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, 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 November 1, 1995 was 3,797,554 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
September 30, June 30, 1995 1995 ASSETS (Unaudited) Current Assets Cash and cash equivalents $419,428 $839,942 Receivables Trade, less allowance for doubtful accounts of $26,999 (unaudited) and $18,000 at September 30, 1995 and June 30, 1995, respectively 2,250,337 2,027,985 Refundable income taxes 125,357 119,540 Other 305,874 268,247 2,681,568 2,415,772 Inventories Raw materials 1,317,235 1,162,559 Work-in-process 324,500 218,351 Finished goods 727,078 716,344 Total inventories 2,368,813 2,097,254 Prepaid expenses and other 405,068 229,796 Deferred tax asset 254,000 254,000 Total current assets 6,128,877 5,836,764 Property, Plant and Equipment - at Cost Building and improvements 1,613,887 1,673,069 Equipment 6,161,282 5,447,479 Furniture and fixtures 429,761 422,265 8,204,930 7,542,813 Less accumulated depreciation 2,997,655 2,813,760 5,207,275 4,729,053 Construction in progress 75,683 583,023 Land 247,731 247,731 5,530,689 5,559,807 Other Assets Patents and trademarks, less accumulated amortization of $586,203 (unaudited) and $554,286 at September 30, 1995 and June 30, 1995, respectively 373,467 386,470 Goodwill, less accumulated amortization of $295,002 (unaudited) and $245,835 at September 30, 1995 and June 30, 1995, respectively 294,998 344,165 Long-term investments 579,930 568,156 Other 20,386 23,784 1,268,781 1,322,575 $12,928,347 $12,719,146
See accompanying notes to the consolidated financial statements LECTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, June 30, 1995 1995 LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) Current Liabilities Notes payable $83,595 $0 Accounts payable 1,024,904 771,471 Accrued expenses Payroll related 288,368 375,282 Distributor bonuses 70,736 71,384 Product returns 18,792 77,831 Other 109,908 50,000 Total current liabilities 1,596,303 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: 3,795,200 shares (unaudited) at September 30, 1995 and 3,786,500 shares at June 30, 1995 37,952 37,865 Additional paid-in capital 10,056,320 10,013,949 Unrealized losses on securities available-for-sale (39,042) (50,816) Retained earnings 1,109,814 1,205,180 11,165,044 11,206,178 $12,928,347 $12,719,146
See accompanying notes to the consolidated financial statements LECTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September 30, 1995 1994 Revenues (Unaudited) (Unaudited) Product sales $3,462,451 $2,904,523 Total revenues 3,462,451 2,904,523 Cost of goods sold 2,123,247 1,557,214 Gross profit 1,339,204 1,347,309 Operating expenses Selling, general and administrative 941,490 789,290 Research and development 511,033 477,220 1,452,523 1,266,510 Operating profit (loss) (113,319) 80,799 Other income (expense) Interest income 9,823 19,624 Dividend income 9,131 9,231 Interest expense 0 0 Other 0 (5,659) 18,954 23,196 Earnings (loss) before income tax expense (94,365) 103,995 Income tax expense 1,001 25,059 Net earnings (loss) ($95,366) $78,936 Net earnings (loss) per common and common equivalent share ($0.03) $0.02 Weighted average number of common and common equivalent shares outstanding during the period 3,788,308 3,760,340
See accompanying notes to the consolidated financial statements I - 3 LECTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months Three months Ended Ended September 30, September 30, 1995 1994 Cash flows from operating activities: (Unaudited) (Unaudited) Net earnings (loss) ($95,366) $78,936 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization 264,979 174,436 Changes in operating assets and liabilities: Trade and other receivables (265,796) (296,991) Inventories (271,559) (705,026) Prepaid expenses and other (171,874) (125,756) Accounts payable 253,433 46,689 Income taxes payable 0 25,059 Accrued expenses (86,693) 56,963 Net cash used in operating activities (372,876) (745,690) Cash flows from investing activities: Purchase of property, plant and equipment (154,777) (253,583) Investment in patents and trademarks (18,914) (47,307) 0 Purchase of marketable securities and other investments 0 (250,341) Sale of marketable securities and other investments 0 863,354 Net cash (used in) provided by investing activities (173,691) 312,123 Cash flows from financing activities: Issuance of common stock 42,458 22,263 Proceeds from notes payable 83,595 0 Net cash provided by financing activities 126,053 22,263 Net decrease in cash and cash equivalents (420,514) (411,304) Cash and cash equivalents at beginning of period 839,942 785,770 Cash and cash equivalents at end of period $419,428 $374,466
See accompanying notes to the consolidated financial statements LECTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Disclosures in Financial Statements Supplemental Disclosures of Cash Flow Information
Three months Three months Ended Ended September 30, September 30, 1995 1994 (Unaudited) (Unaudited) Cash paid during the period for: Interest expense $0 $0 Income taxes 8,000 0
See accompanying notes to the consolidated financial statements LECTEC CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Product sales for the first quarter of fiscal 1996 were $3,462,451 as compared with $2,904,523 for the first quarter of fiscal 1995. The 19.2% increase in product sales was primarily the result of volume increases in medical tape products. Medical tape sales increased by 73.9% from the first quarter of fiscal 1995 primarily due to sales of a new product offering and sales to a major new retail customer. Conductive product sales decreased by 2.4% from the first quarter of fiscal 1995 to the first quarter of fiscal 1996 primarily due to delayed orders for diagnostic electrode products. Therapeutic product sales increased by 30.9% from the first quarter of fiscal 1995 to the first quarter of fiscal 1996 primarily due to increased analgesic pain patch sales by the Natus subsidiary. Gross profit for the first quarter of fiscal 1996 was $1,339,204 as compared with $1,347,309 compared to the first quarter of fiscal 1995. Gross profit as a percent of total revenues for the first quarter of fiscal 1996 was 38.7% as compared to 46.4% for the first quarter of fiscal 1995. The decrease in gross profit percent for the quarter was primarily a reflection of a shift in the sales mix to the lower margin medical tape products and increased raw material costs for all products. Selling, general and administrative expenses for the first quarters of fiscal 1996 and 1995, as a percentage of total revenues, were 27.2%. Selling, general and administrative expenses were $941,490 and $789,290 during the first quarter of fiscal 1996 and fiscal 1995, respectively. Increased selling, general and administrative expenses associated with restructuring the direct selling/network marketing organization of the Natus subsidiary were primarily responsible for this dollar amount increase. Research and development expenses for the first quarter, as a percentage of total revenues, were 14.8% and 16.4% for fiscal 1996 and 1995, respectively. Research and development expenses for the first quarter of fiscal 1996 increased to $511,033 from $477,220 in fiscal 1995. The increase in expense is primarily attributable to the research and development costs associated with the non-nicotine smoking cessation product. Other income (expense) decreased in the first quarter of fiscal 1996 to $18,954 from $23,196 in the first quarter of fiscal 1995. The decline 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 medical tape production line and a new therapeutic production line plus the increases in receivables and inventory necessary to support the growing business. The Company had a loss before income tax expense of $94,365 in the first quarter of fiscal 1996 compared to earnings before income tax expense of $103,995 in the first quarter of fiscal 1995. The decrease in earnings before income taxes for the quarter was the result of an increase in the sales mix of lower margin medical tape products, increased raw material costs for products sold, expenses associated with restructuring the direct selling/network marketing organization of the Natus subsidiary and increased research and development expense. These factors offset the beneficial aspects of the increased overall sales. 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 $3,300,000 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 first quarter of fiscal 1996 of 3.84 as compared to 4.34 at the end of fiscal 1995. Working capital, at the end of the first quarter of fiscal 1996, increased to $4,532,574 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 November 13, 1995 /s/ Erwin W. Templin II Erwin W. Templin II, EVP & CFO