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, 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; 8,045,388 shares outstanding as of February 12, 2004
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
PART I. FINANCIAL INFORMATION
Item
Page
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.............................7
ITEM 3. CONTROLS AND PROCEDURES............................................. 9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................9
SIGNATURES...................................................................10
CERTIFICATIONS
2
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 & JUNE 30, 2003
(unaudited) (audited)
December 31 June 30
2003 2003
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 52,859 $ 41,549
Accounts Receivable, less allowances of $16,700
and $20,500 respectively 158,653 148,052
Prepaid Expenses 59,605 28,265
Inventories 78,969 96,522
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TOTAL CURRENT ASSETS 350,086 314,388
PROPERTY AND EQUIPMENT
Office Equipment 90,814 85,884
Furniture and Fixtures 23,371 15,164
Production Equipment 14,236 14,236
Leasehold Improvements 13,589 0
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142,010 115,284
Accumulated Depreciation (75,746) (66,155)
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TOTAL PROPERTY & EQUIPMENT 66,264 49,129
OTHER ASSETS
Certificates of deposit
plus accrued interest, restricted 17,114 17,114
Deposits 9,064 844
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TOTAL OTHER ASSETS 26,178 17,958
TOTAL ASSETS $ 442,528 $ 381,475
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Current portion of longterm note payable to stockholder 6,775 6,319
Current portion of longterm note payable 321 0
Current portion of capital lease obligations 9,298 8,202
Accounts Payable 184,205 208,111
Accrued Expenses 55,810 67,402
Note payable to stockholder 291,488 291,488
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TOTAL CURRENT LIABILITIES 547,897 581,522
Long Term Liabilities
Note payable to stockholder 6,413 9,920
Note payable 1,237 0
Capital lease obligations 6,201 10,931
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TOTAL LONG TERM LIABILITIES 13,851 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 186,950
Common stock, no par value, 80,000,000 shares
authorized; 8,042,388 shares issued and
outstanding 4,385,677 4,384,676
Paid-in capital 6,000 6,000
Accumulated deficit (4,696,847) (4,798,524)
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TOTAL STOCKHOLDERS' DEFICIENCY (119,220) (220,898)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 442,528 $ 381,475
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See accompaning notes
3
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended December 31, 2003 and 2002
Six Months Ended December 31, 2003 and 2002
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2003 2002 2003 2002
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Net Sales $ 500,092 $ 409,430 $ 985,761 $ 819,569
Cost of Sales 119,745 91,468 227,701 174,459
----------- ----------- ----------- -----------
Gross Profit 380,347 317,962 758,060 645,110
Operating Expenses:
Salaries and Benefits 157,430 142,908 302,089 273,909
Selling, General and Administrative 175,496 172,601 340,329 319,099
----------- ----------- ----------- -----------
Total Operating Expenses 332,926 315,509 642,418 593,008
----------- ----------- ----------- -----------
Profit from Operations 47,421 2,453 115,642 52,102
Other Income (Expense):
Interest Expense (9,714) (9,344) (20,695) (19,053)
Interest Income 57 91 147 249
Other Income 6,486 0 6,586 50
----------- ----------- ----------- -----------
Total Other Expense (3,171) (9,253) (13,962) (18,754)
----------- ----------- ----------- -----------
Net Profit (loss) 44,250 (6,800) 101,680 33,348
Dividend requirements on preferred stock (5,753) (6,903) (10,805) (7,055)
----------- ----------- ----------- -----------
Profit (Loss) applicable to common stock $ 38,497 ($ 13,703) $ 90,875 $ 26,293
=========== =========== =========== ===========
Basic Earnings (Loss) per common share 0.00 (0.01) 0.01 0.00
Weighted average number of
common shares outstanding 8,042,388 7,907,986 8,041,794 7,881,551
=========== =========== =========== ===========
See accompaning notes
4
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 2003 and 2002
Six Months Six Months
Ended Ended
Dec. 31 Dec. 31
2003 2002
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(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Profit $ 101,680 $ 33,348
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 9,591 6,096
Allowance for doubtful accounts (3,800) (2,000)
Common Stock issued for services 0 2,100
Decrease (increase) in:
Accounts Receivable (trade) (6,801) (47,669)
Inventories 17,553 (19,398)
Other Assets (8,220) 0
Prepaid Expenses (31,341) 1,178
Increase (decrease) in:
Accounts Payable (23,906) 21,725
Excess of checks issued
over bank balance 0 (24,168)
Accrued Expenses (11,592) (16,111)
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Cash Provided (Used) by Operating Activities 43,164 (44,899)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property & Equipment (26,726) (499)
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Cash Used in Investing Activities (26,726) (499)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on Long Term Loan (1,493) (2,654)
Payments on Capital Lease Obligations (3,635) 0
Proceeds from Stockholder Loan 0 28,000
Proceeds from Issuance of Common Stock 0 32,100
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Cash Provided (Used) by Financing Activities (5,128) 57,446
Net Increase in cash and cash equivalents 11,310 12,048
Cash and Cash Equivalents, beginning of period 41,549 0
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Cash and Cash Equivalents, end of period $ 52,859 $ 12,048
========= =========
SUPPLEMENTAL DISCLOSURES
Interest Paid $ 20,695 $ 19,053
Taxes Paid $ 0 $ 0
NONCASH TRANSACTIONS DISCLOSURE
Preferred Shares converted to Common Shares $ 1,000 $ 12,500
Purchase of property & equipment through long term loan $ 1,563 $ 0
See accompaning notes
5
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 December 31, 2003 and 2002.
NOTE B - INVENTORIES
Inventories consisted of the following:
December 31, June 30,
2003 2003
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Finished Goods $ 26,549 $ 32,262
Raw Materials $ 52,420 $ 64,260
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$ 78,969 $ 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 December 31, 2003, no dividends have been
declared. Dividends in arrears on the outstanding preferred shares
total $152,317 as of December 31, 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
6
consideration. However, each share of Series A Preferred Stock is
subject to mandatory conversion into one share of common stock of the
Company, effective as of the close of a public offering of the
Company's common stock provided, however, that the offering must
provide a minimum of $1 million in gross proceeds to the Company and
the initial offering price of such common stock must be at least $1
per share. In addition to the rights described above, the holders of
the Series A Preferred Stock will have equal voting rights as the
common stockholders based upon the number of shares of common stock
into which the Series A Preferred Stock is convertible. The Company is
obligated to reserve an adequate number of shares of its common stock
to satisfy the conversion of all the outstanding Series A Preferred
Stock.
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 words 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 believes that additional historical data is necessary to
consider changing this policy. Amerx's management believes that this
policy may never change due to the nature of the customer base and the
product lines currently sold.
7
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.
Financial Condition
As of December 31, 2003, the Company's principal sources of liquid
assets included cash and cash equivalents of $52,859, inventories of
$78,969, and net accounts receivable of $158,653. The Company had
negative working capital of $197,811, and long-term debt of $13,851 at
December 31, 2003.
During the six months ended December 31, 2003, cash and cash
equivalents increased from $41,549 as of June 30, 2003 to $52,859.
Operating activities provided cash of $43,164 during the period,
consisting primarily of net income of $101,680. Cash used by financing
activities was $5,128 as compared to cash provided by financing
activities of $57,446 for the corresponding period in 2002.
The Company has deferred tax assets with a 100% valuation allowance at
December 31, 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 and six months ended December 31, 2003 and
2002.
Net sales during the quarter ended December 31, 2003 were $500,092, as
compared to $409,430 in the quarter ended December 31, 2002, an
increase of $90,662, or 22%. Net sales during the six months ended
December 31, 2003 were $985,761, as compared to $819,569 in the six
months ended December 31, 2002, an increase of $166,192, or 20%.
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 December 31, 2003 was $380,347,
as compared to $317,962 during the quarter ended December 31, 2002, an
increase of $62,385, or 20%. Gross profit during the six months ended
December 31, 2003 was $758,060, as compared to $645,110 during the six
months ended December 31, 2002, an increase of $112,950, or 18%. As a
percentage of net sales, gross profit was 76% in the quarter ended
December 31, 2003, as compared to 78% in the corresponding quarter in
2002. As a percentage of net sales, gross profit was 77% in the six
months ended December 31, 2003, as compared to 79% in the
corresponding six months in 2002. Gross profit increased for the six
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 December 31, 2003, were
$332,926, consisting of $157,430 in salaries and benefits, and
$175,496 in selling, general and administrative expenses. This
compares to operating expenses during the quarter ended December 31,
2002 of $315,509, consisting of $142,908 in salaries and benefits, and
$172,601 in selling, general and administrative expenses. Operating
expenses during the six months ended December 31, 2003, were $642,418,
consisting of $302,089 in salaries and benefits, and $340,329 in
selling, general and administrative expenses. This compares to
operating expenses during the six months ended December 31, 2002 of
$593,008, consisting of $273,909 in salaries and benefits, and
$319,099 in selling, general and administrative expenses. Expenses for
the quarter and six months ended December 31, 2003 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.
8
Operating profit increased by $44,968 (1,833%) from $2,453 for the
quarter ended December 31, 2003, as compared to the comparable quarter
in the prior year. Net Profit (before dividend requirements for
Preferred Shares) was $44,250 during the quarter ended December 31,
2003, as compared to a net loss of $6,800 during the quarter ended
December 31, 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. The Company had an operating profit of $115,642 in the
six months ended December 31, 2003, as compared to an operating profit
of $52,102 in the corresponding six months in 2002. Net Profit (before
dividend requirements for Preferred Shares) was $101,680 during the
six months ended December 31, 2003, as compared to a net profit of
$33,348 during the six months ended December 31, 2002, an increase of
305%. Large growth in sales for the Company comes from growth in the
Amerx subsidiary as Amerx's products are being stocked by new major
medical Physicain distribution centers through out the nation. The
Amerigel Products overall acceptance has grown steadily in the
Podiatric Market. A recent poll in Podiatry Mangament magazine
revealed that Amerigel Wound Dressing was voted the number one product
used by podiatrist for Matrixectomy procedures, holding 23% of the
market.
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 second 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
(A) EXHIBITS
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
9
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 13, 2004 By: /s/ John C. Anderson
----------------- --------------------------------
Date John C. Anderson,
President and
Chief Financial Officer
10