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, 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 February
1, 1997 was 3,835,989 shares.
LECTEC CORPORATION
FORM 10-Q - QUARTERLY REPORT FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996
Table of Contents
Part I - Financial Information
Item 1. Financial Statements and Notes to 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-2
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . II-3
Signature Page. . . . . . . . . . . . . . . . . . . . . II-4
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1996 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 590,432 $ 800,693
Receivables
Trade, net of allowances of $34,185 (unaudited)
and $74,208 at December 31, 1996 and
June 30, 1996, respectively 2,179,318 1,847,736
Refundable income taxes 55,580 55,580
Other 43,277 182,247
----------- -----------
2,278,175 2,085,563
Inventories
Raw materials 1,457,279 1,144,078
Work-in-process 532,059 229,974
Finished goods 363,909 637,275
----------- -----------
Total inventories 2,353,247 2,011,327
Prepaid expenses and other 171,844 123,099
Deferred income taxes 429,000 429,000
----------- -----------
Total current assets 5,822,698 5,449,682
PROPERTY, PLANT AND EQUIPMENT - AT COST
Building and improvements 1,632,423 1,629,630
Equipment 6,480,038 6,414,132
Furniture and fixtures 369,398 354,985
----------- -----------
8,481,859 8,398,747
Less accumulated depreciation 3,881,429 3,533,503
----------- -----------
4,600,430 4,865,244
Construction in progress 18,632 -
Land 247,731 247,731
----------- -----------
4,866,793 5,112,975
OTHER ASSETS
Patents and trademarks, less accumulated
amortization of $768,136 (unaudited) and $687,871
at December 31, 1996 and June 30, 1996, respectively 402,321 417,681
Goodwill, less accumulated amortization of $540,837
(unaudited) and $442,503 at December 31, 1996
and June 30, 1996, respectively 49,163 147,497
Long-term investments 591,159 574,806
Investment in limited liability company 522,924 606,167
Other 258 10,195
----------- -----------
1,565,825 1,756,346
----------- -----------
$12,255,316 $12,319,003
=========== ===========
See accompanying notes to the consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1996 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 736,127 $ 894,846
Accrued expenses
Payroll related 362,315 304,527
Other 173,393 10,285
------------ ------------
Total current liabilities 1,271,835 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 December 31, 1996 and
3,835,800 shares at June 30, 1996 38,360 38,358
Additional paid-in capital 10,452,887 10,368,166
Unrealized losses on securities available-for-sale (27,813) (44,166)
Retained earnings 346,047 572,987
------------ ------------
10,809,481 10,935,345
------------ ------------
$ 12,255,316 $ 12,319,003
============ ============
See accompanying notes to the consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
Three months ended Six months ended
December 31, December 31,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 3,028,118 $ 3,255,110 $ 6,001,601 $ 6,717,561
Cost of goods sold 1,938,591 1,957,457 3,836,985 4,080,704
----------- ----------- ----------- -----------
Gross profit 1,089,527 1,297,653 2,164,616 2,636,857
Operating expenses
Selling, general and administrative 882,157 1,468,050 1,435,373 2,409,540
Research and development 411,726 503,518 911,928 1,014,551
----------- ----------- ----------- -----------
1,293,883 1,971,568 2,347,301 3,424,091
----------- ----------- ----------- -----------
Loss from operations (204,356) (673,915) (182,685) (787,234)
Other income (expense)
Interest income (8,737) 5,782 8,018 15,605
Dividend income 10,117 10,937 19,549 20,068
Interest expense (33) (6,415) (1,263) (6,415)
Other - - 15,000 -
----------- ----------- ----------- -----------
1,347 10,304 41,304 29,258
----------- ----------- ----------- -----------
Loss before income taxes and equity in
losses of unconsolidated subsidiary (203,009) (663,611) (141,381) (757,976)
Income tax expense 913 176 2,316 1,177
----------- ----------- ----------- -----------
Loss before equity in losses of
unconsolidated subsidiary (203,922) (663,787) (143,697) (759,153)
Equity in losses of unconsolidated subsidiary 60,402 - 83,243 -
----------- ----------- ----------- -----------
Net loss $ (264,324) $ (663,787) $ (226,940) $ (759,153)
=========== =========== =========== ===========
Net loss per common share ($ 0.07) ($ 0.17) ($ 0.06) ($ 0.20)
Weighted average number of common shares
outstanding during the period 3,835,989 3,796,824 3,835,973 3,792,566
See accompanying notes to the consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Unaudited)
Six months Six months
Ended Ended
December 31, December 31,
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(226,940) $(759,153)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 526,525 540,304
Gain on sale of equipment (15,000) -
Equity in losses of unconsolidated subsidiary 83,243 -
Changes in operating assets and liabilities:
Trade and other receivables (192,612) 189,166
Inventories (341,920) (374,784)
Prepaid expenses and other (38,808) (76,380)
Accounts payable (75,124) 5,944
Accrued expenses 220,896 283,154
--------- ---------
Net cash used in operating activities (59,740) (191,749)
Cash flows from investing activities:
Purchase of property, plant and equipment (101,744) (222,873)
Proceeds from sale of equipmnent 15,000 -
Investment in patents and trademarks (64,905) (67,488)
--------- ---------
Net cash used in investing activities (151,649) (290,361)
Cash flows from financing activities:
Issuance of common stock 1,128 50,206
Proceeds from notes payable - 83,595
--------- ---------
Net cash provided by financing activities 1,128 133,801
--------- ---------
Net decrease in cash and cash equivalents (210,261) (348,309)
Cash and cash equivalents at beginning of period 800,693 839,942
--------- ---------
Cash and cash equivalents at end of period $ 590,432 $ 491,633
========= =========
See accompanying notes to the consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (Unaudited)
Six months Six months
Ended Ended
December 31, December 31,
1996 1995
----------- ---------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest expense $ 5,957 $ -
Income taxes 6,000 20,725
Supplemental Schedule Of Noncash Activities:
Conversion of subsidiary's notes payable to equity $ 83,595 $ -
During fiscal 1996 the Company recorded the disposition 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.
</TABLE>
LECTEC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Quarters Ended December 31, 1996 and 1995
(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 Company's financial statements for
the three and six months ended December 31, 1996 should be read in conjunction
with its Annual Report on Form 10-K and its Annual Report to Shareholders for
the fiscal year ended June 30, 1996. 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 Corporation
On September 5, 1996 the Company exercised a warrant to purchase
227,959 additional shares of Pharmadyne Corporation at $1 per share by
converting a portion of an outstanding note receivable with Pharmadyne. 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
Three and Six Months Ended December 31, 1996 and 1995
Results of Operations
Net sales for the second quarter of fiscal 1997 were $3,028,118 as
compared with $3,255,110 for the second quarter of fiscal 1996, a decrease of
7.0%. 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 product
sales, the Company's largest product group, decreased by 0.7% from the prior
year while medical tape sales increased by 42.4% and therapeutic product sales
decreased by 70.5%. Medical tape sales increased primarily due to volume
increases and sales to several new customers. The therapeutic product sales
decrease was primarily the result of the absence of direct marketing related
sales as discussed above. Net sales for the first six months of fiscal 1997 were
$6,001,601 as compared with $6,717,561 for the first six months of fiscal 1996,
a decline of 10.7%. The decrease was also due primarily to 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 increased by 5.3% from the prior year primarily as a result of
volume increases and the timing of orders from major customers. Medical tape
sales decreased by 1.5% from the prior year. Therapeutic product sales decreased
66.1% from the prior year primarily as a result of the absence of Pharmadyne
direct marketing related sales as discussed above.
Gross profit for the second quarter of fiscal 1997 was $1,089,527
as compared with $1,297,653 for the second quarter of fiscal 1996. Gross profit
as a percent of net sales for the second quarter of fiscal 1997 was 36.0% as
compared to 39.9% for the second quarter of fiscal 1996. The decrease in gross
profit percent for the quarter was primarily the result of the absence of higher
margin Pharmadyne direct marketing related sales. Gross profit for the first six
months of fiscal 1997 was $2,164,616 as compared with $2,636,857 for the first
six months of fiscal 1996. Gross profit as a percent of net sales for the first
six months of fiscal 1997 was 36.1% as compared to 39.3% for the first six
months of fiscal 1996. The decrease in gross profit percent for the first six
months was also primarily the result of the absence of higher margin Pharmadyne
direct marketing related sales.
Selling, general and administrative expenses were $882,157 and
$1,468,050 during the second quarters of fiscal 1997 and fiscal 1996,
respectively, and as a percentage of net sales, were 29.1% and 45.1%,
respectively. Selling, general and administrative expenses were $1,435,373 and
$2,409,540 during the first six months of fiscal 1997 and fiscal 1996,
respectively, and as a percentage of net sales were 23.9% and 35.9%,
respectively. The decrease in selling, general and administrative expenses for
both the quarter and first six months was primarily due to the absence in fiscal
1997 of expenses associated with the direct marketing operations of the
Pharmadyne subsidiary. These decreases were partially offset by an increase in
administrative expenses associated with hiring a new executive staff, separation
costs associated with several former executives and expanding the sales and
marketing department.
Research and development expenses for the second quarters of
fiscal 1997 and 1996 were $411,726 and $503,518, respectively, and as a
percentage of net sales, were 13.6% and 15.5%, respectively. Research and
development expenses for the first six months of fiscal 1997 decreased to
$911,928 from $1,014,551 in the first six months of fiscal 1996. Research and
development expenses for the first six months, as a percentage of net sales,
were 15.2% and 15.1% for fiscal 1997 and 1996, respectively. The decrease in R&D
expense for both the quarter and first six months reflects reductions in
research costs associated with the further development of the cotinine-based
smoking cessation product.
Other income decreased in the second quarter of fiscal 1997 to
$1,347 from $10,304 in the second quarter of fiscal 1996. Other income increased
in the first six months of fiscal 1997 to $41,304 from $29,258 in the first six
months of fiscal 1996. The decline in the second quarter resulted primarily from
a reduction of interest income. The increase in the first six months resulted
primarily from a gain on the sale of equipment recorded in the first quarter of
fiscal 1997.
The Company had a loss before income taxes and equity in losses of
an unconsolidated subsidiary of $203,009 for the second quarter of fiscal 1997
compared to a loss of $663,611 for the second quarter of fiscal 1996. The
Company had a loss before income taxes and equity in losses of an unconsolidated
subsidiary of $141,381 for the first six months of fiscal 1997 compared to a
loss of $757,976 for the first six months of fiscal 1996. The decrease in the
loss for both the three and six month periods compared to the prior year was
primarily the result of the absence in fiscal 1997 of the losses from the direct
marketing operations of the Pharmadyne subsidiary.
The Company did not record a tax benefit in connection with losses
generated for the three and six month periods ended December 31, 1996 and 1995
due to the uncertainty of the future realization of such tax benefits.
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
second quarter and first six months 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
$60,402 and $83,243, respectively.
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 $210,261 to $590,432 during
the first six months of fiscal 1997. Long-term investments increased by $16,353
to $591,159 during the first six months of fiscal 1997 due to investment value
appreciation. Capital spending for various equipment totaled $101,744 during the
first six months of fiscal 1997. There were no material commitments for capital
expenditures at December 31, 1996.
Working capital, at the end of the first six months of fiscal
1997, increased to $4,550,863 from $4,240,024 at the end of fiscal 1996. The
Company has a current ratio at the end of the first six months of fiscal 1997 of
4.58 as compared to 4.51 at the end of fiscal 1996.
The Company has no outstanding short or long-term debt at December
31, 1996, and is currently negotiating a short-term revolving line of credit in
the event it is needed to meet current operating requirements. Shareholders'
equity decreased by $125,864 to $10,809,481 during the first six months of
fiscal 1997.
Management believes that internally-generated cash, existing cash
and investment assets and the anticipated 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
The Regular Annual Meeting of Shareholders of the Company was held on
November 18, 1996. The following matters were voted on by Shareholders:
1. The election of five directors to serve on the Board of
Directors for a term of one year and until their successor is
duly elected and qualified.
2. The ratification of the appointment of Grant Thornton, LLP as
the Company's independent auditor for the Company's current
fiscal year.
3. The approval of an amendment to increase the shares reserved
for the 1989 Stock Option Plan from 500,000 shares to 800,000
shares.
4. The approval of an amendment to the 1989 Stock Option Plan to
allow for gifting of fully vested and exercisable options.
5. The approval of an amendment to the 1991 Directors' Stock
Option Plan to allow for gifting of fully vested and
exercisable options.
The results of the voting on these matters were as follows:
1. Board of Directors:
For Against/Abstain Total
--- --------------- -----
Lee M. Berlin 3,256,935 237,548 3,494,483
Alan C. Hymes 3,252,212 242,271 3,494,483
Paul O. Johnson 2,958,643 535,840 3,494,483
Alan J. Wilensky 3,185,679 308,804 3,494,483
Rodney A. Young 3,428,122 66,361 3,494,483
Write in votes:
Thomas E. Brunelle 3,003
2. Appointment of Grant Thornton, LLP as independent auditor for
the Company:
For Against Abstain Total
--- ------- ------- -----
3,414,009 42,590 37,884 3,494,483
3. Increase shares reserved for the 1989 Stock Option Plan:
For Against Abstain Total
--- ------- ------- -----
3,267,067 177,743 49,673 3,494,483
4. Allow for gifting of fully vested and exercisable options -
1989 Stock Option Plan:
For Against Abstain Total
--- ------- ------- -----
2,934,032 484,885 75,566 3,494,483
5. Allow for gifting of fully vested and exercisable options -
1991 Directors' Stock Option Plan:
For Against Abstain Total
--- ------- ------- -----
2,929,940 493,067 71,476 3,494,483
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, 1997 /s/ Rodney A. Young
------------------- ----------------------------------
Rodney A. Young, CEO & Pres.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 590,432
<SECURITIES> 0
<RECEIVABLES> 2,312,360
<ALLOWANCES> 34,185
<INVENTORY> 2,353,247
<CURRENT-ASSETS> 5,822,698
<PP&E> 8,748,222
<DEPRECIATION> 3,881,429
<TOTAL-ASSETS> 12,255,316
<CURRENT-LIABILITIES> 1,271,835
<BONDS> 0
0
0
<COMMON> 38,360
<OTHER-SE> 10,771,121
<TOTAL-LIABILITY-AND-EQUITY> 12,255,316
<SALES> 3,028,118
<TOTAL-REVENUES> 3,028,118
<CGS> 1,938,591
<TOTAL-COSTS> 1,938,591
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> (203,009)
<INCOME-TAX> 913
<INCOME-CONTINUING> (203,922)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (264,324)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
