartis fails to provide LecTec with written notice of its acceptance or rejection of the
shipment within sixty (60) days of receipt of the Products and all required documentation, then the
shipment shall be deemed to have been accepted by Novartis. Novartis’ prior payment of any invoice
for a shipment which is timely rejected under this Section 3.1 shall not prejudice Novartis’ right
under Section 3.2 to seek replacement Products or a credit or refund, as Novartis may deem
appropriate, with respect to any such rejected Products.



3.2 Replacements. If Novartis notifies LecTec that any Products, or any part thereof, are
rejected pursuant to Section 3.1, then, at Novartis’ option, (a) LecTec shall, at no additional
charge, deliver replacement Products to Novartis as soon as reasonably practicable thereafter (but,
in any event, within ninety (90) days after the initial notification by Novartis); or (b) the
quantity of Products so rejected shall be deemed to have been deleted from the Purchase Order, and
Novartis shall not be obligated to make any payments to LecTec with respect to such quantity or
the rejected shipment (or, if payment has already been made for such Products, then Novartis shall
be entitled to a credit in such amount). Novartis shall give commercially reasonable cooperation
to LecTec to determine the nature and extent of any problem giving rise to a rejection of Products,
including, without limitation, prompt samples of any allegedly non-conforming Products.



3.3 Returns. Novartis shall not return any rejected Products to LecTec except upon a
return material authorization (“RMA”) from LecTec. LecTec shall pay the freight to deliver
replacement Products to Novartis for rightfully rejected Products, and LecTec shall pay the freight
to return to LecTec or its designee rejected Products for which LecTec has provided to Novartis an
RMA.


 


 









 





Article 4

Documentation and Information




4.1 Confirmation. LecTec shall submit to Novartis the batch manufacturing and testing
documents relating to any Products ordered hereunder, within ten (10) days of the completion of the
manufacturing process with respect to any particular batch of Products. LecTec shall provide such
documentation as reasonably requested by Novartis solely (a) to assist Novartis in determining
whether any manufactured or delivered Products comply fully with the Specifications and the
requirements of this Agreement; (b) to assist Novartis in obtaining any and all regulatory
approvals necessary to market the Products in the Territory; or (c) to enable Novartis to comply
with any statutory or regulatory requirements or with a request by any governmental or regulatory
authority in the Territory. Such records and reports shall be subject to the confidentiality
provisions of Article 7 of this Agreement, shall be deemed LecTec’s Confidential Information, and
shall be subject to the requirements of Section 1.3 of the QA Agreement.



4.2 Certificate of Analysis. Every shipment of the Products to Novartis shall be
accompanied by a Certificate of Analysis from LecTec to certify the active ingredients therein.
LecTec shall warrant the accuracy of each such Certificate of Analysis to a reasonable degree of
scientific certainty.



4.3 Books and Records. During the Manufacturing Period, LecTec shall keep on file all
books and records in connection with the manufacture and testing of the Products, including, but
not limited to, those books and records relating to cross-over cleaning, process validation,
installation qualification, operational qualification and cleaning validation for a period of seven
(7) years, plus the active year, from the time of generation of such documents.



Article 5

Production Procedures




5.1 No Reworked Products. LecTec shall not rework or reprocess any non-conforming Products
without the prior written approval of Novartis.



5.2 Product Packaging. The Products shall be delivered to Novartis packaged in accordance
with the Specifications and the production schedule set forth in
Exhibit 1.1. At a time
designated by Novartis, it shall have the Products packaged with another packager and the cost of
the Products from LecTec shall be reduced as set forth in Exhibit 2.1. Notwithstanding
the foregoing, Novartis shall have the right to require any special or varied packing that it
believes is reasonably necessary to meet customs or regulatory requirements. Reasonable
incremental costs which result directly from any packing changes required by Novartis will be borne
by Novartis.


 


 









 





5.3 Production Procedures. LecTec’s production procedures for the Products (“Production
Procedures”) have previously been approved by the parties. Such
Production Procedures include the manufacturing site, manufacturing equipment, manufacturing
process, manufacturing conditions and testing procedures for the manufacture of the Products. If
LecTec wishes to make any material change in any of the Production Procedures so documented and
approved, LecTec shall provide notice thereof to a designated Novartis employee, and shall permit
such designated Novartis employee to review such proposed changes at LecTec’s facility, at least
thirty (30) days prior to its first production run under such revised Production Procedures. All
such changes to the Production Procedures must be approved in writing by Novartis prior to being
implemented, which approval shall not unreasonably be withheld.



5.4 Waste Disposal. LecTec represents and warrants, to the best of its knowledge, and
shall take all commercially reasonable actions necessary to ensure, that all facilities, equipment
and practices used to perform LecTec’s responsibilities under this Agreement by or on behalf of
LecTec, or by any of LecTec’s contractors of any rank (including, without limitation, environmental
or safety and health consultants or waste management or disposal firms) (each a “LecTec
Contractor”) will be during the term of this Agreement, in full compliance with all health, safety
and environmental laws, statutes, ordinances, regulations, rules, permits and pronouncements.
LecTec assumes responsibility for disposing of any and all waste generated during the performance
of its responsibilities under this Agreement (including, without limitation, during any
manufacturing, storage and transportation activities) in accordance with all legal and professional
standards.




5.4.1 LecTec shall Dispose or arrange for the Disposal of Waste and at an Approved Disposal
Facility. Novartis shall have the right to unilaterally modify any designation of any
Approved Disposal Facility at any time based upon audit and inspection results. LecTec
shall only transport Waste to an Approved Disposal Facility by means of a transporter
lawfully permitted to transport the particular types of Waste at issue. LecTec shall be
solely responsible for the proper Disposal of Waste. For purposes of this Section 5.4.1,




5.4.1.1 “Dispose” or “Disposal” shall mean any discharge, deposit, injection,
dumping, spilling, leaking, or placing of any Waste into or on any land or water
and the arrangement of any of the foregoing, and shall include any storage,
pretreatment, treatment (including incineration), any other actual disposal, use,
sale, sampling or other transfer or application of Waste of any kind or nature
whatsoever;




5.4.1.2 “Waste” shall mean, for purposes of this Agreement only, all materials that
are produced or generated in connection with the manufacture of any chemical
compounds pursuant to this Agreement and for which Disposal is required, including
but not limited to materials that are Hazardous Waste, co-product, by-product,
chemical compounds that fail to conform to the requirements of this Agreement,
wastewaters, residues, wastes, bottoms and other remainders and materials,
packaging of, or components of the chemical compounds, and components of any
chemical compounds that are not used in the manufacture of the chemical compounds;


 


 









 






5.4.1.3 “Hazardous Waste” shall mean (a) any material or substance defined as or
containing materials defined as a “hazardous substance” pursuant to any applicable
laws or regulations, including the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, the Resource Conservation and Recovery
Act, as amended, and any similar successor or supplementary legislation, and the
regulations promulgated thereunder, or (b) any material or substance that is
radioactive; and




5.4.1.4 “Approved Disposal Facility” shall mean a disposal facility approved by
Novartis, which approval shall not be unreasonably withheld.




5.4.2 Notwithstanding anything to the contrary herein, (i) if LecTec and/or any LecTec
Contractor fails to comply with the obligations set forth in this Section 5.4, then LecTec
shall be responsible for any claims, suits, or liabilities resulting therefrom (including,
without limitation, those based on strict liability and joint and several liability), and
LecTec shall indemnify, defend and save Novartis (including officers, directors, employees
and agents of Novartis) harmless from and against any and all such claims, suits, and
liabilities; and (ii) LecTec shall indemnify, defend and save Novartis (including officers,
directors, employees and agents of Novartis) harmless from and against any and all claims,
suits, and liabilities which arise directly or indirectly from the storage, release,
transportation or disposal of chemicals, raw materials, product, waste or any other
substance by LecTec and/or any LecTec Contractor.



Article 6

Ownership, Patent and License Provisions




6.1 Novartis Property. All materials, inventions, know-how, trademarks, information, data,
writings and other property, in any form whatsoever, which is provided to LecTec by and/or on
behalf of Novartis, or which is used by LecTec with respect to the performance of its obligations
hereunder, and which was owned by Novartis prior to being provided to LecTec, shall remain the
property of Novartis (the “Novartis Property”). LecTec shall have a royalty-free license to use any
Novartis Property supplied to it solely to the extent necessary to enable LecTec to perform its
obligations hereunder. LecTec shall not acquire any other right, title or interest in the Novartis
Property as a result of its performance hereunder. Without limiting the foregoing, Novartis
Property shall include the copyrights and trademarks used in the packaging of the Products
(“Packaging IP Rights”).


 


 









 





6.2 License to Novartis.




6.2.1 A promissory note issued by LecTec to Novartis to evidence the Recall Debt of LecTec
to Novartis in the amount of $250,000 (the “Recall Debt Note”) became due and payable, by
its terms, on December 31, 2003.




6.2.2 Upon the signing of this Agreement by both parties, Novartis shall release the
Recall Debt and forgive and relinquish any claim for payment of any of the obligations of
LecTec under the Recall Debt Note in partial consideration of the sale by LecTec to
Novartis of the license described in Section 6.2.3.




6.2.3 On the Effective Date, LecTec shall grant to Novartis, and Novartis shall accept, a
license (the “License”) to all of the intellectual property of LecTec used or useful in the
production of the Products including, without limitation, the trade name “Triaminic Vapor
Patch,” the Licensed Patents listed in Exhibit C, designs, bills of material, manufacturing
procedures, and know-how associated with the Products, together with copies of any
documentary materials embodying the know-how used in the design, packaging, testing and
production of the Products (collectively, the “Intellectual Property”). For the sake of
clarity, the Intellectual Property shall not include any other LecTec trade names and shall
not extend to the foregoing materials used in the design and production of Comparable
Products (as such term is defined in Section 1.2 hereof) to the extent such Intellectual
Property is not also used or useful in the design and production of the Products. The
License shall give Novartis the exclusive right to manufacture and sell the Products for
the Field of Use within the Territory. The term of the License shall be co-terminous with
the duration of any patents included in the Intellectual Property and, with respect to all
other elements of the Intellectual Property, shall be for the maximum duration permitted
under applicable law, and shall continue beyond the end of the Manufacturing Period of
Section 1.1 and Exhibit 1.1. All terms, conditions and obligations of this Agreement that
are required, or relate to, or are appropriate for this License, including but not limited
to the Royalties of Section 6.2.3.1 shall continue in full force and effect beyond the
Manufacturing Period and until the term of this License expires. Upon the expiration of
the patents included in the Intellectual Property, Novartis shall have a non-revocable,
perpetual, fully paid-up, royalty-free license to the Intellectual Property.




The License shall include the right of Novartis to grant sublicenses to any Novartis
Affiliate or any other third party contract manufacturer of the Products, provided, in each
case (i) such sublicensee shall manufacture the Products only for Novartis; (ii) Novartis
shall give written notice to LecTec of the grant of such sublicense at least ten (10) days
prior to the effective date of such sublicense; (iii) such sublicense shall terminate when
the License terminates; and (iv) Novartis shall give prompt written notice to LecTec if
Novartis becomes aware that there has been a material breach of any of the foregoing terms
by a sublicensee. The License shall be assignable by Novartis to any Novartis Affiliate or
to any entity that is a successor to Novartis by merger or sale of all or substantially all
of the assets of Novartis or to any entity that acquires from Novartis the rights to
manufacture, distribute or sell the Product so long as (i) such acquiror or
successor in interest agrees in writing to be bound by all the terms and conditions hereof;
and (ii) Novartis shall first give LecTec written notice of any such assignment. Any
purported assignment, transfer, or attempt to assign or transfer any interest or right
hereunder except in compliance with this Section 6.2.3 shall be null, void and of no
effect. Any such assignment shall be subject to the limitations on duration and scope of
the License set forth in Article 6.


 


 









 






6.2.3.1 Licensing Fee and License Royalty Rate. The Licensing Fee for the
License described in Section 6.2.3 shall be $ 1,065,000.00. This amount shall be paid
to Lectec by (i) forgiveness of the Recall Debt Note as stated under Section 6.2.2,
(ii) payment of $407,500.00 in cash within ten (10) days of execution of this Agreement
and (iii) payment of $407,500.00 in cash on October 1, 2004. Commencing on January 1,
2005 Novartis shall pay Royalties to LecTec based on net semi-annual sales of Products
by Novartis for each year the license is in effect. The term “net sales” as used in
Section 6.2.3.1 shall mean gross revenues from the arms-length sale to unaffiliated
third-parties of Products manufactured by or on behalf of Novartis pursuant to the
License less transportation charges to customers, including insurance; sales, excise
and taxes and duties paid or allowed and any other governmental charges imposed upon
the sale of any Products; Product royalties to any party other than LecTec, normal and
customary trade, quantity and cash discounts allowed; allowances, chargebacks and
credits to customers on account of rejection or return of Product. Royalties pursuant
to Section 6.2.3.1 shall be payable semi-annually not later than ninety (90) days
following the end of Novartis’ two-quarter period by certified check or wire transfer
payable to LecTec or its assignee. Novartis shall furnish to LecTec or its assignee,
at the time of each semi-annual royalty payment, an accounting of its net sales of
Product in reasonable detail. Royalty Rates are based on semi-annual sales and are
shown in Exhibit 6.2.3.1 hereto and made a part hereof. For the sake of clarity,
Novartis shall not owe any royalty payments for any vapor patch products distributed by
Novartis that would not infringe or contribute to the infringement of a valid,
enforceable claim of the licensed patents listed in Exhibit C.




Solely to ensure proper accounting for and payment of the royalties due LecTec under
Article 6, LecTec may request, not more than once per calendar year during the term of
the License, reasonable access during normal business hours and upon at least ten (10)
days prior written notice by LecTec’s independent certified accountants, reasonably
acceptable to Novartis(“LecTec Auditor”), to examine and copy the records of Novartis
relating to the sale of Products during the term of the License. The LecTec Auditor
may not disclose any such Novartis records to LecTec but shall report to LecTec and
Novartis only the results of its audit in respect of whether Novartis has properly
accounted for and paid the royalties due to LecTec under Article 6, which report shall
be final and binding upon the parties. Except in the case of fraud or manifest error,
LecTec shall bear the cost of any such audit by the
LecTec Auditor. If such audit determines that Novartis has underpaid any royalties,
Novartis shall promptly pay the amount underpaid and simple interest thereon at the
rate of ** per annum and also the LecTec audit cost in the event such underpayment
exceeds ** of the royalties due. Any other provision of this Section 6.3.2.1 to the
contrary not withstanding, LecTec may not request the audit of Novartis records for any
royalty period more than two (2) years prior to the date of such request.


 


 









 





6.3 Third Party Obligation — Reduction in Royalties. In the event Novartis is required
or enters into a settlement agreement to obtain a license from any unaffiliated third party
under any patent or other intellectual property right and is obligated to pay a royalty to
such unaffiliated third party or parties in any country in respect of the Product or its
method of use, for which royalties are due under this Agreement, and such third party patent
or intellectual property right overlaps the patents of Exhibit C then Novartis shall have the
right to deduct the amount of such royalties which Novartis pays to such unaffiliated party or
parties for such product in such country from the royalties to be paid to LecTec under this
Agreement for such product in such country, the deduction being limited to a maximum of ** of
the royalties to be paid to LecTec for sale in such country provided that Novartis’ combined
royalty payments to LecTec and such unaffiliated party or parties do not exceed a total of **.
Any excess in the amount of royalties paid by Novartis to an unaffiliated third party or
parties over the amount of royalties payable to LecTec under this Agreement, shall be carried
forward to future royalty payments until such excess amounts are fully exhausted.



LecTec warrants that it has no licenses to third party patent holders or royalty
obligations to third parties that concern the manufacture, sale, offer for sale, use or
import of the Product. Without limiting the generality of the foregoing, LecTec shall
remain responsible for any royalty obligations due to third parties under LecTec Patent
Rights which have been licensed to LecTec and are sub-licensed to Novartis hereunder.
LecTec will not be entitled to add such royalties due to third parties to the Novartis
royalty rates.



6.4 Third Party Competition. In the event competition in the sale of a Product that
would, in the opinion of Novartis patent counsel, infringe the patents of Exhibit C
(“Competitive Product”) occur in the Territory, LecTec shall, at the request of Novartis,
commence legal action against, or settlement negotiations with, the independent third party to
cause the cessation of the making, having made, selling or distributing the Competitive
Product, or to reach a settlement with the independent third party. Should such Competitive
Product achieve ** ACV (All Commodity Volume) distribution in any Food or Drug or Mass (FDM)
channel in any country in the Territory, then any royalty otherwise payable for said country
shall be suspended until such time that the independent third party ceases to make, have made,
sell or distribute the Competitive Product in said country. Such suspension of royalty
payments shall be effective on the date of Novartis’ written notification to LecTec of the
aforesaid distribution level of such Competitive
Product. Upon cessation of manufacturing and distribution of the Competitive Product by the
third party or settlement with the third party, any suspended Royalty payments shall resume
as if never suspended.


 


 









 





6.5 Notification. Each party hereto shall promptly inform the other party of any
infringement of the LecTec Patent Rights of which it has knowledge.



6.6 Right to bring action. Novartis shall have the right, in its sole discretion, to
initiate legal action in respect of any infringement of the LecTec Patent Rights in the Field
of Use in the Territory. In any suit against an infringement brought by either party, the
prosecuting party shall have the right to control such suit and to join as a party to such
suit the other party to the Agreement, and such other party shall reasonably cooperate in any
such suit.



6.7 Costs and Expenses: Recovery. The costs and expenses (including attorneys’ fees) of
any suit against an infringement brought in accordance with this Section 6 shall be borne by
the party controlling the prosecution of such suit. Any monetary recovery in connection with
such infringement action shall first be applied to reimburse Novartis and LecTec for their
out-of-pocket expenses (including reasonable attorneys’ fees) in prosecuting such infringement
action. Once the parties have been reimbursed for their out-of-pocket expenses, the remainder
will be apportioned in proportion to damages incurred by the parties.



6.8 LecTec shall promptly advise Novartis of any additions to, or deletions from the list of
LecTec’s Patents set forth in Exhibit C, including the issuance of patents upon any patent
applications included therein.



6.9 LecTec shall, at its expense, diligently take all steps and incur all costs necessary to
maintain the LecTec Patents on Exhibt C in full force and effect. If LecTec shall elect not
maintain any of such Patents, it shall promptly notify Novartis of that election and shall, at
Novartis’ request, assign to Novartis or its designee all right, title and interest in and to
such Patents, and the payment of a royalty hereunder shall cease.



6.10 LecTec Property. Subject to the provisions of Sections 6.2 and 6.9, all materials,
inventions, know-how, trademarks, information, data, writings and other property, in any form
whatsoever, which is provided to Novartis by or on behalf of LecTec, or which is used by
LecTec with respect to the performance of its obligations hereunder, and which was owned by
LecTec prior to its performance or is developed or acquired in the course of such performance
hereunder, shall remain the property of LecTec (the “LecTec Property”). Novartis shall acquire
no right, title or interest in the LecTec Property as a result of LecTec’s performance
hereunder except as provided in Sections 6.2 and 6.9. Without limiting the foregoing, as
between the parties hereto, all the intellectual property rights for the Products other than
the Packaging IP Rights shall be deemed to be LecTec Property subject to the License granted
to Novartis under Section 6.2 hereof.


 


 









 





Article 7

Trade Secrets; Confidentiality and Publicity




7.1 Confidential Information. During the period that this Agreement is in effect and
thereafter, LecTec and Novartis shall not disclose to anyone in any manner whatsoever or use for
any purpose other than its performance of this Agreement or for a purpose which is otherwise
authorized under this Agreement (except as authorized in writing by the disclosing party) any
information it receives from the other party (“Confidential Information”), including, without
limitation, intellectual property, inventions, works of authorship, trade secrets or know-how or
other information relating in any way to the Products, processes, and services of the other party.



7.2 Limitations. Each party shall limit disclosure of Confidential Information received
hereunder to only those of its employees who are directly concerned with the performance of any
activities with respect to which the Confidential Information was disclosed. Each party agrees to
advise those of its employees who receive any other party’s Confidential Information that such
Confidential Information (a) is proprietary and confidential to such party and (b) shall not be
disclosed to anyone except as authorized by this Agreement or otherwise authorized by such party in
writing. Each party further agrees to take at least such precautions as it normally takes with its
own Confidential Information to prevent unauthorized disclosure of the other party’s Confidential
Information.



7.3 Injunctive Relief. Each party acknowledges that any unauthorized disclosure of any
portion of the other party’s Confidential Information shall cause irreparable injury to the other
party and that no adequate or complete remedy shall be available at law to such other party to
compensate for such injury. Accordingly, each party hereby also acknowledges that the other party
shall be entitled to seek injunctive relief in the event of such unauthorized disclosure by a party
or any of its employees in addition to whatever other remedies it might have at law.



7.4 Effect of Termination. Upon termination of this Agreement, each party shall return to
the other all copies of the other party’s Confidential Information, and shall make no further use
of such Confidential Information, except for one copy which may be retained in the receiving
party’s confidential files. This provision shall not apply if Novartis terminates this Agreement
for breach of contract pursuant to Section 10.2.



7.5 Exceptions. The obligations of this Section 7 shall not apply to information





7.5.1 that is or has been in the possession of the recipient prior to receipt of
the same from the disclosing party as evidenced by recipient’s written records;




7.5.2 which the recipient lawfully obtains from any third party not under an
obligation to the disclosing party to hold the same in confidence;


 


 









 






7.5.3 that is published or becomes part of the public domain without breach of any
undertakings discussed hereinabove;




7.5.4 that is independently developed by personnel of the recipient without any use
of or reliance upon the disclosing party’s Confidential Information; or




7.5.5 solely to the extent that it is required to be disclosed pursuant to judicial
process, court order or administrative request, or that it is otherwise required
for any regulatory filing, provided that the recipient shall notify the other party
sufficiently prior to disclosing such Confidential Information as to permit such
other party to seek a protective order.



7.6 Press Releases. LecTec shall not issue any press release or other public statement
disclosing the existence of or relating to this Agreement without prior written consent of
Novartis, which consent shall not be unreasonably withheld or delayed. The foregoing shall not
limit LecTec’s rights to make such disclosures as reasonably required by applicable securities laws
or the rules of any stock exchange where its securities are traded, provided that LecTec provides a
written opinion from outside counsel stating that disclosure is required.



Article 8

Quality of Products; Compliance with Law




8.1 Representations and Warranties. LecTec hereby represents and warrants that:




8.1.1 No Products constituting or being a part of any shipment hereunder shall at the time
of any such shipment be (i) adulterated or misbranded within the meaning of the Federal
Food, Drug and Cosmetic Act, as amended from time to time (the “Act”), or regulations
promulgated thereunder, as such law or regulation is constituted and in effect at the time
of any such shipment, or (ii) an article which may not, under the provisions of Sections
404, 505 or 512 of the Act, be introduced into interstate commerce;




8.1.2 all Products furnished to Novartis hereunder shall be in full compliance with the
Specifications, and shall remain in full compliance with the Specifications for the full
period of the expected shelf-life of such Products, so long as the Products are stored in
accordance with the Specifications;


 


 









 






8.1.3 LecTec shall perform its obligations hereunder in compliance with any materially
applicable federal, state and local laws and regulations, including
without limitation the Act, the FDA’s then-current Good Manufacturing Practices (“cGMP”),
and any health, safety and environmental laws and regulations applicable to LecTec’s
manufacture and packaging of the Products and its other performance hereunder;




8.1.4 all Products furnished to Novartis hereunder shall have been manufactured in
accordance with the terms of the QA Agreement;




8.1.5 LecTec’s manufacturing, laboratory and packaging facilities shall remain in
compliance with CGMP at all times during the term of this Agreement to the extent
applicable to the manufacture and packaging of the Products; and




8.1.6 LecTec owns or has the right to use all necessary copyright, trademark, patents,
trade secrets and other intellectual property rights which it shall use to perform its
obligations hereunder with respect to sales of the Products in the United States, Canada
and Mexico.



8.2 Disclaimer. EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED IN THIS AGREEMENT, LECTEC MAKES
NO WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, CONCERNING THE PRODUCTS, OR THE MERCHANTABILITY OR
FITNESS THEREOF FOR ANY PURPOSE.



8.3 Remedy. In the event that Products are delivered to Novartis by LecTec that are not in
compliance with the warranties made in Section 8.1 then, at Novartis’s option (i) LecTec shall
replace the non-compliant Products at no additional charge (which replacement Products shall be
delivered to Novartis as soon as reasonably practicable, but in no event more than ninety (90) days
after the initial notification by Novartis); or (ii) LecTec shall credit Novartis’s account in the
amount of the price of the non-compliant Products. Novartis shall give commercially reasonable
cooperation to LecTec to determine the nature and extent of any problem giving rise to a breach of
warranties, including, without limitation, prompt samples of any allegedly non-compliant Products.
Returns of non-compliant Products shall be subject to the provisions of Section 3.3.



8.4 Quality Assurance Representative. Novartis shall have the right, at its expense, to
place a quality assurance representative in the manufacturing facilities of LecTec at all times or
from time to time during the term of this Agreement as determined by Novartis. LecTec shall
provide complete access to its manufacturing operations respecting the Products to such
representative and shall permit such representative to conduct such inspections of materials and
processes as such representative shall determine to be appropriate to assure Novartis that LecTec
is at all times in compliance with the representations and warranties made in Section 8.1.


 


 









 





Article 9

Indemnification and Insurance




9.1 Novartis Indemnification. Novartis shall defend, indemnify and hold LecTec harmless
against any and all claims, damages, expenses, reasonable attorneys’ fees, settlement costs and
judgments arising out of any death, personal injury, bodily injury or property damage to a third
party alleged to have been caused by the Products, except to the extent that such injury or damage
was the result of any breach of this Agreement by LecTec, including any warranty contained herein,
or the result of any latent defects in the Products caused by the negligence or willful misconduct
of LecTec. LecTec shall promptly notify Novartis of any such claim or action, shall reasonably
cooperate with Novartis in the defense of such claim or action, and shall permit Novartis to
control the defense and settlement of such claim or action, all at Novartis’ cost and expense. For
the sake of clarity, the foregoing indemnification, subject to its stated exclusions, shall extend
during the License Phase to any Products made by Novartis or any Novartis Affiliate under the
License and to any Products made for Novartis or any Novartis Affiliate by a third party contract
manufacturer under any sublicense of the License.



9.2 LecTec Indemnification. LecTec shall defend, indemnify and hold Novartis harmless
against any and all claims, damages, expenses, reasonable attorneys’ fees, settlement costs and
judgments arising out of any death, personal injury, bodily injury or property damage to a third
party to the extent that such death, injury or damage is the result of (i) any breach of this
Agreement by LecTec, including any warranty contained herein; (ii) any claim regarding a
work-related death or injury to any LecTec employee; (iii) any claim regarding latent defects in
the Products caused by the negligence or willful misconduct of LecTec; or (iv) any claim that the
Products, or any means used to manufacture the Products, infringe any third party’s patent, trade
secret, trademark, copyright, or other proprietary interest in the Territory. Novartis shall
promptly notify LecTec of any such claim or action, shall reasonably cooperate with LecTec in the
defense of such claim or action, and shall permit LecTec to control the defense and settlement of
such claim or action, all at LecTec’s cost and expense.



9.3 Product Recalls and Withdrawals. Each party shall promptly notify the other party of
any legal and/or factual circumstances which might, under applicable laws and regulations,
necessitate a field correction, recall or withdrawal of any Products (collectively, a “Regulatory
Recall”) and shall consult with each other regarding the appropriate steps to be taken. Novartis
shall determine whether any Regulatory Recall shall take place. Novartis shall notify all
regulatory authorities of any such Regulatory Recall, and shall take all steps necessary to
effectuate such Regulatory Recall. LecTec shall assist Novartis in each of these activities to the
extent reasonably requested by Novartis. LecTec shall reimburse Novartis for the costs of any such
Regulatory Recall to the extent such Regulatory Recall was made necessary by the actions or
inaction of LecTec. If LecTec is unable in good faith to obtain the recall insurance required by
Section 9.4.6 for a reasonable premium, then the maximum amount which LecTec shall be required to
reimburse Novartis pursuant to the preceding sentence shall be $500,000 per Regulatory Recall, not
including the cost of any replacement Products made necessary by the applicable Regulatory Recall.
Novartis shall reimburse LecTec for the costs of any such Regulatory Recall to the extent such
Regulatory Recall was made necessary by the actions or inaction of Novartis. Any claim for such
reimbursement of
costs incurred in such a Regulatory Recall shall be subject to audit by Novartis’ CPA Firm.


 


 









 





9.4 LecTec’s Insurance Coverage. LecTec shall obtain, at its own expense, policies of
insurance in amounts no less than those specified below and shall cause its carrier or carriers to
name Novartis as an additional insured on those coverages marked with an (*) below:




9.4.1 *general liability insurance with combined limits of not less than $1,000,000 per
occurrence and $1,000,000 per accident for bodily injury, including death, and property
damage;




9.4.2 workers’ compensation and disability insurance in the amounts required by the law of
the state(s) in which its workers are located, and employer’s liability insurance with
limits of not less than $1,000,000 per occurrence;




9.4.3 *automobile liability insurance (in the event that the use of an automobile by LecTec
is required in the performance of this Agreement) with combined limits of not less than
$1,000,000 per occurrence and $1,000,000 per accident for bodily injury, including death,
and property damage is required;




9.4.4 *product liability insurance with limits not less than $5,000,000;




9.4.5 property insurance for the replacement value of the facilities and equipment used to
produce the Products;




9.4.6 *excess insurance with limits not less than $5,000,000.



9.5 Documentation of Coverage. Upon request, LecTec shall provide to Novartis evidence of
its insurance or self insurance. LecTec shall provide Novartis thirty (30) days prior written
notice of any cancellation or material change in coverage.



9.6 Novartis’ Insurance Coverage. Novartis warrants and represents to LecTec that Novartis
maintains a policy or program of insurance or self-insurance at levels sufficient to support the
indemnification obligations assumed herein. Upon request, Novartis shall provide to LecTec
evidence of its insurance or self-insurance. Novartis shall provide to LecTec thirty (30) days
prior written notice of any cancellation or material change in coverage.



Article 10

Term and Termination




10.1 Initial Term; Renewal. This Agreement shall commence on the Effective Date and shall
continue in effect until the end of the Manufacturing Period as defined in Section 1.1 except that
the provisions hereof respecting the License granted to Novartis
as provided in Section 6.2.3 hereof shall continue in effect until the conclusion of the term of
the License.


 


 









 





10.2 Termination for Cause. If either party materially breaches this Agreement, the other
party shall give such breaching party written notice thereof with reasonable detail. If the
breaching party fails to cure such breach within forty-five (45) days of its receipt of such
notice, then the non-breaching party may terminate this Agreement at no cost upon written
notice thereof.



10.3 Termination on Insolvency. Either party may terminate the Agreement without notice
if the other party becomes insolvent, makes or has made an assignment for the benefit of
creditors, is the subject of proceedings in voluntary or involuntary bankruptcy instituted on
behalf of or against such party (except for involuntary bankruptcies which are dismissed
within ninety (90) days), or has a receiver or trustee appointed for substantially all of its
property.



Without limitation, Novartis’ rights under this Agreement shall include those rights
afforded by 11 U.S.C. § 365(n) of the United States Bankruptcy Code (the “USBC”) and any
successor thereto. If the bankruptcy trustee of LecTec as a debtor or debtor-in-possession
rejects this Agreement under 11 U.S.C. § 365(o) of the USBC, Novartis may elect to retain
its rights licensed from LecTec hereunder (and any other supplementary agreements hereto)
for the duration of this Agreement and avail itself of all rights and remedies to the full
extent contemplated by this Agreement and 11 U.S.C. § 365(n) of the USBC, and any other
relevant laws.



10.4 In the event that Novartis terminates this agreement pursuant to Article 10.2 (Termination
For Cause), Novartis shall retain all its rights to license the Intellectual Property as set
forth in Article 6 on a royalty free basis. In the event that LecTec terminates this
agreement pursuant to Article 10.2 (Termination For Cause), LecTec shall retain all rights to
license the Intellectual Property to other third parties.



Article 11

Audit and Inspection Rights




11.1 Audit, Inspection and Observation. During the term of this Agreement, Novartis shall
have the right, at its sole cost and expense, to send Novartis representatives to audit, inspect
and observe the manufacture, storage, disposal and transportation of the Products, and all other
materials reasonably related thereto or used in connection therewith, upon reasonable prior notice
to LecTec and during LecTec’s normal business hours. Such Novartis representatives shall have no
responsibility or authority for supervision of LecTec employees performing such manufacture,
storage, disposal or transportation operations. Such Novartis representatives shall comply with
any reasonable LecTec health, safety or security rules or policies while at LecTec’s premises. The
audit,
inspection and observations rights set forth in this Section 11.1 are solely for the purpose of
determining LecTec’s compliance with the terms of this Agreement and the QA Agreement.


 


 









 





11.2 Action Plan. If, as a result of any such audit, inspection or observation under
Section 11.1, Novartis reasonably concludes that LecTec is not in compliance with any of its
obligations hereunder, it shall so notify LecTec in writing, specifying such areas of
non-compliance in reasonable detail. LecTec shall provide to Novartis within thirty (30) days of
Novartis’ request a written action plan with a time line for resolution of the problems identified
within a reasonable, mutually agreed upon time frame.



11.3 Government Inspections. LecTec shall inform Novartis within twenty-four (24) hours of
any notification to LecTec of any site visits to the LecTec facility by the FDA, state or federal
regulatory agencies or any other governmental or regulatory agency, relating, directly or
indirectly, to the manufacture of the Products, and shall provide to Novartis all other materials
related thereto or used in connection therewith. Novartis shall have the option of participating
in any site visit by any governmental or regulatory agency (except to the extent such governmental
or regulatory agency visitor objects) if the site visit relates, directly or indirectly, to the
manufacturing, storage, disposal and transportation of the Products. If Novartis does not
participate in the site visit for any reason, LecTec shall report in writing the results of the
visit to Novartis within seven (7) days of the occurrence thereof. In the event that any such
governmental or regulatory agency finds that the site is deficient or unsatisfactory in any
material respect, LecTec shall cure all such material deficiencies within the earlier of ninety
(90) days or such cure period as ordered by the government or regulatory agency. If all such
deficiencies are not cured by LecTec within the required time frame, Novartis may deem such
condition to be a material breach of this Agreement without the required 45-day cure period in
Section 10.2 of this Agreement and thus may immediately terminate this Agreement.



Article 12

Miscellaneous




12.1 Waiver. Each party acknowledges and agrees that any failure on the part of the other
party to enforce at any time, or for any period of time, any of the provisions of this Agreement
shall not be deemed or construed to be a waiver of such provisions or of the right of such other
party thereafter to enforce each an every such provision.



12.2 Enforcement. If and to the extent that any provision of this Agreement is determined
by any legislature, court or administrative agency to be, in whole or in part, invalid or
unenforceable, such provision or part thereof shall be deemed to be surplusage and, to the extent
not so determined to be invalid or unenforceable, each provision hereof shall remain in full force
and effect unless the purposes of this Agreement cannot be achieved. In the event any provisions
shall be held invalid, illegal or unenforceable the parties shall use commercially reasonable
efforts to substitute a valid, legal and enforceable provision which insofar as practical
implements the purposes hereof.


 


 









 





12.3 Choice of Law. This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Minnesota as though made and to be fully performed in said State.



12.4 Notices. All notices required or permitted hereunder shall be given in writing and
sent by confirmed facsimile transmission, or mailed postage prepaid by first-class certified or
registered mail, or sent by a nationally recognized express courier service, or hand-delivered to
the following addressees:



	 	 	 
	Novartis:

	 	Novartis Consumer Health, Inc.
	 

	 	200 Kimball Drive 
	 

	 	Parsippany, NJ 07054
	 

	 	Attn: General Counsel
	 
	 	 
	LecTec:

	 	LecTec Corporation
	 

	 	10701 Red Circle Dr. 
	 

	 	Minnetonka, MN 55343
	 

	 	Attn: Chief Executive Officer






or to such other address as may be specified in a notice given to the other party in accordance
with this Section 12.4. Any notice, if sent properly addressed, postage prepaid, shall be deemed
made three (3) days after the date of mailing as indicated on the certified or registered mail
receipt, or on the next business day if sent by express courier service or on the date of delivery
or transmission (if delivered or sent during ordinary business hours, otherwise on the next
business day) if hand-delivered or sent by confirmed facsimile transmission.



12.5 Captions. The captions of each section of this Agreement are inserted only as a
matter of convenience and for reference and in no way shall be deemed to define, limit, enlarge, or
describe the scope of this Agreement and the relationship of the parties hereto, and shall not in
any way affect this Agreement or the construction of any provisions herein.



12.6 Entire Agreement; Amendment. This Agreement, including all Exhibits annexed hereto
(which are incorporated herein by reference), represents and incorporates the entire understanding
between the parties hereto with respect to the subject matter of this Agreement and supersedes any
prior offers, proposals, drafts or other communications with respect thereto including, without
limitation, the Prior Agreement. Each party acknowledges that there are no warranties,
representations, covenants or understandings of any kind, nature or description whatsoever made by
any party to any other, except such as are expressly hereinabove set forth. This Agreement shall
not be subject to change or modification except by the execution of a writing specified to be an
explicit amendment to this Agreement duly executed by all parties hereto.


 


 









 





12.7 Effect of Forms. The parties recognize that, during the term of this Agreement, a
purchase order, acknowledgment form or similar routine document (collectively,
“Forms”) may be used to implement or administer provisions of this Agreement. Therefore, the
parties agree that the terms of this Agreement shall prevail in the event of any conflict between
this Agreement and the printed provisions of such Forms, or typed provisions of Forms that appear
to add to, vary, modify or conflict with the provisions of this Agreement.



12.8 Relationship. Nothing in this Agreement shall create between the parties a
partnership, joint venture or principal-agent relationship and, for the avoidance of doubt, each of
LecTec and Novartis now confirms and accepts that it is an independent contractor trading for and
on its own behalf.



12.9 Assignment. LecTec may not assign or otherwise transfer this Agreement or any
interest herein or any right hereunder (other than to an affiliate) without the prior written
consent of Novartis, which consent shall not be unreasonably withheld, except that LecTec may
assign this 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 (i) such
acquirer or successor in interest agrees in writing to be bound by all the terms and conditions
hereof; and (ii) LecTec shall first give Novartis written notice of any such assignment, and
fifteen (15) days to object thereto. The only grounds upon which Novartis may object to such an
assignment are if such acquirer or successor in interest is (a) a direct competitor of Novartis; or
prior to the end of the Manufacturing Period (b) in Novartis’ reasonable discretion, is not a
manufacturer which has a proven record of operational quality at least equal to that of LecTec; or
prior to the end of the Manufacturing Period (c) in Novartis’ reasonable discretion, does not have
sufficient financial wherewithal. Any purported assignment, transfer, or attempt to assign or
transfer any interest or right hereunder except in compliance with this Section 12.9 shall be null,
void and of no effect.



12.10 Counterparts. This Agreement may be executed in two or more counterparts, each of
which shall constitute an original and all of which together shall constitute a single instrument.



12.11 Force Majeure. A party shall not be liable for delayed performance or
non-performance of this Agreement (other than payment of money when due) if such condition is due
to events beyond its reasonable control, including, without limitation, fire, flood, storm,
earthquake, any other Act of God, electrical or computer failures, supply or labor shortages,
strikes, riot, civil disorder, war or government order or decree.




12.11.1 A party claiming relief under this Section 12.11 shall give prompt written notice
thereof to the other party, together with its best estimate of when such condition will end
and its full performance may be resumed.


 


 









 






12.11.2 In the event of a Force Majeure, or if for any other reason LecTec experiences any
shortage and is therefore unable to supply Novartis with the full quantity of Products and
with the delivery date as ordered by Novartis, then Novartis shall be entitled to the same
proportionate quantity of available Vapor
Patches as the quantity of Products purchased by Novartis from LecTec in the twelve (12)
months preceding the shortage bears to all orders for Vapor Patches received by LecTec from
all its customers during such period, including LecTec’s sales to Novartis, and including
LecTec’s sales of Comparable Products directly to retailers under its “TheraPatch” trade
name, or under any Other LecTec Trade Name.




12.11.3 Notwithstanding the foregoing, if such condition continues without change for more
than ninety (90) days, the other party may then elect to treat such delayed performance or
non-performance as a material breach of this Agreement.



12.12 Survival of Terms. Sections 6, 7, 9, 10.3 and 10.4 shall survive and continue in
full force and effect in accordance with their respective terms notwithstanding any termination of
this Agreement.



IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year
first above written.



	 	 	 	 	 	 	 	 	 
	 	 	NOVARTIS CONSUMER HEALTH, INC.	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	Its:	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	LECTEC CORPORATION	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	Its:
	 	 	 	 





 


 









 





Exhibit C




LICENSED PATENTS




1. U.S. Pat. No. 6,090,403




2. U.S. Pat. Nos. 5,536,263; 5,741,510; 6,096,333; 6,096,334 and 6,361,790.



3. CA Pat. No. 2 133 598




4. MX Pat. No. 187839




5. Any reexamination and reissue of the above-listed patents, if applicable.


 


 









 





Exhibit 1.1




Production Schedule




See Attached




 


 









 







Exhibit 2.1

Product Packaging Pricing




LecTec Pricing — Vapor Patch

United States and Mexico



Pricing for lots through and including Lot 171.



	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	SIX PATCHES	 	 	SIX PATCHES	 	 	 	 
	 	 	WITH CARTON	 	 	WITHOUT	 	 	PRICE	 
	MARKET	 	AND STICKERS	 	 	CARTON	 	 	DIFFERENCE	 
	UNITED STATES
	 	$	1.214	 	 	$	0.93	 	 	$	0.28	 
	MEXICO
	 	$	1.140	 	 	$	0.93	 	 	$	0.21	 






Pricing for lots 172 through 200.



	 	 	 	 	 
	 	 	SIX PATCHES	 
	 	 	WITHOUT	 
	MARKET	 	CARTON	 
	UNITED STATES
	 	$	1.104	 
	MEXICO
	 	$	1.104	 






Effective Lot 172 the price will increase by $.029 for each patch.



All prices are in U.S. Dollars.


 


 









 





Exhibit 2.5

Advance Payments and Delivery Schedule




See Attached




 


 









 







Section 2.5.1(a)

Form of New Advance Payment Note




PROMISSORY NOTE




January 1, 2004




Minnetonka, Minnesota




FOR VALUE RECEIVED, the undersigned, LECTEC CORPORATION, a Minnesota corporation with a
mailing address of 10701 Red Circle Drive, Minnetonka, MN 55343 (hereinafter referred to as the
“LecTec”), promises to pay to the order of NOVARTIS CONSUMER HEALTH, INC. with a mailing address of
200 Kimball Drive, Parsippany, NJ 07054 (hereinafter referred to as “Novartis”), the lesser of the
sum of Two Million ($2,000,000.00) Dollars or so much thereof as has been advanced and remains
outstanding pursuant to Section 2.5 of the Supply and License Agreement between LecTec and Novartis
dated as of January 1, 2004, (the “Agreement”) together with interest and costs thereon as set
forth below, such interest and costs being payable only in the event of default by LecTec
hereunder.



All amounts outstanding under this Note, together with interest thereon, shall be repaid in
full on upon Novartis’ acceptance of final shipment of Product delivered by LecTec under the
Agreement. This Note may be subject to mandatory prepayment under circumstances as set forth in
the Agreement.



Interest on the principal amount outstanding hereunder shall begin to accrue as of the date
hereof, and shall be payable only in the event of default by LecTec hereunder on the date of such
default whether or not any judgment has been issued thereon. Such default interest shall be
payable at the rate per annum which shall be two (2) percentage points higher than the “prime” rate
as reported in The Wall Street Journal on the first business day of each month, adjusted monthly.



This Note is the New Advance Payment Note as defined in the Agreement, to which reference may
be made for a description of the terms and conditions of advances of principal hereof and the
method of payment by way of credits for products sold and
delivered by LecTec to Novartis. The indebtedness described herein shall have the benefit of
the Collateral as set forth in a Security Agreement between LecTec and Novartis of even date
herewith.


 


 









 





This Note may be prepaid, at any time, in whole or in part, without premium or fee. If this
Note is not paid when due, LecTec agrees to pay all costs of collection, including reasonable
attorneys’ fees. LecTec hereby waives demand, presentment, notice of dishonor, protest, and notice
of protest.



WITHOUT LIMITING OTHER RIGHTS ACCORDED TO NOVARTIS HEREUNDER, LECTEC HEREBY CERTIFIES THAT THE
TRANSACTION CONTEMPLATED BY THIS NOTE IS A COMMERCIAL TRANSACTION AND HEREBY WAIVES (A) ITS RIGHTS
TO NOTICE AND HEARING AS OTHERWISE ALLOWED BY LAW WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH
NOVARTIS MAY DECIDE TO USE, AND (B) ALL RIGHTS AS OTHERWISE ALLOWED BY LAW TO REQUEST THAT NOVARTIS
POST A BOND, WITH OR WITHOUT SURETY, TO PROTECT LECTEC OR ANY OTHER PERSON OR ENTITY LIABLE UNDER
THIS NOTE AGAINST DAMAGES THAT MAY BE CAUSED BY ANY PREJUDGMENT REMEDY SOUGHT OR OBTAINED BY
NOVARTIS BY VIRTUE OF ANY DEFAULT OR PROVISION OF THIS NOTE OR THE AGREEMENT, AND LECTEC HEREBY
CONSENTS TO THE ISSUANCE OF ANY SUCH PREJUDGMENT REMEDY WITHOUT SUCH A BOND.



IN WITNESS WHEREOF, the undersigned has executed and delivered this Note as of the date and
year first above written.



	 	 	 	 	 	 	 	 	 
	 	 	LECTEC CORPORATION	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 

	 	 
	 

	 	Its:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 

	 	 






 


 









 





Section 2.5.1(b)

Form of New Security Agreement




SECURITY AGREEMENT




THIS SECURITY AGREEMENT (“Security Agreement”) dated as of January 1, 2004 between NOVARTIS
CONSUMER HEALTH, INC., 200 Kimball Drive, Parsippany, NJ 07054 (“Creditor”), a Delaware
corporation, and LECTEC CORPORATION, 10701 Red Circle Drive, Minnetonka, MN 55343 (“Debtor”), a
Minnesota corporation.



Recitals





	A.	 	Creditor has agreed to advance funds to Debtor as provided in a certain Supply and License
Agreement of even date herewith (“Supply Agreement”) and Debtor is otherwise indebted to
Creditor. Debtor has issued it a promissory note (the “Note”) to Creditor evidencing Debtor’s
obligation to repay advances made or to be made by Creditor to Debtor and such other
indebtedness of Debtor to Creditor.







	B.	 	Debtor has agreed to grant a security interest in its assets as provided in this Security
Agreement to secure its payment obligations under the Note.







NOW, THEREFORE, the parties hereby agree as follows:



1. Security Interest. To secure the full and prompt payment to Creditor of the obligations
of Borrower under the Note (hereinafter, the “Liabilities”), Debtor has granted and hereby grants
to Creditor a continuing security interest in and to all of Debtor’s accounts receivable,
inventory, equipment and general intangibles (hereinafter, the “Collateral”), whether now owned or
existing or hereafter acquired or arising, the proceeds of the Collateral, and all books and
records (including, without limitation, customer lists, credit files, computer programs,
print-outs, and other computer materials and records) of Debtor pertaining to the Collateral.



2. Disclosure of Security Interest. Debtor shall make appropriate entries upon its
financial statements disclosing Creditor’s security interest in the Collateral.



3. Financing Statements. At Creditor’s request, Debtor shall execute or deliver to
Creditor, at any time or times hereafter, all supplemental documentation that Creditor may
reasonably request relating to the perfection of the security interest granted in Section 1, in
form and substance acceptable to Creditor, and pay the costs of any recording or filing of the
same.



4. Perfection and Priority; Location of Collateral. Debtor represents that:




	(A)	 	None of the Collateral is subject to any lien, security interest or other encumbrance,
except as disclosed on Exhibit A attached hereto and made a part hereof;





 


 









 











	(B)	 	The address specified above is Debtor’s chief executive office and principal place of
business and Debtor is incorporated under the laws of the state of Minnesota.






5. Event of Default. The occurrence of any one or more of the following events shall
constitute an “Event of Default:”



(A) Debtor fails to pay the Liabilities when due and payable as provided in the Note;





	(B)	 	Debtor fails or neglects to perform, keep or observe any other term, provision, condition,
covenant, warranty or representation contained in this Security Agreement which is required to
be performed, kept or observed and the same is not cured to Creditor’s satisfaction within ten
(10) days after Creditor gives Debtor written notice thereof;







	(C)	 	Any material representation by Debtor to Creditor concerning its financial condition is not
true and correct when made, in all material respects;







	(D)	 	The Collateral or any other of Debtor’s material assets are attached, seized, levied upon or
subjected to a writ or distress warrant, or come within the possession of any receiver,
trustee, custodian or assignee for the benefit of creditors and the same is not cured within
sixty (60) days thereafter; an application is made by any person other than Debtor for the
appointment of a receiver, trustee, or custodian for the Collateral or any other of Debtor’s
assets and the same is not dismissed within sixty (60) days after the application therefore;







	(E)	 	An application is made by Debtor for the appointment of a receiver, trustee or custodian for
the Collateral or any other of Debtor’s assets; a petition under any section or chapter of the
Bankruptcy Code or any similar law or regulation shall be filed by Debtor; Debtor makes an
assignment for the benefit of its creditors or any case or proceeding is filed by Debtor for
its dissolution, liquidation, or termination; or







	(F)	 	Debtor ceases to conduct its business as now conducted or is enjoined, restrained or in any
way prevented by court order from conducting all or any material part of its business affairs;
a petition under any section or chapter of the Bankruptcy Code or any similar law or
regulation is filed against any Debtor or any case or proceeding is filed against Debtor for
its dissolution or liquidation and such injunction, restraint or petition is not dismissed
within sixty (60) days after the entry or filing thereof.






6. Remedies. Upon and after an Event of Default, Creditor shall have the following rights
and remedies:




	(A)	 	All the rights and remedies of a secured party under the Uniform Commercial Code as in effect
at the time in Minnesota, all of which rights and remedies shall be cumulative, and none
exclusive, to the extent permitted by law, in addition to any other rights and remedies
contained in this Security Agreement.





 


 









 











	(B)	 	The right to sell or to otherwise dispose of all or any Collateral in its then condition, or
after any further manufacturing or processing thereof, at public or private sale or sales,
with such notice as may be required by law, in lots or in bulk, for cash or on credit, all as
Creditor, in its sole discretion, may deem advisable; such sales may be adjourned from time to
time with or without notice. Creditor shall have the right to conduct such sales on the
premises of Debtor or elsewhere and shall have the right to use Debtor’s premises without
charge for such sales for such time or times as Creditor may see fit. Creditor is hereby
granted a license or other right to use, without charge, Debtor’s labels, patents, copyrights,
rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or
any property of a similar nature, as it pertains to the Collateral; provided, however, that
the grant of license and right to use herein shall be subject to the license provisions of the
Supply Agreement. Creditor shall have the right to sell, lease or otherwise dispose of the
Collateral, or any part thereof, for cash, credit or any combination thereof and Creditor may
purchase all or any part of the Collateral at public or, if permitted by law, private sale and
in lieu of actual payment of such purchase price, may setoff the amount of such price against
the Liabilities. The proceeds realized from the sale of any Collateral shall be applied first
to the reasonable costs, expenses (including attorneys’ fees and expense) incurred by Creditor
for collection and for acquisition, completion, protection, removal, storage, sale and
delivery of the Collateral; second to interest due upon any of the Liabilities; third to the
principal of the Liabilities; fourth to the holder of any junior lien or any of the
Collateral. If any deficiency shall arise, Debtor shall remain liable to Creditor therefore.
Notwithstanding anything else in this Agreement, Creditor shall not sell, lease or otherwise
dispose of that portion of the Collateral consisting of the Intellectual Property, as that
term is defined in the Supply Agreement, in whole or in part, so long as the Supply Agreement
is in effect.






7. Subordination by Creditor. On no more than a single occasion and upon the written
request of Debtor, Creditor shall subordinate its security interest in the Collateral to a security
interest that Debtor may propose to grant to an institutional lender to secure a new loan to Debtor
in a principal amount of not less than $1,000,000. Such subordination shall have the effect only of
making Creditor’s security interest in the Collateral junior to the security interest granted to
such new lender notwithstanding the priority of the perfection of Creditor’s security interest and
shall not otherwise affect any of Creditor’s rights under the Note or this Security Agreement.



8. Waiver. Each party acknowledges and agrees that any failure on the part of the other
party to enforce at any time, or for any period of time, any of the provisions of this Security
Agreement shall not be deemed or construed to be a waiver of such provisions or of the right of
such other party thereafter to enforce each and every such provision.



9. Enforcement. If and to the extent that any provision of this Security Agreement is
determined by any legislature, court or administrative agency to be, in whole or in part, invalid
or unenforceable, such provision or part thereof shall be deemed to be surplusage and, to the
extent not so determined to be invalid or unenforceable, each provision hereof shall remain in full
force and effect unless the purposes of this Security Agreement cannot be achieved. In the event
any provisions shall be held invalid, illegal or
unenforceable the parties shall use commercially reasonable efforts to substitute a valid, legal
and enforceable provision which insofar as practical implements the purposes hereof.


 


 









 





10. Choice of Law. This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Minnesota as though made and to be fully performed in said State.



11. Notices. All notices required or permitted hereunder shall be given in writing and
sent by confirmed facsimile transmission, or mailed postage prepaid by first-class certified or
registered mail, or sent by a nationally recognized express courier service, or hand-delivered to
the following addressees:



	 	 	 
	Creditor:

	 	Novartis Consumer Health, Inc.
	 

	 	200 Kimball Drive 
	 

	 	Parsippany, New Jersey 07054
	 

	 	Attn: General Counsel
	 
	 	 
	Debtor:

	 	LecTec Corporation
	 

	 	10701 Red Circle Dr. 
	 

	 	Minnetonka, Minnesota 55343
	 

	 	Attn: Chief Executive Officer






or to such other address as may be specified in a notice given to the other party in accordance
with this Section 11. Any notice, if sent properly addressed, postage prepaid, shall be deemed made
three (3) days after the date of mailing as indicated on the certified or registered mail receipt,
or on the next business day if sent by express courier service or on the date of delivery or
transmission (if delivered or sent during ordinary business hours, otherwise on the next business
day) if hand-delivered or sent by confirmed facsimile transmission.



12. Captions. The captions of each section of this Security Agreement are inserted only as
a matter of convenience and for reference and in no way shall be deemed to define, limit, enlarge,
or describe the scope of this Security Agreement and the relationship of the parties hereto, and
shall not in any way affect this Security Agreement or the construction of any provisions herein.


 


 









 





13. Entire Agreement; Amendment. This Security Agreement, including Exhibit A
annexed hereto, and the Supply Agreement represent and incorporate the entire understanding between
the parties hereto with respect to the subject matter of this Security Agreement and supersedes any
prior offers, proposals, drafts or other communications with respect thereto. In the event of a
conflict between the terms of this Security Agreement and the Supply Agreement, the provisions of
the Supply Agreement shall prevail. Each party acknowledges that there are no warranties,
representations, covenants or understandings of any kind, nature or description whatsoever made by
any
party to any other, except such as are expressly hereinabove set forth. This Security Agreement
shall not be subject to change or modification except by the execution of a writing specified to be
an explicit amendment to this Security Agreement duly executed by all parties hereto.



14 Counterparts. This Security Agreement may be executed in two or more counterparts, each
of which shall constitute an original and all of which together shall constitute a single
instrument.


 


 









 





IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first
above written.



	 	 	 	 	 	 	 
	LECTEC CORPORATION	 	 
	 
	 	 	 	 	 	 
	By:
	 	 	 	 	 	 
	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	Title:
	 	 

	 	 
	 

	 	 	 	 

	 	 
	NOVARTIS CONSUMER.HEALTH, INC.	 	 
	 
	 	 	 	 	 	 
	By:
	 	 	 	 	 	 
	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	Title:
	 	 

	 	 
	 

	 	 	 	 

	 	 











 


 









 










Exhibit 6.2.3.1

License Royalty Rates




	 	 	 	 	 
	Novartis Net Semi-Annual Sales	 	Royalty Percentage	 
	 
	 	 	 	 
	Less than **
	 	 	**	 
	 
	 	 	 	 
	**
	 	 	**	 
	 
	 	 	 	 
	over **
	 	 	**