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 March 31, 1997
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 May 13, 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
Item 1. Financial Statements
<PAGE>
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 1997 & June 30, 1996
ASSETS
March 31 June 30
Current Assets 1997 1996
Cash & cash equivalents $ 5,017 $ 290,007
Accounts receivable, less allowances
of $500 for doubtful accounts 88,781 14,679
Inventories (Note 3) 100,772 108,646
Subscriptions receivable (Note 6) - 96,700
Prepaid expenses 268 -
------- -------
194,838 510,032
Machinery and equipment less accumulated
depreciation of $18,596 and $11,548 29,503 36,551
Other Assets:
Deposits 1,267 1,267
Employee advances 35,769 16,500
------- ------
37,036 17,767
------- -------
$ 261,377 $ 564,350
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 101,895 $ 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; 1,436,000 and 1,355,000
shares issued and outstanding 1,409,700 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 (1,974,414) (1,548,154)
-------- ---------
Total stockholders' equity 159,482 504,742
------- ---------
$ 261,377 $ 564,350
======= =======
The accompanying notes are an integral part of these statements.
- 2 -
<PAGE>
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1996
Nine Months Ended March 31, 1997 and 1996
Three Months Ended Nine Months Ended
March 31 March 31
1997 1996 1997 1996
Net sales (Note 8) $ 91,578 $ 48,293 $ 166,725 $ 355,613
Cost of sales 26,231 40,910 42,752 145,244
------- ------ ------- -------
Gross profit 65,347 7,383 123,973 210,369
Operating Expenses:
Salaries and benefits 104,804 71,556 306,527 225,817
Selling, general and
administrative 75,818 94,795 243,436 256,927
------- ------- ------- -------
Total operating expenses 180,622 166,351 549,963 482,744
------- ------- ------- -------
Loss from operations (115,275) (158,968) (425,990) (272,375)
Other income (expense):
Interest expense ( 514) ( 368) (3,831) (368)
Interest income 117 166 3,561 5,361
-------- ------- ------- ------
Total other income (expense) ( 397) ( 202) ( 270) 4,993
-------- ------- -------- -------
Net loss (115,672) (159,170) (426,260) (267,382)
Dividend requirements on
preferred stock 35,900 - 107,700 -
-------- ------- ------- --------
Loss applicable to common
stock $(151,572) $(159,170) $(533,960)$(267,382)
======== ========= ======= =========
Net loss per common share $ (.04) $ (.04) $ (.15) $ (.07)
======== ========= ======== =========
Weighted average number
of common shares
outstanding 3,637,920 3,637,920 3,637,920 3,637,920
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
- 3 -
<PAGE>
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1997 and 1996
Nine Months Ended March 31, 1997 and 1996
Increase (Decrease) in Cash Equivalents
Three Months Ended Nine Months
Ended
March 31 March 31
1997 1996 1997 1996
OPERATING ACTIVITIES
Net loss $(115,672) $(159,170) $(426,260) $(267,382)
Adjustments to reconcile
net income to net cash
used in operating
activities:
Depreciation 2,349 4,880 7,048 7,667
Changes in operating assets
and liabilities
Accounts receivable,
trade (55,144) 67,878 (67,102) (94,808)
Inventories (2,667) (8,026) 874 1,205
Prepaid expenses - 186 (268) 5,000
Accounts payable and
accrued expenses 56,913 39,029 42,287 57,166
-------- ------- -------- --------
Cash used in operating
activities (114,221) (55,223) (443,421) (291,152)
-------- -------- --------- --------
Investing activities:
Purchases of machinery
and equipment - - - (2,420)
Advances to employees
and stockholder (4,500) - (19,269) (28,200)
Repayments of advances
to employees 10,663
Payment for deposit - (18,000) - 2,500
-------- --------- --------- ---------
Cash used in investing
activities (4,500) ( 7,337) (19,269) (28,820)
-------- --------- --------- ---------
Financing activities:
Proceeds from issuance of
preferred stock 81,000 100,000 81,000 260,500
Proceeds from
subscriptions receivable - - 96,700 -
Cash provided by ------ ------- ------- -------
financing activities 81,000 100,000 177,700 260,500
------ ------- ------- -------
Net increase (decrease)
in cash and cash
equivalents ( 37,721) 37,440 (284,990) ( 59,472)
Cash and cash equivalents,
beginning of period 42,738 152,366 290,007 249,278
------ ------- ------- -------
Cash and cash equivalents,
end of period $ 5,017 $189,806 $ 5,017 $189,806
====== ======= ======= =======
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 toa
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 the periods ended March 31, 1996 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 March 31, 1997 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.
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:
March June 30
31, 1997 1996
Finished goods $ 36,455 $ 42,216
Raw materials 64,317 66,430
$100,772 $ 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 March 31, 1997
and 1996 respectively and $20,000 and $14,000 for the nine
months ended March 31, 1997 and 1996. 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 March 31, 1997, the Company had
raised a total of $1,409,700 in proceeds at $1 per share of
which $81,000 was received by the Company during the current
quarter ended March 31, 1997. 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, 1997, no dividends have been declared.
Dividends in arrears on the outstanding preferred shares
total $170,396 as of March 31, 1997. 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 March 31, 1997 consists
of net operating loss carryforwards which after the tax
Carryforwards effect amount to approximately $275,000.
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 March 31, 1997, for income tax purposes, the Company
had net operating loss carryforwards of approximately
$1,376,000 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 March 31, 1997, 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 March 31, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of approximately $5,017 and net
accounts receivable of $88,781. The Company had net working capital of
$92,943 and no long term debt at March 31, 1997.
During the quarter ended March 31 1997, cash and cash equivalents
decreased from $42,738 as of December 31, 1996 to $5,017. Operating
activities used cash of $114,221 during the quarter, consisting primarily
of a net loss of $115,672. Advances against commissions to Shareholders
and employees of $4,500 were made and reflected as cash used in investing
activities.
During the nine months ended March 31 1997, cash and cash equivalents
decreased from $290,007 as of June 30, 1996 to $5,017. Operating
activities used cash of $443,421 during the period, consisting primarily
of a net loss of $426,260. Cash used in investing activities during the
nine months was $14,769. Cash provided by financing activities during
this period was $177,700 in proceeds from the sale of Preferred Stock
At March 31, 1997 the Company had no commitments for capital
expenditures.
The Company has deferred tax assets with a 100% valuation allowance at
March 31, 1997. 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. The Company has made
progress in the past quarter as evidenced in increased sales and lower
losses. 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 March 31, 1997 and 1996. Net sales
during the quarter ended March 31, 1997 were $91,578 as compared to
$48,293 in the quarter ended March 31, 1996, an increase of $43,285, or
90%. The increase in sales quarter to quarter was primarily attributable
to the Company's sales to a major retail chain. The Company initiated
shipment to a limited number of the chain's stores in Florida through the
Company's retail distributor. The Company plans to expand its sales to
the chain during the next quarter and management expects results to
impact sales and profits positively. The Company has begun discussions
with regional management of three additional national chains into whose
regions the products may be introduced during the next business quarter.
The Company did not expand its base of institutional distributors during
the quarter and will continue to refrain from doing so until such time as
it receives a Medicare reimbursement code for certain of its products.
However, institutional sales showed improvement during the quarter.
Management believes this improvement resulted from satisfied user
facilities and continued sales efforts despite lack of a billing code.
The Company received a 510(K) clearance for its AmerigelTM Ointment Wound
Dressing that allows for expanded usage indications. Management believes
the expanded indications will support its efforts to gain a Medicare
reimbursement code and management is hopeful that the approval will come
during the next quarter. There can be no assurance that the Company will
succeed in its effort to qualify any of its products for reimbursement.
When a code is received, management believes its sales will improve
significantly.
The Company did embark on a select market advertising campaign
concomitant to the introduction of its products into the chain store
mentioned above. The radio advertising has been successful thus far and
management states that the program will continue during the next quarter.
Gross profit during the quarter ended March 31, 1997 was $65,347 as
compared to $7,383 during the quarter ended March 31, 1996, an increase
of $57,964, or 785%. As a percentage of net sales, gross profit was 71%
in the quarter ended March 31, 1997, as compared to 15% in the
corresponding quarter in 1996. The $57,964 increase in gross profit
reflects the significant increase in net sales experienced during the
quarter.
Operating expenses during the quarter ended March 31, 1997 were $180,622,
consisting of $104,804 in salaries and benefits and $75,818 in selling,
general and administrative expenses. This compares to operating expenses
during the quarter ended March 31, 1996 of $166,351 consisting of $71,556
in salaries and benefits, and $94,795 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 $115,275 in the quarter ended
March 31, 1997 as compared to an operating loss of $158,968 in the
corresponding quarter in 1996. The decrease in operating loss was
primarily
due to the increases in net sales. Net loss (after dividend requirements
for Preferred Shares) was $151,572 during the quarter ended March 31,
1997 as compared to $159,170 during the quarter ended March 31, 1996.
- 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)
May 14, 1997 /s/ John C. Anderson
Date John C. Anderson, President
May 14, 1997
<TABLE> <S> <C>
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