SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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 February
1, 1996 was 3,799,763 shares.
LECTEC CORPORATION
Table of Contents
Part I
Financial Information
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
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995
----------- -----------
<S> <C> <C>
ASSETS
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 491,633 $ 839,942
Receivables
Trade, less allowance for doubtful accounts
of $20,458 (unaudited) and $18,000 at
December 31, 1995 and June 30, 1995,
respectively 1,801,049 2,027,985
Refundable income taxes 125,357 119,540
Other 291,032 268,247
----------- -----------
2,217,438 2,415,772
Inventories
Raw materials 1,184,550 1,162,559
Work-in-process 289,867 218,351
Finished goods 576,633 716,344
----------- -----------
Total inventories 2,051,050 2,097,254
Prepaid expenses and other 127,205 229,796
Deferred tax asset 254,000 254,000
----------- -----------
Total current assets 5,141,326 5,836,764
PROPERTY, PLANT AND EQUIPMENT - AT COST
Building and improvements 1,611,852 1,673,069
Equipment 6,154,065 5,447,479
Furniture and fixtures 351,579 422,265
----------- -----------
8,117,496 7,542,813
Less accumulated depreciation 3,122,176 2,813,760
----------- -----------
4,995,320 4,729,053
Construction in progress 75,053 583,023
Land 247,731 247,731
----------- -----------
5,318,104 5,559,807
OTHER ASSETS
Patents and trademarks, less accumulated
amortization of $618,625 (unaudited) and $554,286
at December 31, 1995 and June 30, 1995, respectively 389,619 386,470
Goodwill, less accumulated amortization of $344,169
(unaudited) and $245,835 at December 31, 1995
and June 30, 1995, respectively 245,831 344,165
Long-term investments 577,967 568,156
Other 719,856 23,784
----------- -----------
1,933,273 1,322,575
----------- -----------
$12,392,703 $12,719,146
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
CURRENT LIABILITIES
Notes payable $ 83,595 $ 0
Accounts payable 777,415 771,471
Accrued expenses
Payroll related 344,076 375,282
Distributor bonuses 67,374 71,384
Product returns 0 77,831
Other 446,201 50,000
------------ ------------
Total current liabilities 1,718,661 1,345,968
DEFERRED INCOME TAXES 167,000 167,000
SHAREHOLDERS' EQUITY
Common stock, $.01 par value: 15,000,000 shares
authorized; issued and outstanding: 3,797,500
shares (unaudited) at December 31, 1995 and
3,786,500 shares at June 30, 1995 37,975 37,865
Additional paid-in capital 10,064,045 10,013,949
Unrealized losses on securities available-for-sale (41,004) (50,816)
Retained earnings 446,026 1,205,180
------------ ------------
10,507,042 11,206,178
------------ ------------
$ 12,392,703 $ 12,719,146
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
-------------------------- --------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Product sales $ 3,255,110 $ 3,685,809 $ 6,717,561 $ 6,590,332
----------- ----------- ----------- -----------
Total revenues 3,255,110 3,685,809 6,717,561 6,590,332
Cost of goods sold 1,957,457 2,380,262 4,080,704 3,937,476
----------- ----------- ----------- -----------
Gross profit 1,297,653 1,305,547 2,636,857 2,652,856
Operating expenses
Selling, general and administrative 1,468,050 884,880 2,409,540 1,673,975
Research and development 503,518 411,151 1,014,551 888,372
----------- ----------- ----------- -----------
1,971,568 1,296,031 3,424,091 2,562,347
----------- ----------- ----------- -----------
Operating profit (loss) (673,915) 9,516 (787,234) 90,509
Other income (expense)
Interest income 5,782 7,875 15,605 27,500
Dividend income 10,937 11,194 20,068 20,425
Interest expense (6,415) 0 (6,415) (5,659)
Other 0 7,859 0 7,664
----------- ----------- ----------- -----------
10,304 26,928 29,258 49,930
----------- ----------- ----------- -----------
Earnings (loss) before income tax expense (663,611) 36,444 (757,976) 140,439
Income tax expense 176 (2,887) 1,177 22,172
----------- ----------- ----------- -----------
Net earnings (loss) ($ 663,787) $ 39,331 ($ 759,153) $ 118,267
=========== =========== =========== ===========
Net earnings (loss) per common and common
equivalent share ($ 0.17) $ 0.01 ($ 0.20) $ 0.03
Weighted average number of common and
common equivalent shares outstanding
during the period 3,796,824 3,765,938 3,792,566 3,763,138
</TABLE>
See accompanying notes to the consolidated financial statements
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months Six months
Ended Ended
December 31, December 31,
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities: (Unaudited) (Unaudited)
Net earnings (loss) ($ 759,153) $ 118,267
Adjustments to reconcile net earnings (loss)
to net cash used in operating activities:
Depreciation and amortization 540,304 404,383
Loss on disposal of assets 300,000 0
Changes in operating assets and liabilities:
Trade and other receivables 189,166 (341,086)
Inventories (374,784) (643,967)
Prepaid expenses and other (76,380) (188,379)
Accounts payable 5,944 117,425
Accrued expenses (16,846) 101,506
----------- -----------
Net cash used in operating activities (191,749) (431,851)
Cash flows from investing activities:
Purchase of property, plant and equipment (222,873) (863,984)
Investment in patents and trademarks (67,488) (76,275)
Purchase of marketable securities and other investments 0 (234,100)
Sale of marketable securities and other investments 0 1,613,354
----------- -----------
Net cash (used in) provided by investing activities (290,361) 438,995
Cash flows from financing activities:
Issuance of common stock 50,206 31,724
Proceeds from notes payable 83,595 0
----------- -----------
Net cash provided by financing activities 133,801 31,724
----------- -----------
Net (decrease) increase in cash and cash equivalents (348,309) 38,868
Cash and cash equivalents at beginning of period 839,942 785,770
----------- -----------
Cash and cash equivalents at end of period $ 491,633 $ 824,638
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Disclosures in Financial Statements
Six months Six months
Ended Ended
December 31, December 31,
1995 1994
---------- ----------
(Unaudited) (Unaudited)
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest expense $ 0 $ 0
Income taxes 20,725 44,302
Supplemental Schedule Of Noncash Activities:
During fiscal 1996 the Company recorded the sale of certain assets. The effect
of the transaction during the six months ended December 31, 1995 was as follows:
Reduction of accounts receivable $ 9,168
Reduction of inventories 420,988
Reduction of prepaid expenses and other 185,765
Reduction of property and equipment 156,160
Reduction of accumulated depreciation (69,215)
----------
$ 702,866
==========
See accompanying notes to the consolidated financial statements
LECTEC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 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) Sale of the Direct Marketing Related Assets of the Natus Subsidiary
During the quarter ended December 31, 1995 the Company recorded a loss
related to the pending sale of the direct marketing related assets of the Natus
Corporation subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Product sales for the second quarter of fiscal 1996 were $3,255,110 as
compared with $3,685,809 for the second quarter of fiscal 1995. Product sales,
for the second quarter, decreased overall by 11.7% from the prior year. The net
decrease was the result of decreased medical tape product sales and decreased
therapeutic product sales partially offset by increased conductive product
sales. Conductive product sales, the Company's largest product group, increased
by 12.9% from the prior year while medical tape product sales decreased by 50.4%
and therapeutic product sales decreased by 5.6%. Conductive product sales
increased for both diagnostic and hydrogel products as a result of volume
increases and increased market share. The medical tape product sales decrease
was primarily due to the absence of a major tape converter order in the current
year as compared to the prior year. The therapeutic product sales decrease was
primarily the result of decreased direct marketing sales of Natus. Product sales
for the first six months of fiscal 1996 were $6,717,561 as compared with
$6,590,332 for the first six months of fiscal 1995. Product sales, for the first
six months, increased by 1.9% from the prior year as a result of increased
conductive product sales and therapeutic product sales which were partially
offset by decreased medical tape product sales. Conductive product sales
increased by 5.2% from the prior year primarily as a result of volume increases
and increased market share. Medical tape product sales decreased by 10.0%
primarily due to the absence of a major tape converter order in the current year
as compared to the prior year which more than offset increased sales due to a
new product offering and sales to a major new retail customer. Therapeutic
product sales increased 10.1% from the prior year primarily due to increased
analgesic pain patch sales.
Gross profit for the second quarter of fiscal 1996 was $1,297,653 as
compared with $1,305,547 compared to the second quarter of fiscal 1995. Gross
profit as a percent of total revenues for the second quarter of fiscal 1996 was
39.9% as compared to 35.4% for the second quarter of fiscal 1995. The increase
in gross profit percent for the quarter was primarily a reflection of a shift in
the sales mix to the higher margin conductive products and an improvement in
therapeutic product margins which were partially offset by increased raw
material costs for all products. Gross profit for the first six months of fiscal
1996 was $2,636,857 as compared with $2,652,856 compared to the first six months
of fiscal 1995. Gross profit as a percent of total revenues for the first six
months of fiscal 1996 was 39.3% as compared to 40.3% for the first six months of
fiscal 1995. The decrease in gross profit percent for the first six months was
primarily due to increased raw material costs for all products which were
partially offset by a shift in the sales mix to the higher margin conductive and
therapeutic products.
Selling, general and administrative expenses were $1,468,050 and
$884,880 during the second quarters of fiscal 1996 and fiscal 1995,
respectively. Selling, general and administrative expenses for the second
quarters of fiscal 1996 and 1995, as a percentage of total revenues, were 45.1%
and 24.0%, respectively. Selling, general and administrative expenses were
$2,409,540 and $1,673,975 during the first six months of fiscal 1996 and fiscal
1995, respectively. Selling, general and administrative expenses for the first
six months of fiscal 1996 and 1995, as a percentage of total revenues, were
35.9% and 25.4%, respectively. Increased selling, general and administrative
expenses associated with the operations of the Natus subsidiary and the sale of
the direct marketing related assets of the Natus subsidiary were primarily
responsible for the increase in both the second quarter and the first six
months.
Research and development expenses for the second quarters of fiscal
1996 and 1995 were $503,518 and $411,151, respectively. Research and development
expenses for the second quarter, as a percentage of total revenues, were 15.5%
and 11.2% for fiscal 1996 and 1995, respectively. Research and development
expenses for the first six months of fiscal 1996 increased to $1,014,551 from
$888,372 in fiscal 1995. Research and development expenses for the first six
months, as a percentage of total revenues, were 15.1% and 13.5% for fiscal 1996
and 1995, respectively. The increase in expense for both the quarter and the
first six months is primarily attributable to the research and development costs
associated with the non-nicotine smoking cessation product and the pain patch
program.
Other income (expense) decreased in the second quarter of fiscal 1996
to $10,304 from $26,928 in the second quarter of fiscal 1995. Other income
(expense) decreased in the first six months of fiscal 1996 to $29,258 from
$49,930 in the first six months of fiscal 1995. The decline in both the second
quarter and the first six months resulted primarily from a reduction of interest
and dividend income due to the liquidation of short-term investments to finance
the acquisition of a new therapeutic production line as well as to finance the
losses associated with the Natus subsidiary.
The Company had a loss before income tax expense of $663,611 in the
second quarter of fiscal 1996 compared to earnings before income tax expense of
$36,444 in the second quarter of fiscal 1995. The Company had a loss before
income tax expense of $757,976 in the first six months of fiscal 1996 compared
to earnings before income tax expense of $140,439 in the first six months of
fiscal 1995. The decrease in earnings before income taxes for the second quarter
and the first six months was primarily the result of the loss on the sale of the
direct marketing related assets of the Natus subsidiary, the operating loss and
parent Company expenses associated with the direct marketing activities of the
Natus subsidiary, increased raw material costs for products sold and increased
research and development expense.
The Company did not record a tax benefit in connection with losses
generated during the second quarter and year-to-date as the losses relate
primarily to the Natus subsidiary. The Natus losses can not be utilized by
LecTec at this time.
Liquidity and Capital Resources
The Company has used internally generated cash to support growth and
capital spending. The Company has a $1,000,000 line of credit available to meet
current operating requirements. The Company estimates that capital expenditures
will approach $500,000 for equipment and capital improvements during fiscal 1996
with expenditures anticipated to be financed by operations. The Company
continues to have a strong Balance Sheet with no long-term debt and a current
ratio at the end of the second quarter of fiscal 1996 of 2.99 as compared to
4.34 at the end of fiscal 1995. Working capital, at the end of the second
quarter of fiscal 1996, decreased to $3,422,665 from $4,490,796 at the end of
fiscal 1995.
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 - None.
(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 February 14, 1996 /s/ Erwin W. Templin II
------------------ ------------------------------
Erwin W. Templin II, EVP & CFO
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<CASH> 491,633
<SECURITIES> 0
<RECEIVABLES> 2,237,896
<ALLOWANCES> 20,458
<INVENTORY> 2,051,050
<CURRENT-ASSETS> 5,141,326
<PP&E> 8,440,280
<DEPRECIATION> 3,122,176
<TOTAL-ASSETS> 12,392,703
<CURRENT-LIABILITIES> 1,718,661
<BONDS> 0
37,975
0
<COMMON> 0
<OTHER-SE> 10,469,067
<TOTAL-LIABILITY-AND-EQUITY> 12,392,703
<SALES> 6,717,561
<TOTAL-REVENUES> 6,717,561
<CGS> 4,080,704
<TOTAL-COSTS> 4,080,704
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,415
<INCOME-PRETAX> (757,976)
<INCOME-TAX> 1,177
<INCOME-CONTINUING> (759,153)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (759,153)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
