PRO DEX INC — Interim / Quarterly Report 1997

May 15, 1997

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, 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 May 14, 1997, was 8,712,300. PRO-DEX, INC. AND SUBSIDIARIES ------------------------------ 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 Flow F-5 Notes to Consolidated Financial Statements 6-7 Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations 8-9 SIGNATURES 9 EXHIBITS NONE Page 1 of 9 Pages PRO-DEX, INC. AND SUBSIDIARIES ------------------------------ CONSOLIDATED BALANCE SHEET ASSETS March 31, June 30, 1997 1996 (unaudited) Current assets: Cash & cash equivalents $ 605,270 $ 407,722 Accounts receivable, net 4,091,936 5,069,942 Inventories, at cost 4,903,648 4,699,567 Deferred taxes 1,002,417 398,300 Prepaid expenses 468,043 257,898 Total current assets 11,071,314 10,833,429 Property and equipment 5,944,150 5,505,127 Less accumulated depreciation 2,673,598 2,186,233 Net property and equipment 3,270,552 3,318,894 Other assets: Deferred taxes 404,000 387,000 Other 383,054 133,761 Intangibles 12,883,691 13,654,404 Total other assets 13,670,745 14,175,165 Total assets $ 28,012,611 $ 28,327,488 F-1 PRO-DEX, INC. AND SUBSIDIARIES ------------------------------ CONSOLIDATED BALANCE SHEET - CONTINUED LIABILITIES & STOCKHOLDERS' EQUITY March 31, June 30, 1997 1996 (unaudited) Current liabilities: Notes payable $ 62,223 $ 1,162,465 Current portion of long-term debt 1,155,248 1,236,570 Accounts payable 887,020 1,039,706 Accrued expenses 924,049 1,330,450 Income taxes payable 547,007 Deferred revenue 215,466 208,485 Total current liabilities 3,244,006 5,524,683 Long-term debt, net of current portion 9,087,876 5,371,264 Total liabilities 12,331,882 10,895,947 Commitments and contingencies Stockholders' equity: Series A convertible preferred stock, no par value; 10,000,000 shares authorized; 78,129 shares issued and outstanding 282,990 282,990 Common stock, no par value; 50,000,000 shares authorized; 9,080,783 shares issued and outstanding 16,705,161 16,697,660 Additional paid in capital 1,004,541 1,004,541 Accumulated deficit (2,252,850) (532,350) 15,739,842 17,452,841 Receivable from employee stock ownership plan (ESOP) (59,113) (21,300) Total stockholders' equity 15,680,729 17,431,541 Total liabilities and stockholders'equity $ 28,012,611 $ 28,327,488 F-2 PRO-DEX, INC. AND SUBSIDIARIES ------------------------------ CONSOLIDATED STATEMENTS OF INCOME Quarter Ended March 31, 1997 1996 (unaudited) (unaudited) Net sales (net of sales from discontinued operations of $507,172 and $587,289) $ 4,397,093 $ 5,902,581 Cost of Sales 2,023,105 2,378,677 Gross Profits 2,373,988 3,523,904 Operating expenses: Selling 1,143,202 1,216,197 General and administrative 1,415,071 1,168,936 Research and development 205,367 153,924 Amortization 236,567 213,301 Total operating expenses 3,000,207 2,752,358 Income (loss) from operations (626,219) 771,546 Other income (expense): Interest expense 354,920 242,194 Other income, net 11,760 16,482 Total 343,160 225,712 Income (loss) before income taxes (benefit) and (loss) from discontinued operations (969,379) 545,834 Income taxes (benefit) (246,972) 163,759 Income (loss) before income (loss) from discontinued operations (722,407) 382,075 Income (loss) from discontinued operations (net of income tax (benefit)) (489,557) 30,202 Net income (loss) $ (1,211,964) $ 412,277 Earnings per common and common equivalent share: Income (loss) from continuing operations $ (0.08) $ 0.05 (Loss) from discontinued operations (0.05) 0.00 Net income (loss) per share $ (0.13) $ 0.05 F-3 PRO-DEX, INC. AND SUBSIDIARIES ------------------------------ CONSOLIDATED STATEMENTS OF INCOME - CONTINUED Nine months ended March 31, 1997 1996 (unaudited) (unaudited) Net sales (net of sales from discontinued operations of $1,714,178 and $1,763,554) $ 13,605,814 $ 15,220,185 Cost of Sales 5,769,020 6,115,376 Gross Profits 7,836,794 9,104,809 Operating expenses: Selling 3,151,024 2,900,883 General and administrative 3,791,093 3,231,884 Research and development 625,174 397,976 Amortization 693,649 568,803 Total operating expenses 8,260,940 7,099,546 Income (loss) from operations (424,146) 2,005,263 Other income (expense) Interest expense 914,094 663,089 Other income, net 38,987 33,136 Total 875,107 629,953 Income (loss) before income taxes (benefit) and (loss) from discontinued operations (1,299,253) 1,375,310 Income taxes (benefit) (345,872) 412,593 Income (loss) before (losses) from discontinued operations (953,381) 962,717 Income (loss) from discontinued operations (net of tax benefit) (767,119) (12,806) Net income (loss) $ (1,720,500) $ 949,911 Earnings per common and common equivalent share: Income (loss) from continuing operations $ (0.10) $ 0.11 (Loss) from discontinued operations (0.09) 0.00 Net income (loss) per share $ (0.19) $ 0.11 F-4 PRO-DEX, INC. AND SUBSIDIARIES ------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended March 31, 1997 1996 (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (1,720,501) $ 949,911 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,258,078 992,840 Provision for doubtful accounts 558,753 Loss (gain) on sale of property and equipment (19,968) Change in working capital components net of effects from purchase of Oregon Micro Systems,Inc., Micro Motors,Inc., and Pnu-Light Tool Works, Inc. (Increase) decrease in accounts receivable 381,440 (1,105,564) (Increase) decrease in inventories (204,081) (507,449) (Increase) decrease in deferred taxes (621,117) (Increase) decrease in prepaids (210,145) 189,128 (Increase) decrease in other assets (249,293) (81,615) Increase (decrease) in accounts payable and accrued expense (486,033) 310,024 Increase (decrease) in deferred revenue 6,981 25,256 Increase (decrease) in income taxes payable (620,061) 528,180 Net cash provided by (used in) operating activities (1,905,979) 1,280,743 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of businesses (4,738,800) Purchase of property and equipment (439,023) (205,134) Net cash flows (used in) investing activities (439,023) (4,943,934) CASH FLOWS FROM FINANCING ACTIVITIES Net borrowing on revolving credit agreements (1,100,242) 375,054 Proceeds from long-term borrowing 3,913,723 4,000,000 Principal payments on long-term borrowing (278,431) (508,581) Issuance of common stock 7,501 65,000 Net cash flows provided by financing activites 2,542,551 3,931,473 INCREASE (DECREASE) IN CASH 197,549 268,282 CASH, beginning of period 407,722 384,968 CASH, end of period $ 605,271 $ 653,250 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash payments for interest $ 914,094 $ 681,289 Cash payments for income taxes $ 620,061 F-5 PRO-DEX, INC. AND SUBSIDIARIES ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For nine months ended March 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 nine months ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ended June 30, 1997. 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, 1996. NOTE 2 - INCOME PER SHARE Income per share is based on the weighted average number of common shares outstanding during the period. Shares issuable upon the conversion of preferred stock and stock warrants are not included in the calculation if their inclusion would be anti- dilutive. NOTE 3 - BUSINESS ACQUISITIONS On July 26, 1995, the Company acquired for cash all the outstanding shares of Oregon Micro Systems, Inc., a manufacturer of multi-axis motion control circuit boards. Also, on July 26, 1995, the Company acquired all of the outstanding stock of Micro Motors, Inc., a manufacturer of patented miniature pneumatic (air) motors, and dental handpieces. On May 11, 1996, the Company acquired substantially all of the assets and liabilities of Pnu-Light Tool Works, Inc., a developer of pneumatic light mechanisms for pneumatic hand tools. All acquisitions have been accounted for as a purchase and the results of operations of the three companies are included in the consolidated financial statements since the dates of acquisition. Unaudited pro forma consolidated results of operations for the nine months ended March 31, 1996 as though OMS, Micro Motors, and Pnu-Light had been acquired as of July 1, 1995, as follows: Sales $16,165,000 Net Income 773,000 Earnings per share 0.09 -6- NOTE 4 - DISCONTINUED OPERATIONS On June 24, 1996, the Company decided to report the operations of its subsidiary, Pro-Dex Dental Management (PDM), on a discontinued basis and expects to sell that line of business. In March of 1997, the Company revised its estimate of net realizable value of the dental center operations. As a result, an after tax benefit charge of $375,000 was recorded at March 31, 1997. The charge had no effect on cash flow and increased net loss per common share for the nine months ended March 31, 1997 by $0.04. Management's current plans are to sell various assets of PDM and to provide financing to the buyer of the assets. Sales of PDM were approximately $1,640,000 for the nine months ended March 31, 1997, and $1,760,000 for the nine months ended March 31, 1996. Operating expenses for the same periods were $1,763,000 and $1,240,000 respectively. These amounts are presented in the statement of operations as discontinued operations, net of applicable income tax benefits of approximately ($463,000) and ($18,000) for the nine months ended March 31, 1997, and 1996. At March 31, 1997, the net assets of PDM consists of the following: Receivables 1,600,000 Inventories 280,000 Depreciated cost of equipment 516,000 Current liabilities (237,000) Deferred revenue (215,000) In January of 1997, the Company decided to report the operations of its subsidiary, Pnu-Light, Inc. on a discontinued basis, and in accordance with the unwind provisions of the acquisition agreement, return the assets of Pnu-Light to its former owners in exchange for 368,483 shares of the Company's stock. Other details of the transaction are not available at this time. The Company does not expect to incur any future operating losses as a result of its decision to dispose of the Pnu-Light subsidiary. Sales of Pnu-Light for the nine months ended March 31, 1997 were $76,000. Operating expenses for Pnu-Light for the same period were approximately $380,000. These amounts are presented in the statement of operations as a loss from discontinued operations, net of applicable income tax benefits of approximately ($275,000) for the nine months ended March 31, 1997. NOTE 5 - SUBSEQUENT EVENT Pursuant to the unwind provisions of the Asset Purchase Agreement of Pnu-Light Tool Works, Inc., on May 6, 1997, the company acquired 368,483 shares of its stock in exchange for the assignment of the patent acquired in May of 1996 held by its Pnu-Light subsidiary. The shares are now held in treasury. -7- PRO-DEX, INC. AND SUBSIDIARIES ------------------------------ Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Quarter Ended March 31, 1997 Compared to Quarter Ended March 31, 1996 In the quarter ended March 31, 1997, net sales decreased 25 percent to $4.4 million from $5.9 million in the same quarter in 1996. A significant decline in sales of the Company's endodontic and implant products to its OEM customers caused by a consolidation in those specialty dental fields contributed to the lower sales volume for the quarter. In addition, at its OMS subsidiary, a decline in sales of motion control boards to the semiconductor industry compared to the volume a year ago also contributed to the decrease in sales. Gross profit decreased $1.1 million to $2.4 million from $3.5 million in the third quarter of fiscal 1996, primarily due to lower sales. As a percentage of net sales, gross profit decreased from 59.7 percent for the quarter ended March 31, 1996 to 54.0 percent for the same period in 1997. Lower sales volume without a proportionate decrease in fixed manufacturing overhead was the main reason for the decline in gross profit percentage. (Loss) for the quarter ended March 31, 1997 was ($1,211,000) compared to income of $412,000 for the same quarter in the previous year. The decrease in sales and gross profit is only partly responsible for the decline in income. The Company incurred nonrecurring and unusual charges in the quarter of ($475,000) which included a $245,000 restructuring charge reducing the Company's workforce by 13 percent. In addition, loss from discontinued operations (net of tax benefit) for the quarter ended March 31, 1997 was ($490,000) compared to net income from discontinued operations of $30,000 in the same quarter of the prior year. Nine Months Ended March 31, 1997 Compared to Nine Months Ended March 31, 1996. Sales for the nine months ended March 31, 1997 were $13.6 million compared to $15.2 million for the nine months ended March 31, 1996, or a 10.6 percent decline. Weak sales to the Company's OEM dental customers as well as lower sales of motion control boards to the semiconductor industry compared to the same nine month period in the prior year were the main reasons for the decrease. Gross profit decreased 12.4 percent to $7.8 million from $9.1 million in the prior period. As a percentage of sales gross profit decreased 2.3 percent from 59.9 percent in the prior period to 57.6 percent in the current period. Lower sales volume without a proportionate decrease in fixed manufacturing overhead contributed to the decrease. -8- Operating expenses increased from $7.1 million in the nine months ended March 31, 1996 to $8.3 million for the nine-month period in the current year. An increase of 57 percent in research and development expenses to enhance the Company's product lines contributed to the increase in operating expenses. In addition, the Company has recently restructured its operations to reduce operating expenses. During the quarter ended March 31, 1997, the Company's workforce has been reduced by 13 percent. Also, salaries for all senior level management personnel have been reduced by 5 to 10 percent. As a result of the restructuring, operating expenses for the nine-month period ended March 31, 1997 include nonrecurring and unusual charges of $475,000. In addition, interest expense has increased for the nine month period ended March 31, 1997 to $914,000 from $663,000 for the same period in the prior year. Included in interest expense is a nonrecurring prepayment penalty of $260,000 due to the refinancing of the FINOVA debt with more favorable terms from The Harris Bank of Chicago. Total nonrecurring and unusual charges for the nine months ended March 31, 1997 were $735,000. (Loss) from discontinued operations were ($767,000) for the nine months ended March 31, 1997 compared to ($13,000) for the same period in the prior year. Net income (loss) for the nine months ended March 31, 1997 was ($1,720,000) compared to net income of $950,000 for the nine months ended March 31, 1996. In spite of the disappointing results, management believes that the elimination of losses from discontinued operations of $767,000 and nonrecurring and unusual charges of $735,000, combined with the reduction of approximately $1,000,000 in operating expenses as a result of the 13 percent reduction in the Company's workforce will have a significantly positive effect on future operating results. Liquidity and Capital Resources The Company's working capital on March 31, 1997 was $7.8 million (a 3.4:1 ratio) compared to $5.3 million on March 31, 1996 (a 2:1 ratio). The Company was able to increase its bank line of credit in July of 1996 from $5.5 million to $10 million. The Company believes that its present bank line of credit and projected cash flow from operations will satisfy its working capital needs for the foreseeable future. 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, 1997 /s/ Kent E. Searl --------------------- Kent E. Searl, Chairman Date: March 31, 1997 /s/ George J. Isaac ---------------------- George J. Isaac, Chief Financial Officer -9-