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, 1999.
[ ] 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
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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
------------------- ---------------------
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 March 31, 1999, 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 & F-4
Consolidated Statements of Cash Flow F-5
Notes to Consolidated Financial Statements F-6
Item 2.
Management Discussion and Analysis 9
SIGNATURES 16
EXHIBITS NONE
Page 2 of 16 Pages
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, June 30,
1999 1998
------------ -----------
(unaudited)
Current assets:
Cash and cash equivalents $ 92,934 $ 0
Accounts receivable, net of
allowance for doubtful accounts
of $31,283 and $29,194 2,602,345 3,363,433
Inventories, net 5,506,713 4,451,802
Deferred taxes 2,194,943 480,000
Prepaid expenses 533,349 220,770
------------ -----------
Total current assets 10,930,284 8,516,005
------------ -----------
Property and equipment 5,974,621 5,196,935
Less accumulated depreciation (2,734,575) (2,331,113)
------------ -----------
Net property and equipment 3,240,046 2,865,822
------------ -----------
Other assets:
Long-term trade receivables,
net of allowance for
doubtful accounts of
$87,002 and $50,000 938,088 1,847,076
Investment 900,000 0
Deferred taxes 440,000 440,000
Other 502,867 423,428
Intangibles, net 7,918,580 8,746,254
------------ ------------
Total other assets 10,699,535 11,456,758
------------ ------------
Total assets $24,869,865 $22,838,585
============ ============
See "Notes to Consolidated Financial Statements." F-1
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES & SHAREHOLDERS' EQUITY
March 31, June 30,
1999 1998
------------ ------------
(unaudited)
Current liabilities:
Current portion of long-term debt $ 1,610,034 $ 1,394,994
Accounts payable 2,966,167 1,013,576
Accrued expenses 1,632,227 1,149,307
------------ ------------
Total current liabilities 6,208,428 3,557,877
Long-term debt, net of current portion 7,681,574 6,120,922
------------ ------------
Total liabilities 13,890,002 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 (3,990,221) (1,810,649)
------------ -----------
11,130,463 13,310,036
Receivable from employee stock
ownership plan (ESOP) (150,600) (150,250)
------------ ------------
Total shareholders' equity 10,979,863 13,159,786
------------ ------------
Total liabilities and
shareholders' equity $24,869,865 $22,838,585
============ ============
See "Notes to Consolidated Financial Statements." F-2
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter ended March 31,
1999 1998
------------ ------------
(unaudited) (unaudited)
Net sales $ 4,177,478 $ 5,178,034
Cost of sales 2,204,437 2,304,456
------------ ------------
Gross profits 1,973,041 2,873,578
------------ ------------
Operating expenses:
Selling 1,215,336 1,055,666
General and administrative 1,075,975 1,236,614
Research and development 457,852 330,586
Amortization 195,836 225,247
------------ ------------
Total operating expenses 2,944,999 2,848,113
------------ ------------
Income (loss) from operations (971,958) 25,465
------------ ------------
Other income (expense):
Interest (expense) (210,706) (237,153)
Other income, net 13,879 16,634
------------ ------------
Total (196,827) (220,519)
(Loss) before income taxes (credits) (1,168,785) (195,054)
Income taxes (credits) (467,004) (68,269)
------------ ------------
Net (loss) $ (701,781) $ (126,785)
============ ============
Basic (loss) per common and common
equivalent share $ (0.08) $ (0.01)
Basic weighted average number of
common and common equivalent
shares outstanding 8,787,300 8,712,300
See "Notes to Consolidated Financial Statements." F-3
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months ended March 31,
1999 1998
------------ ------------
(unaudited) (unaudited)
Net sales $13,046,571 $17,325,401
Cost of sales 6,666,648 7,186,464
------------ ------------
Gross profits 6,379,923 10,138,937
------------ ------------
Operating expenses:
Selling 3,656,447 3,266,181
General and administrative 3,118,576 3,587,102
Research and development 1,205,113 1,023,505
Amortization 587,512 675,739
Unusual Charges 838,833 0
------------ ------------
Total operating expenses 9,406,481 8,552,527
------------ ------------
Income (loss) from operations (3,026,558) 1,586,410
------------ ------------
Other income (expense):
Interest (expense) (645,606) (733,431)
Other income, net 41,036 36,420
------------ ------------
Total (604,570) (697,011)
Income (loss) before income
taxes (credits) (3,631,128) 889,399
Income taxes (credits) (1,451,557) 328,266
------------ ------------
Net income (loss) $(2,179,571) $ 561,133
============ ============
Basic and diluted net earnings
(loss) per common and common
equivalent share: $ (0.25) $ 0.06
Basic weighted average number
of common and common equivalent
shares outstanding 8,787,300 8,790,429
Diluted weighted average number
of common and common equivalent
shares outstanding 8,787,300 8,923,548
See "Notes to Consolidated Financial Statements." F-4
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended March 31,
1999 1998
(unaudited) (unaudited)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(2,179,571) $ 561,133
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization 1,060,391 1,159,774
Provision for doubtful accounts 2,089 (1,499)
Change in working capital components
net of effects from purchases
and divestitures:
(Increase) decrease in
accounts receivable 1,667,637 (121,685)
(Increase) in inventories (1,054,911) (175,611)
(Increase) decrease in prepaid
expenses and refundable
income taxes (312,579) 442,628
Decrease in other assets 160,723 73,930
Increase (decrease) in accounts
payable and accrued expense 2,189,449 (111,751)
(Increase) in deferred tax asset (1,714,943) 0
Increase in income taxes payable 246,062 309,111
------------ ------------
Net cash provided by
operating activities 64,347 2,136,030
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of investment (900,000) 0
Purchase of property and equipment (847,103) (807,937)
------------ ------------
Net cash flows (used in)
investing activities (1,747,103) (807,937)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowing 2,225,000 0
Principal payments on
long-term borrowing (449,310) (1,884,214)
------------ ------------
Net cash flows provided by
(used in) financing activites 1,775,690 (1,884,214)
------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 92,934 (556,121)
Cash and cash equivalents,
beginning of period 0 851,112
------------ ------------
Cash and cash equivalents,
end of period $ 92,934 $ 294,991
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest $ 645,606 $ 733,431
Cash payments for income taxes $ 3,600 $ 5,688
See "Notes to Consolidated Financial Statements." F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Nine Months Ended March 31, 1999
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, 1999, 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. 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.
NOTE 4 - LONG TERM DEBT
The Company is required to meet certain financial covenants
including minimum tangible net worth, fixed charge coverage, and
cash flow. In addition, the credit facility limits the amount of
dividends and capital expenditures in any one year. At June 30,
1998, the Company did not meet some of the financial covenants;
however, on September a 24, 1998, the bank waived the current
covenants. As of March 31, 1999, the Company still does not meet
the financial covenants of the loan agreement. Management is
working with the bank to restructure a covenant package to bring
the Company into compliance.
F-6
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, 1999
Compared to the Quarter Ended March 31, 1998
Net sales by subsidiary follows:
Increase/
1999 1998 (Decrease)
----------- ----------- ------------
Biotrol $1,435,368 $1,683,867 $ (248,499)
Challenge 474,078 469,675 4,403
Micro Motors 1,611,114 2,006,636 (395,522)
Oregon Micro Systems 1,158,281 1,443,935 (285,654)
(Inter-company sales) (501,363) (426,079) (75,284)
----------- ----------- ------------
$4,177,478 $5,178,034 $(1,000,556)
=========== =========== ============
Consolidated sales decreased 19.3% for the quarter ended March
31, 1999 compared to the quarter ended March 31, 1998. At Biotrol,
sales for the quarter decreased 17.3% compared to the same quarter
of the previous year. Revenue at Biotrol continues to suffer from
the consolidation of three of its largest customers. At Challenge
sales increased by 1% for the quarter. An increase in sales to
private label customers of 53.4% was offset by a decrease in inter-
company sales to Biotrol of 42.3%. Challenge's private label
business has expanded due to an increase in the number of private
label customers as well as additional market penetration of
existing customers. Inter-company sales to Biotrol have declined
due to the previously mentioned consolidation of Biotrol's
customers. Sales at Micro Motors decreased by 19.7% compared to
the same quarter of the previous year. Sales to its customers in
the endodontic and implant segments of the market have declined
substantially. Sales to its four largest customers were down 74%
for the current quarter to $163,055 from $632,192 for the same
quarter in the prior year. Micro completed the development of a
new line of electric controllers to improve its marketing position
in the endodontic and implant dental segments of its business. The
new controllers will enable it to enter the medical microsurgery
market as well. Revenue at OMS decreased by 19.8% for the quarter
ended March 31, 1999, compared to the quarter ended March 31, 1998.
Weaker demand for semiconductors compared to a year ago was the
principle reason for the decline. There has, however, been a
noticeable increase in orders over the past three months that has
signaled a possible end to the weakness in the semiconductor
industry. The book to bill ratio for the semiconductor industry, a
key industry indicator, has increased from a low of .6 to 1 in the
summer of 1998 to 1.30 to 1 as of March 31, 1999.
Gross profits by subsidiary follows:
Increase/
1999 1998 (Decrease)
----------- ----------- ------------
Biotrol $ 562,497 $ 831,671 $ (269,174)
Challenge 161,228 161,764 (536)
Micro Motors 337,588 805,890 (468,302)
Oregon Micro Systems 911,728 1,074,253 (162,525)
----------- ----------- ------------
$1,973,041 $2,873,578 $ (900,537)
=========== =========== ============
Consolidated gross profit dollars decreased by 31.4% for the
quarter ended March 31, 1999, compared to the quarter ended March
31, 1998, due primarily to a decrease in revenue. Gross profit
percentage for the quarter ended March 31, 1999, was 47.2% compared
to 55.5% for the quarter ended March 31, 1998. At March 31, 1999
Micro Motors was still in the process of implementing new
manufacturing and accounting software. Inventory quantities and
values have been reviewed and adjusted when necessary. As a result
of the review Micro reduced its inventory valuation by $225,000,
and took a charge to earnings for that amount during the current
quarter. The management at Micro Motors has identified significant
cost saving operating efficiencies resulting from the
implementation of new manufacturing and accounting software. These
expense reductions total approximately $1.1 million annually and
are mostly related to manufacturing costs. All of the reductions
have been implemented in April 1999, and will result in improved
gross profit levels in the future.
Operating expenses for the quarter ended March 31, 1999, were
$2,944,999 compared to $2,848,113 for the quarter ended March 31,
1998, an increase of 3.4%. The Company continued its commitment to
developing new products. Research and development expense
increased 38.6% for the quarter ended March 31, 1999 to $457,852
from $330,586 for the quarter ended March 31, 1998. Sales and
marketing expenses at Biotrol were $205,791 higher than a year ago
due in part to the costs associated with new product introductions
during the quarter. Increased salesmen's compensation also
contributed to the increase over the previous year. Biotrol has
identified cost saving operating efficiencies totaling
approximately $400,000 within the sales and marketing budget that
have been implemented in the fourth fiscal quarter of the current
year.
Loss from operations for the quarter ended March 31, 1999 was
($971,958) compared to income from operations of $25,465 for the
quarter ended March 31, 1998. Reduced revenue and increased sales
and marketing expenses at Biotrol contributed to an operating loss
for the quarter of ($542,331) compared to ($10,062) for the same
quarter in the previous year. At Challenge increased manufacturing
costs caused a decline in operating income of 24.4% for the quarter
to $122,805 from $162,367. A 19.7% decrease in revenue at Micro
contributed to the operating loss of ($400,111) compared to an
operating profit of $41,691 in the same quarter of the previous
year. At OMS reduced revenue and gross profit dollars caused a 23%
decrease in operating income to $373,653 in the current quarter
from $490,532 for the quarter ended March 31, 1998. Income and
loss from operations are stated before corporate charges.
Interest expense declined to $210,706 for the quarter ended
March 31, 1999, compared to $237,153 for the same quarter in the
previous year, a 11.1% decrease. A rate reduction enabled the
company to reduce interest expense.
The Company's effective income tax rate is 40% for the quarter
ended March 31, 1999 compared to 35% for the quarter ended March
31, 1998. The Company was able to utilize deferred tax assets in
the prior year to lower its effective tax rate.
Net loss for the quarter ended March 31, 1999 was ($701,781),
or ($.08) per share compared to a net (loss) of ($126,785), or
($.01) per share for the same quarter in the previous year.
Results of Operations for the Nine Months Ended March 31, 1999
Compared to the Nine Months Ended March 31, 1998
Net sales by subsidiary follows:
Increase/
1999 1998 (Decrease)
------------ ------------ ------------
Biotrol $ 5,739,198 $ 6,099,550 $ (360,352)
Challenge 1,667,712 1,341,973 325,739
Micro Motors 4,581,293 6,389,480 (1,808,187)
Oregon Micro Systems 2,527,168 4,843,521 (2,316,353)
(Inter-company sales) (1,468,800) (1,349,123) (119,677)
------------ ------------ ------------
$13,046,571 $17,325,401 $(4,278,830)
============ ============ ============
Consolidated sales from continuing operations decreased 24.7%
for the nine months ended March 31, 1999, compared to the nine
months ended March 31, 1998. At Biotrol, sales for the nine months
decreased by 5.9%. The revenue decline at Biotrol is directly
related to inventory consolidation caused by the merger of three of
its largest customers. Combined sales to these three customers for
the nine months ended March 31, 1999 were $733K less than for the
nine months ended March 31, 1998. Sales for the nine months at
Challenge increased 24.3%. Sales by Challenge to its private label
customers increased 70.6% for the nine months ended March 31, 1999
to $1,037,593 compared to $608,077 for the nine months ended March
31, 1998. Inter-company sales to Biotrol decreased by 14.1% to
$630,119 for the nine months ended March 31, 1999 from $733,896 for
the nine months ended March 31, 1998. At Micro Motors, sales for
the nine months ended March 31, 1999 decreased by 28.3%, compared
to the nine months ended March 31, 1998. Continued decline in
demand from Micro's endodontic and implant customers is the
principle reason for the decrease in sales. Sales to Micro's four
largest customers declined $1,455K or 65.4% for the nine months
ended March 31, 1999 compared to the same nine months of the
previous year. Revenue at Oregon Micro Systems declined by 47.8%
for the nine months ended March 31, 1999 compared to the same nine
months of the previous year. Orders received in the last quarter
indicate the slump in demand for semiconductor fabrication
equipment has ended. OMS depends heavily on the semiconductor
fabrication equipment industry for its revenue.
Gross profits by subsidiary follows:
Increase/
1999 1998 (Decrease)
---------- ----------- ------------
Biotrol $2,792,021 $ 3,268,699 $ (476,678)
Challenge 621,543 504,169 117,374
Micro Motors 1,166,034 2,676,984 (1,510,950)
Oregon Micro Systems 1,800,325 3,689,085 (1,888,760
---------- ----------- ------------
$6,379,923 $10,138,937 $(3,759,014)
========== =========== ============
Consolidated gross profit from continuing operations for the
nine months ended March 31, 1999 decreased 37.1% primarily due to
the decrease in sales. The Company's consolidated gross profit
percentage decreased to 48.9% for the nine months ended March 31,
1999 compared to 58.5% for the nine months ended March 31, 1998.
The significant decline in revenue without a corresponding decline
in fixed manufacturing overhead contributed to the lower
percentage. During the nine-month period Micro Motors has reduced
the value of its inventory by $445,000 resulting from discrepancies
found in quantities and valuation. Due to the implementation of
new manufacturing and accounting software, management has
identified cost saving opportunities that will increase operating
efficiency and have a positive impact on gross profits going
forward. Management estimates that expense reductions related to
manufacturing costs totaling approximately $1.1 million at Micro
have been implemented in April 1999.
Operating expenses including unusual charges of $838,833
increased to $9,406,481 for the nine months ended March 31, 1999
compared to $8,552,527 for the nine months ended March 31, 1998.
Research and development expense increased 17.7% to $1,205,113 for
the current nine months compared to $1,023,505 for the same nine-
month period in the previous year. Micro Motors completed the
development of its new high-speed hand-piece as well as a new
electric controller for dental and medical applications. Biotrol
has identified cost saving opportunities in its sales and marketing
budget. Effective May 1, 1999 Biotrol has implemented sales and
marketing expense reductions that will save the Company
approximately $400K annually.
Loss from operations was ($3,026,558) which included unusual
charges of ($838,833) for the nine months ended March 31, 1999
compared to income from operations of $1,586,410 for the nine
months ended March 31, 1998. At Biotrol increased sales and
marketing expenses, and lower gross profits compared to the
previous year are the primary causes for the decrease in operating
income. Biotrol's operating income decreased to a loss of
($468,283) for the nine months ended March 31, 1999 from an
operating income of $567,540 for the same period of the previous
year. At Challenge, operating income increased 99.2% to $241,035
from $120,990 in the previous nine months due to an increase in its
private label business. Lower revenue and gross profits were the
primary reason Micro Motors reported an operating loss of
($1,095,884) for the nine months ended March 31, 1999 compared to
an operating income of $401,202 for the same period in the previous
year. Due to the significant decline in the semiconductor industry
caused in part by the Asian monetary crisis, OMS reported a net
operating loss of ($21,853) for the nine months ended March 31,
1999 compared to an operating income of $1,997,788 for the nine
months ended March 31, 1998. All operating income (loss) numbers
are reported before corporate charges.
The Company's effective tax rate is 40% for the nine months
ended March 31, 1999, compared to 35% for the prior year's nine-
month period. The Company was able to utilize deferred tax assets
in the prior year to lower its effective tax rate.
Net loss for the nine months ending March 31, 1999 was
($2,179,571) or ($.25) per share compared to net income of $561,133
or $.06 per share for the nine months ended March 31, 1998. Net
loss for the nine months ended March 31, 1999 included a net loss
from unusual charges of ($.06) per share.
Liquidity and Capital Resources
The Company is currently out of covenant with certain
requirements of the debt agreement with its bank relating to the
maintenance of certain minimum ratios and levels of working
capital. The Company's lender has allowed the Company to remain in
violation of these agreements. Were a default declared, the
Company would be unable to continue operations. To cure the
default, the Company is in the process of implementing a plan to
allow it to restructure the loan covenants with the lender. The
Company has engaged an investment banker and is considering various
alternatives, including the sale of certain assets or the sale of
common shares, to raise additional funds to partially or entirely
pay off its debt to the bank.
During the quarter ended March 31, 1999 the Company has been
unable to make timely payments to some of its trade and other
creditors. Deferred payment terms have been negotiated with most
of these vendors. To date no vendors have suspended parts
deliveries or services to the Company. Were significant volumes of
orders to be canceled, the Company's ability to operate would be
jeopardized. The Company is currently seeking sources of working
capital financing sufficient to fund delinquent balances and meet
ongoing trade obligations.
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.
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.
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. In
response to its poll of vendors, customers, and general service
providers, the Company is developing 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.
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, 1999 /s/ Kent E. Searl
-----------------------------
Kent E. Searl, Chairman
Date: March 31, 1999 /s/ George J. Isaac
-----------------------------
George J. Isaac,
Chief Financial Officer
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