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, 1996.
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,
1996 was 3,807,733 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>
March 31, June 30,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 229,852 $ 839,942
Receivables
Trade, less allowance for doubtful accounts of $17,771
(unaudited) and $18,000 at March 31, 1996 and
June 30, 1995, respectively 2,485,830 2,027,985
Refundable income taxes 125,357 119,540
Other 289,566 268,247
----------- -----------
2,900,753 2,415,772
Inventories
Raw materials 1,142,953 1,162,559
Work-in-process 280,996 218,351
Finished goods 658,432 716,344
----------- -----------
Total inventories 2,082,381 2,097,254
Prepaid expenses and other 134,359 229,796
Deferred tax asset 254,000 254,000
----------- -----------
Total current assets 5,601,345 5,836,764
Property, Plant and Equipment - at Cost
Building and improvements 1,625,321 1,673,069
Equipment 6,206,245 5,447,479
Furniture and fixtures 353,993 422,265
----------- -----------
8,185,559 7,542,813
Less accumulated depreciation 3,311,637 2,813,760
----------- -----------
4,873,922 4,729,053
Construction in progress 75,053 583,023
Land 247,731 247,731
----------- -----------
5,196,706 5,559,807
Other Assets
Patents and trademarks, less accumulated
amortization of $652,794 (unaudited) and $554,286
at March 31, 1996 and June 30, 1995, respectively 385,965 386,470
Goodwill, less accumulated amortization of $393,336
(unaudited) and $245,835 at March 31, 1996
and June 30, 1995, respectively 196,664 344,165
Long-term investments 1,193,750 568,156
Other 13,592 23,784
----------- -----------
1,789,971 1,322,575
----------- -----------
$12,588,022 $12,719,146
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
<S> <C> <C>
Current Liabilities
Notes payable $ 83,595 $ 0
Accounts payable 1,075,737 771,471
Accrued expenses
Payroll related 260,054 375,282
Distributor bonuses 20,593 71,384
Product returns 0 77,831
Other 288,196 50,000
------------ ------------
Total current liabilities 1,728,175 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: 3,803,900
shares (unaudited) at March 31, 1996 and
3,786,500 shares at June 30, 1995 38,039 37,865
Additional paid-in capital 10,116,444 10,013,949
Unrealized losses on securities available-for-sale (50,162) (50,816)
Retained earnings 588,526 1,205,180
------------ ------------
10,692,847 11,206,178
------------ ------------
$12,588,022 $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 Nine months ended
March 31, March 31,
--------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues
Product sales $ 3,812,332 $ 4,232,402 $ 10,529,893 $ 10,822,734
------------ ------------ ------------ ------------
Total revenues 3,812,332 4,232,402 10,529,893 10,822,734
Cost of goods sold 2,339,427 2,497,670 6,420,131 6,435,146
------------ ------------ ------------ ------------
Gross profit 1,472,905 1,734,732 4,109,762 4,387,588
Operating expenses
Selling, general and administrative 803,230 1,034,310 3,212,770 2,708,480
Research and development 531,675 449,235 1,546,226 1,337,607
------------ ------------ ------------ ------------
1,334,905 1,483,545 4,758,996 4,046,087
------------ ------------ ------------ ------------
Operating profit (loss) 138,000 251,187 (649,234) 341,501
Other income (expense)
Interest income 1,566 6,149 17,171 33,649
Dividend income 8,830 8,930 28,898 29,355
Interest expense (3,916) 5,659 (10,331) 0
Other 0 (5,166) 0 2,693
------------ ------------ ------------ ------------
6,480 15,572 35,738 65,697
------------ ------------ ------------ ------------
Earnings (loss) before income tax expense 144,480 266,759 (613,496) 407,198
Income tax expense 1,981 82,216 3,158 104,388
------------ ------------ ------------ ------------
Net earnings (loss) $ 142,499 $ 184,543 ($ 616,654) $ 302,810
============ ============ ============ ============
Net earnings (loss) per common and common
equivalent share
Primary $ 0.04 $ 0.05 ($ 0.16) $ 0.08
Fully diluted $ 0.04 $ 0.05 ($ 0.16) $ 0.08
Weighted average number of common and
common equivalent shares outstanding
during the period
Primary 3,872,428 3,808,253 3,870,896 3,806,196
Fully diluted 3,872,553 3,859,488 3,872,818 3,823,325
</TABLE>
See accompanying notes to the consolidated financial statements
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months Nine months
Ended Ended
March 31, March 31,
1996 1995
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) earnings ($ 616,654) $ 302,810
Adjustments to reconcile net (loss) earnings to
net cash used in operating activities:
Depreciation and amortization 818,061 616,840
Loss on disposal of assets 300,000 0
Changes in operating assets and liabilities:
Trade and other receivables (517,771) (618,139)
Inventories (367,629) (522,609)
Prepaid expenses and other (24,079) (125,920)
Accounts payable 304,266 96,538
Accrued expenses (305,654) 100,539
----------- -----------
Net cash used in operating activities (409,460) (149,941)
Cash flows from investing activities:
Purchase of property, plant and equipment (288,891) (1,196,780)
Investment in patents and trademarks (98,003) (105,877)
Purchase of marketable securities and other investments 0 (234,317)
Sale of marketable securities and other investments 0 1,613,354
----------- -----------
Net cash (used in) provided by
investing activities (386,894) 76,380
Cash flows from financing activities:
Issuance of common stock 102,669 36,569
Proceeds from notes payable 83,595 0
----------- -----------
Net cash provided by financing activities 186,264 36,569
----------- -----------
Net decrease in cash and cash equivalents (610,090) (36,992)
Cash and cash equivalents at beginning of period 839,942 785,770
----------- -----------
Cash and cash equivalents at end of period $ 229,852 $ 748,778
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Disclosures in Financial Statements
Nine months Nine months
Ended Ended
March 31, March 31,
1996 1995
---------- -----------
(Unaudited) (Unaudited)
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest expense $ 4,987 $ 0
Income taxes 27,632 94,462
Supplemental Schedule Of Noncash Activities:
During fiscal 1996 the Company recorded the sale of certain assets. The effect
of the transaction during the nine months ended March 31, 1996 was as follows:
Reduction of accounts receivable $ 32,791
Reduction of inventories 382,502
Reduction of prepaid expenses and other 135,708
Reduction of property and equipment 154,115
Reduction of accumulated depreciation (74,176)
---------
$ 630,940
=========
See accompanying notes to the consolidated financial statements
LECTEC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996
(1) General
The accompanying consolidated financial statements include the accounts of
LecTec Corporation (the "Company"), LecTec International Corporation, a
wholly-owned subsidiary, and Pharmadyne Corporation, a fifty-one percent owned
subsidiary(formerly Natus Corporation which was renamed Pharmadyne Corporation).
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 Pharmadyne Subsidiary
During the quarter ended March 31, 1996 the Company completed the sale of
the direct marketing related assets of the Pharmadyne Corporation subsidiary.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Product sales for the third quarter of fiscal 1996 were $3,812,332 as
compared with $4,232,402 for the third quarter of fiscal 1995. Product sales,
for the third quarter, decreased overall by 9.9% 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 15.2% from the prior year while medical tape product sales decreased by 14.5%
and therapeutic product sales decreased by 44.6%. 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 brand named
products, reductions in pain patch media sales and decreased sales of other
therapeutic products. Product sales for the first nine months of fiscal 1996
were $10,529,893 as compared with $10,822,734 for the first nine months of
fiscal 1995. Product sales, for the first nine months, decreased by 2.7% from
the prior year as a result of decreased medical tape product sales and
therapeutic product sales partially offset by increased conductive product
sales. Conductive product sales increased by 8.6% from the prior year primarily
as a result of volume increases and increased market share. Medical tape product
sales decreased by 11.8% 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 decreased 16.6% from the prior year due to
decreased direct marketing sales of Natus brand named products as a result of
the sale of the direct marketing related assets of the Pharmadyne subsidiary,
decreased pain patch media sales volumes and decreased sales of other
therapeutic products.
Gross profit for the third quarter of fiscal 1996 was $1,472,905 as
compared with $1,734,732 compared to the third quarter of fiscal 1995. Gross
profit as a percent of total revenues for the third quarter of fiscal 1996 was
38.6% as compared to 41.0% for the third quarter of fiscal 1995. The decrease in
gross profit percent for the third quarter was primarily a reflection of
decreased sales of higher margin therapeutic products. Gross profit for the
first nine months of fiscal 1996 was $4,109,762 as compared with $4,387,588
compared to the first nine months of fiscal 1995. Gross profit as a percent of
total revenues for the first nine months of fiscal 1996 was 39.0% as compared to
40.5% for the first nine months of fiscal 1995. The decrease in gross profit
percent for the first nine months was primarily due to decreased sales of higher
margin therapeutic products as well as increased raw material costs for all
products.
Selling, general and administrative expenses were $803,230 and $1,034,310
during the third quarters of fiscal 1996 and fiscal 1995, respectively. Selling,
general and administrative expenses for the third quarters of fiscal 1996 and
1995, as a percentage of total revenues, were 21.1% and 24.4%, respectively.
Selling, general and administrative expenses were $3,212,770 and $2,708,480
during the first nine months of fiscal 1996 and fiscal 1995, respectively.
Selling, general and administrative expenses for the first nine months of fiscal
1996 and 1995, as a percentage of total revenues, were 30.5% and 25.0%,
respectively. Selling, general and administrative expenses in the third quarter
were reduced primarily due to completion of the sale of the direct marketing
related assets of the Pharmadyne subsidiary. Increased selling, general and
administrative expenses associated with the operations of the Pharmadyne
subsidiary and the expenses associated with the sale of the direct marketing
related assets of the Pharmadyne subsidiary were primarily responsible for the
increase in the first nine months.
Research and development expenses for the third quarters of fiscal 1996 and
1995 were $531,675 and $449,235, respectively. Research and development expenses
for the third quarter, as a percentage of total revenues, were 14.0% and 10.6%
for fiscal 1996 and 1995, respectively. Research and development expenses for
the first nine months of fiscal 1996 increased to $1,546,226 from $1,337,607 in
fiscal 1995. Research and development expenses for the first nine months, as a
percentage of total revenues, were 14.7% and 12.4% for fiscal 1996 and 1995,
respectively. The increase in expense for both the third quarter and the first
nine 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 third quarter of fiscal 1996 to
$6,480 from $15,572 in the third quarter of fiscal 1995. Other income (expense)
decreased in the first nine months of fiscal 1996 to $35,738 from $65,697 in the
first nine months of fiscal 1995. The decline in both the third quarter and the
first nine 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 products production line as well as to finance
the losses associated with the Pharmadyne subsidiary.
The Company had earnings before income tax expense of $144,480 in the third
quarter of fiscal 1996 compared to earnings before income tax expense of
$266,759 in the third quarter of fiscal 1995. The Company had a loss before
income tax expense of $613,496 in the first nine months of fiscal 1996 compared
to earnings before income tax expense of $407,198 in the first nine months of
fiscal 1995. The decrease in earnings before income taxes for the third quarter
and the first nine months was primarily the result of the loss on the sale of
the direct marketing related assets of the Pharmadyne subsidiary, the operating
loss and parent Company expenses associated with the direct marketing activities
of the Pharmadyne subsidiary and increased research and development expense.
The Company did not record a tax benefit in connection with losses
generated during the first nine months as the losses relate primarily to the
Pharmadyne subsidiary and cannot be utilized by the Company 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 $400,000 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 third quarter of fiscal 1996 of 3.24 as compared to 4.34
at the end of fiscal 1995. Working capital, at the end of the third quarter of
fiscal 1996, decreased to $3,873,170 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 May 15, 1996 /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-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 229,852
<SECURITIES> 0
<RECEIVABLES> 2,918,524
<ALLOWANCES> 17,771
<INVENTORY> 2,082,381
<CURRENT-ASSETS> 5,601,345
<PP&E> 8,508,343
<DEPRECIATION> 3,311,637
<TOTAL-ASSETS> 12,588,022
<CURRENT-LIABILITIES> 1,728,175
<BONDS> 0
0
0
<COMMON> 38,039
<OTHER-SE> 10,654,808
<TOTAL-LIABILITY-AND-EQUITY> 12,588,022
<SALES> 10,529,893
<TOTAL-REVENUES> 10,529,893
<CGS> 6,420,131
<TOTAL-COSTS> 6,420,131
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,331
<INCOME-PRETAX> (613,496)
<INCOME-TAX> 3,158
<INCOME-CONTINUING> (616,654)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (616,654)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
