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 SEPTEMBER 30, 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 November
1, 1996 was 3,835,989 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-8
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>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1996 1996
------------ -----------
ASSETS
(Unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 443,931 $ 800,693
Receivables
Trade, less allowance for doubtful accounts of $37,991
(unaudited) and $74,208 at September 30, 1996 and
June 30, 1996, respectively 2,218,929 1,847,736
Refundable income taxes 55,580 55,580
Other 55,841 182,247
----------- -----------
2,330,350 2,085,563
Inventories
Raw materials 1,379,241 1,144,078
Work-in-process 463,440 229,974
Finished goods 403,554 637,275
----------- -----------
Total inventories 2,246,235 2,011,327
Prepaid expenses and other 259,335 123,099
Deferred tax asset 429,000 429,000
----------- -----------
Total current assets 5,708,851 5,449,682
PROPERTY, PLANT AND EQUIPMENT - AT COST
Building and improvements 1,632,423 1,629,630
Equipment 6,424,864 6,414,132
Furniture and fixtures 366,745 354,985
----------- -----------
8,424,032 8,398,747
Less accumulated depreciation 3,697,124 3,533,503
----------- -----------
4,726,908 4,865,244
Construction in progress 8,890 --
Land 247,731 247,731
----------- -----------
4,983,529 5,112,975
OTHER ASSETS
Patents and trademarks, less accumulated
amortization of $727,999 (unaudited) and $687,871
at September 30, 1996 and June 30, 1996, respectively 418,124 417,681
Goodwill, less accumulated amortization of $491,670
(unaudited) and $442,503 at September 30, 1996
and June 30, 1996, respectively 98,330 147,497
Long-term investments 576,114 574,806
Investment in limited liability company 583,326 606,167
Other 3,654 10,195
----------- -----------
1,679,548 1,756,346
----------- -----------
$12,371,928 $12,319,003
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1996 1996
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 805,001 $ 894,846
Accrued expenses
Payroll related 242,763 304,527
Other 91,407 10,285
------------ ------------
Total current liabilities 1,139,171 1,209,658
DEFERRED INCOME TAXES 174,000 174,000
SHAREHOLDERS' EQUITY
Common stock, $.01 par value: 15,000,000 shares
authorized; issued and outstanding: 3,836,000
shares (unaudited) at September 30, 1996 and
3,835,800 shares at June 30, 1996 38,360 38,358
Additional paid-in capital 10,452,884 10,368,166
Unrealized losses on securities available-for-sale (42,858) (44,166)
Retained earnings 610,371 572,987
------------ ------------
11,058,757 10,935,345
------------ ------------
$ 12,371,928 $ 12,319,003
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
September 30,
------------------------------
1996 1995
------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $ 2,973,483 $ 3,462,451
Cost of goods sold 1,898,394 2,123,247
----------- -----------
Gross profit 1,075,089 1,339,204
Operating expenses
Selling, general and administrative 553,216 941,490
Research and development 500,202 511,033
----------- -----------
1,053,418 1,452,523
----------- -----------
Earnings (loss) from operations 21,671 (113,319)
Other income (expense)
Interest income 16,755 9,823
Dividend income 9,432 9,131
Interest expense (1,230) --
Other 15,000 --
----------- -----------
39,957 18,954
----------- -----------
Earnings (loss) before income taxes and equity
in losses of unconsolidated subsidiary 61,628 (94,365)
Income tax expense 1,403 1,001
----------- -----------
Earnings (loss) before equity in losses
of unconsolidated subsidiary 60,225 (95,366)
Equity in losses of unconsolidated subsidiary 22,841 --
----------- -----------
Net earnings (loss) $ 37,384 $ (95,366)
=========== ===========
Net earnings (loss) per common and common
equivalent share $ 0.01 $ (0.03)
Weighted average number of common and
common equivalent shares outstanding
during the period 3,835,956 3,788,308
</TABLE>
See accompanying notes to the consolidated financial statements.
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months Three months
Ended Ended
September 30, September 30,
1996 1995
------------ ------------
Cash flows from operating activities: (Unaudited) (Unaudited)
<S> <C> <C>
Net earnings (loss) $ 37,384 $ (95,366)
Adjustments to reconcile net (loss) earnings to net cash
used in operating activities:
Depreciation and amortization 252,916 264,979
Gain on sale of equipment (15,000) --
Equity in losses of unconsolidated subsidiary 22,841 --
Changes in operating assets and liabilities:
Trade and other receivables (244,787) (265,796)
Inventories (234,908) (271,559)
Prepaid expenses and other (129,695) (171,874)
Accounts payable (6,250) 253,433
Accrued expenses 19,358 (86,693)
--------- ---------
Net cash used in operating activities (298,141) (372,876)
Cash flows from investing activities:
Purchase of property, plant and equipment (34,175) (154,777)
Proceeds from sale of equipment 15,000 --
Investment in patents and trademarks (40,571) (18,914)
--------- ---------
Net cash used in investing activities (59,746) (173,691)
Cash flows from financing activities:
Issuance of common stock 1,125 42,458
Proceeds from notes payable -- 83,595
--------- ---------
Net cash provided by financing activities 1,125 126,053
--------- ---------
Net decrease in cash and cash equivalents (356,762) (420,514)
Cash and cash equivalents at beginning of period 800,693 839,942
--------- ---------
Cash and cash equivalents at end of period $ 443,931 $ 419,428
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Disclosures in Financial Statements
Three months Three months
Ended Ended
September 30, September 30,
1996 1995
------------ ------------
(Unaudited) (Unaudited)
Supplemental Disclosures of Cash Flow Information:
<S> <C> <C>
Cash paid during the period for:
Interest expense $ 5,924 $ --
Income taxes 6,000 8,000
Supplemental Schedule Of Noncash Activities:
Conversion of subsidiary's notes payable to equity $83,595 $ --
</TABLE>
See accompanying notes to the consolidated financial statements.
LECTEC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 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 sixty-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) Increase in Ownership Interest in Pharmadyne Subsidiary
On September 5, 1996 the Company exercised a warrant received
during fiscal 1996 to purchase 227,959 additional shares of Pharmadyne
Corporation at $1 per share. This increased the Company's ownership interest in
Pharmadyne Corporation from 51% to 61%.
(3) Recently Adopted Accounting Standards
The Company implemented Statement of Financial Accounting
Standards (SFAS) 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," effective July 1, 1996. SFAS 121
establishes guidance for when to recognize and how to measure impairment losses
of long-lived assets and certain identifiable intangibles, and how to value
long-lived assets to be disposed of. The adoption of this Standard did not have
a material effect on the Company's financial position.
Additionally, the Company implemented SFAS 123 "Accounting for
Stock-Based Compensation," which established financial accounting and reporting
standards for stock-based employee compensation plans. This Statement defines
and encourages the use of a fair value based method of accounting for an
employee stock option or similar equity instrument. The Statement allows the use
of the intrinsic value based method of accounting as prescribed by current
existing accounting standards for options issued to employees. The Company
adopted this Standard effective July 1, 1996, and management has elected to
utilize the intrinsic value based method of accounting for stock-based
compensation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Sales for the first quarter of fiscal 1997 were $2,973,483 as
compared with $3,462,451 for the first quarter of fiscal 1996. Sales for the
first quarter decreased overall by 14.1% from the prior year. The decrease was
primarily the result of the absence of Pharmadyne Corporation direct marketing
related sales due to the divestiture of the direct marketing related assets in
the third quarter of fiscal 1996. Conductive sales, the Company's largest
product group, increased by 12.9% from the prior year while medical tape sales
decreased by 27.5% and therapeutic sales decreased 61.8%. Conductive sales
increased for both diagnostic and hydrogel products as a result of volume
increases. The medical tape sales decrease was primarily due to volume decreases
which more than offset sales to several new customers. The therapeutic sales
decrease was primarily the result of the absence of direct marketing related
sales.
Gross profit for the first quarter of fiscal 1997 was $1,075,089 as
compared to $1,339,204 for the first quarter of fiscal 1996. Gross profit as a
percent of sales for the first quarter of fiscal 1997 was 36.2% as compared to
38.7% for the first quarter of fiscal 1996. The decrease in gross profit percent
for the quarter was primarily the result of the absence of higher margin direct
marketing related sales.
Selling, general and administrative expenses were $553,216 and
$941,490 during the first quarters of fiscal 1997 and fiscal 1996, respectively.
Selling, general and administrative expenses for the first quarters of fiscal
1997 and 1996, as a percentage of sales, were 18.6% and 27.2%, respectively.
Selling, general and administrative expenses were reduced primarily due to the
absence of expenses associated with the direct marketing operations of the
Pharmadyne subsidiary.
Research and development expenses for the first quarters of fiscal
1997 and 1996 were $500,202 and $511,033, respectively. Research and development
expenses for the first quarter, as a percentage of sales, were 16.8% and 14.8%
for fiscal 1997 and 1996, respectively.
Other income (expense) increased in the first quarter of fiscal
1997 to $39,957 from $18,954 in the first quarter of fiscal 1996. The increase
resulted primarily from a gain incurred on the sale of equipment.
The Company had earnings before income taxes and equity in losses
of unconsolidated subsidiary of $39,957 in the first quarter of fiscal 1997
compared to a loss of $94,365 in the first quarter of fiscal 1996. The increase
in earnings before income taxes for the quarter was primarily the result of the
absence of the losses from the direct selling operations of the Pharmadyne
subsidiary.
Income tax expense was $1,403 and $1,001 during the first quarters
of fiscal 1997 and fiscal 1996 respectively. In the first quarter of fiscal 1997
there was minimal income tax expense because of the utilization of NOL
carryforwards. In the first quarter of fiscal 1996, there was no income tax
benefit because of subsidiary losses that could not be utilized.
On March 12, 1996, the Company contributed the direct marketing
related assets of Pharmadyne Corporation to Natus L.L.C. (an Arizona limited
liability company) in exchange for a 15% interest in Natus L.L.C. During the
first quarter of fiscal 1997, the Company's pro-rata share of Natus L.L.C.'s net
loss (based on a 15% equity ownership position) totaled $22,841.
Inflation has not had a significant impact on the Company as it
has generally been able to adjust its selling prices as the costs of materials
and other expenses have changed.
Liquidity and Capital Resources
Cash and cash equivalents decreased by $356,762 to $443,931 during
the first quarter of fiscal 1997. Long-term investments increased by $1,308 to
$576,114 during the first quarter of fiscal 1997. Capital spending for various
equipment totaled $34,175 during the first quarter. There were no material
commitments for capital expenditures at September 30, 1996.
Working capital, at the end of the first quarter of fiscal 1997,
increased to $4,569,680 from $4,240,024 at the end of fiscal 1996. The Company
has a current ratio at the end of the first quarter of fiscal 1997 of 5.01 as
compared to 4.51 at the end of fiscal 1996.
The Company is free of long-term debt, and has a $1,000,000
annually renewable revolving line of credit for meeting current operating
requirements. There were no outstanding amounts on this short-term facility at
September 30, 1996. Shareholders' equity increased by $123,412 to $11,058,757
during the first quarter of fiscal 1997.
Management believes that internally-generated cash and the
existing short-term credit line will be sufficient for supporting anticipated
growth and capital spending requirements for the remainder of fiscal 1997.
Statements about the remaining fiscal 1997 outlook are
forward-looking and, therefore, involve certain risks and uncertainties,
including but not limited to: buying patterns of customers, competitive forces
and other factors detailed from time to time in filings with the Securities and
Exchange Commission.
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 November 14, 1996 /s/ Rodney A. Young
------------------------ ----------------------------------
Rodney A. Young, Pres. & CEO
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 443,931
<SECURITIES> 0
<RECEIVABLES> 2,368,341
<ALLOWANCES> 37,991
<INVENTORY> 2,246,235
<CURRENT-ASSETS> 5,708,851
<PP&E> 8,680,653
<DEPRECIATION> 3,697,124
<TOTAL-ASSETS> 12,371,928
<CURRENT-LIABILITIES> 1,139,171
<BONDS> 0
0
0
<COMMON> 38,360
<OTHER-SE> 11,020,397
<TOTAL-LIABILITY-AND-EQUITY> 12,371,928
<SALES> 2,973,483
<TOTAL-REVENUES> 2,973,483
<CGS> 1,898,394
<TOTAL-COSTS> 1,898,394
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,230
<INCOME-PRETAX> 61,628
<INCOME-TAX> 1,403
<INCOME-CONTINUING> 60,225
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,384
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
