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 December 31, 1998
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
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 33755
(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 January 26, 1999
Transitional Small Business Disclosure Format (check one) Yes _____ No x
<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 ................................................. 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................. 10
SIGNATURES................................................................. 10
2
<PAGE>
<TABLE>
<CAPTION>
PROCYON CORP & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 & JUNE 30, 1998
ASSETS
December 31, June 30,
1998 1998
---- ----
Current Assets (unadited) (audited)
<S> <C> <C>
Cash & Cash Equivalents $ 60,237 $ 53,080
Accounts Receivable, less allowances
of $500 76 19,828
Inventories 125,661 24,180
Deposit on Inventory 0 93,913
Prepaid Expenses 2,200 0
----------- -----------
TOTAL CURRENT ASSETS 188,174 191,001
Machinery and Equipment less accumulated
depreciation of $18,284 and $15,959 15,180 15,786
Other Assets:
Deposits 2,018 2,056
----------- -----------
$ 205,372 $ 208,843
=========== ===========
LIABILITIES AND STOCK HOLDERS' EQUITY
Current Liabilities:
Accounts Payable and $ 83,405 $ 133,759
Accrued Salaries 109,446 109,446
Loan Payable 288,316 213,316
----------- -----------
Total Current Liabilities 481,168 456,521
Advanced Deposit on Stock 250,000
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;
2,065,000 shares issued and outstanding 1,242,133 1,296,850
Common stock, no par value, 80,000,000 shares
authorized; 4,541,455 shares issued and
outstanding 1,612,831 1,556,396
Accumulated deficit (3,380,760) (3,100,924)
----------- -----------
Total Stock Holders' Equity (525,796) (247,678)
----------- -----------
$ 205,372 $ 208,843
=========== ===========
Note: Taken from the audited balance sheet at that date
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended December 31, 1998 and 1997
Six Months Ended December 31, 1998 and 1997
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 43,952 $ 74,885 $ 74,369 $ 161,941
Cost of Sales 11,429 34,758 21,034 60,005
----------- ----------- ----------- -----------
Gross Profit 32,523 40,127 53,335 101,936
Operating Expenses:
Salaries and Benefits 96,757 119,614 194,552 284,439
Selling, General and Administrative 76,783 102,823 130,584 252,672
----------- ----------- ----------- -----------
Total Operating Expenses 173,540 222,437 325,136 537,111
----------- ----------- ----------- -----------
Loss from Operations (141,017) (182,310) (271,802) (435,175)
Other Income (Expense):
Interest Expense (4,310) (367) (8,223) (4,833)
Interest Income 99 906 188 4,695
----------- ----------- ----------- -----------
Total Other Income (expense) (4,212) 539 (8,035) (138)
----------- ----------- ----------- -----------
Net Loss (145,229) (181,771) (279,836) (435,313)
Dividend requirements on preferred stock 32,117 51,625 58,683 103,149
----------- ----------- ----------- -----------
Loss applicable to common stock ($ 177,346) ($ 233,396) ($ 338,519) ($ 538,462)
=========== =========== =========== ===========
Net Loss per common share ($ 0.04) ($ 0.06) ($ 0.08) ($ 0.15)
Fully Diluted Net Loss per comon share ($ 0.03) ($ 0.04) ($ 0.05) ($ 0.08)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 4,474,242 3,637,920 4,474,242 3,637,920
=========== =========== =========== ===========
4
</TABLE>
<PAGE>
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 1998 and 1997
(Increase / Decrease), in Cash Equivalents
Six Months Six Months
Ended Ended
December 31, December 31,
1998 1997
---- ----
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($279,836) ($435,338)
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 2,325 4,698
Changes in operating assets and liabilities
Accounts Receivable, trade 19,752 27,935
Inventories (101,481) (48,006)
Prepaid Expenses (2,200) (500)
Deposits 38 0
Deposit on Inventory 93,913
Accounts payable and accrued expenses (50,354) 51,348
--------- ---------
Cash used in Operating Activities (317,843) (399,863)
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to employees and stockholders 0 (6,000)
--------- ---------
Cash used in investing activities 0 (6,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Long Term Loans 75,000
Proceeds from subscriptions receivable 250,000 40,000
Cumulative Convertible Preferred Stock 0 67,150
--------- ---------
Cash provided by financing activities 325,000 107,150
--------- ---------
Net Increase (decrease) in cash and cash equivalents 7,157 (298,713)
Cash and Cash Equivalents, beginning of period 53,080 335,121
--------- ---------
Cash and Cash Equivalents, end of period $ 60,237 $ 36,408
========= =========
5
<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.
Earnings per share: In 1997, the Financial Accounting Standards Board
issued SFAS No. 128, Earnings per Share. SFAS No. 128 replaced the previously
reported primary and fully diluted earnings per share with basic and diluted
earnings per share, respectively. Unlike the previously reported primary
earnings per share, basic earnings per share excludes the dilutive effects of
stock options. Diluted earnings per share is similar to the previously reported
fully diluted earnings per share. Earnings per share amounts for all periods
presented have been calculated in accordance with and, where appropriate,
restated to conform to, the requirements of SFAS No. 128.
NOTE B - INVENTORIES
Inventories consisted of the following:
Dec. 31, June 30,
1998 1998
---- ----
Finished Goods $ 89,124 $ 7,097
Raw Materials $ 36,537 $ 17,083
-------- --------
$125,661 $ 24,180
======== ========
NOTE C - RELATED PARTY TRANSACTIONS
At December 31, 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 the fiscal
year ended June 30, 1998 totaled $266,316 all of 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
=======
6
<PAGE>
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
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 December 31, 1998, the Company's principal sources of liquidity
included cash and cash equivalents of approximately $60,237, inventories of
$125,661 and net accounts receivable of $76.
During the six months ended December 31, 1998, cash and cash equivalents
increased from $53,080 as of June 30, 1998 to $60,237. Operating activities
used cash of $317,843 during the period, consisting primarily of a net loss
of $279,836. Cash provided by financing activities was $325,000 as compared
to $107,150 for the corresponding period in 1997. At December 31, 1998 the
Company had no commitments for capital expenditures.
The Company has deferred tax assets with a 100% valuation allowance at
December 31, 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.
Management believes it has made significant progress this past quarter with
respect to future sales of its products to large national chain drug stores
and mass merchandisers. During the last month of the quarter, the Company
began to advertise its products to the retail consumer and management
expects sales to increase in its retail business during the next quarter.
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 Six Months Ended December 31, 1998 and 1997.
Net sales during the quarter ended December 31, 1998 were $ 43,952 as
compared to $ 74,885 in the quarter ended December 31, 1997, a decrease of
$ 30,933, or 41%. The decrease in sales for the quarter ended December 31,
1998 compared to the quarter ended December 31, 1997 was primarily
attributable to lack of advertising in the retail markets.
Gross profit during the quarter ended December 31, 1998, was $ 32,523 as
compared to $40,127 during the quarter ended December 31, 1997, a decrease
of $ 7,604, or 19%. As a percentage of net sales, gross profit was 74% in
the quarter ended December 31, 1998, as compared to 54% in the
corresponding quarter in 1997. The $ 7,604 decrease in gross profit
reflects the significant decrease in net sales experienced during this
quarter.
Operating expenses during the quarter ended December 31, 1998 were $
173,540, consisting of $96,757 in salaries and benefits and $ 76,783 in
selling, general and administrative expenses. This compares to operating
expenses during the quarter ended December 31, 1997 of $222,437 consisting
of $119,614 in salaries and benefits, and $102,823 in selling, general and
administrative expenses. Operating expenses decreased from $222,437 in 1997
to $173,540 a difference of $48,897 or 22%. The Company expects expenses to
rise somewhat as sales increase over the remainder of the fiscal year.
The Company incurred an operating loss of $ 141,017 in the quarter ended
December 31, 1998 as compared to an operating loss of $ 182,310 in the
corresponding quarter in 1997, a decrease of $41,293, or 23%. The decrease
in operating loss was primarily due to a cutback in sales and marketing
expense. Net loss was $ 145,229 during the quarter ended December 31, 1998
as compared to $ 181,771 during the quarter ended December 31, 1997, a
decrease of $36,542 or 20%.
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.
During the quarter ended December 31, 1998, the Company initiated a test
sale market with a large national chain. During the next quarter,
management will conclude the national chain store test. Management is
hopeful that a successful test will lead to a national rollout of its
products during the last quarter of the Company's fiscal year.
8
<PAGE>
Management continues to negotiate with another national chain to carry the
Company's products in its stores. Both chains are potential new customers
during the last quarter of the fiscal year. Management is continuing to
discuss a private equity placement with investors and is hopeful that an
agreement will be reached during this next quarter.
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 December 31, 1998, the Company received a
subscription for 150,000 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 offer 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. Shares will be issued upon the company's receipt of the
necessary documentation.
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
(e) The annual meeting of shareholders was held December 5, 1998.
(f) The shareholders elected the following persons as directors to hold
office for one-year terms or until their successors are elected and qualified.
Name Votes For Votes Withheld
---- --------- --------------
John C. Anderson 3,891,048 9,000
Chester L. Wallack 3,891,048 9,000
Fred W. Suggs, Jr 3,891,048 9,000
Alan B. Crane 3,891,048 9,000
Richard T. Thompson 3,891,048 9,000
9
<PAGE>
(g) The shareholders approved the Company's 1998 Omnibus Stock Option Plan
by the following vote:
For 3,530,870
Against 9,000
Abstained 0
Not Voted 350,958
(h) The shareholders ratified the appointment of Guinta, Ferlita & Walsh,
P.A. as independent auditors of the Company by the following vote:
For 3,891,048
Against 9,000
Abstained 0
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports Form 8-K
None
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
February 2, 1999 By: /s/ John C. Anderson
- ---------------- ------------------------------
Date John C. Anderson, President
and Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 60,237
<SECURITIES> 0
<RECEIVABLES> 576
<ALLOWANCES> 500
<INVENTORY> 125,661
<CURRENT-ASSETS> 188,174
<PP&E> 33,464
<DEPRECIATION> 18,284
<TOTAL-ASSETS> 205,372
<CURRENT-LIABILITIES> 481,168
<BONDS> 0
2,065,000
0
<COMMON> 4,541,455
<OTHER-SE> (3,380,760)
<TOTAL-LIABILITY-AND-EQUITY> 205,372
<SALES> 43,952
<TOTAL-REVENUES> 43,952
<CGS> 11,429
<TOTAL-COSTS> 173,540
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,212
<INCOME-PRETAX> (145,229)
<INCOME-TAX> 0
<INCOME-CONTINUING> (145,229)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (145,229)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
