FORM 10-QSB
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Under Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For Quarter Ended September 30, 1996
Commission File Number: 01-17449
PROCYON CORPORATION
(Name of Small Business Issuer as specified in its charter)
Colorado
(State or Other Jurisdiction of Incorporation or Organization)
36-0732690
(IRS Employer Identification Number)
1150 Cleveland Street, Suite 410
Clearwater, Fl 34615
(Address of Principal Offices)
(813) 447-2998
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant has (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 such shorter period than
the registrant was required to file such reports), and (2) been subject to
such filing requirements for the past 90 days.
YES X NO
Common Stock No Par Value
(Class)
3,637,920 Shares of Common Stock Outstanding as of November 13, 1996
<PAGE>
PROCYON CORPORATION
Table of Contents
Page No.
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 2
Statement of Income(Loss) 3
Statement of Cash Flows 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Part II Other Information 14
<PAGE>
Item 1. Financial Statements
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1996 & June 30, 1996
ASSETS
September 30 June 30
Current Assets 1996 1996
Cash & cash equivalents $ 197,519 $ 290,007
Accounts receivable, less allowances
of $500 for doubtful accounts 21,267 14,679
Inventories (Note 3) 101,269 108,646
Subscriptions receivable (Note 6) - 96,700
Prepaid expenses 2,035 -
-------- -------
322,090 510,032
-------- -------
Machinery and equipment less accumulated
depreciation of $13,897 and $11,548 34,202 36,551
Other Assets:
Deposits 1,267 1,267
Employee advances 26,769 16,500
-------- -------
28,036 17,767
-------- -------
$ 384,328 $ 564,350
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 50,276 $ 59,608
Commitments and contingencies (Notes 1 and 5)
Stockholders' equity (Notes 2, 4, 6 and 8)
Preferred stock, 496,000,000 shares
authorized; none issued - -
Series A Cumulative Convertible Preferred
stock, no par value; 4,000,000 shares
authorized; 1,355,000 shares issued and
outstanding 1,328,700 1,328,700
Common stock, no par value, 80,000,000 shares
authorized; 3,637,920 shares issued and
outstanding 724,196 724,196
Accumulated deficit (1,718,844) (1,548,154)
--------- ---------
Total stockholders' equity 334,052 504,742
--------- ---------
$ 384,328 $ 564,350
========= =========
The accompanying notes are an integral part of these statements.
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<PAGE>
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months Ended September 30, 1996 and 1995
Three Months Three Months
Ended Ended
September 30, September 30
1996 1995
------------ ------------
Net sales (Note 8) $ 32,231 $ 130,028
Cost of sales 8,876 33,244
--------- -------
Gross profit 23,355 96,784
Operating Expenses:
Salaries and benefits 103,418 84,206
Selling, general and administrative 90,519 78,492
--------- -------
Total operating expenses 193,937 162,698
Loss from operations (170,582) ( 65,914)
Other income (expense):
Interest expense (2,539) ( 14)
Interest income 2,431 1,719
------- ------
Total other income (expense) ( 108) 1,705
Net loss (170,690) ( 64,209)
Dividend requirements on preferred stock 33,875 -
-------- -------
Loss applicable to common stock $(204,565) $( 64,209)
======== =======
Net loss per common share $ (.06) $ (.02)
======== =======
Weighted average number of
common shares outstanding 3,637,920 3,637,920
========= =========
The accompanying notes are an integral part of these statements.
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<PAGE>
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Months Ended September 30, 1996 and 1995
Increase (Decrease) in Cash Equivalents
Three Months Three Months
Ended Ended
September 30, September 30
1996 1995
------------ ------------
OPERATING ACTIVITIES
Net loss $(170,690) $( 64,209)
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 2,349 2,134
Changes in operating assets and liabilities
Accounts receivable, trade (6,588) (91,968)
Inventories 7,377 ( 565)
Prepaid expenses (2,035) 5,000
Accounts payable and accrued expenses (9,332) (17,199)
--------- ---------
Cash used in operating activities (178,919) (166,807)
--------- ---------
Investing activities:
Purchases of machinery and equipment - ( 2,097)
Advances to employees and stockholder (10,269) (10,150)
Payment for deposit 2,500
--------- --------
Cash used in investing activities (10,269) ( 9,747)
--------- --------
Financing activities:
Proceeds from subcriptions receivable 96,700 -
--------- --------
Cash provided by financing activities 96,700 -
--------- --------
Net increase (decrease) in cash and
cash equivalents (92,488) (176,554)
Cash and cash equivalents, beginning of period 290,007 314,355
------- -------
Cash and cash equivalents, end of period $ 197,519 $ 137,801
======= =======
The accompanying notes are an integral part of these statements.
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<PAGE>
Procyon Corporation
and Subsidiary
Summary of Accounting Policies
===========================================================================
Organization Procyon Corporation (the "Company"), a Colorado corporation,
and Business was incorporated on March 19, 1987. Through May 9, 1996, the
Company had been considered a development stage company as
it continued to identify and evaluate merger or acquisition
candidates for purposes of engaging in its business
activity. As a result of the acquisition of Amerx Health
Care Corp. ("Amerx") discussed in Note 2, the Company is no
longer considered to be in the development stage.
As described in Note 2, effective May 9, 1996, the Company
acquired 100 percent of the issued and outstanding common
stock of Amerx, a commonly-controlled company. The
acquisition was accounted for in a manner similar to a
pooling-of-interest and, accordingly, the Company's
financial statements have been presented to include the
results of Amerx as though the acquisition occurred as of
July 1, 1994.
The Company manufacturers and distributes a topical cream
and a preventative lotion primarily in the United States
which assists in healing and preventing certain wounds on
humans.
Basis of The consolidated financial statements include the accounts
Presentation of Procyon Corporation and its wholly owned subsidiary,
Principles Amerx, acquired during 1996 as discussed in Note 2. All
of material intercompany accounts and transactions are
Consolida- eliminated.
tion
The statement of operations and statement of cash flows for the
period ended September 30, 1995 have been retroactively
restated to relect consolidated results
Effective May 9, 1996, the Company effected a five for one
reverse split of its then issued and outstanding common
stock in anticipation of its acquisition of Amerx. All share
and per share information in the accompanying financial
statements has been retroactively restated to reflect the
reverse stock split.
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<PAGE>
Procyon Corporation
and Subsidiary
Summary of Accounting Policies
===========================================================================
Use of The preparation of financial statements in conformity with
Estimates generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Concentra- Financial instruments which potentially subject the Company
tions of to concentrations of credit risk consist primarily of cash,
Credit Risk cash equivalents and accounts receivable. The Company places
its cash and cash equivalents in what it considers to be
highly-rated financial institutions and while at times such
amounts may exceed federally insured limits, the Company has
not experienced any losses from such amounts. Concentrations
of credit risk with respect to accounts receivable are
limited due to a broad customer base and generally short
payment terms.
Cash For the purpose of the Statements of Cash Flows, the
Equivalents Company considers cash-on-hand, demand deposits in banks
and highly liquid investments purchased with original maturity
of three months or less to be cash equivalents.
Inventories Inventories are valued at lower of average cost or market.
Machinery & Machinery and equipment are stated at cost. Depreciation is
Equipment computed on a straight-line basis over the estimated useful
lives of the assets of five years.
Revenue Revenue is recognized upon the shipment of finished
Recognition merchandise to customers.
Income The Company accounts for income taxes under Statement of
Taxes Financial Accounting Standards No. 109 ("SFAS No. 109").
Temporary differences are differences between the tax basis
of assets and liabilities and their reported amounts in the
financial statements that will result in taxable or
deductible amounts in future years.
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<PAGE>
Procyon Corporation
and Subsidiary
Summary of Accounting Policies
===========================================================================
Net Loss Net loss per share is based on the weighted average number
Per Share of shares outstanding during each period presented.
Outstanding stock rights are included as common stock
equivalents, when dilutive.
Recent The Financial Standards Board has recently issued Statement
Accounting of Financial Accounting Standards ("SFAS") No. 121,
Pronounce- "Accounting for the Impairment of Long-Lived Assets" and
ments SFAS No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reported at the lower of the
carrying amount or their estimated recoverable amount and
the adoption of this statement by the Company is not
expected to have an impact on the financial statements. SFAS
No. 123 encourages the accounting for stock-based employee
compensation programs to be reported within the financial
statements on a fair-value based method. If the fair-value
based method is not adopted, then the statement requires
proforma disclosure of net income and earnings per share as
If the fair value based method had been adopted. The Company
has not yet determined how SFAS No. 123 will be adopted nor
its impact on the financial statements. Both statements are
effective for fiscal years beginning after December 15,
1995.
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<PAGE>
Procyon Corporation
and Subsidiary
Notes to Consolidated Financial Statements
===========================================================================
1. Going Concern As reflected in the accompanying financial statements, the
Company incurred net losses of $190,144 and $519,393 for the
periods ended September 30 and June 30, 1996. In addition,
net cash used in operations has exceeded $450,000 in each of
the last two years. These operating cash deficiencies
continue to be funded through proceeds from private
preferred stock offerings.
Managements's plans include continuing to attempt to
increase sales volumes and related production efficiencies
to meet its overhead and cash flow requirements.
The Company has filed a registration statement with the
Securities and Exchange Commission for a public offering
of its securities.
2. Acquisition On January 31, 1996, the Company entered into an Agreement
and Plan of Exchange (the "Agreement") with Amerx. The
Agreement provides that the Company acquire Amerx through a
share exchange in which all of the issued and outstanding
common stock of Amerx was exchanged for 3,000,000
(post-split) shares of common stock of the Company (the
"Exchange"). The Agreement provides, as a condition of the
Exchange, that the Company complete a five for one reverse
split of its issued and outstanding shares of common stock.
The president and majority stockholder of the Company was
the sole stockholder of Amerx prior to the Exchange which
was completed effective May 9, 1996.
Considering the nature of the relationship between the
Company and Amerx, the transaction is considered to be an
exchange between enterprises under common control and
accordingly, it has been accounted for at historical cost in
a manner similar to that in pooling-of-interests accounting
with the accompanying financial statements presented to
include the accounts and operations of the acquired company
as though the acquisition had occurred as of July 1, 1994.
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<PAGE>
Procyon Corporation
and Subsidiary
Notes to Consolidated Financial Statements
==========================================================================
3. Inventories Inventories consisted of the following:
September June 30
30, 1996 1996
Finished goods $ 34,318 $ 42,216
Raw materials 66,951 66,430
------- -------
$101,269 $ 108,646
4. Related Party During fiscal 1995, the majority stockholder of the
Transactions Company advanced $348,363 to the Company which was used
to fund operations and an investment in a certificate of
deposit. Effective July 1, 1995, the stockholder
contributed $117,500 of the advance plus accrued interest
of $15,500 into capital which was accounted for as part of
the Exchange discussed in Note 2.
5. Commitments Operating Leases
and
Contingencies The Company leases office space and certain equipment
under operating leases expiring at various dates through
2001. Rent expense under these agreements was
approximately $13,800 and $5,650 for the periods ended
September 30, 1996 and 1995, respectively. Future minimum
rentals under the operating leases are as follows:
Fiscal Year Ending June 30,
----------------------------------------
1997 $ 34,500
1998 9,100
1999 4,700
2000 4,300
2001 4,300
---------------------------------------
$ 56,900
======
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<PAGE>
Procyon Corporation
and Subsidiary
Notes to Consolidated Financial Statements
===========================================================================
6. Stockholder's During January 1995, the Company's Board of Directors
Equity authorized the issuance of up to 4,000,000 shares of Series
A Cumulative Convertible Preferred Stock ("Series A
Preferred Stock"). As of June 30, 1996, the Company had
raised a total of $1,328,700 in proceeds at $1 per share of
which $96,700 was received by the Company in July 1996. In
addition, the Company issued 26,300 shares of Series A
Preferred Stock valued at $1 per share for commissions
relating to the offering. 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, 1996, no dividends have been declared.
Dividends in arrears on the outstanding preferred shares
total $104,621 as of September 30, 1996. 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 of the
outstanding Series A Preferred Stock.
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<PAGE>
Procyon Corporation
and Subsidiary
Notes to Consolidated Financial Statements
===========================================================================
7. Income Taxes The Company's deferred tax asset at September 30, 1996
consists and of net operating loss carryforwards which
after the tax Carryforwards effect amount to approximately
$248,000. The Company has recorded a valuation allowance
equal to 100 percent of the deferred tax asset as the Company
was unable to determine that it is more likely than not that
the deferred tax asset will be realized.
At September 30, 1996, for income tax purposes, the Company
had net operating loss carryforwards of approximately
$1,120,000 which expire through 2012. The utilization of
certain of the loss carryforwards are limited under Section
382 of the Internal Revenue Code.
8. Major During the year ended June 30, 1996, three individual
Customers customers accounted for 16%, 11% and 10% of the Company's
and net sales.
Manufacturing
During the period ended September 30, 1996, three individual
customers accounted for 23%, 15% and 13% of the Company's
net sales.
The Company's manufacturing and packaging activities are
performed at a production facility owned and operated by a
non-affiliated pharmaceutical manufacturer under the
supervision of Company personnel.
- 11 -
<PAGE>
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
From 1990 through May 1996, the Company had minimal operations and was
considered to be a development stage company. During such time, the Company
incurred nominal expenses and its revenues consisted entirely of interest
income. In May 1996, the Company completed its acquisition of Amerx.
The acquisition was accounted for in a manner similar to a
pooling-of-interest since both companies were under common control and,
accordingly, the Company's financial statements include the Amerx operating
results as though the acquisition was completed on July 1, 1994. Beginning
July 1, 1994 the Company's financial statements for fiscal years 1995, 1996
and 1997 reflect the operating results and financial condition of Amerx.
Liquidity and Capital Resources
As of September 30, 1996, the Company's principal sources of liquidity
included cash and cash equivalents of approximately $197,519 and net
accounts receivable of $21,267. The Company had net working capital of
$271,814 and no long term debt at September 30, 1996.
During the quarter ended September 30 1996, cash and cash equivalents
decreased from $290,007 as of June 30, 1996 to $197,519. Operating
activities used cash of $178,919 during the quarter, consisting
primarily of a net loss of $170,690. Cash used in investing
activities during the first quarter was $10,269. Cash provided by
financing activities during the first quarter of fiscal 1997 was
$96,700, consisting of proceeds from subscriptions receivable.
During fiscal 1996, cash and cash equivalents decreased from $314,355 as of
June 30, 1995 to $290,007 as of June 30, 1996. Operating activities used
cash of $483,530 during fiscal 1996, consisting primarily of a net loss of
$519,393. Cash used in investing activities during fiscal 1996 was
$14,211. Cash provided by financing activities during 1996 was
$473,393, consisting of $471,000 in proceeds from the sale of Preferred
Stock, and $232,255 in liquidation of a certificate of deposit, which
amounts were partially offset by repayment of stockholder advances of
$229,862.
At September 30, 1996 the Company had no commitments for capital expenditures.
The Company has deferred tax assets with a 100% valuation allowance at
September 30, 1996. Management is not able to determine if it is more
likely than not that the deferred tax assets will be realized.
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<PAGE>
The Company has incurred losses since its inception and is dependent upon
equity financing to fund working capital needs that raises substantial
doubt about its ability to continue as a going concern. Management's
plans include continuing to attempt to increase sales volumes and related
production efficiencies to meet its overhead and cash flow requirements
as well as working with vendors to maintain their continued support.
The ultimate results of these efforts cannot be determined at the present
time.
Results of Operations
Comparison of Three Months Ended September 30, 1996 and 1995. Net sales during
the quarter ended September 30, 1996 were $32,231 as compared to $130,028 in
the quarter ended September 30, 1995, a decrease of $97,797, or 75%. The
decrease was primarily attributable to a significant change in the Company's
distribution strategies. In particular, the Company has determined that the
network of distributors established in 1995 and early 1996 have failed to
penetrate their respective geographic markets. As a result, the Comapny has
terminated its relationship with many of its distributors. The Comapny
currently has 5 non exclusive distributors. In addition, The Company is
engaged in direct negotiations with a large retail chain and with a large
distributor of completmentary medical products, in each case with a view towards
establishing new sales and distribution channels. The Company's ability to
generate revenues in the next two quarters is likely to depend in large part
on its ability to establish a relationship of such nature.
Future net sales may also be impacted by the Company's ability to arrange for
Medicare and Medicaid reimbursement with respect to certain of the Company's
products. Purchases of the Company's products are not currently eligible
to receive reimbursement from Medicare or Medicaid. Such reimbursement is
available only for products which meet certain Food and Drug Administration
("FDA") requirements. The Company is currently conducting laboratory
testing on on its ointment products (but not on its barrier lotion products)
in order to submit the applications necessary to qualify certain products
for reimbursement. Based upon the estimated time required to complete
laboratory testing and obtain the required FDA clearance, the Company currently
expects that Medicare and Medicaid reimbursement may become possible during the
third or fourth quarter of the current fiscal year. Management expects that
the availabilty of such reimbursement may materially increase the demand for
certain of the Company's products. However, there can be no assurance that
the Company will succeed in qualifying any of its products for Medicare and
Medicaid reimbursement.
Gross profit during the quarter ended September 30, 1996 was $23,355 as
compared to $96,784 during the quarter ended September 30, 1995, a decrease
of $73,429, or 76%. As a percentage of net sales, gross profit was 74% in the
quarter ended Septembe 30, 1996, as compared to 72% in the corresponding
quarter in 1995. The $73,429 decrease in gross profit reflects the significant
decline in net sales experienced in the quarter.
Operating expenses during the quarter ended September 30, 1996 were $193,937,
consisting of $103,418 in salaries and benefits and $90,519 in selling,
general and administrative expenses. This compares to operating expenses during
the quarter ended September 30, 1995 of $162,698 consisting of $84,206 in
salaries and benefits, and $78,492 in selling, general and administrative
expenses. The Company believes that current expense levels will remain
relatively constant for the foreseeable future.
The Company incurred an operating loss of $170,582 in the quarter ended
September 30, 1996 as compared to an operating loss of $65,914 in the
corresponding quarter in 1995. The increase in operating loss was primarily
due to the reduction in net sales. Net loss (after dividend requirements for
Preferred Shares) was was $204, 565 during the quarter ended September 30, 1996
as compared to $64,209 during the quarter ended September 30, 1995.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITIES HOLDERS
Not applicable.
Item 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS
Not applicable.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROCYON CORPORATION
(Registrant)
November 20, 1996 /s/ John C. Anderson
-------------------- ------------------------------
Date John C. Anderson, President
November 20, 1996
