UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2009
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission file number 0-17449
PROCYON CORPORATION
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(Exact name of registrant as specified in its charter)
Colorado 59-3280822
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(State of incorporation) (I.R.S. Employer ID No.)
1300 South Highland Avenue, Clearwater, Florida 33756
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(Address of principal executive offices)(Zip Code)
Issuer's telephone number, including area code: (727) 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
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] Yes [ x ] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [ x ] No
Indicate by checkmark whether the issuer (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 [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss. 232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [X]
Indicate by checkmark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer,""accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
[ ] Large accelerated filer [ ] Accelerated filer
[ ] Non-accelerated filer (Do not check [X] Smaller reporting company
if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter:
The aggregate market value of the 3,726,188 shares of Common Stock held by
non-affiliates was $465,774 on September 16, 2009 based on the average bid
and asked price of $.125 on such date.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
As of September 15, 2009, there were 8,055,388 shares of the issuers Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
INDEX
Title Page
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 7
ITEM 3. LEGAL PROCEEDINGS 7
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 15
ITEM 9A. CONTROLS AND PROCEDURES 15
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 17
ITEM 11. EXECUTIVE COMPENSATION 20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT
AND RELATED STOCKHOLDER MATTERS 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE 24
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 25
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 25
2
PART I
ITEM 1. BUSINESS
History and Organization
Procyon Corporation (the "Company" or "Procyon"), a Colorado corporation,
was incorporated on March 19, 1987, and was deemed a development stage company
until May 1996, when we acquired Amerx Health Care Corp. ("Amerx"), a
corporation based in Clearwater, Florida, which was wholly owned by John C.
Anderson, our deceased Chief Executive Officer. Amerx develops and markets
proprietary medical products used in the treatment of pressure ulcers,
dermatitis, inflammation and other skin problems. We formed Sirius Medical
Supply, Inc. ("Sirius"), a Florida corporation, in 2000, to operate as a full
service mail order medical supply company selling primarily to Medicare
customers. Amerx and Sirius are wholly owned subsidiaries of Procyon.
Historically, Amerx's products are sold through distributors to healthcare
institutions, such as physicians, nursing homes and home health care agencies
and to retailers, including national and regional chain stores and pharmacies;
while Sirius' products were sold directly to Medicare and Medicaid patients. As
previously reported in our current report on Form 8-K, filed on August 3, 2009,
we entered into an Asset Purchase Agreement, effective July 31, 2009 with
Priority Diabetes Supply, Inc., a Florida corporation, doing business as
Diabetes Wellness Supply ("Priority Diabetes"). Pursuant to the Agreement, we
sold certain "Purchased Assets," as defined in the Agreement, including Sirius'
customer list, to Priority Diabetes. Thus, as of July 31, 2009, Sirius no longer
offers testing products to diabetic customers. Management is considering various
options for the future direction of Sirius.
Products
Amerx Health Care Corp.
Amerx sells a proprietary line of advanced skin and wound care products
made with Oakin(R), proven to promote healing in wound and problematic skin
conditions, including the AmeriGel(R) Hydrogel Wound Dressing, Amerigel(R)
Hydrogel Saturated Gauze Dressing, AmeriGel(R) Premium Care Lotion, AmeriGel(R)
Preventive Barrier Lotion, AmeriGel(R) Saline Wound Wash, and the Amerigel(R)
Post Op Surgical Kit. The AmeriGel(R) Hydrogel Wound Dressing and Amerigel(R)
Hydrogel Saturated Gauze Dressing are formulated to be used as a wound dressing
to manage stages I-IV pressure ulcers, stasis ulcers, diabetic skin ulcers, post
surgical incisions, cuts, abrasions, first and second degree burns, and skin
irritations. The AmeriGel(R) Premium Care Lotion is a therapeutic skin
conditioner containing emollients which restore moisture to fragile skin and
alleviate problematic skin conditions. The AmeriGel(R) Barrier Lotion provides
barrier protection to shield the skin from excess moisture and reduce harmful
effects to the skin from friction and chafing. The AmeriGel(R) Saline Wound Wash
is a non-sterile saline solution containing Oakin(R) and is used for wound
cleansing.
Amerx holds a Medicare reimbursement code for the sterile Amerigel(R)
Hydrogel Saturated Gauze Dressing. This reimbursement code, assigned by the
Pricing, Data Analysis and Coding contractor for Medicare and Medicaid ("PDAC"),
is on a per pad or per use basis. We believe that this reimbursement code is
beneficial to Amerx's business, allowing customers on Medicare to seek coverage
for use of the product.
Amerx spent approximately $12,700 towards research and development efforts
over the past fiscal year. These efforts were directed towards additional
studies aimed at expanding existing markets.
Each Amerx product is based on proprietary formulations, which we protect
as trade secret information. Each product is also registered with the Food and
Drug Administration and receives a National Drug Code.
3
Amerx's sales increased by 5% during the year ended June 30, 2009 ("fiscal
2009"). Amerx's growth was impacted by economic factors as well as by PDAC's
decision to change requirements for reimbursement. This year, Amerx made
continued progress in sales distributed across its entire product line through
its continued marketing focus on the benefits of Oakin(R) contained in each of
its products. The Amerigel(R) product line continues to gain acceptance within
the health care community. Amerx's website, which can be viewed at
www.amerigel.com, provides general information about Amerx's products to
consumers and health care professionals and is equipped to handle direct sales
to the public.
Sirius Medical Supply
In fiscal 2009, Sirius' product offering was directed to the diabetic
community and consisted primarily of diabetic supplies, glucose monitors,
heating pads, lancets, test strips, syringes and wound care products. After the
sale to Priority Diabetes of certain "Purchased Assets," as defined in the Asset
Purchase agreement effective July 31, 2009, Sirius will no longer sell
diabetic-related products in the Medicare arena. Management determined that due
to reduced reimbursement from Medicare and the reinstatement of the CMS
Competitive Bidding process with its potential negative impact on Sirius's
ability to sustain its customers, we would make a controlled exit from the
diabetic supply market. Sirius has a website (www.siriusmedical.com) which
previously served new and existing customers. Sirius has not spent any funds on
research and development over the past three fiscal years.
Market for Products
The institutional market for Amerx's skin and wound care treatment products
is primarily comprised of hospitals, nursing homes, home health care agencies
and health care practioners. We believe that AmeriGel(R)products represent a
cost effective, efficacious treatment and prevention program for chronic
pressure ulcers and other skin problems which are treated in health care
institutions. We are continuing to penetrate the health care market including
sales to government agencies.
The retail market for Amerx's skin care and wound care products is
comprised mainly of national and regional chain stores as well as independent
retail pharmacies that sell wound and skin care products to individuals. Amerx
saw a 12% increase in the retail market in fiscal 2009, due to national
distributors increasing sales of multiple products in our Amerx line.
The market for Sirius's products was primarily comprised of diabetic
patients who receive benefits from Medicare or Medicaid, or from their insurance
companies. Sirius attracted these customers through advertising, direct
marketing and referrals.
Distribution and Sales
Amerx's traditional method of distribution has been through retail and
institutional distributors. We expect to continue increasing our distributor
base, particularly with distributors capable of introducing Amerx's products in
new medical specialty markets, in new geographical areas and to new retail
chains. Distributors typically purchase products from Amerx on standard credit
terms. Amerx supports its distributors through product literature, advertising
and participation at industry trade shows. All existing distributors sell Amerx
products on a non-exclusive basis.
4
We periodically receive inquiries about international market distribution
for the AmeriGel(R) product line . These inquiries have been generated by our
advertising, market presence and web sites (www.amerxhc.com and
www.amerigel.com). We respond to and pursue all such inquiries, while complying
with applicable international regulatory guidelines.
Sirius distributed its products directly to consumers by mail order. We had
attracted and retained customers through our marketing efforts, which included
participating in trade shows, physician education, and customer referral. While
the diabetic market contains over 23 million diabetics in the U.S., changes in
reimbursement and the re-emergence of competitive bidding influenced
management's decision to focus on the Amerx subsidiary.
In fiscal 2009, Amerx generated gross revenues of approximately $2,366,000
and Sirius, $262,000, which constituted 90% and 10%, respectively, of our total
gross revenues.
Significant Customers
During fiscal 2009, sales from one customer accounted for approximately 18%
of Amerx's sales. The Company has been able to maintain relationships with its
distributors and has been able to establish relationships with new distributors
each year. Sirius had no significant single customers as it sold only to end
users.
Manufacturing
During fiscal 2009, the majority of manufacturing of Amerx's products was
completed by a non-affiliated manufacturing facility. This company also
performed research and development for Amerx in the past, and we expect that it
will perform research and development activities for Amerx in the future on an
as needed basis. Amerx does not have a written contract with this manufacturer
and there are no minimum purchase requirements. In fiscal 2009, Amerx used a
second facility based in Dallas, TX, to manufacture the AmeriGel(R) Saline Wound
Wash. If necessary, this manufacturer could aid in manufacturing other
AmeriGel(R) products. Amerx believes there are additional companies that could
manufacture Amerx's products according to its specifications, if necessary. The
Company's manufacturing and packaging activities are performed at a production
facility owned and operated by a non-affiliated pharmaceutical manufacturer. The
sudden loss or failure of our primary manufacturer could significantly impair
Amerx's ability to fulfill customer orders on a short-term basis and therefore,
could materially and adversely affect the Company's operations. However, we have
maintained a long-term relationship with this manufacturer and do not expect any
interruption in its production of Amerigel(R) products in the near term. In
addition, the current and projected use of the second manufacturer would help
alleviate most short term delays.
Amerx's manufacturing and packaging activities are performed pursuant to
current good manufacturing practices ("CGMP") as defined under the United States
Federal Food, Drug and Cosmetic Act, as amended (the "FFDC Act"); and the
regulations promulgated under the FFDC Act. All manufacturing activities are
required to comply with the product specifications, supplies and test methods
developed by Amerx specifically for its products, as well as the CGMP.
A single manufacturer furnishes one proprietary ingredient contained in all
Amerigel(R) products. Amerx does not have a written contract with this supplier
and management believes that, if necessary, an alternative supplier could be
secured within a reasonable period of time. The manufacturer generally provides
other raw materials and ingredients and we believe there are numerous other
sources for these materials and ingredients. However, there can be no assurance
that Amerx would be able to timely secure an alternative supplier and the
5
failure to replace this supplier in a timely manner could materially harm
Amerx's operations. We believe that we have a good working relationship with
this supplier and do not anticipate any disruption of supplies.
During fiscal 2009, Sirius purchased approximately 83% of its diabetic
supplies from a non-affiliated supplier. Effective July 31, 2009 this segment
has been discontinued.
Proprietary Rights
In January 1999, the United States Patent and Trademark Office registered
the Company's AmeriGel(R)trademark. Amerx also holds a registered Trademark for
the principal proprietary ingredient used in all of its currently available
products, Oakin(R). Amerx relies on a combination of trademark and trade secret
protection and confidentiality agreements to establish and protect its
proprietary rights.
Competition
The market for skin and wound care treatment products in which Amerx
operates is highly competitive. Competition is based on product efficacy, brand
recognition, loyalty, quality, price and availability of shelf space in the
retail market. Amerx competes against several well-capitalized companies
offering a range of skin treatment products as well as small competitors having
a limited number of products. Amerx has successfully established its products
efficacy and value within specialized health care markets and will continue to
expand this marketplace.
The market for diabetic supplies is also highly competitive. During fiscal
2009, Sirius competed with many large and small companies for market share. We
believed that Sirius could compete on the same level with these larger companies
as to product offerings. We believed Sirius' success would hinge on customer
service rather than product margin.
Order Placement and Backlog
During fiscal 2009, the Company experienced backlogs in the second half of
the fiscal year after the Pricing, Data Analysis and Coding contractor for
Medicare and Medicaid ("PDAC"), formerly the Statistical Analysis DME Regional
Carrier ("SADMERC"), changed its requirements for Medicare and Medicaid
reimbursement on short notice. This caused Amerx to rework the production and
packaging of the AmeriGel(R) Saturated Gauze Dressing. The work was accomplished
by fiscal year end, and the sterile Saturated Gauze Dressing was given a
reimbursement code by PDAC in July of 2009. There was no material backlog in
orders placed in the previous fiscal year.
Governmental Approvals and Regulations
The production and marketing of our products are subject to regulation for
safety, efficacy and quality by numerous governmental authorities in the United
States. Amerx's advertising and sales practices are subject to regulation by the
Federal Trade Commission (the "FTC"), the FDA and state agencies. The FFDC Act,
as amended, the regulations promulgated thereunder, and other federal and state
statutes and regulations govern, among other things, the testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising
and promotion of Amerx's products. The FDA regulates the contents, labeling and
advertising of Amerx's products. Amerx may be required to obtain FDA approval
for proposed nonprescription products. This procedure involves extensive
clinical research, and separate FDA approvals are required at various stages of
product development. The approval process requires, among other things,
6
presentation of substantial evidence to the FDA, based on clinical studies, as
to the safety and efficacy of the proposed product. After approval,
manufacturers must continue to expend time, money and effort in production and
quality control to assure continual compliance with the Current Good
Manufacturing Practices (CGMP) regulations.
Sirius' advertising and sales practices were subject to regulation by the
FTC, Medicare, and state Medicaid agencies. FDA approvals for its products were
obtained by the respective manufacturer. Medicare and Medicaid regulate
advertising, sales pricing, and the guidelines under which Sirius operated.
We believe that we and our subsidiaries are in compliance with all
applicable laws and regulations relating to our and their operations in all
material respects. Compliance with the various provisions of national, state and
local laws and regulations has had a material adverse effect upon the capital
expenditures, earnings, financial position, liquidity and competitive position
of the Company. We have incurred and will continue to incur extra cost in order
to remain compliant with the latest regulations promulgated by the SEC,
including those regulations promulgated pursuant to the Sarbanes Oxley Act of
2002.
Employees
As of September 1, 2009, the Company and its subsidiaries employ a total of
11 full time employees and 4 part time employees, consisting of 5 management
employees, 4 sales-related employees and 6 administrative employees. One
employee works under Procyon, thirteen employees work under the Amerx
subsidiary, and one employee under Sirius.
ITEM 2. PROPERTIES
We currently maintain our offices, and those of Amerx and Sirius, at 1300
South Highland Ave, Clearwater, Florida 33756. Our offices consist of
approximately 3,800 square feet of space. We believe the facility is adequate
for our current needs. The Company leased this building until July 2006, when it
purchased the building from the lessor for $550,000. In addition, at the same
time, we closed on a loan provided by Bank of America, N.A. in the amount of
$508,000, evidenced by a promissory note. Further, the purchase and loan were
secured by a mortgage, also dated July 21, 2006, between the Company and Bank of
America. Our Chief Executive Officer personally guaranteed the loan.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are not a party to any pending material
legal proceedings nor is our property the subject of a pending legal proceeding.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since October 1996, the Company's Common Stock has been traded on the OTC
Bulletin Board, an electronic quotation system used by members of the Financial
Industry Regulatory Authority ("FINRA"). 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 inter-dealer
quotations, without retail markups, markdowns or commissions, and do not
necessarily reflect actual transactions.
7
Fiscal 2009 HIGH LOW
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First Quarter $ .50 $ .25
Second Quarter $ .40 $ .11
Third Quarter $ .15 $ .09
Fourth Quarter $ .17 $ .06
Fiscal 2008
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First Quarter $ .70 $ .34
Second Quarter $ .50 $ .35
Third Quarter $ .51 $ .40
Fourth Quarter $ .55 $ .36
As of September 15, 2009, there were approximately 131 record holders of
the Company's Common Stock. On September 16, 2009, the closing bid price of the
Company's common stock was $.10 and the closing ask price was $.15. On September
15, 2009, the last date on which a sale occurred, the last reported sale price
was $.10.
Holders of Common Stock are entitled to receive such dividends if declared
by the Company's Board of Directors. We have not declared any dividends on our
Common Stock and have no current plans to declare a dividend in the immediate
future.
Holders of the Series A Cumulative Convertible Preferred Stock (the
"Preferred Stock") are entitled to receive, if declared by the Board of
Directors, quarterly dividends at an annual rate of $.10 per share. Dividends
accrue without interest, from the date of issuance, and are payable in arrears
in cash or common stock, when and if declared by the Board of Directors. No
dividends had been declared or paid at June 30, 2009, and dividends, if ever
declared, in arrears at such date total $241,371.
Holders of the Preferred Stock have the right to convert their shares of
Preferred Stock into an equal number of shares of Common Stock of the Company.
In addition, every holder of preferred stock is entitled to that number of votes
equal to the number of shares of common stock into which the preferred stock is
convertible. Such preferred shares will automatically convert into one share of
Common Stock at the close of a public offering of Common Stock by the Company
provided the Company receives gross proceeds of at least $1,000,000, and the
initial offering price of the Common Stock sold in such offering is equal to or
in excess of $1 per share. During fiscal 2009, no holders of Preferred Stock
voluntarily converted their Preferred shares into shares of Common Stock.
As reflected in the price quotations above, there have been significant
price fluctuations in the Company's Common Stock. Factors that may have caused
or can cause market prices to fluctuate include the number of shares available
in the public float, any purchase or sale of a significant number of shares
during a relatively short time period, quarterly fluctuations in results of
operations, issuance of additional securities, entrance of such securities into
the public float, market conditions specific to the Company's industry and
market conditions in general, and the willingness of broker-dealers to effect
transactions in low priced securities. In addition, the stock market in general
has experienced significant price and volume fluctuations in recent years. These
fluctuations, which may be unrelated to a Company's operating performance, have
had a substantial effect on the market price for many small capitalization
companies such as the Company. Factors such as those cited above, as well as
other factors that may be unrelated to the operating performance of the Company,
may significantly affect the price of the Common Stock.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Report on Form 10-K, including Management's Discussion and Analysis or
Plan of Operation, contains forward-looking statements. When used in this
report, the words "may", "will", "expect", "anticipate", "continue", "estimate",
"project", "intend", "hope", "believe" and similar expressions, variations of
these words or the negative of those words, and, any statement regarding
possible or assumed future results of operations of the Company's and its
subsidiaries' business, the markets for its products, anticipated expenditures,
regulatory developments or competition, or other statements regarding matters
that are not historical facts, are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 regarding events, conditions
and financial trends including, without limitation, business conditions in the
skin and wound care market and the general economy, competitive factors, changes
in product mix, production delays, manufacturing capabilities, new and
unanticipated governmental regulations and other risks or uncertainties detailed
in other of the Company's Securities and Exchange Commission filings. Such
statements are based on management's current expectations and are subject to
risks, uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect, the
Company's actual plan of operations, business strategy, operating results and
financial position could differ materially from those expressed in, or implied
by, such forward-looking statements.
Our business in general is subject to certain risks including but not
limited to the following:
- we may not be able to produce or obtain, or may have to obtain at
excessive prices, the raw materials and finished goods we need;
- we may not be able to use any tax loss carryforwards before they
expire;
- the vendors on whom we rely for manufacturing certain products may go
out of business, fail to meet demand or provide shipments on an
untimely basis;
- competitive pressures may require us to lower our prices on certain
products, thereby adversely affecting operational results;
- we may not be able to obtain, or obtain at uneconomic expense and
protracted time, the regulatory approval of new products;
- consumers or distributors may not favorably receive our new or
existing products; we may not be able to obtain adequate financing to
fund our operations or expansion;
- a relatively small group of products may represent a significant
portion of our net revenues or net earnings from time to time; if the
volume or pricing of any of these products declines, it could have a
material adverse effect on our business, financial position and
results of operations;
- we could experience significantly reduced revenues and profits if
Medicare or other government programs change, delay or deny
reimbursement claims;
- the loss of senior management or other key personnel, or our inability
to attract and retain additional senior management or other key
personnel, could adversely affect our ability to execute our business
plan;
- we could become subject to new unanticipated governmental regulations
or fail to comply with regulations applicable to our products, which
could materially and adversely affect our business, financial position
and results of operations; and
- legislative or regulatory programs that may influence prices of
prescription drugs could have a material adverse effect on our
business.
9
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements have been prepared in accordance with standards of
the Public Company Accounting Oversight Board (United States), which require us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosures. A summary of
those significant accounting policies can be found in the Notes to the
Consolidated Financial Statements included in this annual report. The estimates
used by management are based upon our historical experiences combined with
management's understanding of current facts and circumstances. Certain of our
accounting policies are considered critical as they are both important to the
portrayal of our financial condition and the results of its operations and
require significant or complex judgments on the part of management. We believe
that the following critical accounting policies affect the more significant
judgments and estimates used in the preparation of our financial statements.
Accounts receivable allowance
Accounts receivable allowance reflects a reserve that reduces our customer
accounts and receivable to the net amount estimated to be collectible. The
valuation of accounts receivable is based upon the credit-worthiness of
customers and third-party payers as well as historical collection experience.
Estimating the credit worthiness of customers and the recoverability of customer
accounts requires us to exercise considerable judgment. Allowances for doubtful
accounts are recorded as a selling, general and administrative expense for
estimated amounts expected to be uncollectible from third-party payers and
customers. We base our estimates on our historical collection experience,
current trends, credit policy and on the analysis of accounts by aging category.
At June 30, 2009, our allowance for doubtful accounts totaled $4,200.
Advertising and Marketing
The Company uses several forms of advertising, including sponsorships to
agencies who represent the professionals in their respective fields. The Company
expenses these sponsorships over the term of the advertising arrangements, on a
straight line basis. Other forms of advertising used by the Company include
professional journal advertisements and mailing campaigns. These forms of
advertising are expensed when incurred.
Income Tax
Income taxes are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax asset will not be realized. The Company
adopted Financial Standards Board Interpretation No. 48, Accounting for Income
Taxes ("FIN 48"), an interpretation of SFAS 109, on January 1, 2007.
Revenue Recognition
The Company recognizes revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104, "Revenue Recognition, corrected
copy." which requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
10
occurred or services have been rendered; (3) the seller's price to the buyer is
fixed or determinable; and, (4) collectibility is reasonably assured. We
recognize revenue related to product sales upon the shipment of such orders to
customers, provided that the risk of loss has passed to the customer and we have
received and verified any written documentation required to bill Medicare, other
third-party payers and customers. We record revenue at the amounts expected to
be collected from Medicare, other third-party payers and directly from
customers. We delay recognizing revenue for shipments where the Company has not
received the required documentation, until the period when such documentation is
received.
Medicare reimbursements are based upon government-established reimbursement
prices. The reimbursements that Medicare pays us is subject to review by
government regulators. Medicare reimburses at 80% of the government-determined
reimbursement prices and we bill the remaining balance to either third-party
payers, such as insurance companies, or directly to the customers.
Stock Based Compensation
Effective January 1, 2006, we adopted Statement of Financial Accounting
Standards No. 123(R) ("SFAS 123R"), "Share-Based Payment". SFAS 123R requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the statement of operations based upon their fair
values and rescinds the acceptance of pro forma disclosure. SFAS 123R permits
two methods of adoption, a "modified prospective" method and a "modified
retrospective" method. Under the modified prospective method, stock-based
compensation cost is recognized, beginning with the effective date, based on the
requirements of SFAS 123R for all share-based payments granted after the
effective date and for all awards granted prior to the effective date that
remain unvested on the effective date. The modified retrospective method
includes the requirements of the modified prospective method and also permits
restatement of prior periods based on amounts previously reported in pro forma
disclosures pursuant to SFAS 123 for either all periods presented or for only
prior interim periods of the year of adoption. We adopted the modified
prospective method prescribed in SFAS 123R, effective January 1, 2006.
Recent Accounting Pronouncements
In May 2009, the FASB issued Statement of Financial Accounting Standards
No. 165, "Subsequent Events" (SFAS 165). Under SFAS 165, requires companies to
evaluate events and transactions that occur after the balance sheet date but
before the date the financial statements are issued, or available to be issued
in the case of non-public entities. SFAS 165 requires entities to recognize in
the financial statements the effect of all events or transactions that provide
additional evidence of conditions that existed at the balance sheet date,
including the estimates inherent in the financial preparation process. Entities
shall not recognize the impact of events or transactions that provide evidence
about conditions that did not exist at the balance sheet date but arose after
that date. SFAS 165, also requires entities to disclose the date through which
subsequent events have been evaluated. SFAS 165 is effective for interim and
annual reporting periods ending after June 15, 2009. We adopted the provisions
of SFAS 165 for the year ended June 30, 2009, as required, the adoption did not
have a material impact on our financial statements. We have evaluated subsequent
events from the balance sheet date through August 28, 2009, and determined there
are no material transactions to disclose, other then those reported in Note O -
Subsequent Events.
In June, 2009, the FASB issued Statement of Financial Accounting Standards
No. 168 (SFAS 168) "Accounting Standards CodificationTM and the Hierarchy of
Generally Accepted Accounting Principles" - a replacement of FASB Statement No.
162. SFAS 168 establishes the FASB Accounting Standards CodificationTM as the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with US GAAP. FAS 168 will be effective for financial statements
11
issued for interim and annual periods ending after September 15, 2009, for most
entities. On the effective date, all non-SEC accounting and reporting standards
will be superseded. We will adopt SFAS 168 for the quarterly period ended
September 30, 2009, as required, and adoption is not expected to have a material
impact on our consolidated financial statements.
General
Our continuing operations and revenues consist of the operations of and
revenues generated by Amerx, our wholly-owned subsidiary. Amerx's wound care and
skin care products, marketed under the trademark AmeriGel(R), are formulated to
enhance the quality of skin and wound care and to lower the treatment cost for
those who suffer from various skin conditions and wounds. During fiscal 2009 and
up through July 31, 2009, Sirius marketed and distributed diabetic supplies via
mail order primarily to Medicare patients.
Amerx markets Amerigel(R) wound care products to institutional customers
such as hospitals, wound care clinics, skilled nursing facilities and home
health agencies; to retail customers through direct sales, internet sales and
through independent and retail chain drug stores; and to physicians and other
health care practitioners.
Amerx's skin care products are distributed to institutions and to retail
stores through national, regional and local distributors as well as through
direct sales and internet sales. As Amerx grows, more focus is being placed on
distributor sales over direct sales.
Recent Developments
Effective July 31, 2009, Sirius entered into an Asset Purchase Agreement
with Priority Diabetes Supply, Inc. Under the terms of the Agreement Sirius sold
certain "Purchased Assets," as defined in the Asset Purchase agreement, to
Priority Diabetes, consisting primarily of Sirius' list of diabetic customers.
As of August 1, 2009, Sirius no longer markets diabetic testing products.
Management is considering various alternatives for Sirius' future business
operations.
In December 2008, PDAC (formerly SADMERC), issued change requirements for
products to be eligible for Medicare and Medicaid reimbursement. All amorphous
hydrogels and all hydrogel gauze dressings require sterility for reimbursement
as of January 1, 2009. Amerx re-evaluated the process for manufacturing, the
cost of changing manufacturing methods, new packaging and testing cost. Amerx
moved forward and was able to provide its customers with a new "sterile" form of
the Saturated Gauze Dressing. This new "sterile" form of Saturated Gauze
Dressing was approved for reimbursement by PDAC in July of 2009.
Future Expectations
Amerx expects to further penetrate the health care market through its
participation in industry trade shows, advertisements in trade journals,
development of additional distributor relationships and by opening new
geographical territories (including international markets). Amerx management
seeks to develop additional markets as the Amerigel product line gains broader
acceptance in markets involved in advanced wound and skin care.
Sirius, after selling its "Purchased Assets," as defined in the Asset
Purchase agreement, effective July 31, 2009, is in the process of considering
various alternatives for the continuation of its business. Pursuant to the terms
of the Asset Purchase Agreement, Sirius will not be involved in the diabetic
testing supply business for at least the next two years.
12
Results of Operations
Comparison of Fiscal 2009 and 2008.
As previously reported in our current report on Form 8-K, filed on August
3, 2009, we entered into an Asset Purchase Agreement, effective July 31, 2009
with Priority Diabetes Supply, Inc., a Florida corporation, doing business as
Diabetes Wellness Supply ("Priority Diabetes"). Pursuant to the Agreement, we
sold certain "Purchased Assets," as defined in the Agreement, including Sirius'
customer list, to Priority Diabetes. Terms of the sale stipulate that, Sirius no
longer offers testing products to diabetic customers. Management is considering
other options for Sirius to conduct business in the future. The results of
operations for fiscal 2009 and 2008 are being reported to reflect continuing
operations for Procyon and Amerx, with discontinued operation of Sirius.
Net sales during fiscal 2009 were approximately $2,366,000 as compared to
approximately $2,254,000 in fiscal 2008, an increase of approximately $112,000,
or 5%. Amerx sales were impacted by the general economic conditions effect on
the health care market. Increases were seen in quarterly sales for three of the
four quarters when compared to the same quarters of the previous year resulting
in an overall sales increase of 5%. Increased marketing and regulatory costs
have negatively impacted net income from continuing operations. Amerx hopes to
capture more of the health care market in fiscal 2010, as well as increase the
penetration of new markets including government contracts and international
markets.
Cost of sales increased to approximately $452,000 in fiscal 2009, as
compared to approximately $451,000 in fiscal 2008, or approximately less then
1%. Cost of sales in fiscal 2009, as a percentage of net sales, decreased by
approximately 1% over the previous year. Amerx's costs have remained relatively
consistent over the past year with only a slight increase in some of its
ingredient and packaging costs.
Gross profit increased to approximately $1,914,000 during fiscal 2009, as
compared to approximately $1,804,000 during fiscal 2008; an increase of about
$110,000, or 6%. As a percentage of net sales, gross profit was 81% in fiscal
2009, as compared to 80% in fiscal 2008.
Operating expenses during fiscal 2009 were approximately $1,753,000,
consisting of approximately $813,000 in salaries and benefits and $940,000 in
selling, general and administrative expenses. This represents an increase in
expenses of approximately $191,000 in fiscal 2009, as compared to expenses in
fiscal 2008. Operating expenses in fiscal 2008 consisted of $788,000 in salaries
and benefits and $774,000 in selling, general and administrative expenses.
Selling, general and administrative expenses increased, including increases in
marketing, legal, consulting fees and accounting fees. As a percentage of net
sales, operating expenses during fiscal 2009 increased to 74% as compared to 69%
during fiscal 2008; as net sales increased $112,000 for the year on a $191,000
increase in expenses.
Income from operations decreased to approximately $161,000 in 2009, as
compared to approximately $242,000 in fiscal 2008. Net income (after dividend
requirements for Preferred Shares) was approximately $5,000 during fiscal 2009,
compared to a net income of approximately $778,000 during fiscal 2008. The
Company also recorded approximately $674,000 of income tax benefit in arriving
at net income available to common shares in fiscal 2008.
As of June 30, 2009, the Company had deferred tax asset of $1,057,167,
consisting primarily of the tax benefit of net operating loss carryforward. The
decrease in the valuation allowance is due to an increase in expected
13
utilization of net operating loss carryforwards. Management believes it is more
likely than not that it will realize the benefit of the NOL carryforward,
because of its continuing trend of earnings. Therefore, a valuation allowance is
not considered necessary.
Liquidity and Capital Resources
Historically, we have financed our operations through a combination of
revenues from operations, shareholder loans, and the public sales of equity. As
of June 30, 2009, our principal sources of liquidity included inventories of
approximately $109,000, net accounts receivable of approximately $219,000, cash
of approximately $403,000, and certificates of deposit of approximately
$243,000. We had working capital of approximately $888,000 at June 30, 2009.
Operating activities provided cash of approximately $161,000 during fiscal
2009, and approximately $118,000 during fiscal 2008, consisting primarily usage
of prepaid expenses of approximately $75,000 in fiscal 2009 and a net profit of
approximately $793,000 in fiscal 2008. Cash used in investing activities during
fiscal 2009 and 2008 was approximately $14,000 and $242,000, respectively. This
was primarily due to investing in Certificates of Deposit in the amount of
$239,698. Cash used by financing activities during fiscal 2009 was approximately
$22,000, and $21,000 during fiscal 2008.
During fiscal 2009, no holders of Preferred Stock converted their shares to
Common Stock.
Commitments of Capital Expenditures
At June 30, 2009, the Company had no commitments for capital expenditures.
Off-Balance Sheet Arrangements
During fiscal years 2009 and 2008, we did not have any relationships or
arrangements with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements as of June 30, 2009, and 2008 were
audited by Ferlita, Walsh & Gonzalez, P.A., the Company's independent auditors,
as indicated in their report included appearing at page F-1.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Management of the Company, with the participation of the Chief Executive
Officer and the Chief Financial Officer, has conducted an evaluation of the
effectiveness of the Company's disclosure controls and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the
period covered by this report. Based on that evaluation, management, including
the Chief Executive Officer and Chief Financial Officer, concluded that, as of
the date of this report, the Company's disclosure controls and procedures were
effective in ensuring that all material information relating to the Company
required to be disclosed in this report has been made known to management in a
timely manner and ensuring that this information is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
regulations.
Our management, including our Chief Executive Officer and our Chief
Financial Officer, does not expect that our disclosure controls and procedures
or our internal controls over financial reporting will, in all instances,
prevent all errors and all fraud. A control system, no matter how well conceived
or operated, can only provide reasonable, not absolute, assurance that the
objectives of the control system are met. While our control systems provide a
reasonable assurance level, the design of our control systems reflects the fact
that there are resource constraints, and the benefits of such controls were
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the financial reports
of the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple errors or mistakes. Additionally, a control can be
circumvented by the individual act of some person, by collusion of two or more
persons, or by management's override of a specific control. The design of any
system of controls is also based in part on certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
(a) Management's annual report on internal control over financial
reporting. Our management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. The
Company's internal control system was designed to provide reasonable assurance
to the Company's management and board of directors regarding the preparation and
fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of June 30, 2009. In making this
assessment, it used the criteria set forth by the Committee of Sponsoring
15
Organizations of the Treadway Commission ("COSO") in Internal
Control--Integrated Framework, Guidance for Smaller Public Companies. Based on
our assessment based on those criteria we believe that, as of June 30, 2009, the
Company's internal control over financial reporting is not effective to detect
the inappropriate application of Generally Accepted Accounting Principles
"(GAAP") rules as more fully described below. This was due to deficiencies that
existed in the design or operation of our internal controls over financial
reporting that adversely affected our internal controls and that may be
considered to be material weaknesses.
The matters involving internal controls and procedures that the Company's
management considered to be material weaknesses under the standards of the
Public Company Accounting Oversight Board were: 1) inadequate segregation of
duties consistent with control objectives; (2) insufficient written policies and
procedures for accounting and financial reporting with respect to the
requirements and application of GAAP and SEC disclosure requirements; (3)
inadequate internal and external control over the calculation of deferred tax
assets and liabilities and requisite knowledge to properly compute the deferred
tax assets and liabilities; (4) ineffective controls over period end financial
disclosure and reporting processes and (5) insufficient board and audit
committee composition to provide oversight of the financial statement process.
Management believes that the material weaknesses set forth above did not
have an effect on the Company's financial results reported herein.
The Company is committed to improving our internal control environment and
financial organization. As part of this commitment, we will increase our
personnel resources and technical accounting expertise within the accounting
function through outside assistance from accounting experts and increase our
segregation of duties within the company within the limits of our existing
personnel. We will also institute policies and procedures to increase our
internal controls and quality of financial reporting within our personnel. We
will have the board of directors more involved during the year regarding Company
operations, annual and quarterly risk assessments, strategic planning, and
financial oversight and reporting. We will strengthen the expertise of the board
by adding members that have financial and business expertise in our industry. We
will add more members to the audit committee and require the audit committee
members to understand the Sarbanes-Oxley rules and requirements and take
responsibility for implementing stronger internal control policies and
procedures.
We will monitor and evaluate the effectiveness of our internal controls and
procedures over financial reporting on an ongoing basis and are committed to
taking further action and implementing additional improvements as necessary and
as funds allow.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
(b) Attestation report of the registered public accounting firm. Not
applicable.
(c) Changes in internal control. The Company has retained consultants to
assist the company in developing and documenting its internal controls
over financial reporting. As part of that process, we have documented
and instituted a number of controls to benefit our financial
reporting. However, that process is not complete and has resulted in
the above identified material weaknesses. The Company is continuing to
work on remediating those control weaknesses as previously described
and will continue to do that during the subsequent fiscal year.
16
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers
Capacities in Director
NAME Age Which Served Since
---- --- ------------ -----
Regina W. Anderson 62 Chief Executive Officer, and 2005
Chairman of the Board
Chester L. Wallack 68 Director 1995
Fred W. Suggs, Jr. 62 Director 1995
Alan B. Crane* 59 Director 1995
Jeffery S. Slowgrove 52 Director 1999
James B. Anderson 39 Chief Financial Officer; President,
Sirius Medical Supply, Inc. 2006
Justice W. Anderson 32 Vice President - Sales and Marketing;
President, Amerx Health Care Corp. 2006
Michael T. Foley 71 Director 2006
* Mr. Crane resigned as Director and member of the Ethics Committee on July 14,
2009.
Regina Anderson. Ms. Anderson has served as Chairman of the Board of
Directors since September 2005, and as our Chief Executive Officer since
November 2005. Ms. Anderson has 28 years experience in the medical field and 22
years of management experience. Ms. Anderson worked at Health South
Rehabilitation Hospital for ten years as Outpatient Director, in charge of the
main outpatient center plus four satellite offices. As Outpatient Director, she
was responsible for budgets involving over thirty thousand outpatient visits per
year; marketing of multiple outpatient specialty programs; and staffing with
thirty employees reporting directly to her. Prior to her work at HealthSouth,
she worked as the lead clinician at Clearwater Rehabilitation Center. Regina was
Vice-President of Operations at Stuffit Direct Marketing Company from 1980
through 1989. She was in charge of franchise sales and training; coupon
processing/production as well as coordination among thirteen franchise offices.
Regina was co-owner and President of Foxy's T-Shirt Shops and Le Shirt Company
from 1978-1980. Foxy's had five locations. She worked as a Speech Language
Pathologist with Morton Plant Hospital from 1970 through 1976. Regina received
her Masters Degree from Kansas State University in 1970.
Chester L. Wallack. Mr. Wallack has served as a director since 1995. He has
served as Chief Executive Officer of Felton West, Inc., a real estate
development and construction company in Dover, Delaware, since 1990. Mr. Wallack
is a retired United States Air Force officer having served as a pilot and in
various management capacities. He graduated from the University of Kansas with a
B.S. degree in Industrial Management and from Southern Illinois University with
an M.B.A. degree in Finance.
Fred W. Suggs, Jr. Mr. Suggs has served on our Board of Directors since
1995. He has been a practicing attorney since 1975. He is a partner in the
Greenville, South Carolina office of Ogletree, Deakins, Nash, Smoak & Stewart,
specializing in labor and employment law. He has been certified as a specialist
17
in labor and unemployment law by the South Carolina Supreme Court and is a
frequent lecturer on labor and employment law issues. Mr. Suggs graduated from
Kansas State University with a B.S. degree and he received his J.D. degree from
the University of Alabama.
Alan B. Crane. Mr. Crane has served on our board since 1995 and is a
partner in Crane Farms, a farming partnership in Larned, Kansas. In 1994, Mr.
Crane was appointed by the governor of Kansas to the Kansas Water Authority to
oversee project expenditures. He received a B.S. degree from Kansas State
University.Mr. Crane resigned as Director and member of the Ethics Committee on
July 14, 2009.
Jeffery Slowgrove. Mr Slowgrove has served as a director since 1999. Since
1998, Mr. Slowgrove has been the President of JSS Management Consulting, Inc., a
consulting firm in Palm Harbor, Florida, providing funding for start up
organizations and advice on the business and management issues facing companies
during early rapid growth and expansion phases. He co-founded IMR Global Corp.
in 1988 and has served as a director since its inception. From 1988 to 1998, he
also served as Treasurer of IMR Global Corp., which is a public company
providing applications software-outsourcing solutions for the information
technology departments of large businesses. He received a B.B.A. from the
University of Michigan.
James B. Anderson. Mr. Anderson has served as our Chief Financial Officer
since June 2005. In addition, from September 22, 2005, until that position was
filled by Regina Anderson on November 1,2005, Mr. Anderson served as Interim
Chief Executive Officer. On June 28, 2005, Mr. Anderson was appointed to serve
as the President of Sirius Medical Supply, Inc. Since 1993, Mr. Anderson has
been involved with Amerx Health Care Corporation as its Chief Information
Officer until 2005, when he was appoint VP of Operations. In 1996, Mr. Anderson
became involved with Procyon Corporation after its merger and has since
performed the duties of Vice President of Operations. Prior to Mr. Anderson's
work with the Company, he was involved with importing and exporting to Russia
and Direct Mail Marketing. He received a B.S. from the University of South
Florida. Mr. Anderson is the son of John C. Anderson, our late President, Chief
Executive Officer and Chairman of the Board, the son of Regina Anderson, the
Company's Chairman of the Board and Chief Executive Officer, and the brother of
Justice W. Anderson, our Vice President of Sales & Marketing and the President
of Amerx Health Care Corporation. Mr. Anderson is the son-in-law of our deceased
former director, Richard T. Thompson.
Justice W. Anderson. Since June 28, 2005, Mr. Anderson has served as our
Vice President of Sales and Marketing and the President of Amerx Health Care
Corporation. Since January of 2001, Mr. Anderson has been Vice President of
Sales for Amerx Health Care Corp. He also serves on the board of the American
Academy of Podiatric Practice Management. From August 2000 to January 2001 he
served as Senior Sales Representative, and as a sales representative from May
2000 to August 2000. He received a B.A. degree from the University of Florida.
Mr. Anderson is the son of John C. Anderson, our late President, Chief Executive
Officer and Chairman of the Board, the son of Regina Anderson, the Company's
Chairman of the Board and Chief Executive Officer and the brother of James B.
Anderson, our Chief Financial Officer and the President of Sirius Medical
Supply, Inc.
Michael T. Foley. Mr. Foley is currently a Vice President and Director of
Suwannee Lumber Company, manufacturers of various lumber grades, garden mulch
and potting soil. From 1997 to 2003, Mr. Foley served as President and CEO of
Gypsum Products, Inc. of Largo, FL. From 1972 to 1996 Mr. Foley served in
various capacities at Florida Forest Products, Inc. including President,
Chairman and CEO. Prior to his association with these building material
suppliers, Mr. Foley worked for International Paper in pulp and newsprint sales.
Michael received his Bachelor of Business Administration degree from the
University of Notre Dame in 1960 and subsequently served on that university's
National Alumni Board. He obtained his MBA from the University of Florida in
1965. Mr. Foley has been a member of the Pinellas County Committee of 100 and
18
was appointed by Governor Lawton Chiles to the State of Florida Community Health
Purchasing Alliance (CHPA) Board. Mr. Foley is also a retired Captain in the
U.S. Naval Reserve.
Compliance with Section 16(a) of the Exchange Act
Under the securities laws of the United States, our directors, executive
officers, and any persons holding more than ten percent of our Common Stock are
required to report their initial ownership of the Company's Common Stock and any
subsequent changes in that ownership to the Securities and Exchange Commission
and the Company. Specific due dates for these reports have been established and
we are required to disclose any failure to file, or late filing, of such
reports. Based solely on our review of the reports and amendments thereto
furnished to the Company and written representations that no other reports were
required to be filed in fiscal 2009, our officers, directors and beneficial
owners of more than ten percent of its Common Stock complied with all Section
16(a) filing requirements.
Committees of the Board
The Board of Directors has delegated certain of its authority to a
Compensation Committee. The Compensation Committee is composed of Messrs.
Wallack, Slowgrove and Suggs. No member of the Compensation Committee is a
former or current officer or employee of the Company.
The primary function of the Compensation Committee is to review and make
recommendations to the Board with respect to the compensation, including
bonuses, of the Company's officers and to administer the Company's Option Plan.
The Board of Director's adopted a Compensation Committee Charter during the 2008
fiscal year.
The Company formed an Audit Committee in July 2004, composed solely of Mr.
Slowgrove. Richard T. Thompson joined the Audit Committee as its Chairman in
March, 2006. Mr. Slowgrove resigned from the Audit Committee effective March 31,
2006. In October 2006, we determined that our remaining Audit Committee member,
Mr. Thompson, did not meet the definition of independence for purposes of audit
committee service as contained in the applicable rules of The Nasdaq Stock
Market, Inc. ("Nasdaq"). In addition, Mr. Thompson had been unable to serve on
the Audit Committee because of health-related concerns. On October 19, 2006, Mr.
Thompson died. In December 2006, the Board nominated Michael T. Foley as
director and Audit Committee member and Chair. The Board believes that Mr. Foley
is independent pursuant to Nasdaq rules and also meets the requirements of an
audit committee financial expert. In addition, we have determined that Mr. Foley
is also independent within the meaning of SEC Rule 10A-3(b)(1). The function of
the Audit Committee is to review and approve the scope of audit procedures
employed and to review and approve the audit reports rendered by the Company's
independent auditors and to approve the audit fees charged by the independent
auditors. In addition, pursuant to the Sarbanes-Oxley Act of 2002 and rules
promulgated thereunder, the Audit Committee is responsible for, among other
things, pre-approving all audit and non-audit services performed by the
independent auditors, approving the engagement of the auditors and receiving
certain reports from the independent auditors prior to the filing of the audit
report. The Audit Committee reports to the Board of Directors with respect to
such matters and recommends the selection of independent auditors. The Audit
Committee adopted a charter in October 2006.
The Company also formed an Ethics Committee from the board members. The
members include Suggs and Crane. Mr. Crane resigned from the committee on July
14, 2009.
19
The Company does not have a Nominating Committee. However, the entire board
of directors, which is comprised of a majority of independent directors,
performs the function of a nominating committee. There have been no material
changes to the procedures by which security holders may recommend nominees to
our board of directors.
In fiscal 2009, the Board of Directors held eight formal meetings. A
majority of directors attended each meeting in person or by telephone. The
Compensation Committee held one meeting during fiscal 2009. The Audit Committee
held two meetings during fiscal 2009.
Code of Ethics for Senior Financial Officers
The Company has adopted a Code of Ethics for Senior Financial Officers. The
Code of Ethics applies to all senior financial officers of the Company,
including the Chief Executive Officer, the Chief Financial Officer, the
Treasurer and any other person performing similar functions. A copy of the Code
of Ethics may be obtained, free of charge, by requesting the same from the
Company by contacting the Company by telephone, at the telephone number shown on
the cover of this report, or by writing to James B. Anderson, Chief Financial
Officer, Procyon Corporation, 1300 S. Highland Avenue, Clearwater, Florida
33756.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table. The following table sets forth compensation
information for the two fiscal years ended June 30, 2009 and 2008 of the
Company's Chief Executive Officer and the President of our subsidiary, Amerx
Health Care Corp. (the "Named Executive Officers"). Elements of compensation for
our Named Executive Officers include salary, discretionary cash bonuses and
other prerequisites and benefits. We do not have a pension plan, do not pay
non-equity incentive plan based compensation and do not offer non-qualified
deferred compensation arrangements. We also did not grant stock awards in fiscal
year 2009 As a result, columns related to these items have been omitted from the
table below.
All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Total($)
--------------------------- ---- --------- -------- --------------- --------
Regina W. Anderson, 2009 $152,165 $2,000 $ -0- $ 154,165
President, Chief Executive 2008 $152,165 $2,000 -0- $ 154,165
Justice W. Anderson, 2009 $ 40,399 $2,250 $116,868(1) $ 159,517
President (Amerx Health 2008 $ 38,717 $2,000 $105,072(1) $ 145,789
Care Corp.)
James B. Anderson, 2009 $ 98,998 $2,250 $ -0- $ 101,248
Chief Financial, Vice Pres. 2008 $ 98,708 $2,000 $ -0- $ 100,708
of Operations (Amerx
Health Care Corp.)
(1) Consists solely of commission on sales from Amerx Health Care Corp.
Outstanding Equity Awards at 2009 Fiscal Year End
The following table sets forth information regarding the outstanding equity
awards to our Named Executive Officers at June 30, 2009. We have not granted any
stock awards to our Named Executive Officers and, accordingly, we had no
outstanding stock awards during 2009. Thus, the columns related to stock awards
have been omitted from the following table.
20
Option Awards
Number of Number of
Securities Securities
Underlying Underlying
Unexercised Unexercised Option
Options Options Exercise Option
(#) (#) Price Expiration
Name Exercisable Unexercisable ($) Date
---- ----------- ------------- --- ----
Regina W. Anderson, - - - -
Chief Executive
Officer and
Chairman of the
Board of Directors
Justice W. Anderson, 50,000 (1) - $ .2125 12/2009
President, Amerx 10,000 (1) - $ .1594 11/2010
Health Care Corp.
James B Anderson, 25,000 - $ .2125 12/2009
Chief Financial 5,000 - $ .1594 11/2010
Officer and VP
Operations (Amerx)
(1) As trustee of the John C. Anderson Trust in accordance with Mr.
Anderson's will.
Compensation of Directors
No employee of the Company receives any additional compensation for his
services as a director. No non-employee director receives any compensation for
his service; however, the Board of Directors has authorized payment of
reasonable travel or other out-of-pocket expenses incurred by non-management
directors in attending meetings of the Board of Directors. The Board of
Directors may consider alternative director compensation arrangements from time
to time.
Stock Option Plan
The Company's 1998 Omnibus Stock Option Plan (the "1998 Plan") is designed
as a comprehensive benefit plan that gives the Company the ability to offer a
variety of equity based incentives and awards to persons who are key to the
Company's growth, development and financial success. The 1998 Plan permits the
grant of awards to directors, employees and consultants of the Company and its
subsidiaries. The 1998 Plan provides for the grant of incentive stock options
("Incentive Stock Options") within the meaning of the Code, non-qualified stock
options, restricted shares, performance units, performance shares, dividend
equivalent, share appreciation rights ("SARs") and other forms of awards,
including deferrals of earned awards, (collectively, the "Awards"). Employees
and non-employees to whom an offer of employment has been extended, directors
and consultants of the Company are all eligible participants for all Awards,
except that Incentive Stock Options may be granted only to employees.
21
The 1998 Plan is administered by the Compensation Committee of the Board of
Directors, which construes and interprets the 1998 Plan, determines the terms
and conditions of the Awards granted under the 1998 Plan, including the
individuals who are to granted Awards, the exercise price, if any, the number of
shares subject to an Award and the vesting and duration of Awards, subject to
any restrictions contained in the 1998 Plan.
The maximum number of shares of Common Stock reserved and available for
Awards under the 1998 Plan is 1,000,000 and the Compensation Committee may limit
the number of shares that may be awarded in the form of restricted stock Awards.
The exercise price of Incentive Stock Options granted under the 1998 Plan
must be at least equal to the fair market value of the Common Stock of the
Company on the date of grant, and must be 110% of fair market value when granted
to an employee who owns shares representing more than 10% of the voting power of
all classes of stock of the Company. The exercise price of non-qualified stock
options granted under the 1998 Plan can not be less than 85% (100% as amended,
effective for options granted December 31, 2007) of the fair market value of the
Common Stock on the date of grant. The term of all options granted under the
1998 Plan may not exceed ten years, except the term of Incentive Stock Options
granted to a 10% or more stockholder, may not exceed five years. The 1998 Plan
may be amended or terminated by the Board of Directors, but no such action may
impair the rights of a participant under a previously granted option.
The 1998 Plan provides for the award of SARs and Performance Units and
Performance Shares. A SAR is an incentive Award that permits the holder to
receive (per share covered thereby) the amount by which the fair market value of
a share of Common Stock on the date of exercise exceeds the fair market value of
such share on the date the SAR was granted or at such date as the Compensation
Committee designates. The Compensation Committee may grant SARs independently,
in addition to, or in tandem (such that the exercise of the SAR or related stock
option will result in forfeiture of the right to exercise the related stock
option or SAR for an equivalent number of shares) with a stock option Award. A
Performance Unit or Performance Share is an incentive Award whereby the Company
commits to make a distribution depending on the attainment of a performance
objective and condition established by the Committee and the base value of the
Performance Unit or Performance Share.
Upon termination of services of a non-employee director or consultant, all
options issuable, but not yet granted, to such persons for services rendered
shall be granted and all options shall remain exercisable for the original
option term. Options granted to an employee are exercisable for specified
periods of time ranging from one month to one year following an employee's
termination depending on the circumstances of the termination, except that
options granted to an employee terminated for cause shall not be exercisable to
any extent after termination. An unexercised option is exercisable only to the
extent that it was exercisable on the date of termination.
The 1998 Plan provides that, in the event the Company enters into an
agreement providing for the merger of the Company into another corporation, an
exchange of shares with another corporation, the reorganization of the Company
or the sale of substantially all of the Company's assets, unvested stock options
become immediately vested and exercisable. Upon the consummation of the merger,
exchange, reorganization or sale of assets, the successor corporation must
assume all Awards or substitute another Award on substantially identical terms
to the outstanding Award. Effective December 31, 2007, the Company enacted
certain amendments to the plan to make it compliant with the recent regulations
that were issued concerning deferred compensation in Section 409A, IRC. These
amendments did not have any material effect on the finacial reporting of the
Company.
22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of September 2, 2009 by (i) each person known
by the Company to own beneficially more than 5% of the outstanding Common Stock,
(ii) each director or director nominee, and (iii) all executive officers and
directors as a group. Each person has sole voting and sole investment or
dispositive power with respect to the shares shown except as noted. As to the
Company's preferred stock, as of September 2, 2009, no officer or director of
the company owned any preferred shares. In addition, no individual shareholder
beneficially owned more than 5% of the Company's preferred shares.
Common Shareholdings on
September 2, 2009
Number of Percent of
Name and Address(5) Shares Class
Regina W. Anderson 72,500 *
Chester L. Wallack (l) 120,000(3) 1.5
Fred W. Suggs (l) 160,000(3) 2.0
Alan B. Crane 80,000(3) 1.0
Jeffery S. Slowgrove 536,200(4) 6.7
James B. Anderson 111,000(7) 1.4
Justice W. Anderson(6) 3,483,500(3) 43.3
Michael T. Foley(1)(2) 210,000(8) 2.6
All directors and officers
as a group (eight persons) 4,838,200 59.0%
RMS Limited Partnership, 50 W. Liberty St, 1,600,000 19.9%
Suite 650, Reno, NV 89501
*Less than 1%
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Includes 60,000 shares subject to currently exercisable options or options
which will become exercisable within 60 days.
(4) Includes 10,000 shares of subject to currently exercisable options or
options which will become exercisable within 60 days.
(5) Except as noted above, the address for all persons listed is 1300 S.
Highland Ave, Clearwater, Florida 33756
(6) Mr. Anderson beneficially owns 3,350,500 shares of common stock and 60,000
currently exercisable options to purchase shares of common stock as Trustee
of the John C. Anderson Trust in accordance with Mr. Anderson's will. He
also owns of record 73,000 shares of common stock.
(7) Includes 30,000 shares subject to currently exercisable options and 10,000
shares in joint name with his wife.
(8) Includes 5,000 shares in joint name with his wife.
23
Equity Compensation Plan Information
The following table contains information regarding Procyon's equity
compensation plan as of June 30, 2009. The only equity compensation plan
maintained by Procyon is the company's Omnibus Stock Option plan (the "Option
Plan"). The Option Plan was approved by the shareholders of Procyon in 1998.
Plan Category Number of Securities Weighted-average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance under
outstanding options, warrants and rights equity compensation
warrants and rights plans (excluding
securities reflected in
column (a))
( a ) ( b ) ( c )
Equity compensation
plans approved by 300,000 $0.20 603,500
security holders
Equity compensation
plans not approved by 0 0 0
security holders
Total 300,000 $0.20 603,500
1. The total number of securities to be issued upon exercise of outstanding
options, warrants and rights consists of options for the purchase of
Procyon common stock issued pursuant to the Option Plan to employees,
officers, directors and consultants. The total number of securities to be
issued upon exercise of the options is stated, regardless of whether the
options are currently vested.
2. The outstanding options issued under the Option Plan range in exercise
price from $0.15 to $0.25 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Other than transactions described below, since July 1, 2008, there has not
been, nor is there currently proposed, any transaction or series of similar
transactions to which we were or will be a party:
o in which the amount involved exceeds $120,000; and,
o in which any director, nominee for director, executive officer,
shareholder which beneficially owns five percent or more of our common
stock or any member of their immediate family members, had or will
have a direct or indirect material interest.
24
Regina W. Anderson, our Chairman and Chief Executive Officer, personally
guaranteed the loan we secured from Bank of America, N.A., in the amount of
$508,000, to purchase our office building in July 2006 as well as the $250,000
line of credit. Mr. Slowgrove, a director, acted as a consultant to the Company
for portions of fiscal 2008, but not fiscal 2009, at a total compensation to him
of approximately $6,250.
Director Independence.
We have determined that the following directors are independent within
applicable Nasdaq rules: Messrs. Wallack, Suggs, Crane, Slowgrove and Foley. We
considered the fact that Mr. Slowgrove acted as a consultant to the Company for
portions of fiscal 2008, at a total compensation to him of approximately $6,250.
Regina, James and Justice Anderson are not independent as they are executive
officers of the Company and its subsidiaries. Accordingly, our Board of
Directors is composed of a majority of independent directors. Our Compensation
Committee and Audit Committee are composed entirely of independent directors
pursuant to applicable Nasdaq rules. In addition, Mr. Foley, also meets the
definition of independence under SEC Rule 10A-3.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees. In fiscal 2009, the Company paid to its independent accountants
$49,756 in fees related directly to the audit and review of the Company's
financial statements. In fiscal 2008, the Company paid to its independent
accountants $32,629 in fees related directly to the audit and review of the
Company's financial statements.
Audit-Related Fees. The Company's independent accountants performed no
other audit-related services for the Company during fiscal 2008 and 2009, other
than the audit services described above.
Tax Fees: In fiscal 2009, the Company paid to its independent accountants
$2,868 in fees related directly to tax preparations. In fiscal 2008, the Company
paid to its independent accountants $2,490 in fees related directly to tax
preparations.
All Other Fees: The Company's independent accountants performed no other
services for the Company during fiscal 2008 and 2009, other than the audit and
tax services described above.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
1. The financial statements filed herewith are listed in the Index to
Financial Statements included in Item 7.
Exhibit No. Document
----------- --------
* 3.1 Articles of Incorporation
+ 3.1.1 Articles of Amendment to Articles of Incorporation
* 3.2 Bylaws
+ 4.1 Designation of Series A Preferred Stock
# 10.1 1998 Omnibus Stock Option Plan
- 10.1 Office Lease dated September 23, 2003
/ 10.2 Promissory Note dated July 21, 2006
/ 10.3 Mortgage dated July 21, 2006
25
+ 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 there under.
o 10.5 Agreement and Plan of Exchange, dated January 31, 1996, by
and between the Company and Amerx.
**10.6 Asset Purchase Agreement between Sirius Medical Supply, Inc.
and Priority Diabetes Supply, Inc., effective July 31, 2009.
++14.1 Code of Ethics for Senior Financial Officers.
x 31.1 Certification of Regina W. Anderson pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a)
x 31.2 Certification of James B. Anderson pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a)
x 32.1 Certification Pursuant to 18 U.S.C. ss. 1350, as Adopted
Pursuant to Section906 of the Sarbanes-Oxley Act Of 2002
----------
* 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, 1995.
o Incorporated by reference to the Company's Form 8-K filed on
or about February 2, 1996.
# Incorporated by reference to the Company's Schedule 14A
filed on or about November 17, 1998.
/ Incorporated by reference to the Company's Form 8-K filed on
or about August 8, 2006
- Incorporated by reference to the Company's Form 10-QSB for
the period ending September 30, 2003
++ Incorporated by reference to the Company's Schedule 14A
filed on or about October 15, 2004
** Incorporated by reference to the Company's Form 8-K filed on
or about August 3, 2009.
x Filed herewith.
26
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, there unto duly authorized.
PROCYON CORPORATION
By: /s/ Regina W. Anderson
--------------------------
Regina W. Anderson, Chief Executive Officer
Date: September 28, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the registrant and in the capacities and on the
dates indicated have signed this report below.
Signature Title Date
--------- ----- ----
/s/ Regina W. Anderson Chief Executive Officer, September 28, 2009
Regina W. Anderson President
/s/ James B. Anderson Chief Financial Officer, September 28, 2009
James B. Anderson President (Sirius) and Director
/s/ Justice W. Anderson President (Amerx) and Director September 28, 2009
Justice W. Anderson
/s/ Michael T. Foley Director September 28, 2009
Michael T. Foley
/s/ Jeffery S. Slowgrove Director September 28, 2009
Jeffery S. Slowgrove
/s/ Fred W. Suggs, Jr. Director September 28, 2009
Fred W. Suggs, Jr.
/s/ Chester L. Wallack Director September 28, 2009
Chester L. Wallack
27
EXHIBIT INDEX
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 1998 Omnibus Stock Option Plan
- 10.1 Office Lease dated September 23, 2003
/ 10.2 Promissory Note dated July 21, 2006
/ 10.3 Mortgage dated July 21, 2006
+ 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 there under. 10
o 10.5 Agreement and Plan of Exchange, dated January 31, 1996, by
and between the Company and Amerx.
**10.6 Asset Purchase Agreement between Sirius Medical Supply, Inc.
and Priority Diabetes Supply, Inc., effective July 31, 2009.
++14.1 Code of Ethics for Senior Financial Officers.
x 31.1 Certification of Regina W. Anderson pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a) 31
x 31.2 Certification of James B. Anderson pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a) 31
x 32.1 Certification Pursuant to 18 U.S.C. ss. 1350, as Adopted
Pursuant to Section906 of the Sarbanes-Oxley Act Of 2002 32
----------
* 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, 1995.
o Incorporated by reference to the Company's Form 8-K filed on
or about February 2, 1996.
# Incorporated by reference to the Company's Schedule 14A
filed on or about November 17, 1998.
/ Incorporated by reference to the Company's Form 8-K filed on
or about August 8, 2006
- Incorporated by reference to the Company's Form 10-QSB for
the period ending September 30, 2003
++ Incorporated by reference to the Company's Schedule 14A
filed on or about October 15, 2004
** Incorporated by reference to the Company's Form 8-K filed on
or about August 3, 2009.
x Filed herewith.
PROCYON CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2009 and 2008
TABLE OF CONTENTS
Page No.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Financial Statements F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of
Procyon Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Procyon
Corporation and Subsidiaries as of June 30, 2009 and 2008 and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the two-year period ended June 30, 2009. Procyon Corporation and
Subsidiaries' management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of internal control over
financial reporting. Our audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 financial statements referred to above present fairly, in
all material respects, the financial position of Procyon Corporation and
Subsidiaries as of June 30, 2009 and 2008 and the results of its operations and
its cash flows for each of the years in the two-year period ended June 30, 2009,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ FERLITA, WALSH & GONZALEZ, P.A.
-----------------------------------
FERLITA, WALSH & GONZALEZ, P.A.
Certified Public Accountants
Tampa, Florida
August 28, 2009
F - 1
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2009 and 2008
ASSETS
2009 2008
----------- -----------
CURRENT ASSETS
Cash $ 403,030 $ 278,878
Certificates of Deposit 242,825 239,698
Accounts Receivable, less allowance for doubtful 218,696 171,494
accounts of $4,200 and $2,500, respectively.
Inventories 109,498 184,158
Prepaid Expenses 154,109 173,490
Deferred Tax Asset 48,954 132,484
----------- -----------
TOTAL CURRENT ASSETS 1,177,112 1,180,202
PROPERTY AND EQUIPMENT, NET 534,339 555,229
OTHER ASSETS
Deposits 2,575 1,513
Deferred Tax Asset 1,008,213 942,738
----------- -----------
1,010,788 944,251
TOTAL ASSETS $ 2,722,239 $ 2,679,682
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 135,066 $ 105,314
Accrued Expenses 129,097 118,747
Current Portion of Mortgage Payable 24,498 22,790
----------- -----------
TOTAL CURRENT LIABILITIES 288,661 246,851
LONG TERM LIABILITIES
Mortgage Payable 423,114 447,042
----------- -----------
TOTAL LONG TERM LIABILITIES 423,114 447,042
STOCKHOLDERS' EQUITY
Preferred Stock, 496,000,000 shares -- --
authorized, none issued.
Series A Cumulative Convertible Preferred Stock, 154,950 154,950
no par value; 4,000,000 shares authorized;
199,100 shares issued and outstanding.
Common Stock, no par value, 80,000,000 shares 4,416,676 4,416,676
authorized; 8,052,388 shares issued and
outstanding.
Paid-in Capital 6,000 6,000
Accumulated Deficit (2,567,162) (2,591,837)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,010,464 1,985,789
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,722,239 $ 2,679,682
=========== ===========
The accompanying notes are an integral part of these financial statements
F - 2
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 2009 and 2008
2009 2008
----------- -----------
NET SALES $ 2,365,647 $ 2,254,820
COST OF SALES 452,021 450,997
----------- -----------
GROSS PROFIT 1,913,626 1,803,823
OPERATING EXPENSES
Salaries and Benefits 812,734 788,113
Selling , General and Administrative 940,207 774,054
----------- -----------
1,752,941 1,562,167
INCOME FROM OPERATIONS 160,685 241,656
OTHER INCOME (EXPENSE)
Interest Expense (33,795) (35,704)
Interest Income 11,019 10,605
Other Income (Expense) -- (23)
----------- -----------
(22,776) (25,122)
----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 137,909 216,534
INCOME TAX BENEFIT (EXPENSE) (43,383) 637,482
----------- -----------
NET INCOME FROM CONTINUING OPERATIONS 94,526 854,016
DISCONTINUED OPERATIONS
Loss from operations of discontinued component (95,178) (97,544)
Provision for income tax benefit 25,327 36,709
----------- -----------
NET LOSS FROM DISCONTINUED OPERATIONS (69,851) (60,835)
NET INCOME 24,675 793,181
Dividend requirements on preferred stock (19,910) (15,110)
----------- -----------
Basic net income available to common shares $ 4,765 $ 778,071
=========== ===========
Basic net income per common share
Continuing Operations $ 0.01 $ 0.11
Discontinued Operations $ (0.01) $ (0.01)
----------- -----------
Total Basic net income per share $ 0.00 $ 0.10
=========== ===========
Weighted average number of common shares outstanding 8,055,388 8,053,719
=========== ===========
Diluted net income per common share
Continuing Operations $ 0.00 $ 0.10
Discontinued Operations $ 0.00 $ (0.01)
----------- -----------
Total Diluted net income per share $ 0.00 $ 0.09
=========== ===========
Weighted average number of common shares outstanding, diluted 8,267,683 8,426,193
=========== ===========
The accompanying notes are an integral part of these financial statements.
F - 3
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 2009 and 2008
Preferred Stock Common Stock
------------------------- ------------------------ Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2007 203,900 $ 159,750 8,047,588 $ 4,411,876 $ 6,000 $(3,385,018) $ 1,192,608
Conversion of preferred stock
to common stock (4,800) (4,800) 4,800 4,800 -- -- --
Net Income -- -- -- -- -- 793,181 793,181
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2008 199,100 $ 154,950 8,052,388 $ 4,416,676 $ 6,000 $(2,591,837) $ 1,985,789
Net income -- -- -- -- -- 24,675 24,675
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2009 199,100 $ 154,950 8,052,388 $ 4,416,676 $ 6,000 $(2,567,162) $ 2,010,464
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F - 4
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2009 and 2008
2009 2008
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 24,675 $ 793,181
Adjustments to reconcile net income to net cash used in
operating activities:
Loss on disposal of property and equipment -- 23
Depreciation 32,220 35,800
Deferred Income Taxes 18,055 (674,191)
Allowance for Doubtful Accounts 1,700 --
Interest Receivable (5,581) (51)
Decrease (increase) in:
Accounts receivable (43,322) 53,017
Inventory 74,660 (50,266)
Prepaid expenses 19,381 (44,014)
Other assets (1,062) --
Increase (decrease) in:
Accounts payable 29,753 (2,762)
Accrued expenses 10,350 7,434
--------- ---------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 160,829 118,171
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Certificates of Deposit (242,825) (239,698)
Redemption of Certificate of Deposit 239,698
Purchase of property & equipment (11,331) (1,911)
--------- ---------
NET CASH USED
BY INVESTING ACTIVITIES (14,458) (241,609)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on Mortgage Payable (22,219) (20,560)
--------- ---------
NET CASH USED
BY FINANCING ACTIVITIES (22,219) (20,560)
--------- ---------
NET CHANGE IN CASH 124,152 (143,998)
CASH AT BEGINNING OF PERIOD 278,878 422,876
--------- ---------
CASH AT END OF PERIOD $ 403,030 $ 278,878
========= =========
SUPPLEMENTAL DISCLOSURES
Interest Paid $ 33,808 $ 35,461
Taxes Paid $ -- $ --
NONCASH TRANSACTION DISCLOSURE:
Conversion of Series A cumulative convertible preferred
stock to common stock $ -- $ 4,800
The accompanying notes are an integral part of these financial statements
F - 5
PROCYON CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Procyon Corporation has two wholly-owned subsidiaries, Amerx Health Care Corp.
(Amerx) and Sirius Medical Supply, Inc. (Sirius). Amerx manufactures and markets
wound and skin care products primarily in the United States whereas Sirius
markets diabetic supplies primarily to Medicare patients in the United States.
As previously reported on our form 8-K, in July 2009, we sold certain "Purchased
Assets" as defined in the Asset Purchase agreement included the customer list of
Sirius to Priority Diabetes Supply, Inc., a Florida corporation, doing business
as Diabetes Wellness Supply ("Priority Diabetes"). Thus, as of July 31, 2009,
Sirius no longer offers testing products to diabetic customers. Management is
considering various options for the future direction of Sirius. See footnote O
for further details.
Principles of Consolidation
The consolidated financial statements include the accounts of Procyon
Corporation and its wholly-owned subsidiaries, Amerx and Sirius. All material
inter-company accounts and transactions are eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
Revenue Recognition
The Company recognizes revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104, "Revenue Recognition, corrected
copy," which requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the seller's price to the buyer is
fixed or determinable; and, (4) collectibility is reasonably assured.
The Company recognizes revenue related to product sales to customers who have
placed orders upon shipment of such orders, provided that risk of loss has
passed to the customer and the Company has received and verified any written
documentation required to bill Medicare, other third-party payers, and
customers. The Company records revenue at the amounts expected to be collected
from Medicare, other third-party payers, and directly from customers. Revenue
recognition is delayed for product shipments for which the Company has not yet
received the required written forms, until the period in which those documents
are collected and verified.
Revenue related to Medicare reimbursement is calculated based on
government-determined reimbursement prices for Medicare-covered items. The
reimbursements that Medicare pays the Company are subject to review by
appropriate government regulators. Medicare reimburses at 80% of the
government-determined reimbursement prices for reimbursable supplies, and the
Company bills the remaining balance to either third-party payers or directly to
customers.
F - 6
Accounts Receivable and Concentration of Credit Risk
Amerx grants credit to customers, most of whom are national pharmaceutical
distributors, drug stores nationwide and physicians. Amerx wholesales its
products to national pharmaceutical distributors and drug stores at a sales term
of 2/10, net 30. Amerx has a written return policy with its customers. Each
return request is reviewed by management for approval. Sales to physicians are
at contracted rates and standard payment term is 2/10 net 30 days.
Sirius grants credit to patients who are eligible for Medicare coverage. Sales
are at standard payment term of 30 days.
Accounts receivable are generally due from Medicare, private insurance
companies, and customers. The collection process is time consuming, complex and
typically involves the submission of claims to multiple payers whose payment of
claims may be contingent upon the payment of another payer. In accordance with
applicable regulatory requirements, the Company makes reasonable and appropriate
efforts to collect accounts receivable, including deductible and copayment
amounts, in a consistent manner for all payer classes. The valuation of accounts
receivable is based upon the credit-worthiness of customers and third-party
payers as well as historical collection experience. Estimating the credit
worthiness of customers and recoverability of customer accounts requires us to
exercise considerable judgment. Allowances for doubtful accounts are recorded as
a selling, general and administrative expense for estimated amounts expected to
be uncollectible from third-party payers and customers. The Company bases its
estimates on its historical collection and write-off experience, current trends,
credit policy, and on analysis of accounts receivable by aging category. As of
June 30, 2009, accounts receivable allowance was $4,200, or approximately 2% of
gross accounts receivable.
Inventories
Inventories are valued at the lower of average cost or market determined by the
first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over their estimated useful lives. Leased equipment is
recorded at it's fair market value at the beginning of the lease term and is
depreciated over the life of the equipment. Depreciation on leased equipment is
included in depreciation expense.
Cash and 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.
F - 7
Concentration of Credit Risk
The Company maintained its cash in three financial institutions. The Federal
Deposit Insurance Corporation insures up to $250,000 per legal entity per
financial institution. At June 30, 2009, our uninsured cash balance was $0.
Shipping and Handling Costs
Shipping and handling costs incurred were approximately $76,000 and $78,000 for
the years ended June 30, 2009, and 2008, respectively, and were included in
selling, general and administrative expenses.
Advertising and Marketing
The company records advertising and marketing expenses in the periods in which
they are incurred. During the years ended June 30, 2009 and 2008, approximately
$466,000 and $397,000, of advertising and marketing costs were included in
selling, general and administrative expenses for each respective year.
Income Taxes
Income taxes are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax asset will not be realized. The Company
adopted Financial Standards Board Interpretation No. 48, Accounting for Income
Taxes ("FIN 48"), an interpretation of SFAS 109, on January 1, 2007.
Net Income Per Share
The Company computes net income per share in accordance with SFAS No. 128,
"Earnings per Share" (SFAS 128). SFAS 128 requires presentation of both basic
and diluted earnings per shares (EPS) on the face of the income statement. Basic
EPS is computed by dividing net income available to common shareholders
(numerator) by the weighted average number of common shares outstanding
(denominator) during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during the period including stock options,
using the treasury stock method, and convertible preferred stock, using the
if-converted method. In computing diluted EPS, the average stock price for the
period is used in determining the number of shares assumed to be purchased from
the exercise of stock options. Diluted EPS excludes all dilutive potential
common shares if their effect is anti-dilutive.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, prepaid expenses, deposits,
inventory, accounts payable, accrued expenses and notes payable approximate fair
value.
Considerable judgement is required in interpreting market data to develop the
estimates of fair value, and accordingly, the estimates are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange.
F - 8
Stock Based Compensation
In December 1998, the Company adopted a 1998 Omnibus Stock Option Plan that
provides for the granting of equity-based incentive and other awards to
employees and directors of the Company, its subsidiaries and selected
consultants. The Plan is administered by the Compensation Committee of the Board
of Directors. Any employee, directors who are not employees of the Corporation
or a subsidiary, and consultants who are not employees or directors of the
Corporation are eligible to participate in the Plan. The maximum number of
shares of common stock issuable on exercise of options or other awards granted
under the Plan is 1,000,000. Non-qualified options granted must have an exercise
price not less than 85% (100% as amended, effective for options granted December
31, 2007) of the fair market value of the underlying shares of common stock.
Incentive options must have an exercise price not less than 100% of the fair
market value of the underlying shares of common stock. The term of the options
cannot be more than ten years. Awards may be granted in the form of restricted
stock. Awards can also be granted in the form of stock appreciation rights. A
stock appreciation right entitles the participant to receive from the Company an
amount equal to the positive difference between the fair market value of common
stock on the date of exercise of the stock appreciation right and the grant
price. No stock appreciation rights have been issued to date.
Additional information with respect to the Plan's stock option activity is as
follows:
Weighted
Number of Average
Shares Exercise Price
------ --------------
Outstanding at June 30, 2007 300,000 $0.20
Granted - -
Exercised - -
Expired - -
------- ---------
Outstanding at June 30, 2008 300,000 $0.20
Granted - -
Exercised - -
Expired - -
Outstanding at June 30, 2009 300,000 $0.20
======= =====
Options exercisable at June 30, 2008 300,000 $0.20
======= =====
Options exercisable at June 30, 2009 300,000 $0.20
======= =====
The following table summarizes information about stock options outstanding at
June 30, 2009:
Stock Options Outstanding
---------------------------------
Weighted Average
Number of Remaining Weighted
Range of Shares Contractual Life Average
Exercise Prices Outstanding In Years Exercise Price
--------------- ----------- -------- --------------
$0.15 - $0.20 65,000 1.39 $0.16
$0.20 - $0.25 235,000 0.51 $0.21
-------
300,000 0.70 $0.20
=======
F - 9
Effective January 1, 2006, we adopted Statement of Financial Accounting
Standards No. 123(R) ("SFAS 123R"), "Share-Based Payment". SFAS 123R requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the statement of operations based upon their fair
values and rescinds the acceptance of pro forma disclosure. SFAS 123R permits
two methods of adoption, a "modified prospective" method and a "modified
retrospective" method. Under the modified prospective method, stock-based
compensation cost is recognized, beginning with the effective date, based on the
requirements of SFAS 123R for all share-based payments granted after the
effective date and for all awards granted prior to the effective date that
remain unvested on the effective date. The modified retrospective method
includes the requirements of the modified prospective method and also permits
restatement of prior periods based on amounts previously reported in pro forma
disclosures pursuant to SFAS 123 for either all periods presented or for only
prior interim periods of the year of adoption. We adopted the modified
prospective method prescribed in SFAS 123R, effective January 1, 2006.
On June 30, 2009, there were outstanding options to purchase 300,000 shares of
our common stock at exercise prices ranging from $0.16 to $0.21 per share and
expiration dates between December 2009 and November 2010. These options were
vested at the time of grant. During the year ended June 30, 2009, no options
were granted. Therefore, the adoption of SFAS 123R does not have an impact on
the statement of operations for period ending June 30, 2009.
The fair value of a stock option is determined using the Black-Scholes
option-pricing model, which values options based on the stock price at the grant
date, the expected life of the option, the estimated volatility of the stock,
the expected dividend payments, and the risk-free interest rate over the life of
the option.
The Black-Scholes option valuation model was developed for estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. Because option valuation models require the use of subjective
assumptions, changes in these assumptions can materially affect the fair value
of the options. Our options do not have the characteristics of traded options,
therefore, the option valuation models do not necessarily provide a reliable
measure of the fair value of our options.
There were no options granted during fiscal years ended June 30, 2009 and 2008.
Had there been options issued during the fiscal years ended June 30, 2009 and
2008, the fair value of the options would have been determined using the
Black-Scholes option-pricing model, which values options based on the stock
price at the grant date, the expected dividend payments, and the risk-free
interest rate over the life of the option.
Equity instruments issued to non-employees in exchange for goods, fees and
services are accounted for under the fair value-based method of SFAS No. 123(R).
Segment Reporting
In previous years, the Company reported certain financial information on its two
operating segments, sale of skin and wound care products and sales of diabetic
supplies. As a result of the sale of its diabetic supply segment, it is no
longer an operating segment. See note O - SUBSEQUENT EVENTS - DISCONTINUED
OPERATIONS for further details.
Reclassification
Certain information in the 2008 financial statements have been reclassified to
conform to the 2009 financial statement presentations.
F - 10
NOTE B - INVENTORIES
Inventories consisted of the following:
June 30, 2009 June 30, 2008
------------- -------------
Finished Goods $ 45,217 $109,561
Raw Materials 64,281 74,597
-------- --------
$109,498 $184,158
======== ========
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
As of June 30, 2009 Capitalized
Owned Leases Total
------------------------------------------
Office Equipment $ 86,731 $ 26,928 $ 113,659
Furniture and Fixtures 20,726 20,726
Software 19,471 19,471
Leasehold improvements 21,614 21,614
Production Equipment 34,118 34,118
Building 474,168 474,168
Land 64,547 64,547
------------------------------------------
721,375 26,928 748,303
Less accumulated depreciation (187,036) (26,928) (213,964)
------------------------------------------
$ 534,339 $ 0 $ 534,339
==========================================
As of June 30, 2008 Capitalized
Owned Leases Total
------------------------------------------
Office Equipment $ 83,246 $ 26,928 $ 110,354
Furniture and Fixtures 20,726 20,726
Software 19,471 19,471
Leasehold Improvements 13,587 13,587
Production Equipment 34,118 34,118
Building 474,168 474,168
Land 64,547 64,547
------------------------------------------
710,043 26,928 736,971
Less accumulated depreciation (154,975) (26,767) (181,742)
------------------------------------------
$ 555,068 $ 161 $ 555,229
==========================================
F - 11
NOTE D - RELATED PARTY TRANSACTIONS
Mr. Slowgrove, a director, acted as a consultant to the Company for portions of
fiscal 2008, and was paid compensation of $6,250. Our Chief Executive Officer,
Regina W. Anderson, guaranteed a loan to us in the amount of $508,000, issued in
connection with our purchase of our office building in July 2006, as well as the
$250,000 line of credit.
NOTE E - MORTGAGE PAYABLE
On July 21, 2006, we entered into a mortgage loan, guaranteed by our C.E.O.
Regina W. Anderson, for $508,000 with the Bank of America for the purchase of
our corporate office building. The mortgage loan is due in 15 years and interest
is fixed at 7.25%. Interest expense was $ 33,795 for the fiscal year end June
30, 2009.
Maturities of long-term debt associated with the mortgage payable are as
follows:
Year Ending June 30,
---------------------------------------------------
2010 $ 24,498
2011 26,335
2012 28,309
2013 30,431
2014 32,712
2015 and thereafter 305,327
-----------
447,612
Less current portion 24,498
-----------
$ 423,114
===========
NOTE F - LINE OF CREDIT
The Company has a $250,000, due-on-demand line of credit with a financial
institution, collateralized by the Company's inventory of $109,498 and accounts
receivable assets of $218,697. The line of credit is renewable annually in
April. The C.E.O. of the Company personally guaranteed the line of credit to the
Company. At June 30, 2009, the Company owed $0 on the line of credit. Interest
expense for the years ended June 30, 2009 was $0. The line of credit extends
terms of cash advances at a variable rate set equal to the banks prime rate at
the time of advance. The interest rate can fluctuate according to the banks
changes in its published prime rate.
F - 12
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under various operating leases expiring
through year 2011. The minimum lease payments due under the equipment lease
agreements for fiscal years ended June 30 is as follow:
2010 $ 11,458
2011 9,447
---------
$ 20,905
=========
NOTE H - STOCKHOLDERS' 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. The
preferred stockholders are entitled to receive, if declared by the board of
directors, quarterly dividends at an annual rate of $.10 per share of Series A
Cumulative Convertible Preferred Stock per annum. Dividends accrue without
interest and are cumulative from the date of issuance of the Series A Cumulative
Convertible Preferred Stock and are payable quarterly in arrears in cash or
publicly traded common stock when and if declared by the board of directors. As
of June 30, 2009, no dividends have been declared. Dividends in arrears on the
outstanding preferred shares total $241,371 or approximately $1.21 per share as
of June 30, 2009. The preferred stockholders have the right to convert each
share of Series A Cumulative Convertible Preferred Stock into one share of the
Company's common stock at any time without additional consideration. Each share
of Series A Cumulative Convertible 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 Cumulative Convertible Preferred Stock have voting rights equal to the common
stockholders based upon the number of shares of common stock into which the
Series A Cumulative Convertible 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 Cumulative Convertible
Preferred stock.
F - 13
NOTE I - EARNINGS PER SHARE
As required by FASB Statement No. 128, the following table sets forth the
computation of basic and diluted earnings per share:
Years Ended June 30,
2009 2008
------------ ------------
Numerator:
----------
Net Income from Continuing Operations $ 94,526 $ 854,016
Net Loss from Discontinued Operations $ (69,851) $ (60,835)
------------ ------------
Net income $ 24,675 $ 793,181
Adjustment for basic earnings per share:
Dividend requirements on preferred stock (19,910) (15,110)
------------ ------------
Numerator for basic earnings per share-
Net income available to common
stockholders $ 4,765 $ 778,071
Effect of dilutive securities:
Numerator for diluted earnings per share-
Net income available to common
stockholder $ 4,765 $ 778,071
------------ ------------
Denominator:
------------
Denominator for basic earnings per share-
Weighted-average common shares 8,055,388 8,053,719
Effect of dilutive securities:
Stock options 13,195 171,705
Dilutive potential common shares 199,100 200,769
------------ ------------
Denominator for dilutive earnings per share-
Adjusted weighted-average shares and
assumed conversions 8,267,683 8,426,193
============ ============
Basic Net Income from Continuing Operations per share $ 0.01 $ 0.11
Basic Net Loss from Discontinued Operations per share $ (0.01) $ (0.01)
------------ ------------
Basic Net Income per share $ 0.00 $ 0.10
============ ============
Diluted Net Income from Continuing Operations per share $ 0.00 $ 0.10
Diluted Net Loss from Discontinued Operations per share $ 0.00 $ (0.01)
------------ ------------
Diluted Net Income per share $ 0.00 $ 0.09
============ ============
Potential common shares from out of the money options were also excluded from
the computation of diluted earnings per share because calculation of the
associated potential common shares has an anti-dilutive effect. The following
table lists options that were excluded from diluted EPS.
2009 2008
------- -------
Out of the money options excluded:
Stock Options with an exercise price of $.2125 per share 235,000 --
------- -------
Total anti dilutive options excluded from EPS 235,000 --
======= =======
NOTE J - INCOME TAXES AND AVAILABLE CARRYFORWARD
As of June 30, 2009, the Company had consolidated income tax net operating loss
("NOL") carryforward for federal income tax purposes of approximately
$2,828,000. The NOL will expire in various years ending through the year
2023.The utilization of certain of the loss carryforwards are limited under
Section 382 of the Internal Revenue Code.
F - 14
The components of the provision for income taxes (benefits) are attributable to
continuing operations as follows:
2009 2008
--------- ---------
Current
Federal $ -- $ --
State -- --
Deferred
Federal 15,417 (575,651)
State 2,638 (98,540)
--------- ---------
$ 18,055 $(674,191)
========= =========
Deferred income taxes reflect the net tax effects of the temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
Current Non-Current
------- -----------
Deferred tax assets:
NOL and contribution carryforwards $ 47,374 $ 1,019,068
Allowance for doubtful accounts 1,580 --
----------- -----------
48,954 1,019,068
Deferred tax (liabilities):
Excess of tax over book depreciation -- (10,855)
----------- -----------
48,954 1,008,213
Net deferred tax asset (liability) $ 48,954 $ 1,008,213
=========== ===========
The change in the valuation allowance is as follow:
June 30, 2008 $ --
June 30, 2009 --
---------
Decrease in valuation allowance $ --
=========
Management believes it is more likely than not that it will realize the benefit
of the NOL carryforward, because of its continuing trend of earnings. Therefore,
a valuation allowance is not considered necessary.
Income taxes for the years ended June 30, 2009 and 2008 differ from the amounts
computed by applying the effective income tax rates of 37.63% and 37.63%,
respectively, to income before income taxes as a result of the following:
2009 2008
--------- ---------
Expected provision at US statutory rate $ 14,543 $ 40,465
State income tax net of federal benefit 1,553 4,320
Nondeductibles 5,200 4,372
Change in estimates in available NOL carryforwards (3,241) 13,936
Change in valuation allowance -- (737,284)
--------- ---------
Income tax expense / (benefit) $ 18,055 $(674,191)
========= =========
The Company's tax years 2005 through 2008 remain open to examination by taxing
jurisdictions.
F - 15
NOTE K - CONCENTRATION OF SUPPLY RISK
The Company's manufacturing and packaging activities are performed at a
production facility owned and operated by a non-affiliated pharmaceutical
manufacturer. At the present time, the manufacturer is the major source of the
Company's wound care products. The sudden loss or failure of this manufacturer
could significantly impair Amerx's ability to fulfill customer orders on a
short-term basis and therefore, could materially and adversely affect the
Company's operations. However, the Company has maintained a long-term
relationship with this manufacturer and does not expect a discontinuance of its
wound care products from the manufacturer in the near term.
During the year, Sirius purchased approximately 83% of its diabetic supplies
from a non-affiliated supplier. As of July 31, 2009, Sirius is considered a
discontinued segment.
NOTE L - MAJOR CUSTOMERS
During the year ended June 30, 2009, sales from one customer accounted for
approximately 18% of Amerx's sales. The loss of this single customer would have
a material adverse effect on our financial condition or the results of our
operations. During the year ended June 30, 2008, one customer accounted for 11%
of Amerx's sales.
NOTE M - RESEARCH AND DEVELOPMENT
Amerx spent approximately $12,700 towards research and development efforts over
the past fiscal year. These efforts were directed towards additional studies
aimed at expanding existing markets.
NOTE N - RECENT ACCOUNTING PRONOUNCEMENTS
In May 2009, the FASB issued Statement of Financial Accounting Standards No.
165, "Subsequent Events" (SFAS 165). Under SFAS 165, requires companies to
evaluate events and transactions that occur after the balance sheet date but
before the date the financial statements are issued, or available to be issued
in the case of non-public entities. SFAS 165 requires entities to recognize in
the financial statements the effect of all events or transactions that provide
additional evidence of conditions that existed at the balance sheet date,
including the estimates inherent in the financial preparation process. Entities
shall not recognize the impact of events or transactions that provide evidence
about conditions that did not exist at the balance sheet date but arose after
that date. SFAS 165, also requires entities to disclose the date through which
subsequent events have been evaluated. SFAS 165 is effective for interim and
annual reporting periods ending after June 15, 2009. We adopted the provisions
of SFAS 165 for the year ended June 30, 2009, as required, the adoption did not
have a material impact on our financial statements. We have evaluated subsequent
events from the balance sheet date through August 28, 2009, and determined there
are no material transactions to disclose, other then those reported in Note O -
Subsequent Events.
F - 16
In June, 2009, the FASB issued Statement of Financial Accounting Standards No.
168 (SFAS 168) "Accounting Standards CodificationTM and the Hierarchy of
Generally Accepted Accounting Principles" - a replacement of FASB Statement No.
162. SFAS 168 establishes the FASB Accounting Standards CodificationTM as the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with US GAAP. FAS 168 will be effective for financial statements
issued for interim and annual periods ending after September 15, 2009, for most
entities. On the effective date, all non-SEC accounting and reporting standards
will be superseded. We will adopt SFAS 168 for the quarterly period ended
September 30, 2009, as required, and adoption is not expected to have a material
impact on our consolidated financial statements.
NOTE O - SUBSEQUENT EVENTS - DISCONTINUED OPERATIONS
As previously reported in our current report on Form 8-K, filed on August
3, 2009, we entered into an Asset Purchase Agreement, effective July 31, 2009
with Priority Diabetes Supply, Inc., a Florida corporation, doing business as
Diabetes Wellness Supply ("Priority Diabetes"). Pursuant to the Agreement, we
sold certain "Purchased Assets," as defined in the Agreement, including Sirius'
customer list, to Priority Diabetes. Thus, as of July 31, 2009, Sirius no longer
offers testing products to diabetic customers. Management is considering various
options for the future direction of Sirius. The sale to date generated proceeds
of $80,000, based on $225 per patient. This will be recognized in the first
quarter of fiscal 2010. After a hundred and eighty day period, an adjusting
payment will be made, based on the results of the production of the patient list
that was sold. The agreement also contains a non-compete period of two years,
prohibiting Sirius from engaging in the business of the sale of diabetic testing
supply products.
As a result of the sale, the results of the Sirius subsidiary, which had
previously been presented as a separate reporting segment, are included in
discontinued operations in the Company's consolidated financial statements of
operations, no other assets or liabilities were sold in this sale. All prior
period information has been reclassified to be consistent with the current
period presentation.
The following amounts related to the Sirius subsidiary were derived from
historical financial information and have been segregated from continuing
operations and reported as discontinued operations.
2009 2008
--------- ---------
Revenues $ 262,056 $ 307,884
Cost of Sales (154,740) (179,466)
Salaries and Benefits (139,203) (162,899)
Selling, General and Administrative (66,975) (66,696)
--------- ---------
Loss from Operations (98,861) (101,177)
Interest Income 3,684 3,633
--------- ---------
Loss from Discontinued Operations (95,178) (97,544)
Income Tax Benefit (Expense) 25,327 36,709
--------- ---------
Loss from Discontinued Operations, net of income taxes $ (69,851) $ (60,835)
========= =========
F - 17