PROCYON CORP
10QSB, 1998-11-06
PHARMACEUTICAL PREPARATIONS
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                        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
                                                                          ===========             ===========






                                                    -3-
</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
                                                                ===========              ===========










                                                        -4-
</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
                                                                    =========                =========


                                                        -5-
</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,
     

                                       -6-

<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.


                                       -8-

<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>


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