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, 2003
[ ] 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 preceding 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 [ ]
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; 8,042,388 shares outstanding as of November 19, 2003
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
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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.................... 7
ITEM 3. CONTROLS AND PROCEDURES.............................................. 8
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................... 9
SIGNATURES................................................................... 10
2
ITEM 1. FINANCIAL STATEMENTS
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 & JUNE 30, 2003
(unaudited) (audited)
September 30 June 30
2003 2003
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ASSETS
CURRENT ASSETS
Cash $ 26,831 $ 41,549
Accounts Receivable, less allowances of $16,700 125,960 148,052
Prepaid Expenses 67,231 28,265
Inventories 91,730 96,522
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TOTAL CURRENT ASSETS 311,752 314,388
PROPERTY AND EQUIPMENT
Office Equipment 85,885 85,884
Furniture and Fixtures 15,164 15,164
Production Equipment 14,235 14,236
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115,284 115,284
Accumulated Depreciation (70,644) (66,155)
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TOTAL PROPERTY & EQUIPMENT 44,640 49,129
OTHER ASSETS
Certificates of deposit
plus accrued interest, restricted 17,114 17,114
Deposits 1,610 844
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TOTAL OTHER ASSETS 18,724 17,958
TOTAL ASSETS $ 375,116 $ 381,475
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LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Current portion of longterm note payable to stockholder 6,544 6,319
Current portion of capital lease obligations 8,714 8,202
Accounts Payable 185,007 208,111
Accrued Expenses 29,778 67,402
Note payable to stockholder 291,488 291,488
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TOTAL CURRENT LIABILITIES 521,531 581,522
Long Term Liabilities
Note payable to stockholder 8,196 9,920
Capital lease obligations 8,856 10,931
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TOTAL LONG TERM LIABILITIES 17,052 20,851
Stockholders' deficiency
Preferred stock, 496,000,000 shares
authorized; none issued
Series A Cumulative Convertible Preferred stock,
no par value; 4,000,000 shares authorized;
230,100 shares issued and outstanding 185,950 186,950
Common stock, no par value, 80,000,000 shares
authorized; 8,021,388 shares issued and
outstanding 4,251,678 4,384,676
Paid-in capital 6,000 6,000
Accumulated deficit (4,607,095) (4,798,524)
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TOTAL STOCKHOLDERS' DEFICIENCY (163,467) (220,898)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 375,116 $ 381,475
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See accompanying notes
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PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2003 and 2002
Three Months Three Months
Ended Ended
Sept. 30, Sept. 30,
2003 2002
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(unaudited) (unaudited)
Net Sales $ 485,669 $ 410,139
Cost of Sales 107,956 82,819
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Gross Profit 377,713 327,320
Operating Expenses:
Salaries and Benefits 144,659 131,001
Selling, General and Administrative 164,832 146,609
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Total Operating Expenses 309,491 277,610
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Profit (loss) from Operations 68,222 49,710
Other Income (Expense):
Interest Expense (10,981) (9,713)
Interest Income 90 157
Other Income 100 50
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Total Other Income (expense) (10,791) (9,506)
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Net Profit 57,431 40,204
Dividend requirements on preferred stock (5,053) (153)
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Net Profit applicable to common stock $ 52,378 $ 40,051
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Basic earnings per common share 0.01 0.01
Weighted average number of
common shares outstanding 8,041,544 7,866,930
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See accompaning notes
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PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2003 and 2002
Three Months Three Months
Ended Ended
Sept. 30 Sept. 30
2003 2002
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(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Profit $ 57,431 $ 40,204
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 4,489 3,048
Allowance for doubtful accounts (3,800) 0
Decrease (increase) in:
Accounts Receivable (trade) 25,892 (19,461)
Inventories 4,792 (9,730)
Other Assets (766) 0
Prepaid Expenses (38,966) (255)
Increase (decrease) in:
Accounts Payable (23,104) (7,738)
Excess of checks issued
over bank balance 0 (24,168)
Accrued Expenses (37,624) (4,538)
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Cash Used in Operating Activities (11,656) (22,638)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property & Equipment 0 (498)
Cash Used in Investing Activities 0 (498)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Commmon Stock subscribed 0 3,000
Payments on Long Term Loan (1,499) (1,303)
Payments on Capital Lease Obligations (1,563) 0
Proceeds from Stockholder Loan 0 24,500
Proceeds from Issuance of Common Stock 0 12,300
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Cash provided by financing activities (3,062) 38,497
Net Increase (decrease) in cash and cash equivalents (14,718) 15,361
Cash and Cash Equivalents, beginning of period 41,549 0
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Cash and Cash Equivalents, end of period $ 26,831 $ 15,361
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SUPPLEMENTAL DISCLOSURES
Interest Paid $ 10,981 $ 9,713
Taxes Paid 0 0
NONCASH TRANSACTION DISCLOSURE
Preferred Shares converted to Common Shares $ 1,000 $ 12,500
See accompaning notes
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Notes to Financial Statements
NOTE A - SUMMARY OF ACCOUNTING POLICIES
The 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, 2003. 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
The Company has adopted SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure." The Company accounts for stock-based
employee compensation arrangements in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") and has elected to follow the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"). Under the provisions of APB 25,
the Company recognizes compensation expense only to the extent that the exercise
price of the Company's employee stock options is less than the market price of
the underlying stock on the date of grant. SFAS No. 123 requires the
presentation of pro forma information as if the Company has accounted for its
employee stock options granted under the fair value method. There were no
options granted during the quarters ended September 30, 2003 and 2002.
NOTE B - INVENTORIES
Inventories consisted of the following:
September 30, June 30,
2003 2003
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Finished Goods $ 29,069 $ 32,262
Raw Materials $ 62,661 $ 64,260
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$ 91,730 $ 96,522
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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,
2003, no dividends have been declared. Dividends in arrears on the
outstanding preferred shares total $146,564 as of September 30, 2003. The
preferred stockholders have the right to convert each share of Series A
Preferred Stock into one share of the Company's common stock at any time
without additional consideration. However, each share of Series A Preferred
Stock is subject to mandatory conversion into one share of common stock of
the Company, effective as of the close of a public offering of the
Company's common stock provided, however, that the offering must provide a
minimum of $1 million in gross proceeds to the Company and the initial
offering price of such common stock must be at least $1 per share. In
addition to the rights described above, the holders of the Series A
Preferred Stock will have equal voting rights as the common stockholders
based upon the number of shares of common stock into which the Series A
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Preferred Stock is convertible. The Company is obligated to reserve an
adequate number of shares of its common stock to satisfy the conversion of
all the outstanding Series A Preferred Stock.
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,
contains forward-looking statements. When used in this report, the words
"may", "will", "expect", "anticipate", "continue", "estimate", "project",
"intend", "believe", and similar expressions, variations of these words or
the negative of those word 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, and otherwise 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, 2003, which was filed with the Securities and Exchange
Commission on September 29, 2003. 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.
Advertising and Marketing
Currently most of the Company's advertising is direct response. The Company
recognizes expenses from direct response advertising as incurred because
insufficient historical data exists. Sirius's management feels additional
historical data is necessary to consider changing this policy. Amerx's
management feels this policy may never change due to the nature of the
customer base and the product lines currently sold.
Stock Based Compensation
Statement of Financial Accounting Standard ("SFAS") No 123, defines the
fair-value based method of accounting for stock-based employee compensation
plans and transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. SFAS No 123 encourages but
does not require companies to record compensation cost for stock-based
employee compensation plans at fair value. We have chosen to account for
employee stock-based compensation plans using the intrinsic-value method
prescribed in Accounting Principles Board Opinion No. 25. Accordingly,
employee compensation cost for stock is measured as the excess, if any, of
the estimated fair value of our stock at the date of the grant over the
amount an employee must pay to acquire the stock.
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Financial Condition
As of September 30, 2003, the Company's principal sources of liquid assets
included cash and cash equivalents of $26,831, inventories of $91,730, and
net accounts receivable of $125,960. The Company had negative working
capital of $209,779, and long-term debt of $17,052 at September 30, 2003.
During the three months ended September 30, 2003, cash and cash equivalents
decreased from $41,549 as of June 30, 2003 to $26,831. Operating activities
used cash of $11,656 during the period, consisting primarily of an increase
in prepaid expenses of $38,966. Cash used by financing activities was
$3,062 as compared to cash provided by financing activities of $38,497 for
the corresponding period in 2002.
The Company has deferred tax assets with a 100% valuation allowance at
September 30, 2003. Management is not able to determine if it is more
likely than not that the deferred tax assets will be realized.
Results of Operations
Comparison of the three months ended September 30, 2003 and 2002.
Net sales during the quarter ended September 30, 2003 were $485,669, as
compared to $410,139 in the quarter ended September 30, 2002, an increase
of $75,530, or 18%. Increases in sales continue for the Company as market
share increases, and marketing plans continue to reach their target market
for the Amerx subsidiary. Sales from the Sirius subsidiary continue to grow
as the customer base for diabetics continues to grow.
Gross profit during the quarter ended September 30, 2003 was $377,713, as
compared to $327,320 during the quarter ended September 30, 2002, an
increase of $50,393, or 15%. As a percentage of net sales, gross profit was
78% in the quarter ended September 30, 2003, as compared to 80% in the
corresponding quarter in 2002. Gross profit increased for the three months
based on increased sales, however as a percentage of net sales gross profit
decreased based on increased manufacturing cost, and an increase in the
Sirius subsidiary sales for the period as well.
Operating expenses during the quarter ended September 30, 2003, were
$309,491, consisting of $144,659 in salaries and benefits, and $164,832 in
selling, general and administrative expenses. This compares to operating
expenses during the quarter ended September 30, 2002 of $277,610,
consisting of $131,001 in salaries and benefits, and $146,609 in selling,
general and administrative expenses. Expenses for the period have increased
slightly, which is consistent with the overall growth of the Company.
Expenses have seen a shift towards salaries and benefits as the Company has
increased its personnel compared to last year's staff along with increased
compensation for some employees through incentive based programs.
The Company had an operating profit of $68,222 in the quarter ended
September 30, 2003, as compared to an operating profit of $49,710 in the
corresponding quarter in 2002. Net Profit (before dividend requirements for
Preferred Shares) was $57,431 during the quarter ended September 30, 2003,
as compared to a net profit of $40,204 during the quarter ended September
30, 2002. The Company believes it has turned the corner towards
profitability after surviving the financial difficulties faced in the past.
The Company continues to improve its cash position and profitability.
Commitment
During the quarter, the Company entered into a lease for office space with
an unrelated party. The lease calls for monthly rent payment of $3,727 per
month for three years with an option to extend the lease for one successive
term period of three years. The Company also has the option to purchase the
property at a predetermined price after the one-year anniversary from the
date of execution of the lease.
The followings are minimum amounts due on the lease for the fiscal year
ended June 30:
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2004 $ 18,636
2005 44,726
2006 44,726
2007 14,909
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$122,997
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ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Management of the Company, with the participation of the Chief Executive
Officer/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/Chief Financial Officer, has
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.
(b) Changes in Internal Controls Over Financial Reporting
During the first quarter of fiscal 2004, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS -
10.1 Office Lease dated September 23, 2003
31.1 Certification of John C. 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
(B) REPORTS ON FORM 8-K - NONE
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROCYON CORPORATION
November 19, 2003 By: /s/ John C. Anderson
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Date John C. Anderson,
President and
Chief Financial Officer
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