SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] Quarterly Report Under Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For Quarterly Period Ended September 30, 2008
[ ] 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)
Indicate by check mark whether the registrant (1) has 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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check is a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common stock, no par value;
8,055,388 shares outstanding as of November 10, 2008.
PART I - FINANCIAL INFORMATION
Item Page
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ITEM 1. FINANCIAL STATEMENTS 3
Index to Financial Statements
-----------------------------
Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
ITEM 4. CONTROLS AND PROCEDURES 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS 18
SIGNATURES 18
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2008 and June 30, 2008
(unaudited) (audited)
September 30, June 30,
2008 2008
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 388,017 $ 278,878
Certificates of Deposit, and accrued interest 191,005 239,698
Accounts receivable, net of $2,500
allowance for doubtful accounts 153,717 171,494
Inventories 213,308 184,158
Prepaid expenses 160,102 173,490
Deferred tax asset 142,911 132,484
----------- -----------
TOTAL CURRENT ASSETS 1,249,060 1,180,202
PROPERTY AND EQUIPMENT, NET 554,286 555,229
OTHER ASSETS
Deposits 2,574 1,513
Deferred tax asset 929,709 942,738
----------- -----------
932,283 944,251
TOTAL ASSETS $ 2,735,629 $ 2,679,682
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 160,613 $ 105,314
Accrued Expenses 110,701 118,747
Current Portion of Mortgage Payable 23,206 22,790
----------- -----------
TOTAL CURRENT LIABILITIES 294,520 246,851
LONG-TERM LIABILITIES
Mortgage Payable 441,293 447,042
----------- -----------
TOTAL LONG TERM LIABILITIES 441,293 447,042
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; 199,100
shares issued and outstanding 154,950 154,950
Common stock, no par value, 80,000,000 shares
authorized; 8,052,388 shares issued and outstanding 4,416,676 4,416,676
Paid-in Capital 6,000 6,000
Accumulated deficit (2,577,810) (2,591,837)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,999,816 1,985,789
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,735,629 $ 2,679,682
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2008 and 2007
(unaudited) (unaudited)
Three Months Three Months
Ended Ended
Sep. 30, 2008 Sep. 30, 2007
------------- -------------
NET SALES $ 674,178 $ 595,240
COST OF SALES 161,013 146,215
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GROSS PROFIT 513,165 449,025
OPERATING EXPENSES
Salaries and Benefits 218,887 236,190
Selling, General and Administrative 272,693 205,993
----------- -----------
491,580 442,183
INCOME FROM OPERATIONS 21,585 6,842
OTHER INCOME (EXPENSE)
Interest Income 3,709 3,695
Interest Expense (8,662) (8,370)
----------- -----------
(4,953) (4,675)
INCOME BEFORE INCOME TAXES 16,632 2,167
INCOME TAX (EXPENSE) BENEFIT (2,603) 32,896
----------- -----------
NET INCOME 14,029 35,063
Dividend requirements on preferred stock (4,978) (5,098)
----------- -----------
Basic net income available to common shares $ 9,051 $ 29,965
=========== ===========
Basic net income per common share $ -- $ --
Weighted average number of common
shares outstanding 8,055,388 8,050,588
=========== ===========
Diluted net income per common share $ -- $ --
Weighted average number of common shares
outstanding, basic and diluted 8,420,491 8,442,824
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ending September 30, 2008 and 2007
(unaudited) (unaudited)
September 30, September 30,
2008 2007
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 14,029 $ 35,063
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation 8,967 8,966
Deferred Income Taxes 2,602 (32,896)
Accrued interest on Certificates of Deposit (1,332) --
Decrease (increase) in:
Accounts Receivable 17,387 60,761
Inventory (29,150) (52,736)
Prepaid Expenses 13,388 9,300
Other Assets (1,062) --
Increase (decrease) in:
Accounts Payable 55,299 35,362
Accrued Expenses (8,048) (26,055)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 72,080 37,765
CASH FLOW FROM INVESTING ACTIVITIES
Redemption of Certificate of Deposit 50,416 --
Purchase of property & equipment (8,024) --
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES 42,392 --
CASH FLOW FROM FINANCING ACTIVITIES
Payments on Mortgage Payable (5,333) (4,952)
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (5,333) (4,952)
NET CHANGE IN CASH 109,139 32,813
CASH AT BEGINNING OF PERIOD 278,878 422,876
--------- ---------
CASH AT END OF PERIOD $ 388,017 $ 455,689
========= =========
SUPPLEMENTAL DISCLOSURES
Interest Paid $ 8,671 $ 8,370
Taxes Paid $ -- $ --
The accompanying notes are an integral part of these financial statements.
5
Notes to Financial Statements
NOTE A - SUMMARY OF ACCOUNTING POLICIES
The interim financial statements included herein have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted as allowed by such
rules and regulations. The Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the Company's audited financial statements dated
June 30, 2008. The results for interim periods are not necessarily indicative of
results that may be expected for any other interim period or for the full year.
Management of the Company has prepared the accompanying unaudited condensed
financial statements prepared in conformity with generally accepted accounting
principles, which require the use of management estimates, contain all
adjustments (including normal recurring adjustments) necessary to present fairly
the operations and cash flows for the period presented and to make the financial
statements not misleading.
STOCK-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123R ("SFAS 123R"), "Share-Based Payment,"
which is a revision of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." SFAS 123R is effective for small
business publicly traded companies, for interim or annual periods beginning
after December 15, 2005. It supersedes Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and amends Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows." SFAS 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the statement of operations based upon their fair values and
rescinds the acceptance of pro forma disclosure. SFAS 123R permits two methods
of adoption, a "modified prospective" method and a "modified retrospective"
method. Under the modified prospective method, stock-based compensation cost is
recognized, beginning with the effective date, based on the requirements of SFAS
123R for all share-based payments granted after the effective date and for all
awards granted prior to the effective date that remain unvested on the effective
date. The modified retrospective method includes the requirements of the
modified prospective method and also permits restatement of prior periods based
on amounts previously reported in pro forma disclosures pursuant to SFAS 123 for
either all periods presented or for only prior interim periods of the year of
adoption. We adopted the modified prospective method prescribed in SFAS 123R,
effective January 1, 2006.
6
On September 30, 2008, there were outstanding options to purchase 300,000
shares of our common stock at exercise prices ranging from $0.16 to $0.21 per
share and expiration dates between December 2009 and November 2010. These
options were vested at the time of grant. During the quarter ended September 30,
2008, no options were granted. Therefore, the adoption of SFAS 123R does not
have an impact on our statement of operations for period ending September 30,
2008.
The fair value of a stock option is determined using the Black-Scholes
option-pricing model, which values options based on the stock price at the grant
date, the expected life of the option, the estimated volatility of the stock,
the expected dividend payments, and the risk-free interest rate over the life of
the option. There were no options granted during the quarters ended September
30, 2008 and 2007.
The Black-Scholes option valuation model was developed for estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. Because option valuation models require the use of subjective
assumptions, changes in these assumptions can materially affect the fair value
of the options. Our options do not have the characteristics of traded options,
therefore, the option valuation models do not necessarily provide a reliable
measure of the fair value of our options.
NOTE B - INVENTORIES
Inventories consisted of the following:
September 30, June 30,
2008 2008
-------- --------
Finished Goods $114,524 $109,561
Raw Materials $ 98,784 $ 74,597
-------- --------
$213,308 $184,158
======== ========
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, 2008, no dividends have been declared. Dividends in arrears on
the outstanding preferred shares total $226,439 as of September 30, 2008.
7
Holders of the Preferred Stock have the right to convert their shares of
Preferred Stock into an equal number of shares of Common Stock of the Company.
In addition, Preferred Stock holders have the right to vote the number of shares
into which their shares are convertible into Common Stock. Such preferred shares
will automatically convert into one share of Common Stock at the close of a
public offering of Common Stock by the Company provided the Company receives
gross proceeds of at least $1,000,000, and the initial offering price of the
Common Stock sold in such offering is equal to or in excess of $1 per share. The
Company is obligated to reserve an adequate number of shares of its common stock
to satisfy the conversion of all the outstanding Series A Preferred Stock. There
were no shares converted during the reporting period.
The Board of Directors of the Company approved a plan on December 8, 2007,
to repurchase shares of Procyon Corporation's outstanding common stock. The
repurchase plan authorizes management to repurchase up to 10% of the total
outstanding shares of common stock as of December 8, 2007, subject to applicable
SEC regulations and compliance with the Company's trading window policies. The
Board's authorization is based on its belief that Procyon's common stock is
underpriced at times given the Company's working capital, liquidity, assets,
book value and future prospects. The shares may be repurchased from time to time
in the open market, through block purchases or in privately negotiated
transactions depending upon market conditions and other factors, in accordance
with SEC Rule 10b-18. The plan stipulates timing, volume and pricing
restrictions among other things. Procyon has no commitment or obligation to
purchase all or any portion of the authorized shares. All shares purchased are
canceled and returned to the status of authorized but unissued common stock. The
plan does not have an expiration date. As of September 30, 2008, no shares of
common stock had been repurchased by the Company pursuant to its repurchase
plan.
NOTE D - INCOME TAXES AND AVAILABLE CARRYFORWARD
As of September 30, 2008, the Company had consolidated income tax net
operating loss ("NOL") carryforward for federal income tax purposes of
approximately $2,874,000. The federal NOL will expire in various years ending
through the year 2023.
The components of the provision for income taxes expense (benefits) are
attributable to continuing operations as follows:
9/30/08 9/30/07
-------- --------
Current
Federal $ -- $ --
State -- --
-------- --------
$ -- $ --
Deferred
Federal $ 2,223 $(28,088)
State 380 (4,808)
-------- --------
$ 2,603 $(32,896)
======== ========
8
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:
Current Non-Current
--------- -----------
Deferred tax assets:
Net operating loss & contribution carryforwards $ 141,970 $ 939,525
Allowance for doubtful accounts 941 --
--------- ---------
142,911 939,525
Deferred tax liability
Excess of tax over book depreciation -- (9,816)
--------- ---------
142,911 929,709
Net deferred tax asset $ 142,911 $ 929,709
========= =========
Management believes it is more likely than not it will realize the benefit
of the NOL carryforward, because of its continuing trend of earnings. Therefore,
a valuation allowance is not considered necessary.
Income taxes for the three months ended September 30, 2008 and 2007 differ
from the amounts computed by applying the effective income tax rates of 37.63%
and 37.63%, respectively, to income before income taxes as a result of the
following:
9/30/08 9/30/07
-------- --------
Expected provision (benefit) $ 5,599 $ 737
State income taxes net of federal benefits 598 78
Nondeductible expense 1,085 890
Change in estimates in available NOL carryforwards (4,679) 10,260
Change in valuation allowance -- (44,861)
-------- --------
Income tax expense / (benefit) $ 2,603 $(32,896)
======== ========
NOTE E - MORTGAGE PAYABLE
On July 21, 2006, we entered into a mortgage loan, guaranteed by our C.E.O.
Regina W. Anderson, for $508,000 with the Bank of America for the purchase of
our corporate office building. The mortgage loan is due in 15 years and interest
is fixed at 7.25%. Interest expense was $8,662 for the three months ended
September 30, 2008.
9
Maturities of long-term debt associated with the mortgage payable are as
follows:
Year Ending June 30,
---------------------------------------
9 months 2009 $ 17,246
2010 24,498
2011 26,335
2012 28,309
2013 30,431
2014 and thereafter 337,680
---------
464,499
Less current portion 23,206
---------
$ 441,293
=========
NOTE F - LINE OF CREDIT
The Company has a $250,000, due-on-demand line of credit with a financial
institution, collateralized by the Company's inventory of $213,308 and accounts
receivable assets of $153,717. The line of credit is renewable annually in
April. The C.E.O. of the Company personally guaranteed the line of credit to the
Company. At September 30, 2008, the Company owed $0 on the line of credit. The
line of credit extends terms of cash advances at a variable rate set equal to
the banks prime rate at the time of advance. The interest rate can fluctuate
according to the banks changes in its published prime rate.
NOTE G - RELATED PARTY TRANSACTIONS
Our Chief Executive Officer, Regina W. Anderson, guaranteed a loan for the
Company in the amount of $508,000, issued in connection with our purchase of our
office building in July 2006, as well as the $250,000 line of credit.
NOTE H - SEGMENT INFORMATION
The Company operates in the following two business segments:
1. Sale of skin and wound care products - Amerx operates in the skin and wound
care products segment. The marketing of these products is targeted
primarily to diabetic patients who have difficulties providing proper care
and treatment of wounds due to their diabetic condition and physicians who
recommend the products to their patients.
10
2. Sale of diabetic supplies - Sirius provides meters, test strips, monitors,
syringes, etc. primarily to diabetic patients. The Company is then
reimbursed by Medicare and/or patients' secondary insurance.
Each separately managed segment offers different products requiring different
marketing and distribution strategies. Segments information for the three months
ended September 30, 2008 and 2007 is as follows:
Wound Care Diabetic
Sep. 30, Products Products Other Consolidated
-------- -------- -------- ----- ------------
Revenues 2008 $596,237 $ 77,941 $ - $ 674,178
2007 525,060 70,180 - 595,240
Gross Profit 2008 481,671 31,494 - 513,165
2007 419,721 29,304 - 449,025
Identifiable Assets 2008 714,270 180,444 1,840,915 2,735,629
2007 571,458 163,597 1,206,755 1,941,810
Property and Equipment
Additions 2008 - - 8,025 8,025
2007 - - - -
Depreciation 2008 2,362 121 6,484 8,967
2007 2,452 136 6,378 8,966
Geographical Information
The Company operates and sells its products to its customers primarily within
the United States. All assets are located within the United States.
NOTE I - RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, "Fair Value Measurements," which defines fair value, establishes a
framework in generally accepted accounting principles for measuring fair value
and expands disclosures about fair value measurements. This standard only
applies when other standards require or permit the fair value measurement of
assets and liabilities. It does not increase the use of fair value measurement.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
except as it relates to nonrecurring fair value measurements of nonfinancial
assets and liabilities for which the standard is effective for fiscal years
beginning after November 15, 2008. The Company is evaluating the impact on its
consolidated financial statements as a result of the adoption of SFAS No. 157
with respect to financial assets and liabilities.
11
In February 2007, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115." This
standard permits entities to choose to measure eligible items at fair value at
specified election dates and report unrealized gains and losses on items, for
which the fair value option has been elected, in earnings at each subsequent
reporting date. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. The Company is evaluating the impact on its consolidated
financial statements as a result of the adoption of SFAS No. 159.
In May 2008, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 162, "The Hierarchy of
Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 is intended to
improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial statements
that are presented in conformity with generally accepted accounting principles
in the United States for non-governmental entities. SFAS 162 is effective 60
days following approval by the U.S. Securities and Exchange Commission ("SEC")
of the Public Company Accounting Oversight Board's amendments to AU Section 411,
"The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles." The Company does not expect SFAS 162 to have a material impact on
the preparation of its financial statements.
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-Q, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements. When used in this report, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend," "hope," "believe" and
similar expressions, variations of these words or the negative of those words,
and, any statement regarding possible or assumed future results of operations of
the Company's business, the markets for its products, anticipated expenditures,
regulatory developments or competition, or other statements regarding matters
that are not historical facts, are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 regarding events, conditions
and financial trends including, without limitation, business conditions in the
skin and wound care market, diabetic market and the general economy, competitive
factors, changes in product mix, production delays, manufacturing capabilities,
and other risks or uncertainties detailed in other of the Company's Securities
and Exchange Commission filings. Such statements are based on management's
current expectations and are subject to risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, the Company's actual plan of operations,
business strategy, operating results and financial position could differ
materially from those expressed in, or implied by, such forward-looking
statements.
12
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's condensed financial statements have been prepared in
accordance with standards of the Public Company Accounting Oversight Board
(United States), 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-K, for the year ended June 30, 2008, which was
filed with the Securities and Exchange Commission on September 9, 2008. 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. We believe that the following critical accounting policies
affect the more significant judgments and estimates used in the preparation of
our financial statements.
Accounts Receivable Allowance
Accounts receivable allowance reflects a reserve that reduces our customer
accounts receivable to the net amount estimated to be collectible. 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. At September 30, 2008, our allowance for doubtful accounts
totaled $2,500.
Advertising and Marketing
The Company uses several forms of advertising, including sponsorships to
agencies who represent the professionals in their respective fields. The Company
expenses these sponsorships over the term of the advertising arrangements, on a
straight line basis. Other forms of advertising used by the Company include
professional journal advertisements and mailing campaigns. These forms of
advertising are expensed when incurred.
Deferred Income Taxes
Deferred income taxes are recognized for the expected tax consequences in
future years for differences between the tax bases of assets and liabilities and
their financial reporting amounts, based upon exacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. The Company accounts for income taxes under Statement of
13
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). A valuation allowance is used to reduce deferred tax assets to the net
amount expected to be recovered in future periods. The estimates for deferred
tax assets and the corresponding valuation allowance require us to exercise
complex judgments. We periodically review and adjust those estimates based upon
the most current information available. We did not have a valuation allowance as
of September 30, 2008. Because the recoverability of deferred tax assets is
directly dependent upon future operating results, actual recoverability of
deferred tax assets may differ materially from our estimates.
Revenue Recognition
The Company recognizes revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104, "Revenue Recognition, corrected
copy" which requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the seller's price to the buyer is
fixed or determinable; and, (4) collectibility is reasonably assured.
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 are subject to review by government regulators. Medicare
reimburses at 80% of the government-determined reimbursement prices and the
Company bills the remaining balance to either third-party payers, such as
insurance companies, or directly to the customers.
Stock Based Compensation
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123R ("SFAS 123R"), "Share-Based Payment,"
which is a revision of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." SFAS 123R is effective for small
business publicly traded companies, for interim or annual periods beginning
after December 15, 2005. It supersedes Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and amends Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows." SFAS 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the statement of operations based upon their fair values and
rescinds the acceptance of pro forma disclosure. SFAS 123R permits two methods
of adoption, a "modified prospective" method and a "modified retrospective"
method. Under the modified prospective method, stock-based compensation cost is
14
recognized, beginning with the effective date, based on the requirements of SFAS
123R for all share-based payments granted after the effective date and for all
awards granted prior to the effective date that remain unvested on the effective
date. The modified retrospective method includes the requirements of the
modified prospective method and also permits restatement of prior periods based
on amounts previously reported in pro forma disclosures pursuant to SFAS 123 for
either all periods presented or for only prior interim periods of the year of
adoption. We adopted the modified prospective method prescribed in SFAS 123R,
effective January 1, 2006.
FINANCIAL CONDITION
As of September 30, 2008, the Company's principal sources of liquid assets
included cash of $388,017, inventories of $213,308, and net accounts receivable
of $153,717. The company also invested $191,005 in short term Certificates of
Deposit, to take advantage of higher interest rates relative to money market
rates. The Company had net working capital of $954,540, and long-term debt of
$441,293 at September 30, 2008.
During the three months ended September 30, 2008, cash increased from
$278,878 as of June 30, 2008, to $388,017. Operating activities provided cash of
$72,080 during the period, consisting primarily of an increase in accounts
payable of $55,299. Cash used by financing activities was $5,333 as compared to
cash used by financing activities of $4,952 for the corresponding period in
2007.
The Company recorded a current deferred tax asset of $142,911, and
non-current deferred tax asset of $929,709, at September 30, 2008. Because the
recoverability of deferred tax assets is directly dependent upon future
operating results, actual recoverability of deferred tax assets may differ
materially from our estimates.
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 2008 and 2007.
Net sales during the quarter ended September 30, 2008, were $674,178, as
compared to $595,240 in the quarter ended September 30, 2007, an increase of
$78,938, or approximately 13%. Sales from our Sirius subsidiary increased
slightly when compared to previous quarter, mainly due to a focus on customer
retention.
Gross profit during the quarter ended September 30, 2008 was $513,165, as
compared to $449,025 during the quarter ended September 30, 2007, an increase of
$64,140, or approximately 14%. As a percentage of net sales, gross profit was
approximately 76% in the quarter ended September 30, 2008, and approximately 75%
in the corresponding quarter in 2007.
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Operating expenses during the quarter ended September 30, 2008, were
$491,580, consisting of $218,887 in salaries and benefits, and $272,693 in
selling, general and administrative expenses. This compares to operating
expenses during the quarter ended September 30, 2007, of $442,183, consisting of
$236,190 in salaries and benefits, and $205,993 in selling, general and
administrative expenses. Expenses for the quarter ended September 30, 2008,
increased by $49,397, or approximately 11% compared to the corresponding quarter
in 2007. Decreases in the salaries and benefits for the current three month
period was due to a decrease in staffing. Selling, general and administrative
cost increased for the three months ended September 30, 2008, compared to the
three months ended September 30, 2007, increasing by $66,700. Approximately
$50,000 of this increase came from the consulting fees associated with
conducting our management's annual report on our internal controls over
financial reporting.
Operating profit increased by $14,743 (approximately 215%) to $21,585 for
the quarter ended September 30, 2008, as compared to $6,842 in the comparable
quarter of the prior year. Net income (before dividend requirements for
Preferred Shares) was $14,029 during the quarter ended September 30, 2008, as
compared to $35,063 during the quarter ended September 30, 2007, a decrease of
60%. The decrease in net income was primarily attributable to the income tax
expense as compared to an income tax benefit of the previous period. Amerx
continues efforts to increase market share for its products. Sirius continues
efforts to penetrate the aging diabetic market. We also believe that sales will
continue to increase as the Company finds new markets for both its products and
services.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Management of the Company, with the participation of the Chief Executive
Officer and 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 and Chief Financial Officer, has concluded that, as of the
end of the period covered by this report, the Company's disclosure controls and
procedures were effective in reaching a reasonable level of assurance that: (a)
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 (b)
information was 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
As previously reported, our annual assessment of the internal controls over
financial reporting revealed several areas that we consider to be material
weaknesses: (1) inadequate segregation of duties consistent with control
objectives; (2) insufficient written policies and procedures for accounting and
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financial reporting with respect to the requirements and application of GAAP and
SEC disclosure requirements; (3) inadequate internal and external control over
the calculation of deferred tax assets and liabilities and requisite knowledge
to properly compute the deferred tax assets and liabilities; (4) ineffective
controls over period end financial disclosure and reporting processes and (5)
insufficient board and audit committee composition to provide oversight of the
financial statement process.
During the first fiscal quarter of 2009, the Company continues to address
changes needed to improve board oversight of the financial statement process. We
have instituted some changes in segregation of duties as current staffing allows
for.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting for fiscal 2008 on Friday, October 24, 2008, at
5:00 p.m. EST. The following matters were considered and approved by the
shareholders:
A. The following eight directors were elected to hold office for one-year
terms or until their successors are elected and qualified:
Votes
Votes Against Total
For or Withheld Voted
--- ----------- -----
Regina W. Anderson 4,993,698 86,012 5,079,710
Alan B. Crane 4,993,698 86,012 5,079,710
Jeffrey S. Slowgrove 4,983,698 96,012 5,079,710
Fred W. Suggs 4,983,698 96,012 5,079,710
Chester A. Wallack 4,983,698 96,012 5,079,710
James B. Anderson 4,993,698 86,012 5,079,710
Justice W. Anderson 4,993,698 86,012 5,079,710
Michael T. Foley 4,993,698 86,012 5,079,710
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B. To ratify appointment of Ferlita, Walsh & Gonzalez, P.A. as our independent
certified public accountants for the 2008 fiscal year.
Votes For: 4,993,798
Votes Against: 1,000
Votes Abstaining: 84,912
=========
Total Voted 5,079,710
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(A) EXHIBITS
31.1 Certification of Regina W. Anderson pursuant to Exchange Act Rule
13a-14(a)/15d-14(a)
31.2 Certification of James B. Anderson pursuant to Exchange Act Rule
13a-14(a)/15d-14(a)
32.1 Certification Pursuant to 18 U.S.C.ss.1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act Of 2002
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, there unto duly
authorized.
PROCYON CORPORATION
November 14, 2008 By: /s/ REGINA W. ANDERSON
----------------- --------------------------
Date Regina W. Anderson, Chief Executive
Officer
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