Pro-Dex Inc (PDEX) 2007 Q4 法說會逐字稿

Ladies and gentlemen, welcome to today's Pro-Dex call to discuss the Company's fiscal 2007 fourth quarter financial results and a review of current corporate development.

Your speakers today are Mr. Mark Murphy, Chief Executive Officer, and Mr. Jeff Ritchey, Chief Financial Officer. Today's call will be limited to one hour.

Before I turn the call over to Mr. Murphy and Mr. Ritchey, I would like to read a statement concerning forward-looking statements.

Listeners are cautioned that statements made in this presentation that are not historical in nature or that state our management's intentions, hopes, beliefs, expectations or predictions of the future may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended. Forward-looking statements involve risks, uncertainties and assumptions. It is important to note that any such performance and actual results, financial condition or business could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include but are not limited to those discussed in this presentation as well, as those discussed elsewhere in reports filed with the Securities and Exchange Commission. Other unforeseen factors not identified in this presentation could also have such an effect.

We undertake no obligation to update or revise forward-looking statements to reflect, change assumptions, be it occurrence of unanticipated events or changes in future operating results, financial condition, or business over time.

With that said I would like to turn the call over to Mr. Murphy. Please go ahead.

Thank you, [Julianne], and thanks to all of you for joining us to review Pro-Dex's fourth quarter and year end results for the fiscal year ended June 30, 2007.

We have a lot to talk about today so we are going to start with Jeff Ritchey, our CFO, summarizing our financial results. After that I will comment on our journey as a company over the last year and in particular some developments since our last call in May. We will then invite your questions.

I will now turn the call over to Jeff to summarize our financial results.

Thank you, Mark, and good afternoon, everyone.

We've had substantial growth in revenue for the fourth quarter and full year of fiscal year 2007. Compared to a strong fourth quarter last year, revenues rose 8% to $5.8 million, up from $5.3 million. Full year revenue grew by 26% to $21.6 million as compared to last year's sales of approximately $17.1 million. Sales growth was driven by strong year-over-year increases in medical sales, which grew $1.2 million over 90% as compared to last year's fourth quarter, and grew $3 million or 46% as compared to last full year's medical sales.

The remaining growth was due to the inclusion of the full year of product (inaudible) aerospace and medical sales and sales increases in our dental products.

The consolidated gross profit for the quarter ended June 30, 2007, increased 9% to $1.9 million compared to $1.7 million in the same quarter last year. On a full year basis, gross profit increased 12% compared to last year, up from $6.6 million to $7.4 million. Gross profit as a percentage of sales was 32% for the quarter, the same as the fourth quarter of last year. For the year, the gross profit margins decreased to 34% for the year ended June 30th, 2007, compared to 38% last year.

Margins were diluted by expenses related to warranty repairs for (inaudible) of our medical device product line in each period for the majority of the year-to-year change was due to product mix that reflect a reduced amount of the high margin industrial sales and included a higher amount of the lower margin estimate sales.

R&G expense totaled $279,000 for the quarter and $939,000 for the year, which reduced the gross margin percentage by 4.8 to 4.5% respectively. This is compared to prior year expenses of approximately $260,000 for the quarter and $709,000 for the year which reduced the gross margin percentage by 4.9% to 4.2% for the quarter and the year, respectively.

Our warranty reserve for anticipated expenses at the end of the fourth quarter totaled $469,000, up from $402,000 at the end of last quarter and up from $309,000 at the end of the last fiscal year. This reserve has grown by $160,000 this year, primarily due to the higher level of new product shipments that may be subject to future return, and increases and refinements in our estimates of the amount of returns possible.

Total operating expenses for the quarter ending June 30, 2007 increased only 1% to $1,489,000, representing 26% of sales as compared to $1,469,000 or 28% of sales, for the quarter ending June 30, 2006. Comparing the full fiscal years of 2007, 2006 operating expenses increased by $1.1 million from $6.5 million up from $5.4 million but as a percentage of sales reduced to 30% of sales down from 32% of sales.

The increase in operating expense in the prior year was primarily due to two factors. One, the consolidation of full year of Astromec operating expenses, (inaudible) $383,000 of the growth and, two, the adoption of FAS 123R for expensing equity-based compensation, which accounted for $242,000 of the increase.

The remainder of the increase was due to increased product development work.

We maintain solid positive operating income for the fourth quarter of 2006 --fiscal year 2007 with income of $371,000 as compared to operating profit of $233,000 in the fourth quarter of [June] fiscal '06. For the years in the 2007 and (inaudible) 2006 operating income was $842,000 compared to last year's operating profit of $1,146,000.

The effective tax rate incurred for 2007 was approximately 12% compared to 28% last year. Fiscal '07, we realized our normal state tax credit in addition to our onetime retroactive tax credit of (inaudible) due to reinstatement of a Federal research and development tax credit for expenses incurred after December 31, 2005.

As a bottom-line result the Company's net income for the three months ended June 30, 2007, was $187,000 or $0.02 per-share on a basic [undiluted] basis compared to net income of $231,000 or $0.02 per-share on a basic [undiluted] basis for the three months ended June 30, 2006. For the full 2007 year, net income was $506,000 or $0.05 per-share on basic and diluted basis compared to net income of intended $827,000 or $0.09 per-share on a basic of $0.08 per-share and diluted basis for the year ended June 30th, 2006.

We generated $1,480,000 of positive cash flow from operations for the year ended June 30, 2007 compared to $55,000 for the year ended June 30, 2006, primarily due to faster collections and (technical difficulty) growth in inventory.

We ended the quarter with $300,000 borrowed on our $2 million total credit line availability, down from $900,000 borrowed at June 30, 2006. As collections from the fourth quarter sales have been made, we admitted additional payments on our line of credit as it currently has no outstanding balance and full availability.

At June 30, 2007, we kept our operating cash levels stable at $403,000 from cash on hand compared to $358,000 from cash on hand June 30, 2006. We believe that the Company's working capital needs over the next 12 months will be adequately supported by our current operations and credit line availability. We intend to continue to use our credit line judiciously and monitor its use as a key metric for our operating cash generation; and continue to wisely invest our infrastructure for potential internal and external growth opportunities.

As of June 30, 2007, our backlog stood at $10.1 million as compared to $11.7 million in backlog at June 30, 2006, reflecting normal fluctuation in bookings experienced by the Company. The Company's backlog has ranged between $9 million and $12 million over the last year. The sustained strength in our backlog (inaudible) 26% topline growth indicates robust bookings as well as shipments.

In summary, as our fourth quarter and year showed significant sales growth over the same period last year we've continued to incur warranty costs and incurred additional other non-cash charges, associated with accruals and accounting changes and delivered profit cash-generating operations both for the quarter and full year.

With that I will turn the call back over to Mark for his review and outlook comment.

Thank you Jeff. The word that I would used to describe my feelings about Pro-Dex performance during fiscal year 2007 is delighted. Not delighted from the sense of maximizing earnings to the full potential of this Company's engines, but delighted by what has been produced during our most challenging year.

Recall with me the state of the Company as it entered fiscal year 2007. The management team had been through a whirlwind and was not fully aligned as to the direction of the Company, product warranty costs was running $1 million a year on a major customer who was very frustrated with us. Another customer -- major customer -- had actually told us that we would no longer be making certain key products for them after January 1, 2008.

We had over 20 engineering projects open, reflecting unfulfilled commitments to customers and internal development needs. We had not landed a new development contract of any substance in the previous 14 months and there was certainly no engineering capacity to entertain any substantial new development work in the near term. Our quality systems were stagnant at best; and while our associates were smart, hard-working and respectful, they were tired and frustrated. The lease on our Santa Ana facility was coming to an end and we were bursting at the seams, making an inpending relocation necessary but undesirable in our current condition.

Lastly, there were no synergistic activities between our three divisions and given the need to isolate the issues of our Santa Ana medical device business from our other divisions, we had no immediate strategy to be able to pursue such synergies. That is the company that delivered between July 1, 2006, and July 30, 2007 a 26% revenue growth. That is the company that delivered a profit, albeit not huge, a profit nonetheless during a year when there would have been plenty of excuses to explain a loss; and that is the company that delivered $1.5 million in operating cash to invest in its future and reduce its debt load.

I'm very proud of and most grateful to the associates of Pro-Dex who delivered these results.

But it is not the results alone that leave me delighted. Had we achieved these numbers without creating a stronger foundation upon which to build our future, it would not have been worth it. Had we skimped and saved and survived our way through one more year of existence, we may as well have gone home.

I would have much rather produced lesser financial results this year if it meant using between short-term gain and turning the underlying momentum of the Company from negative to positive. It is the fact that we accomplished so much on both fronts simultaneously that delights may. What a difference a year makes. We now have a senior leadership team that is aligned and firing on all cylinders. We don't agree on everything but we work extremely well together to ensure that the needs of our customers, our associates and our shareholders are met.

We remain short one Vice President of Engineering as my search for this key position has not yet produced fruit; and we refuse to settle on anyone less than a game-altering player. We recently hired Mr. Ken McBride as our Director of Project Management. Ken comes to us with a wealth of experience in managing complex projects from sales to engineering and manufacturing.

In addition to his technical ability, Ken brings the blend of teamwork and commitment that will certainly contribute to our growth and success. Your senior leadership team is aligned, passionate, capable and confident in our future. That as you know is the first step to any positive motion.

Let's move on to the warranty issue. While we're not confident that we have eliminate the warranty issue facing one key product, we do have initial data that suggests some nice progress has been made against it. The data comes from a new engineering revision of units that have been in the field since March and are therefore approaching six months of use. The failure rates of this revision are substantially lower than the failure rate at the six-months point of its predecessor design.

Since the warranty period is 12 months we must be cautious about making projections based on six months data but initial indications are good. We also have internal test data that demonstrates the explanation of the improvement.

Lastly, our inch daring team is still actively involved in yet another next-generation design that should further improve our performance. If this six-month revision does not prove to be a satisfactory in solution we have another card to play. We will continue to accrue our warranty costs on future shipments at historically higher rates of the previous versions until we have compelling evidence to the contrary.

At a minimum we should not have to play "a cruel catch-up" in fiscal year 2008 for previously shipped products as we have had to do in the last two fiscal years. In addition to the financial impact of this news, the customer relationship has, as you can imagine, improved considerably. They are quite pleased with a new design and continue to place growing orders with us for the product.

It is important to note that when these warranty issues arose, originally two years ago, the Company made a strategic business decision to continue to manufacture this product despite known deficiencies and the near-term cost of those deficiencies in order to preserve and support this important customer relationship.

We made a profit on these sales although at a reduced margin rate from other medical device sales given the associated warranty costs on each product. Our decision to continue supporting this customer, to take responsibility for our own shortcomings, and incrementally improve the product over time now provides us with an opportunity for future sales growth [at] gradually increasing margins.

Regarding the other major customer we announced on November 14, 2006 that this customer had informed us of his plans to take inhouse to repair a new production of two products that we had made for them over the previous four years. However during the past 10 months since we made that announcement, significant changes have occurred in our relationship and their organizational perception of Pro-Dex resulting in a reevaluation of their previously expressed desires.

In a very recent meeting with this customer we were asked to propose a full program of support for new handpieces, repairs and [loaner] pulp fuel replenishment for at least a large portion of their demand if not all of it. In addition, they initiated conversations with Pro-Dex, related to the development and manufacture of a new product that would eventually replace the existing products under discussion.

These conversations have not been solidified with signed agreements or purchase orders as they have occurred in the last two weeks. However, at a minimum our relationship with this customer has improved to the extent that they are now open to such conversations. A year ago, they clearly were not.

Regarding engineering products you will remember that over half way through the fiscal year, I was still indicating in our conference calls that we did not have sufficient engineering resources to even quote additional work -- to even quote additional work let alone performance. In the last half of the year we have made significant advances in this area, thanks to the entire engineering team and the leadership of Rick Van Kirk. As we continue to complete previously lingering projects, we simultaneously create shippable products and free up engineering resources.

Two engineering products that were recently completed have enabled us to ship over $200,000 in the first quarter of 2008 that were previously frozen in the engineering phase. Other engineering efforts have now gone into actively proposing and staffing new contracts, which I will address shortly.

We are pleased to announce that we have hired a new senior design engineer who will join us later this month. His arrival adds depth and strength to the department to better support the new development business that we secure. We have also contracted with outside engineering resources to provide us with search capacities to keep projects moving forward.

Let's now talk about new business development. First of all, we are thrilled to announce that we have hired Lisa Craig as our Director of Dental Sales and Marketing. Lisa has extensive experience in the dental industry and has been a wonderful addition to our team. Her presence has not only brought structure and focus to this important part of our business, but it has freed up Patrick Johnson to identify and establish important medical device relationships.

We have also dedicated a full-time engineering research resource to support the project feasibility and proposal development function. As a result, we now have several (inaudible) new projects at various stages of discussion with customers.

We are pleased to announce the signing of our first major development agreement in over two years and the first development project that will combine the efforts of our Santa Ana, Beaverton and Carson City operations. This development agreement includes the provision of approximately $275,000 in development services, and contemplates Pro-Dex's explosive manufacture of the new product upon the successful development and regulatory approval of the device.

Forecasted revenue in the first 12 months of shipping this product is between $1.2 million and $2.4 million. We have already delivered functional prototypes to the customer with good initial performance and a current project timeline forecast of full product launch in mid-2008, again contingent upon applicable regulatory approvals.

Hopefully we will be able to disclose the name of this major player as we move closer to the completion of the development phase. By the way this one project is the one I shared about during our May conference call having seen the value of our value proposition firsthand.

We are also actively negotiating another major product development proposal for a new medical device customer. It's estimated that the development fees from this project will be approximately $650,000 with annual revenue potential between $2 million and $4 million. If we win this contract we anticipate the development would take 15 to 18 months with sales starting in early mid-2009. This project also involves the combined effort of our Santa Ana, Beaverton and Carson City operations.

In addition to the two major development projects discussed above, we are actively working on five other development proposals for specific customers who have requested such proposals from us. If accepted, these would also be projects for which Pro-Dex would receive development fees and exclusive manufacturing contracts. I illuminate these specific project not to suggest that we will win them all or that our sales will be increasing dramatically in the short term.

I use them only as solid examples that we have shifted from an environment of scarcity, in both resources and opportunities, to an environment of possibilities. This transformation has already occurred.

In terms of our quality systems and culture, I have made references to substantial progress in that area during previous conference calls. That is because this is one of the earliest areas where a change was detectable under the leadership of Joe Rotino. We continue to see this important cultural transition occurring on multiple levels. We are developing the muscles, the systems, the mentality and the desire to produce consistently performing products from design through manufacturing.

Specifically in the last few months we have implemented and updated our [SMB] analysis procedure of further design or designed control document requirements, administered multiple training sessions for our associates, and successfully passed two customer and two regulatory audits.

Our manufacturing team continues to drive incremental increases in our capacity to produce solid products. In August, we achieved our second highest shipping month in over two years and the second highest in a history of the Santa Ana facility. In addition to generating topline, we have further strengthened our manufacturing engineering capabilities by hiring an additional manufacturing engineer and have now launched a formal continuous improvement program.

Lastly, our manufacturing team is working seamlessly with our engineering team to improve both the quality and quantity of products we can make by providing feedback and also by supplying units for testing and research.

Our lease expired on our Santa Ana facility on June 30, 2007. We have since been operating on extension. We have literally no office or cubicle space in which to place new hires. Parking is well below our requirements. We have only two conference rooms available which means that many meetings occur in the parking not.

In addition, our Santa Ana facility communicates the wrong message internally and externally. It communicates insufficient resources, fragmented departments and low-tech everything. We have recently signed a lease on a new space in Irvine, California which addresses all of these concerns. It is only 2.6 miles from our existing facility so we expect virtually no loss of workforce due to the relocation.

While all of us would have preferred a little more time to further implement the initiatives from improving the Company, the current situation is actually inhibiting our ability to transform into the high-performance disciplined collaborative company we envision. Our new facility will not only exhibit -- will not exhibit any signs of corporate excess in either design or furnishings, but will simply provide an effective space for associates to accomplish their work. We expect to move into the new facility in either late December or early January.

Our Beaverton organization continues to play a key role in our overall corporate strategy. In addition to our profitable motion control business and under the leadership of Phil Brown, we are successfully leveraging our expertise in electrical, electronics and software engineering, allowing us to provide an entirely packaged solution to our customers. The collaboration between Beaverton, Santa Ana, and Carson City is very high right now, resulting in substantial creativity and problem solving.

Our motor business in Carson City led by Rhea Gustafson is also a critical part of the corporate value proposition. Our ability to develop the medical handpiece proof of concept from scratch in less than four months, including the design of a custom motor, is nothing short of impressive. It could take two to three times this long just to get the motor itself from one of our external motor suppliers.

Our All-In-1 offering was quite compelling for the major customer we just landed and remains a valuable selling tool in our discussions with prospects.

On a stand-alone basis, Astromec's sales were up 16.5% last year and its backlog remains strong at $2.2 million. The growth was fueled by commercial aircraft motors which accounted for 64% of our sales and posted 31% growth, as well as medical motors which accounted for 32% of our sales and posted 27% growth. Military motors declined 67%, down to only 4% of our sales this year, as established military programs reached the end of their life.

In the medical segment, Astromec has improved the survivability of its motors in the cleaning and sterilization process. This improvement has listed orders from for an existing 1.1 inch diameter motor and resulted in a new order of .9 inch for the same customer. Astromec also received a development contract to design a new .6 inch diameter motor for high-speed surgical application of a different customer.

As one would imagine, all of these positive trends have re-energized our associates. There is a spirit of accomplishment, teamwork and possibility that was simply not present a year ago. Seeing this energy is both rewarding and exciting.

So there you have it. The numbers produced during fiscal year 2007 in terms of sales growth, profitability and cash generation become far more impressive when taking into account the significant advances being accomplished on multiple other fronts.

But what about going forward? Where is Pro-Dex right now? And what can we expect from it in the future?

It would be easy to interpret my optimism as a clear indication that everything is fixed and that we should expect to see an immediate and sustainable increase in earnings. That interpretation would be a mistake. My optimism is more about the direction of the Company than it is the final destination. We have compelling evidence that the Company has stopped going south and is now headed north.

I expect that fiscal 2008 will be about solidifying our ability to deliver the value proposition; digesting the infrastructure investments we are making in people, equipment and facilities to support the transformation; and producing incrementally but not dramatically improved financial performance. Using a race car analogy fiscal '07 was about getting the engine overhauled and getting the car back on the track. Fiscal '08 is about driving it around the track multiple times at gradually increasing speed to work the bugs out and fiscal '09 will be about seeing what our new machine can really do.

I will tell you that the rest of the senior leadership team and I are having a blast facilitating this transition. We have been blessed with capable associates, understanding customers, and patient shareholders. We remain committed to honoring all three of those constituencies with our best efforts on all fronts.

At this time we invite you to ask any questions you may have.

(OPERATOR INSTRUCTIONS) [Michael Potter].

Congratulations. First of all, thanks for an extremely detailed call and then a great job so far. I guess my question going forward or some of my questions are, can you give us a little color on where you seek the gross margins for '08?

Without giving guidance I think that we will see incremental improvement in the margins. We will not see -- I don't think we will see in the foreseeable future a return to 50, 55% margins. The acquisition of Astromec is just a different structure business. They run more in the 30% margins so that is here to stay. Some of the manufacturing infrastructure that we are adding is going to make us more stable, but it is going to take I would say that the days of the 2005 hypermargins where we were underinvested in our manufacturing were more of an aberration, but I don't think we are fundamentally a 30 to 40% margin business either.

So I think we would want to ease more up. The goal over the next couple of years is to get back up in that high 40s and wherever those dots connect between now and then will occur.

So a two- to three-year goal would be -- would get to that mid- to high 40s range again?

Correct. Correct.

Okay. We still have the search for the VP of Engineering. By not having this individual in place or having this role filled is this affecting our ability to go after new R&D contracts?

No. It hasn't at all. I think there's certainly a motivation on my part to make sure that our engineering team has proper leadership both technically and in the human dimension. However we would characterize that. And I think we are working to do that and make sure that leadership is provided.

It certainly would be a lot easier if Mr. or Mrs. Right walked in the door and we named them VP of Engineering tomorrow and they could do that. But we are focused more on making sure that the leadership is being provided not necessarily on exactly where it's coming from. So we are continuing the search, but I don't view that right now as something that's a constraint on the initiative that we are trying to get done.

Then you -- if we could just go on the reserves again. You mentioned at year end we had a reserve -- warranty reserve -- of $469,000?

Yes.

And how much in reserves are we taking now on a quarterly basis or do anticipate going forward?

We are adding to that reserve based on products that are units that are still being shipped. So it's a function of shipment in the quarter.

So Q4, we added how much?

Q4, we added -- maybe instead of dealing in absolute numbers, Michael, since it's a function of volume, maybe it -- this gets at the spirit of your question. Let's say that the units -- I'm going to use a number that is not accurate -- but let's say that it's the [filling] at 24% and we have been accruing the old units. Every time we ship a unit and sell it for $1000 we put a $240 reserve on the books.

We are continuing to do that for all new units we ship, even though we hope they won't use that. What we are expecting from our warranty reserve this year is that we won't get out to the second quarter, the third quarter and the fourth quarter like we have in the past and go, "Oh, they are not filling at 24% they are filling at 29%. Oh no, they're filling at 32%."

So not only are you having to accrue increasing amount for the ones that you're shipping this quarter, but you are playing that accrual catch-up for ones that shipped one and two years ago. That accrual catch-up has been expensive in this fiscal year. So even if we accrued the whole year or most of the year at a full 24%, but only had to accrue for the products being shipped this year, we should see some relief at the warranty line. If that helps. If that makes sense.

Our hope, of course, is that we get to the 12-month mark and go, "Oh, these products didn't fail at the 24%, they only failed at 14%." So now we have some cushion in our warranty reserve in terms of we were too pessimistic as opposed to right now we are going to err on the side of being too pessimistic. Because the last thing Jeff and I want to do is be optimistic and start underaccruing and then have to sit there three quarters from now and play catch-up again.

So if I understand this correctly, you are still accruing at a same percentage level on volume, if you will, as we have six months, 12 months ago? Correct? Just to be ultraconservative?

Exactly.

And then you mentioned to me that -- you mentioned to me, you mentioned on the call that in March was, I guess, the last reconfiguration? And so (multiple speakers) .

Yes.

So and we are almost at -- we are pretty much at the six-month mark.

Correct.

And if the returns have dropped, do you anticipate that in the second quarter, third quarter that you are going to reduce the reserve amount? Are we going to carry that 24% for the year as a whole?

Difficult to say only because -- and if this is too much detail for the other callers I apologize, but I'm assuming everybody is interested in this. The line if you can visualize a line of accumulative [sale] line that kind of goes month 1, not very many sales. Month 2, a couple of sales. Month 3, by month 6, maybe you have 3, 4, 5% failure. Then month 12 you have 23% -- 24% failure just to stay with my previous number. So there is a hockey stick in that.

So now instead of having 5% failure at month six you only have 3, so that looks good. But you still don't really know what 24% is going to look like. Is the 24 going to be 10? Is the 3 going to grow to 10 or is the 3 going to [pop] right back up and be 24?

So you really have to get pretty darned close to the 12-month, maybe at the 10th or 11th month you can start feeling pretty good in order to know that where you are. So I would say that certainly we are not -- certainly we have to follow GAAP. We don't want to put cushions on our balance sheet that we know are just ridiculous, but I would say we are going to -- when we have a fair amount of data that says, 'Hey', these things are just not failing much beyond 15%," then we will slow down the accrual so that it reflects that.

Great. Just one more. On the debt side, I mean the Company has always done a great job managing cash and generating free cash flow. So we have zero on our line right now. So that only leaves our term debt and our mortgage debt. Is that correct?

Yes. (multiple speakers) there's still a little bit out on the (inaudible) tables but that's the main components of the real bank debt.

Do we have any major CapEx associated with the move to the new facility?

Yes.

Yes. There is some fairly significant tenant improvements that are going to be needed to build out the facility over there.

What do you anticipate the CapEx is going to be for the year?

For just the upcoming year?

Yes.

(multiple speakers)

It will be over 1 million probably approaching 2.

And where was it for -- ?

(multiple speakers)

.5 million.

So a significant increase.

Yes.

Yes.

And I'm assuming a portion of that we are going to use the cash for and the rest will be capital leases?

Probably not the leases side. We are not looking at that side. We are looking at different ways to finance it. Perhaps extending different lines of credit, different debt facilities. A combination of cash and debt to match the length of the asset. We don't want to put it all on our line.

Thanks. Keep up the good work.

(OPERATOR INSTRUCTIONS). Howard [Lew].

Actually this is [Scott Hood], First Wilshire, for Howard. Two questions. On the move if you could talk on a real practical level, what the disruptions would be? Will we have a quarter where we will build up inventory and then the next quarter less sales draw the inventory down. If you could just talk about those things? How long it will take and how disruptive it might be?

Our intention for the move is that there will be no direction for shipment. And please be with me as I speak in division and we all have gone through moves and know that it doesn't work out, but we are not going into the move with the belief that while we are just going to be down for two or three weeks and so it's going to be one of those quarters that that 75% of the normal run rate.

What we're trying to right now is build up all of our machine parts as we speak, by running our machine shop internally as well as our vendor machine shop in hyper mode to make sure that by the time we get to the move, all of those machine parts that we need have been in, received and into the stockroom just prior to the move.

A week prior to the move we will issue to our assembly floor an abundant amount of assembly kits, so that out of the stockroom and into cabinet on the assembly floor will be all of two weeks' worth of assembly work that if the machine shop didn't produce a single part and the stockroom can process a single part because it was in a shambles being broken down and resembled on the other side, the assembly function would remain protected or isolated from those two critical functions. The assembly function in the business consists of cables and chairs and airlines and people with some jigs, some assemblers with some jigs.

So we could almost stop assembling here at 5:00 on Monday and start assembling in the new building at 8:00 on Tuesday morning -- probably exaggerating a little bit but not much. It is pretty equivalent to an office move.

The big move will be at the machine shop and the second biggest move will be at the stockroom. So our plan is to isolate the assembly functions from those two and to not come to the shareholders with a quarter of disaster.

Having said all that I just have done it enough times that I presume it is going to have some negative impact; and there will be some level of shipment or difficulty or challenge that we have had to overcome and there will be a quarter somewhere between December and January that ends up with three or four days' loss -- similar to an extended Christmas holiday or something like that -- that makes our daily shipments not as robust as they would've been.

Is that tight enough or you want more specifics?

That's fine. We will be down there that weekend to help you move.

Appreciate your help.

Thank you.

Actually what is the square footage difference between this -- your facility and the new one?

20,000 here all told with little lunchroom rented across the parking lot moving to 28,000 in the new facility.

All on one floor.

All on a single story building.

And I don't know if you got the -- I mean your office space right now is probably -- you know I've been there, so it's 100 square feet or so. What's the -- you have the floor plan now how you're going to break down -- how much is going to be office space increase from what you have now and -- ?

In the new building, the office space will be about 10 or 11 of the 28 and I think we have about seven -- .

About 80% of the -- we are increasing by 8000 feet. About 6000 feet of that goes to the office. We will end up here with, I think it's at 11,000 (inaudible). It's a 60/40 split at the new building.

Well, I think the office space here is about 7000 or 8000 and we will be going to 11 and then the rest is manufacturing.

Then I hate to bring up the past after your discussion -- .

No problem.

Which was really good by the way that you kind of alluded to the failure rate since March of the new revision. And is that really -- is that in August somewhere around 3%?

Yes, I'm just going through my mind about the specifics of the number. I think I can give you the number. The failure rates of the previous rev, the best versions of the previous rev, after five months were 5%. And these are failing at about 2.5 to 3%.

So it's half which is -- and some of the revisions, other revisions failed at a higher rate than 5%. In other words depending on the month of manufacturer it could be that by the fifth month they had already failed at 7 or 8 or 10%.

So the fact that these have failed at 2.5 to 3 is half but there's not a lot of the failure rate component in the first five months. So it would take another, I am going to say three or four months before we really start to see an area between the previous version line and this line. If that makes sense.

So the best fifth month out you've had is about 5%?

Correct.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. Mr. Murphy, do you have any closing remarks?

I do not. Thank you for your time and appreciate your support and your interest in Pro-Dex and please don't hesitate to call us if you have any questions.

This concludes today's conference call. You may now disconnect.