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 March 31, 1999
[ ] Transition Report Under Section 13 or 18(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 34615
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(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; 4,961,455 shares outstanding as of May 11, 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........ 8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................ 10
ITEM 2. CHANGES IN SECURITIES ................................... 10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ......................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...... 10
ITEM 5. OTHER INFORMATION ....................................... 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ........................ 10
SIGNATURES....................................................... 11
2
<PAGE>
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 & JUNE 30, 1998
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
----------- -----------
Current Assets (unaudited) (audited)
<S> <C> <C>
Cash & Cash Equivalents $ 1,067 $ 53,080
Accounts Receivable, less allowances
of $500 36,180 19,828
Inventories 114,230 24,180
Deposit on Inventory 0 93,913
Prepaid Expenses 2,200 0
----------- -----------
TOTAL CURRENT ASSETS 153,678 191,001
Machinery and Equipment less accumulated
depreciation of $18,284 and $15,959 12,824 15,786
Other Assets:
Deposits 2,045 2,056
----------- -----------
$ 168,547 $ 208,843
=========== ===========
LIABILITIES AND STOCK HOLDERS' EQUITY
Current Liabilities:
Accounts Payable and $ 68,354 $ 133,759
Accrued Salaries 103,908 109,446
Loan Payable 401,627 213,316
----------- -----------
Total Current Liabilities 573,889 456,521
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 867,133 1,296,850
Common stock, no par value, 80,000,000 shares
authorized; 4,961,455 shares issued and
outstanding 1,987,831 1,556,396
Accumulated deficit (3,510,306) (3,100,924)
----------- -----------
Total Stockholders' Equity (655,342) (247,678)
----------- -----------
$ 168,547 $ 208,843
=========== ===========
Note: Taken from the audited balance sheet at that date
3
<PAGE>
PROCYON CORPORATION & SUBSIDIARY CONSOLIDATED
STATEMENT OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
Nine Months Ended March 31, 1999 and 1998
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
------------ ------------ ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Net Sales $ 68,795 $ 66,526 $ 143,163 $ 229,029
Cost of Sales 12,656 21,278 33,690 64,298
----------- ----------- ----------- -----------
Gross Profit 56,139 45,248 109,473 164,731
Operating Expenses:
Salaries and Benefits 78,810 137,011 273,362 468,550
Selling, General and Administrative 103,345 74,235 233,929 361,636
----------- ----------- ----------- -----------
Total Operating Expenses 182,155 211,246 507,291 830,186
----------- ----------- ----------- -----------
Loss from Operations (126,016) (165,998) (397,818) (665,455)
Other Income (Expense):
Interest Expense (4,013) (766) (12,235 (1,477)
Interest Income 483 63 671 4,266
----------- ----------- ----------- -----------
Total Other Income (expense) (3,530) (703) (11,564) 2,789
----------- ----------- ----------- -----------
Net Loss (129,546) (166,701) (409,382) (662,666)
Dividend requirements on preferred stock (36,144) 51,625 (36,144) 103,149
----------- ----------- ----------- -----------
Loss applicable to common stock $ (93,402) $ (218,326) $ (373,238) $ (765,815)
=========== =========== =========== ===========
Basic Loss per common share $ (0.02) $ (0.06) $ (0.08) $ 0.21
Diluted Loss per comon share $ (0.02) $ (0.06) $ (0.08) $ (0.21)
Weighted average number of
common shares outstanding 4,961,455 3,637,920 4,961,455 3,637,920
=========== =========== =========== ===========
4
<PAGE>
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 1999 and 1998
(Increase / Decrease), in Cash Equivalents
Nine Months Nine Months
Ended Ended
March 31, March 31,
1999 1998
--------- ----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(409,382) $(662,666)
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 6,284 7,048
Loss on sale of fixed assets 0 4,663
Changes in operating assets and liabilities
Accounts Receivable, trade (16,352) 20,660
Inventories (90,050) 24,499
Other Assets (3,794) 0
Deposit on Inventory 93,913
Accounts payable and accrued expenses (70,943) 159,340
--------- ---------
Cash used in Operating Activities (490,324) (446,456)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of Property & Equipment 0 2,000
Advances to employees and stockholders 0 (6,000)
--------- ---------
Cash used in investing activities 0 (4,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Long Term Loans 188,311 28,413
Proceeds from subscriptions receivable 250,000 10,000
Cumulative Convertible Preferred Stock 0 79,200
Cash provided by financing activities 438,311 117,613
--------- ---------
Net Increase (decrease) in cash and cash equivalents (52,013) (332,843)
Cash and Cash Equivalents, beginning of period 53,080 335,121
--------- ---------
Cash and Cash Equivalents, end of period $ 1,067 $ 2,278
========= =========
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, 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:
March 31 June 30,
1999 1998
-------- ---------
Finished Goods $ 78,180 $ 7,097
Raw Materials $ 36,050 $ 17,083
-------- ---------
$114,230 $ 24,180
======== =========
NOTE C - RELATED PARTY TRANSACTIONS
At March 31, 1999, the majority stockholder of the Company was owed
$251,62731 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
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 March 31, 1999,
no dividends have been declared. Dividends in arrears on the outstanding
preferred shares total $221,731 as of March 31, 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 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.
7
<PAGE>
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", Aexpect", Aanticipate", Acontinue",
Aestimate", "project", "intend", Abelieve", 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 AYear 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 A00"
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 AYear 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 can 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.
8
<PAGE>
Liquidity and Capital Resources
As of March 31, 1999, the Company's principal sources of liquidity included
cash and cash equivalents of approximately $1,067, inventories of $114,230
and net accounts receivable of $36,180. The Company had net working capital
of $37,247 and no long term debt at March 31, 1999.
During the nine months ended March 31, 1999, cash and cash equivalents
decreased from $53,080 as of June 30, 1998 to $1,067. Operating activities
used cash of $488,719 during the period, consisting primarily of a net loss
of $409,382. Cash provided by financing activities was $436,706 as compared
to $117,613 for the corresponding period in 1998. During the period,
holders of 431,435 Preferred Stock converted their shares to Common Stock.
At March 31, 1999 the Company had no commitments for capital expenditures.
The Company has deferred tax assets with a 100% valuation allowance at
March 31, 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. 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 March 31, 1999 and 1998.
Net sales during the quarter ended March 31, 1999 were $ 68,795 as compared
to $ 74,885 in the quarter ended March 31,1998 a decrease of $ 6,090, or
8%.
Gross profit during the quarter ended March 31, 1999, was $ 56,139 as
compared to $40,127 during the quarter ended March 31, 1998, an increase of
$16,012, or 40%. As a percentage of net sales, gross profit was 82% in the
quarter ended March 31, 1999, as compared to 54% in the corresponding
quarter in 1998.
Operating expenses during the quarter ended March 31, 1999 were $ 182,155,
consisting of $78,810 in salaries and benefits and $ 103,345 in selling,
general and administrative expenses. This compares to operating expenses
during the quarter ended March 31, 1998 of $222,437 consisting of $119,614
in salaries and benefits, and $102,823 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 $ 126,016 in the quarter ended
March 31, 1999 as compared to an operating loss of $ 182,310 in the
corresponding quarter in 1998. 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 $ 129,546 during the quarter ended
March 31, 1999 as compared to $ 233,396 during the quarter ended March 31,
1998.
The Company received a Medicare Part B reimbursement code at the end of
September, 1998, for the Amerigel7 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. Sales
have begun to increase in certain of these markets in the southeast United
States.
9
<PAGE>
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 a
national rollout resulting from the test but the chain wants more testing
which has been initiated in three states during the month of April. Sales
results will be measured during the last quarter of the fiscal year and if
positive, management expects to expand into more states with this chain.
The Company did gain a commitment from a 3,000 store chain to begin
stocking its Amerigel7 Ointment Wound Dressing in all stores. Stocking will
be initiated during the first quarter of the new fiscal year.
Management is continuing its efforts to raise additional funding through a
private equity placement. The funds will be used to support advertising and
it is hoped that the funding effort will be concluded during the quarter.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
Not Applicable.
(c) Not Applicable.
(4) 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
(2) None
10
<PAGE>
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
May 12, 1999 By: /s/ John C. Anderson
- ------------ ----------------------------------------
Date John C. Anderson, President and
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,067
<SECURITIES> 0
<RECEIVABLES> 36,680
<ALLOWANCES> 500
<INVENTORY> 114,230
<CURRENT-ASSETS> 153,678
<PP&E> 31,108
<DEPRECIATION> 18,284
<TOTAL-ASSETS> 168,547
<CURRENT-LIABILITIES> 573,889
<BONDS> 0
0
111,283
<COMMON> 4,961,455
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 168,547
<SALES> 68,795
<TOTAL-REVENUES> 68,795
<CGS> 12,656
<TOTAL-COSTS> 182,155
<OTHER-EXPENSES> 3,530
<LOSS-PROVISION> 129,546
<INTEREST-EXPENSE> 4,013
<INCOME-PRETAX> (129,546)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (129,546)
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
