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, 2004
[ ] 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 [ ]
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 November 8, 2004
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.......................... 9
ITEM 3. CONTROLS AND PROCEDURES .......................................... 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS ......................................................... 12
SIGNATURES................................................................ 12
2
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2004 & June 30, 2004
(unaudited) (audited)
September 30 June 30
2004 2004
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 42,005 $ 14,608
Accounts Receivable, less allowance
of $9,000 for doubtful accounts 129,414 154,648
Prepaid Expenses 31,952 36,665
Inventories 132,185 104,724
Deferred tax asset 96,788 75,000
----------- -----------
TOTAL CURRENT ASSETS 432,344 385,645
PROPERTY AND EQUIPMENT, NET 88,599 95,398
OTHER ASSETS
Certificates of deposit
plus accrued interest, restricted 17,114 17,114
Deposits 14,507 5,214
----------- -----------
TOTAL OTHER ASSETS 31,621 22,328
TOTAL ASSETS $ 552,564 $ 503,371
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of longterm notes payable 375 7,704
Current portion of capital lease obligations 6,577 8,046
Accounts Payable 80,916 98,821
Accrued Expenses 61,523 72,722
----------- -----------
TOTAL CURRENT LIABILITIES 149,391 187,293
Long Term Liabilities
Notes payable 948 3,052
Note payable to related party 226,506 261,506
Capital lease obligations 1,505 2,360
Deferred tax liability 11,658 12,000
----------- -----------
TOTAL LONG TERM LIABILITIES 240,617 278,918
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;
227,100 shares issued and outstanding 182,950 182,950
Common stock, no par value, 80,000,000 shares
authorized; 8,024,388 shares issued and
outstanding 4,254,678 4,388,676
Paid-in capital 6,000 6,000
Accumulated deficit (4,281,072) (4,540,466)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 162,556 37,160
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 552,564 $ 503,371
=========== ===========
The accompanying notes are an integral part of these financial statements
3
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2004 and 2003
Three Months Three Months
Ended Ended
Sept. 30, Sept. 30,
2004 2003
----------- -----------
(unaudited) (unaudited)
NET SALES $ 545,369 $ 485,669
COST OF SALES 132,951 107,956
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GROSS PROFIT 412,418 377,713
OPERATING EXPENSES
Salaries and Benefits 156,033 144,659
Selling, General and Administrative 148,991 164,832
----------- -----------
305,024 309,491
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INCOME FROM OPERATIONS 107,394 68,222
Other Income (Expense):
Interest Expense (4,213) (10,981)
Interest Income 66 90
Other Income 20 100
----------- -----------
(4,127) (10,791)
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INCOME BEFORE INCOME TAXES 103,267 57,431
INCOME TAX BENEFIT 22,130 0
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NET INCOME 125,397 57,431
Dividend requirements on preferred stock (5,678) (5,053)
----------- -----------
Basic net income available to common shares $ 119,719 $ 52,378
=========== ===========
Basic net income per common share $ 0.01 $ 0.01
Weighted average number of
common shares outstanding 8,045,544 8,041,544
=========== ===========
Diluted net income per common share $ 0.01 $ 0.01
Weighted average number of common shares 8,381,610 8,381,396
outstanding, basic and diluted
The accompanying notes are an integral part of these financial statements
4
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2004 and 2003
Three Months Three Months
Ended Ended
Sept. 30 Sept. 30
2004 2003
--------- ---------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 125,397 $ 57,431
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 6,800 4,489
Allowance for doubtful accounts 0 (3,800)
Deferred Income Taxes (22,130) 0
Decrease (increase) in:
Accounts Receivable 25,234 25,892
Inventories (27,461) 4,792
Other Assets (9,293) (766)
Prepaid Expenses 4,713 (38,966)
Increase (decrease) in:
Accounts Payable (17,905) (23,104)
Accrued Expenses (11,199) (37,624)
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Cash provided (used) by Operating Activities 74,156 (11,656)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property & Equipment 0 0
--------- ---------
Cash Used in Investing Activities 0 0
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Long Term Note Payable related party 10,000 0
Payments on Long Term Note Payable related party (54,352) (1,499)
Payments on Capital Lease Obligations (2,324) (1,563)
Payments on Long Term Note Payable (83) 0
--------- ---------
Cash used by financing activities (46,759) (3,062)
Net Increase (decrease) in cash and cash equivalents 27,397 (14,718)
Cash and Cash Equivalents, beginning of period 14,608 41,549
Cash and Cash Equivalents, end of period $ 42,005 $ 26,831
========= =========
SUPPLEMENTAL DISCLOSURES
Interest Paid $ 4,213 $ 10,981
Taxes Paid $ -- $ --
NONCASH TRANSACTION DISCLOSURE
Preferred Shares converted to Common Shares $ 0 $ 1,000
The accompanying notes are an integral part of these financial statements
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, 2004. 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, 2004 and 2003.
The following table illustrates the effect on net income and earnings per
share for the quarter ended September 30, 2004 had the Company applied the
fair value recognition provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation.
2004 2003
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Net income applicable to common stock:
As reported $ 119,719 $ 52,378
Pro forma adjustment for compensation -- --
Pro forma $ 119,719 $ 52,378
========= =========
Income per common share:
Basic - as reported $ 0.01 $ 0.01
Basic - pro forma $ 0.01 $ 0.01
Diluted - as reported $ 0.01 $ 0.01
Diluted - pro forma $ 0.01 $ 0.01
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There were no stock options granted during the three months ended September
30, 2004 and 2003. The fair value of a stock option is determined using the
Black-Scholes option-pricing model, which values options based on the stock
price at the grant date, the expected life of the option, the estimated
volatility of the stock, the expected dividend payments, and the risk-free
interest rate over the life of the option.
The Black-Scholes option valuation model was developed for estimating the
fair value of traded options that have no vesting restrictions and are
fully transferable. Because option valuation models require the use of
subjective assumptions, changes in these assumptions can materially affect
the fair value of the options. Our options do not have the characteristics
of traded options, therefore, the option valuation models do not
necessarily provide a reliable measure of the fair value of our options.
Equity instruments issued, if any, to non-employees in exchange for goods,
fees and services are accounted for under the fair value based method of
SFAS No. 123.
NOTE B - INVENTORIES
Inventories consisted of the following:
September 30, June 30,
2004 2004
---- ----
Finished Goods $ 42,310 $ 39,751
Raw Materials $ 89,875 $ 64.973
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$ 132,185 $ 104,724
========= =========
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,
2004, no dividends have been declared. Dividends in arrears on the
outstanding preferred shares total $167,099 as of September 30, 2004.
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. During fiscal 2004, holders of 4,000
shares of Preferred Stock voluntarily converted their shares to 4,000
shares of Common Stock. 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.
NOTE D - INCOME TAXES AND AVAILABLE CARRYFORWARD
As of September 30, 2004, the Company had consolidated income tax net
operating loss ("NOL") carryforward for federal income tax purposes of
approximately $4,600,000. The NOL will expire in various years ending
through the year 2023.
The components of the provision for income taxes (benefits) are
attributable to continuing operations as follows:
7
2004 2003
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Current
Federal $ -- $ --
State -- --
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-- --
Deferred
Federal (19,118) --
State (3,012) --
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(22,130) --
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Income tax (benefit) $ (22,130) $ --
========= =========
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
Current Non-Current
--------- -----------
Deferred tax assets:
NOL carryforward $ 93,401 $ 1,419,847
Allowance for doubtful accounts 3,387 --
--------- -----------
96,788 1,419,847
Deferred tax (liabilities):
Excess of tax over book depreciation -- (11,658)
--------- -----------
96,788 1,408,189
Valuation allowance for deferred tax asset -- (1,419,847)
--------- -----------
Net deferred tax asset (liability) $ 96,788 $ (11,658)
========= ===========
The change in the valuation allowance is as follows:
September 30, 2004 $ 1,419,847
June 30, 2004 $ 1,498,878
-----------
Decrease in valuation allowance $ (79,031)
===========
The decrease in the valuation allowance is due to an increase in the
expected NOL utilization. A valuation allowance of approximately $1,420,000
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 period ended September 30, 2004 and 2003 differ from
the amounts computed by applying the effective income tax rates of 34% to
income before income taxes as a result of the following:
8
2004 2003
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Expected provision at the US statutory rate $ 35,111 $ --
Effect of:
State income taxes (3,790) --
Nondeductible expenses 392 --
Change in valuation allowance (79,031) --
Other 25,188 --
-------- --------
Income tax (benefit) $(22,130) $ --
======== ========
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 or Plan of Operation, contains forward-looking statements.
When used in this report, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend,"
"hope,""believe" and similar expressions, variations of these words or
the negative of those words, and, any statement regarding possible or
assumed future results of operations of the Company's business, the
markets for its products, anticipated expenditures, regulatory
developments or competition, or other statements regarding matters that
are not historical facts, are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934 regarding
events, conditions and financial trends including, without limitation,
business conditions in the skin and wound care market and the general
economy, competitive factors, changes in product mix, production
delays, manufacturing capabilities, 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, 2004, which was filed
with the Securities and Exchange Commission on September 28, 2004. 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.
9
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
Currently some 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.
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.
The Company calculates Medicare reimbursements based upon
government-established reimbursement prices. The reimbursements that
Medicare pays the Company is 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
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,
2004 and 2003.
10
Financial Condition
As of September 30, 2004, the Company's principal sources of liquid
assets included cash of $42,005, inventories of $132,185, and net
accounts receivable of $129,414. The Company had working capital of
$282,953, and long-term debt of $240,617 at September 30, 2004.
During the three months ended September 30, 2004, cash increased from
$14,608 as of June 30, 2004 to $42,005. Operating activities provided
cash of $74,156 during the period, consisting primarily of net income
of $125,397. Cash used by financing activities was $46,759 as compared
to cash used by financing activities of $3,062 for the corresponding
period in 2003.
The Company has deferred tax assets of $96,788, and deferred tax
liability of $11,658, at September 30, 2004. A valuation allowance of
approximately $1,420,000 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 it will realize.
Results of Operations
Comparison of the three months ended September 30, 2004 and 2003.
Net sales during the quarter ended September 30, 2004 were $545,369, as
compared to $485,669 in the quarter ended September 30, 2003, an
increase of $59,700, or 12%. Increases in sales continue for the
Company as market share increases, and sales grow for the introduction
of Amerx's newest product, the Amerigel impregnated gauze. 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, 2004 was $412,418,
as compared to $377,713 during the quarter ended September 30, 2003, an
increase of $34,705, or 9%. As a percentage of net sales, gross profit
was 76% in the quarter ended September 30, 2004, as compared to 78% in
the corresponding quarter in 2003. Gross profit increased for the three
months based on increased sales, however as a percentage of net sales
gross profit decreased slightly due to initial cost of production in
bringing the new product to market.
Operating expenses during the quarter ended September 30, 2004, were
$305,024, consisting of $156,033 in salaries and benefits, and $148,991
in selling, general and administrative expenses. This compares to
operating expenses during the quarter ended September 30, 2003 of
$309,491, consisting of $144,659 in salaries and benefits, and $164,832
in selling, general and administrative expenses. Expenses for the
quarter ended September 30, 2004 slightly decreased compared to the
corresponding quarter in 2003. Salaries continue to grow based on
incentive based compensation, while the Company saw a reduction in
selling, general, and administrative expense over the quarter. This was
a result of expenses increasing at a slower rate than sales. The
Company hopes to continue this trend in fiscal 2005.
Operating profit increased by $39,172 (57%) from $68,222 for the
quarter ended September 30, 2004, as compared to the comparable quarter
in the prior year. Net Profit (before dividend requirements for
Preferred Shares) was $125,397 during the quarter ended September 30,
2004, as compared to $57,431 during the quarter ended September 30,
2003. The Company continues to improve its cash position and
profitability. The Company believes that significant increases in sales
has come from growth in the Amerx subsidiary as Amerx's products are
being stocked by new major medical physician distribution centers
through out the nation. The Amerigel Products overall acceptance has
grown steadily in the Podiatric Market. This has also made for a
favorable introduction of Amerx's newest product the Amerigel
impregnated gauze.
11
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 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 2005, 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
(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
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 9, 2004 By: /s/ John C. Anderson
---------------- --------------------------------
Date John C. Anderson,
President and
Chief Financial Officer
12