SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] Quarterly Report Under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For Quarterly Period Ended December 31, 2007
[ ] Transition Report Under Section 13 or 18(d) of the Exchange Act
Commission File Number: 0-17449
PROCYON CORPORATION
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(Exact Name of Small Business Issuer as specified in its charter)
COLORADO 59-3280822
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(State of Incorporation) (IRS Employer Identification Number)
1300 S. Highland Ave. Clearwater, FL 33756
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(Address of Principal Offices)
(727) 447-2998
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(Issuer's Telephone Number)
Check 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 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 is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common stock, no par value; 8,055,388
shares outstanding as of February 6, 2008.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [x]
PART I. - FINANCIAL INFORMATION
Item Page
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ITEM 1. FINANCIAL STATEMENTS 3
Index to Financial Statements
-----------------------------
Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION 10
ITEM 3. CONTROLS AND PROCEDURES 15
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS 17
SIGNATURES 17
2
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2007 and June 30, 2007
(unaudited) (audited)
December 31, June 30,
2007 2007
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 365,216 $ 422,876
Certificate of Deposit 185,000 --
Accounts receivable, net of $2,500
allowance for doubtful accounts 195,480 224,460
Inventories 181,988 133,892
Prepaid expenses 106,708 129,476
Deferred tax asset 200,647 169,758
----------- -----------
TOTAL CURRENT ASSETS 1,235,039 1,080,462
PROPERTY AND EQUIPMENT, NET 571,224 589,141
OTHER ASSETS
Deposits 1,515 1,515
Deferred tax asset 261,305 231,274
----------- -----------
262,820 232,789
TOTAL ASSETS $ 2,069,083 $ 1,902,392
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 131,963 $ 108,076
Accrued Expenses 78,432 111,316
Current Portion of Mortgage Payable 21,981 21,201
----------- -----------
TOTAL CURRENT LIABILITIES 232,376 240,593
LONG-TERM LIABILITIES
Mortgage Payable 458,320 469,191
----------- -----------
TOTAL LONG TERM LIABILITIES 458,320 469,191
STOCKHOLDERS' EQUITY
Preferred stock, 496,000,000 shares authorized,
none issued
Series A Cumulative Convertible Preferred stock,
no par value; 4,000,000 shares authorized; 199,100
shares issued and outstanding 154,950 159,750
Common stock, no par value, 80,000,000 shares
authorized; 8,052,388 shares issued and outstanding 4,416,676 4,411,876
Paid-in Capital 6,000 6,000
Accumulated deficit (3,199,239) (3,385,018)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,378,387 1,192,608
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,069,083 $ 1,902,392
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three & Six Months Ended December 31, 2007 and 2006
(unaudited) (unaudited) (unaudited) (unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
Dec. 31, 2007 Dec. 31, 2006 Dec. 31, 2007 Dec. 31, 2006
----------- ----------- ----------- -----------
NET SALES $ 742,454 $ 566,699 $ 1,337,694 $ 1,152,859
COST OF SALES 177,958 126,395 324,173 272,772
----------- ----------- ----------- -----------
GROSS PROFIT 564,496 440,304 1,013,521 880,087
OPERATING EXPENSES
Salaries and Benefits 241,658 193,802 477,848 382,526
Selling, General and Administrative 194,032 219,332 400,025 438,408
----------- ----------- ----------- -----------
435,690 413,134 877,873 820,934
INCOME FROM OPERATIONS 128,806 27,170 135,648 59,153
OTHER INCOME (EXPENSE)
Interest Income 2,860 2,638 6,555 5,134
Interest Expense (8,970) (9,226) (17,340) (15,559)
----------- ----------- ----------- -----------
(6,110) (6,588) (10,785) (10,425)
INCOME BEFORE INCOME TAXES 122,696 20,582 124,863 48,728
INCOME TAX (EXPENSE) BENEFIT 28,024 131,532 60,921 150,794
----------- ----------- ----------- -----------
NET INCOME 150,720 152,114 185,784 199,522
Dividend requirements on preferred stock (58) (5,123) (5,155) (10,245)
----------- ----------- ----------- -----------
Basic net income available to common shares $ 150,662 $ 146,991 $ 180,629 $ 189,277
=========== =========== =========== ===========
Basic net income per common share $ 0.02 $ 0.02 $ 0.02 $ 0.02
Weighted average number of common
shares outstanding 8,053,549 8,049,588 8,052,068 8,049,588
=========== =========== =========== ===========
Diluted net income per common share $ 0.02 $ 0.02 $ 0.02 $ 0.02
Weighted average number of common shares
outstanding, basic and diluted 8,403,742 8,353,493 8,403,742 8,353,493
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
4
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ending December 31, 2007 and 2006
(unaudited) (unaudited)
December 31, December 31,
2007 2006
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 185,784 $ 199,522
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation 17,917 17,805
Deferred Income Taxes (60,920) (150,794)
Decrease (increase) in:
Accounts Receivable 28,980 19,989
Inventory (48,096) 6,976
Prepaid Expenses 22,763 18,161
Other Assets -- (1,627)
Increase (decrease) in:
Accounts Payable 23,887 8,863
Accrued Expenses (32,884) (17,468)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 137,431 101,427
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of Certificates of Deposit (185,000)
Purchase of property & equipment -- (45,990)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (185,000) (45,990)
CASH FLOW FROM FINANCING ACTIVITIES
Payments on Mortgage Payable (10,091) (7,783)
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (10,091) (7,783)
NET CHANGE IN CASH (57,660) 47,654
CASH AT BEGINNING OF PERIOD 422,876 288,377
--------- ---------
CASH AT END OF PERIOD $ 365,216 $ 336,031
========= =========
SUPPLEMENTAL DISCLOSURES
Interest Paid $ 17,340 $ 15,559
Taxes Paid $ -- $ --
NONCASH TRANSACTION DISCLOSURE
Purchase of Office Building Financed by Mortgage $ -- $ 508,000
The accompanying notes are an integral part of these financial statements.
5
Notes to Financial Statements
NOTE A - SUMMARY OF ACCOUNTING POLICIES
The interim financial statements included herein have been prepared by
the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted as allowed by such rules and regulations. The Company
believes that the disclosures are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the Company's audited financial statements dated June 30,
2007. The results for interim periods are not necessarily indicative of
results that may be expected for any other interim period or for the full
year.
Management of the Company has prepared the accompanying unaudited
condensed financial statements prepared in conformity with generally
accepted accounting principles, which require the use of management
estimates, contain all adjustments (including normal recurring adjustments)
necessary to present fairly the operations and cash flows for the period
presented and to make the financial statements not misleading.
STOCK-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123R ("SFAS 123R"),
"Share-Based Payment," which is a revision of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
SFAS 123R is effective for small business publicly traded companies, for
interim or annual periods beginning after December 15, 2005. It supersedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and amends Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows." 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 December 31, 2007, 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 quarter
ended December 31, 2007, no options were granted. Therefore, the adoption
of SFAS 123R does not have an impact on our statement of operations for
period ending December 31, 2007.
6
Prior to January 1, 2006, we accounted for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations and elected to apply the disclosure-only provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation,"as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." Under the intrinsic
value method, compensation expense for stock options was recognized over
the vesting period of the grant based on the excess, if any, of the market
price of our common stock at the date of grant over the stock option
exercise price. As governed by the Plan, stock options were generally
granted at or near fair market value on the date of grant.
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. There were no options granted during the
quarters ended December 31, 2007 and 2006.
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.
NOTE B - INVENTORIES
Inventories consisted of the following:
December 31, June 30,
2007 2007
-------- --------
Finished Goods $ 69,930 $ 36,509
Raw Materials $112,058 $ 97,383
-------- --------
$181,988 $133,892
======== ========
NOTE C - 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 ("Series A Preferred Stock"). The preferred stockholders
are entitled to receive, as and if declared by the board of directors,
quarterly dividends at an annual rate of $.10 per share of Series A
Preferred Stock per annum. Dividends will accrue without interest and will
be cumulative from the date of issuance of the Series A Preferred Stock and
will be payable quarterly in arrears in cash or publicly traded common
stock when and if declared by the Board of Directors. As of December 31,
2007, no dividends have been declared. Dividends in arrears on the
outstanding preferred shares total $211,506 as of December 31, 2007.
7
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, Preferred Stock holders have the right to vote the
number of shares into which their shares are convertible into Common Stock.
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. The Company is obligated to reserve
an adequate number of shares of its common stock to satisfy the conversion
of all the outstanding Series A Preferred Stock.
The Board of Directors of the Company approved a plan on December 8,
2007 to repurchase shares of Procyon Corporation's outstanding common
stock. The repurchase plan authorizes management to repurchase from time to
time up to 10% of the total outstanding shares of common stock as of
December 8, 2007, subject to applicable SEC regulations and compliance with
the Company's trading window policies. The Board's authorization is based
on its belief that Procyon's common stock is underpriced at times given the
Company's working capital, liquidity, assets, book value and future
prospects. The shares may be repurchased from time to time in the open
market, through block purchases or in privately negotiated transactions
depending upon market conditions and other factors, in accordance with SEC
Rule 10b-18. Procyon has no commitment or obligation to purchase all or any
portion of the authorized shares. All shares purchased are canceled and
returned to the status of authorized but unissued common stock.
NOTE D - INCOME TAXES AND AVAILABLE CARRYFORWARD
As of December 31, 2007, the Company had consolidated income tax net
operating loss ("NOL") carryforward for federal income tax purposes of
approximately $2,848,000. The federal NOL will expire in various years
ending through the year 2023.
For the six months periods ended December 31, 2007 and 2006, the
components of the provision for income taxes (benefits) are attributable to
continuing operations as follows:
Six Months Six Months
12/31/07 12/31/06
------------ ------------
Current
Federal $ -- $ --
State -- --
------------ ------------
$ -- $ --
Deferred
Federal $ (52,017) $ (128,754)
State (8,904) (22,040)
------------ ------------
$ (60,921) $ (150,794)
============ ============
8
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:
Net operating loss & contribution carryforwards $ 199,706 $ 885,075
Allowance for doubtful accounts 941 --
Less: Valuation allowance -- (615,803)
--------- ---------
200,647 269,272
Deferred tax liability
Excess of tax over book depreciation -- (7,967)
--------- ---------
200,647 261,305
Net deferred tax asset $ 200,647 $ 261,305
========= =========
The change in the valuation allowance is as follows:
June 30, 2007 $(737,284)
December 31, 2007 (615,803)
---------
Change in valuation allowance $(121,481)
=========
The decrease in the valuation allowance is due to an increase in the
expected utilization of net operating loss carry forwards. A valuation
allowance of approximately $616,000 has been provided to reduce the asset
to the net amount of tax benefit management believes it will more likely
than not realize. As time passes, management will be able to better assess
the amount of tax benefit it will realize from using the carryforward.
Income taxes for the six month periods ended December 31, 2007, and
December 31, 2006, 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:
Six Months Six Months
12/31/07 12/31/06
--------- ---------
Expected provision (benefit) $ 43,190 $ 16,568
State income taxes net of federal benefits 4,612 1,769
Nondeductible (income) expense 2,946 1,323
Change in estimates 9,812 --
Other -- 1,532
Change in valuation allowance (121,481) (171,986)
--------- ---------
$ (60,921) $(150,794)
========= =========
9
NOTE E - MORTGAGE PAYABLE
On July 21, 2006, we entered into a mortgage loan 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 $17,235 for the six months ended December 31, 2007.
Maturities of long-term debt associated with the mortgage payable are as
follows:
Year Ending June 30,
----------------------------------------------
6 months 2008 $ 10,792
2009 22,790
2010 24,498
2011 26,335
2012 28,309
2013 and thereafter 367,577
------------
480,301
Less current portion 21,981
------------
$ 458,320
============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
General
The following discussion and analysis should be read in conjunction
with the unaudited Condensed Financial Statements and Notes thereto
appearing elsewhere in this report.
10
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995
This Report on Form 10-QSB, including Management's Discussion and
Analysis of Financial Condition and Results 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 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, diabetic market and the general economy,
competitive factors, changes in product mix, production delays,
manufacturing capabilities, 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's condensed financial statements have been prepared in
accordance with standards of the Public Company Accounting Oversight Board
(United States), which require the Company 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 the Company's annual report on 10-KSB, for the year
ended June 30, 2007, which was filed with the Securities and Exchange
Commission on September 27, 2007. The estimates used by management are
based upon the Company's historical experiences combined with management's
understanding of current facts and circumstances. Certain of the Company's
accounting policies are considered critical as they are both important to
the portrayal of the Company's 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. 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 experience, current
trends, credit policy and on the analysis of accounts by aging category. At
December 31, 2007, our allowance for doubtful accounts totaled $2,500.
11
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.
Deferred Income Taxes
Deferred income taxes are recognized for the expected tax consequences
in future years for differences between the tax bases of assets and
liabilities and their financial reporting amounts, based upon exacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. The Company accounts for
income taxes under Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). We maintain a valuation
allowance to reduce deferred tax assets to the net amount expected to be
recovered in future periods. The estimates for deferred tax assets and the
corresponding valuation allowance require us to exercise complex judgments.
We periodically review and adjust those estimates based upon the most
current information available. In accordance with SFAS 109 and based upon a
review at December 31, 2007, of our utilization of deferred tax assets, we
maintained a valuation allowance of $615,803. Because the recoverability of
deferred tax assets is directly dependent upon future operating results,
actual recoverability of deferred tax assets may differ materially from our
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 upon the
shipment of such orders to customers, provided that the 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. The Company delays recognizing revenue for shipments where the
Company has not received the required documentation, until the period when
such documentation is received.
12
The Company calculates Medicare reimbursements based upon
government-established reimbursement prices. The reimbursements that
Medicare pays the Company are subject to review by government regulators.
Medicare reimburses at 80% of the government-determined reimbursement
prices and the Company bills the remaining balance to either third-party
payers, such as insurance companies, or directly to the customers.
Stock Based Compensation
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123R ("SFAS 123R"),
"Share-Based Payment," which is a revision of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
SFAS 123R is effective for small business publicly traded companies, for
interim or annual periods beginning after December 15, 2005. It supersedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and amends Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows." 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.
Financial Condition
As of December 31, 2007, the Company's principal sources of liquid
assets included cash of $365,216, inventories of $181,988, and net accounts
receivable of $195,480. The company also invested $185,000 in short term
Certificate of Deposits, to take advantage of higher interest rates
relative to money market rates. The Company had net working capital of
$1,002,663, and long-term debt of $458,320 at December 31, 2007.
During the six months ended December 31, 2007, cash decreased from
$422,876 as of June 30, 2007, to $365,216. Operating activities provided
cash of $137,431 during the period, consisting primarily of net income of
$185,784. Cash used by financing activities was $10,091 as compared to cash
used by financing activities of $7,783 for the corresponding period in
2006.
The Company recorded a current deferred tax asset of $200,647, and
non-current deferred tax asset of $261,305, at December 31, 2007. A
valuation allowance of approximately $616,000 has been recorded to reduce
the asset to the net amount of expected tax benefit management believes it
will more likely than not realize. Because the recoverability of deferred
tax assets is directly dependent upon future operating results, actual
recoverability of deferred tax assets may differ materially from our
estimates.
13
Results of Operations
Comparison of the three and six months ended December 31, 2007 and 2006.
Net sales during the quarter ended December 31, 2007, were $742,454,
as compared to $566,699 in the quarter ended December 31, 2006, an increase
of $175,755, or approximately 31%. Net sales during the six months ended
December 31, 2007, were $1,337,694, as compared to $1,152,859 in the six
months ended December 31, 2006, an increase of $184,835, or approximately
16%. Our net sales for the three and six months ended December 31, 2007
increased from corresponding prior periods primarily because of continued
penetration into current markets. Sales also increased in the second
quarter because we notified our customers of a coming price increase that
took effect January 1, 2008. Sales from our Sirius subsidiary have leveled
off, as we continue to find ways to reach Sirius' intended market. We
believe there is great potential for Sirius as the number of diagnosed
diabetics continues to increase.
Gross profit during the quarter ended December 31, 2007, was $564,496,
as compared to $440,304 during the quarter ended December 31, 2006, an
increase of $124,192, or approximately 28%. As a percentage of net sales,
gross profit was approximately 76% in the quarter ended December 31, 2007,
and approximately 78% in the corresponding quarter in 2006. Gross profit
during the six months ended December 31, 2007, was $1,013,521, as compared
to $880,087 during the six months ended December 31, 2006, an increase of
$133,434, or approximately 15%. As a percentage of net sales, gross profit
was approximately 76% in the six months ended December 31, 2007, and
approximately 77% in the corresponding six months in 2006.
Operating expenses during the quarter ended December 31, 2007, were
$435,690, consisting of $241,658 in salaries and benefits, and $194,032 in
selling, general and administrative expenses. This compares to operating
expenses during the quarter ended December 31, 2006 of $413,134, consisting
of $193,802 in salaries and benefits, and $219,332 in selling, general and
administrative expenses. Expenses for the quarter ended December 31, 2007,
increased by approximately $22,556, or approximately 5% compared to the
corresponding quarter in 2006. Increases in the salaries and benefits for
the current period was due to an increase in staffing and increased
commissions from increased sales in fiscal 2008. Selling, general and
administrative cost decreased for the six months ended December 31, 2007,
compared to the six months ended December 31, 2006 by $56,939. Operating
expenses during the six months ended December 31, 2007, were $877,873,
consisting of $477,848 in salaries and benefits, and $400,025 in selling,
general and administrative expenses. This compares to operating expenses
during the six months ended December 31, 2006 of $820,934, consisting of
$382,526 in salaries and benefits , and $438,408 in selling, general and
administrative expenses. Expenses for the six months ended December 31,
2007, increased by approximately $56,939, or approximately 7% compared to
the corresponding period in 2006.
14
Operating profit increased by $101,636 (approximately 374%) to
$128,806 for the quarter ended December 31, 2007, as compared to $27,170 in
the comparable quarter of the prior year. Net income (before dividend
requirements for Preferred Shares) was $150,720 during the quarter ended
December 31, 2007, as compared to $152,114 during the quarter ended
December 31, 2006, a decrease of 1%. The decrease in net income was
primarily attributable to an increase in sales, without the benefit of a
large income tax benefit as compared to the previous period. The current
deferred tax asset calculation is based on a two year projection verses a
one year projection utilized in previously reported quarters. The two year
projection is currently utilized to reflect the Company's increased fiscal
stability as reported for the past nineteen quarters. Amerx continues
efforts to increase market share for its products. Sirius continues efforts
to penetrate the aging diabetic market. We also believe that sales will
continue to increase if the Company finds new markets for both its products
and services.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Management of the Company, with the participation of the Chief
Executive Officer and 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 and Chief Financial Officer, has
concluded that, as of the end of the period covered by 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.
(b) Changes in Internal Controls Over Financial Reporting
During the second fiscal quarter of 2008, the Company did not
institute any significant changes in its internal control over financial
reporting that materially affected or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting for fiscal 2008 on Saturday, December 8,
2007, at 9:00 a.m. EST. The following matters were considered and approved
by the shareholders:
A. The following eight directors were elected to hold office for one-year
terms or until their successors are elected and qualified:
Votes
Votes Against Total
For or Withheld Voted
-------------------------------------
Regina W. Anderson 5,104,238 12,000 5,116,238
Alan B. Crane 5,083,738 32,500 5,116,238
Jeffrey S. Slowgrove 5,094,238 22,000 5,116,238
Fred W. Suggs 5,083,738 32,500 5,116,238
Chester A. Wallack 5,093,738 22,500 5,116,238
James B. Anderson 5,090,880 25,358 5,116,238
Justice W. Anderson 5,090,880 25,358 5,116,238
Michael T. Foley 5,104,238 12,000 5,116,238
B. To ratify appointment of Ferlita, Walsh & Gonzalez, P.A. as our
independent certified public accountants for the 2008 fiscal year.
Votes For: 5,095,738
Votes Against: 20,500
Votes Abstaining: 0
=========
Total Voted 5,116,238
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ITEM 5. OTHER INFORMATION
The Board of Directors of the Company approved a plan on December 8, 2007
to repurchase shares of Procyon Corporation's outstanding common stock. The
repurchase plan authorizes management to repurchase from time to time up to
10% of the total outstanding shares of common stock as of December 8, 2007,
subject to applicable SEC regulations and compliance with the Company's
trading window policies. The Board's authorization is based on its belief
that Procyon's common stock is underpriced at times given the Company's
working capital, liquidity, assets, book value and future prospects. The
shares may be repurchased from time to time in the open market, through
block purchases or in privately negotiated transactions depending upon
market conditions and other factors, in accordance with SEC Rule 10b-18.
Procyon has no commitment or obligation to purchase all or any portion of
the authorized shares. All shares purchased are canceled and returned to
the status of authorized but unissued common stock.
ITEM 6. EXHIBITS
(A) EXHIBITS
31.1 Certification of Regina W. Anderson pursuant to Exchange Act Rule
13a-14(a)/15d-14(a)
31.2 Certification of James B. Anderson pursuant to Exchange Act Rule
13a-14(a)/15d-14(a)
32.1 Certification Pursuant to 18 U.S.C.ss.1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act Of 2002
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, there unto duly
authorized.
PROCYON CORPORATION
February 8, 2008 By: /s/ REGINA W. ANDERSON
---------------- -------------------------------------
Date Regina W. Anderson, Chief Executive Officer
17