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, 1999
[ ] Transition Report Under Section 13 or 18(d) of the Exchange Act
Commission File Number: 0-17449
PROCYON CORPORATION
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(Exact Name of Small Business Issuer as specified in its charter)
COLORADO 36-0732690
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(State of Incorporation) (IRS Employer Identification Number)
1150 Cleveland Street, Suite 410
Clearwater, Fl 33755
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(Address of Principal Offices)
(727) 447-2998
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(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; 5,762,155 shares outstanding as of October 29, 1999
Transitional Small Business Disclosure Format (check one) Yes [ ] No [x]
<PAGE>
PART I. FINANCIAL INFORMATION
Item Page
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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
SIGNATURES.................................................................. 9
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<TABLE>
<CAPTION>
PROCYON CORP & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 & JUNE 30, 1999
ASSETS
September 30 June 30
Current Assets 1999 1999
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<S> <C> <C>
Cash & Cash Equivalents 17,551 90,150
Accounts Receivable, less allowances of $500 12,521 2,619
Inventories 50,242 64,414
Prepaid Expenses 27,721
Machinery and Equipment less accumulated
depreciation of $2,527 and $20,216 15,517 13,119
Other Assets:
Deposits 4,342 3,066
127,894 173,368
LIABILITIES AND STOCK HOLDERS' EQUITY
Current Liabilities:
Accounts Payable and
Accrued expenses 63,218 54,806
Accrued Salaries 68,617 95,502
Loan Payable 186,000 214,127
Advanced Deposit on Common Stock to be issued -- 642,000
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;
808,783 shares issued and outstanding 764,633 767,133
Common stock, no par value, 80,000,000 shares
authorized; 5,055,955 shares issued and
outstanding 2,732,231 2,087,731
Accumulated deficit (3,686,804) (3,687,931)
Total Stock Holders' Equity (189,940) (833,067)
127,894 173,368
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</TABLE>
<PAGE>
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For The Three Months Ended September 30, 1999 and 1998
Three Months Three Months
Ended Ended
September September
30, 30,
1999 1998
---- ----
Net Sales $ 149,419 $ 30,437
Cost of Sales 20,101 9,607
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Gross Profit 129,317 20,830
Operating Expenses:
Salaries and Benefits 40,068 97,795
Selling, General and Administrative 85,365 52,312
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Total Operating Expenses 125,432 150,107
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Profit / Loss from Operations 3,885 (129,277)
Other Income (Expense):
Interest Expense (3,222) (3,912)
Interest Income 470 90
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Total Other Income (expense) (2,752) (3,822)
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Net Profit 1,133 (133,099)
Dividend requirements on preferred stock 20,220 26,567
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Loss applicable to common stock $ (19,087) $ (159,666)
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Net Loss per common share $ (0.004) $ (0.04)
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Weighted average number of
common shares outstanding 5,055,955 4,474,242
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<PAGE>
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Months Ended September 30, 1999 and 1998
(Increase / Decrease), in Cash Equivalents
Three Three
Months Months
Ended Ended
September September
30, 30,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Profit / Loss $ 1,133 $(133,099)
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 2,527 1,572
Changes in operating assets and liabilities
Accounts Receivable, trade (9,902) 18,541
Inventories 14,172 (93,868)
Deposit on Inventory 0 88,295
Prepaid Expenses (27,721) (500)
Accounts payable and accrued expenses 8,412 (47,420)
Accrued Salary (26,885) 5,539
Other Assets (1,276) 0
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Cash used in Operating Activities (39,540) (160,440)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of machinery and equipment (4,932) --
Payment for Deposit -- 70
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Cash used in investing activities (4,932) 70
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Stock 0 100,000
Proceeds from loan from Stockholder (28,127) 25,000
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Cash provided by financing activities (28,127) 125,000
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Net Increase (decrease) in cash and cash equivalents (72,599) (35,369)
Cash and Cash Equivalents, beginning of period 90,150 53,080
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Cash and Cash Equivalents, end of period $ 17,551 $ 17,711
========= =========
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<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 for the year ended June 30, 1999. 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 implemented 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, containing
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,
1999 1999
---- ----
Finished Goods $37,114 $ 7,097
Raw Materials $13,128 $17,083
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$50,242 $24,180
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NOTE C - RELATED PARTY TRANSACTIONS
At September 30, 1999, the majority stockholder of the Company was owed
$80,627 on a non-interest bearing note due June 30, 2000, collateralized by all
the assets of the Company. In addition, the majority stockholder of the company
was also owed $105,373 on a line of credit, with interest at 8% per annum,
collateralized by the stockholder's personal residence.
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,
2000 7,456
2001 8,082
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$15,538
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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, will be
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<PAGE>
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,
1999, no dividends have been declared. Dividends in arrears on the
outstanding preferred shares total $240,607 as of September 30, 1999. 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 voting rights equal to 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 shares
of its common stock adequate 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 conducted a review of its computer systems and internal systems
in its facility to identify any systems that could be affected by the "Year
2000" issue and implemented all changes necessary to make those systems
Year 2000 compliant. Accordingly, the Company believes that the Year 2000
problem will not pose significant operational problems for the Company's
computer systems or any other internal system. The Company has also
confirmed with its primary vendors that they are or will be Year 2000
compliant before December 31, 1999.
The Company does not anticipate that any material additional expenditures
will be incurred with regard to any Year 2000 issues.
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Liquidity and Capital Resources
As of September 30, 1999, the Company's principal sources of liquidity
included cash and cash equivalents of approximately $17,551, inventories of
$50,242, and net accounts receivable of $12,521. The Company had negative
working capital of $237,521 and no long term debt at September 30, 1999.
Cash and cash equivalents decreased from $90,150 as of June 30, 1999 to
$17,551 for the three months ended September 30, 1999. Operating activities
used cash of $39,540 during the period, consisting primarily of prepaid
expenses and reduction of accrued salaries of $54,606. Cash provided by
financing activities was $(28,127) as compared to $125,000 for the
corresponding period in 1998. During the period, holders of 2,500 shares of
Preferred Stock converted their shares to Common Stock.
At September 30, 1999 the Company had no commitments for capital
expenditures.
The Company has deferred tax assets with a 100% valuation allowance at
September 30, 1999. 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. 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, 1999 and 1998.
Net sales during the quarter ended September 30, 1999 were $ 149,419 as
compared to $ 30,437 in the quarter ended September 30,1998 a increase of $
118,982, or 491%.
Gross profit during the quarter ended September 30, 1999, was $ 129,317, as
compared to $20,830 during the quarter ended September 30, 1998, an
increase of $108,487, or 620%. As a percentage of net sales, gross profit
was 87% in the quarter ended September 30, 1999, as compared to 68% for the
corresponding quarter in 1998.
Operating expenses during the quarter ended September 30, 1999 were $
125,432, consisting of $40,068 in salaries and benefits and $85,365 in
selling, general and administrative expenses. This compares to operating
expenses during the quarter ended September 30, 1998 of $150,107 consisting
of $97,795 in salaries and benefits, and $52,312 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 achieved an operating profit of $ 3,885 for the quarter ended
September 30, 1999 as compared to an operating loss of $129,277 for the
corresponding quarter in 1998. Achieving an operating profit was primarily
due to increased sales. Net Profit (before dividend requirements for
Preferred Shares) was $ 1,133 during the quarter ended September 30, 1999
as compared to a net loss of $133,099 during the quarter ended September
30, 1998.
The Company received a Medicare Part B reimbursement code at the end of
September, 1998, for the Amerigel(R) Wound Dressing. This enabled the
Company to initiate a more aggressive selling effort to institutional
customers such as nursing homes and home health care organizations. Sales
have begun to increase in certain of these markets in the southeast United
States.
During the quarter ended December 31, 1998, the Company initiated a test
sale market with a large national chain. During the quarter ending March
31, 1999, the test was concluded successfully. Management had anticipated
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<PAGE>
a national rollout resulting from the test but the chain wanted more
testing which was initiated in three states during the month of April 1999.
If sales results are positive, management expects to expand into more
states with this chain. The Company did gain a commitment from a drug store
chain to begin stocking its Amerigel(R) Ointment Wound Dressing in all
3,000 stores of the chain. Initial stocking began during the fourth quarter
of fiscal 1999, and was completed in August 1999.
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) In September 1999, an accredited investor converted an investment of
$642,000 made in fiscal 1999 into a total of 706,200 shares of Common
Stock. The Company did not publicly offer the securities and relied on
Section 4(a) of the Securities Act of 1933, as amended for exemption
from the registration requirements of that Act.
(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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27- Financial Data Schedule
(b) 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
November 2, 1999 By: /s/ John C. Anderson
- ---------------- ------------------------
Date John C. Anderson, President
and Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 17,551
<SECURITIES> 0
<RECEIVABLES> 13,021
<ALLOWANCES> 500
<INVENTORY> 50,242
<CURRENT-ASSETS> 108,035
<PP&E> 15,517
<DEPRECIATION> 2,527
<TOTAL-ASSETS> 127,894
<CURRENT-LIABILITIES> 317,835
<BONDS> 0
0
764,633
<COMMON> 2,732,231
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 127,894
<SALES> 149,419
<TOTAL-REVENUES> 149,419
<CGS> 20,101
<TOTAL-COSTS> 125,432
<OTHER-EXPENSES> 2,752
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,222
<INCOME-PRETAX> 1,133
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,133
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,087)
<EPS-BASIC> (.004)
<EPS-DILUTED> (.004)
</TABLE>
