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, 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 February 11, 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
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
December 31, June 30,
1998 1998
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(unaudited)
Current assets:
Accounts receivable, net of
allowance for doubtful accounts
of $34,659 and $29,194 $2,553,513 $3,363,433
Inventories, net 4,855,919 4,451,802
Deferred taxes 480,000 480,000
Prepaid expenses 662,254 220,770
Total current assets 8,551,686 8,516,005
Property and equipment 5,701,192 5,196,935
Less accumulated depreciation (2,578,391) (2,331,113)
Net property and equipment 3,122,801 2,865,822
Other assets:
Long-term receivables, net of
allowance for doubtful accounts
of $87,002 and $50,000 944,214 1,847,076
Investment 900,000
Deferred taxes 440,000 440,000
Other 610,481 423,428
Intangibles, net 8,114,416 8,746,254
Total other assets 11,009,111 11,456,758
Total assets $22,683,598 $22,838,585
See "Notes to Consolidated Financial Statements." F-1
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES & SHAREHOLDERS' EQUITY
December 31, June 30,
1998 1998
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(unaudited)
Current liabilities:
Current portion of long-term debt $1,432,766 $1,394,994
Accounts payable 1,251,028 1,013,576
Accrued expenses 934,823 1,149,307
Total current liabilities 3,618,617 3,557,877
Long-term debt, net of current portion 7,383,337 6,120,922
Total liabilities 11,001,954 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;
8,737,300 shares issued and
outstanding 14,837,694 14,837,695
Accumulated deficit (3,288,440) (1,810,649)
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11,832,244 13,310,036
Receivable for stock purchase (150,600) (150,250)
Total shareholders' equity 11,681,644 13,159,786
Total liabilities and
shareholders'equity $22,683,598 $22,838,585
See "Notes to Consolidated Financial Statements." F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter ended December 31,
1998 1997
(unaudited) (unaudited)
Net sales $4,298,323 $6,329,448
Cost of sales (includes rent paid
to a director of $85,728 and
$84,712 for 1998 and 1997) 2,389,700 2,627,477
Gross profits 1,908,623 3,701,971
Operating expenses:
Selling 1,339,826 1,229,052
General and administrative 1,025,037 1,169,485
Research and development 403,895 340,824
Amortization 195,839 225,246
Unusual charges 0
Total operating expenses 2,964,597 2,964,607
Income (loss) from operations (1,055,974) 737,364
Other income (expense):
Interest (expense) (224,691) (238,723)
Other income, net 13,400 17,709
Total (211,291) (221,014)
Income (loss) before income
taxes (credits) (1,267,265) 516,350
Income taxes (credits) (506,906) 180,723
Net income (loss) $(760,359) $335,627
Basic and diluted net earnings
(loss) per common and
common equivalent share $(0.09) $0.04
Weighted average number of
common and common equivalent
shares outstanding 8,787,300 9,001,646
See "Notes to Consolidated Financial Statements." F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter ended December 31,
1998 1997
Net sales $8,869,093 $12,147,367
Cost of sales (includes rent paid
to a director of $171,457 and
$169,424 for 1998 and 1997) 4,462,211 4,882,008
Gross profits 4,406,882 7,265,359
Operating expenses:
Selling 2,441,111 2,210,515
General and administrative 2,042,601 2,350,488
Research and development 747,261 692,919
Amortization 391,676 450,492
Unusual charges 838,833
Total operating expenses 6,461,482 5,704,414
Income (loss) from operations (2,054,600) 1,560,945
Other income (expense):
Interest (expense) (434,900) (496,278)
Other income (expense), net 27,157 19,786
Total (407,743) (476,492)
Income (loss) before income
taxes (credits) (2,462,343) 1,084,453
Income taxes (credits) (984,553) 396,535
Net income (loss) $(1,477,790) $687,918
Basic and diluted net earnings (loss)
per common and common equivalent share $(0.17) $0.08
Weighted average number of
common and common equivalent
shares outstanding 8,787,300 9,001,646
See "Notes to Consolidated Financial Statements." F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended December 31,
1998 1997
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,477,790) 687,918
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 702,058 753,296
Provision for doubtful accounts 42,467 (39,209)
Change in working capital components
net of effects from
purchases and divestitures:
(Increase) decrease in
accounts receivable 769,965 (913,598)
(Increase) decrease in inventories (404,117) 213,669
(Increase) decrease in
prepaid expenses (441,484) 362,300
Decrease in other assets 53,109 60,763
Increase in accounts payable
and accrued expense 1,007,903 19,055
Increase (decrease) in
income taxes payable (984,937) 377,380
Net cash provided by (used in)
operating activities (732,826) 1,521,574
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (567,361) (374,076)
Net cash flows (used in)
investing activities (567,361) (374,076)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowing 1,950,000 0
Principal payments on
long-term borrowing (649,813)(1,922,018)
Net cash flows provided by
(used in) financing activities 1,300,187 (1,922,018)
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 0 (774,520)
Cash and cash equivalents,
beginning of period 0 851,112
Cash and cash equivalents, end of period 0 76,592
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest $434,900 $496,278
Cash payments for income taxes $ 3,600 $ 5,175
See "Notes to Consolidated Financial Statements." F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Six Months Ended December 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 six months ended December 31, 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.
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 and December 31, 1998, the Company did not meet some of the
financial covenants; however, on September 24, 1998, the bank
waived the current covenants. Management is working with the
bank to structure a covenant package to bring the Company into
compliance.
Item 2. Management's Discussion and Analysis
Results of Operations
Forward Looking Statements. All forward looking statements in
this form 10Q involve important risks and uncertainties that
significantly affect expected results in the future from those
expressed in these forward looking statements. These risks and
uncertainties involve the Company's assumptions regarding factors
to include, but not be limited to, (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, 1998
Compared to the Quarter Ended December 31, 1997.
Net sales by subsidiary follows:
Increase/
1998 1997 (Decrease)
---- ---- ------------
Biotrol $2,176,950 $2,426,820 $ (249,870)
Challenge 559,723 484,841 74,882
Micro Motors 1,478,893 2,120,778 (641,885)
Oregon Micro Systems 517,083 1,729,914 (1,212,831)
Inter-company sales) (434,326) (432,905) (1,421)
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$4,298,323 $6,329,448 $(2,031,125)
=========== =========== ============
Consolidated sales decreased 32.1% for the quarter ended
December 31, 1998, over the quarter ended December 31, 1997. At
Biotrol, sales for the quarter decreased 10.3%. The merger of
three of Biotrol's largest customers continues to hamper sales
growth due to the reduction of warehouse locations and
corresponding reduction in inventory quantities carried by these
customers. Further evidence of this trend is indicated by the
fact that sales of Biotrol products by its customers to dentists
exceeded sales of Biotrol products to its distributors for the
quarter ended December 31, 1998. Sales of Biotrol products to
the end user dentists are increasing, therefore, as 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 15.4% over the previous year's
comparable quarter. Inter-company sales of its preventative
dental products to Biotrol decreased 38.4% for the quarter ended
December 31, 1998 compared to the quarter ended December 31,
1997, primarily due to consolidation of inventory levels of
Biotrol's customers. Private label and OEM sales at Challenge
increased 69.5% to $410,187 for quarter ended December 31, 1998
compared to $241,994 for quarter ended December 31, 1997. At
Micro Motors sales decreased by 30.3% for the quarter ended
December 31, 1998 compared to the quarter ended December 31,1997.
On July 1, 1998, Micro Motors made the conversion to new
manufacturing and accounting software. Due to difficulties
experienced during the conversion process, Micro experienced
significant parts shortages in the current quarter that created a
backorder situation. As of December 31, 1998, Micro had orders
totaling $520,000 that could not be shipped due to the shortage
of parts. It is anticipated that the problems related to the
parts shortages will be solved, and the backorder situation
should be cleaned up by the end of the third fiscal quarter.
Sales to Micro's key private label customers in the endodontic
and implant industries continued to fall below the previous year.
Micro has been developing a new line of controllers to improve
its marketing position in the endodontic and implant dental
segments. The new controller has enabled Micro to enter the
medical microsurgery market. In January 1999, the Company
announced that Micro Motors received an initial order for
electric controllers from a major medical supplier. The order is
valued at $500K and is scheduled for shipment beginning in
February. Revenue at Oregon Micro Systems declined by 70.1% for
the quarter ended December 31, 1998 compared to the previous
year's same quarter. The decrease at OMS was a significant
reason for the decline in revenue and profitability of the
Company. 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. Industry experts indicate
that the semiconductor industry may have hit bottom in October of
1998. Orders received in the past two months for January and
February delivery have been higher than the level of activity
over the previous nine months.
Gross profits by subsidiary follows:
Increase/
1998 1997 (Decrease)
---- ---- ------------
Biotrol $1,153,737 $1,372,523 $ (218,786)
Challenge 188,795 175,162 13,633
Micro Motors 282,165 836,491 (554,326)
Oregon Micro Systems 283,926 1,317,795 (1,033,869)
---------- ---------- ------------
$1,908,623 $3,701,971 $(1,793,348)
========== ========== ============
Overall gross profit dollars decreased by 48.4% for the quarter
ended December 31, 1998, compared to the quarter ended December
31, 1997, due to the decline in revenue. The conversion to new
manufacturing software at Micro beginning on July 1, 1998
disclosed inventory valuation discrepancies under the new system.
As a result Micro took a charge of $220,000 to cost of sales in
the current quarter to correct the discrepancies. Overall gross
profit percentage declined due to lower revenue absorbing fixed
manufacturing overhead. Gross profit percentage for the quarter
ended December 31, 1998, was 44.4% compared to 58.5% for the
quarter ended December 31, 1997.
Operating expenses for the quarter ended December 31, 1998,
were $2,964,597 (69% of net sales) compared to $2,964,607 (46.8%
of net sales) for the quarter ended December 31, 1997. Selling
expenses were higher for the quarter because sales of Biotrol
products out of the dealer warehouses were higher than the
previous quarter. Sales to the dealers were lower due to
inventory consolidation caused by the merger of three of
Biotrol's largest customers. Research and development expense
increased to $403,895 for the quarter ended December 31, 1998,
compared to $340,824 for the quarter ended December 31, 1997, an
18.5% increase. The development of new products at Micro Motors
has enabled them to expand into the medical microsurgery market.
In addition to the $500K order Micro received from one major
medical device supplier, several other potential medical device
customers are currently reviewing the new products.
Loss from operations for the quarter ended December 31, 1998,
was ($1,055,974) compared to income of $737,364 for the quarter
ended December 31, 1997. Several factors contributed to the
decline in profitability for the quarter. At Biotrol, as
previously mentioned, inventory consolidation resulting from the
merger of three of Biotrol's largest customers caused the decline
in revenue in the quarter. Sales of Biotrol's products out of
the dealer warehouses are ahead of last year's revenue, but sales
to the dealer warehouses are below last year. Revenue is
expected to return to normal levels once the desired inventory
levels are attained. At Micro Motors problems related to the new
computer software conversion created a parts shortage that
prevented Micro from building and shipping $520,000 of orders
scheduled for November and December delivery. It is anticipated
that the shortages will be corrected in the third fiscal quarter,
and those shipments will be completed. In addition, demand for
products from several key private label customers is below the
previous year's level. Industry consolidation as well as a
decline in the endodontic and implant segments of the dental
market are attributed to the slowdown in revenue. Over the past
six months, Micro has invested significant dollars in research
and development to update its product line for these markets as
well as the medical microsurgery market. The development is
complete, and the new products are being demonstrated to both old
and potential new customers. Finally, the semiconductor industry
has experienced a major slowdown during all of 1998. Revenue at
OMS for the quarter was down more than 70% over the previous
year. Net operating income from OMS was down $946,858 to a loss
of ($214,998) for the quarter ended December 31, 1998 compared to
a profit of $731,860 for the quarter ended December 31, 1997.
Recent new order activity has signaled a potential end to the
semiconductor industry slump. In addition, OMS has gained new
customers in other motion control related industries.
Net loss for the quarter ended December 31, 1998 was ($760,359)
compared to net income for the quarter ended December 31, 1997 of
$335,627.
Results of Operations for the Six Months Ended December 31, 1998
Compared to the Six Months Ended December 31, 1997.
Net sales by subsidiary follows:
Increase/
1998 1997 (Decrease)
---- ---- ------------
Biotrol $4,303,830 $4,415,683 $ (111,853)
Challenge 1,193,634 872,298 321,336
Micro Motors 2,970,179 4,382,844 (1,412,665)
Oregon Micro Systems 1,368,887 3,399,586 (2,030,699)
Inter-company sales) (967,437) (923,044) (44,393)
----------- ------------ ------------
$8,869,093 $12,147,367 $(3,278,274)
=========== ============ ============
Consolidated sales from continuing operations decreased 27% for
the six months ended December 31, 1998, compared to the six
months ended December 31, 1997. At Biotrol, sales for the six
months decreased 2.5%, primarily due to inventory consolidation
caused by the merger of three of its largest customers. Biotrol
is able to track sales of its products out of its customers'
warehouses. For the six-month period ended December 31, 1998
sales of Biotrol products out of dealer warehouses was
approximately $600K higher than sales to its dealer customers
during the same period. Sales for the six months at Challenge
increased 36.8% over the same six-month period in the previous
year. Overall, the combined sales of dental products by Biotrol
and Challenge increased by 4% over the previous year in spite of
the inventory consolidation occurring within the industry.
Challenge experienced a 79.8% increase in private label sales for
the six months ended December 31, 1998 compared to the six months
ended December 31, 1997. Sales at Micro Motors declined 32.2%
for the six months ended December 31, 1998, compared to the six
months ended December 31, 1997. Problems encountered during the
implementation of new MRP software caused a parts shortage that
prevented the unit from shipping $520,000 of orders scheduled for
November and December delivery. A decline in demand for products
from Micro's endodontic and implant customers also contributed to
the decrease in revenue. Revenue at Oregon Micro Systems
declined 59.7% for the six months ended December 31, 1998
compared to the same six months of the previous year. A severe
slump in the demand for semiconductor fabrication equipment was
the main reason for the decline. Approximately 80% of revenue at
OMS comes from the semiconductor fabrication equipment market.
OMS has made progress through its research and development
efforts to enter the systems integrator, medical, and factory
automation markets.
Gross profits by subsidiary follows:
Increase/
1998 1997 (Decrease)
---- ---- -----------
Biotrol $2,201,591 $2,437,028 $ (235,437)
Challenge 463,925 342,405 121,520
Micro Motors 852,769 1,871,094 (1,018,325)
Oregon Micro Systems 888,597 2,614,832 (1,726,235)
---------- ---------- ------------
$4,406,882 $7,265,359 $(2,858,477)
========== ========== ============
The Company's consolidated gross profit from continuing
operations for the six months ended December 31, 1998, decreased
by 39.3% compared to the six months ended December 31, 1997.
Gross profit percentage decreased to 49.7% for the six months
ended December 31, 1998 from 59.8% for the six months ended
December 31, 1997. The significant decline in revenue without a
corresponding proportionate decline in fixed manufacturing
overhead was the main reason for the reduction in gross profit
percentage. Inventory discrepancies detected at Micro Motors as
a result of the new manufacturing software conversion caused
Micro to take a charge to cost of sales of $220,000 during the
six month period ended December 31, 1998.
Operating expenses without unusual charges decreased 1.4% to
$5,622,649 for the six months ended December 31, 1998, from
$5,704,414 for the six months ended December 31, 1997. The
Company spent approximately $200,000 during the six months ended
December 31, 1998 on the implementation of its information
technology systems. Operating expenses with unusual charges
included increased to $6,461,482 for the six months ended
December 31, 1998 compared to $5,704,414 for the six months ended
December 31, 1997. The Company took an unusual charge in the
current six months 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 six months 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 six months in the amount of
($525,337).
Loss from operations was ($2,054,600) which included unusual
charges of ($838,833) for the six months ended December 31, 1998,
compared to income from operations of $1,560,945 for the six
months ended December 31, 1997. Loss from operations at OMS for
the six months ended December 31, 1998 was ($395,506) compared to
income from operations for the six months ended December 31, 1997
of $1,507,256, or a decrease in income from operations of
$1,902,762. The decrease in income at OMS is directly related to
a decline in revenue from its semiconductor industry customers.
At Biotrol net income from operations for the six months ended
December 31, 1998 was $74,048 compared to $577,602 for the same
six month period in the previous year. Significant inventory
consolidation resulting from the merger of three of Biotrol's
largest customers was the primary reason for the decline in
operating income. At Micro Motors loss from operations for the
six months ended December 31, 1998 was ($695,773) compared to
income from operations of $359,511 for the six months ended
December 31, 1997. Micro experienced a parts shortage problem
that prevented it from shipping $520,000 of orders during
November and December of 1998. Revenue from key customers
declined from the previous year due to disruption caused by
ownership changes. Research and development expenditures at
Micro Motors were $401,977 for the six months ended December 31,
1998 compared to $263,202 for the same six month period in the
previous year, or an increase of 52.7%. Significant enhancements
and upgrades were needed for certain components of the product
line, and Micro finished developing its new line of high speed
hand-pieces during the period. At Challenge, operating income
increased to $213,839 for the six months ended December 31, 1998
from $87,467 for the six months ended December 31, 1997, a 144.5%
increase. Increases in sales to existing private label
customers, as well as sales to new private label customers
contributed to the increase in profitability.
The Company's effective tax rate is 40% for the six months ended
December 31, 1998, compared to 36.6% for the prior year's six
month period. The Company was able to utilize deferred tax
assets in the prior year to lower its tax rate.
Net loss for the six months was ($1,477,790), or ($.17) per
share, compared to net income of $687,918, or $.08 per share for
the six months ended December 31, 1997. Net loss for the six
months included a net loss from unusual charges of ($.06) per
share.
Liquidity and Capital Resources
As of December 31, 1998, the Company had liquid resources
consisting of credit available on an existing credit line of
$250,000. Management believes that funds generated from
operations along with funds available under the credit line may
not be 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. Management has discussed the current financial
condition with its principal lender about additional funding
should the need arise. The bank has indicated that it would
entertain such a request under certain conditions which
management feels it can meet.
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
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: December 31, 1998 /s/ Kent E. Searl
--------------------------
Kent E. Searl, Chairman
Date: December 31, 1998 /s/ George J. Isaac
--------------------------
George J. Isaac,
Chief Financial Officer
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