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 September 30, 2006
[ ] Transition Report Under Section 13 or 18(d) of the Exchange Act
Commission File Number: 0-17449
PROCYON CORPORATION
-------------------
(Exact Name of Small Business Issuer as specified in its charter)
COLORADO 59-3280822
-------- ----------
(State of Incorporation) (IRS Employer Identification Number)
1300 S. Highland Ave. Clearwater, FL 33756
------------------------------------------
(Address of Principal Offices)
(727) 447-2998
--------------
(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; 8,049,588
shares outstanding as of November 13, 2006
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
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .............................12
ITEM 3. CONTROLS AND PROCEDURES ..............................................16
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION ....................................................16
ITEM 6. EXHIBITS .............................................................17
SIGNATURES ...................................................................17
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2006 and June 30, 2006
(unaudited) (audited)
September 30 June 30
2006 2006
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 304,799 $ 288,377
Accounts receivable, less allowance of $2,500 161,432 146,446
for doubtful accounts
Inventories 139,619 150,865
Prepaid Expenses 108,641 120,516
Deferred Tax Asset 152,213 133,245
----------- -----------
Total Current Assets 866,704 839,449
PROPERTY AND EQUIPMENT, NET 597,923 62,962
OTHER ASSETS
Deposits 1,513 8,748
----------- -----------
TOTAL ASSETS $ 1,466,140 $ 911,159
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 135,293 $ 125,648
Accrued Expenses 75,448 82,220
Current Portion of Mortgage Payable 20,082 --
----------- -----------
TOTAL CURRENT LIABILITIES 230,823 207,868
LONG TERM LIABILITIES
Deferred Tax Liability $ 8,769 $ 9,063
Mortgage Payable 484,915 --
----------- -----------
TOTAL LONG TERM LIABILITIES 493,684 9,063
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; 204,900
shares issued and outstanding 160,750 160,750
Common stock, no par value, 80,000,000 shares
authorized; 8,049,588 shares issued and outstanding 4,410,876 4,410,876
Paid-in capital 6,000 6,000
Accumulated Deficit (3,835,993) (3,883,398)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 741,633 694,228
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,466,140 $ 911,159
=========== ===========
The accompanying notes are an integral part of these financial statements
3
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2006 and 2005
Three Months Three Months
Ended Ended
September 30, 2006 September 30, 2005
(unaudited) (unaudited)
----------- -----------
NET SALES $ 586,160 $ 550,103
COST OF SALES 146,379 133,994
----------- -----------
GROSS PROFIT 439,781 416,109
OPERATING EXPENSES
Salaries and Benefits 188,725 153,305
Selling, General and Administrative 219,076 163,270
----------- -----------
407,801 316,575
INCOME FROM OPERATIONS 31,980 99,534
OTHER INCOME (EXPENSE)
Interest Expense (6,333) (2,647)
Interest Income 2,496 340
----------- -----------
(3,837) (2,307)
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INCOME BEFORE INCOME TAXES 28,143 97,227
INCOME TAX BENEFIT 19,262 14,051
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NET INCOME 47,405 111,278
Dividend requirement on preferred stock 5,123 5,373
----------- -----------
Basic net income availabe to common shares $ 42,282 $ 105,905
=========== ===========
Basic net income per common share $ 0.01 $ 0.01
Weighted average number of common
shares outstanding 8,049,588 8,055,827
=========== ===========
Diluted net income per common share $ 0.01 $ 0.01
Weighted average number of common shares
outstanding, basic and diluted 8,371,765 8,382,294
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ending September 30, 2006 and 2005
Three Months Three Months
Ended Ended
September 30, September 30,
2006 2005
--------- ---------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 47,405 $ 111,278
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation 8,287 5,771
Deferred Income Taxes (19,262) (14,051)
Decrease (increase) in:
Accounts Receivable (14,986) (11,369)
Inventory 11,246 31,358
Prepaid Expenses 11,875 7,597
Other Assets 7,235 17,114
Increase (decrease) in:
Accounts payable 9,645 (29,111)
Accrued expenses (6,772) (20,453)
--------- ---------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 54,673 98,134
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property & equipment (35,248) (3,111)
--------- ---------
NET CASH USED
BY INVESTING ACTIVITIES (35,248) (3,111)
CASH FLOW FROM FINANCING ACTIVITIES
Payments on note payable - related party -- (90,000)
Payments on Mortgage Payable (3,003) --
Payments on capital lease obligations -- (856)
--------- ---------
NET CASH USED
BY FINANCING ACTIVITIES (3,003) (90,856)
NET CHANGE IN CASH 16,422 4,167
CASH AT BEGINNING OF PERIOD 288,377 26,580
--------- ---------
CASH AT END OF PERIOD $ 304,799 $ 30,747
========= =========
SUPPLEMENTAL DISCLOSURES
Interest Paid $ 6,333 $ 2,647
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,
2006. 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. 123(R) ("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.
6
On September 30, 2006, 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 September 30, 2006, no options were granted. Therefore, the adoption
of SFAS 123R does not have an impact on the statement of operations for
period ending September 30, 2006.
Previously, 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.
If we had previously accounted for stock-based compensation in the
interim period using the fair value method rather than the intrinsic value
method, the pro forma amounts of our net income and income per common share
would have been reported as follows:
3 months ended
September 30, 2005
------------------
Net income applicable to common stock:
As reported $ 105,905
Pro forma adjustments for compensation --
-----------
Pro forma $ 105,905
===========
Income per common share:
Basic - as reported $ 0.01
Basic - pro forma $ 0.01
Diluted - as reported $ 0.01
Diluted - pro forma $ 0.01
7
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 September 30, 2006 and 2005.
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:
September 30, June 30,
2006 2006
-------- --------
Finished Goods $ 31,254 $ 61,330
Raw Materials $108,365 $ 89,535
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$139,619 $150,865
======== ========
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 September 30,
2006, no dividends have been declared. Dividends in arrears on the
outstanding preferred shares total $191,984 as of September 30, 2006.
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.
8
NOTE D - INCOME TAXES AND AVAILABLE CARRYFORWARD
As of September 30, 2006, the Company had consolidated income tax net
operating loss ("NOL") carryforward for federal income tax purposes of
approximately $3,962,000. The federal NOL will expire in various years
ending through the year 2022.
For the three months periods ended September 30, 2006 and 2005, the
components of the provision for income taxes (benefits) are attributable to
continuing operations as follows:
September 30, September 30,
2006 2005
----------- -----------
Current
Federal $ -- $ --
State -- --
----------- -----------
$ -- $ --
Deferred
Federal $ (16,447) $ (12,696)
State (2,815) (1,355)
----------- -----------
$ (19,262) $ (14,051)
=========== ===========
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 $ 151,273 $ 1,343,377
Allowance for doubtful accounts 941
Less: Valuation allowance (1,343,377)
----------- -----------
$ 152,214 $ --
Deferred tax (liabilities):
Excess of tax over book depreciation (8,769)
----------- -----------
-- (8,769)
----------- -----------
Net deferred tax asset (liability) $ 152,214 $ (8,769)
=========== ===========
The change in the valuation allowance is as follows:
September 30, 2006 $ 1,343,377
June 30, 2006 1,373,049
-----------
Change in valuation allowance $ (29,672)
===========
9
The decrease in the valuation allowance is due to the expected
utilization of net operating loss carryforwards. A valuation allowance of
approximately $1,343,000 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 three month periods ended September 30, 2006 and
September 30, 2005 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:
September 30, September 30,
2006 2005
-------- --------
Expected provision (benefit) $ 9,569 $ 33,057
State income taxes net of federal benefits 1,004 3,571
Nondeductible (income) expense 786 46
Change in valuation allowance (29,672) (50,688)
Other, net (949) (37)
-------- --------
$(19,262) $(14,051)
======== ========
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. Interest is fixed at 7.25%. Interest
expense was $6,129 for the three months ended September 30, 2006.
10
Maturities of long-term debt associated with the mortgage payable are
as follows:
Year Ending June 30,
-----------------------------------------
9 months 2007 $ 14,925
2008 21,201
2009 22,790
2010 24,498
2011 26,335
2012 and thereafter 395,248
--------------
504,997
Less current portion 20,082
--------------
$ 484,915
=============
NOTE F - RECENT ACCOUNTING PRONOUNCEMENT
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123(R) ("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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following discussion and analysis should be read in conjunction
with the unaudited Condensed Financial Statements and Notes thereto
appearing elsewhere in this report.
"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 accounting principles generally accepted in the United
States of America, 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, 2006, which was filed with the Securities and Exchange
Commission on September 29, 2006. 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.
12
Accounts receivable allowance
Accounts receivable allowance consists of an allowance for doubtful
accounts. 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.
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
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
SFAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the differences between the
financial statement and the tax basis of assets and liabilities using
enacted tax provisions currently in effect and rates applicable to the
periods in which the differences are expected to affect taxable income.
Revenue Recognition
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.
13
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. 123(R) ("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 September 30, 2006, the Company's principal sources of liquid
assets included cash of $304,799, inventories of $139,619, and net accounts
receivable of $161,432. The Company had net working capital of $635,881,
and long-term debt of $493,684 at September 30, 2006.
During the three months ended September 30, 2006, cash increased from
$288,377 as of June 30, 2006 to $304,799. Operating activities provided
cash of $54,673 during the period, consisting primarily of net income of
$47,405. Cash used by financing activities was $3,003 as compared to cash
used by financing activities of $90,856 for the corresponding period in
2005.
14
The Company recorded deferred tax assets of $152,213, and deferred tax
liability of $8,769, at September 30, 2006. A valuation allowance of
approximately $1,343,000 has been recorded to reduce the asset to the net
amount of expected tax benefit management believes it will more likely than
not realize. As time passes, management will be able to better assess the
amount of tax benefit the Company expects to realize.
Results of Operations
Comparison of the three months and ended September 30, 2006 and 2005.
Net sales during the quarter ended September 30, 2006 were $586,160,
as compared to $550,103 in the quarter ended September 30, 2005, an
increase of $36,057, or 7%. The increase in sales was mainly attributable
to increased sales to distributors. Sales from the Sirius subsidiary have
leveled off, as management continues to find ways to reach its intended
market. We continue to believe there is great potential for Sirius as the
number of diagnosed diabetics increases each day.
Gross profit during the quarter ended September 30, 2006 was $439,781,
as compared to $416,109 during the quarter ended September 30, 2005, an
increase of 23,762, or 6%. As a percentage of net sales, gross profit was
75% in the quarter ended September 30, 2006 and 76% in the corresponding
quarter in 2005.
Operating expenses during the quarter ended September 30, 2006, were
$407,801, consisting of $188,725 in salaries and benefits, and $219,076 in
selling, general and administrative expenses. This compares to operating
expenses during the quarter ended September 30, 2005 of $316,575,
consisting of $153,305 in salaries and benefits, and $163,270 in selling,
general and administrative expenses. Expenses for the quarter ended
September 30, 2006 increased compared to the corresponding quarter in 2005.
Increases in the salaries and benefits for the period was due to lower
wages paid, secondary to the absence of a CEO for a brief period between
first and second quarters of Fiscal 2006, and increased commissions.
Selling, general and administrative cost increased heavily for the quarter
ended September 30, 2006 compared to the quarter ended September 30, 2005.
This increase was mainly attributable to purchasing our office building
including but not limited to pre-purchase expenses, insurance cost, legal
fees and property taxes. The Company also purchased and implemented a new
accounting software program that is more suitable for growth. The Company
also introduced a new product to the market, and incurred cost accordingly
with its launch.
Operating profit decreased by $67,554 (68%) to $31,980 for the quarter
ended September 30, 2006, from $99,534 in the comparable quarter of the
prior year. Net Profit (before dividend requirements for Preferred Shares)
was $47,405 during the three months ended September 30, 2006, as compared
to $111,278 during the three months ended September 30, 2005. The decrease
in profit comes largely from an increase in prepurchase expenses related to
acquiring our office building, training costs related to new software and
launching a new product. We have improved our cash position. 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.
15
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Management of the Company, with the participation of the President and
Principal Executive, Financial and Accounting 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 President and Principal Executive,
Financial and Accounting 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 first fiscal quarter of 2007, 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 5. OTHER INFORMATION
In July 2006, we closed on the purchase of our previously leased
office property located at 1300 S. Highland Ave., Clearwater, FL 33756,
from G.E.A.P. Corporation, in the amount of $550,000, pursuant to a Lease
Agreement, which contains a purchase option. In addition, at the same time,
we closed on a loan provided by Bank of America, N.A., evidenced by a
promissory note, in the amount of $508,000. Further, the purchase and loan
were secured by a Mortgage, between the Company and Bank of America. Regina
W. Anderson, our Chairman and Chief Executive Officer, personally
guaranteed the loan we secured from Bank of America, N.A.
On October 17, 2006, the Board of Directors approved a resolution to
increase the number of board members to eight.
On October 19, 2006, Richard T. Thompson, who had served as a director
since 1998, died.
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On October 26, 2006, the Board of Directors nominated James B.
Anderson, Justice W. Anderson and Michael T. Foley to stand for election as
directors in the upcoming annual shareholders meeting. If Mr. Foley is
elected, the Board of Directors intends to nominate him to act as sole
member and Chair of the Audit Committee.
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
November 14, 2006 By: /s/ REGINA W. ANDERSON
----------------- ----------------------
Date Regina W. Anderson,
Chief Executive Officer
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