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 March 31, 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
(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 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 May 10, 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
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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...................................... 9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................ 10
SIGNATURES........................................................... 10
CERTIFICATIONS....................................................... 10
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 & JUNE 30, 2003
(unaudited) (audited)
March 31, June 30,
2004 2003
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ASSETS
CURRENT ASSETS
Cash $ 82,571 $ 41,549
Accounts Receivable, less allowances of $16,700 155,386 148,052
and $20,500 respectively
Prepaid Expenses 47,652 28,265
Inventories 83,219 96,522
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TOTAL CURRENT ASSETS 368,828 314,388
PROPERTY AND EQUIPMENT
Office Equipment 116,215 85,884
Furniture and Fixtures 20,337 15,164
Production Equipment 30,236 14,236
Leasehold Improvements 13,589 0
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180,377 115,284
Accumulated Depreciation (81,947) (66,155)
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TOTAL PROPERTY & EQUIPMENT 98,430 49,129
OTHER ASSETS
Certificates of deposit
plus accrued interest, restricted 17,114 17,114
Deposits 5,323 844
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TOTAL OTHER ASSETS 22,437 17,958
TOTAL ASSETS $ 489,695 $ 381,475
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LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Current portion of long-term note payable to stockholder 7,015 6,319
Current portion of long-term note payable 332 0
Current portion of capital lease obligations 9,384 8,202
Accounts Payable 154,276 208,111
Accrued Expenses 70,978 67,402
Note payable to stockholder 291,488 291,488
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TOTAL CURRENT LIABILITIES 533,473 581,522
Long Term Liabilities
Note payable to stockholder 4,567 9,920
Long term note payable 1,176 0
Capital lease obligations 3,877 10,931
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TOTAL LONG TERM LIABILITIES 9,620 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;
227,100 shares issued and outstanding 182,950 186,950
Common stock, no par value, 80,000,000 shares
authorized; 8,045,388 shares issued and
outstanding 4,388,676 4,384,676
Paid-in capital 6,000 6,000
Accumulated deficit (4,631,024) (4,798,524)
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TOTAL STOCKHOLDERS' DEFICIENCY (53,398) (220,898)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 489,695 $ 381,475
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The accompanying notes are an integral part of these financial statements
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PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2004 and 2003
Nine Months Ended March 31, 2004 and 2003
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
March 31, 2004 March 31, 2003 March 31, 2004 March 31, 2003
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net Sales $ 510,344 $ 392,679 $ 1,496,104 $ 1,212,427
Cost of Sales 101,492 88,534 329,193 263,131
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Gross Profit 408,852 304,145 1,166,911 949,296
Operating Expenses:
Salaries and Benefits 164,029 136,492 466,118 410,400
Selling, General and Administrative 170,858 162,245 511,750 481,346
----------- ----------- ----------- -----------
Total Operating Expenses 334,887 298,737 977,868 891,746
----------- ----------- ----------- -----------
Profit (loss) from Operations 73,965 5,408 189,043 57,550
Other Income (Expense):
Interest Expense (8,205) (9,915) (28,901) (28,966)
Interest Income 57 89 204 336
Other Income 569 0 7,155 50
----------- ----------- ----------- -----------
Total Other Income (expense) (7,579) (9,826) (21,542) (28,580)
----------- ----------- ----------- -----------
Income (loss) before income taxes 66,386 (4,418) 167,501 28,970
Income Tax Expnese
Before loss carryforwards 23,000 -- 58,000 5,900
Current benefit of loss carryforwards (23,000) -- (58,000) (5,900)
----------- ----------- ----------- -----------
Net Profit (loss) 66,386 (4,418) 167,501 28,970
Dividend requirements on preferred stock (3,428) (18,972) (14,233) (11,918)
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Net Profit (Loss) applicable to common stock $ 62,958 ($ 23,390) $ 153,268 $ 17,052
=========== =========== =========== ===========
Basic earnings per common share 0.01 (0.00) 0.02 0.00
Diluted earnings per common share 0.01 0.00 0.02 0.00
Weighted average number of
common shares outstanding 8,043,742 7,984,397 8,042,302 7,983,822
=========== =========== =========== ===========
Diluted weighted average number
of common shares outstanding 8,570,842 8,515,497 8,569,402 8,514,922
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
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PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2004 and 2003
Nine Months Nine Months
Ended Ended
March 31, March 31,
2004 2003
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(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Profit $ 167,501 $ 28,970
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 15,792 9,141
Allowance for doubtful accounts (3,800) 6,000
Common Stock issued for services 0 6,863
Decrease (increase) in:
Accounts Receivable (trade) (3,534) (61,867)
Inventories 13,303 (28,142)
Other Assets (4,479) 0
Prepaid Expenses (19,387) (543)
Increase (decrease) in:
Accounts Payable (53,836) 37,735
Excess of checks issued
over bank balance 0 (24,168)
Accrued Expenses (2,933) (3,951)
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Cash provided (used) in Operating Activities 108,627 (29,962)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property & Equipment (57,021) (497)
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Cash Used in Investing Activities (57,021) (497)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on Long Term Loan (55) 0
Payments on Long Term Loan - Related Party (4,657) (4,051)
Payments on Capital Lease Obligations (5,872) 0
Proceeds from Stockholder Loan 0 33,000
Proceeds from Issuance of Common Stock 0 36,900
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Cash provided (used) by financing activities (10,584) 65,849
Net Increase (decrease) in cash and cash equivalents 41,022 35,390
Cash and Cash Equivalents, beginning of period 41,549 0
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Cash and Cash Equivalents, end of period $ 82,571 $ 35,390
========= =========
SUPPLEMENTAL DISCLOSURES
Interest Paid $ 28,901 $ 28,966
Taxes Paid $ 0 $ 0
NONCASH TRANSACTION DISCLOSURE
Preferred Shares converted to Common Shares $ 4,000 $ 57,500
Financing of property & equipment through long term loan $ 1,563 $ 0
Financing of property & equipment through accrued expenses $ 6,509 $ 0
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, 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 March 31, 2004 and 2003.
NOTE B - INVENTORIES
Inventories consisted of the following:
March 31, June 30,
2004 2003
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Finished Goods $ 32,946 $ 32,262
Raw Materials $ 50,273 $ 64,260
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$ 83,219 $ 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 March 31, 2004,
no dividends have been declared. Dividends in arrears on the outstanding
preferred shares total $155,744 as of March 31, 2004. The preferred
stockholders have the right to convert each share of Series A Preferred
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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 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 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.
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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 March 31, 2004, the Company's principal sources of liquid assets
included cash of $82,571, inventories of $83,219, and net accounts
receivable of $155,386. The Company had negative working capital of
$164,645, and long-term debt of $9,620 at March 31, 2004.
During the nine months ended March 31, 2004, cash increased from $41,549 as
of June 30, 2003 to $82,571. Operating activities provided cash of $115,136
during the period, consisting primarily of net income of $167,501. Cash
used by financing activities was $9,021 as compared to cash provided by
financing activities of $65,849 for the corresponding period in 2003.
The Company has deferred tax assets with a 100% valuation allowance at
March 31, 2004. 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 nine months ended March 31, 2004 and 2003.
Net sales during the quarter ended March 31, 2004 were $510,344, as
compared to $392,679 in the quarter ended March 31, 2003, an increase of
$117,665, or 30%. Net sales during the nine months ended March 31, 2004
were $1,496,104, as compared to $1,212,427 in the nine months ended March
31, 2003, an increase of $283,677, or 23%. 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 March 31, 2004 was $408,852, as
compared to $304,145 during the quarter ended March 31, 2003, an increase
of $104,707, or 34%. Gross profit during the nine months ended March 31,
2004 was $1,166,911, as compared to $949,296 during the nine months ended
March 31, 2003, an increase of $217,615, or 23%. As a percentage of net
sales, gross profit was 80% in the quarter ended March 31, 2004, as
compared to 77% in the corresponding quarter in 2003. As a percentage of
net sales, gross profit was 78% in the nine months ended March 31, 2004, as
compared to 78% in the corresponding nine months in 2003. Gross profit
increased for the nine months based on increased sales, however as a
percentage of net sales gross profit remained consistent with the previous
period.
Operating expenses during the quarter ended March 31, 2004, were $334,887,
consisting of $164,029 in salaries and benefits, and $170,858 in selling,
general and administrative expenses. This compares to operating expenses
during the quarter ended March 31, 2003 of $298,737, consisting of $136,492
in salaries and benefits, and $162,245 in selling, general and
administrative expenses. Operating expenses during the nine months ended
March 31, 2004, were $977,868, consisting of $466,118 in salaries and
benefits, and $511,750 in selling, general and administrative expenses.
This compares to operating expenses during the nine months ended March 31,
2003 of $891,746, consisting of $410,400 in salaries and benefits, and
$481,346 in selling, general and administrative expenses. Expenses for the
quarter and nine months ended March 31, 2004 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
compensation for some employees through incentive based programs.
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Operating profit increased by $68,557 (1,268%) from $73,965 for the quarter
ended March 31, 2004, as compared to the comparable quarter in the prior
year. Net Profit (before dividend requirements for Preferred Shares) was
$66,386 during the quarter ended March 31, 2004, as compared to a net loss
of $4,418 during the quarter ended March 31, 2003. 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 $189,043
in the nine months ended March 31, 2004, as compared to an operating profit
of $57,550 in the corresponding nine months in 2003. Net Profit (before
dividend requirements for Preferred Shares) was $167,501 during the nine
months ended March 31, 2004, as compared to a net profit of $28,970 during
the nine months ended March 31, 2003, an increase of 478%. 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.
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 third 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
May 14, 2004 By: /s/ John C. Anderson
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Date John C. Anderson, President
and Chief Financial Officer
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