FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to __________________
Commission file number 0-17449
PROCYON CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 36-0732690
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1150 Cleveland Street, Suite 410
Clearwater, Florida 34615
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(Address of principal executive offices, including Zip Code)
Issuer's telephone number, including area code (813) 447-2998
Securities registered pursuant to Section 12(b)
of the Act:
None
Securities registered pursuant to section 12(g)
of the Act:
Common Stock
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such 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
----- -----
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ]
State Issuer's revenues for its most recent fiscal year: $215,000
As of September 24, 1997, 3,637,920 shares of the registrant's Common Stock were
outstanding. The aggregate market value of the 287,920 shares of Common Stock
held by non-affiliates was $647,820 on September 24, 1997 based on a bid price
of $2.25 on such date.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III of this annual report is incorporated by
reference to the registrant's definitive proxy statement if filed with the
Commission on or before October 28, 1997 or, if such proxy statement is not
filed, will be filed with the Commission as an amendment to this Form 10-K under
cover of Form 10-K/A, not later than October 28, 1997.
Transitional Small Business Disclosure Format: Yes No X
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<PAGE>
INDEX
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Title Page
- ----- ----
ITEM I BUSINESS............................................. 3
ITEM 2 PROPERTIES............................................ 5
ITEM 3 LEGAL PROCEEDINGS..................................... 5
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS................................... 5
ITEM 5 MARKET FOR COMPANY'S COMMON EQUITY AND
RELATED STOCK MATTERS.............................. 6
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION.................................. 6
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA............................................... 7
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ACCOUNTING AND FINANCIAL DISCLOSURE................ 8
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT OF
THE REGISTRANT.................................... 9
ITEM 10 EXECUTIVE COMPENSATION................................. 9
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.............................. 9
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS....................................... 9
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K....................... 10
<PAGE>
Part I
ITEM 1. BUSINESS
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History and Organization
Procyon Corporation (the "Company"), a Colorado corporation, was
incorporated on March 19, 1987. Through May 9, 1997, 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"),
the Company is no longer considered to be in the development stage.
Acquisition of Amerx
On January 31, 1996, the Company entered into an Agreement and Plan of
Exchange (the "Agreement") with Amerx Health Care Corp., a corporation based in
Clearwater, Florida which was wholly-owned by John C. Anderson ("Amerx"). The
Agreement provided that the Company would acquire Amerx through a share exchange
in which all of the issued and outstanding Common Shares of Amerx would be
acquired by the Company for 3,000,000 (post-split) shares of Common Stock (the
"Exchange"). The Agreement provided that as a condition to the Exchange, the
Company would complete a five for one reverse split of its issued and
outstanding Common Shares. The reverse stock split was approved by the Company's
shareholders on April 15, 1996. The reverse stock split became effective as of
May 8, 1996 and the Exchange was completed as of May 9, 1996.
As a result of completing the Exchange, the Company's business operations
are conducted through its wholly-owned subsidiary, Amerx. Amerx was formed as a
Florida corporation in 1993 to develop and market proprietary medical products
which are used in the treatment of pressure ulcers, dermatitis, inflammation,
and various other skin problems. Such problems are most common among the
elderly, particularly residents of long term healthcare facilities and
diabetics. If not treated promptly and effectively, such problems can result in
amputations, particularly of lower extremities. The Company's products are
generally sold through distributors, to health care institutions, such as
nursing homes, hospitals and home health care providers, and to retailers,
including national and regional chain stores and pharmacies.
Products
Amerx's products currently consist of Amerigel(TM) Preventive Care Lotion,
Amerigel(TM) Ointment Wound Dressing and Amerigel(TM) Preventive Barrier Lotion.
The Preventive Care Lotion has emollients which restore moisture to fragile
skin; protect the skin against tears and chafing; and assist in prevention of
chronic pressure ulcers. The Ointment Wound Dressing is formulated to be used to
manage pressure ulcers stages I-IV, stasis ulcers, diabetic skin ulcers, skin
irritations, cuts and abrasions. The Barrier Lotion provides barrier protection
to reduce the harmful effects of urine and feces in incontinent patients.
The Company expects to introduce a saturated gauze sponge product during
the second quarter of fiscal 1998. The new product consists of gauze sponges
saturated with the Amerigel Ointment Wound Dressing. The sponges have been
developed for packing deep wounds, and are expected to improve healing and keep
the wound moist and clean. The sponges will be offered in two-inch and four-inch
squares.
Management believes that each Amerx product is based on proprietary
formulations which the Company attempts to protect as trade secret information.
Each product is registered with the Food and Drug Administration and has been
granted a National Drug Code. The Company is currently seeking a Medicare Part B
HCPCS Reimbursement Code ("Reimbursement Code") for the Amerigel Ointment Wound
Dressing and saturated gauze sponges. Products which carry a Reimbursement Code
qualify for Medicare payments in an amount generally equal to an 80%
reimbursement amount. The Company believes that the Reimbursement Code provides
a significant sales opportunity with respect to product sales made to hospitals,
nursing homes and health care institutions. The applications for Reimbursement
Codes are pending on the Amerigel Ointment Wound Dressing and the saturated
gauze sponge product. Management is not able to predict when or if the Codes may
be granted. The Amerigel Preventive Care Lotion and the Amerigel Barrier Lotion
are not eligible for Medicare Part B reimbursement.
-3-
<PAGE>
Market for Skin Treatment Products
Amerx products are generally sold to an institutional market and a retail
market. The institutional market is comprised of hospitals, nursing homes, and
other health care institutions which provide wound care to a large number of
patients. For example, management believes that based on a study of the clinical
and economic impact of diabetic neuropathy published by the Health Science
Institute, approximately one out of five nursing home patients suffers from
chronic pressure ulcers, and that an estimated 5,000 amputations per month are
performed due to chronic skin wounds. The Company believes that the Amerx
products represent an inexpensive, yet effective, treatment and prevention
program for chronic pressure ulcers and other skin problems which are treated in
health care institutions. The retail market for Amerx's products is comprised of
mass merchandise stores and pharmacies which sell wound care products to
individuals for their own personal use outside of health care facilities.
Sales and Marketing
During fiscal 1997, Amerx implemented certain changes to its distribution
and marketing strategy. Prior to fiscal 1997, Amerx relied primarily on small
distributors which were granted the exclusive right to sell products in
specified territories. Such distributors focused largely on the institutional
market. For various reasons, including the lack of a Reimbursement Code for
Amerx products, the exclusive distributors were not able to achieve the sales
levels desired by Amerx. During fiscal 1997, Amerx terminated its relationship
with substantially all of such distributors and shifted its focus to national
and regional distributors which are capable of selling to the retail market as
well as the institutional market.
The Company's principal distributors to the retail market currently include
McKesson Drug, Amerisource and Bergen Brunswig. To date, product distribution
has been achieved primarily in the Southeastern United States. In particular,
the Company's products are presently carried in certain Wal-Mart stores in
Florida and Kroger Stores in the Atlanta area, as well as independent pharmacies
throughout the Southeast. The Company is currently engaged in discussions with
other distributors in order to expand distribution into other national and
regional retail chains.
The Company's principal distributors to the institutional market currently
include Gulf South, General Medical, Owen Minor and Southland Medical Supply.
Although sales to the institutional market depend more heavily on the
availability of a Reimbursement Code than do sales to the retail market, the
Company's products are currently used in nursing homes, hospitals, and home
health care organizations located primarily in the Southeastern United States.
Distributors purchase products from Amerx on standard credit terms. Product
returns by distributors are generally permitted only on dated products based
upon a two year expiration date. During fiscal 1997, retail and institutional
sales represented approximately 54% and 44%, respectively, of total net sales.
Until Reimbursement Codes are granted with respect to one or more of Amerx's
products, management expects that retail sales will account for an increasing
percentage of total net sales.
The Company supports its distributors through product literature,
advertising and limited participation at industry trade shows. All existing
distributors sell Amerx products on a non-exclusive basis. The Company has seven
employees who engage in direct selling activities as well as support the efforts
of distributors.
Significant Customers
During fiscal 1997, McKesson Drug, Gulf South and DMC accounted for 14%,
13% and 40%, respectively, of Amerx's net sales. McKesson Drug and Gulf South
are current Amerx distributors and DMC was an Amerx distributor from
approximately December 1996 through April 1997. The Company expects that certain
of its principal distributors, such as McKesson and Gulf South, may continue to
account for a significant portion of net sales. The loss of any such distributor
could have an adverse affect on the Company's future operating results and
financial condition. The Company will attempt to reduce its dependence on a
limited number of distributors by establishing relationships with additional
distributors who are capable of introducing and selling Amerx products in new
geographic markets and to additional retail chains.
-4-
<PAGE>
Manufacturing
All manufacturing and packaging activities are performed pursuant to Good
Manufacturing Practices ("GMPs") at an FDA approved production facility operated
by an unrelated pharmaceuticals manufacturer located near Clearwater, Florida.
All manufacturing activities are required to comply with the manufacturing
practices developed by Amerx specifically for its products, as well as the GMPs
which apply to all activities conducted by the manufacturer in the facility. An
independent lab performs tests on product samples in order to confirm quality
and performance of the products.
Except for certain mixing kettles owned by the Company, substantially all
manufacturing equipment used to produce Amerx's products is owned by the
manufacturer. An Amerx employee oversees quality control and ensures compliance
with Amerx's manufacturing practices, while all other manufacturing personnel
are provided by the manufacturer. Raw materials are purchased by Amerx from
various sources and are maintained at the manufacturing facility. Amerx does not
have a written production contract with its manufacturing contractor or written
purchase contracts with the suppliers of raw materials. Management believes that
alternative manufacturers and suppliers could be secured if necessary.
Amerx is currently negotiating a new manufacturing contract with a large
capacity, nationally-recognized manufacturer. Amerx expects that a final
agreement will be reached with the manufacturer during the second quarter of
fiscal 1998, and that the new manufacturing arrangements will provide greater
assurance of product availability, enhance quality control, and eventually
reduce production costs. Management does not expect that the costs associated
with the proposed change will be significant or that a material interruption in
production will occur. There can be no assurance that the proposed new
manufacturing agreement will be finalized. In the absence of a new manufacturing
arrangement, Amerx will continue to utilize its existing contractor.
Employees
As of September 15, 1997, the Company had 13 full-time employees,
consisting of seven sales representatives, four management employees, and two
administrative employees.
ITEM 2. PROPERTIES
- ------------------
The Company currently maintains its offices at 1150 Cleveland Street, Suite
410, Clearwater, Florida 34615. The Company's offices consist of approximately
2,400 square feet of space which is leased from an unrelated party and is
renewable annually. The office lease requires monthly payments of approximately
$2,100. Management believes the facility is adequate for the Company's current
needs.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
No material legal proceedings to which the Company is party or to which
property of the Company is subject is pending and no such material proceeding is
known by management of the Company to be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
No matter was submitted to a vote of security holders during the quarter
ended June 30, 1997.
-5-
<PAGE>
Part II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCK MATTERS.
- ---------------------------------------------------------------------
The Company's securities were traded in the over-the-counter market and
were listed in the "pink sheets" published by the National Quotation Bureau
Incorporated ("NQB") following the Company's public offering in December, 1988.
However, from approximately June 1990 through September 1996, NQB did not
publish a quotation for the Company's securities and to the Company's knowledge,
there was extremely limited, if any, public trading in its securities.
Since October 1996, the Company's Common Stock has traded on the OTC
Bulletin Board, an electronic quotation system used by members of the National
Association of Securities Dealers, Inc. The following table sets forth for each
period indicated the high and low closing bid prices for the Common Stock, as
reported by National Quotation Bureau, LLC. Bid quotations reflect interdealer
quotations, without retail markups, markdowns or commissions, and do not
necessarily reflect actual transactions.
Fiscal 1997 High Low
----------- ---- ---
Second Quarter................... $ 2.25 $ 2.25
Third Quarter.................... $ 2.50 $ .75
Fourth Quarter................... $ 3.50 $ 1.88
As of September 24, 1997 there were approximately 52 record holders of the
Company's Common Shares. The closing bid price of the Common Shares on September
24, 1997 was $2.25.
Holders of Common Shares are entitled to receive such dividends as may be
declared by the Company's Board of Directors. No dividends on the Common Shares
have been paid by the Company, nor does the Company anticipate that dividends
will be paid in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
- ------------------------------------------------------------------
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. The Company's financial statements
for fiscal years 1996 and 1997 therefore reflect the operating results and
financial condition of Amerx.
Liquidity and Capital Resources
As of June 30, 1997, the Company's principal sources of liquidity included
cash and cash equivalents of approximately $335,000, inventories of $72,000 and
net accounts receivable of $56,000. Also at June 30, 1997, the Company had
subscription receivables of $41,000, which have since been received by the
Company. The Company had net working capital of $410,000 and no long term debt
at June 30, 1997.
During fiscal 1997 and 1996, cash and cash equivalents increased $45,000
and decreased $24,000, respectively. Operating activities used cash of $647,000
during fiscal 1997 and $484,000 during fiscal 1996, consisting primarily of net
losses of $697,000 and $519,000, respectively. Cash used in investing activities
during fiscal 1997 and 1996 was $24,000 and $14,000, respectively. Cash provided
by financing activities during fiscal 1997 and 1996 was $716,000 and $473,000,
respectively, consisting of $716,000 and $471,000, respectively, in proceeds
from the sale of Preferred Stock.
At June 30, 1997 the Company had no commitments for capital expenditures.
-6-
<PAGE>
The Company's financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred losses since
its inception and has been dependent upon equity financing to fund working
capital needs. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans for increasing
revenues and reducing losses include securing new distributors in order to
aggressively sell products into the retail market, develop complementary new
products, and continue to pursue a Reimbursement Code for certain products. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Subsequent to June 30, 1997, Amerx
has established relationships with several large distributors, and Amerx
products are now carried in approximately 300 retail locations as compared to
approximately 40 locations at June 30, 1996. There can be no assurance that the
Company will be able to increase its revenues or achieve a profitable level of
operations.
Results of Operations
Comparison of Fiscal 1997 and 1996. Net sales during fiscal 1997 were
$216,000 as compared to $309,000 in fiscal 1996, a decrease of $93,000, or 30%.
The decrease in net sales reflects significant changes in Amerx's sales and
distribution strategies. During fiscal 1995 and 1996, the Company relied on
small distributors who were granted an exclusive right to sell Amerx products
within a specified territory. Such distributors focused their sales efforts on
the institutional market. Although the exclusive distributors were generally
required to make certain minimum purchases, they were largely ineffective in
selling product through to their targeted market. In early fiscal 1997, Amerx
terminated its relationship with most of its exclusive distributors, and began
to implement a retail sales and marketing strategy through large, nonexclusive
distributors. This change in strategy caused net sales during the first six
months of fiscal 1997 to decline to just $75,000. However, during the second
half of fiscal 1997, the Company had net sales of $141,000, consisting primarily
of sales made by new distributors to the retail market.
Gross profit during fiscal 1997 was $119,000 as compared to $213,000 during
fiscal 1996, a decrease of $94,000, or 213%. As a percentage of net sales, gross
profit was 55% in fiscal 1997 as compared to 71% in fiscal 1996. The decrease
reflects returns and write offs of expired inventories and write offs of
accounts receivable.
Operating expenses during fiscal 1997 were $820,000, consisting of $457,000
in salaries and benefits and $363,000 in selling, general and administrative
expenses. This compares to operating expenses during fiscal 1996 of $736,000,
consisting of $315,000 in salaries and benefits and $420,000 in selling, general
and administrative expenses. The decline in selling, general and administrative
expenses reflects, among other things, a reduction in sales and marketing
expenses during the first half of fiscal 1997 while the change in marketing
strategy was being implemented. The increase in salaries and benefits is a
direct result of the increase in the number of employees. As a percentage of net
sales, operating expenses during fiscal 1997 were 380% as compared to 240%
during fiscal 1996. The increase is primarily due to the decrease in net sales
and the inability to reduce certain fixed or minimum operating expenses.
The Company incurred a loss from operations of $523,000 in fiscal 1996 as
compared to $701,000 in fiscal 1997. The increase in operating loss was
primarily due to the significant decline in net sales. Net loss (after dividend
requirements for Preferred Shares) was $590,000 during fiscal 1996 as compared
to $841,000 during fiscal 1997.
As of June 30, 1997, the Company had a deferred tax asset of approximately
$560,000 consisting primarily of net operating losses. The Company 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. The valuation allowance increased
approximately $237,000 from fiscal 1996 to 1997.
Recent Accounting Pronouncements
Please refer to the Summary of Accounting Policies in the accompanying
financial statements.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
Consolidated Financial Statements as of June 30, 1997 and for the years
ended June 30, 1997 and 1996 appear at page F-1.
-7-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
- --------------------------------------------------------------------------------
The Company had a change of its independent auditors during the two most
recent fiscal years or subsequent interim period. On January 1, 1996, the
Company's auditors, Mitchell (Diamond) Finley and Company, P.C., combined their
practice with BDO Seidman, LLP. Thereafter, BDO Seidman, LLP became the
Company's independent auditors. The Company has not reported any disagreement
with its auditors on any matter of accounting principles or practices or
financial statement disclosure.
-8-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT.
- --------------------------------------------------------------------------------
ITEM 10. EXECUTIVE COMPENSATION.
- --------------------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------
The Company will file a definitive Proxy Statement pursuant to Regulation
14A for its annual meeting of shareholders. The information called for by Items
9 through 12 above will be included in such definitive Proxy Statement, which is
incorporated herein by reference. If such definitive Proxy Statement is not
filed with the Commission within 120 days after the end of the fiscal year
covered by this report, then the information required by such items will be
filed as an amendment to this report before the end of such 120-day period.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
- ------------------------------------------
(a) Exhibits
--------
1. The financial statements filed herewith are listed in the Index to
Financial Statements included in Item 7.
2. The Financial Data Schedule is filed herewith. The remaining documents
set forth below have been included as exhibits to previous filings with the
Securities and Exchange Commission and are incorporated herein by this
reference:
Reg. S-K
Exhibit No. Document Item No.
- ----------- -------- --------
* 3.1 Articles of Incorporation 3
+ 3.1.1 Articles of Amendment to Articles of Incorporation 3
* 3.2 Bylaws 3
+ 4.1 Designation of Series A Preferred Stock 4
* 10.1 Incentive Stock Option Plan, authorizing 1,000,000
Common Shares for issuance pursuant to the Plan 10
** 10.2 Agreement and Plan of Merger, dated July 19, 1989,
by and between the Company and Dental Health of
America, Inc. ("DHA"). 10
** 10.3 Promissory Note, Guarantee and Stock Pledge Agreement,
dated July 19, 1989, by and between the Company, DHA
and certain affiliates of DHA. 10
+ 10.4 Loan and Security Agreement, dated as of January 1,
1995, by and between the Company and Amerx Health Care
Corp., including Promissory Notes issued thereunder. 10
-9-
<PAGE>
o 10.4 Agreement and Plan of Exchange, dated January 31,
1996, by and between the Company and Amerx. 10
27.1 Financial Data Schedule 27
- ----------
* Incorporated by reference to the Company's Registration Statement on Form
S-1, S.E.C. File No. 33-13273.
** Incorporated by reference to the Company's Form 10-KSB for the fiscal year
ended June 30, 1989.
+ Incorporated by reference to the Company's Form 10-KSB for the fiscal year
ended June 30, 1995.
o Incorporated by reference to the Company's Form 8-K filed on or about
February 2, 1996.
- ----------
(b) Reports on Form 8-K
-------------------
The Company did not file any reports on Form 8-K during the quarter ended
June 30, 1997.
-10-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ John C. Anderson
------------------------------------------------
John C. Anderson, President and acting Principal
Executive, Financial and Accounting Officer
Date: October 13, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
President and Acting
Principal Executive, Financial
/s/ John C. Anderson and Accounting Officer October 13, 1997
- ----------------------------
John C. Anderson
/s/ Chester L. Wallack Director October 13, 1997
- ----------------------------
Chester L. Wallack
/s/ Fred W. Suggs, Jr. Director October 13, 1997
- ----------------------------
Fred W. Suggs, Jr.
Director
- ----------------------------
Alan B. Crane
-11-
<PAGE>
Procyon Corporation
and Subsidiary
Contents
================================================================================
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheet F-3 - F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Summary of Accounting Policies F-8 - F-11
Notes to Consolidated Financial Statements F-12 - F-15
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Procyon Corporation
Clearwater, Florida
We have audited the accompanying consolidated balance sheet of Procyon
Corporation and subsidiary (the "Company") as of June 30, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Procyon Corporation
and subsidiary at June 30, 1997, and the results of their operations and their
cash flows for each of the two years in the period then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred significant operating losses and is dependent upon equity
financing to fund working capital needs. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
BDO Seidman, LLP
Denver, Colorado
September 11, 1997
F-2
<PAGE>
Procyon Corporation
and Subsidiary
Consolidated Balance Sheet
================================================================================
June 30, 1997
- -----------------------------------------------------------------------------
Assets
Current:
Cash and cash equivalents $ 335,121
Accounts receivable, less allowance
of $24,000 for doubtful accounts 55,555
Inventories (Note 3) 72,357
Subscriptions receivable (Note 6) 41,000
Prepaid expenses 4,378
- -----------------------------------------------------------------------------
Total current assets 508,411
- -----------------------------------------------------------------------------
Machinery and equipment, less accumulated
depreciation of $19,669 31,168
- -----------------------------------------------------------------------------
Other assets:
Deposits 1,267
Employee advances 34,500
- -----------------------------------------------------------------------------
Total other assets 35,767
- -----------------------------------------------------------------------------
$ 575,346
=============================================================================
See accompanying report of independent certified public
accountants, summary of accounting policies and notes to
consolidated financial statements.
F-3
<PAGE>
Procyon Corporation
and Subsidiary
Consolidated Balance Sheet
(continued)
================================================================================
June 30, 1997
- -----------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, trade $ 60,293
Accrued expenses 38,472
- -----------------------------------------------------------------------------
Total current liabilities $ 98,765
- -----------------------------------------------------------------------------
Commitments and contingencies (Notes 1 and 5)
Stockholders' equity (Notes 2 and 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 1,997,850
Common stock, no par value, 80,000,000 shares
authorized; 3,637,920 shares issued and outstanding 724,196
Accumulated deficit (2,245,465)
- -----------------------------------------------------------------------------
Total stockholders' equity 476,581
- -----------------------------------------------------------------------------
$ 575,346
=============================================================================
See accompanying report of independent certified public
accountants, summary of accounting policies and notes to
consolidated financial statements.
F-4
<PAGE>
Procyon Corporation
and Subsidiary
Consolidated Statements of Operations
================================================================================
Years Ended June 30, 1997 1996
- -------------------------------------------------------------------------------
Net sales (Note 8) $ 215,561 $ 308,668
Cost of sales 96,951 95,439
- -------------------------------------------------------------------------------
Gross profit 118,610 213,229
- -------------------------------------------------------------------------------
Operating expenses:
Salaries and benefits 457,084 315,415
Selling, general and administrative 362,804 420,369
- -------------------------------------------------------------------------------
Total operating expenses 819,888 735,784
- -------------------------------------------------------------------------------
Loss from operations (701,278) (522,555)
- -------------------------------------------------------------------------------
Other income (expense):
Interest expense (4,434) (3,469)
Interest income 8,401 6,631
- -------------------------------------------------------------------------------
Total other income (expense) 3,967 3,162
- -------------------------------------------------------------------------------
Net loss (697,311) (519,393)
Dividend requirements on preferred stock 144,009 70,746
- -------------------------------------------------------------------------------
Loss applicable to common stock $ (841,320) $ (590,139)
================================================================================
Net loss per common share $ (.23) $ (.16)
================================================================================
Weighted average number of
common shares outstanding 3,637,920 3,637,920
================================================================================
See accompanying report of independent certified public
accountants, summary of accounting policies and notes to
consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Procyon Corporation
and Subsidiary
Consolidated Statements of Stockholders' Equity
====================================================================================================================================
Preferred Stock Common Stock
Years Ended June 30, ------------------------------- ------------------------------- Accumulated
1997 and 1996 Shares Amount Shares Amount Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995 755,000 $ 755,000 3,637,920 $ 724,196 $ (1,028,761) $ 450,435
Stock issued in connection with
private placements, net of
stock issuance costs 594,000 567,700 - - - 567,700
Stock issued for services 6,000 6,000 - - - 6,000
Net loss - - - - (519,393) (519,393)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 1,355,000 1,328,700 3,637,920 724,196 (1,548,154) 504,742
Stock issued in connection with
private placements, net of
stock issuance costs 701,000 660,150 - - - 660,150
Stock issued for services 9,000 9,000 - - - 9,000
Net loss - - - - (697,311) (697,311)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 2,065,000 $ 1,997,850 3,637,920 $ 724,196 $ (2,245,465) $ 476,581
====================================================================================================================================
See accompanying report of independent certified public accountants, summary of accounting policies and
notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
Procyon Corporation
and Subsidiary
Consolidated Statements of Cash Flows
================================================================================
Increase (Decrease) in Cash and Cash Equivalents
Years Ended June 30, 1997 1996
- --------------------------------------------------------------------------------
Operating activities:
Net loss $ (697,311) $ (519,393)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation 9,620 9,399
Stock issued for services 9,000 6,000
Write-off of stockholder and
employee advances - 16,614
Gain on sale of equipment (1,500) -
Changes in operating assets and liabilities:
Accounts receivable, trade (37,665) 9,475
Inventories 36,290 (17,092)
Prepaid expenses (4,378) 5,000
Accounts payable, trade 1,819 14,697
Accrued expenses 37,337 (8,230)
- --------------------------------------------------------------------------------
Cash used in operating activities (646,788) (483,530)
- --------------------------------------------------------------------------------
Investing activities:
Purchase of machinery and equipment (5,948) (1,764)
Advances to employees and stockholder (18,000) (18,328)
Repayments of advances to employees - 6,714
Payment for deposit - (833)
- --------------------------------------------------------------------------------
Cash used in investing activities (23,948) (14,211)
- --------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of preferred stock 715,850 471,000
Liquidation of certificate of deposit - 232,255
Repayment of advances
from stockholder - (229,862)
- --------------------------------------------------------------------------------
Cash provided by financing activities 715,850 473,393
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 45,114 (24,348)
Cash and cash equivalents, beginning of year 290,007 314,355
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 335,121 $ 290,007
================================================================================
See accompanying report of independent certified public
accountants, summary of accounting policies and notes to
consolidated financial statements.
F-7
<PAGE>
Procyon Corporation
and Subsidiary
Summary of Accounting Policies
================================================================================
Organization
and Business Procyon Corporation (the "Company"), a Colorado corporation,
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 markets wound care and skin
care products primarily in the United States and is actively
seeking foreign market distribution.
Basis of
Presentation and
Principles of
Consolidation The consolidated financial statements include the accounts
of Procyon Corporation and its wholly owned subsidiary,
Amerx, acquired during 1996 as discussed in Note 2. All
material intercompany accounts and transactions are
eliminated.
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.
F-8
<PAGE>
Procyon Corporation
and Subsidiary
Summary of Accounting Policies
================================================================================
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the 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.
Concentrations of
Credit Risk Financial instruments which potentially subject the Company
to concentrations of credit risk consist primarily of cash,
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 Equivalents For the purpose of the Statements of Cash Flows, the Company
considers cash-on-hand, demand deposits in banks and highly
liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Inventories Inventories are valued at the lower of weighted average cost
or market.
Machinery and
Equipment Machinery and equipment are stated at cost. Depreciation is
computed on a straight-line basis over the estimated useful
lives of the assets of five years.
Revenue
Recognition Revenue is recognized upon the shipment of finished
merchandise to customers.
Income Taxes The Company accounts for income taxes under Statement of
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.
F-9
<PAGE>
Procyon Corporation
and Subsidiary
Summary of Accounting Policies
================================================================================
Net Loss
Per Share Net loss per share is based on the weighted average number
of shares outstanding during each period presented.
Outstanding stock rights are included as common stock
equivalents, when dilutive.
Recent
Accounting
Pronouncements The Financial Accounting Standards Board ("FASB") recently
issued Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS 128") and Statement of Financial
Accounting Standards No. 129 "Disclosure of Information
About an Entity's Capital Structure ("SFAS 129"). SFAS 128
provides a different method of calculating earnings per
share than is currently used in accordance with Accounting
Board Opinion ("APB") No. 15 "Earnings Per Share." SFAS 128
provides for the calculation of "Basic" and "Diluted"
earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to
common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully
diluted earnings per share. SFAS 129 establishes standards
for disclosing information about an entity's capital
structure. SFAS No. 128 and SFAS 129 are effective for
financial statements issued for periods ending after
December 15, 1997. Their implementation is not expected to
have a material effect on the consolidated financial
statements.
In June 1997, FASB issued Statement of Financial Accounting
Standard No. 130 "Reporting Comprehensive Income ("SFAS
130") and Statement of Financial Accounting Standard No. 131
"Disclosure about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 130 establishes standards for
reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those
resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS 130 requires that all
items that are required to be recognized under current
accounting standards as components of comprehensive income
be reported in a financial statement that displays with the
same prominence as other financial statements. SFAS 131
supersedes Statement of Financial Accounting Standard No. 14
"Financial Reporting for Segments of a Business Enterprise."
SFAS 131 establishes standards of the way that public
F-10
<PAGE>
Procyon Corporation
and Subsidiary
Summary of Accounting Policies
================================================================================
companies report information about operating segments in
annual financial statements and requires reporting of
selected information about operating segments in interim
financial statements issued to the public. It also
establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS 131
defines operating segments as components of a company about
which separate financial information is available that is
evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing
performance.
SFAS 130 and SFAS 131 are effective for financial statements
for periods beginning after December 15, 1997 and require
comparative information for earlier years to be restated.
Because of the recent issuance of these standards,
management has been unable to fully evaluate the impact, if
any, the standards may have on future financial statement
disclosures. Results of operations and financial position,
however, will be unaffected by implementation of these
standards.
F-11
<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 $697,311 and $519,393 for the
years ended June 30, 1997 and 1996. In addition, net cash
used in operations was $646,788 and $483,530 for the years
ended June 30, 1997 and 1996. These conditions raise
substantial doubt about the Company's ability to continue as
a going concern. Such operating cash deficiency has been
funded through proceeds from private preferred stock
offerings, the continuance of which is uncertain.
Management plans to meet its operating cash requirements by
increasing sales volume and gaining better production
efficiencies by moving its manufacturing to a new
manufacturer with state of the art manufacturing capability.
While the Company has significant losses over the past two
years, it has met its obligations and has established good
working relationships with its vendors. Additionally, the
Company intends to file a registration statement with the
Securities and Exchange Commission for a public offering of
its securities sometime in fiscal 1998. The ultimate results
of these efforts cannot be determined at the present time.
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.
F-12
<PAGE>
Procyon Corporation
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
3. Inventories
Inventories consisted of the following:
June 30, 1997
--------------------------------------------
Finished goods $ 20,422
Raw materials 51,935
--------------------------------------------
$ 72,357
============================================
4. Related Party
Transactions During fiscal 1995, the majority stockholder of the 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. The remainder of the advances were repaid during
fiscal 1996.
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
$34,900 and $32,600 for the years ended June 30, 1997 and
1996. Future minimum rentals under the operating leases are
as follows:
Year Ending June 30,
--------------------------------------------
1998 $ 33,600
1999 6,800
2000 4,300
2001 4,300
--------------------------------------------
$ 49,000
============================================
F-13
<PAGE>
Procyon Corporation
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
Product Liability Insurance
6. 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"). As of June 30, 1997 and 1996, the Company
had preferred stock sales resulting in subscriptions
receivable of $41,000 and $96,700. Such receivables were
collected in July of the subsequent fiscal year. 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 June 30, 1997, no dividends
have been declared. Dividends in arrears on the outstanding
preferred shares total $214,755 as of June 30, 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.
7. Income Taxes
and Available
Carryforwards The Company's deferred tax asset at June 30, 1997 consists
primarily of net operating loss carryforwards which, after
the tax effect, amount to approximately $560,000. The
Company has recorded a valuation allowance equal to 100
F-14
<PAGE>
Procyon Corporation
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
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. The valuation allowance
increased approximately $237,000 from June 30, 1996 to 1997.
At June 30, 1997, for income tax purposes, the Company had
net operating loss carryforwards of approximately $1,623,000
which expire through 2012.
8. Major
Customers
and Supplier During the year ended June 30, 1997, three individual
customers accounted for 42%, 15% and 14% of the Company's
net sales. During the year ended June 30, 1996, three
individual customers accounted for 16%, 11% and 10% 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. The Company does not have
written contracts with the manufacturer or with suppliers of
raw materials. Management is negotiating a manufacturing
agreement with a large capacity, nationally recognized
manufacturer.
9. Supplemental
Disclosures of
Cash Flow
Information Cash paid for interest for the years ended June 30, 1997 and
1996 was $4,434 and $3,469.
Non-cash investing and financing activities consisted of the
following:
Years Ended June 30, 1997 1996
------------------------------------------------------------
Preferred stock issued for
subscription receivable $ 41,000 $ 96,700
Preferred stock issued for
commissions relating to
offering $ - $ 26,300
============================================================
F-15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) The
financial statements contained in the Registrant's Form 10-KSB for the year
ended June 30, 1997.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 335,121
<SECURITIES> 0
<RECEIVABLES> 79,555
<ALLOWANCES> 24,000
<INVENTORY> 72,357
<CURRENT-ASSETS> 508,411
<PP&E> 50,837
<DEPRECIATION> 19,669
<TOTAL-ASSETS> 575,346
<CURRENT-LIABILITIES> 98,765
<BONDS> 0
0
1,997,850
<COMMON> 724,196
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 575,346
<SALES> 215,561
<TOTAL-REVENUES> 215,561
<CGS> 96,951
<TOTAL-COSTS> 96,951
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,967
<INCOME-PRETAX> (697,311)
<INCOME-TAX> 0
<INCOME-CONTINUING> (697,311)
<DISCONTINUED> 0
<EXTRAORDINARY> 144,009
<CHANGES> 0
<NET-INCOME> (841,320)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.15)
</TABLE>
