U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 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.
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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
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(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
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(Title of class)
The number of shares of the Registrant's no par value common
stock outstanding as of November 12, 1998, was 8,787,300.
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 Operations F-3
Consolidated Statements of Cash Flow F-4
Notes to Consolidated Financial Statements F-5
Item 2.
Management Discussion and Analysis 8
SIGNATURES 12
EXHIBITS NONE
Page 2 of 12 Pages
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
1998 1998
(unaudited)
Current assets:
Accounts receivable, net of allowance
for doubtful accounts of $15,443
and $29,194 $ 2,804,349 $ 3,363,433
Inventories, net 4,637,979 4,451,802
Deferred taxes 480,000 480,000
Prepaid expenses 665,759 220,770
Total current assets 8,588,087 8,516,005
Property and equipment 5,471,198 5,196,935
Less accumulated depreciation (2,483,313) (2,331,113)
Net property and equipment 2,987,885 2,865,822
Other assets:
Long-term receivables,
net of allowance for doubtful
accounts of $50,000 939,317 1,847,076
Investment 900,000
Deferred taxes 440,000 440,000
Other 660,971 423,428
Intangibles, net 8,310,255 8,746,254
Total other assets 11,250,543 11,456,758
Total assets $ 22,826,515 $ 22,838,585
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES & SHAREHOLDERS' EQUITY
September 30, June 30,
1998 1998
(unaudited)
Current liabilities:
Current portion of long-term debt $ 1,492,882 $ 1,394,994
Accounts payable 1,059,108 1,013,576
Accrued expenses 1,245,436 1,149,307
Total current liabilities 3,797,426 3,557,877
Long-term debt, net of current portion 6,587,086 6,120,922
Total liabilities 10,384,512 9,678,799
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; 8,787,300 shares
issued and outstanding 14,837,694 14,837,695
Accumulated deficit (2,528,081 (1,810,649)
12,592,603 13,310,036
Receivable for stock purchase (150,600) (150,250)
Total shareholders' equity 12,442,003 13,159,786
Total liabilities and
shareholders' equity $ 22,826,515 $ 22,838,585
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended September 30,
1998 1997
(unaudited) (unaudited)
Net sales $ 4,570,770 $ 5,817,919
Cost of sales (Includes rent paid to a
director of $85,000 for 1998 and 1997) 2,072,511 2,254,531
Gross profits 2,498,259 3,563,388
Operating expenses:
Selling 1,101,285 981,463
General and administrative 1,016,099 1,181,003
Research and development 343,366 352,095
Amortization 195,837 225,246
Unusual charges 838,833
Total operating expenses 3,495,420 2,739,807
Income (loss) from operations (997,161) 823,581
Other income (expense):
Interest (expense) (211,674) (257,555)
Other income, net 13,757 2,077
Total (197,917) (255,478)
Income (loss) before
income taxes (credits) (1,195,078) 568,103
Income taxes (credits) (477,647) 215,812
Net income (loss) $ (717,431) $ 352,291
Basic and diluted net earnings (loss)
per common and common equivalent share: $ (0.08) $ 0.04
Weighted average number of common and
common equivalent shares outstanding 8,787,300 8,842,000
CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended September 30,
1998 1997
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (717,431) $ 352,291
Adjustments to reconcile net income
(loss)to net cash provided by
(used in) operating activities:
Depreciation and amortization 347,784 371,674
Provision for doubtful accounts (13,751) (406)
Change in working capital components
net of effects from purchases
and divestitures:
(Increase) decrease in accounts
receivable 580,244 (436,922)
(Increase) decrease in inventories (186,177) 99,337
(Increase) in prepaid expenses (444,989) (75,918)
Decrease in other assets 2,619 51,197
Increase in accounts payable and
accrued expense 619,692 86,095
Increase (decrease) in income
taxes payable (478,031) 196,657
Net cash provided by (used in)
operating activities (290,040) 644,005
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (274,010) (74,303)
Net cash flows (used in)
investing activities (274,010) (74,303)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowing 1,375,000 0
Principal payments on long-term borrowing (810,950) (933,080)
Net cash flows provided by (used in) 564,050 (933,080)
financing activities
(DECREASE) IN CASH AND CASH EQUIVALENTS 0 (363,378)
Cash and cash equivalents,
beginning of period 0 851,112
Cash and cash equivalents,
end of period $ 0 $ 487,734
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest $ 211,674 $ 257,555
Cash payments for income taxes $ 3,600 $ 5,175
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Quarter Ended September 30, 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 quarter ended September 30, 1998, are
not necessarily indicative of the results that may be expected
for the year ended June 30, 1999. 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, 1998.
NOTE 2 - EARNINGS PER SHARE
The Financial Accounting Standards Board has issued Statement
No. 128, "Earnings per Share" which supercedes APB Opinion No.
15. Statement No. 128 requires the presentation of basic and
diluted 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.
NOTE 3 - DISCONTINUED OPERATIONS
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. During 1998, the purchaser collected approximately
$650,000 of the $1.8 million of accounts receivable, but due to
financial difficulties was only able to remit $50,000 of the
amount collected to the Company. In September 1998, in
conjunction with a reorganization by the purchaser, and in
consideration for guaranteeing collection of the full net amount
of the accounts receivable, the Company agreed to restructure the
balance owed of $1,750,000 in exchange for the following: a five
year, 6% promissory note totaling $850,000, 5% convertible
preferred stock of the purchaser's entity valued at $900,000, and
warrants to acquire common stock in DCM's purchaser.
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, 1998
Compared to Quarter Ended September 30, 1997.
Net sales by subsidiary follows:
1998 1997 Increase/
(Decrease)
Biotrol $ 2,126,880 $ 1,988,863 $ 138,017
Challenge 633,911 387,457 246,454
Micro Motors 1,491,286 2,262,066 (770,780)
Oregon Micro Systems 851,804 1,669,672 (817,868)
(Inter-company sales) (533,111) (490,139) (42,972)
$ 4,570,770 $ 5,817,919 $(1,247,149)
Consolidated sales decreased 21.4% for the quarter ended
September 30, 1998, over the quarter ended September 30, 1997.
At Biotrol, sales for the quarter increased 6.9%, primarily due
to increases in sales of its infection control products and
preventive dental care products. The merger of two of Biotrol's
largest customers continues to hamper sales growth due to the
reduction of warehouse locations and corresponding significant
inventory consolidation. As the inventories of Biotrol products
continue to move out of the dealers' warehouses, orders should
increase in the future. Sales for the quarter at Challenge
increased 63.6%. Inter-company sales of its preventive dental
products to Biotrol increased 42.2% for the quarter ended
September 30, 1998 compared to the quarter ended September 30,
1997. Private label and OEM sales at Challenge increased 96.1%
to $301,696 for quarter ended September 30, 1998 compared to
$153,873 for quarter ended September 30, 1997. At Micro Motors
sales decreased by 34.1% for the quarter ended September 30, 1998
compared to the quarter ended September 30, 1997. Several of
Micro's key private label customers experienced a decline in
business during the quarter ended September 30, 1998. In
addition, two of Micro's largest OEM customers changed ownership
during the quarter causing a temporary disruption in business.
Micro has been developing a new line of controllers to improve
its marketing position in the endodontic and implant dental
segments. The new controller will also enable Micro to enter the
medical microsurgery market. Development of the product is due
to be completed in the second quarter of the current fiscal year.
Revenue at Oregon Micro Systems declined by 49% for the quarter
ended September 30, 1998 compared to the previous year's same
quarter. Revenue at OMS continues to be heavily dependent on the
semiconductor industry. Continued over capacity of memory
products and the Asian monetary crisis are the principle reasons
for the reduction in revenue at OMS.
Gross profits by subsidiary follows:
1998 1997 Increase/
(Decrease)
Biotrol $ 1,069,407 $ 1,064,505 $ 4,902
Challenge 264,353 160,457 103,896
Micro Motors 559,828 1,041,389 (481,561)
Oregon Micro Systems 604,671 1,297,037 (692,366)
$ 2,498,259 $ 3,563,388 $(1,065,129)
The Company's consolidated gross profit for the quarter ended
September 30, 1998, fell 29.9% from the quarter ended September
30, 1997 primarily due to the decrease in revenue. Gross profit
as a percentage of sales decreased to 54.7% for the quarter ended
September 30, 1998 compared to 61.2% for the quarter ended
September 30, 1997. The decline is attributed to lower revenue
without a corresponding decrease in fixed manufacturing overhead,
and a change in the sales mix to lower margin products.
Operating expenses without unusual charges decreased 0.3% to
$2,656,587 for the quarter ended September 30, 1998, from
$2,739,807 for the quarter ended September 30, 1997. The Company
spent approximately $75,000 during the current quarter on the
implementation of its information technology systems. Operating
expenses with unusual charges included increased to $3,495,420
for the quarter ended September 30, 1998 compared to $2,739,807
for the quarter ended September 30, 1997. The Company took an
unusual charge in the current quarter totaling $838,833.
Effective July 1, 1998, management determined that payments made
for consulting services and a non-compete arrangement to an
individual related to a prior acquisition by the Company have no
future value, and has taken a charge to earnings in the current
quarter in the amount of $313,496. In addition, the Company has
amended the duties of an executive under an existing employment
agreement. Management has determined that the value of the new
position will be less than the previous position, but will
continue to honor its obligation under the contract. The Company
is taking a charge for the excess in the current quarter in the
amount of $525,337.
Loss from operations was ($997,161) which included unusual
charges of $838,833 for the quarter ended September 30, 1998,
compared to income from operations of $823,581 for the quarter
ended September 30, 1997. Loss from operations was mainly
attributed to the decline in operating income at the Company's
OMS subsidiary. Operating income at OMS declined $680,351, or
87.7% for the quarter ended September 30, 1998, compared to the
quarter ended September 30, 1997. Continued slowness in the
semiconductor industry was the main factor contributing to the
decrease.
The Company's effective tax rate is 40% for the quarter ended
September 30, 1998, compared to 38% for the prior year's quarter.
The Company was able to utilize deferred tax assets in the prior
year to lower its tax rate.
Net loss for the quarter was ($717,431), or ($.08) per share,
compared to net income of $352,291, or $.04 per share for the
quarter ended September 30, 1997. Net loss for the quarter
included a net loss from unusual charges of ($.06) per share.
Liquidity and Capital Resources
As of September 30, 1998, the Company had liquid resources
consisting of credit available on an existing credit line of
$1,350,000. 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. Capital
expenditures for the Company's operations for the year ended June
30, 1999 are presently anticipated to be approximately $850,000.
In the fourth quarter of fiscal 1998, the Company entered into a
$1.2 million lease credit facility to partially finance these
expenditures.
Accounting Changes
In June 1996, the FASB issued SFAS No. 130 "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 130
requires that an enterprise report, by major components and as a
single total, the change in its net assets during the period from
non-owner sources; and SFAS No. 131 establishes annual and
interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services,
geographic areas and major customers. Adoption of these
Statements will not impact the Company's financial position,
results of operations or cash flows and any effect will be
limited to the form and content of its disclosures. Both
Statements are effective for fiscal years beginning after
December 15, 1997, with earlier application permitted.
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.
Year 2000 Compliance
Pro-Dex has developed a Corporate Information Technology
("IT") Strategic Plan specifically addressing Year 2000 ("Y2K")
compliance issues. Defined areas for Y2K compliance include IT
systems, facilities' systems, vendor and customer systems,
contractual agreements, legal, human resources, etc., throughout
the Company and its subsidiaries. In addition, the IT Strategic
Plan addresses the issue of due diligence with respect to Y2K
compliance within organizations under review for acquisition.
The Company has adopted the following six phase compliance
program. (1) The survey of all facility systems and equipment
that use computers or embedded microprocessors. This effort
includes reviewing equipment inventory, preventive maintenance
lists, and vendor service contracts. (2) Identification of
potential building systems or equipment compliance issues.
Equipment, service and inventory vendors have been asked for
compliance verification and testing procedures. (3) Investigate
the issues identified through reviews with site personnel and
vendors; identify potential impact; develop a strategy for
modification or replacement and develop cost estimates. (4)
Determine funding needs and develop strategy. (5) Implementation
by purchasing required hardware or software (new or upgrades) and
install/implement. (6) Validate by developing testing procedures
to confirm compliance of current and upgraded hardware, software,
and facilities' systems on an ongoing basis.
In accordance with the IT Strategic Plan, Phases 1 through 4
listed above have been completed. Phase 5 is in process with a
scheduled completion date of September 1999, in relation to
current upgraded or implemented systems to validate Y2K
compliance.
Full implementation is scheduled to be complete in Fiscal Year
2001. Subsidiaries not fully implemented by the compliance
completion date of September 1999 will have current systems
upgraded prior to that date. The IT staff, in conjunction with
the operations staff at each subsidiary, is in the process of
implementing compliant upgrades to all other internal systems to
include phone systems/voice mail, time clocks, burglar and fire
alarms systems, postal and fax machines, etc., for Y2K
compliance.
In accordance with the IT Strategic Plan, all outside systems
and suppliers have been directed to provide documentation
validating compliance in an effort to minimize liability with
respect to systems and suppliers. The Company is developing an
internal strategic outline to include locating alternative
sources of services and products if the current supplier is
unable to meet compliance. This includes but is not limited to
all outside suppliers of raw materials, payroll services, parts,
shipping companies, phone/alarm companies, utilities, among other
considerations.
The Company has estimated the cost of replacement of the aging
IT systems at all units with implementation of a new system to be
$1.7 million dollars, of which $700,000 has been expended to
date. It is anticipated that approximately $470,000 will be
spent on the complete replacement of software, including
upgrading all operating systems, application software, and
general office automation software. Approximately $335,000 has
been designated for the upgrade or replacement of hardware.
Approximately $100,000 dollars will be spent between now and the
year 2000 on facilities to meet Y2K compliance. The project is
being funded through the Company's operations. The Company has
not deferred other IT projects in favor of Y2K compliance.
The Company has made inquiry of vendors and customers in
respect to their general state of Y2K readiness. The Company has
learned, through such polling of vendors, customers and general
service providers, that a majority of those responding can not
provide validated assurances of Y2K compliance at this time. The
Company anticipates responses to its poll by this calendar year
end, at which time it will, to the extent possible, develop
contingency plans for any reported non-readiness. The Company,
as are all other businesses, is at risk of experiencing business
interruption due to the failure of general service providers, to
include but not be limited to, electric power, water, gas,
communications services rail services trucking lines and
governmental agencies to be prepared for the year 2000.
The nature of the foregoing discussion requires the use of
forward looking statements that involve assumptions, risks, and
uncertainties that could cause outcomes to be substantially
different from those projected.
Date: September 30, 1998 /s/ Kent E. Searl
_______________________________
Kent E. Searl, Chairman
Date: September 30, 1998 /s/ George J. Isaac
_______________________________
George J. Isaac, Chief Financial Officer
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,819,792
<ALLOWANCES> 15,443
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282,990
<COMMON> 14,782,694
<OTHER-SE> 55,000
<TOTAL-LIABILITY-AND-EQUITY> 22,826,515
<SALES> 4,570,770
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