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 December 31, 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.
(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 9
SIGNATURES 14
EXHIBITS NONE
Page 2 of 14 Pages
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
1997 1997
(unaudited)
Current assets:
Cash and cash equivalents $ 76,592 $ 51,108
Accounts receivable, net 4,270,545 3,496,479
Inventories, net 4,022,400 4,236,069
Deferred taxes 475,000 475,000
Refundable income taxes 645,613
Prepaid expenses 470,300 186,987
Total current assets 9,314,837 9,891,256
Property and equipment 4,763,415 4,388,890
Less accumulated depreciation (2,025,091) (1,721,838)
Net property and equipment 2,738,324 2,667,052
Other assets:
Long-term trade receivables 1,258,699 1,079,957
Deferred taxes 505,000 505,000
Other 322,824 383,586
Intangibles, net 9,201,202 9,651,695
Total other assets 11,287,725 11,620,238
Total assets $23,340,886 $24,178,546
See "Notes to consolidated financial statements." F-1
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES & SHAREHOLDERS' EQUITY
December 31, June 30,
1997 1997
(unaudited)
Current liabilities:
Current portion of long-term debt $ 1,221,230 $ 1,211,999
Accounts payable 819,506 797,071
Accrued expenses 921,024 973,705
Income taxes payable 426,680
Total current liabilities 3,388,440 2,982,775
Long-term debt, net of current portion 6,513,296 8,444,545
Total liabilities 9,901,736 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 (1,427,171) (2,115,095)
13,498,263 12,810,340
Receivable from employee stock
ownership plan (ESOP) (59,113) (59,114)
Total shareholders' equity 13,439,150 12,751,226
Total liabilities
and shareholders' equity $23,340,886 $24,178,546
See "Notes to consolidated financial statements." F-2
CONSOLIDATED STATEMENTS OF INCOME
Quarter ended December 31,
1997 1996
(unaudited) (unaudited)
Net sales (net of sales from
discontinued operations
of $0 and $517,514) $ 6,329,448 $ 4,776,596
Cost of sales 2,627,477 1,941,397
Gross profits 3,701,971 2,835,199
Operating expenses:
Selling 1,229,052 978,940
General and administrative 1,169,485 1,180,253
Research and development 340,824 225,572
Amortization 225,246 215,692
Total operating expenses 2,964,607 2,600,457
Income from operations 737,364 234,742
Other income (expense):
Interest expense (238,723) (306,515)
Other income (expense), net 17,709 13,050
Total (221,014) (293,465)
Income (loss) before income taxes
(credits) and loss from
discontinued operations 516,350 (58,723)
Income taxes (benefits) 180,723 (30,900)
Income (loss) before (loss) from
discontinued operations 335,627 (27,823)
(Loss) from discontinued operations
(net of tax benefit) (140,664)
Net income (loss) $ 335,627 $ (168,487)
Basic and diluted earnings (loss) per share:
Income (loss) from
continuing operations $ 0.04 $ (0.00)
(Loss) from discontinued operations (0.02)
Net income (loss) per share $ 0.04 $ (0.02)
Weighted average number of common and
common equivalent shares outstanding 9,001,646 9,080,783
See "Notes to consolidated financial statements." F-3
CONSOLIDATED STATEMENTS OF INCOME
Six months ended December 31,
1997 1996
(unaudited) (unaudited)
Net sales (net of sales from
discontinued operations
of $0 and $1,111,777) $12,147,367 $ 9,208,722
Cost of sales 4,882,008 3,745,913
Gross profits 7,265,359 5,462,809
Operating expenses:
Selling 2,210,515 2,007,822
General and administrative 2,350,488 2,376,020
Research and development 692,919 419,807
Amortization 450,492 457,082
Total operating expenses 5,704,414 5,260,731
Income from operations 1,560,945 202,078
Other income (expense):
Interest expense (496,278) (559,174)
Other income (expense), net 19,786 27,227
Total (476,492) (531,947)
Income (loss) before income
taxes (credits) and loss from
discontinued operations 1,084,453 (329,869)
Income taxes (credits) 396,535 (98,900)
Income (loss) before (loss)
from discontinued operations 687,918 (230,969)
(Loss) from discontinued
operations (net of tax benefit) (277,564)
Net income (loss) $ 687,918 $ (508,533)
Basic and diluted earnings (loss) per share:
Income (loss) from
continuing operations $ 0.08 $ (0.03)
(Loss) from discontinued operations (0.03)
Net income (loss) per share $ 0.08 $ (0.06)
Weighted average number of common and
common equivalent shares outstanding 9,001,646 9,080,783
See "Notes to consolidated financial statements." F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended December 31,
1997 1996
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 687,918 (508,533)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 753,296 809,392
Provision for doubtful accounts (39,209) 69,480
Change in working capital components
net of effects from purchases
and divestitures:
(Increase) in accounts receivable (913,598) (197,156)
(Increase) decrease in inventories 213,669 (354,158)
(Increase) in deferred taxes (217,800)
(Increase) decrease in prepaid
expenses and refundable
income taxes 362,300 (343,268)
(Increase) decrease in
other assets 60,763 (260,161)
Increase (decrease) in accounts
payable and accrued expense 19,055 (154,426)
Increase in deferred revenue 3,336
Increase (decrease) in
income taxes payable 377,380 (568,602)
Net cash provided by
(used in) operating activities 1,521,574 (1,721,896)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (374,076) (348,923)
Net cash flows (used in)
investing activities (374,076) (348,923)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing on revolving
credit agreements 89,597
Proceeds from long-term borrowing 2,120,362
Principal payments on
long-term borrowing (1,922,018) (186,849)
Issuance of common stock 7,501
Net cash flows provided by
(used in) financing activities (1,922,018) 2,030,611
(DECREASE) IN CASH AND CASH EQUIVALENTS (774,520) (40,208)
Cash and cash equivalents, 851,112 407,722
beginning of period
Cash and cash equivalents, end of period 76,592 367,514
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest 496,278 559,174
Cash payments for income taxes 5,175 699,545
See "Notes to consolidated financial statements." F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Six Months Ended December 31, 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 six months ended
December 31, 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 - 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 December 31, 1996 financial
statement have been reclassified to be comparable with the
financial statement classifications for the six months
ending December 31, 1997. These classifications have no
effect on shareholders' equity or net income as of and for
the six months ending December 31, 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 six months ended December
31, 1996, 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 December 31,
1997 Compared to the Quarter Ended December 31, 1996.
-----------------------------------------------------
Net sales by subsidiary follows:
Increase/
1997 1996 (Decrease)
----------- ----------- -----------
Biotrol $2,426,820 $1,652,664 $ 774,156
Challenge 484,841 381,854 102,987
Micro Motors 2,120,778 2,042,608 78,170
Oregon Micro Systems 1,729,914 915,140 814,774
(Inter-company sales) (432,905) (215,670) (217,235)
----------- ----------- -----------
$6,329,448 $4,776,596 $1,552,852
Sales from continuing operations increased 32.5% for
the quarter ended December 31, 1997 compared to the quarter
ended December 31, 1996. At Biotrol, the increase in the
sales force from 11 to 16 people contributed to the rise in
revenue of both infection control products and the
preventive dental care product line. At Challenge sales
increased by 27% for the quarter, primarily due to
additional sales to its private label customers. Sales at
Micro Motors were flat for the quarter. 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 89% for the quarter ended December 31,
1997, compared to the quarter ended December 31, 1996.
Continued strong growth in the semiconductor industry
provided the substantial rise in business. OMS continues to
add new customers because of its increased sales and
marketing efforts.
Gross profits by subsidiary follows:
Increase/
1997 1996 (Decrease)
---------- ---------- -----------
Biotrol $1,372,523 $ 910,966 $ 461,557
Challenge 175,162 133,926 41,236
Micro Motors 836,491 1,064,321 (227,830)
Oregon Micro Systems 1,317,795 725,986 591,809
---------- ---------- -----------
$3,701,971 $2,835,199 $ 866,772
Overall gross profit dollars increased by 30.6% for the
quarter ended December 31, 1997, compared to the quarter
ended December 31, 1996, due to increased revenue. More
sales of lower margin products and negative inventory
adjustments made during the quarter caused the decline in
gross profit at Micro Motors. Gross profit percentage for
the quarter ended December 31, 1997, was 58.5% compared to
59.4% for the quarter ended December 31, 1996.
Operating expenses for the quarter ended December 31,
1997, were $2,964,607 (46.8% of net sales) compared to
$2,600,457 (54.4% of net sales) for the quarter ended
December 31, 1996. Selling and marketing expenses were
higher for the quarter because of higher year-end sales
rebates paid to customers who purchased more than forecasted
orders. Selling and marketing expenses as a percentage of
sales declined to 19.4% for the quarter ended December 31,
1997, compared to 20.5% for the quarter ended December 31,
1996, due to higher sales volume. General and
administrative expense for the quarter ended December 31,
1997, included a one-time search fee of $50,000 incurred to
find a new general manager for Micro Motors. As previously
mentioned, the search was successful, and a new general
manager along with new engineering and manufacturing
management personnel were hired in January, 1998, for that
operation. Research and development expense increased to
$340,824 for the quarter ended December 31, 1997, compared
to $225,572 for the quarter ended December 31, 1996, a 51.1%
increase.
Income from operations for the quarter ended December
31, 1997, was $737,364 compared to $234,742 for the quarter
ended December 31, 1996, a 214.2% increase. Higher sales
volume and gross profit were the main reason for the
increase in income from operations.
Interest expense declined for the quarter as improved
cash flow from increased profits enabled the Company to
reduce debt and interest expense.
Income from continued operations for the quarter ended
December 31, 1997 increased to $335,627 from a (loss) of
($27,823) for the quarter ended December 31, 1996.
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 ($140,664), net of tax benefit of
($60,250) for the quarter ended December 31, 1996.
Results of Operations for the Six Months Ended December 31,
1997 Compared to the Six Months Ended December 31, 1996.
--------------------------------------------------------
Net sales by subsidiary follows:
Increase/
1997 1996 (Decrease)
------------ ----------- -------------
Biotrol $ 4,415,683 $ 3,082,214 $ 1,333,469
Challenge 872,298 719,713 152,585
Micro Motors 4,382,844 3,909,067 473,777
Oregon Micro Systems 3,399,586 1,872,809 1,526,777
(Inter-company sales) (923,044) (375,081) (547,963)
------------ ------------ ------------
$12,147,367 $ 9,208,722 $ 2,938,645
Consolidated sales from continuing operations increased
31.9% for the six months ended December 31, 1997, compared
to the six months ended December 31, 1996. At Biotrol,
sales for the six months increased 43.3%, 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 quarter ended September 30, 1997, provided
greater market penetration and revenue for its products.
Sales for the six months at Challenge increased 21.2%. An
increase in inter-company sales of its preventative dental
products to Biotrol comprised 66% of the sales increase for
the six months. The remainder of the increase is attributed
to a 34% rise in sales to its private label customers. At
Micro Motors the increase in sales to its private label and
OEM dental customers of 32.5% contributed to the overall
increase in sales for the six months of 12.1%, net of inter-
company sales. 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 81.5% for the six
months ended December 31, 1997, compared to the six months
ended December 31, 1996. 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 $2,437,028 $1,691,840 $ 745,188
Challenge 342,405 301,412 40,993
Micro Motors 1,871,094 2,009,298 (138,204)
Oregon Micro Systems 2,614,832 1,460,259 1,154,573
---------- ---------- -----------
$7,265,359 $5,462,809 $1,802,550
The Company's consolidated gross profit from continuing
operations for the six months ended December 31, 1997, grew
33% over the six months ended December 31, 1996. Gross
profit percentage increased to 59.8% for the six months
ended December 31, 1997 from 59.3% for the six months ended
December 31, 1996. 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 8.4% from $5,260,731 for
the six months ended December 31, 1996, to $5,704,414 for
the six months ended December 31, 1997. Selling and
marketing expense increased by $202,693, or 10.1% for the
six months ended December 31, 1997, compared to the six
months ended December 31, 1996. Year-end rebates paid to
customers for purchases in excess of forecasted orders, was
the principal reason for the increase. Research and
development expense rose 65.1% for the six months ended
December 31, 1997, to $692,919 from $419,807 for the six
months ended December 31, 1996. General and administrative
expense included a one time $50,000 search fee to find a new
general manager for the Micro Motors operation.
Operating income for the six months ended December 31,
1997, increased to $1,560,945 from $202,078 for the six
months ended December 31, 1996, mainly due to the increase
in sales and gross profit for the six months.
Income (loss) from continuing operations increased
$918,887 to $687,918, or $0.08 per share for the six months
ended December 31, 1997, from a loss of ($230,969), or
($0.03) per share for the six months ended December 31,
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
six months ended December 31, 1996, and amounted to $277,564
or, ($0.03) per share, net of related tax benefit of
$118,900.
Liquidity and Capital Resources
- -------------------------------
As of December 31, 1997, the Company had liquid
resources consisting of cash, cash equivalents, and credit
available on an existing credit line totaling $2,326,000.
Cash flow continues to be strong as earnings before
interest, taxes, depreciation, and amortization (EBITDA) for
the six months ended December 31, 1997, were $2,334,027, as
compared to $860,033 for the same six-month period of the
previous year, an increase of 171%. 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: December 31, 1997 /s/ Kent E. Searl
_______________________________
Kent E. Searl, Chairman
Date: December 31, 1997 /s/ George J. Isaac
_______________________________
George J. Isaac,
Chief Financial Officer
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<PERIOD-END> DEC-31-1997
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<RECEIVABLES> 4,309,368
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282,990
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