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, 1998
Commission File Number: 0-17449
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 wether 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 shorter period than the registrant was required to file
such reports), and (2) been subject to such filing requirements
for the past 90 days.
YES X NO
___ ___
Common Stock No Par Value
_________________________
(Class)
3,637,920 Shares of Common Stock Outstanding as of November 13, 1997
PROCYON CORPORATION
Table of Contents
Page No.
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Statement of Operations 4
Statement of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Part II Other Information 14
<PAGE>
PROCYON CORP & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 & JUNE 30, 1997
ASSETS
March 31 June 30
Current Assets
1998 1997
Cash & Cash Equivalents $2,278 $335,121
Accounts Receivable, less allowances
of $24,000 for doubtful accounts 34,895 55,555
Inventories 47,858 72,357
Subscriptions Receivable 10,000 41,000
Prepaid Expenses 4,378 4,378
------ -------
Total Current Assets 99,409 508,411
Machinery and Equipment less accumulated
depreciation of $24,367 and $19,669 5,273 31,168
Other Assets:
Deposits 2,018 1,267
Employee Advances 40,500 34,500
------ ------
Total Other Assets 42,518 35,767
------- --------
Total Assets $147,200 $575,346
LIABILITIES AND STOCK HOLDERS' EQUITY
Current Liabilities:
Accounts Payable $219,633 $60,293
Accrued Expenses 24,452 38,472
------- ------
Total Current Liabilities 244,085 98,765
Commitments and Contingencies
Stockholders' equity (Notes 1 & 5)
Preferred stock, 496,000,000 share
authorized; none issued
Series A Cumulative Convertible
Preferred stock, no par value;
4,000,000 shares authorized;
1,431,050 shares issued and
outstanding 2,087,050 1,997,850
Common stock, no par value,
80,000,000 shares authorized;
4,265,820 shares issued and
outstanding 724,196 724,196
Accumulated deficit (2,908,131)(2,245,465)
---------- ---------
Total Stockholders' Equity (96,885) 476,581
----------- ---------
Total Liabilities & Stockholders' equity $147,200 $575,346
=========== =========
The accompanying notes are an integral part of these statements.
<PAGE>
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
Nine Months Ended March 31, 1998 and 1997
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
March 31 March 31 March 31 March 31
1998 1997 1998 1997
Net Sales 66,526 $91,578 229,029 166,725
Cost of Sales 21,278 26,231 64,298 42,752
------ ------ ------- -------
Gross Profit 45,248 65,347 164,731 123,973
Operating Expenses:
Salaries and
Benefits 137,011 104,804 468,550 306,527
Selling, General
and Administrative 74,235 75,818 361,636 243,436
------- ------- ------- ------
Total Operating
Expenses 211,246 180,622 830,186 549,963
-------- ------- ------- -------
Loss from
Operations (165,998) (115,275) (665,455) (425,990)
Other Income (Expense):
Interest Expense (766) (514) (1,477) (3,831)
Interest Income 63 117 4,266 3,561
-------- -------- -------- --------
Total Other Income
(expense) (703) (397) 2,789 (270)
-------- -------- -------- ---------
Net Loss (166,701) (115,672) (662,666) (426,260)
Dividend
requirements on
preferred stock 51,625 35,900 103,149 107,700
-------- ------- -------- ---------
Loss applicable
to common stock ($218,326) ($151,572) (765,815) (533,960)
========= ======== ======== ========
Net Loss per
common share $0.06 $0.04 $0.21 $0.15
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.
<PAGE>
PROCYON CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 1998 and 1997
Nine Months Nine Months
Ended Ended
March 31, March 31,
1998 1997
Net Loss (662,666) (426,260)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 7,048 7,048
Loss on sale of fixed assets 4,663
Changes in operating assets and liabilities
Accounts Receivable, trade 20,660 (67,102)
Inventories 24,499 874
Prepaid Expenses 0 (268)
Accounts payable and accrued
expenses 159,340 42,287
-------- ---------
Cash used in operating activities (446,456) (443,421)
Cash Flows From Investing Activities
Advances to employees and stockholders (6,000) (19,269)
Proceeds from sale of Property & Equipment 2,000
------- ---------
Cash used in investing activities (4,000) (19,269)
Cash Flows From Financing Activities
Proceeds from related party notes payable 28,413 0
Proceeds from subscriptions receivable 10,000 81,000
Cumulative Convertible Preferred Stock 79,200 96,700
------- -------
Cash provided by financing activities 117,613 177,700
-------- --------
Net decrease in cash and cash equivalents (332,843) (284,990)
Cash and Cash Equivalents, beginning of period 335,121 290,007
-------- --------
Cash and Cash Equivalents, end of period 2,278 5,017
======== ========
The accompanying notes are an integral part of these statements.
Organization Procyon Corporation (the "Company"), a
and Business 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 1, 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 through the acquisition
occurred as of July 1, 1994.
The Company manufactures and markets wound care
and skin care products primarily in the United
States and is actively seeking foreign market
distribution.
Basis of The consolidated financial statements
include the accounts of Procyon Corporation and
Presentation its wholly owned subsidiary, Amerx,
and acquired during 1996 as discussed in Note 1. All
Principles of material inter-company accounts and
transactions are eliminated.
Consolidation
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.
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 Financial instruments which potentially
of subject the Company to concentrations of credit
Credit Risk 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 For the purpose of the statement of cash
Equivalents 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
Machinery and weighted average cost or market. Machinery and
Equipment equipment are stated at cost. Depreciation is
computed on straight-line basis over the
estimated useful lives of the assets of five
years.
Revenue Revenue is recognized upon the shipment of
Recognition 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.
Net Loss Net loss per share is based on the weighted
average number of shares outstanding during
Per Share each period presented. Outstanding stock
rights are included as common stock equivalents,
when dilutive.
Recent The Financial Accounting Standards Board
("FASB") recently issued Statement of Financial
Accounting Accounting Standards No. 128 "Earnings Per
Share" ("SFAS 128") and Statement of
Pronouncements Financial Accounting Standards No. 129
"Disclosure of Information About and 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 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
earning 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 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 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.
1. 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.
2. Inventories Inventories consisted of the following:
March 31, June 30,
1998 1997
Finished Goods $ 35,306 $ 20,422
Raw Materials 12,552 51,935
-------- --------
$ 47,858 $ 72,357
======== ========
3. Related During fiscal 1995, the majority
Parties stockholder of the Company advanced $348,363 to the
Transactions 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 1. The remainder of the advances were repaid
during fiscal 1996.
4. 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 $27,300
1999 6,800
2000 4,300
2001 4,300
-------
$42,700
=======
5. Stockholder's During January 1995, the Company's Board of
Equity 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
December 31, 1997, no dividends have been
declared. Dividends in arrears on the outstanding
preferred shares total $247,158 as of December 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 the outstanding
Series A Preferred Stock.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The following discussion and analysis should
be read in conjunction with the Condensed
Financial Statements and Notes thereto appearing
elsewhere in this report.
The following discussion contains certain forward-
looking statements, within the meaning of the
"safe-harbor" provisions of the Private Securities
Reform Act of 1995, the attainment of which
involves various risks and uncertainties. Forward-
looking statements may be identified by the use of
forward-looking terminology such as "may", "will",
"expect", "believe", "estimate", "anticipate",
"continue", or similar terms, variations of these
terms or the negative of those terms. The
Company's actual results may differ materially
from those described in these forward-looking
statements due to among other factors, competition
in the Company's product markets, dependence on
suppliers, the Company's manufacturing experience,
and production delays or inefficiencies.
The Company has conducted a comprehensive review
of its computer systems to identify systems that
could be affected by the "Year 2000" issue and has
developed an implementation plan to resolve the
issue. The Year 2000 problem is the result of
computer programs being written using two digits
rather than four to define the applicable year.
Any of the Company's programs that have time-
sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. This
could result in a major system failure or
miscalculations if not appropriately addressed.
The Company presently believes that, with
modifications to existing software and by
converting to new software, the Year 2000 problem
will not pose significant operational problems for
the Company's computer systems as so modified and
converted.
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.
<PAGE>
Liquidity and Capital Resources
As of March 31, 1998, the Company's principal sources
of liquidity included cash and cash equivalents of
approximately $2,278 and net accounts receivable of
$34,895. The Company had net working capital of $37,173
and no long term debt at March 31, 1998.
During the nine months ended March 31, 1998, cash and
cash equivalents decreased from $ 335,121 as of June
30, 1997 to $2,278. Operating activities used cash of
$446,456 during the period, consisting primarily of a
net loss of $ 662,666. Advances against commissions to
shareholders and employees of $ 6,000 were made and
reflected as cash used in investing activities.
At March 31, 1998 the Company had no commitments for
capital expenditures.
The Company has deferred tax assets with a 100%
valuation allowance at March 31, 1998. 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 significant
progress this past quarter with respect to future sales
of its products to large national chain drug stores and
mass merchandisers. However, sales have declined from
the previous quarter as a result of the company lacking
the necessary capital to advertise its products to the
retail consumer. Operating losses also were less than
the previous quarter ($165,998 vs. $182,310) primarily
due to lower spending on sales and marketing. The
Company also reduced its headcount during the quarter
which will be reflected in the lower operating cost
next quarter. Management is attempting to raise capital
through private equity placement so that it can
increase spending on sales and marketing and take
advantage of the sales opportunities that have been
created.
<PAGE>
Results of Operations
Comparison of Three Months Ended March 31, 1998 and 1997.
Net sales during the quarter ended March 31, 1998 were
$ 66,526 as compared to $ 91,578 in the quarter ended
March 31, 1997, a decrease of $ 25,052, or 27%. The
decrease in sales for the quarter ended March 31, 1998
compared to the quarter ended March 31, 1997 was
primarily attributable to severing relations with a
distributor who was acting as our distributor to the
retail market. The Company has replaced this
distribution capability with large national drug
wholesale distributors to support retail sales growth
and as sales begin to grow, distribution is in place to
support the growth.
The Company continues to seek Medicare Part B
reimbursement to enable it to initiate a more
aggressive selling effort to the institutional
customers such as nursing homes, hospitals, home health
care, etc. The company will have completed a 80 patient
wound care study assessing the efficacy of its lead
product AmerigelTM Wound Dressing during the next
quarter. Management believes the results will benefit
sales and also help to secure a Medicare Part B
reimbursement code.
Gross profit during the quarter ended March 31, 1998,
was $ 45,248 as compared to $65,347 during the quarter
ended March 31, 1997, a decrease of $ 20,099, or 30%.
As a percentage of net sales, gross profit was 68% in
the quarter ended March 31, 1998, as compared to 71% in
the corresponding quarter in 1997. The $ 20,099
decrease in gross profit reflects the significant
decrease in net sales experienced during this quarter.
Operating expenses during the quarter ended March 31,
1998 were $ 211,246, consisting of $137,011 in salaries
and benefits and $ 74,235 in selling, general and
administrative expenses. This compares to operating
expenses during the quarter ended March 31, 1997 of
$180,622 consisting of $104,804 in salaries and
benefits, and $75,818 in selling, general and
administrative expenses. The Company expects expenses
to rise somewhat as sales increase over the remainder
of the fiscal year.
The Company incurred an operating loss of $ 165,998 in
the quarter ended March 31, 1998 as compared to an
operating loss of $ 115,275 in the corresponding
quarter in 1997. The increase in operating loss was
primarily due to lower sales and the increase in
advertising, and the hire of new sales reps. Net loss
(before dividend requirements for Preferred Shares) was
$ 166,701 during the quarter ended March 31, 1998 as
compared to $ 115,672 during the quarter ended March
31, 1997.
During this next quarter, Management will continue
striving to secure an equity private placement, close
sales to two large retail chain stores and initiate an
advertising campaign consisting of direct mail, select
radio advertising, select journal advertising and in
store point of sale material to support new sales.
Management has secured agreements with three different
independent sales representatives who have long
standing business relationships with major chains to
help sell The Company's products to the chains.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not Applicable.
Item 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY 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.
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, there unto duly authorized.
PROCYON CORPORATION
(Registrant)
May 14, 1998 /s/ John C. Anderson
Date John C. Anderson, President
May 14, 1998
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