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 MARCH 31, 1995.
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 May 1,
1995 was 3,784,903 shares.
LECTEC CORPORATION
Table of Contents
Part I
Financial Information
<TABLE>
<S> <C> <C>
Item 1. Financial Statements . . . . . . . . . . . . . I-1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. I-7
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-1
Item 6. Exhibits and Reports on Form 8-K . . . . . . . II-1
Signature Page. . . . . .. . . . . . . . . . . II-2
</TABLE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994
ASSETS
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $748,778 $785,770
Short-term investments 0 1,396,800
Receivables
Trade, less allowance for doubtful accounts
of $28,762 (unaudited) and $16,402 2,134,154 1,762,507
Other 467,064 220,572
2,601,218 1,983,079
Inventories
Raw materials 1,360,253 1,224,609
Work-in-process 185,209 185,307
Finished goods 749,182 362,119
Total inventories 2,294,644 1,772,035
Prepaid expenses and other 255,561 101,737
Deferred tax asset 77,000 77,000
Total current assets 5,977,201 6,116,421
Property, Plant and Equipment - at Cost
Building and improvements 1,528,704 1,426,072
Equipment 5,453,651 3,413,165
Furniture and fixtures 406,542 309,560
7,388,897 5,148,797
Less accumulated depreciation 2,667,778 2,285,900
4,721,119 2,862,897
Construction in progress 551,654 1,594,974
Land 247,731 247,731
5,520,504 4,705,602
Other Assets
Patents and trademarks, less accumulated
amortization of $523,586 (unaudited) and $436,125
at March 31, 1995 and June 30, 1994, respectively 381,382 362,966
Goodwill, less accumulated amortization of $196,668
(unaudited) and $49,167 at March 31, 1995
and June 30, 1994, respectively 393,332 540,833
Long-term marketable securities at lower of cost or market,
net of allowances of $68,682 (unaudited) and $60,964
at March 31, 1995 and June 30, 1994, respectively 578,718 568,673
Other 32,457 60,361
1,385,889 1,532,833
$12,883,594 $12,354,856
</TABLE>
See accompanying notes to the consolidated financial statements
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994
LIABILITIES AND SHAREHOLDER'S EQUITY (Unaudited)
<S> <C> <C>
Current liabilities
Accounts payable $1,057,066 $960,528
Accrued expenses
Payroll related 361,498 343,560
Profit sharing contribution 42,607 46,918
Deferred compensation 28,429 27,848
Other 86,331 0
Total current liabilities 1,575,931 1,378,854
Deferred Income Taxes 139,000 139,000
Shareholders' Equity
Common stock, $.01 par value: 15,000,000 shares
authorized; issued and outstanding: 3,770,000
shares (unaudited) at March 31, 1995 and
3,757,000 shares at June 30, 1994 37,700 37,570
Additional paid-in capital 9,845,518 9,809,079
Allowance for long-term marketable securities (68,682) (60,964)
Retained earnings 1,354,127 1,051,317
11,168,663 10,837,002
$12,883,594 $12,354,856
</TABLE>
See accompanying notes to the consolidated financial statements
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1995 1994 1995 1994
Revenues (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Product sales $4,232,402 $2,252,783 $10,822,734 $7,849,547
Contract research 0 0 0 15,275
Total revenues 4,232,402 2,252,783 10,822,734 7,864,822
Cost of goods sold 2,497,670 1,490,172 6,435,146 4,876,905
Gross profit 1,734,732 762,611 4,387,588 2,987,917
Operating expenses
Selling, general and administrative 1,034,310 418,463 2,708,480 1,183,217
Research & development 449,235 349,385 1,337,607 1,032,133
1,483,545 767,848 4,046,087 2,215,350
Operating profit 251,187 (5,237) 341,501 772,567
Other income (expense)
Interest income 6,149 8,139 33,649 59,814
Dividend income 8,930 12,269 29,355 54,088
Interest expense 5,659 (944) 0 (1,883)
Other (5,166) 3,007 2,693 3,024
15,572 22,471 65,697 115,043
Earnings before income taxes and
equity in losses of
unconsolidated subsidiary 266,759 17,234 407,198 887,610
Income tax expense (benefit) 82,216 (6,020) 104,388 244,111
Earnings before equity in losses
of unconsolidated subsidiary 184,543 23,254 302,810 643,499
Equity in losses of unconsolidated
subsidiary 0 (3,769) 0 (133,646)
Net earnings $184,543 $19,485 $302,810 $509,853
Net earnings per common and common
equivalent share
Primary $0.05 $0.01 $0.08 $0.13
Fully diluted $0.05 $0.01 $0.08 $0.13
Weighted average number of common
and common equivalent shares
outstanding during the period
Primary 3,808,253 3,813,439 3,806,196 3,802,385
Fully diluted 3,859,488 3,813,457 3,823,325 3,802,432
</TABLE>
See accompanying notes to the consolidated financial statements
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months Nine months
Ended Ended
March 31, March 31,
1995 1994
Cash flows from operating activities (Unaudited) (Unaudited)
<S> <C> <C>
Net earnings $302,810 $509,853
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization 616,840 363,473
Provision for losses on accounts receivable 12,360 27,572
Equity in losses of unconsolidated subsidiary 0 133,646
Changes in operating accounts, current assets
and liabilities
Trade and other receivable (630,499) (598,435)
Inventories (522,609) (666,197)
Prepaid expenses and other (125,920) (49,780)
Accounts payable 96,538 206,877
Income taxes payable 0 107,869
Accrued expenses 100,539 11,555
Net cash (used) provided by operating activities (149,941) 46,433
Cash flows from investing activities
Purchase of property, plant and equipment (1,196,780) (1,216,084)
Investment in patents and trademarks (105,877) (7,833)
Purchase of marketable securities and other investments (234,317) (1,729,946)
Sale of marketable securities and other investments 1,613,354 2,845,989
Net cash provided (used) in investing activities 76,380 (107,874)
Cash flows from financing activities
Issuance of common stock 36,569 14,975
Retirement of common stock 0 (3,619)
Net cash provided (used) by financing activities 36,569 11,356
Net increase (decrease) in cash and cash equivalents (36,992) (50,085)
Cash and cash equivalents at beginning of period 785,770 433,754
Cash and cash equivalents at end of period $748,778 $383,669
</TABLE>
See accompanying notes to the consolidated financial statements
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Disclosures in Financial Statements
Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
Nine months Nine months
Ended Ended
March 31, March 31,
1995 1994
(Unaudited) (Unaudited)
<S> <C> <C>
Cash paid during the period for:
Interest expense $0 $1,883
Income taxes 94,462 175,066
</TABLE>
See accompanying notes to the consolidated financial statements
LECTEC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1995
(1) General
The accompanying consolidated financial statements include the
accounts of LecTec Corporation (the "Company"), LecTec International
Corporation, a wholly-owned subsidiary, and Natus Corporation, a fifty-one
percent owned subsidiary. All significant intercompany balances and transactions
have been eliminated in consolidation. The interim financial statements are
unaudited and in the opinion of management, reflect all adjustments (which
consist only of adjustments of a normal recurring nature) necessary for a fair
presentation of results for the periods presented. Results for interim periods
are not necessarily indicative of results for the year.
(2) Stock Dividend
During June 1994, the Board of Directors declared a 5% stock
dividend payable to shareholders of record as of July 15, 1994 which was paid on
July 29, 1994. The weighted average number of common shares outstanding for all
periods presented has been retroactively adjusted to give effect to the stock
dividends.
(3) Natus Corporation
The Company began consolidating Natus' results of operations
effective April 1, 1994. The Company has restated the Consolidated Financial
Statements to reflect Natus, using the equity method, for all fiscal 1994
quarters prior to April 1, 1994.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Product sales for the third quarter of fiscal 1995 were $4,232,402
as compared with $2,252,783 for fiscal 1994. Product sales for the first nine
months of fiscal 1995 were $10,822,734 as compared with $7,849,547 for fiscal
1994. Product sales, for the third quarter, increased by 87.9%, reflecting
growth in all product groups over the same period of fiscal 1994. Conductive
products, the Company's largest product group, increased by 26.4% over the same
period of last year. Medical tape sales increased 101.1% primarily due to the
receipt of a major tape converter order. Therapeutic product sales experienced a
382.8% increase over the same period last year, mainly due to the increased
sales of the analgesic patch through Natus Corporation. Product sales, for the
first nine months, increased by 37.9% as compared to the first nine months
period of fiscal 1994, primarily as a result of the growth in our Conductive and
Therapeutic product groups plus the inclusion of sales of non analgesic patch
Natus products.
The Company had no contract research revenues for the third
quarter of fiscal 1995 or the first nine months of fiscal 1995. In fiscal 1994,
the Company had no contract research revenues for the third quarter and $15,275
for the nine months period.
Gross profit as a percent of total revenues for the third quarter
of fiscal 1995 was 41.0% as compared to 33.9% for the third quarter of fiscal
1994. For the first nine months, gross profit as a percent of total revenues was
40.5% in fiscal 1995 and 38.0% in fiscal 1994. The increase in gross profit
percent for the quarter and first nine months reflects the impact of the
consolidation of higher margin Natus product sales with LecTec.
Selling, general, and administrative expenses for the third
quarter, as a percentage of total revenues, were 24.4% and 18.6% for fiscal 1995
and 1994, respectively. For the first nine months, selling, general, and
administrative expenses, as a percentage of total revenues, were 25.0% and 15.0%
for fiscal 1995 and 1994, respectively. The increase in expenses for fiscal 1995
for the three month and nine month periods are primarily related to the
consolidation of Natus with LecTec for fiscal 1995, the higher selling costs
associated with the Natus direct selling organization and the inclusion of
goodwill amortization related to the acquisition of Natus Corporation.
Research and development expenses for the third quarter, as a
percentage of total revenues, were 10.6% and 15.5% for fiscal 1995 and 1994,
respectively. Actual expenses for the third quarter of fiscal 1995 increased to
$449,235 from $349,385 in 1994. For the first nine months, research and
development expenses as a percent of total revenues, were 12.4% and 13.1%,
respectively. Actual expenses for the first nine months of fiscal 1995 increased
to $1,337,607 from $1,032,133 in 1994. LecTec has been aggressively moving
forward with the research and development of a non-nicotine active ingredient
for alleviating symptoms of tobacco withdrawal. The Company completed the Phase
I clinical trials during the fourth quarter of fiscal 1994. Due to encouraging
findings on safety and toxicity levels, plus preliminary indications of efficacy
from the initial clinical trials, the Company commenced the Phase II clinical
study in September 1994. In December 1994, McNeil Consumer Products, a division
of Johnson & Johnson, decided not to exercise its option to proceed with the
research, development and licensing agreement previously signed with LecTec
Corporation, thereby relinquishing all licensing agreement rights to the
non-nicotine smoking cessation product. The McNeil action provides LecTec with
the opportunity to establish a new marketing alliance under which the Company
retains maximum rights to the product. In March, 1995, the Company released
preliminary findings from an ongoing study by the Addiction Research Center of
the National Institute of Drug Abuse which found that the non-nicotine smoking
cessation product has a very low potential for addictiveness. Furthermore, in
April, 1995, the Company announced completion of the Phase II clinical study and
results which indicate the non-nicotine smoking cessation product has been found
to be effective at assisting smokers to quit by alleviating tobacco withdrawal
symptoms. The Company has a strategy of developing therapeutic products
internally through clinical trials to market-ready status. Although the Company
will continue to seek strong partners to market selected therapeutic products
and help defray development costs, this in-house strategy permits LecTec to
negotiate with potential partners from a position of strength. The Company
anticipates research and development expenses will continue in the range of 10%
to 15% of revenues. The Company will also continue product development in the
Conductive and Medical Tape product groups.
Other income (expense) decreased in the third quarter of fiscal
1995 to $15,572 from $22,471 in the third quarter of 1994. Other income
(expense) for the first nine months of fiscal 1995 decreased to $65,697 from
$115,043 in the same period of fiscal 1994. The decline resulted from the
liquidation of short-term investments to finance the acquisition of a new
medical tape production line and a new therapeutic production line plus the
increases in receivables and inventory necessary to support the growing
business.
Earnings before income taxes and equity in losses of
unconsolidated subsidiary for the third quarter, as a percent of total revenues,
increased from 0.8% in fiscal 1994 to 6.3% in fiscal 1995. Earnings before
income taxes and equity in losses of unconsolidated subsidiary for the third
quarter were $17,234 and $266,759 in 1994 and 1995, respectively. For the first
nine months earnings before income taxes and equity in losses of unconsolidated
subsidiary as a percent of total revenues decreased from 11.3% in fiscal 1994 to
3.8% in fiscal 1995. Earnings before income taxes and equity in losses of
unconsolidated subsidiary for the first nine months were $887,610 and $407,198
in 1994 and 1995, respectively. The increase in earnings before income taxes and
equity in losses of unconsolidated subsidiary for the quarter was the result of
increased sales, the inclusion of Natus Corporation sales and increased margins
which were offset to a lesser degree by increased selling, general and
administrative expenses associated with the inclusion of Natus Corporation and
increased research and development expenses. The decrease in earnings before
income taxes and equity in losses of unconsolidated subsidiary for the nine
months was the result of significantly reduced margins on medical tape plus the
increased selling, general and administrative expenses associated with the
inclusion of Natus Corporation and increased research and development expenses.
Liquidity and Capital Resources
The Company has used internally generated cash to support growth
and capital spending. The Company continues to have an unused $1,000,000 line of
credit available to meet current operating requirements. The Company estimates
that capital expenditures will exceed $1,300,000 for equipment and capital
improvements during fiscal 1995. The Company continues to have a strong Balance
Sheet with no long term debt and a current ratio at the end of the third quarter
of fiscal 1995 of 3.79 as compared to 7.45 at the end of the same period of
1994. Working capital, at the end of the third quarter of fiscal 1995, decreased
to $4,401,270 from $5,957,622 at the end of the same period of fiscal 1994.
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
None
Item 5. Other Information
The registrant is not aware of any other information of material
importance to be included in this report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - EX.27 Financial Data Schedule for SEC use.
(b) Reports on Form 8-K
None
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 May 12, 1995 /s/ Erwin W. Templin II
Erwin W. Templin II, EVP & CFO
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> MAR-31-1995
<CASH> 748,778
<SECURITIES> 0
<RECEIVABLES> 2,629,980
<ALLOWANCES> 28,762
<INVENTORY> 2,294,644
<CURRENT-ASSETS> 5,977,201
<PP&E> 8,188,282
<DEPRECIATION> 2,667,778
<TOTAL-ASSETS> 12,883,594
<CURRENT-LIABILITIES> 1,575,931
<BONDS> 0
<COMMON> 37,700
0
0
<OTHER-SE> 11,130,963
<TOTAL-LIABILITY-AND-EQUITY> 12,883,594
<SALES> 10,822,734
<TOTAL-REVENUES> 10,822,734
<CGS> 6,435,146
<TOTAL-COSTS> 6,435,146
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 407,198
<INCOME-TAX> 104,388
<INCOME-CONTINUING> 302,810
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 302,810
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
