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
LECTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, June 30, 1996 1996 ------------ ----------- ASSETS (Unaudited) CURRENT ASSETS 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 =========== ===========
See accompanying notes to the consolidated financial statements.
LECTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, June 30, 1996 1996 ------------ ----------- LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) 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 ============ ============
See accompanying notes to the consolidated financial statements.
LECTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended September 30, ------------------------------ 1996 1995 ------------ ----------- (Unaudited) (Unaudited) 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
See accompanying notes to the consolidated financial statements.
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) 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 ========= =========
See accompanying notes to the consolidated financial statements.
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: 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 $ --
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