SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For Quarterly Period Ended September 30, 1998
Commission File Number: 0-17449
PROCYON CORPORATION
(Exact Name of Small Business Issuer as specified in its charter)
COLORADO 36-0732690
(State of Incorporation) (IRS Employer Identification Number)
1150 Cleveland Street, Suite 410
Clearwater, Fl 34615
(Address of Principal Offices)
(727) 447-2998
(Issuer's Telephone Number)
Check whether the issuer (1) 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 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common stock, no par value; 4,541,455 shares outstanding as of November 2, 1998
<PAGE>
PART I. FINANCIAL INFORMATION
Item Page
ITEM 1. FINANCIAL STATEMENTS......................................... 3
Index to Financial Statements
Financial Statements:
Consolidated Balance Sheets................................. 3
Statement of Operations..................................... 4
Statement of Cash Flows .................................... 5
Notes to Financial Statements .............................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 7
PART II.OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................. 9
ITEM 2. CHANGES IN SECURITIES ........................................ 9
ITEM 3. DEFAULTS UPON SENIOR SECURITIES .............................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 9
ITEM 5. OTHER INFORMATION ............................................ 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................. 9
-1-
<PAGE>
PROCYON CORP & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 & JUNE 30, 1998
<TABLE>
<CAPTION>
September 30 June 30
1998 1998
------------ -----------
ASSETS
<S> <C> <C>
Current Assets
Cash & Cash Equivalents $ 17,711 $ 53,080
Accounts Receivable, less allowances
of $500 & $34,252 for doubtful accounts 1,287 19,828
Inventories 118,048 24,180
Deposit on Inventory 5,618 93,913
----------- -----------
TOTAL CURRENT ASSETS 142,663 191,001
Machinery and Equipment less accumulated
depreciation of $16,666 and $15,959 14,214 15,786
Other Assets:
Deposits 1,986 2,056
----------- -----------
$ 158,863 $ 208,843
=========== ===========
LIABILITIES AND STOCK HOLDERS' EQUITY
Current Liabilities:
Accounts Payable and $ 86,339 $ 133,759
Accrued Salaries 114,985 109,446
Loan Payable 238,316 213,316
----------- -----------
TOTAL CURRENT LIABILITIES 439,640 456,521
Advanced Deposit on Stock 100,000
Stockholders' equity (Notes 2 & 6)
Preferred stock, 496,000,000 shares
authorized; none issued
Series A Cumulative Convertible Preferred stock,
no par value; 4,000,000 shares authorized;
1,284,655 shares issued and outstanding 1,240,515 1,296,850
Common stock, no par value, 80,000,000 shares
authorized; 4,526,455 shares issued and
outstanding 1,612,731 1,556,396
Accumulated deficit (3,234,023) (3,100,924)
----------- -----------
Total Stock Holders' Equity (280,777) (247,678)
----------- -----------
$ 158,863 $ 208,843
=========== ===========
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</TABLE>
<PAGE>
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For The Three Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30 September 30
1998 1997
------------- ------------
<S> <C> <C>
Net Sales $ 30,437 $ 87,056
Cost of Sales 9,607 25,271
----------- -----------
Gross Profit 20,830 61,785
Operating Expenses:
Salaries and Benefits 97,795 164,825
Selling, General and Administrative 52,312 149,849
----------- -----------
Total Operating Expenses 150,107 314,674
----------- -----------
Loss from Operations (129,277) (252,889)
Other Income (Expense):
Interest Expense (3,912) (4,466)
Interest Income 90 3,789
----------- -----------
Total Other Income (expense) (3,822) (677)
----------- -----------
Net Loss (133,099) (253,566)
Dividend requirements on preferred stock 26,567 51,524
----------- -----------
Loss applicable to common stock $ (159,666) $ (305,090)
=========== ===========
Net Loss per common share $ (0.04) $ (0.08)
=========== ===========
Weighted average number of common shares outstanding 4,474,242 3,637,920
=========== ===========
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</TABLE>
<PAGE>
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, September 30,
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(133,099) $(253,566)
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 1,572 2,349
Changes in operating assets and liabilities
Decrease (Increase) in:
Accounts Receivable, trade 18,541 (5,918)
Inventories (93,868) 12,211
Deposit on Inventory 88,295 --
Prepaid Expenses (500) --
Increase (Decrease) in:
Accounts payable and accrued expenses (47,420) (30,278)
Accrued Salary 5,539 --
--------- ---------
Cash used in Operating Activities (160,440) (275,702)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of machinery and equipment -- --
Advances to employees and stockholders -- (4,500)
Payment for Deposit 70 --
--------- ---------
Cash used in investing activities 70 (4,500)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Stock 100,000 102,100
Proceeds from loan from Stockholder 25,000 --
--------- ---------
Cash provided by financing activities 125,000 102,100
--------- ---------
Net Increase (decrease) in cash and cash equivalents (35,369) (178,102)
Cash and Cash Equivalents, beginning of period 53,080 335,121
--------- ---------
Cash and Cash Equivalents, end of period $ 17,711 $ 157,019
========= =========
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</TABLE>
<PAGE>
NOTE A - SUMMARY OF ACCOUNTING
The financial statements included herein have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted as allowed by such
rules and regulations. The Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with the Company's audited financial
statements dated June 30, 1998. While management believes the procedures
followed in preparing these financial statements are reasonable, the accuracy of
the amounts are, in some respects, dependent upon the facts that will exist, and
procedures that will be accomplished by the Company later in the year.
Management of the Company is of the opinion that the accompanying unaudited
condensed financial statements prepared in conformity with generally accepted
accounting principles, which require the use of management estimates, contain
all adjustments(including normal recurring adjustments) necessary to present
fairly the operations and cash flows for the period presented and to make the
financial statements not misleading.
NOTE B - INVENTORIES
Inventories consisted of the following:
September 30 June 30,
1998 1998
Finished Goods $ 92,623 $ 7,097
Raw Materials $ 25,424 $ 17,083
-------- ---------
$118,047 $ 24,180
======== =========
NOTE C - RELATED PARTY TRANSACTIONS
At September 30, 1998, the majority stockholder of the Company was owed
$238,316 on a non-interest bearing note due June 30, 1999, collateralized
by all the assets of the Company. Advances on this note during fiscal year
ended June 30, 1998 totaled $266,316 which was used to fund operations.
NOTE D - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space and certain equipment under operating
leases expiring at various dates through 2001. Rent expense under these
agreements was approximately $36,000 and $34,900 for the years ended June
30, 1998 and 1997. Future minimum rentals under the operating leases are as
follows:
Year Ending June 30,
1999 $23,398
2000 4,425
2001 4,325
---------
$32,148
NOTE E - STOCKHOLDER'S EQUITY
During January 1995, the Company's Board of Directors authorized the
issuance of up to 4,000,000 shares of Series A Cumulative Convertible
Preferred Stock ("Series A Preferred Stock"). The preferred stockholders
are entitled to receive, as and if declared by the board of directors,
quarterly dividends at an annual rate of $.10 per share of Series A
Preferred Stock per annum. Dividends will accrue without interest and will
be cumulative from the date of issuance of the Series A Preferred Stock and
will be payable quarterly in arrears in cash or publicly traded common
stock when and if declared by the board of directors. As of September 30,
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<PAGE>
1998, no dividends have been declared. Dividends in arrears on the
outstanding preferred shares total $284,442 as of September 30, 1998. The
preferred stockholders have the right to convert each share of Series A
Preferred Stock into one share of the Company's common stock at any time
without additional consideration. However, each share of Series A Preferred
Stock is subject to mandatory conversion into one share of common stock of
the Company, effective as of the close of a public offering of the
Company's common stock provided, however, that the offering must provide a
minimum of $1 million in gross proceeds to the Company and the initial
offering price of such common stock must be at least $1 per share. In
addition to the rights described above, the holders of the Series A
Preferred Stock will have equal voting rights as the common stockholders
based upon the number of shares of common stock into which the Series A
Preferred Stock is convertible. The Company is obligated to reserve an
adequate number of shares of its common stock to satisfy the conversion of
all the outstanding Series A Preferred Stock.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following discussion and analysis should be read in conjunction with
the unaudited Condensed Financial Statements and Notes thereto appearing
elsewhere in this report.
"Safe Harbor" Statement under the Private Securities Litigation reform Act
of 1995
This Report on Form 10-QSB, including Management's Discussion and analysis
or Plan of Operation, contains forward-looking statements. When used in
this report, the words "may", "will", "expect", "anticipate", "continue",
"estimate", "project", "intend", "believe", and similar expressions,
variations of these words or the negative of those word are intended to
identify forward - looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 regarding events, conditions and financial trends including ,
without limitation, business conditions in the skin and wound care market
and the general economy, competitive factors, changes in product mix,
production delays, manufacturing capabilities, and otherwise or
uncertainties detailed in other of the Company's Securities and Exchange
Commission filings. Such statements are based on management's current
expectations and are subject to risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, the Company's actual plan of
operations, business strategy, operating results and financial position
could differ materially from those expressed in, or implied by, such
forward looking statements.
The Company is cognizant of the issues associated with the programming code
in existing computer systems as the year 2000 approaches. The "Year 2000"
issues are the result of computer programs being written to use two digits,
rather than four, to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. Systems that do not properly
recognize date sensitive information could generate erroneous data or fail.
The Company has conducted a comprehensive review of its computer systems to
identify systems that could be affected by the "Year 2000" issue and has
developed an implementation plan to resolve issues discovered in its
review. The Company also has confirmed with its primary vendors that such
vendors are or will be Year 2000 compliant in sufficient time to allow for
testing and system implementation before December 31, 1999.
The Company presently believes that, with modifications to its existing
software and by converting to certain new software, the year 2000 problem
will not pose significant operational problems for the Company's computer
systems. The Company expects that such modifications and conversions ca be
implemented for approximately $5,000 and that the Company will be fully
Year 2000 compliant by June 1999. The Company does not anticipate that any
other material expenditures will be necessary to achieve Year 2000
compliance.
-7-
<PAGE>
Liquidity and Capital Resources
As of September 30, 1998, the Company's principal sources of liquidity
included cash and cash equivalents of approximately $17,711, inventories of
$118,048 and net accounts receivable of $1,287. The Company also had
prepaid $5,618 for finished products which were not received during the
quarter. The Company had negative working capital of $296,997 and no long
term debt at September 30, 1998.
During the three months ended September 30, 1998, cash and cash equivalents
decreased from $53,080 as of June 30, 1998 to $17,711. Operating activities
used cash of $160,440 during the period, consisting primarily of a net loss
of $133,099. Cash provided by financing activities was $125,000 as compared
to $102,100 for the corresponding period in 1997. During the quarter,
holders of 56,335 Preferred Stock converted their shares to Common Stock.
At September 30, 1998 the Company had no commitments for capital
expenditures.
The Company has deferred tax assets with a 100% valuation allowance at
September 30, 1998. Management is not able to determine if it is more
likely than not that the deferred tax assets will be realized.
The Company has incurred losses since its inception and has been dependent
upon equity financing, and shareholder loans to fund working capital needs.
The Company has made significant progress this past quarter with respect to
future sales of its products to large national chain drug stores and mass
merchandisers. However, sales have declined from the previous quarter as a
result of the Company lacking the necessary capital to advertise its
products to the retail consumer. Management is attempting to raise capital
through private equity placement so that it can increase spending on sales
and marketing and take advantage of the sales opportunities that have been
created.
Results of Operations
Comparison of Three Months Ended September 30, 1998 and 1997.
Net sales during the quarter ended September 30, 1998 were $ 30,437 as
compared to $ 87,056 in the quarter ended September 30, 1997, a decrease of
$ 56,619, or 65%. The decrease in sales for the quarter ended September 30,
1998 compared to the quarter ended September 30, 1997 was primarily
attributable to lack of advertising in the retail markets.
The Company received a Medicare Part B reimbursement code at the end of
September, 1998, for the Amerigel Wound Dressing. This will enable the
Company to initiate a more aggressive selling effort to institutional
customers such as nursing homes and home health care organizations.
Gross profit during the quarter ended September 30, 1998, was $ 20,830 as
compared to $61,785 during the quarter ended September 30, 1997, a decrease
of $ 40,955, or 66%. As a percentage of net sales, gross profit was 68% in
the quarter ended September 30, 1998, as compared to 71% in the
corresponding quarter in 1997. The $ 20,099 decrease in gross profit
reflects the significant decrease in net sales experienced during this
quarter.
Operating expenses during the quarter ended September 30, 1998 were $
150,107, consisting of $97,795 in salaries and benefits and $ 52,312 in
selling, general and administrative expenses. This compares to operating
expenses during the quarter ended September 30, 1997 of $314,674 consisting
of $164,825 in salaries and benefits, and $149,849 in selling, general and
administrative expenses. The Company expects expenses to rise somewhat as
sales increase over the remainder of the fiscal year.
The Company incurred an operating loss of $ 129,277 in the quarter ended
September 30, 1998 as compared to an operating loss of $ 252,889 in the
corresponding quarter in 1997. The decrease in operating loss was primarily
due to a cutback in sales and marketing expense. Net loss (before dividend
requirements for Preferred Shares) was $ 133,099 during the quarter ended
September 30, 1998 as compared to $ 253,566 during the quarter ended
September 30, 1997.
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<PAGE>
During this next quarter, management will continue striving to secure an
equity private placement, close sales to two large retail chain stores and
initiate an advertising campaign consisting of direct mail, select radio
advertising, select journal advertising and in store point of sale material
to support new sales. Management has secured agreements with three
different independent sales representatives who have long standing business
relationships with major chains to help sell the Company's products to the
chains.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not Applicable.
(b) Not Applicable.
(c) During the quarter ended September 30, 1998, the Company sold 100,000
shares of its Series A Preferred Cumulative Convertible Preferred Stock ("Series
A Preferred Stock") at a purchase price of $1 per share. The Company relied on
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act") for the
exemption from the registration requirements of the 1933 Act. Consequently,
these securities were not registered under the 1933 Act. The foregoing sale was
made to an individual who had access to information enabling him to evaluate the
merits and risks of the investment by virtue of his economic bargaining power.
The investor was furnished with information concerning the operations of the
Company and had the opportunity to verify the information supplied.
Holders of the preferred Stock are entitled to receive, as and if declared by
the Board of Directors, quarterly dividends at an annual rate of $0.10 per
share. Dividends accrue without interest, are cumulative from the date of
issuance and are payable in arrears in cash or common stock, when and if
declared by the Board of Directors. No dividends had been declared or paid at
September 30, 1998 and dividends in arrears at such date total $284,442.
Holders of the Preferred Stock have the right to convert their shares of
Preferred Stock into an equal number of shares of Common Stock of the Company.
Such shares will mandatorily convert into one share of Common Stock at the close
of a public offering of Common Stock by the Company provided the Company
receives gross proceeds of at least $1,000,000, and the initial offering price
of the Common Stock sold in such offering is equal to or in excess of $1 per
share.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
-9-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) A report on form 8-K was filed on August 31, 1998 to disclose
a change in the Company's certifying accountants. Amendment to
such Form 8-K were filed on September 21, 1998 and September
30, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, there unto duly
authorized.
PROCYON CORPORATION
November 6, 1998 By: /s/ John C. Anderson
- ---------------- --------------------
Date John C. Anderson, President and
Chief Financial Officer
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS DATED AS OF SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 17,711
<SECURITIES> 0
<RECEIVABLES> 1,787
<ALLOWANCES> 500
<INVENTORY> 118,048
<CURRENT-ASSETS> 142,663
<PP&E> 30,880
<DEPRECIATION> 16,666
<TOTAL-ASSETS> 158,863
<CURRENT-LIABILITIES> 439,640
<BONDS> 0
0
1,284,655
<COMMON> 4,526,455
<OTHER-SE> (3,234,023)
<TOTAL-LIABILITY-AND-EQUITY> 158,863
<SALES> 30,437
<TOTAL-REVENUES> 30,437
<CGS> 9,607
<TOTAL-COSTS> 150,107
<OTHER-EXPENSES> (3,822)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,912
<INCOME-PRETAX> (133,099)
<INCOME-TAX> 0
<INCOME-CONTINUING> (133,099)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (133,099)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>