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 December 31, 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 February 8, 1997
<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 15
<PAGE>
Item 1. Financial Statements
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 & June 30, 1996
ASSETS
December 31 June 30
Current Assets 1996 1996
Cash & cash equivalents $ 42,738 $ 290,007
Accounts receivable, less allowances
of $500 for doubtful accounts 33,637 14,679
Inventories (Note 3) 98,105 108,646
Subscriptions receivable (Note 6) - 96,700
Prepaid expenses 268 -
------- -------
174,748 510,032
Machinery and equipment less accumulated
depreciation of $16,247 and $11,548 31,852 36,551
Other Assets:
Deposits 1,267 1,267
Employee advances 31,269 16,500
------- -------
32,536 17,767
------- -------
$ 239,136 $ 564,350
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 44,982 $ 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 (1,858,742) (1,548,154)
----------- ----------
Total stockholders' equity 194,154 504,742
----------- ----------
$ 239,136 $ 564,350
=========== ==========
The accompanying notes are an integral part of these statements.
- 2 -
<PAGE>
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended December 31, 1996 and 1995
Six Months Ended December 31, 1996 and 1995
Three Months Ended Six Months Ended
December 31 December 31
1996 1995 1996 1995
Net sales (Note 8) $ 42,916 $ 177,292 $ 75,147 $ 307,320
Cost of sales 7,645 71,090 16,521 104,334
------ ------- ------- -------
Gross profit 35,271 106,202 58,626 202,986
Operating Expenses:
Salaries and benefits 98,305 70,055 201,723 154,261
Selling, general and
administrative 77,099 83,640 167,618 162,132
------- ------- ------- -------
Total operating expenses 175,404 153,695 369,341 316,393
------- ------- ------- -------
Loss from operations (140,133) (47,493) (310,715) (113,407)
Other income (expense):
Interest expense ( 779) ( 354) (3,317) ( 368)
Interest income 1,013 3,440 3,444 5,159
------- ------ ------ -----
Total other income (expense) 234 3,086 ( 127) 4,791
------- ------ ------- -------
Net loss (139,899) (44,407) (310,588) (108,616)
Dividend requirements on
preferred stock 33,875 - 67,750 -
-------- ------- -------- -------
Loss applicable to common
stock $(173,774) $(44,407) $(378,338) $(108,616)
======== ======== ======= =======
Net loss per common share $ (.05) $ (.01) $ (.10) $ (.03)
======== ======== ======= ========
Weighted average number
of common shares
outstanding 3,637,920 3,637,920 3,637,920 3,637,920
========= ========= ========= =========
<PAGE>
The accompanying notes are an integral part of these statements.
- 3 -
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended December 31, 1996 and 1995
Six Months Ended December 31, 1996 and 1995
Increase (Decrease) in Cash Equivalents
Three Months Ended Six Months Ended
December 31 December 31
1996 1995 1996 1995
OPERATING ACTIVITIES
Net loss $(139,899) $(44,407) $(310,588) $(108,616)
Adjustments to reconcile
net income to net cash
used in operating
activities:
Depreciation 2,250 653 4,699 2,787
Changes in operating assets
and liabilities
Accounts receivable,
trade (12,370) 9,795 (18,958) (162,786)
Inventories 3,166 (70,818) 10,542 9,231
Prepaid expenses 1,767 (186) (268) 4,814
Accounts payable and
accrued expenses 5,295 35,636 (14,627) 18,137
-------- ------- -------- --------
Cash used in operating
activities (150,281) (69,627) (329,200) (236,433)
Investing activities:
Purchases of machinery
and equipment - (323) - (2,420)
Advances to employees
and stockholder (4,500) (21,411) (14,769) (31,563)
Payment for deposit - - - 2,500
-------- ------- --------- --------
Cash used in investing
activities (4,500) (21,734) (14,769) (31,483)
Financing activities:
Proceeds from issuance of
preferred stock - 160,500 96,700 160,500
Cash provided by
financing activities - 160,500 96,700 160,500
-------- -------- ------- -------
Net increase (decrease)
in cash and cash
equivalents (154,781) 69,139 (247,269) (107,416)
Cash and cash equivalents,
beginning of period 197,519 137,801 290,007 314,356
------- -------- -------- --------
Cash and cash equivalents,
end of period 42,738 206,940 42,738 206,940
======= ======== ======== ========
The accompanying notes are an integral part of these statements.
- 4 -
<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 statements of operations and statements of cash flows for
periods ended December 31, 1995 have been retroactively restated to
reflect 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.
- 5 -
<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.
- 6 -
<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.
- 7 -
<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 $310,588 and $519,393 for the
periods ended December 31 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 prefer-
red stock offerings.
Management'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.
- 8 -
<PAGE>
Procyon Corporation
and Subsidiary
Notes to Consolidated Financial Statements
==========================================================================
3. Inventories Inventories consisted of the following:
December June 30
31, 1996 1996
Finished goods $ 25,953 $ 42,216
Raw materials 72,152 66,430
-------- --------
$ 98,105 $ 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 $6,700 and $4,900 for the three months
ended December 31, 1996 and 1995 respectively and $13,300 and
$9,900 for the six months ended December 31, 1996 and 1995.
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
======
- 9 -
<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 December 31, 1996, no dividends have been declared.
Dividends in arrears on the outstanding preferred shares
total $134,496 as of December 31, 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.
- 10 -
<PAGE>
Procyon Corporation
and Subsidiary
Notes to Consolidated Financial Statements
===========================================================================
7. Income Taxes The Company's deferred tax asset at December 31, 1996
consists and of net operating loss carryforwards which
after the tax Carryforwards effect amount to approximately
$252,000. 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 December 31, 1996, for income tax purposes, the Company
had net operating loss carryforwards of approximately
$1,260,000 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 December 31, 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.
9. Advances to Advances to employees and shareholders represent advances
Employees against commissions. As commissions are earned these amounts
And are recorded as an expense.
Shareholders
- 11 -
<PAGE>
Item 2. MANAGEMENT'S 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 and
1996 and 1997 reflect the operating results and financial condition of
Amerx.
Liquidity and Capital Resources
As of December 31, 1996, the Company's principal sources of liquidity
included cash and cash equivalents of approximately $42,519 and net
accounts receivable of $33,637. The Company had net working capital of
$129,767 and no long term debt at December 31, 1996.
During the quarter ended December 31 1996, cash and cash equivalents
decreased from $197,519 as of September 30, 1996 to $42,738. Operating
activities used cash of $150,281 during the quarter, consisting primarily
of a net loss of $139,899. Advances against commissions to Shareholders
and employees of $4,500 were made relefected as cash used in investing
activities.
During the six months ended December 31 1996, cash and cash equivalents
decreased from $290,007 as of June 30, 1996 to $42,738. Operating
activities used cash of $329,200 during the quarter, consisting primarily
of a net loss of $310,588. Cash used in investing activities during the
six months was $14,769. Cash provided by financing activities during this
period was $96,700 in proceeds from the sale of Preferred Stock
At December 31, 1996 the Company had no commitments for capital
expenditures.
The Company has deferred tax assets with a 100% valuation allowance at
December 31, 1996. 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 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.
The plan to increase sales is more clearly referred to in the following
discussion of the results of operations.
- 12 -
<PAGE>
Results of Operations
Comparison of Three Months Ended December 31, 1996 and 1995. Net sales
during the quarter ended December 31, 1996 were $42,916 as compared to
$177,292 in the quarter ended December 31, 1995, a decrease of $134,376, or
76%. The decrease in sales quarter to quarter was primarily attributable
to the Company's change 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 Company has terminated its relationship with many of its
distributors. The Company currently has 5 non exclusive distributors. The
Company has refrained from establishing new distributors for its
institutional sales until such time as it receives a Medicare reimbursement
code for certain of its products. Institutional sales remain flat. The
Company concluded negotiations with a large retail chain which is expected
to impact sales positively during the next quarter. Like discussions are
underway with additional retail chains. In addition, the Company added a
major wholesale drug distributor for its retail business which will
generate immediate incremental revenue.
The Company concluded laboratory testing on its ointment product and has
submitted the application necessary to gain clearance for claims that will
support its efforts to gain a Medicare reimbursement code. The Company
anticipates gaining reimbursement status during the third or fourth quarter
of its fiscal year. Management expects a material increase in sales upon
gaining a reimbursement code. However, there can be no assurance that the
Company will succeed in its effort to qualify any of its products for
reimbursement.
The Company will be releasing new product packaging targeting the retail
consumer in the third quarter of its fiscal year. In addition, the Company
is launching an ad campaign targeting consumers in selected markets in an
effort to create sales in the retail pharmacy. Management believes this
marketing activity will have a material effect on sales growth in its
retail business.
Gross profit during the quarter ended December 31, 1996 was $35,271 as
compared to $106,202 during the quarter ended December 31, 1995, an
decrease of $70,931, or 67%. As a percentage of net sales, gross profit was
82% in the quarter ended December 31, 1996, as compared to 60% in the
corresponding quarter in 1995. The $70,931 decrease in gross profit
reflects the significant decline in net sales experienced during the
quarter.
Operating expenses during the quarter ended December 31, 1996 were
$175,404, consisting of $98,305 in salaries and benefits and $77,099 in
selling, general and administrative expenses. This compares to operating
expenses during the quarter ended December 31, 1995 of $153,695 consisting
of $70,055 in salaries and benefits, and $83,640 in selling, general and
administrative expenses. The Company expects expenses to rise somewhat as
sales increase over the remainder of the fiscal year.
- 13 -
<PAGE>
The Company incurred an operating loss of $139,899 in the quarter ended
December 31, 1996 as compared to an operating loss of $44,407 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 $173,774 during the quarter ended December 31,
1996 as compared to $44,407 during the quarter ended December 31, 1995.
- 14 -
<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.
- 15 -
<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)
February 10, 1997 /s/ John C. Anderson
Date John C. Anderson, President
February 10, 1997
<TABLE> <S> <C>
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