PRO DEX INC — Interim / Quarterly Report 1997

Feb 12, 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 December 31, 1996 [ ] 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 February 10, 1997, was 9,080,783. 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 Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations 8 SIGNATURES 10 EXHIBITS NONE Page 1 of 10 Pages PRO-DEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS December 31, June 30, 1996 1996 (unaudited) Current assets: Cash & cash equivalents $ 367,514 $ 407,722 Accounts receivable, net 5,192,806 5,069,942 Inventories, at cost 5,053,725 4,699,567 Deferred taxes 599,100 398,300 Prepaid expenses 601,166 257,898 11,814,311 10,833,429 Property and equipment 5,854,044 5,505,127 Less accumulated depreciation 2,502,608 2,186,233 Net property and equipment 3,351,436 3,318,894 Other assets: Deferred taxes 404,000 387,000 Other 393,922 133,761 Intangibles 13,161,387 13,654,404 Total other assets 13,959,309 14,175,165 Total assets $ 29,125,056 $ 28,327,488 PRO-DEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET - CONTINUED LIABILITIES & STOCKHOLDERS' EQUITY December 31, June 30, 1996 1996 (unaudited) Current liabilities: Notes payable $ 1,252,062 $ 1,162,465 Current portion of long-term debt 1,140,393 1,236,570 Accounts payable 1,135,776 1,039,706 Accrued expenses 1,058,359 1,330,450 Income taxes payable 547,007 Deferred revenue 211,821 208,485 Total current liabilities 4,798,411 5,524,683 Long-term debt, net of current portion 7,400,952 5,371,264 Total liabilities 12,199,363 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 (1,040,887) (532,350) 16,951,805 17,452,841 Receivable from employee stock ownership plan (ESOP) (26,112) (21,300) Total stockholders' equity 16,925,693 17,431,541 Total liabilities and stockholders' equity $ 29,125,056 $ 28,327,488 PRO-DEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Quarter Ended December 31, 1996 1995 (unaudited) (unaudited) Net sales (net of sales from discontinued operation of $507,172 and $539,735) $ 4,776,596 $ 5,180,969 Cost of Sales 1,941,397 2,125,336 Gross Profits 2,835,199 3,055,633 Operating expenses: Selling 978,940 926,812 General and administrative 1,180,253 1,265,640 Research and development 225,572 111,406 Amortization 215,692 203,301 Total operating expenses 2,600,457 2,507,159 Income (loss) from operations 234,742 548,474 Other income (expense): Interest expense (306,515) (231,547) Other income, net 13,050 Total (293,465) (231,547) Income (loss) before income taxes (benefit) and loss from discontinued operation (58,723) 316,927 Income taxes (benefit) (30,900) 84,800 Income (loss) before loss from discontinued operation (27,823) 232,127 (Loss) from discontinued operation (net of tax benefit) (140,664) (4,162) Net income $ (168,487) $ 227,965 Earnings per common and common equivalent share: Income (loss) from continuing operations $ (0.00) $ 0.03 (Loss) from discontinued operation (0.02) Net income (loss) per share $ (0.02) $ 0.03 PRO-DEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Six Months ended December 31, 1996 1995 (unaudited) (unaudited) Net sales (net of sales from discontinued operation of $1,111,777 and $1,176,264) $ 9,208,722 $ 9,665,567 Cost of Sales 3,745,913 4,069,125 Gross Profits 5,462,809 5,596,442 Operating expenses: Selling 2,007,822 1,684,341 General and administrative 2,376,020 2,103,293 Research and development 419,807 244,052 Amortization 457,082 355,502 Total operating expenses 5,260,731 4,387,188 Income (loss) from operations 202,078 1,209,254 Other income (expense): Interest expense (559,174) (387,661) Other income, net 27,227 20,852 Total (531,947) (366,809) Income (loss) before income taxes (benefit) and loss from discontinued operation (329,869) 842,445 Income taxes (benefit) (98,900) 239,800 Income (loss) before loss from discontinued operation (230,969) 602,645 (Loss) from discontinued operation (net of tax benefit) (277,564) (27,515) Net income $ (508,533) $ 575,130 Earnings per common and common equivalent share: Income (loss) from continuing operations $ (0.03) $ 0.07 (Loss) from discontinued operations (0.03) Net income (loss) per share $ (0.06) $ 0.07 PRO-DEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended December 31, 1996 1995 (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (508,533) $ 575,130 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 809,392 637,525 Provision for doubtful accounts 69,480 (19,968) Loss (gain) on sale of property and equipment 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 (197,156) (301,975) receivable (Increase) decrease in inventories (354,158) (295,031) (Increase) decrease in deferred taxes (217,800) (Increase) decrease in prepaids (343,268) (Increase) decrease in other assets (260,161) Increase (decrease)in accounts payable and accrued expense (154,426) 382,419 Increase (decrease) in deferred revenue 3,336 5,121 Increase (decrease) in income taxes payable (568,602) 305,330 Net cash provided by (used in) operating activities (1,721,896) 1,288,551 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of businesses (4,738,800) Proceeds from sale of property and equipment Purchase of property and equipment (348,923) (84,652) Net cash flows (used in) investing activities (348,923) (4,823,452) CASH FLOWS FROM FINANCING ACTIVITIES Net borrowing on revolving credit agreements 89,597 95,098 Proceeds from long-term borrowing 2,120,362 4,000,000 Principal payments on long-term borrowing (186,849) (345,527) Issuance of common stock 7,501 Net cash flows provided by financing activities 2,030,611 3,749,571 INCREASE (DECREASE) IN CASH (40,208) (214,670) CASH, beginning of period 407,722 384,968 CASH, end of period $ 367,514 $ 599,638 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash payments for interest $ 559,174 $ 379,055 Cash payments for income taxes $ 699,545 $ PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For six months ended December 31, 1996 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, 1996 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 quarter ended December 31, 1995 as though OMS, Micro Motors, and Pnu-Light had been acquired as of July, 1, 1995, follows: Sales $10,459,000 Net Income 560,000 Earnings per share 0.06 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. The Company believes that PDM will not incur future operating losses through its disposition and that the Company will be able to sell the net assets of this operation for at least equal to their recorded value. 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 $1,090,000 for the six months ended December 31, 1996, and $1,180,000 for the six months ended December 31, 1995. Operating expenses for the same periods were $1,160,000 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 ($67,000) and ($28,000) for the six months ended December 31, 1996, and 1995. At December 31, 1996, the net assets of PDM consists of the following: Receivables $2,004,681 Inventories 273,000 Depreciated cost of equipment 522,000 Current liabilities (280,000) Deferred revenue (212,000) 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 six months ended December 31, 1996 were $23,000. Operating expenses for Pnu-Light for the same period were approximately $330,000. These amounts are presented in the statement of operations as a loss from discontinued operations, net of applicable income tax benefits of approximately ($210,000) for the six months ended December 31, 1996. PRO-DEX, INC. AND SUBSIDIARIES Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As of December 31, 1996, Pro-Dex, Inc. (the "Company") was the parent of six subsidiaries, Biotrol International, Inc. ("Biotrol"), Challenge Products, Inc. ("Challenge"), Pro-Dex Management, Inc. ("PDM"), Micro Motors, Inc. ("Micro"), Oregon Micro Systems, Inc. ("OMS"), and Pnu-Light Acquisition Corporation, ("Pnu-Light"). Biotrol manufactures and distributes infection control products for the dental industry. Challenge manufactures fluoride and related products for preventive dentistry. PDM is a dental management company, operating six dental centers located in Sears stores in northern California. Micro is a manufacturer of miniature pneumatic motors used in dental, medical and industrial devices. In addition, Micro manufactures and distributes a complete line of dental hand- pieces for the dentist and hygienist. OMS designs and manufactures multi-axis circuit boards to control the motion of motors used predominantly in medical testing equipment and computer chip manufacturing machinery. Pnu-Light has developed a patented pneumatic light system for air driven hand tools predominantly used in industrial applications. During the second quarter, the Company signed a letter of intent to sell its dental center operations. Accordingly, the Company's financial statements have been restated to reflect the accounting treatment for discontinued operations of the dental centers. In January, the Company decided to exercise its option under the acquisition agreement and unwind the Pnu-Light transaction. As a result, the Company's financial statements have been restated to reflect the operating results of the Pnu-Light subsidiary as discontinued operations. In accordance with the terms of the unwind provision, the Company will receive 368,483 shares of its stock in exchange for returning the assets of Pnu-Light. Other details of the transaction are unavailable at this time. Quarter Ended December 31, 1996 compared to quarter ended December 31, 1995 In the quarter ended December 31, 1996 the Company's net sales decreased $404,373, or 7.8% to $4,776,596 million from $5,180,969 in the same period of 1995. Gross profit decreased $220,434, or 7.2% to $2,835,199 from $3,055,633 in the second quarter of 1995 as a result of lower sales. As a percentage of sales, gross profit increased from 59.0% to 59.4% primarily due to a more favorable sales mix. Operating expenses increased 3.7% from $2,507,159 to $2,600,457 in the quarter. Income from continuing operations before taxes decreased $313,732 or 57.2% to $234,742 from $548,474 in the same quarter in 1995. Income (loss) before discontinued operations decreased 112% to ($27,823) from $232,127 for the same period in 1995. In the quarter the Company absorbed a pre-payment penalty of $91,000 due to the refinancing of the FINOVA debt with more favorable terms from the Harris Bank of Chicago. In addition, continued softness in the semiconductor industry compared to the same quarter in 1995 slowed deliveries at Oregon Micro Systems resulting in lower revenues and profits for the quarter. Biotrol continued to achieve better than expected revenue from the sale of its infection control and preventive dental products. Loss from discontinued operations (net of tax benefit) for the quarter ended December 31, 1996 consists of Pro-Dex Management of approximately ($63,000) and Pnu-Light of approximately ($78,000). Loss from discontinued operations (net of tax benefit) for the quarter ended December 31, 1995 is approximately ($4,000) from the PDM subsidiary. Six Months Ended December 31, 1996 Compared To Six Months Ended December 31, 1995 Net sales decreased $456,845 or 4.7% to $9,208,722 for the six months ended December 31, 1996 from $9,665,567 for the six months ended December 31, 1995. On a proforma basis revenues for the six months ended December 31, 1995 were $10,459,000, compared to $9,208,722 for the six months ended December 31, 1996, a decrease of 12%. Gross profit margin increased to 59.3% for the six months ended December 31, 1996 compared to 57.9% for the six months ended December 31, 1995. The increase in gross profit percentage was due primarily to a more favorable sales mix. Operating income (loss) from continuing operations decreased 83.3% to $202,078 for the current period from $1,209,254 for the prior period. The decrease in operating income for the six months is mainly attributed to the slowness in the semiconductor industry at Oregon Micro Systems. Income from operations for the six month period at OMS for the current period is $352,000 compared to $856,000 for the five month period ending December 31, 1995. Interest expense increased $171,500 to $559,174 for the current period compared to $387,661 in the prior period mainly due to the absorption of a pre-payment penalty for the refinancing of the FINOVA debt with more favorable terms from the Harris Bank. Losses from discontinued operations (net of tax benefits) for the six months ended December 31, 1996 and 1995 are as follows: 1996 1995 Pro-Dex Management ($67,000) ($28,000) Pnu-Light, Inc. ($210,000) 0 Total ($277,000) ($28,000) Quarter Ended December 31, 1996 Compared To Quarter Ended September 30, 1996 Revenue from continuing operations increased $344,470 to $4,776,596 for the second quarter ended December 31, 1996 compared to $4,136,636 for the first quarter ended September 30, 1996, an increase of 8.3%. The increase was primarily due to sales of infection control and preventive dental products at Biotrol. Income (loss) from continuing operations increased from a loss of ($32,664) in the quarter ended September 30, 1996 to income of $234,742 for the quarter ended December 31, 1996, an increase of $267,406. This increase was primarily due to an increase in sales of infection control and preventive dental care products at Biotrol, and a gradual increase in sales of motion control boards to the semiconductor industry at OMS. Liquidity and Capital Resources The Company's working capital on December 31, 1996 was $7,015,900 (a 2.46:1 ratio), compared to $4,331,732 (a 1.8:1 ratio) on December 31, 1995. The Company was able to increase its bank line of credit from approximately $5,500,000 to $10,000,000 in July, 1996. The Company believes that its present bank line of credit and projected cash generated 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: December 31, 1996 /s/ Kent E. Searl Kent E. Searl, Chairman Date: December 31, 1996 /s/ George J. Isaac George J. Isaac, Chief Financial Officer