U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended September 30, 1997.
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Commission File Number 0-14942
PRO-DEX, INC.
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(Name of small business issuer in its charter)
Colorado 84-1261240
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(State or other jurisdiction of (I.R.S. Employer ID No.)
Incorporation or organization)
1401 Walnut St., Ste. 540, Boulder, Colorado 80302
(Address of principal executive offices)
Issuer's telephone number: (303) 443-6136
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of class)
The number of shares of the Registrant's no par value
common stock outstanding as of November 5, 1997, was 8,712,300.
DOCUMENTS INCORPORATED BY REFERENCE: None.
Table of Contents
PART I. Financial Information Page No.
Item 1.
Financial Statements
Consolidated Balance Sheets F-1 & F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flow F-4
Notes to Consolidated Financial Statements 7
Item 2.
Management Discussion and Analysis 8
SIGNATURES 11
EXHIBITS - NONE
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
1997 1997
(unaudited)
Current assets:
Cash and cash equivalents $ 487,734 $ 851,108
Accounts receivable, net 3,933,808 3,496,479
Inventories, net 4,136,732 4,236,069
Deferred taxes 475,000 475,000
Refundable income taxes 467,926 645,613
Prepaid expenses 440,592 186,987
Total current assets 9,941,792 9,891,256
Property and equipment 4,463,191 4,388,890
Less accumulated depreciation (1,868,264) (1,721,838)
Net property and equipment 2,594,927 2,667,052
Other assets:
Long-term trade receivables 1,079,957 1,079,957
Deferred taxes 505,000 505,000
Other 332,390 383,586
Intangibles, net 9,426,448 9,651,695
Total other assets 11,343,795 11,620,238
Total assets $ 23,880,514 $ 24,178,546
See "Notes to Consolidated Financial Statements." F-1
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES & SHAREHOLDERS' EQUITY
September 30, June 30,
1997 1997
(unaudited)
Current liabilities:
Current portion of long-term debt $ 1,212,884 $ 1,211,999
Accounts payable 831,261 797,071
Accrued expenses 1,023,460 973,705
Income taxes payable 198,807
Total current liabilities 3,266,412 2,982,775
Long-term debt, net of current portion 7,510,580 8,444,545
Total liabilities 10,776,992 11,427,320
Commitments and contingencies
Shareholders' equity:
Series A convertible preferred shares,
no par value; 10,000,000
shares authorized; 78,129 shares
issued and outstanding 282,990 282,990
Common shares, no par value;
50,000,000 shares authorized;
8,712,300 shares
issued and outstanding 14,632,444 14,632,445
Additional paid in capital 10,000 10,000
Accumulated deficit (1,762,799) (2,115,095)
13,162,635 12,810,340
Receivable from employee stock
ownership plan (ESOP) (59,113) (59,114)
Total shareholders' equity 13,103,522 12,751,226
Total liabilities and shareholders'
equity $ 23,880,514 $ 24,178,546
See "Notes to Consolidated Financial Statements." F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended September 30,
1997 1996
(unaudited) (unaudited)
Net sales $ 5,817,919 $ 4,432,125
Cost of sales 2,254,531 1,816,958
Gross profits 3,563,388 2,615,167
Operating expenses:
Selling 981,463 1,028,882
General and administrative 1,181,003 1,183,328
Research and development 352,095 194,235
Amortization 225,246 235,228
Total operating expenses 2,739,807 2,641,673
Income (loss) from operations 823,581 (26,506)
Other income (expense):
Interest expense (257,555) (258,822)
Other income (expense), net 2,077 14,176
Total (255,478) (244,646)
Income (loss) before income taxes
(credits) and (loss) from
discontinued operations 568,103 (271,152)
Income taxes (benefit) 215,812 (68,000)
Income (loss) before (loss)
from discontinued operations 352,291 (203,152)
(Loss) from discontinued operations
(net of tax benefit) (136,894)
Net income (loss) $ 352,291 $ (340,046)
Earnings (loss) per common and
common equivalent share:
Income (loss) from continuing
operations $ 0.04 $ (0.02)
(Loss) from discontinued operations (0.02)
Net income (loss) per share $ 0.04 $ (0.04)
Weighted average number
of common and common
equivalent shares outstanding 8,842,000 9,050,000
See "See Notes to Consolidated Financial Statements." F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter ended September 30,
1997 1996
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 352,291 $ (340,046)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 371,674 398,050
Provision for doubtful accounts (406) 44,251
Change in working capital components net of
effects from purchases and divestitures:
(Increase) decrease in accounts
receivable (436,922) 95,481
(Increase) decrease in inventories 99,337 (97,708)
(Increase) decrease in deferred taxes (114,000)
(Increase) in prepaid expenses
and refundable income taxes (75,918) (456,752)
(Increase) decrease in other assets 51,197 (162,983)
Increase (decrease) in accounts
payable and accrued expense 86,095 (165,115)
Increase in deferred revenue 9,531
Increase (decrease) in income
taxes payable 196,657 (547,007)
Net cash provided by (used in) operating
activities 644,005 (1,336,298)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (74,303) (41,517)
Net cash flows (used in) investing
activities (74,303) (41,517)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing on revolving credit agreements 100,898
Proceeds from long-term borrowing 1,220,362
Principal payments on long-term borrowing (933,080) (85,130)
Net cash flows provided by (used in)
financing activities (933,080) 1,236,130
(DECREASE) IN CASH AND CASH EQUIVALENTS (363,378) (141,685)
Cash and cash equivalents, beginning of
period 851,112 407,722
Cash and cash equivalents, end of period $ 487,734 $ 266,037
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest $ 257,555 $ 261,242
Cash payments for income taxes $ 5,175 $ 677,950
See "Notes to Consolidated Financial Statements." F-4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Quarter Ended September 30, 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instruction to Form 10-Q and Article 10 of regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the quarter ended September 30, 1997, are
not necessarily indicative of the results that may be expected
for the year ended June 30, 1998. For further information, refer
to the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year
ended June 30, 1997.
NOTE 2 - INCOME PER SHARE
Income per share is based on the weighted average number of
common shares outstanding during the period. Shares issuable
upon the conversion of preferred stock and stock warrants are not
included in the calculation if their inclusion would be anti-
dilutive.
NOTE 3 - RECLASSIFICATIONS
Certain items in the September 30, 1996 financial statement
have been reclassified to be comparable with the financial
statement classifications for the year ending September 30, 1997.
These classifications have no effect on shareholders' equity or
net income as of and for the quarter ending September 30, 1996.
NOTE 4 - DISCONTINUED OPERATIONS
On April 25, 1997, consistent with the decision of the Board
of Directors, the Company completed the rescission of its
previous acquisition of the assets of Pnu-Light Tool Works, Inc.
("Pnu-Light"). In accordance with the applicable unwind
provision, the 368,483 shares of the Company's common stock that
were originally issued as consideration for the acquisition were
returned to the Company. Losses sustained by Pnu-Light are
reported as discontinued operations for the quarter ended
September 30, 1996, and amounted to approximately $99,600 net of
related tax benefit of $33,000.
On June 11, 1997, the Company completed the sale of its
Dental Clinic Management ("DCM") operations of its California
subsidiary, Pro-Dex Management, Inc. In exchange for inventory
and equipment, the purchaser assumed approximately $670,000 of
the Company's liabilities. The Company retained ownership of the
existing net accounts receivable of $1,800,000 related to the DCM
operation. On September 10, 1997, the Company finalized the
arrangement for collection of the accounts receivable with the
purchaser. As consideration for the performance of continuing
service obligations on those accounts the Company has agreed to
the following. Proceeds from collection of the accounts
receivable shall be paid to the Company commencing September 30,
1997, in the amount of $50,000. Thereafter, the purchaser shall
pay to Pro-Dex $150,000 quarterly beginning on January 1, 1998,
until the 1.8 million dollar balance is paid in full. Losses
sustained by the DCM operation are reported as discontinued
operations for the quarter ended September 30, 1996, and amounted
to approximately $37,000 net of related tax benefit of $12,000.
Item 2. Management's Discussion and Analysis
Results of Operations
Forward Looking Statements. All forward looking statements
in the following discussion of management's analysis of results
of operation, liquidity and capital requirements, and the
possible effect of inflation, as well as elsewhere in the
Company's assumptions regarding factors such as (1) market
acceptance of the products of each subsidiary, including brand
and name recognition for quality and value in each of the
Company's subsidiaries' markets, (2) existence, scope,
defensibility and non-infringement of patents, trade-secrets and
other trade rights, (3) each subsidiary's relative success in
achieving and maintaining technical parity or superiority with
competitors, (4) interest rates for domestic and Eurofunds, (5)
the relative success of each subsidiary in attracting and
retaining technical and sales personnel with the requisite skills
to develop, manufacture and market the Company's products, (6)
the non-occurrence of general economic downturns or downturns in
any of the Company's market regions or industries ( such as
dental products and tools or computer chip manufacturers), (7)
the relative competitiveness of products manufactured by the
Company's facilities, including any contractors in the global
economy, (8) the non-occurrence of natural disasters, (9) a
stable regulatory environment in areas of significance to each of
the Company's subsidiaries, (10) the Company's success in
managing its regulatory relations and avoiding any adverse
determinations, (11) the availability of talented senior
executives for the parent and each of the subsidiaries, (12)
other factors affecting the sales and profitability of the
Company in each of its markets. Should any of the foregoing
assumptions or other assumptions not listed fail to be realized,
the forward-looking statements herein may be inaccurate. In
making forward looking statements in this and other Sections of
the Company's report on Form 10-QSB, the Company relies upon
recently promulgated policies of the Securities and Exchange
Commission and statutory provisions, including Section 21E of the
Securities Exchange Act of 1934, which provide a safe-harbor for
forward looking statements.
Results of Operations for the Quarter Ended September 30, 1997
Compared to Quarter Ended September 30, 1996
Net sales by subsidiary follows:
Increase/
1997 1996 (Decrease)
------------ ------------ ------------
Biotrol $ 1,988,863 $ 1,429,550 $ 559,313
Challenge 387,457 337,859 49,598
Micro Motors 2,262,066 1,866,459 395,607
Oregon Micro System 1,669,672 957,669 712,003
(Inter-company sales) (490,139) (159,412) (330,727)
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$ 5,817,919 $ 4,432,125 $ 1,385,794
============ ============ ============
Consolidated sales from continuing operations increased
31.2% for the quarter ended September 30, 1997, over the quarter
ended September 30, 1996. At Biotrol, sales for the quarter
increased 39.1%, primarily due to increases in sales of its
infection control products and preventative dental care products.
The increase in the sales force at Biotrol from 11 to 16
personnel, which was completed in the current quarter, provided
greater market penetration and revenue for its products. Sales
for the quarter at Challenge increased 14.7%, predominantly due
to an increase in intercompany sales of its preventative dental
products to Biotrol. At Micro Motors the increase in sales to
its private label and OEM dental customers by 28.1% contributed
to the overall increase in sales for the quarter of 17.5%, net of
intercompany sales. Micro began to market its branded hand-piece
line through the sales force at Biotrol on July 1, 1997.
Training of the Biotrol sales force on the branded hand-piece
began in the current quarter. Revenue at Oregon Micro Systems
grew by 74.3% for the quarter. Continued strength in the
semiconductor industry fueled the growth at OMS. The customer
base and increase in sales is broader based, but continues to be
heavily dependent on the semiconductor industry.
Gross profits by subsidiary follows:
Increase/
1997 1996 (Decrease)
----------- ----------- ---------
Biotrol $ 1,064,505 $ 780,874 $ 283,631
Challenge 160,457 155,043 5,414
Micro Motors 1,041,389 944,977 96,412
Oregon Micro Systems 1,297,037 734,273 562,764
----------- ----------- ---------
$ 3,563,388 $ 2,615,167 $ 948,221
=========== =========== =========
The Company's consolidated gross profit from continuing
operations for the quarter ended September 30, 1997, grew 36.3%
over the quarter ended September 30, 1996. Sales of higher
margin products at Biotrol and Oregon Micro Systems was largely
responsible for the rise. Production efficiencies at Micro and
Oregon Micro Systems also contributed to the increase. Gross
profit dollars increased primarily due to the increase in
revenue.
Operating expenses increased 3.7% from $2,641,673 for the
quarter ended September 30, 1996, to $2,739,807 for the quarter
ended September 30, 1997. Research and development expense rose
81% for the quarter ended September 30, 1997, to $352,095 from
$194,235 for the quarter ended September 30, 1996.
Operating income grew $850,087 from a (loss) of ($26,506)
for the quarter ended September 30, 1996, to income of $823,581
for the quarter ended September 30, 1997. Operating income as a
percent of sales grew from (0.6%) to 14.2% primarily due to the
increase in revenue and gross profit margin.
The Company's effective tax rate is 38% for the quarter
ended September 30, 1997, compared to 25% for the prior year's
quarter. During the prior year certain of the Company's losses
were not tax deductible.
Income (loss) from continuing operations increased $555,443
to $352,291, or $0.04 per share for the quarter ended September
30, 1997, from a loss of ($203,152), or ($0.02) per share for the
quarter ended September 30, 1996.
During fiscal year ended June 30, 1997, the Company disposed
of its Pnu-Light operations as well as its Dental Clinic
Management business. Losses sustained by these two businesses
are reported as discontinued operations for the quarter ended
September 30, 1996, and amounted to approximately $137,000,
($0.02) per share, net of related tax benefit of $46,000.
Liquidity and Capital Resources
As of September 30, 1997, the Company had liquid resources
consisting of cash and cash equivalents of $488,000 and credit
available on an existing credit line of $1,750,000. Management
believes that funds generated from operations along with funds
available under the credit line are sufficient to cover
anticipated operating needs as well as capital expenditure
requirements for the current year.
Accounting Changes
Effective for annual and interim periods ending after
December 15, 1997, the Financial Accounting Standards Board
(FASB) has issued Statement No. 128, "Earnings Per Share," which
supercedes APB Opinion No. 15. Statement No. 128 requires the
presentation of earnings per share by all entities that have
common stock or potential common stock, such as options, warrants
and convertible securities outstanding that trade in a public
market. Those entities that have only common stock outstanding
are required to present basic earnings per share amounts. Diluted
per share amounts assume the conversion, exercise or issuance of
all potential common stock instruments unless the effect is to
reduce a loss or increase the income per common share from
continuing operations. The adoption of Statement No. 128 would
have no effect on reported income (loss) per share for the
quarters ending September 30, 1997 and 1996, respectively.
The FASB has also issued Statement No. 131 "Disclosure about
Segments of an Enterprise and Related Information". Statement
No. 131 modifies the disclosure requirements for reportable
segments and is effective for the Company's year ending June 30,
1999. The Company has not determined the effect the adoption of
this Statement would have on the Company's reported segments.
Impact of Inflation and Changing Prices
The industries in which the Company competes are labor
intensive, often involving personnel with high level technical or
sales skills. Wages and other expenses increase during periods
of inflation and when shortages in the marketplace occur. The
Company expects its subsidiaries to face somewhat higher labor
costs, as the market for personnel with the skills sought by the
Company becomes tighter in a period of full employment. In
addition, suppliers pass along rising costs to the Company's
subsidiaries in the form of higher prices. Further, the
Company's credit facility with Harris Bank involves increased
costs if domestic interest rates rise or there are other adverse
changes in the international interest rates, exchange rates,
and/or Eurocredit availability. To some extent, the Company's
subsidiaries have been able to offset increases in operating
costs by increasing charges, expanding services and implementing
cost control measures. Nevertheless, each of the Company's
subsidiaries' ability to increase prices is limited by market
conditions, including international competition in many of the
Company's markets.
Other Matters
Presently the Company's information technology systems are
inadequate to handle year 2000 requirements. Management is
reviewing recommendations to upgrade the Company's and each
subsidiary's entire information technology system. Many of the
software applications at each subsidiary will be improved and
made to comply with the year 2000 requirements. The operating
plan for fiscal year ended June 30, 1998, includes the estimated
cost to accomplish the improvements to the Company's information
technology capabilities.
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: September 30, 1997 /s/ Kent E. Searl
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Kent E. Searl, Chairman
Date: September 30, 1997 /s/ George J. Isaac
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George J. Isaac, Chief Financial Officer