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, 1997.
[ ] 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
12, 1997 was 4,064,766 shares.
<PAGE>
LECTEC CORPORATION
FORM 10-Q - QUARTERLY REPORT FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1997
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-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
<PAGE>
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
1997 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 579,695 $ 665,190
Short-term investments 390,698 577,587
Receivables
Trade, net of allowances of $80,795 (unaudited) and $67,126
at September 30, 1997 and June 30, 1997 2,891,130 2,178,984
Refundable income taxes 392,926 401,263
Other 28,084 22,780
----------- -----------
3,312,140 2,603,027
Inventories
Raw materials 1,743,496 1,655,924
Work-in-process 230,973 184,208
Finished goods 666,706 736,889
----------- -----------
Total inventories 2,641,175 2,577,021
Prepaid expenses and other 150,642 84,871
Deferred income taxes 366,000 366,000
----------- -----------
Total current assets 7,440,350 6,873,696
PROPERTY, PLANT AND EQUIPMENT - AT COST
Building and improvements 1,748,868 1,635,157
Equipment 6,629,335 6,578,960
Furniture and fixtures 372,530 371,670
----------- -----------
8,750,733 8,585,787
Less accumulated depreciation 4,411,812 4,241,214
----------- -----------
4,338,921 4,344,573
Land 247,731 247,731
----------- -----------
4,586,652 4,592,304
OTHER ASSETS
Patents and trademarks, less accumulated amortization of $889,990
(unaudited) and $846,914 at September 30, 1997 and June 30, 1997 338,042 363,343
Long-term investments 8,013 8,013
----------- -----------
346,055 371,356
----------- -----------
$12,373,057 $11,837,356
=========== ===========
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
1997 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,141,622 $ 779,699
Accrued expenses
Payroll related 303,364 324,381
Restructuring charge 1,502,341 1,521,107
Other 259,773 213,425
------------ ------------
Total current liabilities 3,207,100 2,838,612
DEFERRED INCOME TAXES 211,000 211,000
SHAREHOLDERS' EQUITY
Common stock, $.01 par value: 15,000,000 shares authorized; issued and
outstanding 3,842,800 shares (unaudited) at September 30, 1997 and
3,842,800 shares at June 30, 1997 38,428 38,428
Additional paid-in capital 10,476,428 10,476,428
Unrealized losses on securities available-for-sale (17,852) (33,372)
Retained deficit (1,542,047) (1,693,740)
------------ ------------
8,954,957 8,787,744
------------ ------------
$ 12,373,057 $ 11,837,356
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three months ended
September 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net sales $ 3,630,810 $ 2,973,483
Cost of goods sold 2,421,951 1,898,394
----------- -----------
Gross profit 1,208,859 1,075,089
Operating expenses
Sales and marketing 260,345 109,562
General and administrative 531,346 443,654
Research and development 246,592 500,202
----------- -----------
1,038,283 1,053,418
----------- -----------
Earnings from operations 170,576 21,671
Other income (expense)
Interest income 6,272 16,755
Dividend income 7,948 9,432
Interest expense (366) (1,230)
Other (5,060) 15,000
----------- -----------
8,794 39,957
----------- -----------
Earnings before income taxes and equity in
losses of unconsolidated subsidiary 179,370 61,628
Income tax expense 27,677 1,403
----------- -----------
Earnings before equity in losses of
unconsolidated subsidiary 151,693 60,225
Equity in losses of unconsolidated subsidiary -- 22,841
----------- -----------
Net earnings $ 151,693 $ 37,384
=========== ===========
Net earnings per common and common equivalent share $ 0.04 $ 0.01
=========== ===========
Weighted average number of common and common
equivalent shares outstanding during the period 3,842,818 3,835,956
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Unaudited)
Three Months Three Months
Ended Ended
September 30, September 30,
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 151,693 $ 37,384
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 211,774 252,916
Loss on sale of investments 5,060 --
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 (717,450) (244,787)
Refundable income taxes 8,337 --
Inventories (64,154) (234,908)
Prepaid expenses and other (65,771) (129,695)
Accounts payable 361,923 (6,250)
Accrued expenses 6,565 19,358
--------- ---------
Net cash used in operating activities (102,023) (298,141)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (164,946) (34,175)
Proceeds from sale of equipment -- 15,000
Investment in patents and trademarks (15,875) (40,571)
Sale of investments 197,349 --
--------- ---------
Net cash provided by (used in) investing activities 16,528 (59,746)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock -- 1,125
--------- ---------
Net cash provided by financing activities -- 1,125
--------- ---------
Net decrease in cash and cash equivalents (85,495) (356,762)
Cash and cash equivalents at beginning of period 665,190 800,693
--------- ---------
Cash and cash equivalents at end of period $ 579,695 $ 443,931
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Unaudited)
Three Months Three Months
Ended Ended
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $ 366 $ 5,924
Income taxes 8,500 6,000
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Conversion of subsidiary's notes payable to equity $ -- $83,595
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 1997 AND 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 as of September 30, 1997. All significant intercompany
balances and transactions have been eliminated in consolidation. The Company's
financial statements for the three months ended September 30, 1997 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, 1997. The interim financial
statements are unaudited and in the opinion of management, reflect all
adjustments 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) PHARMADYNE CORPORATION AND RESTRUCTURING CHARGE
During fiscal 1997 the Company adopted a plan for eliminating the
Pharmadyne Corporation subsidiary and recorded a nonrecurring restructuring
charge of $2,180,353. The restructuring charge included approximately $1,369,000
for the planned acquisition of the minority interests in Pharmadyne in exchange
for newly issued shares of LecTec Corporation common stock. In October 1997 the
Company issued 221,948 new shares of its common stock to acquire the minority
interests in Pharmadyne. Effective October 2, 1997 Pharmadyne is a wholly-owned
subsidiary of the Company. The Company is currently in the process of
registering the newly issued shares of LecTec Corporation common stock with the
Securities and Exchange Commission. The Company expects to complete the
restructuring during fiscal 1998.
(3) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) 128, "Earnings Per Share," which is
effective for financial statements issued after December 15, 1997. Early
adoption of the new standard is not permitted. The new standard eliminates
primary and fully diluted earnings per share and requires presentation of basic
and diluted earnings per share together with disclosure of how the per share
amounts were computed.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive
Income," and SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information," which are effective for fiscal year 1999. SFAS 130 will require
the Company to display an amount representing total comprehensive income, as
defined by the statement, as part of the Company's basic financial statements.
Comprehensive income will include items such as unrealized gains or losses on
certain investment securities. SFAS 131 will require the Company to disclose
financial and other information about its business segments, their products and
services, geographic areas, major customers, sales, profits, assets and other
information.
The adoption of these statements is not expected to have a
material effect on the consolidated financial statements of the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
RESULTS OF OPERATIONS
Net sales for the first quarter of fiscal 1998 were $3,630,810
compared to net sales of $2,973,483 for the first quarter of fiscal 1997, an
increase of 22.1%. The increase was primarily the result of increased medical
tape sales and therapeutic product sales. Conductive product sales, the
Company's largest product group, increased by 4.4% from the prior year while
medical tape product sales, the Company's second largest product group,
increased by 39.4% and therapeutic product sales increased by 99.5%. The
conductive sales increase was primarily the result of increased volumes to
existing customers. Medical tape product sales increased primarily due to
increased sales volume to several customers which more than offset the absence
of sales in fiscal 1998 to another large customer who purchases intermittently.
The therapeutic product sales increase was primarily the result of increased
analgesic patch sales volume which more than offset decreased sales of corn and
callous and wart remover products in fiscal 1998.
Gross profit for the first quarter of fiscal 1998 was $1,208,859
compared to $1,075,089 for the first quarter of fiscal 1997. Gross profit as a
percent of net sales for the first quarter of fiscal 1998 was 33.3% compared to
36.2% for the first quarter of fiscal 1997. The decrease in gross profit percent
for the quarter resulted primarily from increased overtime and incentive labor
costs necessary to meet peak production levels, the cost of plant upgrades and
renovations and a decrease in the sales mix of higher margin conductive
products.
Sales and marketing expenses were $260,345 and $109,562 during the
first quarters of fiscal 1998 and 1997, and as a percentage of net sales, were
7.2% and 3.7%. General and administrative expenses were $531,346 and $443,654
during the first quarters of fiscal 1998 and 1997, and as a percentage of net
sales, were 14.6% and 14.9%. The increase in sales and marketing expense for the
quarter was primarily due to staffing level increases and increased consulting
expenses. The Company anticipates that due to increased sales and marketing
efforts, future sales and marketing expense as a percent of sales will be
comparable to the first quarter of fiscal 1998. The increase in general and
administrative expenses for the quarter was primarily due to staffing level
increases and increased legal expenses which more than offset the absence of
goodwill related amortization present in fiscal 1997.
Research and development expenses for the first quarters of fiscal
1998 and 1997 were $246,592 and $500,202, and as a percentage of net sales, were
6.8% and 16.8%. The decrease in R&D expense for the quarter primarily reflects
reductions in research costs associated with the internal development of the
cotinine-based smoking cessation product. The Company is currently pursuing
potential strategic partners to assist in the further development and potential
ultimate commercialization of a cotinine-based pill.
Other income, net decreased in the first quarter of fiscal 1998 to
$8,794 from $39,957 in the first quarter of 1997. Other income was lower in
fiscal 1998 due to the absence in 1998 of a gain on the sale of equipment,
decreased dividend income as a result of lower investment balances and a loss in
1998 on the sale of investments.
Earnings before income taxes and equity in losses of an
unconsolidated subsidiary were $179,370 for the first quarter of fiscal 1998
compared to $61,628 for the first quarter of 1997. Earnings for the current
quarter were primarily the result of increased sales which more than offset
increased costs of goods sold.
<PAGE>
The Company recorded income tax expense of $27,677 in the first
quarter of fiscal 1998 compared to income tax expense of $1,403 in 1997. Income
tax expense in the first quarter of fiscal 1998 reflects the Company's expected
annual effective tax rate for 1998. In the first quarter of fiscal 1997 there
was minimal income tax expense due to the utilization of NOL carryforwards.
In fiscal 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. This
investment was accounted for using the equity method. During the first quarter
of fiscal 1997, the Company recorded $22,841 of equity in the losses of Natus
L.L.C. The investment in Natus L.L.C. was fully written off in the third quarter
of fiscal 1997 as part of the restructuring charge (see note 2 of the Notes to
Consolidated Financial Statements of this report).
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 $85,495 to $579,695 during
the first quarter of fiscal 1998. Short and long-term investments decreased by
$186,889 to $398,711 during the first quarter of fiscal 1998 due primarily to
the sale of investments. Receivables increased by $709,113 to $3,312,140 during
the first quarter of fiscal 1998 due primarily to increased sales in the month
of September. Accounts payable increased by $361,923 to $1,141,622 during the
first quarter of fiscal 1998 primarily due to an increase in the average number
of days outstanding before payment and increased raw material and labor payables
related to increased production during the month of September. Capital spending
for plant renovations and upgrades and various equipment totaled $164,946 during
the first quarter of fiscal 1998. There were no material commitments for capital
expenditures at September 30, 1997.
Working capital, at the end of the first quarter of fiscal 1998,
increased to $4,233,250 from $4,035,084 at the end of fiscal 1997. The Company
had a current ratio at the end of the first quarter of fiscal 1998 of 2.3 as
compared to 2.4 at the end of fiscal 1997.
The Company had no short or long-term debt as of September 30,
1997. During August 1997 the Company obtained an unsecured $1,000,000 working
capital line of credit which expires in September 1998. The previous working
capital line of credit expired January 1, 1997. There were no borrowings
outstanding on the line of credit during the first quarter of fiscal 1998 nor
during all of fiscal 1997. Shareholders' equity increased by $167,213 to
$8,954,957 during the first quarter of fiscal 1998.
Management believes that internally-generated cash-flow and the
existing short-term line of credit will be sufficient to support anticipated
operating and capital spending requirements for the remainder of fiscal 1998.
FORWARD-LOOKING STATEMENTS
From time to time, in reports filed with the Securities and Exchange Commission,
in press releases, and in other communications to shareholders or the investment
community, the Company may provide forward-looking statements concerning
possible or anticipated future results of operations or business developments
which are typically preceded by the words "believes", "expects", "anticipates",
"intends", "will", "may", "should" or similar expressions. Such forward-looking
statements are subject to risks and uncertainties which could cause results or
developments to differ materially from those indicated in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
buying patterns of major customers; competitive forces including new products or
pricing pressures; costs associated with and acceptance of the Company's new
brand strategy; impact of interruptions to production; dependence on key
personnel; need for
<PAGE>
regulatory approvals; changes in governmental regulatory requirements or
accounting pronouncements; and ability to satisfy funding requirements for
operating needs, expansion or capital expenditures.
<PAGE>
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
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
<PAGE>
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 13, 1997 /s/ Rodney A. Young
----------------- ----------------------------------------------------
Rodney A. Young, Chief Executive Officer & President
Date November 13, 1997 /s/ Deborah L. Moore
----------------- ----------------------------------------------------
Deborah L. Moore, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 579,695
<SECURITIES> 390,698
<RECEIVABLES> 3,392,935
<ALLOWANCES> 80,795
<INVENTORY> 2,641,175
<CURRENT-ASSETS> 7,440,350
<PP&E> 8,998,464
<DEPRECIATION> 4,411,812
<TOTAL-ASSETS> 12,373,057
<CURRENT-LIABILITIES> 3,207,100
<BONDS> 0
0
0
<COMMON> 38,428
<OTHER-SE> 8,916,529
<TOTAL-LIABILITY-AND-EQUITY> 12,373,057
<SALES> 3,630,810
<TOTAL-REVENUES> 3,630,810
<CGS> 2,421,951
<TOTAL-COSTS> 2,421,951
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,000
<INTEREST-EXPENSE> 366
<INCOME-PRETAX> 179,370
<INCOME-TAX> 27,677
<INCOME-CONTINUING> 151,693
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 151,693
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
