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
December 31, June 30, 1995 1995 ----------- ----------- 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 =========== ===========
See accompanying notes to the consolidated financial statements LECTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, June 30, 1995 1995 ------------ ------------ 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 ============ ============
See accompanying notes to the consolidated financial statements LECTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Six months ended December 31, December 31, -------------------------- -------------------------- 1995 1994 1995 1994 ----------- ----------- ----------- ----------- 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
See accompanying notes to the consolidated financial statements LECTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months Six months Ended Ended December 31, December 31, 1995 1994 ----------- ----------- 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 =========== ===========
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