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 March 31, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Commission File Number 0-14942
PRO-DEX, INC.
(Name of small business issuer in its charter)
Colorado 84-1261240
(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
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 January 30, 1998, was
8,712,300.
DOCUMENTS INCORPORATED BY REFERENCE: None.
Table of Contents
Page No.
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets F-1 & F-2
Consolidated Statements of Income F-3 & F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements 8
Item 2. Management Discussion and Analysis
SIGNATURES 14
EXHIBITS NONE
Page 2 of 14 Pages
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, June 30,
1998 1997
(unaudited)
Current assets:
Cash and cash equivalents $ 294,991 $ 851,108
Accounts receivable, net 3,446,633 3,496,479
Inventories, net 4,411,680 4,236,069
Deferred taxes 475,000 475,000
Refundable income taxes 645,613
Prepaid expenses 389,972 186,987
Total current assets 9,018,276 9,891,256
Property and equipment 5,201,192 4,388,890
Less accumulated depreciation (2,210,238) (1,721,838)
Net property and equipment 2,990,954 2,667,052
Other assets:
Long-term trade receivables 1,252,988 1,079,957
Deferred taxes 505,000 505,000
Other 309,657 383,586
Intangibles, net 8,975,955 9,651,695
Total other assets 11,043,600 11,620,238
Total assets $23,052,830 $24,178,546
F-1
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES & SHAREHOLDERS' EQUITY
March 31, June 30,
1998 1997
(unaudited)
Current liabilities:
Current portion of long-term debt $ 1,299,932 $ 1,211,999
Accounts payable 779,903 797,071
Accrued expenses 829,821 973,705
Income taxes payable 358,411
Total current liabilities 3,268,067 2,982,775
Long-term debt, net of current portion 6,472,398 8,444,545
Total liabilities 9,740,465 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 (1,553,956) (2,115,095)
13,371,478 12,810,340
Receivable from employee stock
ownership plan (ESOP) (59,113) (59,114)
Total shareholders' equity 13,312,365 12,751,226
Total liabilities and
shareholders' equity $23,052,830 $24,178,546
F-2
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter ended March 31,
1998 1997
(unaudited) (unaudited)
Net sales (net of sales
from discontinued operations
of $0 and $507,172) $ 5,178,034 $ 4,397,093
Cost of sales 2,304,456 2,023,105
Gross profits 2,873,578 2,373,988
Operating expenses:
Selling 1,055,666 1,143,202
General and administrative 1,236,614 1,415,071
Research and development 330,586 205,367
Amortization 225,247 236,567
Total operating expenses 2,848,113 3,000,207
Income (loss) from operations 25,465 (626,219)
Other income (expense):
Interest expense (237,153) (354,920)
Other income, net 16,634 11,760
Total (220,519) (343,160)
(Loss) before income taxes(credits)
and loss from discontinued operations (195,054) (969,379)
Income taxes (credits) (68,269) (246,972)
(Loss) from discontinued operations (126,785) (722,407)
(Loss) from discontinued operations
(net of tax benefit) (489,557)
Net (loss) $ (126,785) $(1,211,964)
Basic and diluted earnings (loss) per
common and common equivalent share
(Loss) from continuing operations $ (0.01) $ (0.08)
(Loss) from discontinued operations 0.00 (0.05)
Net (loss) per share $ (0.01) $ (0.13)
Basic weighted average number of
common and common equivalent
shares outstanding 8,790,429 9,158,912
Diluted weighted average number of
common and common equivalent
shares outstanding 8,956,653 9,218,728
F-3
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months ended March 31,
1998 1997
(unaudited) (unaudited)
Net sales (net of sales from
discontinued operations
of $0 and $1,714,718) $17,325,401 $13,605,814
Cost of sales 7,186,464 5,769,020
Gross profits 10,138,937 7,836,794
Operating expenses:
Selling 3,266,181 3,151,024
General and administrative 3,587,102 3,791,093
Research and development 1,023,505 625,174
Amortization 675,739 693,649
Total operating expenses 8,552,527 8,260,940
Income (loss) from operations 1,586,410 (424,146)
Other income (expense):
Interest expense (733,431) (914,094)
Other income, net 36,420 38,987
Total (697,011) (875,107)
Income (loss) before income taxes
(credits) and loss from
discontinued operations 889,399 (1,299,253)
Income taxes (credits) 328,266 (345,872)
Income (loss) before (loss)
from discontinued operations 561,133 (953,381)
(Loss) from discontinued operations
(net of tax benefit) (767,119)
Net income (loss) $ 561,133 $(1,720,500)
Basic and diluted earnings (loss) per
common and common equivalent share:
Income (loss) from
continuing operations $ 0.06 $ (0.10)
(Loss) from discontinued
operations 0.00 (0.09)
Net income (loss) per share $ 0.06 $ (0.19)
Basic weighted average number
of common and common
equivalent shares outstanding 8,790,429 9,158,912
Diluted weighted average number
of common and common
equivalent shares outstanding 8,923,548 9,502,895
F-4
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended March 31,
1998 1997
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 561,133 $(1,720,501)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,159,774 1,258,078
Provision for doubtful accounts (1,499) 558,753
Change in working capital components
net of effects from purchases
and divestitures:
(Increase) decrease in
accounts receivable (121,685) 381,440
(Increase) in inventories (175,611) (204,081)
(Increase) in deferred taxes (621,117)
(Increase) decrease in prepaid
expenses and refundable
income taxes 442,628 (210,145)
(Increase) decrease in
other assets 73,930 (249,293)
(Decrease) in accounts payable
and accrued expense (111,751) (486,033)
Increase in deferred revenue 6,981
Increase (decrease) in
income taxes payable 309,111 (620,061)
Net cash provided by (used in)
operating activities 2,136,030 (1,905,979)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (807,937) (439,023)
Net cash flows (used in)
investing activities (807,937) (439,023)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing on revolving
credit agreements (1,100,242)
Proceeds from long-term borrowing 3,913,723
Principal payments on
long-term borrowing (1,884,214) (278,431)
Issuance of common stock 7,501
Net cash flows provided by
(used in) financing activities (1,884,214) 2,542,551
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (556,121) 197,549
Cash and cash equivalents,
beginning of period 851,112 407,722
Cash and cash equivalents,
end of period $ 294,991 $ 605,271
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest $ 733,431 $ 914,094
Cash payments for income taxes $ 5,688 $ 620,061
F-5
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Nine Months Ended March 31, 1998
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
nine months ended March 31, 1998, 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 - EARNINGS PER SHARE
Basic earnings per share are computed by dividing net
income available to common shareholders by the weighted-average
number of shares outstanding during the period. Fully diluted
earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the
period plus the incremental shares that would have been
outstanding assuming the exercise of dilutive stock options,
and the assumed conversion of preferred shares.
NOTE 3 - RECLASSIFICATIONS
Certain items in the March 31, 1997 financial statement
have been reclassified to be comparable with the financial
statement classifications for the nine months ending March 31,
1998. These classifications have no effect on shareholders'
equity or net income as of and for the nine months ending March
31, 1997.
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 nine
months ended March 31, 1997, and amounted to approximately
$210,300 net of related tax benefit of $90,100.
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 six months ended December 31, 1996, and amounted to
approximately $67,000 net of related tax benefit of $29,000.
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 March 31, 1998,
Compared to the Quarter Ended March 31, 1997.
Net sales by subsidiary follows:
Increase/
1998 1997 (Decrease)
Biotrol $1,683,867 $1,139,381 $ 544,486
Challenge 469,675 234,839 234,836
Micro Motors 2,006,636 1,790,366 216,270
Oregon Micro Systems 1,443,935 1,326,743 117,192
(Inter-company sales) (426,079) (94,236) (331,843)
$5,178,034 $4,397,093 $ 780,941
Sales from continuing operations increased 17.8% for the
quarter ended March 31, 1998 compared to the quarter ended March
31, 1997. At Biotrol, the increase in the sales force from 11 to
17 people contributed to the 47.8% rise in revenue for the
quarter. Revenue at Biotrol was negatively affected in the
quarter because of a significant buy-in of inventory in December
1997, by its major customers to enable them to qualify for year-
end purchase volume rebates. In addition, a merger of two of its
top three customers caused a slow down in orders from them until
consolidated inventory levels were reduced to acceptable post
merger quantities. At Challenge sales increased by 100% for the
quarter primarily due to an increase in intercompany sales to
Biotrol. Private label sales increased at Challenge by 50%.
Sales at Micro Motors increased by 12% over the same quarter from
the previous year. Significant management personnel changes
occurred at Micro Motors during the quarter. Effective January
12, 1998, a new general manager was hired to complete the
transition to a professionally managed operation at that
subsidiary. In addition, a new director of engineering and a
manufacturing manager were added to the new team in January.
Revenue at OMS increased by only 8.8% for the quarter ended March
31, 1998, compared to the quarter ended March 31, 1997. Weakness
in the semi-conductor industry specifically caused by the
financial problems in Asia was a major factor in the slowdown of
business at OMS.
Gross profits by subsidiary follows:
Increase/
1998 1997 (Decrease)
Biotrol $ 831,671 $ 574,602 $ 257,069
Challenge 161,764 99,046 62,718
Micro Motors 805,890 686,939 118,951
Oregon Micro Systems 1,074,253 1,013,401 60,852
$2,873,578 $2,373,988 $ 499,590
Overall gross profit dollars increased by 21% for the
quarter ended March 31, 1998, compared to the quarter ended March
31, 1997, due to increased revenue. Gross profit percentage for
the quarter ended March 31, 1998, was 55.5% compared to 54% for
the quarter ended March 31, 1997.
Operating expenses for the quarter ended March 31, 1998,
were $2,848,113 compared to $3,044,848 for the quarter ended
March 31, 1997. Included in operating expenses for the quarter
ended March 31, 1997, was a restructuring charge reducing the
Company's workforce by 13% of approximately $245,000. The
Company continued its commitment to developing new products.
Research and development expense increased 61% for the quarter
ended March 31, 1998 to $330,586 from $205,367 for the quarter
ended March 31, 1997. During the quarter, the Company began
implementation of its new information technology program. New
manufacturing and financial software will be installed at every
location, and new computer hardware has been acquired to support
the new software. The new technology will enhance communication
between all of the subsidiaries within the Company as well as
make all Company locations year 2000 compliant.
Income from operations for the quarter ended March 31, 1998,
was $25,465 compared to a loss of ($626,219) for the quarter
ended March 31, 1997. Higher sales volume and gross profit were
the main reason for the increase in income from operations.
Interest expense declined to $237,153 for the quarter ended
March 31, 1998, compared to $354,920 for the same quarter in the
previous year, a 33.2% decrease. Improved cash flow from
increased profits enabled the Company to reduce debt and interest
expense.
(Loss) from continuing operations for the quarter ended
March 31, 1998, decreased to ($126,785) from a (loss) of
($722,407) for the quarter ended March 31, 1997.
Losses from discontinued operations as a result of the
disposition in fiscal year ended June 30, 1997, of the Company's
Pnu-Light operation, and its dental clinic management business,
were ($489,557), net of tax benefit of ($177,400) for the quarter
ended March 31, 1997.
Results of Operations for the Nine Months Ended March 31, 1998,
Compared to the Nine Months Ended March 31, 1997.
Net sales by subsidiary follows:
Increase/
1998 1997 (Decrease)
Biotrol $ 6,099,550 $ 4,221,595 $1,877,955
Challenge 1,341,973 954,552 387,421
Micro Motors 6,389,480 5,699,433 690,047
Oregon Micro Systems 4,843,521 3,199,552 1,643,969
(Inter-company sales)(1,349,123) (469,318) (879,805)
$17,325,401 $13,605,814 $3,719,587
Consolidated sales from continuing operations increased
27.4% for the nine months ended March 31, 1998, compared to the
nine months ended March 31, 1997. At Biotrol, sales for the nine
months increased 44.5%. The increase in the sales force at
Biotrol from 11 to 17 personnel, which was completed in the
quarter ended September 30, 1997, provided greater market
penetration and revenue for its products. Sales for the nine
months at Challenge increased 40.6%. Inter-company sales of its
preventive dental products to Biotrol increased by 56.3% over
the same nine-month period a year ago. The remainder of the
increase is attributed to a 25.3% rise in sales to its private
label customers. At Micro Motors, the increase in sales to its
private label and OEM dental customers of 34.5% contributed to
the overall increase in sales for the nine months ended March 31,
1998. Micro began to market its branded hand-piece line through
the sales force at Biotrol on July 1, 1997. Revenue at Oregon
Micro Systems grew by 51.4% for the nine months ended March 31,
1998, compared to the nine months ended March 31, 1997. The rate
of growth at OMS slowed during the third quarter of the current
year as compared to the first two quarters due to the slowdown in
the semi-conductor industry fueled by the financial crisis in
Asia. Several customers of OMS rely heavily on business from
Asia. Consequently, they have delayed their purchasing plans
temporarily until demand for their products resume. OMS is
heavily dependent on the semiconductor industry for its revenue.
New technology scheduled to be introduced in the 4th quarter of
fiscal year end June 30, 1998, will enable OMS to compete in the
larger Systems Integration market.
Gross profits by subsidiary follows:
Increase/
1998 1997 (Decrease)
Biotrol $ 3,268,699 $ 2,266,442 $ 1,002,257
Challenge 504,169 400,454 103,715
Micro Motors 2,676,984 2,696,237 (19,253)
Oregon Micro Systems 3,689,085 2,473,660 1,215,425
$10,138,937 $ 7,836,793 $ 2,302,144
The Company's consolidated gross profit from continuing
operations for the nine months ended March 31, 1998, grew 29.4%
over the nine months ended March 31, 1997. Gross profit
percentage increased to 58.5% for the nine months ended March 31,
1998, from 57.6% for the nine months ended March 31, 1997. Sales
of higher margin products at Biotrol and Oregon Micro Systems was
largely responsible for the rise. Gross profit dollars increased
primarily due to the increase in revenue.
Operating expenses increased 3.5% from $8,260,940 for the
nine months ended March 31, 1997, to $8,552,527 for the nine
months ended March 31, 1998. As a percentage of revenue
operating expenses for the nine-month period ended March 31,
1998, was 49.4% compared to 60.7% for the same nine-month period
a year ago. Research and development expense rose 63.7% for the
nine months ended March 31, 1998, to $1,023,505 from $624,174 for
the nine months ended March 31, 1998. During the nine month
period ended March 31, 1997, the Company incurred restructuring
expenses mostly for severance costs due to employee terminations
totaling $475,000.
Operating income for the nine months ended March 31, 1998,
increased to $1,586,410 from a loss of ($424,146) for the nine
months ended March 31, 1997, mainly due to the increase in sales
and gross profit for the nine months.
Income (loss) from continuing operations increased
$1,514,514 to $561,133, or $0.06 per share for the nine months
ended March 31, 1998, from a loss of ($953,381), or ($0.10) per
share for the nine months ended March 31, 1997.
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 nine months ended
March 31, 1997, and amounted to $767,119 or, ($0.09) per share,
net of related tax benefit of $296,300.
Liquidity and Capital Resources
As of March 31, 1998, the Company had liquid resources
consisting of cash, cash equivalents, and credit available on an
existing credit line totaling $2,494,991. Cash flow continues to
be strong as earnings before interest, taxes, depreciation, and
amortization (EBITDA) for the nine months ended March 31, 1998,
were $2,747,837. 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. The Company has
purchased new computer hardware and software to enable it among
other things to conform to year 2000 requirements. In addition,
a new information technology position has been staffed to
facilitate the implementation of the new hardware and software,
and the Company will be year 2000 compliant during the fiscal
year ended June 30, 1999.
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: March 31, 1998 /s/ Kent E. Searl
-----------------------------------
Kent E. Searl, Chairman
Date: March 31, 1998 /s/ George J. Isaac
-----------------------------------
George J. Isaac,
Chief Financial Officer